SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2000
OR
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ______________ TO ____________
Commission file number: 0-8043
SOUTHERN MINERAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 36-2068676
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1201 LOUISIANA, SUITE 3350 77002-5609
Houston, Texas (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (713) 658-9444
Check whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days.
Yes [X] No [ ]
Indicate the number of shares outstanding of each of the issuer's classes
of common equity, as of the latest practicable date: As of August 1, 2000, there
were 13,045,397 shares of the Registrant's common stock outstanding. Following a
1:5 stock split on August 1, 2000, there were 2,605,760 shares of the
Registrant's common stock outstanding.
SOUTHERN MINERAL CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets as of June 30, 2000 (unaudited) and December 31, 1999 3
Unaudited Consolidated Statements of Operations for the three months and six months
ended June 30, 2000 and 1999 4
Unaudited Consolidated Statements of Cash Flows for the
six months ended June 30, 2000 and 1999 5
Notes to Consolidated Financial Statements 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations 13
Liquidity and Capital Resources
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk 19
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 20
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
2
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
JUNE 30, DECEMBER 31,
2000 1999
------------ -------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents................................... $ 3,154 $ 1,981
Receivables, net............................................ 5,308 4,923
Property held for sale...................................... --- 8,914
Other....................................................... 466 606
-------- --------
Total current assets............................... 8,928 16,424
PROPERTY AND EQUIPMENT, AT COST USING SUCCESSFUL
EFFORTS METHOD FOR OIL AND GAS ACTIVITIES
Oil and gas producing properties.......................... 113,677 120,932
Unproven properties....................................... 4,533 4,443
Office equipment.......................................... 567 561
Accumulated depreciation, depletion and amortization...... (43,022) (47,971)
-------- --------
75,755 77,965
OTHER ASSETS................................................... 374 345
-------- --------
Total assets....................................... $ 85,057 $ 94,734
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES NOT SUBJECT TO COMPROMISE:
CURRENT LIABILITIES
Accounts payable (Post-petition)............................ $ 1,365 $ 1,375
Accrued liabilities (Post-petition)......................... 5,000 2,950
Canadian bank loan.......................................... 1,547 13,876
-------- --------
Total current liabilities.......................... 7,912 18,201
-------- --------
LONG-TERM LIABILITIES
Deferred Income Taxes....................................... 5,344 4,240
-------- --------
Total liabilities not subject to compromise........ 13,256 22,441
-------- --------
LIABILITIES SUBJECT TO COMPROMISE:
Accounts payable (Pre-petition)............................ 2,113 1,981
Accrued liabilities (Pre-petition)......................... 2,129 1,779
Notes payable banks (Pre-petition)......................... 16,109 16,109
Subordinated debentures (Pre-petition)..................... 41,400 41,400
-------- --------
Total liabilities subject to compromise
(Pre-petition).................................... 61,751 61,269
-------- --------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; authorized 5,000,000
shares at June 30, 2000; none issued
Common stock, par value $.01 per share; authorized 50,000,000
shares at June 30, 2000; issued 13,045,397 and 13,000,360
at June 30, 2000 and December 31,1999, respectively;
outstanding 12,954,137 and 12,909,137 shares at
June 30, 2000 and December 31, 1999, respectively....... 130 130
Additional paid-in capital................................. 30,901 30,885
Accumulated other comprehensive loss-foreign currency
translation adjustment.................................... (1,021) (288)
Retained deficit........................................... (19,908) (19,651)
Less: Treasury stock....................................... (52) (52)
-------- --------
Total stockholders' equity......................... 10,050 11,024
-------- --------
Total liabilities and stockholders' equity......... $ 85,057 $ 94,734
======== ========
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
3
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
STATEMENTS OF CONSOLIDATED OPERATIONS
(in thousands, except per share amounts)
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -----------------------
2000 1999 2000 1999
------- ------- ------- -------
(UNAUDITED) (UNAUDITED)
REVENUE
Oil and gas.......................................... $ 7,702 $ 6,235 $15,114 $11,856
Gains on sales of properties and other assets........ (3) (32) (3) 5,041
------- ------- ------- -------
7,699 6,203 15,111 16,897
EXPENSES
Production........................................... 1,991 2,227 3,964 4,308
Exploration.......................................... 76 1,894 295 1,942
Impairment........................................... --- 209 --- 209
Depreciation, depletion and amortization............. 1,948 2,728 3,865 5,808
General and administrative........................... 729 1,055 1,330 2,095
Restructuring and bankruptcy expenses................ 2,492 --- 3,344 ---
------- ------- ------- -------
7,236 8,113 12,798 14,362
------- ------- ------- -------
Income (Loss) from operations.......................... 463 (1,910) 2,313 2,535
Other income, expenses and deductions
Interest and other income............................ 31 9 103 36
Interest and debt expense............................ (783) (1,795) (1,340) (3,569)
------- ------- ------- -------
Loss before income taxes............................... (289) (3,696) 1,076 (998)
Provision (benefit) for foreign, federal and state
income taxes
Current provision.................................... 30 79 105 112
Deferred provision (benefit)......................... 1,113 (161) 1,229 (424)
------- ------- ------- -------
1,143 (82) 1,334 (312)
------- ------- ------- -------
Net loss............................................... $(1,432) $(3,614) $ (258) $ (686)
======= ======= ======= =======
Net loss per share-basic and diluted................... $ (.11) $ (.28) $ (.02) $ (0.05)
======= ======= ======= =======
Weighted average number of shares outstanding-basic
and diluted........................................... 12,940 12,814 12,928 12,807
======= ======= ======= =======
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
4
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
SIX MONTHS ENDED
JUNE 30,
---------------------------------
2000 1999
-------- -------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) ..................................................... $ (258) $ (686)
Adjustments to net income ...................................... 7,592 101
-------- -------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES.. 7,334 (585)
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of properties ............................. 9,229 6,410
Capital expenditures .......................................... (3,228) (1,600)
-------- -------
NET CASH PROVIDED BY INVESTING ACTIVITIES............ 6,001 4,810
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of long-term debt .................................... --- (3,836)
Reorganization costs........................................... --- (522)
Payment on Canadian debentures................................. (12,113) (190)
Loan acquisition costs......................................... (49) (339)
-------- -------
NET CASH USED IN FINANCING ACTIVITIES................ $(12,162) $(4,887)
Effect of exchange rate changes on cash........................ --- 23
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS........... 1,173 (639)
Cash and cash equivalents at beginning of period .............. 1,981 1,541
-------- -------
Cash and cash equivalents at end of period .................... $ 3,154 $ 902
======== =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest ....................................... $ 985 $ 3,659
Cash paid for taxes ........................................... 197 73
NON-CASH INVESTING AND FINANCING ACTIVITIES
Directors' fees paid in stock.................................. $ 17 $ 16
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
5
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Basis of Presentation
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, though the Company believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's latest Annual Report to the
Securities and Exchange Commission on Form 10-K, as amended, for the year ended
December 31, 1999. In the opinion of the Company, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position as of June 30, 2000, the results of operations for the three and six
months ended June 30, 2000 and 1999 and statements of cash flows for the six
months then ended have been included.
On October 29, 1999 ("Petition Date"), the Company and its wholly-owned
subsidiaries, BEC Energy, Inc., Amerac Energy Corporation, SMC Ecuador, Inc. and
SMC Production Company ("Debtor Subsidiaries"), filed voluntary petitions for
relief under Chapter 11, Title 11 of the United States Code ("Bankruptcy Code"),
in order to facilitate the restructuring of the Company's long-term debt,
revolving credit, trade debt and other obligations. The filings were made in the
U.S. Bankruptcy Court for the Southern District of Texas, Victoria Division
("Bankruptcy Court"). The Company and its Debtor Subsidiaries emerged from
Bankruptcy on August 1, 2000 ("Effective Date"). All debts of the Company and
Debtor Subsidiaries, except those of the Company's Canadian subsidiary, Neutrino
Resources, Inc. ("Neutrino"), as of the Petition Date were stayed by the
bankruptcy petitions, and were subject to compromise pursuant to such
proceedings until the Effective Date. See Note 2 for further information. The
Company and its Debtor Subsidiaries operated as debtors-in-possession subject to
the Bankruptcy Court's supervision and orders. The proceedings of the Company
and its Debtor Subsidiaries were consolidated for administrative purposes.
The accompanying financial statements have been prepared in a manner
consistent with the Company's Annual Report on Form 10-K for the year ended
December 31, 1999. Beginning in the fourth quarter of 1999, 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, 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 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
will result from the ultimate resolution of Plan of Reorganization.
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the reported
amounts of assets and liabilities and disclosure of contingent assets and
6
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
liabilities at the date of the financial statements and the reported amounts of
revenues and expenses during the reporting period. Actual results could differ
from those estimates.
Earnings per Share - Basic earnings per share are based on the weighted average
shares outstanding without any dilutive effects considered. Diluted earnings per
share for the quarter and six months ended June 30, 2000 and 1999 does not
reflect dilution from potential common shares, including options and convertible
debt as these items would have an antidilutive effect on earnings per share due
to the net losses incurred during the periods.
For the quarter ended June 30, 2000 and 1999, respectively the issuance or
conversion of potential common shares of 1,561,000 and 5,012,000 and for the six
months ended June 30, 2000 and 1999, respectively, 1,930,078 and 5,012,000 would
have had an antidilutive effect on the diluted earnings per share calculation
and therefore were not considered in the calculation of the diluted weighted
average number of shares outstanding.
Reclassifications - Certain amounts in prior financial statements may have been
reclassified to conform to the 2000 financial statement presentation.
Comprehensive Income - Comprehensive income includes all changes in a company's
equity except those resulting from investments by owners and distributions to
owners, including, among other things, foreign currency translation adjustments.
The Company's total comprehensive income (loss) for the six months ended June
30, 2000 and 1999 was as follows (in thousands):
Six months ended
June 30,
----------------
2000 1999
----- ------
Net loss $(258) $ (686)
Foreign currency translation adjustment (733) 1,490
----- ------
Total comprehensive income $(991) $ 804
===== ======
NOTE 2. BANKRUPTCY FILING
On October 29, 1999, the Company and its Debtor Subsidiaries, excluding
Neutrino, filed voluntary petitions for relief under the Bankruptcy Code in
order to facilitate the restructuring of the Company's long-term debt, revolving
credit, trade debt and other obligations. The filings were made in the U.S.
Bankruptcy Court for the Southern District of Texas, Victoria Division. The
Company and its Debtor Subsidiaries emerged from bankruptcy on August 1, 2000.
All debts of the Company and its Debtor Subsidiaries as of the Petition Date
were stayed by the bankruptcy petitions and were subject to compromise pursuant
to such proceedings until the Effective Date. The Company and its Debtor
Subsidiaries operated as debtors-in-possession subject to the Bankruptcy Court's
supervision and orders. The proceedings of the Company and its Debtor
Subsidiaries were consolidated for administrative purposes.
The decision to seek protection was taken by the Company and its Debtor
Subsidiaries because the Company concluded that a restructuring of its
indebtedness could not be completed without the protection and assistance of the
bankruptcy court. Timing of the bankruptcy filing was imposed by several
factors, including the possible acceleration of the Company's $16.1 million of
indebtedness by its domestic bank creditors and the inability of the Company and
its debenture holders to reach a satisfactory compromise regarding the
consideration to be received in the previously proposed restructuring. The
bankruptcy petitions were filed in order to preserve cash and to give the
Company the opportunity to restructure its debt.
7
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
On February 25, 2000, the Company filed a Plan of Reorganization and
Disclosure Statement and on May 2, 2000 filed a Second Amended Plan ("Amended
Plan"). The Amended Plan set forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. On May 2, 2000,
the Bankruptcy Court held a hearing and approved the Disclosure Statement and
the procedure for transmitting the Amended Plan and Disclosure Statement for
acceptance or rejection to all affected parties. The Bankruptcy Court set June
30, 2000 for the hearing on confirmation of the Amended Plan.
On July 5, the Company announced an agreement among all parties contesting its
Amended Plan to support modifications to its Plan ("Modified Plan") to emerge
from bankruptcy. The Bankruptcy Court set July 19, 2000 to complete the
confirmation hearing on the Modified Plan subject to certain restrictions and on
July 21, 2000 entered the order confirming the Company's Modified Plan. The
Modified Plan became effective on August 1, 2000. The Modified Plan generally
provides for the satisfaction of the Company and Debtor Subsidiaries' claims
after payment of all Bankruptcy Court approved administrative expenses as
follows:
. Domestic secured debt shall be paid in full with interest and expenses
including default interest of 3.5% from the Petition Date with proceeds from a
new secured credit facility 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 $5 million.
. Issuance of Common Stock that when issued will represent approximately 78%
of the Common Shares.
. A new Board of Directors will be appointed for a one year term as follows: one
by the creditors' committee, two from the existing board, three by
representatives of significant owners of debentures and one jointly by the
creditors' committee and significant owners of debentures.
. A 1:5 reverse stock split of the Company's outstanding common stock, par value
$0.01 per share. Subject to the effects of the reverse split the existing
common stock, options and warrants will remain outstanding with no change in
terms and conditions except that all options and warrants expiring between the
Petition Date and confirmation of the Modified Plan will be extended for a two
year period.
. The current common shareholders, option holders, and warrant holders will
receive warrants allowing them to increase their ownership to up to 40% of the
outstanding common stock. The new warrants will be for a perpetual term with
an exercise price of $4.21 per share, subject to adjustment for certain
customary anti-dilution stock splits, stock dividends and other
recapitalization events. The exercise price must be paid in cash.
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 ongoing operations. The Bankruptcy
Court entered a series of orders granting the Company and its Debtor
Subsidiaries authority to use cash collateral in accordance with an approved
budget until July 31, 2000. To the extent that ongoing expenses were reflected
on the court approved budget, the Company and its Debtor Subsidiaries were
permitted to make such expenditures.
8
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
The Company has, as of July 31, 2000, approximately $3 million in cash and
cash equivalents that can be used for operations pursuant to the terms of the
Cash Collateral Order.
The Company did not need debtor-in-possession financing in order to pursue its
business strategy.
Pursuant to the provisions of SOP 90-7, the Company will not adopt fresh-start
reporting upon its emergence from Bankruptcy. Based on the closing price of the
Company's common stock on the Modified Plan confirmation date, the exchange of
the debentures for shares of the Company's common stock, par value $0.01 per
share, will result in an extraordinary gain of approximately $8.2 million.
Approximately $1 million in additional bankruptcy related costs are estimated.
Both are expected to be reflected in third quarter 2000 statement of operations.
NOTE 3. DIVESTITURES
On July 21, 1999, the Company agreed to sell properties consisting of certain
proven and unproven property interests in Texas to ANR Production Company. The
properties included all of the Company's interest in the Brushy Creek and Texan
Gardens Fields in Dewitt, Lavaca and Hidalgo counties of Texas. In July and
August of 1999, the sale of its interests in the Brushy Creek Field and Texan
Gardens Field were closed for $15.2 million and $0.8 million, respectively.
In the fourth quarter of 1999, Neutrino sold its interest in two non-core
properties in Alberta, Canada for approximately $3.7 million. In March 2000,
Neutrino sold its interest in Inverness and Swan Hills in Alberta, Canada, for
approximately $9.0 million. The Inverness/Swan Hills properties were classified
as properties held for sale and were 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 had occurred on January 1,
1999.
SIX MONTHS ENDED
JUNE 30,
---------------------------
(unaudited)
(in thousands, except per share data)
2000 1999
---- ----
Revenues................................ $14,368 $14,402
Net (loss).............................. (491) (618)
Net (loss) per share-basic and diluted.. $ (0.04) $ (0.05)
The preceding pro forma results are not necessarily indicative of those that
would have occurred had the divestitures taken place at the beginning of 1999.
During the first quarter of 1999, the Company sold its mineral interests and
substantially all of its royalty interests in Texas, Mississippi and New Mexico
for approximately $6 million. These divestitures did not have a material effect
on the Company's historical results of operations.
9
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
NOTE 4. DEBT
Debt consisted of the following (in thousands):
JUNE 30, DECEMBER 31,
2000 1999
------- ------------
Domestic bank credit facility - in default $16,109 $16,109
Canadian bank credit facility (U.S. Dollars) 1,547 13,876
Convertible subordinated debentures - in default 41,400 41,400
------- -------
Total indebtedness $59,056 $71,385
======= =======
As described in Note 2, because of the Company's filing of Chapter 11, all
amounts are subject to compromise as of June 30, 2000, except for its Canadian
bank credit facility which is reflected as Current Liabilities not subject to
compromise on the Consolidated Balance Sheet.
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 August 8, 2000,
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 (9.5% at June 30, 2000) to
the extent of the borrowing base utilized and at Bank Index Rate plus 1% on
Tranche A principal.
10
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO UNAUDITED 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 June 30, 2000, the Canadian Bank prime rate was 7.5% and the
Bankers Acceptance Rate for 30-day maturities was 5.9%. 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. On March 3, 2000, after giving effect to the
reductions related to the sale of certain oil and gas properties, the borrowing
base was reduced to Cdn $11,050,000 (US $7,625,000) through April 30, 2000. At
June 30, 2000, outstanding borrowings under the Canadian Credit Facility were
Cdn $2,294,000 (US $1,548,000). On August 4, 2000, outstanding borrowings under
the Canadian Credit Facility were Cdn $2,105,000 (US $1,419,000). 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 and June 30, 2000, 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 agreement, 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. 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 and Nasdaq SmallCap Market. The
Company's Common Stock is now traded on the OTC Bulletin Board. The Company
decided to not pursue a review of the delisting decision by the Nasdaq Review
Council. The Company believes a permanent delisting of its Common Stock would
impair the liquidity of the Common Stock and capital raising flexibility of the
Company. Although the Company intends to use best efforts to seek a listing with
a stock exchange or market, there is no assurance that the Company will obtain
any such listing. Upon emerging from Chapter 11, the Company's stock symbol on
the OTC Bulletin Board was changed to "SMOP.OB."
11
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION AS OF OCTOBER 29, 1999)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
NOTE 6. RESTRUCTURING AND BANKRUPTCY COSTS
During the third quarter of 1999, the Board of Directors of the Company
concluded that the proposed restructuring plan as filed with the Securities and
Exchange Commission on July 21, 1999 could not be consummated on the terms
contemplated. Therefore, estimated costs of approximately $1,372,000 associated
with the restructuring were expensed during the third and fourth quarters of
1999. These costs are primarily legal, accounting, financial advisory and other
transaction costs related to the proposed restructuring. During the three months
ended June 30, 2000, the Company recorded costs of $500,000 associated with the
restructuring. The Bankruptcy Court granted a Summary Motion on August 8, 2000
related to a disputed claim for services rendered during the proposed
restructuring in 1999. Since the Company's filing for bankruptcy on October 29,
1999, it has incurred costs of approximately $553,000 in 1999; and $1,993,000
and $2,845,000, respectively, in the three and six months ended June 30, 2000,
related to legal, accounting and financial advisory services rendered in
connection with the bankruptcy. In addition, $2,463,000 that was capitalized as
other assets for fees and expenses related to securing the domestic bank debt
and convertible subordinated debentures were expensed during the fourth quarter
of 1999 pursuant to SOP 90-7.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
Liquidity and Capital Resources
The Company has historically funded its operations, acquisitions, exploration
and development expenditures from cash flows from operating activities, bank
borrowing, issuance of common stock and debt securities and the sale of assets.
The Company's cash flow provided by (used in) operating activities for the six
months ended June 30, 2000 and 1999 was $7,334,000 and ($585,000), respectively.
Additional cash in the amounts of $9,229,000 and $6,410,000 were received in
2000 and 1999, respectively, from the sale of assets.
On October 29, 1999, the Company and its Debtor Subsidiaries, excluding
Neutrino, filed voluntary petitions for relief under the Bankruptcy Code in
order to facilitate the restructuring of the Company's long-term debt, revolving
credit, trade debt and other obligations. The filings were made in the U.S.
Bankruptcy Court for the Southern District of Texas, Victoria Division. The
Company and its Debtor Subsidiaries emerged from bankruptcy on August 1, 2000.
All debts of the Company and its Debtor Subsidiaries as of the Petition Date
were stayed by the bankruptcy petitions and were subject to compromise pursuant
to such proceedings until the Effective Date. The Company and its Debtor
Subsidiaries operated as debtors-in-possession subject to the Bankruptcy Court's
supervision and orders. The proceedings of the Company and its Debtor
Subsidiaries were consolidated for administrative purposes.
On February 25, 2000, the Company filed a Plan of Reorganization and
Disclosure Statement and on May 2, 2000 filed a Second Amended Plan ("Amended
Plan"). The Amended Plan set forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. On May 2, 2000,
the Bankruptcy Court held a hearing and approved the Disclosure Statement and
the procedure for transmitting the Amended Plan and Disclosure Statement for
acceptance or rejection to all affected parties. The Bankruptcy Court set June
30, 2000 for the hearing on confirmation of the Amended Plan.
On July 5, the Company announced an agreement among all parties contesting its
Amended Plan to support modifications to its Plan ("Modified Plan") to emerge
from bankruptcy. The Bankruptcy Court set July 19, 2000 to complete the
confirmation hearing on the Modified Plan subject to certain restrictions and on
July 21, 2000 entered the order confirming the Company's Modified Plan. The
Modified Plan became effective on August 1, 2000. The Modified Plan generally
provides for the satisfaction of the Company and Debtor Subsidiaries' claims
after payment of all Bankruptcy Court approved administrative expenses as
follows:
. Domestic secured debt shall be paid in full with interest and expenses
including default interest of 3.5% from the Petition Date with proceeds from a
new secured credit facility 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 $5 million.
. Issuance of Common Stock that when issued will represent approximately 78%
of the Common Shares.
. A new Board of Directors will be appointed for a one year term as follows: one
by the creditors' committee, two from the existing board, three by
representatives of significant owners of debentures and one jointly by the
creditors' committee and significant owners of debentures.
13
. A 1:5 reverse stock split of the Company's outstanding common stock, par value
$0.01 per share. Subject to the effects of the reverse split the existing
common stock, options and warrants will remain outstanding with no change in
terms and conditions except that all options and warrants expiring between the
Petition Date and confirmation of the Modified Plan will be extended for a two
year period.
. The current common shareholders, option holders, and warrant holders will
receive warrants allowing them to increase their ownership to up to 40% of the
outstanding common stock. The new warrants will be for a perpetual term with
an exercise price of $4.21 per share, subject to adjustment for certain
customary anti-dilution stock splits, stock dividends and other
recapitalization events. The exercise price must be paid in cash.
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. The Bankruptcy
Court entered a series of orders granting the Company and its Debtor
Subsidiaries authority to use cash collateral in accordance with an approved
budget until July 31, 2000. To the extent that on going expenses were reflected
on the court approved budget, the Company and its Debtor Subsidiaries were
permitted to make such expenditures.
The Company has, as of July 31, 2000, approximately $3 million in cash and
cash equivalents that can be used for operations pursuant to the terms of the
Cash Collateral Order.
The Company did not need debtor-in-possession financing in order to pursue its
business strategy.
Pursuant to the provisions of SOP 90-7, the Company will not adopt fresh-start
reporting upon its emergence from Bankruptcy. Based on the closing price of the
Company's common stock on the Modified Plan confirmation date, the exchange of
the debentures for shares of the Company's common stock, par value $0.01 per
share, will result in an extraordinary gain of approximately $8.2 million.
Approximately $1 million in additional bankruptcy related costs are estimated.
Both are expected to be reflected in third quarter 2000 statement of operations.
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, were 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.
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 accumulated cash subsequent
to the Petition Date and utilized that cash, subject to restrictions and
provisions of a court-approved cash collateral order, to fund its operations,
including capital
14
expenditures, during the bankruptcy proceedings. The ability to incur capital
expenditures, sell properties and obtain additional financing was subject to the
approval and ongoing supervision of the Bankruptcy Court.
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. Due to the bankruptcy filings on
October 29, 1999, the Company is not in compliance with certain provisions of
the Amended Credit Agreement. As of December 31, 1999 and June 30, 2000, 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 June
30, 2000, 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 (9.5% at June
30, 2000) 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 June 30, 2000 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 remained
subject to the approval and supervision of the Bankruptcy Court until the
Effective Date 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 June 30, 2000, the Canadian Bank prime rate was 7.5% and the
Bankers Acceptance Rate for 30-day maturities was 5.9%. 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 the then lower
world oil prices, the sale of certain non-strategic oil and gas properties and
the Company's financial condition. At June 30, 2000, outstanding borrowings
under the Canadian Credit Facility were Cdn $2,294,494 (US $1,547,615). 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 June 30, 2000, 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. 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
15
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 Code. 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 continued 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 SMOP.OB. Due to its bankruptcy 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 would impair the liquidity of
the Common Stock and capital raising flexibility of the Company. Although the
Company intends to use best efforts to seek a listing with a stock exchange or
market, there is no assurance that the Company will obtain any such listing.
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.
The Company did not declare dividends in six months ended June 30, 2000 and
1999. The Company does not expect, under its existing capital structure, to be
able to pay dividends for the foreseeable future. Payment of dividends is
currently prohibited by the terms of the Company's Amended Credit Facility and
would have required approval from the Bankruptcy Court prior to the Effective
Date.
16
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED JUNE 30, 2000
AS COMPARED TO THE QUARTER ENDED JUNE 30, 1999
Oil and gas revenues for the quarter ended June 30, 2000 were $7,702,000
compared to oil and gas revenues of $6,235,000 for the same period in 1999. Oil
and NGL production decreased 20% to 165,992 barrels and natural gas production
decreased 25% to 1,070 MMcf in the second quarter of 2000 compared to the second
quarter of 1999. The lower production levels in the second quarter of 2000 are
due primarily to the sale of properties in 1999 and the first quarter of 2000.
Increases in commodity prices more that offset the impact of the lower volumes.
The average realized oil and NGL price increased 77% from $14.23 barrel in the
second quarter of 1999 to $25.13 in the second quarter of 2000. Average realized
natural gas prices increased 48% to $3.14 per Mcf during the second quarter of
2000 compared to $2.12 per Mcf in same period a year earlier.
Second quarter 2000 production costs, including production and ad valorem
taxes, decreased 11% to $1,991,000 compared to $2,227,000 in the second quarter
of 1999. However, on an energy equivalent unit basis, production costs rose 15%
quarter-over-quarter resulting primarily from non-reocurring workovers and other
operations.
Exploration, dry hole and lease impairment expenses incurred in the three-
months ended June 30, 1999 were $2,103,000, compared to $76,000 in the same
period in 2000. The 1999 expense is primarily from impairments of a portion of
the property held for sale and non-producing properties. Since the Company uses
the successful efforts method of accounting, exploration expenses may vary
greatly from period to period based upon the level of exploration activity.
General and administrative expenses were $729,000 in the second quarter of
2000, a 31% decrease from $1,055,000 in the prior year's second quarter
primarily related to reductions in force through attrition and layoffs in 1999.
On an energy equivalent unit basis, costs declined 11% from the second quarter
of 1999 to the same period in 2000.
Depreciation, depletion and amortization ("DD&A") decreased 29% to $1,948,000
in the second quarter of 2000 compared to $2,728,000 in 1999 primarily related
to decreased production due to property sales. On a unit of equivalent
production basis, DD&A decreased 8% from $1.02 per Mcfe to $0.94 per Mcfe.
Restructuring and bankruptcy costs were $2,492,000 in the second quarter of
2000 compared to no such costs in 1999. On August 8, 2000, the Bankruptcy Court
granted a Summary Judgement for services rendered related to the proposed 1999
restructuring in the amount of $500,000 which was reflected in the second
quarter 2000 results of operations. These costs were charged to expense pursuant
to SOP 90-7.
Interest and debt expense in the quarter ended June 30, 2000 was $783,000
compared to $1,795,000 in the same period in 1999. The decrease primarily
reflects the reduced indebtedness outstanding due to the application of proceeds
from property sales to debt reduction and no accrual of interest related to
subordinated debt in accordance with SOP 90-7. Additional interest due to
subordinated debt during the second quarter would have been $711,562.
Tax provision in the second quarter 2000 was $1,143,000 compared to tax
benefit of $82,000 in the same period in 1999. The increase in tax provision
primarily reflects increased pre-tax income from the Company's Canadian
operations in the second quarter of 2000 compared to a loss in the same period
in 1999, state income tax liability associated with the Company's U. S.
operations in 2000 and change in the Company's tax strategy for its Canadian
operations subsequent to December 31, 1999.
The Company recorded net loss of $1,432,000, or $(0.11) per basic share for
the quarter ended June 30, 2000 compared to a net loss of $3,614,000 or $(0.28)
per basic share for the quarter ended June 30, 1999.
17
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2000
AS COMPARED TO THE SIX MONTHS ENDED JUNE 30, 1999
Oil and gas revenues for the six months ended June 30, 2000 were $15,114,000
compared to oil and gas revenues of $11,856,000 for the same period in 1999. Oil
and NGL production decreased 18% to 361,783 barrels and natural gas production
decreased 35% to 2,035 MMcf in the six months ended June 30, 2000 compared to
the six months ended June 30, 1999. The lower production levels in the six
months ended June 30, 2000 are due primarily to the sale of properties in 1999
and first quarter 2000. Increases in commodity prices more that offset the
impact of the lower volumes.
The average realized oil and NGL price increased 110% from $11.95 per barrel
in the six months ended June 30, 1999 to $25.08 in the six months ended June 30,
2000. Average realized natural gas prices increased 38% to $2.62 per Mcf during
the six months ended of 2000 compared to $1.90 per Mcf in same period a year
earlier.
During the first quarter of 1999, the Company sold its mineral interests and
substantially all of its royalty interests in Texas, New Mexico and Mississippi
for approximately $6,000,000. The gain on the sale of these assets was
$5,073,000. The proceeds from asset sales in the first quarter of 1999 were used
to reduce bank indebtedness and for other corporate purposes.
Six months ended June 30, 2000 production costs, including production and ad
valorem taxes, decreased 8% to $3,964,000 compared to $4,308,000 in the six
months ended June 30, 1999. However, on an energy equivalent unit basis,
production costs rose 27% quarter-over-quarter resulting primarily from non-
reocurring workovers and other operations.
Exploration, dry hole and lease impairment expenses incurred in the six-months
ended June 30, 1999 were $2,151,000, compared to $295,000 in the same period in
2000. The 1999 expense is primarily from impairments of a portion of the
property held for sale and non-producing properties. Since the Company uses the
successful efforts method of accounting, exploration expenses may vary greatly
from period to period based upon the level of exploration activity.
General and administrative expenses were $1,330,000 in the six months ended
June 30, 2000, a 37% decrease from $2,095,000 in the prior year's period
primarily related to reductions in force through attrition and layoffs in 1999.
On an energy equivalent unit basis, costs declined 12% from the six months ended
June 30, 1999 to the same period in 2000.
Depreciation, depletion and amortization ("DD&A") decreased 33% to $3,865,000
in the six months ended June 30, 2000 compared to $5,808,000 in 1999 primarily
related to decrease in production due to property sales. On a unit of equivalent
production basis, DD&A decreased 8% from $1.00 per Mcfe to $0.92 per Mcfe.
Restructuring and bankruptcy costs were $3,344,000 in the six months ended of
2000 compared to no such costs in 1999. On August 8, 2000 the Bankruptcy Court
granted a Summary Judgement for services rendered related to the proposed 1999
restructuring in the amount of $500,000 which was reflected in the second
quarter 2000 results. These costs were charged to expense pursuant to SOP 90-7.
Interest and debt expense in the six months ended June 30, 2000 was $1,340,000
compared to $3,569,000 in the same period in 1999. The decrease primarily
reflects the reduced indebtedness outstanding due to the application of proceeds
from property sales to debt reduction and no accrual of interest related to
subordinated debt in accordance with SOP 90-7. Additional interest during the
six month period ended June 30, 2000 would have been $1,423,000 due to the
subordinated debt.
Tax provision in the six months ended June 30, 2000 was $1,334,000 compared to
tax benefit of $312,000 in the same period in 1999. The increase in tax
provision primarily reflects increased pre-tax income from the Company's
Canadian operations in the six months ended June 30, 2000 compared to a loss in
the same period in 1999, state income tax liability associated with the
Company's U. S. operations in 2000 and change in the Company's tax strategy for
its Canadian operations subsequent to December 31, 1999.
The Company recorded net loss of $258,000, or $(0.02) per basic share for the
six months ended June 30, 2000 compared to a loss of $686,000 or $(0.05) per
basic share for the six months ended June 30, 1999.
18
DEFINITIONS
As used herein:
Thousand cubic feet ("Mcf")
Million cubic feet ("MMcf")
Natural gas liquids ("NGL")
Energy Equivalents Units (1 barrel of liquids = 6 Mcf of natural gas)
Thousand cubic feet of gas equivalent ("Mcfe")
Recent Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board ("FASB) issued SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities". This
statement, as amended by SFAS No. 137 and SFAS No. 138, establishes standards of
accounting for and disclosures of derivative instruments and hedging activities.
This statement requires all derivative instruments to be carried on the balance
sheet at fair value and is effective for the Company beginning January 1, 2001.
The Company has not yet determined the impact of this statement on its financial
condition or results of operations.
In March 2000, the FASB issued Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation: an Interpretation of APB Opinion No.
25. Among other issues, Interpretation No. 44 clarifies the application of
Accounting Principles Board Opinion No. 25 (APB No. 25) regarding (a) the
definition of employee for purposes of applying APB No. 25, (b) the criteria for
determining whether a plan qualifies as a non-compensatory plan, (c) the
accounting consequence of various modifications to the terms of a previously
fixed stock option or award, and (d) the accounting for an exchange of stock
options in a business combination. The provisions of Interpretation No. 44
affecting us are to be applied on a prospective basis effective July 1, 2000.
FORWARD-LOOKING STATEMENTS
All statements other than statements of historical fact contained in this
report, including statements in Management's Discussion and Analysis of
Financial Condition and Results of Operations, are forward-looking statements.
When used herein, the words "budget", "expressions", "anticipate", "expects",
"believes", "seeks", "goals", "plans", "strategy", "intends", or "projects" and
similar expressions are intended to identify forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those projected by such forward-looking statements and no assurance can be given
that the expectations will prove correct. In reliance upon the Private
Securities Litigation Reform Act of 1995, factors identified by the Company that
could cause the Company's future results to differ materially from the results
discussed in such forward-looking statements include the risks described under
"Risk Factors" in Item 1 of its Annual Report on Form 10-K, as amended, for the
year ended December 31, 1998. All forward-looking statements in this report are
expressly qualified in their entirety by the cautionary statements in this
paragraph and shall be deemed in the future to be modified in their entirety by
the Company's public pronouncements, including those contained in all future
reports and other documents filed by the Company with the Securities and
Exchange Commission.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of market risks including the potential
for adverse changes in oil and gas prices, foreign currency exchange rates and
interest rates. There have been no material changes to the Company's disclosures
about market risk from those contained in its 10-K, as amended, for the year
ended December 31, 1999.
19
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in several lawsuits arising in the ordinary course of
business. Management believes that the outcome of such proceedings will not have
a material adverse effect in the aggregate on the Company's financial position
or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
Pursuant to the Modified Plan, the Company effected a 1:5 reverse stock split
of its outstanding Common Stock on the Effective Date. In lieu of issuing
fractional shares, the number of shares of common stock issuable in the reverse
stock split was rounded downward to the nearest whole share and no consideration
was paid with respect to the fractional shares. The Modified Plan provides for
the issuance of common stock to the Company's 6.875% Convertible Subordinated
Debenture holders as of the record date of July 24, 2000, that, when issued,
will represent approximately 78% of the outstanding Common Stock. In addition, a
cash payment of $5 million will be made on a pro rata basis to the Debenture
holders. The Modified Plan also provides that the holders of stock, options and
warrants outstanding prior to August 1, 2000 will receive warrants representing
approximately 3,668,000 shares of Common Stock allowing them to increase their
ownership to up to 40% of the outstanding Common Stock on a fully diluted basis.
The new warrants have a perpetual term and an exercise price of $4.21 per share,
subject to adjustment for certain customary anti-dilution stock splits, stock
dividends and other recapitalization events. The exercise price must be paid in
cash.
See also Part I - Financial Information, which is incorporated herein by
reference.
ITEM 3: DEFAULTS UPON SENIOR SECURITIES
Except as disclosed in the Modified Plan, which is attached as Exhibits 2.1
through 2.4 or in Part I--Financial Information, which is incorporated herein by
reference, the Company has no information to report in this Item 3.
ITEM 4: SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Pursuant to an order entered by the Bankruptcy Court, the Amended Plan was
submitted for approval to the record holders of the Company's Common Stock and
debentures as of May 1, 2000. On June 19, 2000, the Company tabulated all
shareholder votes. The holders of Common Stock voted 6,157,949 votes for the
approval of the Amended Plan and 84,771 votes against the approval of the
Amended Plan. The debenture holders voted $18,290,970 for the approval of the
Modified Plan and $8,533,030 against the approval of the Modified Plan.
ITEM 5: OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS:
2.1 Debtors' Second Amended Plan of Reorganization filed May 2, 2000
with the United States Bankruptcy Court for the Southern District
of Texas, Victoria Division.
2.2 Modification to Debtors' Second Amended Plan of Reorganization
filed May 2, 2000, dated June 19, 2000.
2.3 Second Modification to Debtors' Second Amended Plan of
Reorganization filed May 2, 2000, dated June 29, 2000.
2.4 Third Modification to Debtors' Second Amended Plan of
Reorganization filed May 2, 2000, dated July 5, 2000.
2.5 Findings of Fact and Conclusions of Law for the Confirmation of
Debtors' Second Amended Plan of Reorganization filed May 2, 2000,
as amended (incorporated by reference from Exhibit 2.1 to the
Company's Current Report on Form 8-K, File Number 000-08043, filed
with the Securities Exchange Commission on August 7, 2000).
2.6 Order Confirming Debtors' Second Amended Plan filed on May 2, 2000,
as amended (incorporated by reference from Exhibit 2.2 to the
Company's Current Report on Form 8-K, File Number 000-08043, filed
with the Securities Exchange Commission on August 7, 2000).
3.1 Second Amended and Restated Articles of Incorporation of the
Company.
4.1 Certificate of Common Stock, par value $.01, of the Company.
27.1 Financial Data Schedule (filed herewith).
(B) REPORT ON FORM 8-K:
Form 8-K filed August 7, 2000, reporting confirmation of the
Registrant's Plan of Reorganization.
Form 8-K/A filed June 15, 2000, reporting the Registrant's
disposition of its interests in the Brushy Creek and Texan
Gardens fields.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SOUTHERN MINERAL CORPORATION
Date: August 14, 2000 By /s/ Michael E. Luttrell
-----------------------------------
Michael E. Luttrell
Vice President-Finance and CFO
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