<PAGE>
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 22, 2000
REGISTRATION NO. 333-49328
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------
AMENDMENT NO. 1
TO
FORM SB-2
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------
GMX RESOURCES INC.
(Name of small business issuer in its charter)
<TABLE>
<S> <C> <C>
OKLAHOMA 1311 73-1534474
(State or other jurisdiction of (Primary Standard (I.R.S. Employer
incorporation or organization) Industrial Code Number) Identification Number)
</TABLE>
9400 NORTH BROADWAY, SUITE 600
OKLAHOMA CITY, OKLAHOMA 73114
(405) 600-0711
(Address and telephone number of principal
executive offices and principal place of business)
------------------------
KEN L. KENWORTHY, JR.
9400 NORTH BROADWAY
SUITE 600
OKLAHOMA CITY, OKLAHOMA 73114
(405) 600-0711
(Name, address and telephone number
of agent for service)
------------------------
COPIES TO:
<TABLE>
<S> <C>
MICHAEL M. STEWART, ESQ. JOHN J. HALLE, ESQ.
CROWE & DUNLEVY, A PROFESSIONAL STOEL RIVES LLP
CORPORATION STANDARD INSURANCE CENTER
1800 MID-AMERICA TOWER 900 SW 5TH AVENUE, SUITE 2600
OKLAHOMA CITY, OKLAHOMA 73102 PORTLAND, OREGON 97204-1268
(405) 235-7700 (503) 224-3380
</TABLE>
------------------------
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
AS SOON AS PRACTICABLE AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE.
------------------------
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, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION,
ACTING PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
--------------------------------------------------------------------------------
--------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION DATED DECEMBER 22, 2000
THE INFORMATION IN THIS PROSPECTUS IS NOT COMPLETE AND MAY BE CHANGED. WE MAY
NOT SELL THESE SECURITIES UNTIL THE REGISTRATION STATEMENT FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION IS EFFECTIVE. THIS PROSPECTUS IS NOT AN OFFER
TO SELL THESE SECURITIES OR TO SOLICIT OFFERS TO BUY THESE SECURITIES IN ANY
PLACE WHERE THE OFFER OR SALE IS NOT PERMITTED.
<PAGE>
2,000,000 UNITS
GMX RESOURCES INC.
[LOGO]
---------------
This is an initial public offering of units by GMX RESOURCES INC. Each unit
consists of one share of common stock and one redeemable warrant to purchase one
share of common stock. The warrants will be exercisable upon issuance and until
they expire five years after the date of this prospectus at an exercise price
per share of $ (150% of the initial public offering price of the units).
We may redeem some or all of the warrants for $0.25 per warrant commencing six
months after the date of this prospectus if the closing price of our common
stock for ten consecutive trading days as reported by Nasdaq has equalled or
exceeded $ (200% of the initial public offering price of the units) and we
provide 30 days prior written notice of redemption.
The common stock and warrants will trade separately immediately following
this offering. The units will not trade as units. Prior to this offering, there
has been no public market for our securities. We have applied for listing of our
common stock and warrants on The Nasdaq National Market under the symbols GMXR
and GMXRW. The estimated initial public offering price is $10.00 per unit.
INVESTING IN THE UNITS INVOLVES CERTAIN RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 8.
<TABLE>
<CAPTION>
PER UNIT TOTAL
<S> <C> <C>
Public Offering Price..................................... $ $
Underwriting discounts and commissions.................... $ $
Proceeds to GMX RESOURCES INC. (before expenses).......... $ $
</TABLE>
We expect total cash expenses of the offering to be approximately $950,000,
which will include a non-accountable expense allowance of two percent of the
gross proceeds of this offering payable to Paulson Investment Company, Inc., the
managing underwriter of this offering. We have granted the underwriters the
option for a period of 45 days to purchase up to an additional 300,000 units to
cover over-allotments. We will also grant to certain underwriters five-year
warrants to purchase up to 200,000 units for $ per unit (120% of the
initial public offering price of the units sold).
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or passed upon the
adequacy or accuracy of the prospectus. Any representation to the contrary is a
criminal offense.
Paulson Investment Company, Inc., on behalf of the underwriters, expects to
deliver the shares and warrants on or about , 2001.
------------------------
PAULSON INVESTMENT COMPANY, INC.
I-BANKERS SECURITIES INCORPORATED
The date of this prospectus is , 2001.
<PAGE>
map
General location of properties of GMX Resources Inc.
Located here is a map depicting the geographic areas in which GMX owns
properties.
<PAGE>
PROSPECTUS SUMMARY
The following summary highlights selected information from this prospectus
and may not contain all of the information that is important to you. For a more
complete understanding of this offering, we encourage you to read this entire
prospectus. Certain terms used in this prospectus are explained under the
section "Certain Technical Terms" on page 50.
ABOUT GMX RESOURCES INC.
GMX is an independent oil and gas company. At the time of our organization
in 1998, we acquired, for $6.0 million, producing and undeveloped properties
located primarily in east Texas and northwestern Louisiana, Kansas and
southeastern New Mexico in the areas depicted on the map on the preceding page.
When we acquired them, the properties consisted of 71.1 net producing wells,
20,829 net developed and 317 net undeveloped acres. At the acquisition date, the
properties had estimated proved developed producing reserves of 5 Bcfe. These
properties were acquired out of a bankruptcy reorganization of a small,
privately held company. We believe the properties had not been developed to
their full potential as a result of the financial condition and lack of
technical geological expertise of the prior owner. However, there was
substantial high quality geological and engineering data available for the
properties, waiting to be evaluated.
Since the acquisition, we have conducted an extensive geological and
engineering evaluation of the property base, improved the operating efficiencies
of the producing properties, recompleted or reworked 58 wells, drilled 3
additional wells and acquired additional related acreage and reserves. As a
result, we have added proved reserves in existing producing wells and identified
proved reserves that can be developed by drilling additional wells.
As of September 30, 2000, Sproule Associates Inc., our independent petroleum
engineers, estimates our proved reserves have increased to 75 Bcfe. An estimated
24 Bcfe is expected to be produced from existing wells and another 51 Bcfe or
67% of the proved reserves, is classified as proved undeveloped. These reserves
were identified by geological and engineering evaluation of the data we acquired
with the properties, as well as by drilling three new wells and reworking or
recompleting 58 wells. The three development wells drilled based on this work
have all been completed as producers. As of September 30, 2000, we had interests
in 158 producing wells, 130 of which we operate.
Our strategy is to create additional value from our existing property base
through development of quality proved undeveloped properties and exploitation
activities focused on adding proved reserves from the inventory of probable and
possible drilling locations. We will also continue to seek improvement in
operating efficiencies, exploitation of existing recompletion and work-over
opportunities and will consider acquisitions of additional properties when
favorable opportunities are presented. We will implement these strategies with
the following resources:
EXPERIENCED MANAGEMENT. The company's founders have experience in finding,
exploiting, developing and operating reserves and companies. Trained as a
petroleum geologist, Ken Kenworthy, Jr., the company's President, has been
active in various aspects of the oil and gas business for over 20 years. He was
formerly Chairman and Chief Executive Officer of OEXCO, Inc., an Oklahoma City
based privately held oil and gas company. He founded OEXCO in 1980 and
successfully managed it until 1995 when it was sold for approximately
$13 million. During this 15 year period, OEXCO operated approximately 300 wells.
Ken L. Kenworthy, Sr. also has extensive financial experience with private and
public businesses, including experience as chief financial officer of CMI
Corporation, a New York Stock Exchange listed company which manufactures and
sells road building equipment.
SUBSTANTIAL DRILLING AND EXPLOITATION OPPORTUNITIES. We have a substantial
inventory of drilling and recompletion projects with an estimated 51 Bcfe of
proved undeveloped reserves as of September 30, 2000. These projects include ten
recompletion projects and thirty-two new drilling locations with proved
undeveloped reserves. We expect to locate additional proved drilling and
recompletion opportunities as our evaluation and drilling of the property base
continues. Based on our September 30, 2000 reserve
3
<PAGE>
report, the present value of the proved undeveloped reserves is $136 million
with anticipated future development costs of $14.3 million.
SIGNIFICANT INVENTORY OF UNPROVED PROSPECTS. We have approximately 200
additional drilling locations in East Texas which have potential in the Pettit,
Travis Peak and Cotton Valley formations at depths of 6,000 to 10,000 feet. We
are continuing to evaluate our acreage in Kansas and New Mexico and we expect to
generate additional drilling prospects. These unproved prospects offer
significant opportunity for growth in reserves and cash flow if drilling
establishes proved reserves. Approximately 21,885 acres of our leasehold
position is held by production, so we do not have rental payments and drilling
targets on those leases can be held and drilled in order of priority without
concern about lease expiration.
EMPHASIS ON GAS RESERVES. Production for the first nine months of 2000 is
60% gas and 40% oil. Proved reserves as of September 30, 2000 are 65% gas and
35% oil. We intend to emphasize acquisition and development of gas reserves due
to the long term outlook for gas demand, but will continue to maintain a portion
of our reserves in oil to take advantage of the current high price levels.
Our principal executive office is located at 9400 North Broadway, Suite 600,
Oklahoma City, Oklahoma, 73114 and our telephone number is (405) 600-0711.
THE OFFERING
<TABLE>
<S> <C>
Securities offered........................... 2,000,000 units. Each unit consists of one
share of common stock and one warrant to
purchase an additional share of common stock.
Common stock outstanding after this
offering................................... 5,000,000 shares. This number assumes no
exercise of the over-allotment option and
does not include 2,000,000 shares of common
stock issuable upon exercise of the 2,000,000
warrants which will be outstanding and
400,000 shares of common stock issuable upon
exercise of the underwriters' warrants and
the warrants underlying the underwriters'
warrants.
Use of proceeds.............................. Repayment of debt, development drilling and
working capital.
Proposed NASDAQ National Market Systems
symbols.................................... Common Stock--GMXR
Warrants--GMXRW
</TABLE>
RISK FACTORS
You should consider carefully the "Risk Factors" beginning on page 8 of this
prospectus before making an investment in the common stock and warrants.
HISTORICAL INFORMATION REGARDING OUR SECURITIES HAS BEEN ADJUSTED TO REFLECT
A 14.51-TO-1 STOCK SPLIT EFFECTED ON OCTOBER 30, 2000. EXCEPT AS OTHERWISE
INDICATED, ALL INFORMATION IN THIS PROSPECTUS ASSUMES NO EXERCISE OF THE
OVER-ALLOTMENT OPTION OR THE UNDERWRITERS' WARRANTS. REFERENCES TO "US," THE
"COMPANY" OR "GMX" INCLUDE GMX RESOURCES INC. AND OUR WHOLLY-OWNED SUBSIDIARIES,
EXPEDITION NATURAL RESOURCES INC. AND ENDEAVOR PIPELINE, INC., UNLESS OTHERWISE
INDICATED.
4
<PAGE>
SUMMARY FINANCIAL DATA
The following table presents a summary of our financial information for the
periods indicated. It should be read in conjunction with our consolidated
financial statements and related notes and the section "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere in this prospectus. The summary financial information as of and for
the nine months ended September 30, 2000 and 1999, is unaudited and, in the
opinion of management reflects all adjustments that are necessary for a fair
statement of the financial position and the results of operations of the interim
periods presented. The results for the nine months ended September 30, 2000 are
not necessarily indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------------
1998 1999 1999 2000
----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas sales........................... $ 1,794,513 $ 2,122,770 $1,530,072 $ 2,879,968
Interest and other income................... 33,404 38,915 11,358 40,793
----------- ----------- ---------- -----------
Total revenues............................ 1,827,917 2,161,685 1,541,430 2,920,761
----------- ----------- ---------- -----------
Lease operations............................ 895,899 917,590 664,025 725,637
Production and severance taxes.............. 150,052 157,193 128,801 295,469
General and administrative.................. 226,313 368,824 225,240 388,145
Depreciation, depletion and
amortization.............................. 433,374 423,474 317,706 313,348
Interest.................................... 419,897 486,234 385,209 431,925
----------- ----------- ---------- -----------
Total expenses............................ 2,125,535 2,353,315 1,720,981 2,154,524
----------- ----------- ---------- -----------
Income (loss) before income taxes........... (297,618) (191,630) (179,551) 766,237
Income taxes................................ -- -- -- 75,000
----------- ----------- ---------- -----------
Net income (loss)........................... $ (297,618) $ (191,630) $ (179,551) $ 691,237
=========== =========== ========== ===========
Net income (loss) applicable to common
shares.................................... $ (478,368) $ (360,193) $ (306,989) $ 567,862
=========== =========== ========== ===========
Net income (loss) per share--basic.......... $ (0.22) $ (0.22) $ (0.18) $ 0.37
=========== =========== ========== ===========
Net income (loss) per share--diluted........ $ (0.22) $ (0.22) $ (0.18) $ 0.19
=========== =========== ========== ===========
Weighted average common shares--basic....... 2,176,500 1,632,375 1,692,883 1,549,000
=========== =========== ========== ===========
Weighted average common shares--diluted..... 2,176,500 1,632,375 1,692,883 3,593,000
=========== =========== ========== ===========
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating activities... $ 197,231 $ 618,759 $ 274,516 $ 921,947
Net cash used in investing activities....... (6,720,450) (666,651) (427,621) (1,750,413)
Net cash provided by financing activities... 6,633,009 473,315 290,446 547,194
BALANCE SHEET DATA (AT END OF PERIOD):
Oil and gas properties, net................. $ 6,870,847 $ 7,153,790 $6,985,599 $ 8,429,461
Total assets................................ 8,003,667 8,986,163 8,299,277 10,285,755
Long-term debt, including current portion... 5,677,348 6,181,813 6,198,173 6,930,229
Shareholders' equity........................ 1,702,382 1,130,483 1,142,589 1,825,720
OTHER DATA:
EBITDA(2)................................... 555,653 718,078 523,364 1,511,510
</TABLE>
------------------------
(1) The Company began operations on January 23, 1998. As such, the 1998 period
reflects activity from inception date to December 31, 1998.
5
<PAGE>
(2) EBITDA is defined as income (loss) before interest, income taxes,
depreciation, depletion and amortization costs. We believe that EBITDA is a
financial measure commonly used in the oil and gas industry as an indicator
of a company's ability to service and incur debt or fund capital
expenditures. However, EBITDA should not be considered in isolation or as a
substitute for net income, cash flows provided by operating activities or
other data prepared in accordance with generally accepted accounting
principles, or as a measure of a company's profitability or liquidity.
EBITDA measures as presented may not be comparable to other similarly titled
measures of other companies.
SUMMARY OPERATING AND RESERVE DATA
The following table presents an unaudited summary of certain operating and
oil and gas reserve data for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1998 1999 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRODUCTION:
Oil production (MBbls)...................................... 75 71 54 56
Natural gas production (MMcf)............................... 442 443 342 511
Equivalent production (MMcfe)............................... 892 869 668 845
AVERAGE SALES PRICE:
Oil price (per Bbl)(1)...................................... $12.67 $16.73 $15.27 $21.39
Natural gas price (per Mcf)................................. 1.91 2.09 1.92 3.29
AVERAGE SALES PRICE (PER MCFE).............................. $ 2.01 $ 2.43 $ 2.25 $ 3.41
OPERATING AND OVERHEAD COSTS (PER MCFE):
Lease operating expenses.................................... $ 1.00 $ 1.06 $ 1.20 $ .87
Production and severance taxes.............................. .17 .18 .16 .35
General and administrative.................................. .25 .42 .40 .46
------ ------ ------ ------
Total..................................................... $ 1.42 $ 1.66 $ 1.76 $ 1.68
====== ====== ====== ======
CASH OPERATING MARGIN (PER MCFE)............................ $ .59 $ .77 $ .49 $ 1.73
OTHER (PER MCFE):
Depreciation, depletion and amortization--oil and gas
properties................................................ $ .43 $ .41 $ .48 $ .37
ESTIMATED NET PROVED RESERVES (AS OF THE RESPECTIVE
PERIOD-END):..............................................
Natural gas (Bcf)........................................... 17.3 19.3 N/A 48.7
Oil (MMbls)................................................. 1.9 2.2 N/A 4.4
Total (Bcfe)................................................ 28.7 32.5 N/A 74.9
Reserve Life (in years)(2).................................. 9.1 14.1 N/A 17.5
Estimated Future Net Revenues ($MM)(2)(3)................... $ 33.4 $ 57.6 N/A $316.3
Present Value ($MM)(2)(3)................................... $ 25.3 $ 33.7 N/A $179.3
</TABLE>
------------------------
(1) Net of results of crude oil hedging activities in 2000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
(2) See "Certain Technical Terms".
(3) The prices used in calculating Estimated Future Net Revenues and the Present
Value are determined using prices as of period end. Estimated Future Net
Revenues and the Present Value give no effect to federal or state income
taxes attributable to estimated future net revenues. See "Business and
Properties--Reserves".
6
<PAGE>
PRO FORMA DATA
The unaudited pro forma income (loss) data presented in the following table
adjusts our historical net income (loss) giving effect to the following:
- the use of a portion of the net proceeds from this offering (using
proceeds from 810,000 of the shares being sold) to repay all outstanding
debt under our bank revolving credit facility and shareholder loans in the
aggregate amount of $7.25 million, as if the transaction occurred on
January 1, 1999;
- the reduction of interest expense of $486,000 for 1999 and $432,000 for
the nine months ended September 30, 2000 related to the above described
debt reduction ; and
- the tax effect of the interest expense reduction calculated at the
statutory rate of 34%.
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------
NINE MONTHS
YEAR ENDED ENDED
DECEMBER 31, 1999 SEPTEMBER 30, 2000
----------------- ------------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Pro forma income............................................ $ 294,604 $ 976,307
Pro forma income per common share:
Basic..................................................... $ 0.05 $ 0.36
Diluted................................................... $ 0.05 $ 0.22
Pro forma weighted average number of common shares
outstanding:
Basic..................................................... 2,442,375 2,359,000
Diluted................................................... 4,668,340 4,403,590
</TABLE>
7
<PAGE>
RISK FACTORS
THIS OFFERING INVOLVES A HIGH DEGREE OF RISK. BEFORE YOU BUY ANY UNITS
OFFERED BY THIS PROSPECTUS YOU SHOULD CONSIDER CAREFULLY THE FOLLOWING RISK
FACTORS, TOGETHER WITH ALL OF THE OTHER INFORMATION IN THIS PROSPECTUS.
RISKS RELATED TO GMX
OUR WELLS PRODUCE OIL AND GAS AT A RELATIVELY SLOW RATE.
We expect that our existing wells and other wells that we plan to drill on
our existing properties will produce the oil and gas constituting the reserves
associated with those wells over a period of between 15 and 70 years at
relatively low annual rates of production. By contrast, wells located in other
areas of the United States, such as offshore gulf coast wells, may produce all
of their reserves in a shorter period, for example, four to seven years. Because
of the relatively slow rates of production of our wells, our reserves will be
affected by long term changes in oil or gas prices or both and we will be
limited in our ability to anticipate any price declines by increasing rates of
production. We may hedge our reserve position by selling oil and gas forward for
limited periods of time but do not expect that, in declining markets, the price
of any such forward sales will be attractive.
WE HAVE LIMITED OPERATING HISTORY.
We were organized in 1998 and have been in operation for less than three
years. Our limited operating history may not be indicative of our future
prospects. We face all of the risks inherent in a new business, including:
- the risk that we will be unable to implement our business plan and achieve
our expected financial results;
- the risk that we will be unable to manage growth in our operations by
adding personnel, systems and practices necessary to operate a larger
business; and
- the risk that, as a small business, we will be subject to market,
environmental, regulatory and other developments that we cannot either
foresee or control as well as can larger or more established businesses.
THE LOSS OF OUR PRESIDENT OR OTHER KEY PERSONNEL COULD ADVERSELY AFFECT US.
We depend to a large extent on the efforts and continued employment of Ken
L. Kenworthy, Jr., our President, and Ken L. Kenworthy, Sr., our Executive Vice
President. The loss of the services of either of them could adversely affect our
business. In addition, it is a default under our credit agreement if there is a
significant change in management or ownership. We are the owner and beneficiary
of a key man life insurance policy covering accidental death of our President,
Ken L. Kenworthy, Jr., in the amount of $3 million.
WE ARE MANAGED BY THE MEMBERS OF A SINGLE FAMILY, GIVING THEM INFLUENCE AND
CONTROL IN CORPORATE TRANSACTIONS AND THEIR INTERESTS MAY DIFFER FROM THOSE OF
OTHER SHAREHOLDERS.
Our executive officers consist of Ken L. Kenworthy, Jr., his father, his
brother and one other person. Because of the family relationship among members
of management, certain employer/employee relationships, including performance
evaluations and compensation reviews may not be conducted on a fully arms-length
basis as would be the case if the family relationships did not exist. Our board
of directors following this offering will include members unrelated to the
Kenworthy family and we expect that significant compensation and other
relationship issues between GMX and its management will be reviewed and approved
by an appropriate committee of outside directors. However, as the owners of a
8
<PAGE>
majority of our common stock, the Kenworthys have appointed the current
directors and will have the power to remove and replace directors.
HEDGING OUR PRODUCTION MAY RESULT IN LOSSES OR LIMIT POTENTIAL GAINS.
To reduce our exposure to fluctuations in the prices of oil and natural gas,
we currently have, and may in the future enter into hedging arrangements.
Hedging arrangements expose us to risk of financial loss in some circumstances,
including the following:
- production is less than expected;
- the counter-party to the hedging contract defaults on its contact
obligations; or
- there is a change in the expected differential between the underlying
price in the hedging agreement and actual prices received.
In addition, these hedging arrangements may limit the benefit we would receive
from increases in the prices for oil and natural gas. If we choose not to engage
in hedging arrangements in the future, we may be more adversely affected by
changes in oil and natural gas prices than our competitors who engage in hedging
arrangements.
RAPID GROWTH MAY PLACE SIGNIFICANT DEMANDS ON OUR RESOURCES.
After this offering, we expect significant expansion of our operations. Our
anticipated future growth will place a significant demand on our managerial,
operational and financial resources due to:
- the need to manage relationships with various strategic partners and other
third parties;
- difficulties in hiring and retaining skilled personnel necessary to
support our business;
- the need to train and manage a growing employee base; and
- pressures for the continued development of our financial and information
management systems.
If we have not made adequate allowances for the costs and risks associated
with this expansion or if our systems, procedures or controls are not adequate
to support our operations, our business could be harmed.
RISKS RELATED TO THE OIL AND GAS INDUSTRY
A SUBSTANTIAL DECREASE IN OIL AND NATURAL GAS PRICES WOULD HAVE A MATERIAL
IMPACT ON US.
Our future financial condition and results of operations are dependent upon
the prices we receive for our oil and natural gas production. Oil and natural
gas prices historically have been volatile and likely will continue to be
volatile in the future. This price volatility also affects our common stock
price. In 1999, we received gas and oil prices at the wellhead ranging from
$0.91 to $2.91 per Mcf and $10.50 to $25.35 per Bbl. In the first nine months of
2000, we received gas and oil prices ranging from $2.40 to $4.80 per Mcf and
$25.64 to $33.50 per Bbl. Oil and gas prices in 2000 have reached their highest
level in the last several years and we cannot assure you that they will remain
at these levels. We cannot predict oil and natural gas prices and prices may
decline in the future. The following factors have an influence on oil and
natural gas prices:
- relatively minor changes in the supply of and demand for oil and natural
gas;
- storage availability;
- weather conditions;
- market uncertainty;
9
<PAGE>
- domestic and foreign governmental regulations;
- the availability and cost of alternative fuel sources;
- the domestic and foreign supply of oil and natural gas;
- the price of foreign oil and natural gas;
- political conditions in oil and natural gas producing regions, including
the Middle East; and
- overall economic conditions.
WE MAY ENCOUNTER DIFFICULTY IN OBTAINING EQUIPMENT AND SERVICES.
Recent increased oil and gas drilling activity in the regions in which we
own properties has resulted in increased demand for drilling rigs, other
oilfield equipment, personnel and other services. We may experience increased
costs or shortages or unavailability of drilling rigs, drill pipe and other
material and other services used in oil and gas drilling. Such unavailability
could result in increased costs, delays in timing of anticipated development or
cause interests in oil and gas leases to lapse. We cannot be certain that we
will be able to implement our drilling plans or at costs that will be as
estimated or acceptable to us.
ESTIMATING OUR RESERVES FUTURE NET CASH FLOWS IS DIFFICULT TO DO WITH ANY
CERTAINTY.
There are numerous uncertainties inherent in estimating quantities of proved
oil and natural gas reserves and their values, including many factors beyond our
control. The reserve data included in this prospectus represents only estimates.
Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact manner.
The accuracy of any reserve estimate is a function of the quality of available
data, the precision of the engineering and geological interpretation, and
judgment. As a result, estimates of different engineers often vary. The
estimates of reserves, future cash flows and present value are based on various
assumptions, including those prescribed by the Securities and Exchange
Commission, and are inherently imprecise. Actual future production, cash flows,
taxes, development expenditures, operating expenses and quantities of
recoverable oil and natural gas reserves may vary substantially from our
estimates. Also, the use of a 10% discount factor for reporting purposes may not
necessarily represent the most appropriate discount factor, given actual
interest rates and risks to which our business or the oil and natural gas
industry in general are subject.
Quantities of proved reserves are estimated based on economic conditions,
including oil and natural gas prices in existence at the date of assessment. A
reduction in oil and gas prices not only would reduce the value of any proved
reserves, but also might reduce the amount of oil and gas that could be
economically produced, thereby reducing the quantity of reserves. Our reserves
and future cash flows may be subject to revisions, based upon changes in
economic conditions, including oil and natural gas prices, as well as due to
production results, results of future development, operating and development
costs, and other factors. Downward revisions of our reserves could have an
adverse affect on our financial condition and operating results.
OUR FUTURE PERFORMANCE DEPENDS UPON OUR ABILITY TO FIND OR ACQUIRE ADDITIONAL
OIL AND NATURAL GAS RESERVES THAT ARE ECONOMICALLY RECOVERABLE.
Unless we successfully replace the reserves that we produce, our reserves
will decline, resulting eventually in a decrease in oil and natural gas
production and lower revenues and cash flows from operations. The business of
exploring for, developing or acquiring reserves is capital intensive. We may not
be able to make the necessary capital investment to maintain or expand our oil
and natural gas reserves if cash flows from operations are reduced, due to lower
oil and natural gas prices or otherwise,
10
<PAGE>
or if external sources of capital become limited or unavailable. In addition,
our drilling activities are subject to numerous risks, including the risk that
no commercially productive oil or gas reserves will be encountered. We expect to
also pursue property acquisition opportunities. We cannot assure you that we
will successfully consummate any future acquisition, that we will be able to
acquire producing oil and natural gas properties that contain economically
recoverable reserves or that any future acquisition will be profitably
integrated into our operations.
OPERATIONAL RISKS IN OUR BUSINESS ARE NUMEROUS AND COULD MATERIALLY IMPACT US.
Our operations involve operational risks and uncertainties associated with
drilling for, and production and transportation of, oil and natural gas, all of
which can affect our operating results. Our operations may be materially
curtailed, delayed or canceled as a result of numerous factors, including:
- the presence of unanticipated pressure or irregularities in formations;
- accidents;
- title problems;
- weather conditions;
- compliance with governmental requirements; and
- shortages or delays in the delivery of equipment.
Also, our ability to market oil and natural gas production depends upon
numerous factors, many of which are beyond our control, including:
- capacity and availability of oil and natural gas systems and pipelines;
- effect of federal and state production and transportation regulations; and
- changes in supply of and demand for oil and natural gas.
WE DO NOT INSURE AGAINST ALL POTENTIAL LOSSES AND COULD BE MATERIALLY IMPACTED
BY UNINSURED LOSSES.
Our operations are subject to the risks inherent in the oil and natural gas
industry, including the risks of fire, explosions, blow-outs, pipe failure,
abnormally pressured formations and environmental accidents, such as oil spills,
gas leaks, salt water spills and leaks, ruptures or discharges of toxic gases.
If any of these risks occur in our operations, we could experience substantial
losses 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
- other losses resulting in suspension of our operations.
In accordance with customary industry practice, we maintain insurance
against some, but not all, of the risks described above with a general liability
limit of $2 million. We do not maintain insurance for damages arising out of
exposure to radioactive material. Even in the case of risks against which we are
insured, our policies are subject to limitations and exceptions that could cause
us to be unprotected against some or all of the risk. The occurrence of an
uninsured loss could have a material adverse effect on our financial condition
or results of operations.
11
<PAGE>
GOVERNMENTAL REGULATIONS COULD ADVERSELY AFFECT OUR BUSINESS.
Our business is subject to certain federal, state and local laws and
regulations on taxation, the exploration for and development, production and
marketing of oil and natural gas, and environmental and safety matters. Many
laws and regulations require drilling permits and govern the spacing of wells,
rates of production, prevention of waste and other matters. These laws and
regulations have increased the costs of our operations. In addition, these laws
and regulations, and any others that are passed by the jurisdictions where we
have production could limit the total number of wells drilled or the allowable
production from successful wells which could limit our revenues.
Laws and regulations relating to our business frequently change, and future
laws and regulations, including changes to existing laws and regulations, could
adversely affect our business.
ENVIRONMENTAL LIABILITIES COULD ADVERSELY AFFECT OUR BUSINESS.
In the event of a release of oil, gas or other pollutants from our
operations into the environment, we could incur liability for personal injuries,
property damage, cleanup costs and governmental fines. We could potentially
discharge these materials into the environment in any of the following ways:
- from a well or drilling equipment at a drill site;
- leakage from gathering systems, pipelines, transportation facilities and
storage tanks;
- damage to oil and natural gas wells resulting from accidents during normal
operations; and
- blowouts, cratering and explosions.
In addition, because we may acquire interests in properties that have been
operated in the past by others, we may be liable for environmental damage,
including historical contamination, caused by such former operators. Additional
liabilities could also arise from continuing violations or contamination not
discovered during our assessment of the acquired properties.
COMPETITION IN THE OIL AND GAS INDUSTRY IS INTENSE, AND WE ARE SMALLER AND HAVE
A MORE LIMITED OPERATING HISTORY THAN MANY OF OUR COMPETITORS.
We compete with major integrated oil and gas companies and independent oil
and gas companies in all areas of operation. In particular, we compete for
property acquisitions and for the equipment and labor required to operate and
develop these properties. Most of our competitors have substantially greater
financial and other resources than we have. In addition, larger competitors may
be able to absorb the burden of any changes in federal, state and local laws and
regulations more easily than we can, which would adversely affect our
competitive position. These competitors may be able to pay more for exploratory
prospects and may be able to define, evaluate, bid for and purchase a greater
number of properties and prospects than we can. Further, our competitors may
have technological advantages and may be able to implement new technologies more
rapidly than we can. Our ability to explore for natural gas and oil prospects
and to acquire additional properties in the future will depend on our ability to
conduct operations, to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment. In addition, most of our
competitors have operated for a much longer time than we have and have
demonstrated the ability to operate through industry cycles.
WE MAY INCUR WRITE-DOWNS OF THE NET BOOK VALUES OF OUR OIL AND GAS PROPERTIES
WHICH WOULD ADVERSELY AFFECT OUR SHAREHOLDERS' EQUITY AND EARNINGS.
The full cost method of accounting, which we follow, requires that we
periodically compare the net book value of our oil and gas properties, less
related deferred income taxes, to a calculated "ceiling". The ceiling is the
estimated after-tax present value of the future net revenues from proved
reserves using a 10% annual discount rate and using constant prices and costs.
Any excess of net book value of
12
<PAGE>
oil and gas properties is written off as an expense and may not be reversed in
subsequent periods even though higher oil and gas prices may have increased the
ceiling in these future periods. A write-off constitutes a charge to earnings
and reduces shareholders' equity, but does not impact our cash flows from
operating activities. Future write-offs may occur which would have a material
adverse effect on our net income in the period taken, but would not affect our
cash flows. Even though such write-offs do not affect cash flow, they can be
expected to have an adverse effect on the price of our publicly traded
securities.
RISKS RELATED TO THIS OFFERING
AN ACTIVE PUBLIC MARKET FOR OUR COMMON STOCK AND WARRANTS MAY NOT DEVELOP OR BE
SUSTAINED AFTER THE OFFERING, AND WE EXPECT THAT OUR STOCK PRICE WILL BE
VOLATILE.
There has been no prior public market for our common stock and warrants, and
an active public market for our common stock and warrants may not develop or be
sustained after the offering. The initial public offering price of the units
will be determined by negotiation between us and the managing underwriter and
may not be indicative of the market price of our common stock and warrants
following the offering. The price at which the common stock and warrants will
trade in the public market after the offering may be less than the initial
public offering price you paid for the units. In addition, we expect the market
price of the common stock and warrants to be volatile because we expect our
stock price to fluctuate with changes in natural gas and oil prices, which have
historically been volatile, and other market conditions.
YOU WILL SUFFER IMMEDIATE DILUTION OF APPROXIMATELY 62% OF YOUR INVESTMENT.
We anticipate that the initial public offering price of the units will be
substantially higher than the net tangible book value per share of our common
stock after this offering. As a result, you will incur immediate dilution of
approximately $6.16, in net tangible book value for each share of our common
stock included in the units you purchase.
FUTURE SALES OF OUR COMMON STOCK BY OUR EXISTING SHAREHOLDERS COULD DECREASE THE
TRADING PRICE OF OUR COMMON STOCK.
Sales of a large number of shares of our common stock in the public markets
after this offering, or the potential for such sales, could decrease the trading
price of our common stock and warrants and could impair our ability to raise
capital through future sales of our common stock. Upon completion of this
offering, there will be 5,000,000 shares of our common stock outstanding. The
2,000,000 shares of common stock sold in this offering are and the 2,000,000
shares of common stock reserved for issuance upon exercise of the warrants sold
in this offering will be, if and when issued, freely tradeable without
restrictions or further registration under the Securities Act of 1933, unless
such shares are purchased by our "affiliates," as that term is defined in the
Securities Act of 1933.
An additional 3,000,000 shares of common stock are outstanding. All of these
shares may be sold in the future subject to compliance with securities laws and
lock-up agreements to which these shares are subject. The lock-up agreements
prohibit the sale in the public market of all of these shares for one year
following the completion of this offering, unless permitted by the managing
underwriter.
OUR PRINCIPAL SHAREHOLDERS OWN A SIGNIFICANT AMOUNT OF COMMON STOCK, GIVING THEM
CONTROL OVER CORPORATE TRANSACTIONS AND OTHER MATTERS.
On completion of this offering, Ken L. Kenworthy, Jr. and Ken L. Kenworthy,
Sr. will beneficially own approximately 39% and 19%, respectively, of our
outstanding common stock. These shareholders, acting together, will be able to
control the outcome of shareholder votes, including votes concerning the
election of directors, the adoption or amendment of provisions in our
certificate of incorporation or
13
<PAGE>
bylaws and the approval of mergers and other significant corporate transactions.
This concentrated ownership makes it unlikely that any other holder or group of
holders of common stock will be able to affect the way we are managed or the
direction of our business. These factors may also delay or prevent a change in
the management or voting control of GMX.
WE HAVE NOT PAID DIVIDENDS AND DO NOT ANTICIPATE PAYING ANY DIVIDENDS ON OUR
COMMON STOCK IN THE FORESEEABLE FUTURE.
We anticipate that we will retain all future earnings and other cash
resources for the future operation and development of our business. We do not
intend to declare or pay any cash dividends in the foreseeable future. Payment
of any future dividends will be at the discretion of our Board of Directors
after taking into account many factors, including our operating results,
financial condition, current and anticipated cash needs and other factors. The
declaration and payment of any future dividends is currently prohibited by our
credit agreement and may be similarly restricted in the future.
THE EXISTENCE OF OUTSTANDING WARRANTS MAY IMPAIR OUR ABILITIES TO RAISE CAPITAL.
After completion of this offering, there will be 2,000,000 shares of our
common stock issuable upon exercise of the warrants issued in this offering at a
price of $ per share. These warrants will be exercisable to purchase common
stock that would represent 29% of the common stock outstanding follow such
exercise, assuming no other change in our outstanding common stock. During the
life of the warrants, the holders are given an opportunity to profit from a rise
in the market price of our common stock with a resulting dilution in the
interest of the other shareholders. Our ability to obtain additional financing
during the period the warrants are outstanding may be adversely affected and the
existence of the warrants may have an effect on the price of our common stock.
The holders of the warrants may be expected to exercise them at a time when we
would, in all likelihood, be able to obtain any needed capital by a new offering
of securities on terms more favorable than those provided by the warrants.
HOLDERS OF WARRANTS MAY NOT BE ABLE TO EXERCISE THE WARRANTS IF WE DO NOT
MAINTAIN AN EFFECTIVE REGISTRATION STATEMENT.
We are required to use commercially reasonable efforts to maintain a
registration statement relating to the offer and sale of the common stock
underlying the warrants offered in this offering and to qualify the warrants for
sale in jurisdictions in which the warrant holders reside unless an exemption
from such registration or qualification exists. If such registration is not
maintained, the holders of the warrants may not be able to exercise them. We
have the right, but not the obligation, so long as our shares of common stock
are listed on a securities exchange or there are least two independent market
makers, to pay a holder exercising the warrants the difference between the
exercise price and the market price of the common stock on the date of exercise
in lieu of registering the underlying common stock.
FORWARD LOOKING STATEMENTS
All statements made in this document and accompanying supplements other than
purely historical information are "forward looking statements" within the
meaning of the federal securities laws. These statements reflect expectations
and are based on historical operating trends, proved reserve positions and other
currently available information. Forward looking statements include statements
regarding future plans and objectives, future exploration and development
expenditures and number and location of planned wells and statements regarding
the quality of our properties and potential reserve and production levels. These
statements may be preceded or followed by or otherwise include the words
"believes", "expects", "anticipates", "intends", "plans", "estimates",
"projects" or similar expressions or statements that events "will" or "may"
occur. Except as otherwise specifically indicated, these
14
<PAGE>
statements assume that no significant changes will occur in the operating
environment for oil and gas properties and that there will be no material
acquisitions or divestitures except as otherwise described.
The forward looking statements in this prospectus are subject to all the
risks and uncertainties which are described in this document. We may also make
material acquisitions or divestitures or enter into financing transactions. None
of these events can be predicted with certainty or not taken into consideration
in the forward looking statements.
For all of these reasons, actual results may vary materially from the
forward looking statements and we cannot assure you that the assumptions used
are necessarily the most likely. We will not necessarily update any forward
looking statements to reflect events or circumstances occurring after the date
the statement is made except as may be required by federal securities laws.
USE OF PROCEEDS
We expect the net proceeds from this offering to be approximately
$17.65 million, after deducting discounts to the underwriters and estimated
expenses of this offering that we will pay, assuming an initial public offering
price of $10.00 per unit. If the underwriters exercise in full their
over-allotment option to purchase additional shares, estimated net proceeds that
we will receive from the offering will increase to approximately
$20.35 million, assuming an initial public offering price of $10.00 per unit.
We plan to use the net proceeds from the offering as follows:
<TABLE>
<CAPTION>
PERCENT OF
USE DOLLAR AMOUNT NET PROCEEDS
--- ------------- ------------
<S> <C> <C>
Repay all outstanding debt......................... $ 7,700,000 44%
Drilling of oil and gas wells...................... $ 9,950,000 56%
----------- ----
Total.............................................. $17,650,000 100%
=========== ====
</TABLE>
If the over-allotment option is exercised in full, we plan to use the
additional estimated $2.7 million for drilling of oil and gas wells.
We plan to drill up to 32 wells with proved undeveloped reserves of 51 Bcfe
with an estimated capital cost of approximately $14.3 million after the
completion of the offering and prior to December 31, 2001. We expect to use
internal cash flows or proceeds from borrowings under our credit facility in
addition to the proceeds from this offering for this purpose. Those funds are
expected to meet our cash requirements for at least 12 months. The actual wells,
costs and timing may vary depending on drilling results, equipment availability,
commodity prices and other factors, including whether and to what extent we
elect to test additional deeper zones in wells we drill. Because of the number
of factors affecting drilling, our plans may change.
The debt to be repaid includes:
- $427,500 to Ken L. Kenworthy, Jr., our president and principal
shareholder, which matures in April, 2001 and bears interest at a rate
approximating the prime rate, which rate was 9.5% at November 30, 2000.
$227,500 of this amount will be used by Mr. Kenworthy to retire debt
incurred personally to loan funds to the company. Except for the
difference in principal amount, the terms of Mr. Kenworthy's loan to the
company were the same as those applicable to his personal debt.
- $7.25 million to reduce debt under our secured revolving credit facility
with a commercial bank, which bears interest at the bank's base rate plus
.5% which rate was 10% at November 30, 2000.
A portion of the bank credit facility, $1,450,000, was borrowed since
September 30, 1999 to fund development drilling ($537,500), to repay loans from
Ken L. Kenworthy, Jr. and Ken L. Kenworthy, Sr.
15
<PAGE>
($377,500) and to acquire interests in producing wells ($544,000).
Messrs. Kenworthy, Sr. and Kenworthy, Jr. personally guarantee the bank credit
facility up to a maximum of $1,000,000 each.
Our secured revolving credit facility is more fully described in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations". After the pay down of the credit facility from proceeds of the
offering, we expect the credit facility to remain in place or be replaced with a
larger facility on more favorable terms. We expect to borrow on the credit
facility in the future for additional development or general corporate purposes.
Until used as described above, proceeds will be held in money market
instruments, deposits or similar investments.
DIVIDEND POLICY
We have never declared or paid any cash dividends on our shares of common
stock and do not anticipate paying any cash dividends on our shares of common
stock in the foreseeable future. Currently, we intend to retain any future
earnings for use in the operation and expansion of our business. Any future
decision to pay cash dividends will be at the discretion of our board of
directors and will be dependent upon our financial condition, results of
operations, capital requirements and other factors our board of directors may
deem relevant. The payment of dividends is currently prohibited under the terms
of our revolving credit facility and may be similarly restricted in the future.
16
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 2000 our historical
capitalization on an actual amd pro forma basis, and our pro forma as adjusted
capitalization after giving effect to the sale of 2,000,000 units in this
offering at an assumed initial public offering price of $10.00 per unit and the
application of the estimated net proceeds from the offering as set forth in "Use
of Proceeds."
This table should be read in conjunction with our financial statements
included elsewhere in this prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000
---------------------------------------
PRO FORMA
HISTORICAL PRO FORMA(1) AS ADJUSTED
---------- ------------ -----------
<S> <C> <C> <C>
CURRENT PORTION OF LONG-TERM DEBT
Bank revolving credit facility and other debt......... $ 695,729 $ 695,729 $ --
Related party......................................... 427,500 427,500 --
---------- ---------- -----------
Total............................................... 1,123,229 1,123,229 --
---------- ---------- -----------
LONG-TERM DEBT:
Bank revolving credit facility........................ 5,807,000 6,581,000 --
---------- ---------- -----------
SHAREHOLDERS' EQUITY:
Preferred stock(2)
Series A............................................ 1,500 -- --
Series B............................................ 220 -- --
Common stock(2)....................................... 2,275 3,000 5,000
Additional paid-in capital............................ 2,046,614 1,390,731 19,038,731
Retained earnings..................................... 201,989 201,989 201,989
Treasury stock........................................ (426,878) -- --
---------- ---------- -----------
Total shareholders' equity.......................... 1,825,720 1,595,720 19,245,720
---------- ---------- -----------
TOTAL CAPITALIZATION.................................... $8,775,949 $9,299,949 $19,245,720
========== ========== ===========
</TABLE>
------------------------
(1) Pro forma information reflects adjustments for (a) amendment of our
certificate of incorporation on October 30, 2000 to increase the authorized
capital stock and reduce the par value from $0.01 to $0.001 per share for
both common and preferred stock; (b) repurchase and retirement of
outstanding Series B Preferred Stock for $230,000 on October 23, 2000;
(c) conversion of outstanding Series A Preferred Stock into common stock on
October 25, 2000; and (d) borrowing on October 31, 2000 of $544,000 to
purchase interests in producing properties; and (e) retirement of previously
purchased treasury stock.
(2) Shares authorized and issued for each class of stock are as follows:
<TABLE>
<CAPTION>
CLASS OR SERIES HISTORICAL AS ADJUSTED
--------------- ---------- -----------
<S> <C> <C>
COMMON STOCK
Authorized.......................................... 4,500,000 50,000,000
Issued (net of treasury stock)...................... 106,754 5,000,000
PREFERRED STOCK
Series A
Authorized........................................ 150,000 --
Issued (net of treasury stock).................... 100,000 --
Series B
Authorized........................................ 22,000 --
Issued............................................ 22,000 --
Undesignated
Authorized........................................ 328,000 10,000,000
Issued............................................ -- --
</TABLE>
17
<PAGE>
DILUTION
If you invest in our units, the share of our net tangible book value
represented by your units will be less than the amount you paid for your units
to the extent of the difference between the public offering price per share of
our common stock and the as adjusted pro forma net tangible book value per share
of our common stock after this offering. For purposes of the dilution
computation and the following tables, we have allocated the full purchase price
of a unit to the share of common stock included in the unit and nothing to the
warrant included in the unit. Net tangible book value per share represents the
amount of our total tangible assets reduced by the amount of our total
liabilities, divided by the total number of shares of common stock outstanding.
Dilution in net tangible book value per share represents the difference between
the amount per share paid by the purchasers of our units in this offering and
the net tangible book value per share of our common stock immediately
afterwards.
As of September 30, 2000, our pro forma net tangible book value was
$1,545,475, or $.52 per share of common stock. Without taking into effect any
changes in the pro forma net tangible book value after September 30, 2000, other
than to give effect to the sale of 2,000,000 units in the offering at an assumed
initial public offering price of $10.00 per unit and the receipt of the net
proceeds of the offering, the pro forma net tangible book value of GMX as of
June 30, 2000 would have been $19,195,295, or $3.84 per share. This represents
an immediate increase in net tangible book value of $3.32 per share of common
stock to existing shareholders and an immediate dilution of $6.16, or 62%, per
share of common stock to the new investors who purchase units in the offering.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price....................... $10.00
Pro forma net tangible book value per share before the
offering.................................................. $ .52
Increase in net tangible book value per share attributable
to new investors.......................................... 3.32
-----
As adjusted pro forma net tangible book value per share
after the offering........................................ 3.84
------
Dilution in pro forma tangible book value per share to new
shareholders.............................................. 6.16
======
</TABLE>
If the over-allotment option is exercised in full, dilution per share to new
shareholders would be $5.62 per share of common stock.
The following table summarizes as of September 30, 2000, the difference
(based on an assumed initial public offering price of $10.00 per unit) between
the existing shareholders and the new shareholders with respect to the number of
shares of common stock included in the units purchased, the total consideration
paid, and the average price per share paid, attributing all of the purchase
price of a unit to the share of common stock:
<TABLE>
<CAPTION>
SHARES PURCHASED TOTAL CONSIDERATION AVERAGE
-------------------- ---------------------- PRICE PER
NUMBER PERCENT AMOUNT PERCENT SHARE
--------- -------- ----------- -------- ---------
<S> <C> <C> <C> <C> <C>
Existing shareholders........................ 3,000,000 60% $ 717,276 3.5% $ 0.24
New shareholders............................. 2,000,000 40% 20,000,000 96.5% $10.00
--------- --- ----------- ----
Total.................................... 5,000,000 100% $20,717,276 100%
========= === =========== ====
</TABLE>
The above amounts and percentages assume no exercise of the over-allotment
option, the warrants included in units sold in the offering or the underwriters'
warrants.
18
<PAGE>
SELECTED FINANCIAL DATA
The following table presents a summary of our financial information for the
periods indicated. It should be read in conjunction with our consolidated
financial statements and related notes and the section "Management's Discussion
and Analysis of Financial Condition and Results of Operations," included
elsewhere in this prospectus. The summary financial information as of and for
the nine months ended September 30, 2000 and 1999, is unaudited and in the
opinion of management, reflects all adjustments that are necessary for a fair
statement of the financial position and results of operation of the interim
periods presented. The results for the nine months ended September 30, 2000 are
not necessarily indicative of the results to be expected for the full year.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
------------------------- ------------------------
1998(1) 1999 1999 2000
----------- ----------- ---------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas sales........................... $ 1,794,513 $ 2,122,770 $1,530,072 $ 2,879,968
Interest and other income................... 33,404 38,915 11,358 40,793
----------- ----------- ---------- -----------
Total revenues.......................... 1,827,917 2,161,685 1,541,430 2,920,761
----------- ----------- ---------- -----------
Lease operations............................ 895,899 917,590 664,025 725,637
Production and severance taxes.............. 150,052 157,193 128,801 295,469
General and administrative.................. 226,313 368,824 225,240 388,145
Depreciation, depletion and amortization.... 433,374 423,474 317,706 313,348
Interest.................................... 419,897 486,234 385,209 431,925
----------- ----------- ---------- -----------
Total expenses.......................... 2,125,535 2,353,315 1,720,981 2,154,524
----------- ----------- ---------- -----------
Income (loss) before income taxes........... (297,618) (191,630) (179,551) 766,237
Income taxes................................ -- -- -- 75,000
----------- ----------- ---------- -----------
Net income (loss)........................... $ (297,618) $ (191,630) $ (179,551) $ 691,237
=========== =========== ========== ===========
Net income (loss) applicable to common
shares.................................... $ (478,368) $ (360,193) $ (306,989) $ 567,862
=========== =========== ========== ===========
Net income (loss) per share--basic.......... $ (0.22) $ (0.22) $ (0.18) $ 0.37
Net income (loss) per share--diluted........ $ (0.22) $ (0.22) $ (0.18) $ 0.19
=========== =========== ========== ===========
Weighted average common shares--basic....... 2,176,500 1,632,375 1,692,883 1,549,000
Weighted average common shares--diluted..... 2,176,500 1,632,375 1,692,883 3,593,000
=========== =========== ========== ===========
STATEMENT OF CASH FLOWS DATA:
Net cash provided by operating activities... $ 197,231 $ 618,759 $ 274,516 $ 921,947
Net cash used in investing activities....... (6,720,450) (666,651) (427,621) (1,750,413)
Net cash provided by financing activities... 6,633,009 473,515 290,446 547,194
BALANCE SHEET DATA (AT END OF PERIOD):
Oil and gas properties, net................. $ 6,870,847 $ 7,153,790 $6,985,599 $ 8,429,461
Total assets................................ 8,003,667 8,986,163 8,299,277 10,285,755
Long-term debt, including current portion... 5,677,348 6,181,813 6,198,173 6,930,229
Shareholders' equity........................ 1,702,382 1,130,483 1,142,489 1,825,720
OTHER DATA:
EBITDA(2)................................... 555,653 718,078 523,364 1,511,510
</TABLE>
------------------------
(1) The Company began operations on January 23, 1998. As such, the 1998 period
reflects activity from inception date to December 31, 1998.
19
<PAGE>
(2) EBITDA is defined as income (loss) before interest, income taxes,
depreciation, depletion and amortization costs. We believe that EBITDA is a
financial measure commonly used in the oil and gas industry as an indicator
of a company's ability to service and incur debt or fund capital
expenditures. However, EBITDA should not be considered in isolation or as a
substitute for net income, cash flows provided by operating activities or
other data prepared in accordance with generally accepted accounting
principles, or as a measure of a company's profitability or liquidity.
EBITDA measures as presented may not be comparable to other similarly titled
measures of other companies.
SUMMARY OPERATING AND RESERVE DATA
The following table presents an unaudited summary of certain operating and
oil and gas reserve data for the periods indicated.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED ENDED
DECEMBER 31, SEPTEMBER 30,
------------------- -------------------
1998 1999 1999 2000
-------- -------- -------- --------
<S> <C> <C> <C> <C>
PRODUCTION:
Oil production (MBbls)...................................... 75 71 54 56
Natural gas production (MMcf)............................... 442 443 342 511
Equivalent production (MMcfe)............................... 892 869 668 845
AVERAGE SALES PRICE:
Oil price (per Bbl)(1)...................................... $12.67 $16.73 $15.27 $21.39
Natural gas price (per Mcf)................................. 1.91 2.09 1.92 3.29
------ ------ ------ ------
AVERAGE SALES PRICE (PER MCFE).............................. $ 2.01 $ 2.43 $ 2.25 $ 3.41
OPERATING AND OVERHEAD COSTS (PER MCFE):
Lease operating expenses.................................... $ 1.00 $ 1.06 $ 1.20 $ .87
Production and severance taxes.............................. .17 .18 .16 .35
General and administrative.................................. .25 .42 .40 .46
------ ------ ------ ------
Total................................................... $ 1.42 $ 1.66 $ 1.76 $ 1.68
====== ====== ====== ======
CASH OPERATING MARGIN (PER MCFE)............................ $ .59 $ .77 $ .49 $ 1.73
OTHER (PER MCFE):
Depreciation, depletion and amortization--oil and gas
properties................................................ $ .43 $ .41 $ .48 $ .37
ESTIMATED NET PROVED RESERVES (AS OF THE RESPECTIVE
PERIOD-END):
Natural gas (Bcf)........................................... 17.3 19.3 N/A 48.7
Oil (MMbls)................................................. 1.9 2.2 N/A 4.4
Total (Bcfe)................................................ 28.7 32.5 N/A 74.9
Reserve Life (in years)(2).................................. 9.1 14.1 N/A 17.5
Estimated Future Net Revenues ($MM)(2)(3)................... $ 33.4 $ 57.6 N/A $316.3
Present Value ($MM)(2)(3)................................... $ 25.3 $ 33.7 N/A $179.3
</TABLE>
------------------------
(1) Net of results of crude oil hedging activities in 2000. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations".
(2) See "Certain Technical Terms".
(3) The prices used in calculating Estimated Future Net Revenues and the Present
Value are determined using prices as of period end. Estimated Future Net
Revenues and the Present Value give no effect to federal or state income
taxes attributable to estimated future net revenues. See "Business and
Properties--Reserves".
20
<PAGE>
PRO FORMA DATA
The unaudited pro forma income (loss) data presented in the following table
adjusts our historical net income (loss) giving effect to the following:
- the use of a portion of the net proceeds from this offering (using
proceeds from 810,000 of the shares being sold) to repay all outstanding
debt under our bank revolving credit facility and shareholder loans in the
aggregate amount of $7.25 million, as if the transaction occurred on
January 1, 1999;
- the reduction of interest expense of $486,000 for 1999 and $432,000 for
the nine months ended September 30, 2000 related to the above described
debt reduction; and
- the tax effect of the interest expense reduction calculated at the
statutory rate of 34%.
<TABLE>
<CAPTION>
PRO FORMA
--------------------------------------
NINE MONTHS
ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, 1999 2000
------------------- ----------------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C>
Pro forma income (loss).............................. $ 294,604 $ 976,307
Pro forma income (loss) per common share:
Basic.............................................. $ 0.05 $ 0.36
Diluted............................................ $ 0.05 $ 0.22
Pro forma weighted average number of common shares
outstanding:
Basic.............................................. 2,442,395 2,359,000
Diluted............................................ 4,668,340 4,403,590
</TABLE>
21
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RESULTS OF OPERATIONS--NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE
MONTHS ENDED SEPTEMBER 30, 1999
OIL AND GAS SALES. Oil and gas sales in the first nine months of 2000
increased 88% to $2,879,968 compared to the first nine months of 1999, primarily
due to increased prices for oil and gas, which accounted for 62% of the
increase, and increased production of gas and oil, which accounted for the
balance of the increase. The average price per barrel of oil and mcf of gas
received in the first nine months of 2000 was $21.39 and $3.29, respectively,
compared to $15.27 and $1.92 in the first nine months of 1999. During the first
nine months of 2000, the company hedged 45,000 Bbls of oil through price swap
agreements with a fixed price of $20.25 per bbl. The price swap agreements
reduced sales revenues by $423,470. These price swap agreements continue at
5,000 bbl per month at a fixed price of $20.25 per bbl until December 31, 2000.
Production of oil and natural gas also increased. Oil production for the first
nine months of 2000 increased 3% to 56 Mbbl compared to 54 Mbbl for the prior
year's first nine months. Gas production increased to 511 MMcf compared to 342
MMcf for the first nine months of 1999, an increase of 49%. Increased production
in the first nine months of 2000 resulted from new production and the reworking
of certain wells.
LEASE OPERATIONS. Lease operations expense increased $61,612 in the first
nine months of 2000 to $725,637, a 9% increase compared to the first nine months
of 1999. Increased expense resulted from additional wells that were recompleted
or drilled. Lease operations expense on an equivalent unit of production basis
was $0.87 per Mcfe in the first nine months of 2000 compared to $1.20 per Mcfe
for the first nine months of 1999. This decrease resulted from an increase in
production.
PRODUCTION AND SEVERANCE TAXES. Production and severance taxes increased
129% to $295,469 in the first nine months of 2000 compared to $128,801 in the
first nine months of 1999. Production and severance taxes are assessed on the
value of the oil and gas produced. As a result, the increase resulted primarily
from increased oil and gas sales as described above.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization expense decreased $4,358 to $313,348 in the first nine months of
2000, down 1% from the first nine months of 1999. This decrease is due primarily
to higher production levels and a decrease in the depletion rate for 2000. The
oil and gas depreciation, depletion and amortization rate per equivalent unit of
production was $0.37 per Mcfe in 2000 compared to $0.48 per Mcfe in 1999.
INTEREST. Interest expense for the first nine months of 2000 was $431,925
compared to $385,209 for the first nine months of 1999. This increase is
primarily attributable to higher average long term debt balances outstanding
during 2000 as well as an increase in interest rates.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
the first nine months of 2000 was $388,145 compared to $225,240 for the first
nine months of 1999, an increase of 72%. This increase resulted primarily from
increases in personnel, net of reimbursements of overhead by third-party working
interest owners. We added two employees in 2000 and expect to add additional
employees as our activities increase. General and administrative expense per
equivalent unit of production was $0.46 per Mcfe for the 2000 period compared to
$0.40 per Mcfe for the comparable period in 1999.
INCOME TAXES. Income tax expense for the first nine months of 2000 was
$75,000. This increase resulted from company profits in 2000 exceeding prior
year cumulative losses.
22
<PAGE>
RESULTS OF OPERATIONS FOR THE YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR
ENDED DECEMBER 31, 1998
OIL AND GAS SALES. Oil and gas sales in the year ended December 31, 1999
increased 18.3% to $2,122,770 compared to the year ended December 31, 1998,
primarily due to increased prices for oil and gas. The average price per barrel
of oil and mcf of gas received in 1999 was $16.73 and $2.09, respectively,
compared to $12.67 and $1.91 in 1998. Production of oil decreased slightly and
natural gas increased slightly. Oil production for 1999 decreased 5% to 71 Mbbl
compared to 75 Mbbl barrels for the prior year. Gas production increased to 443
MMcf compared to 442 MMcf for an increase of 0.2%.
LEASE OPERATIONS. Lease operations expense increased $21,701 in 1999 to
$917,590, a 2% increase compared to 1998. Lease operations expense on an
equivalent unit of production basis was $1.06 per Mcfe in 1999 compared to $1.00
per Mcfe for 1998. The increased 1999 expense resulted from initial costs to
improve the equipment and performance of certain wells.
PRODUCTION AND SEVERANCE TAXES. Production and severance taxes increased 5%
to $157,193 in 1999 compared to $150,052 in 1998. Production and severance taxes
are assessed on the value of the oil and gas produced. As a result, the increase
resulted primarily from increased oil and gas sales as described above.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization decreased $9,900 to $423,474 in 1999, down 2% from 1998. This
decrease is due primarily to an increase in the company's proved reserves during
1999. The oil and gas depreciation, depletion and amortization rate per
equivalent unit of production was $0.41 per Mcfe in 1999 compared to $0.43 per
Mcfe in 1998.
INTEREST. Interest expense for the year ended December 31, 1999 was
$486,234 compared to $419,897 for the year ended December 31, 1998. This
increase is primarily attributable to higher average long term debt balances
outstanding during 1999 as well as an increase in interest rates.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense for
1999 was $368,824 compared to $226,313 for 1998. This increase resulted
primarily from increases in personnel, net of reimbursements of overhead by
third-party working interest owners. General and administrative expense per
equivalent unit of production was $0.42 per Mcfe for 1999 compared to $0.25 per
Mcfe for the prior year.
INCOME TAXES. No income tax benefit was recognized as the company has not
previously generated taxable income and has not met the requirements under
generally accepted accounting principles to recognize a tax benefit.
CAPITAL RESOURCES AND LIQUIDITY
Our business is capital intensive. Our ability to grow our reserve base is
dependent upon our ability to obtain outside capital and generate cash flows
from operating activities to fund our investment activities. Our cash flows from
operating activities are substantially dependent upon oil and gas prices and
significant decreases in market prices of oil or gas could result in reductions
of cash flow and affect the amount of our capital investment. Cash flows from
financing activities are also a significant source of funding. We have relied
heavily upon availability under our revolving bank credit facility and from
drilling advances from outside investors.
CASH FLOW--NINE MONTHS ENDED SEPTEMBER 30, 2000 COMPARED TO NINE MONTHS ENDED
SEPTEMBER 30, 1999
In the nine months ended September 30, 2000 and 1999, we spent $1,688,153
and $388,088, respectively, in oil and gas acquisitions and development
activities. These investments were funded for the first nine months of 2000 by
$921,947 in net cash provided by operations and $547,194 provided by
23
<PAGE>
financing activities, primarily borrowings. EBITDA in the first nine months of
2000 was $1,511,510 compared to $523,364 in the first nine months of 1999, an
increase of 188%. This increase resulted primarily from increases in production
and oil and gas prices. EBITDA is defined as income (loss) before interest,
income taxes, depreciation, depletion and amortization. We believe that EBITDA
is a financial measure commonly used in the oil and gas industry as an indicator
of a company's ability to service and incur debt. However, EBITDA should not be
considered in isolation or as a substitute for net income, cash flows provided
by operating activities or other data prepared in accordance with generally
accepted accounting principles, or as a measure of a company's profitability or
liquidity. EBITDA measures as presented may not be comparable to other similarly
titled measures of other companies.
CASH FLOW--1999 COMPARED TO 1998
In 1999 we expended $657,312 in investing activities compared to $6,729,789
in 1998. The 1998 amount included our initial purchase of oil and gas properties
and equipment for $5,702,907. The 1999 year also included a repurchase of stock
from a former shareholder in the amount of $417,539, $199,860 in acquisition
costs of properties, and $582,047 of development costs. Net cash provided by
operating activities in 1999 was $618,759 compared to $197,231 in 1998,
reflecting significantly increased oil and gas sales. Financing activities
provided $463,976 in cash flow in 1999, including approximately $690,000 in net
borrowings and $221,000 in drilling advances. Financing activities provided
$6,642,348 in 1998, including $1,000,000 from our initial capitalization and
$5,642,000 from net long-term borrowings.
EBITDA in 1999 was $718,078 compared to $555,653 in 1998, primarily
reflecting increased production and oil and gas prices.
CREDIT FACILITY
On October 31, 2000, we entered into a secured credit facility provided by
Local Oklahoma Bank, n.a., which replaced our prior credit facility. The new
credit facility provides for a line of credit of up to $15 million (the
"Commitment"), subject to a borrowing base which is based on a periodic
evaluation of oil and gas reserves which is reduced monthly to account for
production ("Borrowing Base"). The amount of credit available to us at any one
time under the credit facility is the lesser of the Borrowing Base or the amount
of the Commitment. As of October 30, 2000, our Borrowing Base was $7.25 million
which will be reduced by $105,000 per month beginning December 1, 2000. The
credit facility has a maturity date of May 1, 2003. Borrowings bear interest at
the prime rate plus 1/2%. The credit facility requires payment of an annual
facility fee equal to 1/2% on the unused amount of the Borrowing Base. We are
obligated to make principal payments if the amount outstanding would exceed the
Borrowing Base. Borrowings under the credit agreement are secured by
substantially all of our oil and gas properties.
The credit facility contains various affirmative and restrictive covenants.
The material covenants, which must be satisfied unless the lender otherwise
agrees:
- Require us to maintain an adjusted current ratio as defined in the credit
facility of 1 to 1.
- Require us to maintain a quarterly debt service coverage ratio of at least
1.1 to 1. The debt service coverage ratio is defined in the credit
facility generally as net income plus depreciation, depletion and
amortization plus interest expense divided by quarterly principal
reduction requirements plus interest.
- Require a minimum tangible net worth of not less than $1.5 million, plus
75% of net income or other increases in equity after September 30, 2000.
- Prohibit any liens or any other debt in excess of $100,000.
24
<PAGE>
- Prohibit sales of assets more than $100,000.
- Prohibit payment of dividends or repurchases of stock.
- Prohibit mergers or consolidations with other entities.
- Prohibit material changes in management.
We are in compliance with all of these covenants as of December 21, 2000.
After this offering, we do not expect any of these covenants to materially
restrict our activities because we intend to repay all amounts outstanding under
the credit facility and do not anticipate a need to reborrow until the proceeds
of the offering have been expended.
The credit facility is guaranteed by Messrs. Kenworthy, Jr. and Kenworthy,
Sr. The amount of their guarantees is limited to a maximum of $1 million each.
At October 31, 2000, we had borrowed $7.25 million under the credit
facility, leaving no availibility for borrowings to fund development drilling
obligations based on the existing Borrowing Base. We will use a portion of the
proceeds of the offering to fully pay down the credit facility.
In connection with the execution of the credit facility, we entered into a
price swap agreement to hedge 5,000 barrels per month of oil production for the
first six months of 2001 at a fixed price of $29.10 per bbl. Based upon the
lenders' subsequent removal of the oil price hedging requirement, the Company
settled the oil price swap agreement on December 20, 2000 and received $78,000.
SHAREHOLDER LOANS
Ken L. Kenworthy, Jr. has two loans outstanding to the company in the
aggregate amount of $427,500 which were originated in 1999 in order to fund a
purchase of stock from a former shareholder and provide working capital. These
loans have a balance as of September 30, 2000 of $427,500, mature in March 2001
and bear interest at a rate which approximates the prime rate. These loans are
secured by undeveloped oil and gas properties. Subsequent to September 30, 2000,
Ken L. Kenworthy, Jr. and Ken L. Kenworthy, Sr. loaned the company an additional
$230,000 to fund the company's repurchase of outstanding preferred stock from an
unrelated party. This loan bears interest at a rate which approximated prime and
was repaid on October 31, 2000, with an advance under our revolving credit
facility. It is expected that the remaining loans will be repaid from the
proceeds of the offering.
At September 30, 2000, we had a deficit working capital balance of
$(1,050,045) and a current ratio--current assets as a ratio of current
liabilities--of 1 to 1.79. Excluding shareholder loans and the current portion
of long-term debt, we had a positive working capital balance of $73,184. Total
long-term debt outstanding at September 30, 2000 was $5,807,000.
DRILLING ADVANCES
In 1999 we entered into a development agreement with Tara Energy
Partnerships ("Tara"), an unrelated third party, relating to the development of
two wells in east Texas. Tara acquired an 85% working interest in the wells and
advanced its estimated share of drilling and completion costs for these wells.
After Tara has received the return of its investment from oil and gas revenues
or other repayments, the company is entitled to a reversionary interest in the
wells. The size of the reversionary interest decreases based on the amount of
time it takes Tara to achieve payout. At September 30, 2000, we had $73,525 in
unexpended drilling advances from this arrangement. In October, 2000, we
borrowed $544,000 under our credit facility to pay to Tara to cause payout to
occur and increased our interest in the wells by 66% to 81%. The increase in
interest had a Present Value of proved reserves as of September 30, 2000 of
approximately $720,000. We may enter into similar arrangements in the future in
order to finance the development of wells.
25
<PAGE>
COMMITMENTS AND CAPITAL EXPENDITURES
Other than obligations under our long-term debt, our commitments for capital
expenditures relate to planned development of oil and gas properties. We do not
enter into drilling or development commitments until such time as a source of
funding for such commitments is known to be available, either through drilling
advances, internal cash flow, additional funding under our bank credit facility
or, after the completion of the offering, working capital. Our ability to
implement our business plan and develop our existing property base is
substantially dependent upon our ability to obtain funding from this offering or
other external sources because we do not have current availability under our
credit facility or cash flow sufficient to fund our planned development
drilling. If sufficient financing is not available, implementation of our
business plan could be delayed and our growth strategy could be adversely
affected.
HEDGING
We have entered into, and expect to periodically enter into, financial
hedging activities with respect to a portion of projected oil and gas production
through financial price swaps whereby we receive a fixed price for our
production and pay a variable market price to the contract counterparty. These
activities are intended to reduce our exposure to oil and gas price
fluctuations. Realized gains or losses from the settlement of these financial
hedging activities are recognized in oil and gas sales when the associated
production occurs. The gains and losses realized as a result of these hedging
activities are substantially offset in the cash market when the hedged commodity
is delivered. During 2000, we have hedged 5,000 barrels per month of oil at a
fixed price of $20.25 per barrel, representing approximately 80% of our monthly
oil production. These swaps expire on December 31, 2000. For the first six
months of 2001, we have hedged 20,000 mmbtu of natural gas per month at a fixed
price of $4.70 per mmbtu. These arrangements hedge approximately 35% of our
estimated monthly gas production based on our September 30, 2000 reserve report.
As noted above, we settled an oil price swap agreement covering the first six
months of 2001 on December 20 for a gain of $78,000 which will be amortized into
income during 2001 over the original term of the oil price swap agreement.
IMPACT OF RECENTLY ISSUED ACCOUNTING STANDARDS NOT YET ADOPTED
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, "Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133") and in June 2000 issued SFAS 138, which
amended certain provisions of SFAS 133. SFAS 133, as amended, establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts, and for hedging activities.
It requires the recognition of all derivatives as either assets or liabilities
in the statement of financial position and measurement of those instruments at
fair value. If certain conditions are met, a derivative may be specifically
designated as a hedge. The accounting for changes in the fair value of a
derivative (that is gains and losses) depends on the intended use of the
derivative and whether it qualifies as a hedge. The company plans to adopt the
provisions of SFAS 133, as amended, in the first quarter of the year ending
December 31, 2001, and is currently evaluating the effects of this
pronouncement. If prices of oil and gas remain or increase from September 30,
2000 pricing levels, the Company would record a liability and a corresponding
reduction in stockholders' equity equal to the fair value of the derivative
financial instruments. As of September 30, 2000, the fair value was a liability
of $221,827.
26
<PAGE>
BUSINESS
GENERAL
GMX is an independent oil and gas company. At the time of our organization
in 1998, we acquired, for $6.0 million, producing and undeveloped properties
located primarily in east Texas and northwestern Louisiana, Kansas and
southeastern New Mexico. When we acquired them, the properties consisted of 71.1
net producing wells, 20,829 net developed and 317 net undeveloped acres. At the
acquisition date, the properties had estimated proved developed producing
reserves of 5 Bcfe. These properties were acquired out of a bankruptcy
reorganization of a small, privately held company. We believe the properties had
not been developed to their full potential as a result of the financial
condition and lack of technical geological expertise of the prior owner.
However, there was substantial high quality geological and engineering data
available for the properties, waiting to be evaluated.
Since the acquisition, we have conducted an extensive geological and
engineering evaluation of the property base, improved the operating efficiencies
of the properties, recompleted or reworked 58 wells, drilled 3 additional wells
and acquired additional related acreage and reserves. As a result, we have added
proved reserves in existing producing wells and identified proved reserves that
can be developed by drilling additional wells.
RESERVES
As of September 30, 2000, Sproule Associates Inc., our independent petroleum
engineers, estimates our proved reserves have increased to 75 Bcfe. An estimated
24 Bcfe is expected to be produced from existing wells and another 51 Bcfe or
67% of the proved reserves, is classified as proved undeveloped. These reserves
were identified by geological and engineering evaluation of the data we acquired
with the properties, as well as by drilling three new wells and reworking or
recompleting 58 wells. The three development wells drilled based on this work
have all been completed as producers. As of September 30, 2000, we had interests
in 158 producing wells, 130 of which we operate.
The following table shows the estimated net quantities of our proved
reserves as of the dates indicated and the Estimated Future Net Revenues and
Present Values attributable to total proved reserves at such dates.
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1998 1999 2000
-------- -------- -------------
<S> <C> <C> <C>
PROVED DEVELOPED PRODUCING:
Gas (MMcf)................................................ 5,018 7,019 10,800
Oil (MBbls)............................................... 514 878 1,249
Total (MMcfe)........................................... 8,102 12,287 18,294
PROVED DEVELOPED NONPRODUCING:
Gas (MMcf)................................................ 3,579 2,175 4,279
Oil (MBbls)............................................... 266 205 195
Total (MMcfe)........................................... 5,175 3,405 5,449
PROVED UNDEVELOPED:
Gas (MMcf)................................................ 8,704 10,084 33,618
Oil (MBbls)............................................... 1,084 1,137 2,931
Total (Mmcfe)........................................... 15,208 16,906 51,205
TOTAL PROVED:
Gas (MMcf)................................................ 17,301 19,278 48,697
Oil (MBbls)............................................... 1,864 2,220 4,375
Total (MMcfe)........................................... 28,485 32,598 74,948
ESTIMATED FUTURE NET REVENUES(1)($000S)..................... $35,429 $57,592 $398,132
PRESENT VALUE(1)($000S)..................................... $25,275 $33,700 $179,265
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS($000S).............................................. $19,246 $25,178 $121,117
</TABLE>
------------------------
(1) The prices used in calculating Estimated Future Net Revenues and the Present
Value are determined using prices as of period end. Estimated Future Net
Revenues and the Present Value give no effect to federal or state income
taxes attributable to estimated future net revenues.
27
<PAGE>
The significant increase in proved reserves from December 31, 1999 to
September 30, 2000 resulted from the drilling and completion of three wells in
the Travis Peak and Pettit formations in East Texas which confirmed the presence
of additional undeveloped reserves in these formations as well as additional
geological and engineering evaluation of our property base.
The Estimated Future Net Revenues and Present Value are highly sensitive to
commodity price changes and commodity prices have recently been highly volatile.
The prices used to calculate Estimated Future Net Revenues and Present Value of
our proved reserves as of September 30, 2000 were $30.39 per barrel for oil and
$5.45 per Mcf for gas, adjusted for quality, contractual agreements, regional
price variations and transportation and marketing fees. We estimate that if all
other factors (including the estimated quantities of economically recoverable
reserves) were held constant, a $1.00 per Bbl change in oil prices and a $.10
per Mcf change in gas prices from those used in calculating the Present Value
would change such Present Value by $2,163,000 and $2,578,000 respectively, as of
September 30, 2000.
Sproule Associates Inc., our independent reserve engineers, prepared the
estimates of proved reserves as of September 30, 2000. Estimates of proved
reserves for December 31, 1998 and December 31, 1999 were prepared by Jon
Stromberg, an independent petroleum engineer. In October 2000, Mr. Stromberg
became our Vice President--Operations.
No estimates of our proved reserves comparable to those included in this
prospectus have been included in reports to any federal agency other than the
Securities and Exchange Commission.
PROPERTIES
To date our activities have been conducted mainly in well known productive
basins in the United States in which our acquired properties are located:
- The Sabine Uplift in East Texas and Louisiana;
- The Hugoton basin in Western Kansas and Oklahoma;
- The Sedgwick basin in Central Kansas; and
- The Tatum basin in Southeast New Mexico.
The following table sets forth certain information regarding our activities
in each of our principal areas as of September 30, 2000.
<TABLE>
<CAPTION>
WESTERN SOUTHEAST
EAST TEXAS KANSAS AND CENTRAL NEW
AND LOUISIANA OKLAHOMA KANSAS MEXICO TOTAL
------------- ---------- -------- --------- --------
<S> <C> <C> <C> <C> <C>
PROPERTY STATISTICS:
Proved reserves (MMcfe).......................... 59,539 4,345 6,119 4,947 74,950
Percent of total proved reserves................. 79% 6% 8% 7% 100%
Gross producing wells............................ 58 64 29 7 158
Net producing wells.............................. 33.5 20.3 12.4 5.6 71.7
Gross acreage.................................... 18,389 11,539 3,556 2,077 35,562
Net acreage...................................... 17,068 4,120 2,300 1,888 25,377
Proved undeveloped reserves (MMcfe).............. 42,411 1,389 3,410 3,995 51,205
Estimated development costs ($000s).............. $ 9,900 $ 478 $1,741 $2,210 $14,329
Proved undeveloped locations..................... 22 3 4 3 32
NINE MONTHS ENDED SEPTEMBER 30, 2000 RESULTS:
Production (net) (MMcfe)......................... 588 165 101 71 845
Average net daily production (Mcfe).............. 1,849 603 370 259 3,081
</TABLE>
28
<PAGE>
EAST TEXAS AND NORTHWESTERN LOUISIANA
EAST TEXAS
The East Texas properties are located in Harrison and Panola Counties,
Texas. These properties contain approximately 17,708 gross (16,540 net) acres
with rights covering the Travis Peak, Pettit, Glen Rose and Cotton Valley
formations. Our East Texas properties have 58.6 Bcfe of proved reserves or 78%
of our total proved reserves at September 30, 2000, of which 42.4 Bcfe is
classified as proved undeveloped.
We have interests in 49 gross (24.7 net) producing wells in East Texas, of
which we operate 35. Average daily production net to our interest for the first
nine months of 2000 was 1.4 MMcf of gas and 57 Bbls of oil. Production is
primarily from the Betheny, Blocker and Waskom Fields. The producing lives of
these fields are generally 12 to 70 years. We have identified productive zones
in the existing wells that are currently behind pipe and thus are not currently
producing. These zones can be brought into production as existing reserves are
depleted. The Blocker area includes 15 gross (13.5 net) wells in Harrison County
which produce gas that is gathered, compressed and sold by Endeavor
Pipeline, Inc., a subsidiary of GMX. Gas sold from the Blocker area has a high
MMBtu content which results in a net price above Nymex average daily Henry Hub
natural gas price. Oil is sold separately at a slight premium to the average
Nymex Sweet Crude Cushing price, inclusive of deductions. Most of the planned
development will be added to existing gathering systems under comparable
contracts.
The undeveloped acreage in this area lies on Sabine Uplift just north of the
Carthage Field. The area has 28 producing reservoirs at depths from 3,000 to
10,000 feet. The reservoir trends are similar to river channels and beach
barrier bars and are generally substantial in length and sometimes width. These
features occur in more than one producing horizon and we give first priority to
drilling locations where a single well can drill through two or more producing
zones. This increases the reserves recoverable through a single wellbore. We
believe the natural gas development opportunities on this property base are
substantial and abundant. Our proved undeveloped reserves are significant in
this region consisting of 42 Bcfe, frequently located at the intersection of
multiple crossing reservoir trends. We have successfully completed three new
wells since December 31, 1999--the Bosh #1 and #2 and the J. Hancock #1 at
depths ranging from 6,600 to 6,700 feet. These wells produce from multiple zones
of the Pettit and Travis Peak formations and confirmed the existence of
additional proved undeveloped reserves. We have completed mapping and evaluation
of the Travis Peak and Pettit formations and have identified 22 drilling
locations with proved undeveloped reserves in these zones. It is likely that as
these locations are drilled, we will be able to identify still more such
locations with proved undeveloped reserves.
Recent third party drilling in the vicinity of our development acreage
confirms productive zones as shallow as 3700 feet in the Glenn Rose formation.
We expect several wells will target this zone, but we have yet to complete our
geological evaluation of this zone.
The Cotton Valley formation at depths of 8,500 to 10,000 feet is also
present and productive on the entire East Texas property base. In 1998, we
farmed out four 80-acre checkerboard locations in one of our 640-acre gas units
to Andrew Alan Exploration which has since drilled two 10,000 feet successful
Cotton Valley producing wells. One, the Patterson #1, was drilled in less than
30 days at a cost of approximately $900,000 and has estimated reserves of 1.5
Bcf in the Cotton Valley formation. The well also has five other zones that
appear productive in the Travis Peak and Pettit formations now behind pipe.
We are studying the deeper potential in the Cotton Valley formation on our
property block and the Patterson #1 well confirms our theory that the Cotton
Valley formation may be underdeveloped. Prior Cotton Valley wells on our
leasehold were all completed before 1983 and none of these wells tested the
entire zone. We believe current completion procedures and techniques have the
potential to
29
<PAGE>
increase ultimate reserve recovery. Completed well costs range from $700,000 to
$1,200,000 depending on completion methods. Our acreage position offers the
potential for 187 natural gas Cotton Valley drilling locations. We expect to
drill some of our wells containing proved undeveloped reserves in the Pettit
and/or Travis Peak formations to the deeper Cotton Valley field to test this
zone more fully.
LOUISIANA
The Louisiana properties are located in Clairborne, Caddo, Catahoula and
Webster parishes with production from the Cotton Valley, Hosston and Rodessa
formations. We have 9 gross (4.3 net) producing wells, 6 of which we operate.
Production is predominately oil. Louisiana proved reserves are 0.9 Bcfe and
represent approximately 1% of proved reserves at September 30, 2000. Average
daily production net to our interest for the first nine months of 2000 was 20
Bbls of oil and 23 Mcf of gas.
We are in the process of evaluation of additional behind pipe and
undeveloped reserves in the region. The wells are producing around a piercement
saltdome which has produced numerous structural traps for oil. We believe the
potential to recover reserves is substantial. Further geological and geophysical
study could establish more prospective drilling locations.
WESTERN KANSAS AND OKLAHOMA PANHANDLE
The Western Kansas and Oklahoma Panhandle areas are located in the Hugoton
Embayment of Finney and Scott Counties in Kansas, and Texas County in Oklahoma.
These areas combined consist of approximately 11,539 gross (4,120 net) acres.
Our western Kansas and Oklahoma Panhandle properties have 4,345 MMcfe of proved
reserves or 6% of our total proved reserves at September 30, 2000. The Hugoton
Embayment is one of the largest gas fields on the North American Continent. We
have a total of 64 gross (20.3 net) producing wells as of September 30, 2000.
Substantially all of these wells penetrate multiple formations which have
additional development potential. Average daily production net to our interest
for the first nine months of 2000 was 181 Mcf of gas and 60 Bbls of oil. The
producing reservoirs in the Hugoton Embayment have low permeability, so their
production rates are generally modest while their productive lives are generally
longer than 20 years.
In the Western Kansas properties, our ownership comprises approximately
10,899 gross (3,823 net) acres. Our producing properties are producing from
various porosity intervals of the Chase, Lansing, Kansas City, Marmaton and
Mississippian formations at depths from 2,500 to 4,600 feet. We have several
producing units in this area. One of the larger units is the Nunn Pool
waterflood. In a waterflood, water is pumped into the producing formation from
one or more wells to force the oil to migrate to the production wells. The Nunn
Pool Field is producing from the Mississippian and Marmaton formations and is
producing 62 net barrels of oil per day as of September 30, 2000. We are
currently evaluating the engineering plan to increase production from the Nunn
Pool waterflood. We estimate that an expenditure of approximately $277,000 could
result in approximately 34 barrels per day of increased oil production net to
our interest.
In Western Kansas, we have identified three locations with proved
undeveloped reserves of 1,392 MMcfe as of September 30, 2000. We are continuing
to evaluate these properties for further development potential.
Our Oklahoma acreage is the Etta Niles lease, which totals approximately 640
gross (297 net) acres, and is in the Carthage NW Field in Texas County,
Oklahoma. Most of the gas production is from the Topeka limestone formation and
oil production is from the Morrow formation. The company operates 3 producing
wells and 1 saltwater disposal well with an average daily net production of 48
Mcf and 7 Bbls of oil for the first nine months of 2000.
30
<PAGE>
CENTRAL KANSAS
The Central Kansas properties consist of approximately 3,556 gross (2,300
net) acres located in Kingman, Sedgwick, Kiowa and Comanche Counties that are
part of the Sedgwick Basin. Proved reserves in Central Kansas represent 8% of
our total proved reserves at September 30, 2000. Average daily production net to
our interests for the first nine months of 2000 was 176 Mcf of gas and 32 Bbls
of oil.
We have 29 gross (12.4 net) producing wells producing from the Mississippian
formation, two of which are commingled in the Lansing Kansas City formation. Our
Unruh Unit is a water flood of the Marmaton Limestone formation at a depth of
approximately 4,600 feet. We have recently added new wells to this unit,
improved the injection system and added the ability to increase the water
injection volumes. Net production has recently increased 5 Bbls of oil per day
because of these improvements.
We have identified five locations with proved undeveloped reserves as of
September 30, 2000 and are continuing to review others.
SOUTHEAST NEW MEXICO
Our Southeast New Mexico properties are located in Lea and Roosevelt
counties and consist of approximately 2,078 gross (1,888 net) acres. The acreage
lies on the northwestern edge of the Midland Basin, defined as the Tatum Basin.
Existing production is from three zones--the Bough C, Abo and San Andreas--at
depths ranging from 9,500 to 10,000 feet. Proved reserves in Southeast New
Mexico represent 7% of our total proved reserves at September 30, 2000. Average
daily production net to our interests for the first nine months of 2000 from our
7 gross (5.6 net) producing wells in this area was 72 Mcf of gas and 32 Bbls of
oil.
We have identified three locations with proved undeveloped reserves which
are planned for drilling in the near future. If successful, each well could
increase net production by approximately 55 Bbls of oil per day and 40 Mcf of
gas per day. Third party drilling activity in the vicinity of our properties
also suggests that deeper exploration may be warranted to the Atoka, Morrow and
Devonian formations and we are considering 3D seismic evaluations of these
formations.
31
<PAGE>
COSTS INCURRED AND ACQUISITION AND DRILLING RESULTS
The following table shows certain information regarding the costs incurred
by us in our acquisition and development activities during the periods
indicated. We have not incurred any exploration costs.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
----------------------- NINE MONTHS ENDED
1998 1999 SEPTEMBER 30, 2000
---------- ---------- ------------------
<S> <C> <C> <C>
PROPERTY ACQUISITION COSTS:
Proved............................................. $5,720,419 $ 514,212 $ --
Unproved........................................... 615,803 199,860 250,740
DEVELOPMENT COSTS.................................... 418,723 490,587 1,437,413
---------- ---------- ----------
Total............................................ $6,754,945 $1,204,659 $1,688,153
========== ========== ==========
</TABLE>
We acquired, drilled or participated in the drilling of wells as set out in
the table below for the periods indicated. You should not consider the results
of prior acquisition and drilling activities as necessarily indicative of future
performance, nor should you assume that there is necessarily any correlation
between the number of productive wells acquired or drilled and the oil and gas
reserves generated by those wells.
<TABLE>
<CAPTION>
NINE MONTH
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------- SEPTEMBER 30,
1998 1999 2000
------------------- ------------------- -------------------
GROSS NET GROSS NET GROSS NET
-------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C>
ACQUIRED WELLS:
Gas.................................................. 65 31.8 -- -- -- --
Oil.................................................. 90 39.3 -- -- -- --
--- ---- --- ---- --- ----
Total.............................................. 155 71.1 -- -- -- --
=== ==== === ==== === ====
DEVELOPMENT WELLS:
Gas.................................................. -- -- 1 .8 -- --
Oil.................................................. -- -- 1 .8 1 1
Dry.................................................. -- -- -- -- -- --
--- ---- --- ---- --- ----
Total.............................................. -- -- 2 1.6 1 1
=== ==== === ==== === ====
EXPLORATORY WELLS:
Gas.................................................. -- -- -- -- -- --
Oil.................................................. -- -- -- -- -- --
Dry.................................................. -- -- -- -- -- --
--- ---- --- ---- --- ----
Total.............................................. -- -- -- -- -- --
=== ==== === ==== === ====
</TABLE>
32
<PAGE>
ACREAGE
The following table shows our developed and undeveloped oil and gas lease
and mineral acreage as of September 30, 2000. Excluded is acreage in which our
interest is limited to royalty, overriding royalty and other similar interests.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
------------------- -------------------
LOCATION GROSS NET GROSS NET
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C>
East Texas and Louisiana...................... 14,188 13,893 4,200 3,175
Western Kansas and Oklahoma................... 11,539 4,120 -- --
Central Kansas................................ 3,556 2,300 -- --
Southeast New Mexico.......................... 1,760 1,571 317 317
------ ------ ----- -----
Total....................................... 31,045 21,885 4,517 3,492
====== ====== ===== =====
</TABLE>
Title to oil and gas acreage is often complex. Landowners may have
subdivided interests in the mineral estate. Oil and gas companies frequently
subdivide the leasehold estate to spread drilling risk and often create
overriding royalties. When we purchased the properties, the purchase included
title opinions prepared by counsel in the several states analyzing mineral
ownership in each well drilled. Further, for each producing well there is a
division order signed by the current recipients of payments from production
stipulating their assent to the fraction of the revenues they receive. We obtain
similar title opinions and division orders with respect to each new well
drilled. While these practices, which are common in the industry, do not assure
that there will be no claims against title to the wells or the associated
revenues, we believe that we are within normal and prudent industry practices.
Because many of the properties in our current portfolio were purchased out of
bankruptcy in 1998, we have the advantage that any known or unknown liens
against the properties were cleared in the bankruptcy.
PRODUCTIVE WELL SUMMARY
The following table shows our ownership in productive wells as
September 30, 2000. Gross oil and gas wells include one well with multiple
completions. Wells with multiple completions are counted only once for purposes
of the following table.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
-----------------------
TYPE OF WELL GROSS NET
------------ -------- --------
<S> <C> <C>
Gas......................................................... 66 31.8
Oil......................................................... 92 39.9
--- ----
Total..................................................... 158 71.7
</TABLE>
MARKETING AND PRICES
Our ability to market oil and gas often depends on factors beyond our
control. The potential effects of governmental regulation and market factors,
including alternative domestic and imported energy sources, available pipeline
capacity, and general market conditions are not entirely predictable.
NATURAL GAS. Natural gas is generally sold pursuant to individually
negotiated gas purchase contracts, which vary in length from spot market sales
of a single day to term agreements that may extend several years. Customers who
purchase natural gas include marketing affiliates of the major pipeline
companies, natural gas marketing companies, and a variety of commercial and
public authorities, industrial, and institutional end-users who ultimately
consume the gas. Gas purchase contracts define the terms and conditions unique
to each of these sales. The price received for natural gas sold on the spot
market may vary daily, reflecting changing market conditions. The deliverability
and price of natural gas are subject to both governmental regulation and supply
and demand forces.
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<PAGE>
During the past several years, regional surpluses and shortages of natural gas
have occurred, resulting in wide fluctuations in prices received.
All of our gas is currently sold under contracts providing for market
sensitive terms which are terminable with 30-60 day notice by either party
without penalty. This means that we enjoy the high prices in the current market
and that we are subject to price declines if gas prices decline in the future.
CRUDE OIL. Oil produced from our properties will be sold at the prevailing
field price to one or more of a number of unaffiliated purchasers in the area.
Generally, purchase contracts for the sale of oil are cancelable on 30-days
notice. The price paid by these purchasers is generally an established, or
"posted," price that is offered to all producers. During the last several years
prices paid for crude oil have fluctuated substantially. Future oil prices are
difficult to predict due to the impact of worldwide economic trends, coupled
with supply and demand variables, and such non-economic factors as the impact of
political considerations on OPEC pricing policies and the possibility of supply
interruptions.
For 1999, our largest purchasers included TeppCo Crude and Koch Gateway
PipeLine which accounted for 75.4% and 19.3% of oil and natural gas sales,
respectively. For the first nine months of 2000, the same purchasers accounted
for 82.9% and 29.4%, respectively, of oil and natural gas sales, respectively.
We do not believe that the loss of any our purchasers would have a material
adverse affect on our operations. None of our gas or oil sales contracts have a
term of more than one year.
REGULATION
EXPLORATION AND PRODUCTION. The exploration, production and sale of oil and
gas are subject to various types of local, state and federal laws and
regulations. These laws and regulations govern a wide range of matters,
including the drilling and spacing of wells, allowable rates of production,
restoration of surface areas, plugging and abandonment of wells and requirements
for the operation of wells. Our operations are also subject to various
conservation requirements. These include the regulation of the size and shape of
drilling and spacing units or proration units and the density of wells which may
be drilled and the unitization or pooling of oil and gas properties. In this
regard, some states allow forced pooling or integration of tracts to facilitate
exploration, while other states rely on voluntary pooling of lands and leases.
In addition, state conservation laws establish maximum rates of production from
oil and gas wells, generally prohibit the venting or flaring of natural gas and
impose certain requirements regarding the ratability of production. All of these
regulations may adversely affect the rate at which wells produce oil and gas and
the number of wells we may drill. All statements in this prospectus about the
number of locations or wells reflect current laws and regulations.
Laws and regulations relating to our business frequently change, and future
laws and regulations, including changes to existing laws and regulations, could
adversely affect our business.
ENVIRONMENTAL MATTERS. The discharge of oil, gas or other pollutants into
the air, soil or water may give rise to liabilities to the government and third
parties and may require us to incur costs to remedy discharges. Natural gas, oil
or other pollutants, including salt water brine, may be discharged in many ways,
including from a well or drilling equipment at a drill site, leakage from
pipelines or other gathering and transportation facilities, leakage from storage
tanks and sudden discharges from damage or explosion at natural gas facilities
of oil and gas wells. Discharged hydrocarbons may migrate through soil to water
supplies or adjoining property, giving rise to additional liabilities.
A variety of federal and state laws and regulations govern the environmental
aspects of natural gas and oil production, transportation and processing and
may, in addition to other laws, impose liability in the event of discharges,
whether or not accidental, failure to notify the proper authorities of a
discharge, and other noncompliance with those laws. Compliance with such laws
and regulations may increase the cost of oil and gas exploration, development
and production, although we do not currently anticipate that compliance will
have a material adverse effect on our capital expenditures or earnings. Failure
to comply with the requirements of the applicable laws and regulations could
subject us to
34
<PAGE>
substantial civil and/or criminal penalties and to the temporary or permanent
curtailment or cessation of all or a portion of our operations.
The Comprehensive Environmental Response, Compensation and Liability Act or
CERCLA, also known as the "superfund law", imposes liability, regardless of
fault or the legality of the original conduct, on some classes of persons that
are considered to have contributed to the release of a "hazardous substance"
into the environment. These persons include the owner or operator of a disposal
site or sites where the release occurred and companies that dispose or arrange
for disposal of the hazardous substances found at the time. Persons who are or
were responsible for releases of hazardous substances under CERCLA may be
subject to joint and severable 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. We
could be subject to the liability under CERCLA because our drilling and
production activities generate relatively small amounts of liquid and solid
waste that may be subject to classification as hazardous substances under
CERCLA.
The Resource Conservation and Recovery Act of 1976, as amended ("RCRA"), is
the principal federal statute governing the treatment, storage and disposal of
hazardous wastes. RCRA imposes stringent operating requirements, and liability
for failure to meet such requirements, on a person who is either a "generator"
or "transporter" of hazardous waste or an "owner" or "operator" of a hazardous
waste treatment, storage or disposal facility. At present, RCRA includes a
statutory exemption that allows most oil and natural gas exploration and
production waste to be classified as nonhazardous waste. A similar exemption is
contained in many of the state counterparts to RCRA. As a result, we are not
required to comply with a substantial portion of RCRA's requirements because our
operations generate minimal quantities of hazardous wastes. At various times in
the past, proposals have been made to amend RCRA to rescind the exemption that
excludes oil and natural gas exploration and production wastes from regulation
as hazardous waste. Repeal or modification of the exemption by administrative,
legislative or judicial process, or modification of similar exemptions in
applicable state statutes, would increase the volume of hazardous waste we are
required to manage and dispose of and would cause us to incur increased
operating expenses.
We do not believe that our environmental risks will be materially different
from those of comparable companies in the oil and gas industry. We believe our
present activities substantially comply, in all material respects, with existing
environmental laws and regulations. Nevertheless, we cannot assure you that
environmental laws will not result in a curtailment of production or material
increase in the cost of production, development or exploration or otherwise
adversely affect our financial condition and results of operations. Although we
maintain liability insurance coverage for liabilities from pollution,
environmental risks generally are not fully insurable.
In addition, because we have acquired and may acquire interests in
properties that have been operated in the past by others, we may be liable for
environmental damage, including historical contamination, caused by such former
operators. Additional liabilities could also arise from continuing violations or
contamination not discovered during our assessment of the acquired properties.
MARKETING AND TRANSPORTATION. The interstate transportation and sale for
resale of natural gas is regulated by the Federal Energy Regulatory Commission
under the Natural Gas Act of 1938. The sale and transportation of natural gas
also is subject to regulation by various state agencies. The Natural Gas
Wellhead Decontrol Act of 1989 eliminated all gas price regulation effective
January 1, 1993. In addition, FERC recently has proposed several rules and
orders concerning transportation and marketing of natural gas. We cannot predict
the impact of these rules and other regulatory developments on GMX.
In 1992, FERC finalized Order 636, and also has promulgated regulations
pertaining to the restructuring of the interstate transportation of natural gas.
Pipelines serving this function have since
35
<PAGE>
been required to "unbundle" the various components of their service offerings,
which include gathering, transportation, storage, and balancing services. In
their current capacity, pipeline companies must provide their customers with
only the specific service desired, on a non-discriminatory basis. Although we
are not an interstate pipeline, we believe the changes brought about by Order
636 have increased competition in the marketplace, resulting in greater market
volatility.
Various rules, regulations and orders, as well as statutory provisions may
affect the price of natural gas production and the transportation and marketing
of natural gas.
GAS GATHERING
We have acquired, constructed and own gas gathering lines and compression
equipment for gathering and delivering of natural gas from our east Texas
properties. This gathering system currently consists of approximately 24 miles
of gathering lines that collect gas from approximately 18 wells, which accounted
for approximately 65% of our gas production from this area in the first nine
months of 2000. This system enables us to improve the control over our
production and enhances our ability to obtain access to pipelines for ultimate
sale of our gas. We only gather gas from wells in which we own an interest.
Remaining gas is gathered by unrelated third parties.
COMPETITION
We compete with major integrated oil and gas companies and independent oil
and gas companies in all areas of operation. In particular, we compete for
property acquisitions and for the equipment and labor required to operate and
develop these properties. Most of our competitors have substantially greater
financial and other resources than we have. In addition, larger competitors may
be able to absorb the burden of any changes in federal, state and local laws and
regulations more easily than we can, which could adversely affect our
competitive position. These competitors may be able to pay more for exploratory
prospects and may be able to define, evaluate, bid for and purchase a greater
number of properties and prospects than we can. Further, our competitors may
have technological advantages and may be able to implement new technologies more
rapidly than we can. Our ability to explore for natural gas and oil prospects
and to acquire additional properties in the future will depend on our ability to
conduct operations, to evaluate and select suitable properties and to consummate
transactions in this highly competitive environment. In addition, most of our
competitors have operated for a much longer time than we have and have
demonstrated the ability to operate through industry cycles.
Recent increased oil and gas drilling activity in the regions in which we
own properties has resulted in increased demand for drilling rigs and other
oilfield equipment and services. We may experience occasional or prolonged
shortages or unavailability of drilling rigs, drill pipe and other material used
in oil and gas drilling. Such unavailability could result in increased costs,
delays in timing of anticipated development or cause interests in undeveloped
oil and gas leases to lapse.
FACILITIES
We currently lease approximately 3,900 square feet in Oklahoma City,
Oklahoma for our corporate headquarters. We believe this space is adequate for
our current needs, but will need additional space if this offering is completed.
We do not anticipate any difficulty in obtaining adequate space. The annual
rental cost is not expected to exceed $20,000.
EMPLOYEES
As of September 30, 2000, we had 10 full-time employees of which 4 are
management and the balance are clerical or technical employees. We also use five
independent contractors to assist in field operations. We believe our relations
with our employees are satisfactory. Our employees are not covered by a
collective bargaining agreement. After completion of the offering, we expect to
add employees to manage our increased resources, including additional
geological, operations and accounting staff.
LEGAL PROCEEDINGS
As of December 20, 2000, we were not a party to any material legal
proceedings.
36
<PAGE>
MANAGEMENT
OFFICERS AND DIRECTORS
The executive officers and directors of GMX after this offering will be as
follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Ken L. Kenworthy, Jr...................... 44 President and Director
Ken L. Kenworthy, Sr...................... 65 Executive Vice President, Chief Financial
Officer and Director
T. J. Boismier............................ 66 Director
Paul Malloy............................... 47 Director
Kyle Kenworthy............................ 39 Vice President--Land
Jon Stromberg............................. 62 Vice President--Operations
</TABLE>
The board of directors of GMX will initially consist of four members, at
least two of which, Messrs. Boismier and Malloy, will be independent directors.
All directors hold office until the next annual meeting of shareholders and
until their successors are elected. The executive officers of GMX are appointed
by the board of directors and serve at its discretion. There are no employment
agreements with executive officers.
The following is a brief description of the business background of each of
our executive officers and directors.
KEN L. KENWORTHY, JR. is a co-founder of GMX and has been President and a
director since the company's inception in 1998. In 1980, he founded OEXCO Inc.,
a privately held oil and gas company, which he managed until 1995 when its
properties were sold for approximately $13 million. During this period OEXCO
operated 300 wells and drilled and discovered seven fields and dozens of new
zones. During this same period, he formed and managed a small gas gathering
system. From 1995 until he founded GMX in 1998, Mr. Kenworthy was a private
investor. From 1980 to 1984, he was a partner in Hunt-Kenworthy Exploration
which was formed to share drilling and exploration opportunities in different
geological regions. Prior to 1980, he held various geology positions with Lone
Star Exploration, Cities Service Gas Co., Nova Energy, and Berry Petroleum
Corporation. He also served as a director of Nichols Hills Bank, a commercial
bank in Oklahoma City, Oklahoma for ten years before it was sold in 1996 to what
is now Bank of America. He is a member of the American Association of Petroleum
Geologists and Oklahoma City Geological Society.
KEN L. KENWORTHY, SR. is a co-founder of GMX and has been Executive Vice
President, Chief Financial Officer and a director since the company's inception
in 1998. From 1993 to 1998, he was principal owner and Chairman of Granita
Sales Inc., a privately-held frozen beverage manufacturing distribution company.
Prior to that time, he held various financial positions with private and public
businesses, including from 1970 to 1984, as vice president, secretary-treasurer,
chief financial officer and a director of CMI Corporation, a New York Stock
Exchange listed company which manufactures and sells road-building equipment. He
has held several accounting industry positions including past president of the
Oklahoma City Chapter National Association of Accountants, past vice president
of the National Association of Accountants and past officer and director of the
Financial Executives Institute.
T. J. BOISMIER will become a director of the company at the closing of the
offering. Mr. Boismier is founder, president and chief executive officer of T.
J. Boismier Co., Inc., a privately held mechanical contracting company in
Oklahoma City, Oklahoma which designs and installs plumbing, heating, air
conditioning and utility systems in commercial buildings, a position he has held
since 1961.
37
<PAGE>
PAUL MALLOY will become a director at the closing of the offering. He is a
financial advisor and associate vice president of Morgan Stanley Dean Witter in
Oklahoma City, Oklahoma, a position he has held since 1987. He is also the
general partner of The Buffalo Company, a privately held oil and gas royalty
ownership company.
KYLE KENWORTHY became Vice President of Land for the company in March, 1999.
From 1997 until he joined the company, he was an independent petroleum landman,
performing contract land services for other oil and gas companies, and from 1992
to 1997 he was an independent real estate investor and manager. Prior to that
time, he was employed by H&K Exploration and OEXCO Inc. in various geological,
accounting and land management positions over a 12 year period at OEXCO,
Mr. Kenworthy helped structure and managed an aggressive drilling program in
Oklahoma City and surrounding areas for over 300 company operated wells.
JON STROMBERG became Vice President of Operations for the company on
October 1, 2000. From 1990 until he joined the company, Mr. Stromberg was an
independent consulting engineer based in Oklahoma City, Oklahoma, providing
drilling, production, reservoir management and reserve engineering services to
various companies including GMX. Mr. Stromberg is a registered petroleum
engineer and is a member of the Society of Petroleum Engineers.
Ken Kenworthy, Sr. is the father of Ken Kenworthy, Jr. and Kyle Kenworthy.
COMMITTEES OF THE BOARD OF DIRECTORS
Our board of directors will have Audit and Compensation Committees each
consisting of Messrs. Boismier and Malloy. The Audit Committee's functions will
include recommending to the board of directors the engagement of GMX's
independent public accountants, reviewing with such accountants the results and
scope of their auditing engagement and various other matters. The Compensation
Committee will establish compensation policies and levels for our chief
executive officer and other senior officers.
DIRECTOR COMPENSATION
Nonemployee directors will receive $750 for each board and $500 for each
committee meeting which they attend. We will also grant options to our
nonemployee directors as described under "Management--Stock Option Plan."
EXECUTIVE COMPENSATION
The following table sets forth information with respect to compensation
received by the chief executive officer of GMX and the other executive officers
of GMX. Such individuals are hereinafter referred to as the "named executive
officers".
SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
ANNUAL COMPENSATION
----------------------------------
OTHER ANNUAL
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION
--------------------------- -------- -------- -------- ------------
<S> <C> <C> <C> <C>
Ken L. Kenworthy, Jr. .................................. 1998 $45,000 $ -- $ --
President 1999 96,500 -- --
Ken L. Kenworthy, Sr. ..................................
Executive Vice President, 1998 $45,000 $ -- $ --
and Chief Financial Officer 1999 96,500 -- --
Kyle Kenworthy ......................................... 1998 $ -- $ -- $ --
Vice President--Land 1999 40,000 1,000 --
</TABLE>
38
<PAGE>
We expect to increase the compensation of our executive officers after the
offering to a level comparable to similarly sized oil and gas companies.
STOCK OPTION PLAN
In October 2000, the board of directors and shareholders adopted the GMX
RESOURCES INC. Stock Option Plan (the "Option Plan"). Under the Option Plan, we
may grant both stock options intended to qualify as incentive stock options
under Section 422 of the Internal Revenue Code and options which are not
qualified as incentive stock options. Options may be granted under the Plan to
key employees and nonemployee directors.
The maximum number of shares of common stock issuable under the Option Plan
is 300,000, subject to appropriate adjustment in the event of a reorganization,
stock split, stock dividend, reclassification or other change affecting our
common stock. All executive officers and other key employees who hold positions
of significant responsibility are eligible to receive awards under the Option
Plan. In addition, each director of the company is eligible to receive options
under the Plan. The exercise price of options granted under the Plan is not less
than 100% of the fair market value of the shares on the date of grant. Options
granted under the Plan become exercisable as the board may determine in
connection with the grant of each option. In addition, the board may at any time
accelerate the date that any option granted becomes exercisable. Limitations
exist on the duration, exercise price and number of shares that may be subject
to or exercised in connection with incentive stock options. The exercise price
of options may be paid in cash, in shares of common stock (valued at fair market
value at the date of exercise), by surrender of a portion of the option, or by a
combination of such means of payment, as may be determined by the board of
directors.
In the event of any reorganization, merger, consolidation or sale of
substantially all of the assets of GMX while options remain outstanding under
the Option Plan, the Option Plan provides for substitute options with an
appropriate number of shares or other securities of the reorganized, merged,
consolidated or acquiring corporation which were distributed to the shareholders
of GMX. In the event of a Change in Control (as defined in the Option Plan) of
GMX, all outstanding options will become immediately and fully exercisable and
optionees will be entitled to surrender, within 60 days following the Change in
Control, unexercised options or portions of options in return for cash payment
equal to the difference between the aggregate exercise price of the surrendered
options and the fair market value of the shares of common stock underlying the
surrendered options.
The board of directors may amend or terminate the Option Plan at any time,
except that no amendment will become effective without the approval of the
shareholders except to the extent such approval may be required by applicable
law or by the rules of any securities exchange upon which the GMX shares are
admitted to listed trading. The Option Plan will terminate in 2010, except with
respect to awards then outstanding.
As of the date of this prospectus, no options have been granted pursuant to
the Option Plan. On the closing date of this offering, we expect to grant
options to nonemployee directors and named executive officers at an option price
of $10.00 per share as indicated below:
<TABLE>
<CAPTION>
NAME NUMBER OF SHARES
---- ----------------
<S> <C>
T. J. Boismier.............................................. 10,000
Paul Malloy................................................. 10,000
Kyle Kenworthy.............................................. 10,000
Jon Stromberg............................................... 10,000
</TABLE>
Such options will vest at the rate of 25% per year for each year of
continued service.
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<PAGE>
The Option Plan requires that GMX file and maintain a registration statement
under the Securities Act of 1933 for the shares of common stock underlying any
options granted.
CERTAIN TRANSACTIONS
Ken L. Kenworthy, Sr. and Ken L. Kenworthy, Jr. are both guarantors of our
bank debt. Each of their guarantees are limited to $1,000,000. We expect these
guarantees to be released at the completion of the offering.
Ken L. Kenworthy, Jr. loaned an aggregate amount of $575,000 to GMX in March
and May, 1999 to fund the repurchase of stock from a former shareholder and to
provide working capital. These loans bear interest at a floating prime rate,
averaging 9.2% for the year ended December 31, 1999 and 9.8% for the first six
months of 2000. The loans mature on March 11, 2001. The loans are secured by
undeveloped oil and gas leases. For the year ended December 31, 1999 and the six
months ended June 30, 2000, interest accrued on these loans was $29,200 and
$30,200, respectively. Interest is paid monthly and is current. At June 30,
2000, the balance of this debt was $575,000 and was reduced to $427,500
thereafter by a payment made by the company. We expect to repay this loan out of
the proceeds of the offering.
In October 2000, Ken L. Kenworthy, Jr. and Ken L. Kenworthy, Sr. jointly
loaned $230,000 to GMX to fund the repurchase of preferred stock held by an
unrelated third party. This loan bears interest at a floating prime rate and was
repaid on October 31, 2000 from borrowings under our credit facility.
In February, 2000, we issued 98,000 shares of common stock to Jon Stromberg,
our current Vice President--Operations, for engineering consulting services
valued at $50,659 primarily performed in 1999 and pursuant to an agreement
reached with Mr. Stromberg in February 1999. In connection with such issuance,
Mr. Stromberg entered into an agreement providing for certain restrictions
relating to the voting and transfer of his shares which will terminate upon
completion of this offering.
We believe all of the transactions described above were on terms as
favorable to the Company as those that could have been obtained from unrelated
parties in arms length transactions. These transactions were not approved by
independent directors because we will not have independent directors until
closing of this offering. Any future affiliate transactions will be subject to
review by our independent directors who will have access, at our expense, to our
counsel or independent legal counsel.
INDEMNIFICATION ARRANGEMENTS
Under Section 1031 of the Oklahoma General Corporation Act ("OGCA") and our
certificate of incorporation, we have broad powers to indemnify its directors
and officers against liabilities they may incur in such capacities, including
liabilities under the Securities Act of 1933, as amended ("Securities Act").
Our certificate of incorporation provides that GMX shall indemnify, and may
advance litigation expenses to its officers and directors to the fullest extent
permitted by the OGCA. GMX may also indemnify, and advance litigation expenses
to employees and agents of the corporation, and persons serving at the request
of the corporation as directors, officers, employees or agents of another
corporation, partnership, joint venture, trust or enterprise, to the fullest
extent permitted by Oklahoma law. We will enter into agreements with its
nonemployee directors providing for contractual rights of indemnity and expense
advancement.
Our certificate of incorporation provides that, pursuant to Section 1006 of
the OGCA, our directors shall not be liable for monetary damages for breach of
the directors' fiduciary duty of care to the corporation and its stockholders.
The provision in the certificate of incorporation does not
40
<PAGE>
eliminate the duty of care and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Oklahoma Law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the corporation, as
well as for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under the OGCA. The provision
also does not affect a director's responsibilities under any other law, such as
the state or federal securities laws.
41
<PAGE>
SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information regarding the beneficial
ownership of our common stock as of November 30, 2000, and as adjusted to
reflect the sale of 2,000,000 units in this offering, by:
- each person or group of affiliated persons known to be the beneficial
owner of more than 5% of our outstanding common stock,
- each of our directors,
- each our executive officers, and
- all of our directors and executive officers as a group.
As of October 31, 2000, there were 3,000,000 shares of common stock
outstanding held by 4 record holders. The company believes that, except as
otherwise listed below, each named beneficial owner has sole voting and
investment power with respect to the shares listed.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF SHARES PERCENT OF SHARES AFTER
BENEFICIAL OWNER SHARES BEFORE THIS OFFERING THIS OFFERING
---------------- --------- -------------------- -----------------------
<S> <C> <C> <C>
Ken L. Kenworthy, Jr.(1)(2)(3)................ 2,032,676 67.76%(3) 38.7%(3)
Ken L. Kenworthy, Sr.(2)...................... 967,324 32.2% 19.3%
Jon Stromberg(3).............................. 98,000(4) 3.3% 2.0%
T. J. Boismier................................ --(4) -- --
Paul Malloy................................... --(4) -- --
Kyle Kenworthy................................ --(4) -- --
All executive officers and directors as a
group
(7 persons)................................. 3,000,000 100% 60%
</TABLE>
------------------------
(1) Shares owned by Mr. Kenworthy, Jr. include 967,338 shares owned by his wife
as to which he disclaims beneficial ownership.
(2) The address of Messrs. Kenworthy, Jr. and Kenworthy, Sr. is 9400 North
Broadway, Oklahoma City, Oklahoma 73114.
(3) The shares beneficially owned by Mr. Kenworthy, Jr. before the offering and
his percentage ownership include the 98,000 shares also shown as
beneficially owned by Mr. Stromberg. Mr. Kenworthy, Jr. has the sole right
to vote such shares pursuant to an agreement with Mr. Stromberg.
Mr. Stromberg has the sole right to dispose of the shares beneficially owned
by him subject to the prior approval of the company. These voting and
transfer restrictions will terminate on closing of this offering, resulting
in 1,934,676 shares beneficially owned by Mr. Kenworthy, Jr. after the
offering and the percentage ownership shown in the table.
(4) Excludes 10,000 shares underlying options to be granted to these individuals
at the closing of the offering which will be exercisable over four years.
See "Management--Stock Option Plan."
42
<PAGE>
DESCRIPTION OF SECURITIES
GENERAL
Our authorized capital stock consists of 50,000,000 shares of common stock,
$.001 par value, and 10,000,000 shares of preferred stock, $.001 par value.
COMMON STOCK
The holders of common stock are entitled to one vote for each share of
common stock held on all matters voted upon by shareholders, including the
election of directors at any meeting of shareholders, a quorum requires the
presence in person or proxy of holders of the majority of the outstanding common
stock. Subject to the rights of any then outstanding shares of preferred stock,
the holders of common stock are entitled to dividends as may be declared in the
discretion of the board of directors out of funds legally available for the
payment of dividends. The holders of common stock are entitled to share ratably
in GMX's net assets upon liquidation after we pay or provide for all liabilities
and for any preferential liquidation rights of any preferred stock then
outstanding. The common shareholders have no preemptive rights to purchase
shares of GMX stock and no cumulative voting rights in the election of
directors. Shares of common stock are not subject to any redemption provisions
and are not convertible into any of our other securities. All of the shares of
common stock which we are going to issue in the offering will be fully paid and
nonassessable.
PREFERRED STOCK
Our board of directors has the authority, without further action by
shareholders, to issue shares of preferred stock from time to time in one or
more series and to fix the related number of shares and the designations, voting
powers, preferences, optional and other special rights, and restrictions or
qualifications of that preferred stock. The rights, preferences, privileges and
restrictions or qualifications of different series of preferred stock may differ
with respect to dividend rates, amounts payable on liquidation, voting rights,
conversion rights, redemption provisions, sinking fund provisions and other
matters. The issuance of preferred stock could:
- decrease the amount of earnings and assets available for distribution to
holders of common stock;
- adversely affect the rights and powers, including voting rights, of
holders of common stock; and
- have the effect of delaying, deferring or preventing a change in control.
The board of directors has no present plans to approve the issuance of any
preferred stock or designate any series of preferred stock. We will not offer
preferred stock to our promotors except on the same terms it is offered to all
other existing or new shareholders unless the offer to promotors is approved by
a majority of our independent directors, having access, at our expense, to our
counsel or independent legal counsel.
WARRANTS
GENERAL
The warrants are issued pursuant to the terms of a Warrant Agreement between
GMX and UMB Bank, n.a. as warrant agent. The descriptions below of certain
provisions of the warrants and the warrant agreement are summary in nature and
are qualified by the more detailed provisions of the Warrant Agreement and form
of warrant certificate, which have been filed as an exhibit to the registration
statement of which this prospectus is a part. Each warrant entitles the holder
to purchase one share of our common stock at an exercise price per share of
$ (150% of the initial public offering price of the units) for a period
of five years. The exercise price is subject to adjustment upon
43
<PAGE>
the occurrence of certain events as provided in the warrant certificate and
summarized below. Our warrants may be exercised at any time during the period
commencing 30 days after this offering and ending on the fifth anniversary date
of the closing of the offering, which is the expiration date, unless we have
earlier redeemed them. Warrants that have not previously been exercised will
expire on the expiration date. A warrant holder will not be deemed to be a
holder of the underlying common stock for any corporate purpose until the
warrant has been properly exercised. SEC rules relating to disclosure of
beneficial ownership of common stock deem holders of warrants to be beneficial
owners of the outstanding common stock because the holder has the right to
acquire shares within 60 days.
SEPARATE TRANSFERABILITY
Our warrants and common stock will trade separately immediately following
this offering and will not trade as units.
REDEMPTION OF WARRANTS
We have the right, commencing six months after the closing of this offering,
to redeem all or any part of the warrants issued in the offering at a redemption
price of $0.25 per warrant after providing 30 days prior written notice to the
warrant holders, if the average closing price of the common stock equals or
exceeds $ (200% of the initial public offering price of the units) for
ten consecutive trading days ending prior to the date of the notice of
redemption. We will send the written notice of redemption by first class mail to
warrant holders at their last known addresses appearing on the registration
records maintained by the transfer agent for our warrants. No other form of
notice or publication or otherwise will be required. If we call the warrants for
redemption, they will not be exercisable after the specified redemption date so
long as we deposit funds with the warrant agent sufficient to pay the redemption
price.
EXERCISE
A warrant holder may exercise our warrants only if an appropriate
registration statement is then in effect with the Securities and Exchange
Commission and if the shares of common stock underlying our warrants are
qualified for sale under the securities laws of the state in which the holder
resides. If we fail to maintain such registration statement in effect, we may
elect to redeem warrants submitted for exercise by paying the difference between
the market price and the exercise price of our common stock for the number of
shares of common stock underlying the warrant submitted for exercise.
Our warrants may be exercised by delivering to our transfer agent the
applicable warrant certificate on or prior to the expiration date or the
redemption date, as applicable, with the form on the reverse side of the
certificate executed as indicated, accompanied by payment of the full exercise
price for the number of warrants being exercised. Fractional shares will not be
issued upon exercise of our warrants.
ADJUSTMENTS OF EXERCISE PRICE
The exercise price is subject to adjustment if we declare any stock dividend
to shareholders or effect any split or share combination with respect to our
common stock. Therefore, if we effect any stock split or stock combination with
respect to our common stock, the exercise price in effect immediately prior to
such stock split or combination will be proportionately reduced or increased, as
the case may be. Any adjustment of the exercise price will also result in an
adjustment of the number of shares purchasable upon exercise of a warrant or, if
we elect, an adjustment of the number of warrants outstanding. An equitable
adjustment will also be made in the event of certain recapitalizations, mergers
or other events affecting the common stock.
TRANSFER AGENT AND WARRANT AGENT
The transfer agent for our common stock and warrants and the warrant agent
for the warrants is UMB Bank, n.a., Kansas City, Missouri.
44
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
THE UNITS
Upon completion of the offering, we expect to have 5,000,000 shares of
common stock outstanding. Of these shares, the 2,000,000 shares of common stock
issued as part of the units sold in the offering will be freely tradeable
without restrictions or further registration under the Securities Act of 1933,
except to the extent that any such shares are purchased by our "affiliates", as
that term is defined under the Securities Act. If shares are purchased by our
affiliates, they may generally be resold immediately but only in compliance with
the limitations of Rule 144 under the Securities Act. The 2,000,000 shares of
common stock underlying the warrants issued as part of the units sold in this
offering, when and if issued, will also be freely tradeable, except for shares
purchased by our affiliates.
OUTSTANDING RESTRICTED STOCK
The remaining 3,000,000 outstanding shares of common stock are restricted
securities within the meaning of Rule 144 and may not be sold in the absence of
registration under the Securities Act unless an exemption from registration is
available, including the exemption from registration offered by Rule 144.
Holders of all of the 3,000,000 outstanding restricted shares of common stock
have agreed not to sell or otherwise dispose of any of their shares of common
stock for a period of one year after completion of the offering, without the
prior written consent of Paulson Investment Company, Inc., subject to certain
limited exceptions. After the expiration of this lock-up period, or earlier with
the prior written consent of Paulson Investment Company, Inc., (but not before
the expiration of 90 days from the date of this prospectus) all 3,000,000 of
these outstanding restricted shares may be sold in the public market, subject to
certain volume and manner of sale limitations imposed by Rule 144.
UNDERWRITERS' WARRANTS
In connection with the offering, we have agreed to issue to certain
underwriters warrants to purchase up to 200,000 units. The underwriters'
warrants will be exercisable to purchase units at any time during the four-year
period commencing one year after the date of this prospectus. The exercise price
of the underwriters' warrants is $ per unit (120% of the initial public
offering price of the units). In lieu of paying the exercise price in cash, a
holder of underwriters' warrants may elect a "cashless exercise" in which, in
lieu of the cash exercise price otherwise payable, the number of units
obtainable on such exercise will be reduced by the number of units that have
market value equal to the exercise price. We have agreed to cause a registration
statement to be effective with respect to the units obtainable on exercise of
the underwriters' warrants until all of the underwriters' warrants have been
exercised or have expired. If issued and sold pursuant to such registration, and
under certain other circumstances, the common stock and warrants issued to the
underwriters upon exercise of these warrants will be freely tradable.
45
<PAGE>
UNDERWRITING
The underwriters named below have severally agreed, subject to the terms and
conditions contained in an underwriting agreement with us, to purchase 2,000,000
units from us at the price set forth on the cover page of this prospectus, in
accordance with the following table:
<TABLE>
<CAPTION>
NUMBER OF
UNDERWRITER UNITS
----------- ---------
<S> <C>
Paulson Investment Company, Inc.............................
I-Bankers Securities Incorporated...........................
Total....................................................... 2,000,000
=========
</TABLE>
NATURE OF UNDERWRITING COMMITMENT. The underwriting agreement provides that
the underwriters are committed to purchase all the units offered by this
prospectus if any units are purchased. This commitment does not apply to 300,000
units subject to the over-allotment option granted by us to the underwriters to
purchase additional shares in this offering.
CONDUCT OF THE OFFERING. We have been advised by Paulson Investment
Company, Inc., that the underwriters propose to offer the units to be sold in
this offering directly to the public at the initial public offering price set
forth on the cover page of this prospectus, and to certain securities dealers at
that price less a concession of not more than $ per unit. The
underwriters may allow, and those dealers may reallow, a concession not in
excess of $ per unit to certain other dealers. After the units are
released for sale to the public, the offering price and other selling terms may
be changed from time to time by the underwriters. No change in those terms will
change the amount of proceeds to be received by us as set forth on the cover
page of this prospectus.
The underwriters have informed us that they do not expect to confirm sales
of units offered by this prospectus to accounts over which they exercise
discretionary authority without obtaining the specific approval of the account
holder.
OVER-ALLOTMENT OPTION. We have granted the underwriters an option, expiring
45 days after the date of this prospectus, to purchase up to 300,000 additional
units from us on the same terms as set forth in this prospectus with respect to
the 2,000,000 units offered hereby. The underwriters may exercise this option,
in whole or in part, only to cover over-allotments, if any, in the sale of the
units offered by this prospectus.
PRICING CONSIDERATIONS. Prior to this offering, there has been no market
for our securities. Consequently, the initial public offering price of the units
will be determined by arms' length negotiation between us and the underwriters.
Among the factors to be considered in pricing the units are our results of
operations, current financial condition and future prospects, the experience of
management, the amounts of ownership to be retained by the current stockholders,
the general condition of the economy, the condition of the oil and gas industry,
including current and forecasted oil and gas prices, and the securities markets,
the demand for similar securities of companies considered comparable to us and
other factors that we and the underwriters deem relevant.
46
<PAGE>
OFFERING DISCOUNTS. The following table shows the per unit and total
underwriting discounts to be paid by us to the underwriters. These amounts are
shown assuming no exercise and full exercise, respectively, of the underwriters'
over-allotment option described above:
<TABLE>
<CAPTION>
TOTAL WITHOUT TOTAL WITH
PER OVER-ALLOTMENT OVER-ALLOTMENT
UNIT OPTION OPTION
-------- -------------- --------------
<S> <C> <C> <C>
Total underwriting discount to be paid by
us...................................... $ $ $
</TABLE>
EXPENSE ALLOWANCE. We have agreed to pay to Paulson Investment
Company, Inc., a non-accountable expense allowance equal to two percent of the
initial public offering price of the units sold by us in this offering
(including units sold on exercise of the underwriters' over-allotment option).
UNDERWRITERS' WARRANTS. On completion of this offering, we will issue to
certain underwriters warrants to purchase from us up to 200,000 units, for
$ per unit (120% of the public offering price). The warrants are
exercisable during the four-year period beginning one year from the date of this
prospectus. The warrants are not transferable for one year following the date of
this prospectus, except to an individual who is an officer or partner of an
underwriter, by will or by the laws of descent and distribution, and are not
redeemable.
The holder of these warrants will have, in that capacity, no voting,
dividend or other shareholder rights. Any profit realized on the sale of the
units issuable upon exercise of the these warrants may be deemed to be
additional underwriting compensation. The securities underlying these warrants
are being registered pursuant to the registration statement of which this
prospectus is a part. During the term of the warrants, the holder thereof is
given the opportunity to profit from a rise in the market price of our common
stock. We may find it more difficult to raise additional equity capital while
these warrants are outstanding. At any time at which these warrants are likely
to be exercised, we may be unable to obtain additional equity capital on more
favorable terms.
INDEMNIFICATION. We have agreed to indemnify the underwriters against
certain liabilities, including liabilities under the Securities Act, or to
contribute to payments that the underwriters may be required to make in respect
thereof.
LOCK-UP AGREEMENTS. Our shareholders have agreed not to sell or transfer
any shares of our common stock for one year after the date of this prospectus
without first obtaining the written consent of Paulson Investment Company, Inc.
Specifically, our shareholders have agreed not to, directly or indirectly:
- sell or offer to sell any shares of our common stock;
- grant any option to sell any shares of our common stock;
- engage in any short sale of our common stock;
- pledge or otherwise transfer or dispose of any shares of our common stock;
or
- publicly announce an intention to do any of the foregoing.
These lock-up agreements apply to shares of our common stock and also to any
options or warrants to acquire shares of our common stock, or securities
exchangeable or exercisable for or convertible into shares of our common stock.
These lock-up agreements apply to all such securities that are currently owned
or later acquired either of record or beneficially by the persons executing the
agreements. However, Paulson Investment Company, Inc. may, in its sole
discretion and without notice, release some or all of the securities subject to
these agreements at any time during the one year period. Currently, there are no
agreements by Paulson Investment Company, Inc. to release any of the securities
from the lock-up agreements during such one year period.
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<PAGE>
Our shareholders have agreed that, for a period of one year from the date of
this prospectus, they will notify Paulson Investment Company, Inc. before they
sell our common stock under Rule 144.
ONLINE ACTIVITIES. A prospectus in electronic format may be made available
on the Internet sites or through other online services maintained by one or more
of the underwriters of this offering, members of the selling group or by persons
with whom they may contract for such services. In those cases, prospective
investors may view offering terms online and, depending upon the particular
underwriter, prospective investors may be allowed to place orders online. The
underwriters may agree with us to allocate a specific number of shares for sale
to online brokerage account holders. Any such allocation for online
distributions will be made by the underwriters on the same basis as other
allocations.
STABILIZATION AND OTHER TRANSACTIONS. The rules of the SEC generally
prohibit the underwriters from trading in our securities on the open market
during this offering. However, the underwriters are allowed to engage in some
open market transactions and other activities during this offering that may
cause the market price of our securities to be above or below that which would
otherwise prevail in the open market. These activities may include
stabilization, short sales and over-allotments, syndicate covering transactions
and penalty bids.
- Stabilizing transactions consist of bids or purchases made by the managing
underwriter for the purpose of preventing or slowing a decline in the
market price of our securities while this offering is in progress.
- Short sales and over-allotments occur when the managing underwriter, on
behalf of the underwriting syndicate, sells more of our units than they
purchase from us in this offering. In order to cover the resulting short
position, the managing underwriter may exercise the over-allotment option
described above and/or may engage in syndicate covering transactions.
There is no contractual limit on the size of any syndicate covering
transaction. The underwriters will deliver a prospectus in connection with
any such short sales. Purchasers of units sold short by the underwriters
are entitled to the same remedies under the federal securities laws as any
other purchaser of units covered by the registration statement.
- Syndicate covering transactions are bids for or purchases of our
securities on the open market by the managing underwriter on behalf of the
underwriters in order to reduce a short position incurred by the managing
underwriter on behalf of the underwriters.
- A penalty bid is an arrangement permitting the managing underwriter to
reclaim the selling concession that would otherwise accrue to an
underwriter if the common stock originally sold by the underwriter was
later repurchased by the managing underwriter and therefore was not
effectively sold to the public by such underwriter.
If the underwriters commence these activities, they may discontinue them at
any time without notice. The underwriters may carry out these transactions on
the NASDAQ National Market, in the over-the-counter market or otherwise.
EXPENSES. The following table sets forth an itemization of all expenses we
will pay in connection with the issuance and distribution of the securities
being registered. Except for the SEC registration
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<PAGE>
fee, the NASD filing fee and NASDAQ National Market System listing fee, the
amounts listed below are estimates:
<TABLE>
<CAPTION>
NATURE OF EXPENSE AMOUNT
----------------- --------
<S> <C>
SEC registration fee........................................ $ 16,605
Underwriters' nonaccountable expense allowance.............. 400,000
NASD filing fees............................................ 10,000
NASDAQ listing fee.......................................... 60,000
Accounting fees and expenses................................ 50,000
Legal fees and expenses..................................... 75,000
Engineering fees and expenses............................... 50,000
Printing and related expenses............................... 125,000
Transfer agent fees and expenses............................ 10,000
Blue sky fees and expenses.................................. 25,000
Travel...................................................... 50,000
Miscellaneous expenses...................................... 78,395
--------
Total..................................................... $950,000
========
</TABLE>
LEGAL MATTERS
Crowe & Dunlevy, A Professional Corporation, Oklahoma City, Oklahoma, as our
counsel, will issue an opinion for us regarding the validity of the securities
offered by this prospectus. Certain legal matters related to this offering will
be passed upon for the underwriters by Stoel Rives LLP, Portland, Oregon.
EXPERTS
Our financial statements as of December 31, 1999 and for the year then ended
have been included in this prospectus and in the related registration statement
in reliance upon the report of KPMG LLP, independent certified public
accountants, appearing elsewhere in this prospectus and upon the authority of
said firm as experts in accounting and auditing.
Our financial statements as of and for the year ended December 31, 1998 have
been included in this prospectus and in the related registration statement in
reliance upon the report of Wright & McAfee, independent certified public
accountants, appearing elsewhere in this prospectus and upon the authority of
said firm as experts in accounting and auditing.
On October 10, 2000, we terminated Wright & McAfee and elected to engage
KPMG LLP to audit our financial statements as of December 31, 1999 and for the
year then ended due to KPMG's more extensive experience with publicly-held
companies. Wright & McAfee's report on our financial statements for the year
ended December 31, 1998 did not contain an adverse opinion or disclaimer of
opinion and was not modified as to uncertainty, audit scope or accounting
principles. There were no disagreements with Wright & McAfee on any matter of
accounting principles or practices, financial statement disclosure or auditing
scope or procedure for the year ended December 31, 1998 and through October 10,
2000. The decision to change accountants was approved by the board of directors.
The information appearing in this prospectus with respect to our proved oil
and gas reserves as of September 30, 2000 was estimated by Sproule
Associates, Inc., independent petroleum engineers, and is included in this
prospectus on the authority of such firm as experts in petroleum engineering.
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<PAGE>
AVAILABLE INFORMATION
We have filed with the SEC a registration statement on Form SB-2, including
all amendments and exhibits, under the Securities Act of 1933 with respect to
the securities offered in this offering. After this offering, we expect to file
reports and proxy or information statements as required by the Securities
Exchange Act of 1934. As permitted by the rules and regulations of the SEC, this
prospectus omits some of the information contained in the registration
statement. For further information with respect to GMX and the securities
offered in this offering, you should refer to the registration statement and its
exhibits and schedules. You may obtain copies of all or any portion of the
registration statement and future documents that we file at prescribed rates
from the public reference facilities maintained by the SEC at:
- Room 1024, Judiciary Plaza
450 Fifth Street, N.W.,
Washington, D.C. 20549
- 7 World Trade Center
New York, New York 10007
- CitiCorp Center
500 W. Madison Street, Suite 1400
Chicago, IL 60661
You may also call the SEC at 1-800-SEC-0330. In addition, the SEC maintains
a website that contains reports, proxy statements and information statements and
other information regarding registrants, including GMX, that file electronically
with the SEC, which can be accessed at http://www.sec.gov.
We intend to furnish our shareholders with annual reports containing
financial statements audited by our independent public accountants.
CERTAIN TECHNICAL TERMS
The terms whose meaning is explained in this section are used throughout
this prospectus:
BBL. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to oil or other liquid hydrocarbons.
BCF. Billion cubic feet.
BCFE. Billion cubic feet of natural gas equivalent, determined using the
ratio of one Bbl of oil or condensate to six Mcf of natural gas.
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.
BBTU. Billion Btus.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT LOCATION. A location on which a development well can be
drilled.
DEVELOPMENT WELL. A well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive in an
attempt to recover proved undeveloped reserves.
DRILLING UNIT. An area specified by governmental regulations or orders or
by voluntary agreement for the drilling of a well to a specified formation or
formations which may combine several smaller tracts or subdivides a large tract,
and within which there is usually some right to share in production or expense
by agreement or by operation of law.
50
<PAGE>
DRY HOLE. A well found to be incapable of producing either oil or gas in
sufficient quantities to justify completion as an oil or gas well.
EBITDA. EBITDA is defined as income (loss) before interest, income taxes,
depreciation, depletion and amortization. We believe that EBITDA is a financial
measure commonly used in the oil and gas industry as an indicator of a company's
ability to service and incur debt and fund capital expenditures. However, EBITDA
should not be considered in isolation or as a substitute for net income, cash
flows provided by operating activities or other data prepared in accordance with
generally accepted accounting principles, or as a measure of a company's
profitability or liquidity. EBITDA measures as presented may not be comparable
to other similarly titled measures of other companies.
ESTIMATED FUTURE NET REVENUES. Estimated future gross revenue to be
generated from the production of proved reserves, net of estimated production,
future development costs, and future abandonment costs, using prices and costs
in effect as of the date of the report or estimate, without giving effect to
non-property related expenses such as general and administrative expenses, debt
service and future income tax expense or to deprecation, depletion and
amortization,
EXPLORATORY WELL. A well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known reservoir.
GROSS ACRE. An acre in which a working interest is owned.
GROSS WELL. A well in which a working interest is owned.
INFILL DRILLING. Drilling for the development and production of proved
undeveloped reserves that lie within an area bounded by producing wells.
INJECTION WELL. A well which is used to place liquids or gases into the
producing zone during secondary/tertiary recovery operations to assist in
maintaining reservoir pressure and enhancing recoveries from the field or
productive horizons.
LEASE OPERATING EXPENSE. All direct costs associated with and necessary to
operate a producing property.
MBBLS. Thousand barrels.
MBTU. Thousand Btus.
MCF. Thousand cubic feet.
MCFE. Thousand cubic feet of natural gas equivalent, determined using the
ratio of one Bbl of oil or condensate to six Mcf of natural gas.
MMBBLS. Million barrels.
MMBTU. Million Btus.
MMCF. Million cubic feet.
MMCFE. Million cubic feet of natural gas equivalent, determined using the
ratio of one Bbl of oil or condensate to six Mcf of natural gas.
NATURAL GAS LIQUIDS. Liquid hydrocarbons which have been extracted from
natural gas (e.g., ethane, propane, butane and natural gasoline).
NET ACRES OR NET WELLS. The sum of the fractional working interests owned
in gross acres or gross wells.
NYMEX. New York Merchantile Exchange.
51
<PAGE>
OPERATOR. The individual or company responsible for the exploration,
exploitation and production of an oil or natural gas well or lease, usually
pursuant to the terms of a joint operating agreement among the various parties
owning the working interest in the well.
PRESENT VALUE. When used with respect to oil and gas reserves, present
value means the Estimated Future Net Revenues discounted using an annual
discount rate of 10%.
PRODUCTIVE WELL. A well that is producing oil or gas or that is capable of
production.
PROVED DEVELOPED RESERVES. Proved reserves that are expected to be
recovered through existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of oil and 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 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 wellbore in
another formation from that in which the well has previously been completed.
RESERVE LIFE. A measure of how long it will take to produce a quantity of
reserves, calculated by dividing estimated proved developed producing reserves
by production for the twelve-month period prior to the date of determination (in
gas equivalents).
ROYALTY. An interest in an oil and natural gas lease that gives the owner
of the interest the right to receive a portion of the production from the leased
acreage (or of the proceeds of the sale), but generally does not require the
owners to pay any portion of the costs of drilling or operating wells on the
leased acreage. Royalties may be either landowner's royalties, which are
reserved by the owner of a leased acreage at the time the lease is granted, or
overriding royalties, which are usually reserved by an owner of the leasehold in
connection with the transfer to a subsequent owner.
SECONDARY RECOVERY. An artificial method or process used to restore or
increase production from a reservoir after the primary production by the natural
producing mechanism and reservoir pressure has experienced partial depletion.
Gas injection and water flooding are examples of this technique.
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 gas regardless of whether such acreage contains proved reserves.
WATERFLOOD. A secondary recovery operation in which water is injected into
the producing formation in order to maintain reservoir pressure and force oil
toward and into the producing wells.
WORKING INTEREST. An interest in an oil and natural gas lease that gives
the owner of the interest the right to drill for and produce oil and natural gas
on the leased acreage and requires the owner to pay a share of the costs of
drilling and production operations.
WORKOVER. To carry out remedial operations on a productive well with the
intention of restoring or increasing production.
52
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<S> <C>
Independent Auditors' Reports............................... F-2
Consolidated Balance Sheets, December 31, 1999 and
September 30, 2000 (unaudited)............................ F-4
Consolidated Statements of Operations, Years Ended
December 31, 1998 and 1999 and Nine Months Ended
September 30, 1999 and 2000 (unaudited)................... F-5
Consolidated Statements of Cash Flows, Years Ended
December 31, 1999 and 1998 and Nine Months Ended
September 30, 1999 and 2000 (unaudited)................... F-6
Consolidated Statements of Changes in Shareholders' Equity,
Years Ended December 31, 1998 and 1999 and Nine Months
Ended September 30, 2000 (unaudited)...................... F-7
Notes to Financial Statements............................... F-8
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
GMX Resources Inc.
We have audited the accompanying consolidated balance sheet of GMX
Resources Inc. as of December 31, 1999 and the related consolidated statements
of operations, shareholders' equity, and cash flows for the year then ended.
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 audit.
We conducted our audit 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 amount 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 audit provides a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of GMX
Resources Inc. as of December 31, 1999 and the results of its operations and its
cash flows for the year then ended, in conformity with accounting principles
generally accepted in the United States of America.
KPMG LLP
Oklahoma City, Oklahoma
October 31, 2000
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Officers, Directors and Shareholders
GMX RESOURCES INC.
Oklahoma City, Oklahoma
We have audited the statements of operations, shareholders' equity, and cash
flows for the period from inception (January 23, 1998) to December 31, 1998.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amount 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the results of its operations and its cash flows for
the year ended December 31, 1998 in conformity with generally accepted
accounting principles.
WRIGHT, MCAFEE & CO., C.P.A.'S
A PROFESSIONAL CORPORATION
Oklahoma City, Oklahoma
March 31, 1999
F-3
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------- --------------
(UNAUDITED)
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash...................................................... $ 535,213 $ 253,941
Accounts receivable--interest owners...................... 115,121 121,489
Accounts receivable--oil and gas revenues................. 622,420 864,009
Inventories............................................... 84,460 88,989
Prepaid expenses.......................................... 16,819 32,076
---------- -----------
Total Current Assets.................................... 1,374,033 1,360,504
---------- -----------
OIL AND GAS PROPERTIES, at cost, based on the full cost
method of accounting for oil and gas properties........... 7,897,087 9,425,880
Less accumulated depreciation, depletion and
amortization............................................ (743,297) (996,419)
---------- -----------
7,153,790 8,429,461
---------- -----------
OTHER PROPERTY AND EQUIPMENT................................ 489,026 585,480
Less accumulated depreciation............................. (91,261) (140,115)
---------- -----------
397,765 445,365
---------- -----------
OTHER ASSETS................................................ 60,575 50,425
---------- -----------
TOTAL ASSETS................................................ $8,986,162 $10,285,755
========== ===========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Notes payable to Shareholder.............................. $ 200,000 $ 427,500
Accounts payable.......................................... 511,011 515,668
Accrued expenses.......................................... 39,055 63,428
Accrued interest.......................................... 54,144 52,860
Revenue distributions payable............................. 524,611 581,839
Drilling advances......................................... 220,785 73,525
Current portion of long-term debt......................... 71,480 695,729
---------- -----------
Total Current Liabilities............................... 1,621,086 2,410,549
---------- -----------
LONG-TERM DEBT, less current portion........................ 6,110,333 5,807,000
---------- -----------
OTHER LIABILITIES........................................... 124,261 167,486
Deferred income taxes..................................... -- 75,000
SHAREHOLDERS' EQUITY
Preferred stock, par value $.01 per share, 500,000 shares
authorized:
Series A, 150,000 shares issued, and 100,000 shares
outstanding........................................... 1,500 1,500
Series B, 22,000 shares issued and outstanding.......... 220 220
Common stock, par value $.001 per share--authorized
50,000,000 shares; issued 2,176,500 shares in 1999 and
2,274,500 in 2000; outstanding 1,451,000 shares in 1999
and 1,549,001 in 2000................................... 2,177 2,275
Additional paid-in capital................................ 2,042,712 2,046,614
Retained earnings (accumulated deficit)................... (489,248) 201,989
Treasury Stock:
Common--725,500 shares at cost.......................... (213,439) (213,439)
Preferred Series A--50,000 shares at cost............... (213,439) (213,439)
---------- -----------
Total Shareholders' Equity.............................. 1,130,483 1,825,720
---------- -----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY.................. $8,986,162 $10,285,755
========== ===========
</TABLE>
See notes to consolidated financial statements.
F-4
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE
FOR THE YEAR ENDED NINE MONTHS ENDED
DECEMBER 31, SEPTEMBER 30,
----------------------- -------------------------
1998 1999 1999 2000
---------- ---------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
REVENUE
Oil and gas sales............................. $1,794,513 $2,122,770 $1,530,072 $2,879,968
Interest income............................... 21,928 15,108 6,986 15,074
Other income.................................. 11,476 23,807 4,372 25,719
---------- ---------- ---------- ----------
1,827,917 2,161,685 1,541,430 2,920,761
---------- ---------- ---------- ----------
EXPENSES
Lease operations.............................. 895,899 917,590 664,025 725,637
Production and severance taxes................ 150,052 157,193 128,801 295,469
Depreciation, depletion, and amortization..... 433,374 423,474 317,706 313,348
Interest...................................... 419,897 486,234 385,209 431,925
General and administrative.................... 226,313 368,824 225,240 388,145
---------- ---------- ---------- ----------
2,125,535 2,353,315 1,720,981 2,154,524
---------- ---------- ---------- ----------
Income (Loss)Before Income Taxes............ (297,618) (191,630) (179,551) 766,237
INCOME TAXES.................................... -- -- -- 75,000
---------- ---------- ---------- ----------
Net Income (Loss)............................. $ (297,618) $ (191,630) $ (179,551) $ 691,237
========== ========== ========== ==========
Net Income (Loss) Applicable to Common Shares... $ (478,368) $ (360,193) $ (306,989) $ 567,862
========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE--BASIC................ $ (0.22) $ (0.22) $ (0.18) $ 0.37
========== ========== ========== ==========
EARNINGS (LOSS) PER SHARE--DILUTED.............. $ (0.22) $ (0.22) $ (0.18) $ 0.19
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES--BASIC........... 2,176,500 1,632,375 1,692,883 1,549,000
========== ========== ========== ==========
WEIGHTED AVERAGE COMMON SHARES--DILUTED......... 2,176,500 1,632,375 1,692,883 3,593,590
========== ========== ========== ==========
</TABLE>
See notes to consolidated financial statements.
F-5
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
----------------------- -------------------------
1998 1999 1999 2000
----------- --------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C>
CASH FLOWS DUE TO OPERATING ACTIVITIES
Net income (loss)............................... $ (297,618) $(191,630) $(179,551) $ 691,237
Adjustments to reconcile net income (loss) to
net cash provided by operating activities:
Depreciation, depletion, and amortization..... 433,374 423,474 317,706 313,348
Deferred income taxes......................... -- -- -- 75,000
(Gain) loss on sale of other property and
equipment................................... -- (4,513) 2,775 (22,094)
Stock to be issued for consulting services.... -- 46,609 28,169 4,000
Decrease (increase) in:
Accounts receivable......................... (496,292) (244,412) 10,024 (247,957)
Inventory and prepaid expenses.............. (61,364) (39,915) (39,185) (19,786)
Deposits.................................... (4,806) -- -- --
Increase (decrease) in:
Accounts payable............................ 324,853 186,159 (41,804) 4,657
Accrued expenses............................ 65,170 28,029 48,146 23,089
Revenue distributions payable............... 233,914 414,958 128,236 100,453
----------- --------- --------- -----------
Net Cash Provided By Operating
Activities.............................. 197,231 618,759 274,516 921,947
----------- --------- --------- -----------
CASH FLOWS DUE TO INVESTING ACTIVITIES
Purchase of oil and gas properties.............. (6,254,945) (781,907) (388,088) (1,688,153)
Purchase of property and equipment.............. (460,355) (56,171) (41,233) (96,454)
Other Assets.................................... (14,489) 9,339 -- --
Proceeds from sale of oil and gas properties.... -- 142,927 -- 12,100
Proceeds from sale of other property and
equipment..................................... -- 28,500 1,700 22,094
----------- --------- --------- -----------
Net Cash Used In Investing Activities..... (6,729,789) (657,312) (427,621) (1,750,413)
----------- --------- --------- -----------
CASH FLOWS DUE TO FINANCING ACTIVITIES
Proceeds from borrowings........................ 5,681,464 725,000 725,000 700,000
Payments of debt issue costs.................... (35,000) (34,396) (31,269) (1,222)
Payments on debt................................ (4,116) (20,535) (4,175) (151,584)
Issuance of Stock............................... 1,000,000 -- -- --
Purchase of Treasury Stock...................... -- (426,878) (399,110) --
Drilling advances............................... -- 220,785 -- --
----------- --------- --------- -----------
Net Cash Provided By Financing
Activities.............................. 6,642,348 463,976 290,446 547,194
----------- --------- --------- -----------
Net Increase (Decrease) In Cash........... 109,790 425,423 137,341 (281,272)
CASH AT BEGINNING OF PERIOD....................... -- 109,790 109,790 535,213
----------- --------- --------- -----------
CASH AT END OF PERIOD............................. $ 109,790 $ 535,213 $ 247,131 $ 253,941
=========== ========= ========= ===========
NON-CASH INVESTING ACTIVITIES
Acquisition of producing oil and gas properties
by issuance of Preferred Stock, Series B...... $ 1,000,000 $ -- $ -- $ --
=========== ========= ========= ===========
CASH PAID FOR INTEREST............................ $ 381,120 $ 470,867 $ 387,255 $ 433,209
=========== ========= ========= ===========
</TABLE>
See notes to consolidated financial statements.
F-6
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
PREFERRED STOCK PREFERRED STOCK
COMMON STOCK A B ADDITIONAL RETAINED
-------------------- ------------------- ------------------- PAID-IN EARNINGS TREASURY
SHARES AMOUNT SHARES AMOUNT SHARES AMOUNT CAPITAL (ACCUMULATED) STOCK
--------- -------- -------- -------- -------- -------- ---------- ------------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
INITIAL
CAPITALIZATION........ 2,176,500 $2,177 150,000 $1,500 -- $ -- $ 996,323 $ -- --
Issuance of Series B
preferred stock..... -- -- -- -- 22,000 220 999,780 -- --
Net loss.............. -- -- -- -- -- -- -- (297,618) --
--------- ------ ------- ------ ------ ---- ---------- --------- --------
BALANCE AT
DECEMBER 31,1998...... 2,176,500 2,177 150,000 1,500 22,000 220 1,996,103 (297,618) --
Services rendered in
exchange for stock
(Stock issued in
2000)............... -- -- -- -- -- -- 46,609 -- --
Purchase of treasury
stock............. -- -- -- -- -- -- -- -- (426,878)
Net loss.............. -- -- -- -- -- -- -- (191,630) --
--------- ------ ------- ------ ------ ---- ---------- --------- --------
BALANCE AT DECEMBER 31,
1999.................. 2,176,500 $2,177 150,000 $1,500 22,000 $220 $2,042,712 $(489,248) (426,878)
Services rendered in
exchange for
stock............... 98,000 98 -- -- -- -- 3,902 -- --
Net income............ -- -- -- -- -- -- -- 691,237 --
--------- ------ ------- ------ ------ ---- ---------- --------- --------
BALANCE AT SEPTEMBER 30,
2000.................. 2,274,500 $2,275 150,000 $1,500 22,000 $220 $2,046,614 201,989 (426,878)
========= ====== ======= ====== ====== ==== ========== ========= ========
<CAPTION>
TOTAL
SHAREHOLDERS'
EQUITY
-------------
<S> <C>
INITIAL
CAPITALIZATION........ 1,000,000
Issuance of Series B
preferred stock..... 1,000,000
Net loss.............. (297,618)
---------
BALANCE AT
DECEMBER 31,1998...... 1,702,382
Services rendered in
exchange for stock
(Stock issued in
2000)............... 46,609
Purchase of treasury
stock............. (426,878)
Net loss.............. (191,630)
---------
BALANCE AT DECEMBER 31,
1999.................. 1,130,483
Services rendered in
exchange for
stock............... 4,000
Net income............ 691,237
---------
BALANCE AT SEPTEMBER 30,
2000.................. 1,825,720
=========
</TABLE>
See notes to consolidated financial statements.
F-7
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION: The consolidated financial statements include
the accounts of GMX Resources Inc. (the "Company") and its wholly-owned
subsidiaries, Endeavor Pipeline, Inc. and Expedition Natural Resources, Inc.
Endeavor Pipeline, Inc. owns and operates natural gas gathering facilities in
east Texas. Expedition Natural Resources, Inc. owns undeveloped leases,
primarily in east Texas. All significant intercompany accounts and transactions
have been eliminated.
In the opinion of management, the accompanying unaudited financial
statements as of September 30, 2000 and for the nine months ended September 30,
1999 and 2000, reflect all adjustments (which were normal and recurring) which,
in the opinion of management, are necessary for a fair statement of the
financial position and results of operations of the interim periods presented.
ORGANIZATION: The Company was formed in January 1998. In February 1998, the
Company purchased for $6.0 million oil and gas properties and commenced
operations. The Company is primarily engaged in acquisition, exploration, and
development of properties for the production of crude oil and natural gas in
Oklahoma, Kansas, Louisiana, New Mexico, and Texas.
INVENTORIES: Inventories consist of lease and well equipment and crude oil
on hand. The Company plans to utilize the lease and well equipment in its
ongoing operations and is carried at the lower of cost or market. Treated and
stored crude oil inventory on hand at the end of the year is valued at current
field prices less severance taxes.
PROPERTY AND EQUIPMENT: The Company follows the full cost method of
accounting for its oil and gas properties. Accordingly, all costs incidental to
the acquisition, exploration and development of oil and gas properties,
including costs of undeveloped leasehold, dry holes and leasehold equipment, are
capitalized. Net capitalized costs are limited to the estimated future net
revenues, discounted at 10% per annum, from proved oil, natural gas, and natural
gas liquid reserves. Such limitations are imposed separately on a
country-by-country basis. Capitalized costs are depleted by an equivalent
unit-of-production method, converting oil to gas at the ratio of one barrel of
oil to six thousand cubic feet of natural gas. No gain or loss is recognized
upon disposal of oil and gas properties unless such disposal significantly
alters the relationship between capitalized costs and proved reserves.
Depreciation and amortization of other property and equipment, including
leasehold improvements, are provided using the straight-line method based on
estimated useful lives from five to ten years.
REVENUE RECOGNITION AND GAS BALANCING: Oil and gas revenues are recognized
when produced. During the course of normal operations, the Company and other
joint interest owners of natural gas reservoirs will take more or less than
their respective ownership share of the natural gas volumes produced. These
volumetric imbalances are monitored over the lives of the wells' production
capability. If an imbalance exists at the time the wells' reserves are depleted,
cash settlements are made among the joint interest owners under a variety of
arrangements.
The Company follows the sales method of accounting for gas imbalances. A
liability is recorded when the Company's excess takes of natural gas volumes
exceed its estimated remaining recoverable
F-8
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
reserves. No receivables are recorded for those wells where the Company has
taken less than its ownership share of gas production.
CAPITALIZED INTEREST: Interest of $36,271 and $57,529 was capitalized
related to the unproved properties that were not being currently depreciated,
depleted, or amortized and on which exploration activities were in progress in
2000 and 1999, respectively.
INCOME TAXES: The Company accounts for income taxes using the asset and
liability method. Under the asset and liability method, deferred tax assets and
liabilities are recognized at the enacted tax rates for the future tax
consequences attributable to differences between the financial carrying amounts
of existing assets and liabilities and the respective tax bases and tax
operating losses and tax credit carryforwards. 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.
HEDGING ACTIVITIES: The Company has periodically entered into oil and gas
price swaps to manage its exposure to oil and gas price volatility. The hedging
instruments are usually placed with counterparties that the Company believes are
minimal credit risks. The oil and gas reference prices upon which the price
hedging instruments are based reflect various market indices that have a high
degree of historical correlation with actual prices received by the Company.
The Company accounts for its hedging instruments using the deferral method
of accounting. Under this method, realized gains and losses from the Company's
price risk management activities are recognized in oil and gas revenues when the
associated production occurs and the resulting cash flows are reported as cash
flows from operating activities. Gains and losses on hedging contracts that are
closed before the hedged production occurs are deferred until the production
month originally hedged. In the event of a loss of correlation between changes
in oil and gas reference prices under a hedging instrument and actual oil and
gas prices, a gain or loss is recognized currently to the extent the hedging
instrument has not offset changes in actual oil and gas prices.
LOAN FEES: Included in Other Assets are costs associated with long-term
debt. These costs are being amortized over the life of the loan using a method
that approximates the interest method.
GENERAL AND ADMINISTRATIVE EXPENSES: General and administrative expenses
are reported net of amounts allocated to working interest owners of the oil and
gas properties operated by the Company and net of amounts capitalized pursuant
to the full cost method of accounting.
USE OF ESTIMATES: The preparation of financial statements in conformity
with accounting principles generally accepted in the United States of America
requires the use of estimates and assumptions that affect the amounts reported.
The actual results could differ from those estimates, including useful lives of
property and equipment and oil and gas reserve quantities.
FINANCIAL INSTRUMENTS: The Company's financial instruments consist of cash,
accounts receivable, accounts payable, accrued expenses, accrued interest,
revenue distributions payable, and oil price swap agreements. Fair value of
non-derivative financial instruments approximates carrying value due to the
F-9
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE A--SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
short-term nature of these instruments. See note I for the fair value of the oil
and price swap agreements.
NET EARNINGS PER COMMON SHARE: Basic earnings per share is computed by
dividing income available to common Shareholders by the weighted average number
of common shares outstanding for the period. Diluted earnings per share reflect
the potential dilution that could occur if the Company's convertible preferred
stock were converted to common stock, net of preferred dividends associated with
the dilutive convertible preferred stock. The diluted loss per share
calculations for 1998 and 1999 produce results that are anti-dilutive.
Therefore, the diluted loss per share amounts for 1998 and 1999 reported in the
accompanying Consolidated Statements of Operations are the same as the basic
loss per share amounts. The weighted average dilutive shares not included in the
1998 and 1999 annual periods and the nine-month 1999 period were 2,770,090,
2,225,965, and 2,286,423, respectively. The weighted average dilutive shares
included in the 2000 period was 2,044,590.
STOCK OPTIONS: The Company applies the intrinsic value-based method of
accounting for its fixed plan stock options. As such, compensation expense would
be recorded on the date of grant only if the current market price of the
underlying stock exceeded the exercise price of the option.
COMMITMENTS AND CONTINGENCIES: Liabilities for loss contingencies arising
from claims, assessments, litigation, or other sources are recorded when it is
probable that a liability has been incurred and the amount can be reasonably
estimated.
Environmental expenditures are expensed or capitalized in accordance with
accounting principles generally accepted in the United States of America.
Liabilities for these expenditures are recorded when it is probable that
obligations have been incurred and the amounts can be reasonably estimated.
F-10
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE B--PROPERTY AND EQUIPMENT
Property and equipment included the following:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ --------------
(UNAUDITED)
<S> <C> <C>
Oil and gas properties:
Subject to amortization................................... $7,176,877 $8,737,476
Not subject to amortization:
Acquired in 2000........................................ -- 231,524
Acquired in 1999........................................ 199,860 188,379
Acquired in 1998........................................ 520,350 268,501
Accumulated depreciation, depletion, and amortization..... (743,297) (996,419)
---------- ----------
Net oil and gas properties............................ 7,153,790 8,429,461
---------- ----------
Other property and equipment................................ 489,026 585,480
Less accumulated depreciation............................... (91,261) (140,115)
---------- ----------
Net other property and equipment...................... 397,765 445,365
---------- ----------
Property and equipment, net of accumulated
depreciation, depletion, and amortization........... $7,551,555 $8,874,826
========== ==========
</TABLE>
Depreciation, depletion, and amortization of property and equipment
consisted of the following components:
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE NINE MONTHS
DECEMBER 31, ENDED SEPTEMBER 30,
------------------- ---------------------
1998 1999 1999 2000
-------- -------- --------- ---------
(UNAUDITED)
<S> <C> <C> <C> <C>
Depreciation, depletion, and amortization of oil and
gas properties.................................... $384,098 $359,199 $272,745 $253,122
Depreciation of other property and equipment........ 42,464 52,310 36,624 48,947
Amortization of other assets........................ 6,812 11,965 8,337 11,279
-------- -------- -------- --------
Total......................................... $433,374 $423,474 $317,706 $313,348
======== ======== ======== ========
</TABLE>
F-11
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE C--LONG-TERM DEBT
A summary of long-term debt is as follows:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1999 2000
------------ --------------
(UNAUDITED)
<S> <C> <C>
Note payable to bank, maturity date of January 31, 2001,
bearing a variable interest rate, (9.5% and 10.0%, as of
December 31, 1999 and September 30, 2000, respectively),
collateralized by producing oil and gas properties........ $5,800,000 $6,500,000
Notes payable to Shareholder, bearing variable interest
rates, (9.5% and 10.0%, as of December 31, 1999 and
September 30, 2000, respectively), collateralized by
unproved properties....................................... 575,000 427,500
Other....................................................... 6,813 2,729
---------- ----------
6,381,813 6,930,229
Current portion--unrelated parties.......................... (71,480) (695,729)
Current portion--related party.............................. (200,000) (427,500)
---------- ----------
$6,110,333 $5,807,000
========== ==========
</TABLE>
CREDIT FACILITY
On February 18, 1998, the Company entered into a secured credit facility
that provides for a line of credit up to $20 million (the "Commitment"), subject
to a borrowing base which is based on a periodic evaluation of oil and gas
reserves ("Borrowing Base"). The amount of credit available at any one time
under the credit facility is the lesser of the Borrowing Base or the amount of
the Commitment. As of December 31, 1999 and September 30, 2000, the borrowing
base was $6.5 million. The credit facility has a maturity date of January 31,
2002. The Company has the option of either borrowing at the LIBOR rate or the
base rate which approximates the prime rate, in either case plus a margin
ranging from .50% to 3.25% depending upon the amount of advances outstanding in
relation to the Borrowing Base. The credit facility requires payment of an
annual facility fee equal to 0.375% to 0.5% basis points of the amount of the
Commitment. The Company is obligated to make monthly principal payments in
amounts determined by the lender after taking into consideration the expected
reductions in the Borrowing Base as a result of production. The current monthly
principal reduction amount is $77,000 beginning January 1, 2001. Borrowings
under the credit agreement are secured by substantially all of the Company's oil
and gas properties.
The credit facility contains various affirmative and restrictive covenants.
These covenants, among other things, prohibit additional indebtedness, sales of
assets, mergers and consolidations, dividends and distributions, changes in
management and require the maintenance of various financial ratios.
F-12
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE C--LONG-TERM DEBT (CONTINUED)
The credit facility was personally guaranteed by the President and Executive
Vice-President. The amount of their guarantees was limited to $750,000 each. The
facility was terminated on October 31, 2000 and replaced with a new facility.
<TABLE>
<S> <C> <C>
The estimated maturities of long-term debt as of
December 31, 1999 are as follows:
2000........................................................ $ 271,480
2001........................................................ 6,110,333
</TABLE>
On October 31, 2000, the Company entered into a new secured credit facility,
which replaced the prior credit facility. The new credit facility provides for a
line of credit of up to $15 million (the "Commitment"), subject to a borrowing
base which is based on a periodic evaluation of oil and gas reserves which is
reduced monthly to account for production ("Borrowing Base"). The amount of
credit available at any one time under the credit facility is the lesser of the
Borrowing Base or the amount of the Commitment. As of October 31, 2000, the
borrowing base was $7.25 million which will be reduced by $105,000 per month
beginning December 1, 2000. The credit facility has a maturity date of May 1,
2003. Borrowings bear interest at the prime rate plus 50%. The credit facility
requires payment of an annual facility fee equal to 1/2% on the unused amount of
the Borrowing Base. The Company is obligated to make principal payments if the
amount outstanding would exceed the Borrowing Base. Borrowings under the credit
agreement are secured by substantially all of the Company's oil and gas
properties.
The credit facility contains various affirmative and restrictive covenants.
These covenants, among other things, prohibit additional indebtedness, sales of
assets, mergers and consolidations, dividends and distributions, changes in
management and require the maintenance of various financial ratios.
The credit facility is personally guaranteed by the President and Executive
Vice-President. The amount of their guarantees is limited to a maximum of
$1,000,000 each.
At October 31, 2000, the Company had borrowed $7,250,000 under the credit
facility, leaving no availibility for borrowings to fund development drilling
obligations based on the existing Borrowing Base.
NOTE D--INCOME TAXES
Intangible development costs are expensed for income tax reporting purposes,
whereas they are capitalized and amortized for financial statements purposes.
Lease and well equipment and other property and equipment is depreciated for
income tax reporting purposes using accelerated methods. Deferred income taxes
are provided on these timing differences to the extent that income taxes which
otherwise would have been payable are reduced. Deferred income tax assets also
are recognized for operating losses that are available to offset future income
taxes. Due to the uncertainty of the realization of income net operating tax
loss carryfowards, the financial statements reflect a zero value for the
Company's deferred income tax asset.
F-13
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE D--INCOME TAXES (CONTINUED)
At December 31, 1999, the Company had the following carryforwards available
to reduce future income taxes:
<TABLE>
<S> <C>
Federal..................................................... $1,404,723
Oklahoma.................................................... 398,276
Kansas...................................................... 267,424
Louisiana................................................... 83,201
New Mexico.................................................. 37,693
</TABLE>
All of the net operating loss carryforward amounts shown above have been
utilized for financial purposes to fully offset deferred tax liabilities. The
net operating loss carryforwards expire from 2015 to 2019.
As of December 31, 1999, the Company's deferred tax liability of $437,000
was primarily associated with the difference between financial carrying value of
oil and gas properties and the associated tax basis. As of the same date, the
Company's deferred tax asset of $509,000 was primarily the result of the
Company's net operating loss carryforwards.
As of December 31, 1999, the Company has recognized a full valuation
allowance of $72,000 for the net operating loss carryforwards that have been
generated since inception to the extent that the net operating loss
carryforwards exceed the difference between financial carrying value and tax
basis for the Company's property and equipment.
For the nine months ended September 30, 2000, the Company's effective income
tax rate of 10% reflects the utilization of net operating loss carryforwards
that previously were subject to a valuation allowance.
NOTE E--COMMITMENTS AND CONTINGENCIES
The Company is party to various legal actions arising in the normal course
of business. Matters that are probable of unfavorable outcome to the Company and
which can be reasonably estimated are accrued. Such accruals are based on
information known about the matters, the Company's estimates of the outcomes of
such matters, and its experience in contesting, litigating, and settling similar
matters. None of the actions are believed by management to involve future
amounts that would be material to the Company's financial position or results of
operations after consideration of recorded accruals.
OPERATING LEASES: The following is a schedule by year of future minimum
rental payments required under operating leases that have initial or remaining
non-cancelable lease terms in excess of one year as of December 31, 1999.
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31
-----------------------
<S> <C>
2000........................................................ $59,324
2001........................................................ 9,943
</TABLE>
F-14
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE E--COMMITMENTS AND CONTINGENCIES (CONTINUED)
Total rental expense for all operating leases is as follows for the years
ended December 31:
<TABLE>
<S> <C>
1999........................................................ $57,630
1998........................................................ 47,299
</TABLE>
NOTE F--SHAREHOLDERS' EQUITY
The Series A preferred issue (par value $.01 per share) is convertible into
14.51 shares of common stock. Dividends are $.325 per year per share and
cumulative. The Series B issue (par value $.01 per share) pays dividends at
$6.00 per share per year and also are cumulative. Series B can be redeemed at
the option of the Company. The redemption price is as follows:
<TABLE>
<S> <C>
By December 31, 1999........................................ $1,000,000
By December 31, 2000........................................ $1,500,000
By December 31, 2001........................................ $2,000,000
After December 31, 2001..................................... $2,200,000
</TABLE>
No shares were redeemed as of December 31, 1999. After December 31, 2001,
the shares are convertible into shares of common stock representing a specified
increasing percentage of the shares outstanding, ranging from 593,000 shares to
1,089,000 shares as of January 2003. Cumulative dividends in arrears, but not
declared, at December 31, 1999 were $32,500 and $132,000 for Series A and
Series B, respectively. All dividend arrearages were eliminated in the
conversion of the Series A and the purchase of the Series B as described below.
On October 25, 2000, the Company purchased all of the Series B preferred
stock for $230,000 and retired such shares. Additionally, the holders of the
Series A preferred stock converted the Series A preferred stock into 1,451,000
common shares.
On October 30, 2000, the Company effected a 14.51 for 1 stock split in the
form of a stock dividend. All share amounts disclosed in these financial
statements reflect this stock split as if it had occurred as of the earliest
period presented.
In March, 1999, the Company purchased 725,500 shares of common stock and
50,000 shares of Series A preferred stock which was 100% of the holding of two
of the shareholders. The purchase price was $375,000 in cash, along with one
producing well and the surrounding acreage.
In October 2000, the board of directors and shareholders adopted the GMX
RESOURCES INC. Stock Option Plan (the "Option Plan"). Under the Option Plan, the
Company may grant both stock options intended to qualify as incentive stock
options under Section 422 of the Internal Revenue Code and options which are not
qualified as incentive stock options. Options may be granted under the Plan to
key employees and nonemployee directors.
The maximum number of shares of common stock issuable under the Option Plan
is 300,000, subject to appropriate adjustment in the event of a reorganization,
stock split, stock dividend, reclassification or other change affecting our
common stock. All executive officers and other key
F-15
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE F--SHAREHOLDERS' EQUITY (CONTINUED)
employees who hold positions of significant responsibility are eligible to
receive awards under the Option Plan. In addition, each director of the Company
is eligible to receive options under the Plan. The exercise price of options
granted under the Plan is not less than 100% of the fair market value of the
shares on the date of grant. Options granted under the Plan become exercisable
as the board may determine in connection with the grant of each option. In
addition, the board may at any time accelerate the date that any option granted
becomes exercisable.
The board of directors may amend or terminate the Option Plan at any time,
except that no amendment will become effective without the approval of the
shareholders except to the extent such approval may be required by applicable
law or by the rules of any securities exchange upon which the Company shares are
admitted to listed trading. The Option Plan will terminate in 2010, except with
respect to awards then outstanding.
NOTE G--OTHER RELATED PARTY TRANSACTIONS
The Company has an agreement to issue common stock in exchange for services
primarily performed in 1999 based on an agreement reached with an engineer in
February 1999. In February 2000, 98,000 shares were issued pursuant to this
agreement. Invoices subject to the agreement of $50,609 have been recorded as
equity.
NOTE H--MAJOR CUSTOMERS
Sales to individual customers constituting 10% or more of total oil and gas
sales for the year ended December 31, 1999 were as follows:
<TABLE>
<S> <C>
Teppco Crude................................................ 49.7%
Koch Gateway Pipeline....................................... 10.3%
</TABLE>
Management believes that the loss of any of the above customers would not
have a material impact on the Company's results of operations or its financial
position.
NOTE I--HEDGING ACTIVITIES
The Company utilizes a swap arrangement to hedge a portion of its exposure
to price volatility from producing crude oil. The swap arrangement establishes a
price above which the Company pays the counterparty and below which the Company
is paid. Results from commodity hedging transactions are reflected in oil sales.
Payments by the Company for the first nine months of 2000 totaled $423,470 and
in 1999 totaled $81,600.
As of December 31, 1999 and September 30, 2000, the Company had a swap
arrangement covering 5,000 barrels of crude oil per month through December 31,
2000 at a price of $20.25 per barrel. The swap arrangement covers approximately
80% of the Company's expected monthly production.
The fair value of the financial instrument as of December 31, 1999 was a
liability of approximately $134,000.
F-16
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE J--CONCENTRATION OF CREDIT RISK
The Company maintains its cash in bank deposit accounts which, at times, may
exceed federal insured limits. The Company has not experienced any losses in
such accounts and believes it is not exposed to any significant risk.
NOTE K--OIL AND GAS OPERATIONS
Capitalized costs related to the Company's oil and gas producing activities
as of December 31, 1999 are:
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Unproved properties......................................... $ 720,210
Producing properties........................................ 7,176,877
----------
7,897,087
Less accumulated depreciation, depletion, and
amortization.............................................. (743,297)
----------
Net Capitalized Costs................................. $7,153,790
==========
</TABLE>
Unproved properties include leaseholds under exploration. Producing
properties include mineral properties with proved reserves, development wells,
and uncompleted development well costs. Support equipment and facilities include
costs for pipeline facilities, field equipment, and other supporting assets
involved in oil and gas producing activities. The accumulated depreciation,
depletion, and amortization represents the portion of the assets which have been
charged to expense.
Costs incurred in oil and gas property acquisitions, exploration, and
development activities in 1999 are as follows:
<TABLE>
<CAPTION>
1999
----------
<S> <C>
Acquisition costs:
Unproved properties....................................... $ 199,860
Producing properties...................................... 514,212
Development costs........................................... 490,587
----------
$1,204,659
==========
</TABLE>
Development costs include the cost of drilling and equipping development
wells and constructing related production facilities for extracting, treating,
gathering, and storing oil and gas from proved reserves.
F-17
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE K--OIL AND GAS OPERATIONS (CONTINUED)
The Company's results of operations in 1999 includes revenues and expenses
associated directly with oil and gas producing activities.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1998 1999
----------- -----------
<S> <C> <C>
Oil and gas sales.................................. $ 1,794,513 $ 2,122,770
Production costs................................... (1,045,951) (1,074,783)
Depreciation, depletion, and amortization.......... (384,850) (359,199)
----------- -----------
Results Of Operations From Oil And Gas Producing
Activities..................................... $ 363,712 $ 688,788
=========== ===========
</TABLE>
NOTE L--SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS (UNAUDITED)
The oil and gas reserve quantity information presented below is unaudited
and is based upon reports prepared by independent petroleum engineers. The
information is presented in accordance with regulations prescribed by the
Securities and Exchange Commission. The Company emphasizes that reserve
estimates are inherently imprecise. The Company's reserve estimates were
estimated by performance methods, volumetric methods, and comparisons with
analogous wells, where applicable. The reserves estimated by the performance
method utilized extrapolations of historical production data. Reserves were
estimated by the volumetric or analogous methods in cases where the historical
production data was insufficient to establish a definitive trend. Accordingly,
these estimates are expected to change, and such changes could be material and
occur in the near term as future information becomes available.
Proved oil and gas reserves represent 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. Proved
developed oil and gas reserves are those expected to be recovered through
existing wells with
F-18
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE L--SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS (UNAUDITED)
(CONTINUED)
existing equipment and operating methods. As of December 31, 1999, all of the
Company's oil and gas reserves were located in the United States.
<TABLE>
<CAPTION>
OIL GAS
(MBBLS) (MMCF)
-------- --------
<S> <C> <C>
DECEMBER 31, 1998
Proved reserves, beginning of period...................... -- --
Purchase of reserves in-place............................. 1,939 17,743
Production................................................ (75) (442)
----- ------
Proved reserves, end of period............................ 1,864 17,301
===== ======
Proved developed reserves:
Beginning of period..................................... -- --
===== ======
End of period........................................... 780 8,597
===== ======
DECEMBER 31, 1999
Proved reserves, beginning of period...................... 1,864 17,301
Extensions, discoveries, and other additions.............. 66 2,219
Production................................................ (71) (443)
Sale of reserves in-place................................. (20) --
Revisions of previous estimates........................... 381 201
----- ------
Proved reserves, end of period............................ 2,220 19,278
===== ======
Proved developed reserves:
Beginning of period..................................... 780 8,597
===== ======
End of period........................................... 1,083 9,194
===== ======
SEPTEMBER 30, 2000
Proved reserves, beginning of period...................... 2,220 19,278
Extensions, discoveries, and other additions.............. 1,523 30,409
Production................................................ (56) (511)
Revisions of previous estimates........................... 688 (479)
----- ------
Proved reserves, end of period............................ 4,375 48,697
===== ======
Proved developed reserves:
Beginning of period..................................... 1,083 9,194
===== ======
End of period........................................... 1,249 10,801
===== ======
</TABLE>
Future cash inflows and future production and development costs are
determined by applying year-end prices and costs to the estimated quantities of
oil and gas to be produced. Estimates are made of quantities of proved reserves
and the future periods during which they are expected to be produced
F-19
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE L--SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS (UNAUDITED)
(CONTINUED)
based on year-end economic conditions. Estimated future income taxes are
computed using current statutory income tax rates including consideration of the
current tax bases of the properties and related carryforwards giving effect to
permanent differences. The resulting future net cash flows are reduced to
present value amounts by applying a 10% annual discount factor.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board, and, as such do not
necessarily reflect the Company's expectations of actual revenue to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process, as discussed previously, are equally
applicable to the standardized measure computations since these estimates are
the basis for the valuation process.
The following summary sets forth the Company's future net cash flows
relating to proved oil and gas reserves based on the standardized measure
prescribed in Statement of Financial Accounting Standards No. 69.
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1999 2000
------------- ------------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
JUNE 30, 2000
Future cash inflows(a)................................ $ 56,196 $ 90,336 $398,132
Future production costs............................... (14,737) (25,672) (67,001)
Future development costs.............................. (6,029) (7,071) (14,809)
Future income tax provision........................... (8,451) (14,564) (102,606)
-------- -------- --------
Net future cash inflows............................. 26,979 43,029 213,716
Less effect of a 10% discount factor.................. (7,733) (17,851) (92,599)
-------- -------- --------
Standardized measure of discounted future net cash
flows............................................. $ 19,246 $ 25,178 $121,117
======== ======== ========
Discounted (at 10%) future net cash flows before
income taxes...................................... $ 25,275 $ 33,700 $179,266
======== ======== ========
</TABLE>
------------------------
(a) Oil and condensate prices were based on an equivalent base price of $30.39
per barrel for benchmark posted West Texas Intermediate Crude Oil at closing
on September 30, 2000. Adjustments to the base price were made to each lease
to adjust the base price for crude oil quality, contractual agreements, and
regional price variations. Natural gas prices were based on an equivalent
base price of $5.45 per million British thermal unit (mmbtu) for the
composite Henry Hub Spot Market benchmark price at closing on September 30,
2000. Adjustments to the base price were made to each lease to adjust the
base price for quality, contractual agreements, and regional price
variations.
Future income tax expenses are computed by applying the appropriate
statutory rates to the future pre-tax net cash flows relating to proved
reserves, net of the tax basis of the properties involved giving effect to
permanent differences, tax credits, and allowances relating to proved oil and
gas reserves.
F-20
<PAGE>
GMX RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
DECEMBER 31, 1999 AND 1998
(INFORMATION AS IT RELATES TO SEPTEMBER 30, 2000 AND THE
NINE MONTHS ENDED SEPTEMBER 30, 1999 AND 2000 IS UNAUDITED)
NOTE L--SUPPLEMENTAL INFORMATION ON OIL AND GAS OPERATIONS (UNAUDITED)
(CONTINUED)
Principal changes in the standardized measure of discounted future net cash
flows attributable to the Company's proved reserves are as follows:
<TABLE>
<CAPTION>
DECEMBER 31, DECEMBER 31, SEPTEMBER 30,
1998 1999 2000
------------- ------------- --------------
<S> <C> <C> <C>
Standardized measure, beginning of period............... -- 19,246 25,178
Sales of oil and gas, net of production costs........... (696) (976) (3,901)
Net changes in prices and production costs.............. -- 3,809 49,798
Extensions and discoveries, net of future development
costs................................................. -- 1,397 92,967
Development costs that reduced future development
costs................................................. 427 571 957
Revisions of quantity estimates......................... -- 1,143 3,218
Purchases of reserves in place, net of future
development costs..................................... 23,399 -- --
Sales of reserves in place.............................. -- (46) --
Accretion of discount................................... 2,145 2,528 2,527
Net changes in income taxes............................. (6,029) (2,493) (49,627)
------- ------- --------
Standardized measure, end of period..................... 19,246 25,178 121,117
======= ======= ========
</TABLE>
F-21
<PAGE>
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TABLE OF CONTENTS
<TABLE>
<S> <C>
PROSPECTUS SUMMARY......................... 3
RISK FACTORS............................... 8
FORWARD LOOKING STATEMENTS................. 14
USE OF PROCEEDS............................ 15
DIVIDEND POLICY............................ 16
CAPITALIZATION............................. 17
DILUTION................................... 18
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF
OPERATIONS............................... 22
BUSINESS................................... 27
MANAGEMENT................................. 37
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT.................... 42
DESCRIPTION OF SECURITIES.................. 43
SHARES ELIGIBLE FOR FUTURE SALE............ 45
UNDERWRITING............................... 46
LEGAL MATTERS.............................. 49
EXPERTS.................................... 49
AVAILABLE INFORMATION...................... 50
CERTAIN TECHNICAL TERMS.................... 50
INDEX TO FINANCIAL STATEMENTS.............. F-1
</TABLE>
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DEALER PROSPECTUS DELIVERY OBLIGATION
UNTIL (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL
DEALERS THAT EFFECT THE TRANSACTIONS IN THESE SECURITIES; WHETHER OR NOT
PARTICIPATING IN THIS OFFERING, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS
IN ADDITION TO THE DEALERS' OBLIGATION TO DELIVER A PROSPECTUS WHEN ACTING AS
UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR SUBSCRIPTIONS.
2,000,000 UNITS
GMX RESOURCES INC.
[LOGO]
PROSPECTUS
, 2001
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<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 24. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under Section 1031 of the Oklahoma General Corporation Act ("OGCA") and the
Corporation's Certificate of Incorporation, the Corporation has broad powers to
indemnify its directors and officers against liabilities they may incur in such
capacities, including liabilities under the Securities Act of 1933, as amended
("Securities Act").
The Corporation's Certificate of Incorporation provides that the Corporation
shall indemnify, and may advance litigation expenses to its officers and
directors to the fullest extent permitted by the OGCA. The Corporation may also
indemnify, and advance litigation expenses to employees and agents of the
Corporation, and persons serving at the request of the Corporation as directors,
officers, employees or agents of another corporation, partnership, joint
venture, trust or enterprise, to the fullest extent permitted by Oklahoma law.
The Corporation will enter into agreements with its nonemployee directors
providing for contractual rights of indemnity and expense advancement.
The Corporation's Certificate of Incorporation provides that, pursuant to
Section 1006 of the OGCA, its directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty of care to the Corporation and its
stockholders. The provision in the Certificate of Incorporation does not
eliminate the duty of care and, in appropriate circumstances, equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Oklahoma Law. In addition, each director will continue to be subject to
liability for breach of the director's duty of loyalty to the Corporation, as
well as for acts or omissions not in good faith or involving intentional
misconduct, for knowing violations of law, for actions leading to improper
personal benefit to the director, and for payment of dividends or approval of
stock repurchases or redemptions that are unlawful under the OGCA. The provision
also does not affect a director's responsibilities under any other law, such as
the state or federal securities laws.
ITEM 25. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth an itemization of all estimated expenses, all
of which we will pay, in connection with the issuance and distribution of the
securities being registered:
<TABLE>
<CAPTION>
ITEM AMOUNT
---- --------
<S> <C>
Securities and Exchange Commission Registration Fee......... $ 16,606
Underwriter's Nonaccountable Expense Allowance 400,000
NASD Filing Fees............................................ 10,000
Nasdaq Listing Fee.......................................... 60,000
Accounting Fees and Expenses................................ 50,000
Legal Fees and Expenses..................................... 75,000
Engineering Fees and Expenses............................... 25,000
Printing and Related Expenses............................... 125,000
Transfer Agent's Fees and Expenses.......................... 10,000
Blue Sky Fees and Expenses.................................. 25,000
Travel...................................................... 50,000
Miscellaneous Expenses...................................... 78,395
--------
Total..................................................... $950,000
========
</TABLE>
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<PAGE>
ITEM 26. RECENT SALES OF UNREGISTERED SECURITIES.
We have issued the following securities without registration within the last
three years.
(1) On January 23, 1998, we issued 150,000 shares of our Common Stock for
cash consideration of $10,000 to our officers and directors. On February 16,
1998, we issued 150,000 shares of Series A Preferred Stock in exchange for cash
consideration of $990,000 to our officers and directors. These shares were
issued to four persons without publicity and were purchased for investment.
These shares were issued in reliance on the exemption from registration under
Section 4(2) of the Securities Act. All of the shares were sold directly by the
Corporation.
(2) On February 16, 1998, we issued 22,000 shares of Series B Preferred
Stock valued at $1,000,000 in exchange for interests in oil and gas properties
received from an institutional investor. These shares were issued in reliance on
the exemption under Section 4(2) of the Securities Act to a single purchaser who
purchased for investment.
(3) In February, 2000, in return for engineering services, we issued an
additional 6,754 shares of our common stock to a consulting engineer in reliance
on exemption under Section 4(2) of the Securities Act. These shares were issued
to one person who purchased for investment.
(4) On October 30, 2000, 100,000 shares of Series A Preferred Stock were
converted into 100,000 shares of common stock and we also effected a 14.51-to-1
stock split resulting in the issuance of an additional 2,793,246 shares of its
Common Stock. The issuance of these shares did not constitute a sale under the
Securities Act because no consideration was received from the holders of shares.
ITEM 27. EXHIBITS.
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<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<S> <C>
1.1* Form of Underwriting Agreement
3.1* Amended and Restated Certificate of Incorporation of GMX
RESOURCES INC.
3.2* Bylaws of GMX RESOURCES INC.
4.1* Warrant Agreement with form of Warrant
4.2* Form of Underwriters' Warrant
4.3* Form of Lock-up Agreement
5.1* Opinion of Crowe & Dunlevy, A Professional Corporation
10.1* Letter Agreement between GMX and Jon Stromberg relating to
issuance of 6,754 shares of GMX common stock
10.2** Stock Option Plan, as amended
10.3* Secured Revolving Credit Agreement dated October 31, 2000
with Local Oklahoma Bank, N.A.
10.4* Letter Agreement to purchase Series B Preferred Stock
10.5* Form of Director Indemnification Agreement
10.6* Promissory Notes to Ken L. Kenworthy, Jr.
10.7* Development Agreement with Tara Energy Partnerships
16** Letter from Former Accountant
21* List of subsidiaries
23.1** Consent of KPMG LLP, independent auditors
23.2** Consent of Wright & McAfee, independent auditors
23.3** Consent of Sproule Associates, Inc., independent petroleum
engineers
23.4* Consent of Crowe & Dunlevy, A Professional Corporation
(included in Exhibit 5.1)
</TABLE>
II-2
<PAGE>
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
--------------------- -----------
<S> <C>
23.5* Consent of T.J. Boismier to be named a Director
23.6* Consent of Paul Malloy to be named a Director
27* Financial Data Schedule
</TABLE>
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* Previously filed
** Filed herewith
ITEM 512. UNDERTAKINGS.
The Registrant hereby undertakes to:
(1) File, during any period in which it offers or sells securities, a
post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts of events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of prospectus filed with the Commission
pursuant to Rule 424(b) (" 230.424(b) of this chapter) if, in the aggregate,
the changes in volume and price represent no more than a 20% change in the
maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement.
(iii) Include any additional or changed material information on the plan
of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of the
securities which remain unsold at the end of the offering.
The Registrant hereby undertakes to provide to the Underwriters at the
closing specified in the Underwriting Agreement certificates in such
denominations and registered in such names as required by the Underwriters to
permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant of expenses
incurred or paid by a director, officer or controlling person of the Registrant
in the successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.
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<PAGE>
The Registrant further undertakes that:
(1) For purposes of determining any liability under the Securities Act,
treat the information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form of
prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h)
under the Securities Act as part of this registration statement as of the time
it was declared effective.
(2) For purposes of determining any liability under the Securities Act,
treat each post-effective amendment that contains a form of prospectus as a new
registration statement for the securities offered in the registration statement,
and that offering of the securities at that time as the initial bona fide
offering of those securities.
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<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable ground to believe that it meets all of the
requirements of filing on Form SB-2 and authorized this amendment to its
registration statement to be signed on its behalf by the undersigned, in the
City of Oklahoma City, State of Oklahoma, on December 21, 2000.
<TABLE>
<S> <C> <C>
GMX RESOURCES INC.
By: /s/ KEN L. KENWORTHY, JR.
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Ken L. Kenworthy, Jr.
PRESIDENT
</TABLE>
In accordance with the requirements of the Securities Act of 1933, this
amendment to the registration statement was signed by the following persons in
the capacities and on the dates stated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ KEN L. KENWORTHY, JR.
------------------------------------------- President and Director December 21, 2000
Ken L. Kenworthy, Jr.
Executive Vice President,
/s/ KEN L. KENWORTHY, SR. Chief Financial and
------------------------------------------- Accounting Officer and December 21, 2000
Ken L. Kenworthy, Sr. Director
</TABLE>
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