UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM 8-K/A
AMENDMENT TO CURRENT REPORT
PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
Date of Report (Date of earliest event reported): January 30, 2004
UNIT CORPORATION
(Exact Name of Registrant as Specified in Charter)
Delaware 1-9260 73-1283193
(State of Incorporation) (Commission File (IRS Employer
Number) Identification No.)
1000 Kensington Tower,
7130 South Lewis,
Tulsa, Oklahoma 74136
(Address Of Principal Executive Offices) (Zip Code)
(918) 493-7700
(Registrant's telephone number, including area code)
(Not Applicable)
(Former Name Or Former Address, If Changed Since Last Report)
The undersigned hereby amends its Form 8-K filed February 2, 2004 to
include the historical financial statements of PetroCorp Incorporated and the
related pro forma financial information.
Item 7. Financial Statements, Pro Forma Financial Information and Exhibits.
(a) Financial Statements of Business Acquired
Set forth below are the financial statements appearing in this
report:
Page in
PetroCorp Incorporated This Report
------------------------------------------ -----------
Report of Independent Accountants. . . . . . . . . . .F-1
Consolidated Balance Sheets of PetroCorp
Incorporated as of December 31, 2002 and
December 31, 2001. . . . . . . . . . . . . . . . . .F-2
Consolidated Statements of Operations of
PetroCorp Incorporated for the Years Ended
December 31, 2002, 2001 and 2000 . . . . . . . . . .F-3
Consolidated Statements of Shareholder's Equity
of PetroCorp Incorporated for the Years
Ended December 31, 2002, 2001 and 2000 . . . . . . .F-4
Consolidated Statements of Cash Flows of
PetroCorp Incorporated for the Years Ended
December 31, 2002, 2001 and 2000 . . . . . . . . . .F-5
Notes to Consolidated Financial Statements
of PetroCorp Incorporated. . . . . . . . . . . . . .F-7
Condensed Consolidated Balance Sheets of
PetroCorp Incorporated as of September 30, 2003
and December 31, 2002. . . . . . . . . . . . . . . .F-32
Condensed Consolidated Statements of Operations
of PetroCorp Incorporated for the Three and
Nine Months Ended September 30, 2003 and 2002. . . .F-33
Condensed Consolidated Statements of Cash Flows
of PetroCorp Incorporated for the Nine Months
Ended September 30, 2003 and 2002. . . . . . . . . .F-35
Notes to Condensed Consolidated Financial
Statements of PetroCorp Incorporated . . . . . . . .F-36
(b) Pro Forma Financial Information
Set forth below is the pro forma financial information
appearing in this report:
Unaudited Pro Forma Consolidated Condensed
Balance Sheet as of September 30, 2003 . . . . . . .P-1
Unaudited Pro Forma Consolidated Condensed
Statement of Income for the Year Ended
December 31, 2002. . . . . . . . . . . . . . . . . .P-3
Unaudited Pro Forma Consolidated Condensed
Statement of Income for the Nine
Months Ended September 30, 2003. . . . . . . . . . .P-4
Notes to Unaudited Pro Forma Consolidated
Condensed Financial Statements . . . . . . . . . . .P-5
Signatures . . . . . . . . . . . . . . . . . . . . . .P-8
(c) Exhibits
23.1 Consent of Independent Accountants.
Item 7. Financial Statements and Exhibits.
(a) Financial Statements of Business Acquired.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and Shareholders of
PetroCorp Incorporated
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of operations, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
PetroCorp Incorporated and its subsidiaries (the "Company") at December 31, 2002
and 2001, and the results of their operations and their cash flows for each of
the three years in the period ended December 31, 2002, in conformity with
accounting principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based on
our audits. We conducted our audits of these financial statements in accordance
with auditing standards generally accepted in the United States of America,
which 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, assessing the accounting principles
used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
PRICEWATERHOUSECOOPERS LLP
Tulsa, Oklahoma
March 15, 2003
F-1
PETROCORP INCORPORATED
CONSOLIDATED BALANCE SHEETS
December 31, 2002 and 2001
(in thousands, except share amounts)
2002 2001
-------- --------
ASSETS
Current assets:
Cash and cash equivalents............................... $ 3,087 $ 1,265
Accounts receivable, net................................ 11,537 13,267
Assets of discontinued operations....................... 72,300 --
Other current assets.................................... 1,107 1,411
-------- --------
Total current assets................................ 88,031 15,943
-------- --------
Property, plant and equipment:
Oil and gas properties, at cost, full cost method,
net of accumulated depreciation, depletion,
amortization and impairment........................... 48,761 126,925
Other, net.............................................. -- 1,527
-------- --------
48,761 128,452
-------- --------
Deferred income taxes....................................... 22,066 18,261
Other assets, net........................................... 2,723 2,699
-------- --------
Total assets.................................... $161,581 $165,355
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable........................................ $ 7,367 $ 6,708
Accrued liabilities..................................... 2,758 3,877
Liabilities of discontinued operations.................. 22,111 --
Current portion of long-term debt....................... -- 1,327
-------- --------
Total current liabilities........................... 32,236 11,912
-------- --------
Long-term debt.............................................. 28,750 47,620
-------- --------
Deferred income taxes....................................... -- 13,908
-------- --------
Commitments and contingencies (Note 13) Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000
shares authorized, none issued........................ -- --
Common stock, $0.01 par value, 25,000,000
shares authorized, (12,645,309 shares and
12,556,109 shares outstanding at December 31,
2002 and 2001, respectively).......................... 130 128
Additional paid-in capital.............................. 111,905 111,114
Accumulated deficit..................................... (982) (9,666)
Accumulated other comprehensive loss.................... (7,746) (7,311)
Treasury stock, at cost (305,907 and 264,607
shares respectively).................................. (2,712) (2,350)
-------- --------
Total shareholders' equity.......................... 100,595 91,915
-------- --------
Total liabilities and shareholders' equity...... $161,581 $165,355
======== ========
The accompanying notes are an integral part of these financial statements.
F-2
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF OPERATIONS
Years Ended December 31, 2002, 2001 and 2000
(in thousands, except share amounts)
2002 2001 2000
------- ------- -------
Revenues:
Oil and gas..................................... $27,363 $24,970 $23,481
Other........................................... 312 199 107
------- ------- -------
27,675 25,169 23,588
------- ------- -------
Expenses:
Production costs................................ 10,451 8,704 5,813
Depreciation, depletion and amortization........ 8,002 9,616 5,178
Oil and gas property valuation adjustment....... -- 15,400 --
General and administrative...................... 1,838 933 428
Restructuring costs............................. -- -- (425)
Other operating expenses........................ 98 169 243
------- ------- -------
20,389 34,822 11,237
------- ------- -------
Income (loss) from operations....................... 7,286 (9,653) 12,351
------- ------- -------
Other income (expenses):
Investment income............................... 70 65 251
Interest expense................................ (1,566) (1,237) (2,895)
Other income (expenses)......................... 565 921 (257)
------- ------- -------
(931) (251) (2,901)
------- ------- -------
Income (loss) from continuing operations before
income taxes...................................... 6,355 (9,904) 9,450
------- ------- -------
Income tax provision (benefit):
Current......................................... (13) 157 --
Deferred........................................ 2,133 (4,769) 3,662
------- ------- -------
2,120 (4,612) 3,662
------- ------- -------
Income (loss) from continuing operations............ 4,235 (5,292) 5,788
Income from discontinued Canadian operations (net of
applicable taxes of $3,514, $4,332, and $6,304)... 4,449 7,338 7,030
------- ------- -------
Net income.......................................... $ 8,684 $ 2,046 $12,818
======= ======= =======
Net income (loss) per common share--basic:
Income (loss) from continuing operations........ $ 0.34 $ (0.48) $ 0.66
Income from discontinued operations............. 0.35 0.67 0.81
------- ------- -------
Net income...................................... $ 0.69 $ 0.19 $ 1.47
======= ======= =======
Net income (loss) per common share--diluted:
Income (loss) from continuing operations........ $ 0.34 $ (0.48) $ 0.66
Income from discontinued operations............. 0.35 0.66 0.80
------- ------- -------
Net income...................................... $ 0.69 $ 0.18 $ 1.46
======= ======= =======
Weighted average number of common shares--basic..... 12,584 10,975 8,692
======= ======= =======
Weighted average number of common shares--diluted... 12,676 11,119 8,786
======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-3
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(in thousands)
Accumu-
lated
Addi- other
Common Stock tional Accumu- Compre-
------------- Paid-In lated hensive Treasury
Shares Amount Capital Deficit Loss Stock Total
------ ------ --------- --------- -------- -------- --------
Balance, December
31, 1999........ 8,683 87 71,380 (24,530) (4,574) -- $ 42,363
Net income.... -- -- -- 12,818 -- -- 12,818
Exercise of
stock options
and stock
compensation
expense..... 21 -- 234 -- -- -- 234
Other comprehen-
sive loss... -- -- -- -- (1,138) -- (1,138)
------ ------ -------- -------- ------- ------- --------
Balance, December
31, 2000........ 8,704 87 71,614 (11,712) (5,712) -- 54,277
Net income.... -- -- -- 2,046 -- -- 2,046
Shares issued--
merger...... 4,000 40 38,578 -- -- -- 38,618
Exercise of
stock options
and stock
compensation
expense..... 117 1 922 -- -- -- 923
Other comprehen-
sive loss... -- -- -- -- (1,599) -- (1,599)
Treasury stock (265) (2,350) (2,350)
------ ------ -------- -------- ------- ------- --------
Balance, December
31, 2001........ 12,556 128 111,114 (9,666) (7,311) (2,350) 91,915
Net income.... -- -- -- 8,684 -- -- 8,684
Exercise of
stock options
and stock
compensation
expense..... 130 2 791 -- -- -- 793
Other comprehen-
sive loss... -- -- -- -- (435) -- (435)
Treasury stock (41) -- -- -- -- (362) (362)
------ ------ -------- -------- ------- ------- --------
Balance, December
31, 2002........ 12,645 $130 $111,905 $ (982) $(7,746) $(2,712) $100,595
====== ====== ======== ======== ======= ======= ========
The accompanying notes are an integral part of these financial statements.
F-4
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended
December 31, 2002, 2001 and 2000
(in thousands)
2002 2001 2000
-------- -------- --------
Cash flows from operating activities:
Net income (loss)..............................$ 8,684 $ 2,046 $ 12,818
Adjustments to reconcile net income (loss)
to net cash provided by operating activities:
Depreciation, depletion and amortization... 8,002 9,616 5,178
Deferred income tax expense (benefit)...... 2,133 (4,769) 3,662
Oil and gas property valuation adjustment.. -- 15,400 --
Other...................................... (284) 142 492
Changes in operating assets and liabilities:
Accounts receivable........................ (3,473) 4,157 (6,246)
Other current assets....................... (378) 372 (429)
Accounts payable........................... 3,669 (3,180) 2,631
Accrued liabilities........................ (421) (444) (1,546)
Net change provided by discontinued
operations............................... 6,158 (10,237) 16,631
-------- -------- --------
Net cash provided by operating
activities........................... 24,090 13,103 33,191
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties... 11,359 -- 210
Additions to oil and gas properties............ (8,306) (11,632) (1,757)
Purchase of Southern Mineral Corporation,
net of cash acquired......................... -- (20,989) --
Additions to other assets...................... -- -- (16)
Net investing activities of discontinued
operations................................... (5,534) (5,905) (5,630)
-------- -------- --------
Net cash used in investing activities.. (2,481) (38,526) (7,193)
-------- -------- --------
Cash flows from financing activities:
Proceeds from long-term debt................... 1,800 90,967 29,500
Repayment of long-term debt.................... (12,800) (91,000) (45,650)
Purchase of treasury shares.................... (362) (2,350) --
Other.......................................... 565 401 (83)
Net financing activities of discontinued
operations................................... (8,934) 5,523 (593)
-------- -------- --------
Net cash provided by (used in)
financing activities................. (19,731) 3,541 (16,826)
-------- -------- --------
Effect of exchange rate changes on cash............ (56) 1,201 (125)
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents...................................... 1,822 (20,681) 9,047
Cash and cash equivalents at beginning of year..... 1,265 21,946 12,899
-------- -------- --------
Cash and cash equivalents at end of year........... $ 3,087 $ 1,265 $21,946
======== ======== ========
The accompanying notes are an integral part of these financial statements.
F-5
PETROCORP INCORPORATED
CONSOLIDATED STATEMENTS OF CASH FLOWS
Years Ended December 31, 2002, 2001 and 2000
(in thousands)
Supplemental disclosures:
2002 2001 2000
------ ------ ------
Interest paid...................... $1,696 $1,131 $2,917
====== ====== ======
Income taxes paid.................. $ -- $ 210 $ --
====== ====== ======
In 2002, 2001 and 2000, the Company issued $324, $311 and $525 of
additional notes, respectively, as provided under the provisions of the
agreements to finance the company's portion of plant capital additions in
Canada.
The accompanying notes are an integral part of these financial statements.
F-6
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 2002, 2001 and 2000
1. SUMMARY OF ACCOUNTING POLICIES
----------------------------------
General
PetroCorp Incorporated, a Texas corporation, is engaged in the acquisition,
exploration, development, and the production and sale of crude oil and natural
gas in North America. The terms "PetroCorp" and "Company" refer to PetroCorp
Incorporated and its subsidiaries. PetroCorp operates in Canada through its
wholly-owned Canadian subsidiaries PCC Energy Inc. (PCC Inc.) and PCC Energy
Corp. See Note 2. In the United States, PetroCorp conducts business in its own
name.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of
PetroCorp Incorporated. All balance sheet accounts as of December 31, 2002 and
statement of operations and cash flows for 2002, 2001 and 2000 for PetroCorp's
wholly-owned Canadian subsidiaries are reflected as discontinued operations and
all information in the accompanying notes, except for Notes 2, 10 and 14, relate
only to the continuing operations. All significant intercompany accounts and
transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires the Company to make estimates and
assumptions that affect the amounts reported in the financial statements and the
accompanying notes. Actual results may differ from such estimates. In addition,
the oil and gas reserve data and the deferred tax asset include significant
estimates which, in the near term, could materially differ from the amounts
ultimately realized.
Property, Plant and Equipment
The Company follows the full cost method of accounting for oil and gas
properties whereby all productive and nonproductive exploration and development
costs incurred for the purpose of finding oil and gas reserves are capitalized.
Such capitalized costs include lease acquisition, geological and geophysical
work, delay rentals, drilling, completing and equipping oil and gas wells. No
gains or losses are recognized upon the sale or other disposition of oil and gas
properties, except in unusually significant transactions.
The costs of the Company's oil and gas properties, including estimated
future development and dismantlement costs, are depreciated on a
country-by-country basis using a composite unit-of-production rate. An
additional valuation adjustment is made on a country-by-country basis if net
capitalized costs of the Company's oil and gas properties exceed the ceiling,
which is calculated on a quarterly basis as the sum of (1) the present value
(10%) of future net revenues from estimated production of proved oil and gas
reserves plus (2) the lower of cost or estimated fair value of the unproved
properties, less (3) the related income tax effects. In the year ended December
31, 2001, there was a valuation adjustment for the U.S. properties of
$15,400,000. There was no valuation adjustment for the years ended December 31,
2002 or 2000.
Other property and equipment are depreciated by the straight-line method at
rates based on the estimated useful lives of the assets ranging from five to ten
years.
F-7
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
Revenue Recognition
Revenues from the sale of oil and gas produced are recognized upon the
passage of title, net of royalties and net profits royalty interests. In 2001,
the company changed its accounting for transportation and gathering costs to
include those charges in other revenues and other operating expenses.
Revenues from natural gas production are recorded using the sales method,
net of royalties and net profits interests, which may result in more or less
than the Company's share of pro-rata production from certain wells. The Company
estimates its gas balancing position to be approximately $642,000 (401,000 Mcf)
on underproduced properties and approximately $787,000 (492,000 Mcf) on
overproduced properties. When sales volumes exceed the Company's entitled share
and the overproduced balance exceeds the Company's share of the remaining
estimated proved natural gas reserves for a given property, the Company records
a liability. At December 31, 2002 and 2001, the Company included $212,000
(141,000 Mcf) and $171,000 (120,000 Mcf) respectively, in accrued liabilities
with respect to overproduced imbalances. All overproduced and underproduced
imbalance situations are in the Unites States. The Company's policy is to
expense the pro-rata share of lease operating costs from all wells as incurred.
Such expenses relating to the balancing position on wells in which the Company
has imbalances are not significant.
Other revenues include fees associated with the Company's U.S. gathering
system.
Accounts Receivable
Accounts receivable relate primarily to sales of oil and gas and amounts
due from joint-interest partners for expenditures made by the Company on behalf
of such partners. The Company reviews the financial condition of potential
purchasers and partners prior to signing sales or joint-interest agreements. At
December 31, 2002 and 2001, the Company's allowance for doubtful accounts
receivable was not significant.
Income Taxes
The Company utilizes the asset and liability method under which
deferred tax assets and liabilities are recognized for the estimated future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases.
Foreign Currency Translation
The "functional currency" for translating the Company's Canadian
accounts is the Canadian dollar. Assets and liabilities are translated into the
reporting currency at the rate of exchange in effect at the balance sheet date
while revenues, expenses, gains and losses are translated at the average
exchange rate for the period. The resulting translation adjustments are
accumulated in the other comprehensive loss component of shareholders' equity.
Foreign currency transaction gains and losses are recognized currently. For the
year ended December 31, 2002, the Company recognized a foreign currency
transaction gain of $389,000. For the years ended December 31, 2001 and 2000,
the Company recognized a foreign currency transaction gain of $916,000 and a
loss of $98,000, respectively. (See Note 2.)
F-8
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
Cash Equivalents
For purposes of the consolidated statement of cash flows and the balance
sheet, the Company considers all highly liquid debt instruments purchased with a
maturity date of three months or less at the date of purchase to be cash
equivalents. Cash and cash equivalents are not insured above FDIC limits, which
subjects the Company to credit risk.
Hedging Activities
To reduce the impact of fluctuations in the market prices of oil and
natural gas, the Company periodically utilizes hedging strategies such as
futures transactions or swaps to hedge the price of a portion of its future oil
and natural gas production. Results of these hedging transactions are reflected
in oil and gas sales in the month of hedged production. In 2002 and 2001, the
impact of hedging transactions was a net increase in revenues of $423,000 and
$187,000, respectively. In 2000, the impact of hedging transactions was a net
reduction of revenues by $1,097,000. (See Note 7.)
Accounting for Stock Based Compensation
At December 31, 2002, the Company has a stock-based compensation plan,
which is more fully described in Note 9. The Company accounts for this plan
under the recognition and measurement principles of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related Interpretations. No
compensation costs are reflected for stock-based compensation to individuals who
are "employees". Costs are recorded for stock-based compensation to individuals
who are not "employees". The fair value of the options granted during 2002, 2001
and 2000 were $838,000, $751,000 and $432,000, respectively, on the dates of
grants using the Black-Scholes option-pricing model with the following
assumptions:
2002 2001 2000
--------- --------- ---------
Weighted average life, in years.... 10 10 10
Risk-Free interest rate............ 5.3%-5.9% 5.1%-5.2% 6.0%-6.5%
Expected Volatility................ 36% 40% 41%
Expected Dividend Rate............. None None None
The following table illustrates the effect on net income and earnings per
shares if the Company had applied the fair value recognition provision of FASB
Statement No 123, "Accounting for Stock-Based Compensation," (in thousands,
except per share amounts):
Year Ended December 31,
-------------------------
2002 2001 2000
------- ------- -------
Net income, as reported............................... $ 8,684 $ 2,046 $12,818
Deduct: Total stock-based employee compensation
expense determined under fair value based method
for all awards, net of related tax effects.......... 666 383 330
------- ------- -------
Pro forma net income.................................. $ 8,018 $ 1,663 $12,488
======= ======= =======
Earnings per share: Basic--as reported................ $ 0.69 $ 0.19 $ 1.47
Basic--pro forma...................................... $ 0.64 $ 0.15 $ 1.44
Diluted--as reported.................................. $ 0.69 $ 0.18 $ 1.46
Diluted--pro forma.................................... $ 0.63 $ 0.15 $ 1.42
F-9
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
Reclassification
Certain prior year balances have been reclassified to conform with the
current year financial statement presentation.
Other
In June 2001, the Financial Accounting Standards Board ("FASB") issued FAS
No. 142, Goodwill and Other Intangible Assets, and in August 2001, FAS No. 144,
Accounting for Impairment or Disposal of Long-Lived Assets. Effective January 1,
2002, the Company adopted FAS No. 142 and 144. The adoption had no effect on the
Company's financial position or results of operations.
In June 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement
Obligations. FAS 143 is effective for fiscal years beginning after June 15, 2002
(January 1, 2003 for the Company) and establishes an accounting standard
requiring the recording of the fair value of liabilities associated with the
retirement of long-lived assets (mainly plugging and abandonment costs for
depleted wells) in the period in which the liability is incurred (at the time
the wells are drilled). The effect of this standard on the Company's results of
operations and financial condition at adoption is expected to include an
unaudited increase in liabilities of approximately $4.6 million; an unaudited
net increase in property, plant and equipment of approximately $700,000; and an
unaudited charge to income, net of deferred income taxes, for the cumulative
effect of adopting the new standard of approximately $2.5 million and a deferred
tax asset of approximately $1.4 million.
During 2002, the company adopted FAS No. 145, rescission of FASB Statements
No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical
Corrections. Under the provisions of this standard, gains and losses from
extinguishment of debt generally will no longer be classified as extraordinary
items in the statement of operations. Accordingly, the Company's loss on early
retirement of debt of $385 thousand in the year ended December 31, 2000, which
was previously presented as a net of tax extraordinary item, has been
reclassified in the accompanying financial statements and presented as a
component of other income. This reclassification had no impact on the Company's
financial position, net income or cash flows.
In July 2002, the FASB issued FAS No. 146, Accounting for Costs Associated
with Exit or Disposal Activities, which is effective for exit or disposal
activities initiated after December 31, 2002. Management anticipates the
adoption of FAS No. 146 will not materially affect the Company's current
financial position or results of operations.
In November 2002, the FASB issued FASB Interpretation ("FIN") 45,
Guarantor's Accounting and Disclosure Requirements for Guarantees, including
Indirect Guarantee of Indebtedness of Others. FIN 45 requires that upon issuance
of a guarantee, the guarantor must recognize a liability for the fair value of
the obligation it assumes under that guarantee. FIN 45's provisions for initial
recognition and measurement should be applied on a prospective basis to
guarantees issued or modified after December 31, 2002. The guarantor's previous
application may not be revised or restated to reflect the effect of the
recognition and measurement provisions of the interpretation. The disclosure
requirements are effective for financial statements of both interim and annual
periods that end after December 15, 2002. The Company is not a guarantor under
any significant guarantees and thus this interpretation is not expected to have
a significant effect on the Company's financial position or results of
operations.
F-10
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
On December 31, 2002, the FASB issued FAS No. 148, Accounting for
Stock-Based Compensation--Transition and Disclosure--an amendment of FAS 123,
Accounting For Stock-Based Compensation. FAS 148 does not change the provisions
of FAS 123 that permit entities to continue to apply the intrinsic value method
of APB 25, Accounting for Stock Issued to Employees. FAS 148 does require
certain new disclosures in both annual and interim financial statements. The
required annual disclosures were effective immediately for the Company and have
been included in Note 1 of the Company's financial statements. The new interim
disclosure provisions will be effective for the Company in the first calendar
quarter of 2003.
On January 17, 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, An Interpretation of Accounting Research Bulletin No. 51. The
primary objectives of FIN 46 are to provide guidance on how to identify entities
for which control is achieved thought means other than through voting rights
(variable interest entities "VIE" and how to determine when and which business
enterprise should consolidate the VIE. This new model for consolidation applies
to an entity in which either (1) the equity investors do not have a controlling
financial interest on (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. The Company does not expect the adoption
of this standard to have any impact on the financial position and results of
operations.
2. SALE OF CANADIAN SUBSIDIARIES
---------------------------------
On December 24, 2002, PetroCorp signed an agreement to sell its two
Canadian subsidiaries, PCC Energy Inc. and PCC Energy Corp. for C$167.6 million
(approximately US$112 million), with an economically effective date of October
1, 2002. The sale, which closed on March 5, 2003, is subject to post closing
adjustments for certain working capital items. As of December 31, 2002, the
combined unaudited reserves of the Canadian subsidiaries was 2,458 MBbls and
50,799 MMcf. The financial statements reflect the results of the Canadian
operations as discontinued operations and segregate the Canadian assets and
liabilities at December 31, 2002. Prior year statements of operations and cash
flows have been restated to conform to the current year presentation.
Discontinued operations for the fourth quarter of 2002 include $6.7 million
unaudited revenue, 1,861 MMcf equivalent unaudited production and $3.0 million
unaudited pre-tax income.
Net sales and income of the discontinued operations are as follows (amounts
in thousands):
Years ended December 31,
-------------------------
2002 2001 2000
------- ------- -------
Net sales...................................... $23,982 $26,105 $20,985
------- ------- -------
Pre-tax income from discontinued operations.... $ 7,963 $11,670 $13,334
Income tax expense............................. 3,514 4,332 6,304
------- ------- -------
Income from discontinued operations, net of tax $ 4,449 $ 7,338 $ 7,030
======= ======= =======
F-11
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
Assets and liabilities of the discontinued operations are as follows
(amounts in thousands):
December 31,
2002
------------
Cash......................... $ 5,865
Accounts receivable.......... 4,135
Property, plant and equipment 62,183
Other Assets................. 117
Accounts Payable............. (4,607)
Accrued liabilities.......... (2,220)
Long-term debt............... (451)
Deferred tax liability....... (14,833)
--------
$ 50,189
========
3. COMPREHENSIVE INCOME
------------------------
The Company follows SFAS No. 130, "Reporting Comprehensive Income." This
Statement establishes requirements for reporting comprehensive income and its
components which includes the Company's foreign currency translation
adjustments. The Company's comprehensive income (loss) for the years ended
December 31, 2002, 2001 and 2000 are as follows (amounts in thousands):
Years ended December 31,
-------------------------
2002 2001 2000
------- ------- -------
Net income......................................... $ 8,684 $ 2,046 $12,818
------- ------- -------
Derivative hedging gain (loss) (net of taxes
of $2 and $679).................................. (4) 1,057 --
Reclassification of hedging gain into income
(net of taxes of $572 and $105).................. (888) (165) --
Foreign currency translation gain (loss)........... 457 (2,491) (1,138)
------- ------- -------
(435) (1,599) (1,138)
------- ------- -------
Comprehensive income............................... $ 8,249 $ 447 $11,680
======= ======= =======
Derivative hedging gain (loss) include $31 gain (net of $22 taxes) for 2002
and $280 (net of $206 taxes) for 2001 pertaining to discontinued operations.
Reclassification of hedging gain into income includes $202 (net of $147 taxes)
for 2002 and $47 (net of $36 taxes) for 2001 related to discontinued operations.
Accumulated other comprehensive loss was comprised solely of foreign
currency translation loss through December 31, 2000. As of December 31, 2001,
accumulated other comprehensive loss included $892 of derivative hedging gain,
net of taxes and $8,203 of foreign currency translation losses. As of December
31, 2002, accumulated other comprehensive loss included $7,746 of foreign
currency translation losses, which will be reclassified to income from
discontinued operations in the first quarter of 2003 when the sale of the
Canadian operations is recorded.
F-12
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
4. MERGER WITH SOUTHERN MINERAL CORPORATION
--------------------------------------------
PetroCorp completed the acquisition of Southern Mineral on June 6, 2001.
The acquisition of Southern Mineral was accounted for using the purchase method
of accounting as of June 1, 2001 because as of that date, the Company had
effective control, and the results of operations have been included since that
date. Based on evaluations in connection with tax returns filed in 2002, the
Company adjusted its preliminary estimates of the deferred taxes attributable to
the assets acquired in June 2001. Proved oil and gas properties were reduced by
$5.8 million and Deferred tax assets increased by the same amount. In this
acquisition, $88.7 million of assets were acquired and $28.7 million of
liabilities assumed, with $0.4 million of legal, professional and other costs
incurred. $21 million of cash was expended, with the remaining $38.6 million
financed through the issuance of common stock.
The following unaudited pro forma information has been prepared assuming
Southern Mineral had been acquired as of the beginning of the period presented.
The pro forma information is presented for information purposes only and is not
necessarily indicative of what would have occurred if the acquisition had been
made as of that date. In addition, the pro forma information is not intended to
be a projection of future results and does not reflect any efficiencies that may
result from the integration of Southern Mineral.
Pro Forma Information (Unaudited)
(In thousands, except per share data)
Year Ended Year Ended
December 31, December 31,
2001 2000
------------ ------------
Revenues.............................. $ 33,485 $ 44,558
Income (loss) before income taxes..... $ (11,680) $ 10,786
Net income (loss)..................... $ (6,376) $ 6,964
Earnings per common share--basic...... $ (0.50) $ 0.55
Earnings per common share--diluted.... $ (0.50) $ 0.55
The above pro forma data reflects $3,665 and $5,544, respectively, of
bankruptcy expenses and restructuring costs (primarily investment banker and
employee severance related costs) for Southern Mineral for the year ended
December 31, 2001 and 2000.
F-13
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
5. PROPERTY, PLANT AND EQUIPMENT
---------------------------------
Investments in property, plant and equipment were as follows at December
31, 2002 and 2001 (amounts in thousands):
2002 2001(A)
--------- ---------
Oil and gas properties:
Proved............................................... $ 225,414 $ 233,204
Unproved............................................. 233 263
--------- ---------
225,647 233,467
Gas gathering facilities................................. 1,698 1,698
Furniture, fixtures and equipment........................ -- 22
--------- ---------
227,345 235,187
Less--accumulated depreciation, depletion,
amortization and impairment............................ (178,584) (170,687)
--------- ---------
$ 48,761 $ 64,500
========= =========
--------
(A) Total property, plant and equipment does not include $63,952 related to
discontinued operations.
Depreciation, depletion and amortization for all property, plant and
equipment for the years ended December 31, 2002, 2001 and 2000 was $7,897,
$9,537 and $5,118, respectively. Oil and gas property depreciation, depletion
and amortization for the years ended December 31, 2002, 2001 and 2000 was
$7,897, $9,484 and $4,782, respectively. Depreciation, depletion and
amortization per equivalent Mcf (using a Mcf-to-barrel conversion factor of 6 to
1) for the years ended December 31, 2002, 2001 and 2000 was $0.99, $1.38 and
$0.85, respectively. During 2001 the Company also recorded a ceiling test
write-down of $15,400.
6. LONG-TERM DEBT
------------------
The Company's total long-term debt, all which matures in 2004, is as
follows (amounts in thousands):
2002 2001(A)
-------- --------
TD Bank Credit Agreement $ 28,750 $ 47,288
======== ========
--------
(A) Total long-term debt does not include $332 related to discontinued
operations.
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The agreement was amended in August 2002 to extend its term,
increase the borrowing base, and partially change the lenders. The amended term
of the facility is through May 1, 2004 and the amended borrowing base was set at
$70 million. The current lenders are TD Bank, as agent, and Fortis Capital Corp.
and Bank of Oklahoma, N.A. (Bank of Oklahoma, N. A.'s largest beneficial owner
is also the primary beneficial owner of Kaiser-Francis Oil Company.
Approximately 38% of the Company is owned by Kaiser-Francis Oil Company.)
F-14
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
Borrowings can be funded by either Eurodollar loans or Base Rate loans. The
interest rate on the borrowings is equal to an interest rate spread plus either
the Eurodollar rate or the Base Rate. The interest rate spread is determined
from a sliding scale based was on the Company's borrowing base percentage
utilization in effect from time to time. The spread ranges from 1.25 to 2.25 on
Eurodollar loans and .25 to 1.25 on Base Rate loans. At December 31, 2002, the
weighted average interest rate for loans outstanding under this facility was
approximately 4.25%.
The $75 million revolving credit agreement prohibits the declaration and
payment of dividends on the common stock of the Company. Also, the debt
agreement requires the Company to maintain a minimum current ratio, a minimum
tangible net worth, and a minimum interest coverage ratio. The Company obtained
waivers of certain covenants relating to the sale of some of its Alabama
properties and the sale of Canadian operations.
Effective in March 2003, and in conjunction with the sale of Canadian
subsidiaries described in Note 2, the Company amended its revolving credit
agreement to adjust the borrowing base to $25 million, allocated entirely to
United States borrowing. The Canadian lenders were released from the agreement.
All outstanding debt was paid off with proceeds from the sale.
7. HEDGING ACTIVITIES
----------------------
To reduce the impact of fluctuations in the market prices of oil and
natural gas, the Company periodically utilizes hedging strategies such as
futures transactions or swaps to hedge the price of a portion of its future oil
and natural gas production. Results of these hedging transactions are reflected
in oil and natural gas sales in the month of the hedged production.
In the first quarter of 2000, the Company entered into swap transactions in
an effort to lock in a portion of higher oil prices. These transactions applied
to approximately 50 percent of the Company's projected oil production from April
2000 through December 2000, at prices ranging from $23.57 to $29.00 per barrel.
In the second quarter of 2000, the Company entered into a no-cost collar
arrangement for a portion of its natural gas production by which 180,000 MMbtu
for each of the months July through October 2000 were subject to a $4.96 ceiling
and a $3.50 floor per MMbtu. Oil and gas revenue includes $69,000 received and
$1,166,000 paid in settlement of swap and collar transactions through December
31, 2000. At December 31, 2001, oil and gas hedges had an estimated fair value
of $644,000 (included in other assets), of which $479,000 related to hedges of
US production. There were no oil and gas hedges outstanding at December 31, 2000
or 2002.
As part of PetroCorp's acquisition of Southern Mineral Corporation
("Southern Mineral"), the Company obtained crude oil and natural gas costless
collars with a fair value (liability) at date of acquisition of $821,000. These
hedging transactions for the year ended December 31, 2002 increased oil and gas
revenues by $31,000 and increased income from discontinued operations by
$222,000 (reclassified from comprehensive income). All oil and gas hedging
transactions expired in the fourth quarter of 2002.
In April 2002, the Company entered into a swap transaction covering 8,000
MMBTU of natural gas per day at a price of $3.755 per MMBTU and covering the
period from May 2002 through December 2002. The swap index is NYMEX Henry Hub.
Swap transactions for the year ended December 31, 2002 increased oil and gas
revenues by $392,000 (reclassified from comprehensive income).
The Company offsets any gain or loss on the swap and collars contract with
the realized prices for its production. While the swaps and collars reduce the
Company's exposure to declines in the market price of natural gas and oil, this
also limits the Company's gains from increases in the market price.
F-15
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
As a result of the merger with Southern Mineral, the Company also assumed
an interest rate swap position that was originally intended to hedge the
variability of interest expense associated with Southern Mineral's variable rate
Canadian debt. Under the swap agreement, the Company receives a floating rate of
the Canadian prime rate and pays a fixed rate of 5.96% on a notional amount of
Canadian $15 million through August 29, 2003. The interest rate swap does not
qualify for hedge accounting. The estimated fair value at December 31, 2002 is a
liability (included in other liabilities) of $182,000 ($314,000 for 2001).
During 2002 and 2001, $351,000 and $65,000, respectively, were recorded as
additional interest expense relating to this interest rate swap.
8. INCOME TAXES
----------------
The provision (benefit) for income taxes for the years ended December 31,
2002, 2001 and 2000 consists of the following (amounts in thousands):
2002 2001 2000
------- ------- -------
Deferred:
Federal..... $ 1,926 $(4,448) $ 3,355
State....... 207 (321) 307
------- ------- -------
2,133 (4,769) 3,662
Current:
Federal..... -- 110 --
State....... (13) 47 --
------- ------- -------
(13) 157 --
------- ------- -------
$ 2,120 $(4,612) $ 3,662
======= ======= =======
A reconciliation of the Company's United States income tax provision
(benefit) computed by applying the statutory United States federal income tax
rate to the Company's income (loss) from continuing operations before income
taxes for the years ended December 31, 2002, 2001, and 2000 is presented in the
following table (amounts in thousands):
2002 2001 2000
------- ------- -------
United States federal income taxes (benefit) at
statutory rate of 35%............................. $ 2,224 $(3,466) $ 3,308
Increases (reductions) resulting from:
Statutory depletion............................. (175) (1,079) --
State income taxes.............................. 126 (178) 200
Other........................................... (55) 111 154
------- ------- -------
$ 2,120 $(4,612) $ 3,662
======= ======= =======
F-16
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
Deferred tax assets and liabilities related to continuing operations
consist of the following at December 31, 2002 and 2001 (amounts in thousands):
2002 2001(A)
-------- --------
Deferred tax assets:
Depletion and net operating loss carryforward--U.S...... $ 24,023 $ 23,542
-------- --------
Gross deferred tax asset................................... 24,023 23,542
-------- --------
Deferred tax liabilities:
Excess of basis in property, plant and equipment for
Financial reporting purposes over the tax basis--U.S.. (1,957) (5,238)
Derivative asset........................................ -- (43)
-------- --------
Gross deferred tax liability................................ (1,957) (5,281)
-------- --------
$ 22,066 $ 18,261
======== ========
--------
(A) Deferred tax assets and liabilities do not include $13,908 of deferred tax
liabilities related to discontinued operations.
As of December 31, 2002, the Company has U.S. net operating loss (NOL)
carryforwards of approximately $47,737,000 and $51,790,000 for regular tax and
alternative minimum tax purposes, respectively. Regular tax NOL carryforwards
and alternative minimum tax NOL carryforwards begin to expire in 2009.
Additionally, statutory depletion carryforwards, which have no expiration dates,
of $19,552,000 are available at December 31, 2002.
Realization of the deferred tax asset is dependent on generating sufficient
taxable income prior to expiration of loss carryforwards. Although realization
is not assured, management believes it is more likely than not that the deferred
tax asset will be realized. The amount of the deferred tax asset considered
realizable, however, could be reduced in the near term if estimates of future
taxable income during the carryforward period are reduced.
Additionally, certain future changes in the Company's shareholders may
impose restrictions under Section 382 of the Internal Revenue Code on the annual
utilization of its net operating loss carryforwards.
F-17
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
9. STOCK OPTIONS AND OTHER EMPLOYEE BENEFIT PLANS
--------------------------------------------------
Details on the Company's four stock option plans are as follows:
In 1992, the Company established the 1992 PetroCorp Stock Option Plan (the
Option Plan). The Option Plan allows up to 957,357 option shares to be granted.
The following table summarizes these options:
Weighted Average
Options Exercise Price
-------- ----------------
Outstanding at December 31, 1999 672,500 $ 8.04
Granted...................... -- --
Forfeited.................... -- --
Exercised.................... (20,700) $ 6.38
--------
Outstanding at December 31, 2000 651,800 $ 8.09
Granted...................... -- --
Forfeited.................... (162,000) $10.00
Exercised.................... (101,300) $ 6.55
--------
Outstanding at December 31, 2001 388,500 $ 7.69
Granted...................... -- --
Forfeited.................... (187,000) $10.00
Exercised.................... (121,500) $ 5.00
--------
Outstanding at December 31, 2002 80,000 $ 6.38
========
Of the 80,000 outstanding options under the Option Plan at December 31,
2002, all had an exercise price of $6.38 and a weighted average contractual life
of 3.1 years. All of these options are exercisable as of December 31, 2002. No
new options can be issued under this plan.
F-18
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
In 1997, the Company established the 1997 PetroCorp Non-Employee Director
Stock Option Plan (the Director Option Plan) for the benefit of the Company's
Board of Directors. This plan allows up to 75,000 option shares to be granted.
The Director Options were fully vested and exercisable at the date of grant. The
following table summarizes these options:
Weighted Average
Options Exercise Price
------- ----------------
Outstanding at December 31, 1999 37,000 $8.26
Granted...................... -- --
Forfeited.................... -- --
Exercised.................... -- --
-------
Outstanding at December 31, 2000 37,000 $8.26
Granted...................... -- --
Forfeited.................... (14,000) $8.30
Exercised.................... -- --
-------
Outstanding at December 31, 2001 23,000 $8.23
Granted...................... -- --
Forfeited.................... -- --
Exercised.................... -- --
-------
Outstanding at December 31, 2002 23,000 $8.23
=======
As of December 31, 2002, the weighted average remaining contractual life of
the outstanding options under the Director Option Plan was 5.0 years and the
exercise prices ranged from $6.75 to $8.63. No new options can be issued under
this plan.
In 2000, the Company established the 2000 Stock Option Plan for the benefit
of employees and the Company's Board of Directors. Employee options vest one
year from date of grant and director options vest six months from the date of
grant. This plan allows up to 600,000 option shares to be granted. The following
table summarizes these options:
Weighted Average
Options Exercise Price
------- ----------------
Outstanding at December 31, 1999 -- --
Granted...................... 106,650 $6.34
Forfeited.................... -- --
Exercised.................... -- --
-------
Outstanding at December 31, 2000 106,650 $6.34
Granted...................... 163,000 $9.67
Forfeited.................... (6,500) $9.15
Exercised.................... (6,500) $6.13
-------
Outstanding at December 31, 2001 256,650 $8.39
Granted...................... 154,000 $9.31
Forfeited.................... (8,000) $9.53
Exercised.................... (9,000) $6.13
-------
Outstanding at December 31, 2002 393,650 $8.78
=======
F-19
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
As of December 31, 2002, the weighted average remaining contractual life of
the outstanding options under the 2000 Stock Option Plan was 8.4 years. Of the
outstanding options, 278,150 were exercisable at year end with an average
remaining contractual life of 8.1 years. At December 31, 2002, exercise prices
ranged from $6.13 to $9.75.
As part of the merger with Southern Mineral, PetroCorp assumed all stock
options under the various plans of Southern Mineral. Under the terms of these
plans, options equivalent to 330,393 shares of PetroCorp stock have been
authorized. No additional grants are anticipated. All outstanding options were
vested at the date of the merger. The following table summarizes these options:
Weighted Average
Options Exercise Price
-------- ----------------
Outstanding at December 31, 2000 -- --
Granted...................... 179,268 $18.70
Forfeited.................... (44,887) $14.47
Exercised.................... (9,420) $ 5.31
--------
Outstanding at December 31, 2001 124,961 $21.01
Granted...................... -- --
Forfeited.................... (124,961) $21.01
Exercised.................... -- --
--------
Outstanding at December 31, 2002 -- --
========
Stock options under all three plans expire ten years from the date of grant
and the exercise price equals market value on the grant date.
Effective January 1, 1993, the Company established a savings plan, which
qualified as a deferred compensation plan under Section 401(k) of the Internal
Revenue Code. The plan was in the wind up phase during 2001 and 2002 and was
fully liquidated at December 31, 2002. The Company's contributions to the plan,
which are charged to expense, totaled nil, nil and $100,000 in 2002, 2001 and
2000, respectively.
F-20
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
10. EARNINGS PER SHARE
------------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations for the periods presented (in
thousands, except per share amounts).
Per Share Amounts
--------------------------------
Income
(Loss) from Income from
Continuing Discontinued Net
Income Shares Operations Operations Income
------- ------ ----------- ----------- ------
Year ended December 31, 2002
Basic EPS:
Net income........... $ 8,684 12,584 $ 0.34 $ 0.35 $ 0.69
Effect of dilutive
securities:
Options.............. -- 92 -- -- --
------- ------ ------ ------ ------
Diluted EPS:
Net income........... $ 8,684 12,676 $ 0.34 $ 0.35 $ 0.69
======= ====== ====== ====== ======
Year ended December 31, 2001
Basic EPS:
Net income........... $ 2,046 10,975 $(0.48) $ 0.67 $ 0.19
Effect of dilutive
securities:
Options.............. -- 144 -- (0.01) (0.01)
------- ------ ------ ------ ------
Diluted EPS:
Net income........... $ 2,046 11,119 $(0.48) $ 0.66 $ 0.18
======= ====== ====== ====== ======
Year ended December 31, 2000
Basic EPS:
Net income........... $12,818 8,692 $ 0.66 $ 0.81 $ 1.47
Effect of dilutive
securities:
Options.............. -- 94 -- (0.01) (0.01)
------- ------ ------ ------ ------
Diluted EPS:
Net income........... $12,818 8,786 $ 0.66 $ 0.80 $ 1.46
======= ====== ====== ====== ======
The 2002, 2001, and 2000 income per share amounts do not include the effect
of potentially dilutive securities of 303,500, 469,000 and 395,000,
respectively, as the impact of these outstanding options was antidilutive.
F-21
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
11. INDUSTRY SEGMENT DATA
--------------------------
The principal business of the Company is oil and gas, which consists of the
exploration, development, acquisition, exploitation and operation of oil and gas
properties and the production and sale of crude oil and natural gas in North
America. The Company's continuing operations consist of oil and gas operations
in the US. Activity related to the Canadian operations are accounted for as
discontinued operations.
The following table reflects purchasers which accounted for more than 10% of
the Company's oil and gas revenues:
2002 2001 2000
---- ---- ----
EOTT Energy Trading Partnership Ltd 16% 12% 12%
Sunoco, Inc........................ 12% 9% 8%
12. COMMON STOCK REPURCHASES
-----------------------------
On September 14, 2001, the Company announced that the Board of Directors
authorized the purchase of up to 1,000,000 shares of the Company's common stock.
Through December 31, 2002, 305,907 shares have been purchased at a cost of
$2,712,000, which shares are held in treasury.
13. COMMITMENTS AND CONTINGENCIES
----------------------------------
The Company has entered into operating lease agreements with noncancellable
terms in excess of one year for office space. Future minimum lease payments are
$54,000 for the year ending December 31, 2003 with no payments after that date.
Future minimum sublease income with noncancellable terms in excess of one year
for office space is $34,000 for the year ending December 31, 2003. Total rental
expense for office space for the years ended December 31, 2002, 2001 and 2000
was $198,000, $140,000 and $111,000, respectively.
On February 13, 2002, R.A. Mackie & Co., L.P., Millenco, L.P. and Wein
Securities Corp, as plaintiffs, filed a lawsuit against PetroCorp in the New
York Supreme Court. In this action certain former holders of warrants of
Southern Mineral Corporation allege that the provisions made for such warrants
in connection with the merger of Southern Mineral Corporation into PetroCorp
Acquisition Corporation, a wholly-owned subsidiary of PetroCorp Incorporated,
were inadequate. The plaintiffs seek $5,000,000. Based on consultation with
legal counsel, the Company is of the opinion that the action is without merit.
There are other claims and actions pending against the Company. In the
opinion of management, the amounts, if any, which may be awarded in connection
with any of these claims and actions, after indemnification and insurance
reimbursements, would not be material to the Company's consolidated financial
position.
14. RELATED PARTY TRANSACTIONS
-------------------------------
The Company is a joint-interest owner in a project operated by
Kaiser-Francis Oil Company, a shareholder. During 2002, 2001 and 2000, the
Company remitted $451,000, $63,000 and $154,000, respectively, to Kaiser-Francis
as payment of the Company's share of the joint operation. During 2002, 2001 and
2000, the Company remitted $3,146,000, $3,064,000 and $2,076,000, respectively,
to Kaiser-Francis, of which $1,965,000, $2,176,000 and $1,419,000, respectively,
were administrative fees under the Management Agreement. Of these administrative
fees, $1,498,000, $1,693,000 and $1,234,000, respectively, relate to continuing
operations covered under the Management Agreement. Amounts payable to
Kaiser-Francis at December 31, 2002 and 2001 were $213,000 and $272,000,
respectively.
F-22
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
15. OIL AND GAS RESERVES AND RELATED FINANCIAL DATA
----------------------------------------------------
Capitalized Costs Related to Oil and Gas Producing Activities
The following table presents total capitalized costs of proved and unproved
properties and accumulated depreciation, depletion and amortization related to
the continuing oil and gas properties (amounts in thousands):
2002:
Proved properties.................................... $ 225,414
Unproved properties.................................. 233
---------
225,647
Accumulated depreciation, depletion and amortization. (176,886)
---------
$ 48,761
=========
2001:
Proved properties.................................... $ 233,204
Unproved properties.................................. 263
---------
233,467
Accumulated depreciation, depletion and amortization. (168,989)
---------
$ 64,478
=========
2000:
Proved properties.................................... $ 176,834
Unproved properties.................................. 1,223
---------
178,057
Accumulated depreciation, depletion and amortization. (144,105)
---------
$ 33,952
=========
Of the unproved properties capitalized cost at December 31, 2002, none and
approximately $96,000, respectively, were incurred in 2002 and 2001. The Company
anticipates evaluating these properties during subsequent years.
F-23
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
Costs Incurred in Oil and Gas Producing Activities
Presented below are costs incurred in oil and gas property acquisition,
exploration and development activities of the continuing operations (amounts in
thousands):
2002:
Acquisition of properties:
Proved properties....... $ --
Unproved properties..... 415
Exploration costs........... --
Development costs(A)........ 8,886
-------
Total................... $ 9,301
=======
2001:
Acquisition of properties:
Proved properties....... $42,608
Unproved properties..... 678
Exploration costs........... 2,003
Development costs(A)........ 10,121
-------
Total................... $55,410
=======
2000:
Acquisition of properties:
Proved properties....... $ 104
Unproved properties..... 80
Exploration costs........... --
Development costs(A)........ 1,553
-------
Total................... $ 1,737
=======
--------
(A) Includes approximately $4,213, $42 and $600 of costs incurred in 2002, 2001
and 2000, respectively, for development of properties previously classified
as proved undeveloped properties in the prior year.
F-24
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
Results of Operations From Oil and Gas Producing Activities (unaudited)
The results of operations from continuing oil and gas producing activities,
are as follows (amounts in thousands):
2002:
Revenues.......................................................... $ 27,363
Production costs.................................................. (10,451)
Depreciation, depletion and amortization.......................... (7,897)
Income tax benefit (expense)...................................... (3,336)
--------
Results of operations from petroleum producing
activities (excluding corporate overhead and
interest costs)................................................. $ 5,679
========
2001:
Revenues........................................................... $ 24,970
Production costs................................................... (8,704)
Depreciation, depletion, amortization and impairment............... (24,884)
Income tax benefit (expense)....................................... 3,187
--------
Results of operations from petroleum producing
activities (excluding corporate overhead and
interest costs).................................................. $ (5,431)
========
2000:
Revenues........................................................... $ 23,481
Production costs................................................... (5,813)
Depreciation, depletion and amortization........................... (4,782)
Income tax benefit (expense)....................................... (4,728)
--------
Results of operations from petroleum producing
activities (excluding corporate overhead and
interest costs).................................................. $ 8,158
========
Reserve Quantities (unaudited)
Estimates of proved reserves and the related standardized measure of
discounted future net cash flow information related to the continuing operations
are based on the reports of independent petroleum engineers for 2000 and reserve
evaluations performed by the Company's engineer in 2002 and 2001 and reviewed by
independent petroleum engineers. Approximately 85% and 100% of the present value
of reserves at December 31, 2002 and 2001, respectively, were reviewed by
independent petroleum engineers.
F-25
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
The Company's estimates of its continuing proved reserves and proved
developed reserves of oil and gas as of December 31, 2002, 2001 and 2000 and the
changes in its proved reserves are as follows:
U.S.
---------------
Oil Gas
(MBbls) (MMcf)
------- ------
2002:
Proved reserves:
Beginning of year.................. 3,931 41,384
Production......................... (479) (5,089)
Purchase of minerals-in-place...... -- --
Extensions and discoveries......... 429 1,849
Improved recoveries................ 33 (141)
Sales of minerals-in-place......... (1,349) (3,306)
Revision to previous estimates..... 144 4,063
------- ------
End of year........................ 2,709 38,760
======= ======
Proved developed reserves:
Beginning of year.................. 3,350 38,806
======= ======
End of year........................ 2,147 34,317
======= ======
2001:
Proved reserves:
Beginning of year.................. 3,109 22,709
Production......................... (396) (4,498)
Purchase of minerals-in-place...... 2,190 19,722
Extensions and discoveries......... 25 867
Improved recoveries................ -- --
Sales of minerals-in-place......... -- --
Revision to previous estimates..... (997) 2,584
------- ------
End of year........................ 3,931 41,384
======= ======
Proved developed reserves:
Beginning of year.................. 2,888 20,551
======= ======
End of year........................ 3,350 38,806
======= ======
2000:
Proved reserves:
Beginning of year.................. 3,261 20,950
Production......................... (294) (3,850)
Purchase of minerals-in-place...... 8 1
Extensions and discoveries......... 155 1,314
Improved recoveries................ -- --
Sales of minerals-in-place......... -- (213)
Revision to previous estimates..... (21) 4,507
------- ------
End of year........................ 3,109 22,709
======= ======
Proved developed reserves:
Beginning of year.................. 3,180 18,906
======= ======
End of year........................ 2,888 20,551
======= ======
F-26
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
Standardized Measure of Discounted Future Net Cash Flows (unaudited)
The standardized measure of discounted future net cash flows was calculated
by applying current prices to estimated future production, less future
expenditures (based on current costs) to be incurred in developing and producing
such proved reserves and the estimated effect of future income taxes based on
the current tax law. The resulting future net cash flows were discounted using a
rate of 10% per annum.
The standardized measure of discounted future net cash flow amounts
contained in the following tabulation do not purport to represent the fair
market value of oil and gas properties. No value has been given to unproved
properties. There are significant uncertainties inherent in estimating
quantities of proved reserves and in projecting rates of production and the
timing and amount of future costs. Future realization of oil and gas prices over
the remaining reserve lives may vary significantly from current prices. In
addition, the method of valuation utilized, based on current prices and costs
and the use of a 10% discount rate, is not necessarily appropriate for
determining fair value. The average prices used were based on the adjusted cash
spot price for natural gas and oil at December 31. At December 31, 2001, the
fair value of hedges related to U.S. production was an asset of $479,000. At
December 31, 2002 and 2000 there were no oil and gas collar hedges outstanding.
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows (amounts in thousands):
2002:
Future gross revenues........................................ $252,955
Less--future costs:
Production............................................... 69,164
Development(A)........................................... 9,364
--------
Future net cash flows before income taxes.................... 174,427
Less--10% annual discount for estimated timing of cash flows. 66,013
--------
Present value of future net cash flows before income tax..... 108,414
Less--present value of future income taxes................... 10,058
--------
Standardized measure of discounted future net cash flows..... $ 98,356
========
---------
(A) $7,618 of development costs are for proved undeveloped properties
2001:
Future gross revenues........................................ $169,025
Less--future costs:
Production............................................... 58,768
Development(A)........................................... 10,850
--------
Future net cash flows before income taxes.................... 99,407
Less--10% annual discount for estimated timing of cash flows. 39,836
--------
Present value of future net cash flows before income tax..... 59,571
Less--present value of future income taxes................... 752
--------
Standardized measure of discounted future net cash flows..... $ 58,819
========
---------
(A) $7,846 of development costs are for proved undeveloped properties
F-27
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
2000:
Future gross revenues........................................ $313,677
Less--future costs:
Production............................................... 55,534
Development(A)........................................... 2,457
--------
Future net cash flows before income taxes.................... 255,686
Less--10% annual discount for estimated timing of cash flows. 103,563
--------
Present value of future net cash flows before income tax..... 152,123
Less--present value of future income taxes................... 42,860
--------
Standardized measure of discounted future net cash flows..... $109,263
========
---------
(A) $1,204 of development costs are for proved undeveloped properties
F-28
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
The following table summarizes the principal sources of change in the
standardized measure of discounted future net cash flows (amounts in thousands):
2002:
Standardized measure--beginning of period.............. $ 58,819
Sales of oil and gas produced, net of production costs. (16,912)
Purchases of minerals-in-place......................... --
Extensions, discoveries and improved recovery.......... 5,311
Sales of minerals-in-place............................. (4,512)
Net changes in prices and productions costs............ 28,414
Changes in estimated future development costs.......... (7,807)
Development costs incurred............................. 8,886
Revisions to previous quantity estimates............... 30,006
Accretion of discount.................................. 5,238
Changes in timing of production and other.............. 386
Net changes in income taxes............................ (9,473)
---------
Standardized measure--end of period.................... $ 98,356
=========
2001:
Standardized measure--beginning of period.............. $ 109,263
Sales of oil and gas produced, net of production costs. (16,266)
Purchases of minerals-in-place......................... 27,385
Extensions, discoveries and improved recovery.......... 1,197
Sales of minerals-in-place............................. --
Net changes in prices and productions costs............ (114,680)
Changes in estimated future development costs.......... (11,036)
Development costs incurred............................. 10,121
Revisions to previous quantity estimates............... (3,103)
Accretion of discount.................................. 15,213
Changes in timing of production and other.............. (1,383)
Net changes in income taxes............................ 42,108
---------
Standardized measure--end of period.................... $ 58,819
=========
2000:
Standardized measure--beginning of period.............. $ 56,406
Sales of oil and gas produced, net of production costs. (17,668)
Purchases of minerals-in-place......................... 23
Extensions and discoveries............................. 8,502
Sales of minerals-in-place............................. (108)
Net changes in prices and productions costs............ 94,155
Development costs incurred............................. 1,553
Revisions to previous quantity estimates............... 16,130
Accretion of discount.................................. 6,068
Changes in timing of production and other.............. (17,214)
Net changes in income taxes............................ (38,584)
---------
Standardized measure--end of period.................... $ 109,263
=========
F-29
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
The standardized measure amounts are based on current prices at each year
end and reflect overall adjusted weighted average prices of:
2002:
Oil (per BBL).... $29.73
Gas (per Mcf).... 4.44
2001:
Oil (per BBL).... $18.45
Gas (per Mcf).... 2.67
2000:
Oil (per BBL).... $25.45
Gas (per Mcf).... 10.33
16. SUPPLEMENTARY INFORMATION
------------------------------
At December 31, 2002, accrued liabilities included $681,000 of accrued
lease operating expense, $867,000 of accrued capital costs and $1.2 million of
other miscellaneous accrued expense. At December 31, 2001, accrued liabilities
included $1.3 million of accrued lease operating expense, $1.4 million of
accrued capital costs and $1.2 million of other miscellaneous accrued expenses.
F-30
PETROCORP INCORPORATED
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
December 31, 2002, 2001 and 2000
17. SUMMARIZED QUARTERLY FINANCIAL DATA (UNAUDITED)
----------------------------------------------------
(amounts in thousands, except per share amounts)
First Second Third Fourth
Quarter Quarter Quarter Quarter Year
------- ------- ------- ------- -------
Year ended December 31, 2002:
Revenues....................... $ 6,176 $ 7,172 $ 7,255 $ 7,072 $27,675
Gross profit(1)................ 1,239 2,104 3,054 2,727 9,124
Income from continuing
operations................... 323 1,455 860 1,597 4,235
Income from discontinued
operations................... 723 925 1,313 1,488 4,449
Net income..................... 1,046 2,380 2,173 3,085 8,684
Net income per share from
continuing operations--basic. $ 0.02 $ 0.12 $ 0.07 $ 0.13 $ 0.34
Net income per share from
continuing operations--
diluted...................... $ 0.02 $ 0.12 $ 0.07 $ 0.13 $ 0.34
Net income per share from
discontinued operations--
basic........................ $ 0.06 $ 0.07 $ 0.10 $ 0.12 $ 0.35
Net income per share from
discontinued operations--
diluted...................... $ 0.06 $ 0.07 $ 0.10 $ 0.12 $ 0.35
Year ended December 31, 2001:
Revenues....................... $ 6,594 $ 6,447 $ 6,119 $ 6,009 $25,169
Gross profit(1)................ 4,345 2,934 720 (16,719) (8,720)
Income (loss) from continuing
operations................... 3,353 1,146 285 (10,076) (5,292)
Income from discontinued
operations................... 2,853 1,453 2,764 268 7,338
Net income (loss)(2)........... 6,206 2,599 3,049 (9,808) 2,046
Net income (loss) per share
from continuing operations--
basic(2)..................... $ 0.38 $ 0.12 $ 0.02 $ (0.79) $ (0.48)
Net income (loss) per share from
Continuing operations--
diluted(2)................... $ 0.38 $ 0.11 $ 0.02 $ (0.79) $ (0.48)
Net income per share from
discontinued operations--
basic........................ $ 0.33 $ 0.15 $ 0.22 $ 0.02 $ 0.67
Net income per share from
discontinued operations--
diluted...................... $ 0.32 $ 0.15 $ 0.22 $ 0.02 $ 0.66
Quarterly and prior year amounts have been restated to reflect the sale of
Canadian subsidiaries as discontinued operations, as described in Note 2 to the
consolidated financial statements of the Company.
--------
(1) Revenues less operating expenses other than general and administrative
expenses.
(2) Included in the fourth quarter was a $1,092 ($0.10 per share) increase in
the deferred income tax benefit due to a change in the estimated amount of
depletion carryforward.
F-31
PETROCORP INCORPORATED
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share amounts)
(Unaudited)
September 30, December 31,
2003 2002
------------- ------------
ASSETS
Current assets:
Cash and cash equivalents....................... $ 90,283 $ 3,087
Accounts receivable, net........................ 8,803 11,537
Receivable from sale of Canadian subsidiaries... 1,023 --
Assets of discontinued operations............... -- 72,300
Current portion of deferred taxes 740 --
Other current assets............................ 946 1,107
-------- --------
Total current assets........................ 101,795 88,031
-------- --------
Property, plant and equipment:
Oil and gas properties, at cost, full cost
method, net of accumulated depreciation,
depletion, amortization and impairment........ 56,088 48,761
Deferred income taxes............................... 4,650 22,066
Other assets, net................................... 2,788 2,723
-------- --------
Total assets............................ $165,321 $161,581
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable................................ $ 5,300 $ 7,367
Accrued liabilities............................. 2,995 2,758
Current income tax payable...................... 831 --
Liabilities of discontinued operations.......... -- 22,111
-------- --------
Total current liabilities................... 9,126 32,236
-------- --------
Long-term debt...................................... -- 28,750
-------- --------
Dismantlement obligation............................ 5,192 --
-------- --------
Other long-term liabilities 365 --
-------- --------
Shareholders' equity:
Preferred stock, $0.01 par value, 1,000,000
shares authorized, none issued................ -- --
Common stock, $0.01 par value, 25,000,000
shares authorized, (12,645,309 shares and
12,688,046 and 12,645,300 shares outstanding
as of September 30, 2003 and December 31,
2002, respectively)........................... 130 130
Additional paid-in capital...................... 112,643 111,905
Retained Earnings(accumulated deficit).......... 41,107 (982)
Accumulated other comprehensive loss............ -- (7,746)
Treasury stock, at cost (354,087 and 305,907
Shares, respectively)......................... (3,242) (2,712)
-------- --------
Total shareholders' equity.................. 150,638 100,595
-------- --------
Total liabilities and shareholders'
equity................................ $165,321 $161,581
======== ========
The accompanying notes are an integral part of these financial statements.
F-32
PETROCORP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
(Unaudited)
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
---------------- ----------------
2003 2002 2003 2002
------- ------- ------- -------
Revenues:
Oil and gas............................ $ 8,577 $ 7,126 $27,528 $20,369
Other.................................. 135 129 351 234
------- ------- ------- -------
8,712 7,255 27,879 20,603
------- ------- ------- -------
Expenses:
Production costs....................... 2,913 2,787 7,908 7,878
Depreciation, depletion and
amortization......................... 1,887 1,803 5,180 6,253
General and administrative............. 719 506 1,999 1,244
Other operating expenses............... 29 11 84 75
------- ------- ------- -------
5,548 5,107 15,171 15,450
------- ------- ------- -------
Income from operations..................... 3,164 2,148 12,708 5,153
------- ------- ------- -------
Other income (expenses):
Investment income...................... 238 9 468 115
Interest expense....................... (74) (376) (490) (1,226)
Other income (expenses)................ (773) (247) 2,361 8
------- ------- ------- -------
(609) (614) 2,339 (1,103)
------- ------- ------- -------
Income from continuing operations before
Income taxes and accounting change....... 2,555 1,534 15,047 4,050
------- ------- ------- -------
Income tax provision:
Current................................ 653 14 2,304 (13)
Deferred............................... 215 661 3,125 1,425
------- ------- ------- -------
868 675 5,429 1,412
------- ------- ------- -------
Income from continuing operations before
accounting change........................ 1,687 859 9,618 2,638
Discontinued operations:
Income from discontinued Canadian
operations (net of applicable taxes
of nil, $780, $1,530 and $2,028)..... -- 1,314 2,113 2,961
Gain on sale of Canadian subsidiaries
(net of taxes(benefit) of ($198) and
$19,573).............................. (337) -- 33,327 --
------- ------- ------- -------
Income before cumulative effect of a
change in accounting principle........... 1,350 2,173 45,058 5,599
Cumulative effect on prior years of
accounting change, less applicable
income taxes of $1,743................... -- -- (2,969) --
------- ------- ------- -------
Net income................................. $ 1,350 $ 2,173 $42,089 $ 5,599
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-33
PETROCORP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share amounts)
(Unaudited)
(continued)
Net income per common share - basic:
Income from continuing operations...... $ 0.13 $ 0.07 $ 0.75 $ 0.21
Income from discontinued operations.... (0.02) 0.10 2.80 0.24
Cumulative effect of change in
accounting principle................. -- -- (0.23) --
------- ------- ------- -------
Net income............................. $ 0.11 $ 0.17 $ 3.32 $ 0.45
======= ======= ======= =======
Net income per common share - diluted:
Income from continuing operations...... $ 0.13 $ 0.07 $ 0.75 $ 0.21
Income from discontinued operations.... (0.02) 0.10 2.77 0.23
Cumulative effect of change in
accounting principle................. -- -- (0.23) --
------- ------- ------- -------
Net income............................. $ 0.11 $ 0.17 $ 3.29 $ 0.44
======= ======= ======= =======
Weighted average number of common
shares - basic........................... 12,684 12,570 12,661 12,563
======= ======= ======= =======
Weighted average number of common
shares - diluted......................... 12,847 12,653 12,796 12,670
======= ======= ======= =======
The accompanying notes are an integral part of these financial statements.
F-34
PETROCORP INCORPORATED
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
(Unaudited)
For the Nine Months
Ended September, 30,
--------------------
2002 2001
-------- --------
Cash flows from operating activities:
Net income.............................................. $ 42,089 $ 5,599
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and amortization............ 5,180 6,253
Deferred income tax expense (benefit)............... 3,125 1,425
Gain of sale of Canadian subsidiaries............... (33,327) --
Cumulative effect of change in accounting
principle......................................... 2,969 --
Other............................................... 244 97
Changes in operating assets and liabilities:
Accounts receivable............................. 2,734 (3,050)
Other current assets............................ 161 310
Accounts payable................................ (2,067) 3,145
Accrued liabilities............................. 392 2,573
Income tax payable.............................. 831 --
Net change provided (used) by discontinued
operations........................................ (355) 4,792
-------- --------
Net cash provided by operating activities... 21,976 21,144
-------- --------
Cash flows from investing activities:
Additions to oil and gas properties..................... (11,952) (3,615)
Proceeds received on sale on Canadian subsidiaries
(See Note 3).......................................... 107,635 --
Net investing activities of discontinued
operations............................................ (1,596) (3,763)
Other................................................... 146 --
------- --------
Net cash provide by (used in) investing
activities................................ 94,233 (7,378)
-------- --------
Cash flows from financing activities:
Proceeds from long-term debt............................ -- 800
Repayment of long-term debt............................. (28,750) (4,300)
Other................................................... 208 314
Net financing activities of discontinued operations..... (471) (7,789)
-------- --------
Net cash used in financing activities....... (29,013) (10,975)
-------- --------
Effect of exchange rate changes on cash..................... -- (112)
-------- --------
Net increase (decrease) in cash and cash equivalents........ 87,196 2,679
Cash and cash equivalents at beginning of period............ 3,087 1,265
-------- --------
Cash and cash equivalents at end of period.................. $ 90,283 $ 3,944
======== ========
The accompanying notes are an integral part of these financial statements.
F-35
PETROCORP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1 - BASIS OF PRESENTATION:
-------------------------------
The unaudited consolidated financial statements of PetroCorp Incorporated
(the "Company" or "PetroCorp") have been prepared in accordance with generally
accepted accounting principles for interim financial information and with
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, they do
not include all of the information and footnotes required by generally accepted
accounting principles for complete financial statements. In the opinion of
management, all adjustments, consisting of normal and recurring adjustments
necessary for a fair presentation, have been included. For further information,
refer to the consolidated financial statements and footnotes thereto for the
year ended December 31, 2002, included in the Company's 2002 Annual Report on
Form 10-K pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934. Interim period results are not necessarily indicative of results of
operations or cash flows for a full-year period.
Accounting for Stock-Based Compensation
At September 30, 2003, the Company has a stock-based compensation plan,
which is more fully described in Notes 1 and 9 of the Company's Annual Report on
Form 10-K. The Company accounts for this plan under the recognition and
measurement principles of APB Opinion No. 25, Accounting for Stock Issued to
Employees, and related Interpretations. The following table illustrates the
effect on net income and earnings per share if the Company had applied the fair
value recognition provisions of FASB Statement No. 123, Accounting for
Stock-Based Compensation, (in thousands, except per share amounts):
Three Months Nine Months
Ended Ended
September 30, September 30,
---------------- ----------------
2003 2002 2003 2002
------- ------- ------- -------
Net income, as reported................... $ 1,350 $ 2,173 $42,089 $ 5,599
Deduct: Total stock-based employee
Compensation expense determined under
fair value based method for all awards,
net of related tax effects.............. 58 133 177 299
------- ------- ------- -------
Pro forma net income...................... $ 1,292 $ 2,040 $41,912 $ 5,300
======= ======= ======= =======
Earnings per share:
Basic--as reported.................... $ 0.11 $ 0.17 $ 3.32 $ 0.45
Basic--pro forma...................... $ 0.10 $ 0.16 $ 3.31 $ 0.42
Diluted--as reported.................. $ 0.11 $ 0.17 $ 3.29 $ 0.44
Diluted--pro forma.................... $ 0.10 $ 0.16 $ 3.28 $ 0.42
F-36
PETROCORP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 2 - COMPREHENSIVE INCOME:
------------------------------
The Company follows SFAS No. 130, Reporting Comprehensive Income. This
Statement establishes requirements for reporting comprehensive income and its
components which includes the Company's foreign currency translation
adjustments. The Company's comprehensive income for the three and nine months
ended September 30, 2003 and 2002 is as follows (in thousands):
For the Three For the Nine
Months Ended Months Ended
September 30, September 30,
---------------- ----------------
2003 2002 2003 2002
------- ------- ------- -------
Net income........................... $ 1,350 $ 2,173 $42,089 $ 5,599
------- ------- ------- -------
Derivative hedging gain/(loss)
(net of taxes of $266 and ($24))... -- 409 -- (36)
Reclassification of hedging loss
to income (net of taxes of $181
and $361).......................... -- 300 -- 583
Reclassification of translation loss
to income.......................... -- -- 4,939 --
Foreign currency translation gain
(loss)(2003 gain covers period
from January 1 through March 5).... -- (1,826) 2,807 84
------- ------- ------- -------
-- (1,117) 7,746 631
------- ------- ------- -------
Comprehensive income................. $ 1,350 $ 1,056 $49,835 $ 6,230
======= ======= ======= =======
As of December 31, 2002, accumulated other comprehensive loss consisted of
$7,746 of foreign currency translation losses.
F-37
PETROCORP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 3 - SALE OF CANADIAN SUBSIDIARIES:
---------------------------------------
On December 24, 2002, PetroCorp signed an agreement to sell its two
Canadian subsidiaries, PCC Energy Inc. and PCC Energy Corp. for C$167.6 million
(approximately US$112 million), with an economically effective date of October
1, 2002. This is subject to post closing adjustments for certain working capital
items. On March 5, 2003, PetroCorp received approximately 75% of the sale
proceeds. Additionally, $27.5 million of the receivable recorded at the time of
sale was received in September 2003 upon completion of certain tax documentation
with the government of Canada and the remainder is expected to be received in
the fourth quarter of 2003. The financial statements reflect the results of the
Canadian operations and the sale of Canadian subsidiaries as discontinued
operations. Prior year statements of operations have been restated to conform to
the current year presentation. The sale was recorded as follows (amounts in
thousands):
Cash proceeds received, net of $4,350
Canadian taxes withheld........................... $ 80,135
Receivable recorded(A).............................. 28,523
--------
Net proceeds received........................... 108,658
--------
Net assets sold..................................... 55,168
Translation loss reclassified from
comprehensive income.............................. 4,939
Deferred income taxes............................... 15,224
--------
75,331
--------
Gain on sale of Canadian subsidiaries............... $ 33,327
========
---------
(A) Receivable does not include subsequent translation gain and escrow interest,
which are recorded in other income (expense).
F-38
PETROCORP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
Net sales and income of the discontinued operations are as follows (amounts
in thousands):
Nine months
ended
September 30,
----------------
2003 2002
------- -------
Net sales............................... $ 5,937 $16,275
======= =======
Pre-tax income from discontinued
operations............................ $ 3,643 $ 4,988
Income tax expense...................... 1,530 2,028
------- -------
Income from discontinued operations,
net of tax............................ $ 2,113 $ 2,960
======= =======
Assets and liabilities of the discontinued operations were as follows
(amounts in thousands):
March 5, 2003
-------------
Cash.......................................... $ 5,961
Accounts receivable........................... 11,332
Property, plant and equipment................. 66,205
Other Assets.................................. 64
Accounts Payable.............................. (9,388)
Accrued liabilities........................... (1,759)
Deferred tax liability........................ (17,247)
---------
$ 55,168
=========
F-39
PETROCORP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 4 - EARNINGS PER SHARE:
----------------------------
The following is a reconciliation of the numerators and denominators of the
basic and diluted per share computations for the periods presented (in
thousands, except per share amounts).
Per Share Amounts
---------------------------------------
Cumula-
Income tive
Income (Loss) Effect
(Loss) from of
from Discon- Account-
Continuing tinued ing Net
Income Shares Operations Operations Change Income
------- ------ ---------- ---------- -------- ------
Three months ended
September 30, 2003
Basic EPS:
Net income..... $ 1,350 12,684 $ 0.13 $(0.02) $ -- $ 0.11
Effect of dilutive
securities:
Options........ -- 163 -- -- -- --
------- ------ ------ ------ ------ ------
Diluted EPS:
Net income..... $ 1,350 12,847 $ 0.13 $(0.02) $ -- $ 0.11
======= ====== ====== ====== ====== ======
Three months ended
September 30, 2002
Basic EPS:
Net income..... $ 2,173 12,570 $ 0.07 $ 0.10 $ -- $ 0.17
Effect of dilutive
securities:
Options........ -- 83 -- -- -- --
------- ------ ------ ------ ------ ------
Diluted EPS:
Net income..... $ 2,173 12,653 $ 0.07 $ 0.10 $ -- $ 0.17
======= ====== ====== ====== ====== ======
F-40
PETROCORP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
Per Share Amounts
---------------------------------------
Cumula-
Income tive
Income (Loss) Effect
(Loss) from of
from Discon- Account-
Continuing tinued ing Net
Income Shares Operations Operations Change Income
------- ------ ---------- ---------- -------- ------
Nine months ended
September 30, 2003
Basic EPS:
Net income..... $42,089 12,661 $ 0.75 $ 2.80 $(0.23) $ 3.32
Effect of dilutive
securities:
Options........ -- 135 -- (0.03) -- (0.03)
------- ------ ------ ------ ------ ------
Diluted EPS:
Net income..... $42,089 12,796 $ 0.75 $ 2.77 $(0.23) $ 3.29
======= ====== ====== ====== ====== ======
Nine months ended
September 30, 2002
Basic EPS:
Net income..... $ 5,599 12,563 $ 0.21 $ 0.24 $ -- $ 0.45
Effect of dilutive
securities:
Options........ -- 107 -- (0.01) -- (0.01)
------- ------ ------ ------ ------ ------
Diluted EPS:
Net income..... $ 5,599 12,670 $ 0.21 $ 0.23 $ -- $ 0.44
======= ====== ====== ====== ====== ======
The net income per share amounts do not include the effect of potentially
dilutive securities of nil and 306,000 for the three months ended September 30,
2003 and 2002, respectively, and nil and 306,000 for the nine months ended
September 30, 2003 and 2002, respectively, as the impact of these outstanding
options was antidilutive.
F-41
PETROCORP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 5 - HEDGING ACTIVITIES:
----------------------------
To reduce the impact of fluctuations in the market prices of oil and
natural gas, the Company periodically utilizes hedging strategies such as
collars or swaps to hedge the price of a portion of its future oil and natural
gas production. Results of these hedging transactions are reflected in oil and
natural gas sales in the month of hedged production.
No oil or natural gas hedges were outstanding during 2003. Hedging
transactions for the three and nine months ended September 30, 2002 increased
oil and gas revenues by $417,000 and $723,000, respectively, (reclassified from
comprehensive income). All oil and gas hedging transactions expired in the
fourth quarter of 2002.
The Company offsets any gain or loss on the swaps and collars contracts
with the realized prices for its production. While the swaps and collars reduce
the Company's exposure to declines in the market price of natural gas and oil,
this also limits the Company's gains from increases in the market price.
In June, 2003 the Company entered into a costless collar foreign currency
exchange transaction with a nominal amount of Canadian $42 million and a
settlement date of August 8, 2003. In July, the Company exchanged, at no cost,
the collar for a new collar with the nominal Canadian amount extended to October
16, 2003. At September 30, 2003, the fair value of these collars was a liability
of $413,000, which was included in accrued liabilities. The decrease in fair
value during the three and nine months ended September 30, 2003 of $277,000 and
$413,000, respectively, is included in other income (expense).
NOTE 6 - PROPERTY, PLANT AND EQUIPMENT:
---------------------------------------
Investments in property, plant and equipment were as follows at September
30, 2003 and December 31, 2002 (amounts in thousands):
2003 2002
--------- ---------
Oil and gas properties:
Proved.................................. $ 241,227 $ 225,414
Unproved................................ 55 233
--------- ---------
241,282 225,647
Gas gathering facilities.................... 1,698 1,698
--------- ---------
242,980 227,345
Less - accumulated depreciation,
depletion, amortization and impairment.... (186,892) (178,584)
--------- ---------
$ 56,088 $ 48,761
========= =========
As more fully described in the Company's Form 10-K, PetroCorp utilizes the
full cost method of accounting for costs related to its oil and natural gas
properties. Under this method, capitalized costs are subject to a ceiling test,
evaluated each quarter, which limits such pooled costs to the aggregate of the
present value of future net revenues attributable to proved oil and gas reserves
discounted at 10 percent plus the lower of cost or market value of unproved
properties. A decline in oil and gas prices from current levels, or other
factors, without other mitigating circumstances, could cause a future write-down
of capitalized costs and a non-cash charge against future earnings.
F-42
PETROCORP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 7 - LONG-TERM DEBT:
------------------------
In July 2000, the Company entered into a $75 million revolving credit
agreement with the Toronto-Dominion Bank (TD Bank), the agent, and the Bank of
Nova Scotia. The agreement was amended in August 2002 to extend its term,
increase the borrowing base, and partially change the lenders. The amended term
of the facility is through May 1, 2004 and the amended borrowing base was set at
$70 million. In March 2003, and in conjunction with the sale of Canadian
subsidiaries described in Note 3, the Company amended its revolving credit
agreement to adjust the borrowing base to $25 million, allocated entirely to
United States borrowing. The Canadian lenders were released from the agreement.
All outstanding debt was paid off with proceeds from the sale. Effective April
28, 2003 the other lenders to the revolving credit agreement assigned their
interests to the Bank of Oklahoma, N.A.
Borrowings can be funded by either Eurodollar loans or Base Rate loans. The
interest rate on the borrowings is equal to an interest rate spread plus either
the Eurodollar rate or the Base Rate. The interest rate spread is determined
from a sliding scale based on the Company's borrowing base percentage
utilization in effect from time to time. The spread ranges from 1.25 to 2.25 on
Eurodollar loans and .25 to 1.25 on Base Rate loans. At September 30, 2003,
there were no loans outstanding under this facility and $22 million (net of
outstanding letters of credit of $3 million) was available for borrowing.
The revolving credit agreement prohibits the declaration and payment of
dividends on the common stock of the Company. Also, the debt agreement requires
the Company to maintain a minimum current ratio, a minimum tangible net worth,
and a minimum interest coverage ratio. The Company obtained waivers of certain
covenants relating to the sale of some of its Alabama properties and the sale of
the Canadian operations.
NOTE 8 - RECENT ACCOUNTING PRONOUNCEMENTS:
------------------------------------------
Statement of Financial Accounting Standards No. 141, Business Combinations
(FAS 141), and Statement of Financial Accounting Standards No. 142, Goodwill and
Intangible Assets (FAS 142), were issued by the Financial Accounting Standards
Board (FASB) in June 2001 and became effective for the Company on July 1, 2001,
and January 1, 2002, respectively. FAS 141 requires all business combinations
initiated after June 30, 2001 to be accounted for using the purchase method.
Additionally, FAS 141 requires companies to disaggregate and report separately
from goodwill certain intangible assets. FAS 142 establishes new guidelines for
accounting and goodwill and other intangible assets. Under FAS 142, goodwill and
certain other intangible assets are not amortized, but rather are reviewed
annually for impairment. One interpretation being considered relative to these
standards is that oil and gas mineral rights held under lease and other
contractual arrangements representing the right to extract such reserves for
both undeveloped and developed leaseholds should be classified separately from
oil and gas properties, as intangible assets on the Company's balance sheets. In
addition, the disclosures required by FAS 141 and 142 relative to intangibles
would be included in the notes to financial statements. Historically, the
Company has included these oil and gas mineral rights held under lease and other
contractual arrangements representing the right to extract such reserves as part
of the oil and gas properties, even after FAS 141 and 142 became effective.
As applied to companies that have adopted full cost accounting for oil and
gas activities, this interpretation of FAS 141 and 142, as described above,
would only affect the Company's balance sheet classification of proved oil and
gas leaseholds acquired after June 30, 2001 and our unproved oil and gas
leaseholds. The Company's results of operations and cash flows would not be
affected, since these oil and gas mineral rights held under lease and other
contractual arrangements representing the right to extract such reserves would
continue to be amortized in accordance with full cost accounting rules.
F-43
PETROCORP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
At September 30, 2003, the Company had no undeveloped leasehold that would
be classified on our balance sheet as "intangible undeveloped leasehold" and
developed leaseholds of an estimated $1.4 million that would be classified as
"intangible developed leasehold" if the Company applied the interpretation
currently being considered. The Company will continue to classify oil and gas
mineral rights held under lease and other contractual rights representing the
right to extract such reserves as tangible oil and gas properties until further
guidance is provided.
In June 2001, the FASB issued FAS No. 143, Accounting for Asset Retirement
Obligations. FAS 143 is effective for fiscal years beginning after June 15, 2002
(January 1, 2003 for the Company) and establishes an accounting standard
requiring the recording of the fair value of liabilities associated with the
retirement of long-lived assets (mainly plugging and abandonment costs for
depleted wells) in the period in which the liability is incurred (at the time
the wells are drilled). The effect of the adoption of this standard on the
Company's results of operations and financial condition was an unaudited
increase in liabilities of approximately $5 million; an unaudited net increase
in property, plant and equipment of approximately $259 thousand; and an
unaudited after tax charge to income for the cumulative effect of adopting the
new standard of approximately $3 million and a deferred tax asset of
approximately $1.7 million. The new standard had no material impact on income
before the cumulative effect of adoption in the nine months ended September 30,
2003, nor would it have had a material impact in the 2002 periods assuming an
adoption of this accounting standard on a proforma basis on January 1, 2002.
Accretion expense for the nine months ended September 30, 2003 was $221,000 and
other changes to the dismantlement obligation were minimal for the same period.
If FAS No. 143 had been applied etroactively, the effect would be an unaudited
increase to liabilities of $2.4 million, $2.5 million and $5.4 million at
December 31, 1999, 2000 and 2001. The impact on results of operations for those
periods would be insignificant.
On January 17, 2003, the FASB issued FIN 46, Consolidation of Variable
Interest Entities, An Interpretation of Accounting Research Bulletin No. 51. The
primary objectives of FIN 46 are to provide guidance on how to identify entities
for which control is achieved through means other than through voting rights
(variable interest entities "VIE") and how to determine when and which business
enterprise should consolidate the VIE. This new model for consolidation applies
to an entity in which either (1) the equity investors do not have a controlling
financial interest or (2) the equity investment at risk is insufficient to
finance that entity's activities without receiving additional subordinated
financial support from other parties. The adoption of this standard had no
impact on the financial position or results of operations of the Company.
In April 2003, the FASB issued FAS No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. This Statement amends and
clarifies financial accounting and reporting for derivative instruments,
including certain derivative instruments embedded in other contracts
(collectively referred to as derivatives) and for hedging activities under FASB
Statement No. 133, Accounting for Derivative Instruments and Hedging Activities.
This statement is effective for contracts entered into or modified after June
30, 2003. The Company does not expect that adoption of this statement will have
a significant effect on financial condition or results of operations.
In May 2003, the FASB issued FAS No. 150, Accounting for Certain Financial
Instruments with Characteristics of both Liabilities and Equity. This Statement
establishes standards to classify and measure certain financial instruments with
characteristics of both liabilities and equity. It requires the classification
of financial instruments within its scope as a liability (or asset in some
circumstances). Based on financial instruments currently held by the Company, it
does not expect that adoption of this statement will have a significant effect
on financial condition and results of operations.
F-44
PETROCORP INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS--(continued)
(Unaudited)
NOTE 9 - COMMON STOCK REPURCHASES:
----------------------------------
On September 14, 2001, the Board of Directors authorized the purchase of up
to 1,000,000 shares of the Company's common stock. On March 5, 2003, the Board
of Directors increased the number of shares authorized for purchase up to 25% of
the outstanding shares of the Company. Through September 30, 2003, 354,087
shares have been purchased at a cost of $3,242,000.
NOTE 10 - SALE OF COMPANY:
--------------------------
On August 14, 2003, the Company announced that it had entered into a
definitive agreement to be acquired by Unit Corporation. The agreement is
subject to approval by the Company's shareholders and other customary closing
conditions and is expected to close in the fourth quarter of 2003 or early in
2004. If the merger is completed, the Company's shareholders will be entitled to
receive, for each share owned, a minimum of $13.37 in cash at the closing, plus
up to $0.50 per share in the form of cash distributions from an escrow account
set up to settle or satisfy certain of the Company's contingent tax and
litigation liabilities.
F-45
UNIT CORPORATION AND SUBSIDIARIES
(B) Pro Forma Financial Information
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET
As of September 30, 2003
Pro Forma
Unit PetroCorp Adjustments
Corporation Incorporated (Note 3) Pro Forma
---------- ----------- ---------- -----------
(In thousands)
Assets:
-------
Current Assets:
Cash and cash equivalents $ 1,765 $ 90,283 $ (91,381)(c) $ 667
Cash in escrow........... -- -- 5,519 (c) 5,519
Accounts receivable, net. 52,734 8,651 -- 61,385
Receivable from sale of
Canadian subsidiaries.. -- 1,023 (1,023)(a) --
Materials and supplies... 8,510 248 -- 8,758
Income tax receivable.... 107 152 (152)(a) 107
Current portion of
deferred taxes......... 2,042 740 (740)(a) 2,042
Other.................... 2,798 698 516 (c) 4,012
---------- ---------- ---------- -----------
Total current assets 67,956 101,795 (87,261) 82,490
---------- ---------- ---------- -----------
Property and Equipment:
Drilling equipment....... 383,732 -- -- 383,732
Oil and natural gas
properties, on the
full cost method:
Proved properties.... 503,510 241,227 (241,227)(b)
114,508 (b) 618,018
Undeveloped leasehold
not being amortized 19,845 55 (55)(b)
6,557 (b) 26,402
Transportation equipment. 7,532 -- -- 7,532
Other.................... 12,653 1,698 (1,698)(b)
401 (b) 13,054
---------- ---------- ---------- -----------
927,272 242,980 (121,514) 1,048,738
Less accumulated
depreciation,
depletion,
amortization and
impairment............. 370,709 186,892 (186,892)(b) 370,709
---------- ---------- ---------- -----------
Net property and
equipment......... 556,563 56,088 65,378 678,029
---------- ---------- ---------- -----------
Goodwill..................... 12,794 -- -- 12,794
Deferred income taxes........ -- 4,650 (4,650)(b)
5,149 (b) 5,149
Other Assets................. 6,955 2,788 (2,788)(b)
1,499 (b) 8,454
---------- ---------- ---------- -----------
Total Assets................. $ 644,268 $ 165,321 $ (22,673) $ 786,916
========== ========== ========== ===========
The accompanying notes are an integral part of the
pro forma consolidated condensed financial statements.
P-1
UNIT CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED BALANCE SHEET - CONTINUED
As of September 30, 2003
Pro Forma
Unit PetroCorp Adjustments
Corporation Incorporated (Note 3) Pro Forma
---------- ---------- ---------- -----------
(In thousands)
LIABILITIES AND SHAREHOLDERS'
EQUITY
-----------------------------
Current Liabilities:
Current portion of
long-term
liabilities and debt... $ 741 $ -- $ -- $ 741
Accounts payable......... 25,346 5,300 -- 30,646
Accrued liabilities...... 14,795 3,826 (831)(a)
5,519 (d) 23,309
---------- ---------- ---------- -----------
Total current
liabilities........ 40,882 9,126 4,688 54,696
---------- ---------- ---------- -----------
Long-Term Debt............... 15,000 -- 89,162 (d) 104,162
---------- ---------- ---------- -----------
Other Long-Term Liabilities.. 17,609 5,557 -- 23,166
---------- ---------- ---------- -----------
Deferred Income Taxes........ 109,436 -- 34,115 (b) 143,551
---------- ---------- ---------- -----------
Shareholders' Equity:
Preferred stock, $1.00
par value, 5,000,000
shares authorized,
none issued...... -- -- -- --
Common stock $.20 par
value, 75,000,000
shares authorized,
43,569,227 shares
issued and
outstanding............ 8,714 130 (130)(b) 8,714
Capital in excess of
par value. 265,666 112,643 (112,643)(b) 265,666
Retained earnings........ 186,961 41,107 (41,107)(b) 186,961
Treasury stock, at cost
(354,087 shares)....... -- (3,242) 3,242 (b) --
---------- ---------- ---------- -----------
Total shareholders'
equity............. 461,341 150,638 (150,638) 461,341
---------- ---------- ---------- -----------
Total Liabilities and
Shareholders' Equity....... $ 644,268 $ 165,321 $ (22,673) $ 786,916
========== ========== ========== ===========
The accompanying notes are an integral part of the
pro forma consolidated condensed financial statements.
P-2
UNIT CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
For the Year Ended December 31, 2002
Pro Forma
PetroCorp Adjust-
Unit Incorporated ments
Corporation (Note 2) (Note 3) Pro Forma
---------- ---------- ---------- ----------
(In thousands except per share amounts)
Revenues:
Contract drilling......... $ 118,173 $ -- $ -- $ 118,173
Oil and natural gas....... 67,959 27,363 1,100 (f) 96,422
Other..................... 1,504 947 (70)(g) 2,381
---------- ---------- ---------- ----------
Total revenues.... 187,636 28,310 1,030 216,976
---------- ---------- ---------- ----------
Expenses:
Contract drilling:
Operating costs....... 91,338 -- -- 91,338
Depreciation.......... 14,684 -- -- 14,684
Oil and natural gas:
Operating costs....... 20,795 10,451 138 (f) 31,384
Depreciation,
depletion,
amortization
and impairment...... 23,338 8,002 5,434 (e) 36,774
General and
administrative.......... 8,712 1,936 (896)(f) 9,752
Interest.................. 973 1,566 1,228 (g) 3,767
---------- ---------- ---------- ----------
Total expenses.... 159,840 21,955 5,904 187,699
---------- ---------- ---------- ----------
Income From Continuing
Operations Before
Income Taxes................ 27,796 6,355 (4,874) 29,277
---------- ---------- ---------- ----------
Income Tax Expense............ 9,552 2,120 (1,852)(h) 9,820
---------- ---------- ---------- ----------
Income From Continuing
Operations.................. $ 18,244 $ 4,235 $ (3,022) $ 19,457
========== ========== ========== ==========
Earnings From Continuing
Operations Per Share
(Note 4):
Basic................... $ 0.47 $ 0.50
========== ==========
Diluted................. $ 0.47 $ 0.50
========== ==========
The accompanying notes are an integral part of the pro
forma consolidated condensed financial statements.
P-3
UNIT CORPORATION AND SUBSIDIARIES
UNAUDITED PRO FORMA CONSOLIDATED CONDENSED STATEMENT OF INCOME
For the Nine Months Ended September 30, 2003
Pro Forma
PetroCorp Adjust-
Unit Incorporated ments
Corporation (Note 2) (Note 3) Pro Forma
---------- ---------- ---------- ----------
(In thousands except per share amounts)
Revenues:
Contract drilling......... $ 129,839 $ -- $ -- $ 129,839
Oil and natural gas....... 87,521 27,528 1,137 (f) 116,186
Other..................... 2,267 3,180 (468)(g) 4,979
---------- ---------- ---------- ----------
Total revenues.... 219,627 30,708 669 251,004
---------- ---------- ---------- ----------
Expenses:
Contract drilling:
Operating costs....... 97,105 -- -- 97,105
Depreciation.......... 17,111 -- -- 17,111
Oil and natural gas:
Operating costs....... 18,768 7,992 104 (f) 26,864
Depreciation,
depletion
and amortization.... 19,464 5,180 3,742 (e) 28,386
General and
administrative...... 6,766 1,999 (943)(f) 7,822
Interest.............. 540 490 1,292 (g) 2,322
---------- ---------- ---------- ----------
Total expenses.... 159,754 15,661 4,195 179,610
---------- ---------- ---------- ----------
Income From Continuing
Operations Before
Income Taxes................ 59,873 15,047 (3,526) 71,394
---------- ---------- ---------- ----------
Income Tax Expense............ 22,760 5,429 (1,340)(h) 26,849
---------- ---------- ---------- ----------
Income From Continuing
Operations.................. 37,113 9,618 (2,186) 44,545
========== ========== ========== ==========
Earnings From Continuing
Operations Per Share
(Note 4):
Basic................... $ 0.85 $ 1.02
========== ==========
Diluted................. $ 0.85 $ 1.02
========== ==========
The accompanying notes are an integral part of the pro
forma consolidated condensed financial statements.
P-4
UNIT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
NOTE 1 - THE ACQUISITION
------------------------
On January 30, 2004, Unit Corporation completed the acquisition of
PetroCorp Incorporated. The cost of this acquisition was $182.1 million in cash
($91.8 million net of cash acquired) with approximately $5.5 million held in
escrow to cover certain liabilities that PetroCorp might incur after the
closing of this acquisition. The consideration paid was determined through
arms-length negotiations between the parties.
The preliminary allocation of the total consideration paid for the
acquisition is as follows (in thousands):
Working Capital....................................... $ 93,668
Undeveloped Oil and Natural Gas Properties............ 6,557
Producing Oil and Natural Gas Properties.............. 114,518
Property and Equipment - Other........................ 401
Other Assets.......................................... 1,499
Other Long-Term Liabilities........................... (5,557)
Deferred Income Taxes (net)........................... (28,966)
----------
Total consideration............................... $ 182,120
==========
NOTE 2 - BASIS OF PRESENTATION
------------------------------
The accompanying unaudited Pro Forma Consolidated Condensed Financial
Statements are presented to reflect the consummation of the PetroCorp
Incorporated acquisition. Certain amounts from the PetroCorp Incorporated
financial statements have been reclassified to conform to the presentation of
Unit Corporation financial statements. The unaudited Pro Forma Consolidated
Condensed Balance Sheet is presented as if the acquisition, accounted for under
the purchase method, occurred as of September 30, 2003. The unaudited Pro Forma
Consolidated Condensed Statements of Income are presented as if the acquisition
occurred on January 1, 2002 and may not be indicative of the results that would
have occurred if the acquisition had been effective on the dates indicated or of
the results that may be obtained in the future. The accompanying pro forma
financial statements should be read in conjunction with the historical financial
statements and notes to financial statements of both Unit Corporation and
PetroCorp Incorporated.
P-5
UNIT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS - CONTINUED
NOTE 3 - PRO FORMA ADJUSTMENTS
------------------------------
The accompanying unaudited Pro Forma Consolidated Condensed Financial
Statements include the following adjustments:
(a) To reclassify certain assets and liabilities of PetroCorp Incorporated
at September 30, 2003, which are to be settled in accordance with the
escrow agreement.
(b) To record the fair value of assets acquired and eliminate the
shareholders' equity of PetroCorp Incorporated. Undeveloped Leasehold
and Proved Properties were adjusted to their estimated fair value of
$121.1 million and additional adjustments were made for Property,
Plant and Equipment - Other and Other Non-Current Assets of $0.4
million and $1.5 million, respectively. Unit's deferred tax asset was
increased by $5.1 million and deferred tax liability by $34.1 million
to reflect the benefit and liability for taxes to be incurred in
future periods by Unit from its assumption of the tax basis in the
PetroCorp Incorporated's assets acquired and liabilities assumed.
(c) Cash of $5.5 million was transferred to an escrow account to reserve
for certain future potential liabilities that may be incurred by
PetroCorp Incorporated after the closing of the acquisition. Cash was
also adjusted for the receipt of payments on stock options exercised
of $3.9 million, the payment of final compensation and bonuses to
PetroCorp employees of $1.8 million, facility fees on Unit's new loan
agreement of $0.5 million, distribution to the PetroCorp Incorporated
shareholders of $176.6 million and proceeds of Unit's new loan
agreement of $89.2 million.
(d) To record long-term debt incurred in connection with the distribution
of the purchase price to the PetroCorp Incorporated shareholders and
to record a liability for possible future distributios to PetroCorp
Incorporated shareholders regarding matters for which funds are held
in escrow.
(e) Increase in depreciation, depletion and amortization expense for the
increase in fair value of the producing properties acquired and other
property and equipment. Depreciation, depletion and amortization on
producing properties was calculated using a composite
units-of-production method based on the combined proved oil and
natural gas reserves. Other property and equipment was depreciated
using the straight-line method over the estimated remaining useful
lives of the assets of 10 years.
(f) To eliminate general and administrative expense for amounts PetroCorp
Incorporated paid for services provided by Kaiser-Francis for
management and administrative functions in accordance with a
contractual agreement, including accounting and data processing which
will be terminated. In addition, Unit has hired several employees to
provide accounting and engineering functions relating to the PetroCorp
Incorporated properties which costs have been added to expense.
Administrative overhead revenue from outside parties previously netted
against PetroCorp Incorporated general and administrative expense was
also reclassified to oil and natural gas revenues in order to be
consistent with Unit's presentation.
(g) Interest expense was adjusted to reflect interest on the $89.2 million
in additional long-term debt incurred for the acquisition and
investment income was reduced due to the elimination of cash
previously held by PetroCorp Incorporated. With the additional debt
incurred a 1/8% change in interest rates would cause a $10,850 per
month ($130,200 annualized) change in pre-tax income.
(h) To adjust income tax expense for the tax effect associated with the
change in net income due to the pro forma adjustments based on the
statutory (federal and state) tax rate.
P-6
UNIT CORPORATION AND SUBSIDIARIES
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED CONDENSED
FINANCIAL STATEMENTS - CONTINUED
NOTE 4 - NET INCOME PER COMMON SHARE
------------------------------------
The following data shows the amounts used in computing earnings per share.
Weighted
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
(In thousands except
per share amounts)
For the Year Ended December 31, 2002:
Earnings from continuing
operations per common share:
Basic earnings per common share $ 19,457 38,844 $ 0.50
==========
Effect of dilutive stock options -- 268
----------- -------------
Diluted earnings per common
share $ 19,457 39,112 $ 0.50
=========== ============= ==========
Options to purchase 198,500 shares of common stock at an average price of
$19.01 were excluded from the computation of diluted pro forma earnings per
share because the option exercise prices were greater than the average market
price on common shares for the year ended December 31, 2002.
Weighted
Income Shares Per-Share
(Numerator) (Denominator) Amount
----------- ------------- ----------
(In thousands except
per share amounts)
For the Nine Months Ended September 30,
2003:
Earnings from continuing
operations per common share:
Basic earnings per common share $ 44,545 43,503 $ 1.02
==========
Effect of dilutive stock options -- 174
----------- -------------
Diluted earnings per commons
share $ 44,545 43,677 $ 1.02
=========== ============= ==========
Options to purchase 26,000 shares of common stock at an average price of
$20.37 were excluded from the computation of diluted pro forma earnings per
share because the option exercise prices were greater than the average market
price on common shares for the nine months ended September 30, 2003.
P-7
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned hereunto duly authorized.
UNIT CORPORATION
Dated: March 3, 2004 By: /s/ DAVID T. MERRILL
----------------------------
David T. Merrill
Chief Financial Officer and
Treasurer
P-8