<PAGE> 1
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Amendment No. 2
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[x] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[ ] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
PETROGLYPH ENERGY, INC.
--------------------------------------------------------------------------------
(Name of Registrant as Specified in Its Charter)
PETROGLYPH ENERGY, INC.
--------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement)
Payment of Filing Fee (Check the appropriate box):
[ ] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11.
1. Title of each class of securities to which transaction applies:
Common Stock
2. Aggregate number of securities to which transaction applies:
2,704,941 outstanding shares.
3. Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11: $2.85 per share; the
proposed maximum aggregate value of the transaction is
$7,709,081.85. The filing fee equals 1/50 of 1% of the aggregate
value.
4. Proposed maximum aggregate value of transaction: $7,709,081.85.
5. Total fee paid: $1,542.
[x] Fee paid previously with preliminary materials
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1. Amount Previously Paid: None
2. Form, Schedule or Registration Statement No.:
------------------------------------------------------------------------
3. Filing Party:
------------------------------------------------------------------------
4) Date Filed:
-----------------------------------------------------
<PAGE> 2
PETROGLYPH ENERGY, INC.
1302 NORTH GRAND
HUTCHINSON, KANSAS 67501
(316) 665-8500
November __, 2000
TO THE STOCKHOLDERS OF PETROGLYPH ENERGY, INC.
You are cordially invited to attend a special meeting of stockholders
of Petroglyph Energy, Inc. to be held at Petroglyph's corporate offices at 1302
North Grand, Hutchinson, Kansas 67501 on December __, 2000 at 10:00 a.m. local
time.
As described in the accompanying proxy statement, at the special
meeting, you will be asked to approve a merger agreement, as amended, and the
transactions contemplated by that agreement, including the merger of Petroglyph
Acquisition Sub, Inc., a corporation newly formed by III Exploration Company,
with and into Petroglyph. III Exploration, Petroglyph's largest stockholder,
owns approximately 59% of Petroglyph's common stock and three persons affiliated
with III Exploration serve on Petroglyph's board of directors. In the merger:
o each outstanding share of the common stock of Petroglyph (other than shares
owned by III Exploration and its affiliates) will be converted into the
right to receive $2.85 in cash; and
o Petroglyph will become a wholly-owned subsidiary of III Exploration.
The board of directors of Petroglyph formed a special committee of one
independent director to evaluate the fairness of the proposed merger to the
stockholders of the company. The special committee has received a written
opinion dated June 19, 2000 of its financial advisor, Prudential Securities
Incorporated, to the effect that, as of such date and based upon and subject to
the matters stated in the opinion, the merger consideration to be received by
the common stockholders of the company, other than III Exploration and its
affiliates, was fair from a financial point of view. The special committee
approved the merger agreement and the transactions contemplated thereby and
recommended that the entire board of directors approve it and submit it to
Petroglyph's stockholders for approval.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT,
HAS DETERMINED THAT THE MERGER IS FAIR TO, ADVISABLE AND IN THE BEST INTERESTS
OF PETROGLYPH AND THE HOLDERS OF ITS COMMON STOCK AND RECOMMENDS THAT
PETROGLYPH'S STOCKHOLDERS VOTE "FOR" APPROVAL AND ADOPTION OF THE MERGER
AGREEMENT AND THE MERGER. IN WEIGHING THIS RECOMMENDATION, HOWEVER, YOU SHOULD
BE AWARE THAT CERTAIN MEMBERS OF THE BOARD OF DIRECTORS MAY HAVE ACTUAL,
APPARENT OR POTENTIAL CONFLICTS OF INTEREST WHICH ARE DESCRIBED IN THE
ACCOMPANYING PROXY STATEMENT.
<PAGE> 3
Consideration of the merger is an important matter for Petroglyph and
its stockholders. YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF
COMMON STOCK YOU OWN. To assure your representation at the special meeting,
please complete, sign and date the enclosed proxy card and return it in the
enclosed prepaid envelope, which requires no postage if mailed in the United
States. This will allow your shares to be voted whether or not you attend the
meeting. If you attend the special meeting, you may vote in person even if you
have previously returned your proxy.
Detailed information concerning the merger agreement and the proposed
merger is set forth in the accompanying proxy statement. Whether or not you plan
to attend the special meeting, I urge you to read the enclosed material
carefully.
Sincerely,
Robert C. Murdock
President, Chief Executive Officer and
Chairman of the Board
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS PASSED UPON THE FAIRNESS OR MERITS OF THIS TRANSACTION OR UPON
THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED IN THIS DOCUMENT. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
THIS PROXY STATEMENT IS BEING MAILED TO PETROGLYPH STOCKHOLDERS BEGINNING ON OR
ABOUT NOVEMBER ___, 2000.
<PAGE> 4
PETROGLYPH ENERGY, INC.
1302 NORTH GRAND
HUTCHINSON, KANSAS 67501
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
TO BE HELD ON DECEMBER __, 2000
TO THE STOCKHOLDERS OF
PETROGLYPH ENERGY, INC.
Notice is hereby given that a special meeting of stockholders, or any
adjournment or postponement thereof, of Petroglyph Energy, Inc., a Delaware
corporation, will be held on December ___, 2000, at 10:00 a.m., local time, at
Petroglyph's corporate offices at 1302 North Grand, Hutchinson, Kansas 67501,
for the following purposes:
1. To consider and vote on a proposal to approve and adopt an
Agreement and Plan of Merger, dated June 20, 2000, as amended,
by and between III Exploration Company and Petroglyph Energy,
Inc., and the transactions contemplated by that agreement; and
2. To transact such other business as may properly come before
the meeting or any adjournment(s) thereof.
You are cordially invited to attend the special meeting of the
stockholders. At this meeting, you will be asked to consider and vote on the
merger of Petroglyph with Petroglyph Acquisition Sub, Inc., a wholly owned
subsidiary of III Exploration, which is a wholly owned subsidiary of
Intermountain Industries, Inc.
Only holders of Petroglyph common stock of record at the close of
business on November __, 2000 are entitled to notice of and to vote at the
special meeting and any adjournments and postponements thereof.
Stockholders who do not vote in favor of adopting the merger agreement
and the merger and who otherwise comply with the requirements of Delaware law
will be entitled to appraisal rights. A summary of the applicable Delaware law
provisions, including the actions a stockholder must take in order to exercise
his or her appraisal rights, is contained in the accompanying proxy statement.
Holders of stock options under the company's 1997 Incentive Plan are
hereby notified that the merger would constitute a "fundamental change" under
the company's option agreements. Option holders may exercise their options,
vested or unvested, prior to the merger. The merger agreement does not provide
for survival of the options, and the company will cause all unexercised options
to terminate upon the consummation of the merger.
BY ORDER OF THE BOARD OF DIRECTORS
ROBERT C. MURDOCK
President, Chief Executive Officer and
Chairman of the Board
November __, 2000
i
<PAGE> 5
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
SUMMARY TERM SHEET................................................................................................1
The Proposed Transaction.......................................................................................1
Parties to the Transaction.....................................................................................1
Background of the Merger; Board of Directors Recommendation....................................................2
Special Committee's Recommendation.............................................................................2
Intermountain's Reasons for the Merger.........................................................................3
Stockholder Vote Required to approve the Merger Agreement and the Merger.......................................4
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING...................................................................5
THE SPECIAL MEETING...............................................................................................7
Date, Time and Place; Purpose..................................................................................7
Record Date and Voting.........................................................................................7
Vote Required..................................................................................................7
Voting, Revocation and Solicitations of Proxies................................................................8
Adjournments or Postponements..................................................................................8
Other Matters To Be Considered.................................................................................9
SPECIAL FACTORS..................................................................................................10
Background of the Merger......................................................................................10
Purposes and Reasons for the Merger...........................................................................18
Effects of the Merger.........................................................................................18
Alternatives Considered.......................................................................................19
Recommendation of the Special Committee and the Board of Directors; Fairness of the Merger....................20
Opinion of Financial Advisor to the Special Committee.........................................................25
Material Federal Income Tax Considerations....................................................................36
Accounting Treatment of the Merger............................................................................37
PETROGLYPH.......................................................................................................38
Business......................................................................................................38
Recent Events.................................................................................................39
Properties....................................................................................................49
Selected Financial Data.......................................................................................56
Management's Discussion and Analysis of Financial Condition and Results of Operations.........................57
Forward-Looking Statements....................................................................................67
Quantitative and Qualitative Disclosure About Market Risk.....................................................73
Changes In and Disagreements With Accountants On Accounting and Financial Disclosure..........................73
PETROGLYPH ACQUISITION SUB, INC..................................................................................74
</TABLE>
ii
<PAGE> 6
<TABLE>
<S> <C>
III EXPLORATION...................................................................................................74
CONFLICTS OF INTEREST.............................................................................................75
FINANCING; SOURCE OF FUNDS........................................................................................76
FEES AND EXPENSES.................................................................................................76
REGULATORY REQUIREMENTS...........................................................................................76
PLANS FOR PETROGLYPH AFTER THE MERGER.............................................................................77
THE MERGER AGREEMENT..............................................................................................77
The Merger.....................................................................................................77
Time of Closing................................................................................................78
Exchange and Payment Procedures................................................................................78
Transfers of Shares............................................................................................78
Treatment of Stock Options.....................................................................................78
Representations and Warranties.................................................................................79
Petroglyph's Covenants.........................................................................................79
Petroglyph Acquisition Sub's Covenants.........................................................................79
Indemnification and Insurance of Petroglyph's Directors, Officers and Employees................................79
Conditions.....................................................................................................79
Certificate of Incorporation; Bylaws; Officers and Directors...................................................80
Termination of the Merger Agreement............................................................................81
Expenses.......................................................................................................81
Amendments; Waivers............................................................................................81
CERTAIN EXISTING RELATIONSHIPS....................................................................................82
RIGHTS OF DISSENTING STOCKHOLDERS.................................................................................83
COMMON STOCK MARKET PRICE AND DIVIDEND INFORMATION................................................................88
COMMON STOCK PURCHASE INFORMATION.................................................................................89
CURRENT MANAGEMENT OF III EXPLORATION, INTERMOUNTAIN AND PETROGLYPH...............................................89
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT....................................................93
OTHER MATTERS.....................................................................................................94
STOCKHOLDER PROPOSALS.............................................................................................94
INDEPENDENT AUDITORS..............................................................................................94
</TABLE>
iii
<PAGE> 7
<TABLE>
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION..............................................................................95
GLOSSARY OF OIL AND NATURAL GAS TERMS............................................................................96
FINANCIAL STATEMENTS............................................................................................F-1
</TABLE>
Appendix A - Agreement and Plan of Merger, as Amended
Appendix B - Fairness Opinion of Prudential Securities Incorporated
Appendix C - Delaware Appraisal Rights Statute
iv
<PAGE> 8
SUMMARY TERM SHEET
THE PROPOSED TRANSACTION (PAGES 10-37 AND 77-81)
You are being asked to approve the proposed merger of Petroglyph with
and into a newly formed wholly-owned subsidiary of III Exploration. In
connection with the merger:
o each holder of Petroglyph's common stock, other than III Exploration
and its affiliates and any holder who properly perfects his or her
appraisal rights under Delaware law, will be entitled to receive $2.85
in cash for each share of Petroglyph common stock outstanding at the
time of the merger;
o Petroglyph will continue as the surviving corporation and become a
privately-held company owned by III Exploration, a wholly-owned
subsidiary of Intermountain Industries, Inc;
o Petroglyph will terminate registration of its common stock under the
Securities Exchange Act of 1934 and there will be no public market for
its stock;
o the receipt of the merger consideration will be a taxable transaction
to the holders of Petroglyph common stock for U.S. federal income tax
purposes under the Internal Revenue Code and may be a taxable
transaction for foreign, state and local income tax purposes as well.
Holders will recognize gain or loss measured by the difference between
the amount of cash they receive and their tax basis in the shares of
common stock exchanged therefor. You should consult your own tax
advisors regarding the U.S. federal income tax consequences of the
merger particular to you, as well as any tax consequences under state,
local or foreign laws; and
o holders of common stock of Petroglyph who do not vote in favor of the
merger agreement and the merger and who comply with the requirements of
Delaware law will have the right to dissent and seek appraisal of the
fair value of their shares of common stock if the merger is completed.
A summary describing the actions you must take in order to exercise
your appraisal rights is set forth beginning on page 83 of this proxy
statement and a copy of the Delaware statute regarding appraisal rights
is provided in Appendix C.
PARTIES TO THE TRANSACTION (PAGES 38-74)
o Petroglyph Energy, Inc.: Petroglyph is an independent energy company
which was incorporated in October 1997 under the laws of the State of
Delaware. Petroglyph is engaged in the exploration, development and
acquisition of crude oil and natural gas reserves.
o III Exploration Company: III Exploration Company was incorporated in
October 1992 under the laws of the State of Idaho. It was formed for
the purpose of exploring for and developing natural gas and oil
deposits. It has been actively engaged in this activity since its
incorporation.
<PAGE> 9
o Petroglyph Acquisition Sub, Inc.: Petroglyph Acquisition Sub, Inc. is a
Delaware corporation newly formed by III Exploration for the purpose of
effecting the merger. Petroglyph Acquisition Sub will not have engaged
in any business activities other than in connection with its
organization and the consummation of the transactions contemplated by
the merger agreement.
o Intermountain Industries, Inc.: Intermountain was incorporated in
August 1984 under the laws of the State of Idaho. It is a closely held
holding company that neither owns nor operates any physical properties.
Intermountain is the owner of all the outstanding common stock of its
operating subsidiaries: Intermountain Gas Company, III Exploration
Company and InterWest Capital, Inc.
BACKGROUND OF THE MERGER; BOARD OF DIRECTORS RECOMMENDATION (PAGES 10-17 AND
20-24)
Upon receiving an initial proposal from Intermountain to acquire
through a merger the outstanding shares of Petroglyph common stock not already
owned by Intermountain's wholly-owned subsidiary, III Exploration, Petroglyph
formed a special committee. The special committee, consisting of the one
independent director not affiliated with Intermountain or its affiliates or
otherwise interested in the proposed transaction, was formed for the purpose of
evaluating the fairness of Intermountain's merger proposal to Petroglyph's
stockholders, other than Intermountain and its affiliates.
The special committee has concluded, and has so advised and recommended
to the board of directors:
o that the terms of the merger agreement be approved;
o that the board of directors approve the merger and submit the proposal
to Petroglyph's stockholders for their approval; and
o that the board of directors recommend that the stockholders vote in
favor of the merger.
Based on the recommendation of the special committee, the board of
directors believes that the terms of the merger agreement are fair to, and in
the best interests of, Petroglyph's stockholders, other than Intermountain and
its affiliates. The board unanimously approved the merger agreement and the
merger and recommends that you vote for approval of the merger agreement and the
merger. In weighing this recommendation, however, you should be aware that
certain members of the board of directors may have actual, apparent or potential
conflicts of interest which are described more fully on page 75 of this proxy
statement.
SPECIAL COMMITTEE'S RECOMMENDATION (PAGES 20-24)
In arriving at the conclusion stated above, the special committee
relied, in part, on the opinion of Prudential Securities Incorporated, its
financial advisor, that the merger consideration of $2.85 per share was fair, as
of the date of the opinion, to the stockholders of Petroglyph, other than
2
<PAGE> 10
Intermountain and its affiliates, from a financial point of view. In addition,
the special committee considered a number of factors, including the following:
o the fact that the per share price to be paid in the merger represents a
premium over the recent closing prices of Petroglyph's common stock
before Petroglyph announced it had received the initial merger
proposal;
o the absence of any viable alternative sale or merger proposals from
other potential bidders and III Exploration's stated desire not to sell
its shares to a third party;
o the absence of adequate financing alternatives which would enable
Petroglyph to address its liquidity shortage and continue its
operations; and
o the special committee's belief that the price per share to be received
in the merger was fair relative to its own assessment of the business,
condition and prospects of Petroglyph, as a going concern, taking into
account the company's financial situation and prospects.
INTERMOUNTAIN'S REASONS FOR THE MERGER (PAGE 18)
According to William C. Glynn, President of III Exploration and
Intermountain, Intermountain proposed the merger because Intermountain believed
Petroglyph's projected cash needs and its inability to arrange a commercially
reasonable credit facility were likely to result in the cessation of
Petroglyph's future development plans, the default of Petroglyph under its
credit facility and its eventual liquidation. As the majority stockholder of
Petroglyph, such an event could be expected to have an adverse effect on III
Exploration and could result in a loss in III Exploration's and the other
Petroglyph stockholders' investment in the company.
Each of the following parties has expressly adopted the conclusion of
the board of directors and special committee that the transaction is fair to the
stockholders of Petroglyph, other than III Exploration and its affiliates:
o Intermountain;
o III Exploration;
o Petroglyph Acquisition Sub
o Century Partners - Idaho Limited Partnership, the majority owner of
Intermountain; and
o Richard Hokin, the general partner of Century Partners - Idaho Limited
Partnership.
3
<PAGE> 11
STOCKHOLDER VOTE REQUIRED TO APPROVE THE MERGER AGREEMENT AND THE MERGER (PAGES
7-9)
o The merger agreement and the merger must be approved by the affirmative
vote of at least a majority of the outstanding shares of common stock.
o III Exploration and its affiliates own a majority of the outstanding
shares of common stock, and III Exploration has agreed in the merger
agreement to vote all of its shares in favor of the merger agreement
and the merger. Therefore, unless a condition to the consummation of
the merger is not satisfied and III Exploration does not waive such
condition, approval of the merger agreement and the merger by
Petroglyph's stockholders is assured, regardless of whether you or any
of the other stockholders vote for or against, or abstain from voting
upon, the merger.
o More information regarding voting by proxy or at the special meeting is
provided on pages 5-6 and 7-9.
4
<PAGE> 12
QUESTIONS AND ANSWERS ABOUT THE SPECIAL MEETING
Q. WHAT IS THE DATE, TIME AND PLACE OF THE MEETING (SEE PAGE 7)?
A. The special meeting of stockholders will be held on December __, 2000, at
10:00 a.m., local time, at Petroglyph's corporate offices at 1302 North Grand,
Hutchinson, Kansas 67501.
Q. WHO IS ENTITLED TO VOTE AT THE SPECIAL MEETING (SEE PAGE 7)?
A. Stockholders of record as of the close of business on November ___, 2000 are
entitled to vote at the special meeting.
Q. HOW DO I VOTE (SEE PAGE 8)?
A. You can vote by signing and mailing your proxy card. You may also vote in
person at the special meeting.
Q. IF MY SHARES ARE HELD IN "STREET NAME" BY MY BROKER, WILL MY BROKER VOTE MY
SHARES FOR ME (SEE PAGE 7)?
A. Generally, your broker will not have the power to vote your shares. Your
broker will vote your shares only if you provide him or her with instructions on
how to vote. You should follow the directions provided by your broker on how to
instruct your broker to vote your shares. Without instructions, your shares will
not be voted, which for purposes of voting on the merger agreement and the
merger will have the same effect as voting against the merge
Q. WHAT DO I NEED TO DO NOW (SEE PAGE 8)?
A. Please complete, date and sign your proxy card and then mail it in the
enclosed postage-paid envelope as soon as possible, so that your shares may be
represented at the special meeting.
Q. SHOULD I SEND IN MY STOCK CERTIFICATES NOW (SEE PAGE 78)?
A. No. Soon after the merger is completed, we will send you written instructions
explaining how to exchange your Petroglyph stock certificates for cash.
Q. MAY I CHANGE MY VOTE AFTER I HAVE MAILED MY SIGNED PROXY CARD (SEE PAGE 8)?
A. Yes. You may revoke it any time before the special meeting by:
o giving written notice of your revocation to our corporate
secretary;
o filing a revoking instrument or a duly executed proxy bearing
a later date with our corporate secretary; or
o attending the special meeting and voting in person.
5
<PAGE> 13
Q. WHEN DO YOU EXPECT THE MERGER TO BE COMPLETED (SEE PAGES 77-81)?
A. We are working to complete the merger as quickly as possible. We expect to
complete the merger, if it is approved by our stockholders, promptly following
the special meeting.
Q. WHAT HAPPENS IF I SELL MY PETROGLYPH COMMON STOCK BEFORE THE SPECIAL MEETING
(SEE PAGE 7)?
A. The record date for the special meeting is November __, 2000. If you hold
your Petroglyph shares on the record date but subsequently transfer your
Petroglyph shares after the record date and before the merger, you will retain
your right to vote at the special meeting but not the right to receive the
merger consideration. The right to receive the merger consideration will pass to
the person to whom you transferred your shares.
Q. WHO DO I CONTACT FOR MORE INFORMATION?
A. If you have other questions about the merger or would like additional copies
of this proxy statement, you should contact:
Petroglyph Energy, Inc.
1302 North Grand
Hutchinson, Kansas 67501
Attn: Corporate Secretary
Telephone: 316-665-8500
6
<PAGE> 14
THE SPECIAL MEETING
DATE, TIME AND PLACE; PURPOSE
This proxy statement is being furnished to Petroglyph stockholders as
part of the solicitation of proxies by Petroglyph's board of directors for use
at a special meeting to be held on December __, 2000, starting at 10:00 a.m.,
local time, at Petroglyph's corporate offices at 1302 North Grand, Hutchinson,
Kansas 67501. The purpose of the special meeting is for Petroglyph's
stockholders to consider and vote upon a proposal to approve the merger
agreement and the merger. A copy of the merger agreement, as amended, is
attached to this proxy statement as Appendix A. This proxy statement and the
enclosed form of proxy are first being mailed to Petroglyph stockholders on or
about November __, 2000.
RECORD DATE AND VOTING
The holders of record of shares of Petroglyph common stock as of the
close of business on November __, 2000 (referred to as the "record date" in this
proxy statement), are entitled to receive notice of, and to vote at, the special
meeting. On the record date, __________ shares of Petroglyph common stock were
issued and outstanding. Holders of common stock are entitled to one vote per
share.
The holders of record of a majority of the outstanding shares of
Petroglyph common stock on the record date, represented in person or by proxy,
will constitute a quorum for purposes of the special meeting. A quorum is
necessary to hold the special meeting. Once a share is represented at the
special meeting, it will be counted for the purpose of determining a quorum at
the special meeting and any adjournment or postponement of the special meeting,
unless the holder is present solely to object to the special meeting. Because
III Exploration by itself holds a majority of the outstanding shares of
Petroglyph common stock, a quorum will be present if the shares held or
controlled by III Exploration are represented at the meeting, and no quorum is
possible without representation of III Exploration's shares.
VOTE REQUIRED
Approval by Petroglyph's stockholders of the merger agreement and the
merger will require the affirmative vote of a majority of the outstanding shares
of common stock. Under the Delaware General Corporation Law, the required vote
is based on the number of shares of common stock outstanding, not the number of
votes cast.
Any abstentions, broker non-votes (shares held by brokers or nominees
as to which they have no discretionary authority to vote on a particular matter
and have received no instructions from the beneficial owners or persons entitled
to vote thereon) or other limited proxies will have the same effect as a vote
against the proposal to approve the merger agreement and the merger.
III Exploration, which owns a majority of the outstanding shares of
Petroglyph common stock, has agreed in the merger agreement to vote all shares
owned by it in favor of the merger agreement and the merger at the special
meeting. Therefore, unless a condition to the consummation
7
<PAGE> 15
of the merger is not satisfied and III Exploration does not waive such
condition, approval of the merger agreement and the merger by Petroglyph's
stockholders is assured.
Robert C. Murdock, S. Ken Smith and A.J. Schwartz, executive officers
and/or directors of Petroglyph who collectively beneficially own approximately
7% of the outstanding shares of Petroglyph common stock, have also informed the
company that they intend to vote their shares in favor of the merger agreement
and the merger.
The approval of the merger by a majority of stockholders who are
unaffiliated with III Exploration is not required.
VOTING, REVOCATION AND SOLICITATIONS OF PROXIES
If you vote your shares of Petroglyph's common stock by signing a
proxy, your shares will be voted at the special meeting as you indicate on your
proxy card. If no instructions are indicated on your signed proxy card, your
shares of Petroglyph common stock will be voted FOR the approval of the merger
agreement. You may revoke your proxy at any time before the proxy is voted at
the special meeting. A proxy may be revoked prior to the vote at the special
meeting by submitting a written revocation to the corporate secretary of
Petroglyph at 1302 North Grand, Hutchinson, Kansas 67501 or by submitting a new
proxy, in either case, dated after the date of the proxy that is being revoked.
In addition, a proxy may also be revoked by voting in person at the special
meeting. However, simply attending the special meeting will not revoke a proxy.
All expenses incurred in connection with solicitation of the enclosed
proxy will be paid by Petroglyph. Officers and employees of Petroglyph may
solicit proxies by telephone or in person. However, they will not be paid for
soliciting proxies. Petroglyph also will request that persons and entities
holding shares in their names or in the names of their nominees that are
beneficially owned by others send proxy materials to and obtain proxies from
those beneficial owners, and will reimburse those holders for their reasonable
expenses in performing those services.
ADJOURNMENTS OR POSTPONEMENTS
Although it is not expected, the special meeting may be adjourned or
postponed for the purpose of soliciting additional proxies. Any adjournment or
postponement of the special meeting may be made without notice, other than by an
announcement made at the special meeting, by approval of the holders of a
majority of the votes present in person or represented by proxy at the special
meeting, whether or not a quorum exists. Any signed proxies received by
Petroglyph will be voted in favor of an adjournment or postponement of the
special meeting in these circumstances, unless either a written note on the
proxy delivered by the stockholder directs otherwise or the stockholder has
voted against the merger agreement. Thus, proxies voting against the merger
agreement will not be used to vote for adjournment of the special meeting for
the purpose of providing additional time to solicit votes to approve the merger
agreement. Any adjournment or postponement of the special meeting for the
purpose of soliciting additional proxies will allow Petroglyph stockholders who
have already sent in their proxies to revoke them at any time prior to their
use.
8
<PAGE> 16
OTHER MATTERS TO BE CONSIDERED
Petroglyph's board is not currently aware of any other business to be
brought before the special meeting. If, however, other matters are properly
brought before the special meeting or any adjournment or postponement of the
special meeting, the persons appointed as proxies will have discretionary
authority to vote the shares represented by duly executed proxies in accordance
with their discretion and judgment.
9
<PAGE> 17
SPECIAL FACTORS
BACKGROUND OF THE MERGER
Since its inception, Petroglyph has from time to time considered the
possibility of entering into strategic merger and acquisition transactions with
other oil and gas exploration and production companies. Petroglyph has also
regularly engaged in discussions relating to potential acquisitions and
divestitures of oil and gas properties.
Between the summer of 1998 and the summer of 1999, Petroglyph, with the
assistance of Prudential Securities acting as its strategic advisor, attempted
to locate a strategic partner for a potential merger. After discussing a
potential transaction with several industry participants, the company was unable
to attract serious inquiries.
Between January 1999 and June 1999, Petroglyph contacted approximately
30 industry participants regarding a possible joint venture to develop the
company's Raton Basin properties. After preliminary discussions with several of
these parties, Petroglyph entered into confidentiality agreements with each of
these potential partners.
In June 1999, members of Petroglyph's management began discussions with
representatives of certain industry participants, including III Exploration, an
affiliate of Intermountain Industries, with the purpose of locating interested
investors willing to buy shares of Petroglyph's common stock in the open market.
In August 1999, III Exploration acquired 2,753,392 shares of common stock or
approximately 50.4% of the outstanding common stock of Petroglyph from three of
the company's principal stockholders and certain of their affiliates for
approximately $8.3 million, or $3.00 per share.
Following the consummation of this acquisition, William C. Glynn,
Richard Hokin and Eugene C. Thomas, who are members of Intermountain's and III
Exploration's boards of directors, were appointed to fill vacancies on
Petroglyph's board of directors, which then consisted of five members.
After the August 1999 acquisition by III Exploration of shares of
Petroglyph's common stock, Petroglyph's board of directors began discussing
Petroglyph's capital expenditure budget for the remainder of 1999 and 2000. In
addition, management presented estimated cash flow information for Petroglyph
for the same period. According to management estimates, Petroglyph needed to
increase cash flow from its existing properties, from the sale of its Texas
properties, from the sale of a portion of its Raton Basin properties, from
additional equity or debt financings and/or from increases in its borrowing
capacity under its existing or another credit facility to maintain its current
level of operations and to fund future development. As a result of this
information, the board began discussing possible transactions that would improve
Petroglyph's cash flow and increase its liquidity.
During September 1999, representatives of Petroglyph began having
discussions with representatives of Chase, its senior lender, regarding the
company's relationship with Chase. Chase advised Petroglyph that it was
restructuring its energy lending group to focus on larger company
10
<PAGE> 18
accounts, and that Petroglyph should consider obtaining alternative financing.
Petroglyph began discussions with several prospective lenders, but no new
relationship was established.
In September 1999, Petroglyph's board considered two proposals from
potential partners in the Raton Basin. Because the board remained positive about
the prospects of the project and the proposals did not meet the company's
expectations in terms of financial commitments and suitable terms, the board
determined to continue the evaluation of the company's pilot program and did not
pursue either proposal.
In November 1999, Mr. Murdock, Petroglyph's President, Chief Executive
Officer and Chairman of the Board, and Mr. Glynn, President of Intermountain and
III Exploration, met to discuss a proposed transaction that would involve the
issuance of a new series of preferred stock, convertible into Petroglyph common
stock, to III Exploration in exchange for III Exploration's interest in certain
Uinta Basin properties owned by III Exploration. On December 21, 1999, the
Petroglyph board of directors met to discuss the proposed Uinta Basin property
transaction. At this meeting, after the Petroglyph board's independent director,
A. J. Schwartz, determined the transaction was fair to Petroglyph, the
disinterested members, Messrs. Murdock and Schwartz, approved the draft Purchase
and Sale Agreement and the underlying issuance of 250,000 shares of preferred
stock convertible into approximately 714,000 shares of Petroglyph common stock,
subject to the negotiation of a definitive agreement and Petroglyph stockholder
approval. In addition, the board considered Petroglyph's liquidity position and
proposed 2000 capital spending plan, including $6.0 million of projected capital
necessary to develop the Antelope Creek Field, and concluded that Petroglyph
needed to obtain additional equity financing in order to initiate its 2000
development plans, fund its current level of operations and support its ability
to continue to obtain financing from Chase. As a result, the board considered,
and the independent member of the board approved, a private equity sale to III
Exploration in order to address Petroglyph's immediate liquidity needs. III
Exploration offered to acquire 1,000,000 shares of common stock, or
approximately 18% of the outstanding shares, at a purchase price of $2.00 per
share, which represented the current market price for the common stock based on
the closing price as reported on the Nasdaq National Market for the preceding
trading day, for $2.0 million in cash.
The disinterested members of the board accepted the offer, and the
resulting Purchase and Sale Agreement was signed and announced on December 28,
1999.
In January 2000, Petroglyph met with representatives of Chase to
discuss the status of the company's credit facility. During this meeting, the
parties discussed the company's efforts to obtain alternative financing, and the
company advised Chase of the status of its discussions with possible lenders.
Following this meeting, the company continued discussions with several
prospective lenders and began negotiations with two banks. After extensive
discussions and due diligence, the parties were unable to reach an agreement on
a new credit facility.
At March 31, 2000, the company was out of compliance with both the
minimum fixed charge coverage ratio and minimum current ratio covenants as
provided in the Chase credit facility. Chase granted a one-time waiver of
default with respect to such covenants.
In early 2000, the Petroglyph board reevaluated the success of the
Raton Basin test pilot and
11
<PAGE> 19
decided to again pursue a potential partner for its properties. The parties that
had expressed an interest earlier were not interested in resuming discussions,
and the company was unable to interest any other potential partners despite
several meetings with several companies.
Since 1998, Petroglyph has attempted to sell its Texas properties from
time to time and entered into a relationship with a broker in June 1999 to
assist with the marketing of the properties. In December 1999 and May 2000,
Petroglyph negotiated sale transactions with two separate buyers, neither of
which were affiliated with Petroglyph, without consummating a sale of the Texas
properties. The estimated proceeds from the sale of the Texas properties were
anticipated to be $2 million. The first transaction failed to close after the
execution of a purchase and sale agreement when the buyer could not arrange
financing. The second potential buyer withdrew its offer to purchase after due
diligence had been completed. Petroglyph ultimately sold its interest in the
Texas properties on October 6, 2000 for net proceeds of $700,000 after taking
into account the effect of its hedging transactions.
In spring 2000, Petroglyph's cash liquidity shortage became critical
due to a number of factors, which included:
o the inability of the company to find viable
alternative financing to replace the Chase credit
facility;
o Petroglyph's receipt of notice by telephone on May
30, 2000 from Chase that Chase would reduce the
borrowing base of the Petroglyph credit facility by
$2 million;
o the failure to complete a sale of the Texas
properties;
o the inability of the company to obtain joint venture
partners to exploit and develop the company's Raton
Basin properties; and
o the increase of pipeline capacity payments owed to
Colorado Interstate Gas Company.
At a board of directors meeting on April 24 and 25, 2000, the board
reviewed at length the details of the development of the Raton Basin properties
and the inability to consummate an agreement to sell a portion of the properties
to potential joint venture partners. The board discussed the causes and
anticipated effects of the projected cash liquidity shortage facing the company,
including the company's inability to obtain financing to replace the Chase
credit facility, the unsuccessful attempts to sell the company's Texas
properties and the potential inability of the company to meet its operating and
capital plans for fiscal year 2000.
On May 3, 2000, Mr. Richard Hokin, a member of Petroglyph's board and
an affiliate of Intermountain, advised the board of directors that a written
acquisition proposal from III Exploration or one of its affiliates would be
forthcoming.
12
<PAGE> 20
On May 3, 2000, Petroglyph received a written proposal from
Intermountain Industries, the parent company of III Exploration, to acquire
through a merger the shares of Petroglyph common stock not already owned by III
Exploration, Intermountain's wholly owned subsidiary, or 41% of the total
outstanding shares. The May 3 proposal contemplated a $2.20 purchase price,
which at that time represented approximately a 35% premium to Petroglyph's
20-trading day average reported closing price of $1.62. In addition, the
proposal included a commitment by Intermountain to make a $1 million loan to
Petroglyph to fund the company's operations for the period prior to the
consummation of the merger. This loan required the prior approval of Chase under
the terms of the Chase credit facility and required that the loan be repaid upon
consummation or rejection of a merger between the company and an affiliate of
Intermountain. The proposal also stated that Intermountain did not desire to
sell its Petroglyph shares. The Intermountain acquisition proposal was set to
expire on May 10, 2000.
On May 3, 2000, Petroglyph's board met to discuss the Intermountain
offer. At this meeting, the board determined that Messrs. Glynn, Hokin and
Thomas were "interested" directors as a result of their affiliation with
Intermountain. In addition, Mr. Murdock was considered "interested" as a result
of his position as Chief Executive Officer and President of Petroglyph. After
consultation with counsel, the board formed a special committee to evaluate
Intermountain's offer and make a formal recommendation to the board. A.J.
Schwartz, the sole independent member of the board of directors, with respect to
this transaction, was appointed to serve on the special committee, and the board
authorized the special committee to retain counsel and a financial advisor of
its choice to assist it in its evaluation. Mr. Murdock was appointed to act as
an intermediary between the board and the special committee.
On May 5, 2000, the special committee met to consider Intermountain's
offer to acquire Petroglyph and its offer to provide a loan of $1,000,000. By
letter dated May 5, 2000, the special committee requested additional time to
properly evaluate Intermountain's offer.
On May 8, 2000, the special committee interviewed potential financial
advisors telephonically. After listening to each of the presentations and
discussing possible conflicts, capabilities and fee structures, on May 9, 2000,
the special committee selected Prudential Securities Incorporated to act as its
financial advisor for a fee of $250,000 to be paid whether or not the merger is
concluded.
By letter dated May 9, 2000, Intermountain granted the special
committee's request and extended its offer to purchase Petroglyph's outstanding
common stock through May 17, 2000.
On May 10, 2000, the company received an unsolicited oral contact
followed by a written proposal from a third-party finder to arrange, on a
best-efforts basis, a two year, $25 million credit line of credit from
unidentified third-party lenders. The proposal, which was expressly not a
commitment to provide financing, required the payment of an upfront
non-refundable application fee of $70,000 and additional fees in the form of
cash commitment fees, stock purchase warrants and origination fees approximating
$700,000 in the event financing was arranged. In addition, the proposal
contemplated that any loan would be secured by essentially all of the company's
oil and gas assets.
13
<PAGE> 21
On May 12, 2000, the board of directors reviewed the third-party finder's
proposal and concluded that the proposal did not offer a commercially reasonable
solution to the company's cash liquidity problems. The board of directors
believe that the exact terms of the proposal were vague and speculative and
required non-refundable up front fees that Petroglyph could not afford to spend.
In addition, the board of directors determined that the additional indebtedness
would adversely affect Petroglyph's future operations.
On May 12, 2000, the special committee informed the board that it had
selected Prudential Securities as the financial advisor to the special committee
in connection with its review of the Intermountain offer.
On May 12, 2000, at the request of the special committee,
Intermountain agreed to delete from its proposal the expiration deadline, but
reserved its right to impose a deadline in the future if appropriate. In
addition, Intermountain agreed to a nine-month term for the contemplated $1
million loan and to delete the requirement that the loan be repaid immediately
upon the acceptance or rejection of the merger proposal.
On May 15, 2000, at Petroglyph's offices in Hutchinson, Kansas,
Petroglyph's management made a presentation to the special committee and its
legal and financial advisors regarding Petroglyph's operations and properties.
Management provided Prudential Securities with information regarding the
reserves and financial statements of Petroglyph summarized in this proxy
statement as well as certain projections which indicated the company's Raton
Basin and Antelope Creek properties were anticipated to show significant
drilling activity, with an estimated increase from 1999 to 2002 of 93 wells, and
growth in reserves from 25.7 million BOE in 1999 to an estimated 45.9 million
BOE in 2002, which would result in estimated revenues of $26.7 million, earnings
per share before income taxes, depreciation and amortization of $2.47 and net
income of $8.3 million in 2002 if the company was able to obtain additional
infusions of capital. At this meeting, the special committee and the financial
advisor had the opportunity to ask questions and discuss management's
presentation.
Between May 16 and May 31, 2000, the special committee, with advice
from counsel and in consultation with Prudential Securities, and Mr. Glynn,
Intermountain's President, with advice from counsel, continued negotiations
regarding the Intermountain merger proposal and the merger consideration to be
paid.
On May 17, 2000, the special committee held a telephonic meeting with
certain of Petroglyph's minority stockholders. During this telephonic meeting,
the minority stockholders expressed strong disagreement with the proposed merger
and the merger consideration. Prudential Securities participated in the meeting
and engaged in discussion with the minority stockholders. At this meeting, the
minority stockholders had the opportunity to ask questions and receive answers
of the special committee and its financial advisor.
On May 19, 2000, the special committee held a telephonic meeting with
representatives of Wellington Management, a minority stockholder, to discuss
possible financing alternatives. Wellington suggested that Petroglyph undertake
a rights offering to raise at least $6 million to $9 million, of which
Wellington would subscribe only to an amount that would not cause its total
14
<PAGE> 22
ownership in the company to exceed 10%. After discussing the Wellington
suggestion with Petroglyph management and its financial advisor, the special
committee reported the suggestion to the board, which subsequently determined
not to proceed with the suggestion because the amount raised would not have been
sufficient to refinance the company's existing credit facility and meet the
company's ongoing capital needs.
On May 19, 2000, the special committee held a telephonic meeting with
representatives of Schooner Capital, another minority stockholder, to discuss a
possible rights offering for Petroglyph's common stock. Schooner suggested that
Petroglyph undertake a common stock offering to an unspecified number of
minority stockholders at $2.20 per share to raise at least $2 million. The
Schooner suggestion was conditioned on the minority stockholders' right to veto
future acquisition proposals by Intermountain or its affiliates, the minority
stockholders' right to maintain their percentage ownership interest through
co-investments in any future capital infusions, and a change in management.
After discussing the suggestion with Petroglyph management and its financial
advisor, the special committee reported the suggestion to the board, which
determined not to proceed with the suggestion because it did not provide
adequate financing to address the company's liquidity shortage.
On May 30, 2000, Chase informed the company by telephone that it had
determined to reduce the borrowing base on the company's credit facility from
$11 million to $9 million, and required repayment of the $2 million within 90
days. Chase also advised the company that $500,000 of the proposed $1 million
loan from Intermountain would have to be used to pay down the Chase credit
facility. Petroglyph management determined that the position of Chase was
intractable and that it would immediately have to seek funds for short-term
operating expenses.
On May 31, 2000, the board of directors met to discuss, among other
things, the company's liquidity position and the status of the proposed $1
million loan to the company by Intermountain. The board was presented a cash
flow analysis prepared by management and was advised of the company's
delinquency on its accounts payable averaging over 45 days past due. Management
also informed the board of recent discussions with Chase regarding the reduction
of the credit facility borrowing base and the required $500,000 paydown of the
Chase loan with proceeds from the proposed Intermountain loan if made.
On May 31, 2000, the special committee received a preliminary
indication from its financial advisor to the effect that Intermountain's initial
$2.20 per share offer was not within the range of prices it considered to be
fair to Petroglyph's stockholders from a financial point of view. The special
committee then met with representatives of Intermountain to discuss and
negotiate Intermountain's offer. The special committee advised the
representatives of Intermountain, based upon Prudential Securities' valuation of
the company, that the special committee would support an offer of $4.00 per
share, which offer III Exploration rejected.
On May 31, 2000, III Exploration distributed a form of Agreement and
Plan of Merger that III Exploration proposed be entered into by III Exploration
and Petroglyph.
15
<PAGE> 23
On June 1, 2000, the special committee advised Petroglyph and its
counsel that, based upon the advice of Prudential Securities and upon the
committee's own analysis of Intermountain's current offer, the committee had
determined that it was unable to support Intermountain's $2.20 offer in its
current form and that the special committee would so report back to the board of
directors.
On June 1, 2000, the board was advised by management that without
additional funds, Petroglyph would suffer a shortfall in funds available to pay
operating expenses and hedge obligations over the next two months. Between June
1, 2000 and June 6, 2000, members of Petroglyph's management, including Mr.
Murdock, S. Ken Smith, Petroglyph's then-Executive Vice President and Chief
Operating Officer and current Executive Vice President and Chief Financial
Officer, and Tim A. Lucas, Petroglyph's then-Vice President and Chief Financial
Officer and the full board of directors discussed the company's liquidity
position and calculated that the company would have a $2,000,000 shortfall in
available funds needed to meet its obligations over the next two months, a
substantial portion of which would be required within the next ten working days.
The company's management requested that III Exploration purchase $800,000 in
accounts receivable, at no discount to III Exploration, to provide the company
with funds that would be otherwise unavailable to meet its short term cash
requirements.
On June 5, 2000, the special committee had conversations with Mr. Glynn
regarding a possible private placement of Petroglyph's common stock for between
$2.20 and $2.50 per share, for aggregate gross proceeds of $10 million, instead
of the proposed purchase by III Exploration. In those conversations, it was
discussed that shares of such common stock be sold in the private placement to
existing stockholders, including Intermountain. After several conversations,
including discussions with its financial advisor, the special committee
concluded that a private placement would take a significant amount of time with
no assurance that the company would raise sufficient equity from existing
stockholders to implement its development plans, or provide adequate working
capital for any reasonable period of time. In addition, the special committee
considered the limitations and conditions that the minority stockholders were
requiring, including no further dilution and the ability to prevent future
equity purchases by Intermountain. As a result, the special committee decided
not to recommend to the board that the company proceed with the proposed private
placement.
On June 5, 2000, the special committee met with Prudential Securities
and Mr. Glynn, acting as a representative of Intermountain, who discussed with
Prudential Securities its methodology in calculating the Petroglyph valuation,
including Prudential Securities' primary reliance on Petroglyph's liquidation
value in determining the fairness of the Intermountain $2.20 offer. At this
meeting, Prudential Securities defended its valuation and methodologies. Mr.
Glynn, the special committee and Prudential Securities agreed to give this
matter further consideration.
On June 7, 2000, the special committee reported to the board that it
was still negotiating in good faith with Intermountain. The board advised the
special committee to continue its discussions. In addition, the board approved
the above-described proposed sale of $800,000 of accounts receivable to III
Exploration. The sale of accounts was consummated on June 8, 2000, and the funds
so provided were immediately used to pay accounts payable, including the current
portion of the company's past-due hedge obligations.
16
<PAGE> 24
On June 8, 2000, the special committee again met with Mr. Glynn, acting
as a representative of Intermountain, to discuss Prudential Securities'
valuation methodology. Mr. Glynn explained that Intermountain believed
Prudential Securities' proposed liquidation value calculation was incomplete in
that it did not account for the costs associated with liquidation, the inability
of Petroglyph to continue operating in the short term and preserve the asset
values given its cash liquidity shortage, the recognition that the realized
value of Petroglyph's assets would be sought in a distressed sale environment
and the time value of proceeds which would eventually be received in a
liquidation sale. Later that day, Mr. Glynn indicated that Intermountain would
increase its offer to $2.50 per share, notwithstanding its disagreement with
Prudential Securities' valuation of Petroglyph.
On June 14, 2000, after additional negotiations between the special
committee and Intermountain, Intermountain increased its offer to $2.85 per
share. Following receipt of Intermountain's increased offer, the special
committee met with representatives of the financial advisor to review the new
offer. The financial advisor advised the special committee that its preliminary
determination was that the increased offer was fair to Petroglyph's
stockholders.
On June 19, 2000, the financial advisor made a detailed presentation to
the special committee. During the presentation, the financial advisor reported
that the $2.85 per share merger consideration was fair from a financial point of
view to the stockholders of Petroglyph, other than III Exploration and its
affiliates. At this meeting, the special committee had the opportunity to ask
questions of the financial advisor and receive answers to its satisfaction.
At a meeting of the board of directors held on June 20, 2000,
Prudential Securities presented its opinion that the proposed merger
consideration of $2.85 per share was fair from a financial point of view to the
stockholders of Petroglyph, other than III Exploration and its affiliates. The
special committee reported to the board of directors that it had concluded that
the terms of the merger agreement, including the renegotiated $2.85 per share
merger consideration, were fair to and in the best interests of the unaffiliated
stockholders and recommended that the merger agreement and the merger be
approved by the board and submitted to the stockholders for their approval.
After the special committee made its recommendation and Prudential Securities
delivered its opinion, the board determined that the terms of the merger
agreement and the merger were fair to and in the best interests of Petroglyph
and the unaffiliated stockholders. The merger agreement was executed, and its
execution was announced, on June 20, 2000.
On June 28, 2000, the board approved an advancement of $1 million from
III Exploration in exchange for an assignment of $1 million of its rights from
proceeds of oil and natural gas sales to cover past due accounts payable and
hedge obligations.
On July 14, 2000, Intermountain purchased at par the outstanding
indebtedness under the company's Chase credit facility and assumed Chase's
rights and obligations under the credit facility and did not change any of the
terms and conditions of the credit agreement. Following the closing of that
transaction, Intermountain loaned the company an additional $2.4 million to meet
its current obligations.
17
<PAGE> 25
On August 28, 2000, Petroglyph and III Exploration amended the merger
agreement to provide that the board of directors of Petroglyph following the
consummation of merger would consist of the current five members of the
Petroglyph board of directors and an additional six or more members to be
designated by III Exploration and extended the closing date of the merger to
November 30, 2000.
On November 22, 2000, Petrograph and III Exploration amended the merger
agreement to increase the amount of indebtedness the company could incur to $26
million and to extend the closing date of the merger to no later than December
31, 2000.
PURPOSES AND REASONS FOR THE MERGER
The purpose of the merger is to enable III Exploration, through
Petroglyph Acquisition Sub, to acquire the remaining shares of Petroglyph common
stock not already owned by III Exploration, and to provide the public
stockholders with the opportunity to receive $2.85 in cash for each share of
Petroglyph common stock held by them. According to William C. Glynn, the
President of Intermountain and III Exploration, Intermountain proposed the
merger because Intermountain believed Petroglyph's projected cash needs and its
inability to arrange a commercially reasonable credit facility was likely to
result in the cessation of Petroglyph's future development plans, the default of
Petroglyph under its credit facility and its eventual liquidation. As the
majority stockholder of Petroglyph, such an event could be expected to have an
adverse effect on III Exploration and could result in a loss in III
Exploration's and the other Petroglyph stockholders' investment in the company.
According to III Exploration, other than as set forth herein, neither III
Exploration nor Intermountain has any reason for proposing the merger at this
particular time (as opposed to any other time) and neither such company nor
Petroglyph is aware of any material fact or development affecting the future
value of the common stock that is not described in this proxy statement.
EFFECTS OF THE MERGER
The principal results of the merger will be that III Exploration will
own all of the equity interest in Petroglyph and the unaffiliated public
stockholders will receive a cash payment for their shares of common stock that
represents a premium over the market prices at which the common stock traded
immediately prior to the announcement of the initial Intermountain offer.
Petroglyph common stock is currently registered under the Securities Exchange
Act of 1934. Following the merger, registration of Petroglyph common stock under
the Exchange Act will be terminated. By becoming a private company, Petroglyph
will enjoy certain efficiencies and cost savings by eliminating the time devoted
by its management and certain other employees to complying with the reporting
requirements of the Exchange Act, including the obligation to comply with the
proxy rules thereunder, and its directors, officers and beneficial owners of
more than 10% of the shares of common stock will be relieved of the reporting
requirements and restrictions on insider trading under Section 16 of the
Exchange Act. In addition, Petroglyph will be relieved of Nasdaq listing and
reporting requirements. Accordingly, considerably less information will be
required to be made currently available to the public than is the case at this
time. Petroglyph will be able to reduce certain costs, which it estimates to be
approximately $275,000 per year, including the cost of preparing, printing and
mailing certain corporate reports and proxy statements, the expense of a
transfer agent and registrar and the cost of investor relations activities by
becoming a private company. Additionally, as a result of the merger, Petroglyph
will have access to the financial and other resources of III Exploration and
Intermountain, which could facilitate Petroglyph's future growth.
18
<PAGE> 26
Following the merger, III Exploration will be the sole beneficiary of
any future earnings or growth of Petroglyph. Accordingly, the stockholders of
Petroglyph other than III Exploration will not share in any future earnings and
growth of Petroglyph, nor will they bear the risks of any decrease in the value
of Petroglyph. The merger consideration to be received by such stockholders was
the result of negotiations between representatives of III Exploration and the
special committee and their respective advisors following the receipt of the
initial buyout proposal from Intermountain. As a result of the merger, III
Exploration will have a 100% interest in the net book value and net earnings of
Petroglyph, increasing its interests from the approximately 59.07% it currently
owns.
Neither Intermountain nor III Exploration currently has any plans to
dispose of any Petroglyph assets after the merger other than the assets
currently held for sale.
III Exploration structured the transaction as a one-step merger because
it believes that that transaction structure would result in its owning 100% of
the equity of Petroglyph at the earliest time and with the lowest transaction
costs.
Approval of the merger requires the vote of at least a majority of the
outstanding shares of common stock but does not require the separate approval of
a majority of the common stock held by the stockholders not affiliated with III
Exploration. The parties did not structure the transaction to require the
approval of a majority of the unaffiliated common stockholders because such
approval is not required under the Delaware merger statute. In addition, III
Exploration believes that the fairness of the transaction has been established
by other factors, including the negotiation between III Exploration and the
special committee as to the terms of the transaction and the fairness opinion
rendered by Prudential Securities.
ALTERNATIVES CONSIDERED
In connection with the merger and the discussions relating thereto, III
Exploration has advised Petroglyph that, in structuring the merger, III
Exploration considered alternatives that would have allowed the unaffiliated
common stockholders to maintain an equity interest in Petroglyph, including
incurring additional debt or issuing additional equity in Petroglyph, but
concluded that such alternatives would not have accomplished the purposes of the
merger as set forth in this section because
o Petroglyph was not and is not able to find an alternative to
refinance its existing indebtedness because of the company's
financial condition; and
o the issuance of new equity by Petroglyph in order to raise the
amounts of capital needed by the company would likely have
been made at prices that would have resulted in excessive
dilution of Petroglyph's existing stockholders, including III
Exploration.
It is expected that, immediately following the merger, the business and
operations of Petroglyph will be continued by Petroglyph, as the surviving
company in the merger, substantially as they are currently being conducted.
However, Petroglyph and III Exploration will continue to evaluate Petroglyph's
business and operations after the consummation of the merger and make such
changes as are deemed appropriate from time to time.
19
<PAGE> 27
RECOMMENDATION OF THE SPECIAL COMMITTEE AND THE BOARD OF DIRECTORS; FAIRNESS OF
THE MERGER
Recommendation of the Special Committee and the Board of Directors.
On June 20, 2000, the special committee determined, and so advised the
board of directors, that the terms of the merger agreement are fair to and in
the best interests of the holders of common stock, other than III Exploration
and its affiliates, and recommended that the board of directors approve the
terms of the merger agreement and submit the proposal to the stockholders for
their approval.
On June 20, 2000, the board of directors unanimously: (1) determined
that the terms of the merger are fair to and in the best interests of the
holders of common stock, other than III Exploration and its affiliates; (2)
approved the merger agreement and authorized the execution and delivery thereof;
and (3) recommended that the stockholders of Petroglyph approve the merger
agreement, the merger and the transactions contemplated thereby. In weighing
this recommendation, however, you should be aware that certain members of the
board of directors may have actual, apparent or potential conflicts of interest
which are described in "Conflicts of Interest."
Fairness of the Merger.
Special Committee. The special committee was formed to represent the
interests of the company's stockholders not affiliated with III Exploration. In
reaching its determinations referred to above, the special committee considered
the factors listed below. The following discussion of the factors considered by
the special committee is not intended to be exhaustive but summarizes all
material factors considered. The special committee did not assign any relative
or specific weights to the following factors. However, the special committee did
believe that each of the factors was material to its determination that the
transaction was fair, and characterized each of the factors as positive and
supportive of the transaction. Throughout its consideration of the merger, the
special committee received the advice of its financial and legal advisors, who
are experienced in advising on transactions similar to the merger.
o The fact that the per share price to be paid in the merger
represents a premium of 42.5% over the closing price of common
stock on May 3, 2000, the last full trading day before
Petroglyph announced it had received the initial merger
proposal from Intermountain, and a premium of 75% over the
average closing price of the common stock during the 20-day
trading period ended May 3, 2000. The special committee also
considered the fact that the $2.85 per share price represented
a premium of 12.2%, 14.5% and 16.3%, respectively, over the
average closing price of $2.54, $2.49 and $2.45, respectively
for the periods beginning January 1, 1999 and ending August
16, 1999, (the last full trading day before III Exploration
initially purchased Petroglyph common stock), May 3, 2000 (the
last full trading day before Petroglyph announced it had
received the initial merger proposal from Intermountain), and
June 19, 2000 (the last full trading day before Petroglyph
announced the signing of the merger agreement).
o The absence of any viable alternative sale or merger proposals
from other bidders and
20
<PAGE> 28
III Exploration's stated desire not to sell its shares to a
third party, led the special committee to conclude that
exploration of a business combination with or sale to a third
party was not practicable. III Exploration's express statement
that it did not wish to sell any of its shares of common
stock, together with the company's advice that management had
previously unsuccessfully sought a potential or strategic
merger partner between the summer of 1998 and the summer of
1999 and alternative financing arrangements with several third
party lenders between September 1999 and April 2000,
discouraged the special committee from soliciting alternative
sale or merger proposals.
o The negotiations between the special committee and its
representatives, on behalf of the unaffiliated stockholders,
and III Exploration and its representatives, which had
resulted in an increase in the price at which III Exploration
was prepared to acquire the shares from $2.20 to $2.85 per
share, and the special committee's belief that $2.85 was the
highest price that could be obtained from Intermountain under
the circumstances. The special committee believes that the
fact that it was formed by the board of directors to conduct
the negotiations on an independent basis is indicative of the
fairness of the process by which the $2.85 merger
consideration was agreed.
o The opinion of Prudential Securities, dated June 20, 2000,
that, as of such date, and subject to the matters stated in
the opinion, the proposed merger consideration to be paid to
the unaffiliated stockholders was fair from a financial point
of view, and the analyses presented to the special committee
by Prudential Securities in connection with rendering such
opinion. See "-- Opinion of Financial Advisor to the Special
Committee." A copy of Prudential Securities' written opinion
is attached to this proxy statement as Appendix B and is
incorporated herein by reference.
o The special committee's belief that the price per share to be
received in the merger was fair relative to its own assessment
of the business, condition and prospects of Petroglyph, as a
going concern, taking into account the company's liquidity
position, lack of financing alternatives and prospects.
o The special committee's belief that the company's liquidity
problems were such that its operations and outlook would
deteriorate if additional debt or equity financing was not
soon obtained and the company's inability to do so after
exploring that possibility over a period of time.
o The availability of dissenters' rights under the DGCL in
connection with the merger for stockholders who reject the
agreed merger consideration and perfect their appraisal rights
under the DGCL.
In addition to the positive factors listed above, the special committee
also considered the following negative factors in assessing the fairness of the
transaction.
o with sufficient resources to develop the company's large
reserve base, Petroglyph may have been able to generate
significant additional value for the company's stockholders;
21
<PAGE> 29
o Petroglyph's unaffiliated stockholders may have purchased
their shares of common stock at prices significantly higher
than the price per share being offered by Intermountain; and
o the present holders of the company's common stock, other than
III Exploration and its affiliates, will no longer benefit
from any increase in the value of Petroglyph or payment of any
dividends on the shares of common stock.
After considering these negative factors, the special committee
concluded that the company's liquidity problems would preclude the company from
developing its reserve base and otherwise increasing the value of its common
stock. In addition, while many of the company's stockholders may have purchased
their shares at prices higher than the consideration being offered by III
Exploration, the special committee reviewed the company's stock price over the
past year and concluded that the merger consideration was significantly higher
than the trading price for the common stock at certain points over the past
twelve months.
As part of its determination with respect to the fairness of the merger
consideration to be paid to the unaffiliated stockholders, the special committee
adopted the conclusions of Prudential Securities and accepted and concurred in
the conclusion of Prudential Securities, and the analysis underlying such
conclusion, as reasonable. In making this determination, the special committee
reviewed and considered Prudential Securities' conclusions with respect to each
valuation methodology. After reviewing each analysis, the special committee
agreed with the financial advisor's determination that the discounted cash flow
was the appropriate methodology to value the company's equity securities. The
special committee reached this determination as a result of its understanding
that the unique nature of the company's assets would require significant
up-front capital expenditures to adequately develop the company's reserves and
realize their potential cash flow. In addition, due to the secondary recovery
methods necessary to develop the reserves, the special committee recognized that
development would take longer than for more traditional reserves.
Although the special committee considered Petroglyph's liquidation
value, it noted that such range of values did not include costs of liquidation
such as distressed sale circumstances, time value of money, transaction costs or
the likely deterioration of asset values during the liquidation process. In
addition, based on the unique nature of the company's assets described above,
the special committee did not consider a comparable company analysis based on
reserve or financial multiples to be the best indicator of the company's value.
Based on the company's past inability to find strategic partners for a merger or
acquisition, the special committee felt the comparable corporate transaction or
comparable property transaction analyses were also not the best indicators of
the company's value.
The special committee also considered that Prudential Securities had
previously received $50,000 in fees from Petroglyph in connection with a 1998
strategic advisory agreement and $50,000 from Petroglyph in October 1999 for its
fairness opinion rendered in connection with Petroglyph's 1999 purchase of the
Antelope Creek properties. The payments to Prudential Securities were not
contingent on the content of Prudential Securities' fairness opinion;
accordingly the special committee did not believe that these payments influenced
the fairness opinion of Prudential Securities. Prudential Securities has not
received any compensation from Intermountain or III Exploration or their
affiliates.
Petroglyph Board of Directors. In reaching its determinations referred
to above, the board of directors considered the following factors: (1) the
determinations and recommendations of the special committee, which was formed to
represent the interests of the company's unaffiliated stockholders; (2) the
factors referred to above considered by the special committee, including the
opinion of Prudential Securities; (3) the fact that the price and the terms and
conditions of the merger agreement were the result of negotiations between the
special committee and its representatives on
22
<PAGE> 30
behalf of the unaffiliated stockholders and III Exploration; and (4) the fact
that Prudential Securities, acting as the special committee's financial advisor,
determined that the cash consideration to be received by the company's
stockholders was fair from a financial point of view.
In considering the nature of the negotiations and the procedural
fairness of the merger, the board of directors noted that:
o the special committee consisted of an independent director who
represented the interests of the unaffiliated stockholders;
o the member of the special committee was experienced and
sophisticated in business and financial matters and
well-informed about the business and operations of Petroglyph;
o the special committee selected and was advised by independent
legal counsel experienced in advising in transactions similar
to the merger;
o the special committee selected and was advised by Prudential
Securities as its independent financial advisor to assist it
in evaluating the transaction;
o fees and expenses paid to the special committee and Prudential
Securities were not contingent on the recommendation of the
special committee or Prudential Securities and were
commensurate with the time and skill required of the special
committee and Prudential Securities;
o the $2.85 per share price and the other terms and conditions
of the merger agreement resulted from active bargaining
between representatives of the special committee, on the one
hand, and representatives of III Exploration, on the other
hand, which resulted in an increase in the merger
consideration offered from $2.20 per share in the initial
merger proposal to $2.85 per share and in other concessions
and agreements which benefited the unaffiliated stockholders;
and
o under the DGCL, dissenters' appraisal rights are available for
stockholders who reject the agreed merger consideration and
perfect their appraisal rights.
In connection with its consideration of the determination by the
special committee, and as part of its determination with respect to the fairness
of the consideration to be received by the unaffiliated stockholders pursuant to
the merger agreement, the board of directors adopted the conclusion of the
special committee, and the analysis underlying such conclusion, based upon the
view of the board of directors as to the reasonableness of such analysis.
In considering the fairness of the merger, the special committee and
the board considered Petroglyph's liquidation value, which Prudential Securities
estimated to range from $2.75 to $3.70 per share, materially relevant, among
other factors, because they believed those values were material indicators of
Petroglyph's value. The board of directors did note that such range of values
did not include costs of liquidation such as distressed sale circumstances, time
value of money, transaction
23
<PAGE> 31
costs or the likely deterioration of asset values during the liquidation
process. The special committee and the board of directors also considered the
discounted cash flow going-concern values which Prudential Securities estimated
to range from $2.68 to $3.58 per share, and determined that this was the
appropriate valuation methodology for the company because of the high capital
funding requirement and the length of time that would be necessary to achieve
such value. The board also considered the price paid by III Exploration for
Petroglyph common stock of $2.00 per share in a private placement in December
1999 and $3.00 per share in August 1999 to be indicative of a fair price,
particularly in light of the fact that the $3.00 per share stock price was paid
for a control position. Finally, the special committee and the board of
directors considered the historical trading prices for the company's common
stock. Such prices ranged from closing prices of $3.19 on January 4, 1999 to
$2.00 on May 3, 2000, the last full trading day before Petroglyph announced it
had received the initial merger proposal from Intermountain. The special
committee and the board considered the net book value of the company but found
it to result in an unrealistically high price per share, given that it reflected
certain capitalized costs which could not be recouped in a market transaction.
As a result, the special committee and the board believed the valuation
methodologies used by Prudential Securities, particularly the discounted cash
flow analysis, to be more indicative of the fair value of the company.
All of the factors described above were considered by the special
committee and the board of directors in support of their conclusions that the
merger is fair to and in the best interests of the unaffiliated stockholders.
The special committee and the board of directors also considered the fact that
the merger was not conditioned on the approval of a majority of the common stock
held by unaffiliated stockholders, and that III Exploration possesses sufficient
voting power to approve the merger agreement and the merger without the
affirmative vote of any other stockholder of the company, but determined that
other procedural safeguards such as the special committee's representation of
Petroglyph's unaffiliated stockholders and the receipt of a fairness opinion
from Prudential Securities resulted in the merger being procedurally fair.
The description set forth above of the factors considered by the board
of directors is not intended to be exhaustive, but summarizes all material
factors considered. The board of directors did not assign any relative or
specific weights to the foregoing factors. However, the board of directors did
believe that each of the factors was material to its determination that the
transaction was fair, and characterized each of the factors as positive.
Individual members of the board of directors may have given differing weights to
different factors and may have viewed certain factors more positively or
negatively than others.
Other Parties. Intermountain, III Exploration, Petroglyph Acquisition
Sub, Century Partners - Idaho Limited Partnership and Richard Hokin, who are
collectively referred to in this proxy statement as the Intermountain
affiliates, expressly adopted the analysis of the board of directors and the
special committee, and based on the same factors, believe that the terms of the
merger agreement and the merger are fair to and in the best interests of the
holders of common stock, other than III Exploration and its affiliates.
24
<PAGE> 32
OPINION OF FINANCIAL ADVISOR TO THE SPECIAL COMMITTEE
A special committee of the board of directors of Petroglyph retained
Prudential Securities to act as financial advisor to the special committee for
the purpose of evaluating the fairness, from a financial point of view, of the
cash consideration to be received by Petroglyph's stockholders (other than III
Exploration and its affiliates) pursuant to the merger. The special committee
selected Prudential Securities to act as its financial advisor based on
Prudential Securities' qualifications, expertise and reputation and its
knowledge of the business and affairs of Petroglyph. Prudential Securities acted
as the lead underwriter in Petroglyph's initial public offering of common stock
in October 1997. In addition, Prudential Securities was retained to act as a
financial advisor to Petroglyph in 1998 in connection with a strategic advisory
agreement and in October of 1999 in connection with Petroglyph's purchase of the
Antelope Creek properties.
On June 19, 2000, Prudential Securities delivered its oral opinion to
the special committee, which opinion was confirmed in writing as of such date,
to the effect that, as of such date, the cash consideration to be received by
the holders (other than III Exploration and its affiliates) of Petroglyph's
common stock was fair, from a financial point of view, to such holders.
Prudential Securities presented the financial analysis underlying its oral
opinion at a meeting of the special committee of the board of directors of
Petroglyph on June 19, 2000.
In requesting the Prudential Securities opinion, the special committee
did not give any special instructions to Prudential Securities or impose any
limitation upon the scope of the investigation that Prudential Securities used
to deliver its opinion. A copy of the Prudential Securities opinion, which sets
forth the assumptions made, matters considered and limits on the review
undertaken, is attached to this proxy statement as Annex B and is incorporated
herein by reference. Petroglyph stockholders are urged to read the Prudential
Securities opinion in its entirety.
THE PRUDENTIAL SECURITIES OPINION IS DIRECTED ONLY TO THE FAIRNESS OF
THE CASH CONSIDERATION TO BE RECEIVED BY THE HOLDERS (OTHER THAN III EXPLORATION
AND ITS AFFILIATES) OF PETROGLYPH COMMON STOCK, FROM A FINANCIAL POINT OF VIEW.
IT DOES NOT CONSTITUTE A RECOMMENDATION TO ANY STOCKHOLDER AS TO HOW SUCH
STOCKHOLDER SHOULD VOTE AT THE MEETING OR AS TO ANY OTHER ACTION SUCH
STOCKHOLDER SHOULD TAKE REGARDING THE MERGER.
In conducting its analysis and arriving at the Prudential Securities
opinion, Prudential Securities reviewed such information and considered such
financial data and other factors as Prudential Securities deemed relevant under
the circumstances, including the following:
o the offer letter from Intermountain dated May 3, 2000;
o an amendment to the offer letter dated May 16, 2000;
o a draft of the merger agreement dated June 14, 2000;
o certain historical financial, operating and reserve data concerning
Petroglyph, including, but not limited to:
o Petroglyph 's Annual Report on Form 10-K for the fiscal year ended December
31, 1999;
25
<PAGE> 33
o Petroglyph 's Quarterly Report on Form 10-Q for the quarter ended March 31,
2000;
o the Proxy Statement for the Annual Meeting of Stockholders held on May 31,
2000;
o the Proxy Statement for the Special Meeting of Stockholders held on
February 15, 2000;
o Petroglyph's reserve report audited by Lee Keeling & Associates as of
January 1, 2000;
o Petroglyph's internal reserve reports as of January 2000 and April 2000;
o Petroglyph's acquired property reserve report as of July 1, 1999;
o certain information relating to Petroglyph, including financial forecasts
for the fiscal years 2000 through 2002, prepared by management of
Petroglyph;
o historical stock prices and trading volumes for Petroglyph common stock;
o publicly-available financial, operating and stock market data concerning
certain companies engaged in businesses Prudential Securities deemed
reasonably similar to that of Petroglyph;
o the financial terms of certain recent transactions Prudential Securities
deemed relevant to its inquiry; and
o such other factors as Prudential Securities deemed appropriate.
Prudential Securities assumed, with Petroglyph's consent, that the
draft of the merger agreement that Prudential Securities reviewed (as referred
to above) would substantially conform in all material respects to the merger
agreement when in final form and that the merger would be consummated on the
terms described in the merger agreement without any waiver of any material terms
or conditions.
Prudential Securities discussed with the senior management of
Petroglyph:
o the past and current operating and financial condition of its business;
o the prospects for Petroglyph;
o their estimates of Petroglyph's future financial performance; and
o such other matters as Prudential Securities deemed relevant.
In connection with its review and analysis and in the preparation of
the Prudential Securities opinion, Prudential Securities relied upon the
accuracy and completeness of the financial and other information
publicly-available or otherwise provided to Prudential Securities by Petroglyph
and did not undertake any independent verification of such information or any
independent valuation or appraisal of any of the assets or liabilities of
Petroglyph. With respect to certain financial forecasts provided to Prudential
Securities by Petroglyph, Prudential Securities assumed that such information,
26
<PAGE> 34
and the assumptions and bases therefor, represented management's best then
available estimate as to the future financial performance of Petroglyph and that
Petroglyph would perform in accordance with such projections. Prudential
Securities assumes no responsibility for and expresses no view as to such
forecasts and the assumptions under which they were prepared. For the purposes
of the Prudential Securities opinion, Prudential Securities assumed the
transaction contemplated by the merger agreement will be consummated as
described in the merger agreement and in this proxy statement.
The Prudential Securities opinion is based on economic, financial and
market conditions as they existed on June 19, 2000 and can only be evaluated as
of the date of the Prudential Securities opinion. Prudential Securities assumes
no responsibility to update or revise the Prudential Securities opinion based
upon events or circumstances occurring after such date.
The Prudential Securities opinion, including Prudential Securities'
presentation of such opinion to the special committee, was one of the many
factors that the special committee considered in making its determination to
recommend approval of the merger agreement. Consequently, Prudential Securities'
analyses described below should not be viewed as determinative of the opinion of
the special committee with respect to the cash consideration to be received by
the holders (other than III Exploration and its affiliates) of Petroglyph common
stock. The cash consideration was determined through negotiations between the
special committee and III Exploration and was approved by Petroglyph's board of
directors.
The Prudential Securities opinion does not address nor should it be
construed to address the relative merits of the merger or alternative business
strategies that may be available to Petroglyph. In addition, Prudential
Securities opinion does not address the fairness of the merger to III
Exploration with regard to the shares of Petroglyph common stock currently owned
by III Exploration or the shares of Petroglyph common stock issuable upon
exercise of warrants owned by III Exploration.
In arriving at its opinion, Prudential Securities performed a variety
of financial analyses. The description set forth below constitutes a summary of
the analyses presented to the special committee on June 19, 2000. The
preparation of a fairness opinion is a complex process that involves various
determinations as to the most appropriate and relevant methods of financial
analyses and the application of these methods to the particular circumstance.
Therefore, such an opinion is not necessarily susceptible to partial analysis or
summary description. Prudential Securities believes that its analyses must be
considered as a whole and selecting portions thereof or portions of the factors
considered by it, without considering all analyses and factors, could create an
incomplete view of the evaluation process underlying the Prudential Securities
opinion. Prudential Securities made numerous assumptions with respect to
industry performance, general business, economic, market and financial
conditions and other matters, many of which are beyond the control of
Petroglyph. Any estimates contained in Prudential Securities' analyses are not
necessarily indicative of actual values or future results, which may be
significantly more or less favorable than suggested by such analyses.
Additionally, estimates of the values of businesses and securities do not
purport to be appraisals or necessarily reflect the prices at which businesses
or securities may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. Subject to the foregoing, the
following is a summary of the material financial analyses presented by
27
<PAGE> 35
Prudential Securities to the special committee on June 19, 2000 in connection
with the delivery of the Prudential Securities opinion.
DISCOUNTED CASH FLOW. Prudential Securities determined that a
discounted cash flow analysis of Petroglyph, rather than reliance upon
traditional reserve and financial multiple analyses, was the recommended
valuation methodology. Prudential Securities reached this conclusion after
determining that the nature of Petroglyph's reserve base, which includes a
significant percentage of non-producing reserves and a long reserve life, will
require significant future capital. Prudential Securities calculated the net
present value of Petroglyph as a going concern and upon an assumed liquidation,
based on the financial projections provided to Prudential Securities by
Petroglyph. Prudential Securities applied risk levels to Petroglyph's reserves
and discount rates ranging from 8% to 12% on certain liabilities and hedging
activities. This analysis resulted in an implied valuation range of equity value
per share of $2.68 to $3.58, as a going concern, and $2.75 to $3.70 in an
assumed liquidation. Petroglyph's valuation is higher under the liquidation
scenario primarily because Petroglyph as a going concern lacked the necessary
capital to support its ongoing operational needs and maximize the utilization of
its reserves, and therefore, Petroglyph's reserve life is considerably longer
than it would be if the reserves were owned by an entity possessing the
significant capital resources required to develop the reserves.
Discounted Cash Flow - Going Concern Case
<TABLE>
<CAPTION>
Valuation Range
Low Mid High
<S> <C> <C> <C>
Net Discounted Equity Value $17,318,000 $20,521,000 $23,151,000
Shares Outstanding(1) 6,458,000 6,458,000 6,458,000
----------- ----------- -----------
Equity Value Per Share Range $ 2.68 $ 3.18 $ 3.58
</TABLE>
Discounted Cash Flow Liquidation Case
<TABLE>
<CAPTION>
Valuation Range
Low Mid High
<S> <C> <C> <C>
Net Discounted Equity Value $17,776,000 $20,853,000 $25,916,000
Shares Outstanding(1) 6,458,000 6,458,000 6,458,000
----------- ----------- -----------
Equity Value Per Share Range $ 2.75 $ 3.23 $ 3.70
</TABLE>
COMPARABLE COMPANY ANALYSIS. Prudential Securities employed a
comparable companies analysis to establish a range of implied valuation per
share. Prudential Securities analyzed publicly available historical and
projected financial results, including (i) "enterprise value" (calculated as the
product of diluted shares outstanding times the closing stock price on June 14,
2000, and preferred stock outstanding) as a multiple of earnings before
interest, taxes, depreciation and amortization ("EBITDA") for 2000 ("2000
EBITDA") and 2001 ("2001 EBITDA") and "equity value" (calculated as the product
of diluted shares outstanding times the closing stock price on June 14, 2000,
and preferred stock outstanding) as a multiple of cash flow from operations for
2000 ("2000 CFFO") and 2001 ("2001 CFFO") of certain comparable publicly traded
oil and gas companies.
28
<PAGE> 36
Prudential Securities selected companies that similar to Petroglyph are engaged
in the exploration, development and acquisition of domestic crude oil and
natural gas reserves. The companies included were as follows:
o Evergreen Resources;
o HS Resources;
o Inland Resources;
o Mallon Resources; and
o Patina Oil & Gas.
These comparable companies were found to have a range of enterprise
values as a multiple of 2000 EBITDA of 5.3x to 12.4x and as a multiple of 2001
EBITDA of 4.8x to 10.2x, and equity values as a multiple of 2000 CFFO of 3.4x to
19.3x and as a multiple of 2001 CFFO of 3.0x to 12.7x. Applying such multiples
to Petroglyph management's projected 2000 EBITDA; 2001 EBITDA; 2000 CFFO and
2001 CFFO resulted in an implied range of value per share of ($1.85) to $0.73
with a mean of ($0.71) and a median of ($0.86); ($0.50) to $3.21 with a mean of
$1.07 and a median of $0.78; ($0.60) to $1.28 with a mean of $0.09 and a median
of ($0.17); and $0.01 to $3.34 with a mean of $1.14 and a median of $0.60,
respectively.
Using historical reserve information, Prudential Securities also
analyzed the above comparable companies' current total market capitalization of
reserves as a multiple of total proved reserves ("Mcfe"), adjusted on a 6 to 1
basis for natural gas to oil, and applied the standardized measure of discounted
future net cash flows ("SEC Value") for each company. The comparable companies
were found to have a range of 0.56 to 1.10 times Mcfe with a mean of 0.89 times
Mcfe and a median of 1.02 times Mcfe, and a range of SEC Value of 69.7% to
146.6% with a mean of 112.2% and a median of 108.3%. Applying this analysis to
Petroglyph's Mcfe and SEC Value resulted in an implied range of equity per share
of $9.72 to $22.90 with a mean of $17.87 and a median $20.97, and $12.80 to
$31.11 with a mean of $22.94 and a median of $22.00, respectively.
29
<PAGE> 37
<TABLE>
<CAPTION>
Valuation Ratios
--------------------------------------------------------------------------------------
Total Market Enterprise Value/ Price/
Capitalizations EBITDA(1) CFFO(1)
-------------------------- ------------------------- -------------------------
Company SEC Value Mcfe 2000E 2001E 2000E 2001E
------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Evergreen Resources 128.5% $ 0.76 8.9x 10.2x 19.3x 12.7x
HS Resources 108.3% 1.02 5.3 4.8 3.4 3.0
Inland Resources 69.7 0.56 NA(1) NA(3) NA(3) NA(3)
Mellan Resources 146.6 1.02 12.4 6.1 9.1 4.2
Patina Oil & Gas 108.1 1.10 7.2 7.2 5.1 5.2
Mean 112% $ 0.89 8.4x 7.1x 9.2x 6.3x
Median 108.3 1.02 8.0 6.6 7.1 4.7
High 146.6 1.10 12.4 10.2 19.3 12.7
Low 69.7 0.56 5.3 4.8 3.4 3.0
</TABLE>
<TABLE>
<CAPTION>
Implied Valuation Ranges
--------------------------------------------------------------------------------------
Enterprise Value/ Equity Value
TMCR EBITDA /CFFO
-------------------------- ------------------------- -------------------------
Company SEC Value Mcfe 2000E 2001E 2000E 2001E
------- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Mean $ 22.94 $ 17.87 $ (0.71) $ 1.07 $ 0.09 $ 1.14
Median 22.00 20.97 (0.86) 0.78 (0.17) 0.60
High 31.11 22.90 0.73 3.21 1.28 3.34
Low 12.80 9.72 (1.85) (0.50) (0.60) 0.01
</TABLE>
30
<PAGE> 38
PRECEDENT TRANSACTIONS ANALYSIS - CORPORATE TRANSACTIONS. Prudential
Securities also analyzed the consideration paid in seven recent merger and
acquisition transactions that Prudential Securities deemed to be reasonably
similar in size to the merger, and considered the ratio of the acquired entity's
equity purchase price to the acquired entity's total proved reserves ("Mcfe").
The transactions considered were the combinations of:
o Melrose Petroleum Group Limited and Pentex Energy plc;
o Windsor Energy Corp. and SMK Energy Corp.;
o Columbia Energy Group and Alamco, Inc.;
o Seneca Resources Corp. and HarCor Energy, Inc.;
o Quicksilver Resources Inc. and MSR Exploration Ltd.;
o Prize Energy Corp. and Vista Energy Resources, Inc.; and
o Flying J Oil & Gas Inc. and Inland Resources Inc.
The precedent transactions used in this analysis were found to imply
for the acquired entity equity purchase price within a range of 0.38 to 0.70
times Mcfe, a mean of 0.51 times Mcfe and a median of 0.49 times Mcfe. Applying
such results to Petroglyph's Mcfe resulted in implied equity valuation per share
of $5.35 to $13.16 with a mean of $8.66 and a median of $8.05.
31
<PAGE> 39
<TABLE>
<CAPTION>
Purchase Price of Other NYMEX Closing Prices
Reserves Assets for Closing Prompt Month
Date ----------------------- ---------- ------------------------
Buyer/Seller Closed Size $MM $MM $/Mcfe ($MM) Crude Oil Natural Gas
------------ ----------- ---------- ---------- ---------- ---------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Melrose Petroleum Group Limited 5/21/97 $ 22.1 $ 20.3 $ 0.43 $ 1.8 $ 21.86 $ 2.206
Pentex Energy plc
Windsor Energy Corp. 7/1/97 $ 24.9 $ 24.9 $ 0.49 $ -- $ 20.12 $ 2.110
SMK Energy Corp.
Columbia Energy Group 8/7/97 $ 97.9 $ 87.9 $ 0.59 $ 10.0 $ 20.09 $ 2.444
Alamco, Inc.
Seneca Resources Corp. 5/5/98 $ 81.3 $ 70.8 $ 0.53 $ 10.5 $ 15.47 $ 2.215
HarCor Energy, Inc.
Quicksilver Resources, Inc. 3/4/99 $ 31.6 $ 29.4 $ 0.38 $ 2.2 $ 13.35 $ 1.762
MSR Exploration Ltd.
Prize Energy Corp. 2/8/00 $ 91.8 $ 89.0 $ 0.70 $ 2.9 $ 28.02 $ 2.495
Vista Energy Resources, Inc.
Flying J Oil & Gas Inc. 3Q 2000 est $ 166.8 $ 162.7 $ 0.47 $ 4.1 N/A N/A
Inland Resources Inc.
Mean $ 0.51
Median $ 0.49
High $ 0.70
Low $ 0.38
</TABLE>
32
<PAGE> 40
<TABLE>
<CAPTION>
Implied Valuation Range - Corporate Transactions
Mean Median High Low
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Implied Equity Valuation $ 55,948,000 $ 52,020,000 $ 84,988,000 $ 34,540,000
Shares Outstanding(1) 6,458,000 6,458,000 6,458,000 6,458,000
Equity Value Per Share Range $ 8.66 $ 8.05 $ 13.16 $ 5.35
</TABLE>
(1) As of March 31, 2000
PRECEDENT TRANSACTIONS ANALYSIS - PROPERTY TRANSACTIONS. Prudential
Securities also analyzed the consideration paid in seven recent merger and
acquisition transactions that Prudential Securities deemed to be reasonably
similar to the merger because the acquired companies' reserves were located in
the Rocky Mountain region of the United States, and considered the ratio of the
acquired entity's equity purchase price to the acquired entity's Mcfe. The
transactions considered were the combinations of:
o Energen Corporation and Burlington Resources Inc.;
o Cabot Oil & Gas Corp. and Equitable Resources, Inc.;
o Conoco Inc. and Amoco Corp.;
o United States Exploration Inc. and Union Pacific Resources
Group Inc.;
o Evergreen Resources, Inc. and Amoco Corp.;
o Devon Energy Corp. and an undisclosed company;
o Ballard Petroleum LLC and Snyder Oil Corp.;
o Undisclosed and Howell Corp.;
o Cabot Oil & Gas Corp. and an undisclosed company;
o Barrett Resources Corp. and an undisclosed private company;
and
o Barrett Resources Corp. and an undisclosed private company.
The precedent transactions used in this analysis were found to imply
for the acquired entity equity purchase price within a range of 0.29 to 0.97
times Mcfe, a mean of 0.47 times Mcfe and a median of 0.38 times Mcfe. Applying
such results to Petroglyph's Mcfe resulted in implied equity valuation per share
of $3.37 to $19.87 with a mean of $7.51 and a median of $5.31.
33
<PAGE> 41
<TABLE>
<CAPTION>
PURCHASE PRICE OF OTHER NYMEX CLOSING PRICES FOR
DATE RESERVES ASSETS REGION CLOSING PROMPT MONTH
---------- ------------------------ ---------- --------------- -------------------------
BUYER/SELLER CLOSED SIZE $MM $/MCFE ($MM) LOCATION(S) CRUDE OIL NATURAL GAS
------------ ---------- ---------- ---------- ---------- --------------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
Energen Corporation 4/4/97 $ 77.8 $ 0.35 $ -- Rocky Mountains $ 19.12 $ 1.942
Burlington New Mexico
Resources Inc.
Cabot Oil & Gas Corp. 10/3/97 $ 43.3 $ 0.59 $ 0.7 Rocky Mountains $ 22.76 $ 3.125
Equitable Resources, Inc. Wyoming
Conoco Inc. 12/15/97 $ 55.9 $ 0.55 $ 1.0 Rocky Mountains $ 18.17 $ 2.307
Amoco Corp. New Mexico
United States
Exploration Inc. 5/15/98 $ 41.0 $ 0.29 $ -- Rocky Mountains $ 14.47 $ 2.178
Union Pacific Colorado
Resources Group Inc.
Evergreen Resources, Inc. 7/2/98 $ 13.1 $ 0.33 $ -- Rocky Mountains $ 14.50 $ 2.439
Amoco Corp. Colorado
Devon Energy Corp. 7/2/98 $ 14.8 $ 0.47 $ 0.6 Rocky Mountains $ 14.50 $ 2.439
Undisclosed Wyoming
Ballard Petroleum LLC 1/21/99 $ 27.2 $ 0.54 $ 1.6 Rocky Mountains $ 12.46 $ 1.892
Synder Oil Corp. Colorado
Undisclosed 1/29/99 $ 15.8 $ 0.38 $ -- Rocky Mountains $ 12.75 $ 1.777
Howell Corp. Wyoming
Cabot Oil & Gas Corp. 9/21/99 $ 15.4 $ 0.97 $ 2.0 Rocky Mountains $ 24.50 $ 2.427
Undisclosed Wyoming
Barrett Resources Corp. 12/16/99 $ 47.0 $ 0.33 $ 25.0 Rocky Mountains $ 26.83 $ 2.636
Undisclosed private Colorado
company
Barrett Resources Corp. 1/10/00 $ 10.7 $ 0.33 $ -- Rocky Mountains $ 24.67 $ 2.216
Undisclosed private Colorado
company
---------------------------
MEAN $ 0.47
MEDIAN $ 0.38
HIGH $ 0.97
LOW $ 0.29
---------------------------
</TABLE>
34
<PAGE> 42
<TABLE>
<CAPTION>
Valuation Range-Property Transactions
Mean Median High Low
<S> <C> <C> <C> <C>
Implied Equity Valuation $ 48,522,000 $ 34,318,000 $128,346,000 $ 21,757,000
Shares Outstanding(2) 6,458,000 6,458,000 6,458,000 6,458,000
------------ ------------ ------------ ------------
Equity Value Per Share Range $ 7.51 $ 5.31 $ 19.87 $ 3.37
</TABLE>
(2) As of March 31, 2000
None of the publicly-traded companies or the acquired entities in the
above comparable companies analysis, corporate transactions precedent
transactions analysis or property transactions precedent transactions analysis
is, of course, identical to Petroglyph or the merger. Accordingly, a complete
analysis of the results of the foregoing calculations cannot be limited to a
quantitative review of such results and involves complex considerations and
judgments concerning differences in financial and operating characteristics of
the publicly-traded companies and the acquired entities, and other factors that
could affect the public trading value and consideration paid for each of the
publicly-traded companies and the acquired entities, respectively, as well as
that of Intermountain.
The special committee selected Prudential Securities to provide a
fairness opinion because it is a nationally recognized investment banking firm
engaged in the valuation of businesses and their securities in connection with
merger and acquisition transactions and because it has substantial experience in
transactions similar to the merger.
Pursuant to an engagement letter with Prudential Securities, Petroglyph
agreed to pay Prudential Securities $250,000 upon the delivery of the Prudential
Securities opinion. In addition, the engagement letter with Prudential
Securities provides that Petroglyph will reimburse Prudential Securities for its
reasonable out-of-pocket expenses (including fees and expenses of its legal
counsel) and indemnify Prudential Securities and certain related persons,
against certain liabilities, including liabilities under securities laws,
arising out of the merger or its engagement, as set forth in the separate
indemnification agreement. In the past, Prudential Securities and its affiliates
have provided financial advisory and financing services for Petroglyph and has
received customary fees for the rendering of these services. In 1997, Prudential
Securities received a total of $1,190,000 in underwriting fees and commissions
as lead underwriter for Petroglyph's initial public offering. Further,
Prudential Securities received $50,000 in fees from Petroglyph in connection
with a 1998 strategic advisory agreement and $50,000 in financial advisory fees
from Petroglyph in connection with Prudential Securities' services in connection
with Petroglyph's 1999 purchase of the Antelope Creek properties. In the
ordinary course of business, Prudential Securities may actively trade shares of
Petroglyph common stock for its own account and for the accounts of its
customers and, accordingly, may at any time hold a long or short position in
such securities.
35
<PAGE> 43
MATERIAL FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of the material United States federal income
tax consequences of the merger to stockholders that hold shares of Petroglyph
common stock as a capital asset and that exchange those shares for the right to
receive $2.85 in cash for each such share in the merger. Because it is a
summary, it does not include an analysis of all potential tax effects of the
merger.
In particular, this summary:
o does not consider the effect of any applicable state, local or
foreign tax laws;
o does not address all aspects of federal income taxation that
may affect particular stockholders in light of their
particular circumstances;
o is not intended for stockholders that may be subject to
special federal income tax rules, such as:
o insurance companies,
o tax-exempt organizations,
o financial institutions or dealers or traders in
securities,
o stockholders that hold their common stock as part of
a hedge, straddle or conversion transaction or other
arrangement involving more than one position in
respect of Petroglyph common stock,
o tax exempt entities,
o partnerships,
o stockholders who acquired their common stock pursuant
to the exercise of an employee stock option or
otherwise as compensation,
o stockholders who are not citizens or residents of the
United States or that are foreign corporations,
estates or trusts as to the United States,
o holders of stock options; and
o III Exploration or any of its affiliates or any
person who would be treated as constructively owning
Petroglyph common stock immediately after the merger
by reason of the attribution rules of Section 318 of
the Internal Revenue Code.
This summary assumes that stockholders hold their common stock as a
"capital asset" within the meaning of the Internal Revenue Code. This summary is
based on the current provisions of the Internal Revenue Code, applicable
Treasury Regulations, judicial authorities and administrative rulings and
practice. Future legislative, judicial or administrative changes or
interpretations could
36
<PAGE> 44
alter or modify the statements and conclusions set forth in this section. Any
such changes or interpretations could be retroactive and could affect the tax
consequences of the merger to you. It is possible that a court will not sustain
the conclusions reached in this summary if they are challenged by the Internal
Revenue Service. We have not sought and do not intend to seek a ruling from the
Internal Revenue Service with respect to any aspect of the merger.
You should consult your own tax advisor with respect to the specific
tax consequences of the merger, including the applicability to your particular
situation of the tax considerations contained in this summary and the
applicability and effect of any state, local or foreign tax laws.
Treatment of Holders of Common Stock. The conversion of your shares of
common stock into the right to receive $2.85 in cash for each such share in the
merger will be fully taxable to you. Accordingly, you will recognize a gain or
loss equal in an amount to the difference between (1) the amount of cash you
receive in the merger and (2) your tax basis in the common stock. Generally,
your tax basis in your common stock will be equal to what you paid for your
stock. Such gain or loss will be capital gain or loss, and generally will be
long-term capital gain or loss if you held your shares for more than one year at
the time of the merger.
Dissenting Stockholders. If you dissent from the merger, the cash you
receive in the merger generally will be fully taxable to you in the same manner
as if you had participated in the merger (as described above), except that any
amount constituting interest will be taxable as ordinary income.
Backup Withholding Tax. You may be subject to backup withholding tax at
the rate of 31% with respect to the gross proceeds you receive from the
conversion of your common stock unless you:
o are a corporation or other exempt recipient and, when
required, establish this exemption; or
o provide your correct taxpayer identification number, certify
that you are not currently subject to backup withholding tax
and otherwise comply with applicable requirements of the
backup withholding tax rules.
If you do not provide us with your correct taxpayer identification
number, you may be subject to penalties imposed by the Internal Revenue Service.
Backup withholding tax is not an additional tax. Any amount withheld
under these rules will be creditable against your federal income tax liability.
ACCOUNTING TREATMENT OF THE MERGER
The merger will be accounted for as a "purchase" in accordance with
generally accepted accounting principles. Consequently, the aggregate
consideration paid by III Exploration in connection with the merger will be
allocated to the assets and liabilities of the surviving corporation based upon
their fair values, with excess, if any, being treated as goodwill.
37
<PAGE> 45
THE COMPANIES
PETROGLYPH
Certain terms relating to the oil and natural gas industry are defined
in "Glossary of Oil and Gas Terms."
BUSINESS
OVERVIEW
Petroglyph is an independent energy company engaged in the exploration,
development and acquisition of crude oil and natural gas reserves. Petroglyph
has historically grown oil and natural gas reserves and cash flows through
leasehold acquisitions and the subsequent associated development and exploratory
drilling. Petroglyph's primary activities are focused on its 50,000 gross
(46,600 net) acres in the Uinta Basin in Utah, where it is implementing enhanced
oil recovery projects in the Lower Green River Formation of the Greater Monument
Butte Region. Although Petroglyph has focused on exploitation of the Lower Green
River Formation, Petroglyph believes that other formations in the Uinta Basin,
above and below the Lower Green River Formation, have the potential to be
commercially productive. In addition to its Uinta Basin activities, since 1998,
Petroglyph has been developing a pilot coalbed methane project on its 94,100
gross (73,100 net) acres in the Raton Basin in Colorado. Removal of water from
the coalbeds is necessary in order for the coal to release the associated gas in
commercial quantities. The test wells can be utilized to test water production
volumes, coal quality and gas production exclusive of the current pilot area.
Management believes this pilot project will provide sufficient information to
quantify the commercial viability of the area and estimates that approximately
four to 11 additional water withdrawal wells would be required to be drilled to
adequately dewater the coalbeds included in the pilot project. At September 30,
2000, the pilot project was producing approximately 40,000 barrels of water per
day from approximately 22 wells in an attempt to significantly reduce water
levels in the coalbeds.
Petroglyph had estimated net proved reserves of approximately 18.5
MMBbls of oil and 43.4 Bcf of natural gas, or an aggregate of 25.7 MMBOE with a
PV-10 before income taxes of $151.2 million, as of December 31, 1999. The
reserve estimates utilized an average realized price of $22.37 per barrel for
oil and $1.99 per Mcf for gas. Of Petroglyph's estimated proved reserves, 97%
are located in the Uinta Basin. Petroglyph has not included any reserves from
its Raton Basin development in proved categories, as its pilot project is in the
dewatering process. If and at such time as commercial quantities of Raton Basin
gas are produced, the associated probable reserves will be classified in proved
categories. At December 31, 1999, Petroglyph had a total acreage position of
approximately 149,800 gross (125,000 net) acres and estimates that it had over
1,000 potential drilling locations based on current spacing, none of which are
included in Petroglyph's independent petroleum engineers estimate of proved
reserves.
Since inception, Petroglyph's strategy had been to increase its
reserves, production and cash flow through (i) the development of its drillsite
inventory, (ii) the exploitation of its existing reserve base, (iii) the control
of operations of its core properties, (iv) the acquisition of additional
property
38
<PAGE> 46
interests, and (v) the maintenance of a strong financial position that affords
Petroglyph the financial flexibility to execute its business strategy.
Petroglyph was formed in 1997 for the purpose of becoming the holding
company for Petroglyph Gas Partners, L.P., pursuant to the terms of an exchange
agreement dated August 22, 1997. PGP was formed in 1993, and grew primarily
through the acquisition of oil and natural gas properties and the development of
such properties. Under the exchange agreement converting its predecessor
partnership into the company, effective upon consummation of Petroglyph's
initial public offering, (i) the limited partners of the partnership transferred
all of their limited partnership interests in PGP to Petroglyph in exchange for
an aggregate of 2,607,349 shares of common stock and (ii) the stockholders of
the general partner of PGP transferred all of the issued and outstanding stock
of the general partner to Petroglyph in exchange for an aggregate of 225,984
shares of common stock (which is referred to as the conversion in this proxy
statement). As a result of the conversion, Petroglyph acquired, directly or
indirectly, all the partnership interests in PGP. In November 1997, Petroglyph
completed its initial public offering of 2,625,000 shares, including 125,000
shares subject to the underwriters' over-allotment option, of common stock at
$12.50 per share, resulting in net proceeds to Petroglyph of approximately $30.5
million. Approximately $10.0 million of the net proceeds were used to eliminate
all outstanding amounts under Petroglyph's credit agreement. The balance of the
proceeds were utilized to develop production and reserves primarily in
Petroglyph's core Uinta Basin and Raton Basin development properties and for
other working capital needs. Effective June 30, 1998, Petroglyph consolidated
PGP and its subsidiaries into the parent company, Petroglyph Energy, Inc. As a
result, PGP contributed 100% of its assets to Petroglyph Energy, Inc., and the
partnership was dissolved.
RECENT EVENTS
On August 18, 1999, III Exploration, a wholly-owned subsidiary of
Intermountain Industries, Inc., completed the purchase from Robert A.
Christensen, a director and executive officer of Petroglyph, David R. Albin, a
director of Petroglyph, Kenneth A. Hersh, a director of Petroglyph, R. Gamble
Baldwin, John S. Foster, Bruce B. Selkirk, III, Albin Income Trust, Natural Gas
Partners, L.P., Natural Gas Partners II, L.P. and Natural Gas Partners III, L.P.
of 2,753,392 shares of common stock of Petroglyph.
The purchase was effected through a privately negotiated sale between
the sellers and III Exploration, pursuant to Letter Agreements dated as of
August 13, 1999 and July 29, 1999, with a purchase price of $3.00 per share. The
source of funds for the purchase came from working capital of III Exploration.
As a result of the purchase, III Exploration acquired approximately 50.4% of the
outstanding common stock of Petroglyph.
In connection with the purchase, Messrs. Albin, Christensen and Hersh
resigned from Petroglyph's board of directors. Mr. Christensen also resigned as
an executive officer, but remained employed by Petroglyph as an engineer until
December 31, 1999. After discussing the resignations with Intermountain, the
remaining members of Petroglyph's board of directors nominated William C. Glynn,
Richard Hokin and Eugene C. Thomas, who are also members of Intermountain's
board of directors, to fill the vacancies created on the board of directors by
the resignations.
39
<PAGE> 47
In August 1999, Petroglyph sold $5 million of 8% senior subordinated
notes due 2004 to III Exploration. The notes required Petroglyph to deliver to
III Exploration a stock purchase warrant to acquire 150,000 shares of
Petroglyph's common stock at an exercise price of $3.00 per share and gave III
Exploration the right to obtain additional stock purchase warrants over the life
of the notes. The number of future stock purchase warrants is based on the
future stock price performance and the amount and duration of the notes
outstanding. The maximum number of shares of common stock issuable under the
stock purchase warrants for any given period is limited to 250,000 shares in any
one year, 400,000 over the first three years and 750,000 over the five-year life
of the notes. Petroglyph may redeem the notes at par without penalty at any
time. Upon redemption of the notes, any remaining unissued and unearned stock
purchase warrants will expire. Petroglyph utilized proceeds from the notes to
finance the remaining purchase price of the acquisition of the non-working
interest in Petroglyph's Antelope Creek properties and for working capital
needs.
In response to discussions by the board of directors regarding ways to
improve Petroglyph's cash flow, Mr. Murdock suggested in September of 1999 that
Petroglyph evaluate a group of producing oil and gas properties owned by III
Exploration located primarily in the Uinta Basin of Utah, one of the company's
core operating areas. During the months of October and November 1999, several
members of Petroglyph's financial and technical staff reviewed and evaluated the
properties' proved producing oil and gas reserve data and historical results of
operations.
In November 1999, Mr. Murdock and Mr. Glynn met to discuss a proposed
transaction that would involve the issuance of a new series of preferred stock,
convertible into common stock, to III Exploration in exchange for III
Exploration's interest in the properties in Utah. The parties reviewed the
company's reserve values, cash flow, production, debts and liabilities and
potential future projects and prospects. The parties then reviewed an analysis
of the value of the Utah properties' reserves and the corresponding cash flow,
production and future prospects. At the end of this review period, the two
companies' representatives concurred that the sale of the Utah properties for
250,000 shares of preferred stock convertible into approximately 714,000 shares
of common stock of Petroglyph warranted further discussion. On November 30,
1999, Petroglyph and III Exploration entered into a letter of intent with
respect to the purchase of the Utah properties.
During late November and early December 1999, representatives of
Petroglyph and III Exploration discussed reserves, operations, pending projects
and other due diligence issues related to the Utah properties. At the same time,
representatives of the companies and their legal advisors began to work on
documentation for the proposed transaction.
Between December 17 and 21, 1999, the Petroglyph board of directors met
on several occasions to discuss the proposed transaction. On December 21, 1999,
the disinterested members of the board approved the Purchase and Sale Agreement
and the underlying issuance of preferred shares, subject to the negotiation of a
definitive agreement and Petroglyph stockholder approval. In addition, the board
considered the company's liquidity position and proposed 2000 capital spending
plan, including $6.0 million of projected capital necessary to develop the
Antelope Creek Field, and concluded that the Company needed to obtain additional
equity financing in order to initiate its 2000 development plans and fund its
current level of operations. As a result, the board considered a private equity
sale to III Exploration in order to address the Company's immediate liquidity
needs.
40
<PAGE> 48
III Exploration offered to acquire 1,000,000 shares of Common Stock at a
purchase price of $2.00 per share, which represented the current market price,
for an aggregate of $2.0 million.
The Purchase and Sale Agreement was signed on December 28, 1999, and it
was announced in a press release that afternoon. The Purchase and Sale Agreement
was subsequently amended on September 25, 2000, the effect of which eliminated
certain properties from the property acquisition.
On December 28, 1999, Petroglyph sold 1,000,000 shares of common stock
to III Exploration in a privately negotiated sale at a purchase price of $2.00
per share, for aggregate proceeds of $2.0 million. The common stock issued in
this private placement has not been registered under the Securities Act of 1933,
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. Petroglyph used the
proceeds from the private placement for working capital and to fund continuing
operations a portion of Petroglyph's 2000 development plans for its Uinta Basin
and Raton Basin properties. As a result of the private placement, III
Exploration's ownership interest in Petroglyph's common stock increased to
59.07% (assuming the exercise of a warrant to purchase 150,000 shares of common
stock issued in connection with the subordinated notes).
On February 15, 2000, the stockholders of Petroglyph approved the
issuance of 250,000 shares of Series A Convertible Preferred Stock to III
Exploration in exchange for the Utah properties. The stockholders of Petroglyph
also approved the issuance of shares of common stock upon the potential
conversion of the preferred shares. Because III Exploration had a controlling
ownership interest in the company at the time of the stockholder meeting,
approval of the transaction was assured.
The preferred shares are convertible, beginning two years from the date
of issuance, into shares of common stock at a conversion price of $3.50 per
share of common stock, based on the preference amount of $10.00 per preferred
share. Petroglyph has the option to redeem the preferred shares at any time
after the third anniversary of the transaction closing date in whole or in part
at a redemption price of $12.00 per preferred share. The preferred shares were
issued pursuant to an exemption from the registration requirement under the
Securities Act and will be subject to transfer restrictions imposed by the
Securities Act.
The effective date of the sale of the preferred shares was November 1,
1999. The transaction was approved by a special vote of Petroglyph's
stockholders on February 15, 2000 and was closed on February 18, 2000.
On May 3, 2000, Petroglyph received a proposal from Intermountain to
purchase the approximately 2.7 million shares of common stock of Petroglyph that
it does not already indirectly own through III Exploration for $2.20 per share.
In response to the offer, an independent committee of the Petroglyph board of
directors was formed. The special committee was authorized by the board to
employ counsel and a financial advisor to evaluate the fairness of the offer,
consider alternatives and handle all negotiations with Intermountain concerning
the proposed purchase of the shares.
At a board meeting held on June 20, 2000, the special committee
reported that, after negotiations between the special committee and
representatives of Intermountain, Intermountain had
41
<PAGE> 49
increased its offer to $2.85 per share, and the special committee recommended
that the board approve the terms of a proposed merger agreement. The merger
agreement was approved by the board, subject to stockholder approval, and
executed on June 20, 2000.
As previously reported, the funding of Petroglyph's 2000 development
plans was dependent upon its ability to realize proceeds from certain asset
sales, replace its existing credit facility, raise equity capital and increase
its operating cash flow, whether as a result of successful operations in the
Uinta Basin and Raton Basin or from acquisitions. Petroglyph's inability to
obtain such funds has forced Petroglyph to delay its 2000 development plans.
During the first quarter of 2000, Petroglyph continued pursuing finding
additional sources of financing, including selling assets and refinancing its
senior credit facility or replacing its senior lender; however, Petroglyph has
been unsuccessful in accomplishing these additional sources of financing.
Additionally, on May 30, 2000, Petroglyph was notified by telephone
that its senior lender intended to redetermine the borrowing base under
Petroglyph's credit agreement. By letter received by Petroglyph on June 21, 2000
Chase formally notified Petroglyph that it had redetermined the borrowing base,
resulting in a reduction to $9.0 million. As a result of that redetermination,
under the credit agreement, Petroglyph had 90 days to reduce the outstanding
balance from $11.0 million to $9.0 million. Petroglyph did not have sufficient
cash to pay down the $2 million required by its senior lender in connection with
the redetermination. Since Petroglyph also had no assurance that the senior
lender would provide Petroglyph with a waiver if it was unable to reduce the
balance by August 28, 2000, the company asked III Exploration to provide
Petroglyph with financial assistance, which it subsequently agreed to do. As a
result of its discussions with III Exploration, Petroglyph authorized III
Exploration to contact Chase regarding a possible guarantee of Petroglyph's
obligations under the credit agreement. Petroglyph's senior lender refused to
accept III Exploration's guarantee and encouraged III Exploration to purchase
the loan. As a result, on July 14, 2000, III Exploration's parent company,
Intermountain, purchased at par the outstanding indebtedness and assumed the
senior lender's rights and obligations under the credit agreement. Intermountain
did not change any of the terms and conditions of the credit agreement but,
following the closing of that transaction loaned Petroglyph an additional $3.150
million through September 2000 to meet its current obligations. Petroglyph has
been advised that this advance was made in anticipation of the successful
completion of the proposed merger with III Exploration and was specifically
intended to preserve Petroglyph's asset value for the period of time after the
merger. Petroglyph was further advised that any future advances that
Intermountain may consider will only be made if Intermountain believes they are
necessary to preserve Petroglyph's asset value.
In order to help alleviate its liquidity shortfall, on June 8, 2000,
Petroglyph received $800,000 from III Exploration under the terms of an
Agreement and Bill of Sale and Assignment of Proceeds, which assigned to III
Exploration the rights from proceeds of oil and natural gas sales. The funds
were used to cover past due accounts payable and hedge obligations. On June 28,
2000, $1 million was advanced from III Exploration under a similar assignment
agreement to provide needed working capital until additional long-term financing
could be arranged. Both advances were repaid from the proceeds of oil and
natural gas sales.
42
<PAGE> 50
Petroglyph has been advised that III Exploration intends to vote all of
the shares of Petroglyph's common stock in favor of the proposed merger with a
subsidiary of III Exploration. As a result, Petroglyph anticipates that the
transaction will be approved. If however the merger is not completed for any
reason, Petroglyph will likely not be able to meet its credit obligations
originally provided for under the credit agreement, which III Exploration's
affiliate purchased, nor carry out its 2000 development plan since there can be
no assurance that any additional financing will be available to Petroglyph on
acceptable terms or at all.
Petroglyph is incorporated in the State of Delaware, its principal
executive offices are located at 1302 North Grand, Hutchinson, Kansas 67501 and
its telephone number is (316) 665-8500.
MARKETING ARRANGEMENTS
The price received by Petroglyph for its oil and natural gas production
depends on numerous factors beyond Petroglyph's control, including seasonality,
the condition of the United States economy and state and local economies, the
level and availability of foreign imports of crude oil, political conditions in
other oil-producing countries, the actions of OPEC and domestic government
regulation, legislation and policies. Decreases in the prices of oil and natural
gas could have an adverse effect on the carrying value of Petroglyph's proved
reserves and Petroglyph's revenues, profitability and cash flow.
Petroglyph has historically sold its oil production under long-term
contracts calling for a purchaser posted price or NYMEX price and an adjustment
deduction. These contracts have expired and have been extended or re-negotiated
for shorter time periods. Petroglyph currently markets its crude oil either
month-to-month or on a longer term basis up to six months. During the years
ended December 31, 1999, 1998 and 1997, Petroglyph's oil sales volumes totaled
approximately 230 MBbls, 262 MBbls and 252 MBbls, respectively, at an average
sales price per Bbl, exclusive of hedging, for each year of $16.53, $9.65 and
$15.52, respectively. For the nine months ended September 30, 2000 and 1999,
respectively, oil sales volumes were 255 MBbls and 158 MBbls at average sales
prices per Bbl of $19.18 and $14.90, respectively.
Petroglyph's natural gas produced in the Uinta Basin is sold through a
long-term contract because of the need for firm pipeline transportation. The
contract expires June 2003. The price for the natural gas is based on an Inside
FERC index. Petroglyph's natural gas production in Texas is sold under an
annual, renewable contract. For the years ended December 31, 1999, 1998 and
1997, Petroglyph sold 630 MMcf, 680 MMcf and 537 MMcf, respectively, at an
average price per Mcf, exclusive of hedging, of $2.14, $2.01 and $2.08,
respectively. For the nine months ended September 30, 2000 and 1999,
respectively, natural gas sales volumes were 355 MMcf and 489 MMcf at average
sales prices per Mcf of $1.63 and $1.91, respectively.
TRANSPORTATION COMMITMENTS
In July 1998, Petroglyph entered into an agreement with Colorado
Interstate Gas Company whereby CIG agreed to install approximately 37 miles of
10-inch steel pipeline from near Trinidad, Colorado to Petroglyph's Raton Basin
coalbed methane development area approximately six miles southwest of
Walsenburg, Colorado. The pipeline was placed in service in January 1999 with a
43
<PAGE> 51
delivery capacity of approximately 50 MMcf per day and will provide Petroglyph
primary access to mid-continent markets for its future coalbed methane
production. Petroglyph committed to pay CIG a minimum transportation charge
equivalent to $0.325 per Mcf for the daily agreed volumes described below less
$0.02 per Mcf for any unused transportation capacity. Petroglyph's obligations
under the commitment began February 1, 1999 and end January 31, 2009. The
commitment began at a minimum volume of 2,000 Mcf per day and increases by 1,000
Mcf per day after each three-month period, with a maximum commitment of 10,000
Mcf per day. At the end of the first two-year period, Petroglyph has the option
to increase the minimum volume or eliminate the commitment. The cost of
eliminating the commitment is the cost of the pipeline ($6.4 million) less
credit applied for Petroglyph's Raton Basin commercial gas sales up to 16,000
Mcf per day. If paid, the costs of eliminating the commitment could be applied
as a credit to purchase transportation services for gas elsewhere on CIG's
system. Subject to certain restrictions, Petroglyph can reduce the minimum
monthly commitment by selling its available pipeline capacity at market rates.
For the year ended December 31, 1999, and the nine months ended September 30,
2000, Petroglyph paid $254,000 and $398,000 to CIG under this agreement.
HEDGING ACTIVITIES
Petroglyph has historically used various financial instruments such as
collars, swaps and futures contracts to manage its price risk for a portion of
Petroglyph's crude oil and natural gas production. Monthly settlements on these
financial instruments are typically based on differences between the fixed
prices specified in the instruments and the settlement price of certain futures
contracts quoted on the NYMEX or certain other indices. The instruments used by
Petroglyph for oil hedges have not contained a contractual obligation which
requires the future physical delivery of the hedged products. While these
hedging arrangements limit the downside risk of price declines, such
arrangements also limit the benefits which may be derived from price increases.
Approximately 162 MBbls of Petroglyph's expected oil production through
December 31, 2000 was subject to collars at December 31, 1999 with NYMEX floor
prices between $17.00 and $20.00 and ceiling prices between $20.00 and $23.00
based on 2000 NYMEX pricing. Additionally, 72 Mbbls of Petroglyph's expected oil
production through September 30, 2000 was subject to a swap at $20.05 based on
2000 NYMEX pricing. Expected 2000 natural gas production totaling 556,000 MMBtu
was hedged at swap prices from $2.01 to $2.2425 per MMBtu. During March 2000,
Petroglyph hedged 42 MBbls of 2000 oil production with NYMEX floor prices
between $22.00 and $23.00 and ceiling prices between $27.00 and $31.70.
Petroglyph monitors oil and gas market activity and compares its actual
performance to the estimates used when entering into hedging arrangements. If
material variations occur from those anticipated when a hedging arrangement is
made, Petroglyph takes actions intended to minimize any risk through appropriate
market actions. Petroglyph attempts to manage its exposure to counterparty
nonperformance risk through the selection of financially responsible
counterparties.
ACQUISITIONS
In the past, Petroglyph has evaluated and from time to time pursued
acquisitions of oil and gas properties in the Uinta Basin, the Raton Basin and
in other areas that provide investment
44
<PAGE> 52
opportunities for the addition of production and reserves that met Petroglyph's
selection criteria. However, because of Petroglyph's current liquidity shortage
and inability to meet short term obligations, Petroglyph is not currently
evaluating or pursuing any acquisitions. Petroglyph does not anticipate pursuing
any acquisitions before the merger.
COMPETITION
Petroglyph operates in the highly competitive areas of oil and natural
gas exploration, exploitation, acquisition and production with other companies,
many of which have substantially larger financial resources, operations, staffs
and facilities. In seeking to acquire desirable producing properties or new
leases for future exploration and in marketing its oil and natural gas
production, Petroglyph faces competition from other oil and natural gas
companies. Such companies may be able to pay more for productive oil and natural
gas properties and exploratory prospects and to define, evaluate, bid for and
purchase a greater number of properties and prospects than Petroglyph's
financial or human resources permit.
DRILLING AND OPERATING RISKS
Oil and natural gas drilling activities are subject to many risks,
including the risk that no commercially productive reservoirs will be
encountered. In light of its current liquidity shortage, Petroglyph has not
drilled new wells since August 1999 and does not anticipate drilling any new
wells before the merger without financial assistance from Intermountain.
Drilling for oil and natural gas may involve unprofitable efforts, not only from
dry holes, but from wells that are productive but do not produce sufficient net
revenues to return a profit after drilling, completion, operating and other
costs, including the costs of improved recovery and gathering facilities. The
cost of drilling, completing and operating production and injection wells is
often uncertain. In addition, Petroglyph's use of enhanced oil recovery
techniques requires greater upfront development expenditures than primary oil
recovery production strategies. In order to accomplish enhanced oil recovery
using waterflood techniques, Petroglyph drills approximately one injection well
for each producing well drilled. Petroglyph's coalbed methane recovery project
in the Raton Basin may involve significantly more time and capital to achieve
commercial gas production than is currently estimated. Dewatering of the gas
producing coalbed can take place over a period from three months to several
years and depends heavily on the amount and rates of water production. Complete
dewatering can occur up to two years after commercial volumes of gas are
initially produced; therefore, the ultimate effect of the dewatering operations
may not be known for several years. Petroglyph's waterflood program involves
greater risk of mechanical problems than conventional development programs. In
light of Petroglyph's current liquidity shortage, without financial support from
Intermountain, Petroglyph would not anticipate additional drilling operations or
development projects prior to the merger. Petroglyph's future drilling
activities, if any, may not be successful and, if unsuccessful, may have a
material adverse effect on Petroglyph's future results of operations and
financial condition.
Petroglyph's operations are subject to hazards and risks inherent in
drilling for, producing and transporting oil and natural gas, such as fires,
natural disasters, explosions, encountering formations with abnormal pressures,
blowouts, cratering, pipeline ruptures and spills, any of which can result in
the loss of hydrocarbons, environmental pollution, personal injury claims and
other damage to properties of Petroglyph and others. As protection against
operating hazards, Petroglyph maintains
45
<PAGE> 53
insurance coverage against some, but not all, potential losses. Petroglyph may
elect to self-insure in circumstances in which management believes that the cost
of insurance, although available, is excessive relative to the risks presented.
The occurrence of an event that is not covered, or not fully covered, by
third-party insurance could have a material adverse effect on Petroglyph's
business, financial condition and results of operations.
REGULATION
Regulation of Oil and Natural Gas Production. Petroglyph's oil and
natural gas exploration, production and related operations are subject to
extensive rules and regulations promulgated by federal, state, tribal and local
authorities and agencies. For example, the States of Utah, Colorado, Texas and
others in which Petroglyph may operate require permits for drilling operations,
drilling bonds and reports concerning operations and impose other requirements
relating to the exploration and production of oil and natural gas. Such states
also have statutes or regulations addressing conservation matters, including
provisions for the unitization or pooling of oil and natural gas properties, the
establishment of maximum rates of production from wells, and the regulation of
spacing, plugging and abandonment of such wells. Failure to comply with any such
rules and regulations can result in substantial penalties. The regulatory burden
on the oil and gas industry increases Petroglyph's cost of doing business and
affects its profitability. Although Petroglyph believes it is in substantial
compliance with all applicable laws and regulations, because such rules and
regulations are frequently amended or reinterpreted, Petroglyph is unable to
predict the future cost or impact of complying with such laws. Significant
expenditures may be required to comply with governmental laws and regulations
and may have a material adverse effect on Petroglyph's financial condition and
results of operations.
Such regulation requires permits for drilling operations, drilling
bonds and reports concerning operations and imposes other requirements relating
to the exploration and the production of oil and gas.
Federal Regulation of Natural Gas. The Federal Energy Regulatory
Commission regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of natural gas produced by Petroglyph, as
well as the revenues received by Petroglyph for sales of such production. Since
the mid-1980's, FERC has issued a series of orders, culminating in Order Nos.
636, 636-A and 636-B, that have significantly altered the marketing and
transportation of natural gas. Order 636 mandated a fundamental restructuring of
interstate pipeline sales and transportation service, including the unbundling
by interstate pipelines of the sale, transportation, storage and other
components of the city-gate sales services such pipelines previously performed.
One of FERC's purposes in issuing the order was to increase competition within
all phases of the natural gas industry. The United States Court of Appeals for
the District of Columbia Circuit largely upheld Order 636 and the Supreme Court
has declined to hear the appeal from that decision. Generally, Order 636 has
eliminated or substantially reduced the interstate pipelines' traditional role
as wholesalers of natural gas in favor of providing only storage and
transportation service, and has substantially increased competition and
volatility in natural gas markets.
The price Petroglyph receives from the sale of oil and natural gas
liquids is affected by the cost of transporting products to markets. Effective
January 1, 1995, FERC implemented regulations
46
<PAGE> 54
establishing an indexing system for transportation rates for oil pipelines,
which, generally, would index such rates to inflation, subject to certain
conditions and limitations. Petroglyph is not able to predict with certainty the
effect, if any, of these regulations on its operations. However, the regulations
may increase transportation costs or reduce well head prices for oil and natural
gas liquids.
Bureau of Indian Affairs. A substantial part of Petroglyph's producing
properties in the Uinta Basin are operated under oil and natural gas leases
issued by the Ute Indian Tribe, which is under the supervision of the Bureau of
Indian Affairs. These activities must comply with rules and orders that regulate
aspects of the oil and natural gas industry, including drilling and operating on
leased land and the calculation and payment of royalties to the federal
government or the Ute Indian Tribe. Operations on Ute Indian tribal lands must
also comply with significant restrictive requirements of the governing body of
the Ute Indians. For example, such leases typically require the operator to
obtain at least an environmental assessment based on planned drilling activity.
To the extent an operator wishes to drill additional wells, it will be required
to obtain a new assessment. In addition, leases with the Ute Indian Tribe
require that the operator agree to protect certain archeological and ancestral
ruins located on the acreage.
Environmental Matters. Petroglyph's operations and properties are
subject to extensive and changing federal, state and local laws and regulations
relating to environmental protection, including the generation, storage,
handling, emission, transportation and discharge of materials into the
environment, and relating to safety and health. The recent trend in
environmental legislation and regulation generally is toward stricter standards,
and this trend will likely continue. These laws and regulations may (i) require
the acquisition of a permit or other authorization before construction or
drilling commences and for certain other activities; (ii) limit or prohibit
construction, drilling and other activities on certain lands lying within
wilderness and other protected areas; and (iii) impose substantial liabilities
for pollution resulting from Petroglyph's operations. The permits required for
various of Petroglyph's operations are subject to revocation, modification and
renewal by issuing authorities. Governmental authorities have the power to
enforce their regulations, and violations are subject to fines or injunctions,
or both. In the opinion of management, Petroglyph is in substantial compliance
with current applicable environmental laws and regulations, and Petroglyph has
no material commitments for capital expenditures to comply with existing
environmental requirements. Nevertheless, changes in existing environmental laws
and regulations or in interpretations thereof could have a significant impact on
Petroglyph, as well as the oil and natural gas industry in general.
The Comprehensive Environmental, Response, Compensation, and Liability
Act and comparable state statutes impose strict, joint and several liability on
owners and operators of sites and on persons who disposed of or arranged for the
disposal of hazardous substances found at such sites. It is not uncommon for the
neighboring land owners and other third parties to file claims for personal
injury and property damage allegedly caused by the hazardous substances released
into the environment. The Federal Resource Conservation and Recovery Act and
comparable state statutes govern the disposal of solid waste and hazardous waste
and authorize the imposition of substantial fines and penalties for
noncompliance. Although CERCLA currently excludes petroleum from its definition
of hazardous substance, state laws affecting Petroglyph's operations impose
clean-up liability relating to petroleum and petroleum related products. In
addition, although RCRA classifies certain oil field wastes as non-hazardous,
such exploration and production wastes could be
47
<PAGE> 55
reclassified as hazardous wastes thereby making such wastes subject to more
stringent handling and disposal requirements.
Petroglyph has acquired leasehold interests in numerous properties that
for many years have produced oil and natural gas. Although the previous owners
of these interests may have used operating and disposal practices that were
standard in the industry at the time, hydrocarbons or other wastes may have been
disposed of or released on or under the properties. In addition, some of
Petroglyph's properties may be operated in the future by third parties over whom
Petroglyph has no control. Notwithstanding Petroglyph's lack of control over
properties operated by others, the failure of the operator to comply with
applicable environmental regulations may, in certain circumstances, adversely
impact Petroglyph.
NEPA. The National Environmental Policy Act is applicable to many of
Petroglyph's activities and operations. NEPA is a broad procedural statute
intended to ensure that federal agencies consider the environmental impact of
their actions by requiring such agencies to prepare environmental impact
statements in connection with all federal activities that significantly affect
the environment. Although NEPA is a procedural statute only applicable to the
federal government, a large portion of Petroglyph's Uinta Basin acreage is
located either on federal land or Ute tribal land jointly administered with the
federal government. The Bureau of Land Management's issuance of drilling permits
and the Secretary of the Interior's approval of plans of operation and lease
agreements all constitute federal action within the scope of NEPA. Consequently,
unless the responsible agency determines that Petroglyph's drilling activities
will not materially impact the environment, the responsible agency will be
required to prepare an environmental impact statement in conjunction with the
issuance of any permit or approval.
ESA. The Endangered Species Act seeks to ensure that activities do not
jeopardize endangered or threatened animal, fish and plant species, nor destroy
or modify the critical habitat of such species. Under ESA, exploration and
production operations, as well as actions by federal agencies, may not
significantly impair or jeopardize the species or its habitat. ESA provides for
criminal penalties for willful violations of the Act. Other statutes that
provide protection to animal and plant species and that may apply to
Petroglyph's operations include, but are not necessarily limited to, the Fish
and Wildlife Coordination Act, the Fishery Conservation and Management Act, the
Migratory Bird Treaty Act and the National Historic Preservation Act. Although
Petroglyph believes that its operations are in substantial compliance with such
statutes, any change in these statutes or any reclassification of a species as
endangered could subject Petroglyph to significant expense to modify its
operations or could force Petroglyph to discontinue certain operations
altogether.
ABANDONMENT COSTS
Petroglyph is responsible for payment of its working interest share of
plugging and abandonment costs on its oil and natural gas properties. Based on
its experience, Petroglyph anticipates that the ultimate aggregate salvage value
of lease and well equipment located on its properties will exceed the costs of
abandoning such properties. There can be no assurance, however, that Petroglyph
will be successful in avoiding additional expenses in connection with the
abandonment of any of its properties, particularly in light of Petroglyph's
current financial situation.
48
<PAGE> 56
In addition, abandonment costs and their timing may change due to many factors
including actual production results, inflation rates and changes in
environmental laws and regulations. Absent the completion of the merger or other
financial support from Intermountain or other lenders, Petroglyph's liquidity
shortage might force it to abandon some of its properties.
TITLE TO PROPERTIES
Petroglyph believes it has satisfactory title to all of its producing
properties in accordance with standards generally accepted in the oil and
natural gas industry. Petroglyph's properties are subject to customary royalty
interests, liens incident to operating agreements, liens for current taxes and
other burdens which Petroglyph believes do not materially interfere with the use
of or affect the value of such properties. Petroglyph's credit agreement is
secured by substantially all Petroglyph's oil and natural gas properties.
Presently, Petroglyph keeps in force its leaseholds for 20% of its net acreage
by virtue of production on that acreage in paying quantities. The remaining
acreage is held by lease rentals and similar provisions and requires established
production in paying quantities prior to expiration of various time periods to
avoid lease termination.
OTHER FACILITIES
Petroglyph currently leases approximately 8,000 square feet of office
space in Hutchinson, Kansas, where its principal offices are located. The lease
expires in May 2001, at which time the company has the option to renew the lease
or acquire the property. The company also leases a 3,300 square foot office
building through Hutch Realty LLC, an affiliate of the company.
EMPLOYEES
As of September 30, 2000, Petroglyph had 36 full-time employees, none
of whom is represented by any labor union. Included in the total were 12
corporate employees located in Petroglyph's office in Hutchinson, Kansas.
Petroglyph considers its relations with its employees to be good.
PROPERTIES
GENERAL
Petroglyph's primary producing properties are located in the Uinta
Basin in Utah, where it is implementing enhanced oil recovery projects in the
Lower Green River Formation of the Greater Monument Butte Region. Petroglyph's
enhanced oil recovery development strategy utilizes waterflood techniques
designed to rebuild and maintain reservoir pressure. Waterflooding involves the
injection of water into a reservoir, forcing oil through the formation toward
producing wells within the development area and driving free natural gas in the
reservoir back into oil solution, creating greater pressure within the reservoir
and making oil more mobile.
Since July 1997, Petroglyph has acquired 73,100 net acres in the Raton
Basin in Colorado where it has developed a pilot area consisting of 20 completed
wells for the production of coalbed methane gas. Coalbed methane gas production
is similar to traditional natural gas production in terms of the physical
producing facilities and the product produced. Coalbed methane wells are
49
<PAGE> 57
drilled and completed in a manner similar to traditional natural gas wells, but
development relies upon the release of coalbed methane as pressure is reduced in
the reservoir due to water removal. During drilling and completion operations in
this pilot project, Petroglyph determined that significant volumes of water
would be required to be removed to reduce reservoir pressures to a level
conducive to methane gas production.
During 1999, Petroglyph produced a total of approximately 12 million
barrels of water and continuously produced measurable volumes of natural gas
along with the water from the wells in the pilot project. During the period from
January 1, 2000 through September 30, 2000, Petroglyph produced approximately 10
million barrels of water and 405 Mcf of natural gas. These measurable gas
volumes are supplying a portion of the fuel gas required for dewatering
operations in the pilot area, but gas volumes are not currently large enough to
be sold to markets via the gas pipelines connected to the pilot area.
Petroglyph initially estimated that it would take approximately six to
12 months to sufficiently dewater the coal gas reservoirs and bring about
commercial volumes of gas production from the pilot project. However, greater
than anticipated water production from wells in the pilot area has significantly
extended the estimated amount of time and capital necessary to achieve gas
production in commercial quantities. As a result of the higher than anticipated
water volumes, Petroglyph conducted a series of specialized reservoir tests
during December 1999. These tests were designed, among other things, to further
estimate additional time required to dewater the coal gas reservoirs in the
pilot area at the current water withdrawal rate. As a result of this engineering
evaluation, Petroglyph determined that an unconventional and unproven technique
could be attempted in dewatering the pilot area. This technique requires
drilling four to 11 additional water withdrawal wells at a cost ranging from
$1.0 million to $3.0 million in the pilot area to expedite the dewatering
required to begin production of natural gas in commercial quantities. However,
there is no assurance that this technique would result in the production of
commercial quantities of natural gas. In light of Petroglyph's current cash
situation, Petroglyph does not anticipate being able to drill the additional
wells before the merger.
Based on its experience to date, Petroglyph believes that the coal gas
resources within the pilot area, and more generally within the majority of its
entire acreage position in the Raton Basin, contain commercial quantities of
coalbed methane gas. Prior to April 2000 Petroglyph had planned to continue
developing its Raton Basin coal resource. However, Petroglyph does not currently
have funds necessary to continue developing this resource and does not
anticipate that it will be able to obtain such funds before the merger.
Until October 2000, Petroglyph had an operating working interest and
owned approximately 4,900 net acres in the Helen Gohlke field located within the
Wilcox Trend in the Gulf Coast Region of South Texas.
OIL AND NATURAL GAS RESERVES
The following table summarizes the estimates of Petroglyph's estimated
historical net proved reserves of oil and natural gas as of December 31, 1997,
1998 and 1999.
50
<PAGE> 58
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-------------------------------------------------------------------------------------
1997 1998 1999
------------------------- ------------------------- -------------------------
NATURAL NATURAL NATURAL
OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
<S> <C> <C> <C> <C> <C> <C>
Proved developed:
Utah 4,620 9,202 5,260 10,686 10,366 21,309
Other 122 1,637 60 1,984 93 3,011
Total 4,742 10,839 5,320 12,670 10,459 24,320
Proved undeveloped:
Utah 4,714 9,856 1,107 2,822 8,030 17,743
Other -- -- -- -- -- 1,369
---------- ---------- ---------- ---------- ---------- ----------
Total 4,714 9,856 1,107 2,822 8,030 19,112
---------- ---------- ---------- ---------- ---------- ----------
Total Proved 9,456 20,695 6,427 15,492 18,489 43,432
========== ========== ========== ========== ========== ==========
</TABLE>
The following table sets forth the future net cash flows from
Petroglyph's estimated proved reserves:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
----------------------------------------
1997 1998 1999
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future net cash flow before income taxes:
Utah $ 96,768 $ 49,992 $ 338,179
Other 2,469 2,368 8,205
---------- ---------- ----------
Total $ 99,237 $ 52,360 $ 346,384
========== ========== ==========
Future net cash flow before income taxes, discounted at 10%:
Utah $ 41,631 $ 26,581 $ 146,971
Other 1,798 1,727 4,312
---------- ---------- ----------
Total $ 43,429 $ 28,308 $ 151,283
========== ========== ==========
</TABLE>
The reserve estimates for 1997, 1998 and 1999 were prepared by Lee
Keeling and Associates Inc., Petroglyph's independent petroleum engineers.
Petroglyph has not included any reserves from its Raton Basin
development in proved categories, as the pilot area is in the dewatering
process. At such time that commercial quantities of Raton Basin gas are
realized, the associated probable reserves will be classified in proved
categories.
In accordance with applicable requirements of the Commission, estimates
of Petroglyph's proved reserves and future net revenues are made using sales
prices in effect as of the date of such reserve estimates and are held constant
throughout the life of the properties (except to the extent a contract
specifically provides for escalation). Estimated quantities of proved reserves
and future net revenues therefrom are affected by oil and natural gas prices,
which have fluctuated widely in recent years. There are numerous uncertainties
inherent in estimating oil and natural gas reserves and their estimated values,
including many factors beyond the control of the producer. The reserve data set
forth in this report are only estimates. Reservoir engineering is a subjective
process of estimating underground accumulations of oil and natural gas that
cannot be measured in an exact manner. The accuracy of any reserve estimate is a
function of the quality of available data and of engineering and
51
<PAGE> 59
geological interpretation and judgment. In addition, Petroglyph's use of
enhanced oil recovery techniques requires greater upfront development
expenditures than primary oil recovery production strategies. Petroglyph expects
to drill a number of wells and employ waterflood technology to produce them in
the future. Petroglyph's waterflood program involves greater risk of mechanical
problems than conventional development programs. As a result, estimates of
different engineers, including those used by Petroglyph, may vary. In addition,
estimates of reserves are subject to revision based upon actual production,
results of future development and exploration activities, prevailing natural gas
and oil prices, operating costs, availability of capital and other factors,
which revisions may be material. Accordingly, reserve estimates are often
different from the quantities of natural gas and oil that are ultimately
recovered and are highly dependent upon the accuracy of the assumptions upon
which they are based.
EXPLORATION AND DEVELOPMENT ACTIVITIES
Petroglyph drilled, or participated in the drilling of, the following
number of wells during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------------
1997 1998 1999
------------------------- ------------------------- -------------------------
GROSS NET GROSS NET GROSS NET
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Exploratory:
Oil 2 2.0 1 1.0 -- --
Natural Gas 2 1.0 5 5.0 -- --
Nonproductive -- -- -- -- 1 1.0
---------- ---------- ---------- ---------- ---------- ----------
Total 4 3.0 6 6.0 1 1.0
========== ========== ========== ========== ========== ==========
Development:
Oil 52 26.0 26 13.0 -- --
Natural Gas -- -- 20 19.0 2 1.0
Nonproductive -- -- 2 2.0 -- --
---------- ---------- ---------- ---------- ---------- ----------
Total 52 26.0 48 34.0 2 1.0
========== ========== ========== ========== ========== ==========
Total:
Productive 56 29.0 52 38.0 2 1.0
Nonproductive -- -- 2 2.0 1 1.0
---------- ---------- ---------- ---------- ---------- ----------
Total 56 29.0 54 40.0 3 2.0
========== ========== ========== ========== ========== ==========
</TABLE>
Based on Petroglyph's drilling results to date, Petroglyph believes
that the nature of the geology in the Lower Green River Formation in the Greater
Monument Butte Region is characterized by the presence of hydrocarbons
throughout the region and, as a consequence, the distinction between exploratory
and development wells in this region is not as important as it is in other oil
and natural gas producing areas.
Petroglyph does not own any drilling rigs; therefore, all of its
drilling activities are conducted by independent contractors under standard
drilling contracts.
52
<PAGE> 60
PRODUCTIVE WELL SUMMARY
The following table sets forth Petroglyph's ownership interest as of December
31, 1999 in productive oil and natural gas wells in the development areas
indicated.
<TABLE>
<CAPTION>
OIL NATURAL GAS TOTAL
------------------------- ------------------------- -------------------------
GROSS NET GROSS NET GROSS NET
---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Utah:
Antelope Creek Field 107 107.0 -- -- 107 107.0
Duchesne Field 5 5.0 1 1.0 6 6.0
Natural Buttes Extension -- -- 2 1.5 2 1.5
---------- ---------- ---------- ---------- ---------- ----------
Total 112 112.0 3 2.5 115 114.5
Colorado* -- -- 17 17.0 17 17.0
Other 3 3.0 5 3.0 8 6.0
---------- ---------- ---------- ---------- ---------- ----------
Total 115 115.0 25 22.5 140 137.5
========== ========== ========== ========== ========== ==========
</TABLE>
*In dewatering phase of completion operations.
In addition, as of December 31, 1999, Petroglyph had 37 gross (37 net)
active water injection wells on its acreage in the Uinta Basin.
53
<PAGE> 61
VOLUMES, PRICES AND PRODUCTION COSTS
The following table sets forth the production volumes, average sales
prices and average production costs associated with Petroglyph's sale of oil and
natural gas for the period indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Net production:
Oil (Bbls) ............................................................ 251,631 261,817 229,651
Natural gas (Mcf) ..................................................... 537,466 679,992 630,186
Oil equivalent (BOE) .................................................. 341,209 375,149 334,682
Average sales price (1):
Oil (per Bbl):
Utah (2) .......................................................... $ 14.37 $ 11.01 $ 15.85
Other ............................................................. 18.94 12.95 17.43
Weighted average (3) .............................................. 14.84 11.12 15.90
Natural gas (per Mcf) (4):
Utah .............................................................. $ 1.91 $ 2.12 $ 1.84
Other ............................................................. 2.37 1.75 1.84
Weighted average .................................................. 1.99 2.01 1.84
Average lease operating expenses including production and property taxes
(per BOE):
Utah .................................................................. $ 3.67 $ 5.06 $ 9.58
Other ................................................................. 15.08 10.02 11.25
Weighted average ...................................................... 5.09 5.72 9.90
</TABLE>
----------
(1) Before deduction of property taxes.
(2) Excluding the effects of crude oil hedging transactions and
amortization of deferred revenue, the weighted average Uinta Basin
sales price per Bbl of oil received by Petroglyph was $15.12, $9.44 and
$16.50 for the years ended December 31, 1997, 1998 and 1999,
respectively.
(3) Excluding the effects of crude oil hedging transactions and
amortization of deferred revenue, the weighted average sales price per
Bbl of oil was $15.52, $9.65 and $16.53 for the years ended December
31, 1997, 1998 and 1999, respectively.
(4) Excluding the effects of hedging transactions, the weighted average
sales price per Mcf of natural gas was $2.08, $2.01 and $2.14 for the
years ended December 1997, 1998 and 1999, respectively.
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth the costs incurred by Petroglyph in its
development, exploration and acquisition activities during the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Acquisition costs:
Unproved properties ..... $ 1,721,636 $ 7,141,142 $ 1,320,105
Proved properties ....... 147,387 42,533 7,120,952
Development costs ............ 10,003,468 10,123,616 1,038,257
Exploration costs ............ -- 192,526 38,640
Improved recovery costs ...... 895,317 -- --
Total ............... $ 12,767,808 $ 17,499,817 $ 9,517,954
============ ============ ============
</TABLE>
54
<PAGE> 62
ACREAGE
The following table sets forth, as of December 31, 1999, the gross and
net acres of developed and undeveloped oil and natural gas leases which
Petroglyph holds or has the right to acquire. Undeveloped acreage includes
leased acres on which wells have not been drilled or completed to a point that
would permit the production of commercial quantities of oil and natural gas,
regardless of whether or not such acreage contains proved reserves.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED TOTAL
------------------------- ------------------------- -------------------------
AREA GROSS NET GROSS NET GROSS NET
---- ---------- ---------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C> <C>
Utah:
Antelope Creek Field ......... 6,560 6,560 14,457 12,892 21,017 19,452
Duchesne Field ............... 1,400 1,067 11,935 10,565 13,335 11,632
Natural Buttes Extension ..... 360 360 15,336 15,132 15,696 15,492
Total .................... 8,320 7,987 41,728 38,589 50,048 46,576
Colorado .......................... 3,072 3,072 90,988 70,025 94,060 73,097
Other ............................. 5,210 4,900 441 441 5,651 5,341
Total .................... 16,602 15,959 133,157 109,055 149,759 125,014
========== ========== ========== ========== ========== ==========
</TABLE>
LEGAL PROCEEDINGS
Petroglyph is a party to the following legal proceeding:
Mark Lively v. Petroglyph Operating Company, Inc.
Petroglyph is a defendant in a lawsuit filed on or about December 22,
1999 in the District Court of Huerfano County, Colorado, by Mark Lively, wherein
Lively, among other things, seeks an order from the court evicting Petroglyph
from a portion of Lively's property that contains four of Petroglyph's Raton
Basin coalbed methane gas wells. Lively also seeks to recover attorney fees and
costs incurred in connection with the lawsuit. The District Court has entered a
judgment the effect of which was to award Lively a minority working interest in
the minerals underlying the four wells, which judgment Petroglyph plans to
appeal. Petroglyph continues to vigorously defend itself in this matter.
Petroglyph does not believe a negative outcome in this matter would have a
material adverse effect on Petroglyph's financial position or results of
operations.
55
<PAGE> 63
SELECTED FINANCIAL DATA
The following selected consolidated financial data should be read in
conjunction with Management's Discussion and Analysis of Financial Condition and
Results of Operations and Petroglyph's consolidated financial statements and
related notes included in Consolidated Financial Statements and Supplementary
Data.
Petroglyph's Consolidated Financial Statements are included on the
pages immediately following the Index to Consolidated Financial Statements
appearing on page F-1.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------------------------------
1999 1998 1997 1996
------------ ------------ ------------ ------------
(in thousands, except per share amounts and operating data)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Oil sales .................................. $ 3,652 $ 2,912 $ 3,735 $ 4,459
Natural gas sales .......................... 1,160 1,366 1,070 999
Other ...................................... 230 190 61 --
------------ ------------ ------------ ------------
Total operating revenues .............. 5,042 4,468 4,866 5,458
------------ ------------ ------------ ------------
Operating expenses:
Lease operating ............................ 2,953 1,927 1,560 2,369
Production taxes ........................... 359 218 179 249
Exploration costs .......................... 39 193 -- 69
Depreciation, depletion and amortization ... 1,673 1,866 1,852 2,806
Impairments ................................ -- 4,848 -- --
General and administrative ................. 2,024 2,129 1,300 902
------------ ------------ ------------ ------------
Total operating expenses ................... 7,048 11,181 4,891 6,395
------------ ------------ ------------ ------------
Operating loss ................................. (2,006) (6,713) (25) (937)
Other income (expense):
Interest income (expense), net ............. (679) 407 114 40
Gain (loss) on sales of
property and equipment, net ........... 840 59 12 1,384
------------ ------------ ------------ ------------
Net income (loss) before income taxes .......... (1,845) (6,247) 101 487
Income tax benefit (expense)(1) ................ 390 2,062 (2,514) (190)
------------ ------------ ------------ ------------
Net income (loss) before
change in accounting principle ............. $ (1,455) $ (4,185) $ (2,413) $ 297
------------ ------------ ------------ ------------
Accounting change - Expense of Start
Up Costs (net of tax) .......................... $ (111) $ -- $ -- $ --
Net income (loss) ................................... $ (1,566) $ (4,185) $ (2,413) $ 297
============ ============ ============
Dividends earned on preferred stock ............... $ -- $ -- $ -- $ --
------------ ------------ ------------ ------------
Net income (loss) available to
common stockholders ............................ (1,566) (4,185) (2,413) 297
============ ============ ============ ============
Earnings (loss) per common share
before change in accounting principle .......... $ (.27) $ (.77) $ (.73) $ .11
Earnings (loss) per common share
from change in accounting principle ............ $ (0.02) $ -- $ -- $ --
------------ ------------ ------------ ------------
Earnings (loss) per common share
basic and diluted .............................. $ (0.29) $ (0.77) $ (0.73) $ 0.11
============ ============ ============ ============
Weighted average common shares
outstanding .................................... 5,469,292 5,458,333 3,326,826 2,833,333
BALANCE SHEET DATA:
Working capital ................................ 1,969 1,952 14,873 (541)
Total assets ................................... 52,947 46,035 46,714 17,470
Total long-term debt, less current portion ..... 14,953 7,500 -- --
Total stockholders' equity ..................... 35,816 35,312 39,498 39,498
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------ ------------------------------
1995 2000 1999
------------ ------------ ------------
(in thousands, except per share amounts and operating data)
<S> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Operating expenses:
Oil sales .................................. $ 3,217 $ 4,889 $ 2,359
Natural gas sales .......................... 1,016 579 936
Other ...................................... 36 (23) 202
------------ ------------ ------------
Total operating revenues .............. 4,269 5,445 3,497
------------ ------------ ------------
Operating expenses:
Lease operating ............................ 2,260 3,712 1,782
Production taxes ........................... 188 606 220
Exploration costs .......................... 376 -- 21
Depreciation, depletion and amortization ... 2,302 1,509 1,248
Impairments ................................ 109 -- --
General and administrative ................. 1,064 1,821 1,530
------------ ------------ ------------
Total operating expenses ................... 6,299 7,648 4,801
------------ ------------ ------------
Operating loss ................................. (2,030) (2,203) (1,304)
Other income (expense):
Interest income (expense), net ............. (216) (863) (387)
Gain (loss) on sales of
property and equipment, net ........... (138) 65 860
------------ ------------ ------------
Net income (loss) before income taxes .......... 2,384 (3,001) (831)
Income tax benefit (expense)(1) ................ -- -- (299)
------------ ------------ ------------
Net income (loss) before
change in accounting principle ............. $ (2,384) $ (3,001) $ (532)
------------ ------------ ------------
Accounting change - Expense of Start
Up Costs (net of tax) .......................... $ -- $ -- $ (111)
Net income (loss) ................................... $ (2,384) $ (3,001) $ (643)
============ ============ ============
Dividends earned on preferred stock ............... $ -- $ (179) $ --
------------ ------------ ------------
Net income (loss) available to
common stockholders ............................ (2,384) (3,180) (643)
============ ============ ============
Earnings (loss) per common share
before change in accounting principle .......... $ (0.84) $ (0.49) $ (0.10)
Earnings (loss) per common share
from change in accounting principle ............ $ -- $ -- $ (0.02)
------------ ------------ ------------
Earnings (loss) per common share
basic and diluted .............................. $ (0.84) $ (0.49) $ (0.12)
============ ============ ============
Weighted average common shares
outstanding .................................... 2,833,333 6,458,333 5,458,333
BALANCE SHEET DATA:
Working capital ................................ 1,133 (17,506) 1,565
Total assets ................................... 17,598 57,016 51,326
Total long-term debt, less current portion ..... 3,900 (19,041) 15,363
Total stockholders' equity ..................... 12,207 35,136 34,808
</TABLE>
----------
(1) Tax information for 1996 is shown as pro forma to reflect income tax
expense as if partnership income of the company's predecessor,
Petroglyph Gas Partners, L.P., were subject to federal income tax.
56
<PAGE> 64
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The following table sets forth certain operating data of Petroglyph for
the periods presented:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- -----------------------------
1997 1998 1999 1999 2000
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (Bbls) ...................... 251,631 261,817 229,651 158,329 254,889
Natural Gas (Mcf) ............... 537,466 679,992 630,186 489,480 354,582
Total (BOE) ................. 341,209 375,149 334,682 239,909 313,986
AVERAGE SALES PRICE PER UNIT(1):
Oil (per Bbl)(2) ................ $ 14.84 $ 11.12 $ 15.90 $ 14.90 $ 19.18
Natural Gas (per Mcf)(3) ........ $ 1.99 $ 2.01 $ 1.84 $ 1.91 $ 1.63
BOE ............................. $ 14.08 $ 11.40 $ 14.38 $ 14.58 $ 17.34
COSTS PER BOE:
Lease operating expense ......... $ 4.57 $ 5.14 $ 8.82 $ 7.43 $ 11.82
Production and property taxes ... $ 0.52 $ 0.58 $ 1.07 $ 0.92 $ 1.93
General and administrative ...... $ 3.81 $ 5.67 $ 6.05 $ 6.38 $ 5.80
Depreciation, depletion and
amortization .................. $ 5.43 $ 4.97 $ 5.00 $ 5.20 $ 4.81
Average finding costs(4) ........ $ 3.00 $ 0.85 $ 3.08 -- --
</TABLE>
----------
(1) Before deduction of production taxes.
(2) Excluding the effects of crude oil hedging transactions and
amortization of deferred revenue, the weighted average sales price per
Bbl of oil was $15.52, $9.65 and $16.53 for the years ended December
31, 1997, 1998 and 1999, respectively, and $18.45 and $26.34 for the
nine months ended September 30, 1999 and 2000, respectively.
(3) Excluding the effects of hedging transactions, the weighted average
sales prices per Mcf of natural gas was $2.08, $2.01 and $2.14 for the
years ended December 31, 1997, 1998 and 1999, respectively and $1.63
and $1.91 for the nine months ended September 30, 1999 and 2000,
respectively.
(4) The calculation of average finding cost for the year ended December 31,
1999 includes a change in future development costs of $38.6 million.
Average finding cost excluding this amount was $0.54 for 1999. The
calculation of average finding cost for the year ended December 31,
1998 includes a reduction in future development costs of $13.3 million
as a result of a decline in Petroglyph's proved undeveloped reserves
due to low year-end oil prices. 1998 average finding cost excluding
future development cost is not meaningful. The calculation of average
finding cost for the year ended December 31, 1997 includes a change in
future development costs of $2.7 million. Average finding cost
excluding this amount was $2.37 for the year ended December 31, 1997.
Petroglyph uses the successful efforts method of accounting for its oil
and natural gas activities. Costs to acquire mineral interests in oil and
natural gas properties, to drill and equip exploratory wells that result in
proved reserves, and to drill and equip development wells are capitalized. Costs
to drill exploratory wells that do not result in proved reserves, geological,
geophysical and seismic costs, and costs of carrying and retaining properties
that do not contain proved reserves are expensed. Costs of significant
nonproducing properties, wells in the process of being drilled and development
projects are excluded from depletion until such time as the related project is
developed and proved reserves are established or impairment is determined.
57
<PAGE> 65
Petroglyph's predecessor was classified as a partnership for federal
income tax purposes. Therefore, no income taxes were paid or provided for by
Petroglyph prior to the conversion of the company into a corporation in
connection with the initial public offering of Petroglyph's common stock. Future
tax amounts, if any, will be dependent upon several factors, including but not
limited to Petroglyph's results of operations.
RESULTS OF OPERATIONS
Year Ended December 31, 1999 Compared to Year Ended December 31, 1998
OPERATING REVENUES
Oil revenues increased by $740,000 (25%) to $3,652,000 for the year
ended December 31, 1999 as compared to $2,912,000 for 1998 as a result of a
$4.73 (43%) increase in average realized oil sales prices from $11.12 per Bbl in
1998 to $15.90 in 1999. The average oil sales price of $15.90 per Bbl includes
the effects of crude oil hedge losses of $144,000 in 1999 compared to crude oil
hedge gains of $386,000 in the prior year. Petroglyph's average oil sales price
for the year ended December 31, 1999, excluding the effects of the hedge loss,
was $16.53 per Bbl.
Natural gas revenues decreased by $206,000 (15%) to $1,160,000 for the
year ended December 31, 1999 as compared to $1,366,000 for 1998. The average
realized gas price for 1999 was $1.84 per Mcf, including a hedge loss of $0.30
per Mcf, compared to $2.01 per Mcf in 1998. Gas sales volumes for 1999 declined
49,800 Mcf (7%) to 630,200 Mcf, compared to 1998 sales volumes of 680,000 Mcf.
OPERATING EXPENSES
Lease operating expenses increased $1,026,000 (53%) to $2,953,000 for
the year ended December 31, 1999 as compared to $1,927,000 for the year ended
December 31, 1998. Lease operating costs incurred in 1999 which were not
comparable to the previous year included $863,000 attributable to that portion
of the Antelope Creek property purchased in 1999, $206,000 for compressor
rentals and $254,000 in commitment charges to CIG. Absent these three cost
items, lease operating expenses declined $297,000 (15%) between periods.
Depreciation, depletion and amortization expense declined $193,000
(10%) to $1,673,000 for the year ended December 31, 1999 as compared to
$1,866,000 for 1998. This expense, which is based on production volumes,
reflects an 11% decline in production between the two periods.
The company adopted the provisions of Statement of Accounting Standards
("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of," in connection with its formation. SFAS No.
121 requires that proved oil and natural gas properties be assessed for an
impairment in their carrying value whenever events or changes in circumstances
indicate that such carrying value may not be recoverable. SFAS No. 121 requires
that this assessment be performed by comparing the anticipated future net cash
flows to the net carrying value of the oil and natural gas properties. This
assessment must generally be performed on a
58
<PAGE> 66
property-by-property basis. The company recognized impairments of $4,848,218 in
1998. No such impairments were required in the years ended December 31, 1999 and
1997.
Whenever events or changes in circumstance indicate that the carrying
value of oil and gas properties may not be recoverable, the company makes an
assessment by comparing the anticipated future net cash flows to the net
carrying value of the oil and gas properties. If the carrying values of the oil
and gas properties exceeds the amount of the anticipated net future cash flows
from the oil and gas properties then the company calculates an impairment. The
company utilizes the most current externally prepared reserve report by a
petroleum engineer and applies an appropriate discount rate to anticipated
future net cash flows to determine a fair value for the oil and gas properties.
The company then adjusts the carrying value of the oil and gas property by
recording an impairment loss equal to the difference in the carrying value of
the property and the discounted anticipated future net cash flow of the oil and
gas property.
Exploration costs decreased to $39,000 for the year ended December 31,
1999 compared to $193,000 for the year ended December 31, 1998. One exploratory
well was plugged and abandoned on Petroglyph's Texas acreage in 1999, while two
wells, one in Texas and one in the Raton Basin were unsuccessful in 1998.
General and administrative expenses decreased by $105,000 (5%) to
$2,024,000 for the year ended December 31, 1999. This amount included a
one-time, non-cash charge of $176,000 associated with the resignation of an
executive officer of Petroglyph. Additionally, Petroglyph incurred approximately
$108,000 in severance charges associated with a planned reduction in general and
administrative expenses. Absent these items, general and administrative costs
decreased $389,000 (18%) to $1,635,000 in 1999 as compared to $2,129,000 in
1998, as a result of cost reduction measures implemented in the first quarter of
1999.
OTHER INCOME (EXPENSES)
Net interest expense for the year ended December 31, 1999 was $679,000
compared to net interest income of $407,000 for 1998. This represents the
decline in invested cash after the Offering to a net debt position at the end of
1998, that continued through 1999.
During the year ended December 31, 1999, Petroglyph received $1,498,000
in cash from the sale of Utah and Texas compression assets and surplus
inventory. Net book cost and selling expenses resulted in recognized gains
totaling $840,000 for 1999 as compared to $59,000 for the year ended December
31, 1998.
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
OPERATING REVENUES
Oil revenues decreased by $823,000 (22%) to $2,912,000 for the year
ended December 31, 1998 as compared to $3,735,000 for 1997 primarily as a result
of a $3.72 (25%) decline in average oil sales prices from $14.84 per Bbl in 1997
to $11.12 in 1998. The average oil sales price of $11.12 per Bbl includes the
effects of a crude oil hedge gain of $386,000. Petroglyph's average oil sales
price for the year ended December 31, 1998, excluding the effects of the hedge
gain, was $9.65 per Bbl.
Natural gas revenues increased by $296,000 (28%) to $1,366,000 for the
year ended December 31, 1998 as compared to $1,070,000 for 1997 primarily as a
result of an increase in the gas sales volumes of 143,000 Mcf (27%). The
increase in gas sales volumes is attributable to successful drilling activities
in Utah and Texas during the year, offset by normal production declines on
existing wells.
59
<PAGE> 67
OPERATING EXPENSES
Lease operating expenses increased $367,000 (24%) to $1,927,000 for the
year ended December 31, 1998 as compared to $1,560,000 for the year ended
December 31, 1997. This increase is a result of an increase in the average
number of operated wells and facilities between 1997 and 1998, a 10% increase in
allowable overhead charges per well, and an increase in expensed remediation
charges from unsuccessful workovers on Petroglyph's Texas properties. In
addition, Petroglyph's lease operating expenses on a per BOE basis increased by
$0.57 (12%) to $5.14 per BOE during 1998 as compared to $4.57 per BOE for 1997
as a result of the overhead increases and remediation charges mentioned above.
Depreciation, depletion and amortization expense declined $0.46 (8%) on
a per BOE basis to $4.97 for the year ended December 31, 1998, as compared to
$5.43 for the year ended December 31, 1997. The decline is a result of
increasing reserves in proved developed categories between periods.
Exploration costs increased to $193,000 for the year ended December 31,
1998 from zero for the year ended December 31, 1997, as two exploratory wells
drilled during the year, one in the Raton Basin and one on Petroglyph's Texas
acreage, were plugged and abandoned. This compares to 1997, when all of
Petroglyph's exploratory drilling activities were successful and no geological
and geophysical work was performed.
General and administrative expenses increased by $829,000 (64%) to
$2,129,000 for the year ended December 31, 1998, as compared to $1,300,000 for
the year ended December 31, 1997. This increase was the result of an increase in
engineering, geological and administrative staff as Petroglyph prepared for
increased development activity and increased accounting staff necessary to meet
the reporting requirements associated with being a public company. The increase
was enhanced by severance and related items incurred in the fourth quarter of
1998 as Petroglyph implemented staff reductions brought on by reduced drilling
activity and low commodity prices.
OTHER INCOME (EXPENSES)
Interest income (expense) net, for the year ended December 31, 1998,
increased $293,000 to $407,000 as compared to $114,000 for the year ended
December 31, 1997, primarily as a result of increased interest earned on the
invested proceeds from Petroglyph's initial public offering.
CHANGE IN ACCOUNTING PRINCIPLE
Petroglyph adopted Statement of Position (ASOP) 98-5, Reporting on the
Costs of Start-Up Activities, for fiscal years beginning after December 15,
1998. This SOP requires start-up and organizational costs to be expensed as
incurred. It also requires start-up and organizational costs previously
capitalized be expensed and that the resulting one-time expense be accounted for
as a change in accounting principle. Accordingly, Petroglyph has shown as a
change in accounting principle a charge of $111,000, which represents the
writeoff of net capitalized organizational costs of $173,000, net of the
associated income tax benefit of $62,000.
60
<PAGE> 68
RESULTS OF OPERATIONS
Nine Months Ended September 30, 2000 Compared to Nine Months Ended
September 30, 1999
OPERATING REVENUES
Oil revenues of $4,888,636 for the first nine months of 2000 were 107%
above oil revenues for the first nine months of 1999. The volume of oil sold
increased 95,560 barrels (61%) compared to the same period in 1999, due to the
acquisition of the remaining 50% working interest in Antelope Creek and oil
sales from the property acquisition. The company's average realized oil price
increased 29% to $19.18 per barrel for the first nine months of 2000 from $14.90
for the same period in 1999.
Gas volumes for the first nine months of 2000 decreased 27% to 354,582
Mcf compared to 489,480 Mcf for the same period in 1999. Gas volumes in the
Antelope Creek Field decreased in tandem with oil volumes. Gas sales from wells
drilled in the Helen Gohlke Field in 1999 also declined compared to the same
period in 1999. The average sales price for the first nine months of 2000
declined $0.28 to $1.63 (hedge adjusted) compared to $1.91 for the same period
in 1999. The overall result was a 38% decrease in gas revenues to $578,703 for
the first nine months of 2000 compared to $935,625 in 1999.
OPERATING EXPENSES
Lease operating expenses through September 30, 2000 were $3,712,077, or
108% greater than for the first nine months of 1999, due primarily to the
acquisition of the remaining 50% working interest in Antelope Creek, the
property acquisition and the CIG commitment fees. During the first three
quarters of 1999, oil prices were at extremely low levels. As a result,
expenditures from maintenance, workovers and remediations were delayed. As
prices improved during the first three quarters of 2000, the company has
increased the amount of workover and remediation activity to recover from the
reduced activity in 1999. The company has also converted 16 wells from producing
wells to water injection wells. The conversion of producing wells to water
injection wells results in reduced production. As the reservoir is repressured,
less natural gas is being produced. Decreasing natural gas production and fewer
producing oil wells, combined with the increased lease operating expenditures
has resulted in lease operating cost increases of 60% to $11.82 per BOE for the
first nine months of 2000 compared to $7.43 for the same period in 1999.
Depreciation, depletion and amortization expense for the first nine
months of 2000 was $1,509,318 compared to $1,247,825 through September 30, 1999.
Depreciation, depletion and amortization expense increased 21% due to higher
sales volumes. There was an 8% decline in cost to $4.81 net BOE, for the first
nine months of 2000, compared to $5.20 per BOE for the same period in 1999.
61
<PAGE> 69
General and administrative expense increased $290,058 (19%) to
$1,820,323 for the first nine months of 2000 compared to the same period in 1999
due primarily to merger related costs.
OTHER INCOME (EXPENSE)
Net interest expense for the first nine months of 2000 was $863,486
compared to $387,045 net interest expense for the same period in 1999.
Gain on sales of equipment decreased from $859,605 in the first nine
months of 1999 to $64,744 for the first nine months of 2000. During the first
nine months of 2000, the company realized cash of $108,424 from the sale of
surplus inventory, while in the first nine months of 1999 compressors were sold
for $1,393,000.
LIQUIDITY AND CAPITAL RESOURCES
Capital Expenditures
Petroglyph requires capital primarily for the exploration, development
and acquisition of oil and natural gas properties, the repayment of indebtedness
and general working capital purposes.
The following table sets forth costs incurred by Petroglyph in its
exploration, development and acquisition activities during the periods
indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------
1997 1998 1999
------------ ------------ ------------
<S> <C> <C> <C>
Acquisition costs:
Unproved properties $ 1,721,636 $ 7,141,142 $ 1,320,105
Proved properties 147,387 42,533 7,120,952
Development costs 10,003,468 10,123,616 1,038,257
Exploration costs -- 192,526 38,640
Improved recovery costs 895,317 -- --
------------ ------------ ------------
Total $ 12,767,808 $ 17,499,817 $ 9,517,954
============ ============ ============
</TABLE>
Year Ended December 31, 1999. Petroglyph initially estimated that it
would take approximately six to 12 months to sufficiently dewater the coal gas
reservoirs and bring about commercial volumes of gas production from the Raton
Basin Pilot Project. However, greater than anticipated water production from
wells in the pilot area has significantly extended the estimated amount of time
and capital necessary to achieve gas production in commercial quantities. As a
result of the higher than anticipated water volumes, Petroglyph conducted a
series of specialized reservoir tests during December 1999. These tests were
designed, among other things, to further estimate the additional time required
to dewater the coalbed gas reservoirs in the pilot project at the current water
withdrawal rate. As a result of this engineering evaluation, Petroglyph
determined that approximately four to 11 additional water withdrawal wells would
be required to be drilled at a cost ranging from a total of $1.0 million to $3.0
million in the pilot project to remove additional water to enable the coal
formations to begin to produce natural gas in commercial quantities. However,
absent financial support from Intermountain, Petroglyph does not have the funds
required to drill any additional wells.
62
<PAGE> 70
Based on Petroglyph's current financial condition, Petroglyph
anticipates that 2000 capital expenditures prior to the merger will be severely
curtailed and Petroglyph may be required to take further measures to reduce the
size and scope of its business.
Nine Months Ended September 30, 2000. During the first nine months of
2000, the company converted 16 gross (16 net) producing wells in the Antelope
Creek Field to water injection status. Depending on available capital the
company intends to spend up to $6.0 million converting as many as 26 wells to
water injection status and drilling up to eight new wells during the remainder
of 2000 to increase the field-wide water injection pattern and enhance
production.
In the first nine months of 2000, the company completed six gross (six
net) wells previously drilled in the Bear Creek area of the Raton Prospect. The
2000 development plan calls for drilling two additional wells in the Pilot
Project/Little Creek area.
During the first nine months of 2000, the Company plugged and abandoned
one gross (.5 net) well in the Helen Gohlke Field in Victoria and Dewitt
Counties, Texas. This property, which is non-core to the Company's reserve
development strategy, was sold on October 6, 2000 with an effective date of
October 1, 2000.
On February 18, 2000, the company exchanged 250,000 shares of Series A
Convertible Preferred Stock for non-operated working interests in oil and gas
properties owned by III Exploration and primarily located in the Uinta Basin of
Utah. The company anticipates that the property acquisition from III Exploration
will provide cash flow of approximately $1.1 million during the first year and
that proved developed producing reserves will increase 15%, or 400,000 BOE, from
December 31, 1999 levels. The company received $402,910 in the third quarter of
2000 from III Exploration as consideration for an amendment to a purchase and
sale agreement, the effect of which eliminated certain properties from the
original acquisition.
Cash Flow and Working Capital
Year Ended December 31, 1999. Cash used in operating activities was
$2,069,000 for the year ended December 31, 1999. Petroglyph used cash on hand,
proceeds from sales of property and equipment of $1,498,000, draws on its
revolving line of credit of $3,500,000, proceeds from the issuance of the notes
to III Exploration of $5,000,000 and a portion of the proceeds from the private
placement with III Exploration to finance $10,109,000 of capital spending to
acquire the 50% non-operated interest in the Antelope Creek Field, drill three
and complete 1.5 net wells in Texas, convert two gross and net wells to injector
status, acquire additional undeveloped acreage and develop the water
distribution system in the Raton Basin.
Cash used in operating activities was $1,467,000 for the year ended
December 31, 1998. Petroglyph used cash on hand, proceeds from sales of property
and equipment of $88,000, draws on its revolving line of credit of $7,500,000
and the remaining initial public offering proceeds to finance $20,623,000 of
capital spending to drill 40 and complete 36.5 net wells, convert 15 gross (7.5
net) wells to injector status, acquire additional undeveloped acreage and build
a gas gathering and water distribution system in the Raton Basin.
63
<PAGE> 71
Nine Months Ended September 30, 2000. Cash used in operating activities
primarily for remediation and workover and conversions of producing wells to
water injection wells was $1,467,758 during the first nine months of 2000.
Accounts receivable, principally oil and gas receivables, increased $528,750.
Current increases of payables of $1,578,579 partially offset the $3,180,249
loss.
The company reclassified $19,040,725, representing the total amount of
the company's outstanding debt, from long-term liabilities to Current Portion of
Long-Term Debt. On July 14, 2000, Intermountain purchased at par the Chase loan.
As of September 30, 2000, the company was out of compliance with both the
current ratio and the fixed charge coverage ratio covenants provided in the
credit agreement. Because the company is in default under the credit agreement,
and because it converts in December 2000 to a term loan requiring quarterly
principal payments of approximately $916,666 and no alternative financing is
imminent, the total amount of the debt is classified as current. In the third
quarter of 2000, Intermountain advanced under the credit agreement an additional
$3.150 million to cover current working capital requirements. The company has
been advised that this advance was made in anticipation of the successful
completion of the merger and was specifically intended to preserve the company's
asset values for the period of time after the merger. The company has also been
advised that any future advances that Intermountain may consider will only be
made if Intermountain believes they are necessary to preserve the company's
asset values for the period of time after the merger.
Financing
As previously reported, the funding of the company's 2000 development
plans was dependent upon its ability to realize proceeds from future asset
sales, replace its existing credit facility, raise equity capital and increase
its operating cash flow, whether as a result of successful operations in the
Uinta Basin and Raton Basin or from acquisitions. The company's inability to
obtain such funds has forced the company to delay its 2000 development plans.
During the first quarter of 2000, the company continued its pursuit of finding
additional sources of financing, including selling assets and refinancing its
senior credit facility or replacing its senior lender; however, the company was
unsuccessful through the second quarter of 2000.
Additionally, on May 30, 2000, the company was formally notified that
Chase had redetermined the borrowing base under the credit agreement, resulting
in a reduction to $9.0 million. As a result of that redetermination, under the
credit agreement the company had 90 days to reduce the outstanding balance from
$11.0 million to $9.0 million. The company did not have sufficient cash to pay
down the $2 million required by Chase in connection with the redetermination.
Since the company also had no assurance that Chase would provide the company
with a waiver if it was unable to reduce the balance by August 28, 2000, the
company asked III Exploration to provide the company with financial assistance,
which it subsequently agreed to do. As a result of its discussions with III
Exploration, the company authorized III Exploration to contact Chase regarding a
possible guarantee of the company's obligations under the credit agreement.
Chase refused to accept III Exploration's guarantee and encouraged III
Exploration to purchase the loan from Chase. As a result, on July 14, 2000, III
Exploration's parent company, Intermountain, purchased at par the outstanding
indebtedness and assumed Chase's rights and obligations under the credit
agreement. Intermountain did not change any of the terms and conditions of the
credit
64
<PAGE> 72
agreement. During the third quarter of 2000, Intermountain loaned the company an
additional $3.150 million to meet its current obligations. The company has been
advised that this advance was made in anticipation of the successful completion
of the proposed merger with III Exploration and was specifically intended to
preserve the company's asset value for the period of time after the merger. The
company was further advised that any future advances that Intermountain may
consider will only be made if Intermountain believes they are necessary to
preserve the company's asset value.
On June 8, 2000, the company received $800,000 from III Exploration
under the terms of an Agreement and Bill of Sale and Assignment of Proceeds,
which assigned to III Exploration the rights from proceeds of oil and natural
gas sales. The funds were used to cover past due accounts payable and hedge
obligations. On June 28, 2000, $1 million was advanced from III Exploration
under a similar assignment agreement to provide needed working capital until
additional long-term financing could be arranged. Both advances were repaid from
the proceeds of oil and natural gas sales.
The company has been advised that III Exploration intends to vote all
of the shares of the company's common stock in favor of the proposed merger with
a subsidiary of III Exploration. As a result, the company anticipates that the
transaction will be approved. If however the merger is not completed for any
reason, the company will likely not be able to meet its credit obligations
originally provided for under the credit agreement, which III Exploration's
affiliate purchased, nor carry out its 2000 development plan since there can be
no assurance that any additional financing will be available to the company on
acceptable terms or at all.
In August 1999, the company sold $5 million of 8% senior subordinated
notes due 2004 to III Exploration. The notes required the company to deliver to
III Exploration a stock purchase warrant to acquire 150,000 shares of common
stock of the company at an exercise price of $3.00 per share and the ability for
III Exploration to obtain additional stock purchase warrants over the life of
the notes. The number of future stock purchase warrants will be based on the
future stock price performance and the amount and duration of the notes
outstanding. The maximum number of shares of common stock issuable under the
stock purchase warrants for any given period is limited to 250,000 shares in any
one year, 400,000 over the first three years and 750,000 over the five-year life
of the notes. The company may redeem the notes at par without penalty at any
time. Upon redemption of the notes, any remaining unissued and unearned stock
purchase warrants will expire. The company utilized proceeds from the notes to
finance the remaining purchase price of the Antelope Creek Acquisition and for
working capital needs.
At September 30, 2000, the company was out of compliance with both the
minimum fixed charge coverage ratio (1.25 to 1) and the minimum current ratio (1
to 1) covenants as provided in the credit agreement. The company had a fixed
charge ratio of (.07) and a current ratio of .18. Accordingly, the debt
outstanding under the credit agreement is classified as current in the
consolidated balance sheet. As a result of the company's non-compliance with
financial covenants in the credit agreement, the company is also in default
under the notes pursuant to the cross default provisions of the Note Agreement
and has classified the notes as current in the consolidated balance sheet.
65
<PAGE> 73
INFLATION AND CHANGES IN PRICES
Petroglyph's revenue and the value of its oil and natural gas
properties have been, and will continue to be, affected by levels of and changes
in oil and natural gas prices. Petroglyph's ability to obtain capital through
borrowings and other means is also substantially dependent on prevailing and
anticipated oil and natural gas prices. Oil and natural gas prices are subject
to significant seasonal and other fluctuations that are beyond Petroglyph's
ability to control or predict. In an attempt to manage this price risk,
Petroglyph periodically engages in hedging transactions.
Currently, annual inflation in terms of the decrease in the general
purchasing power of the dollar is running much below the general annual
inflation rates experienced in the past. While Petroglyph, like other companies,
continues to be affected by fluctuations in the purchasing power of the dollar,
such effect is not currently considered significant.
HEDGING TRANSACTIONS
Petroglyph has historically entered into hedging contracts of various
types in an attempt to manage price risk with regard to a portion of
Petroglyph's crude and natural gas production. While use of these hedging
arrangements limits the downside risk of price declines, such arrangements may
also limit the benefits which may be derived from price increases.
Petroglyph has used various financial instruments such as collars,
swaps and futures contracts in an attempt to manage its commodity price risk.
Monthly settlements on these financial instruments are typically based on
differences between the fixed prices specified in the instruments and the
settlement price of certain future contracts quoted on the NYMEX or certain
other indices. The instruments used by Petroglyph for oil hedges have not
contained a contractual obligation which requires or allows the future physical
delivery of the hedged products.
At June 30, 2000, the following hedge positions for Petroglyph oil
production were in place:
<TABLE>
<CAPTION>
DURATION VOLUME FLOOR CEILING
-------- ------ ----- -------
<S> <C> <C> <C>
July 2000 - December 2000 12,000 Bbl/month $17.00 $20.00
July 2000 - September 2000 6,000 Bbl/month $20.00 $23.00
July 2000 - September 2000 4,000 Bbl/month $23.00 $31.70
October 2000 - December 2000 10,000 Bbl/month $22.00 $27.00
</TABLE>
Petroglyph has contracted for the sale of its natural gas production
and taken hedge positions to effect the following volumes and prices:
<TABLE>
<CAPTION>
DURATION VOLUME AVERAGE PRICE
-------- ------ -------------
<S> <C> <C>
July 2000 - September 2000 700 MMBtu/day $2.01 MMBtu ($2.33 Mcf)
July 2000 - March 2001 1,000 MMBtu/day $2.2425 MMBtu ($2.39 Mcf)
</TABLE>
66
<PAGE> 74
FORWARD-LOOKING STATEMENTS
Petroglyph or its representatives may make forward looking statements,
oral or written, including statements in this proxy statement, press releases
and filings with the SEC, regarding estimated future net revenues from oil and
natural gas reserves and the present value thereof, planned capital expenditures
(including the amount and nature thereof), increases in oil and gas production,
the number of wells Petroglyph anticipates drilling in specified periods and
Petroglyph's financial position, business strategy and other plans and
objectives for future operations. Although Petroglyph believes that the
expectations reflected in these forward looking statements are reasonable, there
can be no assurance that the actual results or developments anticipated by
Petroglyph will be realized or, even if substantially realized, that they will
have the expected effects on its business or operations. Among the factors that
could cause actual results to differ materially from Petroglyph's expectations
are risks inherent in drilling and other development activities, the timing and
event of changes in commodity prices, unforeseen engineering and mechanical or
technological difficulties in drilling wells and implementing enhanced oil or
coalbed methane gas recovery programs, the availability, proximity and capacity
of refineries, pipelines and processing facilities, shortages or delays in the
delivery of equipment and services, land issues, federal and state regulatory
developments and other factors set forth among the risk factors noted below or
in the description of Petroglyph's business in this proxy statement. All
subsequent oral and written forward looking statements attributable to
Petroglyph or persons acting on its behalf are expressly qualified in their
entirety by these factors. Petroglyph assumes no obligation to update any of
these statements.
VOLATILITY OF OIL AND NATURAL GAS PRICES. Petroglyph's revenues,
operating results, profitability and future growth and the carrying value of its
oil and natural gas properties are substantially dependent upon the prices
received for Petroglyph's oil and natural gas. Historically, the markets for oil
and natural gas have been volatile and such volatility may continue or recur in
the future. Various factors beyond the control of Petroglyph will affect prices
of oil and natural gas, including the worldwide and domestic supplies of oil and
natural gas, the ability of the members of the Organization of Petroleum
Exporting Countries to agree to and maintain oil price and production controls,
political instability or armed conflict in oil or natural gas producing regions,
the price and level of foreign imports, the level of consumer demand, the price,
availability and acceptance of alternative fuels, the availability of pipeline
capacity, weather conditions, domestic and foreign governmental regulations and
taxes and the overall economic environment.
Any significant decline in the price of oil or natural gas would
adversely affect Petroglyph's revenues, operating income (loss) and cash flow
and could require an impairment in the carrying value of Petroglyph's oil and
natural gas properties.
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES.
There are numerous uncertainties inherent in estimating quantities of proved oil
and natural gas reserves and their values, including many factors beyond
Petroglyph's control. Estimates of proved undeveloped reserves and reserves
recoverable through enhanced oil recovery techniques, which comprise a
significant portion of Petroglyph's reserves, are by their nature uncertain. The
reserve information set forth in this report represents estimates only. Although
Petroglyph believes such estimates to be reasonable, reserve estimates are
imprecise and should be expected to change as additional information becomes
available.
67
<PAGE> 75
Estimates of oil and natural gas reserves, by necessity, are
projections based on engineering data, and there are uncertainties inherent in
the interpretation of such data as well as the projection of future rates of
production and the timing of development expenditures. Reserve engineering is a
subjective process of estimating underground accumulations of oil and natural
gas that are difficult to measure. The accuracy of any reserve estimate is a
function of the quality of available data, engineering and geological
interpretation and judgment. In particular, given the early stage of
Petroglyph's development programs, the ultimate effect of such programs is
difficult to ascertain. Estimates of economically recoverable oil and natural
gas reserves and of future net cash flows necessarily depend upon a number of
variable factors and assumptions, such as historical production from the area
compared with production from other producing areas, the assumed effects of
improved recovery techniques such as the enhanced oil recovery techniques
utilized by Petroglyph, the assumed effects of regulations by governmental and
tribal agencies and assumptions concerning future oil and natural gas prices,
future operating costs, severance and excise taxes, development costs and
workover and remedial costs, all of which may in fact vary considerably from
actual results. For these reasons, estimates of the economically recoverable
quantities of oil and natural gas attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of the future net cash flows expected therefrom may vary
substantially. Any significant variance in the assumptions could materially
effect the estimated quantity and value of the reserves. Actual production,
revenues and expenditures with respect to Petroglyph's reserves will likely vary
from estimates, and such variances may be material.
The PV-10 referred to in this proxy statement should not be construed
as the current market value of the estimated oil and natural gas reserves
attributable to Petroglyph's properties. In accordance with applicable
requirements, the estimated discounted future net cash flows from proved
reserves are based on prices and costs as of the date of the estimate, whereas
actual future prices and costs may be materially higher or lower. Actual future
net cash flows also will be affected by factors such as the amount and timing of
actual production, supply and demand for oil and natural gas, refinery capacity,
curtailments or increases in consumption by natural gas purchasers and changes
in governmental regulations or taxation. The timing of actual future net cash
flows from proved reserves, and thus their actual present value, will be
affected by the timing of both the production and the incurrence of expenses in
connection with development and production of oil and natural gas properties. In
addition, the 10% discount factor, which is required to be used to calculate
discounted future net cash flows for reporting purposes, is not necessarily the
most appropriate discount factor based on interest rates in effect from time to
time and risks associated with Petroglyph or the oil and natural gas industry in
general.
HISTORY OF OPERATING LOSSES AND NET LOSSES. Petroglyph has experienced
operating losses in each year since its inception in 1993, including an
operating loss of approximately $2,006,000 in 1999. Excluding the effect of the
$1.3 million gain on the sale of the 50% interest in Antelope Creek in 1996,
Petroglyph also has experienced net losses in each year since its inception. For
the six months ended June 30, 2000, Petroglyph had a net loss of $2.2 million.
LIMITED OPERATING HISTORY. Petroglyph, which began operations in April
1993, has a limited operating history upon which Petroglyph's stockholders may
base their evaluation of Petroglyph's performance. As a result of its brief
operating history, expanded drilling program and change in Petroglyph's mix of
properties during such period as a result of its acquisition and
68
<PAGE> 76
disposition of properties, the operating results from Petroglyph's historical
periods may not be indicative of future results. There can be no assurance that
Petroglyph will continue to experience growth in, or maintain its current level
of, revenues, oil and natural gas reserves or production.
RISKS ASSOCIATED WITH OPERATING IN THE UINTA BASIN
Concentration in Uinta Basin. Petroglyph's properties in the Greater
Monument Butte Region of the Uinta Basin constitute the majority of Petroglyph's
existing inventory of producing properties and drilling locations. Approximately
80% of Petroglyph's 1999 capital expenditures of approximately $10.1 million was
dedicated to developing and acquiring additional interest in Petroglyph's
enhanced oil recovery projects in this area. There can be no assurance that
Petroglyph's operations in the Uinta Basin will yield positive economic returns.
Failure of Petroglyph's Uinta Basin properties to yield significant quantities
of economically attractive reserves and production would have a material adverse
impact on Petroglyph's financial condition and results of operations.
Limited Refining Capacity for Uinta Basin Black Wax. The marketability
of Petroglyph's oil production depends in part upon the availability, proximity
and capacity of refineries, pipelines and processing facilities. The crude oil
produced in the Uinta Basin is known as black wax or yellow wax and has a higher
paraffin content than crude oil found in most other major North American basins.
Currently, the most economic markets for Petroglyph's black wax production are
five refineries in Salt Lake City that have limited facilities to refine
efficiently this type of crude oil. Because these refineries have limited
capacity, any significant increase in Uinta Basin black wax production or
temporary or permanent refinery shutdowns due to maintenance, retrofitting,
repairs, conversions to or from black wax production or otherwise could create
an over supply of black wax in the market, causing prices for Uinta Basin oil to
decrease. Since July 1996, the posted prices for Uinta Basin oil production have
been lower than major national indexes for crude oil. Petroglyph believes these
differences are attributable to one or more market factors, including refinery
capacity constraints caused by the increase in supply of Uinta Basin black wax
production resulting from the recent drilling activity or the reaction to the
availability of additional non-Uinta Basin crude oil production associated with
a new pipeline. There can be no assurance that prices will return to historical
levels or that other price declines related to supply imbalances will not occur
in the future. To the extent crude oil prices decline further or Petroglyph is
unable to market efficiently its oil production, Petroglyph's business,
financial condition and results of operations could be materially adversely
affected.
Marketability of Natural Gas Production. Petroglyph's Uinta Basin
properties currently produce natural gas in association with the production of
crude oil. The produced natural gas is gathered into Petroglyph's natural gas
pipeline gathering system and compressed into an interstate natural gas
pipeline, at which point the produced natural gas is sold to marketers or end
users. Because current state and Ute tribal regulations prohibit the flaring or
venting of natural gas produced in the Uinta Basin, in the event Petroglyph is
unable to market its natural gas production due to pipeline capacity constraints
or curtailments, Petroglyph may be forced to shut in or curtail its oil and
natural gas production from any affected wells or install the necessary
facilities to reinject the natural gas into existing wells. Federal and state
regulation of oil and natural gas production and transportation, tax and energy
policies, changes in supply and demand and general economic conditions all could
adversely affect Petroglyph's ability to produce and market its natural gas. Any
69
<PAGE> 77
dramatic change in any of these market factors or curtailment of oil and natural
gas production due to Petroglyph's inability to vent or flare natural gas could
have a material adverse effect on Petroglyph.
Availability of Water for Enhanced Oil Recovery Program. Petroglyph's
enhanced oil recovery program involves the injection of water into wells to
pressurize reservoirs and, therefore, requires substantial quantities of water.
Petroglyph intends to satisfy its requirements from one or more of three
sources: water produced from water wells, water purchased from local water
districts and water produced in association with oil production. Petroglyph
currently has drilled water wells only in the Antelope Creek Field, and although
these wells are currently producing water there can be no assurance that they
will continue to produce quantities sufficient to support Petroglyph's enhanced
oil recovery program, that Petroglyph will be able to obtain the necessary
approvals to drill additional water wells (assuming Petroglyph has available
funds to drill such wells) or that successful water wells can be drilled in its
other Uinta Basin development areas. Petroglyph has a contract with East
Duchesne Water District to purchase up to 10,000 barrels of water per day
through September 30, 2004. After the initial term, this contract automatically
renews at the conclusion of each contract year for one additional year; however,
either party may terminate the agreement with twelve months prior notice. In the
event of a water shortage, the East Duchesne Water District contract provides
that preferences will be given to residential customers and other water
customers having a higher use priority than Petroglyph. In addition, Petroglyph
has not yet secured a water source for full development of its Natural Buttes
Extension properties. There can be no assurance that water shortages will not
occur or that Petroglyph will be able to renew or enter into new water supply
agreements on commercially reasonable terms or at all. To the extent Petroglyph
is required to pay additional amounts for its supply of water, Petroglyph's
financial condition and results of operations may be adversely affected. While
Petroglyph believes that there will be sufficient volumes of water available to
support its improved oil recovery program and has taken certain actions to
ensure an adequate water supply will be available, in the event Petroglyph is
unable to obtain sufficient quantities of water, Petroglyph's enhanced oil
recovery program and business would be materially adversely affected.
RISKS ASSOCIATED WITH OPERATING IN THE RATON BASIN
Coalbed Methane Production. During the last ten years, new technology
has lowered the cost of coalbed methane production, making production
commercially viable in areas previously thought to be uneconomic. While
Petroglyph believes that use of these new technologies will be successful at its
Raton Basin properties, Petroglyph is still in the early stages of its
development program. Although Petroglyph has discovered natural gas at its Raton
Basin properties, there can be no assurance that it will be successful in
completing commercially productive wells.
Water Disposal. Petroglyph believes that the future water production
from the Raton Basin coal seams will be low in dissolved solids, allowing
Petroglyph, operating under permits which Petroglyph believes will be issued by
the State of Colorado, to discharge the water into streambeds or stockponds.
However, if nonpotable water is discovered, it may be necessary to install and
operate evaporators or to drill disposal wells to reinject the produced water
back into the underground rock formations adjacent to the coal seams or to lower
sandstone horizons. In the event Petroglyph is unable to obtain permits from the
State of Colorado, if nonpotable water is discovered
70
<PAGE> 78
or if applicable future laws or regulations require water to be disposed of in
an alternative manner, the costs to dispose of produced water will increase,
which increase could have a material adverse effect on Petroglyph's operations
in this area.
SUBSTANTIAL CAPITAL REQUIREMENTS. Petroglyph's development plans will
require it to make substantial capital expenditures in connection with the
exploration, development and exploitation of its oil and natural gas properties.
Petroglyph's enhanced oil recovery project and pilot coalbed methane project
require substantial initial capital expenditures. Historically, Petroglyph has
funded its capital expenditures through a combination of internally generated
funds from sales of production or properties, equity contributions, long-term
debt financing and short-term financing arrangements. However, there can be no
assurance that any additional financing will be available to Petroglyph on
acceptable terms or at all. In light of Petroglyph's current financial
situation, without financial support from Intermountain, Petroglyph would
anticipate a delay in its development plans. Future cash flows and the
availability of financing will be subject to a number of variables, such as the
level of production from existing wells, prices of oil and natural gas,
Petroglyph's success in locating and producing new reserves and the success of
the enhanced recovery program in the Uinta Basin and the coalbed methane project
in the Raton Basin. The incurrence of debt financing could result in a
substantial portion of Petroglyph's operating cash flow being dedicated to the
payment of principal and interest on such indebtedness, could render Petroglyph
more vulnerable to competitive pressures and economic downturns and could impose
restrictions on Petroglyph's operations. If revenue were to decrease as a result
of lower oil and natural gas prices, decreased production or otherwise, and
Petroglyph had no availability under its credit agreement or any other credit
facility, Petroglyph could have a reduced ability to execute its current
development plans, replace its reserves or to maintain production levels, which
could result in decreased production and revenue over time.
COMPLIANCE WITH GOVERNMENTAL AND TRIBAL REGULATIONS. Oil and natural
gas operations are subject to extensive federal, state and local laws and
regulations relating to the exploration for, and the development, production and
transportation of, oil and natural gas, as well as safety matters, which may be
changed from time to time in response to economic or political conditions. In
addition, approximately 33% of Petroglyph's acreage is located on Ute tribal
land and is leased by Petroglyph from the Ute Indian Tribe and the Ute
Distribution Corporation. Because the Ute tribal authorities have certain rule
making authority and jurisdiction, such leases may be subject to a greater
degree of regulatory uncertainty than properties subject to only state and
federal regulations. Although Petroglyph has not experienced any material
difficulties with its Ute tribal leases or in complying with Ute tribal laws or
customs, there can be no assurance that material difficulties will not be
encountered in the future. Matters subject to regulation by federal, state,
local and Ute tribal authorities include permits for drilling operations, road
and pipeline construction, reports concerning operations, the spacing of wells,
unitization and pooling of properties, taxation and environmental protection.
Prior to drilling any wells in the Uinta Basin, applicable federal and Ute
tribal requirements and the terms of its development agreements will require
Petroglyph to have prepared by third parties and submitted for approval an
environmental and archaeological assessment for each area to be developed prior
to drilling any wells in such areas. Although Petroglyph has not experienced any
material delays related to such regulation that have affected its development
plans, there can be no assurance that delays will not be encountered in the
preparation or approval of such assessments, or that the results of such
assessments will not require Petroglyph to alter its development plans. Any
delays in obtaining approvals or material alterations to Petroglyph's
71
<PAGE> 79
development plans could have a material adverse effect on Petroglyph's
operations. From time to time, regulatory agencies have imposed price controls
and limitations on production by restricting the rate of flow of oil and natural
gas wells below actual production capacity in order to conserve supplies of oil
and natural gas. Although Petroglyph believes it is in substantial compliance
with all applicable laws and regulations, the requirements imposed by such laws
and regulations are frequently changed and subject to interpretation, and
Petroglyph is unable to predict the ultimate cost of compliance with these
requirements or their effect on its operations. Significant expenditures may be
required to comply with governmental and Ute tribal laws and regulations and may
have a material adverse effect on Petroglyph's financial condition and results
of operations.
COMPLIANCE WITH ENVIRONMENTAL REGULATIONS. Petroglyph's operations are
subject to complex and constantly changing environmental laws and regulations
adopted by federal, state and local governmental authorities. The implementation
of new, or the modification of existing, laws or regulations could have a
material adverse effect on Petroglyph. The discharge of oil, natural gas or
potential pollutants into the air, soil or water may give rise to significant
liabilities on the part of Petroglyph to the government and third parties and
may require Petroglyph to incur substantial costs of remediation. Moreover,
Petroglyph has agreed to indemnify sellers of properties purchased by Petroglyph
against certain liabilities for environmental claims associated with such
properties. No assurance can be given that existing environmental laws or
regulations, as currently interpreted or reinterpreted in the future, or future
laws or regulations will not materially adversely affect Petroglyph's results of
operations and financial condition or that material indemnity claims will not
arise against Petroglyph with respect to properties acquired by Petroglyph.
RESERVE REPLACEMENT RISK. Petroglyph's future success depends upon its
ability to find, develop or acquire additional oil and natural gas reserves that
are economically recoverable. The proved reserves of Petroglyph will generally
decline as reserves are depleted, except to the extent that Petroglyph conducts
successful exploration or development activities, enhanced oil recovery
activities or acquires properties containing proved reserves. Approximately 42%
of Petroglyph's total proved reserves at December 31, 1999 were undeveloped. In
order to increase reserves and production, Petroglyph must continue its
development and exploitation drilling programs or undertake other replacement
activities. Petroglyph's current development plan includes increasing its
reserve base through continued drilling, development and exploitation of its
existing properties. There can be no assurance, however, that Petroglyph's
planned development and exploitation projects will result in significant
additional reserves or that Petroglyph will have continuing success drilling
productive wells at anticipated finding and development costs. In light of
Petroglyph's current financial situation, Petroglyph does not anticipate being
able to pursue any development plans prior to the merger.
In addition to the development of its existing proved reserves,
Petroglyph expects that its inventory of unproved drilling locations will be the
primary source of new reserves, production and cash flow over the next few years
if Petroglyph is financially able to undertake operations in the area.
Petroglyph's properties in the Uinta Basin constitute the majority of
Petroglyph's existing inventory. There can be no assurance that Petroglyph's
activities in the Uinta Basin will yield economic returns. The failure of the
Uinta Basin to yield significant quantities of economically recoverable reserves
could have a material adverse impact on Petroglyph's future financial condition
and results of operations and could result in a write-off of a significant
portion of its investment in the Uinta Basin.
72
<PAGE> 80
QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET RISK
At September 30, 2000, Petroglyph had 210,000 Bbls of year 2000 oil
production subject to hedging and swap arrangements at various levels that
result in an average NYMEX floor price of $18.64 per Bbl and an average NYMEX
ceiling price of $20.94 per Bbl. These arrangements could be classified as
derivative commodity instruments subject to commodity price risk. At September
30, 2000, Petroglyph also had 464,000 MMBtu of its 2000 natural gas production
hedged at swap prices ranging from $2.01 to $2.2425 per MMBtu. Petroglyph uses
hedging contracts to manage its price risk and limit exposure to short-term
fluctuations in commodity prices. However, should 2000 NYMEX oil prices remain
above $20.94 per Bbl, Petroglyph would not receive the marginal benefit of oil
prices in excess of $20.94 per Bbl for the Bbls under hedge contracts.
Additionally, Petroglyph is subject to interest rate risk, as $14.15
million owed at September 30, 2000 under Petroglyph's revolving credit facility
accrues interest at floating rates tied to LIBOR. Petroglyph's current average
rate is approximately 9.234% locked in for various terms from 90 to 180 days.
Petroglyph performed a sensitivity analysis to assess the potential
effect of commodity price risk and interest rate risk and determined that the
effect, if any, of reasonably possible near-term changes in NYMEX oil prices or
interest rates on Petroglyph's financial position, results of operations and
cash flow should not be material.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE
Petroglyph has not had any changes in or disagreements with accountants
on accounting and financial disclosure.
73
<PAGE> 81
PETROGLYPH ACQUISITION SUB, INC.
Petroglyph Acquisition Sub is a newly formed Delaware corporation which
was formed as a wholly-owned subsidiary of III Exploration pursuant to the
merger agreement and in connection with the transactions contemplated by the
merger agreement. Petroglyph Acquisition Sub is a transitory merger vehicle
which will be merged out of existence at the effective time of the merger.
Accordingly, Petroglyph Acquisition Sub has not engaged and is not expected to
engage in any activities other than those incident to its formation and the
merger. In addition, it is not expected to have significant assets or
liabilities (other than arising under the merger agreement or in connection with
the merger).
The principal executive offices of Petroglyph Acquisition Sub, Inc. are
c/o Intermountain Industries, Inc., 555 S. Cole Road, Boise, Idaho 83709;
Telephone (208) 377-6000.
III EXPLORATION
III Exploration is an Idaho corporation which is wholly-owned by
Intermountain Industries, Inc. III Exploration's principal business is the
exploration for and development of natural gas and oil deposits.
Intermountain was incorporated in August 1984 under the laws of the
State of Idaho. It is a closely held holding company exempt from the provisions
of the Public Utilities Holding Company Act of 1935 except Section 9(a)(2),
thereof. It neither owns nor operates any physical properties. Intermountain is
the owner of all the outstanding common stock of its operating subsidiaries:
Intermountain Gas Company, III Exploration and InterWest Capital, Inc.
Intermountain Gas Company was incorporated in 1950. It is the primary
distributor of natural gas in southern Idaho. III Exploration was incorporated
in October 1992 for the purpose of participating in the exploration for and
development of natural gas and oil deposits. InterWest Capital, Inc. was
incorporated in December 1990 for the purpose of investing in non-energy related
assets, principally in the Rock Mountain and Intermountain areas. All of
Intermountain's subsidiaries are incorporated under the laws of the State of
Idaho.
Century Partners - Idaho Limited Partnership, a limited partnership
organized under the laws of Idaho, owns approximately 73% of the outstanding
common stock of Intermountain. Mr. Richard Hokin is the sole general partner of
Century Partners and also serves as the Chairman of III Exploration and
Intermountain. Century Partners was organized primarily to hold the outstanding
securities of Intermountain and any successor corporation. The business address
of Century Partners and of Mr. Hokin is c/o Century America Corporation, 800
Post Road, Darien, Connecticut 06820; telephone (203) 655-8735.
The principal executive offices of III Exploration, Intermountain,
Century Partners - Idaho Limited Partnership and Richard Hokin are c/o
Intermountain Industries, Inc., 555 S. Cole Road, Boise, Idaho 83709; Telephone
(208) 377-6000.
74
<PAGE> 82
CONFLICTS OF INTEREST
General. In considering the recommendation of the special committee and
the board of directors, you should be aware that certain of Petroglyph's
officers and directors have interests in the merger or have certain
relationships as described below, that present actual, apparent or potential
conflicts of interest in connection with the merger.
The special committee and the board of directors were aware of these
actual or potential conflicts of interest and considered them along with other
matters described under "Purposes and Reasons for the Merger; Recommendations of
Petroglyph's Board of Directors and the Special Committee."
Intermountain Ownership. Intermountain, through III Exploration, owns a
majority of the share of Petroglyph's common stock. In addition, Intermountain
has the ability to control the election of all of the five members of
Petroglyph's board of directors. William C. Glynn, Richard Hokin and Eugene
Thomas, who are directors of Petroglyph, are also directors and/or officers of
III Exploration and Intermountain.
Treatment of Options. Certain directors, officers and employees have
received options to acquire shares of Petroglyph common stock under Petroglyph's
1997 Incentive Plan and otherwise. Under the merger agreement, Petroglyph is
obligated to cause all outstanding and unexercised stock options to be
terminated on or before the effective time of the merger, and intends to give
option holders 30 days prior written notice of the occurrence of a "fundamental
change" as defined in the company's option agreements. All of Petroglyph's
outstanding options have an exercise price which is greater than the $2.85 per
share merger consideration. Pursuant to the terms of the option agreements,
following such notice, the company need not provide that the options survive the
consummation of the merger. The merger agreement does not provide for the
survival of the options, and the company will cause all unexercised options to
terminate upon the consummation of the merger. No directors, officers or
employees will continue to hold equity or options in Petroglyph after the
merger.
Employment and Related Agreements. It is anticipated that Robert C.
Murdock, the Chairman of the Board, President and Chief Executive Officer of
Petroglyph, and S. Ken Smith, the Executive Vice President, Chief Financial
Officer and Secretary of Petroglyph, will continue their employment with the
surviving company after the merger.
In connection with Intermountain's original offer to acquire
Petroglyph's common stock, Petroglyph's board of directors approved the payment
of retention bonuses to each employee that remained with Petroglyph through
November 15, 2000.
Special Committee and Financial Advisor. The special committee, which
consisted of Petroglyph's one independent director, Mr. Schwartz, received a fee
of $55,000 and is projected to have expenses of approximately $45,000, including
fees and expenses of its special counsel, which will be reimbursed by
Petroglyph. Prudential Securities received a fee of $250,000 for services in
connection with the merger. Neither fee is contingent upon completion of the
merger.
75
<PAGE> 83
FINANCING; SOURCE OF FUNDS
The aggregate merger consideration to be paid is anticipated to be
approximately $7.7 million (assuming the majority of Petroglyph common
stockholders do not exercise dissenter's appraisal rights). III Exploration
anticipates that the merger consideration will be paid out of its cash on hand
or from funds provided by Intermountain, which are anticipated to come from
Intermountain's working capital. III Exploration has represented and warranted
in the merger agreement that III Exploration has, as of the date of the merger
agreement, and anticipates that it will have on the closing date of the merger,
such funds or access thereto as are necessary for the consummation of the
merger.
FEES AND EXPENSES
We estimate that merger-related fees and expenses, consisting primarily
of financial advisory fees, SEC filing fees, attorneys and accountants fees and
other related charges, will total approximately $700,000, assuming the merger is
completed. This amount consists of the following estimated fees:
<TABLE>
<CAPTION>
DESCRIPTION AMOUNT
----------- ------
<S> <C>
Advisory fees and expenses $ 302,000.00
Special committee fees and expenses, including legal expenses 100,000.00
Legal fees and expenses 246,458.00
Accounting fees and expenses 20,000.00
SEC filing fee 1,542.00
Printing, solicitation and mailing costs 20,000.00
Miscellaneous expenses 10,000.00
--------------
Total $ 700,000.00
</TABLE>
Petroglyph will be responsible for paying all of these expenses. These
expenses will not reduce the merger consideration to be received by Petroglyph's
stockholders.
REGULATORY REQUIREMENTS
In connection with the merger, we will be required to make a number of
filings with and obtain a number of approvals from various federal and state
governmental agencies, including:
o filing of a certificate of merger with the Secretary of State of the State
of Delaware in accordance with the Delaware General Corporation Law after
the approval of the merger agreement by Petroglyph stockholders; and
o complying with federal and state securities laws.
Each state in which Petroglyph or Petroglyph Acquisition Sub has
operations may also review the merger under state antitrust laws.
76
<PAGE> 84
PLANS FOR PETROGLYPH AFTER THE MERGER
Acquired Securities. The securities acquired by III Exploration in the
merger will be canceled upon the effective time of the merger. The shares will
no longer be registered under the Exchange Act or listed on the Nasdaq National
Market or other exchange.
Extraordinary Corporate Transactions. Petroglyph has no, and Petroglyph
has been advised by III Exploration that III Exploration does not have any:
o specific plans or proposals for any extraordinary corporate transaction
involving Petroglyph, as the surviving company after the completion of the
merger; or
o specific plans or proposals for any sale or transfer of a material amount
of assets currently held by Petroglyph after the completion of the merger.
III Exploration has advised Petroglyph that it plans to continue
Petroglyph's ongoing efforts to explore expanding Petroglyph's oil and gas
business after the merger.
Management. Petroglyph has been advised by III Exploration that
Petroglyph's officers and directors immediately before the merger will remain as
officers and directors of Petroglyph immediately after the merger.
If the merger is not completed for any reason, the board of directors
expects to retain the current management team, although there can be no
assurance it will be successful in doing so. If the merger is not completed,
Petroglyph anticipates that III Exploration will cease providing cash loans and
other financial support to Petroglyph. In such an event the board of directors
expects to continue exploring the strategic alternatives available to
Petroglyph.
THE MERGER AGREEMENT
On June 22, 2000, Petroglyph entered into the merger agreement with III
Exploration. The parties amended the merger agreement on August 28, 2000 and
again on November 22, 2000. The following is a summary of the material
provisions of the merger agreement, the text of which is attached as Appendix A
to this proxy statement. We encourage you to read the merger agreement carefully
in its entirety.
THE MERGER
Upon effectiveness of the merger, Petroglyph Acquisition Sub will be
merged with Petroglyph, and Petroglyph will continue as the surviving company.
In connection with the merger your shares of Petroglyph common stock will be
converted into the right for you to receive $2.85 in cash for each of your
shares of Petroglyph common stock. The shares of Petroglyph common stock held by
III Exploration will remain outstanding following the merger and Petroglyph will
be a wholly-owned subsidiary of III Exploration.
As the surviving company after the merger, Petroglyph will have all the
property and rights of both Petroglyph Acquisition Sub and Petroglyph before the
merger, and Petroglyph will be liable
77
<PAGE> 85
for all of the debts, liabilities and obligations of both Petroglyph Acquisition
Sub and Petroglyph before the merger. After the merger, the separate corporate
existence of Petroglyph Acquisition Sub will cease.
TIME OF CLOSING
The merger will close on the date not later than the business day after
satisfaction of the conditions to the merger. For the merger to become
effective, Petroglyph Acquisition Sub and Petroglyph will make certain filings
with the Secretary of State of the State of Delaware.
EXCHANGE AND PAYMENT PROCEDURES
We have appointed American Stock Transfer & Trust Company as our
exchange agent to handle the exchange of our share certificates in the merger
for cash. Soon after the merger becomes effective, the exchange agent will mail
to you a letter of transmittal and instructions explaining how to exchange your
share certificates for cash. Upon surrender to the exchange agent of a valid
share certificate and a properly completed letter of transmittal, along with
such other documents as the paying agent may reasonably require, you will be
entitled to receive $2.85 in cash per share. Until surrendered in this manner,
each share certificate will represent only the right to receive the merger
consideration. No interest will be paid or accrue on any amount payable upon the
surrender of a share certificate.
You should not send your stock certificates now. You should send them
only after you receive a letter of transmittal from the exchange agent. A letter
of transmittal will be mailed to you soon after the merger becomes effective.
Any merger consideration made available to the exchange agent that
remains unclaimed by our stockholders for six months after the time the merger
becomes effective will be returned to us, as the surviving company after the
merger, and any of our stockholders who have not by that time made an exchange
must then look to the surviving company for payment of their claim for merger
consideration, and then only as general creditors of the surviving company,
subject to state unclaimed property laws.
TRANSFERS OF SHARES
No transfers of shares of Petroglyph common stock will be made on our
share transfer books after the merger becomes effective.
TREATMENT OF STOCK OPTIONS
Certain directors, officers and employees have received options to
acquire shares of Petroglyph common stock under Petroglyph's 1997 Incentive Plan
and otherwise. Under the merger agreement, Petroglyph is obligated to cause all
outstanding and unexercised stock options to be terminated on or before the
effective time of the merger, and intends to give option holders 30 days prior
written notice of the occurrence of a "fundamental change" as defined in the
company's option agreements. Pursuant to the terms of the option agreements,
following such notice, the company need not provide that the options survive
consummation of the merger. The merger agreement does
78
<PAGE> 86
not provide for the survival of the options, and the company will cause all
unexercised options to terminate upon the consummation of the merger.
REPRESENTATIONS AND WARRANTIES
In the merger agreement, each of Petroglyph and Petroglyph Acquisition
Sub have made customary representations and warranties to the other party with
respect to their organization, capitalization, operations and financial and
other matters. The representations and warranties in the merger agreement do not
survive the effective time of the merger.
PETROGLYPH'S COVENANTS
We have undertaken certain covenants in the merger agreement. The
following summarizes the more significant of these covenants:
Interim Conduct of Our Business. From June 20, 2000 until the merger
becomes effective, we have agreed to conduct our businesses in the ordinary
course and substantially consistent with past practice and to pay or perform our
debts, taxes and other obligations when due. We have also agreed to use
commercially reasonable efforts to preserve our business and relationships with
third parties and officers and key employees.
We have also agreed to certain specific restrictions during this period
which are subject to the exceptions described in the merger agreement. These
include restrictions limiting our ability to acquire or dispose of any assets
other than consistent with our past practice or incur or assume any indebtedness
other than under our existing credit facility.
PETROGLYPH ACQUISITION SUB'S COVENANTS
Petroglyph Acquisition Sub has also undertaken certain covenants in the
merger agreement. The following summarizes the more significant of these
covenants.
INDEMNIFICATION AND INSURANCE OF PETROGLYPH'S DIRECTORS, OFFICERS AND EMPLOYEES
III Exploration agreed that all rights to indemnification of Petroglyph's
present and former employees, officers, agents and directors existing at the
time of the merger agreement shall remain in effect for a period of six years
following the effective date of the merger. III Exploration has also agreed that
for six years after the effective date of the merger, III Exploration will
maintain or cause the surviving company to maintain in effect officers' and
directors' liability insurance policies on terms no less favorable than our
current policies. However, Petroglyph will not be obligated to pay premiums in
excess of 200% of the annual premiums paid for such coverage as of the date of
the merger agreement.
CONDITIONS
Mutual Closing Conditions. Both parties' obligations to consummate the
merger are subject to the satisfaction or waiver at or before the effective time
of the merger of the following conditions:
79
<PAGE> 87
o the approval by Petroglyph stockholders of the merger agreement;
o there being no proceeding by any court or governmental body, among
other things, challenging, delaying or prohibiting the merger;
o the obtaining of all consents, approvals and authorizations required
from governmental bodies; and
o the special committee of Petroglyph's board of directors shall not
have withdrawn its recommendation that the merger is fair to our
public stockholders and its recommendation that Petroglyph's board
of directors approve the merger.
Additional Closing Conditions for the Benefit of Petroglyph Acquisition
Sub. The obligation of Petroglyph Acquisition Sub to complete the merger is
subject to the satisfaction or waiver of the following additional conditions:
o the material performance by Petroglyph of its obligations under the
merger agreement;
o Petroglyph's representations and warranties being materially
accurate as of the effective time of the merger;
o there being no material undisclosed adverse change in Petroglyph's
business since December 31, 1999;
o the holders of not more than 10% of Petroglyph's shares of
outstanding common stock shall have exercised their right to dissent
from the merger; and
o the aggregate debt of Petroglyph and its subsidiaries shall not, as
of the effective date, exceed $19 million.
Additional Closing Conditions for Petroglyph's Benefit. Petroglyph's
obligation to complete the merger is subject to the satisfaction or waiver of
following additional conditions:
o the material performance by Petroglyph Acquisition Sub of its
obligations under the merger agreement; and
o the representations and warranties of Petroglyph Acquisition Sub
being materially accurate as of the effective time of the merger.
CERTIFICATE OF INCORPORATION; BYLAWS; OFFICERS AND DIRECTORS
The merger agreement provides that the Certificate of Incorporation and
Bylaws of Petroglyph will remain the Certificate of Incorporation and Bylaws of
the surviving company in the merger. The officers of Petroglyph before the
merger will remain the officers of the surviving company after the merger, and
the board of directors of the surviving company after the merger will be
comprised of the current directors of Petroglyph plus six or more new directors
to be designated
80
<PAGE> 88
by III Exploration. The Petroglyph Bylaws have been amended to increase the
maximum number of members of the Petroglyph board of directors permitted to
fifteen.
TERMINATION OF THE MERGER AGREEMENT
Right to Terminate. The merger agreement may be terminated at any time
before the closing in any of the following ways:
o by mutual written consent of Petroglyph and Petroglyph Acquisition
Sub;
o by either Petroglyph or Petroglyph Acquisition Sub if the merger is
not completed by December 31, 2000. However, the party seeking to
terminate for this reason must not be in breach of its obligations
under the merger agreement; or
o by either Petroglyph or Petroglyph Acquisition Sub if the special
committee of Petroglyph's board of directors withdraws or changes
its approval of the merger agreement or merger in a manner adverse
to Petroglyph Acquisition Sub after concluding that failure to take
such action would violate the committee's fiduciary duties.
If the merger agreement terminates, it will become void. However,
termination will not affect the rights of any party against any other party for
breach of the merger agreement.
EXPENSES
All costs and expenses incurred in connection with the merger agreement
will be paid by the party incurring those costs or expenses.
AMENDMENTS; WAIVERS
Any provision of the merger agreement may be amended, by joint
agreement of the parties, or waived before the merger becomes effective. The
approval of Petroglyph's special committee is required for any amendment to the
merger agreement that materially adversely affects the rights of Petroglyph's
stockholders under the merger agreement, any waiver of certain key conditions to
Petroglyph's obligations to consummate the merger or any waiver of Petroglyph's
rights under the merger agreement. If the stockholders of Petroglyph, at a
meeting duly held, vote against the approval of the merger agreement or the
merger agreement is otherwise terminated, Petroglyph intends to continue to
operate as an independent company. After approval of the merger agreement by
Petroglyph stockholders, no amendment can be made that alters the consideration
to be received for Petroglyph common stock.
81
<PAGE> 89
CERTAIN EXISTING RELATIONSHIPS
On August 18, 1999, III Exploration completed the purchase from Robert
A. Christensen, a then director and executive officer of Petroglyph, David R.
Albin, a then director of Petroglyph, Kenneth A. Hersh, a then director of
Petroglyph, R. Gamble Baldwin, John S. Foster, Bruce B. Selkirk, III, Albin
Income Trust, Natural Gas Partners, L.P., Natural Gas Partners II, L.P. and
Natural Gas Partners III, L.P. of 2,753,392 shares of common stock of
Petroglyph. The sale of such shares was effected through a privately negotiated
sale between the sellers and Intermountain, pursuant to Letter Agreements dated
as of August 13, 1999 and July 29, 1999, with a purchase price of $3.00 per
share. The source of funds came from working capital of Intermountain. As a
result of the purchase of the shares, Intermountain, through its ownership of
III Exploration, obtained approximately 50.4% of the outstanding common stock of
Petroglyph. William C. Glynn, Richard Hokin and Eugene C. Thomas, directors of
Petroglyph, are each directors and/or executive officers of Intermountain.
III Exploration has succeeded to rights under a Registration Rights
Agreement between Petroglyph and certain of the sellers in the August 1999
transaction. Pursuant to the Registration Rights Agreement, on three separate
occasions, commencing on the 180th day following the date of Petroglyph's
initial public offering under the securities laws, holders owning at least 35%
of the outstanding shares then subject to such agreement may require Petroglyph
to register shares held by them under applicable securities laws, provided that
the shares to be registered have an estimated aggregate offering price to the
public of at least $5.0 million. The Registration Rights Agreement also provides
that the holders have piggyback registration rights pursuant to which such
persons may include shares of common stock held by them in certain registrations
initiated by Petroglyph or by any other holder of common stock. The piggyback
rights are subject to customary cutback provisions.
In August 1999, Petroglyph sold $5 million of 8% senior subordinated
notes due 2004 to III Exploration to fund a portion of the $6.9 million Antelope
Creek Acquisition. The notes required Petroglyph to deliver to III Exploration a
stock purchase warrant to acquire 150,000 shares of common stock of Petroglyph
at an exercise price of $3.00 per share and gave III Exploration the ability to
obtain additional stock purchase warrants over the life of the notes. The number
of future stock purchase warrants will be based on the future stock price
performance and the amount and duration of the notes outstanding. The maximum
number of shares of common stock issuable under the stock purchase warrants for
any given period is limited to 250,000 shares in any one year, 400,000 over the
first three years and 750,000 over the five-year life of the notes. Petroglyph
may redeem the notes at par without penalty at any time. Upon redemption of the
notes, any remaining unissued and unearned stock purchase warrants will expire.
On December 28, 1999, Petroglyph sold 1,000,000 shares of common stock
to III Exploration in a privately negotiated sale at a purchase price of $2.00
per share, for aggregate proceeds of $2.0 million. The common stock issued in
this private placement has not been registered under the Securities Act of 1933,
and may not be offered or sold in the United States absent registration or an
applicable exemption from registration requirements. Petroglyph used the
proceeds from the private placement for working capital and to fund continuing
operations a portion of Petroglyph's 2000 development plans for its Uinta Basin
and Raton Basin properties. As a result of
82
<PAGE> 90
the private placement, III Exploration's ownership interest in Petroglyph's
common stock increased to 59.07% (assuming the exercise of a warrant to purchase
150,000 shares of common stock issued in connection with the subordinated
notes).
On February 15, 2000, Petroglyph's stockholders approved the issuance
to III Exploration of 250,000 shares of Series A Convertible Preferred Stock in
exchange for certain oil and gas producing properties located primarily in the
Uinta Basin of Utah. The transaction was closed on February 18, 2000. Because of
III Exploration's controlling ownership interest in the company at the time of
the stockholder's meeting, approval of the issuances was assured.
On June 8, 2000, the company received $800,000 from III Exploration
under the terms of an Agreement and Bill of Sale and Assignment of Proceeds,
which assigned to III Exploration the rights from proceeds of oil and natural
gas sales. The funds were used to cover past due accounts payable and hedge
obligations. On June 28, 2000, $1 million was advanced from III Exploration
under a similar assignment agreement to provide needed working capital until
additional long-term financing could be arranged. Both advances were repaid from
the proceeds of oil and natural gas sales.
On July 14, 2000, Intermountain, purchased at par the outstanding
indebtedness under Petroglyph's credit agreement with Chase and assumed Chase's
rights and obligations under the credit agreement and did not change any of the
terms and conditions of the credit agreement. Following the closing of that
transaction, to date Intermountain has loaned the company an additional $2.4
million to meet its current obligations.
Petroglyph currently leases approximately 8,000 square feet of office
space in Hutchinson, Kansas, where its principal offices are located. The lease
has a remaining term of approximately one year, expiring May 2001, at which time
Petroglyph has the option to renew the lease or acquire the property. Petroglyph
also leases a 3,300 square foot office building through Hutch Realty LLC, a
Hutchinson, Kansas realty firm controlled by a member of the board of
Petroglyph.
Messrs. Murdock and Smith each have severance agreements with
Petroglyph which provide that, subject to certain conditions, in the event that
within 180 days following a change of control, (1) such person's employment is
involuntarily terminated without cause or (2) such person voluntarily terminates
his employment with Petroglyph for good reason (meaning a reduction in such
person's base compensation, benefits or duties or a required relocation of more
than thirty miles), such person will be paid a severance payment equal to one
year's total compensation multiplied by a factor provided in each person's
severance agreement, provided with life and disability insurance and an amount
equal to the cost of medical insurance for an eighteen-month period following
the date of termination and provided with outplacement services for a twelve
month period following the date of termination. The factor under the severance
agreements is 2.0 for Mr. Murdock and 1.75 for Mr. Smith. The severance
agreements are not triggered by the merger, and will therefore remain in place
following the merger.
RIGHTS OF DISSENTING STOCKHOLDERS
Under Section 262 of the Delaware General Corporation Law, any holder
of common stock who does not wish to accept the merger consideration of $2.85 in
cash may dissent from the merger
83
<PAGE> 91
and elect to have the fair value of such stockholder's shares of common stock,
exclusive of any element of value arising from the accomplishment or expectation
of the merger, judicially determined and paid to such stockholder in cash,
together with a fair rate of interest, if any, provided that such stockholder
complies with the provisions of Section 262.
The following discussion is a summary of the material provisions of the
law pertaining to appraisal rights under Section 262 of the DGCL, a copy of
which is attached as Appendix C to this proxy statement. All references in
Section 262 and in this summary to a "stockholder" are to the record holder of
the shares of common stock as to which appraisal rights are asserted. A person
having a beneficial interest in shares of common stock held of record in the
name of another person, such as a broker or nominee, must act promptly to cause
the record holder to follow properly the steps summarized below in a timely
manner to perfect appraisal rights.
Under Section 262, where a proposed merger is to be submitted for
approval at a meeting of stockholders, as in the case of the special meeting,
the corporation, not less than 20 days prior to the meeting, must notify each of
its stockholders entitled to appraisal rights that such appraisal rights are
available and include in such notice a copy of Section 262. This proxy statement
will constitute such notice to the holders of common stock and the applicable
statutory provisions of the DGCL are attached to this proxy statement as
Appendix C. Any stockholder who wishes to exercise such appraisal rights or who
wishes to preserve the right to do so should review carefully the following
discussion and Appendix C to this proxy statement. FAILURE TO COMPLY WITH THE
PROCEDURES SPECIFIED IN SECTION 262 TIMELY AND PROPERLY WILL RESULT IN THE LOSS
OF APPRAISAL RIGHTS. Moreover, because of the complexity of the procedures for
exercising the right to seek appraisal of the common stock, Petroglyph believes
that stockholders who consider exercising such rights should seek the advice of
counsel.
Any holder of common stock wishing to exercise the right to dissent
from the merger and demand appraisal under Section 262 of the DGCL must satisfy
each of the following conditions:
o deliver to Petroglyph a written demand for appraisal of such
stockholder's shares before the vote on the merger agreement at the
special meeting, which demand will be sufficient if it reasonably
informs Petroglyph of the identity of the stockholder and that the
stockholder intends thereby to demand the appraisal of such holder's
shares;
o not vote the holder's shares of common stock in favor of the merger
agreement (voting in favor of the merger may waive the holder's
appraisal rights); a proxy which does not contain voting
instructions will, unless revoked, be voted in favor of the merger
agreement. Therefore, a stockholder who votes by proxy and who
wishes to exercise appraisal rights must vote against the merger
agreement or expressly abstain from voting on the merger agreement;
and
o continuously hold such shares from the date of making the demand
through the effective time of the merger. A stockholder who is the
record holder of shares of common stock on the date the written
demand for appraisal is made but who thereafter transfers such
shares prior to the effective time of the merger will lose any right
to appraisal in respect of such shares.
84
<PAGE> 92
Voting against (in person or by proxy), abstaining from voting on, or
failing to vote on the proposal to approve the merger agreement will not
constitute a written demand for appraisal within the meaning of Section 262. The
written demand for appraisal must be in addition to and separate from any such
proxy or vote.
Only a holder of record of shares of common stock issued and
outstanding immediately prior to the effective time of the merger is entitled to
assert appraisal rights for the shares of common stock registered in that
holder's name. A demand for appraisal should be executed by or on behalf of the
stockholder of record, fully and correctly, as such stockholder's name appears
on such stock certificates, should specify the stockholder's name and mailing
address, the number of shares of common stock owned and that such stockholder
intends thereby to demand appraisal of such stockholder's common stock. If the
shares are owned of record in a fiduciary capacity, such as by a trustee,
guardian or custodian, execution of the demand should be made in that capacity.
If the shares are owned of record by more than one person as in a joint tenancy
or tenancy in common, the demand should be executed by or on behalf of all
owners. An authorized agent, including one or more joint owners, may execute a
demand for appraisal on behalf of a stockholder; however, the agent must
identify the record owner or owners and expressly disclose the fact that, in
executing the demand, the agent is acting as agent for such owner or owners. A
record holder such as a broker who holds shares as nominee for several
beneficial owners may exercise appraisal rights with respect to the shares held
for one or more beneficial owners while not exercising such rights with respect
to the shares held for one or more other beneficial owners; in such case, the
written demand should set forth the number of shares as to which appraisal is
sought, and where no number of shares is expressly mentioned the demand will be
presumed to cover all shares held in the name of the record owner. Stockholders
who hold their shares in brokerage accounts or other nominee forms and who wish
to exercise appraisal rights are urged to consult with their brokers to
determine and appropriate procedures for the making of a demand for appraisal by
such nominee.
A stockholder who elects to exercise appraisal rights pursuant to
Section 262 should mail or deliver a written demand to: Petroglyph Energy, Inc.,
1302 North Grand, Hutchinson, Kansas 67501; Attn: Corporate Secretary.
Within ten days after the effective time of the merger, the surviving
company must send a notice as to the effectiveness of the merger to each former
stockholder of Petroglyph who has made a written demand for appraisal in
accordance with Section 262 and who has not voted in favor of the merger
agreement. Within 120 days after the effective time of the merger, but not
thereafter, either the surviving company or any dissenting stockholder who has
complied with the requirements of Section 262 may file a petition in the
Delaware Chancery Court demanding a determination of the value of the shares of
common stock held by all dissenting stockholders. Petroglyph is under no
obligation to and has no present intent to file a petition for appraisal, and
stockholders seeking to exercise appraisal rights should not assume that the
surviving company will file such a petition or that the surviving company will
initiate any negotiations with respect to the fair value of such shares.
Accordingly, stockholders who desire to have their shares appraised should
initiate any petitions necessary for the perfection of their appraisal rights
within the time periods and in the manner prescribed in Section 262. Inasmuch as
Petroglyph has no obligation to file such a petition, the failure of a
stockholder to do so within the period specified could nullify such
stockholder's previous written demand for appraisal. In any event, at any time
within 60 days after the Effective Time (or
85
<PAGE> 93
at any time thereafter with the written consent of Petroglyph), any stockholder
who has demanded appraisal has the right to withdraw the demand and to accept
payment of the merger consideration. Neither Petroglyph nor any of the
Intermountain affiliates has any present intention of granting stockholders
access to its corporate files or to reimburse expenses of counsel or appraisal
services of stockholders seeking appraisal, except to the extent otherwise
required by law.
Within 120 days after the effective time of the merger, any stockholder
who has complied with the provisions of Section 262 to that point in time will
be entitled to receive from the surviving company, upon written request, a
statement setting forth the aggregate number of shares not voted in favor of the
merger agreement and with respect to which demands for appraisal have been
received and the aggregate number of holders of such shares. The surviving
company must mail such statement to the stockholder within 10 days of receipt of
such request or within 10 days after expiration of the period for delivery of
demands for appraisals under Section 262, whichever is later.
A stockholder timely filing a petition for appraisal with the Court of
Chancery must deliver a copy to the surviving company, which will then be
obligated within 20 days to provide the Delaware Court of Chancery with a duly
verified list containing the names and addresses of all stockholders who have
demanded appraisal of their shares. After notice to such stockholders, the
Delaware Court of Chancery is empowered to conduct a hearing on the petition to
determine which stockholders are entitled to appraisal rights. The Delaware
Court of Chancery may require stockholders who have demanded an appraisal for
their shares and who hold stock represented by certificates to submit their
certificates to the Register in Chancery for notation thereon of the pendency of
the appraisal proceedings, and if any stockholder fails to comply with the
requirement, the Delaware Court of Chancery may dismiss the proceedings as to
that stockholder.
After determining the stockholders entitled to an appraisal, the
Delaware Court of Chancery will appraise the "fair value" of their shares,
exclusive of any element of value arising from the accomplishment or expectation
of the merger, together with a fair rate of interest, if any, to be paid upon
the amount determined to be the fair value. The costs of the action may be
determined by the Delaware Chancery Court and taxed upon the parties as the
Delaware Chancery Court deems equitable. Upon application of a dissenting
stockholder, the Delaware Chancery Court may also order that all or a portion of
the expenses incurred by any stockholder in connection with the appraisal
proceeding, including, without limitation, reasonable attorneys' fees and the
fees and expenses of experts, be charged pro rata against the value of all of
the shares entitled to appraisal. STOCKHOLDERS CONSIDERING SEEKING APPRAISAL
SHOULD BE AWARE THAT THE FAIR VALUE OF THEIR SHARES AS DETERMINED UNDER SECTION
262 COULD BE MORE THAN, THE SAME AS OR LESS THAN THE MERGER CONSIDERATION THEY
WOULD RECEIVE PURSUANT TO THE AGREEMENT AND PLAN OF MERGER IF THEY DID NOT SEEK
APPRAISAL OF THEIR SHARES.
In determining fair value and, if applicable, a fair rate of interest,
the Delaware Chancery Court is to take into account all relevant factors. In
Weinberger v. UOP, Inc., the Delaware Supreme Court discussed the factors that
could be considered in determining fair value in an appraisal proceeding,
stating that "proof of value by any techniques or methods that are generally
considered acceptable in the financial community and otherwise admissible in
court" should be considered, and that "fair price obviously requires
consideration of all relevant factors involving the value of a
86
<PAGE> 94
company." The Delaware Supreme Court stated that, in making this determination
of fair value, the court must consider market value, asset value, dividends,
earnings prospects, the nature of the enterprise and any other facts that could
be ascertained as of the date of the merger that throw any light on future
prospects of the merged corporation. In Weinberger, the Delaware Supreme Court
stated that "elements of future value, including the nature of the enterprise,
that are known or susceptible of proof as of the date of the merger and not the
product of speculation, may be considered." Section 262 provides that fair value
is to be "exclusive of any element of value arising from the accomplishment or
expectation of the merger."
Any stockholder who has duly demanded an appraisal in compliance with
Section 262 will not, after the effective time of the merger, be entitled to
vote the shares subject to such demand for any purpose or be entitled to the
payment of dividends or other distributions on those shares (except dividends or
other distributions payable to holders of record of shares as of a record date
prior to the effective time of the merger).
Any stockholder may withdraw its demand for appraisal and accept the
merger consideration of $2.85 per share by delivering to the surviving company a
written withdrawal of such stockholder's demands for appraisal, except that (1)
any such attempt to withdraw made more than 60 days after the effective time of
the merger will require written approval of the surviving company and (2) no
appraisal proceeding in the Delaware Chancery Court shall be dismissed as to any
stockholder without the approval of the Delaware Chancery Court, and such
approval may be conditioned upon such terms as the Delaware Chancery Court deems
just. If the surviving company does not approve a stockholder's request to
withdraw a demand for appraisal when such approval is required, or if the
Delaware Chancery Court does not approve the dismissal of an appraisal
proceeding, the stockholder would be entitled to receive only the appraised
value determined in any such appraisal proceeding, which value could be lower
than the value of the merger consideration of $2.85 per share.
FAILURE TO COMPLY STRICTLY WITH ALL OF THE PROCEDURES SET FORTH IN
SECTION 262 OF THE DGCL WILL RESULT IN THE LOSS OF A STOCKHOLDER'S STATUTORY
APPRAISAL RIGHTS. CONSEQUENTLY, ANY STOCKHOLDER WISHING TO EXERCISE APPRAISAL
RIGHTS IS URGED TO CONSULT LEGAL COUNSEL BEFORE ATTEMPTING TO EXERCISE SUCH
RIGHTS.
87
<PAGE> 95
COMMON STOCK MARKET PRICE AND
DIVIDEND INFORMATION
Petroglyph's common stock has been publicly traded on the Nasdaq
National Market under the symbol "PGEI" since Petroglyph's initial public
offering effective October 20, 1997.
The following table sets forth the high and low closing sales prices
for Petroglyph common stock as reported by Nasdaq for the periods indicated.
<TABLE>
<CAPTION>
High Low
----------- ---------
<S> <C> <C>
1998:
Quarter Ended March 31 $ 9.75 $ 7.375
Quarter Ended June 30 8.625 7.00
Quarter Ended September 30 7.75 5.125
Quarter Ended December 31 6.125 2.875
1999:
Quarter Ended March 31 4.00 1.563
Quarter Ended June 30 3.25 1.625
Quarter Ended September 30 3.988 2.125
Quarter Ended December 31 3.50 1.406
2000:
Quarter Ended March 31 2.688 1.50
Quarter Ended June 30, 2000 2.6875 1.25
Quarter Ended September 30, 2000 2.8125 2.2188
Quarter Ended December 31,
(through November 27, 2000) 2.8125 2.50
----------- --------
</TABLE>
As of June 30, 2000, Petroglyph estimates that there were more than
1,000 stockholders (including brokerage firms and other nominees) of
Petroglyph's common stock.
No dividends have been declared or paid on Petroglyph's common stock to
date. For the foreseeable future, Petroglyph intends to retain any earnings for
the development of its business.
On May 3, 2000, the day before the announcement of Intermountain's
initial offer to purchase all the issued and outstanding Petroglyph common stock
that it does not already own for $2.20, the high, low and closing sales prices
per share of the common stock were $2.00, $2.00 and $2.00, respectively. On June
19, 2000, the day before the announcement of the merger agreement, the high, low
and closing sales prices per share of our common stock were $2.00, $1.875 and
$2.00, respectively. On November 27, 2000, the last full trading day before the
date of this proxy, the high, low and closing sales prices per share of our
common stock on the Nasdaq were $2.8125, $2.6875 and $2.8125, respectively. You
should obtain current market price quotations for Petroglyph common stock in
connection with voting your shares.
88
<PAGE> 96
COMMON STOCK PURCHASE INFORMATION
The table below sets forth the purchases by III Exploration and each of
its directors and executive officers and affiliates of our common stock during
the past two years (or the date that the individual became an affiliate of III
Exploration, if this date is later) including: (1) the date the individual
purchased shares; (2) the number of shares purchased; (3) the price per share
the individual paid for the shares; and (4) the average closing sales price per
share for the quarter as reported by Nasdaq; and (5) the average closing price
for the 20-day period prior to the date of each purchase as reported by Nasdaq.
<TABLE>
<CAPTION>
AVERAGE PRICE 20-DAY
NAME DATE NUMBER OF SHARES PRICE PER SHARE FOR THE QUARTER AVERAGE PRICE
------------------ --------- ---------------- --------------- --------------- --------------
<S> <C> <C> <C> <C> <C>
III Exploration 08/18/99 2,753,392 $3.00 $ 2.90 $ 2.44
III Exploration 12/28/99 1,000,000 $2.00 $ 2.58 $ 1.99
</TABLE>
CURRENT MANAGEMENT OF III EXPLORATION, INTERMOUNTAIN AND
PETROGLYPH
Set forth below is certain information regarding the directors and
executive officers of III Exploration and Intermountain and Petroglyph including
the and the principal occupation or employment of each person during the last
five years. The address of the officers and directors of III Exploration and
Intermountain is c/o Intermountain Industries, Inc., 555 S. Cole Road, Boise,
Idaho, 83709, telephone (208) 377-6000. The address of the officers and
directors of Petroglyph is 1302 N. Grand, Hutchinson, Kansas, 67501, telephone
(316) 665-8500.
<TABLE>
<CAPTION>
POSITION WITH POSITION WITH III POSITION WITH
NAME INTERMOUNTAIN EXPLORATION PETROGLYPH
---- ------------- ----------------- -------------
<S> <C> <C> <C>
Richard Hokin Chairman and Director Chairman and Director Director
William C. Glynn President and Director President and Director Director
Eugene C. Thomas General Counsel, Secretary Secretary and Director Director
and Director
Jeffrey K. Lebens Vice President, Treasurer, Treasurer
and Chief Financial Officer
J. Kermit Birchfield, Jr. Director Director
Alexandra Hokin Director Director
Dana Hokin Director Director
William Hokin Director Director
Justin Hokin Director Director
</TABLE>
89
<PAGE> 97
<TABLE>
<CAPTION>
POSITION WITH POSITION WITH III POSITION WITH
NAME INTERMOUNTAIN EXPLORATION PETROGLYPH
---- ------------- ----------------- -------------
<S> <C> <C> <C>
J. Richard Jordan Director Director
James M. Kelly Director Director
Robert K. Pedersen Director Director
Robert C. Murdock President, CEO and
Chairman
S. Kennard Smith Executive Vice President
and Chief Financial
Officer
</TABLE>
Richard Hokin, 60, has been a member of the board of Intermountain
since 1982 and has served as Chairman of its board and of each of its
subsidiaries since 1984 and of III Exploration since its inception in 1992. Mr.
Hokin has been a director of Displaytech, Inc., Longmont, Colorado, a developer
and manufacturer of microelectronic displays, since 1995 and of Petroglyph since
1999. Since 1966 he has held the position of Managing Partner of Century
Partners, Darien, Connecticut, an investment partnership. Mr. Hokin is also the
sole general partner of Century Partners - Idaho, Darien, Connecticut,
Intermountain's principal shareholder. From 1984 through 1987, Mr. Hokin served
as a director of the Pacific Coast Gas Association. Mr. Hokin is the father of
Alexandra, Dana and Justin Hokin and the brother of William Hokin.
William C. Glynn, 55, has served as President of Intermountain and each
of its subsidiaries since 1987. He was elected a Director of Intermountain in
1987 and has been a Director of III Exploration since its inception in 1992 and
of Petroglyph since 1999. Mr. Glynn is a member of and has served as Chairman of
the Board of Directors of the Pacific Coast Gas Association. He is also a member
of the Board of Directors of the American Gas Association.
Eugene C. Thomas, 69, is a partner of Moffatt, Thomas, Barrett, Rock &
Fields, Chtd., and he has acted as general counsel to Intermountain since 1978.
He was elected a Director of Intermountain in 1984 and has been a Director of
III Exploration since its inception in 1992 and of Petroglyph since 1999. Mr.
Thomas is a member of the American Bar Association and served as its President
from 1986-87 and prior to that was Chairman of the House of Delegates.
Jeffrey K. Lebens, 56, has been Vice President and Chief Financial
Officer of Intermountain since 1984. He has served as Treasurer of III
Exploration since its inception in 1992.
J. Kermit Birchfield, Jr., 60, is Chairman of the Board of Displaytech,
Inc., Longmont, Colorado, a developer and manufacturer of microelectronic
displays, a position he has held since 1997. He was elected a Director of
Intermountain in 1989 and has been a Director of III Exploration since its
inception in 1992.
90
<PAGE> 98
Alexandra Hokin, 31, was formerly employed by the Hyperion Books unit
of Disney. She was elected a Director of Intermountain and III Exploration in
1998. Ms. Hokin is the daughter of Richard Hokin and the sister of Dana and
Justin Hokin.
Dana Hokin, 34, has been Managing Director of Gorda Estates Limited,
the owner and operator of a Caribbean resort, since 1997. She was elected a
Director of Intermountain and III Exploration in 1995. Ms. Hokin is the daughter
of Richard Hokin and the sister of Alexandra and Justin Hokin.
William Hokin, 53, is Vice President of Century America Corporation,
owner of a steel service center. He was elected a Director of Intermountain in
1984 and has been a Director of III Exploration since its inception in 1992. Mr.
Hokin is the brother of Richard Hokin.
Justin Hokin, 26, has been Vice President of Stereo Clinic, Inc. since
June 1999 and has been a Director of Intermountain and III Exploration since
September 2000. Mr. Hokin is the son of Richard Hokin and the brother of
Alexandra and Dana Hokin.
J. Richard Jordan, 72, is a retired Partner of Jordan-Wilcomb
Construction Company, Boise, Idaho. He was elected a Director of Intermountain
in 1979 and has been a Director of III Exploration since its inception in 1992.
James Kelly, 68, retired in 1998 as Dean of the School of Business, St.
Cloud State University, St. Cloud, Minnesota, a position he had held since 1987.
He was elected a Director of Intermountain in 1979 and has been a Director of
III Exploration since its inception in 1992.
Robert K. Pedersen, 81, is President of Pedersen & Associates, Boise,
Idaho, a consultant to the frozen food industry. He was elected a Director of
Intermountain in 1974 and has been a Director of III Exploration since its
inception in 1992.
Robert C. Murdock, 42, has served as President, Chief Executive Officer
and Chairman of the Board of Petroglyph since its formation in April 1993. Prior
to forming Petroglyph, from 1985 to 1993, Mr. Murdock was President of GasTrak
Holdings, Inc., a natural gas gathering and marketing company. From 1982 to
1985, Mr. Murdock held various staff and management positions at Panhandle
Eastern Pipe Line Company, where he was responsible for the development and
implementation of special marketing programs, natural gas supply acquisitions,
natural gas supply planning and forecasting, and for developing computer
management systems for natural gas contract administration.
S. Kennard Smith, 57, has served as Executive Vice President and Chief
Financial Officer and Secretary of Petroglyph since 2000, prior to which he
served as Executive Vice President and Chief Operating Officer of Petroglyph
since January 1994 and Secretary of the Company since April 1997. Prior to
holding these offices, Mr. Smith was responsible for accounting, financial
planning and budgeting through December 1995. From June 1992 through 1993, Mr.
Smith was a principal and treasurer of TKS Consulting, where he performed
economic and financial analysis, as well as served as an expert witness in state
and federal court and regulatory agency hearings. From February
91
<PAGE> 99
1986 to May 1992, Mr. Smith served as Vice President of Finance for Gage
Corporation, a natural gas development and processing company. From August 1982
to July 1985, Mr. Smith was Treasurer and Controller for Sparkman Energy
Corporation. Mr. Smith is a Certified Public Accountant and is a member of the
American Institute of Certified Public Accountants and the Texas and Oklahoma
Societies of Certified Public Accountants.
92
<PAGE> 100
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
The table below sets forth information concerning (i) the only persons known by
Petroglyph, based upon statements filed by such persons pursuant to Section
13(d) or 13(g) of the Securities Exchange Act of 1934, to own beneficially in
excess of 5% of the common stock as of September 30, 2000 and (ii) the number of
shares of common stock beneficially owned, as of September 30, 2000, by each
director of Petroglyph, each named executive officer required to be named
pursuant to Item 402 of Regulation S-K under the Exchange Act and all executive
officers and directors of Petroglyph as a group and (iii) by III Exploration and
its affiliates. Except as indicated, each individual has sole voting power and
sole investment power over all shares listed opposite his name. To the knowledge
of Petroglyph, III Exploration and its affiliates have not affected any
transactions in the common stock in the past 60 days.
<TABLE>
<CAPTION>
SHARES BENEFICIALLY OWNED
NAME OF BENEFICIAL OWNER NUMBER PERCENT
------------------------ ----------- ---------
<S> <C> <C>
Directors and Named Executive Officers(1):
William C. Glynn -- *
Richard Hokin(2) 3,903,392 59.07%
Eugene C. Thomas -- *
A.J. Schwartz(3) 10,710 *
Robert C. Murdock(4) 272,043 4.12%
S. Kennard Smith(5) 191,198 2.90%
Executive Officers and Directors as a Group (7 persons)(6) 4,432,343 63.69%
Holders of 5% or More Not Named Above
III Exploration Company(2)
555 South Cole Road
Boise, Idaho 83709 3,903,392 59.07%
Wellington Management Company, LLP(7)
75 State Street
Boston, MA 02109 540,000 8.36%
</TABLE>
----------
* Represents less than 1% of outstanding common stock.
1. The business address of each director and executive officer is in care
of Petroglyph Energy, Inc., 1302 North Grand, Hutchinson, Kansas 67501.
2. Based upon information reported in a Schedule 13D/A dated November 22,
2000 filed by III Exploration, Century Partners -- Idaho Limited
Partnership, Richard Hokin and Intermountain Industries, Inc. These
parties share the power to dispose of or direct the disposition of all
of such shares of which they may be deemed beneficial owners. Includes
150,000 shares subject to a stock purchase warrant. In addition, III
Exploration owns 262,587 shares of Series A Convertible Preferred
Stock, par value $0.01 per share.
3. Includes (i) 7,000 shares held by Mr. Schwartz's son and (ii) 1,825
shares held by affiliates of Mr. Schwartz.
4. Includes (i) 122,043 shares held by Mr. Murdock and (ii) 150,000 shares
subject to stock options that are exercisable within 60 days.
5. Includes (i) 45,198 shares held by Mr. Smith and (ii) 146,000 shares
subject to stock options that are exercisable within 60 days.
6. Includes 651,000 shares subject to stock options and warrants that are
exercisable within 60 days.
7. Based upon information reported in a Schedule 13G dated February 11,
2000 filed by Wellington Management Company, LLP . Wellington holds
such shares in its capacity as an investment adviser which are owned of
93
<PAGE> 101
record by clients of Wellington. Wellington shares the power to vote or
direct the vote of 540,000 of such shares and shares the power to
dispose of or direct the disposition of all 540,000 shares of which it
may be deemed a beneficial owner
OTHER MATTERS
Petroglyph's management knows of no other business to be presented at
the special meeting. If other matters do properly come before the meeting, or
any adjournment or postponement of the meeting, the persons named in the proxy
intend to vote on those matters according to their best judgment unless the
authority to do so is withheld in the proxy.
STOCKHOLDER PROPOSALS
If the merger is not completed for any reason, stockholder proposals
intended to be included in our proxy statement in connection with our 2001
Annual Meeting of Stockholders must be received by Petroglyph no later than
December 26, 2000, in accordance with Rule 14a-8 under the Exchange Act.
With respect to stockholder proposals which are not intended to be
included in Petroglyph's proxy statement but may be properly brought before the
2001 annual meeting, Petroglyph's Bylaws provide that notice of any such
stockholder proposal nominating persons for election to the board of directors
of Petroglyph must be received at Petroglyph's principal executive office in
Hutchinson, Kansas, addressed to the Secretary not later than 90 days prior to
the annual meeting; and all other stockholder proposals must be received not
less than 60 nor more than 120 days in advance of the date of the annual
meeting.
Petroglyph does not intend to hold a 2001 Annual Meeting if the merger
is approved.
INDEPENDENT AUDITORS
The financial statements of Petroglyph Energy, Inc. for each of the
three fiscal years in the period ended December 31, 1999, included in this proxy
statement, have been audited by Arthur Andersen LLP, independent auditors, as
stated in their report.
94
<PAGE> 102
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and current reports, proxy statements and
other documents with the Securities and Exchange Commission under the Securities
Exchange Act of 1934. The Exchange Act file number for our SEC filings is
000-23185. Our SEC filings made through the SEC's EDGAR system are available to
the public at the SEC's website at http://www.sec.gov. You may also read and
copy any document we file with the SEC at the following SEC public reference
rooms:
<TABLE>
<S> <C> <C>
Judiciary Plaza Citicorp Center 7 World Trade Center
450 Fifth Street 500 West Madison Street Suite 1300 N.W.
Washington, D.C. 20549 Chicago, Illinois 60621 New York, New York 10048
</TABLE>
You may obtain information regarding the operation of the SEC's public
reference rooms by calling the SEC at 1-800-SEC-0330.
Intermountain, III Exploration and Petroglyph Acquisition Sub have
filed a Rule 13e-3 Transaction Statement on Schedule 13E-3 with the SEC with
respect to the merger. As permitted by the SEC, this proxy statement omits
certain information contained in the Schedule 13E-3. The Schedule 13E-3,
including any amendments and exhibits filed or incorporated by reference as a
part thereof, is available for inspection or copying as set forth above.
----------
You should rely only on the information contained in this proxy
statement or to which we have referred you to vote your shares at the special
meeting. We have not authorized anyone to provide you with information that is
different. This proxy statement is dated _______________, 2000. You should not
assume that the information contained in this proxy statement is accurate as of
any date other than that date. In the event that the proxy materials become
materially inaccurate while the proxy statement is in use, we will update the
proxy materials and distribute such updated materials to you. The mailing of
this proxy statement to stockholders does not create a solicitation of a proxy
in any jurisdiction where, or to or from any person to whom, it is unlawful to
make such proxy solicitation in such jurisdiction.
BY ORDER OF THE BOARD OF DIRECTORS
ROBERT C. MURDOCK
Chairman of the Board, Chief Executive Officer and
President
, 2000
-------------
95
<PAGE> 103
GLOSSARY OF OIL AND NATURAL GAS TERMS
The following are abbreviations and definitions of terms commonly used
in the oil and gas industry and this report. Unless otherwise indicated in this
report, natural gas volumes are stated at the legal pressure base of the state
or area in which the reserves are located and at 60 degrees Fahrenheit and in
most instances are rounded to the nearest major multiple. BOEs are determined
using the ratio of six Mcf of natural gas to one Bbl of oil.
Average Finding Costs. The average amount of total capital
expenditures, including acquisition costs, and exploration and abandonment costs
for oil and natural gas activities divided by the amount of proved reserves
(expressed in BOE) added in the specified period (including the effect on proved
reserves or reserve revisions).
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used
herein in reference to oil or other liquid hydrocarbons.
Bcf. One billion cubic feet.
BOE. Barrels of oil equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of oil, condensate or natural gas liquids.
Btu or British thermal unit. The quantity of heat required to raise the
temperature of one pound of water by one degree Fahrenheit.
Coalbed methane. Methane gas from coals in the ground, extracted using
conventional oil and natural gas industry drilling and completion methodology.
The gas produced is usually over 90% methane with a small percentage of ethane
and impurities such as carbon dioxide and nitrogen. Methane is the principal
component of natural gas. Coalbed methane shares the same markets as
conventional natural gas via the natural gas pipeline infrastructure.
Completion. The installation of permanent equipment for the production
of oil or natural gas.
Condensate. A hydrocarbon mixture that becomes liquid and separates
from natural gas when the natural gas is produced and is similar to oil.
Developed acreage. The number of acres which are allocated or
assignable to producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
Dry well. A well found to be incapable of producing either oil or
natural gas in sufficient quantities to justify completion as an oil or natural
gas well.
96
<PAGE> 104
Exploratory well. A well drilled to find and produce oil or natural gas
in an unproved area, to find a new reservoir in a field previously found to be
productive of oil or natural gas in another reservoir, or to extend a known
reservoir.
Gross acres or gross wells. The total acres or wells, as the case may
be, in which Petroglyph has a working interest.
LOE. Lease operating expenses.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand barrels of oil equivalent.
Mcf. One thousand cubic feet of natural gas.
MMBbl. One million barrels of oil or other liquid hydrocarbons.
MMBOE. One million barrels of oil equivalent.
MMcf. One million cubic feet of natural gas.
Net acres or net wells. Gross acres or wells multiplied, in each case,
by the percentage working interest owned by Petroglyph.
Net production. Production that is owned by Petroglyph less royalties
and production due others.
Oil. Crude oil or condensate.
Operator. The individual or company responsible for the exploration,
development, and production of an oil or natural gas well or lease.
Original oil in place. The estimated number of barrels of crude oil in
known reservoirs prior to any production.
Present Value of Future Net Revenues or PV-10. The present value of
estimated future net revenues to be generated from the production of proved
reserves, net of estimated production and ad valorem taxes, future capital costs
and operating expenses, using prices and costs in effect as of the date
indicated, without giving effect to federal income taxes. The future net
revenues have been discounted at an annual rate of 10% to determine their
"present value". The present value is shown to indicate the effect of time on
the value of the revenue stream and should not be construed as being the fair
market value of the properties.
Proved developed reserves. Reserves that can be expected to be
recovered through existing wells with existing equipment and operating methods.
Additional oil and natural gas expected to
97
<PAGE> 105
be obtained through the application of fluid injection or other improved
recovery techniques for supplementing the natural forces and mechanisms of
primary recovery will be included as "proved developed reserves" only after
testing by a pilot project or after the operation of an installed program has
confirmed through production response that increased recovery will be achieved.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions, i.e., prices and costs as of
the date the estimate is made. Prices include consideration of changes in
existing prices provided only by contractual arrangements, but not on
escalations based upon future conditions.
i. Reservoirs are considered proved if economic producibility is
supported by either actual production or conclusive formation test. The
area of a reservoir considered proved includes (A) that portion delineated
by drilling and defined by natural gas-oil and/or oil-water contacts, if
any; and (B) the immediately adjoining portions not yet drilled, but which
can be reasonably judged as economically productive on the basis of
available geological and engineering data. In the absence of information
on fluid contacts, the lowest known structural occurrence of hydrocarbons
controls the lower proved limit of the reservoir.
ii. Reserves which can be produced economically through application of
improved recovery techniques (such as fluid injection) are included in the
"proved" classification when successful testing by a pilot project, or the
operation of an installed program in the reservoir, provides support for
the engineering analysis on which the project or program was based.
Proved undeveloped reserves. Reserves that are expected to be recovered
from new wells on undrilled acreage, or from existing wells where a relatively
major expenditure is required for recompletion. Reserves on undrilled acreage
shall be limited to those drilling units offsetting productive units that are
reasonably certain of production when drilled. Proved reserves for other
undrilled units can be claimed only where it can be demonstrated with certainty
that there is continuity of production from the existing productive formation.
Under no circumstances should estimates for proved undeveloped reserves be
attributable to any acreage for which an application of fluid injection or other
improved recovery technique is contemplated, unless such techniques have been
proved effective by actual tests in the area and in the same reservoir.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reserve replacement cost. Total cost incurred for exploration and
development, divided by reserves added from all sources, including reserve
discoveries, extensions and improved recovery additions, net revisions to
reserve estimates and purchases of reserves-in-place.
Reserves. Proved reserves.
Royalty. An interest in an oil and natural gas lease that gives the
owner of the interest the
98
<PAGE> 106
right to receive a portion of the production from the leased acreage (or of the
proceeds of the sale thereof), but generally does not require the owner to pay
any portion of the costs of drilling or operating the wells on the leased
acreage. Royalties may be either landowner's royalties, which are reserved by
the owner of the leased acreage at the time the lease is granted, or overriding
royalties, which are usually reserved by an owner of the leasehold in connection
with a transfer to a subsequent owner.
Spud. Start drilling a new well (or restart).
3-D seismic. Seismic data that are acquired and processed to yield a
three-dimensional picture of the subsurface.
Tcf. One trillion cubic feet of natural gas.
Undeveloped acreage. Lease acres on which wells have not been drilled
or completed to a point that would permit the production of commercial
quantities of oil and natural gas regardless of whether or not such acreage
contains proved reserves. Included within undeveloped acreage are those lease
acres (held by production under the terms of a lease) that are not within the
spacing unit containing, or acreage assigned to, the productive well holding
such lease.
Waterflood. The injection of water into a reservoir to fill pores or
fractures vacated by produced fluids, thus maintaining reservoir pressure and
assisting production.
Working interest. An interest in an oil and natural gas lease that
gives the owner of the interest the right to drill for and produce oil and
natural gas on the leased acreage and requires the owner to pay a share of the
costs of drilling and production operations. The share of production to which a
working interest owner is entitled will always be smaller than the share of
costs that the working interest owner is required to bear, with the balance of
the production accruing to the owners of royalties. For example, the owner of a
100% working interest in a lease burdened only by a landowner's royalty of 12.5%
would be required to pay 100% of the costs of a well but would be entitled to
retain 87.5% of the production.
Workover. Operations on a producing well to restore or increase
production.
99
<PAGE> 107
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS;
FINANCIAL STATEMENTS OF PETROGLYPH ENERGY, INC.
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants........................................................................F-2
Consolidated Balance Sheets as of December 31, 1999 and 1998 and September 30, 2000.............................F-3
Consolidated Statements of Operations for the Years Ended December 31, 1999, 1998 and 1997 and the
Nine Months Ended September 30, 2000 and 1999..........................................................F-4
Consolidated Statements of Changes in Stockholders' Equity for the Years Ended
December 31, 1999, 1998 and 1997.......................................................................F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1999, 1998 and 1997 and the
Nine Months Ended September 30, 2000 and 1999..........................................................F-6
Notes to Consolidated Financial Statements......................................................................F-7
</TABLE>
F - 1
<PAGE> 108
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholders of Petroglyph Energy, Inc.:
We have audited the accompanying consolidated balance sheets of
Petroglyph Energy, Inc. (a Delaware corporation) and subsidiary as of December
31, 1999 and 1998, and the related consolidated statements of operations,
changes in stockholders' equity, and cash flows for each of the three years in
the period ended December 31, 1999. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States. Those standards require that we plan and perform
the audit to obtain reasonable assurance about whether the financial statements
are free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of
Petroglyph Energy, Inc. and subsidiary as of December 31, 1999 and 1998 and the
results of their operations and cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
Dallas, Texas
April 19, 2000
F - 2
<PAGE> 109
PETROGLYPH ENERGY, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF SEPTEMBER 30,
------------------------ -------------------
1999 1998 2000
---------- ---------- -------------------
(Unaudited)
<S> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents ..................................... $ 1,742 $ 2,008 $ 686
Accounts receivable:
Oil and natural gas sales ................................. 656 265 1,161
Joint interest billing .................................... 34 835 19
Other ..................................................... 87 133 108
---------- ---------- -------------
777 1,233 1,974
Inventory ..................................................... 1,489 1,234 2,281
Prepaid expenses .............................................. 138 248 119
---------- ---------- -------------
Total Current Assets ............................. 4,146 4,723 4,374
---------- ---------- -------------
Property and equipment, successful efforts method at cost:
Proved properties ............................................. 38,836 32,191 43,484
Unproved properties ........................................... 11,769 10,072 11,993
Pipelines, gas gathering and other ............................ 10,424 10,025 10,898
---------- ---------- -------------
61,029 52,288 66,375
Less-Accumulated depreciation, depletion, and amortization .... (12,516) (11,590) (14,025)
---------- ---------- -------------
Property and equipment, net ............................... 48,513 40,698 52,350
---------- ---------- -------------
Other assets, net .................................................. 289 614 292
---------- ---------- -------------
Total Assets ..................................... $ 52,947 $ 46,035 $ 57,016
========== ========== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued liabilities:
Trade ..................................................... $ 635 $ 2,088 $ 1,973
Oil and natural gas sales ................................. 116 280 182
Current portion of long-term debt ......................... 917 -- 19,041
Other ..................................................... 509 403 684
---------- ---------- -------------
Total Current Liabilities ........................ 2,177 2,771 21,880
---------- ---------- -------------
Long-term debt ..................................................... 14,953 7,500 --
---------- ---------- -------------
Deferred tax liability ............................................. -- 452 --
---------- ---------- -------------
Stockholders' Equity:
Common Stock, par value $.01 per share; 25,000,000 shares
authorized; 6,458,333 shares issued and outstanding ....... $ 65 $ 55 $ 65
Preferred Stock, convertible; $250,000 shares outstanding ..... -- -- 2,500
Paid-in capital ............................................... 48,195 46,134 48,195
Retained deficit .............................................. (12,443) (10,877) (15,624)
---------- ---------- -------------
Total Stockholders' Equity ....................... 35,817 35,312 35,136
---------- ---------- -------------
Total Liabilities and Stockholders' Equity ......................... $ 52,947 $ 46,035 $ 57,016
========== ========== =============
</TABLE>
The accompanying notes are an integral part of these
consolidated financial statements.
F - 3
<PAGE> 110
PETROGLYPH ENERGY, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS EXCEPT PER SHARE DATA EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31 SEPTEMBER 30,
-------------------------------------- ------------------------
1999 1998 1997 2000 1999
---------- ---------- ---------- ---------- ----------
(Unaudited)
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Oil sales ............................................. $ 3,652 $ 2,912 $ 3,735 $ 4,889 $ 2,359
Natural gas sales ..................................... 1,160 1,366 1,070 579 936
Other ................................................. 231 190 61 (23) 202
---------- ---------- ---------- ---------- ----------
Total operating revenues ........................ 5,042 4,468 4,866 5,445 3,497
---------- ---------- ---------- ---------- ----------
Operating Expenses:
Lease operating ....................................... 2,953 1,927 1,560 3,712 1,782
Production taxes ...................................... 359 218 179 606 220
Exploration costs ..................................... 39 193 -- -- 21
Depreciation, depletion, and amortization ............. 1,673 1,866 1,852 1,509 1,248
Impairments ........................................... -- 4,848 -- -- --
General and administrative ............................ 2,024 2,129 1,300 1,821 1,530
---------- ---------- ---------- ---------- ----------
Total operating expenses ........................ 7,049 11,181 4,891 7,648 4,801
---------- ---------- ---------- ---------- ----------
Operating Loss ............................................. (2,006) (6,713) (25) (2,203) (1,304)
Other Income (Expenses):
Interest income (expense), net ........................ (679) 407 114 (863) (387)
Gain (loss) on sales of property and equipment, net ... 840 59 12 65 860
---------- ---------- ---------- ---------- ----------
Net income (loss) before income taxes ...................... (1,845) (6,247) 102 (3,001) (831)
---------- ---------- ---------- ---------- ----------
Income Tax Expense (Benefit):
Current ............................................... -- -- (463) -- --
Deferred .............................................. (390) (2,062) 2,977 -- (299)
---------- ---------- ---------- ---------- ----------
Total Income Tax (Benefit) Expense .............. (390) (2,062) 2,514 -- (299)
---------- ---------- ---------- ---------- ----------
Net Income (Loss) before Change in Accounting Principle .... $ (1,455) $ (4,186) $ (2,413) $ (3,001) $ (532)
========== ========== ========== ========== ==========
Accounting Change - Expense of Start Up Costs
(net of tax) ......................................... (111) -- -- -- (111)
Dividends Earned on Preferred Stock ........................ -- -- -- (179) --
Net Income (Loss) Available to Common Stockholders.......... $ (1,567) $ (4,186) $ (2,413) $ (3,180) $ (643)
========== ========== ========== ========== ==========
Earnings (Loss) per Share before Accounting Change ......... $ (0.27) $ (0.77) $ (0.73) $ (0.49) $ (0.10)
Earnings (Loss) per Share from Accounting Change ........... $ (0.02) $ -- $ -- $ -- $ (0.02)
---------- ---------- ---------- ---------- ----------
Earnings (Loss) per Common Share, Basic and Diluted ........ $ (0.29) $ (0.77) $ (0.73) $ (0.49) $ (0.12)
========== ========== ========== ========== ==========
Weighted Average Common Shares Outstanding (Note 5) ........ 5,469 5,458 3,327 6,458,333 5,458,333
========== ========== ========== ========== ==========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements
F - 4
<PAGE> 111
PETROGLYPH ENERGY, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
COMMON PARTNERS' RETAINED TOTAL
STOCK CAPITAL PAID IN CAPITAL DEFICIT EQUITY
-------- ------------ --------------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ -- $ 16,973,044 $ -- $ (4,278,410) $ 12,694,634
Initial public offering of 26,250 -- 29,189,307 -- 29,215,557
common stock, net of
offering costs
Transfers at Conversion 28,333 (16,973,044) 16,944,711 -- --
Deferred income taxes
recorded upon Conversion -- -- -- (2,474,561) (2,474,561)
(Note 2)
Net income -- -- -- 61,927 61,927
-------- ------------ --------------- ------------ ------------
BALANCE, DECEMBER 31, 1997 54,583 -- 46,134,018 (6,691,044) 39,497,557
Net loss -- -- -- (4,185,807) (4,185,807)
-------- ------------ --------------- ------------ ------------
BALANCE, DECEMBER 31, 1998 $ 54,583 $ -- $ 46,134,018 (10,876,851) $ 35,311,750
Private offering of common 10,000 -- 1,921,504 -- 1,931,504
stock, net of offering costs
Warrants issued in connection -- -- 139,500 -- 139,500
with subordinated loan
Net loss -- -- -- (1,556,568) (1,556,568)
-------- ------------ --------------- ------------ ------------
BALANCE, DECEMBER 31, 1999 $ 64,583 $ -- $ 48,195,022 (12,443,419) $ 35,816,186
======== ============ =============== ============ ============
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F - 5
<PAGE> 112
PETROGLYPH ENERGY, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------- --------------------
1999 1998 1997 2000 1999
-------- -------- -------- -------- --------
(unaudited)
<S> <C> <C> <C> <C> <C>
Operating Activities:
Net income (loss) ............................................... $ (1,567) $ (4,186) $ (2,413) $ (3,180) $ (643)
Adjustments to reconcile net income (loss) to net cash
Provided by (used in) operating activities:
Depreciation, depletion, and amortization ............... 1,691 1,866 1,852 1,509 1,263
Amortization of warrants - interest expense
and notes payable .................................... 9 -- -- -- --
Gain on sales of property and equipment, net ............ (840) (59) (12) (65) (859)
Amortization of deferred revenue ........................ -- -- (46) -- --
Impairments ............................................. -- 4,848 -- -- --
Exploration Costs ....................................... 39 193 -- -- 21
Expense capitalized start-up costs - Change in
Accounting Principle ................................. 174 -- -- -- 173
Write-off of officer note receivable .................... 176 -- -- -- 176
Deferred Taxes .......................................... (452) (2,062) 2,514 -- (361)
Changes in current assets and liabilities
(Increase) decrease in accounts and other receivables ...... 426 (113) 142 (529) 359
Increase in inventory ...................................... (324) (34) (312) (835) (183)
(Increase) decrease in prepaid expenses .................... 110 (26) (114) 53 104
Increase (decrease) in accounts payable and accrued
liabilities ............................................. (1,510) (1,895) 21 1,579 (1,707)
-------- -------- -------- -------- --------
Net cash provided by (used in) operating activities ..... (2,069) (1,467) 1,633 (1,468) (1,657)
-------- -------- -------- -------- --------
Investing Activities:
Proceeds from sales of property and equipment ................... 1,498 88 746 108 1,503
Additions to oil and natural gas properties, including
Exploration costs .......................................... (9,518) (17,500) (12,768) (4,872) (9,005)
Additions to pipelines, gas gathering and other ................. (591) (3,123) (3,492) (474) (561)
-------- -------- -------- -------- --------
Net cash used in investing activities ...................... (8,610) (20,535) (15,514) (5,238) (8,063)
-------- -------- -------- -------- --------
Financing Activities:
Proceeds from issuance of equity securities ..................... 1,932 -- 30,516 2,500 8,000
Proceeds from issuance of, and draws on, notes payable .......... 8,500 7,500 10,085 3,150 --
Payments on notes payable ....................................... -- (37) (10,134) -- --
Payments for organization and financing costs ................... (18) (132) (1,485) -- (14)
-------- -------- -------- -------- --------
Net cash provided by financing activities .................. 10,414 7,331 28,982 5,650 7,986
-------- -------- -------- -------- --------
Net increase (decrease) in cash and cash equivalents ............... (266) (14,671) 15,101 (1,056) (1,734)
Cash and cash equivalents, beginning of period ..................... 2,008 16,679 1,578 1,742 2,008
-------- -------- -------- -------- --------
Cash and cash equivalents, end of period ........................... $ 1,742 $ 2,008 $ 16,679 $ 686 $ 274
======== ======== ======== ======== ========
</TABLE>
The accompanying notes are an integral part of
these consolidated financial statements.
F - 6
<PAGE> 113
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
1. ORGANIZATION:
Petroglyph Energy, Inc. ("Petroglyph" or the "Company") was
incorporated in Delaware in April 1997 for the purpose of consolidating and
continuing the activities previously conducted by Petroglyph Gas Partners, L.P.
("PGP" or the "Partnership"). PGP was a Delaware limited partnership, which was
organized on April 15, 1993 to acquire, explore for, produce and sell oil,
natural gas and related hydrocarbons. The sole general partner of PGP was
Petroglyph Energy, Inc., a Kansas corporation ("PEI"). Petroglyph Gas Partners
II, L.P. ("PGP II") was a Delaware limited partnership, which was organized on
April 15, 1995 to acquire, explore for, produce and sell oil, natural gas and
related hydrocarbons. The sole general partner of PGP II was PEI (1% interest)
and the sole limited partner was PGP (99% interest). Pursuant to the terms of an
Exchange Agreement dated August 22, 1997 (the "Exchange Agreement"), the Company
acquired all of the outstanding partnership interests of the Partnership and all
of the stock of PEI in exchange for shares of common stock of the Company (the
"Conversion"). The Conversion and other transactions contemplated by the
Exchange Agreement were consummated on October 24, 1997, immediately prior to
the closing of the initial public offering of the Company's common stock (the
"Offering"). The Conversion was accounted for as a transfer of assets and
liabilities between affiliates under common control in October 1997 and resulted
in no change in carrying values of these assets and liabilities. Effective June
30, 1998, PGP, PGP II, and PEI were dissolved and the assets and liabilities and
results of operations were rolled up into the Company with no change in carrying
values.
On August 18, 1999, III Exploration Company, an Idaho corporation ("III
Exploration"), completed the purchase (the "Purchase") from Robert A.
Christensen, a director and executive officer of the Company, David R. Albin, a
director of the Company, Kenneth A. Hersh, a director of the Company, R. Gamble
Baldwin, John S. Foster, Bruce B. Selkirk, III, Albin Income Trust, Natural Gas
Partners, L.P., Natural Gas Partners II, L.P. and Natural Gas Partners III, L.P.
(collectively, the "Sellers") of 2,753,392 shares of common stock, $.01 par
value of the Company. III Exploration is controlled by Intermountain Industries,
Inc., an Idaho corporation ("Intermountain"). As a result of the Purchase,
Intermountain, through its ownership of III Exploration, acquired approximately
50.4% of the outstanding common stock of the Company (the "Change of Control").
On December 28, 1999, the Company sold 1,000,000 shares of common
stock to III Exploration in a privately negotiated sale at a purchase price of
$2.00 per share (the "Private Placement"). As a result of the Purchase and the
Private Placement, Intermountain, through its ownership of III Exploration, owns
approximately 59% of the outstanding common stock of the Company (assuming the
exercise of a warrant to purchase 150,000 shares of common stock issued in
connection with the sale of subordinated notes).
The accompanying consolidated financial statements of Petroglyph
include the assets, liabilities and results of operations of its wholly owned
subsidiary, Petroglyph Operating Company, Inc. ("POCI"). POCI is a subchapter C
corporation. POCI is the designated operator of all wells for which the Company
has acquired operating rights. Accordingly, all producing overhead and
supervision fees were charged to the joint accounts by POCI. All material
intercompany transactions and balances have been eliminated in the preparation
of the accompanying consolidated financial statements.
The accompanying consolidated financial statements of Petroglyph, with
the exception of the June 30, 1999 and 2000 interim consolidated financial
statements, have been audited by independent public accountants. In the opinion
of the Company's management, the accompanying consolidated financial statements
reflect all adjustments necessary to present fairly the financial position at
June 30, 2000, and the related results of operations for the periods ended June
30, 2000 and 1999. These interim results are not necessarily indicative of
results for a full year.
The Company's operations are primarily focused in the Uinta Basin of
Utah and the Raton Basin of Colorado with additional operations in DeWitt and
Victoria Counties in South Texas.
Certain information and footnote disclosures normally included in
financial statements prepared in accordance with generally accepted accounting
principles have been condensed or omitted in this proxy statement pursuant to
the rules and regulations of the Securities and Exchange Commission.
F - 7
<PAGE> 114
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
MANAGEMENT'S 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 and
disclosure of contingent 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.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original maturity of
three months or less to be cash equivalents.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash payments for interest during 1999, 1998 and 1997 totaled $807,000, $116,000
and $325,000, respectively. The Company did not make any cash payments for
income taxes during 1999 and 1998 based on net losses for the year, and no cash
payment for income taxes was made in 1997 based on its partnership structure in
effect during that period.
ACCOUNTS RECEIVABLE
Accounts receivable are presented net of allowance for doubtful accounts, the
amounts of which are immaterial as of December 31, 1999, 1998 and 1997.
INVENTORY
Inventories consist primarily of crude oil held in tanks available for sale,
tubular goods and oil field materials and supplies, which the Company plans to
utilize in its ongoing exploration and development activities and are carried at
the lower of weighted average historical cost or market value.
PROPERTY AND EQUIPMENT
Oil and Natural Gas Properties
The Company follows the successful efforts method of accounting for its
oil and natural gas properties whereby costs of productive wells, developmental
dry holes and productive leases are capitalized and amortized on a unit-of-
production basis over the respective properties' remaining proved reserves.
Amortization of capitalized costs is provided on a prospect-by-prospect basis.
Leasehold costs are capitalized when incurred. Unproved oil and natural
gas properties with significant acquisition costs are periodically assessed and
any impairment in value is charged to impairment expense. The costs of unproved
properties which are not individually significant are assessed periodically in
the aggregate based on historical experience, and any impairment in value is
charged to exploration costs. The costs of unproved properties that are
determined to be productive are transferred to proved oil and natural gas
properties.
Exploration costs, including geological and geophysical expenses,
property abandonments and annual delay rentals, are charged to expense as
incurred. Exploratory drilling costs, if any, including the cost of
stratigraphic test wells, are initially capitalized but charged to expense if
and when the well is determined to be unsuccessful.
F - 8
<PAGE> 115
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
The Company adopted the provisions of Statement of Financial Accounting
Standards ("SFAS") No. 121, "Accounting for the Impairment of Long-Lived Assets
and for Long-Lived Assets to be Disposed Of," in connection with its formation.
SFAS No. 121 requires that proved oil and natural gas properties be assessed for
an impairment in their carrying value whenever events or changes in
circumstances indicate that such carrying value may not be recoverable. SFAS No.
121 requires that this assessment be performed by comparing the anticipated
future net cash flows to the net carrying value of oil and natural gas
properties. This assessment must generally be performed on a
property-by-property basis. The Company recognized impairments of $4,848,218 in
1998. No such impairments were required in the years ended December 31, 1999 and
1997.
Pipelines, Gas Gathering and Other
Other property and equipment is primarily comprised of field water distribution
systems and natural gas gathering systems located in the Uinta Basin and Raton
Basin, field building and land, office equipment, furniture and fixtures and
automobiles. The gathering systems and the field water distribution systems are
amortized on a unit-of-production basis over the remaining proved reserves
attributable to the properties served. These other items are amortized on a
straight-line basis over their estimated useful lives which range from three to
thirty years.
ORGANIZATION AND FINANCING COSTS
During 1999, the Company adopted Statement of Position ("SOP") 98-5,
Reporting on the Costs of Start-Up Activities, which requires future start-up
and organization charges to be expensed as they are incurred and previously
capitalized charges to be expensed upon adoption as a change in accounting
principle. Accordingly, the Company has shown as a change in accounting
principle a $111,190 expense, which represents the writeoff of net capitalized
organization costs of $173,735 net of the associated income tax benefit of
$62,545. Prior to 1999, organization costs were amortized over a period not to
exceed five years and presented net of accumulated amortization of $100,385 and
$61,895 at December 31, 1998 and 1997, respectively. Amortization of $38,490 and
$12,436 is included in depreciation, depletion and amortization expense in the
accompanying consolidated statements of operations for the years ended December
31, 1998, and 1997, respectively.
Costs related to the issuance of the Company's notes payable are
deferred and amortized on a straight-line basis over the life of the related
borrowing. Such amortization costs of $18,000 and $26,000 are included in
interest expense in the accompanying statements of operations for the year ended
December 31, 1999 and 1998, respectively.
INTEREST INCOME (EXPENSE)
For the year ended December 31, 1999, interest expense is presented net of
interest income of $93,000. For the years ended December 31, 1998 and 1997,
interest income is presented net of interest expense of $132,193 and $198,519,
respectively.
CAPITALIZATION OF INTEREST
Interest costs associated with maintaining the Company's inventory of
unproved oil and natural gas properties and significant development projects are
capitalized. Interest capitalized totaled $118,000, $90,000 and $127,000 for the
years ended December 31, 1999, 1998 and 1997, respectively.
REVENUE RECOGNITION AND NATURAL GAS BALANCING
The Company utilizes the entitlements method of accounting whereby
revenues are recognized based on the Company's revenue interest in the amount of
oil and natural gas production. The amount of oil and natural gas sold may
differ from the amount which the Company is entitled based on its revenue
interests in the properties. The Company had no significant natural gas
balancing positions at December 31, 1999 or 1998.
F - 9
<PAGE> 116
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
INCOME TAXES
Prior to the Conversion, the results of operations of the Company were included
in the tax returns of its owners. As a result, tax strategies were implemented
that are not necessarily reflective of strategies the Company would have
implemented. In addition, the tax net operating losses generated by the Company
during the period from its inception to date of the Conversion will not be
available to the Company to offset future taxable income as such benefit accrued
to the owners.
In conjunction with the Conversion, the Company adopted SFAS No. 109,
"Accounting for Income Taxes," which provides for determining and recording
deferred income tax assets or liabilities based on temporary differences between
the financial statement carrying amounts and the tax bases of assets and
liabilities using enacted tax rates. SFAS No. 109 requires that the net deferred
tax liabilities of the Company on the date of the Conversion be recognized as a
component of income tax expense. The Company recognized a one-time charge of
approximately $2.5 million in deferred tax liabilities and income tax expense on
the date of the Conversion. Upon the Conversion, the Company became taxable as a
corporation.
DERIVATIVES
The Company uses derivatives to hedge against interest rate and product
prices risks, as opposed to their use for trading purposes. The Company's policy
is to ensure that a correlation exists between the financial instruments and the
Company's pricing in its sales contracts prior to entering into such contracts.
Gains and losses on commodity futures contracts and other price risk management
instruments are recognized in oil and natural gas revenues when the hedged
transaction occurs. Cash flows related to derivative transactions are included
in operating activities.
STOCK-BASED COMPENSATION
The Company follows the provisions of Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees." In accordance with
APB No. 25, no compensation will be recorded for stock options or other
stock-based awards that are granted with an exercise price equal to or above the
common stock price on the date of the grant.
RECLASSIFICATIONS
Certain reclassifications have been made to prior year balances to
conform to current year presentation.
3. ACQUISITIONS AND DISPOSITIONS
During August 1999, the Company acquired the remaining 50% working
interest in the Antelope Creek Field in the Uinta Basin of Utah (the "Antelope
Creek Property") from its non-operated working interest partner, Williams
Production Rocky Mountain Company ("Williams"), for a purchase price of $6.9
million (the "Antelope Creek Acquisition"). The Antelope Creek Acquisition,
which was effective August 1, 1999, gives the Company a 100% working interest in
the Antelope Creek Property. The following table shows operating revenues, net
loss and earnings per share as if the Company had owned a 100% working interest
in the Antelope Creek Field from January 1, 1998.
<TABLE>
<CAPTION>
Revenues Net Loss Loss per Share
------------ ------------ --------------
<S> <C> <C> <C>
1998 $ 7,627,100 $ (4,300,891) $(0.79)
1999 $ 6,544,184 $ (1,159,476) $(0.21)
</TABLE>
In July 1997, the Company acquired 56,000 net mineral acres in the
Raton Basin in Colorado for approximately $700,000. This acquisition had an
effective date of May 15, 1997. An additional 17,100 net mineral acres were
acquired
F - 10
<PAGE> 117
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
by December 31, 1999 from various parties for a total of 73,100 net acres. In
addition, the Company also acquired, simultaneously, an 80% interest in a 25
mile pipeline strategically located across the Company's acreage positions in
the Raton Basin for total consideration of approximately $320,000. The Company,
together with an industry partner, formed a partnership to operate this
pipeline. Under the terms of the purchase and sale agreement, the Company paid
$75,000 at closing, $75,000 on December 31, 1997, and paid a final $35,000
during 1998. Additionally, the Company assumed an obligation for delinquent
property taxes of approximately $135,000, which were paid in November of 1997.
The Company acquired the remaining 20% interest in the pipeline for $60,000
effective December 1998. Simultaneously, the partnership formed to operate the
pipeline was dissolved.
4. FUTURE OPERATIONS
The Company has experienced operating losses in each year since its
inception and incurred an operating cash flow deficit (net cash provided by
operating activities before changes in working capital) in the year ended
December 31, 1999. Such operating losses and cash flow deficits have continued
subsequent to December 31, 1999. The future success of the Company is dependent
upon its ability to develop additional oil and natural gas reserves that are
economically recoverable within its two primary operating areas, the Uinta Basin
and Raton Basin Projects. Development of these projects will require substantial
additional capital expenditures. The Company currently has no borrowing capacity
on its existing credit agreement which converts in December 2000, to a term loan
requiring quarterly payments of principal and interest of approximately
$916,000. On July 14, 2000, Intermountain purchased at par the credit agreement
from Chase. The Company has been advised that III Exploration intends to vote
all of the shares of the Company's common stock in favor of the proposed merger
with a subsidiary of III Exploration. As a result, the Company anticipates that
the transaction will be approved. If however the merger is not completed for any
reason, the Company will likely not be able to meet its credit obligations
originally provided for under the Credit Agreement, which III Exploration's
affiliate purchased, nor carry out its 2000 development plan since there can be
no assurance that any additional financing will be available to the Company on
acceptable terms or at all.
5. STOCKHOLDERS' EQUITY:
INITIAL PUBLIC OFFERING
On October 24, 1997, Petroglyph completed its initial public offering
(the "Offering") of 2,500,000 shares of common stock at $12.50 per share,
resulting in net proceeds to the Company of approximately $29.1 million.
Approximately $10.0 million of the net proceeds were used to eliminate all
outstanding amounts under the Company's Credit Agreement, the balance of the
proceeds were utilized to develop production and reserves in the Company's core
Uinta Basin and Raton Basin development properties and for other working capital
needs.
On November 24, 1997, the Company's underwriters exercised a portion of
an over-allotment option granted in connection with the Offering, resulting in
the issuance of an additional 125,000 shares of common stock at $12.50 per
share, with net proceeds to the Company of approximately $1.5 million.
PRIVATE PLACEMENT
On December 28, 1999, the Company sold 1,000,000 shares of Common Stock
to III Exploration in a privately negotiated sale at a purchase price of $2.00
per share, for aggregate proceeds of $2.0 million (the "Private Placement"). The
Common Stock issued in the Private Placement has not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements. The Company used the proceeds from the
Private Placement for working capital, to finance existing operations and to
finance a portion of the Company's 2000 development plans for its Uinta Basin
and Raton Basin properties. As a result of the Private Placement, III
Exploration's ownership interest in the Company's Common Stock has increased to
approximately 59% (assuming the exercise of a warrant to purchase 150,000 shares
of Common Stock issued in connection with the subordinated notes).
F - 11
<PAGE> 118
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
WARRANTS
A warrant to purchase 150,000 shares of Common Stock, at an exercise price equal
to $3.00 per share, was issued to Intermountain in conjunction with the issuance
of $5 million in subordinated notes. The warrant expires on August 20, 2009 and
was still outstanding at June 30, 2000.
EARNINGS PER SHARE INFORMATION
Effective December 31, 1997, the Company adopted the provisions of SFAS
No. 128, "Earnings Per Share," which prescribes standards for computing and
presenting earnings per share ("EPS") and supersedes APB Opinion 15, "Earnings
Per Share."
The computation of basic and diluted EPS were identical for the years ended
December 31, 1999, 1998 and 1997 due to the following reasons:
o A warrant to purchase 150,000 shares of common stock was not
included in the computation of diluted EPS as they are
antidilutive as a result of the Company's net loss for the
year ended December 31, 1999. The warrants, which expire on
August 20, 2009, were still outstanding at December 31, 1999.
o Options to purchase 210,000 and 280,000 shares of common stock
at $5.00 per share at December 31, 1999 and 1998,
respectively, were outstanding since October 19, 1998, but
were not included in the computation of diluted EPS because to
do so would have been antidilutive. The 210,000 options, which
expire on October 19, 2008, were still outstanding at December
31, 1999.
o Options to purchase 210,000, 314,000 and 337,000 shares of
common stock at $12.50 per share at December 31, 1999, 1998
and 1997, respectively, were outstanding since November 1,
1997, but were not included in the computations of diluted EPS
because to do so would have been antidilutive. The 210,000
options, which expire on November 1, 2007, were still
outstanding at December 31, 1999.
o Warrants to purchase up to 6,496 shares of common stock were
not included in the computation of diluted EPS as they are
antidilutive as a result of the Company's net loss for the
year ended December 31, 1999. The warrants, which expire on
September 15, 2007, were still outstanding at December 31,
1999.
6. TRANSACTIONS WITH AFFILIATES:
The Company had notes receivable from certain executive officers
aggregating $141,738 and $246,500 at December 31, 1999 and 1998, respectively.
These notes bear interest at a rate of 9% and mature December 31, 2003. Accrued
interest on the notes at December 31, 1999 and 1998 was $105,305 and $145,965,
respectively. In August 1999, the Company forgave a note receivable of $104,762
with accrued interest of $71,139 owed to the Company by a former executive
officer. In exchange for the debt forgiveness, the officer relinquished his
rights under a severance agreement, which had a potential cash value of
$250,000.
The Company leases an office building from an affiliate. Rentals paid
to the affiliate for such leases totaled $41,676 during 1999, $36,486 during
1998 and $34,800 during 1997. These rentals are included in general and
administrative expense in the accompanying consolidated financial statements.
In August 1997, the Company and Natural Gas Partners ("NGP") entered
into a financial advisory services agreement whereby NGP agreed to provide
financial advisory services to the Company for a quarterly fee of $13,750. In
addition, NGP was reimbursed for its out of pocket expenses incurred while
performing such services. The agreement was terminated at the end of the third
quarter 1998. Advisory fees paid to NGP during 1998 and 1997 totaled $43,190
F - 12
<PAGE> 119
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
and $10,163, respectively. NGP and its affiliates beneficially owned
approximately 49% of the outstanding Common Stock of the Company until the sale
to III Exploration in August of 1999.
For the years ended December 31, 1999, 1998 and 1997, the Company paid
legal fees of $25,254, $57,060 and $139,384, respectively, to the law firm of
Morris, Laing, Evans, Brock & Kennedy, Chartered, where A.J. Schwartz, a
director of the Company, is a shareholder.
During 1997, the Company entered into an agreement with Sego Resources,
Inc. (SEGO), a portfolio company of NGP, to serve as operator on a series of
wells to be drilled in the Wasatch formation in the Company's Natural Buttes
Extension acreage. The Company has participated in drilling and completing two
wells through December 31, 1999. As a result of the drilling and operating
activity, the Company paid SEGO $183,359 for capital expenditures and $6,182 for
operating charges in 1998.
In August 1999, the Company sold $5 million of 8% senior subordinated
notes due 2004 (the "Notes") to III Exploration to fund a portion of the $6.9
million Antelope Creek Acquisition. The Notes required the Company to deliver to
III Exploration a stock purchase warrant to acquire 150,000 shares of Common
Stock of the Company at an exercise price of $3.00 per share and granted III
Exploration the ability to obtain additional stock purchase warrants over the
life of the Notes. The number of future stock purchase warrants will be based on
the future stock price performance and the amount and duration of the Notes
outstanding. The maximum number of shares of Common Stock issuable under the
stock purchase warrants for any given period is limited to 250,000 shares in any
one year, 400,000 over the first three years and 750,000 over the five-year life
of the Notes. The Company may redeem the Notes at par without penalty at any
time. Upon redemption of the Notes, any remaining unissued and unearned stock
purchase warrants will expire.
On December 28, 1999, the Company sold 1,000,000 shares of Common Stock
to III Exploration in a privately negotiated sale at a purchase price of $2.00
per share, for aggregate proceeds of $2.0 million (the "Private Placement"). The
Common Stock issued in the Private Placement has not been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and may not be
offered or sold in the United States absent registration or an applicable
exemption from registration requirements. The Company used the proceeds from the
Private Placement for working capital, to finance existing operations and to
finance a portion of the Company's 2000 development plans for its Uinta Basin
and Raton Basin properties. As a result of the Private Placement, III
Exploration's ownership interest in the Company's Common Stock increased to
approximately 59% (assuming the exercise of a warrant to purchase 150,000 shares
of Common Stock).
On February 15, 2000, Petroglyph's stockholders approved the issuance
to III Exploration of 250,000 shares of Series A Convertible Preferred Stock in
exchange for certain oil and gas producing properties located primarily in the
Uinta Basin of Utah. The transaction was closed on February 18, 2000.
On July 14, 2000, Intermountain purchased at par the outstanding
indebtedness under Petroglyph's Credit Agreement with Chase and assumed Chase's
rights and obligations under the Credit Agreement and did not change any of the
terms and conditions of the Credit Agreement. In the third quarter of 2000,
Intermountain loaned the Company an additional $3.150 million to meet its
current obligations.
On June 8, 2000, the Company received $800,000 from III Exploration
under the terms of an Agreement and Bill of Sale and Assignment of Proceeds,
which assigned to III Exploration the rights from proceeds of oil and natural
gas sales. The funds were used to cover past due accounts payable and hedge
obligations. On June 28, 2000, $1 million was advanced from III Exploration
under a similar assignment agreement to provide needed working capital until
additional long-term financing could be arranged. Both advances were repaid from
the proceeds of oil and natural gas sales.
F - 13
<PAGE> 120
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
7. LONG-TERM DEBT:
Effective September 30, 1998, the Company entered into the Credit
Agreement with Chase. The Credit Agreement established a credit facility for the
Company of up to $50 million with a two-year revolving line and a borrowing base
to be redetermined quarterly. The revolving credit facility expires on September
30, 2000, at which time all outstanding balances will convert to a term loan
expiring on September 30, 2003. Interest on outstanding borrowings is
calculated, at the Company's option, at either Chase's prime rate or the London
Interbank Offer Rate plus a margin determined by the amount outstanding under
the facility.
In order to finance the acquisition of the remaining 50% working
interest in the Antelope Creek Field in the Uinta Basin of Utah (the "Antelope
Creek Acquisition") from its non-operated working interest partner, the Company
entered into Amendment No. 1 to the Credit Agreement with Chase, dated as of
August 20, 1999, pursuant to which the Company borrowed an additional $2.5
million.
During August 1999, in conjunction with the Antelope Creek Acquisition,
the borrowing base was increased to $11.0 million and the quarterly
redetermination scheduled for September 30, 1999 was waived. The redetermination
scheduled for December 31, 1999 resulted in no change to the borrowing base. The
next redetermination was scheduled to occur on or before March 31, 2000.
At March 31, 2000, the Company was out of compliance with both the
minimum fixed charge coverage ratio and minimum current ratio covenants as
provided in the Credit Agreement. Chase granted a one-time waiver of default
with respect to such covenants.
On May 30, 2000, the Company was formally notified that Chase had
redetermined the borrowing base, resulting in a reduction in the borrowing base
to $9.0 million. As a result of that redetermination, under the Credit
Agreement, the Company had 90 days to reduce the outstanding balance from $11.0
million to $9.0 million. On July 14, 2000, Intermountain, purchased at par the
outstanding indebtedness and assumed Chase's rights and obligations under the
Credit Agreement and did not change any of the terms and conditions of the
Credit Agreement. In the third quarter of 2000, Intermountain loaned the Company
an additional $3.150 million to meet its current obligations.
In August 1999, the Company sold $5 million of 8% senior subordinated
notes due 2004 (the "Notes") to III Exploration. The Notes required the Company
to deliver to III Exploration a stock purchase warrant to acquire 150,000 shares
of common stock of the Company at an exercise price of $3.00 per share and the
ability for III Exploration to obtain additional stock purchase warrants over
the life of the Notes. The number of future stock purchase warrants will be
based on the future stock price performance and the amount and duration of the
Notes outstanding. The maximum number of shares of common stock issuable under
the stock purchase warrants for any given period is limited to 250,000 shares in
any one year, 400,000 over the first three years and 750,000 over the five-year
life of the notes. The Company may redeem the Notes at par without penalty at
any time. Upon redemption of the Notes, any remaining unissued and unearned
stock purchase warrants will expire. The Company utilized proceeds from the
Notes to finance the remaining purchase price of the Antelope Creek Acquisition
and for working capital needs.
At September 30, 2000, the Company remained out of compliance with both
the minimum fixed charge coverage ratio (1.25 to 1) and the minimum current
ratio (1 to 1) covenants as provided in the Credit Agreement. The Company had a
fixed charge ratio of (.07) and a current ratio of .18. Accordingly, the debt
outstanding under the Credit Agreement is classified as current in the
consolidated balance sheet. As a result of the Company's non-compliance with
financial covenants in the Credit Agreement, the Company is also in default
under the Notes pursuant to the cross default provisions of the Note Agreement
and has classified the Notes as current in the consolidated balance sheet.
F - 14
<PAGE> 121
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
The following table sets forth the Company's maturities of long-term
debt as of December 31, 1999.
<TABLE>
<CAPTION>
YEAR LONG-TERM DEBT
--------------- --------------
<S> <C>
2001 $ 3,666,667
2002 3,666,667
2003 2,750,000
2004 4,869,800
--------------
Long-term Debt 14,953,134
Current Portion 916,666
--------------
Total Debt $ 15,869,800
==============
</TABLE>
8. INCOME TAXES:
The effective income tax rate for the Company was different than the
statutory federal income tax rate for the periods shown below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------
1999 1998 1997
------ ------ ------
<S> <C> <C> <C>
Income tax expense (benefit) at the federal
statutory rate ................................ (35)% (35)% 35%
State income tax expense (benefit) ..................... (4)% (4)% 4%
Deferred tax liabilities recorded upon the Offering .... -- -- 2438%
Net operating loss utilized by partners ................ -- 2% --
Permanent differences .................................. 1% 2% --
True-ups ............................................... 2% 1% --
Valuation allowance .................................... 14% -- --
Other .................................................. -- 1% --
------ ------ ------
$ (22)% $ (33)% $ 2477%
====== ====== ======
</TABLE>
Components of income tax expense (benefit) are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Current ........................ $ -- $ -- $ (463,238)
Deferred ....................... (452,488) (2,061,666) 2,977,392
------------ ------------ ------------
Total ........ $ (452,488) $ (2,061,666) $ 2,514,154
============ ============ ============
</TABLE>
Deferred tax assets and liabilities are the results of temporary
differences between the financial statement carrying values and tax bases of
assets and liabilities. The Company's net deferred tax liability positions as of
December 31, 1999 and 1998, are summarized below:
F - 15
<PAGE> 122
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Deferred Tax Assets:
Inventory and other ......................... $ 72,168 $ 76,188
Net operating loss carryforwards ............ 3,514,958 2,703,339
Valuation allowance ......................... (290,058) --
------------ ------------
Total Deferred Tax Assets ................ $ 3,297,068 $ 2,779,527
------------ ------------
Deferred Tax Liabilities:
Property and equipment ...................... (3,297,068) (3,232,015)
------------ ------------
Total Deferred Tax Liabilities ........... (3,297,068) (3,232,015)
------------ ------------
Total Net Deferred Tax Liability ......... $ -- $ (452,488)
============ ============
</TABLE>
In August 1999, III Exploration completed the purchase of a majority
interest in the Company from the Sellers. As a result of the Purchase, the
Company's net operating loss carryforwards at the time of the transaction became
subject to an annual limitation of approximately $848,000 under Section 382 of
the Internal Revenue Code of 1986, as amended. Additionally, during 1999, the
Company recognized a valuation allowance due to the uncertainty of realizing a
portion of the Company's net operating loss carryforwards.
9. DERIVATIVES, SALES CONTRACTS AND SIGNIFICANT CUSTOMERS:
DERIVATIVES AND SALES CONTRACTS
The Company accounts for forward sales transactions as hedging
activities and, accordingly, records all gains and losses in oil and natural gas
revenues in the period the hedged production is sold. Included in oil revenue is
a net loss of $144,000 in 1999, a net gain of $386,000 in 1998 and a net loss of
$132,000 in 1997. Included in natural gas revenues in 1999 is a net loss of
$187,000, and a net loss of $46,000 in 1997.
During March of 1999, the Company liquidated a hedge contract covering
72,000 Bbls in the year 2000 for approximately $16,000.
The Company has used various financial instruments such as collars,
swaps and futures contracts in an attempt to manage its price risk. Monthly
settlements on these financial instruments are typically based on differences
between the fixed prices specified in the instruments and the settlement price
of certain future contracts quoted on the NYMEX or certain other indices. The
instruments used by the Company for oil hedges have not contained a contractual
obligation which requires or allows the future physical delivery of the hedged
products.
F - 16
<PAGE> 123
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
At December 31, 1999, the following hedge positions were in place.
<TABLE>
<CAPTION>
Type Floor Cap Price From To Volume
---- ------ ------ ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Crude Oil Collar $17.00 $20.00 NA 1/1/00 12/31/00 12,000 Bbl/Month
Crude Oil Swap NA NA $ 20.05 1/1/00 6/30/00 12,000 Bbl/Month
Crude Oil Collar $ 20.0 $23.00 NA 7/1/00 9/30/00 6,000 Bbl/Mo
Natural Gas Swap NA NA $ 2.010 10/1/99 9/30/00 700 MMBtu/Day
(Questar Index)
Natural Gas Swap NA NA $2.2275 8/1/99 3/31/00 1,000 MMBtu/Day
(Houston Ship Channel
Index)
Natural Gas Swap NA NA $2.2425 4/1/00 3/31/01 1,000 MMBtu/Day
</TABLE>
Additional hedge positions were contracted subsequent to December 31,
1999.
<TABLE>
<CAPTION>
Type Floor Cap Price From To Volume
---- ------ ------ ------- ------- -------- ------
<S> <C> <C> <C> <C> <C> <C>
Crude Oil Collar $23.00 $31.70 NA 7/1/00 9/30/00 4,000 Bbl/Mo
Crude Oil Collar $22.00 $27.00 NA 10/1/00 12/31/00 10,000 Bbl/Mo
</TABLE>
The Company has historically sold its oil production under long-term
contracts calling for a purchaser posted price or NYMEX price and an adjustment
deduction. These contracts have expired and have been extended or re-negotiated
for shorter time periods. The Company currently markets its crude oil either
month-to-month or a longer term basis up to six months. During the years ended
December 31, 1999, 1998 and 1997, Company oil sales volumes totaled
approximately 230 MBbls, 262 MBbls and 252 MBbls, respectively, at an average
sales price per Bbl, exclusive of the impact of hedging, for each year of
$16.53, $9.65 and $15.52, respectively.
Natural gas in Utah is sold through a long-term contract because of the
need for firm pipeline transportation. The contract expires June 2003. The price
for the natural gas is based on an Inside FERC index. Natural gas in Texas is
sold under an annual, renewable contract. A contract of this shorter duration is
more valuable to the purchaser and, in turn, yields a better price to the
Company. For the years ended December 31, 1999, 1998 and 1997, the Company sold
630 MMcf, 680 MMcf and 537 MMcf, respectively at an average price per Mcf,
exclusive of the impact of hedging, for each year of $2.14, $2.01 and $2.08,
respectively.
There is a call on all of the Company's share of oil production from
the Antelope Creek Field, which has priority over all other sales contracts.
Under the terms of the Oil Production Call Agreement (the "Call Agreement"),
which the Company assumed in connection with its acquisition of its initial
interest in the Antelope Creek Field, a purchaser has the option to purchase all
or any portion of the oil produced from the Antelope Creek field at the current
market price for the gravity and type of oil produced and delivered by the
Company. The Call Agreement was assumed by the Company on the date it acquired
its interest in the Antelope Creek Field and has no expiration date. In the
event the call option is exercised, the Company will not be penalized under its
other sales contracts for failure to deliver volumes thereunder.
SIGNIFICANT CUSTOMERS
The Company's revenues are derived principally from uncollateralized
sales to customers in the oil and gas industry. The concentration of credit risk
in a single industry affects the Company's overall exposure to credit risk
because customers may be significantly affected by changes in economic and other
conditions. In addition, the Company sells a significant portion of its oil and
natural gas revenue each year to a few customers. Oil sales to two purchasers in
1999 were approximately 40% and 26% of total 1999 oil and gas revenues. Natural
gas sales to two purchasers in 1999 were approximately 13% each of total 1999
oil and natural gas revenues. Oil sales to two purchasers in 1998 were
F - 17
<PAGE> 124
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
approximately 30% and 9% of total 1998 oil and gas revenues. Natural gas sales
to one purchaser in 1998 were approximately 25% of total oil and natural gas
revenues. Oil sales to three purchasers in 1997 were approximately 24%, 23% and
22% of total 1997 oil and gas revenues. Natural gas sales to one purchaser in
1997 were approximately 18% of total oil and natural gas revenues.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS:
Because of their short-term maturity, the fair value of cash and cash
equivalents, certificates of deposit, accounts receivable and accounts payable
approximate their carrying values at December 31, 1999 and 1998. The fair value
of the Company's bank borrowings approximate their carrying value because the
borrowings bear interest at market rates. The fair value of the Company's
subordinated loans approximate their carrying value because the loans bear
interest at market rates and are reflected net of the value assigned to
associated stock warrants. The Company does not have any investments in debt or
equity securities as of December 31, 1999 or 1998. The fair value of the
Company's outstanding oil price swap arrangement, described in the preceding
note, has an estimated fair value of $857,000 and $648,000 at December 31, 1999
and 1998, respectively. These estimates are based on quoted market values.
11. STOCK INCENTIVE PLAN:
DESCRIPTION OF PLAN
The Board of Directors and the stockholders of the Company approved the
adoption of the Company's 1997 Incentive Plan (the "1997 Incentive Plan")
effective as of the completion of the Offering. The purpose of the 1997
Incentive Plan is to reward selected officers and key employees of the Company
and others who have been or may be in a position to benefit the Company,
compensate them for making significant contributions to the success of the
Company and provide them with proprietary interest in the growth and performance
of the Company. Participants in the 1997 Incentive Plan are selected by the
Compensation Committee of the Board of Directors from among those who hold
positions of responsibility and whose performance, in the judgment of the
Compensation Committee, can have a significant effect on the success of the
Company.
In October 1998, the Board of Directors of the Company approved an
amendment to the 1997 Incentive Plan, increasing the number of shares available
for grant from 375,000 to 605,000. The amendment was approved by the
stockholders of the Company at the annual stockholders meeting held on May 26,
1999. As of December 31, 1999, options have been granted to purchase 570,000
shares of Common Stock. Based upon the provisions of the 1997 Incentive Plan,
all options outstanding at the Change of Control automatically vested. As a
result, all 570,000 options granted under the 1997 Incentive Plan are currently
vested.
F - 18
<PAGE> 125
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
The following table summarizes information about Petroglyph's stock
option activity between periods and the number of stock options which were
outstanding, and those which were exercisable, as of December 31, 1999, 1998 and
1997.
<TABLE>
<CAPTION>
GRANT EXPIRATION EXERCISE OPTIONS OPTIONS OPTIONS
DATE DATE PRICE AUTHORIZED ISSUED VESTED
---------- ------------- ---------- ------------- -------------- ----------
<S> <C> <C> <C> <C> <C> <C>
STOCK OPTIONS AUTHORIZED UNDER 375,000
1997 INCENTIVE PLAN
Issued 11/1/97 11/1/07 $ 12.50 337,000
---------
TOTAL OPTIONS AT 12/31/97 375,000 337,000 18,722
========== ========= ========
STOCK OPTIONS AUTHORIZED UNDER 1998 230,000
AMENDMENT TO 1997 INCENTIVE PLAN
Surrendered $ 12.50 (23,000)
Issued 10/19/98 10/19/08 $ 5.00 280,000
TOTAL OPTIONS AT 12/31/98 605,000 594,000 140,000
=========== ========= ========
Surrendered $ 12.50
Surrendered $ 5.00 (70,000)
---------
TOTAL OPTIONS AT 12/31/99 605,000 420,000 420,000
========== ========= ========
</TABLE>
Pursuant to the 1997 Incentive Plan, participants will be eligible to
receive awards consisting of (i) stock options, (ii) stock appreciation rights,
(iii) stock, (iv) restricted stock, (v) cash, or (vi) any combination of the
foregoing. Stock options may be either incentive stock options within the
meaning of Section 422 of the Internal Revenue Code of 1986, as amended, or
nonqualified stock options.
PRO FORMA EFFECT OF RECORDING STOCK-BASED COMPENSATION AT ESTIMATED FAIR VALUE
(UNAUDITED)
The following table presents the 1998 and 1997 pro forma loss available
to common stock and loss per common share for the periods indicated as if
stock-based compensation had been recorded at the estimated fair value of stock
awards at the grant date, as prescribed by SFAS No. 123 (Note 2):
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED YEAR ENDED
DECEMBER 31, 1999 DECEMBER 31, 1998 DECEMBER 31, 1997
----------------- ----------------- -----------------
<S> <C> <C> <C>
Loss available to common stock
As reported $(1,566,568) $(4,185,807) $(2,412,634)
Pro forma $(2,262,549) $(4,633,833) $(2,492,007)
Loss per common share
As reported, basic and diluted $ (.29) $ (.77) $ (.73)
Pro forma, basic and diluted $ (.41) $ (.85) $ (.75)
</TABLE>
F - 19
<PAGE> 126
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
The fair value of the options, as determined using the Black-Scholes
pricing model were $2.63 and $6.95 for the options issued during 1998
and 1997, respectively. The assumptions used in calculating the values
are set forth in the following table:
<TABLE>
<CAPTION>
1998 1997
---------- -----------
<S> <C> <C>
Risk free interest rate 4.62% 5.89%
Expected life 7 years 7 years
Expected volatility 43.59% 45.24%
Expected dividends 0 0
</TABLE>
12. COMMITMENTS AND CONTINGENCIES:
LEASES
In the second quarter of 1999, the Company sold is compression
equipment in Utah and Texas to Universal Compression, Inc. The Company then
executed a Master Rental Contract whereby Universal Compression will supply
equipment to meet the Company's natural gas compression requirements. The rental
agreements provide for fixed monthly payments of $29,730 for three years in Utah
and $19,780 for two years in Texas and annual redeterminations thereafter. In
1999 $415,860 in compressor rentals plus associated use taxes has been included
in lease operating expense in the accompanying Statements of Operations.
The Company leases offices and office equipment in its primary
locations under non-cancelable operating leases. As of December 31, 1999, annual
minimum future lease payments for all non-cancelable lease agreements, including
compression, are $669,084, $436,231, and $118,920, for 2000, 2001, and 2002,
respectively.
Exclusive of the compressor rentals discussed above, amounts incurred
by the Company under operating leases (including renewable monthly leases) were
$123,764, $91,042, and $53,383, in 1999, 1998, and 1997, respectively.
LITIGATION
The Company and its subsidiaries are involved in certain litigation and
governmental proceedings arising in the normal course of business. Company
management and legal counsel do not believe that ultimate resolution of these
claims will have a material effect on the Company's financial position or
results of operations.
Mark Lively v. Petroglyph Operating Company, Inc.
Petroglyph is a defendant in a lawsuit filed on or about December 22,
1999 in the District Court of Huerfano County, Colorado, by Mark Lively, wherein
Lively, among other things, seeks an order from the court evicting Petroglyph
from a portion of Lively's property that contains four of Petroglyph's Raton
Basin coalbed methane gas wells. Lively also seeks to recover attorney fees and
costs incurred in connection with the lawsuit. The District Court has entered a
judgment the effect of which was to award Lively a minority working interest in
the minerals underlying the four wells, which judgment Petroglyph plans to
appeal. Petroglyph continues to vigorously defend itself in this matter.
Petroglyph does not believe a negative outcome in this matter would have a
material adverse effect on Petroglyph's financial position or results of
operations.
OTHER COMMITMENTS
The Company has hedged a portion of its future production with crude
oil collars based on a floor price and a ceiling price indexed to the NYMEX
light crude future settlement price. Oil hedge contracts in place as of
September 30, 2000 are:
F - 20
<PAGE> 127
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
<TABLE>
<CAPTION>
DURATION VOLUME FLOOR CEILING
-------- ------ ----- -------
<S> <C> <C> <C> <C>
October 2000 - December 2000 12,000 Bbl/month $17.00 $20.00
October 2000 - December 2000 10,000 Bbl/month $22.00 $27.00
</TABLE>
The Company has contracted for the sale of its natural gas production
and taken hedge positions to effect the following volumes and prices as of
September 30, 2000:
<TABLE>
<CAPTION>
DURATION VOLUME AVERAGE PRICE
-------- ------ -------------
<S> <C> <C> <C>
October 2000 - March 2001* 1,000 MMBtu/day $2.2425 MMBtu ($2.39 Mcf)
</TABLE>
*The gas hedges were settled on October 19, 2000 in connection with the
sale of the Texas properties.
The Company uses price hedging arrangements and fixed price natural gas
sales contracts as described above to reduce price risk on a portion of its oil
and natural gas production.
In September 1998, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for
Derivative Instruments and Hedging Activities. SFAS No. 133 establishes
accounting and reporting standards requiring that every derivative instrument be
recorded in the balance sheet as either an asset or liability measured at its
fair market value. SFAS No. 133 requires that changes in the derivative's fair
value be recognized currently in earnings unless specific hedge accounting
criteria are met. Special accounting for qualifying hedges allows a derivative's
gains 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, 2000. With its
current hedge contracts, management believes SFAS No. 133 will not have a
material affect on the Company's financial position or results of operations.
During July 1998, the Company entered into an agreement with Colorado
Interstate Gas Company ("CIG") whereby CIG agreed to install approximately 37
miles of 10-inch steel pipeline from near Trinidad, Colorado to the Company's
Raton Basin coalbed methane development area approximately 6 miles southwest of
Walsenburg, Colorado. The pipeline was placed in service in January 1999 with a
delivery capacity of approximately 50 MMcf per day and would provide the Company
primary access to mid-continent markets for its future coalbed methane
production. The Company has committed to pay CIG a minimum transportation charge
equivalent to $0.325 per Mcf for the daily agreed volumes described below less
$0.02 per Mcf for any unused transportation capacity beginning February 1, 1999
and ending January 31, 2011. The commitment begins at a minimum volume of 2,000
Mcf per day and increases after each three-month period by 1,000 Mcf per day,
with a maximum commitment of 10,000 Mcf per day. At the end of the first
two-year period the Company has the option to: 1) continue the agreement with a
minimum volume of 16,000 Mcf per day, 2) increase the minimum volume to 32,000
Mcf per day, or 3) eliminate the commitment. The cost of eliminating the
commitment is the cost of the pipeline ($6.4 million) less a credit applied for
the Company's Raton Basin commercial gas production up to 16,000 Mcf per day.
This cost could be applied as a credit to transportation elsewhere on CIG's
system. The Company can reduce the minimum monthly commitment by selling its
available pipeline capacity at market rates. Net commitment fees paid to CIG
totaling $97,174 and $398,281 for the three-month and nine-month periods
ending September 30, 2000, are reflected as lease operating expense in the
Company's consolidated statements of operations.
ENVIRONMENTAL MATTERS
The Company's operations and properties are subject to extensive and
changing federal, state and local laws and regulations relating to environmental
protection, including the generation, storage, handling, emission,
transportation and discharge of materials into the environment, and relating to
safety and health. The recent trend in environmental legislation and regulation
generally is toward stricter standards, and this trend will likely continue.
These laws and
F - 21
<PAGE> 128
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
regulations may require the acquisition of a permit or other authorization
before construction of drilling commences and for certain other activities,
limit or prohibit construction, drilling and other activities on certain lands
lying within wilderness and other protected areas, and impose substantial
liabilities for pollution resulting from the Company's operations. The permits
required for various of the Company's operations are subject to revocation,
modification and renewal by issuing authorities. Governmental authorities have
the power to enforce compliance with their regulations, and violations are
subject to fines or injunction, or both. In the opinion of management, the
Company is in substantial compliance with current applicable environmental laws
and regulations, and the Company has no material commitments for capital
expenditures to comply with existing environmental requirements. Nevertheless,
changes in existing environmental laws and regulations or in interpretations
thereof could have a significant impact on the Company, as well as the oil and
natural gas industry in general.
13. SIGNIFICANT EVENTS
On May 3, 2000, the Company received a proposal from Intermountain to
purchase the approximately 2.7 million outstanding shares of common stock of
Petroglyph that it does not already indirectly own through III Exploration for
$2.20 per share. In response to the offer, an independent committee of the
Petroglyph Board of Directors was formed (the "Special Committee"). The Special
Committee was authorized by the Board of Directors to employ counsel and a
financial advisor to evaluate the fairness of the offer, consider alternatives
and handle all negotiations with Intermountain concerning the proposed purchase
of the shares.
At a meeting of the Board of Directors held on June 20, 2000, the
Special Committee reported to the Board of Directors that, after negotiations
between the Special Committee and representatives of Intermountain,
Intermountain had increased its offer to $2.85 per share, and the Special
Committee recommended that the Board of Directors approve the terms of a
proposed merger agreement. The merger agreement was approved by the Board,
subject to stockholder approval, and executed on June 20, 2000.
As previously reported, the funding of the Company's 2000 development
plans was dependent upon its ability to realize proceeds from future asset
sales, replace its existing credit facility, raise equity capital and increase
its operating cash flow, whether as a result of successful operations in the
Uinta Basin and Raton Basin or from acquisitions. The Company's inability to
obtain such funds has forced the Company to delay its 2000 development plans.
During the first quarter of 2000, the Company continued to seek additional
sources of financing, including selling assets and refinancing its senior credit
facility or replacing its senior lender; however, the Company was unsuccessful
through the second quarter of 2000.
Additionally, on May 30, 2000, the Company was formally notified that
The Chase Manhattan Bank ("Chase") had redetermined the borrowing base under the
Company's credit agreement (the "Credit Agreement"), resulting in a reduction to
$9.0 million. As a result of that redetermination, under the Credit Agreement
the Company had 90 days to reduce the outstanding balance from $11.0 million to
$9.0 million. The Company did not have sufficient cash to pay down the $2
million required by Chase in connection with the redetermination. Since the
Company also had no assurance that Chase would provide the Company with a waiver
if it was unable to reduce the balance by August 28, 2000, the Company asked III
Exploration to provide the Company with financial assistance, which it
subsequently agreed to do. As a result of its discussions with III Exploration,
the Company authorized III Exploration to contact Chase regarding a possible
guarantee of the Company's obligations under the Credit Agreement. Chase refused
to accept III Exploration's guarantee and encouraged III Exploration to purchase
the loan from Chase. As a result, on July 14, 2000, III Exploration's parent
company, Intermountain, purchased at par the Company's outstanding indebtedness
under the Credit Agreement and assumed Chase's rights and obligations under the
Credit Agreement. Intermountain did not change any of the terms and conditions
of the Credit Agreement. In the third quarter of 2000, Intermountain loaned the
Company an additional $3.150 million to meet its current obligations. The
Company has been advised that this advance was made in anticipation of the
successful completion of the proposed merger with III Exploration and was
specifically intended to preserve the Company's asset value for the period of
time after the merger. The Company was further advised that any future advances
that Intermountain may consider will only be made if Intermountain believes they
are necessary to preserve the Company's asset value.
F - 22
<PAGE> 129
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
On June 8, 2000, the Company received $800,000 from III Exploration
under the terms of an Agreement and Bill of Sale and Assignment of Proceeds,
which assigned to III Exploration the rights from proceeds of oil and natural
gas sales. The funds were used to cover past due accounts payable and hedge
obligations. On June 28, 2000, $1 million was advanced from III Exploration
under a similar assignment agreement to provide needed working capital until
additional long-term financing could be arranged. Both advances were repaid from
the proceeds of oil and natural gas sales.
The Company has been advised that III Exploration intends to vote all
of the shares of the Company's common stock in favor of the proposed merger with
a subsidiary of III Exploration. As a result, the Company anticipates that the
transaction will be approved. If however the merger is not completed for any
reason, the Company will likely not be able to meet its credit obligations
originally provided for under the Credit Agreement, which III Exploration's
affiliate purchased, nor carry out its 2000 development plan since there can be
no assurance that any additional financing will be available to the Company on
acceptable terms or at all.
14. SUPPLEMENTAL FINANCIAL INFORMATION ON OIL AND NATURAL GAS PRODUCING
ACTIVITIES:
COSTS INCURRED RELATED TO OIL AND NATURAL GAS PRODUCING ACTIVITIES
The following table summarizes costs incurred whether such costs are
capitalized or expensed for financial reporting purposes (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Acquisition
Unproved Properties ............. $ 1,320,105 $ 7,141,142 $ 1,721,636
Proved Properties ............... 7,120,952 42,533 147,387
Development .......................... 1,038,257 10,123,616 10,003,468
Exploration .......................... 38,640 192,526 --
Improved recovery costs .............. -- -- 895,317
------------ ------------ ------------
Total ...................... $ 9,517,954 $ 17,499,817 $ 12,767,808
============ ============ ============
</TABLE>
PROVED RESERVES
Independent petroleum engineers have estimated the Company's proved oil
and natural gas reserves as of December 31, 1999, 1998 and 1997, all of which
are located in the United States. Proved reserves are the estimated quantities
that geologic and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic and
operating conditions. Proved developed reserves are the quantities expected to
be recovered through existing wells with existing equipment and operating
methods. Due to the inherent uncertainties and the limited nature of reservoir
data, such estimates are subject to change as additional information becomes
available. The reserves actually recovered and the timing of production of these
reserves may be substantially different from the original estimate. Revisions
result primarily from new information obtained from development drilling and
production history and from changes in economic factors.
STANDARDIZED MEASURE
The standardized measure of discounted future net cash flows
("standardized measure") and changes in such cash flows are prepared using
assumptions required by the Financial Accounting Standards Board. Such
assumptions include the use of year-end prices for oil and natural gas and
year-end costs for estimated future development and
F - 23
<PAGE> 130
PETROGLYPH ENERGY, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999, 1998 AND 1997
production expenditures to produce year-end estimated proved reserves.
Discounted future net cash flows are calculated using a 10% rate. Estimated
future income taxes are calculated by applying year-end statutory rates to
future pre-tax net cash flows, less the tax basis of related assets and
applicable tax credits.
The standardized measure does not represent management's estimate of
the Company's future cash flows or the value of the proved oil and natural gas
reserves. Probable and possible reserves, which may become proved in the future,
are excluded from the calculations. Furthermore, year-end prices used to
determine the standardized measure of discounted cash flows are influenced by
seasonal demand and other factors and may not be the most representative in
estimating future revenues or reserve data.
<TABLE>
<CAPTION>
OIL NATURAL GAS
(BBLS) (MCF)
-------------- --------------
<S> <C> <C>
PROVED RESERVES (UNAUDITED):
December 31,1996 ................................. 6,127,136
Revisions ............................... 558,350 (2,895,611)
Extensions, additions and discoveries ... 3,168,390 5,939,453
Production .............................. (251,631) (537,466)
Purchases of reserves ................... 10,245 269,323
Sales in place .......................... (156,675) (892,712)
-------------- --------------
December 31,1997 ................................. 9,455,815 20,695,450
Revisions ............................... (3,686,673) (7,358,640)
Extensions, additions and discoveries ... 937,164 2,835,622
Production .............................. (261,817) (679,992)
Purchases of reserves ................... -- --
Sales in place .......................... (17,329) --
-------------- --------------
December 31,1998 ................................. 6,427,160 15,492,440
Revisions ............................... 3,054,195 9,198,718
Extensions, additions and discoveries ... -- 476,777
Production .............................. (229,651) (630,186)
Purchases of reserves ................... 9,236,996 18,894,461
Sales in place .......................... -- --
-------------- --------------
December 31,1999 ................................. 18,488,700 43,432,210
============== ==============
PROVED DEVELOPED RESERVES:
December 31,1996 ................................. 865,018 3,010,401
December 31,1997 ................................. 4,742,028 10,839,164
December 31,1998 ................................. 5,319,768 12,670,033
December 31,1999 ................................. 10,459,030 24,320,120
============== ==============
</TABLE>
F - 24
<PAGE> 131
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED
RESERVES (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Future cash inflows ...... $ 499,812,849 $ 84,010,748 $ 169,302,079
Future costs:
Production ...... (108,699,353) (25,826,978) (50,913,842)
Development ..... (44,729,910) (5,823,801) (19,151,264)
-------------- -------------- --------------
Future income tax ........ (113,359,897) (8,767,729) (22,247,206)
-------------- -------------- --------------
Future net cash flows .... 233,023,689 43,592,240 76,989,767
10% annual discount ...... (128,359,443) 19,398,715 (42,836,688)
-------------- -------------- --------------
Standardized Measure ..... $ 104,664,246 $ 24,193,525 $ 34,153,079
============== ============== ==============
</TABLE>
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------------------------
1999 1998 1997
-------------- -------------- --------------
<S> <C> <C> <C>
Standardized Measure, Beginning of Period .... $ 24,293,525 $ 34,153,079 $ 48,024,088
Revisions:
Prices and costs .................... 41,769,947 (32,472,461) (26,476,631)
Quantity estimates .................. 38,374,712 2,814,596 380,840
Accretion of discount ............... 2,905,978 4,346,915 6,484,830
Future development cost ............. (13,125,359) 7,332,602 (1,869,101)
Income tax .......................... (41,752,296) 5,201,663 7,508,139
Production rates and other .......... (20,963,016) (6,027,000) (8,545,510)
-------------- -------------- --------------
Net revisions .............. 7,209,966 (18,803,685) (22,517,433)
Extensions, additions and discoveries ........ 555,914 6,061,487 12,757,280
Production ................................... (1,499,116) (2,132,680) (3,372,040)
Development costs ............................ 737,180 5,031,367 --
Purchases in place ........................... 73,466,777 -- 397,644
Sales in place ............................... -- (116,043) (1,136,460)
-------------- -------------- --------------
Net change .......................... 80,470,721 (9,959,554) (13,871,009)
Standardized Measure, End of Period .......... $ 104,664,246 $ 24,193,525 $ 34,153,079
============== ============== ==============
</TABLE>
Year-end weighted average oil prices used in the estimation of proved
reserves and calculation of the standardized measure were $22.37, $8.04 and
$13.46 per Bbl at December 31, 1999, 1998, and 1997, respectively. Year-end
weighted average gas prices were $1.99, $2.09 and $2.03 per Mcf at December 31,
1999, 1998, and 1997, respectively.
The Company uses hedging strategies to minimize the Company's exposure
to product price risk. The impact of hedging contracts is reflected in the
Company's reserve report. The 1999 and 1998 weighted average oil prices include
the impact of hedging contracts in pricing assumptions in place at December 31,
1999 and 1998 for those projected barrels under contract. The weighted average
oil price, excluding hedges would have been $22.41 in 1999 and $7.80 in 1998.
F - 25
<PAGE> 132
APPENDIX A
AGREEMENT AND PLAN
OF MERGER
(AS AMENDED)
AGREEMENT AND PLAN OF MERGER
BY AND BETWEEN
III EXPLORATION COMPANY
AND
PETROGLYPH ENERGY, INC.
Dated as of June 20, 2000
AGREEMENT AND PLAN OF MERGER, dated as of June 20, 2000, by and between
III Exploration Company, an Idaho corporation ("IIIX"), and Petroglyph Energy,
Inc., a Delaware corporation ("Petroglyph").
WHEREAS, IIIX desires to acquire the entire equity interest in
Petroglyph and to provide for the payment of $2.85 per share in cash for all
shares of the common stock, par value $.01 per share, of Petroglyph (the
"Petroglyph Common Stock") not held by IIIX; and
WHEREAS, IIIX intends to contribute shares of Petroglyph Common Stock
held by it to a Delaware corporation to be formed for the purpose of effecting
such transaction ("Acquisition") and to acquire in exchange therefor the common
stock of Acquisition; and
WHEREAS, the Board of Directors of Petroglyph, upon the recommendation
of the special committee established to consider the fairness of the transaction
contemplated by this Agreement (the "Special Committee"), has unanimously
approved, and deems advisable and in the best interests of its stockholders, the
merger of Acquisition with and into Petroglyph in accordance with Section 251 of
the Delaware General Corporation Law (the "DGCL") and upon the terms, and
subject to the conditions, of this Agreement (the "Merger");
NOW, THEREFORE, in consideration of the premises and the
representations, warranties and agreements herein contained, the parties hereto,
intending to be legally bound, agree as follows:
ARTICLE I.
The Merger
Section 1.1. Formation of Acquisition. Before consummation of the
Merger, IIIX shall incorporate and organize Acquisition and contribute to
Acquisition, in exchange for the common stock of Acquisition, shares of
Petroglyph Common Stock owned by it and constituting at least a majority of the
shares of Petroglyph Common Stock outstanding.
APPENDIX A - 1
<PAGE> 133
Section 1.2. The Merger. At the Effective Time (as hereinafter
defined), upon the terms and subject to the conditions set forth in this
Agreement and in accordance with the DGCL, Acquisition shall be merged with and
into Petroglyph, the separate existence of Acquisition shall cease, and
Petroglyph shall continue as the surviving corporation (the "Surviving
Corporation"). The Merger shall have the effects as provided by the DGCL and
other applicable law.
Section 1.3. Effective Time. As soon as practicable after the
satisfaction or waiver of the conditions set forth in Article V, Acquisition and
Petroglyph shall file with the Secretary of State of the State of Delaware a
certificate of merger (the "Certificate of Merger") executed in such form as
required by and in accordance with the relevant provisions of the DGCL. The
Merger shall become effective at such time as the Certificate of Merger shall
have been duly filed with the Secretary of State of the State of Delaware, or at
such other time as shall be permissible in accordance with the DGCL and as
Acquisition and Petroglyph shall agree and as specified in the Certificate of
Merger (the time the Merger shall have become effective being the "Effective
Time").
Section 1.4. Closing. The closing of the Merger (the
"Closing") shall take place telephonically or at the offices of Morris, Laing,
Evans, Brock & Kennedy, Chtd., Fourth Floor, 200 West Douglas, Wichita, Kansas
67202 at 10:00 a.m. (central time) on the date that is no later than the
business day after the satisfaction of the conditions provided in Article V, or
at such other time and place as Acquisition and Petroglyph shall agree (the
"Closing Date").
Section 1.5. Certificate of Incorporation; By-laws; Officers
and Directors. Pursuant to the Merger: (a) the Certificate of Incorporation and
By-laws of Petroglyph as in effect immediately before the Effective Time shall
be the Certificate of Incorporation and By-laws of the Surviving Corporation
after the Merger, until thereafter changed or amended as provided therein and in
accordance with applicable law; (b) the directors of Petroglyph shall be the
directors of the Surviving Corporation after the Merger and until the earlier of
their death, resignation or removal or until their respective successors shall
have been duly elected or appointed and qualified; and (c) the officers of
Petroglyph immediately before the Effective Time shall be the officers of the
Surviving Corporation until the earlier of their death, resignation or removal
or until their respective successors shall have been duly elected or appointed
and qualified.
Section 1.6. Effect on Capital Stock. As of the Effective
Time, by virtue of the Merger and without any action on the part of Acquisition,
Petroglyph or the holders of any shares of Petroglyph Common Stock or any other
capital stock of Petroglyph:
(a) Common Stock of Acquisition. Each share of Common
Stock, par value $.01 per share, of Acquisition (the "Acquisition Common Stock")
that shall be issued and outstanding immediately before the Effective Time shall
be converted into and become one share of the Common Stock, par value $.01 per
share, of the Surviving Corporation (the "Surviving Corporation Common Stock").
(b) Common Stock of Petroglyph. Subject to Sections
1.6(c), 1.6(d), 1.6(e), 1.7 and 1.8, each share of Petroglyph Common Stock that
is issued and outstanding immediately before the Effective Time shall be
converted into and become the right to receive the sum (the "Merger
Consideration") of $2.85 in cash and, when so converted, shall automatically be
canceled and retired and shall cease to exist, and each holder of a certificate
representing any such shares of Petroglyph Common Stock shall, to the extent
such certificate represents such shares, cease to have any rights with respect
thereto, except the right to receive the Merger Consideration allocable to the
shares formerly represented by such certificate upon surrender of such
certificate in accordance with Section 1.9.
(c) Cancellation of Treasury Stock. Each share of
Petroglyph Common Stock that shall be owned immediately before the Effective
Time by Petroglyph or any Subsidiary (as hereinafter defined) of Petroglyph that
constitutes treasury stock in the hands of the holder thereof, shall be canceled
and retired and shall cease to exist, and no consideration shall be delivered in
exchange therefor, and each holder of a certificate representing any such shares
shall cease to have any rights with respect thereto. The term "Subsidiary" means
any corporation, joint venture, partnership, limited liability company or other
entity of which Petroglyph, directly or indirectly, owns or controls capital
stock (or other equity interests) representing more than fifty percent of the
general voting power of such entity under ordinary circumstances.
APPENDIX A - 2
<PAGE> 134
(d) Petroglyph Common Stock Held by Acquisition. Each
share of Petroglyph Common Stock that shall be owned immediately before the
Effective Time by Acquisition shall be canceled and retired and shall cease to
exist, and no consideration shall be delivered in exchange therefor, and
Acquisition shall cease to have any rights with respect to any certificates
representing any such shares.
(e) Petroglyph Common Stock Subject to Incentive
Plan. Each share of Petroglyph Common Stock issued pursuant to Petroglyph's 1997
Incentive Plan (as amended, the "Petroglyph Incentive Plan") that is outstanding
immediately before the Effective Time (whether or not vested), and each share of
Petroglyph Common Stock that has been issued prior to the Effective Time upon
exercise of Petroglyph Options (as defined below) granted under the Petroglyph
Incentive Plan shall be converted into and become the right to receive the
Merger Consideration in accordance with Section 1.6(b).
Section 1.7. Dissenting Shares
(a) Notwithstanding anything in this Agreement to the
contrary, shares of Petroglyph Common Stock outstanding immediately before the
Effective Time and held by a holder who shall have demanded and perfected such
holder's right to appraisal of such shares in accordance with Section 262 of the
DGCL ("Dissenting Shares") shall not be converted into or represent the right to
receive the Merger Consideration, but the holder thereof shall instead be
entitled to such rights as are afforded under the DGCL with respect to such
holder's Dissenting Shares, unless such holder shall fail to perfect or shall
withdraw or otherwise lose such holder's right to appraisal.
(b) If any holder of shares of Petroglyph Common
Stock who shall demand appraisal of such holder's shares pursuant to the DGCL
shall fail to perfect or shall withdraw or otherwise lose such holder's right to
appraisal, at the later of the Effective Time or upon the occurrence of such
event, the Dissenting Shares of such holder shall be converted into and
represent the right to receive the Merger Consideration, without interest
thereon, in accordance with Section 1.6(b).
(c) Petroglyph shall give IIIX and, after its
formation, Acquisition (i) prompt notice of any written demand for appraisal or
payment of the fair value of any shares of Petroglyph Common Stock, withdrawals
of such demands, and any other instruments served pursuant to the DGCL received
by Petroglyph and (ii) the opportunity to direct all negotiations and
proceedings with respect to demands for appraisal under the DGCL. Petroglyph
shall not voluntarily make any payment with respect to any demand for appraisal
and shall not, except with the prior written consent of IIIX or Acquisition,
settle or offer to settle any such demands.
Section 1.8. Treatment of Stock Options and Stock Appreciation
Rights. Petroglyph shall take all actions necessary to provide that each
outstanding and unexercised stock option or stock appreciation right
(collectively, the "Petroglyph Options") granted under the Petroglyph Incentive
Plan, whether or not exercisable or vested, shall be terminated in accordance
with the Petroglyph Incentive Plan prior to the Effective Time.
Section 1.9. Exchange of Certificates.
(a) Exchange Agent. Before the Effective Time,
Petroglyph shall appoint a bank or trust company to act as exchange agent (the
"Exchange Agent") for the payment of the Merger Consideration. As of the
Effective Time, Acquisition shall deposit with the Exchange Agent, for the
benefit of the holders of shares of Petroglyph Common Stock, for exchange in
accordance with this Section 1.9, the aggregate amount of cash payable pursuant
to Section 1.6(b) hereof in exchange for outstanding shares of Petroglyph Common
Stock (the "Exchange Fund").
(b) Exchange Procedures. Promptly after the Effective
Time, the Exchange Agent shall mail to each holder of record of a certificate or
certificates, which immediately before the Effective Time shall have represented
outstanding shares of Petroglyph Common Stock, whose shares shall have been
converted into the right to receive cash pursuant to Section 1.6(b), a letter of
transmittal (which shall specify that delivery shall be effected, and risk of
loss and title to the certificates representing such shares of Petroglyph Common
Stock shall pass,
APPENDIX A - 3
<PAGE> 135
only upon delivery of the certificates representing such shares of Petroglyph
Common Stock to the Exchange Agent and shall be in such form and have such other
provisions not inconsistent with this Agreement as the Exchange Agent may
reasonably specify), and instructions for use in effecting the surrender of the
certificates representing such shares of Petroglyph Common Stock, together with
a duly executed (if required) letter of transmittal, in exchange for the Merger
Consideration. Upon surrender to the Exchange Agent of a certificate or
certificates formerly representing shares of Petroglyph Common Stock and
acceptance thereof by the Exchange Agent, the holder thereof shall be entitled
to the amount of cash into which the number of shares of Petroglyph Common Stock
formerly represented by such certificate or certificates surrendered shall have
been converted pursuant to this Agreement. The Exchange Agent shall accept such
certificates upon compliance with such reasonable terms and conditions as the
Exchange Agent may impose to effect an orderly exchange thereof in accordance
with normal exchange practices. After the Effective Time, there shall be no
further transfer on the records of Petroglyph or its transfer agent of
certificates representing shares of Petroglyph Common Stock and, if such
certificates shall be presented to Petroglyph for transfer, they shall be
canceled against delivery of the Merger Consideration allocable to the shares of
Petroglyph Common Stock represented by such certificate or certificates. If any
Merger Consideration is to be remitted to a name other than that in which the
certificate for the Petroglyph Common Stock surrendered for exchange is
registered, it shall be a condition of such exchange that the certificate so
surrendered shall be properly endorsed, with signature guaranteed, or otherwise
in proper form for transfer and that the person requesting such exchange shall
pay to Petroglyph, or its transfer agent, any transfer or other taxes required
by reason of the payment of the Merger Consideration to a name other than that
of the registered holder of the certificate surrendered, or establish to the
satisfaction of Petroglyph or its transfer agent that such tax shall have been
paid or shall not be applicable. Until surrendered as contemplated by this
Section 1.9, each certificate for shares of Petroglyph Common Stock shall be
deemed at any time after the Effective Time to represent only the right to
receive upon such surrender the Merger Consideration allocable to the shares
represented by such certificate as contemplated by Section 1.6(b). No interest
will be paid or will accrue on any amount payable as Merger Consideration.
(c) No Further Ownership Rights in Petroglyph Stock.
The Merger Consideration paid upon the surrender for exchange of certificates
formerly representing shares of Petroglyph Common Stock in accordance with the
terms of this Section 1.9 shall be deemed to have been paid in full satisfaction
of all rights pertaining to the shares of Petroglyph Common Stock formerly
represented by such certificates.
(d) Termination of Exchange Fund. Any portion of the
Exchange Fund (including any interest and other income received by the Exchange
Agent in respect of all such funds) that shall remain undistributed to the
holders of the certificates formerly representing shares of Petroglyph Common
Stock for six months after the Effective Time shall be delivered to the
Surviving Corporation, upon demand, and any holders of shares of Petroglyph
Common Stock before the Merger who have not theretofore complied with this
Section 1.9 shall thereafter look only to the Surviving Corporation, and only as
general creditors thereof, for payment of their claim for Merger Consideration
to which such holders may be entitled.
(e) No Liability. No party to this Agreement shall be
liable to any Person (as hereinafter defined) in respect of any amount from the
Exchange Fund delivered to a public official pursuant to any applicable
abandoned property, escheat or similar law. The term "Person" means any
individual, entity, corporation, partnership, trust or unincorporated
organization or any government or any agency or political subdivision thereof.
(f) Lost Certificates. If any certificate or
certificates formerly representing shares of Petroglyph Common Stock shall have
been lost, stolen or destroyed, upon the making of an affidavit of that fact by
the Person claiming such certificate or certificates to be lost, stolen or
destroyed, and if required by the Surviving Corporation, the posting by such
Person of a bond in such amount as the Surviving Corporation may reasonably
require as indemnity against any claim that may be made against it with respect
to such certificate, the Exchange Agent shall issue in exchange for such lost,
stolen or destroyed certificate the Merger Consideration deliverable in respect
thereof as determined in accordance with this Section 1.9.
(g) Withholding Rights. The Surviving Corporation and
the Exchange Agent shall be entitled to deduct and withhold from the
consideration otherwise payable pursuant to this Agreement to any holder of
shares of Petroglyph Common Stock such amounts as the Surviving Corporation or
the Exchange Agent shall be required to deduct and withhold under the United
States Internal Revenue Code of 1986, as amended, or any provision
APPENDIX A - 4
<PAGE> 136
of state, local or foreign tax law with respect to the making of such payment.
To the extent that amounts are so withheld by the Surviving Corporation or the
Exchange Agent, such withheld amounts shall be treated for all purposes of this
Agreement as having been paid to the holder of the shares of Petroglyph Common
Stock in respect of which such deduction and withholding was made by the
Surviving Corporation or the Exchange Agent.
Section 1.10. Proxy Statement and Schedule 13E-3.
(a) Petroglyph shall prepare, in consultation with
IIIX, the Proxy Statement on Schedule 14A under the Securities Exchange Act of
1934 (the "Exchange Act") (the "Proxy Statement") to be distributed to holders
of the Petroglyph Common Stock for the purpose of soliciting proxies for use at
the annual or special meeting of stockholders of Petroglyph (the "Stockholders
Meeting") at which the adoption of this Agreement and the approval of the
transactions contemplated thereby shall be sought. In the Proxy Statement,
subject to the fiduciary duties of its Board of Directors or of the directors
constituting the Special Committee (as determined by such directors in good
faith after consultation with counsel), Petroglyph shall recommend to its
stockholders the approval of the Merger, this Agreement and the transactions
contemplated hereby. Petroglyph shall file the Proxy Statement with the SEC as
soon as is reasonably practicable after the date hereof and shall use all
reasonable efforts to respond to comments from the SEC and to cause the Proxy
Statement to be mailed to Petroglyph's stockholders at the earliest practicable
time.
(b) None of the information to be supplied by
Petroglyph for inclusion in the Proxy Statement shall, at the time of the
mailing of the Proxy Statement and any amendments or supplements thereto,
contain any untrue statement of a material fact or omit to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they are made, not
misleading. The Proxy Statement shall, as of its date, comply as to form in all
material respects with all applicable laws, including the Exchange Act, and the
rules and regulations thereunder. Petroglyph shall not mail, amend or supplement
the Proxy Statement unless the Proxy Statement or any amendment or supplement
thereof shall be satisfactory in content to IIIX in the exercise of its
reasonable judgment.
(c) As soon as practicable after the date of this
Agreement, IIIX and Petroglyph shall file with the SEC, and shall use their
reasonable best efforts to cause any of their respective affiliates engaging in
this transaction to file with the SEC, a Rule 13e-3 Transaction Statement on
Schedule 13E-3 under the Exchange Act (the "Schedule 13E-3 Transaction
Statement") with respect to the Merger. Each of the parties hereto shall agree
to use its reasonable best efforts to cooperate and to provide each other with
such information as any of such parties may reasonably request in connection
with the preparation of the Proxy Statement and the Schedule 13E-3 Transaction
Statement. Each party hereto shall promptly supplement, update and correct any
information provided by it for use in the Proxy Statement and the Schedule 13E-3
Transaction Statement if and to the extent that such information shall be or
shall have become incomplete, false or misleading.
Section 1.11. Additional Agreements and Provisions. Upon the
terms and subject to the conditions of this Agreement and subject to the
fiduciary duties of the directors of Petroglyph or of the directors constituting
the Special Committee (as determined by such directors in good faith after
consultation with counsel), each of the parties hereto shall use its
commercially reasonable best efforts to take, or cause to be taken, all
additional action and to do, or cause to be done, all additional things
necessary, proper or advisable under applicable laws and regulations to
consummate and make effective the transactions contemplated by this Agreement.
If, at any time after the Effective Time, any further action is necessary or
desirable to carry out the purposes of this Agreement or to vest the Surviving
Corporation with full title to all properties, assets, rights, approvals,
immunities and franchises of either Petroglyph or Acquisition, the proper
officers and directors of each corporation that is a party to this Agreement
shall take all such necessary action. The parties hereto shall use their
respective best efforts to challenge any action brought against any of the
parties hereto seeking a temporary restraining order or preliminary or permanent
injunctive relief which would prohibit, or materially interfere with, the
consummation of the transactions contemplated by this Agreement.
APPENDIX A - 5
<PAGE> 137
ARTICLE II.
Representations and Warranties of Petroglyph
Petroglyph hereby represents and warrants to IIIX and Acquisition as follows:
Section 2.1. Organization of Petroglyph and its Subsidiaries.
Each of Petroglyph and its Subsidiaries is a corporation duly organized, validly
existing and in good standing under the laws of its jurisdiction of organization
and has all the requisite corporate power and authority to carry on its business
as now being conducted and to own, lease, use and operate the properties owned
and used by it. Each of Petroglyph and its Subsidiaries is qualified and in good
standing to do business in each jurisdiction in which the nature of its business
requires it to be so qualified, except to the extent the failure to be so
qualified has not had, and would not reasonably be expected to have, a Material
Adverse Effect. The term "Material Adverse Effect" means a material adverse
effect on the business, assets, liabilities, results of operations or financial
condition of Petroglyph and its Subsidiaries, taken as a whole.
Section 2.2. Capitalization of Petroglyph; Ownership. The
authorized capital stock of Petroglyph consists of 25,000,000 shares of
Petroglyph Common Stock, of which 6,458,333 shares are issued and outstanding as
of the date hereof, and 5,000,000 shares of preferred stock, of which 292,915
shares have been designated as Series A Convertible Preferred Stock 262,588
shares of which are issued and outstanding as of the date hereof. All the issued
and outstanding shares of capital stock of Petroglyph are duly authorized,
validly issued, fully paid and non-assessable and free of preemptive rights.
Except for outstanding Petroglyph Options to purchase an aggregate of no more
than 420,000 shares of Petroglyph Common Stock and as disclosed on Schedule 2.2
hereto, there are no outstanding options, warrants or other rights of any kind
to acquire (including preemptive rights) any additional shares of capital stock
of Petroglyph or securities convertible into or exchangeable for, or which
otherwise confer on the holder thereof any right to acquire, any such additional
shares, nor is Petroglyph committed to issue any such option, warrant, right or
security. After the Merger, Petroglyph will not have any obligation to issue,
transfer or sell any shares of its capital stock or other securities of
Petroglyph pursuant to any employee benefit plan or otherwise.
Section 2.3. Subsidiaries of Petroglyph. All shares of capital
stock of each Subsidiary have been validly issued and are fully paid and
non-assessable. There are no outstanding options, warrants or other rights of
any kind to acquire (including preemptive rights) any additional equity
interests of any Subsidiary or securities convertible into or exchangeable for,
or which otherwise confer on the holder thereof any right to acquire, any
additional equity interests of any Subsidiary, nor is any Subsidiary committed
to issue any such option, warrant, right or security. Other than the
Subsidiaries referred to in this Section 2.3, Petroglyph does not own, directly
or indirectly, any equity interest in any other corporation, joint venture,
partnership, limited liability company or other entity.
Section 2.4. Authorization. Petroglyph has all requisite
corporate power and authority to enter into this Agreement and, subject to any
necessary approval of the Merger by the stockholders of Petroglyph, to carry out
its obligations hereunder and to consummate the transactions contemplated
hereby. The execution and delivery of this Agreement and the consummation of the
transactions contemplated hereby have been duly authorized by all requisite
corporate action on the part of Petroglyph (other than the approval of this
Agreement and the transactions contemplated hereby by the stockholders of
Petroglyph). The Board of Directors of Petroglyph has unanimously adopted
resolutions approving this Agreement and the Merger, and has determined that the
terms of the Merger are fair to, and in the best interests of, Petroglyph and
its stockholders. Petroglyph has taken all action necessary to exempt the Merger
and the other transactions contemplated hereby with IIIX, Acquisition and their
affiliates from the operation of the "Business Combination Statute" at Section
203 of the DGCL. This Agreement has been duly executed and delivered by
Petroglyph and, assuming the due authorization, execution and delivery hereof by
IIIX, constitutes the valid and binding obligation of Petroglyph, enforceable
against Petroglyph in accordance with its terms, except as such enforceability
may be limited by applicable bankruptcy, insolvency, reorganization or similar
laws affecting creditors' rights generally or by general equitable principles.
Section 2.5. Fairness Opinion and Approval by the Special
Committee. On or before the date hereof, the Special Committee (i) determined
that the Merger is fair to and in the best interest of the stockholders of
Petroglyph other than IIIX (the "Public Stockholders") and (ii) recommended that
the Board of Directors of Petroglyph
APPENDIX A - 6
<PAGE> 138
approve this Agreement and such transactions. The Special Committee has received
an opinion of Prudential Securities Incorporated to the effect that the
consideration to be received by the Public Stockholders in the Merger is fair to
such stockholders from a financial point of view.
Section 2.6. Brokers and Finders Neither Petroglyph nor any
Subsidiary has employed any broker, finder, advisor or intermediary in
connection with the transactions contemplated by this Agreement which would be
entitled to a broker's, finder's or similar fee or commission in connection
therewith or upon the consummation thereof.
Section 2.7. SEC Documents; Undisclosed Liabilities.
Petroglyph has filed all required reports, schedules, forms, statements and
other documents with the Securities and Exchange Commission (the "SEC") since
January 1, 1998 (the "SEC Documents"). As of their respective dates, the SEC
Documents complied in all material respects with the requirements of the
Securities Act of 1933, as amended (the "Securities Act"), or the Exchange Act,
as the case may be, and the rules and regulations of the SEC thereunder
applicable to such SEC Documents. Except to the extent that information
contained in any SEC Document has been revised or superseded by a later filed
SEC Document, as of their respective dates none of the SEC Documents contained
any untrue statement of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading. The financial statements of Petroglyph included in the SEC Documents
comply as to form in all material respects with applicable accounting
requirements and the published rules and regulations of the SEC with respect
thereto, have been prepared in accordance with GAAP (except, in the case of
unaudited statements, as permitted by applicable instructions or regulations of
the SEC relating to the preparation of quarterly reports on Form 10-Q) applied
on a consistent basis during the period involved (except as may be indicated in
the notes thereto) and fairly present the financial position of Petroglyph as of
the dates thereof and the results of operations and cash flows for the periods
then ended (subject, in the case of unaudited statements, to normal year-end
audit adjustments).
Section 2.8. Absence of Certain Changes or Events. Except as
disclosed in the SEC Documents filed and publicly available before the date of
this Agreement or as discussed at any duly called meeting of the Board of
Directors of Petroglyph at which a quorum was present, since the date of the
most recent audited financial statements included in the filed SEC Documents,
Petroglyph has conducted its business only in the ordinary course, and there has
not been any material adverse change in the business or financial condition of
Petroglyph and its subsidiaries taken as a whole.
Section 2.9. Taxes.
(a) Except as set forth in Schedule 2.9, (i) each of
Petroglyph and its Subsidiaries has timely filed with the appropriate
governmental authorities all Tax Returns (as hereinafter defined) required to be
filed by or with respect to it or its operations or assets, and such Tax Returns
are true, correct and complete, (ii) all Taxes (as hereinafter defined) due with
respect to taxable years for which each of Petroglyph's and its Subsidiaries'
Tax Returns were filed, all Taxes required to be paid on an estimated or
installment basis, and all Taxes required to be withheld with respect to each of
Petroglyph and its Subsidiaries or its employees, operations or assets have been
timely paid or, if applicable, withheld and paid to the appropriate taxing
authority in the manner provided by law, (iii) the reserve for Taxes set forth
on the balance sheet of each of Petroglyph and its Subsidiaries as of December
31, 1999 is adequate in all material respects for the payment of all Taxes
through the date thereof and no Taxes have been incurred after December 31, 1999
which were not incurred in the ordinary course of business, (iv) there are no
liens for Taxes upon the assets of any of Petroglyph or its Subsidiaries, (v) no
federal, state, local or foreign audits, administrative proceedings or court
proceedings are pending with regard to any Taxes or Tax Returns of any of
Petroglyph or its Subsidiaries, and there are no outstanding deficiencies or
assessments asserted or proposed, and any such proceedings, deficiencies or
assessments shown in Schedule 2.9 are being contested in good faith through
appropriate proceedings, and each of Petroglyph and its Subsidiaries has made
available to Acquisition copies of all revenue agent reports (or similar
reports) and related schedules relating to pending income tax audits of each of
Petroglyph and its Subsidiaries, (vi) there are no outstanding agreements,
consents or waivers extending the statutory period of limitations applicable to
the assessment of any Taxes or deficiencies against any of Petroglyph or its
Subsidiaries, or with respect to its operations or assets, no power of attorney
granted by any of Petroglyph or its Subsidiaries with respect to any matter
relating to Taxes is currently in force, and each of Petroglyph and its
Subsidiaries is not a party to any agreement providing for the
APPENDIX A - 7
<PAGE> 139
allocation or sharing of Taxes and (vii) the federal income Tax Returns of each
of Petroglyph and its Subsidiaries have been examined by the IRS (or the
applicable statutes of limitations for the assessment of federal income Taxes
for such periods have expired) for all periods through and including December
31, 1996.
(b) Each of Petroglyph and its Subsidiaries has not
filed a consent to the application of Section 341(f) of the Internal Revenue
Code of 1986, as amended (the "Code").
(c) Each of Petroglyph and its Subsidiaries is not
and has not been a United States real property holding company (as defined in
Section 897(c)(2) of the Code) during the applicable period specified in Section
897(c)(1)(ii) of the Code.
(d) Except as set forth in Schedule 2.9, each of
Petroglyph and its Subsidiaries is not a party to any agreement, contract or
arrangement that could result, separately or in the aggregate, in the payment of
any "excess parachute payments" within the meaning of section 280G of the Code.
(e) For purposes of this Agreement, "Taxes" means all
taxes, charges, fees, levies or other assessments imposed by any United States
federal, state, or local taxing authority or by any non-U.S. taxing authority,
including but not limited to, income, gross receipts, excise, property, sales,
use, transfer, payroll, license, ad valorem, value added, withholding, social
security, national insurance (or other similar contributions or payments),
franchise, estimated, severance, stamp, and other taxes (including any interest,
fines, penalties or additions attributable to or imposed on or with respect to
any such taxes, charges, fees, levies or other assessments).
(f) For purposes of this Agreement, "Tax Return"
means any return, report, information return or other document (including any
related or supporting information and, where applicable, profit and loss
accounts and balance sheets) with respect to Taxes.
ARTICLE III.
Representations and Warranties of IIIX
IIIX hereby represents and warrants to Petroglyph as follows:
Section 3.1. Organization and Authority of Acquisition. At the
Effective Time, Acquisition will be a corporation duly incorporated, validly
existing and in good standing under the laws of the State of Delaware.
Acquisition will be incorporated solely for the purpose of merging with and into
Petroglyph and taking action incident thereto. Except for obligations or
liabilities incurred in connection with the transactions contemplated by this
Agreement or in connection with its organization, at the Effective Time
Acquisition will not have incurred any obligations or liabilities or engaged in
any business activities of any kind.
Section 3.2. Authorization. IIIX has, and Acquisition will
have, all corporate power and authority to enter into this Agreement and to
perform its obligations hereunder and to consummate the transactions
contemplated hereby. The execution and delivery of this Agreement and the
consummation of the transactions contemplated hereby have been (or in the case
of Acquisition, will be) duly authorized by all requisite partnership or
corporate action on the part of IIIX and Acquisition. This Agreement has been
duly executed and delivered by IIIX and, assuming the due authorization,
execution and delivery hereof by Petroglyph, constitutes the valid and binding
obligation of IIIX, enforceable against IIIX in accordance with its terms,
except as such enforceability may be limited by applicable bankruptcy,
insolvency, reorganization, or similar laws affecting creditors' rights
generally or by general equitable principles. Upon consummation of the
Assignment (as hereinafter defined), assuming the due authorization, execution
and delivery hereof by Petroglyph, this Agreement will constitute the valid and
binding obligation of Acquisition, enforceable against Acquisition in accordance
with its terms, except as such enforceability may be limited by applicable
bankruptcy, insolvency, reorganization, or similar laws affecting creditors'
rights generally or by general equitable principles.
APPENDIX A - 8
<PAGE> 140
Section 3.3 Brokers and Intermediaries. IIIX has not, and
Acquisition will not have, employed any broker, finder, advisor or intermediary
in connection with the transactions contemplated by this Agreement which would
be entitled to a broker's, finder's, or similar fee or commission in connection
therewith or upon the consummation thereof. Any such fees shall be the liability
of IIIX or Acquisition.
Section 3.4. Proxy Statement. None of the information to be
supplied by IIIX or Acquisition for inclusion in the Proxy Statement will, at
the time of the mailing of the Proxy Statement and any amendments or supplements
thereto, contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to make the
statements therein, in light of the circumstances under which they are made, not
misleading.
Section 3.5. Financing. IIIX has on the date hereof, and
anticipates that at the Closing it will have, such funds as are necessary for
the consummation by Acquisition of the Merger as contemplated hereby.
ARTICLE IV.
Certain Covenants and Agreements
Section 4.1. Announcement. None of Petroglyph, IIIX or
Acquisition shall issue any press release or otherwise make any public statement
with respect to this Agreement and the transactions contemplated hereby without
the prior consent of the others (which consent shall not be unreasonably
withheld or delayed), except as may be required by applicable law or stock
exchange regulation. Notwithstanding anything in this Section 4.1 to the
contrary, Acquisition, IIIX and Petroglyph shall, to the extent practicable,
consult with each other before issuing, and provide each other the opportunity
to review and comment upon, any such press release or other public statement
with respect to this Agreement and the transactions contemplated hereby, whether
or not required by law.
Section 4.2. Notification of Certain Matters. Petroglyph shall
give prompt notice to IIIX and Acquisition, and IIIX and Acquisition shall give
prompt notice to Petroglyph, of (a) the occurrence or non-occurrence of any
event the occurrence or non-occurrence of which would be reasonably likely to
cause any representation or warranty contained in this Agreement to be untrue or
inaccurate in any material respect at or before the Effective Time and (b) any
material failure of Petroglyph, or of IIIX or Acquisition, as the case may be,
to comply with or satisfy any covenant, condition or agreement to be complied
with or satisfied by it hereunder; provided, however, that the delivery of any
notice pursuant to this Section 4.3 shall not limit or otherwise affect the
remedies available hereunder to the party or parties receiving such notice.
Section 4.3. Directors' And Officers' Indemnification.
(a) The Certificate of Incorporation and the By-laws
of the Surviving Corporation shall contain the provisions with respect to
indemnification and limitation of liability of directors and officers set forth
in Petroglyph's Certificate of Incorporation and By-laws on the date of this
Agreement, which provisions shall not be amended, repealed or otherwise modified
for a period of six years from the Effective Time in any manner that would
adversely affect the rights thereunder of individuals who on or before the
Effective Time were directors or officers of Petroglyph, unless such
modification shall be required by law.
(b) IIIX or the Surviving Corporation shall maintain
in effect for six years from the Effective Time policies of directors' and
officers' liability insurance containing terms and conditions which shall not be
less advantageous to the insured (as defined under the Petroglyph Insurance
Policies (as hereinafter defined)) than any such policies of Petroglyph
currently in effect on the date of this Agreement (the "Petroglyph Insurance
Policies"), with respect to matters occurring before the Effective Time, to the
extent available, and having the maximum available coverage under any such
Petroglyph Insurance Policies; provided, that in no event shall the Surviving
Corporation be required to pay annual premiums for insurance under this Section
4.3(b) in excess of 200% of the annual premiums currently paid by Petroglyph and
provided further, however, that if the annual premiums for such insurance
coverage exceed 200% of the annual premiums currently paid by Petroglyph, the
Surviving Corporation shall be obliged to obtain
APPENDIX A - 9
<PAGE> 141
a policy with the greatest coverage that can be obtained for premiums that are
200% of the annual premiums currently paid by Petroglyph.
Section 4.4. Stockholders Meeting. Petroglyph shall seek and
solicit the requisite vote of stockholders at the Stockholders Meeting for the
adoption and approval of this Agreement and the transactions contemplated
hereby. IIIX shall vote all shares of Petroglyph Common Stock owned by it, and
shall cause Acquisition to vote any and all shares of Petroglyph Common Stock
that Acquisition may own, at the Stockholders Meeting in favor of the adoption
and approval of this Agreement and the transactions contemplated hereby.
Section 4.5. Obligations of Acquisition. IIIX shall take all
actions necessary to cause Acquisition to perform its obligations in accordance
with the terms, and subject to the conditions, of this Agreement.
Section 4.6. Petroglyph Interim Operations. During the period
from the date of this Agreement and continuing until the earlier of the
termination of this Agreement and the Effective Time, Petroglyph shall (except
to the extent that IIIX shall otherwise have previously consented in writing)
carry on its business and the business of its Subsidiaries in the usual, regular
and ordinary course in substantially the same manner as heretofore conducted,
pay, to the extent it is able, its debts and taxes when due (unless debts and
taxes are subject to a dispute that Petroglyph is reasonably and actively
seeking to resolve), pay or perform, to the extent it is able, other obligations
when due (unless such obligations are the subject of a dispute that Petroglyph
is actively seeking to resolve) and, to the extent consistent with such
businesses, use its reasonable efforts consistent with past practice and
policies to preserve intact its present business organizations, keep available
the services of its present officers and key employees, to maintain in effect
all material foreign, federal, state and local licenses, approvals and
authorizations, including, without limitation, all material licenses and permits
that are required for Petroglyph or any of its Subsidiaries to carry on its
business and preserve its relationships with customers, suppliers, distributors,
licensors, licensees, and others having business dealings with it, all with the
goal of preserving Petroglyph's goodwill and ongoing business at the Effective
Time, and shall refrain from taking such action that would cause any of the
conditions contained in Article V hereof not to be satisfied; provided, however,
that the parties hereby acknowledge that Petroglyph currently has a negative net
cash working capital position of approximately $2 million. Without limiting the
generality of the foregoing, except as otherwise contemplated by this Agreement,
from the date hereof until the Effective Time, without the prior written consent
of IIIX, Petroglyph shall not, nor shall it permit any Subsidiary to:
(a) acquire or dispose of (by merger, consolidation,
acquisition of stock or assets or otherwise), directly or indirectly, any
assets, other than (i) pursuant to agreements that are in effect as of the date
hereof and that have been disclosed to IIIX in writing prior to the date hereof,
(ii) assets used in the ordinary course of business, including sales of oil and
gas products, in a manner that is consistent with past practice or (iii)
approved by the Petroglyph Board of Directors; or
(b) incur, assume or guarantee any indebtedness for
borrowed money other than pursuant to Petroglyph's credit facility with Chase
Manhattan Bank (up to amounts available under such credit facility on the date
hereof);
provided, however, that the parties hereby acknowledge that Petroglyph, with the
approval of IIIX, intends to seek additional debt financing.
ARTICLE V.
Conditions Precedent
Section 5.1. Conditions to Each Party's Obligation to Effect
the Merger. The respective obligation of each party to effect the Merger shall
be subject to the satisfaction on or before the Closing Date of each of the
following conditions (any of which may be waived by the parties hereto in
writing, in whole or in part, to the extent permitted by applicable law):
APPENDIX A - 10
<PAGE> 142
(a) No Injunction or Proceeding. No preliminary or
permanent injunction, temporary restraining order or other decree of a court,
legislature or other agency or instrumentality of federal, state or local
government (a "Governmental Entity") shall be in effect, no statute, rule or
regulation shall have been enacted by a Governmental Entity and no action, suit
or proceeding by any Governmental Entity shall have been instituted or
threatened, which shall prohibit the consummation of the Merger or shall
materially challenge the transactions contemplated hereby.
(b) Consents. Except for the filing of the
Certificate of Merger, all consents, approvals and authorizations of and filings
with Governmental Entities required for the consummation of the transactions
contemplated hereby shall have been obtained or effected or filed.
(c) Approval of Holders of Petroglyph Common Stock.
This Agreement and the Merger shall have been adopted by the affirmative vote or
written consent of a majority of the shares of Petroglyph Common Stock
outstanding.
(d) Consent of Chase Manhattan Bank. Chase Manhattan
Bank, as lender under the Credit Agreement, dated as of September 30, 1998,
between Chase Manhattan Bank and Petroglyph, shall have consented to the Merger.
(e) Recommendation of the Special Committee. The
Special Committee shall not have withdrawn its recommendation that (i) the
Merger is fair to and in the best interest of the Public Stockholders and (ii)
the Board of Directors of Petroglyph approve this Agreement and such
transactions.
Section 5.2. Conditions to the Obligation of Petroglyph to
Effect the Merger. The obligation of Petroglyph to effect the Merger is further
subject to the satisfaction or waiver of each of the following conditions before
or at the Closing Date:
(a) Representations and Warranties. The
representations and warranties of IIIX contained in this Agreement shall be true
and correct in all material respects at and as of the Effective Time as though
made at and as of the Effective Time, and Petroglyph shall have received a
certificate of the President of IIIX to that effect.
(b) Agreements. IIIX and Acquisition shall have
performed and complied in all material respects with all their undertakings and
agreements required by this Agreement to be performed or complied with by them
before or at the Closing Date.
Section 5.3. Conditions to the Obligation of Acquisition to
Effect the Merger. The obligation of Acquisition to effect the Merger is further
subject to the satisfaction or waiver of each of the following conditions before
or at the Closing Date:
(a) Representations and Warranties. The
representations and warranties of Petroglyph contained in this Agreement shall
be true and correct in all material respects at and as of the Effective Time as
though made at and as of the Effective Time, and Acquisition shall have received
a certificate of the President and Chief Executive Officer of Petroglyph to that
effect.
(b) Agreements. Petroglyph shall have performed and
complied in all material respects with all of undertakings and agreements
required by this Agreement to be performed or complied with by it before or at
the Closing Date.
(c) No Material Adverse Change. Except as set forth
in the Petroglyph SEC Reports filed on or before the date of this Agreement or
as discussed at any duly called meeting of the Board of Directors of Petroglyph
at which a quorum was present, since December 31, 1999 there shall not have been
any material adverse change in the business, assets, liabilities, results of
operations or financial condition of Petroglyph and its Subsidiaries, taken as a
whole.
APPENDIX A - 11
<PAGE> 143
(d) Appraisal Rights. The holders of not more than
10% of the issued and outstanding shares of Petroglyph Common Stock shall have
exercised their rights to dissent from the Merger in accordance with Section 262
of the DGCL and pursuant to Section 1.7 of this Agreement.
(e) Indebtedness of Petroglyph. Except as otherwise
provided in this Agreement or approved by IIIX, the gross aggregate amount of
all indebtedness (including, without limitation, capitalized leases (but
specifically excluding any obligations under Petroglyph's agreements with
Colorado Interstate Gas), senior subordinated notes issued to IIIX, Petroglyph's
credit facility with Chase Manhattan Bank and the loan agreement between
Petroglyph and IIIX, and all accrued and unpaid interest on such amounts) of
Petroglyph and its Subsidiaries shall not, on the Closing Date, exceed $19
million.
ARTICLE VI.
Termination, Amendment and Waiver
Section 6.1. Termination. This Agreement may be terminated and
the Merger may be abandoned at any time before the Effective Time, whether
before or after stockholder approval thereof:
(a) by the mutual written consent of IIIX (or
Acquisition, after its formation) and Petroglyph (with the approval of the
Special Committee);
(b) by either IIIX (or Acquisition, after its
formation) or Petroglyph (with the approval of the Special Committee), in each
case by written notice to the other, if:
(i) the Merger shall have not been
consummated on or before September 15, 2000; provided, however, that the right
to terminate this Agreement under this Section 6.1(b)(i) shall not be available
to any party whose failure to fulfill any obligation under this Agreement has
been the cause of, or resulted in, the failure of the Merger to occur on or
before such date; or
(ii) the Special Committee shall have
withdrawn, or modified or changed in any manner adverse to Acquisition its
approval of this Agreement or the Merger after having concluded to do so in good
faith after consultation with independent legal counsel that there is a
reasonable probability that the failure to take such action would result in a
violation of its fiduciary obligations under applicable law.
Section 6.2. Effect of Termination. If this Agreement shall be
terminated as provided in Section 6.1, this Agreement shall become null and
void, and there shall be no liability on the part of IIIX, Acquisition or
Petroglyph (except as set forth in Section 7.2 hereof, which shall survive any
termination of this Agreement); provided, however, that nothing herein shall
relieve any party from any liability or obligation with respect to any breach of
this Agreement.
Section 6.3. Amendment. This Agreement may be amended in
writing by the parties hereto; provided, however, that any amendment of this
Agreement after approval by the stockholders of Petroglyph at the Stockholders
Meeting that, in the judgment of the Special Committee, shall adversely affect
in any material respect the rights of stockholders under this Agreement shall
require the prior approval of the stockholders of Petroglyph.
Section 6.4. Waiver. At any time before the Effective Time,
whether before or after the approval of the holders of Petroglyph Common Stock
referred to in Section 5.1(c) hereof, either party may (i) extend the time for
the performance of any of the obligations or other acts of the other party
hereto or (ii) waive compliance with any of the agreements of the other party or
fulfillment of any conditions to its own obligations hereunder. Any agreement on
the part of a party hereto to any such extension or waiver shall be valid only
if set forth in an instrument in writing signed on behalf of such party by a
duly authorized officer.
Section 6.5. Approval of Special Committee Required. The
approval of the Special Committee shall be required for (i) any amendment or
modification of this Agreement that adversely affects in any material respect
the rights of stockholders under this Agreement, (ii) any waiver of any
condition to the obligations of Petroglyph under Sections 5.1(e), 5.2(a) or
5.2(b) hereof and (iii) any waiver of Petroglyph's rights under this Agreement.
APPENDIX A - 12
<PAGE> 144
ARTICLE VII.
Miscellaneous
Section 7.1. Non-Survival of Representations and Warranties.
None of the representations and warranties in this Agreement or in any
instrument delivered pursuant to this Agreement shall survive the Effective
Time, and neither IIIX, Acquisition or Petroglyph, nor any of their respective
officers, directors or employees or stockholders, shall have any liability
whatsoever with respect to any such representation or warranty after such time.
This Section 7.1 shall not limit any covenant or agreement of the parties which
by its terms contemplates performance after the Effective Time.
Section 7.2. Expenses. Except as contemplated by this
Agreement, all costs and expenses incurred in connection with the Agreement and
the consummation of the transactions contemplated hereby shall be the obligation
of the party incurring such expenses. All costs and expenses incurred by IIIX or
Acquisition in connection with the Agreement and the consummation of the
transactions contemplated hereby shall, after the Effective Time, be obligations
of the Surviving Corporation.
Section 7.3. Applicable Law. This Agreement shall be governed
by the law of the State of Delaware without regard to the laws that might apply
under otherwise applicable choice-of-law principles.
Section 7.4. Notices. All notices and other communications
hereunder shall be in writing and shall be deemed to have been duly given or
made as follows: (a) if sent by registered or certified mail in the United
States return receipt requested, upon receipt; (b) if sent by reputable
overnight air courier, two business days after being so sent; (c) if sent by
telecopy transmission, with a copy mailed on the same day in the manner provided
in clauses (a) or (b) above, when transmitted and receipt is confirmed by
telephone; or (d) if otherwise actually personally delivered, when delivered,
and shall be sent or delivered as follows:
If to Petroglyph, to:
c/o Petroglyph Energy, Inc.
1302 N. Grand
Hutchinson, KS 67501
Attention: Robert C. Murdock
President
Facsimile: (316) 665-0687
with copies (which shall not constitute notice) to:
Roger Walter, Esq.
Morris, Laing, Evans, Brock &
Kennedy, Chtd.
800 S.W. Jackson, Ste. 914
Topeka, KS 66612
Facsimile: (785) 232-9883
and
Craig N. Adams, Esq.
Thompson & Knight LLP
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201
Facsimile: (214) 969-1751
APPENDIX A - 13
<PAGE> 145
If to IIIX or Acquisition, to:
c/o Intermountain Industries, Inc.
555 S. Cole Road
P.O. Box 7608
Boise, ID 83707
Facsimile: (208) 377-6097
with copies (which shall not constitute notice) to:
Roger D. Blanc, Esq.
Willkie Farr & Gallagher
787 Seventh Avenue
New York, NY 10019
Facsimile: (212) 728-8111
and
Eugene C. Thomas
Moffatt, Thomas. Barrett, Rock & Fields, Chtd.
US Bank Plaza Building
101 S. Capitol Blvd., 10th Floor
Boise, ID 83701-0829
Facsimile: (208) 385-5384
Such names and addresses may be changed by such notice.
Section 7.5. Entire Agreement. This Agreement (including the
documents and instruments referred to herein) contains the entire understanding
of the parties hereto with respect to the subject matter contained herein, and
supersedes and cancels all prior agreements, negotiations, correspondence,
undertakings and communications of the parties, oral or written, respecting such
subject matter.
Section 7.6. Assignment. Neither this Agreement nor any of the
rights, interests or obligations hereunder shall be assigned by any either party
hereto (whether by operation of law or otherwise) without the prior written
consent of the other party; provided, however, that promptly following the
formation of Acquisition, IIIX shall assign to Acquisition (the "Assignment")
its rights, interests and obligations hereunder, and Acquisition shall assume
and succeed to such rights, interests and obligations; provided that such
assignment shall not relieve IIIX of its obligations to cause the Merger to be
consummated pursuant to and in accordance with the terms of this Agreement. This
Section 7.6 shall survive any termination of this Agreement.
Section 7.7. Headings; References. The article, section and
paragraph headings contained in this Agreement are for reference purposes only
and shall not affect in any way the meaning or interpretation of this Agreement.
Section 7.8. Counterparts. This Agreement may be executed in
one or more counterparts, each of which shall be deemed to be an original but
all of which shall be considered one and the same agreement.
Section 7.9. No Third-Party Beneficiaries. Except as provided
in Sections 1.9 and 4.3, nothing in this Agreement, express or implied, is
intended to confer upon any Person not a party to this Agreement any rights or
remedies under or by reason of this Agreement.
Section 7.10. Severability; Enforcement. Any term or provision
of this Agreement that is invalid or unenforceable in any jurisdiction shall, as
to that jurisdiction, be ineffective to the extent of such invalidity or
unenforceability without rendering invalid or unenforceable the remaining terms
and provisions of this Agreement or
APPENDIX A - 14
<PAGE> 146
affecting the validity or unenforceability of any of the terms or provisions of
this Agreement in any other jurisdiction and such provision shall be deemed to
have been replaced in such jurisdiction by the provisions enforceable in such
jurisdiction that shall most nearly express the intent and achieve the
commercial effect of the unenforceable provision. If any provision of this
Agreement is so broad as to be unenforceable, the provisions shall be
interpreted to be only so broad as is enforceable.
[THE NEXT PAGE IS THE SIGNATURE PAGE]
APPENDIX A - 15
<PAGE> 147
IN WITNESS WHEREOF, the parties hereto have duly executed this
Agreement as of the date first above written.
PETROGLYPH ENERGY, INC.
By: /S/ ROBERT C. MURDOCK
------------------------
Name: Robert C. Murdock
Title: President
III EXPLORATION COMPANY
By: /S/ WILLIAM C. GLYNN
------------------------
Name: William C. Glynn
Title: President
[SIGNATURE PAGE TO AGREEMENT AND PLAN OF MERGER]
APPENDIX A - 16
<PAGE> 148
EXECUTION COPY
AMENDMENT NO. 1 TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT NO. 1 TO THE AGREEMENT AND PLAN OF MERGER (this
"Amendment") is made and entered into as of August 24, 2000, by and between III
Exploration Company, an Idaho corporation ("IIIX") and Petroglyph Energy, Inc.,
a Delaware corporation company ("Petroglyph").
RECITALS
WHEREAS, on June 20, 2000, IIIX and Petroglyph entered into an
Agreement and Plan of Merger (the "Merger Agreement") pursuant to which, upon
the terms and subject to the conditions of the Merger Agreement and in
accordance with the DGCL (such term, and other capitalized terms used in this
Amendment without being otherwise defined having the meanings assigned thereto
in the Merger Agreement), IIIX and Petroglyph have agreed to consummate the
Merger; and
WHEREAS, IIIX and Petroglyph now desire to amend certain terms
contained in the Merger Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, and the
covenants, promises and representations set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and accepted, the parties hereto hereby agree as follows:
1. Section 1.5 of the Merger Agreement is hereby amended by
deleting clause (b) in its entirety and adding the following in place
thereof:
"(b) the board of directors of the Surviving Corporation
immediately following the consummation of the Merger shall be comprised
of the directors of Petroglyph immediately prior to the consummation of
the Merger plus an additional 6 or more directors to be designated by
IIIX prior to the consummation of the Merger (and the By-laws of
Petroglyph shall be amended as promptly as practicable after the date
hereof to permit the expansion of the board of directors to up to
fifteen members); and"
2. Section 6.1(a)(i) of the Merger Agreement is hereby amended
by deleting the date "September 15, 2000" and replacing it with
"November 30, 2000."
3. This Amendment may be executed in one or more counterparts,
all of which shall be considered one and the same agreement and shall
become effective when one or more counterparts have been signed by each
of the parties hereto and delivered to the other party hereto, it being
understood that each party hereto need not sign the same counterpart.
APPENDIX A - 17
<PAGE> 149
4. Except as expressly modified hereby, all of the
representations, warranties, terms, covenants, conditions and other
provisions of the Merger Agreement shall remain in full force and
effect in accordance with their respective terms, and the provisions in
Article VII of the Merger Agreement shall apply to this Amendment.
[Remainder of Page Intentionally Left Blank]
APPENDIX A - 18
<PAGE> 150
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
executed by their duly authorized respective officers, as of the date first
above written.
III EXPLORATION COMPANY
By: /S/ WILLIAM C. GLYNN
----------------------
Name: William C. Glynn
Title: President
PETROGLYPH ENERGY, INC.
By: /S/ ROBERT C. MURDOCK
----------------------
Name: Robert C. Murdock
Title: President
APPENDIX A - 19
<PAGE> 151
AMENDMENT NO. 2 TO
AGREEMENT AND PLAN OF MERGER
THIS AMENDMENT NO. 2 TO THE AGREEMENT AND PLAN OF MERGER (this
"Amendment") is made and entered into as of November 22, 2000, by and between
III Exploration Company, an Idaho corporation ("IIIX"), and Petroglyph Energy,
Inc., a Delaware corporation company ("Petroglyph").
RECITALS
WHEREAS, on June 20, 2000, IIIX and Petroglyph entered into an
Agreement and Plan of Merger, as amended by amendment dated August 24, 2000 (the
"Merger Agreement"), pursuant to which, upon the terms and subject to the
conditions of the Merger Agreement and in accordance with the DGCL (such term,
and other capitalized terms used in this Amendment without being otherwise
defined, having the meanings assigned thereto in the Merger Agreement), IIIX and
Petroglyph have agreed to consummate the Merger; and
WHEREAS, IIIX and Petroglyph now desire to amend certain terms
contained in the Merger Agreement.
NOW, THEREFORE, in consideration of the foregoing premises, and the
covenants, promises and representations set forth herein, and for other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged and accepted, the parties hereto hereby agree as follows:
1. Section 5.3 of the Merger Agreement is hereby amended by
deleting clause (e) in its entirety and adding the following in place
thereof:
"(e) Indebtedness of Petroglyph. Except as otherwise provided
in this Agreement or approved by IIIX, the gross aggregate amount of
all indebtedness (including, without limitation, capitalized leases
(but specifically excluding any obligations under Petroglyph's
agreements with Colorado Interstate Gas), senior subordinated notes
issued to IIIX, Petroglyph's credit facility with Intermountain
Industries, Inc. (formerly with Chase Manhattan Bank) and the loan
agreement between Petroglyph and IIIX, and all accrued and unpaid
interest on such amounts) of Petroglyph and its Subsidiaries shall not,
on the Closing Date, exceed $26 million.
2. Section 6.1(a)(i) of the Merger Agreement is hereby amended
by deleting the date "November 30, 2000" and replacing it with
"December 31, 2000."
3. This Amendment may be executed in one or more counterparts,
all of which shall be considered one and the same agreement and shall
become effective when one or more counterparts have been signed by each
of the parties hereto and delivered to the other party hereto, it being
understood that each party hereto need not sign the same counterpart.
APPENDIX A - 20
<PAGE> 152
4. Except as expressly modified hereby, all of the
representations, warranties, terms, covenants, conditions and other
provisions of the Merger Agreement shall remain in full force and
effect in accordance with their respective terms, and the provisions in
Article VII of the Merger Agreement shall apply to this Amendment.
[Remainder of Page Intentionally Left Blank]
APPENDIX A - 21
<PAGE> 153
IN WITNESS WHEREOF, the undersigned have caused this Amendment to be
executed by their duly authorized respective officers, as of the date first
above written.
III EXPLORATION COMPANY
By: /s/ WILLIAM C. GLYNN
----------------------
Name: William C. Glynn
Title: President
PETROGLYPH ENERGY, INC.
By: /s/ ROBERT C. MURDOCK
----------------------
Name: Robert C. Murdock
Title: President
APPENDIX A - 22
<PAGE> 154
APPENDIX B
FAIRNESS OPINION
OF
PRUDENTIAL SECURITIES INCORPORATED
Prudential Securities Incorporated
One New York Plaza, New York, NY 10292
(212) 778-1000
PRIVATE AND CONFIDENTIAL
June 19, 2000
Special Committee of the Board of Directors
Petroglyph Energy, Inc.
1302 North Grand
Hutchinson, KS 67501
Members of the Special Committee of the Board of Directors:
We understand that III Exploration Company, an Idaho corporation
("IIIX"), and Petroglyph Energy, Inc., a Delaware corporation (the "Company"),
propose to enter into an Agreement and Plan of Merger (the "Merger Agreement")
whereby IIIX will acquire all the issued and outstanding shares of Company
common stock, per value $.01 per share ("Company Common Stock") (other than
Company Common Stock owned by IIIX or its affiliates), for $2.85 per share in
cash (the "Cash Consideration") by forming a Delaware corporation ("Merger Sub")
and merging Merger Sub with and into the Company (the "Merger").
You have requested our opinion as to the fairness, from a financial
point of view, of the Cash Consideration to be received by the stockholders of
the Company (other than IIIX and its affiliates) in the Merger.
In conducting our analysis and arriving at the opinion expressed
herein, we have reviewed such materials and considered such financial and other
factors we deemed relevant under the circumstances, including:
(i) the offer letter from Intermountain Industries, Inc., sole
stockholder of IIIX, dated May 3, 2000;
(ii) an amendment to the offer letter dated May 16, 2000;
(iii) a draft of the Merger Agreement dated June 14, 2000;
(iv) certain historical financial, operating and reserve data
concerning the Company including, but not limited to: (a) the
Annual Report on Form 10-K for the fiscal year ended December
31, 1999; (b) the Quarterly Report on Form 10-Q for the
quarterly period ended March 31, 2000; (c) the Proxy Statement
for the Annual Meeting of Stockholders held on May 31, 2000;
(d) the Proxy Statement for the Special Meeting of
Stockholders held on February 15, 2000;
APPENDIX B - 1
<PAGE> 155
(e) the Company's reserve report audited by Lee Keeling &
Associates as of January 1, 2000; (f) the Company's internal
reserve reports as of January 2000 and April 2000; and (g) the
Company's acquired property reserve report as of July 1, 1999.
(v) certain information relating to the Company, including
financial forecasts for the fiscal years 2000 through 2002,
prepared by the management of the Company;
(vi) publicly available financial, operating and stock market data
concerning certain companies engaged in businesses we deemed
comparable to the Company or otherwise relevant to our
inquiry;
(vii) the financial terms of certain recent transactions, including
"going private" transactions, we deemed relevant to our
inquiry;
(viii) the historical stock prices and trading volumes of Company
Common Stock; and
(ix) such other financial studies, analyses and investigations that
we deemed appropriate.
We have assumed, with your consent, that the draft of the Merger
Agreement, which we reviewed will conform in all material respects to that
document when in final form.
We have met with the senior management of the Company to discuss: (i)
the past and current operating and financial condition of the Company; (ii) the
prospects for the Company; (iii) their estimates of the Company's future
financial performance; and (iv) such other matters that we deemed relevant.
In connection with our review and analysis and in arriving at our
opinion, we have relied upon the accuracy and completeness of the financial and
other information that is publicly available or was provided to us by the
Company and we have not undertaken any independent verification of such
information or any independent valuation or appraisal of any of the assets or
liabilities of the Company.
With respect to certain financial forecasts provided to us by senior
management of the Company, we have assumed that such information (and the
assumptions and bases therefor) represents senior management's best currently
available estimate as to the future financial performance of the Company. Our
opinion is necessarily based on economic, financial and market conditions as
they exist and can only be evaluated as of the date hereof and we assume no
responsibility to update or revise our opinion based upon events or
circumstances occurring after the date hereof.
Our opinion does not address nor should it be construed to address the
relative merits of the Merger or alternative business strategies that may be
available to the Company. In addition, our opinion does not address the fairness
of the Merger to IIIX with regard to the 3,753,392 shares of Company Common
Stock currently owned by IIIX or the 150,000 shares of Company Common Stock
issuable upon exercise of warrants owned by IIIX.
As you know, we have been retained by the Company to render this
opinion and will receive a fee upon rendering this opinion. In the past, we have
provided financing and advisory services to the Company and have received fees
for such services. In the ordinary course of business we may actively trade the
shares of Company Common Stock for our own account and for the accounts of
customers and, accordingly, may at any time hold a long or short position in
such securities.
APPENDIX B - 2
<PAGE> 156
This letter and the opinion expressed herein are for the use of the
Special Committee of the Board of Directors of the Company. This opinion does
not constitute a recommendation to the stockholders of the Company as to how
such stockholders should vote regarding the Merger or as to any other action
such stockholders should take regarding the Merger. This opinion may not be
reproduced, summarized, excerpted from or otherwise publicly referred to or
disclosed in any manner without our prior written consent; except that the
Company may include this opinion in its entirety in any proxy statement or other
document distributed to the Company's stockholders and filed with the Securities
and Exchange Commission.
Based upon and subject to the foregoing, we are of the opinion that, as
of the date hereof, the Cash Consideration to be received by the stockholders of
the Company (other than IIIX and its affiliates) in the Merger is fair from a
financial point of view.
Very truly yours,
/s/ HOWARD W. HOUSE
PRUDENTIAL SECURITIES INCORPORATED
APPENDIX B - 3
<PAGE> 157
APPENDIX C
DELAWARE APPRAISAL RIGHTS STATUTE
(a) Any stockholder of a corporation of this State who holds shares of
stock on the date of the making of a demand pursuant to subsection (d)
of this section with respect to such shares, who continuously holds
such shares through the effective date of the merger or consolidation,
who has otherwise complied with subsection (d) of this section and who
has neither voted in favor of the merger or consolidation nor consented
thereto in writing pursuant to 8 Del. C. Section 228 of this title
shall be entitled to an appraisal by the Court of Chancery of the fair
value of the stockholder's shares of stock under the circumstances
described in subsections (b) and (c) of this section. As used in this
section, the word "stockholder" means a holder of record of stock in a
stock corporation and also a member of record of a nonstock
corporation; the words "stock" and "share" mean and include what is
ordinarily meant by those words and also membership or membership
interest of a member of a nonstock corporation; and the words
"depository receipt" mean a receipt or other instrument issued by a
depository representing an interest in one or more shares, or fractions
thereof, solely of stock of a corporation, which stock is deposited
with the depository.
(b) Appraisal rights shall be available for the shares of any class or
series of stock of a constituent corporation in a merger or
consolidation to be effected pursuant to Section Section 251 (other
than a merger effected pursuant to 8 Del. C. Section 251(g) of this
title), Section 252, Section 254, Section 257, Section 258, Section 263
or 8 Del. C. Section 264 of this title:
(1) Provided, however, that no appraisal rights under this section
shall be available for the shares of any class or series of
stock, which stock, or depository receipts in respect thereof,
at the record date fixed to determine the stockholders
entitled to receive notice of and to vote at the meeting of
stockholders to act upon the agreement of merger or
consolidation, were either (i) listed on a national securities
exchange or designated as a national market system security on
an interdealer quotation system by the National Association of
Securities Dealers, Inc. or (ii) held of record by more than
2,000 holders; and further provided that no appraisal rights
shall be available for any shares of stock of the constituent
corporation surviving a merger if the merger did not require
for its approval the vote of the stockholders of the surviving
corporation as provided in subsection (f) of 8 Del. C. Section
251 of this title.
(2) Notwithstanding paragraph (1) of this subsection, appraisal
rights under this section shall be available for the shares of
any class or series of stock of a constituent corporation if
the holders thereof are required by the terms of an agreement
of merger or consolidation pursuant to Section Section 251,
252, 254, 257, 258, 263 and 264 of this title to accept for
such stock anything except:
a. Shares of stock of the corporation surviving or
resulting from such merger or consolidation, or
depository receipts in respect thereof;
b. Shares of stock of any other corporation, or
depository receipts in respect thereof, which shares
of stock (or depository receipts in respect thereof)
or depository receipts at the effective date of the
merger or consolidation will be either listed on a
national securities exchange or designated as a
national market system security on an interdealer
quotation system by the National Association of
Securities Dealers, Inc. or held of record by more
than 2,000 holders;
c. Cash in lieu of fractional shares or fractional
depository receipts described in the foregoing
subparagraphs a. and b. of this paragraph; or d. Any
combination of the shares of stock, depository
receipts and cash in lieu of fractional shares or
fractional depository receipts described in the
foregoing subparagraphs a., b. and c. of this
paragraph.
(3) In the event all of the stock of a subsidiary Delaware
corporation party to a merger effected under 8 Del. C. Section
253 of this title is not owned by the parent corporation
immediately prior to the merger, appraisal rights shall be
available for the shares of the subsidiary Delaware
corporation.
(c) Any corporation may provide in its certificate of incorporation that
appraisal rights under this section shall be available for the shares
of any class or series of its stock as a result of an amendment to its
certificate of incorporation, any merger or consolidation in which the
corporation is a constituent corporation or the sale of all or
substantially all of the assets of the corporation. If the certificate
of incorporation contains such a provision, the procedures of this
section, including those set forth in subsections (d) and (e) of this
section, shall apply as nearly as is practicable.
APPENDIX C - 1
<PAGE> 158
(d) Appraisal rights shall be perfected as follows:
(1) If a proposed merger or consolidation for which appraisal
rights are provided under this section is to be submitted for
approval at a meeting of stockholders, the corporation, not
less than 20 days prior to the meeting, shall notify each of
its stockholders who was such on the record date for such
meeting with respect to shares for which appraisal rights are
available pursuant to subsection (b) or (c) hereof that
appraisal rights are available for any or all of the shares of
the constituent corporations, and shall include in such notice
a copy of this section. Each stockholder electing to demand
the appraisal of such stockholder's shares shall deliver to
the corporation, before the taking of the vote on the merger
or consolidation, a written demand for appraisal of such
stockholder's shares. Such demand will be sufficient if it
reasonably informs the corporation of the identity of the
stockholder and that the stockholder intends thereby to demand
the appraisal of such stockholder's shares. A proxy or vote
against the merger or consolidation shall not constitute such
a demand. A stockholder electing to take such action must do
so by a separate written demand as herein provided. Within 10
days after the effective date of such merger or consolidation,
the surviving or resulting corporation shall notify each
stockholder of each constituent corporation who has complied
with this subsection and has not voted in favor of or
consented to the merger or consolidation of the date that the
merger or consolidation has become effective; or
(2) If the merger or consolidation was approved pursuant to
Section 228 or 8 Del. C. Section 253 of this title, each
constituent corporation, either before the effective date of
the merger or consolidation or within ten days thereafter,
shall notify each of the holders of any class or series of
stock of such constituent corporation who are entitled to
appraisal rights of the approval of the merger or
consolidation and that appraisal rights are available for any
or all shares of such class or series of stock of such
constituent corporation, and shall include in such notice a
copy of this section; provided that, if the notice is given on
or after the effective date of the merger or consolidation,
such notice shall be given by the surviving or resulting
corporation to all such holders of any class or series of
stock of a constituent corporation that are entitled to
appraisal rights. Such notice may, and, if given on or after
the effective date of the merger or consolidation, shall, also
notify such stockholders of the effective date of the merger
or consolidation. Any stockholder entitled to appraisal rights
may, within 20 days after the date of mailing of such notice,
demand in writing from the surviving or resulting corporation
the appraisal of such holder's shares. Such demand will be
sufficient if it reasonably informs the corporation of the
identity of the stockholder and that the stockholder intends
thereby to demand the appraisal of such holder's shares. If
such notice did not notify stockholders of the effective date
of the merger or consolidation, either (i) each such
constituent corporation shall send a second notice before the
effective date of the merger or consolidation notifying each
of the holders of any class or series of stock of such
constituent corporation that are entitled to appraisal rights
of the effective date of the merger or consolidation or (ii)
the surviving or resulting corporation shall send such a
second notice to all such holders on or within 10 days after
such effective date; provided, however, that if such second
notice is sent more than 20 days following the sending of the
first notice, such second notice need only be sent to each
stockholder who is entitled to appraisal rights and who has
demanded appraisal of such holder's shares in accordance with
this subsection. An affidavit of the secretary or assistant
secretary or of the transfer agent of the corporation that is
required to give either notice that such notice has been given
shall, in the absence of fraud, be prima facie evidence of the
facts stated therein. For purposes of determining the
stockholders entitled to receive either notice, each
constituent corporation may fix, in advance, a record date
that shall be not more than 10 days prior to the date the
notice is given, provided, that if the notice is given on or
after the effective date of the merger or consolidation, the
record date shall be such effective date. If no record date is
fixed and the notice is given prior to the effective date, the
record date shall be the close of business on the day next
preceding the day on which the notice is given.
(e) Within 120 days after the effective date of the merger or
consolidation, the surviving or resulting corporation or any
stockholder who has complied with subsections (a) and (d) hereof and
who is otherwise entitled to appraisal rights, may file a petition in
the Court of Chancery demanding a determination of the value of the
stock of all such stockholders. Notwithstanding the foregoing, at any
time within 60 days after the effective date of the merger or
consolidation, any stockholder shall have the right to withdraw such
stockholder's demand for appraisal and to accept the terms offered upon
the merger or consolidation. Within 120 days after the effective date
of the merger or consolidation, any stockholder who has complied with
the requirements of subsections
APPENDIX C - 2
<PAGE> 159
(a) and (d) hereof, upon written request, shall be entitled to receive
from the corporation surviving the merger or resulting from the
consolidation a statement setting forth the aggregate number of shares
not voted in favor of the merger or consolidation and with respect to
which demands for appraisal have been received and the aggregate number
of holders of such shares. Such written statement shall be mailed to
the stockholder within 10 days after such stockholder's written request
for such a statement is received by the surviving or resulting
corporation or within 10 days after expiration of the period for
delivery of demands for appraisal under subsection (d) hereof,
whichever is later.
(f) Upon the filing of any such petition by a stockholder, service of a
copy thereof shall be made upon the surviving or resulting corporation,
which shall within 20 days after such service file in the office of the
Register in Chancery in which the petition was filed a duly verified
list containing the names and addresses of all stockholders who have
demanded payment for their shares and with whom agreements as to the
value of their shares have not been reached by the surviving or
resulting corporation. If the petition shall be filed by the surviving
or resulting corporation, the petition shall be accompanied by such a
duly verified list. The Register in Chancery, if so ordered by the
Court, shall give notice of the time and place fixed for the hearing of
such petition by registered or certified mail to the surviving or
resulting corporation and to the stockholders shown on the list at the
addresses therein stated. Such notice shall also be given by 1 or more
publications at least 1 week before the day of the hearing, in a
newspaper of general circulation published in the City of Wilmington,
Delaware or such publication as the Court deems advisable. The forms of
the notices by mail and by publication shall be approved by the Court,
and the costs thereof shall be borne by the surviving or resulting
corporation.
(g) At the hearing on such petition, the Court shall determine the
stockholders who have complied with this section and who have become
entitled to appraisal rights. The Court may require the stockholders
who have demanded an appraisal for their shares and who hold stock
represented by certificates to submit their certificates of stock to
the Register in Chancery for notation thereon of the pendency of the
appraisal proceedings; and if any stockholder fails to comply with such
direction, the Court may dismiss the proceedings as to such
stockholder.
(h) After determining the stockholders entitled to an appraisal, the Court
shall appraise the shares, determining their fair value exclusive of
any element of value arising from the accomplishment or expectation of
the merger or consolidation, together with a fair rate of interest, if
any, to be paid upon the amount determined to be the fair value. In
determining such fair value, the Court shall take into account all
relevant factors. In determining the fair rate of interest, the Court
may consider all relevant factors, including the rate of interest which
the surviving or resulting corporation would have had to pay to borrow
money during the pendency of the proceeding. Upon application by the
surviving or resulting corporation or by any stockholder entitled to
participate in the appraisal proceeding, the Court may, in its
discretion, permit discovery or other pretrial proceedings and may
proceed to trial upon the appraisal prior to the final determination of
the stockholder entitled to an appraisal. Any stockholder whose name
appears on the list filed by the surviving or resulting corporation
pursuant to subsection (f) of this section and who has submitted such
stockholder's certificates of stock to the Register in Chancery, if
such is required, may participate fully in all proceedings until it is
finally determined that such stockholder is not entitled to appraisal
rights under this section.
(i) The Court shall direct the payment of the fair value of the shares,
together with interest, if any, by the surviving or resulting
corporation to the stockholders entitled thereto. Interest may be
simple or compound, as the Court may direct. Payment shall be so made
to each such stockholder, in the case of holders of uncertificated
stock forthwith, and the case of holders of shares represented by
certificates upon the surrender to the corporation of the certificates
representing such stock. The Court's decree may be enforced as other
decrees in the Court of Chancery may be enforced, whether such
surviving or resulting corporation be a corporation of this State or of
any state.
(j) The costs of the proceeding may be determined by the Court and taxed
upon the parties as the Court deems equitable in the circumstances.
Upon application of a stockholder, the Court may order all or a portion
of the expenses incurred by any stockholder in connection with the
appraisal proceeding, including, without limitation, reasonable
attorney's fees and the fees and expenses of experts, to be charged pro
rata against the value of all the shares entitled to an appraisal.
(k) From and after the effective date of the merger or consolidation, no
stockholder who has demanded appraisal rights as provided in subsection
(d) of this section shall be entitled to vote such stock for any
purpose or to receive payment of dividends or other distributions on
the stock (except dividends or other distributions payable to
stockholders of record at a date which is prior to the effective date
of the merger or consolidation); provided, however, that if no petition
for an appraisal shall be filed within the time provided in subsection
(e) of this section, or if such stockholder shall deliver to the
surviving or resulting corporation a written withdrawal of such
APPENDIX C - 3
<PAGE> 160
stockholder's demand for an appraisal and an acceptance of the merger
or consolidation, either within 60 days after the effective date of the
merger or consolidation as provided in subsection (e) of this section
or thereafter with the written approval of the corporation, then the
right of such stockholder to an appraisal shall cease. Notwithstanding
the foregoing, no appraisal proceeding in the Court of Chancery shall
be dismissed as to any stockholder without the approval of the Court,
and such approval may be conditioned upon such terms as the Court deems
just.
(l) The shares of the surviving or resulting corporation to which the
shares of such objecting stockholders would have been converted had
they assented to the merger or consolidation shall have the status of
authorized and unissued shares of the surviving or resulting
corporation.
APPENDIX C - 4
<PAGE> 161
PETROGLYPH ENERGY, INC.
1302 NORTH GRAND
HUTCHINSON, KANSAS 67501
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
The undersigned stockholder of Petroglyph Energy, Inc., a Delaware
corporation (the "Company"), hereby appoints Robert C. Murdock and S. Kennard
Smith, or either of them, the proxy or proxies of the undersigned, each with
full power of substitution, to vote all shares of Common Stock of the Company
which the undersigned would be entitled to vote at the Special Meeting of
Stockholders to be held on December __, 2000 at 10:00 a.m., Central Standard
Time at 1302 North Grand, Hutchinson, Kansas 67501, or any adjournment thereof,
according to the number of votes that the undersigned would be entitled to if
personally present upon the matters referred to in this proxy.
THE BOARD OF DIRECTORS RECOMMENDS A VOTE "FOR" EACH OF THE PROPOSALS.
1. PROPOSAL 1--Approval and adoption of: the Agreement and Plan of Merger,
dated June 20, 2000 by and between the Company and III Exploration
Company and the related merger of Petroglyph Acquisition Sub, Inc., a
wholly owned subsidiary of III Exploration Company, with and into the
Company whereby each outstanding share of the common stock of the
Company (other than shares owned by III Exploration and its affiliates)
will be converted into the right to receive $2.85 in cash.
[ ] FOR [ ] AGAINST [ ] ABSTAIN
(CONTINUED AND TO BE SIGNED ON OTHER SIDE)
<PAGE> 162
(CONTINUED FROM OTHER SIDE)
This Proxy when properly executed will be voted in the manner directed
herein by the undersigned stockholder. If no direction is made, this proxy will
be voted FOR the proposals set forth herein.
The undersigned acknowledges receipt of Notice of Special Meeting of
Stockholders dated __________, 2000, and the accompanying Proxy Statement.
Date: ___________________ , 2000
--------------------------------
Signature
--------------------------------
Signature
--------------------------------
Name(s) (typed or printed)
--------------------------------
--------------------------------
Address(es)
Please sign exactly as name appears on this Proxy. When shares
are held by joint tenants, both should sign. When signing as attorney,
executor, administrator, trustee or guardian, please give full title as
such. If a corporation, please sign in full corporate name by the
President or other authorized officer. If a partnership, please sign in
partnership name by authorized person.
PLEASE MARK, SIGN, DATE AND RETURN THE PROXY CARD PROMPTLY
USING THE ENCLOSED ENVELOPE. NO POSTAGE IS REQUIRED IF MAILED IN THE
UNITED STATES.
2
