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SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
Form 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the fiscal year ended December 31, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from to
Commission file number 1-11516
REMINGTON OIL AND GAS CORPORATION
(Exact name of registrant as specified in its charter)
Delaware 75-2369148
(State or other jurisdiction of
incorporation or organization) (I.R.S. employer identification no.)
8201 Preston Road, Suite 600, Dallas, Texas 75225-6211
(Address of principal executive offices) (Zip code)
Registrant's telephone number, including area code: (214) 890-8000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
Title of each class Name of each exchange on which
registered
Class A (Voting) Common Stock,
$1 Par Value Pacific Stock Exchange
Class B (Non-Voting) Common Stock,
$1 Par Value Pacific Stock Exchange
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A (Voting) Common Stock, $1 Par Value
(Title of Class)
Class B (Non-Voting) Common Stock, $1 Par Value
(Title of Class)
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for 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 by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K. [ ]
The aggregate market value of voting stock held by non-affiliates of
the registrant on March 26, 1998 was $8,243,910. On that date, the number
of outstanding shares of Class A (Voting) Common Stock, $1 par value, was
3,221,510, and the number of outstanding shares of Class B (Non-Voting)
Common Stock, $1 par value, was 17,128,738.
Registrant's Registration Statement filed on Form S-2 effective
December 1, 1992 for its 8 1/4% Convertible Subordinated Notes is
incorporated by reference in Part IV of this Form 10-K.
FORM 10-K
REMINGTON OIL AND GAS CORPORATION
Table of Contents
PART I
ITEM 1. BUSINESS. 3
ITEM 2. PROPERTIES. 6
ITEM 3. LEGAL PROCEEDINGS. 11
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS. 11
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED
STOCKHOLDER MATTERS. 12
ITEM 6. SELECTED FINANCIAL DATA. 13
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. 13
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. 20
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
ACCOUNTING AND FINANCIAL DISCLOSURE. 41
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT. 41
ITEM 11. EXECUTIVE COMPENSATION.. 45
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT. 55
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS. 57
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K. 59
PART I
ITEM 1. BUSINESS.
THE COMPANY
Remington Oil and Gas Corporation, formerly known as Box Energy
Corporation, (the "Company" or "Remington") is an independent oil and gas
exploration and production company with activity and properties in the Gulf
of Mexico, Mississippi, Alabama, Texas and New Mexico. Remington is
incorporated in Delaware with its executive offices located at 8201 Preston
Road, Suite 600, Dallas, Texas 75225-6211 (telephone number 214/890-8000).
The Company employed 15 people on December 31, 1997. Originally organized
in 1981 as OKC Limited Partnership (the "Partnership"), the Company
converted to a corporation on April 15, 1992 (the "Corporate Conversion").
The Corporate Conversion involved the exchange of the Company's common
stock for the assets and liabilities of the Partnership. The Partnership
distributed the common stock to its partners and other unitholders on a
one-for-one basis and then dissolved.
The Company has two classes of stock, Class A (Voting) Common Stock
("Class A Stock") and Class B (Non-Voting) Common Stock ("Class B Stock").
Class A Stock carries voting rights while no voting rights are carried by
the Class B Stock, unless otherwise required by Delaware law. However, both
classes are entitled to equal participation in earnings, dividends and
liquidation proceeds. Unless otherwise required by the context, the term
"Company" or "Remington" includes Remington Oil and Gas Corporation, Box
Energy Corporation and the Partnership.
S-Sixteen Holding Company ("SSHC"), formerly known as Box Brothers
Holding Company ("BBHC"), owns 1.8 million shares or approximately 57% of
the Company's outstanding Class A Stock. In August 1997, entities
controlled by Mr. J. R. Simplot purchased BBHC (the "Simplot Transaction").
LONG-TERM BUSINESS STRATEGY
The Company is primarily engaged in one industry segment and one line
of business, which is finding, developing, and producing oil and natural
gas reserves. The Company's strategy for 1997 was to focus on stopping a
decline in oil and natural gas reserves. The Company accomplished this
objective by increasing oil and natural gas reserves at December 31, 1997
by approximately seven percent on a barrel of oil equivalent ("BOE") basis
over oil and natural gas reserves at December 31, 1996. The long-term
strategy for the future will now focus on increasing reserves by sustaining
an acceptable annual growth rate for reserves with finding and development
costs in line with industry peers. Capital expenditures, financed primarily
by operating cash flow, will entail a balanced exploration, development and
acquisition program.
Natural gas production from one of the Company's producing properties,
South Pass Block 89, is subject to a gas sales contract containing prices
substantially higher than current spot market prices. Part of the strategy
also includes developing the full potential of this block.
The Company employs operational, technical and support staff that
conduct independent evaluations of the acquisition, exploration and
development activities in three core areas, Gulf of Mexico,
Mississippi/Alabama and onshore Gulf Coast area. Remington owns three 3-D
workstations and utilizes current technology to generate oil and gas
prospects in its core areas and review outside generated oil and gas
prospects which are available for acquisition, farm-in or working interest
participation.
COMPETITION
The Company faces competition from large integrated oil and gas
companies, independent exploration and production companies, private
individuals and sponsored drilling programs. The Company competes for
operational, technical and support staff, options and/or leases on
prospective oil and natural gas properties and sales of products from
developed properties. Many of the Company's competitors have significantly
more financial, personnel, technological and other resources available. In
addition, some of the larger integrated companies may be better able to
respond to industry changes including price fluctuations, oil and gas
demands and governmental regulations.
MARKETS
The Company sells its oil production based upon a market price for
crude oil as posted from day to day by major purchasers. The applicable
posted price is modified for crude oil quality, refined product yields,
geographical proximity to refineries and availability of transportation
facilities. In certain areas, because of the volume produced, the Company
negotiates a premium over the posted prices. Oil prices fluctuate
significantly over time because of changes in supply and demand, changes in
refinery utilization, levels of economic activity throughout the country
and political developments throughout the world.
The Company sells its natural gas production from South Pass Block 89
under a sales contract with Texas Eastern Transmission Company ("Texas
Eastern") which expires on July 15, 2002. In November 1990, the Company
settled litigation with Texas Eastern. Part of the settlement modified the
original gas sales contract by lowering the price paid, limiting the
production sold from the northern portion of South Pass Block 89 to 15.0
Bcf and exempting production from sands beneath the U-sand horizon. In
January 1998, the Company received $12.35 and $6.84 per Mcf for natural gas
sold under the contract from wells in the southern and northern portion of
South Pass Block 89, respectively. Prices for gas sold under the gas
contract increase 10% on January 1 of each year. Texas Eastern is obligated
to take or pay for 80% of the Company's delivery capacity (i.e., the
maximum efficient flow rate based on periodic field deliverability tests)
of gas well gas. Texas Eastern is required to take and pay for 100% of the
casinghead gas. Casinghead gas is gas produced from "oil wells," as
distinguished from gas produced from "gas wells." The gas sales contract
expressly provides that Texas Eastern assumes any and all regulatory risks
associated with the performance of the contract and waives any right to
assert that it is not obligated to perform under the contract by reason of
economic, governmental or regulatory conditions or changes, including
action by a regulatory agency such as the Federal Energy Regulatory
Commission ("FERC"). PanEnergy Corporation, the parent company of Texas
Eastern, guarantees all of the obligations of Texas Eastern under the
contract.
The Company sells its non-contract natural gas production at spot
market prices or a derivation thereof. Late in 1997, the Company began to
use a third party to market a significant portion of its non-contract
natural gas production. Natural gas spot market prices fluctuate
significantly because of changes in supply and demand, seasonal or
extraordinary weather patterns and levels of economic activity throughout
the country.
MAJOR CUSTOMERS
Purchases by BayOil (USA), Inc. during 1997 and 1996 represented 31%
and 18%, respectively, of the Company's total oil and natural gas revenues.
Marathon Oil Company's purchases during 1995 accounted for 25% of the total
oil and natural gas revenues for that year. Purchases by Texas Eastern
during 1997, 1996 and 1995 represented 42%, 51%, and 70%, respectively, of
the total oil and natural gas revenues.
RISK OF COMPANY OPERATIONS
Exploration, development and production operations involve a high
degree of risk. Unprofitable efforts may result not only from dry holes but
also from marginally productive wells that do not produce oil or gas in
sufficient quantities to return a profit on the amounts expended. The
Company is dependent upon production from wells in the South Pass area and
upon the continued performance by the natural gas purchaser under the
Company's long-term gas sales contract covering South Pass Block 89. The
loss of one well or such contract could cause a material decline in
revenues, cash flow and profitability. The utilization of 3-D seismic data
or other technology to identify and define the parameters of drilling
prospects may be unprofitable in situations where the interpretation of the
data determines that a prospect should not be drilled or indicates that a
prospect should be drilled which later proves to be unproductive. The
success of the Company's operations depends, in part, upon the ability and
continued employment of its management and technical personnel.
Accordingly, there is no assurance that the Company's oil and gas drilling
or acquisition activities will be successful, that significant additional
production will be obtained, that any such production, if obtained, will be
profitable or that the Company's management and technical personnel will
make correct decisions or continue to be employed.
The Company's operations are subject to all of the operating hazards
and risks normally incident to drilling for and producing oil and gas, such
as title risks, exploration risks, geophysical interpretation risks and
risks of encountering unusual or unexpected formations and pressures,
blowouts, environmental pollution and personal injury. The Company
maintains general liability insurance and insurance against blowouts,
redrilling expenses and certain other operating hazards, including certain
pollution risks. If the Company sustains an uninsured loss or liability, or
if the amount of loss exceeds the limits of its insurance, its financial
condition may be materially adversely affected.
GOVERNMENTAL REGULATION
Oil and Gas Operations
As an oil and gas company, Remington is subject to numerous federal
and state regulations as it pursues its domestic exploration, production
and oil and natural gas sales activities. Current regulations are
constantly reviewed at the same time that new regulations are being
considered and implemented. This regulatory burden upon the oil and gas
industry increases its cost of doing business and consequently affects its
profitability. These burdens are increased because the Company holds
federal leases which, as government contracts, require the Company to
comply with numerous regulations not focused simply on the oil and gas
industry but on government contractors as a whole. These regulations
increase the Company's general and administrative costs.
State regulatory agencies further exert a regulatory burden on the
Company. State regulations relate to virtually all aspects of the oil and
gas business including drilling permits, bonds and operation reports. In
addition, many states have regulations relating to or pooling of oil and
gas properties, maximum rates of production and spacing and plugging and
abandonment of wells.
Environmental
Remington's oil and gas operations are subject to stringent federal,
state and local laws and regulations relating to improving or maintaining
the quality of the environment. The Company's costs associated with
environmental compliance, while not yet of a material amount, have
increased over time and the Company expects such costs to rise in the
future. Moreover, the cost of compliance with federal legislation and its
state counterparts, such as the Oil Pollution Act of 1990 and the Clean
Water Act together with their Amendments could have a significant impact on
the financial ability of the Company to carry out its oil and gas
operations. The legislation and accompanying regulations could impose
financial responsibility requirements, liability features and operational
requirements which the Company cannot profitably satisfy.
The laws, which require or address environmental remediation, apply
retroactively to previous waste disposal practices. In many cases, these
laws apply regardless of fault, legality of the original activities or
ownership or control of sites. Liability under these laws can result in
severe fines and cleanup costs being levied against the liable party. The
Company has never been a liable party under these laws nor has it been
named a potentially responsible party for waste disposal at any site. The
potential for sudden and unpredictable liability under these environmental
laws is an issue of increasing importance to the Company and, indeed, the
oil and gas industry as a whole.
OTHER BUSINESS CONDITIONS
Except for its oil and gas leases with third parties, the Company has
no material patents, licenses, franchises or concessions which it considers
significant to its oil and gas operations. The nature of the Company's
business is such that it does not maintain or require a "backlog" of
products, customer orders or inventory. The Company has not been a party to
any bankruptcy, reorganization, adjustment or similar proceeding.
Generally, the Company's business activities are not seasonal in nature.
However, weather conditions affect the demand for natural gas and can
hinder drilling activities. Demand for natural gas is typically higher
during winter months.
ITEM 2. PROPERTIES.
OIL AND GAS PROPERTIES
Certain information required by this Item is incorporated herein by
reference from Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations", Item 8. "Financial Statements and
Supplementary Data" and Note 12. Notes to Financial Statements. The
following table presents the Company's gross and net acreage at December
31, 1997.
Undeveloped Developed
Gross Net Gross Net
Offshore Gulf of Mexico 75,646 36,672 23,534 6,094
Onshore Gulf Coast 39,339 6,200 16,500 3,316
Mississippi/Alabama 31,096 13,644 860 607
Other 4,951 2,746 754 189
Total 151,032 59,262 41,648 10,206
The following table presents the Company's net proved oil and natural
gas reserves by area at December 31, 1997 as evaluated by Netherland,
Sewell and Associates, Inc. and Miller and Lents, Ltd.
Oil (MBbls) Gas (MMcf)
Gross Net Gross Net
Offshore Gulf of Mexico 10,043 2,211 141,457 30,234
Onshore Gulf Coast 4,971 944 41,173 6,273
Mississippi Alabama 2,136 1,271 0 0
Other 110 25 164 36
Total 17,260 4,451 182,794 36,543
OFFSHORE GULF OF MEXICO
Oil and natural gas reserves totaling 2.2 million barrels of oil
(MMBbls) and 30.2 billion cubic feet of gas (Bcf) in the Gulf of Mexico,
represent approximately 50% and 83% of Remington's total net oil and
natural gas reserves, respectively. The Company has and continues to
diversify its offshore portfolio away from the South Pass area through new
lease purchases, evaluation of submittals of others and evaluation of
acquisition opportunities. The Company owns three 3-D workstations for
evaluating offshore prospects and has purchased an extensive database of
both 2-D and 3-D seismic for reviewing exploration and development
opportunities. The Company owns several undeveloped offshore blocks that,
depending on rig availability and partner approvals, will be drilled in
1998 or beyond. The following table presents the proved oil and natural gas
reserves for major properties in the Gulf of Mexico at December 31, 1997.
Oil (MBbls) Gas (MMcf)
Gross Net Gross Net
South Pass 89 4,516 943 48,660 10,140
South Pass 87 2,920 709 42,314 10,993
South Pass 86 953 199 16,804 3,501
Eugene Island 135 942 118 27,165 3,396
West Cameron 170 712 242 6,400 2,172
Main Pass 262 0 0 114 32
Total 10,043 2,211 141,457 30,234
South Pass Block 89
The Company acquired South Pass Block 89 through a farmout from
Aminoil USA, now Phillips Petroleum Company ("Phillips") in 1977. The
Company has a 25% working interest burdened with a 33% Net Profits Interest
("NPI") to Phillips pursuant to the original farmout. Remington and
Phillips are currently involved in litigation concerning the calculation of
the NPI. See Item 3. "Legal Proceedings." Marathon Oil Company
("Marathon") is operator of the block. The Company's natural gas production
is subject to a gas sales contract through July 15, 2002 with Texas Eastern
Transmission Company. See Item 1. "Business-Markets."
Platform B was installed in South Pass Block 89 in 1991 and has
produced 48.7 MMBO (10.2 MMBO net) and 174.6 BCFG (36.4 BCFG net). The U-
sand is the primary reservoir on the block with the beds orientated almost
vertically adjacent to a sub-surface salt dome. At December 31, 1997, one
well was producing from this reservoir and 11 wells were producing from
shallower reservoirs. The Company's reserve report requires an additional
well to produce all the reserves defined.
The Company is producing two wells from Platform C, into the northern
portion of South Pass Block 89. The platform is physically located on South
Pass Block 86, immediately to the north of South Pass Block 89. The two
wells in South Pass Block 89 are completed in the U-sand reservoir, but in
an isolated fault block separated from the U-sand production from Platform
B. The U-sand reservoir in this location is not as structurally complex as
at Platform B. Cumulative production from the C Platform wells completed
in South Pass Block 89 as of December 31, 1997 was 5.2 MMBbls (1.08 MMBbls
net) and 28.5 Bcf (5.9 Bcf net). The platform was installed in 1992 and
Marathon is the operator.
South Pass Block 87, West Delta Block 128
Platform D, located on South Pass Block 87 to the northwest of South
Pass Block 89 was installed in 1995 with Marathon as operator. There are
five wells producing from South Pass Block 87 and West Delta Block 128. The
Company has a 33% working interest in the four wells in South Pass Block 87
and a 20% working interest in one well in West Delta Block 128. Cumulative
production from Platform D, all of which has been from the U-sand through
December 1997 was 5.0 MMBbls (1.0 MMBbls net) and 24.9 Bcf (5.2 Bcf net).
Additional drilling is anticipated on this block in 1998.
South Pass Block 86
The Company completed five wells from Platform C in the southern
portion of South Pass Block 86. The Company has a 25% working interest in
the block and Marathon is the operator. The primary reservoir is the U-
sand. Cumulative production from 1992 to December 31, 1997 was 3.6 MMBbls
(748 MBbls net) and 16.6 Bcf (3.5 Bcf net).
Eugene Island Block 135
The Company acquired a 15% working interest in the block in 1995,
drilled, and successfully tested the #1 well in 1996. In 1997, a platform
was installed, the A-1 well completed, the A-2 well drilled and completed
and the A-3 well partially drilled. Enron Oil and Gas Company is operator
of the block. The A-3 well will be completed in 1998 and additional
drilling may be proposed. Production from Eugene Island Block 135 commenced
in the last quarter of 1997 with cumulative production of 83 MBO (10 MBO
net) and 600 MMCFG (76MMCFG net). The Company acquired a 20% working
interest in Eugene Island Blocks 153 and 154 immediately to the south of
Eugene Island Block 135 in 1997.
West Cameron Block 170
The Company acquired a 42% working interest in this block in 1997. CXY
Energy Offshore, Inc. ("CXY") is the operator and the block has a
production platform in place. Drilling commenced on the #2 well in 1997 and
the well logged sufficient pay to book proved oil and natural gas reserves
in the shallow portion of the hole before year-end. Deeper pays have been
drilled in the well and it is anticipated to be completed in 1998. The
deeper pays are not included in the December 31, 1997 proved oil and
natural gas reserves. The Company anticipates additional drilling on this
block before the end of 1998.
Main Pass Block 262
The Company completed three wells from the platform on this block in
1996 and 1997. The Company has a 33% working interest in the block and CXY
is the operator. These wells did not perform as anticipated and the
undepreciated cost of the wells was impaired in the fourth quarter of 1997.
The Company anticipates drilling a deeper exploratory test well from the
platform in 1998.
MISSISSIPPI/ALABAMA
In the onshore Mississippi/Alabama area, the Company's proved oil
reserves are 1.3 MMBbls representing approximately 29% of Remington's net
proved oil reserves at December 31, 1997. Currently, the Company has an
interest in two developed fields and one developing field. Using outside
consultants, the Company has developed several prospects for drilling in
1998 and beyond. This program is anticipated to continue using a database
of 2-D data coupled with specific 3-D data on field discoveries. The
following table presents the proved oil reserves attributable to
Mississippi/Alabama at December 31, 1997.
Oil (MBbls)
Gross Net
East Melvin 103 43
Indian Wells 355 261
Parker Creek 1,678 967
Total 2,136 1,271
East Melvin Field
The East Melvin field, located in Choctaw County, Alabama, is a two-
well field that produces from the Smackover formation. The Company has a
52% working interest in the field. The second well in the field was drilled
in 1997 and is anticipated to be completed in 1998. The Company does not
expect any further development of this field.
Indian Wells Field
The Indian Wells field is located in Jasper County, Mississippi and
produces from the Rodessa formation. The Company has a 92% working interest
in the field. Two wells are completed in the field and no additional
development is anticipated.
Parker Creek Field (formerly Moselle Dome Prospect)
The Parker Creek field is on the flank of a salt dome located in Jones
County, Mississippi. The first well drilled in 1996 and completed in 1997
encountered pays from the shallow Eutaw and Tuscaloosa interval above 8000
feet and the Hosston interval below 14,000 feet. The Company completed this
first deep well in the Hosston interval in the first quarter of 1997. The
Company completed a second well, the first shallow well completion, in the
Tuscaloosa interval during the third quarter of 1997. The shallow Eutaw and
Tuscaloosa are heavy oils. In the fourth quarter of 1997, the Company began
drilling both a second deep well and a second shallow well. Both wells will
be completed and producing in 1998. A newly acquired 3-D seismic survey is
scheduled to be completed in the summer of 1998. Additional drilling is
anticipated in the field after interpretation of the 3-D seismic survey is
completed. During the partial year of 1997, the field produced 162 MBbls
(98 MBbls net).
ONSHORE GULF COAST
The Company's net proved oil and natural gas reserves in the onshore
Gulf Coast area are 944 MBbls and 6.2 Bcf, representing approximately 21%
and 17% of the net proved oil and natural gas respectively. The Company
initiated an active acquisition program in this area in 1997 along with
participating in an active exploration program conducted by Suemaur
Exploration, Inc. This exploration program has resulted in 3-D surveys
defining several prospects that are anticipated to be drilled in 1998 and
beyond. The acquisition program resulted in one acquisition of an interest
in six separate fields in 1997. The Company anticipates using the knowledge
gained from participating in the various 3-D surveys not only to develop
new prospects but to better define the upside opportunities within the
fields acquired. The following table presents the proved oil and natural
gas reserves from the major properties in the Onshore Gulf Coast area at
December 31, 1997.
Oil (MBbls) Gas (MMcf)
Gross Net Gross Net
W. Buna 4,324 874 19,919 3,628
Other 647 70 21,254 2,645
Total 4,971 944 41,173 6,273
West Buna Field
This field, located in Jasper and Hardin counties, Texas is the
largest field of the six-well group of fields acquired in 1997. The field
currently has 23 wells producing from the Wilcox formation. Additional
drilling and workover operations are anticipated in 1998. The Company has
approximately a 30% working interest in the field.
PRODUCING WELLS
The following table presents a summary of the gross and net producing
wells by core area for the years ended December 31, 1997, 1996 and 1995.
Productive wells are producing wells and wells capable of production but do
not include wells awaiting completion or the installation of a platform.
Gross wells refer to the total producing wells in which the Company owns an
interest. Net wells represent the gross wells multiplied by the Company's
working interest percentage.
1997 1996 1995
Gross Net Gross Net Gross Net
Oil Wells
Gulf of Mexico 17 4.37 18 4.61 25 6.28
Mississippi and Alabama 6 4.38 5 3.53 2 1.00
Onshore Gulf Coast 3 .28 2 0.21 - -
Other 3 .81 3 0.81 1 0.31
Total 29 9.84 28 9.16 28 7.59
Gas Wells
Gulf of Mexico 10 2.46 9 2.57 4 1.16
Mississippi and Alabama - - - - - -
Onshore Gulf Coast 78 18.24 3 0.53 - -
Other - - - - - -
Total 88 20.70 12 3.10 4 1.16
DRILLING ACTIVITIES
The following is a summary of the Company's exploration and
development drilling activities for the past three years by core area:
1997 1996 1995
Gross Net Gross Net Gross Net
Prod. Dry Prod. Dry Prod. Dry Prod. Dry Prod .Dry Prod. Dry
Exploratory
Gulf of
Mexico 2 2 .30 .42 4 4 1.15 1.15 1 1 .25 .33
Mississippi
and Alabama 1 2 .80 1.84 2 8 1.65 5.81 1 1 .52 .25
Onshore Gulf
Coast - 2 - .32 4 5 .60 1.87 1 4 .47 1.56
Other - 1 - .40 2 4 .50 1.72 1 1 .30 .35
Total 3 7 1.10 2.98 12 21 3.90 10.55 4 7 1.54 2.49
Development
Gulf of
Mexico 1 - .25 - - - - - 1 - .33 -
Mississippi
and Alabama 1 3 .76 2.42 1 2 .94 1.87 2 - .89 -
Onshore Gulf
Coast 3 - .82 - - - - - - - - -
Other - 1 - .35 - - - - - - - -
Total 5 4 1.83 2.77 1 2 .94 1.87 3 - 1.22 -
At December 31, 1997, the Company had an interest in six (1.77 net to
Remington) wells in progress.
OPERATING AGREEMENTS
The Company typically owns its interests in oil and gas properties
subject to joint operating agreements naming another company as operator of
the property. Many of the agreements grant the operator a lien on the
Company's interests to secure payment of the Company's share of expenses.
Being a non-operator is advantageous to the Company by not requiring the
Company to employ an operational staff, but is disadvantageous in that the
Company foregoes certain control over the property as a non-operator. The
Company may become an operator of certain properties in 1998.
TITLE TO PROPERTIES
The Company's oil and gas properties are subject to customary royalty
interests, liens incident to operating agreements and liens for other
burdens, including other mineral encumbrances and restrictions. Such
burdens, encumbrances or other restrictions do not materially interfere
with the normal operations of such properties. After a thorough examination
of title to its properties, the Company believes that it is vested with
satisfactory title to such properties. The Company does a preliminary
investigation of titles on all undeveloped properties and obtains a full
title opinion before commencement of drilling operations.
NON-OIL AND GAS PROPERTIES
The Company owns approximately 7,800 surface acres in several non-
contiguous tracts of land in Southern Louisiana and Southern Mississippi.
Outside parties lease several of the tracts for farming, grazing, timber,
sand and gravel, camping, hunting and other purposes. Gross operating
revenues from these real estate properties in 1997 totaled $224,000. The
Company intends to divest these properties, although the timing and the
amount of sales proceeds from the disposition of these properties is
unknown.
OFFICE LEASE
The Company leases office space in Dallas, Texas covering
approximately 33,000 square feet. In January 1998, the Company amended the
current lease effective April 1998. The amended lease extends the term an
additional 10 years and reduces the leased office space to approximately
17,000 square feet.
ITEM 3. LEGAL PROCEEDINGS.
The information required by this Item is incorporated herein by
reference to Item 8. "Financial Statements and Supplementary Data." - Note
11. Notes to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 4, 1997, the Company held its annual stockholders' meeting
to elect members to the Company's Board of Directors, adopt the 1997 Stock
Option Plan, adopt the Non-Employee Director Stock Purchase Plan and change
the name of the Company to "Remington Oil and Gas Corporation." Set forth
below are the results of the stockholder voting:
Director For Withheld
Don D. Box 2,342,240 39,135
John E. Goble, Jr. 2,373,625 7,750
William E. Greenwood 2,373,625 7,750
David H. Hawk 2,373,625 7,750
James Arthur Lyle 2,372,475 8,900
David E. Preng 2,372,475 8,900
Thomas W. Rollins 2,373,625 7,750
Alan C. Shapiro 2,373,210 8,165
James A. Watt 2,373,625 7,750
For Against Abstain
Adoption of 1997 Stock Option Plan 2,001,723 57,300 4,480
Adoption of Non-Employee Director
Stock Purchase Plan 2,003,343 51,115 9,045
Name change to Remington Oil and
Gas Corporation 2,361,970 16,785 2,620
The members of the Company's Board of Directors do not serve staggered
terms of office. All directors elected at the meeting were already members
of the Board at the time of election. No Director serving at the time of
the election failed to retain his seat on the Board, other than Bernay C.
Box, who did not stand for reelection.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
The Company has two classes of stock: Class A Stock and Class B Stock.
Both classes trade on the NASDAQ National Market System, under the trading
symbols ROILA and ROILB, respectively. Previously, as Box Energy
Corporation the shares traded under the symbols BOXXA and BOXXB,
respectively. The stock also trades on the Pacific Stock Exchange under the
symbols REMA.P and REMB.P, respectively, and previously traded under the
symbols BXCA.P and BXCB.P, respectively, as Box Energy Corporation before
the change of name. The following table sets forth, for the periods
indicated, the high and low last sales price per share for the Class A
Stock and the Class B Stock as reported by NASDAQ.
Class A Stock Class B Stock
High Low High Low
1998
First Quarter (through
March 26, 1998) 6.250 5.125 6.375 5.000
1997
Fourth Quarter 8.875 5.125 8.125 5.063
Third Quarter 9.250 6.500 8.750 6.250
Second Quarter 8.750 6.375 7.500 5.813
First Quarter 10.500 7.000 9.313 6.625
1996
Fourth Quarter 11.000 8.000 10.375 8.000
Third Quarter 10.750 8.000 9.750 8.000
Second Quarter 11.625 9.000 11.125 8.750
First Quarter 13.000 8.625 11.375 7.750
On March 26, 1998, the last reported sales prices of Class A Stock and
Class B Stock were $6.00 and $6.125 per share, respectively. On such date,
there were 427 shareholders of record of Class A Stock and 1,074
shareholders of record of Class B Stock. The Company has not declared or
paid any cash dividends since its commencement of operations in 1992. There
are no contractual restrictions on the amount of dividends that may be
paid. However, if dividends in excess of 2% of the then market price per
share of Class B Stock are paid in a calendar quarter, the conversion price
of the 8 1/4% Convertible Subordinated Notes will be adjusted
proportionately. The determination of future cash dividends, if any, will
depend upon, among other things, the Company's financial condition, cash
flow from operating activities, the level of its capital and exploration
expenditure needs and its future business prospects.
ITEM 6. SELECTED FINANCIAL DATA.
1997 1996 1995 1994 1993
(In thousands, except per share data, unless otherwise indicated)
Financial
Total revenue $ 61,053 $ 70,210 $ 59,493 $ 59,244 $ 37,102
Net income (loss) $ (26,790) $ (7,662) $ 5,392 $ 9,157 $ 2,161
Basic and diluted
income (loss) per
share $ (1.31) $ (0.37) $ 0.26 $ 0.44 $ 0.10
Total assets $ 98,515 $ 136,599 $ 145,491 $ 135,041 $ 128,882
8 1/4% convertible
subordinated notes $ 38,371 $ 55,077 $ 55,077 $ 55,077 $ 55,077
Other indebtedness $ 6,000 $ 0 0 $ 0 $ 1,970
Stockholders' equity $ 44,287 $ 74,356 $ 82,047 $ 75,513 $ 67,655
Shares outstanding
Class A Common Stock 3,219 3,250 3,250 3,250 3,245
Class B Common Stock 17,087 17,553 17,553 17,553 17,558
Net cash flow from
operations $ 27,546 $ 28,955 $ 24,047 $ 27,644 $ 11,006
Net cash flow from
investments (38,442) $ (39,538) $ (19,899) $ (13,769) $ (10,082)
Net cash flow from
financing $ 12,451 $ (8,064) $ 0 $ (1,970) $ (514)
Operational
Average sales prices
Oil (per Bbl) $ 17.79 $ 20.21 $ 16.64 $ 15.51 $ 17.02
Natural Gas (per Mcf) $ 5.06 $ 5.69 $ 6.89 $ 7.46 $ 5.07
Future net revenue
from proved reserves
(before tax)
Undiscounted $ 141,672 $ 227,817 $ 223,896 $ 206,701 $ 222,300
Discounted $ 108,698 $ 189,155 $ 173,388 $ 157,721 $ 163,793
Future net revenue
from proved reserves
(after tax)
Undiscounted $ 124,828 $ 177,178 $ 173,869 $ 163,633 $ 167,626
Discounted $ 93,838 $ 146,013 $ 133,982 $ 124,490 $ 124,002
Proved reserves
Oil (MBbls) 4,451 3,299 2,938 3,298 3,389
Natural gas (Bcf) 36.5 39.3 51.4 50.3 53.2
Average production
(net sales volume)
Oil (BOPD) 3,280 2,555 2,300 1,796 2,204
Natural gas (MMcfgd) 19.5 22.5 16.1 17.2 10.7
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion will assist in the understanding of the
Company's financial position and results of operations. The information
below should be read in conjunction with the financial statements and the
related notes to financial statements. This discussion contains historical
information and certain forward-looking statements that involve risks and
uncertainties about the business, long-term strategy, financial condition
and future of the Company. Statements concerning results of future
exploration, exploitation, development and acquisition expenditures and
expense and reserve levels are forward-looking statements. These statements
are based on assumptions concerning commodity prices, drilling results and
production and administrative and interest costs that management believes
are reasonable based on currently available information of known facts and
trends. However, management's assumptions and the Company's future
performance are both subject to a wide range of business risks and there is
no assurance that these goals and projections can or will be met. Factors
that may affect future results are included in the discussion below and in
Part I, Item 1. "Business" and Item 2. "Properties."
Remington Oil and Gas Corporation (the "Company") is an independent
oil and gas exploration and production company with activity and properties
located in offshore Gulf of Mexico, Mississippi/Alabama and onshore Gulf
Coast. The Company acquired all of the assets and liabilities of OKC
Limited Partnership (the "Partnership") on April 15, 1992, in exchange for
the common stock of the Company (the "Corporate Conversion"). The
Partnership then distributed, as part of its liquidation and dissolution,
3,245,110 shares of Class A Common (Voting) Stock (the "Class A Stock") and
17,558,110 shares of Class B (Non-Voting) Common Stock (the "Class B
Stock") to the former general partners, limited partners and unitholders of
the Predecessor Partnership. After the Corporate Conversion, Cloyce K. Box,
one of the former general partners, owned approximately 57% of the
outstanding Class A Stock.
At the time of the Corporate Conversion, Mr. J.R. Simplot, Mr. James
Arthur Lyle and others had pending litigation against the Partnership
concerning voting issues and the purchase of an oil pipeline by a privately
controlled affiliate of Cloyce K. Box (the "Griffin Case"). See Notes to
the Financial Statements - Note 11. Contingencies - Griffin Case. After
Cloyce Box's death in October 1993, the Class A Stock was foreclosed upon
by Box Brothers Holding Company ("BBHC"). At the time of the foreclosure,
BBHC was primarily owned and controlled by the four sons of Cloyce K. Box.
A number of disputes and lawsuits concerning the control of BBHC arose
among the four brothers.
In March 1997, the Company appointed James A. Watt as President and
Chief Operating Officer. Subsequently, in February 1998, the Board of
Directors named Mr. Watt Chief Executive Officer. Mr. Watt, who has
significant oil and gas experience, is the first executive from outside the
controlling interest of the Company to head the Company. In August 1997, an
entity controlled by Mr. Simplot purchased the controlling interest in BBHC
(the "Simplot Transaction"). Shortly thereafter, BBHC changed its name to
S-Sixteen Holding Company ("SSHC"). In connection with this purchase, Mr.
Simplot and the four Box brothers agreed to settle all lawsuits among them
and the Company.
The primary objective set by the new management for 1997 was to stop
the decline in oil and natural gas reserves and bring average finding costs
down to industry averages. The Company accomplished the first objective by
increasing oil and natural gas reserves by approximately 7% at December 31,
1997 compared to December 31, 1996. Management also made great progress in
the second objective by decreasing average finding costs from $65.02 per
BOE in 1996 to $13.71 per BOE in 1997. The long-term strategy now focuses
on increasing reserves by sustaining an acceptable annual growth rate for
reserves with finding and development costs that are in line with industry
peers. Capital expenditures, financed primarily by operating cash flow,
will entail a balanced exploration, development and acquisition program.
LIQUIDITY AND CAPITAL RESOURCES
The Company's balance sheet liquidity decreased significantly during
1997. At December 31, 1996, current assets exceeded current liabilities by
$39.0 million, and the current ratio was approximately 6.4 to 1. At
December 31, 1997, current assets exceeded current liabilities by $3.0
million and the current ratio was approximately 1.2 to 1. The decline in
liquidity resulted primarily from the sale of marketable securities in
October 1997, and the use of the proceeds to repurchase $16.7 million of
the 8 1/4 % Convertible Subordinated Notes (the "Notes"). The Simplot
Transaction caused a "change in control" as defined in the Indenture for
the Notes (the "Indenture") that required the Company to make an offer to
purchase the Notes at 100% of the face amount. In addition, during 1997,
the Company used some of the liquid assets and borrowed $6.0 million to
purchase $3.5 million of treasury stock and fund the excess of capital
expenditures over net cash flow from operations.
Cash flow from operations for the year ended December 31, 1997 was
$27.5 million compared to $29.0 million for the prior year. In addition to
lower natural gas revenues of $10.7 million, cash payments totaling $7.1
million for reorganization costs had a detrimental effect on the cash flow
from operations during the year. The lower natural gas revenues resulted
primarily from a decrease in natural gas production from South Pass Block
89. Natural gas production from this offshore Gulf of Mexico Block is sold
under a gas sales contract that includes prices substantially above spot
market prices. Therefore, a reduction in production from this block has a
significant effect on natural gas revenues, total revenues, net income and
cash flow from operations. The concern over the concentration of revenues
has prompted management to diversify the revenue stream through
acquisitions and exploration drilling in other areas. Natural gas revenues
from South Pass Block 89 accounted for 40%, 51%, and 79% of total revenues
for 1997, 1996, and 1995, respectively. Reorganization costs paid during
1997 included employee severance expense, litigation settlement amounts and
other costs related to the Simplot Transaction. See Notes to Financial
Statements - Note 5. Reorganization Costs.
The Company will continue to make significant capital expenditures
over the next several years as part of the long-term growth strategy and
the primary source of funding the capital expenditures will be net cash
flow from operations. As stated above, natural gas sales from South Pass
Block 89 provided approximately 40% of the Company's total revenue in 1997.
Further, a significant portion of the natural gas revenues from South Pass
Block 89 is dependent on Well B-20S. Early in 1997 and throughout the year,
the Company identified and followed a trend of increasing oil production
and decreasing natural gas production in the Well B-20S, the only well
currently producing from the U-sand reservoir. The trend may indicate,
among other things, that natural gas production will continue to decline as
the oil column moves into the perforations of this well. The Company's net
working interest deliverability ("Seller's Delivery Capacity") from
Platform B has declined from 7.2 MMcfgd in January 1997 to 2.9 MMcfgd in
December 1997. Current estimates have Well B-20S producing at decreasing
rates until March 1999. A large quantity of proved undeveloped natural gas
reserves still remains in the U-1/1 reservoir above the existing
perforations in Well B-20S. Management is currently evaluating several
possible courses of action concerning the maximization of profit from South
Pass Block 89 and specifically the U-1/1 reservoir. Such plans include, but
are not limited to, a new well or sidetrack of an existing wellbore in the
U-1/1 reservoir. Recent discoveries, development wells and acquisitions
lessen the Company's dependence on natural gas revenue from this block, but
may not be adequate to replace the immediate decline in gas revenue from
unforeseen mechanical or other problems with Well B-20S.
The recent decline in oil prices has a negative impact on total
revenues and therefore net income and cash flow from operations. The
Company's average oil price for 1997 was $17.79 per barrel but has averaged
under $14.00 per barrel for the first two months of 1998. While the
Company's gas sales contract insulates the Company to some degree from the
lower oil prices, continued low prices for oil production will reduce the
projected cash flow from operations and may cause the Company to defer or
eliminate certain capital expenditures. The following table sets forth the
Company's actual capital expenditures, including exploration expenses, for
the last three years and the current 1998 capital and exploration budget.
1998 1997 1996 1995
Budget Actual Actual Actual
(In thousands)
Acquisition $ 6,000 $ 12,545 $ - $ -
Land and leasehold 4,000 5,793 5,548 3,215
Development 13,300 9,975 9,359 11,597
Exploration 15,900 13,767 27,811 8,902
Total $ 39,200 $ 42,080 $ 42,718 $ 23,714
Net proved oil and natural gas
reserve additions (in barrels
of oil equivalents) 3,070 657 1,630
Finding costs (per barrel of
oil equivalent) $ 13.71 $ 65.02 $ 14.55
Capital and exploration expenditures for oil and natural gas
properties during 1997 totaled $42.1 million compared to $42.7 million in
1996. The primary capital expenditures for 1997 included drilling,
completion and platform construction costs for Eugene Island Block 135,
drilling costs for a well on West Cameron 170, drilling and completion
costs on the Parker Creek field and a purchase of several South Texas
properties. Expected development costs for 1998 include one or two new
wells in South Pass Block 87, a new well or a side-track well in South Pass
Block 89, additional development of West Cameron Block 170 and Eugene
Island Block 135 and four to six onshore wells including three to four
wells in the Parker Creek field. The Company budgeted $10.0 million for
acquisition, land and leasehold costs. The Company will use these budgeted
amounts to purchase oil and natural gas reserves at attractive prices and
to maintain and develop an inventory of exploration development projects.
In March 1998, the Company completed an acquisition for $1.6 million and
submitted the high bid on one offshore block in the MMS lease sales. The
Company does not yet know whether the bid will be accepted. Budgeted
exploration costs include three planned wells in the Gulf of Mexico, at
least two wells in Mississippi, and several wells in the onshore gulf coast
region. In addition, the Company plans for approximately $4.0 million of
exploration expenses, which is primarily to purchase 2-D and 3-D seismic
data. The capital and exploration budget for 1998 is flexible and the
Company can delay many of the planned expenditures if better opportunities
arise or if capital is not available from operations.
Additional sources of capital include the repayment of the note
receivable from SSHC and additional cash available on the Company's line of
credit. The note receivable from SSHC is due May 29, 1998. The balance at
December 31, 1997 was $6.2 million, and payments from SSHC have been
greater than the required $100,000 per month. During the second quarter of
1994, the Company established a $25.0 million line of credit with a bank.
The line of credit, with a current borrowing base of $10.0 million, expires
in June 1998. The Company anticipates renewing this line again in 1998 or
obtaining a similar line of credit when the line of credit comes due. The
line of credit is collateralized by the Company's South Pass oil and
natural gas properties. The Company has borrowed $6.0 million and has
issued letters of credit totaling $250,000 against this line.
The Company and Phillips Petroleum Company ("Phillips") are engaged in
a dispute concerning the Net Profits Interest in South Pass Block 89. A
non-jury trial was held in April 1997. Phillips alleges damages in excess
of $21.5 million on one claim and several million dollars on two additional
claims. Phillips further contended that it was entitled to double damages
and cancellation of the farmout agreement that created the Net Profits
Interest. Oral arguments were presented to the court September 3, 1997.
Certain outcomes of this litigation could have a material adverse impact on
the liquidity of the Company.
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, entitled "Earnings per Share" in 1997. SFAS simplifies
the standards for computing earnings per share previously found in
Accounting Principles Board ("APB") Opinion No. 15. Basic income per share
and diluted income per share have replaced primary income per share and
fully diluted income per share, respectively. Basic income per share
excludes dilution and is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted income
per share reflects the potential dilution from the exercise or conversion
of securities or other contracts to issue common stock and other events
that result in the issuance of common stock that shares in the net income
of the Company. Diluted income per share is computed similarly to fully
diluted income per share pursuant to APB Opinion 15. The Company's
presentation of basic income per share and diluted income per share are the
same as the previously presented primary income per share and fully diluted
income per share. Basic income per share and diluted income per share are
the same because the effects of the potential dilutive securities are anti
dilutive. See Notes to Financial Statements - Note 1. Significant
Accounting Policies.
The Company has assessed and continues to assess the impact of the
"year 2000" issue on its reporting systems and operations. The "year 2000"
issue exists because many computer systems and applications currently use
two-digit date fields to designate a year. As the century date occurs, date
sensitive systems will recognize the year 2000 as 1900 or not at all. This
inability to recognize or properly treat the year 2000 may cause systems to
process critical financial and operational information incorrectly. The
Company's system is a PC based network and all application software is
purchased from outside third parties that have a significant presence in
the oil and natural gas industry or in general application software. The
Company projects all computer systems and software will be year 2000
compliant during 1998. Management does not estimate future expenditures
related to the year 2000 exposure to be significant.
RESULTS OF OPERATIONS
The following table discloses the net oil and natural gas sales
volumes, average sales prices and average lifting costs for each of the
three years ended December 31, 1997, 1996, and 1995. The table is an
integral part of the following discussion of results of operations for the
periods 1997 compared to 1996 and 1996 compared to 1995.
% Increase % Increase
1997 (Decrease) 1996 (Decrease) 1995
Net sales volumes:
Oil (MBbls) 1,197 28 % 933 11 % 839
Natural gas (MMcf) 7,116 (13)% 8,219 40 % 5,867
Average sales price:
Oil (per Bbl) $ 17.79 (12)% $ 20.21 21 % $ 16.64
Natural gas (per Mcf) $ 5.06 (11)% $ 5.69 (17)% $ 6.89
Average lifting costs
(per BOE) $ 1.68 1 % $ 1.66 (4)% $ 1.73
1997 Compared to 1996
The Company incurred a net loss for 1997 of $26.8 million or $1.31
per share compared to the prior year loss of $7.6 million or $0.37 per
share. The net loss for 1997 included non-cash charges totaling $18.9
million or $0.94 per share. The charges included deferred income tax
expense of $14.6 million or $0.73 per share, impairment charges from
marginal oil and gas properties of $3.9 million or $0.19 per share, and
accelerated amortization of debt-issue costs of $416,000 or $0.02 per
share, caused by the early retirement of some of the Company's Notes. In
addition, during 1997, the Company incurred reorganization costs totaling
$7.1 million, or $0.34 per share, and legal costs and expenses totaling
$2.5 million, or $0.12 per share.
Total revenues were $ 61.1 million for the year ended December 31,
1997 compared to $70.2 million for the year ended December 31, 1996.
Natural gas sales revenue decreased $10.7 million, or 23%, for 1997
compared to 1996. Lower natural gas production caused the decrease but was
partially offset by higher average prices of 6% for spot gas sales and 10%
for natural gas sales under the South Pass gas sales contract. The increase
in average prices added $1.3 million to natural gas sales revenue. Natural
gas production from South Pass Block 89 Platform B decreased 1.4 Bcf during
1997 as production from Well B-20 experienced anticipated declines. The
decrease in natural gas production from Platform B caused natural gas
revenues to decrease by $14.2 million. Natural gas production from the
Company's South Texas properties increased 379,000 Mcf during 1997 but was
more than offset by lower net natural gas production from other offshore
properties.
An increase in oil production partially offset by lower oil prices
resulted in a net increase in oil sales revenue of $2.4 million, or 13%,
for the year ended December 31, 1997 as compared to the prior year. Oil
production increased by 264,000 barrels which increased oil sales revenue
by $4.8 million. However, a decrease of $2.44 in average oil prices caused
oil sales revenue to be $2.4 million lower. A net increase in oil
production came from all areas of operation primarily the Parker Creek
field in Mississippi and South Pass 86 and 87 in the Gulf of Mexico.
Interest income was lower in 1997 because of the sale of the
marketable securities in October. Most of the proceeds of the sale were
used to purchase $16.7 million of the Company's outstanding Notes. Other
income was lower because of lower oil trading income and losses on the sale
of assets, primarily artwork.
Operating and transportation expenses increased as a result of new
operating properties and an increase in oil production from the South Pass
area. Net Profits expense decreased as a result of the lower natural gas
sales revenues from South Pass Block 89. In addition, Exploration expenses
decreased significantly as a result of lower dry hole costs. In 1996 the
Company drilled three high cost dry exploration wells totaling $10.6
million in the Gulf of Mexico.
Depreciation, depletion and amortization expenses increased because of
new properties becoming productive. Marginal production as well as lower
oil prices caused the Company to record impairment charges against some of
the oil and natural gas properties. A large decrease in production during
the last quarter of 1997 from Main Pass Block 262, located in the Gulf of
Mexico, caused the Company to record a $1.9 million impairment charge to
write down 100% of the remaining well costs. The Company will use the
platform on Main Pass Block 262 to drill a new unrelated prospect in 1998.
Another $1.2 million charge was recorded on the Hub property located in
Mississippi. This property was drilled in 1996 but never performed up to
expectations. The remaining impairment charge related primarily to lower
oil prices which reduced the amount of commercially recoverable oil
reserves.
General and administrative expenses decreased by 18% during 1997 when
compared to 1996. Salaries and other employment related expenses during
1997 decreased $706,000 as the number of employees decreased from 41 at
December 31, 1996 to 15 at December 31, 1997. Other areas of significant
savings were professional fees and investor relations' expenses. Legal
fees decreased by $1.1 million as the Company settled the Griffin
litigation including all of the surrounding litigation, ended the family
litigation, and concluded the trial proceedings in the Phillips
litigation.
Reorganization expense for the year includes payments to employees
under the employee severance agreements and legal fees or other charges
that relate to or were paid because of the Simplot Transaction.
Reorganization costs accrued or paid are as follows: employee severance
payments $3.6 million, Thomas D. Box severance, legal claims and fees $1.2
million, Mr. Simplot and Mr. Lyle $2.0 million, and other associated
expenses $300,000. See Notes to the Financial Statements - Note 5.
Reorganization Costs.
Interest and financing expenses increased during 1997 when compared to
1996 as a result of interest costs from a $6.0 million balance on the line
of credit and a non-cash charge for deferred offering costs in October
1997, partially offset by lower interest costs from a reduced outstanding
balance on the Notes. The Company used the line of credit to provide a
portion of the funds to purchase some onshore Gulf Coast properties. In
addition, under the terms of the Indenture, the Company purchased $16.7
million of the Notes. The Simplot transaction triggered the offer to
purchase requirement in the Indenture.
Although the Company expects to realize the benefits of the deferred
income tax asset, it adopted a more conservative view of the accounting and
reporting policies and increased the valuation allowance in 1997 to reserve
the full amount of the deferred income tax asset. The Company believes that
this approach is consistent with other small-cap exploration and production
companies particularly those companies that are attempting to grow their
oil and natural gas reserves. The Company is required to analyze its
ability to realize the deferred income tax asset based on proved reserves
and a "more likely than not" scenario for future projections. The analysis
excludes probable and possible oil and natural gas reserves and does not
include results from future drilling activities. The Company concluded that
based on the future growth plans of the Company, prior actual results, and
the "more likely than not" criteria, it was more desirable to reserve the
entire deferred income tax asset. The Company will realize a benefit from
these tax attributes if income is generated in the future.
1996 Compared to 1995
The Company incurred a net loss for 1996 totaling $7.7 million, or
$0.37 per share. This loss resulted primarily from a $15.9 million, or
323%, increase in exploration expenses; a $7.8 million, or 52%, increase in
depreciation, depletion and amortization expense on the oil and natural gas
properties, and a $4.0 million, or 43%, increase in general and
administrative and reorganization expenses. Exploration expenses increased
because of higher dry hole costs which resulted from the increased drilling
activity. The most significant dry holes drilled during the year included
the following offshore Gulf of Mexico blocks: Ship Shoal Block 352 at $7.9
million, High Island Block 576 at $1.8 million and West Cameron Block 365
at $923,000. Depreciation, depletion and amortization expense increased as
a result of new properties being depleted, an increase in the depreciable
basis of offshore platforms and a decrease in net oil and natural gas
reserves.
General and administrative expenses and reorganization costs were
higher because of an increase in legal fees primarily related to the
reimbursement of legal fees to the Estate of Cloyce K. Box for the Simplot
litigation and the "change in control" which occurred when BBHC replaced
the existing Board of Directors by a written consent effective July 30,
1996. The "change in control" triggered the applicability of severance
agreements which then resulted in the payment of severance benefits in
certain situations. Resignations and terminations decreased the total
number of employees from 55 prior to July 30, 1996, to 41 at December 31,
1996.
Natural gas revenue increased $6.3 million primarily as a result of
higher average natural gas prices. Although the average sales price shown
on the table above reflects a decrease, such decrease in prices is a result
of the lower percentage of total volume from South Pass Block 89 sold at
above market prices compared to a higher percentage of total volume from
other areas which were sold at spot market prices during 1996 as compared
to the prior years. The 10% per annum increase in the gas price for South
Pass Block 89 production, in accordance with the gas sales contract,
resulted in an additional $3.3 million in natural gas sales revenue.
Average spot market prices for natural gas increased from $1.88 in 1995 to
$2.45 for 1996, which added another $2.4 million to natural gas sales
revenue. In addition, production from Platform D located in South Pass
Block 87, Main Pass Block 262, and other properties increased by 3.0 Bcf,
or 222%, when compared to 1995, resulting in an additional $6.7 million in
natural gas sales revenue. However, the above increases were partially
offset by a 624,000 Mcf decrease in natural gas production from South Pass
Block 89 which, when combined with the high contract price received for
production from this block, lowered natural gas sales revenue by $5.5
million. Natural gas production from South Pass Block 89 decreased because
the B-11 Well experienced mechanical difficulties in March 1996, and
attempts to drill a replacement well in 1996 were not successful. Net
natural gas production from South Pass Block 86 decreased 296,000 Mcf,
resulting in a decrease in natural gas sales revenue totaling $550,000.
Oil sales increased $4.9 million, or 35%, because of an increase of
$3.57 in the average oil price from $16.64 to $20.21 and an increase in
total oil production of 94,000 Bbls. The increase in price caused oil sales
revenue to increase $3.3 million, and the increase in production caused oil
sales revenue to increase $1.6 million. Oil production increased as a
result of a full year of production from Platform D producing from South
Pass Block 87 and West Delta Block 128, and new production from the Indian
Wells field in Mississippi and other onshore oil properties. Platform D
production increased 233,000 Bbls and new production from the Indian Wells
Field totaled 39,000 Bbls in 1996. Oil production from South Pass Blocks 86
and 89 decreased primarily as a result of natural depletion of the
reservoirs.
In 1995, the Company sold real estate properties in Mississippi and
Louisiana for a total gain of $1.0 million as part of a reorganization plan
adopted in early 1995. In 1996, the gain from the sales of real estate in
Mississippi and Louisiana was $93,000. The decrease was partially offset by
a $661,000 increase in net oil trading income.
Operating expenses were $889,000, or 16%, higher in 1996 because of
the increase in the number of operating properties, a full year of
operating cost from Platform D in South Pass Block 87, and a partial year
of operating costs from Main Pass Block 262. Net Profits expense decreased
approximately 8%, or $1.0 million primarily, because of a net decrease in
natural gas revenues from South Pass Block 89 as described above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
INDEX TO FINANCIAL STATEMENTS
Reports of Independent Accountants 21
Balance Sheets as of December 31, 1997 and 1996 22
Statements of Income for 1997, 1996 and 1995 23
Statements of Stockholders' Equity for 1997, 1996 and 1995 24
Statements of Cash Flow for 1997, 1996 and 1995 25
Notes to Financial Statements 26
REPORT OF INDEPENDENT ACCOUNTANTS
To The Stockholders and Board of Directors of
Remington Oil and Gas Corporation
We have audited the accompanying balance sheets of Remington Oil and
Gas Corporation ("the Company") as of December 31, 1997 and 1996 and the
related statements of income, stockholders' equity and cash flows for each
of the two years in the period ending December 31, 1997. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Remington Oil
and Gas Corporation as of December 31, 1997 and 1996 and the results of its
operations and its cash flows for each of the two years in the period ended
December 31, 1997 in conformity with generally accepted accounting
principles.
Dallas, Texas
March 20, 1998 /S/ ARTHUR ANDERSEN LLP
To The Stockholders and Board of Directors of
Remington Oil and Gas Corporation
We have audited the accompanying statements of income, stockholders'
equity and cash flows of Remington Oil and Gas Corporation (formerly Box
Energy Corporation) for the year ended December 31, 1995. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audit
provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows
of Remington Oil and Gas Corporation for the year ended December 31, 1995
in conformity with generally accepted accounting principles.
Dallas, Texas
March 5, 1996, except for the thirteenth
paragraph of Note 1 as to which the
date is March 27, 1998
/S/ COOPERS & LYBRAND L.L.P.
Remington Oil and Gas Corporation
Balance Sheets
(In thousands, except share data)
For Years Ended
December 31,
Assets 1997 1996
Current assets
Cash and cash equivalents $ 4,552 $ 2,997
Marketable securities - available for sale - 32,678
Accounts receivable - oil and natural gas 5,725 7,093
Accounts receivable - other 268 1,456
Note receivable - S-Sixteen Holding Company 6,192 -
Prepaid expenses and other current assets 2,118 1,961
Total current assets 18,855 46,185
Properties
Unproved oil and gas properties 8,755 6,504
Oil and natural gas properties
(successful-efforts method) 211,726 180,747
Other properties 2,800 3,226
Accumulated depreciation, depletion and
amortization (144,548) (116,371)
Total properties 78,733 74,106
Other assets
Deferred income taxes (net of valuation
allowance) - 14,723
Deferred charges (net of accumulated
amortization) 927 1,585
Total other assets 927 16,308
Total assets $ 98,515 $ 136,599
Liabilities and stockholders' equity
Current liabilities
Accounts payable $ 8,694 $ 5,043
Accrued interest payable 264 379
Accrued transportation payable - related party 305 263
Net Profits expense payable 594 1,481
Short-term notes payable 6,000 -
Total current liabilities 15,857 7,166
Convertible subordinated notes payable 38,371 55,077
Total Liabilities 54,228 62,243
Commitments and Contingencies (Note 11)
Stockholders' equity
Common Stock, $1.00 par value
Class A (Voting) - 15,000,000 shares
authorized; 3,250,110 shares issued 3,250 3,250
Class B (Non-Voting) - 30,000,000 shares
authorized; 17,553,010 shares issued 17,553 17,553
Additional paid-in capital 25,197 25,197
Treasury stock, at cost, 31,100 shares
Class A, and 465,600 shares Class B (3,465) -
Retained earnings 1,752 28,542
Valuation allowance for marketable securities - (186)
Total stockholders' equity 44,287 74,356
Total liabilities and stockholders' equity $ 98,515 $ 136,599
See accompanying Notes to Financial Statements.
Remington Oil and Gas Corporation
Statements of Income
(In thousands, except per share amounts)
Years Ended December 31,
1997 1996 1995
Revenues
Oil sales $ 21,292 $ 18,849 $ 13,966
Gas sales 36,012 46,757 40,440
Interest income 1,998 2,273 2,123
Gain (loss) investment (125) (73) -
Other income 1,876 2,404 2,964
Total revenues 61,053 70,210 59,493
Costs and expenses
Operating costs and expenses 4,015 3,825 3,142
Transportation expense 2,851 2,491 2,285
Net Profits Interest expense 8,341 11,479 12,500
Exploration expenses 8,554 20,805 4,924
Depreciation, depletion and amortization 24,298 22,349 14,401
Impairment of oil and natural gas properties 3,953 451 566
General and administrative 6,344 7,731 7,073
Legal expense 2,509 3,657 1,452
Reorganization expense 7,072 1,959 800
Interest and financing expense 5,283 4,895 4,836
Total costs and expense 73,220 79,642 51,979
Income (loss) before taxes (12,167) (9,432) 7,514
Income tax expense (benefit) 14,623 (1,770) 2,122
Net income (loss) $ (26,790) $ (7,662) $ 5,392
Basic and diluted income (loss) per share $ (1.31) $ (0.37) $ 0.26
See accompanying Notes to Financial Statements.
Remington Oil and Gas Corporation
Statements of Stockholders' Equity
(In thousands)
Common Stock Valuation
Class A Stock Class B Stock Additional Allowance
Par Par Paid in Retained Treasury Marketable
Shares Value Shares Value Capital Earnings Stock Securities
Balance
December 31,
1994 3,250 $3,250 17,553 $17,553 $25,197 $30,812 $ - $(1,299)
Net income 5,392
Unrealized gain
(net of income
taxes) 1,142
Balance
December 31,
1995 3,250 3,250 17,553 17,553 25,197 36,204 - (157)
Net income
(loss) (7,662)
Unrealized loss
(net of income
taxes) (29)
Balance
December 31,
1996 3,250 3,250 17,553 17,553 25,197 28,542 - (186)
Net income
(loss) (26,790)
Purchase of
Treasury Stock (3,465)
Unrealized gain
(net of income
taxes) 186
Balance
December 31,
1997 3,250 $3,250 17,553 $17,553 $25,197 $ 1,752 $(3,465) $ -
See accompanying Notes to Financial Statements.
Remington Oil and Gas Corporation
Statements of Cash Flows
(In thousands)
Years Ended December 31,
1997 1996 1995
Cash flow provided by operations
Net income (loss) $ (26,790) $ (7,662) $ 5,392
Depreciation, depletion and amortization 24,298 22,349 14,401
Impairment of oil and natural gas properties 3,953 451 566
Amortization of deferred charges 658 262 254
Amortization of premium on marketable securities 27 27 15
Deferred income tax (benefit) expense 14,623 (1,696) 1,995
Dry hole costs 5,319 17,638 2,223
Decrease in accounts receivable 2,556 105 (3,492)
(Increase) in prepaid expenses and other current
assets (157) (1,298) (127)
Increase (decrease) in accounts payable and
accrued expenses 2,692 (1,201) 3,900
Loss (gain) on sale of properties 367 (20) (1,080)
Net cash flow provided by operations 27,546 28,955 24,047
Cash from investing activities
Payments for capital expenditures (39,144) (39,798) (21,274)
Proceeds from property sales 702 260 1,375
Net cash used in investing activities (38,442) (39,538) (19,899)
Cash from financing activities
Proceeds from notes payable 7,000 - -
Payments on notes payable (1,000) - -
Sales and maturities of marketable securities 33,411 19,127 -
Investment in marketable securities (597) (27,191) -
Notes receivable - S-Sixteen Holding Company (7,250) - -
Principal repayments - S-Sixteen Holding Company 1,058 - -
Repurchase common stock (3,465) - -
Principal payments on Convertible Subordinated
Notes (16,706) - -
Net cash provided by (used in) financing activities 12,451 (8,064) -
Net increase (decrease) in cash and cash equivalents 1,555 (18,647) 4,148
Cash and cash equivalents at beginning of period 2,997 21,644 17,496
Cash and cash equivalents at end of period $ 4,552 $ 2,997 $ 21,644
See accompanying Notes to Financial Statements.
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
Remington Oil and Gas Corporation, formerly Box Energy Corporation,
(the "Company" or "Remington") is an independent oil and gas exploration
and production company with activity and properties in three core areas:
offshore Gulf of Mexico, Mississippi/Alabama and onshore Gulf Coast.
Originally organized in 1981 as OKC Limited Partnership (the
"Partnership"), the Company converted to a corporation on April 15, 1992
(the "Corporate Conversion"). The Corporate Conversion involved the
exchange of common stock for the assets and liabilities of the Partnership.
Management prepares the financial statements in conformity with generally
accepted accounting principles. This requires estimates and assumptions
that affect the reported amounts of assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reported periods. Actual results could differ from those
estimates. The Company makes certain reclassifications to prior year
financial statements in order to conform to the current year presentation.
S-Sixteen Holding Company ("SSHC") (formerly known as Box Brothers
Holding Company ("BBHC")) owns 1.8 million shares or approximately 57% of
the Company's outstanding Class A (Voting) Common Stock ("Class A Stock").
On August 29, 1997, entities controlled by Mr. J. R. Simplot purchased BBHC
(the "Simplot Transaction").
Cash and Cash Equivalents
Cash equivalents consist of liquid investments with maturities of
three months or less when purchased, including investment grade commercial
paper and money market funds invested in United States government
securities. Cash and cash equivalents are stated at cost that approximates
market value.
Marketable Securities
Marketable securities, classified as available-for-sale, are recorded
on the balance sheet at their market value on the balance sheet date.
Unrealized holding gains and losses for securities classified as available-
for-sale are excluded from earnings and recorded, net of tax, as a separate
component of stockholders' equity.
Oil and Natural Gas Properties
The Company uses the successful-efforts accounting method for oil and
gas exploration and development expenditures. Capitalized costs include
leasehold acquisition costs, development costs, including costs of tangible
equipment, intangible drilling costs and certain interest costs. Costs
classified and charged to exploration expense include geological,
geophysical and other prospecting costs. The Company capitalizes drilling
costs for exploratory wells pending a determination of commercial oil and
natural gas reserves. The costs of exploratory wells that do not ultimately
find commercial oil and natural gas reserves are charged to exploration
expense as a dry hole cost. The Company amortizes capitalized costs using
the units-of-production method based on total proved reserves for leasehold
acquisition costs and total proved developed oil and natural gas reserves
for all other capitalized costs. The Company capitalizes interest costs
incurred for construction of major facilities such as offshore platforms.
No interest was capitalized in 1997 or 1996, and $69,000 was capitalized in
1995.
Periodically the Company records an impairment expense for oil and
natural gas properties when the net book value of a particular property is
greater than the undiscounted future net cash flows before income taxes
from that same property. Certain events such as drilling a dry hole, a
large decrease in oil and natural gas reserves or production and
significantly lower oil and natural gas prices cause the Company review the
property to determine if an impairment charge is proper. The impairment
loss is equal to the difference between the net book value and the fair
value of the asset. Undiscounted future net cash flow includes estimated
proved and risk adjusted probable and possible oil and natural gas
reserves. The Company uses the present value of the future net cash flows
from proved oil and natural gas reserves discounted at an appropriate rate
to estimate the fair value of the asset.
Impairment losses totaling $3.9 million, $451,000, and $566,000 were
recognized during 1997, 1996, and 1995, respectively. In 1997, the
Company's impairment losses included interests in Main Pass Block 262,
located in the Gulf of Mexico, the Hub Prospect and East Melvin properties
located in Mississippi and the Bronco S. W. and Whopper II properties
located in Texas and New Mexico, respectively. In 1996, the impairment
losses included the Company's interests in East Melvin and Raleigh
properties located in Mississippi. In 1995, the Company recorded an
impairment of the Traxler property located in Mississippi.
Future dismantlement, restoration and abandonment ("DR&A") costs
include the estimated costs to dismantle, restore and abandon the Company's
offshore platforms, flowlines, wells and related structures. The total
estimated future DR&A liability is $4.2 million. The liability is accrued
over the life of the property using the units-of production method and
recorded as a component of depreciation, depletion and amortization
expense. The accrued liability at December 31, 1997 and 1996 was $3.1
million and $2.5 million, respectively. See Note 12. Supplemental
Disclosures - Oil and Natural Gas Properties.
Other Properties
Other properties include leasehold improvements, furnishings and
equipment for office space leased by the Company and are depreciated on a
straight-line method over their estimated useful lives ranging from 3 to 12
years.
Deferred Charges
Deferred charges are the costs incurred in 1992 with respect to the
Company's offering of the Notes, as defined in Note 5 below. The deferred
charges are amortized to interest and financing costs on a straight-line
basis over the 10-year term of the Notes. In October 1997, the Company
purchased $16.7 million of the outstanding Notes. The retirement of these
Notes resulted in the accelerated amortization of the deferred offering
costs totaling $416,000. See Note 7. Notes Payable.
Oil and Gas Revenues
The Company recognizes oil and natural gas sales as revenue in the
month of production. The Company's actual sales are not materially
different from its entitled share of production. There are no significant
natural gas imbalances for the years ended December 31, 1997, 1996, and
1995.
Income Taxes
Income tax expense or benefit includes the current income taxes and
deferred income taxes. Current income tax expense or benefit is the amount
calculated on the current year income tax return. Deferred income tax
expense or benefit is calculated as the change in the net deferred income
tax asset or liability at the beginning of the year compared to the end of
the year. The amount of the deferred income tax asset or liability is
determined by multiplying the enacted tax rate by the temporary
differences, net operating or capital loss carry-forwards plus any tax
credit carry-forwards. The tax rate used is the effective rate applicable
for the year in which the temporary differences or carry-forwards expect to
be reversed or utilized. A valuation allowance offsets deferred income tax
assets, which are not expected to reverse in future years using a "more
likely than not" scenario that excludes probable and possible oil and
natural gas reserves. See Note 6. Deferred Income Tax Asset and Income
Taxes.
Income per Common Share
The Company adopted Statement of Financial Accounting Standards
("SFAS") No. 128, entitled "Earnings per Share" in 1997. SFAS simplifies
the standards for computing earnings per share previously found in
Accounting Principles Board ("APB") Opinion No. 15. Primary income per
share has been replaced by basic income per share. Basic income per share
excludes dilution and is computed by dividing net income by the weighted
average number of common shares outstanding for the period. Diluted income
per share reflects the potential dilution that could occur if securities or
other contracts to issue common stock were exercised or converted into
common stock or resulted in the issuance of common stock that then shares
in the net income of the Company. Diluted income per share is computed
similarly to fully diluted income per share pursuant to APB Opinion 15. As
a result of the adoption of SFAS No. 128 income per share has been restated
to conform with the provisions of the statement. The amounts restated equal
the amounts as reported in the prior years. The following table presents
the Company's calculation of basic and diluted income per share.
For Years Ended December 31,
1997 1996 1995
(In thousands, except per share data)
Net income (loss) available for basic
income per share $ (26,790) $ (7,662) $ 5,392
Interest expense on the Notes
(net of tax) (1) - - -
Net income (loss) available for diluted
income per share $ (26,790) $ (7,662) $ 5,392
Basic income (loss) per share $ (1.31) $ (0.37) $ 0.26
Diluted income (loss) per share $ (1.31) $ (0.37) $ 0.26
Weighted average
Class A Stock 3,233 3,250 3,250
Class B Stock 17,291 17,553 17,553
Total Common shares for basic income
(loss) per share 20,524 20,803 20,803
Dilutive stock options outstanding
(treasury stock method) (1) - - -
Shares assumed issued by conversion
of the Notes (1) - - -
Total common share for diluted income
(loss) per share 20,524 20,803 20,803
(1) Non dilutive.
Potential increase to net income for
diluted income per share
Interest expense on Notes (net of tax) $ 2,835 $ 2,954 $ 2,954
Potential issues of common stock for
diluted income per share
Weighted average stock options granted 99 302 312
Weighted average shares issued assuming
conversion of Notes 4,741 5,007 5,007
NOTE 2. MARKETABLE SECURITIES
The following table presents the amortized costs of all marketable
securities, the range of maturities and the gross unrealized holding gains
and losses.
At December 31,
1997 1996
(In thousands)
Amortized cost of marketable securities:
Maturities within one year
United States government and agency debt securities - $ 1,240
Corporate debt securities - 1,491
Maturities between one and five years
United States government and agency debt securities - 21,001
Corporate debt securities - 7,679
Foreign government debt securities - 1,553
Total amortized cost of marketable securities - 32,964
Gross unrealized holding gains - 47
Gross unrealized holding losses - (333)
Net carrying value at year end - $ 32,678
Realized gains and losses are computed based on specific
identification of the securities sold. The proceeds from the sale of
available-for-sale securities and the gross realized gains and losses and
change in net unrealized holding gains and losses included as a separate
component of shareholders' equity were as follows:
For Years ended December 31,
1997 1996 1995
(In thousands)
Sales Proceeds $ 33,411 $ 8,127 $ -
Gross realized gains $ 46 $ 7 -
Gross realized (losses) $ (169) $ (80) -
Change in net unrealized holding
gains and losses $ 186 $ (29) $ 1,142
NOTE 3. NOTE RECEIVABLE S-SIXTEEN HOLDING COMPANY
On April 29, 1997, the Company lent SSHC $7.25 million. The original
May 29, 1997 due date was extended to June 3, 1997, at which time the note
receivable was replaced by a new $6.95 million note receivable dated June
3, 1997. The new note receivable matures May 29, 1998, and requires monthly
installment payments of principal and interest totaling $100,000 commencing
June 29, 1997. The interest rate is equal to the prime rate of Texas
Commerce Bank National Association plus 1% until the sixth month when the
rate escalates monthly by 0.1% over the previous month's rate. Pledged as
collateral under a related Amended and Restated Pledge Agreement (the
"Pledge Agreement") are the 1.8 million shares of the Company's Class A
Stock, 800,000 shares of CKB Petroleum, Inc. ("CKBP") common stock and
800,000 shares of CKB & Associates, Inc. ("Associates") common stock owned
by SSHC. The pledged stock represents approximately 57%, 94% and 94% of the
outstanding shares of the classes stock, respectively. The fair market
value of the collateral is required to be $2.00 for each $1.00 of unpaid
principal debt. Failure to pay the monthly installment within 10 days and
failure to maintain fair market value of collateral are two, among several,
actions which constitute events of default under the Pledge Agreement. In
the event of default, as defined in the Pledge Agreement, the Company, upon
five days' notice to SSHC, has the right to foreclose upon and sell the
collateral stock. The Pledge Agreement also provides that upon the
occurrence and during the continuance of an event of default, if the
collateral has not been foreclosed upon, the Company may direct the vote of
the collateral stock.
NOTE 4. NET PROFITS EXPENSE
The Company pays a Net Profits expense to Phillips Petroleum
Company("Phillips") party pursuant to a farmout agreement regarding the
Company's working interest in the oil and gas lease covering South Pass
Block 89. Net Profits expense is calculated as 33% of the Company's "net
profits" from the subject lease, as defined in the farmout agreement.
Phillips and the Company are involved in litigation concerning the
calculation and inclusion of certain revenues or expenses in the "net
profits account." See Note 11. Commitments and Contingencies - Phillips
Petroleum Case. The following table summarizes the Net Profits expense
calculation:
For years ending December 31,
1997 1996 1995
(In thousands)
South Pass Block 89
Oil and natural gas revenue
(net of transportation) $ 30,567 $ 42,063 $ 45,354
Operating, overhead and capital expenditures (5,292) (7,279) (7,475)
"Net Profits" from South Pass Block 89 $ 25,275 $ 34,784 $ 37,879
Net Profits expense (at 33%) $ 8,341 $ 11,479 $ 12,500
NOTE 5. REORGANIZATION COSTS
Reorganization expense includes employee severance expense, litigation
settlement amounts and other costs. The litigation settlement amounts and
certain other costs were connected with the Simplot Transaction. The
expense accrued and recorded through December 31, 1997, 1996, and 1995 was
$7.1 million, $2.0 million, and $800,000, respectively, of which $9.6
million has been paid as of December 31, 1997. The remaining accrued
reorganization liability on December 31, 1997 is $361,000.
Employee Severance
The Company's prior management entered into severance agreements with
its employees in December 1995. The severance agreements provided between 6
and 18 months' pay plus certain benefits to employees terminated by the
Company without cause (as defined in the severance agreements) or who
resign for good reason. Good reason (as defined in the severance
agreements) includes, among other things, any change in benefits or job
status that an employee believes is adverse to that employee. On July 30,
1996, certain of the Company's Directors were replaced by written consent
of the holders of more than a majority of the Company's Class A stock. The
replacement of the directors caused a change in control as defined in the
severance agreements and the agreements became exercisable.
During 1997, 31 employees were dismissed, resigned or notified the
Company of their resignation. The 31 employees included three executive
officers (Senior Vice President/Operations, Vice President/Marketing and
Supply, and Treasurer), ten employees from the operations technical staff
(eight geologists and geophysicists, one engineer and one landman), and 18
other professional or clerical personnel. The total employee severance
expense during 1997 was $3.6 million. In 1996, under the same severance
agreements, 15 employees were dismissed, resigned or notified the Company
of their resignation. The employees included the Chief Executive Officer,
Executive Vice President, Chief Financial Officer, General Counsel, and
Chief Accounting Officer. The reorganization expense for 1996 was $2.0
million which included severance pay, related legal fees and other related
costs. During 1995, the Company adopted a reorganization plan which
eliminated eight positions within the Company, including personnel involved
with corporate development and the management of the Company's real estate
properties in Mississippi and Louisiana. Total reorganization costs
included primarily severance pay and benefits to terminated employees, but
also included rent expense on closed offices.
Thomas D. Box Settlement
In the third quarter of 1997, in connection with the Simplot
Transaction, the Company agreed to pay Thomas D. Box $1.2 million to settle
his severance claims and lawsuits against the Company. See Note 11.
Contingencies - Thomas D. Box Cases. Mr. Box was the Chief Executive
Officer and President of the Company before his termination by the
Company's Board of Directors in August 1996. Additionally, Mr. Box was
granted options to purchase 50,000 shares of Class B Stock at $9.00 per
share, office furniture, computer equipment and a 3-D seismic workstation.
Simplot Settlement
Further, in connection with the Simplot Transaction, the Company and
the plaintiffs in the Griffin Case executed a letter of intent to settle
all the litigation brought by the plaintiffs. See Note 11. Contingencies -
Griffin Case. Under the terms of the subsequently-executed settlement
agreement, the Company paid Mr. Simplot $1.9 million for attorneys' fees
and Mr. James Arthur Lyle (one of the plaintiffs in the Griffin Case)
$100,000 for attorneys' fees. The amounts were accrued in the third quarter
of 1997 and paid during the fourth quarter of 1997.
NOTE 6. DEFERRED INCOME TAX ASSET AND INCOME TAXES
The significant components of the Company's deferred tax asset are as
follows:
At December 31,
1997 1996
(In thousands)
Excess of tax basis over book basis for oil
and natural gas properties $ 11,012 $ 7,461
Excess of tax basis over book basis for other
properties 192 133
Excess of tax basis over book basis for
marketable securities - 100
Excess of accrued book liabilities over tax
liabilities 1,204 862
Federal income tax operating loss carry-forward 9,549 9,072
Federal long-term capital loss carry-forward 197 197
Alternative minimum tax credit carry-forward 262 262
Total deferred tax asset 22,416 18,087
Valuation allowance (22,416) (3,364)
Net deferred tax asset $ - $14,723
The Company carried over the tax basis in the oil and gas properties
from the Partnership. The tax basis for the Partnership consisted primarily
of the sum of each partner's tax basis in the oil and gas properties, which
exceeded the Company's book basis as accounted for under generally accepted
accounting principles. The unused federal income tax operating loss carry-
forward of $27.3 million will expire during the years 2007 through 2012 if
not previously utilized, and the long-term capital loss carry-forward of
$563,000 will expire in 1999. Although the Company expects to realize the
benefits of the deferred income tax asset, it adopted a more conservative
view of the accounting and reporting policies and increased the valuation
allowance in 1997, to reserve the full amount of the deferred income tax
asset. The Company believes that this approach is consistent with other
small-cap exploration and production companies particularly those companies
that are attempting to grow their oil and natural gas reserves. The Company
is required to analyze its ability to realize the deferred income tax asset
based on proved reserves and a "more likely than not" scenario for future
projections. The analysis excludes probable and possible oil and natural
gas reserves and does not include results from future drilling activities.
The Company concluded that based on the future growth plans of the Company,
prior actual results, and the "more likely than not" criteria it was more
desirable to reserve the entire deferred income tax asset. The following
table provides a reconciliation of the Company's income tax expense or
(benefit):
For the Years Ended December 31,
1997 1996 1995
(In thousands)
"Expected" tax expense (benefit) (computed at 35%
of income before taxes) $ (4,258) $ (3,301) $ 2,630
Expense (benefit) from change in book and tax
basis differences 230 932 (2,397)
(Benefit) from alternative minimum tax credit - - (127)
(Benefit) from long-term capital loss carry-forward - - (197)
Utilization (benefit) of net operating loss (401) (363) 2,608
Total deferred income tax expense (benefit) (4,429) (2,732) 2,517
Valuation allowance 19,052 1,036 (522)
Net deferred income tax expense (benefit) 14,623 (1,696) 1,995
Current income tax expense (benefit) - (74) 127
Total income tax expense (benefit) $ 14,623 $ (1,770) $ 2,122
NOTE 7. NOTES PAYABLE
In December 1992, the Company issued $55.1 million of 8 1/4%
Convertible Subordinated Notes ("Notes"). The Notes mature December 1, 2002
and are convertible into shares of Class B (Non-Voting) Common Stock
("Class B Stock") at the election of the holder any time before maturity,
unless previously redeemed. Interest accrued at 8 1/4% per annum is payable
semiannually on each June 1 and December 1. The Company may redeem all or a
portion of the Notes any time after December 1, 1995, at 105.775% of the
face amount. This percentage decreases .825% each subsequent December 1.
The Notes are unsecured and subordinate in right of payment to all existing
and future senior indebtedness.
The Simplot Transaction caused a "change in control" as defined in the
Indenture for the Notes (the "Indenture"). On September 22, 1997, in
accordance with the Indenture, the Company made an offer to purchase the
Notes at 100% of the face amount, plus accrued interest. In October 1997,
the Company repurchased $16.7 million of the Notes outstanding, as a result
of the offer to purchase required by the Indenture.
During the second quarter of 1994, the Company established a one-year
line of credit with a bank. The line of credit with a borrowing base of
$10.0 million expires in June 1998. The Company renewed the line in 1995,
1996 and 1997. The line of credit is collateralized by the Company's South
Pass oil and natural gas properties. The interest rate for the line of
credit is the lender's floating base rate plus 0.5%. The Company has
borrowed $6.0 million and has issued letters of credit totaling $250,000
against this line of credit. The Company is currently negotiating an
increase in the borrowing base. The credit facility will expire in June
1998, unless renewed.
The estimated fair value of the Company's long-term indebtedness,
including the current maturities of such obligations, was approximately
$43.0 million and $55.8 million at December 31, 1997 and 1996,
respectively. The fair value was based on the quoted market bid price for
the Company's Notes and on current rates available to the Company for its
other indebtedness with the same remaining maturities.
NOTE 8. COMMON STOCK AND DIVIDENDS ON COMMON STOCK
The holders of Class A Stock and Class B Stock of the Company
participate equally in earnings, dividends and other characteristics. The
only difference between the two classes of stock is that Class A Stock has
voting rights while the Class B Stock has no voting rights, unless
otherwise required by Delaware law. Twenty eight thousand five hundred
shares of authorized but unissued Class B Stock have been reserved for the
two 1992 stock option plans, and 2.8 million shares have been reserved for
the 1997 Stock Option Plan. See Note 9. Employee and Director Benefit
Plans.
The Company has not paid a dividend since 1992. Currently, dividends
are not contractually restricted. However, in the event that the Company
pays dividends in excess of 2% of the market price of Class B Stock in a
calendar quarter, the conversion price for Class B Stock under the Notes
will be adjusted proportionally.
NOTE 9. EMPLOYEE AND DIRECTOR BENEFIT PLANS
Stock option plans
SFAS No. 123, entitled "Accounting for Stock-Based Compensation,"
encourages but does not require companies to record compensation cost for
stock-based employee compensation plans at fair value. During 1996, the
Company adopted the disclosure provisions of SFAS No. 123. The Company
continues to apply the accounting provisions of Accounting Principles Board
Opinion 25, entitled "Accounting for Stock Issued to Employees," and
related interpretations to account for stock-based compensation.
Accordingly, compensation cost for stock options is measured as the excess,
if any, of the quoted market price of the Company's stock at the date of
the grant over the amount an employee must pay to acquire the stock.
The Company has two stock option plans: the 1992 Incentive Stock
Option Plan and the 1997 Stock Option Plan. A third plan, the 1992 Non-
Qualified Stock Option Plan was discontinued in1997. The Company no longer
uses the 1992 Non Qualified Stock Option Plan however, 28,500 options
remain outstanding. Under the 1992 Incentive Stock Option Plan 50% of the
options are exercisable no sooner than three years from the date of the
grant, and the remaining 50% may be exercised only after five years from
the date of the grant and the options expire ten years from the date of
grant.
The 1997 Stock Option Plan is intended to benefit the Company by
providing Directors and key employees of the Company with additional
incentives and giving them a greater interest as stockholders in the
success of the Company. The 1997 Stock Option Plan provides for the
issuance of options to purchase Class B Stock. A committee that includes at
least two or more outside Non-Employee Directors administers the plan. The
committee has the discretion to determine the participants to be granted
options, the number of shares granted to each person, the purchase price of
the Class B Stock covered by each option and other terms of the option.
Options granted under the plan may be either incentive stock options or
non-qualified stock options. The Company may issue up to 2.8 million shares
of Class B Stock upon the exercise of the options but no individual may be
issued more than 275,000 shares.
A summary of the Company's stock option plans as of December 31, 1997,
1996, and 1995 and changes during the years ending on those dates is
presented below:
For Years Ended December 31,
1997 1996 1995
Weighted Weighted Weighted
Average Average Average
Exercise Exercise Exercise
Shares Price Shares Price Shares Price
Outstanding at beginning
of year 312,500 $ 9.52 622,000 $10.08 334,000 $11.71
Granted 426,500 $ 6.73 41,000 $ 8.85 353,800 $ 8.87
Exercised - - -
Forfeited (284,000) $ 9.51 (350,500) $10.43 (65,800) $11.88
Outstanding at end of year 455,000 $ 6.92 312,500 $ 9.52 622,000 $10.08
Options exercisable at
year-end 8,000 $11.88 38,600 $11.88 116,600 $11.98
Weighted-average fair value
of options granted during
the year $ 4.65 $ 6.15 $ 6.00
The options outstanding at December 31, 1997 have a weighted-average
remaining contractual life of 9 years and an exercise price ranging from $6
5/8 to $11 7/8 per share.
The following is a pro forma disclosure of the effect on net income or
loss if compensation cost for the Company's stock option compensation plans
had been determined consistent with SFAS No. 123.
For Years Ended December 31,
1997 1996 1995
(In thousands)
Net income (loss) As reported $(26,790) $(7,662) $ 5,392
Pro forma $(27,062) $(7,774) $ 4,987
Basic and diluted income (loss) per share As reported $ (1.31) $ (0.37) $ 0.26
Pro forma $ (1.32) $ (0.37) $ 0.24
The fair value of each option grant for the years ended December 31,
1997, 1996, and 1995 is estimated on the date of grant using the Black-
Scholes option-pricing model with the following weighted average
assumptions:
For the Years Ended December 31,
1997 1996 1995
Expected life (years) 10 10 10
Interest rate 6.19% 6.85% 5.97%
Volatility 49.50% 48.21% 47.96%
Dividend yield 0 0 0
Non-Employee Director Stock Purchase Plan
The Company approved the Non-Employee Director Stock Purchase Plan in
December 1997. The plan provides a means for the Non-Employee Directors to
receive their directors' fees in shares of Class B Stock. Each non-employee
Director of the Company may elect once each year to receive all or a
portion of the fees he receives as a director in restricted shares of Class
B Stock in lieu of cash. The number of shares received will be the number
of shares that equal 150% of the cash fees divided by the closing market
price of the Class B Stock on the day that the cash fees would otherwise be
paid. The Class B Stock is restricted from transfer until one year after
issuance or the termination of a Director resulting from death, disability,
removal or failure to be nominated for an additional term. The Director
will have the right to vote the shares of restricted stock and to receive
any dividend paid in cash or other property.
Pension Plan
The Company's Pension Plan is a noncontributory defined benefit
pension plan covering substantially all employees. The retirement benefits
available are generally based on years of service and average earnings. The
Company funds the plan with annual contributions at least equal to the
minimum funding provisions of the Employee Retirement Income Security Act
of 1974, as amended, but no more than the maximum tax deductible
contribution allowed. Plan assets consist primarily of equity and fixed
income securities. The following table sets forth the plan's funded status
and amounts recognized in the Company's balance sheets:
At December 31,
1997 1996
(In thousands)
Vested benefit obligation $ 2,801 $ 2,657
Non-vested benefit obligation 82 208
Total accumulated benefit obligation 2,883 2,865
Additional liability due to projected salary
Increases 55 167
Projected benefit obligation 2,938 3,032
Fair value of plan assets (3,160) (3,500)
Fair value of plan assets in excess of projected
benefit obligation (222) (468)
Unrecognized transition obligation - (147)
Unrecognized net gain - 350
Prepaid pension liability $ (222) $ (265)
The net periodic pension cost in the Company's statements of income
included the following components:
For the Years Ended December 31,
1997 1996 1995
(In thousands)
Service cost $ 116 $ 140 $ 126
Interest cost on projected benefit obligation 222 214 215
Actual return on plan assets (281) (324) (420)
Net amortization and deferrals 21 114 221
Net periodic pension cost 78 144 142
Special recognition due to curtailment and
lump sum settlements (36) - -
Net periodic pension cost $ 42 $ 144 $ 142
The determination of the actuarial present value of the projected
benefit obligation assumed a weighted average discount rate of 7.0% for
1997 and 7.5% for 1996 and 1995, and a 3% increase in future compensation
levels for all three years. The weighted average expected long-term rate
of return on plan assets was 8%.
Postretirement benefits and post employment benefits
SFAS No. 106 entitled "Employers' Accounting for Postretirement
Benefits Other than Pensions" and SFAS No. 112 entitled "Employers
Accounting for Postemployment Benefits" require the recognition and
disclosure of the estimated future costs of postretirement and
postemployment benefits to which the Company is obligated. The Company has
no history of paying postretirement benefits other than pensions and is not
obligated to pay such benefits in the future. Future obligations for
postemployment benefits are immaterial. Therefore, no liability for either
has been recognized in the financial statements.
Employee Severance Plan
The Company adopted a severance plan in November 1997. The plan
provides severance benefits ranging from 2 months to 18 months of the
employee's base salary if the employee is terminated involuntarily. The
plan incorporates the provisions and terms of any individual contract or
agreement that an employee may have with the Company. The Company had
previously entered into individual severance agreements with its employees
in December 1995. Only five of the severance agreements still exist. Three
of the five have been voluntarily amended to remove certain portions that
allow the employee to exercise the agreement except for a reduction in base
salary, involuntary termination by the Company without cause and relocation
greater than 50 miles. In addition, certain of the executive officers have
individual employment contracts with the Company.
NOTE 10. RELATED PARTY TRANSACTIONS
SSHC owns approximately 57% of the outstanding Class A Stock of the
Company and 94% of the outstanding shares of both CKBP and Associates.
Under both applicable law and Board of Directors' resolution, transactions
with affiliates must be approved by the Board of Directors, be fair and
reasonable to the Company, and be on terms no less favorable to the Company
than can be obtained from an unaffiliated party in an arm's-length
transaction.
CKBP owns a minority interest in the pipeline that transports oil from
South Pass Area (offshore Louisiana) to Venice, Louisiana. The pipeline
tariff is $2.75 per barrel and is published with the Federal Energy
Regulatory Commission. The rate is consistent with all other rates from the
South Pass Area to Venice. Transportation incurred and payable to CKBP was
$3.2 million, $2.8 million and $2.7 million for the years ended December
31, 1997, 1996 and 1995, respectively.
Under the Partnership Agreement of the Partnership, the general
partners were entitled to advancement of litigation expenses in the event
they were named parties to litigation in their capacity as general
partners. In order to receive such advancements, each general partner was
required to request, in writing, advancement of litigation expenses and
undertake to repay any advancements in the event it was determined, in
accordance with applicable law, that the general partners were not entitled
to indemnification for litigation expenses. Each general partner executed
such an undertaking agreement in relation to the Griffin Case. Accordingly,
the Partnership, and later the Company, advanced litigation expenses to
Associates and Cloyce K. Box (and his estate following his death) in
connection with such litigation. In addition, the Company advanced
litigation expenses on behalf of certain directors and officers of the
Company for one lawsuit related to the Griffin litigation and other
lawsuits related to the Devere and Nealon Case and Thomas D. Box Cases. See
Note 11. Contingencies. In accordance with the By-Laws of the Company, the
defendants have executed written undertakings to repay the Company for any
related expenses advanced on their behalf if it is later found that such
costs were not subject to indemnification by the Company. No judicial
determination has been made that any of the general partners, directors or
officers are not entitled to indemnification for litigation expenses
incurred. The total legal costs incurred related to these cases were
$351,000, $1.5 million and $583,000, for 1997, 1996, and 1995,
respectively.
The Company has a $6.95 million note receivable from SSHC. The balance
of the note receivable at December 31, 1997, was $6.2 million. See Note 3.
Note Receivable S-Sixteen Holding Company.
In December 1997, the Company paid $1.9 million to Mr. Simplot and
$100,000 to Mr. Lyle for attorneys' fees in connection with the settlement
of the Griffin Cases. See Note 5. Reorganization Costs.
During 1997, the Company paid executive search fees totaling $141,000
to Preng and Associates Inc., which is a company controlled by a member of
the Board of Directors.
The Company bills CKBP and other related parties for an allocated
portion of office space that is subleased to CKBP, payroll including the
related costs and benefits, and other overhead costs. The amounts billed
are considered to be the fair value of such usage or allocations. The
Company billed expenses totaling $40,000, $81,000 and $134,000 for the
three years ending December 31, 1997, 1996 and 1995, respectively.
NOTE 11. COMMITMENTS AND CONTINGENCIES
Lease Commitments
The Company leases office space in Dallas, Texas covering
approximately 33,00 0 square feet. The lease is a non-cancelable operating
lease that expires April 1, 1998. In January 1998, the Company amended the
current lease effective April 1, 1998. The amended lease extends the term
an additional 10 years and reduces the leased office space to approximately
17,000 square feet. Future minimum rental payments for $ 474,000, $407,000,
$407,000, $433,000 and $ 441,000 are due in the next five years,
respectively, and future commitments are $2.5 million for the remaining 6
years. Total rent expense was $716,000, $717,000 and $688,000 in 1997,
1996, and 1995, respectively.
Litigation Contingencies
Griffin Case
Griffin et al. v. Box et al. was filed in November 1987, in the United
States District Court in Dallas, Texas by unitholders, including Mr.
Simplot, of the Predecessor Partnership, against the general partners of
the Predecessor Partnership and certain of their affiliates. While the
plaintiffs brought individual claims, all of which were dismissed before or
during the trial, the core of the action was founded upon derivative claims
brought on behalf of the Predecessor Partnership and the Company. Chief
among these derivative claims was the allegation that the general partners
breached the partnership agreement, their fiduciary duties and implied
duties in relation to their affiliate's acquisition of an oil pipeline that
transports oil from the Gulf of Mexico to Venice, Louisiana. See Note 10.
Related Party Transactions.
Following a jury verdict adverse to the general partners, the court
entered judgment, on behalf of the Company, against the general partners
for approximately $20.0 million in actual damages and approximately $2.2
million in punitive damages against the individual general partner, Cloyce
K. Box. In addition, the court imposed a constructive trust on the
pipeline revenue of CKBP. On appeal, this judgment was reversed because of
inconsistent jury findings on which the judgment was based, and the case
was remanded for a new trial on the pipeline derivative claims. Further,
the appeals court held that Mr. Lyle had standing to bring the derivative
action but remanded for further fact findings regarding the stock ownership
status of two of the original plaintiffs, who held a small number of units
of the Predecessor Partnership. In June 1997, the district court dismissed,
without prejudice, the case for lack of federal jurisdiction. On July 22,
1997, Mr. Lyle filed a Notice of Appeal to the Fifth Circuit challenging
the District Court's dismissal. This appeal was subsequently dismissed.
Plaintiffs refiled the action in Texas state court, and on November 4, 1997
the state action was dismissed.
The Company and Mr. Simplot executed a letter of intent concerning
settlement of this litigation. The Company executed the letter in order to
avoid continuing litigation. Under the terms of the subsequently executed
settlement agreement, Mr. Simplot received $1.9 million for attorneys'
fees and Mr. Lyle received $100,000 for attorneys' fees from the Company.
In addition, Mr. Lyle has the right to convert 2,500 of his shares of the
Company's Class B Stock into a like number of shares of shares of Class A
Stock.
Phillips Petroleum Case
This litigation was filed against the Predecessor Partnership in
August 1990 by Phillips Petroleum Company ("Phillips") and is currently
pending in Orleans Parish, Louisiana. A non-jury trial was held in April
1997. At this trial, Phillips claimed that pursuant to its 33% Net Profits
interest in South Pass Block 89, it was entitled to receive an overriding
royalty for months in which "net profits" were not achieved; that an
excessive oil transportation fee was being charged to the Net Profits
account; and that the entire $69.6 million lump sum cash payment received
by the Predecessor Partnership should have been credited to the Net Profits
account instead of the $5.8 million that was credited. On the latter claim,
Phillips alleged damages in excess of $21.5 million, while on the first two
claims Phillips alleged aggregate damages of several million dollars.
Phillips further contended that it was entitled to double damages and
cancellation of the farmout agreement that created the Net Profits
interest. In addition to contesting the claims of Phillips, the Company
asserted a counterclaim at trial that Phillips had breached a settlement
agreement regarding previous litigation between the parties and claimed
damages in excess of $10.0 million. The parties presented oral arguments to
the court on September 3, 1997.
Shareholder Litigation
The Company, several former directors and two current directors were
named defendants in a consolidated class action suit filed in 1995 in
Delaware Chancery Court in Wilmington. Plaintiffs, holders of the Company's
Class B Stock, alleged that the Company did not properly respond to what
the Company considered informal overtures and not offers from two outside
entities. The Plaintiffs sought to compel the Company to put itself up for
sale and also sought unspecified damages and attorneys' fees. The case was
dismissed on March 10, 1998.
Thomas D. Box Cases
In August 1996, Thomas D. Box filed suit in state district court in
Dallas, purportedly both on his own behalf and on behalf of the Company,
against all of his brothers, SSHC (then BBHC) and CKBP. He alleged breaches
of fiduciary duties and waste of corporate assets. As remedies, he claimed
unspecified monetary damage, attorneys' fees, an accounting and appointment
of a receiver for SSHC. He later amended his lawsuit to add the Company and
several of its then directors as defendants. In accordance with Delaware
law, the Company's Board of Directors appointed a special committee to
review the litigation and take any actions the committee, on the advice of
independent counsel, deemed necessary. All of Thomas D. Box's claims
against the Company were settled in connection with the Simplot
Transaction. See Note 5. Reorganization Expense - Thomas D. Box Settlement.
Other Contingencies
The Company is not a party to any material pending legal proceedings
other than the foregoing. If the Company is not successful in the foregoing
suits, it is the opinion of the Company that any adverse judgments, other
than certain possible results of the Phillips Litigation, would not have a
material adverse effect on the Company.
NOTE 12. SUPPLEMENTAL DISCLOSURES
Oil and Natural Gas Properties
Investments in oil and natural gas properties (all of which are in the
United States), including onshore fee lands, were as follows:
At December 31,
1997 1996
Proved Unproved Total Proved Unproved Total
(In thousands)
Onshore $ 26,401 $ 5,194 $ 31,595 $ 8,924 $ 3,502 $ 12,426
Offshore 185,325 3,561 188,886 171,823 3,002 174,825
Total 211,726 8,755 220,481 180,747 6,504 187,251
Accumulated depreciation,
depletion and
amortization (139,781) - (139,781) (112,648) - (112,648)
Net oil and natural gas
Properties $ 71,945 $ 8,755 $ 80,700 $ 68,099 $ 6,504 $ 74,603
Expenditures for acquisition, exploration, development and production
for oil and gas properties incurred by the Company are summarized as
follows:
For the years ended December 31,
1997 1996 1995
(Unaudited, in thousands)
Acquisition costs $ 12,545 - -
Leasehold acquisition costs $ 5,793 $ 5,548 $ 3,215
Exploration costs $ 13,767 $ 27,811 $ 8,902
Development costs $ 9,975 $ 9,359 $ 11,597
Production costs $ 4,015 $ 3,825 $ 3,142
The Company's net ownership interest in proved oil and gas reserves
was as follows:
At December 31,
1997 1996 1995
Natural Natural Natural
Oil Gas Oil Gas Oil Gas
MBbls(1) MMcf MBbls MMcf MBbls MMcf
(Unaudited, in thousands)
Beginning of period 3,299 39,332 2,938 51,373 3,298 50,334
Revisions of previous
estimates 330 (6,004) 709 (8,162) 7 1,040
Extensions, discoveries
and other 1,046 4,115 585 4,340 472 5,866
Purchased reserves 973 6,216 - - - -
Production (1,197) (7,116) (933) (8,219) (839) (5,867)
End of period 4,451 36,543 3,299 39,332 2,938 51,373
Proved developed reserves
Beginning of period 2,541 28,323 2,282 33,521 1,941 23,488
End of period 3,208 27,259 2,541 28,323 2,282 33,521
(1) Includes Natural Gas Liquids
The proved developed and undeveloped reserves and standardized measure
of discounted future net cash flows associated with South Pass Block 89 are
burdened by a 33% Net Profits expense. The reserves included herein for
South Pass Block 89 are stated before deduction of Net Profits expense,
which is treated as an operating expense rather than a reduction in proved
reserves. At December 31, 1997 proved reserves from South Pass Block 89
represented approximately 21% and 28% of the total proved oil and natural
gas reserves, respectively.
Estimates of oil and gas reserves were prepared by the independent
engineering and consulting firm of Netherland, Sewell & Associates, Inc.
for 1996 and 1995, and by Netherland, Sewell & Associates, Inc. and Miller
and Lents, Ltd. for 1997. The determination of these reserves is a complex
and interpretative process that is subject to continued revision as
additional information becomes available. In most cases, a relatively
accurate determination of reserves may not be possible for several years
due to the time necessary for development drilling, testing and studies of
the reservoirs.
The quantities of proved oil and gas reserves presented include only
those amounts which the Company reasonably expects to recover in the future
from known oil and gas reservoirs under existing economic and operating
conditions. Proved reserves are limited to those quantities which are
recoverable commercially at current prices and costs, under existing
regulatory practices and technology. Therefore, any changes in future
prices, costs, regulations, technology and unforeseen factors could
significantly increase or decrease proved reserve estimates.
The following tables include amounts determined in accordance with the
requirements of the SFAS No. 69 entitled "Disclosures About Oil and Gas
Producing Activities" with respect to estimated future net cash flows from
oil and gas reserves and the present worth of those estimated future net
cash flows discounted at 10% per annum.
In accordance with SFAS No. 69 methodology, specific assumptions were
applied in the computation of the reserve evaluation estimates. Under this
methodology, future net cash flows are determined by reducing estimated
future gross cash flows from oil and gas sales by the estimated costs to
develop and produce the underlying reserves, including the Net Profits
expense on South Pass Block 89.
Future cash inflows were based on year end prices of proved oil and
gas reserves as adjusted by known contractual pricing information assuming
that the Company will sell its future gas production from South Pass Block
89 at the prices set forth in its existing long-term gas purchase contract
for such gas. Future production costs were based on costs as of the
estimated date to produce the proved oil and gas reserves. A significant
portion of the proved reserves are undeveloped and future development costs
were calculated based on a continuation of present economic conditions.
Future net cash flows were then discounted at 10% per annum to arrive at
the standard measure of discounted future net cash flows.
Due to the imprecise nature of the oil and gas reserves and the
uncertainty of future economic conditions, the Company makes no
representation regarding what interpretations may be made or what degree of
reliance may be placed on this method of evaluating proved oil and gas
reserves. The following table presents the standardized measures of
discounted future estimated net cash flows and changes therein relating to
proved oil and gas reserves:
At December 31,
1997 1996 1995
(Unaudited, in thousands)
Oil and natural gas revenues $ 226,262 $ 326,498 $ 335,199
Production costs (31,702) (26,971) (26,269)
Net Profits expense (28,933) (53,955) (64,988)
Development costs (23,954) (17,756) (20,046)
Income tax expense (16,845) (50,638) (50,027)
Net cash flow 124,828 177,178 173,869
10% annual discount (30,990) (31,165) (39,887)
Standardized measure of discounted future
net cash flow $ 93,838 $ 146,013 $ 133,982
Following are the principal sources of changes in the standardized
measure of discounted future net cash flows
At December 31,
1997 1996 1995
(Unaudited, in thousands)
Standardized measure of discounted cash
flows at beginning of year $ 146,013 $ 133,982 $ 124,490
Sales and transfers of oil and natural gas
produced, net of production costs and
Net Profits expense (42,097) (47,810) (36,479)
Net changes in prices and production costs (61,134) 37,764 12,300
Net changes in estimated development costs (5,130) (1,332) (3,229)
Net changes in estimated Net Profits expense 14,029 1,750 (8,990)
Net changes in income tax expense 28,283 (3,736) (6,175)
Extensions, discoveries and improved
recovery less related costs 9,171 16,060 25,042
Purchases of proved oil and natural gas
Reserves 13,865 - -
Development costs incurred during the year 9,975 9,359 11,597
Revisions of previous quantity estimates (21,306) (10,747) 15,048
Other changes (12,432) (2,675) (12,071)
Accretion of discount 14,601 13,398 12,449
Standardized measure of discounted future
net cash flows end of year $ 93,838 $ 146,013 $ 133,982
NOTE 13. INDUSTRY SEGMENT INFORMATION
The Company is engaged in only one industry segment -- crude oil and
natural gas exploration, development and production. The Company generally
does not operate oil and gas properties but owns interests in such
properties as a working interest owner.
Purchases by BayOil (USA), Inc. during 1997 and 1996 represented 31%
and 18% of the Company's total oil and natural gas revenues, respectively.
Marathon Oil Company's purchases during 1995 accounted for 25% of the total
oil and natural gas revenues for that year. Purchases by Texas Eastern
during 1997, 1996 and 1995 represented 42%, 51%, and 70%, of the total oil
and natural gas revenues, respectively.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The following table provides information with respect to persons who
served on the Company's Board of Directors (a "Director") or as an
executive officer of the Company during 1997. Each Director holds office
until his successor is elected and qualified or until his or her earlier
resignation or removal in accordance with the Certificate of Incorporation
and By-Laws of the Company. Several of the present and former Directors and
several of the present and former officers have been named as defendants in
one or more legal actions. See "Litigation Involving Directors and
Officers." Executive officers hold their respective offices at the
pleasure of the Board of Directors.
Name Age Position
Don D. Box (1) (4) 47 Director, Executive Vice President
John E. Goble, Jr. (2) 51 Director
William E. Greenwood (3) 59 Director
David H. Hawk (1) 53 Director, Chairman of the Board
James Arthur Lyle (3) 52 Director
David E. Preng (3) 51 Director
Thomas W. Rollins (1) 66 Director
Alan C. Shapiro (2) (3) 52 Director
James A. Watt (1) 47 Director, President and
Chief Executive Officer
Steven J. Craig 45 Senior Vice President/Planning and
Administration
J. Burke Asher 57 Vice President/Finance and
Secretary
Edward V. Howard 34 Vice President, Controller and
Assistant Secretary
Glen Adams (2) (5) 59 Director
Bernay C. Box (2) (7) 36 Director
Daryl L. Buchanan (1) (3) (6) 48 Director
Richard D. Squires (1) (3) (8) 40 Director
Dennis A. Francis (9) 45 Senior Vice President/Operations
Rodney A. Madden (9) 42 Vice President/Marketing and Supply
Dorothy A. Knauf (10) 77 Treasurer and Assistant Secretary
- ------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
(4) Don D. Box served as Chairman of the Board of Directors and Chief
Executive Officer until October 8, 1997, at which time he was appointed
Executive Vice President.
(5) Glen Adams resigned as a Director on January 24, 1997.
(6) Daryl L. Buchanan resigned as Director on January 23, 1997.
(7) Bernay C. Box did not stand for reelection at the annual
stockholders' meeting held on December 4, 1997.
(8) Richard D. Squires resigned as a Director on April 25, 1997.
(9) The employment of Dennis A. Francis and Rodney A. Madden terminated
effective October 31, 1997.
(10) Dorothy A. Knauf resigned effective October 24, 1997.
The following is a brief description of the background and principal
occupation of each Director and executive officer of the Company. The
periods of service shown below for officers of the Company include service
prior to the Corporate Conversion, as officers of Associates, which served
as the corporate general partner of the Partnership.
Don D. Box has served as a Director of the Company since March 1991,
and as Executive Vice President of the Company since October 1997. He
served as Chairman of the Board of Directors from January 1994 to October
1997, as Chief Executive Officer from August 1996 to October 1997 and as
President from August 1996 to March 1997. From March 1994, until January
1995, he served as the Company's Director of Corporate Development. He has
served as Vice President of BBHC, Associates, and CKBP since September
1997. For more than five years prior to September 1997, he served as a
director and executive officer of BBHC, Associates, and CKBP and certain
other affiliates of BBHC. BBHC is the prior name of S-Sixteen Holding
Company, which owns 57.2% of the Class A Stock and which is the parent
corporation of Associates and CKBP. Mr. Box is a director of Toucan Mining
Company. He is a co-executor of the Cloyce K. Box Estate.
John E. Goble, Jr. has served as a Director since April 1997. Mr.
Goble is a certified public accountant and a certified financial planner
and from 1986 through the present has served as an investment and financial
advisor to Byrd Investments. Mr. Goble is a director of the Miracle of
Pentecost Foundation.
William E. Greenwood has served as a Director since April 1997. From
1995 through the present, Mr. Greenwood has served as a consultant. He
served as director and chief operating officer of Burlington Northern
Railroad Corporation from 1990 until 1994. Mr. Greenwood is a director of
AmeriTruck Distribution Corporation, Mark VII, Inc., and Transport Dynamics
Inc. Mr. Greenwood is also president of the Mendota Museum and Historical
Society.
David H. Hawk has served as a Director since September 1997 and as
Chairman of the Board since October 1997. Since 1984, he served as
Director, Energy Natural Resources for the J.R. Simplot Company in Boise
Idaho, which was founded by J.R. Simplot, who together with members of his
family, controls 57.2% of the Company's Class A Stock.
James Arthur Lyle, CCIM has served as a Director since September 1997.
Since 1976, he has been the owner of James Arthur Lyle & Associates, a
commercial industrial and investment real estate firm in El Paso, Texas.
Since 1984, Mr. Lyle has served as a director, Chief Operating Officer, and
Vice President of Hueco Mountain Estates, Inc., a 10,500-acre multi-use
real estate development located in El Paso County, Texas.
David E. Preng has served as a Director since April 1997. From 1980
through the present, Mr. Preng has been Chief Executive Officer and
President of Preng and Associates, Inc., an international executive search
firm. He is a director of Citizens National Bank of Texas and the British
American Business Association, and is a fellow of the Institute of
Directors in London.
Thomas W. Rollins has served as a Director since July 30, 1996. Since
1992, Mr. Rollins has been Chief Executive Officer of Rollins Resources, a
natural gas and oil consulting firm. From March 1991 until 1992, Mr.
Rollins was President and Chief Executive Officer of Park Avenue
Exploration Corporation, an oil and gas exploration company and a
subsidiary of USF&G Corporation. He is a director of Pheasant Ridge Winery,
The Teaching Company, and the Nature Conservancy of Texas.
Alan C. Shapiro has served as a Director since May 5, 1994. From 1993
through the present, Professor Shapiro has served as Chairman of the
Department of Finance and Business Economics in the Graduate School of
Business Administration of the University of Southern California. Since
1984, Professor Shapiro has been a Professor of Finance and Business
Economics at the University of Southern California's Graduate School of
Business. From 1991 to present, Professor Shapiro has been the Ivadelle and
Theodore Johnson Professor of Banking and Finance at the school. In
addition, Professor Shapiro has also taught at the Wharton School of the
University of Pennsylvania and at Carnegie Mellon University. His visiting
teaching appointments have included Yale University and the University of
California at Los Angeles.
James A. Watt has served as a Director since September 1997 and as
President and Chief Operating Officer from March 1997 to February 1998. He
was appointed Chief Executive Officer on February 4, 1998. Mr. Watt was a
Vice President/Exploration of Seagull Energy E&P, Inc. from 1993 to 1997.
He was Vice President/Exploration & Exploitation of Nerco Oil & Gas, Inc.
from 1991 to 1993. Mr. Watt received a Bachelor of Science in Physics from
Rensselaer Polytechnic Institute.
Steven J. Craig has served as Senior Vice President/Planning and
Administration of the Company since April 1997, and served as
Administrative Assistant to the Chairman from August 1996 to April 1997.
He served as Vice President and Assistant Treasurer of BBHC, Associates and
CKBP from March 1997 to October 1997, and as director from March 1997 to
August 1997. Mr. Craig served as Assistant Treasurer and Controller of
Associates and CKBP from March 1996 to March 1997, and served as Chief
Financial Officer and Assistant Treasurer of BBHC from May 1996 to March
1997. He served as Vice President of the Company from February 1994 to
March 1995. Mr. Craig was self employed in real estate and consulting from
1992 to 1994 and from March 1995 to March 1996.
J. Burke Asher has served as Vice President/Finance of the Company
since December 1997 and as Secretary since October 1996. He served as the
Company's Chief Accounting Officer from September 1996 to December 1997.
He has served as Treasurer and Assistant Secretary of BBHC, Associates, and
CKBP since March 1997. He served as a director of BBHC and Associates from
March 1997 to August 1997, and as a director of CKBP from March 1997 to
April 1997. Mr. Asher was an independent, self-employed financial
consultant and adviser from 1987 to 1996. He also served as controller of
Doty-Moore Tower Services, Inc., a privately held contractor to the
communications industry, from 1993 to 1995.
Edward V. Howard, a Certified Public Accountant, has served as Vice
President and Controller of the Company since March 1992 and as a senior
accountant from 1989 to 1992. He was elected Assistant Secretary on
October 1, 1997. Mr. Howard received a Bachelor of Business Administration
in Accounting from West Texas State University.
Glen Adams served as a Director from July 30, 1996 until January 24,
1997. From 1990 until August 15, 1996, Mr. Adams served as a Director,
Chairman, President and Chief Executive Officer of Southmark Corporation, a
diversified company with interests in real estate, oil and gas properties,
insurance and other areas.
Bernay C Box served as a Director from July 30, 1996 to December 4,
1997. He has served as President of Bernay Box & Co., a private Dallas
investment advisory firm, since 1991. Bernay C. Box is the nephew of the
late Cloyce K. Box and is the first cousin of Don D. Box.
Daryl L. Buchanan served as a Director from July 30, 1996 until
January 23, 1997. Since January, 1986, he has served as Executive Vice
President of Georges Investment Company, a Houston and Dallas diversified
investment firm formerly controlled by the late Basil Georges whose estate
holds 13.6% of the Company's Class A Stock.
Richard D. Squires served as a Director from July 30, 1996 until April
25, 1997. Since 1988, Mr. Squires has served as President of RS Holdings,
Inc., a Dallas-based real estate and high-yield securities investment firm.
Mr. Squires also serves as a director of Vista 2000, Inc. and American
Consumer Products, Inc., a subsidiary of Vista 2000, Inc., and as President
of R3 Realty Corp. (formerly Pace Membership Warehouse, Inc.).
Dennis A. Francis served as Senior Vice President/Operations of the
Company from 1989 to 1997, and as Vice President from 1981 to 1989. He
served as Vice President of CKBP from 1982 until November 1993.
Rodney A. Madden served as Vice President/Marketing and Supply of the
Company from 1989 to 1997, and as a manager of marketing from 1982 to 1989.
Dorothy A. Knauf served as Treasurer and Assistant Secretary of the
Company from 1981 until 1997. She served as Treasurer of Associates until
March 1996.
New Officer
Robert P. Murphy joined the Company as Vice President/Exploration on
January 22, 1998. Mr. Murphy served as a director of Cairn Energy USA, Inc.
from May 1996 to November 1997. Mr. Murphy joined Cairn in 1990 as an
exploration geologist and was Cairn's Vice President-Exploration from March
1993 to January 1998. From 1984 to 1990, Mr. Murphy served as an
exploration geologist for Ensearch Exploration, an oil and gas company.
Mr. Murphy holds a M.S. in geology from The University of Texas at Dallas.
He is 39 years of age.
None of the Directors have significant personal interests in the
exploration, development or production of oil and gas.
LITIGATION INVOLVING DIRECTORS AND EXECUTIVE OFFICERS
Shareholder Litigation
The Company, several former directors and two current directors were
named defendants in a consolidated class action suit filed in 1995 in
Delaware Chancery Court in Wilmington. Plaintiffs, holders of the Company's
Class B Stock, alleged that the Company did not properly respond to what
the Company considered informal overtures and not offers from two outside
entities. The Plaintiffs sought to compel the Company to put itself up for
sale and also sought unspecified damages and attorneys' fees. The case was
dismissed on March 10, 1998.
Section 16(a) Beneficial Ownership Reporting Compliance
Based solely upon the Company's review of Forms 3 and 4 received by
the Company, all persons required by Section 16(a) of the Securities
Exchange Act of 1934 ("the Act") to file such forms complied with Section
16(a) of the Act with the following exceptions: Directors John E. Goble,
Jr., William E. Greenwood, David E. Preng, David H. Hawk, and James Arthur
Lyle each filed one late Form 3, and Mr. Preng filed one late Form 4.
ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the Company
during 1997, 1996, and 1995 to the Company's Chief Executive Officer and
its four most highly compensated executive officers, other than the Chief
Executive Officer, whose total annual salary and bonus in 1997 exceeded
$100,000 (collectively, the "Named Executive Officers").
Summary Compensation Table
Annual Compensation Long-Term Compensation
Securities
Other Restricted Underlying
Name and Annual Stock Options/ All Other
Principal Fiscal Salary Bonus Compensation Awards SAR's Compensation
Position Year ($) ($) ($)(1) ($) (#) ($)
James A. Watt 1997 166,250 100,000 - 112,500(3) 100,000 148,039(4)
President
and Chief 1996 - - - - - -
Executive
Officer(2) 1995 - - - - - -
Don D. Box 1997 183,335 - - - 100,000 2,884(6)
Executive
Vice 1996 - - - - - 28,000(6)
President (5)
1995 19,300 - - - - 554,100(6)
Dennis A. 1997 113,330 - - - - 249,107(8)
Francis
Senior Vice 1996 136,000 4,000 - - - 400(10)
President/
Operations (7) 1995 123,600 21,700 - - 20,000(9) 102(10)
Steven J. Craig 1997 100,008 15,000 - - 20,000 177(10)
Senior Vice
President/ 1996 40,202 10,000 - - - 77(10)
Planning and
Administration 1995 25,641 - - - - -
J. Burke Asher 1997 95,004 15,000 - - 20,000 450(10)
Vice President
/Finance and 1996 31,668 3,200 - - - 150(10)
Secretary
1995 - - - - - -
- ----------
(1) No amount is included as it is less than 10% of the total salary and
bonus of the individual for the year.
(2) James A. Watt served as President and Chief Operating Officer from
March 17, 1997 to February 4, 1998, on which date he was appointed Chief
Executive Officer.
(3) At December 31, 1997 Mr. Watt held 15,000 restricted shares of Class
B Stock with a value of $77,813. The total number of restricted shares
awarded effective March 17, 1997 was 15,000, which vest 20% per year from
the effective date. If any dividends are paid to holders of Class B Stock,
Mr. Watt's restricted shares will be entitled to receive dividends.
(4) This amount includes a signing bonus of $25,000, reimbursed
relocation expenses of $122,892, and $147 for group term life insurance
premiums paid by the Company.
(5) Don D. Box served as Chairman of the Board from March 1991 to October
1997 and as Chief Executive Officer from August 1996 to October 1997. He
served as Director of Corporate Development from March 1994 until January
1995 and as President from August 1996 until March 1997.
(6) For 1995, this amount includes $463,500 of severance payments (equal
to 24 months of salary), $68,900 in other severance benefits such as art
work and furniture and reclassification of certain disputed items as
income, and $21,700 for Director's fees. For 1996, this amount is for
Director's fees. For 1997, $2,722 is for Director's fees and $162 is for
group term life insurance premiums paid by the Company.
(7) Dennis A. Francis' employment terminated effective October 31, 1997.
(8) This amount is for severance payments.
(9) All options terminated upon the optionee's termination of employment
with the Company.
(10) These amounts are for group term life insurance premiums paid by the
Company.
Severance agreements are discussed below. Three Named Executive
Officers have employment contracts with the Company. See "Change in
Control Arrangements."
EMPLOYEE STOCK OPTIONS
1992 Plan
The Company's Board of Directors approved the 1992 Incentive Stock
Option Plan (the "1992 Plan") on April 24, 1992 for Company employees. The
1992 Plan was approved by the holders of a majority of the Company's Class
A Stock on July 1, 1992, effective as of April 24, 1992. The 1992 Plan
terminates on April 23, 2002. The primary purposes of the 1992 Plan are to
provide an additional inducement for those employees granted options to
remain with the Company and to continue to increase their efforts to make
the Company successful. The 1992 Plan is administered by those Directors
serving on the Compensation Committee. During 1997, no options were
granted under the 1992 Plan. As of December 31, 1997, only 28,500 options
remain outstanding under the 1992 Plan, and the Company does not anticipate
granting any more options thereunder.
Terms of the 1992 Plan include the following:
a. More than one option may be granted to an employee, but options
for no more than 20,000 shares, in the aggregate, may be granted under the
1992 Plan to any employee. In 1995, the Board of Directors voted to amend
the 1992 Plan to allow the granting of options for an unlimited number of
shares, in the aggregate, to an employee, provided that options for no more
than 20,000 shares per year are granted to any individual employee, except
the Chief Executive Officer, who would be limited to options for no more
than 50,000 shares per year. In order to become effective, such amendment
to the 1992 Plan requires the approval of the holders of a majority of the
Company's Class A Stock (the "Stock Option Amendment"). The present Board
of Directors does not anticipate submitting the Stock Option Amendment to a
vote of the stockholders.
b. The option price is equal to the fair market value of a share of
Class B Stock on the date of the grant, except that the option price for an
employee owning more than 10% of the voting power of the Company is equal
to 110% of the fair market value of Class B Stock on the date of grant.
c. Options may be exercised by the optionee only by written notice
stating the number of shares covered by options being exercised. The shares
purchased through the exercise of options are to be paid for in cash or a
combination of cash and payments under an installment note payable to the
Company monthly plus interest over a period of up to five years. No options
can be exercised in the first three years after the date of grant; options
can be exercised for no more than 50% of the optioned shares after the
third year but before the fifth year after the date of grant, and the
remaining 50% of the optioned shares may be exercised no sooner than five
years after the date of grant.
d. All options terminate 10 years from the date of grant, except
those options granted to an individual who at the time of such grant owns
more than 10% of the voting power of any class of the Company's outstanding
stock, which options terminate five years from the date of grant, or upon a
termination of an optionee's employment with the Company, other than an
authorized retirement or as a result of death or an acknowledged physical
disability. The options granted under the 1992 Plan may not be transferred
by an optionee except by will or the laws of descent and distribution.
e. As a condition to the grant of an option, the optionee is required
to execute a written agreement to remain in the employment of the Company
for one year, subject to termination at will by the Company.
f. The number of shares of Class B Stock covered by options granted
to any individual under the 1992 Plan and the option prices are subject to
certain anti-dilution adjustments.
1997 Plan
On December 4, 1997, the holders of a majority of the Company's Class
A Stock approved the 1997 Stock Option Plan (the "1997 Plan"), which is
intended to benefit the Company by providing Directors and key employees of
the Company with additional incentives and giving them a greater interest
as shareholders in the success of the Company.
The 1997 Plan provides for the issuance of options to purchase only
Class B Stock and is administered by a committee (the "Committee") of two
or more Directors of the Company who each qualify as a "Non-Employee
Director" under Rule 16b-3 under the Securities Exchange Act of 1934, as
amended and as an "outside director" under Section 162(m) of the Internal
Revenue Code of 1986, as amended (the "Code"). Directors and those key
employees of the Company and its subsidiaries selected by the Committee are
eligible to be granted options under the 1997 Plan. The Committee has the
discretion to determine the participants to be granted options, the number
of shares granted to each person, the purchase price of the Class B Stock
covered by each option and other terms of the option. Options intended to
meet the requirements of Section 162(m) of the Code will have an exercise
price no less than the fair market value of the Class B Stock on the date
of grant. The Committee estimates that approximately 22 employees will be
eligible participants.
Options granted under the 1997 Plan may be either incentive stock
options qualifying under Section 422 of the Code or non-qualified stock
options. The Company may issue up to 2,750,000 shares of Class B Stock
upon the exercise of options granted under the 1997 Plan, but no individual
may be issued more than 275,000 shares. In the event any option
terminates, expires or is surrendered without having been exercised in
full, the shares subject to such option will again be available for
issuance pursuant to options to be granted under the 1997 Plan. The shares
of Class B Stock to be issued upon exercise of options may be authorized
but unissued shares or shares previously issued and reacquired by the
Company. The 1997 Plan will terminate 10 years after its effective date,
which is December 4, 1997.
The term of an option will be fixed by the Committee, but in no event
will the term be more than 10 years (five years with respect to incentive
stock options granted to a holder of more than 10% of the total combined
voting power of all classes of stock then outstanding) from the date of
grant. Each option will be exercisable at such times and upon such
conditions as the Committee may determine, except that the aggregate fair
market value of Class B Stock with respect to which incentive stock options
are exercisable for the first time by an optionee in any calendar year may
not exceed $100,000. The option exercise price will be determined by the
Committee, but may not be less than the par value of the Class B Stock, and
in the case of incentive options may not be less than the fair market value
of the Class B Stock on the date of grant or 110% of the fair market value
with respect to any incentive stock options granted to a holder of more
than 10% of the total combined voting power of all classes of stock then
outstanding. Option holders will pay the option exercise price in cash
or, unless the Committee objects, in shares of Common Stock owned by the
option holder. The Committee may provide the option holder with the right
to satisfy any withholding tax obligation by delivery of previously owned
shares or withholding shares otherwise issuable upon exercise of a non-
qualified stock option. The Committee may provide that unexpired and
unvested options will become fully exercisable upon a change in control of
the Company, as defined in the stock option agreement. Adjustments will be
made to the option exercise price and number of shares covered by
outstanding options to prevent dilution or enlargement of rights of option
holders as a result of certain corporate events, such as reorganizations,
mergers, stock splits, stock dividends or other changes in the capital
structure of the Company. Adjustments will also be made to the number of
shares remaining subject to issuance under the 1997 Plan and to the maximum
number of shares issuable to any individual.
In the event of the retirement of an optionee at the normal retirement
age in accordance with the retirement policy of the Company, or the
resignation of the optionee with the written consent of the Company, or
after ceasing to be a member of the Board of Directors in the case of a
director who is not an employee of the Company, an optionee may exercise
vested options for a period of 60 days following the date of such
retirement, resignation, or ceasing to be a director. In the event of his
death or disability, the optionee may exercise vested options for a period
of one year from the date of death or disability. In the event of any other
termination of employment, unless otherwise determined by the Committee,
all outstanding options held by the optionee will terminate on the date of
such termination of employment. No option, however, will be exercisable
after the expiration of the term of the option.
The Board of Directors may suspend, terminate or amend the 1997 Plan
at any time, except that without the approval of the shareholders no such
amendment may increase the maximum number of shares subject to the 1997
Plan, increase the maximum number of shares issuable to any person or
change the designation of the class of persons eligible to receive options.
Under the 1997 Plan, each Director, other than Don D. Box, David H.
Hawk, James Arthur Lyle and James A. Watt, has been granted stock options
in three grants: one grant to purchase 25,000 shares effective May 1, 1997,
at an exercise price of $6.94 per share (the closing market price of the
Class B Stock on such date); a second grant to purchase 25,000 shares to be
effective May 1, 1998, at an exercise price of $9.00 per share; and a third
grant to purchase 25,000 shares to be effective May 1, 1999, at an exercise
price of $11.00 per share. The options will not be exercisable until one
year after their respective grants or, if earlier, the termination of the
director from the Board of Directors other than by resignation, and will
terminate 60 days after the director's ceasing to be a member of the Board
of Directors (one year if due to death or disability). Pursuant to an
employment agreement with James A. Watt, the Company's President and Chief
Executive Officer, the Company issued a grant to Mr. Watt of options
covering 100,000 shares at an exercise price of market value on the day of
grant, with the options to become exercisable 20% per year over five years.
Also under the 1997 Plan, the Company granted to Don D. Box, the former
Chief Executive Officer and current Executive Vice President of the
Company, options to purchase 100,000 shares of Class B Stock.
Federal Income Tax Consequences
No taxable income will be realized by a participant upon the grant of
a non-qualified stock option. Upon exercise, the excess of the fair market
value of the shares at the time of exercise over the option exercise price
for such shares will generally constitute taxable compensation. The
Company or a subsidiary will be entitled to a deduction for such
compensation income (assuming any federal income tax withholding
requirements are satisfied). Upon disposition of the shares acquired upon
exercise, any appreciation (or depreciation) in the stock value after the
date of exercise will be treated as capital gain (or loss).
No taxable income will be recognized by a participant upon the grant
or exercise of an incentive stock option, assuming there is no disposition
of the option shares within two years after the option was granted or
within one year after the option was exercised (the "holding period"), and
provided that the participant has been employed by the Company or one of
its subsidiaries from the date of grant to a date that is not more than
three months before the date of exercise. The exercise of an incentive
stock option, however, could result in an item of tax preference for
purposes of the alternative minimum tax. The sale of incentive stock option
shares after the holding period at a price in excess of the participant's
adjusted basis (ordinarily the option exercise price) will constitute
capital gain to the participant, and neither the Company nor any subsidiary
will be entitled to a federal income tax deduction by reason of the grant
or exercise of the option or the sale of the shares. If incentive stock
option shares are sold by the participant prior to the expiration of the
holding period, generally the participant will have compensation income
taxable in the year of such sale in an amount equal to the excess, if any,
of the fair market value of such shares at the time of exercise of the
option (or, if less, the amount received upon the sale) over the option
exercise price for such shares. The Company or a subsidiary will be
entitled to a deduction for such compensation income (assuming any federal
income tax withholding requirements are satisfied).
Option Grants in Last Fiscal Year
Individual Grants
Percent of
Number of Total
Securities Options
Underlying Granted to Grant Date
Options Employees in Exercise Expiration Present Value
Name Granted Fiscal Year Price/Share Date ($)
James A. Watt 100,000 36.7% $6.625 03/17/07 454,370
Don D. Box 100,000 36.7% $6.625 12/05/07 454,370
Steven J. Craig 20,000 7.2% $6.625 12/05/07 90,874
J. Burke Asher 20,000 7.2% $6.625 12/05/07 90,874
- ----------
(1) These values were determined under the Black-Scholes option pricing
model based on the following assumptions: stock price volatility of
49.51%; interest rate based on the yield to maturity of a 10-year stripped
Treasury security; exercise in the tenth year; and a dividend rate of zero.
No adjustments were made for nontransferability or risk of forfeiture. The
Company's use of this model does not constitute an endorsement or an
acknowledgment that such model can accurately determine the value of
options. No assurance can be given that the actual value, if any, realized
by an executive upon the exercise of these options will approximate the
estimated values calculated by using the Black-Scholes model.
Aggregated Option Exercises in Last Fiscal Year and Fiscal Year-End Option Values
Number of Securities Value of Unexercised In-
Number of Underlying Unexercised the Money Options at
Shares Value Options at Fiscal Fiscal Year-End
Acquired on Realized Year-End ($)(1)
Name Exercise ($) Exercisable Unexercisable Exercisable Unexercisable
James A. Watt - - - 100,000 - -
Don D. Box - - - 100,000 - -
Steven J. Craig - - - 20,000 - -
J. Burke Asher - - - 20,000 - -
- ----------
(1) Computed as the number of securities multiplied by the difference
between the option exercise prices and the closing price of the Class B
Stock on December 31, 1997.
PENSION PLAN
The Company's pension plan provides retirement and other benefits to
eligible employees upon reaching the "normal retirement age," which is age
65 or after five years of service, if later. Directors who are not also
employees of the Company are not eligible to participate in the plan.
Employees are eligible to participate on January 1 following the completion
of six months of service or the attainment of age 20 1/2, if later.
Additional provisions are made for early or late retirement, disability
retirement and benefits to surviving spouses. At normal retirement age, an
eligible employee will receive a monthly retirement income equal to 35% of
his or her average monthly compensation during the three consecutive
calendar years in the prior 10 years which provide the highest average
compensation, plus 0.65% of such average compensation in excess of the
amount shown in the Social Security Covered Compensation Table (as
published annually by the Internal Revenue Service) multiplied by his or
her years of service, limited to 35 years. If an employee terminates
employment (other than by death or disability) before completion of five
years of service, no benefits are payable. If an employee terminates
employment after five years of service, the employee is entitled to all
accrued benefits.
The following table illustrates the annual pension for plan
participants that retire at "normal retirement age" in 1997:
Pension Plan Table
Years of Service (1)(3)(4)
Average
Compensation (1)(2) 15 20 25 30 35
($) ($) ($) ($) ($) ($)
125,000 53,071 56,178 59,285 62,392 65,499
150,000 64,259 68,178 72,098 76,017 79,937
160,000 68,734 72,978 77,223 81,467 85,712
175,000 68,734 72,978 77,223 81,467 85,712
225,000 68,734 72,978 77,223 81,467 85,712
250,000 68,734 72,978 77,223 81,467 85,712
300,000 68,734 72,978 77,223 81,467 85,712
400,000 68,734 72,978 77,223 81,467 85,712
450,000 68,734 72,978 77,223 81,467 85,712
500,000 68,734 72,978 77,223 81,467 85,712
- ----------
(1) As of December 31, 1997, the Internal Revenue Code does not allow
qualified plan compensation to exceed $160,000 or the benefit payable
annually to exceed $125,000. These limitations will be adjusted by the
Internal Revenue Service for inflation in future years. When the
limitations are raised, the compensation considered, and the benefits
payable under the Retirement Plan will increase to the level of the new
limitations or the amount otherwise payable under the Retirement Plan,
whichever amount is lower.
(2) Subject to the above limitations, compensation in this table is
generally equal to all of a participant's compensation paid in a fiscal
year (the total of Salary, Bonus, Other Annual Compensation, and All Other
Compensation in the Summary Compensation Table). Average compensation in
this table is the average of a plan participant's compensation during the
highest three consecutive years out of the prior 10 years.
(3) The estimated credited service at December 31, 1997 for the Named
Executive Officers is as follows: James A. Watt (1 year), Don D. Box (2
years), Dennis A. Francis (16 years), Steven J. Craig (3 years), and J.
Burke Asher (1 year).
(4) The normal form of payment is a life annuity for a single participant
or a 50% joint and survivor annuity for a married participant. Such
benefits are not subject to a deduction for Social Security or other offset
amounts.
COMPENSATION OF DIRECTORS
The Directors held eleven meetings in 1997. All Directors attended at
least 75% of the 1997 meetings held during their respective tenures. With
respect to Director activities undertaken by a committee of Directors, a
quorum of committee members were present at each of the respective
committee meetings. Each Director was paid a fee of $20,000 per annum. In
addition, each Director receives $1,000 for each Board meeting attended and
$750 for each committee meeting attended if the committee meeting is on a
different day than the Board meeting. Directors are entitled to
reimbursement for out-of-pocket expenses related to their services as
Directors. The Company also provides the Directors with directors' and
officers' liability insurance. Further, the Company's By-Laws provide for
the Company's indemnification of Directors and officers in certain
situations.
Bernay C. Box, John E. Goble, Jr., William E. Greenwood, David E.
Preng, Thomas W. Rollins and Alan C. Shapiro each were granted stock
options to purchase shares of Class B Stock under the 1997 Stock Option
Plan. The option grants to each of these Directors consist of three
grants: one grant to purchase 25,000 shares to be effective May 1, 1997, at
an exercise price of $6.94 per share (the closing market price of the Class
B Stock on such date); a second grant to purchase 25,000 shares to be
effective May 1, 1998, at an exercise price of $9.00 per share; and a third
grant to purchase 25,000 shares to be effective May 1, 1999, at an exercise
price of $11.00 per share. The options will have 10-year terms, will not
be exercisable until one year after their respective grants or, if earlier,
the termination of the director from the Board of Directors other than by
resignation, and will terminate 60 days after the director's ceasing to be
a member of the Board of Directors (one year if due to death or
disability). Stock options previously granted to Directors were canceled
upon approval by stockholders of the Non-Employee Director Stock Purchase
Plan (the "Director Stock Purchase Plan"). Options granted to Bernay C. Box
expired unexercised in February 1998 as a result of his ceasing to be a
Director on December 4, 1997.
Additional compensation was paid to each of Messrs. Don D. Box, Bernay
C. Box, Thomas W. Rollins and Alan C. Shapiro equal to 7,207 shares of
Class B Stock (having a market value of $50,000 on May 1, 1997), which will
be subject to restrictions on transfer until July 11, 1998. The
restrictions on transfer relating to the shares issued to Bernay C. Box
terminated December 4, 1997, as a result of his ceasing to be a Director.
During 1997, the Company paid Rollins Resources, a proprietorship
owned by Director Thomas W. Rollins, $3,750 for consulting fees. During
1997, the Company paid $141,000 in fees and expense reimbursements to Preng
& Associates, Inc., which is majority-owned by Director David E. Preng, for
executive search services.
The Company's Board of Directors approved the 1992 Non-Qualified Stock
Option Plan (the "Non-Qualified Plan") on April 24, 1992 for Company
Directors. The Non-Qualified Plan was approved by the holders of the Class
A Stock on July 1, 1992, effective as of April 24, 1992. The Non-Qualified
Plan was scheduled to terminate on April 23, 2002. However, upon adoption
of the Director Stock Purchase Plan, the Non-Qualified Plan was terminated
and all options outstanding thereunder were canceled.
DIRECTOR STOCK PURCHASE PLAN
On December 4, 1997, the holders of a majority of the Company's Class
A Stock approved the Non-Employee Director Stock Purchase Plan (the
"Director Stock Purchase Plan"), which is intended to encourage Directors
of the Company to acquire a greater equity interest in the Company by
providing a means for them to receive their director fees in shares of
Class B Stock.
Each non-employee Director of the Company may elect once each year to
receive all or a portion of the fees he receives as a Director in
restricted shares of Class B Stock in lieu of cash. The number of shares
of Class B Stock to be received will be the number of shares that will
equal 150% of the cash amount of such Director's fees divided by the
closing market price of the Class B Stock on the day that cash fees would
otherwise be paid to the Director. The shares of Class B Stock will be
restricted from transfer by the Director until one year after issuance or,
if earlier, his termination as a member of the Board of Directors as a
result of his death, disability, removal or failure to be nominated for an
additional term. The Director will have the right to vote the shares of
restricted stock and to receive any dividends paid in cash or other
property.
The Director Stock Purchase Plan may be terminated at any time upon a
vote of the Board of Directors to terminate the Plan.
CHANGE IN CONTROL ARRANGEMENTS
1995 Severance Agreements
The Company entered into Severance Agreements with its employees in
December 1995, including Dennis A. Francis. The Severance Agreements
required certain payments to employees upon a termination of employment, in
certain instances, during a period of two years after a change in control
(as defined in the Severance Agreements). Terminations providing severance
benefits include terminations by the Company other than for cause (as
defined in the Severance Agreements) or by the employee following a change
in control upon the occurrence of certain enumerated events adversely
affecting the employee's employment. A change in control is defined in the
Severance Agreements as the acquisition of 25% or more of the combined
voting power of the then outstanding Class A Stock, the cessation of
membership of more than one-third of the eight members who comprised the
Board of Directors of the Company on August 16, 1995, a merger,
consolidation or reorganization of the Company, a plan of complete
liquidation or dissolution of the Company or an agreement to sell or
otherwise dispose of substantially all of the assets of the Company. A
change in control, as defined in the severance agreements, occurred in July
1996.
In applicable situations, the Severance Agreements provided for cash
payments to former employees equal to the sum of: (1) all accrued, unpaid
compensation and a pro-rata bonus, (2) severance pay ranging from 6 to 18
months of the employee's base salary, and (3) an amount equal to the
actuarial present value, as of the date of termination, of three years'
hypothetical additional benefits under the Company's pension plan;
provided, however, the former employee retains all vested benefits under
the Company's pension plan and any other qualified pension or profit-
sharing plans. In addition, in applicable situations, the Severance
Agreements provided for the continuation of life, disability, medical,
dental and hospitalization insurance for 6 to 18 months, and for the
lapsing of all restrictions on and full vesting of any outstanding
incentive awards, including stock options granted to the employee. The
Severance Agreements entered into with employees other than officers and
executives provide that, in applicable situations, the employee may elect
to receive the cash equivalent of the insurance benefits. The Company's
Incentive Plan provides that options granted thereunder must be exercised
only during the continuance of the optionee's employment by the Company,
except in cases of retirement, death or disability. Accordingly, any
options remaining unexercised when an employee's employment is terminated
for any other reason expire at the time of termination.
During 1996 and 1997, all employees except two non-officers either
terminated their employment or agreed to amendments to their severance
agreements accepting coverage under the Company's new severance plan. (See
1997 Severance Plan.) In August 1997, Thomas D. Box, former Chief
Executive Officer of the Company, reached a settlement with the Company
concerning, among other things, his severance payments. All other
employees who asserted benefits under the severance plan have been paid in
full for their severance benefits.
1997 SEVERANCE PLAN
In November 1997, the Company adopted the Box Energy Corporation
Severance Plan (the "1997 Severance Plan") which generally covers all full-
time regular employees of the Company. The 1997 Severance Plan provides for
severance pay in applicable instances of "Involuntary Termination" (as
defined in the 1997 Severance Plan) of amounts ranging from the equivalent
of two months base pay to the equivalent of 18 months base pay. The level
of severance pay for which an employee may be eligible depends upon the
employee's classification and full years of service. An "Involuntary
Termination" of a covered employee is any termination which does not result
from a voluntary resignation other than any of (i) a "Termination for
Cause", (ii) a termination by reason of death, (iii) a termination by
reason of disability if one is eligible for benefits under a Company
disability benefit plan or (iv) a termination which is expected to be of
short duration and to be followed by reemployment with the Company. A
"Termination for Cause" is any termination of an individual's employment
with the Company by reason of such individual's conviction of any felony or
of a misdemeanor involving moral turpitude, failure to perform his or her
duties or responsibilities in a manner satisfactory to the Company,
engagement in business activities which are in conflict with the business
interests of the Company, insubordination or engagement in conduct which is
in violation of the Company's safety rules or standards or which otherwise
causes injury to another employee or any other person, or engagement in
conduct which is otherwise inappropriate in the office or work environment.
EMPLOYMENT AGREEMENTS
The Company entered into an employment agreement with James A. Watt,
President and Chief Executive Officer of the Company, for a period of five
years from March 17, 1997, renewable upon mutual agreement of the parties.
Under the terms of the agreement, Mr. Watt will receive a salary of
$210,000 per year, subject to annual increases at the discretion of the
Board of Directors or its designee, with a target bonus amount equal to 50%
of his base salary. Mr. Watt received $123,000 for reimbursement of moving
expenses. The Company will recommend to the Compensation Committee of the
Board of Directors the granting to Mr. Watt 15,000 shares of Class B Stock
and employee stock options to purchase 100,000 shares of Class B Stock
vesting 20% per year over five years, subject to appropriate stockholder
approval. If the exercise price established for such stock options should
be greater than the market price of the Class B Stock on March 17, 1997,
then Mr. Watt will be entitled to receive on the dates of exercise of such
stock options a cash payment equal to the difference between the exercise
price and the market price on March 17, 1997, multiplied by the number of
shares purchased upon such exercise.
In the event of Mr. Watt's termination of employment by the Company
other than for cause (as defined in the agreement) or his resignation for
good reason (as defined in the agreement), Mr. Watt will be entitled to
receive the amount of his then annual base salary plus his target bonus. In
the event of his termination of employment by the Company other than for
cause or by Mr. Watt for good reason, within one year after a change in
control of the Company (as defined in the agreement), Mr. Watt will be
entitled to receive a lump-sum payment equal to a multiple of the sum of
his then annual base salary plus his target bonus. Such multiple will
decline from three , if the change of control occurs within two years after
execution of the agreement, to two, if the change in control occurs between
two and four years after execution of the agreement. If payment to Mr. Watt
upon termination of employment after a change in control of the Company
should be subject to federal excise tax, Mr. Watt will be entitled to
receive additional payments from the Company in an amount necessary to
place him in the same after-tax position as would have been the case if no
additional tax had been imposed.
The Company entered into employment agreements with Steven J. Craig,
Senior Vice President of the Company, and J. Burke Asher, Vice President of
the Company, for a period of two years from August 29, 1997, renewable only
by written agreement signed by the Company and the officer. Under the terms
of the agreements, Mr. Craig will receive a salary of $100,000 per year,
and Mr. Asher will receive a salary of $95,000 per year, both subject to
annual increases at the discretion of the Board of Directors. The officer
may receive, but is not guaranteed, an annual performance bonus. In the
event that the employment of the officer is terminated by the Company
"Without Cause" (as defined in the agreement), or is terminated by the
officer for "Good Reason" (as defined in the agreement), the officer will
be entitled to receive a lump-sum cash severance payment equal to two times
the amount of the officer's then current annual base salary.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
The Company believes that employing and retaining highly qualified and
high performing executive officers is vital to the Company's achievement of
its long-term business goals. To this end, the Compensation Committee of
the Board of Directors (the "Committee") developed an executive
compensation program which is designed to attract and retain such officers.
The Committee's philosophy is to develop a systematic, competitive
executive compensation program which recognizes an executive officer's
position and responsibilities within the Company, takes into account
competitive compensation levels payable within the Company's industry by
similarly sized companies, and reflects both individual and Company
performance.
The executive compensation program developed by the Committee is
composed of the following three elements: (i) a Base Salary, (ii) a
performance-based Annual Cash Incentive (Short Term), and (iii) a stock-
based incentive (Long Term). Under this program, Short Term and Long Term
incentives are "at risk" and are based on performance of the Company versus
defined goals.
The Committee compiles data reflecting the compensation practices of a
broad range of organizations in the Company's industry that are similar to
the Company in size and performance. For both the Base Salary and Annual
Cash Incentives portions of executive compensation discussed below, the
Committee adopted a philosophy of paying the executive officers at a level
that is competitive and within the ranges reflected by the data compiled.
For 1997 only, the primary stated goals for the Chief Executive
Officer were to reduce overhead, reduce the Company's involvement in
litigation, and to recruit a highly qualified operating officer with
pertinent experience in oil and gas exploration, exploitation, acquisition,
production, and operations. The Committee recommended and the entire Board
approved, effective February 1, 1997, the initial base salary of the then
Chief Executive Officer, at a level believed to be consistent with those
stated goals and within the ranges reflected by the aforementioned data
compiled. From October 1997 to February 1998, the Company did not have a
Chief Executive Officer. On February 4, 1998, the Board appointed the
former Chief Operating Officer to be the Chief Executive Officer.
Base Salaries
Base Salary is the portion of an executive officer's total
compensation package which is payable for performing the specific duties
and assuming the specific responsibilities defining the executive's
position with the Company. The Committee's objective is to provide each
executive officer a base salary which is competitive at the desired level.
Annual Cash Incentives
The Committee is developing a performance-based annual cash incentive
plan covering the Company's executive officers and top managers. The
objectives in designing the plan are to reward participants for
accomplishing objectives which are generally measurable and increase
shareholder value. Under the Company's Annual Cash Incentive Plan, the
Compensation Committee has established a "target" cash incentive award for
each executive officer (including the Chief Executive Officer) that is
payable based mostly upon the Company's achieving certain performance
targets and, to a lesser extent, for achieving highly challenging
individual performance objectives. The performance targets will be
increasing reserves and production; controlling finding, development, and
production costs; and achieving an overall return on capital; all of which
are competitive with a peer group of oil and gas companies. The Committee
also determined that award levels under the plan should be fiscally
prudent.
Long-term Stock-based Incentives
The Company maintains a stock option plan for officers and other
employees. The philosophy is to award stock options to selected plan
participants based on their levels within the Company and upon individual
merit. The plan is to grant stock options which are competitive within the
industry for other individuals at the employee's level and which provide
the employee a meaningful incentive to increase performance and focus on
achieving long-term increases in shareholder value. Other factors the
Committee should consider in granting stock options include the employee's
contributions toward achieving the Company's long-term objectives, such as
reserve replacements and acquisitions, as well as the employee's
contributions in achieving the Company's short-term and long-term
profitability targets.
Composition and Actions of the Committee in 1997
During 1997 Messrs. Daryl L. Buchanan and Richard D. Squires served on
the Committee until their resignations from the Board in January and April,
respectively. Alan C. Shapiro served on the Committee until October 1997.
Mr. David E. Preng was appointed to the Committee as its Chairman in April
1997, and Messrs. James Arthur Lyle and William E. Greenwood were appointed
to the Committee in October 1997. In 1997, the Committee approved the
initial base salary and bonus target level of the Chief Operating Officer
who joined the Company in March. The Committee also determined the Annual
Cash Incentive awards for the executive officers at a level believed to be
fiscally prudent and reflective of the individual performances for the year
in achieving plan objectives.
COMPENSATION COMMITTEE
David E. Preng
William E. Greenwood
James Arthur Lyle
PERFORMANCE GRAPH
The following performance graph compares the performance of both
classes of the Company's common stock to the NASDAQ indices of United
States companies and to a peer group comprised of NASDAQ companies listed
under the Standard Industrial Classification Codes 1310-1319 for the
Company's last five fiscal years. Such industrial codes include companies
engaged in the oil and gas business. The graph assumes that the value of an
investment in the Company's common stock and in each index was $100 at
December 31, 1992, and that all dividends were reinvested.
GRAPH HERE DEPICTING INFORMATION FROM TABLE BELOW
12/31/92 12/31/93 12/31/94 12/31/95 12/31/96 12/31/97
ROILA 100.00 247.62 133.33 103.57 88.10 50.00
ROILB 100.00 131.17 111.69 89.61 94.81 53.90
NASDAQ U.S. 100.00 114.79 112.21 158.69 195.18 239.57
NASDAQ O&G 100.00 119.42 110.44 116.04 167.61 159.76
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
As of March 26, 1998, the following persons held shares of the
Company's Class A (Voting) Common Stock in amounts totaling more than 5% of
the total shares of such class outstanding. This information was furnished
to the Company by such persons or statements filed with the Commission.
Name and Address of Shares of Class A (Voting) Percent of Class A (Voting)
Beneficial Owner Common Stock Beneficially Owned Common Stock
S-Sixteen Holding Company
1105 North Market, Suite 1300
Wilmington, Delaware 19801 1,840,525(1) 57%
Estate of Basil Georges
200 Crescent Court, Suite 1800
Dallas, Texas 75201 442,500 14%
Pat Rutherford, Jr.
1550 Two Shell Plaza
Houston, Texas 77002 292,500 9%
- ----------
(1) S-Sixteen Holding Company is wholly-owned by BBHC Acquisition Co.,
L.L.C., a Delaware limited liability company (the "LLC"). S-Sixteen Limited
Partnership ("SSLP"), an Idaho Limited Partnership, is the sole member of
the LLC. The sole general partner of SSLP is the J.R. Simplot Self
Declaration of Revocable Trust dated December 21, 1989, an intervivos
revocable trust of which Mr. J.R. Simplot is the trustee and beneficiary.
OWNERSHIP OF MANAGEMENT
The number of shares of the Company's Class A (Voting) Common Stock
and Class B (Non-Voting) Common Stock beneficially owned as of March 26,
1998 by Directors of the Company, each Named Executive Officer and as a
group comprised of all Directors and executive officers, are set forth in
the following table. This information was furnished to the Company by such
persons.
Shares of Class Percent of Shares of Class B Percent of
A (Voting) Class A (Non-Voting) Class B (Non-
Common Stock (Voting) Common Stock Voting)
Beneficially Common Beneficially Common Stock
Name Owned Stock Owned(1) (1)
J. Burke Asher 1,350 * 676 *
Don D. Box 0 0 7,207 *
Steven J. Craig 300 * 1,100 *
John E. Goble, Jr. 0 0 25,000 *
William E. Greenwood 0 0 25,000 *
David H. Hawk 200 * 700 *
James Arthur Lyle 2,500 * 107 *
David E. Preng 2,750 * 33,000 *
Thomas W. Rollins 0 0 34,207 *
Alan C. Shapiro 0 0 32,207 *
James A. Watt 0 0 39,600 *
Glen Adams 0 0 0 0
Bernay C. Box 0 0 7,207 *
Daryl L. Buchanan(2) 0 0 12,000 0
Dennis A. Francis 0 0 0 0
Richard D. Squires 500 * 2,000 *
All Directors and executive
officers as a group
(19 persons) 9,600 * 227,231 1.3%
- ----------
* Less than 1% of the outstanding shares of this class.
(1) Included in the table above are shares of Class B Stock issuable
within 60 days of March 26, 1998, upon the exercise of stock options
pursuant to the Company's Stock Option Plans to John E. Goble, Jr., (25,000
shares), William E. Greenwood (25,000 shares), David E. Preng (25,000
shares), Thomas W. Rollins (25,000 shares), Alan C. Shapiro (25,000
shares), James A. Watt (20,000 shares), and Directors and executive
officers as a group (150,000 shares).
(2) The number of shares of Class B Stock shown as beneficially owned by
Mr. Buchanan includes 10,000 shares held by the Georges Investment Company
Profit Sharing Plan, of which he is one of three trustees.
Arrangements Relating to Potential Change of Control
On June 3, 1997, the Company extended a $6.95 million loan to S-
Sixteen Holding Company that matures May 29, 1998, and requires monthly
installment payments of $100,000. SSHC pledged as collateral for the
promissory note the 1,840,525 shares of the Company's Class A Stock owned
by SSHC. The pledge agreement provides that in the event that SSHC defaults
on the note, the Company, upon five days' notice to SSHC has the right to
foreclose upon and sell the collateral stock and to bid for and buy the
stock (except at private sale). The pledge agreement also provides that
upon the occurrence and during the continuance of an event of default, the
Company may direct the vote of such stock.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
S-Sixteen Holding Company owns approximately 57% of outstanding shares
of the Class A (Voting) Stock of the Company and 94% of the outstanding
shares of both CKBP and Associates. A resolution adopted in 1992 by the
Board of Directors of the Company authorizes the Company to enter into a
transaction with an affiliate of the Company so long as the Board of
Directors determines that such a transaction is fair and reasonable to the
Company and is on terms no less favorable to the Company than can be
obtained from an unaffiliated party in an arms' length transaction.
The Company pays oil transportation charges to CKBP for transporting
crude oil from its South Pass blocks. Since March 1985, CKBP has owned a
minority interest in the pipeline transporting oil from the wells in the
South Pass blocks to Venice, Louisiana. The tariff for the pipeline at
$2.75 per barrel was published and filed with the Federal Energy Regulatory
Commission, which regulates such rates. The rate has been uniform since
1982 among all owners of the pipeline from South Pass Block 89 Field and is
consistent with the rate charged by an unaffiliated party to the
Partnership prior to the acquisition of the pipeline interest by CKBP. CKBP
billed the Company $3.2 million, $2.8 million and $2.7 million for oil
transportation expense in 1997, 1996, and 1995, respectively.
The Company bills CKBP and other related parties, including SSHC and
Associates for the estimated fair value of usage of an allocated portion of
subleased office space, certain payroll costs and benefits, and other
overhead costs. The amounts billed are considered to be the fair value of
such usage by, or allocations for the benefit of, the related parties. The
Company billed related parties $40,000, $81,000 and $134,000 in 1997, 1996,
and 1995, respectively, for items such as rent, payroll and overhead costs.
Under the Partnership Agreement of the Partnership, the general
partners were entitled to advancement of litigation expenses in the event
they were named parties to litigation in their capacity as general
partners. In order to receive such advancements, each general partner was
required, in writing, to request advancement of litigation expenses and
undertake to repay any advancements in the event it was determined, in
accordance with applicable law, that the general partners were not entitled
to indemnification for litigation expenses. Each general partner executed
such an undertaking agreement in relation to the Griffin Case. Accordingly,
the Partnership and later the Company, advanced litigation expenses to
Associates and Cloyce K. Box (and his estate following his death) in
connection with such litigation. In addition, the Company advanced
litigation expenses on behalf of certain directors and officers of the
Company for one lawsuit related to the Griffin litigation and other
lawsuits related to the shareholder litigation and Thomas D. Box Cases. See
Notes to Financial Statements - Note 11. Contingencies. In accordance with
the By-Laws of the Company, the defendants have executed written
undertakings to repay the Company for any related expenses advanced on
their behalf if it is later found that such costs were not subject to
indemnification by the Company. No judicial determination has been made
that any of the general partners, directors or officers are not entitled to
indemnification for litigation expenses incurred. The total legal costs
incurred related to these cases were $351,000, $1.5 million and $583,000,
for 1997, 1996 and 1995, respectively.
In December 1997, the Company paid $1.9 million to Mr. Simplot and
$100,000 to Mr. Lyle for attorneys' fees in connection with the settlement
of the Griffin Cases. See Notes to Financial Statements - Note 5.
Reorganization Costs.
On April 29, 1997, the Company lent SSHC $7.25 million to retire
existing secured debt of SSHC. The note to the Company was payable on May
29, 1997, but was extended to June 3, 1997. After partial repayment by
SSHC of the note, the Company extended a new note in the amount of $6.95
million at an interest rate of 9.5% that matures May 29, 1998, and requires
monthly installment payments of $100,000. SSHC pledged as collateral for
the promissory note the 1,840,525 shares of the Company's Class A (Voting)
Common Stock owned by SSHC. The pledge agreement provides that in the
event that SSHC defaults on the note, the Company, upon five days' notice
to SSHC, has the right to foreclose upon and sell the collateral stock and
to bid for and buy the stock (except at a private sale). The pledge
agreement also provides that upon the occurrence and during the continuance
of an event of default, the Company may direct the vote of such stock.
SSHC has made payments in excess of the required amounts, and as of
December 31, 1997, the outstanding principal amount of the note had been
reduced to $6,192,000.
The Company paid $194,000 to Preng & Associates, Inc., which is
majority-owned by David E. Preng, a Director of the Company, for executive
search services provided to the Company from July 1996 through the end of
1997.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Documents filed as part of this report:
1. Financial Statements included in Item 8:
(i) Independent Auditors' Reports
(ii) Balance Sheets as of December 31, 1997 and 1996
(iii) Statements of Income for years ended December 31, 1997, 1996 and
1995
(iv) Statement of Stockholders' Equity for years ended December 31,
1997, 1996 and 1995
(v) Statements of Cash Flows for the years ended December 31, 1997,
1996 and 1995
(vi) Notes to Financial Statements
(vii) Supplemental Oil and Natural Gas Information (Unaudited)
2. Financial Statement Schedules
Financial statement schedules are omitted as they are not applicable,
or the required information is included in the financial statements or notes
thereto.
(b) The Company did not file any reports on Form 8-K during the quarter
ended December 31, 1997.
(c) Exhibits:
3.1* Certificate of Incorporation, as amended.
3.2 Certificate of Amendment of Certificate of Incorporation of
Box Energy Corporation.
3.3++ By-Laws as amended.
4.1* Form of Indenture Box Energy Corporation to United States
Trust Company of New York, Trustee, dated December 1, 1992,
8 1/4% Convertible Subordinated Notes due December 1, 2002.
10.1* Amended and Restated Certificate and Articles of Limited
Partnership of OKC Limited Partnership.
10.2* Restatement and Amendment of Gas Purchase Contract dated
July 15, 1982, as amended October 5, 1982 and December 21,
1982 and December 26, 1984.
10.3* Assignment of Lease, dated May 26, 1977.
10.4* Oil and Gas Lease of Submerged Lands under the Outer
Continental Shelf Lands Act dated July 1, 1967, covering all
of Block 89, South Pass Area and East Addition by the United
States of America, as Lessor, dated July 1, 1967, said lease
having been assigned to Box Energy Corporation as of April
15, 1992.
10.5* Oil and Gas Lease of Submerged Lands under the Outer
Continental Shelf Lands Act dated July 1, 1967, covering all
of Block 86, South Pass Area and East Addition by the United
States of America, as Lessor, dated July 1, 1983, said lease
having been assigned to Box Energy Corporation as of April
15, 1992.
10.6* Oil and Gas Lease of Submerged Lands under the Outer
Continental Shelf Lands Act dated July 1, 1967, covering all
of Block 87, South Pass Area and East Addition by the United
States of America, as Lessor, dated September 1, 1985, said
lease having been assigned to Box Energy Corporation as of
April 15, 1992.
10.7* Farmout Agreement with Aminoil USA, Inc., effective May 1,
1977, dated May 9, 1977.
10.8* Transportation Agreement with CKB Petroleum, Inc. dated
March 1, 1985, as amended on April 19, 1989.
10.9* Agreement of Compromise and Amendment to Farmout Agreement,
dated July 3, 1989.
10.10 Settlement Agreement with Texas Eastern Transmission
Corporation, dated November 14, 1990.
10.11* Guarantee of Panhandle Eastern Corporation, dated November
21, 1990.
10.12* Bill of Sale and Assumption of Obligations from OKC Limited
Partnership, dated April 15, 1992.
10.13* Asset Purchase Agreement, dated April 15, 1992.
10.14* 1992 Incentive Stock Option Plan of Box Energy Corporation.
10.15* 1992 Non-Qualified Stock Option Plan of Box Energy
Corporation.
10.16** Pension Plan of Box Energy Corporation, effective April 16,
1992.
10.17# First Amendment to the Pension Plan of Box Energy
Corporation dated December 16, 1993.
10.18## Second Amendment to the Pension Plan of Box Energy
Corporation dated December 31, 1994.
10.19+ Form of Executive Severance Agreement dated as of December
12, 1995 by and between Box Energy Corporation and key
employees.
10.20+ Form of Letter Agreement regarding severance benefits dated
as of December 12, 1995 by and between Box Energy
Corporation and employees not covered by Executive Severance
Agreements.
10.21*** Amended and Restated Promissory Note between Box Energy
Corporation and Box Brothers Holding Company.
10.22*** Amended and Restated Pledge Agreement between Box Energy
Corporation and Box Brothers Holding Company.
10.23*** Agreement by and between Box Energy Corporation and James A.
Watt.
10.24 Box Energy Corporation Severance Plan.
10.25 Box Energy Corporation 1997 Stock Option Plan.
10.26 Box Energy Corporation Non-Employee Director Stock Purchase
Plan.
10.27 Form of Executive Employment Agreement effective August 29,
1997, by and between Box Energy Corporation and two
executive officers.
23.1 Consent of Arthur Andersen LLP
23.2 Consent of Coopers & Lybrand L.L.P.
27 Financial Data Schedule
* Incorporated by reference to the Company's Registration
Statement on Form S-2 (file number 33-52156) filed with the
Commission and effective on December 1, 1992.
** Incorporated by reference to the Company's Form 10-K (file
number 0-19967) for the fiscal year ended December 31, 1992
filed with the Commission and effective on or about March
30, 1993.
# Incorporated by reference to the Company's Form 10-K (file
number 0-19967) for the fiscal year ended December 31, 1993
filed with the Commission and effective on or about March
30, 1994.
## Incorporated by reference to the Company's Form 10-K (file
number 0-19967) for the fiscal year ended December 31, 1994
filed with the Commission and effective on or about March
30, 1995.
+ Incorporated by reference to the Company's Form 10-K (file
number 0-19967) for the fiscal year ended December 31, 1995
filed with the Commission and effective on or about April 1,
1996.
++ Incorporated by reference to the Company's Form 10-K (file
number 1-11516) for the fiscal year ended December 31, 1996
filed with the Commission and effective on or about March
31, 1997.
*** Incorporated by reference to the Company's Form 10-Q (file
number 1-11516) for the fiscal quarter ended June 30, 1997
filed with the Commission and effective on or about August
12, 1997.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized.
REMINGTON OIL AND GAS CORPORATION
Date: March 30, 1998 By: /S/ JAMES A. WATT
James A. Watt
President and Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1934, this
report has been signed below by the following persons on behalf of the
Registrant and in the capacities and on the date indicated.
DIRECTORS:
/S/ DON D. BOX /S/ JOHN E. GOBLE, JR. /S/ WILLIAM E. GREENWOOD
Don D. Box John E. Goble, Jr. William E. Greenwood
Director Director Director
/S/ DAVID H. HAWK /S/ JAMES ARTHUR LYLE /S/ DAVID E. PRENG
David H. Hawk James Arthur Lyle David E. Preng
Director Director Director
/S/ THOMAS W. ROLLINS /S/ ALAN C. SHAPIRO /S/ JAMES A. WATT
Thomas W. Rollins Alan C. Shapiro James A. Watt
Director Director Director
OFFICERS:
/S/ JAMES A. WATT /S/ J. BURKE ASHER /S/ EDWARD V. HOWARD
James A. Watt J. Burke Asher Edward V. Howard
President and Chief Vice President/Finance Vice President,
Executive Officer and Secretary Controller and
Assistant Secretary
Date: March 30, 1998