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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ______________
Commission file number: 0-8043
SOUTHERN MINERAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 36-2068676
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1201 LOUISIANA, SUITE 3350 77002-5609
HOUSTON, TEXAS (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (713) 658-9444
Check whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
-------- ---------
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of November 9, 2000,
there were 12,231,934 shares of the Registrant's common stock outstanding.
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SOUTHERN MINERAL CORPORATION
TABLE OF CONTENTS
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PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Financial Statements:
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Consolidated Balance Sheets as of September 30, 2000 (unaudited) and December 31, 1999........... 3
Unaudited Consolidated Statements of Operations for the three months and nine months ended
September 30, 2000 and 1999.................................................................... 4
Unaudited Consolidated Statements of Cash Flows for the
nine months ended September 30, 2000 and 1999.................................................. 5
Notes to Consolidated Unaudited Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations...... 13
Liquidity and Capital Resources
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................. 19
PART II. OTHER INFORMATION......................................................................... 20
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
</TABLE>
2
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PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
ASSETS (Unaudited)
<S> <C> <C>
CURRENT ASSETS
Cash and cash equivalents........................................................................... $ 1,938 $ 1,981
Receivables, net.................................................................................... 6,055 4,923
Property held for sale.............................................................................. - 8,914
Other............................................................................................... 444 606
-------- --------
Total current assets................................................................................ 8,437 16,424
PROPERTY AND EQUIPMENT, AT COST USING SUCCESSFUL EFFORTS METHOD FOR OIL AND GAS ACTIVITIES
Oil and gas producing properties.................................................................... 113,979 120,932
Unproven properties................................................................................. 5,173 4,443
Office equipment.................................................................................... 567 561
Accumulated depreciation, depletion and amortization................................................ (44,868) (47,971)
-------- --------
74,851 77,965
OTHER ASSETS........................................................................................ 497 345
-------- --------
Total assets........................................................................................ $ 83,785 $ 94,734
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES
Accounts payable.................................................................................... $ 4,198 $ 1,375
Accrued liabilities................................................................................. 4,661 2,950
Canadian bank loan.................................................................................. - 13,876
-------- --------
Total current liabilities........................................................................... 8,859 18,201
-------- --------
LONG-TERM LIABILITIES
Bank Debt........................................................................................... 19,746 -
Deferred income taxes............................................................................... 5,815 4,240
-------- --------
Total liabilities not subject to compromise......................................................... 34,420 22,441
-------- --------
LIABILITIES SUBJECT TO COMPROMISE:
Accounts payable.................................................................................... - 1,981
Accrued liabilities................................................................................. - 1,779
Notes payable banks................................................................................. - 16,109
Subordinated debentures............................................................................. - 41,400
-------- --------
Total liabilities subject to compromise............................................................. - 61,269
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; authorized 5,000,000
shares at September 30, 2000; none issued
Common stock, par value $.01 per share; authorized 50,000,000
shares at September 30, 2000; issued 12,231,934 and 2,600,072
at September 30, 2000 and December 31, 1999, respectively;
outstanding 12,213,689 and 2,581,827
shares at September 30, 2000 and December 31, 1999, respectively.................................... 122 26
Additional paid-in capital.......................................................................... 61,781 30,989
Accumulated other comprehensive loss-foreign currency translation adjustment........................ (1,279) (288)
Retained deficit.................................................................................... (11,207) (19,651)
Less: Treasury stock................................................................................ (52) (52)
-------- --------
Total stockholders' equity.......................................................................... 49,365 11,024
-------- --------
Total liabilities and stockholders' equity.......................................................... $ 83,785 $ 94,734
======== ========
The accompanying notes to consolidated financial statements of Southern Mineral Corporation
and subsidiaries are an integral part of these statements.
</TABLE>
3
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SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
UNAUDITED STATEMENTS OF CONSOLIDATED OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
---------------------- -----------------------
2000 1999 2000 1999
------ ------ ------ ------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Oil and gas................................................... $ 8,989 $ 6,556 $ 24,103 $ 18,411
Gain (Loss) on sales of properties and other assets........... (33) 7,139 (36) 12,181
---------- ---------- ---------- ----------
8,956 13,695 24,067 30,592
EXPENSES
Production.................................................... 2,349 2,325 6,313 6,634
Exploration................................................... 163 24 458 1,965
Impairment.................................................... - 1 - 210
Depreciation, depletion and amortization...................... 2,040 2,562 5,905 8,370
General and administrative.................................... 1,259 1,039 2,589 3,134
Restructuring and bankruptcy expenses......................... 1,844 1,280 5,188 1,280
---------- ---------- ---------- ----------
7,655 7,231 20,453 21,593
---------- ---------- ---------- ----------
Income from operations.......................................... 1,301 6,464 3,614 8,999
Other income, expenses and deductions
Interest and other income..................................... 30 43 133 79
Interest and debt expense..................................... (539) (1,704) (1,879) (5,273)
---------- ---------- ---------- ----------
Income before income taxes and extraordinary gain............... 792 4,803 1,868 3,805
Provision (benefit) for foreign, federal and state income taxes
Current provision (benefit)................................... (191) 205 (85) 316
Deferred provision (benefit).................................. 542 (312) 1,770 (735)
---------- ---------- ---------- ----------
351 (107) 1,685 (419)
---------- ---------- ---------- ----------
Net income before extraordinary gain............................ 441 4,910 183 4,224
Extraordinary gain from extinguishment of debt, net of tax...... 8,259 - 8,259 -
---------- ---------- ---------- ----------
Net income...................................................... $ 8,700 $ 4,910 $ 8,442 $ 4,224
========== ========== ========== ==========
Income per share from continuing operations-basic............... $ 0.04 $ 1.90 $ 0.04 $ 1.65
Income per share from continuing operations-diluted............. $ 0.04 $ 1.50 $ 0.04 $ 1.18
Income per share from extraordinary item-basic.................. $ 0.83 - $ 1.63 -
Income per share from extraordinary item-diluted................ $ 0.83 - $ 1.62 -
Net income per share-basic...................................... $ 0.87 $ 1.90 $ 1.67 $ 1.65
Net income per share-diluted.................................... $ 0.87 $ 1.50 $ 1.66 $ 1.18
Weighted average number of shares outstanding-basic............. 9,976 2,570 5,070 2,564
Weighted average number of shares outstanding-diluted........... 10,003 3,601 5,084 3,576
The accompanying notes to consolidated financial statements of Southern Mineral Corporation
and subsidiaries are an integral part of these statements.
</TABLE>
4
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SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
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<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
------ ------
(UNAUDITED)
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................... $ 8,442 $ 4,224
Adjustments to net income................................................ 2,396 (3,965)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................... 10,838 259
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of properties........................................ 9,209 22,416
Capital expenditures..................................................... (4,952) (2,439)
-------- --------
NET CASH PROVIDED BY INVESTING ACTIVITIES.................... 4,257 19,977
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt............................................... (32,327) (20,114)
Proceeds from long-term debt............................................. 17,456 --
Loan acquisition costs................................................... (250) (416)
-------- --------
NET CASH USED IN FINANCING ACTIVITIES........................ (15,121) (20,530)
EFFECT OF EXCHANGE RATE CHANGES ON CASH.................................... (16) 24
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......... (42) (270)
Cash and cash equivalents at beginning of period........................... 1,980 1,541
-------- --------
Cash and cash equivalents at end of period................................. $ 1,938 $ 1,271
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................................... $ 3,693 $ 4,712
Cash paid for taxes...................................................... 386 422
NON-CASH INVESTING AND FINANCING ACTIVITIES
Directors' fees paid in stock............................................ $ 297 $ 26
Common shares issued to debenture holders................................ $ 29,801 --
The accompanying notes to consolidated financial statements of Southern Mineral Corporation
and subsidiaries are an integral part of these statements.
</TABLE>
5
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, though the Company believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's latest Annual Report to the
Securities and Exchange Commission on Form 10-K, as amended, for the year ended
December 31, 1999. In the opinion of the Company, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position as of September 30, 2000, the results of operations for the three and
nine months ended September 30, 2000 and 1999 and statements of cash flows for
the nine months then ended have been included.
On October 29, 1999 ("Petition Date"), the Company and its wholly-owned
subsidiaries, BEC Energy, Inc., Amerac Energy Corporation, SMC Ecuador, Inc. and
SMC Production Company ("Debtor Subsidiaries"), filed voluntary petitions for
relief under Chapter 11, Title 11 of the United States Code ("Bankruptcy Code"),
in order to facilitate the restructuring of the Company's long-term debt,
revolving credit, trade debt and other obligations. The filings were made in
the U.S. Bankruptcy Court for the Southern District of Texas, Victoria Division
("Bankruptcy Court"). The Company and its Debtor Subsidiaries emerged from
Bankruptcy on August 1, 2000 ("Effective Date"). The Company and its Debtor
Subsidiaries operated as debtors-in-possession subject to the Bankruptcy Court's
supervision and orders until the Effective Date. See Note 2 for further
information.
The accompanying financial statements have been prepared in a manner
consistent with the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. Beginning in the fourth quarter of 1999 through the second
quarter of 2000, and for the year ended December 31, 1999, the consolidated
financial statements of the Company and its subsidiaries are presented in
accordance with Statement of Position 90-7 "Financial Reporting by Entities in
Reorganization Under the Bankruptcy Code" ("SOP 90-7"). SOP 90-7 provides
guidance on financial reporting by entities that have filed petitions with the
bankruptcy court and expect to reorganize as going concerns under the Bankruptcy
Code. SOP 90-7 generally requires the reclassification of the consolidated
balance sheet, statement of operations and cash flows to distinguish
transactions and events that are directly associated with the reorganization
from the ongoing operations of the Company.
Use of Estimates in the Preparation of Financial Statements - The preparation
of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could
differ from those estimates.
Earnings per Share - Basic earnings per share are based on the weighted average
shares outstanding without any dilutive effects considered.
On August 1, 2000, pursuant to the plan of reorganization of the Bankruptcy
Code, old shareholders of the Company's common stock received one share of the
Company's new common stock for each five shares of the Company's old common
stock. All per-share amounts have been restated to reflect the 1 for 5 August
1, 2000 reverse stock split. See Note 2 Bankruptcy Filing.
Earnings per share have been calculated on the restated weighted average
number of shares outstanding for the three and nine months ended September 30,
1999 and 2000, respectively. For the quarters and nine months ended September
30, 2000 and 1999, respectively, the issuance or conversion of potential common
shares of 1,013,070 and 589,809, would have had an antidilutive effect on the
diluted earnings per share calculation and therefore were not considered in the
calculation of the diluted weighted average number of shares outstanding.
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
Reclassifications - Certain amounts in prior financial statements may have been
reclassified to conform to the 2000 financial statement presentation.
Comprehensive Income - Comprehensive income includes all changes in a company's
equity except those resulting from investments by owners and distributions to
owners, including, among other things, foreign currency translation adjustments.
The Company's total comprehensive income for the nine months ended September 30,
2000 and 1999 was as follows (in thousands):
Nine months ended
September 30,
-----------------
2000 1999
------ ------
Net income $8,442 $4,224
Foreign currency translation adjustment (991) 1,108
------ ------
Total comprehensive income $7,451 $5,332
====== ======
Note 2. Bankruptcy Filing
On October 29, 1999, the Company and its Debtor Subsidiaries, which excluded
Neutrino, filed voluntary petitions for relief under the Bankruptcy Code in
order to facilitate the restructuring of the Company's long-term debt, revolving
credit, trade debt and other obligations. The filings were made in the U.S.
Bankruptcy Court for the Southern District of Texas, Victoria Division. The
Company and its Debtor Subsidiaries emerged from bankruptcy on August 1, 2000.
All debts of the Company and its Debtor Subsidiaries as of the Petition Date
were stayed by the bankruptcy petitions and were subject to compromise pursuant
to such proceedings until the Effective Date. The Company and its Debtor
Subsidiaries operated as debtors-in-possession subject to the Bankruptcy
Court's supervision and orders. The proceedings of the Company and its Debtor
Subsidiaries were consolidated for administrative purposes.
The decision to seek protection was taken by the Company and its Debtor
Subsidiaries because the Company concluded that a restructuring of its
indebtedness could not be completed without the protection and assistance of the
Bankruptcy Court. Timing of the bankruptcy filing was imposed by several
factors, including the possible acceleration of the Company's $16.1 million of
indebtedness by its domestic bank creditors and the inability of the Company and
its debenture holders to reach a satisfactory compromise regarding the
consideration to be received in the previously proposed restructuring. The
bankruptcy petitions were filed in order to preserve cash and to give the
Company the opportunity to restructure its debt.
On February 25, 2000, the Company filed a Plan of Reorganization and
Disclosure Statement and on May 2, 2000 filed a Second Amended Plan ("Amended
Plan"). The Amended Plan set forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. On May 2, 2000,
the Bankruptcy Court held a hearing and approved the Disclosure Statement and
the procedure for transmitting the Amended Plan and Disclosure Statement for
acceptance or rejection to all affected parties. The Bankruptcy Court set June
30, 2000 for the hearing on confirmation of the Amended Plan.
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
On July 5, 2000, the Company announced an agreement among all parties
contesting its Amended Plan to support modifications to its Plan ("Modified
Plan") to emerge from bankruptcy. The Bankruptcy Court set July 19, 2000 to
complete the confirmation hearing on the Modified Plan subject to certain
restrictions and on July 21, 2000 entered the order confirming the Company's
Modified Plan. The Modified Plan became effective on August 1, 2000. The
Modified Plan generally provides for the satisfaction of the Company and Debtor
Subsidiaries' claims including payment of all Bankruptcy Court approved
administrative expenses as follows:
. Domestic secured debt was paid in full with interest and expenses including
default interest of 3.5% from the Petition Date with proceeds from a new
secured credit facility secured by the Company. Payment of the domestic
secured debt, interest and expenses was $16,882,511 and occurred on August
23, 2000.
. All other creditors other than domestic secured debt and amounts owed
debenture holders will be paid in cash over periods ranging from 1 to 14
months.
. Debenture holders were satisfied as follows:
. Cash payment of $5 million, which was made to the indenture trustee on
August 31, 2000.
. Issuance of common stock that when issued represented approximately 78%
of the Company's outstanding common shares (9,536,422 shares).
. A new Board of Directors was appointed for a one year term as follows: one by
the creditors' committee, two from the existing board, three by
representatives of significant owners of debentures and one jointly by the
creditors' committee and significant owners of debentures.
. A 1:5 reverse stock split of the Company's outstanding common stock, par
value $0.01 per share, was effectuated on August 1, 2000, the Effective Date.
Subject to the effects of the reverse split, the existing common stock,
options and warrants remained outstanding with no change in terms and
conditions except that all options and warrants expiring between the Petition
Date and confirmation of the Modified Plan were extended for a two year
period.
. The current common shareholders, option holders, and warrant holders of
record on July 24, 2000, received approximately 3,667,000 warrants allowing
them to increase their ownership from 22% to up to 40% of the outstanding
common stock. The new warrants are for a perpetual term with an exercise
price of $4.21 per share, subject to adjustment for certain customary anti-
dilution stock splits, stock dividends and other recapitalization events. The
exercise price must be paid in cash.
Pursuant to the provisions of SOP 90-7, the Company did not adopt fresh-start
reporting upon its emergence from Bankruptcy. Based on the closing price of the
Company's common stock on the Modified Plan confirmation date, the exchange of
the debentures for shares of the Company's common stock, par value $0.01 per
share, resulted in an extraordinary gain of approximately $8.2 million, which is
reflected in third quarter 2000 statement of operations. In addition, the
$616,000 fair value of the warrants issued was charged to bankruptcy expense.
NOTE 3. DIVESTITURES
On July 21, 1999, the Company agreed to sell properties consisting of certain
proven and unproven property interests in Texas to ANR Production Company. The
properties included all of the Company's interest in the Brushy Creek and Texan
Gardens Fields in Dewitt, Lavaca and Hidalgo counties of Texas. In July and
August of 1999, the sale of its interests in the Brushy Creek Field and Texan
Gardens Field were closed for $15.2 million and $0.8 million, respectively.
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
Pro forma
The following table summarizes the pro forma (unaudited) results (stated in
thousands, except per share data), of the Company as though the dispositions of
Brushy Creek, Texan Gardens and Inverness/Swan Hills had occurred on January 1,
1999.
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
(unaudited)
(in thousands, except per share data)
2000 1999
---- ----
Revenues..................................... $23,327 $ 24,105
Net income (loss)............................ 8,209 (2,580)
Net income (loss) per share-basic............ $ 1.62 $ (1.01)
Net income (loss) per share - diluted........ $ 1.61 $ (1.01)
The preceding pro forma results are not necessarily indicative of those that
would have occurred had the divestitures taken place at the beginning of 1999.
During the first quarter of 1999, the Company sold its mineral interests and
substantially all of its royalty interests in Texas, Mississippi and New Mexico
for approximately $6 million. These divestitures did not have a material effect
on the Company's historical results of operations.
Note 4. Debt
Debt consisted of the following (in thousands):
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
Domestic Credit Facility $14,283 $ -
Old domestic credit facility - in default - 16,109
Canadian credit facility (U.S. Dollars) 5,463 -
Old Canadian credit facility (U.S. Dollars) - 13,876
Convertible subordinated debentures - in default - 41,400
------- -------
Total indebtedness $19,746 $71,385
======= =======
As described in Note 2, because of the Company's filing of Chapter 11, all
amounts were subject to compromise as of December 31, 1999, except for its
Canadian bank credit facility, which is reflected as Current Liabilities not
subject to compromise on the Consolidated Balance Sheet.
On August 23, 2000, the Company entered into a new credit facility ("Domestic
Credit Facility") with a domestic lender in the principal amount of up to
$30,000,000. The Domestic Credit Facility provides for a borrowing base of
$18,725,000 and matures on August 23, 2002. The borrowing base reduces $275,000
per month beginning September 1, 2000. Proceeds from the Domestic Credit
Facility were used to repay the preexisting domestic facility as provided in the
Modified Plan. The obligations under the Domestic Credit Facility are secured
by substantially all of the assets of the Company and its subsidiaries other
than Neutrino. The Domestic Credit Facility prohibits the payment of dividends
and contains covenants relating to the financial condition of the Company,
including working capital, tangible net worth and cash flow coverage covenants.
At September 30, 2000, the outstanding borrowing was $14,282,512. On November
6, 2000, outstanding borrowings under the Domestic Credit Facility were
$13,482,512 with borrowing availability of $4,417,488. Outstanding principal
under the Domestic Credit Facility bears interest at the Bank Index Rate plus
0.5% (10.0% at September 30, 2000) to the extent of the borrowing base utilized.
The borrowing base is re-determined semi-annually beginning November 2000 and
will be made at the sole discretion of the domestic lender. The Company may
request four additional borrowing base redeterminations during any calendar year
except that no more than one redetermination will be made each calendar quarter.
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
On August 29, 2000, Neutrino repaid its old Canadian credit facility and
entered into a new principal amount of up to US $30,000,000 loan facility (the
"Canadian Credit Facility") with a new US lender. The initial borrowing base
under the Canadian Credit Facility was $10,815,000 and reduces US $185,000 per
month beginning September 2000 due August 29, 2002. At September 30, 2000,
outstanding borrowings under the Canadian Credit Facility were US $5,463,389.
The Canadian Credit Facility is secured by substantially all of Neutrino's
assets and guaranteed by the Company. On November 6, 2000, outstanding
borrowings under the Canadian Credit Facility were US $4,512,276 (Cdn
$6,800,000) with a borrowing availability of US $5,747,724 (Cdn $8,661,820).
Outstanding principal under the Canadian Credit Facility bears interest at the
bank's prime rate plus 0.5% (8.0% at September 30, 2000) to the extent of the
borrowing base utilized. The Canadian Credit Facility contains certain covenants
relating to the financial condition of Neutrino, including working capital,
tangible net worth and cash flow coverage covenants. The borrowing base under
the Canadian Credit Facility is subject to semi-annual redeterminations
beginning November 2000. The borrowing base is redetermined semi-annually
beginning November 2000 and will be made at the sole discretion of the Canadian
lender. Neutrino may request four additional borrowing base redeterminations
during any calendar year except that no more than one redetermination will be
made each calendar quarter.
The outstanding balance under the old Canadian credit facility was classified
as a current liability because of the demand feature of the loan. However, it
was management's intention that the facility be utilized to provide long-term
financing for the Company.
On October 2, 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures due on October 1, 2007. The debentures were 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 agreement, in
the event of a change of control of the Company, debenture holders had the right
to require the Company to repurchase the security at face value plus accrued
interest. Due to the bankruptcy filings on October 29, 1999, the Company was
not in compliance with certain provisions of the debenture agreement at December
31, 2000. Pursuant to the Modified Plan, the debentures were extinguished and
converted in exchange for $5 million in cash and approximately 78% of the common
stock of the Company. Based on the closing price of the Company's common stock
on the Modified Plan confirmation date, the exchange of the debentures for cash
and common stock resulted in an extraordinary gain, net of tax, of $8,258,993.
See Note 2 -Bankruptcy Filing.
NOTE 5. NASDAQ NATIONAL MARKET LISTING
Early in 1999, the Company was advised that it was not in compliance with
Nasdaq Stock Market listing requirements due to the low price per share of its
Common Stock. The Company was granted a hearing on May 27, 1999 to present a
plan to the Nasdaq National Market for compliance with the $1.00 per share
minimum bid requirement. Subsequently, the Company was notified that effective
with the close of business on August 4, 1999, its securities, including
convertible subordinated debentures, were delisted from the Nasdaq National
Market and Nasdaq SmallCap Market. The Company's Common Stock is now traded on
the OTC Bulletin Board. The Company decided to not pursue a review of the
delisting decision by the Nasdaq Review Council. The Company believes a
permanent delisting of its Common Stock would impair the liquidity of the Common
Stock and capital raising flexibility of the Company. Although the Company
intends to use best efforts to seek a listing with a stock exchange or market
and has made application with the American Stock Exchange, there is no assurance
that the Company will obtain any such listing. Upon emerging from Chapter 11,
the Company's stock symbol on the OTC Bulletin Board was changed to "SMOP.OB."
The symbol for the new warrants issued to old common shareholders, option
holders and warrant holders is "SMOPW.OB".
NOTE 6. RESTRUCTURING AND BANKRUPTCY COSTS
During the third quarter of 1999, the Board of Directors of the Company
concluded that the proposed restructuring plan as filed with the Securities and
Exchange Commission on July 21, 1999 could not be consummated on the terms
contemplated. Therefore, estimated costs of approximately $1,372,000 associated
with the restructuring were expensed during the third and fourth quarters of
1999. These costs are primarily legal, accounting, financial advisory and other
transaction costs related to the proposed restructuring. Since the Company's
filing for bankruptcy on October 29, 1999, it has incurred costs of
approximately $553,000 in 1999; and $1,204,000 and $4,023,000, respectively, in
the three and
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
nine months ended September 30, 2000, related to legal, accounting and financial
advisory services rendered in connection with the bankruptcy. In addition,
$2,463,000 that was capitalized as other assets for fees and expenses related to
securing the old domestic bank debt and convertible subordinated debentures were
expensed during the fourth quarter of 1999 pursuant to SOP 90-7.
NOTE 7. HEDGING
As required by the Company's Domestic and Canadian Credit Facilities, the
Company has entered into the following crude oil and natural gas costless
collars:
OIL HEDGES
<TABLE>
<CAPTION>
U S $
NYMEX WTI
Total Monthly -----------------------
Period bbl bbl Floor Cap
------ ----- ------- ----- ---
<S> <C> <C> <C> <C> <C>
United States
Oct-00 - Dec-00 36,000 12,000 $ 22.00 $ 37.40
Jan-01 - Dec-01 132,400 11,033 $ 22.00 $ 32.20
Jan-02 - Sep-02 88,200 9,800 $ 22.00 $ 25.60
Canada
Oct-00 - Dec-00 31,000 10,333 $ 22.00 $ 37.60
Jan-01 - Dec-01 111,100 9,258 $ 22.00 $ 33.30
Jan-02 - Sep-02 70,300 7,811 $ 22.00 $ 27.00
</TABLE>
<TABLE>
GAS HEDGES
United States
U S $
Houston Ship Channel
Total Monthly -----------------------
mmbtu mmbtu Floor Cap
----- -------- ----- ---
<S> <C> <C> <C> <C> <C>
Oct-00 - Oct-00 104,000 104,000 $ 2.75 $ 5.90
Nov-00 - Mar-01 486,000 97,200 $ 2.75 $ 6.85
Apr-01 - Oct-01 600,000 85,714 $ 2.75 $ 4.98
Nov-01 - Mar-02 378,000 75,600 $ 2.75 $ 4.85
Apr-02 - Oct-02 466,000 66,571 $ 2.75 $ 3.80
</TABLE>
<TABLE>
Canada
CDN $
Alberta Spot-AECO
Total Monthly -----------------------
gigajoules gigajoules Floor Cap
---------- ---------- ----- ---
<S> <C> <C> <C> <C> <C>
Oct-00 - Sep-02 1,200,000 50,000 $ 4.05 $ 6.15
</TABLE>
The fair value at September 30, 2000 of collars was an unrealized loss of $1.4
million.
In August, 2000, the Company fixed the rate of interest on its outstanding bank
borrowings under its Canadian Credit Facility through interest rate swaps. The
estimated gain on liquidation of the interest rate swap position at September
30, 2000 was $2,130.
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
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 assets.
The Company's cash flow provided by operating activities for the nine months
ended September 30, 2000 and 1999 was $10,838,000 and $259,000, respectively.
Additional cash in the amounts of $9,209,000 and $22,416,000 were received in
2000 and 1999, respectively, from the sale of assets.
On October 29, 1999, the Company and its Debtor Subsidiaries, which excluded
Neutrino, filed voluntary petitions for relief under the Bankruptcy Code in
order to facilitate the restructuring of the Company's long-term debt, revolving
credit, trade debt and other obligations. The filings were made in the U.S.
Bankruptcy Court for the Southern District of Texas, Victoria Division. The
Company and its Debtor Subsidiaries emerged from bankruptcy on August 1, 2000.
All debts of the Company and its Debtor Subsidiaries as of the Petition Date
were stayed by the bankruptcy petitions and were subject to compromise pursuant
to such proceedings until the Effective Date. The Company and its Debtor
Subsidiaries operated as debtors-in-possession subject to the Bankruptcy Court's
supervision and orders. The proceedings of the Company and its Debtor
Subsidiaries were consolidated for administrative purposes.
The decision to seek protection was taken by the Company and its Debtor
Subsidiaries because the Company concluded that a restructuring of its
indebtedness could not be completed without the protection and assistance of the
Bankruptcy Court. Timing of the bankruptcy filing was imposed by several
factors, including the possible acceleration of the Company's $16.1 million of
indebtedness by its domestic bank creditors and the inability of the Company and
its debenture holders to reach a satisfactory compromise regarding the
consideration to be received in the previously proposed restructuring. The
bankruptcy petitions were filed in order to preserve cash and to give the
Company the opportunity to restructure its debt.
On February 25, 2000, the Company filed a Plan of Reorganization and
Disclosure Statement and on May 2, 2000 filed a Second Amended Plan ("Amended
Plan"). The Amended Plan sets forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. On May 2, 2000,
the Bankruptcy Court held a hearing and approved the Disclosure Statement and
the procedure for transmitting the Amended Plan and Disclosure Statement for
acceptance or rejection to all affected parties. The Bankruptcy Court set June
30, 2000 for the hearing on confirmation of the Amended Plan.
On July 5, 2000, the Company announced an agreement among all parties
contesting its Amended Plan to support modifications to its Plan ("Modified
Plan") to emerge from bankruptcy. The Bankruptcy Court set July 19, 2000 to
complete the confirmation hearing on the Modified Plan subject to certain
restrictions and on July 21, 2000 entered the order confirming the Company's
Modified Plan. The Modified Plan became effective on August 1, 2000. The
Modified Plan generally provides for the satisfaction of the Company and Debtor
Subsidiaries' claims including payment of all Bankruptcy Court approved
administrative expenses as follows:
. Domestic secured debt was paid in full with interest and expenses including
default interest of 3.5% from the Petition Date with proceeds from a new
secured credit facility secured by virtually all the assets of the Company.
Payment of the domestic secured debt, interest and expenses was $16,882,511
and occurred on August 23, 2000.
. All other creditors other than domestic secured debt and amounts owed
debenture holders will be paid in cash over periods ranging from 1 to 14
months.
. Debenture holders were satisfied as follows:
. Cash payment of $5 million, which was made to the indenture trustee on
August 31, 2000.
. Issuance of common stock that when issued represented approximately 78%
of the Company's outstanding common shares (9,536,422 shares).
. A new Board of Directors was appointed for a one year term as follows: one by
the creditors' committee, two from the existing board, three by
representatives of significant owners of debentures and one jointly by the
creditors' committee and significant owners of debentures.
<PAGE>
. A 1:5 reverse stock split of the Company's outstanding common stock, par
value $0.01 per share, was effectuated on August 1, 2000, the Effective Date.
Subject to the effects of the reverse split, the existing common stock,
options and warrants remained outstanding with no change in terms and
conditions except that all options and warrants expiring between the Petition
Date and confirmation of the Modified Plan were extended for a two year
period.
. The current common shareholders, option holders, and warrant holders of
record on July 24, 2000, received approximately 3,667,000 warrants allowing
them to increase their ownership from 22% to up to 40% of the outstanding
common stock. The new warrants are for a perpetual term with an exercise
price of $4.21 per share, subject to adjustment for certain customary anti-
dilution stock splits, stock dividends and other recapitalization events. The
exercise price must be paid in cash.
Pursuant to the provisions of SOP 90-7, the Company did not adopt fresh-start
reporting upon its emergence from Bankruptcy. Based on the closing price of the
Company's common stock on the Modified Plan confirmation date, the exchange of
the debentures for shares of the Company's common stock, par value $0.01 per
share, resulted in an extraordinary gain of approximately $8.2 million, net of
tax, which is reflected in third quarter 2000 statement of operations.
On August 21, 2000, the Company announced the engagement of Petrie Parkman &
Co., LLC and FirstEnergy Capital Corporation of Canada to evaluate strategic
alternatives available to the Company in an effort to maximize shareholder
value.
In the ordinary course of business, the Company makes substantial capital
expenditures for the acquisitions, exploration and development of oil and
natural gas reserves. Historically, the Company has financed its capital
expenditures, debt service and working capital requirements with cash flow from
operations, public offerings of equity, private offerings of debt, asset sales,
borrowings under its senior credit facility and other financings. Cash flow
from operations is sensitive to the prices the Company receives for its oil and
natural gas production. Lower hydrocarbon production associated with a
reduction in planned capital spending or an extended decline in oil and gas
prices could result in less than anticipated cash flow from operations in later
years, which could have a material adverse effect on the Company.
On August 23, 2000, the Company entered into a new credit facility ("Domestic
Credit Facility") with a domestic lender in the principal amount of up to
$30,000,000. The Domestic Credit Facility provides for a borrowing base of
$18,725,000 and matures on August 23, 2002. The borrowing base reduces $275,000
per month beginning September 1, 2000. Proceeds from the Domestic Credit
Facility were used to repay the preexisting domestic facility as provided in the
Modified Plan. The obligations under the Domestic Credit Facility are secured
by substantially all of the assets of the Company and its subsidiaries other
than Neutrino. The Domestic Credit Facility prohibits the payment of dividends
and contains covenants relating to the financial condition of the Company,
including working capital, tangible net worth and cash flow coverage covenants.
At September 30, 2000 the outstanding borrowing was $14,282,512. On November 6,
2000, outstanding borrowings under the Domestic Credit Facility were $13,482,512
with borrowing availability of $4,417,488. Outstanding principal under the
Domestic Credit Facility bears interest at the Bank Index Rate plus 0.5% (10.0%
at September 30, 2000) to the extent of the borrowing base utilized. The
borrowing base is redetermined semi-annually beginning November 2000 and will be
made at the sole discretion of the domestic lender. The Company may request
four additional borrowing base redeterminations during any calendar year except
that no more than one redetermination will be made each calendar quarter.
On August 29, 2000, Neutrino repaid its old Canadian credit facility and
entered into a new principal amount of up to US $30,000,000 loan facility (the
"Canadian Credit Facility") with a new US lender. The initial borrowing base
under the Canadian Credit Facility was US $10,815,000 and reduces US $185,000
per month beginning September 2000 due August 29, 2002. At September 30, 2000,
outstanding borrowings under the Canadian Credit Facility were US $5,463,389.
The Canadian Credit Facility is secured by substantially all of Neutrino's
assets and guaranteed by the Company. On November 6, 2000, outstanding
borrowings under the Canadian Credit Facility were US $4,512,276 (Cdn
$6,800,000) with a borrowing availability of US $5,747,724 (Cdn $8,661,820).
Outstanding principal under the Canadian Credit Facility bears interest at the
bank's prime rate plus 0.5% (8.0% at September 30, 2000) to the extent of the
borrowing base utilized. The Canadian Credit Facility contains certain covenants
relating to the financial condition of Neutrino, including working capital,
tangible net worth and cash flow coverage covenants. The borrowing base under
the Canadian Credit Facility is subject to semi-annual redeterminations
beginning November 2000. The borrowing base is redetermined semi-annually
beginning November 2000 and will be made at the sole discretion of the Canadian
lender. Neutrino may request four additional borrowing base redeterminations
during any calendar year except that no more than one redetermination will be
made each calendar quarter.
The outstanding balance under the old Canadian credit facility was classified
as a current liability because of the demand feature of the loan. However, it
was management's intention that the facility be utilized to provide long-term
financing for the Company.
<PAGE>
On October 2, 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures due on October 1, 2007. The debentures were 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 agreement, in
the event of a change of control of the Company, debenture holders had the right
to require the Company to repurchase the security at face value plus accrued
interest. Due to the bankruptcy filings on October 29, 1999, the Company was
not in compliance with certain provisions of the debenture agreement at December
31, 2000. Pursuant to the Modified Plan, the debentures were extinguished and
converted in exchange for $5 million in cash and approximately 78% of the common
stock of the Company. Based on the closing price of the Company's common stock
on the Modified Plan confirmation date, the exchange of the debentures for cash
and common stock resulted in an extraordinary gain of $8,258,993. See Note 2 -
Bankruptcy Filing.
The Company's 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 financial condition at the end of 1998 resulted in the Company's
independent auditors, in their opinion on the 1998 financial statements,
disclosing their substantial doubt about the Company's ability to continue as a
going concern. In February 1999, the Board of Directors of the Company retained
CIBC World Markets Corp. as independent advisors to assist in evaluating various
strategic alternatives for maximizing shareholder value. On July 21, 1999, the
Company announced that its Board of Directors had approved a restructuring of
the Company that involved a $20.6 million equity infusion, the sale of the
Brushy Creek and Texan Garden Fields in Texas and an exchange offer for its
6.875% Convertible Subordinated Debentures due 2007. The restructuring plan, as
initially filed with the Securities and Exchange Commission, would have
substantially reduced the current common stockholders interest in the Company.
Based upon discussions with certain of the holders of its debentures, the Board
of Directors of the Company concluded that the restructuring could not be
consummated on the terms previously contemplated.
Due to the Company's filing for bankruptcy on October 29, 1999 and its
continuing high level of indebtedness and working capital deficit as of December
31, 1999, the Company's independent auditors' 1999 report continued to disclose
their substantial doubt about the Company's ability to continue as a going
concern.
Early in 1999, the Company was advised that it was not in compliance with
Nasdaq Stock Market listing requirements due to the low price per share of its
Common Stock. The Company was granted a hearing on May 27, 1999 to present a
plan to the Nasdaq National Market for compliance with the $1.00 per share
minimum bid requirement. Subsequently, the Company was notified that effective
with the close of business on August 4, 1999, its securities, including
convertible subordinated debentures, were delisted from the Nasdaq National
Market and Nasdaq SmallCap Market. The Company's Common Stock is now traded on
the OTC Bulletin Board. The Company decided to not pursue a review of the
delisting decision by the Nasdaq Review Council. The Company believes a
permanent delisting of its Common Stock would impair the liquidity of the Common
Stock and capital raising flexibility of the Company. Although the Company
intends to use best efforts to seek a listing with a stock exchange or market
and has made application with the American Stock Exchange, there is no assurance
that the Company will obtain any such listing. Upon emerging from Chapter 11,
the Company's stock symbol on the OTC Bulletin Board was changed to "SMOP.OB."
The symbol for the new warrants issued to old common shareholders, option
holders and warrant holders is "SMOPW.OB".
Since the trading of the Company's securities will be conducted on the OTC
Bulletin Board, the Company expects the spreads between the "bid and "asked"
prices of the Common Stock quoted by market makers will likely be greater than
in the past and shareholders will likely experience a greater degree of
difficulty in trading the Common Stock. In addition, there are significant
restrictions imposed by most brokerage houses on the ability of their brokers to
solicit orders or recommend the purchase of securities that trade on the OTC
Bulletin Board. In the majority of the cases, the purchase of the securities is
limited to unsolicited offers from private investors, who have to comply with
policies and practices involving the completion of time consuming forms that can
make the handling of lower priced securities economically unattractive.
Moreover, most brokerage houses do not permit lower priced securities to be used
as collateral for margin accounts or to be purchased on margin. The Company
believes that the current market price of its securities may limit the effective
marketability because of the reluctance of many brokerage firms and
institutional investors to recommend lower priced securities to their clients or
to hold them in their own portfolios. The brokerage commission on the purchase
or sale of lower priced securities may also represent a higher percentage of the
price than the brokerage commission on a higher priced issue.
The Company did not declare dividends in nine months ended September 30, 2000
and 1999. 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 Credit Facility.
<PAGE>
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 2000
AS COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 1999
Oil and gas revenues for the quarter ended September 30, 2000 were $8,989,000
compared to oil and gas revenues of $6,556,000 for the same period in 1999. Oil
and NGL production decreased 15% to 170,412 barrels and natural gas production
decreased 15% to 1,033 MMcf in the third quarter of 2000 compared to the third
quarter of 1999. The lower production levels in the third quarter of 2000 are
due primarily to the sale of properties in 1999 and the first quarter of 2000,
offset by new production from development drilling on proven prospects.
Increases in commodity prices more than offset the impact of the lower oil and
NGL volumes.
The average realized oil and NGL price increased 45% from $18.94 barrel in the
third quarter of 1999 to $27.44 in the third quarter of 2000. Average realized
natural gas prices increased 67% to $3.96 per Mcf during the third quarter of
2000 compared to $2.37 per Mcf in same period a year earlier.
During the third quarter of 1999, the Company sold domestic properties
resulting in a net gain of approximately $7.1 million with no significant sales
in 2000.
Third quarter 2000 production costs, including production and ad valorem
taxes, increased 1% to $2,349,000 compared to $2,325,000 in the third quarter of
1999. On an energy equivalent unit basis, production costs rose 19% quarter-
over-quarter resulting primarily from non-recurring workovers and other
operations.
Exploration, dry hole and lease impairment expenses incurred in the quarter
ended September 30, 1999 were $24,000, compared to $163,000 in the same period
in 2000. The 2000 expense is primarily from dry holes drilled and other
exploration costs in Canada. Since the Company uses the successful efforts
method of accounting, exploration expenses may vary greatly from period to
period based upon the level of exploration activity.
General and administrative expenses were $1,259,000 in the third quarter of
2000, a 21% increase from $1,039,000 in the prior year's third quarter primarily
related to issuance of common shares to the new directors in lieu of cash
compensation and non-cash charges associated with implementation of FASB
Interpretation No. 44, Accounting for Certain Transactions Involving Stock
Compensation ("FIN 44") offset by savings related to reductions in force through
attrition and layoffs in 1999. On an energy equivalent unit basis, costs
increased 43% from the third quarter of 1999 to the same period in 2000.
Depreciation, depletion and amortization ("DD&A") decreased 20% to $2,040,000
in the third quarter of 2000 compared to $2,562,000 in 1999 primarily related to
decreased production due to property sales. On a unit of equivalent production
basis, DD&A decreased 6% from $1.06 per Mcfe to $0.99 per Mcfe.
Restructuring and bankruptcy costs were $1,844,000 in the third quarter of
2000 compared to $1,280,000 in 1999. The costs for 2000 relate primarily to
charges associated with the Company's Modified Plan, which became effective
August 1, 2000 and implementation of FIN 44. The 1999 costs relate to charges
associated with the proposed restructuring as filed with the Securities and
Exchange Commission on July 21, 1999, which was not consummated.
Interest and debt expense in the quarter ended September 30, 2000 was $539,000
compared to $1,704,000 in the same period in 1999. The decrease primarily
reflects the reduced indebtedness outstanding due to the application of proceeds
from property sales to debt reduction and no accrual of interest related to
subordinated debt in accordance with SOP 90-7 through the effective date of the
Modified Plan.
Tax provision in the third quarter 2000 was $351,000 compared to tax benefit
of $107,000 in the same period in 1999. The increase in tax provision primarily
reflects increased pre-tax income from the Company's Canadian operations in the
third quarter of 2000 compared to a loss in the same period in 1999 and state
income tax liability associated with the Company's U. S. operations in 2000.
The extraordinary gain in the third quarter of 2000 results from the
exchange of the Company's debentures for shares of common stock based on the
closing price of the Company's common stock on the Modified Plan confirmation
date.
The Company recorded net income of $8,700,000 or $ 0.87 per basic share for
the quarter ended September 30, 2000 compared to a net income of $4,910,000 or
$ 1.90 per basic share for the quarter ended September 30, 1999.
<PAGE>
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000
AS COMPARED TO THE NINE MONTHS ENDED SEPTEMBER 30, 1999
Oil and gas revenues for the nine months ended September 30, 2000 were
$24,103,000 compared to oil and gas revenues of $18,411,000 for the same period
in 1999. Oil and NGL production decreased 17% to 532,195 barrels and natural
gas production decreased 30% to 3,068 MMcf in the nine months ended September
30, 2000 compared to the nine months ended September 30, 1999. The lower
production levels in the nine months ended September 30, 2000 are due primarily
to the sale of properties in 1999 and first quarter 2000. Increases in
commodity prices more than offset the impact of the lower volumes.
The average realized oil and NGL price increased 79% from $14.45 per barrel in
the nine months ended September 30, 1999 to $25.84 in the nine months ended
September 30, 2000. Average realized natural gas prices increased 56% to $3.17
per Mcf during the nine months ended September 30, 2000 compared to $2.03 per
Mcf in same period a year earlier.
During the first quarter of 1999, the Company sold its mineral interests and
substantially all of its royalty interests in Texas, New Mexico and Mississippi
for approximately $6,000,000. The gain on the sale of these assets was
$5,073,000. The proceeds from asset sales in the first quarter of 1999 were
used to reduce bank indebtedness and for other corporate purposes. During the
third quarter of 1999, the Company sold domestic properties resulting in a net
gain of approximately $7.1 million with no significant sales in 2000.
Nine months ended September 30, 2000 production costs, including production
and ad valorem taxes, decreased 5% to $6,313,000 compared to $6,634,000 in the
nine months ended September 30, 1999. However, on an energy equivalent unit
basis, production costs rose 25%, resulting primarily from non-recurring
workovers and other operations.
Exploration, dry hole and lease impairment expenses incurred in the nine
months ended September 30, 1999 were $2,175,000, compared to $458,000 in the
same period in 2000. The 1999 expense is primarily from impairments of a
portion of the property held for sale and non-producing properties. Since the
Company uses the successful efforts method of accounting, exploration expenses
may vary greatly from period to period based upon the level of exploration
activity.
General and administrative expenses were $2,589,000 in the nine months ended
September 30, 2000, a 17% decrease from $3,134,000 in the prior year's period
primarily related to reductions in force through attrition and layoffs in 1999
offset by charges related to issuance of common shares to the Company's new
directors in lieu of cash compensation and implementation of FIN 44. On an
energy equivalent unit basis, costs increased 9% from the nine months ended
September 30, 1999 to the same period in 2000.
Depreciation, depletion and amortization ("DD&A") decreased 29% to $5,905,000
in the nine months ended September 30, 2000 compared to $8,370,000 in 1999
primarily related to decrease in production due to property sales. On a unit of
equivalent production basis, DD&A decreased 6% from $1.01 per Mcfe to $0.95 per
Mcfe.
Restructuring and bankruptcy costs were $5,188,000 in the nine months ended
September 30, 2000 compared to $1,280,000 in 1999. The costs for 2000 relate
primarily to charges associated with the Company's Modified Plan, which became
effective August 1, 2000 and implementation of FIN 44. The 1999 costs relate
to charges associated with the proposed restructuring as filed with the
Securities and Exchange Commission on July 21, 1999, which was not consummated.
Interest and debt expense in the nine months ended September 30, 2000 was
$1,879,000 compared to $5,273,000 in the same period in 1999. The decrease
primarily reflects the reduced indebtedness outstanding due to the application
of proceeds from property sales to debt reduction and no accrual of interest
related to subordinated debt in accordance with SOP 90-7 through the effective
date of the Modified Plan.
Tax provision in the nine months ended September 30, 2000 was $1,685,000
compared to tax benefit of $419,000 in the same period in 1999. The increase in
tax provision primarily reflects increased pre-tax income from the Company's
Canadian operations in the nine months ended September 30, 2000 compared to a
loss in the same period in 1999, state income tax liability associated with the
Company's U. S. operations in 2000 and change in the Company's tax strategy for
its Canadian operations subsequent to December 31, 1999.
<PAGE>
The extraordinary gain in the third quarter of 2000 results from the exchange
of the Company's debentures for shares of common stock based on the closing
price of the Company's common stock on the Modified Plan confirmation date.
The Company recorded income of $8,442,000, or $1.67 per basic share for the
nine months ended September 30, 2000 compared to a net income of $4,224,000 or
$1.65 per basic share for the nine months ended September 30, 1999.
<PAGE>
DEFINITIONS
As used herein:
Thousand cubic feet ("Mcf")
Million cubic feet ("MMcf")
Natural gas liquids ("NGL")
Energy Equivalents Units (1 barrel of liquids = 6 Mcf of natural gas)
Thousand cubic feet of gas equivalent ("Mcfe")
One gigajoule equals 1.055 MMBtu
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement, as amended by SFAS No. 137 and SFAS No. 138, establishes standards of
accounting for and disclosures of derivative instruments and hedging activities.
This statement requires all derivative instruments to be carried on the balance
sheet at fair value and is effective for the Company beginning January 1, 2001.
The Company is currently assessing the impact of this statement on its financial
condition and results of operations and is beginning to document and implement
new policies to insure compliance with this new statement.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation: an Interpretation of APB Opinion No.
25. Among other issues, Interpretation No. 44 clarifies the application of
Accounting Principles Board Opinion No. 25 (APB No. 25) regarding (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
options in a business combination. The provisions of Interpretation No. 44
affecting us are to be applied on a prospective basis effective July 1, 2000.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact contained in this
report, including statements in Management's Discussion and Analysis of
Financial Condition and Results of Operations, are forward-looking statements.
When used herein, the words "budget", "expressions", "anticipate", "expects",
"believes", "seeks", "goals", "plans", "strategy", "intends", or "projects" and
similar expressions are intended to identify forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those projected by such forward-looking statements and no assurance can be given
that the expectations will prove correct. In reliance upon the Private
Securities Litigation Reform Act of 1995, factors identified by the Company that
could cause the Company's future results to differ materially from the results
discussed in such forward-looking statements include the risks described under
"Risk Factors" in Item 1 of its Annual Report on Form 10-K, as amended, for the
year ended December 31, 1998. All forward-looking statements in this report are
expressly qualified in their entirety by the cautionary statements in this
paragraph and shall be deemed in the future to be modified in their entirety by
the Company's public pronouncements, including those contained in all future
reports and other documents filed by the Company with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of market risks including the potential
for adverse changes in oil and gas prices, foreign currency exchange rates and
interest rates. There have been no material changes to the Company's
disclosures about market risk from those contained in its 10-K, as amended, for
the year ended December 31, 1999. See Note 7 to the Financial Statements which
is incorporated herein by reference.
<PAGE>
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
On October 29, 1999, the Company and its Debtor Subsidiaries, excluding
Neutrino, filed voluntary petitions for relief under the Bankruptcy Code. The
filings were made in the U.S. Bankruptcy Court for the Southern District of
Texas, Victoria Division. See also Note 2 to the Financial Statements which is
incorporated herein by reference.
The Company is involved in several lawsuits arising in the ordinary course of
business. Management believes that the outcome of such proceedings will not
have a material adverse effect in the aggregate on the Company's financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Pursuant to the Modified Plan, the Company effected a 1:5 reverse stock split
of its outstanding Common Stock on the Effective Date. In lieu of issuing
fractional shares, the number of shares of common stock issuable in the reverse
stock split was rounded downward to the nearest whole share and no consideration
was paid with respect to the fractional shares. The Modified Plan provides for
the issuance of common stock to the Company's 6.875% Convertible Subordinated
Debenture holders as of the record date of July 24, 2000, that, when issued,
will represent approximately 78% of the outstanding Common Stock. In addition, a
cash payment of $5 million will be made on a pro rata basis to the Debenture
holders. The Modified Plan also provides that the holders of stock, options and
warrants outstanding prior to August 1, 2000 will receive warrants representing
approximately 3,668,000 shares of Common Stock allowing them to increase their
ownership to up to 40% of the outstanding Common Stock on a fully diluted basis.
The new warrants have a perpetual term and an exercise price of $4.21 per share,
subject to adjustment for certain customary anti-dilution stock splits, stock
dividends and other recapitalization events. The exercise price must be paid in
cash.
See also Part I - Financial Information, which is incorporated herein by
reference.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Except as disclosed in the Modified Plan, which is attached as Exhibit 2.1
through 2.4, or in Part I - Financial Information, which is incorporated herein
by reference, the Company has no information to report in this Item 3.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5: OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS:
2.1 Warrant Agreement dated as of September 29, 2000 between
Southern Mineral Corporation and American Stock Transfer &
Trust Company, as Warrant Agent.
4.1 Series B Perpetual Warrant Certificate Representing Warrants
to Purchase Shares of Common Stock, Par Value $.01 per share
dated as of September 29, 2000.
10.1 Credit Agreement, dated August 23, 2000, between Southern
Mineral Corporation, SMC Ecuador, Inc., SMC Production Co.,
BEC Energy, Inc. and Spruce Hills production Company, Inc. and
Bank One, Texas national Association for Reducing Revolving
Line of Credit up to $30,000,000.
10.2 Credit Agreement, dated August 29, 2000, between Neutrino
Resources, Inc. and Bank One Canada for U.S. $30,000,000
Revolving Reducing Credit Facility.
27.1 Financial Data Schedule
<PAGE>
REPORT ON FORM 8-K:
None.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SOUTHERN MINERAL CORPORATION
Date: November 14, 2000 By /s/ Michael E. Luttrell
-----------------------------
Michael E. Luttrell
Vice President-Finance and CFO
