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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(D)
OF THE SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1999
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 STREET, 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 11/18/99, there were
12,982,397 shares of the Registrant's common stock outstanding.
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SOUTHERN MINERAL CORPORATION
(DEBTOR-IN-POSSESSION)
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Unaudited Consolidated Financial Statements
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of September 30, 1999 (unaudited) and December 31, 1998.......... 3
Unaudited Consolidated Statements of Operations for the three months and nine months ended
September 30, 1999 and 1998................................................................... 4
Unaudited Consolidated Statements of Cash Flows for the nine months ended
September 30, 1999 and 1998................................................................... 5
Notes to Unaudited Consolidated Financial Statements............................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
Liquidity and Capital Resources............................................................... 13
Financial Condition and Results of Operations................................................. 16
Item 3. Quantitative and Qualitative Disclosures about Market Risk............................... 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings....................................................................... 20
Item 6. Exhibits and Reports on Form 8-K........................................................ 21
2
PART I - FINANCIAL INFORMATION
ITEM 1. UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
CONSOLIDATED BALANCE SHEET
(in thousands, except share amounts)
September 30, December 31,
1999 1998
------------- ------------
ASSETS (Unaudited)
CURRENT ASSETS
Cash............................................................................. $ 1,271 $ 1,541
Receivables...................................................................... 4,825 5,602
Other............................................................................ 577 633
-------- --------
Total current assets............................................................. 6,673 7,776
PROPERTY AND EQUIPMENT, AT COST USING SUCCESSFUL
EFFORTS METHOD FOR OIL AND GAS ACTIVITIES
Oil and gas producing properties................................................. 130,901 136,833
Mineral rights................................................................... - 167
Unproven properties.............................................................. 2,435 5,454
Office equipment................................................................. 545 580
Accumulated depreciation, depletion and amortization ............................ (34,988) (28,847)
-------- --------
98,893 114,187
PROPERTIES HELD FOR SALE AND OTHER................................................. 5,554 6,327
-------- --------
Total assets..................................................................... $111,120 $128,290
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable................................................................. $ 7,647 $ 10,300
Canadian bank loan............................................................... 18,837 18,490
Current portion of long-term debt................................................ 5,564 13,124
-------- --------
Total current liabilities........................................................ 32,048 41,914
LONG-TERM DEBT (LESS CURRENT PORTION).............................................. 52,170 64,370
DEFERRED INCOME TAXES.............................................................. 6,815 7,279
STOCKHOLDERS' EQUITY
Preferred stock, par value $.01 per share; authorized 5,000,000
shares at September 30, 1999; none issued
Common stock, par value $.01 per share; authorized 50,000,000 shares
at September 30, 1999; issued 12,956,397 and 12,884,672 shares
at September 30, 1999 and December 31, 1998, respectively;
outstanding 12,865,174 and 12,793,449 shares at September 30, 1999
and December 31, 1998, respectively............................................ 130 128
Additional paid-in capital......................................................... 30,874 30,848
Accumulated other comprehensive loss-foreign currency
translation adjustment........................................................... (1,196) (2,304)
Retained deficit................................................................... (9,669) (13,893)
Less: Treasury stock............................................................... (52) (52)
-------- --------
Total stockholders' equity...................................................... 20,087 14,727
-------- --------
Total liabilities and stockholders' equity...................................... $111,120 $128,290
======== ========
The accompanying notes to unaudited consolidated financial statements of
Southern Mineral Corporation
and subsidiaries are an integral part of these statements.
3
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
Three Months Ended Nine Months Ended
September 30, September 30,
-------------------------- -------------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
Revenue
Oil and gas ..................................... $ 6,556 $ 6,743 $ 18,411 $ 15,520
Gains (loss) on sales of properties and
other assets.................................... 7,139 (3) 12,181 (6)
----------- ----------- ----------- -----------
13,695 6,740 30,592 15,514
Expenses
Production...................................... 2,325 2,774 6,634 5,960
Exploration .................................... 24 456 1,965 2,122
Impairment...................................... 1 - 210 -
Depreciation, depletion and amortization ....... 2,562 2,988 8,370 6,217
General and administrative...................... 1,039 1,050 3,134 2,952
Restructuring costs ............................ 1,280 - 1,280 -
----------- ----------- ----------- -----------
7,231 7,268 21,593 17,251
----------- ----------- ----------- -----------
Income (loss) from operations....................... 6,464 (528) 8,999 (1,737)
Other income, expenses and deductions
Interest and other income ...................... 43 80 79 220
INTEREST AND DEBT EXPENSE ...................... (1,704) (1,768) (5,273) (3,554)
----------- ----------- ----------- -----------
INCOME (LOSS) BEFORE INCOME TAXES.................. 4,803 (2,216) 3,805 (5,071)
Provision (benefit) for foreign, federal and state
income taxes
Current provision ............................. 205 50 316 38
Deferred provision (benefit).................... (312) (274) (735) (285)
----------- ----------- ----------- -----------
(107) (224) (419) (247)
----------- ----------- ----------- -----------
Net income (loss).................................. $ 4,910 $ (1,992) $ 4,224 $ (4,824)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE-BASIC.................. $0.38 ($0.16) $0.33 ($0.39)
=========== =========== =========== ===========
NET INCOME (LOSS) PER SHARE-DILUTED ............... $0.30 ($0.16) $0.31 ($0.39)
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING-BASIC................................ 12,851,185 12,833,844 12,821,705 12,279,019
=========== =========== =========== ===========
WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING-DILUTED.............................. 18,002,531 12,833,844 17,880,735 12,279,019
=========== =========== =========== ===========
The accompanying notes to unaudited consolidated financial statements of
Southern Minerals Corporation
and subsidiaries are an integral part of these statements.
4
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
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, 1998. In the opinion of the Company, all adjustments, consisting only of
normal recurring adjustments, necessary to present fairly the financial position
as of September 30, 1999 and December 31, 1998, the results of operations for
the nine months ended September 30, 1999 and 1998 and statements of cash flows
for the nine months then ended have been included.
On October 29, 1999 (the "Petition Date"), the Company and its wholly-owned
subsidiaries, BEC Energy, Inc., Amerac Energy Corporation, SMC Ecuador, Inc. and
SMC Production Company ("Debtor Subsidiaries"), filed voluntary petitions for
relief under Chapter 11 of the U.S. 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. District Court for the
Southern District of Texas, Victoria Division. The Company and its Debtor
Subsidiaries continue to operate as debtors-in-possession subject to the
Bankruptcy Court's supervision and orders. The proceedings of the Company and
its Debtor Subsidiaries have been consolidated for administrative purposes.
Under the provisions of the Bankruptcy Code, the debtors-in-possession have the
exclusive right for 120 days following the Petition Date to file a plan of
reorganization within the Bankruptcy Court. See Note 2. Recent Events.
The accompanying financial statements have been prepared in a manner consistent
with the Company's Annual Report on Form 10-K for the year ended December 31,
1998. Beginning in the fourth quarter of 1999, and for the Annual Report on
Form 10-K for the year ended December 31, 1999, the consolidated financial
statements of the Company and its subsidiaries will be 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.
Use of Estimates - The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amount 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 (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.
Stock options and warrants to purchase 2,949,046 shares of common stock at $.50
to $6.77 per share were outstanding during the quarter and nine month periods
ended September 30, 1999, but were not included in the computation of diluted
earnings per share because the options exercise prices were greater than the
average market price of the common shares. For the quarter and nine months
ended September 30, 1998, the issuance or conversion of potential common shares
of 8,225,453 were excluded as they would have an antidilutive effect on the
diluted earning per share calculation, and therefore were not considered in the
calculation of the diluted weighted average number of shares outstanding.
In connection with termination of certain employees in third quarter 1999, the
Company repriced certain options to the fair market value and extended the
vesting terms by two years.
Reclassifications - Certain amounts in prior financial statements may have been
reclassified to conform to the 1999 financial statement presentation.
6
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
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 nine months ended
September 30, 1999 and 1998 was as follows (in thousands):
Nine months ended
September 30,
-------------------
1999 1998
------ ------
Net income (loss) $ 4,224 $(4,824)
Foreign currency translation adjustment 1,108 (1,758)
------- -------
Total comprehensive income (loss) $ 5,332 $(6,582)
======= =======
NOTE 2. RECENT EVENTS
On October 29, 1999 (the "Petition Date"), the Company and its wholly-owned
subsidiaries, BEC Energy, Inc., Amerac Energy Corporation, SMC Ecuador, Inc. and
SMC Production Company, filed voluntary petitions for relief under Chapter 11
of the U.S. Bankruptcy Code ("Chapter 11") 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. District Court for the
Southern District of Texas, Victoria Division (the "Bankruptcy Court"). The
Company and its Debtor Subsidiaries continue to operate as debtors-in-possession
subject to the Bankruptcy Court's supervision and orders. The proceedings of the
Company and its Debtor Subsidiaries have been consolidated for administrative
purposes. Under the provisions of the Bankruptcy Code, the debtors-in-possession
have the exclusive right for 120 days following the Petition Date to file a plan
of reorganization within the Bankruptcy Court.
The decision to seek protection was taken by the Company and certain
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 $16.3 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 a previously proposed restructuring. The lack
of liquidity during the restructuring period has made the process of working
through this problem significantly more difficult.
The bankruptcy petitions were filed in order to preserve cash and to give the
Company the opportunity to restructure its debt. The consummation of a plan of
reorganization is the primary objective of the Company. The plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. A plan of
reorganization may result in, among other things, substantial dilution to or
elimination of existing security holders as a result of the issuance of
securities to creditors or new investors. The Company intends to submit a plan
of reorganization for consideration by the Bankruptcy Court in the near future.
The consummation of any plan of reorganization will require approval of the
Bankruptcy Court.
At this time, it is not possible to predict the outcome of the bankruptcy
proceedings, in general, or the effect on the business of the Company or on the
interests of creditors or stockholders. As a result of the bankruptcy filing,
all of the Company's and Debtor Subsidiaries liabilities incurred prior to the
Petition Date, including certain secured debt, are subject to compromise.
7
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
The accompanying financial statements have been prepared on a going concern
basis, which contemplates continuity of operations, realization of assets and
liquidation of liabilities in the ordinary course of business. As a result of
the bankruptcy filing and related events, there is no assurance that the
carrying amounts of assets will be realized or that liabilities will be
liquidated or settled for the amounts recorded. In addition, a plan of
reorganization, or rejection thereof, could change the amounts reported in the
financial statements. As a result, there is substantial doubt about the
Company's ability to continue as a going concern. The ability of the Company to
continue as a going concern is dependent upon confirmation of a plan of
reorganization, adequate sources of capital and the ability to sustain positive
results of operations and cash flows sufficient to continue to explore for and
develop oil and gas reserves.
In the ordinary course of business, the Company makes substantial capital
expenditures for the exploration and development of oil and natural gas
reserves. Historically, the Company has financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
offerings of equity, private offerings of debt, asset sales, borrowings under
its senior credit facility and other financings. Cash flow from operations is
sensitive to the prices the Company receives for its oil and natural gas
production. Lower hydrocarbon production associated with a reduction in planned
capital spending or an extended decline in oil and gas prices could result in
less than anticipated cash flow from operations in the current fiscal year and
in later years, which could have a material adverse effect on the Company.
Management's plans are to continue to incur capital expenditures with the goal
of increasing production and reserves. The Company plans to accumulate cash
subsequent to the Petition Date and may utilize that cash, subject to
restrictions and provisions of a court-approved cash collateral order, to fund
its operations, including planned capital expenditures, during the pending
bankruptcy proceedings. The ability to incur capital expenditures, sell
properties and obtain additional financing is subject to the approval and
ongoing supervision of the Bankruptcy Court. There is no assurance that
adequate funds can be obtained on a timely basis or that the Bankruptcy Court
will approve such transactions.
Subsequent to the Petition Date, the Company and its Debtor Subsidiaries filed a
Motion for Order Authorizing Use of Cash Collateral (the "Cash Collateral
Order"), pursuant to which the Company and its Debtor Subsidiaries sought the
use of the secured domestic banks' cash collateral in on-going operations. On
November 15, 1999, the Bankruptcy Court granted the Company and its Debtor
Subsidiaries authority to use cash collateral in accordance with an approved
budget until January 31, 2000. To the extent that on going expenses are
reflected on the court-approved budget, the Company and its Debtor Subsidiaries
are permitted to make such expenditures. The Company has accumulated, as of
October 31, 1999, approximately $500,000 since the Petition Date that can be
used for operations pursuant to the terms of the Cash Collateral Order.
The Company does not presently anticipate the need for debtor-in-possession
financing in order to pursue its business strategy.
NOTE 3. ACQUISITIONS AND DIVESTITURES
Neutrino
On June 23, 1998, the Company agreed to acquire 92.3% of the outstanding common
shares of Neutrino Resources Inc. ("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 Neutrino 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
8
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
Neutrino's bank debt and working capital deficit. Neutrino is an independent
oil and gas company located in Calgary, Canada. The merger was accounted for as
a purchase. The total purchase price of approximately $57,198,000 consisted of
the following:
Cash consideration for common stock $34,091,000
Fair value of 324,430 shares of common stock 1,095,000
Debt assumed and working capital deficit 20,307,000
Legal, accounting and transaction costs 1,705,000
-----------
$57,198,000
===========
The allocation of the purchase price is summarized as follows:
Oil and gas properties and other assets (net)................... $66,760,000
Deferred income taxes (9,562,000)
-----------
$57,198,000
Following the acquisition of Neutrino, the purchase price was reduced to reflect
the proceeds from the sale of non-strategic assets in the amount of $3,390,000.
Amerac
On January 28, 1998, the shareholders of both the Company and Amerac Energy
Corporation ("Amerac") approved the merger of Amerac into a subsidiary of the
Company. Pursuant to the merger agreement, the Company issued 3,333,333 shares
of its Common Stock to acquire all of the outstanding 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
of approximately $24,820,000 consisted of the following :
Issuance of Common Stock $15,433,000
Debt assumed and working capital 8,714,000
Legal, accounting and transaction costs 673,000
-----------
$24,820,000
===========
Subsequent to the acquisition of Amerac, the purchase price was reduced by
$7,919,000 to reflect 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.
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.
These divestitures would have had a material effect on the Company's historical
results of operations.
9
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(Continued)
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 the acquisitions of Neutrino and Amerac had
occurred on January 1, 1998.
Nine Months Ended Nine Months Ended
September 30, 1999 September 30, 1998
------------------ -------------------
Revenues.................................... $22,185 $19,971
Net loss.................................... (2,575) (7,502)
Net loss per share - basic.................. $ (.20) $ (.57)
Net loss per share - diluted................ (.20) (.57)
The preceding pro forma results are not necessarily indicative of those that
would have occurred had the acquisitions and divestitures taken place at the
beginning of 1998. During 1998, the Company made additional acquisitions, none
of which would have had a material effect on the historical results of
operations of the Company. During the first quarter of 1999, the Company sold
its mineral interests and substantially all of its royalty interests in Texas,
Mississippi and New Mexico for approximately $6,000,000. These divestitures
would not have had a material effect on the Company's historical results of
operations.
NOTE 4. LONG-TERM DEBT
Long-term debt consisted of the following at September 30, 1999 and December 31,
1998 (in thousands):
September 30, December 31,
1999 1998
------------------- --------------------
Domestic bank credit facility....................................................... $ 16,333 $ 35,910
Canadian bank credit facility (U.S. Dollars)....................................... 18,837 18,490
Convertible subordinated debentures................................................. 41,400 41,400
Other............................................................................... - 184
-------- --------
Total indebtedness................................................................ 76,570 95,984
Less: Current maturities of long-term debt........................................ 5,564 13,124
Canadian bank credit facility (U.S. Dollars)................................ 18,837 18,490
-------- --------
$ 52,170 $ 64,370
======== ========
On March 29, 1999, the Company entered into a restructured and amended credit
facility ("Amended Credit Facility") with its domestic lenders. The Amended
Credit Facility provided for a borrowing base of $19,353,000, plus a principal
tranche of $12,500,000 ("Tranche A") that was due to mature on September 1,
1999. The borrowing base was reduced to $18,830,000 on April 1, 1999,
reflecting the $6,000,000 received in March and April 1999, for the sale of the
Company's mineral interests in Texas, Mississippi and New Mexico. In July and
August of 1999 the sale of the Company's interests in the Brushy Creek and Texan
Gardens Fields were closed for $15.2 million and $0.8 million, respectively.
The majority of the net proceeds were applied to the Company's domestic bank
facility with $5.0 million being applied to the borrowing base facility and $9.6
million to the Tranche A obligation. In September and October 1999, the Amended
Credit Facility was further amended to extend the ultimate due date of the
Tranche A principal to October 28, 1999. As of September 30, 1999 and December
31, 1998, Tranche A principal was classified as current portion of long-term
debt in the Company's Consolidated Balance Sheet. As of September 30, 1999, the
Company was in compliance with the terms and conditions of the Amended Credit
Facility, as revised. Due to the bankruptcy filings on October 29, 1999, the
Company is no longer in compliance with certain provisions of the Amended Credit
Agreement. See Note 2 - Recent Events.
10
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS-(continued)
The obligations under the Amended Credit Facility are secured by substantially
all of the assets of the Company and its subsidiaries other than Neutrino. The
Amended Credit Facility prohibits the payment of dividends and contains
covenants relating to the financial condition of the Company including tangible
net worth and cash flow coverage covenants. Outstanding borrowings under the
domestic bank credit facility were $16,333,455 at September 30, 1999. On
November 10, 1999, outstanding borrowings under the Amended Credit Facility were
$16,108,000 with no further borrowing availability. Outstanding principal under
the Amended Credit Facility bears interest at the Bank Index Rate (8.25% at
September 30, 1999) to the extent of the borrowing base utilized and at Bank
Index Rate plus 1% on Tranche A principal.
Effective June 25, 1998, Neutrino entered into a new Cdn $40,000,000 (US
$27,155,000) revolving demand loan facility (the "Canadian Credit Facility")
under which it could borrow at bank prime or Bankers Acceptance Rates plus a 1%
stamping fee. At September 30, 1999, the Canadian Bank prime rate was 6.25% and
the Bankers Acceptance Rate for 30-day maturities was 4.73%. Effective July 15,
1999, the borrowing base under the Canadian Credit Facility was reduced to Cdn
$30,500,000 (US $20,706,000) and the interest rate was increased to prime plus
1%. These changes were a result of a lender review giving effect to lower world
oil prices, the sale of certain non-strategic oil and gas properties, and the
Company's financial condition. At September 30, 1999, outstanding borrowings
under the Canadian Credit Facility were Cdn $28,105,000 (US $18,837,000). On
November 15, 1999, outstanding borrowings under the Canadian Credit Facility
were Cdn $27,172,000 (US $18,212,000). The Canadian Credit Facility contains a
covenant relating to the financial condition of Neutrino, including, at each
quarter's end, maintenance of a working capital of no more than negative Cdn
$1,500,000 through September 30, 1999 and Cdn $0 through maturity. The borrowing
base under the Canadian Credit Facility reduces Cdn $500,000 per month beginning
August 28, 1999 and is subject to semi-annual redeterminations. The last
borrowing base review was as of September 30, 1999 which did not result in
further revisions in the Canadian Credit Facility. As of September 30, 1999 and
November 10, 1999, Neutrino was in compliance with the terms of the credit
facility. The outstanding balance under the Canadian Credit Facility is
classified as a current liability because of the demand feature of the loan.
However, it is management's intention that the facility be utilized to provide
long-term financing for the Company.
The Company's financial condition and liquidity are impacted by prices the
Company receives for its oil and natural gas. In the first quarter of 1999, oil
and natural gas prices continued to be weak, but began to strengthen early in
the second quarter and have continued to strengthen through the third quarter.
Judgments by the Canadian lender regarding the level of future oil and natural
gas prices, among other things, will impact their borrowing base determinations
for the Canadian Credit Facility. See Note 2. Recent Events.
The Company's substantial leverage poses certain risks, including the risk that
the Company may not generate sufficient cash flow to service its indebtedness or
that the Company may be unable to obtain additional financing in the future and
as a result, may not have the necessary resources to respond to market
conditions and opportunities. The Company's high level of indebtedness,
covenant requirements and working capital deficit subjects it to risks of
default, which may significantly impair its ability to meet its liquidity needs.
The Company's Amended Credit Facility contains provisions whereby a default
under the Company's Canadian Credit Facility or to the 6.875% convertible
subordinated debentures or the filing of a bankruptcy petition would create a
default condition under the Amended Credit Facility. In such a default
condition, the banks may declare amounts outstanding under the Amended Credit
Facility to become immediately due and payable. In addition, the holders of
convertible subordinated debentures have acceleration rights if the Company is
in payment default under either its Amended Credit Facility or Canadian Credit
Facility or has filed a petition under the Bankruptcy Act. See Note 2 - Recent
Events.
The Company's financial condition at the end of 1998 resulted in the Company's
independent auditors, in their opinion on the 1998 financial statements,
disclosing their substantial doubt about the Company's ability to continue as a
going concern. In February 1999, the Board of Directors of the Company retained
CIBC World Markets Corp. as independent advisors to assist in evaluating various
strategic alternatives for maximizing shareholder value. On July 21, 1999, the
Company announced that its Board of Directors had approved a restructuring of
the Company that involved a $20.6 million equity infusion, the sale of the
Brushy Creek and Texan Garden Fields and an exchange offer for its 6.875%
convertible subordinated debentures due 2007. The restructuring plan, as
initially filed with the Securities and Exchange Commission,
11
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS -- (Continued)
would have substantially reduced the current common stockholders interest in the
Company. Based upon discussions with certain of the holders of its debentures,
the Board of Directors of the Company concluded that the restructuring could not
be consummated on the terms previously contemplated. In addition, following
completion of its evaluation of strategic alternatives to maximize shareholder
value, the Board of Directors terminated the services of CIBC World Markets
Corp. as independent advisors.
NOTE 5. NATURAL GAS AND OIL HEDGING
The Company has entered into natural gas and oil price swaps with third parties
to hedge a portion of its production from the effects of fluctuations in the
market price of natural gas and oil. While the financial hedging reduces the
Company's exposure to declines in the market price of natural gas and oil,
hedging also limits the Company's gains from increases in market price. At
September 30, 1999, the Company had the following financial hedges:
Product Type Period Volume Price
- ------------------- ------ ------------------------- ----------- ---------------------
Natural Gas -HSC Swap October 1999 31,000 MCF $2.213 per MCF
Crude Oil -WTI Swap October 1999-January 2000 30,750 BBLs $20.04 per BBL
Crude Oil - WTI Collar January- March 2000 27,300 BBLs $19.43-$23.43 per BBL
Crude Oil- So La Collar April- June 2000 27,300 BBLs $15.00-$19.50 per BBL
The Company estimates the loss from unwinding these positions to be
approximately $145,000 at September 30, 1999. Subsequent to the Company's filing
of Chapter 11, the Company was notified by the counter-parties to these
contracts of the cancellation of these contracts and expects the loss not to
exceed $200,000 in the fourth quarter of 1999.
At September 30, 1999, Neutrino had Canadian swap contracts on approximately
27,900 MMcf of natural gas for October 1999 at an average price of Cdn $3.00 (US
$2.01) and approximately 23,000 barrels of oil for the period October through
December 1999 at an average price of Cdn $26.185 (US $17.55). The Company
estimates the loss from the unwinding position to be approximately Cdn $137,000
(US $92,000) at September 30, 1999.
NOTE 6. NASDAQ NATIONAL MARKET LISTING
The Company was advised that it was not in compliance with Nasdaq Stock Market
listing requirements due to the recent low price per share of its Common Stock.
The Company was granted a hearing on May 27, 1999 to present a plan to the
Nasdaq National Market for compliance with the $1.00 per share minimum bid
requirement. Subsequently, the Company was notified that effective with the
close of business on August 4, 1999, its securities including convertible
subordinated debentures were delisted from the Nasdaq National Market. The
Company's Common Stock is now traded on the OTC Bulletin Board. The Company has
requested a review of the delisting decision by the Nasdaq Review Council and
has been notified of a hearing in January 2000. The Company believes a permanent
delisting of its Common Stock and convertible subordinated debentures would
impair the liquidity of the Common Stock, convertible subordinated debentures
and capital raising flexibility of the Company. The Company cannot assure that
it will be successful in its request to Nasdaq to reverse its delisting
decision.
NOTE 7. REORGANIZATION COSTS
During the third, quarter the Board of Directors of the Company concluded that
the proposed restructuring plan as filed with the Securities and Exchange
Commission on July 21, 1999 could not be consummated on the terms contemplated.
Therefore, estimated costs of approximately $1,280,000 associated with the
restructuring were expensed during the third quarter of 1999. These costs are
primarily legal, accounting, financial advisory and other transaction costs
related to proposed restructuring.
12
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
LIQUIDITY AND CAPITAL RESOURCES
On October 29, 1999 (the "Petition Date"), the Company and its wholly-owned
subsidiaries, BEC Energy, Inc., Amerac Energy Corporation, SMC Ecuador, Inc. and
SMC Production, Inc. ("Debtor Subsidiaries"), filed voluntary petitions for
relief under Chapter 11 of the U.S. Bankruptcy Code ("Chapter 11") in order to
facilitate the restructuring of the Company's long-term debt, revolving credit,
trade debt and other obligations. The filing was made in the U.S. District
Court for the Southern District of Texas, Victoria Division (the "Bankruptcy
Court"). The Company and its Debtor Subsidiaries continue to operate as
debtors-in-possession subject to the Bankruptcy Court's supervision and orders.
The proceedings of the Company and its Debtor Subsidiaries have been
consolidated for administrative purposes. Under the provisions of the Bankruptcy
Code, the debtors-in-possession have the exclusive right for 120 days following
the Petition Date, to file a plan of reorganization within the Bankruptcy Court.
The bankruptcy petitions were filed in order to preserve cash and to give the
Company the opportunity to restructure its debt. The consummation of a plan of
reorganization will set forth the means for satisfying claims, including
liabilities subject to compromise and interests in the Company. A plan of
reorganization may result in, among other things, material dilution or
elimination of existing security holders as a result of the issuance of
securities to creditors or new investors. The consummation of a plan of
reorganization will require the approval of the Bankruptcy Court.
At this time, it is not possible to predict the outcome of the bankruptcy
proceedings, in general, or the effect on the business of the Company or on the
interests of creditors or stockholders. The Company intends to submit a plan of
reorganization for consideration by the Bankruptcy Court in the near future.
There can be no assurance that the plan of reorganization to be submitted by the
Company will be approved or that the Bankruptcy Court will permit the Company
and its Debtor Subsidiaries to continue to operate as debtors-in-possession. As
a result, there is substantial doubt about the Company's ability to continue as
a going concern.
In the ordinary course of business, the Company makes substantial capital
expenditures for the exploration and development of oil and natural gas
reserves. Historically, the Company has financed its capital expenditures, debt
service and working capital requirements with cash flow from operations, public
offerings of equity, private offerings of debt, asset sales, and borrowings
under its senior credit facility and other financings. Cash flow from
operations is sensitive to the prices the Company receives for its oil and
natural gas production. Lower hydrocarbon production associated with a
reduction in planned capital spending or an extended decline in oil and gas
prices could result in less than anticipated cash flow from operations in the
current year and in later years, which could have a material adverse effect on
the Company.
Subsequent to the Petition Date, the Company and its Debtor Subsidiaries filed a
Motion for Order Authorizing Use of Cash Collateral (the "Cash Collateral
Order"), pursuant to which the Company and its Debtor Subsidiaries sought the
use of the secured domestic banks' cash collateral in on-going operations. On
November 15, 1999, the Bankruptcy Court granted the Company and its Debtor
Subsidiaries authority to use cash collateral in accordance with an approved
budget until January 31, 2000. To the extent that on-going expenses are
reflected on the court-approved budget, the Company and its Debtor Subsidiaries
are permitted to make such expenditures. The Company has accumulated, as of
October 31, 1999, $500,000 approximately in cash since the Petition Date that
can be used for operations pursuant to the terms of the Cash Collateral Order.
The Company does not presently anticipate the need for debtor-in-possession
financing in order to pursue its business strategy.
The Company has historically funded its operations, acquisitions, exploration
and development expenditures from cash flows from operating activities, bank
borrowing, issuance of common stock and debt securities and the sale of non-
strategic assets.
During the third quarter, the Board of Directors of the Company concluded that
the restructuring plan as filed with the Securities and Exchange Commission on
July 21, 1999, could not be consummated on the terms contemplated. Therefore,
the estimated costs of approximately $1,280,000 associated with the
restructuring were expensed during the third quarter of 1999.
13
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (continued)
The Company's cash flow provided by operating activities for the nine months
ended September 30, 1999 and 1998 was $259,000 and $2,776,000, respectively.
Effective June 25, 1998, Neutrino entered into a new Cdn $40,000,000 (US
$27,155,000) revolving demand loan facility (the "Canadian Credit Facility")
under which it could borrow at bank prime or Bankers Acceptance Rates plus a 1%
stamping fee. At September 30, 1999, the Canadian Bank prime rate was 6.25% and
the Bankers Acceptance Rate for 30-day maturities was 4.73%. Effective July 15,
1999, the borrowing base under the Canadian Credit Facility was reduced to Cdn
$30,500,000 (US $20,706,000) and the interest rate was increased to prime plus
1%. These changes were a result of a lender review giving effect to lower world
oil prices, the sale of certain non-strategic oil and gas properties, and the
Company's financial condition. At September 30, 1999, outstanding borrowings
under the Canadian Credit Facility were Cdn $28,105,000 (US $18,837,000). On
November 15, 1999, outstanding borrowings under the Canadian Credit Facility
were Cdn $27,172,000 (US $18,212,000). The Canadian Credit Facility contains a
covenant relating to the financial condition of Neutrino, including, at each
quarter's end, maintenance of a working capital of no more than negative Cdn
$1,500,000 through September 30, 1999 and Cdn $0 through maturity. The borrowing
base under the Canadian Credit Facility reduces Cdn $500,000 per month beginning
August 28, 1999 and is subject to semi-annual redeterminations. The last
borrowing base review was as of September 30, 1999, which did not result in
further revisions in the Canadian Credit Facility. As of September 30, 1999 and
November 10, 1999, Neutrino was in compliance with the terms of the credit
facility. The outstanding balance under the Canadian Credit Facility is
classified as a current liability because of the demand feature of the loan.
However, it is management's intention that the facility be utilized to provide
long-term financing for the Company.
The obligations under the Amended Credit Facility are secured by substantially
all of the assets of the Company and its subsidiaries other than Neutrino. The
Amended Credit Facility prohibits the payment of dividends and contains certain
covenants relating to the financial condition of the Company. Outstanding
borrowings under the domestic bank credit facility were $16,333,455 at September
30, 1999. On November 15, 1999, outstanding borrowings under the Amended Credit
Facility were $16,108,000 with no further borrowing availability. Outstanding
principal under the Amended Credit Facility bears interest at the Bank Index
Rate (8.25% at September 30, 1999) to the extent of the borrowing base and at
Bank Index Rate plus 1% on Tranche A principal.
The working capital and net cash balances available at September 30, 1999 may be
used to cover some of the liabilities subject to compromise pursuant to a final
plan of reorganization. The Company's capital expenditures for 1999 will remain
subject to the approval and supervision of the Bankruptcy Court and may vary
significantly due to a variety of factors, including drilling results, oil and
gas prices, industry conditions and outlook, future acquisitions of properties,
the availability of capital and the consent of the Company's creditors.
Effective June 25, 1998, Neutrino entered into a new Cdn $40,000,000 (US
$27,155,000) revolving demand loan facility (the "Canadian Credit Facility")
under which it could borrow at bank prime or Bankers Acceptance Rates plus a 1%
stamping fee. At September 30, 1999, the Canadian Bank prime rate was 6.25% and
the Bankers Acceptance Rate for 30-day maturities was 4.75%. Effective July 15,
1999, the borrowing base under the Canadian Credit Facility was reduced to Cdn
$30,500,000 (US $20,706,000) and the interest rate was increased to prime plus
1% and the stamping fee on Bankers Acceptance was increased to 1 1/4% per annum.
These changes were a result of a lender review giving effect to lower world oil
prices, the sale of certain non-strategic oil and gas properties and the
Company's financial condition. At September 30, 1999, outstanding borrowings
under the Canadian Credit Facility were Cdn $28,105,000 (US $18,837,000). On
November 15, 1999, outstanding borrowings under the Canadian Credit Facility
were Cdn $27,172,000 (US $18,212,000). The Canadian Credit Facility contains
certain covenants relating to the financial condition of Neutrino including, at
each quarter's end, maintenance of working capital of no more than negative Cdn
$1,500,000 through September 30, 1999 and no working capital deficit through
maturity. The borrowing base under the Canadian Credit Facility reduces by Cdn
$500,000 per month beginning August 28, 1999 and is subject to semi-annual
redeterminations. The last borrowing base review was September 30, 1999, which
did not result in further revisions in the Canadian Credit Facility. As of
September 30, 1999 and November 10, 1999, Neutrino was in compliance with the
terms of the credit facility. The outstanding balance under the Canadian Credit
Facility is classified as a current liability because of the demand feature of
the loan. However, it is management's intention that the facility be utilized to
provide long-term financing for the Company.
14
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (continued)
The Company's financial condition and liquidity are impacted by prices the
Company receives for its oil and natural gas. In the first quarter of 1999, oil
and natural gas prices continued to be weak, but began to strengthen early in
the second quarter. Judgments by the Canadian lender regarding the level of
future oil and natural gas prices, among other things, will impact their
borrowing base determinations for the Company's Canadian Credit Facilities.
The Company's substantial leverage poses certain risks, including the risk that
the Company may not generate sufficient cash flow to service its indebtedness or
that the Company may be unable to obtain additional financing in the future and
as a result, may not have the necessary resources to respond to market
conditions and opportunities. The Company's high level of indebtedness,
covenant requirements and working capital deficit subjects it to risks of
default, which may significantly impair its ability to meet its liquidity needs.
The Company's Amended Credit Facility contains provisions whereby default under
the Company's Canadian Credit Facility or to the 6.875% Convertible Subordinated
Debentures or the filing of a bankruptcy petition would create a default
condition under the Amended Credit Facility. In such a default condition, the
banks may declare amounts outstanding under the Amended Credit Facility to
become immediately due and payable. In addition, the holders of Convertible
Subordinated Debentures have acceleration rights if the Company is in payment
default under either its Amended Credit Facility or Canadian Credit Facility or
has filed a petition under the Bankruptcy Act.
The Company's financial condition at the end of 1998 resulted in the Company's
independent auditors, in their opinion on the 1998 financial statements,
disclosing their substantial doubt about the Company's ability to continue as a
going concern. In February 1999, the Board of Directors of the Company retained
CIBC World Markets Corp. as independent advisors to assist in evaluating various
strategic alternatives for maximizing shareholder value. On July 21, 1999 the
Company announced that its Board of Directors had approved a restructuring of
the Company that involved a $20.6 million equity infusion, the sale of the
Brushy Creek and Texan Garden Fields and an exchange offer for its 6.875%
convertible subordinated debentures due 2007. The restructuring plan, as
initially filed with the Securities and Exchange Commission, would have
substantially reduced the current common stockholders interest in the Company.
Based upon discussions with certain of the holders of its debentures, the Board
of Directors of the Company concluded that the restructuring could not be
consummated on the terms previously contemplated. In addition, following
completion of its evaluation of strategic alternatives to maximize shareholder
value, the Board of Directors terminated the services of CIBC World Markets
Corp. as independent advisors.
The Company was notified that effective with the close of business on August 4,
1999, its securities including convertible subordinated debentures were delisted
from the Nasdaq National Market. This action was attributable to its inability
to satisfy the Nasdaq National Market maintenance standards for the continued
listing of its securities. Following the delisting the Company's Common Stock
will continue to be quoted and traded on the OTC Bulletin Board under the
symbol, SMINQ.OB. Additionally, the Company requested a review of the delisting
decision by the Nasdaq Review Council and has been notified of a hearing in
January 2000. The Company believes a permanent delisting of its Common Stock and
convertible subordinated debentures would impair the liquidity of the Common
Stock, convertible subordinated debentures and capital raising flexibility of
the Company. The Company cannot assure that it will be successful in its
request to Nasdaq to reverse its delisting decision.
Since the trading of our securities will be conducted on the OTC Bulletin Board,
the Company expects the spreads between the "bid and "asked" prices of the
securities quoted by market makers will likely be greater than in the past and
shareholders will likely experience a greater degree of difficulty in trading
the securities. In addition, there are significant restrictions imposed by most
brokerage houses on the ability of their brokers to solicit orders or recommend
the purchase of securities that trade on the OTC Bulletin Board. In the
majority of the cases, the purchase of the securities is limited to unsolicited
offers from private investors, who have to comply with policies and practices
involving the completion of time-consuming forms that can make the handling of
lower-priced securities economically unattractive. Moreover, most brokerage
houses do not permit lower-priced securities to be used as collateral for margin
accounts or to be purchased on margin. We believe that the current market price
of our securities may limit the effective marketability because of the
reluctance of many brokerage firms and institutional investors to recommend
lower-priced securities to their clients or to hold them in their own
portfolios. The brokerage commission on the purchase or sale of a lower-priced
securities may also represent a higher percentage of the price than the
brokerage commission on a higher-priced issue.
The Company did not declare dividends in the nine months ended September 30,
1999 and 1998. The Company does not expect, under its existing capital
structure, to be able to pay dividends. Payment of dividends is currently
prohibited by the terms of the Company's Amended Credit Facility.
15
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (continued)
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS FOR THE QUARTER ENDED SEPTEMBER 30, 1999
AS COMPARED TO THE QUARTER ENDED SEPTEMBER 30, 1998
Oil and gas revenues for the quarter ended September 30, 1999 were $6,555,905
compared to oil and gas revenues of $6,743,000 for the same period in 1998. The
decrease in revenues reflects a decrease in oil and natural gas liquids ("NGL")
production of 21% to 200,373 barrels and a decrease in natural gas production of
42% to 1,219 MMcf in the third quarter of 1999 compared to the third quarter of
1998. Neutrino production levels for the third quarter of 1999 are
approximately 30% lower than comparable production levels in 1998 due in part to
the sale of certain properties in the fourth quarter of 1998 and other factors
including normal and unanticipated production declines. The domestic
production levels are 37% lower due primarily to the sale of mineral and royalty
interests in the first quarter of 1999, the sales Brushy Creek and Texan Gardens
Fields in the third quarter of 1999 and other factors including normal
production declines.
The decreased production was offset by an average realized oil price increase of
70% from $10.99 per barrel in the third quarter of 1998 to $18.94 per barrel in
the third quarter of 1999. Average realized natural gas prices increased 40% to
$2.37 per Mcf during the third quarter of 1999 compared to $1.69 per Mcf in same
period a year earlier.
Third quarter 1999 production costs, including production and ad valorem taxes,
declined 17% to $2,326,000 compared to $2,774,000 in the third quarter of 1998,
but on an energy equivalent unit basis increased 26% quarter-over-quarter.
Production costs declined primarily due to the domestic property sales in 1999.
The increased costs on an energy equivalent basis are primarily the result of
the sale of the domestic mineral properties and Brushy Creek, which had
substantially lower production costs.
General and administrative expenses were $1,034,086 in the third quarter of
1999, a decrease of 2% from $1,059,116 in the prior year's third quarter.
General and administration costs excluding severance costs of approximately
$145,000 declined 16%. The Company terminated seven employees in August 1999
resulting in the additional cost.
During the third quarter the Board of Directors of the Company concluded that
the proposed restructuring plan as filed with the Securities and Exchange
Commission on July 21, 1999 could not be consummated on the terms contemplated.
Therefore, the estimated costs of approximately $1,280,000 associated with the
restructuring were expensed during the third quarter of 1999.
Depreciation, depletion and amortization ("DD&A") decreased 14% to $2,562,000 in
the third quarter of 1999 compared to $2,988,000 in 1998. On a unit of
equivalent production basis, DD&A increased 28%from $0.82 per Mcfe to $0.82 per
Mcfe to $1.05 per Mcfe. The increase reflects the sales of primarily natural
gas properties from Neutrino in the fourth quarter of 1998, the mineral and
royalty interests in the first quarter of 1999 and the Brushy Creek Field in the
third quarter of 1999 with lower per unit average depletion costs.
Exploration, dry hole and lease impairment expenses decreased to $24,735 from
$455,529 in the three months ended September 30, 1999 compared to 1998. The
1998 expense is due primarily to a dry hole drilled in Lafourche Parish,
Louisiana in which the Company had a 93% working interest. The 1999 expense is
primarily from impairments of a portion of the property held for resale and non-
producing properties.
Interest and debt expense in the quarter ended September 30, 1999 was $1,704,000
compared to $1,768,000 in the same period in 1998. Although the overall rate of
interest increased, the decrease in interest expense is primarily the result of
decreased levels of domestic bank debt achieved through reductions from the
proceeds of sale of properties.
Tax benefits in the third quarter of 1999 were $107,000 compared to $224,000 in
the same period in 1998. The decrease primarily reflects the Company's tax
provision related to the sale of domestic properties.
During the third quarter of 1999, the Company sold domestic properties resulting
in a net gain of approximately $7.1 million with no significant property sales
in 1998.
16
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (continued)
Results of Operations for the Quarter Ended September 30, 1999
As Compared to the Quarter Ended September 30, 1998 - (continued)
The Company recorded net income of $4,910,000, or a net income of $0.38 per
basic share, for the quarter ended September 30, 1999, compared to a net loss of
$1,992,000, or a loss of $0.16 per basic share, for the quarter ended September
30, 1998. The 1999 income is primarily the result of the gain on sale of
domestic properties and increased oil and gas prices offset by decreased oil and
gas revenues due to decreased production and restructuring costs.
For the Nine Months Ended September 30, 1999
As Compared to the Nine Months Ended September 30, 1998
Oil and gas revenues for the nine months ended September 30, 1999, were
$18,411,000 compared to oil and gas revenues for the same period in 1998 of
$15,520,000. The increase in revenues reflects higher production volumes of
both crude oil and NGL's and increased natural gas and crude oil prices.
Natural gas production in the nine months ended September 30, 1999 was 4,367
MMcf, essentially unchanged as compared to production for the same period in
1998 of 4,380 MMcf. The Company's crude oil and NGL production for the nine
months ended September 30, 1999 increased 53% to 642,992 barrels as compared to
523,542 barrels for the same period in 1998. Production levels for the nine
months ended September 30, 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 in the nine months ended September 30, 1999
increased 5% to $2.03 per Mcf compared to $1.93 per Mcf in the same nine months
of 1998. During the nine months of 1999, crude oil prices increased 16% to
$14.45 per barrel, compared to $12.38 per barrel in the same period in 1998.
Production costs, including production and ad valorem taxes, increased in the
nine months September 30, 1999 to $6,634,000, up 11% from $5,960,000 in the same
period in 1998, due in part to Neutrino, which occurred in July 1998. On a cost
per Mcfe basis, production costs for the nine months ended September 30, 1999
increased to $0.80 per Mcfe, or 1% from $0.79 per Mcfe in 1998.
General and administrative expenses increased to $3,129,000 in the nine months
ended September 30, 1999, up 5% from $2,965,000 in the nine months of 1998.
However, on a cost per Mcfe basis, general and administrative expenses decreased
2% in the first nine months of 1999 to $0.38 per Mcfe from $0.39 per Mcfe in the
same period of 1998. The increase in general and administrative expenses for
1999, when compared to 1998 is not as great as would have been expected due to
the effect of Neutrino. Significant reductions in force through attrition and
layoffs have occurred in 1999. In 1998 the Company accrued and paid bonuses of
$360,000 with no corresponding amounts in 1999.
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, the estimated costs associated with the restructuring
of approximately $1,280,000 were expensed during the third quarter of 1999.
Exploration, dry hole and lease impairment expenses were relatively flat in the
nine months ended September 30, 1999 of $2,175,000, compared to $2,122,000 in
the same period of 1998. The amount recorded in the nine months ended September
30, 1998 was due primarily to a dry hole drilled in Lafourche Parish, Louisiana
in which the Company had a 93% working interest. The 1999 expense is primarily
from impairments of a portion of the property held for sale and non-producing
properties. Since the Company uses the successful efforts method of accounting,
exploration expenses may vary greatly from period to period based upon the level
of exploration activity.
17
17
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (continued)
For the Nine Months Ended September 30, 1999
As Compared to the Nine Months Ended September 30, 1998 (continued)
DD&A expense for the nine months ended September 30, 1999 increased to
$8,370,000, up 34% from $6,217,000 in the nine months ended September 1998. The
Company computes depreciation and depletion on each producing property using the
unit-of-production method. Since this method employs estimates of remaining
reserves, depreciation and depletion expenses may vary from period to period
because of revisions to reserve estimates, production rates and other factors.
DD&A expenses increased in the first nine months of 1999 to $1.01 per Mcfe, up
23% from $0.82 per Mcfe in the same period of 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
with lower per unit average depletion costs.
Interest and debt expense in the nine months ended September 30, 1999 was
$5,273,000, compared to $3,554,000 in the same period in 1998. Interest expense
increased as a result of an increase in the outstanding bank debt incurred and
assumed with Neutrino in July 1998 and because of increased rates of interest
charged by the Company's domestic and Canadian banks.
Tax benefits in the nine months ended September 30, 1999 and 1998 were $418,624
and $247,000, respectively. The increase primarily reflects the increased pre-
tax loss from the Company's Canadian operations compared to same period in 1998.
The Company reported an income in the nine months ended September 30, 1999, of
$4,224,000, or income of $0.33 per basic share, compared to a loss of
$4,824,000, or a loss of $0.39 per basic share, in the same period in 1998.
18
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations - (continued)
Year 2000 Compliance
The Company's State of Readiness
The "Year 2000" problem concerns the ability of technology to properly recognize
and process date sensitive information beyond December 31, 1999. The Company is
in the process of evaluating its information technology (IT) and non-information
technology. Year 2000 Committees have been formed at the Company's office in
Houston and at the Company's Canadian subsidiary headquarters in Calgary. The
Committees include members of senior management and key employees from major
business units. The Committees assess Year 2000 issues; direct remedial actions
necessary to minimize systems disruptions and other risks; contact significant
third party purchasers, suppliers, vendors and operators with whom there are
material transactions and data exchange; test internal hardware and software;
and make appropriate contingency plans. Neutrino has engaged a consulting firm
that has prepared a report on the Year 2000 readiness of Neutrino, including a
detailed inventory of hardware and software priorities for action and an
implementation plan. Additionally, the Company, on behalf of itself and its
other subsidiaries, has contacted principal software vendors. Thus far, the
Company has received a letter of compliance for its accounting and payroll
systems and product conformity assurance for its reservoir engineering system.
Additionally, the land lease record systems vendor has informed the Company that
the system is Year 2000 compatible. The Company has no proprietary software.
Purchased software and hardware systems have been installed and assembled by
third party vendors that provide network and software IT services to the
Company. Vendors have been engaged to update the systems for Year 2000
compliance that is expected to be completed by mid-December 1999.
Costs to Address the Company's Year 2000 Issues
Management expects the costs of compliance, excluding internal costs, will not
exceed $40,000, which includes the evaluation, planning, replacement of the land
and lease records systems at Neutrino and the replacement of several desktop
computers and other hardware. Approximately $9,000 was expended in 1998, with
the balance to be incurred in 1999. The amount spent during the third quarter
of 1999 was $ 5,000 with additional $20,000 expected to incurred in the fourth
quarter.
Risks of the Company's Year 2000 Issues
Risks associated with the Year 2000 problem are potentially significant.
Failure to remedy a critical system problem could have a material affect on the
results of operations and financial condition. The Company has interests in
operated and non-operated properties in the United States, Canada and Ecuador.
The Company will continue to review and monitor software and equipment within
its control. The Company will continue to contact operators of its non-operated
properties and other third parties to determine their Year 2000 compliance
procedures, but cannot warrant the readiness of those systems. As the Company
is in the process of collecting this information from third parties, the Company
cannot currently state whether its operations will be materially affected by
third party compliance. However, the Company is not currently aware of any
third party that could cause a significant business disruption. While there can
be no assurance, the Company believes that it will be able to achieve Year 2000
compliance by the end of 1999 with respect to the Company's internal systems,
and does not currently anticipate any disruption in its operations or any
materially adverse effects to its financial condition, results of operations or
cash flows as the result of any failure by the Company to be in compliance.
In a recent Securities and Exchange Commission ("SEC") release regarding Year
2000 disclosures, the SEC required public companies to disclose the most likely
worst case Year 2000 scenario. Situations which must be included in any worst
case scenario include: the possibility of widespread failure of oil and gas
production and transportation systems, the inability of Company personnel to
gain access to offices and other facilities, and the inability of customers to
make payment for purchases. The effects of such occurrences would have a
cumulative material adverse impact on the Company, although not quantifiable at
this time.
The Company's Contingency Plan
Contingency plans are being developed at this time, and will be monitored and
modified after the initial evaluation by the Year 2000 Committees is complete.
The Company intends to have such plans in place by December 15, 1999.
19
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations (continued)
Definitions
As used herein:
Thousand cubic feet ("Mcf")
Million cubic feet ("MMcf")
Natural gas liquids ("NGL")
Energy Equivalents Units (1 barrel of liquids = 6 Mcf of natural gas)
Thousand cubic feet of gas equivalent ("Mcfe")
Recent Accounting Pronouncements
Statement of Financial Accounting Standards No. 133, "Accounting for Derivative
Instruments and Hedging Activities" ("SFAS 133"), was issued by the Financial
Accounting Standards Board in June 1998. SFAS 133 standardizes the accounting
for derivative instruments, including certain derivative instruments embedded in
other contracts. Under the standard, entities are required to carry all
derivative instruments in the statement of financial position at fair value.
The Company will adopt SFAS 133, as amended, beginning in the first quarter of
fiscal year 2001. The Company has not yet determined the impact that SFAS 133
will have on its financial statements.
Forward-Looking Statements
All statements other than statements of historical fact contained in this
report, including statements in Management's Discussion and Analysis of
Financial Condition and Results of Operations, are forward-looking statements.
When used herein, the words "budget", "expressions", "anticipate", "expects",
"believes", "seeks", "goals", "plans", "strategy", "intends", or "projects" and
similar expressions are intended to identify forward-looking statements. It is
important to note that the Company's actual results could differ materially from
those projected by such forward-looking statements and no assurance can be given
that the expectations will prove correct. In reliance upon the Private
Securities Litigation Reform Act of 1995, factors identified by the Company that
could cause the Company's future results to differ materially from the results
discussed in such forward-looking statements include the risks described under
"Risk Factors" in Item 1 of its Annual Report on Form 10-K, as amended, for the
year ended December 31, 1998. All forward-looking statements in this report are
expressly qualified in their entirety by the cautionary statements in this
paragraph and shall be deemed in the future to be modified in their entirety by
the Company's public pronouncements, including those contained in all future
reports and other documents filed by the Company with the Securities and
Exchange Commission.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The Company is exposed to a variety of market risks including the potential for
adverse changes in oil and gas prices, foreign currency exchange rates and
interest rates. There have been no material changes to the Company's
disclosures about market risk from those contained in its 10-K, as amended, for
the year ended December 31, 1998 except for the cancellation of all domestic
commodity financial instruments in connection with the Company's filing for
protection under Chapter 11 of the Bankruptcy Code. The cancellation is
estimated to result in a net loss of not more than $200,000 in the fourth
quarter of 1999.
20
SOUTHERN MINERAL CORPORATION AND SUBSIDIARIES
(DEBTOR-IN-POSSESSION)
Part II - Other Information
Item 1. Legal Proceedings
On September 1999, Neutrino Resources, Inc ("Neutrino") was served with a
lawsuit in the Court of Queen's Bench of Alberta, Judicial District of Calgary,
Canada. The plaintiffs are two former executive officers of Neutrino and
directors of Southern Mineral Corporation. The suit alleges wrongful
termination and breach of Employment Contracts and seeks damage of approximately
CDN $1,000,000 (US$670,000). Southern Mineral and its counsel believe that the
suit is completely without merit.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
27.1 Financial Data Schedule
(b) Report on Form 8-K:
1. Current report on Form 8-K, dated July 30, 1999, announcing the
sale of certain oil and gas properties by the Company to ANR
Production Company and the delisting of the Company's Common Stock
from the Nasdaq Mutual Market.
21
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
By /s/ Michael E. Luttrell
------------------------------------------
Date: November 22, 1999 Michael E. Luttrell
Vice President-Finance and Chief
Financial Officer
22