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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K/A
[X] ANNUAL REPORT PURSUANT OT SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2000
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 [X] No [ ]
APPLICABLE ONLY TO REGISTRANTS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE
PRECEDING FIVE YEARS
Indicate by check mark whether the registrant has filed all documents and
reports required to be filed by Section 12, 13 or 15(d) of the Securities
Exchange Act of 1934 subsequent to the distribution of securities under a plan
confirmed by a court.
Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers in response to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of March 7, 2001, 12,261,460 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 $4.09 per share) held by non-
affiliates of the Registrant was approximately $41,780,887 million. As of March
7, 2001, 3,667,829 Series B Perpetual Warrants were outstanding and the
aggregate market value of these warrants at such date (based upon the last
reported sales price on the OTC Bulletin Board of $0.56 per share) held by non-
affiliates of the Registrant was approximately $1,811,256 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
Overview and History
Southern Mineral is an independent oil and gas company headquartered in
Houston, Texas, and 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.
Southern Mineral was incorporated in 1937 as a vehicle to consolidate
mineral tracts retained as its parent company lumbered large tracts of southern
Mississippi forestlands. For the next 50 years, Southern Mineral was largely a
passive participant in the oil and gas business, merely granting leases on its
spread of mineral interests in Mississippi. In the mid-1980s, Southern Mineral
became a more active participant in the oil and gas business, redeploying its
significant cash flow from revenues derived from the Poplarville Field in
southern Mississippi into exploration activities. For the next ten years,
Southern Mineral pursued the sole strategy of exploration for oil and gas. As a
result of generally poor results, Southern Mineral changed its focus beginning
in 1995 to one of a more balanced program of acquisitions, exploitation and
exploration. Southern Mineral endured poor operating results in 1998 and its
financial condition at the end of 1998 resulted in Southern Mineral's
independent auditors, in their opinion on the 1998 financial statements,
disclosing their substantial doubt about Southern Mineral's ability to continue
as a going concern. In February 1999, the Southern Mineral board retained CIBC
World Markets Corp. as independent advisors to assist in evaluating various
strategic alternatives for maximizing shareholder value.
On July 21, 1999, Southern Mineral announced that its board had approved a
restructuring of Southern Mineral 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. However,
based upon discussions with certain of the holders of its debentures, the
Southern Mineral board concluded that the restructuring could not be consummated
on the terms previously contemplated.
On October 29, 1999, Southern Mineral and its wholly-owned subsidiaries
(other than Neutrino) filed voluntary petitions for relief under Chapter 11,
Title 11 of the United States Code, in order to facilitate the restructuring of
Southern Mineral'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. Southern Mineral emerged from bankruptcy
on August 1, 2000. All debts of Southern Mineral, except those of Neutrino
Resources, Inc., as of October 29, 1999 were stayed by the bankruptcy petitions,
and were subject to compromise pursuant to such proceedings until August 1,
2000. Southern Mineral operated as a debtor-in-possession subject to the
bankruptcy court's supervision and orders.
Southern Mineral decided to seek protection because it concluded that a
restructuring of its indebtedness could not be completed without the protection
and assistance of the bankruptcy court. The timing of the bankruptcy filing was
imposed by several factors, including the possible acceleration of Southern
Mineral's $16.1 million of indebtedness by its domestic bank creditors and the
inability of Southern Mineral to reach a satisfactory compromise with its
debenture holders regarding the consideration to be received in a previously
proposed restructuring. The bankruptcy petitions were filed in order to preserve
cash and to give Southern Mineral the opportunity to restructure its debt.
Corporate Overview
The following table shows Southern Mineral's principal subsidiaries and
equity investments, including their domicile and our percentage ownership in
each:
Percentage
Entity Domicile Ownership
- ------ -------- ----------
BEC Energy................ Texas 100%
SMC Ecuador............... Delaware 100%
SMC Production............ Texas 100%
Neutrino Resources........ Alberta 100%
Spruce Hills Production... Delaware 100%
Canadian Operations
Approximately 38% of Southern Mineral's oil and gas revenues during the
year ended December 31, 2000 were derived from Canadian properties. The costs
and revenues associated with Southern Mineral's Canadian operations are
denominated in Canadian dollars. Southern Mineral prepares its consolidated
financial statements in U.S. dollars. Fluctuations in the value of the two
currencies may cause currency translation losses for Southern Mineral or reduced
revenues and earnings, or both, with respect to its Canadian operations.
Southern Mineral cannot predict the effect of exchange rate fluctuations upon
future operating results.
Neutrino's principal assets at December 31, 2000 include one core area in
the Pine Creek Field in central and southern Alberta, Canada. At year-end 2000,
Neutrino's proved reserves totaled 2.0 million barrels of liquids (oil,
condensate and natural gas liquids) and 15.5 billion cubic feet, or Bcf, of
natural gas. In 2000, Southern Mineral's Canadian production, or was
approximately 308,000 barrels of liquids and 1,555 million cubic feet, or MMcf,
of natural gas. On March 1, 2000, Southern Mineral 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 Southern Mineral's financial statements as
an impairment charge at December 31, 1999.
Customers
We usually sell our oil and gas in the spot market or on such other bases
that may be impacted by the effect of changes in current market prices. Sales of
oil and gas to customers accounting for 10% or more of our revenues were as
follows years ended December 31, (in thousands):
2000 1999 1998
--------------- --------------- ---------------
Customer Revenue % Revenue % Revenue %
-------- ------- ---- ------- ---- ------- -----
Damsco Distribution $7,298 21.7% $4,117 15.9% $3,747 17.2%
Global Petroleum Marketing 2,931 11.3%
Canpet Energy Group, Inc. 4,220 12.56% 2,793 10.8%
Recent Developments
On August 21, 2000, Southern Mineral announced the engagement of Petrie
Parkman & Co., Inc. and FirstEnergy Capital Corp. to evaluate strategic
alternatives available to Southern Mineral in an effort to maximize
shareholder value. Southern Mineral and PetroCorp Incorporated announced on
December 22, 2000, the execution of a definitive agreement regarding Southern
Mineral's merger into PetroCorp. In the merger, shareholders of Southern Mineral
will receive for each share of Southern Mineral stock $4.71 cash, or, if such
shareholder makes a valid election, PetroCorp common stock or a combination of
cash and stock. For both companies, the merger provides strategic and economic
benefits. The operations of the two companies are complementary, with PetroCorp
primarily operating in the Gulf Coast and Mid-continent areas of the United
States and Southern Mineral primarily operating in the Gulf Coast of the United
States. PetroCorp and Southern Mineral both have significant oil and gas
interests in the province of Alberta, Canada. Additionally, the combined company
will benefit by having a substantially greater critical mass and cost savings
resulting from the consolidation of operations. In connection with the merger,
Southern Mineral shareholders will not receive as a result of stock elections
more than 4,000,000 shares of PetroCorp stock. If Southern Mineral shareholders
elect to receive more than 4,000,000 shares of PetroCorp stock, the 4,000,000
shares available for issuance will be prorated among shareholders electing to
receive stock. If Southern Mineral shareholders do not elect to receive at least
3,000,000 shares of PetroCorp stock, PetroCorp will not be obligated to complete
the merger. The merger is subject to other customary conditions to closing,
including obtaining shareholder and regulatory approvals. The transaction is
anticipated to close by May 31, 2001.
Risk Factors
Oil price declines and volatility could adversely affect our revenues, cash
flows and profitability.
Southern Mineral's revenues, profitability and future rate of growth depend
substantially upon the prevailing prices of oil and gas. Because approximately
61% of our estimated proved reserves as of December 31, 2000 were natural gas
reserves, our financial results are more sensitive to movements in natural gas
prices.
Natural gas and oil and are commodities and, therefore, their prices are
subject to wide fluctuations in response to relatively minor changes in supply
and demand. Historically, the markets for natural gas and oil have been
volatile, and they are likely to continue to be volatile in the future. For
example, natural gas and oil prices declined significantly in late 1997, 1998,
and early 1999, and, for an extended period of time, remained substantially
below prices obtained in previous years. Southern Mineral's inability to
satisfy its debt obligations in 1999 was in part a result of this decline in
oil prices and ultimately led Southern Mineral to file for bankruptcy
protection in October 1999.
Factors that can cause fluctuation in oil and gas prices include:
. worldwide and domestic supplies of oil and gas,
. weather conditions,
. the ability of the members of the Organization of Petroleum Exporting
Countries to agree to and maintain oil price and production controls,
. political instability or armed conflict in oil-producing regions,
. the price and level of foreign imports,
. the level of consumer demand,
. the price and availability of alternative fuels,
. the availability of pipeline capacity, and
. domestic and foreign governmental regulations and taxes.
Southern Mineral is unable to predict the long-term effects of these and
other conditions on the prices of oil and gas. Lower oil and gas prices may
reduce the amount of oil and gas Southern Mineral produces, which may adversely
affect Southern Mineral's revenues and operating income. Significant reductions
in oil and gas prices may require Southern Mineral to reduce its capital
expenditures. Reducing drilling will make it more difficult for Southern Mineral
to replace the reserves it produces.
If Southern Mineral is not able to replace reserves, it may not be able to
sustain current production rates.
Southern Mineral's future success depends largely upon its ability to find,
develop or acquire additional oil and gas reserves that are economically
recoverable. Unless Southern Mineral replaces the reserves it produces through
successful development, exploration or acquisition, its proved reserves will
decline over time. In addition, approximately 12% by volume of Southern
Mineral's total estimated proved reserves at December 31, 1999 were undeveloped.
By their nature, undeveloped reserves are less certain. Recovery of such
reserves will require significant capital expenditures and successful drilling
operations. Southern Mineral may fail to successfully find and produce reserves
economically in the future.
Southern Mineral's increased reserve base will make it more difficult to find
exploration and acquisition opportunities to replace production. Drilling
levels required to replace reserves will likely increase Southern Mineral's
exposure to drilling risk.
Southern Mineral's industry experiences numerous operating risks. Insurance
may not be adequate to protect Southern Mineral against all these risks.
Oil and gas drilling and production activities are subject to numerous
risks, including the risk that no commercially productive oil and gas reserves
will be found. The cost of drilling and completing wells is often uncertain.
Oil and gas drilling and production activities may be shortened, delayed or
canceled as a result of a variety of factors, many of which are beyond our
control. These factors include:
. pressure or irregularities in formations;
. equipment failures or accidents;
. shortages in experienced labor or shortages or delays in the delivery of
equipment;
. blowouts and surface cratering;
. pipe or cement failures;
. casing collapse;
. embedded oil field drilling and service tools;
. fires and explosions;
. uncontrollable flows of oil and formation water;
. natural disasters; and
. environmental hazards such as oil spills, pipeline ruptures and
discharges of toxic gases.
If any of these events occur, we could incur substantial losses as a result
of:
. injury or loss of life;
. severe damage to and destruction of property, natural resources and
equipment;
. pollution and other environmental damage;
. regulatory investigation and penalties;
. clean-up responsibilities;
. suspension of our operations;
. repairs to resume operations; and
. loss of productive energy.
The occurrence of a significant accident or other event not fully covered by
our insurance could have a material adverse effect on our operations and
financial condition. Our insurance does not protect us against all operational
risks. We do not carry business interruption insurance at levels that would
provide enough funds for us to continue operating without access to other
funds. For some risks, we may not obtain insurance if we believe the cost of
available insurance is excessive relative to the risks presented. Because third
party drilling contractors are used to drill our wells, we not may not realize
the full benefit of workmen's compensation laws in dealing with their
employees. In addition, pollution and environmental risks generally are not
fully insurable.
Reserve estimates depend on many assumptions that may turn out to be
inaccurate. Any material inaccuracies in these reserve estimates or underlying
assumptions will materially affect the quantities and net present value of our
reserves.
The calculations of proved reserves of oil and gas included in this document
have been prepared by independent petroleum engineers retained by Southern
Mineral. The accuracy of any reserve estimate is a function of the quality of
available data, engineering and geological interpretations and judgment and the
assumptions used regarding quantities of recoverable oil and natural gas
reserves and prices for crude oil and natural gas. Actual prices, production,
development expenditures, operating expenses and quantities of recoverable oil
and natural gas reserves will vary from those assumed in our estimates, and
these variances may be significant. Any significant variance from the
assumptions used could result in the actual quantity of our reserves and future
net cash flow being materially different from the estimates in our reserve
reports. In addition, results of drilling, testing and production and changes in
crude oil and natural gas prices after the date of the estimate may result in
substantial upward or downward revisions.
In addition, we may adjust estimates of proved reserves to reflect
production history, results of exploration and development, prevailing natural
gas and oil prices and other factors, many of which are beyond our control.
Because most of our reserve estimates are not based on a lengthy production
history and are calculated using volumetric analysis, these estimates are less
reliable than estimates based on a lengthy production history.
You should not assume that the present value of future net cash flows from
our proved reserves included or incorporated by reference in this prospectus is
the current market value of our estimated natural gas and oil reserves. In
accordance with Securities and Exchange Commission requirements, we base the
estimated discounted future net cash flows from our proved reserves on prices
and costs on the date of the estimate. Actual future prices and costs may
differ materially from those used in the net present value estimate.
Hedging activities could result in losses to Southern Mineral.
Southern Mineral uses, and it is expected that Southern Mineral will continue
to use, natural gas and oil price swaps and collars to reduce sensitivity to oil
and gas price volatility. If Southern Mineral's reserves are not produced at the
rates estimated by Southern Mineral due to inaccuracies in the reserve
estimation process, operational difficulties or regulatory limitations, Southern
Mineral will be required to satisfy obligations it may have under hedging
contracts on potentially unfavorable terms without the ability to hedge that
risk through sales of comparable quantities of its own production. Further, the
terms under which Southern Mineral enters into hedging contracts are based on
assumptions and estimates of numerous factors such as cost of production, and
pipeline and other transportation costs to delivery points. Substantial
variations between the assumptions and estimates used and actual results
experienced could materially and adversely affect anticipated profit margins and
Southern Mineral's ability to manage the risk associated with fluctuations in
oil and gas prices.
Additionally, fixed price sales and hedging contracts limit the benefits
Southern Mineral will realize if actual prices rise above the contract prices.
Based upon prices in effect at December 31, 2000 the fair value (loss) of the
crude oil and natural gas hedging instruments were net unrealized losses of $3.1
million for Southern Mineral. In addition, fixed price sales and hedging
contracts are subject to the risk that the counter-party may prove unable or
unwilling to perform its obligations under these contracts. Any significant
nonperformance could have a material adverse financial effect on Southern
Mineral.
Costs to comply with environmental laws are significant.
Environmental and other governmental laws, some of which are applied
retroactively, have increased the costs to plan, design, drill, install,
operate and abandon oil and natural gas wells and related facilities. We may be
required to make large expenditures to comply with environmental laws.
Under these laws and regulations, we could be liable for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. We do not believe that full
insurance coverage for all potential environmental damages is available at a
reasonable cost. Failure to comply with these laws and regulations also may
result in the suspension or termination of our operations and subject us to
administrative, civil and criminal penalties. Moreover, these laws and
regulations could change in ways that substantially increase our costs. For
example, Congress or the Minerals Management Service could decide to limit
exploratory drilling or natural gas production in some areas of the Gulf of
Mexico. Accordingly, any of these liabilities, penalties, suspensions,
terminations or regulatory changes could materially and adversely affect our
financial condition and results of operations.
Competition
There is a high degree of competition in the oil and gas exploration and
production industry. Consequently, Southern Mineral competes with many other
entities for capital and desirable potential acquisitions and exploration and
development prospects. Southern Mineral's competitors include the major
integrated oil companies, as well as numerous independent oil and gas companies
and other producers of energy sources and fuels. Many of these competitors have
capital resources much greater than that of Southern Mineral, and may therefore
be better able than Southern Mineral to withstand and compete during adverse
market conditions. Southern Mineral's ability to generate revenues and reserves
in the future will be dependent upon, among other things, its success in
competing with these competitors. Southern Mineral attempts to use its
geographic diversity of operations to its advantage.
Regulations
Domestic Environmental Regulation. Southern Mineral's operations are subject
to numerous federal, state, and local laws and regulations 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. While we do not anticipate that
Southern Mineral will be required in the near future to spend amounts that are
material in relation to our total capital expenditure program due to
environmental laws and regulations, because such laws and regulations are
frequently changed, we are unable to predict with certainty the ultimate cost of
compliance.
Southern Mineral generates wastes that may be subject to the federal
Resource Conservation and Recovery Act of 1976, as amended, or the RCRA, and
comparable state statutes. The U.S. Environmental Protection Agency 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 the 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.
Southern Mineral currently owns or leases numerous properties that for many
years have been used for the exploration and production of oil and gas.
Although Southern Mineral believes that it has used good operating and waste
disposal practices, prior owners and operators of these properties may not have
used similar practices, and hydrocarbons or other wastes may have been disposed
of or released on or under Southern Mineral's properties 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 Southern
Mineral's control. The properties and the wastes disposed thereon may be
subject to the Comprehensive Environmental Response, Compensation and Liability
Act of 1980, as amended, or CERCLA, RCRA and analogous state laws as well as
state laws governing the management of oil and gas wastes. Under such laws,
Southern Mineral could be required to remove or remediate previously disposed
wastes (including wastes disposed 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, or 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. 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 cover 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 would subject Southern Mineral to 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 million. 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 or CWA, and comparable state laws and regulations require
certain owners or operators of facilities that store or otherwise handle oil,
such as Southern Mineral, to prepare and implement spill prevention, control,
countermeasure and response plans relating to the possible discharge of oil
into 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. Under the CWA, permits must be obtained to discharge
pollutants into 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 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 oil and gas industry has
experienced or is experiencing similar costs. Southern Mineral believes that
these costs will not have a material adverse impact on its financial condition
and results of operations. Some oil and gas exploration and production
facilities are also 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.
Our operations may be subject to the Clean Air Act 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 Southern Mineral's
operations. The EPA and various states have been developing regulations to
implement these requirements. Southern Mineral 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, Southern
Mineral does not believe its operations will be materially affected by any such
requirements.
International Environmental Regulation. Southern Mineral's operations 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. Southern
Mineral does not anticipate that it will be required to make capital or other
expenditures by reason of international environmental laws and regulations that
are material in relation to its total capital expenditure program or that would
have a material adverse effect on its earnings, but inasmuch as such laws and
regulations, are frequently changed, Southern Mineral 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 Southern
Mineral's operations and often require interpretation by Southern Mineral'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 Southern
Mineral's operations.
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, Southern Mineral 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, or the 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 the
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 Southern Mineral 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
. maximize competition in short-term transportation markets,
. provide interstate pipelines with additional flexibility in order to
better tailor rates and terms and conditions of service to individual
customer needs, and
. 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, Southern Mineral 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 is administered by the FERC.
Canadian Oil and Gas Regulation. The oil and natural gas industry in Canada
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.
Employees
At March 7, 2001, Southern Mineral employed 16 full-time persons and 11
consultants. Southern Mineral is not subject to a collective bargaining
agreement and believes that its relations with its employees and consultants
are good.
Item 2. Description of Properties
General
At December 31, 2000, Southern Mineral held working interests in 480 gross
wells in the continental United States, 855 in Ecuador and 1,330 in Canada.
Approximately 38.7% of Southern Mineral's proved reserves are oil and liquids,
and approximately 61.3% 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 Southern Mineral's estimated proved reserves at
December 31, 2000. The oil and gas reserves are principally onshore in the
continental United States, Canada and Ecuador. Southern Mineral's reserve
information has been based on estimates prepared by or audited by independent
petroleum engineers. Netherland, Sewell & Associates, Inc. prepared the
domestic and Ecuador reserve estimates. Chapman Petroleum Engineering Ltd.
prepared most of the Canadian reserve estimates, while Gilbert Laustsen Jung
Associates Ltd. prepared the remaining Canadian reserves estimates as of such
dates. Southern Mineral's U.S. oil reserves (including oil, condensate and
natural gas liquids) have been prepared using year-end oil prices received by
Southern Mineral of $25.52 per barrel and gas reserves were prepared using
year-end prices received by Southern Mineral of $10.05 per thousand cubic feet
(Mcf). The Canadian reserves have been prepared using year-end oil prices
received by Southern Mineral of $26.42 per barrel and year-end natural gas
prices of $9.38 per Mcf. Ecuador reserves were prepared using a year-end oil
price of $28.53. See "Risk Factors -- Reserve estimates depend on many
assumptions that may turn out to be accurate. Any material inaccuracies in
these reserve estimates or underlying assumptions will materially affect the
quantities and net present value of our reserves", "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
and "Notes to the Consolidated Financial Statements" elsewhere in this report.
U.S. Ecuador Canada Total
-------------------- ------------------ -------------------- --------------------
Gas Gas Gas Gas
(thousand (thousand (thousand (thousand
Oil cubic Oil cubic Oil cubic Oil cubic
(Barrels) feet) (Barrels) feet) (Barrels) feet) (Barrels) feet)
--------- ---------- --------- -------- --------- ---------- --------- ----------
Proved Reserves......... 2,774,395 32,134,959 254,080 -- 1,986,000 15,522,000 5,014,475 47,656,959
========= ========== ======= === ========= ========== ========= ==========
Proved Developed
Reserves............... 2,518,217 22,816,013 254,080 -- 1,882,000 14,922,000 4,654,297 37,738,013
========= ========== ======= === ========= ========== ========= ==========
The following table sets forth the standardized measure of discounted
future net cash flows from projected production of Southern Mineral's proved oil
and gas reserves as of December 31, 2000 (in thousands):
United
States Ecuador Canada Total
------ ------- ------ -----
Future cash inflows....................... $ 393,777 $ 7,249 $ 163,186 $ 564,212
Future production costs................... (76,260) (3,801) (29,023) (109,084)
Future development costs.................. (11,131) (27) (1,227) (12,385)
Future income taxes....................... (87,097) (174) (54,122) (141,393)
---------- ---------- ---------- ---------
Future net cash flows..................... 219,289 3,247 78,814 301,350
10% Annual discount....................... (93,695) (804) (34,482) (128,981)
---------- ---------- ---------- ---------
Standardized measure of discounted
future net cash flows.................... $ 125,594 $ 2,443 $ 44,332 $ 172,369
========== ========== ========== =========
Production and Price History
The following table sets forth certain information concerning Southern Mineral's
annual net oil and gas production and average price information for the year
ended December 31:
Production: 2000 1999 1998
------ ------ ------
Oil and natural gas liquids (Barrels)
U.S............................................. 351,839 326,584 406,920
Ecuador......................................... 35,716 35,473 28,592
Canada.......................................... 307,753 494,350 321,040
---------- ---------- ----------
Total..................................... 695,308 856,407 756,552
========== ========== ==========
Gas (thousand cubic feet)
U.S............................................. 2,491,537 3,095,456 4,219,528
Ecuador......................................... --- --- ---
Canada.......................................... 1,554,655 2,299,527 2,212,983
---------- ---------- ----------
Total..................................... 4,046,192 5,394,983 6,432,511
========== ========== ==========
Average sales prices:
Oil and natural gas liquids ($ per Barrel)
U.S............................................. $ 27.50 $ 15.30 $ 12.11
Ecuador......................................... 32.27 17.60 10.15
Canada.......................................... 23.89 15.28 10.51
Average......................................... $ 26.15 $ 15.39 $ 11.36
Gas ($ per thousand cubic feet)
U.S............................................. $ 3.83 $ 2.21 $ 2.13
Canada.......................................... 3.24 1.90 1.42
Average......................................... $ 3.60 $ 2.08 $ 1.89
Average costs ($ per thousand cubic feet equivalent)
Operating expenses and production taxes............ $ 1.06 $ 0.84 $ 0.78
Depreciation, depletion and
amortization...................................... 0.99 1.15 0.96
Productive Wells Statistics
The following table sets forth information concerning productive wells in
which Southern Mineral has an interest as of December 31, 2000. In the following
data "Gross" refers to the total wells in which Southern Mineral has a working
interest and "Net" refers to gross wells multiplied by the percentage of the
working interest owned by Southern Mineral.
Oil Gas Total
------------- ------------ ------------
Gross Net Gross Net Gross Net
------ ----- ------ ----- ------ -----
Canada 1,062 46.0 268 12.0 1,330 58.0
Ecuador 855 85.5 -- -- 855 85.5
U. S. 204 41.9 276 27.1 480 69.0
----- ----- --- ---- ----- -----
Total 2,121 173.4 544 39.1 2,665 212.5
===== ===== === ==== ===== =====
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:
2000 1999 1998
------------- ------------ ------------
Exploratory: Gross Net Gross Net Gross Net
------ ---- ------ ---- ------ ----
Oil -- -- -- -- 2 1.002
Gas 1 .094 8 2.620 1 .250
Dry 1 .250 1 .500 6 2.586
Development:
Oil 53 5.412 11 .457 11 .970
Gas 15 .754 13 .426 26 2.588
Dry 4 1.091 -- -- 5 2.135
Total:
Productive 69 6.260 32 3.503 40 4.810
Dry 5 1.341 1 .500 11 4.721
Developed and Undeveloped Leasehold Acreage
The following table shows Southern Mineral's leasehold interest in
developed and undeveloped oil and gas acreage as of December 31, 2000. In the
following data "Gross" refers to the total acres in which Southern Mineral has a
working interest and "Net" refers to gross acres multiplied by the percentage of
the working interest owned by Southern Mineral.
Developed Undeveloped
Acreage Acreage
-------------- --------------
Gross Net Gross Net
----- ---- ----- ----
United States
- -------------
Alabama 11,539 2,346 -- --
Arkansas -- -- 1,799 450
Colorado 1,920 21 -- --
Kansas 1,360 53 -- --
Louisiana 34,728 2,780 392 131
Mississippi 2,880 84 -- --
Montana 160 2 -- --
New Mexico 18,720 227 -- --
North Dakota 800 48 -- --
Oklahoma 13,380 578 -- --
Oregon 80 80 -- --
Texas 80,125 9,072 18,300 14,153
Utah 5,120 228 20,880 4,391
Wyoming 70,699 811 -- --
------- ------ ------ ------
Total-United States 241,511 16,330 41,371 19,125
------- ------ ------ ------
Canada
------
Alberta 155,824 13,209 111,734 22,641
Saskatchewan 2,815 252 5,347 5,188
British Columbia 7,415 547 12,046 813
Manitoba 2,180 2,020 120 0
------- ------ ------- ------
Total-Canada 168,234 16,028 129,247 28,642
------- ------ ------- ------
Ecuador 15,400 1,540 279,819 27,982
------- ------ ------- ------
Total Leasehold Acreage 425,145 33,898 450,437 75,749
======= ====== ======= ======
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.
Item 3. Legal Proceedings
Southern Mineral 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 Southern Mineral's
financial position or results of operations.
Item 4. Submission of Matters to a Vote of Security Holders
During the three months ended December 31, 2000, no matters were submitted
to a vote of security holders.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
Market for Southern Mineral's Common Stock
The common stock is currently quoted on the OTC Bulletin Board under the
symbol "SMOP.OB"
Effective with the close of business on August 4, 1999, Southern Mineral's
securities, including convertible subordinated debentures, were delisted from
the Nasdaq National Market and Nasdaq SmallCap Market. Southern Mineral's common
stock is now traded on the OTC Bulletin Board. Southern Mineral believes a
permanent delisting of its common stock would impair the liquidity of the common
stock and capital raising flexibility of Southern Mineral. Due to the pending
merger with PetroCorp, Southern Mineral has suspended its listing application
with the American Stock Exchange. Upon emerging from bankruptcy, Southern
Mineral's stock symbol on the OTC Bulletin Board was changed to "SMOP.OB." The
symbol for the new warrants issued to old common shareholders, option holders
and warrant holders is "SMOPW.OB".
On August 1, 2000, pursuant to the plan of reorganization, holders of
Southern Mineral's common stock received one share of Southern Mineral's new
common stock for each five shares of Southern Mineral's old common stock. All
share and per-share amounts have been restated to reflect this one-for-five
reverse stock split. See Note 2, in "Notes to the Consolidated Financial
Statements" Bankruptcy Filing.
The following table sets forth the high and low sales prices on the market
systems noted above for Southern Mineral's common stock for the periods
indicated:
2000 1999
----------- -------------
High Low High Low
First Quarter................. $2.42 $0.78 $5.00 $1.25
Second Quarter................ 3.13 0.78 2.95 1.55
Third Quarter................. 4.19 2.75 2.65 1.10
Fourth Quarter................ 4.00 2.91 1.70 0.45
For the Year.................. 4.19 0.78 5.00 0.45
On March 7, 2001, the closing sale price of Southern Mineral's common stock, as
reported by the OTC Bulletin Board, was $4.09 per share.
Southern Mineral did not declare any dividends in its 2000, 1999 or 1998
fiscal years. The payment of future dividends on the common stock, if any, will
be reviewed periodically by Southern Mineral's Board of Directors, and will
depend upon, among other things, Southern Mineral's financial condition, funds
available from operations, the amount of anticipated capital and other
expenditures, and Southern Mineral's future business prospects. Southern Mineral
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 Southern Mineral's domestic and Canadian bank credit
agreements. See Item 7, "Management's Discussion and Analysis of Financial
Condition and Results of Operations".
Southern Mineral had 310 stockholders of record as of March 7, 2001.
Recent Sales of Unregistered Securities
Southern Mineral did not have any unregistered sales during the period
covered by this report which were not previously reported.
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 Southern Mineral and should be read in connection with
the financial statements and the related notes included elsewhere herein.
COMPARATIVE CONSOLIDATED BALANCE SHEETS
(in thousands)
As of December 31,
-----------------------------------------------------
ASSETS 2000 1999 1998 1997 1996
-------- -------- -------- ------ -------
Current assets.................................... $ 7,757 $ 16,424 $ 7,776 $13,455 $ 2,918
Property and equipment-net........................ 73,536 77,965 114,187 42,293 20,599
Oil and gas properties held for sale and other.... 603 345 6,327 6,127 869
-------- ------- -------- -------- --------
$81,896 $94,734 $128,290 $ 61,875 $ 24,386
======= ======== ======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Liabilities not subject to compromise............. $ -- $18,201 $ -- $ -- $ --
Liabilities subject to compromise.................. -- 61,269 -- -- --
Current liabilities................................ 6,808 -- 41,914 2,956 683
Deferred income taxes.............................. 6,490 4,240 7,279 1,039 1,169
Long-term debt..................................... 16,814 -- 64,370 41,400 3,900
Stockholders' equity............................... 51,784 11,024 14,727 16,480 18,634
------- ------- -------- -------- --------
$81,896 $ 94,734 $128,290 $ 61,875 $ 24,386
======= ======== ======== ======== ========
WORKING CAPITAL.................................... $ 949 $(63,046) $(34,138) $ 10,499 $ 2,235
======= ======== ======== ======== ========
COMPARATIVE CONSOLIDATED OPERATING DATA
(in thousands, except per share amounts)
Year Ended December 31,
--------------------------------------------------
2000 1999 1998 1997 1996
--------- ------- ------- ------ -------
Revenues
Oil and gas.................................. $33,581 $25,865 $21,722 $13,790 $11,780
Gains (losses) on sales of properties....... (1) 11,976 (250) 413 453
------- ------- ------- ------- -------
33,580 37,841 21,472 14,203 12,233
Expenses
Production................................. 8,730 8,898 8,518 3,682 2,742
Exploration................................ 511 2,501 3,635 1,776 262
Depreciation, depletion and amortization... 8,306 12,302 10,505 4,211 2,875
General and administrative................. 3,248 3,926 3,622 2,308 1,682
Impairment................................. -- 8,686 9,344 2,838 603
Restructuring and bankruptcy items
Restructuring expenses..................... 754 1,372 -- -- --
Bankruptcy expenses........................ 4,790 3,016 -- -- --
------- ------- ------ ------ ------
26,339 40,701 35,624 14,815 8,164
------- ------- ------- ------- -------
Income (loss) from operations................ 7,241 (2,860) (14,152) (612) 4,069
Other income, expenses and deductions
Interest and other income................... 239 456 330 328 286
Interest and debt expense (contractual
amounts of $4,069 and $6,727 for 2000 and
1999, respectively)........................ (2,470) (6,236) (5,362) (1,591) (1,242)
------- ------- ------- ------- -------
Income (loss) before income taxes............ 5,010 (8,640) (19,184) (1,875) 3,113
Provision (benefit) for income taxes......... 2,415 (2,882) (2,775) 174 679
------- ------- ------- ------- -------
Income (loss) before extraordinary gain...... 2,595 (5,758) (16,409) (2,049) 2,434
------- ------- ------- ------- -------
Extraordinary gain from extinguishment of debt,
net of tax................................ 8,259 - - - -
------- ------- ------- ------- -------
Net Income (Loss)............................ $10,854 $(5,758) $(16,409) $(2,049) $2,434
======= ======= ======== ======= =======
Earnings (Loss) per share from continuing
operations
Basic...................................... $ 0.39 $ (2.25) $ (6.60) $ (1.10) $ 1.85
======= ======= ======== ======= =======
Diluted.................................... $ 0.39 $ (2.25) $ (6.60) $ (1.10) $ 1.70
======= ======= ======== ======= =======
Earnings (Loss) per share:
Basic...................................... $ 1.62 $ (2.25) $ (6.60) $ (1.10) $ 1.85
======= ======= ======== ======= =======
Diluted.................................... $ 1.61 $ (2.25) $ (6.60) $ (1.10) $ 1.70
======= ======= ======== ======= =======
Weighted average number of shares-basic..... 6,708 2,568 2,484 1,822 1,324
======= ======= ======== ======= =======
Weighted average number of shares-diluted.... 6,725 2,568 2,484 1,822 1,423
======= ======= ======== ======= =======
Note: Southern Mineral recognized a pre-tax non-cash expense of $8,686 in 1999
and $9,344 in 1998, in connection with the writedown of its investment in
certain oil and gas producing properties. Southern Mineral did not recognize any
writedowns of its oil and gas producing properties during 2000.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
In addition to the above discussion, the following is intended to assist you
in understanding our financial condition and results of operations for each of
the years ended December 31, 2000, 1999 and 1998. This discussion should be
read together with the selected consolidated financial data and the
consolidated financial statements and related footnotes included in this
document. The following information contains forward-looking statements based
on our current expectations, assumptions, estimates and projections about us
and our industry which involve risks and uncertainties.
Accounting Policies
We use the successful efforts method of accounting for oil property
acquisition, exploration, development, and production activities. Property
acquisition, exploration well and development well costs are capitalized as
incurred. Unsuccessful exploration well costs are subsequently charged to
exploration expense. Other exploration costs, including geological and
geophysical costs, the costs of retaining unproved property and costs to
operate and maintain wells and equipment are expensed as incurred. Capitalized
costs are amortized by field using the units-of-production method. Acquisition
costs are amortized based on proved reserves. Development costs are amortized
based on proved developed reserves. Capitalized costs of unproved properties
are excluded from amortization until such time as proved reserves are
established or impairment is determined.
External Factors
Our results of operations and the period to period comparability of our
financial results are affected by external factors, including changes in the
price of crude oil. Oil prices have historically been highly volatile. See "Risk
Factors."
Results of operations for the year ended December 31, 2000 as compared to the
year ended December 31, 1999
Oil and gas revenues for the year ended December 31, 2000 were $33,581,000
compared to oil and gas revenues of $25,865,000 for the same period in 1999.
Oil and natural gas liquids, or NGL, production decreased 19% to 695,308 barrels
and natural gas production decreased 25% to 4,046 million cubic feet, or mmcf,
in the year ended December 31, 2000 compared to the year ended December 31,
1999. The lower production levels in the year ended December 31, 2000 are due
primarily to the sale of properties in 1999 and the first quarter of 2000, and
natural declines in producing properties. Increases in commodity prices more
than offset the impact of the lower volumes.
Southern Mineral's average realized oil and NGL price increased 70% from
$15.39 per barrel in the year ended December 31, 1999 to $26.15 in the year
ended December 31, 2000. Southern Mineral's average realized natural gas prices
increased 73% to $3.60 per thousand cubic feet during the year ended December
31, 2000 compared to $2.08 per thousand cubic feet in the same period a year
earlier.
During the first quarter of 1999, Southern Mineral sold its mineral
interests and substantially all of its royalty interests in Texas, New Mexico
and Mississippi for approximately $6,000,000. The gain on the sale of these
assets was $5,073,000. The proceeds from asset sales in the first quarter of
1999 were used to reduce bank indebtedness and for other corporate purposes.
During the third quarter of 1999, Southern Mineral sold domestic properties
resulting in a net gain of approximately $7.1 million with no significant sales
in 2000.
For the year ended December 31, 2000, production costs, including production
and ad valorem taxes, decreased 2% to $8,730,000 compared to $8,898,000 in the
year ended December 31, 1999. However, on an energy equivalent unit basis,
production costs rose 26%, resulting primarily from non-recurring workovers and
other operations
Exploration, dry hole and lease impairment expenses incurred in the year
ended December 31, 2000 were $511,000, compared to $2,501,000 in the same
period in 1999. The 1999 expense is primarily from impairments of a portion of
the property held for sale and non-producing properties. Since Southern Mineral
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 $3,248,000 in the year ended
December 31, 2000, a 17% decrease from $3,926,000 in the prior year's period
primarily related to reductions in force through attrition and layoffs in 1999
offset by charges related to issuance of common shares to Southern Mineral's new
directors in lieu of cash compensation and application of FASB Interpretation
No. 44, Accounting for Certain Transactions Involving Stock Compensation. On an
energy equivalent unit basis, costs increased 6% from the year ended December
31, 1999 to the same period in 2000.
Depreciation, depletion and amortization, or DD&A, decreased 32% to
$8,306,000 in the year ended December 31, 2000 compared to $12,302,000 in 1999
primarily related to decrease in production due to property sales. On a unit of
equivalent production basis, DD&A decreased 14% from $1.15 per thousand cubic
feet equivalent to $0.99 per thousand cubic feet equivalent.
Restructuring and bankruptcy costs were $5,544,000 in the year ended
December 31, 2000 compared to $4,388,000 in 1999. The costs for 2000 relate
primarily to charges associated with Southern Mineral's plan of reorganization,
which became effective August 1, 2000 and application of FIN 44. The 1999 costs
relate to charges associated with the proposed restructuring as filed with the
Securities and Exchange Commission on July 21, 1999, which was not consummated.
Interest and debt expense in the year ended December 31, 2000 was $2,470,000
compared to $6,236,000 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 Statement of Position 90-7,
Financial Reporting by Entities in Reorganization under the Bankrupcty Code, or
SOP 90-7, through the effective date of the plan of reorganization.
Tax provision in the year ended December 31, 2000 was $2,415,000 compared to
tax benefit of $2,882,000 in the same period in 1999. The increase in tax
provision primarily reflects increased pre-tax income from Company's Canadian
operations in the year ended December 31, 2000 compared to a loss in the same
period in 1999, state income tax liability associated with Southern Mineral's
U.S. operations in 2000 and change in Southern Mineral's tax strategy for its
Canadian operations subsequent to December 31, 1999.
The extraordinary gain occurred in the third quarter of 2000 resulting from
the exchange of Southern Mineral's debentures for shares of common stock based
on the closing price of Southern Mineral's common stock on the plan of
reorganization confirmation date.
Southern Mineral recorded net income of $10,854,000, or $1.62 per basic
share for the year ended December 31, 2000 compared to a net loss of $5,758,000
or $2.25 per basic share for the year ended December 31, 1999.
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 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 six months of 1998 offset by decreased production
related to properties sold during 1999.
Natural gas production for 1999 was 5,395 million cubic feet, a 16% decrease
as compared to production for the same period in 1998 of 6,433 million cubic
feet. Southern Mineral's crude oil and natural gas liquids 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 compared to $1.89 per thousand cubic feet 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 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
thousand cubic feet equivalent basis, production costs in 1999 increased to
$0.84 per thousand cubic feet equivalent, or up 8% from $0.78 per thousand
cubic feet equivalent 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 Southern Mineral had a 93%
working interest. Since Southern Mineral 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 expense for 1999 increased to
$12,302,000, up 17% from $10,505,000 in 1998. Southern Mineral 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.
Depreciation, depletion and amortization expense increased in 1999 to $1.15 per
thousand cubic feet equivalent, up 20% from $0.96 per thousand cubic feet
equivalent 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 thousand cubic feet equivalent
basis, general and administrative expenses increased 12% for 1999 to $0.37 per
thousand cubic feet equivalent from $0.33 per thousand cubic feet equivalent 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 Southern Mineral 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 Southern Mineral board concluded that the proposed
restructuring plan as filed with the SEC 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 Southern Mineral'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."
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 Southern Mineral's
domestic and Canadian banks. Subsequent to the filing of bankruptcy, no
additional interest was accrued in accordance with Statement of Position 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 Southern Mineral's Canadian operations.
As a result of the above items, Southern Mineral reported a net loss in 1999
of $5,758,000 or $2.25 per basic share, compared to a loss of $16,409,000, or
$6.60 per basic share in 1998.
Liquidity and Capital Resources
Southern Mineral 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.
Southern Minerals's cash flow provided by operating activities for the year
ended December 31, 2000 was $14,144,000, for the year ended December 31, 1999
was $3,396,000, and for the year ended December 31, 1998 was $6,670,000.
Additional cash from the sale of assets was received in the amount of
$9,142,000 in 2000, $26,119,000 in 1999 and $11,508,000 in 1998.
On October 29, 1999, Southern Mineral and its wholly-owned subsidiaries
(other than Neutrino) filed voluntary petitions for relief under Chapter 11,
Title 11 of the United States Code, in order to facilitate the restructuring of
Southern Mineral'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. Southern Mineral emerged from
bankruptcy on August 1, 2000. All debts of Southern Mineral, except those of
Neutrino, as of October 29, 1999 were stayed by the bankruptcy petitions, and
were subject to compromise pursuant to such proceedings until August 1, 2000.
Southern Mineral operated as a debtor-in-possession subject to the bankruptcy
court's supervision and orders.
Southern Mineral decided to seek protection because it concluded that a
restructuring of its indebtedness could not be completed without the protection
and assistance of the bankruptcy court. The timing of the bankruptcy filing was
imposed by several factors, including the possible acceleration of Southern
Mineral's $16.1 million of indebtedness by its domestic bank creditors and the
inability of Southern Mineral to reach a satisfactory compromise with its
debenture holders regarding the consideration to be received in a previously
proposed restructuring. The bankruptcy petitions were filed in order to preserve
cash and to give Southern Mineral the opportunity to restructure its debt.
In the ordinary course of business, Southern Mineral makes substantial
capital expenditures for the acquisitions, exploration and development of oil
and natural gas reserves. Historically, Southern Mineral 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 Southern Mineral 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 Southern Mineral.
On August 23, 2000, Southern Mineral entered into a new credit facility with
BankOne Texas in the principal amount of up to $30,000,000. The domestic credit
facility provides for a borrowing base of $17,625,000 and matures on August 23,
2003. The borrowing base reduces $275,000 per month. We used proceeds from the
domestic credit facility to repay the preexisting domestic facility as provided
in the modified bankruptcy plan. The obligations under the domestic credit
facility are secured by substantially all of the assets of Southern Mineral and
its subsidiaries, other than Neutrino. The domestic credit facility prohibits
the payment of dividends and contains covenants relating to the financial
condition of Southern Mineral, including working capital, tangible net worth and
cash flow coverage covenants. At December 31, 2000 the outstanding borrowing
was $14,282,512. On March 7, 2001, outstanding borrowings under the domestic
credit facility were $13,582,512 with borrowing availability of $3,767,488.
Outstanding principal under the domestic credit facility bears interest at the
index rate published by BankOne plus 0.5% (10.0% at December 31, 2000) to the
extent of the borrowing base utilized. The borrowing base is redetermined semi-
annually and will be made at the sole discretion of the domestic lender.
Southern Mineral may request four additional borrowing base redeterminations
during any calendar year except that no more than one redetermination will be
made each calendar quarter.
On August 29, 2000, Neutrino repaid its old Canadian credit facility and
entered into a new principal amount of up to US $30,000,000 loan facility with
BankOne Canada. At December 31, 2000, the borrowing base under the Canadian
credit facility was US $10,075,000 and reduces US $185,000 per month since
September 2000. The facility is due August 29, 2002. At December 31, 2000,
outstanding borrowings under the Canadian credit facility were US $2,531,814.
The Canadian credit facility is secured by substantially all of Neutrino's
assets and guaranteed by Southern Mineral. On March 7, 2000, outstanding
borrowings under the Canadian credit facility were US $1,950,000 ($3,000,000
Canadian) with a borrowing availability of US $7,940,000 ($12,215,384 Canadian).
Outstanding principal under the Canadian credit facility bears interest at the
bank's prime rate plus 0.5% (8.0% at December 31, 2000) to the extent of the
borrowing base utilized. The Canadian credit facility contains certain covenants
relating to the financial condition of Neutrino, including working capital,
tangible net worth and cash flow coverage covenants. The borrowing base under
the Canadian credit facility is subject to semi-annual redeterminations.
Neutrino may request four additional borrowing base redeterminations during any
calendar year except that no more than one redetermination will be made each
calendar quarter.
The outstanding balance under the old Canadian credit facility was
classified as a current liability because of the demand feature of the loan.
However, it was management's intention that the facility be utilized to provide
long-term financing for Southern Mineral.
Southern Mineral did not declare dividends in the years ended December 31,
2000 and 1999. Southern Mineral 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 Southern Mineral's domestic
credit facility.
Recent Accounting Pronouncements
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133, or SFAS 133, Accounting for Derivative Instruments
and Hedging Activities, and SFAS No. 138, Accounting for Certain Derivative
Instruments and Certain Hedging Activities, an amendment of FASB Statement No.
133. These statements establish accounting and reporting standards requiring
that derivative instruments, including certain derivative instruments embedded
in other contracts, be recorded on the balance sheet at fair value as either
assets or liabilities. The accounting for changes in the fair value of a
derivative instrument depends on the intended use and designation of the
derivative at its inception. Special accounting for qualifying hedges allows a
derivative's gains and losses to offset related results of the hedged item in
the statement of operations, and requires the Company to formally document,
designate and assess the effectiveness of the hedge transaction to receive hedge
accounting. For derivatives designated as cash flow hedges, changes in fair
value, to the extent the hedge is effective, are recognized in other
comprehensive income until the hedged item is recognized in earnings. Overall
hedge effectiveness is measured at least quarterly. Any changes in the fair
value of the derivative instrument resulting from hedge ineffectiveness, as
defined by SFAS 133 and measured based on the cumulative changes in the fair
value of the derivative instrument and the cumulative changes in the estimated
future cash flows of the hedged item, are recognized immediately in earnings.
The Company has designated all of its commodity hedges as cash flow hedges.
Adoption of SFAS 133, at January 1, 2001, resulted in the recognition of
$197,000 of derivative assets and $3.3 million of derivative liabilities on the
Company's balance sheet and $1.9 million, net of taxes, of hedging losses
included in accumulated other comprehensive income as the cumulative effect of a
change in accounting principle and $796,000, net of taxes, recorded as a
cumulative effect of change in accounting principle to net income. Amounts are
determined as of January 1, 2001 based on market quotes and the Company's
portfolio of derivative instruments.
Item 7A. Quantitative and Qualitative Disclosures about Market Risk
Southern Mineral is exposed to a variety of market risks including the
potential for adverse changes in oil and gas natural gas prices, foreign
currency exchange rates and interest rates.
Southern Mineral's revenue stream is significantly affected by the level of
oil and natural gas prices, which can be volatile and over which Southern
Mineral has no control or influence. Southern Mineral has utilized natural gas
and oil price swaps and collars on a limited basis to hedge a portion of its
exposure to commodity price fluctuations. The effect of price swaps
is to fix the price for a specific quantity of gas or oil for a specific time
and collars are to secure a maximum and minimum price for a specific time.
Southern Mineral uses the deferral method of accounting for its natural gas and
oil price swaps and collars and therefore offsets any gain or loss on the swap
or collar contracts with the realized prices for its production.
As required by Southern Mineral's domestic and Canadian credit facilities,
Southern Mineral has entered into the following crude oil and natural gas
costless collars as of December 31, 2000:
Oil Hedges
US$ NYMEX WTI
Monthly ---------------------
Period Total Bbl Bbl Floor Cap
------ ---------- ---------- ---------------------
United States
Jan-01 - Dec-01................... 132,400 11,033 $ 22.00 $ 32.20
Jan-02 - Sep-02................... 88,200 9,800 $ 22.00 $ 25.60
Canada
Jan-01 - Dec-01................... 111,100 9,258 $ 22.00 $ 33.30
Jan-02 - Sep-02................... 70,300 7,811 $ 22.00 $ 27.00
Gas Hedges
US$
Houston Ship Channel
Total Monthly --------------------
Mmbtu Mmbtu Floor Cap
---------- ---------- ---------------------
United States
Jan-01 - Mar-01................... 285,000 95,000 $ 2.75 $ 6.85
Apr-01 - Oct-01................... 600,000 85,714 $ 2.75 $ 4.98
Nov-01 - Mar-02................... 378,000 75,600 $ 2.75 $ 4.85
Apr-02 - Oct-02................... 466,000 66,571 $ 2.75 $ 3.80
CDN $ Alberta Spot-
AECO
Total Monthly ---------------------
gigajoules gigajoules Floor Cap
---------- ---------- ---------------------
Canada
Jan-01 - Sep-02................... 1,050,000 50,000 $ 4.05 $ 6.15
Based on analysis utilizing actual derivative contractual terms in Southern
Mineral's contracts, which are standard form contracts in the industry, at
December 31, 2000, a 10% change in oil and gas prices would not have a material
adverse effect on the financial position or results of operations of the
Company, related to the collars.
The fair value at December 31, 2000 of collars was a net unrealized loss of
$3.1 million.
Southern Mineral 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 from
operations or cash flows.
Southern Mineral has two primary sources of debt financing: its domestic
bank credit facility and its Canadian bank credit facility. In Canada, Southern
Mineral has utilized interest rate swaps as a means of fixing the interest rate
on its indebtedness. The following table presents Southern Mineral's
indebtedness at December 31, 2000 as it relates to interest rate type and
maturity. Given the amount of Southern Mineral's variable rate indebtedness at
December 31, 2000, and taking in to account the interest rate swap currently in
place, a 10% change in interest rates would imply an annualized change in pre-
tax interest expense of approximately $32,000.
2001 2002 2003 Thereafter Total Fair Value
----------- ---------- ----------- ----------- ----------- -----------
Variable Rate
Domestic Bank Debt.... -- $14,282,512 -- $14,282,512 $14,282,512
Canadian Bank Debt.... -- -- 2,531,814 -- 2,531,814 2,531,814
----------- ---------- ----------- ----------- ----------- -----------
-- -- $16,814,326 $16,814,326 $16,814,326
Average Rate........ 9.70% 9.70%
In August 2000, Southern Mineral fixed the rate of interest on its
outstanding bank borrowings under its Canadian credit facility through interest
rate swaps. At December 31, 2000, the fair value of Southern Mineral's interest
rate swap was a loss of approximately $94,000.
Item 8. Financial Statements and Supplementary Data
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, 2000 and 1999, 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, 2000. 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 auditing standards generally
accepted in the United States of America. 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, 2000 and 1999, and the
consolidated results of their operations and their cash flows for each of the
years in the three-year period ended December 31, 2000, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Houston, Texas
March 1, 2001
F-1
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
December 31,
------------------
ASSETS 2000 1999
------ -------- --------
Current Assets
Cash and cash equivalents................................ $ 1,207 $ 1,981
Receivables, net......................................... 6,050 4,923
Property held for sale................................... -- 8,914
Other.................................................... 500 606
-------- --------
Total current assets................................... 7,757 16,424
Property and equipment, at cost using successful efforts
method for oil and gas activities
Oil and gas producing properties......................... 115,705 120,932
Unproven properties...................................... 4,541 4,443
Office equipment......................................... 567 561
Accumulated depreciation, depletion and amortization..... (47,277) (47,971)
-------- --------
73,536 77,965
Other Assets............................................... 603 345
-------- --------
Total assets........................................... $ 81,896 $ 94,734
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Liabilities not subject to compromise:
Current liabilities
Accounts payable......................................... $ 3,362 $ 1,375
Accrued liabilities...................................... 3,446 2,950
Canadian bank loan....................................... -- 13,876
-------- --------
Total current liabilities.............................. 6,808 18,201
-------- --------
Long-term liabilities
Bank Debt................................................ 16,814 --
Deferred income taxes.................................... 6,490 4,240
-------- --------
Total liabilities not subject to compromise............ 30,112 22,441
-------- --------
Liabilities subject to compromise:
Accounts payable......................................... -- 1,981
Accrued liabilities...................................... -- 1,779
Notes payable banks...................................... -- 16,109
Subordinated debentures.................................. -- 41,400
-------- --------
Total liabilities subject to compromise................ -- 61,269
-------- --------
Stockholders' Equity
Preferred stock, par value $.01 per share; authorized
5,000,000 shares at December 31, 2000; none issued......
Common stock, par value $.01 per share; authorized
50,000,000 shares at December 31, 2000; issued
12,231,960 and 2,600,072 at December 31, 2000
and 1999, respectively; outstanding 12,213,715 and
2,581,827 shares at December 31, 2000 and 1999,
respectively............................................ 122 26
Additional paid-in capital............................... 61,794 30,989
Accumulated other comprehensive loss-foreign currency
translation adjustment.................................. (1,283) (288)
Retained deficit......................................... (8,797) (19,651)
Less: Treasury stock..................................... (52) (52)
-------- --------
Total stockholders' equity............................. 51,784 11,024
-------- --------
Total liabilities and stockholders' equity............. $ 81,896 $ 94,734
======== ========
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
F-2
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(in thousands, except per share amounts)
For the Year's Ended
December 31,
--------------------------
2000 1999 1998
------- ------- --------
Revenue
Oil and gas....................................... $33,581 $25,865 $ 21,722
Gain (loss) on sales of properties and other
assets........................................... (1) 11,976 (250)
------- ------- --------
33,580 37,841 21,472
Expenses
Production........................................ 8,730 8,898 8,518
Exploration....................................... 511 2,501 3,635
Depreciation, depletion and amortization.......... 8,306 12,302 10,505
General and administrative........................ 3,248 3,926 3,622
Impairment on oil and gas properties.............. -- 8,686 9,344
Restructuring and Bankruptcy items
Restructuring expenses.......................... 754 1,372 --
Bankruptcy expenses............................. 4,790 3,016 --
------- ------- --------
26,339 40,701 35,624
------- ------- --------
Income (loss) from operations..................... 7,241 (2,860) (14,152)
Other income, expenses and deductions
Interest and other income....................... 239 456 330
Interest and debt expense (contractual amounts
of $4,069 and $6,727 for 2000 and 1999,
respectively)................................. (2,470) (6,236) (5,362)
------- ------- --------
Income (loss) before income taxes................. 5,010 (8,640) (19,184)
Provision (benefit) for foreign, federal and state
income taxes
Current provision (benefit)..................... (24) 575 6
Deferred provision (benefit).................... 2,439 (3,457) (2,781)
------- ------- --------
2,415 (2,882) (2,775)
------- ------- --------
Income (loss) before extraordinary gain........... 2,595 (5,758) (16,409)
------- ------- --------
Extraordinary gain from extinguishment of debt,
net of tax....................................... 8,259 -- --
------- ------- --------
Net income (loss)................................. $10,854 $(5,758) $(16,409)
======= ======= ========
Income (loss) per share from continuing
operations--basic................................ $ 0.39 $ (2.25) $ (6.60)
======= ======= ========
Income (loss) per share from continuing
operations--diluted.............................. $ 0.39 $ (2.25) $ (6.60)
======= ======= ========
Income per share from extraordinary item--basic... $ 1.23 $ -- $ --
======= ======= ========
Income per share from extraordinary item--
diluted.......................................... $ 1.23 $ -- $ --
======= ======= ========
Net income (loss) per share--basic................ $ 1.62 $ (2.25) $ (6.60)
======= ======= ========
Net income (loss) per share--diluted.............. $ 1.61 $ (2.25) $ (6.60)
======= ======= ========
Weighted average number of shares outstanding--
basic............................................ 6,708 2,568 2,484
======= ======= ========
Weighted average number of shares outstanding--
diluted.......................................... 6,725 2,568 2,484
======= ======= ========
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
F-3
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED STOCKHOLDERS'
EQUITY AND COMPREHENSIVE INCOME (LOSS)
(in thousands)
Accumulated
Common Shares Additional Other Retained Total
------------- Paid-In Comprehensive Earning Treasury Stock Stockholders'
Shares Amount Capital Loss (Deficit) Shares Amount Equity
------ ------ ---------- ------------- --------- -------- ------ -------------
Balance at December
1997................... 1,826 $ 18 $14,225 $ (227) $ 2,516 (18) $ (52) $ 16,480
Stock issued for
directors' fees........ 9 -- 139 -- -- -- -- 139
Stock issued for
directors' fees........ 2 -- 22 -- -- -- -- 22
Issuance of common stock
for property
acquisition............ 2 -- 50 -- -- -- -- 50
Issuance of common stock
for property in
corporate
acquisitions........... 738 8 16,514 -- -- -- -- 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
1998................... 2,577 $ 26 $30,950 $(2,304) $(13,893) (18) $ (52) $ 14,727
Stock issued for
directors' fees........ 22 -- 36 -- -- -- -- 36
Stock issued for stock
purchase plan.......... 1 -- 3 -- -- -- -- 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
1999................... 2,600 $ 26 $30,989 $ (288) $(19,651) (18) $ (52) $ 11,024
Stock issued for
directors' fees........ 96 1 308 309
Stock issued in exchange
for debt............... 9,536 95 29,706 29,801
Warrants issued......... 791 791
Comprehensive income:
Net Income............. 10,854 10,854
Foreign currency
translation
adjustment............ (995) (995)
--------
Total comprehensive
income, net of tax..... 9,859
------ ---- ------- ------- -------- --- ------ --------
Balance at December
2000................... 12,232 $122 $61,794 $(1,283) $ (8,797) (18) $ (52) $ 51,784
====== ==== ======= ======= ======== === ====== ========
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
F-4
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS
(in thousands)
For the Year's Ended
December 31,
----------------------------
2000 1999 1998
-------- -------- --------
Cash Flows from Operating Activities
Net (loss) income............................... $ 10,854 $ (5,758) $(16,409)
Adjustments to reconcile net income (loss) to
cash provided by operating activities:
Depreciation, depletion and other assets....... 8,306 12,302 10,505
Loss (gains) on sales of properties and other
assets........................................ 1 (11,976) 250
Impairment of proved oil and gas properties.... -- 8,686 9,344
Dry hole costs and impairment of exploration
properties.................................... 360 2,415 2,470
Deferred taxes................................. 2,439 (3,457) (2,781)
Non-cash portion of Bankruptcy costs........... -- 2,463 --
Warrant Fair Value Expense..................... 791 -- --
Extraordinary item............................. (8,259) -- --
Other........................................... 290 353 418
Change in assets and liabilities, net of effects
of acquisitions and dispositions
Decrease (Increase) in receivables............. (1,231) 869 2,205
(Increase) decrease in other current assets.... 92 55 (136)
Increase (Decrease) in payables................ 501 (2,556) 804
-------- -------- --------
Net cash provided by operating activities..... 14,144 3,396 6,670
Cash Flows from Investing Activities
Proceeds from sales of:
Proved properties.............................. 9,142 26,111 11,425
Properties held for sale and unproved
properties.................................... -- 8 83
Capital Expenditures:
Acquisition, exploration and development....... (6,046) (2,954) (17,103)
Properties held for sale....................... -- -- (1,083)
Acquisition of Amerac, net of cash............. -- -- (9,387)
Acquisition of Neutrino, net of cash........... -- -- (35,926)
-------- -------- --------
Net cash received (used) in investing
activities................................... 3,096 23,165 (51,991)
Cash Flows from Financing Activities
Proceeds from debentures offering, net.......... -- (7)
Debenture offering costs........................ -- (12)
Proceeds from revolving loan.................... 18,213 -- 50,813
Payments on revolving loan...................... -- (10,280)
Payments on note payable........................ (35,989) (25,763) (208)
Loan acquisition costs.......................... (263) (388) (259)
Proceeds from equity offering, net.............. -- -- --
Proceeds on Canadian subordinated debentures.... -- -- (3,270)
-------- -------- --------
Net cash provided by (used in) financing
activities..................................... (18,039) (26,151) 36,777
Effect of Exchange Valuation on Cash............ 25 30 74
-------- -------- --------
Net (decrease) increase in cash and cash
equivalents.................................... (774) 440 (8,470)
Cash and cash equivalents at beginning of year.. 1,981 1,541 10,011
-------- -------- --------
Cash and cash equivalents at end of year........ $ 1,207 $ 1,981 $ 1,541
======== ======== ========
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
F-5
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENT OF CONSOLIDATED CASH FLOWS-(continued)
(in thousands)
For the Year's Ended
December 31,
----------------------
2000 1999 1998
------- ------ -------
Supplemental Disclosure of Cash Flow Information
Cash paid for taxes.................................... $ 449 $ 693 $ 159
Cash paid for interest................................. 3,894 5,295 3,753
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
Issuance of common stock to debenture holders.......... $29,801 -- --
Change in deferred tax liability on property
acquisitions.......................................... -- -- 9,562
Directors' fees paid in stock.......................... 309 $ 36 139
The accompanying notes to consolidated financial statements of Southern Mineral
Corporation and subsidiaries are an integral part of these statements.
F-6
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
General Business--Southern Mineral Corporation, a Nevada corporation, with
its subsidiaries ("Southern Mineral" or the "Company"), is an independent oil
and gas company headquartered in Houston, Texas. The Company is engaged in the
acquisition, exploitation, exploration and operation of oil and gas properties,
primarily along the Gulf Coast of the United States, in Canada and in Ecuador.
The Company conducts its operations in Canada exclusively through its
subsidiary, Neutrino Resources Inc. ("Neutrino"). The Company's business
strategy is to increase reserves and shareholder value through a balanced
program of acquisitions, exploitation and exploration.
On October 29, 1999 ("Petition Date"), the Company and its wholly-owned
subsidiaries, BEC Energy, Inc., Amerac Energy Corporation, SMC Ecuador, Inc.
and SMC Production Company ("Debtor Subsidiaries"), filed voluntary petitions
for relief under Chapter 11, Title 11 of the United States Code ("Bankruptcy
Code"), in order to facilitate the restructuring of the Company's long-term
debt, revolving credit, trade debt and other obligations. The filings were made
in the U.S. Bankruptcy Court for the Southern District of Texas, Victoria
Division ("Bankruptcy Court"). The Company and its Debtor Subsidiaries emerged
from Bankruptcy on August 1, 2000 ("Effective Date"). The Company and its
Debtor Subsidiaries operated as debtors-in-possession subject to the Bankruptcy
Court's supervision and orders until the Effective Date. See Note 2 for further
information.
Note 1. Summary of Significant Accounting Policies
Basis of Presentation--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. As discussed above, the Company
filed for reorganization under Chapter 11 of the United States Bankruptcy Code.
Subsequent to emergence from Chapter 11 in 2000, the Company has presented its
financial statements in accordance with generally accepted accounting
principles in a manner consistent with prior periods.
Principles of Consolidation--The consolidated financial statements include
the accounts of Southern Mineral Corporation and its wholly owned subsidiaries.
In consolidation, all significant intercompany transactions have been
eliminated. The Company accounts for its investment in oil and gas partnerships
and joint ventures using the proportional consolidation method.
Revenues--Natural gas revenues generally are recorded using the sales
method, whereby the Company recognizes natural gas revenue based on the amount
of gas sold to purchasers on its behalf. All other revenue is also recorded
using the sales method. The Company believes that imbalances related to the
sales of natural gas are insignificant.
Foreign Currency Translation--Translation adjustments result 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. The U. S. dollar is considered the functional currency for the
Company's Ecuadorian operations, as predominately all transactions in these
operations are denominated in U. S. dollars. 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.
F-7
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Resulting translation adjustments are reported as a component of other
comprehensive income in stockholders' equity. Foreign currency transaction
gains and losses resulting from the effect of exchange rate fluctuations on
transactions in currencies other than the functional currency are included in
the determination of net earnings. The Company has no material foreign currency
transaction gains or losses for any of the periods presented in these financial
statements.
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 of approximately $578,000 as a
component of accumulated depreciation, depletion and amortization.
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.
There were no impairment charges in the year ended December 31, 2000. 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
impairment 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.
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.
F-8
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
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 counting
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 may use derivative instruments,
such as futures, swaps and options, to manage its exposure to commodity price
risk and interest rate risk. Derivatives that qualify a hedges and held for
non-trading purposes are accounted for using the deferral method of accounting.
For a commodity derivative to qualify as a hedge, the price movements in the
commodity derivative must be highly correlated with the underlying hedged
commodity. Under this method of accounting, gains and losses are not recognized
until the underlying physical transaction occurs. Deferred gains and losses
related to such instruments are reported on the consolidated balance sheet as
assets or liabilities. The Company does not typically directly enter into
derivative contracts for the purposes of speculating on commodity price changes
or interest rate changes. Contracts held for trading purposes, or contracts
which do not qualify as hedges, are accounted for using the mark-to-market
method. Under this methodology, contracts are reported on the consolidated
balance sheet at fair value as assets or liabilities with the changes in fair
value recognized in current period income. The Company monitors open derivative
positions with a strict policy which limit its exposures to market risk and
require reporting to management of potential financial exposure.
Effective January 1, 2001, the Company adopted Statement of Financial
Accounting Standards No. 133 ("SFAS 133"), Accounting for Derivative
Instruments and Hedging Activities, and SFAS No. 138, Accounting for Certain
Derivative Instruments and Certain Hedging Activities, an amendment of FASB
Statement No. 133. These statements establish accounting and reporting
standards requiring that derivative instruments, including certain derivative
instruments embedded in other contracts, be recorded on the balance sheet at
fair value as either assets or liabilities. The accounting for changes in the
fair value of a derivative instrument depends on
F-9
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the intended use and designation of the derivative at its inception. Special
accounting for qualifying hedges allows a derivative's gains and losses to
offset related results of the hedged item in the statement of operations, and
requires the Company to formally document, designate and assess the
effectiveness of the hedge transaction to receive hedge accounting. For
derivatives designated as cash flow hedges, changes in fair value, to the
extent the hedge is effective, are recognized in other comprehensive income
until the hedged item is recognized in earnings. Overall hedge effectiveness is
measured at least quarterly. Any changes in the fair value of the derivative
instrument resulting from hedge ineffectiveness, as defined by SFAS 133 and
measured based on the cumulative changes in the fair value of the derivative
instrument and the cumulative changes in the estimated future cash flows of the
hedged item, are recognized immediately in earnings. The Company has designated
all of its commodity hedges as cash flow hedges.
Adoption of SFAS 133, at January 1, 2001, resulted in the recognition of
$197,000 of derivative assets and $3.3 million of derivative liabilities on the
Company's balance sheet and $1.9 million, net of taxes, of hedging losses
included in accumulated other comprehensive income as the cumulative effect of a
change in accounting principle and $796,000, net of taxes, recorded as a
cumulative effect of change in accounting principle to net income. Amounts are
determined as of January 1, 2001 based on market quotes and the Company's
portfolio of derivative instruments.
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.
On August 1, 2000, pursuant to the plan of reorganization of the Bankruptcy
Code, old shareholders of the Company's common stock received one share of the
Company's new common stock for each five shares of the Company's old common
stock. All share and per-share amounts have been restated to reflect the 1 for
5 August 1, 2000 reverse stock split. See Note 2 Bankruptcy Filing.
Earnings per share have been calculated on the restated weighted average
number of shares outstanding for the years ended December 31, 2000, 1999 and
1998, respectively. For the year ended December 31, 2000, 1999 and 1998,
respectively, the issuance or conversion of potential common shares of
4,087,437, 16,451 and 138,600 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 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 years ended December 31, 2000, 1999 and 1998 was as follows (in thousands):
Years Ended December
--------------------------
2000 1999 1998
------- ------- --------
Net income (loss)............................ $10,854 $(5,758) $(16,409)
Foreign currency translation adjustment...... (995) 2,016 (2,077)
------- ------- --------
Total comprehensive income (loss)............ $ 9,859 $(3,742) $(18,486)
======= ======= ========
F-10
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 2. Bankruptcy Filing
On October 29, 1999, the Company and its Debtor Subsidiaries, which excluded
Neutrino, filed voluntary petitions for relief under the Bankruptcy Code in
order to facilitate the restructuring of the Company's long-term debt,
revolving credit, trade debt and other obligations. The filings were made in
the U.S. Bankruptcy Court for the Southern District of Texas, Victoria
Division. The Company and its Debtor Subsidiaries emerged from bankruptcy on
August 1, 2000. All debts of the Company and its Debtor Subsidiaries as of the
Petition Date were stayed by the bankruptcy petitions and were subject to
compromise pursuant to such proceedings until the Effective Date. The Company
and its Debtor Subsidiaries operated as debtors-in-possession subject to the
Bankruptcy Court's supervision and orders. The proceedings of the Company and
its Debtor Subsidiaries were consolidated for administrative purposes.
The decision to seek protection was taken by the Company and its Debtor
Subsidiaries because the Company concluded that a restructuring of its
indebtedness could not be completed without the protection and assistance of
the Bankruptcy Court. Timing of the bankruptcy filing was imposed by several
factors, including the possible acceleration of the Company's $16.1 million of
indebtedness by its domestic bank creditors and the inability of the Company
and its debenture holders to reach a satisfactory compromise regarding the
consideration to be received in the previously proposed restructuring. The
bankruptcy petitions were filed in order to preserve cash and to give the
Company the opportunity to restructure its debt.
On February 25, 2000, the Company filed a Plan of Reorganization and
Disclosure Statement and on May 2, 2000 filed a Second Amended Plan ("Amended
Plan"). The Amended Plan set forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. On May 2, 2000,
the Bankruptcy Court held a hearing and approved the Disclosure Statement and
the procedure for transmitting the Amended Plan and Disclosure Statement for
acceptance or rejection to all affected parties. The Bankruptcy Court set June
30, 2000 for the hearing on confirmation of the Amended Plan.
On July 5, 2000, the Company announced an agreement among all parties
contesting its Amended Plan to support modifications to its Plan ("Modified
Plan") to emerge from bankruptcy. The Bankruptcy Court set July 19, 2000 to
complete the confirmation hearing on the Modified Plan subject to certain
restrictions and on July 21, 2000 entered the order confirming the Company's
Modified Plan. The Modified Plan became effective on August 1, 2000. The
Modified Plan generally provided for the satisfaction of the Company and Debtor
Subsidiaries' claims including payment of all Bankruptcy Court approved
administrative expenses as follows:
. Domestic secured debt was paid in full with interest and expenses
including default interest of 3.5% from the Petition Date with proceeds
from a new secured credit facility secured by the Company. Payment of
the domestic secured debt, interest and expenses was $16,882,511 and
occurred on August 23, 2000.
. All other creditors other than domestic secured debt and amounts owed
debenture holders are to be paid in cash over periods ranging from 1 to
14 months.
. Debenture holders were satisfied as follows:
. Cash payment of $5 million, which was made to the indenture trustee
on August 31, 2000.
. Issuance of common stock that when issued represented approximately
78% of the Company's outstanding common shares (9,536,422 shares).
. A new Board of Directors was appointed for a one year term as follows:
one by the creditors' committee, two from the existing board, three by
representatives of significant owners of debentures and one jointly by
the creditors' committee and significant owners of debentures.
F-11
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
. A 1:5 reverse stock split of the Company's outstanding common stock,
par value $0.01 per share, was effectuated on August 1, 2000, the
Effective Date. Subject to the effects of the reverse split, the
existing common stock, options and warrants remained outstanding with
no change in terms and conditions except that all options and warrants
expiring between the Petition Date and confirmation of the Modified
Plan were extended for a two year period.
. The current common shareholders, option holders, and warrant holders of
record on July 24, 2000, received approximately 3,667,000 warrants
allowing them to increase their ownership from 22% to up to 40% of the
outstanding common stock. The new warrants are for a perpetual term
with an exercise price of $4.21 per share, subject to adjustment for
certain customary anti-dilution stock splits, stock dividends and other
recapitalization events. The exercise price must be paid in cash.
Pursuant to the provisions of SOP 90-7, the Company did not adopt fresh-
start reporting upon its emergence from Bankruptcy. Based on the closing price
of the Company's common stock on the Modified Plan confirmation date (July 21,
2000), the satisfaction of the $41.4 million debentures and accrued interest of
$1.6 million through the issuance of 9,536,422 shares of the Company's common
stock, par value $0.01, per share and cash of $5 million resulted in an
extraordinary gain of approximately $8.3 million, which is reflected in the
December 31, 2000 statement of operations. In addition, the $616,000 fair value
of the warrants issued was charged to bankruptcy expenses.
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.
The following is a reconciliation of the net cash paid in connection with
the acquisition of Neutrino:
Cash consideration for common stock.......................... $34,091,000
Cash paid for legal, accounting and transaction costs........ 1,705,000
Cash paid for other closing costs............................ 130,000
-----------
$35,926,000
===========
F-12
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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
===========
The following is a reconciliation of the net cash paid in connection with
the acquisition of Amerac:
Cash paid for assumed debt at consummation of acquisition... $8,714,000
Cash paid for legal, accounting and transaction costs....... 673,000
----------
$9,387,000
==========
Subsequent to the acquisition of Amerac, the purchase price was reduced by
$7,919,000 for the sale of non-strategic assets, including Amerac's Golden
Trend properties for $6,969,000 on June 30, 1998 and the Riffe Field for
$510,000 on July 1, 1998.
Big Escambia Creek
During 1997 and 1998, the Company acquired interests in the Big Escambia
Creek Field and surrounding area in a series of six transactions. The largest
acquisition was the purchase of the outstanding capital stock of BEC Energy,
Inc. on May 10, 1997, for $10,640,000. BEC's assets consisted of working
interests in fourteen oil and gas wells located in the Big Escambia Creek
Field, Escambia County, Alabama. Thereafter, the Company acquired additional
working interests in the area for $12.1 million. Each acquisition was accounted
for as a purchase.
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 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. The
sale of interests in Brushy Creek resulted in a gain of approximately $10.6
million and Texan Gardens Field a loss of approximately $3.4 million.
Neutrino sold in the fourth quarter of 1999 its interest in two non-core
properties in Alberta, Canada for approximately $3.7 million, resulting in a
loss of sale of approximately $207,000. In March 2000, Neutrino sold its
interest in Inverness and Swan Hills in Alberta, Canada, for $9.0 million.
These assets were classified as properties held for sale and are included in
current assets at December 31, 1999. The Company recorded an impairment of
approximately $5.3 million in 1999 to adjust the cost basis of Inverness and
Swan Hills to their net realized value based on the estimated sales price
received in March 2000.
F-13
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Pro forma
The following table summarizes the pro forma (unaudited) results (stated in
thousands, except per share data), of the Company as though the dispositions of
Brushy Creek, Texan Gardens and Inverness/Swan Hills had occurred on January 1,
1999.
Years Ended
December 31,
---------------
2000 1999
------- -------
(unaudited)
in thousands,
except per
share data
Revenues................................................. $32,840 $26,617
Net income (loss)........................................ 10,621 (8,783)
Net income (loss) per share--basic....................... 1.58 (3.40)
Net income (loss) per share--diluted..................... 1.58 (3.40)
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 1999. During 1999, 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.
Note 4. Debt
Debt consisted of the following (in thousands):
December 31,
---------------
2000 1999
------- -------
Domestic Credit Facility................................. $14,282 $ --
Old domestic credit facility--in default................. 16,109
Canadian credit facility (U.S. Dollars).................. 2,532
Old Canadian credit facility (U.S. Dollars).............. -- 13,876
Convertible subordinated debentures--in default.......... -- 41,400
------- -------
Total indebtedness..................................... $16,814 $71,385
======= =======
As described in Note 2, because of the Company's filing of Chapter 11, all
amounts as of December 31, 1999 were subject to compromise, except for its
Canadian bank credit facility, which was reflected as a current liability not
subject to compromise on the Consolidated Balance Sheet.
On August 23, 2000, the Company entered into a new credit facility
("Domestic Credit Facility") with a domestic lender in the principal amount of
up to $30,000,000. At December 31, 2000, the Domestic Credit Facility provides
for a borrowing base of $17,625,000 and matures on August 23, 2003. Proceeds
from the Domestic Credit Facility were used to repay the prior domestic
facility as provided in the Modified Plan. The obligations under the Domestic
Credit Facility are secured by substantially all of the assets of the Company
and its subsidiaries other than Neutrino. The Domestic Credit Facility
prohibits the payment of dividends and contains covenants relating to the
financial condition of the Company, including working capital, tangible net
worth and cash flow coverage covenants. At December 31, 2000, the outstanding
borrowing was $14,282,512. On March 7, 2001 outstanding borrowings under the
Domestic Credit Facility were $13,582,512 with borrowing availability of
$3,767,488. Outstanding principal under the Domestic Credit Facility bears
interest at
F-14
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
the Bank Index Rate plus 0.5% (10.0% at December 31, 2000) to the extent of the
borrowing base utilized. The borrowing base is redetermined semi-annually in
May and November at the sole discretion of the domestic lender. The Company may
request four additional borrowing base redeterminations during any calendar
year except that no more than one redetermination will be made each calendar
quarter.
On August 29, 2000, Neutrino repaid its prior Canadian credit facility and
entered into a new loan facility in the principal amount of up to US
$30,000,000 loan facility (the "Canadian Credit Facility") with a new Canadian
lender. At December 31, 2000 the borrowing base under the Canadian Credit
Facility is US $10,075,000 and is due August 29, 2003. At December 31, 2000,
outstanding borrowings under the Canadian Credit Facility were US $2,531,814.
The Canadian Credit Facility is secured by substantially all of Neutrino's
assets and guaranteed by the Company. On March 7, 2001, outstanding borrowings
under the Canadian Credit Facility were US $1,950,000 (Cdn $3,000,000) with a
borrowing availability of US $7,940,000 (Cdn $12,215,384). Outstanding
principal under the Canadian Credit Facility bears interest at the bank's prime
rate plus 0.5% (8.0% at December 31, 2000) to the extent of the borrowing base
utilized. The Canadian Credit Facility contains certain covenants relating to
the financial condition of Neutrino, including working capital, tangible net
worth and cash flow coverage covenants. The borrowing base under the Canadian
Credit Facility is subject to semi-annual redeterminations beginning November
2000. The borrowing base is redetermined semi-annually beginning November 2000
and will be made at the sole discretion of the Canadian lender. Neutrino may
request four additional borrowing base redeterminations during any calendar
year except that no more than one redetermination will be made each calendar
quarter.
On October 2, 1997, the Company issued $41,400,000 of 6.875% convertible
subordinated debentures due on October 1, 2007. The debentures were convertible
into Common Stock of the Company at any time prior to maturity, at a conversion
price of $8.26 per share. Proceeds of the offering were used to reduce bank
debt and fund subsequent acquisitions. Pursuant to the debenture agreement, in
the event of a change of control of the Company, debenture holders had the
right to require the Company to repurchase the security at face value plus
accrued interest. Due to the bankruptcy filings on October 29, 1999, the
Company was not in compliance with certain provisions of the debenture
agreement at December 31, 1999. Pursuant to the Modified Plan, the debentures
were extinguished and converted in exchange for $5 million in cash and
approximately 78% of the common stock of the Company. Based on the closing price
of $3.125 of the Company's common stock on the Modified Plan confirmation date,
the exchange of the $41.4 million of debentures and accrued interest of
approximately $1.6 million for cash of $5 million and 9,536,422 shares of common
stock resulted in an extraordinary gain, net of tax, of $8,258,993. 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):
Years Ended December 31,
--------------------------------------
2000 1999
------------------ ------------------
Book Fair Book Fair
Value Value Value Value
-------- -------- -------- --------
Assets/(Liabilities)
Debt............................ $(16,814) $(16,814) $(71,385) $(44,061)
Commodity hedges, net........... -- (3,136) -- --
Interest rate swap.............. (94) (94) -- 77
The estimated fair value of cash and equivalents, receivables and payables
approximates book value.
The fair value of the Company's indebtedness at December 31, 1999 is
estimated based on market interest rates and quoted prices for the Company's
6.875% convertible subordinated debentures.
F-15
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 6. Derivative Financial Instruments
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. Due to
the bankruptcy filing, all third-party oil and gas hedges were cancelled by
the counter-parties to these contracts, resulting in the Company's recognition
of a loss of approximately $163,000 during 1999.
Subsequent to the Company's emergence from bankruptcy and as required by
the Company's Domestic and Canadian Credit Facilities, the Company has entered
into the following crude oil and natural gas costless collars in 2000.
Oil Hedges
U.S. $
NYMEX WTI
Monthly -------------
Period Total Bbl Bbl Floor Cap
------ ---------- ---------- ------ ------
United States
Jan-01--Dec-01........................... 132,400 11,033 $22.00 $32.20
Jan-02--Sep-02........................... 88,200 9,800 $22.00 $25.60
Canada
Jan-01--Dec-01........................... 111,100 9,258 $22.00 $33.30
Jan-02--Sep-02........................... 70,300 7,811 $22.00 $27.00
Gas Hedges
US $
Houston Ship
Channel
Total Monthly -------------
Mmbtu Mmbtu Floor Cap
---------- ---------- ------ ------
United States
Jan-01--Mar-01........................... 285,000 95,000 $ 2.75 $ 6.85
Apr-01--Oct-01........................... 600,000 85,714 $ 2.75 $ 4.98
Nov-01--Mar-02........................... 378,000 75,600 $ 2.75 $ 4.85
Apr-02--Oct-02........................... 466,000 66,571 $ 2.75 $ 3.80
CDN $ Alberta
Spot-AECO
Total Monthly -------------
Gigajoules Gigajoules Floor Cap
---------- ---------- ------ ------
Canada
Jan-01--Sep-02........................... 1,050,000 50,000 $ 4.05 $ 6.15
Based on analysis utilizing actual derivative contractual terms at December
31, 2000, a 10% change in oil and gas prices would not have a material adverse
effect on the financial position or results of operations of the Company
relating to collars.
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.
The fair value at December 31, 2000 of collars was a net unrealized loss of
approximately $3.1 million.
F-16
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
At December 31, 2000, the Company held an interest rate swap that was
originally intended to hedge the variability of interest expense associated
with the Company's variable rate Canadian debt. Under the swap agreement, the
Company receives a floating rate of the Canadian prime rate and pays a fixed
rate of 5.96% on a notional amount of Cdn $15 million. The interest rate swap
does not qualify for hedge accounting at December 31, 2000 and the Company has
recorded the swap's fair value loss of $94,000 as a liability and an expense for
the year ended December 31, 2000.
Note 7. Federal and State Income Taxes
United States and foreign income (loss) before income taxes are as follows
(in thousands):
Year Ended December 31,
------------------------
2000 1999 1998
------ ------- --------
United States................................... $ 769 $(1,924) $ (8,504)
Foreign......................................... 4,241 (6,716) (10,680)
------ ------- --------
Total........................................... $5,010 $(8,640) $(19,184)
====== ======= ========
Income tax expense (benefit) attributable to income from continuing
operations consists of (in thousands):
Current Deferred Total
------- -------- -------
Year ended December 31, 2000:
U.S. Federal.................................. $(81) $ -- $ (81)
State and local............................... 29 -- 29
Foreign....................................... 28 2,439 2,467
---- ------- -------
$(24) $ 2,439 $ 2,415
==== ======= =======
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)
==== ======= =======
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
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Differences between the effective tax rate and the statutory federal rate
are as follows:
For the Year Ended
December 31,
----------------------
2000 1999 1998
------ ----- -----
Expected statutory rate................... 34.0 % (34.0)% (34.0)%
Changes in valuation allowance............ (100.5) 5.8 23.7
Foreign taxes, net of federal benefit..... 20.5 (12.2) (4.2)
Non-deductible Bankruptcy charges......... 93.0 6.4 --
Other..................................... 1.2 .6 --
------ ----- -----
Effective tax rate........................ 48.2 % (33.4)% (14.5)%
====== ===== =====
Deferred taxes consist of the following (in thousands):
For the Year
Ended
December 31,
-----------------
2000 1999
------- --------
Deferred tax assets:
Oil and gas properties................................ $ -- $ 691
Net operating loss carryforward..................... 5,467 7,956
Accounts receivable................................. -- --
Accrued liabilities not currently deductible........ -- 34
Foreign tax credits................................. 187 187
Minimum tax credits................................. 170 214
Deferred financing costs............................ -- 837
Statutory depletion carryforward.................... 557 395
------- --------
6,381 10,314
Valuation allowance................................... (5,278) (10,314)
------- --------
Net deferred tax assets............................... 1,103 --
Deferred tax liabilities:
Oil and gas properties--U.S. and other.............. (1,103) --
Oil and gas properties--Canadian taxes.............. (6,490) (4,240)
------- --------
Deferred tax liability................................ (7,593) (4,240)
------- --------
Net deferred tax liability............................ $(6,490) $ (4,240)
======= ========
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 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.
The restructuring and emergence from bankruptcy will cause the Company's net
operating losses to be subject to certain limitations under IRC Section 382.
F-18
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The extraordinary item from extinguishment of debt includes no tax expense
or benefit.
The valuation allowance for deferred tax assets as of December 31, 2000 and
1999 was $5,278,000 and $10,314,000, respectively. The net change in the total
valuation allowance for the year ended December 31, 2000, 1999 and 1998 was
$5,036,000, ($42,924,000) and $52,509,000, 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 realize any of deferred
tax asset, the Company will need to generate sufficient future taxable income
prior to the expiration of the net operating loss carryforwards in 2020. Based
upon the level of historical taxable income, the section 382 limitations, 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 $16,078,000 and $23,398,000 at December 31, 2000 and
1999. These NOLs are limited under IRC Section 382 and must be utilized prior to
their expiration, which is between 2001 and 2020. The Company also has statutory
depletion carryforwards of $1,638,000 and $1,160,000 at December 31, 2000 and
1999, respectively.
Note 8. Related Party Transactions
In conjunction with the acquisition of Neutrino in July, 1998, 324,430
shares of Southern Mineral Common Stock, a value of approximately $1,095,000,
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 former 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 the leases. As of December 31, 1999 and 2000 the Company had
no carrying costs subject to recovery related to Southern Links. The Company
received no proceeds from the sales of prospects associated with Southern Links
during 2000, 1999 or 1998.
F-19
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
SMC Production Company, a wholly-owned subsidiary of the Company, owns an
18.906% interest in Diverse GP III ("Diverse") a general partnership. Two of
the Company's directors and a third is a former director and are managers of
Diverse and through various entities own the majority of the remaining interest
in Diverse. The carrying value of the Company's investment in Diverse as of
December 31, 2000 is approximately $2.3 million. The Company accounts for this
oil and gas partnership using the proportional consolidation method. The
Company received net distributions from Diverse of $497,000; $257,000 and
$301,000 during the years ended December 31, 2000, 1999 and 1998, respectively.
Note 9. 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):
% of % of % of
Oil & Gas Oil & Gas Oil & Gas
Customer 2000 Revenue 1999 Revenue 1998 Revenue
-------- ------ --------- ------ --------- ------ ---------
Damsco Distribution..... $7,298 21.7% $4,117 15.9% $3,747 17.2%
Global Petroleum
Marketing.............. -- -- 2,931 11.3% -- --
Canpet Energy Group,
Inc.................... 4,220 12.56% 2,793 10.8% -- --
Note 10. Stock Options and Common Stock
During 1997 and 1996, the Company granted options exercisable for 34,000 and
26,000 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 60,000 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
24,500, 71,840 and 27,000 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 140,000 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 $5.00,
which was higher than the $3.125 per share closing price of the Company's
common stock on the date of grant, and thus there was no impact of the
repricing on the December 31, 1998 financial statements. In conjunction with
severance arrangements with certain officers and employees in 1999, the Company
repriced 61,000 shares at the current market price of $1.40, granted full
vesting and extending the expiration date to August 31, 2001. Because the
options were repriced to the market price at the date of grant, there was no
impact of these modifications on the December 31, 1999 financial statements.
F-20
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
During 1998, and in conjunction with the acquisition of Neutrino, the
Company granted Non-Qualified Stock Options exercisable for 110,000 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
$5.00, on December 21, 1998. There was no impact on the December 31, 1998
financial statements relating to the repricing of these options as the exercise
price exceeded the closing price of the Company's common stock on the date of
grant.
The Company granted to non-employee directors stock pursuant to a directors
compensation plan. During 2000, 1999 and 1998 the Company issued 96,000, 22,000
and 9,000 shares, respectively, to its directors.
During 2000, the Financial Accounting Standards Board issued an
Interpretation regarding APB 25 that requires 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 is 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 will
occur at the date of exercise. The FASB determined that some of the provisions
of the interpretation 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 qualify for variable-
plan accounting at each quarterly reporting date, beginning July 1, 2000 and
continuing until the options are exercised or cancelled. With the
implementation of FASB Interpretation No. 44, Accounting for Certain
Transactions Involving Stock Compensation, the Company recorded approximately
$175,000 of compensation expense in 2000.
During 1999 and 1998, the Company granted options exercisable for 1,137 and
1,042 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 60,000 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.
F-21
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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):
2000 1999 1998
------- ------- --------
Net income (loss)................. As reported $10,854 $(5,758) $(16,409)
Pro forma......................... 10,854 (5,789) (16,951)
Basic loss per share.............. As reported $ 1.62 $ (2.25) $ (6.60)
Pro forma......................... 1.62 (2.25) (6.80)
Diluted loss per share............ As reported $ 1.61 (2.25) (6.60)
Pro forma......................... 1.61 (2.25) (6.80)
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 and 1998. There were no compensatory stock
options granted during 2000.
1999 1998
-------------- -------------
Expected volatility.......................... 65.88% 65.63%
Risk free interest rate...................... 5.00% to 5.63% 4.48 to 5.47%
Expected life of options..................... 1 to 3 years 3 years
Expected dividend yield...................... 0% 0%
The Company's President holds a non-qualified option to purchase 90,000
shares of the Company's common stock at a price of $5.00 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
former director of the Company an option to acquire 8,775 shares of the
Company's common stock at $5.00 per share exercisable through June 2002. The
Company accounted for the option grants to these directors under APB 25 and
related interpretations and because the exercise price was in excess of the
market price at the grant date, there was no financial statement impact at
issuance of these options.
In connection with the acquisition of DPC in 1995, the Company granted
options exercisable for 65,000 shares of its common stock at $6.25 a share
through July 2002. Each of the individuals that received the options became
directors of the Company in connection with the acquisition of DPC. The
Company accounted for the option grants to these directors under APB 25 and
related interpretations and because the exercise price was in excess of the
market price at the grant date, there was no financial statement impact at
issuance of these options.
In conjunction with the acquisition of Amerac in 1998, outstanding warrants
to purchase 95,471 shares of Amerac Common Stock were exchanged for warrants to
purchase 81,244 shares of Southern Mineral Common Stock at an average price of
$33.85 per share. The warrants expired November 18, 1999, but were reinstated
pursuant to the Modified Plan and expire in July 2002.
The current common shareholders, option holders, and warrant holders of
record on July 24, 2000, were issued approximately 3,667,000 warrants in
connection with the Modified Plan (see Note 2). The warrants are for a
perpetual term with an exercise price of $4.21 per share, subject to adjustment
for certain customary anti-dilution stock splits, stock dividends and other
recapitalization events. The exercise price must be paid in cash. The Company
also modified certain existing options in connection with the Modified Plan,
including the
F-22
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
immediate vesting of all options, extension of option terms and reinstatement
of certain options. As a result of these warrant issuances and modifications,
the Company charged the estimated fair value of $616,000 to bankruptcy expense
during the year ended December 31, 2000.
A summary of the Company's stock options and warrants as of December 31,
2000, 1999 and 1998, and changes during the years ending on those dates is
presented below:
2000 1999 1998
---------------- ---------------- ----------------
Weighted Avg. Weighted Avg. Weighted Avg.
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
--------- ----- -------- ------ -------- ------
Outstanding at beginning
of year................ 455,515 $6.85 684,705 $13.55 393,157 $11.85
Granted................. 3,722,116 4.55 85,500 1.85 518,080 15.90
Exercised............... (26) 4.21 -- -- -- --
Forfeited............... (9,167) 5.00 (314,690) 17.60 (226,532) 20.00
--------- ----- -------- ------ -------- ------
Outstanding at end of
year................... 4,168,438 $4.80 455,515 $ 6.85 684,705 $13.55
========= ===== ======== ====== ======== ======
Options exercisable at
end of year............ 4,168,438 391,855 518,606
========= ======== ========
Certain options granted during 2000, 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 and 1998 were $1.85 and $4.20,
respectively, per option. The Company does not consider any of the options
issued in 2000 to be compensatory. The following table summarizes information
about options and warrants outstanding at December 31, 2000:
Options and Warrants Outstanding Options and Warrants Exercisable
---------------------------------------------- ---------------------------------------------
Weighted Avg.
Range of Number Remaining Weighted-Average Number Weighted Average
Exercise Price Outstanding Contractual Life Exercise Price Outstanding Exercise Price
-------------- ----------- ---------------- ---------------- ----------- ----------------
$1.40 to 7.50 307,571 2.40 years $ 4.40 307,571 $ 4.40
10.00 to 15.00 128,822 0.12 years 10.34 128,822 10.34
22.50 to 33.85 64,216 1.36 years 29.04 64,216 29.04
4.21 3,667,829 Perpetual 4.21 3,667,829 4.21
---------- ----------
4,168,438 4,168,438
========== ==========
Note 11. Restructuring and Bankruptcy Costs
During the third quarter of 1999, the Board of Directors of the Company
concluded that the proposed restructuring plan as filed with the Securities and
Exchange Commission on July 21, 1999 could not be consummated on the terms
contemplated. Therefore, estimated costs of approximately $1,372,000 associated
with the restructuring were expensed during the third and fourth quarters of
1999. These costs are primarily legal, accounting, financial advisory and other
transaction costs related to the proposed restructuring. Since the Company's
filing for bankruptcy on October 29, 1999, it has incurred costs of
approximately $553,000 during the year-ended December 31, 1999 and $4,790,000
during the year-ended December 31, 2000, primarily related to legal, accounting
and financial advisory services rendered in connection with the bankruptcy. In
addition, $2,463,000 that was capitalized as other assets for fees and expenses
related to securing the old domestic bank debt and convertible subordinated
debentures were expensed during the fourth quarter of 1999 pursuant to
SOP 90-7. The Company earned interest income of approximately $90,000 during
the year ended December 31, 2000 and approximately $310,000 during the year
ended December 31, 1999 that it would not have but for the bankruptcy
proceeding.
F-23
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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.
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, 2000 are:
2001 2002 2003 2004 Total
---- -------- ------- ---- --------
$277,011 $176,964 $45,577 $-- $499,552
Lease expenses in 2000, 1999 and 1998 were $251,601, $309,631 and $336,461,
respectively.
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, 2000 and 1999.
Note 13. Quarterly Financial Data (Unaudited)
Selected quarterly financial data of the Company are presented below for the
years ended December 31, 2000 and 1999 (in thousands, except per share
amounts):
Income Basic Diluted
(Loss) Net Income Income
from Income (Loss) (Loss)
Revenues Operations (Loss) Per Share Per Share
-------- ---------- ------- --------- ---------
2000 Quarter
March 31(4).................... $ 7,412 $ 1,850 $ 1,174 $ 0.45 $ 0.45
June 30(4)..................... 7,699 463 (1,432) (0.55) (0.55)
September 30(1)(4)............. 8,956 1,301 8,700 0.87 0.87
December 31(2)(4).............. 9,513 3,627 2,412 0.20 0.20
------- -------- -------
$33,580 $ 7,241 $10,854 $ 1.62 $ 1.61
======= ======== ======= ====== ======
1999 Quarter
March 31....................... $10,694 $ 4,445 $ 2,928 $ 1.15 $ 1.00
June 30........................ 6,203 (1,910) (3,614) (1.40) (1.40)
September 30(2)................ 13,695 6,464 4,910 1.90 1.50
December 31(2)................. 7,249 (11,859) (9,982) (3.90) (3.90)
------- -------- -------
$37,841 $ (2,860) $(5,758) $(2.25) $(2.25)
======= ======== ======= ====== ======
- --------
(1) Includes the extraordinary gain from extinguishment of debt of $8.3
million, net of taxes.
(2) Includes the charge for restructuring costs of $1.3 million and $720,000
for the quarter ended September 30, 1999 and December 31, 2000,
respectively.
(3) 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.
(4) Includes $852,000, $2,492,000 and $1,844,000 in bankruptcy expenses for the
quarters ended March 31, 2000; June 30, 2000 and September 30, 2000,
respectively. Included in the fourth quarter ended December 31, 2000 is a
net reduction of approximately $398,000 to bankruptcy expense as a result
of the correction of previous accrued amounts to amounts actually paid
pursuant to the confirmation of the Modified Plan.
F-24
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 15. 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 did not make contributions during 2000, 1999 or 1998.
Note 16. 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, 2000, 1999 and 1998 is as follows (in thousands):
U.S. Ecuador Canada Total
------- ------- ------- -------
Year ended December 31, 2000
Oil and gas sales(1).......................... $19,796 $1,152 $12,633 $33,581
Gains (losses) on sales of properties......... 21 -- (22) (1)
------- ------ ------- -------
19,817 1,152 12,611 33,580
------- ------ ------- -------
Expenses:
Production.................................. 5,517 496 2,717 8,730
Exploration................................. 59 -- 452 511
Depreciation, depletion and amortization.... 4,728 -- 3,578 8,306
General & administrative.................... 2,050 16 1,182 3,248
Restructuring and bankruptcy costs.......... 5,510 -- 34 5,544
------- ------ ------- -------
17,864 512 7,963 26,339
Interest & other income, net................ 144 -- 95 239
Interest expense............................ 1,968 -- 502 2,470
------- ------ ------- -------
Income before income taxes.................. 129 640 4,241 5,010
Income tax (expense) benefit ............... 52 -- (2,467) (2,415)
------- ------ ------- -------
Income before extraordinary gain............ 181 640 1,774 2,595
Extraordinary gain, net of tax.............. 8,259 -- -- 8,259
------- ------ ------- -------
Net income.................................. $ 8,440 $ 640 $ 1,774 $10,854
======= ====== ======= =======
Identifiable assets as of December 31, 2000
Net property and equipment.................... $39,204 $1,036 $33,296 $73,536
Corporate assets.............................. 8,360
-------
Total assets................................ $81,896
=======
F-25
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
U.S. Ecuador Canada Total
------- ------- ------- --------
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..... (2,105) 181 (6,716) (8,640)
Income tax (expense) benefit.............. (459) -- (3,341) 2,882
------- ------- ------- --------
Net income (loss)......................... $(2,564) $ 181 $(3,375) $ (5,758)
======= ======= ======= ========
Identifiable assets as of December 31,
1999
Net property and equipment................ $40,135 $ 992 $36,838 $ 77,965
Corporate assets.......................... 16,769
--------
Total assets............................ $ 94,734
========
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
Net property and equipment................ $55,073 $ 1,000 $58,114 $114,187
Corporate assets.......................... 14,103
--------
Total assets.............................. $128,290
========
- --------
(1) Includes sulfur revenues of $572,000, $779,000 and $700,000 in 2000, 1999
and 1998, respectively.
F-26
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
Note 17. 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):
2000 1999
-------- --------
Proved properties................................... $115,705 $120,932
Unproved properties................................. 4,541 4,443
Less accumulated depreciation, depletion and
amortization...................................... (46,786) (47,587)
-------- --------
Total............................................. $ 73,460 $ 77,788
======== ========
The Company's depreciation, depletion and amortization costs per Mcfe in
2000, 1999 and 1998 were $0.99, $1.15 and $0.94, respectively. The Company's
share of oil and gas revenues produced from its royalty interests was $0,
$2,550,000 and $966,000 for the years ended December 31, 2000, 1999 and 1998,
respectively.
Costs incurred in oil and gas property acquisition, exploration and
development activities were as follows (in thousands):
United States Ecuador Canada Total
------------- ------- ------- ---------
As of December 31, 2000
Property acquisition costs
Proved............................. $ 184 $ -- $ 389 $ 573
Unproved........................... 213 44 -- 257
Exploration costs.................... 59 -- 452 511
Development cost (a)................. 3,406 -- 1,805 5,211
------- ---- ------- ---------
Total costs incurred............. $ 3,862 $ 44 $ 2,646 $ 6,552
======= ==== =======
Less: Certain exploration expenses
and other items..................... (506)
---------
Total capital expenditures per
statement of cash flows............. $ 6,046
=========
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
======= ==== =======
Less: Certain exploration expenses
and other items..................... (151)
---------
Total capital expenditures per
statement of cash flows............. $ 2,954
=========
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
======= ==== =======
Less: Certain exploration expenses,
non-cash consideration and other
items............................... (26,455)
---------
Total capital expenditures per
statement of cash flows............. $ 63,499
=========
(a) Includes approximately $1,017 of costs for development of costs for
development of properties previously classified as proved undeveloped
properties.
F-27
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
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):
United States Ecuador Canada Total
------------- ------- -------- ---------
At December 31, 2000
Future cash inflows............... $393,777 $ 7,249 $163,186 $ 564,212
Future production costs........... (76,260) (3,801) (29,023) (109,084)
Future development costs (a)...... (11,131) (27) (1,227) (12,385)
Future income taxes............... (87,097) (174) (54,122) (141,393)
-------- ------- -------- ---------
Future net cash flows........... 219,289 3,247 78,814 301,350
10% Annual discount............... (93,695) (804) (34,482) (128,981)
-------- ------- -------- ---------
Standardized measure of discounted
future net cash flows............ $125,594 $ 2,443 $ 44,332 $ 172,369
======== ======= ======== =========
At December 31, 1999
Future cash inflows............... $142,872 $ 8,015 $127,246 $ 278,133
Future production costs........... (46,156) (5,060) (41,415) (92,631)
Future development costs.......... (8,763) (31) (1,544) (10,338)
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 costs........... (42,945) -- (34,968) (77,913)
Future development costs.......... (7,597) -- (1,306) (8,903)
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
======== ======= ======== =========
(a) Includes $8,973 of development costs for proved undeveloped properties
for 2001 and does not include any such costs in 2002 and 2003.
F-28
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The following are the principal sources of change in the standardized
measure of discounted future net cash flows (in thousands):
U.S. Ecuador Canada Total
------- ------- ------- -------
At December 31, 2000
Standardized measure--beginning of year..... 44,641 2,085 34,529 81,255
Sales, net of production costs.............. (13,705) (656) (9,916) (24,277)
Accretion of discount....................... 4,961 208 4,903 10,072
Sales of minerals in place.................. -- -- (12,449) (12,449)
Net changes in prices, net of production
costs...................................... 125,580 1,243 75,475 202,298
Revisions to previous quantity estimates.... 5,118 (406) (8,344) (3,632)
Extensions and discoveries ................. 2,379 -- 1,888 4,267
Net change in income taxes.................. (44,916) (131) (15,953) (61,000)
Changes in estimated future development
costs...................................... (6,786) 3 (2,150) (8,933)
Development costs incurred during the
period..................................... 3,406 -- 1,805 5,211
Changes of production rates and other....... 4,916 97 (25,457) (20,444)
------- ----- ------- -------
Standardized measure--end of year........... 125,594 2,443 44,331 172,368
======= ===== ======= =======
At December 31, 1999
Standardized measure--beginning of year .... 43,459 -- 27,251 70,710
Sales, net of production costs.............. (6,416) (211) (8,711) (15,338)
Accretion of discount....................... 4,944 2,725 7,669
Purchases and sales of minerals in place.... (15,066) -- (2,191) (17,257)
Net changes in prices, net of production
costs...................................... 27,264 -- 31,373 58,637
Revisions to previous quantity estimates.... 7,083 -- (1,593) 5,490
Extensions and discoveries.................. 2,277 -- -- 2,277
Net change in income taxes.................. 2,070 -- (9,263) (7,193)
Changes in estimated future development
costs...................................... (2,260) (24) (1,989) (4,273)
Development costs incurred during the
period..................................... 1,516 3 1,435 2,954
Changes of production rates and other....... (20,230) 2,317 (4,508) (22,421)
------- ----- ------- -------
Standardized measure--end of year........... 44,641 2,085 34,529 81,255
======= ===== ======= =======
F-29
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
U.S. Ecuador Canada Total
------ ------- ------ -------
At December 31, 1998
Standardized measure--beginning of year....... 39,310 2,381 6,281 47,972
Sales, net of production costs................ (9,059) 81 (3,707) (12,685)
Accretion of discounts........................ 4,024 183 663 4,870
Purchases and sales of minerals in place...... 10,500 24,130 34,630
Net changes in prices, net of production
costs........................................ (7,431) (3,298) (1,849) (12,578)
Revisions to previous quantity estimates...... (3,472) 1,161 (370) (2,681)
Extensions and discoveries.................... 13,199 -- 1,377 14,576
Net change in income taxes.................... (5,471) (547) (2,908) (8,926)
Changes in estimated future development
costs........................................ (2,002) (505) 162 (2,345)
Development costs incurred during the
period....................................... 3,838 505 1,343 5,686
Changes of production rates and other......... 23 39 2,129 2,191
------ ------ ------ -------
Standardized measure--end of year............. 43,459 -- 27,251 70,710
====== ====== ====== =======
The Company's foreign reserves in 2000, 1999 and 1998 were 37%, 46% and 43%
of total reserves, respectively.
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, 1998, 1999 and 2000. NSA prepared most of the
domestic reserve estimates as of December 31, 1998. The Company prepared the
remaining reserve estimates. Chapman Petroleum Engineering Ltd. prepared
most of the Canadian reserve estimates as of December 31, 1998 and 1999 and all
of 2000. Gilbert Laustsen Jung Associates Ltd. prepared the remaining Canadian
reserve estimates as of December 31, 1998 and 1999. 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. 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
year-end oil prices received by the Company of $25.52, $24.31 and $9.67 per
barrel and gas reserves were prepared using year-
F-30
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
end prices received by the Company of $10.05, $2.12 and $2.17 per Mcf, as of
December 31, 2000, 1999 and 1998, respectively. The Canadian reserves have been
prepared using year-end oil prices received by the Company of $26.42, $22.34
and $8.71 per barrel and natural gas prices of $9.38, $2.02 and $1.72 per Mcf,
as of December 31, 2000, 1999 and 1998, respectively. Ecuador reserves were
prepared using a year-end oil price of $28.53 and $24.16 per barrel as of
December 31, 2000 and 1999, respectively.
U.S. Ecuador Canada Total
---------------------- --------------- ---------------------- -----------------------
Oil Gas Oil Gas Oil Gas Oil Gas
Proved Reserves (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf) (Bbls) (Mcf)
- --------------- --------- ----------- -------- ----- ---------- ---------- ---------- -----------
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
Extensions, discoveries
and additions.......... 104,868 113,681 -- -- 6 202,000 104,874 315,681
Revisions of previous
estimates.............. 60,638 1,022,733 (41,933) -- (227,453) (1,814,245) (208,748) (791,512)
Purchases and sale of
minerals in place
(net).................. -- -- -- -- (1,430,800) (129,100) (1,430,800) (129,100)
Production.............. (351,839) (2,491,537) (35,716) -- (307,753) (1,554,655) (695,308) (4,046,192)
--------- ----------- -------- --- ---------- ---------- ---------- -----------
Balance, December 31,
2000................... 2,774,395 32,134,959 254,080 -- 1,986,000 15,522,000 5,014,475 47,656,959
========= =========== ======== === ========== ========== ========== ===========
Proved Developed
Reserves
- ----------------
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
Balance, December 31,
2000................... 2,518,217 22,816,013 254,080 -- 1,882,000 14,922,000 4,654,297 37,738,013
Note 17. Merger Agreement
On August 21, 2000, the Company announced the engagement of Petrie Parkman &
Co. LLP and FirstEnergy Capital Corporation of Canada to evaluate strategic
alternatives available to the Company in an effort to maximize shareholder
value. The Company and PetroCorp Incorporated announced on December 22, 2000
that they have executed a definitive agreement regarding the Company's merger
into PetroCorp. In the merger, shareholders of the Company will, at their
election, receive for each share of Southern Mineral stock $4.71 per share in
cash, PetroCorp common stock or a combination of cash and stock, subject to
certain adjustments. For both companies, the merger provides strategic and
economic benefits. The operations of the two companies are very complementary,
with PetroCorp primarily operating in the Gulf Coast and Mid-continent areas of
the United States and the Company primarily operating in the Gulf Coast of the
United States. PetroCorp and the Company both have significant oil and gas
interests in the province of Alberta, Canada. Additionally, the combined
company will benefit by having a substantially greater critical mass and cost
savings resulting from the consolidation of operations. In connection with the
merger, PetroCorp will not be obligated to issue more than four million shares
of common stock. The merger is subject to customary conditions to closing,
including obtaining shareholder and regulatory approvals and the voting of
shareholders to elect to receive at least three million shares of PetroCorp
stock. The transaction is anticipated to close by May 31, 2001.
F-31
Item 9. Changes in and Disagreements With Accounting and Financial Disclosure.
None.
PART III
Items 10 through 13 of this Part III are omitted since Southern Mineral
expects to file with the Securities and Exchange Commission within 120 days
after the close of its fiscal year ended December 31, 2000 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 Southern Mineral are
included in Part II, Item 8. of this report:
Page
Number
------
Consolidated Statements of Operations...................................... 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
Independent Auditors' Report............................................... F-8
(a)(2) Exhibits
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)).
2.3 Debtors' Second Amended Plan of Reorganization filed May 2, 2000 with the
United States Bankruptcy Court for the Southern District of Texas, Victoria
Division. (incorporated by reference to Exhibit 2.1 to Form 10-Q dated June
30, 2000 (Commission File No. 0-8043)).
2.4 Modification to Debtors' Second Amended Plan of Reorganization filed May 2,
2000, dated June 19, 2000. (incorporated by reference to Exhibit 2.2 to
Form 10-Q dated June 30, 2000 (Commission File No. 0-8043)).
2.5 Second Modification to Debtors' Second Amended Plan of Reorganization filed
May 2, 2000, dated June 29, 2000. (incorporated by reference to Exhibit 2.3
to Form 10-Q dated June 30, 2000 (Commission File No. 0-8043)).
2.6 Third Modification to Debtors' Second Amended Plan of Reorganization filed
May 2, 2000, dated July 5, 2000. (incorporated by reference to Exhibit 2.4
to Form 10-Q dated June 30, 2000 (Commission File No. 0-8043)).
2.7 Findings of Fact and Conclusion 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).
Exhibit
Numbers Description
- ------- -----------
2.8 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).
2.9 Warrant Agreement dated as of September 29, 2000 between Southern Mineral
Corporation and American Stock Transfer & Trust Company, as Warrant Agent.
(incorporated by reference to 2.1 to Form 10-Q dated September 30, 2000
(Commission File No. 0-8043)).
3.1 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)).
3.2 Second Amended and Restated Articles of Incorporation of the Company.
(incorporated by reference to Exhibit 3.3 to Form 10-Q dated June 30, 2000
(Commission File No. 0-8043)).
4.1 Series B Perpetual Warrant Certificate Representing Warrants to Purchase
Shares of Common Stock, Par Value $.01 per share dated as of September 29,
2000. (incorporated by reference to Exhibit 4.1 to Form 10-Q dated
September 30, 2000 (Commission File No. 0-8043)).
*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 (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)).
Exhibit
Numbers Description
- ------- -----------
*10.3 1996 Stock Option Plan (incorporated by reference to Exhibit 10.10 to
Form 10-KSB dated December 31, 1995 (Commission File No. 0-8043)).
*10.4 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)).
10.5 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)).
*10.6 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)).
*10.7 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)).
10.8 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)).
*10.9 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)).
Exhibit
Numbers Description
- ------- -----------
10.11 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)).
10.12 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)).
*10.13 1997 Stock Option Plan (incorporated by reference to Form S-8, filed
April 28, 1998, Registration No. 333-51237 (Commission File No. 333-
420450)).
*10.14 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)).
*10.15 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)).
*10.16 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)).
10.17 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)).
10.18 Employment Agreement between David W. Beckwermert and Neutrino Resources,
Inc., dated as of July 1, 1998 (incorporated by reference to Exhibit
10.31 to Form 10-K/A dated December 31, 1998 (Commission File
No. 0-8043)).
10.19 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)).
10.20 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. 0-8043)).
10.21 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)).
Exhibit
Numbers Description
- ------- -----------
10.22 Credit Agreement, dated August 23, 2000, between Southern Mineral
Corporation, SMC Ecuador, Inc., SMC Production Co., BEC Energy, Inc. and
Spruce Hills production Company, Inc. and Bank One, Texas national
Association for Reducing Revolving Line of Credit up to $30,000,000.
(incorporated by reference to Exhibit 10.1 to Form 10-Q dated September
30, 2000 (Commission File No. 0-8043)).
10.23 Credit Agreement, dated August 29, 2000, between Neutrino Resources, Inc.
and Bank One Canada for U.S. $30,000,000 Revolving Credit Facility.
(incorporated by reference to 10.2 to Form 10-Q dated September 30, 2000
(Commission File No. 0-8043)).
21.1 Subsidiaries of the Company (filed herewith).
23.1 Consent of Netherland, Sewell & Associates, Inc. (filed herewith).
23.2 Consent of Chapman Petroleum Engineering, Ltd. (filed herewith).
23.3 Consent of Gilbert Laustsen Jung Associates Ltd. (filed herewith).
* Management Contracts, Plans or Arrangements under Item 601(b)(10)(iii)(A)
of regulation S-K.
(a) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the Company has duly caused this report to be signed on its behalf
by the undersigned, hereunto duly authorized.
SOUTHERN MINERAL CORPORATION
BY: /s/ Steven H. Mikel
--------------------------------------
Steven H. Mikel
President and Chief Executive Officer
Date: March 28, 2001
Pursuant with Section 13 or 15(d) of the Securities Exchange Act of 1934, the
Company has duly caused this report to be signed on its behalf by the
undersigned, hereunto duly authorized.
Date: March 28, 2001
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/ Steven H. Mikel President and Chief March 28, 2001
- ------------------------------ Executive Officer
Steven H. Mikel
/s/ Michael E. Luttrell Vice President-Finance March 28, 2001
- ------------------------------ and Chief Financial
Michael E. Luttrell Officer and Accounting
Officer
/s/ Paul J. Coughlin, III Director March 28, 2001
- ------------------------------
Paul J. Coughlin, III
/s/ Thomas R. Fuller Director March 28, 2001
- ------------------------------
Thomas R. Fuller
/s/ James L. Payne Director March 28, 2001
- ------------------------------
James L. Payne
/s/ Myron M. Sheinfeld Director March 28, 2001
- ------------------------------
Myron M. Sheinfeld
/s/ Donald H. Wiese, Jr. Director March 28, 2001
- ------------------------------
Donald H. Wiese, Jr.