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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 8, 1997
REGISTRATION NO. 333-31625
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------------
AMENDMENT NO. 2
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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PETSEC ENERGY INC.
(Exact name of Registrant as specified in its charter)
NEVADA 1311 84-1157202
(State of other (Primary Standard (I.R.S. Employer
jurisdiction of Industrial Classification Identification No.)
incorporation Code Number)
or organization)
143 RIDGEWAY DRIVE, SUITE 113 JEFFREY H. WARREN
LAFAYETTE, LA 70503-3402 VICE PRESIDENT AND SECRETARY
(318) 989-1942 143 RIDGEWAY DRIVE, SUITE 113
(Address, including zip code, and LAFAYETTE, LA 70503-3402
telephone number, including area code, of (318) 989-1942
registrant's principal executive offices) (Name, Address, including zip
code, and telephone number,
including area code, of agent
for service)
Copy to:
ALAN P. BADEN
VINSON & ELKINS L.L.P.
2300 FIRST CITY TOWER
HOUSTON, TEXAS 77002-6760
(713) 758-2430
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. |_|
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CALCULATION OF REGISTRATION FEE
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TITLE OF EACH CLASS OF AMOUNT TO BE AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED REGISTRATION FEE
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9 1/2% Senior Subordinated Notes due 2007...................... $100,000,000 $30,303 (1)
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(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 OCTOBER 8, 1997
PROSPECTUS
PETSEC ENERGY INC.
OFFER TO EXCHANGE
9 1/2% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
FOR ALL OUTSTANDING 9 1/2% SERIES A SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON _________, 1997, UNLESS EXTENDED
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Petsec Energy Inc., a Nevada 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 9 1/2% Series B Senior Subordinated Notes due 2007 (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 9 1/2% Series A Senior Subordinated Notes
due 2007 (the "Old Notes"), of which $100,000,000 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 and registration rights 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 subordinated obligations of the Company and are
subordinated in right of payment to all existing and future Senior Indebtedness
(as defined herein) of the Company, including indebtedness under the Bank
Credit Facility (as defined herein), pari passu in right of payment with all
future senior subordinated indebtedness of the Company and senior in right of
payment to all existing and future subordinated indebtedness of the Company.
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;
Amendment." 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 maximum period of
time that the Exchange Offer will remain open is 60 days from the date the
Registration Statement is declared effective, including all extensions. 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)
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SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROSPECTUS FOR A
DISCUSSION OF CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN
INVESTMENT IN THE NOTES.
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
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The Exchange Notes will bear interest at the rate of 9 1/2% per annum,
payable semi-annually on June 15 aNd December 15 of each year, commencing
December 15, 1997, to holders of record on the June 1 and December 1
immediately preceding such interest payment date. Holders of Exchange Notes of
record on December 1, 1997 will receive interest on December 15, 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 13,
1997, 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 13, 1997 to the Initial
Purchasers (as defined herein) in a transaction not registered under the
Securities Act in reliance upon Section 4(2) of the Securities Act. The Old
Notes were thereupon offered and sold by the Initial Purchasers 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) 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 the
Initial Purchasers in connection with the offering of the Old Notes. See "The
Exchange Offer" and "Description of Notes -- Registration Rights; Liquidated
Damages."
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 may be a statutory underwriter and 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. The Company has consented to the use of this Prospectus and any
amendment or supplement to this Prospectus by any broker-dealer for use in
connection with any such resale for a period of up to 180 days after
consummation of the Exchange Offer. See "Plan of Distribution."
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.
Merrill Lynch & Co., Donaldson, Lufkin & Jenrette Securities Corporation and
Salomon Brothers Inc (together, the "Initial Purchasers") have informed the
Company that they currently intend to make a market for the Exchange Notes.
However, they are 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.
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THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT
SURRENDERS FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH
THE EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH
THE SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
TABLE OF CONTENTS
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Available Information..................................................... 3
Prospectus Summary........................................................ 5
Forward Looking Statements................................................ 15
Risk Factors.............................................................. 15
The Company............................................................... 21
Private Placement......................................................... 21
Use of Proceeds........................................................... 21
Capitalization............................................................ 22
Selected Financial Data................................................... 23
Management's Discussion and Analysis of Financial
Condition and Results of Operations.............................. 24
Business.................................................................. 30
Management................................................................ 46
Certain Affiliate Transactions............................................ 48
The Exchange Offer........................................................ 49
Description of Notes...................................................... 55
Exchange Offer; Registration Rights....................................... 88
Plan of Distribution...................................................... 90
Transfer Restrictions on Old Notes........................................ 90
Legal Matters............................................................. 92
Experts................................................................... 92
Glossary of Oil and Gas Terms............................................. 94
Index to Financial Statements............................................. F-1
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AVAILABLE INFORMATION
The Company is not subject to the informational requirements of the
Securities Exchange Act of 1934, as amended (the "Exchange Act"). However, the
Company has agreed under the Indenture to file with the Commission, to the
extent such filings are accepted by the Commission, 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(d) of the Exchange Act. Such
reports and other information 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, proxy and
information statements and other information filed electronically by the
Company with the Commission which can be accessed over the Internet at
http://www.sec.gov. 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 the
Secretary of the Company, 143 Ridgeway Drive, Suite 113, Lafayette, Louisiana
70503-3402.
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
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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.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED 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.
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SUMMARY
The following summary is qualified in its entirety by the more detailed
information and financial statements (including the notes thereto) appearing
elsewhere in this Prospectus. References in this Prospectus to the "Company"
refer to Petsec Energy Inc. References to "Petsec Energy Ltd" or "Parent" refer
to the Company's parent. Certain terms relating to the oil and gas business are
defined in "Glossary of Oil and Gas Terms." Prospective investors should
carefully consider the matters discussed under the caption "Risk Factors."
THE COMPANY
GENERAL
Petsec Energy Inc. (the "Company") is an independent exploration and
production company operating in the shallow waters of the central and western
Gulf of Mexico. The Company is the principal operating subsidiary of Petsec
Energy Ltd, an Australian public company that owns 100% of the Company's common
stock and that has American Depositary Shares ("ADSs") listed on the Nasdaq
National Market (symbol: PSALY). For the five year period ended December 31,
1996, the Company achieved compound annual growth rates for both production and
Adjusted EBITDA (as defined in footnote 1 on page 23) of 98%. Although the
Company believes these growth rates are significant, there can be no assurance
that these growth rates will continue in the future. The Company has a
significant base of operations consisting of 100% working interests in 30 lease
blocks, a 43.33% working interest in another lease block and seven production
facilities. For the year ended December 31, 1996 and for the six months ended
June 30, 1997, the Company generated revenues of $67.0 million and $59.0
million, respectively, and Adjusted EBITDA of $55.6 million and $51.9 million,
respectively. Adjusted EBITDA is presented because it is a widely accepted
measure of an exploration and production Company's ability to service and incur
debt. As of December 31, 1996, the Company's estimated net proved reserves were
123.2 Bcfe (approximately 59% of which were attributable to natural gas), with
a PV10 of approximately $308 million. See "Summary -- Reserve and Operating
Data." The principal executive offices of the Company are located at 143
Ridgeway Drive, Suite 113, Lafayette, Louisiana 70503-3402, and its telephone
number at such offices is (318) 989-1942.
COMPANY STRENGTHS AND BUSINESS STRATEGY
The Company's strengths include the experience of its personnel, its large
inventory of drilling prospects defined by 3-D seismic data, and the operating
flexibility achieved through 100% ownership of leases. The Company has
assembled a team of experienced geoscientists, engineers and other technical
personnel, with an extensive base of knowledge regarding geophysical processing
and interpretation of data, as well as field operating practices in the Gulf of
Mexico. This base of knowledge has led to the development of over 50 prospects
on its existing acreage and, the Company believes, provides it with a
competitive advantage in evaluating the potential of leases proposed for
acquisitions. The Company has developed a focused, integrated business
strategy, which it believes capitalizes on its strengths and which incorporates
the following elements:
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FOCUS ON THE SHALLOW WATERS OF THE GULF OF MEXICO. Since beginning
operations in the Gulf of Mexico, the Company has achieved significant growth
in production and reserves by concentrating its exploration and development
efforts in the shallow federal and state waters (400 feet or less) in the
region. The Company attributes this growth to the quality of its inventory of
lease blocks and the location of these blocks in regions where the Company has
accumulated a substantial base of technical and operating experience.
CONTROL OF OPERATIONS AND COSTS. Over the last three years, the Company
has consistently been able to lower lease operating expenses and general and
administrative expense per unit of production, concurrent with increases in
production, through a strict control over operations and costs. For the three
years ended December 31, 1996, the total of these costs per Mcfe was $0.87,
$0.68 and $0.46, respectively. For the six years ended December 31, 1996, the
Company had an average finding and development cost of $1.09 per Mcfe of proved
reserves.
APPLICATION OF ADVANCED TECHNOLOGIES. The Company relies significantly on
advanced exploration technologies, such as 3-D seismic and time depth
migration, in its lease acquisition assessment and its exploration and
development activities. Historically, the Company has acquired and evaluated
3-D seismic data on leases prior to acquisition in order to reduce the risk
associated with the acquisition. The Company's geotechnical staff has
substantial experience in analyzing 3-D seismic data, which has enabled the
Company to identify multiple exploration and development prospects in both
mature producing fields where advanced technology has not been applied and in
unexplored areas.
EXPANSION OF EXPLORATION AND DEVELOPMENT PROSPECTS. The Company intends to
continue to expand its inventory of exploration and development prospects
through an active lease acquisition and exploitation program. The Company has
in excess of 10 development and 40 exploratory prospects that it expects to
drill over the next four years. For 1997, the Company has allocated a capital
expenditure budget of $140 million, 70% of which will be spent on exploration
and development drilling activities. In addition to the acreage the Company
currently owns, the Company actively participates in Outer Continental Shelf
("OCS") and state lease sales to build its inventory of lease blocks.
RISK FACTORS
Prospective investors in the Notes should carefully consider all of the
information in this Prospectus and should evaluate the specific factors set
forth under "Risk Factors" for risks involved with an investment in the Notes.
In particular, investors should consider the following factors; (i) the
Company's substantial level of indebtedness, (ii) the effect of volatile oil and
gas prices on the Company, (iii) the availability of markets for the Company's
production, (iv) the uncertainty of estimates of oil and gas reserves, (v) the
Company's ability to find, develop or acquire additional reserves, (vi)
substantial capital requirements, (vii) industry risks, (viii) regulation, and
(ix) subordination of the notes.
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THE PRIVATE PLACEMENT AND USE OF PROCEEDS
The Old Notes were sold by the Company on June 13, 1997 to the Initial
Purchasers and were thereupon offered and sold by the Initial Purchasers only
to certain qualified buyers. A portion of the $96.6 million net proceeds
received by the Company in connection with the sale of the Old Notes was used
to repay all borrowings outstanding under the Bank Credit Facility. It is
anticipated that the remainder of the net proceeds will be used to provide
working capital to the Company to fund further exploration and development of
the Company's oil and gas properties, the acquisition of lease blocks, and
other general corporate purposes. See "Private Placement" and "Capitalization."
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $100,000,000 principal
amount of Exchange Notes for up to $100,000,000 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 the Notes."
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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, $100,000,000 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.
Resale................................... The Company believes that the Exchange Notes issued pursuant to the
Exchange Offer generally will be freely transferable by the holders
thereof without registration or any prospectus delivery requirement
under the Securities Act, except for certain Restricted Holders who
may be required to deliver copies of this Prospectus in connection
with any resale of the Exchange Notes issued in exchange for such
Old Notes. See "The Exchange Offer-- General" and "Plan of
Distribution."
Expiration Date.......................... 5:00 p.m., New York City time, on ________, 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 semi-annually on
June 15 and December 15 of each year, commencing December 15,
1997. Holders of Exchange Notes of record on December 1, 1997
will receive interest on December 15, 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 13,
1997, to the date of exchange thereof. Consequently, assuming the
Exchange Offer is consummated prior to the record date in respect of
the December 15, 1997 interest payment for the Old Notes, holders
who exchange their Old Notes for Exchange Notes will receive the
same interest payment on December 15, 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."
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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 in "The Exchange Offer--
Guaranteed Delivery Procedures."
Withdrawal Rights........................ Tenders of Old Notes may be withdrawn at any time prior to 5:00
p.m., New York City time, on the business day prior to the Expiration
Date, unless previously accepted for exchange. See "The Exchange
Offer -- Withdrawal of Tenders."
Termination of the Exchange Offer........ The Company may terminate the Exchange Offer if it determines that
the Exchange Offer violates any applicable law or interpretation of
the staff of the SEC. Holders of Old Notes will have certain rights
against the Company under the Registration Rights Agreement should
the Company fail to consummate the Exchange Offer. See "The
Exchange Offer-- Termination" and "Description of the Notes--
Registration Rights; Liquidated Damages."
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."
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Exchange Agent........................... The Bank of New York is serving as exchange agent (the "Exchange
Agent") in connection with the Exchange Offer. The mailing address
of the Exchange Agent is: The Bank of New York, 101 Barclay
Street, 7th Floor, Reorganization Section, New York, New York
10286, Attention: Henry Lopez. Hand deliveries and deliveries by
overnight courier should be sent to: The Bank of New York, 101
Barclay Street, New York, NY 10286, Corporate Trust Services
Window, Ground Level, Attention: Reorganization Section. For
information with respect to the Exchange Offer, the telephone number
for the Exchange Agent is (212) 815-2742 and the facsimile number
for the Exchange Agent is (212) 815-6639. 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. See
"Use of Proceeds." For a discussion of the use of the net proceeds
received by the Company from the sale of the Old Notes, see "Private
Placement."
TERMS OF THE NOTES
Notes Outstanding........................ $100,000,000 aggregate principal amount of 9 1/2% Series A Senior
Subordinated Notes due 2007.
Maturity Date............................ June 15, 2007.
Interest Payment Dates................... Interest on the Notes will be payable semi-annually in arrears on
June 15 and December 15 of each year, commencing December 15,
1997.
Optional Redemption...................... The Notes will be redeemable at the option of the Company, in whole
or in part, at any time on or after June 15, 2002, at the redemption
prices set forth herein, together with accrued and unpaid interest, if
any, to the date of redemption. In addition, at any time on or prior to
June 15, 2000, the Company may redeem up to 33=% of the Notes
with the net cash proceeds of one or more Public Equity Offerings, at
a redemption price equal to 109.5% of the principal amount to be
redeemed, together with accrued and unpaid interest, if any, to the
date of redemption, provided that at least $66,600,000 of the
aggregate principal amount of the Notes remains outstanding after
each such redemption. See "Description of the Notes--
Redemption-- Optional Redemption."
Mandatory Redemption..................... None.
Guarantees............................... The Company currently has no subsidiaries. Under certain
circumstances, however, the Company's payment obligations under
the Notes may be jointly and severally guaranteed on a senior
subordinated basis (the "Subsidiary Guarantees") by certain of the
Company's future Restricted Subsidiaries (the "Subsidiary
Guarantors"). See "Risk Factors-- Fraudulent Conveyance
Considerations Relating to Subsidiary Guarantees" and "Description
of the Notes-- Future Subsidiary Guarantees of the Notes."
Change of Control........................ Upon the occurrence of a Change of Control, each Holder may
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,
</TABLE>
9
<PAGE> 11
<TABLE>
<S> <C>
together with accrued and unpaid interest, if any, to the date of
purchase. See "Description of the Notes -- Certain Covenants --
Change of Control."
Ranking.................................. The Notes will be unsecured senior subordinated obligations of the
Company that will be subordinated in right of payment to all existing
and future Senior Indebtedness of the Company, pari passu with all
future senior subordinated indebtedness of the Company and senior
in right of payment to all existing and future Subordinated
Indebtedness of the Company. As of May 31, 1997, after giving
effect to the Offering, the Company would have had no outstanding
indebtedness that effectively would rank senior to the Notes other
than $9.5 million in reimbursement obligations for letters of credit
outstanding under the Company's revolving credit facility (the "Bank
Credit Facility"). Subject to certain limitations set forth in the
Indenture, the Company and its subsidiaries may incur additional
indebtedness. See "Capitalization," "Description of the Notes" and
"Management's Discussion and Analysis of Financial Condition and
Results of Operations-- Liquidity and Capital Resources."
Certain Covenants........................ The Indenture pursuant to which the Notes (and, if issued, the
Exchange Notes) will be issued (the "Indenture") will contain certain
covenants, including, without limitation, covenants with respect to the
following matters: (i) limitations on Indebtedness; (ii) limitations on
Restricted Payments; (iii) limitations on issuances and sales of
Restricted Subsidiary stock; (iv) limitations on transactions with
Affiliates; (v) limitations on Liens; (vi) limitations on disposition of
proceeds of Asset Sales; (vii) limitations on Non-Guarantor
Restricted Subsidiaries; (viii) limitations on dividends and other
payment restrictions affecting Restricted Subsidiaries; (ix) limitations
on other Senior Subordinated Indebtedness; (x) limitations on conduct
of business; and (xi) reports. See "Description of the Notes--
Certain Covenants."
Use of Proceeds.......................... The net proceeds to the Company from the Offering will be used to
repay borrowings under the Bank Credit Facility and for general
corporate purposes. See "Use of Proceeds."
Exchange Offer;
Registration Rights.................... Pursuant to a Registration Rights Agreement by and among the Company and
the Initial Purchasers (the "Registration Rights Agreement"), the
Company agreed to use its best efforts (i) to Make the 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 the Exchange
Notes that are identical in all material respects to the 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 Notes (the "Shelf
Registration Statement") that would include a prospectus under cover of
which holders would be free to offer and sell their Notes from time to
time. The Company has agreed to use its best efforts to file with the
Commission a registration statement relating to the Exchange Offer (the
"Exchange Offer Registration Statement") within 60 days after the date
of issuance of the Notes (the "Issue Date"), 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
</TABLE>
10
<PAGE> 12
<TABLE>
<S> <C>
of the Shelf Registration Statement, to cause such to remain effective
until the second anniversary of its effective 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 "Exchange Offer; Registration
Rights."
Absence of a Public
Market for the Notes................... The Exchange Notes will be a new issue of securities for which there is
currently no market. The Company does not intend to apply for listing
of the Notes on any securities exchange or stock market. Although the
Initial Purchasers have informed the Company that they each currently
intend to make a market in the Notes and, if issued, the Exchange Notes,
they are not obligated to do so, and any such market making may be
discontinued at any time without notice. Accordingly, there can be no
assurance as to the development or liquidity of any market for the
Notes. The Old Notes currently trade in the PORTAL market.
</TABLE>
11
<PAGE> 13
SUMMARY FINANCIAL DATA
The following table sets forth summary historical financial data for the
Company as of and for each of the periods indicated. The financial data, other
than the ratio of Adjusted EBITDA to pro forma interest expense and the ratio
of pro forma debt to Adjusted EBITDA, as of and for the three years ended
December 31, 1996, are derived from the financial statements of the Company
audited by KPMG Peat Marwick LLP, independent accountants. The financial data,
other than the ratio of Adjusted EBITDA to pro forma interest expense and the
ratio of pro forma debt to Adjusted EBITDA, for the six months ended June 30,
1996 and 1997 are derived from the Company's unaudited financial statements,
which, in the opinion of management, include all adjustments (which consist
only of normal recurring adjustments) necessary for a fair presentation of the
financial position and results of operations of the Company for such interim
periods. The following information should be read in conjunction with
"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,
------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas sales .............................................. $ 5,172 $ 11,829 $ 15,098 $ 30,462 $ 67,027
Lease operating expenses ....................................... 809 2,782 3,855 4,757 6,161
Depletion, depreciation and amortization ....................... 1,379 4,113 4,291 9,256 29,639
Exploration expenditures, including dry hole costs ............. 1,982 2,603 3,020 3,396 7,061
General and administrative ..................................... 775 1,421 2,046 4,502 5,259
Income from operations ..................................... 227 910 1,886 8,551 18,426
Interest expense ............................................... (109) (347) (959) (2,452) (3,369)
Interest income ................................................ 9 19 14 64 172
Net income ................................................. $ 127 $ 582 $ 845 $ 6,973 $ 8,924
OTHER FINANCIAL DATA AND SELECTED RATIOS:
Adjusted EBITDA (1) ............................................ $ 3,588 $ 7,626 $ 9,142 $ 21,238 $ 55,607
Adjusted EBITDA margin (2) ..................................... 69% 64% 61% 70% 83%
Capital and exploration expenditures ........................... $ 11,093 $ 12,739 $ 22,449 $ 56,187 $ 93,000
Ratio of Adjusted EBITDA to interest expense ................... 32.9x 22.0x 9.5x 8.7x 16.5x
Ratio of long-term debt to Adjusted EBITDA ..................... 4.5x 2.8x 2.6x 2.7x 1.7x
Ratio of earnings to fixed charges (3) ......................... 2.2x 2.7x 1.9x 5.3x 5.5x
Net cash provided by operating activities ...................... $ 1,235 $ 4,650 $10,475 $21,561 $47,297
Net cash used in investing activities .......................... 9,112 10,385 19,429 47,836 85,939
Net cash provided by financing activities ...................... 8,934 5,015 9,078 27,158 37,566
PRO FORMA SELECTED RATIOS:
Ratio of Adjusted EBITDA to pro forma interest expense(4) ...... -- -- -- -- 5.3x
Ratio of pro forma debt to Adjusted EBITDA (4)(5) .............. -- -- -- -- 2.0x
Ratio of pro forma earnings to fixed charges(5) ................ -- -- -- -- 1.8x
<CAPTION>
SIX MONTHS ENDED
JUNE 30
---------------------
1996 1997
-------- --------
<S> <C> <C>
INCOME STATEMENT DATA:
Oil and gas sales .............................................. $ 29,506 $ 59,302
Lease operating expenses ....................................... 2,882 4,763
Depletion, depreciation and amortization ....................... 14,210 29,425
Exploration expenditures, including dry hole costs ............. 1,812 4,688
General and administrative ..................................... 2,800 2,606
Income from operations ..................................... 7,802 17,402
Interest expense ............................................... (1,870) (2,099)
Interest income ................................................ 36 203
Net income ................................................. $ 3,180 $ 10,566
OTHER FINANCIAL DATA AND SELECTED RATIOS:
Adjusted EBITDA (1) ............................................ $ 23,824 $ 51,933
Adjusted EBITDA margin (2) ..................................... 81% 88%
Capital and exploration expenditures ........................... $ 39,559 $ 76,658
Ratio of Adjusted EBITDA to interest expense ................... 12.7x 24.7x
Ratio of long-term debt to Adjusted EBITDA ..................... 2.0x(3) 1.7x(3)
Ratio of earnings to fixed charges (4) ......................... 4.2x 8.5x
Net cash provided by operating activities ...................... $ 18,282 $ 51,687
Net cash used in investing activities .......................... 37,749 74,242
Net cash provided by financing activities ...................... 19,650 60,982
PRO FORMA SELECTED RATIOS:
Ratio of Adjusted EBITDA to pro forma interest expense(5) ...... -- 8.7x
Ratio of pro forma debt to Adjusted EBITDA (5) ................. -- 1.7x(6)
Ratio of pro forma earnings to fixed charges(5) ................ -- 3.2x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
----------------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------- ------- ------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets................................... $14,960 $21,894 $36,969 $89,110 $146,145 $112,401 $230,407
Bank credit facility........................... 4,500 9,766 12,825 32,350 37,000 52,000 --
Senior subordinated notes ..................... -- -- -- -- -- -- 99,618
Subordinated shareholder loan(7)............... 11,637 11,386 11,386 25,038 57,954 25,038 39,453
------ ------- ------- ------- -------- -------- --------
Total long-term debt....................... 16,137 21,152 $24,211 57,388 94,954 77,038 139,071
Shareholder's equity(7)........................ (2,770) (2,188) (1,342) 5,631 15,036 8,811 45,614
</TABLE>
- ------------------
(1) Adjusted EBITDA is defined as earnings before interest, taxes, exploration
expenditures, stock compensation expense, depletion, depreciation and
amortization and other non-cash charges and is presented because it is a
widely accepted financial indication of an exploration and production
company's ability to service and incur debt. Adjusted EBITDA should not be
considered as an alternative to earnings (loss) as an indicator of the
Company's operating performance or to cash flows as a measure of
liquidity. The amount of exploration expenditures, stock compensation
expense, and other non-cash charges was $2.0 million, $2.6 million,
$3.0 million, $3.4 million, and $7.5 million for the years ended December
31, 1992, 1993, 1994, 1995, and 1996, respectively, and $1.8 million and
$5.1 million for the six months ended June 30, 1996 and 1997, respectively.
(2) Represents Adjusted EBITDA divided by oil and gas sales.
(3) For the six months ended June 30, 1996 and 1997, Adjusted EBITDA was
calculated using data from the 12 months ended June 30, 1996 and
1997, respectively.
(4) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income (loss) before tax plus fixed charges. Fixed
charges consist of interest expense.
(5) Gives effect to the Offering and the application of the net proceeds
therefrom as described under "Use of Proceeds" as if such transaction had
occurred at the beginning of the period. Also gives effect to (i) a
recapitalization of $20 million of subordinated shareholder loan as equity
to be effective prior to the closing of the Offering and (ii) pro forma
interest expense on the outstanding balance of such loan.
(6) For the six months ended June 30, 1997, Adjusted EBITDA was calculated
using data from the 12 months ended June 30, 1997.
(7) $20 million of such subordinated shareholder loan was recapitalized as
equity effective June 1, 1997. See "Capitalization."
12
<PAGE> 14
SUMMARY RESERVE AND OPERATING DATA
The following tables set forth summary information with respect to the
Company's estimated net proved oil and gas reserves as of June 30, 1993, 1994
and 1995 and December 31, 1995 and 1996 and the Company's operating data for
the years ended December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1996 and 1997. In 1996, the Company changed its fiscal year end from
June 30 to December 31, and consequently, the reserves presented below reflect
the periods for which the Company has reserve reports. All information in this
Prospectus relating to estimated net proved oil and gas reserves and the
estimated future net revenues attributable thereto is based upon the reserve
reports (the "Ryder Scott Reports") prepared by Ryder Scott Company,
independent petroleum engineers. All calculations of estimated net proved
reserves have been made in accordance with the rules and regulations of the
Commission and, except as otherwise indicated, give no effect to federal or
state income taxes otherwise attributable to estimated future net revenues from
the sale of oil and gas. The present value of estimated future net revenues has
been calculated using a discount factor of 10%. See "Risk Factors --
Uncertainty of Estimates of Oil and Gas Reserves," "Business -- Oil and Gas
Reserves" and "Reserve Engineers."
<TABLE>
<CAPTION>
AS OF
AS OF JUNE 30, DECEMBER 31,
---------------------------------- ---------------------
1993 1994 1995 1995 1996
-------- -------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total net proved:
Gas (Mmcf)......................................... 11,755 12,830 20,327 49,747 73,291
Oil (Mbbls)........................................ 1,136 2,650 6,881 7,172 8,318
Total (Mmcfe)...................................... 18,571 28,730 61,613 92,779 123,199
NET PROVED DEVELOPED:
Gas (Mmcf)......................................... 11,755 12,830 12,003 25,852 43,133
Oil (Mbbls)........................................ 1,136 2,650 4,076 6,962 6,670
Total (Mmcfe)...................................... 18,571 28,730 36,459 67,624 83,153
Estimated future net revenues before income taxes
(in thousands)........................................ $ 29,387 $ 44,480 $ 102,517 $ 190,703 $ 372,980
Present value of estimated future net revenues
before income taxes (in thousands)(1)(2).............. $ 24,653 $ 34,990 $ 76,632 $ 153,648 $ 308,226
Standardized measure of discounted future
net cash flows (in thousands)(3)...................... $ 21,509 $ 30,122 $ 65,136 $ 131,488 $ 223,381
</TABLE>
- ------------------
(1) The present value of estimated future net revenues attributable to the
Company's reserves was prepared using constant prices, including the
effects of hedging, as of the calculation date, discounted at 10% per
annum on a pre-tax basis.
(2) The December 31, 1996 amount was calculated using an average oil price of
$25.09 per barrel and an average gas price of $3.68 per Mcf, both adjusted
to reflect the effects of hedging. Using an oil price of $20.00 per barrel
and a gas price of $2.00 per Mcf at December 31, 1996, the discounted
present value of cash flows before income taxes of the Company's proved
reserves as of December 31, 1996, as estimated by Ryder Scott, would have
been $175 million.
(3) The standardized measure of discounted future net cash flows represents
the present value of estimated future net revenues after income tax
discounted at 10%.
13
<PAGE> 15
OPERATING DATA:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------- ----------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Net production:
Gas (Mmcf)......................................... 4,028 7,519 11,722 5,648 12,084
Oil (Mbbls)........................................ 449 1,014 2,150 1,005 1,549
Total (Mmcfe).................................. 6,722 13,603 24,622 11,678 21,378
Net sales data (in thousands):
Gas................................................ $ 8,667 $ 13,863 $ 23,056 $ 10,440 $ 27,992
Oil................................................ $ 6,431 $ 16,599 $ 43,971 $ 19,066 $ 31,310
Total Oil and Gas Sales........................ $ 15,098 $ 30,462 $ 67,027 $ 29,506 $ 59,302
Average sales prices(1):
Gas (per Mcf)...................................... $ 2.15 $ 1.84 $ 1.97 $ 1.85 $ 2.32
Oil (per Bbls)..................................... $ 14.32 $ 16.37 $ 20.45 $ 18.97 $ 20.21
Total (per Mcfe)............................... $ 2.25 $ 2.24 $ 2.72 $ 2.53 $ 2.77
Average costs (per Mcfe):
Lease operating expenses........................... $ 0.57 $ 0.35 $ 0.25 $ 0.25 $ 0.22
General and administrative expenses................ $ 0.30 $ 0.33 $ 0.21 $ 0.24 $ 0.12
</TABLE>
- ------------------
(1) Includes effects of hedging activities. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations."
RISK FACTORS
Prospective investors in the Notes should carefully consider all of the
information set forth in this Prospectus and, in particular, should evaluate
the specific factors set forth under "Risk Factors" for risks involved with an
investment in the Notes.
14
<PAGE> 16
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning
of Section 27A of the Securities Act and Section 21E of the Securities Exchange
Act of 1934, as amended (the "Exchange Act"). 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"
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.
RISK FACTORS
In addition to the other information set forth elsewhere in this
Prospectus, the following factors should be carefully considered when
evaluating an investment in the Exchange Notes.
SUBSTANTIAL LEVERAGE
As of May 31, 1997, as adjusted for the issuance of the Notes and the
application of the proceeds therefrom and after giving effect to a
recapitalization of $20 million of a portion of the subordinated shareholder
loan as additional paid in capital, the Company's long-term debt would have
been $139.2 million, of which $39.2 million was a subordinated shareholder
loan. See "Capitalization." In addition, the Indenture will allow the Company
to incur additional Indebtedness on a secured basis. As of May 31, 1997, after
giving effect to the Offering and the application of the net proceeds
therefrom, the Company estimates that it would have had $41.5 million committed
but undrawn under the Company's Bank Credit Facility, subject to the borrowing
base formula at the time of draw.
The Company's level of indebtedness will have several important effects on
its operations, including (i) a substantial portion of the Company's cash flow
from operations will be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) the covenants
contained in the Indenture 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 (iii) 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."
VOLATILITY OF OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION
The Company's revenue, profitability and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. 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
15
<PAGE> 17
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 oil and gas imports and overall economic conditions.
From time to time, oil and gas prices have been depressed by excess domestic
and imported supplies. There can be no assurance that current price levels will
be sustained. 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 and may reduce the amount of the Company's oil and natural gas that
can be produced economically. Additionally, substantially all of the Company's
sales of oil and natural gas are made in the spot market or pursuant to
contracts based on spot market prices and not pursuant to long-term fixed price
contracts. With the objective of reducing price risk, the Company enters into
hedging transactions with respect to a portion of its expected future
production. There can be no assurance, however, that such hedging transactions
will reduce risk or mitigate the effect of any substantial or extended decline
in oil or natural gas prices. Any substantial or extended decline in the prices
of oil or natural gas would have a material adverse effect on the Company's
financial condition and results of operations. Since December 31, 1996, spot
prices at Henry Hub for gas have declined from $2.46 per Mmbtu to $2.26 per
Mmbtu at May 15, 1997. During the same period, the West Texas Intermediate spot
price for oil has declined from $25.92 per barrel to $21.30 per barrel.
In addition, the marketability of the Company's production depends upon
the availability and capacity of gas gathering systems, pipelines and
processing facilities. Federal and state regulation of oil and gas production
and transportation, general economic conditions and changes in supply and
demand all could adversely affect the Company's ability to produce and market
its oil and natural gas. If market factors were to change dramatically, the
financial impact on the Company could be substantial. The availability of
markets and the volatility of product prices are beyond the control of the
Company and represent a significant risk. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Overview" and
"Business -- Oil and Gas Marketing."
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
This Prospectus contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom based upon the Ryder
Scott Reports that rely upon various assumptions, including assumptions
required by the Commission as to oil and gas prices, drilling and operating
expenses, capital expenditures, taxes and availability of funds. The process of
estimating oil and gas reserves is complex, requiring significant decisions and
assumptions in the evaluation of available geological, geophysical, engineering
and economic data for each reservoir. As a result, such estimates are
inherently imprecise. Actual future production, oil and gas prices, revenues,
taxes, development expenditures, operating expenses and quantities of
recoverable oil and gas reserves may vary substantially from those estimated in
the Ryder Scott Reports. Any significant variance in these assumptions could
materially affect the estimated quantity and value of reserves set forth in
this Prospectus. In addition, the Company's proved reserves may be subject to
downward or upward revision based upon production history, results of future
exploration and development, prevailing oil and gas prices and other factors,
many of which are beyond the Company's control. Actual production, revenues,
taxes, development expenditures and operating expenses with respect to the
Company's reserves will likely vary from the estimates used, and such variances
may be material.
Approximately 33% of the Company's total proved reserves at December 31,
1996 were undeveloped, which are by their nature less certain. Recovery of such
reserves will require significant capital expenditures and successful drilling
operations. The reserve data set forth in the Ryder Scott Report assumes that
substantial capital expenditures by the Company will be required to develop
such reserves. Although cost and reserve estimates attributable to the
Company's oil and gas reserves have been prepared in accordance with industry
standards, no assurance can be given that the estimated costs are accurate,
that development will occur as scheduled or that the results will be as
estimated. See "Business -- Oil and Gas Reserves."
The present value of future net revenues referred to in this Prospectus
should not be construed as the current market value of the estimated oil and
gas reserves attributable to the Company's properties. In accordance with
applicable requirements of the Securities and Exchange 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 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 thus their actual present value, will
be affected by the timing of both the production and the incurrence of expenses
in connection with development and production of oil and gas properties. In
addition, the 10% discount factor,
16
<PAGE> 18
which is required by the Securities and Exchange Commission to be used in
calculating discounted future net cash flows for reporting purposes, is not
necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with the Company or the oil and
gas industry in general.
REPLACEMENT OF RESERVES
As is customary in the oil and gas exploration and production industry,
the Company's future success depends upon its ability to find, develop or
acquire additional oil and gas reserves that are economically recoverable.
Unless the Company replaces its estimated proved reserves (through development,
exploration or acquisition), the Company's proved reserves will generally
decline as they are produced.
The Company's current strategy includes increasing its reserve base
through acquisitions of lease blocks with drilling potential and by continuing
to exploit its existing properties. There can be no assurance, however, that
the Company's exploration and development projects will result in significant
additional reserves or that the Company will have continuing success drilling
productive wells at economically viable costs. Furthermore, while the Company's
revenues may increase if prevailing oil and gas prices increase significantly,
the Company's finding costs for additional reserves could also increase. For a
discussion of the Company's reserves, see "Business -- Oil and Gas Reserves."
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial expenditures for
the development, exploration, acquisition and production of oil and natural gas
reserves. The Company made capital expenditures, including exploration expense,
of $56 million during 1995 and $93 million during 1996. The Company plans to
make capital expenditures, including exploration expense but not including
expenditures for acquisitions, of approximately $290 million in 1997 and 1998.
Management believes that the Company will have sufficient cash provided by
operating activities, borrowings under the Bank Credit Facility and the
proceeds from the Offering to fund planned capital expenditures in 1997 and
1998. However, if revenues or cash flows from operations 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, or it may be forced to raise additional debt or
equity proceeds to fund such expenditures. The Company has received loans from
the Parent in the past, and it may receive loans from the Parent in the future
to help meet working capital needs. There can be no assurance that additional
debt or equity financing or cash generated by operations will be available
to meet these requirements. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources."
INDUSTRY RISKS
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or natural gas reservoirs will be
encountered, that operations may be curtailed, delayed or canceled and that
title problems, weather conditions, compliance with governmental requirements,
mechanical difficulties or shortages or delays in the delivery of drilling
rigs, work boats and other equipment may limit the Company's ability to market
its production. There can be no assurance that new wells drilled by the Company
will be productive or that the Company will recover all or any portion of its
investment. Drilling for oil and natural gas may involve unprofitable efforts,
not only from dry wells but also from wells that are productive but do not
produce sufficient net revenues to return a profit after drilling, operating
and other costs. In addition, the Company's properties may be susceptible to
hydrocarbon drainage from production by other operators on adjacent properties.
Industry operating risks include the risk of fire, explosions, blow-outs,
pipe failure, abnormally pressured formations and environmental hazards such as
oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of
any of which could result in substantial losses to the Company due to injury or
loss of life, severe damage to or destruction of property, natural resources
and equipment, pollution or other environmental damage, clean-up
responsibilities, regulatory investigation and penalties and suspension of
operations. Additionally, the Company's oil and gas operations are located in
an area that is subject to tropical weather disturbances, some of which can be
severe enough to cause substantial damage to facilities and possibly interrupt
production. 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 will be adequate to cover losses
or liabilities. The Company cannot predict the continued availability of
insurance at premium levels that justify its purchase.
17
<PAGE> 19
GOVERNMENTAL REGULATION
Oil and gas operations are subject to various United States federal, state
and local governmental regulations that change 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,
reports concerning operations, the spacing of wells, and unitization 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 gas wells below actual production capacity in order to conserve
supplies of oil and gas. In addition, the production, handling, storage,
transportation and disposal of oil and gas, by-products thereof and other
substances and materials produced or used in connection with oil and gas
operations are subject to regulation under federal, state and local laws and
regulations primarily relating to protection of human health and the
environment. To date, expenditures related to complying with these laws and for
remediation of existing environmental contamination have not been significant
in relation to the results of operations of the Company. Although the Company
believes it is in substantial compliance with all applicable laws and
regulations, the requirements imposed by such laws and regulations are
frequently changed and subject to interpretation, and the Company is unable to
predict the ultimate cost of compliance with these requirements or their effect
on its operations. See "Business -- Regulation."
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. Prior to any such repurchase of the
Notes, the Company may be required to (i) repay all or a portion of
indebtedness under the Bank Credit Facility or (ii) obtain any requisite
consent to permit the repurchase. If the Company is unable to repay all of such
indebtedness or is unable to obtain the necessary consents, the Company would
be unable to offer to repurchase the Notes, which would constitute an Event of
Default under the Indenture. Neither the board of directors of the Company nor
the Trustee may waive the Company's obligation to make a Change of Control
offer. There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) as described above. See "Description of the
Notes -- Certain Covenants -- Change of Control."
The events that constitute a Change of Control under the Indenture may
also be events of default under the Bank Credit Facility or other senior
indebtedness of the Company. Such events may permit the leaders under such debt
instruments to reduce the borrowing base thereunder or accelerate the debt and,
if the debt is not paid, to enforce security interests on, or commence
litigation that could ultimately result in a sale of, substantially all the
assets of the Company, thereby limiting the Company's ability to raise cash to
repurchase the Notes and receive the special benefit of the offer-to-purchase
provisions to the Holders of the Notes.
SUBORDINATION OF NOTES
The Indenture governing the Notes, and, if issued, the Exchange Notes,
will limit, but will not prohibit, the incurrence by the Company of additional
indebtedness that is senior in right of payment to the Notes and, if issued,
the Exchange Notes. In the event of bankruptcy, liquidation, reorganization or
other winding up of the Company, the assets of the Company will be available to
pay the Company's obligations on the Notes only after all Senior Indebtedness
(as defined herein) has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on the Notes. In addition, under certain
circumstances, no payments may be made with respect to principal of, premium,
if any, or interest on the Notes if a default exists with respect to any Senior
Indebtedness. See "Description of the Notes -- Subordination."
In addition, the Notes will be effectively subordinated to any
indebtedness and liabilities (including trade payables) of the Company's future
Subsidiaries that are not Subsidiary Guarantors. Presently, the Company has no
subsidiaries.
The Indenture imposes limits on the ability of the Company and its future
Restricted Subsidiaries (as defined herein) to incur additional indebtedness
and liens and to enter into agreements that would restrict the ability of such
future Restricted Subsidiaries to make distributions, loans or other payments
to the Company. These limitations are subject to various qualifications.
Subject to certain limitations, the Company and its Subsidiaries may incur
additional secured indebtedness. For additional details of these provisions and
the applicable qualifications, see "Description of the Notes -- Subordination"
and "-- Certain Covenants."
18
<PAGE> 20
FRAUDULENT CONVEYANCE CONSIDERATIONS RELATING TO FUTURE SUBSIDIARY GUARANTEES
Although the Company currently has no Restricted Subsidiaries, the
Company's obligations under the Notes may under certain circumstances be
guaranteed on an unsecured senior subordinated basis by future Restricted
Subsidiaries. Various fraudulent conveyance laws have been enacted for the
protection of creditors and may be utilized by a court of competent
jurisdiction to subordinate or avoid any Subsidiary Guarantee issued by a
Subsidiary Guarantor. It is also possible that under certain circumstances a
court could hold that the direct obligations of a Subsidiary Guarantor could be
superior to the obligations under the Subsidiary Guarantee.
To the extent that a court were to find that at the time a Subsidiary
Guarantor entered into a Subsidiary Guarantee either (x) the Subsidiary
Guarantee was incurred by a Subsidiary Guarantor with the intent to hinder,
delay or defraud any present of future creditor or that a Subsidiary Guarantor
contemplated insolvency with a design to favor one or more creditors to the
exclusion in whole or in part of others or (y) the Subsidiary Guarantor did not
receive fair consideration or reasonably equivalent value for issuing the
Subsidiary Guarantee and, at the time it issued the Subsidiary Guarantee, the
Subsidiary Guarantor (i) was insolvent or rendered insolvent by reason of the
issuance of the Subsidiary Guarantee, (ii) was engaged or about to engage in a
business or transaction for which the remaining assets of the Subsidiary
Guarantor constituted unreasonably small capital or (iii) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as
they matured, the court could avoid or subordinate the Subsidiary Guarantee in
favor or the Subsidiary Guarantor's other credits. Among other things, a legal
challenge of a Subsidiary Guarantee issued by a Subsidiary Guarantor on
fraudulent conveyance grounds may focus on the benefits, if any, realized by
the Subsidiary Guarantor as a result of the issuance by the Company of the
Notes. To the extent a Subsidiary Guarantee is avoided as a fraudulent
conveyance or held unenforceable for any other reason, the Holders of the Notes
would cease to have any claim in respect of such Subsidiary Guarantor and would
be creditors solely of the Company.
RELIANCE ON KEY PERSONNEL
The Company's operations are dependent upon a relatively small group of
key management and technical personnel. There can be no assurance that such
individuals will remain with the Company for the immediate or foreseeable
future. The unexpected loss of the services of one or more of these individuals
could have a detrimental effect on the Company.
See "Management."
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with major and independent oil and gas companies for the acquisition
of desirable oil and gas properties, as well as for the equipment and labor
required to develop and operate such properties. Many of these competitors have
financial and other resources substantially greater than those of the Company.
See "Business -- Competition."
RISKS OF HEDGING TRANSACTIONS
In order to manage its exposure to price risks in the marketing of its oil
and natural gas, the Company has in the past and expects to continue to enter
into oil and natural gas price hedging arrangements with respect to a portion
of its expected production. These arrangements may include futures contracts on
the New York Mercantile Exchange (NYMEX), fixed price delivery contracts and
financial swaps. While intended to reduce the effects of volatility of the
price of oil and natural gas, such transactions may limit potential gains by
the Company if oil and natural gas prices were to rise substantially over the
price established by the hedge. In addition, such transactions may expose the
Company to the risk of financial loss in certain circumstances, including
instances in which (i) production is less than expected, (ii) if there is a
widening of price differentials between delivery points for the Company's
production and the delivery point assumed in the hedge arrangement, (iii) the
counterparties to the Company's future contracts fail to perform the contract
or (iv) a sudden, unexpected event materially impacts oil or natural gas
prices. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Business -- Oil
and Gas Marketing."
19
<PAGE> 21
ABSENCE OF PUBLIC MARKET FOR THE NOTES
The Notes will be new securities for which currently there is no trading
market. The Company does not intend to apply for listing of the Notes on any
securities exchange or stock market. The Notes are expected to be eligible for
trading in the Private Offerings, Resale and Trading through Automated Linkages
("PORTAL") market. Although the Initial Purchasers have informed the Company
that they currently intend to make a market in the Notes, the Initial
Purchasers are not obligated to do so, and any such market making may be
discontinued at any time without notice. The liquidity of any market for the
Notes will depend upon the number of Holders of the Notes, the interest of
securities dealers in making a market in the Notes and other factors.
Accordingly, there can be no assurance as to the development or liquidity of
any market for the Notes, and even if a market does develop, the price at which
the holders of Exchange Notes will be able to sell such Notes is not assured
and the Exchange Notes could trade at a price above or below either their
purchase price or face value.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the Notes. There can be no assurance that the market, if any, for
the Notes will not be subject to similar disruptions. Any such disruptions may
have an adverse effect on the Holders of 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 or the Securities Act and applicable
state securities laws.
20
<PAGE> 22
THE COMPANY
The address of the Company's principal executive offices is 143 Ridgeway
Drive, Suite 113, Lafayette, LA 70503-3402 and its telephone number is (318)
989-1942. The offices of the Company's parent, Petsec Energy Ltd, are located
at Level 13, 1 Alfred Street, Sydney NSW 2000, Australia, and its telephone
number is (011) (6129) 246-4605.
The Company's parent, Petsec Energy Ltd, was incorporated in 1967 and
began focusing its operations on oil and gas exploration and production in
1981, when Terrence N. Fern became Chief Executive Officer. In 1988, the
management of the Company's parent decided to sell most of its petroleum
interests in Australia and began evaluation of opportunities in the United
States. The Company entered into a joint venture with Ampolex (Texas), Inc. in
1990 and participated in an oil discovery in the Paradox Basin in Colorado. In
addition, the Company acquired oil and gas lease interests in northern
California. Subsequently, the Company decided to focus its activities
principally in the offshore Gulf of Mexico and sell substantially all of its
other interests. The Company established an office in Lafayette, Louisiana,
hired several former employees of Tenneco Oil Company and acquired leases in
the Gulf of Mexico, offshore Louisiana. The Company purchased oil and gas
leases from the State of Louisiana in Main Pass Block 6 and drilled its first
discovery well thereon in 1991. In 1992, the Company purchased two adjoining
oil and gas leases in Main Pass Blocks 6 and 7 and a production facility
located thereon.
PRIVATE PLACEMENT
On June 13, 1997, the Company completed the private sale to the Initial
Purchasers of $100,000,000 principal amount of the Old Notes at a price of
97.117% of the principal amount thereof in a transaction not registered under
the Securities Act in reliance upon Section 4(2) of the Securities Act. The
Initial Purchasers thereupon offered and resold the Old Notes only to qualified
institutional buyers and a limited number of institutional accredited investors
at an initial price to such purchasers of 99.617% of the principal amount
thereof. A portion of the $96.6 million net proceeds received by the Company in
connection with the sale of the Old Notes was used to repay all borrowings
outstanding under the Bank Credit Facility. It is anticipated that the
remainder of the net proceed will be used to provide working capital to the
Company to fund further exploration and development of the Company's oil and
gas properties, the acquisition of lease blocks, and other general corporate
purposes.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange a like
principal amount of Old Notes, the terms of which are identical in all material
respects to the Exchange Notes. The Old Notes surrendered in exchange for the
Exchange Notes will be retired and canceled and cannot be reissued.
Accordingly, issuance of the Exchange Notes will not result in any change in
capitalization of the Company.
21
<PAGE> 23
CAPITALIZATION
The following table sets forth the cash and cash equivalents and the
capitalization of the Company as of June 30, 1997 after a recapitalization of a
portion of the subordinated shareholder loan and the application of the
estimated net proceeds of the Offering. See "Use of Proceeds." This table should
be read in conjunction with the Financial Statements and notes thereto included
elsewhere herein.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1997
--------------------
ACTUAL
--------------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents................................... $ 38,769
==================
Long-term debt, less current maturities:
Bank Credit Facility................................... $ --
Notes offered hereby................................... 99,618
Subordinated shareholder loan.......................... 39,453
------------------
Total long-term debt 139,071
------------------
Shareholder's equity:
Common stock, $1.00 par value, 1,000,000 shares
authorized; one share issued and outstanding....... --
Additional paid in capital............................. 20,494
Retained earnings (deficit)............................ 25,120
------------------
Total shareholder's equity......................... 45,614
------------------
Total capitalization............................... $ 184,685
==================
</TABLE>
- -----------------
22
<PAGE> 24
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected historical financial data for the
Company as of and for each of the periods indicated. The financial data, other
than the ratio of Adjusted EBITDA to pro forma interest expense and the ratio
of pro forma debt to adjusted EBITDA, as of and for the years ended December
31, 1994, 1995 and 1996, are derived from the financial statements of the
Company audited by KPMG Peat Marwick LLP, independent accountants. The
financial data, other than the ratio of Adjusted EBITDA to pro forma interest
expense and the ratio of pro forma debt to Adjusted EBITDA, for the years ended
December 31, 1992 and 1993 and the six months ended June 30, 1996 and 1997 are
derived from the Company's unaudited financial statements which, in the opinion
of management, include all adjustments (which consist only of normal recurring
adjustments) necessary for a fair presentation of the financial position and
results of operations of the Company for such interim periods. The following
information should be read in conjunction with "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 1996, the Company changed its fiscal year end from June 30
to December 31. The audited financial statements for the 1994, 1995 and 1996
periods and the unaudited financial data for 1992 and 1993 have been presented
on a calendar year end.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------------------------------- -------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Oil and gas sales ............................ $ 5,172 $ 11,829 $ 15,098 $ 30,462 $ 67,027 $ 29,506 $ 59,302
Lease operating expenses ..................... 809 2,782 3,855 4,757 6,161 2,882 4,763
Depletion, depreciation and amortization ..... 1,379 4,113 4,291 9,256 29,639 14,210 29,425
Exploration expenditures,
including dry hole costs .................... 1,982 2,603 3,020 3,396 7,061 1,812 4,688
General and administrative ................... 775 1,421 2,046 4,502 5,259 2,800 2,606
Stock compensation expense ................... -- -- -- -- 481 -- 418
-------- -------- -------- -------- -------- --------
Total operating expenses ................. 4,945 10,919 13,212 21,911 48,601 21,704 41,900
-------- -------- -------- -------- -------- -------- --------
Income from operations ....................... 227 910 1,886 8,551 18,426 7,802 17,402
Other income (expense)........................ -- -- (55) 35 -- -- 194
Gain (loss) on sale of property, plant
and equipment ............................ -- -- (16) 4,312 6 -- --
Interest expense ............................. (109) (347) (959) (2,452) (3,369) (1,870) (2,099)
Interest income .............................. 9 19 14 64 172 36 203
-------- -------- -------- -------- -------- -------- --------
Income before income taxes ............... 127 582 870 10,510 15,235 5,968 15,700
Income tax expense ........................... -- -- 25 3,537 6,311 2,788 5,134
-------- -------- -------- -------- -------- -------- --------
Net income ............................... $ 127 $ 582 $ 845 $ 6,973 $ 8,924 $ 3,180 $ 10,566
======== ======== ======== ======== ======== ======== ========
OTHER FINANCIAL DATA AND SELECTED RATIOS:
Adjusted EBITDA (1) .......................... $ 3,588 $ 7,626 $ 9,142 $ 21,238 $ 55,607 $ 23,824 $ 51,933
Adjusted EBITDA margin (2) ................... 69% 64% 61% 70% 83% 81% 88%
Capital and exploration expenditures ......... $ 11,093 $ 12,739 $ 22,449 $ 56,187 $ 93,000 $ 39,559 $ 76,658
Ratio of Adjusted EBITDA to
interest expense ......................... 32.9x 22.0x 9.5x 8.7x 16.5x 12.7x 24.7x
Ratio of long-term debt to Adjusted EBITDA ... 4.5x 2.8x 2.6x 2.7x 1.7x 2.0x(3) 1.7x(3)
Ratio of earnings to fixed charges (4) ....... 2.2x 2.7x 1.9x 5.3x 5.5x 4.2x 8.5x
Net cash provided by operating activities .... $ 1,235 $ 4,650 $ 10,475 $ 21,561 $ 47,297 $ 18,282 $ 51,687
Net cash used in investing activities ........ 9,112 10,385 19,429 47,836 85,939 37,749 $ 74,242
Net cash provided by financing activities .... 8,934 5,015 9,078 27,158 37,566 19,650 60,982
PRO FORMA SELECTED RATIOS:
Ratio of Adjusted EBITDA to pro forma interest
expense(5) ............................... -- -- -- -- 5.3x -- 8.7x
Ratio of pro forma debt to
Adjusted EBITDA (5).......................... -- -- -- -- 2.0x -- 1.7x(6)
Ratio of pro forma earnings to fixed
charges(5) ............................... -- -- -- -- 1.8x -- 3.2x
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
--------------------------------------------------- ------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets ........................... $ 14,960 $ 21,894 $ 36,969 $ 89,110 $146,145 $112,401 $230,407
Bank credit facility ................... 4,500 9,766 12,825 32,350 37,000 52,000 --
Senior subordinated notes .............. -- -- -- -- -- -- 99,618
Subordinated shareholder loan(7) ....... 11,637 11,386 11,386 25,038 57,954 25,038 39,453
-------- -------- -------- -------- -------- -------- --------
Total long-term debt ............... 16,137 21,152 24,211 57,388 94,954 77,038 139,071
Shareholder's equity(7) ................ (2,770) (2,188) (1,342) 5,631 15,036 8,811 45,614
</TABLE>
- ------------------
(1) Adjusted EBITDA is defined as earnings before interest, taxes, exploration
expenditures, stock compensation expense, depletion, depreciation and
amortization and other non-cash charges and is presented because it is a
widely accepted financial indication of an exploration and production
company's ability to service and incur debt. Adjusted EBITDA should not be
considered as an alternative to earnings (loss) as an indicator of the
Company's operating performance or to cash flows as a measure of
liquidity. The amount of exploration expenditures, stock compensation
expense, and other non-cash charges was $2.0 million, $2.6 million,
$3.0 million, $3.4 million, and $7.5 million for the years ended
December 31, 1992, 1993, 1994, 1995, and 1996, respectively, and
$1.8 million and $5.1 million for the six months ended June 30, 1996 and
1997, respectively.
(2) Represents Adjusted EBITDA divided by oil and gas sales.
(3) For the six months ended June 30, 1996 and 1997, Adjusted EBITDA was
calculated using data from the 12 months ended June 30, 1996 and 1997,
respectively.
(4) For purposes of determining the ratio of earnings to fixed charges,
earnings are defined as income (loss) before tax plus fixed charges. Fixed
charges consist of interest expense.
(5) Gives effect to the Offering and the application of the net proceeds
therefrom as described under "Use of Proceeds" as if such transaction had
occurred at the beginning of the period. Also gives effect to (i) a
recapitalization of $20 million of subordinated shareholder loan as equity
to be effected prior to the closing of the Offering and (ii) pro forma
interest expense on the outstanding balance of such loan.
(6) For the six months ended June 30, 1997, Adjusted EBITDA was calculated
using data from the 12 months ended June 30, 1997.
(7) $20 million of such subordinated shareholder loan was recapitalized as
equity effective June 1, 1997. See "Capitalization."
23
<PAGE> 25
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
The following discussion is intended to assist in the understanding of the
Company's historical financial position and results of operations for each year
in the three years ended December 31, 1996 and for the six months ended June
30, 1997 and 1996. Financial Statements and notes thereto included elsewhere in
this Prospectus should be referred to in conjunction with the following
discussion.
OVERVIEW
The Company is the principal operating subsidiary of Petsec Energy Ltd, an
Australian public company with ADSs listed on the Nasdaq National Market. The
Company was incorporated in March 1990 to evaluate oil and gas exploration
opportunities in the United States. In 1990, the Company participated in an oil
discovery in the Paradox Basin in Colorado. In addition the Company acquired
oil and gas lease interests in northern California. The Company also
established an office in Lafayette, Louisiana, hired several former employees
of Tenneco Oil Company and acquired leases in the Gulf of Mexico, offshore
Louisiana. The Company subsequently made a strategic decision to focus its
efforts entirely in the Gulf of Mexico and disposed of its interests in the
Paradox Basin in January 1995.
The Company has acquired substantially all of its 31 leases in the Gulf of
Mexico at federal or state lease sales. The Company maintains an active lease
acquisition program in order to increase its inventory of prospects and was
recently awarded two leases following the Central Gulf of Mexico federal
OCS lease sale held in March 1997. To date, the Company has retained a 100%
working interest ownership in all but one of its leases in the Gulf of Mexico,
which enables it to effectively control expenses, capital allocation, and the
timing and method of exploration and development of its properties. In the
future, the Company intends to maintain substantial working interest positions.
The Company has historically expanded its oil and gas reserves principally
through drilling. The Company is currently producing from 15 of its lease
blocks. The Company's activities are focused in the shallow waters of the Gulf
of Mexico, which provides the Company with access to the substantial
infrastructure of the Gulf and allows the Company to utilize lower cost rigs
and equipment in bringing its production on line. Over the last three years,
concurrent with increases in production, the Company has lowered its lease
operating expenses and general and administrative expenses per unit of
production.
The Company has significantly increased production and proved reserves in
the last three years. Production has increased from 6,722 Mmcfe in 1994 to
24,622 Mmcfe in 1996. For the six months ended June 30, 1997, the Company's
average daily net production was 118 Mmcfe. As of December 31, 1996, the
Company's proved reserves were 123.2 Bcfe. The Company's current production and
reserves base represents a balanced mix between oil and gas, with 59% of proved
reserves consisting of natural gas.
The Company markets its oil through spot price contracts and typically
receives a premium above the price posted. The Company's gas production is sold
under contracts which generally reflect spot market conditions in the central
Gulf of Mexico. The Company has historically entered into crude oil and natural
gas price swaps to reduce its exposure to price fluctuations. The results of
operations described herein reflect any hedging transactions undertaken by the
Company. See Note 9 to the Financial Statements.
The Company follows the successful efforts method of accounting. Under
this method, the Company capitalizes lease acquisition costs, costs to drill
and complete exploration wells in which proven reserves are discovered and
costs to drill and complete development wells. Seismic, geological and
geophysical, and delay rental expenditures are expensed as incurred. See Note
12 to the Financial Statements.
The Company is allocated stock compensation expense in respect to options
in the Parent which are granted to the Company's employees and certain
consultants. In 1996, the Parent adopted SFAS No. 123, Accounting for
Stock-Based Compensation under which it recognizes as expense over the vesting
period the fair value of all stock based awards on the date of grant. See Note
5 to the Financial Statements.
24
<PAGE> 26
The Company reimburses Petsec Energy Ltd for direct expenses incurred in
connection with the Company's operations. In addition, the Company has received
subordinated loans from its parent to finance its operations. See "-- Liquidity
and Capital Resources."
The Company's revenues, profitability and future rate of growth are
substantially dependent upon prevailing prices for oil and gas, which are in
turn dependent upon numerous factors that are beyond the Company's control,
such as economic, political and regulatory developments and competition from
other sources of energy. The energy markets have historically been volatile,
and there can be no assurance that oil and gas prices will not be subject to
wide fluctuations in the future. A substantial or extended decline in oil and
gas prices could have a material adverse effect on the Company's financial
position, results of operations and access to capital, as well as the
quantities of oil and gas reserves that the Company may economically produce.
The following table sets forth certain operating information with respect
to the oil and gas operations of the Company.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
<S> <C> <C> <C> <C> <C>
NET PRODUCTION:
Gas (Mmcf)........................................... 4,028 7,519 11,722 5,648 12,084
Oil (Mbbls).......................................... 449 1,014 2,150 1,005 1,549
Total (Mmcfe)........................................ 6,722 13,603 24,622 11,678 21,378
NET SALES DATA (IN THOUSANDS):
Gas.................................................. $ 8,667 $ 13,863 $ 23,056 $ 10,440 $ 27,992
Oil.................................................. $ 6,431 $ 16,599 $ 43,971 $ 19,066 $ 31,310
Total................................................ $ 15,098 $ 30,462 $ 67,027 $ 29,506 $ 59,302
AVERAGE SALES PRICE (1):
Gas (per Mcf)........................................ $ 2.15 $ 1.84 $ 1.97 $ 1.85 $ 2.32
Oil (per Bbl)........................................ $ 14.32 $ 16.37 $ 20.45 $ 18.97 $ 20.21
Total (per Mcfe)..................................... $ 2.25 $ 2.24 $ 2.72 $ 2.53 $ 2.77
AVERAGE COSTS (PER MCFE):
Lease operating expenses............................. $ 0.57 $ 0.35 $ 0.25 $ 0.25 $ 0.22
General, administrative and other expenses........... $ 0.30 $ 0.33 $ 0.21 $ 0.24 $ 0.12
</TABLE>
- ------------------
(1) Includes effects of hedging activities.
RESULTS OF OPERATIONS
SIX MONTHS ENDED JUNE 30, 1997 COMPARED WITH SIX MONTHS ENDED JUNE 30, 1996
General. The Company drilled eleven wells during the six month period ended
June 30, 1997. Nine wells discovered oil and gas, one well was suspended pending
evaluation of future sidetrack options and one well was plugged and abandoned.
Facilities were installed at Ship Shoal 194 and South Marsh Island 7. In
addition, a satellite (B) facility was installed at Ship Shoal 193 and tied
into the main (A) platform. The installation of these two facilities enabled
additional wells to be brought into production and resulted in an increase in
production of 9.7 Bcfe to 21.4 Bcfe for the half year, or 83% over the
corresponding period in 1996. Average daily production for the six months
ended June 30, 1997 was 118 Mmcfe, almost double the average rate of 64 Mmcfe
for the comparable period in 1996.
Oil and Gas Revenues. Oil and gas revenues for the six months ended June
30, 1997 were $59.3 million, an increase of $29.8 million, or 101% above $29.5
million for the comparable period in 1996. A 54% increase in oil production and
a 7% increase in oil prices combined to account for $12.2 million of the
increase. A 114% increase in gas production and a 25% increase in gas prices
accounted for the remaining $17.6 million of the increase. Increased oil
production followed the successful drilling and development of the Ship Shoal
194 field and Ship Shoal 193 B-1 well, while the increased gas production stems
from successful drilling at the Main Pass 6/7 and 91 and West Cameron 543/544
fields.
In the six month period to June 30, 1997 gas price hedging resulted in an
average realized gas price of $2.32 per Mcf, or 6% below the $2.46 per Mcf
average gas price that would otherwise have been received. Over the same
period, oil price hedging resulted in an average realized oil price of $20.21
per Bbl, or 2% above the $19.88 per Bbl average oil price that would otherwise
have been received. Hedging activities resulted in a $1.2 million decrease in
oil and gas revenues. In the six month period to June 30, 1996, gas price
hedging resulted in an average realized gas price of $1.85 per Mcf, or 28% below
the $2.57 per Mcf average gas price that would otherwise have been received.
Over the same period oil price hedging resulted in an average realized oil price
of $18.97 per Bbl, or 4% below the $19.68 per Bbl average oil price that would
otherwise have been received. Hedging activities resulted in a $4.8 million
decrease in oil and gas revenues for the six month period to June 30, 1996.
25
<PAGE> 27
Lease Operating Expenses. Lease operating expenses increased $1.9 million,
or 66% to $4.8 million for the six months ended June 30, 1997, from $2.9 million
for the six months ended June 30, 1996. The increase was attributable to
increased production. Lease operating expenses per Mcfe decreased from $0.25 to
$0.22 continuing the trend of previous years reflecting economies of scale from
higher rates of production.
Depletion, Depreciation and Amortization ("DD&A"). DD&A expense for the
six months ended June 30, 1997 increased $15.2 million, or 107% to $29.4
million from $14.2 million, in the same period in 1996. Production increases
accounted for $11.8 million of the increase while an increase in the average
rate per Mcfe from $1.22 to $1.38 per Mcfe accounted for the balance. The
increase in the unit rate was attributable to increased capital expenditures
from the Company's exploration and production activities coupled with increased
costs of drilling goods and services, platform and facilities construction and
transportation services in the industry.
Exploration Expenses including dry hole costs. During the six month period
ended June 30, 1997, $2.3 million was expensed as dry hole cost for the West
Cameron 480 #1 well. There were no dry hole costs in the 1996 period. Seismic,
geological and geophysical expenditures of $2.4 million were also expensed
during the six month period ended June 30, 1997, an increase of $0.6 million
over the comparable period in 1996.
General and Administrative Expense. General and administrative expense
increased $0.2 million, or 7%, to $3.0 million for the six months ended June
30, 1997 from $2.8 million for the comparable period in 1996. On a per Mcfe
basis the rate decreased 50% from $0.24 to $0.12 due to increased production.
Interest Expense. Interest expense of $2.1 million for the six months ended
June 30, 1997 was marginally higher than the expense of $1.9 million for the
comparable period in 1996.
Net Income. As a result of the conditions discussed above, net income for
the six months ended June 30, 1997 was $10.6 million, an increase of $7.4
million, or 231% over the earnings of $3.2 million for the six months ended June
30, 1996.
1996 COMPARED TO 1995
General. During the twelve month period ended December 31, 1996, the
Company set a larger platform and facility at Ship Shoal 193, significantly
increasing production capacity at that field. In addition, a facility and
pipeline was completed to tie-in its Main Pass 91 wells to its Main Pass 6/7
facility. The Company drilled and completed eight wells during the period. This
activity resulted in an increase in production of 81% from 13.6 Bcfe in 1995 to
24.6 Bcfe in 1996. Average daily production for 1996 increased 81% to 67.5 Mmcfe
from 37.3 Mmcfe for 1995.
Oil and Gas Revenues. Oil and gas revenues for 1996 were $67.0 million, an
increase of $36.5 million, or 120% above 1995 revenues of $30.5 million. A 112%
increase in oil production coupled with a 25% increase in oil prices combined
to account for $27.3 million of the increase. A 56% increase in gas production
and a 7% increase in the gas price accounted for the remaining $9.2 million of
the increase. The increased oil production resulted from the tie-back of
additional wells and increased capacity at Ship Shoal 193 following installation
of a larger manned four pile platform. The increased gas production resulted
from a full year's production at West Cameron 543/544 and commencement of
production at Main Pass 91 in the second half of the year.
Gas price hedging in 1996 resulted in an average realized price of $1.97
per Mcf, or 24% below the $2.58 per Mcf price that would have otherwise been
received. In the same period oil price hedging resulted in an average realized
price of $20.45 per Bbl, or 3% below the $21.04 per Bbl that would have
otherwise been received. For the comparable period in 1995 gas price hedging
resulted in an average realized price of $1.84 per Mcf, or 4% above the $1.76
per Mcf that would have otherwise been received. In the same period oil price
hedging resulted in an average realized price of $16.37, or 1% above the $16.22
per Bbl that would have otherwise been received. Hedging activities resulted in
a $8.4 million decrease in revenues for 1996 compared to a $0.8 million increase
in 1995.
26
<PAGE> 28
Lease Operating Expenses. Lease operating expenses in 1996 were $6.2
million, an increase of $1.4 million, or 29%, from $4.8 million in 1995.
Production efficiencies were realized as lease operating expense per Mcfe
decreased from $0.35 in 1995 to $0.25 in 1996.
Depletion, Depreciation and Amortization. DD&A expense increased $20.3
million, or 218%, from $9.3 million in 1995 to $29.6 million in 1996. Production
increases accounted for $7.5 million of the increase while an increase in the
average rate per unit from $0.68 to $1.20 per Mcfe accounted for the balance.
The increase in rate was attributable to increased capital expenditures from the
Company's exploration and production activities.
Exploration Expenditures. Under the successful efforts method of accounting
$7.1 million of seismic, geological and geophysical expenditures were expensed
as incurred in 1996. This was an increase of $3.7 million, or 109%, over the
expense of $3.4 million for 1995 as the Company expanded its access to a broader
seismic base in the Gulf of Mexico.
General and Administrative Expenses. General and administrative expense
increased $0.8 million, or 18%, to $5.3 million in 1996 from $4.5 million in
1995. This increase was attributable to the Company's success and resultant
growth in production. On a per Mcfe basis the rate decreased 36% from $0.33 to
$0.21.
Interest Expense. Interest expense in 1996 increased $0.9 million, or 36%,
to $3.4 million from $2.5 million in 1995 due to increased borrowings under the
Bank Credit Facility.
Net Income. As a result of the conditions noted above, net income for 1996
was $8.9 million, an increase of $1.9 million, or 27% over the earnings of $7.0
million for 1995.
1995 COMPARED TO 1994
General. During the twelve month period to December 31, 1995, the Company
set production facilities at West Cameron 543/44. In addition, the Company
drilled and completed five wells during the period. This resulted in an increase
in production of 103% from 6.7 Bcfe in 1994 to 13.6 Bcfe in 1995. Average daily
production for 1995 increased 103% to 37.3 Mmcfe from 18.4 Mmcfe for 1994.
Oil and Gas Revenues. Oil and gas revenues for 1995 were $30.5 million, an
increase of $15.4 million, or 102% above 1994 revenues of $15.1 million. A 126%
increase in oil production and a 14% increase in oil prices combined to account
for $10.2 million of the increase. An 87% increase in gas production offset by
a 14% decrease in the gas price accounted for the remaining $5.2 million of the
overall increase. The increase in oil production resulted from the successful
drilling of two additional wells at Ship Shoal 193 in late 1994 and consequently
a full year's production in 1995 from four wells at this field. The increase in
gas production followed the completion of development and commencement of
production at West Cameron 543/544 in May 1995.
Gas price hedging in 1995 resulted in an average realized price of $1.84
per Mcf, or 4% above the $1.76 per Mcf price that would have otherwise been
received. In the same period oil price hedging resulted in an average realized
price of $16.37 per Bbl, or 1% above the $16.22 per Bbl that would have
otherwise been received. The Company did not enter into any oil or gas price
hedging agreements in 1994. Hedging activities resulted in a $0.8 million
increase in revenues in 1995.
Lease Operating Expenses. Lease operating expenses increased $0.9 million
(23%) to $4.8 million in 1995 from $3.9 million for 1994. The increase was due
to higher production. Lease operating expenses per Mcfe decreased 39% from $0.57
in 1994 to $0.35 in 1995 as the Company's production base expanded
significantly.
Depletion, Depreciation and Amortization. DD&A expense for 1995 increased
$5.0 million, or 116% to $9.3 million in 1995 from $4.3 million in 1994. The
increase was attributable to the increase in oil and gas production over the
two periods. The average depletion rate per unit increased from $0.64 per Mcfe
in 1994 to $0.68 per Mcfe in 1995.
Exploration Expenditures. Under the successful efforts method of accounting
$3.4 million of seismic, geological and geophysical expenditures were expensed
as incurred in 1995. This was a marginal increase on the $3.0 million expensed
in 1994.
27
<PAGE> 29
General and Administrative Expenses. General and administrative expense
increased $2.5 million, or 125%, to $4.5 million in 1995 from $2.0 million in
1994. This increase was due to the Company's growth in operations. On a per Mcfe
basis the rate increased 10% from $0.30 to $0.33.
Interest Expense. Interest expense in 1995 increased $1.5 million, or 150%,
to $2.5 million from $1.0 million in 1994 due to increased borrowings under the
Company's reserve based credit facility.
Net Income. As a result of the conditions noted above, net income for 1995
was $7.0 million, an increase of $6.2 million or 775% over the earnings of $0.8
million for 1994.
LIQUIDITY AND CAPITAL RESOURCES
The following table represents cash flow data for the Company for the
periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, -------------------------
1994 1995 1996 1996 1997
------------ ------------ ------------ ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOW DATA:
Net cash provided by operating activities........ $ 10,475 $ 21,561 $ 47,297 $ 18,282 $ 51,687
Net cash used in investing activities............ 19,429 47,836 85,939 37,749 74,242
Net cash provided by financing activities........ 9,078 27,158 37,566 19,650 60,982
</TABLE>
The fluctuation in cash provided by operating activities from 1995 to 1996
was primarily due to increased oil and gas production coupled with higher prices
for both commodities. Similarly the fluctuation from 1994 to 1995 was as a
result of increased production however this was offset by decreased prices.
Working capital decreased in all periods. Before changes in working capital,
cash flow from operations was $45.4 million in 1996, $16.0 million in 1995, $5.2
million in 1994 and $20.2 million and $47.6 million for the respective six month
periods in 1996 and 1997.
The increase in cash used in investing activities in 1996 over 1995 was due
to expenditures on exploration and development. Similarly the increase in 1995
over 1994 was due to exploration and development expenditures offset by the
proceeds from the sale of the Paradox Basin producing properties.
The cash provided by financing activities in all periods consisted of
advances from Petsec Energy Ltd and borrowings under the Bank Credit Facility.
In 1997, this was supplemented with proceeds from the Senior Subordinated Notes.
The Company generally uses available cash to reduce bank debt and,
therefore, does not maintain large cash and cash equivalent balances. Short-term
liquidity requirements are satisfied by borrowings under the Bank Credit
Facility. Because of this, and since the Company's principal source of operating
cash flows (i.e., proved reserves to be produced in the following year) cannot
be reported as working capital, the Company has consistently had negative
working capital.
Since 1990 the Company has financed its working capital needs, operations
and growth primarily with advances from its parent, Petsec Energy Ltd, cash flow
from operations and bank borrowings. The Company may receive loans from the
Parent in the future to help meet working capital needs.
Petsec Energy Ltd made an initial cash investment of $11.4 million in the
Company and, subsequently, increased this investment with advances of $18.5
million from an Australian offering of Ordinary Shares in September 1995 and
$31.0 million out of net proceeds from a U.S. offering of ADSs in July 1996.
Funds advanced by the Company's parent have historically been provided in
the form of subordinated loans. These loans are subordinated to the payment of
all Senior Indebtedness and have been subordinated to the Notes. Effective as
of June 1, 1997, the U.S. dollar loans bear interest at 6% and, in the case of
Australian dollar borrowings, at 6.24%. The loans from the Company's parent do
not have any mandatory principal payments due until after the maturity of the
Notes. See "Certain Affiliate Transactions." No interest has been paid or
accrued on these loans prior to June 1, 1997. Payments or distributions made by
the Company to its Parent have been made principally for reimbursement of direct
expenses incurred in connection with the Company's operations. For the years
ended December 31, 1995 and 1996, the aggregate cash payments to the Company's
Parent were $630,000 and $1.0 million, respectively.
In April 1996, the Company entered into a $75 million Bank Credit Facility,
under which the current borrowing base, as a result of this Offering, is $50
million, with a sublimit of $15 million for letter of credit purposes to support
the bonding requirements of the MMS and commodity swap transactions. At June 30,
1997, there were no borrowings outstanding under the Bank Credit Facility. The
Bank Credit Facility is a two-year
28
<PAGE> 30
revolving credit facility followed by a two-year term period with equal
quarterly amortization payments maturing in April 2001. The Bank Credit Facility
is secured by the Company's Gulf of Mexico producing properties and contains
financial covenants that require the Company to maintain a ratio of senior debt
to earnings before interest, taxes, depreciation and amortization of not more
than 2.75 to 1.0 and a coverage ratio of earnings before interest and taxes to
total interest of not less than 2.5 to 1.0 until December 31, 1996, and 3.0 to
1.0 thereafter. The Company is currently in compliance with all financial
covenants under the Bank Credit Facility. Outstanding borrowings accrue
interest at the rate of LIBOR plus a margin of 1.25% to 1.75% per annum,
depending upon the total amount borrowed. The Company is obligated to pay a fee
equal to .3% to .375% per annum based on the unused portion of the borrowing
base under the facility.
The Company's ability to borrow under the Bank Credit Facility is dependent
upon the reserve value of its oil and gas properties, as determined by The Chase
Manhattan Bank ("Chase"). If the reserve value of the Company's borrowing base
declines, the amount available to the Company under the Bank Credit Facility
will be reduced and, to the extent that the borrowing base is less than the
amount then outstanding (including letters of credit) under the Bank Credit
Facility, the Company will be obligated to repay such excess amount upon ninety
days' notice from Chase or to provide additional collateral.
The Company has used a portion of the net proceeds of the Offering of the
Old Notes to repay borrowings under the Bank Credit Facility. The remainder of
the net proceeds will be used to provide working capital to the Company to fund
further exploration and development of the Company's oil and gas properties, the
acquisition of lease blocks and other general corporate purposes.
For 1997, the Company has budgeted capital expenditures of approximately
$140 million on exploration and development drilling and other capital projects.
In the six months ended June 30, 1997, the Company incurred $77 million of
capital expenditures. The Company intends to finance expenditures for the
remainder of 1997 and for 1998 with proceeds from the Offering, cash flow from
operations and bank borrowings. The Company continues to evaluate its capital
expenditure budget based on drilling results, commodity prices, cash flow from
operations and property acquisitions.
HEDGING TRANSACTIONS
From time to time, the Company has utilized hedging transactions with
respect to a portion of its oil and gas production to achieve a more predictable
cash flow and to reduce its exposure to oil and gas price fluctuations. While
these hedging arrangements limit the downside risk of adverse price movements,
they may also limit future revenues from favorable price movements. The use of
hedging transactions also involves the risk that the counterparties will be
unable to meet the financial terms of such transactions. The credit worthiness
of counter parties is subject to continuing review and full performance is
anticipated. The Company limits the duration of the transactions and the
percentage of the Company's expected aggregate oil and gas production that may
be hedged. The Company accounts for these transactions as hedging activities
and, accordingly, gains or losses are included in oil and gas revenues when the
hedged production is delivered. The Company's current policy is to hedge
not more than 55% of forecast net production from wells in production at that
time. The hedge positions detailed below are within that policy.
As of June 30, 1997 for the remainder of 1997, the Company has entered
into commodity swaps effectively fixing the price of 7.5 million Mmbtu of gas
at a volume-weighted average New York Mercantile Exchange ("NYMEX") price of
$2.12 per Mmbtu. The Company had also entered into commodity swap contracts for
7.0 million Mmbtu, 1.8 million Mmbtu and 760,000 Mmbtu at volume-weighted
average NYMEX prices of $1.98 per Mmbtu, $2.15 per Mmbtu and $2.15 per Mmbtu
for calendar years 1998, 1999 and 2000 respectively.
As of June 30, 1997, for the remainder of 1997, the Company had entered
into commodity swap contracts for 736,000 barrels of oil at a volume-weighted
average NYMEX price of $21.29 per barrel. The Company had also entered into
commodity swap contracts for 761,000 Bbls, 365,000 Bbls and 152,000 Bbls at
volume-weighted average NYMEX prices of $20.10 per Bbl, $19.70 per Bbl and
$19.70 per Bbl for calendar years 1998, 1999 and 2000 respectively.
The fair value at June 30, 1997, represented by the estimated amount that
would be required to terminate these contracts, was a net cost of $1.8 million
for the gas contracts and a net benefit of $1.0 million for the oil contracts.
For any particular swap transaction, the counterparty is required to make
a payment to the Company in the event that the average NYMEX reference prices
for any settlement period are less that the swap prices for such hedge, and the
Company is required to make a payment to the counterparty in the event that the
average NYMEX reference prices for any settlement period is greater than the
swap price for such hedge. The Company has proved reserves sufficient to cover
all of these contracts and does not enter into derivatives without underlying
forecasted production and proved reserves.
29
<PAGE> 31
BUSINESS
GENERAL
The Company is an independent exploration and production company operating
in the shallow waters of the central and western Gulf of Mexico. The Company is
the principal operating subsidiary of Petsec Energy Ltd, an Australian public
company with ADSs listed on the Nasdaq National Market (symbol: PSALY). Since
establishing its Gulf of Mexico operations in 1990, the Company has employed a
focused, integrated strategy of exploration and development to generate
substantial increases in reserves, production and cash flow. Currently, the
Company is drilling three wells in the Gulf of Mexico and has suspended
operations on one other well pending evaluation of sidetracking alternatives.
The Company has completed or plans to complete for commercial production
all but two of the 33 wells it has drilled in the Gulf of Mexico. For the five
year period ended December 31, 1996, the Company achieved compound annual growth
rates for both production and EBITDA (as defined herein) of approximately 98%.
As of December 31, 1996, the Company's estimated net proved reserves were 123.2
Bcfe (approximately 59% of which were attributable to natural gas), with a PV10
of approximately $308 million. See "Summary -- Reserve and Operating Data."
The regions of the central and western Gulf of Mexico within which the
Company operates have an extensive history of significant oil and gas
production. Through the application of 3-D seismic data and advanced
geophysical techniques, the Company has assembled a large inventory of lease
blocks that it believes has substantial exploration and production potential.
The Company has a significant base of operations covering a net total of 107,541
acres consisting of 100% working interests in 30 lease blocks, a 40.33% working
interest in another lease block and seven production facilities. In addition,
the Company was recently awarded two federal lease blocks. Currently producing
from only 15 of its lease blocks, the Company has in excess of 50 prospects on
its existing acreage that it intends to drill in the next four years.
For the year ended December 31, 1996 and for the six months ended June 30,
1997, the Company generated revenues of $67.0 million and $59.0 million,
respectively, and Adjusted EBITDA of $55.6 million and $51.9 million,
respectively. In the first six months of 1997, the Company drilled 11
exploratory wells, two of which were drilled on the Company's previously
producing lease blocks and have been brought on production. A further three
wells, drilled on non-producing lease blocks, have been brought on production,
and three other wells are expected to be brought on production in the second
half of 1997. In the first six months of 1997, the Company's average
daily net production was 118 Mmcfe, a 84% increase over the first six months
of 1996.
COMPANY STRENGTHS AND BUSINESS STRATEGY
The Company believes that it is well-positioned to continue to grow its
reserves, production and cash flow by capitalizing on strengths developed since
inception. These strengths include the experience of its personnel, its large
inventory of drilling prospects defined by 3-D seismic data and the operating
flexibility achieved through 100% ownership of leases. The Company has
assembled a team of experienced geoscientists, engineers and other technical
personnel, with substantial experience with major oil companies or large
independents. This technical team has developed an extensive base of knowledge
regarding geophysical processing and interpretation of data, as well as field
operating practices in the Gulf of Mexico. This base of knowledge has led to
the development of over 50 prospects on its existing acreage and, the Company
believes, provides it with a competitive advantage in evaluating the potential
of leases proposed for acquisitions.
The Company has developed a focused, integrated business strategy, which
it believes capitalizes on its strengths and which incorporates the following
elements:
FOCUS ON THE SHALLOW WATERS OF THE GULF OF MEXICO. Each year from the
start of its operations in the Gulf of Mexico, the Company has achieved
significant growth in production and reserves by concentrating its exploration
and development efforts in the shallow federal and state waters (400 feet or
less) in the region. The Company attributes this growth to the quality of its
inventory of lease blocks and the location of these blocks in regions where the
Company has accumulated a substantial base of technical and operating
experience. While these regions have prolific production histories, the Company
believes these regions have significant undiscovered reserves. By focusing its
efforts on leaseholds that generally have not been explored using 3-D seismic
techniques, the Company is able to take maximum advantage of both its
proprietary knowledge base and, in many cases, the results of prior operators
on the same or contiguous properties. The Company is producing from 15 of its
31 lease blocks. The Company believes it will take
30
<PAGE> 32
four to five years to evaluate and drill the exploration and exploitation
prospects on its existing lease blocks. The Company believes that focusing its
drilling activities on properties in a relatively concentrated area in the Gulf
of Mexico permits it to utilize its base of geological, engineering, and
production experience in the region to enhance its drilling results and to
minimize finding and development costs.
CONTROL OF OPERATIONS AND COSTS. Over the last three years, the Company
has consistently been able to lower lease operating expenses and general and
administrative expense per unit of production, concurrent with increases in
production, through a strict control over operations and costs. For the three
years ended December 31, 1996, the total of these costs per Mcfe was $0.87,
$0.68 and $0.46, respectively. For the six years ended December 31, 1996, the
Company had an average finding and development cost of $1.09 per Mcfe of proved
reserves. The Company holds 100% working interests in all but one of its Gulf
of Mexico properties, unlike many other independent energy companies that
conduct business through fractional working interests and non-operated joint
ventures. Ownership of large working interests enables the Company to
effectively control expenses, capital allocation, and the timing and method of
exploration and development of its properties. The geographic focus of the
Company allows it to manage a large asset base with a relatively small number
of employees. The Company currently operates five production facilities, two of
which were upgraded in 1996 and all of which have excess capacity available.
Many of the prospects the Company intends to drill in the next three years are
located in close proximity to these production facilities, enabling the Company
to bring new wells into production at lower incremental costs. The Company also
pursues cost savings through the use of outside contractors where appropriate
for field operations, turnkey drilling and construction agreements, and
production handling agreements with operators of adjoining lease blocks. The
Company believes its working interest position, base of operations and focus on
costs will allow it to further reduce its per unit operating expenses as
additional production volumes are realized.
APPLICATION OF ADVANCED TECHNOLOGIES. The Company relies significantly on
advanced exploration technologies, such as 3-D seismic and time depth
migration, in its lease acquisition assessment and its exploration and
development activities. Historically, the Company has acquired and evaluated
3-D seismic data on leases prior to acquisition in order to reduce the risk
associated with the acquisition. The Company's geotechnical staff has
substantial experience in analyzing 3-D seismic data, which has enabled the
Company to identify multiple exploration and development prospects in both
mature producing fields where advanced technology has not been applied and in
unexplored areas.
EXPANSION OF EXPLORATION AND DEVELOPMENT PROSPECTS. The Company intends to
continue to expand its inventory of exploration and development prospects
through an active lease acquisition and exploitation program. The Company has in
excess of 10 development and 40 exploratory prospects that it expects to drill
over the next four years. For 1997, the Company has allocated a capital
expenditure budget of $140 million, 70% of which will be spent on exploration
and development drilling activities. In addition to the acreage the Company
currently owns, the Company actively participates in OCS and state lease sales
to build its inventory of lease blocks. Recently, the Company was awarded two
lease blocks following the Central Gulf of Mexico OCS Lease Sale held on March
5, 1997. The aggregate cost to the Company of such blocks was $4.1 million. The
Company's principal lease acquisition criteria include, but are not limited to,
shallow offshore Gulf of Mexico properties with geological characteristics
similar to its existing properties, multiple pay objectives, proximity to
existing infrastructure, and the availability of 3-D seismic data for evaluation
prior to bidding. While the Company intends that competitive lease sales will
continue to be its primary method of building its inventory of lease blocks, it
will also evaluate other opportunities to acquire properties that will
complement the Company's existing reserve base and meet its economic and
investment criteria.
31
<PAGE> 33
PROPERTIES
The following table lists the status, year of acquisition, lease
acquisition cost, working interest, and net revenue interest of the Company's
offshore Gulf of Mexico properties. All of the leases are located offshore
Louisiana, except Mustang Island 748, High Island A-307 and A-308, which are
located offshore Texas. The lease term for the following leases is five years
from the date acquired unless a successful well is drilled and developed, in
which case the lease will be held by production.
<TABLE>
<CAPTION>
LEASE
YEAR ACQUISITION WORKING NET REVENUE
LEASE STATUS(1) ACQUIRED COST(2) INTEREST INTEREST
- --------------------------------------- --------- --------- ---------------- -------- --------------
<S> <C> <C> <C> <C> <C>
Main Pass 6 and 7 Area (3) HBP 1989-1992 $ 4,209,000 100% 75.5% - 81.33%
Ship Shoal 193 HBP 1993 $ 1,666,650 100% 80.33%
West Cameron 543 HBP 1991 $ 421,150 100% 80.83%
West Cameron 544 HBP 1994 $ 1,381,185 100% 80.33%
Main Pass 91 (western half) HBP 1994 $ 40,905 100% 80.33%
Ship Shoal 194 HBP 1995 $ 1,166,000 100% 83.33%
West Cameron 542(4) HBP 1997 $ 850,000 33.33% 27.77%
South Marsh Island 7 HBP 1993 $ 441,050 100% 80.33%
West Cameron 237(4) HBP 1997 $ 150,000 100% 83.33%
West Cameron 461 Drlg. 1994 $ 331,000 100% 80.33%
Grand Isle 45 Drlg. 1996 $ 1,280,000 100% 83.33%
Main Pass 84 Drlg. 1994 $ 14,463 100% 77.00%
West Cameron 480 Drlg. 1993 $ 411,050 100% 80.33%
Main Pass 104 Drlg. 1993 $ 328,140 100% 80.33%
West Cameron 462 Expl. 1994 $ 428,000 100% 80.33%
Ship Shoal 192 Expl. 1996 $ 893,000 100% 83.33%
South Marsh Island 189 Expl. 1996 $ 831,000 100% 83.33%
South Marsh Island 190 Expl. 1996 $ 3,181,000 100% 83.33%
West Cameron 515 Expl. 1995 $ 281,000 100% 83.33%
West Cameron 516 Expl. 1995 $ 171,000 100% 83.33%
High Island A-307 Expl. 1996 $ 384,100 100% 83.33%
High Island A-308 Expl. 1996 $ 466,100 100% 83.33%
Vermilion 47 Expl. 1995 $ 561,000 100% 83.33%
Mustang Island 748 Expl. 1997 $ 200,160 100% 75.0% - 80.0%
West Cameron 653 Expl. 1997 $ 1,917,962 100% 83.33%
South Pelto 22 Expl. 1997 $ 2,218,000 100% 83.33%
</TABLE>
- ------------------
(1) HBP: Held by production; Drlg: Drilling or drilled and awaiting
installation of production facilities; Expl.: Exploration lease; NYA:
Company was high bidder but lease not yet awarded by the MMS.
(2) Represents competitive bid price paid for award of leases, except for Main
Pass 6 and 7 (see footnote 3).
(3) Comprised of four leases acquired from the State of Louisiana for $209,000
and two producing leases acquired from Unocal Corporation for $4 million.
(4) Both properties were acquired by the Company from a third party for an
aggregate price of $1 million.
Set forth below is a description of the Company's significant properties
and certain related exploration and production projects which the Company
expects to pursue in the next several years. The number, type, and timing of
the proposed projects are subject to revision as a result of many factors,
including the availability of capital to fund such projects, initial test
results, results of drilling by third parties on adjacent blocks, oil and gas
prices, weather, and other general and economic conditions that are beyond the
control of the Company. The Company has budgeted capital expenditures of
approximately $140 million for exploration and development drilling and other
projects in 1997. The Company continues to evaluate its capital expenditure
budget based on drilling results, commodity prices, cash flow from operations
and property acquisitions. Actual capital spending may vary from the capital
expenditure budget. There can be no assurance that any of these projects can be
successfully developed within budget, or that, once developed, such projects
will be commercially productive. See "Risk Factors -- Uncertainty of Estimates
of Oil and Gas Reserves," "-- Replacement of Reserves" and "-- Industry Risks."
32
<PAGE> 34
Main Pass 6 and 7 Area
The Company acquired four leases in the Main Pass 6 area from the State of
Louisiana in 1990 for $209,000. The leases are 40 miles offshore Louisiana and
lie on the west flank of the Main Pass 6 gas field in 35 feet of water.
In September 1991, the Company drilled its first well in the Gulf of
Mexico on these leases and discovered gas in commercial quantities.
Subsequently the Company acquired for $4.0 million two leases in the adjacent
Main Pass 7 area, which contained production facilities and wells producing
approximately 300 barrels of oil per day. Detailed mapping by the Company
indicated a number of unproduced gas sands could be accessed from existing
wells on this property. In October 1992, following a number of recompletions in
existing wells, the drilling of a sidetrack well and modification of the
facilities, these Main Pass 6 and 7 leases commenced production at a net rate
of 8.6 Mmcf of gas per day and 420 barrels of oil per day from 10 wells.
In 1995, the Company acquired and interpreted a 3-D seismic survey
covering all of the Company's Main Pass leases, resulting in the mapping of
additional drilling prospects. Three wells were subsequently drilled and
completed for gas production on the Main Pass 7 leases. The #8 well intersected
several zones with gas pay and the #A-12 well intersected the gas reservoir in
a crestal position and both wells were brought into production in February
1996. In addition, the #A-11 well intersected 122 feet of net gas and oil pay
in ten sands and this well was brought into production in November 1996 as a
dual zone producer.
All wells are produced through the Main Pass 7 platform, where facilities
were upgraded in 1996 to accommodate the increased production from the new
discoveries. The upgrade of the Main Pass 7 platform included conversion from
unmanned to fully-manned status and the connection of a second pipeline from the
platform to the gas sales trunk-line. The Main Pass 7 facilities are capable of
handling 40 Mmcf per day and 3,000 barrels of oil per day and currently service
13 wells from the Main Pass 6, 7, and 91 areas. For the six months ended June
30, 1997, net production from the Main Pass 6 and 7 leases averaged 592 barrels
of oil per day and 6.0 Mmcf of gas per day.
Ship Shoal Block 193
The Company acquired Ship Shoal Block 193 in a 1993 OCS lease sale for
$1.7 million. This block is approximately 50 miles offshore Louisiana in water
depths of approximately 80 feet adjacent to the Ship Shoal Block 182 field.
Prior to the Company's acquisition, Ship Shoal Block 193 had no previous
production, although five prior unsuccessful exploration wells had been drilled
on the block by other energy companies. Two of such wells encountered
non-commercial oil bearing sands. Using 2-D seismic data, the Company
identified four prospect traps with seismic amplitude anomalies in the "E"
Series Sands. After acquiring the lease block, the Company purchased a 3-D
seismic survey which confirmed these anomalies and identified additional
prospects.
In the second half of 1993, the Company drilled and completed two
exploratory wells that were brought into production in February 1994.
Subsequently, an additional three wells were drilled and completed for
commercial production. Initially the Company produced the wells through a
"mantis" style production platform which consisted of a supported caisson
structure connected by pipeline to the Ship Shoal Block 182 field. In January
1996, the Company installed a manned four-pile production platform with a
processing capacity of 10,000 barrels of oil per day and 20 Mmcf of gas per
day. In January 1997, this processing capacity was further increased to 20,000
barrels of oil per day and 40 Mmcf of gas per day to accommodate production
from recent discoveries on Ship Shoal Blocks 193 and 194 with some extra
capacity for future discoveries on the Ship Shoal Block 192, 193, and 194
leases.
In the first quarter of 1997, the Company drilled and completed the Ship
Shoal 193 #B-1 well that intersected 36 feet of net oil pay in two sands
identified on 3-D seismic data in the central part of the lease block. After
installing a caisson platform and connecting the platform to the Ship Shoal 193
main processing facility, the well commenced production at the rate of 1,100
barrels of oil per day and 1.9 Mmcf of gas per day. The Company spudded its
seventh well on Block 193 on May 4, 1997. After failing to recover stuck drill
pipe, the Company has suspended operations in the well pending its review of
sidetrack operations.
For the six months ended June 30, 1997, six wells produced a net average of
4,125 barrels of oil per day and 5.3 Mmcf of gas per day from four separate
pools in three geologic horizons. The Company believes there is additional
exploration potential on this block and plans to drill additional wells on the
block over the next two years to evaluate this reserve potential.
33
<PAGE> 35
West Cameron Blocks 543 and 544
The Company acquired West Cameron Block 543 in a 1991 OCS lease sale for
$421,150. This block is located on the southeast flank of a shale diapir
situated approximately 100 miles offshore Louisiana in approximately 180 feet
of water. Between 1972 and 1985, the previous lessee produced approximately 175
Bcf of gas and one million barrels of oil from this block primarily from the
L-1 Sand. Prior production data is not necessarily indicative of future
production. In developing the L-1 Sand, however, the previous lessee located
its platform off structure in a less than optimum position to evaluate and
access hydrocarbons trapped in sands both above and below the L-1 Sand level.
Prior to bidding on this block, the Company used 2-D seismic data to determine
the prospects for hydrocarbons in sands above and below the L-1 Sand.
After acquiring Block 543, the Company shot a proprietary 3-D seismic
survey over the block and the adjoining Block 544. This seismic data indicated
the presence of untested hydrocarbon bearing sands trapped updip against the
shale diapir. The Company subsequently acquired West Cameron Block 544 at a
1994 OCS lease sale for $1.4 million.
During the second half of calendar 1994, the Company drilled two
exploratory wells down the face of the shale diapir. The first well intersected
multiple hydrocarbon bearing sand intervals and encountered over 637 feet of
net pay. The second well confirmed the areal extent of these pay intervals in a
second fault block, and the decision was made to proceed immediately with the
construction and installation of a manned four-pile production platform. This
platform was installed in June 1995 and is capable of processing 4,000 barrels
of oil and 80 Mmcf of gas per day. This manned platform is expected to be the
center of operations for the Company's West Cameron and High Island area
leases.
In 1996, the Company drilled two additional wells on the lease blocks. The
#A-6 well intersected oil and gas pay in five of the "B" Series Sands. This
well was brought into production during the first quarter of 1997, after the
Company performed remedial actions to correct mechanical problems in the well
bore. The #A-7 well intersected 203 feet of net gas pay in three zones and
production from this well has stabilized at the approximate rate of 200 barrels
of oil per day and 26 Mmcf of gas per day from two of the zones.
In February 1997, the Company drilled and completed the #A-8 well. This
well intersected 70 feet of net gas and oil pay in two zones. Production from
this well has stabilized at the approximate rate of 650 barrels of oil per day
and 2.0 Mmcf of gas per day.
For the six months ended June 30, 1997, the eight wells produced a net
average of 1,771 barrels of oil per day and 30.2 Mmcf of gas per day.
Main Pass Block 91
The Company acquired the western half of Main Pass Block 91 in a 1994 OCS
lease sale for $40,905. This property is approximately 40 miles offshore
Louisiana in approximately 35 feet of water. The lease block is adjacent to the
Company's Main Pass 6 and 7 area leases. Between 1968 and 1992, previous
lessees produced 14 Mbbls of oil and 87 Bcf of gas from four wells on this
lease block, however prior production data is not necessarily indicative of
future production.
Main Pass Block 91 is situated on the north flank of the Main Pass Block 6
gas field, which is a four-way anticline with numerous gas reservoirs and one
oil reservoir. Prior to acquiring the lease block, the Company identified what
it believed to be additional reserve potential through the use of 3-D seismic
data and detailed geologic work.
During the fourth quarter of calendar 1995, the Company drilled and
completed two exploratory wells on this block. These wells encountered a number
of geologic horizons that the Company believes will be commercially productive
and to which proved reserves have been ascribed in the Ryder Scott Report as of
December 31, 1996. Production from both wells commenced during the second
quarter of calendar 1996 after the Company installed pipelines connecting the
wells to the Company's Main Pass Block 7 production facility. During the third
quarter of 1996, the Company drilled the #A-2 well that intersected gas pay in
eleven sands. This well was brought into production in October 1996 as a dual
zone producer. For the six months ended June 30, 1997, net production from Main
Pass Block 91 averaged 41 barrels of oil per day and 16.5 Mmcf of gas per day.
34
<PAGE> 36
Ship Shoal Block 194
Ship Shoal Block 194 is adjacent to the Company's productive Ship Shoal
Block 193 and is due south of the Ship Shoal Block 181 oil field. The lease was
acquired in a 1995 OCS lease sale for $1.2 million and is in 80 feet of water.
The lease had not been previously drilled and before acquiring this lease,
the Company, using 3-D seismic data, identified a fault closure prospect
similar to the productive traps on Ship Shoal Block 193.
In 1996, the Company drilled and completed two exploratory wells on this
block. The first well encountered commercial quantities of hydrocarbons in six
sands. The Company electrically logged in excess of 232 feet (true vertical
thickness) of hydrocarbon-bearing sands. The well was completed as a dual zone
producer with production commencing in January 1997. Production stabilized at
the combined total rate of approximately 4,000 barrels of oil per day and 14
Mmcf of gas per day.
The second well drilled on the block tested the structural crest at a
bottom hole location lying approximately 2,500 feet northeast of the bottom
hole location of the #1 well. The second well encountered thirty feet of true
vertical thickness net oil pay in the primary target that was fault separated
from the #1 well. This well was brought into production in February 1997.
To produce reserves from these wells, a mantis-type platform facility was
installed and connected by pipeline to the Company's production platform
located on Ship Shoal Block 193.
West Cameron Blocks 461, 462 and 480
West Cameron Blocks 461, 462 and 480 were acquired at OCS lease sales in
1993 and 1994 at an aggregate cost of $1.17 million. These blocks are
contiguous and in approximately 135 feet of water offshore Louisiana. Between
1975 and 1991, the previous lessee of Block 480 produced 106 Bcf of gas from 16
wells completed in four separate pay zones, although prior production data is
not necessarily indicative of future production. The Company identified its
initial prospects on this block using 2-D seismic data and conventional log
analysis. Although the Company has identified prospects on this block, there
can be no assurance that such prospects will be commercially productive.
In late 1993, the Company acquired 3-D seismic data over Block 480 and the
adjoining open lease blocks, Blocks 461 and 462, on which only one well had
been previously drilled. Using this 3-D seismic data, the Company identified
additional reserve potential on all three lease blocks and subsequently
acquired Blocks 461 and 462 at a 1994 OCS lease sale.
The Company has identified six prospective zones, characterized by 3-D
seismic amplitude anomalies, trapped in three separate fault blocks. In the
first quarter of 1997, the Company drilled two wells on Block 461. The #1 well
encountered 111 feet of net gas pay in seven zones and the #2 well intersected
60 feet of net gas pay in two zones. Production from both wells is expected to
commence by mid 1997 after the Company installs a caisson platform and pipeline
connecting the facility to a gas sales trunkline. The Company spudded the first
exploratory well on Block 480 on May 22, 1997. The well encountered a single
target amplitude which was found to be an undersaturated gas sand, and the
Company has suspended operations in the well pending its review of sidetrack
options.
The Company is currently drilling the West Cameron Block 461 #3 well from
the same surface location as the Block 480 well. This well will test different
zones than those zones encountered in the West Cameron Block 461 #1 and #2
wells. The results of this well will determine which options will be pursued in
the Block 480 well.
South Marsh Island Block 7
South Marsh Island Block 7 is in 65 feet of water adjacent to the South
Marsh Island Block 6 field. The Company acquired this block at a 1993 OCS lease
sale for $411,050.
The lease produced gas until 1991 from two pools trapped in strong east
dipping sands truncated against a salt dome with north and south bounding
radial faults. Using conventional 3-D seismic data and well log analysis, the
Company identified objectives in two established producing zones and two zones
not previously tested. The seismic data also suggested the possibility of a
salt overhang existing on the block. Subsequently, the Company reprocessed
35
<PAGE> 37
newly-acquired 3-D seismic data using post-stack turning wave depth migration,
which identified an untested geologic prospect beneath the salt overhang.
During the first quarter of 1997, the Company tested these prospects with the
drilling of the South Marsh Island 7 #1 well. This well encountered 100 feet of
net gas pay in three zones. After installing a production caisson and pipeline,
this well was brought on production during the last week of June 1997. This
well has been completed as a dual producer.
Grand Isle Block 45
Grand Isle Block 45 was purchased by the Company at an OCS lease sale in
1996 for $1.3 million. This block is in 120 feet of water, and the lease was
originally purchased by a consortium in 1967. The lease was held by production
until 1988 at which time it was dropped. The previous lessees reacquired the
lease block in 1990 and dropped the lease in 1995 without any additional
drilling activity.
The Company's interpretation of 3-D seismic data indicated a number of
prospects involving the same Pliocene and Miocene sands that produce from the
nearby Grand Isle Block 41, Block 43, and Block 47 Fields. These prospects
include a structural stratigraphic trap that is updip from a watered out gas
well with a deeper untested fault trap closure. Previous lessees of Block 45
did not have 3-D seismic data available for interpretation prior to drilling on
the block.
During the second quarter of 1997, the Company drilled its first
exploratory well on this block. This well encountered 40 feet of net gas pay in
two zones in an updip section of a previously produced structural stratigraphic
trap. Production from the well is expected to commence during the third quarter
of 1997 after the Company installs a caisson platform and pipeline connecting
the facility to a gas sales trunkline. The Company anticipates drilling
additional wells on Block 45 commencing in the fourth quarter of 1997.
Ship Shoal Block 192
Ship Shoal Block 192 is located east of and adjacent to the Company's
productive Ship Shoal Block 193. The lease was acquired in a 1996 OCS lease
sale for $893,000 and is in 80 feet of water.
In 1980 and 1981, two unsuccessful exploration wells were drilled on the
lease block by other energy companies. Neither exploratory well was drilled
deep enough to test the Company's objective. Before acquiring the lease, the
Company used 3-D seismic data to identify a fault closure prospect. Previous
lessees of this block did not have 3-D seismic data available for
interpretation prior to drilling.
The objective on Ship Shoal Block 192 is a prospective sand in a
south-dipping down thrown, amplitude supported fault trap located in the
central portion of the lease block. This sand is stratigraphically equivalent
to sands that are currently producing oil from the Company's Ship Shoal Block
193. The Company plans to test this objective sand in Block 192 during the
third quarter of 1997. Although the Company has identified prospects on this
block, there can be no assurance that these prospects will be commercially
productive.
Main Pass Block 104
Main Pass Block 104 is five miles from the Company's Main Pass Block 7
production facility in approximately 35 feet of water. The lease was acquired
by the Company at an OCS lease sale in 1993 for $328,140.
The Company initially identified an amplitude in a down thrown fault
closure on a portion of this lease block. The trapping fault is an easterly
extension of a trapping fault in the nearby Main Pass Block 19 field, and 3-D
seismic data indicates the potential presence of gas bearing sands. The Company
believes that these prospects could be developed with one well and, due to its
proximity to the Company's Main Pass Block 7 production facility, at relatively
low development costs. The Company is currently drilling its initial
exploration well on this block. Although the Company has identified prospects
on this block, there can be no assurance that these prospects will be
commercially productive.
Main Pass Block 84
The Company acquired Main Pass Block 84, located in less than ten feet of
water, at a State of Louisiana lease sale in May 1994 for $14,463. The Company
has identified a prospect using 2-D seismic data and well control. The prospect
is interpreted to contain multiple oil zones lying updip from an adjacent
abandoned well drilled by a previous operator.
36
<PAGE> 38
The Company believes this prospect can be developed with one well. There are
several transportation pipelines within a three-mile radius of the lease block.
The Company is currently drilling its initial exploration well on Block
84. Although the Company has identified prospects on this block, there can be
no assurance that these prospects will be commercially productive.
South Marsh Island Blocks 189 and 190
South Marsh Island Blocks 189 and 190 were awarded to the Company at an
OCS lease sale in 1996 for $831,000 and $3.2 million, respectively. These
leases are in 350 feet of water, and the blocks were originally leased in 1983
at a total cost of $10,000,000. The original lessees drilled wells on the
blocks and encountered hydrocarbons that were considered non-commercial and the
blocks were dropped in 1988. The blocks were leased again in 1990 at a total
cost of $3,500,000 and this lessee drilled two wells on the blocks that were
also considered non-commercial. These leases expired in 1995.
The Company has identified four primary objectives distributed over five
areas underlying the two blocks. The reservoirs are typically stacked
channel-levee systems and ponded basin floor fans. One objective is a south
plunging faulted nose on the south flank of a partially overhung salt dome.
Previous lessees of Blocks 189 and 190 did not have 3-D seismic data available
for interpretation prior to drilling on the blocks. Although the Company has
identified multiple prospects on these blocks, there can be no assurance that
these prospects will be commercially productive.
West Cameron Blocks 515 and 516
The Company acquired West Cameron Blocks 515 and 516, located in
approximately 160 feet of water, at an OCS lease sale in 1995 for a total cost
of $452,000. The Company has identified a prospect that overlaps both blocks
using 3-D seismic data. The prospect is interpreted to be a gas-filled channel
sand encased by a thick shale section. The Company believes this prospect could
be developed with one well and the installation of a support caisson with
production deck and pipeline. Although the Company has identified prospects on
these blocks, there can be no assurance that the prospects will be commercially
productive.
High Island Blocks A-307 and A-308
At an OCS lease sale in 1995, the Company acquired at a total cost of
$850,200 the contiguous High Island Blocks 307-A and 308-A, which are
approximately 100 miles offshore Texas in 200 feet of water and 12 miles
southwest of the Company's facilities at West Cameron 544.
The Company identified a number of prospects using 3-D seismic data
acquired just prior to the lease sale. These prospects are characterized by 3-D
seismic amplitudes located within northerly dipping up thrown fault traps. The
Company believes these prospects could be developed with one unmanned
production facility and connected by pipeline to the Company's nearby West
Cameron 543/544 production platform, where the hydrocarbons could be processed
for sale at relatively low incremental costs. Although the Company has
identified prospects on these blocks, there can be no assurance that such
prospects will be commercially productive. Although the Company has identified
prospects on these blocks, there can be no assurance that the prospects will be
commercially productive.
Vermilion Block 47
Vermilion Block 47 was purchased by the Company at an OCS lease sale in
1995 for $561,000. This block is in 24 feet of water two miles east of the
Vermilion 46 field, which has produced over 130 Bcf; however, prior production
data is not necessarily indicative of future production. Production on this
block ceased in 1971 prior to the Company's acquisition.
The Company's interpretation of 3-D seismic data indicated a number of
prospects located in several northerly dipping up thrown fault block traps
potentially containing multiple pay sands similar to those sands found in
adjacent fields. Although the Company has identified prospects on this block,
there can be no assurance that these prospects will be commercially productive.
The Company plans to test its primary objective in this Block 47 within
the next two years.
37
<PAGE> 39
Mustang Island Block 748
The Company acquired Mustang Island Block 748, located in approximately 35
feet of water, at a State of Texas lease sale in April 1997 for a total cost of
$200,160. The Company has identified a prospect using 2-D seismic data and well
control. The first 3-D seismic survey is scheduled to be shot over the block in
1997. The Company believes this prospect could be developed with one well and
the installation of a support caisson with production deck and pipeline.
Although the Company has identified prospects on this block, there can be no
assurance that the prospects will be commercially productive.
OIL AND GAS RESERVES
The following table sets forth estimated net proved oil and gas reserves
of the Company, the estimated future net revenues before income taxes and the
present value of estimated future net revenues before income taxes related to
such reserves as of June 30, 1993, 1994, and 1995 and December 31, 1995 and
1996. All information in this Prospectus relating to estimated net proved oil
and gas reserves and the estimated future net cash flows attributable thereto
is based upon the Ryder Scott Reports. All calculations of estimated net proved
reserves have been made in accordance with the rules and regulations of the
Securities and Exchange Commission, and, except as otherwise indicated, give no
effect to federal or state income taxes otherwise attributable to estimated
future net revenues from the sale of oil and gas. The present value of
estimated future net revenues has been calculated using a discount factor of
10%.
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
--------------------------------------- -------------------------
1993 1994 1995 1995 1996
------------ ----------- ------------ ----------- ------------
<S> <C> <C> <C> <C> <C>
Total net proved:
Gas (Mmcf)...................................... $ 11,755 12,830 20,327 49,747 73,291
Oil (Mbbls)..................................... 1,136 2,650 6,881 7,172 8,318
Total (Mmcfe)................................... 18,571 28,730 61,613 92,779 123,199
NET PROVED DEVELOPED:
Gas (Mmcf)...................................... 11,755 12,830 12,003 25,852 43,133
Oil (Mbbls)..................................... 1,136 2,650 4,076 6,962 6,670
Total (Mmcfe)................................... 18,571 28,730 36,459 67,624 83,153
Estimated future net revenues before income taxes
(in thousands)..................................... $ 29,387 $ 44,480 $ 102,517 $ 190,703 $ 372,980
Present value of estimated future net revenues
before income taxes (in thousands)(1)(2)........... $ 24,653 $ 34,990 $ 76,632 $ 153,648 $ 308,226
Standardized measure of discounted future
net cash flows (in thousands)(3)................... $ 21,509 $ 30,122 $ 65,136 $ 131,488 $ 223,381
</TABLE>
- ------------------
(1) The present value of estimated future net revenues attributable to the
Company's reserves was prepared using constant prices as of the
calculation date, discounted at 10% per annum on a pre-tax basis.
(2) The December 1, 1996 amount was calculated using an average oil price of
$25.09 per barrel and an average gas price of $3.68 per Mcf, both adjusted
to reflect the effects of hedging. Using an oil price of $20.00 per barrel
and a gas price of $2.00 per Mcf at December 31, 1996, the discounted
present value of cash flows before income taxes of the Company's proved
reserves as of December 31, 1996, as estimated by Ryder Scott, would have
been $175 million.
(3) The standardized measure of discounted future net cash flows represents
the present value of estimated future net revenues after income tax
discounted at 10%.
There are numerous uncertainties inherent in estimating quantities of
proved reserves, future rates of production and the timing of development
expenditures, including many factors beyond the control of the Company. The
reserve data set forth herein represent only estimates. Reserve engineering is
a subjective process of estimating underground accumulations of oil and gas
that cannot be measured in an exact manner, and the accuracy of any reserve
estimate is a function of the quality of available data, engineering and
geological interpretation and judgment and the existence of development plans.
As a result, estimates of reserves made by different engineers for the same
property will often vary. Results of drilling, testing and production
subsequent to the date of an estimate may justify a revision of such estimates.
Accordingly, reserve estimates generally differ from the quantities of oil and
gas ultimately produced. Further, the
38
<PAGE> 40
estimated future net revenues from proved reserves and the present value thereof
are based upon certain assumptions, including geological success, prices, future
production levels and costs that may not prove to be correct. Predictions about
prices and future production levels are subject to great uncertainty, and the
meaningfulness of such estimates depends on the accuracy of the assumptions upon
which they are based.
ACQUISITION, PRODUCTION AND DRILLING ACTIVITY
Acquisition and Development Costs. The following table sets forth certain
information regarding the costs incurred by the Company in its acquisition,
exploration and development activities.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
------------ ----------- ------------ ----------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
Acquisition costs....................................... $ 2,785 $ 2,930 $ 6,699 $ 6,655 $ 5,789
Exploration costs....................................... 11,115 34,786 71,490 25,343 16,771
Development costs....................................... 6,344 12,925 14,187 7,221 53,831
------------ ----------- ------------ ----------- ------------
Total costs incurred.................................... $ 20,244 $ 50,641 $ 92,376 $ 39,219 $ 76,391
============ =========== ============ =========== ============
</TABLE>
Productive Well and Acreage Data. The following table sets forth certain
statistics for the Company regarding the number of productive wells and
developed and undeveloped acreage in the Gulf of Mexico as of June 30, 1997.
<TABLE>
<CAPTION>
GROSS NET
----------- -------------
<S> <C> <C>
Productive Wells(1):
Oil(2)............................................................................... 15 15.0
Gas(3)............................................................................... 24 23.3
----------- -------------
Total............................................................................ 39 38.3
=========== =============
Developed Acreage(1)...................................................................... 36,654 33,821
Undeveloped Acreage(1)(4)................................................................. 73,720 73,720
----------- -------------
Total............................................................................ 110,374 107,541
=========== =============
</TABLE>
- ------------------
(1) Productive wells consist of producing wells and wells capable of
production, including gas wells awaiting pipeline connections. Wells that
are completed in more than one producing horizon are counted as one well.
Undeveloped acreage includes leased acres on which wells have not been
drilled or completed to a point that would permit the production of
commercial quantities of oil and gas, regardless of whether or not such
acreage contains proved reserves. A gross acre is an acre in which an
interest is owned. A net acre is deemed to exist when the sum of
fractional ownership interests in gross acres equals one. The number of
net acres is the sum of the fractional interests owned in gross acres
expressed as whole numbers and fractions thereof.
(2) Two gross wells each have dual completions.
(3) Seven gross wells each have dual completions.
(4) Leases covering 13% of the Company's undeveloped acreage will expire in
1998, approximately 14% in 1999, 20% in 2000, 40% in 2001, and 13% in
2002.
Drilling Activity. The following table sets forth the Company's drilling
activity for the periods indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------------------------ ------------------------------
1994 1995 1996 1996 1997
------------- ------------ ------------- ------------- -------------
GROSS NET GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Gulf of Mexico
Exploratory wells.............. 2 2 4 4 1 1 1 1 10 10
Development wells.............. 1 1 3 3 7 7 4 4 0 0
Dry holes...................... 0 0 0 0 0 0 0 0 1 1
----- --- ----- --- ----- --- ----- --- ----- ---
Total...................... 3 3 7 7 8 8 5 5 11 11
</TABLE>
39
<PAGE> 41
OIL AND GAS MARKETING
All of the Company's natural gas, oil and condensate production was sold
at market prices under short-term contracts providing for variable or market
sensitive prices. The Company has not experienced any difficulties in marketing
its oil or gas.
There are a variety of factors which affect the market for oil and gas,
including the extent of domestic production and imports of oil and gas, the
proximity and capacity of natural gas pipelines and other transportation
facilities, demand for oil and gas, the marketing of competitive fuels and the
effects of state and federal regulations of oil and gas production and sales.
The oil and gas industry also competes with other industries in supplying the
energy and fuel requirements of industrial, commercial and individual
customers.
From time to time, the Company has utilized hedging transactions with
respect to a portion of its oil and gas production to achieve more predictable
cash flows, as well as to reduce its exposure to fluctuations in oil and gas
prices. The Company restricts the time and quantity of the aggregate oil and
gas production covered by such transactions. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations -- Hedging
Transactions."
Despite the measures taken by the Company to attempt to control price
risk, the Company remains subject to price fluctuations for oil and natural gas
sold in the spot market due primarily to seasonality of demand and other
factors beyond the Company's control. Domestic oil prices generally follow
worldwide oil prices, which are subject to price fluctuations resulting from
changes in world supply and demand. The Company continues to evaluate the
potential for reducing these risks, and expects to enter into additional hedge
transactions in future years. In addition, the Company also may close out any
portion of the existing, or yet to be entered into, hedges as determined to be
appropriate by management.
PRODUCTION SALES CONTRACTS
The Company markets all of the oil and gas production from its properties.
All of the Company's crude oil and gas production is sold to a variety of
purchasers under short-term (less than twelve months) contracts or thirty-day
spot purchase contracts. Natural gas and crude oil sales contracts are based
upon field posted prices plus negotiated bonuses. During calendar 1996, Pan
Energy Trading and Market Services, L.L.C. (formerly Panhandle Eastern
Corporation), Aquila Energy Marketing Corporation, and Natural Gas
Clearinghouse each purchased in excess of 10% of the gas sold by the Company
and Vision Resources, Inc. purchased in excess of 10% of the oil sold by the
Company. Based upon current demand for oil and gas, the Company does not
believe the loss of any of these purchasers would have a material adverse
effect on the Company.
Most of the Company's oil and all of the Company's gas is transported
through gathering systems and pipelines that are not owned by the Company.
Transportation space on such gathering systems and pipelines is occasionally
limited, and at times unavailable, due to repairs or improvements being made to
such facilities or due to such space being utilized by other oil or gas
shippers with priority transportation agreements. While the Company has not
experienced any inability to market its natural gas and oil, if transportation
space is restricted or unavailable, the Company's cash flow could be adversely
impacted.
COMPETITION
The oil and gas industry is highly competitive. The Company competes for
the acquisition of oil and gas properties with numerous other entities,
including major oil companies, other independent oil and gas concerns and
individual producers and operators. Many of these competitors have financial,
technical and other resources substantially greater than those of the Company.
Such companies may be able to pay more for productive oil and gas properties
and exploratory prospects and to define, evaluate, bid for and purchase a
greater number of properties and prospects than the Company's financial or
human resources permit. The Company's ability to acquire additional properties
and to discover reserves in the future will be dependent upon its ability to
evaluate and select suitable properties and to consummate transactions in a
highly competitive environment.
40
<PAGE> 42
REGULATION
The oil and gas industry is extensively regulated by federal, state and
local authorities. In particular, oil and gas production operations and
economics are affected by price controls, environmental protection statutes and
regulations, tax statutes and other laws relating to the petroleum industry, as
well as changes in such laws, changing administrative regulations and the
interpretations and application of such laws, rules and regulations. In October
1992, comprehensive national energy legislation was enacted which focuses on
electric power, renewable energy sources and conservation. This legislation,
among other things, guarantees equal treatment of domestic and imported natural
gas supplies, mandates expanded use of natural gas and other alternative fuel
vehicles, funds natural gas research and development, permits continued
offshore drilling and use of natural gas for electric generation and adopts
various conservation measures designed to reduce consumption of imported oil.
The legislation may be viewed as generally intended to encourage the
development and use of natural gas. Oil and gas industry legislation and agency
regulation are under constant review for amendment and expansion for a variety
of political, economic and other reasons.
Regulation of Natural Gas and Oil Exploration and Production. The
Company's operations are subject to various types of regulation at the federal,
state and local levels. Such regulation includes requiring permits for the
drilling of wells, maintaining bonding requirements in order to drill or
operate wells and regulating the location of wells, the method of drilling and
casing wells, the surface use and restoration of properties upon which wells
are drilled, the plugging and abandoning of wells and the disposal of fluids
used in connection with operations. The Company's operations are also subject
to various conservation laws and regulations. These include the regulation of
the size of drilling and spacing units or proration units and the density of
wells which may be drilled in and the unitization or pooling of oil and gas
properties. In this regard, some states (such as Oklahoma) allow the forced
pooling or integration of tracts to facilitate exploration while other states
(such as Texas) rely on voluntary pooling of lands and leases. In areas where
pooling is voluntary, it may be more difficult to form units and, therefore,
more difficult to develop a project if the operator owns less than 100% of the
leasehold. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, generally prohibit the venting or flaring of
gas and impose certain requirements regarding the ratability of production. The
effect of these regulations may limit the amount of oil and gas the Company can
produce from its wells and may limit the number of wells or the locations at
which the Company can drill. The regulatory burden on the oil and gas industry
increases the Company's costs of doing business and, consequently, affects its
profitability. Inasmuch as such laws and regulations are frequently expanded,
amended or reinterpreted, the Company is unable to predict the future cost or
impact of complying with such regulations.
The Company has operations located on federal oil and gas leases, which
are administered by the MMS. Such leases are issued through competitive
bidding, contain relatively standardized terms and require compliance with
detailed MMS regulations and orders pursuant to the Outer Continental Shelf
Lands Act ("OCSLA") (which are subject to change by the MMS). For offshore
operations, lessees must obtain MMS approval for exploration plans and
development and production plans prior to the commencement of such operations.
In addition to permits required from other agencies (such as the Coast Guard,
the Army Corps of Engineers and the Environmental Protection Agency (the
"EPA")), lessees must obtain a permit from the MMS prior to the commencement of
drilling. The MMS has promulgated regulations requiring offshore production
facilities located on the OCS to meet stringent engineering and construction
specifications. The MMS proposed additional safety-related regulations
concerning the design and operating procedures for OCS production platforms and
pipelines. These proposed regulations were withdrawn pending further
discussions among interested federal agencies. The MMS also has regulations
restricting the flaring or venting of natural gas, liquid hydrocarbons and oil
without prior authorization. Similarly, the MMS has promulgated other
regulations governing the plugging and abandonment of wells located offshore
and the removal of all production facilities. To cover the various obligations
of lessees on the OCS, the MMS generally requires that lessees post substantial
bonds or other acceptable assurances that such obligations will be met. The
cost of such bonds or other surety can be substantial and there is no assurance
that bonds or other surety can be obtained in all cases. Under certain
circumstances, the MMS may require Company operations on federal leases to be
suspended or terminated. Any such suspension or termination could materially
and adversely affect the Company's financial condition and operations.
The MMS issued a notice of proposed rulemaking in which it proposed to
amend its regulations governing the calculation of royalties and the valuation
of crude oil produced from federal leases. The proposed rule would modify the
valuation procedures for both arm's length and non-arm's length crude oil
transactions to decrease reliance on posted prices and assign a value to crude
oil that better reflects market value, establish a new MMS form for collecting
value differential data, and amend the valuation procedure for the sale of
federal royalty oil. The Company cannot predict at this stage of the rulemaking
proceeding how it might be affected by this amendment to the MMS' regulations.
41
<PAGE> 43
In April 1997, after two years of study, the MMS withdrew proposed changes
to the way it values natural gas for royalty payments. These proposed changes
would have established an alternative market-based method to calculate
royalties on certain natural gas sold to affiliates or pursuant to non-arm's
length sales contracts.
Natural Gas and Oil Marketing and Transportation. Historically, the
transportation and sale for resale of natural gas in interstate commerce have
been regulated pursuant to the Natural Gas Act of 1938, the Natural Gas Policy
Act of 1978 (the "NGPA") and the regulations promulgated thereunder by the
Federal Energy Regulatory Commission (the "FERC"). In the past, the federal
government has regulated the prices at which oil and gas could be sold.
Deregulation of wellhead sales in the natural gas industry began with the
enactment of the NGPA. In 1989, the Natural Gas Wellhead Decontrol Act was
enacted. This act amended the NGPA to remove both price and non-price controls
from natural gas sold in "first sales" as of January 1, 1993. 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.
Several major regulatory changes have been implemented by the FERC from
1985 to the present that affect the economics of natural gas production,
transportation and sales. In addition, the FERC continues to promulgate
revisions to various aspects of the rules and regulations affecting those
segments of the natural gas industry, most notably interstate natural gas
transmission companies, which remain subject to the FERC's jurisdiction. These
initiatives may also affect the intrastate transportation of gas under certain
circumstances. The stated purposes of many of these regulatory changes is to
promote competition among the various sectors of the gas industry. The ultimate
impact of these complex and overlapping rules and regulations, many of which
are repeatedly subjected to judicial challenge and interpretation, cannot be
predicted.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B and
636-C (collectively, "Order No. 636"), which, among other things, require
interstate pipelines to "restructure" to provide transportation separate, or
"unbundled," from the pipelines' sales of gas. Also, Order No. 636 requires
pipelines to provide open-access transportation on a basis that is equal for
all gas supplies. Order No. 636 has been implemented as a result of FERC orders
in individual pipeline service restructuring proceedings. In many instances,
the result of the Order No. 636 and related initiatives have been to
substantially reduce or bring to an end the interstate pipelines' traditional
roles as wholesalers of natural gas in favor of providing only storage and
transportation services. The FERC has issued final orders in virtually all
pipeline restructuring proceedings, and has completed a series of one year
reviews to determine whether refinements are required regarding individual
pipeline implementations of Order No. 636.
Although Order No. 636 does not directly regulate natural gas producers
such as the Company, the FERC has stated that Order No. 636 is intended 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 and its natural gas
marketing efforts. The United States Court of Appeals for the District of
Columbia Circuit (the "Court") recently issued its decision in the appeals of
Order No. 636. The Court largely upheld the basic tenets of Order No. 636,
including the requirements that interstate pipelines "unbundle" their sales of
gas from transportation and that pipelines provide open-access transportation
on a basis that is equal for all gas suppliers. The Court remanded several
relatively narrow issues for further explanation by the FERC. In doing so, the
Court made it clear that the FERC's existing rules on the remanded issues would
remain in effect pending further consideration. The Company believes that the
issues remanded for further action do not appear to materially affect it. The
United States Supreme Court has decided not to review the Court's decision
regarding Order No. 636. In February 1997, the FERC issued Order No. 636-C, its
order on remand from the Court. Order 636-C is currently pending on rehearing
before the FERC. Although Order No. 636 could provide the Company with
additional market access and more fairly applied transportation service rates,
terms and conditions, it could also subject the Company to more restrictive
pipeline imbalance tolerances and greater penalties for violations of those
tolerances. The Company does not believe, however, that it will be affected by
any action taken with respect to Order No. 636 materially differently than
other natural gas producers and marketers with which it competes.
The FERC has issued a statement of policy and a request for comments
concerning alternatives to its traditional cost-of-service rate making
methodology. This policy statement articulates the criteria that the FERC will
use to evaluate proposals to charge market-based rates for the transportation
of natural gas. The policy statement also provides that the FERC will consider
proposals for negotiated rates for individual shippers of natural gas, so long
as a cost-of-service-based rate is available as a recourse rate. The FERC also
has requested comments on whether it should allow gas pipelines the flexibility
to negotiate the terms and conditions of transportation service with
prospective
42
<PAGE> 44
shippers. The Company cannot predict what further action the FERC will take on
these matters, however, the Company does not believe that it will be affected
by any action taken materially differently than other natural gas producers and
marketers with which it competes.
The FERC has announced its intention to reexamine certain of its
transportation-related policies, including the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
for resale in the secondary market. While any resulting FERC action would
affect the Company only indirectly, the FERC's current rules and policies may
have the effect of enhancing competition in natural gas markets by, among other
things, encouraging non-producer natural gas marketers to engage in certain
purchase and sale transactions. The Company cannot predict what action the FERC
will take on these matters, nor can it accurately predict whether the FERC's
actions will achieve the goal of increasing competition in markets in which the
Company's natural gas is sold. However, the Company does not believe that it
will be affected by any action taken materially differently than other natural
gas producers and marketers with which it competes.
The FERC has issued a policy statement on how interstate natural gas
pipelines can recover the costs of new pipeline facilities. While the FERC's
policy statement on new construction cost recovery affects the Company only
indirectly, in its present form, the new policy should enhance competition in
natural gas markets and facilitate construction of gas supply laterals. The
FERC has denied requests for rehearing of this policy statement. The FERC has
issued numerous orders approving the spin-down or spin-off by interstate
pipelines of their gathering facilities. A "spin-off" is a FERC-approved sale
of gathering facilities to a non-affiliate. A "spin-down" is a transfer of
gathering facilities to an affiliate. These approvals were given despite the
strong protests of a number of producers concerned that any diminution in
FERC's oversight of interstate pipeline-related gathering services might result
in a denial of open access or otherwise enhance the pipeline's monopoly power.
While the FERC has stated that it will retain limited jurisdiction over such
gathering facilities and will hear complaints concerning any denial of access,
it is unclear what effect the FERC's gathering policy will have on producers
such as the Company and the Company cannot predict what further action the FERC
will take on these matters.
Commencing in October 1993, the FERC issued a series of rules (Order Nos.
561 and 561-A) establishing an indexing system under which oil pipelines will
be able to change their transportation rates, subject to prescribed ceiling
levels. The indexing system, which allows or may require pipelines to make rate
changes to track changes in the Producer Price Index for Finished Goods, minus
one percent, became effective January 1, 1995. The FERC's decision in this
matter was recently affirmed by the Court. The Company is not able at this time
to predict the effects of Order Nos. 561 and 561-A, 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 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.
Notwithstanding the foregoing, the Company does not anticipate that compliance
with existing federal, state and local laws, rules and regulations will have a
material or significantly adverse effect upon the capital expenditures,
earnings or competitive position of the Company.
Environmental Regulation. Activities of the Company with respect to the
exploration, development and production of oil and natural gas are subject to
stringent environmental regulation by state and federal authorities including
the EPA. Such regulation has increased the cost of planning, designing,
drilling, operating and in some instances, abandoning wells. In most instances,
the regulatory requirements relate to the handling and disposal of drilling and
production waste products and waste created by water and air pollution control
procedures. Although the Company believes that compliance with environmental
regulations will not have a material adverse effect on operations or earnings,
the risks of substantial costs and liabilities are inherent in oil and gas
operations, and there can be no assurance that significant costs and
liabilities, including criminal penalties, will not be incurred. Moreover, it
is possible that other developments, such as stricter environmental laws and
regulations, and claims for damages to property or person resulting from the
Company's operations could result in substantial costs and liabilities.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons with respect to the release of a "hazardous substance" into the
environment. These persons include the owner and operator of the disposal site
or sites where the release occurred and companies that disposed or arranged for
the
43
<PAGE> 45
disposal of the hazardous substances found at such site. Persons who are or
were responsible for releases of hazardous substances under CERCLA may be
subject to joint and several liability for the costs of cleaning up the
hazardous substances that have been released into the environment and for
damages to natural resources, and it is not uncommon for neighboring landowners
and other third parties to file claims for personal injury and property damage
allegedly caused by the hazardous substances released into the environment.
The Company generates wastes, including hazardous wastes, that are subject
to the federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. The EPA and various state agencies have limited the disposal
options for certain hazardous and nonhazardous wastes. Furthermore, certain
wastes generated by the Company's oil and natural gas operations that are
currently exempt from treatment as "hazardous wastes" may in the future be
designated as "hazardous wastes," and therefore be subject to more rigorous and
costly operating and disposal requirements.
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the exploration and
production of oil and gas. Although the Company has utilized operating and
disposal practices that were standard in the industry at the time, hydrocarbons
or other wastes may have been disposed of or released on or under the
properties owned or leased by the Company or on or under other locations where
such wastes have been taken for disposal. In addition, many of these properties
have been operated by third parties whose treatment and disposal or release of
hydrocarbons or other wastes was not under the Company's control. These
properties and the wastes disposed thereon may be subject to CERCLA, RCRA and
analogous state laws. Under such laws, the Company could be required to remove
or remediate previously disposed wastes (including wastes disposed of or
released by prior owners or operators) or property contamination (including
groundwater contamination) or to perform remedial plugging operations to
prevent future contamination.
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder
impose a variety of regulations on "responsible parties" related to the
prevention of oil spills and liability for damages resulting from such spills
in United States waters. A "responsible party" includes the owner or operator
of an onshore facility, vessel or pipeline, or the lessee or permittee of the
area in which an offshore facility is located. The OPA assigns liability to
each responsible party for oil removal costs and a variety of public and
private damages. While liability limits apply in some circumstances, a party
cannot take advantage of liability limits if the spill was caused by gross
negligence or willful misconduct or resulted from violation of a federal
safety, construction or operating regulation. If the party fails to report a
spill or cooperate fully in the cleanup, liability limits likewise do not
apply. Few defenses exist to the liability imposed by the OPA.
The OPA also imposes ongoing requirements on responsible parties,
including proof of financial responsibility to cover at least some costs in a
potential spill. For tank vessels, including mobile offshore drilling rigs, the
OPA imposes on owners, operators and charterers of the vessels, an obligation
to maintain evidence of financial responsibility of up to $10 million depending
on gross tonnage. With respect to offshore facilities, proof of greater levels
of financial responsibility may be applicable. For offshore facilities that
have a worst case oil spill potential of more than 1,000 barrels (which
includes many of the Company's offshore producing facilities), certain
amendments to the OPA that were enacted in 1996 provide that the amount of
financial responsibility that must be demonstrated by most facilities range
from $10 million in specified state waters to $35 million in federal OCS
waters, with higher amounts, up to $150 million in certain limited
circumstances where the MMS believes such a level is justified by the risks
posed by the quantity or quality of oil that is handled by the facility. On
March 25, 1997, the MMS promulgated a proposed rule implementing these OPA
financial responsibility requirements. Under the proposed rule, the amount of
financial responsibility required for a facility would depend on the "worst
case" oil spill discharge volume calculated for the facility. For oil and gas
producers such as the Company operating offshore facilities in OCS waters,
worst case discharge volumes of up to 35,000 barrels will require a financial
responsibility demonstration of $35.0 million, while worst case discharge
volumes in excess of 35,000 barrels will require demonstrations ranging from
$70.0 million to $150.0 million.
The Company believes that it currently has established adequate proof of
financial responsibility for its offshore facilities at no significant increase
in expense over recent prior years. However, the Company cannot predict whether
these financial responsibility requirements under the OPA amendments or
proposed rule will result in the imposition of substantial additional annual
costs to the Company in the future or otherwise materially adversely effect the
Company. The impact, however, should not be any more adverse to the Company
than it will be to other similarly situated or less capitalized owners or
operators in the Gulf of Mexico. OPA also imposes other requirements on
facility operators, such as the preparation of an oil spill contingency plan.
The Company has such plans in place. The failure to comply with
44
<PAGE> 46
ongoing requirements or inadequate cooperation in a spill event may subject a
responsible party to civil or even criminal liability.
OPERATING HAZARDS AND INSURANCE
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or natural gas reservoirs will be
encountered, that operations may be curtailed, delayed or canceled as a result
of title problems, weather conditions, compliance with governmental
requirements, mechanical difficulties or shortages or delays in the delivery of
equipment and that the availability or capacity of gathering systems, pipelines
or processing facilities may limit the Company's ability to market its
production. There can be no assurance that new wells drilled by the Company
will be productive or that the Company will recover all or any portion of its
investment. Drilling for oil and natural gas may involve unprofitable efforts,
not only from dry wells, but from wells that are productive but do not produce
sufficient net revenues to return a profit after drilling, operating and other
costs.
In addition, the Company's properties may be susceptible to hydrocarbon
drainage from production by other operators on adjacent properties. Industry
operating risks include the risk of fire, explosions, blow-outs, pipe failure,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures or discharges of toxic gases, the occurrence of any of
which could result in substantial losses to the Company due to injury or loss
of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations.
Additionally, the Company's oil and gas operations are located in an area that
is subject to tropical weather disturbances, some of which can be severe enough
to cause substantial damage to facilities and possibly interrupt production.
The MMS requires lessees of OCS properties to post performance bonds in
connection with the plugging and abandonment of wells located offshore and the
removal of all production facilities. The Company has posted an area wide bond
meeting MMS requirements and has obtained additional supplemental bonding on
its offshore leases as required by the MMS. The amount of bonds posted with the
MMS is $5.46 million.
The Company maintains customary oil and gas related third party liability
coverage, which it must renew annually, that insures the Company against
certain sudden and accidental risks associated with drilling, completing and
operating its wells. There can be no assurance that this insurance will be
adequate to cover any losses or exposure to liability or that the Company will
be able to renew its coverage annually. The Company and its subsidiaries carry
workers' compensation insurance in all states in which they operate. While the
Company believes this coverage is customary in the industry, it does not
provide complete coverage against all operating risks.
EMPLOYEES
The Company presently has 47 full-time employees, primarily professionals,
including geologists, geophysicists and engineers. The Company also relies on
the services of certain consultants for technical and operational guidance. The
Company believes that its relationships with its employees and consultants are
satisfactory and has entered into employment and consulting contracts with its
executives and agreements with certain technical personnel and consultants whom
it considers particularly important to the operations of the Company. There can
be no assurance that such individuals will remain with the Company for the
immediate or foreseeable future. None of the Company's employees are covered by
a collective bargaining agreement. In addition, the Company does not carry
keyman insurance on any of its employees. From time to time, the Company also
utilizes the services of independent consultants and contractors to perform
various professional services, particularly in the areas of construction,
design, well site surveillance, permitting and environmental assessment. Field
and on-site production operation services, such as maintenance, dispatching,
inspection and testing, are generally provided by independent contractors
supervised by Company employees.
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.
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<PAGE> 47
MANAGEMENT
DIRECTORS AND EXECUTIVES
The following table sets forth the name, age and position of each person
who is a director, executive officer, key employee, or who provides services to
the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------------------- ------- ----------------------------------------------------
<S> <C> <C>
DIRECTORS AND EXECUTIVES:
Terrence N. Fern........................... 48 Chairman and Chief Executive Officer
Alan H. Stevens............................ 52 Director, President and Chief Operating Officer
Jeffrey H. Warren.......................... 45 Director, Vice President and Secretary
Anthony J. Walton.......................... 54 Director
Maynard V. Smith........................... 47 General Manager-- Exploration and Production
Howard H. Wilson, Jr....................... 39 Vice President (Operations)
Mark A. Gannaway........................... 41 Exploration Manager
Prent H. Kallenberger...................... 42 Geophysical Manager
Ross A. Keogh.............................. 38 Financial Controller and Treasurer
</TABLE>
Mr. Smith provides services to the Company through an arrangement with the
Company's parent.
The following biographies describe the business experience of the
directors and executives of the Company and Petsec Energy. Directors serve
annual terms.
TERRENCE N. FERN has served as Chairman and Chief Executive Officer of the
Company since 1989. Mr. Fern has over 25 years of extensive international
experience in petroleum and minerals exploration, development and financing.
Mr. Fern holds a Bachelor of Science degree from The University of Sydney and
has followed careers in both exploration geophysics and natural resource
investment.
ALAN H. STEVENS has served as Director, President and Chief Operating
Officer since July 1997. Mr. Stevens has over 31 years of experience in the
petroleum industry and has served in various technical and executive positions
involving all phases of exploration and operations management in domestic and
international regions. Previously, Mr. Stevens was Senior Vice President,
Worldwide Exploration, for Occidental Petroleum Corporation. Prior to joining
Occidental, Mr. Stevens was the Exploration Manager in Tenneco Oil Company's
Pacific Coast Division. Mr. Stevens holds Bachelor of Science and Master of
Science degrees in Geological Engineering from Michigan Technical University.
JEFFREY H. WARREN has served as Director, Vice President and Secretary of
the Company since 1994. Between 1978 and 1988, Mr. Warren served in various
technical and supervisory positions with Getty Oil Company and Tenneco Oil
Company in California. From November 1988 to September 1994, Mr. Warren served
as Vice President of Tejon Ranch Company (AMEX: TRC). Mr. Warren holds a
Bachelor of Science degree and Bachelor of Arts degree from the University of
California at Davis.
ANTHONY J. WALTON has served as Director of the Company since 1994. Mr.
Walton is President of Armstrong Holdings Corp., a private investment company
and corporate finance advisory firm. Previously, Mr. Walton was Chief Executive
Officer of Llama Company, a regional investment bank specializing in private
equity and debt placements for medium-sized companies. Prior to joining Llama
Company, Mr. Walton served as Chief General Manager, Americas and Europe, of
Westpac Banking Corporation of Sydney, Australia, and held various management
positions with Chase Manhattan Bank in New York and London. Mr. Walton received
his B.A. from Haverford College and an M.B.A. in International Finance from the
Wharton Graduate School of Finance at the University of Pennsylvania.
MAYNARD V. SMITH has served as General Manager -- Exploration and
Production since 1990. Mr. Smith has over 20 years of oil and gas exploration
experience and has served in various technical and executive positions with
Gulf Oil Corporation, Tenneco Oil Company, Natomas Oil Company, and Barcoo
Petroleum Company in the United States, Australia and Southeast Asia. Mr. Smith
holds a Bachelor of Science degree in Geology from the California State
University at San Diego.
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<PAGE> 48
HOWARD H. WILSON, JR. has served as Vice President (Operations) of the
Company since 1993. Between 1981 and 1993, Mr. Wilson held various technical
and managerial positions with Placid Oil Company and Nerco Oil and Gas, Inc.
involving onshore and offshore oil and gas fields in Louisiana. Mr. Wilson
holds a Bachelor of Science degree in Petroleum Engineering from the Louisiana
Polytechnic Institute.
MARK A. GANNAWAY is the Exploration Manager of the Company. Mr. Gannaway
joined the Company in July 1991. Between 1979 and 1988, Mr. Gannaway worked for
Tenneco Oil Company in various technical and supervisory positions and his
career with Tenneco involved working in the Midcontinent and Eastern Gulf of
Mexico regions. From 1988 to 1990 Mr. Gannaway was a geologic consultant in
Lafayette, Louisiana. Mr. Gannaway holds a Bachelor of Science degree in
Geological Engineering from the University of Oklahoma.
PRENT H. KALLENBERGER is the Geophysical Manager of the Company. He joined
the Company in September 1992. Between 1982 and 1992, Mr. Kallenberger worked
in various technical and supervisory positions with Tenneco Oil Company, Union
Pacific Resources, Inc., and Unocal Corporation in California and Texas. Mr.
Kallenberger holds a Bachelor of Science degree in Geology from Boise State
University and a Master of Science degree in Geophysics from the Colorado
School of Mines.
ROSS A. KEOGH has served as Financial Controller and Treasurer of the
Company since 1990 and has 15 years experience in the oil and gas industry.
Between 1979 and 1989, Mr. Keogh worked in the financial accounting and
budgeting divisions of Total Oil Company and as Joint Venture Administrator for
Bridge Oil Limited in Australia. Mr. Keogh holds a Bachelor of Economics
degree, with a major in Accounting, from Macquarie University in Sydney.
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. Fern, the
Chairman and Chief Executive Officer of the Company, and the four other most
highly compensated executive officers of the Company who have compensation in
excess of $100,000 (collectively, the "Named Executive Officers"). The Company
has entered into employment agreements with certain management and technical
personnel. These agreements expire in June 1999.
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
December 31, 1996
Annual Compensation
----------------------------
Name and Principal Position Salary ($) Bonus ($)
--------------------------- ------------- ------------
<S> <C> <C>
Terrence N. Fern(1) . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 0 $ 0
Chairman of the Board, Chief Executive Officer and President
Jeffrey H. Warren . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 169,800 16,263
Vice President and Secretary
Howard H. Wilson, Jr. . . . . . . . . . . . . . . . . . . . . . . . . . . 140,000 45,561
Vice President (Operations)
Mark A. Gannaway . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,375 113,875
Exploration Manager
Prent H. Kallenberger . . . . . . . . . . . . . . . . . . . . . . . . . . . 139,375 17,114
Geophysical Manager
</TABLE>
- ---------------
(1) Mr. Fern receives no compensation from the Company. The Parent made
payments in 1996 of $292,334 to a company controlled by Mr. Fern's
family and which provides management and geological services to the
Parent.
47
<PAGE> 49
SHARE AND OPTION PLANS OF PARENT
The Parent maintains an Employee Share Plan (the "Share Plan") and an
Employee Share Option Plan (the "Option Plan"). Both plans were approved by
the shareholders at the Parent's 1994 Annual General Meeting and are
administered by a committee (the "Remuneration Committee") appointed by the
Board of Directors of the Parent. The total number of ordinary shares of the
Parent (the "Ordinary Shares") issued or subject to option under all share and
option plans during any five year period may not exceed 5% of the total number
of issued Ordinary Shares of the relevant date.
The Share Plan provides for the issue of Ordinary Shares to employees
and directors at prevailing market prices. Purchases pursuant to the Share
plan are financed by interest free loans from the Parent, subject to certain
conditions set by the Remuneration Committee. Grants are subject to a minimum
six month vesting term and the vesting may also be contingent upon the market
price of the Ordinary Shares on the ASX achieving certain benchmarks. After
the vesting of such shares, the grantee may either repay the Parent loan or
sell such shares and retain the difference. As of December 31, 1996, all
employees and directors of the Company, in the aggregate, owned 1,525,000
Ordinary Shares subject to the terms of this Plan.
The Option Plan provides for the issue of options to purchase Ordinary
Shares to employees and directors at prevailing market prices and subject to
certain conditions set by the Remuneration Committee. Grants are subject to a
minimum six month vesting term and the vesting may also be contingent upon the
market price on the ASX of the Ordinary Shares achieving certain benchmarks.
Options granted under the Option Plan expire five years from the date of grant.
As of December 31, 1996 all directors and employees of the Company, in the
aggregate, held options to purchase an aggregate of 1,894,000 Ordinary Shares
pursuant to the Option Plan.
The following table sets forth the individual grants of options made
by the Parent during the year ended December 31, 1996.
OPTION GRANTS BY PARENT IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
% of
Number of Total Potential Realizable Value
Ordinary Options at Assumed Annual Rates
Shares Granted to Exercise of Stock Price Appreciation
Underlying Employees or Base For Option Term(1)(2)(3)
Options In 1996 Price Expiration -------------------------------
Name Granted (#) Fiscal Year ($/sh)(1) Date 0% 5% 10%
----------------------------- ----------- ----------- --------- ---------- ----- ----- ----------
<S> <C> <C> <C> <C> <C> <C> <C>
Terrence N. Fern . . . . . . 0 0 -- -- -- -- --
Jeffrey H. Warren . . . . . . 110,000 6.0% A$4.87 July 21, 2001 $ 0 $ 0 A$133,793
Howard H. Wilson, Jr. . . . . 125,000 6.8% A$4.87 July 21, 2001 $ 0 $ 0 A$148,659
Mark A. Gannaway . . . . . . 275,000 15.0% A$4.87 July 21, 2001 $ 0 $ 0 A$327,050
Prent H. Kallenberger . . . . 275,000 15.0% A$4.87 July 21, 2001 $ 0 $ 0 A$327,050
</TABLE>
- ---------------
(1) The exercise prices and the potential realizable value for the
options are in Australian dollars ("A$"), being the currency
of the ordinary shares subject to the options. The
exchange rate on October 6, 1997, was US$0.7235=A$1.00, based on the
noon buying rate in New York City for cable transfers in Australian
dollars as certified for customs purposes by the Federal Reserve Bank
of New York.
(2) The 5% and 10% assumed annual rates of compounded stock price
appreciation are mandated by rules of the Securities and Exchange
Commission and do not represent the Company's estimate or projection
of the Company's future Common Stock prices. These amounts represent
certain assumed rates of appreciation only. Actual gains, if any, on
stock option exercises are dependent on the future performance of the
Common Stock and overall stock market conditions. The amounts
reflected in this table may not necessarily be achieved.
(3) The options in this table are subject to vesting periods of either two
or three year periods. Options with two year vesting are only
exercisable if the market price of the Parent's ordinary shares is at
least A$7.50 and those with three year vesting are only exercisable if
the market price of the Parent's ordinary shares is at least A$8.25.
The potentially realizable values reflect the fact that the options
have no value unless these targets are reached.
48
<PAGE> 50
The following table sets forth the aggregated option exercises by each
of the Named Executive Officers during the year ended December 31, 1996.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR AND
FISCAL YEAR-END OPTIONS VALUE
<TABLE>
<CAPTION>
Number of Value of
Securities Unexercised
Underlying In-the-Money
Unexercised Options At
Options At Fiscal Year-End
Shares Fiscal Year-End ($)
Acquired on Value Realized Exercisable/ Exercisable/
Name Exercise (#) ($) Unexercisable Unexercisable
------------------------------- ------------ ------------- ---------------- --------------
<S> <C> <C> <C> <C>
Terrence N. Fern . . . . . . . -- -- -- / -- -- / --
Jeffrey H. Warren . . . . . . . -- -- -- /160,000 -- / $169,431
Howard H. Wilson, Jr. . . . . . 50,000 $ 97,338 -- /175,000 -- / $178,150
Mark A. Gannaway . . . . . . . 200,000 $ 662,690 -- /375,000 -- / $468,763
Prent H. Kallenberger . . . . . 30,000 $ 97,691 170,000 / 375,000 $525,174 / $468,763
</TABLE>
COMPENSATION OF DIRECTORS
Anthony J. Walton was paid $40,000 in 1996 for services as a director
pursuant to an arrangement whereby Mr. Walton provided financial advice to the
Company. There were no other arrangements pursuant to which directors of the
Company receive compensation for their services as directors in 1996.
49
<PAGE> 51
the Private Offering, Resale and Trading through Automated Linkages (PORTAL)
Market, the National Association of Securities Dealers' screen based, automated
market trading of securities eligible for resale under Rule 144A.
The Company shall be deemed to have accepted for exchange validly tendered
Old Notes when, as and if the Company has given oral or written notice thereof
to the Exchange Agent. See "-- Exchange Agent." The Exchange Agent will act as
agent for the tendering holders of Old Notes for the purpose of receiving
Exchange Notes from the Company and delivering Exchange Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an invalid
tender or the occurrence of certain other events set forth herein, certificates
for any such unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of the date of this Prospectus.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean ___________, 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 semi-annually on June 15 and
December 15 of each year, commencing December 15, 1997. Holders of Exchange
Notes of record on December 1, 1997 will receive interest on December 15, 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 13, 1997, to the date of exchange thereof. Consequently, assuming the
Exchange Offer is consummated prior to the record date in respect of the
December 15, 1997 interest payment for the Old Notes, holders who exchange
their Old Notes for Exchange Notes will receive the same interest payment on
December 15, 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
50
<PAGE> 52
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 a
book-entry transfer of Old Notes into the Exchange Agent's account at DTC with
an Agent's Message) with the Exchange Agent.
51
<PAGE> 53
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.
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
52
<PAGE> 54
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.
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
53
<PAGE> 55
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
The Bank of New York, 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 or Overnight Courier:
The Bank of New York The Bank of New York
101 Barclay Street, 7th Floor 101 Barclay Street, 7th Floor
Reorganization Section New York, New York 10286
New York, New York 10286 Corporate Trust Services Window
Attention: Henry Lopez Ground Level
Attention: Reorganization Section
Facsimile Transmission: (212) 815-6639
Confirm by Telephone: (212) 815-2742
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or telephone. The Company will not make any payments to brokers,
dealers or other persons soliciting acceptances of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse the Exchange Agent for its reasonable
out-of-pocket expenses in connection therewith. The Company may also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this
Prospectus, Letters of Transmittal and related documents to the beneficial
owners of the Old Notes and in handling or forwarding tenders for exchange.
The other expenses incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting
and legal fees, will be paid by the Company. The Company will pay all transfer
taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange
Offer. If, however, Exchange Notes or Old Notes not tendered or accepted for
exchange are to be delivered to, or are to be registered or issued in the name
of, any person other than the registered holder of the Old Notes tendered, or
if tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes
will be billed directly to such tendering holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
upon the consummation of the Exchange Offer. The expenses of the Exchange Offer
will be amortized by the Company over the term of the Exchange Notes under
generally accepted accounting principles.
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DESCRIPTION OF THE NOTES
The Exchange Notes will be issued and the Old Notes were issued under an
indenture to be dated as of June 13, 1997 (the "Indenture") between the
Company, as issuer, and The Bank of New York, as trustee (the "Trustee"). A
copy of the Indenture in substantially the form in which it is to be executed
is available upon request. The following summary of the material provisions of
the Indenture does not purport to be complete and is subject to, and qualified
in its entirety by reference to, all of the provisions of the Indenture,
including the definitions of certain terms contained therein. The definitions
of certain capitalized terms used in the following summary are set forth below
under "Certain Definitions."
It is expected that the Notes and the Exchange Notes will constitute a
single series of debt securities under the Indenture. If the Exchange Offer is
consummated, Holders of Notes who do not exchange their Notes for Exchange
Notes will vote together with Holders of the Exchange Notes for all relevant
purposes under the Indenture. In that regard, the Indenture requires that
certain actions by the Holders thereunder (including acceleration following an
Event of Default) must be taken, and certain rights must be exercised, by
specified minimum percentages of the aggregate principal amount of the
outstanding securities issued under the Indenture. In determining whether
Holders of the requisite percentage in principal amount have given any notice,
consent or waiver or taken any other action permitted under the Indenture, any
Notes that remain outstanding after the Exchange Offer will be aggregated with
the Exchange Notes, and the Holders of such Notes and the Exchange Notes will
vote together as a single series for all such purposes. Accordingly, all
references herein to specified percentages in aggregate principal amount of the
outstanding Notes shall be deemed to mean, at any time after the Exchange Offer
is consummated, such percentages in aggregate principal amount of the Notes and
the Exchange Notes then outstanding.
GENERAL
The Notes will be unsecured senior subordinated obligations of the Company
limited to $100,000,000 aggregate principal amount. The Notes will be issued
only in registered form, without coupons, in denominations of $1,000 and
integral multiples thereof. Principal of, premium, if any, on and interest on
the Notes will be payable, and the Notes will be transferable, at the office or
agency of the Company in the City of New York maintained for such purposes,
which initially will be the corporate trust office or agency of the Trustee
maintained at New York, New York. In addition, interest may be paid, at the
option of the Company, by check mailed to the registered holders of the Notes
at their respective addresses as shown on the Note Register. No service charge
will be made for any transfer, exchange or redemption of Notes, but the Company
or the Trustee may require payment of a sum sufficient to cover any tax or
other governmental charge that may be payable in connection therewith. For a
discussion of the circumstances in which the interest rate on the Notes may be
temporarily increased, see "Exchange Offer; Registration Rights."
Under certain circumstances, the Company will be able to designate
Subsidiaries as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not
be subject to many of the restrictive covenants set forth in the Indenture.
MATURITY, INTEREST AND PRINCIPAL PAYMENTS
The Notes will mature on June 15, 2007. Interest on the Notes will accrue
at the rate of 9 1/2% per annum and will be payable semiannually on June 15 and
December 15 of each year, commencing December 15, 1997, to the Person in whose
name the Note is registered in the Note Register at the close of business on
the June 1 or December 1 next preceding such interest payment date. Interest
will be computed on the basis of a 360-day year comprised of twelve 30-day
months.
REDEMPTION
Optional Redemption. The Notes will be redeemable at the option of the
Company, in whole or in part, at any time on or after June 15, 2002, at the
redemption prices (expressed as percentages of principal amount) set forth
below, plus accrued and unpaid interest, if any, to the redemption date
(subject to the right of Holders of record on the relevant record date to
receive interest due on an interest payment date that is on or prior to the
redemption date), if redeemed during the 12-month period beginning on June 15
of the years indicated below:
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<TABLE>
<CAPTION>
YEAR PRICE
- ---- -----
<S> <C>
2002 104.750%
2003 103.167%
2004 101.583%
2005 and thereafter 100%
</TABLE>
In addition, at any time and from time to time prior to June 15, 2000, the
Company may, at its option, redeem in the aggregate up to 33% of the aggregate
principal amount of the Notes originally issued under the Indenture with the
cash proceeds of one or more Public Equity Offerings at a redemption price
(expressed as a percentage of principal amount) of 109.5%, plus accrued and
unpaid interest, if any, to the redemption date (subject to the right of
Holders of Notes on the relevant record date to receive interest due on the
relevant interest payment date); provided, however, that at least $66,600,000
aggregate principal amount of the Notes must remain outstanding after each such
redemption. In order to effect the foregoing redemption, the Company must mail
notice of redemption no later than 60 days after the related Public Equity
Offering and must consummate such redemption within 90 days of the closing of
the Public Equity Offering.
Selection and Notice. In the event that less than all of the Notes are to
be redeemed at any time, selection of such Notes (or any portion thereof that
is an integral multiple of $1,000) for redemption will be made by the Trustee
from the outstanding Notes not previously called for redemption (or otherwise
purchased by the Company) on a pro rata basis, by lot or by such method as the
Trustee shall deem fair and appropriate; provided, however, that no Note with a
principal amount of $1,000 or less shall be redeemed in part. Notice of
redemption shall be mailed by first-class mail at least 30 but not more than 60
days before the redemption date to each Holder of Notes to be redeemed at its
registered address. If any Note is to be redeemed in part only, the notice of
redemption that relates to such Note shall state the portion of the principal
amount thereof to be redeemed. A new Note in a principal amount equal to the
unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note. On and after the redemption date,
interest will cease to accrue on Notes or portions thereof called for
redemption and accepted for payment.
Offers to Purchase. As described below, (a) upon the occurrence of a
Change of Control, the Company is 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 the occurrence of an Asset Sale, the Company may be
obligated to make offers to purchase Notes with a portion of the Net Cash
Proceeds of such Asset Sale 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 "Certain Covenants -- Change of Control" and "Limitation on
Disposition of Proceeds of Asset Sales."
SUBORDINATION
Payments of and distributions on or with respect to the Note Obligations
will be subordinated, to the extent set forth in the Indenture, in right of
payment to the prior payment in full in cash or cash equivalents of all
existing and future Senior Indebtedness, which includes, without limitation,
all Credit Agreement Obligations of the Company. The Notes will rank prior in
right of payment only to other Indebtedness of the Company which is, by its
terms, expressly subordinated in right of payment to the Notes. There is
currently no Indebtedness of the Company which would constitute such
Subordinated Indebtedness other than $59.2 million of subordinated loans from
the Company's immediate parent outstanding as of May 31, 1997. Of such
Subordinated Indebtedness, $20 million has been recapitalized as equity. In
addition, the Note Obligations will be effectively subordinated to all of the
creditors of the Company's Subsidiaries, including trade creditors. See "Risk
Factors -- Subordination of Notes."
The Indenture will provide that in the event of (a) any insolvency or
bankruptcy case or proceeding, or any receivership, liquidation, reorganization
or other similar case or proceeding in connection therewith, relating to the
Company (or its creditors, as such) or its assets, or (b) any liquidation,
dissolution or other winding-up of the Company, whether voluntary or
involuntary or (c) any assignment for the benefit of creditors or other
marshaling of assets or liabilities of the Company, all Senior Indebtedness of
the Company must be paid in full in cash or cash equivalents before any direct
or indirect payment or distribution, whether in cash, property or securities
(excluding certain permitted equity and subordinated debt securities referred
to in the Indenture as "Permitted Junior Securities" and payments made from the
trusts described under "-- Legal Defeasance or Covenant Defeasance of
Indenture"), is made on account of the Note Obligations. In the event that,
notwithstanding the foregoing, the Trustee or the Holder of any Note receives
any payment
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<PAGE> 58
or distribution of properties or assets of the Company of any kind or
character, whether in cash, property or securities, by set-off or otherwise, in
respect of Note Obligations before all Senior Indebtedness is paid or provided
for in full, then the Trustee or the Holders of Notes receiving any such
payment or distribution (other than a payment or distribution in the form of
Permitted Junior Securities and payments made from the trusts described under
"-- Legal Defeasance or Covenant Defeasance of Indenture") will be required to
pay or deliver such payment or distribution forthwith to the trustee in
bankruptcy, receiver, liquidating trustee, custodian, assignee, agent or other
person making payment or distribution of assets of the Company for application
to the payment of all Senior Indebtedness remaining unpaid, to the extent
necessary to pay all Senior Indebtedness in full.
During the continuance of any default in the payment when due (whether at
Stated Maturity, upon scheduled repayment, upon acceleration or otherwise) of
principal of or premium, if any, or interest on, or of unreimbursed amounts
under drawn letters of credit or fees relating to letters of credit
constituting, any Designated Senior Indebtedness (a "Payment Default"), no
direct or indirect payment or distribution by or on behalf of the Company of
any kind or character shall be made on account of the Note Obligations or any
obligation under any Subsidiary Guarantee unless and until such default has
been cured or waived in writing or such Designated Senior Indebtedness shall
have been discharged or paid in full in cash or cash equivalents.
In addition, during the continuance of any default other than a Payment
Default with respect to any Designated Senior Indebtedness pursuant to which
the maturity thereof may then be accelerated (a "Nonpayment Default"), after
receipt by the Trustee from the holders (or their representative) of such
Designated Senior Indebtedness of a written notice of such Non-payment Default,
no payment or distribution of any kind or character may be made by the Company
on account of the Note Obligations for the period specified below (the "Payment
Blockage Period").
The Payment Blockage Period shall commence upon the receipt of notice of a
Non-payment Default by the Trustee from the holders (or their representative)
of Designated Senior Indebtedness stating that such notice is a payment
blockage notice pursuant to the Indenture and shall end on the earliest to
occur of the following events: (i) 179 days shall have elapsed since the
receipt by the Trustee of such notice; (ii) the date, as set forth in a written
notice to the Company or the Trustee from the holders (or their representative)
of the Designated Senior Indebtedness initiating such Payment Blockage Period,
on which such default is cured or waived (provided that no other Payment
Default or Non-payment Default has occurred or is then continuing after giving
effect to such cure or waiver); (iii) the date on which such Designated Senior
Indebtedness is discharged or paid in full in cash or cash equivalents; and
(iv) the date, as set forth in a written notice to the Company or the Trustee
from the holders (or their representative) of the Designated Senior
Indebtedness initiating such Payment Blockage Period, on which such Payment
Blockage Period shall have been terminated by written notice to the Company or
the Trustee from the holders (or their representative) of Designated Senior
Indebtedness initiating such Payment Blockage Period, after which the Company,
subject to the subordination provisions set forth above and the existence of
another Payment Default, shall promptly resume making any and all required
payments in respect of the Notes, including any missed payments. Only one
Payment Blockage Period with respect to the Notes may be commenced within any
360 consecutive day period. No Non-payment Default with respect to Designated
Senior Indebtedness that existed or was continuing on the date of the
commencement of any Payment Blockage Period with respect to the Designated
Senior Indebtedness initiating such Payment Blockage Period will be, or can be,
made the basis for the commencement of a second Payment Blockage Period,
whether or not within a period of 360 consecutive days, unless such default has
been cured or waived in writing for a period of not less than 90 consecutive
days (it being acknowledged that any subsequent action, or any breach of any
financial covenant for a period commencing after the date of commencement of
such Payment Blockage Period, that, in either case, would give rise to a
Non-payment Default pursuant to any provision under which a Non-payment Default
previously existed or was continuing shall constitute a new Non-payment Default
for this purpose; provided, however, that, in the case of a breach of a
particular financial covenant, the Company shall have been in compliance for at
least one full 90 consecutive day period commencing after the date of
commencement of such Payment Blockage Period). In no event will a Payment
Blockage Period extend beyond 179 days from the date of the receipt by the
Trustee of the notice, and there must be a 181 consecutive day period in any
360-day period during which no Payment Blockage Period is in effect. In the
event that, notwithstanding the foregoing, the Company makes any payment or
distribution to the Trustee or the Holder of any Note prohibited by the
subordination provision of the Indenture, then such payment or distribution
will be required to be held in trust for the holders of the Designated Senior
Indebtedness and will be paid over and delivered forthwith to the holders (or
their representative) of Designated Senior Indebtedness.
If the Company fails to make any payment on the Notes when due or within
any applicable grace period, whether or not on account of the payment blockage
provisions referred to above, such failure will constitute an Event of Default
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under the Indenture and will enable the Holders of the Notes to accelerate the
maturity thereof. See "-- Events of Default."
By reason of such subordination, in the event of liquidation,
receivership, reorganization or insolvency, creditors of the Company who are
holders of Senior Indebtedness may recover more, ratably, than the Holders of
the Notes, and funds which would be otherwise payable to the Holders of the
Notes will be paid to the holders of the Senior Indebtedness to the extent
necessary to pay the Senior Indebtedness in full, and the Company may be unable
to meet its obligations in full with respect to the Notes.
As of May 31, 1997, after giving effect to the sale of the Notes and the
estimated application of the net proceeds therefrom, there would have been no
outstanding Senior Indebtedness other than approximately $9.5 million in letter
of credit reimbursement obligations under the Credit Facility. See "Use of
Proceeds," "Capitalization" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources." Although the Indenture will contain limitations on the amount of
additional Indebtedness that the Company and the Restricted Subsidiaries may
incur, the amounts of such Indebtedness could be substantial and, in any case,
such Indebtedness may be Senior Indebtedness or Indebtedness of Subsidiaries to
which the Notes will be subordinated. The Indenture will prohibit the
incurrence by the Company of Indebtedness that is contractually subordinated in
right of payment to any Senior Indebtedness of the Company and senior in right
of payment to the Notes. After giving effect to the issuance of the Notes and
the application of the net proceeds therefrom and after giving effect to a
recapitalization of $20 million of a portion of the Subordinated Shareholder
Loan as additional paid-in-capital, there will be $39.2 million of Indebtedness
of the Company owed to its immediate parent, which constitutes all Indebtedness
that is subordinated in right of payment to the Notes, and there will be no
Indebtedness of the Company which is pari passu in right of payment with the
Notes.
FUTURE SUBSIDIARY GUARANTEES OF THE NOTES
The Company has no Subsidiaries as of the date of this Prospectus. Under
the circumstances described below, the Company's payment obligations under the
Notes may in the future be jointly and severally guaranteed by future
Subsidiaries of the Company as Subsidiary Guarantors. Each Subsidiary Guarantor
will guarantee, jointly and severally, to each Holder of Notes and the Trustee,
the full and prompt performance of the Company's obligations under the
Indenture and the Notes, including the payment of principal of (or premium, if
any, on) and interest on the Notes pursuant to its Subsidiary Guarantee. The
Subsidiary Guarantees will be subordinated to Guarantor Senior Indebtedness of
the Subsidiary Guarantors to the same extent and in the same manner as the
Notes are subordinated to Senior Indebtedness.
The obligations of each Subsidiary Guarantor will be limited to the
maximum amount as will, after giving effect to all other contingent and fixed
liabilities (including, but not limited to, Guarantor Senior Indebtedness) 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 Subsidiary
Guarantee or pursuant to its contribution obligations under the Indenture,
result in the obligations of such Subsidiary Guarantor under the Subsidiary
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 Subsidiary Guarantee shall be entitled to a contribution
from each other Subsidiary Guarantor (if any) 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 all,
substantially all or any portion of its 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"
section of the Indenture. Each Subsidiary Guarantor may consolidate with or
merge into or sell all or substantially all of its assets to a corporation
other than the Company or another Subsidiary Guarantor (whether or not
affiliated with the Subsidiary Guarantor); provided, however, that (a) if the
surviving corporation is not the Subsidiary Guarantor, the surviving
corporation agrees to assume such Subsidiary Guarantor's Subsidiary Guarantee
and all its obligations pursuant to the Indenture (except to the extent the
following paragraph would result in the release of such Subsidiary Guarantee)
and (b) such transaction does not (i) violate any of the covenants described
below under "Certain Covenants" or in the Indenture or (ii) result in a Default
or Event of Default immediately thereafter that is continuing. The Subsidiary
Guarantee of any Restricted Subsidiary may be released upon the terms and
subject to the conditions described under paragraph (b) of "Certain Covenants
- -- Limitation on Non-Guarantor Restricted Subsidiaries."
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Although the Indenture does not contain any requirement that any
Subsidiary execute and deliver a Subsidiary Guarantee, certain covenants
described below require a Restricted Subsidiary in the future to execute and
deliver a Subsidiary Guarantee prior to the incurrence or guarantee of other
Indebtedness. In addition, any Subsidiary Guarantor that is designated an
Unrestricted Subsidiary in accordance with the terms of the Indenture shall be
released from and relieved of its obligations under its Subsidiary Guarantee.
See "Certain Covenants -- Limitation on Non-Guarantor Restricted Subsidiaries."
CERTAIN COVENANTS
The Indenture will contain, among others, the covenants described below.
Limitation on Indebtedness. (a) The Indenture will provide that neither
the Company nor any Restricted Subsidiary will create, incur, issue, assume,
guarantee or in any manner become directly or indirectly liable for the payment
of (collectively "incur") any Indebtedness (including any Acquired
Indebtedness), other than Permitted Indebtedness and Permitted Subsidiary
Indebtedness, as the case may be; provided, however, that the Company and its
Restricted Subsidiaries that are Subsidiary Guarantors may incur Indebtedness
if (x) the Company's Consolidated Fixed Charge Coverage Ratio for the four full
fiscal quarters immediately preceding the incurrence of such Indebtedness (and
for which financial statements are available), taken as one period (at the time
of such incurrence, after giving pro forma effect to: (i) the incurrence of
such Indebtedness and (if applicable) the application of the net proceeds
therefrom, including to refinance other Indebtedness or to acquire producing
oil and gas properties, as if such Indebtedness had been incurred and the
application of such proceeds had occurred at the beginning of such four-quarter
period; (ii) the incurrence, repayment or retirement of any other Indebtedness
(including Permitted Indebtedness) by the Company or its Restricted
Subsidiaries since the first day of such four-quarter period (including any
other Indebtedness to be incurred concurrent with the incurrence of such
Indebtedness) as if such Indebtedness had been incurred, repaid or retired at
the beginning of such four-quarter period; and (iii) notwithstanding clause (d)
of the definition of Consolidated Net Income, the acquisition (whether by
purchase, merger or otherwise) or disposition (whether by sale, merger or
otherwise) of any Person acquired, or to be acquired, or disposed of, or to be
disposed of, by the Company or its Restricted Subsidiaries, as the case may be,
since the first day of such four-quarter period, as if such acquisition or
disposition had occurred at the beginning of such four-quarter period and the
pro forma effect to consolidated results of operations of the Company were
reflected for such period), would have been equal to at least 2.5 to 1.0 and
(y) no Default or Event of Default shall have occurred and be continuing at the
time such additional Indebtedness is incurred or would occur as a consequence
of the incurrence of the additional Indebtedness.
Limitation on Restricted Payments. (a) The Indenture will provide that the
Company will not, and will not permit any Restricted Subsidiary to, directly or
indirectly, take the following actions:
(i) declare or pay any dividend on, or make any distribution to
holders of, any shares of the Company's Capital Stock (other than
dividends or distributions payable solely in shares of Qualified Capital
Stock of the Company, options, warrants or other rights to purchase
Qualified Capital Stock of the Company);
(ii) purchase, redeem or otherwise acquire or retire for value (other
than solely for shares of Qualified Capital Stock of the Company, options,
warrants or other rights to purchase Qualified Capital Stock of the
Company) any Capital Stock of the Company or any Affiliate thereof (other
than any Wholly Owned Restricted Subsidiary of the Company) or any
options, warrants or other rights to acquire such Capital Stock;
(iii)make any principal payment on or repurchase, redeem, defease or
otherwise acquire or retire for value (other than solely for shares of
Qualified Capital Stock of the Company, options, warrants or other rights
to purchase Qualified Capital Stock of the Company), prior to any
scheduled principal payment, scheduled sinking fund payment or maturity,
any Subordinated Indebtedness;
(iv) declare or pay any dividend on, or make any distribution to the
holders of, any shares of Capital Stock of any Restricted Subsidiary of
the Company (other than to the Company or any of its Wholly Owned
Restricted Subsidiaries) or purchase, redeem or otherwise acquire or
retire for value any Capital Stock of any Restricted Subsidiary or any
options, warrants or other rights to acquire any such Capital Stock (other
than with respect to any such Capital Stock held by the Company or any
Wholly Owned Restricted Subsidiary of the Company);
(v) make any Investment (other than a Permitted Investment); or
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(vi) incur any guarantee of Indebtedness of any Affiliate (other than
(a) guarantees of Indebtedness of any Restricted Subsidiary by the Company
or (b) guarantees of Indebtedness of the Company by any Restricted
Subsidiary, in each case in accordance with the terms of the Indenture);
(such payments or other actions described in (but not excluded from) clauses
(i) through (vi) are collectively referred to as "Restricted Payments"), unless
at the time of and after giving effect to the proposed Restricted Payment (with
the amount of any such Restricted Payment, if other than cash, being the amount
determined by the Board of Directors of the Company, whose determination shall
be conclusive and evidenced by a board resolution), (1) no Default or Event of
Default shall have occurred and be continuing, (2) the Company could incur
$1.00 of additional Indebtedness (excluding Permitted Indebtedness) in
accordance with the "Limitation on Indebtedness" covenant and (3) the aggregate
amount of all Restricted Payments declared or made after the date of the
Indenture shall not exceed the sum (without duplication) of the following:
(A) 50% of the aggregate cumulative Consolidated Net Income of the
Company accrued on a cumulative basis during the period beginning on the
first day of the first month after the date of the Indenture and ending on
the last day of the Company's last fiscal quarter ending prior to the date
of such proposed Restricted Payment (or, if such aggregate cumulative
Consolidated Net Income shall be a loss, minus 100% of such loss), plus
(B) the aggregate net cash proceeds received after the date of the
Indenture by the Company either (i) from the issuance or sale (other than
to any of its Restricted Subsidiaries) of shares of Qualified Capital
Stock of the Company or any options, warrants or rights to purchase such
shares of Qualified Capital Stock of the Company or (ii) as an equity
contribution from the holder of all of the outstanding Qualified Capital
Stock of the Company provided that at the time of such equity contribution
such holder delivers an officers' certificate to the Company and the
Trustee designating such equity contribution, plus
(C) the aggregate net cash proceeds received after the date of the
Indenture by the Company (other than from any of its Restricted
Subsidiaries) upon the exercise of any options, warrants or rights to
purchase shares of Qualified Capital Stock of the Company, plus
(D) the aggregate net cash proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of
its Restricted Subsidiaries) of debt securities or shares of Redeemable
Capital Stock that have been converted into or exchanged for Qualified
Capital Stock of the Company to the extent such debt securities were
originally sold for cash, together with the aggregate cash received by the
Company at the time of such conversion or exchange, plus
(E) to the extent not otherwise included in the Company's Consolidated
Net Income, the net reduction in Investments in Unrestricted Subsidiaries
resulting from the payments of interest on Indebtedness, dividends,
repayments of loans or advances, or other transfers of assets, in each
case to the Company or a Restricted Subsidiary after the date of the
Indenture from any Unrestricted Subsidiary or from the redesignation of an
Unrestricted Subsidiary as a Restricted Subsidiary (valued in each case as
provided in the definition of "Investment"), not to exceed in the case of
any Unrestricted Subsidiary the total amount of Investments (other than
Permitted Investments) in such Unrestricted Subsidiary made by the Company
and its Restricted Subsidiaries in such Unrestricted Subsidiary after the
date of the Indenture, plus
(F) $5,000,000.
(b) Notwithstanding paragraph (a) above, the Company and its Restricted
Subsidiaries may take the following actions so long as (in the case of clauses
(ii), (iii) and (iv) below) no Default or Event of Default shall have occurred
and be continuing:
(i) the payment of any dividend within 60 days after the date of
declaration thereof, if at such declaration date such declaration complied
with the provisions of paragraph (a) above (and such payment shall be
deemed to have been paid on such date of declaration for purposes of any
calculation required by the provisions of paragraph (a) above);
(ii) the repurchase, redemption or other acquisition or retirement of
any shares of any class of Capital Stock of the Company or any Restricted
Subsidiary, in exchange for, or out of the aggregate net cash proceeds of,
a
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substantially concurrent issue and sale (other than to a Restricted
Subsidiary) of shares of Qualified Capital Stock of the Company;
(iii)the purchase, redemption, repayment, defeasance or other
acquisition or retirement for value of any Subordinated Indebtedness
(other than Redeemable Capital Stock) in exchange for or out of the
aggregate net cash proceeds of a substantially concurrent (A) issue and
sale (other than to a Restricted Subsidiary) by the Company of shares of
Qualified Capital Stock of the Company or (B) equity contribution to the
Company by the holder of all of the Qualified Capital Stock of the
Company; and
(iv) the purchase, redemption, repayment, defeasance or other
acquisition or retirement for value of Subordinated Indebtedness (other
than Redeemable Capital Stock) in exchange for, or out of the aggregate
net cash proceeds of, a substantially concurrent incurrence (other than to
a Restricted Subsidiary) of Subordinated Indebtedness of the Company so
long as (A) the principal amount of such new Indebtedness does not exceed
the principal amount (or, if such Subordinated Indebtedness being
refinanced provides for an amount less than the principal amount thereof
to be due and payable upon a declaration of acceleration thereof, such
lesser amount as of the date of determination) of the Subordinated
Indebtedness being so purchased, redeemed, repaid, defeased, acquired or
retired, plus the amount of any premium required to be paid in connection
with such refinancing pursuant to the terms of the Subordinated
Indebtedness refinanced or the amount of any premium reasonably determined
by the Company as necessary to accomplish such refinancing, plus the
amount of expenses of the Company incurred in connection with such
refinancing, (B) such new Subordinated Indebtedness is subordinated to the
Notes at least to the same extent as such Subordinated Indebtedness so
purchased, redeemed, repaid, defeased, acquired or retired, (C) such new
Subordinated Indebtedness has an Average Life to Stated Maturity that is
longer than the Average Life to Stated Maturity of the Notes and such new
Subordinated Indebtedness has a Stated Maturity for its final scheduled
principal payment that is at least 91 days later than the Stated Maturity
for the final scheduled principal payment of the Notes.
The actions described in clauses (i), (ii) and (iii) of this paragraph (b)
shall be permitted to be taken in accordance with this paragraph (b) but to the
extent such actions otherwise constitute Restricted Payments under this
covenant, such actions shall reduce the amount that would otherwise be
available for Restricted Payments under clause (3) of paragraph (a) (provided
that any dividend paid pursuant to clause (i) of this paragraph (b) shall
reduce the amount that would otherwise be available under clause (3) of
paragraph (a) when declared, but not also when subsequently paid pursuant to
such clause (i)), and the actions described in clause (iv) of this paragraph
(b) shall be permitted to be taken in accordance with this paragraph and shall
not reduce the amount that would otherwise be available for Restricted Payments
under clause (3) of paragraph (a).
(c) In computing Consolidated Net Income of the Company under paragraph
(a) above, (1) the Company shall use audited financial statements for the
portions of the relevant period for which audited financial statements are
available on the date of determination and unaudited financial statements and
other current financial data based on the books and records of the Company for
the remaining portion of such period and (2) the Company shall be permitted to
rely in good faith on the financial statements and other financial data derived
from the books and records of the Company that are available on the date of
determination. If the Company makes a Restricted Payment which, at the time of
the making of such Restricted Payment, would in the good faith determination of
the Company be permitted under the requirements of the Indenture, such
Restricted Payment shall be deemed to have been made in compliance with the
Indenture notwithstanding any subsequent adjustments made in good faith to the
Company's financial statements affecting Consolidated Net Income of the Company
for any period.
(d) Notwithstanding paragraph (a) above, payments by the Company or any
Restricted Subsidiary to an Affiliate of the Company described in clauses (6)
and (7) of the proviso to the covenant described under "Limitation on
Transactions with Affiliates" shall not constitute Restricted Payments.
Limitation on Issuances and Sales of Restricted Subsidiary Stock. The
Indenture will provide that the Company (i) will not permit any Restricted
Subsidiary to issue any Preferred Stock (other than to the Company or a Wholly
Owned Restricted Subsidiary) and (ii) will not permit any Person (other than
the Company and/or one or more Wholly Owned Restricted Subsidiaries) to own any
Capital Stock of any Restricted Subsidiary; provided, however, that this
covenant shall not prohibit (1) the issuance and sale of all, but not less than
all, of the issued and outstanding Capital Stock of any Restricted Subsidiary
owned by the Company or any of its Restricted Subsidiaries in compliance with
the other
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provisions of the Indenture, or (2) the ownership by directors of directors'
qualifying shares or the ownership by foreign nationals of Capital Stock of any
Restricted Subsidiary, to the extent mandated by applicable law.
Limitation on Transactions with Affiliates. The Indenture will provide
that the Company will not, and will not permit any Restricted Subsidiary to,
directly or indirectly, enter into or suffer to exist any transaction or series
of related transactions (including, without limitation, the sale, purchase,
exchange or lease of assets, property or the rendering of any services) with,
or for the benefit of, any Affiliate of the Company other than a Restricted
Subsidiary (each, other than a Restricted Subsidiary, being an "Interested
Person"), unless (i) such transaction or series of transactions is on terms
that are no less favorable to the Company or such Restricted Subsidiary, as the
case may be, than those that would be available in a comparable arm's length
transaction with unrelated third parties who are not Interested Persons, (ii)
except with respect to loans from Affiliates, with respect to any one
transaction or series of transactions involving aggregate payments in excess of
$1,000,000, the Company delivers an officer's certificate to the Trustee
certifying that such transaction or series of transactions complies with clause
(i) above and such transaction or series of transactions has been approved by
the Board of Directors of the Company and (iii) except with respect to loans
from Affiliates, with respect to any one transaction or series of transactions
involving aggregate payments in excess of $10,000,000, the officer's
certificate referred to in clause (ii) above also certifies that such
transaction or series of transactions has been approved by a majority of the
Disinterested Directors or, in the event there are no such Disinterested
Directors, that the Company has obtained a written opinion from an independent
nationally recognized investment banking firm or appraisal firm, in either case
specializing or having a specialty in the type and subject matter of the
transaction or series of transactions at issue, which opinion shall be to the
effect set forth in clause (i) above or shall state that such transaction or
series of transactions is fair from a financial point of view to the Company or
such Restricted Subsidiary; provided, however, that this covenant will not
restrict the Company from (1) paying reasonable and customary regular
compensation and fees to directors of the Company who are not employees of the
Company or any Restricted Subsidiary, (2) entering into and making payments
under any employment or secondment agreement entered into in the ordinary
course of its business and consistent with past practices, (3) paying dividends
on, or making distributions with respect to, shares of Capital Stock of the
Company on a pro rata basis to the extent permitted by the "Limitation on
Restricted Payments" covenant, (4) other transactions permitted by the
"Limitation on Restricted Payments" covenant, (5) effecting transactions
pursuant to agreements with Affiliates existing on the date of the Indenture or
entering into any amendment thereto or any transaction contemplated thereby
(including pursuant to any amendment thereto) in any replacement agreement
thereto, so long as any such amendment or replacement is not more
disadvantageous to the Holders in any material respect than the original
agreement as in effect on the date of the Indenture, (6) making payments to
Affiliates in reimbursement for direct expenses incurred for the benefit of the
Company or any Restricted Subsidiary, including without limitation,
compensation, consulting services, insurance, communications, travel, legal and
audit expenses, to the extent such costs and expenses are reasonably allocable
to the Company and any Restricted Subsidiaries plus a mark-up on such costs and
expenses but only to the extent permitted under international transfer pricing
regulations, rules and procedures applicable to the Company and such Affiliates
for tax purposes, (7) any payment to an Affiliate under any parent-subsidiary
or consolidated group tax sharing agreement, whether existing or entered in the
future, provided that the obligations of the Company and any Restricted
Subsidiaries thereunder shall be no greater than their aggregate separate
return liability if the Company and the Restricted Subsidiaries filed separate
tax returns or separate consolidated tax returns with taxing authorities, (8)
repayments of any Senior Indebtedness to an Affiliate of the Company which,
when incurred or entered into, complied with clause (i) of this definition and
(9) indemnities of officers, directors and employees of the Company or any
Subsidiary pursuant to bylaw or statutory provisions.
Limitation on Liens. The Indenture will provide that the Company will not,
and will not permit any Restricted Subsidiary to, directly or indirectly,
create, incur, assume, affirm or suffer to exist or become effective any Lien
of any kind, except for Permitted Liens, on or with respect to any of its
property or assets, whether owned at the date of the Indenture or thereafter
acquired, or any income, profits or proceeds therefrom, or assign or otherwise
convey any right to receive income thereon, unless (x) in the case of any Lien
securing Subordinated Indebtedness, the Notes are secured by a Lien on such
property, assets or proceeds that is senior in priority to such Lien and (y) in
the case of any other Lien, the Notes are directly secured equally and ratably
with the obligation or liability secured by such Lien. The incurrence of
additional secured Indebtedness by the Company or any Restricted Subsidiary is
subject to further limitations on the incurrence of Indebtedness as described
under "-- Limitation on Indebtedness."
Change of Control. Upon the occurrence of a Change of Control, the Company
shall be obligated to make an offer to purchase all of the then outstanding
Notes (a "Change of Control Offer"), and shall purchase, on a business day (the
"Change of Control Purchase Date") not more than 70 nor less than 30 days
following 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
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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.
In order to effect such Change of Control Offer, the Company shall, not
later than the 30th day after the Change of Control, mail to each Noteholder a
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 Noteholders must follow to accept the Change of Control Offer.
If a Change of Control Offer is made, there can be no assurance that the
Company will have available funds sufficient to pay the Change of Control
Purchase Price for all of the Notes delivered by Noteholders seeking to accept
the Change of Control Offer. If on a Change of Control Purchase Date the
Company does not have available funds sufficient to pay the Change of Control
Purchase Price or is prohibited from purchasing the Notes, an Event of Default
will occur under the Indenture. The definition of "Change of Control" includes
an event by which the Company sells, conveys, transfers or leases all or
substantially all of its properties to any Person; the phrase "all or
substantially all" is subject to applicable legal precedent and as a result in
the future there may be uncertainty as to whether a Change of Control has
occurred.
The Company will not be required to make a Change of Control Offer upon a
Change of Control if a third party makes the Change of Control Offer at the
same purchase price, at the same times and otherwise in substantial compliance
with the requirements applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
The Company intends to comply with Rule 14e-1 under the Exchange Act and
any other securities laws and regulations thereunder, if applicable, in the
event that a Change of Control occurs and the Company is required to purchase
Notes as described above. The existence of a Holder's right to require, subject
to certain conditions, the Company to repurchase its Notes upon a Change of
Control may deter a third party from acquiring the Company in a transaction
that constitutes, or results in, a Change of Control.
Limitation on Disposition of Proceeds of Asset Sales. (a) The Indenture
will provide that the Company will not, and will not permit any Restricted
Subsidiary to, engage in any Asset Sale unless (i) the Company or such
Restricted Subsidiary, as the case may be, receives consideration at the time
of such Asset Sale at least equal to the fair market value of the assets and
properties sold or otherwise disposed of pursuant to the Asset Sale (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and evidenced by a board resolution) and (ii) at least 75% of the
consideration received by the Company or the Restricted Subsidiary, as the case
may be, in respect of such Asset Sale consists of cash, Cash Equivalents or the
assumption by the purchaser of liabilities of the Company (other than
liabilities of the Company that are by their terms subordinated to the Notes)
or any Restricted Subsidiary as a result of which the Company and its remaining
Restricted Subsidiaries are no longer liable.
(b) If the Company or any Restricted Subsidiary engages in an Asset Sale,
the Company may either (x) apply the Net Cash Proceeds thereof to permanently
reduce Senior Indebtedness or to permanently reduce Guarantor Senior
Indebtedness, or (y) invest all or any part of the Net Cash Proceeds thereof,
within 365 days after such Asset Sale, in properties and assets which replace
the properties and assets that were the subject of the Asset Sale or in
properties and assets that will be used in the business of the Company or its
Restricted Subsidiaries, as the case may be ("Replacement Assets"). The amount
of such Net Cash Proceeds not applied or invested as provided in this paragraph
constitutes "Excess Proceeds."
(c) When the aggregate amount of Excess Proceeds equals or exceeds
$15,000,000, the Company shall make an offer to purchase, from all Holders of
the Notes and any then outstanding Pari Passu Indebtedness required to be
repurchased or repaid on a permanent basis in connection with an Asset Sale, an
aggregate principal amount of Notes and any then outstanding Pari Passu
Indebtedness equal to such Excess Proceeds as follows:
(i) (A) the Company shall make an offer to purchase (a "Net Proceeds
Offer") from all Holders of the Notes in accordance with the procedures
set forth in the Indenture the maximum principal amount (expressed as a
multiple of $1,000) of Notes that may be purchased out of an amount (the
"Payment Amount") equal to the product of such Excess Proceeds multiplied
by a fraction, the numerator of which is the outstanding principal amount
of the Notes and the denominator of which is the sum of the outstanding
principal amount of the Notes and such Pari Passu
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Indebtedness, if any (subject to proration in the event such amount is
less than the aggregate Offered Price (as defined herein) of all Notes
tendered), and (B) to the extent required by such Pari Passu Indebtedness
and provided there is a permanent reduction in the principal amount of
such Pari Passu Indebtedness, the Company shall make an offer to purchase
Pari Passu Indebtedness (a "Pari Passu Offer") in an amount (the "Pari
Passu Indebtedness Amount") equal to the excess of the Excess Proceeds
over the Payment Amount.
(ii) The offer price for the Notes shall be payable in cash in an
amount equal to 100% of the principal amount of the Notes tendered
pursuant to a Net Proceeds Offer, plus accrued and unpaid interest, if
any, to the date such Net Proceeds Offer is consummated (the "Offered
Price"), in accordance with the procedures set forth in the Indenture. To
the extent that the aggregate Offered Price of the Notes tendered pursuant
to a Net Proceeds Offer is less than the Payment Amount relating thereto
or the aggregate amount of the Pari Passu Indebtedness that is purchased
or repaid pursuant to the Pari Passu Offer is less than the Pari Passu
Indebtedness Amount (such shortfall constituting a "Net Proceeds
Deficiency"), the Company may use such Net Proceeds Deficiency, or a
portion thereof, for general corporate purposes, subject to the
limitations of the "Limitation on Restricted Payments" covenant.
(iii)If the aggregate Offered Price of Notes validly tendered and not
withdrawn by Holders thereof exceeds the Payment Amount, Notes to be
purchased will be selected on a pro rata basis. Upon completion of such
Net Proceeds Offer and Pari Passu Offer, the amount of Excess Proceeds
shall be reset to zero.
The Credit Agreement may prohibit the Company from purchasing any Notes
and also provides that certain change of control events with respect to the
Company would constitute a default thereunder. Any future credit agreements or
other agreements relating to Senior Indebtedness to which the Company becomes a
party may contain similar restrictions and provisions. In the event a Change of
Control or Net Proceeds Offer occurs at a time when the Company is prohibited
from purchasing Notes, the Company could seek the consent of its lenders to the
purchase of the Notes or could attempt to refinance the borrowings that contain
such prohibition. If the Company does not obtain such a consent or repay such
borrowings, the company may remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture which would, in turn, constitute a default
under the Credit Agreement. In such circumstances, the subordination provisions
in the Indenture would likely restrict payments to the Holders of Notes. The
Company will not permit any Subsidiary to enter into or suffer to exist any
agreement that would place any restriction of any kind (other than pursuant to
law or regulation) on the ability of the Company to make a Net Proceeds Offer
following any Asset Sale.
The Company intends to comply with Rule 14e-1 under the Exchange Act, and
any other securities laws and regulations thereunder, if applicable, in the
event that an Asset Sale occurs and the Company is required to purchase Notes
as described above.
Limitation on Non-Guarantor Restricted Subsidiaries. (a) The Indenture
will provide that the Company will not permit any Restricted Subsidiary that is
not a Subsidiary Guarantor to incur any Indebtedness for borrowed money or
guarantee the payment of any such Indebtedness of the Company or any other
Restricted Subsidiary unless (i)(A) such Restricted Subsidiary simultaneously
executes and delivers a supplemental indenture to the Indenture providing for a
Subsidiary Guarantee of the Notes by such Restricted Subsidiary which
Subsidiary Guarantee will be subordinated to Guarantor Senior Indebtedness (but
no other Indebtedness) to the same extent that the Notes are subordinated to
Senior Indebtedness and (B), with respect to any guarantee of Subordinated
Indebtedness by a Restricted Subsidiary, any such guarantee shall be
subordinated to such Restricted Subsidiary's Subsidiary Guarantee at least to
the same extent as such Subordinated Indebtedness is subordinated to the Notes;
(ii) such Restricted Subsidiary waives, and agrees not in any manner whatsoever
to claim to take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its Subsidiary Guarantee until such time as the obligations guaranteed
thereby are paid in full; and (iii) such Restricted Subsidiary shall deliver to
the Trustee an opinion of independent legal counsel to the effect that such
Subsidiary Guarantee has been duly executed and authorized and constitutes a
valid, binding and enforceable obligation of such Restricted Subsidiary, except
insofar as enforcement thereof may be limited by bankruptcy, insolvency or
similar laws (including, without limitation, all laws relating to fraudulent
transfers) and except insofar as enforcement thereof is subject to general
principles of equity; provided that this paragraph (a) shall not be applicable
to any guarantee of any Restricted Subsidiary that (x) existed at the time such
Person became a Restricted Subsidiary of the Company and (y) was not incurred
in connection with, or in contemplation of, such Person becoming a Restricted
Subsidiary of the Company.
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(b) Notwithstanding the foregoing and the other provisions of the
Indenture, any Subsidiary Guarantee incurred by a Restricted Subsidiary
pursuant to the covenant shall provide by its terms that it shall be
automatically and unconditionally released and discharged upon (i) any sale,
exchange or transfer, to any Person that is not an Affiliate of the Company, of
all of the Company's Capital Stock in, or all or substantially all the assets
of, such Restricted Subsidiary (which sale, exchange or transfer is not
prohibited by the Indenture), (ii) the merger of such Restricted Subsidiary
into the Company or any other Restricted Subsidiary (provided the surviving
Restricted Subsidiary assumes the Subsidiary Guarantee) or the liquidation and
dissolution of such Restricted Subsidiary (in each case to the extent not
prohibited by the Indenture), or (iii) (x) the release or discharge of all
guarantees by such Restricted Subsidiary of any Indebtedness other than the
Note Obligations, except a discharge or release by or as a result of payment
under such guarantees and (y) after giving effect to the proposed release and
discharge, the aggregate total combined assets of all Restricted Subsidiaries
that are not Subsidiary Guarantors do not exceed 5% of Adjusted Consolidated
Net Tangible Assets.
Limitation on Dividends and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Indenture will provide that the Company will not,
and will not permit any Restricted Subsidiary to, directly or indirectly,
create or otherwise cause or suffer to exist or become effective any consensual
encumbrance or restriction of any kind on the ability of any Restricted
Subsidiary to (a) pay dividends, in cash or otherwise, or make any other
distributions on or in respect of its Capital Stock to the Company or any
Restricted Subsidiary, (b) pay any Indebtedness owed to the Company or any
Restricted Subsidiary, (c) make an Investment in the Company or any Restricted
Subsidiary or (d) transfer any of its properties or assets to the Company or
any Restricted Subsidiary, except for such encumbrances or restrictions under
or by reason of (i) any agreement in effect or entered into on the date of the
Indenture (including the Credit Agreement), (ii) any agreement or other
instrument of a Person acquired by the Company or any Restricted Subsidiary in
existence at the time of such acquisition (but not created in contemplation
thereof), which encumbrance or restriction is not applicable to any other
Person, or the properties or assets of any other Person, other than the Person,
or the property or assets of the Person, so acquired, (iii) any agreement that
extends, renews, refinances or replaces the agreements containing the
restrictions in the foregoing clauses (i) and (ii), provided that the terms and
conditions of any such restrictions are not materially less favorable to the
Holders of the Notes than those under or pursuant to the agreement evidencing
the Indebtedness so extended, renewed, refinanced or replaced, (iv) the
Indenture and the Notes, (v) applicable law, (vi) customary non-assignment
provisions in leases, and customary provisions in other agreements that
restrict assignment of such agreements or rights thereunder, (vii) customary
restrictions contained in asset sale agreements limiting the transfer of such
assets pending the closing of such sale or (viii) purchase money obligations
for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (d) above on the property so
acquired.
Limitation on Other Senior Subordinated Indebtedness. The Indenture will
provide that the Company will not incur, directly or indirectly, any
Indebtedness which is expressly subordinate or junior in right of payment in
any respect to Senior Indebtedness unless such Indebtedness ranks pari passu in
right of payment with the Notes, or is expressly subordinated in right of
payment to the Notes; provided, however, that the foregoing limitations will
not apply to distinctions between categories of Indebtedness that exist by
reason of any Liens arising or created in respect of some but not all such
Indebtedness.
Limitation on Conduct of Business. The Company shall not, and shall not
permit any of its Restricted Subsidiaries to, engage in the conduct of any
business other than the Oil and Gas Business.
Reports. The Indenture will require that the Company (and the Subsidiary
Guarantors, if applicable) 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(d) of the Exchange
Act). The Company (and the Subsidiary Guarantors, if applicable) will also be
required (a) to file with the Trustee, and provide to each holder of Notes,
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 (and the Subsidiary Guarantors,
if applicable) would be required to file such reports and documents if the
Company (and the Subsidiary Guarantors, if applicable) 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 furnish at the Company's
cost copies of such reports and documents to any holder of Notes promptly upon
written request. The Company is obligated to make available, upon request, to
any Holder of Notes the information required by 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.
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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. Generally, a Restricted Subsidiary
includes any Subsidiary of the Company, whether existing on or after the date
of the Indenture, unless the Subsidiary of the Company is designated as an
Unrestricted Subsidiary pursuant to the terms of the Indenture. The definition
of "Unrestricted Subsidiary" set forth under the caption "-- Certain
Definitions" describes the circumstances under which a future Subsidiary of the
Company may be designated as an Unrestricted Subsidiary by the Board of
Directors of the Company.
MERGER, CONSOLIDATION AND SALE OF ASSETS, ETC.
The Indenture will provide that the Company will not, in any single
transaction or series of related transactions, merge or consolidate with or
into any other Person, or sell, assign, convey, transfer, lease or otherwise
dispose of all or substantially all of its properties and assets to any Person
or group of Affiliated Persons, and the Company may not permit any of its
Restricted Subsidiaries to enter into any such transaction or series of
transactions if such transaction or series of transactions, in the aggregate,
would result in a sale, assignment, conveyance, transfer, lease or other
disposition of all or substantially all of the properties and assets of the
Company and its Restricted Subsidiaries on a consolidated basis to any other
Person or group of Affiliated Persons, unless at the time and after giving
effect thereto (i) either (A) if the transaction or transactions is a merger or
consolidation, the Company shall be the surviving Person of such merger or
consolidation, or (B) the Person (if other than the Company) formed by such
consolidation or into which the Company or such Restricted Subsidiary is merged
or to which the properties and assets of the Company or such Restricted
Subsidiary, as the case may be, are sold, assigned, conveyed, transferred,
leased or otherwise disposed of (any such surviving Person or transferee Person
being the "Surviving Entity") shall be a corporation organized and existing
under the laws of the United States of America, any state thereof or the
District of Columbia and shall, in either case, expressly assume by a
supplemental indenture to the Indenture executed and delivered to the Trustee,
in form satisfactory to the Trustee, all the obligations of the Company under
the Notes and the Indenture, and, in each case, the Indenture shall remain in
full force and effect; (ii) immediately before and immediately after giving
effect to such transaction or series of transactions on a pro forma basis (and
treating any Indebtedness not previously an obligation of the Company or any of
its Restricted Subsidiaries in connection with or as a result of such
transaction as having been incurred at the time of such transaction), no
Default or Event of Default shall have occurred and be continuing; (iii) except
in the case of the consolidation or merger of any Restricted Subsidiary with or
into the Company, immediately after giving effect to such transaction or
transactions on a pro forma basis, the Consolidated Net Worth of the Company
(or the Surviving Entity if the Company is not the continuing obligor under the
Indenture) is at least equal to the Consolidated Net Worth of the Company
immediately before such transaction or transactions; (iv) except in the case of
the consolidation or merger of any Restricted Subsidiary with or into the
Company or any Wholly Owned Restricted Subsidiary, immediately before and
immediately after giving effect to such transaction or transactions on a pro
forma basis (on the assumption that the transaction or transactions occurred on
the first day of the period of four fiscal quarters ending immediately prior to
the consummation of such transaction or transactions, with the appropriate
adjustments with respect to the transaction or transactions being included in
such pro forma calculation), the Company (or the Surviving Entity if the
Company is not the continuing obligor under the Indenture) could incur $1.00 of
additional Indebtedness (excluding Permitted Indebtedness) pursuant to the
"Limitation on Indebtedness" covenant; (v) each Subsidiary Guarantor, unless it
is the other party to the transactions described above, shall have by
supplemental indenture to the Indenture confirmed that its Subsidiary Guarantee
of the Notes shall apply to such Person's obligations under the Indenture and
the Notes; and (vi) if any of the properties or assets of the Company or any of
its Restricted Subsidiaries would upon such transaction or series of related
transactions become subject to any Lien (other than a Permitted Lien), the
creation and imposition of such Lien shall have been in compliance with the
"Limitation on Liens" covenant.
In connection with any consolidation, merger, transfer, lease or other
disposition contemplated hereby, the Company shall deliver, or cause to be
delivered, to the Trustee, in form and substance reasonably satisfactory to the
Trustee, an officers' certificate stating that such consolidation, merger,
transfer, lease or other disposition and the supplemental indenture in respect
thereto comply with the requirements under the Indenture and an opinion of
counsel stating that the requirements of clause (i) of the preceding paragraph
have been complied with. Upon any consolidation or merger or any sale,
assignment, transfer, lease or other disposition of all or substantially all of
the assets of the Company in accordance with the foregoing, in which the
Company is not the continuing corporation, the Surviving Entity shall 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
corporation had been named as the Company therein, and thereafter the Company,
except in the case of a lease, will be discharged from all obligations and
covenants under the Indenture and the Notes.
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EVENTS OF DEFAULT
The following will be "Events of Default" under the Indenture:
(i) default in the payment of the principal of or premium, if any,
on any of the Notes, whether such payment is due at maturity, upon
redemption, upon repurchase pursuant to a Change of Control Offer or a Net
Proceeds Offer, upon acceleration or otherwise; or
(ii) default in the payment of any installment of interest on any of
the Notes, when it becomes due and payable, and the continuance of such
default for a period of 30 days; or
(iii) default in the performance or breach of the provisions of the
"Merger, Consolidation and Sale of Assets" section of the Indenture, the
failure to make or consummate a Change of Control Offer in accordance with
the provisions of the "Change of Control" covenant or the failure to make
or consummate a Net Proceeds Offer in accordance with the provisions of
the "Limitation on Disposition of Proceeds of Asset Sales" covenant; or
(iv) the Company or any Subsidiary Guarantor shall fail to perform or
observe any other term, covenant or agreement contained in the Notes, any
Subsidiary Guarantee or the Indenture (other than a default specified in
(i), (ii) or (iii) above) for a period of 60 days after written notice of
such failure requiring the Company to remedy the same shall have been
given (x) to the Company by the Trustee or (y) to the Company and the
Trustee by the holders of at least 25% in aggregate principal amount of
the Notes then outstanding; or
(v) the occurrence and continuation beyond any applicable grace
period of any default in the payment of the principal of (or premium, if
any, on) or interest on any Indebtedness of the Company (other than the
Notes) or any Restricted Subsidiary for money borrowed when due, or any
other default causing acceleration of any Indebtedness of the Company or
any Restricted Subsidiary for money borrowed, provided that the aggregate
principal amount of such Indebtedness shall exceed $5,000,000; provided
further that if any such default is cured or waived or any such
acceleration rescinded, or such debt is repaid, within a period of 10 days
from the continuation of such default beyond the applicable grace period
or the occurrence of such acceleration, as the case may be, such Event of
Default under the Indenture and any consequential acceleration of the
Notes shall be automatically rescinded, so long as such rescission does
not conflict with any judgment or decree; or
(vi) any Subsidiary Guarantee shall for any reason cease to be, or be
asserted by the Company or any Subsidiary Guarantor, as applicable, not to
be, in full force and effect, enforceable in accordance with its terms
(except pursuant to the release of any such Subsidiary Guarantee in
accordance with the Indenture); or
(vii) final judgments or orders rendered against the Company or any
Restricted Subsidiary that are unsatisfied and that require the payment in
money, either individually or in an aggregate amount, that is more than
$5,000,000 over the coverage under applicable insurance policies and
either (i) commencement by any creditor of an enforcement proceeding upon
such judgment (other than a judgment that is stayed by reason of pending
appeal or otherwise) or (ii) the occurrence of a 60-day period during
which a stay of such judgment or order, by reason of pending appeal or
otherwise, was not in effect; or
(viii)the entry of a decree or order by a court having jurisdiction
in the premises (A) for relief in respect of the Company or any Restricted
Subsidiary in an involuntary case or proceeding under any applicable
federal or state bankruptcy, insolvency, reorganization or other similar
law or (B) adjudging the Company or any Restricted Subsidiary bankrupt or
insolvent, or approving a petition seeking reorganization, arrangement,
adjustment or composition of the Company or a Restricted Subsidiary under
any applicable federal or state law, or appointing under any such law a
custodian, receiver, liquidator, assignee, trustee, sequestrator or other
similar official of the Company or any Restricted Subsidiary or of a
substantial part of their consolidated assets, or ordering the winding up
or liquidation of their affairs, and the continuance of any such decree or
order for relief or any such other decree or order unstayed and in effect
for a period of 60 consecutive days; or
(ix) the commencement by the Company or any Restricted Subsidiary of a
voluntary case or proceeding under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law or any other
case or proceeding to be adjudicated bankrupt or insolvent, or the consent
by the Company or any Restricted Subsidiary to the entry of a decree or
order for relief in respect thereof in an involuntary case or proceeding
under any
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applicable federal or state bankruptcy, insolvency, reorganization or
other similar law or to the commencement of any bankruptcy or insolvency
case or proceeding against it, or the filing by the Company or any
Restricted Subsidiary of a petition or consent seeking reorganization or
relief under any applicable federal or state law, or the consent by it
under any such law to the filing of any such petition or to the
appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee or sequestrator (or other similar official) of any of
the Company or any Restricted Subsidiary or of any substantial part of
their consolidated assets, or the making by it of an assignment for the
benefit of creditors under any such law, or the admission by it in writing
of its inability to pay its debts generally as they become due or taking
of corporate action by the Company or any Restricted Subsidiary in
furtherance of any such action.
If an Event of Default (other than as specified in clause (viii) or (ix)
above) shall occur and be continuing, the Trustee, by written notice to the
Company, or the holders of at least 25% in aggregate principal amount of the
Notes then outstanding, by notice to the Trustee and the Company, may declare
the principal of, premium, if any, and accrued interest on all of the
outstanding Notes due and payable immediately, upon which declaration all
amounts payable in respect of the Notes shall be immediately due and payable.
If an Event of Default specified in clause (viii) or (ix) above occurs and is
continuing, then the principal of, premium, if any, and accrued interest on all
of the outstanding Notes shall ipso facto become and be immediately due and
payable without any declaration, notice or other act on the part of the Trustee
or any holder of Notes.
After a declaration of acceleration under the Indenture, but before a
judgment or decree for payment of the money due has been obtained by the
Trustee, the holders of a majority in aggregate principal amount of the
outstanding Notes, by written notice to the Company and the Trustee, may
rescind such declaration if (a) the Company or any Subsidiary Guarantor has
paid or deposited with the Trustee a sum sufficient to pay (i) all sums paid or
advanced by the Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel,
(ii) all overdue interest on all Notes, (iii) the principal of and premium, if
any, on any Notes which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes, and (iv) to
the extent that payment of such interest is lawful, interest upon overdue
interest and overdue principal at the rate borne by the Notes which has become
due otherwise than by such declaration of acceleration; (b) the rescission
would not conflict with any judgment or decree of a court of competent
jurisdiction; and (c) all Events of Default, other than the nonpayment of
principal of, premium, if any, and interest on the Notes that has become due
solely by such declaration of acceleration, have been cured or waived.
Under certain circumstances described in the Indenture, in the event of a
declaration of acceleration in respect of the Notes because of an Event of
Default specified in clause (v) above shall have occurred and be continuing,
such declaration of acceleration and any consequential acceleration shall be
automatically rescinded if the Indebtedness that is the subject of such Event
of Default has been repaid, or if the default relating to such Indebtedness is
waived or cured and if such Indebtedness had been accelerated, then the holders
thereof have rescinded their declaration of acceleration in respect of such
Indebtedness.
The holders of not less than a majority in aggregate principal amount of
the outstanding Notes may on behalf of the holders of all the Notes waive any
past defaults under the Indenture, except a default in the payment of the
principal of, premium, if any, or interest on any Note, or in respect of a
covenant or provision which under the Indenture cannot be modified or amended
without the consent of the holder of each Note outstanding.
No holder of any of the Notes has any right to institute any proceeding
with respect to the Indenture or any remedy thereunder, unless the holders of
at least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee under the Notes and the Indenture, the Trustee has
failed to institute such proceeding within 60 days after receipt of such notice
and offer of indemnity and the Trustee, within such 60-day period, has not
received directions inconsistent with such written request by holders of a
majority in aggregate principal amount of the outstanding Notes. Such
limitations do not apply, however, to a suit instituted by a holder of a Note
for the enforcement of the payment of the principal of, premium, if any, or
interest on such Note on or after the respective due dates expressed in such
Note.
During the existence of an Event of Default, the Trustee is required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default shall occur and be continuing, the Trustee
under the Indenture
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is not under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Noteholders unless such
holders shall have offered to the Trustee reasonable security or indemnity.
Subject to certain provisions concerning the rights of the Trustee, the holders
of a majority in aggregate principal amount of the outstanding Notes 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
the Trustee under the Indenture.
If a Default or an Event of Default occurs and is continuing and is known
to the Trustee, the Trustee shall mail to each holder of the Notes notice of
the Default or Event of Default within 60 days after the occurrence thereof,
provided, however, that in case of a Default of the type listed in clause (v)
above, no notice to Holders shall be given until at least 60 days after the
occurrence thereof. Except in the case of a Default or an Event of Default in
payment of principal of, premium, if any, or interest on any Notes, the Trustee
may withhold the notice to the holders of such Notes if a committee of its
Trust Officers in good faith determines that withholding the notice is in the
interest of the Noteholders.
The Company is required to furnish to the Trustee annual and quarterly
statements as to the performance by the Company and the Subsidiary Guarantors
of its obligations under the Indenture and as to any default in such
performance.
The Company is also required to notify the Trustee within ten days of any
Default.
LEGAL DEFEASANCE OR COVENANT DEFEASANCE OF INDENTURE
The Company may, at its option and at any time, terminate the obligations
of the Company and the Subsidiary Guarantors with respect to the outstanding
Notes ("legal defeasance"). Such legal defeasance means that the Company and
the Subsidiary Guarantors shall be deemed to have paid and discharged the
entire Indebtedness represented by the outstanding Notes, except for (i) the
rights of holders of outstanding Notes to receive payment in respect of the
principal of, premium, if any, on and interest on such Notes when such payments
are due, (ii) the Company's obligations to issue temporary Notes, register the
transfer or exchange of any Notes, replace mutilated, destroyed, lost or stolen
Notes and maintain an office or agency for payments in respect of the Notes,
(iii) the rights, powers, trusts, duties and immunities of the Trustee, and
(iv) the defeasance provisions of the Indenture. In addition, the Company may,
at its option and at any time, elect to terminate the obligations of the
Company and any Subsidiary Guarantor with respect to certain covenants that are
set forth in the Indenture, some of which are described under "-- Certain
Covenants" above, and any omission to comply with such obligations shall not
constitute a Default or an Event of Default with respect to the Notes
("covenant defeasance").
In order to exercise either legal defeasance or covenant defeasance, (i)
the Company or any Subsidiary Guarantor must irrevocably deposit, with the
Trustee, in trust, for the benefit of the holders of the Notes, cash in United
States dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of, premium, if any, on and interest on the outstanding Notes to
redemption or maturity; (ii) the Company shall have delivered to the Trustee an
opinion of counsel to the effect that the holders of the outstanding Notes will
not recognize income, gain or loss for federal income tax purposes as a result
of such legal defeasance or covenant defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such legal defeasance or covenant defeasance had
not occurred (in the case of legal defeasance, such opinion must refer to and
be based upon a published ruling of the Internal Revenue Service or a change in
applicable federal income tax laws); (iii) no Default or Event of Default shall
have occurred and be continuing on the date of such deposit (other than a
Default or Event of Default resulting from the borrowing of funds to be applied
to such deposit) or insofar as either clause (viii) or (ix) under "-- Events of
Default" is concerned, at any time in the period ending on the 91st day after
the date of the deposit; (iv) such legal defeasance or covenant defeasance
shall not cause the Trustee to have a conflicting interest under the Indenture
or the Trust Indenture Act with respect to any securities of the Company or any
Subsidiary Guarantor, (v) such legal defeasance or covenant defeasance shall
not result in a breach or violation of, or constitute a default under, any
material agreement or instrument to which the Company or any Subsidiary
Guarantor is a party or by which it is bound; and (vi) the company shall have
delivered to the Trustee an officers' certificate and an opinion of counsel
satisfactory to the Trustee, which, taken together, state that all conditions
precedent under the Indenture to either legal defeasance or covenant
defeasance, as the case may be, have been complied with and that no violations
under agreements governing any other outstanding Indebtedness would result
therefrom.
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SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights or registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (i) either (a) all the Notes theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the
Company or discharged from such trust) have been delivered to the Trustee for
cancellation or (b) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable or will become due and payable at
their Stated Maturity within one year, or are to be called for redemption
within one year under arrangement satisfactory to the Trustee for the serving
of notice of redemption by the Trustee in the name, and at the expense, of the
Company, and the Company has irrevocably deposited or caused to be deposited
with the Trustee funds in an amount sufficient to pay and discharge the entire
indebtedness on the Notes not theretofore delivered to the Trustee for
cancellation, for principal of (and premium, if any, on) and interest on the
Notes to the date of deposit (in the case of Notes which have become due and
payable) or to the Stated Maturity or Redemption Date, as the case may be,
together with instructions from the Company irrevocably directing the Trustee
to apply such funds to the payment thereof at maturity or redemption, as the
case may be, (ii) the Company has paid all other sums payable under the
Indenture by the Company; and (iii) the Company has delivered to the Trustee an
officers' certificate and an opinion of counsel satisfactory to the Trustee,
which, taken together, state that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
AMENDMENTS AND WAIVERS
From time to time, the Company and the Trustee may, without the consent of
the Noteholders, amend, waive or supplement the Indenture or the Notes for
certain specified purposes, including, among other things, curing ambiguities,
defects or inconsistencies, qualifying, or maintaining the qualification of,
the Indenture under the Trust Indenture Act of 1939, or making any change that
does not adversely affect the rights of any Noteholder. Other amendments and
modifications of the Indenture or the Notes may be made by the Company, the
Subsidiary Guarantors and the Trustee with the consent of the holders of not
less than a majority of the aggregate principal amount of the outstanding
Notes; provided, however, that no such modification or amendment may, without
the consent of the holder of each outstanding Note affected thereby, (a) change
the Stated Maturity of the principal of, or any installment of interest on any
Note, (b) reduce the principal amount of (or the premium, if any, on) or
interest on any Note, (c) change the coin or currency of payment of principal
of (or the premium, if any, on) or interest on, any Note, (d) impair the right
to institute suit for the enforcement of any payment on or with respect to any
Note, (e) reduce the above-stated percentage of aggregate principal amount of
outstanding Notes necessary to modify or amend the Indenture, (f) reduce the
percentage of aggregate principal amount of outstanding Notes necessary for
waiver of compliance with certain provisions of the Indenture or for waiver of
certain defaults, (g) modify any provisions of the Indenture relating to the
modification and amendment of the Indenture or the waiver of past defaults or
covenants, except as otherwise specified, (h) modify any provision of the
Indenture relating to the Subsidiary Guarantees in a manner adverse to the
Holders, or (i) amend, change or modify the obligation of the Company to make
and consummate a Change of Control Offer in the event of a Change of Control or
make and consummate the Net Proceeds Offer with respect to any Asset Sale or
modify any of the provisions or definitions with respect thereto.
The Holders of a majority in aggregate principal amount of the outstanding
Notes may waive compliance by the Company with certain restrictive provisions
of the Indenture. The Holders of a majority in aggregate principal amount of
the outstanding Notes may waive any past default under the Indenture, except a
default in the payment of principal (or premium, if any, on) or interest on the
Notes.
THE TRUSTEE
The Indenture provides that, except during the continuance of an Event of
Default, the Trustee thereunder will perform only such duties as are
specifically set forth in the Indenture. If an Event of Default has occurred
and is continuing, the Trustee will exercise such rights and powers vested in
it under the Indenture and use the same degree of care and skill in its
exercise as a prudent Person would exercise under the circumstances in the
conduct of such Person's own affairs.
The Indenture and provisions of the Trust Indenture Act of 1939, as
amended, contain limitations on the rights of the Trustee thereunder, should it
become a creditor of the Company, to obtain payment of claims in certain cases
or to
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realize on certain property received by it in respect of any such claims, as
security or otherwise. The Trustee is permitted to engage in other
transactions; provided, however, that if it acquires any conflicting interest
(as defined) it must eliminate such conflict or resign.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees provide that they
will be governed by the laws of the State of New York, without regard to the
principles of conflicts of law.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth in the next paragraph, the Notes will be issued in the
form of one or more global Notes (the "Global Notes"). The Global Notes will be
deposited on the original date of issuance of the Notes with, or on behalf of,
The Depository Trust Company ("DTC") and registered in the name of Cede & Co.,
as nominee of DTC. The interest of QIBs in the Global Notes will be represented
through financial institutions acting on their behalf as direct or indirect
participants of DTC.
Notes (a) originally purchased by or transferred to an institutional
"accredited investor" within the meaning of subparagraph (a)(1), (2), (3) or
(7) of Rule 501 under the Securities Act (each an "Institutional Accredited
Investor") who are not QIBs or (b) held by "qualified institutional buyers"
("QIBs") who elect to take physical delivery of their certificates instead of
holding their interest in the Global Notes (and which are thus ineligible to
trade through DTC) will be represented by certificates in definitive form
registered in the names of such investors or their nominees ("Certificated
Securities"). Upon the transfer of Certificated Securities to a QIB, such
Certificated Securities will, unless the transferee requests otherwise or the
Global Notes have previously been exchanged in whole for Certificated
Securities, be exchanged for an interest in the Global Notes. For a description
of the restrictions on the transfer of Certificated Securities and any interest
in the Global Notes, see "Notices to Investors."
Ownership of beneficial interests in a Global Note will be limited to
persons who have accounts with DTC ("participants") or persons who hold
interests through participants. Ownership of beneficial interests in the Global
Notes will be shown on, and the transfer of these ownership interests will be
effected only through, records maintained by DTC or its nominee (with respect
to interests of participants) and the records of participants (with respect to
interests of persons other than participants).
So long as DTC, or its nominee, is the registered owner or holder of a
Global Note, DTC or such nominee, as the case may be, will be considered the
sole owner or holder of the Notes represented by such Global Note for all
purposes under the Indenture and the Notes. In addition, no beneficial owner of
an interest in a Global Note will be able to transfer that interest except in
accordance with the applicable procedures of DTC.
Payments on Global Notes will be made to DTC or its nominee, as the
registered owner thereof. None of the Company, the Trustee or any paying agent
will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in
the Global Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests. The Company expects that DTC
or its nominee, upon receipt of any payment in respect of a Global Note
representing any Notes held by it or its nominee, will immediately credit
participants' accounts with payments in amounts proportionate to their
respective beneficial interests in the principal amount of such Global Note for
such Notes as shown on the records of DTC or its nominee. The Company also
expects that payments by participants will be governed by standing instructions
and customary practices, as is now the case with securities held for the
accounts of customers registered in the names of nominees for such customers.
Such payments will be the responsibility of such participants.
Transfers between participants in DTC will be effected in the ordinary way
in accordance with DTC rules. The laws of some states require that certain
Persons take physical delivery of securities in definitive form. Consequently,
the ability to transfer beneficial interests in a Global Note to such Persons
may be limited. Because DTC can only act on behalf of participants, who in turn
act on behalf of indirect participants (as defined below) and certain banks,
the ability of a Person having a beneficial interest in a Global Note to pledge
such interest to Persons that do not participate in the DTC system, or
otherwise take actions in respect of such interest, may be affected by the lack
of a physical certificate of such interest.
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DTC has advised the Company as follows: DTC is a limited-purpose trust
company organized under the New York Banking Law, a "banking organization"
within the meaning of the New York Banking Law, a member of the Federal Reserve
System, a "clearing corporation" within the meaning of the New York Uniform
Commercial Code and a "clearing agency" registered pursuant to the provisions
of Section 17A of the Exchange Act. DTC holds securities that its participants
deposit with DTC and facilitates the settlement among participants of
securities transactions, such as transfers and pledges, in deposited securities
through electronic computerized book-entry changes in participants' accounts,
thereby eliminating the need for physical movement of securities certificates.
Direct participants include securities brokers and dealers, banks, trust
companies, clearing corporations and certain other organizations. Access to the
DTC system is also available to others such as securities brokers and dealers,
banks and trust companies that clear through or maintain a custodial
relationship with a direct participant, either directly or indirectly
("indirect participants"). The rules applicable to DTC and its participants are
on file with the Commission. Although DTC is expected to follow the foregoing
procedures in order to facilitate transfers of interests in the Global Notes
among participants of DTC it is under no obligation to perform or continue to
perform such procedures, and such procedures may be discontinued at any time.
Neither the Company nor the Trustee will have any responsibility for the
performance by DTC or the participants or indirect participants of their
respective obligations under the rules and procedures governing their
operations.
CERTIFICATED SECURITIES
Subject to certain conditions, any Person having a beneficial interest in
a Global Note may, upon request to the Company or the Trustee, exchange such
beneficial interest for Notes in the form of Certificated Securities. See
"Notices to Investors." Upon any such issuance, the Trustee is required to
register such Notes in the name of, and cause the same to be delivered to, such
Person or Persons (or the nominee of any thereof). All such Certificated
Securities would be subject to the legend requirements described herein under
"Notices to Investors." In addition, if (i) DTC or any successor depositary
(the "Depositary") notifies the Company in writing that the Depositary is no
longer willing or able to act as a depositary and the Company is unable to
locate a qualified successor within 90 days or (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Notes
in the form of Certificated Securities under the Indenture, then, upon
surrender by the registered owner or holder of a Global Note (a "Global Note
Holder") of its Global Note, Notes in such form will be issued to each Person
that such Global Note Holder and the Depositary identify as the beneficial
owner of the related Notes.
Neither the Company nor the Trustee will be liable for any delay by the
related Global Note Holder or the Depositary in identifying the beneficial
owners of the related Notes, and each such Person may conclusively rely on, and
will be protected in relying on, instructions from such Global Note Holder or
of the Depositary for all purposes (including with respect to the registration
and delivery, and the respective principal amounts, of the Notes to be issued).
CERTAIN DEFINITIONS
"Acquired Indebtedness" means Indebtedness of a Person (a) assumed in
connection with an Asset Acquisition from such Person, (b) outstanding at the
time such Person becomes a Subsidiary of any other Person (other than any
Indebtedness incurred in connection with, or in contemplation of, such Asset
Acquisition or such Person becoming such a Subsidiary) or (c) any renewals,
extensions, substitutions, refinancings or replacements (each, for purposes of
this clause, a "refinancing") by the Company of any Indebtedness described in
clause (a) or (b) of this definition, including any successive refinancings, so
long as (A) any such new Indebtedness shall be in a principal amount that does
not exceed the principal amount (or, if such Indebtedness being refinanced
provides for an amount less than the principal amount thereof to be due and
payable upon a declaration of acceleration thereof, such lesser amount as of
the date of determination) so refinanced plus the amount of any premium
required to be paid in connection with such refinancing pursuant to the terms
of the Indebtedness refinanced or the amount of any premium reasonably
determined by the Company as necessary to accomplish such refinancing, plus the
amount of expenses of the Company incurred in connection with such refinancing,
and (B) in the case of any refinancing of Subordinated Indebtedness, such new
Indebtedness is made subordinate to the Notes at least to the same extent as
the Indebtedness being refinanced and (C) such new Indebtedness has an Average
Life longer than the Average Life of the Notes and a final Stated Maturity
later than the final Stated Maturity of the Notes.
"Adjusted Consolidated Net Tangible Assets" means (without duplication),
as of the date of determination, (a) the sum of (i) discounted future net
revenues from proved oil and gas reserves of the Company and its Restricted
Subsidiaries calculated in accordance with SEC guidelines before any state or
federal income taxes, as estimated by a nationally recognized firm of
independent petroleum engineers in a reserve report prepared as of the end of
the Company's most
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recently completed fiscal year, as increased by, as of the date of
determination, the estimated discounted future net revenues from (A) estimated
proved oil and gas reserves acquired since the date of such year-end reserve
report, and (B) estimated oil and gas reserves attributable to upward revisions
of estimates of proved oil and gas reserves since the date of such year-end
reserve report due to exploration, development or exploitation activities, in
each case calculated in accordance with SEC guidelines (utilizing the prices
utilized in such year-end reserve report), and decreased by, as of the date of
determination, the estimated discounted future net revenues from (C) estimated
proved oil and gas reserves produced or disposed of since the date of such
year-end reserve report and (D) estimated oil and gas reserves attributable to
downward revisions of estimates of proved oil and gas reserves since the date
of such year-end reserve report due to changes in geological conditions or
other factors which would, in accordance with standard industry practice, cause
such revisions, in each case calculated in accordance with SEC guidelines
(utilizing the prices utilized in such year-end reserve report); provided that,
in the case of each of the determinations made pursuant to clauses (A) through
(D), such increases and decreases shall be as estimated by the Company's
petroleum engineers, unless in the event that there is a Material Change as a
result of such acquisitions, dispositions or revisions, then the discounted
future net revenues utilized for purposes of this clause (a)(i) shall be
confirmed in writing by a nationally recognized firm of independent petroleum
engineers, (ii) the capitalized costs that are attributable to oil and gas
properties of the Company and its Restricted Subsidiaries to which no proved
oil and gas reserves are attributable, based on the Company's books and records
as of a date no earlier than the date of the Company's latest annual or
quarterly financial statements, (iii) the Net Working Capital on a date no
earlier than the date of the Company's latest annual or quarterly financial
statements and (iv) the greater of (A) the net book value on a date no earlier
than the date of the Company's latest annual or quarterly financial statements
or (B) the appraised value, as estimated by independent appraisers, of other
tangible assets (including, without duplication, Investments in unconsolidated
Restricted Subsidiaries) of the Company and its Restricted Subsidiaries, as of
the date no earlier than the date of the Company's latest audited financial
statements, minus (b) the sum of (i) minority interests (other than a minority
interest in a Subsidiary that is a business trust or similar entity formed for
the primary purpose of issuing preferred securities the proceeds of which are
loaned to the Company or a Restricted Subsidiary), (ii) any net gas balancing
liabilities of the Company and its Restricted Subsidiaries reflected in the
Company's latest audited financial statements, (iii) to the extent included in
(a)(i) above, the discounted future net revenues, calculated in accordance with
SEC guidelines (utilizing the prices utilized in the Company's year-end reserve
report), attributable to reserves which are required to be delivered to third
parties to fully satisfy the obligations of the Company and its Restricted
Subsidiaries with respect to Volumetric Production Payments on the schedules
specified with respect thereto and (iv) the discounted future net revenues,
calculated in accordance with SEC guidelines, attributable to reserves subject
to Dollar-Denominated Production Payments which, based on the estimates of
production and price assumptions included in determining the discounted future
net revenues specified in (a)(i) above, would be necessary to fully satisfy the
payment obligations of the Company and its Restricted Subsidiaries with respect
to Dollar-Denominated Production Payments on the schedules specified with
respect thereto. If the Company changes its method of accounting from the
successful efforts method to the full cost method or a similar method of
accounting, "Adjusted Consolidated Net Tangible Assets" will continue to be
calculated as if the Company were still using the successful efforts method of
accounting.
"Affiliate" means, with respect to any specified Person, 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 Person, means the power to direct
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing. For
purposes of this definition, beneficial ownership of 10% or more of the voting
common equity (on a fully diluted basis) or options or warrants to purchase
such equity (but only if exercisable at the date of determination or within 60
days thereof) of a Person shall be deemed to constitute control of such Person.
No Person shall be deemed an Affiliate of an oil and gas royalty trust solely
by virtue of ownership of units of beneficial interest in such trust.
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary or any Restricted Subsidiary shall be merged
with or into the Company or any Restricted Subsidiary or (b) the acquisition by
the Company or any Restricted Subsidiary of the assets of any Person which
constitute all or substantially all of the assets of such Person or any
division or line of business of such Person.
"Asset Sale" means any sale, issuance, conveyance, transfer, lease or
other disposition to any Person other than the Company or any of its Restricted
Subsidiaries (including, without limitation, by means of a Sale/Leaseback
Transaction or by way of merger or consolidation) (collectively, for purposes
of this definition, a "transfer"), directly or indirectly, in one or a series
of related transactions, of (a) any Capital Stock of any Restricted Subsidiary
held by the Company or
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any Restricted Subsidiary; (b) all or substantially all of the properties and
assets of any division or line of business of the Company or any of its
Restricted Subsidiaries; or (c) any other properties or assets of the Company
or any of its Restricted Subsidiaries other than a disposition of hydrocarbons
or other mineral products in the ordinary course of business. For the purposes
of this definition, the term "Asset Sale" shall not include (i) any transfer of
properties or assets that is governed by, and made in accordance with, the
provisions described under "Merger, Consolidation and Sale of Assets, Etc.";
(ii) a Permitted Investment or Restricted Payment, if permitted under the
covenant described under "Limitation on Restricted Payments"; (iii) any trade
or exchange of oil and gas properties or shares of Capital Stock in any
corporation in the Oil and Gas Business owned by the Company or any Restricted
Subsidiary for oil and gas properties owned or held by another Person provided
that (x) the fair market value of the properties or shares traded or exchanged
by the Company or such Restricted Subsidiary (including any cash or Cash
Equivalents, not to exceed 15% of such fair market value, to be delivered by
the Company or such Restricted Subsidiary) is reasonably equivalent to the fair
market value of the properties (together with any cash or Cash Equivalents, not
to exceed 15% of such fair market value) to be received by the Company or such
Restricted Subsidiary as determined in good faith by (A) any officer of the
Company if such fair market value is less than $5,000,000 and (B) the Board of
Directors of the Company as certified by a certified resolution delivered to
the Trustee if such fair market value is equal to or in excess of $5,000,000;
provided that if such resolution indicates that such fair market value is equal
to or in excess of $10,000,000 such resolution shall be accompanied by a
written appraisal by a nationally recognized investment banking firm or
appraisal firm, in each case specializing or having a specially in oil and gas
properties, and (y) such exchange is approved by a majority of the
Disinterested Directors of the Company; (iv) the abandonment, farm-out, lease
or sublease of developed or undeveloped oil and gas properties in the ordinary
course of business; (v) the sale or transfer of surplus or obsolete equipment
in the ordinary course of business; or (vi) any transfer of properties or
assets having a fair market value of less than $750,000.
"Attributable Indebtedness" means, with respect to any particular lease
under which any Person is at the time liable and at any date as of which the
amount thereof is to be determined, the present value of the total net amount
of rent required to be paid by such Person under the lease during the primary
term thereof, without giving effect to any renewals at the option of the
lessee, discounted from the respective due dates thereof to such date of
determination at the rate of interest per annum implicit in the terms of the
lease. As used in the preceding sentence, the "net amount of rent" under any
lease for any such period shall mean the sum of rental and other payments
required to be paid with respect to such period by the lessee thereunder,
excluding any amounts required to be paid by such lessee on account of
maintenance and repairs, insurance, taxes, assessments, water rates or similar
charges. In the case of any lease which is terminable by the lessee upon
payment of a penalty, such net amount of rent shall also include the amount of
such penalty, but no rent shall be considered as required to be paid under such
lease subsequent to the first date upon which it may be so terminated.
"Average Life" means, with respect to any Indebtedness, as at any date of
determination, the quotient obtained by dividing (a) the sum of the products of
(i) the number of years (and any portion thereof) from the date of
determination to the date or dates of each successive scheduled principal
payment (including, without limitation, any sinking fund or mandatory
redemption payment requirements) of such Indebtedness multiplied by (ii) the
amount of each such principal payment by (b) the sum of all such principal
payments.
"Capital Stock" means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents in the equity
interests (however designated) in such Person, and any rights (other than debt
securities convertible into an equity interest), warrants or options
exercisable for, exchangeable for or convertible into such an equity interest
in such Person.
"Capitalized Lease Obligation" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified
and accounted for as a capital lease obligation under GAAP, and, for the
purpose of the Indenture, the amount of such obligation at any date shall be
the capitalized amount thereof at such date, determined in accordance with
GAAP.
"Cash Equivalents" means (i) any evidence of Indebtedness with a maturity
of 365 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided
that the full faith and credit of the United States of America is pledged in
support thereof); (ii) demand and time deposits and certificates of deposit or
acceptances with a maturity of 365 days or less of any financial institution
that is a member of the Federal Reserve System, or a United States branch of a
commercial bank with its principal offices located in Australia, in each case
having combined capital and surplus and undivided profits of not less than
$500,000,000; (iii) commercial paper with a maturity of 365 days or less issued
by a corporation that is not an Affiliate of the Company
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and is organized under the laws of any state of the United States or the
District of Columbia and rated at least A-1 by S&P or at least P-1 by Moody's;
(iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clause (i) above entered into
with any commercial bank meeting the specifications of clause (ii) above; and
(v) overnight bank deposits and bankers' acceptances at any commercial bank
meeting the qualifications specified in clause (ii) above.
"Change of Control" means the occurrence of any of the following events:
(a) any "person" or "group" (as such terms are used in Sections 13(d)(3) or
14(d)(2) of the Exchange Act) other than the Exempt Interests is or becomes the
"beneficial owner" (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of more than (i) 50% of the total voting power of the
outstanding Voting Stock of the Parent or (ii) 50% of the total voting power of
outstanding Voting Stock of the Company; (b) the Parent or the Company is
merged with or into or consolidated with another Person and, immediately after
giving effect to the merger or consolidation, (A) less than 50% of the total
voting power of the outstanding Voting Stock of the surviving or resulting
Person is then "beneficially owned" (within the meaning of Rule 13d-3 under the
Exchange Act) in the aggregate by (x) the stockholders of the Parent or the
Company immediately prior to such merger or consolidation, or (y) if a record
date has been set to determine the stockholders of the Parent or the Company
entitled to vote with respect to such merger or consolidation, the stockholders
of the Parent or the Company as of such record date and (B) any "person" or
"group" (as such terms are used in Sections 13(d)(3) or 14(d)(2) of the
Exchange Act) has become the direct or indirect "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act) of more than 50% of the total voting
power of the Voting Stock of the surviving or resulting Person; (c) the
Company, either individually or in conjunction with one or more Restricted
Subsidiaries, sells, conveys, transfers or leases, or the Restricted
Subsidiaries sell, convey, transfer or lease, all or substantially all of the
assets of the Company and the Restricted Subsidiaries, taken as a whole (either
in one transaction or a series of related transactions), including Capital
Stock of the Restricted Subsidiaries, to any Person (other than the Company or
a Wholly Owned Subsidiary that is a Restricted Subsidiary); (d) during any
consecutive two-year period, (i) individuals who at the beginning of such
period constituted the Board of Directors of the Parent, or (ii) in the event
the Parent is not the beneficial owner, directly or indirectly of 50% of the
total voting power of the outstanding Voting Stock of the Company, individuals
who at the beginning of such two-year period constituted the Board of Directors
of the Company (in each case, together with any new directors whose election by
such Board of Directors or whose nomination for election by the stockholders of
Parent or the Company, as the case may be, was approved by a vote of a majority
of the directors then still in office who were either directors at the
beginning of such period or whose election or nomination for election was
previously so approved), cease for any reason to constitute a majority of the
Board of Directors of the Parent or the Company, as the case may be, then in
office; or (e) the liquidation or dissolution of the Company. For purposes of
this definition only, "Parent" shall also include any Subsidiary of Parent that
holds, directly or indirectly, more than 50% of the total voting power of the
outstanding Voting Stock of the Company.
"Common Stock" of any Person means Capital Stock of such Person that does
not rank prior, as to the payment of dividends or as to the distribution of
assets upon any voluntary or involuntary liquidation, dissolution or winding up
of such Person, to shares of Capital Stock of any other class of such Person.
"Consolidated Exploration Expense" means all exploration expenses of the
Company and Restricted Subsidiaries to the extent deducted in calculating
Consolidated Net Income.
"Consolidated Fixed Charge Coverage Ratio" means, for any period, the
ratio of (a) the sum of Consolidated Net Income, Consolidated Interest Expense,
Consolidated Income Tax Expense, Consolidated Exploration Expense and
Consolidated Non-cash Charges deducted in computing Consolidated Net Income, in
each case, for such period, of the Company and its Restricted Subsidiaries on a
consolidated basis, all determined in accordance with GAAP, decreased (to the
extent included in determining Consolidated Net Income) by the sum of (x) the
amount of deferred revenues that are amortized during such period and are
attributable to reserves that are subject to Volumetric Production Payments and
(y) amounts recorded in accordance with GAAP as repayments of principal and
interest pursuant to Dollar-Denominated Production Payments, to (b) the sum of
such Consolidated Interest Expense for such period; provided that (i) in making
such computation, the Consolidated Interest Expense attributable to interest on
any Indebtedness required to be computed on a pro forma basis in accordance
with clause (x) of the "Limitation on Indebtedness" covenant and bearing a
floating interest rate shall be computed as if the rate in effect on the date
of computation had been the applicable rate for the entire period, (ii) in
making such computation, the Consolidated Interest Expense attributable to
interest on any Indebtedness under a revolving credit facility required to be
computed on a pro forma basis in accordance with clause (x) of the "Limitation
on Indebtedness" covenant shall be computed based upon the average daily
balance of such Indebtedness during the applicable period, provided that such
average daily balance shall be reduced by the amount of any repayment
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of Indebtedness under a revolving credit facility during the applicable period,
which repayment permanently reduced the commitments or amounts available to be
reborrowed under such facility, (iii) notwithstanding clauses (i) and (ii) of
this proviso, interest on Indebtedness determined on a fluctuating basis, to
the extent such interest is covered by agreements relating to Interest Rate
Protection Obligations, shall be deemed to have accrued at the rate per annum
resulting after giving effect to the operation of such agreements and (iv) in
making such calculation, Consolidated Interest Expense shall exclude interest
attributable to Dollar Denominated Production Payments.
"Consolidated Income Tax Expense" means, for any period, the provision for
federal, state, local and foreign income taxes of the Company and its
Restricted Subsidiaries as on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, without
duplication, the sum of (i) the interest expense of the Company and its
Restricted Subsidiaries for such period as determined on a consolidated basis
in accordance with GAAP, including, without limitation, (a) any amortization of
debt discount, (b) the net cost under Interest Rate Protection Obligations
(including any amortization of discounts), (c) the interest portion of any
deferred payment obligation, (d) all commissions, discounts and other fees and
charges owed with respect to letters of credit and bankers' acceptance
financing and (e) all accrued interest, in each case to the extent attributable
to such period, (ii) to the extent any Indebtedness of any Person (other than
the Company or a Restricted Subsidiary) is guaranteed by the Company or any
Restricted Subsidiary, the aggregate amount of interest paid or accrued by such
other Person during such period attributable to any such Indebtedness, in each
case to the extent attributable to that period, (iii) the aggregate amount of
the interest component of Capitalized Lease Obligations paid, accrued and/or
scheduled to be paid or accrued by the Company and its Restricted Subsidiaries
during such period as determined on a consolidated basis in accordance with
GAAP and (iv) the aggregate amount of dividends paid or accrued on Redeemable
Capital Stock or Preferred Stock of the Company and its Restricted
Subsidiaries, to the extent such Redeemable Capital Stock or Preferred Stock is
owned by Persons other than Restricted Subsidiaries.
"Consolidated Net Income" means, for any period, the consolidated net
income (or loss) of the Company and its Restricted Subsidiaries for such period
as determined in accordance with GAAP, adjusted by excluding (a) net after-tax
extraordinary gains or losses (less all fees and expenses relating thereto),
(b) net after-tax gains or losses (less all fees and expenses relating thereto)
attributable to Asset Sales, (c) the net income (or net loss) of any Person
(other than the Company or any of its Restricted Subsidiaries), in which the
Company or any of its Restricted Subsidiaries has an ownership interest, except
to the extent of the amount of dividends or other distributions actually paid
to the Company or its Restricted Subsidiaries in cash by such other Person
during such period (regardless of whether such cash dividends, distributions or
interest on indebtedness is attributable to net income (or net loss) of such
Person during such period or during any prior period), (d) net income (or net
loss) of any Person combined with the Company or any of its Restricted
Subsidiaries on a "pooling of interests" basis attributable to any period prior
to the date of combination, (e) the net income of any Restricted Subsidiary to
the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary is not at the date of determination
permitted, directly or indirectly, by operation of the terms of its charter or
any agreement, instrument, judgment, decree, order, statute, rule or
governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (f) income resulting from transfers of assets received by the
Company or any Restricted Subsidiary from an Unrestricted Subsidiary, (g) any
write-downs of non-current assets; provided, however, that any ceiling
limitation write-downs under SEC guidelines shall be treated as capitalized
costs, as if such write-downs had not occurred and (h) any cumulative effect of
a change in accounting principles.
"Consolidated Net Worth" means, at any date, the consolidated
stockholders' equity of the Company less the amount of such stockholders'
equity attributable to Redeemable Capital Stock or treasury stock of the
Company and its Restricted Subsidiaries, as determined in accordance with GAAP.
"Consolidated Non-cash Charges" means, for any period, the aggregate
depreciation, depletion, amortization, impairment, stock compensation and other
non-cash expenses of the Company and its Restricted Subsidiaries reducing
Consolidated Net Income for such period, determined on a consolidated basis in
accordance with GAAP (excluding any such non-cash charge which requires an
accrual of or reserve for cash charges for any future period).
"Credit Agreement" means the Credit Agreement dated April 25, 1996, as
amended, among the Company and Chase Manhattan Bank, as agent, and the other
lenders party thereto from time to time, as such agreement may be further
amended, modified, supplemented, extended, restated, replaced (including
replacement after the termination of such agreement), restructured, increased,
renewed or refinanced from time to time in one or more credit agreements, loan
agreements, instruments or similar agreements, as such may be further amended,
modified, supplemented, extended,
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restated, replaced (including replacement after the termination of such
agreement), restructured, increased, renewed or refinanced from time to time.
"Credit Agreement Obligations" means all monetary obligations of every
nature of the Company or a Restricted Subsidiary, including, without
limitation, obligations to pay principal and interest, reimbursement
obligations in connection with letters of credit, fees, expenses, indemnities
and other amounts, from time to time owed to the lenders or any agent under or
in respect of the Credit Agreement or any note, mortgage or other agreement,
instrument or document executed at any time in connection with or pursuant to
the Credit Agreement.
"Default" means any event, act or condition that is, or after notice or
passage of time or both would be, an Event of Default.
"Designated Senior Indebtedness" means (i) all Senior Indebtedness
constituting Credit Agreement Obligations and (ii) any other Senior
Indebtedness which (a) at the time of incurrence equals or exceeds $10,000,000
in aggregate principal amount and (b) is specifically designated by the Company
in the instrument evidencing such Senior Indebtedness as "Designated Senior
Indebtedness" for purposes of the Indenture.
"Disinterested Director" means, with respect to any transaction or series
of transactions in respect of which the Board of Directors of the Company is
required to deliver a resolution of the Board of Directors under the Indenture,
a member of the Board of Directors of the Company who does not have any
material direct or indirect financial interest (other than an interest arising
solely from the beneficial ownership of Capital Stock of the Company, the
Parent or an Affiliate of Parent or the Company) in or with respect to such
transaction or series of transactions.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Event of Default" has the meaning set forth above under the caption
"Events of Default."
"Exempt Interest" means, collectively, (i) Terrence N. Fern, his spouse,
lineal descendants and ascendants, heirs, executors or other legal
representatives and any trusts established for the benefit of the foregoing,
(ii) any company, corporation or other business entity a majority of the
outstanding Voting Stock of which is owned beneficially and of record by a
Person described in clause (i) of this definition or (iii) a Subsidiary of
Parent provided that such Subsidiary shall constitute an Exempt Interest only
for so long as a majority of the outstanding Voting Stock is "beneficially
owned" (within the meaning of Rule 13d-3 under the Exchange Act), directly or
indirectly, by the Parent.
"GAAP" means generally accepted accounting principles, consistently
applied, that are set forth in the opinions and pronouncements of the
Accounting Principles Board of the American Institute of Certified Public
Accountants and statements and pronouncements of the Financial Accounting
Standards Board or in such other statements by such other entity as may be
approved by a significant segment of the accounting profession of the United
States of America, which are applicable as of the date of the Indenture.
"Guarantee" means, as applied to any obligation, (i) a guarantee (other
than by endorsement of negotiable instruments for collection in the ordinary
course of business), direct or indirect, in any manner, of any part or all of
such obligation and (ii) an agreement, direct or indirect, contingent or
otherwise, the practical effect of which is to assure in any way the payment or
performance (or payment of damages in the event of nonperformance) of all or
any part of such obligation, including, without limiting the foregoing, the
payment of amounts drawn down by letters of credit. When used as a verb,
"guarantee" shall have a corresponding meaning.
"Guarantor Senior Indebtedness" means all Indebtedness of a Subsidiary
Guarantor (including Indebtedness of a Subsidiary Guarantor under any guarantee
of Indebtedness under the Credit Agreement) created, incurred, assumed or
guaranteed by such Subsidiary Guarantor (and all renewals, substitutions,
refinancings or replacements thereof) (including the principal of, interest on
and fees, premiums, expenses (including costs of collection), indemnities and
other amounts payable in connection with, such Indebtedness) (and including, in
the case of the Credit Agreement, interest accruing after the filing of a
petition by or against such Subsidiary Guarantor under any bankruptcy law, in
accordance with and at the rate, including any default rate, specified with
respect to such Indebtedness, whether or not a claim for such interest is
allowed as a claim after such filing in any proceeding under such bankruptcy
law), unless the instrument governing such Indebtedness expressly provides that
such Indebtedness is not senior in right of payment to its Subsidiary
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Guarantee. Notwithstanding the foregoing, Guarantor Senior Indebtedness of a
Subsidiary Guarantor will not include (i) Indebtedness of such Subsidiary
Guarantor evidenced by its Subsidiary Guarantee, (ii) Indebtedness of such
Subsidiary Guarantor that is expressly subordinated or junior in tight of
payment to any Guarantor Senior Indebtedness of such Subsidiary Guarantor or
its Subsidiary Guarantee, (iii) Indebtedness which, when incurred and without
respect to any election under Section 1111(b) of Title 11 United States Code,
is by its terms without recourse to such Subsidiary Guarantor, (iv) any
repurchase, redemption or other obligation in respect of Redeemable Capital
Stock of such Subsidiary Guarantor, (v) to the extent it might constitute
Indebtedness, any liability for federal, state, local or other taxes owed or
owing by such Subsidiary Guarantor, (vi) Indebtedness of such Subsidiary
Guarantor to the Company or any of the Company's other Subsidiaries or any
other Affiliate of the Company or any of such Affiliate's Subsidiaries, and
(vii) that portion of any Indebtedness of such Subsidiary Guarantor which at
the time of issuance is issued in violation of the Indenture (but, as to any
such Indebtedness, no such violation shall be deemed to exist for purposes of
this clause (vii) if the holder(s) of such Indebtedness or their representative
or such Subsidiary Guarantor shall have furnished to the Trustee an opinion of
counsel unqualified in all material respects of independent legal counsel,
addressed to the Trustee (which legal counsel may, as to matters of fact, rely
upon a certificate of such Subsidiary Guarantor) to the effect that the
incurrence of such Indebtedness does not violate the provisions of such
Indenture); provided that the foregoing exclusions shall not affect the
priorities of any Indebtedness arising solely by operation of law in any case
or proceeding or similar event described in clause (a), (b) or (c) of the
second paragraph of "-- Subordination."
"Holder" or "Noteholder" means a Person in whose name a Note is registered
in the Note Register and, after the Exchange Offer, a person in whose name an
Exchange Note is registered in the Note Register.
"Indebtedness" means, with respect to any Person, without duplication, (a)
all liabilities of such Person for borrowed money or for the deferred purchase
price of property or services, excluding any trade accounts payable and other
accrued current liabilities incurred in the ordinary course of business, but
including, without limitation, all obligations, contingent or otherwise, of
such Person under any letters of credit, bankers' acceptance or other similar
credit transaction and in connection with any agreement to purchase, redeem,
exchange, convert or otherwise acquire for value any Capital Stock of such
Person, or any warrants, rights or options to acquire such Capital Stock, now
or hereafter outstanding, if, and to the extent, any of the foregoing would
appear as a liability upon a balance sheet of such Person prepared in
accordance with GAAP, (b) all obligations of such Person evidenced by bonds,
notes, debentures or other similar instruments, if, and to the extent, any of
the foregoing would appear as a liability upon a balance sheet of such Person
prepared in accordance with GAAP, (c) all Indebtedness of such Person created
or arising under any conditional sale or other title retention agreement with
respect to property acquired by such Person (even if the rights and remedies of
the seller or lender under such agreement in the event of default are limited
to repossession or sale of such property), but excluding trade accounts payable
arising in the ordinary course of business, (d) all Capitalized Lease
Obligations of such Person, (e) the Attributable Indebtedness (in excess of any
related Capitalized Lease Obligations) related to any Sale/Leaseback
Transaction of such Person, (f) all Indebtedness referred to in the preceding
clauses of other Persons and all dividends of other Persons, the payment of
which is secured by (or for which the holder of such Indebtedness has an
existing right, contingent or otherwise, to be secured by) any Lien upon
property (including, without limitation, accounts and contract rights) owned by
such Person, even though such Person has not assumed or become liable for the
payment of such Indebtedness (the amount of such obligation being deemed to be
the lesser of the value of such property or asset or the amount of the
obligation so secured), (g) all guarantees by such Person of Indebtedness
referred to in this definition (including, with respect to any Production
Payment, any warranties or guaranties of production or payment by such Person
with respect to such Production Payment but excluding other contractual
obligations of such Person with respect to such Production Payment), (h) all
Redeemable Capital Stock of such Person valued at the greater of its voluntary
or involuntary maximum fixed repurchase price plus accrued dividends, (i) all
obligations of such Person under or in respect of currency exchange contracts
and Interest Rate Protection Obligations and (j) any amendment, supplement,
modification, deferral, renewal, extension or refunding of any liability of
such Person of the types referred to in clauses (a) through (i) above. For
purposes hereof, the "maximum fixed repurchase price" of any Redeemable Capital
Stock which does not have a fixed repurchase price shall be calculated in
accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the fair market value of such Redeemable Capital
Stock, such fair market value shall be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock; provided, however,
that if such Redeemable Capital Stock is not at the date of determination
permitted or required to be repurchased, the "maximum fixed repurchase price"
shall be the book value of such Redeemable Capital Stock. Subject to clause (g)
of the first sentence of this definition, neither Dollar-Denominated Production
Payments nor Volumetric Production Payments shall be deemed to be Indebtedness.
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"Interest Rate Protection Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest
on a stated notional amount in exchange for periodic payments made by such
Person calculated by applying a fixed or a floating rate of interest on the
same notional amount and includes, without limitation, interest rate swaps,
caps, floors, collars and similar agreements or arrangements designed to
protect against or manage such Person's and any of its Subsidiaries' exposure
to fluctuations in interest rates.
"Investment" means, with respect to any Person, any direct or indirect
advance, loan, guarantee of Indebtedness or other extension of credit or
capital contribution to (by means of any transfer of cash or other property or
assets to others (other than Capital Stock of the Company) or any payment for
property, assets or services for the account or use of others), or any purchase
or acquisition by such Person of any Capital Stock, bonds, notes, debentures or
other securities (including derivatives) or evidences of Indebtedness issued
by, any other Person. In addition, the fair market value of the net assets of
any Restricted Subsidiary at the time that such Restricted Subsidiary is
designated an Unrestricted Subsidiary shall be deemed to be an "Investment"
made by the Company in such Unrestricted Subsidiary at such time. "Investments"
shall exclude (a) extensions of trade credit on commercially reasonable terms
in accordance with normal trade practices and (b) Interest Rate Protection
Obligations entered into in the ordinary course of business or as required by
any Permitted Indebtedness or any Indebtedness incurred in compliance with the
"Limitation on Indebtedness" covenant, but only to the extent that the notional
principal amount of such Interest Rate Protection Obligations does not exceed
105% of the principal amount of such Indebtedness to which such Interest Rate
Protection Obligations relate, (c) bonds, notes, debentures or other securities
received in compliance with the "Limitation on Disposition of Proceeds of Asset
Sales" covenant and (d) endorsements of negotiable instruments and documents in
the ordinary course of business.
"Lien" means any mortgage, charge, pledge, lien (statutory or other),
security interest, hypothecation, assignment for security, claim, or preference
or priority or other encumbrance or similar agreement or preferential
arrangement of any kind or nature whatsoever (including, without limitation,
any agreement to give or grant a Lien or any lease, conditional sale or other
title retention agreement having substantially the same economic effect as any
of the foregoing) upon or with respect to any property of any kind. A Person
shall be deemed to own subject to a Lien any property which such Person has
acquired or holds subject to the interest of a vendor or lessor under any
conditional sale agreement, capital lease or other title retention agreement.
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 10% during a fiscal quarter
in the estimated discounted future net cash flows from proved oil and gas
reserves of the Company and its Restricted Subsidiaries, calculated in
accordance with clause (a)(i) of the definition of Adjusted Consolidated Net
Tangible Assets; provided, however, that the following will be excluded from
the calculation of Material Change: (i) any acquisitions during the quarter of
oil and gas reserves that have been estimated by a nationally recognized firm
of independent petroleum engineers and on which a report or reports exist and
(ii) any disposition of properties held at the beginning of such quarter that
have been disposed of as provided in the "Limitation on Disposition of Proceeds
of Asset Sales" covenant.
"Maturity" means, with respect to any Note, the date on which any
principal of such Note becomes due and payable as provided therein or in the
Indenture, whether at the Stated Maturity with respect to such principal or by
declaration of acceleration, call for redemption or purchase or otherwise.
"Moody's" means Moody's Investors Service, Inc. and its successors.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect
of deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary), net of (i)
brokerage commissions and other fees and expenses (including fees and expenses
of legal counsel and investment banks) related to such Asset Sale, (ii)
provisions for all taxes payable as a result of such Asset Sale, (iii) amounts
required to be paid to any Person (other than the Company or any Restricted
Subsidiary) owning a beneficial interest in the assets subject to the Asset
Sale, (iv) amounts required to be applied to the repayment of indebtedness
(other than indebtedness under any credit facility) secured by a Lien on the
assets or the assets that were the subject of such Asset Sale, and (v)
appropriate amounts to be provided by the Company or any Restricted Subsidiary,
as the case may be, as a reserve required in accordance with GAAP consistently
applied against any liabilities associated with such Asset Sale and retained by
the Company or any Restricted Subsidiary, as the case may be, after such Asset
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Sale, including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale, all as
reflected in an officers' certificate delivered to the Trustee; provided,
however, that any amounts remaining after adjustments, revaluations or
liquidations of such reserves shall constitute Net Cash Proceeds.
"Net Working Capital" means (i) all current assets of the Company and its
Restricted Subsidiaries, minus (ii) all current liabilities of the Company and
its Restricted Subsidiaries, except current liabilities included in
Indebtedness, in each case as set forth in financial statements of the Company
prepared in accordance with GAAP.
"Non-Recourse Indebtedness" means Indebtedness or that portion of
Indebtedness of the Company or a Restricted Subsidiary incurred in connection
with the acquisition by the Company or a Restricted Subsidiary of any property
or assets and as to which (a) the holders of such Indebtedness agree that they
will look solely to the property or assets so acquired and securing such
Indebtedness for payment on or in respect of such Indebtedness and (b) no
default with respect to such Indebtedness would permit (after notice or passage
of time or both), according to the terms thereof, any holder of any
Indebtedness of the Company or a Restricted Subsidiary to declare a default on
such Indebtedness or cause the payment thereof to be accelerated or payable
prior to its stated maturity.
"Note Register" means the register maintained by or for the Company in
which the Company shall provide for the registration of the Notes and, after
the Exchange Offer, the Exchange Notes and of transfer of the Notes and the
Exchange Notes.
"Note Obligations" means any principal of, premium, if any, and interest
on, and any other amounts (including, without limitation, any payment or
purchase obligations with respect to the Notes as a result of any Asset Sale,
Change of Control or redemption) owing in respect of, the Notes payable
pursuant to the terms of the Notes or the Indenture or upon acceleration of the
Notes, in each case whether now or hereafter existing.
"Oil and Gas Business" means (i) the acquisition, exploration,
development, operation and disposition of interests in oil, gas and other
hydrocarbon properties (including properties producing other minerals and
products in association with hydrocarbon production), (ii) the gathering,
marketing, treating, processing, storage, refining, selling and transporting of
any production of oil, gas and other minerals produced in association therewith
from such interests or properties, (iii) any business relating to or arising
from exploration for or development, production, treatment, processing,
storage, refining, transportation or marketing of oil, gas and other minerals
and products produced in association therewith, and (iv) any activity
necessary, appropriate or incidental to the activities described in the
foregoing clauses (i) through (iii) of this definition.
"Parent" means Petsec Energy Ltd, an Australian public limited company, or
its successor, or if the foregoing entity ceases to beneficially own, directly
or indirectly, 50% of the Voting Stock of the Company, "Parent" shall mean such
ultimate parent corporation, limited company or other business entity that
beneficially owns, directly or indirectly, more than 50% of the Voting Stock of
the Company.
"Pari Passu Indebtedness" means any Indebtedness of the Company that is
pari passu in right of payment to the Notes.
"Permitted Indebtedness" means any of the following:
(i) Indebtedness of the Company under one or more credit or
revolving credit facilities, including Indebtedness of the Company under
the Credit Agreement, (which may also include credit or revolving credit
facilities provided by an Affiliate of the Company provided that such
facility and borrowings thereunder comply with the "Limitation on
Transactions with Affiliates" covenant) in an aggregate principal amount
at any one time outstanding not to exceed the greater of (A) $85,000,000
and (B) an amount equal to the sum of (x) $25,000,000 and (y) 20% of
Adjusted Consolidated Net Tangible Assets determined as of the date of the
incurrence of such Indebtedness (such greater amount being referred to as
the "Adjusted Maximum Credit Amount") (plus interest and fees under such
facilities), less any amounts derived from Asset Sales and applied to the
required permanent reduction of Senior Indebtedness (and a permanent
reduction of the related commitment to lend or amount available to be
reborrowed in the case of a revolving credit facility) under such credit
facilities as contemplated by the "Limitation on Disposition of Proceeds
of Asset Sales" covenant (the "Maximum Credit Amount") (with the Maximum
Credit Amount to be an aggregate maximum amount for the Company and all
Restricted Subsidiaries, pursuant to clause
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(i) of the definition of "Permitted Subsidiary Indebtedness"), and any
renewals, amendments, extensions, supplements, modifications, deferrals,
refinancings or replacements (each, for purposes of this clause, a
"refinancing") thereof by the Company, including any successive
refinancings thereof by the Company, so long as the aggregate principal
amount of any such new Indebtedness, together with the aggregate principal
amount of all other Indebtedness outstanding pursuant to this clause (i)
(and clause (i) of the definition of "Permitted Subsidiary Indebtedness"),
shall not at any one time exceed the Maximum Credit Amount;
(ii) Indebtedness of the Company under the Notes;
(iii) Indebtedness of the Company outstanding on the date of the
Indenture (and not repaid or defeased with the proceeds of the Offering),
provided that the aggregate principal amount of such Indebtedness for
borrowed money shall not exceed $50,000,000, and provided further that if
such Indebtedness is payable to an Affiliate of the Company, such
Indebtedness (A) shall be subordinate in right of payment to the Notes and
all other Indebtedness of the Company, at least to the same extent as the
Notes are subordinated in right of payment to the Senior Indebtedness and
(B) shall not be subject to maturity or any mandatory principal or sinking
fund payment or mandatory repurchase right prior to 91 days after the
stated Maturity of the Notes;
(iv) obligations of the Company pursuant to Interest Rate Protection
Obligations, but only to the extent such obligations do not exceed 105% of
the aggregate principal amount of the Indebtedness covered by such
Interest Rate Protection Obligations; obligations under currency exchange
contracts entered into in the ordinary course of business; and hedging
arrangements that the Company enters into in the ordinary course of
business for the purpose of protecting its production against fluctuations
in oil or natural gas prices;
(v) Indebtedness of the Company to any Restricted Subsidiaries;
(vi) in-kind obligations relating to net gas balancing positions
arising in the ordinary course of business and consistent with past
practice;
(vii) Indebtedness in respect of bid, performance or surety bonds
issued or other reimbursement obligations for the account of the Company
or any Restricted Subsidiary in the ordinary course of business, including
guarantees and letters of credit supporting such bid, performance, surety
bonds or other reimbursement obligations (in each case other than for an
obligation for money borrowed);
(viii)any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") by the
Company of any Indebtedness of the Company other than Indebtedness
incurred pursuant to clauses (iv), (vi) and (vii) of this definition,
including any successive refinancings by the Company, so long as (A) any
such new Indebtedness shall be in a principal amount that does not exceed
the principal amount (or, if such Indebtedness being refinanced provides
for an amount less than the principal amount thereof to be due and payable
upon a declaration of acceleration thereof, such lesser amount as of the
date of determination) so refinanced plus the amount of any premium
required to be paid in connection with such refinancing pursuant to the
terms of the Indebtedness refinanced or the amount of any premium
reasonably determined by the Company as necessary to accomplish such
refinancing, plus the amount of expenses of the Company incurred in
connection with such refinancing, and (B) in the case of any refinancing
of Subordinated Indebtedness, such new Indebtedness is made subordinate to
the Notes at least to the same extent as the Indebtedness being refinanced
and (C) such new Indebtedness has an Average Life equal to or longer than
the Average Life of the Indebtedness being refinanced and a final Stated
Maturity equal to or later than the final Stated Maturity of the
Indebtedness being refinanced;
(ix) Subordinated Indebtedness of the Company to Affiliates, provided,
however, that all such Indebtedness (A) shall be incurred solely for cash
loaned or advanced to the Company, (B) shall have a principal amount equal
to the amount of cash so loaned or advanced, (C) shall be subordinate in
right of payment to the Notes and all other Indebtedness of the Company,
at least to the same extent as the Notes are subordinated in right of
payment to the Senior Indebtedness, (D) shall not be subject to maturity
or any mandatory principal or sinking fund payment, or mandatory
repurchase right prior to 91 days after the Stated Maturity of the Notes,
and (E) the aggregate principal amount of Indebtedness incurred pursuant
to this clause (ix) shall not exceed the aggregate interest payments made
by the Company after the date of the Indenture in respect of all
Subordinated Indebtedness of the Company to Affiliates;
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(x) Non-Recourse Indebtedness;
(xi) Indebtedness consisting of obligations in respect of purchase
price adjustments, indemnities or guarantees incurred in connection with
the acquisition or disposition of assets; and
(xii) other Indebtedness of the Company in an aggregate principal
amount, which taken together with all outstanding Indebtedness incurred
pursuant to clause (viii) of this definition in respect of Indebtedness
previously incurred pursuant to this clause (xii), does not exceed
$25,000,000 at any one time outstanding.
"Permitted Investments" means any of the following: (i) Investments in
Cash Equivalents; (ii) Investments in the Company or any of its Restricted
Subsidiaries; (iii) Investments in an amount not to exceed $15,000,000
determined as of the date of the making or incurrence of such Permitted
Investment at any one time outstanding; (iv) Investments by the Company or any
of its Restricted Subsidiaries in another Person, if as a result of such
Investment (A) such other Person becomes a Restricted Subsidiary of the Company
or (B) such other Person is merged or consolidated with or into, or transfers
or conveys all or substantially all of its assets to, the Company or a
Restricted Subsidiary; (v) entry into operating agreements, joint ventures,
partnership agreements, working interests, royalty interests, mineral leases,
processing agreements, farm-out agreements, farm-in agreements, contracts for
the sale, transportation or exchange of oil and natural gas, unitization
agreements, pooling arrangements, area of mutual interest agreements,
production sharing agreements 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, excluding,
however, Investments in corporations; (vi) entry into any hedging arrangements
in the ordinary course of business for the purpose of protecting the Company's
or any Restricted Subsidiary's production against fluctuations in oil or
natural gas prices; (vii) Investments in units of any oil and gas royalty
trust; (viii) entry into a joint venture or partnership agreement in connection
with ownership and operation of office and building real estate and related
assets owned by the Company or any Restricted Subsidiary and contribution of
such assets to such entity; (ix) Investments in the form of securities received
from Asset Sales, provided that such Asset Sales are made in compliance with
the covenant described under "Limitation on Disposition of Proceeds of Asset
Sales" or (x) Investment in shares of Capital Stock or other securities
received in settlement of debts owed to the Company or any of its Restricted
Securities as a result of foreclosure, perfection or enforcement of any Lien or
Indebtedness or in connection with any good faith settlement of a bankruptcy
proceeding.
"Permitted Liens" means the following types of Liens:
(a) Liens existing as of the date the Notes are first issued;
(b) Liens securing the Notes;
(c) Liens in favor of the Company or a Subsidiary Guarantor;
(d) Liens securing Senior Indebtedness or Guarantor Senior
Indebtedness;
(e) Liens for taxes, assessments and governmental charges or claims
either (i) not delinquent or (ii) contested in good faith by appropriate
proceedings and as to which the Company or its Restricted Subsidiaries
shall have set aside on its books such reserves as may be required
pursuant to GAAP;
(f) statutory Liens of landlords and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by
law incurred in the ordinary course of business;
(g) Liens incurred or deposits made in the ordinary course of business
in connection with workers' compensation, unemployment insurance and other
types of social security, or to secure the payment or performance of
tenders, statutory or regulatory obligations, surety and appeal bonds,
bids, leases, government contracts and leases, performance and return of
money bonds and other similar obligations (exclusive of obligations for
the payment of borrowed money but including lessee or operator obligations
under statutes, governmental regulations or instruments related to the
ownership, exploration and production of oil, gas and minerals on state,
federal or foreign lands or waters);
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(h) judgment Liens not giving rise to an Event of Default so long as
any appropriate legal proceedings which may have been duly initiated for
the review of such judgment shall not have been finally terminated or the
period within which such proceeding may be initiated shall not have
expired;
(i) easements, rights-of-way, restrictions and other similar charges
or encumbrances not interfering in any material respect with the ordinary
conduct of the business of the Company or any of its Restricted
Subsidiaries;
(j) any interest or title of a lessor under any Capitalized Lease
Obligation or operating lease;
(k) Liens resulting from the deposit of funds or evidences of
Indebtedness in trust for the purpose of defeasing Indebtedness of the
Company or any of the Subsidiaries;
(l) Liens securing obligations under hedging agreements that the
Company or any Restricted Subsidiary enters into in the ordinary course of
business for the purpose of protecting its production against fluctuations
in oil or natural gas prices;
(m) Liens upon specific items of inventory or other goods and proceeds
of any Person securing such Person's obligations in respect of bankers'
acceptances issued or created for the account of such Person to facilitate
the purchase, shipment or storage of such inventory or other goods;
(n) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(o) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets;
(p) Liens encumbering deposits made to secure obligations arising from
statutory, regulatory, contractual or warranty requirements of the Company
or any of its Restricted Subsidiaries, including rights of offset and
set-off;
(q) Liens securing Interest Rate Protection Obligations which Interest
Rate Protection Obligations relate to Indebtedness that is secured by
Liens otherwise permitted under this Indenture;
(r) Liens on, or related to, properties or assets to secure all or
part of the costs incurred in the ordinary course of business for the
acquisition, exploration, drilling, development or operation thereof;
(s) Liens on pipeline or pipeline facilities which arise out of
operation of law;
(t) Liens arising under operating agreements, joint venture
agreements, partnership agreements, oil and gas leases, farm-out
agreements, farm-in agreements, division orders, contracts for the sale,
transportation or exchange of oil and natural gas, unitization and pooling
declarations and agreements, area of mutual interest agreements and other
agreements which are customary in the Oil and Gas Business;
(u) Liens reserved in oil and gas mineral leases for bonus or rental
payments and for compliance with the terms of such leases;
(v) Liens constituting survey exceptions, encumbrances, easements, or
reservations of, or rights to others for, rights-of-way, zoning or other
restrictions as to the use of real properties, and minor defects of title
which, in the case of any of the foregoing, were not incurred or created
to secure the payment of borrowed money or the deferred purchase price of
Property or services, and in the aggregate do not materially adversely
affect the value of Property of the Company and the Restricted
Subsidiaries, taken as a whole, or materially impair the use of such
Properties for the purposes for which such Properties are held by the
Company or any Restricted Subsidiaries;
(w) Liens securing Non-Recourse Indebtedness; provided, however, that
the related Non-Recourse Indebtedness shall not be secured by any property
or assets of the Company or any Restricted Subsidiary other than the
property and assets acquired by the Company with the proceeds of such
Non-Recourse Indebtedness;
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(x) Liens securing Attributable Indebtedness with respect to any Sale/
Leaseback Transaction permitted by the terms of the Indenture;
(y) Liens on property existing at the time of acquisition thereof by
the Company or any Subsidiary of the Company and Liens on property or
assets of a Subsidiary existing at the time it became a Subsidiary,
provided that such Liens were in existence prior to the contemplation of
the acquisition and do not extend to any assets other than the acquired
property;
(z) Liens on the Capital Stock of Unrestricted Subsidiaries;
(aa)Liens to secure any permitted extension, renewal, refinancing,
refunding or exchange (or successive extensions, renewals, refinancings,
refundings or exchanges), in whole or in part, of or for any Indebtedness
secured by Liens referred to in clauses (b), (p), and (y) of this
definition; provided, however, that (i) such new Lien shall be limited to
all or part of the same property that secured the original Lien, plus
improvements on such property and (ii) the Indebtedness secured by such
Lien at such time is not increased to any amount greater than the sum of
(A) the outstanding principal amount or, if greater, the committed amount
of the Indebtedness secured by Liens described under clauses (b), (p), and
(y) of this definition at the time the original Lien became a Lien
permitted in accordance with the Indenture and (B) an amount necessary to
pay any fees and expenses, including premiums, related to such
refinancing, refunding, extension, renewal or exchange; and
(bb)other Liens that are incurred in the ordinary course of business
of the Company or any Restricted Subsidiary with respect to obligations
that do not exceed $5.0 million at any one time outstanding.
Notwithstanding anything in clauses (a) through (aa) of this definition, the
term "Permitted Liens" does not include any Liens resulting from the creation,
incurrence, issuance, assumption or guarantee of any Production Payments other
than Production Payments that are created, incurred, issued, assumed or
guaranteed in connection with the financing of, and within 30 days after, the
acquisition of the properties or assets that are subject thereto.
"Permitted Subsidiary Indebtedness" means any of the following:
(i) Indebtedness of any Restricted Subsidiary under one or more
credit or revolving credit facilities, including Indebtedness of any
Restricted Subsidiary under the Credit Agreement, (which may also include
credit or revolving credit facilities provided by an Affiliate of the
Company provided that such facility and borrowings thereunder comply with
the "Limitation on Transactions with Affiliates" covenant) (and
"refinancings" thereof) in an amount at any one time outstanding not to
exceed the Maximum Credit Amount (in the aggregate for all Restricted
Subsidiaries and the Company, pursuant to clause (i) of the definition of
"Permitted Indebtedness");
(ii) obligations of any Restricted Subsidiary pursuant to Interest
Rate Protection Obligations, but only to the extent such obligations do
not exceed 105% of the aggregate principal amount of the Indebtedness
covered by such Interest Rate Protection Obligations; and hedging
arrangements that any Restricted Subsidiary enters into in the ordinary
course of business for the purpose of protecting its production against
fluctuations in oil or natural gas prices;
(iii) any Subsidiary Guarantees (and any assumption of the obligations
guaranteed thereby);
(iv) Indebtedness of any Restricted Subsidiary relating to guarantees
by such Restricted Subsidiary of Permitted Indebtedness pursuant to clause
(i) of the definition of "Permitted Indebtedness;"
(v) in-kind obligations relating to net gas balancing positions
arising in the ordinary course of business and consistent with past
practice;
(vi) Indebtedness in respect of bid, performance or surety bonds or
other reimbursement obligations issued for the account of any Restricted
Subsidiary in the ordinary course of business, including guarantees and
letters of credit supporting such bid, performance, surety bonds or other
reimbursement obligations (in each case other than for an obligation for
money borrowed);
(vii) Indebtedness of any Restricted Subsidiary to any other
Restricted Subsidiary or to the Company;
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(viii)Indebtedness relating to guarantees by any Restricted
Subsidiary permitted to be incurred pursuant to paragraph (a) of the
"Limitation on Non-Guarantor Restricted Subsidiaries" covenant;
(ix) Non-Recourse Indebtedness; and
(x) any renewals, extensions, substitutions, refinancings or
replacements (each, for purposes of this clause, a "refinancing") by any
Restricted Subsidiary of any Indebtedness of such Restricted Subsidiary
other than Indebtedness incurred pursuant to clauses (ii), (iv) and (v) of
this definition, including any successive refinancings by such Restricted
Subsidiary, so long as (a) any such new Indebtedness shall be in a
principal amount that does not exceed the principal amount (or, if such
Indebtedness being refinanced provides for an amount less than the
principal amount thereof to be due and payable upon a declaration of
acceleration thereof, such lesser amount as of the date of determination)
so refinanced plus the amount of any premium required to be paid in
connection with such refinancing pursuant to the terms of the Indebtedness
refinanced or the amount of any premium reasonably determined by such
Restricted Subsidiary as necessary to accomplish such refinancing, plus
the amount of expenses of such Subsidiary incurred in connection with such
refinancing and (b) such new Indebtedness has an Average Life equal to or
longer than the Average Life of the Indebtedness being refinanced and a
final Stated Maturity equal to or later than the final Stated Maturity of
the Indebtedness being refinanced.
"Person" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political
subdivision thereof.
"Preferred Stock" means, with respect to any Person, any and all shares,
interests, participation or other equivalents (however designated) of such
Person's preferred or preference stock, whether now outstanding or issued after
the date of the Indenture, including, without limitation, all classes and
series of preferred or preference stock of such Person.
"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Public Equity Offering" means (i) an underwritten public offering for
cash by the Company of its Qualified Capital Stock pursuant to a registration
statement that has been declared effective by the Commission (other than a
registration statement on Form S-8 or any successor form or otherwise relating
to equity securities issuable under any employee benefit plan of the Company)
or (ii) a public offering for cash by Parent of its Qualified Capital Stock
(including without limitation an offering of American depositary shares) but
only to the extent that the net cash proceeds of such public offering of Parent
are advanced to the Company by Parent or its Subsidiaries as an equity
contribution within 30 days of the completion of such offering.
"Qualified Capital Stock" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"Redeemable Capital Stock" means any class or series of Capital Stock
that, either by its terms, by the terms of any security into which it is
convertible or exchangeable or by contract or otherwise, is, or upon the
happening of an event or passage of time would be, required to be redeemed
prior to 91 days after the final Stated Maturity of the Notes or is redeemable
at the option of the holder thereof at any time prior to 91 days after such
final Stated Maturity, or is convertible into or exchangeable for debt
securities at any time prior to 91 days after such final Stated Maturity.
"Restricted Subsidiary" means any Subsidiary of the Company, whether
existing on or after the date of the Indenture, unless such Subsidiary of the
Company is an Unrestricted Subsidiary or is designated as an Unrestricted
Subsidiary pursuant to the terms of the Indenture.
"S&P" means Standard and Poor's Rating Group, a division of McGraw Hill,
Inc., and its successors.
"Sale/Leaseback Transaction" means, with respect to any Person, any direct
or indirect arrangement pursuant to which properties or assets are sold or
transferred by such Person or a Subsidiary of such Person and are thereafter
leased back from the purchaser or transferee thereof by such Person or one of
its Subsidiaries.
"Senior Indebtedness" means the principal of, premium, if any, and
interest on any Indebtedness of the Company (including all Indebtedness of the
Company under the Credit Agreement (which includes reimbursement obligations in
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connection with letters of credit thereunder) and, in the case of the Credit
Agreement, interest accruing after the filing of a petition by or against the
Company under any bankruptcy law, in accordance with and at the rate, including
any default rate, specified with respect to such indebtedness, whether or not a
claim for such interest is allowed as a claim after such filing in any
proceeding under such bankruptcy law), whether outstanding on the date of the
Indenture or thereafter created, incurred or assumed, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness shall not be senior in right of payment to the Notes.
Notwithstanding the foregoing, "Senior Indebtedness" shall not include (a)
Indebtedness evidenced by the Notes, (b) Indebtedness that is expressly
subordinate or junior in right of payment to any Senior Indebtedness of the
Company, (c) Indebtedness which, when incurred and without respect to any
election under Section 1111(b) of Title 11 United States Code, is by its terms
without recourse to the Company, (d) any repurchase, redemption or other
obligation in respect of Redeemable Capital Stock of the Company, (e) to the
extent it might constitute Indebtedness, any liability for federal, state,
local or other taxes owed or owing by the Company, (f) Indebtedness of the
Company to a Subsidiary of the Company, to any other Affiliate of the Company
(other than a lender under the Credit Agreement) or to any of such Affiliate's
Subsidiaries (other than a lender under the Credit Agreement), and (g) that
portion of any Indebtedness of the Company which at the time of issuance is
issued in violation of the Indenture (but, as to any such Indebtedness, no such
violation shall be deemed to exist for purposes of this clause (g) if the
holder(s) of such Indebtedness or their representative or the Company shall
have furnished to the Trustee an opinion of counsel unqualified in all material
respects of independent legal counsel, addressed to the Trustee (which legal
counsel may, as to matters of fact, rely upon a certificate of the Company) to
the effect that the incurrence of such Indebtedness does not violate the
provisions of such Indenture); provided that the foregoing exclusions shall not
affect the priorities of any Indebtedness arising solely by operation of law in
any case or proceeding or similar event described in clause (a), (b) or (c) of
the second paragraph of "Subordination."
"Stated Maturity" means, when used with respect to any Note or any
installment of interest thereon, the date specified in such Note as the fixed
date on which the principal of such Note or such installment of interest is due
and payable, and, when used with respect to any other Indebtedness or any
installment of interest thereon, means the date specified in the instrument
evidencing or governing such Indebtedness as the fixed date on which the
principal of such Indebtedness or such installment of interest is due and
payable.
"Subordinated Indebtedness" means Indebtedness of the Company which is
expressly subordinated in right of payment to the Note Obligations.
"Subsidiary" means, with respect to any Person, (i) a corporation a
majority of whose Voting Stock is at the time, directly or indirectly, owned,
by such Person, by one or more Subsidiaries of such Person or by such Person
and one or more Subsidiaries thereof or (ii) any other Person (other than a
corporation), including, without limitation, a joint venture, in which such
Person, one or more Subsidiaries thereof or such Person and one or more
Subsidiaries thereof, directly or indirectly, at the date of determination
thereof, has at least majority ownership interest entitled to vote in the
election of directors, managers or trustees thereof (or other Person performing
similar functions).
"Subsidiary Guarantee" means any guarantee of the Notes by (i) any
Subsidiary Guarantor in accordance with the provisions set forth in "Subsidiary
Guarantees of Notes" and (ii) any Restricted Subsidiary in accordance with the
provisions set forth in the "Limitation on Non-Guarantor Restricted
Subsidiaries" covenant.
"Subsidiary Guarantor" means (i) each of the Company's Restricted
Subsidiaries that becomes a guarantor of the Notes in compliance with the
provisions described under "-- Subsidiary Guarantees of the Notes" or the
provisions of the "Limitation on Non-Guarantor Restricted Subsidiaries"
covenant 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 and to guarantee on an unsubordinated basis the payment of the Notes
pursuant to the provisions described under "-- Subsidiary Guarantees of Notes."
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination will be designated an Unrestricted Subsidiary by the
Board of Directors of the Company as provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors of the Company may designate
any Subsidiary of the Company as an Unrestricted Subsidiary so long as (a)
neither the Company nor any Restricted Subsidiary is directly or indirectly
liable pursuant to the terms of any Indebtedness of such Subsidiary, (b) no
default with respect to any Indebtedness of such Subsidiary would permit (upon
notice, lapse of time or otherwise) any holder of any other Indebtedness of the
Company or any Restricted Subsidiary to declare a default on such other
Indebtedness or cause the
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payment thereof to be accelerated or payable prior to its stated maturity, (c)
neither the Company nor any Restricted Subsidiary has made an Investment in
such Subsidiary unless such Investment was made pursuant to, and in accordance
with, the "Limitation on Restricted Payments" covenant (other than Investments
of the type described in clause (iv) of the definition of Permitted
Investments), and (d) such designation shall not result in the creation or
imposition of any Lien on any of the Properties of the Company or any
Restricted Subsidiary (other than any Permitted Lien or any Lien the creation
or imposition of which shall have been in compliance with the "Limitation on
Liens" covenant); provided, however, that with respect to clause (a), the
Company or a Restricted Subsidiary may be liable for Indebtedness of an
Unrestricted Subsidiary if (x) such liability constituted a Permitted
Investment or a Restricted Payment permitted by the "Limitation on Restricted
Payments" covenant, in each case at the time of incurrence, or (y) the
liability would be a Permitted Investment at the time of designation of such
Subsidiary as an Unrestricted Subsidiary. Any such designation by the Board of
Directors of the Company shall be evidenced to the Trustee by filing a board
resolution with the Trustee giving effect to such designation. The Board of
Directors of the Company may designate any Unrestricted Subsidiary as a
Restricted Subsidiary if, immediately after giving effect to such designation,
(i) no Default or Event of Default shall have occurred and be continuing, (ii)
the Company could incur $1.00 of additional Indebtedness (not including the
incurrence of Permitted Indebtedness) under the first paragraph of the
"Limitation on Indebtedness" covenant and (iii) if any of the Properties of the
Company or any of its Restricted Subsidiaries would upon such designation
become subject to any Lien (other than a Permitted Lien), the creation or
imposition of such Lien shall have been in compliance with the "Limitation on
Liens" covenant.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" means any class or classes of Capital Stock pursuant to
which the holders thereof have the general voting power under ordinary
circumstances to elect at least a majority of the board of directors, managers
or trustees of any Person (irrespective of whether or not, at the time, stock
of any other class or classes shall have, or might have, voting power by reason
of the happening of any contingency).
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary to
the extent all of the Capital Stock or other ownership interests in such
Restricted Subsidiary, other than any directors qualifying shares mandated by
applicable law, is owned directly or indirectly by the Company.
"Wholly Owned Subsidiary" means, with respect to any Person, any
Subsidiary of such Person to the extent all of the Capital Stock or other
ownership interests in such Subsidiary, other than any directors qualifying
shares mandated by applicable law, is owned directly or indirectly by such
Person.
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EXCHANGE OFFER; REGISTRATION RIGHTS
The Company entered into a Registration Rights Agreement with the Initial
Purchasers pursuant to which the Company agreed, for the benefit of the holders
of the Notes, at the Company's cost, to use its best efforts (i) to file with
the Commission the Exchange Offer Registration Statement with respect to the
Exchange Offer of the Exchange Notes within 60 days after the date of original
issuance of the Notes (the "Issue Date"), (ii) to cause the Exchange Offer
Registration Statement to be declared effective under the Securities Act within
120 days of the Issue Date, (iii) to keep the Exchange Offer Registration
Statement effective until the closing of the Exchange Offer, and (iv) to cause
the Exchange Offer to be consummated within 180 days of the Issue Date.
Promptly after the Exchange Offer Registration Statement has been declared
effective, the Company will offer the Exchange Notes in exchange for surrender
of the Notes. The Company will keep the Exchange Offer open for not less than
30 days (or longer if required by applicable law) after the date notice of the
Exchange Offer has been mailed to the holders of the Notes. For each Old Note
validly tendered to the Company pursuant to the Exchange Offer and not
withdrawn by the holder thereof, the holder of such Old Note will receive an
Exchange Note having a principal amount equal to the principal amount of such
surrendered Note. Interest on each Exchange Note will accrue from the last
interest payment date to which interest was paid on the Old Note surrendered in
exchange therefor or, if no interest has been paid on such Note, from the Issue
Date.
Based on existing interpretations of the Securities Act by the staff of
the Commission set forth in several no-action letters to third parties, and
subject to the immediately following sentence, the Company believes that the
Exchange Notes issued pursuant to the Exchange Offer may be offered for resale,
resold and transferred by the holders thereof without further compliance with
the registration and prospectus delivery requirements of the Securities Act.
However, any purchaser of Notes who is an affiliate of the Company or who
intends to participate in the Exchange Offer for the purpose of distributing
the Exchange Notes, or any broker-dealer who purchased the Notes from the
Company to resell pursuant to Rule 144A or any other available exemption under
the Securities Act, (i) will not be able to rely on the interpretations by the
staff of the Commission set forth in the above-mentioned no-action letters;
(ii) will not be able to tender its Notes in the Exchange Offer and (iii) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or transfer of the Notes unless such
sale or transfer is made pursuant to an exemption from such requirements. The
Company does not intend to seek its own no-action letter and there is no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Notes as it has in such no-action letters to third
parties.
Each holder of the Old Notes (other than certain specified holders) who
wishes to exchange Old Notes for Exchange Notes in the Exchange Offer will be
required to represent that (i) it is not an affiliate of the Company nor a
broker-dealer tendering Notes acquired directly from the Company for its own
account, (ii) any Exchange Notes to be received by it were acquired in the
ordinary course of its business and (iii) at the time of the commencement of the
Exchange Offer, 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
who acquired the Notes for its own account as a result of market-making
activities or other trading activities (a "Participating Broker-Dealer") must
deliver a prospectus meeting the requirements of the Securities Act. The staff
of the Commission has taken the position 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 the
Notes) with the prospectus contained in the Exchange Offer Registration
Statement. Under the Registration Rights Agreement, the Company will be required
to allow Participating Broker-Dealers to use the prospectus contained in the
Exchange Offer Registration Statement, for up to 180 days following the Exchange
Offer, in connection with the resale of Exchange Notes received in exchange for
Notes acquired by such Participating Broker-Dealers for their own account as a
result of market-making or other trading activities.
In the event that any changes in law or the applicable interpretations of
the staff of the Commission do not permit the Company to effect the Exchange
Offer, or if for any reason the Exchange Offer Registration Statement is not
declared effective within 120 days following the Issue Date or the Exchange
Offer is not consummated within 180 days after such date, or upon the request
of the Initial Purchasers in certain circumstances, the Company will, in lieu
of effecting (or, in the case of such a request by the Initial Purchasers, in
addition to effecting) the registration of the Exchange Notes pursuant to the
Exchange Offer Registration Statement (i) as promptly as practicable, file with
the Commission the Shelf Registration Statement covering resales of the Notes,
(ii) use its best efforts to cause the Shelf Registration Statement to be
declared effective under the Securities Act by the 180th day after the Issue
Date (or promptly in the event of a request by the Initial Purchasers) and
(iii) use its best efforts to keep effective the Shelf Registration Statement
until two years after its effective date (or until one year after such
effective date if such Shelf Registration Statement is filed at the
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request of the Initial Purchasers) or until all of the Notes covered by such
Shelf Registration Statement have been sold. In the event of the filing of the
Shelf Registration Statement, the Company will provide to each holder of the
Notes copies of the prospectus which is a part of the Shelf Registration
Statement and notify each such holder when the Shelf Registration Statement has
become effective. A holder of Notes that sells such Notes pursuant to the Shelf
Registration Statement generally 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
the Securities Act in connection with such sales and will be bound by the
provisions of the Registration Rights Agreement which are applicable to such a
holder (including certain indemnification obligations). In addition, each
holder of the Notes will be required to deliver information to be used in
connection with the Shelf Registration Statement and to provide comments on the
Shelf Registration Statement in order to have its Notes included in the Shelf
Registration Statement and to benefit from the provisions regarding the
increase in the interest rate borne by the Notes described in the second
succeeding paragraph.
The Company may require, as a condition to including the Notes of any
holder in the Shelf Registration Statement, that such holder furnish to the
Company a written agreement to the effect that such holder agrees to comply
with and be bound by the provisions of the Registration Rights Agreement. In
that regard, each holder of Notes registered under the Shelf Registration
Statement will be deemed to have agreed that, upon receipt of notice from the
Company of the occurrence of any event that makes any statement in the
prospectus that is a part of the Shelf Registration Statement (or, in the case
of Participating Broker-Dealers, the prospectus that is a part of the Exchange
Offer Registration Statement) untrue in any material respect or that requires
the making of any changes in such prospectus in order to make the statements
therein not misleading or of certain other events specified in the Registration
Rights Agreement, such holder (or Participating Broker-Dealers, as the case may
be) will suspend the sale of Notes pursuant to such prospectus until the
Company has amended or supplemented such prospectus to correct such
misstatement or omission, has furnished copies of the amended or supplemented
prospectus to such holder (or Participating Broker-Dealer, as the case may be)
or the Company has given notice that the sale of the Notes may be resumed, as
the case may be. If the Company shall give such notice to suspend the sale of
the Notes, it shall extend the relevant period referred to above during which
it is required to keep effective the Shelf Registration Statement (or the
period during which Participating Broker-Dealers are entitled to use the
prospectus included in the Exchange Offer Registration Statement in connection
with the resale of Exchange Notes, as the case may be) by the number of days
during the period and including the date of the giving of such notice to and
including the date when holders shall have received copies of the supplemented
or amended prospectus necessary to permit resales of the Notes or to and
including the date on which the Company has given notice that the sale of Notes
may be resumed, as the case may be.
In the event that (a) the Exchange Offer Registration Statement is not
filed with the Commission on or prior to the 60th day following the Issue Date,
(b) the Exchange Offer Registration Statement is not declared effective on or
prior to the 120th day following the Issue Date or (c) the Exchange Offer is
not consummated or a Shelf Registration Statement with respect to the Notes is
not declared effective on or prior to the 180th day following the Issue Date,
the interest rate borne by the Notes shall be increased by .50% per annum
following such 60th day in the case of clause (a) above, such 120th day in the
case of clause (b) above and such 180th day in the case of clause (c) above;
provided that the aggregate amount of any such increase in the interest rate on
the Notes pursuant to the foregoing provisions shall in no event exceed 1.50%
per annum; and provided, further, that if the Exchange Offer Registration
Statement is not declared effective on or prior to the 120th day following the
Issue Date and the Company shall request holders of Notes to provide the
information called for by the Registration Rights Agreement for inclusion in
the Shelf Registration Statement, then Notes owned by holders who do not
deliver such information to the Company or who do not provide comments on the
Shelf Registration Statement when required pursuant to the Registration Rights
Agreement will not be entitled to any such increase in the interest rate for
any day after the 180th day following the Issue Date. Upon (x) the filing of
the Exchange Offer Registration Statement after the 60th day described in
clause (a) above, (y) the effectiveness of the Exchange Offer Registration
Statement after the 120th day described in clause (b) above or (z) the
consummation of the Exchange Offer or the effectiveness of the Shelf
Registration Statement, as the case may be, after the 180th day described in
clause (c) above, the interest rate on the Notes from the date of such filing,
effectiveness or consummation, as the case may be, will be reduced to the
original interest rate set forth on the cover page of this Prospectus;
provided, however, that the interest rate on the Notes will be reduced to the
original interest rate only if all of the events set forth in the immediately
preceding sentence causing the rate on the Notes to increase have been cured.
The Registration Rights Agreement is governed by, and construed in
accordance with, the laws of the State of New York. 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 reference to,
all the provision of the Registration Rights Agreement, a form of which is
available upon request to the Company. In addition, the information set forth
above
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concerning certain interpretations of and positions taken by the staff of the
Commission is not intended to constitute legal advice and prospective investors
should consult their own legal advisors with respect to such matters.
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. The Company has agreed
that it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale for a period of 180
days after consummation of the Exchange Offer, or such shorter period as will
terminate when all Old Notes acquired by broker-dealers for their own accounts
as a result of market-making activities or other trading activities have been
exchanged for Exchange Notes and resold by such broker-dealers. 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 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. For a period of 180 days after consummation of the Exchange
Offer, or such shorter period as will terminate when all Old Notes acquired by
broker-dealers for their own accounts as a result of market-making activities
or other trading activities have been exchanged for Exchange Notes and resold
by such broker-dealers, the Company has consented to the use of this Prospectus
and any amendment or supplement to this Prospectus by any 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. The Company has agreed in the
Registration Rights Agreement to indemnify such broker-dealers against certain
liabilities, including liabilities under the Securities Act.
TRANSFER RESTRICTIONS ON OLD NOTES
OFFERS AND SALES BY THE INITIAL PURCHASERS
The Old Notes were not 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 in the United States to QIBs under Rule 144A under the Securities Act
and other Institutional Accredited Investors who, prior to their purchase of
Old Notes, delivered to the Initial Purchasers a letter containing certain
representations and agreements, 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 understands and acknowledges that the Notes have not been
registered under the Securities Act or any other applicable securities
law, the Notes are being offered for resale in transactions not requiring
registration under the Securities Act or any other securities laws,
including sales pursuant to Rule 144A, and none of the Notes may be
offered, sold or otherwise transferred except in compliance with the
registration requirements of the Securities
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Act and any other applicable securities laws, pursuant to an exemption
therefrom or in a transaction not subject thereto and in each case in
compliance with the conditions for transfer set forth in paragraph (4)
below.
(2) It is not an "affiliate" (as defined in Rule 501(b) under the
Securities Act) of the Company or acting on behalf of the Company and it
is either:
(a) a "Qualified Institutional Buyer" within the meaning of Rule
144A and is aware that any sale of Notes to it will be made in
reliance on Rule 144A. Such acquisition will be for its own account or
for the account of another Qualified Institutional Buyer; or
(b) an institutional "accredited investor" within the meaning of
subparagraph (a)(1), (2), (3) or (7) of Rule 501 under the Securities
Act (an "Institutional Accredited Investor") or, if the Notes are to
be purchased for one or more accounts ("investor accounts") for which
it is acting as fiduciary or agent (except if it is a bank as defined
in Section 3(a)(2) of the Securities Act or a savings and loan
association or other institution as described in Section 3(a)(5)(A) of
the Securities Act, whether acting in its individual capacity or in a
fiduciary capacity), each such investor account is an Institutional
Accredited Investor on a like basis; in the normal course of its
business, it invests in or purchases securities similar to the Notes
and it has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of
purchasing Notes. It is aware that it (or any investor account) may be
required to bear the economic risk of an investment in the Notes for
an indefinite period of time and it (or such investor account) is able
to bear such risk for an indefinite period.
(3) It acknowledges that neither the Company nor the Initial
Purchasers nor any person representing the Company or the Initial
Purchasers has made any representation to it with respect to the Company
or the offering or sale of any Notes, other than the information contained
in the Offering Memorandum, which Offering Memorandum has been delivered
to it. Accordingly, it acknowledges that the Initial Purchasers make no
representation or warranty as to the accuracy or completeness of such
materials. It has had access to such financial and other information as it
has deemed necessary in connection with its decision to purchase Notes,
including an opportunity to ask questions of and to request information
from the Company and the Initial Purchasers, and it has received and
reviewed all information that it requested.
(4) It is purchasing the Notes for its own account, or for one or more
investor accounts for which it is acting as a fiduciary or agent, in each
case for investment, and not with a view to, or for offer or sale in
connection with, any distribution thereof in violation of the Securities
Act, subject to any requirement of law that the disposition of its
property or the property of such investor account or accounts be at all
times within its or their control and subject to its or their ability to
resell such Notes pursuant to Rule 144A, or any exemption from
registration available under the Securities Act. It agrees on its own
behalf and on behalf of any investor account for which it is purchasing
the Notes, and each subsequent holder of the Notes by its acceptance
thereof will agree, to offer, sell or otherwise transfer such Notes prior
to the date that is two years after the later of the date of the original
issuance of the Notes and the last date on which the Company or any
affiliate of the Company was the owner of such Notes (the "Resale
Restriction Termination Date") only (a) to the Company, (b) pursuant to a
registration statement that has been declared effective under the
Securities Act, (c) for so long as the Notes are eligible for resale
pursuant to Rule 144A, to a person it reasonably believes is a Qualified
Institutional Buyer that purchases for its own account or for the account
of a Qualified Institutional Buyer to whom notice is given that the
transfer is being made in reliance to Rule 144A, (d) to an Institutional
Accredited Investor that is acquiring the security for its own account or
for the account of another Institutional Accredited Investor for
investment purposes and not with a view to, or for offer or sale in
connection with, any distribution in violation of the Securities Act or
(e) pursuant to any available exemption from the registration requirements
of the Securities Act, subject in each of the foregoing cases to any
requirement of law that the disposition of its property or the property of
such investor account or accounts be at all times within its or their
control and to compliance with any applicable state securities laws. The
foregoing restrictions on resale will not apply subsequent to the Resale
Restriction Termination Date. If any resale or other transfer of the Notes
is proposed to be made pursuant to clause (d) above prior to the Resale
Restriction Termination Date, the transferor shall deliver a letter from
the transferee substantially in the form of Annex A hereto to the Company,
which shall provide (as applicable) that, among other things, the
transferee is an Institutional Accredited Investor that is acquiring such
Notes for investment purposes and not with a view to, or for offer or sale
in connection with, any distribution in violation of the Securities Act.
Each purchaser acknowledges that the Company and the Trustee reserve the
right prior to any offer, sale or other transfer pursuant to clauses (d)
or (e) prior to the Resale Restriction
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Termination Date of the Notes to require the delivery of an opinion of
counsel, certifications and/or other information satisfactory to the
Company and the Trustee.
Each purchaser acknowledges that each certificate representing a Note will
contain a legend substantially to the following effect:
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS.
NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION OR UNLESS SUCH TRANSACTION
IS EXEMPT FROM, OR NOT SUBJECT TO, THE REGISTRATION REQUIREMENTS OF THE
SECURITIES ACT. THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF
AGREES TO OFFER, SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE
DATE THAT IS TWO YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF
AND THE LAST DAY ON WHICH PETSEC ENERGY Inc. (THE "COMPANY") OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY
PREDECESSOR OF THIS SECURITY) (THE "RESALE RESTRICTION TERMINATION DATE")
ONLY (A) TO THE COMPANY, (B) PURSUANT TO AN EFFECTIVE REGISTRATION
STATEMENT UNDER THE SECURITIES ACT, (C) FOR SO LONG AS THIS SECURITY IS
ELIGIBLE FOR RESALE PURSUANT TO RULE 144A UNDER THE SECURITIES ACT ("RULE
144A"), TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL
BUYER" AS DEFINED IN RULE 144A THAT IS ACQUIRING SUCH SECURITY FOR ITS OWN
ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO WHOM
NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE 144A,
(D) TO AN INSTITUTIONAL "ACCREDITED INVESTOR" WITHIN THE MEANING OF
SUBPARAGRAPH (a)(1), (2), (3) OR (7) OF RULE 501 UNDER THE SECURITIES ACT
("INSTITUTIONAL ACCREDITED INVESTOR") THAT IS ACQUIRING SUCH SECURITY FOR
ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF ANOTHER INSTITUTIONAL ACCREDITED
INVESTOR, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO, OR FOR OFFER OR
SALE IN CONNECTION WITH, ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES
ACT, OR (E) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE COMPANY'S AND THE
TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER (i) PURSUANT TO
CLAUSES (D) OR (E) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND
(ii) IN EACH OF THE FOREGOING CASES, TO REQUIRE THAT A CERTIFICATE OF
TRANSFER IN THE FORM APPEARING ON THIS SECURITY IS COMPLETED AND DELIVERED
BY THE TRANSFEROR TO THE TRUSTEE. THIS LEGEND WILL BE REMOVED UPON THE
REQUEST OF A HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
(5) It acknowledges that the Company, the Initial Purchasers and
others will rely upon the truth and accuracy of the foregoing
acknowledgments, representations, warranties and agreements and agrees
that if any of the acknowledgments, representations, warranties or
agreements deemed to have been made by its purchase of the Notes is no
longer accurate, it shall promptly notify the Initial Purchasers. If it is
acquiring any Notes as a fiduciary or agent for one or more investor
accounts, it represents that it has sole investment discretion with
respect to each such investor account and that it has full power to make
the foregoing acknowledgments, representations and agreements on behalf of
each such investor account.
LEGAL MATTERS
The validity of the issuance of the Exchange Notes offered hereby is being
passed upon for the Company by Sklar Warren & Sylvester Ltd., Las Vegas,
Nevada.
EXPERTS
The financial statements of the Company as of December 31, 1995 and 1996,
and for each of the years in the three year period ended December 31, 1996,
have been included herein and in the registration statement in reliance upon
the report of KPMG Peat Marwick LLP, independent certified public accountants,
appearing elsewhere herein, and upon the authority of said firm as experts in
accounting and auditing. The report of KPMG Peat Marwick LLP indicates that
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the Parent Company adopted the method of accounting for stock based
compensation prescribed by the Statement of Financial Accounting Standard No.
123 for expense allocated to the Company.
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.
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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.
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.
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.
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.
Liquids. Crude oil, condensate and natural gas liquids.
Mbbls. One thousand barrels of crude oil or other liquid hydrocarbons.
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.
MMS. Mineral Management Service of the United States Department of the
Interior.
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.
94
<PAGE> 96
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells, as the case may be.
OCS. Outer continental shelf.
Oil. Crude oil and condensate.
Present value or PV10. 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 to market.
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.
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.
Updip. A higher point in the reservoir.
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.
95
<PAGE> 97
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
<S> <C>
Independent Auditors' Report....................................................................................F-2
Balance Sheets as of December 31, 1995, 1996 and June 30, 1997..................................................F-3
Statements of Operations and Retained Earnings (Deficit) for the years ended
December 31, 1994, 1995 and 1996 and the six months ended
June 30, 1996 and 1997........................................................................................F-4
Statements of Cash Flows for the years ended December 31, 1994, 1995 and
1996 and the six months ended June 30, 1996 and 1997..........................................................F-5
Notes to Financial Statements...................................................................................F-6
</TABLE>
F-1
<PAGE> 98
INDEPENDENT AUDITOR'S REPORT
The Board of Directors
Petsec Energy Inc.:
We have audited the balance sheets of Petsec Energy Inc. as of December
31, 1995 and 1996, and the related statements of operations and retained
earnings (deficit) and cash flows for each of the years in the three-year
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 audits 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 presentations. 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 Petsec Energy Inc. as of
December 31, 1995 and 1996, and the results of its operations and its cash
flows for each of the years in the three-year period ended December 31, 1996 in
conformity with generally accepted accounting principles.
As discussed in note 5 to the financial statements, in 1996 the Parent
Company adopted the method of accounting for stock-based compensation
prescribed by the Statement of Financial Accounting Standards No. 123 for the
expense allocated to the Company.
KPMG PEAT MARWICK LLP
New Orleans, Louisiana
May 2, 1997
F-2
<PAGE> 99
PETSEC ENERGY INC.
BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------- JUNE 30,
1995 1996 1997
------------- ------------ -------------
ASSETS (UNAUDITED)
<S> <C> <C> <C>
Current Assets:
Cash................................................................. $ 1,418 $ 342 $ 38,769
Accounts receivable.................................................. 8,332 11,855 11,191
Other receivables.................................................... 403 101 96
Inventories of crude oil............................................. 88 45 41
Prepaid expenses..................................................... 191 168 632
------------- ------------ -------------
Total Current Assets............................................. 10,432 12,511 50,729
------------- ------------ -------------
Property, plant and equipment-- at cost under the successful efforts
method of accounting for oil and gas properties
Proved oil and gas properties.................................... 61,729 131,933 175,549
Unproved oil and gas properties.................................. 5,859 7,276 22,623
Production facilities............................................ 24,353 38,049 50,789
Other............................................................ 436 1,040 1,307
------------- ------------ -------------
92,377 178,298 250,268
Less accumulated depletion, depreciation and amortization............ (15,636) (44,664) (73,498)
------------- ------------ -------------
Net property, plant and equipment.................................... 76,741 133,634 176,770
-------------- ------------ -------------
Other assets.............................................................. 1,937 -- 2,908
------------- ------------ -------------
Total Assets..................................................... $ 89,110 $ 146,145 $ 230,407
============= ============ =============
LIABILITIES AND SHAREHOLDER'S EQUITY
Current Liabilities:
Trade accounts payable............................................... 18,601 18,364 20,672
Interest payable..................................................... 187 202 590
Accrued liabilities.................................................. 2,621 6,003 7,161
------------- ------------ -------------
Total Current Liabilities........................................ 21,409 24,569 28,423
------------- ------------ -------------
Senior subordinated notes................................................. -- -- 99,618
Bank credit facility...................................................... 32,350 37,000 --
Subordinated shareholder loan............................................. 25,038 57,954 39,453
Provision for dismantlement............................................... 1,145 1,738 2,317
Deferred income taxes..................................................... 3,537 9,848 14,982
------------- ------------ -------------
Total Liabilities................................................ 83,479 131,109 184,793
------------- ------------ -------------
Shareholder's Equity:
Common stock, $1 par value; authorized 1,000,000 shares;
issued and outstanding 1 share..................................... -- -- --
Additional paid in capital........................................... 1 482 20,494
Retained earnings.................................................... 5,630 14,554 25,120
------------- ------------ -------------
Total Shareholder's Equity....................................... 5,631 15,036 45,614
------------- ------------ -------------
Total Liabilities and Shareholder's Equity....................... $ 89,110 $ 146,145 $ 230,407
============= ============ =============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 100
PETSEC ENERGY INC.
STATEMENTS OF OPERATIONS AND RETAINED EARNINGS (DEFICIT)
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenue:
Oil and gas sales................................. $ 15,098 $ 30,462 $ 67,027 $ 29,506 $ 59,302
Operating expenses:
Lease operating expenses.......................... 3,139 4,269 5,561 2,608 4,375
Production taxes.................................. 716 488 600 274 388
Exploration expenditures.......................... 3,020 3,396 7,061 1,812 4,688
General and administrative........................ 2,046 4,502 5,259 2,800 2,606
Stock compensation................................ -- -- 481 -- 418
Depletion, depreciation and amortization.......... 4,291 9,256 29,639 14,210 29,425
----------- ----------- ----------- ----------- -----------
Total operating expenses............................... 13,212 21,911 48,601 21,704 41,900
----------- ----------- ----------- ----------- -----------
Income from operations................................. 1,886 8,551 18,426 7,802 17,402
----------- ----------- ----------- ----------- -----------
Other income (expenses):
Interest expense.................................. (959) (2,452) (3,369) (1,870) (2,099)
Interest income................................... 14 64 172 36 203
Gain (loss) on sale of property, plant
and equipment................................... (16) 4,312 6 -- --
Foreign exchange gain............................. -- -- -- -- 191
Other............................................. (55) 35 -- -- 3
----------- ----------- ----------- ----------- -----------
(1,016) 1,959 (3,191) (1,834) (1,702)
----------- ----------- ----------- ----------- -----------
Income before income taxes............................. 870 10,510 15,235 5,968 15,700
Income tax expense..................................... 25 3,537 6,311 2,788 5,134
----------- ----------- ----------- ----------- -----------
Net income............................................. 845 6,973 8,924 3,180 10,566
Retained earnings (deficit) at beginning of year....... (2,188) (1,343) 5,630 5,630 14,554
----------- ----------- ----------- ----------- -----------
Retained earnings (deficit) at end of year............. $ (1,343) $ 5,630 $ 14,554 $ 8,810 $ 25,120
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 101
PETSEC ENERGY INC.
STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED DECEMBER 31, JUNE 30,
------------------------------------- ------------------------
1994 1995 1996 1996 1997
----------- ----------- ----------- ----------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income........................................ $ 845 $ 6,973 $ 8,924 $ 3,180 $ 10,566
Adjustments to reconcile income to net cash
provided by operating activities:
Depletion, depreciation and amortization.......... 4,291 9,256 29,639 14,210 29,425
Deferred income taxes............................. 25 3,537 6,311 2,788 5,134
Loss (gain) on sale of property, plant
and equipment................................. 16 (4,312) -- -- --
Dry hole costs and abandonments................... -- 545 2 2 2,272
Stock compensation expense........................ -- -- 481 -- 418
Unrealized foreign exchange (gain) loss........... 56 (30) -- -- (191)
Changes in operating assets and liabilities:
Decrease (increase) in receivables................ (530) (6,197) (3,523) 859 664
Decrease (increase) in inventories................ 48 (78) 43 47 4
Decrease (increase) in prepayments................ 30 (140) 23 (295) (464)
Decrease (increase) in other receivables.......... (69) (334) 301 (312) 5
Decrease (increase) in other assets............... -- (1,937) 1,937 436 --
Increase (decrease) in trade accounts payable..... 4,479 12,754 (237) (2,900) 2,308
Increase in accrued liabilities................... 1,284 1,337 3,381 280 1,158
Increase (decrease) in interest payable........... -- 187 15 (13) 388
----------- ----------- ----------- ----------- -----------
Net cash provided by operating activities..... 10,475 21,561 47,297 18,282 51,687
----------- ----------- ----------- ----------- -----------
Cash flows from investing activities:
Lease acquisitions................................ (2,364) (2,792) (6,367) (6,350) (5,510)
Exploration and development expenditures.......... (16,908) (50,369) (78,951) (31,063) (68,465)
Proceeds from sale of property, plant
and equipment................................. -- 5,500 -- -- --
Other asset additions............................. (157) (175) (621) (336) (267)
----------- ----------- ----------- ----------- -----------
Net cash used in investing activities......... (19,429) (47,836) (85,939) (37,749) (74,242)
----------- ----------- ----------- ----------- -----------
Cash flows from financing activities:
Net proceeds from senior subordinated notes....... -- -- -- -- 96,697
Proceeds from bank credit facility................ 10,184 20,025 63,540 56,540 21,000
Repayment of bank credit facility................. (1,625) (6,000) (58,890) (36,890) (58,000)
Proceeds from shareholder loans................... 519 18,500 36,000 -- 1,500
Repayment of shareholder loans.................... -- (5,367) (3,084) -- (215)
----------- ----------- ----------- ----------- -----------
Net cash provided by financing activities..... 9,078 27,158 37,566 19,650 60,982
----------- ----------- ----------- ----------- -----------
Net increase (decrease) in cash........................ 124 883 (1,076) 183 38,427
Cash at beginning of year.............................. 411 535 1,418 1,418 342
----------- ----------- ----------- ----------- -----------
$ 535 $ 1,418 $ 342 $ 1,601 $ 38,769
=========== =========== =========== =========== ===========
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 102
PETSEC ENERGY INC.
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) Description of Business
Petsec Energy Inc. (the Company), located in Lafayette, Louisiana, is a
wholly-owned subsidiary of Petsec (U.S.A.) Inc. which is a wholly-owned
subsidiary of Petsec America Pty. Limited, a company incorporated in Australia.
The ultimate holding company is Petsec Energy Ltd (the Parent Company),
(formerly Petroleum Securities Australia Limited), also incorporated in
Australia.
The primary business of the Company is exploration, development and
production of oil and gas; therefore, the Company is directly affected by
fluctuating economic conditions of the oil and gas industry. The Company's
activities are focused in the shallow waters of the Gulf of Mexico, primarily
offshore Louisiana and Texas. Additionally, the Company currently owns a 100%
working interest in all of its leaseholds in order to control all exploration,
development and marketing decisions.
(b) Income Taxes
The Company is included in the consolidated federal and state income tax
returns of Petsec (U.S.A.) Inc. The income tax provision has been prepared as
if the Company were a separate taxpayer.
The Company accounts for income taxes under Statement of Financial
Accounting Standards No. 109 (Statement 109), Accounting for Income Taxes.
Under the asset and liability method of Statement 109, deferred tax assets and
liabilities are recognized for the future tax consequences attributable to
differences between the financial statement carrying amounts of existing assets
and liabilities and their respective tax bases. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled. Under Statement 109, the effect on deferred tax assets
and liabilities of a change in tax rates is recognized in income in the period
that includes the enactment date.
(c) Oil and Gas Properties
The Company uses the successful efforts method of accounting for oil and
gas producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill
exploratory wells that do not find proved reserves, and geological and
geophysical costs are expensed.
Unproved oil and gas properties are periodically assessed on a
property-by-property basis, and a loss is recognized to the extent, if any,
that the cost of the property has been impaired. Capitalized costs of producing
oil and gas properties are depreciated and depleted by the units-of-production
method.
Effective in 1996, the Company began assessing the impairment of
capitalized costs of proved oil and gas properties and other long-lived assets
in accordance with Statement of Financial Accounting Standards No. 121
(Statement 121), Accounting for the Impairment of Long-Lived Assets and for
Long-Lived Assets to be Disposed Of. Under this method, the Company generally
assesses its oil and gas properties on a field-by-field basis, utilizing its
current estimate of future revenues and operating expenses. In the event net
undiscounted cash flow is less than the carrying value, an impairment loss is
recorded based on estimated fair value, which would consider discounted future
net cash flows. Prior to 1996, this assessment had been determined on a
company-wide basis. The adoption of Statement 121 did not have an effect on the
Company's financial position or results of operations.
The estimated costs of dismantling and abandoning offshore oil and gas
properties are provided currently using the units-of-production method. Such
provision is included in depletion, depreciation and amortization in the
accompanying statement of operations.
F-6
<PAGE> 103
On the sale or retirement of a complete unit of a proved property, the
cost and related accumulated depletion, depreciation and amortization are
eliminated from the property accounts, and the resultant gain or loss is
recognized.
(d) Other Property, Plant and Equipment
Depreciation is calculated using the straight-line method over the
estimated useful lives of the assets.
(e) Inventories
Inventories are stated at the lower of cost or market. Cost is determined
principally on the average cost method.
(f) Hedging Activities
The Company uses derivative commodity instruments to manage commodity
price risks associated with future natural gas and crude oil production but does
not use them for speculative purposes. The Company's commodity price hedging
program utilizes swap contracts to set a floor price for future production. To
qualify as a hedge, these contracts must correlate to anticipated future
production such that the Company's exposure to the effects of commodity price
changes is reduced. The Company uses the accrual method of accounting for
derivative commodity instruments. At inception, the contract premiums paid are
recorded as prepaid expenses and, upon settlement of the hedged production
month, are included with the gains and losses on the contracts in oil and gas
revenues.
(g) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(h) Fiscal Year End
Effective December 31, 1996, the Company changed its fiscal year end from
June 30 to December 31. These financial statements have been prepared on a
calendar year basis; however, reserve information required for Note 12 is
unavailable for calendar years preceding December 31, 1995.
(i) Interim Financial Information
The interim financial information have been prepared without audit. In the
opinion of management, all adjustments, consisting of normal recurring
accruals, considered necessary for a fair presentation have been included.
2. BANK CREDIT FACILITY
At December 31, 1995, the Company had a commercial credit facility of
$34.75 million. At the option of the Company, the outstanding borrowings
accrued interest at the bank's prime rate plus .5%, or at LIBOR plus 2%. At
December 31, 1995, there were $32.35 million in borrowings and $2.4 million in
letters of credit outstanding under the facility. The weighted average annual
interest rate applicable to the outstanding principal balance was 7.82%.
In April 1996, the Company entered into a $75 million revolving credit
facility (the facility) with a syndicate of banks with a borrowing base of $65
million. The facility is a two-year revolving credit facility followed by a
two-year term loan with equal quarterly amortization payments. Maturities based
on current amounts outstanding are $9.25 million, $18.5 million and $9.25
million for the years ended 1999, 2000 and 2001. The facility is secured by the
Company's Gulf of Mexico producing properties. Outstanding borrowings accrue
interest at LIBOR plus a margin of 1.375% to 1.875% per annum, depending on the
balance drawn. The Company is obligated to pay a fee equal to one-half of 1%
per annum of the unused portion of the borrowing base.
At December 31, 1996, borrowings outstanding totaled $37 million at a
weighted average annual interest rate of 7.155% and letters of credit
outstanding totaled $12.21 million. The fair market value of secured loans
payable approximated the carrying amount of the liability.
In June 1997, the Company issued $100 million 9 1/2% Senior Subordinated
Notes due in 2007 (unaudited). The notes were issued at a discount with an
annual yield to maturity of 9.56%. A portion of the proceeds was used to pay the
outstanding balance on the bank credit facility.
F-7
<PAGE> 104
3. SUBORDINATED SHAREHOLDER LOAN
Petsec (U.S.A.) Inc. had advances outstanding to the Company of $25
million and $58 million at December 31, 1995 and 1996 respectively. A summary
of activity is as follows (in thousands):
<TABLE>
<CAPTION>
BEGINNING ENDING
BALANCE ADVANCES REPAYMENTS BALANCE
--------------- ---------------- ----------------- --------------
<S> <C> <C> <C> <C>
1994 ...................................... $ 11,386 $ -- $ -- $ 11,386
1995....................................... 11,905 18,500 (4,848) 25,038
1996....................................... 25,038 36,000 (3,084) 57,954
</TABLE>
The average balance outstanding for the years ended 1994, 1995 and 1996
was $11.6 million, $13.7 million and $33.6 million, respectively.
The advances are without interest charges or fixed repayment terms. Petsec
(U.S.A.) Inc. has confirmed that no repayments will be required prior to
December 31, 2007.
Effective June 1, 1997, Petsec (U.S.A.) Inc. began charging the Company
interest on the subordinated shareholder loan at market rates, 6% for U.S.
dollar loans and 6.24% for Australian dollar loans at June 30, 1997 (unaudited).
In addition, effective June 1, 1997, $20 million of the outstanding subordinated
shareholder loan was recapitalized as equity (unaudited).
4. SIGNIFICANT CUSTOMERS
Customers which account for 10% or more of revenue for the years ended
December 31, 1994, 1995 and 1996 follow:
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------ ------------
<S> <C> <C> <C>
Vision Resources, Inc.......................................... 37% 55% 60%
Aquila Energy Marketing Corporation............................ * 30% 12%
Pan Energy Trading and Market Services, L.L.C.................. 45% 13% 19%
Celsius Energy Company......................................... 10% * *
</TABLE>
* less than 10%
Based upon the current demand for oil and gas, the Company does not
believe the loss of any current purchasers would have a material adverse effect
on the Company. The Company continually evaluates the financial strength of its
customers but does not require collateral to support trade receivables.
5. STOCK COMPENSATION EXPENSE
The Parent Company has an Employee Option Plan under which the employees
and certain consultants of the Company are entitled to receive options to
purchase stock in the Parent Company. The Parent Company's shares are traded on
both the Australian Stock Exchange and the Nasdaq National Market.
The Company is allocated stock compensation expense in respect to the
options in the Parent Company which are granted to the Company's employees and
certain consultants. Prior to 1996, the Parent Company accounted for its
expense related to the stock option plan in accordance with the provisions of
Accounting Principles Board (APB) Opinion No. 25, Accounting for Stock Issued
to Employees, and related interpretations. In 1996, the Parent Company adopted
Statement of Financial Accounting Standards No. 123 (Statement 123), Accounting
for Stock-Based Compensation, under which it recognizes as expense over the
vesting period the fair value of all stock-based awards on the date of grant.
The amount is recorded as an increase to additional paid in capital. The fair
value was determined using the Black-Scholes valuation method. The calculation
takes into account the exercise price, expected life, current price of
underlying stock, expected volatility of the underlying stock, expected
dividend yield and the risk-free interest rate. The expected life, volatility,
dividend yield and risk-free interest rates used in determining the fair value
of options granted in 1996 were 2.1 to 3.5 years (weighted average 3.0 years);
30%; 0; and 7.1% to 8.4% per annum (weighted average 8% per annum),
respectively.
F-8
<PAGE> 105
6. INCOME TAXES
Although the Company is included in the consolidated federal and state
income tax returns of Petsec (U.S.A.) Inc., the income tax provision has been
prepared as if the Company were a separate taxpayer. Income tax expense
attributable to income from continuing operations was $25,000, $3.5 million, and
$6.3 million for the years ended December 31, 1994, 1995 and 1996, respectively,
and differed from the amounts computed by applying the U.S. federal income tax
rate of 34% to pretax income from continuing operations as a result of the
following:
<TABLE>
<CAPTION>
1994 1995 1996
------------- ------------ -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Computed "expected" tax expense.......................................... $ 296 $ 3,573 $ 5,180
Increase (reduction) in income taxes resulting from:
Items not deductible (assessable) for tax........................... 53 78 550
State income taxes.................................................. 26 282 322
Other............................................................... -- -- 259
Change in the beginning of the year balance, of the valuation
allowance for deferred tax assets allocated to income
tax expense..................................................... (350) (396) --
------------- ------------ -------------
$ 25 $ 3,537 $ 6,311
============= ============ =============
</TABLE>
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31,
1995 and 1996 are presented below.
<TABLE>
<CAPTION>
1995 1996
------------- --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Financial provisions not currently deductible for tax purposes................... $ 219 $ 1,160
Net operating loss carryforwards................................................. 9,912 17,167
------------- --------------
Total gross deferred tax assets.............................................. 10,131 18,327
------------- --------------
Deferred tax liabilities:
Differences in depreciation and depletion of oil and gas assets.................. (13,668) (28,175)
------------- --------------
Net deferred tax liability................................................... $ (3,537) $ (9,848)
============= ==============
</TABLE>
At December 31, 1996, the Company has net operating loss carryforwards for
federal income tax purposes of $45.2 million which are available to offset
future federal taxable income, if any, through 2011. Although realization is not
assured, management believes that it is more likely than not that all of the
deferred tax assets will be realized.
7. RELATED PARTY TRANSACTIONS
The Parent Company has advanced funds to Petsec Energy Inc. through its
wholly-owned subsidiaries, Petsec America Pty. Limited and Petsec (U.S.A.) Inc.
(Note 3). The funds were used to finance operations.
For the years ended December 31, 1994, 1995 and 1996, Petsec Energy Inc.
paid an amount of $733,000, $630,000 and $1.0 million to the Parent Company
principally for reimbursement of direct expenses incurred in connection with
the Company's operations.
F-9
<PAGE> 106
8. COMMITMENTS AND CONTINGENCIES
Future minimum lease commitments at December 31, 1996, applicable to
noncancelable operating leases with terms of one year or more are summarized as
follows (in thousands):
<TABLE>
<CAPTION>
YEAR
----
<S> <C>
1997 $241
1998 170
1999 153
2000 51
----
$615
====
</TABLE>
Rent expense for the years ended December 31, 1994, 1995 and 1996 was
$139,000, $239,000 and $281,000, respectively.
9. HEDGING ACTIVITIES
The Company has entered into forward swap contracts to reduce the price
volatility on the sale of oil and gas production. At December 31, 1996, the
Company had the following contracts maturing monthly:
-- through December 31, 1997 covering the net sale of 365,000 barrels
of crude oil at an average price of $22.15 per barrel.
-- through November 1998 covering the net sale of 13,831,000 mmbtu of
gas at an average price of $2.035 per mmbtu.
The cost to the Company to terminate these contracts at December 31, 1996
is estimated to be $0.4 million for oil and $3.1 million for gas which
represents the fair market value of the Company's swap agreements at that date.
For the years ended December 31, 1995 and 1996, the Company recognized hedging
gains of $0.8 million and losses of $8.4 million respectively. The
counterparties to these contracts are major financial institutions.
The effect to the Company to terminate swap contracts at June 30, 1997 is
estimated to be a gain of $1.0 million (unaudited) for oil and a cost of $1.8
million (unaudited) for gas which represents the fair market value of the
Company's swap agreements at that date. For the six-months ended June 30, 1996
and 1997, the Company recognized hedging losses of $4.8 million (unaudited) and
$1.2 million (unaudited) respectively.
Subsequent to December 31, 1996, the Company entered into additional swap
contracts. As of June 30, 1997 the Company had additional contracts as follows
(all amounts unaudited):
-- through May 2000 covering the net sale of 2,132,000 barrels of crude
oil at an average price of $20.44 per barrel.
-- through May 2000 covering the net sale of 8,530,000 mmbtu of gas at
an average price of $2.20 per mmbtu.
10. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest was $1.0 million, $2.3 million and $3.4 million for
the years ended December 31, 1994, 1995 and 1996 respectively. The Company has
not paid any cash for income taxes in these years.
11. LITIGATION
The Company is involved in certain lawsuits arising in the ordinary course
of business. While the outcome of any of these lawsuits cannot be predicted
with certainty, management expects these matters to have no material adverse
effect on the financial position, results of operations or liquidity of the
Company.
F-10
<PAGE> 107
PETSEC ENERGY INC.
SUPPLEMENTARY OIL AND GAS DISCLOSURES -- UNAUDITED
12. SUPPLEMENTARY OIL AND GAS DISCLOSURES -- UNAUDITED
Users of this information should be aware that the process of estimating
quantities of "proved" and "proved developed" natural gas and crude oil reserves
is very complex, requiring significant subjective decisions in the evaluation
of all available geological, engineering and economic data for each reservoir.
The data for a given reservoir may also change substantially over time as a
result of numerous factors including, but not limited to, additional development
activity, evolving production history and continual reassessment of the
viability of production under varying economic conditions. Consequently,
material revisions to existing reserve estimates occur from time to time.
Although every reasonable effort is made to ensure that reserve estimates
reported represent the most accurate assessments possible, the significance of
the subjective decisions required and variances in available data for various
reservoirs make these estimates generally less precise than other estimates
presented in connection with financial statement disclosures.
Proved oil and gas reserves are the estimated quantities of crude oil,
natural gas, and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known reservoirs under existing economic and operating conditions, i.e., prices
and costs as of the date the estimate is made. Prices include consideration of
changes in existing prices provided only by contractual arrangements, but not
on escalations based upon future conditions.
Proved developed oil and gas reserves are reserves that can be expected to
be recovered through existing wells with existing equipment and operating
methods. Additional oil and gas expected to be obtained through the
application of fluid injection or other improved recovery techniques for
supplementing the natural forces and mechanisms of primary recovery should be
included as "proved developed reserves" only after testing by a pilot project
or after the operation of an installed program has confirmed through production
response that increased recovery will be achieved.
Prior to December 31, 1996 the Company had a June 30 fiscal year end. As
such, reserve data for December 31 was unavailable prior to 1995.
Estimates of proved and proved developed reserves at June 30, 1994 and
1995 and December 31, 1995 and 1996 were based on studies performed by Ryder
Scott Company.
No major discovery or other favorable or adverse event subsequent to
December 31, 1996 is believed to have caused a material change in the estimates
of proved or proved developed reserves as of that date.
F-11
<PAGE> 108
ESTIMATED NET QUANTITIES OF OIL AND GAS RESERVES
The following table sets forth the Company's net proved reserves,
including the changes therein, and proved developed reserves (all within the
United States) as estimated by Ryder Scott Company:
<TABLE>
<CAPTION>
CRUDE OIL NATURAL OIL
(MBBL) (MMCF)
--------------- ---------------
<S> <C> <C>
Proved developed and undeveloped reserves:
June 30, 1993.................................................................. 1,136 11,755
Revisions of previous estimates............................................ (39) 1,476
Extensions, discoveries and other additions................................ 1,908 3,658
Production................................................................. (355) (4,059)
--------------- ---------------
June 30, 1994.................................................................. 2,650 12,830
Revisions of previous estimates............................................ 2,861 293
Extensions, discoveries and other additions................................ 2,210 11,194
Production................................................................. (583) (3,556)
Sales of reserves in place................................................. (257) (434)
--------------- ---------------
June 30, 1995.................................................................. 6,881 20,327
Revisions of previous estimates............................................ (675) (482)
Extensions, discoveries and other additions................................ 1,624 35,783
Production................................................................. (658) (5,881)
--------------- ---------------
December 31, 1995.............................................................. 7,172 49,747
Revisions of previous estimates............................................ 211 2,297
Extensions, discoveries and other additions................................ 3,085 32,969
Production................................................................. (2,150) (11,722)
--------------- ---------------
December 31, 1996.............................................................. 8,318 73,291
=============== ===============
</TABLE>
<TABLE>
<CAPTION>
CRUDE OIL NATURAL OIL
(MBBL) (MMCF)
--------- -----------
<S> <C> <C>
Proved developed reserves:
June 30, 1994.................................................................. 2,650 12,830
June 30, 1995.................................................................. 4,076 12,003
December 31, 1995.............................................................. 6,962 25,852
December 31, 1996.............................................................. 6,670 43,133
</TABLE>
Capitalized costs for oil and gas producing activities consist of the
following:
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
------------------------------------------------
1994 1995 1996
-------------- -------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
Proved properties.................................................... $ 39,172 $ 86,082 $ 169,982
Unproved properties.................................................. 3,734 5,859 7,276
42,906 91,941 177,258
-------------- -------------- --------------
Accumulated depreciation, depletion and amortization................. (8,906) (15,484) (44,349)
-------------- -------------- --------------
Net capitalized costs........................................... $ 34,000 $ 76,457 $ 132,909
============== ============== ==============
</TABLE>
Costs incurred for oil and gas property acquisition, exploration and
development activities are as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
(IN THOUSANDS)
<S> <C> <C> <C>
Lease acquisition.................................................... $ 2,785 $ 2,930 $ 6,699
Exploration.......................................................... 11,115 34,786 71,490
Development.......................................................... 6,344 12,925 14,187
--------------- --------------- ---------------
Total costs incurred............................................ $ 20,244 $ 50,641 $ 92,376
=============== =============== ===============
</TABLE>
F-12
<PAGE> 109
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS REVENUES
The following information has been developed utilizing procedures
prescribed by Statement of Financial Accounting Standards No. 69 "Disclosures
about Oil and Gas Producing Activities" (SFAS No. 69) and based on natural gas
and crude oil reserve and production volumes estimated by Ryder Scott Company.
It may be useful for certain comparative purposes, but should not be solely
relied upon in evaluating the Company or its performance. Further, information
contained in the following table should not be considered as representative of
realistic assessments of future cash flows, nor should the Standardized Measure
of Discounted Future Net Cash Flows be viewed as representative of the current
value of the Company.
The Company believes that the following factors should be taken into
account in reviewing the following information: (1) future costs and selling
prices will probably differ from those required to be used in these
calculations; (2) due to future market conditions and governmental regulations,
actual rates of production achieved in future years may vary significantly from
the rate of production assumed in the calculations; (3) selection of a 10%
discount rate is arbitrary and may be subject to different rates of income
taxation.
Under the Standardized Measure, future cash inflows were estimated by
applying period end oil and gas prices adjusted for fixed and determinable
escalations to the estimated future production of period-end proved reserves.
As of December 31, 1995, approximately 23.3 Bcf of the Company's future gas
production and 331 Mbls of oil were subject to open hedge positions. As of
December 31, 1996, approximately 13.8 Bcf of the Company's future gas production
and 1,036 MBls of oil were subject to such positions. Future cash inflows were
reduced by estimated future development, abandonment and production costs based
on period-end costs in order to arrive at net cash flow before tax. Future
income tax expense has been computed by applying period-end statutory tax rates
to aggregate future pretax net cash flows, reduced by the tax basis of the
properties involved and tax carryforwards. Use of a 10% discount rate is
required by SFAS No. 69.
Management does not rely solely upon the following information in making
investment and operating decisions. Such decisions are based upon a wide range
of factors, including estimates of probable as well as proved reserves and
varying price and cost assumptions considered more representative of a range of
possible economic conditions that may be anticipated.
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is as follows:
<TABLE>
<CAPTION>
AS OF JUNE 30, AS OF DECEMBER 31,
--------------------------- ----------------------------
1994 1995 1995 1996
------------ ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Future cash inflows......................................... $ 74,657 $ 154,139 $ 251,971 $ 479,220
Future production costs................................ (26,185) (32,022) (36,163) (58,367)
Future development and abandonment costs............... (3,992) (19,600) (25,105) (47,873)
Future income tax expense.............................. (9,049) (21,143) (43,552) (102,669)
------------ ------------- ------------- -------------
Future net cash flows after income taxes.................... 35,431 81,374 147,151 270,311
10% annual discount for estimated timing of
cash flows............................................. (5,309) (16,238) (15,663) (46,930)
------------ ------------- ------------- -------------
Standardized measure of discounted future
net cash flows......................................... $ 30,122 $ 65,136 $ 131,488 $ 223,381
============ ============= ============= =============
</TABLE>
A summary of the changes in the standardized measure of discounted future
net cash flows applicable to proved oil and gas reserves is as follows:
F-13
<PAGE> 110
<TABLE>
<CAPTION>
SIX MONTHS YEAR
YEAR ENDED JUNE 30, ENDED ENDED
--------------------------- DEC. 31, DEC. 31,
1994 1995 1995 1996
------------ ------------- ------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Beginning of the period..................................... $ 21,509 $ 30,122 $ 65,136 $ 131,488
------------ ------------- ------------- -------------
Sales and transfers of oil and gas produced, net of
production costs....................................... (10,955) (12,482) (17,791) (60,764)
Net changes in prices and production costs.................. (862) 4,532 19,708 61,394
Extensions, discoveries and improved recoveries,
net of future production and development costs......... 24,168 76,642 88,947 145,494
Net changes due to revisions in quantity
estimates.............................................. 1,910 (1,220) 2,547 10,070
Development costs incurred during the period................ 391 -- 4,200 8,945
Sales of reserves in place.................................. -- (3,140) -- --
Change in estimated future development costs................ (173) (4,050) (10,355) (26,208)
Accretion of discount....................................... (2,088) (13,174) 1,505 12,079
Net change in income taxes.................................. (3,778) (12,094) (22,409) (59,117)
------------ ------------- ------------- -------------
Net increase................................................ 8,613 35,014 66,352 91,893
------------ ------------- ------------- -------------
End of period............................................... $ 30,122 $ 65,136 $ 131,488 $ 223,381
============ ============= ============= =============
</TABLE>
F-14
<PAGE> 111
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation (the "Articles") provide that
directors and officers of the Company shall not be liable to the Company or its
shareholders for damages for breach of fiduciary duty as a director or officer,
to the extent permitted by Nevada law.
The Articles and Bylaws provide that each person who was or is a party or
is threatened to be made a party to any action, suit, or proceeding whether
civil, criminal, administrative or investigative by reason of the fact that he
or she is or was a director, officer, employee or agent of the Company or is or
was serving at the request of the Company as a director, officer, employee or
agent of another corporation, partnership, joint venture, trust or other
enterprise, or by reason of the fact that he or she is or was a director,
officer or employee of the Company serving in any fiduciary capacity with
respect to any profit sharing, pension or other type of welfare plan or trust
for the benefit of employees of the Company or any subsidiary of the Company, be
indemnified and held harmless by the Company to the fullest extent authorized
by Nevada law and any other laws of the State of Nevada in effect from time to
time, against expense (including attorneys' fees, judgments, fines and amounts
paid in settlement) actually and reasonably incurred by such person in
connection with such action, suit or proceeding.
The Bylaws permit the Company to maintain insurance, at its expense, to
protect 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, partnership, joint venture, trust or other enterprise,
or by reason of the fact that he or she is or was a director, officer or
employee of the Company serving in any fiduciary capacity with respect to any
profit sharing, pension or other type of welfare plan or trust for the benefit
of employees of the Company or any subsidiary of the Company, against any
liability asserted against the person and incurred by the person in any such
capacity or arising out of the person's status as such, whether or not the
Company would have the power to indemnify such person against such liability
under Nevada law.
The Bylaws provide that the expenses incurred by a director, officer,
employee, or agent in defending a civil or criminal action, suit, or proceeding
may be paid by the Company in advance of its final disposition as authorized by
the Board of Directors in the specific case upon delivery to the Company of an
undertaking by or on behalf of such director, officer, employee, or agent to
repay all amounts so advanced unless it is ultimately determined that such
person is entitled to be indemnified by the Company under the Bylaws.
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> <C>
4.1** -- Articles of Incorporation of the Company
4.2** -- By-Laws of the Company
4.3** -- Indenture dated as of June 13, 1997 among the Company,
as issuer, and The Bank of New York, as trustee
</TABLE>
II-1
<PAGE> 112
<TABLE>
<S> <C> <C>
4.4** -- Registration Rights Agreement dated June 13, 1997 by and
among the Company and Merrill Lynch & Co., Merrill,
Lynch, Pierce, Fenner & Smith Incorporated, Donaldson,
Lufkin & Jenrette Securities Corporation and Salomon
Brothers Inc
5.1 -- Opinion of Sklar Warren & Sylvester Ltd.
10.1** -- Credit Agreement by and among Petsec Energy Inc. and
Chase Manhattan Bank and certain financial institutions
named therein as Lenders.
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Ryder Scott Company
23.3 -- Consent of Sklar Warren & Sylvester Ltd. (included in
Exhibit 5.1)
24.1** -- Power of Attorney (included on the signature pages of
this Registration Statement)
25.1** -- Statement of Eligibility of The Bank of New York
99.1** -- Form of Letter of Transmittal
</TABLE>
- ----------------------------
** Previously filed.
II-2
<PAGE> 113
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment to the Registration Statement to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Lafayette, the State of Louisiana on October 8, 1997.
PETSEC ENERGY INC.
By: /s/ Jeffrey H. Warren
-----------------------------------
Jeffrey H. Warren
Vice President and Secretary
Pursuant to the requirements of the Securities Act of 1933, this Amendment
to the 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/ Terrence N. Fern*
- ------------------------------- Chairman and Chief Executive Officer October 8, 1997
Terrence N. Fern (Principal-Executive-Officer)
/s/ Alan H. Stevens
- ------------------------------- Director, President and Chief Operating October 8, 1997
Alan H. Stevens Officer
/s/ Jeffrey H. Warren
- ------------------------------- Director, Vice President and Secretary October 8, 1997
Jeffrey H. Warren
/s/ Anthony J. Walton*
- ------------------------------- Director October 8, 1997
Anthony J. Walton
/s/ Ross A. Keogh
- ------------------------------- Financial Controller and Treasurer October 8, 1997
Ross A. Keogh
</TABLE>
*By: /s/ Jeffrey H. Warren
----------------------------------------
Jeffrey H. Warren
(Attorney-in-fact for person indicated)
II-3
<PAGE> 114
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C> <C>
4.1** -- Articles of Incorporation of the Company
4.2** -- By-Laws of the Company
4.3** -- Indenture dated as of June 13, 1997 among the Company,
as issuer, and The Bank of New York, as trustee
4.4** -- Registration Rights Agreement dated June 13, 1997 by
and among the Company and Merrill Lynch & Co.,
Merrill, Lynch, Pierce, Fenner & Smith Incorporated,
Donaldson, Lufkin & Jenrette Securities Corporation
and Salomon Brothers Inc
5.1 -- Opinion of Sklar Warren & Sylvester Ltd.
10.1** -- Credit Agreement by and among Petsec Energy Inc. and
Chase Manhattan Bank and certain financial
institutions named therein as Lenders.
23.1 -- Consent of KPMG Peat Marwick LLP
23.2 -- Consent of Ryder Scott Company
23.3 -- Consent of Sklar Warren & Sylvester Ltd. (included in
Exhibit 5.1)
24.1** -- Power of Attorney (included on the signature pages of
this Registration Statement)
25.1** -- Statement of Eligibility of The Bank of New York
99.1** -- Form of Letter of Transmittal
</TABLE>
- ----------------------------
** Previously filed
<PAGE> 1
EXHIBIT 5.1
[Letterhead of Sklar Warren & Sylvester LTD.]
September 30, 1997
Petsec Energy, Inc.
143 Ridgeway Drive, Suite 113
Lafayette, LA 70503-3402
Dear Sirs:
We have acted as counsel for Petsec Energy Inc., a Nevada corporation
(the "Company"), in connection with the proposed offer by the Company to
exchange (the "Exchange Offer") for all outstanding 9 1/2% Series A Senior
Subordinated Notes Due 2007 ($100 million principal amount outstanding) (the
"Old Notes") its 9 1/2% Series B Senior Notes Due 2007 ($100 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 13, 1997 (the
"Indenture"), among the Company and The Bank of New York, as trustee.
SCOPE OF REVIEW
As Nevada counsel, and for the purpose of rendering this opinion, we
have reviewed the following: (i) the Articles of Incorporation and Bylaws of
the Company certified on September 30, 1997 by the Secretary of the Company,
all as amended to date; (ii) resolutions of the Board of Directors of the
Company authorizing the execution of certain documents described therein; (iii)
certificates of existence from the Nevada Secretary of State certifying that
the Company is duly organized, existing, and in good standing under the laws of
Nevada; (iv) the Indenture; (v) the Purchase Agreement (the "Purchase
Agreement"), among the Company and Merrill Lynch & Co., Donaldson, Lufkin &
Jenrette Securities Corporation, and Salomon Brothers Inc (the "Initial
Investors"); (vi) the Registration Rights Agreement ("Rights Agreement") among
the Company and the Initial Investors; (vii) the Exchange Notes; and (viii) the
Registration Statement on Form S-4, 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"
and the documents described in clauses (iv) through (vii) inclusive, the
"Transaction Documents"). With your knowledge and permission, we have not
reviewed, and express no opinion as to, any instrument or agreement referred to
or incorporated by reference in the Transaction Documents. We have also
examined copies, certified or otherwise identified to our satisfaction, of such
records, documents, instruments, and certificates (collectively, the "Client
and Public Record Documents") of the Company and public officials as we have
deemed necessary or appropriate to enable us to render the opinions expressed
below.
<PAGE> 2
Petsec Energy, Inc.
September 30, 1997
Page 2
ASSUMPTIONS
We have assumed, with your knowledge and permission, and without
independent verification: (i) the genuineness of all signatures; (ii) the
authenticity of all documents submitted to us as originals; (iii) the
conformity to authentic original documents of all documents submitted to us as
certified, conformed photostatic, or facsimile copies; (iv) to the extent that
execution copies have not been furnished to us, the conformity of draft and/or
conformed documents to the final execution versions thereof; (v) the accuracy
and completeness of all corporate records made available to us by Petsec; and
(vi) the veracity of the matters of fact set forth in the Client and Public
Record Documents, although, with your knowledge and permission we have not
necessarily independently verified the content of factual statements made
therein.
In addition, our opinion is premised upon: (i) the assumption that
each of the Transaction Documents which are governed by the laws of
jurisdictions other than the State of Nevada ("Governing Jurisdictions") are
valid and binding on all parties thereto under such law; and (ii) information
that we have been furnished as to certain contacts between the Governing
Jurisdictions and the transactions contemplated by the Transaction Documents,
including the following: (a) substantial negotiations relating to such
transactions have taken place in the Governing Jurisdictions; (b) counsel
representing parties to the Transaction Documents in connection with such
transactions have their offices in the Governing Jurisdictions and negotiations
in connection with such transactions have taken place in certain of their
offices in the Governing Jurisdictions; and (c) many of the parties to the
Transaction Documents are located in the Governing Jurisdictions.
QUALIFICATIONS
The opinions hereinafter expressed are subject to the following
qualifications:
A. With respect to factual matters, we have relied solely upon
certificates of the Company and/or one or more of its officers.
B. The fact that a court might not enforce certain covenants of
the Transaction Documents or allow acceleration of the amounts due under the
Exchange Notes if it concludes that: (i) such enforcement or acceleration
would be commercially unreasonable; or (ii) such enforcement is not undertaken
in good faith under the then existing circumstances, and the fact that each of
the Transaction Documents is subject to any requirement under applicable law
generally imposing an obligation of good faith or of reasonableness in the
performance and enforcement of contracts.
C. The fact that certain provisions and remedies of the Exchange
Notes may be rendered ineffective, or limited, by applicable laws or judicial
decisions governing such provisions or
<PAGE> 3
Petsec Energy, Inc.
September 30, 1997
Page 3
remedies, but such laws and judicial decisions do not, in our opinion, make the
Exchange Notes inadequate for the practical realization of the rights and
benefits afforded thereby.
D. The opinion contained herein as to the enforceability of the
Exchange Notes is subject to the effect of bankruptcy, insolvency,
reorganization, moratorium, anti-deficiency, and other similar laws now or
hereafter in effect relating to or affecting the enforcement of creditors'
rights generally or by general equitable principles (including, without
limitation the federal Bankruptcy Code and the Uniform Fraudulent Transfers Act
as adopted as Chapter 112 of Nevada Revised Statutes, it being understood that
no opinion is rendered hereby with respect to the issue of fraudulent
conveyances) and the exercise of judicial discretion in accordance with general
principles of equity (whether considered in a proceeding in equity or at law).
E. We express no opinion as to the enforceability of provisions
in the Transaction Documents: (i) to the effect that failure to exercise, or
delay in exercising, rights or remedies will not operate as a waiver of any
such rights or remedies; (ii) requiring that a waiver be in writing in order to
be effective; (iii) purporting to disavow that the waiver of the right to
enforce a provision on one or more occasions can constitute a waiver of the
right to enforce the same or similar provisions on other occasions; (iv)
waiving any right of offset; (v) waiving any right of the statute of
limitations; (vi) directly or indirectly requiring that any consent,
modification, amendment, or waiver be in writing; (vii) purporting to exculpate
or indemnify any party against the consequences of any of its own future gross
negligence or tortious conduct; (viii) purporting to grant to any party the
right to collect attorneys' fees from any other party in any action between
them which is ultimately decided in favor of such other party; (ix) purporting
to preserve the liability of some, but not all obligors, except as provided by
the Uniform Joint Obligations Act as adopted by the State of Nevada; (x)
waiving a right to have security on an indebtedness marshaled; (xi) purporting
to require that litigation and other proceedings with respect to the
above-mentioned documents only be prosecuted in certain jurisdictions; or (xii)
providing for service of process other than as provided by law.
F. Our opinion is limited to the extent that (i) rights to
indemnity and contribution may be limited under principles of public policy or
federal securities laws; (ii) we express no opinion as to the reasonableness of
any late charge or liquidated damages; (iii) the availability of the remedy of
specific performance or injunctive relieve is subject to the discretion of the
court before which a proceeding seeking such remedy is brought; (iv) Nevada law
may restrict the enforcement of any provisions in the Transaction Documents
purporting to restrict the application of proceeds of insurance or condemnation
when there has not been an impairment of the value of collateral; and (v) a
court might not enforce certain covenants of the Transaction Documents or allow
acceleration of any amounts due thereunder if it concludes that (x) such
enforcement is not reasonably necessary for the protection of the payee's
security; (y) such enforcement or acceleration would not be commercially
reasonable, or (z) such enforcement is not undertaken in good faith under the
then existing circumstances, and the fact that each of such documents is
subject to any requirement under
<PAGE> 4
Petsec Energy, Inc.
September 30, 1997
Page 4
applicable law generally imposing an obligation of good faith or of
reasonableness in the performance and enforcement of contracts.
G. We express no opinion as to any matters of federal or state
securities law.
OPINION
Based upon and subject to the foregoing, 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, executed by the person or
persons authorized by the Company, delivered, and sold in accordance with the
Exchange Offer, the Indenture, the Purchase Agreement, and the Rights Agreement
will be valid and legally binding obligations of the Company enforceable
against the Company in accordance with their respective terms.
* * *
We are qualified to practice law in the State of Nevada and the
opinions set forth herein are expressly limited to the laws of the State of
Nevada. This letter is being furnished to you solely for your information and
may not be circulated, quoted from, or relied upon by any other person or for
any other purpose, except that we hereby consent to the filing of this opinion
as an Exhibit to the Registration Statement and to the reference to Sklar
Warren & Sylvester, Ltd. under "Legal Matters" in the Prospectus forming a part
of the Registration Statement. In giving such 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,
/s/ Sklar Warren & Sylvester, Ltd.
SKLAR WARREN & SYLVESTER, LTD.
<PAGE> 1
EXHIBIT 23.1
The Board of Directors
Petsec Energy Inc.:
We consent to the use of our report included herein and to the reference to our
firm under the headings "Selected Historical Financial Data," "Summary Financial
Data" and "Experts" in the prospectus. Our report indicates that the Parent
Company adopted the method of accounting for stock based compensation prescribed
by Statement of Financial Accounting Standards No. 123 for expense allocated to
the Company.
KPMG PEAT MARWICK LLP
New Orleans, Louisiana
October 7, 1997
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
To the Board of Directors of Petsec Energy Inc.:
We hereby consent to (i) the use in the Prospectus constituting a part of
the Registration Statement on Form S-4 filed by Petsec Energy Inc., a Nevada
corporation (the "Company"), under the Securities Act of 1933, of information
contained in our reserve report dated February 20, 1997, relating to the oil
and gas reserves and estimated future net revenues, as of December 31, 1996, of
certain properties held by the Company and (ii) all references to such report
and/or to this firm in such Prospectus, and further to our being named as an
expert therein.
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ Ryder Scott Company Petroleum Engineers
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Houston, Texas
October 7, 1997
