-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Q0GIkiDBh/oLO+pMyCuxCmRei5rzF3ls/VXk9A2vFUJ2tbac7BwSp1c4he2v+o1M jEVTkF+pgGTZ4HCA97J7GQ== 0000950129-99-001021.txt : 19990318 0000950129-99-001021.hdr.sgml : 19990318 ACCESSION NUMBER: 0000950129-99-001021 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 19981231 FILED AS OF DATE: 19990317 FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAMS RESOURCES & ENERGY INC CENTRAL INDEX KEY: 0000002178 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PETROLEUM & PETROLEUM PRODUCTS (NO BULK STATIONS) [5172] IRS NUMBER: 741753147 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-07908 FILM NUMBER: 99567174 BUSINESS ADDRESS: STREET 1: 6603 KIRBYVILLE STREET 2: P O BOX 844 CITY: HOUSTON STATE: TX ZIP: 77033 BUSINESS PHONE: 7136400100 MAIL ADDRESS: STREET 1: P O BOX 844 CITY: HOUSTON STATE: TX ZIP: 77001 FORMER COMPANY: FORMER CONFORMED NAME: ADA RESOURCES INC DATE OF NAME CHANGE: 19790620 10-K405 1 ADAMS RESOURCES & ENERGY, INC. - DATED 12/31/98 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-K (Mark One) X ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES ----- EXCHANGE ACT OF 1934 (FEE REQUIRED) For the Fiscal Year ended December 31, 1998 OR TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE ----- SECURITIES EXCHANGE ACT OF 1934 (NO FEE REQUIRED) For the Transition Period from __________ to _________ Commission File Number 1-7908 ADAMS RESOURCES & ENERGY, INC. (Exact name of registrant as specified in its charter) DELAWARE 74-1753147 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation or organization) 5 POST OAK PARK STE. 2700 HOUSTON, TEXAS 77027 (Address of Principal executive offices) (Zip Code) Registrant's telephone number, including area code: (713) 881-3600 SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT: Title of each class Name of each exchange on which registered ------------------- ----------------------------------------- COMMON STOCK, $.10 PAR VALUE AMERICAN STOCK EXCHANGE SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT: NONE Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X] Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to the filing requirements for the past 90 days. YES [X] NO [ ] A total of 4,217,596 shares of Common Stock were outstanding at March 11, 1999. The aggregate market value of the voting stock held by nonaffiliates as of March 11, 1999 was $14,604,871. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Proxy Statement for Annual Meeting of Stockholders to be held April 28, 1999 are incorporated by reference in Part III. 2 PART I Items 1 and 2. BUSINESS AND PROPERTIES. General Adams Resources & Energy, Inc. and its subsidiaries (the "Company") are engaged in the business of crude oil and petroleum products marketing, tank truck transportation of liquid chemicals, and oil and gas exploration and production. The revenues and operating earnings for each industry segment and the identifiable assets attributable to each industry segment for the three years ended December 31, 1998 are set forth in Note 8 of the Notes to Consolidated Financial Statements included elsewhere herein. Marketing Through its subsidiary, GulfMark Energy, Inc., the Company purchases crude oil at the wellhead and arranges transportation to refiners and other customers. The crude oil is transported via common carrier pipeline, barge or truck. Activity is primarily concentrated offshore Louisiana and onshore in Texas. Wellhead purchases of crude oil currently approximate 170,000 barrels per day. As part of this business, the Company operates 55 tractor-trailer rigs and maintains over 100 pipeline inventory locations or injection stations. In addition, the Company owns and operates a 7.5 mile 6 inch crude oil gathering pipeline in the Louisiana offshore, Ship Shoal, area. Two separate crude oil pipeline systems in the Gulf Coast region of Texas are also owned and operated by the Company. Crude oil is generally purchased at indexed prices that fluctuate with market conditions. The crude oil is transported and either sold outright at the field level or buy-sell arrangements (trades) are made in order to minimize transportation or maximize the sales price. Except in certain limited situations where back-to-back fixed price trades are in place, the contracted sales price is also pegged to an index that fluctuates with market conditions. This reduces the Company's loss exposure from sudden changes in crude oil prices. Sales of crude oil are facilitated in the industry by established trade points that include Cushing, Oklahoma, St. James, Louisiana and Midland, Texas. A key element of profitability is the differential between market prices at the field level and at the various trade points. Such price differentials vary with local supply and demand conditions. Unforeseen fluctuations in price differentials can impact financial results either favorably or unfavorably. In addition, through its trading activities, the Company attempts to capture additional margins that may exist between futures market versus cash market pricing. While the Company's policies are designed to minimize market risk, some degree of exposure to unforeseen fluctuations in market conditions remains. Crude oil marketing revenues totaled $1.9 billion for 1998 and the Company believes alternative customers are available should any of its customers reduce their purchases. I-2 3 Through its subsidiary Ada Resources, Inc., the Company markets branded and unbranded refined petroleum products, such as gasoline and diesel fuel. The marketing service area includes primarily metropolitan Houston and the surrounding one hundred miles. Purchases are made at the suppliers' established jobber prices with such prices generally being lower than the Company's sales price to its customers. The Company is also a supplier of industrial lubricants, oils and greases. The primary product distribution and warehousing facility is located on 5.5 owned acres in Houston, Texas. This property includes a 60,000 square foot warehouse, 11,000 square feet of office space, bulk storage for 25,000 gallons of motor fuels and a storage facility for 200,000 gallons of lubricating oil. Petroleum products marketing revenues totaled $27 million for 1998 and the Company believes alternative customers are available should any of its customers reduce their purchases. Tank Truck Transportation Through its Service Transport Company subsidiary, the Company transports liquid chemicals and petroleum products on a "for hire" basis throughout the Continental United States and Canada. Transportation service is provided to over 400 customers under contracts and on a call and demand basis. Pursuant to regulatory requirements, the Company holds a Hazardous Materials Certificate of Registration issued by the U.S. Department of Transportation. The Company presently operates 227 truck tractors and 377 tank trailers and maintains truck terminals in Houston, Corpus Christi, and Port Nueces, Texas as well as St. Gabriel, Louisiana and Mobile (Saraland), Alabama. Transportation operations are headquartered at the Houston terminal facility. This terminal is situated on 22 owned acres and includes maintenance facilities, an office building and a six bay internal tank washrack and water treatment system. In December 1998, the Company completed construction on its St. Gabriel, Louisiana property. This terminal is now situated on 11.5 owned acres and includes an office building, maintenance bays and a tank cleaning facility. Service Transport Company has maintained its registration to the ISO-9002 Quality Management Standard. The scope of this Quality System Certificate, registered in both the United States and Europe, covers the carriage of bulk liquids throughout their area of operations as well as the tank trailer cleaning facilities and equipment maintenance. The Company's quality management process is one of its major assets. The practice of using statistical process control covering safety, on-time performance and customer satisfaction aids the Company to continuously improve in all areas of quality service to customers. Oil and Gas Exploration and Production The Company is actively engaged in the exploration and development of domestic onshore oil and gas properties primarily in the state of Texas. Exploration offices are maintained at the Company's headquarters in Houston and the Company holds an interest in 252 wells, of which 58 are Company-operated. I-3 4 Producing Wells--The following table sets forth the Company's gross and net productive wells at December 31, 1998. Gross wells are the total number of wells in which the Company has an interest, while net wells are the sum of the fractional interests owned.
Oil Wells Gas Wells Total Wells --------- --------- ----------- Gross Net Gross Net Gross Net ----- ----- ----- ---- ----- ----- Texas 106 17.97 21 5.89 127 23.86 Other 104 4.33 21 2.70 125 7.03 --- ----- ---- ---- --- ----- 210 22.30 42 8.59 252 30.89 === ===== ==== ==== === =====
Acreage--The following table sets forth the Company's gross and net developed and undeveloped acreage as of December 31, 1998.
Developed Acreage Undeveloped Acreage -------------------- ---------------------- Gross Net Gross Net -------- ------ -------- ------ Texas 58,517 10,360 92,647 15,796 Other 7,176 1,777 6,338 1,797 ------ ------ ------ ------ 65,693 12,137 98,985 17,593 ====== ====== ====== ======
Drilling Activity--The following table sets forth the Company's drilling activity for each of the three years during the period ended December 31, 1998. All drilling activity was onshore in Texas and Louisiana.
1998 1997 1996 ------------------ ----------------- --------------- Gross Net Gross Net Gross Net -------- ------ ------- ------ ------ ----- Exploratory wells drilled - Productive 1 .13 -- -- -- -- - Dry 1 .13 -- -- -- -- Development wells drilled - Productive 10 1.82 14 1.99 10 1.62 - Dry -- -- -- -- -- --
In addition to the above drilling activity, at year-end 1998 one exploratory well (.10 net wells) was in process. The well is located in San Miguel County, Colorado. I-4 5 Production and Reserve Information--The Company's estimated net quantities of proved oil and gas reserves, the estimated future net cash flows and present value of future net cash flows from oil and gas reserves before income taxes, calculated at a 10% discount rate for the three years ended December 31, 1998, are presented in the table below.
December 31, -------------------------------------------------- 1998 1997 1996 ---- ---- ---- (In thousands) Crude oil (Barrels) 195 211 225 Natural gas (Mcf) 9,248 9,761 9,834 Future net cash flows $ 12,710 $ 18,468 $ 29,566 Present value of future net cash flows $ 7,606 $ 13,644 $ 21,467
The estimates of the Company's oil and gas reserves and future net revenues therefrom as of December 31, 1998, were made by the Company's independent petroleum engineers, Ryder Scott Company. The reserve estimates provided at December 31, 1998 are based on oil prices of approximately $9.87 per barrel and natural 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 reserve quantities and prices reported herein include the value of associated natural gas liquids. Reserve estimates are based on many judgmental factors. The accuracy of reserve estimates depends on the quantity and quality of geological data, production performance data and reservoir engineering data, as well as the skill and judgment of petroleum engineers in interpreting such data. The process of estimating reserves involves continual revision of estimates (usually on an annual basis) as additional information is made available through drilling, testing, reservoir studies and acquiring historical pressure and production data. In addition, the discounted present value of estimated future net revenues should not be construed as the fair market value of oil and gas producing properties. Such estimates do not necessarily portray a realistic assessment of current value or future performance of such properties. Such revenue calculations are also based on estimates by petroleum engineers as to the timing of oil and gas production, and there is no assurance that the actual timing of production will conform to or approximate such estimates. Also, certain assumptions have been made with respect to pricing; essentially, the estimates assume that prices will remain constant from the date of the engineer's estimates except for changes reflected under natural gas sales contracts. There can be no assurance that actual future prices will not vary as industry conditions, governmental regulation and other factors impact the market price for oil and gas. The Company's net oil and gas production for the three years ended December 31, 1998 has been as follows:
Years Ended Crude Oil Natural December 31, (Barrels) Gas (Mcf) ------------ --------- --------- 1998............................ 68,000 2,552,000 1997............................ 62,000 3,775,000 1996............................ 92,000 3,450,000
I-5 6 Certain financial information relating to the Company's oil and gas activities is summarized as follows:
Years Ended December 31, ------------------------------- 1998 1997 1996 --------- -------- -------- Average oil and condensate sales price per Bbl................................. $ 12.37 $ 19.88 $ 18.31 Average natural gas sales price per Mcf................................. $ 1.89 $ 2.29 $ 2.12 Average production cost, per equivalent Bbl, charged to expense.............. $ 3.13 $ 2.62 $ 2.54
The average crude oil and natural gas sales price received for December 1998 production was $9.30 per barrel and $1.78 per Mcf, respectively. 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. The Company has had no reports to Federal authorities or agencies of estimated oil and gas reserves except for a required report on the Department of Energy's "Annual Survey of Domestic Oil and Gas Reserves." The Company is not obligated to provide any fixed and determinable quantities of oil or gas in the future under existing contracts or agreements associated with its oil and gas exploration and production segment. Reference is made to the Supplementary Financial Data following the Notes to Consolidated Financial Statements for additional disclosures relating to oil and gas exploration and production activities. Employees and other At December 31, 1998 the Company employed 565 persons, 22 of whom were employed in oil and gas exploration and production, 194 in the marketing of crude oil and petroleum products, 341 in transportation operations and 8 in administrative capacities. None of the Company's employees are represented by a union. Management believes its employee relations are satisfactory. The Company leases approximately 12,000 square feet of office space for its executive offices located at 5 Post Oak Park, Suite 2700, Houston, Texas. Competition In all phases of its operations, the Company encounters strong competition from a number of companies, including some very large companies. Many of these larger competitors possess and employ financial and personnel resources substantially in excess of those which are available to the Company. The Company faces competition principally in pricing and quality of service. In its oil and gas operation, the Company also competes for the acquisition of mineral properties. The Company's marketing division competes with integrated oil companies which in some cases own or control refining and marketing facilities. These major oil companies may offer their products to others on more favorable terms than those available to the Company. The Company is a minor competitor in all the businesses in which it has operations. I-6 7 From time to time in recent years, there has been an oversupply of crude oil and natural gas in the marketplace. This in turn has led to a reduced level of prices for crude oil and natural gas, and as a result, there is a high degree of uncertainty regarding the future market price for oil and gas. Federal and State Taxation The Company is subject to the provisions of the Internal Revenue Code of 1986, as amended (the "Code"). In accordance with the Code, the Company computes its income tax provision based on a 34% tax rate. The Company's operations are primarily conducted within the State of Texas. As such, the Company is subject to a 4.5% state tax on corporate net taxable income as computed for federal income tax purposes. Oil and gas activities are also subject to state and local income, severance, property and other taxes. Management believes the Company is currently in compliance with all federal and state tax regulations. Forward-Looking Statements--Safe Harbor Provisions This annual report for the year ended December 31, 1998 contains certain forward-looking statements which are intended to be covered by the safe harbors provided under Federal securities law and regulation. To the extent such statements are not recitations of historical fact, forward-looking statements involve risks and uncertainties. In particular, statements under the captions (a) Production and Reserve Information, (b) Competition, (c) Regulatory Status and Potential Environmental Liability, (d) Management's Discussion and Analysis of Financial Condition and Results of Operations, (e) Use of Estimates, (f) Income Taxes, (g) Concentration of Credit Risk, (h) Commitments and Contingencies, (i) Supplementary Financial Data, among others, contain forward-looking statements. Where the Company expresses an expectation or belief to future results or events, such expression is made in good faith and believed to have a reasonable basis in fact. However, there can be no assurance that such expectation or belief will actually result or be achieved. A number of factors could cause actual results or events to differ materially from those anticipated. Such factors include, (a) general economic conditions, (b) fluctuations in hydrocarbon prices and margins, (c) unanticipated environmental liabilities or regulatory changes, (d) the availability and cost of insurance, (e) changes in tax laws, and (f) the availability of capital, among others. Environmental Compliance and Regulation The Company is subject to an extensive variety of evolving United States federal, state and local laws, rules and regulations governing the storage, transportation, manufacture, use, discharge, release and disposal of product and contaminants into the environment, or otherwise relating to the protection of the environment. A non-exclusive listing of the environmental laws which potentially impact the Company's Regulated Environmental Activities is set out below: Resource Conservation and Recovery Act of 1976, as amended in 1984 ("RCRA")--The United States Congress enacted RCRA in 1976 and amended it in 1984. RCRA established a comprehensive regulatory framework for the management of hazardous wastes at active facilities. RCRA creates a "cradle to grave" system for managing hazardous wastes. Those who generate, transport, treat, store or dispose of waste above certain quantities are required to undertake certain performance, testing and record keeping. The 1984 amendments to RCRA known as the Hazardous and Solid Waste Amendments "HSWA" increased the scope of RCRA to regulate small quantity hazardous waste generators and waste oil handlers and recyclers as well as require the identification and regulation of underground storage tanks in I-7 8 which liquid petroleum or hazardous substances were stored. HSWA and its implementing regulations require the notification to designated state agencies of the existence and condition of regulated underground storage tanks and impose design, construction and installation requirements; leak detection, reporting, and cleanup requirements; tank closure and removal requirements; and fiscal responsibility requirements. RCRA specifically excludes "drilling fluids, produced waters, and other wastes associated with the exploration, development, or production of crude oil, natural gas or geothermal energy." Comprehensive Environmental Response Compensation and Liability Act of 1980 ("CERCLA" or "Superfund") as amended in 1986--CERCLA established the Superfund program to clean up inactive sites at which hazardous substances had been released. Superfund has been interpreted to create strict, joint and several liability for the costs of removal and remediation, other necessary response costs and damages for injury to natural resources. Superfund liability extends to generators of hazardous substances, as well as to (i) the current owners and operators of a site at which hazardous substances were disposed; (ii) any prior owner or operator of the site at the time of disposal; and (iii) waste transporters who selected such facilities for treatment or disposal of hazardous substances. CERCLA allows the United States Environmental Protection Agency ("EPA") to investigate and remediate contaminated sites and to recover the costs of such activities (response costs), as well as damages to natural resources, from parties specified as liable under the statute. CERCLA also authorizes private parties who incur response costs to seek recovery from statutorily liable parties. CERCLA was amended by the Superfund Amendments and Reauthorization Act of 1986 ("SARA"). SARA provides a separate funding mechanism for the clean up of underground storage tanks. CERCLA excludes petroleum, including crude oil or any fraction thereof, with certain limitations from the definition of "hazardous substances" for which liability for clean up of a contaminated site will attach. This exclusion also applies to those otherwise hazardous substances which are inherent in petroleum, but not to those added to or mixed with petroleum products. The Clean Water Act of 1972, as amended (the "Clean Water Act")--The Clean Water Act establishes water pollutant discharge standards applicable to many basic types of manufacturing facilities and imposes standards on municipal sewage treatment plants. The Clean Water Act requires states to set water quality standards for significant bodies of water within their boundaries and to ensure attainment and/or maintenance of those standards. Many industrial and governmental facilities must apply for and obtain discharge permits, monitor pollutant discharges and under certain conditions reduce certain discharges. The Clean Water Act also requires pre-treatment of certain discharges prior to release into a publicly owned treatment works. Federal Oil Pollution Act of 1990 ("OPA")--The OPA amends the Clean Water Act and expands the liability for the discharge of oil into navigable waters. Liability is triggered by discharge or substantial threat of a discharge of oil into navigable waters of adjoining shoreline from any vessel or any on-shore or off-shore facility. OPA defines three classes of parties subject to liability: 1) owners, operators, and persons chartering vessels; 2) lessees and permitees of areas where off-shore facilities are located; and 3) owners and operators of on-shore facilities. The Clean Air Act of 1970, as amended (the "Clean Air Act")--The Clean Air Act required EPA to establish and ensure compliance with national ambient air quality standards ("NAAQS") for certain pollutants. The NAAQS generally are to be achieved by the individual states through state implementation plans ("SIPs"). SIPs typically attempt to meet the NAAQS by, among other things, regulating the quantity and quality of emissions from specific industrial sources. As required by the Clean Air Act, EPA also has established regulations that limit emissions of specified hazardous air pollutants and other regulations that limit emissions from new industrial sources within certain source categories. The Clean Air Act was amended extensively in 1990, to, among other things, impose additional emissions I-8 9 standards that must be implemented by the EPA through regulations. The implementation of the Clean Air Act requirements is accomplished in Texas by the Texas Natural Resources Conservation Commission ("TNRCC"). The Toxic Substances Control Act of 1976 ("TSCA")--TSCA authorizes the EPA to gather information on the risks of chemicals, and to monitor and regulate the manufacture, distribution, processing, use and disposal of many chemicals. The Emergency Planning and Community Right-to-Know Act ("EPCRA")--EPCRA requires emergency planning notification, emergency release notification and reports with respect to the storage and release of specified chemicals. Industry must provide information to communities regarding the presence of extremely hazardous substances at facilities within those communities. The Occupational Safety and Health Administration Act ("OSHA")--OSHA regulates exposure to toxic substances and other forms of workplace pollution. The Department of Labor administers OSHA. OSHA specifies maximum levels of toxic substance exposure. OSHA also sets out a "right-to-know" rule which requires that workers be informed of, and receive training relating to, the physical and health hazards posed by hazardous materials in the workplace. Texas Clean Air Act and Texas Natural Resources Conservation Commission Regulations--Pursuant to the federal Clean Air Act and the Texas Clean Air Act, the TNRCC has established rules that, among other things, regulate various types of emissions from industrial sources. Among these rules is a requirement that each industrial source in Texas that emits any air pollutant be authorized by a permit, or be exempt from permitting through a standard exemption or because such facility was in existence as of August 30, 1971 and has not been modified since then (i.e., is "grandfathered"). Industrial sources that are located in areas in which the NAAQS have not been attained for certain pollutants ("non-attainment areas") and that emit such pollutants, are often subject to additional and/or more stringent rules than similar facilities located in attainment areas. Texas Solid Waste Disposal Act ("TSWDA")--The TSWDA and the TNRCC regulations promulgated thereunder regulate the generation and management of industrial solid waste, including hazardous waste, and municipal solid waste. These regulations include permitting requirements applicable to most facilities that manage such wastes. The TNRCC regulations relating to the generation and management of hazardous wastes implement the requirement of RCRA (discussed above). The TSWDA also contains enforcement provisions that allow for civil and criminal penalties and/or injunctive relief for violations of the TSWDA and/or associated regulations. A state "superfund" program, which is similar to the federal Superfund program, was also established by the TSWDA to provide remediation of inactive sites at which hazardous substances have been released. Texas Water Code--Chapter 26 of the Texas Water Code and the TNRCC regulations promulgated thereunder prohibit the unauthorized discharge of waste into or adjacent to waters of the State. They also regulate (including requiring permits) industrial, domestic, and municipal wastewater discharges to ensure that the state water quality standards are satisfied. The Texas Water Code contains enforcement provisions that provide for civil and/or criminal penalties and/or injunctive relief for violations of the Texas Water Code and/or associated regulations. Another program mandated by the Texas Water Code regulates underground storage tanks that store certain materials, including among other materials gasoline, oil, and other petroleum products, and established a fee-based fund to remediate contamination from leaking underground storage tanks. Texas Oil Spill Prevention and Response Act of 1991 ("OSPRA")--With respect to oil spills in the marine I-9 10 environment, OSPRA provides a comprehensive legal framework and funding system allowing the State to establish and monitor oil spill prevention and response requirements for vessels and facilities that handle oil, to establish and carry out an effective program for state response to oil spills, to provide timely and equitable settlement and compensation of claims for those harmed by oil spills, and to provide for assessment and restoration for environmental damage from oil spills. OSPRA supports and compliments OPA. State and Local Government Regulation--Many states have been authorized by the EPA to enforce regulations promulgated under various federal statutes. In addition, there are numerous other state as well as local authorities that regulate the environment, some of which impose more stringent environmental standards than Federal laws and regulations. The penalties for violations of state law vary but typically include injunctive relief, recovery of damages for injury to air, water or property and fines for non-compliance. Oil and Gas Operations--The Company's oil and gas drilling and production activities are generally subject to existing laws and regulations relating to environmental quality and pollution control. One associated aspect of the Company's oil and gas operation is the disposal of used drilling fluids, saltwater, and crude oil sediments. In addition, at times low-level naturally occurring radiation may occur with the production of crude oil and natural gas. The Company's policy in these areas has been to comply with environmental regulations and industry standards as they have historically existed. Environmental standards in these areas are becoming increasingly stringent and the Company, from time to time, has been required to remediate past practices. Management believes that such required remediations in the future, if any, will not have a material adverse impact on the Company's financial position or results of operations. All states in which the Company owns significant producing oil and gas properties have statutory provisions regulating the production and sale of crude oil and natural gas. Regulations generally require permits for the drilling of wells and extend to the spacing of wells, the prevention of waste of oil and gas reserves, the rate of production, prevention and clean-up of pollution and other matters. In Texas, the Texas Railroad Commission is the state agency with primary jurisdiction for regulating oil and gas operations. Historically, the Federal government has instituted a number of regulations designed to control and limit the market price for crude oil and/or natural gas. Under the current weak market conditions and the recent deregulation practices of the federal government, this area of federal law does not generally impact the Company's operations. Marketing Operations--The Company's marketing facilities are subject to a number of state and federal environmental statutes and regulations, including the regulation of underground fuel storage tanks. The EPA's Office of Underground Tanks has established regulations requiring owners or operators of underground fuel tanks to demonstrate evidence of financial responsibility for the costs of corrective action and the compensation of third parties for bodily injury and property damage caused by sudden and nonsudden accidental releases arising from operating underground tanks. In addition, the EPA requires the installation of leak detection devices and stringent monitoring of the ongoing condition of underground tanks. Should leakage develop in an underground tank, the Company would be obligated for clean up costs. The Company has secured insurance covering both third party liability and clean up costs. Currently, the Company is responsible for less than 10 underground storage tanks. Transportation Operations--The Company's tank truck operations are conducted pursuant to authority of the United States Department of Transportation (DOT) and various State regulatory authorities. The I-10 11 Company's transportation operations must also be conducted in accordance with various laws relating to pollution and environmental control. Interstate motor carrier operations are subject to safety requirements prescribed by the DOT. Such matters as weight and dimension of equipment are also subject to federal and state regulations. DOT regulations also require mandatory drug testing of drivers and require certain tests for alcohol levels in drivers and other safety personnel. The trucking industry is subject to possible regulatory and legislative changes such as increasingly stringent environmental regulations or limits on vehicle weight and size. Regulatory change may affect the economics of the industry by requiring changes in operating practices or by changing the demand for common or contract carrier services or the cost of providing truckload services. In addition, the Company's tank wash facilities are subject to increasingly more stringent local, state and federal environmental regulations. Former Coal Operations--Under Kentucky and Illinois law and the Federal Surface Mining Control and Reclamation Act of 1977, the Company was required to obtain permits prior to beginning active mining operations. In order to obtain a permit, the Company was required to show that its mining operations would meet certain reclamation and environmental standards. The Company believes it has complied in all respects with the regulations under which the permits were issued. Regulatory Status and Potential Environmental Liability--The operations and facilities of the Company are subject to numerous federal, state and local environmental laws and regulations including those described above, as well as associated permitting and licensing requirements. The Company regards compliance with applicable environmental regulations as a critical component of its overall operation, and devotes significant attention to providing quality service and products to its customers, protecting the health and safety of its employees, and protecting the Company's facilities from damage. Management believes the Company has obtained or applied for all permits and approvals required under existing environmental laws and regulations to operate its current business. Management has reported that the Company is not subject to any pending or threatened environmental litigation or enforcement action(s) which could materially and adversely affect the Company's business. While the company has, where appropriate, implemented operating procedures at each of its facilities designed to assure compliance with environmental laws and regulation, the Company, given the nature of its business, is subjected to environmental risks and the possibility remains that the Company's ownership of its facilities and its operations and activities could result in civil or criminal enforcement and public as well as private action(s) against the Company, which may necessitate or generate mandatory clean up activities, revocation of required permits or licenses, denial of application for future permits, or significant fines, penalties or damages, any and all of which could have a material adverse effect on the Company. 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. I-11 12 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:
Name Age Positions with the Company - ------------------------ --- ------------------------------------------------ K. S. Adams, Jr. 76 Chairman, President and Chief Executive Officer Claude H. Lewis 55 Vice President-Land Transportation Richard B. Abshire 46 Vice President-Finance David B. Hurst 45 Secretary
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. I-12 13 PART II 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.
American Stock Exchange ----------------------- Year High Low - ---- ---- --- 1997 First Quarter.............................................. 18-3/8 11-5/8 Second Quarter............................................. 15-3/8 11-5/8 Third Quarter.............................................. 15-5/8 12 Fourth Quarter............................................. 16-3/4 13-5/16 1998 First Quarter.............................................. 14-9/16 11-5/8 Second Quarter............................................. 14-3/4 11-1/8 Third Quarter.............................................. 11-9/16 6-3/8 Fourth Quarter............................................. 8-7/8 5-1/4
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. II-1 14 Item 6. SELECTED FINANCIAL DATA FIVE YEAR REVIEW OF SELECTED FINANCIAL DATA
Years Ended December 31, ------------------------------------------------------------------------------------- 1998 1997 1996 1995 1994 ------------ ----------- ----------- ----------- ----------- (In thousands, except per share data) Revenues: Marketing ................ $ 1,936,358 $ 1,921,486 $ 1,466,736 $ 803,669 $ 610,944 Transportation ........... 32,145 31,970 21,282 21,390 20,455 Oil and gas .............. 5,689 9,904 9,061 6,378 3,586 ----------- ----------- ----------- ----------- ----------- $ 1,974,192 $ 1,963,360 $ 1,497,079 $ 831,437 $ 634,985 =========== =========== =========== =========== =========== Operating earnings: Marketing ................ $ 4,478 $ 1,382 $ 5,816 $ 2,496 $ 2,114 Transportation ........... 3,474 5,225 2,356 2,045 2,923 Oil and gas .............. (1,840)(1) 4,059 3,711 (1,410)(1) 1,272 ----------- ----------- ----------- ----------- ----------- 6,112 10,666 11,883 3,131 6,309 Other income (expense): General and administrative (2,738) (2,578) (2,783) (2,176) (2,018) Property sales and other . 420 792 142 1,134 583 Interest ................. (327) (318) (477) (526) (106) ----------- ----------- ----------- ----------- ----------- Earnings before income taxes . 3,467 8,562 8,765 1,563 4,768 Income tax provision Current .................. 226 1,092 624 100 305 Deferred ................. 901 1,737 2,500 238 1,446 ----------- ----------- ----------- ----------- ----------- 1,127 2,829 3,124 338 1,751 ----------- ----------- ----------- ----------- ----------- Net earnings ................. $ 2,340 $ 5,733 $ 5,641 $ 1,225 $ 3,017 =========== =========== =========== =========== =========== Basic and diluted earnings per common share ............. $ .55 $ 1.36 $ 1.34 $ .29 $ .72 =========== =========== =========== =========== =========== FINANCIAL POSITION Working capital .............. $ 10,855 $ 8,694 $ 10,484 $ 5,115 $ 2,957 Total assets ................. 122,334 114,283 110,882 80,917 62,301 Long-term debt, net of current maturities ....... 9,100 6,900 6,171 10,589 9,263 Shareholders' equity ......... 30,056 28,138 22,760 15,678 13,233 Dividends on common shares ... 422 422 292 207 124
- ---------------------- (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. II-2 15 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):
Wellhead Average Operating Purchases Crude Oil Revenues Earnings per day (1) Price ------------ ------------ ------------ ------------- 1998.................... $ 1,936,358 $ 4,478 136,000 bbls $ 12.46/bbl 1997.................... $ 1,921,486 $ 1,382 76,000 bbls $ 18.50/bbl 1996.................... $ 1,466,736 $ 5,816 58,000 bbls $ 20.50/bbl
(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. II-3 16 - Transportation Transportation revenues and operating earnings were as follows (in thousands):
Revenues Operating Earnings ----------------------- --------------------- Percentage Percentage Amount Change (1) Amount Change (1) --------- ----------- -------- ----------- 1998.............................. $ 32,145 1% $ 3,474 (33)% 1997.............................. $ 31,970 50% $ 5,225 122% 1996.............................. $ 21,282 (1)% $ 2,356 15%
(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):
Crude Oil Natural Gas Operating ------------------ ------------------- Earnings Average Average Revenues (Loss) Barrels Price Mcf's Price -------- -------- ------- ------ ------ ------ 1998........................ $5,689 $(1,840) 68 $12.37 2,552 $1.89 1997........................ $9,904 $ 4,059 62 $19.88 3,775 $2.28 1996........................ $9,061 $ 3,711 92 $18.31 3,450 $2.12
II-4 17 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.
1998 1997 1996 ---------- ----------- ---------- (In thousands) Net earnings.................................. $ 2,340 $ 5,733 $ 5,641 Depreciation, depletion & amortization........ 8,606 5,914 6,160 Deferred taxes and other...................... 398 1,118 1,995 --------- --------- --------- Cash flow before working capital items........ 11,344 12,765 13,796 Debt and other financing activities........... (573) 1,198 (7,839) --------- --------- --------- Property and equipment additions............. $ 10,771 $ 13,963 $ 5,957 ========== ========== =========
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 II-5 18 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. II-6 19 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. 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 II-7 20 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 21 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES INDEX TO FINANCIAL STATEMENTS Item 8.
Page ----- REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ........................................................ II-10 FINANCIAL STATEMENTS: Consolidated Balance Sheet as of December 31, 1998 and 1997 ............................ II-11 Consolidated Statement of Earnings for the Years Ended December 31, 1998, 1997 and 1996 ........................................................................ II-12 Consolidated Statement of Shareholders' Equity for the Years Ended December 31, 1998, 1997 and 1996...................................................... II-13 Consolidated Statement of Cash Flows for the Years Ended December 31, 1998, 1997 and 1996................................................................... II-14 Notes to Consolidated Financial Statements ............................................. II-15 Supplementary Financial Data............................................................ II-25
II-9 22 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 II-10 23 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEET (IN THOUSANDS)
December 31, -------------------------- ASSETS 1998 1997 ---------- ----------- CURRENT ASSETS: Cash and cash equivalents $ 10,215 $ 6,496 Accounts receivable, net 73,864 73,806 Inventories 8,288 5,092 Prepaids 801 1,675 --------- --------- Total current assets 93,168 87,069 --------- --------- PROPERTY AND EQUIPMENT: Marketing 17,491 14,432 Transportation 14,906 11,144 Oil and gas (successful efforts method) 31,523 30,623 Other 99 99 --------- --------- 64,019 56,298 Less -Accumulated depreciation, depletion and amortization (36,226) (30,361) --------- --------- 27,793 25,937 --------- --------- OTHER ASSETS 1,373 1,277 --------- --------- $ 122,334 $ 114,283 ========= ========= LIABILITIES AND SHAREHOLDERS' EQUITY CURRENT LIABILITIES: Accounts payable $ 78,444 $ 74,829 Accrued and other liabilities 3,869 3,475 Current maturities of long-term debt -- 71 --------- --------- Total current liabilities 82,313 78,375 LONG-TERM DEBT, less current maturities 9,100 6,900 DEFERRED TAXES AND OTHER LIABILITIES 865 870 --------- --------- 92,278 86,145 --------- --------- COMMITMENTS AND CONTINGENCIES (NOTE 7) SHAREHOLDERS' EQUITY: Preferred stock, $1.00 par value, 960,000 shares authorized, none outstanding -- -- Common stock, $.10 par value, 7,500,000 shares authorized, 4,217,596 issued and outstanding 422 422 Contributed capital 11,693 11,693 Retained earnings since December 31, 1992 17,941 16,023 --------- --------- Total shareholders' equity 30,056 28,138 --------- --------- $ 122,334 $ 114,283 ========= =========
The accompanying notes are an integral part of these financial statements. II-11 24 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF EARNINGS (IN THOUSANDS, EXCEPT PER SHARE DATA)
Years Ended December 31, --------------------------------------------- 1998 1997 1996 ----------- ----------- ----------- REVENUES: Marketing $ 1,936,358 $ 1,921,486 $ 1,466,736 Transportation 32,145 31,970 21,282 Oil and gas 5,689 9,904 9,061 ----------- ----------- ----------- 1,974,192 1,963,360 1,497,079 ----------- ----------- ----------- COSTS AND EXPENSES: Marketing 1,928,754 1,918,885 1,459,021 Transportation 27,706 26,106 18,346 Oil and gas 3,014 1,810 1,695 General and administrative 2,738 2,578 2,783 Depreciation, depletion and amortization 8,606 5,914 6,160 ----------- ----------- ----------- 1,970,818 1,955,293 1,488,005 ----------- ----------- ----------- OPERATING EARNINGS 3,374 8,067 9,074 OTHER INCOME (EXPENSE): Property sales and other 420 813 168 Interest (327) (318) (477) ----------- ----------- ----------- EARNINGS BEFORE INCOME TAXES 3,467 8,562 8,765 INCOME TAX PROVISION Current 226 1,092 624 Deferred 901 1,737 2,500 ----------- ----------- ----------- 1,127 2,829 3,124 ----------- ----------- ----------- NET EARNINGS $ 2,340 $ 5,733 $ 5,641 =========== =========== =========== BASIC AND DILUTED EARNINGS PER SHARE $ .55 $ 1.36 $ 1.34 =========== =========== =========== DIVIDENDS PER COMMON SHARE $ .10 $ .10 $ .07 =========== =========== ===========
The accompanying notes are an integral part of these financial statements. II-12 25 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (IN THOUSANDS)
TOTAL COMMON CONTRIBUTED RETAINED SHAREHOLDERS' STOCK CAPITAL EARNINGS EQUITY -------- ----------- -------- ------------- BALANCE, December 31, 1995 ...... $ 420 $ 9,895 $ 5,363 $ 15,678 Stock options exercised ...... -- 23 -- 23 Deferred income taxes (Note 3) -- 1,710 -- 1,710 Net earnings ................. -- -- 5,641 5,641 Dividends paid on common stock -- -- (292) (292) -------- -------- -------- -------- BALANCE, December 31, 1996 ...... 420 11,628 10,712 22,760 Stock options exercised ...... 2 65 -- 67 Net earnings ................. -- -- 5,733 5,733 Dividends paid on common stock -- -- (422) (422) -------- -------- -------- -------- BALANCE, December 31, 1997 ...... 422 11,693 16,023 28,138 Net earnings ................. -- -- 2,340 2,340 Dividends paid on common stock -- -- (422) (422) -------- -------- -------- -------- BALANCE, December 31, 1998 ...... $ 422 $ 11,693 $ 17,941 $ 30,056 ======== ======== ======== ========
The accompanying notes are an integral part of these financial statements. II-13 26 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF CASH FLOWS (IN THOUSANDS)
Years Ended December 31, ------------------------------------- 1998 1997 1996 --------- --------- --------- CASH PROVIDED BY OPERATIONS: Net earnings .......................................... $ 2,340 $ 5,733 $ 5,641 Items of income not requiring (providing) cash Depreciation, depletion and amortization ............ 8,606 5,914 6,160 Gain on sales of properties ......................... (182) (230) (168) Deferred income taxes ............................... 901 1,737 2,500 Other, net .......................................... (321) (389) (337) Decrease (increase) in accounts receivable ............ (58) 6,432 (29,754) Decrease (increase) in inventories .................... (3,196) (225) (1,690) Decrease (increase) in prepaids ....................... 194 (559) (96) Increase (decrease) in accounts payable ............... 3,615 (2,620) 27,912 Increase (decrease) in accrued liabilities ............ 394 (6) 1,065 -------- -------- -------- Net cash provided by operating activities ........ 12,293 15,787 11,233 -------- -------- -------- INVESTING ACTIVITIES: Property and equipment additions ...................... (10,771) (13,963) (5,957) Proceeds from property sales .......................... 490 509 742 -------- -------- -------- Net cash used in investing activities ............ (10,281) (13,454) (5,215) -------- -------- -------- FINANCING ACTIVITIES: Borrowings ............................................ 2,200 3,300 -- Repayment of debt ..................................... (71) (2,564) (6,004) Issuance of common stock .............................. -- 67 23 Dividend payments ..................................... (422) (422) (292) -------- -------- -------- Net cash (used in) provided by financing activities 1,707 381 (6,273) -------- -------- -------- INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................................ 3,719 2,714 (255) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR ........................................... 6,496 3,782 4,037 -------- -------- -------- CASH AND CASH EQUIVALENTS AT END OF YEAR ................ $ 10,215 $ 6,496 $ 3,782 ======== ======== ========
The accompanying notes are an integral part of these financial statements. II-14 27 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):
December 31, --------------------- 1998 1997 --------- ------ Crude oil................................................ $ 6,795 $3,638 Petroleum products....................................... 1,063 1,062 Materials and supplies................................... 430 392 --------- ------ $ 8,288 $5,092 ========= ======
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. II-15 28 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. II-16 29 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 30 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):
December 31, -------------------------- 1998 1997 ----------- ---------- Bank lines of credit, secured by substantially all of the Company's (excluding GulfMark's) assets, due in twelve quarterly installments commencing on October 27, 2000....................................... $ 9,100 $ 6,900 Notes payable in varying installments through September 1998, interest rate up to 10%, secured by certain land and equipment ............... -- 71 ----------- ---------- Total debt........................................... 9,100 6,971 Less - current maturities............................................ -- 71 ----------- ---------- Long-term debt......................................................... $ 9,100 $ 6,900 =========== ==========
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 II-18 31 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):
Years Ended December 31, ---------------------------------------- 1998 1997 1996 ---------- ----------- ---------- Current: Federal................................................. $ 71 $ 707 $ 170 State................................................... 155 385 454 ---------- ---------- ---------- 226 1,092 624 ---------- ---------- ---------- Deferred: Federal................................................. 901 1,737 2,500 ---------- ---------- ---------- $ 1,127 $ 2,829 $ 3,124 ========== ========== ==========
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. II-19 32 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):
Years Ended December 31, -------------------------------------- 1998 1997 1996 ---------- ----------- ---------- Statutory federal income tax provision at 34%............ $ 1,126 $ 2,780 $ 2,825 State income tax provision............................... 155 385 454 Federal statutory depletion.............................. (153) (340) (175) Other.................................................... (1) 4 20 ----------- ---------- ---------- Income taxes as reported........................ $ 1,127 $ 2,829 $ 3,124 ========== ========== ==========
(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. II-20 33 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. II-21 34 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. II-22 35 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):
Earnings Depreciation, Property (Loss) Depletion and from and Equipment Identifiable Revenues Operations Amortization Additions Assets ---------- ---------- ------------- --------- ------------ Year ended December 31, 1998 - Marketing ....................... $1,936,358 $ 4,478 $ 3,126 $ 3,370 $ 86,510 Transportation .................. 32,145 3,474 965 4,378 13,947 Oil and gas ..................... 5,689 (1,840)(1) 4,493 3,023 10,227 Other ........................... -- -- 22 -- 11,650 ---------- ---------- ---------- ---------- ---------- $1,974,192 $ 6,112 $ 8,606 $ 10,771 $ 122,334 ========== ========== ========== ========== ========== Year ended December 31, 1997 - Marketing ....................... $1,921,486 $ 1,382 $ 1,219 $ 6,913 $ 82,923 Transportation .................. 31,970 5,225 639 1,377 10,345 Oil and gas ..................... 9,904 4,059 4,035 5,653 12,445 Other ........................... -- -- 21 20 8,570 ---------- ---------- ---------- ---------- ---------- $1,963,360 $ 10,666 $ 5,914 $ 13,963 $ 114,283 ========== ========== ========== ========== ========== Year ended December 31, 1996 - Marketing ....................... $1,466,736 $ 5,816 $ 1,899 $ 1,953 $ 84,087 Transportation .................. 21,282 2,356 580 758 9,012 Oil and gas ..................... 9,061 3,711 3,655 3,161 11,218 Other ........................... -- -- 26 85 6,565 ---------- ---------- ---------- ---------- ---------- $1,497,079 $ 11,883 $ 6,160 $ 5,957 $ 110,882 ========== ========== ========== ========== ==========
- -------------------- (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. II-23 36 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):
Years Ended December 31, ------------------------------------------- 1998 1997 1996 ---------- ----------- ----------- Earnings from operations............................. $ 6,112 $ 10,666 $ 11,883 General and administrative expenses.................. (2,738) (2,578) (2,783) Property sales and other............................. 420 792 142 Interest expense .................................... (327) (318) (477) ----------- --------- ---------- Earnings before income taxes......................... $ 3,467 $ 8,562 $ 8,765 ========== ========= ==========
II-24 37 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):
Net Earnings Dividends -------------------------- ---------------------- Operating Per Per Revenues Earnings Amount Share(1) Amount Share ------------- ------------ ------------ -------- ------- ------- 1998 - March 31........... $ 416,636 $ 2,134 $ 1,040 $ .25 $ -- $ -- June 30............ 464,578 1,427 424 .10 -- -- September 30....... 542,390 1,056 143 .03 -- -- December 31........ 550,588 1,495 733 .17 422 .10 ------------- ------------ ------------ ------ ------- ------- $ 1,974,192 $ 6,112 $ 2,340 $ .55 $ 422 $ .10 ============= ============ ============ ====== ======= ======= 1997 - March 31........... $ 494,145 $ 3,257 $ 1,882 $ .45 $ -- $ -- June 30............ 442,015 1,477 716 .17 -- -- September 30....... 451,870 2,977 1,568 .37 -- -- December 31........ 575,330 2,955 1,567 .37 422 .10 ------------- ------------ ------------ ------ ------- ------ $ 1,963,360 $ 10,666 $ 5,733 $ 1.36 $ 422 $ .10 ============= ============ ============ ====== ======= ======
- ----------------- (1) Reflects basic and diluted earnings per share for indicated periods. II-25 38 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):
Years Ended December 31, --------------------------------------- 1998 1997 1996 ---------- ---------- ---------- Property acquisition costs Unproved...................................... $ 600 $ 472 $ 41 Proved........................................ 788 -- -- Exploration costs.................................. 1,559 -- -- Development costs.................................. 1,636 5,181 3,120 ---------- ---------- ---------- Total costs incurred.......................... $ 4,583 $ 5,653 $ 3,161 ========== ========== ==========
The aggregate capitalized costs relative to oil and gas producing activities are as follows (in thousands):
December 31, ----------------------------- 1998 1997 --------- ---------- Unproved oil and gas properties...................... $ 871 $ 1,135 Proved oil and gas properties........................ 30,652 29,488 --------- ---------- 31,523 30,623 Accumulated depreciation, depletion and amortization................................... (22,010) (19,641) --------- ---------- Net capitalized cost........................ $ 9,513 $ 10,982 ========= ==========
II-26 39 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.
Years Ended December 31, --------------------------------------------------------------------- 1998 1997 1996 ------------------- ------------------- --------------------- Natural Natural Natural Gas Oil Gas Oil Gas Oil (Mcf's) (Bbls.) (Mcf's) (Bbls.) (Mcf's) (Bbls.) (In thousands) Proved developed and undeveloped reserves - Beginning of year 9,761 211 9,834 225 7,692 281 Revisions of previous estimates 75 19 1,153 (12) 1,124 1 Purchase of oil and gas reserves 1,281 3 -- -- -- -- Extensions, discoveries and other additions 683 30 2,549 60 4,468 35 Production (2,552) (68) (3,775) (62) (3,450) (92) -------- ------ ------ --- ------ --- End of year 9,248 195 9,761 211 9,834 225 ======== ====== ====== === ====== === Proved developed reserves - End of year 9,248 195 9,761 211 9,834 225 ======== ====== ====== === ====== ===
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. II-27 40 ADAMS RESOURCES & ENERGY, INC. AND SUBSIDIARIES SUPPLEMENTARY FINANCIAL DATA
Years Ended December 31, ---------------------------------------- 1998 1997 1996 ----------- ----------- ---------- (In thousands) Future gross revenues............................................. $ 19,157 $ 25,569 $ 38,074 Future costs - Lease operating expenses...................................... (6,381) (7,042) (8,407) Development costs............................................. (66) (59) (101) ----------- ---------- ---------- Future net cash flows before income taxes......................... 12,710 18,468 29,566 Discount at 10% per annum......................................... (5,104) (4,824) (8,099) ------------ ---------- ---------- Discounted future net cash flows before income taxes........................................... 7,606 13,644 21,467 Future income taxes, net of discount at 10% per annum..................................................... (1,765) (1,777) (4,431) ------------ ---------- ----------- Standardized measure of discounted future net cash flows.............................. $ 5,841 $ 11,867 $ 17,036 =========== ========== ==========
The following are the principal sources of changes in the standardized measure of discounted future net cash flows:
Years Ended December 31, ----------------------------------------- 1998 1997 1996 ----------- ----------- ----------- (In thousands) Beginning of year................................................. $ 11,867 $ 17,036 $ 8,211 Revisions to reserves proved in prior years - Net change in prices and production costs................... (2,625) (7,978) 2,875 Net change due to revisions in quantity estimates........... 316 1,331 1,840 Accretion of discount....................................... 1,364 2,146 1,010 Production rate changes and other .......................... (3,218) (770) 2,383 ----------- ---------- ---------- Total revisions.......................................... (4,163) (5,271) 8,108 Purchase of oil and gas reserves, net of future production costs............................................ 1,282 -- -- New field discoveries and extensions, net of future production costs.............................. 1,080 5,542 10,623 Sales of oil and gas produced, net of production costs ........................................... (4,213) (8,094) (7,366) Net change in income taxes.................................... (12) 2,654 (2,540) ----------- ---------- ----------- Net change in standardized measure of discounted future net cash flows ........................... (6,026) (5,169) 8,825 ----------- ---------- ---------- End of year....................................................... $ 5,841 $ 11,867 $ 17,036 =========== ========== ==========
II-28 41 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:
Years Ended December 31, ----------------------------------------- 1998 1997 1996 ----------- ---------- ----------- (In thousands) Revenues.......................................................... $ 5,689 $ 9,904 $ 9,061 Costs and expenses - Production.................................................... 1,476 1,810 1,695 Exploration................................................... 1,560 -- -- Depreciation, depletion and amortization...................... 4,493 4,035 3,655 ----------- ---------- ---------- Operating income (loss) before income taxes....................... (1,840) 4,059 3,711 Income tax expense (benefit)...................................... (644) 1,380 1,170 ----------- ---------- ---------- Operating income (loss)........................................... $ (1,196) $ 2,679 $ 2,541 =========== ========== ==========
Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. II-29 42 PART III 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. EXECUTIVE COMPENSATION Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT 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. III-1 43 PART IV 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 44 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 45 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 46 EXHIBIT INDEX
Exhibit Number Description - --------- ------------- 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) 4(b) - Loan Agreement between Adams Resources & Energy, Inc. and NationsBank Texas N.A. dated October 27, 1993 ( Incorporated by reference to Exhibit 4(b) of the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1993) 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 V-2 EX-4.C 2 FIFTH AMENDMENT TO LOAN AGREEMENT 1 EXHIBIT 4(c) FIFTH AMENDMENT TO LOAN AGREEMENT THIS FIFTH AMENDMENT TO LOAN AGREEMENT (this "Fifth Amendment") is made and entered into as of the 2nd day of February, 1999, by and among SERVICE TRANSPORT COMPANY, a Texas corporation ("Service Transport Company"), ADAMS RESOURCES EXPLORATION CORPORATION, a Delaware corporation ("Exploration"), BUCKLEY MINING CORPORATION, a Kentucky corporation ("Buckley Mining"), CJC LEASING, INC., a Kentucky corporation ("CJC"), CLASSIC COAL CORPORATION, a Delaware corporation ("Classic Coal"), ADA MINING CORPORATION, a Texas corporation ("Ada Mining") and BAYOU CITY PIPELINES, INC., a Texas corporation formerly known as Bayou City Barge Lines, Inc. ("Bayou City"), each with offices and place of business at 5 Post Oak Place, 4400 Post Oak Parkway, 27th Floor, Houston, Texas 77027 (Service Transport Company, Exploration, Buckley Mining, CJC, Classic Coal, Ada Mining and Bayou City are hereinafter individually called a "Borrower" and collectively called the "Borrowers"), and NATIONSBANK, N.A., a national banking association (the "Lender"), successor in interest by merger to NationsBank of Texas, N.A. (the "Original Lender"). WHEREAS, the Borrowers, Ada Crude Oil Company ("Ada Crude Oil") and Ada Resources, Inc. ("Ada Resources"), (collectively referred to as the "Original Borrowers") and the "Original Lender entered into that certain Loan Agreement dated October 27, 1993, which Loan Agreement was amended by that certain First Amendment to Loan Agreement dated October 27, 1994 among the Original Borrowers and the Original Lender, that certain Second Amendment to Loan Agreement dated December 29, 1995 among the Original Borrowers and the Original Lender, that certain Third Amendment to Loan Agreement dated January 27, 1997 among the Original Borrowers and the Original Lender and that certain Fourth Amendment to Loan Agreement dated September 30th, 1997 among the Original Borrowers and the Original Lender (as amended, the "Loan Agreement"); and WHEREAS, due to the assignment of the assets and assumption of liabilities of Ada Crude Oil and Ada Resources, such parties are no longer parties under the Loan Agreement; and WHEREAS, the Borrowers and the Lender desire to make certain amendments to the terms and provisions of the Loan Agreement, as set forth herein. NOW, THEREFORE, FOR AND IN CONSIDERATION of the mutual covenants and agreements contained herein, the parties hereto agree as follows: 1. The first sentence of Section 1.3(a) of the Loan Agreement is deleted in its entirety, and the following is substituted in its place: The Lender, during the period from the date of the Third Amendment through October 27, 2000, subject to the terms and conditions of this Agreement, agrees (i) to make loans to the 2 Borrowers pursuant to a revolving credit and term loan facility up to but not in excess of the lesser of $ 10,000,000.00 or the amount of the Tranche A Borrowing Base and (ii) to make additional loans to the Borrowers pursuant to a revolving credit and term loan facility up to but not in excess of the lesser of $5,000,000.00 or the amount of the Tranche B Borrowing Base. 2. The fourth and fifth sentences of Section 1.3(b) of the Loan Agreement are deleted in their entirety, and the following is substituted in their place: Commencing October 31, 2000, a principal payment shall be made on each Note on the last day of each October, January, April and July in an amount equal to one-twelfth (1/12th) of the principal amount outstanding under such Note at the close of Lender's business on October 27, 2000. All unpaid principal and accrued and unpaid interest on the Notes shall be due and payable on or before October 27, 2003. 3. The closing of the transactions contemplated by this Fifth Amendment is subject to the satisfaction of the following conditions: (a) All legal matters incident to the transactions herein contemplated shall be satisfactory to Gardere Wynne Sewell & Riggs, L.L,P., counsel to the Lender; (b) The Lender shall have received a fully executed copy of this Fifth Amendment and a Notice as to Written Agreement; and (c) The Lender shall have received an executed copy OF resolutions of the Board of Directors of each of the Borrowers and the Guarantor, in form and substance satisfactory to the Lender, authorizing the execution, delivery and performance of this Fifth Amendment and all documents, instruments and certificates referred to herein. 4. Each of the Borrowers hereby reaffirms each of its representations, warranties, covenants and agreements set forth in the Loan Agreement with the same force and effect as if each were separately stated herein and made as of the date hereof. Except as amended hereby, the Loan Agreement shall remain unchanged, and the terms, conditions and covenants of the Loan Agreement shall continue and be binding upon the parties hereto. 5. Each of the Borrowers hereby agrees that its liability under any and all documents and instruments executed by it as security for the Indebtedness (including, without limitation, the Mortgages, the Security Agreements, the Collateral Assignment and the Pledges) shall not be reduced, altered, limited, lessened or in any way affected by the execution and delivery of this Fifth Amendment or any of the instruments or documents referred to herein, except as specifically set forth herein or therein, that all of such documents and instruments are hereby renewed, extended, ratified, confirmed and carried forward by the Borrowers in all respects, that all of such documents and instruments shall remain in full force and effect and are and shall remain enforceable against the -2- 3 Borrowers in accordance with their terms and that all of such documents and instruments shall cover all indebtedness of the Borrowers to the Lender described in the Loan Agreement as amended hereby. 6. Each of the terms defined in the Loan Agreement is used in this Fifth Amendment with the same meaning, except as otherwise indicated in this Fifth Amendment. Each of the terms defined in this Fifth Amendment is used in the Loan Agreement with the same meaning, except as otherwise indicated in the Loan Agreement. 7. THIS FIFTH AMENDMENT SHALL BE DEEMED TO BE A CONTRACT UNDER, SUBJECT TO, AND SHALL BE CONSTRUED FOR ALL PURPOSES IN ACCORDANCE WITH THE LAWS OF THE STATE OF TEXAS. 8. THE LOAN AGREEMENT, AS AMENDED, REPRESENTS THE FINAL AGREEMENT BETWEEN THE PARTIES AND MAY NOT BE CONTRADICTED BY EVIDENCE OF PRIOR, CONTEMPORANEOUS OR SUBSEQUENT ORAL AGREEMENTS OF THE PARTIES. THERE ARE NO UNWRITTEN ORAL AGREEMENTS BETWEEN THE PARTIES. IN WITNESS WHEREOF, the parties have caused this Fifth Amendment to be executed by their duly authorized officers as of the day and year first above written. SERVICE TRANSPORT COMPANY By: /s/ R. B. ABSHIRE ---------------------------------------- Name: R. B. Abshire ----------------------------------- Title: Treasurer ---------------------------------- ADAMS RESOURCES EXPLORATION CORPORATION By: /s/ R. B. ABSHIRE ---------------------------------------- Name: R. B. Abshire ----------------------------------- Title: Treasurer ---------------------------------- -3- 4 BUCKLEY MINING CORPORATION By: /s/ R. B. ABSHIRE ---------------------------------------- Name: R. B. Abshire ----------------------------------- Title: Treasurer ---------------------------------- CJC LEASING, INC. By: /s/ R. B. ABSHIRE ---------------------------------------- Name: R. B. Abshire ----------------------------------- Title: Treasurer ---------------------------------- CLASSIC COAL CORPORATION By: /s/ R. B. ABSHIRE ---------------------------------------- Name: R. B. Abshire ----------------------------------- Title: Treasurer ---------------------------------- ADA MINING CORPORATION By: /s/ R. B. ABSHIRE ---------------------------------------- Name: R. B. Abshire ----------------------------------- Title: Treasurer ---------------------------------- BAYOU CITY PIPELINES, INC. By: /s/ R. B. ABSHIRE ---------------------------------------- Name: R. B. Abshire ----------------------------------- Title: Treasurer ---------------------------------- -4- 5 NATIONSBANK, N.A. By: /s/ JAMES R. ALLRED ---------------------------------------- Name: James R. Allred ----------------------------------- Title: Senior Vice President ---------------------------------- Guarantor joins in the execution of this Fifth Amendment to evidence that it hereby agrees and consents to all of the matters contained in this Fifth Amendment and further agrees that (i) its liability under that certain Guaranty Agreement dated October 27, 1993, executed by Guarantor for the benefit of the Lender, as the same may be amended or modified from time to time (the "Guaranty") shall not be reduced, altered, limited, lessened or in any way affected by the execution and delivery of this Fifth Amendment or any of the instruments or documents referred to herein by the parties hereto, except as specifically set forth herein or therein, (ii) the Guaranty is hereby renewed, extended, ratified, confirmed and carried forward in all respects, (iii) the Guaranty is and shall remain in full force and effect and is and shall remain enforceable against Guarantor in accordance with its terms and (iv) the Guaranty shall cover all indebtedness of the Borrowers to the Lender described in the Loan Agreement as amended hereby. ADAMS RESOURCES & ENERGY, INC. By: /s/ R. B. ABSHIRE ---------------------------------------- Name: R. B. Abshire ----------------------------------- Title: Vice President ---------------------------------- -5- EX-21 3 SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21 SUBSIDIARIES OF THE REGISTRANT The following is a list of all subsidiary corporations of the registrant. All subsidiaries are wholly-owned by the Company, except that Buckley Mining Corporation and Plastics Universal Corporation are wholly-owned subsidiaries of Ada Mining Corporation. The Company's consolidated financial statements include the accounts of all subsidiaries.
State of Subsidiary Incorporation ------------------------ ------------- Adams Resources Exploration Corporation Delaware Kirbyville Marketing Co., Inc. Texas Service Transport Company Texas Bayou City Pipelines, Inc. Texas Ada Crude Oil Company Texas Ada Mining Corporation Texas Classic Coal Corporation Delaware Plastics Universal Corporation Kentucky CJC Leasing, Inc. Kentucky Buckley Mining Corporation Kentucky GulfMark Energy, Inc. Texas Ada Resources, Inc. Texas
V-3 EX-27 4 FINANCIAL DATA SCHEDULE
5 YEAR DEC-31-1998 DEC-31-1998 10,215 0 74,099 (235) 8,288 93,168 64,019 (36,226) 122,334 82,313 9,100 0 0 422 29,634 122,334 1,974,192 1,974,612 1,959,474 1,970,818 0 0 327 3,467 1,127 2,340 0 0 0 2,340 .55 .55
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