Item 3. LEGAL PROCEEDINGS
The Company's subsidiary, Ada Crude Oil Company (Ada), has been named as one of sixty-three defendants in a lawsuit styled The State of Texas et al vs Amerada Hess Corporation. The suit alleges, among other claims, that the defendants as "common purchasers of oil" discriminated against the plaintiffs in favor of the defendants' own production and that of others. The plaintiffs also seek class certification. In response, the Company has filed a general denial and has asserted a number of affirmative defenses. Attorneys for the plantiff reviewed Ada's response and subsequently informed the Company that Ada has been recommended for dismissal from the lawsuit. This recommendation is currently under review by the plantiff. The Company will continue to vigorously contest this matter and does not expect it to have a significant adverse effect on its financial position or results of operations.
In the normal course of business, the Company becomes involved in litigation incident to operations. In management's opinion, the ultimate resolution of all litigation matters and disputes will not have a material adverse impact on the Company's financial position or results of operations.
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Item 4.
Item 4. SUBMISSION OF MATTER TO A VOTE OF SECURITY HOLDERS.
None. EXECUTIVE OFFICERS OF THE REGISTRANT
The persons who are currently serving as executive officers of the Company, their ages and the positions they hold with the Company are as follows:
Each officer has served in his present position for at least five years. No family relationship exists between any of the officers. Mr. Hurst is a partner in the law firm of Chaffin & Hurst.
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PART II
Item 5.
Item 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER MATTERS
The Company's common stock is traded on the American Stock Exchange. The following table sets forth the high and low sales prices of the common stock as published in The Wall Street Journal for issues listed on the American Stock Exchange for each calendar quarter since January 1, 1997.
At December 31, 1998 there were 765 holders of record of the Company's common stock and the closing stock price was $5-3/4 per share.
The terms of the Company's bank loan agreement require the Company to retain at least 50% of annual net income as an addition to total shareholders' equity, thus such amount would not be available for payment of cash dividends on the Company's common stock.
On each of December 15, 1998, 1997 and 1996, the Company paid an annual cash dividend of $.10, $ .10 and $.07, respectively, to all holders of its common stock of record on December 1st of each year. Such dividends aggregated $422,000, $422,000 and $292,000, respectively.
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Item 6.
Item 6. SELECTED FINANCIAL DATA
FIVE YEAR REVIEW OF SELECTED FINANCIAL DATA
- ----------------------
(1) The oil and gas operating loss in 1998 and 1995 resulted principally from a write-down of oil and gas properties due to reduced prices for crude oil and natural gas and for 1998, additional 3D seismic expense.
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Item 7.
Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS
- Marketing
Marketing segment profitability is dependent upon the spread between the price paid to suppliers for the commodity purchased (i.e., crude oil, natural gas or refined products) and the sales price to the end market customer, less distribution costs. Since the Company is marketing a commodity, the gross purchase price at the supplier level and the gross sales price at the customer level tend to move in unison. However, the spread between purchase and sales contracts will vary with localized supply and demand conditions. In a commodity business, operating margins as a percentage of gross revenues are typically very narrow; e.g., less than 1/2 of 1% in the case of crude oil. As a small margin, high volume business, a relatively minor change in the spread can have a significant impact on earnings.
Substantially all of the Company's marketing revenues and operating earnings are derived from the purchase and sale of crude oil. The strategy for crude oil marketing is to link purchase and sales contracts to established quotations that move with general market trends. Thus, the Company is insulated from the impact of general movements in world crude oil prices. While the Company policy is designed to minimize market risk, some degree of exposure to unforeseen market conditions remains.
Marketing division revenues, operating earnings and significant operating statistics were as follows (in thousands except barrel and price information):
(1) Reflects the volume of crude purchased from third parties at the lease level and shipped to market.
Sustained volume growth has increased or at least maintained gross revenues during a period of generally falling commodity prices. The spread between the commodity acquisition cost and the ultimate sales realization is the most significant determinant of profitability. The year 1996 offered exceptional margins while spreads were very narrow during 1997. The margins available in 1998 were fairly normal and the Company utilized its volume growth to improve earnings.
Because of its effect on inventory valuation, both 1998 and 1997 earnings were adversely affected by the general crude oil price decline. As a shipper of crude oil on common carrier pipelines, the Company is required to carry its pro-rata share of line fill. When crude oil prices fell from $25 per barrel at the end 1996, to $17 per barrel at year-end 1997, and to $10 per barrel at the end of 1998, the Company recognized a $1.3 million and a $1.1 million inventory valuation write-down in 1998 and 1997, respectively. As of December 31, 1998 the Company was holding approximately 673,000 barrels of crude oil inventory valued at approximately $10.09 per barrel.
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- Transportation
Transportation revenues and operating earnings were as follows (in thousands):
(1) Represents the percentage increase (decrease) from the prior year.
Initially in early 1997, the Company was able to increase its transportation revenues because of strong customer demand. This demand improvement was consistent with the generally strong United States economy existing at the time. In response to projected demand, the Company began to expand its fleet and terminal capacity. This allowed the Company to continue sales growth. As sales volume began to grow in 1997, operating earnings improved as a direct result of the increased demand. Because of the fixed costs associated with a trucking operation, on a percentage basis in 1997, operating earnings improved at a faster rate than revenues.
Beginning in early 1998 the United States economy slowed and while still growing, demand for the Company's petrochemical trucking services did not meet projections. With the new expanded capacity, higher fixed costs caused 1998 operating earnings to be reduced in spite of still increasing revenues and demand. As presently configured the Transportation division's fixed costs are approximately $18 million per year and consist primarily of tractor-trailer rentals, insurance, depreciation and terminal operating expenses. Variable costs, which typically approximate 33 percent of gross revenues, consist primarily of drivers' wages and fuel. As a result of varying demand conditions, revenues and operating earnings may experience significant variations between periods.
- Oil and Gas
Oil and gas division revenues and operating earnings are primarily derived from crude oil and natural gas production volumes and prices. Comparative amounts are as follows (in thousands except average price data):
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Oil and gas revenues and operating earnings were consistent in 1996 and 1997 as prices were stable and new production from current drilling efforts offset normal production declines. Revenues and earnings declined in 1998, however, as prices fell without offsetting new volume. In addition, the prolonged period of price declines necessitated an approximate $1 million write-down in the carrying value of certain oil and gas properties. Further, the Company incurred and expensed $1.4 million of 3D seismic costs during the current year. This combination of factors produced the $1.8 million operating loss in 1998.
Other Income (Expense)
Property sales and other income in 1998 includes $179,000 of interest income and $182,000 in gains from various property and equipment sales. Other income for 1997 includes $179,000 of interest income, a $400,000 recovery from an insurance carrier and a $230,000 gain realized on the sale of twenty-one truck tractors. Seven tank trailers were sold in 1996 for a $168,000 gain.
LIQUIDITY AND CAPITAL RESOURCES
Overview
The Company's liquidity and its capital investment program are primarily a function of annual net earnings as adjusted by the non-cash provision for depreciation, depletion, and amortization. In recent years, the Company has utilized its available cash flow to make discretionary investments in its oil and gas, transportation and marketing businesses. The table below illustrates this relationship.
Historically, the Company's operating earnings from its diversified operations have been stable and reliable. Management relies on the continued stability of this earnings stream in making capital project decisions. All capital projects are divided into manageable segments and the timing of their implementation is accelerated or delayed based on current cash flows.
The balancing factor for the Company's short term cash needs is the Company's bank line of credit. For the past five years the Company has maintained an approximate $4 - 9 million outstanding balance on its bank line of credit. Day-to-day fluctuations in cash flow needs are accommodated by daily borrowing or repayments on the line of credit. While the Company's bank line of credit is fully secured, the bank is primarily relying on the Company's ability to generate cash flow from continuing operations for repayment. At year-end 1998, the Company's balance of bank debt outstanding ($9.1 million) was balanced by the Company's cash balance of $10.2 million.
Also important to liquidity and capital availability is the Company's ability to conduct its truck
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fleet management program through lease financing transactions. The Company has readily found lease financing from a number of major national leasing concerns. See Note 7 to Consolidated Financial Statements. The Company's philosophy is to maintain a modern, up-to-date fleet of tractors and trailers to accommodate demand for its services. This requires frequent tractor replacements as well as modest growth in the size of the fleet. Since there is a large active secondary market for truck-tractors, historically, the Company has realized gains upon the disposition of such equipment.
Due to the high volume of the Company's transactions, the components of working capital such as accounts receivable and accounts payable can fluctuate dramatically from day to day. No particular significance should be ascribed to such variations. A key factor that provides order and discipline for cash flow is the practice of the crude oil industry to settle all accounts by cash payment on the 20th of the month following inception of the transaction. Since 90% of the Company's business is tied to crude oil marketing, this settlement process is critical. The Company relies on payments received from its customers to satisfy the requirements to pay its suppliers on the same day. See Note 4 to Consolidated Financial Statements for a discussion of "Concentration of Credit Risk."
Banking Relationships
The Company's bank loan agreement provides for two separate lines of credit with interest at the bank's prime rate minus 1%. The agreement also provides for an interest rate option at the lender's quoted Eurodollar rate (LIBOR) plus 2%. The working capital loan provides for borrowings up to $5,000,000 based on 80% of eligible accounts receivable and 50% of eligible inventories. Available capacity under the line is calculated monthly and as of December 31, 1998 was established at $4,400,000. The oil and gas production loan provides for flexible borrowings subject to a borrowing base established semi-annually by the bank. The borrowing base is presently established at $5,500,000, with the next scheduled redetermination date being September 1, 1999. The working capital loans also provide for the issuance of letters of credit. The amount of each letter of credit obligation is deducted from the borrowing capacity. The line of credit loans are scheduled to expire on October 27, 2000, with the then present balance outstanding converting to a term loan payable in 12 equal quarterly installments. As of December 31, 1998, bank debt outstanding under the Company's two revolving credit facilities totaled $9,100,000, with letters of credit outstanding totaling $25,000.
The Company's GulfMark subsidiary maintains a separate banking relationship in order to support its crude oil purchasing activities. GulfMark has established a bank letter of credit facility that is maintained on a month-to-month basis in order to secure the purchase of crude oil. In addition to providing letters of credit, GulfMark's banking institution will also finance up to $5,000,000 of crude oil inventory and certain accounts receivable associated with crude oil sales. Such financing is provided on a demand note basis with interest at the bank's prime rate plus 1 percent. As of December 31, 1998 the Company had $6.8 million of eligible crude oil inventory, however, no amounts were outstanding under this facility.
Investment Activities
During 1998, the Company invested approximately $3 million in oil and gas projects, $4.4 million for expansion of its truck terminals and fleet and $.6 million for the completion of construction on its 7.5 mile offshore crude oil gathering pipeline. An additional $2.8 million was invested in facilities, trucks and equipment for the Company's marketing operations. Oil and gas exploration and development efforts continue and the Company plans to invest approximately $5 million toward such projects in 1999. An additional $2 million is anticipated to be invested during 1999 toward the Company's marketing activities.
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During 1998, the Company entered into certain operating lease transactions in order to acquire 90 tractors and 71 trailers for use in its common carrier fleet. Further, during 1999 the Company anticipates entering into certain operating lease transactions in order to acquire approximately 30 additional tractors and 20 trailers for use in its trucking fleet. Annual lease costs associated with the planned 1999 additions are estimated to be $500,000.
Year 2000
Many currently installed computer systems and software products are coded to accept only two digit entries in the date code field. Beginning in the year 2000, these date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, computer systems and software used by many companies may need to be upgraded to comply with such "Year 2000" requirements. Significant uncertainty exists concerning the potential effects associated with such compliance, but systems that do not properly recognize such information could generate erroneous data or cause a system to fail.
The Company has completed a review of its key computer systems and is in the process of implementing certain new operating systems applications necessary to resolve potential year 2000 compliance issues. Many of the Company's operating and financial systems are already compliant. The Company's remaining operating and financial systems are scheduled for compliance in phases and will be compliant by the year 2000.
The Company is communicating with software vendors, business partners and others with which it conducts business to provide assurances that their systems will be year 2000 compliant. Adams could be adversely affected by the failure of these unaffiliated companies to adequately address the year 2000 issue. Contingency planning will be included in this assessment to identify arrangements to mitigate the impact of disruptions from outside sources.
As of year-end 1998, the Company had incurred and expensed approximately $150,000 of costs to become year 2000 compliant. An additional $50,000 is expected to be incurred and expensed in 1999 in order to complete this project.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is exposed to market risk, including adverse changes in commodity prices and interest rates as discussed below.
Commodity Price Risk.
The Company's major market risk exposure is in the pricing applicable to its marketing of crude oil and its production of crude oil and natural gas. Realized pricing is primarily driven by the prevailing worldwide price for crude oil and spot prices applicable to oil and gas.
Commodity price risk in the Company's marketing operations represents the potential loss that may result from a change in the market value of an asset or a commitment. As part of its crude oil marketing operations, the Company enters into forward contracts to minimize the impact of market
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fluctuations on its purchases of crude oil. The Company also enters into natural gas price support contracts with certain customers to secure a floor price on the purchase of certain natural gas supply. In each instance, the Company locks in a separate matching price support contract with a third party in order to minimize the risk of these financial instruments. The crude oil forward contracts are no longer than one year in duration. The Company monitors all commitments and positions to ensure that all positions are effectively balanced. At December 31, 1998 the Company had an insignificant gain on its open positions.
Historically, prices received for oil and gas production have been volatile and unpredictable. Pricing volatility is expected to continue. Gas price realizations ranged from a monthly low of $1.51 per Mcf to a monthly high of $2.22 per Mcf during 1998. Oil prices ranged from a low of $9.87 per barrel to a high of $15.01 per barrel during the same period.
Interest Rate Risk.
Total long-term debt at December 31, 1998 included $9,100,000 of floating rate debt. As a result, the Company's annual interest costs in 1999 will fluctuate based on interest rate changes. Because the interest rate on the Company's long-term debt is a floating rate, the fair value approximates carrying value as of December 31, 1998. A hypothetical 10 percent adverse change in the floating rate would not have had a material effect on the Company's results of operations for the fiscal year ending December 31, 1998.
II-8 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
Item 8.
Item 8.
II-9
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Adams Resources & Energy, Inc.:
We have audited the accompanying consolidated balance sheet of Adams Resources & Energy, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1998 and 1997, and the related consolidated statements of earnings, shareholders' equity and cash flows for each of the three years in the period ended December 31, 1998. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Adams Resources & Energy, Inc. and subsidiaries as of December 31, 1998 and 1997, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1998, in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
Houston, Texas March 11, 1999
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
The accompanying notes are an integral part of these financial statements.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
The accompanying notes are an integral part of these financial statements.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Adams Resources & Energy, Inc., a Delaware corporation, and its subsidiaries (the "Company") after elimination of all significant intercompany accounts and transactions. The Company accounts for its operating or working interests in oil and gas joint ventures through pro-rata consolidation.
Nature of Operations
The Company is engaged in the business of oil and gas exploration and production, crude oil marketing, petroleum products marketing and tank truck transportation of petroleum products and liquid chemicals. Its primary area of operation is within a 500 mile radius of Houston, Texas.
Cash and Cash Equivalents
Cash and cash equivalents include any treasury bill, commercial paper, money market fund or federal fund with a maturity of 30 days or less. Included in the cash balance at December 31, 1998 and 1997 is a $2 million deposit to collateralize the Company's month-to-month crude oil letter of credit facility. See Note 2 to Consolidated Financial Statements.
Inventories
Crude oil and petroleum products inventories are carried at the lower of cost or market. Petroleum products inventories include gasoline, lubricating oils and other petroleum products purchased for resale and are priced at cost determined primarily on the first-in, first-out basis, while crude oil inventory is priced at average cost. Materials and supplies inventories are included in inventories at specific cost, with a valuation allowance provided if needed. Components of inventory are as follows (in thousands):
Property and Equipment
Expenditures for major renewals and betterments are capitalized, and expenditures for maintenance and repairs are expensed as incurred. Interest costs incurred in connection with major capital expenditures are capitalized and amortized over the lives of the related assets. When properties are retired or sold, the related cost and accumulated depreciation, depletion and amortization ("DD&A") are removed from the accounts and any gain or loss is reflected in earnings.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Oil and gas exploration and development expenditures are accounted for in accordance with the successful efforts method of accounting. Direct costs of acquiring developed or undeveloped leasehold acreage, including lease bonus, brokerage and other fees, are capitalized. Exploratory drilling costs are initially capitalized until the properties are evaluated and determined to be either productive or nonproductive. If an exploratory well is determined to be nonproductive, the capitalized costs of drilling the well are charged to expense. Costs incurred to drill and complete development wells, including dry holes, are capitalized.
Producing oil and gas leases, equipment and intangible drilling costs are depleted or amortized over the estimated recoverable reserves using the units-of-production method. Other property and equipment is depreciated using the straight-line method over the estimated average useful lives of eight to twenty years for marketing, three to fifteen years for transportation and ten to twenty years for all others. The 1996 provision for depreciation, depletion and amortization includes a $1,167,000 asset impairment recognized by the Company on certain refined product marketing facilities and equipment. The impairment was recorded because of continued operating and cash flow losses associated with these assets.
Statement of Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment of Long-Lived Assets to be Disposed of" requires that long-lived assets be reviewed for impairment whenever there is evidence that the carrying value of such assets may not be recoverable. This consists of comparing the carrying value of the asset with the asset's expected future undiscounted cash flows without interest costs. Estimates of expected future cash flows are to represent management's best estimate based on reasonable and supportable assumptions. The Company reviews its proved oil and gas properties on a field by field basis when such evidence exists. Any impairment recognized in accordance with SFAS No. 121 is permanent and may not be restored. Due principally to the prolonged depressed state of oil and natural gas prices, one of the Company's proved oil and gas fields was deemed impaired because it was not expected to individually recover its entire carrying value. A $1 million charge for this asset impairment was included in 1998 DD&A.
Other Assets
Included in other assets is $1,195,000 held in escrow as part of the Company's efforts to comply with State of Kentucky regulations governing certain of the Company's former coal mining operations. The Company has submitted all documentation necessary to obtain final approval for land reclamation on a 280 acre tract in Kentucky. When the State issues its final approval, the escrowed cash will be returned to the Company.
Crude Oil Marketing Activities
The Company enters into forward contracts to minimize the impact of market fluctuations on its purchases of crude oil. The Company does not consider these contracts to be financial instruments since the contracts permit settlement in the delivery of crude oil. These contracts are no longer than one year in duration. Gains and losses due to changes in the underlying market value of crude oil are recognized in cost of sales in the month of physical delivery.
The Company also utilizes swap agreements with two counterparties, which are financial instruments requiring payments to (or receipt of payments from) counterparties based on the differential between a fixed and variable price for stated volumes over a contractual period of time.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For each swap agreement written, the Company enters into an offsetting swap agreement with a separate counterparty. These swap agreements are accounted for using the mark-to-market method of accounting and the gain or loss is recorded in cost of sales in the period of change in the market value. Gains and losses on these agreements were immaterial to the Company for the years ended December 31, 1997 and 1996. No such agreements were utilized in 1998.
Statement of Cash Flows
Interest paid totaled $327,000, $323,000 and $619,000 during the years ended December 31, 1998, 1997 and 1996, respectively. Income taxes paid during these same periods totaled $566,000, $2,075,000 and $564,000, respectively.
Earnings Per Share
The Company computes and presents earnings per share in accordance with SFAS No. 128, "Earnings Per Share", which requires the presentation of basic earnings per share and fully diluted earnings per share for potentially dilutive securities. Earnings per share are based on the weighted average number of shares of common stock and common stock equivalents outstanding during the period. Such shares outstanding averaged 4,217,596 for 1998, 4,210,471 for 1997, and 4,200,225 for 1996.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Examples of significant estimates used in the accompanying consolidated financial statements include the accounting for depreciation, depletion and amortization, income taxes and contingencies.
Recent Accounting Pronouncements
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive Income." The statement establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The statement requires (a) classification of items of other comprehensive income by their nature in a financial statement and (b) display of the accumulated balance of other comprehensive income separate from retained earnings and additional paid-in capital in the equity section of the balance sheet. SFAS No. 130 is effective for fiscal years beginning after December 15, 1997 and reclassification of financial statements for earlier periods provided for comparative purposes is required. There were no differences between comprehensive and net income for the periods presented.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." The Statement establishes accounting and reporting standards requiring that every derivative instrument (including certain derivative instruments embedded in other contracts) be recorded in the balance sheet as either an asset or liability measured at its fair value. The Statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Qualifying hedges allow a derivative's gains
II-17 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
and losses to offset related results on the hedged item in the income statement, and requires that a company must formally document, designate, and assess the effectiveness of transactions that receive hedge accounting. SFAS No. 133 is effective for fiscal years beginning after June 15, 1999. The standard cannot be applied retroactively but early adoption is permitted. The Company has not yet determined the impacts of adopting SFAS No. 133; however, this standard could increase volatility in earnings and shareholders' equity, through other comprehensive income.
In December 1998, the Emerging Issues Task Force ("EITF") reached a consensus on Issue 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." EITF 98-10 is effective for fiscal years beginning after December 15, 1998, and requires energy trading contracts to be recorded at fair value on the balance sheet, with the change in fair value to be recorded in earnings. The effect of initial application of EITF 98-10 will be recorded as a cumulative effect of a change in accounting principle. Management believes that the adoption of EITF 98-10 will not have a material impact on its financial position or results of operations.
(2) LONG-TERM DEBT
Long-term debt is comprised of the following (in thousands):
The Company's revolving bank loan agreement provides for two separate lines of credit with interest at the bank's prime rate minus 1%. The agreement also provides for an interest rate option at the lender's quoted Eurodollar rate (LIBOR) plus 2%. The first line of credit or working capital loan provides for borrowings up to $5,000,000 based on the total of 80% of eligible accounts receivable and 50% of eligible inventories. Available borrowing capacity under the working capital line is calculated monthly and as of December 31, 1998 was established at $4,400,000 with $3,625,000 outstanding at year end 1998. The second line of credit or oil and gas production loan provides for flexible borrowings, subject to a borrowing base established semi-annually by the bank. The borrowing base is presently established at $5,500,000, with the next scheduled redetermination date being September 1, 1999. As of December 31, 1998, $5,475,000 was outstanding under the oil and gas production loan facility. The working capital loans also provide for the issuance of letters of credit. The amount of each letter of credit obligation is deducted from the borrowing capacity. As of December 31, 1998, letters of credit under this
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
facility totaled $25,000. The revolving line of credit loans are scheduled to expire on October 27, 2000, with the then present balance outstanding converting to a term loan payable in 12 equal quarterly installments.
The revolving loan agreement, among other things, places certain restrictions on the Company with respect to additional borrowings and the purchase or sale of assets, as well as requiring the Company to comply with certain financial covenants, including maintaining a 1.0 to 1.0 ratio of consolidated current assets to consolidated current liabilities. The Company is also required to restrict from dividend payment at least 50% of annual net income. At December 31, 1998, the Company was in compliance with all loan covenants.
A subsidiary of the Company (GulfMark) maintains a separate banking relationship to provide letters of credit and to provide financing for up to $5 million of crude oil inventories and certain accounts receivable associated with sales of crude oil. Such financing is provided on a demand note basis with interest at the bank's prime rate plus 1 percent. The letter of credit and demand note facilities are secured by substantially all of GulfMark's assets. GulfMark had approximately $105 million and $85 million in letters of credit outstanding as of December 31, 1998 and 1997, respectively, in support of its crude oil purchasing activities. As of December 31, 1998, the Company had $6.8 million of eligible crude oil inventory, however, no amounts were outstanding under the GulfMark term loan facility.
The Company's weighted average effective interest rate for 1998, 1997, and 1996 was 6.75%, 7.5% and 7.9%, respectively. No interest was capitalized during 1998, 1997 or 1996. At December 31, 1998, the scheduled aggregate principal maturities of the Company's long-term debt are: 1999 - None; 2000 - $758,333; 2001 - $3,033,333; and 2002 - $3,033,333; 2003 - $2,275,001.
(3) INCOME TAXES
The following table shows the components of the Company's income tax provision (in thousands):
As of December 31, 1998 and 1997, the Company's deferred tax liability totaled $560,000 and $229,000, respectively, and consisted principally of book basis in excess of the underlying tax basis of fixed assets.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
A reconciliation of taxes computed at the corporate federal income tax rate to the reported income tax provision is as follows (in thousands):
(4) FAIR VALUE OF FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Fair Value of Financial Instruments
Cash Equivalents, Long and Short Term Debt
The carrying amount of cash equivalents are assumed to approximate their fair values because of the short maturities of these instruments. Substantially all of the Company's long and short term debt obligations bear interest at floating rates. As such, carrying amounts approximate fair values.
Trading Activities
During 1997 and 1996, the Company entered into swap agreements which required payments to (or receipt of payments from) counterparties based on the differential between a fixed and variable price for the commodities specified. The Company accounted for these agreements using the mark-to-market method of accounting and recorded the gain or loss as a cost of sales in the period of change in the market with an offsetting entry to trade accounts receivable or payable as appropriate. This activity was not material to the Company's financial position or results of operations in 1997 or 1996. No such agreements were entered into in 1998.
The Company does not consider its forward contracts to be financial instruments since the contracts permit settlement through the delivery of crude oil.
Concentration of Credit Risk
Credit risk represents the account loss which the Company would absorb if its customers failed to perform pursuant to contractual terms. Management of credit risk involves a number of considerations, such as the financial profile of the customer, the value of collateral held, if any, specific terms and duration of the contractual agreement, and the customer's sensitivity to economic developments. The Company has established various procedures to manage credit exposure, including initial credit approval, credit limits, and rights of offset. Letters of credit and guarantees are also utilized to limit credit risk.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company's largest customers consist of large multinational integrated oil companies. In addition, the Company transacts business with independent oil producers, major chemical concerns, crude oil trading companies and a variety of commercial energy users. Accounts receivable associated with crude oil marketing activities comprise approximately 90% of the Company's total receivables as of December 31, 1998, and industry practice requires payment for purchases of crude oil to take place on the 20th of the month following a transaction. The Company's credit policy and the relatively short duration of receivables mitigates the amount of the allowance for doubtful accounts required. The Company had accounts receivable from two customers that comprised 16% and 15%, respectively, of total receivables at December 31, 1998 and from one customer that comprised 20% of total receivables at December 31, 1997.
An allowance for doubtful accounts is provided on non-crude oil marketing receivables and accounts receivable are net of allowances for doubtful accounts at December 31, 1998 and 1997, of $235,000 and $98,000, respectively.
(5) EMPLOYEE BENEFITS
The Company's 1984 stock option plan authorized the granting of incentive stock options or non-qualified stock options to certain executives and key employees to purchase an aggregate of 125,000 shares of common stock at not less than the fair market value at the date of grant. The plan expired in 1994 with respect to the granting of additional stock options. During 1997, 14,250 stock options were exercised at prices ranging from $3.625 to $4.75 per share. During 1996, 5,750 stock options were exercised at prices ranging from $3.625 to $4.75 per share. As of December 31, 1997, the plan was terminated and all unexecuted options expired.
The Company maintains a 401(k) plan for the benefit of its employees. Company contributions to the plan were $210,000 in 1998, $180,000 in 1997, and $180,000 in 1996.
(6) TRANSACTIONS WITH RELATED PARTIES
Sakco, Ltd. ("Sakco") and Kasco, Ltd. ("Kasco"), family limited partnerships of which Mr. K. S. Adams, Jr., Chairman and President, is a limited partner, Sakdril, Inc. ("Sakdril"), a wholly owned subsidiary of KSA Industries Inc. (KSAI), a major stockholder of the Company, and certain officers and members of the Board of Directors of the Company have participated as working interest owners in certain oil and gas wells and programs drilled or administered by the Company. Sakco, Kasco, Sakdril and the officers and directors participated in each of the wells and programs under terms no better than those afforded other non-affiliated working interest owners. Associated with this activity, as of December 31, 1998, the Company was owed $40,000 from Kasco and Sakco, and the Company owed $285,000 to Kasco and Sakco. As of December 31, 1997, the Company was owed $38,000 from Kasco and Sakco, and the Company owed $720,000 to Kasco and Sakco.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
David B. Hurst, Secretary of the Company, is a partner in the law firm of Chaffin & Hurst. The Company has been represented by Chaffin & Hurst since 1974 and plans to use the services of that firm in the future. Chaffin & Hurst currently leases office space from the Company. Such transactions with Chaffin & Hurst are on the same terms as those prevailing at the time for comparable transactions with unrelated entities.
The Company also enters into certain transactions in the normal course of business with other affiliated entities. These transactions with affiliated companies are on the same terms as those prevailing at the time for comparable transactions with unrelated entities.
(7) COMMITMENTS AND CONTINGENCIES
The Company has operating lease arrangements for tractors, trailers, office space, warehousing and other equipment and facilities. Rental expense for the years ended December 31, 1998, 1997, and 1996 was $7,093,000, $5,933,000 and $3,827,000, respectively. At December 31, 1998, commitments under long-term noncancelable operating leases for the next five years and thereafter are payable as follows: 1999 - $4,787,000; 2000 - $4,054,000; 2001 - $3,827,000; 2002 - $2,984,000; 2003 - $2,139,000; 2004 and thereafter - $2,331,000.
The Company's subsidiary, Ada Crude Oil Company (Ada), has been named as one of sixty-three defendants in a lawsuit styled The State of Texas et al vs Amerada Hess Corporation. The suit alleges, among other claims, that the defendants as "common purchasers of oil" discriminated against the plaintiffs in favor of the defendants' own production and that of others. The plaintiffs also seek class certification. In response, the Company has filed a general denial and has asserted a number of affirmative defenses. Attorneys for the plantiff reviewed Ada's response and subsequently informed the Company that Ada has been recommended for dismissal from the lawsuit. This recommendation is currently under review by the plantiff. The Company will continue to vigorously contest this matter and does not expect it to have a significant adverse effect on its financial position or results of operations.
In the normal course of business, the Company and its subsidiaries become involved in litigation incident to operations. In management's opinion, the ultimate resolution of all litigation matters and disputes will not have a material adverse impact on the Company's financial position or results of operations.
(8) SEGMENT REPORTING
In June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." Under this new standard, companies are required to report certain information about operating segments in consolidated statements. Operating segments are determined based on the method by which management organizes its business for making operating decisions and assessing performance. The standard also requires that companies report certain information about their products and services, the geographic areas in which they operate, and their major customers. The Company adopted SAFS No. 131 effective January 1, 1998. Previous presentation of segment information reflected management's view of its operations and, as such, adoption of this standard did not alter the segment information that follows.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company is primarily engaged in the business of crude oil and petroleum products marketing, transportation, and oil and gas exploration and production. Information concerning the Company's various business activities is summarized as follows (in thousands):
- --------------------
(1) Includes a $5,899,000 comparative earnings decrease caused by 3D seismic expense, decreased crude oil and natural gas prices and a related write-down of oil and gas properties.
Intersegment sales are insignificant. Other identifiable assets are primarily corporate cash, accounts receivable, and properties not identified with any specific segment of the Company's business. All sales by the Company occurred in the United States.
During 1998, the Company had sales to one customer that totaled $319 million or more than 10% of total sales. During 1997 and 1996, the Company had sales to two customers which totaled more than 10% of total sales. Such sales totaled $267 million and $261 million in 1997 and $166 million and $151 million, in 1996.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Earnings from operations by segment represent revenues less operating costs and expenses and depreciation, depletion and amortization and are reconciled to earnings from operations before income taxes, as follows (in thousands):
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
Quarterly Financial Data (Unaudited) -
Selected quarterly financial data and earnings per share of the Company are presented below for the years ended December 31, 1998 and 1997 (in thousands, except per share data):
- -----------------
(1) Reflects basic and diluted earnings per share for indicated periods.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
Oil and Gas Producing Activities (Unaudited) -
Total costs incurred in oil and gas exploration and development activities, all incurred within the United States, were as follows (in thousands, except per barrel information):
The aggregate capitalized costs relative to oil and gas producing activities are as follows (in thousands):
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
Estimated Oil and Natural Gas Reserves (Unaudited) -
The following information regarding estimates of the Company's proved oil and gas reserves, all located in the United States, is based on reports prepared on behalf of the Company by independent petroleum engineers, Ryder Scott Company. Because oil and gas reserve estimates are inherently imprecise and require extensive judgments of reservoir engineering data, they are generally less precise than estimates made in conjunction with financial disclosures. The revisions of previous estimates as reflected in the table below result from more precise engineering calculations based upon additional production histories.
Standardized Measure of Discounted Future Net Cash Flows from Oil and Gas Operations and Changes Therein (Unaudited) -
The standardized measure of discounted future net cash flows was determined based on the economic conditions in effect at the end of the years presented, except in those instances where fixed and determinable gas price escalations are included in contracts. The disclosures below do not purport to present the fair market value of the Company's oil and gas reserves. An estimate of the fair market value would also take into account, among other things, the recovery of reserves in excess of proved reserves, anticipated future changes in prices and costs, a discount factor more representative of the time value of money and risks inherent in reserve estimates.
The reserve estimates provided at December 31, 1998 are based on oil prices of approximately $9.87 per barrel and gas prices of approximately $1.86 per Mcf. In most instances, the Company's natural gas sales contracts provide for the Company to receive a percentage of the combined proceeds from the sales of natural gas and associated natural gas liquids. Therefore, average natural gas prices reported herein include the value of associated natural gas liquids.
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
The following are the principal sources of changes in the standardized measure of discounted future net cash flows:
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ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES
SUPPLEMENTARY FINANCIAL DATA
Results of Operations for Oil and Gas Producing Activities (Unaudited) -
The results of oil and gas producing activities, excluding corporate overhead and interest costs, are as follows:
Item 9.
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
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PART III
Item 10.
Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The information concerning executive officers of the Company is included in Part I. The information concerning directors of the Company is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 28, 1999, to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K.
Item 11.
Item 11. EXECUTIVE COMPENSATION
Item 12.
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Item 13.
Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Items 11, 12 and 13 is incorporated by reference from the Company's definitive Proxy Statement for the Annual Meeting of Shareholders to be held April 28, 1999, to be filed with the Commission not later than 120 days after the end of the fiscal year covered by this Form 10-K.
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PART IV
Item 14.
Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) The following documents are filed as a part of this Form 10-K:
1. Financial Statements
Report of Independent Public Accountants
Consolidated Balance Sheet as of December 31, 1998 and 1997
Consolidated Statement of Earnings for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996
Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996
Notes to Consolidated Financial Statements
Supplementary Financial Data (All unaudited)
2. Exhibits required to be filed
3(a) - Certificate of Incorporation of the Company, as amended. (Incorporated by reference to Exhibit 3(a) filed with the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1987)
3(b) - Bylaws of the Company, as amended (Incorporated by reference to Exhibits 3.2 and 3.2.1 of Amendment No. 1 to the Registration Statement on Form S-1 filed with the Securities and Exchange Commission on October 29, 1973 - File No. 2-48144)
3(c) - Amendment to the Bylaws of the Company to add an Article VII, Section 8. Indemnification of Directors, Officers, Employees and Agents (Incorporated by reference to Exhibit 3(c) of the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1986)
4(a) - Specimen common stock Certificate (Incorporated by reference to Exhibit 4(a) of the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1991)
IV-1
4(c)* - Fifth Amendment to Loan Agreement between Service Transport Company et al and NationsBank of Texas N.A. dated September 30, 1997.
21* - Subsidiaries of the Registrant
27* - Financial Data Schedule
- ------------------------------ * - Filed herewith
All other financial schedules have been omitted because they are not applicable or the required information is shown in the financial statements or notes thereto.
The separate financial statements of Adams Resources & Energy, Inc. (the "Parent") are omitted because the conditions specified in Rules 5-04 and 12-04 of regulation S-X are met.
Copies of all agreements defining the rights of holders of long-term debt of the Company and its subsidiaries, which agreements authorize amounts not in excess of 10% of the total consolidated assets of the Company, are not filed herewith but will be furnished to the Commission upon request.
IV-2
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
ADAMS RESOURCES & ENERGY, INC. (Registrant)
By /s/ RICHARD B. ABSHIRE By /s/ K. S. ADAMS, JR. ------------------------------------ -------------------------------- (Richard B. Abshire, (K. S. Adams, Jr., Vice President-Finance, Director President,Chairman of the Board, and Chief Financial Officer) and Chief Executive Officer)
Date: March 11, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the date indicated.
By /s/ CLAUDE H. LEWIS By /s/ E. C. REINAUER, JR. ------------------------------------ -------------------------------- (Claude H. Lewis, Director) (E. C. Reinauer, Jr., Director)
By /s/ THOMAS S. SMITH By /s/ E. JACK WEBSTER, JR. ------------------------------------ -------------------------------- (Thomas S. Smith, Director) (E. Jack Webster, Jr., Director)
By /s/ JUANITA G. SIMMONS By /s/ EDWARD WIECK ------------------------------------ -------------------------------- (Juanita G. Simmons, Director) (Edward Wieck, Director)
By /s/ JOHN A. BARRETT ------------------------------------ (John A. Barrett, Director
Date: March 11, 1999
V-1
EXHIBIT INDEX
- ------------------------------ * - Filed herewith
V-2