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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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from to
Commission file number 0-8043
SOUTHERN MINERAL CORPORATION
(Exact name of registrant as specified in its charter.)
Nevada 36-2068676
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
1201 Louisiana, Suite 3350
Houston, Texas 77002-5609
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (713) 658-9444
Securities registered pursuant to Section 12(b) of the Act:
Name of each exchange
Title of each class on which registered
----------------------- ----------------------
None None
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01
(TITLE OF CLASS)
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 No X
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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 16, 2000, 13,014,397 shares of Common Stock were outstanding and the
aggregate market value of these shares at such date (based upon the last
reported sales price on the OTC Bulletin Board of $0.34 per share) held by non-
affiliates of the Registrant was approximately $4.425 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.
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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 wholly - owned
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 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 contemplated.
On October 29, 1999 (the "Petition Date"), the Company and its wholly-owned
subsidiaries, BEC Energy, Inc., Amerac Energy Corporation, SMC Ecuador, Inc. and
SMC Production Company (the "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
(the "Bankruptcy Court"). The Company and its Debtor Subsidiaries continue to
operate as debtors-in-possession subject to the Bankruptcy Court's supervision
and orders. The proceedings of the Company and its Debtor Subsidiaries have
been consolidated for administrative purposes. Under the provisions of the
Bankruptcy Code, the Company and Debtor Subsidiaries have the exclusive right
for 120 days following the Petition Date to file a plan of reorganization with
the Bankruptcy Court. On February 25, 2000, the Company and its Debtor
Subsidiaries filed a plan of Reorganization ("Plan") and Disclosure Statement
dated February 25, 2000 ("Disclosure Statement") extending the exclusivity
period to solicit acceptances of its Plan until April 26, 2000. The hearing to
consider the approval of the Disclosure Statement will be held on April 17,
2000.
The decision to seek protection was taken by the Company and 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
Company's lack of liquidity during the restructuring period had made the process
of working through this problem significantly more difficult.
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 and is in the process of finalizing an Amended Plan
("Amended Plan") having terms negotiated with its unsecured creditor's committee
("Committee"). On March 7, 2000, the Committee filed a motion to terminate the
Company's exclusivity period. The Committee has agreed to extend the hearing on
their motion until April 17, 2000 due to the continuing negotiations with the
Company related to the Amended Plan. The consummation of an Amended Plan is the
primary objective of the Company. The Amended Plan sets forth the means for
satisfying claims, including liabilities subject to compromise and interests in
the Company. The Amended Plan would result in, among other things, potential
substantial dilution in the future of existing shareholders as a result of the
issuance of securities to creditors or new investors. The consummation of any
plan of reorganization will require approval of the Bankruptcy Court.
The Amended Plan generally provides for the satisfaction of the Company and
Debtor Subsidiaries' claims after payment of all Bankruptcy Court approved
administrative expenses as follows:
. Domestic secured debt shall be paid in full with interest at non-default
rate and expenses of no greater that $100,000 with proceeds from a new
secured credit facility to be obtained by the Company.
. All other creditors other than domestic secured debt and amounts owed
debenture holders shall be paid in cash over periods ranging from 1 to
14 months.
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Debenture holders shall be satisfied as follows:
. Cash payment of approximately $1.4 million
. Issuance of Convertible Preferred Stock with liquidation preference of
$38.5 million.
The terms of the Preferred Stock will be generally as follows:
. Amount - $38.5 million with liquidation preference.
. Type - convertible into 78% of the fully diluted common stock
outstanding at confirmation (subject to certain limitations).
. Dividends - 7.5% per annum, accumulating semi - annually with no
dividends payable or accrued during the first two years following
confirmation and payable thereafter as permitted by new secured
credit facility when funds are legally available and as properly
declared by the Board of Directors.
. Board of Directors - two appointed by the creditor's committee, two
from existing board and fifth chosen by the four, all with two year
terms.
. Other - Subject to conversion rights, optional redemption and
voting rights provisions.
Existing common stock, option and warrants will remain outstanding with no
change in terms and conditions.
This summary is not intended to be a complete discussion of all the terms
and conditions of the Amended Plan. The general terms have been verbally
agreed to by the creditors' committee appointed by the Bankruptcy Court. The
Bankruptcy Court has not approved the adequacy of the final Amended Plan or
Disclosure Statement and the creditors' committee can only recommend the
approval of the Amended Plan by creditors of the Company and Debtor
Subsidiaries. Final approval and confirmation of the Amended Plan will not
occur until voted on by all affected parties and approval by the Bankruptcy
Court.
At this time, it is not possible to predict the outcome of the bankruptcy
proceedings, in general, or the effect on the business of the Company or on the
interests of creditors or shareholders. As a result of the bankruptcy filing,
all of the Company's and Debtor Subsidiaries, liabilities incurred prior to the
Petition Date, including certain secured debt, are subject to compromise.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. As a result of
the bankruptcy filing and related events, there is no assurance that the
carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a plan of
reorganization, or rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial doubt about the
Company's ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon confirmation of a plan of
reorganization, adequate sources of capital and the ability to sustain positive
results of operations and cash flows sufficient to continue to acquire, explore
for and develop oil and gas reserves.
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.
Management's plans are to continue to incur capital expenditures with the
goal of increasing production and reserves. The Company plans to accumulate
cash subsequent to the Petition Date and may utilize that cash, subject to
restrictions and provisions of a court-approved cash collateral order, to fund
its operations, including planned capital expenditures, during the pending
bankruptcy proceedings. The ability to incur capital expenditures, sell
properties and obtain additional financing is subject to the approval and
ongoing supervision of the Bankruptcy Court. There is no assurance that
adequate funds can be obtained on a timely basis or that the Bankruptcy Court
will approve such transactions.
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Subsequent to the Petition Date, the Company and its Debtor Subsidiaries
filed a Motion for Order Authorizing Use of Cash Collateral (the "Cash
Collateral Order"), pursuant to which the Company and its Debtor Subsidiaries
sought the use of the secured domestic banks' cash collateral in on-going
operations. On November 29, 1999, the Bankruptcy Court entered an order
granting the Company and its Debtor Subsidiaries authority to use cash
collateral in accordance with an approved budget until January 31, 2000. On
January 31, 2000, the Bankruptcy Court entered an order granting an extension of
the authority to use cash collateral in accordance with an approved budget until
April 30, 2000. To the extent that on going expenses are reflected on the court-
approved budget, the Company and its Debtor Subsidiaries are permitted to make
such expenditures. The Company has as of February 29, 2000 approximately $1.8
million in cash and cash equivalents that can be used for operations pursuant to
the terms of the Cash Collateral Order.
The Company does not presently anticipate the need for debtor-in-possession
financing in order to pursue its business strategy.
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. 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.
Neutrino's principal assets at December 31, 1999 include two core areas in
central and southern Alberta, Canada: (i) the Pine Creek Field and (ii) the
Inverness/Swan Hills Field. In late 1998, an oil discovery was made at Gift Lake
in north central Alberta. At year-end 1999, Neutrino's proved reserves totaled
3.9 million barrels of liquids (oil, condensate and natural gas liquids) and
18.8 billion cubic feet (Bcf ) of natural gas. In 1999, the Company's Canadian
production was approximately 494,000 barrels of liquids and 2,300 million cubic
feet (MMcf) of natural gas. On March 1, 2000, the Company sold its interests in
the Inverness/Swan Hills Field for approximately $9.0 million resulting in a
loss of $5.3 million which was recorded in the Company's financial statements
as an impairment charge at December 31, 1999.
Amerac Energy Corporation. In January 1998, the Company issued 3,333,333
shares of its Common Stock for all the outstanding shares of Amerac Energy
Corporation ("Amerac") in a merger effective January 28, 1998. At
January 1, 1998, Amerac had proved reserves of 32.7 billion cubic feet of gas
equivalent (Bcfe) according to a report prepared by a major independent
engineering firm. Subsequent to the acquisition, a number of non-strategic
Amerac properties were sold, and the remainder became a part of the Company's
U.S. oil and gas asset base.
Big Escambia Creek, Alabama. During 1997 and 1998, the Company acquired
working interests in the Big Escambia Creek Field and the surrounding area in a
series of six transactions. The largest acquisition was the purchase of BEC
Energy, Inc. in May 1997, for $10.6 million. Thereafter, the Company acquired
additional working interests in the area for $12.1 million.
The Big Escambia Creek Field represents the Company's largest asset in
terms of reserves with approximately 2.2 million barrels of oil equivalent
(MMboe) proved reserves as of December 31, 1999. In addition to sales of oil
and gas, the Company earned $779,000 in revenues during 1999 from the sale of
sulfur from the field.
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 . In addition, the Company is party to a 10,000 acre farm-out from Exxon,
providing further development potential to the project. One successful
development well was drilled in 1999, and the operator currently plans two
additional development locations in 2000. As a result of liquidity issues, the
Company farmed out the development well in 1999 for a 20% after payout interest.
Proved reserves at year-end 1999 were approximately 538,000 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; however, at year-end 1999 proved reserves exceeded 331,000
(barrels).
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-2000. Plans currently call for the
drilling of two exploratory wells in 2000, which are being funded out of cash
flow from the project.
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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.
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 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 well.
Yoakum Field, Texas. In late 1999, the Company participated, through a
farmout, in a successful horizontal reentry in the Edwards limestone formation.
A second horizontal well was commenced in February 2000. After evaluation of
this second well, the Company will decide whether further development is
warranted. The Company owns a 25% working interest in the first two wells and
100% working interest in approximately 2,000 adjacent acres.
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.
DIVESTITURES
During the first quarter of 1999, the Company sold its mineral interests
and substantially all of its royalty interests in Texas, Mississippi and New
Mexico for approximately $6,000,000.
In July 1999, the Company agreed to sell properties consisting of certain
proven and unproven property interests in Texas to ANR Production Company. The
properties include all of the Company's interest in the Brushy Creek and Texan
Gardens Fields in Dewitt, Lavaca and Hidalgo counties of Texas. The sale of its
interests in the Brushy Creek Field and Texan Gardens Field was closed for
$16.0 million.
Neutrino sold in the fourth quarter of 1999 its interest in two non - core
properties in Alberta, Canada for approximately $3.7 million. In March 2000,
the Neutrino sold its interests in Inverness and Swan Hills in Alberta, Canada,
for $9.0 million.
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 are included herein. 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 16, 2000, the Company's
total outstanding indebtedness was approximately $62.9 million, which is secured
by substantially all of the assets of the Company and its subsidiaries. Cash on
hand at February 29, 2000 was approximately $2.0 million. This substantial
leverage poses certain risks, including the risk that the Company may
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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 16, 2000, the Company had no borrowing availability
under its domestic credit facility and approximately $2.2 million under its
Canadian credit facility after considering the minimum working capital
requirement. The Canadian credit facility is a revolving demand loan. See Note 4
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 and are ultimately dependent on the completion of a plan
of reorganization under Chapter 11. See Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations". The accompanying
notes to consolidated financial statements of Southern Mineral Corporation and
subsidiaries are an integral part of these statements.
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
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and sales of oil and natural gas. In the past, the Company's compliance with
such laws, rules and regulations has not had a material adverse effect on its
capital expenditures, earnings or competitive position. However, the Company
cannot predict whether its future compliance with, or the effect of, such laws,
rules and regulations or those that may be enacted in the future, would have a
material adverse effect on its capital expenditures, earnings or competitive
position.
The Company's international operations are subject to certain risks,
including expropriation of assets, governmental reinterpretation of applicable
laws and contract terms, increases in or assessments of taxes and government
royalties, renegotiations of contracts with governments or customers, government
approvals of lease, permit or similar applications and of exploration and
development plans, political and economic instability, guerilla activity,
disputes between governments, payment delays, export and import restrictions,
limits on allowable levels of exploration and production, and currency
shortages, currency rate fluctuations, exchange losses and repatriation
restrictions, as well as changes in laws and policies governing operations of
companies with overseas operations, including more strict environmental
regulation. In addition, in the event of a dispute arising from foreign
operations, the Company may be subject to the exclusive jurisdiction of foreign
courts or may not be successful in subjecting foreign persons to the
jurisdiction of courts in the U. S. The 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 49% of the Company's oil and gas revenues during the year
ended December 31, 1999 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 translation losses for the Company or reduced revenues and earnings,
or both, with respect to its Canadian operations. The Company cannot predict
the effect of exchange rate fluctuations upon future operating results.
COMPETITION
There is a high degree of competition in the oil and gas exploration and
production industry. Consequently, the Company competes with many other
entities for capital and desirable potential acquisitions and exploration and
development prospects. The Company's competitors include the major integrated
oil companies, as well as numerous independent oil and gas companies and other
producers of energy sources and fuels. Many of these competitors have capital
resources and other competitive advantages much greater than that of the
Company, and may therefore be better able than the Company to withstand and
compete during adverse market conditions. The Company's ability to generate
revenues and reserves in the future will be dependent upon, among other things,
its success in competing with these competitors, as to which there can be no
assurances.
REGULATIONS
Domestic Environmental Regulation. Operations of the Company are subject to
numerous federal, state, and local laws and regulations governing the discharge
of materials into the environment or otherwise relating to environmental
protection. These laws and regulations may require the acquisition of permits
before drilling commences; restrict or prohibit the types, quantities and
concentration of substances that can be released into the environment in
connection with drilling and production activities; prohibit drilling activities
on certain lands lying within wetlands or other protected areas, impose
restrictions on the injection of liquid into subsurface formations, require
remedial measures to mitigate pollution from former operations (such as pit
closure and plugging abandoned wells), and impose substantial liabilities for
pollution resulting from drilling and production operations. Moreover, state
and federal environmental laws and regulations may become more stringent, and
public interest in the protection of the environment has increased dramatically
in recent years. These environmental laws and regulations may affect the
Company's operations and costs as a result of their effect on oil and gas
development, exploration, and production operations. It is not anticipated that
the Company will be required in the near future to expend amounts that are
material in relation to its total capital expenditure program by reason of
environmental laws and regulations, but inasmuch as such laws and regulations
are frequently changed, the Company is unable to predict the ultimate cost of
compliance.
The Company generates wastes that may be subject to the federal Resource
Conservation and Recovery Act of 1976, as amended ("RCRA") and comparable state
statutes. The U.S. Environmental Protection Agency ("EPA") and various state
agencies have limited the approved methods of disposal for certain hazardous and
non-hazardous wastes. Moreover, legislation has been proposed in Congress from
time to time that would amend RCRA to reclassify oil and gas production wastes
as "hazardous waste." If such legislation were enacted, it could have a
significant impact on the Company's operating costs, as well as on the oil and
gas industry in general.
The Company currently owns or leases numerous properties that for many
years have been used for the exploration and production of oil and gas.
Although the Company believes that it has used good operating and waste disposal
practices, prior owners and operators of these properties may not have used
similar practices, and hydrocarbons or other wastes may have been
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disposed of or released on or under the properties owned or leased by the
Company or on or under locations where such wastes have been taken for disposal.
In addition, many of these properties have been operated by third parties whose
treatment and disposal or release of hydrocarbons or other wastes was not under
the Company's control. These properties and the wastes disposed thereon may be
subject to the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended ("CERCLA" or "Superfund"), RCRA and analogous state laws
as well as state laws governing the management of oil and gas wastes. Under such
laws, the Company could be required to remove or remediate previously disposed
wastes (including wastes disposed of or released by prior owners or operators)
or property contamination (including groundwater contamination) or to perform
remedial plugging operations to prevent future contamination.
The Oil Pollution Act ("OPA") contains numerous requirements relating to
the prevention of and response to oil spills into waters of the United States.
The OPA subjects persons responsible for "offshore facilities" to strict joint
and several liability for all containment and cleanup costs and certain other
damages arising from a spill, including, but not limited to, the costs of
responding to a release of oil to surface waters. The OPA also requires owners
and operators of offshore facilities that could be the source of an oil spill
into federal or state waters, including wetlands, to post a bond, letter of
credit or other form of financial assurance in amounts ranging from $10 million
in specified state waters to $35 million in federal outer continental shelf
waters to covers costs that could be incurred by governmental authorities in
responding to an oil spill. Such financial assurances may be increased by as
much as $150 million if a formal risk assessment indicates that the increase is
warranted. Noncompliance with OPA may result in varying civil and criminal
penalties and liabilities.
OPA imposes a variety of additional requirements on "responsible parties"
for vessels or oil and gas facilities related to the prevention of oil spills
and liability for damages resulting from such spills in waters of the United
States. The "responsible party" includes the owner or operator of an onshore
facility, pipeline, or vessel or the lessee or permittee of the area in which an
offshore facility is located. OPA assigns liability to each responsible party
for oil spill removal costs and a variety of public and private damages from oil
spills. While liability limits apply in some circumstances, a party cannot take
advantage of liability limits if the spill is caused by gross negligence or
willful misconduct or resulted from violation of a federal safety, construction
or operating regulation. If a party fails to report a spill or to cooperate
fully in the cleanup, liability limits likewise do not apply. OPA establishes a
liability limit for offshore facilities (including pipelines) of all removal
costs plus $75,000,000. Few defenses exist to the liability for oil spills
imposed by OPA. OPA also imposes other requirements on facility operators, such
as the preparation of an oil spill contingency plan. Failure to comply with
ongoing requirements or inadequate cooperation in a spill event may subject a
responsible party to civil or criminal enforcement actions.
The Federal Water Pollution Control Act, as amended, commonly known as the
Clean Water Act ("CWA"), and comparable state laws and regulations require
certain owners or operators of facilities that store or otherwise handle oil,
such as the Company, to prepare and implement spill prevention, control,
countermeasure and response plans relating to the possible discharge of oil into
the surface waters. The CWA also imposes restrictions and strict controls
regarding the discharge of produced waters and other oil and gas wastes into
navigable waters. Permits must be obtained to discharge pollutants to state and
federal waters. The CWA and analogous state laws provide for civil, criminal
and administrative penalties for any unauthorized discharges of oil and other
hazardous substances in reportable quantities and, along with the OPA, may
impose substantial potential liability for the costs of removal, remediation and
damages. State water discharge regulations and the federal ("NPDES") permits
prohibit, or severely restrict the discharge of produced water and sand, and
some other substances related to the oil and gas industry, to coastal waters.
Although the costs to comply with zero discharge mandates under federal or state
law may be significant, the entire industry has experienced or is experiencing
similar costs and the Company believes that these costs will not have a material
adverse impact on the Company's financial condition and results of operations.
Some oil and gas exploration 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
8
<PAGE>
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.
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.
9
<PAGE>
CUSTOMERS
Oil and gas hydrocarbons are the principal products produced by the Company
and sales of such products are usually made in the spot market or on such other
bases that may be impacted by the effect of changes in current market prices.
Future oil and natural gas prices may be affected by a variety of factors
including, but not limited to, supply and demand, world and regional market
conditions, political conditions and seasonal factors, all of which the Company
is unable to control or accurately predict. In the past, there have not been,
and management does not expect there to be in the near term, any material
adverse effects on the Company's business due to seasonal aspects. Backlog is
not a factor in the Company's operations. The Company is engaged in a single
industry segment: the acquisition, exploration, development, and production of
oil and gas reserves, all in the United States, Ecuador and Canada. Sales of oil
and gas to customers accounting for 10% or more of revenues were as follows (in
thousands):
Customer 1999 1998 1997
- -------- ------ ------ ------
G C Marketing Company $ - $ - $2,267
Damsco Distribution 4,117 3,747 1,656
Diasu Oil & Gas Co., Inc. - - 1,631
Global Petroleum Marketing 2,931 - -
Canpet Energy Group Inc. 2,793 - -
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 16, 2000, the Company employed 20 full-time persons and 8
consultants. The Company is not subject to a collective bargaining agreement and
believes that its relations with its employees and consultants are good.
10
<PAGE>
Item 2. Description of Properties
GENERAL
At December 31, 1999, the Company held working interests in 431 gross wells
in the continental United States, 863 in Ecuador and 1,359 in Canada.
Approximately 45.4% of the Company's proved reserves are oil and liquids, and
approximately 54.6% 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, 1997 and 1999 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, 1996 and 1997. Chapman Petroleum Engineering Ltd. prepared most of
the Canadian reserve estimates as of December 31, 1998 and 1999, while Gilbert
Laustsen Jung Associates Ltd. prepared the remaining Canadian reserve estimates
as of such dates. The year-end estimates as of December 31, 1999 were negatively
affected relative to amounts previously reported due to downward revisions of
previous estimates. The downward revisions, totaling 492,816 BOE, related to the
Company's properties in the U.S. totaling 368,500 BOE and in Canada totaling
124,316 BOE. The U.S. revisions resulted from differences in interpretation
between the current and predecessor independent engineering firms. The Canadian
revisions resulted primarily from decreased production performance in 1999.
These differences, many of which relate to classification of reserves within the
different oil and gas reserve categories (i.e. proved, probable and possible)
are due to the numerous engineering, geological and operational assumptions that
generally are derived from limited data. 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 were not economic as of December 31, 1998 which
resulted in the elimination of all units. The Company's U.S. oil reserves
(including, oil, condensate and natural gas liquids) have been prepared using
average oil prices received by the Company of $24.31, $9.67 and $16.91 per
barrel and gas reserves were prepared using average prices received by the
Company of $2.12, $2.17 and $2.20 per Mcf, as of December 31, 1999, 1998 and
1997, respectively. The Canadian reserves have been prepared using average oil
prices received by the Company of $22.34, $8.71 and $15.30 per barrel and
average natural gas prices of $2.02, $1.72 and $1.34 per Mcf, as of December 31,
1999, 1998 and 1997, respectively. Ecuador reserves were prepared using an
average oil price of $24.16 and $18.00 per barrel as of December 31, 1999 and
1997, respectively. 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 Gas Oil Gas Oil Gas
PROVED RESERVES (Bbls) (Mcf) Oil (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
- --------------- --------- ---------- -------- -------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Extensions, discoveries
and additions 131,397 1,110,740 - - - - 131,397 1,110,740
Revisions of previous
estimates 339,573 5,186,006 367,202 - 707,794 (5,654,126) 1,414,569 (468,120)
Purchase and sale of
minerals in place (net) (175,573) (18,101,385) - - (293,444) (512,147) (469,017) (18,613,532)
Production (326,584) (3,095,456) (35,473) - (494,350) (2,299,527) (856,407) (5,394,983)
--------- ----------- -------- ---- --------- ---------- --------- -----------
Balance, December 31, 1999 2,960,728 33,490,082 331,729 - 3,952,000 18,818,000 7,244,457 52,308,082
========= =========== ======== ==== ========= ========== ========= ===========
PROVED DEVELOPED RESERVES
- -------------------------
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
Balance, December 31, 1999 2,668,623 25,940,224 331,729 - 3,559,476 18,552,200 6,559,828 44,492,424
</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: 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Oil and NGLs (Bbls)
U.S. 326,584 406,920 186,759
Ecuador 35,473 28,592 23,966
Canada 494,350 321,040 93,486
---------- ---------- ----------
Total 856,407 756,552 304,211
========== ========== ==========
Gas (Mcf)
U.S. 3,095,456 4,219,528 2,554,072
Ecuador --- --- ---
Canada 2,299,527 2,212,983 942,625
---------- ---------- ----------
Total 5,394,983 6,432,511 3,496,697
========== ========== ==========
Average sales prices:
Oil and NGLs ($ per Bbl)
U.S. $ 15.30 $ 12.11 $ 17.73
Ecuador 17.60 10.15 16.10
Canada 15.28 10.51 17.58
---------- ---------- ----------
Average $ 15.39 $ 11.36 $ 17.55
========== ========== ==========
Gas ($ per Mcf)
U.S. $ 2.21 $ 2.13 $ 2.49
Canada 1.90 1.42 1.45
---------- ---------- ----------
Average $ 2.08 $ 1.89 $ 2.21
========== ========== ==========
Average costs ($ per Mcfe)
Operating expenses and production taxes $ 0.84 $ 0.78 $ 0.69
Depreciation, depletion and amortization 1.15 0.96 0.79
</TABLE>
PRODUCTIVE WELLS STATISTICS
The following table sets forth information concerning productive wells in
which the Company has an interest as of December 31, 1999. In the following
data "Gross" refers to the total wells in which the Company has a working
interest and "Net" refers to gross wells multiplied by the percentage of the
working interest owned by the Company.
<TABLE>
<CAPTION>
OIL GAS TOTAL
------------ ------------ -------------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Canada 1,111 84.0 248 10.0 1,359 94.0
Ecuador 863 86.3 -- -- 863 86.3
U. S. 156 39.9 275 26.8 431 66.7
----- ----- --- ---- ----- ------
Total 2,130 210.2 523 36.8 2,653 247.0
===== ===== === ==== ===== ======
</TABLE>
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:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ----------------- ------------------
GROSS NET GROSS NET GROSS NET
----- ----- ------- ------ ----- -----
<S> <C> <C> <C> <C> <C> <C>
Exploratory:
Oil - - 2 1.002 0 .000
Gas 8 2.620 1 .250 2 .489
Dry 1 .500 6 2.586 3 .495
DEVELOPMENT:
Oil 11 .457 11 .970 34 1.282
Gas 13 .426 26 2.588 4 .116
Dry - - 5 2.135 8 2.246
TOTAL:
Productive 32 3.503 40 4.810 40 1.887
Dry 1 .500 11 4.721 11 2.741
</TABLE>
DEVELOPED AND UNDEVELOPED LEASEHOLD ACREAGE
The following table shows the Company's leasehold interest in developed and
undeveloped oil and gas acreage as of December 31, 1999. In the following data
"Gross" refers to the total acres in which the Company has a working interest
and "Net" refers to gross acres multiplied by the percentage of the working
interest owned by the Company.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
ACREAGE ACREAGE
----------------- ----------------
GROSS NET GROSS NET
------- ------- ------- ------
<S> <C> <C> <C> <C>
UNITED STATES
Alabama 11,539 2,345 - -
Arkansas - - 1,799 450
Colorado 1,920 21 - -
Kansas 1,360 53 - -
Louisiana 34,728 2,780 392 131
Mississippi 2,880 85 - -
Montana 160 9 - -
New Mexico 18,720 227 - -
North Dakota 800 48 - -
Oklahoma 13,380 578 - -
Oregon 80 80 - -
Texas 80,125 9,072 17,372 13,541
Utah 5,120 228 20,880 4,391
Wyoming 70,699 811 - -
------- ------ ------ ------
Total-United States 241,511 16,337 40,443 18,513
======= ====== ====== ======
CANADA
Alberta 189,744 37,751 133,024 27,957
Saskatchewan 2,915 352 5,347 5,188
British Columbia 7,415 547 12,046 813
Manitoba 2,220 2,060 560 0
------- ------ ------- ------
Total-Canada 202,294 40,710 150,977 33,958
ECUADOR 15,400 1,540 279,819 27,982
------- ------ ------- ------
Total Leasehold Acreage 459,205 58,587 471,239 80,453
======= ====== ======= ======
</TABLE>
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>
ITEM 3. LEGAL PROCEEDINGS
On September 1999, Neutrino Resources, Inc ("Neutrino") was served with a
lawsuit in the Court of Queen's Bench of Alberta, Judicial District of Calgary,
Canada. The plaintiffs are two former executive officers of Neutrino and
directors of Southern Mineral Corporation. The suit alleged wrongful termination
and breach of Employment Contracts and sought damage of approximately CDN
$1,000,000 (US$670,000). In March 2000, Neutrino settled this suit for an
immaterial amount.
On October 29, 1999 (the "Petition Date"), the Company and its wholly-owned
subsidiaries, BEC Energy, Inc., Amerac Energy Corporation, SMC Ecuador, Inc. and
SMC Production Company (the "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 (the
"Bankruptcy Court"). The Company and its Debtor Subsidiaries continue to operate
as debtors-in-possession subject to the Bankruptcy Court's supervision and
orders. The proceedings of the Company and its Debtor Subsidiaries have been
consolidated for administrative purposes. Under the provisions of the Bankruptcy
Code, the Company and Debtor Subsidiaries have the exclusive right for 120 days
following the Petition Date to file a plan of reorganization with the Bankruptcy
Court. On February 25, 2000, the Company and its Debtor Subsidiaries filed a
plan of Reorganization ("Plan") and Disclosure Statement dated February 25, 2000
("Disclosure Statement") extending the exclusivity period to solicit acceptances
of its Plan until April 26, 2000. The hearing to consider the approval of the
Disclosure Statement will be held on April 17, 2000. See Part I, Item 1.
Description of Business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matters were submitted to a vote of the security holders during the
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 has been quoted on the OTC Bulletin Board under the symbol
"SMINQ.OB" since August 4, 1999 and is currently quoted under the symbol
"SMINE.OB". From July 23, 1997 to August 3, 1999, the Common Stock was quoted on
the Nasdaq National Market under the symbol "SMINQ". From March 10, 1995 until
July 22, 1997, the Common Stock was quoted on the Nasdaq Small Cap Market under
the symbol "SMIN". 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. The Company
attended a hearing on May 27, 1999 to present a plan to the Nasdaq National
Market for compliance. Subsequently, the Company was notified on August 4,
1999, that its securities, including its convertible subordinated debentures,
were delisted from the Nasdaq National Market and Small Cap Market. The Company
believes that 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
plans to pursue the relisting of its Common Stock after confirmation of its Plan
of reorganization under the Bankruptcy Code. The Company cannot assure that it
will be successful in its efforts to regain its Nasdaq listing in the future.
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:
1999 1998
--------------- ----------------
High Low High Low
------ ----- ------- ------
First Quarter $1.00 $0.25 $5.06 $3.19
Second Quarter 0.59 0.31 4.00 3.31
Third Quarter 0.53 0.22 3.38 2.00
Fourth Quarter 0.34 0.09 2.19 .44
----- ----- ----- -----
For the Year $1.00 $0.09 $5.06 $ .44
===== ===== ===== =====
On March 16, 2000, the closing sale price of the Company's Common Stock, as
reported by the OTC Bulletin Board was $0.34 per share.
The Company did not declare any dividends in fiscal 1999, 1998 or 1997.
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 and would require Bankruptcy Court
approval while the Company is in bankruptcy. See Item 7. "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
There were 977 stockholders of record on March 16, 2000.
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
15
<PAGE>
of each option granted in the 1996 SOP was the market price for the Common Stock
on the date of grant, determined by reference to the most recent closing price
thereof reported on the Nasdaq Systems.
1997 Stock Option Plan. During 1999, 1998 and 1997, the Company granted
options exercisable for 122,500, 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 under the
1997 SOP was 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. In conjunction with
severance arrangements with the certain officers and employees in 1999, the
Company repriced 305,000 shares at the then current market price of $0.28,
granted full vesting and extended the expiration date to August 31, 2001.
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 1999, 1998 and 1997, the Company
granted options exercisable for 5,686, 5,211 and 6,297 shares of Common Stock,
respectively, under the Company's 1996 Employee Stock Purchase Plan (the "SPP").
The SPP is intended to constitute an "employee stock purchase plan" within the
meaning of Section 423 of the Internal Revenue Code of 1986, as amended.
Pursuant to the SPP, the Company may grant options to purchase up to 300,000
shares (subject to customary anti-dilution adjustments) of its Common Stock to
employees of the Company. Options may be granted on January 1 and July 1 of
each year to eligible employees who elect to participate in the SPP. The term
of each option is six months from the date of grant. The number of options
granted to each participant equals the quotient of (i) the total payroll
deductions authorized by the participant during the applicable option period,
divided by (ii) 85% of the fair market value of the Common Stock as of the date
of grant of such option. The exercise price of options under SPP is 85% of the
fair market value of the Common Stock as of the date of grant or the date of
exercise of such option, whichever is less, determined by reference to the most
recent closing price reported on the Nasdaq Systems.
The Company's Form S-8 Registration Statement generally covers the issuance
and resale (subject, in the case of affiliates, to Rule 144 under the Securities
Act of 1933) of Common Stock issuable upon exercise of options under the 1996
and 1997 SOPs and SPP.
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.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
As of December 31,
------------------------------------------------------
ASSETS 1999 1998 1997 1996 1995
---------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C>
Current assets $ 16,424 $ 7,776 $13,455 $ 2,918 $ 2,071
Property and equipment-net 77,965 114,187 42,293 20,599 18,042
Oil and gas properties held for sale and other 345 6,327 6,127 869 1,554
-------- -------- ------- ------- -------
$ 94,734 $128,290 $61,875 $24,386 $21,667
======== ======== ======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to compromise $ 18,201 $ - $ - $ - $ -
Liabilities subject to compromise 61,269 - - - -
Current liabilities - 41,914 2,956 683 5,960
Deferred income taxes 4,240 7,279 1,039 1,169 606
Long-term debt - 64,370 41,400 3,900 9,920
Stockholders' equity 11,024 14,727 16,480 18,634 5,181
-------- -------- ------- ------- -------
$ 94,734 $128,290 $61,875 $24,386 $21,667
======== ======== ======= ======= =======
WORKING CAPITAL $(63,046) $(34,138) $10,499 $ 2,235 $(3,889)
======== ======== ======= ======= =======
</TABLE>
COMPARATIVE CONSOLIDATED OPERATING DATA
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
Year Ended December 31,
------------------------------------------------------
1999 1998 1997 1996 1995
--------- --------- --------- -------- -------
<S> <C> <C> <C> <C> <C>
REVENUES
Oil and gas $25,865 $ 21,722 $13,790 $11,780 $2,044
Gains (losses) on sales of properties 11,976 (250) 413 453 170
------- -------- ------- ------- ------
37,841 21,472 14,203 12,233 2,214
EXPENSES 40,701 35,624 14,815 8,164 2,488
------- -------- ------- ------- ------
Income (loss) from operations (2,860) (14,152) (612) 4,069 (274)
Other income, expenses and deductions
Interest and other income 456 330 328 286 146
Interest and debt expense (6,236) (5,362) (1,591) (1,242) -
------- -------- ------- ------- ------
Income (loss) before income taxes (8,640) (19,184) (1,875) 3,113 (128)
Provision (benefit) for income taxes (2,882) (2,775) 174 679 9
------- -------- ------- ------- ------
NET INCOME (LOSS) $(5,758) $(16,409) $(2,049) $ 2,434 $ (137)
======= ======== ======= ======= ======
EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
Basic $(0.45) $(1.32) $(.22) $.37 $(0.02)
======= ======== ======= ======= ======
Diluted $(0.45) $(1.32) $(.22) $.34 $(0.02)
------- ======== ======= ======= ======
Weighted average number of shares-basic 12,838 12,422 9,109 6,621 5,701
======= ======== ======= ======= ======
Weighted average number of shares-diluted 12,838 12,422 9,109 7,114 5,701
======= ======== ======= ======= ======
</TABLE>
Note: In 1999, 1998 and 1997, the Company recognized a pre-tax non-cash expense
of $8,686, $9,344 and $2,838, 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, 1999 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 1998
Oil and gas revenues for 1999, were $25,865,000 up 19% compared to oil and
gas revenues for the same period in 1998 of $21,722,000. The increase in
revenues reflects higher production volumes of crude oil and natural gas liquids
("NGL's") and increased natural gas and crude oil prices. The higher production
volumes are primarily the result of the inclusion of Neutrino for an entire year
in 1999 compared to 6 months of 1998 offset by decreased production related to
properties sold during 1999.
Natural gas production for 1999 was 5,395 million cubic feet ("MMcf"), a
16% decrease as compared to production for the same period in 1998 of 6,433
MMcf. The Company's crude oil and NGL production for 1999, increased 13% to
856,407 barrels as compared to 756,552 barrels for the same period in 1998.
Production levels for 1999, when compared to 1998, reflect increased production
from Neutrino beginning in July 1998, offset by decreased production related to
property sales from Neutrino in the fourth quarter of 1998, the domestic mineral
and royalty interests in the first quarter of 1999 and the Brushy Creek and
Texan Gardens Field in the third quarter of 1999.
Average realized natural gas prices for 1999 increased 10% to $2.08 per
thousand cubic feet ("Mcf") compared to $1.89 per Mcf in the same period of
1998. During 1999, crude oil prices increased 35% to $15.39 per barrel,
compared to $11.36 per barrel in the same period in 1998.
Gain on sale of properties in 1999 was $11,976,000 compared to a loss of
$250,000 in 1998. The 1999 gain is primarily the result of sales of the
Company's mineral interests in the first quarter and Brushy Creek and Texan
Garden Fields in the third quarter of 1999.
Production costs, including production and ad valorem taxes, increased in
1999 to $8,898,000, up 4% from $8,518,000 in the same period in 1998, due in
part to the acquisition of Neutrino, which occurred in July 1998. On a cost per
Mcfe basis, production costs 1999 increased to $0.84 per Mcfe, or up 8% from
$0.78 per Mcfe in 1998.
Exploration, dry hole and lease impairment expenses decreased for 1999 to
$2,501,000, compared to $3,635,000 in the same period of 1998. The 1999 expense
is primarily from impairments of properties held for sale and non-producing
properties. The amount recorded for 1998 was due primarily to a dry hole
drilled in Lafourche Parish, Louisiana in which the Company had a 93% working
interest. 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.
Depreciation, depletion and amortization ("DD&A") expense for 1999
increased to $12,302,000, up 17% from $10,505,000 in 1998. 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 period to period because of
revisions to reserve estimates, production rates and other factors. DD&A
expense increased in 1999 to $1.15 per Mcfe, up 20% from $0.96 per Mcfe in 1998.
The increase reflects inclusion of Neutrino beginning in July 1998 at a higher
per unit average depletion cost and the sales of primarily natural gas
properties of Neutrino in the fourth quarter of 1998, the domestic mineral and
royalty interests in the first quarter of 1999 and the Brushy Creek Field in the
third quarter of 1999, all with lower per unit average depletion costs.
General and administrative expenses increased to $3,926,000 in 1999, up 8%
from $3,622,000 in 1998. However, on a cost per Mcfe basis, general and
administrative expenses increased 12% for 1999 to $0.37 per Mcfe from $0.33 per
Mcfe in the same period of 1998. The increase in general and administrative
expenses for 1999, when compared to 1998, is not as great as would have been
expected due to the full year effect of Neutrino. Significant reductions in work
force through attrition and layoffs have occurred in 1999. In 1998 the Company
accrued and paid bonuses of $360,000 with no corresponding amounts in 1999.
Impairment of proved oil and gas properties decreased to $8,686,000, down
7% compared to $9,344,000 in 1998. The 1999 impairments were primarily
$3,386,000 to reflect revision of previous estimates and $5,300,000 to adjust
Neutrino's cost basis in Inverness and Swan Hills Fields to their net realized
value based on the estimated sales price received in 2000. Significant declines
in world oil prices during 1998 resulted in a writedown in the book value of a
number of proved oil and gas properties during the fourth quarter of 1998.
Restructuring and bankruptcy costs were $4,388,000 in 1999 compared to no
such costs in 1998. 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,
the estimated costs associated with the restructuring of approximately
$1,372,000 were expensed during the third and fourth quarters of 1999. Since the
Company's filing for bankruptcy on October 29, 1999, it has incurred
approximately $553,000 related to the bankruptcy. In addition $2,463,000
capitalized as other assets for fees and expenses related to securing the
domestic bank debt and convertible subordinated debentures were expensed during
the fourth quarter of 1999 pursuant to Statement of Position 90-7 "Financial
Reporting by Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7").
18
<PAGE>
Interest and debt expense in 1999 was $6,236,000, compared to $5,362,000 in
the same period in 1998. Interest expense increased as a result of an increase
in the outstanding bank debt incurred and assumed with Neutrino in July 1998 and
because of increased rates of interest charged by the Company's domestic and
Canadian banks. Subsequent to the filing of bankruptcy, no additional interest
was accrued in accordance with SOP 90-7. The additional interest from October
29, 1999 to December 31, 1999 would have been $474,375.
Tax benefits in 1999 and 1998 were $2,882,000 and $2,775,000, respectively,
resulting from pre-tax loss from the Company's Canadian operations.
As a result of the above items, the Company reported a net loss in 1999 of
$5,758,000 or $0.45 per basic share, compared to a loss of $16,409,000, or $1.32
per basic share in 1998.
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1998 AS COMPARED TO THE
YEAR ENDED DECEMBER 31, 1997
Oil and gas revenues for 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 MMcf, an 84% increase compared to
1997 production of 3,497 MMcf. The Company's crude oil 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 $11.36 per barrel compared to $17.55 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.
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.
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.
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.
Impairment of proved oil and gas properties increased to $9,344,000, up
229% compared to $2,838,000 in 1998. 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.
19
<PAGE>
A tax benefit of $2,775,000 was recognized in 1998, compared to a tax
expense of $174,000 in 1997. The year to year change is due primarily to the tax
effects of the Canadian portion of the 1998 impairment of proved properties
recorded during the fourth quarter of 1998.
The Company reported a loss in 1998 of $16,409,000 or $1.32 per basic
share, compared to a loss of $2,049,000, or $0.22 per basic share in 1997.
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 years
ended December 31, 1999, 1998 and 1997 was $3,396,000, $6,670,000 and
$6,808,000, respectively. Additional cash in the amounts of $26,119,000
$11,508,000 and $1,063,000 were received in 1999, 1998 and 1997, respectively,
from the sale of assets.
On October 29, 1999 (the "Petition Date"), the Company and its wholly-owned
subsidiaries, BEC Energy, Inc., Amerac Energy Corporation, SMC Ecuador, Inc. and
SMC Production Company (the "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
(the "Bankruptcy Court"). The Company and its Debtor Subsidiaries continue to
operate as debtors-in-possession subject to the Bankruptcy Court's supervision
and orders. The proceedings of the Company and its Debtor Subsidiaries have
been consolidated for administrative purposes. Under the provisions of the
Bankruptcy Code, the Company and Debtor Subsidiaries have the exclusive right
for 120 days following the Petition Date to file a plan of reorganization with
the Bankruptcy Court. On February 25, 2000, the Company and its Debtor
Subsidiaries filed a plan of Reorganization ("Plan") and Disclosure Statement
dated February 25, 2000 ("Disclosure Statement") extending the exclusivity
period to solicit acceptances of its Plan until April 26, 2000. The hearing to
consider the approval of the Disclosure Statement will be held on April 17,
2000.
The decision to seek protection was taken by the Company and 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
Company's lack of liquidity during the restructuring period had made the process
of working through this problem significantly more difficult.
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 and is in the process of finalizing an Amended Plan
("Amended Plan") having terms negotiated with its unsecured creditor's committee
("Committee"). On March 7, 2000, the Committee filed a motion to terminate the
Company's exclusivity period. The Committee has agreed to extend the hearing on
their motion until April 17, 2000 due to the continuing negotiations with the
Company related to the Amended Plan. The consummation of an Amended Plan is the
primary objective of the Company. The Amended Plan sets forth the means for
satisfying claims, including liabilities subject to compromise and interests in
the Company. The Amended Plan would result in, among other things, potential
substantial dilution in the future of existing shareholders as a result of the
issuance of securities to creditors or new investors. The consummation of any
plan of reorganization will require approval of the Bankruptcy Court.
The Amended Plan generally provides for the satisfaction of the Company and
Debtor Subsidiaries' claims after payment of all Bankruptcy Court approved
administrative expenses as follows:
. Domestic secured debt shall be paid in full with interest at non-default
rate and expenses of no greater that $100,000 with proceeds from a new
secured credit facility to be obtained by the Company.
. All other creditors other than domestic secured debt and amounts owed
debenture holders shall be paid in cash over periods ranging from 1 to
14 months.
Debenture holders shall be satisfied as follows:
. Cash payment of approximately $1.4 million
. Issuance of Convertible Preferred Stock with liquidation preference of
$38.5 million.
The terms of the Preferred Stock will be generally as follows:
. Amount - $38.5 million with liquidation preference.
. Type - convertible into 78% of the fully diluted common stock
outstanding at confirmation (subject to certain limitations).
. Dividends - 7.5% per annum, accumulating semi - annually with no
dividends payable or accrued during the first two years following
confirmation and payable thereafter as permitted by new secured
credit facility when funds are legally available and as properly
declared by the Board of Directors.
. Board of Directors - two appointed by the creditor's committee, two
from existing board and fifth chosen by the four, all with two year
terms.
. Other - Subject to conversion rights, optional redemption and
voting rights provisions.
Existing common stock, option and warrants will remain outstanding with no
change in terms and conditions.
This summary is not intended to be a complete discussion of all the terms
and conditions of the Amended Plan. The general terms have been verbally
agreed to by the creditors' committee appointed by the Bankruptcy Court. The
Bankruptcy Court has not approved the adequacy of the final Amended Plan or
Disclosure Statement and the creditors' committee can only recommend the
approval of the Amended Plan by creditors of the Company and Debtor
Subsidiaries. Final approval and confirmation of the Amended Plan will not
occur until voted on by all affected parties and approval by the Bankruptcy
Court.
At this time, it is not possible to predict the outcome of the bankruptcy
proceedings, in general, or the effect on the business of the Company or on the
interests of creditors or shareholders. As a result of the bankruptcy filing,
all of the Company's and Debtor Subsidiaries, liabilities incurred prior to the
Petition Date, including certain secured debt, are subject to compromise.
The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. As a result of
the bankruptcy filing and related events, there is no assurance that the
carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a plan of
reorganization, or rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial doubt about the
Company's ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon confirmation of a plan of
reorganization, adequate sources of capital and the ability to sustain positive
results of operations and cash flows sufficient to continue to acquire, explore
for and develop oil and gas reserves.
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.
Management's plans are to continue to incur capital expenditures with the
goal of increasing production and reserves. The Company plans to accumulate
cash subsequent to the Petition Date and may utilize that cash, subject to
restrictions and provisions of a court-approved cash collateral order, to fund
its operations, including planned capital expenditures, during the pending
bankruptcy proceedings. The ability to incur capital expenditures, sell
properties and obtain additional financing is subject to the approval and
ongoing supervision of the Bankruptcy Court. There is no assurance that
adequate funds can be obtained on a timely basis or that the Bankruptcy Court
will approve such transactions.
On March 29, 1999, the Company entered into a restructured and amended
credit facility ("Amended Credit Facility") with its domestic lenders. The
Amended Credit Facility provided for a borrowing base of $19,353,000, plus a
principal tranche of $12,500,000 ("Tranche A") that was due to mature on
September 1, 1999. The borrowing base was reduced to $18,830,000 on April 1,
1999, reflecting the $6,000,000 received in March and April 1999, for the sale
of the Company's mineral interests in Texas, Mississippi and New Mexico. In July
and August of 1999 the sale of the Company's interests in the Brushy Creek and
Texan Gardens Fields in Texas were closed for $15.2 million and $0.8 million,
respectively. The majority of the net proceeds were applied to the Company's
Amended Credit Facility with $5.0 million being applied to the borrowing base
facility and $9.6 million to the Tranche A obligation. In September and October
1999, the Amended Credit Facility was further amended to extend the ultimate due
date of the Tranche A principal to October 28, 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. As of December 31, 1998, the Company was
in compliance with the terms and conditions of the Amended Credit Facility, as
revised. Due to the bankruptcy filings on October 29, 1999, the Company is no
longer in compliance with certain provisions of the Amended Credit Agreement. As
of December 31, 1999, the entire amount outstanding under the Amended Credit
Facility was included in Liabilities Subject to Compromise on the Consolidated
Balance Sheet. See Note 2 - Bankruptcy Filing.
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 covenants relating to the financial condition of the Company including
tangible net worth and cash flow coverage covenants. On December 31, 1999,
outstanding borrowings under the Amended Credit Facility were $16,109,000 with
no further borrowing availability. Outstanding principal under the Amended
Credit Facility bears interest at the Bank Index Rate (8.5% at December 31,
1999) to the extent of the borrowing base utilized and at Bank Index Rate plus
1% on Tranche A principal.
The working capital and net cash balances available at December 31, 1999
may be used to cover some of the liabilities subject to compromise pursuant to a
final plan of reorganization. The Company's capital expenditures for 2000 will
remain subject to the approval and supervision of the Bankruptcy Court until
plan confirmation and may vary significantly due to a variety of factors,
including drilling results, oil and gas prices, industry conditions and outlook,
future acquisitions of properties, the availability of capital and the consent
of the Company's creditors.
Effective June 25, 1998, Neutrino entered into a new Cdn $40,000,000 (US
$27,155,000) 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, 1999, the Canadian Bank prime rate was 6.5% and
the Bankers Acceptance Rate for 30-day maturities was 5.25%. Effective July 15,
1999, the borrowing base under the Canadian Credit Facility was reduced to Cdn
$30,500,000 (US $20,706,000) and the interest rate was increased to prime plus
1% 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, 1999, outstanding borrowings
under the Canadian Credit Facility were Cdn $20,040,057 (US $13,876,234). On
March 3, 2000 subsequent to the sale of certain oil and gas properties, the
borrowing base under the Canadian Credit Facility was reduced to Cdn $11,050,000
(US $7,624,500). The Canadian Credit Facility contains certain covenants
relating to the financial condition of Neutrino including, at each quarter's
end, maintenance of a positive working capital through maturity. The borrowing
base under the Canadian Credit Facility is subject to semi-annual
redeterminations. As of December 31, 1999, 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.
20
<PAGE>
In the first quarter of 1999, oil and natural gas prices continued to be weak,
but began to strengthen early in the second quarter. Judgments by the Canadian
lender regarding the level of future oil and natural gas prices, among other
things, will impact their borrowing base determinations for the Company's
Canadian Credit Facilities.
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 significantly impaired its ability to meet its liquidity needs.
The Company's Amended Credit Facility contained provisions whereby default under
the Company's Canadian Credit Facility or the 6.875% Convertible Subordinated
Debentures or the filing of a bankruptcy petition create a default condition
under the Amended Credit Facility. In addition, the holders of Convertible
Subordinated Debentures have acceleration rights if the Company is in payment
default under either its Amended Credit Facility or Canadian Credit Facility or
has filed a petition under the Bankruptcy Act. Due to the bankruptcy filing on
October 29, 1999, the Company is in default under its Amended Credit Facility,
the Canadian Credit Facility and the 6.875% Convertible Subordinated Debentures.
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 continues to disclose
their substantial doubt about the Company's ability to continue as a going
concern.
The Company was notified that effective with the close of business on
August 4, 1999, its Common Stock was delisted from the Nasdaq National Market
and its Convertible Subordinated Debentures were delisted from the NASDAQ Small
Cap Market. This action was attributable to its inability to satisfy the Nasdaq
National Market maintenance standards for the continued listing of its Common
Stock. Following the delisting, the Company's Common Stock has continued to be
quoted and traded on the OTC Bulletin Board under the symbol, SMINQ.OB and is
currently SMINE.OB. Due to its Chapter 11 proceedings, the Company did not
pursue a review of the delisting decision by the Nasdaq Review Council. The
Company believes a permanent delisting of its Common Stock and Convertible
Subordinated Debentures would impair the liquidity of the Common Stock,
Convertible Subordinated Debentures and capital raising flexibility of the
Company. The Company cannot assure that it will be successful in obtaining
relisting of its securities once it emerges from Bankruptcy proceedings.
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 a lower-priced securities may also represent a higher percentage of
the price than the brokerage commission on a higher-priced issue.
21
<PAGE>
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 in 1999
decreased 97% compared to $89,877,000 for 1998 to $2,954,000, and was 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, was not
available.
The Company's ratio of debt to total capitalization was 87% at December 31,
1999, compared to 87% at December 31, 1998. 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 3.7 to 1 in 1999 compared to 1.74 to 1 in 1998.
The Company did not declare dividends in fiscal 1999, 1998 and 1997. The
Company does not expect, under its existing capital structure, to be able to pay
dividends for the foreseeable future. Payment of dividends is currently
prohibited by the terms of the Company's Amended Credit Facility and would
require approval from the Bankruptcy Court.
YEAR 2000 ISSUES
In 1998, the Company initiated a program to prepare the Company's process
controls and business computer systems for the "Year 2000" issue. Process
controls are the automated equipment including hardware and software systems
which run operational activities. Business computer systems are the computer
hardware and software used by the Company. The Company did not encounter any
critical system application or hardware failures during the date roll over to
the Year 2000, and has not experienced any disruptions of business activities as
a result of Year 2000 failures encountered by customers, suppliers and service
providers.
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 2001. 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 and oil price swaps
and collars on a limited basis to hedge a portion of its exposure to commodity
price fluctuations. The effect of price swaps and collars is to fix the price
for a specific quantity of gas or oil for a specific time and collars are to
secure a maximum and minimum price for a specific time. The Company uses the
deferral method of accounting for its natural gas and oil price swaps and
collars and therefore offsets any gain or loss on the swap collars contracts
with the realized prices for its production. At December 31, 1999, the Company
had no fixed natural gas or oil swaps or collars. Upon filing of bankruptcy, the
then outstanding third party hedges were cancelled by the counter-parties.
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. 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, 1999 as it relates to interest rate type and maturity. Given the
amount of the Company's variable rate indebtedness at December 31, 1999, 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 $140,000.
<TABLE>
<CAPTION>
2000 2001 Thereafter Total Fair Value
---- ---- ---------- ----- ----------
<S> <C> <C> <C> <C> <C>
Variable Rate
Domestic Bank Debt $16,108,455 - - $16,108,455 $16,108,455
Canadian Bank Debt 28,234 - - 28,234 28,234
----------- ----------- -----------
16,136,689 16,136,689 16,136,689
Average Rate 8.68% 8.68%
Fixed Rate
6.875% Convertible
Debentures $41,400,000 $41,400,000 $14,076,000
Canadian Bank Debt $10,386,000 $3,462,000 - 13,848,000 13,848,000
----------- ---------- ----------- ----------- -----------
$10,386,000 $3,462,000 $41,400,000 $55,248,000 $27,924,000
Average Rate 5.34% 5.0% 6.875% 6.47%
</TABLE>
The Company's 6.875% Convertible Debentures traded on the OTC Bulletin
Board under the symbol "SMING" until August 1999 and there is currently no
published quote. The fair value was estimated based on a price obtained from a
securities broker's statement for 1999. At December 31,1999 the closing price
of the debentures was 34% of face value. The interest rate on the Company's
Canadian fixed rate swaps at December 31, 1999 was approximately equivalent to
the Canadian floating rate. The estimated gain on liquidation of the Company's
Canadian fixed rate swap position at December 31, 1999 was approximately
$77,000.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Financial Statements are filed as a part of this report. See page F-1,
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:
Independent Auditors' Report............................................ F-2
Consolidated Balance Sheets at December 31, 1999 and 1998............... F-3
Statements of Consolidated Operations for the Years Ended December 31,
1999, 1998 and 1997.................................................... F-4
Statements of Consolidated Stockholders' Equity and Comprehensive Income
(Loss) for the Years Ended December 31, 1999, 1998 and 1997............ F-5
Statements of Consolidated Cash Flows
for the Years Ended December 31, 1999, 1998 and 1997................... F-6
Notes to Consolidated Financial Statements
for the Years Ended December 31, 1999, 1998 and 1997................... F-8
F-1
<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, 1999 and 1998, 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, 1999. 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, 1999 and 1998, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 1999, 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
2 to the consolidated financial statements, the Company has filed under Chapter
11 of the U.S. Bankruptcy Code raising substantial doubt about its ability to
continue as a going concern. Management's plans in regard to this matter are
also discussed in Note 2. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
KPMG LLP
Houston, Texas
March 30, 2000
F-2
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
<TABLE>
<CAPTION>
December 31,
-----------------------
1999 1998
-------- --------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents............................................................ $ 1,981 $ 1,541
Receivables, net..................................................................... 4,923 5,602
Property held for sale............................................................... 8,914 --
Other................................................................................ 606 633
-------- --------
Total current assets............................................................. 16,424 7,776
Property and equipment, at cost using successful
efforts method for oil and gas activities
Oil and gas producing properties................................................... 120,932 136,833
Mineral rights..................................................................... -- 167
Unproven properties................................................................ 4,443 5,454
Office equipment................................................................... 561 580
Accumulated depreciation, depletion and amortization............................... (47,971) (28,847)
-------- --------
77,965 114,187
Other Assets......................................................................... 345 6,327
-------- --------
Total assets..................................................................... $ 94,734 $128,290
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to compromise:
Current liabilities
Accounts payable and accrued liabilities............................................. $ - $ 10,484
Accounts payable (Post-petition)..................................................... 1,375 -
Accrued liabilities (Post-petition).................................................. 2,950 -
Canadian bank loan................................................................... 13,876 18,490
-------- --------
Total current liabilities........................................................ 18,201 28,974
-------- --------
Long-Term liabilities
Deferred Income Taxes................................................................ 4,240 7,279
-------- --------
Total liabilities not subject to compromise...................................... 22,441 36,253
-------- --------
Liabilities subject to compromise:
Accounts payable (Pre-petition)...................................................... 1,981 -
Accrued liabilities (Pre-petition)................................................... 1,779 -
Notes payable banks (Pre-petition)................................................... 16,109 35,910
Subordinated debentures (Pre-petition)............................................... 41,400 41,400
-------- --------
Total liabilities subject to compromise (Pre-petition)........................... 61,269 77,310
-------- --------
Stockholders' Equity
Preferred stock, par value $.01 per share; authorized 5,000,000
shares at December 31, 1999; none issued
Common stock, par value $.01 per share; authorized 50,000,000
shares at December 31, 1999; issued 13,000,360 and 12,884,672
at December 31, 1999 and 1998, respectively;
outstanding 12,909,137 and 12,793,449
shares at December 31, 1999 and 1998, respectively................................. 130 128
Additional paid-in capital........................................................... 30,885 30,848
Accumulated other comprehensive loss-foreign currency translation adjustment......... (288) (2,304)
Retained deficit..................................................................... (19,651) (13,893)
Less: treasury stock................................................................. (52) (52)
-------- --------
Total stockholders' equity....................................................... 11,024 14,727
-------- --------
Total liabilities and stockholders' equity....................................... $ 94,734 $128,290
======== ========
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
F-3
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
STATEMENTS OF CONSOLIDATED OPERATIONS
(in thousands, except per share amounts)
<TABLE>
<CAPTION>
For the Years Ended December 31,
----------------------------------------
1999 1998 1997
--------- -------- --------
<S> <C> <C> <C>
Revenues
Oil and gas........................................................... $25,865 $ 21,722 $13,790
Gain (loss) on sales of properties and other assets................... 11,976 (250) 413
-------- -------- -------
37,841 21,472 14,203
Expenses
Production............................................................ 8,898 8,518 3,682
Exploration........................................................... 2,501 3,635 1,776
Depreciation, depletion and amortization.............................. 12,302 10,505 4,211
General and administrative............................................ 3,926 3,622 2,308
Impairment on oil and gas properties.................................. 8,686 9,344 2,838
Restructuring expenses................................................ 1,372 --- ---
Bankruptcy expenses................................................... 3,016 --- ---
-------- -------- -------
40,701 35,624 14,815
-------- -------- -------
Loss from operations................................................... (2,860) (14,152) (612)
Other income, expenses and deductions
Interest and other income............................................ 456 330 328
Interest and debt expense............................................ (6,236) (5,362) (1,591)
-------- -------- -------
Loss before income taxes............................................... (8,640) (19,184) (1,875)
Provision (benefit) for foreign, federal and state income taxes
Current provision..................................................... 575 6 304
Deferred benefit...................................................... (3,457) (2,781) (130)
-------- -------- -------
(2,882) (2,775) 174
-------- -------- -------
Net loss............................................................... $(5,758) $(16,409) $(2,049)
======== ======== =======
Net loss per share-basic............................................... $ (0.45) $ (1.32) $ (.22)
======== ======== =======
Net loss per share-diluted............................................. $ (0.45) $ (1.32) $ (.22)
======== ======== =======
Weighted average number of shares outstanding-basic.................... 12,838 12,422 9,109
======== ======== =======
Weighted average number of shares outstanding-diluted.................. 12,838 12,422 9,109
======== ======== =======
</TABLE>
The accompanying notes to consolidated financial statements of
Southern Mineral Corporation and subsidiaries are an integral part of these
statements.
F-4
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
STATEMENTS OF CONSOLIDATED STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
<TABLE>
<CAPTION>
Accumulated
Common Stock Additional Other Retained Treasury Stock Stockholder's
------------------- Paid-in Comprehensive Earnings ---------------
Shares Amount Capital Loss (Deficit) Shares Amount Equity
-------- -------- ------- ------------- ---------- ------ ------ -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 9,089 $ 91 $14,030 $ -- $ 4,565 (91) $ (52) $ 18,634
Stock issued for directors' fees 31 -- 181 -- -- -- -- 181
Stock issued for stock purchase plan 9 -- 29 -- -- -- 29
Stock issued for stock option plan, net 4 -- -- -- -- -- -- --
Issuance costs for private placement -- -- (88) -- -- -- -- (88)
Comprehensive loss:
Net loss -- -- -- -- (2,049) -- -- (2,049)
Foreign currency translation adjustment -- -- -- (227) -- -- -- (227)
---------
Total comprehensive loss, net of tax (2,276)
-------- -------- ------- -------- -------- ------ ------ ---------
Balance at December 31, 1997 9,133 91 14,152 (227) 2,516 (91) (52) 16,480
Stock issued for directors' fees 43 -- 139 -- -- -- -- 139
Stock issued for stock purchase plan 8 -- 22 -- -- -- -- 22
Issuance of common stock for property
acquisition 8 -- 50 -- -- -- -- 50
Issuance of common stock
in corporate acquisitions 3,693 37 16,485 -- -- -- -- 16,522
Comprehensive loss:
Net loss -- -- -- -- (16,409) -- -- (16,409)
Foreign currency translation
adjustment -- -- -- (2,077) -- -- -- (2,077)
---------
Total comprehensive loss, net of tax (18,486)
-------- -------- ------- -------- -------- ------ ------ ---------
Balance at December 31, 1998 12,885 $ 128 $30,848 $ (2,304) $(13,893) (91) $ (52) $ 14,727
Stock issued for director's fees 110 1 35 -- -- -- -- 36
Stock issued for stock purchase plan 5 1 2 -- -- -- -- 3
Comprehensive loss:
Net loss -- -- -- -- (5,758) -- -- (5,758)
Foreign currency translation adjustment -- -- -- 2,016 -- -- -- 2,016
---------
Total comprehensive loss, net of tax (3,742)
-------- -------- ------- -------- -------- ------ ------ ---------
Balance at December 31, 1999 13,000 $ 130 $30,885 $ (288) $(19,651) (91) $ (52) $ 11,024
======== ======== ======= ======== ======== ====== ====== =========
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
F-5
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
For the Years Ended December 31,
------------------------------------
Cash Flows from Operating Activities 1999 1998 1997
---------- ---------- ----------
<S> <C> <C> <C>
Net (loss) income.......................................................... $ (5,758) $ (16,409) $ (2,049)
Adjustments to reconcile net income (loss) to cash provided by
operating activities:
Depreciation, depletion and amortization................................ 12,302 10,505 4,211
Loss/(gains) on sales of properties and other assets.................... (11,976) 250 (413)
Impairment of proved oil and gas properties............................. 8,686 9,344 2,838
Dry hole costs and impairment of exploration properties................. 2,415 2,470 930
Decrease in deferred taxes.............................................. (3,457) (2,781) (130)
Non-cash portion of Bankruptcy
costs.................................................................. 2,463 -- --
Other...................................................................... 353 418 351
Change in assets and liabilities, net of effects of
acquisitions and dispositions:
Decrease (Increase) in receivables................................... 869 2,205 (987)
(Increase) decrease in other current assets.......................... 55 (136) (9)
Increase (Decrease) in payables..................................... (2,556) 804 2,066
---------- ---------- ----------
Net cash provided by operating activities........................... 3,396 6,670 6,808
Cash Flows from Investing Activities
Proceeds from sales of:
Proved properties..................................................... 26,111 11,425 26
Properties held for sale and unproved properties...................... 8 83 1,037
Capital expenditures:
Acquisition, exploration and development.............................. (2,954) (17,103) (16,168)
Properties held for sale............................................. -- (1,083) (2,203)
Acquisition of Amerac, net of cash.................................... -- (9,387) --
Acquisition of Neutrino, net of cash.................................. -- (35,926) --
Acquisition of BEC Energy, Inc., net of cash.......................... -- -- (10,683)
Acquisition of SMC Ecuador, Inc., net of cash......................... -- -- (2,816)
Other....................................................................... -- -- (24)
---------- ---------- ----------
Net cash received (used) in investing activities.................... 23,165 (51,991) (30,831)
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
Payments on revolving loan................................................. -- (10,280) (23,100)
Payments on note payable................................................... (25,763) (208) (1,262)
Loan acquisition costs..................................................... (388) (259) (45)
Proceeds from equity offering, net......................................... -- -- (88)
Payment on Canadian subordinated debentures................................ -- (3,270) --
---------- ---------- ----------
Net cash provided by (used in) financing activities................. (26,151) 36,777 33,569
Effect of Exchange Valuation on Cash......................................... 30 74 (6)
---------- ---------- ----------
Net (decrease) increase in cash and cash equivalents................ 440 (8,470) 9,540
Cash and cash equivalents at beginning of year............................. 1,541 10,011 471
---------- ---------- ----------
Cash and cash equivalents at end of year................................... $ 1,981 $ 1,541 $ 10,011
========== ========== ==========
</TABLE>
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
F-6
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
STATEMENTS OF CONSOLIDATED CASH FLOWS - (continued)
(in thousands)
<TABLE>
<CAPTION>
Supplemental disclosure of cash flow information:
<S> <C> <C> <C>
Cash paid for taxes................................................... $ 693 $ 159 984
Cash paid for interest................................................ 5,295 3,753 916
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 --
Change in deferred tax liability on property acquisitions.............. -- 9,562 --
Directors' fees paid in stock.......................................... 36 139 181
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.
F-7
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
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.
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"). All debts of the Company and Debtor Subsidiaries, except
those of the Company's Canadian Subsidiary, Neutrino, as of the Petition Date
are currently stayed by the bankruptcy petition and subject to compromise
pursuant to such proceedings. See Note 2 for further information. The Company
and its Debtor Subsidiaries continue to operate as debtors-in-possession subject
to the Bankruptcy Court's supervision and orders. The proceedings of the Company
and its Debtor Subsidiaries have been consolidated for administrative purposes.
Under the provisions of the Bankruptcy Code, the Company and its Debtor
Subsidiaries have the exclusive right for 120 days following the Petition Date
to file a Plan of Reorganization with the Bankruptcy Court. On February 25, 2000
the Company and its Debtor Subsidiaries filed a Plan of Reorganization and
Disclosure Statement. On April 17, 2000 a hearing will be held to consider the
approval of the Disclosure Statement. (See Note 2 for further discussion).
Note 1. Summary of Significant Accounting Policies
Basis of Presentation - The accompanying financial statements have been
prepared in a manner consistent with prior periods for the years ended December
31, 1998 and 1997. Beginning in the fourth quarter of 1999, 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 Chapter 11 of title 11 of the United States 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. The accompanying consolidated financial statements of the
Company have been prepared on a going concern basis, which contemplates the
realization of assets and the liquidation of liabilities in the ordinary course
of business. As discussed above, the Company has filed for reorganization under
Chapter 11 of the United States Bankruptcy Code. The consolidated financial
statements do not include any adjustments relating to recoverability and
classifications of reported asset amounts or the amounts and classifications of
liabilities that might result from the ultimate resolution of Plan or
Reorganization.
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.
F-8
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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, net of tax. 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.
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 proved 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 year end proved reserves and management's estimate of future
prices. At December 31, 1999, estimated prices were based on an independent
consultant's price survey obtained from four middle market merger and
acquisition-oriented exploration and development companies. During 1999 the
Company recorded pre-tax impairment charges of $8,686,000 related to its oil and
gas properties in the U.S. and Canada. Approximately $3,386,000 of the
impairment charge resulted from downward revisions of the Company's proved
undeveloped reserves. The year-end estimates as of December 31, 1999 were
negatively affected relative to amounts previously reported due to downward
revisions, totaling 492,816 BOE, related to the Company's properties in the U.S.
totaling 368,500 BOE and in Canada totaling 124,316 BOE. The U.S. revisions
resulted from differences in the interpretation between the current and
predecessor independent engineering firms. The Canadian revisions resulted
primarily from decreased production performance in 1999. These differences, many
of which relate to classification of reserves within the different oil and gas
reserve categories (i.e. proved, probable and possible) are due to the numerous
engineering, geological and operational assumptions that generally are derived
from limited data. In addition, approximately $5,300,000 of the 1999 imparement
resulted from the pre-tax adjustments of Neutrino's cost basis to the net
realized value of the sale of Inverness and Swan Hills in March 2000 (See Note
17 - Subsequent Events). 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.
F-9
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 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.
Use of Commodity Derivatives - The Company manages its exposure to
commodity price risk through futures, swaps and options. For derivative
contracts to qualify as a hedge, the price movements in the commodity derivative
must be highly correlated with the underlying hedged commodity. Contracts that
qualify as hedges and held for non-trading purposes are accounted for using the
deferral method of accounting. Under this method, gains and losses are not
recognized until the underlying physical transaction occurs. Deferred gains and
losses related to futures are reported in the consolidated balance sheet as
current assets or current liabilities. Deferred gains and losses related to
swaps and options are carried off-balance sheet until the instruments are
settled. It is the Company's general policy not to acquire crude oil futures
contracts or other derivative products for the purpose of speculating on price
changes. Contracts held for trading purposes are accounted for using the
mark-to-market method. Under this methodology, contacts are adjusted to market
value, and the gains and losses are recognized in current period income. The
Company monitors open derivative positions with strict policies which limit its
exposure to market risk and require daily reporting to management of potential
financial exposure. At December 31, 1999 the Company had no outstanding
commodity contracts. At December 31, 1998, the Company's outstanding commodity
derivative contracts were not material.
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 2001. The Company has not determined
the impact that SFAS 133 will have on its financial statements.
F-10
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 82,256, 693,000 and 717,000 are not considered
in the calculation of diluted earnings per share in 1999, 1998 and 1997,
respectively, as the amounts are antidilutive. No adjustment to net income
(loss) was made in calculating diluted per share earnings for 1999, 1998 and
1997.
Reclassifications - Certain amounts in prior financial statements have been
reclassified to conform to the 1999 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 (loss) for
the years ended December 31, 1999, 1998 and 1997 was as follows (in thousands):
<TABLE>
<CAPTION>
Years ended December
-------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
Net income (loss) $ (5,758) $ (16,409) $ (2,049)
Foreign currency translation adjustment 2,016 (2,077) (227)
--------- --------- --------
Total comprehensive income (loss) $ (3,742) $ (18,486) $ (2,276)
========= ========= ========
</TABLE>
Note 2. Bankruptcy Filing
On October 29, 1999, the Company and its Debtor Subsidiaries, excluding
Neutrino, filed voluntary petitions for relief under Chapter 11, 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. All
debts of the Company and its Debtor Subsidiaries as of the Petition Date are
currently stayed by the bankruptcy petition and subject to compromise pursuant
to such proceedings. The Company and its Debtor Subsidiaries continue to operate
as debtors-in-possession subject to the Bankruptcy Court's supervision and
orders. The proceedings of the Company and its Debtor Subsidiaries have been
consolidated for administrative purposes. Under the provisions of the Bankruptcy
Code, the Company and its Debtor Subsidiaries have the exclusive right for 120
days following the Petition Date to file a Plan of Reorganization with the
Bankruptcy Court.
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.
F-11
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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 and is in the process of finalizing an Amended Plan
("Amended Plan") having terms negotiated with its unsecured creditor's committee
("Committee"). On March 7, 2000, the Committee filed a Motion to terminate the
Company's exclusivity period. The Committee has agreed to extend the hearing on
their motion until April 17, 2000 due to the continuing negotiations with the
Company related to the Amended Plan. The consummation of an Amended Plan is the
primary objective of the Company. The Amended Plan sets forth the means for
satisfying claims, including liabilities subject to compromise and interests in
the Company. The Amended Plan would result in, among other things, potential
substantial dilution in the future of existing shareholders as a result of the
issuance of securities to creditors or new investors. The consummation of any
plan of reorganization will require approval of the Bankruptcy Court.
The Amended Plan generally provides for the satisfaction of the Company and
Debtor Subsidiaries' claims after payment of all Bankruptcy Court approved
administrative expenses as follows:
. Domestic secured debt shall be paid in full with interest at non-default
rate and expenses of no greater that $100,000 with proceeds from a new
secured credit facility to be obtained by the Company.
. All other creditors other than domestic secured debt and amounts owed
debenture holders shall be paid in cash over periods ranging from 1 to 14
months.
Debenture holders shall be satisfied as follows:
. Cash payment of approximately $1.4 million
. Issuance of Convertible Preferred Stock with liquidation preference of
$38.5 million.
The terms of the Preferred Stock will be generally as follows:
. Amount - $38.5 million with liquidation preference.
. Type - convertible into 78% of the fully diluted common stock
outstanding at confirmation (subject to certain limitations).
. Dividends - 7.5% per annum, accumulating semi - annually with no
dividends payable or accrued during the first two years following
confirmation and payable thereafter as permitted by new secured
credit facility when funds are legally available and as properly
declared by the Board of Directors.
. Board of Directors - two appointed by the creditor's committee,
two from existing board and fifth chosen by the four, all with two
year terms.
. Other - Subject to conversion rights, optional redemption and
voting rights provisions.
Existing common stock, option and warrants will remain outstanding with no
change in terms and conditions.
This summary is not intended to be a complete discussion of all the terms
and conditions of the Amended Plan. The general terms have been verbally agreed
to by the creditor's committee appointed by the Bankruptcy Court. The Bankruptcy
Court has not approved the adequacy of the final Amended Plan or Disclosure
Statement and the creditors' committee can only recommend the approval of the
Amended Plan by creditors of the Company and Debtor Subsidiaries. Final approval
and confirmation of the Amended Plan will not occur until voted on by all
affected parties and approval by the Bankruptcy Court.
Subsequent to the Petition Date, the Company and its Debtor Subsidiaries
filed a Motion for Order Authorizing Use of Cash Collateral ("Cash Collateral
Order"), pursuant to which the Company and its Debtor Subsidiaries sought the
use of the secured domestic banks' cash collateral in on-going operations. On
November 29, 1999, the Bankruptcy Court entered an order granting the Company
and its Debtor Subsidiaries authority to use cash collateral in accordance with
an approved budget until January 31, 2000. On January 31, 2000, the Bankruptcy
Court entered an order granting an extension of the authority to use cash
collateral in accordance with an approved budget until April 30, 2000. To the
extent that on going expenses are reflected on the court-approved budget, the
Company and its Debtor Subsidiaries are permitted to make
F-12
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
such expenditures. The Company has as of February 29, 2000, approximately $1.8
million in cash and cash equivalents that can be used for operations pursuant to
the terms of the Cash Collateral Order.
The Company does not presently anticipate the need for debtor-in-possession
financing in order to pursue its business strategy.
Note 3. Acquisitions and Divestitures
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 and consists of the following:
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.
F-13
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Big Escambia Creek
During 1997 and 1998, the Company acquired interests in the Big Escambia
Creek Field and surrounding area in a series of six transactions. The largest
acquisition was the purchase of the outstanding capital stock of BEC Energy,
Inc. on May 10, 1997, for $10,640,000. BEC's assets consisted of working
interests in fourteen oil and gas wells located in the Big Escambia Creek Field,
Escambia County, Alabama. Thereafter, the Company acquired additional working
interests in the area for $12.1 million. Each acquisition was accounted for as a
purchase.
Disposition
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 include 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.
Neutrino sold in the fourth quarter of 1999 its interest in two non-core
properties in Alberta, Canada for approximately 3.7 million. In March 2000, the
Neutrino sold its interest in Inverness and Swan Hills in Alberta, Canada, for
$9.0 million. These assets are classified as properties held for sale and are
included in current assets at December 31, 1999.
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 and the acquisitions of
Neutrino, Amerac and Big Escambia Creek had occurred on January 1, 1998.
Years Ended December 31,
-------------------------
1999 1998
------------ -----------
(unaudited)
(in thousands, except per share data)
Revenues.......................... $26,617 $ 24,320
Net loss.......................... (8,783) (18,998)
Net loss per share-basic.......... (.68) (1.48)
Net loss per share-diluted........ (.68) (1.48)
The preceding pro forma results are not necessarily indicative of those
that would have occurred had the acquisitions and divestitures taken place at
the beginning of 1998. During 1998, the Company made additional acquisitions,
none of which would have had a material effect on the historical results of
operations of the Company. During the first quarter of 1999, the Company sold
its mineral interests and substantially all of its royalty interests in Texas,
Mississippi and New Mexico for approximately $6,000,000. These divestitures
would not have had a material effect on the Company's historical results of
operations.
F-14
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 4. Debt
Debt consisted of the following at December 31, 1999 and 1998 (in
thousands):
<TABLE>
<CAPTION>
<S> <C> <C>
1999 1998
-------- ---------
Domestic bank credit facility - in default $ 16,109 $ 35,910
Canadian bank credit facility (U.S. Dollars) 13,876 18,490
Convertible subordinated debentures - in default 41,400 41,400
Other --- 184
-------- ---------
Total indebtedness $ 71,384 $ 95,984
======== =========
</TABLE>
As described in Note 2, because of the Company's filing of Chapter 11, all
amounts are 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. Current maturities of
long-term debt amounted to $31,614,000 as of December 31, 1998.
On March 29, 1999, the Company entered into a restructured and amended
credit facility ("Amended Credit Facility") with its domestic lenders. The
Amended Credit Facility provided for a borrowing base of $19,353,000, plus a
principal tranche of $12,500,000 ("Tranche A") that was due to mature on
September 1, 1999. The borrowing base was reduced to $18,830,000 on April 1,
1999, reflecting the $6,000,000 received in March and April 1999, for the sale
of the Company's mineral interests in Texas, Mississippi and New Mexico. In July
and August of 1999 the sale of the Company's interests in the Brushy Creek and
Texan Gardens Fields were closed for $15.2 million and $0.8 million,
respectively. The majority of the net proceeds were applied to the Company's
domestic bank facility with $5.0 million being applied to the borrowing base
facility and $9.6 million to the Tranche A obligation. In September and October
1999, the Amended Credit Facility was further amended to extend the ultimate due
date of the Tranche A principal to October 28, 1999. Due to the bankruptcy
filings on October 29, 1999, the Company is no longer in compliance with certain
provisions of the Amended Credit Agreement. See Note 2 - Bankruptcy Filing.
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 covenants relating to the financial condition of the Company including
tangible net worth and cash flow coverage covenants. On March 15, 2000,
outstanding borrowings under the Amended Credit Facility were $16,108,000 with
no further borrowing availability. Outstanding principal under the Amended
Credit Facility bears interest at the Bank Index Rate (8.5% at December 31,
1999) to the extent of the borrowing base utilized and at Bank Index Rate plus
1% on Tranche A principal.
F-15
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Effective June 25, 1998, Neutrino entered into a new Cdn $40,000,000 (US
$27,155,000) 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, 1999, the Canadian Bank prime rate was 6.5% and
the Bankers Acceptance Rate for 30-day maturities was 5.25%. Effective July 15,
1999, the borrowing base under the Canadian Credit Facility was reduced to Cdn
$30,500,000 (US $20,706,000) and the interest rate was increased to prime plus
1%. 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, 1999, outstanding borrowings
under the Canadian Credit Facility were Cdn $20,040,057 (US $13,876,234). On
March 3, 2000 after giving effect to the reductions related to the sale of
certain oil and gas prospectus, outstanding borrowings under the Canadian Credit
Facility were Cdn $7,492,752 (US $5,170,000) with a borrowing base of CDN
$11,050,000 (US$7,624,500) through April 30, 2000. The Canadian Credit Facility
contains a covenant relating to the financial condition of Neutrino, including,
at each quarter's end, maintenance of a positive working capital through
maturity. The borrowing base under the Canadian Credit Facility is subject to
semi-annual redeterminations. The last borrowing base review was as of March 3,
2000. As of December 31, 1999, Neutrino was in compliance with the terms of the
credit facility. The outstanding balance under the Canadian Credit Facility is
classified as a current liability because of the demand feature of the loan.
However, it is management's intention that the facility be utilized to provide
long-term financing for the Company.
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. Due to the bankruptcy filings on October 29, 1999, the Company is no
longer in compliance with certain provisions of the debenture agreement. See
Note 2 - Bankruptcy Filing.
Note 5. Fair Value of Financial Instruments
The Company has estimated the fair value of financial instruments based on
arms length transactions or quoted market values. The estimated fair values are
summarized below (in thousands):
<TABLE>
<CAPTION>
Years Ended December 31,
1999 1998
---------------- ----------------
Book Fair Book Fair
Assets Value Value Value Value
------- ------- ------- -------
<S> <C> <C> <C> <C>
Cash and equivalents $ 1,981 $ 1,981 $ 1,541 $ 1,541
Liabilities
Debt 71,385 44,061 95,984 64,869
Commodity price swaps-Payable position -- 86
Interest rate swaps - Receivable position 77 -- --
</TABLE>
The estimated fair value of cash and equivalents approximates book value
because the amounts primarily represent cash on hand, U. S. Treasury bills 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 and 1999, 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 and
1999, 87% and 100%, respectively, 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. The estimated gain on liquidation of the interest rate
swap position at December 31, 1999 was $76,627.
During 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures. The debentures were publicly traded on the OTC
Bulletin Board under the symbol "SMING" until August 1999 and there is currently
no published quote. The fair value was estimated based on the closing market
price of the security for 1998 and a price obtained from a securities broker's
statement for 1999. The closing prices on December 31, 1999 and 1998 were 34%
and 25% of face value, respectively.
F-16
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
During 1998 and 1999, the Company entered into natural gas and oil price
swaps and collars with third parties to hedge a portion of its production from
the effects of fluctuations in the market price of natural gas and oil. The
Company uses the deferral method of accounting for its natural gas and oil price
swaps and collars and, therefore, offsets any gain or loss on the swap and
collars contract with the realized prices for its production. While the swaps
and collars reduce the Company's exposure to declines in the market price of
natural gas and oil, this also limits the Company's gains from increases in
market price. Due to the bankruptcy filing, all third-party oil and gas hedges
were cancelled by the counter-parties to these contracts.
Note 6. Federal and State Income Taxes
United States and foreign income (loss) before income taxes are as follows
(in thousands):
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------
1999 1998 1997
----------- ----------- -----------
<S> <C> <C> <C>
United States $(1,924) $ (8,504) $(2,697)
Foreign (6,716) (10,680) 822
----------- ----------- -----------
Total $(8,640) $(19,184) $(1,875)
=========== =========== ===========
</TABLE>
Income tax expense (benefit) attributable to income from continuing
operations consists of (in thousands):
<TABLE>
<CAPTION>
Current Deferred Total
------------ ------------ ------------
<S> <C> <C> <C>
Year ended December 31, 1999:
U.S. Federal........................... $ 233 $ --- $ 233
State and local........................ 225 --- 225
Foreign................................ 117 (3,457) (3,340)
--------- -------- -------
$ 575 $ (3,457) $ (2,882)
========= ======== =======
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
========= ======== =======
</TABLE>
The Company allocated state taxes of approximately $250,000 to the purchase
price of Amerac as a result of the gain on sale of the Golden Trend properties
in the second quarter of 1998.
F-17
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Differences between the effective tax rate and the statutory federal rate
are as follows:
<TABLE>
<CAPTION>
For the Year Ended December 31,
---------------------------------
1999 1998 1997
---------------------------------
<S> <C> <C> <C>
Expected statutory rate................................. (34.0%) (34.0%) (34.0%)
Changes in valuation allowance.......................... 5.8% 23.7 38.9
Foreign taxes, net of federal benefit................... (12.2%) 4.2 9.7
State taxes, net of federal benefit..................... -- -- 4.0
Percentage depletion.................................... -- -- (12.1)
Non-deductible Bankruptcy charges....................... 6.4% -- --
Other................................................... .6% -- 2.8
----- ----- -----
Effective tax rate...................................... (33.4%) (14.5%) 9.3%
===== ===== =====
Deferred taxes consist of the following (in thousands):
<CAPTION>
For the Year Ended December 31,
------------------------------
Deferred tax assets: 1999 1998
---- ----
<S> <C> <C>
Oil and gas properties................................ $ 691 $ --
Net operating loss carryforward....................... 7,956 49,689
Accounts receivable................................... -- 34
Accrued liabilities not currently deductible.......... 34 99
Foreign tax credits................................... 187 187
Minimum tax credits................................... 214 11
Deferred financing costs.............................. 837 --
Statutory depletion carryforward...................... 395 4,950
------- --------
10,314 54,970
Valuation allowance..................................... (10,314) (53,238)
------- --------
Deferred tax assets................................. -- 1,732
Deferred tax liabilities
Oil and gas properties-U.S. and other................. -- 1,732
Oil and gas properties-Canadian taxes................. 4,240 7,279
------- --------
Deferred tax liability.............................. 4,240 9,011
------- --------
Net deferred tax liability.............................. $ 4,240 $ 7,279
======= ========
</TABLE>
In 1998, the Company acquired Amerac, which had regular tax net operating
loss ("NOL") carryforwards of approximately $139,827,000 and alternative minimum
tax ("AMT") NOL carryforwards or $112,687,000, as of December 31, 1998. During
1999, in connection with the Company's filing of its 1998 US Consolidated
Federal Income Tax Return, the Company elected under Internal Revenue
Code("IRC") Section 1502 to relinquish $114,234,000 of the regular tax NOL
carryforwards and $94,859,000 of the AMT NOL carryforwards related to Amerac.
The relinquishment had no effect on the Company's Consolidated Statement of
Operations as the deferred tax asset related to these NOL carryforwards was
fully offset by a valuation allowance for the year ended December 31, 1998. The
remaining loss carryforwards expire in years 2006 through 2017 and their
utilization is subject to stringent limitations under the IRC. The Company has a
full valuation allowance related to the remaining NOL carryforward to reduce the
corresponding deferred asset, since it is more likely than not that this NOL
carryforward will not be realized.
F-18
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The valuation allowance for deferred tax assets as of December 31, 1999,
1998 and 1997 was $10,314,000, $53,238,000 and $729,000, respectively. The net
change in the total valuation allowance for the year ended December 31, 1999,
1998 and 1997 was ($42,924,000), $52,509,000 and $729,000, respectively. Of the
($42,924,000) net change in the valuation allowance for the year ended December
31, 1999, $38,840,000 was caused by the relinquishment of a portion of the
Amerac NOL carryforwards as discussed above and had no effect on the Company's
Consolidated Statement of Operations. In addition, the Company wrote off the
deferred tax asset and corresponding valuation allowance, totaling $4,588,000,
for the statutory depletion carryforwards received in the Amerac acquisition,
since these carryforwards will never be realized. The remaining change of
$504,000 is reflected in the rate reconciliation schedule. In assessing the
realizability of deferred tax assets, management considers whether it is more
likely than not that some portion or all of the deferred tax assets will not be
realized. The ultimate realization of deferred tax assets is dependent upon the
generation of future taxable income during the periods in which those temporary
differences become deductible. Management considers the scheduled reversal of
deferred tax liabilities, projected future taxable income, and tax planning
strategies in making this assessment. In order to fully realize the deferred tax
asset, the Company will need to generate sufficient future taxable income prior
to the expiration of the net operating loss carryforwards in 2017. 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 $23,398,000, $146,144,000 and $812,000 for the years
ended December 31, 1999, 1998 and 1997. These NOLs must be utilized prior to
their expiration, which is between 2000 and 2018. The Company also has statutory
depletion carryforward of $1,160,000, $14,558,000 and $1,136,000 at December 31,
1999, 1998 and 1997 respectively.
Note 7. 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 a reduction in staff in 1999, Mr.
Weddle was terminated as an employee and officer but has been retained as a
consultant.
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.
SMC Production Company, a wholly - owned subsidiary of the Company, owns an
18.906% interest in Diverse GP III ("Diverse") a general partnership. Three of
the Company's directors are managers of Diverse and through various entities own
the majority of the remaining interest in Diverse.
F-19
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 8. Major Customers
The Company is engaged in a single industry segment: the exploration,
development and production of oil and gas reserves. Sales of oil and gas to
customers accounting for 10% or more of revenues were as follows (in thousands):
<TABLE>
<CAPTION>
Customer 1999 1998 1997
-------- ------ ------ ------
<S> <C> <C> <C>
G C Marketing Company $ --- $ --- $2,267
Damsco Distribution 4,117 3,747 1,656
Diasu Oil & Gas Co., Inc. --- --- 1,631
Global Petroleum Marketing 2,931 --- ---
Canpet Energy Group Inc. 2,793 --- ---
</TABLE>
Note 9. 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 System.
During 1999, 1998 and 1997, the Company granted options exercisable for
122,500, 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. In conjunction with severance arrangements with
certain officers and employees in 1999, the Company repriced 305,000 shares at
the current market price of $0.28, granted full vesting and extend the
expiration date to August 31, 2001.
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.
F-20
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In January 1999, the FASB issued an Exposure Draft of an Interpretation
regarding APB 25 that would require that the cancellation of an option and
issuance of a new option with a lower exercise price be considered in substance
a modified option. Variable-plan accounting would be required to be applied to
the modified option from the date of the modification until the date of
exercise. Consequently, the final measurement of compensation expense would
occur at the date of exercise. The FASB determined that the proposed effective
date would be the issuance date of the final interpretation that would be
applied prospectively but would cover events that occur after December 15, 1998.
As the option repricings described above, occurred after December 15, 1998, the
new option grants will qualify for variable-plan accounting at each quarterly
reporting date, beginning September 30,1999 and continuing until the options are
exercised or cancelled, if the exposure draft becomes effective in its present
form.
During 1999, 1998 and 1997, the Company granted options exercisable for
5,686, 5,211 and 6,297 shares of Common Stock, respectively, under the Company's
1996 Employee Stock Purchase Plan ("SPP"). The SPP is intended to constitute an
"employee stock purchase plan" within the meaning of Section 423 of the Internal
Revenue Code of 1986, as amended. Pursuant to the SPP, the Company may grant
options to purchase up to 300,000 shares (subject to customary anti-dilution
adjustments) of its Common Stock to employees of the Company. Options may be
granted on January 1 and July 1 of each year to eligible employees who elect to
participate in the SPP. The term of each option is six months from the date of
grant. The number of options granted to each participant equals the quotient of
(i) the total payroll deductions authorized by the participant during the
applicable option period, divided by (ii) 85% of the fair market value of the
Common Stock as of the date of grant of such option. The exercise price of
options under SPP is 85% of the fair market value of the Common Stock as of the
date of grant or the date of exercise of such option, whichever is less,
determined by reference to the most recent closing price reported on the Nasdaq
Systems.
The Company applies APB 25 and related Interpretations in accounting for
stock-based compensation. Had compensation costs been determined based on the
fair value at the grant dates for awards, consistent with 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>
1999 1998 1997
--------- --------- ---------
<S> <C> <C> <C> <C>
Net income (loss).......................... As reported $(5,758) $(16,409) $(2,049)
Pro forma (5,789) (16,951) (2,127)
Basic loss per share....................... As reported $ (0.45) $ (1.32) $ (0.22)
Pro forma (0.45) (1.36) (0.23)
Fully diluted loss per share............... As reported (0.45) (1.32) (0.22)
Pro forma (0.45) (1.36) (0.23)
</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 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
-------------- ------------- -------------
<S> <C> <C> <C>
Expected volatility 65.88% 65.63% 54.52%
Risk free interest rate 5.00% to 5.63% 4.48 to 5.47% 4.48 to 5.47%
Expected life of options 1 to 3 years 3 years 3 years
Expected dividend yield 0% 0% 0%
</TABLE>
F-21
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
In 1994, in connection with the offer and acceptance of employment, the
Company's President was granted a non-qualified option to purchase 450,000
shares of the Company's common stock at a price of $1.00 per share. The option
is non-assignable, and is exercisable until December, 2004. Payment for the
option can be made in cash, common stock of the Company, or a combination
thereof.
In consideration for initiating the transactions pursuant to which the
Company acquired Diverse Production Company ("DPC"), the Company granted a
director of the Company an option to acquire 43,878 shares of the Company's
common stock at $1.00 per share exercisable through April 2000.
In connection with the acquisition of DPC in 1995, the Company granted
options exercisable for 325,000 shares of its common stock at $1.25 a share
through April 2000. Each of the individuals that received the options became
directors of the Company in connection with the acquisition of DPC.
In 1996, the Company entered into an exploration arrangement with Diasu Oil
& Gas Co., Inc. ("Diasu") and Diasu's two principal shareholders. Pursuant to
the arrangement, the Company issued the Diasu shareholders 175,000 shares of
Common Stock and warrants to purchase up to 600,000 shares at $2.00 a share for
a term of five years.
In consideration for services as financial advisor and placement agent for
the private placement in December 1996, the Company granted Morgan Keegan &
Company, Inc. 120,000 warrants of the Company's common stock at $4.50 per share
exercisable through December, 2001.
In conjunction with the acquisition of Amerac in 1998, outstanding warrants
to purchase 477,357 shares of Amerac Common Stock were exchanged for warrants
to purchase 406,218 shares of Southern Mineral Common Stock at an average price
of $6.773 per share. The warrants expired 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,
1999, 1998 and 1997, and changes during the years ending on those dates is
presented below:
<TABLE>
<CAPTION>
1999 1998 1997
--------------------------- --------------------------- ---------------------------
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....... 3,423,526 $2.71 1,965,788 $2.37 1,668,878 $1.71
Granted................................ 427,500 0.37 2,590,399 3.18 305,000 5.97
Exercised.............................. ---- ---- ---- ---- (8,090) 3.00
Forfeited.............................. (1,573,448) 3.52 (1,132,661) 4.00 ---- ----
----------- ----------- -----------
Outstanding at end of year............. 2,277,578 1.37 3,423,526 2.71 1,965,788 2.37
=========== =========== ===========
Options exercisable at end of year..... 1,959,277 2,593,036 1,548,878
=========== =========== ===========
</TABLE>
F-22
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Certain options granted during 1999 and 1998 include the grant of
repriced options; options forfeited during 1999 and 1998 include the
cancellation of these higher priced options. The weighted-average fair value of
compensatory options granted during 1999, 1998 and 1997 were $0.37, $0.84 and
$2.51, respectively, per option. The following table summarizes information
about options and warrants outstanding at December 31, 1999:
<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>
$0.28 to 1.50 1,557,578 2.81 years $0.88 1,239,277 $ 0.89
2.00 to 3.00 600,000 1.01 years 2.00 600,000 2.00
3.50 and over 120,000 1.98 years 4.50 120,000 4.50
--------- ---------
2,277,578 1,959,277
========= =========
</TABLE>
Note 10. Nasdaq National Market Listing
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. The
Company's Common Stock is now traded on the OTC Bulletin Board. The Company
decided to not pursue at this time a review of the delisting decision by the
Nasdaq Review Council. The Company believes a permanent delisting of its Common
Stock and convertible subordinated debentures would impair the liquidity of the
Common Stock, convertible subordinated debentures and capital raising
flexibility of the Company. The Company cannot assure that it will be successful
in obtaining from Nasdaq a reversal of its delisting decision.
Note 11. Restructuring and Bankruptcy Costs
During the third quarter, 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 approximately
$553,000 related to attorney, accounting and financial advisory services
rendered in connection with the bankruptcy. In addition $2,463,000 capitalized
as other assets for fees and expenses related to securing the domestic bank debt
and convertible subordinated debentures were expensed during the fourth quarter
of 1999 pursuant to Statement of Position 90-7 "Financial Reporting by Entities
in Reorganization Under the Bankruptcy Code".
Note 12. 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. The Company has sub-leased a portion of
its headquarters office space through the term of its lease. Lease commitments
exclusive of the sublease at December 31, 1999 are:
2000 2001 2002 2003 2004 Total
---- ---- ---- ---- ---- -----
$221,805 $153,371 $152,208 $44,133 $ -- $571,522
Lease expenses in 1999, 1998 and 1997 were $309,631, $336,461 and
$136,192, respectively.
F-23
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
The Company is involved in several lawsuits arising in the ordinary
course of business, none of which presents the possibility of a material loss.
The Company is unaware of any material possible exposure from actual
or potential claims or lawsuits involving environmental matters. As such, no
liability has been accrued as of December 31, 1999 and 1998.
Note 13. Quarterly Financial Data (Unaudited)
Selected quarterly financial data of the Company are presented below
for the years ended December 31, 1999 and 1998 (in thousands, except per share
amounts):
<TABLE>
<CAPTION>
Fully
Income Basic Diluted
(Loss) Net Income Income
1999 from Income (Loss) (Loss)
Quarter Revenues Operations (Loss) Per Share Per Share
------ -------- ---------- -------- --------- ---------
<S> <C> <C> <C> <C> <C>
March 31................ $ 10,694 $ 4,445 $ 2,928 $ 0.23 $ 0.20
June 30................. 6,203 (1,910) (3,614) (0.28) (0.28)
September 30 (1)........ 13,695 6,464 4,910 0.38 0.30
December 31 (2)......... 7,249 (11,859) (9,982) (0.78) (0.78)
-------- -------- -------- ------ ------
$ 37,841 $ (2,860) $ (5,758) $(0.45) $(0.45)
======== ======== ======== ====== ======
<CAPTION>
1998
Quarter
-------
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)
======== ======== ======== ====== ======
</TABLE>
(1) Includes the charge for restructuring costs of $1.3 million.
(2) Includes an impairment related to the Company's unproved and proved oil and
gas properties of $8.5 million, bankruptcy costs of $553,000 and the write-
off of debt issuance fees capitalized to other assets totaling $2,463,000.
F-24
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 14. 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 $33,784 and was 50% of the amount
contributed by each of the participants in the plan during 1997.
Note 15. 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, 1999, 1998 and 1997 is as follows (in thousands):
<TABLE>
<CAPTION>
U. S. Ecuador Canada Total
--------- ------- --------- ---------
<S> <C> <C> <C> <C>
Year ended December 31, 1999
Oil and gas sales (1)................................ $ 12,613 $ 624 $ 12,628 $ 25,865
Gain (Loss) on sales of properties................... 12,183 -- (207) 11,976
-------- ------- --------- ---------
24,796 624 12,421 37,841
Expenses:
Production......................................... 4,568 414 3,916 8,898
Exploration........................................ 2,408 -- 93 2,501
Impairment of proved oil and gas properties........ 2,616 -- 6,070 8,686
Depreciation, depletion and amortization........... 5,602 3 6,697 12,302
General & administrative........................... 2,459 53 1,414 3,926
Restructuring and bankruptcy cost.................. 4,388 -- -- 4,388
-------- ------- --------- ---------
22,041 470 18,190 40,701
-------- ------- --------- ---------
Interest & other income, net......................... 46 27 383 456
Interest expense..................................... 4,906 -- 1,330 6,236
-------- ------- --------- ---------
Net income (loss) before income taxes................ (2,104) 181 (6,717) (8,640)
Income tax (expense) benefit......................... (459) -- (3,340) (2,882)
-------- ------- --------- ---------
Net income (loss).................................... $ (2,562) $ 181 $ (3,377) $ (5,758)
======== ======= ========= =========
Identifiable assets as of
December 31, 1999................................... $ 43,628 $ 122 $ 49,004 $ 92,754
Corporate assets-cash and cash equivalents........... 1,980
---------
Total assets......................................... $ 94,734
=========
</TABLE>
F-25
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
<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>
(1) Includes sulfur revenues of $779,000, $700,000 and $250,100 in 1999, 1998
and 1997 respectively.
F-26
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 16. Oil and Gas Producing Activities
The Company's capitalized costs of all oil and gas properties and
related allowances for depreciation and depletion are as follows at December 31
(in thousands):
<TABLE>
<CAPTION>
1999 1998 1997
-------- -------- --------
<S> <C> <C> <C>
Proved properties........................... $120,932 $136,833 $ 53,437
Unproved properties......................... 4,443 5,454 494
Less accumulated depreciation, depletion
and amortization....................... (47,587) (28,546) (11,905)
-------- -------- --------
Total....................................... $ 77,788 $113,741 $ 42,026
======== ======== ========
</TABLE>
The Company's depreciation, depletion and amortization costs per Mcfe
in 1999, 1998 and 1997 were $1.15, $0.94 and $0.78, respectively. The Company's
share of oil and gas revenues produced from its royalty interests was
$2,550,000, $966,000 and $1,053,000 for the years ended December 31, 1999, 1998
and 1997, respectively.
Costs incurred in oil and gas property acquisition, exploration and development
activities were as follows (in thousands):
<TABLE>
<CAPTION>
United States Ecuador Canada Total
------------- ------- -------- --------
<S> <C> <C> <C> <C>
As of December 31, 1999
Property acquisition costs
Proved.................................. $ -- $ -- $ -- $ --
Unproved................................ 8 -- -- 8
Exploration costs......................... 50 -- 93 143
Development cost.......................... 2,020 3 931 2,954
------- ------ ------- -------
Total costs incurred................. $ 2,078 $ 3 $ 1,024 $ 3,105
======= ====== ======= =======
As of December 31, 1998
Property acquisition costs
Proved.................................. $22,885 $ -- $50,452 $73,337
Unproved................................ 1,979 -- 3,812 5,791
Exploration costs......................... 4,150 -- 923 5,073
Development cost.......................... 3,838 505 1,410 5,753
------- ------ ------- -------
Total costs incurred................. $32,852 $ 505 $56,597 $89,954
======= ====== ======= =======
As of December 31, 1997
Property acquisition costs
Proved.................................. $22,492 $2,582 $ -- $25,074
Unproved................................ -- -- -- --
Exploration costs......................... 5,606 76 -- 5,682
Development cost.......................... 2,209 1,023 402 3,634
------- ------ ------- -------
Total costs incurred................. $30,307 $3,681 $ 402 $34,390
======= ====== ======= =======
</TABLE>
F-27
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
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>
U.S. Ecuador Canada Total
---------- -------- --------- ----------
<S> <C> <C> <C> <C>
At December 31, 1999
Future cash inflows $142,872 $ 8,015 $127,246 $278,133
Future production and development costs (54,919) (5,091) (42,959) (102,969)
Future income taxes (8,806) - (24,916) (33,722)
-------- ------- -------- --------
Future net cash flows 79,147 2,924 59,371 141,442
10% Annual discount (34,506) (839) (24,842) (60,187)
-------- ------- -------- --------
Standardized measure of discounted
future net cash flows $ 44,641 $ 2,085 $ 34,529 $ 81,255
======== ======= ======== ========
At December 31, 1998
Future cash inflows $142,303 $ --- $ 91,260 $233,563
Future production and development costs (50,542) --- (36,274) (86,816)
Future income taxes (13,061) --- (9,423) (22,484)
-------- ------- -------- --------
Future net cash flows 78,700 --- 45,563 124,263
10% Annual discount (35,241) --- (18,312) (53,553)
-------- ------- -------- --------
Standardized measure of discounted
future net cash flows $ 43,459 $ --- $ 27,251 $ 70,710
======== ======= ======== ========
At December 31, 1997
Future cash inflows $106,515 $ 8,388 $ 16,240 $131,143
Future production and development costs (32,626) (4,829) (6,847) (44,302)
Future income taxes (12,368) (40) (1,287) (13,695)
-------- ------- -------- --------
Future net cash flows 61,521 3,519 8,106 73,146
10% Annual discount (22,211) (1,138) (1,825) (25,174)
-------- ------- -------- --------
Standardized measure of discounted
future net cash flows $ 39,310 $ 2,381 $ 6,281 $ 47,972
======== ======= ======== ========
</TABLE>
F-28
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
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):
Total Company
-------------
At December 31, 1999
Standardized measure -- beginning of year............. $ 70,710
Oil and gas sales, net of production costs............ (15,338)
Purchases and sales of reserves in place (net)........ (17,256)
Net changes in prices, net of production costs........ 58,637
Extensions and discoveries............................ 2,277
Revisions to previous quantity estimates.............. 5,490
Net change in income taxes............................ (7,193)
Accretion of discount................................. 7,669
Changes in estimated future development costs......... (4,273)
Development costs incurred during the period.......... 2,954
Other................................................. (22,422)
--------
Standardized measure at end of year................... $ 81,255
========
At December 31, 1998
Standardized measure -- beginning of year............. $ 47,972
Oil and gas sales, net of production costs............ (12,685)
Purchases and sales of reserves in place (net)........ 34,630
Net changes in prices, net of production costs........ (12,578)
Extensions and discoveries............................ 14,576
Revisions to previous quantity estimates.............. (2,681)
Net change in income taxes............................ (8,926)
Accretion of discount................................. 4,870
Changes in estimated future development costs......... (2,345)
Development costs incurred during the period.......... 5,686
Other................................................. 2,191
--------
Standardized measure at 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 at end of year................... $ 47,972
========
The Company's foreign reserves in 1999, 1998 and 1997 were 46%, 44% and 19% of
total reserves, respectively.
F-29
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
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, 1997 and 1999 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, 1996 and 1997. Chapman Petroleum Engineering Ltd.
prepared most of the Canadian reserve estimates as of December 31, 1998 and
1999, while Gilbert Laustsen Jung Associates Ltd. prepared the remaining
Canadian reserve estimates as of such dates. The year-end estimates as of
December 31, 1999 were negatively affected relative to amounts previously
reported due to downward revisions of previous estimates. The downward
revisions, totaling 492,816, related to the Company's properties in the U.S.
totaling 368,500 BOE and in Canada totaling 124,316 BOE. The U.S. properties
resulted from differences in interpretation between the current and
predecessor independent engineering firms. The Canadian revisions resulted
primarily from decreased production performance in 1999. These differences, many
of which relate to classification of reserves within the different oil and gas
reserve categories (i.e. proved, probable and possible) are due to the numerous
engineering, geological and operational assumptions that generally are derived
from limited data. 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 were not economic as of December 31, 1998 which resulted in the
elimination of all units. The Company's U.S. oil reserves (including, oil,
condensate and natural gas liquids) have been prepared using average prices
received by the Company of $24.31, $9.67 and $16.91 per barrel and gas reserves
were prepared using average natural gas prices received by the Company of $2.12,
$2.17 and $2.20 per Mcf, as of December 31, 1999, 1998 and 1997, respectively.
The Canadian reserves have been prepared using average prices received by the
Company oil of $22.34, $8.71 and $15.30 per barrel and average natural gas
prices of $2.02, $1.72 and $1.34 per Mcf, as of December 31, 1999, 1998 and
1997, respectively. Ecuador reserves were prepared using an average oil price of
$24.16 and $18.00 per barrel as of December 31, 1999 and 1997, respectively. 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
----------------------- ---------------------- ---------------------- -----------------------
Proved Reserves Oil Gas Oil Gas Oil Gas Oil Gas
- --------------- (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
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
Extensions, discoveries and
additions 131,397 1,110,740 -- -- -- -- 131,397 1,110,740
Revisions of previous
estimates 339,573 5,186,006 367,202 -- 707,794 (5,654,126) 1,414,569 (468,120)
Purchase and sale of
minerals in place (net) (175,573) (18,101,385) -- -- (293,444) (512,147) (469,017) (18,613,532)
Production (326,584) (3,095,456) (35,473) -- (494,350) (2,299,527) (856,407) (5,394,983)
---------- ---------- ---------- ---------- ---------- ---------- ---------- -----------
Balance, December 31, 1999 2,960,728 33,490,082 331,729 -- 3,952,000 18,818,000 7,244,457 52,308,082
========== ========== ========== ========== ========== ========== ========== ===========
Proved Developed Reserves
- -------------------------
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
Balance, December 31, 1999 2,668,623 25,940,224 331,729 -- 3,559,476 18,552,000 6,559,828 44,492,424
</TABLE>
F-30
<PAGE>
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (continued)
Note 17. Subsequent Events
On March 1, 2000, the Company sold Neutrino's interests in Inverness
and Swan Hills in Alberta, Canada, for $9.0 million, subject to certain
adjustments. Of the $9.0 million sales price, $7.55 million was closed and
funded on March 1, 2000. The remainder of the transaction closed on March 21,
2000. Proceeds received were used to reduce Canadian indebtedness.
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
F-31
<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, 1999 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.................. F-2
Consolidated Balance Sheets........................ F-3
Consolidated Statements of Cash Flows.............. F-4
Consolidated Statements of Stockholders' Equity.... F-5
Notes to Consolidated Financial Statements......... F-6
Report of independent accountants.................. F-8
F-32
<PAGE>
(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).
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)).
F-33
<PAGE>
Exhibit
Numbers Description
------- -----------
10.6 Promissory Note, dated December 20, 1995, in the
original principal amount of $3,500,000 made by
Southern Mineral Corporation, SMC Production Co., San
Salvador Development Company, Inc., Venture Resources,
Inc., Venture Pipeline Company, VenGas Pipeline
Company, Spruce Hills Production Company, Inc. in favor
of Compass Bank-Houston (incorporated by reference to
Exhibit 10.4 to Form 8-K of Registrant dated December
20, 1995 (Commission File No. 0-8043)).
*10.7 1996 Stock Option Plan (incorporated by reference to
Exhibit 10.10 to Form 10-KSB dated December 31, 1995
(Commission File No. 0-8043)).
*10.8 1996 Employee Stock Purchase Plan (incorporated by
reference to Exhibit 10.11 to Form 10-KSB dated
December 31, 1995 (Commission File No. 0-8043)).
10.9 Joint Venture Agreement, dated October 1, 1995, between
Southern Mineral Corporation and The Links Group, Inc.
(incorporated by reference to Exhibit 10.12 to Form 10-
KSB dated December 31, 1995 (Commission File No. 0-
8043)).
*10.10 Option Agreement, dated January 5, 1996, between
Southern Mineral Corporation and Diasu Oil & Gas
Company, Inc. covering the exploration joint venture
(incorporated by reference to Exhibit 10.13 to Form 10-
KSB dated December 31, 1995 (Commission File No. 0-
8043)).
*10.11 Stock Option Agreement dated April 6, 1995, between
Southern Mineral Corporation and Robert R. Hillery
(incorporated by reference to Exhibit 10.14 to Form 10-
KSB dated December 31, 1995 (Commission File No. 0-
8043)).
10.12 Subscription Agreement and Assumption of Obligations,
dated January 5, 1995, between Southern Mineral
Corporation and Gary L. Chitty, and Thomas J McMinn
(incorporated by reference to Exhibit 10.15 to Form 10-
KSB/A-1 dated December 31, 1995 (Commission File No. 0-
8043)).
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)).
F-34
<PAGE>
Exhibit
Numbers Description
------- -----------
10.18 Fifth Amendment to Credit Agreement between the Company
and Compass Bank, dated December 31, 1997 (incorporated
by reference to Exhibit 10.1 to Form 8-K dated January
28, 1998 (Commission File No. 0-8043)).
10.19 Sixth Amendment to Credit Agreement between the Company
and Compass Bank, dated January 28, 1998 (incorporated
by reference to Exhibit 10.2 to Form 8-K dated January
28, 1998 (Commission File No. 0-8043 )).
10.20 Letter Agreement between the Company and Amerac, dated
November 17, 1997 (incorporated by reference to Exhibit
10.18 to Form S-4 (Commission File No. 333-42045)).
10.21 Letter Agreement between the Company and Amerac, dated
November 21, 1997 (incorporated by reference to Exhibit
10.19 to Form S-4 (Commission File No. 333-42045)).
10.22 Amended and Restated Credit Agreement between the
Company, Compass Bank-Houston and First Union National
Bank dated June 19, 1998 (incorporated by reference to
Exhibit 10.1 to Form 10-QSB for the quarterly period
ended June 30, 1998 (Commission File No. 0-8043)).
10.23 Letter Amendment dated November 4, 1998, to the Amended
and Restated Credit Agreement between the Company,
Compass Bank-Houston and First Union National Bank
dated June 19, 1998 (incorporated by reference to
Exhibit 10.1 to the Company's Form 10-QSB for the
quarterly period ended September 30, 1998).
*10.24 1997 Stock Option Plan (incorporated by reference to
Form S-8, filed April 28, 1998, Registration No. 333-
51237 (Commission File No. 333-420450)).
10.25 Neutrino Resources Inc. Credit Facility Agreement with
National Bank of Canada as amended February 26, 1999
(incorporated by reference to Exhibit 10.25 to Form 10-
K dated December 31, 1998 (Commission File No. 0-
08043)).
*10.26 Neutrino Resources Inc. Employee Stock Savings Plan
effective July 8, 1998 (incorporated by reference to
Exhibit 10.26 to Form 10-K dated December 31, 1998
(Commission File No. 0- 8043)).
10.27 Second Amendment to Amended and Restated Credit
Agreement between the Company, Compass Bank-Houston and
First Union National Bank dated March 29, 1999
(incorporated by reference to Exhibit 10.27 to Form 10-
K dated December 31, 1998 (Commission File No. 0-
8043)).
*10.28 Amendment to Incentive Stock Option Agreement of the
Registrant (incorporated by reference to Exhibit 10.28
to Form 10K dated December 31, 1998 (Commission File
No. 0-8043)).
*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 (incorporated by
reference to Exhibit 10.29 to Form 10-K dated December
31, 1998 (Commission File No. 0-8043)).
10.30 Employment Agreement between Jeffrey W.C. Arsenych and
Neutrino Resources, Inc., dated as of July 1, 1998
(incorporated by reference to Exhibit 10.30 to Form 10-
K/A dated December 31, 1998 (Commission File No. 0-
8043)).
10.31 Employment Agreement between David W. Beckwermert and
Neutrino Resources, Inc., dated as of July 1, 1998
(incorporated by reference to Exhibit 10.31 to Form 10-
K/A dated December 31, 1998 (Commission File No. 0-
8043)).
F-35
<PAGE>
Exhibit
Numbers Description
------- -----------
10.32 Stock Purchase Agreement, dated July 20, 1999, among
EnCap Energy Capital Fund III, L.P., EnCap Energy
Capital Fund III-B, L.P., Energy Capital Investment
Company PLC, BOCP Energy Partners, L.P. and the
Registrant (incorporated by reference to Exhibit 10.32
to Form S-4 (Commission File No. 333-83345)).
10.33 Purchase and Sale Agreement, July 9, 1999, between the
Registrant, Amerac Energy Corporation and ANR
Production Company (incorporated by reference to
Exhibit 10.34 to Form S-4 (Commission File No. 333-
88345)).
10.34 Agreement of Purchase and Sale, dated February 16,
2000, between Neutrino Resources, Inc. and Star Oil and
Gas Ltd (incorporated by reference to Exhibit 10.1 to
Form 8-K dated March 16, 2000 (Commission File No. 0-
8043)).
10.35 Neutrino Resources Inc. Credit Facility Agreement with
National Bank of Canada as amended July 15, 1999 (filed
herewith).
10.36 Neutrino Resources Inc. Credit Facility Agreement with
National Bank of Canada as amended December 24, 1999
(filed herewith).
10.37 Neutrino Resources Inc. Credit Facility Agreement with
National Bank of Canada as amended March 3, 2000 (filed
herewith).
10.38 Letter Amendment dated July 28, 1999, to the Amended
and Restated Credit Agreement between the Company,
Compass Bank-Houston and First Union National Bank
dated June 19, 1998 (filed herewith).
10.39 Letter Amendment dated September 2, 1999, to the
Amended and Restated Credit Agreement between the
Company, Compass Bank-Houston and First Union National
Bank dated June 19, 1998 (filed herewith).
10.40 Letter Amendment dated September 30, 1999, to the
Amended and Restated Credit Agreement between the
Company, Compass Bank-Houston and First Union National
Bank dated June 19, 1998 (filed herewith).
10.41 Letter Amendment dated October 8, 1999, to the Amended
and Restated Credit Agreement between the Company,
Compass Bank-Houston and First Union National Bank
dated June 19, 1998 (filed herewith).
10.42 Letter Amendment dated October 12, 1999, to the Amended
and Restated Credit Agreement between the Company,
Compass Bank-Houston and First Union National Bank
dated June 19, 1998 (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).
F-36
<PAGE>
23.4 Consent of Ryder Scott Company (filed herewith).
23.5 Consent of Chapman Petroleum Engineering, Ltd. (filed
herewith).
23.6 Consent of Gilbert Laustsen Jung Associates Ltd. (filed
herewith).
27.1 Financial Data Schedule (filed herewith).
* 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 filed October 29, 1999, reporting the Registrant's
(and certain subsidiaries of the Registrant) filing for
protection under Chapter 11 of the United States Bankruptcy
Code in the United States Bankruptcy Court.
F-37
<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: April 5, 2000
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: April 5, 2000
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/ B. TRAVIS BASHAM Director April 5, 2000
- ----------------------------------
B. Travis Basham
/s/ MICHAEL E. LUTTRELL Vice President-Finance and April 5, 2000
- ----------------------------------
Michael E. Luttrell Chief Financial Officer and
Accounting Officer
/s/ THOMAS R. FULLER Director April 5, 2000
- ----------------------------------
Thomas R. Fuller
/s/ ROBERT R. HILLERY Director April 5, 2000
- ----------------------------------
Robert R. Hillery
/s/ HOWELL H. HOWARD Director and Chairman April 5, 2000
- ----------------------------------
Howell H. Howard of the Board of Directors
/s/ STEVEN H. MIKEL Director, President and Chief April 5, 2000
- ----------------------------------
Steven H. Mikel Executive Officer
/s/ JEFFREY B. ROBINSON Director April 5, 2000
- ----------------------------------
Jeffrey B. Robinson
/s/ DONALD H. WIESE, JR. Director April 5, 2000
- ----------------------------------
Donald H. Wiese, Jr.
/s/ SPENCER L. YOUNGBLOOD Director April 5, 2000
- ----------------------------------
Spencer L. Youngblood
F-38
<PAGE>
EXHIBIT 10.35
[National Bank of Canada Letterhead]
Writer's Direct Line
(403) 294-4994
July 15, 1999
Neutrino Resources Inc. Southern Mineral Corporation
#1400, 300 - 5th Avenue SW 1201 Louisiana
Calgary, Alberta Suite 3350
T2P 3C4 Houston, Texas 77002-5609
ATTENTION: MR. RANDY DENECKY ATTENTION: MR. MICHAEL LUTTRELL
CONTROLLER VICE PRESIDENT, FINANCE
Dear Sir:
RE: CREDIT FACILITIES - NATIONAL BANK OF CANADA/NEUTRINO RESOURCES INC.
We wish to advise that National Bank of Canada has approved the following
revised Credit Facilities for Neutrino Resources Inc., subject to the terms and
conditions set out herein. This Offering Letter contains all of the terms and
conditions pertaining to the availability of Credit Facilities from National
Bank of Canada and as a result it amends, incorporates, and restates the terms
and conditions of all existing and new commitments.
BORROWER: NEUTRINO RESOURCES INC. (the "Borrower").
LENDER: NATIONAL BANK OF CANADA (the "Bank").
CREDIT FACILITY A: REVOLVING REDUCING DEMAND LOAN (the "Credit Facility A").
MAXIMUM AMOUNT: $30,500,000. Sublimit of $5,000,000 for Letters of Credit
and/or Letters of Guarantee ("L/C/Gs").
PURPOSE: General corporate purposes including capital expenditures.
AVAILABILITY: Canadian dollars. Reducing $500,000/month commencing August
28, 1999. Revolving in multiples of $100,000.
L/C/Gs (maximum term one year).
REPAYMENT: Interest only, but always subject to Availability and the
Bank's right of demand.
INTEREST RATE: 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 percent (Prime + 1% p.a.). Interest
<PAGE>
Neutrino Resources Inc.
RE: Offering Letter
July 15, 1999 Page 2
- --------------------------------------------------------------------------------
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 1/4% per annum.
DRAWDOWN,
NOTIFICATION,
AND CONVERSION: Canadian Dollar Advances
As required.
STANDBY FEE: One-eighth percent per annum (1/8% p.a.) on the undrawn
portion of the Credit Facility A, payable monthly.
L/C/Gs FEE: One and one-quarter percent per annum (1 1/4% p.a.) of the
issue amount, payable at issue. The fee is to be based on
the number of days the L/C/G is to be outstanding with any
portion of 31 days to be considered a complete month.
EVIDENCE OF DEBT: Revolving Demand Credit Agreement and/or the records of the
Bank.
CREDIT FACILITY B: TREASURY RISK LINE (the "Credit Facility B").
MAXIMUM AMOUNT: $1,500,000 (Notional Risk Content).
PURPOSE: For interest rate and foreign exchange risk management.
AVAILABILITY: Various risk management products, including swaps and
forwards. Maximum term 36 months, subject to Bank
availability. Further utilization at the discretion of the
Bank.
REPAYMENT: Settlement as per contract maturities, payable from
corporate cashflow.
EVIDENCE OF DEBT: Executed Treasury contracts and/or ISDA Master Agreement
with appropriate annexes and/or the records of the Bank.
FOR ALL CREDIT FACILITIES
RENEWAL FEE: $30,000. $15,000 payable upon provision of this Offering
Letter and $15,000 due and payable upon Interim Review. This
fee includes the Bank's engineering expenses incurred for
this review.
SECURITY: The following security shall be completed, duly executed,
delivered and registered, where necessary, to the entire
satisfaction of the Bank and its counsel. All present and
future security (the "Security") and the terms thereof shall
be held by the Bank as Security for the 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.
<PAGE>
Neutrino Resources Inc.
RE: Offering Letter
July 15, 1999 Page 3
- --------------------------------------------------------------------------------
HELD:
1. Accepted Offering Letter dated June 25, 1998.
2. General Assignment of Book Debts.
3. $2,500,000 Debenture with floating charge over all
assets of the Borrower with fixed charges over the major
producing petroleum properties of the Borrower.
4. $5,000,000 Supplemental Debenture with a floating charge
over all assets of the Borrower with fixed charges over
additional major producing petroleum properties of the
Borrower.
5. $15,000,000 Supplemental Debenture with a floating
charge over all assets of the Borrower with additional
fixed charges over major producing petroleum properties
acquired from Cody Energy Canada.
6. $50,000,000 Debenture with a floating charge over all
assets of the Borrower with fixed charges over the major
producing petroleum properties of the Borrower.
7. Evidence of Insurance coverage in accordance with
industry standards, with the Bank shown as first loss
payee.
8. Appropriate title representation (Title Opinion and/or
Officer's Certificate as to Title) satisfactory to the
Bank and its counsel, including a schedule of major
producing petroleum properties described by lease (type,
date, term, parties), legal description (wells and
spacing units), interest (W.I. or other APO/BPO
interests), overrides (APO/BPO), gross overrides, and
other liens, encumbrances, and overrides.
9. Assignment of revenues and monies under material
contracts, as applicable.
10. Legal Opinion of the Bank's counsel.
The Security shall be registered in the Provinces of Alberta
and Saskatchewan.
TO BE OBTAINED
1. Accepted Offering Letter dated July 15, 1999.
2. Such other security, documents, and agreements that the
Bank or its legal counsel may reasonably request.
REPRESENTATIONS
AND WARRANTIES: The Borrower represents and warrants to the Bank that:
1. It has been duly incorporated and is in good standing
under the legislation governing it, and it has the
powers, permits, and licenses required to operate its
business or enterprise and to own, manage, and
administer its property;
<PAGE>
Neutrino Resources Inc.
RE: Offering Letter
July 15, 1999 Page 4
- --------------------------------------------------------------------------------
2. This Offering Letter constitutes, and the Security and
related agreements will constitute, legal, valid, and
binding obligations of the Borrower, enforceable in
accordance with their terms, subject to applicable
bankruptcy, insolvency, or similar laws affecting
creditors' rights generally and to the availability of
equitable remedies;
3. The Borrower has the right to pledge, charge, mortgage,
or lien its assets in accordance with the Security
contemplated by this Agreement;
4. The Borrower is presently in good standing under, and
shall duly perform and observe, all material terms of
all documents, agreements, and instruments affecting or
relating to the petroleum assets of the Borrower;
5. There has been no adverse material change in the
financial position of the Borrower since the date of its
most recent financial statements dated May 31, 1999
which were furnished to the Bank. Such financial
statements fairly present the financial position of the
Borrower at the date that they were drawn up. The
Borrower does not foresee incurring any major liability
which it has not already disclosed to the Bank;
6. It is not involved in any dispute or legal proceedings
likely to materially affect its financial position or
its capacity to operate its business; and
7. It is not in default under the contracts to which it is
a party or under the applicable legislation and
regulations governing the operation of its business or
its property, including, without limitation, all
Environmental Requirements subsequently stated in
Environmental Obligations.
CONDITIONS
PRECEDENT: Prior to additional advances under the Credit Facilities,
the Borrower shall have provided to the Bank:
1. A Revolving Demand Credit Agreement in the face amount
of $30,500,000 duly executed and delivered to the Bank
by the Borrower.
2. All Security, denoted in the Security To Be Obtained
section, shall be duly completed, authorized, executed,
and delivered by the Borrower to the satisfaction of the
Bank and its counsel and registered where applicable.
REPORTING
REQUIREMENTS: The Borrower shall submit to the Bank:
1. Monthly production and revenue reports within 60
calendar days of each month end;
2. Quarterly unaudited financial statements within 60
calendar days of each fiscal quarter end;
<PAGE>
Neutrino Resources Inc.
RE: Offering Letter
July 15, 1999 Page 5
- --------------------------------------------------------------------------------
3. Quarterly compliance certificate (in the form attached)
within 60 calender days of each fiscal quarter end;
4. Annual audited consolidated financial statements within
120 calendar days of each fiscal year end;
5. Annual independent engineering report on the petroleum
properties of the Borrower within 120 calendar days of
each fiscal year end, prepared by a firm acceptable to
the Bank; and
6. Any other information the Bank may reasonably require.
AFFIRMATIVE
COVENANTS: The Borrower shall:
1. Carry on business and operate its petroleum properties
in accordance with good practices consistent with
accepted industry standards and pursuant to applicable
agreements, regulations, and laws;
2. Maintain corporate existence and comply with all
applicable laws;
3. Comply with all regulatory bodies and provisions
regarding environmental procedures and controls;
4. Upon reasonable notice, allow the Bank access to visit
and inspect the Borrower's assets;
5. Maintain adequate and appropriate insurance on the
Borrower's assets including protection against public
liability, blow-outs, and "all-risk" perils;
6. Inform the Bank of any event or action which would have
a material adverse impact on the Borrower's operational
or financial affairs, including but not limited to the
sale of assets, guarantees, funded debt from other
lenders, or alteration of type of business;
7. Keep and maintain books of account and other accounting
records in accordance with generally accepted accounting
principles; and
8. Maintain a Working Capital deficit of less than
$1,500,000 until Interim Review, thereafter maintain a
Working Capital Ratio of not less than 1:1 at all times.
The Working Capital Ratio shall be defined as Current
Assets (including unused availability under the Credit
Facility A) to Current Liabilities (excluding any
current portion of Long Term Debt).
NEGATIVE
COVENANTS: The Borrower shall not without the prior approval of the
Bank, not to be unreasonably withheld:
1. Allow a change in control;
<PAGE>
Neutrino Resources Inc.
RE: Offering Letter
July 15, 1999 Page 6
- --------------------------------------------------------------------------------
2. Merge, amalgamate, or consolidate;
3. Reduce or distribute capital or pay dividends or redeem
or repurchase common or preferred shares, or pay
management fees or other remuneration to Southern
Mineral Corporation ("SMC") or SMC's other subsidiaries;
4. Incur further secured indebtedness, pledge or encumber
assets, or guarantee the obligations of others;
5. Make loans or investments to subsidiaries or affiliates;
6. Sell or dispose of any assets subject to the Bank's
Security in the aggregate of greater than $100,000
annually. This shall include sale/leaseback transactions
on facilities; or
7. Hedge or contract crude oil, natural gas liquids, or
natural gas, on a fixed price basis, exceeding 50% of
actual production volumes.
ENVIRONMENTAL
OBLIGATIONS: 1. The Borrower shall comply with the requirements of all
legislative and regulatory environmental provisions
("The Environmental Requirements") and shall at all
times maintain the authorizations, permits, and
certificates required under these provisions.
2. The Borrower shall immediately notify the Bank in the
event a contaminant spill or emission occurs or is
discovered with respect to its property, operations, or
those of any neighbouring property. In addition, it
shall report to the Bank forthwith any notice, order,
decree, or fine that it may receive or be ordered to pay
with respect to the Environmental Requirements relating
to its business or property.
3. At the request of and in accordance with the conditions
set forth by the Bank, the Borrower shall, at its own
cost, provide any information or document which the Bank
may require with respect to its environmental situation,
including any study or report prepared by a firm
acceptable to the Bank. In the event that such studies
or reports reveal that any Environmental Requirements
are not being respected, the Borrower shall effect the
necessary work to ensure that its business and property
comply with the Environmental Requirements within a
period acceptable to the Bank.
4. The Borrower undertakes to indemnify the Bank for any
damage which the Bank may suffer or any liability which
it may incur as a result of any non-compliance with
Environmental Requirements.
5. The provisions, undertakings, and indemnification set
out in this section shall survive the satisfaction and
release of the Security and payment and satisfaction of
the indebtedness and liability of the Borrower to the
Bank pursuant to the terms hereof.
<PAGE>
Neutrino Resources Inc.
RE: Offering Letter
July 15, 1999 Page 7
- --------------------------------------------------------------------------------
EVENTS OF DEFAULT: Notwithstanding that the Credit Facilities are on a demand
basis, and without prejudice to the Bank's rights thereby
the following shall be considered Events of Default, upon
the occurrence of which the Bank may choose, in its sole
discretion, to cancel all credit availability and to demand
repayment of the Credit Facilities in full, together with
outstanding accrued interest and, without prejudice to the
Bank's other rights and remedies, the Bank's Security shall
become enforceable.
1. Default in payment of principal or interest when due.
2. Any material Representation or Warranty which proves to
be untrue.
3. Failure to observe or comply with any Affirmative or
Negative Covenant, condition, or term as outlined
herein, or in any Security document or underlying
agreements delivered pursuant hereto and following
notice from the Bank of such failure, this default
remains unrectified for a period of 30 days.
4. In the opinion of the Bank, acting reasonably, a
material adverse change in the financial condition of
the Borrower or to the operation of the Borrower's
assets has occurred.
5. If a petition is filed, an order is made or a resolution
passed, or any other proceeding is taken for the winding
up, dissolution, or liquidation of the Borrower.
6. If proceedings are taken to enforce any encumbrance on
the assets of the Borrower having a value in the
aggregate greater than $100,000, excepting as long as
such proceedings are being contested in good faith by
the Borrower and security satisfactory to the Bank has
been provided to the Bank.
7. If the Borrower ceases or threatens to cease to carry on
its business, or if proceedings are commenced for the
suspension of the business of the company, or if any
proceedings are commenced under the Companies Creditors
Arrangements Act or under the Bankruptcy and Insolvency
Act (including filing a proposal or notice of
intention), or if the Borrower commits or threatens to
commit an act of bankruptcy, or if the Borrower becomes
insolvent or bankrupt or makes an authorized assignment
pursuant to the Bankruptcy and Insolvency Act, or a
bankruptcy petition is filed by or presented against the
Borrower.
8. If proceedings are commenced to appoint a receiver,
receiver/manager, or trustee in respect of the assets of
the Borrower by a court or pursuant to any other
agreement.
COSTS: All reasonable third party expenses incurred by the Bank in
connection with the Credit Facilities are for the account of
the Borrower including, but not limited to, legal fees (on a
solicitor and own client basis) and future engineering fees.
CHANGE OF LAWS: The Bank reserves the right to revise the conditions
contained herein upon 30 days prior notice, if and when any
charges, levies, assessments, or other impositions
whatsoever are imposed by a competent governmental authority
with respect to the services offered herein.
CURRENT ACCOUNTS: The Borrower maintain its current accounts at the Calgary
Branch of the Bank through which it shall conduct all of its
banking activities.
<PAGE>
Neutrino Resources Inc.
RE: Offering Letter
July 15, 1999 Page 8
- --------------------------------------------------------------------------------
GENERAL: Time is of the essence.
The Borrower shall do all things and execute all documents
deemed necessary or appropriate by the Bank for the purposes
of giving full force and effect to the terms, conditions,
undertakings, and security granted or to be granted
hereunder.
When a contradiction exists between the Security and this
Offering Letter, this Offering Letter will be the operative
document. Notwithstanding the foregoing, if there is any
right or remedy of the Bank set out in any of the Security
or any part of which is not set out or provided for in this
Offering Letter, such additional right shall not constitute
a conflict or inconsistency.
ACCOUNT DEBITS: The Borrower hereby irrevocably authorizes the Bank to debit
periodically or from time to time, any bank account it may
maintain at the Bank in order to pay all or part of the
amounts the Borrower may owe to the Bank hereunder.
PERSONAL PROPERTY
SECURITY ACT ("PPSA")
REQUIREMENTS: The Borrower hereby waives the requirement for the Bank to
provide copies of PPSA registrations, verification
statements, or financing statements undertaken by the Bank.
The Borrower hereby agrees to provide to the Bank written
notice of a change in name or address immediately.
ASSIGNMENT: No rights or obligations of the Borrower hereunder and no
amount of the Credit Facilities may be transferred or
assigned by the Borrower, any such transfer or assignment
being null and void insofar as the Bank is concerned and
rendering any balance then outstanding of the loan
immediately due and payable at the option of the Bank and
releasing the Bank from any and all obligations of making
any further advances hereunder.
DEMAND: Notwithstanding any of the terms of this Offering Letter,
all obligations of the Borrower hereunder are repayable to
the Bank at any time upon its demand.
NO OBLIGATION: Upon the Bank's demand for repayment or upon the occurrence
of an Event of Default, the Bank shall have no obligation or
liability to make further advances under the Credit
Facilities.
GOVERNING LAW: This Offering Letter shall be construed and governed in
accordance with the laws of the Province of Alberta.
INTERIM REVIEW: By September 30, 1999.
REVIEW DATE: The Credit Facilities may be reviewed periodically by the
Bank, the next review being scheduled on or before April 30,
2000.
EXPIRY DATE: This Offering Letter is open for acceptance until July 20,
1999 at which time it will expire unless extended by mutual
consent.
<PAGE>
Neutrino Resources Inc.
RE: Offering Letter
July 15, 1999 Page 9
- --------------------------------------------------------------------------------
If the foregoing terms and conditions are acceptable, please sign both copies of
this Offering Letter and return one copy to the Bank by the expiry date.
National Bank of Canada appreciates the opportunity of providing this Offering
Letter 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
AGREED AND ACCEPTED this 19th day of July, 1999.
NEUTRINO RESOURCES INC.
PER: /s/ Michael E. Luttrell (CORPORATE SEAL)
-----------------------------
Vice President Finance
PER:_____________________________
<PAGE>
Neutrino Resources Inc.
RE: Offering Letter
July 15, 1999 Page 10
- --------------------------------------------------------------------------------
APPENDIX A
----------
<TABLE>
<CAPTION>
<S> <C> <C>
ADMINISTRATION: Corporate and Energy Group Manager: Mr. Timothy D. Bacon
National Bank of Canada Telephone: (403) 294-4994
#600, 407 - 8/th/ Avenue SW Facsimile: (403) 294-3078
Calgary, Alberta
T2P 1E5
BA Bookings; Team Manager: Ms. Leslie Stewart
Syndicate Administration; Telephone: (403) 294-4978
Loan/Account Balances; General. Facsimile: (403) 294-3078
Current Account Documents; L/C/Gs Senior Clerk: Mrs. Donna Calafatis
MasterCard BusinessCard; Telephone: (403) 294-4992
Loan/Account Balances. Facsimile: (403) 294-3078
BRANCH: Calgary Branch Manager: Mr. Darrell Stelmack
National Bank of Canada Telephone: (403) 294-4931
401 - 8/th/ Avenue SW Facsimile: (403) 294-4965
Calgary, Alberta
T2P 1E4
Current Account Documents; Manager, Administration: Mrs. Dawne Raho
Safety Deposit Boxes; General Telephone: (403) 294-4972
Foreign Exchange; Bank Facsimile: (403) 294-4965
Confirmations; Money Orders/Bank
Drafts; General.
Term Deposits; RRSPs; GICs; Manager, Investments: Ms. Diane Marx
Investment BAs. Telephone: (403) 294-4909
Facsimile: (403) 294-4965
OTHER: Treasury & Financial Markets Sales Representative: Ms. Dolsie Doodha
National Bank of Canada Telephone: 1-888-495-3146
150 York Street - 4th Floor Facsimile: (416) 814-2920
Toronto, Ontario
M5M 3A9
International - Commercial Operations
National Bank of Canada Manager: Mr. Vaughn Wright
Suite 200 - 555 Burrard Telephone: 1-800-755-6935
Vancouver, British Columbia Facsimile: (604) 661-5523
V7X 1M7
PAYROLL SERVICES: Western Canada Region Sales Representative: Mr. Michael Kushner
National Bank of Canada Telephone: (403) 294-4963
#600, 407 - 8/th/ Avenue SW Facsimile: (403) 294-4993
Calgary, Alberta
T2P 1E5
</TABLE>
<PAGE>
EXHIBIT 10.36
[NATIONAL BANK OF CANADA LETTERHEAD]
Writer's Direct Line
(403) 294-4957
December 24, 1999
Neutrino Resources Inc. Southern Mineral Corporation
#1400, 300 - 5th Avenue SW 1201 Louisiana
Calgary, Alberta Suite 3350
T2P 3C4 Houston, Texas 77002-5609
ATTENTION: Mr. Randy Denecky ATTENTION: Mr. Michael Luttrell
Controller Vice-President, Finance
Dear Sir:
RE: CREDIT FACILITIES - NATIONAL BANK OF CANADA/NEUTRINO RESOURCES INC.
We are pleased to advise that National Bank of Canada has approved the following
amendments to the Credit Facilities for Neutrino Resources Inc., subject to the
terms and conditions below. All other terms and conditions of the accepted
Offering Letter dated July 15, 1999 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 REDUCING DEMAND LOAN (the "Credit Facility A").
- ------------------
MAXIMUM AMOUNT: $28,500,000. Sublimit of $5,000,000 for Letters of Credit
- -------------- and/or Letters of Guarantee ("L/C/Gs").
AVAILABILITY: Canadian dollars. Reducing $500,000/month commencing
- ------------ December 28, 1999 then $450,000/month commencing January 28,
2000. Further reducing $3,500,000 upon sale of Sylvan Lake/
Medicine River, Alberta and Lessard, Alberta producing
petroleum properties in December, 1999. Revolving in
multiples of $100,000.
FOR ALL CREDIT FACILITIES
-------------------------
CONDITIONS
PRECEDENT: Prior to any increased drawdown on the Credit Facilities,
- ---------- the Borrower shall provide:
1. All security denoted in the following Security To Be
Obtained section, completed, duly authorized, executed,
and delivered by the Borrower to the satisfaction of
the Bank and its counsel.
<PAGE>
Neutrino Resources Inc.
RE: Offering Letter
December 21, 1999 Page 2
- --------------------------------------------------------------------------------
SECURITY: All security shall be completed, duly executed, delivered,
- --------- and registered promptly, 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. Amending Offering Letter dated December 24, 1999.
EXPIRY DATE: This Amending Offering Letter is open for acceptance until
- ----------- January 21, 2000, at which time it will expire unless
extended by mutual consent.
If the foregoing terms and conditions are acceptable, please sign both copies of
this Offering Letter and return one copy to the Bank by the expiry date.
National Bank of Canada appreciates the opportunity of providing this Offering
Letter to Neutrino Resources Inc. We look forward to our continuing and
mutually beneficial relationship.
Yours truly,
NATIONAL BANK OF CANADA
/s/ Kevin Kynoch /s/ signature here
- ------------------------ ----------------------------
Kevin Kynoch per: Brian J. Mellum
Manager Senior Manager
Corporate and Energy Group Energy Group
AGREED AND ACCEPTED this 21st day of January, 2000.
NEUTRINO RESOURCES INC.
PER:/s/ MICHAEL E. LUTTRELL
-----------------------------
Vice President
(Corporate Seal)
PER:
-----------------------------
<PAGE>
EXHIBIT 10.37
[NATIONAL BANK OF CANADA LETTERHEAD]
Writer's Direct Line
(403) 294-4957
March 3, 2000
Neutrino Resources Inc. Southern Mineral Corporation
#1400, 300 - 5th Avenue SW 1201 Louisiana
Calgary, Alberta Suite 3350
T2P 3C4 Houston, Texas 77002-5609
ATTENTION: Mr. Randy Denecky ATTENTION: Mr. Michael Luttrell
Controller Vice-President, Finance
Dear Sir:
RE: CREDIT FACILITIES - NATIONAL BANK OF CANADA/NEUTRINO RESOURCES INC.
We are pleased to advise that National Bank of Canada has approved the following
amendments to the Credit Facilities for Neutrino Resources Inc., subject to the
terms and conditions below. All other terms and conditions of the accepted
Offering Letter dated July 15, 1999 and accepted amendment to the Offering
Letter dated December 24, 1999 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: $11,050,000. Sublimit of $2,500,000 for Letters of Credit
- -------------- and/or Letters of Guarantee ("L/C/Gs").
AVAILABILITY: Canadian dollars. Revolving in multiples of $100,000.
- ------------
FOR ALL CREDIT FACILITIES
-------------------------
SECURITY: All security shall be completed, duly executed, delivered,
- -------- and registered promptly, 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. Amending Offering Letter dated March 3, 2000.
<PAGE>
Neutrino Resources Inc.
RE: Offering Letter
March 3, 2000 Page 2
- --------------------------------------------------------------------------------
EXPIRY DATE: This Amending Offering Letter is open for acceptance until
- ----------- March 10, 2000, at which time it will expire unless extended
by mutual consent.
If the foregoing terms and conditions are acceptable, please sign both copies of
this Offering Letter and return one copy to the Bank by the expiry date.
National Bank of Canada appreciates the opportunity of providing this Offering
Letter to Neutrino Resources Inc. We look forward to our continuing and
mutually beneficial relationship.
Yours truly,
NATIONAL BANK OF CANADA
/s/ Kevin Kynoch /s/ Brian J. Mellum
- ------------------------ ----------------------------
Kevin Kynoch Brian J. Mellum
Manager Senior Manager
Energy Group Energy Group
AGREED AND ACCEPTED this 7th day of March, 2000.
NEUTRINO RESOURCES INC.
PER:/s/illegible signature
-----------------------------
(Corporate Seal)
PER:/s/illegible signature
-----------------------------
<PAGE>
EXHIBIT 10.38
[COMPASS BANK LETTERHEAD]
July 28, 1999
Mr. Steven H. Mikel
President & CEO
Southern Mineral Corporation
1201 Louisiana Street, Suite 3350
Houston, Texas 77002-5609
RE: Amended and Restated Credit Agreement dated June 19, 1998 by and
between Southern Mineral Corporation, SMC Ecuador, Inc., SMC
Production Co., BEC Energy, Inc., Amerac Energy Corporation, Compass
Bank and First Union National Bank (as subsequently amended, restated,
and/or supplemented, the "Credit Agreement"). All capitalized terms
used but not defined herein shall have the meanings attributed thereto
in the Credit Agreement.
Dear Steve:
Pursuant to Section 2.9 of the Credit Agreement, the Lenders have
redetermined that as of this date the Borrowing Base is $18,670,000 and
commencing August 1, 1999, the Scheduled Reduction Amount shall be $100,000 and
commencing October 1, 1999, the Scheduled Reduction Amount shall increase to
$225,000.
You have submitted to the Lenders term sheets for a restructure of the
current loan, a DIP facility and a post corporate reorganization facility in
your letter of July 22, 1999. The terms proposed by the Company for these
facilities are unacceptable to the Lenders. As you know, the Lenders have
submitted to the Company a preliminary term sheet for a restructuring of the
existing loan with a $20,000,000 Borrowing Base (prior to the ANR Sale
referenced below). This preliminary term sheet is subject to Lenders' credit
committee approvals and is based on the Lenders' determination of the Company's
value following the proposed restructure including the EnCap equity infusion and
conversion of the public debt to equity. The Lenders remain interested in
reaching an agreement on the terms of a restructure of the Credit Agreement and
are also receptive to considering DIP financing and a post restructure facility
which will be both acceptable to the Lenders and will assist your Company in
going forward with its recapitalization.
You have informed us that the Company intends to sell all of Southern
Mineral Corporation and Amerac's interests in the Brushy Creek and Texan Gardens
Fields, respectively (the "Subject Properties"), for approximately $15,900,000
(the "ANR Sale"). The Borrowing Base value attributable to the Subject
Properties is $5,000,000. Section 5.23 of the Credit Agreement provides that,
subject to the Lenders' prior consent to the release of their liens in
connection with any such sale, the proceeds from the sale of the Subject
Properties shall 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 the principal outstanding under the Borrowing Base facility
to the extent of the allocated Borrowing Base value for such assets
sold;
(d) next, to the payment of Tranche A Principal; and
(e) finally, 100% of the remainder, if any, to reduce the Loan Balance.
The Borrowing Base shall be reduced by a like amount.
<PAGE>
Mr. Steven H. Mikel
July 28, 1999
Page 2
You state in your letter dated July 22, 1999 that the Company has incurred
the following costs associated with the proposed sale of the Subject Properties:
a. $50,000 legal fees,
b. $244,200 investment banker fees, and
c. $320,000 federal income taxes.
Initially, note that it is the Lenders' position that federal income tax ("FIT")
liability associated with the sale of the Subject Properties is not a "cost".
Nevertheless, and without waiving the Lender's right to exclude such amounts
from any future asset sale, as one of the conditions set forth below, the
Lenders are prepared to agree to let the Company purchase a certificate of
deposit in the amount of $320,000 which shall be pledged as collateral for the
Borrower's Obligations to Compass Bank, as Agent under a Deposit Pledge
Agreement (the "CD Pledge") and directly applied to such FIT obligations as and
when due.
The Lenders' agree to consent to the sale of the Subject Properties
conditioned upon:
1. Satisfactory documentation of the Company's net sale proceeds amount,
legal costs, investment banker fees and FIT liability.
2. Net sale proceeds after legal fees of $50,000 and investment banker
fees of $244,200 shall be wired directly to Compass Bank and applied
in the following order:
a. Certificate of deposit purchased by the Company $320,000
and pledged to Compass Bank, Agent
b. Past due interest or fees due $0
c. Borrowing Base Facility principal payment $5,000,000
d. Tranche A Facility principal payment $10,285,000
-----------
$15,900,000
3. Upon consummation of the ANR Sale, the Borrowing Base shall be
$13,670,000, if the sale occurs prior to July 31, 1999, and
$13,570,000, if the sale occurs during August, 1999 (after payment of
the $100,000 August 1, 1999, Scheduled Reduction Amount).
4. Past due legal fees owed to Jackson Walker L.L.P. totaling $43,675.15
per the March and April 1999 invoices shall be paid in full.
In conjunction with this Borrowing Base redetermination, please remit
payment directly to each Lender for the engineering fees owed to each Lender as
a result of this redetermination.
Except as expressly provided herein, the Credit Agreement, the CD Pledge
and the other Loan Documents shall remain in full force and effect in accordance
with their respective terms, and this letter shall not be construed to:
a. impair the validity, perfection or priority of any lien or security
interest securing the Obligations;
b. waive or impair any rights, powers or remedies of the Agent and the
Lenders under the Credit Agreement and the other Loan Documents;
<PAGE>
Mr. Steven H. Mikel
July 28, 1999
Page 3
c. grant any forbearance periods, or extend the term of the Credit
Agreement or the time for payment of any of the Obligations; or
d. constitute an acceptance of the proposed facilities set forth in your
July 22, 1999 letter or to make any loans or other extensions of
credit to the Borrowers.
No Event of Default and no Default is waived or remedied by the execution
of this letter by the Lenders, and any such Default or Event or Default
heretofore arising and currently continuing shall continue after the execution
and delivery hereof. Nothing contained in this letter, nor any past indulgence
by the Lenders, nor any prior waiver or consents or any waivers or consents
which may hereafter be granted nor any other action or inaction on behalf of the
Lenders (i) shall constitute or be deemed to constitute a waiver of any Defaults
or Events of Default which exist or may exist under the Credit Agreement or the
other Loan Documents, or (ii) shall constitute or be deemed to constitute an
election of remedies by the Lenders or a waiver of any of the rights or remedies
of the Lenders provided in the Credit Agreement or the other Loan Documents or
otherwise afforded at law or in equity.
THIS LETTER, THE AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS (INCLUDING
THE DEPOSIT PLEDGE) REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT BETWEEN THE
PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR
SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL
AGREEMENTS BETWEEN THE PARTIES.
Very truly yours,
/s/ Dorothy Marchand Wilson
---------------------------
Dorothy Marchand Wilson
cc: Murray Brasseux
Jay Chernosky
Buddy Clark
Allison Hammer
Bruce Ruzinsky
Philip Trinder
<PAGE>
EXHIBIT 10.39
[Logo] Compass Bank Compass Bank
P.O. Box 4444
Houston, TX 77210-4444
September 2, 1999
Mr. Steven H. Mikel
President & CEO
Southern Mineral Corporation
1201 Louisiana Street, Suite 3350
Houston, Texas 77002-5609
RE: Amended and Restated Credit Agreement dated June 19, 1998, by and
between Southern Mineral Corporation, SMC Ecuador, Inc., SMC
Production Co., BEC Energy, Inc., Amerac Energy Corporation, Compass
Bank and First Union National Bank (as subsequently amended, restated,
and/or supplemented, the "Credit Agreement")
Dear Steve:
Section 2.5 (a) of the Credit Agreement shall be amended to change the date of
September 1, 1999, to September 30, 1999.
The above date extension is contingent upon the payment of a fee ("Extension
Fee") to the Lenders in the amount of $50,000, to be shared pro rata by the
Lenders.
In connection with the proceeds from the sale of the Borrower's interest in the
Texan Gardens field, the Lenders agree to waive the requirements of Section 5.23
of the Credit Agreement, thereby allowing the Borrower to retain the remainder
of the proceeds ("Remaining Proceeds") from the sale of its interests in the
Texan Gardens field after payment of the following:
(i) Payment to the Lenders of the Restructure Fee as provided in Section 2.26
of the Credit Agreement. Section 2.26 of the Credit Agreement is hereby
amended to provide that such Restructure Fee is payable upon the
Borrower's sale of its interests in the Texan Gardens field.
(ii) Payment shall be made to the Lenders of the Extension Fee as provided
herein.
The allowance to retain the Remaining Proceeds is further contingent upon the
Borrower providing to the Agent original checks written on the Borrower's
account, payable to vendors and other parties, including amounts due associated
with the sale of the Texan Gardens field (along with stamped addressed
envelopes) which are to be paid out of the Remaining Proceeds in an amount
totaling no less than the Remaining Proceeds. Such checks will be mailed by the
Agent upon deposit of the Remaining Proceeds into Borrower's account.
<PAGE>
Mr. Steven H. Mikel
September 2, 1999
Page 2
Except as expressly provided herein, the Credit Agreement and the other Loan
Documents shall remain in full force and effect in accordance with their
respective terms and this letter shall not be construed to:
(i) impair the validity, perfection or priority of any lien or security
interest securing the Obligations;
(ii) waive or impair any rights, powers or remedies of the Agent and the
Lenders under the Credit Agreement and the other Loan Documents; or
(iii) grant any forbearance periods or extend the term of the Credit
Agreement or the time for payment of any of the Obligations, except as
expressly provided herein.
No Event of Default and no Default is waived or remedied by the execution of
this letter by the Lenders, and any such Default or Event of Default heretofore
arising and currently continuing shall continue after the execution and delivery
hereof. Nothing contained in this letter, nor any past indulgence by the
Lenders, nor any prior waiver or consents or any waivers or consents which may
hereafter be granted nor any other action or inaction on behalf of the Lenders
(i) shall constitute or be deemed to constitute a waiver of any Defaults or
Events of Default which exist or may exist under the Credit Agreement or any
other Loan Document, or (ii) shall constitute or be deemed to constitute an
election of remedies by the Lenders or a waiver of any of the rights or remedies
of the Lenders provided in the Credit Agreement or the other Loan Documents or
otherwise afforded at law or in equity.
THIS LETTER, THE AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS REPRESENT,
COLLECTIVELY, THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
Sincerely,
COMPASS BANK
By: /s/ Dorothy Marchand Wilson
-------------------------------
Dorothy Marchand Wilson
Senior Vice President
FIRST UNION NATIONAL BANK
By: Illegible Signature
-------------------------------
Its:Senior Vice President
-------------------------------
<PAGE>
Mr. Steven H. Mikel
September 2, 1999
Page 3
ACKNOWLEDGED AND AGREED:
SOUTHERN MINERAL CORPORATION
/s/ Steven H. Mikel
- ----------------------------
Steven H. Mikel
President
<PAGE>
EXHIBIT 10.40
[COMPASS BANK LETTERHEAD]
September 30, 1999
Mr. Steven H. Mikel
President & CEO
Southern Mineral Corporation
1201 Louisiana Street, Suite 3350
Houston, Texas 77002-5609
RE: Amended and Restated Credit Agreement dated June 19, 1998, by and
between Southern Mineral Corporation, SMC Ecuador, Inc., SMC
Production Co., BEC Energy, Inc., Amerac Energy Corporation, Compass
Bank and First Union National Bank (as subsequently amended, restated,
and/or supplemented, the "Credit Agreement")
Dear Steve:
Section 2.5 (a) of the Credit Agreement shall be amended to change the date of
September 30, 1999 to October 8, 1999.
Except as expressly provided herein, the Credit Agreement and the other Loan
Documents shall remain in full force and effect in accordance with their
respective terms and this letter shall not be construed to:
(i) impair the validity, perfection or priority of any lien or security
interest securing the Obligations;
(ii) waive or impair any rights, powers or remedies of the Agent and the
Lenders under the Credit Agreement and the other Loan Documents; or
(iii) grant any forbearance periods or extend the term of the Credit
Agreement or the time for payment of any of the Obligations, except
as expressly provided herein.
No Event of Default and no Default is waived or remedied by the execution of
this letter by the Lenders, and any such Default or Event of Default heretofore
arising and currently continuing shall continue after the execution and delivery
hereof. Nothing contained in this letter, nor any past indulgence by the
Lenders, nor any prior waiver or consents or any waivers or consents which may
hereafter be granted nor any other action or inaction on behalf of the Lenders
(i) shall constitute or be deemed to constitute a waiver of any Defaults or
Events of Default which exist or may exist under the Credit Agreement or any
other Loan Document, or (ii) shall constitute or be deemed to constitute an
election of remedies by the Lenders or a waiver of any of the rights or remedies
of the Lenders provided in the Credit Agreement or the other Loan Documents or
otherwise afforded at law or in equity.
<PAGE>
Mr. Steven H. Mikel
September 30, 1999
Page 2
THIS LETTER, THE AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS
REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
Sincerely,
COMPASS BANK
By:/s/ Dorothy Marchand Wilson
---------------------------
Dorothy Marchand Wilson
Senior Vice President
FIRST UNION NATIONAL BANK
By: __________________________
Its: __________________________
ACKNOWLEDGED AND AGREED:
SOUTHERN MINERAL CORPORATION
/s/ Michael. E. Luttrell
- ------------------------
Michael E. Luttrell
Vice President & CFO
<PAGE>
EXHIBIT 10.41
COMPASS BANK Compass Bank
P.O. Box 4444
Houston, TX 77210-4444
October 8, 1999
Mr. Steven H. Mikel
President & CEO
Southern Mineral Corporation
1201 Louisiana Street, Suite 3350
Houston, Texas 77002-5609
RE: Amended and Restated Credit Agreement dated June 19, 1998, by and
between Southern Mineral Corporation, SMC Ecuador, Inc., SMC
Production Co., BEC Energy, Inc., Amerac Energy Corporation, Compass
Bank and First Union National Bank (as subsequently amended, restated,
and/or supplemented, the "Credit Agreement")
Dear Steve:
Section 2.5 (a) of the Credit Agreement shall be amended to change the date of
October 8, 1999 to October 15, 1999.
In response to your letter dated as of today, the Lenders would like to point
out that the Company has been able to get to this point of improvement due, in
part, to the cooperation of the Lenders, which have acted in good faith by,
among other things, not declaring certain Events of Default and by extending the
maturity of Tranche A, as the Borrower and the Lenders have attempted to resolve
outstanding issues. We remain interested in working with the Borrower and the
Co-Borrowers toward improving their financial condition and satisfying their
Obligations under the Credit Agreement. We will respond shortly to some of the
comments contained in your letter of October 8, 1999.
Except as expressly provided herein, the Credit Agreement and the other Loan
Documents shall remain in full force and effect in accordance with their
respective terms and this letter shall not be construed to:
(i) impair the validity, perfection or priority of any lien or security
interest securing the Obligations;
(ii) waive or impair any rights, powers or remedies of the Agent and the
Lenders under the Credit Agreement and the other Loan Documents; or
(iii) grant any forbearance periods or extend the term of the Credit
Agreement or the time for payment of any of the Obligations, except as
expressly provided herein.
No Event of Default and no Default is waived or remedied by the execution of
this letter by the Lenders, and any such Default or Event of Default heretofore
arising and currently
<PAGE>
Mr. Steven H. Mikel
October 8, 1999
Page 2
continuing shall continue after the execution and delivery hereof. Nothing
contained in this letter, nor any past indulgence by the Lenders, nor any prior
waiver or consents or any waivers or consents which may hereafter be granted nor
any other action or inaction on behalf of the Lenders (i) shall constitute or be
deemed to constitute a waiver of any Defaults or Events of Default which exist
or may exist under the Credit Agreement or any other Loan Document, or (ii)
shall constitute or be deemed to constitute an election of remedies by the
Lenders or a waiver of any of the rights or remedies of the Lenders provided in
the Credit Agreement or the other Loan Documents or otherwise afforded at law or
in equity.
All capitalized terms not otherwise defined herein shall have the same meaning
as set forth in the Credit Agreement.
As additional consideration for the waiver granted herein by the Lenders, 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 modification 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 modification and the other
Loan Documents and the making, extension, renewal, modification, amendment or
restatement of any thereof.
THIS LETTER, THE CREDIT AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS
REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
Sincerely,
COMPASS BANK
By: /s/ Dorothy Marchand Wilson
-------------------------------
Dorothy Marchand Wilson
Senior Vice President
FIRST UNION NATIONAL BANK
By: /s/ Robert R. Wetteroff
-------------------------------
Its: Robert R. Wetteroff
------------------------------
Senior Vice President
<PAGE>
Mr. Steven H. Mikel
October 8, 1999
Page 3
ACKNOWLEDGED AND AGREED:
SOUTHERN MINERAL CORPORATION
/s/ Steven H. Mikel
- -------------------------------
Steven H. Mikel
President
<PAGE>
EXHIBIT 10.42
[COMPASS BANK LETTERHEAD]
October 12, 1999
Mr. Steven H. Mikel
President & CEO
Southern Mineral Corporation
1201 Louisiana Street, Suite 3350
Houston, Texas 77002-5609
RE: Amended and Restated Credit Agreement dated June 19, 1998, by and
between Southern Mineral Corporation, SMC Ecuador, Inc., SMC
Production Co., BEC Energy, Inc., Amerac Energy Corporation, Compass
Bank and First Union National Bank (as subsequently amended, restated,
and/or supplemented, the "Credit Agreement")
Dear Steve:
Section 2.5 (a) of the Credit Agreement shall be amended to change the date of
October 15, 1999 to October 22, 1999.
Except as expressly provided herein, the Credit Agreement and the other Loan
Documents shall remain in full force and effect in accordance with their
respective terms and this letter shall not be construed to:
(i) impair the validity, perfection or priority of any lien or security
interest securing the Obligations;
(ii) waive or impair any rights, powers or remedies of the Agent and the
Lenders under the Credit Agreement and the other Loan Documents; or
(iii) grant any forbearance periods or extend the term of the Credit
Agreement or the time for payment of any of the Obligations, except
as expressly provided herein.
No Event of Default and no Default is waived or remedied by the execution of
this letter by the Lenders, and any such Default or Event of Default heretofore
arising and currently continuing shall continue after the execution and delivery
hereof. Nothing contained in this letter, nor any past indulgence by the
Lenders, nor any prior waiver or consents or any waivers or consents which may
hereafter be granted nor any other action or inaction on behalf of the Lenders
(i) shall constitute or be deemed to constitute a waiver of any Defaults or
Events of Default which exist or may exist under the Credit Agreement or any
other Loan Document, or (ii) shall constitute or be deemed to constitute an
election of remedies by the Lenders or a waiver of any of the rights or remedies
of the Lenders provided in the Credit Agreement or the other Loan Documents or
otherwise afforded at law or in equity.
<PAGE>
Mr. Steven H. Mikel
October 12, 1999
Page 2
All capitalized terms not otherwise defined herein shall have the same meaning
as set forth in the Credit Agreement.
As additional consideration for the waiver granted herein by the Lenders, 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 OTHER WISE), OF THE AGENT AND THE LENDERS, THEIR
RESPECTIVE REPRESENTATIVES, AGENTS, OFFICERS, DIRECTORS, EMPLOYEES, SUCCESSORS
AND ASSIGNS. Notwithstanding any provision of this modification 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 modification and the other
Loan Documents and the making, extension, renewal, modification, amendment or
restatement of any thereof.
THIS LETTER, THE CREDIT AGREEMENT AND THE OTHER WRITTEN LOAN DOCUMENTS
REPRESENT, COLLECTIVELY, THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE
CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS, OR SUBSEQUENT ORAL
AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE
PARTIES.
Sincerely,
COMPASS BANK
By:/s/ Dorothy Marchand Wilson
-----------------------------
Dorothy Marchand Wilson
Senior Vice President
FIRST UNION NATIONAL BANK
/s/ Robert R. Wetteroff
By: __________________________
Robert R. Wetteroff
Senior Vice President
Its:__________________________
<PAGE>
Mr. Steven H. Mikel
October 12, 1999
Page 3
ACKNOWLEDGED AND AGREED:
SOUTHERN MINERAL CORPORATION
/s/ Steven H. Mikel
- ----------------------------
Steven H. Mikel
President
<PAGE>
TYPE: EX-21.1
SEQUENCE: 7
<TABLE>
<CAPTION>
EXHIBIT 21.1
OTHER NAME UNDER WHICH JURISDICTION OF
NAME OF SUBSIDIARY SUBSIDIARY CONDUCTS BUSINESS INCORPORATION
<S> <C> <C>
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
</TABLE>
<PAGE>
[GILBERT LAUSTSEN JUNG ASSOCIATES LTD. LETTER HEAD]
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.:
. the Reserve Determination and Evaluation of the Canadian Oil and Gas
Properties of Neutrino Resources Inc. effective January 1, 2000, dated
January 6, 2000.
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 10 K
filing.
Yours very truly,
GILBERT LAUSTSEN JUNG
ASSOCIATES LTD.
/s/ Wayne W. Chow
--------------------------
Wayne W. Chow, P. Eng.
Vice-President
Calgary, Alberta
Date: March 28, 2000
<PAGE>
[CHAPMAN LETTER HEAD APPEARS HERE]
March 28, 2000
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
report entitled "Neutrino Resources Inc., Reserve and Economic Evaluation
Constant Price/No Cost Escalation Case", dated January 6, 2000 and any other
associated 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
CWC/hmh/2686
PERMIT TO PRACTICE
CHAPMAN PETROLEUM ENGINEERING LTD
Signature:/s/ C. W. Chapman
--------------------
Date: 3/28/00
-----------------------
PERMIT NUMBER: P 4201
The Association of Professional Engineers,
Geologists and Geophysicists of Alberta
<PAGE>
EXHIBIT 21.1
<TABLE>
<CAPTION>
EXHIBIT 21.1
OTHER NAME UNDER WHICH JURISDICTION OF
NAME OF SUBSIDIARY SUBSIDIARY CONDUCTS BUSINESS INCORPORATION
<S> <C> <C>
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
</TABLE>
<PAGE>
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 dated March 31, 2000, relating to the consolidated balance sheet of
Southern Mineral Corporation and subsidiaries as of December 31, 1999 and 1998
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, 1999, which report appears in the December 31,
1999 annual report on Form 10-K of Southern Mineral Corporation. Our report
dated March 30, 2000, contains an explanatory paragraph that states the Company
has filed under Chapter 11 of the U.S. Bankruptcy Code and therefore raising
substantial doubt about its ability to continue as a going concern.
Management's plans in regard to this matter are also discussed in Note 2. The
financial statements do not include any adjustments that might result from the
outcome of this uncertainty.
KPMG LLP
Houston, Texas
April 5, 2000
<PAGE>
EXHIBIT 23.2
[LETTERHEAD OF NETHERLAND, SEWELL & ASSOCIATES, INC.]
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 and Ecuador proved reserves contained in the Annual Report on
Form 10-K for the year ended December 31, 1999.
1. Audit of domestic proved reserves estimates as of January 1, 1997 dated
February 25, 1997.
2. Report of domestic proved reserves estimates as of January 1, 1998 dated
February 16, 1998.
3. Report of domestic proved reserves estimates as of January 1, 1999 dated
February 11, 1999.
4. Report of domestic and Ecuador proved reserves as of January 1, 2000 dated
January 19, 2000.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Frederic D. Sewell
------------------------------
Frederic D. Sewell
President
Dallas, Texas
March 30, 2000
<PAGE>
EXHIBIT 23.3
[MCDANIEL & ASSOCIATES LETTERHEAD APPEARS HERE]
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 reserve contained in the Annual Report on Form 10-K
for the year ended December 31, 1999.
1. Report of Canadian reserve estimates as of December 31, 1996
2. Report of Canadian reserve estimates as of December 31, 1997
McDANIEL & ASSOCIATES CONSULTANTS LTD.
/s/ W.C. Seth
- ------------------------
W.C. Seth, P Eng.
President & Managing Director
Calgary, Alberta
Dated: March 29, 2000
<PAGE>
EXHIBIT 23.4
[LETTERHEAD OF RYDER SCOTT COMPANY]
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, 1999.
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 L.P.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
March 29, 2000
<PAGE>
EXHIBIT 23.5
[CHAPMAN LETTER HEAD APPEARS HERE]
March 28, 2000
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
report entitled "Neutrino Resources Inc., Reserve and Economic Evaluation
Constant Price/No Cost Escalation Case", dated January 6, 2000 and any other
associated 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
CWC/hmh/2686
PERMIT TO PRACTICE
CHAPMAN PETROLEUM ENGINEERING LTD
Signature:/s/ C. W. Chapman
--------------------
Date: 3/28/00
-----------------------
PERMIT NUMBER: P 4201
The Association of Professional Engineers,
Geologists and Geophysicists of Alberta
<PAGE>
EXHIBIT 23.6
[GILBERT LAUSTSEN JUNG ASSOCIATES LTD. LETTER HEAD]
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.:
. the Reserve Determination and Evaluation of the Canadian Oil and Gas
Properties of Neutrino Resources Inc. effective January 1, 2000, dated
January 6, 2000.
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 10 K
filing.
Yours very truly,
GILBERT LAUSTSEN JUNG
ASSOCIATES LTD.
/s/ Wayne W. Chow
--------------------------
Wayne W. Chow, P. Eng.
Vice-President
Calgary, Alberta
Date: March 28, 2000
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