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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, 1998
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) 210-2650
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE ON WHICH REGISTERED
------------------- -----------------------------------------
COMMON STOCK, $0.01 PAR VALUE PACIFIC EXCHANGE, INC.
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
COMMON STOCK, $0.01 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 24, 1999, WAS $71,160,343. ON THAT DATE, THE NUMBER OF
OUTSTANDING SHARES, $0.01 PAR VALUE, WAS 21,453,453.
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.
REGISTRANT'S REGISTRATION STATEMENT FILED ON FORM S-4 EFFECTIVE
NOVEMBER 27, 1998, IS INCORPORATED BY REFERENCE IN PART IV OF THIS FORM 10-K.
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FORM 10-K
REMINGTON OIL AND GAS CORPORATION
Table of Contents
PART I........................................................................3
ITEM 1. BUSINESS..........................................................3
ITEM 2. PROPERTIES........................................................5
ITEM 3. LEGAL PROCEEDINGS.................................................8
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS...............8
PART II.......................................................................9
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS...........................................................9
ITEM 6. SELECTED FINANCIAL DATA..........................................10
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS............................................11
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.......16
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA......................17
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.........................................37
PART III.....................................................................37
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT...............37
ITEM 11. EXECUTIVE COMPENSATION...........................................40
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT...49
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................50
PART IV......................................................................52
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K..52
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PART I
ITEM 1. BUSINESS.
General
Remington Oil and Gas Corporation began in 1981 as OKC Limited
Partnership. In 1992, we converted the limited partnership to a corporation
named Box Energy Corporation. The company changed its name in December 1997, to
Remington Oil and Gas Corporation. We are incorporated in Delaware, and our
executive offices are located at 8201 Preston Road, Suite 600, Dallas, Texas
75225-6211 (telephone number 214/210-2650). The company employed 20 people on
December 31, 1998.
Long-term Strategy
Our long-term strategy to increase shareholder value involves
increasing our oil and gas reserve base by finding, developing or acquiring
more oil and gas reserves than we produce each year. In addition to adding
reserves, our long-term strategy also includes increasing production each year
through our development drilling operations. It is essential to the success of
the long-term strategy that our finding and development costs be competitive
with our industry peers. It is also important, especially during a period of
low oil and gas prices, that our balance sheet remains strong so that we can
complete our exploration, development and acquisition activity. In 1997, we
replaced 129% of our production and increased our oil and gas reserves by 6% to
10.5 million barrels of oil equivalents. In 1998, we replaced 264% of our
production and increased our reserve base by 3.8 million barrels of oil
equivalents, or 36%. In determining barrels of oil equivalents, we convert gas
reserves or production at a ratio of six Mcf to one barrel.
Operations and Risks Involved in Exploration, Development and Production
Our primary business operation is the exploration, development and
production of oil and gas reserves in the offshore Gulf of Mexico and onshore
Gulf Coast areas. Our geophysical and geological staff identifies prospects in
the core areas primarily by using 3-D technology. We then attempt, along with
various industry partners, to acquire a leasehold interest in properties that
merit further exploration. After acquiring a leasehold interest, the company
drills an exploratory well. Positive results from the exploratory well may lead
to additional exploration or development of the property. In addition, the
company purchases properties with existing oil and gas reserves and production
for further exploration, development or exploitation. Remington sells the oil
and gas production from the properties and reinvests the net cash flow from
operations in its exploration, development and acquisition activities.
Exploration, development and production operations involve a high
degree of risk. Unprofitable efforts may result from drilling dry holes or from
drilling marginally productive wells that do not produce enough oil or gas to
return a profit on the amount invested in a well or property. Although we use
3-D seismic data or other technology to identify and define the parameters of
drilling prospects, there is no guarantee that such technology will lead to
successful results. Much of our success depends upon the abilities and
experience of our management and technical personnel. Additional operating
risks include mechanical failure, title risks, blowouts, environmental
pollution, and personal injury. We maintain general liability insurance and
insurance against blowouts, redrilling, and certain other operating hazards,
including certain pollution risks. An uninsured loss or liability, or a loss
that exceeds the limits of our insurance, could adversely affect our financial
condition.
Operating Agreements
We typically own interests in oil and gas properties subject to joint
operating agreements. Although we have typically been a non-operator, we
anticipate operating many of our properties in the future to maintain control
over timing and amount of capital expenditures. Many of the agreements grant
the operator a lien on our interest to secure payment of our share of expenses.
Competition in the Oil and Gas Industry
Remington faces competition from large integrated oil and gas
companies, independent exploration and production
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companies, private individuals and sponsored drilling programs. We compete for
operational, technical and support staff, options and/or leases on prospective
oil and gas properties, and sales of products from developed properties. Many
of the 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 for Oil and Gas Production
We sell our oil and gas production at posted market prices, spot
market indices, or prices derived from the posted price or index. Purchasers
modify the price for quality, refined product yield, geographical proximity to
refineries, and availability of transportation facilities. Oil and gas prices
fluctuate significantly over time because of changes in supply and demand,
changes in refinery utilization, levels of economic activity throughout the
country, seasonal or extraordinary weather patterns, and political developments
throughout the world.
We use an independent third party to sell a significant portion of our
gas production from the Gulf of Mexico. The revenue from the sale of gas by
this marketing company accounted for approximately 53% of our total gas revenue
in 1998. In addition, we sold approximately 72% of our total oil production to
one company during the year, which accounted for approximately 75% of our total
oil revenues in 1998.
Before July 1998, we sold our gas production from South Pass block 89
under a long-term contract. Effective July 1, 1998, we terminated this contract
and received $49.8 million for the termination. Because of this termination the
average price received for gas produced from this block decreased by $6.55 per
Mcf, which reduced our total gas revenues $3.7 million for the remainder of
1998.
Governmental Regulation of Oil and Gas Operations and Environmental Regulations
The federal government and the various state governments have issued
numerous regulations that affect our oil and gas operations. 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 the cost of doing business and consequently affects
profitability. In addition, because we hold federal leases, the federal
government requires us to comply with numerous additional regulations that
focus on government contractors. These regulations also increase the company's
general and administrative costs.
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 pooling of oil and gas properties,
maximum rates of production, and spacing and plugging and abandonment of wells.
Our oil and gas operations are subject to stringent federal, state and
local laws and regulations related to improving or maintaining the quality of
the environment. The most significant environmental regulations include
compliance with federal legislation for the Oil Pollution Act of 1990 and the
Clean Water Act together with their amendments. The cost of compliance with
this federal and state legislation could have a significant impact on our
financial ability to carry out our oil and gas operations. The legislation and
accompanying regulations could impose financial responsibility requirements,
liability features, and operational requirements, which could be onerously
burdensome to satisfy.
The laws that 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. A company could be subject to severe fines and cleanup costs
if found liable under these laws. We have never been a liable party under these
laws nor have we been named a potentially responsible party for waste disposal
at any site.
Recapitalization of Common Stock and Other Business Information
In December 1998, the holders of both classes of common stock approved
the merger agreement which merged S-Sixteen Holding Company into Remington. As
part of that transaction, Remington's two classes of common stock were
recapitalized into a single class of voting common stock. The primary asset we
acquired in the merger was an undivided interest in the oil pipeline that
transports our oil production from the South Pass area to onshore Louisiana.
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Except for our oil and gas leases with third parties and licenses to
acquire or use seismic data, we have no material patents, licenses, franchises
or concessions that we consider significant to our oil and gas operations. The
nature of our business is such that we do not have any "backlog" of products,
customer orders, or inventory. We have not been a party to any bankruptcy,
reorganization, adjustment or similar proceeding except in the capacity as a
creditor.
ITEM 2. PROPERTIES.
We concentrate our principal operations in two areas, the federal
waters of the Gulf of Mexico and the onshore regions of the Gulf Coast. Net
proved oil and gas reserves at December 31, 1998, as evaluated by Netherland,
Sewell, and Associates, Inc. and Miller and Lents, Ltd., are summarized below
on the following table. The Netherland, Sewell, and Associates report covers
approximately 90% of the total proved reserves. In addition to the information
below, we recommend that you read "Management's Discussion and Analysis of
Financial Condition and Results of Operations" found on pages 11 through 16 and
"Financial Statements and Notes to Consolidated Financial Statements" found on
pages 17 through 36. Note 5 -- Oil and Gas Properties in our Notes to
Consolidated Financial Statements provides detailed information concerning
costs incurred, proved oil and gas reserves and discounted future net revenue
for proved reserves.
The quantities of proved oil and gas reserves discussed in this
section include only the amounts which we reasonably expect to recover in the
future from known oil and gas reservoirs under the current economic and
operating conditions. Proved reserves include only quantities that we can
commercially recover using current prices, costs, existing regulatory practices
and technology. Therefore, any changes in future prices, costs, regulations,
technology or other unforeseen factors could significantly increase or decrease
proved reserve estimates.
Net Oil Net Gas Pre-tax
Reserves Reserves Present Value
Barrels Mcf Discounted @10%
-------- -------- ---------------
(In thousands)
Offshore Gulf of Mexico 2,853 47,710 $60,319
Onshore Gulf Coast 2,666 4,999 9,799
----- ------ -------
Total 5,519 52,709 $70,118
===== ====== =======
The table below summarizes our ownership in producing wells at December 31,
1998.
1998 1997 1996
------------------- --------------------- -------------------------
GROSS NET GROSS NET GROSS NET
------- ------- ------- ----- ---------- -----------
Oil Wells
Offshore Gulf of Mexico 22 5.87 17 4.37 18 4.61
Onshore Gulf Coast 52 17.49 12 5.47 10 4.55
------ ----- ----- ----- ----- ----
Total 74 23.36 29 9.84 28 9.16
====== ===== ===== ===== ===== ====
Gas Wells
Gulf of Mexico 41 5.92 10 2.46 9 2.57
Onshore Gulf Coast 80 14.09 78 18.24 3 0.53
------ ----- ----- ----- ----- ----
Total 121 20.01 88 20.70 12 3.10
====== ===== ===== ===== ===== ====
The table below summarizes our lease holding acreage at December 31, 1998.
UNDEVELOPED DEVELOPED
---------------------------------- -----------------------------------
GROSS NET GROSS NET
-------------- --------------- --------------- ----------------
Offshore 92,166 49,088 67,834 15,220
Onshore 80,804 23,650 21,314 4,950
--------- --------- --------- ---------
Total 172,970 72,738 89,148 20,170
========= ========= ========= =========
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Producing Properties
At December 31, 1998, our net pre-tax proved oil and gas reserves, as
valued according to the Securities and Exchange Commission's rules and
regulations were valued at $70.1 million. Our Gulf of Mexico producing
properties accounted for 86% of the discounted present value and 75% of the
total proved reserves. The onshore Gulf Coast producing properties accounted
for 14% of the discounted present value and 25% of the total proved reserves.
In 1998, the company's oil and gas production from the Gulf of Mexico accounted
for 81% of the total volumes, while the onshore Gulf Coast accounted for 19%.
We owned varying working interests in 38 offshore Gulf of Mexico
blocks at December 31, 1998. We currently produce from 11 of these blocks with
new production expected in the second quarter of 1999 from a 1998 gas discovery
at High Island block 86. We plan additional exploratory drilling for some of
our undeveloped offshore acreage in 1999.
At December 31, 1998, we owned 28,550 net acres in the Gulf Coast
areas of which 4,950 net acres were considered producing. Our Gulf Coast area
properties are principally located in Mississippi and Texas. We have a
substantial investment in acreage and seismic data in Nueces County, Texas,
where a 110 square mile, proprietary three-dimensional seismic survey has just
been completed. We plan to drill several exploratory wells in Nueces County
during 1999.
Oil and gas production from 5 offshore Gulf of Mexico blocks and two
onshore Gulf Coast fields accounted for over 90% of our total production.
Production from South Pass blocks 86, 87, 89, and 1 well in West Delta block
128 accounted for 72% of the total oil production and 61% of the total gas
production in 1998. We own a 25% working interest in South Pass blocks 86 and
89, a 33% working interest in South Pass block 87, and a 20% working interest
in the West Delta block 128 well. In 1999, we have additional development and
exploratory drilling planned on South Pass block 87. Marathon Oil Company
operates all four blocks. As a result of our merger with S-Sixteen Holding
Company in December 1998, we acquired CKB Petroleum, Inc. CKB Petroleum owns an
undivided interest in the pipeline that transports our oil production from the
South Pass blocks to Venice Louisiana.
Production from Eugene Island block 135 accounted for 22% of our total
gas production and 4% of our total oil production in 1998. We discovered the
Eugene Island field in 1996. Production from this field commenced in the third
quarter of 1997 from two wells. In 1998, we drilled a third well into a
untested fault block, which discovered hydrocarbons in three additional sands.
We are currently participating in an exploratory well that will test deeper
targets below the producing reservoirs. Enron Oil and Gas Company operates
Eugene Island block 135. We own a 15% working interest in this block.
Significant onshore Gulf Coast fields include our composite 66% owned
Parker Creek Field located in Jones County, Mississippi. In 1998, we drilled
and completed one deep exploratory and one shallow development well in the
field. The Butler #5-5 well, drilled to 13,724 feet confirmed the presence of
the deep Hosston field sands south of the original discovery well. A recently
acquired 3-D seismic survey has identified several offset-drilling locations
for both the deep and shallow producing horizons. We plan to drill additional
wells in this field during 1999. Production from our onshore Texas fields
contributed 8% of our total oil and 14% of our total gas production in 1998.
Our primary producing interests in Texas are located in Hardin, Jaspar and
Lavaca Counties. We plan additional drilling and workover operations on our
Texas properties in 1999.
In early December 1998, we acquired varying working interests in 10
offshore Gulf of Mexico blocks from Union Pacific Resources. Eight of these
blocks are producing and 2 are undeveloped. We have identified additional
development and exploratory opportunities on several of these blocks.
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Drilling Activities
The following is a summary of our exploration and development drilling
activities for the past three years by core area:
1998 1997 1996
----------------------------- ----------------------------- ---------------------------------
GROSS NET GROSS NET GROSS NET
------------- --------------- ------------- --------------- ---------------- ----------------
PROD. DRY PROD. DRY PROD. DRY PROD. DRY PROD. DRY PROD. DRY
------ ----- ------ ------- ------- ----- -------- ------ ------- -------- -------- -------
Exploratory
Gulf of Mexico 3 - .90 - 2 2 .30 .42 4 4 1.15 1.15
Onshore Gulf Coast 9 7 2.72 2.13 1 5 .80 2.56 8 17 2.75 9.40
----- ---- ------ ------ ---- ---- ------ ------ ----- ----- ------ ------
Total 12 7 3.62 2.13 3 7 1.10 2.98 12 21 3.90 10.55
===== ==== ====== ====== ===== ==== ====== ====== ===== ===== ====== ======
Development
Gulf of Mexico - - - - 1 - .25 - - - - -
Onshore Gulf Coast 2 1 .82 .30 4 4 1.58 2.77 1 2 .94 1.87
----- ---- ------ ------ ---- ---- ------ ------ ----- ----- ------ ------
Total 2 1 .82 .30 5 4 1.83 2.77 1 2 .94 1.87
===== ==== ====== ====== ==== ==== ====== ====== ===== ===== ====== ======
We had an interest in 5 wells (1.18 net) in progress at December 31,
1998, 6 wells (2.47 net) in progress at December 31, 1997, and 4 wells (1.49
net) in progress at December 31, 1996.
Other Property and Office Lease
We own several non-contiguous tracts of land covering approximately
7,800 surface acres 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 revenues from these real
estate properties in 1998 totaled $233,000. We lease approximately 17,000
square feet of office space in Dallas, Texas. An amendment to our lease
extended the term of the lease an additional 10 years from April 1998.
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ITEM 3. LEGAL PROCEEDINGS.
The information required by this Item is incorporated herein by
reference to Item 8. "Financial Statements and Supplementary Data." - Note 10.
Notes to Financial Statements.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
On December 23, 1998, we held our annual stockholders' meeting to
elect members to the company's board of directors and ratify the independent
auditors for 1998. Immediately after the annual meeting we held a special
meeting to approve the merger agreement between S-Sixteen Holding Company and
us. The stockholders voted as follows:
ANNUAL MEETING
---------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK
--------------------------------
Election of Directors FOR WITHHELD
---------- ----------
Don D. Box 2,160,513 12,300
John E. Goble, Jr. 2,167,013 5,800
William E. Greenwood 2,167,013 5,800
David H. Hawk 2,167,013 5,800
James Arthur Lyle 2,167,013 5,800
David E. Preng 2,167,013 5,800
Thomas W. Rollins 2,167,013 5,800
Alan C. Shapiro 2,167,013 5,800
James A. Watt 2,167,013 5,800
Ratification of Arthur Andersen LLP as independent auditors for 1998 2,160,013 9,200
The members of the 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.
SPECIAL MEETING
- ---------------------------------------------------------------------------------------------------------------------------
CLASS A COMMON STOCK CLASS B COMMON STOCK
---------------------------------------- -------------------------------------------
FOR AGAINST ABSTAIN FOR AGAINST ABSTAIN
------------ ---------- ---------- ------------ ----------- ------------
Approval of merger agreement
2,262,728 6,201 2,880 9,307,011 49,256 67,558
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
MATTERS.
In December 1998, we issued a new single class of voting common stock
in exchange for the surrender of all of the previously outstanding voting and
non-voting common stock. The new common stock trades on the NASDAQ National
Market System under the symbol ROIL and on the Pacific Exchange under the
symbol REM.P. Prior to this exchange of common stock, our two classes of shares
traded on the NASDAQ National Market System, under the trading symbols ROILA
and ROILB. During the same period, the two classes traded on the Pacific
Exchange under the symbols REMA.P and REMB.P. Before we changed our name to
Remington Oil and Gas Corporation in December 1997, the shares traded on the
NASDAQ National Market System under the symbols BOXXA and BOXXB and on the
Pacific Exchange under the symbols BXCA.P and BXCB.P. The following table sets
forth the high and low last sales price per share as reported by NASDAQ for the
periods indicated.
COMMON STOCK CLASS A COMMON STOCK CLASS B COMMON STOCK
------------------------ ----------------------- -------------------------
HIGH LOW HIGH LOW HIGH LOW
---------- ---------- ---------- --------- ---------- -----------
1999
First Quarter through March 24 4.000 2.375 - - - -
1998
Fourth Quarter 3.188 2.938 5.000 3.000 4.688 2.875
Third Quarter - - 6.750 3.750 5.875 3.375
Second Quarter - - 7.250 5.500 6.750 5.375
First Quarter - - 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
On March 24, 1999, the last reported sales price was $3.375 per share.
On that date, there were 592 stockholders of record. Our transfer agent
informed us that as of this date there were also 228 stockholders of record of
class A common stock and 500 stockholders of record of class B common stock who
had not yet surrendered their old stock for the new common stock to which they
are entitled. We have not declared or paid any cash dividends during the past
seven years. Dividends are not currently restricted. However, if we pay
dividends in excess of 2% of the market price per share during 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, our financial condition, cash flow
from operating activities, the level of our capital and exploration expenditure
needs, and future business prospects.
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ITEM 6. SELECTED FINANCIAL DATA.
The selected consolidated financial data should be read in conjunction
with our consolidated financial statements and notes to the consolidated
financial statements. In addition, you should also read our "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included in Item 7. below.
1998 (1) 1997 (2) 1996 1995 1994
----------- ----------- ---------- ---------- ----------
(In thousands, except prices and per share data)
Financial
Total revenue $ 87,689 $ 61,053 $ 70,210 $ 59,493 $ 59,244
Net income (loss) $ 13,617 $ (26,790) $ (7,662) $ 5,392 $ 9,157
Basic income (loss) per share $ 0.67 $ (1.31) $ (0.37) $ 0.26 $ 0.44
Diluted income (loss) per share $ 0.66 $ (1.31) $ (0.37) $ 0.26 $ 0.44
Total assets $ 130,229 $ 98,515 $ 136,599 $ 145,491 $ 135,041
81/4% convertible subordinated notes $ 38,371 $ 38,371 $ 55,077 $ 55,077 $ 55,077
Other indebtedness $ 3,500 $ 6,000 $ -- $ -- $ --
Stockholders' equity $ 59,699 $ 44,287 $ 74,356 $ 82,047 $ 75,513
Shares outstanding
Common stock 21,247 -- -- -- --
Class A common stock -- 3,219 3,250 3,250 3,250
Class B common stock -- 17,087 17,553 17,553 17,553
--------- --------- --------- --------- ---------
Total shares outstanding 21,247 20,306 20,803 20,803 20,803
========= ========= ========= ========= =========
Net cash flow from operations $ 54,040 $ 27,546 $ 28,955 $ 24,047 $ 27,644
Net cash flow from investing $ (38,149) $ (11,820) $ (47,602) $ (19,899) $ (13,769)
Net cash flow from financing $ (1,425) $ (14,171) $ -- $ -- $ (1,970)
Operational
Average sales prices
Oil (per Bbl) $ 10.99 $ 17.79 $ 20.21 $ 16.64 $ 15.51
Natural Gas (per Mcf) $ 3.22 $ 5.06 $ 5.69 $ 6.89 $ 7.46
Future net revenue - proved reserves (before
tax)
Undiscounted $ 94,824 $ 141,672 $ 227,817 $ 223,896 $ 206,701
Discounted $ 70,118 $ 108,698 $ 189,155 $ 173,388 $ 157,721
Future net revenue - proved reserves (after tax)
Undiscounted $ 86,936 $ 124,828 $ 177,178 $ 173,869 $ 163,633
Discounted $ 63,467 $ 93,838 $ 146,013 $ 133,982 $ 124,490
Proved reserves
Oil (MBbls) 5,519 4,451 3,299 2,938 3,298
Natural gas (Bcf) 52.7 36.5 39.3 51.4 50.3
Average production (net sales volume)
Oil (BOPD) 3,411 3,280 2,555 2,300 1,796
Natural gas (MMcfgd) 17.5 19.5 22.5 16.1 17.2
(1) Financial results for 1998 include $49.8 million in other income from the
termination of our gas sales contract and a $18.0 million charge recorded
for the Phillips Petroleum judgment.
(2) The net loss in 1997 includes a $14.6 million deferred income tax expense
that we recorded when we increased the valuation allowance against the
deferred income tax asset originally recorded in 1992.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS.
The following discussion will assist you in understanding our
financial position, liquidity, and results of operations. The information below
should be read in conjunction with the financial statements, and the related
notes to financial statements. Our discussion contains both historical and
forward-looking information. We assess the risks and uncertainties about our
business, long-term strategy, and financial condition before we make any
forward-looking statements, but we can not guarantee that our assessment is
accurate or that our goals and projections can or will be met. Statements
concerning results of future exploration, exploitation, development and
acquisition expenditures as well as expense and reserve levels are
forward-looking statements. We make assumptions about commodity prices,
drilling results, production costs, administrative expenses and interest costs
that we believe are reasonable based on currently available information of
known facts and trends.
LONG-TERM STRATEGY AND BUSINESS DEVELOPMENTS
Our long-term strategy is to increase shareholder value by
economically increasing reserves, production, and cash flow on an annual basis.
At the same time, we believe it is important to maintain a strong balance sheet
by keeping our total debt at a manageable level. We will balance our capital
expenditures, financed primarily by operating cash flow and bank debt, among
exploration, development, and acquisitions. Proved oil and gas reserves at
December 31, 1998, were 5.5 million barrels of oil and 52.7 Bcf of gas compared
to 4.5 million barrels of oil and 36.5 Bcf of gas at December 31, 1997. These
results amount to a 45% increase in gas reserves and a 36% growth in total
barrels of oil equivalents. We replaced 264% of our total 1998 production,
based on barrels of oil equivalent. During the last two years, we have
concentrated on reducing our costs and expenses so as to be in line with our
industry peers. In addition, we have made an effort to end the litigation that
has characterized this company for much of our history.
Since 1982, we have had a long-term contract covering gas sales from
South Pass block 89. The contract was to expire in July 2002. We entered into
the contract with Texas Eastern Transmission Corporation during a time when
natural gas supplies were scarce. Over time as natural gas supplies became more
abundant, we continued to receive the contract price for our gas production
from this block, although such price was by then substantially higher than the
market price. In 1989, Texas Eastern Transmission Corporation sued us alleging
termination of the contract. In 1990 we settled this litigation and received
$69.6 million as part of the settlement. The contract continued to be in
effect, although the settlement reduced the new contract price to approximately
one-half of the original contract price. These prices, however, escalated 10%
each year. For the first six months of 1998, under the contract, we received
$12.38 per Mcf for gas produced from the southern portion of the block and
$6.83 per Mcf for gas produced from the northern portion of the block.
On July 31, 1998, we executed an agreement with Texas Eastern
Transmission Corporation to terminate this gas sales contract. The termination
was effective June 30, 1998, and as of July 1, 1998, we began selling all gas
produced from this block at spot market prices. We received $49.8 million in
cash and agreed to release Texas Eastern from the contract, including the gas
substitution and indemnification rights, as well as related indemnification and
other obligations that had been in effect under the 1990 settlement agreement
between Texas Eastern and us.
During the first six months of 1998, we received approximately $5.8
million more for the gas sold at the long-term contract price compared to the
same gas if sold at spot market prices. During the last six months of 1998, we
calculate that gas revenues were approximately $3.7 million lower than if we
had continued to receive the contract price.
Phillips Petroleum Company owns a net profits interest created in 1977
by a farm-out agreement covering South Pass block 89. Since 1981, Phillips has
brought numerous pieces of litigation against us over the net profits interest.
Since the inception of the farm-out, we have paid Phillips Petroleum Company
$100.8 million related to the net profits interest and overriding royalty. We
have tried numerous times to settle the latest litigation equitably, but so
far, have been unsuccessful in our settlement attempts. Our goal is to settle
or dispose of this litigation in a manner that would discourage any future
litigation. However, we will vigorously defend ourselves against all litigation
that Phillips Petroleum Company brings against us. We believe, and the
Louisiana court has ruled, that under the farm-out agreement Phillips can look
only to actual production for determination of its net profits interest.
In this latest litigation, Phillips contends 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 cash payment that had been
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received by OKC Limited Partnership (our predecessor) from the 1990 settlement
of previous litigation between Texas Eastern and us, should have been credited
to the net profits account instead of the $5.8 million that was credited. On
the latter claim, Phillips seeks to receive in excess of $21.5 million, while
on the first two claims Phillips alleges aggregate damages of several million
dollars. In addition, Phillips, under the Louisiana Mineral Code, is seeking
double damages and cancellation of the farm-out agreement that created the net
profits interest. We denied Phillips' claims and defended ourselves during a
non-jury trial in April 1997. At trial we asserted a counterclaim that Phillips
had breached a settlement agreement regarding previous litigation, and we
sought to recover damages in excess of $10.0 million.
In August 1998, the trial court ruled in the litigation. In its
ruling, the court awarded Phillips $1.6 million plus interest for its
overriding royalty claim and $9.3 million plus interest for its claim on the
1990 settlement. The trial court dismissed Phillips' claim of excessive
transportation charges and its claims for double damages and lease
cancellation. The trial court also dismissed our counterclaim. In October 1998,
the trial court finalized its judgment. The judgment, including interest, was
$18.0 million. We have filed notice of our intent to appeal certain adverse
portions of the judgment. The trial court has required that we post a bond in
order to prevent Phillips from executing on the judgment pending appeal. The
amount of the bond is $18.0 million, $9.0 million of which is collateralized by
cash and a letter of credit. During the pendency of the appeal, simple interest
will continue to accrue on the $10.9 million judgment. Phillips has also filed
notice to appeal. In connection with the judgment, and in accordance with
Statement of Financial Accounting Standards No. 5 entitled "Accounting for
Contingencies," we recorded $18.0 million as an expense in the third quarter of
1998.
In connection with the proceeds from the termination of the Texas
Eastern gas sales contract, we filed a declaratory judgment action against
Phillips in federal district court in Dallas, Texas. In the action we asked the
court to declare that none of the $49.8 million we received from the contract
termination is owed to Phillips under the farm-out agreement. In existing
litigation in Collin County, Texas, addressing the same issues that have been
adjudicated by the Louisiana court, Phillips has filed a counterclaim asserting
that the proceeds of the termination agreement should be credited to the net
profits account. In response to Phillips counterclaim, we have filed an amended
petition seeking a declaratory judgment that the termination proceeds need not
be credited to the net profits account. We agreed to dismiss our federal action,
and the Collin County action is stayed pending resolution of the Louisiana
appeal. Certain possible outcomes of our current litigation with Phillips
Petroleum Company could have a material adverse effect on Remington.
In June 1998, we entered into a merger agreement with S-Sixteen
Holding Company, which was approved by the stockholders on December 23, 1998.
One of the subsidiaries we acquired in the merger, CKB Petroleum, Inc., owns an
undivided interest in the pipeline that transports our oil production from four
of our offshore properties to Venice, Louisiana. We anticipate that the
acquisition of CKB Petroleum, Inc. will have a positive effect on our future
net income and cash flow from operations. In addition, we issued a new single
class of voting common stock in exchange for the surrender of all of the
previously outstanding voting and non-voting common stock. Holders of the class
A (voting) common stock received 1.15 shares of the new common stock for each
share of class A common stock owned. Holders of class B (non-voting) common
stock received 1 share of the new common stock for each share of class B common
stock owned.
NEW ACCOUNTING STANDARDS
New accounting standards include Statements of Financial Accounting
Standards No. 133 entitled "Accounting for Derivative Instruments and Hedging
Activities." The provisions of Statement No. 133, which require companies to
recognize all derivatives as either assets or liabilities and measure those
instruments at their fair value, will not have a material effect on our
financial statements or related disclosures.
LIQUIDITY AND CAPITAL RESOURCES
Our balance sheet liquidity increased significantly during the third
quarter of 1998 after we received $49.8 million from the termination of our gas
contract with Texas Eastern. During the fourth quarter of 1998 we reinvested
$7.5 million in an acquisition of 10 offshore Gulf of Mexico blocks and paid
down our bank line of credit by $6.2 million. In addition, because of the
merger agreement and the exchange of our common stock, we were required to
offer to purchase any tendered 8 1/4% Convertible Subordinated Notes. Of the
$38.4 million outstanding at December 31, 1998, we were required to purchase
$32.4 million on February 25, 1999. We refinanced $24.0 million of the purchase
with a long-term bank line of credit and used cash to purchase the remaining
$8.4 million of the tendered notes. At December 31, 1998, we reclassified the
portion of the convertible notes that we purchased with cash as a current
liability. Primarily because of the acquisition,
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payment on the bank line of credit, and the reclassification of the 8 1/4%
Convertible Subordinated Notes, our current liabilities exceeded our current
assets by $1.2 million and the current ratio was .96 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.
Cash flow from operations for 1998 increased $26.5 million, or 96%,
compared to 1997. The increase relates to the cash received from the
termination of the gas contract. Without the proceeds from the termination of
the gas contract, cash flow from operations would have decreased by $20.8
million, or 76%. This decrease resulted from lower total oil prices and lower
gas revenue from South Pass block 89 and the increase in restricted cash used
as collateral for the appeal bond in the Phillips litigation. The average oil
prices for 1998 were $10.99 per barrel compared to $17.79 per barrel during
1997. The lower oil prices caused oil revenues to be $8.1 million lower in
1998. This reduction was somewhat offset by an increase of 48,000 barrels sold.
In addition, gas sales revenue from South Pass block 89 decreased $15.1 million
during 1998. The decrease in gas revenue from South Pass block 89 resulted
primarily from lower gas production for the first six months of 1998 and both
lower production and lower gas prices during the last six months of 1998. If
the gas production during the third and fourth quarters of 1998 from South Pass
block 89 had been sold at the former contract price, gas revenues would have
been approximately $3.7 million higher than was actually received.
The decline in oil prices has a negative impact on total revenues, net
income, and cash flow from operations. In addition, the termination of the
long-term gas contract also has a negative impact on our gas sales, net income,
and cash flow from operations. However, because of recent acquisitions and
completed and planned development drilling in 1998 and 1999, we project a 30%
increase in total production for 1999 as compared to 1998. Based on this
increase, our current projections indicate that we can finance the majority of
our planned capital expenditures through our cash flow from operations. Our
projections consider the current depressed oil and gas prices. We also have
$5.4 million available on our bank line of credit.
We expect to continue to make significant capital expenditures over
the next several years as part of our long-term growth strategy. The primary
source of funding the capital expenditures will be net cash flow from
operations and additional bank debt. We have budgeted $25.5 million for capital
expenditures in 1999. While we have projected this amount for capital
expenditures, we can delay or cancel the drilling of wells included in the
current capital expenditure budget. Our capital expenditure budget for 1999,
includes drilling 21 exploratory wells and 3 development wells. In the Gulf of
Mexico, we are currently drilling a development well in South Pass block 87, an
exploratory well in Eugene Island block 135, and connecting the High Island
block 86 well to a production platform. We also have plans for additional
drilling on High Island block 86 and Galveston block 333. During the first
quarter of 1999, we completed a sidetrack of well A-3 on Main Pass block 262.
This well did not encounter commercial oil or gas reserves. We completed the
Berryman Unit well in Nueces, County, Texas during the first quarter of 1999,
which tested at 10,000 Mcf per day and 318 barrels of oil per day. This well is
now waiting for a pipeline connection. We are currently participating in an
additional exploratory well located 10 miles south of this discovery well. In
addition we have planned additional exploratory wells from 3-D defined
prospects in South Texas.
At December 31, 1998, we had a revolving line of credit established
with a bank. The line of credit had a borrowing base of $15.0 million and an
expiration date of March 1, 2000. Our oil and gas properties were the
collateral for this line of credit. At December 31, 1998, we had an outstanding
balance of $3.5 million and had issued letters of credit totaling $250,000
against this line of credit. In February 1999, we replaced the existing line of
credit with a new line of credit from a different bank. The new line of credit
with a borrowing base of $32.0 million expires in 2003. We pledged our oil and
gas properties as collateral for the new line of credit. On February 24, 1999,
we borrowed $24.5 million on this line of credit and used the majority of the
proceeds to buy a portion of the convertible notes. The bank will review the
borrowing base semi-annually and may increase or decrease the borrowing base
relative to the redetermined estimate of proved oil and gas reserves.
YEAR 2000 ISSUE
The year 2000 issue relates to computer programs written with two
digits defining a year rather than four. Computer programs that have
date-sensitive software may recognize a date using "00" as the year 1900
instead of 2000 or not at all. This inability to recognize or properly treat
the year 2000 may cause a breakdown of both information technology and
non-information technology systems and cause these systems to process critical
financial and operational information incorrectly. We have assessed and
continue to assess the year 2000 issue and its impact on us, our partners,
suppliers, vendors and customers. The year 2000 issue has a potential impact on
us in several areas including, among others, the ability to be paid for our
oil and gas production, the operations of the producing properties in which we
hold an interest, the ability to pay our
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vendors and suppliers, and the management of our financial assets including
cash and securities held with financial institutions.
We currently receive payment for the majority of our oil and gas
production from two sources. While these two sources are currently studying the
year 2000 issue in order to develop systems to prevent problems in payment
processing, they have informed us that manual backup systems exist so that even
in the event that the computer software fails, such failure would not result in
a material delay in our receiving payment for oil and gas production.
During the first quarter of 1999, we operated one of our oil and gas
properties. The property was not commercial therefore we have not developed
contingency plans relating to the year 2000 issue concerning the operation of
this property. We do not believe that any problem relating to the year 2000
issue on this property will have a material impact on our operations. The
operators of our other properties are, however, studying the year 2000 issue in
connection with both the information technology and non-information technology
aspects of operating the oil and gas properties. These operators have informed
us that they will develop systems sufficient to address any problems that may
arise. In addition the operators have informed us that manual back-up systems
exist in the event the computer software fails to adequately address any
problems. If, in the future, we act as operator on any other oil or gas
property, we anticipate that we will provide for adequate systems to address
any year 2000 issue.
We continue to assess our current oil and gas accounting system and
network operating software to determine if they are year 2000 compliant. The
company that provides our oil and gas accounting software has informed us that
that the system is year 2000 compliant. In June 1999, we will assess our
network system and individual computers and make any repairs or upgrades as
required at that time. In the event that the network operating system fails due
to a year 2000 problem, we believe that our accounting system can operate on a
stand-alone basis. We do not believe that the year 2000 issue will materially
affect our ability to pay our vendors and suppliers or track our assets in the
custody of financial institutions. We do not believe that the cost of our
preparations or upgrades for any year 2000 issues or problems will be material.
RESULTS OF OPERATIONS
Net income for 1998 was $13.6 million or $0.67 per share ($0.66
diluted income per share) compared to a net loss for 1997 of $26.8 million or
$1.31 per share. The increase in net income resulted primarily from the
termination of the gas contract with Texas Eastern in July 1998. Lower oil and
gas prices, reductions of gas production at South Pass block 89, and the
Phillips Petroleum judgment partially offset the income from the termination of
the gas contract.
The following table discloses the net oil and gas sales
volumes, average sales prices and average lifting costs for each of the three
years ended December 31, 1998, 1997, and 1996. The table is an integral part of
the following discussion of results of operations for the periods 1998 compared
to 1997 and 1997 compared to 1996.
% INCREASE % INCREASE
1998 (DECREASE) 1997 (DECREASE) 1996
------------ --------------- ------------- -------------- ------------
Net sales volumes:
Oil (MBbls) 1,245 4 % 1,197 28 % 933
Natural gas (MMcf) 6,383 (10)% 7,116 (13)% 8,219
Average sales price:
Oil (per Bbl) $ 10.99 (38)% $ 17.79 (12)% $ 20.21
Natural gas (per Mcf) $ 3.22 (36)% $ 5.06 (11)% $ 5.69
Average lifting costs (per BOE) $ 2.54 51 % $ 1.68 1 % $ 1.66
1998 compared to 1997
Oil revenue for 1998, decreased $7.6 million because of a $6.80, or
38%, decrease in prices, partially offset by a 48,000-barrel, or 4%, increase
in oil production. The lower prices alone caused oil revenue to be $8.1 million
lower. Oil production increased primarily because of additional oil production
from the Parker Creek property in Mississippi and the West Buna Property in
South Texas.
Gas revenue for 1998 was $15.4 million, or 43%, lower than 1997,
primarily due to the lower production from South Pass block 89 in 1998 compared
to the prior year. In 1998, production from this block was 1.4 Bcf lower than
in 1997
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causing a decrease in gas revenue of approximately $11.6 million. The average
gas price decrease, from $5.06 to $3.22 resulted primarily from the termination
of the gas sales contract on South Pass block 89. We sold gas from South Pass
block 89 at an average price of $8.54 per Mcf in 1997 compared to $6.20 in
1998. Gas production from properties other than South Pass block 89 increased
630,000 Mcf, or 15%, primarily from Eugene Island block 135 in the Gulf of
Mexico.
Other income increased primarily because of the $49.8 million received
from the termination of the gas sales contract. Operating costs increased
during 1998 compared to 1997 because the number of our producing properties has
increased significantly. Net profits expense decreased in 1998 because of the
decreased revenues credited to the net profits account on South Pass block89.
Exploration expense increased $943,000, or 11%, primarily due to
increased expenditures for 3-D seismic data. Dry hole expense, which is
included in exploration expense, included $3.3 million for costs accumulated on
the Main Pass block 262 well A-3 at December 31, 1998. This well was determined
to be non-commercial during the first quarter of 1999. Depreciation, depletion
and amortization decreased by $4.3 million, or 18%, because of an increase in
proved oil and gas reserves on producing properties. The impairment expense
recorded in 1998 includes $2.5 million for impairment on South Pass block89
platform B that was recorded in the third quarter of 1998 due to the
termination of the gas sales contract.
In connection with the August 1998 judgment issued in our litigation
with Phillips Petroleum Company, and in accordance with Statement of Financial
Accounting Standards No. 5 entitled "Accounting for Contingencies," we recorded
an $18.0 million expense in August 1998. This amount includes the damage award
by the trial court and the estimated interest on the award.
We reduced general and administrative expense by 25% in 1998 compared
to 1997. The decrease in general and administrative expense was primarily from
reduced salaries and payroll expense, rent expense, and professional services
fees. Legal expenses decreased because of the reduction in expense associated
with defending the Phillips Petroleum Company litigation and the settlement of
other litigation.
Reorganization expense for 1997 includes payments to employees under
employee severance agreements and legal fees or other charges that relate to or
were paid because of the purchase of S-Sixteen Holding Company (formerly Box
Brothers Holding Company) by Mr. J. R. Simplot in August 1997. We recorded the
following as reorganization costs: employee severance payments $3.6 million,
Thomas D. Box severance and legal claims and fees $1.2 million, Mr. Simplot and
Mr. James Arthur Lyle $2.0 million for legal claims and fees, and other
associated expenses $300,000.
Interest expense is 19% lower for 1998 because of our purchase of
$16.7 million of the outstanding 8 1/4% Convertible Subordinated Notes in
October 1997. In 1997, we recorded a valuation allowance against the entire
deferred tax benefit, and reflected the amount in the income statement as
deferred income tax expense. In 1998, we were able to use those tax benefits to
the extent that our effective federal income tax rate for 1998 is only about
5%. The income tax expense for 1998 includes alternative minimum tax expense of
$433,000 as a current income tax expense.
1997 Compared to 1996
We 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 a
portion of our 8 1/4% Convertible Subordinated Notes in October 1997. In
addition, during 1997, we 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. Gas sales
revenue decreased $10.7 million, or 23%, for 1997 compared to 1996. Lower gas
production caused the decrease but was partially offset by higher average
prices of 6% for spot gas sales and 10% for gas sales under the South Pass gas
sales contract. The increase in average prices added $1.3 million to gas sales
revenue. 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 gas production from platform B caused gas revenues to decrease by
$14.2 million. Natural gas production from our South Texas properties increased
379,000 Mcf during 1997 but was more than offset by
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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 but the most significant increases came from the Parker Creek field
in Mississippi and South Pass blocks 86 and 87 in the Gulf of Mexico.
Our 1997 interest income decreased because we sold our marketable
securities in October 1997 and used most of the proceeds to purchase $16.7
million of our outstanding 8 1/4% Convertible Subordinated 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 because of lower dry hole costs. In 1996, we 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 us 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 us to
record a $1.9 million impairment charge to write down 100% of the remaining
well costs.
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 we settled outstanding 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.
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.
Interest and financing expenses increased 8% during 1997 when compared
to 1996. The increase results from an increase on our line of credit and a
non-cash charge for deferred offering costs on the 8 1/4% Convertible
Subordinated Notes in October 1997. We used the line of credit to provide a
portion of the funds to purchase some onshore Gulf Coast properties.
In 1997 we increased the valuation allowance against the entire
deferred tax asset and recorded a deferred income tax expense. Our actual 1997
results and future projections were significantly different than anticipated in
our 1996 and prior projections. The difference resulted from a significant drop
in commodity prices, the unusual and unforeseen reorganization expenses
incurred in the last half of 1997, and a downward revision in our proved gas
reserves as of January 1, 1998, on South Pass block 89. We believe that future
drilling results, planned capital expenditures and other future transactions
could allow us to realize substantial benefits from the net operating loss
carryforwards and the other book-tax attributes underlying the deferred income
tax asset. However, the requirement of a greater than 50% probability (more
likely than not) of occurrence does not allow us to use much of this
information in projecting future taxable income.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our market risk sensitive instrument at December 31, 1998, is a
revolving line of credit from a bank. At December 31, 1998, the unpaid
principal balance under the line was $3.5 million. The interest rate on this
debt is sensitive to market fluctuations, however we do not believe that
significant fluctuations in the market interest have a material effect on our
consolidated financial position, results of operations, or cash flow from
operations.
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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.
Index to Financial Statements
Report of Independent Accountants 18
Consolidated Balance Sheets as of December 31, 1998 and 1997 19
Consolidated Statements of Income and Comprehensive Income for 1998, 1997 and 1996 20
Consolidated Statements of Stockholders' Equity for 1998, 1997 and 1996 21
Consolidated Statements of Cash Flow for 1998, 1997 and 1996 22
Notes to Consolidated Financial Statements 23
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REPORT OF INDEPENDENT ACCOUNTANTS
To The Stockholders and Board of Directors of
Remington Oil and Gas Corporation
We have audited the accompanying consolidated balance sheets of
Remington Oil and Gas Corporation ("the Company"), a Delaware corporation, as
of December 31, 1998 and 1997 and the related consolidated statements of income
and comprehensive income, stockholders' equity and cash flows for each of the
three years in the period ended December 31, 1998. These consolidated 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 consolidated financial statements referred to
above present fairly, in all material respects, the financial position of
Remington Oil and Gas Corporation as of December 31, 1998 and 1997 and the
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1998 in conformity with generally accepted accounting
principles.
Dallas, Texas
March 23, 1999 ARTHUR ANDERSEN LLP
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REMINGTON OIL AND GAS CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
FOR YEARS ENDED
DECEMBER 31,
--------------------------
ASSETS 1998 1997
-------- -------
CURRENT ASSETS
Cash and cash equivalents $ 19,018 $ 4,552
Restricted cash and cash equivalents 8,750 --
Accounts receivable - oil and natural gas 2,400 5,725
Accounts receivable - other 812 268
Note receivable - S-Sixteen Holding Company -- 6,192
Prepaid expenses and other current assets 1,871 2,118
--------- ---------
TOTAL CURRENT ASSETS 32,851 18,855
--------- ---------
PROPERTIES
Oil and natural gas properties (successful-efforts method) 260,649 220,481
Other properties 2,706 2,800
Accumulated depreciation, depletion and amortization (167,053) (144,548)
--------- ---------
TOTAL PROPERTIES 96,302 78,733
--------- ---------
OTHER ASSETS
Long-term accounts receivable - related party 299 --
Deferred charges (net of accumulated amortization) 777 927
--------- ---------
TOTAL OTHER ASSETS 1,076 927
--------- ---------
TOTAL ASSETS $ 130,229 $ 98,515
========= =========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable $ 6,923 $ 8,694
Accrued interest payable 264 264
Accrued transportation payable - related party -- 305
Phillips judgment payable 18,165 --
Net Profits expense payable 77 594
Short-term notes payable and current portion of long-term notes payable 8,651 6,000
--------- ---------
TOTAL CURRENT LIABILITIES 34,080 15,857
--------- ---------
OTHER LIABILITIES
Minority interest in subsidiaries 87 --
Long-term accounts payable 2,913 --
Notes payable 3,500 --
Convertible subordinated notes payable 29,950 38,371
--------- ---------
TOTAL OTHER LIABILITIES 36,450 38,371
--------- ---------
TOTAL LIABILITIES 70,530 54,228
--------- ---------
COMMITMENTS AND CONTINGENCIES (NOTE 10)
STOCKHOLDERS' EQUITY
Common stock, $1.00 par value
Class A (Voting) - 15,000,000 shares authorized; 3,250,110 shares issued -- 3,250
Class B (Non-Voting) - 30,000,000 shares authorized; 17,553,010 shares issued -- 17,553
Common stock $0.01 par value; 100,000,000 shares authorized;
21,453,453 issued and 21,247,478 outstanding 213 --
Additional paid-in capital 44,117 25,197
Treasury stock, at cost, 31,100 shares class A, and 465,600 class B in 1997 -- (3,465)
Retained earnings 15,369 1,752
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 59,699 44,287
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 130,229 $ 98,515
========= =========
See accompanying Notes to Consolidated Financial Statements.
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REMINGTON OIL AND GAS CORPORATION
CONSOLIDATED STATEMENTS OF INCOME AND COMPREHENSIVE INCOME
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEARS ENDED
DECEMBER 31,
-----------------------------------------
1998 1997 1996
-------- -------- ---------
REVENUES
Oil sales $ 13,677 $ 21,292 $ 18,849
Gas sales 20,579 36,012 46,757
Interest income 1,582 1,998 2,273
Gain (loss) on sale of investment -- (125) (73)
Other income 51,851 1,876 2,404
-------- -------- ---------
TOTAL REVENUES 87,689 61,053 70,210
-------- -------- ---------
COSTS AND EXPENSES
Operating costs and expenses 5,861 4,015 3,825
Transportation expense 2,654 2,851 2,491
Net profits interest expense 3,600 8,341 11,479
Exploration expenses 9,497 8,554 20,805
Depreciation, depletion and amortization 19,964 24,298 22,349
Impairment of oil and natural gas properties 4,154 3,953 451
General and administrative 4,782 6,344 7,731
Legal expense 552 2,509 3,657
Phillips judgment 17,950 -- --
Reorganization expense -- 7,072 1,959
Interest and financing expense 4,302 5,283 4,895
-------- -------- ---------
TOTAL COSTS AND EXPENSE 73,316 73,220 79,642
-------- -------- ---------
Income (loss) before taxes 14,373 (12,167) (9,432)
Income tax expense (benefit) 756 14,623 (1,770)
-------- -------- ---------
NET INCOME (LOSS) 13,617 (26,790) (7,662)
-------- -------- ---------
OTHER COMPREHENSIVE INCOME (LOSS) (NET OF TAXES)
Unrealized gain (loss) on marketable securities - available
for sale -- 186 (29)
-------- -------- ---------
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) (NET OF TAXES) -- 186 (29)
-------- -------- ---------
COMPREHENSIVE INCOME (LOSS) $ 13,617 $(26,604) $ (7,691)
======== ======== =========
BASIC INCOME (LOSS) PER SHARE $ 0.67 $ (1.31) $ (0.37)
======== ======== =========
DILUTED INCOME (LOSS) PER SHARE $ 0.66 $ (1.31) $ (0.37)
======== ======== =========
BASIC COMPREHENSIVE INCOME (LOSS) PER SHARE $ 0.67 $ (1.30) $ (0.37)
======== ======== =========
DILUTED COMPREHENSIVE INCOME (LOSS) PER SHARE $ 0.66 $ (1.30) $ (0.37)
======== ======== =========
See accompanying Notes to Consolidated Financial Statements.
20
21
REMINGTON OIL AND GAS CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
COMMON STOCK
------------------------------------ VALUATION
CLASS A CLASS B COMMON ADDITIONAL ALLOWANCE
$1.00 PAR $1.00 PAR $0.01 PAR PAID IN RETAINED TREASURY MARKETABLE
VALUE VALUE VALUE CAPITAL EARNINGS STOCK SECURITIES
---------- --------- --------- ---------- -------- -------- ----------
Balance December 31, 1995 $ 3,250 $ 17,553 $ -- $ 25,197 $ 36,204 $ -- $ (157)
Net income (7,662)
Unrealized (loss) (net of income taxes) (29)
-------- -------- -------- -------- -------- -------- --------
Balance December 31, 1996 3,250 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 17,553 -- 25,197 1,752 (3,465) --
-------- -------- -------- -------- -------- -------- --------
Net income (loss) -- 13,617
Common stock issued 27 156
Treasury stock issued 305
Merger and exchange of common stock (3,250) (17,580) 213 18,764 3,160
-------- -------- -------- -------- -------- -------- --------
Balance December 31, 1998 $ -- $ -- $ 213 $ 44,117 $ 15,369 $ -- $ --
======== ======== ======== ======== ======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
21
22
REMINGTON OIL AND GAS CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-----------------------------------
1998 1997 1996
-------- -------- ---------
CASH FLOW PROVIDED BY OPERATIONS
NET INCOME (LOSS) $ 13,617 $(26,790) $ (7,662)
Adjustments to reconcile net income
Depreciation, depletion and amortization 19,964 24,298 22,349
Impairment of oil and natural gas properties 4,154 3,953 451
Amortization of deferred charges 254 658 262
Amortization of premium on marketable securities -- 27 27
Deferred income tax (benefit) expense 323 14,623 (1,696)
Dry hole costs 5,222 5,319 17,638
Stock issued to directors and employees for compensation 488 -- --
Loss (gain) on sale of properties (111) 367 (20)
Changes in working capital
(Increase) in deferred charges (104) -- --
Decrease in accounts receivable 3,133 2,556 105
Decrease (increase) in prepaid expenses and other current assets 296 (157) (1,298)
Increase (decrease) in accounts payable and accrued expenses 15,554 2,692 (1,201)
(Increase) in restricted cash (8,750) -- --
-------- -------- --------
NET CASH FLOW PROVIDED BY OPERATIONS 54,040 27,546 28,955
-------- -------- --------
CASH FROM INVESTING ACTIVITIES
Payments for capital expenditures (40,155) (39,144) (39,798)
Cash acquired in merger with S-Sixteen Holding Company and Subsidiaries 79 -- --
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 1,432 1,058 --
Proceeds from property sales 495 702 260
-------- -------- --------
NET CASH USED IN INVESTING ACTIVITIES (38,149) (11,820) (47,602)
-------- -------- --------
CASH FROM FINANCING ACTIVITIES
Proceeds from notes payable and long-term accounts receivable 7,813 7,000 --
Payments on notes payable (7,400) (1,000) --
Repurchase common stock -- (3,465) --
Issuance costs for exchange of common stock (1,838) -- --
Principal payments on Convertible Subordinated Notes -- (16,706) --
-------- -------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (1,425) (14,171) --
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 14,466 1,555 (18,647)
Cash and cash equivalents at beginning of period 4,552 2,997 21,644
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 19,018 $ 4,552 $ 2,997
======== ======== ========
Cash paid for interest $ 3,879 $ 5,398 $ 4,907
======== ======== ========
Cash paid for taxes $ 433 $ -- $ --
======== ======== ========
See accompanying Notes to Consolidated Financial Statements.
22
23
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
NOTE 1 -- DESCRIPTION OF THE COMPANY AND BASIS OF PRESENTATION
Remington Oil and Gas Corporation, formerly Box Energy Corporation, is
an independent oil and gas exploration and production company incorporated in
Delaware. We have working interest ownership rights in properties in the
offshore Gulf of Mexico and onshore Gulf Coast.
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. Some of the more significant estimates
include oil and gas reserves, useful lives of assets, impairment of oil and gas
properties, and future dismantlement and restoration liabilities. Actual
results could differ from those estimates. We make certain reclassifications to
prior year financial statements in order to conform to the current year
presentation.
NOTE 2 -- CONSOLIDATION OF SUBSIDIARIES
On December 28, 1998, we acquired all of the assets of S-Sixteen
Holding Company including its five subsidiaries. The subsidiaries acquired
include CKB Petroleum, Inc., CKB & Associates, Inc., Box Brothers Realty
Investments Company, CB Farms, Inc., and Box Resources, Inc. Remington issued
579,757 shares of common stock, a warrant to purchase up to 300,000 additional
shares of common stock and canceled the note receivable from S-Sixteen Holding
Company for the acquisition. Remington's total investment in the transaction
was $8.5 million. The effect of the acquisition was not material to the
combined consolidated financial statements. We eliminated all inter-company
transactions and account balances for the period of consolidation. Before the
merger, S-Sixteen Holding Company owned approximately 57% of Remington's voting
common stock. The primary operating subsidiary, CKB Petroleum, Inc., owns an
undivided interest in a pipeline that transports oil from our South Pass
blocks, offshore Gulf of Mexico, to Venice Louisiana. We paid transportation
costs to CKB Petroleum, Inc. totaling $3.0 million in 1998, $3.2 million in
1997 and $2.8 million in 1996.
NOTE 3 -- CASH, CASH EQUIVALENTS AND RESTRICTED CASH
Cash equivalents consist of liquid investments that mature within
three months or less when purchased. Our cash equivalents include investment
grade commercial paper and money market funds invested in United States
government securities. We record cash equivalents at cost, which approximates
their market value at the balance sheet date.
As part of the appeal of the Phillips litigation, more fully discussed
in the note about net profits expense, we transferred $8.8 million to a surety
company as collateral for the suspensive appeal bond. That amount is presented
as restricted cash and cash equivalents on the balance sheet.
NOTE 4 -- NOTE RECEIVABLE FROM S-SIXTEEN HOLDING COMPANY
In April 1997, Remington lent S-Sixteen Holding Company $7.3 million.
S-Sixteen Holding Company repaid $1.4 million of the principal balance of the
note receivable in 1998 and $1.1 million in 1997. The remaining $4.8 million
balance of the note receivable was effectively canceled in December 1998 when
the two companies merged. Remington received $527,000 in interest income in
1998 and $437,000 in interest income in 1997 from S-Sixteen Holding Company on
the note receivable. The interest rate was equal to the prime rate of Texas
Commerce Bank National Association plus 1% until the sixth month when the rate
escalated monthly by 0.1% over the previous month's rate.
NOTE 5 -- OIL AND GAS PROPERTIES, ACCOUNTING METHODS, COSTS, PROVED RESERVES
AND VALUE BASED INFORMATION
Remington uses the successful-efforts method to account for oil and
gas exploration and development expenditures. Under this method, we record the
expenditures for leasehold acquisitions, tangible equipment, and
23
24
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
intangible drilling costs for an individual oil and gas property as an asset.
In addition, if the construction cost of an offshore platform is significant,
we record an allocated portion of the interest expense incurred during the
construction period as part of the oil and gas property cost. The following
table summarizes the oil and gas properties, all of which are located in the
United States.
AT DECEMBER 31,
-------------------------------------------------------------------------------
1998 1997
----------------------------------- --------------------------------------
PROVED UNPROVED TOTAL PROVED UNPROVED TOTAL
---------- ---------- -------- ---------- ---------- ----------
(IN THOUSANDS)
Onshore $ 31,704 $ 5,861 $ 37,565 $ 26,401 $ 5,194 $ 31,595
Offshore 210,631 12,453 223,084 185,325 3,561 188,886
--------- --------- --------- --------- --------- ---------
Total 242,335 18,314 260,649 211,726 8,755 220,481
Accumulated depreciation,
depletion and amortization (165,414) -- (165,414) (139,781) -- (139,781)
--------- --------- --------- --------- --------- ---------
Net oil and gas properties $ 76,921 $ 18,314 $ 95,235 $ 71,945 $ 8,755 $ 80,700
========= ========= ========= ========= ========= =========
We accumulate the expenditures incurred in drilling exploratory wells
as work in process until we determine whether the well has encountered
commercial oil and gas reserves. If the well has encountered commercial
reserves, we transfer the accumulated cost to oil and gas properties;
otherwise, we charge the accumulated cost to dry hole expense. We record
expenditures for geological, geophysical or other prospecting costs as
exploration expenses on the income statement when incurred. The following table
presents a summary of our oil and gas expenditures during the last three years.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(UNAUDITED, IN THOUSANDS)
Unproved acquisition costs $ 11,160 $ 5,793 -
Proved acquisition costs $ 5,353 $ 12,545 $ 5,548
Exploration costs $ 23,279 $ 13,767 $ 27,811
Development costs $ 4,318 $ 9,975 $ 9,359
Capitalized interest expense - - -
We amortize the capitalized cost of each oil and gas property using
the units-of-production method. To calculate the cost per unit we divide the
leasehold costs by total proved reserves and the costs for wells, platforms and
other equipment by proved developed reserves. Oil and gas reserves that do not
require significant additional cost to access the reserves, such as a new well
or major sidetrack, are classified as proved developed. We then multiply the
cost per unit by the actual production and record the result to depreciation,
depletion and amortization expense. Gas reserves are converted at a ratio of 6
Mcf to 1 barrel. We depreciate our costs in the pipeline owned by CKB
Petroleum, Inc. over its estimated useful life of 10 years.
Future dismantlement, restoration and abandonment costs include the
estimated costs to dismantle, restore and abandon our offshore platforms, wells
and related facilities. As of December 31, 1998, the total estimated future
liability is $4.2 million. We record the liability over the life of the
property using the units-of-production method and record the expense 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.
We review a property for impairment if there is a large decrease in
oil and gas reserves or production on the property, or if a dry hole is drilled
on or near the property. In addition, significant decreases in oil and gas
prices may also indicate that a property has become impaired. If the net book
value of a property is greater than the estimated undiscounted future net cash
flow before income taxes from the same property, the property is impaired. The
undiscounted future net cash flow may include risk adjusted probable and
possible oil and natural gas reserves in addition to the estimated proved
reserves. In addition, we may use escalated prices in projecting future oil and
gas revenue. For our 1998 projection of future oil and gas revenue, we
estimated oil prices to be $13.00 per barrel and gas prices to be $2.10 per
MMBtu in 1999. We escalated oil prices by $2.00 per barrel through 2001 and
then by 3% to a
24
25
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
maximum of $25.00 per barrel. We escalated gas prices by 3% to a maximum of
$3.50 per MMBtu. We adjusted the above oil and gas prices for location
differentials. These prices, consistent with forecasts by others in the
industry, were applied to the reserve estimates prepared by our independent
reserve engineers. The impairment expense is equal to the difference between
the net book value and the fair value of the asset. We estimate fair value by
discounting, at an appropriate rate, the future net cash flows from the
property.
In 1998 we recognized impairment expense totaling $4.2 million. This
expense in 1998 included $2.5 million from South Pass block 89 because of the
reduction in estimated undiscounted future net cash flow caused by the
termination of the long-term gas sales contract for that property. In 1997 we
recorded $4.0 million for impairment expense, and in 1996 we recorded $451,000.
The remaining impairment expense for 1998 and the impairment expense for 1997
and 1996 primarily resulted from inadequate oil and gas reserves or a
significant decrease in oil and gas production from the specific property.
The estimates of oil and gas reserves were prepared by the independent
engineering and consulting firms of Netherland, Sewell & Associates, Inc. and
Miller and Lents, Ltd. for 1998 and 1997, and by Netherland, Sewell &
Associates, Inc. for 1996. The Netherland, Sewell, and Associates, Inc. report
covers approximately 90% of the total proved oil and gas reserves in 1998. The
determination of these reserves is a complex and interpretative process that is
subject to continued revision as additional information becomes available. In
many 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 below include
only the amounts which we reasonably expect to recover in the future from known
oil and gas reservoirs under the current economic and operating conditions.
Proved reserves include only quantities that we can commercially recover using
current prices, costs, existing regulatory practices and technology. Therefore,
any changes in future prices, costs, regulations, technology or other
unforeseen factors could significantly increase or decrease proved reserve
estimates. The following table presents our net ownership interest in proved
oil and gas reserves.
AT DECEMBER 31,
------------------------------------------------------------------------------
1998 1997 1996
------------------------------------------------------------------------------
OIL GAS OIL GAS OIL GAS
MBbls (1) MMcf MBbls (1) MMcf MBbls MMcf
--------------------------------------- --------------------------------------
(UNAUDITED, IN THOUSANDS)
Beginning of period 4,451 36,543 3,299 39,332 2,938 51,373
Revisions of previous estimates 850 6,533 330 (6,004) 709 (8,162)
Extensions, discoveries and other 1,311 10,958 1,046 4,115 585 4,340
Purchased reserves 152 5,058 973 6,216 - -
Production (1,245) (6,383) (1,197) (7,116) (933) (8,219)
---------- --------- --------- --------- --------- ---------
End of period 5,519 52,709 4,451 36,543 3,299 39,332
========== ========= ========= ========= ========= =========
Proved developed reserves
Beginning of period 3,208 27,259 2,541 28,323 2,282 33,521
End of period 3,605 33,680 3,208 27,259 2,541 28,323
- -----------------------------------------
(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 interest. The reserves included in the above
table include our full net ownership interest without any reduction for the net
profit interest. We treat the net profit interest as an operating expense
rather than a reduction in proved reserves. Please see Note 14 - Net Profits
Expense for a more detailed discussion about the net profit interest.
The following tables represent value-based information about our
proved oil and gas reserves. The standardized measure of discounted future net
cash flows result from the application of specific criteria applicable to the
value-based disclosures of all oil and gas reserves in the industry. Due to the
imprecise nature of estimating oil and gas reserve
25
26
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
quantities and the uncertainty of future economic conditions, we can not make
any representation about interpretations that may be made or what degree of
reliance that may be placed on this method of evaluating proved oil and gas
reserves.
We compute future cash revenue by multiplying the year-end commodity
prices or contractual pricing if applicable, by the proved oil and gas
reserves. Future production and development costs include the estimated costs
to produce or develop the proved reserves based primarily on historical costs.
We calculated the future net profits expense by multiplying the net profit
percentage to the future revenue less production and development costs on South
Pass block 89. Future income tax expense was determined by applying the current
tax rate to the future net cash flow from all properties. Finally, we
discounted the future net cash flow, after tax, by 10% per year to arrive at
the standardized measure of discounted future net cash flows presented below.
AT DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(UNAUDITED, IN THOUSANDS)
Oil and natural gas revenues $ 160,416 $ 226,262 $ 326,498
Production costs (31,474) (31,702) (26,971)
Development costs (30,665) (23,954) (17,756)
Net Profits expense (3,453) (28,933) (53,955)
Income tax expense (7,888) (16,845) (50,638)
--------- --------- ---------
Net cash flow 86,936 124,828 177,178
10% annual discount (23,469) (30,990) (31,165)
--------- --------- ---------
Standardized measure of discounted future net cash flow $ 63,467 $ 93,838 $ 146,013
========= ========= =========
The following table summarizes the principal sources of change in the
standardized measure of discounted future net cash flows from year to year. In
July of this year, we terminated our gas sales contract that covered gas
production on South Pass block 89. The standardized measure of discounted
future net cash flows in the prior years included future revenue based on the
long-term contract price.
AT DECEMBER 31
--------------------------------------
1998 1997 1996
-------- -------- --------
(UNAUDITED, IN THOUSANDS)
Standardized measure of discounted cash flows at beginning of year $ 93,838 $ 146,013 $ 133,982
Sales and transfers of oil and natural gas produced, net of production
costs and net profits expense (24,796) (42,097) (47,810)
Net changes in prices and production costs (77,769) (61,134) 37,764
Net changes in estimated development costs 1,274 (5,130) (1,332)
Net changes in estimated net profits expense 17,624 14,029 1,750
Net changes in income tax expense 8,208 28,283 (3,736)
Extensions, discoveries and improved recovery less related costs 11,625 9,171 16,060
Purchases of proved oil and natural gas reserves 5,050 13,865 --
Development costs incurred during the year 4,318 9,975 9,359
Revisions of previous quantity estimates 18,673 (21,306) (10,747)
Other changes (3,962) (12,432) (2,675)
Accretion of discount 9,384 14,601 13,398
--------- --------- ---------
Standardized measure of discounted future net cash flows end of year $ 63,467 $ 93,838 $ 146,013
========= ========= =========
NOTE 6 -- OTHER PROPERTIES
Other properties include improvements on the leased office space and
office computers and equipment. The company depreciates these assets using the
straight-line method over their estimated useful lives that range from 3 to 12
years.
26
27
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
NOTE 7 - OTHER ASSETS
Long-term accounts receivable - related party reflects CKB Petroleum's
claims under Collateral Assignment Split Dollar Insurance Agreements among CKB
Petroleum and Don D. Box (an officer and director) and two of his brothers.
Deferred charges include the costs, net of amortization, incurred when
we issued the 8 1/4% Convertible Subordinated Notes in 1992. We amortize the
debt issuance costs on a straight-line basis over the 10-year term of the notes
and charge the amortized amount to interest and financing costs. In October
1997, we purchased $16.7 million of the outstanding notes and accelerated the
amortization of the allocated portion of the issuance costs. This resulted in
an additional $416,000 charge in October 1997. We will accelerate the
amortization of the debt issuance costs a second time because of our purchase
of an additional $32.4 million of the notes in February 1999.
NOTE 8 -- MINORITY INTEREST IN SUBSIDIARIES
Two individuals own a combined 5.8824% in two of our subsidiaries, CKB
Petroleum, Inc. and CKB & Associates, Inc. The two subsidiaries were acquired
when we merged with S-Sixteen Holding Company in December 1998. The minority
interest liability reflects their percentage of the total combined equity in
the two subsidiaries. Before the merger, the two shareholders, which were
former officers of the companies, filed suit against S-Sixteen Holding Company
and the two subsidiaries. In this suit the plaintiffs allege that from 1981 to
the present the defendants wasted and/or misappropriated CKB Petroleum's
corporate assets by paying excessive and unreasonable salaries, bonuses and
expenses, and making bogus loans and cash advances. The plaintiffs believe that
the court should reclassify these "improper" expenditures as "constructive"
dividends and that they should receive a pro-rata share of such dividends. In
addition, the plaintiffs also seek an equitable order from the court compelling
us to buy out their interest. We will vigorously defend against all of these
claims.
NOTE 9 -- LONG-TERM ACCOUNTS PAYABLE AND NOTES PAYABLE
Long-term accounts payable include the long-term portion of future
payments due to a vendor that become due over the next three years.
In December 1992, we issued $55.1 million of 8 1/4% Convertible
Subordinated Notes. The notes mature December 1, 2002, and convert into shares
of common stock at the election of the note-holder any time before maturity,
unless previously redeemed. Interest is payable semiannually on June 1 and
December 1. We may redeem all or a portion of the notes any time after December
1, 1995, at 105.775% of the face amount. The redemption price decreases .825%
each subsequent December 1. The notes are unsecured and subordinate to existing
and future senior indebtedness.
The indenture for the notes requires us to make an offer to purchase
the notes if a "change in control" occurs. The purchase price is the total of
the par value plus accrued interest through the date of purchase. In August
1997, Mr. J.R. Simplot purchased S-Sixteen Holding Company, then known as Box
Brothers Holding Company. The purchase resulted in a "change of control" as
defined in the indenture. In October 1997, we repurchased $16.7 million of the
notes outstanding. In December 1998, we reclassified our two classes of common
stock into one class of common stock. The indenture also defined this
transaction as a "change in control" and we made another offer to purchase the
notes. In February 1999, we repurchased $32.4 million of the notes outstanding
pursuant to this offer. Of the total amount of notes purchased by us in
February 1999, we classified $8.4 million as a short-term liability and the
remainder as a long-term liability because we refinanced this portion with
long-term debt.
At December 31, 1998, we had a revolving line of credit established
with a bank. The line of credit with a borrowing base of $15.0 million was
scheduled to expire in March 2000. The company's oil and gas properties were
the collateral for this line of credit. The interest rate for the line of
credit was the lender's floating base rate plus 0.5% until December 31, 1998,
and was reduced to the lender's floating base rate effective January 1, 1999.
At December 31, 1998, we had an outstanding balance of $3.5 million and had
issued letters of credit totaling $250,000 against this line of credit.
27
28
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
In February 1999, we replaced the existing line of credit with a new
line of credit from a different bank. The new line of credit with a borrowing
base of $32.0 million expires in 2003. We pledged our oil and gas properties as
collateral for the new line of credit. We will accrue and pay interest at
varying rates based on premiums of from 1.625 to 2.375 percentage points over
the London Interbank Offered Rates. On February 24, 1999, we borrowed $24.5
million on this line of credit and used the proceeds to buy a portion of the
convertible notes. The most significant financial covenants in the new line of
credit include, among others, maintaining a minimum current ratio of 1.0 to
1.0, excluding any current liabilities associated with the Phillips Petroleum
Company litigation, a minimum tangible net worth of $55.0 million plus 50% of
future net income and 100% of any non-redeemable preferred or common stock
offerings, maximum debt to EBITDA of 3.0 to 1.0, and interest coverage of 3.0
to 1.0.
We estimate that the fair value of our long-term indebtedness,
including the current maturities of such obligations, is approximately $43.6
million at December 31, 1998 and $43.0 million at December 31, 1997. We based
the fair value on the quoted market bid price for our convertible notes and on
current rates available for our other indebtedness.
NOTE 10 -- LEASE COMMITMENTS AND CONTINGENT LIABILITIES
We lease approximately 17,000 square feet of office space in Dallas
Texas. The non-cancelable operating lease expires in April 2008. The following
table reflects our rent payments for the past three years and the commitment
for the future minimum rental payments.
Year Rent
---------------------------- --------------------
1996 $ 717,000
1997 $ 716,000
1998 $ 474,000
1999 $ 407,000
2000 $ 407,000
2001 $ 433,000
2002 $ 441,000
2003 $ 441,000
Remaining commitment $ 2,027000
We are defendants in litigation with Phillips Petroleum Company
concerning their net profits interest ownership in South Pass block 89. We
discuss this litigation in more detail in Note 14 -- Net Profits Expense.
Because of our acquisition of S-Sixteen Holding Company in December 1998, we
are involved in litigation with the minority stockholders of CKB Petroleum,
Inc. and CKB & Associates, Inc. A more detailed discussion of this litigation
is located in Note 8 -- Minority Interest Liability. During the first quarter
of 1999, the Minerals Management Service informed us of certain audit issues.
The issues involve alleged underpaid royalties on the November 1990 gas
contract settlement, the use of FERC tariffs for oil transportation allowances
from our South Pass blocks, and alleged underpaid crude oil royalties on our
South Pass blocks. We have responded to their audit issue letters. In our
responses to the MMS's audit issue letters, we expressed our disagreement with
the positions set forth in their letters.
We have no other material pending legal proceedings other than the
litigation mentioned above. Other than certain possible outcomes of the
Phillips litigation, it is our opinion that any adverse judgments or results
would not have a material adverse effect on our financial position.
NOTE 11 -- COMMON STOCK, PREFERRED STOCK AND DIVIDENDS
In December 1998, the holders of class A common stock and class B
common stock approved the merger agreement with S-Sixteen Holding Company. Part
of the transaction involved the exchange of one class of new voting common
stock for the two classes of common stock that were outstanding. The
stockholders who owned class A common stock received 1.15 shares of the new
common stock for each share of class A common stock. The stockholders who owned
class B common stock received 1 share of the new common stock for each share of
class B common stock.
We issued 579,757 shares of the new common stock plus a warrant to
purchase 300,000 additional shares of
28
29
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
the new common stock for the assets of S-Sixteen Holding Company. The exercise
prices on the warrant range from $7.00 to $11.00. In addition, our stockholders
approved an increase in the number of authorized common stock shares to 100
million and authorized 25.0 million shares of "blank check" preferred stock.
The par value of the new common stock is $0.01 per share. The board of
directors can issue multiple series of preferred stock and set different terms,
voting rights, conversion features and redemption rights for each distinct
series of the preferred stock. We have reserved approximately 2.8 million
shares of common stock for our two stock option plans, which are discussed in
more detail in Note 16 -- Employee and Director Compensation Plans, and 300,000
shares for the warrant.
We have not paid dividends since before 1992. Dividends are not
currently restricted. However, if we pay dividends in excess of 2% of the
market price per share during 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, our financial condition, cash flow from operating activities, the level
of our capital and exploration expenditure needs and our future business
prospects.
NOTE 12 -- OIL AND GAS REVENUES
We recognize oil and gas revenue in the month of actual production.
Our actual sales have not been materially different from our entitled share of
production and we do not have any significant gas imbalances. In 1998, sales by
a gas marketing company accounted for approximately 53% of our total gas
revenue. In addition, we sold approximately 72% of our total oil production to
one company during the year, which accounted for approximately 75% of our total
oil revenues in 1998. We do not believe that the risk of losing services or
sales from either of these companies would have a material adverse effect on
us.
NOTE 13 -- MARKETABLE SECURITIES
When we sell a marketable security, we record the realized gain or
loss on that specific security in the income statement. The following table
includes certain information about our marketable security transactions and the
change in net unrealized holding gains and losses.
FOR THE YEARS ENDED DECEMBER 31,
--------------------------------------
1998 1997 1996
-------- -------- --------
(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)
In 1997 and 1996, we classified all of our marketable securities as
available-for-sale and recorded them on the balance sheet at their market value
as of the balance sheet date. The unrealized holding gains and losses that
result from the difference between the market value and the cost of these
securities are recorded, net of tax, as a separate component of stockholders'
equity.
NOTE 14 -- NET PROFITS EXPENSE
We pay Phillips Petroleum Company 33% of the "net profit", as defined
in the farm-out agreement, from South Pass block 89. The following table
summarizes the net profits expense calculation:
FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1998 1997 1996
-------- -------- --------
(In thousands)
Oil and natural gas revenue (net of transportation) $ 13,434 $ 30,567 $ 42,063
Operating, overhead, and capital expenditures (2,525) (5,292) (7,279)
-------- -------- --------
"Net profit" from South Pass block 89 $ 10,909 $ 25,275 $ 34,784
======== ======== ========
Net profit expense (at 33%) $ 3,600 $ 8,341 $ 11,479
======== ======== ========
29
30
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
We are engaged in litigation with Phillips Petroleum Company
concerning the Net Profits interest in South Pass block 89. In this dispute,
Phillips contends 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
cash payment that had been received by OKC Limited Partnership (our
predecessor) from the 1990 settlement of previous litigation between Texas
Eastern and us, should have been credited to the Net Profits account instead of
the $5.8 million that was credited. On the latter claim, Phillips seeks to
receive in excess of $21.5 million, while on the first two claims Phillips
alleged aggregate damages of several million dollars. In addition, Phillips,
under the Louisiana Mineral Code, is seeking double damages and cancellation of
the farm-out agreement that created the Net Profits interest. We denied
Phillips' claims and defended ourselves during a non-jury trial in April 1997.
At trial, we asserted a counterclaim that Phillips had breached a settlement
agreement regarding previous litigation, and we sought to recover damages in
excess of $10.0 million.
In August 1998, the trial court ruled in the litigation. In its
ruling, the court awarded Phillips $1.6 million plus interest for its
overriding royalty claim and $9.3 million plus interest for its claim on the
1990 settlement. The trial court dismissed Phillips' claim of excessive
transportation charges and its claims for double damages and lease
cancellation. The trial court also dismissed our counterclaim. In October 1998,
the trial court finalized its judgment. We have filed an appeal on certain of
the adverse portions of the judgment. The trial court has required that we post
a bond in order to prevent Phillips from executing on the judgment pending
appeal. The amount of the bond is $18.0 million, 50% of which is collateralized
by cash and a letter of credit. During the pendency of the appeal, simple
interest will continue to accrue on the $10.9 million judgment.
Phillips has also filed notice to appeal.
In connection with the proceeds from the termination of the Texas
Eastern gas sales contract, we filed a declaratory judgment action against
Phillips in federal district court in Dallas, Texas. In the action we asked the
court to declare that none of the $49.8 million we received from the contract
termination is owed to Phillips under the farm-out agreement. In existing
litigation in Collin County, Texas, addressing the same issues that have been
adjudicated by the Louisiana court, Phillips has filed a counterclaim asserting
that the proceeds of the termination agreement should be credited to the Net
Profits account. In response to Phillips counterclaim, we have filed an amended
petition seeking a declaratory judgment that the termination proceeds need not
be credited to the Net Profits account. We agreed to dismiss our federal court
action and the Collin County action is stayed pending resolution of the
Louisiana appeal. Certain possible outcomes of our current litigation with
Phillips Petroleum Company could have a material adverse effect on Remington.
In connection with the judgment, and in accordance with Statement of
Financial Accounting Standards No. 5 entitled "Accounting for Contingencies,"
we recorded $18.0 million as an expense in August 1998. This amount includes
both the awards by the trial court and the estimated interest on those awards
through September 30, 1998.
NOTE 15 -- REORGANIZATION COSTS
Reorganization expense recorded in 1997 and 1996 includes employee
severance expense, litigation settlement amounts and other costs. During 1997,
31 employees were dismissed, resigned or notified us of their resignation. We
paid severance amounts to the employees ranging from 6 to 18 months of their
base pay because of severance agreements between the employees and us. 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 and 18 other professional or clerical personnel. In
1996, under the same severance agreements, 15 employees were dismissed,
resigned or notified us of their resignation. The employees included the Chief
Executive Officer, Executive Vice President, Chief Financial Officer, General
Counsel, and Chief Accounting Officer. During 1995, we adopted a reorganization
plan, which eliminated eight positions that included personnel involved with
corporate development and the management of our 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.
In the third quarter of 1997, we agreed to pay Thomas D. Box $1.2
million to settle his severance claims and lawsuits against us. He was the
Chief Executive Officer and President of the company before his dismissal by
the board of directors in August 1996. In addition, the company granted him
options to purchase 50,000 shares of common stock
30
31
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
at $9.00 per share, office furniture, computer equipment and a 3-D seismic
workstation.
When Mr. J.R. Simplot purchased S-Sixteen Holding Company in August
1997, we executed a letter of intent to settle all the litigation brought by Mr.
Simplot and other plaintiffs. Under the terms of the subsequently-executed
settlement agreement, we paid Mr. Simplot $1.9 million for attorneys' fees and
Mr. James Arthur Lyle $100,000 for attorneys' fees. S-Sixteen Holding Company
owned approximately 57% of our voting common stock until December 1998. At
December 31, 1998, Mr. Simplot controlled approximately 27% of our common stock.
Mr. Lyle has been a member of the board of directors since September 2, 1997.
NOTE 16 - EMPLOYEE AND DIRECTOR BENEFIT PLANS
Stock option plans
We have two stock option plans: the 1992 Incentive Stock Option Plan
and the 1997 Stock Option Plan. Remington discontinued a third plan, the 1992
Non-Qualified Stock Option Plan in 1997. We no longer use the 1992 Incentive
Stock Option Plan, however, 28,500 options remain outstanding thereunder. An
employee can exercise up to 50% of the options granted under the 1992 Incentive
Stock Option Plan after three years from the date of grant and may exercise the
remaining 50% after five years from the date of grant. The options expire ten
years from the date of grant. A committee that includes at least two or more
outside non-employee directors administers the 1997 Stock Option Plan. The
committee has the discretion to determine the participants, the number of
shares granted to each person, the purchase price of the common stock covered
by each option and most other terms of the option. Options granted under the
plan may be either incentive stock options or non-qualified stock options. The
committee may issue options for up to 2.8 million shares of common stock, but
no more than 275,000 shares to any individual.
We continue 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 our stock at the date of the
grant over the amount an employee must pay to acquire the stock. A summary of
our stock option plans as of December 31, 1997, 1996, and 1995 and changes
during the years ending on those dates is presented below:
AT DECEMBER 31,
---------------------------------------------------------------------
1998 1997 1996
----------------------- --------------------- -----------------------
WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE
EXERCISE EXERCISE EXERCISE
SHARES PRICE SHARES PRICE SHARES PRICE
--------- --------- ---------- --------- ---------- ---------
Outstanding at beginning of year 455,000 $6.92 312,500 $ 9.52 622,000 $10.08
Granted 751,000 $5.72 426,500 $ 6.73 41,000 $ 8.85
Exercised -- -- -- -- -- --
Forfeited (30,500) $6.80 (284,000) $ 9.51 (350,500) $10.43
--------- ----- -------- ------ -------- ------
Outstanding at end of year 1,175,500 $6.15 455,000 $ 6.92 312,500 $ 9.52
========= ===== ======== ====== ======== ======
Options exercisable at year-end 257,921 $7.07 8,000 $11.88 38,600 $11.88
Weighted-average fair value of options
granted during the year $3.32 $ 4.65 $ 6.15
The options outstanding at December 31, 1998, have a weighted-average
remaining contractual life of 9 years and an exercise price ranging from $3.125
to $11.875 per share.
31
32
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
The table below reflects the effect on our net income or loss if we
recorded the estimated compensation costs for the stock options using the
estimated fair value as determined by applying the Black-Scholes option pricing
model.
FOR YEARS ENDED DECEMBER 31,
-----------------------------------------------
1998 1997 1996
-------- -------- ---------
(In thousands)
Net income (loss) As reported $ 13,617 $ (26,790) $ (7,662)
Pro forma $ 12,591 $ (27,062) $ (7,774)
Basic income (loss) per share As reported $ 0.67 $ (1.31) $ (0.37)
Pro forma $ 0.62 $ (1.32) $ (0.37)
Diluted income (loss) per share As reported $ 0.66 $ (1.31) $ (0.37)
Pro forma $ 0.61 $ (1.32) $ (0.37)
The fair value of each option grant for the years ended December 31,
1998, 1997, and 1996 is estimated on the date of grant using the Black-Scholes
option-pricing model with the following weighted average assumptions:
FOR YEARS ENDED DECEMBER 31,
----------------------------------------------
1998 1997 1996
-------- -------- --------
Expected life (years) 10 10 10
Interest rate 5.50% 6.19% 6.85%
Volatility 51.17% 49.50% 48.21%
Dividend yield 0 0 0
Non-Employee Director Stock Purchase Plan
The stockholders approved the non-employee director stock purchase
plan in December 1997. The plan allows the non-employee directors to receive
their directors' fees in shares of common stock. Once each year each
non-employee director of the company may elect to receive all or a portion of
his fees in restricted shares of common stock instead of cash. The number of
shares received will be equal to 150% of the cash fees divided by the closing
market price of the common stock on the day that the cash fees would otherwise
be paid. The director can not transfer the common stock 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 can
vote the shares of restricted stock and receive any dividend paid in cash or
other property.
Transactions with Directors
We paid executive search fees during 1998 totaling $40,000 and during
1997 totaling $141,000 to Preng and Associates, Inc., which is a company
controlled by a member of our board of directors.
32
33
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
Pension Plan
Remington and CKB Petroleum each have a noncontributory defined
benefit pension plan. The retirement benefits available are generally based on
years of service and average earnings. We fund the plans 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
reconciliation of the benefit obligation, plan assets, and funded status for
Remington's pension plan.
AT DECEMBER 31,
----------------------
ASSETS 1998 1997
-------- -------
RECONCILIATION OF THE CHANGE IN BENEFIT OBLIGATION
Beginning benefit obligation $ 2,938 $ 3,032
Service cost 79 116
Interest cost 201 222
Effect of settlement (644) (632)
Actuarial loss (gain) 372 820
Benefits paid (142) (620)
------- -------
Ending benefit obligation $ 2,804 $ 2,938
======= =======
RECONCILIATION OF THE CHANGE IN PLAN ASSETS
Beginning market value $ 3,160 $ 3,500
Actual return on plan assets 312 280
Employer contributions 150 --
Benefit payments (786) (620)
------- -------
Ending market value $ 2,836 $ 3,160
======= =======
FUNDED STATUS AND AMOUNTS RECOGNIZED IN THE BALANCE SHEET
Funded status $ 32 $ 222
Unrecognized net actuarial loss (gain) 320 --
Effect of the settlement (60) --
------- -------
Adjusted prepaid (accrued) benefit cost $ 292 $ 222
======= =======
The net periodic pension cost recognized in our income statements
include the following components:
FOR YEARS ENDED DECEMBER 31,
-----------------------------
1998 1997 1996
-------- -------- ---------
(In thousands)
COMPONENTS OF NET PERIODIC PENSION COST
Service cost $ 79 $ 116 $ 140
Interest cost on projected benefit obligation 201 222 214
Actual return on plan assets (259) (281) (324)
Net amortization and deferrals -- 21 114
----- ----- -----
Net periodic pension cost 21 78 144
Special recognition due to curtailment and lump sum settlements -- (36) --
----- ----- -----
Net periodic pension cost $ 21 $ 42 $ 144
===== ===== =====
WEIGHTED AVERAGE ASSUMPTIONS
Discount rate 7.00% 7.00% 7.50%
Expected return on plan assets 8.00% 8.00% 8.00%
Rate of compensation increase 3.00% 3.00% 3.00%
33
34
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
Remington acquired CKB Petroleum in December 1998 as part of the
merger with S-Sixteen Holding Company. Because of the merger, we acquired the
CKB Petroleum pension plan. The following table presents the benefit
obligation, plan assets, and funded status of the CKB Petroleum plan at the
time of acquisition.
Benefit obligation $ 527,000
Market value of plan assets $ 553,000
Adjusted prepaid benefit cost $ 19,000
Statement of Financial Accounting Standards No. 88 entitled
"Employers' Accounting for Settlements and Curtailments of Defined Benefit
Pension Plans and for Termination Benefits" requires immediate recognition of
certain previously unrecognized amounts when certain transactions or events
occur in a defined benefit pension plan. It prescribes the method for
determining the amount to be recognized in earnings when a pension obligation
is settled or a plan is curtailed. Settlement is defined as an irrevocable
action that relieves the employer (or the plan) of primary responsibility for
an obligation and eliminates significant risks related to the obligation and
the assets used to effect the settlement. A curtailment is defined as a
significant reduction in, or an elimination of, defined benefit accruals for
present employees' future services. During 1998, Remington distributed plan
assets in settlement of certain obligations to former employees. The following
is reconciliation of the settlement on the various components of the plan.
Disclosure Loss Disclosure
Prior to Measured at With effect of
Settlement Settlement Settlement Settlement
------------- ------------- ------------ --------------
(In thousands)
Vested benefit obligation $ (2,925) $ (373) $ 644 $ (2,654)
Nonvested benefit obligation (90) - - (90)
---------- ---------- ---------- ----------
Accumulated benefit obligation (3,015) (373) 644 (2,744)
Effect of future pay increases (60) - - (60)
---------- ---------- ---------- ----------
Projected benefit obligation (3,075) (373) 644 (2,804)
Assets 3,480 - (644) 2,836
---------- ---------- ---------- ----------
Funded status 405 (373) - 32
Unrecognized (gain) loss (53) 373 (60) 260
---------- ---------- ---------- ----------
(Accrued) prepaid pension cost $ 352 $ - $ (60) $ 292
========== ========== ========== ==========
Employee Severance Plan, Post Retirement Benefits and Post Employment Benefits
We adopted an employee 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. In 1995, certain employees had
signed individual severance agreements with the company. In addition, certain
of the executive officers have individual employment contracts with the
company.
We have never paid postretirement benefits other than pensions and
have not obligated ourselves to pay such benefits in the future. Future
obligations for postemployment benefits are immaterial. Therefore, we have not
recognized any liability for either.
34
35
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
NOTE 17 -- INCOME TAXES
Income tax expense or benefit includes both the current income taxes
and deferred income taxes. Current income tax expense or benefit equals the
amount calculated on our income tax return for that year. Deferred income tax
expense or benefit equals the change in the net deferred income tax asset or
liability from the beginning of the year to the end of the year. The following
table provides a reconciliation of our income tax expense or (benefit):
FOR YEARS ENDED DECEMBER 31,
------------------------------------
1998 1997 1996
-------- -------- ---------
(In thousands)
"Expected" tax expense (benefit) (35% of income before taxes) $ 5,031 $(4,258) $ (3,301)
Net adjustment to valuation allowance (4,708) 19,052 1,036
Other -- (171) 569
-------- -------- --------
Total deferred income tax expense (benefit) 323 14,623 (1,696)
Provision (credit) for alternative minimum tax 433 -- (74)
-------- -------- --------
Total income tax expense (benefit) $ 756 $ 14,623 $ (1,770)
======== ======== ========
In 1997 we increased the valuation allowance against the entire
deferred tax asset and recorded the related deferred income tax expense. Our
actual 1997 results and future projections were significantly different than
anticipated in our 1996 and prior projections. The difference resulted from a
significant drop in commodity prices, the unusual and unforeseen reorganization
expenses incurred in the last half of 1997, and a downward revision in our
proved gas reserves as of January 1, 1998, on South Pass block 89.
We determine the amount of our deferred income tax asset or liability
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 reverse. 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. The following table reflects the significant
components of our deferred tax asset.
AT DECEMBER 31,
----------------------
1998 1997
--------- ---------
(In thousands)
Asset (liability) from difference in book and tax basis of oil and gas properties $ (2,257) $ 11,012
Asset from difference in book and tax basis of other assets 879 192
Asset from difference in book and tax basis accrued liabilities 5,339 1,204
Federal income tax operating loss carry-forward 7,977 9,549
Federal capital loss carry-forwards 327 197
Alternative minimum tax credit carry-forward 644 262
-------- --------
Total deferred tax asset 12,909 22,416
Valuation allowance (12,909) (22,416)
-------- --------
Net deferred tax asset $ - $ -
======== ========
The unused federal income tax operating loss carry-forward of $22.8
million will expire during the years 2007 through 2012 if not previously
utilized, and the capital loss carry-forward of $934,000 will expire in the
years 1999 through 2002.
35
36
Remington Oil and Gas Corporation
Notes to Consolidated Financial Statements
NOTE 18 -- INCOME PER COMMON SHARE
We compute basic income per share 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. The following table presents our calculation of
basic and diluted income per share.
FOR YEARS ENDED DECEMBER 31,
---------------------------------------
1998 1997 1996
-------- -------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Net income (loss) available for basic income per share $ 13,617 $(26,790) $ (7,662)
Interest expense on the Notes (net of tax) (2) 2,058 -- --
-------- -------- --------
Net income (loss) available for diluted income per share $ 15,675 $(26,790) $ (7,662)
======== ======== ========
Basic income (loss) per share $ 0.67 $ (1.31) $ (0.37)
======== ======== ========
Diluted income (loss) per share $ 0.66 $ (1.31) $ (0.37)
======== ======== ========
Weighted average common shares for basic income (loss) per share 20,370 20,524 20,803
Dilutive stock options outstanding (treasury stock method) (1) -- -- --
Shares assumed issued by conversion of the Notes (2) 3,488 -- --
-------- -------- --------
Total common share for diluted income (loss) per share 23,858 20,524 20,803
======== ======== ========
(1) Non dilutive
(2) Non dilutive in 1997 and 1996
Potential increase to net income for diluted income per share
Interest expense on Notes (net of tax) $ -- $ 2,835 $ 2,954
Potential issues of common stock for diluted income per share
Weighted average stock options granted 875 99 302
Weighted average shares from warrant issued in merger 2 -- --
Weighted average shares issued assuming conversion of Notes -- 4,741 5,007
NOTE 19 -- OTHER RELATED PARTY TRANSACTIONS
Under the Limited Partnership Agreement of OKC Limited 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 CKB &
Associates, Inc. and Cloyce K. Box (and his estate following his death) in
connection with such litigation. In addition, we 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. In accordance with our By-Laws, the
defendants have executed written undertakings to repay us for any related
expenses advanced on their behalf if it is later found that such costs were not
subject to indemnification. 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 in 1997 and $1.5 million in 1996.
Included in Accounts receivable - other is a receivable in the amount
of $210,000 from the Estate of Cloyce K. Box. Don D. Box, an officer and
director of the company, is co-executor of the Estate.
36
37
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 or as an executive officer of the
company during 1998. Each director holds office until his successor is elected
and qualified or until his or her earlier resignation or removal in accordance
with our Certificate of Incorporation and By-Laws. 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 48 Director, Executive Vice President
John E. Goble, Jr. (2) 52 Director
William E. Greenwood (3) 60 Director
David H. Hawk (1) 54 Director, Chairman of the Board
James Arthur Lyle (3) 54 Director
David E. Preng (3) 52 Director
Thomas W. Rollins (1) 67 Director
Alan C. Shapiro (2) 53 Director
James A. Watt (1) 49 Director, President and Chief Executive Officer
Robert P. Murphy 40 Vice President/Exploration
Steven J. Craig 47 Senior Vice President/Planning and Administration
J. Burke Asher 58 Vice President/Finance and Secretary
Edward V. Howard 36 Vice President/Controller and Assistant Secretary
- ---------------
(1) Member of the Executive Committee.
(2) Member of the Audit Committee.
(3) Member of the Compensation Committee.
The following is a brief description of the background and principal
occupation of each director and executive officer of the company.
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
our Director of Corporate Development. He served as Vice President of S-Sixteen
Holding Company from September 1997 until December 1998. He has served as Vice
President of CKB & Associates, Inc. and CKB Petroleum, Inc. since September
1997. For more than five years prior to September 1997, he served as a director
and executive officer of S-Sixteen Holding Company, CKB & Associates, CKB
Petroleum, and certain other affiliates of S-Sixteen Holding Company. Mr. Box
is a director of Toucan Mining Company. He is a co-executor of the Cloyce K.
Box Estate. He received a Bachelor of Arts degree from the University of
Pennsylvania, a Bachelor of Science in Economics degree from the Wharton School
of the University of Pennsylvania, and a Master of Business Administration
degree from Southern Methodist University.
37
38
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. Mr. Goble is a member of the American Institute of Certified Public
Accountants and the Texas Society of Certified Public Accountants. He has a
Bachelor of Business Administration degree from Southern Methodist University.
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. He
received a Bachelor of Science degree from Marquette University.
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
approximately 27% of the company's outstanding common stock. Mr. Hawk
previously held the positions of Exploration Geologist with Atlantic Richfield
Company and Tenneco Inc. He has held executive positions with IGC Production
Company, Sundance Oil Company, and Horn Resources Corporation. He received a
Bachelor of Science in Geology degree from the University of Idaho and a Master
of Science in Geology degree from the University of Oklahoma.
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 President
of Hueco Mountain Estates, Inc., a 10,500-acre multi-use real estate
development located in El Paso County, Texas. He received a Bachelor of Science
in Industrial Management degree from the Georgia Institute of Technology.
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
specializing in the energy industry. He is a director of Citizens National Bank
of Texas and the British American Business Council in Houston, and is a fellow
of the Institute of Directors in London. He has a Bachelor of Science in
Business Administration degree from Marquette University and a Master of
Business Administration degree from DePaul University.
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 Enron Cash Company #2, Pheasant Ridge Winery,
The Teaching Company, and the Nature Conservancy of Texas. During his career,
Mr. Rollins has held executive positions and/or directorships with Shell Oil
Company, Pennzoil Company, Florida Gas Transmission Company, Pogo Producing
Company, Magma Cooper Company, and Felmont Oil Corporation. He is a graduate
and Distinguished Career Medalist of the Colorado School of Mines.
Alan C. Shapiro has served as a director since May 5, 1994. Since
1991, Dr. Shapiro has been the Ivadelle and Theodore Johnson Professor of
Banking and Finance in the Department of Finance and Business Economics,
Marshall School of Business, University of Southern California. From 1993 to
1998, he was chairman of the Department. His business activity also includes
frequent engagements as a consultant and/or expert witness with a wide variety
of businesses and government agencies. Dr. Shapiro has authored many books and
articles including a best-selling textbook, Multinational Financial Management,
which is in use in many of the MBA programs around the world. Dr. Shapiro
received a Bachelor of Arts in Mathematics degree from Rice University and a
Ph.D. in Economics degree from Carnegie Melon University.
James A. Watt has served as a director since September 1997, as
President and Chief Operating Officer from March 1997 to February 1998, and as
President and Chief Executive Officer since February 1998. Since January 1999
he has also served as a director and President of CKB & Associates, Inc. and
CKB Petroleum, Inc. 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
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Rensselaer Polytechnic Institute.
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 Enserch Exploration, an oil and gas company. Mr. Murphy holds a
Master of Science in geology from The University of Texas at Dallas.
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. Since January 1999 he
has also served as a director and Vice President of CKB & Associates, Inc. and
CKB Petroleum, Inc. He served as Vice President and Assistant Treasurer of
S-Sixteen Holding Company, CKB & Associates, and CKB Petroleum from March 1997
to October 1997, and as a director from March 1997 to August 1997. Mr. Craig
served as Assistant Treasurer and Controller of CKB & Associates and CKB
Petroleum from March 1996 to March 1997, and served as Chief Financial Officer
and Assistant Treasurer of S-Sixteen Holding Company from May 1996 to March
1997. He served as Vice President of Remington 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. Mr. Craig received a Bachelor of Arts
in Economics degree and a Master of Business Administration in Finance and
Quantitative Analysis degree from Southern Methodist University.
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
served as Treasurer and Assistant Secretary of S-Sixteen Holding Company from
March 1997 to December 1998. He has served as Treasurer and Assistant Secretary
of CKB & Associates, Inc. and CKB Petroleum, Inc. since March 1997. He served
as a director of S-Sixteen Holding Company and CKB & Associates from March 1997
to August 1997, and as a director of CKB Petroleum 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. Mr. Asher received a Bachelor of Science in Economics degree
from the Wharton School of the University of Pennsylvania.
Edward V. Howard, a Certified Public Accountant, has served as Vice
President/Controller of the company since March 1992 and served 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
degree from West Texas State University.
No director has a significant personal interest 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, stockholders of the company at the
time, 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: J. R. Simplot filed one late Form 3. Steven
J. Craig filed one late Form 4 reporting two transactions and one late Form 4
reporting one transaction. James Arthur Lyle filed one late Form 4 reporting
one transaction.
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ITEM 11. EXECUTIVE COMPENSATION
The following table summarizes the compensation paid by the company
during 1998, 1997, and 1996 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 1998 exceeded $100,000
(collectively, the "Named Executive Officers").
SUMMARY COMPENSATION TABLE
-------------------------------------- ----------------------------------------------
ANNUAL COMPENSATION LONG-TERM COMPENSATION
-------------------------------------- ----------------------------------------------
SECURITIES
OTHER RESTRICTED UNDERLYING
ANNUAL STOCK OPTIONS/ ALL OTHER
Name and FISCAL SALARY BONUS COMPENSATION AWARDS SAR'S COMPENSATION
Principal Position YEAR ($) ($) ($)(1) ($) (#) ($)
- ------------------ ------ ------- ----- ------------ ---------- ----------- ------------
James A. Watt 1998 250,006 70,000 - - 130,000 174 (7)
President and Chief 1997 166,250 100,000 - 112,500 (3) 100,000 148,039 (4)
Executive Officer(2) 1996 - - - - - -
Don D. Box 1998 200,004 - - - 40,000 174 (7)
Executive Vice 1997 183,335 - - - 100,000 2,884 (6)
President (5) 1996 - - - - - 28,000 (6)
Robert P. Murphy 1998 146,260 30,000 - - 60,000 62 (7)
Vice President/ 1997 - - - - - -
Exploration 1996 - - - - - -
Steven J. Craig
Senior Vice President/ 1998 110,259 20,000 - - 40,000 174 (7)
Planning and 1997 100,008 15,000 - - 20,000 177 (7)
Administration 1996 40,202 10,000 - - - 77 (7)
J. Burke Asher 1998 105,000 19,000 - - 35,000 450 (7)
Vice President/Finance 1997 95,004 15,000 - - 20,000 450 (7)
and Secretary 1996 31,668 3,200 - - - 150 (7)
- -------------
(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, 1998, Mr. Watt held 12,000 restricted shares of common
stock with a value of $38,250. 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
common 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 January 1994 to
October 1997 and as Chief Executive Officer from August 1996 to
October 1997. He served as President from August 1996 until March
1997.
(6) 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) These amounts are for group term life insurance premiums paid by the
company.
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Severance agreements are discussed below. Three Named Executive
Officers have employment contracts with Remington. See "Change in Control
Arrangements."
EMPLOYEE STOCK OPTIONS
1992 Plan
Our board of directors approved the 1992 Incentive Stock Option Plan
(the "1992 Plan") on April 24, 1992, for our employees. The 1992 Plan was
approved by the holders of a majority of the company's voting 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 us and to
continue to increase their efforts to make the company successful. During 1998,
no options were granted under the 1992 Plan. As of December 31, 1998, only
28,500 options remain outstanding under the 1992 Plan, and we do not anticipate
granting any more options thereunder.
1997 Plan
On December 4, 1997, the holders of a majority of our voting stock
approved the 1997 Stock Option Plan (the "1997 Plan"), which is intended to
benefit us by providing directors and key employees with additional incentives
and giving them a greater interest as shareholders in our success.
The 1997 Plan provides for the issuance of options to purchase common
stock and is administered by a 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 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 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 common 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 common 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 common 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 common 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 common stock, and in the case of incentive options may not be less
than the fair market value of the common 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
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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 our
capital structure. 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 our retirement policy, 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.
Federal Income Tax Consequences
A participant will not realize taxable income 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. We will be entitled to a
deduction for such compensation income if we satisfy any federal income tax
withholding requirements. 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).
A participant will not recognize taxable income 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 us 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 we will not 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 the participant sells incentive stock option shares 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. We will be entitled to a deduction for such
compensation income if we satisfy any federal income tax withholding
requirements.
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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 $(1)
- ---- --------------- ------------- ------------- ---------- -------------
James A. Watt 50,000 9.88% 5.750 02/04/08 197,555
James A. Watt 80,000 15.81% 3.500 12/11/08 193,680
Don D. Box 20,000 3.95% 5.750 02/04/08 79,022
Don D. Box 20,000 3.95% 3.500 12/11/08 48,420
Robert P. Murphy 20,000 3.95% 5.375 01/22/08 73,818
Robert P. Murphy 20,000 3.95% 5.750 02/04/08 79,022
Robert P. Murphy 40,000 7.91% 3.500 12/11/08 96,840
Steven J. Craig 15,000 2.96% 5.750 02/04/08 59,267
Steven J. Craig 25,000 4.94% 3.500 12/11/08 60,525
J. Burke Asher 15,000 2.96% 5.750 02/04/08 59,267
J. Burke Asher 20,000 3.95% 3.500 12/11/08 48,420
- -------------
(1) We determined these values under the Black-Scholes option pricing
model based on the following assumptions: stock price volatility of
49.73% for options expiring on 01/22/08, 50.30% for options expiring
on 02/04/08, and 52.98% for options expiring on 12/11/08; interest
rate based on the yield to maturity of a 10-year stripped Treasury
security; exercise in the tenth year; and a dividend rate of zero. We
made no adjustments for nontransferability or risk of forfeiture. Our
use of this model does not constitute an endorsement or an
acknowledgment that such model can accurately determine the value of
options. No assurance can be given that the actual value, if any,
realized by an executive upon the exercise of these options will
approximate the estimated values calculated by using the Black-Scholes
model.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
- ---------------------------------------------------------------------------------------------------------------------------
NUMBER OF SECURITIES VALUE OF UNEXERCISED
NUMBER OF UNDERLYING UNEXERCISED OPTIONS IN-THE-MONEY OPTIONS AT
SHARES AT FISCAL YEAR-END FISCAL YEAR-END ($) (1)
ACQUIRED ON VALUE REALIZED ------------------------------ ----------------------------
NAME EXERCISE ($) EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ---- ----------- -------------- ----------- ------------- ----------- --------------
James A. Watt - - 20,000 210,000 - -
Don D. Box - - 20,000 120,000 - -
Robert P. Murphy - - - 80,000 - -
Steven J. Craig - - 6,667 53,333 - -
J. Burke Asher - - 6,667 48,333 - -
- -------------
(1) Computed as the number of securities multiplied by the difference
between the option exercise prices and the closing price of our common
stock on December 31, 1998.
PENSION PLANS
Our defined benefit pension plans provide 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 plans.
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
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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 1998:
PENSION PLAN TABLE
-------------------------------------------------------------------------------------------------------------
YEARS OF SERVICE (1)(3)(4)
-------------------------------------------------------------------------------
AVERAGE
COMPENSATION (1)(2) 15 20 25 30 35
------------------- ------- ------ ------- ------ -------
($) ($) ($) ($) ($) ($)
125,000 52,896 55,944 58,983 62,041 65,090
150,000 64,083 67,944 71,805 75,666 79,527
160,000 68,558 72,744 76,930 81,116 85,302
175,000 68,558 72,744 76,930 81,116 85,302
200,000 68,558 72,744 76,930 81,116 85,302
225,000 68,558 72,744 76,930 81,116 85,302
250,000 68,558 72,744 76,930 81,116 85,302
300,000 68,558 72,744 76,930 81,116 85,302
400,000 68,558 72,744 76,930 81,116 85,302
450,000 68,558 72,744 76,930 81,116 85,302
500,000 68,558 72,744 76,930 81,116 85,302
- ------------
(1) As of December 31, 1998, the Internal Revenue Code does not allow
qualified plan compensation to exceed $160,000 or the benefit payable
annually to exceed $130,000. The Internal Revenue Service will adjust
these limitations for inflation in future years. When the limitations
are raised, the compensation considered and the benefits payable under
the pension plans will increase to the level of the new limitations or
the amount otherwise payable under the pension plans, 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, 1998, for the Named
Executive Officers is as follows: James A. Watt (2 years), Don D. Box
(3 years), Robert P. Murphy (1 year), Steven J. Craig (4 years), and
J. Burke Asher (2 years).
(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 full board of directors held five meetings in 1998. All directors
attended at least 75% of the 1998 meetings. 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. We also provide the directors with directors' and officers'
liability insurance. Further, our By-Laws provide that we will indemnify the
directors and officers in certain situations.
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In 1998 David H. Hawk and James Arthur Lyle each were granted stock
options to purchase shares of our common 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 December 4, 1997, at an
exercise price of $6.94 per share; 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).
Also in 1998 David H. Hawk and David E. Preng each were awarded stock
options under the 1997 Stock Option Plan to purchase 10,000 shares effective
December 23, 1998, at an exercise price of $3.13 per share. The options are
exercisable one-third each year beginning December 23, 1999.
During 1998, we paid Rollins Resources, a proprietorship owned by
director Thomas W. Rollins, $9,928 for consulting fees and expense
reimbursements. During 1998, we paid $39,601 in fees and expense reimbursements
to Preng & Associates, Inc., which is majority-owned by director David E.
Preng, for executive search services.
Director Stock Purchase Plan
On December 4, 1997, the holders of a majority of our voting stock
approved the Non-Employee Director Stock Purchase Plan (the "Director Stock
Purchase Plan"), which is intended to encourage our directors to acquire a
greater equity interest in the company by providing a means for them to receive
their director fees in shares of common 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 common stock in lieu of cash. The number of shares of 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 stock on the
day that cash fees would otherwise be paid to the director. The director may
not transfer shares of stock for 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.
During 1998 the directors received shares of stock in lieu of cash
fees as follows:
John E Goble, Jr. received 4,018 shares in lieu of $12,000 cash.
James Arthur Lyle received 6,698 shares in lieu of $20,000 cash.
David E. Preng received 11,630 shares in lieu of $35,500 cash.
Thomas W. Rollins received 6,698 shares in lieu of $20,000 cash.
Alan C. Shapiro received 11,277 shares in lieu of $34,750 cash.
The board of directors may terminate the Director Stock Purchase Plan
at any time.
Change in Control Arrangements
1997 Severance Plan
In November 1997, we adopted the Box Energy Corporation Severance Plan
(the "1997 Severance Plan") which generally covers all of our full-time regular
employees. 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 by
reason of such individual's conviction of any felony or of a misdemeanor
involving moral
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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
We 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 recommended
to the compensation committee of the board of directors (and the committee
approved) the granting to Mr. Watt 15,000 shares of common stock and employee
stock options to purchase 100,000 shares of common stock vesting 20% per year
over five years, subject to appropriate stockholder approval.
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.
We 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.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION IN COMPENSATION
DECISIONS
No executive officer serves on the compensation committee of the
board. The company paid $234,000 to Preng & Associates, Inc., which is
majority-owned by David E. Preng, chairman of compensation committee, for
executive search services provided to the company from July 1996 through the
end of 1998, including $40,000 in 1998. The level of fees received by Preng &
Associates usually depends, at least in part, on the initial level of
compensation we offer to the candidate successfully recruited by us through
Preng & Associates.
BOARD COMPENSATION COMMITTEE REPORT ON EXECUTIVE COMPENSATION
We believe that employing and retaining highly qualified and high
performing executive officers is vital to our achievement of 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 philosophy is to develop a systematic, competitive executive
compensation program which recognizes an
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executive officer's position and responsibilities, takes into account
competitive compensation levels payable within the 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 oil and gas industry that are similar to us
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.
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 that is competitive at the desired level.
ANNUAL CASH INCENTIVES
The Committee developed a performance-based annual cash incentive plan
covering the 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 annual cash
incentive plan, the 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 are 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
We maintain 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 remain with the company, to increase performance, and to focus on achieving
long-term increases in shareholder value. Other factors the Committee considers
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.
COMPENSATION COMMITTEE
David E. Preng
William E. Greenwood
James Arthur Lyle
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PERFORMANCE GRAPH
The following performance graph compares the performance of all classes
of our 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 our common stock and in each
index was $100 at December 31, 1993, and that all dividends were reinvested.
[GRAPH]
12/31/93 12/31/94 12/31/95 12/31/96 12/31/97 12/31/98
-------- -------- -------- -------- -------- --------
ROILA 100.00 53.85 41.83 35.58 20.19 14.10*
ROILB 100.00 85.15 68.32 72.28 41.09 25.25*
ROIL *
NASDAQ U.S. 100.00 97.75 138.27 170.03 208.53 293.83
NASDAQ O&G 100.00 92.48 97.19 140.48 133.88 64.95
* The last day of trading for ROILA and ROILB was December 24, 1998. Effective
at the opening of trading on December 28, 1998, both former classes of stock
were replaced by the new single class of voting common stock (ROIL). The values
shown above as of December 31, 1998, for ROILA give effect to the 1.15:1
exchange ratio that the former holders of ROILA received in the exchange for
the new class of common stock, and the 1:1 exchange ratio that the former
holders of ROILB received in the exchange for the new class of common stock.
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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
Ownership of Certain Beneficial Owners
As of March 24, 1999, the following persons held shares of the
company's common stock in amounts totaling more than 5% of the total shares of
common stock outstanding. This information was furnished to us by such persons
or statements filed with the Commission.
NAME AND ADDRESS OF SHARES OF PERCENT OF
BENEFICIAL OWNER COMMON STOCK BENEFICIALLY OWNED COMMON STOCK
- ------------------------------------- ------------------------------------------ --------------------------------
J.R. Simplot
999 Main Street
Boise, Idaho 83702 (1) 5,931,028 (1) 27%
S-Sixteen Limited Partnership
PO Box 27
Boise, Idaho 83707 (1) 3,085,028 (1) 14%
Heartland Advisors, Inc.
790 North Milwaukee Street
Milwaukee, Wisconsin 53202 (2) 3,588,220 (2) 17%
- -------------
(1) Mr. J.R. Simplot is the trustee and beneficiary of the J.R. Simplot Self
Declaration of Revocable Trust dated December 21, 1989, an inter vivos
revocable trust. The Trust is the sole general partner of S-Sixteen
Limited Partnership, an Idaho limited partnership. Mr. Simplot may be
deemed a beneficial owner of the 2,785,028 shares and 300,000 warrants
owned by S-Sixteen Limited Partnership. Mr. Simplot may be deemed a
beneficial owner of 2,845,000 shares owned by the Trust and 1,000 shares
owned jointly by Mr. Simplot and his spouse. Included in the above table
are 300,000 shares of common stock issuable to S-Sixteen Limited
Partnership upon the exercise of warrants within 60 days of March 24,
1999. 100,000 warrants are exercisable at $7.00 per share for a period of
12 months from December 28, 1998; 100,000 warrants are exercisable at
$9.00 per share for a period of 36 months from December 28, 1998; and
100,000 warrants are exercisable at $11.00 per share for a period of 60
months from December 28, 1998.
(2) Heartland Advisors, Inc. informed us that it has sole dispositive power
over all 3,588,220 shares and sole voting power over 1,932,520 of the
shares.
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OWNERSHIP OF MANAGEMENT
The number of shares of the company's common stock beneficially owned
as of March 24, 1999, 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 OPTIONS
COMMON STOCK EXERCISABLE PERCENT OF
BENEFICIALLY WITHIN 60 DAYS OF COMMON
NAME OWNED MARCH 24, 1999 TOTAL STOCK
- ---- ------------ ----------------- ----- -----------
J. Burke Asher 3,001 11,667 14,668 *
Don D. Box 33,707 26,667 60,374 *
Steven J. Craig 10,365 11,667 22,032 *
John E. Goble, Jr. 5,018 50,000 55,018 *
William E. Greenwood 0 50,000 50,000 *
David H. Hawk 1,630 50,000 51,630 *
James Arthur Lyle 9,680 50,000 59,680 *
Robert P. Murphy 2,650 13,334 15,984 *
David E. Preng 27,392 50,000 77,392 *
Thomas W. Rollins 16,905 50,000 66,905 *
Alan C. Shapiro 18,484 50,000 68,484 *
James A. Watt 32,700 56,667 89,367 *
All Directors and executive officers as a
group (13 persons) 162,932 490,002 652,934 3.0%
- ---------------------
* Less than one percent of the outstanding shares.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Until December 28, 1998, S-Sixteen Holding Company owned approximately
57% of outstanding shares of the class A (Voting) stock of Remington and 94% of
the outstanding shares of both CKB Petroleum, Inc. and CKB & Associates, Inc. A
resolution adopted in 1992 by our board of directors authorizes the us 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.
We pay oil transportation charges to CKB Petroleum, Inc. for
transporting crude oil from our South Pass blocks. Since March 1985, CKB
Petroleum, Inc. 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 our
predecessor entity prior to the acquisition of the pipeline interest by CKB
Petroleum, Inc. CKB Petroleum billed the company $3.0 million, $3.2 million and
$2.8 million for oil transportation fees in 1998, 1997, and 1996, respectively.
We bill S-Sixteen Holding Company, CKB Petroleum, Inc., and CKB &
Associates, Inc. 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 amounts
that we billed related parties were not material in 1998, 1997, and 1996.
Under the Limited Partnership Agreement of our predecessor, OKC
Limited 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
50
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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 OKC
Limited Partnership and later the company, advanced litigation expenses to CKB &
Associates, Inc. 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 of our directors and officers for one lawsuit
related to the Griffin litigation and other lawsuits related to the shareholder
litigation and Thomas D. Box Cases. In accordance with our By-Laws, 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 and $1.5 million for 1997
and 1996, respectively.
In December 1997, we 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 S-Sixteen Holding Company $7.25
million to retire existing secured debt of S-Sixteen Holding Company. 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. In 1998 the
maturity date was extended to November 29, 1998. S-Sixteen Holding Company
pledged as collateral for the promissory note the 1,840,525 shares of the
company's class A (Voting) common stock owned by S-Sixteen Holding Company. The
pledge agreement provided that in the event that S-Sixteen Holding Company
defaults on the note, the company, upon five days' notice to S-Sixteen Holding
Company, 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
provided that upon the occurrence and during the continuance of an event of
default, the company may direct the vote of such stock. S-Sixteen Holding
Company made payments in excess of the required amounts, and as of December 28,
1998, the outstanding principal amount of the note had been reduced to $4.76
million. On December 28, 1998, S-Sixteen Holding Company was merged into
Remington and the remaining balance of the note is considered forgiven as part
of the cost of our acquisition of S-Sixteen Holding Company.
We paid $234,000 to Preng & Associates, Inc., which is majority-owned
by David E. Preng, a director of the company, for executive search services
provided to us from July 1996 through the end of 1998.
In the merger with S-Sixteen Holding Company we acquired a receivable
in the estimated fair value amount of $210,000 from the Estate of Cloyce K.
Box. Don D. Box is co-executor of the Estate.
A long-term receivable in the aggregate amount of $299,000 acquired in
the merger reflects CKB Petroleum's claims under Collateral Assignment Split
Dollar Insurance Agreements among CKB Petroleum and Don D.
Box and two of his brothers.
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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' Report
(ii) Consolidated Balance Sheets as of December 31, 1998 and 1997
(iii) Consolidated Statements of Income and Comprehensive Income for years
ended December 31, 1998, 1997 and 1996
(iv) Consolidated Statement of Stockholders' Equity for years ended
December 31, 1998, 1997 and 1996
(v) Consolidated Statements of Cash Flows for the years ended December
31, 1998, 1997 and 1996
(vi) Notes to Consolidated 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) We did not file any reports on Form 8-K during the quarter ended December
31, 1998.
(c) Exhibits:
2.0++ Agreement and Plan of Merger dated as of June 22, 1998, by
and between Remington Oil and Gas Corporation and S-Sixteen
Holding Company.
3.1* Certificate of Incorporation, as amended.
3.2### Certificate of Amendment of Certificate of Incorporation of
Box Energy Corporation.
3.2.1++ Certificate of Amendment of Certificate of Incorporation of
Remington Oil and Gas 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.
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53
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.
10.16** 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.
21 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
27.2 Restated Financial Data Schedule
53
54
* 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-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.
### Incorporated by reference to the Company's Form 10-K (file
number 1-11516) for the fiscal year ended December 31, 1997
filed with the Commission and effective on or about March 30,
1998.
++ Incorporated by reference to the Company's Registration
Statement on Form S-4 (file number 333-61513) filed with the
Commission and effective on November 27, 1998.
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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 29, 1999 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 Executive Vice President/Finance and Vice President/Controller and
Officer Secretary Assistant Secretary
Date: March 29, 1999
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INDEX TO EXHIBITS
Exhibit
Number Description of Document
2.0++ Agreement and Plan of Merger dated as of June 22, 1998, by
and between Remington Oil and Gas Corporation and S-Sixteen
Holding Company.
3.1* Certificate of Incorporation, as amended.
3.2### Certificate of Amendment of Certificate of Incorporation of
Box Energy Corporation.
3.2.1++ Certificate of Amendment of Certificate of Incorporation of
Remington Oil and Gas 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.
57
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.
10.28 ### Box Energy Corporation Severance Plan.
10.29 ### Box Energy Corporation 1997 Stock Option Plan.
10.30 ### Box Energy Corporation Non-Employee Director Stock Purchase
Plan.
10.31 ### Form of Executive Employment Agreement effective August
29, 1997, by and between Box Energy Corporation and two
executive officers.
21 Subsidiaries of the registrant.
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
27.2 Restated 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-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.
### Incorporated by reference to the Company's Form 10-K (file
number 1-11516) for the fiscal year ended December 31, 1997
filed with the Commission and effective on or about March 30,
1998.
58
++ Incorporated by reference to the Company's Registration
Statement on Form S-4 (file number 333-61513) filed with the
Commission and effective on November 27, 1998.