<PAGE>
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-31375
PROSPECTUS
FORMAN PETROLEUM CORPORATION
OFFER TO EXCHANGE
13.5% SENIOR SECURED NOTES DUE 2004, SERIES B
FOR ALL OUTSTANDING 13.5% SENIOR SECURED NOTES DUE 2004, SERIES A
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON OCTOBER 30, 1997, UNLESS EXTENDED
---------------
Forman Petroleum Corporation, a Louisiana corporation (the "Company"),
hereby offers, upon the terms and subject to the conditions set forth in this
Prospectus and the accompanying letter of transmittal (the "Letter of
Transmittal," and together with this Prospectus, the "Exchange Offer"), to
exchange $1,000 principal amount of its 13.5% Senior Secured Notes due 2004,
Series B (the "Exchange Notes"), which have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), pursuant to a
Registration Statement (as defined herein) of which this Prospectus
constitutes a part, for each $1,000 principal amount of its outstanding 13.5%
Senior Secured Notes due 2004, Series A (the "Old Notes"), of which
$70,000,000 principal amount is outstanding. The form and terms of the
Exchange Notes are identical in all material respects to the form and terms of
the Old Notes except for certain transfer restrictions, certain registration
rights and the provision for Additional Interest, all relating to the Old
Notes. The Exchange Notes will evidence the same debt as the Old Notes and
will be issued under and be entitled to the benefits of the Indenture (as
defined herein). The Exchange Notes and the Old Notes are collectively
referred to herein as the "Notes."
The Notes are senior secured obligations of the Company, ranking pari passu
in right of payment with all existing or future senior Indebtedness (as
defined herein) and senior to all existing or future Subordinated Indebtedness
(as defined herein) of the Company. The Notes are secured by a security
interest in certain of the Company's oil and gas properties, subject only to a
prior lien on such assets to secure future indebtedness in a limited amount
and under limited circumstances as permitted in the indenture governing the
Notes (the "Indenture").
The Company will accept for exchange any and all Old Notes that are validly
tendered on or prior to 5:00 p.m., New York City time, on the date the
Exchange Offer expires, which will be October 30, 1997, unless the Exchange
Offer is extended. See "The Exchange Offer--Expiration Date; Extensions;
Amendments." Tenders of Old Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the business day prior to the Expiration Date (as
defined herein), unless previously accepted for exchange. The Exchange Offer
is not conditioned upon any minimum principal amount of Old Notes being
tendered for exchange. However, the Exchange Offer is subject to certain
conditions which may be waived by the Company and to the terms and provisions
of the Registration Rights Agreement (as defined herein). Old Notes may be
tendered only in denominations of $1,000 principal amount and integral
multiples thereof. The Company has agreed to pay the expenses of the Exchange
Offer. See "The Exchange Offer."
(Cover continued on next page)
---------------
SEE "RISK FACTORS" BEGINNING ON PAGE 16 OF THIS PROSPECTUS FOR A DISCUSSION
OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING EXCHANGING NOTES IN
THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
---------------
The date of this Prospectus is September 26, 1997.
<PAGE>
The Exchange Notes will bear interest at the rate of 13.5% per annum,
payable semi-annually in cash in arrears on June 1 and December 1 of each
year, commencing December 1, 1997. Holders of Exchange Notes of record on
November 15, 1997 will receive interest on December 1, 1997 from the date of
issuance of the Exchange Notes, plus an amount equal to the accrued interest
on the Old Notes from the date of issuance of the Old Notes, June 3, 1997
("Issue Date"), to the date of exchange thereof. Interest on the Old Notes
accepted for exchange will cease to accrue upon issuance of the Exchange
Notes.
The Old Notes were sold by the Company on June 3, 1997 to Jefferies &
Company, Inc. in a transaction not registered under the Securities Act in
reliance upon Section 4(2) of the Securities Act and Rule 506 of Regulation D
under the Securities Act. The Old Notes were thereupon offered and sold by
Jefferies & Company, Inc. only to "qualified institutional buyers" (as defined
in Rule 144A under the Securities Act) and to a limited number of
institutional "accredited investors" (as defined in Rule 501(a)(1),(2),(3) or
(7) of Regulation D under the Securities Act), each of whom agreed to comply
with certain transfer restrictions and other conditions. Accordingly, the Old
Notes may not be offered, resold or otherwise transferred unless registered
under the Securities Act or unless an applicable exemption from the
registration requirements of the Securities Act is available. The Exchange
Notes are being offered hereunder in order to satisfy the obligations of the
Company under the Registration Rights Agreement entered into with Jefferies &
Company, Inc. in connection with its purchase of the Old Notes (the
"Registration Rights Agreement"). See "The Exchange Offer" and "Description of
Notes."
Based on no-action letters issued by the staff of the Securities and
Exchange Commission (the "Commission" or "SEC") to third parties, including
Exxon Capital Holdings Corporation, SEC No-Action Letter (available April 13,
1989), Morgan Stanley & Co. Inc., SEC No-Action Letter (available June 5,
1991) (the "Morgan Stanley Letter") and Mary Kay Cosmetics, Inc., SEC No-
Action Letter (available June 5, 1991), the Company believes that the Exchange
Notes issued pursuant to the Exchange Offer may be offered for resale, resold
and otherwise transferred by the respective holders thereof (other than a
"Restricted Holder," being (i) a broker-dealer who purchased Old Notes
exchanged for such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
a person that is an affiliate of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business
and such holder is not participating in, and has no arrangement with any
person to participate in, the distribution (within the meaning of the
Securities Act) of such Exchange Notes. Eligible holders wishing to accept the
Exchange Offer must represent to the Company that such conditions have been
met. Holders who tender Old Notes in the Exchange Offer with the intention to
participate in a distribution of the Exchange Notes may not rely upon the
Morgan Stanley Letter or similar no-action letters. See "The Exchange Offer--
General." Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. A broker-
dealer that delivers such a prospectus to purchasers in connection with such
resales will be subject to certain of the civil liability provisions under the
Securities Act and will be bound by the provisions of the Registration Rights
Agreement (including certain indemnification rights and obligations). This
Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of Exchange Notes received
in exchange for Old Notes where such Old Notes were acquired by such broker-
dealer as a result of market-making activities or other trading activities.
Any such prospectus will be required to disclose certain additional
information, including, the name of such broker-dealer, any relationship with
the Company or its Affiliates, the amount of Exchange Notes owned and the
amount of Exchange Notes offered for sale. The Company will make this
Prospectus available to broker-dealers for ninety days after the effectiveness
of this Registration Statement.
The Company will not receive any proceeds from the Exchange Offer.
The Exchange Notes will constitute a new issue of securities with no
established trading market, and there can be no assurance as to the liquidity
of any markets that may develop for the Exchange Notes or as to the ability of
or price at which the holders of Exchange Notes would be able to sell their
Exchange Notes. Future
2
<PAGE>
trading prices of the Exchange Notes will depend on many factors, including,
among others, prevailing interest rates, the Company's operating results and
the market for similar securities. The Company does not intend to apply for
listing of the Exchange Notes on any securities exchange. Jefferies & Company,
Inc. has informed the Company that it currently intends to make a market for
the Exchange Notes. However, it is not so obligated, and any such market
making may be discontinued at any time without notice. Accordingly, no
assurance can be given that an active public or other market will develop for
the Exchange Notes or as to the liquidity of or the trading market for the
Exchange Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN
WHICH THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE
WITH THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
NO.
----
<S> <C>
Available Information..................................................... 4
Disclosure Regarding Forward Looking Statements........................... 5
Summary................................................................... 6
Risk Factors.............................................................. 16
The Company............................................................... 21
Private Placement......................................................... 21
Use of Proceeds........................................................... 21
Capitalization............................................................ 22
Selected Historical Financial Information................................. 23
Management's Discussion and Analysis of Financial Condition and Results of
Operations............................................................... 25
Business and Properties................................................... 31
Management................................................................ 43
Principal Stockholders.................................................... 45
Certain Transactions...................................................... 45
The Exchange Offer........................................................ 47
Description of Capital Stock.............................................. 54
Description of Notes...................................................... 56
Registration Rights....................................................... 83
Certain Federal Income Tax Consequences................................... 84
Plan of Distribution...................................................... 88
Transfer Restrictions on Old Notes........................................ 88
Legal Matters............................................................. 91
Experts................................................................... 91
Glossary of Oil and Gas Terms............................................. 92
Financial Statements...................................................... F-1
</TABLE>
3
<PAGE>
AVAILABLE INFORMATION
The Company will be subject to the reporting requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act") and, in accordance
therewith, will be required to file reports with the Commission. Such reports
can be inspected and copied at the public reference facilities maintained by
the Commission at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, and at the following regional offices of the Commission: Seven World
Trade Center, Suite 1300, New York, New York 10048 and Citicorp Center, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511. Copies of such
materials can be obtained by mail from the Public Reference Section of the
Commission, at Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C.
20549, at prescribed rates. In addition, the Commission maintains a site on
the World Wide Web that contains reports filed electronically by the Company
with the Commission which can be accessed over the Internet at
http://www.sec.gov. Pursuant to the Indenture, the Company also agreed to file
with the Trustee within 15 days after it files with the SEC such reports,
information and other documents that the Company filed with the SEC pursuant
to Section 13 or 15(d) of the Exchange Act, along with a sufficient number of
copies of all reports and other documents and information that the Trustee may
be required to deliver to holders of the Notes. While any Old Notes remain
outstanding, the Company will make available, upon request, to any holder and
any prospective purchaser of Old Notes, the information required pursuant to
Rule 144A(d)(4) under the Securities Act during any period in which the
Company is not subject to Section 13 or 15(d) of the Exchange Act. Any such
request should be directed to Marvin J. Gay, Vice President of Finance and
Administration of the Company, 650 Poydras Street, Suite 2200, New Orleans,
Louisiana, 70130-6101.
This Prospectus constitutes part of a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act. This Prospectus omits certain of the information set forth in
the Registration Statement. Reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the securities offered hereby. Statements contained
herein concerning the provisions of contracts or other documents are not
necessarily complete, and each such statement is qualified in its entirety by
reference to the copy of the applicable contract or other document filed with
the Commission. Copies of the Registration Statement and the exhibits thereto
are on file at the offices of the Commission and may be obtained upon payment
of the fee prescribed by the Commission, or may be examined without charge at
the public reference facilities of the Commission described above.
4
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
All statements other than statements of historical facts included in this
Prospectus, including without limitation statements under "Summary," "Risk
Factors," "Management's Discussion and Analysis of Financial Condition and
Results of Operations" and "Business and Properties" regarding the planned
capital expenditures, increases in oil and gas production, the number of
anticipated wells to be drilled in 1997 and thereafter, the Company's
financial position, business strategy and other plans and objectives for
future operations, are forward-looking statements. Although the Company
believes that the expectations reflected in such forward-looking statements
are reasonable, it can give no assurance that such expectations will prove to
have been correct. There are numerous uncertainties inherent in estimating
quantities of proved oil and natural gas reserves and in projecting future
rates of production and timing of development expenditures, including many
factors beyond the control of the Company. Reserve engineering is a subjective
process of estimating underground accumulations of oil and natural gas that
cannot be measured in an exact way, and the accuracy of any reserve estimate
is a function of the quality of available data and of engineering and
geological interpretation and judgment. As a result, estimates made by
different engineers often vary from one another. In addition, results of
drilling, testing and production subsequent to the date of an estimate may
justify revisions of such estimate and such revisions, if significant, would
change the schedule of any further production and development drilling.
Accordingly, reserve estimates are generally different from the quantities of
oil and natural gas that are ultimately recovered. Additional important
factors that could cause actual results to differ materially from the
Company's expectations are disclosed under "Risk Factors" and elsewhere in
this Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED OR INCORPORATED BY REFERENCE IN
THIS PROSPECTUS AND THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR
MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY OR THE EXCHANGE AGENT. NEITHER THE DELIVERY OF
THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER,
NOR ANY SALE MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF. NEITHER THIS PROSPECTUS NOR THE ACCOMPANYING LETTER OF
TRANSMITTAL, OR BOTH TOGETHER, CONSTITUTE AN OFFER TO SELL OR A SOLICITATION
OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED HEREBY BY ANYONE IN ANY
JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT AUTHORIZED OR IN WHICH
THE PERSON MAKING SUCH OFFER OR SOLICITATION IS NOT QUALIFIED TO DO SO OR TO
ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION.
5
<PAGE>
SUMMARY
The following summary is qualified in its entirety by, and should be read in
conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. As used in
this Prospectus, the terms "Forman" and the "Company" refer to Forman Petroleum
Corporation. Investors should carefully consider the information set forth
under "Risk Factors." Unless otherwise indicated herein, the information
contained in this Prospectus gives effect to the acquisition by the Company of
certain overriding royalty interests in the Company's properties and interests
in the Bayou Fer Blanc Field and the West Gueydan Field, as described in
"Private Placement," as if such transactions occurred on January 1, 1996 or
January 1, 1997, as the case may be.
THE COMPANY
The Company is an independent energy company engaged in the acquisition,
exploration, development, exploitation and production of crude oil and natural
gas. Since 1991, the Company has acquired five fields onshore in south
Louisiana. These fields have cumulative production of 153 MMBoe and contain
complex geologic structures that are well suited to 3-D seismic surveys and
interpretation to identify potential reserves. Since 1994, the Company has
acquired and processed over 74 square miles of 3-D seismic data over four of
these fields from which the Company has identified additional exploitation and
development prospects. In the Lake Enfermer Field, using this 3-D seismic data
along with existing well control, the Company drilled and completed three wells
in 1996. The Company drilled and completed a fourth well in 1997, and drilled
and temporarily suspended operations on a fifth well pending further
evaluation. A sixth well has been drilled and is currently being completed.
This drilling activity increased net production from a daily average of 942
Boe/d in January 1996 to 1,895 Boe/d in December 1996. Over the same period,
proved reserves increased 92% from 3.6 MMBoe with a present value of $31.0
million to 6.9 MMBoe with a present value of $96.4 million. In 1997 and 1998,
the Company plans aggregate capital expenditures of approximately $33.0 million
to perform an estimated seven recompletions and/or workovers and drill an
estimated eight new wells based on the Lake Enfermer 3-D seismic survey, to
drill an estimated two additional wells and to perform an estimated four
recompletions on other properties.
Since 1991, the Company has experienced considerable growth with proved
reserves and present value increasing from 1.8 MMBoe and $13.7 million,
respectively, at September 30, 1991 to 6.9 MMBoe and $96.4 million,
respectively, at December 31, 1996. The Company's average per well production
for the year ended December 31, 1996 was approximately 110 Boe/d, which
contributed to unit gross profit (gross margin less general and administrative
expense) that averaged $11.90 per Boe ($1.98 per Mcfe) in 1996. On a Boe basis,
52% of the Company's reserves are classified as proved developed and the
Company's reserve to production ratio was 11.6 years as of December 31, 1996.
The reserve replacement ratio and finding and development costs, including 3-D
seismic costs, during the five years ended December 31, 1996, have averaged
386% and $5.43 per Boe, respectively. The Company operates each of its fields
and owns a weighted average working interest of 91% in its fields, which
enables the Company to control the timing and implementation of all
exploitation and exploration activities.
The Company believes that it can identify new drilling opportunities in its
fields by combining 3-D seismic survey data with other technologies, including
CAEX technology, as well as other available geological and engineering data.
The Company's advanced visualization and data analysis techniques and
sophisticated computing resources enable its geoscientists to view collectively
large volumes of information contained within the 3-D seismic data. These
techniques and resources also allow the Company's geoscientists to more easily
identify features such as shallow and deep amplitude anomalies, complex channel
systems, sharp structural details and fluid contacts, which might have been
overlooked using less sophisticated 3-D seismic data interpretation techniques.
The Company has made a significant investment in its 3-D seismic data
visualization
6
<PAGE>
technology, which is closely linked with the Company's well-log data base and
other geoscience application software. The Company uses a series of
workstations from Silicon Graphics, and has licensed Photon Seisx software for
interpreting the geophysical data on the 3-D workstations, Geographix software
for analysis, mapping and interpretation of geological data, and Cogniseis'
Voxtel Geo technology for advanced 3-D geologic interpretation of data.
The Company's technological success is dependent in part upon hiring and
retaining highly skilled technical personnel. The Company has assembled a
technical team that it believes has the capacity to adapt to the rapidly
changing technological demands in the field of oil and natural gas exploration.
This team consists of six geoscientists and engineers with an average of 22
years industry experience, primarily concentrated in the Gulf Coast region. The
expertise of the Company's team of geoscientists and engineers reduces its
dependence on outside technical consultants and enables the Company to
internally generate substantially all of its prospects.
BUSINESS STRATEGY
The Company's business strategy is to expand its proved reserves, production
and cash flow through a disciplined technology-based program of exploitation
and exploration for crude oil and natural gas, emphasizing the following key
competitive strengths:
Control of Critical Exploration Functions. The Company owns substantially all
of the working interests in its fields and is the operator of each field.
Controlling operations is a crucial element in the strategy of the Company,
since it allows the Company to control the critical functions in the
exploration and exploitation process. This has enabled the Company to manage
the land permitting and seismic option process; design the seismic surveys to
ensure optimum results; supervise the data acquisition and processing;
integrate and interpret the 3-D data with existing 2-D and subsurface
geological data; select well sites; and design and drill wells to exploit
identified prospective reserves.
Technological Expertise. Many of the fields in south Louisiana are ideally
suited for the application of 3-D seismic data surveys to interpret the large
structures of the area, using an exploitation technique in which the Company
has extensive experience. The geological complexities in the Lake Enfermer
Field have in the past made conventional interpretation very difficult. The
Company uses 3-D seismic data in this field combined with existing well control
and production information for its interpretations. In addition to enhancing
the interpretations of structures, the Company uses 3-D seismic data to
optimize its well programs.
Inventory of Exploratory Drilling Prospects. In addition to the proved
undeveloped reserves scheduled to be drilled during the next two years, the
Company has an inventory of what it believes are significant exploratory
prospects. These exploratory prospects have been identified through the
application of 3-D seismic technology in the Company's Lake Enfermer Field,
Bayou Fer Blanc Field and Manila Village Field. The Company believes that
additional exploratory prospects will be identified as soon as the recently
completed 3-D survey at the Company's West Gueydan Field has been interpreted
and a 3-D survey has been completed at the Boutte Field.
Geographic Specialization. The Company focuses its operations in the
environmentally sensitive coastal marshlands of south Louisiana. The Company's
reputation for preserving the integrity of these marshlands and years of
experience have enabled the Company to acquire fields owned by landowners who
restrict and carefully monitor all operations on their property.
7
<PAGE>
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $70,000,000 principal
amount of Exchange Notes for up to $70,000,000 principal amount of Old Notes.
The form and terms of the Exchange Notes are identical in all material respects
to the form and terms of the Old Notes except that the Exchange Notes have been
registered under the Securities Act and will not contain certain transfer
restrictions and, hence, are not entitled to the benefits of the Registration
Rights Agreement relating to the contingent increases in the interest rate
provided for pursuant thereto. The Exchange Notes will evidence the same debt
as the Old Notes and will be issued under and be entitled to the benefits of
the Indenture governing the Old Notes. See "Description of Notes."
The Exchange Offer...... Each $1,000 principal amount of Exchange Notes will
be issued in exchange for each $1,000 principal
amount of outstanding Old Notes. As of the date
hereof, $70,000,000 principal amount of Old Notes are
issued and outstanding. The Company will issue the
Exchange Notes to tendering holders of Old Notes on
or promptly after the Expiration Date (as defined
herein).
Resale.................. The Company believes that the Exchange Notes issued
pursuant to the Exchange Offer generally will be
freely transferable by the holders thereof without
registration or any prospectus delivery requirement
under the Securities Act, except for certain
Restricted Holders who may be required to deliver
copies of this Prospectus in connection with any
resale of the Exchange Notes issued in exchange for
such Old Notes. See "The Exchange Offer--General" and
"Plan of Distribution."
Expiration Date......... 5:00 p.m., New York City time, on October 30, 1997,
unless the Exchange Offer is extended, in which case
the term "Expiration Date" means the latest date to
which the Exchange Offer is extended. See "The
Exchange Offer--Expiration Date; Extensions;
Amendments."
Interest on the Notes... The Exchange Notes will bear interest payable in cash
in arrears and semi-annually on June 1 and December 1
of each year, commencing December 1, 1997. Holders of
Exchange Notes of record on November 15, 1997 will
receive interest on December 1, 1997 from the date of
issuance of the Exchange Notes, plus an amount equal
to the accrued interest on the Old Notes from the
date of issuance of the Old Notes, June 3, 1997, to
the date of exchange thereof. Consequently, assuming
the Exchange Offer is consummated prior to the record
date in respect of the December 1, 1997 interest
payment for the Old Notes, holders who exchange their
Old Notes for Exchange Notes will receive the same
interest payment on December 1, 1997 that they would
have received had they not accepted the Exchange
Offer. Interest on the Old Notes accepted for
exchange will cease to accrue upon issuance of the
Exchange Notes. See "The Exchange Offer--Interest on
the Exchange Notes."
Procedures for
Tendering Old Notes.... Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of
Transmittal, or such facsimile, or an Agent's Message
(as defined herein) together with the Old Notes to be
8
<PAGE>
exchanged and any other required documentation to the
Exchange Agent at the address set forth herein and
therein or effect a tender of Old Notes pursuant to
the procedures for book-entry transfer as provided
for herein. See "The Exchange Offer--Procedures for
Tendering."
Special Procedures for
Beneficial Holders..... Any beneficial holder whose Old Notes are registered
in the name of a broker, dealer, commercial bank,
trust company or other nominee and who wishes to
tender in the Exchange Offer should contact such
registered holder promptly and instruct such
registered holder to tender on the beneficial
holder's behalf. If such beneficial holder wishes to
tender directly, such beneficial holder must, prior
to completing and executing the Letter of Transmittal
and delivering the Old Notes, either make appropriate
arrangements to register ownership of the Old Notes
in such holder's name or obtain a properly completed
bond power from the registered holder. The transfer
of record ownership may take considerable time. See
"The Exchange Offer--Procedures for Tendering."
Guaranteed Delivery
Procedures............. Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes and a
properly completed Letter of Transmittal or any other
documents required by the Letter of Transmittal to
the Exchange Agent prior to the Expiration Date, or
who cannot complete the procedure for book-entry
transfer on a timely basis and deliver an Agent's
Message, may tender their Old Notes according to the
guaranteed delivery procedures set forth herein. See
"The Exchange Offer--Guaranteed Delivery Procedures."
Withdrawal Rights....... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
business day prior to the Expiration Date, unless
previously accepted for exchange. See "The Exchange
Offer--Withdrawal of Tenders."
Termination of the
Exchange Offer......... The Company may terminate the Exchange Offer if it
determines that the Exchange Offer violates any
applicable law or interpretation of the staff of the
SEC. Holders of Old Notes will have certain rights
against the Company under the Registration Rights
Agreement should the Company fail to consummate the
Exchange Offer. See "The Exchange Offer--Termination"
and "Description of the Notes."
Acceptance of Old Notes
and Delivery of
Exchange Notes......... Subject to certain conditions (as summarized above in
"Termination of the Exchange Offer" and described
more fully in "The Exchange Offer--Termination"), the
Company will accept for exchange any and all Old
Notes which are properly tendered in the Exchange
Offer prior to 5:00 p.m., New York City time, on the
Expiration Date. The Exchange Notes issued pursuant
to the Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange
Offer--General."
Exchange Agent.......... U. S. Trust Company of Texas, N.A. is serving as
exchange agent (the "Exchange Agent") in connection
with the Exchange Offer. The mailing
9
<PAGE>
address of the Exchange Agent is P. O. Box 841,
Cooper Station, New York, New York 10276-0841. Hand
deliveries should be addressed to 111 Broadway, Lower
Level, New York, New York 10006-1906. Deliveries by
overnight courier should be addressed to 770
Broadway--13th Floor, Corporate Trust Operations, New
York, New York 10003-9598. For information with
respect to the Exchange Offer, the telephone number
for the Exchange Agent is (800) 225-2398, and the
facsimile number for the Exchange Agent is (212) 420-
6504. See "The Exchange Offer--Exchange Agent."
Use of Proceeds......... There will be no cash proceeds payable to the Company
from the issuance of the Exchange Notes pursuant to
the Exchange Offer.
THE NOTES
Notes Outstanding....... $70,000,000 principal amount of 13.5% Senior Secured
Notes due 2004, Series A.
Maturity Date........... June 1, 2004
Interest Rate and
Payment Dates.......... The Notes bear interest at a rate of 13.5% per annum
payable semi-annually in cash in arrears on June 1
and December 1 of each year, commencing December 1,
1997. Approximately $9.5 million has been deposited
with the Trustee in a separate account (the
"Capitalized Interest Account") to pay interest on
the Notes through June 1, 1998.
Optional Redemption..... The Notes are redeemable at the option of the
Company, in whole or in part, at any time on or after
June 1, 2002, at the redemption prices set forth
herein, together with accrued and unpaid interest to
the date of redemption. In the event the Company
consummates a Public Equity Offering (as defined
herein) on or prior to June 1, 1999, the Company may
at its option use all or a portion of the proceeds
from such offering to redeem up to 25% of the
principal amount of the Notes at a redemption price
equal to 113.5% of the aggregate principal thereof,
together with accrued and unpaid interest to the date
of redemption provided that at least $52.5 million
aggregate principal amount of the Notes remains
outstanding after such redemption. See "Description
of Notes--Optional Redemption."
Mandatory Redemption.... None.
Change of Control....... Upon the occurrence of a Change of Control, each
holder of Notes has the right to require the Company
to purchase all or a portion of such holder's Notes
at a price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest,
if any, to the date of purchase. If a Change of
Control were to occur, the Company may not have the
financial resources to repay all of the future senior
Indebtedness of the Company and the Notes that would
become payable upon the occurence of a Change of
Control. See "Description of Notes--Change of
Control."
10
<PAGE>
Ranking................. The Notes are senior secured obligations of the
Company, ranking pari passu in right of payment with
all existing and future senior Indebtedness of the
Company (presently there is no other senior
Indebtedness) and senior to all existing and future
subordinated Indebtedness of the Company. Subject to
certain limitations, the Company may incur additional
indebtedness in the future. The Company's outstanding
indebtedness, other than the Notes, as of June 30,
1997 is $14,086. Such amount is secured by property
of the Company not subject to any lien to secure the
Notes. As of June 30, 1997, the Company has no other
indebtedness. See "Management's Discussion and
Analysis of Financial Condition and Results of
Operations--Liquidity and Capital Resources" and
"Description of Notes--General and Security".
Security................ The Notes are secured by a security interest in
certain of the Company's oil and gas properties in
the Lake Enfermer Field, Manilla Village Field and
Boutte Field, subject only to a prior lien on such
assets to secure future indebtedness in a limited
amount and under limited circumstances. See
"Description of Notes--Security."
Certain Covenants....... The indenture under which the Old Notes have been
issued (and the Exchange Notes will be issued) (the
"Indenture") contains certain covenants, including
but not limited to covenants with respect to the
following matters: (i) limitations on incurrence of
additional indebtedness; (ii) limitations on certain
investments; (iii) limitations on restricted
payments; (iv) limitations on disposition of assets;
(v) limitation on dividends and other payment
restrictions affecting subsidiaries; (vi) limitations
on transactions with affiliates; (vii) limitations on
liens; and (viii) restrictions on mergers,
consolidations and transfers of assets. The failure
of the Company to comply with either the affirmative
or negative covenants in the Indenture and to remedy
such failure within a period of 60 days after written
notice to the Company, is an Event of Default under
the Indenture. Upon the occurrence of an Event of
Default, the Trustee or the Holders of not less than
25% in principal amount of the Notes then outstanding
may accelerate the maturity of the Notes and take
certain customary remedial actions against the
property securing such Notes and the Company, as well
as other customary remedies. See "Description of
Notes--Events of Default". See "Description of
Notes--Certain Covenants."
Exchange Offer and
Registration Rights
Agreement.............. Pursuant to a Registration Rights Agreement between
the Company and Jefferies & Company, Inc., the
Company agreed to use its best efforts (i) to make a
registered exchange offer pursuant to which holders
of the Old Notes will have the opportunity to
exchange their Old Notes for a like principal amount
of new notes that are identical in all material
respects to the Old Notes and that may be offered and
sold by the holders without restrictions or
limitations under the Securities Act or (ii) under
certain circumstances, to effect a shelf registration
of the Old Notes (the "Note Shelf Registration
Statement") that would include a prospectus under
cover of which holders would be free to offer and
sell their Old Notes
11
<PAGE>
from time to time. The Company agreed to use its best
efforts to file with the Commission a registration
statement relating to the Exchange Offer (the
"Exchange Offer Registration Statement") or the Note
Shelf Registration Statement within 60 days after the
date of issuance of the Old Notes, and to use its
best efforts to cause such registration statement to
be declared effective by the Commission within 120
days after the Issue Date and, in the case of the
Note Shelf Registration Statement, to cause such to
remain effective until the second anniversary after
the Issue Date. The interest rate on the Old Notes is
subject to increase under certain circumstances if
the Company is not in compliance with its obligations
under the Registration Rights Agreement. See
"Registration Rights."
Transfer Restrictions... The Old Notes have not been registered under the
Securities Act and are subject to restrictions on
Securities Act and are subject to restrictions on
transferability and resale. There is currently no
established market for the Old Notes. If issued, the
Exchange Notes will generally be freely transferable
(subject to the restrictions discussed elsewhere
herein) but will be new securities for which there
will not initially be a market. Accordingly, there
can be no assurance as to the development or
liquidity of any market for the Old Notes or, if
issued, the Exchange Notes. Jefferies & Company, Inc.
advised the Company that it currently intends to make
a market in the Old Notes. However, Jefferies &
Company, Inc. is not obligated to do so, and any
market making with respect to the Old Notes may be
discontinued at any time without notice. The Company
does not intend to apply for a listing of the Old
Notes, or, if issued, the Exchange Notes, on a
securities exchange.
Private Placement....... A portion of the proceeds (approximately $9.5
million) received by the Company from the sale of the
Old Notes has been segregated into a Capitalized
Interest Account to pay interest on the Notes through
June 1, 1998. The Company has used the net proceeds
from the sale of the Old Notes and warrants to
purchase common stock combined with the net proceeds
from a sale of preferred stock and warrants to
purchase common stock to repay approximately $45.0
million of debt and to purchase for approximately
$7.6 million certain overriding royalty interests in
the Company's properties and interests in the Bayou
Fer Blanc Field and the West Gueydan Field. The
remainder of the net proceeds from these offerings is
being used for capital expenditures, working capital
and other general corporate purposes. See "Private
Placement."
PORTAL Listing.......... The Old Notes that were sold to QIBs are eligible for
trading in the PORTAL System of the National
Association of Securities Dealers, Inc.
RISK FACTORS
The Exchange Notes involve certain risks that a potential investor should
carefully evaluate prior to making an investment. See "Risk Factors."
12
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA
The following tables set forth, as of the dates and for the periods
indicated, summary financial and operating information of the Company. The pro
forma information set forth below gives effect to the acquisition by the
Company of certain overriding royalty interests in the Company's properties and
interests in the Bayou Fer Blanc Field and the West Gueydan Field as described
in "Private Placement," as if such transactions occurred on the last day of the
period prior to the period presented. The following information should be read
in conjunction with "Capitalization," "Selected Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Financial Statements of the Company and the related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -----------------------------
PRO
FORMA PRO FORMA
1994 1995 1996 1996(1) 1996 1997 1997(1)
-------- -------- --------- -------- ------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues:
Oil and natural gas
revenue............... $ 9,532 $ 6,919 $ 10,892 $ 11,773 $ 4,887 $ 6,262 $ 6,717
Interest income........ 14 194 37 37 19 54 54
Overhead
reimbursements........ 74 131 95 95 61 35 35
Other.................. 119 61 93 93 46 21 21
-------- -------- --------- -------- ------- --------- ---------
Total revenues....... $ 9,739 $ 7,305 $ 11,117 $ 11,998 $ 5,013 $ 6,372 $ 6,827
Costs and expenses:
Production taxes....... 791 661 585 655 416 304 331
Oil and natural gas
operating expenses.... 2,775 2,196 2,526 2,526 1,239 1,199 1,199
General and
administrative........ 1,204 921 1,539 1,539 709 841 841
Interest expense....... 2,121 3,522 3,983 4,334 1,843 2,825 2,971
Depreciation,
depletion and
amortization.......... 2,391 3,558 4,259 4,491 2,088 3,595 3,728
Income tax expense..... -- -- -- -- -- 4,746 4,801
-------- -------- --------- -------- ------- --------- ---------
Total costs and
expenses............ $ 9,282 $ 10,858 $ 12,892 $ 13,545 $ 6,295 $ 13,510 $ 13,871
-------- -------- --------- -------- ------- --------- ---------
Net income (loss)...... $ 457 $(3,553) $ (1,775) $(1,547) $(1,282) $ (7,138) $ (7,044)
======== ======== ========= ======== ======= ========= =========
UNAUDITED PRO FORMA
DATA:
Net income as reported
above................. -- -- $ (1,775) $(1,547) -- $ (7,138) $ (7,044)
Pro forma (provision)
benefit for income
taxes(2).............. -- -- 657 572 -- 5,631 5,631
-------- -------- --------- -------- ------- --------- ---------
Pro forma net income
(loss)................ -- -- $ (1,118) $ (975) -- $ (1,507) $ (1,413)
======== ======== ========= ======== ======= ========= =========
Weighted average
shares outstanding.... -- -- 90,000 90,000 -- 90,000 90,000
======== ======== ========= ======== ======= ========= =========
Pro forma net income
(loss) per share(3)... -- -- $ (12.42) $(10.83) -- $ (16.74) $ (15.70)
======== ======== ========= ======== ======= ========= =========
OTHER FINANCIAL DATA:
Operating cash flows.... $ 2,217 $ 1,273 $ 9,083 $ 9,311 $ 7,863 $ 2,223 $ 2,317
Investing cash flows.... $(17,387) $ (1,468) $(15,394) $(4,494) $(7,954) $(16,182) $(16,182)
Financing cash flows.... $ 14,812 $ (1,130) $ 6,128 $ 12,228 $ (15) $ 22,228 $ 22,228
EBITDA(4)............... $ 4,969 $ 3,527 $ 6,467 $ 7,278 $ 2,649 $ 4,027 $ 4,454
Ratio of EBITDA to net
interest(5)............ 2.3x 1.0x 1.6x 1.7x 1.4x 1.4x 1.5x
ACNTA(6)................ $ 27,951 $ 29,888 $ 83,902 $118,260 $22,679 $ 108,224 $ 108,224
Ratio of ACNTA to total
indebtedness(5)(6)..... 0.9x 1.0x 2.1x 1.5x 0.8x 1.4x 1.4x
Capital expenditures.... $ 10,105 $ 8,079 $ 16,301 $ 22,401 $ 7,897 $ 16,556 $ 16,556
Payments on debt........ $ 3,688 $ 1,152 $ 566 $ 566 $ 13 $ 43,529 $ 43,529
Ratio of earnings to
fixed charges and
preferred stock
dividends(7)........... 1.2x -- -- -- -- -- --
</TABLE>
13
<PAGE>
<TABLE>
<CAPTION>
AS OF
JUNE 30,
1997
--------------
(IN THOUSANDS)
<S> <C>
BALANCE SHEET DATA:
Cash and cash equivalents........................................ $ 8,400
Working capital.................................................. 11,066
Property and equipment, net...................................... 51,250
Total assets..................................................... 77,283
Long-term debt, including current maturities, net................ 67,841
Mandatory Redeemable Preferred Stock, net........................ 9,795
Total stockholder's deficit...................................... (12,688)
</TABLE>
- --------
(1) Reflects adjustments to oil and natural gas revenue, production taxes, and
depreciation, depletion and amortization for the incremental revenue and
expenses that would have been reported had the acquisition of the
overriding royalty interests occurred at the beginning of the period
presented. Interest expense has been adjusted assuming that the $2.6
million purchase price of the overriding royalty interests would have been
financed with new indebtedness.
(2) For all periods presented herein, the Company has operated as an S
Corporation for Federal and state income tax purposes. Upon the issuance of
the Equity Units described under "Private Placement," the Company
terminated its Subchapter-S election and will subsequently be treated as a
C Corporation for tax purposes (see Note 1 to Financial Statements). The
unaudited pro forma data includes the effect of income taxes as if the
Company were a C Corporation for the year ended December 31, 1996 and the
six months ended June 30, 1997, and the related pro forma periods.
(3) Historical earnings per share data has not been presented due to the
Company's termination of its Subchapter-S election. Pro forma net income
(loss) per share amounts are calculated by dividing net income (loss) by
the weighted average number of common shares outstanding, plus the effect,
using the treasury stock method, of common shares contingently issuable, if
dilutive. Due to net losses reported in all periods, exercise of
outstanding warrants to purchase shares of common stock would be
antidilutive and are therefore not considered.
(4) EBITDA means earnings before interest, taxes, depreciation, depletion and
amortization. EBITDA is commonly used by debt holders and financial
statement users as a measurement to determine the ability of an entity to
meet its interest obligations. EBITDA is not a measurement presented in
accordance with generally accepted accounting principles ("GAAP") and is
not intended to be used in lieu of GAAP presentation of results of
operations and cash provided by operating activities.
(5) As adjusted for the issuance of the Notes, for the pro forma 1996 and 1997
periods, EBITDA did not cover net interest by $2,533,000 and $452,000,
respectively. As adjusted for the issuance of the Notes, for the pro forma
1996 and 1997 periods the ratio of ACNTA to total indebtedness would be
1.5x and 1.4x, respectively.
(6) For the purpose of this calculation, ACNTA means Adjusted Consolidated Net
Tangible Assets and indebtedness means Indebtedness as both terms are
defined in the Indenture. See "Description of Notes--Certain Definitions."
(7) For purposes of computing this ratio, "earnings" represents income (loss)
before taxes and extraordinary items, plus fixed charges. "Fixed charges"
consist of interest expense on all indebtedness, amortization of deferred
financing costs and a portion of rental expense considered to be
representative of the interest factor therein. There was no preferred stock
outstanding during any of the historical periods presented prior to the
June 30, 1997 period. As a result of the losses incurred for the years
ended December 31, 1995 and 1996, and the 6 months ended June 30, 1996 and
1997, earnings did not cover fixed charges by $3,553,000, $1,775,000,
$1,282,000 and $7,263,000, respectively. For the pro forma 1996 and 1997
periods, earnings did not cover fixed charges by $1,547,000 and $7,169,000,
respectively. As adjusted for the issuance of the Notes and Equity Units,
earnings would not have covered fixed charges by $8,816,000 and $8,969,000,
respectively, for the pro forma 1996 and 1997 periods.
14
<PAGE>
SUMMARY RESERVE AND PRODUCTION DATA
(IN THOUSANDS, EXCEPT PER BOE INFORMATION AND RATIOS)
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
---------------------------------
PRO
FORMA
1994 1995 1996 1996(1)
------- ------- -------- --------
<S> <C> <C> <C> <C>
PROVED RESERVE DATA:
ESTIMATED NET PROVED RESERVES (AT PERIOD
END):
Crude oil and natural gas liquids (Bbls)... 1,718 2,000 2,512 2,721
Natural gas (Mcf).......................... 10,624 9,593 23,223 25,159
OIL EQUIVALENT (BOE)........................ 3,489 3,599 6,383 6,914
ESTIMATED FUTURE NET CASH FLOWS (BEFORE
INCOME TAX)................................ $27,888 $42,084 $116,995 $128,966
PRESENT VALUE OF PROVED RESERVES(2)......... $19,228 $30,596 $ 87,381 $ 96,389
PROVED RESERVES TO PRODUCTION RATIO (YEARS). 5.0 7.2 11.6 11.6
ANNUAL RESERVE ADDITION ACTIVITY:
Proved reserve additions (Boe)............. 536 612 3,334 3,612
Total capital costs attributable to:
Acquisition.............................. $ 1,799 $ 0 $ 0 $ 6,100
Development and exploitation............. 4,002 3,589 3,853 3,853
Exploration.............................. 4,304 4,490 12,448 12,448
------- ------- -------- --------
Total.................................. $10,105 $ 8,079 $ 16,301 $ 22,401
======= ======= ======== ========
Five year average finding and development
cost (per Boe)(3).......................... $ 5.43
Five year average reserve replacement
ratio(4)................................... 386%
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- ---------------------
PRO PRO
FORMA FORMA
1994 1995 1996 1996(1) 1996 1997 1997(1)
------ ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION DATA:
ANNUAL SALES VOLUMES:
Crude oil and natural gas
liquids (Bbls)............ 330 252 330 357 171 153 164
Natural gas (Mcf).......... 2,241 1,505 1,325 1,435 520 995 1,068
Oil equivalent (Boe)....... 704 503 551 596 258 319 342
UNIT ECONOMICS:
Average sales price per
Boe....................... $13.55 $13.76 $19.77 $19.77 $19.01 $19.62 $19.62
Production expense per Boe. $ 5.06 $ 5.68 $ 5.65 $ 5.29 $ 6.44 $ 4.71 $ 4.46
------ ------ ------ ------ ------ ------ ------
Gross margin per Boe....... $ 8.49 $ 8.08 $14.12 $14.48 $12.57 $14.91 $15.16
General and administrative
expenses per Boe.......... $ 1.71 $ 1.83 $ 2.79 $ 2.58 $ 2.75 $ 2.64 $ 2.46
------ ------ ------ ------ ------ ------ ------
Gross profit per Boe........ $ 6.78 $ 6.25 $11.33 $11.90 $ 9.82 $12.27 $12.70
====== ====== ====== ====== ====== ====== ======
</TABLE>
- --------
(1) Reflects adjustments to give effect to the acquisition by the Company of
certain overriding royalty interests in the Company's properties and
interests in the Bayou Fer Blanc Field and the West Gueydan Field as
described in "Private Placement," as if such acquisition had occurred on
the last day of the period prior to the period presented.
(2) These amounts do not consider future income taxes which will be payable as
a result of the termination of the Company's S-Corporation election.
(3) The five year average finding and development cost per Boe is calculated by
dividing (a) total capital expenditures for the five year period by (b) the
sum of proved reserves added through purchases of reserves in place,
extensions, discoveries and other additions and the effects of revisions
("Reserve Additions") for such period. Reserve information at each year-end
is based on reports prepared by independent petroleum engineers.
(4) The five year average reserve replacement ratio is calculated by dividing
(a) aggregate Reserve Additions for the trailing five year period by (b)
aggregate production for such period.
15
<PAGE>
RISK FACTORS
The following factors, together with the other information contained in this
Prospectus, should be considered carefully before purchasing the securities
offered hereby.
VOLATILITY OF OIL AND NATURAL GAS PRICES
Revenues generated from the Company's operations are highly dependent upon
the price of, and demand for, oil and natural gas. Historically, the markets
for oil and natural gas have been volatile and are likely to continue to be
volatile in the future. Prices for oil and natural gas are subject to wide
fluctuations in response to relatively minor changes in the supply of and
demand for oil and natural gas, market uncertainty and a variety of additional
factors that are beyond the control of the Company. These factors include the
level of consumer product demand, weather conditions, domestic and foreign
governmental regulations, the price and availability of alternative fuels,
political conditions in the Middle East, the foreign supply of oil and natural
gas, the price of foreign imports and overall economic conditions. It is
impossible to predict future oil and natural gas price movements with any
certainty. Declines in oil and natural gas prices may materially adversely
affect the Company's financial condition, liquidity and results of operations.
Lower oil and natural gas prices also may reduce the amount of the Company's
oil and natural gas that can be produced economically. In order to reduce its
exposure to price risks in the sale of its oil and natural gas, the Company
enters into hedging arrangements from time to time; however, the Company's
hedging arrangements apply to only a portion of its production and provide
only limited price protection against fluctuations in the oil and natural gas
markets. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--General" and "Business and Properties--Marketing."
The Company uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties
in the pool are depleted and charged to operations using the future gross
revenues method based on the ratio of current gross revenue to total proved
future gross revenues, computed based on current prices. To the extent that
such capitalized costs (net of accumulated depreciation, depletion and
amortization) less deferred taxes exceed the present value (using a 10%
discount rate) of estimated future net cash flow from proved oil and natural
gas reserves, and the lower of cost and fair value of unproved properties
after income tax effects, excess costs are charged to operations. Once
incurred, a write down of oil and natural gas properties is not reversible at
a later date even if oil or natural gas prices increase. While the Company has
never been required to write down its asset base, significant downward
revisions of quantity estimates or declines in oil and natural gas prices that
are not offset by other factors could result in a write down for impairment of
oil and natural gas properties.
REPLACEMENT OF RESERVES
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted. Except to the extent the Company acquires
properties containing proved reserves or conducts successful development and
exploration activities, or both, the proved reserves of the Company will
decline as reserves are produced. The Company's future oil and natural gas
production is, therefore, highly dependent upon its level of success in
finding or acquiring additional reserves. The business of exploring for,
developing or acquiring reserves is capital intensive. To the extent cash flow
from operations is reduced and external sources of capital become limited or
unavailable, the Company's ability to make the necessary capital investment to
maintain or expand its asset base of oil and natural gas reserves would be
impaired. In addition, there can be no assurance that the Company's future
development, acquisition and exploration activities will result in additional
proved reserves or that the Company will be able to drill productive wells at
acceptable costs.
UNCERTAINTY OF RESERVE INFORMATION AND FUTURE NET REVENUE ESTIMATES
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 Prospectus
16
<PAGE>
represents 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. 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 regulations by governmental 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 recovery and estimates of the future net cash flows
expected therefrom prepared by different engineers or by the same engineers at
different times may vary substantially and such reserve estimates may be
subject to downward or upward adjustment based upon such factors. Actual
production, revenues and expenditures with respect to the Company's reserves
will likely vary from estimates, and such variances may be material. See
"Business and Properties--Oil and Natural Gas Reserves."
The present values of estimated future net cash flows referred to in this
Prospectus should not be construed as the current market value of the
estimated oil and natural gas reserves attributable to the Company's
properties. In accordance with applicable requirements of the Commission, the
estimated discounted future net cash flows from proved reserves are generally
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, curtailments or
increases in consumption by gas purchasers and changes in governmental
regulations or taxation. The timing of actual future net cash flows from
proved reserves, and 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 calculation of the present value of the future net revenues
using a 10% discount, as required by the Commission, is not necessarily the
most appropriate discount factor based on interest rates in effect from time
to time and risks associated with the Company's reserves or the oil and
natural gas industry in general.
SUBSTANTIAL LEVERAGE
As of June 30, 1997, the Company's long-term debt and stockholder's deficit
are $67.8 million and $12.7 million, respectively. See "Capitalization." In
addition, the Indenture allows the Company to incur a minimum of $10.0 million
in additional Indebtedness that may be secured, under certain circumstances.
See "Description of Notes--Certain Covenants."
The Company's level of indebtedness has several important effects on its
operations, including (i) the covenants contained in the Indenture require the
Company to meet certain financial tests, and other restrictions limit its
ability to borrow additional funds or to dispose of assets and may affect the
Company's flexibility in planning for, and reacting to, changes in business
conditions and (ii) the Company's ability to obtain additional financing in
the future for working capital, capital expenditures, acquisitions, general
corporate purposes or other purposes may be impaired. Moreover, future
acquisition or development activities may require the Company to alter its
capitalization significantly. These changes in capitalization may
significantly alter the leverage of the Company. The Company's ability to meet
its debt service obligations and to reduce its total indebtedness will be
dependent upon the Company's future performance, which will be subject to
general economic conditions and to financial, business and other factors
affecting the operations of the Company, many of which are beyond its control.
There can be no assurance that the Company's future performance will not be
adversely affected by such economic conditions and financial, business and
other factors. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Liquidity and Capital Resources."
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial capital
expenditures for the development, exploration, acquisition and production of
oil and natural gas reserves. The Company made capital expenditures
17
<PAGE>
of $8.1 million during 1995 and $16.3 million during 1996. The Company plans
to make capital expenditures, not including expenditures for acquisitions, of
approximately $33.0 million in 1997 and 1998. Although management believes
that the Company will have sufficient cash provided by operating activities
and the proceeds from the Offerings to fund planned capital expenditures in
1997 and 1998, if revenues decrease as a result of lower oil and natural gas
prices or operating difficulties, the Company may be limited in its ability to
expend the capital necessary to undertake or complete its drilling program in
future years. There can be no assurance that additional debt or equity
financing or cash generated by operations will be available to meet these
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations--Liquidity and Capital Resources."
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may
require the Company to purchase all or a portion of such holder's Notes at
101% of the principal amount of the Notes, together with accrued and unpaid
interest, if any, to the date of purchase. The Indenture requires that, prior
to such a purchase, the Company must either repay all outstanding Debt (as
defined therein) or obtain any required consents to such purchase. If a Change
of Control were to occur, the Company may not have the financial resources to
repay all of the Notes and the other indebtedness that would become payable
upon the occurrence of such Change of Control. See "Description of Notes--
Change of Control."
LACK OF PUBLIC MARKET
The Notes are new issues of securities for which there is currently no
active trading market. The Company does not currently intend to apply for a
listing or quotation of the Notes on any securities exchange or stock market.
Jefferies & Company, Inc. informed the Company that it currently intends to
make a market in the Notes. However, Jefferies & Company, Inc. is not
obligated to do so, and any such market making may be discontinued at any time
without notice. No assurance can be given as to the liquidity of the trading
market for the Notes. Accordingly, there can be no assurance as to the
development or liquidity of any market for the Notes. The Notes sold to QIBs
are eligible for trading by qualified buyers in the PORTAL System.
The liquidity of, and trading market for the Notes also may be adversely
affected by general declines in the market for similar securities. Such a
decline may adversely affect such liquidity and trading markets independent of
the financial performance of the Company.
VOTING CONTROL
McLain J. Forman, the Company's Chairman of the Board, President and Chief
Executive Officer, as of June 15, 1997, owned all of the outstanding voting
shares of Common Stock. Therefore, Mr. Forman has the ability to elect all of
the Company's directors and, directly and indirectly, influence all decisions
made by the Company. Upon completion of the Offerings, the Company acquired
the Bayou Fer Blanc Field and the West Gueydan Field from Forman Petroleum
Corporation II, a company whose sole stockholder is Mr. Forman. See "Certain
Transactions."
DRILLING RISKS
Drilling involves numerous risks, including the risk that no commercially
productive oil or natural gas reservoirs will be encountered. The cost of
drilling, completing and operating wells is often uncertain, and drilling
operations may be curtailed, delayed or canceled as a result of a variety of
factors, including unexpected drilling conditions, pressure or irregularities
in formations, equipment failures or accidents, adverse weather conditions and
shortages or delays in the delivery of equipment. The Company's future
drilling activities may not be successful and, if unsuccessful, such failure
will have an adverse effect on the Company's future results of operations and
financial condition.
18
<PAGE>
RISKS OF HEDGING TRANSACTIONS
In order to manage its exposure to price risks in the marketing of its oil
and natural gas, the Company has in the past and expects to continue to enter
into oil and natural gas price hedging arrangements with respect to a portion
of its expected production. These arrangements may include futures contracts
on the New York Mercantile Exchange (NYMEX), fixed price delivery contracts
and financial swaps. While intended to reduce the effects of volatility of the
price of oil and natural gas, such transactions may limit potential gains by
the Company if oil and natural gas prices were to rise substantially over the
price established by the hedge. In addition, such transactions may expose the
Company to the risk of financial loss in certain circumstances, including
instances in which (i) production is less than expected, (ii) if there is a
widening of price differentials between delivery points for the Company's
production and the delivery point assumed in the hedge arrangement, (iii) the
counterparties to the Company's future contracts fail to perform the contract
or (iv) a sudden, unexpected event materially impacts oil or natural gas
prices. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Liquidity and Capital Resources" and "Business and
Properties--Marketing--Hedging Activities."
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the services of its founder, McLain
J. Forman, and certain other senior management personnel. The loss of the
services of Mr. Forman and other senior management personnel could have a
material adverse effect on the Company's operations. The Company does not
currently have an employment contract with any senior management or key
personnel. The Company believes that its success is also dependent upon its
ability to continue to employ and retain skilled technical personnel. The
Company does not currently have any key-man insurance coverage on McLain J.
Forman, other senior management or any key personnel. The inability of the
Company to employ or retain skilled technical personnel could have a material
adverse effect on the Company's operations.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS
Oil and natural gas operations are subject to various federal, state and
local government regulations that may be changed from time to time in response
to economic or political conditions. Matters subject to regulation include
discharge permits for drilling operations, drilling and abandonment bonds or
other financial responsibility requirements, reports concerning operations,
the spacing of wells, utilization and pooling of properties and taxation. 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 to conserve supplies of oil and natural gas.
In addition, the production, handling, storage, transportation and disposal of
oil and natural gas, by-products thereof and other substances and materials
produced or used in connection with oil and natural gas operations are subject
to regulation under federal, state and local laws and regulations primarily
relating to protection of human health and the environment. These laws and
regulations have continuously imposed increasingly strict requirements for
water and air pollution control and solid waste management. See "Regulation".
MARKETABILITY OF PRODUCTION
The marketability of the Company's production depends upon the availability
and capacity of gas gathering systems, pipelines and processing facilities,
and the unavailability or lack of capacity thereof could result in the shut-in
of producing wells or the delay or discontinuance of development plans for
properties. In addition, federal and state regulation of oil and natural gas
production and transportation, general economic conditions and changes in
supply and demand could adversely affect the Company's ability to produce and
market its oil and natural gas on a profitable basis.
SUBSTANTIAL COMPETITION
The Company operates in a highly competitive environment. The Company
competes with major and independent oil and natural gas companies for the
acquisition of desirable oil and natural gas properties, as well as for the
equipment and labor required to develop and operate such properties. The
Company also competes
19
<PAGE>
with major and independent oil and natural gas companies in the marketing and
sale of oil and natural gas to marketers and end-users. Many of these
competitors have financial and other resources substantially greater than
those of the Company. See "Business and Properties--Competition."
OPERATING RISKS OF OIL AND NATURAL GAS OPERATIONS
The oil and natural gas business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, casing
collapse, abnormally pressured formations and hazards such as oil spills,
natural gas leaks, ruptures or discharges of toxic gases. The occurrence of
any of these operating risks could result in substantial losses to the Company
due to injury or loss of life, severe damage to or destruction of property and
equipment, pollution or other environmental damage, including damage to
natural resources, clean-up responsibilities, penalties and suspension of
operations. In accordance with customary industry practice, the Company
maintains insurance against some, but not all, of the risks described above.
There can be no assurance that any insurance obtained by the Company will be
adequate to cover any losses or liabilities. The Company cannot predict the
continued availability of insurance or the availability of insurance at
premium levels that justify its purchase.
ADEQUACY OF COLLATERAL
Neither the Indenture nor the mortgage documentation securing the Indenture
contains any provisions for measuring the current value, adequacy or frequency
of valuation of the Collateral. Nor does the mortgage documentation contain
any provisions for the substitution of the Collateral under any circumstances
or the maintenance of Collateral value in the event of declining prices.
Therefore, there can be no assurance that the proceeds of any sale of the
Collateral, in whole or in part, pursuant to the Indenture and the related
Security Documents, would be sufficient to satisfy payments on a Bank Credit
Agreement, if any, and the Notes.
RISKS OF NOT ACCEPTING THE EXCHANGE OFFER
Investors who do not accept the Exchange Offer will continue to hold Old
Notes and any rights to receive registered Exchange Notes will be
extinguished. The Old Notes have not been, and will not be, registered under
the Securities Act or any state securities laws. Unless so registered, the Old
Notes may not be offered or sold except pursuant to an exemption from, or in a
transaction not subject to, the registration requirements of the Securities
Act and applicable state securities laws.
20
<PAGE>
THE COMPANY
Forman Petroleum Corporation is an independent energy company engaged in the
exploration, acquisition, development, exploitation and production of crude
oil and natural gas.
The Company's principal executive office is located at 650 Poydras Street,
Suite 2200, New Orleans, Louisiana 70130-6101, and its telephone number is
(504) 586-8888. Unless the context otherwise requires, the terms "Company" or
"Forman" as used in this Prospectus mean Forman Petroleum Corporation.
PRIVATE PLACEMENT
On June 3, 1997, the Company completed the private sale to Jefferies &
Company, Inc. of 70,000 units ("Note Units") consisting of $70,000,000
principal amount of the Old Notes and warrants to purchase 29,067 shares of
Common Stock, no par value (the "Common Stock"), of the Company at a price of
$65,667,000 in a transaction not registered under the Securities Act in
reliance upon Section 4(2) of the Securities Act and Rule 506 of Regulation D
under the Securities Act. Jefferies & Company, Inc. thereupon offered and
resold the Note Units only to qualified institutional buyers and a limited
number of institutional accredited investors at an initial price to such
purchasers of $68,467,000. Concurrently with the offering of the Note Units,
the Company completed a private sale to Jefferies & Company, Inc. of 200,000
units ("Equity Units") consisting of 200,000 shares of Series A Cumulative
Preferred Stock and warrants to purchase 14,533 shares of Common Stock. The
offerings and sales of the Note Units and the Equity Units are referred to
herein as the "Offerings."
The net proceeds to the Company from these Offerings was approximately $74.9
million. A portion of the net proceeds (approximately $9.5 million) was
segregated into the Capitalized Interest Account to pay interest on the Notes
through June 1, 1998. The Company used the remaining net proceeds of the
Offerings as follows: (i) approximately $35.2 million was used to repay all of
the outstanding indebtedness (including accrued interest and associated fees)
due under the Endowment Energy Partners ("EEP") and Endowment Energy Co-
Investment Partnership ("EECIP") loans; (ii) approximately $10.5 million was
used to repay all of the outstanding indebtedness (including accrued interest
and associated fees) under the Joint Energy Development Investments Limited
Partnership ("JEDI") loan; (iii) $2.6 million was used to purchase from EEP
and EECIP a 7.5% overriding royalty interest in the Company's Lake Enfermer
Field, Manila Village Field and Boutte Field; (iv) $5.0 million was used in
connection with the Company's acquisition from Forman Petroleum Corporation II
("FPC II"), a company whose sole stockholder is McLain J. Forman, all of FPC
II's interest in the Bayou Fer Blanc Field and the West Gueydan Field, of
which $1.5 million was paid to FPC II, $1.0 million was used to pay bank debt
and $2.5 million was used to pay trade payables to third parties; (v)
Jefferies & Company, Inc. received a fee of $1.9 million for financial
advisory services provided to the Company and also received a warrant to
purchase 4,844 shares of Common Stock at an initial exercise price of $1.00
per share; and (vi) $0.9 million was used to pay expenses of the Offerings.
See "Certain Transactions."
The remaining net proceeds from the Offerings of $9.4 million are being used
for capital expenditures, working capital and other general corporate
purposes.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange a
like principal amount of Old Notes, the terms of which are identical in all
material respects to the Exchange Notes. The Old Notes surrendered in exchange
for the Exchange Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any change in
capitalization of the Company.
21
<PAGE>
CAPITALIZATION
The following table sets forth as of June 30, 1997 short-term debt
(including current maturities of long-term debt) and capitalization of the
Company. The information was derived from, and is qualified by reference to
the Financial Statements of the Company, including the notes thereto, included
elsewhere in this Prospectus. This information should be read in conjunction
with such financial statements, including the notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30,
1997
--------------
(IN THOUSANDS)
<S> <C>
Short-term debt (including current maturities of long-term
debt)(1)....................................................... $ 14
Long-term debt (less current maturities):
13.5% Senior Secured Notes due 2004(2)........................ 67,827
--------
Total debt.................................................. $ 67,841
========
Mandatorily Redeemable Preferred Stock, no par value, 1,000,000
authorized shares, none outstanding, 200,000 shares outstanding
as adjusted(3)................................................. $ 9,795
Stockholder's equity:
Common Stock, no par value, 1,000,000 authorized shares;
90,000 outstanding (exclusive of 10,000 treasury shares)..... 1
Additional paid-in capital(4)................................. --
Accumulated deficit(5)........................................ (12,689)
--------
Total stockholder's deficit................................. (12,688)
--------
Total debt and capitalization............................... $ 64,948
========
</TABLE>
- --------
(1) See Notes 2 and 8 to the Financial Statements of the Company.
(2) Long-term debt is net of unamortized debt discount of $2,173,000 of which
$667,000 represents the estimated value of the warrants attached to the
Old Notes.
(3) Preferred Stock is net of $333,000 allocated to the value of the warrants
offered with the Equity Units, but includes $125,000 of accrued dividends
payable in additional shares of preferred stock.
(4) Additional paid-in capital includes $1.0 million representing the value of
the warrants attached to the Old Notes and the warrants offered with the
Equity Units, recorded as additional paid-in capital. In connection with
the termination of the Subchapter-S Corporation election, see
"Management's Discussion and Analysis of Financial Condition and Results
of Operations," $1,786,000 of accumulated deficit was reclassified to
additional paid-in capital (see also (5) below).
(5) Reflects $1.5 million of the purchase price of the Bayou Fer Blanc Field
and the West Gueydan Field which represents a distribution to McLain J.
Forman. Additionally, in connection with the termination of the
Subchapter-S Corporation election, see "Management's Discussion and
Analysis of Financial Condition and Results of Operations," accumulated
deficit has been reclassified to additional paid-in capital to the extent
possible.
22
<PAGE>
SELECTED HISTORICAL FINANCIAL INFORMATION
The following tables set forth selected actual historical and pro forma
financial information of the Company for the periods set forth below. The pro
forma information set forth below gives effect to the acquisition by the
Company of certain overriding royalty interests in the Company's properties
and interests in the Bayou Fer Blanc Field and the West Gueydan Field as
described in "Private Placement," as if such transactions occurred on the last
day of the period prior to the period presented. The following information
should be read in conjunction with "Capitalization," "Management's Discussion
and Analysis of Financial Condition and Results of Operations" and the
Financial Statements of the Company and the related notes thereto included
elsewhere in this Prospectus. In 1994, the Company changed its fiscal year end
from September 30 to December 31. As such, the financial information for the
years ended September 30, 1994 and December 31, 1994 overlaps for January 1,
1994 to September 30, 1994.
<TABLE>
<CAPTION>
YEAR ENDED YEAR ENDED SIX MONTHS ENDED
SEPTEMBER 30, DECEMBER 31, JUNE 30,
---------------------- --------------------------------- -------------------------
PRO PRO
FORMA FORMA
1992 1993 1994 1994 1995 1996 1996(1) 1996 1997 1997(1)
------ ------ ------ ------ ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Oil and natural gas
revenue............... $2,090 $7,868 $8,718 $9,532 $ 6,919 $10,892 $11,773 $ 4,887 $ 6,262 $ 6,717
Costs and expenses:
Oil and natural gas
operating expenses.... 451 1,608 2,741 2,775 2,196 2,526 2,526 1,239 1,199 1,199
Production taxes....... 233 684 678 791 661 585 655 416 304 331
Depreciation,
depletion and
amortization.......... 533 2,167 2,207 2,391 3,558 4,259 4,491 2,088 3,595 3,728
General and
administrative........ 793 706 1,151 1,204 921 1,539 1,539 709 841 841
------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Total operating
expenses............ 2,010 5,165 6,777 7,161 7,336 8,909 9,211 4,452 5,939 6,099
------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Operating income
(loss)................ 80 2,703 1,941 2,371 (417) 1,983 2,562 435 323 618
Interest expense....... 617 1,354 1,897 2,121 3,522 3,983 4,334 1,843 2,825 2,971
Income tax expense..... 0 0 0 0 0 0 0 -- 4,746 4,801
Other income:
Interest income........ 16 9 12 14 194 37 37 19 54 54
Overhead
reimbursements........ 39 58 77 74 131 95 95 61 35 35
Other.................. 9 143 163 119 61 93 93 46 21 21
------ ------ ------ ------ ------- ------- ------- ------- ------- -------
Net income (loss).... $ (473) $1,559 $ 296 $ 457 $(3,553) $(1,775) $(1,547) $(1,282) $(7,138) $(7,044)
====== ====== ====== ====== ======= ======= ======= ======= ======= =======
Ratio of earnings to
fixed charges and
preferred stock
dividends(2).......... -- 2.2x 1.2x 1.2x -- -- -- -- -- --
====== ====== ====== ====== ======= ======= ======= ======= ======= =======
UNAUDITED PRO FORMA
DATA:
Net income (loss) as
reported above........ -- -- -- -- -- $(1,775) $(1,547) -- $(7,138) $(7,044)
Pro forma (provision)
benefit for income
taxes(3).............. -- -- -- -- -- 657 572 -- 5,631 5,631
------- ------- ------- ------- -------
Pro forma net income
(loss)................ -- -- -- -- -- $(1,118) $ ( 975) -- $(1,507) $(1,413)
======= ======= ======= ======= =======
Weighted average
shares outstanding.... -- -- -- -- -- 90,000 90,000 -- 90,000 90,000
======= ======= ======= ======= =======
Pro forma net income
(loss) per share(4)... -- -- -- -- -- $(12.42) $(10.83) -- $(16.74) $(15.70)
======= ======= ======= ======= =======
</TABLE>
23
<PAGE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, AS OF JUNE 30, AS OF
------------------------- -------------------------- JUNE 30,
1992 1993 1994 1994 1995 1996 1997
------- ------- ------- ------- ------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital........ $(1,989) $(3,498) $(3,654) $(2,097) $(2,117) $(44,198) $ 11,066
Property and equipment,
net................... 5,411 10,859 20,446 20,874 25,814 37,352 51,250
Total assets........... 7,478 14,048 25,229 32,962 29,160 42,377 77,283
Long-term debt,
including current
maturities, net....... 8,514 12,262 20,252 29,721 28,607 39,043 67,841
Mandatorily redeemable
preferred stock, net.. -- -- -- -- -- -- 9,795
Total stockholder's
equity (deficit)...... (1,803) (244) 52 295 (3,258) (5,033) (12,688)
</TABLE>
- --------
(1) Reflects adjustments to oil and natural gas revenue, production taxes, and
depreciation, depletion and amortization for the incremental revenue and
expenses that would have been reported had the acquisitions occurred at
the beginning of the period presented. Interest expense has been adjusted
assuming that the $2.6 million purchase price of the overriding royalty
interests would have been financed with new indebtedness.
(2) For purposes of computing this ratio, "earnings" represents income (loss)
before taxes and extraordinary items, plus fixed charges. "Fixed charges"
consist of interest expense on all indebtedness, amortization of deferred
financing costs and a portion of rental expense considered to be
representative of the interest factor therein. There was no preferred
stock outstanding during any of the historical periods presented prior to
the June 30, 1997 period. As a result of the losses incurred for the years
ended September 30, 1992 and December 31, 1995 and 1996, and the six
months ended June 30, 1996 and 1997, earnings did not cover fixed charges
by $473,000, $3,553,000, $1,775,000, $1,282,000 and $7,263,000,
respectively. For the pro forma 1996 and 1997 periods, earnings did not
cover fixed charges by $1,547,000 and $7,169,000, respectively. As
adjusted for the issuance of the Notes and Equity Units, earnings would
not have covered fixed charges by $8,816,000 and $8,969,000 for the pro
forma 1996 and 1997 periods, respectively.
(3) For all periods presented herein, the Company has operated as an S
Corporation for Federal and state income tax purposes. Upon the issuance
of the Equity Units described under "Private Placement," the Company
terminated its Subchapter-S election and will subsequently be treated as a
C Corporation for tax purposes (see Note 1 to Financial Statements). The
unaudited pro forma data includes the effect of providing income taxes as
if the Company were a C Corporation for the year ended December 31, 1996
and the six months ended June 30, 1997, and the related pro forma periods.
(4) Historical earnings per share data has not been presented due to the
Company's termination of its Subchapter-S election. Pro forma net income
(loss) per share amounts are calculated by dividing net income (loss) by
the weighted average number of common shares outstanding, plus the effect,
using the treasury stock method, of common shares contingently issuable if
dilutive. Due to net losses reported in all periods, exercise of warrants
to purchase shares of common stock would be antidilutive and are therefore
not considered.
24
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The Company is an independent energy company engaged in the acquisition,
exploration, development, exploitation and production of crude oil and natural
gas. Since 1991, the Company has acquired five fields onshore in south
Louisiana. These fields have cumulative production of 153 MMBoe and contain
complex geologic structures that are well suited to 3-D seismic surveys and
interpretation to identify potential reserves. Since 1994, the Company has
acquired and processed over 74 square miles of 3-D seismic data over four of
these fields from which the Company has identified additional exploitation and
development prospects. In the Lake Enfermer Field, using this 3-D seismic data
along with existing well control, the Company drilled and completed three
wells in 1996 and is currently in the process of completing a fourth well.
This drilling activity increased net production from a daily average of 942
Boe/d in January 1996 to 1,895 Boe/d in December 1996. Over the same period,
proved reserves increased 92% from 3.6 MMBoe with a present value of $31.0
million to 6.9 MMBoe with a present value of $96.4 million. In 1997 and 1998,
the Company plans aggregate capital expenditures of approximately $33.0
million to perform an estimated seven recompletions and/or workovers and drill
an estimated eight new wells based on the Lake Enfermer 3-D seismic survey, to
drill an estimated two additional wells and to perform an estimated four
recompletions on other properties.
The Company uses the full cost method of accounting for its investment in
oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties
in the pool are depleted and charged to operations using the future gross
revenue method based on the ratio of current gross revenue to total proved
future gross revenues, computed based on current prices. To the extent that
such capitalized costs (net of accumulated depreciation, depletion and
amortization) less deferred taxes exceed the present value (using a 10%
discount rate) of estimated future net cash flow from proved oil and natural
gas reserves, and the lower of cost and fair value of unproved properties
after income tax effects, excess costs are charged to operations. Once
incurred, a write-down of oil and natural gas properties is not reversible at
a later date even if oil or natural gas prices increase. While the Company has
never been required to write down its asset base, significant downward
revisions of quantity estimates or declines in oil and natural gas prices that
are not offset by other factors could result in a write-down for impairment of
oil and natural gas properties.
On June 3, 1997, the Company issued preferred stock as further described
under "Private Placement." Prior to the issuance of this preferred stock, the
Company was taxed as an S Corporation. See Note 1 to the financial statements
of the Company. The issuance of preferred stock terminated the S Corporation
status effective June 3, 1997. For the short year beginning June 4, 1997 and
subsequent years, the Company will be subject to Federal and state income tax.
RESULTS OF OPERATIONS
Six Months Ended June 30, 1997 Compared to Six Months Ended June 30, 1996
The Company's oil and gas revenues increased approximately $1.4 million, or
28% to $6.3 million for the six months ended June 30, 1997, from $4.9 million
for the comparable period in 1996. Production levels for the six months ended
June 30, 1997, increased 24% to 319 thousand barrels of oil equivalent
("MBOE") from 257 MBOE for the comparable period in 1996. Gas production
volumes increased 91%, while oil volumes declined 10%. The Company's average
sales prices (including hedging activities) for oil and natural gas for the
six months ended June 30, 1997 were $21.58 per Bbl and $2.97 per Mcf versus
$19.75 per Bbl and $2.93 per Mcf in the 1996 period. Revenues increased $1.0
million due to the aforementioned production increases, and by $320,000 as a
result of increased oil and gas prices.
25
<PAGE>
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
six months ended June 30, 1996 and 1997:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE
30,
------------------------
$ INCREASE
1996 1997 (DECREASE)
------ ------ ----------
<S> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate (MBbls)........................... 171 153 (11)%
Natural gas (MMcf)................................... 520 995 91 %
AVERAGE SALES PRICES:
Oil and condensate ($ per Bbl)....................... $19.75 $21.58 9 %
Natural gas ($ per Mcf).............................. 2.93 2.97 1 %
OPERATING REVENUES:
Oil and condensate (in thousands).................... $3,367 $3,308 (2)%
Natural gas (in thousands)........................... $1,520 $2,954 94 %
------ ------ ---
Total (in thousands)............................... $4,887 $6,262 28 %
====== ====== ===
</TABLE>
On a BOE basis, lease operating expenses experienced a 22% decrease, to
$3.76 per BOE for the six months ended June 30, 1997 from $4.82 per BOE in the
comparable 1996 period. For the first six months of 1997, lease operating
expenses were down 3%, from $1.24 million in 1996 to $1.20 million in the
comparable 1997 period. This decrease was due primarily to the abandonment of
one of the Company's fields between 1996 and 1997.
The effective severance tax rate as a percentage of oil and gas revenues
decreased to 4.9% for the six months ended June 30, 1997, from 8.5% for the
comparable period in 1996. The decrease was due primarily to the increased
production from wells that have a state severance tax exemption under
Louisiana's severance tax abatement program.
For the six months ended June 30, 1997, depreciation, depletion and
amortization ("DD&A") expense increased 72% over the comparable 1996 period.
The increase for the six-month period is attributable to (i) the Company's
increased production and related future capital costs during the first six
months of 1997 and (ii) the write-off of deferred financing costs related to
the loans that were repaid in June, 1997. This accelerated write-off of
deferred financing costs during the six-month period ended June 30, 1997
resulted from the December, 1996, change in the maturity dates of the
Endowment Energy Partners ("EEP") and Endowment Energy Co-Investment
Partnership ("EECIP") loans from December 31, 1999, and September 30, 1998,
respectively, to June 30, 1997 for each loan.
Excluding the one-time write-off of deferred financing costs in June 1997,
the DD&A expense for the six months ended June 30, 1997 increased 37% over the
comparable 1996 period. On a BOE basis, which reflects the increases in
production, the DD&A rate for the first six months of 1997 was $8.99 per BOE
compared to $8.12 per BOE for the same period in 1996, an increase of only
11%.
For the six months ended June 30, 1997, general and administrative ("G&A")
expenses were $2.64 per BOE, a 4% decrease from the $2.75 per BOE for the
first six months of 1996.
Interest expense for the six months ended June 30, 1997 increased to $2.8
million from $1.8 million for the comparable 1996 period. This increase of
$1.0 million in interest expense is due primarily to (i) $275,000 of interest
on a term loan from Joint Energy Development Investments Limited Partnership
("JEDI") made in December 1996 which was repaid in June 1997, and (ii)
$528,000 of additional interest in June 1997, relating to the issuance of $70
million principal amount of 13.5% Senior Secured Notes due 2004, Series A (the
"Notes"), on June 3, 1997 (See "Liquidity and Capital Resources").
Due to the factors described above, the net loss increased to $2.4 million
for the six months ended June 30, 1997, from a loss of $1.3 million for the
comparable period in 1996.
26
<PAGE>
The Company issued a second class of stock on June 3, 1997, effectively
terminating its S Corporation election. As a result, the Company will be
subject to Federal and state income taxes for the results of operations
subsequent to June 2, 1997, and accordingly, a benefit of $335,000 was
reflected in income tax expense for the six-month period ended June 30, 1997.
In addition, due to the termination of the Company's status as an S
Corporation for federal income tax purposes, the Company was also required to
establish a net deferred tax liability calculated at the applicable Federal
and state tax rates resulting primarily from financial reporting and income
tax reporting basis differences in oil and gas properties. Accordingly, a net
deferred tax liability of $5,081,000 was accrued at June 3, 1997 and is
included in income tax expense for the six- month period ended June 30, 1997.
The net result of these two accruals was an increase of $4,700,000 in the net
loss of the Company for the six-month period ended June 30, 1997.
Year Ended December 31, 1996 Compared to Year Ended December 31, 1995
During 1996, the Company reported increases in total production, operating
income and cash flow from operations, compared to 1995. Oil and natural gas
revenues increased 57% from $6.9 million in 1995 to $10.9 million in 1996.
Production volumes for oil increased 31% from 252 MBbls in 1995 to 330 MBbls
in 1996. The increase in oil production increased revenues $2.6 million.
Production volumes for natural gas decreased 12% from 1,505 MMcf in 1995 to
1,325 MMcf in 1996. Although volumes decreased by 12%, revenues for natural
gas increased $1.3 million due to a 72% increase in average natural gas prices
in 1996. The overall increase in oil and natural gas production was due to
three new wells being drilled and completed during 1996, which was partially
offset by normal production declines from existing wells. Increases in average
oil and natural gas prices were directly attributable to the general improved
market conditions.
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
years ended December 31, 1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
% INCREASE
1995 1996 (DECREASE)
------- ------- ----------
<S> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate (MBbls)......................... 251.8 329.9 31 %
Natural gas (MMcf)................................. 1,504.5 1,325.1 (12)%
AVERAGE SALES PRICES:
Oil and condensate ($ per Bbl)..................... $ 17.19 $ 21.10 23 %
Natural gas ($ per Mcf)............................ $ 1.72 $ 2.96 72 %
OPERATING REVENUES:
Oil and condensate (in thousands).................. $ 4,327 $ 6,964 61 %
Natural gas (in thousands)......................... $ 2,592 $ 3,928 52 %
------- ------- ---
Total (in thousands)............................. $ 6,919 $10,892 57 %
</TABLE>
Oil and natural gas operating expenses increased 14% from $2.2 million in
1995 to $2.5 million in 1996. This increase was due to the overall increase in
production generated from new oil and natural gas wells drilled and completed.
DD&A expense increased 19% from $3.6 million in 1995 to $4.3 million in
1996. This increase was due to the overall increase in oil and natural gas
production, offset by a 27% decrease in the depletion rate.
G&A increased 67% from $0.9 million in 1995 to $1.5 million in 1996. This
increase was due to the capitalization of $0.5 million of G&A in 1995
attributable to the conduct of the 3-D seismic survey. Excluding this
capitalization, G&A increased 7% during 1996.
Interest expense increased 14% from $3.5 million in 1995 to $4.0 million in
1996. This increase was due to the imposition of interest on interest that was
accrued and not paid to the lender during all of 1996.
27
<PAGE>
Net income (loss) was $(1.8 million) in 1996 as compared to $(3.6 million)
in 1995, as a result of the factors described above.
Year Ended December 31, 1995 Compared to Year Ended December 31, 1994
During 1995, the Company reported decreases in total production, operating
income and cash flow from operations. Oil and natural gas revenues decreased
27% from $9.5 million in 1994 to $6.9 million in 1995. Production volumes for
oil decreased 24% from 331 MBbls in 1994 to 252 MBbls in 1995 due to the
cessation of drilling activities during the conduct of a 3-D seismic survey on
the Lake Enfermer Field. The decrease in oil production decreased revenues
$1.3 million. Production volumes for natural gas decreased 33% from 2,241 MMcf
in 1994 to 1,505 MMcf in 1995. The decrease in natural gas production
decreased revenues by $1.3 million.
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
years ended December 31, 1994 and 1995.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------
% INCREASE
1994 1995 (DECREASE)
------- ------- ----------
<S> <C> <C> <C>
PRODUCTION VOLUMES:
Oil and condensate (MBbls)......................... 330.5 251.8 (24)%
Natural gas (MMcf)................................. 2,240.6 1,504.5 (33)%
AVERAGE SALES PRICES:
Oil and condensate ($ per Bbl)..................... $ 17.09 $ 17.19 1 %
Natural gas ($ per Mcf)............................ $ 1.73 $ 1.72 (1)%
OPERATING REVENUES:
Oil and condensate (in thousands).................. $ 5,647 $ 4,327 (23)%
Natural gas (in thousands)......................... $ 3,885 $ 2,592 (33)%
------- ------- ---
Total (in thousands)............................. $ 9,532 $ 6,919 (27)%
</TABLE>
Oil and natural gas operating expenses decreased 21% from $2.8 million in
1994 to $2.2 million in 1995. This decrease was due to decreased production
generated from oil and natural gas wells drilled and completed.
DD&A expense increased 50% from $2.4 million in 1994 to $3.6 million in
1995. This increase resulted from a significant negative revision the Company
made to the estimated future gross revenues from its oil and natural gas
reserves for the year ended December 31, 1995, as based upon its internal
reserve estimate as of that date. This revision was primarily the result of
the deletion of almost all of the future oil and natural gas reserves in the
Company's Bayou Dularge Field, as necessitated by the unsuccessful attempt to
develop the field's proved undeveloped reserves. This negative revision of
almost 40% of the Company's proved reserves was so large that it caused the
net increase in both the DD&A rate and the actual DD&A expense charge for
1995, despite the decrease in production in 1995.
G&A decreased 25% from $1.2 million in 1994 to $0.9 million in 1995. This
decrease is due to the capitalization of $0.5 million of G&A in 1995
attributable to the conduct of the 3-D seismic survey. Excluding this
capitalization, G&A in 1995 increased 17% primarily due to increased staffing
for 3-D seismic interpretations.
Interest expense increased 67% from $2.1 million in 1994 to $3.5 million in
1995. This increase was due to the additional debt in the amount of $7.0
million, which added to the Company's long-term debt the last day of December
1994. Thus, no interest was paid on this $7.0 million of new debt in 1994
while a full year of interest was paid or accrued on it in 1995. In total,
long-term debt increased almost $15.0 million during 1994, and the full impact
of increased interest on this new debt was not reflected until 1995.
Net income (loss) was $(3.6 million) in 1995 as compared to net income of
$0.5 million in 1994, as a result of the factors described above.
28
<PAGE>
LIQUIDITY AND CAPITAL RESOURCES
The Company's primary sources of liquidity have included funds generated by
operations, the sale of prospects, from borrowings from its senior lenders,
EEP and EECIP, and the Offerings. In addition, in September 1996, McLain J.
Forman, the sole stockholder of the Company, loaned the Company $1.0 million
on an unsecured basis for the purpose of paying certain trade payables. In
late November 1996, the Company secured a bridge loan in the amount of $4.0
million from JEDI for the specific purpose of paying certain additional trade
payables. On December 23, 1996, the Company repaid the bridge loan with the
proceeds of a term loan from JEDI. As of May 31, 1997, the Company had drawn
all of the $10.0 million available under the term loan, with $4.0 million
applied toward payment of the bridge loan, $0.5 million used to partially
repay the $1.0 million loan from Mr. Forman and $5.5 million used to pay trade
payables. The borrowings from EEP, EECIP and JEDI were repaid with the
proceeds of the Offerings.
Operating cash flow was $222,000 and $1.5 million in the three months ended
March 31, 1996 and 1997, respectively. The increase in operating cash flow was
primarily attributable to increased production volumes and higher average
sales prices. Operating cash flow was $2.9 million, $5,500 and $2.5 million in
1994, 1995 and 1996, respectively. The increase in operating cash flow in 1996
as compared to 1995 was primarily attributable to an increase in operating
income of $3.6 million, partially offset by an increase in oil and natural gas
revenue receivables and increased interest expenses. Accrued liabilities
increased by $3.4 million in 1996 as compared to 1995 due to the unpaid well
costs incurred in drilling the three post-3-D survey wells in 1996. The
decrease in cash flows used in 1995 as compared to 1994 was due primarily to
the operating loss in 1995 and the cessation of drilling activity during the
period the 3-D seismic survey was being conducted.
The Company has a budget of $33 million of capital expenditures in 1997 and
1998. A substantial portion of this amount is budgeted for the development
drilling necessary to bring the proved undeveloped and non-producing reserves
into production, as well as the exploratory drilling in the Lake Enfermer
Field. In addition, the Company used a portion of the net proceeds of the
Offerings to acquire from an affiliated entity, FPC II, two prospects (Bayou
Fer Blanc Field and West Gueydan Field), which, in the aggregate, cost
approximately $5.0 million. See "Private Placement." As part of such
acquisitions, the Company also acquired a recently completed 3-D seismic
survey covering the entire Bayou Fer Blanc Field. The Bayou Fer Blanc Field is
strategically located immediately adjacent to the Lake Enfermer Field. The
Company has integrated this 3-D data with the data from the existing 3-D
survey on the Lake Enfermer Field, resulting in a contiguous 58 square mile 3-
D survey over two of its oil and natural gas fields.
During 1994, the Company invested approximately $1.8 million in the
acquisition of the Bayou Dularge Field, with the remainder of the investing
activities for the year focused on development drilling in the Company's four
producing fields. During 1995, the Company invested $4.0 million in the
design, conduct and processing of the 3-D seismic survey at the Lake Enfermer
Field and $3.6 million in development drilling on Company-owned properties.
Beginning in November 1995, the Company ceased making principal and interest
payments on its long-term debt in order to utilize the cash flow from
operations to fund the ongoing post-3-D survey drilling activities. In January
1996, the Company began drilling the first of the six post-3-D survey wells,
with the sixth well currently being completed.
Cash flows from financing activities in 1994 were $14.8 million, reflecting
a combination of borrowings from EEP and EECIP totaling $19.0 million, offset
by repayments of principal in the amount of $3.7 million. The Company received
its final funding from EEP on December 31, 1994 for $7.0 million for the
conduct of a 3-D survey and for drilling development wells, and the funds were
placed into an escrow account upon receipt, causing a commensurate shift in
cash flows from investing activities between 1994 and 1995, when the funds
were subsequently withdrawn from escrow. The cash applied to financing
activities in 1995 consisted primarily of repayments of principal in the
amount of $1.2 million. During 1996, the Company continued to seek additional
sources of financing for its post-3-D survey drilling program to supplement
operating cash flow. In August 1996, the Company sold its interests in the
Bayou Fer Blanc Field and the West Gueydan Field to FPC II for $950,000, with
the proceeds used to reduce the Company's accrued trade payables. In September
1996, the Company
29
<PAGE>
borrowed $1.0 million from its sole shareholder, McLain J. Forman. The
proceeds from both of these transactions were applied to reduce the
outstanding trade payables that accrued from the post-3-D survey drilling
activity. In December 1996, the Company renegotiated its outstanding loans
from EEP and EECIP in conjunction with a commitment from JEDI to lend the
Company $10.0 million on a six month senior term loan. Under the terms of the
loan, the accrued interest payable to EEP and EECIP was capitalized as part of
the outstanding balance due, and by December 31, 1996, the Company had
borrowed $6.0 million under the JEDI term loan, with $5.5 million applied
toward payment of the JEDI bridge loan and the Company's accrued trade
payables and $0.5 million applied toward partial repayment of the $1.0 million
loan from Mr. Forman.
With the objective of achieving more predictable revenues and cash flows and
reducing the exposure to fluctuations in oil and natural gas prices, the
Company has entered into hedging transactions of various kinds with respect to
both oil and natural gas. While the use of these hedging arrangements limits
the downside risk of adverse price movements, it may also limit future
revenues from favorable price movements. In December 1996, the Company entered
into a fixed price contract with respect to 150,000 MMBtu's for the month of
January 1997 at a price of $4.93 per Mcf. In January 1997, the Company entered
into a fixed price contract with respect to 90,000 MMBtu's per month
(approximately 40% of its estimated net natural gas production in the Lake
Enfermer Field) for the months of February, March and April, 1997, at a
weighted average price for the three-month period of approximately $3.18 per
Mcf. Also in January 1997, the Company hedged through a swap agreement 400
barrels of oil per day (approximately 30% of its estimated net oil production)
for the five-month period from February through June 1997 at a weighted
average price of $23.75 per Bbl. The Company's swap agreement contained
specific contracted prices ("Swaps") that were settled monthly based on the
differences between the contract prices and the average NYMEX prices for each
month applied to the related contract volumes. This was the first oil Swap
transaction entered into by the Company, and the Company has not yet executed
any gas Swaps. However, going forward the Company will continue to evaluate
its hedging opportunities for both oil and natural gas in light of market
conditions, commodity price forecasts, capital spending and debt service
requirements. The Company may hedge additional volumes through the remainder
of 1997 or it may determine from time to time to terminate its then existing
hedging positions.
For the three and six-month periods ended June 30, 1997, net oil hedging
gains amounted to $71,200 and $189,300, respectively, and were recorded in the
accompanying statement of operations as an increase in revenues from oil and
gas production. At June 30, 1997, the Company currently has no outstanding oil
or natural gas swaps.
As a result of the Company's active development and exploration program to
be conducted on the current producing properties and on the two prospects
acquired with a portion of the net proceeds of the Offerings, the Company
anticipates significant working capital requirements. The Company believes
that the net proceeds from the Offerings, when combined with cash flow from
operations will be adequate to finance the Company's planned drilling and
other activities for the next twelve months. Specifically, the Company intends
to utilize the net proceeds from the Offerings to complete the drilling and
workover activity planned for 1997 in the Lake Enfermer Field, as well as the
drilling activity scheduled in the Bayou Fer Blanc and West Gueydan Fields.
These funds will be supplemented as necessary with cash flow from current
production and from increased or new production resulting from current
drilling and workover activities. The Company also anticipates utilizing
industry partners, where appropriate and available, to participate in the
drilling activities in either Bayou Fer Blanc or West Gueydan, thus reducing
the working capital requirements of the Company for projects in these two
fields. In 1998 the Company intends to fund the continued exploitation of its
properties primarily with cash flow from operations, supplemented where
appropriate and available by participation with industry working interest
partners on selected projects.
The Company is not pursuing a revolving credit facility at this time. The
Company may seek such a facility in the future to increase working capital. No
assurance can be given as to whether the Company will obtain such a facility
or as to the amount of any such facility. The Indenture imposes restrictions
on the Company's ability to incur additional indebtedness. In addition, the
Indenture restricts the ability of the Company to secure any new indebtedness,
which may in turn restrict the Company's ability to obtain a bank facility.
30
<PAGE>
BUSINESS AND PROPERTIES
OVERVIEW
The Company is an independent energy company engaged in the acquisition,
exploration, development, exploitation and production of crude oil and natural
gas. Since 1991, the Company has acquired five fields onshore in south
Louisiana. These fields have cumulative production of 153 MMBoe and contain
complex geologic structures that are well suited to 3-D seismic surveys and
interpretation to identify potential reserves. Since 1994, the Company has
acquired and processed over 74 square miles of 3-D seismic data over four of
these fields from which the Company has identified additional exploitation and
development prospects. In the Lake Enfermer Field, using this 3-D seismic data
along with existing well control, the Company drilled and completed three
wells in 1996. The Company drilled and completed a fourth well in 1997, and
drilled and temporarily suspended operations on a fifth well pending further
evaluation. A sixth well has been drilled and is currently being completed.
This drilling activity increased net production from a daily average of 942
Boe/d in January 1996 to 1,895 Boe/d in December 1996. Over the same period,
proved reserves increased 92% from 3.6 MMBoe with a present value of $31.0
million to 6.9 MMBoe with a present value of $96.4 million. In 1997 and 1998,
the Company plans aggregate capital expenditures of approximately $33.0
million to perform an estimated seven recompletions and/or workovers and drill
an estimated eight new wells based on the Lake Enfermer 3-D seismic survey, to
drill an estimated two additional wells and to perform an estimated four
recompletions on other properties.
EXPLORATION TECHNOLOGY
The Company believes that it can identify new drilling opportunities in its
fields by combining 3-D seismic survey data with other technologies, including
CAEX technology, as well as other available geological and engineering data.
The principal advantage of 3-D seismic data over 2-D seismic data is that it
affords a geoscientist the ability to investigate the entire prospective area
using a 3-D seismic data volume, as compared to the limited number of two
dimensional profiles covering a small percentage of the prospective area that
are available using 2-D seismic data. As a consequence, a geoscientist using
3- D seismic data can more fully evaluate prospective areas and produce more
accurate interpretations. The use of structural maps based upon 3-D seismic
data can improve the probability of drilling commercially successful wells,
since this data allows structurally advantageous positions to be more
accurately identified. The use of these modern technologies facilitates a more
optimal placement of development wells, more clearly identifies elements of
risk and aids in the prediction of geologic conditions and potential reserves.
The Company's advanced visualization and data analysis techniques and
sophisticated computing resources enable its geoscientists to view
collectively large volumes of information contained within the 3-D seismic
data. This improves the geoscientist's ability to recognize certain important
patterns or attributes in the data that may indicate hydrocarbon traps and
that, if viewed incorrectly or with the application of improper techniques,
could go undetected. Visualization techniques also enable the geoscientist to
quickly identify and prioritize key areas from the large volumes of data
reviewed to realize early benefits. The Company's sophisticated computing
resources and visualization and data analysis techniques and sophisticated
computing resources allow its geoscientists to more easily identify features
such as shallow and deep amplitude anomalies, complex channel systems, sharp
structural details and fluid contacts, which might have been overlooked using
less sophisticated 3-D seismic data interpretation techniques.
The application of advanced 3-D exploration technology requires large scale
information processing and graphic visualization, made possible by the rapid
improvements in computing technology. The Company has made a significant
investment in its 3-D seismic data visualization technology, which is closely
linked with the Company's well-log data base and other geoscience application
software. The Company uses a series of workstations from Silicon Graphics, and
has licensed Photon Seisx software for interpreting the geophysical data on
the 3-D workstations, Geographix software for analysis, mapping and
interpretation of geological data, and Cogniseis' Voxel Geo technology for
advanced 3-D geologic interpretation of data.
31
<PAGE>
The Company's technological success is dependent in part upon hiring and
retaining highly skilled technical personnel. The Company has assembled a
technical team that it believes has the capacity to adapt to the rapidly
changing technological demands in the field of oil and natural gas
exploration. This team consists of six geoscientists and engineers with an
average of 22 years industry experience, primarily concentrated in the Gulf
Coast region. The expertise of the Company's team of geoscientists and
engineers reduces its dependence on outside technical consultants and enables
the Company to internally generate substantially all of its prospects.
EXPLORATION AND OPERATING APPROACH
The Company's exploration approach is to utilize advanced 3-D seismic,
visualization and interpretation techniques to identify or evaluate prospects
and then drill the prospects that it believes provide the potential for
significant returns. The Company typically seeks to explore in areas (i) that
have shown a rich hydrocarbon content, (ii) with numerous accumulations of
normally pressured reserves at shallow depths and in geologic traps that are
difficult to define without the use of advanced 3-D data visualization and
interpretation and (iii) with the potential for large accumulations of deeper,
over-pressured reserves. Once the Company has identified a prospect, it begins
negotiations with landowners to secure a lease. The Company's experience in
the environmentally sensitive coastal marshlands of south Louisiana gives it
credibility with landowners who restrict and carefully monitor all operations
on their property. The Company designs the 3-D seismic survey to optimize data
acquisition at both shallow and deep horizons. After the data is acquired and
processed, the Company interprets such data in-house with its staff of
geoscientists and engineers. The 3-D seismic data is integrated with existing
well data to identify patterns of bright spots that could indicate productive
horizons. The Company's sophisticated computing resources and visualization
and data analysis techniques allow its geoscientists to more easily identify
features such as shallow and deep amplitude anomalies, complex channel
systems, sharp structural details and fluid contacts. With the 3-D seismic
generated subsurface mapping, the Company can seek to optimize the drilling
locations and wellbore paths to gain maximum structural advantage and identify
the optimum number of targets for a particular wellbore. When drilling
commences, the Company can integrate the 3-D seismic with logging while
drilling techniques to monitor the progress of the well and fine tune its
geologic and engineering profile in real time. Since the Company began to
utilize advanced 3-D seismic, visualization and interpretation techniques, the
Company has drilled and completed four wells, is currently in the process of
completing a fifth well, and drilled and temporarily suspended operations on a
sixth well pending further evaluation.
The Company has emphasized preplanning in project development to lower
capital and operational costs and to efficiently integrate potential well
locations into the existing and planned infrastructure, including gathering
systems and other surface facilities. The Company also seeks to minimize cycle
time from drilling to hook-up of wells, thereby accelerating cash flow and
improving ultimate project economics. For example, the Company has developed
an extensive gathering infrastructure in Lake Enfermer Field with
strategically placed production facilities designed to handle high volumes and
expedite the development cycle.
SIGNIFICANT PROJECT AREAS
Set forth below are descriptions of the Company's south Louisiana fields
where it is actively exploring for and developing oil and natural gas reserves
and in many cases currently has production. The 3-D surveys which the Company
is using to analyze its project areas range from regional non-proprietary
group shoots to single field proprietary surveys.
Although the Company is currently pursuing prospects within the project
areas listed below, there can be no assurance that these prospects will be
drilled at all or within the expected time frame. The final determination with
respect to the drilling of any scheduled or budgeted wells will be dependent
on a number of factors, including (i) results of the exploration efforts and
the acquisition, review and analysis of the seismic data, (ii) the
availability of sufficient capital resources by the Company and the other
participants for the drilling of the prospects, (iii) the approval of the
prospects by the other participants after additional data has been compiled,
(iv) economic and industry conditions at the time of drilling, including
prevailing and anticipated prices for oil
32
<PAGE>
and natural gas and the availability of drilling rigs and crews, (v) the
financial resources and operating results of the Company and (vi) the
availability of leases on reasonable terms and permitting for the prospect.
There can be no assurance that these projects can be successfully developed or
that the scheduled or budgeted wells discussed will, if drilled, encounter
reservoirs of commercially productive oil and natural gas. The reserve data
set forth below for the various prospects is based upon the estimate of the
reserves, future production and income attributable to certain leasehold and
royalty interests of the Company as of December 31, 1996 prepared by Ryder
Scott Company, Petroleum Engineers (the "Ryder Scott Report"). There are
numerous uncertainties in estimating quantities of proved reserves, including
many factors beyond the control of the Company. See "Risk Factors--Replacement
of Reserves," "--Uncertainty of Reserve Information and Future Net Revenue
Estimates" and "--Drilling Risks."
Lake Enfermer Field
The Lake Enfermer Field is located on a deep, complexly faulted, salt
structure in Lafourche Parish in a coastal marsh that is subsiding and grading
into an open bay environment. The Company has acquired 3,650 acres in this
field since 1992 and has an average 98.5% working interest in and is the
operator of the field. The field was first discovered in 1955 by Olin Gas.
Production through March 1997 for the field has been over 29 MMBoe. The
acquisition of the field included two production facilities and one satellite
location. In 1997, the Company built an additional production facility that
cost approximately $0.5 million. These three processing centers are located
approximately 1.5 miles apart from each other and are adequate to service all
of the Company's anticipated wells.
Upon the acquisition of the field, the Company used its extensive database of
2-D seismic data to drill and complete three wells in 1993 and 1994 (two of
which are currently productive) for a cost of $5.3 million. The Company
determined that an extensive 3-D survey of the Lake Enfermer Field area was
necessary to optimally develop the field. In April 1995 the Company commenced
a 33 square mile proprietary 3-D survey encompassing the entire Lake Enfermer
Field for the purpose of better identifying additional reserve potential and
more accurately determining drilling locations. The 3-D survey resulted in the
identification of numerous drilling opportunities. The Company utilized this
seismic data to drill and complete three wells in 1996 at a cost of $12.3
million. The three wells added a total of 3.2 MMBoe to proved reserves. The
first post-3-D survey well, spudded in January 1996, logged over 200 feet of
productive sands and was successfully completed as a dually-producing oil well
in March 1996, adding approximately $9.1 million of pro forma present value.
The second and third post-3-D survey wells, spudded in April and July 1996,
together logged over 312 feet of productive sands, adding approximately $37.9
million of pro forma present value to the Company's reserve base. The Company
drilled and completed a fourth well in 1997, and drilled and temporarily
suspended operations on a fifth well pending further evaluation. A sixth well
has been drilled and is currently being completed.
During 1997 and 1998, the Company plans to drill an estimated eight
additional wells and perform seven workovers and/or recompletions in the Lake
Enfermer Field at an estimated cost of approximately $25.0 million. In
addition, the Company has identified other exploratory and development
locations that it could drill in the future based upon its 3-D seismic survey
and the wells drilled to date.
Manila Village Field
The Manila Village Field is located in Jefferson Parish in a brackish water
marsh environment. The Company acquired 825 acres in this field in 1991 from
Manila Village Production Company, has an average 65% working interest in and
is the operator of the field. The field was first discovered by Whitestone in
1949 and through March 1997 the field had produced 35 MMBoe. Recently, the
Company undertook a 12 square mile 3-D survey over the area data from which is
currently being interpreted by the Company. During 1998, the Company plans to
drill an estimated one additional well at an estimated cost of approximately
$2.0 million.
Boutte Field
The Boutte Field is located in a fresh water marsh in St. Charles Parish.
All well locations are accessible by roads. The Company acquired in 1992 from
Texaco and Apache a 100% working interest in 3,250 acres in this
33
<PAGE>
field, which it operates. Discovered by Texaco in 1953, through March 1997 the
field had produced a total of 36 MMBoe with a production mix of 80% natural
gas and 20% oil. In 1996, the Company recompleted one well, which as of March
1997 was producing 312 Boe/d. During 1997, the Company has recompleted one
well, is in the process of recompleting a second well and plans to recomplete
two additional wells.
Bayou Fer Blanc Field
The Bayou Fer Blanc Field is located in Lafourche Parish, adjacent to the
Lake Enfermer Field. The Company used a portion of the net proceeds of the
Offerings to purchase a 100% working interest in the Bayou Fer Blanc Field,
which it now operates. See "Private Placement." Although classified as two
distinct fields, the Lake Enfermer Field and the Bayou Fer Blanc Field have
produced from a single geologic structure. The Bayou Fer Blanc Field was
discovered by Texaco in 1959 and through March 1997 the field had produced a
total of 17 MMBoe. The Company completed a 25 square mile proprietary 3-D
seismic survey of the Bayou Fer Blanc Field in 1996, which was integrated with
the 33 square mile 3-D seismic survey of the Lake Enfermer Field for a total
of 58 contiguous square miles for the two fields. The Company's initial
analysis of the 3-D survey suggests numerous undrilled amplitude anomalies
with exploratory potential.
West Gueydan Field
The West Gueydan Field is located in rice fields in Vermilion Parish on a
deep salt structure. The Company used a portion of the net proceeds of the
Offerings to purchase a 90% working interest in 1,180 acres in the field,
which it now operates. The field includes a wellbore that has been cleaned out
to total depth and is available for re-entry and sidetracking. See "Private
Placement." The field was discovered by Magnolia Oil Company in 1938 and
through March 1997 the field had produced a total of 36 MMBoe. The Company has
an extensive 2-D seismic data grid of the field and recently acquired
additional 3-D seismic data.
OIL AND NATURAL GAS RESERVES
The following table summarizes the estimates of the Company's proved
producing, proved non-producing and proved undeveloped reserves as of December
31, 1996, and the related present value of estimated future net revenues
before income taxes at such date, as estimated by independent petroleum
engineers, Ryder Scott Company, Petroleum Engineers.
<TABLE>
<CAPTION>
PRO FORMA PROVED RESERVES(1)
---------------------------------------
NON-
PRODUCING PRODUCING UNDEVELOPED TOTAL
--------- --------- ----------- -------
<S> <C> <C> <C> <C>
Natural gas (MMcf)..................... 4,165 5,029 15,965 25,159
Oil and NGLs (MBbls)................... 848 1,209 664 2,721
Natural gas equivalents (MMcfe)........ 9,253 12,283 19,949 41,485
Oil equivalents (MBoe)................. 1,542 2,047 3,325 6,914
Present value of estimated future net
revenues before income taxes
(discounted at 10%) (in
thousands)(2)......................... $25,329 $25,809 $45,251 $96,389
</TABLE>
- --------
(1) Reflects adjustments to give effect to the acquisition by the Company of
certain overriding royalty interests in the Company's properties and
interests in the Bayou Fer Blanc Field and the West Gueydan Field as
described in "Private Placement."
(2) The present value of estimated future net revenues before income taxes
(discounted at 10%) as of December 31, 1996 was determined using the
weighted average sales prices of $3.78 per Mcf of natural gas and $25.32
per Bbl of oil.
These estimates of the Company's proved reserves have not been filed with or
included in reports to any federal agency.
In accordance with applicable requirements of the Commission, estimates of
the Company's proved reserves and future net revenues are made using oil and
natural gas sales prices estimated to be in effect as of the date of
34
<PAGE>
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 Prospectus represents 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 engineering and
geological interpretation and judgment. As a result, estimates of different
engineers may vary. In addition, estimates of reserves are subject to revision
based upon actual production, results of future development and exploration
activities, prevailing oil and natural gas prices, operating costs and other
factors, which revisions may be material. Accordingly, reserve estimates are
often different from the quantities of oil and natural gas that are ultimately
recovered. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they are based.
In general, the volume of production from oil and natural gas properties
declines as reserves are depleted. Except to the extent the Company acquires
properties containing proved reserves or conducts successful exploration and
development activities, or both, the proved reserves of the Company will
decline as reserves are produced. The Company's future oil and natural gas
production is, therefore, highly dependent upon its level of success in
finding or acquiring additional reserves. See "Risk Factors--Replacement of
Reserves" and "--Uncertainty of Reserve Information and Future Net Revenue
Estimates."
ACREAGE
The table below describes the Company's developed and undeveloped leasehold
acreage as of December 31, 1996 on a pro forma basis.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
ACREAGE ACREAGE TOTAL
----------- ----------- -----------
FIELD GROSS NET GROSS NET GROSS NET
- ----- ----- ----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Lake Enfermer............................... 3,650 3,595 0 0 3,650 3,595
Manila Village.............................. 825 536 0 0 825 536
Boutte...................................... 3,250 3,250 0 0 3,250 3,250
Bayou Fer Blanc............................. 0 0 320 320 320 320
West Gueydan................................ 0 0 1,180 1,062 1,180 1,062
----- ----- ----- ----- ----- -----
7,725 7,381 1,500 1,382 9,225 8,763
===== ===== ===== ===== ===== =====
</TABLE>
No possible or probable reserves have been assigned to the Company's
undeveloped acreage. As is customary in the oil and natural gas industry, the
Company can retain its interests in undeveloped acreage by drilling activity
that establishes commercial production sufficient to maintain the leases, or
by payment of delay rentals during the remaining primary term of such a lease.
Delay rentals paid in 1996 and those projected for 1997 are insignificant. The
oil and natural gas leases in which the Company has an interest are for
varying primary terms.
35
<PAGE>
DRILLING ACTIVITY
The following table sets forth the wells drilled by the Company during the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
--------- --------- ---------
GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
DEVELOPMENT:
Productive...................................... 2.0 2.0 0.0 0.0 0.0 0.0
Non-productive.................................. 2.0 1.7 1.0 0.5 0.0 0.0
--- --- --- --- --- ---
Total......................................... 4.0 3.7 1.0 0.5 0.0 0.0
=== === === === === ===
EXPLORATORY:
Productive...................................... 0.0 0.0 0.0 0.0 3.0 3.0
Non-productive.................................. 0.0 0.0 0.0 0.0 0.0 0.0
--- --- --- --- --- ---
Total......................................... 0.0 0.0 0.0 0.0 3.0 3.0
=== === === === === ===
TOTAL:
Productive...................................... 2.0 2.0 0.0 0.0 3.0 3.0
Non-productive.................................. 2.0 1.7 1.0 0.5 0.0 0.0
--- --- --- --- --- ---
Total......................................... 4.0 3.7 1.0 0.5 3.0 3.0
=== === === === === ===
</TABLE>
As of December 31, 1996, the Company had a working interest in 16 gross (13
net) oil wells and seven gross (seven net) natural gas wells.
PRODUCTION
The following table sets forth certain oil and natural gas production data
of the Company during the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEARS ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------ -----------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996 1996 1997 1997
------ ------ ------ --------- ------ ------ ---------
<S> <C> <C> <C> <C> <C> <C> <C>
NET PRODUCTION:
Natural gas (MMcf)..... 2,241 1,505 1,325 1,435 520 995 1,068
Oil (MBbls)............ 330 252 330 357 171 153 164
Natural gas equivalents
(MMcfe)............... 4,221 3,017 3,305 3,577 1,546 1,913 2,051
Oil equivalents
(MBoe)................ 704 503 551 596 258 319 342
AVERAGE NET DAILY
PRODUCTION:
Natural gas (Mcf)...... 6,140 4,123 3,630 3,933 2,870 5,499 5,900
Oil (Bbls)............. 904 690 904 979 942 847 905
Natural gas equivalents
(Mcfe)................ 11,564 8,263 9,054 9,807 8,522 10,582 11,333
Oil equivalents (Boe).. 1,927 1,377 1,509 1,635 1,420 1,764 1,889
AVERAGE SALES PRICE:
Natural gas($/Mcf)..... $ 1.73 $ 1.72 $ 2.96 $ 2.96 $ 2.93 $ 2.97 $ 2.97
Oil ($/Bbl)............ $17.09 $17.19 $21.10 $21.10 $19.75 $21.58 $21.58
Natural gas equivalents
($/Mcfe).............. $ 2.26 $ 2.29 $ 3.30 $ 3.30 $ 3.17 $ 3.27 $ 3.27
Oil equivalents
($/Boe)............... $13.55 $13.76 $19.77 $19.77 $19.01 $19.62 $19.62
OTHER DATA:
Production taxes
($/Mcfe).............. $ 0.19 $ 0.22 $ 0.18 $ 0.18 $ 0.27 $ 0.16 $ 0.16
Operating expenses
($/Mcfe).............. $ 0.66 $ 0.73 $ 0.76 $ 0.71 $ 0.80 $ 0.63 $ 0.58
General and
administrative
expenses ($/Mcfe)..... $ 0.29 $ 0.30 $ 0.47 $ 0.43 $ 0.46 $ 0.44 $ 0.41
Depreciation, depletion
and amortization
($/Mcfe).............. $ 0.57 $ 1.18 $ 1.29 $ 1.26 $ 1.35 $ 1.88 $ 1.82
Production taxes
($/Boe)............... $ 1.12 $ 1.31 $ 1.06 $ 1.06 $ 1.62 $ 0.95 $ 0.95
Operating expenses
($/Boe)............... $ 3.94 $ 4.37 $ 4.59 $ 4.23 $ 4.82 $ 3.76 $ 3.51
General and
administrative
expenses ($/Boe)...... $ 1.71 $ 1.83 $ 2.79 $ 2.58 $ 2.75 $ 2.64 $ 2.46
Depreciation, depletion
and amortization
($/Boe)............... $ 3.40 $ 7.08 $ 7.73 $ 7.53 $ 8.12 $11.26 $10.90
</TABLE>
36
<PAGE>
MARKETING
Hedging Activities. The Company utilizes commodity swap agreements in an
attempt to reduce its exposure to commodity price movements. In December 1996,
the Company entered into a fixed price contract with respect to 150,000
MMBtu's for the month of January 1997 at a price of $4.93 per Mcf. In January
1997, the Company entered into a fixed price contract with respect to 90,000
MMBtu's per month (approximately 40% of its estimated net natural gas
production in the Lake Enfermer Field) for the months of February, March and
April, 1997, at a weighted average price for the three-month period of
approximately $3.18 per Mcf. Also in January 1997, the Company hedged through
a swap agreement 400 barrels of oil per day (approximately 30% of its
estimated net oil production) for the five-month period from February through
June 1997 at a weighted average price of $23.75 per Bbl. The Company's swap
agreement contained specific contracted prices ("Swaps") that were settled
monthly based on the differences between the contract prices and the average
NYMEX prices for each month applied to the related contract volumes. This was
the first oil Swap transaction entered into by the Company, and the Company
has not yet executed any gas Swaps. However, going forward the Company will
continue to evaluate its hedging opportunities for both oil and natural gas in
light of market conditions, commodity price forecasts, capital spending and
debt service requirements. The Company may hedge additional volumes through
the remainder of 1997 or it may determine from time to time to terminate its
then existing hedging positions.
Customers. During 1996 Scurlock Permian Corporation purchased 69% of the oil
sold by the Company. During the same period, Olympic Fuels and BNG, Inc.
purchased 74% of the natural gas sold by the Company. The Company benefits
from a long-standing business relationship with the above purchasers; however,
based on the current demand for oil and natural gas, the Company does not
believe the loss of any of these purchasers would have a material adverse
effect on the Company.
Oil and Natural Gas Condensate. All of the Company's crude oil and
condensate is sold at current market prices, under various short and
intermediate term contracts. The Company aggregates the majority of its
production into regional packages and periodically solicits offers from
qualified buyers.
TITLE TO PROPERTIES
As is customary in the oil and natural gas industry, the Company makes only
a cursory review of title to farmout acreage and to undeveloped oil and
natural gas leases upon execution of any contracts. Prior to the commencement
of drilling operations, a thorough title examination is conducted and curative
work is performed with respect to significant defects. To the extent title
opinions or other investigations reflect title defects, the Company, rather
than the seller of the undeveloped property, is typically responsible to cure
any such title defects at its expense. If the Company were unable to remedy or
cure any title defect of a nature such that it would not be prudent to
commence drilling operations on the property, the Company could suffer a loss
of its entire investment in the property. The Company has obtained title
opinions on substantially all of its producing properties and believes that it
has satisfactory title to such properties in accordance with standards
generally accepted in the oil and natural gas industry. Prior to completing an
acquisition of producing oil and natural gas leases, the Company obtains title
opinions on all leases. The Company's oil and natural gas properties are
subject to customary royalty interests, liens for current taxes and other
burdens that the Company believes do not materially interfere with the use of
or affect the value of such properties.
COMPETITION
The oil and natural gas industry is highly competitive. The Company competes
for the acquisition of oil and natural gas properties, primarily on the basis
of the price to be paid for such properties, with numerous entities, including
major oil companies, other independent oil and natural gas concerns and
individual producers and operators. Many of these competitors have financial
and other resources substantially greater than those of the Company. See "Risk
Factors--Competition."
37
<PAGE>
VOLATILITY OF OIL AND NATURAL GAS PRICES
Historically, the markets for oil and natural gas have been volatile and are
likely to continue to be volatile in the future. Prices for oil and natural
gas are subject to wide fluctuation in response to relatively minor changes in
the supply of and demand for oil and natural gas, market uncertainty and a
variety of additional factors that are beyond the control of the Company.
These factors include the level of consumer product demand, weather
conditions, domestic and foreign governmental regulations, the price and
availability of alternative fuels, political conditions in the Middle East,
the foreign supply of oil and natural gas, the price of foreign imports and
overall economic conditions. It is impossible to predict future oil and
natural gas price movements with any certainty. Declines in oil and natural
gas prices may adversely affect the Company's financial condition, liquidity
and results of operations. Lower oil and natural gas prices also may reduce
the amount of the Company's oil and natural gas that can be produced
economically.
REGULATION
General
Various aspects of the Company's oil and natural gas operations are subject
to extensive and continually changing regulation, as legislation affecting the
oil and natural gas industry is under constant review for amendment or
expansion. Numerous departments and agencies, both federal and state, are
authorized by statute to issue, and have issued, rules and regulations binding
upon the oil and natural gas industry and its individual members. The Federal
Energy Regulatory Commission ("FERC") regulates the transportation and sale
for resale of natural gas in interstate commerce pursuant to the Natural Gas
Act of 1938 ("NGA") and the Natural Gas Policy Act of 1978 ("NGPA"). In the
past, the Federal government has regulated the prices at which oil and natural
gas could be sold. While sales by producers of natural gas and all sales of
crude oil, condensate and natural gas liquids can currently be made at
uncontrolled market prices, Congress could reenact price controls in the
future. Deregulation of wellhead sales in the natural gas industry began with
the enactment of the NGPA in 1978. In 1989, Congress enacted the Natural Gas
Wellhead Decontrol Act (the "Decontrol Act"). The Decontrol Act removed all
remaining NGA and NGPA price and nonprice controls affecting wellhead sales of
natural gas effective January 1, 1993.
Regulation of Oil and Natural Gas Exploration and Production
Exploration and production operations of the Company are subject to various
types of regulation at the federal, state and local levels. Such regulations
include requiring permits and drilling bonds for the drilling of wells,
regulating the location of wells, the method of drilling and casing wells, and
the surface use and restoration of properties upon which wells are drilled.
Many states also have statutes or regulations addressing conservation matters,
including provisions for the utilization or pooling of oil and natural gas
properties, the establishment of maximum rates of production from oil and
natural gas wells and the regulation of spacing, plugging and abandonment of
such wells. Some state statutes limit the rate at which oil and natural gas
can be produced from the Company's properties. See "Risk Factors--Compliance
with Governmental Regulations."
Natural Gas Marketing, Gathering, Processing and Transportation
Federal legislation and regulatory controls in the United States have
historically affected the price of natural gas and the manner in which such
production is marketed.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B and
636-C ("Order No. 636"), which require interstate pipelines to provide
transportation separate, or "unbundled," from the pipelines' sales of natural
gas. Also, Order No. 636 requires pipelines to provide open-access
transportation on a basis that is equal for all natural gas supplies. Although
Order No. 636 does not directly regulate the Company's activities, the FERC
has stated that it intends for Order No. 636 to foster increased competition
within all phases of the natural gas industry. It is unclear what impact, if
any, increased competition within the natural gas industry under
38
<PAGE>
Order No. 636 will have on the Company's activities. Although Order No. 636
could provide the Company with additional market access and more fairly
applied transportation service rates, Order No. 636 could also subject the
Company to more restrictive pipeline imbalance tolerances and greater
penalties for violation of those tolerances.
In many instances, the result of Order No. 636 and related initiatives have
been to substantially reduce or eliminate the interstate pipelines'
traditional role as wholesalers of natural gas in favor of providing only
storage and transportation services.
Order No. 636 has been implemented on all interstate pipelines. In July
1996, the United States Court of Appeals for the District of Columbia Circuit
largely upheld Order No. 636. The Supreme Court denied certiorari on May 12,
1997. Certain issues, however, were remanded to the FERC by the District of
Columbia Circuit. On remand, the FERC in Order No. 636-C reaffirmed some
elements of Order No. 636 and modified others. Order No. 636-C may be the
subject of further proceedings at the FERC and is subject to appeal. Numerous
parties also have filed petitions for review of orders in individual pipeline
restructuring proceedings. Upon judicial review, the FERC's orders may be
remanded or reversed in whole or in part. Consequently, it is difficult to
predict Order No. 636's ultimate effects.
The FERC has announced several important transportation-related policy
statements and proposed rule changes, including the appropriate manner in
which interstate pipelines release capacity under Order No. 636 and, more
recently, the price that shippers can charge for their released capacity. In
addition, in 1995, FERC issued a policy statement on how interstate natural
gas pipelines can recover the costs of new pipeline facilities. In January
1996, the FERC issued a policy statement and a request for comments concerning
alternatives to its traditional cost-of-service ratemaking methodology. A
number of pipelines have obtained FERC authorization to charge negotiated
rates as one such alternative. While any additional FERC action on these
matters would affect the Company only indirectly, these policy statements and
proposed rule changes are intended to further enhance competition in natural
gas markets. In February 1997, the FERC announced a broad inquiry into issues
facing the natural gas industry to assist the FERC in establishing regulatory
goals and priorities in the post-Order No. 636 environment. The Company cannot
predict what action the FERC will take on these matters, nor can it predict
whether the FERC's actions will achieve its stated goal of increasing
competition in natural gas markets. However, the Company does not believe that
it will be treated materially differently than other natural gas producers and
marketers with which it competes.
Regulation of onshore natural gas gathering activities is primarily a matter
of state oversight. Regulation of natural gas gathering and transportation
activities, depending upon the state involved, may include various
transportation, safety, rate, environmental and non-discriminatory purchase
and transport requirements.
Oil Sales and Transportation Rates
Sales prices of crude oil and natural gas liquids by the Company are not
regulated. The price the Company receives from the sale of these products may
be affected by the cost of transporting the products to market. Effective
January 1995, the FERC implemented regulations establishing an indexing system
under which oil pipelines will be able to change their transportation rates,
subject to prescribed ceiling levels. The indexing system generally indexes
such rates to inflation, subject to certain conditions and limitations. The
Company is not able at this time to predict the effects of these regulations,
if any, on the transportation costs associated with oil production from the
Company's oil producing operations.
Additional proposals and proceedings that might affect the oil and natural
gas industry are pending before the FERC and the courts. The Company cannot
predict when or whether any such proposals may become effective. In the past,
the natural gas industry has been heavily regulated. There is no assurance
that the regulatory approach currently pursued by the FERC will continue
indefinitely.
39
<PAGE>
Operating Hazards and Environmental Matters
The oil and natural gas business involves a variety of operating risks,
including the risk of fire, explosions, blow-outs, pipe failure, casing
collapse, abnormally pressured formations and hazards such as oil spills,
natural gas leaks, ruptures and discharges of toxic gases. The occurrence of
any of these operating risks could result in substantial losses to the Company
due to injury or loss of life, severe damage to or destruction of property and
equipment, pollution or other environmental damage, including damage to
natural resources, clean-up responsibilities, penalties and suspension of
operations. Such hazards may hinder or delay drilling, development and on-line
operations.
Extensive federal, state and local laws regulating the discharge of
materials into the environment or otherwise relating to the protection of the
environment affect the Company's oil and natural gas operations. Numerous
governmental departments issue rules and regulations to implement and enforce
such laws, which are often difficult and costly to comply with and which carry
substantial penalties for failure to comply. Some laws, rules and regulations
relating to protection of the environment may, in certain circumstances,
impose "strict liability" for environmental contamination, rendering a person
liable for environmental damages and cleanup costs without regard to
negligence or fault on the part of such person. Other laws, rules and
regulations may restrict the rate of oil and natural gas production below the
rate that would otherwise exist or even prohibit exploration and production
activities in sensitive areas. In addition, state laws often require various
forms of remedial action to prevent pollution, such as closure of inactive
pits and plugging of abandoned wells. The regulatory burden on the oil and
natural gas industry increases its cost of doing business and consequently
affects its profitability. The Company believes that it is in substantial
compliance with current applicable environmental laws and regulations and that
continued compliance with existing requirements will not have a material
adverse impact on the Company's operations. However, environmental laws and
regulations have been subject to frequent changes over the years, and the
imposition of more stringent requirements could have a material adverse effect
upon the capital expenditures, earnings or competitive position of the
Company.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as "Superfund," imposes liability, without regard to
fault or the legality of the original conduct, on certain classes of persons
that are considered to be responsible for the release of a "hazardous
substance" into the environment. These persons include the current or former
owner or operator of the disposal site or sites where the release occurred and
companies that disposed or arranged for the disposal of hazardous substances.
Under CERCLA, such persons may be subject to joint and several liability for
the costs of investigating and cleaning up hazardous substances that have been
released into the environment, for damages to natural resources and for the
costs of certain health studies. In addition, companies that incur Superfund
liability frequently also confront third party claims because it is not
uncommon for neighboring landowners and other third parties to file claims for
personal injury and property damage allegedly caused by hazardous substances
or other pollutants released into the environment from a Superfund site.
The Federal Solid Waste Disposal Act, as amended by the Resource
Conservation and Recovery Act of 1976 ("RCRA"), regulates the generation,
transportation, storage, treatment and disposal of hazardous wastes and can
require cleanup of hazardous waste disposal sites. RCRA currently excludes
drilling fluids, produced waters and other wastes associated with the
exploration, development or production of oil and natural gas from regulation
as "hazardous waste." However, other wastes handled at exploration and
productions sites may not fall within this exclusion. Disposal of non-
hazardous oil and natural gas exploration, development and production wastes
usually are regulated by state law.
Stricter standards for waste handling and disposal may be imposed on the oil
and natural gas industry in the future. From time to time legislation has been
proposed in Congress that would revoke or alter the current exclusion of
exploration, development and production wastes from the RCRA definition of
"hazardous wastes," thereby potentially subjecting such wastes to more
stringent handling, disposal and cleanup requirements. If such legislation
were enacted, it could have a significant impact on the operating costs of the
Company, as well as the oil and natural gas industry in general. Furthermore,
although petroleum, including crude oil and natural gas, is
40
<PAGE>
exempt from CERCLA, at least two courts have ruled that certain wastes
associated with the production of crude oil may be classified as "hazardous
substances" under CERCLA. The impact of future revisions to environmental laws
and regulations cannot be predicted.
The Oil Pollution Act of 1990 ("OPA") provides that persons responsible for
facilities and vessels (including the owners and operators of onshore
facilities) are subject to strict joint and several liability for cleanup
costs and certain other public and private damages arising from a spill of oil
into waters of the United States. OPA establishes a liability limit for
onshore facilities of $350.0 million. However, facilities located in coastal
waters may be considered "offshore" facilities subject to greater liability
limits under OPA (all removal costs plus $75.0 million). In addition, a party
cannot take advantage of this liability limit if the spill was caused by gross
negligence or willful misconduct or resulted from a violation of a federal
safety, construction or operating regulation. If a party fails to report a
spill or cooperate in the cleanup, liability limits likewise do not apply. OPA
also imposes other requirements on facility owners and operators, such as the
preparation of an oil spill response plan. Failure to comply with ongoing
requirements or inadequate cooperation in a spill event may subject the
responsible party to civil or criminal enforcement actions.
The OPA also imposes financial responsibility requirements on the person or
persons statutorily responsible for certain facilities. On March 25, 1997, the
U.S. Minerals Management Service ("MMS") proposed new regulations to implement
these financial responsibility requirements. Under the regulations proposed by
the MMS, oil production and storage facilities that are located in wetlands
adjacent to coastal waters could be required to demonstrate various levels of
financial ability to reimburse governmental entities and private parties for
costs that they could incur in responding to an oil spill, if the MMS
determines that spills from those particular facilities could reach coastal
waters. Although the Company owns and operates oil production and storage
facilities in wetland areas in southern Louisiana, the Company does not
believe that an oil spill from one of its facilities could reach coastal
waters, and therefore the Company does not expect to be subject to the
financial responsibility requirements, if such requirements are implemented in
the manner proposed by the MMS. However, if the financial responsibility
requirements apply to the Company, the amount of financial responsibility that
the Company would have to demonstrate (under the MMS's proposed rules) would
be $10.0 million, an amount that the Company believes it could satisfy without
any negative impact on its financial condition or cost of doing business.
The Federal Water Pollution Control Act ("FWPCA") imposes restrictions and
strict controls regarding the discharge of produced waters and other oil and
natural gas wastes into navigable waters. Permits must be obtained to
discharge pollutants to waters and to conduct construction activities in
waters and wetlands. The FWPCA and similar state laws provide for civil,
criminal and administrative penalties for any unauthorized discharges of
pollutants and unauthorized discharges of reportable quantities of oil and
other hazardous substances. Many state discharge regulations and the Federal
National Pollutant Discharge Elimination System general permits prohibit the
discharge of produced water and sand, drilling fluids, drill cuttings and
certain other substances related to the oil and natural gas industry to
coastal waters. Although the costs to comply with recently-enacted zero
discharge mandates under federal or state law may be significant, the entire
industry is expected to experience similar costs and the Company believes that
these costs will not have a material adverse impact on the Company's financial
conditions and operations. In 1992 the EPA adopted regulations requiring
certain oil and natural gas exploration and production facilities to obtain
permits for storm water discharges. Costs may be associated with the treatment
of wastewater or developing and implementing storm water pollution prevention
plans.
The Company's operations are also subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Amendments to the CAA were adopted in
1990 and contain provisions that may result in the gradual imposition of
certain pollution control requirements with respect to air emissions from
operations of the Company. The Company may be required to incur certain
capital expenditures in the next several years for air pollution control
equipment in connection with obtaining and maintaining operating permits and
approvals for air emissions. However, the Company does not believe its
operations will be materially adversely affected by
41
<PAGE>
any such requirements, and the requirements are not expected to be any more
burdensome to the Company than to other similarly situated companies involved
in oil and natural gas exploration and production activities.
Although the Company maintains insurance against some, but not all, of the
risks described above, including insuring the cost of clean-up operations,
public liability and physical damage, there can be no assurance that such
insurance will be adequate to cover all such costs or that such insurance will
continue to be available in the future or that such insurance will be
available at premium levels that justify its purchase. The occurrence of a
significant event not fully insured or indemnified against could have a
material adverse effect on the Company's financial condition and operations.
EMPLOYEES
On July 1, 1997, the Company employed 32 people, including 15 that work in
the Company's various field offices.
OFFICES
The Company leases its New Orleans, Louisiana headquarters under a lease
covering approximately 10,900 square feet, expiring in June 2000. The monthly
rent is approximately $11,300. The Company also leases office space for its
field offices in Houston, Texas and Lafayette, Louisiana.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to its business that management
believes would not have a material adverse effect on its financial condition
or results of operations.
42
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table provides information concerning the directors and
executive officers of the Company. All directors hold office until the next
annual meeting of stockholders of the Company and until their successors have
been duly elected and qualified. All officers serve at the discretion of the
Board of Directors.
<TABLE>
<CAPTION>
DIRECTOR
NAME AGE POSITION SINCE
---- --- -------- --------
<C> <C> <S> <C>
McLain J. Forman, Ph.D........... 68 Chairman of the Board, Chief 1982
Executive Officer and
President
Harold C. Block.................. 66 Vice President of Land and 1997
Acquisitions Director
Marvin J. Gay.................... 54 Vice President of Finance 1997
and Administration and
Director
Michael A. Habetz................ 48 Vice President, Manager of 1997
Operations and Director
Randolph R. Birkman.............. 42 Director 1997
John W. Sinders.................. 43 Director 1997
</TABLE>
A brief biography of each director and executive officer follows:
McLain J. Forman, Ph.D. founded the Company in 1982 and has served as the
Chairman of the Board, President and Chief Executive Officer of the Company
since inception. Dr. Forman began his career in 1955 as a consulting geologist
as a member of the predecessor firm of Atwater Consultants Ltd. Since 1960,
Dr. Forman has directed and supervised exploration and production activities
for clients and for his own account in the Gulf Coast Region. From 1972 to
1982, Dr. Forman concentrated his efforts on originating and developing
wildcat exploration prospects with various industry and financial partners.
With the formation of the Company in 1982, his focus shifted to exploratory
and development prospects, and in 1991 the Company began to selectively
acquire and exploit producing properties. Dr. Forman earned a B.S. degree in
Geology from Tulane University and an M.A. degree and a Ph.D. in geology from
Harvard University.
Harold C. Block is the Vice President of Land and Acquisitions and a
director of the Company. Mr. Block joined Forman Exploration Company, the
predecessor of the Company, in 1973 as Manager of the Land Department, and in
1982 he moved to his current position with the Company. Mr. Block began his
career with F.A. Callery, Inc. in 1957, where he became Land Manager in 1959.
Upon leaving Callery in 1971 until he joined the Company, Mr. Block was a
consultant and organized and conducted an oil and gas exploration program. Mr.
Block has a B.B.A. degree in Management from the University of Houston.
Marvin J. Gay is the Vice President of Finance and Administration and a
director of the Company. Mr. Gay has been a Vice President of the Company
since he joined the Company at its inception in 1982. Mr. Gay was the
Controller and Treasurer of Forman Exploration Company, the predecessor of the
Company, from 1974 to 1982. Before joining the Company, Mr. Gay was a
consultant with Arthur Andersen & Co. Mr. Gay holds a B.B.A. in Accounting
from the University of Mississippi. He is a Certified Public Accountant and a
member of the American Institute of Certified Public Accountants.
Michael A. Habetz is Vice President, Manager of Operations and a director of
the Company. Mr. Habetz has been a Vice President and the Manager of
Operations since he joined the Company in 1993. From 1970 to 1987, he held
various supervisory and management positions with Texaco and Edwin L. Cox,
where he was responsible for all phases of drilling, completion, workover and
production operations. From 1987 until 1991, Mr. Habetz provided consulting
engineering services through Energy Research and Development Corporation, and
in 1991 he began to provide those services on a consulting basis for the
Company. Mr. Habetz holds a B.S. degree in Mechanical Engineering from
Louisiana State University.
Randolph R. Birkman currently serves as Vice President for the High Yield
Bond Research Department of Trust Company of the West ("TCW") and has been
with TCW or its predecessor-in-interest, Crescent Capital
43
<PAGE>
Corporation, since May 1995. From June 1993 to May 1995, Mr. Birkman was the
Portfolio Manager of The Pilgrim High Yield Trust, an open-end mutual fund
which invested primarily in fixed income corporate securities. Mr. Birkman
also held the positions of Senior Credit Analyst for Pilgrim Prime Rate Trust
and an Equity Analyst for Pilgrim Regional Bankshares, from October 1989 to
June 1993. Mr. Birkman received his B.A. degree in Psychology from the
University of California, Davis and earned his M.B.A. from Texas Tech
University.
John W. Sinders is currently an Executive Vice President in the Energy Group
of Jefferies & Company, Inc. and is a member of the Board of Directors of
Jefferies & Co., Inc. Prior to joining Jefferies in January 1993, Mr. Sinders
was a Managing Director and Manager of the Corporate Finance Department at
Howard, Weil, Labouisse, Friedrichs Incorporated where he had primary
responsibility for the oil service, refining and transportation industries.
Prior to joining Howard Weil in 1987, Mr. Sinders was a Partner at McGlinchey,
Stafford, Cellini and Lang, a New Orleans law firm. Mr. Sinders is also a
member of the Board of Directors of The Shaw Group, Inc. Mr. Sinders is a
graduate of the University of Virginia and received his law degree from the
University of Virginia School of Law. Mr. Sinders is admitted to the Louisiana
and Tennessee Bars.
Pursuant to an understanding with McLain J. Forman, upon the completion of
the Offerings, Mr. Birkman and Mr. Sinders were elected directors.
COMPENSATION OF EXECUTIVE OFFICERS
The following table sets forth certain information for the year ended
December 31, 1996 with respect to the compensation paid to Mr. Forman, the
Chairman, President and Chief Executive Officer, and the three other most
highly compensated executive officers of the Company (collectively, the "Named
Executive Officers"). No other executive officers of the Company received
annual compensation (including salary and bonuses earned) that exceeded
$100,000 for the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
DECEMBER 31, 1996
ANNUAL
COMPENSATION
------------------
NAME AND PRINCIPAL
POSITION SALARY($) BONUS($)
------------------ --------- --------
<S> <C> <C>
McLain J. Forman Ph.D. .. $185,400 $7,725
Chairman of the Board,
Chief Executive Officer
and President
Harold C. Block.......... 108,150 4,506
Vice President of Land
and Acquisitions
Marvin J. Gay............ 86,071 3,586
Vice President of
Finance and
Administration
Michael A. Habetz........ 98,880 4,120
Vice President, Manager
of Operations
</TABLE>
1997 STOCK OPTION PLAN
The 1997 Stock Option Plan (the "Stock Option Plan") was adopted by the
Board of Directors and approved by the sole stockholder of the Company in
April 1997. A total of 36,333 shares of Common Stock have been reserved for
issuance pursuant to the Stock Option Plan. The Stock Option Plan provides for
the grant to employees, including officers of the Company, of "incentive stock
options" within the meaning of Section 422 of the Internal Revenue Code of
1986, as amended (the "Code"), and non-statutory stock options (collectively,
the "Awards"). In addition, nonemployee directors (the "Outside Directors")
are eligible to receive non-statutory stock options. The Company has granted
incentive stock options to certain employees, including directors and
executive officers, of the Company entitling such persons to purchase
approximately 25%
44
<PAGE>
of the Common Stock (on a fully diluted basis) at an exercise price equal to
the fair market value of the Common Stock as of the date of issuance, as
established by an independent appraiser selected by the Company.
The Stock Option Plan provides that Awards may be granted to employees
(including officers) and directors of the Company. The Stock Option Plan is
administered by a committee designated by the Board. Subject to special
provisions relating to Outside Directors, the Board's designated committee
selects the employees to which Awards may be granted and the type of Award to
be granted and determines, as applicable, the number of shares to be subject
to each Award, the exercise price and the vesting of each Award. In making
such determination, the Board's designated committee takes into account the
employee's present and potential contributions to the success of the Company
and other relevant factors.
401(K) PLAN
The Company has adopted a defined contribution retirement plan that complies
with Section 401(k) of the Code (the "401(k) Plan"). Pursuant to the terms of
the 401(k) Plan, all employees with at least one year of continuous service
are eligible to participate and may contribute up to 15% of their annual
compensation (subject to certain limitations imposed under the Code). The
401(k) Plan provides that a discretionary match of employee contributions may
be made by the Company in cash. The Company has not made any matching
contributions to the 401(k) Plan in the past and does not anticipate making
any such contributions in 1997. The amounts held under the 401(k) Plan are
invested among various investment funds maintained under the 401(k) Plan in
accordance with the directions of each participant. Employee contributions
under the 401(k) Plan are 100% vested and participants are entitled to payment
of vested benefits upon termination of employment.
COMPENSATION OF DIRECTORS
Directors of the Company do not presently receive compensation for their
services as directors. Directors of the Company are entitled to reimbursement
of their reasonable out-of-pocket expenses in connection with their travel to
and attendance at meetings of the Board of Directors or committees thereof. In
addition, the Board or its designated committee may from time to time grant
Awards to directors pursuant to the terms of the Stock Option Plan. See " --
1997 Stock Option Plan."
PRINCIPAL STOCKHOLDERS
As of June 30, 1997, the beneficial ownership of the voting Common Stock was
as follows: (i) 70,000 shares of Common Stock (representing 100% of the issued
and outstanding voting shares of Common Stock) was owned by McLain J. Forman
and (ii) 67,444 shares of Common Stock were issuable upon exercise of certain
warrants (see "Description of Capital Stock--Warrants"). Certain employees,
including directors and executive officers, of the Company have options to
purchase approximately 25% of the Common Stock (on a fully diluted basis). See
"Description of Capital Stock--Common Stock."
CERTAIN TRANSACTIONS
September 1996 Company Loan. In September 1996, McLain J. Forman, the
Chairman of the Board, President, Chief Executive Officer and sole stockholder
of the Company, loaned $1.0 million to the Company on an unsecured basis for
the purpose of paying certain trade payables. As of April 10, 1997, the
outstanding balance of this loan was $140,000, the Company having repaid
$500,000 from the proceeds of the loan from JEDI and repaid $120,000 per month
in February, March and April 1997. The Company used a portion of the net
proceeds from the Offerings to pay the outstanding balance of such loan.
Sale of Bayou Fer Blanc Field and West Gueydan Field. In August 1996, the
Company sold its interests in the Bayou Fer Blanc Field and the West Gueydan
Field to FPC II, a company whose sole shareholder is
45
<PAGE>
Mr. Forman, for a purchase price of $950,000. In connection with such sale,
FPC II assumed certain liabilities of the Company relating to the completion
of the 3-D seismic survey conducted on those fields and other related matters.
The Company used $5.0 million of the net proceeds from the Offerings in
connection with FPC II's sale back to the Company of its interests in the
fields, of which $1.5 million was paid to FPC II, $1.0 million was used to pay
bank debt incurred by Mr. Forman in connection with FPC II's purchase of the
fields and $2.5 million was used to pay trade payables to third parties. As a
consequence of this sale, the Company now owns 100% of the working interest in
the Bayou Fer Blanc Field and 90% of the working interest in the West Gueydan
Field. See "Private Placement" and "Business and Properties--Significant
Project Areas."
Repurchase of Loan Warrants. The Company, Mr. Forman and the certain holders
of warrants are parties to an agreement pursuant to which such holders granted
to Mr. Forman the right to purchase all of such warrants. See "Description of
Capital Stock--Warrants."
Purchase of Overriding Royalty Interests from EEP and EECIP. Pursuant to the
Repayment Agreement dated December 16, 1996, among the Company, Mr. Forman,
EEP and EECIP, upon the Company's repayment of the outstanding balance of the
loans from EEP and EECIP on a date prior to June 16, 1997, the Company
purchased for $2.6 million overriding royalty interests in the Lake Enfermer
Field, the Manila Village Field and the Boutte Field equal to 7.5% of the
Company's interests in those fields. The effective date of the Company's
acquisition of such overriding royalty interests is the date on which the
Company repaid such loans and pays the purchase price of $2.6 million. The
Company used $2.6 million of the net proceeds from the Offerings to purchase
such interests on June 3, 1997.
46
<PAGE>
THE EXCHANGE OFFER
GENERAL
In connection with the sale of the Old Notes, the purchasers thereof became
entitled to the benefits of certain registration rights under the Registration
Rights Agreement. The Exchange Notes are being offered hereunder in order to
satisfy the obligations of the Company under the Registration Rights
Agreement. See "Registration Rights."
For each $1,000 principal amount of Old Notes surrendered to the Company
pursuant to the Exchange Offer, the holder of such Old Notes will receive
$1,000 principal amount of Exchange Notes. Upon the terms and subject to the
conditions set forth in this Prospectus and in the accompanying Letter of
Transmittal, the Company will accept all Old Notes properly tendered prior to
5:00 p.m., New York City time, on the Expiration Date. Holders may tender some
or all of their Old Notes pursuant to the Exchange Offer in integral multiples
of $1,000 principal amount.
Under existing interpretations of the staff of the SEC, including Exxon
Capital Holdings Corporation, SEC No-Action Letter (available April 13, 1989),
the Morgan Stanley Letter and Mary Kay Cosmetics, Inc., SEC No-Action Letter
(available June 5, 1991), the Company believes that the Exchange Notes would
in general be freely transferable after the Exchange Offer without further
registration under the Securities Act by the respective holders thereof (other
than a "Restricted Holder," being (i) a broker-dealer who purchased Old Notes
exchanged for such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii)
a person that is an affiliate of the Company within the meaning of Rule 405
under the Securities Act), without compliance with the registration and
prospectus delivery provisions of the Securities Act, provided that such
Exchange Notes are acquired in the ordinary course of such holder's business
and such holder is not participating in, and has no arrangement with any
person to participate in, the distribution (within the meaning of the
Securities Act) of such Exchange Notes. Eligible holders wishing to accept the
Exchange Offer must represent to the Company that such conditions have been
met. Any holder of Old Notes who tenders in the Exchange Offer for the purpose
of participating in a distribution of the Exchange Notes may not rely on the
interpretation by the staff of the SEC enunciated in the Morgan Stanley Letter
and similar no-action letters, and must comply with the registration and
prospectus delivery requirements of the Securities Act in connection with any
resale transaction.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange Notes
in the Exchange Offer will be required to make certain representations,
including that (i) it is neither an affiliate of the Company nor a broker-
dealer tendering Old Notes acquired directly from the Company for its own
account, (ii) any Exchange Notes to be received by it are being acquired in
the ordinary course of its business and (iii) it is not participating in, and
it has no arrangement with any person to participate in, the distribution
(within the meaning of the Securities Act) of the Exchange Notes. In addition,
in connection with any resales of Exchange Notes, any broker-dealer (a
"Participating Broker-Dealer") who acquired Old Notes for its own account as a
result of market-making activities or other trading activities must
acknowledge that it will deliver a prospectus meeting the requirements of the
Securities Act in connection with any resale of such Exchange Notes. The staff
of the SEC has taken the position in no-action letters issued to third parties
including Shearman & Sterling, SEC No-Action Letter (available July 2, 1993),
that Participating Broker-Dealers may fulfill their prospectus delivery
requirements with respect to the Exchange Notes (other than a resale of an
unsold allotment from the original sale of Old Notes) with this Prospectus, as
it may be amended or supplemented from time to time. Under the Registration
Rights Agreement, the Company is required to allow Participating Broker-
Dealers to use this Prospectus, as it may be amended or supplemented from time
to time, in connection with the resale of such Exchange Notes. See "Plan of
Distribution."
The Exchange Offer shall be deemed to have been consummated upon the earlier
to occur of (i) the Company having exchanged Exchange Notes for all
outstanding Old Notes (other than Old Notes held by a Restricted Holder)
pursuant to the Exchange Offer and (ii) the Company having exchanged, pursuant
to the
47
<PAGE>
Exchange Offer, Exchange Notes for all Old Notes that have been tendered and
not withdrawn on the Expiration Date. In such event, holders of Old Notes
seeking liquidity in their investment would have to rely on exemptions to
registration requirements under the securities laws, including the Securities
Act.
As of the date of this Prospectus, $70,000,000 aggregate principal amount of
Old Notes are issued and outstanding. Currently, Old Notes are eligible for
trading in the Private Offerings, Resales and Trading through Automated
Linkages (PORTAL) Market, the National Association of Securities Dealers'
screen based, automated market trading of securities eligible for resale under
Rule 144A.
The Company shall be deemed to have accepted for exchange validly tendered
Old Notes when, as and if the Company has given oral or written notice thereof
to the Exchange Agent. See "--Exchange Agent." The Exchange Agent will act as
agent for the tendering holders of Old Notes for the purpose of receiving
Exchange Notes from the Company and delivering Exchange Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an invalid
tender or the occurrence of certain other events set forth herein,
certificates for any such unaccepted Old Notes will be returned, without
expense, to the tendering holder thereof as promptly as practicable after the
Expiration Date. Holders of Old Notes who tender in the Exchange Offer will
not be required to pay brokerage commissions or fees or, subject to the
instructions in the Letter of Transmittal, transfer taxes with respect to the
exchange of Old Notes pursuant to the Exchange Offer. The Company will pay all
charges and expenses, other than certain applicable taxes, in connection with
the Exchange Offer. See "--Fees and Expenses."
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of the date of this Prospectus.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean October 30, 1997 unless the Company,
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time. The Company reserves the right
(i) to delay acceptance of any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer and to refuse to accept Old Notes not previously
accepted, if any of the conditions set forth herein under "--Termination"
shall have occurred and shall not have been waived by the Company (if
permitted to be waived by the Company), by giving oral or written notice of
such delay, extension or termination to the Exchange Agent, and (ii) to amend
the terms of the Exchange Offer in any manner deemed by it to be advantageous
to the holders of the Old Notes. Any such delay in acceptance, extension,
termination or amendment will be followed as promptly as practicable by oral
or written notice thereof. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment in a manner reasonably calculated to inform
the holders of the Old Notes of such amendment. Without limiting the manner in
which the Company may choose to make public announcements of any delay in
acceptance, extension, termination or amendment of the Exchange Offer, the
Company shall have no obligation to publish, advertise, or otherwise
communicate any such public announcement, other than by making a timely
release to the Dow Jones News Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest payable in cash semi-annually in
arrears on June 1 and December 1 of each year, commencing December 1, 1997.
Holders of Exchange Notes of record on November 15, 1997 will receive interest
on December 1, 1997 from June 3, 1997. Assuming the Exchange Offer is
consummated prior to the record date in respect of the December 1, 1997
interest payment for the Old Notes, holders who exchange
48
<PAGE>
their Old Notes for Exchange Notes will receive the same interest payment on
December 1, 1997 that they would have received had they not accepted the
Exchange Offer. Interest on the Old Notes accepted for exchange will cease to
accrue upon issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, or an Agent's Message,
together with the Old Notes and any other required documents, to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. In
addition, either (i) the certificates for such Old Notes must be received by
the Exchange Agent along with the Letter of Transmittal or (ii) a timely
confirmation of a book-entry transfer (a "Book-Entry Confirmation") of such
Old Notes, if such procedure is available, into the Exchange Agent's account
at The Depository Trust Company (the "Book-Entry Transfer Facility") pursuant
to the procedure for book-entry transfer described below, must be received by
the Exchange Agent along with an Agent's Message prior to the Expiration Date
or (iii) the Holder must comply with the guaranteed delivery procedures
described below. The tender by a holder of Old Notes will constitute an
agreement between such holder and the Company in accordance with the terms and
subject to the conditions set forth herein and in the Letter of Transmittal.
Delivery of all documents must be made to the Exchange Agent at its address
set forth herein. Holders may also request that their respective brokers,
dealers, commercial banks, trust companies or nominees effect such tender for
such holders.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part
of a Book-Entry Confirmation, which states that such Book-Entry Transfer
Facility has received an express acknowledgment from the participant in such
Book-Entry Transfer Facility tendering Old Notes which are the subject of such
Book-Entry Confirmation that such participant has received and agrees to be
bound by the terms of the Letter of Transmittal, and that the Company may
enforce such agreement against such participant.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use
an overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Old Notes
should be sent to the Company. Only a holder of Old Notes may tender such Old
Notes in the Exchange Offer. The term "holder" with respect to the Exchange
Offer means any person in whose name Old Notes are registered on the books of
the Company or any other person who has obtained a properly completed stock
power from the registered holder.
Any beneficial holder whose Old Notes are registered in the name of such
holder's broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact such registered holder promptly and
instruct such registered holder to tender on behalf of the registered holder.
If such beneficial holder wishes to tender directly, such beneficial holder
must, prior to completing and executing the Letter of Transmittal and
delivering his Old Notes, either make appropriate arrangements to register
ownership of the Old Notes in such holder's name or obtain a properly
completed bond power from the registered holder. The transfer of record
ownership may take considerable time. If the Letter of Transmittal is signed
by the record holder(s) of the Old Notes tendered thereby, the signature must
correspond with the name(s) written on the face of the Old Notes without
alteration, enlargement or any change whatsoever. If the Letter of Transmittal
is signed by a participant in Depositary Trust Company ("DTC"), the signature
must correspond with the name as it appears on the security position listing
as the holder of the Old Notes. Signatures on a Letter of Transmittal or a
notice of withdrawal, as the case may be, must be guaranteed by a member firm
of a registered national securities exchange or of the National Association of
Securities Dealers, Inc., a commercial bank or trust company having an office
or correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution") unless the Old Notes tendered pursuant thereto are
49
<PAGE>
tendered (i) by a registered holder (or by a participant in DTC whose name
appears on a security position listing as the owner) who has not completed the
box entitled "Special Issuance Instructions" or "Special Delivery
Instructions" on the Letter of Transmittal and the Exchange Notes are being
issued directly to such registered holder (or deposited into the participant's
account at DTC) or (ii) for the account of an Eligible Institution. If the
Letter of Transmittal is signed by a person other than the registered holder
of any Old Notes listed therein, such Old Notes must be endorsed or
accompanied by appropriate bond powers which authorize such person to tender
the Old Notes on behalf of the registered holder, in either case signed as the
name of the registered holder or holders appears on the Old Notes. If the
Letter of Transmittal or any Old Notes or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Old Notes
(or a timely confirmation received of a book-entry transfer of Old Notes into
the Exchange Agent's account at DTC with an Agent's Message) or a Notice of
Guaranteed Delivery from an Eligible Institution is received by the Exchange
Agent. Issuances of Exchange Notes in exchange for Old Notes tendered pursuant
to a Notice of Guaranteed Delivery by an Eligible Institution will be made
only against delivery of the Letter of Transmittal (and any other required
documents) and the tendered Old Notes (or a timely confirmation received of a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC with
an Agent's Message) with the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be
determined by the Company in its sole discretion, which determination will be
final and binding. The Company reserves the absolute right to reject any and
all Old Notes not properly tendered or any Old Notes the Company's acceptance
of which would, in the opinion of the Company or its counsel, be unlawful. The
Company also reserves the absolute right to waive any conditions of the
Exchange Offer or defects or irregularities in tender as to particular Old
Notes. The Company's interpretation of the terms and conditions of the
Exchange Offer (including the instructions in the Letter of Transmittal) shall
be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Old Notes must be cured within
such time as the Company shall determine. Neither the Company, the Exchange
Agent nor any other person shall be under any duty to give notification of
defects or irregularities with respect to tenders of Old Notes nor shall any
of them incur any liability for failure to give such notification. Tenders of
Old Notes will not be deemed to have been made until such irregularities have
been cured or waived. Any Old Notes received by the Exchange Agent that are
not properly tendered and as to which the defects or irregularities have not
been cured or waived will be returned without cost by the Exchange Agent to
the tendering holder of such Old Notes unless otherwise provided in the Letter
of Transmittal, as soon as practicable following the Expiration Date. In
addition, the Company reserves the right in its sole discretion to (i)
purchase or make offers for any Old Notes that remain outstanding subsequent
to the Expiration Date, or, as set forth under "--Termination," to terminate
the Exchange Offer and (ii) to the extent permitted by applicable law,
purchase Old Notes in the open market, in privately negotiated transactions or
otherwise. The terms of any such purchases or offers may differ from the terms
of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Old Notes
at DTC within two business days after the date of this Prospectus, and any
financial institution which is a participant in DTC may make book-entry
delivery of the Old Notes by causing DTC to transfer such Old Notes into the
Exchange Agent's account in accordance with DTC's procedure for such transfer.
Although delivery of Old Notes may be effected through book-entry transfer
into the Exchange Agent's account at DTC, an Agent's Message must be
transmitted to and received by the Exchange Agent on or prior to the
Expiration Date at one of its addresses set forth below under "--Exchange
Agent," or the guaranteed delivery procedure described below must be complied
with.
50
<PAGE>
DELIVERY OF DOCUMENTS TO DTC DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE
AGENT. All references in this Prospectus to deposit or delivery of Old Notes
shall be deemed to include DTC's book-entry delivery method.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or who cannot complete the procedure for book-entry transfer
on a timely basis and deliver an Agent's Message, may effect a tender if: (i)
the tender is made by or through an Eligible Institution; (ii) prior to the
Expiration Date, the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder of the Old Notes, the registration number or numbers of
such Old Notes (if applicable), and the total principal amount of Old Notes
tendered, stating that the tender is being made thereby and guaranteeing that,
within five business days after the Expiration Date, the Letter of
Transmittal, together with the Old Notes in proper form for transfer (or a
confirmation of a book-entry transfer into the Exchange Agent's account at DTC
with an Agent's Message) and any other documents required by the Letter of
Transmittal, will be deposited by the Eligible Institution with the Exchange
Agent; and (iii) such properly completed and executed Letter of Transmittal,
together with the certificate(s) representing all tendered Old Notes in proper
form for transfer (or a confirmation of such a book-entry transfer) and all
other documents required by the Letter of Transmittal are received by the
Exchange Agent within five business days after the Expiration Date.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain terms and
conditions which are summarized below and are part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that such holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of the Exchange Notes, and that such holder
is not a Restricted Holder.
Old Notes tendered in exchange for Exchange Notes (or a timely confirmation
of a book-entry transfer of such Old Notes into the Exchange Agent's account
at DTC) must be received by the Exchange Agent, with the Letter of Transmittal
or an Agent's Message and any other required documents, by the Expiration Date
or within the time periods set forth above pursuant to a Notice of Guaranteed
Delivery from an Eligible Institution. Each holder tendering the Old Notes for
exchange sells, assigns and transfers the Old Notes to the Exchange Agent, as
agent of the Company, and irrevocably constitutes and appoints the Exchange
Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be
transferred and exchanged. The holder warrants that it has full power and
authority to tender, exchange, sell, assign and transfer the Old Notes and to
acquire the Exchange Notes issuable upon the exchange of such tendered Old
Notes, that the Exchange Agent, as agent of the Company, will acquire good and
unencumbered title to the tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances, and that the Old Notes tendered for
exchange are not subject to any adverse claims when accepted by the Exchange
Agent, as agent of the Company. The holder also warrants and agrees that it
will, upon request, execute and deliver any additional documents deemed by the
Company or the Exchange Agent to be necessary or desirable to complete the
exchange, sale, assignment and transfer of the Old Notes. All authority
conferred or agreed to be conferred in the Letter of Transmittal by the holder
will survive the death, incapacity or dissolution of the holder and any
obligation of the holder shall be binding upon the heirs, personal
representatives, successors and assigns of such holder.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day prior
to the Expiration Date, unless previously accepted for exchange.
51
<PAGE>
To withdraw a tender of Old Notes in the Exchange Offer, a written or
facsimile transmission notice of withdrawal must be received by the Exchange
Agent at its address set forth herein prior to 5:00 p.m., New York City time,
on the business day prior to the Expiration Date and prior to acceptance for
exchange thereof by the Company. Any such notice of withdrawal must (i)
specify the name of the person having deposited the Old Notes to be withdrawn
(the "Depositor"), (ii) identify the Old Notes to be withdrawn (including, if
applicable, the registration number or numbers and total principal amount of
such Old Notes), (iii) be signed by the Depositor in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accompanied by
documents of transfer sufficient to permit the Trustee with respect to the Old
Notes to register the transfer of such Old Notes into the name of the
Depositor withdrawing the tender, (iv) specify the name in which any such Old
Notes are to be registered, if different from that of the Depositor and (v) if
applicable because the Old Notes have been tendered pursuant to the book-entry
procedures, specify the name and number of the participant's account at DTC to
be credited, if different than that of the Depositor. All questions as to the
validity, form and eligibility (including time of receipt) of such withdrawal
notices will be determined by the Company, whose determination shall be final
and binding on all parties. Any Old Notes so withdrawn will be deemed not to
have been validly tendered for purposes of the Exchange Offer and no Exchange
Notes will be issued with respect thereto unless the Old Notes so withdrawn
are validly retendered. Any Old Notes which have been tendered but which are
not accepted for exchange will be returned to the holder thereof without cost
to such holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under "--
Procedures for Tendering" at any time prior to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange any Old Notes not theretofore accepted for
exchange, and may terminate the Exchange Offer if it determines that the
Exchange Offer violates any applicable law or interpretation of the staff of
the SEC.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Old Notes and return any
Old Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the Expiration of
the Exchange Offer, subject to the rights of such holders of tendered Old
Notes to withdraw their tendered Old Notes or (iii) waive such termination
event with respect to the Exchange Offer and accept all properly tendered Old
Notes that have not been withdrawn. If such waiver constitutes a material
change in the Exchange Offer, the Company will disclose such change by means
of a supplement to this Prospectus that will be distributed to each registered
holder of Old Notes, and the Company will extend the Exchange Offer for a
period of five to ten business days, depending upon the significance of the
waiver and the manner of disclosure to the registered holders of the Old
Notes, if the Exchange Offer would otherwise expire during such period.
Holders of Old Notes will have certain rights against the Company under the
Registration Rights Agreement should the Company fail to consummate the
Exchange Offer.
52
<PAGE>
EXCHANGE AGENT
U.S. Trust Company of Texas, N.A., the trustee under the Indenture, has been
appointed as Exchange Agent for the Exchange Offer. Questions and requests for
assistance and requests for additional copies of this Prospectus or of the
Letter of Transmittal should be directed to the Exchange Agent addressed as
follows:
By Mail: By Hand Delivery:
U. S. Trust Company of Texas, N.A. U. S. Trust Company of Texas, N.A.
Attention: Corporate Trust Attention: Corporate Trust
P. O. Box 841 111 Broadway--Lower Level
Cooper Station New York, New York 10006-1906
New York, New York 10276-0841
By Overnight Courier:
Facsimile Transmission: (212) 420-6504 U. S. Trust Company of Texas, N.A.
Confirm by Telephone: (800) 225-2398 770 Broadway--13th Floor
Corporate Trust Operations
New York, New York 10003-9598
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or telephone. The Company will not make any payments to brokers,
dealers or other persons soliciting acceptances of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse the Exchange Agent for its reasonable out-of-
pocket expenses in connection therewith. The Company may also pay brokerage
houses and other custodians, nominees and fiduciaries the reasonable out-of-
pocket expenses incurred by them in forwarding copies of this Prospectus,
Letters of Transmittal and related documents to the beneficial owners of the
Old Notes and in handling or forwarding tenders for exchange.
The other expenses incurred in connection with the Exchange Offer, including
fees and expenses of the Exchange Agent and Trustee and accounting and legal
fees, will be paid by the Company. The Company will pay all transfer taxes, if
any, applicable to the exchange of Old Notes pursuant to the Exchange Offer.
If, however, Exchange Notes or Old Notes not tendered or accepted for exchange
are to be delivered to, or are to be registered or issued in the name of, any
person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
upon the consummation of the Exchange Offer. The expenses of the Exchange Offer
will be amortized by the Company over the term of the Exchange Notes under
generally accepted accounting principles.
53
<PAGE>
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 1,000,000 shares of
Common Stock, no par value per share (the "Common Stock"), divided into
classes, voting and non-voting, of which 70,000 voting shares and 20,000 non-
voting shares (which are convertible into voting shares) were issued and
outstanding as of June 30, 1997, and 1,000,000 shares of preferred stock,
$0.01 par value per share, 200,000 shares of which are outstanding. In
addition, the Company has reserved for issuance 19,000 shares of Common Stock
upon exercise of certain outstanding warrants and 36,333 shares of Common
Stock under the Stock Option Plan. See "Management--1997 Stock Option Plan"
and "--Warrants" below. In addition, the Company has reserved for issuance
14,533 shares of Common Stock upon exercise of certain outstanding warrants
issued in connection with the sale of the Series A Cumulative Preferred Stock
(the "Equity Units"), another 29,067 shares of Common Stock upon exercise of
certain outstanding warrants issued in connection with the sale of the Old
Notes, and another 4,844 shares of Common Stock upon exercise of certain
warrants to Jefferies & Company, Inc., that were also issued in connection
with the sale of the Old Notes. See "Private Placement."
COMMON STOCK
Holders of voting Common Stock are entitled to one vote for each share held
in the election of directors and all other matters submitted to a vote of
shareholders and do not have cumulative voting rights. Holders of a majority
of the shares of Common Stock entitled to vote in any election of directors
may elect all of the directors of the Company standing for election. Holders
of Common Stock are entitled to receive ratably such dividends, if any, that
may be declared by the Board of Directors out of funds legally available for
such purpose. The Company has never paid dividends on the Common Stock, and it
is not anticipated that the Company will pay any cash dividends in the
foreseeable future. Upon the liquidation, dissolution or winding up of the
Company, the holders of Common Stock are entitled to receive ratably the net
assets of the Company available after payment of all debts and other
liabilities. Holders of Common Stock have no preemptive rights.
PREFERRED STOCK
The Company is authorized to issue, without any action on the part of its
stockholders, 1,000,000 shares of preferred stock, $.01 par value per share.
The Board of Directors has the authority to divide the preferred stock into
one or more series and to fix and determine the relative rights and
preferences of the shares of each such series, including dividend rates, terms
of redemption, sinking funds, the amount payable in the event of voluntary
liquidation, dissolution or winding up of the affairs of the Company,
conversion rights and voting powers. The Company authorized the issuance of a
series consisting of 550,000 shares of preferred stock, that is designated the
"Series A Cumulative Preferred Stock," 200,000 shares of which were offered
and sold as part of the Equity Units that were placed concurrently with the
sale of the Old Notes.
Terms of Series A Preferred Stock
Holders of the Series A Cumulative Preferred Stock (the "Preferred Stock")
are entitled to receive a cumulative annual dividend of $7.50 per share,
payable quarterly. Dividends are payable in additional shares of Preferred
Stock (valued at $50.00 per share) through June 1, 1999, and thereafter in
cash, or at the Company's election, in shares of Preferred Stock (valued at
$50.00 per share). In the event of any liquidation, dissolution or winding up
of the Company, after payment or provision for payment of the debts and other
liabilities of the Company, the holders of the Preferred Stock shall be
entitled to receive, out of the remaining net assets of the Company available
for distribution to stockholders, liquidating distributions in the amount of
$50.00 per share, plus an amount equal to all dividends accrued and unpaid on
each such share (whether or not declared) to the date fixed for distribution,
before any distribution is made to holders of the Common Stock or any other
class of stock of the Company ranking junior to the Preferred Stock. The
Preferred Stock may be redeemed for cash, in whole or in part, at the option
of the Company under certain circumstances. The Preferred Stock will be
mandatorily redeemed, in whole, on June 1, 2005 for cash. As of September 1,
1997 the Company declared a dividend in additional shares of Preferred Stock.
54
<PAGE>
WARRANTS
In connection with its loans from EEP and EECIP, the Company issued (i) to
EEP a warrant to purchase 9,000 shares of Common Stock for $25 per share
pursuant to the terms of the Common Stock Purchase Warrant dated March 5, 1991
and a warrant to purchase 5,000 shares of Common Stock for $44.57 per share
pursuant to the terms of the Common Stock Purchase Warrant dated March 17,
1994 (collectively, the "EEP Warrants"), (ii) to EECIP a warrant to purchase
4,000 shares of Common Stock for $44.57 per share pursuant to the terms of the
Common Stock Purchase Warrant dated March 17, 1994 (the "EECIP Warrant"), and
(iii) to Associated Energy Managers, Inc., ("AEM," and together with EEP and
EECIP, the "Existing Holders"), a warrant to purchase 1,000 shares of Common
Stock for $44.57 per share pursuant to the terms of the Common Stock Purchase
Warrant dated March 17, 1994 (the "AEM Warrant"). The issuance of certain
warrants related to the Offerings has caused a minimal adjustment in the
exercise price of the EEP Warrants, the EECIP Warrants and the AEM Warrants.
The EEP Warrants, the EECIP Warrant and the AEM Warrant (collectively, the
"Loan Warrants") expire on December 31, 2025. The Loan Warrants may be
exercised on the earliest to occur of (a) the sale or merger of the Company or
the sale of substantially all of the assets of the Company, (b) an initial
public offering of Common Stock or (c) December 1, 2025. Pursuant to the terms
of the Loan Warrants, unexercised warrants are subject to adjustment if (i)
the Company issues Common Stock (or certain securities exercisable or
exchangeable for or convertible into Common Stock) for consideration per share
less than the fair market value per share of Common Stock at the time of
issuance, (ii) there is a subdivision or combination of the Common Stock,
(iii) there is payment of a stock dividend or distribution of assets to all
holders of Common Stock or (iv) there is any other increase or decrease in the
number of shares of Common Stock outstanding and the Company does not receive
compensation therefor. In addition, the number and type of securities subject
to the Loan Warrants are subject to adjustment if the Company is a party to a
merger or consolidation. As of the date of this Prospectus, the Loan Warrants
have not been exercised.
In December 1996, the Company, Mr. Forman and the Existing Holders entered
into the Put/Call Agreement, pursuant to which the Existing Holders granted to
Mr. Forman the right to purchase all of the Loan Warrants (a) during the
period of June 30, 1999 through December 31, 1999, (b) at any time at which
the "Company Value" (as determined pursuant to the terms of the Put/Call
Agreement) reaches $75.0 million or (c) when Mr. Forman sells all of his
shares of Common Stock. In addition, Mr. Forman granted to the Existing
Holders the right to require Mr. Forman to purchase all of the Existing
Holders' Loan Warrants at any time that (i) the Company sells or transfers 33%
or more of the Company's interest in the Lake Enfermer Field, (ii) Mr. Forman
sells or transfers 25% or more of his shares of Common Stock, (iii) the
Company Value reaches $125.0 million or (iv) the Company makes a distribution
of property to its shareholders, the value of which exceeds 25% of the Company
Value. The Put/Call Agreement provides that the purchase price per share of
the Loan Warrants is equal to Company Value plus the exercise price of the
employee options divided by the sum of the outstanding shares of Common Stock
and the number of shares of Common Stock covered by the Loan Warrants and
employee options.
In connection with the offering and sale of the Note Units, the Company
issued warrants to purchasers of the Note Units to entitle the holders thereof
to purchase, in the aggregate, 29,067 shares of Common Stock (the "Note
Warrants"). Each Note Warrant, when exercised, entitles the holder thereof to
receive 0.41524 shares of Common Stock at the exercise price, as adjusted (the
"Note Exercise Price"), which initially is $1.00 per share. The Note Exercise
Price, the number of shares of Common Stock received in respect of a Note
Warrant and the number of Note Warrants outstanding are subject to adjustment
in certain cases. The Note Warrants are currently exercisable and will
automatically expire on June 1, 2004. If the last day for the exercise of the
Note Warrants is not a business day, then the Note Warrants may be exercised
on the next succeeding business day.
55
<PAGE>
In connection with the offering and sale of the Note Units, the Company also
issued to Jefferies & Company, Inc. a warrant to purchase 4,844 shares of
Common Stock at an initial exercise price of $1.00 per share.
In connection with the offering and sale of the Equity Units, the Company
issued warrants to purchasers of the Equity Units that entitle the holders
thereof to purchase, in the aggregate, 14,533 shares of Common Stock. Each
Equity Warrant, when exercised, entitles the holder thereof to receive 0.07267
shares of Common Stock at the exercise price, as adjusted (the "Equity
Exercise Price"), which initially is $1.00 per share. The Equity Exercise
Price, the number of shares of Common Stock received in respect of an Equity
Warrant and the number of Equity Warrants outstanding are subject to
adjustment in certain cases. The Equity Warrants are currently exercisable
immediately and will automatically expire on June 1, 2004. If the last day for
the exercise of the Equity Warrants is not a business day, then the Equity
Warrants may be exercised on the next succeeding business day.
REGISTRATION RIGHTS
Pursuant to the terms of the Loan Warrants, if the Company proposes to
register any shares of Common Stock under the Securities Act, the Existing
Holders may require the Company to include all or a portion of the shares of
Common Stock underlying the Loan Warrants in such registration, subject to
certain conditions and restrictions. Generally, all fees, costs and expenses
will be borne by the Company, except for fees of the Existing Holders' legal
counsel and financial advisors incurred by the Existing Holders in connection
with any such registration and applicable underwriting discounts and
commissions.
LOUISIANA CONTROL SHARE ACQUISITION STATUTE
The Louisiana Control Share Acquisition Statute provides that any shares
acquired by a person or group (an "Acquiror") in an acquisition that causes
such person or group to have the power to direct the exercise of voting power
in the election of directors in excess of 20%, 33 and 1/3% or 50% thresholds
shall have only such voting power as shall be accorded by the holders of all
shares other than "interested shares," as defined below, at a meeting called
for the purpose of considering the voting power to be accorded to such shares.
"Interested shares" include all shares as to which the Acquiror, any officer
of a company and any director of a company who is also an employee of a
company may exercise or direct the exercise of voting power. If a meeting of
stockholders is held to consider the voting rights to be accorded to an
Acquiror and the stockholders do not vote to accord voting rights to such
shares, a company may have the right to redeem the shares held by the Acquiror
for their fair value. The statute permits the articles of incorporation or by-
laws of a company to exclude from the statute's application acquisitions
occurring after the adoption of the exclusion. The Company's Articles of
Incorporation and By-laws do not contain such an exclusion.
DESCRIPTION OF NOTES
The Exchange Notes will be issued, and the Old Notes were issued, under the
Indenture between the Company and U. S. Trust Company of Texas, N.A., as
trustee (the "Trustee"), dated as of June 3 1997 (the Issue Date). References
to the Notes include the Exchange Notes unless the context otherwise requires.
Upon the issuance of the Exchange Notes, the Indenture will be subject to and
governed by the Trust Indenture Act of 1939, as amended (the "Trust Indenture
Act"). The following summaries of certain provisions of the Indenture do not
purport to be complete and are subject to, and are qualified in their entirety
by reference to, all of the provisions of the Indenture, including the
definition of certain terms contained therein and those terms that are made a
part of the Indenture by reference to the Trust Indenture Act. Capitalized
terms not otherwise defined below or elsewhere in this Prospectus have the
meanings given to them in the Indenture. The definitions of certain
capitalized terms used in the summary are set forth below under "--Certain
Definitions."
The Notes are senior secured obligations of the Company and rank pari passu
in right of payment to all existing and future senior Indebtedness of the
Company. The Notes rank senior in right of payment to all existing
56
<PAGE>
and future Subordinated Indebtedness of the Company. The Guarantees, to the
extent issued in the future, will be senior unsecured obligations of the
Subsidiary Guarantors and will rank pari passu in right of payment to all
senior obligations of the Subsidiary Guarantors and senior in right of payment
to all Subordinated Indebtedness of the Subsidiary Guarantors. The Guarantees,
however, will be effectively subordinated to all senior secured indebtedness
of the Subsidiary Guarantors to the extent of the value of the assets securing
such indebtedness. The Company's outstanding indebtedness, other than the
Notes, as of June 30, 1997 is $14,086. Such amount is secured by property of
the Company not subject to the lien to secure the Notes.
PRINCIPAL, MATURITY AND INTEREST
The Notes are secured obligations of the Company, mature on June 1, 2004
(the "Maturity Date"), and are limited in aggregate principal amount to $70.0
million. The Notes are issued in denominations of $1,000 and integral
multiples thereof in fully registered form.
The Notes accrue interest at the rate per annum shown on the cover page of
this Prospectus from June 3, 1997, or from the most recent interest payment
date to which interest has been paid or duly provided for, and accrued and
unpaid interest will be payable semi-annually on June 1 and December 1 of each
year commencing on December 1, 1997. Interest will be paid to the person in
whose name the Note is registered at the close of business on May 15 and
November 15 next preceding such interest payment date. The interest rate on
the Notes is subject to increase if the Company fails to satisfy certain
provisions of the Registration Rights Agreement. See "Registration Rights."
Interest will be computed on the basis of a 360-day year of twelve 30-day
months. The Notes are payable both as to principal and interest at the office
or agency of the Company maintained for such purpose within the City and State
of New York. In addition, in the event the Notes do not remain in book-entry
form, interest may be paid, at the option of the Company, by check mailed to
the holders of the Notes ("Holders") at their respective addresses set forth
in the register of Holders. Until otherwise designated by the Company, the
Company's office or agency in New York will be the office of the Trustee
maintained for such purpose. Any Notes that remain outstanding after the
completion of the Exchange Offer, together with the Exchange Notes issued in
connection with the Exchange Offer, will be treated as a single class of
securities under the Indenture.
REDEMPTION AND REPURCHASE
Optional Redemption. The Notes are redeemable at the option of the Company
in whole at any time or in part from time to time, on and after June 1, 2002,
at the following redemption prices (expressed as percentages of the principal
amount) if redeemed during the twelve-month period commencing on June 1 of the
year set forth below, plus, in each case, accrued interest thereon to the date
of redemption:
<TABLE>
<CAPTION>
REDEMPTION
YEAR PRICE
---- ----------
<S> <C>
2002........................................ 103.375%
2003 and thereafter......................... 100.000%
</TABLE>
In the event of a redemption of less than all of the Notes, the Notes will
be selected for redemption by the Trustee pro rata, by lot or by any other
method that the Trustee considers fair and appropriate and, if the Notes are
listed on any securities exchange, by a method that complies with the
requirements of such exchange. Notice of redemption will be mailed at least 30
days but not more than 60 days before the redemption date to each Holder of
Notes to be redeemed at such Holder's registered address. On and after the
redemption date, interest will cease to accrue on Notes or portions thereof
called for redemption (unless the Company shall default in the payment of the
redemption price or accrued interest).
In addition, at any time or from time to time prior to June 1, 1999, the
Company may redeem up to 25% of the principal amount of the Notes at 113.5% of
the principal amount thereof, together with accrued and unpaid interest, if
any, to the date of redemption with the Net Proceeds of a Public Equity
Offering; provided that,
57
<PAGE>
immediately after giving effect to such redemption, at least $52.5 million
aggregate principal amount of the Notes remains outstanding and that such
redemption occurs within 60 days following the closing of such Public Equity
Offering.
Offers to Purchase. As described below, (a) upon the occurrence of a Change
of Control, the Company will be obligated to make an offer to purchase all
outstanding Notes at a purchase price equal to 101% of the principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase and (b) upon certain sales or other dispositions of assets, the
Company may be obligated to make offers to purchase Notes with a portion of
the Net Proceeds of such sales or other dispositions at a purchase price equal
to 100% of the principal amount thereof, together with accrued and unpaid
interest, if any, to the date of purchase. See "--Change of Control" and "--
Certain Covenants--Limitation on Disposition of Assets."
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, the Company is obligated to make
an offer to purchase all of the then outstanding Notes (a "Change of Control
Offer"), and purchase, on a Business Day (the "Change of Control Purchase
Date") not more than 60 nor less than 30 days following the occurrence of the
Change of Control, all of the then outstanding Notes validly tendered pursuant
to such Change of Control Offer, at a purchase price (the "Change of Control
Purchase Price") equal to 101% of the principal amount thereof, plus accrued
and unpaid interest, if any, to the Change of Control Purchase Date. The
Change of Control Offer is required to remain open for at least 20 Business
Days and until the close of business on the fifth Business Day prior to the
Change of Control Purchase Date.
To effect such Change of Control Offer, the Company shall, not later than
the 30th day after the occurrence of the Change of Control, mail to the
Trustee and to each Holder of the Notes notice of the Change of Control Offer,
which notice shall govern the terms of the Change of Control Offer and shall
state, among other things, the procedures that Holders of the Notes must
follow to accept the Change of Control Offer.
The Company, to the extent applicable and if required by law, will comply
with Sections 13 and 14 of the Exchange Act and the provisions of Regulation
14E and any other tender offer rules under the Exchange Act and any other
federal and state securities laws, rules and regulations that may then be
applicable to any offer by the Company to purchase the Notes pursuant to the
Change of Control covenant.
Should a Change of Control occur and a substantial amount of the Notes be
presented for purchase, there can be no assurance that the Company would have
sufficient financial resources to enable it to purchase such Notes. In the
event the Company is required to purchase outstanding Notes pursuant to a
Change of Control Offer, the Company expects that it would seek third party
financing to the extent it does not have available funds to meet its purchase
obligations. However, there can be no assurance that the Company would be able
to obtain such financing.
The Indenture provides that a default in the payment of the Change of
Control Purchase Price would constitute an Event of Default under the
Indenture as a remedy for which Holders would be entitled to receive the
Change of Control Purchase Price. If such an Event of Default resulted in a
default under senior Indebtedness, the right of the Holders of Notes to
receive the Change of Control Purchase Price (whether at a Change of Control
Purchase Date or upon acceleration) or any other amounts due on acceleration
of the Notes would rank pari passu with the rights of the holders of such
senior Indebtedness.
The Change of Control provisions of the Indenture as well as the
restrictions in the Indenture on the ability of the Company and its
Subsidiaries to incur additional Indebtedness, to grant Liens on its property,
to make Restricted Payments and to make Asset Dispositions may make more
difficult or discourage a takeover of the Company, whether favored or opposed
by current management of the Company. Consummation of any such transaction in
certain circumstances may require redemption or repurchase of the Notes, and
there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such
58
<PAGE>
redemption or repurchase. Such restrictions and the restrictions on
transactions with Related Persons may, in certain circumstances, make more
difficult or discourage any leveraged buyout of the Company or any of its
Subsidiaries by the management of the Company. While such restrictions cover a
wide variety of arrangements that have traditionally been used to effect
highly leveraged transactions, the Indenture may not afford the Holders of
Notes protection in all circumstances from the adverse aspects of a highly
leveraged transaction, reorganization, restructuring, merger or similar
transaction.
GUARANTEES
Currently, the Company has no Subsidiaries. The Company will cause each
Person (other than an Unrestricted Subsidiary) that becomes a Material
Subsidiary after the Issue Date to execute and deliver a supplement to the
Indenture pursuant to which such Person will become a Subsidiary Guarantor.
Each Person that becomes a Subsidiary Guarantor in the future will
unconditionally guarantee, jointly and severally, to each Holder and the
Trustee, the full and prompt performance of the Company's obligations under
the Indenture and the Notes, including the payment of principal of and
interest on the Notes. As described below under "--Certain Covenants--
Limitation on Incurrence of Additional Indebtedness," a Subsidiary that is not
a Subsidiary Guarantor may not incur any Indebtedness with respect to
Indebtedness of the Company or another Subsidiary unless such Subsidiary
becomes a guarantor of the Notes.
The obligations of each Subsidiary Guarantor are limited to the maximum
amount as will, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor
under its Guarantee or pursuant to its contribution obligations under the
Indenture, result in the obligations of such Subsidiary Guarantor under the
Guarantee not constituting a fraudulent conveyance or fraudulent transfer
under federal or state law. Each Subsidiary Guarantor that makes a payment or
distribution under a Guarantee shall be entitled to a contribution from each
other Subsidiary Guarantor in a pro rata amount based on the Adjusted Net
Assets of each Subsidiary Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell or
otherwise dispose of all or substantially all of its properties and assets to
the Company or another Subsidiary Guarantor without limitation, except to the
extent any such transaction is subject to the "Merger, Consolidation and Sale
of Assets" covenant of the Indenture. Each Subsidiary Guarantor may
consolidate with or merge into or sell all or substantially all of its
properties and assets to a Person other than the Company or another Subsidiary
Guarantor (whether or not affiliated with the Subsidiary Guarantor), provided
that (a) if the surviving Person is not the Subsidiary Guarantor, the
surviving Person agrees to assume such Subsidiary Guarantor's Guarantee and
all its obligations pursuant to the Indenture (except to the extent the
following paragraph would result in the release of such Guarantee) and (b)
such transaction does not (i) violate any of the covenants described below
under "--Certain Covenants" or (ii) result in a Default or Event of Default
immediately thereafter that is continuing.
Upon the sale or other disposition (by merger or otherwise) of a Subsidiary
Guarantor (or all or substantially all of its properties and assets) pursuant
to a transaction that is otherwise in compliance with the Indenture (including
as described in the foregoing paragraph), such Subsidiary Guarantor shall be
deemed released from its Guarantee and the related obligations set forth in
the Indenture; provided, however, that any such termination shall occur only
to the extent that all obligations of such Subsidiary Guarantor under all of
its guarantees of, and under all of its pledges of assets or other security
interests that secure, other Indebtedness of the Company or any Subsidiary
shall also terminate or be released upon such sale or other disposition. Each
Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in
accordance with the Indenture shall be released from its Guarantee and related
obligations set forth in the Indenture for so long as it remains an
Unrestricted Subsidiary.
SECURITY
All of the obligations of the Company under the Notes and the Indenture are
secured by a Lien on the Collateral, which is comprised of certain oil and gas
properties of the Company in the Lake Enfermer Field,
59
<PAGE>
Manilla Village Field and Boutte Field. Such obligations of the Company will
not be secured by any other property, whether currently existing or
subsequently acquired, unless, under certain circumstances, such property is
acquired to replace Collateral disposed of in an Asset Disposition. Further,
the Company has no obligation to maintain the value of the Collateral in the
event of declining prices or routine reserve depletion, and the Company has no
obligation to provide valuation reports relating to the Collateral. Therefore,
there can be no assurance that the proceeds of any sale of the Collateral in
whole or in part pursuant to the Indenture and the related Security Documents
would be sufficient to satisfy payments due on a Bank Credit Agreement, if
any, and the Notes.
The Lien on the Collateral in favor of the Trustee for the benefit of the
Holders is subject to certain Permitted Liens, including, if required by a
lender, a first priority Lien pursuant to a Bank Credit Agreement and the
Subordination Agreement. The Lien on the Collateral is currently pursuant to
mortgages that were filed after the Issue Date pursuant to the terms of the
Indenture. These mortgages replaced Liens that were assigned to the Trustee at
the Issue Date, which Liens were originally granted on the Collateral to JEDI
("JEDI Lien") pursuant to the terms of JEDI's loan to the Company.
Subject to the Subordination Agreement, the proceeds received by the Trustee
from a sale of the Collateral will be applied by the Trustee first to pay the
expenses of any foreclosure and fees and other amounts then payable to the
Trustee under the Indenture and the Security Documents and, thereafter, to pay
all amounts owing to the Holders under the Indenture, the Notes and the
Security Documents (with any remaining proceeds to be payable to the Company
or as may otherwise be required by law). There can be no assurance that the
proceeds of any sale of the Collateral in whole or in part pursuant to the
Indenture and the related Security Documents following an Event of Default
would be sufficient to satisfy payments due on a Bank Credit Agreement and the
Notes. By its nature, some or all of the Collateral will be illiquid and may
have no readily ascertainable market value. Accordingly, there can be no
assurance that the Collateral can be sold in a short period of time, if
saleable. To the extent that third parties enjoy Permitted Liens, such third
parties may have rights and remedies with respect to the property subject to
such Lien that, if exercised, could adversely affect the value of the
Collateral. In addition, the ability of the Holders to realize upon the
Collateral may be subject to certain bankruptcy law limitations in the event
of a bankruptcy.
The collateral release provisions of the Indenture permit the release of
Collateral without substitution of collateral of equal value under certain
circumstances. See "--Release of Collateral." As described under "--Certain
Covenants--Limitation on Disposition of Assets", the Net Available Proceeds of
certain Asset Dispositions may under specified circumstances be required to be
utilized to make an offer to purchase Notes. To the extent that any such offer
to purchase Notes is not fully subscribed to by Holders thereof, the
unutilized Net Available Proceeds may, under certain circumstances, be
retained and used by the Company free of the Security Interest.
SUBORDINATION AGREEMENT
The Trustee, on behalf of the Holders, may enter into a Subordination
Agreement with the Company and any lender pursuant to the terms of a Bank
Credit Agreement. The Subordination Agreement provides, among other things,
that (a) the lender has a first priority mortgage lien and security interest
in the Collateral and the Trustee a second priority interest therein, (b)
during any insolvency proceeding, the lender and the Trustee will coordinate
their efforts to give effect to the relative priority of their mortgage liens
and security interests in the Collateral and (c) following an Event of
Default, all decisions with respect to the Collateral, including the time and
method of any disposition thereof, will be made by the lender. The
Subordination Agreement also provides that the Trustee and the lender will
provide notices to each other with respect to acceleration of the Notes or the
Indebtedness outstanding under a Bank Credit Agreement, as the case may be. If
the Notes become due and payable prior to the final stated maturity thereof
for any reason or are not paid in full at the final stated maturity thereof
and after any applicable grace period has expired, at a time when Collateral
secures outstanding Indebtedness under a Bank Credit Agreement, the Trustee
will not have the right to foreclose upon the Collateral unless the lender
thereunder forecloses upon the Collateral. Thereafter, the Trustee has the
right to foreclose upon
60
<PAGE>
the Collateral in accordance with instructions from the Holders of a majority
in aggregate principal amount of the Notes or, in the absence of such
instructions, in such manner as the Trustee deems appropriate in its absolute
discretion. Proceeds from the sale of Collateral will first be applied to
repay Indebtedness outstanding under a Bank Credit Agreement and thereafter
paid to the Trustee.
CAPITALIZED INTEREST ACCOUNT
Pursuant to the Indenture, $9.45 million of the proceeds from the sale of
the Old Notes was placed in the Capitalized Interest Account held by the
Trustee. The Trustee will disburse the funds contained in the Capitalized
Interest Account to the Holders for the payment of interest when due on
December 1, 1997 and June 1, 1998. Any earnings on the funds deposited in the
Capitalized Interest Account to the extent not required for the required
interest payments will be paid to the Company after June 1, 1998.
CERTAIN COVENANTS
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness
The Company will not, and will not permit any of the Subsidiaries directly
or indirectly, to issue, incur, assume, guarantee, become liable, contingently
or otherwise, with respect to or otherwise become responsible for the payment
of (collectively, "incur") any Indebtedness (other than Permitted
Indebtedness); provided, however, that if no Default or Event of Default with
respect to the Notes shall have occurred and be continuing at the time or as a
consequence at the incurrence of such Indebtedness, the Company and the
Subsidiaries or any of them may incur Indebtedness if on the date of the
incurrence, (i) both (A) the Company's Consolidated EBITDA Coverage Ratio
would have been greater than 2.25 to 1.0 for the period from the Issue Date
through May 31, 1998, and 2.5 to 1.0 from June 1, 1998, and thereafter,
respectively, and (B) the Company's Adjusted Consolidated Net Tangible Assets
are equal to or greater than 150% of Indebtedness of the Company and the
Subsidiaries, or (ii) the Company's Adjusted Consolidated Net Tangible Assets
are equal to or greater than 250% of Indebtedness of the Company and the
Subsidiaries.
For purposes of determining any particular amount of Indebtedness under this
covenant, (i) guarantees of Indebtedness otherwise included in the
determination of such amount shall not also be included and (ii) any
Indebtedness incurred by the Company or any Subsidiary incurred for, or
related to, a Person other than another Subsidiary or the Company, as
applicable, shall be deemed to be in an amount equal to the greater of (i) the
lesser of (A) the full amount of the Indebtedness of such other Person or (B)
the fair market value of the assets and properties of the Company or such
Subsidiary, as to which the holder or holders of such Indebtedness are
expressly limiting the obligations of the Company or such Subsidiary, the
value of which assets and properties of the Company or any Subsidiary will be
as determined in good faith by the Board of Directors of the Company or such
Subsidiary, as applicable (which determinations shall be evidenced by a Board
Resolution of the applicable Person), and (ii) the amount of the Indebtedness
of such other Person as has been expressly contractually assumed or guaranteed
by the Company or such Subsidiary.
Notwithstanding anything to the contrary in this covenant, no Subsidiary
that is not already a Subsidiary Guarantor shall incur any Indebtedness with
respect to any Indebtedness of the Company or any other Subsidiary unless such
Subsidiary, the Company and the Trustee execute and deliver a supplemental
indenture evidencing such Subsidiary's Guarantee of the Notes, such Guarantee
to be a senior unsecured obligation of such Subsidiary.
The Company will not, and will not permit any Subsidiary Guarantor to, incur
any Indebtedness that by its terms (or by the terms of any agreement governing
such Indebtedness) is subordinated in right of payment to any other
Indebtedness of the Company or such Subsidiary Guarantor unless such
Indebtedness is also by its terms (or by the terms of any agreement governing
such Indebtedness) made expressly subordinate in right of payment to the Notes
or the Guarantee of such Subsidiary Guarantor, as the case may be, pursuant to
61
<PAGE>
subordination provisions that are substantively identical to the subordination
provisions of such Indebtedness (or such agreement) that are the most
favorable to the holders of any other Indebtedness of the Company or such
Subsidiary Guarantor, as the case may be.
Limitation on Restricted Payments
The Company will not, and will not permit any of the Subsidiaries to,
directly or indirectly, make any Restricted Payment, if at the time of such
Restricted Payment, or on a pro forma basis after giving effect thereto:
(x) a Default or an Event of Default under the Indenture has occurred and
is continuing;
(y) the aggregate amount expended for all Restricted Payments subsequent
to the Issue Date exceeds the sum of (without duplication):
(1) 50% of aggregate Consolidated Net Income (net of losses resulting
from full costs ceiling write downs attributable to any oil and gas
properties of the Company or any Subsidiary) of the Company (or if such
Consolidated Net Income is a loss, minus 100% of such loss) earned on a
cumulative basis during the period beginning on the Issue Date and
ending on the last date of the Company's fiscal quarter immediately
preceding such Restricted Payment; plus
(2) 100% of the aggregate Net Proceeds received by the Company from
any Person other than a Subsidiary from the issuance and sale
subsequent to the Issue Date of Qualified Capital Stock (excluding (A)
any Qualified Capital Stock paid as a dividend on any Capital Stock or
as interest on any Indebtedness, (B) the issuance of Qualified Capital
Stock upon the conversion of, or in exchange for, any Qualified Capital
Stock and (C) any Qualified Capital Stock with regard to issuances and
sales financed directly or indirectly using funds borrowed from the
Company or any Subsidiary, until and to the extent such borrowing is
repaid); plus
(3) to the extent not otherwise included in Consolidated Net Income,
dividends, repayments of loans or advances, or other transfers of
assets, in each case to the Company or a Subsidiary after the date of
the Indenture from any Unrestricted Subsidiary or from the
redesignation of an Unrestricted Subsidiary as a Subsidiary (valued in
each case as provided in the definition of Investment) other than
amounts constituting Permitted Unrestricted Subsidiary Investments;
plus
(4) $1.0 million; or
(z) the Company would not be able to incur $1.00 of additional
Indebtedness (excluding Permitted Indebtedness) as provided in the first
paragraph of "--Limitation on Incurrence of Additional Indebtedness."
The foregoing provisions of this covenant will not prevent the payment of (a)
any dividend within 60 days after the date of its declaration if the dividend
would have been permitted on the date of declaration and (b) cash dividends by
the Company in respect of its Series A Cumulative Preferred Stock if (i) no
Default or Event of Default under the Indenture shall have occurred and be
continuing at the time or as a consequence of the payment of such cash
dividends and (ii) on the date of the payment of such cash dividends and after
giving effect to such payment, the Company's Consolidated EBITDA Coverage
Ratio would have been greater than 1.5 to 1.0; provided, however, that
payments made in accordance with this paragraph shall be counted for purposes
of computing amounts expended pursuant to subclause (y) in the immediately
preceding paragraph.
Limitation on Disposition of Assets
The Company will not, and will not permit any Subsidiary to, make any Asset
Disposition unless:
(i) in the case of any Asset Disposition or series of related Asset
Dispositions having a fair market value of more than $5.0 million, the
Company or such Subsidiary receives consideration at the time of such Asset
Disposition at least equal to the fair market value as determined by either
(a) a majority of the disinterested directors of the Company or (b) a
nationally recognized investment banking firm,
62
<PAGE>
(ii) at least (a) 70% of the consideration received by the Company or
such Subsidiary, as the case may be, from such Asset Disposition shall be
in the form of cash or cash equivalents and is received at the time of such
Asset Disposition and (b) 15% of such consideration received if in a form
other than cash or cash equivalents is converted into or exchanged for cash
or cash equivalents within 120 days of such Asset Disposition, and
(iii) within 365 days following the receipt of the Net Available Proceeds
from such Asset Disposition, 100% of the Net Available Proceeds from such
Asset Disposition are applied by the Company or such Subsidiary:
(a) to repay Indebtedness (other than Subordinated Indebtedness) of
the Company or any Subsidiary, provided, in each case, that the related
loan commitment of any revolving credit facility or other borrowing (if
any) is thereby permanently reduced by the amount of such Indebtedness
so repaid;
(b) at the Company's option to the extent that such Net Available
Proceeds are not applied to repay Indebtedness, to Permitted Industry
Investments made by the Company or a Subsidiary (or, to the extent not
so applied during such 365 day period, to Permitted Industry
Investments specifically identified during such 365 day period
reasonably anticipated in good faith by the Board of Directors of the
Company to be expended within 180 days after being specifically
identified (such 180-day period, the "Project Period")); and
(c) to the extent that any Net Available Proceeds are not applied to
repay Indebtedness or applied or to be applied to Permitted Industry
Investments, to make an offer to purchase (the "Net Proceeds Offer")
(on a Business Day (the "Net Proceeds Payment Date") not later than the
later of (1) 365 days following the receipt of such Net Available
Proceeds or (2) in the case of application of proceeds intended to be
applied under clause (b), 35 Business Days following any Project
Period) the Notes at a price equal to 100% of the principal amount of
the Notes plus accrued interest to the Net Proceeds Payment Date.
Notwithstanding the foregoing, the Company and its Subsidiaries will not be
required to apply any Net Available Proceeds in accordance with such
provisions except to the extent that the Net Available Proceeds from all Asset
Dispositions that are not applied in accordance with such provisions exceed
$5.0 million.
Notice of a Net Proceeds Offer to purchase the Notes will be made on behalf
of the Company not less than 25 Business Days nor more than 60 Business Days
before the Net Proceeds Payment Date. Notes tendered to the Company pursuant
to a Net Proceeds Offer will cease to accrue interest after the Net Proceeds
Payment Date. The Company will not be entitled to any credit against the above
obligations for the principal amount of Notes previously acquired by the
Company. For purposes of this covenant, the term "Net Proceeds Offer Amount"
means the principal of outstanding Notes in an aggregate principal amount
equal to any remaining Net Available Proceeds.
On the Net Proceeds Payment Date, the Company will (i) accept for payment
Notes or portions thereof tendered pursuant to the Net Proceeds Offer in an
aggregate principal amount equal to the Net Proceeds Offer Amount or such
lesser amount of Notes as has been tendered, (ii) deposit with the paying
agent money sufficient to pay the purchase price of all Notes or portions
thereof so tendered in an aggregate principal amount equal to the Net Proceeds
Offer Amount or such lesser amount, and (iii) deliver or cause to be delivered
to the Trustee, Notes so accepted together with an officers' certificate
stating the Notes or portions thereof tendered to the Company. If the
aggregate principal amount of Notes tendered exceeds the Net Proceeds Offer
Amount, the Trustee will select the Notes to be purchased on a pro rata basis
based on the principal amount of Notes so tendered. The paying agent will
promptly mail or deliver to Holders of the Notes so accepted payment in an
amount equal to the purchase price, and the Company will execute, and the
Trustee will promptly authenticate and mail or make available for delivery to
such Holders, a new Note equal in principal amount to any unpurchased portion
of the Note surrendered. Any Notes not so accepted will be promptly mailed or
delivered to the Holder thereof. The Company will publicly announce the
results of the Net Proceeds Offer on or as soon as practicable after the Net
Proceeds Payment Date. For purposes of this covenant, the Trustee or its agent
will act
63
<PAGE>
as the paying agent. The Company may make Asset Dispositions in accordance
with this covenant and receive consideration in the form of equity,
partnership or other ownership interests where it might not control such
resulting entity.
The Company's ability to repurchase Notes in a Net Proceeds Offer may be
restricted by the terms of a Bank Credit Agreement and may be prohibited or
otherwise limited by the terms of any then existing borrowing arrangements and
by its financial resources.
Limitation on Liens Securing Indebtedness
The Company will not, and will not permit any of the Subsidiaries to,
create, incur, assume or suffer to exist any Liens (other than Permitted
Liens) upon any of their respective Properties securing (i) any Indebtedness
of the Company, unless the Notes are equally and ratably secured or (ii) any
Indebtedness of any Subsidiary Guarantor, unless the Notes or the Guarantees,
as the case may be, are equally and ratably secured; provided that if such
Indebtedness is expressly subordinated to the Notes or the Guarantees, the
Lien securing such Indebtedness will be subordinated and junior to the Lien
securing the Notes or the Guarantees, with the same relative priority as such
Subordinated Indebtedness will have with respect to the Notes or the
Guarantees, as the case may be.
Limitation on Payment Restrictions Affecting Subsidiaries
The Company will not, and will not permit any Subsidiary to, directly or
indirectly, create or suffer to exist or allow to become effective any Payment
Restriction, except for such encumbrances or restrictions existing under or by
reason of (A) a Bank Credit Agreement, (B) customary provisions restricting
subletting or assignment of any lease governing a leasehold interest of the
Company or any Subsidiary, (C) any instrument governing Indebtedness of a
Person acquired by the Company or a Subsidiary at the time of such
acquisition, which encumbrance or restriction is not applicable to any Person,
other than the Person, or the Property of the Person, so acquired, provided
that such Indebtedness was not incurred in anticipation of such acquisition,
(D) with respect to clauses (i)(c) and (ii)(c) contained in the definition of
Payment Restriction, Purchase Money Obligations for Property acquired in the
ordinary course of business, (E) Indebtedness existing pursuant to a written
agreement in effect on the date of the Indenture, (F) Indebtedness under the
Indenture, or (G) Indebtedness incurred to refinance, refund, extend or renew
Indebtedness referred to in clauses (A), (C), (D), (E) or (F) above, provided
that the Payment Restrictions contained therein are not materially more
restrictive than those provided for in the Indebtedness being refinanced,
refunded, extended or renewed.
Limitation on Transactions with Related Persons
Neither the Company nor any of the Subsidiaries will (i) sell, lease,
transfer or otherwise dispose of any of its Property to, (ii) purchase any
property from, (iii) make any Investment (other than Permitted Unrestricted
Subsidiary Investments and other Investments that do not breach the covenant
described under the caption "--Limitation on Restricted Payments") in, or (iv)
enter into any contract or agreement with or for the benefit of, a Related
Person of the Company or any Subsidiary (other than the Company or any such
Subsidiary in which no Related Person (other than the Company or another
Wholly Owned Subsidiary) owns, directly or indirectly, an equity interest) (a
"Related Person Transaction"), other than Related Person Transactions that are
on terms (which terms are in writing) no less favorable to the Company or a
Subsidiary, as applicable, than could be obtained in a comparable arm's length
transaction from an unaffiliated party; provided that, if the Company or any
Subsidiary enters into a Related Person Transaction or series of Related
Person Transactions involving or having an aggregate value of more than (i)
$1.0 million, such Related Person Transaction will have been approved by a
majority of the independent directors of the Company and (ii) $5.0 million
($1.0 million if there are no independent directors of the Company), such
Related Person Transaction will have been determined by a nationally
recognized investment banking firm to be fair from a financial standpoint to
the Company and its Subsidiaries. Notwithstanding anything to the contrary in
the foregoing, the foregoing restrictions shall not apply to (i) Related
Person Transactions that are approved by the Board of Directors of the Company
and such
64
<PAGE>
Subsidiary, if applicable, as in the best interests of the Company or such
Subsidiary, which transactions together with all other Related Person
Transactions in a related series involve or have an aggregate value not
exceeding $1.0 million in each fiscal year; (ii) fees and compensation paid to
or agreements with officers, directors, employees or consultants of the
Company or any Subsidiary in each case that are reasonable, as determined by
the Board of Directors or senior management thereof in good faith; and (iii)
Restricted Payments that are not prohibited by the "Limitation on Restricted
Payments" covenant.
Limitation on Conduct of Business
The Company will be operated in a manner such that it will not engage in any
business other than the exploration for and the development, acquisition,
production, gathering, treating, processing, marketing, storage, selling and
transportation of, Hydrocarbons and such other businesses as are reasonably
necessary or desirable to facilitate the conduct and operations of the
foregoing businesses.
Reports
The Company will file on a timely basis with the Commission, to the extent
such filings are accepted by the Commission and whether or not the Company has
a class of securities registered under the Exchange Act, the annual reports,
quarterly reports and other documents that the Company would be required to
file if it were subject to Section 13 or 15 of the Exchange Act. The Company
will also be required (a) to file with the Trustee (with exhibits), and
provide to each Holder of Notes (without exhibits), without cost to such
Holder, copies of such reports and documents within 15 days after the date on
which the Company files such reports and documents with the Commission or the
date on which the Company would be required to file such reports and documents
if the Company were so required and (b) if filing such reports and documents
with the Commission is not accepted by the Commission or is prohibited under
the Exchange Act, to supply at its cost copies of such reports and documents
(including any exhibits thereto) to any Holder of Notes promptly upon written
request.
Impairment of Security Interest
Subject to any Subordination Agreement, neither the Company nor any of its
Subsidiaries will take or omit to take any action which action or omission
would have the result of adversely affecting or impairing the security
interest in favor of the Trustee, on behalf of itself and the Holders, with
respect to the Collateral, and neither the Company nor any of its Subsidiaries
shall grant to any Person, or suffer any Person (other than the Company) to
have (other than to the Trustee on behalf of the Trustee and the Holders) any
interest whatsoever in the Collateral other than Liens securing a Bank Credit
Agreement and Liens permitted by the Security Documents. Neither the Company
nor any of its Subsidiaries will enter into any agreement or instrument that
by its terms requires the proceeds received from any sale of Collateral to be
applied to repay, redeem, defease or otherwise acquire or retire any
Indebtedness of any Person, other than pursuant to any Subordination
Agreement, the Indenture, the Notes and the Security Documents.
Future Designation of Restricted and Unrestricted Subsidiaries
The foregoing covenants (including calculation of financial ratios and the
determination of limitations on the incurrence of Indebtedness and Liens) may
be affected by the designation by the Company of any future Subsidiary of the
Company as an Unrestricted Subsidiary. The definition of "Unrestricted
Subsidiary" set forth under the caption "--Certain Definitions" describes the
circumstances under which a Subsidiary of the Company may be designated as an
Unrestricted Subsidiary by the Board of Directors of the Company.
MERGER, CONSOLIDATION OR SALE OF SUBSTANTIALLY ALL ASSETS
The Company will not consolidate with or merge with any other Person or
convey, transfer or lease all or substantially all of its Property to any
Person, unless: (i) the Company survives such merger or the Person formed by
such consolidation or into which the Company is merged or that acquires by
conveyance or transfer, or which
65
<PAGE>
leases, all or substantially all of the Property of the Company is a
corporation organized and existing under the laws of the United States of
America or any State thereof or the District of Columbia and expressly
assumes, by supplemental indenture, the due and punctual payment of the
principal of (and premium, if any) and interest on all the Notes and the
performance of every other covenant and obligation of the Company under the
Indenture; (ii) immediately before and after giving effect to such
transaction, no Default or Event of Default exists; (iii) immediately after
giving effect to such transaction on a pro forma basis, the Consolidated Net
Worth of the Company (or the surviving entity if the Company is not
continuing) is equal to or greater than the Consolidated Net Worth of the
Company immediately before such transaction and (iv) immediately after giving
effect to such transaction on a pro forma basis, the Company (or the surviving
entity if the Company is not continuing) would be able to incur $1.00 of
additional Indebtedness (excluding Permitted Indebtedness) under the tests
described in the first paragraph of "Limitation on Incurrence of Additional
Indebtedness." Upon any such consolidation, merger, conveyance, lease or
transfer in accordance with the foregoing, the successor Person formed by such
consolidation or into which the Company is merged or to which such conveyance,
lease or transfer is made will succeed to, and be substituted for, and may
exercise every right and power of, the Company under the Indenture with the
same effect as if such successor had been named as the Company therein, and
thereafter (except in the case of a lease) the predecessor corporation will be
relieved of all further obligations and covenants under the Indenture and the
Notes.
EVENTS OF DEFAULT
The following will constitute Events of Default under the Indenture:
(i) default in the payment of principal of, or premium, if any, on, the
Notes when due at maturity, upon repurchase, upon acceleration or
otherwise, including failure of the Company to repurchase the Notes
required to be repurchased upon a Change of Control or a Net Proceeds Offer
and failure to make any optional redemption payment;
(ii) default in the payment of any installment of interest on the Notes
when due (including any interest payable in connection with optional
redemption payment) and continuance of such default for 30 days;
(iii) default on any other Indebtedness of the Company, any Subsidiary
Guarantor or any other Subsidiary if either (a) such default results from
the failure to pay principal of, premium, if any, or interest on any such
Indebtedness when due in excess of $5.0 million and continuance of such
default beyond any applicable cure, forbearance or notice period, or (b) as
a result of such default, the maturity of such Indebtedness has been
accelerated prior to its scheduled maturity, without such default and
acceleration having been rescinded or annulled within a period of 10 days,
and the principal amount of such Indebtedness, together with the principal
amount of any other such indebtedness in default, or the maturity of which
has been so accelerated, aggregates $5.0 million or more;
(iv) default in the performance, or breach, of any other covenant of the
Company or any Subsidiary Guarantor in the Indenture and failure to remedy
such default within a period of 60 days after written notice thereof from
the Trustee or Holders of 25% in principal amount of the outstanding Notes;
(v) the entry by a court of one or more judgments or orders against the
Company, any Subsidiary Guarantor or any other Subsidiary in an aggregate
amount in excess of $5.0 million and which are not covered by insurance
written by third parties that has not been vacated, discharged, satisfied
or stayed pending appeal within 60 days from the entry thereof;
(vi) certain events of bankruptcy, insolvency or reorganization in
respect of the Company or any Material Subsidiary;
(vii) a Guarantee by a Subsidiary Guarantor that is a Material Subsidiary
shall cease to be in full force and effect (other than a release of a
Guarantee by designation of a Subsidiary Guarantor as an Unrestricted
Subsidiary) or any Subsidiary Guarantor shall deny or disaffirm its
obligations with respect thereto; or
(viii) any of the Security Documents cease to be in full force and effect
(other than in accordance with their respective terms or the terms of the
Indenture), or any of the Security Documents cease to give the
66
<PAGE>
Trustee the Liens, rights, powers and privileges purported to be created
thereby, or any Security Document is declared null and void, or the Company
denies any of its obligations under any Security Document or any Collateral
becomes subject to any Lien other than the Liens created or permitted by
the Security Documents and a Bank Credit Agreement.
If any Event of Default (other than an Event of Default specified in clause
(vi) above) occurs and is continuing, then and in every such case the Trustee
or the Holders of not less than 25% in principal amount of the Notes then
outstanding may declare the unpaid principal of, and accrued and unpaid
interest on, all the Notes then outstanding to be due and payable, by a notice
in writing to the Company (and to the Trustee, if given by Holders) and upon
any such declaration such principal amount, premium, if any, and accrued and
unpaid interest shall become immediately due and payable, notwithstanding
anything contained in the Indenture or the Notes to the contrary. If an Event
of Default specified in clause (vi) above occurs, all unpaid principal of,
premium, if any, and accrued interest on, the Notes then outstanding will
become due and payable, without any declaration or other act on the part of
the Trustee or any Holder.
The Holders of a majority in principal amount of the then outstanding Notes,
by written notice to the Company, the Subsidiary Guarantors and the Trustee,
may rescind and annul a declaration of acceleration and its consequences if
(1) the Company or any Subsidiary Guarantor has paid or deposited with such
Trustee a sum sufficient to pay (A) all overdue installments of interest on
all the Notes, (B) the principal of, and premium, if any, on, any Notes that
have become due otherwise than by such declaration of acceleration and
interest thereon at the rate or rates prescribed therefor in the Notes, (C) to
the extent that payment of such interest is lawful, interest on the defaulted
interest at the rate or rates prescribed therefor in the Notes, and (D) all
money paid or advanced by the Trustee thereunder and the reasonable
compensation, expenses, disbursements and advances of the Trustee, its agents
and counsel; (2) all Events of Default, other than the non-payment of the
principal of any Notes that have become due solely by such declaration of
acceleration, have been cured or waived as provided in the Indenture; and (3)
the rescission would not conflict with any judgment or decree of a court of
competent jurisdiction. No such rescission will affect any subsequent Event of
Default or impair any right consequent thereon.
No Holder of any of the Notes will have any right to institute any
proceeding, judicial or otherwise, or for the appointment of a receiver or
trustee or pursue any remedy under the Indenture, unless (1) such Holder has
previously given notice to the Trustee of a continuing Event of Default, (2)
the Holders of not less than 25% in principal amount of the outstanding Notes
have made written request to such Trustee to institute proceedings in respect
of such Event of Default in its own name as Trustee under the Indenture, (3)
such Holder or Holders have offered to such Trustee reasonable indemnity
against the costs, expenses and liabilities to be incurred in compliance with
such request, (4) such Trustee for 30 days after its receipt of such notice,
request and offer of indemnity has failed to institute any such proceeding,
and (5) no direction inconsistent with such written request has been given to
such Trustee during such 30-day period by the Holders of a majority in
principal amount of the outstanding Notes.
The Holder of any Note will have the right, which is absolute and
unconditional, to receive payment of the principal of, premium, if any, and
interest on such Note on the stated maturity therefor and to institute suit
for the enforcement of any such payment, and such right may not be impaired
without the consent of such Holder.
The Holders of a majority in principal amount of the Notes will have the
right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee or exercising any trust or power conferred
on such Trustee, provided that (1) such direction is not in conflict with any
rule of law or with the Indenture and (2) the Trustee may take any other
action deemed proper by such Trustee that is not inconsistent with such
direction.
MODIFICATIONS AND WAIVERS
The Indenture may be amended or rights thereunder may be waived with the
consent of the Company, the Subsidiary Guarantors, and the Holders of at least
a majority of the principal amount of Notes then outstanding,
67
<PAGE>
provided that, without the consent of each Holder of Notes affected thereby,
no such modification or waiver will be made with regard to: (i) a default in
the payment of principal, premium (if any) or interest on the Notes; (ii) a
reduction of the interest rate on or principal amount of the Notes, an
extension of the maturity schedule of the Notes, or a modification of the
redemption or repurchase provisions of the Notes; (iii) a change that
adversely affects subordination rights; (iv) a change in the currency in which
the Notes are payable; or (v) a change in the percentage required by this
provision.
SATISFACTION AND DISCHARGE OF INDENTURE; DEFEASANCE
The Company may at any time terminate its Obligations under the Notes and
the Indenture, and the Subsidiary Guarantors may, at such times, terminate
their corresponding obligations under the Guarantees and the Indenture, with
certain exceptions specified in the Indenture, by irrevocably depositing in
trust cash or obligations of the United States government and its agencies for
payment of principal of, and interest on, the Notes to redemption or maturity,
subject to the satisfaction of certain conditions.
Subject to the conditions described below, at the Company's option, either
(a) the Company and the Subsidiary Guarantors will be deemed to have been
discharged from their obligations with respect to the Notes and Guarantees and
the provisions of the Indenture on the 91st day after the applicable
conditions set forth below have been satisfied or (b) the Company and the
Subsidiary Guarantors will cease to be under any obligation to comply with
certain restrictive covenants, including those described under "-- Certain
Covenants," at any time after the applicable conditions set forth below have
been satisfied: (1) the Company or any Subsidiary Guarantor has deposited or
caused to be deposited irrevocably with the Trustee as trust funds in trust,
specifically pledged as security for, and dedicated solely to, the benefit of
the Holders (i) money or (ii) United States government obligations, which
through the payment of interest and principal in respect thereof in accordance
with their terms will provide (without any reinvestment of such interest or
principal), not later than one day before the due date of any payment, money
or (iii) a combination of (i) and (ii), in an amount sufficient, in the
opinion (with respect to (ii) and (iii)) of a nationally recognized firm of
independent public accountants expressed in a written certification thereof
delivered to the Trustee at or prior to the time of such deposit, to pay and
discharge each installment of principal of, premium, if any, and interest on,
the outstanding Notes on the dates such installments are due; (2) no Default
or Event of Default has occurred or is continuing on the date of such deposit
or will occur as a result of such deposit and such deposit will not result in
a breach or violation of, or constitute a default under, any other instrument
to which the Company or a Subsidiary Guarantor or any Subsidiary is a party or
by which any of them is bound, as evidenced to the Trustee in an officers'
certificate delivered to the Trustee concurrently with such deposit; (3) the
Company has delivered to the Trustee an opinion of counsel (which counsel may
be an employee of the Company) to the effect that Holders will not recognize
income, gain or loss for federal income tax purposes as a result of the
Company's exercise of its option described above and will be subject to
federal income tax on the same amount and in the same manner and at the same
time as would have been the case if such option had not been exercised, and,
in the case of the Notes being discharged pursuant to clause (a) above,
accompanied by a ruling to the effect received from or published by the
Internal Revenue Service (it being understood that (A) such opinion will also
state, if applicable, that such ruling is consistent with the conclusions
reached in such opinion and (B) the Trustee will be under no obligation to
investigate the basis of correctness of such ruling); (4) the Company has
delivered to the Trustee an opinion of counsel (which counsel may be an
employee of the Company) to the effect that the Company's exercise of its
option described above will not result in any of the Company, the Trustee or
the trust created by the Company's deposit of funds hereunder becoming or
being deemed to be an "investment company" under the Investment Company Act of
1940, as amended; (5) the Company or any Subsidiary Guarantor has paid or duly
provided for payment of all amounts then due to the Trustee pursuant to the
terms of the Indenture; and (6) the Company has delivered to the Trustee an
officers' certificate and an opinion of counsel (which counsel may be an
employee of the Company), each stating that all conditions precedent provided
for in the Indenture relating to the satisfaction and discharge of the
Indenture have been complied with.
68
<PAGE>
The Company or any Subsidiary Guarantor may make an irrevocable deposit
pursuant to this provision only if at such time it is not prohibited from
doing so under the Subordination Agreement and the Company has delivered to
the Trustee and any relevant paying agent an officer's certificate to that
effect.
RELEASE OF COLLATERAL
Subject to compliance by the Company with the conditions set forth above in
respect of any Asset Disposition under "--Certain Covenants--Limitation on
Disposition of Assets," the Company will be entitled to obtain a release of,
and the Trustee shall release, items of Collateral (the "Released Interests")
from the Security Interest under any of the following circumstances:
(1) Oil and gas properties of the Company that are located onshore in
South Louisiana that are not a part of the Collateral and are of equal or
greater fair market value to the value of the Released Interests are then
subjected to the Security Interest.
(2) All of the proceeds from the disposition of the Released Interests
are used to develop the Collateral.
(3) The Released Interests are comprised of Farmout Interests entered
into with any Person other than a Related Person.
(4) If, as of the date of the release of the Released Interests, the
Company's Adjusted Consolidated Net Tangible Assets equal or exceed the
following percentages of the Company's Secured Indebtedness:
(i) 150%, then the value of the Released Interests may be in an
amount up to $5.0 million less the value of the Released Interests
previously released pursuant to this clause (4) and clause (5) at the
time released;
(ii) 160%, then the value of the Released Interests may be in an
amount up to $6.0 million less the value of the Released Interests
previously released pursuant to this clause (4) and clause (5) at the
time released;
(iii) 170%, then the value of the Released Interests may be in an
amount up to $7.0 million less the value of the Released Interests
previously released pursuant to this clause (4) and clause (5) at the
time released;
(iv) 180%, then the value of the Released Interests may be in an
amount up to $8.0 million less the value of the Released Interests
previously released pursuant to this clause (4) and clause (5) at the
time released;
(v) 190%, then the value of the Released Interests may be in an
amount up to $9.0 million less the value of the Released Interests
previously released pursuant to this clause (4) and clause (5) at the
time released; and
(vi) 200%, then the value of the Released Interests may be in an
amount up to $10.0 million less the value of the Released Interests
previously released pursuant to this clause (4) and clause (5) at the
time released.
(5) If, as of the date of the release of the Released Interests, the
Company's Adjusted Consolidated Net Tangible Assets exceed 200% of the
Company's Secured Indebtedness, then the value of the Released Interests
may be in an amount equal to the positive number, if any, of the difference
of (x) the amount obtained by multiplying the percentage amount by which
the Company's Adjusted Consolidated Net Tangible Assets exceed 200% of the
Company's Secured Indebtedness (e.g., if the Company's Adjusted
Consolidated Net Tangible Assets equal 250% of the Company's Secured
Indebtedness, then the percentage amount equals 50%) by the principal
amount of the Securities then outstanding, less (y) the value of the
Released Interests previously released pursuant to this clause (5) at the
time released.
69
<PAGE>
The release of Collateral pursuant to the foregoing circumstances is subject
to the condition that the Company deliver to the Trustee the following:
(a) a notice from the Company requesting the release of the Released
Interests, (i) describing the proposed Released Interests, (ii) in the case
of clauses (1), (4) and (5) above, specifying the value of such Released
Interests on such date, (iii) stating that the release of such Released
Interests will not interfere with the Trustee's ability to realize the
value of the remaining Collateral and will not impair the maintenance and
operation of the remaining Collateral, (iv) certifying that release of the
Released Interests complies with the terms and conditions of the Indenture
with respect thereto, (v) specifying which of the circumstances described
in clauses (1) through (5) above pursuant to which the Collateral is
requested to be released and (vi) in the event there is to be a
substitution of property for the Released Interests, specifying the
property intended to be substituted for the Released Interests;
(b) an Officers' Certificate of the Company stating that (i) the release
covers only the Released Interests and complies with the terms and
conditions of the Indenture with respect to Asset Dispositions, (ii) there
is no Default or Event of Default in effect or continuing on the date
thereof, (iii) the release will not result in a Default or Event of Default
under the Indenture and (iv) all conditions precedent in the Indenture
relating to the release in question have been complied with; and
(c) all documentation required by the Trust Indenture Act, if any, prior
to the release of the Collateral by the Trustee and, in the event there is
to be a substitution of property for the Released Interests, all
documentation necessary to effect the substitution of such new Collateral.
GOVERNING LAW
The Indenture provides that it will be governed by, and construed in
accordance with, the laws of the State of New York but without giving effect
to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee need perform only those duties that are specifically set
forth (or incorporated by reference) in the Indenture and no others. During
the existence of an Event of Default, the Trustee will exercise such rights
and powers vested in it by the Indenture, and use the same degree of care and
skill in such exercise as a prudent person would exercise or use under the
circumstances in the conduct of such person's own affairs.
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payments of claims in
certain cases or to realize on certain property received in respect of any
such claims as security or otherwise.
CERTAIN DEFINITIONS
"Adjusted Consolidated Net Tangible Assets" means (without duplication), as
of the date of determination, (A) the sum of (i) the Present Value of Oil and
Gas Reserves, (ii) the Net Working Capital on a date no earlier than the date
of the Company's latest consolidated annual or quarterly financial statements,
and (iii) with respect to each other tangible asset of the Company or its
consolidated Subsidiaries, the greater of (a) the net book value of such other
tangible asset on a date no earlier than the date of the Company's latest
consolidated annual or quarterly financial statements, and (b) the appraised
value, as estimated by a qualified independent appraiser, of such other
tangible asset, as of a date no earlier than the date that is three years
prior to the date of determination (or such later date on which the Company
shall have a reasonable basis to believe that there has occurred a material
decrease in value since the determination of such appraised value), minus (B)
minority interests and, to the extent not otherwise taken into account in
determining Adjusted Consolidated Net Tangible Assets, any gas balancing
liabilities of the Company and its consolidated Subsidiaries. In addition to,
but without duplication of,
70
<PAGE>
the foregoing, for purposes of this definition, "Adjusted Consolidated Net
Tangible Assets" shall be calculated after giving effect, on a pro forma
basis, to (1) any Investment not prohibited by the Indenture, to and including
the date of the transaction giving rise to the need to calculate Adjusted
Consolidated Net Tangible Assets (the "Assets Transaction Date"), in any other
Person that, as a result of such Investment, becomes a Subsidiary of the
Company, (2) the acquisition, to and including the Assets Transaction Date (by
merger, consolidation or purchase of stock or assets), of any business or
assets, including, without limitation, Permitted Industry Investments, and (3)
any sales or other dispositions of assets permitted by the Indenture (other
than sales of Hydrocarbons or other mineral products in the ordinary course of
business) occurring on or prior to the Assets Transaction Date. For purposes
of calculating the ratio of the Company's Adjusted Consolidated Net Tangible
Assets to Indebtedness of the Company and its Subsidiaries, Indebtedness of a
Subsidiary that is not a Wholly Owned Subsidiary (which Indebtedness is non-
recourse to the Company or any other Subsidiary or any of their assets) shall
be included only to the extent of the Company's pro rata ownership interest in
such Subsidiary.
"Adjusted Net Assets" of a Subsidiary Guarantor at any date shall mean the
lesser of the amount by which (x) the fair value of the property of such
Subsidiary Guarantor exceeds the total amount of liabilities, including,
without limitation, contingent liabilities (after giving effect to all other
fixed and contingent liabilities incurred or assumed on such date), but
excluding liabilities under the Guarantee, of such Subsidiary Guarantor at
such date and (y) the present fair saleable value of the assets of such
Subsidiary Guarantor at such date exceeds the amount that will be required to
pay the probable liability of such Subsidiary Guarantor on its debts (after
giving effect to all other fixed and contingent liabilities incurred or
assumed on such date and after giving effect to any collection from any
Subsidiary of such Subsidiary Guarantor in respect of the obligations of such
Subsidiary under the Guarantee), excluding debt in respect of the Guarantee,
as they become absolute and matured.
"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any specified Person means the power to
direct the management and policies of such Person directly or indirectly,
whether through the ownership of Voting Stock, by contract or otherwise; and
the terms "controlling" and "controlled" have meanings correlative to the
foregoing.
"Asset" means each of the assets that are owned by the Company on the date
of the Indenture or that are acquired by the Company or a Subsidiary after the
date of the Indenture.
"Asset Disposition" means any sale, lease (other than a sale and leaseback
that creates a Capitalized Lease Obligation), transfer, exchange or other
disposition (or series of related sales, leases, transfers, exchanges or
dispositions) of shares of Capital Stock of a Subsidiary (other than
directors' qualifying shares), or of property or assets (including any
interests therein) (each referred to for purposes of this definition as a
"disposition") by the Company or any of its Subsidiaries, including any
disposition by means of a merger, consolidation or similar transaction (other
than (A) by the Company to a Subsidiary or by a Subsidiary to the Company or a
Subsidiary (in the case of a transfer to a Subsidiary that is not a wholly
owned Subsidiary, dispositions shall be excluded pursuant to clause (A) only
to the extent of the Company's interest in such Subsidiary after giving effect
to such transfer), (B) any Investment in an Unrestricted Subsidiary not
prohibited under the provisions described in the "Limitation on Restricted
Payments" covenant, (C) a disposition of Hydrocarbons or other mineral
products in the ordinary course of business, and (D) the disposition of all or
substantially all of the assets of the Company in compliance with the "Merger,
Consolidation or Sale of Substantially All Assets" covenant).
"Assigned Mortgage" means the Act of Mortgage, Security Agreement,
Assignment of Production and Financing Statement, assigned by the Act of
Assignment of Note and Liens executed by JEDI and the Company, dated as of the
Issue Date, related to the Collateral.
"Average Life" means, as of the date of determination, with respect to any
Indebtedness, the quotient obtained by dividing (i) the sum of the products of
(x) the number of years from such date to the date of each successive
scheduled principal payment of such Indebtedness multiplied by (y) the amount
of such principal payment by (ii) the sum of all such principal payments.
71
<PAGE>
"Bank Credit Agreement" means one or more credit agreements that may be
entered into between the Company and one or more lenders that may be secured
by certain assets of the Company, as such agreement may be amended, modified
(without limitation as to amount), supplemented, extended, restated, replaced,
renewed or refinanced from time to time in whole or in part in one or more
credit agreements, loan agreements, instruments or similar agreements, as such
may be further amended, modified (without limitation as to amount),
supplemented, extended, restated, replaced, renewed or refinanced from time to
time.
"Board of Directors" means, with respect to any Person, the board of
directors of such Person or any committee of the board of directors of such
Person duly authorized to act on behalf of the board of directors of such
Person.
"Business Day" means any day other than a Saturday, Sunday or any other day
on which banking institutions in the City of New York are required or
authorized by law or other governmental action to be closed.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of
corporate stock and any and all warrants, options and rights with respect
thereto, including each class of common stock and preferred stock of such
Person.
"Capitalized Lease Obligation" means the discounted present value of the
rental obligations of any Person under any lease of Property, which in
accordance with GAAP, is required to be capitalized on the balance sheet of
such Person.
"Change of Control" means (i) an event or series of events by which any
Person or other entity or group of Persons or other entities acting in concert
as a partnership or other group (a "Group of Persons") shall, as a result of a
tender or exchange offer, open market purchases, privately negotiated
purchases, merger, consolidation or otherwise, have become the beneficial
owner (within the meaning of Rule 13d-3 under the Exchange Act) of 40% or more
of the combined voting power of the then outstanding Voting Stock of the
Company; provided, however, that such event or series of events shall not
constitute a Change of Control if the Principals continue to beneficially own
more than 50% of the combined voting power of the then outstanding Voting
Stock of the Company, (ii) during any period of two consecutive years,
Continuing Directors cease for any reason to constitute a majority of the
Board of Directors then in office, or (iii) the direct or indirect sale,
lease, exchange or other transfer of all or substantially all of the Assets to
any Person or Group of Persons.
"Collateral" means the collateral described in the Security Documents, which
collateral includes certain oil and gas properties of the Company in the Lake
Enfermer Field, Manilla Village Field and Boutte Field.
"Company Properties" means all Properties, and equity, partnership or other
ownership interests therein, that are related or incidental to, or used or
useful in connection with, the conduct or operation of any business activities
of the Company or the Subsidiaries, which business activities are not
prohibited by the terms of the Indenture.
"Consolidated EBITDA" means, with respect to any Person for any period, the
Consolidated Net Income of such Person for such period increased (to the
extent deducted in determining Consolidated Net Income) by the sum of: (i) all
income taxes of such Person and its subsidiaries paid or accrued according to
GAAP for such period (other than income taxes attributable to extraordinary,
unusual or non-recurring gains or losses), (ii) all interest expense of such
Person and its subsidiaries paid or accrued in accordance with GAAP for such
period (including amortization of original issue discount and the interest
portion of deferred payment obligations), (iii) depreciation and depletion of
such Person and its subsidiaries, (iv) amortization of such Person and its
subsidiaries including, without limitation, amortization of capitalized debt
issuance costs, (v) the amount of any preferred stock dividends paid by such
Person on its preferred stock and (vi) any other non-cash charges to the
extent deducted from Consolidated Net Income.
"Consolidated EBITDA Coverage Ratio" means, with respect to any Person, the
ratio of (1) Consolidated EBITDA of such Person for the period (the "Pro Forma
Period") consisting of the most recent four full fiscal
72
<PAGE>
quarters for which financial information in respect thereof is available
immediately prior to the date of the transaction giving rise to the need to
calculate the Consolidated EBITDA Coverage Ratio (the "Transaction Date") to
(2) the aggregate Fixed Charges that such Person will accrue during the fiscal
quarter in which the Transaction Date occurs and the three fiscal quarters
immediately subsequent to such fiscal quarter (the "Forward Period") on the
aggregate amount of Indebtedness outstanding on the Transaction Date,
including any Indebtedness proposed to be incurred on such date and excluding
any Indebtedness repaid with the proceeds of such Indebtedness (as though all
such Indebtedness was incurred or repaid on the first day of the quarter in
which the Transaction Date occurred). In addition to, but without duplication
of, the foregoing, for purposes of this definition, "Consolidated EBITDA"
shall be calculated after giving effect (without duplication), on a pro forma
basis for the Pro Forma Period (but no longer), to (a) any Investment, during
the period commencing on the first day of the Pro Forma Period to and
including the Transaction Date (the "Reference Period"), in any other Person
that, as a result of such Investment, becomes a subsidiary of such Person, (b)
the acquisition, during the Reference Period (by merger, consolidation or
purchase of stock or assets) of any business or assets, which acquisition is
not prohibited by the Indenture, including but not limited to Permitted
Industry Investments, as if such acquisition had occurred on the first day of
the Reference Period (c) any sales or other dispositions of assets (other than
sales of Hydrocarbons and other mineral products in the ordinary course of
business) occurring during the Reference Period, in each case as if such
incurrence, Investment, repayment, acquisition or asset sale had occurred on
the first day of the Reference Period and (d) interest income reasonably
anticipated by the Company to be received during the Pro Forma Period from
Investments in Permitted Obligations, which Investments exist on the
Transaction Date or will exist as a result of the transaction giving rise to
the need to calculate the Consolidated EBITDA Coverage Ratio. For purposes of
this definition, "Fixed Charges" shall be calculated after giving effect
(without duplication), on a pro forma basis for the Forward Period, to any
Indebtedness incurred or repaid on or after the first day of the Forward
Period and prior to the Transaction Date. For purposes of calculating the
Company's Consolidated EBITDA Coverage Ratio, Indebtedness of a Subsidiary
that is not a Wholly Owned Subsidiary (which Indebtedness is non- recourse to
the Company or any other Subsidiary or any of their assets) shall be included
only to the extent of the Company's pro rata ownership interest in such
Subsidiary.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate net income (or loss) of such Person and its subsidiaries for
such period on a consolidated basis, determined in accordance with GAAP,
provided that (a) the net income of (i) any Unrestricted Subsidiary and (ii)
any other Person in which such Person or any subsidiary thereof has an
interest (which interest, in the case of those Persons referred to in clause
(ii), does not cause the net income of such other Person to be consolidated
with the net income of such Person in accordance with GAAP) will be included
only to the extent of the amount of dividends or distributions actually paid
to such Person or its subsidiaries by such other Person in such period; (b)
the net income of any subsidiary of such Person that is subject to any Payment
Restriction will be excluded to the extent of such Payment Restriction; and
(c) (i) the net income (or loss) of any other Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition,
(ii) any net gain (but not loss) on the sale or other disposition by such
Person or any of its subsidiaries of assets and of the Capital Stock of any
subsidiary of such Person, and (iii) after-tax items classified as
extraordinary or nonrecurring gains, will each be excluded.
"Consolidated Net Worth" means with respect to any Person as of any date the
amount by which the assets of such Person and its subsidiaries on a
consolidated basis exceed (i) the total liabilities of such Person and its
subsidiaries on a consolidated basis, plus (ii) Disqualified Capital Stock of
such Person or Disqualified Capital Stock of any subsidiary of such Person
issued to any Person other than such Person or another wholly owned Subsidiary
of such Person, in each case determined in accordance with GAAP.
"Continuing Directors" means any member of the Board of Directors of the
Company on the Issue Date, any director elected since the date thereof in any
annual meeting of the stockholders upon the recommendation of the Board of
Directors of the Company and any other member of the Board of Directors of the
Company who will be recommended or elected to succeed a Continuing Director by
a majority of Continuing Directors who are then members of the Board of
Directors of the Company.
73
<PAGE>
"Currency Agreement" means the obligations of any Person pursuant to any
foreign exchange contract, currency swap agreement or other similar agreement
or arrangement designed to protect such Person or any of its subsidiaries
against fluctuations in currency values.
"Default" means any event that is, or after notice or passage of time would
be, an Event of Default.
"Disqualified Capital Stock" means, with respect to any Person, any Capital
Stock of such Person or its subsidiaries that, by its terms, by the terms of
any agreement related thereto or by the terms of any security into which,
mandatorily or at the option of the holder, it is convertible or exchangeable,
is, or upon the happening of an event or the passage of time would be,
required to be redeemed or repurchased by such Person or its subsidiaries,
including at the option of the holder, in whole or in part, or has, upon the
happening of an event or the passage of time would have, a redemption or
similar payment due, in each such case on or prior to the Maturity Date.
"Farmout Interest" means an undivided interest in a portion of the
Collateral that has been assigned, transferred, subleased, granted or conveyed
pursuant to a farmout, conditional assignment or similar type agreement.
"Fixed Charges" means, with respect to any Person, for any period, the
aggregate amount of (i) interest, whether expensed or capitalized, paid,
accrued or scheduled to be paid or accrued during such period (except to the
extent accrued in a prior period) in respect of all Indebtedness of such
Person and its consolidated subsidiaries (including (a) original issue
discount on any Indebtedness and (b) the interest portion of all deferred
payment obligations, calculated in accordance with the effective interest
method, in each case to the extent attributable to such period) and (ii) the
product of (a) the dividend requirements on Disqualified Capital Stock of such
Person and its consolidated subsidiaries and, in the case of the Company, on
the Series A Preferred Stock (in each case, whether in cash or otherwise
(except dividends payable in shares of Qualified Capital Stock) (non-cash
dividends being valued as determined in good faith by the Board of Directors
of such Person, as evidenced by a Board Resolution)) paid, accrued or
scheduled to be paid or accrued during such period (except to the extent
accrued in a prior period) times (b) a fraction, the numerator of which is one
and the denominator of which is one minus the then current effective
consolidated federal, state and local income tax rate of such Person and its
consolidated subsidiaries, expressed as a decimal, and, with respect to all of
the foregoing items in this definition, excluding items eliminated in
consolidation.
For purposes of the definition of Fixed Charges, (a) interest on a
Capitalized Lease Obligation shall be deemed to accrue at an interest rate
reasonably determined by the Board of Directors of such Person (as evidenced
by a Board Resolution) to be the rate of interest implicit in such Capitalized
Lease Obligation in accordance with GAAP; (b) interest on Indebtedness that is
determined on a fluctuating basis shall be deemed to have accrued at a fixed
rate per annum equal to the rate of interest of such Indebtedness in effect on
the date Fixed Charges are being calculated, subject to the proviso in clause
(c); (c) interest on Indebtedness that may optionally be determined at an
interest rate based upon a factor of a prime or similar rate, a eurocurrency
interbank offered rate, or other rate, shall be deemed to have been based upon
the rate actually chosen, or, if none, then based upon such optional rate
chosen as the Company may designate, (provided that, for the period following
the date on which the rate actually chosen ceases to be in effect, the Company
may designate an optional rate other than that actually chosen, which optional
rate shall be deemed to accrue at a fixed per annum equal to the rate of
interest on such optional rate in effect on the date Fixed Charges are being
calculated); and (d) Fixed Charges shall be increased or reduced by the net
cost (including amortization of discount) or benefit associated with
obligations under Interest Rate Agreements attributable to such period.
"GAAP" means generally accepted accounting principles as in effect in the
United States of America as of any date of determination.
"Hydrocarbons" means oil, gas, casinghead gas, drip gasoline, natural
gasoline, condensate, distillate, liquid hydrocarbons, gaseous hydrocarbons
and all constituents, elements or compounds thereof and products refined or
processed therefrom.
74
<PAGE>
"Immediate Family" of any specified Person means a spouse, sibling, child or
grandchild of such specified Person, whether related through blood, marriage
or adoption.
"Indebtedness" means, with respect to any Person, without duplication, any
liability, contingent or otherwise, of such Person (i) for borrowed money
(whether or not the recourse of the lender is to the whole of the assets of
such Person or only to a portion thereof), (ii) evidenced by bonds, notes,
debentures or similar instruments, (iii) representing the deferred and unpaid
balance of the purchase price of any property or interest therein (other than
any such balance that represents an account payable or any other monetary
obligation to a trade creditor created, incurred, assumed or guaranteed by
such Person in the ordinary course of business of such Person in connection
with obtaining goods, materials or services and due within 12 months (or such
longer period for payment as is customarily extended by such trade creditor)
of the incurrence thereof, which account is not overdue by more than 150 days,
according to the original terms of sale, unless such account payable is being
contested in good faith or has been extended), (iv) for the payment of a
Capitalized Lease Obligation of such Person, (v) with respect to the
reimbursement of any letter of credit, banker's acceptance or similar credit
transaction, (vi) with respect to Indebtedness (as otherwise defined in this
definition) of another Person secured by a Lien on any asset of such Person,
whether or not such Indebtedness is assumed by such Person (provided that if
the obligations so secured have not been assumed in full by such Person or are
not otherwise such Person's legal liability in full, then such obligations
shall be deemed to be in an amount equal to the greater of (A) the lesser of
(1) the full amount of such obligations, and (2) the fair market value of such
assets, as determined in good faith by the Board of Directors of such Person,
which determination shall be evidenced by a Board Resolution, and (B) the
amount of obligations as have been assumed by such Person or that are
otherwise such Person's legal liability), (vii) with respect to production
payments in connection with oil and gas properties of such Person, other than
any Permitted Production Payment Obligations, (viii) to the extent not
otherwise included, under Currency Agreements and Interest Rate Agreements
entered into other than in the ordinary course of such Person's business, (ix)
in the case of such Person, the liquidation preference and any mandatory
redemption payment obligations in respect of Disqualified Capital Stock, and,
in the case of a subsidiary of such Person, the liquidation preference and any
mandatory redemption payment obligations in respect of preferred stock of such
subsidiary, and (x) in respect of all Indebtedness of others that such Person
has guaranteed, endorsed with recourse (otherwise than for collection, deposit
or other similar transactions in the ordinary course of business), agreed to
purchase or repurchase or in respect of which such Person has agreed
contingently to supply or advance funds or for which such Person has otherwise
become liable; provided, however, Indebtedness arising pursuant to clause
(iii) of this definition as a result of such account payable becoming overdue
by more than 150 days shall only be deemed to be incurred at a time when
Indebtedness, other than such Indebtedness, is incurred.
"Insolvency or Liquidation Proceeding" means, with respect to any Person,
(a) an insolvency or bankruptcy case or proceeding, or any receivership,
liquidation, reorganization proceeding or other similar case or proceeding,
relative to such Person or to its creditors, as such, or its assets, (b) any
liquidation, dissolution, or reorganization proceeding of such Person, whether
voluntary or involuntary and whether or not involving insolvency or
bankruptcy, or (c) any assignment for the benefit of creditors or any other
marshalling of assets and liabilities of such Person.
"Interest Rate Agreement" means the obligations of any Person pursuant to
any interest swap agreement, interest rate collar agreement or other similar
agreement or arrangement designed to protect such Person or any of its
subsidiaries against fluctuations in interest rates.
"Investment" means, in respect of any Person, any investment in another
Person, whether by means of a share purchase, capital contribution, loan,
advance (other than advances to employees for moving and travel expenses,
drawing accounts and similar expenditures in the ordinary course of business)
or similar credit extension constituting Indebtedness of such other Person and
any guaranty of Indebtedness of any other Person. For purposes of the
"Limitation on Restricted Payments" covenant and the definition of Permitted
Unrestricted Subsidiary Investments, (i) an "Investment" in an Unrestricted
Subsidiary shall be deemed to include and be
75
<PAGE>
valued at the fair market value of the net assets of any Subsidiary at the
time that such Subsidiary is designated an Unrestricted Subsidiary, and (ii)
any Investment in an Unrestricted Subsidiary shall be valued at fair market
value at the time of such Investment (except however, when such Investment
consists of a loan or advance by a Person to another Person that is of an
intercompany or similar nature between such Persons and arises pursuant to an
agreement or understanding in the ordinary course of business relating to tax
sharing, administrative or other similar arrangements, then such Investment
shall be valued at fair market value at the time that the investing Person
shall have paid monies or transferred other consideration to another Person
for the benefit of the Person in whom the agreement to make such loan or
advance was made), in each case as determined by the Board of Directors of the
Company and such Subsidiary, as applicable, in good faith.
"Lien" means, with respect to any Person, any mortgage, pledge, lien,
encumbrance, easement, restriction, covenant, right-of-way, charge or adverse
claim affecting title or resulting in an encumbrance against real or personal
property of such Person, or a security interest of any kind (including any
conditional sale or other title retention agreement, any lease in the nature
thereof, any option, right of first refusal or other similar agreement to
sell, in each case securing obligations of such Person and any filing of or
agreement to give any financing statement under the Uniform Commercial Code
(or equivalent statute or statutes) of any jurisdiction).
"Material Change" means an increase or decrease of more than 10% during a
fiscal quarter in the discounted future net cash flows (excluding changes that
result solely from changes in prices) from proved oil and gas reserves of the
Company and consolidated Subsidiaries (before any state or federal income
tax); provided, however, that the following will be excluded from the Material
Change calculation: (i) any acquisitions during the quarter of oil and gas
reserves that have been estimated by independent petroleum engineers and on
which a report or reports exist, (ii) any reserves added during the quarter
attributable to the drilling or recompletion of wells not included in previous
reserve estimates, but which will be included in future quarters, and (iii)
any disposition of properties existing at the beginning of such quarter that
have been disposed of as provided in "Limitation on Disposition of Assets".
"Material Subsidiary" means any Subsidiary of the Company that, as of the
relevant date of determination, would be a "significant subsidiary" as defined
in Reg. (S) 230.405 promulgated pursuant to the Securities Act as in effect on
the Issue Date, assuming the Company is the "registrant" referred to in such
definition, except that the 10% amounts referred to in such definition shall
be deemed to be 5%.
"Moody's" means Moody's Investors Service, Inc. and any successor to the
rating agency business thereof.
"Net Available Proceeds" means, with respect to any Asset Disposition of any
Person, cash proceeds received (including any cash proceeds received by way of
deferred payment of principal pursuant to a note or installment receivable or
otherwise, but only as and when received, and excluding any other
consideration until such time as such consideration is converted into cash)
therefrom, in each case net of (i) all legal, title and recording tax
expenses, commissions and other fees and expenses incurred and (ii) all
federal, state or local taxes required to be accrued as a liability as a
consequence of such Asset Disposition, and in each case net of all
Indebtedness that is secured by such Assets, in accordance with the terms of
any Lien upon or with respect to such Assets, or that must, by its terms or to
obtain a necessary consent to such Asset Disposition or by applicable law, be
repaid out of the proceeds from such Asset Disposition and that is actually so
repaid.
"Net Proceeds" means (a) in the case of any sale by the Company of Qualified
Capital Stock, the aggregate net cash proceeds received by the Company, after
payment of expenses, commissions and the like incurred in connection
therewith, and (b) in the case of any exchange, exercise, conversion or
surrender of any outstanding securities or Indebtedness of the Company for or
into shares of Qualified Capital Stock of the Company, the net book value of
such outstanding securities or Indebtedness as adjusted on the books of the
Company on the date of such exchange, exercise, conversion or surrender (plus
any additional amount required to be paid by the holder of such Indebtedness
or securities to the Company upon such exchange, exercise, conversion or
surrender and less any and all payments made to the holders of such
Indebtedness or securities, and all other expenses incurred by the Company in
connection therewith).
76
<PAGE>
"Net Working Capital" means (i) all current assets of the Company and its
consolidated Subsidiaries, minus (ii) all current liabilities of the Company
and its consolidated Subsidiaries, except current liabilities included in
Indebtedness.
"Non-Recourse Indebtedness" means Indebtedness that, under the terms thereof
or pursuant to applicable law, neither the Company nor any Subsidiary of the
Company (other than a Subsidiary being designated as an Unrestricted
Subsidiary) is directly or indirectly liable for and there is no recourse
against any of the assets or properties of the Company or such Subsidiary.
"Obligations" mean the due and punctual payment of principal of and interest
on the Securities when due, whether at maturity, by acceleration, by
redemption or otherwise, and all other monetary obligations of the Company
under the Indenture and the Notes and the due and punctual performance of all
other obligations of the Company under the Indenture and the Notes.
"Oil and Gas Hedge Agreements" means, with respect to any Person, any oil
and gas agreements and other agreements or arrangements or any combination
thereof entered into by such Person in the ordinary course of business and
that is designed to provide protection against oil and natural gas price
fluctuations.
"Oil and Gas Properties" means all Properties, including equity or other
ownership interests therein, owned by any Person that have been assigned
"proved oil and gas reserves" as defined in Rule 4-10 of Regulation S-X of the
Securities Act as in effect on the Issue Date.
"Payment Restriction" means a consensual encumbrance or restriction of any
kind (i) on the ability of any of the Subsidiaries (a) to pay dividends or
make other distributions on its Capital Stock or make payments on any
Indebtedness owed to the Company or any other Subsidiary, (b) to make loans or
advances to the Company or any other Subsidiary, or (c) to transfer any of its
Property to the Company or any other Subsidiary; or (ii) on the ability of
such Person or any other subsidiary of such Person to receive or retain any
such (a) dividends, distributions or payments, (b) loans or advances, or (c)
transfers of Property.
"Permitted Indebtedness" means (i) Indebtedness under the Notes and any
Exchange Note issued in exchange for Notes of equal principal amount; (ii)
Indebtedness outstanding under a Bank Credit Agreement in an aggregate
principal amount at any one time outstanding not to exceed (a) $10.0 million
if the Present Value of Oil and Gas Reserves is less than $125.0 million and
(b) 15% of the Present Value of Oil and Gas Reserves if the Present Value of
Oil and Gas Reserves is equal to or greater than $125.0 million; (iii) the
Guarantees of the Notes (and any assumption of the obligations guaranteed
thereby); (iv) Permitted Refinancing Indebtedness; (v) Indebtedness of the
Company to any Wholly Owned Subsidiary, and any Indebtedness of any Wholly
Owned Subsidiary to the Company or to any Wholly Owned Subsidiary of the
Company; provided, that in each case, such Indebtedness has not been incurred
in contemplation of any subsequent issuance or transfer of any Capital Stock
or any other event that would result in any such Wholly Owned Subsidiary
ceasing to be a Wholly Owned Subsidiary or any other subsequent transfer of
any such Indebtedness (except to the Company or a Wholly Owned Subsidiary),
and if incurred in contemplation of any of the foregoing events, then such
Indebtedness shall be deemed to be incurred and shall be treated as an
incurrence of Indebtedness for purposes of the "Limitation on Incurrence of
Additional Indebtedness" covenant at the time the Wholly Owned Subsidiary in
question ceased to be a Wholly Owned Subsidiary; (vi) obligations arising in
connection with Oil and Gas Hedge Agreements of the Company or a Subsidiary;
(vii) Permitted Operating Obligations; (viii) other Indebtedness outstanding
at any time in an aggregate principal amount not to exceed the greater of $5.0
million or 5% of Adjusted Consolidated Net Tangible Assets; and (ix)
Indebtedness outstanding on the Issue Date. Permitted Refinancing Indebtedness
that constitutes a refinancing of amounts referred to in clauses (ii) and
(viii) shall be deemed to be incurred pursuant to and subject to the
limitations in clauses (ii) and (viii), respectively. The Company may elect at
any time that amounts of Indebtedness incurred under clauses (ii) or (viii) be
deemed to be incurred pursuant to the first paragraph of the "Limitation on
Incurrence of Additional Indebtedness" covenant (if then permitted to be so
incurred), in which event such amounts so incurred shall be deemed not to be
incurred under clause (ii) or
77
<PAGE>
(viii); provided, however, any such Indebtedness deemed not to be incurred
under clause (ii) shall still be treated as Indebtedness under and governed by
a Bank Credit Agreement for purposes of all other provisions of the Indenture.
"Permitted Industry Investments" means (i) capital expenditures, including,
without limitation, acquisitions of Company Properties and interests therein;
(ii)(a) entry into operating agreements, joint ventures, working interests,
royalty interests, mineral leases, unitization agreements, pooling
arrangements or other similar or customary agreements, transactions,
properties, interests or arrangements, and Investments and expenditures in
connection therewith or pursuant thereto, in each case made or entered into in
the ordinary course of the oil and gas business, or (b) exchanges of Company
Properties for other Company Properties of at least equivalent value as
determined in good faith by the Board of Directors of the Company; (iii)
Investments by the Company or any Subsidiary in any Subsidiary (or in any
Person that becomes a Subsidiary as a result of such Investment) that are not
subject to any Payment Restriction; (iv) Investments in the Company or another
Subsidiary that are not subject to any Payment Restriction by any Subsidiary;
and (v) Investments of operating funds on behalf of co-owners of Oil and Gas
Properties of the Company or the Subsidiaries pursuant to joint operating
agreements.
"Permitted Investments" means Permitted Obligations and Permitted Industry
Investments (in each case, other than Investments in Unrestricted
Subsidiaries).
"Permitted Liens" means (i) Liens for taxes, assessments and governmental
charges not yet delinquent or being contested in good faith and for such
adequate reserves have been established to the extent required by GAAP, (ii)
landlord's, carriers, warehouseman's, storage, mechanics', workmen's,
materialmen's, operator's or similar Liens arising in the ordinary course of
business, (iii) easements, rights-of-way, restrictions and other similar
encumbrances incurred in the ordinary course of business and encumbrances
consisting of zoning restrictions, easements, licenses, restrictions on the
use of Company Properties or minor imperfections in title thereto that, in the
aggregate, are not material in amount, and that do not in any case materially
detract from the Company Properties subject thereto or interfere with the
ordinary conduct of the business of the Company or the Subsidiaries, (iv)
Liens on, or related to, Properties to secure all or part of the costs
incurred in the ordinary course of business of exploration, drilling,
development, production, processing, transportation, marketing or storage, or
operation thereof, (v) Liens on pipeline or pipeline facilities, Hydrocarbons
or Company Properties that arise out of operation of law, (vi) judgment and
attachment Liens not giving rise to an Event of Default or Liens created by or
existing from any litigation or legal proceeding that are currently being
contested in good faith by appropriate proceedings and for which adequate
reserves have been made, (vii) (a) Liens upon any Property of any Person
existing at the time of acquisition thereof by the Company, (b) Liens upon any
Property of a Person existing at the time such Person is merged or
consolidated with the Company or any Subsidiary or existing at the time of the
sale or transfer of any such Property of such Person to the Company or any
Subsidiary, or (c) Liens upon any Property of a Person existing at the time
such Person becomes a Subsidiary; provided that in each case such Lien has not
been created in contemplation of such sale, merger, consolidation, transfer or
acquisition, and provided further that in each such case no such Lien shall
extend to or cover any Property of the Company or any Subsidiary other than
the Property being acquired and improvements thereon, (viii) Liens existing on
the Issue Date, (ix) Liens on deposits made in the ordinary course of
business, including, without limitation, pledges or deposits under worker's
compensation, unemployment insurance and other social security legislation and
deposits to secure the performance of bids, trade contracts (other than for
borrowed money), leases, statutory obligations, surety and appeal bonds,
performance bonds and other obligations of a similar nature incurred in the
ordinary course of business, (x) Liens in favor of collecting or payor banks
having a right of setoff, revocation, refund or chargeback with respect to
money or instruments of the Company or any Subsidiary on deposit with or in
possession of such bank, (xi) royalties, overriding royalties, revenue
interests, net revenue interests, net profit interests, reversionary
interests, production payments, production sales contracts, operating
agreements and other similar interests, properties, arrangements and
agreements, all as ordinarily exist with respect to Company Properties, (xii)
Liens upon any Property that were created solely for the purpose of securing
Indebtedness representing, or incurred to finance, refinance or refund, the
cost (including the cost of construction) of such Property; provided that no
such Lien shall extend to or cover any Property of the Company
78
<PAGE>
or any Subsidiary other than the Property so acquired and improvements
thereon, (xiii) Liens securing the Securities and the Guarantees, (xiv) with
respect to any Company Properties, Liens arising under, or in connection with,
or related to, farm-out, farm-in, joint operating, area of mutual interest
agreements and/or other similar or customary arrangements, agreements or
interests that the Company or any Subsidiary determines in good faith to be
necessary for the economic development of such Property, (xv) Liens upon any
Property securing obligations under hedging agreements, swap agreements or
other similar agreements entered into for the purpose of protecting against
fluctuations in oil or natural gas prices and (xvi) Liens upon any Property
securing Indebtedness under a Bank Credit Agreement; provided that if such
Property is part of the Collateral, the amount of Indebtedness so secured by
such Liens does not exceed, at the time of and after giving effect to the
incurrence of such Indebtedness, the greater of (A) $10.0 million if the ratio
of the Company's Consolidated EBITDA to all of the Company's consolidated
interest expense paid or accrued in accordance with GAAP for the prior four
quarter period (including amortization of original issue discount and the
interest portion of deferred payment obligations) is equal to or exceeds 1.5
and the Adjusted Consolidated Net Tangible Assets at such time equals or
exceeds 120% of the Company's Consolidated Indebtedness or (B) the amount, if
any, that Adjusted Consolidated Net Tangible Assets at such time exceeds 200%
of the Company's Consolidated Indebtedness.
"Permitted Obligations" means (a) the following kinds of instruments if, in
the case of instruments referred to in clauses (i)-(iv) below, on the date of
purchase or other acquisition of any such instrument by the Company or any
Subsidiary, the remaining term to maturity is not more than one year: (i)
readily marketable obligations issued or unconditionally guaranteed as to
principal and interest by the United States of America or by any agency or
authority controlled or supervised by and acting as an instrumentality of the
United States of America; (ii) repurchase obligations for instruments of the
type described in clause (i) for which delivery of the instrument is made
against payment; (iii) obligations (including, but not limited to, demand or
time deposits, bankers' acceptances and certificates of deposit) issued by a
depository institution or trust company incorporated or doing business under
the laws of the United States of America, any state thereof or the District of
Columbia or a branch or subsidiary of any such depository institution or trust
company operating outside the United States, provided that such depository
institution or trust company has, at the time of the Company's or such
Subsidiary's investment therein or contractual commitment providing for such
investment, capital, surplus or undivided profits (as of the date of such
institution's most recently published financial statements), in excess of
$100.0 million; and (iv) commercial paper issued by any Person, if such
commercial paper has, at the time of the Company's or any Subsidiary's
investment therein or contractual commitment providing for such investment,
credit ratings of A-1 by Standard & Poor's and P-1 by Moody's; and (b) money
market mutual or similar funds having assets in excess of $100.0 million.
"Permitted Operating Obligations" means Indebtedness of the Company or any
Subsidiary in respect of one or more standby letters of credit, bid,
performance or surety bonds, or other reimbursement obligations, issued for
the account of, or entered into by, the Company or any Subsidiary in the
ordinary course of business (excluding obligations related to the purchase by
the Company or any Subsidiary of Hydrocarbons for which the Company or such
Subsidiary has contracts to sell), or in lieu of any thereof or in addition to
any thereto, guarantees and letters of credit supporting any such obligations
and Indebtedness (in each case, other than for an obligation for borrowed
money, other than borrowed money represented by any such letter of credit,
bid, performance or surety bond, or reimbursement obligation itself, or any
guarantee and letter of credit related thereto).
"Permitted Production Payment Obligations" means obligations with respect to
production payments entered into in the ordinary course of the Company's or
any Subsidiary's business, which obligations are non-recourse to the Company
and its Subsidiaries other than to Hydrocarbon production from the properties
subject to such obligations.
"Permitted Refinancing Indebtedness" means Indebtedness of the Company or
any Subsidiary, the net proceeds of which are used to renew, extend,
refinance, refund or repurchase (including, without limitation, pursuant to a
Change of Control Offer as required by the terms of the Notes) outstanding
Indebtedness of the
79
<PAGE>
Company or any Subsidiary, provided that (i) if the Indebtedness (including
the Notes) being renewed, extended, refinanced, refunded or repurchased is
pari passu with or subordinated in right of payment to either the Notes or the
Guarantees, then such Indebtedness is pari passu with or subordinated in right
of payment to, as the case may be, the Notes or the Guarantees at least to the
same extent as the Indebtedness being renewed, extended, refinanced, refunded
or repurchased, (ii) such Indebtedness is scheduled to mature no earlier than
the Indebtedness being renewed, extended, refinanced, refunded or repurchased,
and (iii) such Indebtedness has an Average Life at the time such Indebtedness
is incurred that is greater than the Average Life of the Indebtedness being
renewed, extended, refinanced, refunded or repurchased; provided, further,
that such Indebtedness (to the extent that such Indebtedness constitutes
Permitted Refinancing Indebtedness) is in an aggregate principal amount (or,
if such Indebtedness is issued at a price less than the principal amount
thereof, the aggregate amount of gross proceeds therefrom is) not in excess of
the aggregate principal amount then outstanding of the Indebtedness being
renewed, extended, refinanced, refunded or repurchased (or if the Indebtedness
being renewed, extended, refinanced, refunded or repurchased was issued at a
price less than the principal amount thereof, then not in excess of the amount
of liability in respect thereof determined in accordance with GAAP) plus the
amount of reasonable fees and expenses and premium, if any, incurred by the
Company or such Subsidiary in connection therewith.
"Permitted Unrestricted Subsidiary Investments" means Investments in
Unrestricted Subsidiaries in a cumulative aggregate amount (in cash or the
fair market value of property other than cash, as determined in good faith by
the Board of Directors of the Company) not to exceed the sum of (i) $3.0
million and (ii) cash or cash equivalent distributions made from any
Unrestricted Subsidiary and received, after the Issue Date, as such by the
Company, provided that any amount included in this clause (ii) shall be
deducted from any amounts referred to in clause (y)(3) of the "Limitation on
Restricted Payments" covenant. Notwithstanding the foregoing, Permitted
Unrestricted Subsidiary Investments shall also include any Investments in
Unrestricted Subsidiaries to the extent such Investment consists of (A)
Qualified Capital Stock of the Company or (B) amounts referred to in clause
(y)(2) of the "Limitation on Restricted Payments" covenant, which Investments
shall be excluded from the sum in the previous sentence, provided that the
amount of any Investments pursuant to clause (B) shall be deducted from
amounts referred to in clause (y)(2) of the "Limitation on Restricted
Payments" covenant.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, trust, estate, unincorporated organization or
government or any agency or political subdivision thereof.
"Present Value of Oil and Gas Reserves" means the discounted future net cash
flows from proved oil and gas reserves of the Company and its consolidated
Subsidiaries, calculated in accordance with Commission guidelines (before any
state or federal income tax), as estimated by independent petroleum engineers
as of a date no earlier than the date of the Company's latest annual
consolidated financial statements (or, in the case that the date of
determination is after the end of the first fiscal quarter of the fiscal year
of the Company, as estimated by Company engineers as of a date no earlier than
the end of the most recent fiscal quarter, which estimates shall be confirmed
in writing by a report by independent petroleum engineers in accordance with
Commission guidelines
in the event of a Material Change if the amount of Adjusted Consolidated Net
Tangible Assets or Permitted Indebtedness is required to be computed under the
Indenture).
"Principals" means (i) McLain J. Forman, (ii) Persons controlled by McLain
J. Forman, (iii) any member of the Immediate Family of McLain J. Forman, (iv)
a corporation that is wholly owned by any member of the Immediate Family of
McLain J. Forman, (v) a testamentary trust, the sole beneficiaries of which
are members of the Immediate Family of McLain J. Forman, or (vi) the Officers
of the Company, and "Principal" means any one of such Persons.
"pro forma" means, with respect to any calculation made or required to be
made pursuant to the terms of the Indenture, a calculation in accordance with
Article 11 of Regulation S-X under the Securities Act.
"Property" means, with respect to any Person, any interest of such Person in
any kind of property or asset, whether real, personal or mixed, or tangible or
intangible, including, without limitation, Capital Stock, partnership
interests and other equity or ownership interests in any other Person.
80
<PAGE>
"Public Equity Offering" means an underwritten public offer and sale of
common stock (that is Qualified Capital Stock) of the Company pursuant to a
registration statement that has been declared effective by the Commission
pursuant to the Securities Act (other than a registration statement on Form S-
8 or otherwise relating to equity securities issuable under any employee
benefit plan of the Company).
"Qualified Capital Stock" means any Capital Stock that is not Disqualified
Capital Stock.
"Rating Agency" means Standard & Poor's and Moody's or, if Standard & Poor's
or Moody's shall have ceased to be a "nationally recognized statistical rating
organization" (as defined in Rule 436 under the Securities Act) or shall have
ceased to make publicly available a rating on any outstanding securities of
any company engaged primarily in the oil and gas business, such other
organization or organizations, as the case may be, then making publicly
available a rating on the Notes as is selected by the Company.
"Related Person" means (i) any Affiliate of the Company, (ii) any individual
or other Person who directly or indirectly holds 10% or more of the combined
voting power of the then outstanding Voting Stock of the Company, (iii) any
relative of any individual referred to in clauses (i), (ii) and (iv) hereof by
blood, marriage or adoption not more remote than first cousin and (iv) any
officer or director of the Company.
"Restricted Debt Prepayment" means any purchase, redemption, defeasance
(including, but not limited to, in substance or legal defeasance) or other
acquisition or retirement for value, directly or indirectly, by the Company or
a Subsidiary, prior to the scheduled maturity or prior to any scheduled
repayment of principal or sinking fund payment, as the case may be, in respect
of Indebtedness of the Company or any Subsidiary that is subordinate in right
to the Notes or the Guarantees, provided, however, that any such acquisition
shall be deemed not to be a Restricted Debt Prepayment to the extent it is
made (x) in exchange for or with the proceeds from the substantially
concurrent issuance of Qualified Capital Stock or (y) in exchange for or with
the proceeds from the substantially concurrent issuance of Indebtedness, in a
principal amount (or, if such Indebtedness provides for an amount less than
the principal amount thereof to be due and payable upon the acceleration
thereof, with an original issue price) not to exceed the lesser of (i) the
principal amount of Indebtedness being acquired in exchange therefor (or with
the proceeds therefrom) and (ii) if such Indebtedness being acquired was
issued at an original issue discount, the original issue price thereof plus
amortization of the original issue discount at the time of the incurrence of
the Indebtedness being issued in exchange therefor (or the proceeds of which
will finance such acquisition), and provided further that any such
Indebtedness shall have an Average Life not less than the Average Life of the
Indebtedness being acquired, and shall contain subordination and default
provisions no less favorable, in any material respect, to holders of the Notes
than those contained in such Indebtedness being acquired.
"Restricted Payment" means any (i) Stock Payment, (ii) Investment (other
than Permitted Investments and other than Permitted Unrestricted Subsidiary
Investments) or (iii) Restricted Debt Prepayment.
"Secured Indebtedness" means, with respect to any Person, any Indebtedness
of such Person that is secured by a Lien.
"Security Documents" means, collectively, the Assigned Mortgage and the
mortgages that will replace the Assigned Mortgage, as the same may be in force
from time to time.
"Security Interest" means the Lien on the Collateral created by the
Indenture and the Security Documents in favor of the Trustee for the benefit
of the Holders.
"Standard & Poor's" means Standard & Poor's Ratings Group, a division of The
McGraw Hill Companies, Inc. and any successor to the rating agency business
thereof.
"Stock Payment" means, with respect to any Person, (a) the declaration or
payment by such Person, either in cash or in property, of any dividend on
(except, in the case of the Company, dividends payable solely in
81
<PAGE>
Qualified Capital Stock of the Company), or the making by such Person or any
of its subsidiaries of any other distribution in respect of, such Person's
Capital Stock or any warrants, rights or options to purchase or acquire shares
of any class of such Capital Stock (except for the issuance of Qualified
Capital Stock pursuant to the exercise thereof), or (b) the redemption,
repurchase, retirement or other acquisition for value by such Person or any of
its subsidiaries, directly or indirectly, of such Person's or any of its
subsidiaries' Capital Stock or any warrants, rights or options to purchase or
acquire shares of any class of such Capital Stock other than, in the case of
the Company, through the issuance in exchange therefor solely of Qualified
Capital Stock of the Company; provided, however, that in the case of a
Subsidiary, the term "Stock Payment" shall not include (i) any such payment
with respect to its Capital Stock or warrants, rights or options to purchase
or acquire shares of any class of its Capital Stock payable to the Company or
a Wholly Owned Subsidiary, or (ii) the payment of pro rata dividends to
holders of minority interests in Capital Stock of a Subsidiary.
"Subordinated Indebtedness" means any Indebtedness of the Company or a
Subsidiary Guarantor that is expressly subordinated in right of payment to the
Notes or the Guarantees, as the case may be.
A "subsidiary" of any Person means (i) a corporation a majority of whose
Voting Stock is at the time, directly or indirectly, owned by such Person, by
one or more wholly-owned subsidiaries of such Person or by such Person and one
or more wholly-owned subsidiaries of such Person, (ii) a partnership in which
such Person or a wholly-owned subsidiary of such Person is, at the date of
determination, a general or limited partner of such partnership, but only if
such Person or its wholly-owned subsidiary is entitled to receive more than
fifty percent of the assets of such partnership upon its dissolution, or (iii)
any other Person (other than a corporation or partnership) in which such
Person, a wholly-owned subsidiary of such Person or such Person and one or
more wholly- owned subsidiaries of such Person, directly or indirectly, at the
date of determination thereof, has (x) at least a majority ownership interest
or (y) the power to elect or direct the election of a majority of the
directors or other governing body of such Person.
"Subsidiary" means any subsidiary of the Company; provided, that an
Unrestricted Subsidiary shall not be deemed a subsidiary of the Company for
purposes of the Indenture.
"Subsidiary Guarantor" means (i) each of the Company's Subsidiaries that
becomes a guarantor of the Notes in compliance with the terms of the Indenture
and (ii) each of the Company's Subsidiaries executing a supplemental indenture
in which such Subsidiary agrees to be bound by the terms of the Indenture.
"Unrestricted Subsidiary" means (1) any subsidiary of the Company that at
the time of determination shall be an Unrestricted Subsidiary (as designated
by the Board of Directors of the Company, as provided below) and (2) any
subsidiary of an Unrestricted Subsidiary. The Board of Directors of the
Company may designate any subsidiary of the Company (including any newly
acquired or newly formed subsidiary or a Person becoming a subsidiary through
merger or consolidation or Investment therein) to be an Unrestricted
Subsidiary only if: (A) such subsidiary does not own any Capital Stock of, or
own or hold any Lien on any property of, any other subsidiary of the Company
that is not a subsidiary of the subsidiary to be so designated or otherwise an
Unrestricted Subsidiary; (B) all the Indebtedness of such subsidiary shall at
the date of designation, and will at all times thereafter consist of, Non-
Recourse Indebtedness; (C) the Company certifies that such designation
complies with the "Limitation on Restricted Payments" covenant; and (D) such
subsidiary, either alone or in the aggregate with all other Unrestricted
Subsidiaries, does not operate, directly or indirectly, all or substantially
all of the business of the Company and the Subsidiaries. Any such designation
by the Board of Directors of the Company shall be evidenced to the Trustee by
filing with the Trustee a Board Resolution of the Board of Directors of the
Company giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing conditions. If,
at any time, such Unrestricted Subsidiary would fail to meet the foregoing
requirements as an Unrestricted Subsidiary, it shall thereafter cease to be an
Unrestricted Subsidiary for purposes of the Indenture and any Indebtedness of
such Subsidiary shall be deemed to be incurred as of such date. The Board of
Directors of the Company may designate any Unrestricted Subsidiary to be a
Subsidiary; provided that immediately after giving effect to such designation,
the Company could incur at least
82
<PAGE>
$1.00 of additional Indebtedness (excluding Permitted Indebtedness) pursuant
to the first paragraph of the "Limitation on Incurrence of Additional
Indebtedness" covenant on a pro forma basis taking into account such
designation.
"Voting Stock" means, with respect to any Person, securities of any class or
classes of Capital Stock in such Person entitling the holders thereof (whether
at all times or only so long as no senior class of stock has voting power by
reason of any contingency) to vote in the election of members of the board of
directors or other governing body of such Person.
"Wholly Owned Subsidiary" means a Subsidiary all the Capital Stock (other
than directors' qualifying shares, if applicable) of which is owned by the
Company or another Wholly Owned Subsidiary.
REGISTRATION RIGHTS
The Company and Jefferies & Company, Inc. have entered into a registration
rights agreement (the "Registration Rights Agreement") pursuant to which the
Company has agreed to use its best efforts, at its cost, for the benefit of
the holders of the Old Notes, to file a registration statement on an
appropriate registration form with respect to a registered offer to exchange
the Old Notes for notes (the "Exchange Notes") of the Company secured by the
same collateral as the Notes, which Exchange Notes will have terms
substantially identical in all material respects to the Notes (except that the
Exchange Notes will not contain terms with respect to transfer restrictions or
liquidated damages). The Company believes that the Registration Statement and
the Exchange Offer will fulfill these requirements of the Registration Rights
Agreement.
If, (i) because of any change in law or in currently prevailing
interpretations of the staff of the Division of Corporation Finance of the
Commission, the Company is not permitted to effect an Exchange Offer, (ii) the
Exchange Offer is not consummated within 180 days of the Issue Date, (iii) in
certain circumstances, certain holders of unregistered Exchange Notes so
request, or (iv) in the case of any Holder that participates in the Exchange
Offer, such Holder does not receive Exchange Notes on the date of the exchange
that may be sold without restriction under state and federal securities laws
(other than due solely to the status of such Holder as an affiliate of the
Company within the meaning of the Securities Act), then in each case the
Company has agreed to use its best efforts to (x) promptly deliver to the
Holders and Trustee written notice thereof and (y) at its sole expense, (A) as
promptly as practicable, to file a shelf registration statement covering
resales of the Notes (the "Note Shelf Registration Statement"), (B) to cause
the Note Shelf Registration Statement to be declared effective under
Securities Act and (C) to keep effective the Note Shelf Registration Statement
until the earlier of two years after the Issue Date (or such earlier date as
may be authorized under Rule 144(k), as it may be amended from time to time)
or such time as all of the applicable Notes have been sold thereunder or are
otherwise eligible for sale under Rule 144 under the Securities Act. The
Company will, in the event that a Note Shelf Registration Statement is filed,
provide to each Holder a copy of the prospectus that is a part of the Note
Shelf Registration Statement, notify each such Holder when the Note Shelf
Registration Statement for the Notes has become effective and take certain
other actions as are required to permit unrestricted resales of the Notes. A
Holder that sells Notes pursuant to the Note Shelf Registration Statement will
be required to be named as a selling security holder in the related prospectus
and to deliver a prospectus to purchasers, will be subject to certain of the
civil liability provisions under Securities Act in connection with such sales
and will be bound by the provisions of the Registration Rights Agreement that
are applicable to such a Holder (including certain indemnification rights and
obligations). In addition, each holder of the Notes will be required to
deliver information to be used in connection with the Note Shelf Registration
Statement and to provide comments on the Note Shelf Registration Statement
within the time periods set forth in the Registration Rights Agreement in
order to have its Notes included in the Note Shelf Registration Statement and
to benefit from the provisions regarding liquidated damages set forth in the
following paragraph.
In the event that the Exchange Offer is not consummated or the Note Shelf
Registration Statement is not declared effective on or prior to the date
required by the Registration Rights Agreement or the Note Shelf
83
<PAGE>
Registration Statement ceases to be effective (such event referred to as a
"Registration Default"), the Company will pay, as liquidated damages, cash
interest 85("Additional Interest") to each Holder of the Notes during the
first 90 day period immediately following the occurrence of such Registration
Default in an amount equal to 0.50% per annum of the principal amount of such
Notes. The amount of the Additional Interest will increase by an additional
0.50% per annum for each subsequent 90 day period until the Exchange Offer is
consummated or the Note Shelf Registration Statement is declared effective or
again becomes effective, as the case may be, up to a maximum amount of
Additional Interest of 2.00% per annum. All Additional Interest shall be paid
to Holders of the Notes on each interest payment date for the Notes, whether
or not any other cash interest would then be payable on such date. Upon the
consummation of the Exchange Offer or the effectiveness of a Note Shelf
Registration Statement, Additional Interest shall cease to accrue on the Notes
from the date of such filing, effectiveness or consummation.
If for any reason a Holder fails to exchange its Old Notes for Exchange
Notes or any Old Notes remain outstanding, the Company will promptly notify
the Trustee and the Old Notes and Exchange Notes will be deemed one class of
security subject to the provisions of the Indenture and entitled to
participate in all the security granted by the Company pursuant thereto.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified
in its entirety by, all the provisions of the Registration Rights Agreement, a
copy of which will be available upon request to the Company.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS
The following discussion is a summary of the material United States federal
income tax consequences relating to exchange of Old Notes for Exchange Notes
and the ownership and disposition of the Exchange Notes. The discussion is the
opinion of Vinson & Elkins L.L.P., counsel to the Company and is based upon
provisions of the Internal Revenue Code of 1986, as amended (the "Code"), the
Treasury Regulations promulgated thereunder, and judicial and administrative
interpretations thereof, all as in effect as of the date hereof, and all of
which are subject to change (possibly on a retroactive basis) or different
interpretation. There can be no assurance that the Internal Revenue Service
(the "Service") will not challenge one or more of the tax consequences
described herein, and the Company has not obtained, nor does it intend to
obtain, a ruling from the Service with respect to the federal income tax
consequences of the purchase, ownership or disposition of the Note Units.
Except as otherwise noted, this summary only addresses the tax consequences to
a person that acquired Old Notes at the time of original issuance by the
Company as part of the Note Units. Moreover, the discussion below and
counsel's opinion are based upon, and assume the correctness of, the Company's
allocation of the issue price of the Note Units between the Old Notes and the
Note Warrants as described below. This discussion does not purport to address
all aspects of United States federal income taxation that may be relevant to
particular holders in light of their personal circumstances, the United States
federal income tax consequences to certain types of holders subject to special
treatment under the Code (e.g., life insurance companies, tax exempt
organizations, financial institutions, dealers in securities or currencies,
persons holding Notes as a part of a hedging or conversion transaction or a
straddle and foreign taxpayers), or the effect of any applicable state, local
or foreign tax laws. The discussion assumes that the Notes, the Note Warrants
and the Common Stock will be held as "capital assets" within the meaning of
Section 1221 of the Code. INVESTORS CONSIDERING THE PURCHASE OF NOTE UNITS OR
THE EXCHANGE OF OLD NOTES IN THE EXCHANGE OFFER ARE URGED TO CONSULT THEIR OWN
TAX ADVISOR TO DETERMINE THEIR PARTICULAR TAX CONSEQUENCES OF THE PURCHASE,
OWNERSHIP AND DISPOSITION OF THE NOTE UNITS UNDER FEDERAL AND APPLICABLE
STATE, LOCAL AND OTHER TAX LAWS.
EXCHANGE NOTE
The exchange of Old Notes for Exchange Notes pursuant to the Exchange Offer
should not constitute a material modification of the terms of the Notes and,
therefore, such exchange should not constitute an exchange
84
<PAGE>
for United States federal income tax purposes. Accordingly, such exchange
should have no United States federal income tax consequences to United States
Holders of Notes and the holding period of the Exchange Notes will include the
holding period of the Notes, and the adjusted tax basis of the Exchange Notes
will be the same as that of the Notes immediately before the exchange.
ALLOCATION OF UNIT ISSUE PRICE TO NOTES AND WARRANTS
Each Old Note was treated for federal income tax purposes as having been
issued as part of an "investment unit" consisting of the Old Note and the
associated Note Warrants. The issue price of an investment unit consisting of
the Note and the associated Note Warrants was the first price at which a
substantial amount of Note Units are sold to investors. The "issue price" of
an investment unit is allocated between its component parts based on their
relative fair market values. The Company will allocate the issue price of a
Note Unit between the Old Note and the associated Note Warrants in accordance
with the Company's determination of their relative fair market values on the
issue date of the Note Units. In connection with the issuance of the Note
Units, the Company allocated $667,000 of the issue price of the Note Units
(approximately $9.53 per Note Unit) to the Note Warrants. Although the
Company's allocation is not binding on the Service, a United States Holder, as
defined below, of a Note Unit must use the Company's allocation unless the
United States Holder discloses on its federal income tax return that it plans
to use an allocation that is inconsistent with the Company's allocation.
STATED INTEREST AND ORIGINAL ISSUE DISCOUNT
The stated interest on the Notes will be includable in a United States
Holder's gross income as ordinary income for United States federal income tax
purposes at the time it is paid or accrued in accordance with the United
States Holder's method of tax accounting. As used herein, a "United States
Holder" of a Note means a holder that is a citizen or resident of the United
States, a corporation, partnership or other entity formed under the laws of
the United States or any political subdivision thereof, an estate the income
of which is subject to United States federal income taxation regardless of its
source and a trust subject to the primary supervision of a court within the
United States and the control of a United States fiduciary as described in
Section 7701(a)(30) of the Code.
The Notes are considered to be issued with original issue discount ("OID")
to the extent the stated redemption price at maturity of the Notes (which, for
these purposes, will be its stated principal amount) exceeds the portion of
the issue price of the Note Units that is allocable to the Notes. The amount
of OID is, however, considered de minimis and deemed to be zero if such excess
is less than 1/4 of 1% of the stated redemption price at maturity multiplied
by the number of complete years to maturity. It is anticipated that the Notes
will be issued with OID in excess of the de minimis threshold.
The stated redemption price at maturity of each Note is $1000. After taking
into account the allocation of issue price to the Note Warrants described
above, the issue price of the Notes was $67,800,000 in the aggregate or
$968.57 (96.857%) per Note. The amount of OID attributable to each Note
therefore is $31.43, an amount in excess of the de minimis threshold.
A United States Holder of a Note (regardless of its method of accounting)
will be required to include in income the sum of the daily portions of OID
with respect to such Note for each day during the taxable year or portion of a
taxable year in which such United States Holder holds the Note (such sum,
"Accrued OID"), with the result that a United States Holder will be required
to include amounts in income without any current corresponding receipt of
cash. The daily portion is determined by allocating to each day of any accrual
period within a taxable year a pro rata portion of an amount equal to the
adjusted issue price of the Note at the beginning of the accrual period
multiplied by the yield to maturity of the Note. The adjusted issue price of a
Note at the beginning of any accrual period is the issue price of the Note
increased by the Accrued OID for all prior accrual periods (less all payments
made on the Notes other than payments of stated interest on the Notes). The
Company will annually furnish to record holders of the Notes and to the IRS
information with respect to any OID accruing during the calendar year as may
be required by applicable regulations.
85
<PAGE>
RULES AFFECTING HIGH YIELD DEBT INSTRUMENTS
Sections 163(e) (5) and (i) of the Code affect the treatment of interest on
applicable high yield debt obligations maturing more than five years from the
date of issuance ("AHYDOs"). The rules are complex and ambiguous in many
respects, and their full potential application to the Notes cannot be
anticipated with precision.
The Notes will constitute AHYDOs if (i) the Notes have "significant original
issue discount" within the meaning of the Code, and (ii) the yield to maturity
of the Notes is equal to or greater than the sum of the relevant applicable
federal rate (the "AFR") for the month in which the Notes are issued, plus
five percentage points. Based upon their terms, the Notes may have
"significant original issue discount." The relevant AFR for long-term debt
instruments issued in June 1997 is 6.69% compounded semiannually. The yield to
maturity of the Note is approximately 14.2% and thus exceeds the threshold
amount. While the yield to maturity of the Notes exceeds threshold amount,
based on the Company's allocation of the issue price of the Units between the
Notes and the Warrants, the Notes should not be treated as issued with
significant OID and therefore should not be treated as AHYDOs.
If the Notes were treated as AHYDOs, a portion of the tax deductions that
would otherwise be available to the Company in respect of the Notes would be
deferred or disallowed, which, in turn, might reduce the after-tax cash flows
of the Company. More particularly, if the Notes were treated as AHYDOs, the
Company would not be entitled to deduct OID that accrues with respect to the
Notes until amounts attributable to OID are paid in cash or property
(excluding, however, stock of the Company or a related entity). In addition,
if the Notes were treated as AHYDOs, the "disqualified portion" of the OID
accruing on the Notes will be characterized as a nondeductible dividend with
respect to the Company. The "disqualified portion" of the OID is the lesser of
(i) the amount of OID on the instrument and (ii) the portion of the total
return on such instrument that bears the same ratio to such total return as
the "Excess Yield" bears to the total yield to maturity on the instrument. The
"Excess Yield" is the amount by which the yield to maturity exceeds the AFR
plus six percentage points. The tax treatment to United States Holders of
Notes will be unaffected by these provisions except that corporate holders of
the Notes may be treated as receiving distributions with respect to the stock
of the Company (rather than interest on such Notes) eligible for the dividends
received deduction, subject to applicable limitations, to the extent of the
"disqualified portion" of the OID and to the extent that such distributions
would have been treated as dividends if actually made by the Company with
respect to its stock.
ADJUSTED TAX BASIS
A United States Holder's adjusted tax basis in a Note will be equal to the
portion of the issue price of a Note Unit that is allocable to the Note,
increased by OID (if any) included in gross income with respect to such Note.
AMORTIZABLE BOND PREMIUM
If a United States Holder of a Note acquires the Note at a cost that is in
excess of the amount payable at maturity (which, under certain Proposed
Treasury Regulations, will be determined by reference to an earlier call date
if the call price would increase a United States Holder's yield on the Note),
the United States Holder may elect under Section 171 of the Code to amortize
the excess cost (as an offset to interest income) on a constant interest rate
basis over the term of such Note. If the United States Holder makes an
election to amortize bond premium, the tax basis of all of such United States
Holder's Notes will be reduced by the allowable bond premium amortization. The
amortization election would apply to all debt instruments held or subsequently
acquired by the electing purchaser and cannot be revoked without permission
from the Service.
MARKET DISCOUNT
Except as described below, gain recognized on the disposition of a Note that
has accrued market discount will be treated as ordinary income, and not
capital gain, to the extent of the accrued market discount. "Market
86
<PAGE>
discount" is defined generally as the excess, if any, of (i) the principal
amount of the Note over (ii) the tax basis of the Note in the hands of the
United States Holder immediately after its acquisition.
Under a de minimis exception, there is no market discount if the excess of
the principal amount of the Note over the United States Holder's tax basis in
the Note is less than 0.25% of the principal amount multiplied by the number
of complete years after the acquisition date to the Note's date of maturity.
Unless the United States Holder elects otherwise, the accrued market discount
generally would be the amount calculated by multiplying the market discount by
a fraction, the numerator of which is the number of days the Note has been
held by the United States Holder and the denominator of which is the number of
days after the United States Holder's acquisition of the Note up to and
including its maturity date.
If a United States Holder of a Note acquired with market discount disposes
of such Note in any transaction other than a sale, exchange or involuntary
conversion, such United States Holder will be deemed to have realized an
amount equal to the fair market value of the Note and will be required to
recognize as ordinary income any accrued market discount. See the discussion
below under "Sale or Redemption" for the tax consequences of a sale or
exchange. A partial principal payment (if any) on a Note will be includable as
ordinary income upon receipt to the extent of any accrued market discount
thereon. A United States Holder of a Note acquired at a market discount also
may be required to defer the deduction of all or a portion of the interest on
any indebtedness incurred or maintained to purchase or carry the Note until it
is disposed of in a taxable transaction.
A United States Holder of a Note acquired at a market discount may elect to
include the market discount in income as it accrues. This election would apply
to all market discount obligations acquired by the electing United States
Holder on or after the first day of the first year to which the election
applies. The election may be revoked only with the consent of the Service. If
a United States Holder of a Note elects to include market discount in income
currently, the rules discussed above regarding (i) ordinary income recognition
resulting from a sale and certain other disposition transactions and (ii)
deferral of interest deductions would not apply.
SALE OR REDEMPTION
A United States Holder of a Note who disposes of such Note in a taxable
sale, exchange, redemption or other disposition generally will recognize gain
or loss equal to the difference between (i) the amount of cash plus the fair
market value of any property received for such Note (other than cash or
property received in payment of accrued and unpaid interest) and (ii) the
United States Holder's adjusted tax basis in such Note (other than any portion
of the tax basis attributable to accrued and unpaid interest that was included
in the United States Holder's income). Subject to the market discount rules
discussed above, such gain or loss will be a capital gain or loss and will be
long-term if the Note has been held for a period of one year or more at the
time of sale, exchange, redemption or other disposition. Any portion of the
amount realized on the sale or other disposition of a Note that represents
accrued but unpaid interest will be treated as a payment of such interest.
Under current law, net capital gains of individuals are, under certain
circumstances, taxed at lower rates than items of ordinary income. The
deductibility of capital losses is subject to limitations.
BACKUP WITHHOLDING
Under the Code, a United States Holder of Notes may be subject, under
certain circumstances, to "backup withholding" at a 31% rate with respect to
interest payments or gross proceeds. This withholding generally applies only
if the United States Holder (i) fails to furnish to the payor the United
States Holder's social security or other taxpayer identification number
("TIN") within a reasonable time after the request therefor, (ii) furnishes an
incorrect TIN, (iii) is notified by the Service that it has failed to report
properly interest or dividends or (iv) fails, under certain circumstances, to
provide a certified statement, signed under penalty of perjury, that the TIN
provided is its correct number and that it is not subject to backup
withholding. Any amount withheld from a payment to a United States Holder
under the backup withholding rules is allowable as a credit against such
United States Holder's United States federal income tax liability, provided
that the required information is
87
<PAGE>
furnished to the Service. Corporations and certain other entities described in
the Code and Treasury Regulations are exempt from such withholding if their
exempt status is properly established. United States Holders of Notes should
consult their tax advisors as to their qualifications for exemption from
withholding and the procedure for obtaining such exemption.
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such Exchange Notes. This Prospectus, as it may
be amended or supplemented from time to time, may be used by a broker-dealer
in connection with resales of Exchange Notes received in exchange for Old
Notes where such Old Notes were acquired as a result of market- making
activities or other trading activities. A broker-dealer that delivers such a
prospectus to purchasers in connection with such resales will be subject to
certain of the civil liability provisions under the Securities Act and will be
bound by the provisions of the Registration Rights Agreement (including
certain indemnification rights and obligations). The Company will make this
Prospectus available to broker-dealers for ninety days after the effective
date of this Registration Statement.
The Company will not receive any proceeds from any sale of Exchange Notes by
broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at
prices related to such prevailing market prices or negotiated prices. Any such
resale may be made directly to purchasers or to or through brokers or dealers
who may receive compensation in the form of commissions or concessions from
any such broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker- dealer that resells Exchange Notes that were received by it for its
own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit on any
such resale of Exchange Notes and any commissions or concessions received by
any such persons may be deemed to be underwriting compensation under the
Securities Act. The Company has agreed in the Registration Rights Agreement to
indemnify such broker-dealers against certain liabilities, including
liabilities under the Securities Act.
TRANSFER RESTRICTIONS ON OLD NOTES
OFFERS AND SALES BY JEFFERIES & COMPANY, INC.
The Old Notes have not been registered under the Securities Act and may not
be offered or sold in the United States or to, or for the account or benefit
of, U.S. persons except in accordance with an applicable exemption from the
registration requirements thereof. Accordingly, the Old Notes were offered and
sold only to QIBs under Rule 144A under the Securities Act and other
Institutional Accredited Investors in a private sale exempt from the
registration requirements of the Securities Act.
INVESTOR REPRESENTATIONS AND RESTRICTIONS ON RESALE
Each purchaser of the Old Notes was deemed to have represented and agreed as
follows:
(1) it was acquiring the Old Notes for its own account or for an account
with respect to which it exercises sole investment discretion, and that it
or such account is a QIB, an Institutional Accredited Investor acquiring
the Old Notes for investment purposes and not for distribution or a foreign
purchaser outside the United States;
(2) it acknowledged that the Old Notes were not registered under the
Securities Act and may not be offered or sold except as permitted below;
88
<PAGE>
(3) it understood and agreed (x) that such Old Notes were being offered
only in a transaction not involving any public offering within the meaning
of the Securities Act, and (y) that (A) if within one year after the date
of original issuance of the Old Notes or if within three months after it
ceases to be an affiliate (within the meaning of Rule 144 under the
Securities Act) of the Company, it decides to resell, pledge or otherwise
transfer the Old Notes on which the legend set forth below appears, such
securities may be resold, pledged or transferred only (i) to the Company,
(ii) so long as such securities are eligible for resale pursuant to Rule
144A, to a person whom the seller reasonably believes is a QIB that
purchases for its own account or for the account of a QIB to whom notice is
given that the resale, pledge or transfer is being made in reliance on Rule
144A (as indicated by the box checked by the transferor on the Certificate
of Transfer on the reverse of the Note if such Note is not in book-entry
form), (iii) in an offshore transaction in accordance with Regulation S
under the Securities Act (as indicated by the box checked by the transferor
on the Certificate of Transfer on the reverse of the Note), but, if such
transfer is being effected by any foreign purchaser who has purchased Old
Notes from any person other than a QIB or an Institutional Accredited
Investor pursuant to this clause (iii) prior to the expiration of the "40-
day restricted period" (within the meaning of Rule 903(c)(3) of Regulation
S under the Securities Act), the transferee shall have certified to the
Company and the Trustee for the Old Notes that such transferee is a non-
U.S. person (within the meaning of Regulation S) and that such transferee
is acquiring the Old Notes in an offshore transaction, (iv) to an
Institutional Accredited Investor (as indicated by the box checked by the
transferor on the Certificate of Transfer on the reverse of the Note if
such Old Note is not in book-entry form ) who has certified to the Company
and the Trustee for the Old Notes that such transferee is an Institutional
Accredited Investor and is acquiring the Old Notes for investment purposes
and not for distribution (provided that any foreign purchaser who has
purchased Old Notes from any person other than a QIB or an Institutional
Accredited Investor pursuant to clause (iii) shall not be permitted to
transfer any Old Notes so purchased by it to an Institutional Accredited
Investor pursuant to this clause (iv) prior to the expiration of the "40-
day restricted period" (within the meaning of Rule 903(c)(3) of Regulation
S under the Securities Act), (v) pursuant to an exemption from the
registration requirements of the Securities Act provided by Rule 144 (if
applicable) under the Securities Act or (vi) pursuant to an effective
registration statement under the Securities Act, in each case in accordance
with any applicable securities laws of any state of the United States, (B)
the purchaser will, and each subsequent holder is required to, notify any
purchaser of Old Notes from it of the resale restrictions referred to in
(A) above, if then applicable, and (C) with respect to any transfer of Old
Notes by an Institutional Accredited Investor, such holder will deliver to
the Company and the Trustee such certificates and other information as they
may reasonably require to confirm that the transfer by it complies with the
foregoing restrictions.
(4) it understood that the notification requirement referred to in (3)
above will be satisfied, in the case only of transfers by physical delivery
of certificated securities other than a global note by virtue of the fact
that the following legend was placed on the Old Notes unless otherwise
agreed by the Company:
"THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR THE SECURITIES LAWS OF ANY
STATE. THE HOLDER HEREOF, BY PURCHASING THIS SECURITY, AGREES FOR THE
BENEFIT OF THE COMPANY THAT THIS SECURITY MAY NOT BE RESOLD, PLEDGED OR
OTHERWISE TRANSFERRED (X) PRIOR TO THE FIRST ANNIVERSARY OF THE
ISSUANCE HEREOF (OR A PREDECESSOR NOTE HERETO) OR (Y) BY ANY HOLDER
THAT WAS AN AFFILIATE OF THE COMPANY AT ANY TIME DURING THE THREE
MONTHS PRECEDING THE DATE OF SUCH TRANSFER, IN EITHER CASE OTHER THAN
(1) TO THE COMPANY, (2) SO LONG AS THIS SECURITY IS ELIGIBLE FOR RESALE
PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE 144A"), TO A
PERSON WHOM THE SELLER REASONABLY BELIEVES IS A QUALIFIED INSTITUTIONAL
BUYER WITHIN THE MEANING OF RULE 144A PURCHASING FOR ITS OWN ACCOUNT OR
FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM NOTICE IS
GIVEN THAT THE RESALE, PLEDGE OR OTHER TRANSFER IS BEING MADE IN
RELIANCE ON RULE 144A
89
<PAGE>
(AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE
OF TRANSFER ON THE REVERSE OF THIS NOTE), (3) IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH REGULATION S UNDER THE SECURITIES ACT
(AS INDICATED BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE
OF TRANSFER ON THE REVERSE OF THIS SECURITY), AND IF SUCH TRANSFER IS
BEING EFFECTED BY CERTAIN TRANSFERORS SPECIFIED IN THE INDENTURE
RELATING TO THIS NOTE [THE NOTE WITH WHICH THIS WARRANT COMPRISES A
UNIT] PRIOR TO THE EXPIRATION OF THE "40-DAY RESTRICTED PERIOD" (WITHIN
THE MEANING OF RULE 903(c)(3) OF REGULATION S UNDER THE SECURITIES
ACT), A CERTIFICATE THAT MAY BE OBTAINED FROM THE COMPANY OR THE
TRUSTEE IS DELIVERED BY THE TRANSFEREE TO THE COMPANY AND THE TRUSTEE,
(4) TO AN INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN
RULE 501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT (AS INDICATED
BY THE BOX CHECKED BY THE TRANSFEROR ON THE CERTIFICATE OF TRANSFER ON
THE REVERSE OF THIS NOTE) THAT IS ACQUIRING THIS SECURITY FOR
INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION, AND A CERTIFICATE IN THE
FORM ATTACHED TO THIS NOTE IS DELIVERED BY THE TRANSFEREE TO THE
COMPANY AND THE TRUSTEE (PROVIDED THAT CERTAIN HOLDERS SPECIFIED IN THE
INDENTURE MAY NOT TRANSFER THIS SECURITY PURSUANT TO THIS CLAUSE (4)
PRIOR TO THE EXPIRATION OF THE "40-DAY RESTRICTED PERIOD" (WITHIN THE
MEANING OR RULE 903(c)(3) OF REGULATION S UNDER THE SECURITIES ACT)),
(5) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 (IF APPLICABLE) UNDER THE SECURITIES ACT OR (6)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES
ACT, IN EACH CASE IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS OF
ANY STATE OF THE UNITED STATES. AN INSTITUTIONAL ACCREDITED INVESTOR
HOLDING THIS SECURITY AGREES IT WILL FURNISH TO THE COMPANY AND THE
TRUSTEE SUCH CERTIFICATES AND OTHER INFORMATION AS THEY MAY REASONABLY
REQUIRE TO CONFIRM THAT ANY TRANSFER BY IT OF THIS NOTE COMPLIES WITH
THE FOREGOING RESTRICTIONS. THE HOLDER HEREOF, BY PURCHASING THIS NOTE,
REPRESENTS AND AGREES FOR THE BENEFIT OF THE COMPANY THAT IT IS (1) A
QUALIFIED INSTITUTIONAL BUYER WITHIN THE MEANING OF RULE 144A OR (2) AN
INSTITUTION THAT IS AN "ACCREDITED INVESTOR" AS DEFINED IN RULE
501(a)(1), (2), (3) OR (7) UNDER THE SECURITIES ACT AND THAT IT IS
HOLDING THIS SECURITY FOR INVESTMENT PURPOSES AND NOT FOR DISTRIBUTION
OR (3) A NON-U.S. PERSON OUTSIDE THE UNITED STATES WITHIN THE MEANING
OF (OR AN ACCOUNT SATISFYING THE REQUIREMENTS OF PARAGRAPH (O)(2) OF
RULE 902 UNDER) REGULATION S UNDER THE SECURITIES ACT."
(5) it (i) had such knowledge and experience in financial and business
matters as to be capable of evaluating the merits and risks of its
prospective investment in the Old Notes and (ii) had the ability to bear
the economic risks of its prospective investment and can afford the
complete loss of such investment;
(6) it received a copy of the Offering Circular relating to the offering
and acknowledged that it had access to such financial and other
information, and has been afforded the opportunity to ask questions of the
Company and receive answers thereto, as it deemed necessary in connection
with its decision to purchase the Old Notes; and
(7) it understood that the Company, Jefferies & Company, Inc. and others
relied upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and agreed that if any of the
acknowledgments, representations and warranties deemed to have been made by
it by its purchase of the Old Notes were no longer accurate, it would
promptly notify the Company and Jefferies & Company, Inc. If it was
acquiring the Old Notes as a fiduciary or agent for one or more investor
accounts, it represented that it had sole investment discretion with
respect to each such account and it had full power to make the foregoing
acknowledgments, representations and agreements on behalf of such account.
90
<PAGE>
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Vinson & Elkins L.L.P., Houston, Texas.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996,
and for each of the three years in the period ended December 31, 1996,
included in this Prospectus have been audited by Arthur Andersen LLP,
independent public accountants, as stated in their report with respect
thereto, and are included herein in reliance upon the authority of said firm
as experts in accounting and auditing in giving said reports.
Information relating to the estimated proved reserves of oil and natural gas
and the related estimates of future net revenues and present values thereof
for the periods included in this Prospectus and in the notes to the Financial
Statements of the Company have been prepared by Ryder Scott Company, Petroleum
Engineers, independent petroleum engineers.
91
<PAGE>
GLOSSARY OF OIL AND GAS TERMS
The definitions set forth below shall apply to the indicated terms as used
in this Prospectus. All volumes of natural gas referred to herein are stated
at the legal pressure base of the state or area where the reserves exist and
at 60 degrees Fahrenheit and in most instances are rounded to the nearest
major multiple.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Bbl/d. One Bbl per day.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Boe. Barrel of oil equivalent, determined using the ratio of one Bbl of
crude oil, condensate or natural gas liquids to six Mcf of natural gas.
Boe/d. One barrel of oil equivalent per day.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. The installation of permanent equipment for the production of
oil or natural gas, or in the case of a dry hole, the reporting of abandonment
to the appropriate agency.
Developed acreage. The number of acres that 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 hole or well. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production
exceed production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or natural gas
reserves not classified as proved, 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.
Farm-in or farm-out. An agreement whereunder the owner of a working interest
in an oil and natural gas lease assigns the working interest or a portion
thereof to another party that desires to drill on the leased acreage.
Generally, the assignee is required to drill one or more wells to earn its
interest in the acreage. The assignor usually retains a royalty or
reversionary interest in the lease. The interest received by an assignee is a
"farm-in" while the interest transferred by the assignor is a "farm-out."
Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Gross acres or gross wells. The total acres or wells, as the case may be, in
which a working interest is owned.
Horizontal drilling. A drilling technique that permits the operator to
contact and intersect a larger portion of the producing horizon than
conventional vertical drilling techniques and can result in both increased
production rates and greater ultimate recoveries of hydrocarbons.
92
<PAGE>
Liquids. Crude oil, condensate and natural gas liquids.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
MBbls/d. One thousand barrels of crude oil or other liquid hydrocarbons per
day.
MBoe. One thousand barrels of oil equivalent, determined using the ratio of
one Bbl of crude oil, condensate or natural gas liquids to six Mcf of natural
gas.
Mcf. One thousand cubic feet.
Mcf/d. One thousand cubic feet per day.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
MMBbls. One million barrels of crude oil or other liquid hydrocarbons.
MMBoe. One million barrels of oil equivalent, determined using the ratio of
one Bbl of crude oil, condensate or natural gas liquids to six Mcf of natural
gas.
MMBoe/d. One million barrels of oil equivalent per day.
MMBtu. One million Btus.
MMcf. One million cubic feet.
MMcfe. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Net acres or net wells. The sum of the fractional working interests owned in
gross acres or gross wells, as the case may be.
Oil. Crude oil and condensate.
Present value. When used with respect to oil and natural gas reserves, the
estimated future gross revenue to be generated from the production of proved
reserves, net of estimated production and future development costs, using
prices and costs in effect as of the date indicated, without giving effect to
non- property related expenses such as general and administrative expenses,
debt service and future income tax expenses or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed nonproducing reserves. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and capable of production.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
93
<PAGE>
Proved undeveloped reserves. Proved 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.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a natural
accumulation of producible oil and/or natural gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
Royalty interest. An interest in an oil and natural gas property entitling
the owner to a share of oil or natural gas production free of costs of
production.
Undeveloped acreage. Lease acreage 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 such acreage contains proved
reserves.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
Workover. Operations on a producing well to restore or increase production.
94
<PAGE>
FORMAN PETROLEUM CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Report of Independent Public Accountants.................................. F-2
Balance Sheets as of June 30, 1997 and December 31, 1996 and 1995......... F-3
Statements of Operations for the Six Months Ended June 30, 1997 and
1996 and the Years Ended December 31, 1996, 1995 and 1994................ F-4
Statements of Changes in Stockholder's Equity for the Six Months Ended
June 30, 1997 and the Years Ended December 31, 1996, 1995 and 1994....... F-5
Statements of Cash Flows for the Six Months Ended June 30, 1997 and 1996
and the Years Ended December 31, 1996, 1995 and 1994..................... F-6
Notes to Financial Statements............................................. F-7
</TABLE>
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To the Stockholder of Forman Petroleum Corporation:
We have audited the accompanying balance sheets of Forman Petroleum
Corporation (a Louisiana corporation) as of December 31, 1996 and 1995, and
the related statements of operations and accumulated deficit and cash flows
for each of the three years in the period ended December 31, 1996. 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 generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Forman Petroleum
Corporation as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting
principles.
/s/ Arthur Andersen LLP
New Orleans, Louisiana,
March 26, 1997 (except with
respect to Note 8, as to which
the date is June 3, 1997).
F-2
<PAGE>
FORMAN PETROLEUM CORPORATION
BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, -------------------------
1997 1996 1995
------------ ------------ -----------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents........... $ 8,399,851 $ 130,551 $ 314,070
Accounts receivable................. 388,303 500,602 130,577
Oil and gas revenue receivable...... 1,080,771 2,503,478 1,200,013
Prepaid interest (Note 8)........... 8,662,500 -- --
Unbilled well costs................. 45,461 7,269 9,737
Prepaid expenses.................... 80,611 52,919 93,575
Due from related parties (Note 6)... 12,457 12,457 12,457
------------ ------------ -----------
Total current assets.............. 18,669,954 3,207,276 1,760,429
------------ ------------ -----------
PROPERTY AND EQUIPMENT, at cost (Notes
1, 2 and 9):
Oil and gas properties, full cost
method............................. 64,915,462 48,359,890 33,009,297
Other property and equipment........ 1,423,214 1,425,451 1,366,117
------------ ------------ -----------
66,338,676 49,785,341 34,375,414
Less--accumulated depreciation,
depletion and amortization
(Note 1)........................... (15,088,937) (12,433,801) (8,561,900)
------------ ------------ -----------
Net property and equipment........ 51,249,739 37,351,540 25,813,514
------------ ------------ -----------
OTHER ASSETS:
Due from affiliate (Note 6)......... -- 327,828 --
Escrowed and restricted funds (Note
5)................................. 510,645 881,970 897,662
Deferred financing costs (net of
accumulated amortization of $61,458,
$1,772,026 and $1,206,383
respectively) (Note 1)............. 6,852,990 460,954 543,096
Deferred charges (Note 1)........... -- 147,097 145,747
------------ ------------ -----------
Total assets...................... $ 77,283,328 $ 42,376,665 $29,160,448
============ ============ ===========
LIABILITIES AND STOCKHOLDER'S EQUITY
CURRENT LIABILITIES:
Accounts payable and accrued
liabilities......................... $ 6,547,140 $ 6,241,069 $ 2,855,388
Undistributed oil and gas revenues... 1,042,761 1,625,517 956,422
Current portion of long-term debt
(Notes 2 and 8)..................... 14,086 21,160 65,602
Note payable to stockholder (Note 6). -- 500,000 --
------------ ----------- -----------
Total current liabilities.......... 7,603,987 8,387,746 3,877,412
------------ ----------- -----------
LONG-TERM LIABILITIES:
Notes payable (Notes 2 and 8)........ 67,826,520 39,021,487 28,541,055
Deferred tax liability (Note 1)...... 4,746,000 -- --
Mandatorily redeemable preferred
stock, $.01 par, value 1,000,000
authorized shares, 200,000 shares
outstanding (Note 8)................ 9,795,139 -- --
------------ ----------- -----------
STOCKHOLDER'S EQUITY:
Common stock, no par value,
authorized 1,000,000 shares; issued
and outstanding 90,000 shares....... 1,000 1,000 1,000
Treasury stock....................... (10) (10) (10)
Additional paid-in capital (Notes 1
and 3).............................. -- 785,823 785,823
Accumulated deficit (Note 1)......... (12,689,308) (5,819,381) (4,044,832)
------------ ----------- -----------
Total stockholder's equity......... (12,688,318) (5,032,568) (3,258,019)
------------ ----------- -----------
$ 77,283,328 $42,376,665 $29,160,448
============ =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE>
FORMAN PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
SIX MONTHS YEAR ENDED
ENDED JUNE 30, DECEMBER 31,
------------------------ ------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- ----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales..... $ 6,262,454 $ 4,886,716 $10,891,640 $ 6,918,727 $9,532,408
Interest income....... 54,111 19,389 36,740 193,594 14,076
Overhead
reimbursements....... 35,165 61,261 95,672 131,308 73,621
Other income.......... 20,262 45,174 94,051 60,615 119,227
----------- ----------- ----------- ----------- ----------
6,371,992 5,012,540 11,118,103 7,304,244 9,739,332
----------- ----------- ----------- ----------- ----------
COSTS AND EXPENSES:
Production taxes...... 303,647 416,437 584,710 660,132 791,013
Lease operating
expenses (exclusive
of depreciation,
depletion and
amortization
set forth separately
below)............... 1,198,679 1,239,220 2,526,488 2,196,420 2,775,060
General and
administrative
expenses............. 842,437 707,610 1,539,245 919,837 1,204,012
Interest expense...... 2,824,601 1,843,275 3,982,797 3,522,285 2,121,115
Depreciation,
depletion and
amortization......... 3,595,006 2,088,081 4,259,412 3,558,215 2,390,694
----------- ----------- ----------- ----------- ----------
8,764,370 6,294,623 12,892,652 10,856,889 9,281,894
----------- ----------- ----------- ----------- ----------
Net income (loss) from
operations........... (2,392,378) (1,282,083) (1,774,549) (3,552,645) 457,438
Income tax expense
(Note 1)............. 4,746,000 -- -- -- --
----------- ----------- ----------- ----------- ----------
Net income (loss)... $(7,138,378) $(1,282,083) $(1,774,549) $(3,552,645) $ 457,438
=========== =========== =========== =========== ==========
UNAUDITED PRO FORMA DATA
(Note 1):
Net loss from
operations reported
above................ $(2,392,378) $(1,774,549)
Pro forma benefit for
income taxes......... 885,180 656,583
----------- -----------
Pro forma net loss.. $(1,507,198) $(1,117,966)
=========== ===========
Weighted average
shares outstanding... 90,000 90,000
----------- -----------
Pro forma net loss
per share.......... $ (16.75) $ (12.42)
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE>
FORMAN PETROLEUM CORPORATION
STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
<TABLE>
<CAPTION>
ADDITIONAL
COMMON TREASURY PAID-IN ACCUMULATED
STOCK STOCK CAPITAL DEFICIT TOTAL
------ -------- ---------- ------------ ------------
<S> <C> <C> <C> <C> <C>
BALANCE, December 31,
1993................... $1,000 $(10) $ 785,823 $ (949,625) $ (162,812)
Net income............ -- -- -- 457,438 457,438
------ ---- ---------- ------------ ------------
BALANCE, December 31,
1994................... 1,000 (10) 785,823 (492,187) 294,626
Net loss.............. -- -- -- (3,552,645) (3,552,645)
------ ---- ---------- ------------ ------------
BALANCE, December 31,
1995................... 1,000 (10) 785,823 (4,044,832) (3,258,019)
Net loss.............. -- -- -- (1,774,549) (1,774,549)
------ ---- ---------- ------------ ------------
BALANCE, December 31,
1996................... 1,000 (10) 785,823 (5,819,381) (5,032,568)
Net loss.............. -- -- -- (7,138,378) (7,138,378)
ISSUANCE OF WARRANTS
TO PURCHASE COMMON
STOCK (Note 3)......... -- -- 1,111,100 -- 1,111,100
RECLASS ACCUMULATED
DEFICIT TO ADDITIONAL
PAID-IN CAPITAL........ -- -- (1,896,923) 1,896,923 --
DISTRIBUTION TO SOLE
STOCKHOLDER (Note 6)... -- -- -- (1,500,000) (1,500,000)
ACCRUE DIVIDENDS ON
MANDATORILY REDEEMABLE
PREFERRED STOCK........ -- -- -- (125,000) (125,000)
ACCRETION OF DISCOUNT
ON MANDATORILY
REDEEMABLE PREFERRED
STOCK.................. -- -- -- (3,472) (3,472)
------ ---- ---------- ------------ ------------
BALANCE June 30, 1997... $1,000 $(10) $ -- $(12,689,308) $(12,688,318)
====== ==== ========== ============ ============
</TABLE>
F-5
<PAGE>
FORMAN PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS
ENDED MARCH 31, YEAR ENDED DECEMBER 31,
------------------------ -------------------------------------
1997 1996 1996 1995 1994
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM
OPERATING ACTIVITIES:
Net income/(loss)..... $(7,138,378) $(1,282,083) $(1,774,549) $(3,552,645) $ 457,438
Adjustments to
reconcile net income
to net cash provided
by operating
activities--
Depreciation and
amortization....... 3,595,006 2,088,081 4,259,412 3,558,215 2,390,694
Gain on sale of
assets............. -- -- -- (11,189) --
Interest expense
refinanced (Note
2)................. -- -- 3,627,948 -- --
Change in assets and
liabilities--
(Increase) Decrease
in oil and gas
revenue receivable. 1,422,707 58,573 (1,303,465) 39,033 (735,670)
(Increase) Decrease
in accounts
receivable......... 112,299 (51,784) (370,025) 321,120 (269,097)
(Increase) Decrease
in unbilled well
costs.............. (38,192) (15,314) 2,468 75,212 114,215
(Increase) Decrease
in prepaids........ (27,692) (14,575) 40,656 12,609 (45,627)
Increase (Decrease)
in accounts
payable............ 306,068 7,220,166 4,260,163 1,201,047 (227,190)
Increase (Decrease)
in undistributed
oil and gas
revenues........... (582,756) (139,873) 669,095 (287,570) 655,668
Increase in deferred
charges............ -- -- (1,350) (22,405) (123,342)
Increase in deferred
tax liability...... 4,746,000 -- -- -- --
Decrease (increase)
in due from related
parties............ 327,828 -- (327,828) (12,457) --
Decrease in due to
stockholder........ -- -- -- (47,935) --
----------- ----------- ----------- ----------- -----------
Net cash provided
by operating
activities....... 2,722,890 7,863,191 9,082,525 1,273,035 2,217,089
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Additions to oil and
gas properties....... (16,555,572) (7,897,275) (16,300,593) (8,078,633) (10,104,678)
Reduction of (deposit
into) escrow
account.............. 371,325 (17,560) 15,692 6,715,008 (6,927,325)
Purchase of other
property and
equipment............ 2,236 (39,305) (59,334) (179,346) (355,291)
Proceeds from sale of
oil and gas
property............. -- -- 950,000 -- --
Proceeds from sale of
non-oil & gas
property............. -- -- -- 75,000 --
----------- ----------- ----------- ----------- -----------
Net cash used in
investing
activities....... (16,182,011) (7,954,140) (15,394,235) (1,467,971) (17,387,294)
----------- ----------- ----------- ----------- -----------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from notes
payable.............. 72,467,000 -- 7,000,000 39,139 18,939,137
Repayment of notes
payable.............. (43,528,501) (13,157) (566,442) (1,152,216) (3,688,463)
Deferred financing
costs................ (6,926,745) (1,350) (305,367) (17,224) (438,218)
Purchase of FPCII
assets............... (1,500,000) -- -- -- --
Proceeds from
preferred stock...... 9,666,667 -- -- -- --
Proceeds from
issuance of
warrants............. 1,000,000 -- -- -- --
Deposit into interest
escrow account....... (9,450,000) -- -- -- --
----------- ----------- ----------- ----------- -----------
Net cash (used)
provided by
financing
activities....... 21,728,421 (14,507) 6,128,191 (1,130,301) 14,812,456
----------- ----------- ----------- ----------- -----------
NET DECREASE IN CASH
AND CASH EQUIVALENTS.. 8,269,300 (105,456) (183,519) (1,325,237) (357,749)
CASH AND CASH
EQUIVALENTS AT
BEGINNING OF PERIOD... 130,551 314,070 314,070 1,639,307 1,997,056
----------- ----------- ----------- ----------- -----------
CASH AND CASH
EQUIVALENTS AT END OF
PERIOD................ $ 8,399,851 $ 208,614 $ 130,551 $ 314,070 $ 1,639,307
=========== =========== =========== =========== ===========
SUPPLEMENTAL
DISCLOSURES:
Cash paid for--
Interest............. $ 2,370,228 $ 7,215 $ 21,721 $ 2,258,565 $ 2,047,313
=========== =========== =========== =========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-6
<PAGE>
FORMAN PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
(INFORMATION WITH RESPECT TO JUNE 30, 1997 AND 1996, IS UNAUDITED)
1. ORGANIZATION AND SIGNIFICANT ACCOUNTING POLICIES:
ORGANIZATION
Forman Petroleum Corporation ("Forman" or the "Company"), a Louisiana
corporation, is an independent energy company engaged in the exploration,
development, acquisition and production of crude oil and natural gas, with
operations primarily in the onshore Gulf Coast area of Louisiana. Forman was
incorporated in Louisiana in 1982 and began operations in that year.
The Company is substantially leveraged. As such, a significant portion of
the Company's cash flow from operations will be dedicated to debt service. As
with other independent oil and gas producers, the Company is subject to
numerous uncertainties and commitments associated with its operations. For
example, the Company's results of operations are highly dependent upon the
prices received for oil and gas. In addition, the Company will be required to
make substantial future capital expenditures for the acquisition, exploration,
development, production and abandonment of its oil and gas properties.
OIL AND GAS PROPERTIES
Forman utilizes the full-cost method of accounting, which involves
capitalizing all exploration and development costs incurred for the purpose of
finding oil and gas reserves, including the costs of drilling and equipping
productive wells, dry hole costs, lease acquisition costs and delay rentals.
The Company also capitalizes certain related employee costs and general and
administrative costs which can be directly identified with significant
acquisition, exploration or development projects undertaken. Such costs are
amortized on the future gross revenue method whereby amortization is computed
using the ratio of gross revenues generated during the period to total
estimated future gross revenues from proved oil and gas reserves.
Additionally, the capitalized costs of oil and gas properties cannot exceed
the present value of the estimated net cash flow from its proved reserves,
together with the lower of cost or estimated fair value of its undeveloped
properties (the full cost ceiling). Transactions involving sales of reserves
in place, unless extraordinarily large portions of reserves are involved, are
recorded as adjustments to accumulated depreciation, depletion and
amortization.
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards No. 121 (SFAS 121) regarding
accounting for the impairment of long-lived assets. The Company adopted SFAS
121 in 1996, the effect of which was not material.
CASH AND CASH EQUIVALENTS
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash and cash equivalents.
DEPRECIATION OF OTHER PROPERTY AND EQUIPMENT
Depreciation of property and equipment other than oil and gas properties is
provided on the straight-line method over the estimated useful lives of the
assets.
DEFERRED FINANCING COSTS
For oil and gas property acquisitions which are burdened by an overriding
royalty interest assigned to its lenders (see Note 3), the Company allocated a
portion of the purchase price of such acquisitions to deferred financing
costs. The amount allocated is proportional to the discounted future net cash
flows associated with the interest assigned as compared to the total
discounted future net cash flows for the acquisition (before carve-out
F-7
<PAGE>
FORMAN PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
of the overriding royalty interest) as of the date of the acquisition. These
allocated costs, along with other costs of obtaining financing, are deferred
and amortized using the effective interest method over the term of the related
debt.
FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value of cash, cash equivalents, accounts receivable and accounts
payable approximates book value at December 31, 1996. Fair value of debt is
determined by discounting the debt at the estimated rate the Company would
incur currently on similar debt. At December 31, 1996, given existing market
conditions, the book value approximates fair value of the outstanding long-
term debt.
INCOME TAXES
Forman has elected to file as an S corporation for income tax reporting
purposes. Under this election, income from the corporation is treated as
taxable federal and state income of the individual stockholder. Accordingly,
no provision for income taxes has been included in the accompanying financial
statements for the years ended December 31, 1994, 1995 or 1996.
As discussed in Note 8, the Company issued a second class of stock on June
3, 1997, effectively terminating its S Corporation election. As a result, the
Company will be subject to Federal and state income taxes for the results of
operations subsequent to June 2, 1997, and accordingly a benefit of $335,000
is reflected in income tax expense in the June 30, 1997 statement of
operations. In addition, due to the termination of the Company's status as an
S Corporation for federal income tax purposes, the Company is also required to
establish a net deferred tax liability, calculated at the applicable Federal
and state tax rates, resulting primarily from financial reporting and income
tax reporting basis differences in oil and gas properties. Accordingly, a net
deferred tax liability of $5,081,000 was accrued at June 3, 1997 and is
included in income tax expense in the June 30 statement of operations.
For purposes of the pro forma net loss presentation, income taxes have been
adjusted to reflect the actual income tax benefit that would have been
recorded by the Company had it operated as a C Corporation throughout the
indicated periods.
PERVASIVENESS 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.
DEFERRED CHARGES
The Company has capitalized $147,097 of legal and professional costs as of
December 31, 1996, related to the preparation of documents for an initial
public offering. These costs will be deducted from proceeds of the offering
discussed in Note 8 or charged to expense if an initial public offering is not
consummated.
DERIVATIVES
The Company uses derivative financial instruments (see Note 7) for price
protection purposes on a limited amount of its future production and does not
use them for trading purposes. Such derivatives are accounted for on an
accrual basis and amounts paid or received under the agreements are recognized
as oil and gas sales in the period in which they accrue.
F-8
<PAGE>
FORMAN PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CERTAIN CONCENTRATIONS
During 1996, a significant portion of the Company's oil and gas production
was sold to three customers. Based on the current demand for oil and gas, the
Company does not believe the loss of any of these customers would have a
significant financially disruptive effect on its business or financial
condition.
PER SHARE AMOUNTS
Historical earnings per share data has not been presented due to the
Company's termination of its Subchapter S election discussed under Income
Taxes above. Pro forma net loss per share amounts are calculated by dividing
pro forma net loss by the weighted average number of common shares outstanding
plus the effect, using the treasury stock method, of common shares
contingently issuable, if dilutive (90,000 for each period presented).
2. NOTES PAYABLE:
Notes payable was composed of the following at:
<TABLE>
<CAPTION>
DECEMBER 31,
JUNE 30, ------------------------
1997 1996 1995
----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Whitney National Bank, due June 30,
1996, and bearing interest at 8.75% in
1996; interest due monthly, unsecured.. $ -- $ -- $ 40,000
Whitney National Bank, due November 9,
1997, and bearing interest at 8.75% in
1996; interest due monthly, unsecured.. 5,000 10,000 23,000
Endowment Energy Partners, L.P. ("EEP"),
principal and
interest due June 23, 1997, and bearing
interest at 12%........................ -- 13,607,469 11,751,892
Endowment Energy Co.--Investment
Partnership ("EECIP"), principal and
interest due June 23, 1997, and bearing
interest at 12%........................ -- 19,410,259 16,763,403
Joint Energy Development Investments Ltd
Partnership
("JED"), principal and interest due
June 16, 1997, and
bearing interest at 10%................ -- 6,000,000 --
13.5% senior notes due 2004 with
warrants to purchase
common stock........................... 67,826,520 -- --
Other................................... 9,086 14,919 28,362
----------- ----------- -----------
67,840,606 39,042,647 28,606,657
Less: current portion................... (14,086) (21,160) (65,602)
----------- ----------- -----------
$67,826,520 $39,021,487 $28,541,055
=========== =========== ===========
</TABLE>
The EEP note was originally secured 1) by a first priority lien against 100%
of Forman's right, title and interest in the Manila Village and Bayou Dularge
Fields, and 2) second priority lien against 100% of Forman's right, title and
interest in the Lake Enfermer, Boutte and Lafourche Crossing Fields. The EECIP
note was originally secured 1) by a first priority lien against 100% of
Forman's right, title and interest in the Lake Enfermer, Boutte and Lafourche
Crossing Fields, and 2) second priority lien against 100% of Forman's right,
title and interest in the Manila Village and Bayou Dularge Fields. During
1996, both lenders' liens were subordinated to the new JED term loan.
Additionally, as discussed in Note 1, Forman has assigned a 10% overriding
royalty interest on its interests acquired in the Manila Village Field to EEP,
an 8% overriding royalty
F-9
<PAGE>
FORMAN PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
interest on its interest acquired in the Bayou Dularge Field and a 10%
overriding royalty interest on its interests acquired in the Boutte and Lake
Enfermer Fields to EECIP. Both the EEP and EECIP agreements contain covenants
which require, among other things, that Forman maintain a certain working
capital level and debt service ratio. In connection with the Repayment
Agreement with EEP and EECIP (discussed below), the Company received certain
waivers to these covenants which were to remain in effect until maturity of
the EEP and EECIP loans on June 16, 1997 (See Note 8).
The JED note was issued December 16, 1996, and had a maximum commitment of
$10,000,000. Proceeds from the note were used to repay a prior bridge note and
outstanding accounts payables. It is expected that the unfunded $4,000,000
portion will be drawn upon by the Company during 1997 to finance developmental
activities at Lake Enfermer Field. As mentioned above, EEP and EECIP have
subordinated their respective liens to the liens of JED. The JED note
agreement contains convenants with which Forman has complied. Under the JED
loan agreement, the Company has agreed to auction off its oil and gas
properties if it is unable to satisfy the principal indebtedness in full
before the maturity date (June 16, 1997).
Concurrent with the issuance of the JED note, the Company, EEP, and EECIP
entered into a repayment agreement concerning the current principal and
accrued interest balances outstanding under the EEP and EECIP loans. Unpaid
accrued interest of $4,502,000 at December 16, 1996, (of which $3,629,948
represents interest expense incurred during 1996) was added to the outstanding
principal balance and a forbearance of loan covenants was granted. The terms
of the repayment agreement called for the full repayment of all amounts due
EEP and EECIP no later than the maturity date of the JED note (June 16, 1997).
In the event the Company was unable to secure alternate financing sufficient
to repay the JED note and the EEP and EECIP loans, the Company had agreed to
promptly auction off its oil and gas properties in order to generate
sufficient funds to fully repay the EEP and EECIP loans.
Also, concurrent with the above transactions, EEP and EECIP granted certain
options to JED and the Company to purchase a portion of the respective
lenders' overriding royalty interest discussed above for a predetermined
amount, exerciseable upon the full satisfaction of all outstanding
indebtedness to EEP and EECIP.
The aggregate principal payments required for each of the next five years
are as follows (see Note 8):
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1997......................................................... $ 21,160
1998......................................................... 3,759
1999......................................................... --
2000......................................................... --
2001......................................................... --
Thereafter.................................................... 39,017,728
-----------
$39,042,647
===========
</TABLE>
3. STOCK WARRANTS ISSUED:
As a condition precedent to the loan from EEP, Forman executed and delivered
to EEP a warrant assigning and conveying to EEP the right to purchase nine
shares of Forman's common stock, no par value per share, at an exercise price
of $25,000 per share. No value was assigned to this warrant because its
exercise price was substantially in excess of the estimated market value of
Forman's stock at the date of grant and the Company believed its value to be
immaterial. The exercise date of the warrant is the earliest of a) the date on
which Forman agrees to sell all or substantially all of the outstanding common
stock or assets of the Company; b) the date on which the Company files a
registration for public sale of the Company's stock; or c) thirty days prior
to the
F-10
<PAGE>
FORMAN PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
expiration date of the warrants, which is December 31, 2025. In any event, EEP
is precluded from exercising this warrant if, in the opinion of Forman's
counsel, such exercise would affect the Company's qualification under
Subchapter S of the Internal Revenue Code of 1986, as amended. As a result of
a stock split during 1993, the number of common shares available for purchase
under this warrant increased from 9 to 9,000, with a corresponding reduction
of the exercise price from $25,000 per share to $25 per share.
In connection with the EECIP financing, Forman executed and delivered to
EECIP a warrant assigning and conveying the right to purchase ten shares of
Forman's common stock. The exercise price was based on a calculated value of
the Company, and was subsequently established at $44,567 per share. No value
was assigned to this warrant because its exercise price was substantially in
excess of the estimated market value of Forman's stock, at the date of grant
and the Company believed its value to be immaterial. The exercise date for
this warrant is the earliest of (a) the date Forman agrees to sell all or
substantially all of the outstanding shares of common stock or assets of the
Company for cash or securities in a publicly traded company; (b) the date
Forman files a registration for the public sale of its common stock; or (c)
thirty days prior to the expiration date, which is December 31, 2025. As a
result of a stock split during 1993, the number of common shares available for
purchase under this warrant increased from 10 to 10,000, with a corresponding
reduction of the exercise price from $44,567 per share to $44.57 per share.
In connection with the offerings discussed at Note 8, the Company issued
warrants to purchase 43,600 shares of common stock at an initial exercise
price of $1.00 per share, subject to adjustment in certain defined cases. The
warrants are immediately exercisable and will automatically expire on June 1,
2004. The company has allocated $666,667 and $333,333 of the proceeds received
from the sale of the note units and equity units, respectively, to the
warrants issued, which has been recorded as additional paid in capital at June
30, 1997. In addition, the Company also issued warrants to purchase 4,844
shares of common stock under the same conditions as discussed above. The
Company has recorded $111,100 of additional paid-in capital for these
warrants, to be amortized as deferred financing costs over the term of the
note units.
4. COMMITMENTS UNDER OPERATING LEASES:
Forman has two noncancellable operating leases for the rental of office
space, which expire on July 31, 1999 and January 14, 2000. Future commitments
under these leases are as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------
<S> <C>
1997............................................................ $204,046
1998............................................................ 204,046
1999............................................................ 185,647
2000............................................................ --
2001............................................................ --
</TABLE>
Rental expense under operating leases during 1996, 1995 and 1994 was
$192,633, $192,847 and $105,262, respectively.
5. RESTRICTED CASH:
Cash restricted for payment of abandonment costs for the Boutte and Bayou
Dularge Fields is classified as a long-term asset. Such amounts are invested
in short-term interest-bearing investments. The cash is escrowed under an
agreement which required Forman to make additional specified monthly
contributions through November 1995. As of December 31, 1996, the escrow
accounts are fully funded.
F-11
<PAGE>
FORMAN PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
6. RELATED PARTY TRANSACTIONS:
In August 1996, the Company sold all of its interests in the Bayou Fer Blanc
Field and the West Gueydan Field to a company (the "Purchaser") that is owned
by the sole stockholder. The purchase price was $950,000 cash, which was paid
at the closing. The Company did not realize any gain or loss on the sale of
these properties. In connection with the sale, the Purchaser also agreed to
assume certain liabilities of the Company relating to the completion of the 3-
D seismic survey and other related matters. As of December 31, 1996, the
Company had incurred aggregate costs of $327,828 subsequent to the closing on
behalf of the Purchaser, which are recorded as due from affiliate. On June 3,
1997, the Company repurchased its interests in these fields for $5,000,000
with the proceeds from the offerings discussed in Note 8. At that time, the
Purchaser's cost basis in these fields was $3,500,000, which the Company has
recorded as unevaluated properties at June 30, 1997. The balance of the
purchase price of $1,500,000 was recorded as a distribution to the sole
stockholder.
During 1996, the sole stockholder loaned the Company $1,000,000, of which
$500,000 had been repaid as of December 31, 1996. The outstanding balance
bears interest at 10% and is due June 26, 1997. The Company recorded interest
expense of $27,361 during 1996 related to this loan.
At December 31, 1996 and 1995, the Company had $12,457 receivable from the
sole stockholder for advances.
7. HEDGING CONTRACTS:
The Company hedges with third parties certain of its crude oil and natural
gas production in various swap agreement contracts. The contracts are tied to
published market prices for crude oil and natural gas and are settled monthly
based on the differences between contract prices and the average defined
market price for that month applied to the related contract volume. As of June
30, 1997, the Company had no open forward sales contracts.
For the six months ended June 30, 1997, the Company recorded revenue of
$189,300 under these swap agreements. The Company did not conduct any hedging
activity prior to 1997.
8. SUBSEQUENT EVENT:
On June 3, 1997, the Company closed offerings for 70,000 note units
consisting of $70,000,000 of 13.5% Senior Notes due 2004 with warrants to
purchase 29,067 shares of common stock and 200,000 equity units consisting of
$10,000,000 of Series A Cumulative Preferred Stock with warrants to purchase
14,533 shares of common stock. A portion of the proceeds from the offerings
were used to repay the EEP, EECIP, and JED notes (see Note 2), purchase 75% of
the overriding royalty interests held by EEP and EECIP for $2,600,000 (see
Note 2), and buy back its interests in Bayou Fer Blanc and West Gueydan Fields
for $5,000,000 (see Note 6). In addition, the Company was required to escrow
from the proceeds the first year's interest obligation on the 13.5% Senior
Notes ($9,450,000). As part of the offerings, the Company has also agreed to
publicly register the 13.5% Senior Notes and Preferred Stock and bear all
costs related thereto.
At December 31, 1996, the EEP, EECIP, and JED notes have been classified as
long-term in the accompanying balance sheets as a result of the refinancing
discussed above.
9. OIL AND GAS ACTIVITIES:
This footnote provides unaudited information required by SFAS No. 69
"Disclosures About Oil and Gas Producing Activities."
F-12
<PAGE>
FORMAN PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
CAPITALIZED COSTS--Capitalized costs and accumulated depreciation, depletion
and amortization relating to the Company's oil and gas producing activities,
all of which are conducted within the continental United States, are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Proved producing oil and gas
properties................. $61,415,462 $48,359,890 $33,009,297 $24,931,450
Unevaluated properties...... 3,500,000 -- -- --
Accumulated depreciation,
depletion and amortization. 13,921,675 11,307,719 7,641,102 4,592,467
----------- ----------- ----------- -----------
Net capitalized costs....... $50,993,787 $37,052,171 $25,368,195 $20,338,983
=========== =========== =========== ===========
COSTS INCURRED--Costs incurred in oil and gas property acquisition,
exploration and development activities are summarized below:
<CAPTION>
YEAR ENDED DECEMBER 31,
JUNE 30, -----------------------------------
1997 1996 1995 1994
----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Acquisition costs........... $ 7,827,535 $ -- $ -- $ 1,799,044
Exploration costs........... 93,069 12,448,239 4,490,045 4,304,342
Development costs........... 8,634,968 3,852,354 3,588,588 4,001,292
----------- ----------- ----------- -----------
Gross costs incurred.... 16,555,572 16,300,593 8,078,633 10,104,678
Less proceeds from sales of
prospects.................. -- 950,000 -- --
----------- ----------- ----------- -----------
Net cost incurred....... $16,555,572 $15,350,593 $ 8,078,633 $10,104,678
=========== =========== =========== ===========
</TABLE>
Included in exploration costs for 1995 is $518,000 of capitalized general
and administrative costs. No such costs were capitalized in either 1994 or
1996. Gross cost incurred excludes sales of proved and unproved properties
which are accounted for as adjustments of capitalized costs with no gain or
loss recognized, unless such adjustments would significantly alter the
relationship between capitalized costs and proved reserves.
RESERVES--(UNAUDITED)--Proved reserves are estimated quantities of oil and
natural gas which geological 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
proved reserves that can reasonably be expected to be recovered through
existing wells with existing equipment and operating methods.
Proved oil and natural gas reserve quantities and the related discounted
future net cash flows before income taxes for the periods presented are based
on estimates prepared by Ryder Scott Company, independent petroleum engineers.
Such estimates have been prepared in accordance with guidelines established by
the Securities and Exchange Commission.
F-13
<PAGE>
FORMAN PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
The Company's net ownership interests in estimated quantities of proved oil
and natural gas reserves and changes in net proved reserves, all of which are
located in the continental United States, are summarized below.
<TABLE>
<CAPTION>
OIL, CONDENSATE AND NATURAL GAS
LIQUIDS (BBLS)
----------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year.................. 1,999,859 1,718,480 1,762,919
Revisions of previous estimates.... 87,871 42,099 25,483
Purchases of oil and gas
properties........................ -- -- 92,445
Extensions and discoveries......... 753,776 482,970 178,273
Production......................... (329,944) (243,690) (340,640)
---------- ---------- ----------
End of year........................ 2,511,562 1,999,859 1,718,480
========== ========== ==========
Proved developed reserves at end of
year................................ 1,898,978 -- --
========== ========== ==========
<CAPTION>
NATURAL GAS (MCF)
----------------------------------
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Proved developed and undeveloped
reserves:
Beginning of year.................. 9,593,000 10,624,000 11,362,000
Revisions of previous estimates.... 619,282 622,115 145,681
Purchases of oil and gas
properties........................ -- -- 634,443
Extensions and discoveries......... 14,335,783 138,235 1,135,279
Production......................... (1,325,065) (1,791,350) (2,653,403)
---------- ---------- ----------
End of year........................ 23,223,000 9,593,000 10,624,000
========== ========== ==========
Proved developed reserves at end of
year................................ 8,485,000 -- --
========== ========== ==========
STANDARDIZED MEASURE (UNAUDITED)--The table of the Standardized Measure of
Discounted Future Net Cash Flows related to the Company's ownership interests
in proved oil and gas reserves as of period end is shown below:
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows.................. $ 143,652 $ 57,650 $ 43,151
Future oil and natural gas operating
expenses............................ (12,598) (9,993) (10,562)
Future development costs............. (14,059) (5,573) (4,702)
---------- ---------- ----------
Future net cash flows................ 116,995 42,084 27,887
10% annual discount for estimating
timing of
cash flows.......................... (29,614) (11,488) (8,659)
---------- ---------- ----------
Standardized measure of discounted
future net
cash flows.......................... $ 87,381 $ 30,596 $ 19,228
========== ========== ==========
</TABLE>
Future cash flows are computed by applying year end prices of oil and
natural gas to year end quantities of proved oil and natural gas reserves.
Future operating expenses and development costs are computed primarily by
F-14
<PAGE>
FORMAN PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS--(CONTINUED)
the Company's petroleum engineers by estimating the expenditures to be
incurred in developing and producing the Company's proved oil and natural gas
reserves at the end of the year, based on year end costs and assuming the
continuation of existing economic conditions. The standardized measure of
discounted future net cash flows does not purport, nor should it be
interpreted, to present the fair value of the Company's oil and natural gas
reserves. An estimate of fair value would also take into account, among other
things, the recovery of reserves not presently classified as proved,
anticipated future changes in prices and costs, a discount factor more
representative of the time value of money and the risks inherent in reserve
estimates.
Oil and natural gas prices have declined subsequent to December 31, 1996.
Accordingly, the discounted future net cash flows would be reduced if the
standardized measure was calculated at a later date.
CHANGES IN STANDARDIZED MEASURE (UNAUDITED)--Changes in standardized measure
of future net cash flows relating to proved oil and gas reserves are
summarized below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Changes due to current year operations:
Sales of oil and natural gas, net of oil and
natural gas operating expenses................... $(7,781) $(4,063) $(5,966)
Extensions and discoveries........................ 42,983 5,557 --
Purchases of oil and gas properties............... -- -- 2,325
Changes due to revisions in standardized variables:
Prices and operating expenses..................... 28,682 7,113 55
Revisions of previous quantity estimates.......... 3,633 1,336 1,445
Estimated future development costs................ (7,784) (901) (170)
Accretion of discount............................. 3,060 1,923 1,817
Production rates (timing) and other............... (6,008) 403 1,549
------- ------- -------
Net Change.......................................... 56,785 11,368 1,055
Beginning of year................................... 30,596 19,228 18,173
------- ------- -------
End of year......................................... $87,381 $30,596 $19,228
======= ======= =======
</TABLE>
F-15
