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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2001
OR
[_] TRANSITION REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM __________ TO ________
COMMISSION FILE NUMBER: 0-8043
SOUTHERN MINERAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
NEVADA 36-2068676
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
1201 LOUISIANA, SUITE 3350 77002-5609
Houston, Texas (Zip Code)
(Address of Principal Executive Offices)
Registrant's Telephone Number, Including Area Code: (713) 658-9444
Check whether the Registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or such shorter period that the Registrant was required to
file such reports) and (2) has been subject to such filing requirements for the
past 90 days.
Yes X No
----- -----
Indicate the number of shares outstanding of each of the issuer's classes of
common equity, as of the latest practicable date: As of May 9, 2001, 12,283,939
shares of Common Stock and 3,667,115 Series B Perpetual Warrants outstanding.
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SOUTHERN MINERAL CORPORATION
TABLE OF CONTENTS
- --------------------------------------------------------------------------------
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
Consolidated Financial Statements:
Consolidated Balance Sheets as of March 31, 2001 (unaudited) and December 31, 2000................ 3
Unaudited Consolidated Statements of Operations for the three months ended
March 31, 2001 and 2000......................................................................... 4
Unaudited Consolidated Statements of Cash Flows for the
three months ended March 31, 2001 and 2000...................................................... 5
Notes to Consolidated Unaudited Financial Statements.............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations....... 13
Liquidity and Capital Resources
Financial Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market Risk................................... 19
PART II. OTHER INFORMATION.......................................................................... 20
Item 1. Legal Proceedings
Item 2. Changes in Securities and Use of Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
Item 5. Other Information
Item 6. Exhibits and Reports on Form 8-K
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
MARCH 31, DECEMBER 31,
2001 2000
------------ ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash and cash equivalents.......................................................... $ 1,729 $ 1,207
Receivables, net................................................................... 5,984 6,050
Other.............................................................................. 571 500
------------ ------------
Total current assets.................................................... 8,284 7,757
PROPERTY AND EQUIPMENT, AT COST USING SUCCESSFUL
EFFORTS METHOD FOR OIL AND GAS ACTIVITIES
Oil and gas producing properties................................................. 114,832 115,705
Unproven properties.............................................................. 4,959 4,541
Office equipment................................................................. 566 567
Accumulated depreciation, depletion and amortization............................. (48,285) (47,277)
------------ ------------
72,072 73,536
OTHER ASSETS.......................................................................... 1,135 603
------------ ------------
Total assets............................................................ $ 81,491 $ 81,896
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................................... $ 3,367 $ 3,362
Accrued liabilities................................................................ 3,597 3,446
Derivative hedging liability....................................................... 1,485 ---
------------ ------------
Total current liabilities............................................... 8,449 6,808
------------ ------------
LONG-TERM LIABILITIES
Bank debt.......................................................................... 14,851 16,814
Derivative hedging liability....................................................... 1,029 ---
Deferred Income Taxes.............................................................. 6,504 6,490
------------ ------------
Total liabilities....................................................... 30,833 30,112
------------ ------------
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; authorized 5,000,000
shares at March 31, 2001; none issued
Common stock, par value $.01 per share; authorized 50,000,000
shares at March 31, 2001; issued 12,260,460 and 12,231,960
at March 31, 2001 and December 31,2000, respectively;
outstanding 12,242,215 and 12,213,715
shares at March 31, 2001 and December 31, 2000, respectively................... 123 122
Additional paid-in capital....................................................... 61,906 61,794
Accumulated other comprehensive loss-Derivative hedging loss..................... (1,844) ---
Accumulated other comprehensive loss-foreign currency translation adjustment..... (2,445) (1,283)
Retained deficit................................................................. (7,030) (8,797)
Less: Treasury stock............................................................. (52) (52)
------------ ------------
Total stockholders' equity............................................. 50,658 51,784
------------ ------------
Total liabilities and stockholders' equity............................. $ 81,491 $ 81,896
============ ============
The accompanying notes to consolidated financial statements of Southern
Mineral Corporation and subsidiaries are an integral part of these statements.
3
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED OPERATIONS
(in thousands, except per share amounts)
THREE MONTHS ENDED
MARCH 31,
------------------------
2001 2000
--------- ---------
(UNAUDITED)
REVENUE
Oil and gas.............................................................................. $ 8,827 $ 7,412
EXPENSES
Production............................................................................... 2,088 1,973
Exploration.............................................................................. 33 218
Depreciation, depletion and amortization................................................. 1,825 1,918
General and administrative............................................................... 972 601
Restructuring and bankruptcy expenses.................................................... 484 852
--------- ---------
5,402 5,562
--------- ---------
Income from operations..................................................................... 3,425 1,850
Other income, expenses and deductions
Interest and other income (expense)...................................................... (190) 72
Interest and debt expense................................................................ (621) (557)
--------- ---------
Income before income taxes................................................................. 2,614 1,365
Provision for foreign, federal and state income taxes
Current provision........................................................................ 586 75
Deferred provision....................................................................... 260 116
--------- ---------
846 191
--------- ---------
Net income................................................................................. $ 1,768 $ 1,174
========= =========
Net income per share-basic................................................................. $ .14 $ .45
========= =========
Net income per share-diluted............................................................... $ .14 $ .45
========= =========
Weighted average number of shares outstanding-basic........................................ 12,242 2,583
========= =========
Weighted average number of shares outstanding-diluted...................................... 12,274 2,591
========= =========
The accompanying notes to consolidated financial statements of Southern
Mineral Corporation and subsidiaries are an integral part of these statements.
4
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
STATEMENTS OF CONSOLIDATED CASH FLOWS
(in thousands)
THREE MONTHS ENDED
MARCH 31,
--------------------------
2001 2000
--------- ---------
(UNAUDITED)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income............................................................................... $ 1,768 $ 1,174
Adjustments to net income................................................................ 2,629 2,946
--------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES.................................... 4,397 4,120
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sales of properties........................................................ 9,335 ---
Capital expenditures..................................................................... (1,984) (1,907)
--------- ---------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES.......................... (1,984) 7,428
CASH FLOWS FROM FINANCING ACTIVITIES
Payments of bank debt.................................................................... (1,879) ---
Payments on note payable................................................................. (11,246)
Loan acquisition costs................................................................... (12) (20)
--------- ---------
NET CASH USED IN FINANCING ACTIVITIES........................................ (1,891) (11,266)
--------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS......................... 522 282
--------- ---------
Cash and cash equivalents at beginning of period........................................... 1,207 1,981
--------- ---------
Cash and cash equivalents at end of period................................................. $ 1,729 $ 2,263
========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest................................................................... $ 359 $ 551
Cash paid for taxes...................................................................... 116 25
NON-CASH ACTIVITIES
Directors' fees paid in stock............................................................ $ 85 $ 7
The accompanying notes to consolidated financial statements of Southern
Mineral Corporation and subsidiaries are an integral part of these statements.
5
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. BASIS OF PRESENTATION
The consolidated financial statements included herein have been prepared by
the Company, without audit, pursuant to the rules and regulations of the
Securities and Exchange Commission. Certain information and note disclosures
normally included in financial statements prepared in accordance with generally
accepted accounting principles have been condensed or omitted pursuant to such
rules and regulations, though the Company believes that the disclosures are
adequate to make the information presented not misleading. These consolidated
financial statements should be read in conjunction with the financial statements
and the notes thereto included in the Company's latest Annual Report to the
Securities and Exchange Commission on Form 10-K, as amended, for the year ended
December 31, 2000. In the opinion of the Company, all adjustments, consisting
only of normal recurring adjustments, necessary to present fairly the financial
position as of March 31, 2001, the results of operations for the three months
ended March 31, 2001 and statements of cash flows for the three months then
ended have been included.
On October 29, 1999 ("Petition Date"), the Company and its wholly-owned
subsidiaries, BEC Energy, Inc., Amerac Energy Corporation, SMC Ecuador, Inc. and
SMC Production Company ("Debtor Subsidiaries"), filed voluntary petitions for
relief under Chapter 11, Title 11 of the United States Code ("Bankruptcy Code"),
in order to facilitate the restructuring of the Company's long-term debt,
revolving credit, trade debt and other obligations. The filings were made in
the U.S. Bankruptcy Court for the Southern District of Texas, Victoria Division
("Bankruptcy Court"). The Company and its Debtor Subsidiaries emerged from
Bankruptcy on August 1, 2000 ("Effective Date"). The Company and its Debtor
Subsidiaries operated as debtors-in-possession subject to the Bankruptcy Court's
supervision and orders until the Effective Date. See Note 2 for further
information.
Beginning in the fourth quarter of 1999 through the second quarter of 2000 the
consolidated financial statements of the Company and its subsidiaries were
presented in accordance with Statement of Position 90-7 "Financial Reporting by
Entities in Reorganization Under the Bankruptcy Code" ("SOP 90-7"). SOP 90-7
provides guidance on financial reporting by entities that have filed petitions
with the bankruptcy court and expect to reorganize as going concerns under the
Bankruptcy Code. SOP 90-7 generally requires the reclassification of the
consolidated balance sheet, statement of operations and cash flows to
distinguish transactions and events that are directly associated with the
reorganization from the ongoing operations of the Company.
Use of Estimates in the Preparation of Financial Statements - The preparation of
financial statements in conformity with generally accepted accounting principles
requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the date of the financial statements and the reported
amounts of revenues and expenses during the reporting period. Actual results
could differ from those estimates.
Earnings per Share - Basic earnings per share are based on the weighted average
shares outstanding without any dilutive effects considered.
On August 1, 2000, pursuant to the plan of reorganization of the Bankruptcy
Code, old shareholders of the Company's common stock received one share of the
Company's new common stock for each five shares of the Company's old common
stock. All per-share amounts have been restated to reflect the 1 for 5
August 1, 2000 reverse stock split. See Note 2 Bankruptcy Filing.
Earnings per share have been calculated on the restated weighted average
number of shares outstanding for the three months ended March 31, 2000 and 2001,
respectively. For the quarters ended March 31, 2001 and 2000, respectively, the
issuance or conversion of potential common shares of 4,087,437 and 1,930,000
would have had an antidilutive effect on the diluted earnings per share
calculation and therefore were not considered in the calculation of the diluted
weighted average number of shares outstanding.
6
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
Change in Accounting Method - Effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards requiring that derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded at fair market value and included in the balance sheet as assets or
liabilities. The accounting for changes in the fair value of a derivative
instrument depends on the intended use of the derivative and the resulting
designation, which is established at the inception of a derivative. Special
accounting for qualifying fair value hedges allows a derivative's gains and
losses to offset related results on the hedged item in the statement of
operations. For derivative instruments 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. Hedge
effectiveness is measured at least quarterly based on the relative changes in
fair value between the derivative contract and the hedged item over time. Any
change in fair value resulting from ineffectiveness, as defined by SFAS 133, is
recognized immediately in earnings.
Adoption of SFAS 133 at January 1, 2001 resulted in the recognition of $0.2
million of derivative assets and $3.3 million of derivative liabilities and $2.7
million, net of taxes, of hedging losses included in accumulated other
comprehensive income, a component of stockholders' equity, as the cumulative
effect of the change in accounting principle. The cumulative effect of the
accounting change did not have a material effect on the Company's net income and
had no effect on earnings per share amounts. Amounts were determined as of
January 1, 2001 based on quoted market values, the Company's portfolio of
derivative instruments, and the Company's measurement of hedge effectiveness.
From time to time, the Company has utilized and expects to continue to utilize
derivative financial instruments with respect to a portion of its oil and gas
production to achieve a more predictable cash flow by reducing its exposure to
price fluctuations. These transactions generally are swaps, collars or options
and are entered into with major financial institutions or commodities trading
institutions. Derivative financial instruments are intended to reduce the
Company's exposure to declines in the market price of natural gas and crude oil.
Through December 31, 2000, gains and losses from these financial instruments
have been recognized in revenues during the periods to which the derivative
financial instruments relate.
Reclassifications - Certain amounts in prior financial statements have been
reclassified to conform to the 2001 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 and
derivative hedging adjustments. The Company's total comprehensive income for
the three months ended March 31, 2001 and 2000 was as follows (in thousands):
THREE MONTHS ENDED
MARCH 31,
2001 2000
------- ------
Net income $ 1,768 $1,174
Cumulative effect attributable to adoption of
SFAS No. 133 (2,699) --
Hedge accounting for derivative instruments 622 --
Foreign currency translation adjustment (1,162) (189)
------- ------
Total comprehensive income $(1,471) $ 985
======= ======
7
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
The accumulated balance of other comprehensive loss related to cash flow hedges
is as follows (in thousands):
Balance at December 31, 2000 $ -
Cumulative effect of accounting charge (2,669)
Net losses on cash flow hedges (79)
Reclassification adjustments 904
---------
Balance at March 31, 2001 $ (1,844)
=========
NOTE 2. BANKRUPTCY FILING
On October 29, 1999, the Company and its Debtor Subsidiaries, which excluded
its Canadian subsidiary, Neutrino Resources, Inc. ("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.
8
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
. Issuance of common stock that when issued represented approximately 78% of
the Company's outstanding common shares (9,536,422 shares).
. A new Board of Directors was appointed for a one year term as follows: one by
the creditors' committee, two from the existing board, three by
representatives of significant owners of debentures and one jointly by the
creditors' committee and significant owners of debentures.
. A 1:5 reverse stock split of the Company's outstanding common stock, par
value $0.01 per share, was effectuated on August 1, 2000, the Effective Date.
Subject to the effects of the reverse split, the existing common stock,
options and warrants remained outstanding with no change in terms and
conditions except that all options and warrants expiring between the Petition
Date and confirmation of the Modified Plan were extended for a two year
period.
. The current common shareholders, option holders, and warrant holders of
record on July 24, 2000, received approximately 3,667,000 warrants allowing
them to increase their ownership from 22% to up to 40% of the outstanding
common stock. The new warrants are for a perpetual term with an exercise
price of $4.21 per share, subject to adjustment for certain customary anti-
dilution stock splits, stock dividends and other recapitalization events. The
exercise price must be paid in cash.
Pursuant to the provisions of SOP 90-7, the Company did not adopt fresh-start
reporting upon its emergence from Bankruptcy. Based on the closing price of the
Company's common stock on the Modified Plan confirmation date (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 was 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 during 2000.
NOTE 3. DIVESTITURES
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.
Pro forma
The following table summarizes the pro forma (unaudited) results (stated in
thousands, except per share data), of the Company as though the disposition of
Inverness/Swan Hills in March 2000 had occurred on January 1, 2000.
THREE MONTHS ENDED
MARCH 31, 2000
------------------
(unaudited)
(in thousands, except per share data)
Revenues......................................................... $6,660
Net income....................................................... $ 937
Net income per share-basic and diluted........................... $ .36
The preceding pro forma results are not necessarily indicative of those that
would have occurred had the divestitures taken place at the beginning of 2000.
9
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
NOTE 4. DEBT
Debt consisted of the following (in thousands):
MARCH 31, DECEMBER 31,
2001 2000
--------- ------------
Domestic Credit Facility $13,582 $14,282
Canadian Credit Facility (U.S. Dollar 1,269 2,532
------- -------
Total indebtedness $14,851 $16,814
======= =======
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 March 31, 2001, the Domestic Credit Facility provides for a
borrowing base of $17,350,000 and matures on August 23, 2003. Beginning May 1,
2001, the borrowing base will decrease $300,000 each month until the borrowing
base redetermination has been completed. 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 March
31, 2001, the outstanding borrowing was $13,582,512. On May 7, 2001 outstanding
borrowings under the Domestic Credit Facility were $12,982,512 with borrowing
availability of $4,067,488. Outstanding principal under the Domestic Credit
Facility bears interest at the Bank Index Rate plus 0.5% (8.5% at March 31,
2001) 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 Bank One Canada. At March
31, 2001 the borrowing base under the Canadian Credit Facility is US $9,890,000
and is due August 29, 2003. Beginning May 1, 2001, the borrowing base will
decrease US $225,000 each month until the borrowing base redetermination has
been completed. At March 31, 2001, outstanding borrowings under the Canadian
Credit Facility were US $1,268,794. The Canadian Credit Facility is secured by
substantially all of Neutrino's assets and guaranteed by the Company. On May 7,
2001, outstanding borrowings under the Canadian Credit Facility were US
$1,268,794 (Cdn $2,000,000) with a borrowing availability of US $8,396,210 (Cdn
$13,234,946). Outstanding principal under the Canadian Credit Facility bears
interest at the bank's prime rate plus 0.5% (7.0% at March 31, 2001) 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 in May and November 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. 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 $5 million in cash and 9,536,422 shares of common
stock resulted in an extraordinary gain, net of tax, of $8,258,993 in the third
quarter of 2000. See Note 2-- Bankruptcy Filing.
10
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
NOTE 5. RESTRUCTURING AND BANKRUPTCY COSTS
The Company incurred restructuring and bankruptcy costs of approximately
$484,000 and $852,000 during the three months ended March 31, 2001 and 2000,
respectively, 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. The Company earned interest income of
approximately $90,000 during the year ended December 31, 2000 that it would not
have but for the bankruptcy proceeding. In addition, the Company incurred
restructuring costs of approximately $454,000 during the three months ended
March 31, 2001 and $720,000 during the year-ended December 31, 2000, primarily
related to legal, accounting and financial advisory services rendered in
connection with the restructuring and proposed merger. See Note 2 - Bankruptcy
Filing and Merger Agreement.
NOTE 6. DERIVATIVE FINANCIAL INSTRUMENTS
As of March 31, 2001, the Company has in place the following crude oil and
natural gas costless collars:
Oil Hedges
U.S. $
NYMEX WTI
Monthly -------------
Period Total Bbl Bbl Floor Cap
--------- ------- ------- -------
United States
Apr-01--Dec-01............................................. 97,600 10,844 $22.00 $32.20
Jan-02--Sep-02............................................. 88,200 9,800 $22.00 $25.60
Canada
Apr-01--Dec-01............................................. 81,400 9,044 $22.00 $33.30
Jan-02--Sep-02............................................. 70,300 7,811 $22.00 $27.00
Gas Hedges
U.S. $
Houston Ship
Channel
Total Monthly ----------
Mmbtu Mmbtu Floor Cap
--------- ------- ------- -------
United States
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
Apr-01--Sep-02............................................ 900,000 50,000 $ 4.05 $ 6.15
11
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-continued
As discussed in Note 1, the Company began accounting for the collars, which
have been designated as cash flow hedges, in accordance with SFAS No. 133. As a
result, changes in the fair value of these cash flow hedges are recognized in
other comprehensive income until the hedged item is recognized in earnings, and
any change in fair value resulting in ineffectiveness is recognized immediately
in earnings. During the quarter ended March 31, 2001, the Company recognized
losses of $701,000, included in oil and gas revenues, on the oil and gas
collars. In addition, losses amounting to $203,000 attributable to hedge
ineffectiveness were included in other income (expense) for the current quarter.
The Company expects to transfer approximately $1,485,000 of the balance in
accumulated other comprehensive income to earnings over the next twelve months.
At March 31, 2001, 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 March 31, 2001 and the Company has recorded the
swap's fair value of $285,000 as a liability and recorded an expense for the
three months ended March 31, 2001 of $190,000.
NOTE 7. MERGER AGREEMENT
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 cash, PetroCorp common
stock or a combination of cash and stock, subject to certain adjustments. 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 the election of shareholders to receive at
least three million shares of PetroCorp stock as long as these conditions are
satisfied or waived by PetroCorp. The transaction is anticipated to close by
May 31, 2001.
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 three
months ended March 31, 2001 and 2000 was $4,397,000 and $4,120,000,
respectively. Additional cash from the sale of assets was received in the amount
of $9,335,000 during the three months ended March 31, 2000.
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, 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 March 31, 2001, the Domestic Credit Facility provides for a
borrowing base of $17,350,000 and matures on August 23, 2003. Beginning May 1,
2001, the borrowing base will decrease $300,000 each month until the borrowing
base redetermination has been completed. 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 March 31, 2001, the outstanding borrowing was $13,582,512. On May 7, 2001
outstanding borrowings under the Domestic Credit Facility were $12,982,512 with
borrowing availability of $4,067,488. Outstanding principal under the Domestic
Credit Facility bears interest at the Bank Index Rate plus 0.5% (8.5% at March
31, 2001) 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 Bank One Canada. At March
31, 2001 the borrowing base under the Canadian Credit Facility is US $9,890,000
and is due August 29, 2003. Beginning May 1, 2001, the borrowing base will
decrease US $225,000 each month until the borrowing base
13
redetermination has been completed. At March 31, 2001, outstanding borrowings
under the Canadian Credit Facility were US $1,268,794. The Canadian Credit
Facility is secured by substantially all of Neutrino's assets and guaranteed by
the Company. On May 7, 2001, outstanding borrowings under the Canadian Credit
Facility were US $1,268,794 (Cdn $2,000,000) with a borrowing availability of US
$8,396,210 (Cdn $13,234,946). Outstanding principal under the Canadian Credit
Facility bears interest at the bank's prime rate plus 0.5% (7.0% at March 31,
2001) 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 in May and November 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.
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.
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED MARCH 31, 2001
AS COMPARED TO THE QUARTER ENDED MARCH 31, 2000
Oil and gas revenues for the quarter ended March 31, 2001 were $8,827,000
compared to oil and gas revenues of $7,412,000 for the same period in 2000. Oil
and NGL production decreased 24.4% to 148,037 barrels and natural gas production
decreased 14.7% to 824 MMcf in the first quarter of 2001 compared to the first
quarter of 2000. The lower production levels in the first quarter of 2001 are
due primarily to the sale of properties in the first quarter of 2000, offset by
new production from development drilling on proven prospects. Increases in
natural gas prices more than offset the impact of the lower volumes.
The average realized oil and NGL price decreased 6.4% from $25.72 per barrel
in the first quarter of 2000 to $24.09 in the first quarter of 2001. Average
realized natural gas prices increased 154% to $6.00 per Mcf during the first
quarter of 2001 compared to $2.36 per Mcf in same period a year earlier.
During the first quarter of 2000, the Company completed its sale of its
interests in Inverness/Swan Hill properties in Canada, which were primarily oil
properties. The loss on the sale of these assets was recognized as impairment
to the properties carrying value in 1999. The proceeds from asset sales in the
first quarter of 2000 were used to reduce bank indebtedness and for other
corporate purposes.
First quarter 2001 production costs, including production and ad valorem
taxes, increased 5.8% to $2,088,000 compared to $1,973,000 in the first quarter
of 2000. On an energy equivalent unit basis, production costs rose 32.3%
quarter-over-quarter resulting primarily from non-reccurring workovers and other
operations.
General and administrative expenses were $972,000 in the first quarter of
2001, a 62% increase from $601,000 in the prior year's first quarter, primarily
related to the classification of certain professional fees in 2000 as
restructuring and bankruptcy costs during the pendency of the Company's
bankruptcy proceedings. On an energy equivalent unit basis, costs increased 102%
from the first quarter of 2000 to the same period in 2001.
Depreciation, depletion and amortization ("DD&A") decreased 4.8% to $1,825,000
in the first quarter of 2001 compared to $1,918,000 in 2000. On a unit of
equivalent production basis, DD&A increased 19.3% to $1.07 per Mcfe from $0.89
per Mcfe.
Restructuring and bankruptcy costs were $852,000 in the first quarter of 2000
compared to $484,000 in 2001. The bankruptcy costs in 2000 were charged to
expense pursuant to SOP 90-7. The costs in 2001 were primarily related to the
proposed merger.
14
Interest and debt expense in the quarter ended March 31, 2001 was $621,000
compared to $557,000 in the same period in 2000. The increase primarily
reflects the reduced indebtedness outstanding offset by the mark-to-market non-
cash provision related to the Company's Canadian interest rate swaps.
Tax provision in the first quarter 2001 was $846,000 compared to $191,000 in
the same period in 2000. The increase in tax provision primarily reflects
increased pre-tax income from the Company's Canadian operations in the first
quarter of 2001 compared to in the same period in 2000 and state income tax
liability associated with the Company's U. S. operations in 2001.
Adoption of Statement of Financial Accounting Standards No. 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 $2.7
million, net of taxes, of hedging losses included in accumulated other
comprehensive income as the cumulative effect of a change in accounting
principle. Amounts are determined as of January 1, 2001 based on market quotes
and the Company's portfolio of derivative instruments. During the quarter ended
March 31, 2001, the Company recognized losses of $701,000, included in oil and
gas revenues, on the oil and gas collars. In addition, losses amounting to
$203,000 attributable to hedge ineffectiveness were included in other income
(expense) for the current quarter.
The Company recorded net income of $1,768,000, or $0.14 per basic share, for
the quarter ended March 31, 2001 compared to $1,174,000 or $0.45 per basic share
for the quarter ended March 31, 2000.
15
DEFINITIONS
As used herein:
Thousand cubic feet ("Mcf")
Million cubic feet ("MMcf")
Natural gas liquids ("NGL")
Energy Equivalents Units (1 barrel of liquids = 6 Mcf of natural gas)
Thousand cubic feet of gas equivalent ("Mcfe")
One gigajoule equals 1.055 MMbtu
RECENT ACCOUNTING PRONOUNCEMENTS
Change in Accounting Method - Effective January 1, 2001, the Company adopted
Statement of Financial Accounting Standards No. 133 ("SFAS 133"), Accounting for
Derivative Instruments and Hedging Activities. This statement establishes
accounting and reporting standards requiring that derivative instruments
(including certain derivative instruments embedded in other contracts) be
recorded at fair market value and included in the balance sheet as assets or
liabilities. The accounting for changes in the fair value of a derivative
instrument depends on the intended use of the derivative and the resulting
designation, which is established at the inception of a derivative. Special
accounting for qualifying fair value hedges allows a derivative's gains and
losses to offset related results on the hedged item in the statement of
operations. For derivative instruments 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. Hedge
effectiveness is measured at least quarterly based on the relative changes in
fair value between the derivative contract and the hedged item over time. Any
change in fair value resulting from ineffectiveness, as defined by SFAS 133, is
recognized immediately in earnings.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to a variety of market risks including the potential
for adverse changes in oil and gas prices, foreign currency exchange rates and
interest rates. There have been no material changes to the Company's
disclosures about market risk from those contained in its annual report
Form 10-K, as amended, for the year ended December 31, 2000. See Note 6 to the
Financial Statements in the annual report on Form 10-K which is incorporated
herein by reference.
16
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in several lawsuits arising in the ordinary course of
business. Management believes that the outcome of such proceedings will not
have a material adverse effect in the aggregate on the Company's financial
position or results of operations.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.
None
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
(a) EXHIBITS:
REPORT ON FORM 8-K:
None
17
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the Company
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
SOUTHERN MINERAL CORPORATION
Date: May 14, 2001 By /s/ Michael E. Luttrell
------------------------------------
Michael E. Luttrell
Vice President-Finance and CFO
18