<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON SEPTEMBER 23, 1997
Registration No. 333-31375
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
____________________
FORMAN PETROLEUM CORPORATION
(Exact name of Registrant as specified in its charter)
<TABLE>
<S> <C> <C>
LOUISIANA 1311 72-0954774
(State of other jurisdiction (Primary Standard Industrial (I.R.S. Employer
of incorporation or organization) Classification Code Number) Identification No.)
MARVIN J. GAY
Vice President -- Finance
and Administration
650 POYDRAS STREET, SUITE 2200 650 POYDRAS STREET, SUITE 2200
New Orleans, Louisiana 70130-6101 New Orleans, Louisiana 70130-6101
(504) 586-8888 (504) 586-8888
(Address, including zip code, and telephone (Name, Address, including zip code, and
number, including area code, of registrant's telephone number, including area code,
principal executive offices) of agent for service)
</TABLE>
Copy to:
ALAN P. BADEN
Vinson & Elkins L.L.P.
2300 First City Tower
Houston, Texas 77002-6760
(713) 758-2222
Approximate date of commencement of proposed sale of the securities to the
public: As soon as practicable following the effectiveness of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
____________________
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
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Proposed Proposed
Title of each class of Amount to be maximum offering maximum aggregate Amount of
securities to be registered registered price per unit offering price registration fee
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
13.5% Senior Secured
Notes due 2004, Series B $ 70,000,000 100% $ 70,000,000 $ 21,213(1)
=====================================================================================================================
</TABLE>
(1) Previously paid
The Registrant hereby amends this Registration Statement on such date or dates
as may be necessary to delay its effective date until the Registrant shall file
a further amendment which specifically states that this Registration Statement
shall thereafter become effective in accordance with Section 8(a) of the
Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
================================================================================
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* Information contained herein is subject to completion or amendment. A *
* registration statement relating to these securities has been filed with *
* the Securities and Exchange Commission. These securities may not be sold *
* nor may offers to buy be accepted prior to the time the registration *
* statement becomes effective. This prospectus shall not constitute an offer *
* to sell or the solicitation of an offer to buy nor shall there be any sale *
* of these securities in any state in which such offer, solicitation or sale *
* would be unlawful prior to registration or qualification under the *
* securities laws of any such state. *
*******************************************************************************
SUBJECT TO COMPLETION, DATED ____________, 1997
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 ____________, 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 ________, 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 __ 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 ________, 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 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.
2
<PAGE>
TABLE OF CONTENTS
PAGE NO.
--------
Available Information....................................... 3
Disclosure Regarding Forward Looking Statements............. 4
Prospectus Summary.......................................... 5
Risk Factors................................................ 15
The Company................................................. 19
Private Placement........................................... 19
Use of Proceeds............................................. 19
Capitalization.............................................. 20
Selected Historical Financial Information................... 21
Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 23
Business and Properties..................................... 28
Management.................................................. 39
Principal Stockholders...................................... 41
Certain Transactions........................................ 41
The Exchange Offer.......................................... 43
Description of Capital Stock................................ 49
Description of Notes........................................ 51
Registration Rights......................................... 76
Certain Federal Income Tax Consequences..................... 77
Plan of Distribution........................................ 80
Transfer Restrictions on Old Notes.......................... 81
Legal Matters............................................... 83
Experts..................................................... 83
Glossary of Oil and Gas Terms............................... 84
Financial Statements........................................ F-1
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
3
<PAGE>
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.
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.
4
<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 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.
5
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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.
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."
6
<PAGE>
Expiration Date........... 5:00 p.m., New York City time, on ___________, 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
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."
7
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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 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.
8
<PAGE>
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."
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;
9
<PAGE>
(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 occurence 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 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
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
10
<PAGE>
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."
11
<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,
------------------------------------------------ --------------------------------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Pro Forma Pro Forma
1994 1995 1996 1996(1) 1996 1997 1997(1)
---------- ---------- ---------- ---------- ---------- ---------- ----------
<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)........... 2.3 x 1.0 x 1.6 x 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)... 0.9 x 1.0 x 2.1 x 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>
<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
Mandatorily Redeemable Preferred Stock, net............................................................ 9,795
Total stockholder's deficit............................................................................ (12,688)
</TABLE>
12
<PAGE>
__________________________________________
(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.
13
<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>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------- ----------------------------
ProForma ProForma
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.
14
<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 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
15
<PAGE>
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 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
16
<PAGE>
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.
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
17
<PAGE>
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 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.
18
<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.
19
<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.
20
<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 FORMA PRO 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>
<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> <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>
21
<PAGE>
__________________
(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.
22
<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 $320,000 as a result of
increased oil and gas prices.
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the six
months ended June 30, 1996 and 1997:
Six Months Ended June 30,
------------------------------------
% Increase
1996 1997 (Decrease)
---------- ---------- ----------
PRODUCTION VOLUMES:
Oil and condensate (MBbls) 171 153 -11%
Natural gas (MMcf) 520 995 91%
AVERAGE SALES PRICES:
Oil and condensate ($ 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%
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
23
<PAGE>
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.
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 $1.3
million due to a 72% increase in average natural gas prices in 1996. The overall
increase in oil and natural gas production was due to three new wells being
drilled and completed during 1996, which was partially offset by normal
production declines from existing wells. Increases in average oil and natural
gas prices were directly attributable to the general improved market conditions.
24
<PAGE>
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
years ended December 31, 1995 and 1996.
YEAR ENDED DECEMBER 31,
-------------------------------
% Increase
1995 1996 (Decrease)
-------- -------- ----------
PRODUCTION VOLUMES:
Oil and condensate (MBbls)............. 251.8 329.9 31%
Natural gas (MMcf)..................... 1,504.5 1,325.1 (12)%
AVERAGE SALES PRICES:
Oil and condensate ($ 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%
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.
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
$1.3 million.
25
<PAGE>
The following table summarizes production volumes, average sales prices and
operating revenues for the Company's oil and natural gas operations for the
years ended December 31, 1994 and 1995.
YEAR ENDED DECEMBER 31,
-----------------------------------
% Increase
1994 1995 (Decrease)
-------- -------- ---------------
PRODUCTION VOLUMES:
Oil and condensate (MBbls)............ 330.5 251.8 (24)%
Natural gas (MMcf).................... 2,240.6 1,504.5 (33)%
AVERAGE SALES PRICES:
Oil and condensate ($ 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)%
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.
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.
26
<PAGE>
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 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.
27
<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.
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.
28
<PAGE>
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 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."
29
<PAGE>
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 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.
30
<PAGE>
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)
------------------------------------------------------------------
Producing Non-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 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."
31
<PAGE>
ACREAGE
The table below describes the Company's developed and undeveloped leasehold
acreage as of December 31, 1996 on a pro forma basis.
DEVELOPED ACREAGE UNDEVELOPED ACREAGE TOTAL
------------------ ------------------- ----------------
FIELD GROSS NET GROSS NET GROSS NET
- ----- -------- -------- -------- ------- ------- -------
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
===== ===== ===== ===== ===== =====
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.
DRILLING ACTIVITY
The following table sets forth the wells drilled by the Company during the
periods indicated:
YEARS ENDED DECEMBER 31,
----------------------------------------------------------
1994 1995 1996
------------------ ------------------- ---------------
GROSS NET GROSS NET GROSS NET
-------- -------- -------- ------- ------- -------
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
==== ==== ==== ==== ==== ====
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.
32
<PAGE>
PRODUCTION
The following table sets forth certain oil and natural gas production data of
the Company during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31, SIX MONTHS 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>
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.
33
<PAGE>
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."
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.
34
<PAGE>
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 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.
35
<PAGE>
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.
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."
36
<PAGE>
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 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.
37
<PAGE>
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
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.
38
<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
---- --- -------- --------
<S> <C> <C> <C>
McLain J. Forman, Ph.D. ..... 68 Chairman of the Board, Chief Executive
Officer and President 1982
Harold C. Block ............. 66 Vice President of Land and Acquisitions
Director 1997
Marvin J. Gay ............... 54 Vice President of Finance and
Administration and Director 1997
Michael A. Habetz ........... 48 Vice President, Manager of Operations
and Director 1997
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 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
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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 $100,000 for
the year ended December 31, 1996.
SUMMARY COMPENSATION TABLE
December 31, 1996
Annual Compensation
-----------------------
Name and Principal Position Salary ($) Bonus ($)
- --------------------------- ---------- ---------
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
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% 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.
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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 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
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$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.
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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 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
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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 _________, 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 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
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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
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
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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. 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.
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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. 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.
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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.
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:
U. S. Trust Company of Texas, N.A.
770 Broadway - 13th Floor
Corporate Trust Operations
New York, New York 10003-9598
Facsimile Transmission: (212) 420-6504
Confirm by Telephone: (800) 225-2398
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
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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.
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.
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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.
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
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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.
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 and future
Subordinated Indebtedness of the Company. The Guarantees, to the extent issued
in the future, will be senior
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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:
Redemption
YEAR Price
---- ----------
2002 103.375%
2003 and thereafter 100.000%
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, 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
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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 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
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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, 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
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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 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,
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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
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
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(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,
(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.
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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 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.
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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 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.
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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 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;
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(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 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
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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, 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.
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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.
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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,
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
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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.
"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,
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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 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
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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.
"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.
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"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.
"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
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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 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".
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"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).
"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
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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 (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
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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
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).
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"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 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.
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"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.
"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 Qualified
Capital
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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 $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.
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"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 Registration
Statement ceases to be effective (such event referred to as a "Registration
Default"), the Company will pay, as liquidated damages, cash interest
("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
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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 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.
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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.
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
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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 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.
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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 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.
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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;
(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:
81
<PAGE>
"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 (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,
82
<PAGE>
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.
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.
83
<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.
Liquids. Crude oil, condensate and natural gas liquids.
84
<PAGE>
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.
85
<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.
86
<PAGE>
FORMAN PETROLEUM CORPORATION
----------------------------
INDEX TO FINANCIAL STATEMENTS
-----------------------------
PAGE
----
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
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 Anderson 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
------------ ------------ ------------
(Unaudited)
------------
ASSETS
------
CURRENT ASSETS:
<S> <C> <C> <C>
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.
F-7
<PAGE>
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 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.
F-8
<PAGE>
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.
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>
F-9
<PAGE>
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 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):
December 31,
------------
1997 $ 21,160
1998 3,759
1999 -
2000 -
2001 -
Thereafter 39,017,728
----------
$39,042,647
===========
F-10
<PAGE>
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 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:
December 31,
1997 $204,046
1998 204,046
1999 185,647
2000 -
2001 -
Rental expense under operating leases during 1996, 1995 and 1994 was $192,633,
$192,847 and $105,262, respectively.
F-11
<PAGE>
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.
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.
F-12
<PAGE>
9. OIL AND GAS ACTIVITIES:
This footnote provides unaudited information required by SFAS No. 69
"Disclosures About Oil and Gas Producing Activities."
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
=============== ============== ============== ==============
</TABLE>
COSTS INCURRED - Costs incurred in oil and gas property acquisition, exploration
and development activities are summarized below:
<TABLE>
<CAPTION>
Year Ended December 31,
----------------------------------------------
June 30,
1997 1996 1995 1994
--------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
(Unaudited)
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>
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 - -
=============== =============== ===============
Natural Gas (Mcf)
----------------------------------------------------------
Year Ended December 31,
----------------------------------------------------------
1996 1995 1994
--------------- --------------- ---------------
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 - -
=============== =============== ===============
</TABLE>
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:
<TABLE>
<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>
F-14
<PAGE>
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 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
----------- ----------- -----------
<S> <C> <C> <C>
(In Thousands)
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
<PAGE>
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Restated Articles of Incorporation, as amended (the
"Articles"), provide that no director or officer of the Company will be
personally liable to the Company or its stockholders for monetary damages for
any breach of fiduciary duty as a director or officer, except for liability (i)
for breach of the director's or officer's duty of loyalty to the Company or its
shareholders, (ii) for acts or omissions not in good faith or that involve
intentional misconduct or a knowing violation of law, (iii) under Section 92(D)
of the Louisiana Business Corporation Law (the "LBCL"), which concerns unlawful
payments of dividends, stock purchases or redemptions, or (iv) for any
transaction from which the director or officer derived an improper personal
benefit. If the LBCL is amended to authorize corporate action further
eliminating or limiting the personal liability of directors and officers, then
the liability of each officer and director of the Company shall be eliminated or
limited to the fullest extent permitted by the LBCL, as so amended from time to
time.
The Articles provide that each person who was or is a party or is
threatened to be made a party to or is involved in any threatened, pending or
completed action, suit or proceeding, whether civil, criminal, administrative or
investigative (a "Proceeding"), including any action by or in the right of the
Company, by reason of the fact that he or she, or a person of whom he or she is
the legal representative, is or was a director or officer of the Company or, as
a director or officer of the Company, is or was serving at the request of the
Company as a director, officer, partner, employee or agent of another business,
nonprofit or foreign corporation, partnership, joint venture, limited liability
company, registered limited liability partnership, trust or other enterprise,
including service with respect to employee benefit plans, whether the basis of
such Proceeding is alleged action in an official capacity as a director,
officer, partner, trustee, employee or agent or in any other capacity, shall be
indemnified and held harmless by the Company to the fullest extent authorized by
law, including but not limited to the LBCL, as the same exists or may hereafter
be amended (but, in the case of any amendment to the LBCL, such amendment shall
be enforced only to the extent that such amendment permits the Company to
provide broader indemnification rights than the LBCL permitted the Company to
provide prior to such amendment), against any and all expenses, including
attorneys' fees, liabilities, losses, judgments, fines, ERISA excise taxes or
penalties and amounts paid or to be paid in settlement actually and reasonably
incurred or suffered by such person in connection with such Proceeding, if he or
she acted in good faith and in a manner he or she reasonably believed to be in,
or not opposed to, the best interests of the Company, and, with respect to any
criminal Proceeding, had no reasonable cause to believe his or her conduct was
unlawful; provided, however, that the Company shall indemnify any such person
seeking indemnity in connection with a Proceeding (or part thereof) initiated by
such person only if such Proceeding (or part thereof) initiated by such person
was first authorized by the Board of Directors of the Company.
Pursuant to the Articles, if a claim described in the preceding paragraph
is not paid in full by the Company within ninety days after a written claim has
been received by the Company, the claimant may bring suit against the Company to
recover the unpaid amount of the claim and, if successful in whole or in part,
the claimant shall also be entitled to be paid the expense, including attorneys'
fees, of prosecuting such claim. The Articles provide that it is a defense to
any such action (other than an action brought to enforce a claim for expenses
incurred in defending any Proceeding in advance of its final disposition where
the required undertaking, if any, has been tendered to the Company) that the
claimant has not met the standards of conduct which make it permissible under
the LBCL for the Company to indemnify the claimant for the amount claimed, but
the burden of proving such defense is on the Company. Neither the failure of
the Company (including the Board, independent legal counsel or shareholders) to
have made a determination prior to the commencement of such action that
indemnification of the claimant is proper in the circumstances because he or she
has met the applicable standard of conduct set forth in the LBCL, nor an actual
determination by the Company (including the Board, independent legal counsel or
shareholders) that the claimant has not met such applicable standard of conduct,
is a defense to the action or create a presumption that the claimant has not met
the applicable standard of conduct.
The Articles provide that the right to indemnification and the payment of
expenses incurred in defending a proceeding in advance of its final disposition
conferred in the Articles is not exclusive of any other right which any
II-1
<PAGE>
person may have or may in the future acquire under any statute, provision of the
Certificate, the Bylaws, Indemnification Agreement, vote of stockholders or
disinterested directors or otherwise. The Articles permit the Company to
maintain insurance, at its expense, to protect itself and any director, officer,
employee or agent of the Company or any person serving at the request of the
Company as a director, officer, employee or agent of another corporation, or of
a partnership, joint venture, trust or other enterprise, including service with
respect to employee benefit plans maintained or sponsored by the Company,
against any such expense, liability or loss, whether or not the Company would
have the power to indemnify such person against such expense, liability or loss
under the LBCL.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Securities Act") may be permitted to directors, officers or
persons controlling the registrant pursuant to the foregoing provisions, the
Registrant has been informed that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL SCHEDULES
The following instruments and documents are included as Exhibits to this
Registration Statement. Exhibits incorporated by reference are so indicated by
parenthetical information.
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- -------
<S> <C>
3(i)* Restated Articles of Incorporation dated July 2, 1997.
3(ii)* Bylaws.
4.1* Indenture dated as of June 3, 1997 by and among the Forman Petroleum
Corporation, as issuer, and U.S. Trust Company of Texas, N.A., as trustee.
4.2* Act of Mortgage, Security Agreement, Assignment of Production and
Financing Statement dated November 21, 1996, by Forman Petroleum
Corporation for the benefit of Joint Energy Development Investments
Limited Partnership.
4.3* Act of First Amendment to Mortgage, Security Agreement, Assignment
of Production and Financing Statement dated December 23, 1996, by
and among Forman Petroleum Corporation and Joint Energy
Development Investments Limited Partnership.
4.4* Act of Second Amendment to Mortgage, Security Agreement,
Assignment of Production and Financing Statement dated June 3, 1997,
by and among Forman Petroleum Corporation and U.S. Trust Company
of Texas, N.A.
4.5* Act of Assignment of Note and Liens dated June 3, 1997, by and among
Joint Energy Development Investments Limited Partnership, as assignor,
and U.S. Trust Company of Texas, N.A., as assignee.
4.6* Act of Mortgage, Security Agreement, Assignment of Production and Financing
Statement dated July 30, 1997, by Forman Petroleum Corporation for the
benefit of U.S. Trust Company of Texas, N.A. as Trustee under the Indenture.
5 Opinion of Vinson & Elkins L.L.P. (legality).
8 Opinion of Vinson & Elkins L.L.P. (tax).
10.1* Registration Rights Agreement dated June 3, 1997 by and between Forman
Petroleum Corporation and Jefferies & Company, Inc. regarding Old Notes
and warrants to purchase Common Stock.
10.2* Registration Rights Agreement dated June 3, 1997 by and between Forman
Petroleum Corporation and Jefferies & Company, Inc. regarding Series A
Cumulative Preferred Stock and warrants to purchase Common Stock.
10.3* Warrant Agreement dated June 3, 1997 by and between Forman Petroleum
Corporation and U.S. Trust Company of Texas, N.A. regarding warrants
issued in connection with issuance of Series A Cumulative Preferred
Stock.
10.4* Warrant Agreement dated June 3, 1997 by and between Forman Petroleum
Corporation and U.S. Trust Company of Texas, N.A. regarding warrants
issued in connection with issuance of Old Notes.
12* Statements Regarding Computation of Ratios.
23(i)* Consent of Ryder Scott Company.
23(ii) Consent of Arthur Andersen L.L.P.
23(iii) Consent of Vinson & Elkins L.L.P. (included in Opinion filed as Exhibit
No. 5).
</TABLE>
II-2
<PAGE>
24* Power of Attorney.
25* Statement of Eligibility of U.S. Trust Company of Texas, N.A.
27* Financial Data Schedule.
99* Form of Letter of Transmittal.
- --------------
* Previously filed.
ITEM 22. UNDERTAKINGS
The undersigned Registrant hereby undertakes as follows: That prior to any
public reoffering of the securities registered hereunder through use of a
Prospectus which is a part of this Registration Statement, by any person or
party who is deemed to be an underwriter within the meaning of Rule 145(c), the
Issuer undertakes that such reoffering Prospectus will contain the information
called for by the applicable registration form with respect to reofferings by
persons who may be deemed underwriters, in addition to the information called
for by the other Items of the applicable form.
The Registrant undertakes that every prospectus (i) that is filed pursuant
to the paragraph immediately preceding, or (ii) that purports to meet the
requirements of section 10(a)(3) of the Act and is used in connection with an
offering of securities subject to Rule 415 ((S) 230.415 of this chapter), will
be filed as a part of an amendment to the registration statement and will not be
used until such amendment is effective, and that, for purposes of determining
any liability under the Securities Act of 1933, each such post-effective
amendment shall be deemed to be a new registration statement relating to the
securities offered therein, and the offering of such securities at that time
shall be deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the Company
pursuant to the provisions described under Item 15 above, or otherwise, the
Company has been advised that, in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the Company in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the Company will, unless, in
the opinion of its counsel, the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the
Securities Act and will be governed by the final adjudication of such issue.
II-3
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of New Orleans, the State of
Louisiana on September 11, 1997.
FORMAN PETROLEUM CORPORATION
By: /s/ McLain J. Forman
----------------------
McLain J. Forman
Chairman of the Board, Chief
Executive Officer and President
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Name Title Date
---- ----- ----
<S> <C> <C>
/s/ McLain J. Forman Chairman of the Board, September 23, 1997
- --------------------------- Chief Executive Officer and President
McLain J. Forman (Principal Executive Officer)
/s/ Harold C. Block Vice President of Land and Acquisition September 23, 1997
- --------------------------- and Director
Harold C. Block
/s/ Marvin J. Gay Vice President of Finance and September 23, 1997
- --------------------------- Administration and Director
Marvin J. Gay (Principal Financial and
Accounting Officer)
/s/ Michael A. Habetz * Vice President, Manager of Operations September 23, 1997
- --------------------------- and Director
Michael A. Habetz
/s/ Randolph R. Birkman* Director September 23, 1997
- ---------------------------
Randolph R. Birkman
/s/ John W. Sinders* Director September 23, 1997
- ---------------------------
John W. Sinders
</TABLE>
* By: /s/ Marvin J. Gay
-------------------
Marvin J. Gay
(Attorney in-fact for person indicated)
II-4
<PAGE>
EXHIBIT 5
September 23, 1997
Forman Petroleum Corporation
650 Poydras Street, Suite 2200
New Orleans, Louisiana 70130-6101
Dear Sirs:
We have acted as counsel for Forman Petroleum Corporation, a Louisiana
corporation (the "Company"), in connection with the proposed offer by the
Company to exchange (the "Exchange Offer") for all outstanding 13.5% Senior
Secured Notes Due 2004, Series A ($70 million principal amount outstanding) (the
"Old Notes") its 13.5% Senior Secured Notes Due 2004, Series B ($70 million
principal amount) (the "Exchange Notes"). The Old Notes have been, and the
Exchange Notes will be, issued pursuant to an Indenture dated as of June 3, 1997
(the "Indenture"), between the Company and U.S. Trust Company of Texas, N.A., as
trustee (the "Trustee").
In connection with such matters we have examined the Indenture, the form of
Registration Statement on Form S-4, to be filed by the Company with the
Securities and Exchange Commission, for the registration of the Exchange Notes
(the "Securities") under the Securities Act of 1933 (the Registration Statement,
as amended at the time it becomes effective, being referred to as the
"Registration Statement") and such corporate records of the Company,
certificates of public officials and such other documents as we have deemed
necessary or appropriate for the purpose of this opinion.
Based upon the foregoing, subject to the qualifications hereinafter set
forth, and having regard for such legal considerations as we deem relevant, we
are of the opinion that the Securities proposed to be issued pursuant to the
Exchange Offer have been duly authorized for issuance and, subject to the
Registration Statement becoming effective under the Securities Act of 1933, and
to compliance with any applicable state securities laws, when issued, delivered
and sold in accordance with the Exchange Offer and the Indenture, will be valid
and legally binding obligations of the Company, enforceable against the Company
in accordance with their respective terms.
The opinions expressed herein are subject to the following: The
enforceability of the Securities may be limited or affected by (i) bankruptcy,
insolvency, reorganization, moratorium, liquidation, rearrangement, fraudulent
transfer, fraudulent conveyance and other similar laws
<PAGE>
(including court decisions) now or hereafter in effect and affecting the rights
and remedies of creditors generally or providing for the relief of debtors, (ii)
the refusal of a particular court to grant equitable remedies, including without
limitation specific performance and injunctive relief, and (iii) general
principles of equity (regardless of whether such remedies are sought in a
proceeding in equity or at law).
The opinions express herein are limited exclusively to the laws of the
State of New York and the General Corporation Law of the State of Louisiana.
We hereby consent to the filing of this opinion as an Exhibit to the
Registration Statement and to the reference to Vinson & Elkins L.L.P. under
"Legal Matters" in the Prospectus forming a part of the Registration Statement.
In giving this consent, we do not thereby admit that we are within the category
of persons whose consent is required under Section 7 of the Securities Act of
1933 and the rules and regulations of the Securities and Exchange Commission
thereunder.
Very truly yours,
VINSON & ELKINS L.L.P.
<PAGE>
EXHIBIT 8
[VINSON & ELKINS L.L.P. Letterhead]
September 23, 1997
Forman Petroleum Corporation
650 Poydras Street, Suite 2200
New Orleans, Louisiana 70130-6101
Gentlemen:
We participated in the preparation of the Registration Statement on Form S-4
dated July 16, 1997 (and all subsequent amendments) filed with the Securities
and Exchange Commission by Forman Petroleum Corporation (the "Company") with
respect to the Company's 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
"Registration Statement")/1/, including the discussion set forth in the
Registration Statement under the heading "Certain United States Federal Income
Tax Considerations". The discussion and the legal conclusions with respect to
United States federal income tax matters set forth therein is our opinion with
respect to the matters discussed therein, and we believe the discussion is
accurate and complete in all material respects.
Our opinion is based and conditioned upon the initial and continuing
accuracy of the facts and assumptions set forth in the Registration Statement.
In addition, our opinion is based upon, assumes the correctness of, the
Company's allocation of the Note Unit issue price between the Old Notes and the
Note Warrants. Our opinion is also based upon provisions of the United States
Internal Revenue Code of 1986, as amended, regulations promulgated or proposed
thereunder and interpretations thereof by the Internal Revenue Service and the
courts, all as of the date of the Registration Statement, all of which are
subject to change with prospective or retroactive effect, and our opinion could
be adversely affected or rendered obsolete by any such change.
- -------------------
/1/All capitalized terms used but not defined herein have the meaning
ascribed to them in the Registration Statement.
<PAGE>
We hereby consent to the use of our name in the Registration Statement and
to the filing of this opinion as part of the Registration Statement. This
consent does not constitute an admission that we are "experts" within the
meaning of such term as used in the Securities Act of 1933.
Very truly yours,
VINSON & ELKINS L.L.P.
<PAGE>
EXHIBIT 23(ii)
CONSENT OF ARTHUR ANDERSEN LLP
As independent public accountants, we hereby consent to the use in this
registration statement (file # 333-31375) of our report dual dated March 26,
1997 and June 3, 1997 included herein and to all references to our Firm included
in this registration statement.
ARTHUR ANDERSEN L.L.P.
New Orleans, Louisiana
September 23, 1997
