<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K/A
CURRENT REPORT
Pursuant to Section 13 or 15(d) of
The Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): May 1, 2000
AROC Inc.
(Exact name of registrant as specified in its charter)
Delaware 000-28463 74-2932492
---------------------------- ------------------------ ---------------------
(State or other jurisdiction (Commission File Number) (IRS Employer
of incorporation) Identification No.)
4200 East Skelly Drive, Suite 1000, Tulsa, Oklahoma 74135
--------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (918) 491-1100
--------------------------------------------------------------------------------
(Former name or former address, if changed since last report)
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
This report is filed as an amendment to the Current Report on Form 8-K of the
registrant filed May 17, 2000. It is filed to provide the financial information
required by Item 7.
Item 7. Financial Statements and Exhibits.
---------------------------------
(a) Financial statements of businesses acquired.
The financial statements for AROC Inc. (formerly EnCap Equity 1996 LP)
and the EnCap Acquisition are filed beginning on page F-1.
(b) Pro Forma Financial Information
Filed herewith, beginning on page F-23 are the unaudited pro forma
combined statements of operations of the Company as of the dates and for the
periods indicated.
The unaudited pro forma financial statements should be read in
conjunction with the separate financial statements and notes thereto for the
AROC Inc. (Formerly EnCap Equity 1996 LP) and EnCap Acquisition and the
Company's financial statements and notes thereto included in its previously
filed Form 10-K Report for its fiscal year ended April 30, 2000 and Form 10-Q
Report for the six months ended June 30, 2000. The unaudited pro forma financial
statements are not necessarily indicative of the financial position or results
of operations of the consolidated businesses that might have occurred or as may
occur in the future.
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Index to Financial Statements
<TABLE>
<CAPTION>
Page
--------
<S> <C>
Financial Statements of AROC Inc. (Formerly EnCap Equity 1996 LP)
Independent Auditor's Report F-1
Balance Sheets-December 31, 1998 and 1999 F-2
Statements of Operations-Years Ended December 31, 1997, 1998 and 1999 F-3
Statements of Stockholders' Equity and Comprehensive Income/Loss-Years
Ended December 31, 1997, 1998 and 1999 F-4
Statements of Cash Flows-Years Ended December 31, 1997, 1998 and 1999 F-5
Notes to Financial Statements F-6
Financial Statements of EnCap Acquisition
Independent Auditors' Report F-15
Statements of Revenues and Direct Operating Expenses-
For the Years Ended December 31, 1998 and 1999 and
Four Months Ended April 30, 1999 and 2000 F-16
Notes to Financial Statements F-17
Pro Forma Financial Statements
Unaudited Pro Forma Combined Statement of Operations-
Year Ended December 31, 1999 F-22
Unaudited Pro Forma Combined Statement of Operations-
For the Six Months Ended June 30, 2000 F-23
Notes to Unaudited Pro Forma Combined Financial Statements F-24
Signature F-28
</TABLE>
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
AROC Inc. and Subsidiaries
We have audited the balance sheets of AROC Inc. (formerly EnCap Equity 1996 LP)
as of December 31, 1998 and 1999, and the related statements of operations,
stockholders' equity and comprehensive income (loss), and cash flows for each of
the years in the three-year period ended December 31, 1999. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of AROC Inc. as of December 31,
1998 and 1999 and the results of its operations and its cash flows for each of
the years in the three-year period ended December 31, 1999, in conformity with
accounting principles generally accepted in the United States of America.
KPMG LLP
Tulsa, Oklahoma
October 20, 2000
F-1
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Balance Sheets
December 31, 1998 and 1999
<TABLE>
<CAPTION>
1998 1999
------------ ---------------
Assets
------
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 396,822 $ 901,546
Accounts receivable 640,407 923,813
Marketable equity securities - available for sale 3,308,868 322,166
------------ --------------
Total current assets 4,346,097 2,147,525
------------ --------------
Investment in affiliate 4,251,961 -
Oil and gas properties, full cost method 18,183,183 16,656,780
Less accumulated depreciation, depletion
and amortization (2,317,900) (3,094,393)
------------ --------------
Net oil and gas properties 15,865,283 13,562,387
------------ --------------
$ 24,463,341 $ 15,709,912
============ ==============
Liabilities and Stockholders' Equity
------------------------------------
Current liabilities:
Accounts payable $ 667,981 $ 486,676
Payable to affiliates 67,161 78,872
------------ --------------
Total current liabilities 735,142 565,548
------------ --------------
Stockholders' equity:
Common shares - par value $0.001; 100,000,000
authorized; 48,678,837 issued and outstanding 48,679 48,679
Convertible shares - par value $0.001; 10,000,000
authorized; 10,000,000 issued and outstanding 10,000 10,000
Additional paid-in capital 29,911,235 25,741,395
Accumulated other comprehensive income (6,081,623) (213,123)
Accumulated deficit (160,092) (10,442,587)
------------ --------------
Total stockholders' equity 23,728,199 15,144,364
------------ --------------
$ 24,463,341 $ 15,709,912
============ ==============
</TABLE>
See accompanying notes to financial statements.
F-2
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Statements of Operations
Years Ended December 31, 1997, 1998 and 1999
<TABLE>
<CAPTION>
1997 1998 1999
-------------- ------------- ---------------
<S> <C> <C> <C>
Oil and gas revenues $ 4,848,393 $ 3,880,237 $ 3,374,342
------------- ------------ --------------
Operating expenses:
Lease operating expenses 2,436,484 2,722,204 2,262,371
General and administrative expenses 163,015 325,885 299,256
Depreciation, depletion and amortization 1,279,563 1,018,837 776,493
------------- ------------ --------------
Total operating expenses 3,879,062 4,066,926 3,338,120
------------- ------------ --------------
Income (loss) from operations 969,331 (186,689) 36,222
------------- ------------ --------------
Other income (expense):
Impairment write-down and loss on sale of - (741,486) (6,060,890)
marketable securities
Equity in net losses of affiliate - (518,039) (4,251,961)
Other 50 (32,458) (5,866)
------------- ------------ --------------
Total other income (expense) 50 (1,291,983) (10,318,717)
------------- ------------ --------------
Net income (loss) $ 969,381 $ (1,478,672) $ (10,282,495)
============= ============ ==============
Basic income (loss) per common share $ .02 $ (0.03) $ (0.19)
============= ============ ==============
Weighted average number of shares outstanding 53,678,837 53,678,837 53,678,837
============= ============ ==============
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Statements of Stockholders' Equity and Comprehensive Income (Loss)
Years Ended December 31, 1997, 1998 and 1999
Accumulated Retained
Additional Other Earnings
Common Convertible Paid-In Comprehensive (Accumulated
Shares Shares Capital Income (Loss) Deficit) Total
-------- -------- ------------ ------------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1996 $ 48,679 $ 10,000 $ 2,935,800 $ - $ 349,199 $ 3,343,678
Contributions - - 16,480,902 - - 16,480,902
Distributions - - (1,849,161) - - (1,849,161)
Net income - - - - 969,381 969,381
-------- -------- ------------ ------------- ------------ ------------
Balance at December 31, 1997 48,679 10,000 17,567,541 - 1,318,580 18,944,800
Contributions - - 17,661,200 - - 17,661,200
Distributions - - (5,317,506) - - (5,317,506)
Comprehensive income (loss):
Net loss - - - - (1,478,672) (1,478,672)
Net unrealized change in marketable
equity securities - - - (6,081,623) - (6,081,623)
------------
Total comprehensive loss (7,560,295)
-------- -------- ------------ ------------- ------------ ------------
Balance at December 31, 1998 48,679 10,000 29,911,235 (6,081,623) (160,092) 23,728,199
Contributions - - 1,846,287 - - 1,846,287
Distributions - - (6,016,127) - - (6,016,127)
Comprehensive income (loss):
Net loss - - - - (10,282,495) (10,282,495)
Net unrealized change in marketable
equity securities - - - 5,868,500 - 5,868,500
------------
Total comprehensive loss (4,413,995)
-------- -------- ------------ ------------- ------------ ------------
Balance at December 31, 1999 $ 48,679 $ 10,000 $ 25,741,395 $ (213,123) $(10,442,587) $ 15,144,364
======== ======== ============ ============= ============ ============
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Statements of Cash Flows
Years Ended December 31, 1997, 1998, and 1999
<TABLE>
<CAPTION>
1997 1998 1999
--------------- --------------- ---------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 969,381 $ (1,478,672) $ (10,282,495)
Adjustments to reconcile net income (loss) to net
cash provided by (used in) operating activities:
Depreciation, depletion and amortization 1,279,563 1,018,837 776,493
Impairment writedown and loss on sale of - 741,486 6,060,890
marketable securities
Equity in net losses of affiliate - 518,039 4,251,961
Changes in assets and liabilities:
Accounts receivable (573,188) 200,535 (283,406)
Other assets (50,314) 74,375 -
Accounts payable 1,641,696 (1,360,952) (181,305)
Payable to affiliates 302,561 (281,830) 11,711
--------------- --------------- ---------------
Net cash provided by (used in) operating
activities 3,569,699 (568,182) 353,849
--------------- --------------- ---------------
Cash flows from investing activities:
Proceeds from sale of oil and gas properties - 3,219,862 2,540,918
Additions to oil and gas properties (17,872,720) (7,301,492) (1,014,515)
Proceeds from sale of marketable equity securities - 1,073,515 2,794,312
available for sale
Purchase of marketable equity securities - (4,146,033) -
Investment in affiliate - (4,770,000) -
--------------- --------------- ---------------
Net cash provided by (used in) investing activities (17,872,720) (11,924,148) 4,320,715
--------------- --------------- ---------------
Cash flows from financing activities:
Contributions 16,480,902 17,661,200 1,846,287
Distributions (1,849,161) (5,317,506) (6,016,127)
--------------- --------------- ---------------
Net cash provided by (used in) financing activities 14,631,741 12,343,694 (4,169,840)
--------------- --------------- ---------------
Net increase (decrease) in cash 328,720 (148,636) 504,724
Cash at beginning of period 216,738 545,458 396,822
--------------- --------------- ---------------
Cash at end of period $ 545,458 $ 396,822 $ 901,546
=============== =============== ===============
Supplemental disclosure of non-cash investing and
financing activity -
Marketable equity securities (fair value) received
from sale of interest in oil and gas properties $ - $ 6,257,820 $ -
=============== =============== ===============
</TABLE>
F-5
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Notes to Financial Statements
1. Organization
As a result of the May 2, 2000 transactions described below, EnCap Equity
1996 Limited Partnership (EnCap 1996 LP) became the largest stockholder
(approximately 39%) of AROC Inc. (old AROC). Although old AROC is the legal
acquirer, EnCap 1996 LP is treated as having acquired old AROC for
accounting purposes. Accordingly, the transactions have been accounted for
as a reverse acquisition and EnCap 1996 LP is now referred to as AROC or
the Company. The historical financial statements are those of EnCap 1996
LP, which have been restated for the equivalent number of shares received
in the merger. The results of operations of AROC (legal acquirer) will be
included in the financial statements of the combined AROC and EnCap 1996 LP
financial statements from May 2, 2000 (acquisition date).
On May 2, 2000, pursuant to four separate Purchase and Sale agreements by
and between (i) EnCap Equity 1994 Limited Partnership (EnCap 1994 LP), (ii)
Energy Capital Investment Company PLC (ECIC) and ECIC Corporation, (iii)
EnCap 1996 LP, and (iv) Mountaineer Limited Partnership (together the
Sellers) and old AROC, old AROC acquired direct or indirect ownership of
oil and gas properties located in Texas, Louisiana, New Mexico and Wyoming
(EnCap Acquisition). The properties were acquired in exchange for the
issuance to the Sellers of an aggregate of 930,140 shares of the Company's
Series A Voting Redeemable Preferred Stock.
Also, on May 2, 2000, old AROC sold to Bank of America, EnCap 1996 LP,
ECIC, El Paso Capital Investments, L.L.C. (El Paso), EF-II Holdings, LLC
(EF-II), Picosa Creek Limited Partnership (Picosa) and EnCap Investments,
L.L.C. (EnCap Investments) 850,163 shares of the Company's newly created
Series A Voting Redeemable Preferred Stock for a total consideration of
approximately $42.5 million, received in satisfaction of outstanding
obligations to those parties and in consideration of cash (approximately
$2,700,000) and the purchase of an oil and gas property interest (valued at
approximately $2,000,000).
The Series A Voting Redeemable Preferred Stock accrues cumulative dividends
at the rate of $5.00 per share per year, payable semiannually. Until May 1,
2002, dividends are payable in kind through the issuance of additional
shares of preferred stock at a price equal to the fair market value of the
preferred stock at the time of the payment. The preferred stock has a
liquidation preference of $50.00 per share and may be redeemable at $50.00
per share at either AROC's or the holder's option upon the occurrence of
certain events. Each share of preferred stock is convertible at any time
into 384.6 shares of AROC's common stock and has the right to vote in all
matters on the same basis as if the preferred stock had been converted into
common stock. The terms of the preferred stock prohibit AROC from taking
certain actions without the consent of the holders of the preferred stock.
Upon the first to occur of (1) an event of default, as defined, or (2) May
1, 2005, each holder of a share of Series A Voting Redeemable Preferred
Stock shall be entitled to require that AROC redeem all of the Series A
Voting Redeemable Preferred Stock held by such holder by paying in cash the
redemption price ($50.00 per share plus unpaid dividends).
Pursuant to a Credit Agreement dated as of May 2, 2000, among AROC, Toronto
Dominion (Texas), Inc., individually and as Agent, and the lenders named in
that agreement (the "Credit Agreement"), the Company obtained a new
$35,000,000 credit facility. The credit facility is secured by a first lien
on substantially all of the Company's assets. The credit facility imposes
certain restrictions on the Company's activities, including the payment of
dividends and purchases of stock. The credit facility provides for a
revolving line of credit for three years. Borrowings under the credit
facility bear interest at either the LIBOR rate plus from 1.75% to 2.5% or
the agent's prime rate plus from .25% to 1.0%, at the Company's election.
Interest is payable quarterly beginning July 31, 2000. Principal is payable
in full on the third anniversary of the closing of the credit facility. The
borrowing base for the credit facility will typically be redetermined
semiannually, although the lenders and borrowers have the right to make a
redetermination at any time.
F-6
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Notes to Financial Statements
In addition, on May 2, 2000, old AROC entered into a purchase agreement
providing for the sale to EnCap 1996 LP, ECIC and El Paso of a total of
$17,000,000 in subordinated notes in exchange for cash in that amount. The
subordinated notes bear interest at the rate of 12% per year, payable
semiannually. Principal is due May 1, 2007. Until May 1, 2002, interest is
payable in kind by increasing the principal amount of the debt.
Additionally, old AROC also issued to EnCap 1996 LP, ECIC and El Paso
warrants to purchase a total of 39,541,233 shares of AROC's common stock at
a price of $0.01 per share at any time until April 30, 2007 pursuant to
such purchase agreement.
After these transactions, AROC has outstanding 55,278,837 shares of common
stock, 10,000,000 convertible restricted voting shares, warrants to
purchase 45,813,963 shares of common stock, and 1,780,303 shares of Series
A Voting Redeemable Preferred Stock that are convertible into an aggregate
of 684,731,923 shares of common stock.
The accompanying financial statements include AROC's pro rata share of the
assets and liabilities of Mountaineer Ltd. Partnership, Famcor Oil
W.T.L.P., Pledger Partners, Ltd., St. Martinville Partners, Ltd., and
Wheel-Moore, Ltd.
The Company is engaged in the exploration, development, production and
operation of oil and gas properties. Operations are primarily conducted in
Texas, Louisiana, New Mexico and Wyoming.
2. Summary of Significant Accounting Principles
Cash Equivalents
For purposes of the statements of cash flows, the Company treats all
investments with an original maturity of three months or less at date of
purchase to be cash equivalents.
Investment in Affiliate
The investment in affiliate has been accounted for on the equity method.
The equity method of accounting is used for companies and other investments
in which the Company has significant influence, generally this represents
common stock ownership or partnership equity of approximately 20% and not
more than 50%.
Marketable Equity Securities
Marketable securities consist of equity securities, which are classified as
available-for-sale. Available-for-sale securities are recorded at fair
value. Unrealized holding gains and losses are excluded from earnings and
are reported as a separate component of other comprehensive income until
realized.
A decline in the market value of any available-for-sale security below cost
that is deemed other than temporary is charged to operations, resulting in
the establishment of a new cost basis for the security. Dividend income is
recognized when earned. The Company recorded a charge to operations of
approximately $1,600,000 in 1999 due to an other than temporary decline in
market value of available-for-sale securities.
Financial Instruments and Derivatives
The carrying amounts of the Company's financial instruments, which include
cash equivalents, accounts receivable, accounts payable and payable to
affiliates, approximate fair values because of their short-term nature.
F-7
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Notes to Financial Statements
Changes in value of financial instruments, utilized to hedge commodity
price risk are recognized in the statement of operations when the underling
transactions are recognized. Changes in value of financial instruments
which do not meet the criteria to be treated as a hedge of an underlying
risk are recognized in the statements of operations as they occur.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas
operations whereby all costs of exploring for and developing oil and gas
reserves are capitalized as tangible fixed assets. Such costs include lease
acquisition costs, geological costs, the costs of drilling both productive
and non-productive wells, capitalized interest, production equipment and
related overhead costs. Capitalized costs, plus estimated future
development costs, are accumulated in pools on a country-by-country basis
and depleted using the unit-of-production method based upon estimated net
proved reserve volumes. Reserve volumes are combined into equivalent units
using approximate relative energy content.
Costs of acquiring and evaluating unproved properties and major development
projects are excluded from the depletion calculation until it is determined
whether or not proved reserves are attributable to the properties, the
major development projects are completed, or impairment occurs, at which
point such costs are transferred into the pool.
Proceeds from the sale or disposal of properties are deducted from the
relevant cost pool except for sales involving significant reserves where a
gain or loss is recognized.
The Company performs a "ceiling test" calculation in line with industry
practice. Costs permitted to be accumulated in respect of each cost pool
are limited to the future estimated net recoverable amounts from estimated
production of proved reserves. Future estimated net recoverable amounts are
determined after discounting and using prices and cost levels at the
balance sheet date.
Provision is made for abandonment costs net of estimated salvage values, on
a unit-of-production basis, where appropriate.
Revenues
Oil and gas revenues are recognized on the sales method. Under this method,
revenues are recognized based on actual volumes of oil and gas sold to
purchasers.
Comprehensive Income (Loss)
The Company follows FAS 130, "Reporting Comprehensive Income" which
established standards for reporting and display of comprehensive income and
its components in a full set of general-purpose financial statements. The
components of total comprehensive income (loss) for the periods presented
consist of net income (loss) and net unrealized changes in marketable
equity securities and are presented in the statements of stockholders'
equity and comprehensive income (loss).
Accounting Estimates
In the course of preparing financial statements, management makes various
assumptions and estimates to determine the reported amounts of assets,
liabilities, revenue and expenses and in relation to the disclosure of
commitments and contingencies. Changes in these assumptions and estimates
will occur as a result of the passage of time and the occurrence of future
events and, accordingly, the actual results could differ from the amounts
estimated.
F-8
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Notes to Financial Statements
Income Taxes
AROC is not currently subject to taxation, and the tax effects of its
activities accrue to the individual partners of EnCap 1996 LP. Accordingly,
no provision for income taxes is included in the accompanying financial
statements. AROC's tax returns are subject to examination by the federal
and state taxing authorities. If such examinations result in adjustments,
the tax liability of the former partners of EnCap Equity 1996 LP, if any,
would accordingly be adjusted. After the May 2, 2000 transactions discussed
in note 1, AROC is a taxable corporation.
Income (Loss) Per Share
Basic income (loss) per share has been computed by dividing the net income
(loss) attributable to common stockholders by the weighted average number
of common shares and convertible shares (convertible at any time into a
minimum of 5,000,000 common shares-see note 7) outstanding during the
period.
3. Investment in Affiliate
On October 31, 1998, AROC acquired 11,250,000 common shares of old AROC for
$4,770,000 cash. The investment represented approximately 20% of the old
AROC shares outstanding. The following summarizes AROC's investment in old
AROC for the period from acquisition through December 31, 1999 (in
thousands):
1998 1999
------- -------
Investment at beginning of year $ - $ 4,252
Acquisition of AROC common stock 4,770 -
Equity in net losses 518 4,252
------- -------
Investment at end of year $ 4,252 $ -
======= =======
The Company discontinued the equity method when its investment was reduced
to zero as it has no funding requirements or contingent liabilities with
regard to old AROC.
Old AROC and its subsidiaries were engaged in oil and gas exploration,
development and production in the United States and United Kingdom.
Summarized financial information for old AROC and subsidiaries as of and
for their fiscal years ended April 30, 1999 and 2000 follows (in
thousands):
1999 2000
-------- --------
Current assets $ 2,451 $ 3,229
Net property, plant and equipment 30,355 40,200
Other assets 3,357 2,936
Current liabilities 8,072 10,151
Non-current liabilities 44,727 63,057
-------- --------
Stockholders' deficit $(16,636) $(26,843)
======== ========
Oil and gas revenues $ 6,234 $ 12,506
======== ========
Impairment of oil and gas properties $(28,260) $ (2,500)
======== ========
Net loss $(34,464) $(10,974)
======== ========
F-9
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Notes to Financial Statements
AROC's equity in old AROC net losses is based on old AROC's January 31
financial statements.
4. Related Party Transactions
During 1997, certain shareholders of AROC (certain partners of EnCap 1996
LP) purchased and subsequently sold or contributed (at approximately the
same amount) to the Company oil and gas properties of approximately
$10,903,000.
5. Disposition of Oil and Gas Properties
During the years ended December 31, 1999 and 1998, the Company sold oil and
gas properties for approximately $2,541,000 and $9,500,000, respectively.
Proceeds from such sales have been credited to the full cost pool. No sales
occurred in 1997.
6. Oil and Gas Contract
On December 1, 1999, the Company entered into a sales agreement to sell
approximately 200 bbls produced per day from specific oil leases to a third
party at a price of $19.12 per bbl. The contract expires on November 30,
2000.
7. Capital Stock
Each convertible share is entitled to one-half vote on all matters in which
the common shares are entitled to vote and have rights identical to the
common shares except for certain restrictions on transfer. In addition, the
holders of the convertible shares have a contingent right to acquire from
5,000,000 to 20,000,000 common shares prior to 2003.
8. Significant Customers
Oil and gas sales to 5 customers constitute substantially all of the
Company's revenues. There are adequate buyers or purchasers of the
Company's production such that management believes the loss of one or more
of the above customers would not have a material adverse effect on the
results of operations of the Company.
F-10
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Notes to Financial Statements
9. Supplemental Financial Information for Oil and Gas Producing Activities
(Unaudited)
Results of Operations from Oil and Gas Producing Activities
The following sets forth certain information with respect to the Company's
results of operations from oil and gas producing activities for the years
ended December 31, 1997, 1998, and 1999 (in thousands):
<TABLE>
<CAPTION>
United States
-------------------------------------------
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Revenues $ 4,848 $ 3,880 $ 3,374
Production costs (2,042) (2,434) (2,064)
Gross production taxes (395) (288) (198)
Depreciation, depletion and impairments (1,280) (1,019) (776)
--------- --------- ---------
Results of operations (excluding corporate
overhead and interest costs) $ 1,131 $ 139 $ 336
========= ========= =========
</TABLE>
All of the Company's oil and gas producing activities are located
within the United States.
Capitalized Costs and Cost Incurred Relating to Oil and Gas Activities
The following sets forth certain information with respect to the Company's
capitalized costs and costs associated with oil and gas activities for the
years ended December 31, 1997, 1998, and 1999 (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
--------- --------- ---------
<S> <C> <C> <C>
Capitalized costs $ 21,204 $ 18,183 $ 16,656
Less accumulated depreciation,
depletion and amortization (1,342) (2,318) (3,094)
--------- --------- ---------
Net capitalized costs $ 19,862 $ 15,865 $ 13,562
========= ========= =========
Costs incurred during the year:
Exploration costs $ 966 $ 201 $ 544
========= ========= =========
Development costs $ 6,004 $ 7,101 $ 471
========= ========= =========
Purchase of minerals in place $ 10,903 $ - $ -
========= ========= =========
</TABLE>
Estimated Quantities of Proved Oil and Gas Reserves
The estimates of proved oil and gas reserves were prepared by independent
petroleum engineers. The Company emphasizes that reserve estimates are
inherently imprecise. Accordingly, the estimates are expected to change as
more current information becomes available. In addition, a portion of the
proved reserves are undeveloped, which increases the imprecision inherent
in estimating reserves which may ultimately be produced.
F-11
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Notes to Financial Statements
Proved reserves are 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. Proved
developed reserves are those which are expected to be recovered through
existing wells with existing equipment and operating methods.
The following is an analysis of the Company's proved oil and gas reserves.
Oil (MBbls) Gas (Mmcf)
---------- ---------
Proved reserves at December 31, 1996 310.1 7,225
Revisions of previous estimates (89.2) (2,077)
Production (184.6) (718)
Purchases of reserves-in-place 5,662.8 17,406
---------- ---------
Proved reserves at December 31, 1997 5,699.1 21,836
Revisions of previous estimates 916.4 1,596
Production (193.2) (631)
Sales of reserves-in-place (1,553.0) (4,309)
---------- ---------
Proved reserves at December 31, 1998 4,869.3 18,492
Revisions of previous estimates 131.2 (10,460)
Production (151.0) (361)
---------- ---------
Proved reserves at December 31, 1999 4,849.5 7,671
========== =========
Proved developed reserves at:
December 31, 1997 1,395.2 10,011
December 31, 1998 2,195.8 3,077
December 31, 1999 2,302.0 2,286
Standardized Measure of Discounted Future Net Cash Flows of Proved Oil and
Gas Reserves
The Company has estimated the standardized measure of discounted future net
cash flows and changes therein relating to proved oil and gas reserves in
accordance with the standards established by the Financial Accounting
Standards Board through its Statement No. 69. The estimates of future cash
flows and future production and development costs are based on year-end
sales prices for oil and gas, estimated future production of proved
reserves, and estimated future production and development costs of proved
reserves, based on current costs and economic conditions. The estimated
future net cash flows are then discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and production costs and risks associated with future
production. Because of these and other considerations, any estimate of fair
market value is necessarily subjective and imprecise.
F-12
<PAGE>
AROC Inc.
(Formerly EnCap Equity 1996 LP)
Notes to Financial Statements
The following are the Company's estimated standardized measure of
discounted future net cash flows for the years ended December 31, 1997,
1998 and 1999 (in thousands):
<TABLE>
<S> <C> <C> <C>
1997 1998 1999
---------- ---------- ----------
Future cash inflows $ 149,575 $ 89,557 $ 140,486
Future production and development
costs (66,066) (42,600) (52,244)
---------- ---------- ----------
Future net cash inflows 83,509 46,957 88,242
10% annual discount for estimated
timing of cash flows (33,054) (16,528) (40,839)
---------- ---------- ----------
Standardized measure of discounted
future net cash flows $ 50,455 $ 30,429 $ 47,403
========== ========== ==========
</TABLE>
The following are the sources of changes in the standardized measure of
discounted future net cash flows (in thousands):
<TABLE>
<CAPTION>
1997 1998 1999
---------- ---------- ----------
<S> <C> <C> <C>
Beginning of period $ 9,777 $ 50,455 $ 30,429
Increases (decreases)
Sales, net of production costs (2,412) (1,158) (1,112)
Net change in sales prices, net
of production costs 4,084 (16,371) 42,929
Changes in estimated future
development costs (4,105) (3,999) (110)
Revisions of previous quantity
estimates (4,152) 5,818 (16,574)
Accretion of discount 978 5,045 3,043
Purchases of reserves-in-place 40,900 - -
Sales of reserves-in-place - (11,745) -
Changes of production rates,
timing and other 5,385 2,384 (11,202)
---------- ---------- ----------
End of period $ 50,455 $ 30,429 $ 47,403
========== ========== ==========
</TABLE>
F-13
<PAGE>
EnCap Acquisition
Statements of Revenues and Direct Operating Expenses
December 31, 1998 and 1999
(With Independent Auditors' Report)
F-14
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
AROC Inc.:
We have audited the accompanying statements of revenues and direct
operating expenses of the oil and gas properties acquired (the "EnCap
Acquisition") for the years ended December 31, 1998 and 1999. These statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the
statements of revenues and direct operating expenses are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying statements of revenues and direct operating expenses were
prepared to present revenues and direct operating expenses of the oil and gas
properties acquired and are not intended to be a complete presentation of the
EnCap Acquisition revenues and expenses.
In our opinion, the statements of revenues and direct operating expenses
referred to above present fairly, in all material respects, the revenues and
direct operating expenses of the EnCap Acquisition for the years ended December
31, 1998 and 1999, in conformity with accounting principles generally accepted
in the United States of America.
KPMG LLP
Tulsa, Oklahoma
October 20, 2000
F-15
<PAGE>
EnCap Acquisition
Statements of Revenues and Direct Operating Expenses
For the Years Ended December 31, 1998 and 1999 and
Four Months Ended April 30, 1999 and 2000
<TABLE>
<CAPTION>
Four Months Ended
December 31 April 30
------------------------ -------------------------
<S> <C> <C> <C> <C>
1998 1999 1999 2000
----------- ----------- ----------- -----------
(unaudited) (unaudited)
Oil and gas revenue $2,117,136 $2,649,700 $503,620 $1,509,992
Direct operating expenses
Lease operating 1,733,076 2,100,238 550,904 902,836
Production taxes 154,029 175,016 33,649 84,189
---------- ---------- -------- ----------
1,887,105 2,275,254 584,553 987,025
---------- ---------- -------- ----------
Revenues in excess of
(less than) direct
operating expenses $ 230,031 $ 374,446 $(80,933) $ 522,967
========== ========== ======== ==========
</TABLE>
F-16
<PAGE>
EnCap Acquisition
Notes to Financial Statements
(1) General
As a result of the May 2, 2000 transactions described below, EnCap Equity
1996 Limited Partnership (EnCap 1996 LP) became the largest stockholder
(approximately 39%) of AROC Inc. (old AROC). Although old AROC is the legal
acquirer, EnCap 1996 LP is treated as having acquired old AROC for
accounting purposes. Accordingly, the transactions have been accounted for
as a reverse acquisition and EnCap 1996 LP is now referred to as AROC or
the Company. The historical financial statements are those of EnCap 1996
LP, which have been restated for the equivalent number of shares received
in the merger. The results of operations of AROC (legal acquirer) will be
included in the financial statements of the combined AROC and EnCap 1996 LP
financial statements from May 2, 2000 (acquisition date).
On May 2, 2000, pursuant to four separate Purchase and Sale Agreements by
and between (i) EnCap Equity 1994 Limited Partnership (EnCap 1994 LP), (ii)
Energy Capital Investment Company PLC (ECIC) and ECIC Corporation, (iii)
EnCap 1996 LP, and (iv) Mountaineer Limited Partnership (together the
Sellers) and old AROC, old AROC acquired direct or indirect ownership of
oil and gas properties located in Texas, Louisiana, New Mexico and Wyoming
("EnCap Acquisition"). The properties were acquired in exchange for the
issuance to the Sellers of an aggregate of 930,140 shares of the Company
Series A Voting Redeemable Preferred Stock.
Also, on May 2, 2000, old AROC sold to Bank of America, EnCap 1996 LP,
ECIC, El Paso Capital Investments, L.L.C. (El Paso), EF-II Holdings, LLC
(EF-II), Picosa Creek Limited Partnership (Picosa) and EnCap Investments,
L.L.C. (EnCap Investments) 850,163 shares of the Company's newly created
Series A Voting Redeemable Preferred Stock for a total consideration of
approximately $42.5 million, received in satisfaction of outstanding
obligations to those parties and in consideration of cash (approximately
$2,700,000) and the purchase of an oil and gas property interest (valued at
approximately $2,000,000).
In addition, on May 2, 2000, old AROC entered into a purchase agreement
providing for the sale to EnCap 1996 LP, ECIC and El Paso (together the
EnCap affiliates) of a total of $17,000,000 in subordinated notes in
exchange for cash in that amount. The subordinated notes bear interest at
the rate of 12% per year, payable semiannually. Principal is due May 1,
2007. Until May 1, 2002, interest is payable in kind by increasing the
principal amount of the debt. Additionally, AROC also issued to the EnCap
affiliates warrants to purchase a total of 39,451,233 shares of AROC's
common stock at a price of $0.01 per share at any time until April 30, 2007
pursuant to such purchase agreement.
(2) Basis of Presentation
The accompanying statements of revenues and direct operating expenses for
AROC's proportionate share of properties acquired from EnCap 1994 LP and
ECIC do not include general and administrative expenses, interest income or
expense, a provision for depreciation, depletion and amortization, or any
provision for income taxes since these historical expenses incurred by
EnCap 1994 and ECIC are not necessarily indicative of the costs to be
incurred by AROC.
Revenues in the accompanying statements of revenues are recognized on the
sales method. Under this method, revenues are recognized based on actual
volumes of oil and gas sold to purchasers. Direct operating expenses are
recognized on the accrual method.
F-17
<PAGE>
EnCap Acquisitions
Notes to Financial Statements
Preparation of the accompanying statements of revenues and direct operating
expenses requires management to make estimates and assumptions that affect
the reported amounts of revenues and direct operating expenses during the
reporting periods. Actual results could differ from those estimates.
(3) Interim Statements of Revenues and Direct Operating Expenses
The interim financial information for the periods ended April 30, 1999 and
2000 is unaudited. However, in the opinion of management, the interim
statements of revenues and direct operating expenses include all the
necessary adjustments to fairly present the results of the interim periods
and all such adjustments are of a normal recurring nature. The interim
statements of revenues and direct operating expenses should be read in
conjunction with the audited statements of revenues and direct operating
expenses for the years ended December 31, 1998 and 1999.
(4) Supplementary Financial Information for Oil and Gas Producing
Activities (Unaudited)
Estimated Quantities of Proved Oil and Gas Reserves
Reserve information presented below for the EnCap Acquisition, as of
January 1, 1998, December 31, 1998 and 1999, is based on reserve estimates
prepared by independent petroleum engineers, using prices and costs in
effect at each date. Changes in reserve estimates were derived by adjusting
such quantities and values for actual production using historical prices
and costs.
Proved reserves are estimated quantities of crude oil and natural gas which
geological and engineering data demonstrate with reasonable certainty to be
recoverable in future years from known reservoirs under existing economic
and operating conditions. Proved developed reserves are those which are
expected to be recovered through existing wells with existing equipment and
operating methods. Oil and gas reserve quantity estimates are subject to
numerous uncertainties inherent in the estimation of quantities of proved
reserves and in the projection of future rates of production and the timing
of development expenditures. The accuracy of such estimates is a function
of the quality of available data and of engineering and geological
interpretation and judgment. Results of subsequent drilling, testing and
production may cause either upward or downward revision of previous
estimates. Furthermore, the volumes considered to be commercially
recoverable fluctuate with changes in prices and operating costs. Reserve
estimates are inherently imprecise and estimates of new discoveries are
more imprecise than those of currently producing oil and gas properties.
Accordingly, these reserve estimates are expected to change as additional
information becomes available in the future.
F-18
<PAGE>
EnCap Acquisition
Notes to Financial Statements
Below are the net estimated quantities of proved reserves and proved
developed reserves for the EnCap Acquisition:
<TABLE>
<CAPTION>
Oil Gas
(MBbls) (MMcf)
------- ------
<S> <C> <C>
Proved reserves at January 1, 1998 5,027.1 8,383
Production (159.1) (297)
Revisions of previous estimates 40.9 644
------- -----
Proved reserves at December 31, 1998 4,908.9 8,730
Production (122.7) (226)
Revisions of previous estimates 506.4 (4,156)
------- -----
Proved reserves at December 31, 1999 5,292.6 4,348
======= =====
Proved developed reserves:
January 1, 1998 1,617.4 3,666
December 31, 1998 1,760.7 1,991
December 31, 1999 2,905.1 1,758
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows of Proved Oil and
Gas Reserves
The estimated standardized measure of discounted future net cash flows and
changes therein relating to proved oil and gas reserves are prepared in
accordance with the standards established by the Financial Accounting
Standards Board through its Statement No. 69. The estimates of future cash
flows and future production and development costs are based on year-end
sales prices for oil and gas, estimated future production of proved
reserves, and estimated future production and development costs of proved
reserves, based on current costs and economic conditions. The estimated
future net cash flows are then discounted at a rate of 10%.
Discounted future net cash flow estimates like those shown below are not
intended to represent estimates of the fair market value of oil and gas
properties. Estimates of fair market value should also consider probable
reserves, anticipated future oil and gas prices, interest rates, changes in
development and productions costs and risks associated with future
production. Because of these and other considerations, any estimate of fair
market value is necessarily subjective and imprecise.
The following are the estimated standardized measure of discounted future
net cash flows from proved reserves attributable to the EnCap Acquisition
(in thousands):
<TABLE>
<CAPTION>
December 31
-----------------------
1998 1999
-------- --------
<S> <C> <C>
Future cash inflows $ 69,908 $140,726
Production and development costs (35,544) (47,888)
-------- --------
Future net cash flows 34,364 92,838
10% annual discount for estimated
timing of cash flows (14,945) (40,961)
-------- --------
Standardized measure of discounted
future net cash flows $ 19,419 $ 51,877
======== ========
</TABLE>
F-19
<PAGE>
EnCap Acquisition
Notes to Financial Statements
The following are the sources of changes in the standardized measure of
discounted net cash flows before income taxes (in thousands):
<TABLE>
<CAPTION>
December 31
-----------------------------
1998 1999
-------- -------
<S> <C> <C>
Standardized measure, beginning of period $35,432 $19,419
Sales, net of production costs (230) (374)
Net change in sales prices, net of
production costs (17,723) 35,391
Revisions of previous quantity estimates 499 (1,741)
Accretion of discount 3,543 1,943
Changes in estimated future development costs (1,309) (875)
Changes of production rates, timing and other (793) (1,886)
------- -------
Standardized measure, end of period $19,419 $51,877
======= =======
</TABLE>
F-20
<PAGE>
AROC Inc.
(Formerly EnCap 1996 LP)
Unaudited Pro Forma Combined Financial Statements
As a result of the May 2, 2000 transactions described herein, EnCap Equity 1996
Limited Partnership (EnCap 1996 LP) became the largest stockholder
(approximately 39%) of AROC Inc. (old AROC). Although old AROC is the legal
acquirer, EnCap 1996 LP is treated as having acquired old AROC for accounting
purposes. Accordingly, the transactions have been accounted for as a reverse
acquisition and EnCap 1996 LP is now referred to as AROC or the Company. The
historical financial statements are those of EnCap 1996 LP, which have been
restated for the equivalent number of shares received in the merger. The results
of operations of old AROC (legal acquirer) will be included in the financial
statements of the combined old AROC and EnCap 1996 LP financial statements from
May 2, 2000 (acquisition date). As AROC is the legal acquirer, these financial
statements are considered those of AROC.
The following unaudited pro forma combined statements of operations have been
prepared to give effect to the May 2, 2000; (i) reverse acquisition of AROC Inc.
(legal acquirer) by EnCap 1996 LP (accounting acquirer), (ii) the acquisition of
interests in oil and gas properties (EnCap Acquisition) and (iii) the
refinancing of AROC debt, as if these transactions had taken place on January 1,
1999.
The unaudited pro forma combined financial statements included herein are not
necessarily indicative of the results that might have occurred had the
transactions taken place at the date specified and are not intended to be a
projection of future results. In addition, future results may vary significantly
from the results reflected in the accompanying unaudited pro forma combined
financial statements because of normal production declines, changes in product
prices, future acquisitions and divestitures, and other factors. The
acquisitions are accounted for under the purchase method of accounting.
The following unaudited pro forma combined financial statements should be read
in conjunction with the financial statements and the related notes of AROC Inc.
and the EnCap Acquisition.
F-21
<PAGE>
AROC Inc.
(Formerly EnCap 1996 LP)
Unaudited Pro Forma Combined Statement of Operations
Year ended December 31, 1999
<TABLE>
<CAPTION>
EnCap
AROC Old AROC Acquisition
Historical Historical Year
Year ended Year ended ended Pro Forma Pro Forma
12/31/99 01/31/00 12/31/99 Adjustments Combined
------------- ------------ ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Oil and gas revenues $ 3,374 $ 10,038 $ 2,650 $ - $ 16,062
------------- ------------ ------------ ------------ -----------
Operating expenses:
Lease operating expenses 2,262 5,009 2,275 - 9,546
General and administrative expenses 299 3,497 - - 3,796
Depreciation, depletion and amortization 777 2,505 - (a) 2,043 5,325
Impairment of oil and gas properties - 30,760 - - 30,760
------------- ------------ ------------ ------------ -----------
Total operating expenses 3,338 41,771 2,275 2,043 49,427
------------- ------------ ------------ ------------ -----------
Income (loss) from operations 36 (31,733) 375 (2,043) (33,365)
------------- ------------ ------------ ------------ -----------
Other income (expense):
Interest income 2 30 - - 32
Interest expense - (5,898) - (b) (390) -
(c) 698
(d) (1,888)
(e) (1,509)
(f) 5,476 (3,511)
Equity in old AROC Inc. net losses (4,252) - - (g) 4,252 -
Impairment writedown and loss on sale of
marketable securities (6,061) - - (h) 6,061 -
Miscellaneous income (8) 415 - - 407
------------- ------------ ------------ ------------ -----------
Total other income (expense) (10,319) (5,453) - 12,700 (3,072)
------------- ------------ ------------ ------------ -----------
Net income (loss) (10,283) (37,186) 375 10,657 (36,437)
Preferred stock dividends - - - (i) 8,901 8,901
------------- ------------ ------------ ------------ -----------
Net income (loss) for common shareholders $ (10,283) $ (37,186) $ 375 $ 1,756 $ (45,338)
============= ============ ============ ============ ===========
Loss per common share $ (0.19) $ (0.71) $ (0.86)
============= ============ ===========
Weighted average number of shares
outstanding 53,678,837 52,663,448 52,663,448
============= ============ ===========
</TABLE>
F-22
<PAGE>
AROC Inc.
(Formerly EnCap 1996 LP)
Unaudited Pro Forma Combined Statement of Operations
Six months ended June 30, 2000
<TABLE>
<CAPTION>
AROC Old AROC EnCap
Historical Historical Acquisition
Six months Four months Four months
ended ended ended Pro Forma Pro Forma
06/30/00 04/30/00 04/30/00 Adjustments Combined
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Oil and gas revenues $ 5,545 $ 5,207 $ 1,510 $ - $ 12,262
------------ ------------ ------------ ------------ ------------
Operating expenses:
Lease operating expenses 2,407 2,923 987 - 6,317
General and administrative expenses 648 1,829 - - 2,477
Depreciation, depletion and amortization 1,245 1,011 - (a) 775 3,031
------------ ------------ ------------ ------------ ------------
Total operating expenses 4,300 5,763 987 775 11,825
------------ ------------ ------------ ------------ ------------
Income (loss) from operations 1,245 (556) 523 (775) 437
------------ ------------ ------------ ------------ ------------
Other income (expense):
Interest income - 8 - - 8
Interest expense (756) (2,960) - (b) (130) -
(c) 233
(d) (689)
(e) (906)
(f) 2,683 (2,525)
Impairment writedown and loss on sale of
marketable securities (263) - - (h) 263 -
Miscellaneous income (32) 53 - - 21
------------ ------------ ------------ ------------ ------------
Total other expense (1,051) (2,899) - 1,454 (2,496)
------------ ------------ ------------ ------------ ------------
Net income (loss) 194 (3,455) 523 679 (2,059)
Preferred stock dividends 1,484 - - (i) 2,966 4,450
------------ ------------ ------------ ------------ ------------
Net income (loss) for common shareholders $ (1,290) $ (3,455) $ 523 $ (2,287) $ (6,509)
============ ============ ============ ============ ============
Loss per common share $ (0.02) $ (0.06) $ (0.12)
============ ============ ============
Weighted average number of shares
outstanding 53,678,837 53,678,837 53,678,837
============ ============ ============
</TABLE>
F-23
<PAGE>
AROC Inc.
(Formerly EnCap 1996 LP)
Notes to Unaudited Pro Forma Combined Financial Statements
Note 1. Basis of Presentation
As a result of the May 2, 2000 transactions described below, EnCap
Equity 1996 Limited Partnership (EnCap 1996 LP) became the largest stockholder
(approximately 39%) of AROC Inc. (old AROC). Although old AROC is the legal
acquirer, EnCap 1996 LP is treated as having acquired old AROC for accounting
purposes. Accordingly, the transactions have been accounted for as a reverse
acquisition and EnCap 1996 LP is now referred to as AROC or the Company. The
historical financial statements are those of EnCap 1996 LP, which have been
restated for the equivalent number of shares received in the merger. The results
of operations of AROC (legal acquirer) will be included in the financial
statements of the combined AROC and EnCap 1996 LP financial statements from May
2, 2000 (acquisition date). As AROC is the legal acquirer, these financial
statements are considered those of AROC.
On May 2, 2000, pursuant to four separate Purchase and Sale Agreements
by and between (i) EnCap Equity 1994 Limited Partnership (EnCap 1994 LP), (ii)
Energy Capital Investment Company PLC (ECIC) and ECIC Corporation, (iii) EnCap
1996 LP, and (iv) Mountaineer Limited Partnership (together the Sellers) and old
AROC, old AROC acquired direct or indirect ownership of oil and gas properties
located in Texas, Louisiana, New Mexico, and Wyoming ("EnCap Acquisition"). The
properties were acquired in exchange for the issuance to the sellers of an
aggregate of 930,140 shares of the Company's Series A Voting Redeemable
Preferred Stock.
Also, on May 2, 2000, old AROC sold to Bank of America, EnCap 1996 LP,
ECIC, El Paso Capital Investments, L.L.C. (El Paso), EF-II Holdings, LLC
(EF-II), Picosa Creek Limited Partnership (Picosa) and EnCap Investments, L.L.C.
(EnCap Investments) 850,163 shares of the Company's Newly Created Series A
Voting Redeemable Preferred Stock for a total consideration of approximately
$42.5 million, received in satisfaction of outstanding obligations to those
parties and in consideration of cash (approximately $2,700,000) and the purchase
of an oil and gas property interest (valued at approximately $2,000,000).
In addition, on May 2, 2000, old AROC entered into a purchase
agreement providing for the sale to EnCap 1996 LP, ECIC and El Paso (together
EnCap) of a total of $17,000,000 in subordinated notes in exchange for cash in
that amount. The subordinated notes bear interest at the rate of 12% per year,
payable semiannually. Principal is due May 1, 2007. Until May 1, 2002, interest
is payable in kind by increasing the principal amount of the debt. Additionally,
old AROC also issued to EnCap warrants to purchase a total of 39,451,233 shares
of AROC's common stock at a price of $0.01 per share at any time until April 30,
2007 pursuant to such purchase agreement.
Pursuant to a Credit Agreement dated as of May 1, 2000, among AROC,
Toronto Dominion (Texas), Inc. individually and as Agent, and the lenders named
in that agreement (the TD Credit Agreement), AROC obtained a new $35,000,000
credit facility. The credit facility provides for a revolving line of credit for
three years. Borrowings ($25,000,000 initial borrowing) under the credit
facility bear interest at either the LIBOR rate plus from 1.75% to 3.0% or the
agent's prime rate plus from .25% to 1.0%, at AROC's election. Interest is
payable quarterly beginning July 31, 2000. Principal is payable in full on the
third anniversary of the closing of the credit facility.
Old AROC's fiscal year is April 30. Accordingly, the old AROC
historical amounts are based on old AROC fiscal quarter ends nearest to the
period ends presented.
F-24
<PAGE>
AROC Inc.
(Formerly EnCap 1996 LP)
Notes to Unaudited Pro Forma Combined Financial Statements
Note 2. Pro Forma Adjustments
(a) To adjust depreciation, depletion and amortization expense for
the additional basis allocated to the oil and gas properties
acquired on May 2, 2000; (i) reverse acquisition of old AROC by
AROC and (ii) the EnCap Acquisition.
(b) To record amortization of deferred debt issuance costs
($1,969,000) incurred in connection with the Toronto Dominion
(Texas) Inc. Credit Agreement and EnCap subordinated notes. The
debt issuance costs are being amortized (interest method) over
periods of from 36 to 84 months.
(c) To eliminate amortization of deferred debt issuance costs related
to Bank of America and old EnCap debt.
(d) To record interest expense on Toronto Dominion $25,000,000 loan.
Interest is assumed to be at the LIBOR rate plus 1.75% (average
7.55% for the year ended December 31, 1999 and 8.27% for the six
months ended June 30, 2000).
(e) To record interest on $17,000,000 EnCap subordinated unsecured
notes at 12% per year and the amortization of the related
discount less amount of capitalized interest. The fair value of
the warrants ($4,744,948) attaching to the debt was treated as a
discount.
(f) To eliminate interest on Bank of America (average 10.2% for the
year ended December 31, 1999 and 10.2% for the six months ended
June 30, 2000) and old EnCap debt (10% interest rate). The Bank
of America debt had an average balance outstanding of $39,769,000
during the year ended December 31, 1999 and $47,553,000 during
the six months ended June 30, 2000.
(g) To eliminate EnCap 1996 LP's 20% equity in AROC's net losses.
(h) To eliminate impairment loss on EnCap 1996 LP marketable
securities as such marketable securities were not acquired by
AROC and are assumed to be distributed to the EnCap 1996 LP
partners on January 1, 1999.
(i) To record preferred stock dividends related to the Series A
Voting Redeemable Preferred Stock issued in connection with the
May 2, 2000 transactions; (i) reverse acquisition of AROC by
EnCap 1996 LP, (ii) the EnCap Acquisition, and (iii) the
refinancing of AROC debt. The Series A Voting Redeemable
Preferred Stock accrues cumulative dividends at the rate of $5
per share per year.
Note 3. Supplemental Oil and Gas Reserve Information
The following unaudited pro forma supplemental information regarding
the oil and gas activities of the Company is presented pursuant to the
disclosure requirements promulgated by the Commission and Statement of Financial
Accounting Standards No. 69, "Disclosures About Oil and Gas Producing
Activities". The pro forma combined reserve information is presented as if the
transactions had occurred on January 1, 1999.
Management emphasizes that reserve estimates are inherently imprecise
and subject to revision and that estimates of new discoveries are more imprecise
than those of producing oil and gas properties. Accordingly, the estimates are
expected to change as future information becomes available; such changes could
be significant.
F-25
<PAGE>
AROC Inc.
(Formerly EnCap 1996 LP)
Notes to Unaudited Pro Forma Combined Financial Statements
(a) Quantities of oil and gas reserves
Set forth below is a pro forma summary of the changes in the net
quantities of oil and natural gas reserves for the year ended December 31, 1999
follows (in thousands):
<TABLE>
<CAPTION>
United States United Kingdom
------------------------------------ -------------------
Oil Gas Gas
(MBbls) (MMcf) (Mcf)
-------------- -------------- -------------------
<S> <C> <C> <C>
Proved reserves at January 1, 1999 18,543.6 50,404 73,870
Revisions of previous estimates 611.6 (12,458) (8,344)
Production (570.7) (2,190) (1,242)
Sales of reserves-in-place (47.5) (534) -
Purchase of reserves-in-place 339.7 18,846 -
--------- -------- --------
Proved reserves at December 31, 1999 18,876.7 54,068 64,284
========= ======== ========
Proved developed reserves
January 1, 1999 10,015.3 24,916 -
========= ======== ========
December 31, 1999 11,990.9 25,469 8,111
========= ======== ========
</TABLE>
(b) Standardized measure of discounted future net cash flows of proved oil and
gas reserves
The pro forma combined standardized measure of discounted future net
cash flows is computed by applying year-end prices of oil and gas (with
consideration of price changes only to the extent provided by contractual
arrangements) to the estimated future production of oil and gas reserves less
estimated future expenditures (based on year-end costs) to be incurred in
developing and producing the proved reserves, discounted using a rate of 10% per
year to reflect the estimated timing of the future cash flows. Future income
taxes are calculated by comparing discounted future cash flows to the tax basis
of oil and gas properties, plus available carryforwards and credits, and
applying the current tax rate to the difference. Set forth below is the pro
forma combined standardized measure of discounted future net cash flows at
December 31, 1999 (in thousands):
<TABLE>
<CAPTION>
United States United Kingdom
--------------------- ------------------
<S> <C> <C>
Future cash inflows $ 556,513 $ 117,756
Future production and development costs (225,838) (68,583)
----------- -----------
Future net cash flows before income taxes 330,675 49,173
Future income tax expense (66,709) (1,200)
----------- -----------
Future net cash flows 263,966 47,973
10% annual discount factor (127,025) (32,546)
----------- -----------
Standardized measure of discounted
future net cash flows $ 136,941 $ 15,427
=========== ===========
</TABLE>
F-26
<PAGE>
AROC Inc.
(Formerly EnCap 1996 LP)
Notes to Unaudited Pro Forma Combined Financial Statements
(c) Changes relating to the standardized measure of discounted future net cash
flows
The principal sources of the change in the pro forma combined
standardized measure of discounted future net cash flows for the year ended
December 31, 1999 follows (in thousands):
<TABLE>
<CAPTION>
United States United Kingdom
--------------------- ---------------------
<S> <C> <C>
Standardized measure, beginning of year $ 74,866 $ 30,067
Revisions of previous quantity estimates (20,294) 8,588
Net changes in income tax (14,891) (261)
Net changes in prices and production costs 98,479 (6,833)
Revisions of estimated future development costs (402) (11,369)
Sales, net of production costs (4,543) (1,973)
Accretion of discount 9,367 1,106
Sales of reserves-in-place (571) -
Purchases of reserves-in-place 16,155 -
Changes of production rates (timing) and other (21,225) (3,898)
---------- ----------
Standardized measure, end of year $ 136,941 $ 15,427
========== ==========
</TABLE>
F-27
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated October 27, 2000
AROC Inc.
By: /s/ John A. Keenan
--------------------------------
John A. Keenan
Chief Executive Officer
F-28
