PROSPECTUS
APRIL 3, 1997
4,875,000 SHARES
[LOGO] BELLWETHER EXPLORATION COMPANY
COMMON STOCK
Of the 4,875,000 Shares of Common Stock offered hereby (the "Common Stock
Offering"), 4,400,000 Shares are being sold by Bellwether Exploration Company
("Bellwether" or the "Company") and 475,000 Shares are being sold by Selling
Stockholders. The Company will not receive any part of the proceeds of the sale
of Shares by the Selling Stockholders. The Common Stock is traded on the Nasdaq
National Market under the symbol "BELW." On April 3, 1997, the closing price
of the Common Stock was $8 3/4 per share.
The Common Stock Offering is being conducted concurrently with an offering
(the "Notes Offering") of 10 7/8% Senior Subordinated Notes due 2007 (the
"Notes") of the Company. The proceeds of the Common Stock Offering and the
Notes Offering, together with bank indebtedness, will be used to finance the
Pending Acquisition described herein and to refinance existing indebtedness. The
Common Stock Offering and the Notes Offering (collectively, the "Offerings")
are each conditioned on the consummation of the other and on the consummation of
the Pending Acquisition.
SEE "RISK FACTORS" COMMENCING ON PAGE 10 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE COMMON
STOCK.
------------------
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS.
ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
- -------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS PROCEEDS TO
THE DISCOUNTS AND TO THE THE SELLING
PUBLIC COMMISSIONS(1) COMPANY(2) STOCKHOLDERS
- -------------------------------------------------------------------------------
Per Share..... $8.25 $0.50 $7.75 $7.75
Total(3)...... $40,218,750 $2,437,500 $34,100,000 $3,681,250
- -------------------------------------------------------------------------------
(1) THE COMPANY AND THE SELLING STOCKHOLDERS HAVE AGREED TO INDEMNIFY THE
UNDERWRITERS AGAINST CERTAIN LIABILITIES, INCLUDING LIABILITIES UNDER THE
SECURITIES ACT OF 1933, AS AMENDED. SEE "UNDERWRITING."
(2) BEFORE DEDUCTING EXPENSES PAYABLE BY THE COMPANY ESTIMATED AT $175,000.
(3) THE SELLING STOCKHOLDERS AND THE COMPANY HAVE GRANTED THE UNDERWRITERS
OPTIONS, EXERCISABLE WITHIN 30 DAYS HEREOF, TO PURCHASE UP TO AN AGGREGATE
OF 719,264 AND 11,986 ADDITIONAL SHARES, RESPECTIVELY, AT THE PRICE TO THE
PUBLIC LESS UNDERWRITING DISCOUNTS AND COMMISSIONS FOR THE PURPOSE OF
COVERING OVER-ALLOTMENTS, IF ANY. IF THE UNDERWRITERS EXERCISE SUCH OPTIONS
IN FULL, THE TOTAL PRICE TO THE PUBLIC, UNDERWRITING DISCOUNTS AND
COMMISSIONS, PROCEEDS TO THE COMPANY AND PROCEEDS TO THE SELLING
STOCKHOLDERS WILL BE $46,251,562, $2,803,125, $34,192,891 AND $9,255,546,
RESPECTIVELY. SEE "UNDERWRITING."
The Shares of Common Stock are offered by the several Underwriters when, as
and if issued to and accepted by them, subject to various prior conditions,
including their right to reject orders in whole or in part. It is expected that
delivery of Share certificates will be made in New York, New York on or about
April 9, 1997.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.P. MORGAN & CO.
PRINCIPAL FINANCIAL SECURITIES, INC.
<PAGE>
[INSIDE COVER PAGE]
MAP
CERTAIN PERSONS PARTICIPATING IN THE COMMON STOCK OFFERING MAY ENGAGE IN
TRANSACTIONS THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE
COMMON STOCK. SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH
THE COMMON STOCK OFFERING AND MAY BID FOR AND PURCHASE SHARES OF THE COMMON
STOCK IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE
"UNDERWRITING."
IN CONNECTION WITH THE COMMON STOCK OFFERING, CERTAIN UNDERWRITERS AND
SELLING GROUP MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON STOCK ON NASDAQ IN ACCORDANCE WITH RULE 103 UNDER REGULATION M. SEE
"UNDERWRITING."
2
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ
IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE HEREIN. REFERENCES TO
"BELLWETHER" OR THE "COMPANY" HEREIN INCLUDE BELLWETHER EXPLORATION COMPANY
AND ITS PREDECESSORS AND SUBSIDIARIES UNLESS THE CONTEXT OTHERWISE REQUIRES.
BELLWETHER'S FISCAL YEAR ENDS ON JUNE 30. PRO FORMA INFORMATION REGARDING
BELLWETHER GIVES EFFECT TO THE PENDING ACQUISITION, THE OFFERINGS AND THE OTHER
TRANSACTIONS DESCRIBED UNDER "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA" (COLLECTIVELY, THE "TRANSACTIONS") AS IF THEY OCCURRED ON THE
DATES INDICATED. THE ESTIMATES AS OF JUNE 30, 1996 OF THE COMPANY'S NET PROVED
RESERVES ARE BASED ON THE REPORT OF WILLIAMSON PETROLEUM CONSULTANTS INC.
("WILLIAMSON"), AND THE ESTIMATES OF NET PROVED RESERVES OF THE ACQUIRED
PROPERTIES (AS HEREINAFTER DEFINED) ARE DERIVED FROM A RESERVE REPORT PREPARED
BY THE COMPANY AND AUDITED BY RYDER SCOTT COMPANY PETROLEUM ENGINEERS ("RYDER
SCOTT"). UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES
THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS IN THE COMMON STOCK OFFERING WILL NOT
BE EXERCISED. CERTAIN TERMS RELATING TO THE OIL AND GAS INDUSTRY ARE DEFINED IN
"GLOSSARY."
THE COMPANY
Bellwether is an independent energy company primarily engaged in the
acquisition, exploitation, development and exploration of oil and gas
properties. The Company has grown and diversified its reserve base through the
acquisition of oil and gas properties and the subsequent development of these
properties. Bellwether's estimated net proved reserves have increased at a
compounded annual growth rate of 65.9%, from 1.6 MMBOE as of June 30, 1993 to
7.3 MMBOE as of June 30, 1996. During this period, average net daily production
increased at a compounded annual growth rate of 73.6%, from 618.0 BOE/d in
fiscal 1993 to 3,235.0 BOE/d in fiscal 1996, and EBITDA increased at a
compounded annual growth rate of 89.0%, from $1.6 million in fiscal 1993 to
$10.8 million in fiscal 1996. The Company's net cash flows from operations have
increased at a compounded annual growth rate of 67.4%, from $1.6 million in
fiscal 1993 to $7.5 million in fiscal 1996. The Company believes its primary
strengths are a demonstrated ability to identify and acquire properties which
have significant potential for further exploitation, development and
exploration, an inventory of development and exploration projects, expertise in
the use of advanced technologies such as 3-D seismic and horizontal drilling and
a conservative capital structure supportive of continued investment in its core
properties as well as additional acquisitions.
The Company has recently agreed to acquire (the "Pending Acquisition")
the oil and gas properties (the "Acquired Properties") and associated working
capital owned by partnerships and other entities (the "Sellers") managed or
sponsored by Torch Energy Advisors Incorporated ("Torch"). Bellwether believes
that the Pending Acquisition provides the opportunity to significantly increase
reserves and cash flow at an attractive price while providing opportunities for
future reserve growth through exploitation and exploration activities. On a pro
forma basis, Bellwether's estimated net proved reserves as of June 30, 1996 were
46.6 MMBOE (86% developed and 62% natural gas) with a PV-10 Value (pre-tax) of
$260.1 million. Pro forma average daily net production was 22.7 MBOE/d for
fiscal 1996 and pro forma EBITDA for fiscal 1996 was $75.0 million, excluding
non-recurring gas contract settlements payable to the Company aggregating $18.9
million. Following the Pending Acquisition, the Company's properties will be
concentrated in Texas, Louisiana, Alabama, California and the Gulf of Mexico.
BUSINESS STRATEGY
Bellwether's strategy is to maximize long-term shareholder value through
aggressive growth in reserves and cash flow using advanced technologies,
implementation of a low cost structure and maintenance of a capital structure
supportive of growth. Bellwether expects the additional cash flows from the
3
<PAGE>
Acquired Properties will finance a significant portion of its growth strategy.
Key elements of this strategy are:
OPPORTUNISTIC ACQUISITIONS
Bellwether seeks to acquire properties that have produced significant
quantities of oil and gas and have upside potential which can be exploited using
3-D seismic, computer aided exploration ("CAEX"), horizontal drilling,
workovers and other enhanced recovery techniques. Such acquisitions have
included the Fausse Pointe field in south Louisiana, the Cove field offshore
Texas and the Fort Trinidad field in east Texas.
EXPLOITATION AND DEVELOPMENT OF PROPERTIES
The Company actively pursues the exploitation of its properties through
recompletions, waterfloods and development wells, including horizontal drilling.
Examples of recent exploitation successes include a five well workover program
and two development wells in the Cove field, which increased Bellwether's
average net production in this field from 1.0 MMcf/d in January 1996 to 11.1
MMcf/d in February 1997. In addition, the Company recently drilled a successful
horizontal development well into the Buda formation in the Fort Trinidad field
which tested in January 1997 at 420 Bbls/d of oil. Bellwether also initiated a
waterflood project in the Fort Trinidad field during fiscal 1996. Future planned
exploitation projects include in excess of 20 horizontal drilling locations in
the Buda and Glen Rose B formations in the Fort Trinidad field and up to three
horizontal drilling locations to exploit the Company's exploratory success in
the Giddings field in the Austin Chalk formation. In addition, because the
Sellers were formed to distribute net cash flows rather than reinvest in the
exploitation of the Acquired Properties, the Company believes that such
properties will provide significant exploitation and development opportunities.
The Company's exploitation budget for fiscal 1997 is $8.6 million, of which
approximately $4.8 million had been spent as of December 31, 1996. During fiscal
1997, the capital expenditures on the Acquired Properties are estimated to be
$23.2 million of which $5.7 million had been spent as of December 31, 1996. For
fiscal 1998, the Company has identified exploitation projects totaling $25.2
million (including amounts to be spent on the Acquired Properties).
EXPLORATION ACTIVITIES
The Company's exploration activities focus on projects with potential for
substantial reserve increases. In January 1997, the Company completed a
successful exploration well in the Austin Chalk formation in the Giddings field
in central Texas. Exploration projects in the remainder of fiscal 1997 and in
fiscal 1998 include multiple wells in the Fausse Pointe field and an exploration
well west of the Cove field, both of which are operated by the Company. In
addition, the Company also expects the Acquired Properties to present
exploration opportunities. For example, in the Ship Shoal complex in the Gulf of
Mexico, the Sellers declined to acquire available 3-D seismic surveys and to
participate in six offshore exploration or exploitation wells in 1996, all of
which were successful. The Company plans to acquire this and other 3-D seismic
surveys of the Acquired Properties and to participate in future wells based on
its interpretation of the data. During fiscal 1997, the Company has budgeted
$4.8 million for exploration, of which $2.1 million had been spent as of
December 31, 1996. For fiscal 1998, the Company has identified exploration
projects totaling $17.6 million (including amounts to be spent on the Acquired
Properties).
ADVANCED TECHNOLOGY
The Company seeks to improve the efficiency and reduce the risks associated
with its exploration and exploitation activities using advanced technologies.
These advanced technologies include 3-D seismic, CAEX techniques and horizontal
drilling. The Company acquired a 3-D survey on the Cove field, conducted a 3-D
survey on the Fausse Pointe field and plans to acquire three 3-D surveys on
certain of the Acquired Properties. The Company believes its existing properties
and the Acquired Properties will benefit from the application of advanced
technologies.
4
<PAGE>
TORCH RELATIONSHIP
The Company operates under an Administrative Services Agreement with Torch.
Torch has a staff of 39 geologists, geophysicists, reservoir engineers and
landmen and 59 financial personnel and professionals. The Company believes that
its relationship with Torch provides it with access to acquisition opportunities
and financial and technical expertise that are generally only available to
significantly larger companies. In addition, the fees payable to Torch reduce
significantly on a BOE basis as the Company's asset base and production grow.
LOW COST STRUCTURE
The Company's cost structure will benefit from the Pending Acquisition and
the Company believes that its larger asset and production base will allow it to
maintain a low cost structure prospectively. Because general and administrative
costs are spread over higher production, pro forma general and administrative
costs per BOE in fiscal 1996 and the six months ended December 31, 1996 were
$1.00 and $0.99, respectively, compared with $2.55 and $2.37, respectively, on a
historical basis.
PENDING ACQUISITION
In March 1997, the Company agreed to purchase the Acquired Properties and
an estimated $18.0 million of working capital for $188.3 million, plus a
contingent payment of up to $9.0 million, the actual amount of which will be
based on 1997 gas prices (the "Contingent Payment"). The effective date of the
Pending Acquisition is July 1, 1996 and the estimated net adjusted purchase
price assuming an April 9, 1997 closing date is $141.8 million plus the
Contingent Payment. As of June 30, 1996, estimated net proved reserves
attributable to the Acquired Properties were 39.2 MMBOE (89% developed and 59%
gas) with a PV-10 Value (pre-tax) of $212.0 million.
The Company will finance the cash portion of the Pending Acquisition and
related fees, estimated to aggregate $173.2 million, including repayment of an
estimated $12.0 million of existing indebtedness with the proceeds of the
Offerings (estimated to be $136.3 million) and $36.9 million of borrowings under
its new credit facility ("New Credit Facility"). Torch and a subsidiary of
Torchmark Corporation ("Torchmark"), the parent corporation of a Selling
Stockholder, have interests in the Acquired Properties and will receive an
estimated $18.0 million and $12.7 million, respectively, of the purchase price
paid for the Acquired Properties. Torch and Torchmark will also receive fees
payable in cash and Common Stock in connection with the Pending Acquisition
aggregating an estimated $3.3 million. See "Risk Factors -- Conflicts of
Interest" and "Transactions with Related Persons." The Pending Acquisition
will close simultaneously with the Offerings, except that Bellwether has agreed
to acquire the interest of one investor which owns less than $2.2 million of
properties on April 15, 1997. See "Business and Properties -- Structure of the
Pending Acquisition."
The Company has identified for divestiture non-core properties representing
approximately 10% of the estimated net proved reserves attributable to the
Acquired Properties as of June 30, 1996. These properties are primarily small
working interests in geographically diverse locations, with generally low
production rates and cash flows, and limited potential for development. The
Company expects to sell these properties during fiscal 1997 and fiscal 1998. The
net proceeds from these divestitures, which will be used to repay indebtedness,
are currently estimated to be $15 million, but will depend on prevailing market
conditions at the time of sale.
The Company's address is 1331 Lamar, Suite 1455, Houston, TX 77010, and its
phone number is (713) 650-1025.
5
<PAGE>
THE COMMON STOCK OFFERING
Shares of Common Stock offered by the
Company............................ 4,400,000 shares
Shares of Common Stock offered by the
Selling Stockholders............... 475,000 shares
Shares of Common Stock outstanding
after the Offerings(a)(b):......... 13,707,979 shares
Notes Offering....................... Concurrently with the Common Stock
Offering, the Company is offering
$100,000,000 aggregate principal amount
of Notes to the public. The closings of
the Common Stock Offering and the Notes
Offering are contingent upon each other
and upon the consummation of the Pending
Acquisition. See "Notes Offering."
Use of Proceeds...................... The Company will use the proceeds of the
Common Stock Offering and the Notes
Offering, together with bank borrowings
under the New Credit Facility
(collectively, the "Financing"), to
finance the cash portion of the Pending
Acquisition, to repay bank borrowings
under the Company's existing credit
facility and to pay transaction costs.
See "Use of Proceeds."
Nasdaq National Market symbol........ "BELW"
- -----------------------------
(a) Excludes 1,115,325 shares of Common Stock issuable upon exercise of
incentive stock options currently outstanding, 187,500 shares of Common
Stock issuable upon exercise of a warrant held by a subsidiary of Torchmark,
and 60,000 shares of Common Stock issuable upon exercise of warrants held by
Howard, Weil, Labouisse, Friedrichs Incorporated and Principal Financial
Securities, Inc.
(b) Includes 150,000 shares of Common Stock to be issued to Torch for advisory
services rendered in connection with the Pending Acquisition. Excludes
100,000 shares of Common Stock issuable upon the exercise of warrants to be
issued to Torch for advisory services.
RISK FACTORS
See "Risk Factors" for a discussion of certain matters that should be
considered in evaluating an investment in the Common Stock.
6
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables set forth summary historical financial data of the
Company for the three fiscal years ended June 30, 1996, and the six months ended
December 31, 1995 and 1996, as well as summary unaudited pro forma financial
data of the Company for the fiscal year ended June 30, 1996 and the six months
ended December 31, 1996. Pro forma statement of operations data give effect to
the Transactions as if they occurred on June 30, 1995 and pro forma balance
sheet data give effect to the Transactions as if they occurred on December 31,
1996. The unaudited financial information as of December 31, 1996, and for the
six months ended December 31, 1995 and 1996 has been prepared by the Company in
accordance with generally accepted accounting principles and reflects all
adjustments (consisting of normal recurring adjustments) necessary for a fair
statement, in all material respects, of the results for the interim periods
presented. Certain financial statement items in the interim 1995 period have
been reclassified to conform to the interim 1996 presentation. The unaudited pro
forma financial data are not necessarily indicative of the financial results
that would have occurred had the Transactions been effective on and as of the
dates indicated and should not be viewed as indicative of operations in future
periods. These data should be read in conjunction with "Capitalization,"
"Unaudited Pro Forma Condensed Consolidated Financial Data," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
--------------------------------------------- --------------------------------
1994 1995 1996 1995 1996
--------------------- --------------------
ACTUAL PRO FORMA ACTUAL PRO FORMA
(IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues:
Gas revenues..................... $ 2,620 $ 4,864 $ 9,856 $ 63,765 $ 4,186 $ 6,759 $34,418
Oil revenues..................... 1,086 3,643 5,810 48,111 2,956 3,087 24,619
Gas plant and gas gathering
revenues(a).................... 6,930 10,705 8,719 8,802 4,923 3,879 3,881
Interest income and other........ 63 97 116 20,291(b) 57 53 393(b)
--------- -------- -------- --------- --------- ------- ---------
Total revenues..................... 10,699 19,309 24,501 140,969 12,122 13,778 63,311
--------- -------- -------- --------- --------- ------- ---------
Expenses:
Operating expenses............... 5,307 8,934 10,502 38,644 5,453 4,888 19,394
General and administrative
expenses....................... 1,234 2,739 3,013 8,328 1,559 1,452 3,430
Depreciation, depletion and
amortization................... 2,489 5,269 8,148 42,969 3,866 4,167 18,299
Interest expense................. 721 1,245 1,657 14,535 956 520 7,493
Other expense.................... -- -- 153 153 155 -- --
--------- -------- -------- --------- --------- ------- ---------
Total expenses..................... 9,751 18,187 23,473 104,629 11,989 11,027 48,616
--------- -------- -------- --------- --------- ------- ---------
Income before income taxes and
minority interest in gas plant
ventures......................... 948 1,122 1,028 36,340 133 2,751 14,695
Net income......................... $ 814 $ 941 $ 982 $ 23,228 $ 1 $ 1,733 $ 9,258
========= ======== ======== ========= ========= ======= =========
Net income per share(c).............. $ 0.27 $ 0.12 $ 0.11 $ 1.71 $ 0.00 $ 0.19 $ 0.68
========= ======== ======== ========= ========= ======= =========
Weighted average common and common
equivalent shares outstanding(c)... 3,006 7,713 9,052 13,602 9,045 9,118 13,668
========= ======== ======== ========= ========= ======= =========
OTHER FINANCIAL DATA:
Capital expenditures............... $ 22,034 $ 41,901 $ 6,999 -- $ 1,174 $ 7,475 --
EBITDA(d).......................... $ 4,158 $ 7,636 $ 10,833 $ 74,977(e) $ 4,955 $ 7,438 $40,611(e)
EBITDA/interest expense............ 5.77 6.13 6.54 5.16 5.18 14.30 5.42
Net cash flows provided by
operating activities............. $ 3,122 $ 5,283 $ 7,485 -- $ 3,496 $ 7,105 --
Net cash flows (used in) provided
by investing activities.......... $ (9,423) $(27,289) $ 3,542 -- $ (1,174) $(5,810) --
Net cash flows provided by (used
in) by financing activities...... $ 7,334 $ 21,642 $(11,332) -- $ (1,000) $(1,628) --
Ratio of earnings to fixed
charges(f)....................... 2.31 1.90 1.62 3.50 1.14 6.29 2.96
</TABLE>
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<PAGE>
DECEMBER 31, 1996
-------------------------
ACTUAL PRO FORMA
BALANCE SHEET DATA:
Working capital.................. $ 4,357 $ 22,394
Total assets..................... 68,982 239,987
Long term debt, net of current
maturities...................... 11,000 135,892
Stockholders' equity............. 48,751 84,438
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(a) In March 1996 Bellwether assumed a contract to purchase gas at $4.50 per
MMBtu (the "Contract Assumption"), for which Bellwether received $9.9
million. As a result of this transaction, Bellwether ceased to recognize gas
gathering revenues and expenses. Historical gas gathering revenues were $2.4
million, $5.0 million and $3.4 million, respectively, for the years ended
June 30, 1994, 1995 and 1996, and $2.5 million for the six months ended
December 31, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Six Months
Ended December 31, 1995 Compared With December 31, 1996 -- Revenues."
(b) Includes $18.9 million and $(124,000), respectively, of revenues and
expenses attributable to non-recurring gas contract settlements for the year
ended June 30, 1996 and the six months ended
December 31, 1996.
(c) Restated to reflect a 1-for-8 reverse stock split consummated in fiscal
1994.
(d) EBITDA is defined as income before income taxes, interest, depreciation,
depletion and amortization. Management of the Company believes that EBITDA
may provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA is a financial measure commonly used in the Company's
industry and should not be considered in isolation or as a substitute for
net income, cash flow provided by operating activities or other income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of the Company's profitability or liquidity.
(e) Pro forma EBITDA for the year ended June 30, 1996 and for the six months
ended December 31, 1996 exclude $18.9 million and $(124,000), respectively,
of revenues and expenses attributable to non-recurring gas contract
settlements.
(f) For purposes of computing the ratio of earnings to fixed charges,
"Earnings" are consolidated earnings (loss) from continuing operations
before tax, exclusive of the period's undistributed equity earnings of
affiliated companies, plus fixed charges. "Fixed charges" are comprised of
interest on indebtedness, amortization of debt issuance costs and that
portion of capital lease expense which is deemed to be representative of an
interest factor.
8
<PAGE>
SUMMARY OPERATING DATA
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
----------------------------------------- ----------------------------------
1994 1995 1996 1995 1996
------------------ --------------------
PRO PRO
ACTUAL FORMA(a) ACTUAL FORMA(b)
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (MBbls)........................ 71 216 334 3,124 184 143 1,302
Gas (MMcf)......................... 1,206 2,932 5,099 31,080 2,428 2,814 12,962
Oil equivalent (MBOE).............. 272 705 1,184 8,304 589 612 3,462
AVERAGE SALES PRICE(c):
Oil (per Bbl)...................... $ 15.27 $ 16.89 $17.81 $15.40 $ 16.04 $21.59 $18.91
Gas (per Mcf)(d)................... 2.17 1.66 2.02 2.05 1.72 2.40 2.66
COSTS PER BOE:
Production costs, including ad
valorem and severance taxes...... $ 4.75 $ 4.05 $ 4.49 $ 4.03 $ 4.16 $ 5.00 $ 5.07
Depreciation, depletion and
amortization..................... 5.71 5.52 5.86 4.90 5.39 6.09 5.00
General and administrative......... 4.54 3.89 2.55 1.00 2.65 2.37 0.99
GAS PLANT DATA:
Net gas processed (MMcf)........... 10,746 8,780 7,548 7,548 3,679 3,172 3,172
Net NGL sales (MBbls).............. 375 382 321 321 158 173 173
Average sales price per Bbl........ $ 10.50 $ 12.18 $13.02 $13.02 $ 11.72 $18.10 $18.10
</TABLE>
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(a) Gives effect to the Transactions as if they had occurred on June 30, 1995.
(b) Gives effect to the Transactions as if they had occurred on June 30, 1996.
(c) Average sales price does not include the effect of hedge transactions.
(d) Average sales price for natural gas includes revenues received from the sale
of natural gas liquids removed from the Company's gas production.
The following table sets forth historical reserve information derived from
reserve reports prepared by the Company's independent reserve engineers and pro
forma reserve information derived from such reserve reports together with a
reserve report regarding the Acquired Properties prepared by the Company and
audited by Ryder Scott.
SUMMARY RESERVE DATA
<TABLE>
<CAPTION>
AS OF JUNE 30,
---------------------------------------------
1994 1995 1996
-----------------------
PRO
ACTUAL FORMA(a)
<S> <C> <C> <C> <C>
ESTIMATED NET PROVED RESERVES:
Oil (MBbls)........................ 393 2,597 1,808 17,858
Gas (MMcf)......................... 10,671 30,159 33,196 172,253
Oil equivalent (MBOE).............. 2,172 7,623 7,341 46,567
PV-10 Value (pre-tax) ($000)....... 12,044 37,291 48,140 260,132
Standardized measure of discounted
future net cash flows (after-tax)
($000)........................... 12,044 37,291 45,176 223,262
</TABLE>
- -----------------------------
(a) Gives effect to the Transactions as if they had occurred on June 30, 1995.
9
<PAGE>
RISK FACTORS
THIS PROSPECTUS INCLUDES "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING
OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934 ("EXCHANGE
ACT"). ALL STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS
PROSPECTUS, INCLUDING WITHOUT LIMITATION, STATEMENTS UNDER "PROSPECTUS
SUMMARY," "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA,"
"MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS" AND "BUSINESS AND PROPERTIES" REGARDING THE COMPANY'S FINANCIAL
POSITION, ESTIMATED QUANTITIES AND NET PRESENT VALUES OF RESERVES, BUSINESS
STRATEGY, PLANS AND OBJECTIVES FOR FUTURE OPERATIONS AND COVENANT COMPLIANCE,
ARE FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE
ASSUMPTIONS UPON WHICH SUCH FORWARD-LOOKING STATEMENTS ARE BASED ARE REASONABLE,
IT CAN GIVE NO ASSURANCES THAT SUCH ASSUMPTIONS WILL PROVE TO HAVE BEEN CORRECT.
IMPORTANT FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE
COMPANY'S EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED BELOW AND
ELSEWHERE IN THIS PROSPECTUS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING
STATEMENTS ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE
EXPRESSLY QUALIFIED BY THE CAUTIONARY STATEMENTS. PROSPECTIVE PURCHASERS OF
SECURITIES OFFERED HEREBY SHOULD CAREFULLY CONSIDER, TOGETHER WITH OTHER
INFORMATION IN THIS PROSPECTUS, THE FOLLOWING FACTORS THAT AFFECT THE COMPANY.
VOLATILITY OF OIL AND GAS PRICES AND MARKETS
The Company's financial condition, operating results, future growth and the
carrying value of its oil and gas properties are substantially dependent on
prevailing prices of oil and gas. The Company's ability to maintain or increase
its borrowing capacity and to obtain additional capital on attractive terms is
also substantially dependent upon oil and gas prices. Prices for oil and gas are
subject to large fluctuations in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of
additional factors beyond the control of the Company. These factors include
weather conditions in the United States, the condition of the United States
economy, the actions of the Organization of Petroleum Exporting Countries,
governmental regulation, political stability in the Middle East and elsewhere,
the foreign supply of oil and gas, the price of foreign imports and the
availability of alternate fuel sources. Any substantial and extended decline in
the price of oil or gas would have an adverse effect on the Company's carrying
value of its proved reserves, its borrowing capacity, its ability to obtain
additional capital, and its revenues, profitability and cash flows.
Volatile oil and gas prices make it difficult to estimate the value of
producing properties in connection with acquisitions and often cause disruption
in the market for oil and gas producing properties, as buyers and sellers have
difficulty agreeing on such value. Price volatility also makes it difficult to
budget for and project the return on acquisitions and exploitation, development
and exploration projects.
The availability of a ready market for the Company's oil and natural gas
production also depends on a number of factors, including the demand for and
supply of oil and natural gas and the proximity of reserves to, and the capacity
of, oil and natural gas gathering systems, pipelines or trucking and terminal
facilities. Wells may temporarily be shut-in for lack of a market or due to
inadequacy or unavailability of pipeline or gathering system capacity.
ABILITY TO REPLACE RESERVES
The Company's future performance depends upon its ability to find, develop
and acquire additional oil and gas reserves that are economically recoverable.
The proved reserves of Bellwether will generally decline as reserves are
depleted. The Company therefore must locate and develop or acquire new oil and
gas reserves to replace those being depleted by production. Because the
Company's reserves on a pro forma basis are characterized by relatively rapid
decline rates, without successful exploration, development or acquisition
activities, the Company's revenues will decline rapidly. No assurances can be
given that the Company will be able to find and develop or acquire additional
reserves at an acceptable cost.
10
<PAGE>
ACQUISITION RISKS
The Company's rapid growth in recent years has been attributable in
significant part to acquisitions of oil and gas properties. The Company expects
to continue to evaluate and, where appropriate, pursue acquisition opportunities
on terms management considers favorable to the Company. There can be no
assurance that suitable acquisition candidates will be identified in the future,
or that the Company will be able to finance such acquisitions on favorable
terms. In addition, the Company competes against other companies for
acquisitions, and there can be no assurances that the Company will be successful
in the acquisition of any material property interests. Further, there can be no
assurances that any future acquisitions made by the Company will be integrated
successfully into the Company's operations or will achieve desired profitability
objectives.
The successful acquisition of producing properties requires an assessment
of recoverable reserves, exploration and exploitation potential, future oil and
natural gas prices, operating costs, potential environmental and other
liabilities and other factors beyond the Company's control. In connection with
such an assessment, the Company performs a review of the properties that it
believes to be generally consistent with industry practices. Nonetheless, the
resulting assessments are necessarily inexact and their accuracy inherently
uncertain, and such a review may not reveal all existing or potential problems,
nor will it necessarily permit the Company to become sufficiently familiar with
the properties to fully assess their merits and deficiencies. Inspections may
not always be performed on every well, and structural and environmental problems
are not necessarily observable even when an inspection is undertaken. In
addition, sellers of properties may be unwilling or financially unable to
indemnify the Company for known liabilities at the time of an acquisition.
Additionally, significant acquisitions can change the nature of the
operations and business of the Company depending upon the character of the
acquired properties, which may be substantially different in operating and
geologic characteristics or geographic location than existing properties. While
the Company's pro forma operations will be focused in Texas, Louisiana, Alabama,
California and the Gulf of Mexico, there is no assurance that the Company will
not pursue acquisitions or properties located in other geographic areas.
In connection with the Pending Acquisition, Bellwether will assume or
otherwise become liable for all obligations with respect to operations of the
Acquired Properties, including environmental and operational liabilities,
unknown liabilities, and liabilities arising prior to the closing date.
DRILLING RISKS
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil and
natural gas may involve unprofitable efforts, not only from dry wells, but from
wells that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain and cost overruns are common.
The Company's drilling operations may be curtailed, delayed or canceled as a
result of numerous factors, many of which are beyond the Company's control,
including title problems, weather conditions, compliance with governmental
requirements and shortages or delays in the delivery of equipment and services.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial capital
expenditures for the exploitation, exploration, acquisition and production of
oil and gas reserves. Historically, the Company has financed these expenditures
primarily with cash generated by operations, proceeds from bank borrowings and
sales of its Common Stock. The Company believes that it will have sufficient
cash flows provided by operating activities, the proceeds of the Offerings and
borrowings under the New Credit Facility to fund such planned capital
expenditures. If revenues or the Company's borrowing base decrease as a result
of lower oil and gas prices, operating difficulties or declines in reserves, the
Company may have limited ability to expend the
11
<PAGE>
capital necessary to undertake or complete future drilling programs. There can
be no assurance that additional debt or equity financing or cash generated by
operations will be available to meet these requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Capital Resources and Liquidity."
SIGNIFICANT LEVERAGE AND DEBT SERVICE
Following the Pending Acquisition and the Offerings, the Company will be
highly leveraged with pro forma outstanding indebtedness of $136.9 million. On a
pro forma basis, as of December 31, 1996, the Company's ratio of total debt to
total capitalization would have been 61.7% compared with 18.4% on a historical
basis. The Company intends to sell properties, for estimated proceeds of $15
million, to reduce such indebtedness. The Company has not identified a purchaser
for these properties and no assurance can be given of the ability of the Company
to sell such properties, the price that will be received or as to whether the
sales price of such assets will exceed the book value of such assets.
The Company's level of indebtedness will have several important effects on
its future operations, including (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the Company's debt obligations will require the Company to meet
certain financial tests, and other restrictions will limit its ability to borrow
additional funds or to dispose of assets and may affect the Company's
flexibility in planning for, and reacting to, changes in its business, including
possible acquisition activities and (iii) the Company's ability to obtain
financing in the future for working capital, capital expenditures, acquisitions,
general corporate purposes or other purposes may be impaired. The Company's
ability to meet its debt service obligations and to reduce its total
indebtedness will be dependent upon the Company's future performance, which will
be subject to general economic conditions and to financial, business and other
factors affecting the operations of the Company, many of which are beyond its
control. There can be no assurance that the Company's future performance will
not be adversely affected by such economic conditions and financial, business
and other factors. See " -- Volatility of Oil and Gas Prices and Markets,"
"Capitalization" and "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Capital Resources and Liquidity."
ADMINISTRATIVE SERVICES AGREEMENT; RELIANCE ON TORCH
The Company currently has eight employees. The Company is party to an
Administrative Services Agreement with Torch, pursuant to which Torch performs
certain administrative and technical functions for the Company, including
financial, accounting, legal, geological, engineering and technical support. The
Company believes that its relationship with Torch provides the Company with
access to professional, technical and administrative personnel not otherwise
available to a company of its size. Bellwether believes that if the
Administrative Services Agreement were terminated Bellwether could, over time,
hire experienced personnel and acquire the accounting and reporting systems and
other assets necessary to replace Torch. However, the unanticipated termination
of the Administrative Services Agreement could have a material adverse effect
upon the Company. The Administrative Services Agreement may be terminated by
Bellwether upon one year's prior notice and may not be terminated by Torch prior
to December 31, 1999. See "Transactions with Related Persons -- Relationship
with Torch and Affiliates."
CONFLICTS OF INTEREST
Torch and Bellwether have a common director and certain common officers.
Certain members of the Boards of Directors and management of Torch and
Bellwether were therefore subject to conflicts of interest in connection with
negotiating or approving the terms of the Pending Acquisition and the fees to be
received by Torch in connection with the Pending Acquisition. In addition, under
the Administrative Services Agreement, Bellwether relies on Torch to perform
title, environmental, operational and other due diligence reviews of acquisition
prospects, and Bellwether does not have personnel to independently perform all
of these functions in connection with the acquisition of the Acquired
Properties. Bellwether therefore relied on Torch to perform certain of these
functions in connection with the Pending Acquisition.
12
<PAGE>
Torch owns interests in each of the Sellers, and will receive an estimated
$18.0 million of the purchase price paid in connection with the Pending
Acquisition. Torch will also receive 150,000 shares of Common Stock and warrants
to purchase an aggregate of 100,000 shares of Common Stock at 120% of the price
to the public in the Common Stock Offering at any time for five years following
the closing of the Pending Acquisition as fees for advisory services in
connection with the Pending Acquisition.
Torchmark, which prior to the Offerings beneficially owned interests in
certain of the Sellers, will receive an estimated $12.7 million of the purchase
price paid in connection with the Pending Acquisition. In connection with the
Pending Acquisition, Torchmark, Torch and all investors in the Sellers will
settle certain disagreements relating to fees and other amounts paid by the
Sellers to Torch for oil and gas marketing and sales of non-strategic
properties. Pursuant to an existing agreement with Torch, Torchmark will make a
cash payment of $9.7 million on behalf of Torch to such investors in order to
settle such disagreements. Torchmark, Torch, such investors and their agents and
affiliates will release each other from any liability arising out of, or related
to, among other things, such matters. In connection with such settlement,
Bellwether will pay Torchmark $1.5 million and (as successor to the Sellers as a
result of the Pending Acquisition) also will be released by the investors from
all such liabilities. See "Transactions with Related Persons -- Pending
Acquisition."
Bellwether formed a special committee of its Board of Directors (the
"Special Committee") composed of directors who are not employees of the
Company and who are not affiliated with Torch to consider and approve the terms
of the acquisition of the Acquired Properties and the fees paid to Torch. The
Special Committee retained legal counsel to advise it in connection with its
duties, and retained Ryder Scott to audit the reserve estimates prepared by
Torch on behalf of the Company in connection with the determination of the
purchase price for the Acquired Properties. In addition, the Special Committee
retained Principal Financial Securities, Inc. ("Principal") to advise it in
connection with the terms of the acquisition of the Acquired Properties.
Principal is also an underwriter in the Common Stock Offering. Principal issued
its opinion that the Pending Acquisition is fair to the Company from a financial
point of view and the Special Committee approved the terms of the purchase of
the Acquired Properties and fees payable to Torch prior to the execution of the
definitive agreement for the Pending Acquisition. No assurances can be made,
however, that the terms of the purchase of the Acquired Properties or the fees
paid to Torch are as favorable to the Company as the terms that would have been
negotiated in a transaction between persons who were not affiliates.
Torch also renders administrative services to Nuevo Energy Company, a
publicly traded independent oil and gas company ("Nuevo"), and may manage or
render management or administrative services for other energy companies in the
future. These services may include the review and recommendation of potential
acquisitions. It is possible that conflicts may occur between Nuevo and
Bellwether in connection with possible acquisitions or otherwise in connection
with the services rendered by Torch. Although the Administrative Services
Agreement provides for procedures to reconcile conflicts of interest between
Nuevo and the Company, no assurances can be made that such procedures will fully
protect the Company from losses which may occur if a conflict between the
Company and Nuevo arises. In addition, Nuevo and the Company have two common
directors. See "Transactions with Related Persons -- Relationship with Torch
and Affiliates."
ESTIMATES OF OIL AND GAS RESERVES
This Prospectus contains estimates of oil and gas reserves owned by the
Company on June 30, 1994, 1995 and 1996, and the future net cash flows
attributable to those reserves, prepared by independent petroleum engineers. In
addition, the Prospectus contains estimates of oil and gas reserves attributable
to the Acquired Properties, and the future net cash flows attributable to those
reserves, prepared by the Company and audited by Ryder Scott. There are numerous
uncertainties inherent in estimating quantities of proved reserves and cash
flows attributable to such reserves, including factors beyond the control of the
Company and the reserve engineers. Reserve engineering is a subjective process
of estimating underground accumulations of oil and gas that cannot be measured
in an exact manner. The accuracy of an estimate of quantities of reserves, or of
cash flows attributable to such reserves, is a function of the available data,
assumptions
13
<PAGE>
regarding future oil and gas prices and expenditures for future development and
exploitation activities, and of engineering and geological interpretation and
judgment. Additionally, reserves and future cash flows may be subject to
material downward or upward revisions based upon production history, development
and exploitation activities and prices of oil and gas. Actual future production,
revenue, taxes, development expenditures, operating expenses, quantities of
recoverable reserves and the value of cash flows from such reserves may vary
significantly from the assumptions and estimates set forth herein. In addition,
reserve engineers may make different estimates of reserves and cash flows based
on the same available data. In calculating reserves on a MBOE basis, gas was
converted to oil equivalent at the ratio of six Mcf of gas to one Bbl of oil.
While this ratio approximates the energy equivalency of gas to oil on a Btu
basis, it may not represent the relative prices received by the Company on the
sale of its oil and gas production.
The estimated quantities of proved reserves and the discounted present
value of future net cash flows attributable to estimated proved reserves set
forth in this Prospectus were prepared or audited by the reserve engineers in
accordance with the rules of the Securities and Exchange Commission (the
"SEC"), and are not intended to represent the fair market value of such
reserves.
HEDGING OF PRODUCTION
Part of the Company's business strategy is to reduce its exposure to the
volatility of oil and gas prices by hedging a portion of its production. In a
typical hedge transaction, the Company will have the right to receive from the
counterparty to the hedge, the excess of the fixed price specified in the hedge
over a floating price based on a market index, multiplied by the quantity
hedged. If the floating price exceeds the fixed price, the Company is required
to pay the counterparty this difference multiplied by the quantity hedged. In
such case, the Company is required to pay the difference regardless of whether
the Company has sufficient production to cover the quantities specified in the
hedge. Significant reductions in production at times when the floating price
exceeds the fixed price could require the Company to make payments under the
hedge agreements even though such payments are not offset by sales of
production. Hedging will also prevent the Company from receiving the full
advantage of increases in oil or gas prices above the fixed amount specified in
the hedge. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General."
OPERATING HAZARDS, OFFSHORE OPERATIONS AND UNINSURED RISKS
Bellwether's operations are subject to risks inherent in the oil and gas
industry, such as blowouts, cratering, explosions, uncontrollable flows of oil,
gas or well fluids, fires, pollution, earthquakes and environmental risks. These
risks could result in substantial losses to the Company due to injury and loss
of life, severe damage to and destruction of property and equipment, pollution
and other environmental damage and suspension of operations. Moreover, a portion
of the Company's operations are offshore and therefore are subject to a variety
of operating risks peculiar to the marine environment, such as hurricanes or
other adverse weather conditions, to more extensive governmental regulation,
including regulations that may, in certain circumstances, impose strict
liability for pollution damage, and to interruption or termination of operations
by governmental authorities based on environmental or other considerations.
The Company's operations could result in liability for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. The Company could be liable for
environmental damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could have a material adverse effect on the
Company's financial condition and results of operations. The Company maintains
insurance coverage for its operations, including limited coverage for sudden
environmental damages, but does not believe that insurance coverage for
environmental damages that occur over time is available at a reasonable cost.
Moreover, the Company does not believe that insurance coverage for the full
potential liability that could be caused by sudden environmental damages is
available at a reasonable cost. Accordingly, the Company may be subject to
liability or may lose substantial portions of its properties in the event of
certain environmental damages.
14
<PAGE>
ENVIRONMENTAL AND OTHER REGULATION
The Company's operations are subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. These laws and regulations require the acquisition
of a permit before drilling commences, restrict the types, quantities and
concentration of various substances that can be released into the environment in
connection with drilling and production activities, limit or prohibit drilling
activities on certain lands lying within wilderness, wetlands and other
protected areas, and impose substantial liabilities for pollution resulting from
the Company's operations. Moreover, the recent trend toward stricter standards
in environmental legislation and regulation is likely to continue. For instance,
legislation has been proposed in Congress from time to time that would
reclassify certain oil and gas exploration and production wastes as "hazardous
wastes" which would make the reclassified wastes subject to much more stringent
handling, disposal and clean-up requirements. If such legislation were to be
enacted, it could have a significant impact on the operating costs of the
Company, as well as the oil and gas industry in general. Initiatives to further
regulate the disposal of oil and gas wastes are also pending in certain states,
and these various initiatives could have a similar impact on the Company.
Management believes that the Company is in substantial compliance with current
applicable environmental laws and regulations.
The Oil Pollution Act of 1990 imposes a variety of regulations on
"responsible parties" related to the prevention of oil spills. The
implementation of new, or the modification of existing, environmental laws or
regulations, including regulations promulgated pursuant to the Oil Pollution Act
of 1990, could have a material adverse impact on the Company. See "Business and
Properties -- Competition, Markets and Regulation."
COMPETITION
The Company operates in the highly competitive areas of oil and gas
exploration, development and production. The Company's competitors include major
integrated oil and gas companies and substantial independent energy companies,
many of which possess greater financial and other resources than the Company.
See "Business and Properties -- Competition, Markets and Regulation."
MANDATORY OFFER TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL
The Indenture governing the Notes provides that upon the occurrence of a
Change of Control the Company is required to offer to repurchase any or all of
the outstanding Notes at a price equal to 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase. Generally, a "Change of Control" includes (i) the acquisition
(including any acquisition by merger or consolidation) by any person or group of
more than 50% of the voting stock of the Company, (ii) the sale or transfer of
substantially all of the assets of the Company, (iii) certain replacements of a
majority of the Board of Directors of the Company over a two-year period or (iv)
the liquidation or dissolution of the Company. Should a Change of Control occur,
there is no assurance that the Company will have available funds sufficient to
pay for the Notes tendered for repurchase. In the event an offer to repurchase
is required to be made and the Company does not have available funds sufficient
to pay for Notes tendered for repurchase, an event of default would occur under
the Indenture.
15
<PAGE>
NOTES OFFERING
Concurrently with the Common Stock Offering, the Company is offering $100
million aggregate principal amount of its 10 7/8% Senior Subordinated Notes due
2007. The Common Stock Offering and the Notes Offering are contingent upon each
other and upon the closing of the Pending Acquisition. See "Description of
Indebtedness."
PRICE RANGE OF COMMON STOCK AND DIVIDEND POLICY
The Common Stock is traded on the Nasdaq National Market under the symbol
"BELW." The following table sets forth the high and low sales prices, as
reported by the Nasdaq National Market for the periods indicated. The last
reported sale price for the Common Stock on April 3, 1997 on the Nasdaq National
Market was $8 3/4 per share. As of June 30, 1996, there were approximately 1,148
record holders of the Common Stock.
PRICE RANGE OF
COMMON STOCK
--------------------
YEAR ENDED JUNE 30, 1995: HIGH LOW
1st Quarter 1994..................... $ 6 1/2 $ 5 1/8
2nd Quarter 1994..................... $ 6 $ 4 5/8
3rd Quarter 1995..................... $ 6 1/4 $ 4 5/8
4th Quarter 1995..................... $ 6 3/4 $ 5 1/2
YEAR ENDED JUNE 30, 1996:
1st Quarter 1995..................... $ 6 1/4 $ 5
2nd Quarter 1995..................... $ 6 1/8 $ 4 1/16
3rd Quarter 1996..................... $ 7 $ 5
4th Quarter 1996..................... $ 8 $ 5 1/2
YEAR ENDED JUNE 30, 1997:
1st Quarter 1996..................... $ 6 7/8 $ 4 3/8
2nd Quarter 1996..................... $ 9 $ 6 1/4
3rd Quarter 1997..................... $ 11 1/2 $ 7 7/8
4th Quarter through April 3, 1997.... $ 10 1/8 $ 8 1/2
The Company has not paid cash dividends on its Common Stock. The Company
presently intends to retain its funds for operations and expansion of its
business. The declaration and payment by the Company of any dividends on its
Common Stock in the future and the amount thereof will depend upon the Company's
operating results, financial condition, cash requirements, future prospects and
other factors deemed relevant by the Company's Board of Directors. The Company's
New Credit Facility and the Notes limit dividends which may be paid on the
Company's capital stock. See "Description of Indebtedness."
16
<PAGE>
USE OF PROCEEDS
The proceeds to the Company from the Offerings are estimated to be
approximately $136.3 million. The Company intends to use such proceeds, together
with borrowings under its New Credit Facility, to fund the Pending Acquisition
and related fees, estimated to be $173.2 million, including repayment of
outstanding indebtedness under its existing credit facility, estimated to be
$12.0 million. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Capital Resources and Liquidity." The closing of
the Offerings are conditioned upon the simultaneous closing of the Pending
Acquisition.
As of December 31, 1996, $11.0 million was outstanding under the Company's
existing credit facility. The existing credit facility matures in October 2000.
Borrowings under the existing credit facility bear interest, at the election of
the Company, at floating rates based upon the bank's prime rate, the London
Interbank Offered Rate ("LIBOR") or the federal funds rate. The interest rate
on outstanding borrowings at December 31, 1996 was 6.4%.
Following the Offerings and the repayment of amounts outstanding under the
existing credit facility, the Company is expected to have approximately $53.1
million of available borrowing capacity under the New Credit Facility. See
"Description of Indebtedness" for a discussion of the terms of the New Credit
Facility.
The following table sets forth the sources and uses of the estimated net
proceeds of the Offerings and borrowings under the Company's New Credit
Facility:
Sources (in thousands):
Common Stock Offering........... $ 36,300
Notes Offering.................. 100,000
New Credit Facility............. 36,893
----------
Total...................... $ 173,193
==========
Uses (in thousands):
Pending Acquisition............. $ 141,768
Repay existing credit
facility....................... 12,000
Contingent Payment(a)........... 9,011
Payments to Torchmark........... 1,500
Fees and expenses(b)............ 8,914
----------
Total...................... $ 173,193
==========
- ------------------------------
(a) Represents the maximum amount of the Contingent Payment which will be
deposited in escrow at closing. The actual amount of the Contingent Payment
will be determined 30 days following the closing based on actual and future
gas prices in 1997. If the amount of the Contingent Payment is less than $9
million, the difference will be returned to the Company and used to reduce
borrowings under the New Credit Facility.
(b) Includes underwriting expenses associated with the Offerings.
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<PAGE>
CAPITALIZATION
The following table sets forth, as of December 31, 1996, the historical
cash position and capitalization of the Company and such cash position and
capitalization giving pro forma effect to the Transactions. See "Use of
Proceeds." This table should be read in conjunction with the "Unaudited Pro
Forma Condensed Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements, including the Notes thereto.
DECEMBER 31, 1996
------------------------
HISTORICAL PRO FORMA
(IN THOUSANDS, EXCEPT
SHARE DATA)
Cash and cash equivalents............... $ 450 $ 530
========== =========
Current maturities of long-term debt.... $ -- $ --
========== =========
Long-term debt (excluding current
maturities)
10 7/8% Senior Subordinated
Notes............................. $ -- $ 100,000
Existing credit facility........... 11,000 --
New Credit Facility................ -- 35,893
Stockholders' equity:
Preferred Stock, $0.01 par value,
1,000,000 shares authorized,
none issued or outstanding....... -- --
Common Stock, $0.01 par value,
15,000,000 shares authorized,
9,152,979 shares issued and
outstanding, 13,702,979 shares
pro forma(a)(b).................. 92 137
Capital in excess of par value.......... 42,059 77,701
Retained earnings....................... 6,600 6,600
---------- ---------
Total stockholders' equity.............. 48,751 84,438
---------- ---------
Total capitalization.................... $ 59,751 $ 220,331
========== =========
- ------------------------------
(a) Excludes 1,115,325 shares of Common Stock issuable upon exercise of
incentive stock options currently outstanding, 187,500 shares of Common
Stock issuable upon exercise of warrants held by a subsidiary of Torchmark
(the "Torchmark Warrants"), and 60,000 shares of Common Stock issuable
upon exercise of warrants held by Howard, Weil, Labouisse, Friedrichs
Incorporated and Principal. In connection with the Common Stock Offering,
Bellwether and Torchmark have agreed that Torchmark will use 62,500 shares
issuable upon exercise of the Torchmark Warrants to pay a portion of the
exercise price of the warrants, such stock to be valued at the price to the
public in the Common Stock Offering. Accordingly, the maximum number of
shares of Common Stock issuable in connection with the Torchmark Warrants is
125,000. The Selling Stockholders have granted the Underwriters an option to
purchase 719,264 shares of Common Stock solely to cover over-allotments, if
any, including shares issuable upon exercise of the Torchmark Warrants.
(b) Includes 150,000 shares of Common Stock to be issued to Torch for advisory
services rendered in connection with the Pending Acquisition. Excludes
100,000 shares of Common Stock issuable upon exercise of warrants to be
issued to Torch for such advisory services.
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<PAGE>
UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma condensed consolidated balance sheet as of December
31, 1996 gives effect to the Transactions as if they occurred on December 31,
1996. The unaudited pro forma condensed consolidated statements of operations
for the year ended June 30, 1996 and the six months ended December 31, 1996 give
effect to the Transactions as if they had occurred at the beginning of the
periods presented.
The following unaudited pro forma financial data have been included as
required by the rules of the SEC and are provided for comparative purposes only.
The unaudited pro forma financial data presented are based upon the historical
consolidated financial statements of Bellwether and the historical statement of
assets (other than productive oil and gas assets) and liabilities and the
related statements of revenues and direct operating expenses of the Acquired
Properties and should be read in conjunction with such financial statements and
the related notes thereto which are included elsewhere herein.
The pro forma financial data are based upon assumptions and include
adjustments as explained in the notes to the unaudited pro forma condensed
consolidated financial statements, and the actual recording of the transactions
could differ. The unaudited pro forma financial data are not necessarily
indicative of the financial results that would have occurred had the
Transactions been effective on and as of the dates indicated and should not be
viewed as indicative of operations in future periods.
19
<PAGE>
BELLWETHER EXPLORATION COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- UNAUDITED
<TABLE>
<CAPTION>
AS OF DECEMBER 31, 1996
------------------------------------------------------------
ADJUSTMENTS
FOR THE ADJUSTMENTS PRO FORMA
PENDING FOR THE FOR THE
HISTORICAL ACQUISITION FINANCING TRANSACTIONS
(IN THOUSANDS)
<S> <C> <C> <C> <C>
ASSETS
Current Assets:
Cash and cash equivalents....... $ 450 $ (153,577)(a) $ 153,657(b) $ 530
Accounts and other
receivables................... 7,599 27,382(a) -- 34,981
Other........................... 586 -- -- 586
----------- ----------- ----------- ------------
Total current assets....... 8,635 (126,195) 153,657 36,097
----------- ----------- ----------- ------------
Oil and gas properties (full cost
method)............................ 83,473 129,372(a) -- 212,845
Gas plant facilities................. 12,843 -- -- 12,843
----------- ----------- ----------- ------------
96,316 129,372 -- 225,688
Accumulated depreciation, depletion
and amortization................... (36,561) -- -- (36,561)
----------- ----------- ----------- ------------
59,755 129,372 -- 189,127
Other................................ 592 9,011(a) 5,160(b) 14,763
----------- ----------- ----------- ------------
Total assets............... $ 68,982 $ 12,188 $ 158,817 $239,987
=========== =========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities................... $ 4,278 $ 9,425(a) $ -- $ 13,703
Current maturities of long term
debt.......................... -- -- -- --
----------- ----------- ----------- ------------
Total current
liabilities............. 4,278 9,425 -- 13,703
----------- ----------- ----------- ------------
Other liabilities.................... 1,148 -- -- 1,148
Existing credit facility............. 11,000 -- (11,000)(b) --
New credit facility.................. -- -- 35,893(b) 35,893
Senior Subordinated Notes............ -- -- 100,000(b) 100,000
Deferred income taxes................ 3,805 1,000(a) -- 4,805
Stockholders' Equity................. 48,751 1,763(a) 33,924(b) 84,438
----------- ----------- ----------- ------------
Total liabilities and
Stockholders' equity.... $ 68,982 $ 12,188 $ 158,817 $239,987
=========== =========== =========== ============
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
20
<PAGE>
BELLWETHER EXPLORATION COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
------------------------------------------------------------
ADJUSTMENTS
FOR THE ADJUSTMENTS PRO FORMA
PENDING FOR THE FOR THE
HISTORICAL ACQUISITION FINANCING TRANSACTIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas revenues............ $ 15,666 $ 96,210(c) $ -- $111,876
Gas plant and gas gathering
revenues...................... 8,719 83(c) -- 8,802
Interest and other income....... 116 20,175(c) -- 20,291
---------- ----------- ----------- ------------
Total revenues............. 24,501 116,468 -- 140,969
---------- ----------- ----------- ------------
Costs and Expenses:
Production expenses............. 5,317 28,142(c) -- 33,459
Gas plant and gas gathering
expenses...................... 5,185 -- -- 5,185
Depreciation, depletion and
amortization.................. 8,148 34,821(e) -- 42,969
General and administrative
expenses...................... 3,013 5,315(d) -- 8,328
Interest expense................ 1,657 -- 12,878(h) 14,535
Other expenses.................. 153 -- -- 153
---------- ----------- ----------- ------------
Total costs and expenses... 23,473 68,278 12,878 104,629
---------- ----------- ----------- ------------
Income before income taxes........... 1,028 48,190 (12,878) 36,340
Provision for income taxes........... 46 17,831(f) (4,765)(i) 13,112
---------- ----------- ----------- ------------
$ 982 $ 30,359 $ (8,113) $ 23,228
========== =========== =========== ============
Net income per share................. $ 0.11 $ 1.71
========== ============
Weighted average common and common
equivalent shares outstanding...... 9,052 150(g) 4,400(j) 13,602
========== =========== =========== ============
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
21
<PAGE>
BELLWETHER EXPLORATION COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
----------------------------------------------------------
ADJUSTMENTS
FOR THE ADJUSTMENTS PRO FORMA
PENDING FOR THE FOR THE
HISTORICAL ACQUISITION FINANCING TRANSACTIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas revenues............ $ 9,846 $49,191(k) $-- $ 59,037
Gas plant revenues.............. 3,879 2(k) -- 3,881
Interest and other income....... 53 340(k) -- 393
---------- ----------- ----------- ------------
Total revenues............. 13,778 49,533 -- 63,311
---------- ----------- ----------- ------------
Costs and Expenses:
Production expenses............. 3,061 14,506(k) -- 17,567
Gas plant expenses.............. 1,827 -- -- 1,827
Depreciation, depletion and
amortization.................. 4,167 14,132(l) -- 18,299
General and administrative
expenses...................... 1,452 1,978(d) -- 3,430
Interest expense................ 520 -- 6,973(h) 7,493
---------- ----------- ----------- ------------
Total costs and expenses... 11,027 30,616 6,973 48,616
---------- ----------- ----------- ------------
Income before income taxes........... 2,751 18,917 (6,973) 14,695
Provision for income taxes........... 1,018 6,999(f) (2,580)(i) 5,437
---------- ----------- ----------- ------------
$ 1,733 $11,918 $(4,393) $ 9,258
========== =========== =========== ============
Net income per share................. $ 0.19 $ 0.68
========== ============
Weighted average common and common
equivalent shares outstanding...... 9,118 150(g) 4,400(j) 13,668
========== =========== =========== ============
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
22
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) To record the purchase of the Acquired Properties and working capital
pursuant to the transaction. The allocation of the pro forma purchase
price under the purchase method of accounting is presented in the tables
below.
The pro forma purchase price entries are as follows:
Purchase price....................... $ 188,348
Estimated purchase price adjustments,
including distributions of cash
flows from the Acquired Properties
from the effective date to the
assumed closing date of April 9,
1997............................... (46,580)
----------
141,768
Estimated acquisition fees:
Common stock issued to Torch
(150,000 shares @ $9.75)...... 1,463
Warrants issued to Torch
(100,000 shares exercisable
within five years @ $9.90).... 300
Payment to Torchmark............ 1,500
----------
3,263
Escrow of funds reserved for pricing
adjustments........................ 9,011
Legal and other acquisition costs.... 1,377
----------
Total purchase price................. $ 155,419
==========
Purchase allocation:
Acquisition costs allocated to
oil and gas properties........ $ 129,372
Working capital................. 18,036
Escrow account.................. 9,011
Deferred income taxes........... (1,000)
----------
Total purchase allocation....... $ 155,419
==========
(b) To record the effect of the financing transactions required to purchase
the Acquired Properties.
Senior credit facility............... $ 35,893
Senior subordinated notes............ 100,000
Common stock......................... 44
Additional paid in capital........... 33,880
Deferred financing costs............. (5,160)
Existing credit facilities........... (11,000)
----------
Cash received from the financing
transactions....................... $ 153,657
==========
(c) To reflect the historical consolidated operations of the Acquired
Properties for the fiscal year ended June 30, 1996. Certain additions and
deductions to revenues and expenses have been made to convert such
operations from a calendar year to the fiscal year ended June 30, 1996.
See "Statements of Assets Acquired (Other than Productive Oil and Gas
Properties) and Liabilities" and related "Statements of Revenues and
Direct Operating Expenses" included elsewhere in this Prospectus.
(d) To adjust general and administrative expenses including management fees to
give effect to the increase in the Torch fee pursuant to the
Administrative Services Agreement due to the acquisition of the Acquired
Properties. Annual general and administrative, production overhead and
direct general and administrative expenses will increase $750,000 and
$375,000 for the year ended June 30, 1996 and for the six months ended
December 31, 1996, respectively. Annual management fees will increase $4.6
million and $1.6 million for the year ended June 30, 1996 and for the six
months ended December 31, 1996, respectively, pursuant to the
Administrative Services Agreement.
General and administrative services are provided to Bellwether by Torch
for an annual fee based on (i) 1/12 of 2% per month of total assets
excluding cash, and (ii) 2.0% of operating cash flows (net
23
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
income plus depletion, depreciation and amortization and deferred income
taxes). Additionally, 20% of operator's overhead on wells operated by
Torch are credited to management fees.
(e) To adjust depreciation, depletion and amortization to give effect to the
acquisition of the Acquired Properties under the full cost method of
accounting to the amount which would have been recorded had the
acquisition of the Acquired Properties occurred at July 1, 1995. The pro
forma adjustment assumes a depreciation, depletion and amortization rate
per BOE of $4.90 for the year ended June 30, 1996 based upon depletable
costs of $268.8 million, including $51.9 million of future development
costs and plugging and abandonment costs, and proved reserves of 54.9
MMBOE at June 30, 1995.
(f) To adjust federal and state income taxes for the acquisition of the
Acquired Properties at Bellwether's effective rate of 37%.
(g) To increase the weighted average common shares outstanding for 150,000
shares of Common Stock to be issued to Torch for the acquisition of the
Acquired Properties.
(h) To adjust interest expense to give effect to the portion of the Acquired
Properties financed under the New Credit Facility and through issuance of
the Notes.
The pro forma interest expense related to the New Credit Facility was $3.3
million for the year ended June 30, 1996, including the amortization of
$1.0 million of deferred and other financing costs. The pro forma interest
expense related to the New Credit Facility was $1.9 million for the six
months ended December 31, 1996, including the amortization of $727,000 of
deferred and other financing costs. The New Credit Facility has an annual
interest rate of London Interbank Offered Rate ("LIBOR") plus 1.00%.
The pro forma interest related to the Notes was $11.2 million for the year
ended June 30, 1996, at an interest rate of 10 7/8% and including the
amortization of $325,000 of deferred financing costs. The pro forma
interest expense related to the Notes was $5.6 million for the six months
ended December 31, 1996, at an interest rate of 10 7/8% and including
amortization of $163,000 of deferred financing costs. The Notes mature in
2007. No principal payments are required prior to 2007.
(i) To reflect the decrease in income taxes resulting from additional interest
incurred as a result of the Offerings.
(j) To increase the weighted average common shares outstanding for issuance of
4,400,000 shares of Common Stock in the Common Stock Offering.
(k) To reflect the historical consolidated operations of the Acquired
Properties for the six months ended December 31, 1996. See "Statement of
Assets Acquired (Other than Productive Oil and Gas Properties) and
Liabilities" and the related "Statements of Revenues and Direct
Operating Expenses" included elsewhere in this Prospectus.
(l) To adjust depreciation, depletion and amortization to give effect to the
acquisition of the Acquired Properties under the full cost method of
accounting to the amount which would have been recorded had the
acquisition of the Acquired Properties occurred at July 1, 1996. The pro
forma adjustment assumes a depreciation, depletion and amortization rate
per BOE of $5.00 for the six months ended December 31, 1996 based upon
depletable costs of $232.9 million, including $48.3 million of future
development costs and plugging and abandonment costs, and proved reserves
of 46.6 MMBOE at June 30, 1996.
24
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA SUPPLEMENTAL OIL AND GAS DISCLOSURE
The following tables set forth certain unaudited pro forma information
concerning Bellwether's proved oil and gas reserves at June 30, 1996, giving
effect to the acquisition of the Acquired Properties as if they had occurred on
June 30, 1995. There are numerous uncertainties inherent in estimating the
quantities of proved reserves and projecting future rates of production and
timing of development expenditures. The following reserve data represent
estimates only and should not be construed as being exact. The proved oil and
gas reserve information is as of June 30, 1996 and reflects prices and costs in
effect as of such date.
RESERVES:
<TABLE>
<CAPTION>
OIL AND CONDENSATE (MBBLS) NATURAL GAS (MMCF) MBOE
------------------------------------ ------------------------------------ ----------
ACQUIRED ACQUIRED
BELLWETHER PROPERTIES PRO FORMA BELLWETHER PROPERTIES PRO FORMA BELLWETHER
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995................... 2,597 18,840 21,437 30,159 165,038 195,197 7,624
Extensions and discoveries.............. 89 89 7,128 7,128 1,277
Purchase of minerals in-place........... 4 4 176 176 33
Revision of previous estimates.......... (534) (534) 2,855 2,855 (58)
Production(a)........................... (334) (2,790) (3,124) (5,099) (25,981) (31,080) (1,184)
Sales of minerals in-place.............. (14) (14) (2,023) (2,023) (351)
---------- ----------- --------- ---------- ----------- --------- ----------
Balance, June 30, 1996.................. 1,808 16,050 17,858 33,196 139,057 172,253 7,341
========== =========== ========= ========== =========== ========= ==========
Proved developed reserves............... 1,494 13,536 15,030 22,698 128,242 150,940 5,277
========== =========== ========= ========== =========== ========= ==========
</TABLE>
MBOE
-----------------------
ACQUIRED
PROPERTIES PRO FORMA
Balance, July 1, 1995................... 46,346 53,970
Extensions and discoveries.............. -- 1,277
Purchase of minerals in-place........... -- 33
Revision of previous estimates.......... -- (58)
Production(a)........................... (7,120) (8,304)
Sales of minerals in-place.............. -- (351)
----------- ---------
Balance, June 30, 1996.................. 39,226 46,567
=========== =========
Proved developed reserves............... 34,910 40,187
=========== =========
- -----------------------------
(a) Excludes 253 MBbls of natural gas liquids which were produced in fiscal
1996.
STANDARD MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL &
GAS RESERVES:
<TABLE>
<CAPTION>
ACQUIRED
BELLWETHER PROPERTIES PRO FORMA
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows..................... $113,554 $ 562,930 $676,484
Future production costs................. (33,131) (210,084) (243,215)
Future development costs................ (8,961) (42,921) (51,882)
---------- ---------- --------
Future net inflows before income
taxes................................. 71,462 309,925 381,387
Income taxes............................ (11,095) (49,570) (60,665)
---------- ---------- --------
Future net cash flows................... 60,367 260,355 320,722
10% discount factor..................... (15,191) (82,269) (97,460)
---------- ---------- --------
Standardized measure of discounted
future net cash flows................. $ 45,176 $ 178,086 $223,262
========== ========== ========
</TABLE>
25
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
CHANGES TO STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED
OIL AND GAS RESERVES:
ACQUIRED
BELLWETHER PROPERTIES PRO FORMA
(IN THOUSANDS)
Standardized measure, June 30,
1995............................... $ 37,291 $ 207,418 $244,709
Sales, net of production
costs......................... (10,349) (68,068) (78,417)
Purchases of reserves in
place......................... 246 -- 246
Net changes in prices and
production costs.............. 11,458 -- 11,458
Net changes in income taxes..... (2,958) -- (2,958)
Extensions, discoveries and
improved recovery, net of
future production and
development costs............. 7,709 -- 7,709
Changes in estimated future
development costs............. 497 -- 497
Development costs incurred
during the period............. 883 -- 883
Revisions of quantity
estimates..................... (438) -- (438)
Accretion of discount........... 3,729 20,742 24,471
Sales of reserves in place...... (1,614) -- (1,614)
Changes in production rates and
other......................... (1,278) 17,994 16,716
----------- ----------- ----------
Standardized measure, June 30,
1996............................... $ 45,176 $ 178,086 $223,262
=========== =========== ==========
26
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial
data with respect to the Company for the periods and as of the dates indicated.
The consolidated financial data and notes thereto for the two years ended June
30, 1993 were derived from the historical consolidated financial statements and
notes thereto of the Company which have been audited by KPMG Peat Marwick LLP,
independent certified public accountants and such information for the three
years ended June 30, 1996 were derived from such statements and notes thereto
which have been audited by Deloitte & Touche LLP, independent auditors. The
consolidated financial data for the six months ended December 31, 1995 and 1996
have been derived from unaudited condensed consolidated financial statements,
which management believes includes all adjustments necessary to make a fair
presentation of the results for such unaudited interim periods. The Consolidated
Financial Statements of the Company and notes thereto for June 30, 1994, 1995
and 1996, and the six months ended December 31, 1995 and 1996 are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
STATEMENT OF OPERATIONS DATA:
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Gas revenues..................... $ 1,528 $ 1,807 $ 2,620 $ 4,864 $ 9,856 $ 4,186 $ 6,759
Oil revenues..................... 1,246 1,708 1,086 3,643 5,810 2,956 3,087
Gas plant and gas gathering
revenues(a).................... 51 23 6,930 10,705 8,719 4,923 3,879
Interest income and other........ 82 116 63 97 116 57 53
--------- --------- --------- --------- --------- --------- ---------
Total revenues.............. 2,907 3,654 10,699 19,309 24,501 12,122 13,778
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Production expenses.............. 904 1,273 1,294 2,856 5,317 2,447 3,061
Gas plant and gas gathering
expenses(a).................... -- -- 4,013 6,078 5,185 3,006 1,827
General and administrative
expenses....................... 676 787 1,234 2,739 3,013 1,559 1,452
Depreciation, depletion and
amortization................... 1,113 1,455 2,489 5,269 8,148 3,866 4,167
Interest expense................. 21 77 721 1,245 1,657 956 520
Other expenses................... -- -- -- -- 153 155 --
--------- --------- --------- --------- --------- --------- ---------
Total cost and expenses..... 2,714 3,592 9,751 18,187 23,473 11,989 11,027
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
minority interest.................. 193 62 948 1,122 1,028 133 2,751
Provision for income taxes........... 65 21 -- 9 46 132 1,018
Minority interest in gas plant
ventures............................. -- -- 134 172 -- -- --
Extraordinary income(b).............. 65 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 193 $ 41 $ 814 $ 941 $ 982 $ 1 $ 1,733
========= ========= ========= ========= ========= ========= =========
Net income per share(c).............. $ 0.08 $ 0.02 $ 0.27 $ 0.12 $ 0.11 $ 0.00 $ 0.19
========= ========= ========= ========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding(c)... 2,289 2,289 3,006 7,713 9,052 9,045 9,118
========= ========= ========= ========= ========= ========= =========
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
27
<PAGE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
----------------------------------------------------- --------------------
1992 1993 1994 1995 1996 1995 1996
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER FINANCIAL DATA:
Capital expenditures............. $ 4,315 $ 2,289 $ 22,034 $ 41,901 $ 6,999 $ 1,174 $ 7,475
EBITDA(d)........................ $ 1,327 $ 1,594 $ 4,158 $ 7,636 $ 10,833 $ 4,955 $ 7,438
EBITDA/Interest expense.......... 63.19 20.70 5.77 6.13 6.54 5.18 14.30
Net cash flows provided by
operating activities........... $ 2,401 $ 1,555 $ 3,122 $ 5,283 $ 7,485 $ 3,496 $ 7,105
Net cash flows (used in) provided
by investing activities........ $ (1,204) $ (1,390) $ (9,423) $ (27,289) $ 3,542 $ (1,174) $ (5,810)
Net cash flows provided by (used
in) financing activities....... $ 1,000 $ (2,146) $ 7,334 $ 21,642 $ (11,332) $ (1,000) $ (1,628)
Ratio of earnings to fixed
charges(e)..................... 10.19 1.81 2.31 1.90 1.62 1.14 6.29
BALANCE SHEET DATA (END OF PERIOD):
Working capital.................. $ 406 $ 414 $ (249) $ (1,246) $ 5,168 $ 4,357
Total assets..................... 14,140 12,480 35,870 74,650 67,225 68,982
Total debt (net of current
maturities).................... 1,000 1,000 12,796 18,525 13,048 11,000
Stockholders' equity............. 10,729 10,770 18,372 45,447 46,597 48,751
</TABLE>
- -----------------------------
(a) In March 1996 Bellwether assumed a contract to purchase gas at $4.50 per
MMBtu, for which Bellwether received $9.9 million. As a result of this
transaction, Bellwether ceased to recognize gas gathering revenues and
expenses. Historical gas gathering revenues were $2.4 million, $5.0 million
and $3.4 million, respectively, for the years ended June 30, 1994, 1995 and
1996, and $2.5 million for the six months ended December 31, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Six Months Ended December 31, 1995
Compared With December 31, 1996 -- Revenues."
(b) Extraordinary income in 1992 represents reductions of income taxes resulting
from utilization of loss carryforwards.
(c) Restated to reflect a 1-for-8 reverse stock split consummated in fiscal
1994.
(d) EBITDA is defined as income before income taxes, interest, depreciation,
depletion and amortization. Management of the Company believes that EBITDA
may provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA is a financial measure commonly used in the Company's
industry and should not be considered in isolation or as a substitute for
net income, cash flow provided by operating activities or other income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of the Company's profitability or liquidity.
(e) For purposes of computing the ratio of earnings to fixed charges,
"Earnings" are consolidated earnings (loss) from continuing operations
before tax, exclusive of the period's undistributed equity earnings of
affiliated companies, plus fixed charges. "Fixed charges" are comprised of
interest on indebtedness, amortization of debt issuance costs and that
portion of capital lease expense which is deemed to be representative of an
interest factor.
28
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Bellwether is an independent energy company primarily engaged in the
acquisition, exploitation, development and exploration of oil and gas
properties. The Company has grown and diversified its operations through the
acquisition of oil and gas properties and the subsequent development of these
properties. The Company's results of operations have been significantly affected
by its success in acquiring oil and gas properties and its ability to maintain
or increase production through its exploitation activities. Fluctuations in oil
and gas prices have also significantly affected the Company's results.
The Company uses the full cost method of accounting for its investment in
oil and gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
in a "full cost pool" as incurred. Oil and gas properties in the pool, plus
estimated future expenditures to develop proved reserves and future abandonment,
site reclamation and dismantlement costs, are depleted and charged to operations
using the unit of production method based on the ratio of current production to
total proved recoverable oil and gas reserves. To the extent that such
capitalized costs (net of depreciation, depletion and amortization) exceed the
discounted future net revenues on an after-tax basis of estimated proved oil and
gas reserves, such excess costs are charged to operations. Once incurred, the
writedown of oil and gas properties is not reversible at a later date even if
oil and gas prices increase. Sharp declines in oil and gas prices may cause
companies who report on the full cost method, such as Bellwether, to write down
their oil and gas properties, thereby decreasing earnings during such period.
The Company periodically uses derivative financial instruments to manage
oil and gas price risk. Settlements of gains and losses on price swap contracts
are generally based upon the difference between the contract price and the
average closing NYMEX or other floating index price and are reported as a
component of oil and gas revenue. Gains or losses attributable to the
termination of swap contracts are deferred and recognized in revenue when the
hedged oil and gas is sold. The Company has hedged 300 Bbls of oil per day at a
NYMEX price of $22.17 per Bbl for the calendar months of April through October
1997. For March 1997, the Company has hedged 6 million MMBtu of gas per day at
$2.94 per MMBtu and for April through October 1997 has hedged 6 million MMBtu of
gas per day at $2.21 per MMBtu, based upon the Houston Ship Channel Index.
29
<PAGE>
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1995 COMPARED WITH DECEMBER 31, 1996
The following table sets forth certain operating information of the Company
for the periods presented:
SIX MONTHS ENDED DECEMBER 31,
-------------------------------------
INCREASE/
1995 1996 (DECREASE)
PRODUCTION DATA:
Oil (MBbls)..................... 184 143 (22.3)%
Gas (MMcf)...................... 2,428 2,814 15.9%
AVERAGE SALES PRICE:
Oil (per Bbl)................... $ 16.04 $ 21.59(a) 34.6%
Gas (per Mcf)(b)................ 1.72 2.40 39.5%
Average unit production cost per
BOE(c)............................. 4.16 5.00 20.2%
Average unit depreciation, depletion
and amortization rate per BOE...... 5.39 6.09 13.0%
- ------------
(a) Average sales price does not include the effects of hedge transactions.
(b) Average sales price for natural gas includes revenues received from the sale
of natural gas liquids removed from the Company's gas production.
(c) Includes ad valorem and severance taxes.
REVENUES. Oil and gas revenues for the six months ended December 31, 1996
were $9.8 million or 38.0% higher than oil and gas revenues of $7.1 million for
the same period in 1995. The increase in oil and gas revenues was attributable
primarily to additional production from natural gas well workovers in the
Company's Cove field and increases in oil and gas prices. The effect of hedge
transactions was immaterial.
Gas plant and gas gathering revenues in the six months ended December 31,
1996 were $3.9 million compared with $4.9 million in the same period of 1995.
This decrease is primarily a result of decreased gas gathering revenues of $2.5
million. In March 1996, Bellwether assumed a contract to purchase gas at $4.50
per MMBtu (the "Contract Assumption"), for which Bellwether received $9.9
million. As a result of this transaction, Bellwether ceased to recognize gas
gathering revenues and expenses. In addition, Bellwether wrote off the remaining
book value of the gas gathering system and has recorded a liability to cover the
estimated future losses under the contract, which are charged to the liability
as incurred. See Note 5 of the Notes to the Condensed Consolidated Financial
Statements. Gas plant revenues in the six months ended December 31, 1996
increased by $1.5 million compared to the same period in 1995 due to increased
prices and sales volumes.
EXPENSES. Lease operating expenses for the six months ended December 31,
1996 totaled $3.1 million or 29.2% in excess of the $2.4 million for the six
months ended December 31, 1995. Lease operating expenses per BOE were 20.2%
higher in the six months ended December 31, 1996 when compared to the same
period in 1995, due primarily to higher severance taxes from increases in oil
and gas prices of 34.6% and 39.5%, respectively.
Gas plant and gas gathering expenses were $1.8 million in the six months
ended December 31, 1996 compared with $3.0 million for the prior period,
reflecting the reduction in gas gathering activity relating to the Contract
Assumption somewhat offset by higher payments from gas plant operations to
producers under the Company's percent of proceeds contracts. The higher payments
to producers resulted primarily from higher liquids prices received by the
Company.
Depreciation, depletion and amortization of $4.2 million for the six months
ended December 31, 1996 reflects a 7.7% increase from $3.9 million in the same
period in 1995, primarily because of an increase in oil and gas production and
an increase in the depreciation, depletion and amortization rate per BOE, both
of which were caused by increases in reserves due to the mergers, new drilling
and workovers.
30
<PAGE>
General and administrative expenses were $1.5 million in the six months
ended December 31, 1996 compared with $1.6 million in the 1995 period.
Interest expense decreased to $520,000 for the six months ended December
31, 1996 from $956,000 in the same period of 1995. The Company used the proceeds
from the Contract Assumption (described below) to reduce its outstanding
indebtedness by $9.5 million.
INCOME TAXES. Provision for federal and state income taxes for the six
months ended December 31, 1996 is 37% of income.
NET INCOME. Net income for the six months ended December 31, 1996 was
approximately $1.7 million as compared to net income of $1,000 in the same
period of 1995.
COMPARISONS OF FISCAL YEARS ENDED JUNE 30, 1994, 1995 AND 1996
The following table sets forth certain oil and gas production information
of the Company for the periods presented:
YEARS ENDED JUNE 30,
-------------------------------
1994 1995 1996
PRODUCTION DATA:
Oil (MBbls)..................... 71 216 334
Gas (MMcf)...................... 1,206 2,932 5,099
AVERAGE SALES PRICE:
Oil (per Bbl)................... $ 15.27 $ 16.89 $ 17.81(a)
Gas (per Mcf)(b)................ 2.17 1.66 2.02(a)
Average unit production cost per
BOE(c)............................. 4.75 4.05 4.49
Average unit depreciation, depletion
and amortization rate per BOE...... 5.71 5.52 5.86
- -----------------------------
(a) Average sales price does not include the effects of hedge transactions.
(b) Average sales price for natural gas includes revenues received from the sale
of natural gas liquids removed from the Company's gas production.
(c) Includes ad valorem and severance taxes.
REVENUES. Oil and gas revenues for fiscal 1996 were $15.7 million, or
84.7% higher than fiscal 1995 oil and gas revenues of $8.5 million. In 1995, oil
and gas revenues were 129.7% higher than the fiscal 1994 oil and gas revenues of
$3.7 million. The Company's acquisition of properties in two transactions are
responsible for the increased revenues during fiscal 1995 and 1996. During the
three year period, the volatility of oil and gas prices directly impacted
revenues. Most significantly, average natural gas sales prices increased in
fiscal 1996 to $2.02 per Mcf from $1.66 per Mcf in fiscal 1995. During fiscal
1996, the Company utilized various hedging transactions to manage a portion of
the risks associated with oil and gas price volatility. As a result of these
hedges, oil and gas revenues were $560,000 lower than what they otherwise would
have been in fiscal 1996.
Gas plant and gas gathering revenues were $8.7 million in fiscal 1996
compared to $10.7 million in fiscal 1995. Gas gathering revenues decreased to
$3.4 million in fiscal 1996 from $5.0 million in fiscal 1995 due to the Contract
Assumption in March 1996. Gas plant revenues were $5.3 million in fiscal 1996,
or 7.0% lower than fiscal 1995 revenues of $5.7 million due primarily to
decreased throughput, partially offset by a 6.9% increase in natural gas liquids
prices. Fiscal 1995 gas plant revenues of $5.7 million were 26.7% higher than
the $4.5 million in fiscal 1994. Such increase was due to the purchase of
interests in the gas plant in July and December 1993 and a 16.0% increase in
prices.
EXPENSES. Production expenses for fiscal 1996 totaled $5.3 million,
compared with $2.9 million in fiscal 1995 and $1.3 million in fiscal 1994. The
82.8% increase in fiscal 1996 over fiscal 1995 and the 123.1% increase between
fiscal 1995 and 1994 were attributable primarily to acquisitions of producing
properties.
31
<PAGE>
Gas plant and gas gathering expenses were $5.2 million in fiscal 1996
compared to $6.1 million in fiscal 1995. Gas gathering expenses decreased to
$2.4 million in fiscal 1996 from $3.1 million in fiscal 1995 due to the Contract
Assumption in March 1996. Gas plant expenses were $2.8 million or 6.7% lower in
fiscal 1996 than in fiscal 1995 as a result of decreased throughput, offset
partially by higher prices. In fiscal 1995, expenses were 24.6% higher than
fiscal 1994 due to a full year of operations being reflected in fiscal 1995.
Depreciation, depletion and amortization of $8.1 million reflects an
increase of 52.8% for fiscal 1996 over $5.3 million in fiscal 1995. Such
increase reflects a full year of production volumes from acquisitions and a 6.2%
increase in the depreciation, depletion and amortization rate per net equivalent
barrel due to additional costs associated with dry holes drilled in Fausse
Pointe and Cove fields. In fiscal 1995, depreciation, depletion and amortization
was 111.7% higher than the fiscal 1994 amount. This reflects additional
production volumes from acquisitions and a full year of depreciation included
for the Gas Plant and gas gathering facilities.
General and administrative expenses totaled $3.0 million, $2.7 million and
$1.2 million for the fiscal years ended June 30, 1996, 1995 and 1994,
respectively. The fee under the Administrative Service Agreement with Torch
accounted for $337,000 and $578,000 of the increase in general and
administrative expenses in fiscal 1996 and fiscal 1995, respectively, and is due
to the significant growth of assets and cash flows experienced by the Company.
Additionally, acquisitions added to increases in salaries and other
administrative overhead in fiscal 1995 compared with fiscal 1994.
Interest expense increased to $1.6 million in fiscal 1996 from $1.2 million
in fiscal 1995 and $721,000 in fiscal 1994. Such increase is due to the increase
in bank debt which financed a portion of the acquisitions of properties.
Interest rates were 7.3%, 7.9% and 6.2% at June 30, 1996, 1995 and 1994,
respectively.
The Company recorded a provision for income taxes of $46,000 in fiscal
1996. Actual payments of $126,000 in fiscal 1996 and $9,000 in fiscal 1995
relate to alternative minimum tax and state taxes. Prior to the merger with
Hampton Resources Corporation ("Hampton") in 1995, the Company's net operating
loss was sufficient to eliminate any deferred tax liability. Upon merging with
Hampton, the Company was required to record a deferred tax liability of $2.4
million.
NET INCOME. Net income of $982,000 was generated in fiscal 1996, as
compared to $941,000 and $814,000 in fiscal 1995 and fiscal 1994, respectively.
CAPITAL RESOURCES AND LIQUIDITY
The Company's principal sources of capital for the last three years have
been borrowings under credit facilities with banks, cash flows from operations
and public and private sales of equity securities. Borrowings from banks were
$8.5 million, $25.9 million and $0.0 during the years ended June 30, 1994, 1995
and 1996 and cash flow from operations was $3.1 million, $5.3 million and $7.5
million during each of such periods. Increases in cash flows from operations are
primarily attributable to the acquisitions made since 1993. The Company also
issued 3.4 million shares of stock in a public offering in 1994 for total net
proceeds of $17.2 million and issued an aggregate of 3.3 million shares of
common stock in private transactions since July 1, 1993 in exchange for assets.
In addition, during March 1996, the Company agreed to assume the purchase
obligation under a gas purchase contract in the West Monroe field in Louisiana
in exchange for a cash payment of $9.9 million. Under the terms of the contract,
Bellwether and other producers were entitled to sell a specified quantity of gas
for $4.50 per MMBtu. Bellwether supplied a substantial portion of the gas
subject to purchase under the contract. Proceeds from the gas contract
assumption were used to repay indebtedness.
The Company's primary uses of capital have been to fund acquisitions and to
fund its exploration and development operations. Since 1993, the Company has
made two significant acquisitions: (i) the purchase of Odyssey Partners, Ltd.
("Odyssey") in 1994 for $5.6 million and 917,000 shares of Common Stock and
(ii) the purchase of Hampton in 1995 for $21.1 million and 1.0 million shares of
Common Stock. The Company's expenditures for exploration and development were
$1.0 million, $3.4 million and $6.9 million in 1994, 1995 and 1996,
respectively.
32
<PAGE>
The Company's capital budget for the third and fourth quarters of fiscal
1997 is $8.1 million for its existing properties and $17.5 million for the
Acquired Properties. The Company has identified $42.8 million of projects for
all of such properties for fiscal 1998.
Concurrently with the completion of the Offerings, the Company will enter
into the $90 million New Credit Facility and will use borrowings under the New
Credit Facility, together with the net proceeds from the Offerings, to repay in
full outstanding indebtedness under the existing bank indebtedness. Outstanding
indebtedness under the New Credit Facility upon consummation of the Transactions
is anticipated to be $36.9 million.
The Company believes that the net proceeds of the Offerings, together with
borrowings under the New Credit Facility and internally generated cash flows,
will be sufficient to fund the Transactions and the Company's capital budget
through fiscal 1998.
GAS BALANCING POSITIONS
It is customary in the industry for various working interest partners to
sell more or less than their entitled share of natural gas. The settlement or
disposition of gas balancing positions as of June 30, 1996 is not anticipated to
adversely impact the financial condition of the Company.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of." SFAS 121 establishes guidance
for determining and measuring asset impairment and the required timing of asset
impairment evaluations. The Company adopted SFAS 121 on July 1, 1996, and it did
not have a material effect on the financial condition and results of operations
of the Company based upon current economic conditions.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 123
In October 1995, the FASB issued Statement No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation" which is effective for the Company
beginning July 1, 1996. SFAS No. 123 permits, but does not require, a
fair-value-based method of accounting for employee stock option plans which
results in compensation expense being recognized in the results of operations
when stock options are granted. The Company plans to continue to use the current
intrinsic-value-based method of accounting for such plans where no compensation
expense is recognized. However, as required by SFAS 123, the Company will
provide pro forma disclosure of net income and earnings per share in the notes
to the consolidated financial statements as if the fair-value-based method of
accounting had been applied.
INFLATION
Inflation has not had a material impact on the Company and is not expected
to have a material effect on the Company in the future.
33
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Bellwether is an independent energy company primarily engaged in the
acquisition, exploitation, development and exploration of oil and gas
properties. The Company has grown and diversified its reserve base through the
acquisition of oil and gas properties and the subsequent development of these
properties. Bellwether's estimated net proved reserves have increased at a
compounded annual growth rate of 65.9% from 1.6 MMBOE as of June 30, 1993 to 7.3
MMBOE as of June 30, 1996. During this period, average net daily production
increased at a compounded annual growth rate of 63.1% from 745.0 BOE/d in fiscal
1993 to 3,235.0 BOE/d in fiscal 1996, and EBITDA increased at a compounded
annual growth rate of 89.0% from $1.6 million in fiscal 1993 to $10.8 million in
fiscal 1996. The Company's net cash flows from operations have increased at a
compounded annual growth rate of 67.4%, from $1.6 million in fiscal 1993 to $7.5
million in fiscal 1996. The Company believes its primary strengths are a
demonstrated ability to identify and acquire properties which have significant
potential for further exploitation, development and exploration, an inventory of
development and exploration projects, expertise in the use of advanced
technologies such as 3-D seismic and horizontal drilling and a conservative
capital structure supportive of continued investment in its core properties as
well as additional acquisitions.
The Company has recently agreed to acquire the oil and gas properties and
associated working capital owned by partnerships and other entities managed or
sponsored by Torch. Bellwether believes that the Pending Acquisition provides
the opportunity to significantly increase reserves and cash flow at an
attractive price while providing opportunities for future reserve growth through
exploitation and exploration activities. On a pro forma basis, Bellwether's
estimated net proved reserves as of June 30, 1996 were 46.6 MMBOE (86% developed
and 62% natural gas), with a PV-10 Value (pre-tax) of $260.1 million. Pro forma
average daily net production was 22.7 MBOE/d for fiscal 1996 and pro forma
EBITDA for fiscal 1996 was $75.0 million, excluding non-recurring gas contract
settlements payable to the Company aggregating $18.9 million. Following the
Pending Acquisition, the Company's properties will be concentrated in Texas,
Louisiana, Alabama, California and the Gulf of Mexico.
In fiscal 1994, the Company reincorporated from Colorado to Delaware. The
Company's address is 1331 Lamar, Suite 1455, Houston, Texas 77010, and its phone
number is (713) 650-1025.
BUSINESS STRATEGY
Bellwether's strategy is to maximize long-term shareholder value through
aggressive growth in reserves and cash flow, using advanced technologies,
implementation of a low cost structure and maintenance of a capital structure
supportive of growth. Bellwether expects the additional cash flows from the
Acquired Properties will finance a significant portion of its growth strategy.
Key elements of this strategy are:
OPPORTUNISTIC ACQUISITIONS
Bellwether seeks to acquire properties that have produced significant
quantities of oil and gas and have upside potential which can be exploited using
3-D seismic, CAEX, horizontal drilling, workovers and other enhanced recovery
techniques. Such acquisitions have included the Fausse Pointe field in south
Louisiana, the Cove field offshore Texas and the Fort Trinidad field in east
Texas.
EXPLOITATION AND DEVELOPMENT OF PROPERTIES
The Company actively pursues the exploitation of its properties through
recompletions, waterfloods and development wells, including horizontal drilling.
Examples of recent exploitation successes include a five well workover program
and two development wells in the Cove field, which increased Bellwether's
average net production in this field from 1.0 MMcf/d in January 1996 to 11.1
MMcf/d in February 1997. In addition, the Company recently drilled a successful
horizontal development well into the Buda formation in the Fort Trinidad field
which tested in January 1997 at 420 Bbls/d of oil. Bellwether also initiated a
waterflood project in the Fort Trinidad field during fiscal 1996. Future planned
exploitation projects include in excess of 20 horizontal drilling locations in
the Buda and Glen Rose B formations in the Fort Trinidad
34
<PAGE>
field and up to three horizontal drilling locations to exploit the Company's
exploratory success in the Giddings field in the Austin Chalk formation. In
addition, because the Sellers were formed to distribute net cash flows rather
than reinvest in the exploitation of the Acquired Properties, the Company
believes that such properties will provide significant exploitation and
development opportunities. The Company's exploitation budget for fiscal 1997 is
$8.6 million, of which approximately $4.8 million had been spent as of December
31, 1996. During fiscal 1997, the capital expenditures on the Acquired
Properties are estimated to be $23.2 million of which $5.7 million had been
spent as of December 31, 1996. For fiscal 1998, the Company has identified
exploitation projects totaling $25.2 million (including amounts to be spent on
the Acquired Properties).
EXPLORATION ACTIVITIES
The Company's exploration activities focus on projects with potential for
substantial reserve increases. In January 1997, the Company completed a
successful exploration well in the Austin Chalk formation in the Giddings field
in central Texas. Exploration projects in the remainder of fiscal 1997 and in
fiscal 1998 include multiple wells in the Fausse Pointe field and an exploration
well west of the Cove field, both of which are operated by the Company. In
addition, the Company also expects the Acquired Properties to present
exploration opportunities. For example, in the Ship Shoal complex in the Gulf of
Mexico, the Sellers declined to acquire available 3-D seismic surveys and to
participate in six offshore exploration or exploitation wells in 1996, all of
which were successful. The Company plans to acquire this and other 3-D seismic
surveys of the Acquired Properties and to participate in future wells based on
its interpretation of the data. During fiscal 1997, the Company has budgeted
$4.8 million for exploration, of which $2.1 million had been spent as of
December 31, 1996. For fiscal 1998, the Company has identified exploration
projects totaling $17.6 million (including amounts to be spent on the Acquired
Properties).
ADVANCED TECHNOLOGY
The Company seeks to improve the efficiency and reduce the risks associated
with its exploration and exploitation activities using advanced technologies.
These advanced technologies include 3-D seismic, CAEX techniques and horizontal
drilling. The Company acquired a 3-D survey on the Cove field, conducted a 3-D
survey on the Fausse Pointe field and plans to acquire three 3-D surveys on
certain of the Acquired Properties. The Company believes its existing properties
and the Acquired Properties will benefit from the application of advanced
technologies.
TORCH RELATIONSHIP
The Company operates under an Administrative Services Agreement with Torch.
Torch has a staff of 39 geologists, geophysicists, reserve engineers and landmen
and 59 financial personnel and professionals. The Company believes that its
relationship with Torch provides it with access to acquisition opportunities and
financial and technical expertise that are generally only available to
significantly larger companies. In addition, the fees payable to Torch reduce
significantly on a BOE basis as the Company's asset base and production grow.
LOW COST STRUCTURE
The Company's cost structure will benefit from the Pending Acquisition and
the Company believes that its larger asset and production base will allow it to
maintain a low cost structure prospectively. Because general and administrative
costs are spread over higher production, pro forma general and administrative
costs per BOE in fiscal 1996 and the six months ended December 31, 1996 were
$1.00 and $0.99, respectively, compared with $2.55 and $2.37, respectively, on a
historical basis.
PENDING ACQUISITION
In March 1997, the Company agreed to purchase the Acquired Properties and
an estimated $18.0 million of working capital for $188.3 million, plus the
Contingent Payment. The effective date of the Pending Acquisition is July 1,
1996 and the estimated net adjusted purchase price assuming an April 9, 1997
closing date is $141.8 million plus the Contingent Payment. As of June 30, 1996,
estimated net proved reserves
35
<PAGE>
attributable to the Acquired Properties were 39.2 MMBOE (89% developed and 59%
gas) with a PV-10 Value (pre-tax) of $212.0 million.
The Company will finance the cash portion of the Pending Acquisition and
related fees, estimated to aggregate $173.2 million, including the repayment of
an estimated $12.0 million of existing indebtedness, with the proceeds of the
Offerings (estimated to be $136.3 million) and $36.9 million of borrowings under
its New Credit Facility. Torch and a subsidiary of Torchmark, the parent
corporation of a Selling Stockholder, have interests in the Acquired Properties
and will receive an estimated $18.0 million and $12.7 million, respectively, of
the purchase price paid for the Acquired Properties. Torch and Torchmark will
also receive fees payable in cash and Common Stock in connection with the
Pending Acquisition aggregating an estimated $3.3 million. See "Risk
Factors -- Conflicts of Interest" and "Transactions with Related Persons." In
addition, certain of the Sellers own properties the production from which
qualifies for tax credits under Section 29 of the Internal Revenue Code of 1986.
Torch will pay such Sellers $250,000 and will enter into agreements with
Bellwether which will transfer the Section 29 tax credits to Torch.
The Company has identified for divestiture non-core properties representing
approximately 10% of the estimated net proved reserves attributable to the
Acquired Properties as of June 30, 1996. These properties are primarily small
working interests in geographically diverse locations, with generally low
production rates and cash flows, and limited potential for development. The
Company expects to sell these properties during fiscal 1997 and fiscal 1998. The
net proceeds from these divestitures, which will be used to repay indebtedness,
is currently estimated to be $15 million, but will depend on prevailing market
conditions at the time of sale.
Because Torch has an equity interest in the Sellers and Torch will receive
fees and other consideration in connection with the Pending Acquisition,
Bellwether's Board of Directors formed the Special Committee composed of four
directors not affiliated with Torch or the Sellers to review and approve the
terms of the purchase of the Acquired Properties. Bellwether retained Principal
to render its opinion to the Special Committee and the Board of Directors that
the Pending Acquisition was fair to Bellwether from a financial point of view.
The Special Committee also retained legal counsel to represent it, and retained
Ryder Scott to audit the report of estimated reserves attributable to the
Acquired Properties prepared by Torch and upon which Bellwether based its offer
for the Acquired Properties. On March 19, 1996, Principal gave its opinion to
the Special Committee that the Pending Acquisition was fair to Bellwether from a
financial point of view, and on that date the Special Committee approved the
Pending Acquisition and all fees and other consideration to be paid to Torch in
connection therewith.
THE CONTINGENT PAYMENT
In addition to the cash portion of the purchase price, Bellwether has
agreed to pay the Sellers the Contingent Payment up to a maximum of $9.0
million, based on the prices of gas in 1997. The Contingent Payment will equal
the average monthly NYMEX price for gas during 1997 minus $2.10 per MMBtu,
multiplied by 13.6 million (representing 75% of the Company's estimated 1997 gas
production from the Acquired Properties). For months prior to the closing date,
the actual NYMEX prices will be used, and for months after closing, the NYMEX
futures price will be used.
STRUCTURE OF THE PENDING ACQUISITION
The interests of the Sellers in the Acquired Properties were structured
differently to satisfy the investment goals of the investors. Certain Sellers
are limited partnerships which own either working interests or net profits
interests that burden working interests. Several investors made loans secured by
mortgages of working interests or net profits interests owned by the Sellers. In
addition, certain Sellers directly acquired net profits interests burdening
working interests. In general, a subsidiary of Torch owns the working interests
burdened by net profits interests owned by the Sellers.
The acquisition of the Acquired Properties is structured as a merger of
certain of the Sellers which are limited partnerships into a subsidiary of
Bellwether and the acquisition of general and limited partnership interests in
other partnerships. Each Seller (other than such partnerships) which owns net
profits interests
36
<PAGE>
will convey such net profits interests to Bellwether's subsidiary, and the stock
of each subsidiary of Torch which owns working interests burdened by the net
profits interests will be sold by Torch to Bellwether. Bellwether will merge the
subsidiary into Bellwether simultaneously with the closing of the Offerings and
the Pending Acquisition so that a substantial portion of the Acquired Properties
will be held directly by Bellwether. One of the Sellers has notified Bellwether
that, because of public notice requirements applicable to such Seller, it is
unable to execute the Acquisition Agreement before April 15, 1997. Bellwether
will not acquire the interest of such Seller in the Acquired Properties, or the
related interests in such properties owned by Torch and its affiliates at the
closing. Bellwether has agreed to acquire the interests of such Seller and the
related interests of Torch and its affiliates on April 15, 1997, if such Seller
executes the Acquisition Agreement on or before such date. No assurances can be
made that such Seller will execute the Acquisition Agreement. The net purchase
price of the properties owned by such Seller and the related interests of Torch
and its affiliates is less than $2.2 million, and the failure to acquire such
interests is not expected to have a material effect on Bellwether.
In the purchase agreement covering the Pending Acquisition, the Sellers
will make a special warranty of their title to the properties, and customary
warranties as to power and authority to effect the transactions. Neither the
Sellers nor Torch will make any representation or warranty with respect to
environmental or operational matters with respect to the properties. Bellwether
will assume all such liabilities, including those which are unknown or
contingent, and including those which arise prior to the closing of the Pending
Acquisitions. See "Risk Factors -- Acquisition Risks."
ACQUISITION HISTORY
Bellwether has increased its reserves, production and cash flows through a
series of acquisitions since July 1, 1993. In July 1993, the Company acquired
through a joint venture, for $8.5 million, an interest in the Snyder Gas Plant
and the Diamond M-Sharon Ridge Gas Plant (collectively, the "Gas Plant"), the
operations of which were subsequently consolidated.
In December 1993, the Company acquired by merger Associated Gas Resources,
Inc. ("AGRI"), a corporation owned by an institutional investor and managed by
Torch for a total cost of $7.0 million principally consisting of Common Stock.
AGRI's assets included additional interests in the Gas Plant and a 300 mile gas
gathering system in Union Parish, Louisiana ("Monroe Gathering System"), that
serves the Monroe Gas field.
In August 1994, the Company acquired Odyssey for $9.6 million consisting of
cash and Common Stock. Included among the assets of Odyssey was the Fausse
Pointe field in south Louisiana. The Company has conducted a 54 square mile 3-D
seismic survey and is conducting exploitation and development activities in the
Fausse Pointe field. See "Principal Properties."
In February 1995, the Company completed the acquisition of Hampton for
$25.9 million consisting of cash and Common Stock. Included among the assets of
Hampton were the Cove field and the Fort Trinidad field.
In February 1997, the Company acquired a 25% interest in the Mud Lake field
from Nuevo for a net purchase price of $2.0 million in cash. The Company plans
to commence a 45 square mile 3-D seismic survey in the Mud Lake field in March
1997.
37
<PAGE>
PRINCIPAL PROPERTIES
The following table sets forth certain information, as of June 30, 1996,
which relates to the oil and gas properties owned by Bellwether and to the
Acquired Properties:
<TABLE>
<CAPTION>
ESTIMATED PV-10
NET PROVED VALUE
RESERVES 1996 NET PRODUCTION (PRE TAX)
------------------------------ ------------------------------ -----------
OIL GAS OIL GAS (IN
(MBBLS) (MMCF) MBOE (MBBLS) (MMCF) MBOE THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENTLY OWNED PROPERTIES:
Cove field, TX..................... 7 10,401 1,741 2 1,002 169 $ 12,876
Fort Trinidad field, TX............ 454 3,007 955 24 152 49 5,684
Fausse Pointe field, LA............ 127 3,736 750 -- -- -- 4,068
Other.............................. 1,220 16,052 3,895 308 3,945 966 25,512
------- --------- --------- ------- --------- --------- -----------
Total currently owned......... 1,808 33,196 7,341 334 5,099 1,184 $ 48,140
------- --------- --------- ------- --------- --------- -----------
ACQUIRED PROPERTIES:
Waddell Ranch complex, TX.......... 4,086 6,004 5,086 245 849 386 $ 23,338
Blue Creek field, AL............... -- 8,938 1,490 -- 1,075 179 12,946
High Island A-334 field,
Gulf of Mexico................... 290 7,521 1,544 80 3,330 635 11,634
Ship Shoal complex, Gulf of
Mexico........................... 1,042 4,617 1,811 175 527 263 11,095
Pt. Pedernales field, CA........... 4,846 3,236 5,385 802 -- 802 9,453
West Chalkley field, LA............ 31 5,232 903 10 753 135 7,758
Other.............................. 5,755 103,509 23,007 1,478 19,477 4,725 135,768
------- --------- --------- ------- --------- --------- -----------
Total Acquired Properties.. 16,050 139,057 39,226 2,790 26,011 7,125 $ 211,992
======= ========= ========= ======= ========= ========= ===========
Total pro forma.......... 17,858 172,253 46,567 3,124 31,110 8,309 $ 260,132
======= ========= ========= ======= ========= ========= ===========
</TABLE>
The following is a description of the principal properties currently owned
by Bellwether and the Acquired Properties:
CURRENTLY OWNED PROPERTIES
COVE FIELD. The Cove field is located in state waters nine miles offshore
Texas. Bellwether operates the field and controls 2,880 acres with a 90.0%
working (73.0% net revenue) interest in 5 wells (4.5 net) and a 42.1% working
(34.2% net revenue) interest in a sixth well (0.4 net). The Company acquired the
field in February 1995 and subsequently gained access to a 25 square mile 3-D
seismic survey covering the field. Bellwether's exploitation activities have
included a five well workover program and two development wells. These
activities increased net production from 1.0 MMcf/d in January 1996 to 11.1
MMcf/d in February 1997. The Company has budgeted $3.3 million for development
of the Cove field in fiscal 1997 and has identified projects totaling $3.8
million for 1998.
The Company expects to drill an exploration well in July 1997 on acreage
which it owns to the west of the currently producing wells. The targets include
gas production from formations at approximately 14,000 feet and 15,000 feet.
FORT TRINIDAD FIELD. The Fort Trinidad field is located in east Texas.
Bellwether owns a 47.9% working (41.0% net revenue) interest in the Dexter Unit
waterflood and a 38.7% working (32.3% net revenue) interest in the Upper Glen
Rose Unit. The waterflood was initiated in December 1995 in the Dexter reservoir
which had cumulative production of 6.4 MMBbls. In December 1996, net production
from 13 wells (5.5 net) averaged 125 BOE/d. The operator of both units is Parten
Operating Company.
The Company is currently evaluating horizontal drilling development
opportunities for the Buda, Georgetown, Edwards and Glen Rose reservoirs on
19,000 acres that are held by production. Additionally,
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Bellwether has entered into a joint venture with Moran Resources Company to
develop 2,700 acres with the drilling of three horizontal wells in the Buda
reservoir. The first well was completed in January 1997 and is currently being
tested at 420 Bbls/d. Bellwether owns a 30.0% working (22.5% net revenue)
interest in the drilling program. The Company has budgeted $1.5 million in
development capital for the Fort Trinidad field in fiscal 1997 and has
identified projects totaling $5.6 million in fiscal 1998.
FAUSSE POINTE FIELD. The Fausse Pointe field is located in south
Louisiana. Since its discovery in the mid 1930's, over 50 MMBbls of oil and 200
Bcf of gas have been produced from 19 producing formations ranging in depth from
1,000 feet to 14,000 feet. Bellwether acquired its undeveloped interest in the
field in fiscal 1995 and operates the seismic and drilling program in the field
with a 19.5% working (14.2% net revenue) interest in the 8,250-acre State Lease
No. 293 and a 26.0% working interest (19.9% net revenue interest) in 5,198 acres
of private leases and lease options. In 1995, the Company initiated and
completed a 54 square mile 3-D seismic survey. In 1996, Bellwether drilled a
south flank exploration well which was plugged due to mechanical difficulties
and drilled an unsuccessful east flank exploration well and south flank
development well which was spudded in December 1996. Bellwether expects to drill
a third south flank well in April 1997. The Company has budgeted $4.4 million
for additional development and exploration of the field in fiscal 1997 and has
identified projects totaling $2.5 million for fiscal 1998. Additional drilling
prospects on the north and south flanks are also being evaluated.
ACQUIRED PROPERTIES
WADDELL RANCH COMPLEX. The Waddell Ranch complex, comprising fields
located in west Texas, was discovered in the 1930s. The Acquired Properties
include fee interests, net profits interests and working interests that
approximate a composite 10.2% working (10.0% net revenue) interest in 76,921
gross (7,876 net) acres and 1,350 gross (138 net) wells. Production is from a
number of formations from depths between 2,000 and 6,000 feet, including the
upper Permian Grayburg (3,200 feet), San Andres (3,400 feet) and lower Clearfork
Tubb (4,200 feet) formations. Over 400 MMBbls of oil and 1,000 Bcf of gas have
been produced from over 3,000 wells since the initial discovery. Peak production
rates occurred in the early 1960's but the field has experienced a resurgence of
activity in the 1990's with renewed drilling, waterflood expansion and
completion of a 79 square mile 3-D seismic survey. The resulting net production
has increased from 1.4 MBOE/d in 1990 to 1.7 MBOE/d in December 1996. The
Waddell Ranch complex is operated by Burlington Resources Oil & Gas Company,
with Coastal Management Corporation acting as contract operator. The Company's
estimated capital expenditures for identified exploitation and exploration
projects in this complex for fiscal 1997 is $2.9 million, with identified
projects totaling $2.4 million for fiscal 1998.
BLUE CREEK FIELD. The Blue Creek field is located in the Black Warrior
Basin in Alabama. The Acquired Properties include a weighted average 15.2%
royalty interest in 9,918 acres with 168 wells. The field was developed from
1988 through 1991 and produces coalbed methane gas from Pennsylvanian coal seams
at depths of 700 feet to 2,500 feet. Average coal seam thickness is between 10
feet and 35 feet. Average net production during December 1996 was 4.5 MMcf/d.
The field is operated by River Gas Corporation.
HIGH ISLAND BLOCK A-334 FIELD. The High Island Block A-334 field is
located in federal waters 110 miles southeast of Galveston, Texas in 230 feet of
water. The Acquired Properties include an average 25.0% working (20.8% net
revenue) interest in 10,000 gross (2,500 net) acres with 16 gross (4.0 net)
wells. This field is operated by Union Oil Company of California ("Unocal").
Production is from two gas reservoirs and one oil reservoir at depths ranging
from 3,500 feet to 6,000 feet. Average net production during December 1996 was
1,194 BOE/d. A 3-D seismic survey has been conducted on a portion of this
acreage, and the Company plans to review the survey as part of its due diligence
investigation of the Pending Acquisition.
SHIP SHOAL COMPLEX. The Ship Shoal properties are located in federal
waters 120 miles southwest of New Orleans in 125 feet of water. The complex
comprises working interests in eight blocks which include the Ship Shoal Block
208, Block 230 and Block 239 fields. The Acquired Properties consist of working
interests in the three fields ranging from 9.7% to 29.3% with a 1/6 royalty
burden. The 31 wells (5.8 net) in
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the complex are operated by Kerr-McGee Corporation. Production is from a variety
of formations ranging from 2,000 feet to 12,000 feet. The fields have produced
over 128 MMBbls of oil and 649 Bcf of gas since their discovery in 1963. Average
net production during December 1996 was 1.4 MBOE/d. Since 1990, Kerr-McGee has
been actively redeveloping the field and has drilled 11 successful wells
including four exploratory wells. A 3-D seismic survey has been conducted on
this acreage, and the Company plans to purchase the survey as part of its due
diligence investigation of the Pending Acquisition. The Company's estimated
capital expenditures for identified exploitation and exploration projects in
this complex for fiscal 1997 is $4.6 million, with identified projects totaling
$6.9 million for fiscal 1998.
POINT PEDERNALES FIELD. The Acquired Properties include a 19.7% working
(16.4% net revenue) interest in 9,500 gross (1,871 net) acres in federal waters
offshore California. The field is located approximately 4.5 miles offshore in
242 feet of water. Production is from the Monterey Shale formation at depths of
between 3,800 feet and 5,300 feet. Average net production from 14 gross (2.8
net) wells during December 1996 was 1.5 MBOE/d. The Point Pedernales field is
operated by Nuevo, which owns the other 80.3% working interest. Torch acts as
contract operator of this field for Nuevo. This property was purchased from
Unocal and six other major oil companies in 1993 and has seen significant
activity with production optimization, de-bottlenecking of facilities and the
drilling of three new wells. The Company has identified capital expenditures of
$3.9 million for two additional wells and a gas processing plant for this field
in fiscal 1997. Pursuant to the 1993 purchase agreement, Bellwether's maximum
realized oil price is capped at $9.00/Bbl for the projected life of this field.
WEST CHALKLEY FIELD. The West Chalkley field is located in south
Louisiana. The Acquired Properties include a 2.3% working (1.9% net revenue)
interest in 5 gross (0.1 net) wells producing from the Miogyp "B" reservoir at
an average depth of 14,400 feet and operated by Exxon Company USA. A sixth well
(0.1 net) is completed in the lower Miogyp at 15,400 feet and operated by Torch.
The Sellers own a 9.3% working (7.1% net revenue) interest in the Torch-operated
well. Average net production for the field during December 1996 was 0.3 MBOE/d.
Future plans include the recompletion of the Torch-operated well to the main
field pay interval.
RESERVES
The following table sets forth certain information regarding the estimated
net proved oil and gas reserves of the Company, the estimated net proved
reserves attributable to the Acquired Properties and the pro forma estimated net
proved reserves of the Company as of June 30, 1996:
ACQUIRED COMPANY
COMPANY PROPERTIES PRO FORMA
Proved developed:
Oil (MBbls)........................ 1,494 13,536 15,030
Gas (MMcf)......................... 22,698 128,242 150,940
MBOE............................... 5,277 34,910 40,187
Proved undeveloped:
Oil (MBbls)........................ 314 2,514 2,828
Gas (MMcf)......................... 10,498 10,815 21,313
MBOE............................... 2,064 4,316 6,380
Total Proved:
Oil (MBbls)........................ 1,808 16,050 17,858
Gas (MMcf)......................... 33,196 139,057 172,253
MBOE............................... 7,341 39,226 46,567
PV-10 Value (pre-tax) ($000)............ $48,140 $ 211,992 $ 260,132
The Company's historical proved reserves were estimated by Williamson,
independent petroleum reserve engineers, whose report is attached as Exhibit A,
and the proved reserves attributable to the Acquired Properties were estimated
by the Company and audited by Ryder Scott, whose report is attached
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hereto as Exhibit B. Ryder Scott reviewed properties representing 84% of the
PV-10 Value (pre-tax) of the Acquired Properties.
All of the Company's oil and gas reserves are located onshore in the United
States or in state or federal waters.
In general, estimates of economically recoverable oil and natural gas
reserves and of the future net cash flows therefrom are based upon a number of
variable factors and assumptions, such as historical production from the
properties, assumptions concerning future oil and natural gas prices and future
operating costs and the assumed effects of regulation by governmental agencies,
all of which may vary considerably from actual results. All such estimates are
to some degree speculative, and classifications of reserves are only attempts to
define the degree of speculation involved. Estimates of the economically
recoverable oil and natural gas reserves attributable to any particular group of
properties, classifications of such reserves based on risk of recovery and
estimates of future net cash flows expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
The Company's actual production, revenues, severance and excise taxes and
development and operating expenditures with respect to its reserves will vary
from such estimates, and such variances could be material. See "Risk
Factors -- Estimates of Oil and Gas Reserves."
Estimates with respect to proved reserves that may be developed and
produced in the future are often based upon volumetric calculations and upon
analogy to similar types of reserves rather than actual production history.
Estimates based on these methods are generally less reliable than those based on
actual production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves.
In accordance with applicable requirements of the SEC, the estimated
discounted future net cash flows from estimated proved reserves are based on
prices and costs as of the date of the estimate unless such prices or costs are
contractually determined at such date. Actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by factors such as actual production, supply and demand for oil and natural gas,
curtailments or increases in consumption by natural gas purchasers, changes in
governmental regulations or taxation and the impact of inflation on costs. See
"Risk Factors -- Volatility of Oil and Gas Prices and Markets."
ACREAGE
The following table sets forth the acres of developed and undeveloped oil
and gas properties in which the Company held an interest as of June 30, 1996.
Undeveloped acreage is considered to be those leased acres on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of oil and gas, regardless of whether or not such acreage
contains proved reserves.
GROSS NET
Developed Acreage....................... 481,446 110,513
Undeveloped Acreage..................... 63,549 56,713
------- ---------
Total.............................. 544,995 167,226
======= =========
PRODUCTIVE WELLS
The following table sets forth Bellwether's gross and net interests in
productive oil and gas wells as of June 30, 1996. Productive wells are producing
wells and wells capable of production.
GROSS NET
Oil Wells............................... 359 60.82
Gas Wells............................... 483 72.98
----- ---------
Total.............................. 842 133.80
===== =========
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DRILLING ACTIVITY
The following table sets forth the results of drilling activity by the
Company for the last three fiscal years.
EXPLORATORY WELLS
-------------------------------------------------------
GROSS NET
-------------------------- --------------------------
DRY DRY
PRODUCTIVE HOLES TOTAL PRODUCTIVE HOLES TOTAL
1994.................. 1 1 2 0.10 0.20 0.30
1995.................. 3 4 7 0.27 0.65 0.92
1996.................. 2 3 5 0.34 0.39 0.73
DEVELOPMENT WELLS
-------------------------------------------------------
GROSS NET
-------------------------- --------------------------
DRY DRY
PRODUCTIVE HOLES TOTAL PRODUCTIVE HOLES TOTAL
1994.................. 1 2 3 0.08 0.27 0.35
1995.................. 1 2 3 0.30 0.18 0.48
1996.................. 17 1 18 0.93 0.04 0.97
During the three years ended June 30, 1996, the Company's principal
drilling activities occurred in the continental United States and offshore in
Texas state waters. The Company had three gross (0.66 net) wells drilling at
June 30, 1996.
GAS PLANT
The Company acquired interests in the Snyder Gas Plant and the Diamond
M-Sharon Ridge Gas Plant in 1993. These plants are located in the Horseshoe
Atoll reef area in the Permian Basin of West Texas. The Diamond M-Sharon Ridge
Plant was subsequently dismantled and gas previously processed at the plant is
currently processed at the Snyder Gas Plant. The Gas Plant is a cryogenic gas
plant with 60.0 MMcf/d capacity and a carbon dioxide removal facility. The
Company owns a 11.9% interest in the Gas Plant and a 35.8% interest in gas
processed under contracts with the Diamond M-Sharon Ridge Gas Plant, which
results in an approximate 15% interest in all gas processed by the Gas Plant.
The Company also owns an interest in the 650 mile gathering system connected to
the Gas Plant. The Gas Plant is operated by a subsidiary of Torch.
The Gas Plant operated at 34% of capacity in fiscal 1996. The operator of
the Sacroc Unit, which currently supplies over 70% of the plant's inlet volume,
has identified several areas within the Unit that have not been effectively
flooded and is evaluating a large capital project to initiate carbon dioxide
flooding in these areas. Two other operators in the area have disclosed plans to
commence two additional carbon dioxide flood development programs. No assurance
can be made, however, that any additional deposits of gas will be dedicated to
the Gas Plant.
The Gas Plant generally processes gas under percent of proceeds contracts,
in which the plant is entitled to a percent of the liquids extracted from the
processed gas stream. In these cases the Gas Plant typically retains 60.0% to
66.7% of the extracted liquids. In some cases, the Gas Plant processes gas for a
fixed fee per Mcf. In these instances the Gas Plant does not retain any of the
extracted liquids.
TITLE TO PROPERTIES
Bellwether believes that the title to its oil and gas properties is good
and defensible in accordance with standards generally accepted in the oil and
gas industry, subject to such exceptions which, in the opinion of the Company,
are not so material as to detract substantially from the use or value of such
properties. The Company's properties are typically subject, in one degree or
another, to one or more of the following: royalties and other burdens and
obligations, express or implied, under oil and gas leases; overriding royalties
and other burdens created by the Company or its predecessors in title; a variety
of contractual obligations (including, in some cases, development obligations)
arising under operating agreements,
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farmout agreements, production sales contracts and other agreements that may
affect the properties or their titles; back-ins and reversionary interests
arising under purchase agreements and leasehold assignments; liens that arise in
the normal course of operations, such as those for unpaid taxes, statutory liens
securing obligations to unpaid suppliers and contractors and contractual liens
under operating agreements; pooling, unitization and communitization agreements,
declarations and orders; and easements, restrictions, rights-of-way and other
matters that commonly affect oil and gas producing property. To the extent that
such burdens and obligations affect the Company's rights to production revenues,
they have been taken into account in calculating the Company's net revenue
interests and in estimating the size and value of the Company's reserves.
Bellwether believes that the burdens and obligations affecting the Company's
properties are conventional in the industry for properties of the kind owned by
the Company.
OTHER PROPERTIES
The Company's headquarters are located in Houston, Texas, in approximately
1,200 square feet of leased space.
EMPLOYEES
The Company had eight employees on January 1, 1997.
LITIGATION
The Company is a defendant in various legal proceedings and claims which
arise in the ordinary course of Bellwether's business. Bellwether does not
believe the ultimate resolution of such actions will have a material effect on
the Company's financial position or results of operations.
COMPETITION, MARKETS AND REGULATION
COMPETITION
The oil and gas industry is highly competitive in all of its phases.
Bellwether encounters competition from other oil and gas companies in all areas
of the Company's operations, including the acquisition of reserves and producing
properties and the marketing of oil and gas. Many of these companies possess
greater financial and other resources than the Company. Competition for
producing properties is affected by the amount of funds available to the
Company, information about a producing property available to the Company and any
standards established by the Company for the minimum projected return on
investment. Because gathering systems and related facilities are the only
practical method for the intermediate transportation of gas, competition for gas
delivery is presented by other pipelines and gas gathering systems. Competition
may also be presented by alternate fuel sources.
MARKETS
Bellwether's ability to market oil and gas from the Company's wells depends
upon numerous factors beyond the Company's control, including the extent of
domestic production and imports of oil and gas, the proximity of the gas
production to gas pipelines, the availability of capacity in such pipelines, the
demand for oil and gas by utilities and other end users, the availability of
alternate fuel sources, the effects of inclement weather, state and federal
regulation of oil and gas production and federal regulation of gas sold or
transported in interstate commerce. No assurances can be given that Bellwether
will be able to market all of the oil or gas produced by the Company or that
favorable prices can be obtained for the oil and gas Bellwether produces.
In view of the many uncertainties affecting the supply of and demand for
oil, gas and refined petroleum products, the Company is unable to predict future
oil and gas prices and demand or the overall effect such prices and demand will
have on the Company. The marketing of oil and gas by Bellwether can be affected
by a number of factors which are beyond the Company's control, the exact effects
of which cannot be accurately predicted. See "Risk Factors -- Volatility of Oil
and Gas Prices and Markets."
During fiscal 1996, no single customer accounted for more than 10% of the
Company's revenues. Bellwether does not believe that the loss of any of the
Company's oil purchasers would have a material
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adverse effect on the Company's operations. Additionally, since substantially
all of the Company's gas sales are on the spot market, the loss of one or more
gas purchasers should not materially and adversely affect the Company's
financial condition.
FEDERAL REGULATION
SALES OF GAS
Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act
deregulated prices for all "first sales" of gas. Thus, all sales of gas by the
Company may be made at market prices, subject to applicable contract provisions.
TRANSPORTATION OF GAS
The rates, terms and conditions applicable to the interstate transportation
of natural gas by pipelines are regulated by the Federal Energy Regulatory
Commission ("FERC") under the Natural Gas Act ("NGA"), as well as under
section 311 of the Natural Gas Policy Act ("NGPA"). Since 1985, the FERC has
implemented regulations intended to make gas transportation more accessible to
gas buyers and sellers on an open-access, nondiscriminatory basis.
Most recently, in Order No. 636, ET SEQ., the FERC promulgated an extensive
set of new regulations requiring all interstate pipelines to "restructure"
their services. The most significant provisions of Order No. 636 (i) require
that interstate pipelines provide firm and interruptible transportation solely
on an "unbundled" basis, separate from their sales service, and convert each
pipeline's bundled firm city-gate sales service into unbundled firm
transportation service; (ii) issue blanket certificates to pipelines to provide
unbundled sales service; (iii) require that pipelines provide firm and
interruptible transportation service on a basis that is equal in quality for all
gas supplies, whether purchased from the pipeline or elsewhere; (iv) require
that pipelines provide a new, non-discriminatory "no-notice" transportation
service; (v) establish two new, generic programs for the reallocation of firm
pipeline capacity; (vi) require that all pipelines offer access to their storage
facilities on a firm and interruptible, open access, contract basis; (vii)
provide pregranted abandonment of unbundled sales and interruptible and
short-term firm transportation service and conditional pregranted abandonment of
long-term transportation service; (viii) modify transportation rate design by
requiring all fixed costs related to transportation to be recovered through the
reservation charge under the straight fixed variable ("SFV") method. The order
also recognized that the elimination of city-gate sales service and the
implementation of unbundled transportation service would result in considerable
costs being incurred by the pipelines. Therefore, Order No. 636 provided
mechanisms for the recovery by pipelines from present, former and future
customers of certain types of "transition" costs likely to occur due to these
new regulations.
In subsequent orders, the FERC substantially upheld the requirements
imposed by Order No. 636. Pursuant to Order No. 636, pipelines and their
customers engaged in extensive negotiations in order to develop and implement
new service relationships under Order No. 636. Tariffs instituting these new
restructured services were placed into effect on all pipelines on or before
November 1, 1993. The final form of the FERC's open-access rules, the tariff and
related provisions by which Order No. 636 ET SEQ. have been implemented by the
interstate pipelines and the flow-through of transition costs are subject to
final administrative and judicial action. In this regard, numerous parties filed
for judicial review of Order No. 636, ET SEQ., and the United States Court of
Appeals for the District of Columbia Circuit recently issued its decision
largely upholding the basic elements of the order. Further review of and
revisions to the FERC's orders is still possible, and related appeals remain
pending. The Company cannot predict the final outcome of the FERC's open-access
series of orders, but the outcome of these proceedings and future action by the
FERC respecting open access transportation could have an effect on the Company's
operations and the costs of transporting and selling natural gas.
The FERC is currently considering several other rules intended to
streamline its regulation of the industry and promote competition. One deals
with pipeline rates. For decades, the principal methodology used to set
interstate pipeline rates has been based on the actual cost to provide that
service. In recent years
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regulators have concluded that sufficient competition may exist in certain
markets to allow a relaxation of this historic approach. In January 1996, the
FERC issued a statement of policy and request for comments concerning
alternatives to its traditional cost-of-service ratemaking methodology and set
forth the criteria that the FERC will use to evaluate proposals to charge
market-based rates for the transportation of natural gas. The FERC also
requested comments on whether it should allow gas pipelines the flexibility to
negotiate the terms and conditions of transportation service with prospective
shippers. In another rulemaking, the FERC is considering how to alter its
regulations to promote the fair and effective release and recontracting of
pipeline capacity from one shipper to another, and whether and to what extent
such transactions should be regulated where the market is demonstrably
competitive. In this regard, an experimental pilot program implementing certain
new procedures will be implemented in the 1996-97 winter heating season. Lastly,
the FERC has issued a policy statement on how interstate pipelines can recover
in rates the costs of new facilities. While the policy may affect the Company
and other producer-shippers only indirectly, the policy should enhance
competition in new markets and encourage the construction of gas supply
laterals. As to all of these matters, the Company cannot predict what further
action the FERC will take; however, the Company does not believe that it will be
affected by any action taken materially differently than other natural gas
producers, gatherers and marketers with which it competes.
SALES AND TRANSPORTATION OF OIL
Sales of oil and condensate can be made by the Company at market prices not
subject at this time to price controls. The price that the Company receives from
the sale of these products will be affected by the cost of transporting the
products to market. As required by the Energy Policy Act of 1992, the FERC
revised its regulations governing the transportation rates that may be charged
by oil pipelines. The new rules, which were effective January 1, 1995, provide a
simplified, generally applicable method of regulating such rates by use of an
index for setting rate ceilings. In certain circumstances, the new rules permit
oil pipelines to establish rates using traditional cost of service and other
methods of ratemaking. The FERC's orders were recently affirmed on appeal. The
effect that these new rules may have on moving the Company's products to market
cannot yet be determined. In addition, at the same time as it issued the new
rules, the FERC also issued notices of inquiry regarding market-based pricing
for oil pipeline rates and the information required to be filed for ratemaking
and reporting purposes. It is not possible to predict what rules, if any, the
FERC will ultimately adopt as a result of these inquiry proceedings whether the
pipelines used by the Company will apply for market based or other rates or the
effect that any rules that are adopted or authorizations sought might have on
the cost of moving the Company's products to market.
LEGISLATIVE PROPOSALS
In the past, Congress has been very active in the area of gas regulation.
There are legislative proposals pending in the state legislatures of various
states, which, if enacted, could significantly affect the petroleum industry. At
the present time it is impossible to predict what proposals, if any, might
actually be enacted by Congress or the various state legislatures and what
effect, if any, such proposals might have on the Company's operations.
FEDERAL, STATE OR INDIAN LEASES
In the event the Company conducts operations on federal, state or Indian
oil and gas leases, such operations must comply with numerous regulatory
restrictions, including various nondiscrimination statutes, and certain of such
operations must be conducted pursuant to certain on-site security regulations
and other appropriate permits issued by the Bureau of Land Management ("BLM")
or Minerals Management Service or other appropriate federal or state agencies.
The Mineral Leasing Act of 1920 (the "Mineral Act") prohibits direct or
indirect ownership of any interest in federal onshore oil and gas leases by a
foreign citizen of a country that denies "similar or like privileges" to
citizens of the United States. Such restrictions on citizens of a
"non-reciprocal" country include ownership or holding or controlling stock in
a corporation that holds a federal onshore oil and gas lease. If this
restriction is violated, the corporation's lease can be canceled in a proceeding
instituted by the United States Attorney General. Although the regulations of
the BLM (which administers the Mineral Act)
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provide for agency designations of nonreciprocal countries, there are presently
no such designations in effect. The Company owns interests in numerous federal
onshore oil and gas leases. It is possible that the Common Stock will be
acquired by citizens of foreign countries, which at some time in the future
might be determined to be non-reciprocal under the Mineral Act.
STATE REGULATION
Most states regulate the production and sale of oil and gas, including
requirements for obtaining drilling permits, the method of developing new
fields, the spacing and operation of wells and the prevention of waste of oil
and gas resources. The rate of production may be regulated and the maximum daily
production allowable from both oil and gas wells may be established on a market
demand or conservation basis or both.
The Company may enter into agreements relating to the construction or
operation of a pipeline system for the transportation of gas. To the extent that
such gas is produced, transported and consumed wholly within one state, such
operations may, in certain instances, be subject to the jurisdiction of such
state's administrative authority charged with the responsibility of regulating
intrastate pipelines. In such event, the rates which the Company could charge
for gas, the transportation of gas, and the construction and operation of such
pipeline would be subject to the rules and regulations governing such matters,
if any, of such administrative authority. In addition, the administrative
authority in certain states have regulatory authority over the gathering of
natural gas, either as public utilities, common carriers and/or common
purchasers of production. As a result of FERC Order No. 636, federal agency
oversight of gathering performed by interstate pipelines has diminished in favor
of increased state oversight of such facilities. Given these recent events, it
is possible that state regulation over the Company's gathering activities, and
respecting gatherers which provide services to the Company, may increase.
ENVIRONMENTAL REGULATION
GENERAL
The Company's activities are subject to existing federal, state and local
laws and regulations governing environmental quality and pollution control.
Although no assurances can be made, the Company anticipates that, absent the
occurrence of an extraordinary event such as those noted under "Risk Factors,"
compliance with existing federal, state and local laws, rules and regulations
regulating the release of materials into the environment or otherwise relating
to the protection of the environment will not have a material effect upon the
capital expenditures, earnings or the competitive position of Bellwether with
respect to the Company's operations. The Company cannot predict what effect
additional regulation or legislation, enforcement policies issued thereunder,
and claims for damages to property, employees, other persons and the environment
resulting from the Company's operations could have on its activities.
Activities of the Company with respect to gas facilities, including the
operation and construction of pipelines, plants and other facilities for
transporting, processing, treating or storing gas and other products, are
subject to stringent environmental regulation by state and federal authorities
including the Environmental Protection Agency ("EPA"). Such regulation can
increase the cost of planning, designing, installing and operating such
facilities. In most instances, the regulatory requirements impose water and air
pollution control measures. Although Bellwether believes that compliance with
environmental regulations will not have a material adverse effect on the
Company, risks of substantial costs and liabilities related to environmental
compliance issues are inherent in oil and gas production operations, and no
assurance can be given that significant costs and liabilities will not be
incurred. Moreover, it is possible that other developments, such as stricter
environmental laws and regulations, and claims for damages to property or
persons resulting from oil and gas production, would result in substantial costs
and liabilities to the Company.
SOLID AND HAZARDOUS WASTE
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that have been used for production of oil and gas for many
years. Although the Company has utilized operating
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and disposal practices that were standard in the industry at the time,
hydrocarbons or other solid wastes may have been disposed or released on or
under the properties owned or leased by the Company. In addition, many of these
properties have been operated by third parties. The Company had no control over
such parties' treatment of hydrocarbons or other solid wastes and the manner in
which such substances may have been disposed or released. State and federal laws
applicable to oil and gas wastes and properties have gradually become stricter
over time. Under these new laws, the Company could be required to remove or
remediate previously disposed wastes (including wastes disposed or released by
prior owners or operators) or property contamination (including groundwater
contamination by prior owners or operators) or to perform remedial plugging
operations to prevent future contamination.
The Company generates wastes, including hazardous wastes, that are subject
to the Federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. The EPA has limited the disposal options for certain hazardous
wastes and is considering the adoption of stricter disposal standards for
nonhazardous wastes. Furthermore, it is possible that certain wastes currently
exempt from treatment as "hazardous wastes" generated by the Company's oil and
gas operations may in the future be designated as "hazardous wastes" under
RCRA or other applicable statutes, and therefore be subject to more rigorous and
costly disposal requirements.
SUPERFUND
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons with respect to the release of a "hazardous substance" into the
environment. These persons include the owner and operator of a site and any
party that disposed or arranged for the disposal of the hazardous substance
found at a site. CERCLA also authorizes the EPA and, in some cases, third
parties, to take actions in response to threats to the public health or the
environment and to seek to recover from the responsible classes of persons the
costs of such action. In the course of the Company's operations, Bellwether has
generated and will generate wastes that may fall within CERCLA's definition of
"hazardous substances." The Company may also be an owner of sites on which
"hazardous substances" have been released. The Company may be responsible
under CERCLA for all or part of the costs to clean up sites at which such wastes
have been disposed. At this time, neither the Company nor its predecessors has
been designated as a potentially responsible party under CERCLA with respect to
any such site.
OIL POLLUTION ACT
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder
impose a variety of regulations on "responsible parties" related to the
prevention of oil spills and liability for damages resulting from such spills in
"waters of the United States." The term "waters of the United States" has
been broadly defined to include inland waterbodies, including wetlands, playa
lakes and intermittent streams. A "responsible party" includes the owner or
operator of a facility or vessel, or the lessee or permittee of the area in
which an offshore facility is located. The OPA assigns liability to each
responsible party for oil removal costs and a variety of public and private
damages. While liability limits apply in some circumstances, a party cannot take
advantage of liability limits if the spill was caused by gross negligence or
willful misconduct or resulted from violation of a federal safety, construction
or operating regulation. If the party fails to report a spill or to cooperate
fully in the cleanup, liability limits also do not apply. Few defenses exist to
the liability imposed by the OPA.
The OPA also imposes ongoing requirements on a responsible party, including
proof of financial responsibility to cover at least some costs in a potential
spill. OPA originally required owners and operators of offshore oil and gas
facilities to establish $150.0 million in financial responsibility. Congress
passed legislation in September 1996 that was subsequently signed by the
President and that would make two significant changes to the original OPA.
First, the amount of financial responsibility that must be demonstrated for an
offshore facility was reduced to $35.0 million if the facility is located
seaward of the seaward boundary of a state, or $10.0 million if the facility is
located landward of such boundary. A higher amount, up to a maximum of $150.0
million, may still be required if justified by the risks of a particular
47
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facility. Second, certain offshore facilities with a worst-case oil spill risk
of 1,000 barrels or less are exempted altogether from the financial
responsibility requirement, unless the President demonstrates a need for it with
respect to a particular facilty. The requirements under OPA may have the
potential to result in the imposition of substantial additional annual costs on
the Company or otherwise materially adversely affect the Company. However, the
impact of the statute is not expected to be any more burdensome to the Company
than it will be to other similarly or less capitalized owners or operators in
the Gulf of Mexico.
AIR EMISSIONS
The operations of the Company are subject to local, state and federal laws
and regulations for the control of emissions from sources of air pollution.
Administrative enforcement actions for failure to comply strictly with air
regulations or permits are generally resolved by payment of monetary fines and
correction of any identified deficiencies. Alternatively, regulatory agencies
could require the Company to cease construction or operation of certain air
emission sources, although the Company believes that in the such case it would
have enough permitted or permittable capacity to continue its operations without
a material adverse effect on any particular producing field.
OSHA
The Company is subject to the requirements of the Federal Occupational
Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the EPA Community Right-to-Know regulations under Title
III of CERCLA and similar state statutes require Bellwether to organize and/or
disclose information about hazardous materials used or produced in the Company's
operations. Certain of this information must be provided to employees, state and
local governmental authorities and local citizens.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table provides information with respect to the directors and
executive officers of the Company.
NAME AGE POSITION
J.P. Bryan................ 57 Chairman of the Board
J. Darby Sere............. 49 Director, President and Chief Executive
Officer
Charles C. Green III...... 50 Director, Executive Vice President and Chief
Financial Officer
Roland E. Sledge.......... 51 Vice President and Secretary
Michael B. Smith.......... 34 Vice President and Treasurer
C. Barton Groves.......... 59 Director of the Company; President of Odyssey
Kenneth W. Welch.......... 39 Vice President -- Land of Odyssey
Dr. Jack Birks............ 77 Director
Vincent H. Buckley........ 74 Director
Habib Kairouz............. 30 Director
A.K. McLanahan............ 70 Director
Michael D. Watford........ 43 Director
Mr. Bryan has been Chairman of the Board of the Company since August 31,
1987, and was Chief Executive Officer of the Company from June 30, 1994 to
January 25, 1995 and from August 1987 to March 6, 1988. Since January 25, 1995,
Mr. Bryan has been Chief Executive Officer of Gulf Canada Resources Limited. He
has been Chairman of the Board of Nuevo since March 1990 and was Chief Executive
Officer of Nuevo from March 1990 to January 1995. Mr. Bryan has also been
Chairman of the Board and Chief Executive Officer of Torch and its predecessor
since January 1, 1985. Mr. Bryan is a member of the Board of Directors of Gulf
Canada Resources Limited, Nuevo and Republic Waste Industries.
Mr. Sere has been Chief Executive Officer of the Company since January 25,
1995, President since March 7, 1988, and a director since March 25, 1988. Mr.
Sere was Chief Executive Officer of the Company from March 7, 1988 to June 29,
1994. He was a consultant with Patrick Petroleum Company, an independent oil and
gas company, from September 1987 to February 1988 and was a co-founder,
President, Chief Executive Officer and a director of Bayou Resources, Inc., an
independent oil and gas exploration and development company, from January 1982
until its acquisition by Patrick Petroleum Company in August 1987. Mr. Sere
served in various positions with Howell Corporation and Howell Petroleum
Corporation, an independent oil and gas company, from 1977 to 1981, the last of
which was Executive Vice President.
Mr. Green has been Executive Vice President and Chief Financial Officer of
the Company since January 1, 1997, a director since February 24, 1997 and an
officer of the Company since December 31, 1992. He was an officer of Torch from
December 1992 through December 1996, serving as Vice Chairman and Chief
Investment Officer of Torch from May 1995 to December 1996, and as President and
Chief Operating Officer for 18 months prior thereto. For over ten years prior to
joining Torch, Mr. Green was President and Chief Operating Officer of Treptow
Development Company, a real estate development company. Previously, at J. P.
Morgan Investment Management, he was Vice President and Senior Portfolio Manager
and Head of International Fixed Income in London (1974-1982) and, in New York,
was Assistant Vice President in the Investment Department (1973-1974) and
Investment Research Officer and Energy Analyst (1969-1973). He has been a
director of Teletouch Communications, Inc. since May 1995. Mr. Green is a
Chartered Financial Analyst.
Mr. Sledge, Vice President and Secretary of the Company since September 1,
1987, is Managing Director, Secretary and General Counsel of Torch and has been
an officer with Torch and its predecessor since July 1983. He was an attorney
with the law firm of Watt, White & Craig, Houston, Texas from 1980 to 1983.
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Mr. Smith has been Vice President and Treasurer of the Company since
January 1, 1997 and was Vice President and Chief Financial Officer of the
Company from September 1995 through December 1996. Mr. Smith joined Torch in
April 1995 as Vice President of Acquisitions and Financial Analysis and in
September 1995 became Torch's Chief Financial Officer. Prior to joining Torch,
Mr. Smith held various positions in finance with ARCO beginning August 1989, the
last of which was Financial Advisor in the Corporate Treasury department.
Mr. Groves has been President of Odyssey and a director of the Company
since August 26, 1994. He was President of the managing general partner of
Odyssey Partners, the predecessor in interest of Odyssey, from 1986 to August
1994. Between 1973 and 1986, Mr. Groves held various positions with Diamond
Shamrock Corporation, including President of its Diamond Shamrock Exploration
Company subsidiary.
Mr. Welch has been Vice President -- Land of Odyssey since August 26, 1994.
From 1987 to August 1994, Mr. Welch was Land Manager of the Odyssey Partnership.
Between 1979 and 1987, Mr. Welch held Area Landman and Senior Landman positions
with Enserch Exploration, Inc., Penn Resources, Inc., and Moore McCormack
Energy, Inc.
Dr. Birks has been a Director of the Company since 1988. He is Chairman of
the Board of Midland & Scottish Resources Plc. He is life president of British
Maritime Technology Limited. Dr. Birks served as Chairman of the Board of North
American Gas Investment Trust Plc. from 1989 until his retirement in 1995; as
Chairman of the Board of British Maritime Technology Limited from 1985 to 1995;
as Chairman of the Board of Charterhouse Petroleum Plc from 1982 to 1986; as
Chairman of the Board of London American Energy Inc. from 1982 to 1988; as Vice
Chairman of the Board of Petrofina (UK) Limited from 1986 to 1989; and as a
director of George Wimpey Plc, a construction company, from 1982 to May 1990.
Mr. Buckley has been a Director of the Company since 1987. He has been Of
Counsel to the law firm of Liddell, Sapp, Zivley, Hill & LaBoon since January
1989. He serves as a Director of Enron Cactus III Corporation, Houston, Texas,
an oil and gas company, and as a Director on the Houston Medical Area Advisory
Board of Texas Commerce Bank National Association. Mr. Buckley was President and
Chief Executive Officer of Cockburn Oil Corporation from August 1984 until
September 1, 1988, and was Vice President of Apache Corporation, an oil and gas
company, Denver, Colorado, from October 1982 to August 1984.
Mr. Kairouz has been a director of the Company since August 26, 1994. Since
December 1993 he has been employed by Rho Management Company, Inc., an
investment advisory firm which serves as advisor to the principal investor of
Alpine Investment Partners. Prior to that, Mr. Kairouz was employed for five
years in investment banking at the firms of Jesup & Lamont Securities, Inc. and
more recently, Reich & Co., Inc. Under the agreement pursuant to which the
Company acquired Odyssey, certain former owners ("Owners") of the Odyssey
Partnership acquired the right to designate one representative to the Company's
board of directors. Pursuant to such agreement, until the earlier to occur of
the five-year anniversary of the closing of such acquisition or the date such
Owners no longer own at least 5% of the outstanding Common Stock, the Company is
obligated to nominate and recommend to the Company's Stockholders one
representative of the Owners. Mr. Kairouz is the person so designated by the
Owners.
Mr. McLanahan has been a director of the Company since November 6, 1987. He
has been a First Vice President of PaineWebber Incorporated since January, 1995.
He was a Vice President of Kidder Peabody & Co., Inc., an investment banking
firm from April 1985 until its sale to PaineWebber Incorporated in 1995. From
April 1982 to April 1985 he served as a Senior Vice President and Branch Office
Manager of Donaldson, Lufkin & Jenrette, Inc., an investment banking firm.
Mr. Watford has been a Director of the Company since March 1994. He has
been Chief Executive Officer of Nuevo since January 1995 and President, Chief
Operating Officer, and a member of the Board of Directors of Nuevo since
February 1994. He was President of Torch Energy Marketing, Inc., a subsidiary of
Torch, from 1990 until April 1995 and was Director of Natural Gas Marketing for
Meridian Oil, Inc. from 1985 until 1990. Mr. Watford was employed by Superior
Oil Company from 1981 until 1985 and Shell Oil Company from 1975 until 1981.
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COMPENSATION OF DIRECTORS
Directors of the Company who are neither officers nor employees of the
Company or Torch received $2,000 for the first quarter meeting of the Board of
Directors and $3,000 per meeting thereafter during the fiscal year ended June
30, 1996, and were reimbursed for reasonable expenses incurred in attending such
meetings. Directors who are officers or employees of the Company or Torch did
not receive any additional compensation for services as members of the Board of
Directors. The Company paid a total of $39,000 in director fees for the fiscal
year ended June 30, 1996. Each non-employee board member also received an annual
grant of 2,000 options under the 1994 Stock Incentive Plan and receives an
annual grant of 4,000 options under the 1996 Stock Incentive Plan ("1996
Plan") following each annual meeting commencing in 1997.
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth the past three years
cash compensation and certain other components of the compensation of J. Darby
Sere, the Company's President and Chief Executive Officer, C. Barton Groves,
President of Odyssey and Kenneth W. Welch, Vice President -- Land of Odyssey,
who were the only officers of the Company in fiscal 1996 whose total salary and
bonus exceeded $100,000. All other executive officers of the Company were also
officers or employees of Torch during fiscal 1996 and provided services to the
Company (including holding executive officer positions with Company) pursuant to
the Administrative Services Agreement between the Company and Torch. Executive
officers who perform services for the Company under the Administrative Services
Agreement received no compensation from the Company other than the grant of
stock options under the 1994 Stock Incentive Plan ("1994 Plan") and were all
compensated primarily by Torch.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION ------------------------------------------------
--------------------------------- AWARDS
OTHER ---------------------- PAYOUTS ALL
NAME AND ANNUAL RESTRICTED NUMBER ------- OTHER
PRINCIPAL COMPENSA- STOCK OF LTIP COMPENSA-
POSITION YEAR SALARY BONUS TION(1) AWARD(S) OPTIONS PAYOUTS TION(2)
<S> <C> <C> <C> <C> <C> <C> <C>
J. Darby Sere ....................... 1996 $ 171,000 $ 50,000(3) $ -- -- --(4) $ -- $ 8,752
President and Chief 1995 158,000 -- -- -- 25,000 -- 8,450
Executive Officer 1994 147,000 16,500 -- -- 234,450 -- 7,561
C. Barton Groves .................... 1996 154,000 30,000(3) -- -- --(4) -- 30,500
President of Odyssey 1995 125,000 -- -- -- 165,000 -- 21,013
1994 -- -- -- -- -- -- --
Kenneth W. Welch .................... 1996 98,000 15,000(3) -- -- --(4) -- 10,750
Vice President -- Land 1995 80,486 -- -- -- 82,500 -- 7,899
of Odyssey 1994 -- -- -- -- -- -- --
</TABLE>
- -----------------------------
(1) These amounts do not include the value of the benefit to Mr. Sere of the use
of a Company-owned automobile used primarily for commuting to the Company;
the expense of a $7,110 per month disability insurance policy under which
Mr. Sere is the insured, the premiums of which are paid by the Company; and
the expenses of Mr. Sere's membership in certain professional and athletic
clubs. While some personal benefit may be derived from the foregoing, the
expenses are considered by the Company to be ordinary, necessary and
reasonable to its business and such expenses did not exceed 10% of Mr.
Sere's salary in fiscal 1996.
(2) Represents premiums paid on a $500,000 term life insurance policy for Mr.
Sere and an annual payment pursuant to a Simplified Employee Pension Plan
for Mr. Sere, Mr. Groves and Mr. Welch. Also includes $17,000 per year for
personal benefit plans paid to Mr. Groves in lieu of certain Company
benefits and amounts paid for a car allowance for Mr. Groves and Mr. Welch.
(3) Represents the bonuses paid during fiscal 1996 based upon performance in
fiscal 1995. On October 1, 1996, Messrs. Sere, Groves and Welch were granted
bonuses of $70,000, $32,500 and $17,500, respectively, in recognition of
their performance during fiscal 1996.
(4) Represents the number of options granted during fiscal 1996 based upon
performance in fiscal 1995. On September 16, 1996, Messrs. Sere, Groves and
Welch were granted, subject to stockholder approval of
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
51
<PAGE>
the 1996 Plan, options to purchase 55,000, 15,000 and 7,500 shares of Common
Stock, respectively, in recognition of their performance during fiscal 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No option or stock appreciation rights grants were made in fiscal year
1996.
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information concerning the exercise
in fiscal 1996 of options to purchase Common Stock by the executive officers
named in the Summary Compensation Table and the number and value of unexercised
options to purchase Common Stock held by such individuals at June 30, 1996. Also
reported are the values for "in-the-money" options which represent the
positive spread between the exercise price of any such existing stock options
and the June 30, 1996 price of the Common Stock. The actual amount, if any,
realized upon exercise of stock options will depend upon the market price of the
Common Stock relative to the exercise price per share of Common Stock at the
time the stock option is exercised. There is no assurance that the values of
unexercised, "in-the-money" stock options reflected in this table will be
realized.
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
SHARES OPTIONS AT JUNE 30, 1996 JUNE 30, 1996(1)
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
<S> <C> <C> <C> <C> <C> <C>
J. Darby Sere........................ -- -- 236,560 22,890 $ 154,255 $25,751
C. Barton Groves..................... -- -- 165,000 -- $ 60,000 --
Kenneth W. Welch..................... -- -- 82,500 -- $ 30,000 --
</TABLE>
- -----------------------------
(1) Based upon $6.00, the closing price of Common Stock on June 30, 1996.
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
At this time, the Company does not have a long-term incentive plan for its
employees, other than the 1988 Non-Qualified Stock Option Plan, the 1994 Stock
Incentive Plan and the 1996 Stock Incentive Plan.
1988 PLAN
In 1988, the Board of Directors adopted and the stockholders approved the
1988 Non-Qualified Stock Option Plan ("1988 Plan"). The Company has reserved
131,325 shares of common stock under the 1988 Plan and no further options will
be granted under the plan. Options under the 1988 Plan may be granted by the
Compensation Committee to any director, executive officer or key employee of the
Company. The exercise price of an option is 100% of the fair market value on the
date of the grant. Options granted under the 1988 Plan may be exercised at any
time for up to 10 years from the date of grant but prior to termination of the
1988 Plan on March 25, 1998, or such shorter time as the Compensation Committee
determines.
1994 PLAN
In 1994, the Board of Directors adopted and the stockholders approved the
1994 Plan. The Company has reserved 825,000 shares of Common Stock under the
1994 Plan. The Company has issued options to purchase an aggregate of 825,000
shares under the 1994 Plan.
The 1994 Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has full power to select, from among the
persons eligible for awards, the individuals to whom awards are granted, to make
any combination of awards to any participant and to determine the specific terms
of each grant, subject to the provisions of the 1994 Plan. The option price per
share of Common Stock deliverable upon the exercise of a Stock Option shall be
100% of the fair market value of a share of Common Stock on the date the Stock
Option is granted.
Directors, officers and key employees of the Company and officers and key
employees of Torch who render services for the Company under the Administrative
Services Agreement are eligible to receive stock options or performance shares
under the 1994 Plan.
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<PAGE>
1996 PLAN
In 1996, the Board of Directors adopted and the stockholders approved the
1996 Plan. Individual awards under the 1996 Plan may take the form of one or
more of (i) incentive stock options; (ii) non-qualified stock options; or (iii)
performance shares.
The 1996 Plan is administered by a plan administrator which may be any of
(i) the Board of Directors of the Company; (ii) any duly constituted committee
of the Board of Directors consisting of at least two non-employee directors; or
(iii) any other duly constituted committee of the Board of Directors. The plan
administrator will select the officers, key employees and consultants who will
receive awards and the terms and conditions of those awards. The maximum number
of shares of Common Stock that may be subject to outstanding awards may not
exceed 500,000 shares of Common Stock tendered as payment for shares issued upon
exercise of an option or which are attributable to awards which have expired,
terminated or been canceled or forfeited are available for issuance or use in
connection with future awards.
The option price of any incentive stock option shall be 100% of the fair
market value of a share of Common Stock on the date the incentive option is
granted. Any incentive option must be exercised within ten years of the date of
grant. Unless otherwise determined by the plan administrator, the option price
of any non-qualified stock option shall be 100% of the fair market value of a
share of Common Stock on the date the option is granted. Vesting of stock
options and performance shares, and the term of any non-qualified stock option
or performance share award is determined by the plan administrator.
The 1996 Plan provides that each director that is not an employee of the
Company shall, on the date on which he or she is initially elected or appointed
a director of the Company, be granted a stock option to purchase 4,000 shares of
Common Stock for the fair market price on the date of grant and for a term of
ten years. After each subsequent annual meeting of stockholders at which such
person continues to serve as a director, he or she will automatically be granted
a stock option to purchase 4,000 additional shares of Common Stock for the fair
market price on the date of such grant and for a term of ten years.
In the event of a termination of employment, outstanding options and
performance shares may be subject to forfeiture and/or time limitations. Stock
options and performance shares are evidenced by written agreements, the terms
and provisions of which may differ. No stock option is transferable other than
by will or by the laws of descent or distribution.
The 1996 Plan may be amended by the Board of Directors without the consent
of the stockholders except that any amendment, though effective when made, will
be subject to stockholder approval if required by any federal or state law or
regulation or by the rules of any stock exchange or automated quotation system
on which the Common Stock may then be listed or quoted. In addition, no
amendment can impair the rights of a holder of an outstanding award under the
Plan without such holder's consent.
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<PAGE>
TRANSACTIONS WITH RELATED PERSONS
RELATIONSHIP WITH TORCH AND AFFILIATES
ADMINISTRATIVE SERVICES AGREEMENT
The Company has been party to an Administrative Services Agreement with
Torch since 1987. Torch, headquartered in Houston, Texas, is primarily engaged
in the business of providing outsourcing services for clients in the energy
industry with respect to the acquisition and divestiture, exploration,
development, exploitation and operation of oil and gas properties, including
management advisory services, legal, financial and accounting services, and the
marketing of oil and gas. In addition, Torch provides energy industry investment
management and advisory services for public companies and private investors. The
Administrative Services Agreement is subject to termination by Bellwether upon
one year's prior notice. The agreement has an initial term expiring on December
31, 1999 and may not be terminated by Torch prior to such date.
The Administrative Services Agreement requires Torch to administer certain
activities of the Company for a monthly fee. These administrative services
include providing the Company with office space, equipment and supplies,
accounting, legal, financial, geological, engineering, technical and insurance
professionals retained by the Company, maintaining the books and records of the
Company, assisting the Company in determining its capital requirements,
preparing any reports or other documents required by governmental authorities,
analyzing economic and other data related to the Company's business and
otherwise providing general management services and advice to the Company's
business. The Company presently intends to continue to operate under the
Administrative Services Agreement.
The monthly fee payable to Torch is equal to (i) one-twelfth of 2% of the
book value of the Company's assets, excluding cash and cash equivalents, plus
(ii) 2% of operating cash flows during such month less 20% of overhead on Torch
operated properties. The fees paid for fiscal 1994, 1995 and 1996 were $600,000,
$1.2 million and $1.5 million, respectively. On a pro forma basis, the amount
payable under the Administrative Services Agreement for administrative services
would have been $6.1 million and $2.4 million in fiscal 1996 and the six months
ending December 31, 1996, respectively. The Company believes that the terms and
fees under the Administrative Services Agreement are comparable with those that
could be negotiated with a third party in an arm's length transaction and are
fair to the Company.
Under the Administrative Services Agreement, the monthly fee for
administrative services does not apply to extraordinary investing and financing
services that Torch may agree to provide to the Company upon the Company's
request. For such investing and financing services the Company pays Torch a fee
based on the Torch employees providing such services on an hourly basis, certain
overhead expenses with respect to such employees and any related expenses. The
Company has not paid any fees for these services in the last three fiscal years.
The Company has agreed to indemnify Torch and its affiliates for
liabilities incurred by Torch or its affiliates for actions taken under the
Administrative Services Agreement, other than acts of fraud, willful misconduct
or gross negligence of Torch or its affiliates or any of their employees.
In the course of its business, Torch generates potential investments in oil
and gas properties, processing plants, gathering systems and pipelines, and
other oil and gas assets (collectively "Investments"). Torch also provides
services to Nuevo. Under the Administrative Services Agreement and the agreement
with Nuevo, Torch is required to offer to the Company and Nuevo all Investments
that are within the scope of the Company's or Nuevo's business.
The business and acquisition strategy of the Company and Nuevo may overlap
regarding certain Investments. The Company, Nuevo and Torch have adopted a
policy regarding the rights as between Nuevo and the Company to Investments
generated by Torch that Torch is required to offer to the Company and Nuevo. If
an Investment is located in the Company's Area of Exclusive Interest (as
hereinafter defined), the Investment will be offered first to the Company. If an
Investment is located in Nuevo's Area of Exclusive Interest, the Investment will
be offered first to Nuevo. Investments located outside of or in both the Areas
of Exclusive Interest will be offered by Torch to both the Company and Nuevo.
Unless the Company and Nuevo agree otherwise, the Company will be entitled to
acquire a 20% interest in the assets representing the Investment, and Nuevo will
be entitled to acquire the remaining 80%. With respect to assets that form part
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<PAGE>
of an Investment which is not capable of division, Torch will allocate such
assets between Nuevo and the Company in a manner deemed fair and reasonable by
Torch, whose decision shall be final and binding.
The Company's Area of Exclusive Interest is defined as (i) for Investments
in an oil and gas property, any geographic area which produces from the same
formation as the proposed Investment and in which the Company owns proved
reserves with a discounted present value of future net cash flows of $500,000 or
more, and (ii) for Investments that are not an oil and gas property, any area in
which the Company owns a non-oil and gas property investment with a book value
of over $100,000. Nuevo's Area of Exclusive Interest is defined as (i) for
Investments in an oil and gas property, any geographic area which produces from
the same formation as the proposed Investment and in which Nuevo owns proved
reserves with a discounted present value of future net cash flows of $5 million
or more, and (ii) for Investments that are not an oil and gas property, any area
in which Nuevo owns a non-oil and gas property investment with a book value of
over $1 million.
The Company will continue to generate its own Investments in the future,
and neither Torch nor Nuevo will have any right to participate in such
Investments. Decisions to accept an Investment generated by Torch are made by
the Company's management and Board of Directors, some of whom are members of
Torch's executive management. The Compensation Committee of the Board of
Directors, which is composed of persons who are not employees of Torch or the
Company, meets quarterly to review Torch's performance under the Administrative
Services Agreement.
Torch also invests in oil and gas assets for its own account and may do so
in the future. In accordance with the Administrative Services Agreement, Torch
may not acquire an Investment within the scope of the Company's business and
acquisition strategy without first offering such Investment to the Company
pursuant to the criteria set forth above.
The organizational agreements of the Sellers also contained provisions
which required Torch to offer to the Sellers Investments meeting the criteria
set forth in such agreements. Although these requirements will terminate as a
result of the Pending Acquisitions, it is possible that Torch will form similar
investment vehicles in the future. In such event, all Investments meeting the
criteria of such investment vehicles would be offered first to any such Sellers
formed in the future. Bellwether has reviewed the investment criteria for the
Sellers and does not believe that such criteria would be competitive with the
Company's business and acquisition strategy in the future. No assurances can be
made, however, that the investment criteria of future investment vehicles formed
by Torch will not compete with the Company's acquisition strategy or that such
investment vehicles will not acquire Investments that the Company would
otherwise propose to acquire.
OTHER RELATIONSHIPS WITH TORCH
Torch markets a portion of the oil and natural gas production for certain
properties in which the Company owns an interest. For fiscal 1994, 1995, and
1996, marketing fees paid by the Company to Torch amounted to $3,000, $12,000,
and $114,000, respectively.
Torch began operating the Gas Plant in December 1993 pursuant to an
operating agreement with the Company and other interest owners in the Gas Plant.
The amount paid to Torch in connection with such operations during the seven
months ended June 30, 1994 and fiscal 1995 and 1996, were $38,000, $71,000 and
$83,000, respectively.
Torch operates certain oil and gas interests owned by the Company. The
Company is charged, on the same basis as other third parties, for all customary
expenses and cost reimbursements associated with these activities. Operator's
overhead charged for these activities for the years ended June 30, 1994, 1995
and 1996 was $45,000, $164,000 and $367,000, respectively.
Costs of the evaluation of potential property acquisitions and due
diligence conducted in conjunction with acquisitions are incurred by Torch at
the Company's request. The Company was charged $193,000 and $74,000 for such
costs in 1995 and 1996, respectively.
Certain officers and directors of the Company are also officers or
employees of Torch. On September 30, 1996, Torch Acquisition Company ("TAC"),
a company formed by executive management of Torch, acquired all of the
outstanding shares of capital stock of Torch from United Investors Management
Company ("United"), a subsidiary of Torchmark Corporation. J.P. Bryan,
Chairman of the Board of the
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Company, is also Chairman of the Board of TAC and owns options to purchase
approximately 24% of the outstanding shares of common stock of TAC on a fully
diluted basis for a nominal price. Roland E. Sledge and Michael B. Smith, who
are officers of Torch and the Company, own 5.5% and 4.5% of the common stock of
Torch on a fully diluted basis, and Charles C. Green III, Executive Vice
President and Chief Financial Officer, holds options to purchase 2.1% of the
common stock of Torch on a fully diluted basis.
CERTAIN ACQUISITIONS
A joint venture 90% owned by the Company (the "Company Venture") acquired
7.6% and 23.3% interests in the Snyder Plant and the Diamond M-Sharon Ridge Gas
Plant, respectively, in July 1993. The interests were acquired for $8.5 million.
In a simultaneous transaction, a joint venture 90% owned by Torch (the "Torch
Venture") acquired 4.1% and 12.5% interests in the Snyder Plant and Diamond
M-Sharon Ridge Gas Plant, respectively, for $4.6 million. The other partner in
the Company Venture is not affiliated with the Company or Torch.
In December 1993, Torch sold its interests in the Torch Venture to AGRI for
a promissory note in the amount of $4.6 million, which bore interest at 7.0% per
annum. In December 1993, the Company acquired AGRI by merger. In March 1994, the
Company repaid the $4.6 million note to Torch with borrowings under an existing
credit facility.
Under the terms of the Administrative Services Agreement in effect at that
time, Torch became entitled to consideration equal to 2.5% of the consideration
paid by the Company to the shareholders of AGRI in such acquisition. In lieu of
this fee, the Company issued Torch a warrant to purchase 187,500 shares of
Common Stock for $6.40 per share. The warrant is exercisable at any time prior
to December 31, 1998. In connection with the sale of the capital stock of Torch
to TAC, Torch transferred the warrant to United. See "Principal and Selling
Stockholders."
Prior to its acquisition by the Company, AGRI was managed by Torch. During
the fiscal 1994, AGRI paid Torch management fees of $300,000.
In connection with the merger of AGRI into the Company, AGRI issued
650,000, 150,000, 150,000 and 50,000 shares of its common stock to Torch, J. P.
Bryan, Michael D. Watford and an employee of Torch, respectively. In connection
with the Company's acquisition of AGRI, the shares owned by Torch, Mr. Bryan,
Mr. Watford and the employee were converted into 54,151, 12,497 and 12,497
shares of Common Stock, and $25,000, respectively.
PURCHASES FROM NUEVO
During the year ended June 30, 1994, the Company acquired interests in
certain exploratory prospects from Nuevo for an aggregate cost of $143,000. In
February 1997, the Company acquired a 25.0% working interest in the Mud Lake
field from Nuevo for a net purchase price of $2.0 million.
MINING VENTURES
During fiscal year 1992, the Company acquired an average 24.4% interest in
three mining ventures (the "Mining Ventures") from an unaffiliated person for
$128,500. At the time of such acquisition, Mr. Bryan, his brother and Robert L.
Gerry, a director and executive officer of Nuevo (the "Affiliated Group"),
owned an average 21.5% interest in the Mining Ventures. The Company's interest
in the Mining Ventures increased as it paid costs of the venture. As of June 30,
1996, the Company had invested $324,000 in the Mining Ventures.
3DX
3DX Technologies, Inc. ("3DX") is a participant in the 3-D seismic
projects in the Fausse Pointe and Cove fields. Nuevo owns a 27% interest in a
partnership that owns a 4.9% interest in 3DX.
HAMPTON ACQUISITION
In connection with the purchase of 7,500 shares of Hampton Preferred Stock
from R. Chaney & Partners - 1993, L.P. (the "Chaney Partnership"), the Company
agreed to indemnify and hold harmless the Chaney Partnership and its affiliates
from any expenses to which they may become subject, to the extent arising out of
the Company's purchase of such shares of Hampton Preferred Stock. One of the
limited
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partners in the Chaney Partnership is Nuevo. In addition, the Company agreed to
reimburse the Chaney Partnership for legal fees (not to exceed $2,000) incurred
by it in connection with the sale of such shares of Hampton Preferred Stock.
ODYSSEY MERGER
In connection with the acquisition of Odyssey, the former owners of Odyssey
assigned approximately 5.0% of the consideration to the then current management
of Odyssey, all of whom became employees of the Company following the
acquisition. Pursuant to this agreement, a corporation owned by C. Barton Groves
received 20,625 shares of Common Stock and $123,750 and Kenneth W. Welch
received 10,312 shares of Common Stock and $61,875. The former owners of Odyssey
also formed a new partnership ("New Odyssey") and transferred to it interests
in certain prospects formerly owned by Odyssey. Messrs. Groves and Welch
received a 2.2% and 1.1% interest, respectively, in New Odyssey. Certain
subsidiaries of Torchmark which own Common Stock have agreed with Odyssey's
former owners that if the Torchmark subsidiaries sell Common Stock in certain
transactions, such subsidiaries will arrange for the sale of the Common Stock
held by the former owners of Odyssey on the same basis as the Torchmark
subsidiaries' shares are sold. Additionally, former owners of Odyssey have been
granted registration rights with respect to such shares.
PENDING ACQUISITION
The Sellers were formed by Torch between 1987 and 1994. The investors in
the Sellers are insurance companies, pension plans, charitable foundations and
other institutional investors. Although the Sellers were structured differently
to satisfy the regulatory constraints and investment objectives of each
investor, such programs generally provided that Torch would invest 1% of all
capital and would receive 2% of revenues until "payout" (generally defined as
the return of the investors' capital contributions). After payout, Torch would
receive a larger interest, generally approximately 11%. In addition, Torch's
interest in the distributions made by the Sellers would increase if the
investors received a return of their capital plus a specified rate of return.
Some of the agreements forming the Sellers also required Torch to invest 10% of
the amount invested by the investors. As a result of the Pending Acquisition,
substantially all of the Sellers will achieve payout. In exchange for its
interests in the Sellers, Torch will receive an estimated $18.0 million in
connection with the Pending Acquisition.
Prior to September 30, 1996, Torch was an indirect wholly owned subsidiary
of Torchmark. Torchmark continues to own a $25.5 million subordinated note
issued by Torch and warrants to purchase approximately 10% of the common stock
of Torch on a fully diluted basis. Torchmark also has a representative on
Torch's board of directors and certain other ongoing relationships with Torch.
Wholly owned subsidiaries of Torchmark invested on the same basis as other
investors in certain of the Sellers. In exchange for their interests in these
Sellers, these wholly owned subsidiaries of Torchmark will receive approximately
$12.7 million in connection with the Pending Acquisitions.
Torch will receive 150,000 shares of Common Stock and warrants to purchase
100,000 shares of Common Stock at a per share exercise price of 120% above the
price to the public in the Common Stock Offering as a fee for advising
Bellwether in connection with the Pending Acquisition. The warrants expire five
years following the closing of the Offerings.
Torchmark owns the working interests in certain of the Acquired Properties
which are net profits interests. Production from these properties is eligible
for tax credits under Section 29 of the Internal Revenue Code. Following the
Pending Acquisition, Torchmark will be obligated to pay to Bellwether $0.50 per
each $1.00 of tax credits received by Torchmark with respect to these
properties. During fiscal 1995 and 1996, total payments by Torchmark with
respect to these properties were $439,000 and $1.1 million, respectively.
In 1994, pursuant to the organizational agreements of the Sellers, certain
investors in the Sellers instituted an audit relating principally to fees and
other amounts previously paid to Torch for oil and gas marketing activities and
sales of non-strategic properties. Based on its own internal audit, Torch
determined that it had not fully complied with certain provisions of the
organizational agreements relating to oil and gas marketing activities. In July
1996, Torch and Torchmark offered to settle the matters addressed in the
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<PAGE>
audits, including the marketing issues, but final settlement was deferred until
the proposed sale of the Sellers' properties could be pursued further. In
connection with the acquisition of Torch by certain of its executive officers in
September 1996, Torchmark agreed to pay all amounts incurred in settlement of
the audit issues. In connection with the Pending Acquisition, Torchmark and
Torch will settle all such matters with the investors in the Sellers on the
terms proposed in July 1996. Pursuant to its agreement with Torch, Torchmark
will make a cash payment of $9.7 million on behalf of Torch to such investors in
order to settle such matters. Torchmark, Torch, such investors and their agents
and affiliates will release each other from any liability arising out of or
related to, among other things, such matters. In connection with such
settlement, Bellwether will pay Torchmark $1.5 million and (as successor to the
Sellers as a result of the Pending Acquisition) also will be released by the
investors in the Sellers from any liabilities relating to such matters. Torch
has advised Bellwether that an investor in one of the Sellers advised Torch that
the SEC's staff requested information (including the audit) regarding the
investor's investments with Torch, and that the investor supplied such
information. Torch has further advised Bellwether that the SEC's staff has not
contacted Torch regarding such matters.
NEGOTIATION OF THE PENDING ACQUISITION; CONFLICTS OF INTEREST
Bellwether is entering into the Pending Acquisition because it believes
that the Pending Acquisition provides the opportunity to significantly increase
reserves and cash flow at an attractive price while providing opportunities for
future reserve growth through exploitation and exploration activities. Torch and
Bellwether have a common director and certain common officers. Certain members
of the Board of Directors and management of Bellwether were therefore subject to
conflicts of interest in connection with negotiating and approving the terms of
the Pending Acquisition and the fees to be received by Torch in connection with
the Pending Acquisition. In addition, under the Administrative Services
Agreement, Bellwether relies on Torch to perform title, operational and other
due diligence reviews of acquisition prospects, and Bellwether does not have
personnel to independently perform all of these functions in connection with the
acquisition of the Acquired Properties. Bellwether therefore relied on Torch to
perform certain of these functions in connection with the Pending Acquisition.
In order to resolve the conflicts of interest, Bellwether formed the
Special Committee of its Board of Directors, which is composed of directors who
are not affiliated with Torch, to consider and approve the terms of the Pending
Acquisition and the fees paid to Torch. The Special Committee retained legal
counsel to advise it in connection with its duties, and retained Ryder Scott to
audit the reserve estimates prepared by Torch on behalf of the Company in
connection with the determination of the purchase price for the Acquired
Companies. In addition, the Special Committee retained Principal to advise it in
connection with the terms of the acquisition of the Acquired Properties.
Principal is also an underwriter in the Common Stock Offering. Principal issued
its opinion to the Special Committee as to the fairness of the Pending
Acquisition from a financial point of view. The Special Committee approved the
terms of the agreement for the Pending Acquisition and the terms and amount of
all consideration paid to Torch in connection with the Pending Acquisition. See
"Risk Factors -- Conflicts of Interest."
In addition, the Sellers retained independent legal counsel and an
independent investment advisor to review the terms of the Pending Acquisition.
The Sellers also formed a committee ("Steering Committee") composed of
employees of five of the institutional investors in the Sellers to coordinate
the negotiation and execution of the agreements for the Pending Acquisition.
The terms of the Pending Acquisition were negotiated among Bellwether
(including the Special Committee of its Board of Directors), the Sellers
(primarily through the Steering Committee), and Torch. Although Bellwether
believes that the terms of the Pending Acquisition represent the results of
arm's length bargaining, no assurances can be given that the terms of the
Pending Acquisition are the same as those that would have been negotiated among
unrelated parties.
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PRINCIPAL AND SELLING STOCKHOLDERS
MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of February 28, 1997, the name, address,
and number of shares of Common Stock owned beneficially by (i) all persons known
to the Company to be the beneficial owners of more than five percent of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the executive officers of the Company named in the Summary Compensation
Table, and (iv) all executive officers and directors of the Company as a group.
The information set forth in the following table is based on public filings made
with the SEC as of January 31, 1997 and certain information supplied to the
Company by the persons listed below. Unless otherwise indicated, all shares are
owned directly and the owner has sole voting and investment power with respect
thereto.
<TABLE>
<CAPTION>
SHARES OWNED SHARES OWNED
NAME AND BEFORE OFFERINGS AFTER OFFERINGS
ADDRESS OF ---------------------- SHARES SOLD IN COMMON ----------------------
BENEFICIAL OWNER NUMBER % STOCK OFFERING NUMBER %
<S> <C> <C> <C> <C> <C>
Allstate Insurance Company........... 1,340,584 14.6 -- 1,340,584 9.8
3075 Sanders Road, Suite G5B
Northbrook, Illinois 60062
Torchmark Corporation................ 750,196(a) 8.2 285,000(b) 402,696 2.9
United Investors Management Company
2001 Third Avenue South
Birmingham, Alabama 35233
Rho Management Partners L. P. c/o Rho
Management Company, Inc............ 729,832(c) 8.0 -- 729,832 5.3
767 Fifth Avenue
New York, New York 10153
Weiss, Peck & Greer.................. 515,200 5.6 -- 515,200 3.8
1 New York Plaza
New York, New York 10004
PPM America Inc...................... 506,568 5.5 190,000(b) 316,568 2.3
No. 1 Waterhouse Square
Holborn Bars
London EC1N2ST U.K.
J.P. Bryan........................... 147,372(d) 1.6 -- 147,372 1.1
J. Darby Sere........................ 317,950(e) 3.4 -- 317,950 2.3
Charles C. Green III................. 150,000(f) 1.6 -- 150,000 1.1
A.K. McLanahan....................... 17,750 * -- 17,750 *
Vincent H. Buckley................... 13,000(g) * -- 13,000 *
Dr. Jack Birks....................... 13,000(g) * -- 13,000 *
Michael D. Watford................... 66,497(h) * -- 66,497 *
C. Barton Groves..................... 191,625(i) 2.1 -- 191,625 1.4
Kenneth W. Welch..................... 100,312(j) 1.1 -- 100,312 *
Habib Kairouz........................ 10,000(k) * -- 10,000 *
All officers and directors
as a group (12 persons)............ 1,047,506(l) 10.4 -- 1,047,506 7.1
</TABLE>
- -----------------------------
* Under 1%
(a) All of the 750,196 shares indicated as beneficially owned by Torchmark are
owned by United, a wholly owned subsidiary of Torchmark. Of those shares,
187,500 shares are issuable pursuant to a warrant owned by United. In
connection with the Common Stock Offering, Bellwether and Torchmark have
agreed that Torchmark will use 62,500 shares issuable upon exercise of the
warrant to pay a portion of the exercise price of the warrant, such shares
to be valued at the price to the public in the Common Stock Offering.
Accordingly, the maximum number of shares issuable pursuant to the warrant
in connection with the Common Stock Offering is 125,000.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
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(b) Assumes the Underwriters' over-allotment options are not exercised. If the
over-allotment options are exercised in full, Torchmark and PPM America
Inc. will sell an additional 402,696 and 316,568, respectively, reducing
their ownership to zero.
(c) Rho Management Partners L. P. ("Rho") as beneficial owner of shares
registered in the name of Alpine Investment Partners, pursuant to an
investment advisory agreement between Rho and such entity, which agreement
confers sole voting and investment control over such shares in Rho. Joshua
Ruch, chief executive officer and controlling stockholder of the general
partner of Rho, shares voting and investment control with Rho over such
shares, and may therefore be considered a beneficial owner of such shares.
Amount shown includes 1,242 shares beneficially owned by Mr. Ruch held in
the name of XBF Inc.
(d) Includes 134,875 shares which Mr. Bryan has the right to acquire, within
60 days, pursuant to options. Excludes 6,250 shares owned by Mr. Bryan's
wife as to which he has no voting or dispositive power.
(e) Includes 291,560 shares that Mr. Sere has the right to acquire within 60
days pursuant to vested stock options. Does not include 6,000 shares owned
by Mr. Sere's wife as to which he has no voting or dispositive power.
(f) Includes 150,000 shares that Mr. Green has the right to acquire within 60
days pursuant to options.
(g) Includes 13,000 shares which the director has the right to acquire within
60 days pursuant to options.
(h) Includes 54,000 shares that Mr. Watford has the right to acquire within 60
days pursuant to options.
(i) Includes 180,000 shares that Mr. Groves has the right to acquire within 60
days pursuant to options.
(j) Includes 90,000 shares that Mr. Welch has the right to acquire within 60
days pursuant to options.
(k) Includes 10,000 shares which Mr. Kairouz has the right to acquire within
60 days pursuant to options. Mr. Kairouz is a Managing Director of Rho
Management Company, Inc., an affiliate of Rho. Mr. Kairouz does not have
voting or investment control over shares of the Company beneficially owned
by Rho.
(l) Includes the following: the shares beneficially owned by Messrs. Bryan as
described in note (d); shares which officers and directors of the Company
have the right to acquire pursuant to options, as described in note (e)
(f), (g), (h), (i), (j) and (k) and 10,000 shares and 5,000 shares that
Michael B. Smith and Roland E. Sledge, respectively, have the right to
acquire within 60 days pursuant to options.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized by its Certificate of Incorporation to issue up
to 15,000,000 shares of Common Stock, $0.01 par value. As of February 28, 1997,
9,157,979 shares of Common Stock were issued and outstanding, 131,325, 825,000
and 500,000 shares of Common Stock were reserved for issuance under the 1988
Plan, the 1994 Plan and the 1996 Plan, pursuant to which options for the
purchase of 131,325, 707,500 and 276,500 shares of Common Stock were
outstanding, respectively. Also reserved for issuance were 187,500 shares of
Common Stock issuable upon exercise of a warrant held by United, a subsidiary of
Torchmark Corporation, and 60,000 shares of Common Stock issuable upon exercise
of warrants issued to Howard, Weil, Labouisse, Friedrichs Incorporated and
Principal Financial Securities, Inc.
Holders of Common Stock are entitled to one vote per share in the election
of directors and on all other matters submitted to a vote of stockholders. Such
holders do not have the right to cumulate their votes in the election of
directors. Holders of Common Stock have no redemption or conversion rights and
no preemptive or other rights to subscribe for securities of the Company. In the
event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share equally and ratably in all of the assets
remaining, if any, after satisfaction of all debts and liabilities of the
Company, and of the preferential rights of any series of preferred stock then
outstanding. The outstanding shares of Common Stock are validly issued, fully
paid and nonassessable. Holders of Common Stock are entitled to receive
dividends
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when, as and if declared by the Board of Directors out of funds legally
available therefor. American Stock Transfer & Trust Company is transfer agent
and registrar for the Common Stock.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock,
$0.01 par value per share. The Board of directors has the authority to divide
the preferred stock into one or more series and to fix and determine the
relative rights and preferences of the shares of each such series, including
dividend rates, terms of redemption, sinking funds, the amount payable in the
event of voluntary liquidation, dissolution or winding up of the affairs of the
Company, conversions rights and voting powers. As of March 31, 1997 no shares of
preferred stock were outstanding.
DESCRIPTION OF INDEBTEDNESS
NEW CREDIT FACILITY
The Company has received a commitment from a bank group led by Morgan
Guaranty Trust Company of New York to extend to the Company a New Credit
Facility which matures on March 31, 2002 in order to fund part of the purchase
price of the Acquired Properties, to repay the existing indebtedness and for
general corporate purposes. The New Credit Facility will have a combined total
commitment of $90.0 million following the Offerings until June 30, 1997, when
the total commitment will be automatically reduced to the Borrowing Base (as
hereinafter defined) as then in effect (the "Reference Borrowing Base"), and
will thereafter be automatically reduced quarterly by an amount equal to 1/12th
of the Reference Borrowing Base, commencing March 31, 1999. Amounts outstanding
under the New Credit Facility will bear interest at a rate equal to LIBOR or a
base rate plus a number of basis points which increases as the total outstanding
senior indebtedness of the Company as a percent of the Borrowing Base increases.
The maximum borrowings that may be outstanding under the New Credit
Facility may not exceed a borrowing base ("Borrowing Base") which will be
equal to the present value of the Company's U.S. oil and gas reserves based on
assumptions regarding prices, production and costs approved by the bank group.
Sales of Borrowing Base assets in excess of $5.0 million will trigger a
requirement to re-calculate the Borrowing Base.
Borrowings under the New Credit Facility will be unsecured and will be
guaranteed by certain of the Company's subsidiaries. The New Credit Facility
will have customary covenants including, but not limited to, covenants with
respect to the following matters: (i) information, (ii) maintenance of property
and insurance, (iii) conduct of business and maintenance of existence, (iv)
compliance with laws, (v) limitation on liens, (vi) limitation on
consolidations, mergers and sales of assets, (vii) limitation on debt (including
subsidiary debt), (viii) use of proceeds, (ix) restrictions on investments, (x)
limitation on restricted payments and (xi) limitation on transactions with
affiliates. The Company will also be required to maintain certain financial
ratios, including, without limitation, a minimum ratio of EBITDA to the sum of
cash interest plus deferred dividends and a minimum tangible net worth.
NOTES
The Company is concurrently offering $100 million in aggregate principal
amount of the Notes by means of a separate prospectus. The sale of the Common
Stock pursuant to the Common Stock Offering is subject to, among other things,
the sale of the Notes. After giving effect to the consummation of the
Transactions, the Company will have total outstanding indebtedness of
approximately $135.9 million as of December 31, 1996. See "Use of Proceeds."
The following is a summary of the terms of the Notes, which were issued
pursuant to an Indenture (the "Indenture"), the form of which is filed as an
exhibit to the registration statement of which this Prospectus is a part. The
Notes will be general unsecured senior subordinated obligations of the Company
and will be guaranteed on a unsecured senior subordinated basis by Odyssey
Petroleum Company, a wholly owned subsidiary of the Company. The $100 million
aggregate principal amount of Notes will bear interest from the date of issuance
at the rate of 10 7/8% per annum, payable semi-annually in arrears. The Notes
will mature
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on April 1, 2007. The Notes will not require any mandatory redemption or sinking
fund payment prior to maturity.
The Notes are redeemable at the option of the Company, in whole or in part,
at any time on or after, 2002 at redemption prices specified in the Indenture,
together with accrued and unpaid interest, if any, to the date of redemption.
Upon the occurrence of certain events constituting a "Change of Control" (as
defined in the Indenture), holders of the Notes will have the right to require
the Company to purchase each such holder's Notes, in whole or in part, at a
purchase price equal to 101% of the principal amount thereof, together with
accrued and unpaid interest to the date of purchase. Furthermore, under certain
circumstances, the Company may become obligated to offer to purchase all or a
portion of the Notes at a price equal to 100% of the principal amount thereof,
together with accrued and unpaid interest, if any, to the date of purchase with
the net proceeds of certain Asset Sales (as defined).
The Indenture will contain certain covenants, including, without
limitation, covenants with respect to the following matters: (i) limitation on
indebtedness; (ii) limitation on restricted payments; (iii) limitation on
transactions with affiliates; (iv) limitation on liens; (v) limitation on
guarantees of indebtedness by subsidiaries; (vi) limitation on dividends and
other payment restrictions affecting restricted subsidiaries; (vii) limitation
on issuances and sales of restricted subsidiary stock; (viii) limitation on the
disposition of proceeds of asset sales; and (ix) restrictions on mergers,
consolidations or sales of assets.
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UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
(the "Underwriting Agreement"), a syndicate of underwriters named below (the
"Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation,
J.P. Morgan Securities Inc. and Principal Financial Securities, Inc., are acting
as representatives (the "Representatives"), have severally agreed to purchase
4,400,000 shares of Common Stock from the Company and 475,000 shares of Common
Stock from a Selling Stockholder. The number of shares of Common Stock that each
Underwriter has severally agreed to purchase is set forth opposite its name
below:
NUMBER
UNDERWRITERS OF SHARES
- ---------------------------------------- ---------
Donaldson, Lufkin & Jenrette Securities
Corporation........................... 1,586,000
J.P. Morgan Securities Inc.............. 1,387,750
Principal Financial Securities, Inc..... 991,250
Bear Stearns & Co. Inc.................. 70,000
A.G. Edwards & Sons, Inc................ 70,000
Goldman, Sachs & Co..................... 70,000
Howard, Weil, Labouisse, Friedrichs
Incorporated.......................... 70,000
Merrill Lynch, Pierce, Fenner & Smith
Incorporated.......................... 70,000
Oppenheimer & Co., Inc.................. 70,000
Salomon Brothers Inc.................... 70,000
Arneson, Kercheville & Associates,
Inc................................... 35,000
EVEREN Securities, Inc.................. 35,000
Gaines, Berland Inc..................... 35,000
Hoak Breedlove Wesneski & Co............ 35,000
Jefferies & Company, Inc................ 35,000
Kenny Securities Corp................... 35,000
Morgan Keegan & Company, Inc............ 35,000
Nesbitt Burns Securities, Inc........... 35,000
San Jacinto Securities.................. 35,000
Sanders Morris Mundy Inc................ 35,000
Southcoast Capital Corporation.......... 35,000
Stephens Inc............................ 35,000
---------
Total.............................. 4,875,000
=========
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the shares of Common Stock are
subject to certain conditions. If any of the shares of Common Stock are
purchased by the Underwriters pursuant to the Underwriting Agreement, all such
shares of Common Stock (other than the shares of Common Stock covered by the
over-allotment option described below) must be so purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the shares of Common Stock directly to the public initially at
the price to the public set forth on the cover page of this Prospectus and to
certain dealers (who may include the Underwriters) at such price less a
concession not to exceed $0.27 per share. The Underwriters may allow, and such
dealers may re-allow, a discount not to exceed $0.10 per share to any other
Underwriter and certain other dealers.
The Company and the Selling Stockholders have granted to the Underwriters
options to purchase up to 11,986 and 719,264 additional shares of Common Stock,
respectively, at the public offering price set forth on the cover page hereof
less underwriting discounts and commissions, solely to cover over-allotments.
Such option may be exercised at any time until 30 days after the date of this
Prospectus. To the extent that the Underwriters exercise such options, each of
the Underwriters will be committed, subject to certain
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conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment as indicated in the preceding table.
The Company, each of its directors and executive officers and the Selling
Stockholders, subject to certain exceptions, have agreed not to offer, sell or
otherwise dispose of any shares of Common Stock, or any shares exercisable for
or convertible into shares of Common Stock, prior to the expiration of 90 days
from the date of this Prospectus, without the prior written consent of
Donaldson, Lufkin & Jenrette Securities Corporation, acting on behalf of the
Underwriters.
The Company and the Selling Stockholders 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.
J.P. Morgan Securities Inc. ("JPMSI") and certain of its affiliates have
provided and may in the future provide investment banking and commercial banking
services to the Company. Morgan Guaranty Trust Company of New York ("Morgan"),
an affiliate of JPMSI, is the agent bank and lender under the New Credit
Facililty. Morgan, together with another banking firm, has committed to provide
the Company with financing in the event the Offerings are not completed to fund
the Pending Acquisition and will receive customary fees in connection with such
commitment.
See "Description of Indebtedness -- New Credit Facility." Principal
Financial Securities, Inc. acted as a financial advisor to the Special Committee
in connection with the Pending Acquisition and will receive customary fees in
connection therewith. See "Risk Factors -- Conflicts of Interest."
In connection with the Common Stock Offering, the Underwriters may engage
in transactions that stabilize, maintain or otherwise affect the price of the
Common Stock. Specifically, the Underwriters may overallot the Common Stock
Offering, creating a syndicate short position. Underwriters may bid for and
purchase shares of Common Stock in the open market to cover syndicate short
positions. In addition, the Underwriters may bid for and purchase shares of
Common Stock in the open market to stabilize the price of the Common Stock.
These activities may stabilize or maintain the market price of the Common Stock
above independent market levels. The Underwriters are not required to engage in
these activities and may end these activities at any time.
The Underwriters and dealers may engage in passive market making
transactions in the Common Stock in accordance with Rule 103 of Regulation M
promulgated by the SEC. In general, a passive market maker may not bid for or
purchase the Common Stock at a price that exceeds the highest independent bid.
In addition, the net daily purchases made by any passive market maker generally
may not exceed 30% of its average daily trading volume in the Common Stock
during a specified two month prior period, or 200 shares, whichever is greater.
A passive market maker must identify passive market making bids on the Nasdaq
electronic inter-dealer reporting system. Passive market making may stabilize or
maintain the market price of the Common Stock above independent market levels.
Underwriters and dealers are not required to engage in passive market making and
may end passive market making activities at any time.
LEGAL MATTERS
The validity of the Common Stock and the Notes will be passed upon by
Butler & Binion, L.L.P., Houston, Texas. Certain legal matters with respect to
such securities will be passed upon for the Underwriters by Baker & Botts,
L.L.P., Dallas, Texas.
EXPERTS
The financial statements of the Company included in this Prospectus have
been audited by Deloitte & Touche LLP, independent auditors as stated in their
reports appearing herein, and are included in reliance upon the reports of such
firm given their authority as experts in accounting and auditing. The statements
of assets acquired (other than oil and gas properties) and liabilities as of
December 31, 1995 and 1996 and the related statements of revenues and direct
operating expenses of the Acquired Properties for each of the years in the
three-year period ended December 31, 1996, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
64
<PAGE>
The information appearing in this Prospectus regarding historical
quantities of reserves of oil and gas and the future net cash flows and the
present values thereof of the Company as of June 30, 1996 is based on estimates
of such reserves and present values prepared by Williamson Petroleum Consultants
Inc., independent petroleum engineers, and are included herein in reliance upon
the authority of said firm as experts in estimating such reserves and cash
flows. The report of Williamson is included herein as Exhibit A. The information
appearing in this Prospectus regarding quantities of reserves of oil and gas and
the future net cash flows and present value thereof attributable to the Acquired
Properties as of June 30, 1996 were prepared by Bellwether and audited by Ryder
Scott. The audit reports of Ryder Scott is attached as Exhibit B to this
Prospectus and is included herein in reliance upon the authority of such firm as
experts in estimating reserves and cash flows.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Exchange
Act, and, in accordance therewith, files reports and other information with the
SEC. Reports, proxy and information statements and other information filed by
the Company with the SEC pursuant to the informational requirements of the
Exchange Act may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549-1004,
and at the following Regional Offices of the SEC: Chicago Regional Office, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and New York
Regional Office, 7 World Trade Center, New York, New York 10048. Copies of such
material may also be obtained from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549-1004 at prescribed rates. The
Registration Statement was filed with the SEC electronically. The SEC maintains
a site on the World Wide Web that contains documents filed with the SEC
electronically. The address of such site is http://www.sec.gov, and the
Registration Statement may be inspected at such site. The Common Stock is traded
on the Nasdaq National Market. The Company's registration statements, reports,
proxy and information statements, and other information may also be inspected at
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
This Prospectus constitutes a part of a Registration Statement on Form S-1
filed by the Company with the SEC under the Securities Act. This Prospectus
omits certain of the information contained in the Registration Statement, and
reference is hereby made to the Registration Statement for further information
with respect to the Company and the securities offered hereby. Any statements
contained herein concerning the provisions of any document filed as an exhibit
to the Registration Statement or otherwise filed with the SEC are not
necessarily complete and in each instance reference is made to the copy of such
document so filed. Each such statement is qualified in its entirety by such
reference.
65
<PAGE>
GLOSSARY
The following definitions shall apply to the technical terms used in this
Prospectus.
"Bbls" means barrels of oil or other liquids, approximately 42 U.S.
gallons.
"Bbls/d" means barrels per day.
"Bcf" means billion cubic feet.
"BOE" means barrel of oil equivalent, comparing an Mcf of gas to a Bbl of
oil at a rate of 6 to 1.
"BOE/d" means barrel of oil equivalent per day.
"Btu" means British thermal unit. A Btu is the heat required to raise the
temperature of a one-pound mass of water from 59.5 to 60.5 degrees Fahrenheit
under specified conditions.
"Gross" means the number of wells or acres in which the Company has an
interest.
"MBbls" means thousands of barrels.
"Mcf" means thousands of cubic feet. Gas volumes are stated at the legal
pressure base of the state or area in which the reserves are located at 60
degrees Fahrenheit.
"Mcf/d" means thousand cubic feet per day.
"MBOE/d" means thousand Bbls of oil equivalent per day.
"MBOE" means thousand barrels of oil equivalent, determined using the
ratio of six Mcf of gas to one barrel of oil, condensate or natural gas liquids.
"MMBbls" means millions of barrels.
"MMBtu" means million British thermal units.
"MMcf" means millions of cubic feet.
"MMcf/d" means million cubic feet of gas per day.
"MMBOE" means millions of barrels of oil equivalent, determined using the
ratio of six Mcf of gas to one barrel of oil, condensate or natural gas liquids.
"Net" is determined by multiplying gross wells or acres by the Company's
working interest in such wells or acres.
"PV-10 Value" means the pre-tax, present value, discounted at 10%, of
future net cash flows from estimated proved reserves, calculated holding prices
and costs constant at amounts in effect on the date of the report (unless such
prices or costs are subject to change pursuant to contractual provisions).
66
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Bellwether Exploration Company
Historical Consolidated Financial Statements:
Independent Auditors' Report ...................................... F-2
Consolidated Balance Sheets as of June 30, 1995 and 1996 .......... F-3
Consolidated Statements of Operations for the Years Ended
June 30, 1994, 1995 and 1996 .................................... F-5
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended June 30, 1994, 1995, and 1996 ................ F-6
Consolidated Statements of Cash Flows for the Years Ended
June 30, 1994, 1995 and 1996 .................................... F-7
Notes to Consolidated Financial Statements ........................ F-8
Condensed Consolidated Balance Sheets as of June 30, 1996 and
December 31, 1996 (unaudited) ................................... F-23
Condensed Consolidated Statements of Operations for
the Six Months Ended December 31, 1995 (unaudited)
and December 31, 1996 (unaudited) ................................ F-24
Condensed Consolidated Statements of Changes in Stockholders'
Equity for the Six Months Ended December 31, 1996 (unaudited) .... F-25
Condensed Consolidated Statements of Cash Flows for
the Six Months Ended December 31, 1995 (unaudited)
and December 31, 1996 (unaudited) ................................ F-26
Notes to Condensed Consolidated Financial Statements .............. F-27
Acquired Properties -- Statements of Assets Acquired (Other than
Productive Oil and Gas Properties) and Liabilities and related
Statements of Revenues and Direct Operating Expenses:
Independent Auditors' Report ...................................... F-30
Statements of Assets Acquired (Other than Productive Oil and
Gas Properties) and Liabilities as of December 31, 1994, 1995
and 1996 ......................................................... F-31
Statements of Revenues and Direct Operating Expenses for
the Years Ended December 31, 1994, 1995 and 1996 ................. F-32
Notes to Statements of Assets Acquired (Other than Productive
Oil and Gas Properties) and Liabilities and related
Statements of Revenues and Direct Operating Expenses ............. F-33
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Bellwether Exploration Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Bellwether
Exploration Company and subsidiaries as of June 30, 1995 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in
all material respects, the financial position of Bellwether Exploration Company
and subsidiaries as of June 30, 1995 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
June 30, 1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 11, 1997
F-2
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, JUNE 30,
1995 1996
--------- ---------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents............ $ 1,088 $ 783
Accounts receivable and accrued
revenues............................. 5,322 5,990
Accounts receivable -- related
parties.............................. -- 1,417
Prepaid expenses..................... 217 314
--------- ---------
Total current assets............ 6,627 8,504
--------- ---------
Property, Plant and Equipment, at
cost:
Oil and gas properties (full cost
method) including $13,453 and
$15,125 of unproved properties
which are excluded from
amortization in 1996 and 1995,
respectively....................... 71,426 76,043
Gas gathering system and gas plant
facilities........................... 19,060 12,840
--------- ---------
90,486 88,883
Less accumulated depreciation,
depletion and amortization........... (23,291) (30,748)
--------- ---------
67,195 58,135
--------- ---------
Other Assets......................... 828 586
--------- ---------
$ 74,650 $ 67,225
========= =========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, JUNE 30,
1995 1996
--------- ---------
(IN THOUSANDS, EXCEPT
SHARES)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities........................ $ 1,774 $ 2,634
Accounts payable -- related
parties............................ 76 702
Current maturities of long-term
debt............................... 6,023 --
--------- ---------
Total current liabilities....... 7,873 3,336
--------- ---------
Long-term debt, excluding current
maturities......................... 18,525 13,048
Deferred income taxes................ 2,400 2,861
Other liabilities.................... 151 1,383
Minority interest in gas plant
ventures........................... 254 --
Contingencies........................ -- --
Stockholders' Equity:
Preferred stock, $0.01 par value,
1,000,000 shares authorized, none
issued
or outstanding..................... -- --
Common stock, $0.01 par value,
15,000,000 shares authorized,
9,045,479 and 9,075,479 shares
issued and outstanding at June 30,
1995 and 1996, respectively........ 90 91
Additional paid-in capital........... 41,472 41,639
Retained earnings.................... 3,885 4,867
--------- ---------
Total stockholders' equity...... 45,447 46,597
--------- ---------
$74,650 $67,225
========= =========
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
-------------------------------
1994 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Revenues:
Gas revenues....................... $ 2,620 $ 4,864 $ 9,856
Oil revenues....................... 1,086 3,643 5,810
Gas plant and gas gathering
revenues......................... 6,930 10,705 8,719
Interest and other income.......... 63 97 116
--------- --------- ---------
10,699 19,309 24,501
--------- --------- ---------
Costs And Expenses:
Production expenses................ 1,294 2,856 5,317
Gas plant and gas gathering
expenses......................... 4,013 6,078 5,185
General and administrative
expenses......................... 1,234 2,739 3,013
Depreciation, depletion and
amortization..................... 2,489 5,269 8,148
Interest expense................... 721 1,245 1,657
Other expenses..................... -- -- 153
--------- --------- ---------
9,751 18,187 23,473
--------- --------- ---------
Income before income taxes and minority
interest.............................. 948 1,122 1,028
Provision for income taxes.............. -- 9 46
Minority interest in gas plant
ventures.............................. 134 172 --
Net income......................... $ 814 $ 941 $ 982
========= ========= =========
Net income per share.................... $ 0.27 $ 0.12 $ 0.11
========= ========= =========
Weighted average common and common
equivalent shares
outstanding........................... 3,006 7,713 9,052
========= ========= =========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL TREASURY STOCK
----------------- ----------------- PAID-IN RETAINED ----------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993.................. 2,318 $ 1,156 -- -- $ 7,598 $2,130 29 $(115)
Shares issued in merger with Associated
Gas Resources,
Inc................................... 1,419 708 -- -- 6,066 -- -- --
To change par value per share........... -- (1,827) -- -- 1,827 -- -- --
Other................................... -- -- -- -- (1) -- (14) 16
Net earnings............................ -- -- -- -- -- 814 -- --
------ ------- ------ ------- ---------- -------- ------ ------
Balance, June 30, 1994.................. 3,737 37 -- -- 15,490 2,944 15 (99)
Shares issued in public stock
offering.............................. 3,400 34 -- -- 17,204 -- -- --
Cancellation of treasury stock.......... (15) -- -- -- -- -- (15) 99
Shares issued in merger with Odyssey
Partners, Ltd......................... 917 9 -- -- 3,944 -- -- --
Shares issued in merger with Hampton
Resources
Corporation........................... 1,006 10 -- -- 4,834 -- -- --
Net earnings............................ -- -- -- -- -- 941 -- --
------ ------- ------ ------- ---------- -------- ------ ------
Balance, June 30, 1995.................. 9,045 90 -- -- 41,472 3,885 -- --
Stock options exercised................. 30 1 -- -- 167 -- -- --
Net earnings............................ -- -- -- -- -- 982 -- --
------ ------- ------ ------- ---------- -------- ------ ------
Balance, June 30, 1996.................. 9,075 $ 91 -- -- $ 41,639 $4,867 -- $--
====== ======= ====== ======= ========== ======== ====== ======
</TABLE>
TOTAL
Balance, June 30, 1993.................. $10,769
Shares issued in merger with Associated
Gas Resources,
Inc................................... 6,774
To change par value per share........... --
Other................................... 15
Net earnings............................ 814
-------
Balance, June 30, 1994.................. 18,372
Shares issued in public stock
offering.............................. 17,238
Cancellation of treasury stock.......... 99
Shares issued in merger with Odyssey
Partners, Ltd......................... 3,953
Shares issued in merger with Hampton
Resources
Corporation........................... 4,844
Net earnings............................ 941
-------
Balance, June 30, 1995.................. 45,447
Stock options exercised................. 168
Net earnings............................ 982
-------
Balance, June 30, 1996.................. $46,597
=======
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
---------------------------------
1994 1995 1996
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net Income.............................. $ 814 $ 941 $ 982
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion and
amortization..................... 2,530 5,382 8,273
Minority interest in gas plant
ventures......................... 120 120 --
Deferred taxes..................... -- -- 183
Change in assets and liabilities, net of
acquisition effects:
Accounts receivable and accrued
revenues......................... (73) 1,548 (668)
Prepaid expenses................... -- 117 25
Accounts payable and accrued
expenses......................... (464) (2,047) 84
Due (to) from affiliates........... 750 (633) (791)
Other.............................. (555) (145) (603)
--------- ---------- ----------
Net Cash Flows Provided by Operating
Activities............................ 3,122 5,283 7,485
--------- ---------- ----------
Cash Flows From Investing Activities:
Additions to oil and gas properties..... (782) (27,039) (6,934)
Proceeds from sales of properties....... 36 265 644
Additions to gas plant facilities and
gas gathering system.................. (8,649) (225) (65)
Proceeds from gas contract assignment... -- -- 9,875
Other................................... (28) (290) 22
--------- ---------- ----------
Net Cash Flows (Used In) Provided by
Investing Activities.................. (9,423) (27,289) 3,542
--------- ---------- ----------
Cash Flows From Financing Activities:
Proceeds from borrowings................ 8,471 25,860 --
Net proceeds from issuance of common
stock................................. -- 17,238 168
Payments of long-term debt.............. (1,151) (21,456) (11,500)
Other................................... 14 -- --
--------- ---------- ----------
Net Cash Flows Provided By (Used In)
Financing Activities.................. 7,334 21,642 (11,332)
--------- ---------- ----------
Net increase (decrease) in cash and cash
equivalents........................... 1,033 (364) (305)
Cash and cash equivalents at beginning
of year............................... 419 1,452 1,088
--------- ---------- ----------
Cash and cash equivalents at end of
year.................................. $ 1,452 $ 1,088 $ 783
========= ========== ==========
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Bellwether Exploration Company ("the Company") was formed as a Delaware
corporation in 1994 to succeed to the business and properties of its predecessor
company pursuant to a merger, the primary purpose of which was to change the
predecessor company's state of incorporation from Colorado to Delaware. The
predecessor company was formed in 1980 from the consolidation of the business
and properties of related oil and gas limited partnerships. References to
Bellwether or the Company include the predecessor company, unless the context
requires otherwise.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Bellwether
Exploration Company and its wholly-owned subsidiaries. Snyder Gas Plant Venture
and NGL/Torch Gas Plant Venture and their 11.98% and 35.78% investments in the
Snyder and Diamond M-Sharon Ridge Gas Plants have been pro rata consolidated.
Minority interests have been deducted from results of operations and
stockholders' equity in the appropriate period. All significant intercompany
accounts and transactions have been eliminated in consolidation.
OIL AND GAS PROPERTIES
The Company utilizes the full cost method to account for its investment in
oil and gas properties. Under this method, all costs of acquisition, exploration
and development of oil and gas reserves (including such costs as leasehold
acquisition costs, geological expenditures, dry hole costs and tangible and
intangible development costs) are capitalized as incurred. Oil and gas
properties, the estimated future expenditures to develop proved reserves, and
estimated future abandonment, site remediation and dismantlement costs are
depleted and charged to operations using the unit-of-production method based on
the ratio of current production to proved oil and gas reserves as estimated by
independent engineering consultants. Costs directly associated with the
acquisition and evaluation of unproved properties are excluded from the
amortization computation until it is determined whether or not proved reserves
can be assigned to the properties or whether impairment has occurred. Depletion
expense per equivalent barrel of production was approximately $5.86 in 1996,
$5.52 in 1995 and $5.71 in 1994. Dispositions of oil and gas properties are
recorded as adjustments to capitalized costs, with no gain or loss recognized
unless such adjustments would significantly alter the relationship between
capitalized costs and proved reserves of oil and gas. To the extent that
capitalized costs of oil and gas properties, net of accumulated depreciation,
depletion and amortization, exceed the discounted future net revenues of proved
oil and gas reserves net of deferred taxes, such excess capitalized costs would
be charged to operations. No such write-down in book value was required in 1996,
1995 and 1994.
Any reference to oil and gas reserve information in the Notes to
Consolidated Financial Statements is unaudited.
GAS PLANTS AND GAS GATHERING SYSTEM
Gas plant facilities include the costs to acquire certain gas plants and to
secure rights-of-way. Capitalized costs associated with gas plants facilities
are amortized primarily over the estimated useful lives of the various
components of the facilities utilizing the straight-line method. The estimated
useful lives of such assets range from four to fifteen years.
The Company's gas gathering subsidiary and certain third parties were the
beneficiaries of an agreement whereby another party had an obligation to
purchase, until May 31, 1999, the gas produced by the Company and such third
parties from the West Monroe field in Union Parish, Louisiana at a price of
$4.50 per MMBTU. Bellwether owned a large majority of the gas produced and sold
pursuant to the
F-8
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Purchase Agreement. In March 1996, in exchange for Bellwether's agreement to
assume the purchase obligations under the gas purchase contract, Bellwether was
paid $9.9 million. As a result of this transaction, the Company has written off
the remaining book value of the gas gathering system and has recorded a
liability to cover the estimated future losses under the contract. Gas gathering
operations of the subsidiary and payments to third parties are charged to the
liability as incurred. From the proceeds, $9.5 million was paid on the Company's
credit facility.
GAS IMBALANCES
The Company uses the sales method of accounting for gas imbalances. Under
this method, gas sales are recorded when revenue checks are received or are
receivable on the accrual basis. The Company's imbalance was immaterial at June
30, 1996 and 1995.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of." SFAS 121 is effective
beginning July 1, 1996 and establishes guidelines for determining and measuring
asset impairment and the required timing of asset impairment evaluations.
Management has addressed the requirements of this statement and believes that it
will not have a significant effect on the financial condition and results of
operations of the Company based upon current economic conditions.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 123
In October 1995, the FASB issued Statement No. 123 ("SFAS 123"),
"Accounting for Stock-Based Compensation," which is effective for the Company
beginning July 1, 1996. SFAS 123 permits, but does not require, a
fair-value-based method of accounting for employee stock option plans which
results in compensation expense being recognized in the results of operations
when stock options are granted. The Company plans to continue to use the current
intrinsic-value-based method of accounting for such plans where no compensation
expense is recognized. However, as required by SFAS 123, the Company will
provide pro forma disclosure of net income and earnings per share in the notes
to the consolidated financial statements as if the fair-value-based method of
accounting had been applied.
NATURAL GAS AND CRUDE OIL HEDGING
The Company participated in certain crude oil and natural gas price swaps
to reduce its exposure to price fluctuations on sales during fiscal 1996.
Settlement of gains and losses on price swap contracts are realized monthly,
generally based upon the difference between the contract price and the average
closing New York Mercantile Exchange ("NYMEX") price and are reported as a
component of oil and gas revenues.
EARNINGS PER SHARE
Earnings per share calculations are based on the weighted average number of
common shares and common share equivalents and earnings attributable to common
stockholders. Common share equivalents include dilutive common stock options.
Such options do not have a material effect in the calculations of earnings per
share.
INCOME TAXES
Deferred taxes are accounted for under the asset and liability method of
accounting for income taxes. Under this method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the
F-9
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
financial statement carrying amounts and the tax basis of existing assets and
liabilities. The effect on deferred taxes of a change in tax rates is recognized
in income in the period the change occurs.
STATEMENTS OF CASH FLOWS
For cash flow presentation purposes, the Company considers all highly
liquid debt instruments purchased with an original maturity of three months or
less to be cash equivalents. Interest paid in cash for 1996, 1995 and 1994 was
$1.6 million, $1.2 million and $0.7 million, respectively. Income taxes paid in
cash for 1996 and 1995 were $162,000 and $9,000, respectively. During 1995 and
1994, a portion of the mergers with Associated Gas Resources Inc. ("AGRI"),
Odyssey Partners, Ltd. ("Odyssey") and Hampton Resources Corporation
("Hampton"), collectively the ("Mergers") was financed by assumption of debt
of $6.1 million for AGRI, $1.4 million for Odyssey and $4.1 million for Hampton.
Common stock with a value of $4.0 million and $4.8 million was issued as part of
the costs of the Odyssey and Hampton mergers in 1995, respectively. In 1994,
common stock with a value of $6.8 million was issued in the AGRI merger.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities as well as reserve information which affects
the depletion calculation and the computation of the full cost ceiling
limitation to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
RECLASSIFICATIONS
Certain reclassifications of prior period statements have been made to
conform with current reporting practices.
3. AGING OF UNEVALUATED PROPERTIES
Oil and natural gas properties not subject to amortization consist of the
cost of undeveloped leaseholds, exploratory and developmental wells in progress,
and secondary recovery projects before the assignment of proved reserves. These
costs are reviewed periodically by management for impairment, with the
impairment provision included in the cost of oil and natural gas properties
subject to amortization. Factors considered by management in its impairment
assessment include drilling results by the Company and other operators, the
terms of oil and gas leases not held by production, production responses to
secondary recovery activities and available funds for exploration and
development. The following table summarizes the cost of properties not subject
to amortization for the year the cost was incurred (000s):
JUNE 30,
--------------------
1995 1996
Year cost incurred:
Remainder
1994....................... $ 360 $ 360
1995....................... 14,765 12,139
1996....................... -- 954
--------- ---------
$ 15,125 $ 13,453
========= =========
The principal acquisitions of undeveloped acreage were received in the
Odyssey acquisition of the Fausse Pointe field and the Hampton acquisition which
included the Cove field and the Ft. Trinidad waterflood project. In 1996, $2.5
million was included in oil and gas properties subject to amortization from
drilling in the Cove and Fausse Pointe fields.
F-10
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS AND MERGERS
During the last three years, the Company has completed the following
mergers and acquisitions:
On February 28, 1995, the Company acquired Hampton in exchange for $17.0
million in cash and 1,006,458 shares of the Company's common stock. The Company
had paid previous to the merger $2.7 million to acquire common and preferred
stock of Hampton and incurred $1.4 million in expenses in arranging the merger.
The total cost of the Hampton acquisition was $25.9 million, consisting of $21.1
million in cash and $4.8 million in common stock. Hampton was an energy company
engaged in the exploration, acquisition and production of oil and natural gas,
primarily in the onshore Gulf Coast region and offshore in Texas state waters.
On August 26, 1994, the Company acquired Odyssey in exchange for $5.6
million in cash (funded from a common stock offering which closed on the same
date) and 916,665 shares of the Company's common stock, for a total cost of $9.6
million. Odyssey is an exploration company which assembles, exploits and
operates oil and gas properties using state-of-the-art 3-D seismic and
computer-aided exploration technology. Odyssey's primary areas of operation have
been the onshore Gulf Coast region and the Permian Basin area of West Texas and
Southeast New Mexico.
On December 31, 1993, AGRI merged into the Company in consideration of the
issuance of 1,419,726 shares of the Company's common stock and cash payments of
$232,000, for a total cost of $7.0 million. AGRI's principal assets are a gas
gathering system located in Union Parish, Louisiana (the "Gathering System");
a 4.12% interest in the Snyder Gas Plant; a 12.52% interest in the Diamond
M-Sharon Ridge Gas Plant (the "Gas Plants"); working interests in
approximately 828 wells in Union, Morehouse and Ouachita Parishes, Louisiana;
and small non-operated working interests in approximately 137 gas wells in
Oklahoma.
On July 30, 1993 the Company acquired certain interests in the Gas Plants,
both in Scurry County, Texas, for a purchase price of $8.5 million.
5. RELATED PARTY TRANSACTIONS
The Company is a party to a management agreement with Torch Energy Advisors
Incorporated ("Torch") which was renewed for one year on September 1, 1993 and
amended effective January 1, 1994. Torch is currently an affiliate of Torchmark
Corporation ("Torchmark"), an insurance and diversified financial services
holding company and the parent corporation of Torch. The management agreement
requires Torch to administer the business activities of the Company for a
monthly fee equal to the sum of one-twelfth of 2% of the average of the book
value of the Company's total assets, excluding cash, plus reimbursement of
certain costs incurred on behalf of the Company for the management of its oil
and gas properties, plus 2% of annual operating cash flows (as defined) during
the period in which the services are rendered. The initial term of this
agreement (as amended) is six years. Thereafter, the agreement renews
automatically for successive one-year periods until terminated by either party
in accordance with the applicable provisions of the agreement. For the years
ended June 30, 1996, 1995 and 1994, management fees paid to Torch amounted to
$1.5 million, $1.2 million and $0.6 million, respectively. Additionally, in the
ordinary course of business, the Company incurs intercompany balances resulting
from the payment of costs and expenses by affiliated entities on behalf of the
Company. Torch may charge interest on any unpaid balances not paid within 30
days, however, no such interest has been charged by Torch since the inception of
the agreement. In December 1993, Torch was issued a warrant to purchase 187,500
shares of the Company's common stock at a price of $6.40 per share for its
services in identifying and negotiating the AGRI merger.
A subsidiary of Torch markets oil and natural gas production from certain
oil and gas properties in which the Company owns an interest. The Company pays
fees of 2% of revenues for such marketing services. Such charges were $114,000,
$12,000 and $3,000 in 1996, 1995 and 1994, respectively.
F-11
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs of the evaluation of potential property acquisitions and due
diligence conducted in conjunction with acquisitions closed are incurred by
Torch at the Company's request. The Company was charged $74,000 and $193,000 for
these costs in 1996 and 1995, respectively.
Torch operates certain oil and gas interests owned by the Company. The
Company is charged, on the same basis as other third parties, for all customary
expenses and cost reimbursements associated with these activities. Operator's
overhead charged for these activities for the years ended June 30, 1996, 1995
and 1994 was $367,000, $164,000 and $45,000, respectively.
Torch became the operator of the Gas Plants on December 1, 1993. In fiscal
1996, 1995 and 1994, the fees paid by the Company to Torch were $83,000, $71,000
and $38,000, respectively.
6. STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
The Certificate of Incorporation of the Company authorizes the issuance of
up to 15,000,000 shares of common stock and 1,000,000 shares of preferred stock,
the terms, preferences, rights and restrictions of which are established by the
Board of Directors of the Company. Certain restrictions contained in the
Company's loan agreements limit the amount of dividends which may be declared.
There is no present plan to pay dividends on common stock as the Company intends
to reinvest its cash flows for continued growth of the Company.
On April 4, 1994, shareholders approved the merger of Bellwether
Exploration Company, a Delaware corporation, into the Company. The common stock
of the Company was converted into one-eighth share of the newly formed Company's
common stock.
During the first quarter of fiscal 1995, the Company consummated the sale
of 3,650,000 shares of common stock. The net proceeds to the Company were $17.3
million which were used for the Odyssey and Hampton mergers and general
corporate purposes. Of the shares sold, 3,400,000 were newly-issued by the
Company and 250,000 were sold by certain stockholders.
STOCK INCENTIVE PLANS
The Company has stock option plans that provide for granting of options for
the purchase of common stock to directors, officers and key employees of the
Company and Torch. These stock options may be granted subject to terms ranging
from 6 to 10 years at a price equal to the fair market value of the stock at the
date of grant. At June 30, 1996, options under the plans available for future
grants were 18,000.
F-12
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity in the stock option plans is set forth below:
NUMBER OPTION
OF SHARES PRICE RANGE
Balance at June 30, 1993............. 151,715 $3.00 - $5.25
Granted......................... 456,950 $4.88 - $7.00
Surrendered..................... (114,450) $4.50
Exercised....................... (22,890) $3.25
--------- -----------------
Balance at June 30, 1994............. 471,325 $3.00 - $7.00
Granted......................... 450,000 $5.56 - $5.94
--------- -----------------
Balance at June 30, 1995............. 921,325 $3.00 - $7.00
Granted......................... 27,000 $4.375 - $6.375
Surrendered..................... (10,000) $5.75
Exercised....................... (30,000) $5.625
--------- -----------------
Balance at June 30, 1996............. 908,325 $3.00 - $7.00
========= =================
Exercisable at June 30, 1996......... 830,917 $3.00 - $7.00
========= =================
7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company periodically uses derivative financial instruments to manage
oil and gas price risk. As of June 30, 1996, the Company was a party to an oil
swap price agreement for the month of July for 9,300 barrels of crude oil with a
price of $18.25 per barrel. This contract is accounted for as a hedge for
financial reporting purposes and, accordingly, is deferred until the related
sales are made.
8. LONG-TERM DEBT
Long-term debt is comprised of the following at June 30, 1996 and 1995 (in
thousands):
1995 1996
Bank credit facility................. $ 24,548 $ 13,048
Less current maturities.............. (6,023) --
--------- ---------
Long-term debt....................... $ 18,525 $ 13,048
========= =========
On February 28, 1995, the Company entered into a credit facility ("Credit
Facility") with a commercial bank providing for an initial borrowing base of
$29.8 million. The borrowing base is reviewed semiannually. Borrowings under the
Credit Facility are secured by the Company's interests in oil and gas properties
and in the Gathering System and the Gas Plant. The maturity date for the credit
facility as modified in the second quarter, fiscal 1996 is March 31, 2001. A
principal payment of $9.5 million made in the third quarter, fiscal 1996
extinguished all current maturities. The interest rate is either the agent
bank's prime rate or the adjusted Eurodollar Rate plus 1 1/4% at the Company's
option. A commitment fee of three-eighths of one percent (0.375%) per annum is
charged on the unused portion of the Credit Facility. The interest rate on the
Company's borrowings at June 30, 1996 was approximately 7.275%.
F-13
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Debt maturities by fiscal year are as follows (in thousands):
Year ending June 30, 1997............... $ --
Year ending June 30, 1998............... 1,929
Year ending June 30, 1999............... 4,766
Year ending June 30, 2000............... 4,170
Year ending June 30, 2001............... 2,183
---------
$ 13,048
=========
The Credit Facility has various covenants including certain required
financial measurements for a current ratio, consolidated tangible net worth and
a ratio of consolidated liabilities to consolidated tangible net worth. In
addition, the Company may not pay dividends of greater than 20% of its
consolidated after-tax net income in any fiscal year or make any other payment
on account of its capital stock or redeem or repurchase any of its capital
stock.
Currently, the Company is negotiating a syndicated credit facility in an
amount up to $50 million, with the original borrowing base of $27 million, to be
redetermined semi-annually. The interest rate, at the Company's option will
vary, based upon borrowing base usage, from LIBOR plus 7/8% to LIBOR plus
1 1/4%, or the greater of the prime rate or Fed Funds plus 1/2%. The debt
facility will have a termination date four years from closing.
9. GUARANTOR FINANCIAL STATEMENTS
The guarantor consolidating financial statements for the years ended June
30, 1995 and 1996 are as follows:
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BELLWETHER ODYSSEY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Total current assets................. $ 6,001 $ 626 $ -- $ 6,627
Net property, plant and equipment.... 56,273 10,922 -- 67,195
Total other assets................... 10,518 47 (9,737) 828
---------- ------- ------------ ------------
Total assets.................... $ 72,792 $11,595 $ (9,737) $ 74,650
========== ======= ============ ============
Total current liabilities............ $ 6,393 $ 1,480 $ -- $ 7,873
Long-term debt....................... 18,525 -- -- 18,525
Deferred taxes....................... 2,260 140 -- 2,400
Other long-term liabilities.......... 405 -- -- 405
Total stockholders' equity........... 45,209 9,975 (9,737) 45,447
---------- ------- ------------ ------------
Total liabilities and
stockholders' equity.......... $ 72,792 $11,595 $ (9,737) $ 74,650
========== ======= ============ ============
</TABLE>
F-14
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING INCOME STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1995
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
Revenues............................. $ 16,582 $ 2,727 $ 19,309
Expenses............................. 16,010 2,349 18,359
---------- ------- ------------
Net earnings before income taxes..... 572 378 950
---------- ------- ------------
Income taxes......................... (131) 140 9
---------- ------- ------------
Net earnings......................... $ 703 $ 238 $ 941
========== ======= ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1995
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 703 $ 238 $ 941
Non-cash adjustments............ 4,393 1,109 5,502
Change in assets and
liabilities................... (3,725) 2,565 (1,160)
---------- ------- ------------
Net cash provided by operating
activities.................... 1,371 3,912 5,283
---------- ------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil & gas
properties.................... (24,786) (2,478) (27,264)
Proceeds from sale of
properties.................... 265 -- 265
Additions to other properties
and other..................... (292) 2 (290)
---------- ------- ------------
Net cash used in investing
activities.................... (24,813) (2,476) (27,289)
---------- ------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings........ 25,860 -- 25,860
Payments of long-term debt...... (20,031) (1,425) (21,456)
Net proceeds from issuance of
common stock.................. 17,238 -- 17,238
---------- ------- ------------
Net cash provided by (used in)
financing activities.......... 23,067 (1,425) 21,642
---------- ------- ------------
Net increase (decrease) in cash
and cash equivalents.......... (375) 11 (364)
Cash and cash equivalents at
beginning of period........... 1,452 -- 1,452
---------- ------- ------------
Cash and cash equivalents at end
of period..................... $ 1,077 $ 11 $ 1,088
========== ======= ============
F-15
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BELLWETHER ODYSSEY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Total current assets................. $ 7,617 $ 887 $ -- $ 8,504
Net property, plant and equipment.... 47,130 11,005 -- 58,135
Total other assets................... 10,298 25 (9,737) 586
---------- ------- ------------ ------------
Total assets.................... $ 65,045 $11,917 $ (9,737) $ 67,225
========== ======= ============ ============
Total current liabilities............ $ 2,291 $ 1,045 $ -- $ 3,336
Long-term debt....................... 13,048 -- -- 13,048
Deferred taxes....................... 2,449 412 -- 2,861
Other long-term liabilities.......... 1,383 -- -- 1,383
Total stockholders' equity........... 45,874 10,460 (9,737) 46,597
---------- ------- ------------ ------------
Total liabilities and
stockholders' equity.......... $ 65,045 $11,917 $ (9,737) $ 67,225
========== ======= ============ ============
</TABLE>
CONDENSED CONSOLIDATING INCOME STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
Revenues............................. $ 20,902 $ 3,599 $ 24,501
Expenses............................. 20,644 2,829 23,473
---------- ------- ------------
Net earnings before income taxes..... 258 770 1,028
---------- ------- ------------
Income taxes......................... (239) 285 46
---------- ------- ------------
Net earnings......................... $ 497 $ 485 $ 982
========== ======= ============
F-16
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1996
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 497 $ 485 $ 982
Non-cash adjustments............ 6,950 1,506 8,456
Change in assets and
liabilities................... (1,709) (244) (1,953)
---------- ------- ------------
Net cash provided by operating
activities.................... 5,738 1,747 7,485
---------- ------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil & gas
properties.................... (5,432) (1,567) (6,999)
Proceeds from sale of
properties.................... 644 -- 644
Proceeds from gas contract
assumption.................... 9,875 -- 9,875
Additions to other properties
and other..................... 22 -- 22
---------- ------- ------------
Net cash provided by (used in)
investing activities.......... 5,109 (1,567) 3,542
---------- ------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt...... (11,500) -- (11,500)
Net proceeds from issuance of
common stock.................. 168 -- 168
---------- ------- ------------
Net cash used in financing
activities.................... (11,332) -- (11,332)
---------- ------- ------------
Net increase (decrease) in cash
and cash equivalents.......... (485) 180 (305)
Cash and cash equivalents at
beginning of period........... 1,077 11 1,088
---------- ------- ------------
Cash and cash equivalents at end
of period..................... $ 592 $ 191 $ 783
========== ======= ============
10. INCOME TAXES
Income tax expense is summarized as follows (in thousands):
YEARS ENDED JUNE 30,
-------------------------------
1994 1995 1996
Current
Federal............................ $ -- $ 9 $ 126
State.............................. -- -- 103
Deferred -- Federal and State........... -- -- (183)
--------- --------- ---------
Total income tax expense................ $ -- $ 9 $ 46
========= ========= =========
The balances for deferred tax assets and liabilities were modified as of
the effective date of the Hampton merger based on the allocation of the purchase
price.
F-17
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and liabilities at June 30, 1996 and 1995
are as follows:
AT JUNE 30,
---------------------
1995 1996
Net operating loss carryforwards........ $ 8,858 $ 8,922
Percentage depletion carryforwards...... 271 271
Alternative minimum tax credit
carryforwards......................... -- 126
---------- ---------
Total deferred income tax assets........ 9,129 9,319
---------- ---------
Plant, property and equipment........... (11,529) (8,841)
State income taxes...................... -- (446)
---------- ---------
Total deferred income tax liabilities... (11,529) (9,287)
Valuation allowances.................... -- (2,893)
---------- ---------
Net deferred income tax liability....... $ (2,400) $ (2,861)
========== =========
The Company files a consolidated federal income tax return. Deferred income
taxes are provided for transactions which are recognized in different periods
for financial and tax reporting purposes. Such temporary differences arise
primarily from the deduction for tax purposes of certain oil and gas development
costs which are capitalized for financial statement purposes. In the years ended
June 30, 1995 and 1994, the Company did not provide a provision for deferred
income taxes due to the availability of sufficient net operating losses
("NOLs") to offset net income.
Total income tax differs from the amount computed by applying the Federal
income tax rate to income before income taxes and minority interest. The reasons
for the differences are as follows:
AT JUNE 30,
--------------------
1995 1996
Statutory Federal income tax rate....... 34.0% 34.0%
Increase (Decrease) in tax rate
resulting from:
State income taxes, net of federal
benefit........................... 0.0 7.0
Nondeductable travel and
entertainment......................... 1.2 .3
Reduction of valuation allowance due to
utilization
of net operating loss carryforwards... (34.2) (36.5)
--------- ---------
1.0% 4.8%
========= =========
The Company issued 3,400,000 shares of its common stock on July 20, 1994.
As a result of the common stock issuance, the Company has undergone an ownership
change. Therefore, the Company's ability to use its NOL for federal income tax
purposes is subject to significant restrictions.
Section 382 of the Internal Revenue Code significantly limits the amount of
NOL and investment tax credit carryforwards that are available to offset future
taxable income and related tax liability when a change in ownership occurs after
December 31, 1986.
At June 30, 1996, the Company had NOLs of approximately $26.2 million which
will expire in future years beginning in 1997. Due to provisions of Section 382,
the Company is limited to approximately $4.6 million utilization of NOL per
year.
F-18
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SEGMENT INFORMATION
The Company's operations are concentrated in two segments. The results of
operations of these business segments are as follows (in thousands):
YEARS ENDED JUNE 30,
-------------------------------
1994 1995 1996
Revenues:
Oil............................. $ 2,620 $ 4,864 $ 5,810
Gas............................. 1,086 3,643 9,856
Gas plants and gas gathering.... 6,930 10,705 8,719
Other revenues.................. 63 97 116
--------- --------- ---------
Total revenues............. $ 10,699 $ 19,309 $ 24,501
========= ========= =========
Operating profit before income tax:
Oil and gas..................... $ 859 $ 1,758 $ 3,416
Gas plants and gas gathering.... 1,847 3,251 2,319
--------- --------- ---------
2,706 5,009 5,735
Unallocated corporate expenses....... 1,172 2,823 2,943
Other expenses....................... -- -- 153
Interest expense..................... 721 1,245 1,657
--------- --------- ---------
Income before taxes.................. $ 813 $ 941 $ 982
========= ========= =========
Identifiable assets:
Oil and gas..................... $ 13,763 $ 53,218 $ 47,727
Gas plants and gas gathering.... 19,285 18,289 10,408
--------- --------- ---------
33,048 71,507 58,135
Corporate assets..................... 2,822 3,143 9,090
--------- --------- ---------
Total assets............... $ 35,870 $ 74,650 $ 67,225
========= ========= =========
Capital expenditures:
Oil and gas..................... $ 3,199 $ 41,676 $ 6,934
Gas plants and gas gathering.... 18,835 225 65
--------- --------- ---------
$ 22,034 $ 41,901 $ 6,999
========= ========= =========
Depreciation, depletion and
amortization:
Oil and gas..................... $ 1,553 $ 3,893 $ 6,933
Gas plants and gas gathering......... 936 1,376 1,215
--------- --------- ---------
$ 2,489 $ 5,269 $ 8,148
========= ========= =========
In 1996, 1995 and 1994, the Company had 3 customers which accounted for 33%
of its revenues, two customers which accounted for 42% of its revenues and three
customers which accounted for 58% of its revenues, respectively.
12. CONTINGENCIES
The Company has been named as a defendant in certain lawsuits incidental to
its business. Management does not believe that the outcome of such litigation
will have a material adverse impact on the Company.
F-19
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SELECTED QUARTERLY FINANCIAL DATA (AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA) (UNAUDITED):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994(1) 1994 1995(2) 1995
<S> <C> <C> <C> <C>
Revenues............................. $ 3,997 $4,186 $ 4,783 $6,343
Operating Income..................... $ 424 $ 272 $ 238 $ 188
Net income........................... $ 378 $ 224 $ 199 $ 140
Earnings per common equivalent
share.............................. $ 0.07 $ 0.03 $ 0.02 $ 0.02
QUARTER ENDED
------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
Revenues............................. $ 5,678 $6,444 $ 6,338 $6,041
Operating Income..................... $ 38 $ 95 $ 542 $ 353
Net income (loss).................... $ 13 $ (12) $ 557 $ 424
Earnings per common equivalent
share.............................. $ 0.00 $ 0.00 $ 0.06 $ 0.05
</TABLE>
- ------------
(1) Includes the acquisition of Odyssey on August 26, 1994.
(2) Includes the acquisition of Hampton on February 28, 1995.
14. SUPPLEMENTAL INFORMATION -- (UNAUDITED)
OIL AND GAS PRODUCING ACTIVITIES
Included herein is information with respect to oil and gas acquisition,
exploration, development and production activities, which is based on estimates
of year-end oil and gas reserve quantities and estimates of future development
costs and production schedules. Reserve quantities and future production are
based primarily upon reserve reports prepared by the Company's independent
petroleum engineering firms. These estimates are inherently imprecise and
subject to substantial revision.
Estimates of future net cash flows from proved reserves of gas, oil,
condensate and natural gas liquids were made in accordance with Statement of
Financial Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." The estimates are based on prices at year-end. Estimated future
cash inflows are reduced by estimated future development and production costs
based on year-end cost levels, assuming continuation of existing economic
conditions, and by estimated future income tax expense. Tax expense is
calculated by applying the existing statutory tax rates, including any known
future changes, to the pre-tax net cash flows, less depreciation of the tax
basis of the properties and depletion allowances applicable to the gas, oil,
condensate and NGL production. The results of these disclosures should not be
construed to represent the fair market value of the Company's oil and gas
properties. A market value determination would include many additional factors
including: (i) anticipated future increases or decreases in oil and gas prices
and production and development costs; (ii) an allowance for return on
investment; (iii) the value of additional reserves, not considered proved at the
present, which may be recovered as a result of further exploration and
development activities; and (iv) other business risks.
F-20
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COSTS INCURRED
The following table sets forth the costs incurred in property acquisition
and development activities (in thousands):
YEARS ENDED JUNE 30,
-------------------------------
1994 1995 1996
Property acquisition:
Proved properties............... $ 1,896 $ 25,072 $ 128
Unproved properties............. 295 13,233 424
Exploration.......................... 364 530 824
Development.......................... 644 2,841 5,558
--------- --------- ---------
$ 3,199 $ 41,676 $ 6,934
========= ========= =========
CAPITALIZED COSTS
The following table sets forth the capitalized costs relating to oil and
gas activities and the associated accumulated depreciation, depletion and
amortization (in thousands):
YEARS ENDED JUNE 30,
----------------------------------
1994 1995 1996
Proved properties....................... $ 28,917 $ 56,300 $ 62,590
Unproved properties..................... 832 15,125 13,453
---------- ---------- ----------
Total capitalized costs................. 29,749 71,425 76,043
Accumulated depreciation, depletion and
amortization.......................... (17,043) (20,983) (28,316)
---------- ---------- ----------
Net capitalized costs................... $ 12,706 $ 50,442 $ 47,727
========== ========== ==========
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES (IN THOUSANDS):
YEARS ENDED JUNE 30,
-------------------------------
1994 1995 1996
Revenues from oil and gas producing
activities............................ $ 3,706 $ 8,507 $ 15,666
Production costs........................ 1,294 2,856 5,317
Depreciation, depletion and
amortization.......................... 1,553 3,893 6,933
--------- --------- ---------
Results of operations from producing
activities (excluding corporate
overhead and interest costs).......... $ 859 $ 1,758 $ 3,416
========= ========= =========
PER UNIT SALES PRICES AND COSTS:
YEARS ENDED JUNE 30,
-------------------------------
1994 1995 1996
Average sales price:(1)
Oil (per barrel)................... $ 15.27 $ 16.89 $ 17.81
Gas (per MCF)...................... 2.17 1.66 2.02
Average production cost per equivalent
barrel................................ 4.75 4.05 4.49
Average unit depletion rate per
equivalent barrel..................... 5.71 5.52 5.86
- ------------
(1) Average sales price is exclusive of the effect of natural gas and crude oil
price swaps.
F-21
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESERVES:
The Company's estimated total proved and proved developed reserves of oil
and gas are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
--------------------------------------------------------
1994 1995 1996
---------------- ---------------- ----------------
OIL GAS OIL GAS OIL GAS
DESCRIPTION (MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
<S> <C> <C> <C> <C> <C> <C>
Proved reserves at beginning of year.... 438 7,202 393 10,671 2,597 30,159
Revisions of previous estimates......... (44) 58 (61) (988) (534) 2,855
Extensions and discoveries.............. -- -- 724 1,179 89 7,128
Production.............................. (71) (1,206) (216) (2,932) (334) (5,099)
Sales of reserves in-place.............. -- -- (1) (3) (14) (2,023)
Purchases of reserves in-place.......... 67 287 -- 163 4 176
Reserves added in Mergers............... 3 4,330 1,758 22,069 -- --
------ ------ ----- ------ ----- ------
Proved reserves at end of year.......... 393 10,671 2,597 30,159 1,808 33,196
====== ====== ===== ====== ===== ======
Proved developed reserves --
Beginning of year.................. 410 7,151 361 9,154 1,891 23,795
====== ====== ===== ====== ===== ======
End of year........................ 361 9,154 1,891 23,795 1,494 22,698
====== ====== ===== ====== ===== ======
</TABLE>
The standardized measure of discounted future net cash flows and changes therein
related to proved oil and gas reserves are shown below:
YEARS ENDED JUNE 30,
----------------------------------
1994 1995 1996
(IN THOUSANDS)
Future cash inflows.................. $ 31,180 $ 96,738 $ 113,554
Future production costs.............. (11,462) (34,093) (33,131)
Future income taxes.................. -- -- (11,095)
Future development costs............. (402) (7,738) (8,961)
---------- ---------- ----------
Future net cash flows................ 19,316 54,907 60,367
10% discount factor.................. (7,272) (17,616) (15,191)
---------- ---------- ----------
Standardized measure of discounted
future net cash
flows.............................. $ 12,044 $ 37,291 $ 45,176
========== ========== ==========
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
YEARS ENDED JUNE 30,
----------------------------------
1994 1995 1996
(IN THOUSANDS)
Standardized measure -- beginning of
year................................. $ 10,519 $ 12,044 $ 37,291
Sales, net of production costs....... (2,412) (5,651) (10,349)
Purchases of reserves in-place....... 566 162 246
Reserves received in Mergers......... 3,598 34,039 --
Net change in prices and production
costs.............................. (1,500) (8,326) 11,458
Net change in income taxes........... -- -- (2,958)
Extensions, discoveries and improved
recovery, net of future production
and development costs.............. -- 5,085 7,709
Changes in estimated future
development costs.................. (163) (3,148) 497
Development costs incurred during the
period............................. 644 629 883
Revisions of quantity estimates...... (194) (4) (438)
Accretion of discount................ 1,052 1,204 3,729
Sales of reserves in-place........... -- (5) (1,614)
Changes in production rates and
other.............................. (66) 1,262 (1,278)
---------- ---------- ----------
Standardized measure -- end of
year............................... $ 12,044 $ 37,291 $ 45,176
========== ========== ==========
F-22
<PAGE>
BELLWETHER EXPLORATION COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1996 1996
-------- ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents............... $ 783 $ 450
Accounts receivable and accrued
revenues.............................. 5,990 7,296
Accounts receivable -- related
parties............................... 1,417 303
Prepaid expenses and other.............. 314 586
-------- ------------
Total current assets............... 8,504 8,635
-------- ------------
Property, Plant and Equipment, at cost:
Oil and gas properties (full cost
method)............................... 76,043 83,473
Gas plant facilities and gas gathering
system................................ 12,840 12,843
-------- ------------
88,883 96,316
Accumulated depreciation, depletion and
amortization.......................... (30,748) (36,561)
-------- ------------
58,135 59,755
-------- ------------
Other Assets............................ 586 592
-------- ------------
$ 67,225 $ 68,982
======== ============
Current Liabilities:
Accounts payable and accrued
liabilities........................... $ 2,634 $ 3,867
Due to affiliates....................... 702 411
Current maturities of long-term debt.... -- --
-------- ------------
Total current liabilities.......... 3,336 4,278
-------- ------------
Long-term debt, excluding current
maturities............................ 13,048 11,000
Deferred income taxes................... 2,861 3,805
Other liabilities....................... 1,383 1,148
Stockholders' Equity:
Preferred stock, $0.01 par value,
1,000,000 shares authorized, none
issued or outstanding at June 30, 1996
and December 31, 1996................. -- --
Common stock, $0.01 par value,
15,000,000 shares authorized,
9,075,479
and 9,152,979 shares issued and
outstanding at June 30, 1996 and
December 31, 1996, respectively....... 91 92
Additional paid-in capital.............. 41,639 42,059
Retained earnings....................... 4,867 6,600
-------- ------------
Total stockholders' equity......... 46,597 48,751
-------- ------------
$ 67,225 $ 68,982
======== ============
See Notes to Condensed Consolidated Financial Statements.
F-23
<PAGE>
BELLWETHER EXPLORATION COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- --------------------
1995 1996 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas revenues............... $ 3,853 $ 5,383 $ 7,142 $ 9,846
Gas plant and gas gathering
revenues......................... 2,555 2,158 4,923 3,879
Interest and other income.......... 36 26 57 53
--------- --------- --------- ---------
6,444 7,567 12,122 13,778
--------- --------- --------- ---------
Costs and Expenses:
Lease operating expenses........... 1,347 1,696 2,447 3,061
Gas plant and gas gathering
expenses......................... 1,549 934 3,006 1,827
Depreciation, depletion and
amortization..................... 1,979 2,173 3,866 4,167
General and administrative
expenses......................... 859 761 1,559 1,452
Interest expense................... 472 232 956 520
Other expense...................... 143 -- 155 --
--------- --------- --------- ---------
6,349 5,796 11,989 11,027
--------- --------- --------- ---------
Income before income taxes.............. 95 1,771 133 2,751
Provision for income taxes.............. 107 655 132 1,018
--------- --------- --------- ---------
Net income......................... $ (12) $ 1,116 $ 1 $ 1,733
========= ========= ========= =========
Net income per share.................... $ -- $ 0.12 $ 0.00 $ 0.19
========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding......... 9,045 9,145 9,045 9,118
========= ========= ========= =========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-24
<PAGE>
BELLWETHER EXPLORATION COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL TREASURY STOCK
----------------- ----------------- PAID-IN RETAINED ----------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993.................. 2,318 $ 1,156 -- -- $ 7,598 $2,130 29 $(115)
Shares issued in merger with Associated
Gas Resources, Inc.................... 1,419 708 -- -- 6,066 -- -- --
To change par value per share........... -- (1,827) -- -- 1,827 -- -- --
Other................................... -- -- -- -- (1) -- (14) 16
Net earnings............................ -- -- -- -- -- 814 -- --
----- ------- ------ ------- ---------- -------- ------ ------
Balance, June 30, 1994.................. 3,737 37 -- -- 15,490 2,944 15 (99)
Shares issued in public stock
offering.............................. 3,400 34 -- -- 17,204 -- -- --
Cancellation of treasury stock.......... (15) -- -- -- -- -- (15) 99
Shares issued in merger with Odyssey
Partners, Ltd......................... 917 9 -- -- 3,944 -- -- --
Shares issued in merger with Hampton
Resources Corporation................. 1,006 10 -- -- 4,834 -- -- --
Net earnings............................ -- -- -- -- -- 941 -- --
----- ------- ------ ------- ---------- -------- ------ ------
Balance, June 30, 1995.................. 9,045 90 -- -- 41,472 3,885 -- --
Stock options exercised................. 30 1 -- -- 167 -- -- --
Net earnings............................ -- -- -- -- -- 982 -- --
----- ------- ------ ------- ---------- -------- ------ ------
Balance, June 30, 1996.................. 9,075 91 -- -- 41,639 4,867 -- --
Stock options exercised................. 70 1 420
Net earnings............................ -- -- -- -- -- 1,733 -- --
----- ------- ------ ------- ---------- -------- ------ ------
Balance, December 31, 1996
(unaudited)........................... 9,145 $ 92 -- -- $ 42,059 $6,600 -- $--
===== ======= ====== ======= ========== ======== ====== ======
</TABLE>
TOTAL
Balance, June 30, 1993.................. $10,769
Shares issued in merger with Associated
Gas Resources, Inc.................... 6,774
To change par value per share........... --
Other................................... 15
Net earnings............................ 814
-------
Balance, June 30, 1994.................. 18,372
Shares issued in public stock
offering.............................. 17,238
Cancellation of treasury stock.......... 99
Shares issued in merger with Odyssey
Partners, Ltd......................... 3,953
Shares issued in merger with Hampton
Resources Corporation................. 4,844
Net earnings............................ 941
-------
Balance, June 30, 1995.................. 45,447
Stock options exercised................. 168
Net earnings............................ 982
-------
Balance, June 30, 1996.................. 46,597
Stock options exercised................. 421
Net earnings............................ 1,733
-------
Balance, December 31, 1996
(unaudited)........................... $48,751
=======
See Notes to Condensed Consolidated Financial Statements.
F-25
<PAGE>
BELLWETHER EXPLORATION COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
SIX MONTHS
ENDED
DECEMBER 31,
---------------------
1995 1996
(IN THOUSANDS)
Net Income........................... $ 1 $ 1,733
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and
amortization................... 3,897 4,308
Deferred taxes and other........ -- 951
Change in assets and liabilities:
Accounts receivable and accrued
revenues........................ (439) (1,306)
Accounts payable and other
liabilities..................... 405 999
Due (to) from affiliates........ (158) 823
Other........................... (210) (403)
--------- ----------
Net Cash Flows Provided by Operating
Activities......................... 3,496 7,105
--------- ----------
Cash Flows From Investing Activities:
Additions to oil and gas
properties...................... (1,133) (7,430)
Proceeds from sales of
properties...................... -- 1,665
Other........................... (41) (45)
--------- ----------
Net Cash Flows Used In Investing
Activities......................... (1,174) (5,810)
--------- ----------
Cash Flows From Financing Activities:
Proceeds from borrowings........ -- 13,000
Payments of long-term debt...... (1,000) (15,048)
Net proceeds from issuance of
common stock.................... -- 420
--------- ----------
Net Cash Flows (Used In) Provided by
Financing Activities............... (1,000) (1,628)
--------- ----------
Net increase (decrease) in cash
and cash equivalents............ 1,322 (333)
Cash and cash equivalents at
beginning of period............ 1,088 783
--------- ----------
Cash And Cash Equivalents At End of
Period............................. $ 2,410 $ 450
========= ==========
Supplemental Disclosures Of Cash Flow
Information:
Cash paid during the period for:
Interest........................ $ 480 $ 348
Income taxes (net of refund).... 127 63
See Notes to Condensed Consolidated Financial Statements.
F-26
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with instructions to Form 10-Q and, therefore, do
not include all disclosures required by generally accepted accounting
principles. However, in the opinion of management, these statements include all
adjustments, which are of a normal recurring nature, necessary to present fairly
the financial position at December 31, 1996, and June 30, 1996, and the results
of operations and changes in cash flows for the periods ended December 31, 1996,
and 1995. These financial statements should be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements in the 1996 Form 10-K of Bellwether Exploration Company ("the
Company") that was filed with the Securities and Exchange Commission.
2. INDUSTRY SEGMENT INFORMATION
The Company's operations are concentrated primarily in two segments; the
exploration and production of oil and natural gas and gas plants and gas
gathering operations.
FOR THE SIX MONTHS
ENDED
DECEMBER 31,
--------------------
1995 1996
(IN THOUSANDS)
Sales to unaffiliated customers:
Oil and gas..................... $ 7,142 $ 9,846
Gas plants and gas gathering.... 4,923 3,879
Other revenues.................. 57 53
--------- ---------
Total revenues............. 12,122 13,778
========= =========
Operating profit before income tax:
Oil and gas..................... 1,520 3,059
Gas plants and gas gathering.... 1,226 1,611
--------- ---------
2,746 4,670
--------- ---------
Unallocated corporate expenses....... 1,657 1,399
Interest expense..................... 956 520
--------- ---------
Income before taxes........ 133 2,751
========= =========
Depreciation, depletion and
amortization:
Oil and gas..................... 3,175 3,726
Gas plants and gas gathering.... 691 441
--------- ---------
$ 3,866 $ 4,167
========= =========
3. LONG TERM DEBT
On February 28, 1995, the Company entered into a credit facility ("Credit
Facility") with a commercial bank providing an initial borrowing base of $29.8
million. The borrowing base is reviewed semi-annually. The borrowings under the
Credit Facility are secured by the Company's interest in oil and gas properties
and in the Gathering System and the Gas Plant. The maturity date, as modified in
the second quarter, fiscal 1996 is March 31, 2001, and the borrowing base is
$20.1 million. The Credit Facility was retired in October 1996.
In October 1996 the Company entered into a syndicated credit facility
("New Credit Facility") in an amount up to $50 million with an initial
borrowing base of $27 million, to be determined semi-annually. The interest
rate, at the Company's option, will vary, based upon borrowing base usage, from
LIBOR plus
F-27
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (CONTINUED)
7/8% to LIBOR plus 1 1/4%, or the greater of the prime rate or Fed Funds plus
1/2%. The New Credit Facility is unsecured with respect to oil and gas assets
and has a termination date of October 15, 2000.
The New Credit Facility contains various covenants including certain
required financial measurements for a current ratio, consolidated tangible net
worth, and interest coverage ratio. In addition, the New Credit Facility
includes certain limitations on restricted payments and dividends, incurrence of
additional funded indebtedness/guarantees and asset sales.
4. GAS CONTRACT LIABILITY
The Company and certain third parties were the beneficiaries of an
agreement ("Purchase Agreement") whereby another party had an obligation to
purchase, until May 1999, the gas produced by the Company and such third parties
from the West Monroe field in Union Parish, Louisiana, at a price of $4.50 per
MMBTU. Bellwether owned a large majority of the gas produced and sold pursuant
to the Purchase Agreement. In March 1996, in exchange for Bellwether's agreement
to assume this obligation to purchase gas under the Purchase Agreement,
Bellwether was paid $9.9 million. As a result of this transaction, the Company
has written off the book value of the gas gathering system and has recorded a
liability of $2.0 million to cover estimated liabilities under the contract. Gas
gathering operations of the subsidiary and payments to third parties are charged
to the liability as incurred. From the proceeds, $9.5 million was paid on the
Company's credit facility.
5. GUARANTOR FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEETS -- UNAUDITED
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BELLWETHER ODYSSEY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Total current assets................. $ 7,595 $ 1,040 $ -- $ 8,635
Net property, plant and equipment.... 47,385 12,370 -- 59,755
Total other assets................... 10,314 15 (9,737) 592
---------- ------- ------------ ------------
Total assets.................... $ 65,294 $13,425 $ (9,737) $ 68,982
========== ======= ============ ============
Total current liabilities............ $ 2,254 $ 2,024 $ -- $ 4,278
Long-term debt....................... 11,000 -- -- 11,000
Deferred taxes....................... 3,202 603 -- 3,805
Other long-term liabilities.......... 1,148 -- -- 1,148
Total stockholders' equity........... 47,690 10,798 (9,737) 48,751
---------- ------- ------------ ------------
Total liabilities and
stockholders' equity.......... $ 65,294 $13,425 $ (9,737) $ 68,982
========== ======= ============ ============
</TABLE>
CONDENSED CONSOLIDATING INCOME STATEMENTS-- UNAUDITED
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
Revenues............................. $ 11,970 $ 1,808 $ 13,778
Expenses............................. 9,736 1,291 11,027
---------- ------- ------------
Net earnings before income taxes..... 2,234 517 2,751
---------- ------- ------------
Income taxes......................... 839 179 1,018
---------- ------- ------------
Net earnings......................... $ 1,395 $ 338 $ 1,733
========== ======= ============
F-28
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 1,395 $ 338 $ 1,733
Non-cash adjustments............ 4,670 589 5,259
Change in assets and
liabilities................... (804) 917 113
---------- ------- ------------
Net cash provided by operating
activities.................... 5,261 1,844 7,105
---------- ------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil & gas
properties.................... (5,487) (1,943) (7,430)
Proceeds from sale of
properties.................... 1,665 -- 1,665
Additions to other properties
and other..................... (45) -- (45)
---------- ------- ------------
Net cash used in investing
activities.................... (3,867) (1,943) (5,810)
---------- ------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings........ 13,000 -- 13,000
Payments of long-term debt...... (15,048) -- (15,048)
Net proceeds from issuance of
common stock.................. 420 -- 420
---------- ------- ------------
Net cash provided by in
financing activities.......... (1,628) -- (1,628)
---------- ------- ------------
Net increase (decrease) in cash
and cash equivalents.......... (234) (99) (333)
Cash and cash equivalents at
beginning of period........... 592 191 783
---------- ------- ------------
Cash and cash equivalents at end
of period..................... $ 358 $ 92 $ 450
========== ======= ============
6. OTHER MATTERS -- (UNAUDITED)
In February 1997, the Company filed a registration statement with the SEC
with regard to an offering by the Company of 4,400,000 shares of common stock
("Common Stock Offering") and $100.0 million in Senior Subordinated Notes
("Notes Offering"), the proceeds of which are to be used to purchase oil and
gas properties and an estimated $18.0 million of working capital for $188.3
million, plus a contingent payment of up to $9.0 million, the actual amount of
which will be based on 1997 gas prices (the "Contingent Payment"). The
effective date of the pending acquisition is July 1, 1996 and the estimated net
adjusted purchase price assuming an April 9, 1997 closing date is $141.8 million
plus the Contingent Payment. As of June 30, 1996, estimated net proved reserves
attributable to the properties were 39.2 MMBOE (89% developed and 59% gas) with
a PV-10 Value (pre-tax) of $212.0 million. The Company is also negotiating a new
$90 million credit facility ("New Credit Facility") with a group of banks. The
Company will finance the cash portion of the acquisition and related fees,
estimated to aggregate $173.2 million, including repayment of an estimated $12.0
million of existing indebtedness with advances under the New Credit Facility and
the proceeds of the Common Stock Offering and the Notes Offering.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Torch Energy Advisors Incorporated:
We have audited the accompanying statements of assets (other than
productive oil and gas properties) and liabilities as of December 31, 1995 and
1996 to be acquired by Bellwether Exploration Company (Acquired Properties) as
described in Note 1 and the related statements of revenues and direct operating
expenses for each of the years in the three-year period ended December 31, 1996.
These financial statements are the responsibility of Torch Energy Advisors
Incorporated's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared as described in Note 1 for the
purpose of complying with certain rules and regulations of the Securities and
Exchange Commission ("SEC") for inclusion in certain SEC regulatory reports
and filings and are not intended to be a complete financial presentation.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets (other than productive oil and gas
properties) and liabilities of the Acquired Properties as of December 31, 1995
and 1996 and the related revenues and direct operating expenses for each of the
years in the three-year period ended December 31, 1996, in conformity with
generally accepted accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
March 11, 1997
F-30
<PAGE>
THE ACQUIRED PROPERTIES
STATEMENTS OF ASSETS ACQUIRED (OTHER THAN PRODUCTIVE OIL
AND GAS PROPERTIES) AND LIABILITIES (NOTE 1)
(IN THOUSANDS)
DECEMBER 31,
--------------------
1995 1996
Assets acquired (other than productive
oil and gas properties)
Cash and cash equivalents.......... $ 603 $ 79
Accounts receivable and other...... 19,291 23,428
Due from affiliates................ 5,798 3,954
Liabilities
Accounts payable and accrued
liabilities....................... (8,968) (9,050)
Due to affiliates.................. (30) (375)
--------- ---------
Excess of assets acquired (other
than productive oil and gas
properties) over liabilities
assumed........................... $ 16,694 $ 18,036
========= =========
See accompanying notes.
F-31
<PAGE>
THE ACQUIRED PROPERTIES
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
----------------------------------
1994 1995 1996
REVENUES:
Oil revenues....................... $ 42,215 $ 43,424 $ 42,842
Gas revenues....................... 60,129 49,354 58,132
Natural gas processing income...... 114 126 49
Other oil and gas income........... 655 19,363 1,338
---------- ---------- ----------
103,113 112,267 102,361
---------- ---------- ----------
DIRECT OPERATING EXPENSES:
Lease operating expenses........... $ 26,890 $ 28,894 $ 24,733
Production taxes................... 3,511 2,238 3,081
---------- ---------- ----------
Direct operating expenses.......... 30,401 31,132 27,814
---------- ---------- ----------
REVENUES IN EXCESS OF DIRECT OPERATING
EXPENSES.............................. $ 72,712 $ 81,135 $ 74,547
========== ========== ==========
See accompanying notes.
F-32
<PAGE>
THE ACQUIRED PROPERTIES
NOTES TO STATEMENTS OF ASSETS ACQUIRED (OTHER THAN PRODUCTIVE OIL AND GAS
PROPERTIES) AND LIABILITIES AND STATEMENTS OF REVENUES AND DIRECT OPERATING
EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying statements present the assets (other than productive oil
and gas properties) and liabilities to be acquired and the related revenues and
direct operating expenses of oil and gas properties (the "Acquired
Properties") to be acquired by Bellwether Exploration Company from Torch Energy
Advisors Incorporated ("Torch") and certain partnerships and other entities
managed or sponsored by Torch (collectively, the "Partnerships"). The Acquired
Properties are primarily located in Texas, Louisiana, California and the Gulf of
Mexico.
The accompanying financial statements were derived from the historical
accounting records from the Partnerships. Direct operating expenses include
payroll, lease and well repairs, maintenance and other direct operating
expenses.
OMITTED HISTORICAL FINANCIAL INFORMATION
Full historical financial statements, including general and administrative
expense, income tax expense and interest expense have not been presented
historically because the above properties were not accounted for or operated as
a separate division by the Partnerships. Historical depletion expense, including
abandonment provision, also has not been included as the basis in the properties
will be adjusted in the purchase price allocation when they are sold; therefore,
historical depletion no longer will be relevant.
ACCRUAL BASIS STATEMENTS
Memorandum adjustments have been made to the financial information in order
to present the accompanying financial statements in accordance with generally
accepted accounting principles.
CASH AND CASH EQUIVALENTS
The Partnerships consider all highly liquid debt instruments purchased with
an original maturity date of three months or less to be cash equivalents.
GAS BALANCING
Certain Partnerships use the entitlement method for recording sales of
natural gas. Under the entitlement method of accounting, revenue is recorded
based on the Partnerships' net revenue interest in production. Deliveries of
natural gas in excess of the Partnerships' revenue interests are recorded as
liabilities and under-deliveries are recorded as assets. Production imbalances
are recorded at the lower of the sales price in effect at the time of production
or the current market value. At December 31, 1995 and 1996 the Partnerships'
aggregate net receivable was $781,705 and $1,174,950, respectively. Such amounts
have been included in accounts receivable and accounts payable and accrued
liabilities as it is expected that a substantial portion of the production
imbalances will be settled with production in the upcoming year.
Certain other Partnerships use the sales method for recording sales of
natural gas. Under the sales method of accounting, revenue is recorded based on
the Partnerships' sales of production. Substantially all such gas imbalances are
anticipated to be settled with production in future periods. If such
Partnerships had used the entitlement method of recording sales of natural gas,
there would have been no significant impact on the financial statements.
USE OF ESTIMATES
A number of estimates and assumptions relating to the reporting of assets
and liabilities and to the disclosure of contingent assets and liabilities have
been made by Torch to prepare these financial statements in conformity with
generally accepted accounting principles. Actual results could differ from those
estimates.
F-33
<PAGE>
THE ACQUIRED PROPERTIES
NOTES TO STATEMENTS OF ASSETS ACQUIRED (OTHER THAN PRODUCTIVE OIL AND GAS
PROPERTIES) AND LIABILITIES AND STATEMENTS OF REVENUES AND DIRECT OPERATING
EXPENSES -- (CONTINUED)
DETERMINATION OF FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value for cash, receivables, and payables approximates carrying value.
2. OTHER OIL AND GAS REVENUES
Included in revenues are $0.6 million, $18.2 million and $0.4 million
during 1994, 1995 and 1996, respectively, which were received from various
bankruptcy and contract pricing settlements. Also included in revenues are
payments in lieu of tax credits of $66,000, $0.8 million and $1.0 million,
during 1994, 1995 and 1996, respectively.
3. RELATED PARTY TRANSACTIONS
An affiliate of Torch operates certain oil and gas wells included in the
Acquired Properties. Fees under joint operating agreements related to such wells
in the amount of $1.8 million, $1.8 million and $1.7 million were incurred the
years ended December 31, 1994, 1995 and 1996, and are included in direct
operating expenses. In addition, an affiliate of Torch marketed a portion of the
production of the Acquired Properites, for which service it charged the
Partnerships marketing fees on the same basis as other third parties. The amount
of such fees charged to the Partnerships during 1994, 1995 and 1996 was $1.4
million, $1.5 million and $1.6 million, respectively. Such amounts are included
as a reduction to oil and gas revenues.
4. CAPITAL EXPENDITURES
Direct operating expenses do not include exploration and development
expenditures related to the properties which totaled approximately $14.9
million, $14.0 million and $7.5 million in 1994, 1995 and 1996, respectively.
5. COMMITMENTS AND CONTINGENCIES
Management is unaware of any legal, environmental or other contingencies
that would be materially important in relation to these financial statements.
6. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Total proved and proved developed oil and gas reserves of the Acquired
Properties at December 31, 1996 have been estimated based on reserve estimates
prepared by the Company and audited by Ryder Scott Company Petroleum Engineers
as of June 30, 1996, adjusted for production from June 30, 1996 to December 31,
1996. No comparable estimates were available for subsequent or prior periods.
Therefore, reserves for December 31, 1994, 1995 and 1996 have been calculated by
adjusting the June 30, 1996 amounts for the respective period's activities and,
consequently, no revisions of previous estimates have been reflected. All
reserve estimates are based on economic and operating conditions existing at
June 30, 1996. The future net cash flows from production of these proved reserve
quantities were computed by applying current prices of oil and gas, averaging
$16.17 per barrel of oil and $2.22 per thousand cubic foot of gas (with
consideration of price changes only to the extent provided by contractual
arrangements) as of June 30, 1996 to estimated future production of proved oil
and gas reserves less the estimated future expenditures (based on current costs)
as of June 30, 1996, to be incurred in developing and producing the
F-34
<PAGE>
THE ACQUIRED PROPERTIES
NOTES TO STATEMENTS OF ASSETS ACQUIRED (OTHER THAN PRODUCTIVE OIL AND GAS
PROPERTIES) AND LIABILITIES AND STATEMENTS OF REVENUES AND DIRECT OPERATING
EXPENSES -- (CONTINUED)
proved reserves. The Acquired Properties are located primarily in Texas,
Louisiana, Alabama, California and the Gulf of Mexico.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------
1994 1995 1996
-------------------- -------------------- --------------------
OIL GAS OIL GAS OIL GAS
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year............... 23,341 215,441 20,422 181,139 17,351 151,297
Production...................... (2,919) (34,302) (3,071) (29,842) (2,460) (22,387)
--------- --------- --------- --------- --------- ---------
End of Year..................... 20,422 181,139 17,351 151,297 14,891 128,910
========= ========= ========= ========= ========= =========
Proved developed reserves:
Beginning of year............... 20,827 204,626 17,908 170,324 14,837 140,482
--------- --------- --------- --------- --------- ---------
End of year..................... 17,908 170,324 14,837 140,482 12,377 118,095
========= ========= ========= ========= ========= =========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved
Oil & Gas Reserves (in thousands):
AS OF
DECEMBER 31,
1996
------------
Future cash inflows..................... $ 513,741
Future production costs................. (195,576)
Future development costs................ (40,450)
------------
Future net inflows before income
taxes................................. 277,715
Income taxes............................ (54,913)
------------
Future net cash flows................... 222,802
10% discount factor..................... (70,403)
------------
Standardized measure of discounted
future net cash flows................. $ 152,399
============
Changes to Standardized Measure of Discounted Future Net Cash Flows
Relating to Proved Oil and Gas Reserves (in thousands):
Standardized measure, beginning of
year.................................. $ 182,057
Sales, net of production costs..... (73,160)
Net change in income taxes......... 17,418
Net change in future development
costs............................. 4,336
Accretion of discount.............. 18,206
Net change in timing and other..... 3,542
------------
Standardized measure, end of year....... $ 152,399
============
F-35
<PAGE>
EXHIBIT A
Williamson Petroleum Consultants, Inc.
March 12, 1997
Bellwether Exploration Company
1221 Lamar, Suite 1600
Houston, Texas 77010
Attention Mr. J. Darby Sere'
Gentlemen:
Subject: Revision to the Williamson Petroleum Consultants, Inc. Report Entitled
"Evaluation of Oil and Gas Reserves to the Interests of Bellwether
Exploration Company in Certain Properties, Effective June 30, 1996,
for Disclosure to the Securities and Exchange Commission, Williamson
Project 6.8369"
At your request, Williamson Petroleum Consultants, Inc. (Williamson) has
prepared a revision to the Williamson report entitled "Evaluation of Oil and Gas
Reserves to the Interests of Bellwether Exploration Company in Certain
Properties, Effective June 30, 1996, for Disclosure to the Securities and
Exchange Commission, Williamson Project 6.8369" dated August 20, 1996 (the
August 20, 1996 report). Revisions were made for three properties in the South
Bullocks Church field, Victoria County, Texas and four properties in the Fort
Trinidad field, Houston and Madison Counties, Texas. These revisions were small
increases in ownership interests which resulted in a minor increase in net
reserves and associated future net revenues. All other data, definitions, and
assumptions are as stated in the August 20, 1996 report. The following is a
revised summary of the evaluation effective June 30, 1996:
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED DEVELOPED PROVED TOTAL
PRODUCING NONPRODUCING UNDEVELOPED PROVED
---------- ------------ ---------- ----------
Net Reserves to the
Evaluated Interests:
<S> <C> <C> <C> <C>
Oil/Condensate, BBL ..................... 1,380,372 113,323 314,658 1,808,353
Gas, MCF ................................ 17,436,973 5,260,717 10,497,974 33,195,664
Future Net Revenue, $:
Undiscounted ............................ 43,372,307 10,276,435 17,813,708 71,462,450
Discounted Per Annum
at 10.00 Percent ........................ 30,650,666 6,224,432 11,264,518 48,139,616
</TABLE>
A-1
<PAGE>
The total company, state, and field reserves category summaries and individual
lease reserves and economics that were revised are attached.
If you have any questions, please call me at 713-750-7215.
Yours very truly,
/s/ WILLIAMSON PETROLEUM CONSULTANTS, INC.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
JDS/jek
Attachments
A-2
<PAGE>
EXHIBIT B
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS FAX (403) 262-2790
1610, 855-2ND STREET S.W. CALGARY, ALBERTA T2P 2P2 TELEPHONE (403) 262-2799
February 7, 1997
Mr. Darby Sere
Bellwether Exploration Company
1221 Lamar, Suite 1600
Houston, TX 77010
Gentlemen:
At your request, we have reviewed the estimates of the remaining proved reserves
and future net income attributable to certain properties being considered for
purchase by Bellwether Exploration Company (Bellwether), as of July 1, 1996, as
prepared by the engineering and geological consultants to Bellwether and based
on Securities and Exchange Commission (SEC) guidelines for future cost and price
parameters.
The properties that we reviewed represent 84 percent of the total proved
discounted future net income based on constant pricing and costs as taken from
reserve and income projections prepared by Bellwether as of July 1, 1996.
The estimated reserves presented in this report are related to hydrocarbon
prices. June 1996 hydrocarbon prices were used in the preparation of this report
as required by SEC guidelines. However, actual future prices may vary
significantly from those used. Therefore, volumes of reserves actually recovered
and the amounts of income actually received may differ significantly from the
estimated quantities presented in this report. The estimated net reserves and
future net income attributable to the properties being considered for purchase
are summarized as follows:
SEC PARAMETERS
Estimated Net Remaining Reserves and Income Data
Attributable to Certain Properties Considered for Purchase by
BELLWETHER EXPLORATION COMPANY
As of July 1, 1996
<TABLE>
<CAPTION>
Proved
---------------------------------------------------------------------------------
Developed
--------------------------------------------- Proved Total
Producing Non-Producing Undeveloped Costs Proved
----------- ------------- ----------- ------- ------------
NET RESERVES OF PROPERTIES
REVIEWED BY RYDER SCOTT
<S> <C> <C> <C> <C> <C>
Oil/Condensate - Barrels .................. 11,635,800 623,900 2,100,600 0 14,360,400
Gas - MMcf ................................ 103,109 25,134 10,815 0 139,057
Plant Products - Bbls ..................... 1,082,500 193,800 413,100 0 1,689,400
PV(10) Future Net Income ($M) ............. $ 181,897 $ 26,171 $ 19,609 ($15,686) $ 211,992
</TABLE>
<PAGE>
Liquid hydrocarbons are expressed in standard 42 gallon barrels. All gas volumes
are expressed in millions of cubic feet (MMCF) at the official temperature and
pressure bases of the areas in which the gas reserves are located.
The proved developed non-producing reserves attributable to the reviewed
properties are comprised of shut-in and behind pipe reserves.
The proved reserves, which are attributable to the properties that we reviewed,
conform to the definition as set forth in the Securities and Exchange
Commission's Regulation S-X Part 210.4-10(a) as clarified by subsequent
Commission Staff Accounting Bulletins. The proved reserves are defined as
follows:
PROVED RESERVES of crude oil, condensate, natural gas and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from
known reservoirs under existing conditions. Reservoirs are considered proved
if economic producibility is supported by actual production or formation
tests. In certain instances, proved reserves are assigned on the basis of a
combination of core analysis and electrical and other type logs which
indicate the reservoirs are analogous to reservoirs in the same field which
are producing or have demonstrated the ability to produce on a formation
test. The area of a reservoir considered proved includes (1) that portion
delineated by drilling and defined by fluid contacts, if any, and (2) the
adjoining portions not yet drilled that can be reasonably judged as
economically productive on the basis of available geological and engineering
data. In the absence of data on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the reservoir.
Proved reserves are estimates of hydrocarbons to be recovered from a given
date forward. They may be revised as hydrocarbons are produced and
additional data become available. Proved natural gas reserves are comprised
of non-associated, associated, and dissolved gas. An appropriate reduction
in gas reserves has been made for the expected removal of liquids, for lease
and plant fuel, and the exclusion of non-hydrocarbon gases if they occur in
significant quantities and are removed prior to sale. Reserves that can be
produced economically through the application of established improved
recovery techniques are included in the proved classification when these
qualifications are met: (1) successful testing by a pilot project or the
operation of an installed program in that reservoir or one in the immediate
area with similar rock and fluid properties provides support for the
engineering analysis on which the project or program was based, and (2) it
is reasonably certain the project will proceed. Reserves to be recovered by
improved recovery techniques that have yet to be established through
repeated economically successful applications are included in the proved
category only after testing by a pilot project or after the operation of an
installed program in the reservoir provides support for the engineering
analysis on which the project or program was based. Improved recovery
includes all methods for supplementing natural reservoir forces and energy,
or otherwise increasing ultimate recovery from a reservoir, including (1)
pressure maintenance, (2) cycling, and (3) secondary recovery in its
original sense. Improved recovery also includes the enhanced recovery
methods of thermal, chemical flooding, and the use of miscible and
immiscible displacement fluids. Estimates of proved reserves do not include
crude oil, condensate, natural gas or natural gas liquids being held in
B-2
<PAGE>
underground storage. Depending on the status of development, these proved
reserves are further subdivided into:
1) "developed reserves" which are those proved reserves reasonably
expected to be recovered through existing wells with existing
equipment and operating methods, including (a) "developed producing
reserves" which are those proved developed reserves reasonably
expected to be produced from existing completion intervals now open
for production in existing wells, and (b) "developed non-producing
reserves" which are those proved developed reserves which exist
behind the casing of existing wells which are reasonably expected to
be produced through these wells in the predictable future where the
cost of making such hydrocarbons available for production should be
relatively small compared to the cost of a new well; and
2) "undeveloped reserves" which are those proved reserves reasonably
expected to be recovered from new wells on undrilled acreage, from
existing wells where a relatively large expenditure is required and
from acreage for which an application of fluid injection or other
improved recovery technique is contemplated where the technique has
been proved effective by actual tests in the area in the same
reservoir or one with similar rock and fluid properties. Reserves
from undrilled acreage are limited to those drilling units
offsetting productive units that are reasonably certain of
production when drilled. Proved reserves for other undrilled units
are included only where it can be demonstrated with reasonable
certainty that there is continuity of production from the existing
formation.
REVIEWED PROCEDURE AND OPINION
In performing our review, we have relied upon data furnished by Bellwether with
respect to property interests owned, production and well tests from examined
wells, geological structural and isopach maps, well logs, core analyses, and
pressure measurements. These data were accepted as authentic and sufficient for
determining the reserves unless, during the course of our examination, a matter
of question came to our attention in which case the data were not accepted until
all questions were satisfactorily resolved. Our review included such tests and
procedures as we considered necessary under the circumstances to render the
conclusions set forth herein.
In our opinion, estimates of future reserves for the reviewed properties were
prepared in accordance with generally accepted procedures for the estimation of
future reserves, and we found no bias in the utilization and analysis of data in
estimates for these properties. In general, we were in reasonable agreement with
Bellwether's estimates of remaining proved reserves for the properties which
were reviewed; however, in certain cases there was more than an acceptable
variance in Bellwether's estimates and our estimates due to a difference in
interpretation of data or due to our having access to data which were not
available to Bellwether when its reserve estimates were prepared. In these
cases, Bellwether revised its estimates to conform to our estimates. As a
consequence, it is our opinion that the data presented herein
B-3
<PAGE>
for the properties that we reviewed fairly reflect the estimated net reserves
owned by Bellwether.
Certain technical consultants to Bellwether are responsible for the preparation
of reserve estimates on new properties and for the preparation of revised
estimates, when necessary, on old properties. These personnel assembled the
necessary data and maintained the data and work papers in an orderly manner. We
consulted with these technical personnel and had access to their workpapers and
supporting data in the course of our review.
RESERVES ESTIMATES
The reserves for the properties that we reviewed were estimated by performance
methods or the volumetric method. The reserve estimates by performance method
utilized extrapolations of various historical data in those cases where such
data were definitive. Reserves were estimated by the volumetric method in those
cases where there were inadequate historical data to establish a definitive
trend or where the use of production performance data as a basis for the
reserves estimates was considered to be inappropriate and the volumetric data
were adequate for a reasonable estimate.
The reserves presented herein, as estimated by Bellwether and reviewed by us,
are estimates only and should not be construed as being exact quantities.
Moreover, estimates of reserves may increase or decrease as a result of future
operations.
ECONOMIC EVALUATIONS
Bellwether provided the economic evaluations associated with their reserve
estimates and projections. They also provided the operating and development
costs used in these evaluations. We reviewed these costs for reasonableness, but
did not compare them against actual detailed lease operating expense statements.
We found these provided costs to be within acceptable ranges generally
experienced in their respective areas.
Bellwether provided the initial hydrocarbon prices used in this evaluation. We
have not compared the initial prices provided by Bellwether with actual prices
being received at the effective date of their evaluation.
The cashflow evaluations provided by Belllwether were produced by economic
software not internally authored by Ryder Scott Company. We therefore, cannot
comment as to the accuracy of the internal calculations associated with this
software. It is, however, a widely used and accepted commercial software
package. These economic evaluations, as provided by Bellwether, have not been
reviewed in detail by Ryder Scott.
B-4
<PAGE>
GENERAL
In general, the reserve estimates for the properties that we reviewed are based
on data generally available through June 1996. Gas imbalances, if any, were not
taken into account in the gas reserves estimates reviewed.
Neither we nor any of our employees have any interest in the subject properties
and neither the employment to do this work nor the compensation is contingent on
our estimates of reserves for the properties which were reviewed.
This report was prepared for the exclusive use of Bellwether. The data and work
papers used in the preparation of this report are available for examination by
authorized parties in our offices. Please contact us if we can be of further
service.
Yours very truly,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ DOUGLAS G. MANNER
Douglas G. Manner, P.E.
Senior Vice President,
DGM/jkl
[SEAL]
B-5
<PAGE>
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE OFFER CONTAINED HEREIN AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL, OR A SOLICITATION OF AN OFFER TO BUY, THE COMMON STOCK OFFERED HEREBY
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER IS NOT AUTHORIZED, OR IN WHICH
THE PERSON MAKING SUCH OFFER IS NOT QUALIFIED TO DO SO, OR TO ANY PERSON TO WHOM
IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE AN
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THAT THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY
TIME SUBSEQUENT TO THE DATE HEREOF.
------------------
TABLE OF CONTENTS
PAGE
Prospectus Summary...................... 3
Risk Factors............................ 10
Notes Offering.......................... 16
Price Range of Common Stock and
Dividend Policy....................... 16
Use of Proceeds......................... 17
Capitalization.......................... 18
Unaudited Pro Forma Condensed
Consolidated Financial Data........... 19
Selected Consolidated Financial Data.... 27
Management's Discussion and Analysis of
Financial Condition and Results of
Operations............................ 29
Business and Properties................. 34
Management.............................. 49
Transactions with Related Persons....... 54
Principal and Selling Stockholders...... 59
Description of Capital Stock............ 60
Description of Indebtedness............. 61
Underwriting............................ 63
Legal Matters........................... 64
Experts................................. 64
Available Information................... 65
Glossary................................ 66
Index to Financial Statements........... F-1
Report of Williamson Petroleum
Consultants Inc....................... Exhibit A
Report of Ryder Scott Company
Petroleum Engineers................... Exhibit B
4,875,000 SHARES
[LOGO]
BELLWETHER
EXPLORATION
COMPANY
COMMON STOCK
_____________________
PROSPECTUS
_____________________
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
J.P. MORGAN & CO.
PRINCIPAL FINANCIAL SECURITIES, INC.
================================================================================
PROSPECTUS
BELLWETHER EXPLORATION COMPANY
$100,000,000
10 7/8% SENIOR SUBORDINATED NOTES DUE 2007
INTEREST PAYABLE APRIL 1 AND OCTOBER 1
ISSUE PRICE: 100%
The 10 7/8% Senior Subordinated Notes due 2007 (the "Notes") are being offered
(the "Notes Offering") by Bellwether Exploration Company, a Delaware
corporation (the "Company"). Concurrently with the Notes Offering, the Company
and Selling Stockholders are offering an aggregate of 4,875,000 shares of the
Company's Common Stock (the "Common Stock Offering," and together with the
Notes Offering, the "Offerings") pursuant to an underwritten public offering.
The Notes Offering and the Common Stock Offering are each conditioned on the
consummation of the other and the consummation of the Pending Acquisition (as
defined herein). The Notes mature on April 1, 2007, unless previously redeemed.
Interest on the Notes is payable semiannually on April 1 and October 1,
commencing October 1, 1997. The Notes will be redeemable, in whole or in part,
at the option of the Company at any time on or after April 1, 2002, at the
redemption prices set forth herein, plus accrued and unpaid interest, if any, to
the date of redemption.
The Company expects to use the net proceeds of the Offerings, together with
borrowings under the New Credit Facility (as defined herein), to fund the cash
purchase price of the Pending Acquisition and to refinance existing
indebtedness.
Upon a Change of Control (as defined herein), the Company will have the
obligation to offer to purchase all outstanding Notes at a price equal to 101%
of the principal amount thereof, plus accrued and unpaid interest to the date of
purchase.
The Notes will be general unsecured obligations of the Company, subordinated in
right of payment to all existing and future Senior Indebtedness (as defined
herein) of the Company, which will include borrowings under the New Credit
Facility. The Notes will be fully and unconditionally guaranteed (the
"Subsidiary Guarantee") by Odyssey Petroleum Company (the "Subsidiary
Guarantor"). The Subsidiary Guarantee will be a general unsecured obligation of
the Subsidiary Guarantor and will rank subordinate in right of payment to all
existing and future Guarantor Senior Indebtedness (as defined herein). The Notes
and the Subsidiary Guarantee will rank PARI PASSU in right of payment with any
other senior subordinated indebtedness of the Company and the Subsidiary
Guarantor, respectively. As of December 31, 1996, on a pro forma basis after
giving effect to the Transactions (as defined herein), the Company had $35.9
million of outstanding Senior Indebtedness. No Indebtedness (as defined herein)
of the Company is expressly subordinated to the Notes. There is currently no
trading market for the Notes and the Company does not intend to list the Notes
on any securities exchange.
SEE "RISK FACTORS" COMMENCING ON PAGE 12 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC(1) DISCOUNTS(2) COMPANY(3)
- ----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Note 100% 3% 97%
- ----------------------------------------------------------------------------------------------------------
Total $100,000,000 $3,000,000 $97,000,000
- ----------------------------------------------------------------------------------------------------------
</TABLE>
(1) Plus accrued interest, if any, from the date of issuance.
(2) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(3) Before deducting expenses payable by the Company estimated at $475,000.
The Notes are offered by the Underwriters, subject to prior sale, when, as and
if issued to and accepted by them and subject to certain other conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the Notes
will be made through the book entry facilities of The Depository Trust Company,
against payment therefor on or about April 9, 1997.
J.P. MORGAN & CO. CHASE SECURITIES INC.
April 3, 1997
<PAGE>
[MAP]
CERTAIN PERSONS PARTICIPATING IN THE NOTES OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES.
SPECIFICALLY, THE UNDERWRITERS MAY OVERALLOT IN CONNECTION WITH THE NOTES
OFFERING AND MAY BID FOR, AND PURCHASE, NOTES IN THE OPEN MARKET. FOR A
DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
<PAGE>
No dealer, salesperson or any other person has been authorized to give any
information or to make any representations not contained in this Prospectus in
connection with the offer contained herein and, if given or made, such
information or representations must not be relied upon as having been authorized
by the Company or any Underwriter. This Prospectus does not constitute an offer
to sell, or a solicitation of an offer to buy, the Notes offered hereby by
anyone in any jurisdiction in which such offer is not authorized, or in which
the person making such offer is not qualified to do so, or to any person to whom
it is unlawful to make such offer or solicitation. Neither the delivery of this
Prospectus nor any sale made hereunder shall, under any circumstances, create an
implication that there has been no change in the affairs of the Company since
the date hereof or that the information contained herein is correct as of any
time subsequent to the date hereof.
TABLE OF CONTENTS
PAGE
Available Information .................................................... 3
Prospectus Summary ....................................................... 4
Risk Factors ............................................................. 12
Common Stock Offering .................................................... 18
Use of Proceeds .......................................................... 18
Capitalization ........................................................... 19
Unaudited Pro Forma Condensed Consolidated Financial Data ................ 20
Selected Consolidated Financial Data ..................................... 28
Management's Discussion and Analysis of Financial
Condition and Results of Operations .................................... 30
Business and Properties .................................................. 35
Management ............................................................... 49
Transactions with Related Persons ........................................ 54
Principal and Selling Stockholders ....................................... 59
Description of Capital Stock ............................................. 60
Description of New Credit Facility ....................................... 61
Description of Notes ..................................................... 62
Underwriting ............................................................. 90
Legal Matters ............................................................ 91
Experts .................................................................. 91
Glossary ................................................................. 92
Index to Financial Statements ............................................ F-1
Report of Williamson Petroleum Consultants, Inc.............Exhibit ...... A
Report of Ryder Scott Company Petroleum Engineers.......Exhibit .......... B
<PAGE>
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"), and, in accordance therewith, files
reports and other information with the Securities and Exchange Commission
("SEC"). Reports, proxy and information statements and other information filed
by the Company with the SEC pursuant to the informational requirements of the
Exchange Act may be inspected at the public reference facilities maintained by
the SEC at 450 Fifth Street, N.W., Judiciary Plaza, Washington, D.C. 20549-1004,
and at the following Regional Offices of the SEC: Chicago Regional Office, 500
West Madison Street, Suite 1400, Chicago, Illinois 60661-2511, and New York
Regional Office, 7 World Trade Center, New York, New York 10048. Copies of such
material may also be obtained from the Public Reference Section of the SEC, 450
Fifth Street, N.W., Washington, D.C. 20549-1004 at prescribed rates. The
Registration Statement was filed with the SEC electronically. The SEC maintains
a site on the World Wide Web that contains documents filed with the SEC
electronically. The address of such site is http://www.sec.gov, and the
Registration Statement may be inspected at such site. The Common Stock is traded
on the Nasdaq National Market. The Company's registration statements, reports,
proxy and information statements, and other information may also be inspected at
the National Association of Securities Dealers, Inc., 1735 K Street, N.W.,
Washington, D.C. 20006.
This Prospectus constitutes a part of a Registration Statement on Form S-1 filed
by the Company with the SEC under the Securities Act of 1933 ("Securities
Act"). This Prospectus omits certain of the information contained in the
Registration Statement, and reference is hereby made to the Registration
Statement for further information with respect to the Company and the securities
offered hereby. Any statements contained herein concerning the provisions of any
document filed as an exhibit to the Registration Statement or otherwise filed
with the SEC are not necessarily complete and in each instance reference is made
to the copy of such document so filed. Each such statement is qualified in its
entirety by such reference.
3
<PAGE>
PROSPECTUS SUMMARY
THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY, AND SHOULD BE READ IN
CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND CONSOLIDATED FINANCIAL
STATEMENTS AND THE NOTES THERETO APPEARING ELSEWHERE HEREIN. REFERENCES TO
"BELLWETHER" OR THE "COMPANY" HEREIN INCLUDE BELLWETHER EXPLORATION COMPANY
AND ITS PREDECESSORS AND SUBSIDIARIES UNLESS THE CONTEXT OTHERWISE REQUIRES.
BELLWETHER'S FISCAL YEAR ENDS ON JUNE 30. PRO FORMA INFORMATION REGARDING
BELLWETHER GIVES EFFECT TO THE PENDING ACQUISITION, THE OFFERINGS AND THE OTHER
TRANSACTIONS DESCRIBED UNDER "UNAUDITED PRO FORMA CONDENSED CONSOLIDATED
FINANCIAL DATA" (COLLECTIVELY, THE "TRANSACTIONS") AS IF THEY OCCURRED ON THE
DATES INDICATED. THE ESTIMATES AS OF JUNE 30, 1996 OF THE COMPANY'S NET PROVED
RESERVES ARE BASED ON THE REPORT OF WILLIAMSON PETROLEUM CONSULTANTS INC.
("WILLIAMSON"), AND THE ESTIMATES OF NET PROVED RESERVES OF THE ACQUIRED
PROPERTIES (AS HEREINAFTER DEFINED) ARE DERIVED FROM A RESERVE REPORT PREPARED
BY THE COMPANY AND AUDITED BY RYDER SCOTT COMPANY PETROLEUM ENGINEERS ("RYDER
SCOTT"). UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES
THE UNDERWRITERS' OVER-ALLOTMENT OPTIONS IN THE COMMON STOCK OFFERING WILL NOT
BE EXERCISED. CERTAIN TERMS RELATING TO THE OIL AND GAS INDUSTRY ARE DEFINED IN
"GLOSSARY."
THE COMPANY
Bellwether is an independent energy company primarily engaged in the
acquisition, exploitation, development and exploration of oil and gas
properties. The Company has grown and diversified its reserve base through the
acquisition of oil and gas properties and the subsequent development of these
properties. Bellwether's estimated net proved reserves have increased at a
compounded annual growth rate of 65.9%, from 1.6 MMBOE as of June 30, 1993 to
7.3 MMBOE as of June 30, 1996. During this period, average net daily production
increased at a compounded annual growth rate of 73.6%, from 618.0 BOE/d in
fiscal 1993 to 3,235.0 BOE/d in fiscal 1996, and EBITDA increased at a
compounded annual growth rate of 89.0%, from $1.6 million in fiscal 1993 to
$10.8 million in fiscal 1996. The Company's net cash flows from operations have
increased at a compounded annual growth rate of 67.4%, from $1.6 million in
fiscal 1993 to $7.5 million in fiscal 1996. The Company believes its primary
strengths are a demonstrated ability to identify and acquire properties which
have significant potential for further exploitation, development and
exploration, an inventory of development and exploration projects, expertise in
the use of advanced technologies such as 3-D seismic and horizontal drilling and
a conservative capital structure supportive of continued investment in its core
properties as well as additional acquisitions.
The Company has recently agreed to acquire (the "Pending Acquisition") the oil
and gas properties (the "Acquired Properties") and associated working capital
owned by partnerships and other entities (the "Sellers") managed or sponsored
by Torch Energy Advisors Incorporated ("Torch"). Bellwether believes that the
Pending Acquisition provides the opportunity to significantly increase reserves
and cash flow at an attractive price while providing opportunities for future
reserve growth through exploitation and exploration activities. On a pro forma
basis, Bellwether's estimated net proved reserves as of June 30, 1996 were 46.6
MMBOE (86% developed and 62% natural gas) with a PV-10 Value (pre-tax) of $260.1
million. Pro forma average daily net production was 22.7 MBOE/d for fiscal 1996
and pro forma EBITDA for fiscal 1996 was $75.0 million, excluding non-recurring
gas contract settlements payable to the Company aggregating $18.9 million.
Following the Pending Acquisition, the Company's properties will be concentrated
in Texas, Louisiana, Alabama, California and the Gulf of Mexico.
BUSINESS STRATEGY
Bellwether's strategy is to maximize long-term shareholder value through
aggressive growth in reserves and cash flow using advanced technologies,
implementation of a low cost structure and maintenance of a capital structure
supportive of growth. Bellwether expects the additional cash flows from the
Acquired Properties will finance a significant portion of its growth strategy.
Key elements of this strategy are:
OPPORTUNISTIC ACQUISITIONS. Bellwether seeks to acquire properties that have
produced significant quantities of oil and gas and have upside potential which
can be exploited using 3-D seismic, computer aided exploration ("CAEX"),
horizontal drilling, workovers and other enhanced recovery techniques. Such
acquisitions have included the Fausse Pointe field in south Louisiana, the Cove
field offshore Texas and the Fort Trinidad field in east Texas.
EXPLOITATION AND DEVELOPMENT OF PROPERTIES. The Company actively pursues the
exploitation of its properties through recompletions, waterfloods and
development wells, including horizontal drilling. Examples of recent
exploitation successes include a five well workover program and two development
wells in the Cove field, which increased Bellwether's average net production in
this field from 1.0 MMcf/d in January 1996 to 11.1 MMcf/d in February 1997. In
addition, the Company recently drilled a successful horizontal development well
into the Buda
4
<PAGE>
formation in the Fort Trinidad field which tested in January 1997 at 420 Bbls/d
of oil. Bellwether also initiated a waterflood project in the Fort Trinidad
field during fiscal 1996. Future planned exploitation projects include in excess
of 20 horizontal drilling locations in the Buda and Glen Rose B formations in
the Fort Trinidad field and up to three horizontal drilling locations to exploit
the Company's exploratory success in the Giddings field in the Austin Chalk
formation. In addition, because the Sellers were formed to distribute net cash
flows rather than reinvest in the exploitation of the Acquired Properties, the
Company believes that such properties will provide significant exploitation and
development opportunities. The Company's exploitation budget for fiscal 1997 is
$8.6 million, of which approximately $4.8 million had been spent as of December
31, 1996. During fiscal 1997, the capital expenditures on the Acquired
Properties are estimated to be $23.2 million of which $5.7 million had been
spent as of December 31, 1996. For fiscal 1998, the Company has identified
exploitation projects totaling $25.2 million (including amounts to be spent on
the Acquired Properties).
EXPLORATION ACTIVITIES. The Company's exploration activities focus on projects
with potential for substantial reserve increases. In January 1997, the Company
completed a successful exploration well in the Austin Chalk formation in the
Giddings field in central Texas. Exploration projects in the remainder of fiscal
1997 and in fiscal 1998 include multiple wells in the Fausse Pointe field and an
exploration well west of the Cove field, both of which are operated by the
Company. In addition, the Company also expects the Acquired Properties to
present exploration opportunities. For example, in the Ship Shoal complex in the
Gulf of Mexico, the Sellers declined to acquire available 3-D seismic surveys
and to participate in six offshore exploration or exploitation wells in 1996,
all of which were successful. The Company plans to acquire this and other 3-D
seismic surveys of the Acquired Properties and to participate in future wells
based on its interpretation of the data. During fiscal 1997, the Company has
budgeted $4.8 million for exploration, of which $2.1 million had been spent as
of December 31, 1996. For fiscal 1998, the Company has identified exploration
projects totaling $17.6 million (including amounts to be spent on the Acquired
Properties).
ADVANCED TECHNOLOGY. The Company seeks to improve the efficiency and reduce the
risks associated with its exploration and exploitation activities using advanced
technologies. These advanced technologies include 3-D seismic, CAEX techniques
and horizontal drilling. The Company acquired a 3-D survey on the Cove field,
conducted a 3-D survey on the Fausse Pointe field and plans to acquire three 3-D
surveys on certain of the Acquired Properties. The Company believes its existing
properties and the Acquired Properties will benefit from the application of
advanced technologies.
TORCH RELATIONSHIP. The Company operates under an Administrative Services
Agreement with Torch. Torch has a staff of 39 geologists, geophysicists,
reservoir engineers and landmen and 59 financial personnel and professionals.
The Company believes that its relationship with Torch provides it with access to
acquisition opportunities and financial and technical expertise that are
generally only available to significantly larger companies. In addition, the
fees payable to Torch reduce significantly on a BOE basis as the Company's asset
base and production grow.
LOW COST STRUCTURE. The Company's cost structure will benefit from the Pending
Acquisition and the Company believes that its larger asset and production base
will allow it to maintain a low cost structure prospectively. Because general
and administrative costs are spread over higher production, pro forma general
and administrative costs per BOE in fiscal 1996 and the six months ended
December 31, 1996 were $1.00 and $0.99, respectively, compared with $2.55 and
$2.37, respectively, on a historical basis.
5
<PAGE>
PENDING ACQUISITION
In March 1997, the Company agreed to purchase the Acquired Properties and an
estimated $18.0 million of working capital for $188.3 million, plus a contingent
payment of up to $9.0 million, the actual amount of which will be based on 1997
gas prices (the "Contingent Payment"). The effective date of the Pending
Acquisition is July 1, 1996 and the estimated net adjusted purchase price
assuming an April 9, 1997 closing date is $141.8 million plus the Contingent
Payment. As of June 30, 1996, estimated net proved reserves attributable to the
Acquired Properties were 39.2 MMBOE (89% developed and 59% gas) with a PV-10
Value (pre-tax) of $212.0 million.
The Company will finance the cash portion of the Pending Acquisition and related
fees, estimated to aggregate $173.2 million, including repayment of an estimated
$12.0 million of existing indebtedness with the proceeds of the Offerings
(estimated to be $136.3 million) and $36.9 million of borrowings under its new
credit facility ("New Credit Facility"). Torch and a subsidiary of Torchmark
Corporation ("Torchmark"), the parent corporation of a Selling Stockholder,
have interests in the Acquired Properties and will receive an estimated $18.0
million and $12.7 million, respectively, of the purchase price paid for the
Acquired Properties. Torch and Torchmark will also receive fees payable in cash
and Common Stock in connection with the Pending Acquisition aggregating an
estimated $3.3 million. See "Risk Factors -- Conflicts of Interest" and
"Transactions with Related Persons." The Pending Acquisition will close
simultaneously with the Offerings, except that Bellwether has agreed to acquire
the interest of one investor which owns less than $2.2 million of properties on
April 15, 1997. See "Business and Properties -- Structure of the Pending
Acquisition."
The Company has identified for divestiture non-core properties representing
approximately 10% of the estimated net proved reserves attributable to the
Acquired Properties as of June 30, 1996. These properties are primarily small
working interests in geographically diverse locations, with generally low
production rates and cash flows, and limited potential for development. The
Company expects to sell these properties during fiscal 1997 and fiscal 1998. The
net proceeds from these divestitures, which will be used to repay indebtedness,
are currently estimated to be $15 million, but will depend on prevailing market
conditions at the time of sale.
The Company's address is 1331 Lamar, Suite 1455, Houston, TX 77010, and its
phone number is (713) 650-1025.
6
<PAGE>
THE NOTES OFFERING
SECURITIES OFFERED................... $100,000,000 principal amount of 10 7/8%
Senior Subordinated Notes due 2007.
MATURITY DATE........................ April 1, 2007.
INTEREST PAYMENT DATES............... Interest on the Notes will be payable
semi-annually in arrears on April 1 and
October 1 of each year, commencing
October 1, 1997.
OPTIONAL REDEMPTION.................. The Notes will be redeemable at the
option of the Company, in whole or in
part, at any time on or after April 1,
2002 at the redemption prices set forth
herein, together with accrued and unpaid
interest, if any, to the date of
redemption.
RANKING.............................. The Notes will be general unsecured
senior subordinated obligations of the
Company which will be subordinated in
right of payment to all existing or
future senior indebtedness of the
Company, pari passu with all existing
and future senior subordinated
indebtedness of the Company, and senior
in right of payment to all future
subordinated indebtedness of the
Company. As of December 31, 1996, on a
pro forma basis after giving effect to
the Transactions, the Company and its
restricted subsidiaries would have had
approximately $35.9 million of
indebtedness that effectively would rank
senior to the Notes. Subject to certain
limitations set forth in the Indenture,
the Company and its subsidiaries may
incur additional Indebtedness. See
"Capitalization," "Description of the
Notes" and "Management's Discussion and
Analysis of Financial Condition and
Results of Operations--Liquidity and
Capital Resources."
GUARANTEE............................ The Notes will be initially guaranteed
(the "Subsidiary Guarantee") by Odyssey
Petroleum Company (the "Subsidiary
Guarantor"), a subsidiary of the
Company. The Subsidiary Guarantee will
be a general unsecured senior
subordinated obligation of the
Subsidiary Guarantor and will be
subordinated in right of payment to all
existing or future senior indebtedness
of the Subsidiary Guarantor, PARI PASSU
with all existing and future senior
subordinated indebtedness of the
Subsidiary Guarantor, and senior in
right of payment to all future
subordinated indebtedness of the
Subsidiary Guarantor. The Subsidiary
Guarantee may be released under certain
circumstances. See "Description of the
Notes--Senior Subordinated Guarantee of
Notes."
CERTAIN COVENANTS.................... The Indenture pursuant to which the
Notes will be issued (the "Indenture")
will contain certain covenants,
including, without limitation, covenants
with respect to the following matters:
(i) limitation on indebtedness; (ii)
limitation on restricted payments; (iii)
limitation on transactions with
affiliates; (iv) limitation on liens;
(v) limitation on guarantees of
indebtedness by subsidiaries; (vi)
limitation on dividends and other
payment restrictions affecting
restricted subsidiaries; (vii)
limitation on issuances and sales of
restricted subsidiary stock; (viii)
limitation on the disposition of
proceeds of asset sales; and (ix)
restrictions on mergers, consolidations
or sales of assets. See "Description of
the Notes--Certain Covenants."
7
<PAGE>
MANDATORY OFFERS TO PURCHASE......... Upon a Change of Control (as defined
herein), each holder of the Notes may
require the Company to purchase all or a
portion of such holder's Notes at a
purchase price equal to 101% of the
principal amount thereof, together with
accrued and unpaid interest, if any, to
the date of purchase. See "Description
of the Notes--Certain Definitions." In
the event of certain asset dispositions,
the Company will be required to make an
offer to purchase the Notes at 100% of
the principal amount thereof, together
with accrued and unpaid interest, if
any, to the date of purchase. See
"Description of the Notes--Repurchase at
the Option of the Holders--Change of
Control" and "--Asset Sales."
COMMON STOCK OFFERING................ Concurrent with the Notes Offering, the
Company and Selling Stockholders are
offering 4,400,000 and 475,000 shares of
Common Stock, respectively, for sale to
the public. The Company will not receive
any proceeds from the sale of Common
Stock by the Selling Stockholders in the
Common Stock Offering. The consummation
of the Notes Offering and the Common
Stock Offering are contingent upon each
other and upon the Pending Acquisition.
USE OF PROCEEDS...................... The Company will use the net proceeds
from the Notes Offering and the Common
Stock Offering, together with bank
borrowings under the New Credit
Facility, to finance the cash portion of
the Pending Acquisition, to repay bank
borrowings under the Company's existing
credit facility and to pay transaction
costs. See "Use of Proceeds."
RISK FACTORS
See "Risk Factors" for a discussion of certain matters that should be
considered in evaluating an investment in the Notes.
8
<PAGE>
SUMMARY CONSOLIDATED FINANCIAL DATA
The following tables set forth summary historical financial data of the Company
for the three fiscal years ended June 30, 1996, and the six months ended
December 31, 1995 and 1996, as well as summary unaudited pro forma financial
data of the Company for the fiscal year ended June 30, 1996 and the six months
ended December 31, 1996. Pro forma statement of operations data give effect to
the Transactions as if they occurred on June 30, 1995 and pro forma balance
sheet data give effect to the Transactions as if they occurred on December 31,
1996. The unaudited financial information as of December 31, 1996, and for the
six months ended December 31, 1995 and 1996 has been prepared by the Company in
accordance with generally accepted accounting principles and reflects all
adjustments (consisting of normal recurring adjustments) necessary for a fair
statement, in all material respects, of the results for the interim periods
presented. Certain financial statement items in the interim 1995 period have
been reclassified to conform to the interim 1996 presentation. The unaudited pro
forma financial data are not necessarily indicative of the financial results
that would have occurred had the Transactions been effective on and as of the
dates indicated and should not be viewed as indicative of operations in future
periods. These data should be read in conjunction with "Capitalization,"
"Unaudited Pro Forma Condensed Consolidated Financial Data," "Selected
Consolidated Financial Data," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
ACTUAL PRO FORMA ACTUAL PRO FORMA
1994 1995 1996 1996 1995 1996 1996
--------- -------- -------- --------- --------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE DATA AND RATIOS
STATEMENT OF OPERATIONS DATA:
Revenues:
Gas revenues.................... $ 2,620 $ 4,864 $ 9,856 $ 63,765 $ 4,186 $ 6,759 $34,418
Oil revenues.................... 1,086 3,643 5,810 48,111 2,956 3,087 24,619
Gas plant and gas gathering
revenues(a)................... 6,930 10,705 8,719 8,802 4,923 3,879 3,881
Interest income and other....... 63 97 116 20,291(b) 57 53 393(b)
--------- -------- -------- --------- --------- ------- ---------
Total revenues..................... 10,699 19,309 24,501 140,969 12,122 13,778 63,311
--------- -------- -------- --------- --------- ------- ---------
Expenses:
Operating expenses.............. 5,307 8,934 10,502 38,644 5,453 4,888 19,394
General and administrative
expenses...................... 1,234 2,739 3,013 8,328 1,559 1,452 3,430
Depreciation, depletion and
amortization.................. 2,489 5,269 8,148 42,969 3,866 4,167 18,299
Interest expense................ 721 1,245 1,657 14,535 956 520 7,493
Other expense................... -- -- 153 153 155 -- --
--------- -------- -------- --------- --------- ------- ---------
Total expenses..................... 9,751 18,187 23,473 104,629 11,989 11,027 48,616
--------- -------- -------- --------- --------- ------- ---------
Income before income taxes and
minority interest in gas plant
ventures........................ 948 1,122 1,028 36,340 133 2,751 14,695
Net income......................... $ 814 $ 941 $ 982 $ 23,228 $ 1 $ 1,733 $ 9,258
========= ======== ======== ========= ========= ======= =========
Net income per share(c).............. $ 0.27 $ 0.12 $ 0.11 $ 1.71 $ 0.00 $ 0.19 $ 0.68
========= ======== ======== ========= ========= ======= =========
Weighted average common and common
equivalent shares outstanding(c)... 3,006 7,713 9,052 13,602 9,045 9,118 13,668
========= ======== ======== ========= ========= ======= =========
OTHER FINANCIAL DATA:
Capital expenditures............... $ 22,034 $ 41,901 $ 6,999 -- $ 1,174 $ 7,475 --
EBITDA(d).......................... $ 4,158 $ 7,636 $ 10,833 $ 74,977 (e) $ 4,955 $ 7,438 $40,611(e)
EBITDA/interest expense............ 5.77 6.13 6.54 5.16 5.18 14.30 5.42
Net cash flows provided by
operating activities............ $ 3,122 $ 5,283 $ 7,485 -- $ 3,496 $ 7,105 --
Net cash flows (used in) provided
by investing activities......... $ (9,423) $(27,289) $ 3,542 -- $ (1,174) $(5,810) --
Net cash flows provided by (used
in) by financing activities..... $ 7,334 $ 21,642 $(11,332) -- $ (1,000) $(1,628) --
Ratio of earnings to fixed
charges(f)...................... 2.31 1.90 1.62 3.50 1.14 6.29 2.96
</TABLE>
9
<PAGE>
------------------------
DECEMBER 31, 1996
ACTUAL PRO FORMA
------------------------
BALANCE SHEET DATA:
Working capital................. $ 4,357 $ 22,394
Total assets.................... 68,982 239,987
Long term debt, net of current
maturities..................... 11,000 135,892
Stockholders' equity............ 48,751 84,438
- -----------------------------
(a) In March 1996 Bellwether assumed a contract to purchase gas at $4.50 per
MMBtu (the "Contract Assumption"), for which Bellwether received $9.9
million. As a result of this transaction, Bellwether ceased to recognize gas
gathering revenues and expenses. Historical gas gathering revenues were $2.4
million, $5.0 million and $3.4 million, respectively, for the years ended
June 30, 1994, 1995 and 1996, and $2.5 million for the six months ended
December 31, 1995. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Six Months
Ended December 31, 1995 Compared With December 31, 1996 -- Revenues."
(b) Includes $18.9 million and $(124,000), respectively, of revenues and
expenses attributable to non-recurring gas contract settlements for the year
ended June 30, 1996 and the six months ended December 31, 1996.
(c) Restated to reflect a 1-for-8 reverse stock split consummated in fiscal
1994.
(d) EBITDA is defined as income before income taxes, interest, depreciation,
depletion and amortization. Management of the Company believes that EBITDA
may provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA is a financial measure commonly used in the Company's
industry and should not be considered in isolation or as a substitute for
net income, cash flow provided by operating activities or other income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of the Company's profitability or liquidity.
(e) Pro forma EBITDA for the year ended June 30, 1996 and for the six months
ended December 31, 1996 exclude $18.9 million and $(124,000), respectively,
of revenues and expenses attributable to non-recurring gas contract
settlements.
(f) For purposes of computing the ratio of earnings to fixed charges,
"Earnings" are consolidated earnings (loss) from continuing operations
before tax, exclusive of the period's undistributed equity earnings of
affiliated companies, plus fixed charges. "Fixed charges" are comprised of
interest on indebtedness, amortization of debt issuance costs and that
portion of capital lease expense which is deemed to be representative of an
interest factor.
10
<PAGE>
<TABLE>
<CAPTION>
SUMMARY OPERATING DATA
------------------------------------------------------------------------------
YEARS ENDED JUNE 30, SIX MONTHS ENDED DECEMBER 31,
1994 1995 ACTUAL PRO FORMA 1995 ACTUAL PRO FORMA
1996 1996(A) 1996 1996(B)
--------- --------- -------------------- --------- ---------------------
<S> <C> <C> <C> <C> <C> <C> <C>
PRODUCTION DATA:
Oil (MBbls)........................ 71 216 334 3,124 184 143 1,30
Gas (MMcf)......................... 1,206 2,932 5,099 31,080 2,428 2,814 12,962
Oil equivalent (MBOE).............. 272 705 1,184 8,304 589 612 3,462
AVERAGE SALES PRICE(C):
Oil (per Bbl)...................... $ 15.27 $ 16.89 $17.81 $15.40 $ 16.04 $21.59 $18.91
Gas (per Mcf)(d)................... 2.17 1.66 2.02 2.05 1.72 2.40 2.66
COSTS PER BOE:
Production costs, including ad
valorem and severance taxes..... $ 4.75 $ 4.05 $ 4.49 $ 4.03 $ 4.16 $ 5.00 $ 5.07
Depreciation, depletion and
amortization 5.71 5.52 5.86 4.90 5.39 6.09 5.00
General and administrative......... 4.54 3.89 2.55 1.00 2.65 2.37 0.99
GAS PLANT DATA:
Net gas processed (MMcf)........... 10,746 8,780 7,548 7,548 3,679 3,172 3,172
Net NGL sales (MBbls).............. 375 382 321 321 158 173 173
Average sales price per Bbl........ $ 10.50 $ 12.18 $13.02 $13.02 $ 11.72 $18.10 $18.10
</TABLE>
- -----------------------------
(a) Gives effect to the Transactions as if they had occurred on June 30, 1995.
(b) Gives effect to the Transactions as if they had occurred on June 30, 1996.
(c) Average sales price does not include the effect of hedge transactions.
(d) Average sales price for natural gas includes revenues received from the sale
of natural gas liquids removed from the Company's gas production.
The following table sets forth historical reserve information derived from
reserve reports prepared by the Company's independent reserve engineers and pro
forma reserve information derived from such reserve reports together with a
reserve report regarding the Acquired Properties prepared by the Company and
audited by Ryder Scott.
SUMMARY RESERVE DATA
<TABLE>
<CAPTION>
---------------------------------------------
AS OF JUNE 30,
1994 1995 ACTUAL PRO FORMA
1996 1996(A)
--------- --------- -----------------------
<S> <C> <C> <C> <C>
ESTIMATED NET PROVED RESERVES:
Oil (MBbls)........................ 393 2,597 1,808 17,858
Gas (MMcf)......................... 10,671 30,159 33,196 172,253
Oil equivalent (MBOE).............. 2,172 7,623 7,341 46,567
PV-10 Value (pre-tax) ($000)....... 12,044 37,291 48,140 260,132
Standardized measure of discounted
future net cash flows
(after-tax) ($000).............. 12,044 37,291 45,176 223,262
</TABLE>
- -----------------------------
(a) Gives effect to the Transactions as if they had occurred on June 30, 1995.
11
<PAGE>
RISK FACTORS
THIS PROSPECTUS INCLUDES "FORWARD LOOKING STATEMENTS" WITHIN THE MEANING OF
SECTION 27A OF THE SECURITIES ACT AND SECTION 21E OF THE EXCHANGE ACT. ALL
STATEMENTS OTHER THAN STATEMENTS OF HISTORICAL FACT INCLUDED IN THIS PROSPECTUS,
INCLUDING WITHOUT LIMITATION, STATEMENTS UNDER "PROSPECTUS SUMMARY,"
"UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA," "MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS" AND
"BUSINESS AND PROPERTIES" REGARDING THE COMPANY'S FINANCIAL POSITION,
ESTIMATED QUANTITIES AND NET PRESENT VALUES OF RESERVES, BUSINESS STRATEGY,
PLANS AND OBJECTIVES FOR FUTURE OPERATIONS AND COVENANT COMPLIANCE, ARE
FORWARD-LOOKING STATEMENTS. ALTHOUGH THE COMPANY BELIEVES THAT THE ASSUMPTIONS
UPON WHICH SUCH FORWARD-LOOKING STATEMENTS ARE BASED ARE REASONABLE, IT CAN GIVE
NO ASSURANCES THAT SUCH ASSUMPTIONS WILL PROVE TO HAVE BEEN CORRECT. IMPORTANT
FACTORS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THE COMPANY'S
EXPECTATIONS ("CAUTIONARY STATEMENTS") ARE DISCLOSED BELOW AND ELSEWHERE IN
THIS PROSPECTUS. ALL SUBSEQUENT WRITTEN AND ORAL FORWARD-LOOKING STATEMENTS
ATTRIBUTABLE TO THE COMPANY OR PERSONS ACTING ON ITS BEHALF ARE EXPRESSLY
QUALIFIED BY THE CAUTIONARY STATEMENTS. PROSPECTIVE PURCHASERS OF SECURITIES
OFFERED HEREBY SHOULD CAREFULLY CONSIDER, TOGETHER WITH OTHER INFORMATION IN
THIS PROSPECTUS, THE FOLLOWING FACTORS THAT AFFECT THE COMPANY.
VOLATILITY OF OIL AND GAS PRICES AND MARKETS
The Company's financial condition, operating results, future growth and the
carrying value of its oil and gas properties are substantially dependent on
prevailing prices of oil and gas. The Company's ability to maintain or increase
its borrowing capacity and to obtain additional capital on attractive terms is
also substantially dependent upon oil and gas prices. Prices for oil and gas are
subject to large fluctuations in response to relatively minor changes in the
supply of and demand for oil and gas, market uncertainty and a variety of
additional factors beyond the control of the Company. These factors include
weather conditions in the United States, the condition of the United States
economy, the actions of the Organization of Petroleum Exporting Countries,
governmental regulation, political stability in the Middle East and elsewhere,
the foreign supply of oil and gas, the price of foreign imports and the
availability of alternate fuel sources. Any substantial and extended decline in
the price of oil or gas would have an adverse effect on the Company's carrying
value of its proved reserves, its borrowing capacity, its ability to obtain
additional capital, and its revenues, profitability and cash flows.
Volatile oil and gas prices make it difficult to estimate the value of producing
properties in connection with acquisitions and often cause disruption in the
market for oil and gas producing properties, as buyers and sellers have
difficulty agreeing on such value. Price volatility also makes it difficult to
budget for and project the return on acquisitions and exploitation, development
and exploration projects.
The availability of a ready market for the Company's oil and natural gas
production also depends on a number of factors, including the demand for and
supply of oil and natural gas and the proximity of reserves to, and the capacity
of, oil and natural gas gathering systems, pipelines or trucking and terminal
facilities. Wells may temporarily be shut-in for lack of a market or due to
inadequacy or unavailability of pipeline or gathering system capacity.
ABILITY TO REPLACE RESERVES
The Company's future performance depends upon its ability to find, develop and
acquire additional oil and gas reserves that are economically recoverable. The
proved reserves of Bellwether will generally decline as reserves are depleted.
The Company therefore must locate and develop or acquire new oil and gas
reserves to replace those being depleted by production. Because the Company's
reserves on a pro forma basis are characterized by relatively rapid decline
rates, without successful exploration, development or acquisition activities,
the Company's revenues will decline rapidly. No assurances can be given that the
Company will be able to find and develop or acquire additional reserves at an
acceptable cost.
ACQUISITION RISKS
The Company's rapid growth in recent years has been attributable in significant
part to acquisitions of oil and gas properties. The Company expects to continue
to evaluate and, where appropriate, pursue acquisition opportunities on terms
management considers favorable to the Company. There can be no assurance that
suitable acquisition candidates will be identified in the future, or that the
Company will be able to finance such acquisitions on favorable terms. In
addition, the Company competes against other companies for acquisitions, and
there can be no assurances that the Company will be successful in the
acquisition of any material property interests. Further, there can be no
assurances that any future acquisitions made by the Company will be integrated
successfully into the Company's operations or will achieve desired profitability
objectives.
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The successful acquisition of producing properties requires an assessment of
recoverable reserves, exploration and exploitation potential, future oil and
natural gas prices, operating costs, potential environmental and other
liabilities and other factors beyond the Company's control. In connection with
such an assessment, the Company performs a review of the properties that it
believes to be generally consistent with industry practices. Nonetheless, the
resulting assessments are necessarily inexact and their accuracy inherently
uncertain, and such a review may not reveal all existing or potential problems,
nor will it necessarily permit the Company to become sufficiently familiar with
the properties to fully assess their merits and deficiencies. Inspections may
not always be performed on every well, and structural and environmental problems
are not necessarily observable even when an inspection is undertaken. In
addition, sellers of properties may be unwilling or financially unable to
indemnify the Company for known liabilities at the time of an acquisition.
Additionally, significant acquisitions can change the nature of the operations
and business of the Company depending upon the character of the acquired
properties, which may be substantially different in operating and geologic
characteristics or geographic location than existing properties. While the
Company's pro forma operations will be focused in Texas, Louisiana, Alabama,
California and the Gulf of Mexico, there is no assurance that the Company will
not pursue acquisitions or properties located in other geographic areas.
In connection with the Pending Acquisition, Bellwether will assume or otherwise
become liable for all obligations with respect to operations of the Acquired
Properties, including environmental and operational liabilities, unknown
liabilities, and liabilities arising prior to the closing date.
DRILLING RISKS
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil and
natural gas may involve unprofitable efforts, not only from dry wells, but from
wells that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain and cost overruns are common.
The Company's drilling operations may be curtailed, delayed or canceled as a
result of numerous factors, many of which are beyond the Company's control,
including title problems, weather conditions, compliance with governmental
requirements and shortages or delays in the delivery of equipment and services.
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial capital expenditures
for the exploitation, exploration, acquisition and production of oil and gas
reserves. Historically, the Company has financed these expenditures primarily
with cash generated by operations, proceeds from bank borrowings and sales of
its Common Stock. The Company believes that it will have sufficient cash flows
provided by operating activities, the proceeds of the Offerings and borrowings
under the New Credit Facility to fund such planned capital expenditures. If
revenues or the Company's borrowing base decrease as a result of lower oil and
gas prices, operating difficulties or declines in reserves, the Company may have
limited ability to expend the capital necessary to undertake or complete future
drilling programs. There can be no assurance that additional debt or equity
financing or cash generated by operations will be available to meet these
requirements. See "Management's Discussion and Analysis of Financial Condition
and Results of Operations -- Capital Resources and Liquidity."
SIGNIFICANT LEVERAGE AND DEBT SERVICE
Following the Pending Acquisition and the Offerings, the Company will be highly
leveraged with pro forma outstanding indebtedness of $136.9 million. On a pro
forma basis, as of December 31, 1996, the Company's ratio of total debt to total
capitalization would have been 61.7% compared with 18.4% on a historical basis.
The Company intends to sell properties, for estimated proceeds of $15 million,
to reduce such indebtedness. The Company has not identified a purchaser for
these properties and no assurance can be given of the ability of the Company to
sell such properties, the price that will be received or as to whether the sales
price of such assets will exceed the book value of such assets.
The Company's level of indebtedness will have several important effects on its
future operations, including (i) a substantial portion of the Company's cash
flow from operations must be dedicated to the payment of interest on its
indebtedness and will not be available for other purposes, (ii) covenants
contained in the Company's debt obligations will require the Company to meet
certain financial tests, and other restrictions will limit its ability to borrow
additional funds or to dispose of assets and may affect the Company's
flexibility in planning for, and reacting to, changes in its business, including
possible acquisition activities and (iii) the Company's ability to obtain
financing in the future for working
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capital, capital expenditures, acquisitions, general corporate purposes or other
purposes may be impaired. The Company's ability to meet its debt service
obligations and to reduce its total indebtedness will be dependent upon the
Company's future performance, which will be subject to general economic
conditions and to financial, business and other factors affecting the operations
of the Company, many of which are beyond its control. There can be no assurance
that the Company's future performance will not be adversely affected by such
economic conditions and financial, business and other factors. See
" -- Volatility of Oil and Gas Prices and Markets," "Capitalization" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity."
ADMINISTRATIVE SERVICES AGREEMENT; RELIANCE ON TORCH
The Company currently has eight employees. The Company is party to an
Administrative Services Agreement with Torch, pursuant to which Torch performs
certain administrative and technical functions for the Company, including
financial, accounting, legal, geological, engineering and technical support. The
Company believes that its relationship with Torch provides the Company with
access to professional, technical and administrative personnel not otherwise
available to a company of its size. Bellwether believes that if the
Administrative Services Agreement were terminated Bellwether could, over time,
hire experienced personnel and acquire the accounting and reporting systems and
other assets necessary to replace Torch. However, the unanticipated termination
of the Administrative Services Agreement could have a material adverse effect
upon the Company. The Administrative Services Agreement may be terminated by
Bellwether upon one year's prior notice and may not be terminated by Torch prior
to December 31, 1999. See "Transactions with Related Persons -- Relationship
with Torch and Affiliates."
CONFLICTS OF INTEREST
Torch and Bellwether have a common director and certain common officers. Certain
members of the Boards of Directors and management of Torch and Bellwether were
therefore subject to conflicts of interest in connection with negotiating or
approving the terms of the Pending Acquisition and the fees to be received by
Torch in connection with the Pending Acquisition. In addition, under the
Administrative Services Agreement, Bellwether relies on Torch to perform title,
environmental, operational and other due diligence reviews of acquisition
prospects, and Bellwether does not have personnel to independently perform all
of these functions in connection with the acquisition of the Acquired
Properties. Bellwether therefore relied on Torch to perform certain of these
functions in connection with the Pending Acquisition.
Torch owns interests in each of the Sellers, and will receive an estimated $18.0
million of the purchase price paid in connection with the Pending Acquisition.
Torch will also receive 150,000 shares of Common Stock and warrants to purchase
an aggregate of 100,000 shares of Common Stock at 120% of the price to the
public in the Common Stock Offering at any time for five years following the
closing of the Pending Acquisition as fees for advisory services in connection
with the Pending Acquisition.
Torchmark, which prior to the Offerings beneficially owned interests in certain
of the Sellers, will receive an estimated $12.7 million of the purchase price
paid in connection with the Pending Acquisition. In connection with the Pending
Acquisition, Torchmark, Torch and all investors in the Sellers will settle
certain disagreements relating to fees and other amounts paid by the Sellers to
Torch for oil and gas marketing and sales of non-strategic properties. Pursuant
to an existing agreement with Torch, Torchmark will make a cash payment of $9.7
million on behalf of Torch to such investors in order to settle such
disagreements. Torchmark, Torch, such investors and their agents and affiliates
will release each other from any liability arising out of, or related to, among
other things, such matters. In connection with such settlement, Bellwether will
pay Torchmark $1.5 million and (as successor to the Sellers as a result of the
Pending Acquisition) also will be released by the investors from all such
liabilities. See "Transactions with Related Persons -- Pending Acquisition."
Bellwether formed a special committee of its Board of Directors (the "Special
Committee") composed of directors who are not employees of the Company and who
are not affiliated with Torch to consider and approve the terms of the
acquisition of the Acquired Properties and the fees paid to Torch. The Special
Committee retained legal counsel to advise it in connection with its duties, and
retained Ryder Scott to audit the reserve estimates prepared by Torch on behalf
of the Company in connection with the determination of the purchase price for
the Acquired Properties. In addition, the Special Committee retained Principal
Financial Securities, Inc. ("Principal") to advise it in connection with the
terms of the acquisition of the Acquired Properties. Principal is also an
underwriter in the Common Stock Offering. Principal issued its opinion that the
Pending Acquisition is fair to the Company from a financial point of view and
the Special Committee approved the terms of the purchase of the Acquired
Properties and fees payable to Torch prior to the execution of the definitive
agreement for the Pending Acquisition. No assurances can be made, however, that
the terms of the purchase of
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<PAGE>
the Acquired Properties or the fees paid to Torch are as favorable to the
Company as the terms that would have been negotiated in a transaction between
persons who were not affiliates.
Torch also renders administrative services to Nuevo Energy Company, a publicly
traded independent oil and gas company ("Nuevo"), and may manage or render
management or administrative services for other energy companies in the future.
These services may include the review and recommendation of potential
acquisitions. It is possible that conflicts may occur between Nuevo and
Bellwether in connection with possible acquisitions or otherwise in connection
with the services rendered by Torch. Although the Administrative Services
Agreement provides for procedures to reconcile conflicts of interest between
Nuevo and the Company, no assurances can be made that such procedures will fully
protect the Company from losses which may occur if a conflict between the
Company and Nuevo arises. In addition, Nuevo and the Company have two common
directors. See "Transactions with Related Persons -- Relationship with Torch
and Affiliates."
ESTIMATES OF OIL AND GAS RESERVES
This Prospectus contains estimates of oil and gas reserves owned by the Company
on June 30, 1994, 1995 and 1996, and the future net cash flows attributable to
those reserves, prepared by independent petroleum engineers. In addition, the
Prospectus contains estimates of oil and gas reserves attributable to the
Acquired Properties, and the future net cash flows attributable to those
reserves, prepared by the Company and audited by Ryder Scott. There are numerous
uncertainties inherent in estimating quantities of proved reserves and cash
flows attributable to such reserves, including factors beyond the control of the
Company and the reserve engineers. Reserve engineering is a subjective process
of estimating underground accumulations of oil and gas that cannot be measured
in an exact manner. The accuracy of an estimate of quantities of reserves, or of
cash flows attributable to such reserves, is a function of the available data,
assumptions regarding future oil and gas prices and expenditures for future
development and exploitation activities, and of engineering and geological
interpretation and judgment. Additionally, reserves and future cash flows may be
subject to material downward or upward revisions based upon production history,
development and exploitation activities and prices of oil and gas. Actual future
production, revenue, taxes, development expenditures, operating expenses,
quantities of recoverable reserves and the value of cash flows from such
reserves may vary significantly from the assumptions and estimates set forth
herein. In addition, reserve engineers may make different estimates of reserves
and cash flows based on the same available data. In calculating reserves on a
MBOE basis, gas was converted to oil equivalent at the ratio of six Mcf of gas
to one Bbl of oil. While this ratio approximates the energy equivalency of gas
to oil on a Btu basis, it may not represent the relative prices received by the
Company on the sale of its oil and gas production.
The estimated quantities of proved reserves and the discounted present value of
future net cash flows attributable to estimated proved reserves set forth in
this Prospectus were prepared or audited by the reserve engineers in accordance
with the rules of the SEC, and are not intended to represent the fair market
value of such reserves.
HEDGING OF PRODUCTION
Part of the Company's business strategy is to reduce its exposure to the
volatility of oil and gas prices by hedging a portion of its production. In a
typical hedge transaction, the Company will have the right to receive from the
counterparty to the hedge, the excess of the fixed price specified in the hedge
over a floating price based on a market index, multiplied by the quantity
hedged. If the floating price exceeds the fixed price, the Company is required
to pay the counterparty this difference multiplied by the quantity hedged. In
such case, the Company is required to pay the difference regardless of whether
the Company has sufficient production to cover the quantities specified in the
hedge. Significant reductions in production at times when the floating price
exceeds the fixed price could require the Company to make payments under the
hedge agreements even though such payments are not offset by sales of
production. Hedging will also prevent the Company from receiving the full
advantage of increases in oil or gas prices above the fixed amount specified in
the hedge. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- General."
OPERATING HAZARDS, OFFSHORE OPERATIONS AND UNINSURED RISKS
Bellwether's operations are subject to risks inherent in the oil and gas
industry, such as blowouts, cratering, explosions, uncontrollable flows of oil,
gas or well fluids, fires, pollution, earthquakes and environmental risks. These
risks could result in substantial losses to the Company due to injury and loss
of life, severe damage to and destruction of property and equipment, pollution
and other environmental damage and suspension of operations. Moreover, a portion
of the Company's operations are offshore and therefore are subject to a variety
of operating risks peculiar to the marine environment, such as hurricanes or
other adverse weather conditions, to more extensive governmental regulation,
including
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<PAGE>
regulations that may, in certain circumstances, impose strict liability for
pollution damage, and to interruption or termination of operations by
governmental authorities based on environmental or other considerations.
The Company's operations could result in liability for personal injuries,
property damage, oil spills, discharge of hazardous materials, remediation and
clean-up costs and other environmental damages. The Company could be liable for
environmental damages caused by previous property owners. As a result,
substantial liabilities to third parties or governmental entities may be
incurred, the payment of which could have a material adverse effect on the
Company's financial condition and results of operations. The Company maintains
insurance coverage for its operations, including limited coverage for sudden
environmental damages, but does not believe that insurance coverage for
environmental damages that occur over time is available at a reasonable cost.
Moreover, the Company does not believe that insurance coverage for the full
potential liability that could be caused by sudden environmental damages is
available at a reasonable cost. Accordingly, the Company may be subject to
liability or may lose substantial portions of its properties in the event of
certain environmental damages.
ENVIRONMENTAL AND OTHER REGULATION
The Company's operations are subject to numerous laws and regulations governing
the discharge of materials into the environment or otherwise relating to
environmental protection. These laws and regulations require the acquisition of
a permit before drilling commences, restrict the types, quantities and
concentration of various substances that can be released into the environment in
connection with drilling and production activities, limit or prohibit drilling
activities on certain lands lying within wilderness, wetlands and other
protected areas, and impose substantial liabilities for pollution resulting from
the Company's operations. Moreover, the recent trend toward stricter standards
in environmental legislation and regulation is likely to continue. For instance,
legislation has been proposed in Congress from time to time that would
reclassify certain oil and gas exploration and production wastes as "hazardous
wastes" which would make the reclassified wastes subject to much more stringent
handling, disposal and clean-up requirements. If such legislation were to be
enacted, it could have a significant impact on the operating costs of the
Company, as well as the oil and gas industry in general. Initiatives to further
regulate the disposal of oil and gas wastes are also pending in certain states,
and these various initiatives could have a similar impact on the Company.
Management believes that the Company is in substantial compliance with current
applicable environmental laws and regulations.
The Oil Pollution Act of 1990 imposes a variety of regulations on "responsible
parties" related to the prevention of oil spills. The implementation of new, or
the modification of existing, environmental laws or regulations, including
regulations promulgated pursuant to the Oil Pollution Act of 1990, could have a
material adverse impact on the Company. See "Business and
Properties -- Competition, Markets and Regulation."
COMPETITION
The Company operates in the highly competitive areas of oil and gas exploration,
development and production. The Company's competitors include major integrated
oil and gas companies and substantial independent energy companies, many of
which possess greater financial and other resources than the Company. See
"Business and Properties -- Competition, Markets and Regulation."
MANDATORY OFFER TO REPURCHASE THE NOTES UPON A CHANGE OF CONTROL
The Indenture governing the Notes provides that upon the occurrence of a Change
of Control the Company is required to offer to repurchase any or all of the
outstanding Notes at a price equal to 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase. Generally, a "Change of Control" includes (i) the acquisition
(including any acquisition by merger or consolidation) by any person or group of
more than 50% of the voting stock of the Company, (ii) the sale or transfer of
substantially all of the assets of the Company, (iii) certain replacements of a
majority of the Board of Directors of the Company over a two-year period or (iv)
the liquidation or dissolution of the Company. Should a Change of Control occur,
there is no assurance that the Company will have available funds sufficient to
pay for the Notes tendered for repurchase. In the event an offer to repurchase
is required to be made and the Company does not have available funds sufficient
to pay for Notes tendered for repurchase, an event of default would occur under
the Indenture.
FRAUDULENT CONVEYANCE CONSIDERATIONS RELATING TO SUBSIDIARY GUARANTEE
The Company's obligations under the Notes will be guaranteed on an unsecured
senior subordinated basis by the Subsidiary Guarantor. Various fraudulent
conveyance laws have been enacted for the protection of creditors and may be
utilized by a court of competent jurisdiction to subordinate or avoid the
Subsidiary Guarantee issued by the Subsidiary
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<PAGE>
Guarantor. It is also possible that under certain circumstances a court could
hold that the direct obligations of the Subsidiary Guarantor could be superior
to the obligations under the Subsidiary Guarantee.
To the extent that a court were to find that (x) the Subsidiary Guarantee was
incurred by the Subsidiary Guarantor with the intent to hinder, delay or defraud
any present or future creditor or that the Subsidiary Guarantor contemplated
insolvency with a design to favor one or more creditors to the exclusion in
whole or in part of others or (y) the Subsidiary Guarantor did not receive fair
consideration or reasonably equivalent value for issuing the Subsidiary
Guarantee and at the time it issued the Subsidiary Guarantee, the Subsidiary
Guarantor (i) was insolvent by reason of the issuance of the Subsidiary
Guarantee, (ii) was engaged or about to engage in a business or transaction for
which the remaining assets of the Subsidiary Guarantor constituted unreasonably
small capital or (iii) intended to incur, or believed that it would incur, debts
beyond its ability to pay such debts as they matured, the court could avoid or
subordinate the Subsidiary Guarantee in favor of the Subsidiary Guarantor's
other creditors. Among other things, a legal challenge of the Subsidiary
Guarantee issued by the Subsidiary Guarantor on fraudulent conveyance grounds
may focus on the benefits, if any, realized by the Subsidiary Guarantor as a
result of the issuance by the Company of the Notes. To the extent the Subsidiary
Guarantee is avoided as a fraudulent conveyance or held unenforceable for any
other reason, the holders of the Notes would cease to have any claim in respect
of the Subsidiary Guarantor and would be creditors solely of the Company.
On the basis of financial information and other information currently available
to it, the Company believes that the Notes and the Subsidiary Guarantee issued
concurrently with the issuance of the Notes are being incurred for proper
purposes and in good faith and that, after giving effect to indebtedness
incurred in connection with the issuance of the Notes and the issuance of the
Subsidiary Guarantee, the Company and the Subsidiary Guarantor are solvent and
will continue to be solvent, will have sufficient capital for carrying on their
respective business and will be able to pay their debts as such debts as such
debts become absolute and mature. There can be no assurance, however, that a
court passing on such questions would reach the same conclusions. Furthermore,
there can be no assurance that such standards would be satisfied in the case of
any person that becomes a Subsidiary Guarantor after the date the Notes are
first issued, because a determination as to whether such standards would be
satisfied will depend upon, among other circumstances, the financial condition
of any such Subsidiary Guarantor at the time of the incurrence of its
obligations in respect of its Subsidiary Guarantee.
SUBORDINATION OF NOTES
The Indenture governing the Notes will limit, but will not prohibit, the
incurrence by the Company of additional indebtedness that is senior in right of
payment to the Notes (including by reason of structural subordination of the
Notes to the indebtedness and other liabilities of the Company's subsidiaries).
In the event of bankruptcy, liquidation, reorganization or other winding up of
the Company, the assets of the Company will be available to pay the Company's
obligations on the Notes offered hereby only after all Senior Indebtedness (as
defined) has been paid in full, and there may not be sufficient assets remaining
to pay amounts due on the Notes. In addition, under certain circumstances, no
payments may be made with respect to principal of, premium, if any, or interest
on the Notes if a default exists with respect to any Senior Indebtedness. See
"Description of Notes--Subordination."
ABSENCE OF A PUBLIC MARKET OF THE NOTES
There is no existing market for the Notes and there can be no assurance as to
the liquidity of any markets that may develop for the Notes, the ability of
holders of the Notes to sell their Notes or the price at which holders would be
able to sell their Notes. Future trading prices of the Notes will depend on many
factors, including, among other things, prevailing interest rates, the Company's
operating results and the market for similar securities. The Company has been
advised by the Underwriters that, subject to applicable laws and regulations,
such firms currently intend to make a market in the Notes after the consummation
of the Notes Offering, although they are not obligated to do so and may
discontinue any market-making activities with respect to the Notes at any time
without notice. The Company does not intend to apply for listing of the Notes on
any securities exchange. See "Underwriting."
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COMMON STOCK OFFERING
Concurrently with this Notes Offering, the Company and Selling Stockholders are
offering 4,400,000 and 475,000 shares, respectively, of the Company's Common
Stock. The Company will not receive any proceeds from the sale of Common Stock
by the Selling Stockholders. The Notes Offering and the Common Stock Offering
are contingent upon each other and upon the closing of the Pending Acquisitions.
USE OF PROCEEDS
The proceeds to the Company from the Offerings are estimated to be approximately
$136.3 million. The Company intends to use such proceeds, together with
borrowings under its New Credit Facility, to fund the Pending Acquisition and
related fees, estimated to be $173.2 million, including repayment of outstanding
indebtedness under its existing credit facility, estimated to be $12.0 million.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Capital Resources and Liquidity." The closing of the Offerings
are conditioned upon the simultaneous closing of the Pending Acquisition.
As of December 31, 1996, $11.0 million was outstanding under the Company's
existing credit facility. The existing credit facility matures in October 2000.
Borrowings under the existing credit facility bear interest, at the election of
the Company, at floating rates based upon the bank's prime rate, the London
Interbank Offered Rate ("LIBOR") or the federal funds rate. The interest rate
on outstanding borrowings at December 31, 1996 was 6.4%.
Following the Offerings and the repayment of amounts outstanding under the
existing credit facility, the Company is expected to have approximately $53.1
million of available borrowing capacity under the New Credit Facility. See
"Description of New Credit Facility" for a discussion of the terms of the New
Credit Facility.
The following table sets forth the sources and uses of the estimated net
proceeds of the Offerings and borrowings under the Company's New Credit
Facility:
IN THOUSANDS
SOURCES:
Common Stock Offering........... $ 36,300
Notes Offering.................. 100,000
New Credit Facility............. 36,893
----------
Total...................... $ 173,193
==========
USES:
Pending Acquisition............. $ 141,768
Repay existing credit
facility....................... 12,000
Contingent Payment(a)........... 9,011
Payments to Torchmark........... 1,500
Fees and expenses(b)............ 8,914
----------
Total...................... $ 173,193
==========
- ------------------------------
(a) Represents the maximum amount of the Contingent Payment which will be
deposited in escrow at closing. The actual amount of the Contingent Payment
will be determined 30 days following the closing based on actual and future
gas prices in 1997. If the amount of the Contingent Payment is less than $9
million, the difference will be returned to the Company and used to reduce
borrowings under the New Credit Facility.
(b) Includes underwriting expenses associated with the Offerings.
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CAPITALIZATION
The following table sets forth, as of December 31, 1996, the historical cash
position and capitalization of the Company and such cash position and
capitalization giving pro forma effect to the Transactions. See "Use of
Proceeds." This table should be read in conjunction with the "Unaudited Pro
Forma Condensed Consolidated Financial Data," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
Consolidated Financial Statements, including the Notes thereto.
------------------------
DECEMBER 31, 1996
IN THOUSANDS, EXCEPT SHARE DATA HISTORICAL PRO FORMA
---------- ---------
Cash and cash equivalents............... $ 450 $ 530
========== =========
Current maturities of long-term debt.... $ -- $ --
========== =========
Long-term debt (excluding current
maturities)
10 7/8% Senior Subordinated
Notes............................. $ -- $100,000
Existing credit facility........... 11,000 --
New Credit Facility................ -- 35,893
Stockholders' equity:
Preferred Stock, $0.01 par value,
1,000,000 shares authorized,
none issued or outstanding....... -- --
Common Stock, $0.01 par value,
15,000,000 shares authorized,
9,152,979 shares issued and
outstanding, 13,702,979 shares
pro forma(a)(b).................. 92 137
Capital in excess of par value.......... 42,059 77,701
Retained earnings....................... 6,600 6,600
---------- ---------
Total stockholders' equity.............. 48,751 84,438
---------- ---------
Total capitalization.................... $ 59,751 $220,331
========== =========
- ------------------------------
(a) Excludes 1,115,325 shares of Common Stock issuable upon exercise of
incentive stock options currently outstanding, 187,500 shares of Common
Stock issuable upon exercise of warrants held by a subsidiary of Torchmark
(the "Torchmark Warrants"), and 60,000 shares of Common Stock issuable
upon exercise of warrants held by Howard, Weil, Labouisse, Friedrichs
Incorporated and Principal. In connection with the Common Stock Offering,
Bellwether and Torchmark have agreed that Torchmark will use 62,500 shares
issuable upon exercise of the Torchmark Warrants to pay a portion of the
exercise price of the warrants, such stock to be valued at the price to the
public in the Common Stock Offering. Accordingly, the maximum number of
shares of Common Stock issuable in connection with the Torchmark Warrants is
125,000. The Selling Stockholders have granted the Underwriters an option to
purchase 719,264 shares of Common Stock solely to cover over-allotments, if
any, including shares issuable upon exercise of the Torchmark Warrants.
(b) Includes 150,000 shares of Common Stock to be issued to Torch for advisory
services rendered in connection with the Pending Acquisition. Excludes
100,000 shares of Common Stock issuable upon exercise of warrants to be
issued to Torch for such advisory services.
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UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
The unaudited pro forma condensed consolidated balance sheet as of December 31,
1996 gives effect to the Transactions as if they occurred on December 31, 1996.
The unaudited pro forma condensed consolidated statements of operations for the
year ended June 30, 1996 and the six months ended December 31, 1996 give effect
to the Transactions as if they had occurred at the beginning of the periods
presented.
The following unaudited pro forma financial data have been included as required
by the rules of the SEC and are provided for comparative purposes only. The
unaudited pro forma financial data presented are based upon the historical
consolidated financial statements of Bellwether and the historical statement of
assets (other than productive oil and gas assets) and liabilities and the
related statements of revenues and direct operating expenses of the Acquired
Properties and should be read in conjunction with such financial statements and
the related notes thereto which are included elsewhere herein.
The pro forma financial data are based upon assumptions and include adjustments
as explained in the notes to the unaudited pro forma condensed consolidated
financial statements, and the actual recording of the transactions could differ.
The unaudited pro forma financial data are not necessarily indicative of the
financial results that would have occurred had the Transactions been effective
on and as of the dates indicated and should not be viewed as indicative of
operations in future periods.
20
<PAGE>
BELLWETHER EXPLORATION COMPANY
PRO FORMA CONDENSED CONSOLIDATED BALANCE SHEET -- UNAUDITED
<TABLE>
<CAPTION>
-------------------------------------------------------------
AS OF DECEMBER 31, 1996
ADJUSTMENTS
FOR THE ADJUSTMENTS PRO FORMA
PENDING FOR THE FOR THE
HISTORICAL ACQUISITION FINANCING TRANSACTIONS
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
IN THOUSANDS
ASSETS
Current Assets:
Cash and cash equivalents....... $ 450 $(153,577)(a) $ 153,657(b) $ 530
Accounts and other
receivables................... 7,599 27,382(a) -- 34,981
Other........................... 586 -- -- 586
----------- ----------- ----------- ------------
Total current assets....... 8,635 (126,195) 153,657 36,097
----------- ----------- ----------- ------------
Oil and gas properties (full cost
method)............................ 83,473 129,372(a) -- 212,845
Gas plant facilities................. 12,843 -- -- 12,843
----------- ----------- ----------- ------------
96,316 129,372 -- 225,688
Accumulated depreciation, depletion
and amortization................... (36,561) -- -- (36,561)
----------- ----------- ----------- ------------
59,755 129,372 -- 189,127
Other................................ 592 9,011(a) 5,160(b) 14,763
----------- ----------- ----------- ------------
Total assets............... $68,982 $ 12,188 $ 158,817 $239,987
=========== =========== =========== ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities................... $ 4,278 $ 9,425(a) $ -- $ 13,703
Current maturities of long term
debt.......................... -- -- -- --
----------- ----------- ----------- ------------
Total current
liabilities.............. 4,278 9,425 -- 13,703
----------- ----------- ----------- ------------
Other liabilities.................... 1,148 -- -- 1,148
Existing credit facility............. 11,000 -- (11,000)(b) --
New credit facility.................. -- -- 35,893(b) 35,893
Senior Subordinated Notes............ -- -- 100,000(b) 100,000
Deferred income taxes................ 3,805 1,000(a) -- 4,805
Stockholders' Equity................. 48,751 1,763(a) 33,924(b) 84,438
----------- ----------- ----------- ------------
Total liabilities and
Stockholders' equity..... $68,982 $ 12,188 $ 158,817 $239,987
=========== =========== =========== ============
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
21
<PAGE>
BELLWETHER EXPLORATION COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
------------------------------------------------------------
FOR THE FISCAL YEAR ENDED JUNE 30, 1996
ADJUSTMENTS
FOR THE ADJUSTMENTS PRO FORMA
PENDING FOR THE FOR THE
HISTORICAL ACQUISITION FINANCING TRANSACTIONS
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE DATA
Revenues:
Oil and gas revenues............ $ 15,666 $ 96,210(c) $ -- $111,876
Gas plant and gas gathering
revenues...................... 8,719 83(c) -- 8,802
Interest and other income....... 116 20,175(c) -- 20,291
---------- ----------- ----------- ------------
Total revenues............. 24,501 116,468 -- 140,969
---------- ----------- ----------- ------------
Costs and Expenses:
Production expenses............. 5,317 28,142(c) -- 33,459
Gas plant and gas gathering
expenses...................... 5,185 -- -- 5,185
Depreciation, depletion and
amortization.................. 8,148 34,821(e) -- 42,969
General and administrative
expenses...................... 3,013 5,315(d) -- 8,328
Interest expense................ 1,657 -- 12,878(h) 14,535
Other expenses.................. 153 -- -- 153
---------- ----------- ----------- ------------
Total costs and expenses... 23,473 68,278 12,878 104,629
---------- ----------- ----------- ------------
Income before income taxes........... 1,028 48,190 (12,878) 36,340
Provision for income taxes........... 46 17,831(f) (4,765)(i) 13,112
---------- ----------- ----------- ------------
$ 982 $ 30,359 $ (8,113) $ 23,228
========== =========== =========== ============
Net income per share................. $ 0.11 $ 1.71
========== ============
Weighted average common and common
equivalent shares outstanding...... 9,052 150(g) 4,400(j) 13,602
========== =========== =========== ============
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
22
<PAGE>
BELLWETHER EXPLORATION COMPANY
PRO FORMA CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
----------------------------------------------------------
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
ADJUSTMENTS
FOR THE ADJUSTMENTS PRO FORMA
PENDING FOR THE FOR THE
HISTORICAL ACQUISITION FINANCING TRANSACTIONS
---------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE DATA
Revenues:
Oil and gas revenues............ $ 9,846 $49,191(k) $-- $ 59,037
Gas plant revenues.............. 3,879 2(k) -- 3,881
Interest and other income....... 53 340(k) -- 393
---------- ----------- ----------- ------------
Total revenues............. 13,778 49,533 -- 63,311
---------- ----------- ----------- ------------
Costs and Expenses:
Production expenses............. 3,061 14,506(k) -- 17,567
Gas plant expenses.............. 1,827 -- -- 1,827
Depreciation, depletion and
amortization.................. 4,167 14,132(l) -- 18,299
General and administrative
expenses...................... 1,452 1,978(d) -- 3,430
Interest expense................ 520 -- 6,973(h) 7,493
---------- ----------- ----------- ------------
Total costs and expenses... 11,027 30,616 6,973 48,616
---------- ----------- ----------- ------------
Income before income taxes........... 2,751 18,917 (6,973) 14,695
Provision for income taxes........... 1,018 6,999(f) (2,580)(i) 5,437
---------- ----------- ----------- ------------
$ 1,733 $11,918 $(4,393) $ 9,258
========== =========== =========== ============
Net income per share................. $ 0.19 $ 0.68
========== ============
Weighted average common and common
equivalent shares outstanding...... 9,118 150(g) 4,400(j) 13,668
========== =========== =========== ============
</TABLE>
See accompanying notes to unaudited pro forma condensed financial statements.
23
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(a) To record the purchase of the Acquired Properties and working capital
pursuant to the transaction. The allocation of the pro forma purchase
price under the purchase method of accounting is presented in the tables
below.
The pro forma purchase price entries are as follows:
Purchase price....................... $ 188,348
Estimated purchase price adjustments,
including distributions of cash
flows from the Acquired Properties
from the effective date to the
assumed closing date of April 9,
1997............................... (46,580)
----------
141,768
Estimated acquisition fees:
Common stock issued to Torch
(150,000 shares @ $9.75)....... 1,463
Warrants issued to Torch
(100,000 shares exercisable
within five years @ $9.90)..... 300
Payment to Torchmark............ 1,500
----------
3,263
Escrow of funds reserved for pricing
adjustments........................ 9,011
Legal and other acquisition costs.... 1,377
----------
Total purchase price................. $ 155,419
==========
Purchase allocation:
Acquisition costs allocated to
oil and gas properties......... $ 129,372
Working capital................. 18,036
Escrow account.................. 9,011
Deferred income taxes........... (1,000)
----------
Total purchase allocation....... $ 155,419
==========
(b) To record the effect of the financing transactions required to purchase
the Acquired Properties.
Senior credit facility............... $ 35,893
Senior subordinated notes............ 100,000
Common stock......................... 44
Additional paid in capital........... 33,880
Deferred financing costs............. (5,160)
Existing credit facilities........... (11,000)
----------
Cash received from the financing
transactions....................... $ 153,657
==========
(c) To reflect the historical consolidated operations of the Acquired
Properties for the fiscal year ended June 30, 1996. Certain additions and
deductions to revenues and expenses have been made to convert such
operations from a calendar year to the fiscal year ended June 30, 1996.
See "Statements of Assets Acquired (Other than Productive Oil and Gas
Properties) and Liabilities" and related "Statements of Revenues and
Direct Operating Expenses" included elsewhere in this Prospectus.
(d) To adjust general and administrative expenses including management fees to
give effect to the increase in the Torch fee pursuant to the
Administrative Services Agreement due to the acquisition of the Acquired
Properties. Annual general and administrative, production overhead and
direct general and administrative expenses will increase $750,000 and
$375,000 for the year ended June 30, 1996 and for the six months ended
December 31, 1996, respectively. Annual management fees will increase $4.6
million and $1.6 million for the year ended June 30, 1996 and for the six
months ended December 31, 1996, respectively, pursuant to the
Administrative Services Agreement.
General and administrative services are provided to Bellwether by Torch
for an annual fee based on (i) 1/12 of 2% per month of total assets
excluding cash, and (ii) 2.0% of operating cash flows (net income plus
depletion, depreciation and amortization and deferred income taxes).
Additionally, 20% of operator's overhead on wells operated by Torch are
credited to management fees.
24
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
(e) To adjust depreciation, depletion and amortization to give effect to the
acquisition of the Acquired Properties under the full cost method of
accounting to the amount which would have been recorded had the
acquisition of the Acquired Properties occurred at July 1, 1995. The pro
forma adjustment assumes a depreciation, depletion and amortization rate
per BOE of $4.90 for the year ended June 30, 1996 based upon depletable
costs of $268.8 million, including $51.9 million of future development
costs and plugging and abandonment costs, and proved reserves of 54.9
MMBOE at June 30, 1995.
(f) To adjust federal and state income taxes for the acquisition of the
Acquired Properties at Bellwether's effective rate of 37%.
(g) To increase the weighted average common shares outstanding for 150,000
shares of Common Stock to be issued to Torch for the acquisition of the
Acquired Properties.
(h) To adjust interest expense to give effect to the portion of the Acquired
Properties financed under the New Credit Facility and through issuance of
the Notes.
The pro forma interest expense related to the New Credit Facility was $3.3
million for the year ended June 30, 1996, including the amortization of
$1.0 million of deferred and other financing costs. The pro forma interest
expense related to the New Credit Facility was $1.9 million for the six
months ended December 31, 1996, including the amortization of $727,000 of
deferred and other financing costs. The New Credit Facility has an annual
interest rate of London Interbank Offered Rate ("LIBOR") plus 1.00%.
The pro forma interest related to the Notes was $11.2 million for the year
ended June 30, 1996, at an assumed interest rate of 10 7/8% and including
the amortization of $325,000 of deferred financing costs. The pro forma
interest expense related to the Notes was $5.6 million for the six months
ended December 31, 1996, at an interest rate of 10 7/8% and including
amortization of $163,000 of deferred financing costs. The Notes mature in
2007. No principal payments are required prior to 2007.
(i) To reflect the decrease in income taxes resulting from additional interest
incurred as a result of the Offerings.
(j) To increase the weighted average common shares outstanding for issuance of
4,400,000 shares of Common Stock in the Common Stock Offering.
(k) To reflect the historical consolidated operations of the Acquired
Properties for the six months ended December 31, 1996. See "Statement of
Assets Acquired (Other than Productive Oil and Gas Properties) and
Liabilities" and the related "Statements of Revenues and Direct
Operating Expenses" included elsewhere in this Prospectus.
(l) To adjust depreciation, depletion and amortization to give effect to the
acquisition of the Acquired Properties under the full cost method of
accounting to the amount which would have been recorded had the
acquisition of the Acquired Properties occurred at July 1, 1996. The pro
forma adjustment assumes a depreciation, depletion and amortization rate
per BOE of $5.00 for the six months ended December 31, 1996 based upon
depletable costs of $232.9 million, including $48.3 million of future
development costs and plugging and abandonment costs, and proved reserves
of 46.6 MMBOE at June 30, 1996.
25
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
UNAUDITED PRO FORMA SUPPLEMENTAL OIL AND GAS DISCLOSURE
The following tables set forth certain unaudited pro forma information
concerning Bellwether's proved oil and gas reserves at June 30, 1996, giving
effect to the acquisition of the Acquired Properties as if they had occurred on
June 30, 1995. There are numerous uncertainties inherent in estimating the
quantities of proved reserves and projecting future rates of production and
timing of development expenditures. The following reserve data represent
estimates only and should not be construed as being exact. The proved oil and
gas reserve information is as of June 30, 1996 and reflects prices and costs in
effect as of such date.
RESERVES:
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------
OIL AND CONDENSATE (MBBLS) NATURAL GAS (MMCF) MBOE
------------------------------------ ------------------------------------ ----------
ACQUIRED ACQUIRED
BELLWETHER PROPERTIES PRO FORMA BELLWETHER PROPERTIES PRO FORMA BELLWETHER
---------- ----------- --------- ---------- ----------- --------- ----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, July 1, 1995................... 2,597 18,840 21,437 30,159 165,038 195,197 7,624
Extensions and discoveries.............. 89 89 7,128 7,128 1,277
Purchase of minerals in-place........... 4 4 176 176 33
Revision of previous estimates.......... (534) (534) 2,855 2,855 (58)
Production(a)........................... (334) (2,790) (3,124) (5,099) (25,981) (31,080) (1,184)
Sales of minerals in-place.............. (14) (14) (2,023) (2,023) (351)
---------- ----------- --------- ---------- ----------- --------- ----------
Balance, June 30, 1996.................. 1,808 16,050 17,858 33,196 139,057 172,253 7,341
========== =========== ========= ========== =========== ========= ==========
Proved developed reserves............... 1,494 13,536 15,030 22,698 128,242 150,940 5,277
========== =========== ========= ========== =========== ========= ==========
</TABLE>
ACQUIRED
PROPERTIES PRO FORMA
----------- ---------
Balance, July 1, 1995................... 46,346 53,970
Extensions and discoveries.............. -- 1,277
Purchase of minerals in-place........... -- 33
Revision of previous estimates.......... -- (58)
Production(a)........................... (7,120) (8,304)
Sales of minerals in-place.............. -- (351)
----------- ---------
Balance, June 30, 1996.................. 39,226 46,567
=========== =========
Proved developed reserves............... 34,910 40,187
=========== =========
- -----------------------------
(a) Excludes 253 MBbls of natural gas liquids which were produced in fiscal
1996.
STANDARD MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL &
GAS RESERVES:
-------------------------------------
ACQUIRED
BELLWETHER PROPERTIES PRO FORMA
---------- ---------- ---------
IN THOUSANDS
Future cash inflows..................... $113,554 $ 562,930 $676,484
Future production costs................. (33,131) (210,084) (243,215)
Future development costs................ (8,961) (42,921) (51,882)
---------- ---------- ---------
Future net inflows before income
taxes................................. 71,462 309,925 381,387
Income taxes............................ (11,095) (49,570) (60,665)
---------- ---------- ---------
Future net cash flows................... 60,367 260,355 320,722
10% discount factor..................... (15,191) (82,269) (97,460)
---------- ---------- ---------
Standardized measure of discounted
future net cash flows................. $ 45,176 $ 178,086 $223,262
========== ========== =========
26
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO UNAUDITED PRO FORMA CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS -- (CONTINUED)
CHANGES TO STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO
PROVED
OIL AND GAS RESERVES:
----------------------------------------
ACQUIRED
BELLWETHER PROPERTIES PRO FORMA
----------- ----------- ----------
IN THOUSANDS
Standardized measure, June 30,
1995............................... $37,291 $ 207,418 $244,709
Sales, net of production
costs.......................... (10,349) (68,068) (78,417)
Purchases of reserves in
place.......................... 246 -- 246
Net changes in prices and
production costs............... 11,458 -- 11,458
Net changes in income taxes..... (2,958) -- (2,958)
Extensions, discoveries and
improved recovery, net of
future production and
development costs.............. 7,709 -- 7,709
Changes in estimated future
development costs.............. 497 -- 497
Development costs incurred
during the period.............. 883 -- 883
Revisions of quantity
estimates...................... (438) -- (438)
Accretion of discount........... 3,729 20,742 24,471
Sales of reserves in place...... (1,614) -- (1,614)
Changes in production rates and
other.......................... (1,278) 17,994 16,716
----------- ----------- ----------
Standardized measure, June 30,
1996............................... $45,176 $ 178,086 $223,262
=========== =========== ==========
27
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth selected historical consolidated financial data
with respect to the Company for the periods and as of the dates indicated. The
consolidated financial data and notes thereto for the two years ended June 30,
1993 were derived from the historical consolidated financial statements and
notes thereto of the Company which have been audited by KPMG Peat Marwick LLP,
independent certified public accountants and such information for the three
years ended June 30, 1996 were derived from such statements and notes thereto
which have been audited by Deloitte & Touche LLP, independent auditors. The
consolidated financial data for the six months ended December 31, 1995 and 1996
have been derived from unaudited condensed consolidated financial statements,
which management believes includes all adjustments necessary to make a fair
presentation of the results for such unaudited interim periods. The Consolidated
Financial Statements of the Company and notes thereto for June 30, 1994, 1995
and 1996, and the six months ended December 31, 1995 and 1996 are included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT PER SHARE DATA
STATEMENT OF OPERATIONS DATA:
Revenues:
Gas revenues..................... $ 1,528 $ 1,807 $ 2,620 $ 4,864 $ 9,856 $ 4,186 $ 6,759
Oil revenues..................... 1,246 1,708 1,086 3,643 5,810 2,956 3,087
Gas plant and gas gathering
revenues(a).................... 51 23 6,930 10,705 8,719 4,923 3,879
Interest income and other........ 82 116 63 97 116 57 53
--------- --------- --------- --------- --------- --------- ---------
Total revenues.............. 2,907 3,654 10,699 19,309 24,501 12,122 13,778
--------- --------- --------- --------- --------- --------- ---------
Costs and expenses:
Production expenses.............. 904 1,273 1,294 2,856 5,317 2,447 3,061
Gas plant and gas gathering
expenses(a).................... -- -- 4,013 6,078 5,185 3,006 1,827
General and administrative
expenses....................... 676 787 1,234 2,739 3,013 1,559 1,452
Depreciation, depletion and
amortization................... 1,113 1,455 2,489 5,269 8,148 3,866 4,167
Interest expense................. 21 77 721 1,245 1,657 956 520
Other expenses................... -- -- -- -- 153 155 --
--------- --------- --------- --------- --------- --------- ---------
Total cost and expenses..... 2,714 3,592 9,751 18,187 23,473 11,989 11,027
--------- --------- --------- --------- --------- --------- ---------
Income before income taxes and
minority interest.................. 193 62 948 1,122 1,028 133 2,751
Provision for income taxes........... 65 21 -- 9 46 132 1,018
Minority interest in gas plant
ventures............................. -- -- 134 172 -- -- --
Extraordinary income(b).............. 65 -- -- -- -- -- --
--------- --------- --------- --------- --------- --------- ---------
Net income........................... $ 193 $ 41 $ 814 $ 941 $ 982 $ 1 $ 1,733
========= ========= ========= ========= ========= ========= =========
Net income per share(c).............. $ 0.08 $ 0.02 $ 0.27 $ 0.12 $ 0.11 $ 0.00 $ 0.19
========= ========= ========= ========= ========= ========= =========
Weighted average common and common
equivalent shares outstanding(c)... 2,289 2,289 3,006 7,713 9,052 9,045 9,118
========= ========= ========= ========= ========= ========= =========
</TABLE>
(CONTINUED ON FOLLOWING PAGE)
28
<PAGE>
<TABLE>
<CAPTION>
---------------------------------------------------------------------------
SIX MONTHS ENDED
YEARS ENDED JUNE 30, DECEMBER 31,
1992 1993 1994 1995 1996 1995 1996
--------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
IN THOUSANDS, EXCEPT RATIOS
OTHER FINANCIAL DATA:
Capital expenditures............. $ 4,315 $ 2,289 $ 22,034 $ 41,901 $ 6,999 $ 1,174 $ 7,475
EBITDA(d)........................ $ 1,327 $ 1,594 $ 4,158 $ 7,636 $ 10,833 $ 4,955 $ 7,438
EBITDA/Interest expense.......... 63.19 20.70 5.77 6.13 6.54 5.18 14.30
Net cash flows provided by
operating activities........... $ 2,401 $ 1,555 $ 3,122 $ 5,283 $ 7,485 $ 3,496 $ 7,105
Net cash flows (used in) provided
by investing activities........ $ (1,204) $ (1,390) $ (9,423) $ (27,289) $ 3,542 $ (1,174) $ (5,810)
Net cash flows provided by (used
in) financing activities....... $ 1,000 $ (2,146) $ 7,334 $ 21,642 $ (11,332) $ (1,000) $ (1,628)
Ratio of earnings to fixed
charges(e)..................... 10.19 1.81 2.31 1.90 1.62 1.14 6.29
BALANCE SHEET DATA (END OF PERIOD):
Working capital.................. $ 406 $ 414 $ (249) $ (1,246) $ 5,168 $ 4,357
Total assets..................... 14,140 12,480 35,870 74,650 67,225 68,982
Total debt (net of current
maturities).................... 1,000 1,000 12,796 18,525 13,048 11,000
Stockholders' equity............. 10,729 10,770 18,372 45,447 46,597 48,751
</TABLE>
- -----------------------------
(a) In March 1996 Bellwether assumed a contract to purchase gas at $4.50 per
MMBtu, for which Bellwether received $9.9 million. As a result of this
transaction, Bellwether ceased to recognize gas gathering revenues and
expenses. Historical gas gathering revenues were $2.4 million, $5.0 million
and $3.4 million, respectively, for the years ended June 30, 1994, 1995 and
1996, and $2.5 million for the six months ended December 31, 1995. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Results of Operations -- Six Months Ended December 31, 1995
Compared With December 31, 1996 -- Revenues."
(b) Extraordinary income in 1992 represents reductions of income taxes resulting
from utilization of loss carryforwards.
(c) Restated to reflect a 1-for-8 reverse stock split consummated in fiscal
1994.
(d) EBITDA is defined as income before income taxes, interest, depreciation,
depletion and amortization. Management of the Company believes that EBITDA
may provide additional information about the Company's ability to meet its
future requirements for debt service, capital expenditures and working
capital. EBITDA is a financial measure commonly used in the Company's
industry and should not be considered in isolation or as a substitute for
net income, cash flow provided by operating activities or other income or
cash flow data prepared in accordance with generally accepted accounting
principles or as a measure of the Company's profitability or liquidity.
(e) For purposes of computing the ratio of earnings to fixed charges,
"Earnings" are consolidated earnings (loss) from continuing operations
before tax, exclusive of the period's undistributed equity earnings of
affiliated companies, plus fixed charges. "Fixed charges" are comprised of
interest on indebtedness, amortization of debt issuance costs and that
portion of capital lease expense which is deemed to be representative of an
interest factor.
29
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
Bellwether is an independent energy company primarily engaged in the
acquisition, exploitation, development and exploration of oil and gas
properties. The Company has grown and diversified its operations through the
acquisition of oil and gas properties and the subsequent development of these
properties. The Company's results of operations have been significantly affected
by its success in acquiring oil and gas properties and its ability to maintain
or increase production through its exploitation activities. Fluctuations in oil
and gas prices have also significantly affected the Company's results.
The Company uses the full cost method of accounting for its investment in oil
and gas properties. Under the full cost method of accounting, all costs of
acquisition, exploration and development of oil and gas reserves are capitalized
in a "full cost pool" as incurred. Oil and gas properties in the pool, plus
estimated future expenditures to develop proved reserves and future abandonment,
site reclamation and dismantlement costs, are depleted and charged to operations
using the unit of production method based on the ratio of current production to
total proved recoverable oil and gas reserves. To the extent that such
capitalized costs (net of depreciation, depletion and amortization) exceed the
discounted future net revenues on an after-tax basis of estimated proved oil and
gas reserves, such excess costs are charged to operations. Once incurred, the
writedown of oil and gas properties is not reversible at a later date even if
oil and gas prices increase. Sharp declines in oil and gas prices may cause
companies who report on the full cost method, such as Bellwether, to write down
their oil and gas properties, thereby decreasing earnings during such period.
The Company periodically uses derivative financial instruments to manage oil and
gas price risk. Settlements of gains and losses on price swap contracts are
generally based upon the difference between the contract price and the average
closing NYMEX or other floating index price and are reported as a component of
oil and gas revenue. Gains or losses attributable to the termination of swap
contracts are deferred and recognized in revenue when the hedged oil and gas is
sold. The Company has hedged 300 Bbls of oil per day at a NYMEX price of $22.17
per Bbl for the calendar months of April through October 1997. For March 1997,
the Company has hedged 6 million MMBtu of gas per day at $2.94 per MMBtu and for
April through October 1997 has hedged 6 million MMBtu of gas per day at $2.21
per MMBtu, based upon the Houston Ship Channel Index.
RESULTS OF OPERATIONS
SIX MONTHS ENDED DECEMBER 31, 1995 COMPARED WITH DECEMBER 31, 1996
The following table sets forth certain operating information of the Company for
the periods presented:
-------------------------------------
SIX MONTHS ENDED DECEMBER 31,
INCREASE/
1995 1996 (DECREASE)
--------- --------- -------------
PRODUCTION DATA:
Oil (MBbls)..................... 184 143 (22.3)%
Gas (MMcf)...................... 2,428 2,814 15.9%
AVERAGE SALES PRICE:
Oil (per Bbl)................... $ 16.04 $ 21.59(a) 34.6%
Gas (per Mcf)(b)................ 1.72 2.40 39.5%
Average unit production cost per
BOE(c)............................. 4.16 5.00 20.2%
Average unit depreciation, depletion
and amortization rate per BOE...... 5.39 6.09 13.0%
- ------------
(a) Average sales price does not include the effects of hedge transactions.
(b) Average sales price for natural gas includes revenues received from the sale
of natural gas liquids removed from the Company's gas production.
(c) Includes ad valorem and severance taxes.
30
<PAGE>
REVENUES. Oil and gas revenues for the six months ended December 31, 1996 were
$9.8 million or 38.0% higher than oil and gas revenues of $7.1 million for the
same period in 1995. The increase in oil and gas revenues was attributable
primarily to additional production from natural gas well workovers in the
Company's Cove field and increases in oil and gas prices. The effect of hedge
transactions was immaterial.
Gas plant and gas gathering revenues in the six months ended December 31, 1996
were $3.9 million compared with $4.9 million in the same period of 1995. This
decrease is primarily a result of decreased gas gathering revenues of $2.5
million. In March 1996, Bellwether assumed a contract to purchase gas at $4.50
per MMBtu (the "Contract Assumption"), for which Bellwether received $9.9
million. As a result of this transaction, Bellwether ceased to recognize gas
gathering revenues and expenses. In addition, Bellwether wrote off the remaining
book value of the gas gathering system and has recorded a liability to cover the
estimated future losses under the contract, which are charged to the liability
as incurred. See Note 5 of the Notes to the Condensed Consolidated Financial
Statements. Gas plant revenues in the six months ended December 31, 1996
increased by $1.5 million compared to the same period in 1995 due to increased
prices and sales volumes.
EXPENSES. Lease operating expenses for the six months ended December 31, 1996
totaled $3.1 million or 29.2% in excess of the $2.4 million for the six months
ended December 31, 1995. Lease operating expenses per BOE were 20.2% higher in
the six months ended December 31, 1996 when compared to the same period in 1995,
due primarily to higher severance taxes from increases in oil and gas prices of
34.6% and 39.5%, respectively.
Gas plant and gas gathering expenses were $1.8 million in the six months ended
December 31, 1996 compared with $3.0 million for the prior period, reflecting
the reduction in gas gathering activity relating to the Contract Assumption
somewhat offset by higher payments from gas plant operations to producers under
the Company's percent of proceeds contracts. The higher payments to producers
resulted primarily from higher liquids prices received by the Company.
Depreciation, depletion and amortization of $4.2 million for the six months
ended December 31, 1996 reflects a 7.7% increase from $3.9 million in the same
period in 1995, primarily because of an increase in oil and gas production and
an increase in the depreciation, depletion and amortization rate per BOE, both
of which were caused by increases in reserves due to the mergers, new drilling
and workovers.
General and administrative expenses were $1.5 million in the six months ended
December 31, 1996 compared with $1.6 million in the 1995 period.
Interest expense decreased to $520,000 for the six months ended December 31,
1996 from $956,000 in the same period of 1995. The Company used the proceeds
from the Contract Assumption (described below) to reduce its outstanding
indebtedness by $9.5 million.
INCOME TAXES. Provision for federal and state income taxes for the six months
ended December 31, 1996 is 37% of income.
NET INCOME. Net income for the six months ended December 31, 1996 was
approximately $1.7 million as compared to net income of $1,000 in the same
period of 1995.
31
<PAGE>
COMPARISONS OF FISCAL YEARS ENDED JUNE 30, 1994, 1995 AND 1996
The following table sets forth certain oil and gas production information of the
Company for the periods presented:
-------------------------------
YEARS ENDED JUNE 30,
1994 1995 1996
--------- --------- ---------
PRODUCTION DATA:
Oil (MBbls)..................... 71 216 334
Gas (MMcf)...................... 1,206 2,932 5,099
AVERAGE SALES PRICE:
Oil (per Bbl)................... $ 15.27 $ 16.89 $ 17.81(a)
Gas (per Mcf)(b)................ 2.17 1.66 2.02(a)
Average unit production cost per
BOE(c)............................. 4.75 4.05 4.49
Average unit depreciation, depletion
and amortization rate per BOE...... 5.71 5.52 5.86
- -----------------------------
(a) Average sales price does not include the effects of hedge transactions.
(b) Average sales price for natural gas includes revenues received from the sale
of natural gas liquids removed from the Company's gas production.
(c) Includes ad valorem and severance taxes.
REVENUES. Oil and gas revenues for fiscal 1996 were $15.7 million, or 84.7%
higher than fiscal 1995 oil and gas revenues of $8.5 million. In 1995, oil and
gas revenues were 129.7% higher than the fiscal 1994 oil and gas revenues of
$3.7 million. The Company's acquisition of properties in two transactions are
responsible for the increased revenues during fiscal 1995 and 1996. During the
three year period, the volatility of oil and gas prices directly impacted
revenues. Most significantly, average natural gas sales prices increased in
fiscal 1996 to $2.02 per Mcf from $1.66 per Mcf in fiscal 1995. During fiscal
1996, the Company utilized various hedging transactions to manage a portion of
the risks associated with oil and gas price volatility. As a result of these
hedges, oil and gas revenues were $560,000 lower than what they otherwise would
have been in fiscal 1996.
Gas plant and gas gathering revenues were $8.7 million in fiscal 1996 compared
to $10.7 million in fiscal 1995. Gas gathering revenues decreased to $3.4
million in fiscal 1996 from $5.0 million in fiscal 1995 due to the Contract
Assumption in March 1996. Gas plant revenues were $5.3 million in fiscal 1996,
or 7.0% lower than fiscal 1995 revenues of $5.7 million due primarily to
decreased throughput, partially offset by a 6.9% increase in natural gas liquids
prices. Fiscal 1995 gas plant revenues of $5.7 million were 26.7% higher than
the $4.5 million in fiscal 1994. Such increase was due to the purchase of
interests in the gas plant in July and December 1993 and a 16.0% increase in
prices.
EXPENSES. Production expenses for fiscal 1996 totaled $5.3 million, compared
with $2.9 million in fiscal 1995 and $1.3 million in fiscal 1994. The 82.8%
increase in fiscal 1996 over fiscal 1995 and the 123.1% increase between fiscal
1995 and 1994 were attributable primarily to acquisitions of producing
properties.
Gas plant and gas gathering expenses were $5.2 million in fiscal 1996 compared
to $6.1 million in fiscal 1995. Gas gathering expenses decreased to $2.4 million
in fiscal 1996 from $3.1 million in fiscal 1995 due to the Contract Assumption
in March 1996. Gas plant expenses were $2.8 million or 6.7% lower in fiscal 1996
than in fiscal 1995 as a result of decreased throughput, offset partially by
higher prices. In fiscal 1995, expenses were 24.6% higher than fiscal 1994 due
to a full year of operations being reflected in fiscal 1995.
Depreciation, depletion and amortization of $8.1 million reflects an increase of
52.8% for fiscal 1996 over $5.3 million in fiscal 1995. Such increase reflects a
full year of production volumes from acquisitions and a 6.2% increase in the
depreciation, depletion and amortization rate per net equivalent barrel due to
additional costs associated with dry holes drilled in Fausse Pointe and Cove
fields. In fiscal 1995, depreciation, depletion and amortization was 111.7%
higher than the fiscal 1994 amount. This reflects additional production volumes
from acquisitions and a full year of depreciation included for the Gas Plant and
gas gathering facilities.
General and administrative expenses totaled $3.0 million, $2.7 million and $1.2
million for the fiscal years ended June 30, 1996, 1995 and 1994, respectively.
The fee under the Administrative Service Agreement with Torch accounted for
32
<PAGE>
$337,000 and $578,000 of the increase in general and administrative expenses in
fiscal 1996 and fiscal 1995, respectively, and is due to the significant growth
of assets and cash flows experienced by the Company. Additionally, acquisitions
added to increases in salaries and other administrative overhead in fiscal 1995
compared with fiscal 1994.
Interest expense increased to $1.6 million in fiscal 1996 from $1.2 million in
fiscal 1995 and $721,000 in fiscal 1994. Such increase is due to the increase in
bank debt which financed a portion of the acquisitions of properties. Interest
rates were 7.3%, 7.9% and 6.2% at June 30, 1996, 1995 and 1994, respectively.
The Company recorded a provision for income taxes of $46,000 in fiscal 1996.
Actual payments of $126,000 in fiscal 1996 and $9,000 in fiscal 1995 relate to
alternative minimum tax and state taxes. Prior to the merger with Hampton
Resources Corporation ("Hampton") in 1995, the Company's net operating loss
was sufficient to eliminate any deferred tax liability. Upon merging with
Hampton, the Company was required to record a deferred tax liability of $2.4
million.
NET INCOME. Net income of $982,000 was generated in fiscal 1996, as compared to
$941,000 and $814,000 in fiscal 1995 and fiscal 1994, respectively.
CAPITAL RESOURCES AND LIQUIDITY
The Company's principal sources of capital for the last three years have been
borrowings under credit facilities with banks, cash flows from operations and
public and private sales of equity securities. Borrowings from banks were $8.5
million, $25.9 million and $0.0 during the years ended June 30, 1994, 1995 and
1996 and cash flow from operations was $3.1 million, $5.3 million and $7.5
million during each of such periods. Increases in cash flows from operations are
primarily attributable to the acquisitions made since 1993. The Company also
issued 3.4 million shares of stock in a public offering in 1994 for total net
proceeds of $17.2 million and issued an aggregate of 3.3 million shares of
common stock in private transactions since July 1, 1993 in exchange for assets.
In addition, during March 1996, the Company agreed to assume the purchase
obligation under a gas purchase contract in the West Monroe field in Louisiana
in exchange for a cash payment of $9.9 million. Under the terms of the contract,
Bellwether and other producers were entitled to sell a specified quantity of gas
for $4.50 per MMBtu. Bellwether supplied a substantial portion of the gas
subject to purchase under the contract. Proceeds from the gas contract
assumption were used to repay indebtedness.
The Company's primary uses of capital have been to fund acquisitions and to fund
its exploration and development operations. Since 1993, the Company has made two
significant acquisitions: (i) the purchase of Odyssey Partners, Ltd.
("Odyssey") in 1994 for $5.6 million and 917,000 shares of Common Stock and
(ii) the purchase of Hampton in 1995 for $21.1 million and 1.0 million shares of
Common Stock. The Company's expenditures for exploration and development were
$1.0 million, $3.4 million and $6.9 million in 1994, 1995 and 1996,
respectively.
The Company's capital budget for the third and fourth quarters of fiscal 1997 is
$8.1 million for its existing properties and $17.5 million for the Acquired
Properties. The Company has identified $42.8 million of projects for all of such
properties for fiscal 1998.
Concurrently with the completion of the Offerings, the Company will enter into
the $90 million New Credit Facility and will use borrowings under the New Credit
Facility, together with the net proceeds from the Offerings, to repay in full
outstanding indebtedness under the existing bank indebtedness. Outstanding
indebtedness under the New Credit Facility upon consummation of the Transactions
is anticipated to be $36.9 million.
The Company believes that the net proceeds of the Offerings, together with
borrowings under the New Credit Facility and internally generated cash flows,
will be sufficient to fund the Transactions and the Company's capital budget
through fiscal 1998.
33
<PAGE>
GAS BALANCING POSITIONS
It is customary in the industry for various working interest partners to sell
more or less than their entitled share of natural gas. The settlement or
disposition of gas balancing positions as of June 30, 1996 is not anticipated to
adversely impact the financial condition of the Company.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121 ("SFAS 121"), "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of." SFAS 121 establishes guidance
for determining and measuring asset impairment and the required timing of asset
impairment evaluations. The Company adopted SFAS 121 on July 1, 1996, and it did
not have a material effect on the financial condition and results of operations
of the Company based upon current economic conditions.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 123
In October 1995, the FASB issued Statement No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation" which is effective for the Company beginning July
1, 1996. SFAS No. 123 permits, but does not require, a fair-value-based method
of accounting for employee stock option plans which results in compensation
expense being recognized in the results of operations when stock options are
granted. The Company plans to continue to use the current intrinsic-value-based
method of accounting for such plans where no compensation expense is recognized.
However, as required by SFAS 123, the Company will provide pro forma disclosure
of net income and earnings per share in the notes to the consolidated financial
statements as if the fair-value-based method of accounting had been applied.
INFLATION
Inflation has not had a material impact on the Company and is not expected to
have a material effect on the Company in the future.
34
<PAGE>
BUSINESS AND PROPERTIES
GENERAL
Bellwether is an independent energy company primarily engaged in the
acquisition, exploitation, development and exploration of oil and gas
properties. The Company has grown and diversified its reserve base through the
acquisition of oil and gas properties and the subsequent development of these
properties. Bellwether's estimated net proved reserves have increased at a
compounded annual growth rate of 65.9% from 1.6 MMBOE as of June 30, 1993 to 7.3
MMBOE as of June 30, 1996. During this period, average net daily production
increased at a compounded annual growth rate of 63.1% from 745.0 BOE/d in fiscal
1993 to 3,235.0 BOE/d in fiscal 1996, and EBITDA increased at a compounded
annual growth rate of 89.0% from $1.6 million in fiscal 1993 to $10.8 million in
fiscal 1996. The Company's net cash flows from operations have increased at a
compounded annual growth rate of 67.4%, from $1.6 million in fiscal 1993 to $7.5
million in fiscal 1996. The Company believes its primary strengths are a
demonstrated ability to identify and acquire properties which have significant
potential for further exploitation, development and exploration, an inventory of
development and exploration projects, expertise in the use of advanced
technologies such as 3-D seismic and horizontal drilling and a conservative
capital structure supportive of continued investment in its core properties as
well as additional acquisitions.
The Company has recently agreed to acquire the oil and gas properties and
associated working capital owned by partnerships and other entities managed or
sponsored by Torch. Bellwether believes that the Pending Acquisition provides
the opportunity to significantly increase reserves and cash flow at an
attractive price while providing opportunities for future reserve growth through
exploitation and exploration activities. On a pro forma basis, Bellwether's
estimated net proved reserves as of June 30, 1996 were 46.6 MMBOE (86% developed
and 62% natural gas), with a PV-10 Value (pre-tax) of $260.1 million. Pro forma
average daily net production was 22.7 MBOE/d for fiscal 1996 and pro forma
EBITDA for fiscal 1996 was $75.0 million, excluding non-recurring gas contract
settlements payable to the Company aggregating $18.9 million. Following the
Pending Acquisition, the Company's properties will be concentrated in Texas,
Louisiana, Alabama, California and the Gulf of Mexico.
In fiscal 1994, the Company reincorporated from Colorado to Delaware. The
Company's address is 1331 Lamar, Suite 1455, Houston, Texas 77010, and its phone
number is (713) 650-1025.
BUSINESS STRATEGY
Bellwether's strategy is to maximize long-term shareholder value through
aggressive growth in reserves and cash flow, using advanced technologies,
implementation of a low cost structure and maintenance of a capital structure
supportive of growth. Bellwether expects the additional cash flows from the
Acquired Properties will finance a significant portion of its growth strategy.
Key elements of this strategy are:
OPPORTUNISTIC ACQUISITIONS. Bellwether seeks to acquire properties that have
produced significant quantities of oil and gas and have upside potential which
can be exploited using 3-D seismic, CAEX, horizontal drilling, workovers and
other enhanced recovery techniques. Such acquisitions have included the Fausse
Pointe field in south Louisiana, the Cove field offshore Texas and the Fort
Trinidad field in east Texas.
EXPLOITATION AND DEVELOPMENT OF PROPERTIES. The Company actively pursues the
exploitation of its properties through recompletions, waterfloods and
development wells, including horizontal drilling. Examples of recent
exploitation successes include a five well workover program and two development
wells in the Cove field, which increased Bellwether's average net production in
this field from 1.0 MMcf/d in January 1996 to 11.1 MMcf/d in February 1997. In
addition, the Company recently drilled a successful horizontal development well
into the Buda formation in the Fort Trinidad field which tested in January 1997
at 420 Bbls/d of oil. Bellwether also initiated a waterflood project in the Fort
Trinidad field during fiscal 1996. Future planned exploitation projects include
in excess of 20 horizontal drilling locations in the Buda and Glen Rose B
formations in the Fort Trinidad field and up to three horizontal drilling
locations to exploit the Company's exploratory success in the Giddings field in
the Austin Chalk formation. In addition, because the Sellers were formed to
distribute net cash flows rather than reinvest in the exploitation of the
Acquired Properties, the Company believes that such properties will provide
significant exploitation and development opportunities. The Company's
exploitation budget for fiscal 1997 is $8.6 million, of which approximately $4.8
million had been spent as of December 31, 1996. During fiscal 1997, the capital
expenditures on the Acquired Properties are estimated to be $23.2 million of
35
<PAGE>
which $5.7 million had been spent as of December 31, 1996. For fiscal 1998, the
Company has identified exploitation projects totaling $25.2 million (including
amounts to be spent on the Acquired Properties).
EXPLORATION ACTIVITIES. The Company's exploration activities focus on projects
with potential for substantial reserve increases. In January 1997, the Company
completed a successful exploration well in the Austin Chalk formation in the
Giddings field in central Texas. Exploration projects in the remainder of fiscal
1997 and in fiscal 1998 include multiple wells in the Fausse Pointe field and an
exploration well west of the Cove field, both of which are operated by the
Company. In addition, the Company also expects the Acquired Properties to
present exploration opportunities. For example, in the Ship Shoal complex in the
Gulf of Mexico, the Sellers declined to acquire available 3-D seismic surveys
and to participate in six offshore exploration or exploitation wells in 1996,
all of which were successful. The Company plans to acquire this and other 3-D
seismic surveys of the Acquired Properties and to participate in future wells
based on its interpretation of the data. During fiscal 1997, the Company has
budgeted $4.8 million for exploration, of which $2.1 million had been spent as
of December 31, 1996. For fiscal 1998, the Company has identified exploration
projects totaling $17.6 million (including amounts to be spent on the Acquired
Properties).
ADVANCED TECHNOLOGY. The Company seeks to improve the efficiency and reduce the
risks associated with its exploration and exploitation activities using advanced
technologies. These advanced technologies include 3-D seismic, CAEX techniques
and horizontal drilling. The Company acquired a 3-D survey on the Cove field,
conducted a 3-D survey on the Fausse Pointe field and plans to acquire three 3-D
surveys on certain of the Acquired Properties. The Company believes its existing
properties and the Acquired Properties will benefit from the application of
advanced technologies.
TORCH RELATIONSHIP. The Company operates under an Administrative Services
Agreement with Torch. Torch has a staff of 39 geologists, geophysicists, reserve
engineers and landmen and 59 financial personnel and professionals. The Company
believes that its relationship with Torch provides it with access to acquisition
opportunities and financial and technical expertise that are generally only
available to significantly larger companies. In addition, the fees payable to
Torch reduce significantly on a BOE basis as the Company's asset base and
production grow.
LOW COST STRUCTURE. The Company's cost structure will benefit from the Pending
Acquisition and the Company believes that its larger asset and production base
will allow it to maintain a low cost structure prospectively. Because general
and administrative costs are spread over higher production, pro forma general
and administrative costs per BOE in fiscal 1996 and the six months ended
December 31, 1996 were $1.00 and $0.99, respectively, compared with $2.55 and
$2.37, respectively, on a historical basis.
PENDING ACQUISITION
In March 1997, the Company agreed to purchase the Acquired Properties and an
estimated $18.0 million of working capital for $188.3 million, plus the
Contingent Payment. The effective date of the Pending Acquisition is July 1,
1996 and the estimated net adjusted purchase price assuming an April 9, 1997
closing date is $141.8 million plus the Contingent Payment. As of June 30, 1996,
estimated net proved reserves attributable to the Acquired Properties were 39.2
MMBOE (89% developed and 59% gas) with a PV-10 Value (pre-tax) of $212.0
million.
The Company will finance the cash portion of the Pending Acquisition and related
fees, estimated to aggregate $173.2 million, including the repayment of an
estimated $12.0 million of existing indebtedness, with the proceeds of the
Offerings (estimated to be $136.3 million) and $36.9 million of borrowings under
its New Credit Facility. Torch and a subsidiary of Torchmark, the parent
corporation of a Selling Stockholder, have interests in the Acquired Properties
and will receive an estimated $18.0 million and $12.7 million, respectively, of
the purchase price paid for the Acquired Properties. Torch and Torchmark will
also receive fees payable in cash and Common Stock in connection with the
Pending Acquisition aggregating an estimated $3.3 million. See "Risk
Factors -- Conflicts of Interest" and "Transactions with Related Persons." In
addition, certain of the Sellers own properties the production from which
qualifies for tax credits under Section 29 of the Internal Revenue Code of 1986.
Torch will pay such Sellers $250,000 and will enter into agreements with
Bellwether which will transfer the Section 29 tax credits to Torch.
The Company has identified for divestiture non-core properties representing
approximately 10% of the estimated net proved reserves attributable to the
Acquired Properties as of June 30, 1996. These properties are primarily small
working interests in geographically diverse locations, with generally low
production rates and cash flows, and limited potential for development. The
Company expects to sell these properties during fiscal 1997 and fiscal 1998. The
net proceeds from
36
<PAGE>
these divestitures, which will be used to repay indebtedness, is currently
estimated to be $15 million, but will depend on prevailing market conditions at
the time of sale.
Because Torch has an equity interest in the Sellers and Torch will receive fees
and other consideration in connection with the Pending Acquisition, Bellwether's
Board of Directors formed the Special Committee composed of four directors not
affiliated with Torch or the Sellers to review and approve the terms of the
purchase of the Acquired Properties. Bellwether retained Principal to render its
opinion to the Special Committee and the Board of Directors that the Pending
Acquisition was fair to Bellwether from a financial point of view. The Special
Committee also retained legal counsel to represent it, and retained Ryder Scott
to audit the report of estimated reserves attributable to the Acquired
Properties prepared by Torch and upon which Bellwether based its offer for the
Acquired Properties. On March 19, 1996, Principal gave its opinion to the
Special Committee that the Pending Acquisition was fair to Bellwether from a
financial point of view, and on that date the Special Committee approved the
Pending Acquisition and all fees and other consideration to be paid to Torch in
connection therewith.
THE CONTINGENT PAYMENT
In addition to the cash portion of the purchase price, Bellwether has agreed to
pay the Sellers the Contingent Payment up to a maximum of $9.0 million, based on
the prices of gas in 1997. The Contingent Payment will equal the average monthly
NYMEX price for gas during 1997 minus $2.10 per MMBtu, multiplied by 13.6
million (representing 75% of the Company's estimated 1997 gas production from
the Acquired Properties). For months prior to the closing date, the actual NYMEX
prices will be used, and for months after closing, the NYMEX futures price will
be used.
STRUCTURE OF THE PENDING ACQUISITION
The interests of the Sellers in the Acquired Properties were structured
differently to satisfy the investment goals of the investors. Certain Sellers
are limited partnerships which own either working interests or net profits
interests that burden working interests. Several investors made loans secured by
mortgages of working interests or net profits interests owned by the Sellers. In
addition, certain Sellers directly acquired net profits interests burdening
working interests. In general, a subsidiary of Torch owns the working interests
burdened by net profits interests owned by the Sellers.
The acquisition of the Acquired Properties is structured as a merger of certain
of the Sellers which are limited partnerships into a subsidiary of Bellwether
and the acquisition of general and limited partnership interests in other
partnerships. Each Seller (other than such partnerships) which owns net profits
interests will convey such net profits interests to Bellwether's subsidiary, and
the stock of each subsidiary of Torch which owns working interests burdened by
the net profits interests will be sold by Torch to Bellwether. Bellwether will
merge the subsidiary into Bellwether simultaneously with the closing of the
Offerings and the Pending Acquisition so that a substantial portion of the
Acquired Properties will be held directly by Bellwether. One of the Sellers has
notified Bellwether that, because of public notice requirements applicable to
such Seller, it is unable to execute the Acquisition Agreement before April 15,
1997. Bellwether will not acquire the interest of such Seller in the Acquired
Properties, or the related interests in such properties owned by Torch and its
affiliates at the closing. Bellwether has agreed to acquire the interests of
such Seller and the related interests of Torch and its affiliates on April 15,
1997, if such Seller executes the Acquisition Agreement on or before such date.
No assurances can be made that such Seller will execute the Acquisition
Agreement. The net purchase price of the properties owned by such Seller and the
related interests of Torch and its affiliates is less than $2.2 million, and the
failure to acquire such interests is not expected to have a material effect on
Bellwether.
In the purchase agreement covering the Pending Acquisition, the Sellers will
make a special warranty of their title to the properties, and customary
warranties as to power and authority to effect the transactions. Neither the
Sellers nor Torch will make any representation or warranty with respect to
environmental or operational matters with respect to the properties. Bellwether
will assume all such liabilities, including those which are unknown or
contingent, and including those which arise prior to the closing of the Pending
Acquisitions. See "Risk Factors -- Acquisition Risks."
ACQUISITION HISTORY
Bellwether has increased its reserves, production and cash flows through a
series of acquisitions since July 1, 1993. In July 1993, the Company acquired
through a joint venture, for $8.5 million, an interest in the Snyder Gas Plant
and the Diamond M-Sharon Ridge Gas Plant (collectively, the "Gas Plant"), the
operations of which were subsequently consolidated.
37
<PAGE>
In December 1993, the Company acquired by merger Associated Gas Resources, Inc.
("AGRI"), a corporation owned by an institutional investor and managed by
Torch for a total cost of $7.0 million principally consisting of Common Stock.
AGRI's assets included additional interests in the Gas Plant and a 300 mile gas
gathering system in Union Parish, Louisiana ("Monroe Gathering System"), that
serves the Monroe Gas field.
In August 1994, the Company acquired Odyssey for $9.6 million consisting of cash
and Common Stock. Included among the assets of Odyssey was the Fausse Pointe
field in south Louisiana. The Company has conducted a 54 square mile 3-D seismic
survey and is conducting exploitation and development activities in the Fausse
Pointe field. See "Principal Properties."
In February 1995, the Company completed the acquisition of Hampton for $25.9
million consisting of cash and Common Stock. Included among the assets of
Hampton were the Cove field and the Fort Trinidad field.
In February 1997, the Company acquired a 25% interest in the Mud Lake field from
Nuevo for a net purchase price of $2.0 million in cash. The Company plans to
commence a 45 square mile 3-D seismic survey in the Mud Lake field in March
1997.
PRINCIPAL PROPERTIES
The following table sets forth certain information, as of June 30, 1996, which
relates to the oil and gas properties owned by Bellwether and to the Acquired
Properties:
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------
PV-10
ESTIMATED NET PROVED RESERVES VALUE
1996 NET PRODUCTION (PRE TAX)
------------------------------ ------------------------------ -----------
OIL GAS OIL GAS (IN
(MBBLS) (MMCF) MBOE (MBBLS) (MMCF) MBOE THOUSANDS)
------- --------- --------- ------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
CURRENTLY OWNED PROPERTIES:
Cove field, TX..................... 7 10,401 1,741 2 1,002 169 $ 12,876
Fort Trinidad field, TX............ 454 3,007 955 24 152 49 5,684
Fausse Pointe field, LA............ 127 3,736 750 -- -- -- 4,068
Other.............................. 1,220 16,052 3,895 308 3,945 966 25,512
------- --------- --------- ------- --------- --------- -----------
Total currently owned......... 1,808 33,196 7,341 334 5,099 1,184 $ 48,140
------- --------- --------- ------- --------- --------- -----------
ACQUIRED PROPERTIES:
Waddell Ranch complex, TX.......... 4,086 6,004 5,086 245 849 386 $ 23,338
Blue Creek field, AL............... -- 8,938 1,490 -- 1,075 179 12,946
High Island A-334 field,
Gulf of Mexico................... 290 7,521 1,544 80 3,330 635 11,634
Ship Shoal complex, Gulf of
Mexico........................... 1,042 4,617 1,811 175 527 263 11,095
Pt. Pedernales field, CA........... 4,846 3,236 5,385 802 -- 802 9,453
West Chalkley field, LA............ 31 5,232 903 10 753 135 7,758
Other.............................. 5,755 103,509 23,007 1,478 19,477 4,725 135,768
------- --------- --------- ------- --------- --------- -----------
Total Acquired Properties..... 16,050 139,057 39,226 2,790 26,011 7,125 $ 211,992
======= ========= ========= ======= ========= ========= ===========
Total pro forma.......... 17,858 172,253 46,567 3,124 31,110 8,309 $ 260,132
======= ========= ========= ======= ========= ========= ===========
</TABLE>
The following is a description of the principal properties currently owned by
Bellwether and the Acquired Properties:
CURRENTLY OWNED PROPERTIES
COVE FIELD. The Cove field is located in state waters nine miles offshore
Texas. Bellwether operates the field and controls 2,880 acres with a 90.0%
working (73.0% net revenue) interest in 5 wells (4.5 net) and a 42.1% working
(34.2% net revenue) interest in a sixth well (0.4 net). The Company acquired the
field in February 1995 and subsequently gained access to a 25 square mile 3-D
seismic survey covering the field. Bellwether's exploitation activities have
included a five well workover program and two development wells. These
activities increased net production from 1.0 MMcf/d in January
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1996 to 11.1 MMcf/d in February 1997. The Company has budgeted $3.3 million for
development of the Cove field in fiscal 1997 and has identified projects
totaling $3.8 million for 1998.
The Company expects to drill an exploration well in July 1997 on acreage which
it owns to the west of the currently producing wells. The targets include gas
production from formations at approximately 14,000 feet and 15,000 feet.
FORT TRINIDAD FIELD. The Fort Trinidad field is located in east Texas.
Bellwether owns a 47.9% working (41.0% net revenue) interest in the Dexter Unit
waterflood and a 38.7% working (32.3% net revenue) interest in the Upper Glen
Rose Unit. The waterflood was initiated in December 1995 in the Dexter reservoir
which had cumulative production of 6.4 MMBbls. In December 1996, net production
from 13 wells (5.5 net) averaged 125 BOE/d. The operator of both units is Parten
Operating Company.
The Company is currently evaluating horizontal drilling development
opportunities for the Buda, Georgetown, Edwards and Glen Rose reservoirs on
19,000 acres that are held by production. Additionally, Bellwether has entered
into a joint venture with Moran Resources Company to develop 2,700 acres with
the drilling of three horizontal wells in the Buda reservoir. The first well was
completed in January 1997 and is currently being tested at 420 Bbls/d.
Bellwether owns a 30.0% working (22.5% net revenue) interest in the drilling
program. The Company has budgeted $1.5 million in development capital for the
Fort Trinidad field in fiscal 1997 and has identified projects totaling $5.6
million in fiscal 1998.
FAUSSE POINTE FIELD. The Fausse Pointe field is located in south Louisiana.
Since its discovery in the mid 1930's, over 50 MMBbls of oil and 200 Bcf of gas
have been produced from 19 producing formations ranging in depth from 1,000 feet
to 14,000 feet. Bellwether acquired its undeveloped interest in the field in
fiscal 1995 and operates the seismic and drilling program in the field with a
19.5% working (14.2% net revenue) interest in the 8,250-acre State Lease No. 293
and a 26.0% working interest (19.9% net revenue interest) in 5,198 acres of
private leases and lease options. In 1995, the Company initiated and completed a
54 square mile 3-D seismic survey. In 1996, Bellwether drilled a south flank
exploration well which was plugged due to mechanical difficulties and drilled an
unsuccessful east flank exploration well and a south flank development well
which was spudded in December 1996. Bellwether expects to drill a third south
flank well in April 1997. The Company has budgeted $4.4 million for additional
development and exploration of the field in fiscal 1997 and has identified
projects totaling $2.5 million for fiscal 1998. Additional drilling prospects on
the north and south flanks are also being evaluated.
ACQUIRED PROPERTIES
WADDELL RANCH COMPLEX. The Waddell Ranch complex, comprising fields located in
west Texas, was discovered in the 1930s. The Acquired Properties include fee
interests, net profits interests and working interests that approximate a
composite 10.2% working (10.0% net revenue) interest in 76,921 gross (7,876 net)
acres and 1,350 gross (138 net) wells. Production is from a number of formations
from depths between 2,000 and 6,000 feet, including the upper Permian Grayburg
(3,200 feet), San Andres (3,400 feet) and lower Clearfork Tubb (4,200 feet)
formations. Over 400 MMBbls of oil and 1,000 Bcf of gas have been produced from
over 3,000 wells since the initial discovery. Peak production rates occurred in
the early 1960's but the field has experienced a resurgence of activity in the
1990's with renewed drilling, waterflood expansion and completion of a 79 square
mile 3-D seismic survey. The resulting net production has increased from 1.4
MBOE/d in 1990 to 1.7 MBOE/d in December 1996. The Waddell Ranch complex is
operated by Burlington Resources Oil & Gas Company, with Coastal Management
Corporation acting as contract operator. The Company's estimated capital
expenditures for identified exploitation and exploration projects in this
complex for fiscal 1997 is $2.9 million, with identified projects totaling $2.4
million for fiscal 1998.
BLUE CREEK FIELD. The Blue Creek field is located in the Black Warrior Basin in
Alabama. The Acquired Properties include a weighted average 15.2% royalty
interest in 9,918 acres with 168 wells. The field was developed from 1988
through 1991 and produces coalbed methane gas from Pennsylvanian coal seams at
depths of 700 feet to 2,500 feet. Average coal seam thickness is between 10 feet
and 35 feet. Average net production during December 1996 was 4.5 MMcf/d. The
field is operated by River Gas Corporation.
HIGH ISLAND BLOCK A-334 FIELD. The High Island Block A-334 field is located in
federal waters 110 miles southeast of Galveston, Texas in 230 feet of water. The
Acquired Properties include an average 25.0% working (20.8% net revenue)
interest in 10,000 gross (2,500 net) acres with 16 gross (4.0 net) wells. This
field is operated by Union Oil Company of California ("Unocal"). Production is
from two gas reservoirs and one oil reservoir at depths ranging from 3,500 feet
to
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6,000 feet. Average net production during December 1996 was 1,194 BOE/d. A 3-D
seismic survey has been conducted on a portion of this acreage, and the Company
plans to review the survey as part of its due diligence investigation of the
Pending Acquisition.
SHIP SHOAL COMPLEX. The Ship Shoal properties are located in federal waters 120
miles southwest of New Orleans in 125 feet of water. The complex comprises
working interests in eight blocks which include the Ship Shoal Block 208, Block
230 and Block 239 fields. The Acquired Properties consist of working interests
in the three fields ranging from 9.7% to 29.3% with a 1/6 royalty burden. The 31
wells (5.8 net) in the complex are operated by Kerr-McGee Corporation.
Production is from a variety of formations ranging from 2,000 feet to 12,000
feet. The fields have produced over 128 MMBbls of oil and 649 Bcf of gas since
their discovery in 1963. Average net production during December 1996 was 1.4
MBOE/d. Since 1990, Kerr-McGee has been actively redeveloping the field and has
drilled 11 successful wells including four exploratory wells. A 3-D seismic
survey has been conducted on this acreage, and the Company plans to purchase the
survey as part of its due diligence investigation of the Pending Acquisition.
The Company's estimated capital expenditures for identified exploitation and
exploration projects in this complex for fiscal 1997 is $4.6 million, with
identified projects totaling $6.9 million for fiscal 1998.
POINT PEDERNALES FIELD. The Acquired Properties include a 19.7% working (16.4%
net revenue) interest in 9,500 gross (1,871 net) acres in federal waters
offshore California. The field is located approximately 4.5 miles offshore in
242 feet of water. Production is from the Monterey Shale formation at depths of
between 3,800 feet and 5,300 feet. Average net production from 14 gross (2.8
net) wells during December 1996 was 1.5 MBOE/d. The Point Pedernales field is
operated by Nuevo, which owns the other 80.3% working interest. Torch acts as
contract operator of this field for Nuevo. This property was purchased from
Unocal and six other major oil companies in 1993 and has seen significant
activity with production optimization, de-bottlenecking of facilities and the
drilling of three new wells. The Company has identified capital expenditures of
$3.9 million for two additional wells and a gas processing plant for this field
in fiscal 1997. Pursuant to the 1993 purchase agreement, Bellwether's maximum
realized oil price is capped at $9.00/Bbl for the projected life of this field.
WEST CHALKLEY FIELD. The West Chalkley field is located in south Louisiana. The
Acquired Properties include a 2.3% working (1.9% net revenue) interest in 5
gross (0.1 net) wells producing from the Miogyp "B" reservoir at an average
depth of 14,400 feet and operated by Exxon Company USA. A sixth well (0.1 net)
is completed in the lower Miogyp at 15,400 feet and operated by Torch. The
Sellers own a 9.3% working (7.1% net revenue) interest in the Torch-operated
well. Average net production for the field during December 1996 was 0.3 MBOE/d.
Future plans include the recompletion of the Torch-operated well to the main
field pay interval.
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RESERVES
The following table sets forth certain information regarding the estimated net
proved oil and gas reserves of the Company, the estimated net proved reserves
attributable to the Acquired Properties and the pro forma estimated net proved
reserves of the Company as of June 30, 1996:
----------------------------------
ACQUIRED COMPANY
COMPANY PROPERTIES PRO FORMA
------- ---------- ---------
Proved developed:
Oil (MBbls)........................ 1,494 13,536 15,030
Gas (MMcf)......................... 22,698 128,242 150,940
MBOE............................... 5,277 34,910 40,187
Proved undeveloped:
Oil (MBbls)........................ 314 2,514 2,828
Gas (MMcf)......................... 10,498 10,815 21,313
MBOE............................... 2,064 4,316 6,380
Total Proved:
Oil (MBbls)........................ 1,808 16,050 17,858
Gas (MMcf)......................... 33,196 139,057 172,253
MBOE............................... 7,341 39,226 46,567
PV-10 Value (pre-tax) ($000)............ $48,140 $ 211,992 $260,132
The Company's historical proved reserves were estimated by Williamson,
independent petroleum reserve engineers, whose report is attached as Exhibit A,
and the proved reserves attributable to the Acquired Properties were estimated
by the Company and audited by Ryder Scott, whose report is attached hereto as
Exhibit B. Ryder Scott reviewed properties representing 84% of the PV-10 Value
(pre-tax) of the Acquired Properties.
All of the Company's oil and gas reserves are located onshore in the United
States or in state or federal waters.
In general, estimates of economically recoverable oil and natural gas reserves
and of the future net cash flows therefrom are based upon a number of variable
factors and assumptions, such as historical production from the properties,
assumptions concerning future oil and natural gas prices and future operating
costs and the assumed effects of regulation by governmental agencies, all of
which may vary considerably from actual results. All such estimates are to some
degree speculative, and classifications of reserves are only attempts to define
the degree of speculation involved. Estimates of the economically recoverable
oil and natural gas reserves attributable to any particular group of properties,
classifications of such reserves based on risk of recovery and estimates of
future net cash flows expected therefrom, prepared by different engineers or by
the same engineers at different times, may vary substantially. The Company's
actual production, revenues, severance and excise taxes and development and
operating expenditures with respect to its reserves will vary from such
estimates, and such variances could be material. See "Risk Factors -- Estimates
of Oil and Gas Reserves."
Estimates with respect to proved reserves that may be developed and produced in
the future are often based upon volumetric calculations and upon analogy to
similar types of reserves rather than actual production history. Estimates based
on these methods are generally less reliable than those based on actual
production history. Subsequent evaluation of the same reserves based upon
production history will result in variations, which may be substantial, in the
estimated reserves.
In accordance with applicable requirements of the SEC, the estimated discounted
future net cash flows from estimated proved reserves are based on prices and
costs as of the date of the estimate unless such prices or costs are
contractually determined at such date. Actual future prices and costs may be
materially higher or lower. Actual future net cash flows also will be affected
by factors such as actual production, supply and demand for oil and natural gas,
curtailments or increases in consumption by natural gas purchasers, changes in
governmental regulations or taxation and the impact of inflation on costs. See
"Risk Factors -- Volatility of Oil and Gas Prices and Markets."
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ACREAGE
The following table sets forth the acres of developed and undeveloped oil and
gas properties in which the Company held an interest as of June 30, 1996.
Undeveloped acreage is considered to be those leased acres on which wells have
not been drilled or completed to a point that would permit the production of
commercial quantities of oil and gas, regardless of whether or not such acreage
contains proved reserves.
-------------------
GROSS NET
------- ---------
Developed Acreage....................... 481,446 110,513
Undeveloped Acreage..................... 63,549 56,713
------- ---------
Total.............................. 544,995 167,226
======= =========
PRODUCTIVE WELLS
The following table sets forth Bellwether's gross and net interests in
productive oil and gas wells as of June 30, 1996. Productive wells are producing
wells and wells capable of production.
-----------------
GROSS NET
----- ---------
Oil Wells............................... 359 60.82
Gas Wells............................... 483 72.98
----- ---------
Total.............................. 842 133.80
===== =========
DRILLING ACTIVITY
The following table sets forth the results of drilling activity by the Company
for the last three fiscal years.
-------------------------------------------------------
EXPLORATORY WELLS
GROSS NET
-------------------------- --------------------------
DRY DRY
PRODUCTIVE HOLES TOTAL PRODUCTIVE HOLES TOTAL
---------- ----- ----- ---------- ----- -----
1994....... 1 1 2 0.10 0.20 0.30
1995....... 3 4 7 0.27 0.65 0.92
1996....... 2 3 5 0.34 0.39 0.73
-------------------------------------------------------
DEVELOPMENT WELLS
GROSS NET
-------------------------- --------------------------
DRY DRY
PRODUCTIVE HOLES TOTAL PRODUCTIVE HOLES TOTAL
---------- ----- ----- ---------- ----- -----
1994....... 1 2 3 0.08 0.27 0.35
1995....... 1 2 3 0.30 0.18 0.48
1996....... 17 1 18 0.93 0.04 0.97
During the three years ended June 30, 1996, the Company's principal drilling
activities occurred in the continental United States and offshore in Texas state
waters. The Company had three gross (0.66 net) wells drilling at June 30, 1996.
GAS PLANT
The Company acquired interests in the Snyder Gas Plant and the Diamond M-Sharon
Ridge Gas Plant in 1993. These plants are located in the Horseshoe Atoll reef
area in the Permian Basin of West Texas. The Diamond M-Sharon Ridge Plant was
subsequently dismantled and gas previously processed at the plant is currently
processed at the Snyder Gas Plant. The Gas Plant is a cryogenic gas plant with
60.0 MMcf/d capacity and a carbon dioxide removal facility. The Company owns a
11.9% interest in the Gas Plant and a 35.8% interest in gas processed under
contracts with the Diamond M-Sharon Ridge Gas Plant, which results in an
approximate 15% interest in all gas processed by the Gas Plant. The Company also
owns an interest in the 650 mile gathering system connected to the Gas Plant.
The Gas Plant is operated by a subsidiary of Torch.
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The Gas Plant operated at 34% of capacity in fiscal 1996. The operator of the
Sacroc Unit, which currently supplies over 70% of the plant's inlet volume, has
identified several areas within the Unit that have not been effectively flooded
and is evaluating a large capital project to initiate carbon dioxide flooding in
these areas. Two other operators in the area have disclosed plans to commence
two additional carbon dioxide flood development programs. No assurance can be
made, however, that any additional deposits of gas will be dedicated to the Gas
Plant.
The Gas Plant generally processes gas under percent of proceeds contracts, in
which the plant is entitled to a percent of the liquids extracted from the
processed gas stream. In these cases the Gas Plant typically retains 60.0% to
66.7% of the extracted liquids. In some cases, the Gas Plant processes gas for a
fixed fee per Mcf. In these instances the Gas Plant does not retain any of the
extracted liquids.
TITLE TO PROPERTIES
Bellwether believes that the title to its oil and gas properties is good and
defensible in accordance with standards generally accepted in the oil and gas
industry, subject to such exceptions which, in the opinion of the Company, are
not so material as to detract substantially from the use or value of such
properties. The Company's properties are typically subject, in one degree or
another, to one or more of the following: royalties and other burdens and
obligations, express or implied, under oil and gas leases; overriding royalties
and other burdens created by the Company or its predecessors in title; a variety
of contractual obligations (including, in some cases, development obligations)
arising under operating agreements, farmout agreements, production sales
contracts and other agreements that may affect the properties or their titles;
back-ins and reversionary interests arising under purchase agreements and
leasehold assignments; liens that arise in the normal course of operations, such
as those for unpaid taxes, statutory liens securing obligations to unpaid
suppliers and contractors and contractual liens under operating agreements;
pooling, unitization and communitization agreements, declarations and orders;
and easements, restrictions, rights-of-way and other matters that commonly
affect oil and gas producing property. To the extent that such burdens and
obligations affect the Company's rights to production revenues, they have been
taken into account in calculating the Company's net revenue interests and in
estimating the size and value of the Company's reserves. Bellwether believes
that the burdens and obligations affecting the Company's properties are
conventional in the industry for properties of the kind owned by the Company.
OTHER PROPERTIES
The Company's headquarters are located in Houston, Texas, in approximately 1,200
square feet of leased space.
EMPLOYEES
The Company had eight employees on January 1, 1997.
LITIGATION
The Company is a defendant in various legal proceedings and claims which arise
in the ordinary course of Bellwether's business. Bellwether does not believe the
ultimate resolution of such actions will have a material effect on the Company's
financial position or results of operations.
COMPETITION, MARKETS AND REGULATION
COMPETITION
The oil and gas industry is highly competitive in all of its phases. Bellwether
encounters competition from other oil and gas companies in all areas of the
Company's operations, including the acquisition of reserves and producing
properties and the marketing of oil and gas. Many of these companies possess
greater financial and other resources than the Company. Competition for
producing properties is affected by the amount of funds available to the
Company, information about a producing property available to the Company and any
standards established by the Company for the minimum projected return on
investment. Because gathering systems and related facilities are the only
practical method for the intermediate transportation of gas, competition for gas
delivery is presented by other pipelines and gas gathering systems. Competition
may also be presented by alternate fuel sources.
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<PAGE>
MARKETS
Bellwether's ability to market oil and gas from the Company's wells depends upon
numerous factors beyond the Company's control, including the extent of domestic
production and imports of oil and gas, the proximity of the gas production to
gas pipelines, the availability of capacity in such pipelines, the demand for
oil and gas by utilities and other end users, the availability of alternate fuel
sources, the effects of inclement weather, state and federal regulation of oil
and gas production and federal regulation of gas sold or transported in
interstate commerce. No assurances can be given that Bellwether will be able to
market all of the oil or gas produced by the Company or that favorable prices
can be obtained for the oil and gas Bellwether produces.
In view of the many uncertainties affecting the supply of and demand for oil,
gas and refined petroleum products, the Company is unable to predict future oil
and gas prices and demand or the overall effect such prices and demand will have
on the Company. The marketing of oil and gas by Bellwether can be affected by a
number of factors which are beyond the Company's control, the exact effects of
which cannot be accurately predicted. See "Risk Factors -- Volatility of Oil
and Gas Prices and Markets."
During fiscal 1996, no single customer accounted for more than 10% of the
Company's revenues. Bellwether does not believe that the loss of any of the
Company's oil purchasers would have a material adverse effect on the Company's
operations. Additionally, since substantially all of the Company's gas sales are
on the spot market, the loss of one or more gas purchasers should not materially
and adversely affect the Company's financial condition.
FEDERAL REGULATION
SALES OF GAS
Effective January 1, 1993, the Natural Gas Wellhead Decontrol Act deregulated
prices for all "first sales" of gas. Thus, all sales of gas by the Company may
be made at market prices, subject to applicable contract provisions.
TRANSPORTATION OF GAS
The rates, terms and conditions applicable to the interstate transportation of
natural gas by pipelines are regulated by the Federal Energy Regulatory
Commission ("FERC") under the Natural Gas Act ("NGA"), as well as under
section 311 of the Natural Gas Policy Act ("NGPA"). Since 1985, the FERC has
implemented regulations intended to make gas transportation more accessible to
gas buyers and sellers on an open-access, nondiscriminatory basis.
Most recently, in Order No. 636, ET SEQ., the FERC promulgated an extensive set
of new regulations requiring all interstate pipelines to "restructure" their
services. The most significant provisions of Order No. 636 (i) require that
interstate pipelines provide firm and interruptible transportation solely on an
"unbundled" basis, separate from their sales service, and convert each
pipeline's bundled firm city-gate sales service into unbundled firm
transportation service; (ii) issue blanket certificates to pipelines to provide
unbundled sales service; (iii) require that pipelines provide firm and
interruptible transportation service on a basis that is equal in quality for all
gas supplies, whether purchased from the pipeline or elsewhere; (iv) require
that pipelines provide a new, non-discriminatory "no-notice" transportation
service; (v) establish two new, generic programs for the reallocation of firm
pipeline capacity; (vi) require that all pipelines offer access to their storage
facilities on a firm and interruptible, open access, contract basis; (vii)
provide pregranted abandonment of unbundled sales and interruptible and
short-term firm transportation service and conditional pregranted abandonment of
long-term transportation service; (viii) modify transportation rate design by
requiring all fixed costs related to transportation to be recovered through the
reservation charge under the straight fixed variable ("SFV") method. The order
also recognized that the elimination of city-gate sales service and the
implementation of unbundled transportation service would result in considerable
costs being incurred by the pipelines. Therefore, Order No. 636 provided
mechanisms for the recovery by pipelines from present, former and future
customers of certain types of "transition" costs likely to occur due to these
new regulations.
In subsequent orders, the FERC substantially upheld the requirements imposed by
Order No. 636. Pursuant to Order No. 636, pipelines and their customers engaged
in extensive negotiations in order to develop and implement new service
relationships under Order No. 636. Tariffs instituting these new restructured
services were placed into effect on all pipelines on or before November 1, 1993.
The final form of the FERC's open-access rules, the tariff and related
provisions by which Order No. 636 ET SEQ. have been implemented by the
interstate pipelines and the flow-through of
44
<PAGE>
transition costs are subject to final administrative and judicial action. In
this regard, numerous parties filed for judicial review of Order No. 636, ET
SEQ., and the United States Court of Appeals for the District of Columbia
Circuit recently issued its decision largely upholding the basic elements of the
order. Further review of and revisions to the FERC's orders is still possible,
and related appeals remain pending. The Company cannot predict the final outcome
of the FERC's open-access series of orders, but the outcome of these proceedings
and future action by the FERC respecting open access transportation could have
an effect on the Company's operations and the costs of transporting and selling
natural gas.
The FERC is currently considering several other rules intended to streamline its
regulation of the industry and promote competition. One deals with pipeline
rates. For decades, the principal methodology used to set interstate pipeline
rates has been based on the actual cost to provide that service. In recent years
regulators have concluded that sufficient competition may exist in certain
markets to allow a relaxation of this historic approach. In January 1996, the
FERC issued a statement of policy and request for comments concerning
alternatives to its traditional cost-of-service ratemaking methodology and set
forth the criteria that the FERC will use to evaluate proposals to charge
market-based rates for the transportation of natural gas. The FERC also
requested comments on whether it should allow gas pipelines the flexibility to
negotiate the terms and conditions of transportation service with prospective
shippers. In another rulemaking, the FERC is considering how to alter its
regulations to promote the fair and effective release and recontracting of
pipeline capacity from one shipper to another, and whether and to what extent
such transactions should be regulated where the market is demonstrably
competitive. In this regard, an experimental pilot program implementing certain
new procedures will be implemented in the 1996-97 winter heating season. Lastly,
the FERC has issued a policy statement on how interstate pipelines can recover
in rates the costs of new facilities. While the policy may affect the Company
and other producer-shippers only indirectly, the policy should enhance
competition in new markets and encourage the construction of gas supply
laterals. As to all of these matters, the Company cannot predict what further
action the FERC will take; however, the Company does not believe that it will be
affected by any action taken materially differently than other natural gas
producers, gatherers and marketers with which it competes.
SALES AND TRANSPORTATION OF OIL
Sales of oil and condensate can be made by the Company at market prices not
subject at this time to price controls. The price that the Company receives from
the sale of these products will be affected by the cost of transporting the
products to market. As required by the Energy Policy Act of 1992, the FERC
revised its regulations governing the transportation rates that may be charged
by oil pipelines. The new rules, which were effective January 1, 1995, provide a
simplified, generally applicable method of regulating such rates by use of an
index for setting rate ceilings. In certain circumstances, the new rules permit
oil pipelines to establish rates using traditional cost of service and other
methods of ratemaking. The FERC's orders were recently affirmed on appeal. The
effect that these new rules may have on moving the Company's products to market
cannot yet be determined. In addition, at the same time as it issued the new
rules, the FERC also issued notices of inquiry regarding market-based pricing
for oil pipeline rates and the information required to be filed for ratemaking
and reporting purposes. It is not possible to predict what rules, if any, the
FERC will ultimately adopt as a result of these inquiry proceedings whether the
pipelines used by the Company will apply for market based or other rates or the
effect that any rules that are adopted or authorizations sought might have on
the cost of moving the Company's products to market.
LEGISLATIVE PROPOSALS
In the past, Congress has been very active in the area of gas regulation. There
are legislative proposals pending in the state legislatures of various states,
which, if enacted, could significantly affect the petroleum industry. At the
present time it is impossible to predict what proposals, if any, might actually
be enacted by Congress or the various state legislatures and what effect, if
any, such proposals might have on the Company's operations.
FEDERAL, STATE OR INDIAN LEASES
In the event the Company conducts operations on federal, state or Indian oil and
gas leases, such operations must comply with numerous regulatory restrictions,
including various nondiscrimination statutes, and certain of such operations
must be conducted pursuant to certain on-site security regulations and other
appropriate permits issued by the Bureau of Land Management ("BLM") or
Minerals Management Service or other appropriate federal or state agencies.
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The Mineral Leasing Act of 1920 (the "Mineral Act") prohibits direct or
indirect ownership of any interest in federal onshore oil and gas leases by a
foreign citizen of a country that denies "similar or like privileges" to
citizens of the United States. Such restrictions on citizens of a
"non-reciprocal" country include ownership or holding or controlling stock in
a corporation that holds a federal onshore oil and gas lease. If this
restriction is violated, the corporation's lease can be canceled in a proceeding
instituted by the United States Attorney General. Although the regulations of
the BLM (which administers the Mineral Act) provide for agency designations of
nonreciprocal countries, there are presently no such designations in effect. The
Company owns interests in numerous federal onshore oil and gas leases. It is
possible that the Common Stock will be acquired by citizens of foreign
countries, which at some time in the future might be determined to be
non-reciprocal under the Mineral Act.
STATE REGULATION
Most states regulate the production and sale of oil and gas, including
requirements for obtaining drilling permits, the method of developing new
fields, the spacing and operation of wells and the prevention of waste of oil
and gas resources. The rate of production may be regulated and the maximum daily
production allowable from both oil and gas wells may be established on a market
demand or conservation basis or both.
The Company may enter into agreements relating to the construction or operation
of a pipeline system for the transportation of gas. To the extent that such gas
is produced, transported and consumed wholly within one state, such operations
may, in certain instances, be subject to the jurisdiction of such state's
administrative authority charged with the responsibility of regulating
intrastate pipelines. In such event, the rates which the Company could charge
for gas, the transportation of gas, and the construction and operation of such
pipeline would be subject to the rules and regulations governing such matters,
if any, of such administrative authority. In addition, the administrative
authority in certain states have regulatory authority over the gathering of
natural gas, either as public utilities, common carriers and/or common
purchasers of production. As a result of FERC Order No. 636, federal agency
oversight of gathering performed by interstate pipelines has diminished in favor
of increased state oversight of such facilities. Given these recent events, it
is possible that state regulation over the Company's gathering activities, and
respecting gatherers which provide services to the Company, may increase.
ENVIRONMENTAL REGULATION
GENERAL
The Company's activities are subject to existing federal, state and local laws
and regulations governing environmental quality and pollution control. Although
no assurances can be made, the Company anticipates that, absent the occurrence
of an extraordinary event such as those noted under "Risk Factors," compliance
with existing federal, state and local laws, rules and regulations regulating
the release of materials into the environment or otherwise relating to the
protection of the environment will not have a material effect upon the capital
expenditures, earnings or the competitive position of Bellwether with respect to
the Company's operations. The Company cannot predict what effect additional
regulation or legislation, enforcement policies issued thereunder, and claims
for damages to property, employees, other persons and the environment resulting
from the Company's operations could have on its activities.
Activities of the Company with respect to gas facilities, including the
operation and construction of pipelines, plants and other facilities for
transporting, processing, treating or storing gas and other products, are
subject to stringent environmental regulation by state and federal authorities
including the Environmental Protection Agency ("EPA"). Such regulation can
increase the cost of planning, designing, installing and operating such
facilities. In most instances, the regulatory requirements impose water and air
pollution control measures. Although Bellwether believes that compliance with
environmental regulations will not have a material adverse effect on the
Company, risks of substantial costs and liabilities related to environmental
compliance issues are inherent in oil and gas production operations, and no
assurance can be given that significant costs and liabilities will not be
incurred. Moreover, it is possible that other developments, such as stricter
environmental laws and regulations, and claims for damages to property or
persons resulting from oil and gas production, would result in substantial costs
and liabilities to the Company.
46
<PAGE>
SOLID AND HAZARDOUS WASTE
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that have been used for production of oil and gas for many
years. Although the Company has utilized operating and disposal practices that
were standard in the industry at the time, hydrocarbons or other solid wastes
may have been disposed or released on or under the properties owned or leased by
the Company. In addition, many of these properties have been operated by third
parties. The Company had no control over such parties' treatment of hydrocarbons
or other solid wastes and the manner in which such substances may have been
disposed or released. State and federal laws applicable to oil and gas wastes
and properties have gradually become stricter over time. Under these new laws,
the Company could be required to remove or remediate previously disposed wastes
(including wastes disposed or released by prior owners or operators) or property
contamination (including groundwater contamination by prior owners or operators)
or to perform remedial plugging operations to prevent future contamination.
The Company generates wastes, including hazardous wastes, that are subject to
the Federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. The EPA has limited the disposal options for certain hazardous
wastes and is considering the adoption of stricter disposal standards for
nonhazardous wastes. Furthermore, it is possible that certain wastes currently
exempt from treatment as "hazardous wastes" generated by the Company's oil and
gas operations may in the future be designated as "hazardous wastes" under
RCRA or other applicable statutes, and therefore be subject to more rigorous and
costly disposal requirements.
SUPERFUND
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without
regard to fault or the legality of the original conduct, on certain classes of
persons with respect to the release of a "hazardous substance" into the
environment. These persons include the owner and operator of a site and any
party that disposed or arranged for the disposal of the hazardous substance
found at a site. CERCLA also authorizes the EPA and, in some cases, third
parties, to take actions in response to threats to the public health or the
environment and to seek to recover from the responsible classes of persons the
costs of such action. In the course of the Company's operations, Bellwether has
generated and will generate wastes that may fall within CERCLA's definition of
"hazardous substances." The Company may also be an owner of sites on which
"hazardous substances" have been released. The Company may be responsible
under CERCLA for all or part of the costs to clean up sites at which such wastes
have been disposed. At this time, neither the Company nor its predecessors has
been designated as a potentially responsible party under CERCLA with respect to
any such site.
OIL POLLUTION ACT
The Oil Pollution Act of 1990 (the "OPA") and regulations thereunder impose a
variety of regulations on "responsible parties" related to the prevention of
oil spills and liability for damages resulting from such spills in "waters of
the United States." The term "waters of the United States" has been broadly
defined to include inland waterbodies, including wetlands, playa lakes and
intermittent streams. A "responsible party" includes the owner or operator of
a facility or vessel, or the lessee or permittee of the area in which an
offshore facility is located. The OPA assigns liability to each responsible
party for oil removal costs and a variety of public and private damages. While
liability limits apply in some circumstances, a party cannot take advantage of
liability limits if the spill was caused by gross negligence or willful
misconduct or resulted from violation of a federal safety, construction or
operating regulation. If the party fails to report a spill or to cooperate fully
in the cleanup, liability limits also do not apply. Few defenses exist to the
liability imposed by the OPA.
The OPA also imposes ongoing requirements on a responsible party, including
proof of financial responsibility to cover at least some costs in a potential
spill. OPA originally required owners and operators of offshore oil and gas
facilities to establish $150.0 million in financial responsibility. Congress
passed legislation in September 1996 that was subsequently signed by the
President and that would make two significant changes to the original OPA.
First, the amount of financial responsibility that must be demonstrated for an
offshore facility was reduced to $35.0 million if the facility is located
seaward of the seaward boundary of a state, or $10.0 million if the facility is
located landward of such boundary. A higher amount, up to a maximum of $150.0
million, may still be required if justified by the risks of a particular
facility. Second, certain offshore facilities with a worst-case oil spill risk
of 1,000 barrels or less are exempted altogether from the financial
responsibility requirement, unless the President demonstrates a need for it with
respect to a particular facilty.
47
<PAGE>
The requirements under OPA may have the potential to result in the imposition of
substantial additional annual costs on the Company or otherwise materially
adversely affect the Company. However, the impact of the statute is not expected
to be any more burdensome to the Company than it will be to other similarly or
less capitalized owners or operators in the Gulf of Mexico.
AIR EMISSIONS
The operations of the Company are subject to local, state and federal laws and
regulations for the control of emissions from sources of air pollution.
Administrative enforcement actions for failure to comply strictly with air
regulations or permits are generally resolved by payment of monetary fines and
correction of any identified deficiencies. Alternatively, regulatory agencies
could require the Company to cease construction or operation of certain air
emission sources, although the Company believes that in the such case it would
have enough permitted or permittable capacity to continue its operations without
a material adverse effect on any particular producing field.
OSHA
The Company is subject to the requirements of the Federal Occupational Safety
and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the EPA Community Right-to-Know regulations under Title
III of CERCLA and similar state statutes require Bellwether to organize and/or
disclose information about hazardous materials used or produced in the Company's
operations. Certain of this information must be provided to employees, state and
local governmental authorities and local citizens.
48
<PAGE>
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS OF THE COMPANY
The following table provides information with respect to the directors and
executive officers of the Company.
NAME AGE POSITION
- ------------------------------- --- ---------------------------------------
J.P. Bryan..................... 57 Chairman of the Board
J. Darby Sere.................. 49 Director, President and Chief Executive
Officer
Charles C. Green III........... 50 Director, Executive Vice President and
Chief Financial Officer
Roland E. Sledge............... 51 Vice President and Secretary
Michael B. Smith............... 34 Vice President and Treasurer
C. Barton Groves............... 59 Director of the Company; President of
Odyssey
Kenneth W. Welch............... 39 Vice President -- Land of Odyssey
Dr. Jack Birks................. 77 Director
Vincent H. Buckley............. 74 Director
Habib Kairouz.................. 30 Director
A.K. McLanahan................. 70 Director
Michael D. Watford............. 43 Director
MR. BRYAN has been Chairman of the Board of the Company since August 31, 1987,
and was Chief Executive Officer of the Company from June 30, 1994 to January 25,
1995 and from August 1987 to March 6, 1988. Since January 25, 1995, Mr. Bryan
has been Chief Executive Officer of Gulf Canada Resources Limited. He has been
Chairman of the Board of Nuevo since March 1990 and was Chief Executive Officer
of Nuevo from March 1990 to January 1995. Mr. Bryan has also been Chairman of
the Board and Chief Executive Officer of Bellwether and its predecessor since
January 1, 1985. Mr. Bryan is a member of the Board of Directors of Gulf Canada
Resources Limited, Nuevo and Republic Waste Industries.
MR. SERE has been Chief Executive Officer of the Company since January 25, 1995,
President since March 7, 1988, and a director since March 25, 1988. Mr. Sere was
Chief Executive Officer of the Company from March 7, 1988 to June 29, 1994. He
was a consultant with Patrick Petroleum Company, an independent oil and gas
company, from September 1987 to February 1988 and was a co-founder, President,
Chief Executive Officer and a director of Bayou Resources, Inc., an independent
oil and gas exploration and development company, from January 1982 until its
acquisition by Patrick Petroleum Company in August 1987. Mr. Sere served in
various positions with Howell Corporation and Howell Petroleum Corporation, an
independent oil and gas company, from 1977 to 1981, the last of which was
Executive Vice President.
MR. GREEN has been Executive Vice President and Chief Financial Officer of the
Company since January 1, 1997, a director since February 24, 1997 and an officer
of the Company since December 31, 1992. He was an officer of Torch from December
1992 through December 1996, serving as Vice Chairman and Chief Investment
Officer of Torch from May 1995 to December 1996, and as President and Chief
Operating Officer for 18 months prior thereto. For over ten years prior to
joining Torch, Mr. Green was President and Chief Operating Officer of Treptow
Development Company, a real estate development company. Previously, at J. P.
Morgan Investment Management, he was Vice President and Senior Portfolio Manager
and Head of International Fixed Income in London (1974-1982) and, in New York,
was Assistant Vice President in the Investment Department (1973-1974) and
Investment Research Officer and Energy Analyst (1969-1973). He has been a
director of Teletouch Communications, Inc. since May 1995. Mr. Green is a
Chartered Financial Analyst.
MR. SLEDGE, Vice President and Secretary of the Company since September 1, 1987,
is Managing Director, Secretary and General Counsel of Torch and has been an
officer with Torch and its predecessor since July 1983. He was an attorney with
the law firm of Watt, White & Craig, Houston, Texas from 1980 to 1983.
MR. SMITH has been Vice President and Treasurer of the Company since January 1,
1997 and was Vice President and Chief Financial Officer of the Company from
September 1995 through December 1996. Mr. Smith joined Torch in April 1995 as
Vice President of Acquisitions and Financial Analysis and in September 1995
became Torch's Chief Financial Officer. Prior to joining Torch, Mr. Smith held
various positions in finance with ARCO beginning August 1989, the last of which
was Financial Advisor in the Corporate Treasury department.
49
<PAGE>
MR. GROVES has been President of Odyssey and a director of the Company since
August 26, 1994. He was President of the managing general partner of Odyssey
Partners, the predecessor in interest of Odyssey, from 1986 to August 1994.
Between 1973 and 1986, Mr. Groves held various positions with Diamond Shamrock
Corporation, including President of its Diamond Shamrock Exploration Company
subsidiary.
MR. WELCH has been Vice President -- Land of Odyssey since August 26, 1994. From
1987 to August 1994, Mr. Welch was Land Manager of the Odyssey Partnership.
Between 1979 and 1987, Mr. Welch held Area Landman and Senior Landman positions
with Enserch Exploration, Inc., Penn Resources, Inc., and Moore McCormack
Energy, Inc.
DR. BIRKS has been a Director of the Company since 1988. He is Chairman of the
Board of Midland & Scottish Resources Plc. He is life president of British
Maritime Technology Limited. Dr. Birks served as Chairman of the Board of North
American Gas Investment Trust Plc. from 1989 until his retirement in 1995; as
Chairman of the Board of British Maritime Technology Limited from 1985 to 1995;
as Chairman of the Board of Charterhouse Petroleum Plc from 1982 to 1986; as
Chairman of the Board of London American Energy Inc. from 1982 to 1988; as Vice
Chairman of the Board of Petrofina (UK) Limited from 1986 to 1989; and as a
director of George Wimpey Plc, a construction company, from 1982 to May 1990.
MR. BUCKLEY has been a Director of the Company since 1987. He has been Of
Counsel to the law firm of Liddell, Sapp, Zivley, Hill & LaBoon since January
1989. He serves as a Director of Enron Cactus III Corporation, Houston, Texas,
an oil and gas company, and as a Director on the Houston Medical Area Advisory
Board of Texas Commerce Bank National Association. Mr. Buckley was President and
Chief Executive Officer of Cockburn Oil Corporation from August 1984 until
September 1, 1988, and was Vice President of Apache Corporation, an oil and gas
company, Denver, Colorado, from October 1982 to August 1984.
MR. KAIROUZ has been a director of the Company since August 26, 1994. Since
December 1993 he has been employed by Rho Management Company, Inc., an
investment advisory firm which serves as advisor to the principal investor of
Alpine Investment Partners. Prior to that, Mr. Kairouz was employed for five
years in investment banking at the firms of Jesup & Lamont Securities, Inc. and
more recently, Reich & Co., Inc. Under the agreement pursuant to which the
Company acquired Odyssey, certain former owners ("Owners") of the Odyssey
Partnership acquired the right to designate one representative to the Company's
board of directors. Pursuant to such agreement, until the earlier to occur of
the five-year anniversary of the closing of such acquisition or the date such
Owners no longer own at least 5% of the outstanding Common Stock, the Company is
obligated to nominate and recommend to the Company's Stockholders one
representative of the Owners. Mr. Kairouz is the person so designated by the
Owners.
MR. MCLANAHAN has been a director of the Company since November 6, 1987. He has
been a First Vice President of PaineWebber Incorporated since January, 1995. He
was a Vice President of Kidder Peabody & Co., Inc., an investment banking firm
from April 1985 until its sale to PaineWebber Incorporated in 1995. From April
1982 to April 1985 he served as a Senior Vice President and Branch Office
Manager of Donaldson, Lufkin & Jenrette, Inc., an investment banking firm.
MR. WATFORD has been a Director of the Company since March 1994. He has been
Chief Executive Officer of Nuevo since January 1995 and President, Chief
Operating Officer, and a member of the Board of Directors of Nuevo since
February 1994. He was President of Torch Energy Marketing, Inc., a subsidiary of
Torch, from 1990 until April 1995 and was Director of Natural Gas Marketing for
Meridian Oil, Inc. from 1985 until 1990. Mr. Watford was employed by Superior
Oil Company from 1981 until 1985 and Shell Oil Company from 1975 until 1981.
COMPENSATION OF DIRECTORS
Directors of the Company who are neither officers nor employees of the Company
or Torch received $2,000 for the first quarter meeting of the Board of Directors
and $3,000 per meeting thereafter during the fiscal year ended June 30, 1996,
and were reimbursed for reasonable expenses incurred in attending such meetings.
Directors who are officers or employees of the Company or Torch did not receive
any additional compensation for services as members of the Board of Directors.
The Company paid a total of $39,000 in director fees for the fiscal year ended
June 30, 1996. Each non-employee board member also received an annual grant of
2,000 options under the 1994 Stock Incentive Plan and receives an annual grant
of 4,000 options under the 1996 Stock Incentive Plan ("1996 Plan") following
each annual meeting commencing in 1997.
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<PAGE>
SUMMARY COMPENSATION TABLE
The following Summary Compensation Table sets forth the past three years cash
compensation and certain other components of the compensation of J. Darby Sere,
the Company's President and Chief Executive Officer, C. Barton Groves, President
of Odyssey and Kenneth W. Welch, Vice President -- Land of Odyssey, who were the
only officers of the Company in fiscal 1996 whose total salary and bonus
exceeded $100,000. All other executive officers of the Company were also
officers or employees of Torch during fiscal 1996 and provided services to the
Company (including holding executive officer positions with Company) pursuant to
the Administrative Services Agreement between the Company and Torch. Executive
officers who perform services for the Company under the Administrative Services
Agreement received no compensation from the Company other than the grant of
stock options under the 1994 Stock Incentive Plan ("1994 Plan") and were all
compensated primarily by Torch.
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------
LONG TERM COMPENSATION
ANNUAL COMPENSATION ----------------------------------------------
---------------------------------
OTHER AWARDS ALL
ANNUAL RESTRICTED NUMBER PAYOUTS OTHER
COMPENSA- STOCK OF LTIP COMPENSA-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS TION(1) AWARD(S) OPTIONS PAYOUTS TION(2)
- ------------------------------------- ---- --------- --------- --------- ---------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
J. Darby Sere ....................... 1996 $ 171,000 $ 50,000(3) $ -- -- --(4) $ -- $ 8,752
President and Chief 1995 158,000 -- -- -- 25,000 -- 8,450
Executive Officer 1994 147,000 16,500 -- -- 234,450 -- 7,561
C. Barton Groves .................... 1996 154,000 30,000(3) -- -- --(4) -- 30,500
President of Odyssey 1995 125,000 -- -- -- 165,000 -- 21,013
1994 -- -- -- -- -- -- --
Kenneth W. Welch .................... 1996 98,000 15,000(3) -- -- --(4) -- 10,750
Vice President -- 1995 80,486 -- -- -- 82,500 -- 7,899
Land of Odyssey 1994 -- -- -- -- -- -- --
</TABLE>
- -----------------------------
(1) These amounts do not include the value of the benefit to Mr. Sere of the use
of a Company-owned automobile used primarily for commuting to the Company;
the expense of a $7,110 per month disability insurance policy under which
Mr. Sere is the insured, the premiums of which are paid by the Company; and
the expenses of Mr. Sere's membership in certain professional and athletic
clubs. While some personal benefit may be derived from the foregoing, the
expenses are considered by the Company to be ordinary, necessary and
reasonable to its business and such expenses did not exceed 10% of Mr.
Sere's salary in fiscal 1996.
(2) Represents premiums paid on a $500,000 term life insurance policy for Mr.
Sere and an annual payment pursuant to a Simplified Employee Pension Plan
for Mr. Sere, Mr. Groves and Mr. Welch. Also includes $17,000 per year for
personal benefit plans paid to Mr. Groves in lieu of certain Company
benefits and amounts paid for a car allowance for Mr. Groves and Mr. Welch.
(3) Represents the bonuses paid during fiscal 1996 based upon performance in
fiscal 1995. On October 1, 1996, Messrs. Sere, Groves and Welch were granted
bonuses of $70,000, $32,500 and $17,500, respectively, in recognition of
their performance during fiscal 1996.
(4) Represents the number of options granted during fiscal 1996 based upon
performance in fiscal 1995. On September 16, 1996, Messrs. Sere, Groves and
Welch were granted, subject to stockholder approval of the 1996 Plan,
options to purchase 55,000, 15,000 and 7,500 shares of Common Stock,
respectively, in recognition of their performance during fiscal 1996.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
No option or stock appreciation rights grants were made in fiscal year 1996.
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<PAGE>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUES
The following table sets forth certain information concerning the exercise in
fiscal 1996 of options to purchase Common Stock by the executive officers named
in the Summary Compensation Table and the number and value of unexercised
options to purchase Common Stock held by such individuals at June 30, 1996. Also
reported are the values for "in-the-money" options which represent the
positive spread between the exercise price of any such existing stock options
and the June 30, 1996 price of the Common Stock. The actual amount, if any,
realized upon exercise of stock options will depend upon the market price of the
Common Stock relative to the exercise price per share of Common Stock at the
time the stock option is exercised. There is no assurance that the values of
unexercised, "in-the-money" stock options reflected in this table will be
realized.
<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------
NUMBER OF VALUE OF UNEXERCISED
SHARES NUMBER OF UNEXERCISED IN-THE-MONEY OPTIONS AT
ACQUIRED VALUE OPTIONS AT JUNE 30, 1996 JUNE 30, 1996(1)
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------------------- -------------- ---------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
J. Darby Sere........................ -- -- 236,560 22,890 $ 154,255 $25,751
C. Barton Groves..................... -- -- 165,000 -- $ 60,000 --
Kenneth W. Welch..................... -- -- 82,500 -- $ 30,000 --
</TABLE>
- -----------------------------
(1) Based upon $6.00, the closing price of Common Stock on June 30, 1996.
LONG-TERM INCENTIVE PLAN--AWARDS IN LAST FISCAL YEAR
At this time, the Company does not have a long-term incentive plan for its
employees, other than the 1988 Non-Qualified Stock Option Plan, the 1994 Stock
Incentive Plan and the 1996 Stock Incentive Plan.
1988 PLAN
In 1988, the Board of Directors adopted and the stockholders approved the 1988
Non-Qualified Stock Option Plan ("1988 Plan"). The Company has reserved
131,325 shares of common stock under the 1988 Plan and no further options will
be granted under the plan. Options under the 1988 Plan may be granted by the
Compensation Committee to any director, executive officer or key employee of the
Company. The exercise price of an option is 100% of the fair market value on the
date of the grant. Options granted under the 1988 Plan may be exercised at any
time for up to 10 years from the date of grant but prior to termination of the
1988 Plan on March 25, 1998, or such shorter time as the Compensation Committee
determines.
1994 PLAN
In 1994, the Board of Directors adopted and the stockholders approved the 1994
Plan. The Company has reserved 825,000 shares of Common Stock under the 1994
Plan. The Company has issued options to purchase an aggregate of 825,000 shares
under the 1994 Plan.
The 1994 Plan is administered by the Compensation Committee of the Board of
Directors. The Compensation Committee has full power to select, from among the
persons eligible for awards, the individuals to whom awards are granted, to make
any combination of awards to any participant and to determine the specific terms
of each grant, subject to the provisions of the 1994 Plan. The option price per
share of Common Stock deliverable upon the exercise of a Stock Option shall be
100% of the fair market value of a share of Common Stock on the date the Stock
Option is granted.
Directors, officers and key employees of the Company and officers and key
employees of Torch who render services for the Company under the Administrative
Services Agreement are eligible to receive stock options or performance shares
under the 1994 Plan.
1996 PLAN
In 1996, the Board of Directors adopted and the stockholders approved the 1996
Plan. Individual awards under the 1996 Plan may take the form of one or more of
(i) incentive stock options; (ii) non-qualified stock options; or (iii)
performance shares.
The 1996 Plan is administered by a plan administrator which may be any of (i)
the Board of Directors of the Company; (ii) any duly constituted committee of
the Board of Directors consisting of at least two non-employee directors; or
(iii) any
52
<PAGE>
other duly constituted committee of the Board of Directors. The plan
administrator will select the officers, key employees and consultants who will
receive awards and the terms and conditions of those awards. The maximum number
of shares of Common Stock that may be subject to outstanding awards may not
exceed 500,000 shares of Common Stock tendered as payment for shares issued upon
exercise of an option or which are attributable to awards which have expired,
terminated or been canceled or forfeited are available for issuance or use in
connection with future awards.
The option price of any incentive stock option shall be 100% of the fair market
value of a share of Common Stock on the date the incentive option is granted.
Any incentive option must be exercised within ten years of the date of grant.
Unless otherwise determined by the plan administrator, the option price of any
non-qualified stock option shall be 100% of the fair market value of a share of
Common Stock on the date the option is granted. Vesting of stock options and
performance shares, and the term of any non-qualified stock option or
performance share award is determined by the plan administrator.
The 1996 Plan provides that each director that is not an employee of the Company
shall, on the date on which he or she is initially elected or appointed a
director of the Company, be granted a stock option to purchase 4,000 shares of
Common Stock for the fair market price on the date of grant and for a term of
ten years. After each subsequent annual meeting of stockholders at which such
person continues to serve as a director, he or she will automatically be granted
a stock option to purchase 4,000 additional shares of Common Stock for the fair
market price on the date of such grant and for a term of ten years.
In the event of a termination of employment, outstanding options and performance
shares may be subject to forfeiture and/or time limitations. Stock options and
performance shares are evidenced by written agreements, the terms and provisions
of which may differ. No stock option is transferable other than by will or by
the laws of descent or distribution.
The 1996 Plan may be amended by the Board of Directors without the consent of
the stockholders except that any amendment, though effective when made, will be
subject to stockholder approval if required by any federal or state law or
regulation or by the rules of any stock exchange or automated quotation system
on which the Common Stock may then be listed or quoted. In addition, no
amendment can impair the rights of a holder of an outstanding award under the
Plan without such holder's consent.
53
<PAGE>
TRANSACTIONS WITH RELATED PERSONS
RELATIONSHIP WITH TORCH AND AFFILIATES
ADMINISTRATIVE SERVICES AGREEMENT
The Company has been party to an Administrative Services Agreement with Torch
since 1987. Torch, headquartered in Houston, Texas, is primarily engaged in the
business of providing outsourcing services for clients in the energy industry
with respect to the acquisition and divestiture, exploration, development,
exploitation and operation of oil and gas properties, including management
advisory services, legal, financial and accounting services, and the marketing
of oil and gas. In addition, Torch provides energy industry investment
management and advisory services for public companies and private investors. The
Administrative Services Agreement is subject to termination by Bellwether upon
one-year prior notice. This agreement has an initial term expiring on December
31, 1999, and may not be terminated by Torch prior to such date.
The Administrative Services Agreement requires Torch to administer certain
activities of the Company for a monthly fee. These administrative services
include providing the Company with office space, equipment and supplies,
accounting, legal, financial, geological, engineering, technical and insurance
professionals retained by the Company, maintaining the books and records of the
Company, assisting the Company in determining its capital requirements,
preparing any reports or other documents required by governmental authorities,
analyzing economic and other data related to the Company's business and
otherwise providing general management services and advice to the Company's
business. The Company presently intends to continue to operate under the
Administrative Services Agreement.
The monthly fee payable to Torch is equal to (i) one-twelfth of 2% of the book
value of the Company's assets, excluding cash and cash equivalents, plus (ii) 2%
of operating cash flows during such month less 20% of overhead on Torch operated
properties. The fees paid for fiscal 1994, 1995 and 1996 were $600,000, $1.2
million and $1.5 million, respectively. On a pro forma basis, the amount payable
under the Administrative Services Agreement for administrative services would
have been $6.1 million and $2.4 million in fiscal 1996 and the six months ending
December 31, 1996, respectively. The Company believes that the terms and fees
under the Administrative Services Agreement are comparable with those that could
be negotiated with a third party in an arm's length transaction and are fair to
the Company.
Under the Administrative Services Agreement, the monthly fee for administrative
services does not apply to extraordinary investing and financing services that
Torch may agree to provide to the Company upon the Company's request. For such
investing and financing services the Company pays Torch a fee based on the Torch
employees providing such services on an hourly basis, certain overhead expenses
with respect to such employees and any related expenses. The Company has not
paid any fees for these services in the last three fiscal years.
The Company has agreed to indemnify Torch and its affiliates for liabilities
incurred by Torch or its affiliates for actions taken under the Administrative
Services Agreement, other than acts of fraud, willful misconduct or gross
negligence of Torch or its affiliates or any of their employees.
In the course of its business, Torch generates potential investments in oil and
gas properties, processing plants, gathering systems and pipelines, and other
oil and gas assets (collectively "Investments"). Torch also provides services
to Nuevo. Under the Administrative Services Agreement and the agreement with
Nuevo, Torch is required to offer to the Company and Nuevo all Investments that
are within the scope of the Company's or Nuevo's business.
The business and acquisition strategy of the Company and Nuevo may overlap
regarding certain Investments. The Company, Nuevo and Torch have adopted a
policy regarding the rights as between Nuevo and the Company to Investments
generated by Torch that Torch is required to offer to the Company and Nuevo. If
an Investment is located in the Company's Area of Exclusive Interest (as
hereinafter defined), the Investment will be offered first to the Company. If an
Investment is located in Nuevo's Area of Exclusive Interest, the Investment will
be offered first to Nuevo. Investments located outside of or in both the Areas
of Exclusive Interest will be offered by Torch to both the Company and Nuevo.
Unless the Company and Nuevo agree otherwise, the Company will be entitled to
acquire a 20% interest in the assets representing the Investment, and Nuevo will
be entitled to acquire the remaining 80%. With respect to assets that form part
of an Investment which is not capable of division, Torch will allocate such
assets between Nuevo and the Company in a manner deemed fair and reasonable by
Torch, whose decision shall be final and binding.
54
<PAGE>
The Company's Area of Exclusive Interest is defined as (i) for Investments in an
oil and gas property, any geographic area which produces from the same formation
as the proposed Investment and in which the Company owns proved reserves with a
discounted present value of future net cash flows of $500,000 or more, and (ii)
for Investments that are not an oil and gas property, any area in which the
Company owns a non-oil and gas property investment with a book value of over
$100,000. Nuevo's Area of Exclusive Interest is defined as (i) for Investments
in an oil and gas property, any geographic area which produces from the same
formation as the proposed Investment and in which Nuevo owns proved reserves
with a discounted present value of future net cash flows of $5 million or more,
and (ii) for Investments that are not an oil and gas property, any area in which
Nuevo owns a non-oil and gas property investment with a book value of over $1
million.
The Company will continue to generate its own Investments in the future, and
neither Torch nor Nuevo will have any right to participate in such Investments.
Decisions to accept an Investment generated by Torch are made by the Company's
management and Board of Directors, some of whom are members of Torch's executive
management. The Compensation Committee of the Board of Directors, which is
composed of persons who are not employees of Torch or the Company, meets
quarterly to review Torch's performance under the Administrative Services
Agreement.
Torch also invests in oil and gas assets for its own account and may do so in
the future. In accordance with the Administrative Services Agreement, Torch may
not acquire an Investment within the scope of the Company's business and
acquisition strategy without first offering such Investment to the Company
pursuant to the criteria set forth above.
The organizational agreements of the Sellers also contained provisions which
required Torch to offer to the Sellers Investments meeting the criteria set
forth in such agreements. Although these requirements will terminate as a result
of the Pending Acquisitions, it is possible that Torch will form similar
investment vehicles in the future. In such event, all Investments meeting the
criteria of such investment vehicles would be offered first to any such Sellers
formed in the future. Bellwether has reviewed the investment criteria for the
Sellers and does not believe that such criteria would be competitive with the
Company's business and acquisition strategy in the future. No assurances can be
made, however, that the investment criteria of future investment vehicles formed
by Torch will not compete with the Company's acquisition strategy or that such
investment vehicles will not acquire Investments that the Company would
otherwise propose to acquire.
OTHER RELATIONSHIPS WITH TORCH
Torch markets a portion of the oil and natural gas production for certain
properties in which the Company owns an interest. For fiscal 1994, 1995, and
1996, marketing fees paid by the Company to Torch amounted to $3,000, $12,000,
and $114,000, respectively.
Torch began operating the Gas Plant in December 1993 pursuant to an operating
agreement with the Company and other interest owners in the Gas Plant. The
amount paid to Torch in connection with such operations during the seven months
ended June 30, 1994 and fiscal 1995 and 1996, were $38,000, $71,000 and $83,000,
respectively.
Torch operates certain oil and gas interests owned by the Company. The Company
is charged, on the same basis as other third parties, for all customary expenses
and cost reimbursements associated with these activities. Operator's overhead
charged for these activities for the years ended June 30, 1994, 1995 and 1996
was $45,000, $164,000 and $367,000, respectively.
Costs of the evaluation of potential property acquisitions and due diligence
conducted in conjunction with acquisitions are incurred by Torch at the
Company's request. The Company was charged $193,000 and $74,000 for such costs
in 1995 and 1996, respectively.
Certain officers and directors of the Company are also officers or employees of
Torch. On September 30, 1996, Torch Acquisition Company ("TAC"), a company
formed by executive management of Torch, acquired all of the outstanding shares
of capital stock of Torch from United Investors Management Company ("United"),
a subsidiary of Torchmark Corporation. J.P. Bryan, Chairman of the Board of the
Company, is also Chairman of the Board of TAC and owns options to purchase
approximately 24% of the outstanding shares of common stock of TAC on a fully
diluted basis for a nominal price. Roland E. Sledge and Michael B. Smith, who
are officers of Torch and the Company, own 5.5% and 4.5% of the common stock of
Torch on a fully diluted basis, and Charles C. Green III, Executive Vice
President and Chief Financial Officer, holds options to purchase 2.1% of the
common stock of Torch on a fully diluted basis.
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CERTAIN ACQUISITIONS
A joint venture 90% owned by the Company (the "Company Venture") acquired 7.6%
and 23.3% interests in the Snyder Plant and the Diamond M-Sharon Ridge Gas
Plant, respectively, in July 1993. The interests were acquired for $8.5 million.
In a simultaneous transaction, a joint venture 90% owned by Torch (the "Torch
Venture") acquired 4.1% and 12.5% interests in the Snyder Plant and Diamond
M-Sharon Ridge Gas Plant, respectively, for $4.6 million. The other partner in
the Company Venture is not affiliated with the Company or Torch.
In December 1993, Torch sold its interests in the Torch Venture to AGRI for a
promissory note in the amount of $4.6 million, which bore interest at 7.0% per
annum. In December 1993, the Company acquired AGRI by merger. In March 1994, the
Company repaid the $4.6 million note to Torch with borrowings under an existing
credit facility.
Under the terms of the Administrative Services Agreement in effect at that time,
Torch became entitled to consideration equal to 2.5% of the consideration paid
by the Company to the shareholders of AGRI in such acquisition. In lieu of this
fee, the Company issued Torch a warrant to purchase 187,500 shares of Common
Stock for $6.40 per share. The warrant is exercisable at any time prior to
December 31, 1998. In connection with the sale of the capital stock of Torch to
TAC, Torch transferred the warrant to United. See "Principal and Selling
Stockholders."
Prior to its acquisition by the Company, AGRI was managed by Torch. During the
fiscal 1994, AGRI paid Torch management fees of $300,000.
In connection with the merger of AGRI into the Company, AGRI issued 650,000,
150,000, 150,000 and 50,000 shares of its common stock to Torch, J. P. Bryan,
Michael D. Watford and an employee of Torch, respectively. In connection with
the Company's acquisition of AGRI, the shares owned by Torch, Mr. Bryan, Mr.
Watford and the employee were converted into 54,151, 12,497 and 12,497 shares of
Common Stock, and $25,000, respectively.
PURCHASES FROM NUEVO
During the year ended June 30, 1994, the Company acquired interests in certain
exploratory prospects from Nuevo for an aggregate cost of $143,000. In February
1997, the Company acquired a 25.0% working interest in the Mud Lake field from
Nuevo for a net purchase price of $2.0 million.
MINING VENTURES
During fiscal year 1992, the Company acquired an average 24.4% interest in three
mining ventures (the "Mining Ventures") from an unaffiliated person for
$128,500. At the time of such acquisition, Mr. Bryan, his brother and Robert L.
Gerry, a director and executive officer of Nuevo (the "Affiliated Group"),
owned an average 21.5% interest in the Mining Ventures. The Company's interest
in the Mining Ventures increased as it paid costs of the venture. As of June 30,
1996, the Company had invested $324,000 in the Mining Ventures.
3DX
3DX Technologies, Inc. ("3DX") is a participant in the 3-D seismic projects in
the Fausse Pointe and Cove fields. Nuevo owns a 27% interest in a partnership
that owns a 4.9% interest in 3DX.
HAMPTON ACQUISITION
In connection with the purchase of 7,500 shares of Hampton Preferred Stock from
R. Chaney & Partners - 1993, L.P. (the "Chaney Partnership"), the Company
agreed to indemnify and hold harmless the Chaney Partnership and its affiliates
from any expenses to which they may become subject, to the extent arising out of
the Company's purchase of such shares of Hampton Preferred Stock. One of the
limited partners in the Chaney Partnership is Nuevo. In addition, the Company
agreed to reimburse the Chaney Partnership for legal fees (not to exceed $2,000)
incurred by it in connection with the sale of such shares of Hampton Preferred
Stock.
ODYSSEY MERGER
In connection with the acquisition of Odyssey, the former owners of Odyssey
assigned approximately 5.0% of the consideration to the then current management
of Odyssey, all of whom became employees of the Company following the
acquisition. Pursuant to this agreement, a corporation owned by C. Barton Groves
received 20,625 shares of Common Stock and $123,750 and Kenneth W. Welch
received 10,312 shares of Common Stock and $61,875. The former owners of
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Odyssey also formed a new partnership ("New Odyssey") and transferred to it
interests in certain prospects formerly owned by Odyssey. Messrs. Groves and
Welch received a 2.2% and 1.1% interest, respectively, in New Odyssey. Certain
subsidiaries of Torchmark which own Common Stock have agreed with Odyssey's
former owners that if the Torchmark subsidiaries sell Common Stock in certain
transactions, such subsidiaries will arrange for the sale of the Common Stock
held by the former owners of Odyssey on the same basis as the Torchmark
subsidiaries'shares are sold. Additionally, former owners of Odyssey have been
granted registration rights with respect to such shares.
PENDING ACQUISITION
The Sellers were formed by Torch between 1987 and 1994. The investors in the
Sellers are insurance companies, pension plans, charitable foundations and other
institutional investors. Although the Sellers were structured differently to
satisfy the regulatory constraints and investment objectives of each investor,
such programs generally provided that Torch would invest 1% of all capital and
would receive 2% of revenues until "payout" (generally defined as the return
of the investors' capital contributions). After payout, Torch would receive a
larger interest, generally approximately 11%. In addition, Torch's interest in
the distributions made by the Sellers would increase if the investors received a
return of their capital plus a specified rate of return. Some of the agreements
forming the Sellers also required Torch to invest 10% of the amount invested by
the investors. As a result of the Pending Acquisition, substantially all of the
Sellers will achieve payout. In exchange for its interests in the Sellers, Torch
will receive an estimated $18.0 million in connection with the Pending
Acquisition.
Prior to September 30, 1996, Torch was an indirect wholly owned subsidiary of
Torchmark. Torchmark continues to own a $25.5 million subordinated note issued
by Torch and warrants to purchase approximately 10% of the common stock of Torch
on a fully diluted basis. Torchmark also has a representative on Torch's board
of directors and certain other ongoing relationships with Torch. Wholly owned
subsidiaries of Torchmark invested on the same basis as other investors in
certain of the Sellers. In exchange for their interests in these Sellers, these
wholly owned subsidiaries of Torchmark will receive approximately $12.7 million
in connection with the Pending Acquisitions.
Torch will receive 150,000 shares of Common Stock and warrants to purchase
100,000 shares of Common Stock at a per share exercise price of 120% above the
price to the public in the Common Stock Offering as a fee for advising
Bellwether in connection with the Pending Acquisition. The warrants expire five
years following the closing of the Offerings.
Torchmark owns the working interests in certain of the Acquired Properties which
are net profits interests. Production from these properties is eligible for tax
credits under Section 29 of the Internal Revenue Code. Following the Pending
Acquisition, Torchmark will be obligated to pay to Bellwether $0.50 per each
$1.00 of tax credits received by Torchmark with respect to these properties.
During fiscal 1995 and 1996, total payments by Torchmark with respect to these
properties were $439,000 and $1.1 million, respectively.
In 1994, pursuant to the organizational agreements of the Sellers, certain
investors in the Sellers instituted an audit relating principally to fees and
other amounts previously paid to Torch for oil and gas marketing activities and
sales of non-strategic properties. Based on its own internal audit, Torch
determined that it had not fully complied with certain provisions of the
organizational agreements relating to oil and gas marketing activities. In July
1996, Torch and Torchmark offered to settle the matters addressed in the audits,
including the marketing issues, but final settlement was deferred until the
proposed sale of the Sellers' properties could be pursued further. In connection
with the acquisition of Torch by certain of its executive officers in September
1996, Torchmark agreed to pay all amounts incurred in settlement of the audit
issues. In connection with the Pending Acquisition, Torchmark and Torch will
settle all such matters with the investors in the Sellers on the terms proposed
in July 1996. Pursuant to its agreement with Torch, Torchmark will make a cash
payment of $9.7 million on behalf of Torch to such investors in order to settle
such matters. Torchmark, Torch, such investors and their agents and affiliates
will release each other from any liability arising out of or related to, among
other things, such matters. In connection with such settlement, Bellwether will
pay Torchmark $1.5 million and (as successor to the Sellers as a result of the
Pending Acquisition) also will be released by the investors in the Sellers from
any liabilities relating to such matters. TORCH HAS ADVISED BELLWETHER THAT AN
INVESTOR IN ONE OF THE SELLERS ADVISED TORCH THAT THE SEC'S STAFF REQUESTED
INFORMATION (INCLUDING THE AUDIT) REGARDING THE INVESTOR'S INVESTMENTS WITH
TORCH, AND THAT THE INVESTOR SUPPLIED SUCH INFORMATION. TORCH HAS FURTHER
ADVISED BELLWETHER THAT THE SEC'S STAFF HAS NOT CONTACTED TORCH REGARDING SUCH
MATTERS.
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NEGOTIATION OF THE PENDING ACQUISITION; CONFLICTS OF INTEREST
Bellwether is entering into the Pending Acquisition because it believes that the
Pending Acquisition provides the opportunity to significantly increase reserves
and cash flow at an attractive price while providing opportunities for future
reserve growth through exploitation and exploration activities. Torch and
Bellwether have a common director and certain common officers. Certain members
of the Board of Directors and management of Bellwether were therefore subject to
conflicts of interest in connection with negotiating and approving the terms of
the Pending Acquisition and the fees to be received by Torch in connection with
the Pending Acquisition. In addition, under the Administrative Services
Agreement, Bellwether relies on Torch to perform title, operational and other
due diligence reviews of acquisition prospects, and Bellwether does not have
personnel to independently perform all of these functions in connection with the
acquisition of the Acquired Properties. Bellwether therefore relied on Torch to
perform certain of these functions in connection with the Pending Acquisition.
In order to resolve the conflicts of interest, Bellwether formed the Special
Committee of its Board of Directors, which is composed of directors who are not
affiliated with Torch, to consider and approve the terms of the Pending
Acquisition and the fees paid to Torch. The Special Committee retained legal
counsel to advise it in connection with its duties, and retained Ryder Scott to
audit the reserve estimates prepared by Torch on behalf of the Company in
connection with the determination of the purchase price for the Acquired
Properties. In addition, the Special Committee retained Principal to advise it
in connection with the terms of the acquisition of the Acquired Properties.
Principal is also an underwriter in the Common Stock Offering. Principal issued
its opinion to the Special Committee as to the fairness of the Pending
Acquisition from a financial point of view. The Special Committee approved the
terms of the agreement for the Pending Acquisition and the terms and amount of
all consideration paid to Torch in connection with the Pending Acquisition. See
"Risk Factors -- Conflicts of Interest."
In addition, the Sellers retained independent legal counsel and an independent
investment advisor to review the terms of the Pending Acquisition. The Sellers
also formed a committee ("Steering Committee") composed of employees of five
of the institutional investors in the Sellers to coordinate the negotiation and
execution of the agreements for the Pending Acquisition.
The terms of the Pending Acquisition were negotiated among Bellwether (including
the Special Committee of its Board of Directors), the Sellers (primarily through
the Steering Committee), and Torch. Although Bellwether believes that the terms
of the Pending Acquisition represent the results of arm's length bargaining, no
assurances can be given that the terms of the Pending Acquisition are the same
as those that would have been negotiated among unrelated parties.
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PRINCIPAL AND SELLING STOCKHOLDERS
MANAGEMENT AND PRINCIPAL STOCKHOLDERS
The following table sets forth, as of February 28, 1997, the name, address, and
number of shares of Common Stock owned beneficially by (i) all persons known to
the Company to be the beneficial owners of more than five percent of the
outstanding shares of Common Stock, (ii) each director of the Company, (iii)
each of the executive officers of the Company named in the Summary Compensation
Table, and (iv) all executive officers and directors of the Company as a group.
The information set forth in the following table is based on public filings made
with the SEC as of January 31, 1997 and certain information supplied to the
Company by the persons listed below. Unless otherwise indicated, all shares are
owned directly and the owner has sole voting and investment power with respect
thereto.
<TABLE>
<CAPTION>
----------------------------------------------------------------------
SHARES OWNED SHARES SOLD SHARES OWNED
BEFORE OFFERINGS IN COMMON AFTER OFFERINGS
NAME AND ADDRESS OF BENEFICIAL OWNER NUMBER % STOCK OFFERING NUMBER %
- ------------------------------------------------------ ---------- ------- ------------ ---------- ---
<S> <C> <C> <C> <C>
Allstate Insurance Company ........................... 1,340,584 14.6 -- 1,340,584 9.8
3075 Sanders Road, Suite G5B
Northbrook, Illinois 60062
Torchmark Corporation ................................ 750,196(a) 8.2 285,000(b) 402,696 2.9
United Investors Management Company
2001 Third Avenue South
Birmingham, Alabama 35233
Rho Management Partners L. P. c/o Rho
Management Company, Inc. ........................... 729,832(c) 8.0 -- 729,832 5.3
767 Fifth Avenue
New York, New York 10153
Weiss, Peck & Greer .................................. 515,200 5.6 -- 515,200 3.8
1 New York Plaza
New York, New York 10004
PPM America Inc. ..................................... 506,568 5.5 190,000(b) 316,568 2.3
No. 1 Waterhouse Square
Holborn Bars
London EC1N2ST U.K .................................
J.P. Bryan ........................................... 147,372(d) 1.6 -- 147,372 1.1
J. Darby Sere ........................................ 317,950(e) 3.4 -- 317,950 2.3
Charles C. Green III ................................. 150,000(f) 1.6 -- 150,000 1.1
A.K. McLanahan ....................................... 17,750(g) * -- 17,750 *
Vincent H. Buckley ................................... 13,000(g) * -- 13,000 *
Dr. Jack Birks ....................................... 13,000(g) * -- 13,000 *
Michael D. Watford ................................... 66,497(h) * -- 66,497 *
C. Barton Groves ..................................... 191,625(i) 2.1 -- 191,625 1.4
Kenneth W. Welch ..................................... 100,312(j) 1.1 -- 100,312 *
Habib Kairouz ........................................ 10,000(k) * -- 10,000 *
All officers and directors
as a group (12 persons) ............................ 1,047,506(l) 10.4 -- 1,047,506 7.1
</TABLE>
- -----------------------------
* Under 1%
(a) All of the 750,196 shares indicated as beneficially owned by Torchmark are
owned by United, a wholly owned subsidiary of Torchmark. Of those shares,
187,500 shares are issuable pursuant to a warrant owned by United. In
connection with the Common Stock Offering, Bellwether and Torchmark have
agreed that Torchmark will use 62,500 shares issuable upon exercise of the
warrant to pay a portion of the exercise price of the warrant, such shares
to be valued at the price to the public in the Common Stock Offering.
Accordingly, the maximum number of shares issuable pursuant to the warrant
in connection with the Common Stock Offering is 125,000.
(FOOTNOTES CONTINUED ON FOLLOWING PAGE)
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(b) Assumes the Underwriters' over-allotment options are not exercised. If the
over-allotment options are exercised in full, Torchmark and PPM America
Inc. will sell an additional 402,696 and 316,568, respectively, reducing
their ownership to zero.
(c) Rho Management Partners L. P. ("Rho") as beneficial owner of shares
registered in the name of Alpine Investment Partners, pursuant to an
investment advisory agreement between Rho and such entity, which agreement
confers sole voting and investment control over such shares in Rho. Joshua
Ruch, chief executive officer and controlling stockholder of the general
partner of Rho, shares voting and investment control with Rho over such
shares, and may therefore be considered a beneficial owner of such shares.
Amount shown includes 1,242 shares beneficially owned by Mr. Ruch held in
the name of XBF Inc.
(d) Includes 134,875 shares which Mr. Bryan has the right to acquire, within
60 days, pursuant to options. Excludes 6,250 shares owned by Mr. Bryan's
wife as to which he has no voting or dispositive power.
(e) Includes 291,560 shares that Mr. Sere has the right to acquire within 60
days pursuant to vested stock options. Does not include 6,000 shares owned
by Mr. Sere's wife as to which he has no voting or dispositive power.
(f) Includes 150,000 shares that Mr. Green has the right to acquire within 60
days pursuant to options.
(g) Includes 13,000 shares which the director has the right to acquire within
60 days pursuant to options.
(h) Includes 54,000 shares that Mr. Watford has the right to acquire within 60
days pursuant to options.
(i) Includes 180,000 shares that Mr. Groves has the right to acquire within 60
days pursuant to options.
(j) Includes 90,000 shares that Mr. Welch has the right to acquire within 60
days pursuant to options.
(k) Includes 10,000 shares which Mr. Kairouz has the right to acquire within
60 days pursuant to options. Mr. Kairouz is a Managing Director of Rho
Management Company, Inc., an affiliate of Rho. Mr. Kairouz does not have
voting or investment control over shares of the Company beneficially owned
by Rho.
(l) Includes the following: the shares beneficially owned by Messrs. Bryan as
described in note (d); shares which officers and directors of the Company
have the right to acquire pursuant to options, as described in note (e)
(f), (g), (h), (i), (j) and (k) and 10,000 shares and 5,000 shares that
Michael B. Smith and Roland E. Sledge, respectively, have the right to
acquire within 60 days pursuant to options.
DESCRIPTION OF CAPITAL STOCK
COMMON STOCK
The Company is authorized by its Certificate of Incorporation to issue up to
15,000,000 shares of Common Stock, $0.01 par value. As of February 28, 1997,
9,157,979 shares of Common Stock were issued and outstanding, 131,325, 825,000
and 500,000 shares of Common Stock were reserved for issuance under the 1988
Plan, the 1994 Plan and the 1996 Plan, pursuant to which options for the
purchase of 131,325, 707,500 and 276,500 shares of Common Stock were
outstanding, respectively. Also reserved for issuance were 187,500 shares of
Common Stock issuable upon exercise of a warrant held by United, a subsidiary of
Torchmark Corporation, and 60,000 shares of Common Stock issuable upon exercise
of warrants issued to Howard, Weil, Labouisse, Friedrichs Incorporated and
Principal Financial Securities, Inc.
Holders of Common Stock are entitled to one vote per share in the election of
directors and on all other matters submitted to a vote of stockholders. Such
holders do not have the right to cumulate their votes in the election of
directors. Holders of Common Stock have no redemption or conversion rights and
no preemptive or other rights to subscribe for securities of the Company. In the
event of a liquidation, dissolution or winding up of the Company, holders of
Common Stock are entitled to share equally and ratably in all of the assets
remaining, if any, after satisfaction of all debts and liabilities of the
Company, and of the preferential rights of any series of preferred stock then
outstanding. The outstanding shares of Common Stock are validly issued, fully
paid and nonassessable. Holders of Common Stock are entitled to receive
dividends when, as and if declared by the Board of Directors out of funds
legally available therefor. American Stock Transfer & Trust Company is transfer
agent and registrar for the Common Stock.
PREFERRED STOCK
The Company is authorized to issue 1,000,000 shares of preferred stock, $0.01
par value per share. The Board of directors has the authority to divide the
preferred stock into one or more series and to fix and determine the relative
rights and preferences of the shares of each such series, including dividend
rates, terms of redemption, sinking funds, the
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amount payable in the event of voluntary liquidation, dissolution or winding up
of the affairs of the Company, conversions rights and voting powers. As of March
31, 1997 no shares of preferred stock were outstanding.
DESCRIPTION OF NEW CREDIT FACILITY
The Company has received a commitment from a bank group led by Morgan Guaranty
Trust Company of New York to extend to the Company a New Credit Facility which
matures on March 31, 2002 in order to fund part of the purchase price of the
Acquired Properties, to repay the existing indebtedness and for general
corporate purposes. The New Credit Facility will have a combined total
commitment of $90.0 million following the Offerings until June 30, 1997, when
the total commitment will be automatically reduced to the Borrowing Base (as
hereinafter defined) as then in effect (the "Reference Borrowing Base"), and
will thereafter be automatically reduced quarterly by an amount equal to 1/12th
of the Reference Borrowing Base, commencing March 31, 1999. Amounts outstanding
under the New Credit Facility will bear interest at a rate equal to LIBOR or a
base rate plus a number of basis points which increases as the total outstanding
senior indebtedness of the Company as a percent of the Borrowing Base increases.
The maximum borrowings that may be outstanding under the New Credit Facility may
not exceed a borrowing base ("Borrowing Base") which will be equal to the
present value of the Company's U.S. oil and gas reserves based on assumptions
regarding prices, production and costs approved by the bank group. Sales of
Borrowing Base assets in excess of $5.0 million will trigger a requirement to
re-calculate the Borrowing Base.
Borrowings under the New Credit Facility will be unsecured and will be
guaranteed by certain of the Company's subsidiaries. The New Credit Facility
will have customary covenants including, but not limited to, covenants with
respect to the following matters: (i) information, (ii) maintenance of property
and insurance, (iii) conduct of business and maintenance of existence, (iv)
compliance with laws, (v) limitation on liens, (vi) limitation on
consolidations, mergers and sales of assets, (vii) limitation on debt (including
subsidiary debt), (viii) use of proceeds, (ix) restrictions on investments, (x)
limitation on restricted payments and (xi) limitation on transactions with
affiliates. The Company will also be required to maintain certain financial
ratios, including, without limitation, a minimum ratio of EBITDA to the sum of
cash interest plus deferred dividends and a minimum tangible net worth.
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DESCRIPTION OF NOTES
GENERAL
The Notes will be issued pursuant to an Indenture (the "Indenture") between
the Company, as issuer, a subsidiary of the Company named in the Indenture, as
the initial Subsidiary Guarantor, and Bank of Montreal Trust Company, as trustee
(the "Trustee"). The terms of the Notes include those stated in the Indenture
and those made part of the Indenture by reference to the Trust Indenture Act of
1939, as amended (the "Trust Indenture Act"). The Notes are subject to all
such terms, and Holders of Notes are referred to the Indenture and the Trust
Indenture Act for a statement thereof. The following summary of certain
provisions of the Indenture does not purport to be complete and is qualified in
its entirety by reference to the Indenture, including the definitions therein of
certain terms used below. A copy of the Indenture in substantially the form in
which it is to be executed will be filed as an exhibit to the Registration
Statement of which this Prospectus is a part. For purposes of this section of
this Prospectus, references to the "Company" mean Bellwether Exploration
Company excluding its subsidiaries. The definitions of certain terms used in the
following summary are set forth below under " -- Certain Definitions."
PRINCIPAL, MATURITY AND INTEREST
The Notes will be general unsecured senior subordinated obligations of the
Company, limited in aggregate principal amount to $100,000,000 and will mature
on April 1, 2007. Interest on the Notes will accrue at the rate of 10 7/8% per
annum and will be payable semiannually in arrears on April 1 and October 1 ,
commencing on October 1, 1997 to the Persons in whose names the Notes are
registered in the Note Register at the close of business on the March 15 or
September 15 next preceding such interest payment date. Interest on the Notes
will accrue from the most recent date to which interest has been paid or, if no
interest has been paid, from the date of original issuance. Interest will be
computed on the basis of a 360-day year comprised of twelve 30-day months.
Principal, premium, if any, and interest on the Notes will be payable, and the
Notes will be transferable, at the office or agency of the Company maintained
for such purpose within the City and State of New York. In addition, in the
event the Notes do not remain in book-entry form, interest may be paid, at the
option of the Company, by check mailed to the registered holders of the Notes at
their respective addresses as set forth on the Note Register. No service charge
will be made for any transfer or exchange of Notes, but the Company or the
Trustee may require payment of a sum sufficient to cover any tax or other
governmental charge that may be payable in connection therewith. The Notes will
be issued in denominations of $1,000 and integral multiples thereof.
SUBORDINATION
The payment of the principal of, and premium, if any, and interest on the Notes
will be subordinated in right of payment, as set forth in the Indenture, to the
prior payment in full of Senior Indebtedness, which will include borrowings
under the New Credit Facility, whether outstanding on the date of the Indenture
or thereafter incurred. In the event of any insolvency or bankruptcy case or
proceeding, or any receivership, liquidation, reorganization or other similar
case or proceeding in connection therewith, relating to the Company or to its
creditors, as such, or to its assets, or any liquidation, dissolution or other
winding-up of the Company, whether voluntary or involuntary and whether or not
including insolvency or bankruptcy, or any assignment for the benefit of
creditors or other marshaling of assets or liabilities of the Company (provided
that the consolidation or merger of the Company or its liquidation or
dissolution following the conveyance, transfer, lease or other disposition of
all or substantially all the properties and assets of the Company and its
Restricted Subsidiaries on a consolidated basis upon the terms and conditions
described under " -- Merger, Consolidation or Sale of Assets" below shall not
be deemed an insolvency or liquidation proceeding (requiring the repayment of
all of the Senior Indebtedness in full in cash or cash equivalents as a
prerequisite to any payments being made to Holders of Notes) for the purposes of
the Subordination provisions), the holders of Senior Indebtedness will first be
entitled to receive payment in full in cash or cash equivalents of all amounts
due on or in respect of all Senior Indebtedness, before the Holders of Notes
will be entitled to receive any direct or indirect payment or distribution of
any kind or character (other than any payment or distribution in the form of
Permitted Junior Securities or from the trust described below under " -- Legal
Defeasance and Covenant Defeasance") on account of principal of (or premium, if
any, on) or interest on the Notes or on account of the purchase or redemption or
other acquisition of the Notes (including pursuant to an optional redemption, a
Change of Control Offer or a Net Proceeds Offer). In the event
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that, notwithstanding the foregoing, the Trustee or the Holder of any Note
receives any payment or distribution of properties or assets of the Company of
any kind or character, whether in cash, property or securities, by set-off or
otherwise, in respect of principal of (or premium, if any, on) or interest on
the Notes before all Senior Indebtedness is paid or provided for in full, then
the Trustee or the Holders of Notes receiving any such payment or distribution
(other than a payment or distribution in the form of Permitted Junior
Securities) will be required to pay or deliver such payment or distribution
forthwith to the trustee in bankruptcy, receiver, liquidating trustee,
custodian, assignee, agent or other Person making payment or distribution of
assets of the Company for application to the payment of all Senior Indebtedness
remaining unpaid, to the extent necessary to pay all Senior Indebtedness in
full.
The Company also may not make any payment or distribution of any properties or
assets of the Company of any kind or character (other than Permitted Junior
Securities or from the trust described below under " -- Legal Defeasance and
Covenant Defeasance") on account of principal of (or premium, if any, on) or
interest on the Notes or on account of the purchase or redemption or other
acquisition of Notes upon the occurrence of a Payment Event of Default and
receipt by the Trustee of written notice thereof until such Payment Event of
Default shall have been cured or waived or shall have ceased to exist or such
Senior Indebtedness shall have been paid in full or otherwise discharged, after
which the Company shall resume making any and all required payments in respect
of the Notes, including any missed payments.
The Company also may not make any payment or distribution of any properties or
assets of the Company of any kind or character (other than Permitted Junior
Securities or from the trust described below under " -- Legal Defeasance and
Covenant Defeasance") on account of any principal of (or premium, if any, on)
or interest on the Notes or on account of the purchase or redemption or other
acquisition of Notes for the period specified below ("Payment Blockage
Period") upon the occurrence of a Non-payment Event of Default and receipt by
the Trustee and the Company of written notice thereof from one or more of the
holders of Specified Senior Indebtedness (or their representative). The Payment
Blockage Period will commence upon the earlier of the dates of receipt by the
Trustee or the Company of such notice from one of more of the holders of
Specified Senior Indebtedness (or their representative) and shall end on the
earliest of (i) 179 days thereafter, (ii) the date, as set forth in a written
notice from the holders of the Specified Senior Indebtedness, (or their
representative) to the Company or the Trustee, on which such Non-payment Event
of Default is cured, waived in writing or ceases to exist or such Specified
Senior Indebtedness is discharged or (iii) the date on which such Payment
Blockage Period shall have been terminated by written notice to the Company or
the Trustee from one or more of such holders (or their representative)
initiating such Payment Blockage Period, after which the Company will resume
(unless otherwise prohibited pursuant to the immediately preceding paragraph)
making any and all required payments in respect of the Notes, including any
missed payments. In any event, not more than one Payment Blockage Period may be
commenced during any period of 360 consecutive days. No Non-payment Event of
Default that existed or was continuing on the date of delivery of any Payment
Blockage Notice to the Trustee can be made the basis for a subsequent Payment
Blockage Notice. In the event that, notwithstanding the foregoing, the Company
makes any payment to the Trustee or the Holder of any Note prohibited by the
subordination provision of the Indenture, then such payment will be required to
be paid over and delivered forthwith to the Company.
If the Company fails to make any payment on the Notes when due or within any
applicable grace period whether or not on account of the payment blockage
provision described above, such failure would constitute an Event of Default
under the Indenture and would enable the Holders of the Notes to accelerate the
maturity thereof. See "-- Events of Default and Remedies."
As a result of such subordination provisions described above, in the event of a
distribution of assets upon the liquidation, receivership, reorganization or
insolvency of the Company, creditors of the Company who are holders of Senior
Indebtedness may recover more, ratably, than the Holders of the Notes, and
assets which would otherwise be available to pay obligations in respect of the
Notes will be available only after all Senior Indebtedness has been paid in
full, and there may not be sufficient assets remaining to pay amounts due on any
or all of the Notes.
The Notes will be structurally subordinated to all existing and future
liabilities of Subsidiaries of the Company other than the Subsidiary Guarantor.
See " -- Senior Subordinated Guarantees of Notes."
At December 31, l996, after giving PRO FORMA effect to the Transactions and the
application of the estimated net proceeds therefrom as described in "Use of
Proceeds", the amount of Senior Indebtedness outstanding would have been
approximately $35.9 million. See "Use of Proceeds" and "Capitalization."
Although the Indenture will contain limitations on the amount of additional
Indebtedness that the Company and its Subsidiaries may incur, the amounts of
such
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Indebtedness could be substantial and, in any case, such Indebtedness may be
Senior Indebtedness or Guarantor Senior Indebtedness. See " -- Certain
Covenants -- Incurrence of Indebtedness."
SENIOR SUBORDINATED GUARANTEES OF NOTES
Initially, Odyssey Petroleum Company will be the only Subsidiary Guarantor;
however, other Restricted Subsidiaries may in the future incur Subsidiary
Guarantees of the Notes as described herein. Each Subsidiary Guarantor will
unconditionally guarantee, jointly and severally, to each Holder and the Trustee
the full and prompt performance of the Company's obligations under the Indenture
and the Notes, including the payment of principal of (and premium, if any, on)
and interest on the Notes pursuant to its Subsidiary Guarantee. The obligations
of each Subsidiary Guarantor will be limited to the maximum amount as will,
after giving effect to all other contingent and fixed liabilities (including,
but not limited to, Guarantor Senior Indebtedness) of such Subsidiary Guarantor
and after giving effect to any collections from or payments made by or on behalf
of any other Subsidiary Guarantor in respect of the obligations of such other
Subsidiary Guarantor under its Subsidiary Guarantee or pursuant to its
contribution obligations under the Indenture, result in the obligations of such
Subsidiary Guarantor under the Subsidiary Guarantee not constituting a
fraudulent conveyance or fraudulent transfer under federal or state law. Each
Subsidiary Guarantor that makes a payment or distribution under a Subsidiary
Guarantee shall be entitled to a contribution from each other Subsidiary
Guarantor in a pro rata amount based on the Adjusted Net Assets of each
Subsidiary Guarantor.
Each Subsidiary Guarantor may consolidate with or merge into or sell or
otherwise dispose of all or substantially all of its properties and assets to
the Company or another Subsidiary Guarantor without limitation, except to the
extent any such transaction is subject to the "Merger, Consolidation or Sale of
Assets" covenant of the Indenture. Each Subsidiary Guarantor may consolidate
with or merge into or sell all or substantially all of its properties and assets
to a Person other than the Company or another Subsidiary Guarantor (whether or
not Affiliated with the Subsidiary Guarantor), PROVIDED that (i) if the
surviving Person is not the Subsidiary Guarantor, the surviving Person agrees to
assume the Subsidiary Guarantor's Subsidiary Guarantee and all its obligations
pursuant to the Indenture (except to the extent the following paragraph would
result in the release of such Subsidiary Guarantee) and (ii) such transaction
does not (a) violate any of the covenants described under the heading
" -- Certain Covenants" or (b) result in a Default or Event of Default
immediately thereafter that is continuing.
Upon the sale or other disposition (by merger or otherwise) of a Subsidiary
Guarantor (or all or substantially all of its properties and assets) to a Person
other than the Company or another Subsidiary Guarantor and pursuant to a
transaction that is otherwise in compliance with the Indenture (including as
described in the foregoing paragraph), such Subsidiary Guarantor shall be deemed
released from its Subsidiary Guarantee and the related obligations set forth in
the Indenture; PROVIDED, HOWEVER, that any such termination shall occur only to
the extent that all obligations of such Subsidiary Guarantor under all of its
guarantees of, and under all of its pledges of assets or other security
interests which secure, other Indebtedness of the Company or any other
Restricted Subsidiary shall also terminate upon such sale or other disposition.
Each Subsidiary Guarantor that is designated as an Unrestricted Subsidiary in
accordance with the Indenture shall be released from its Subsidiary Guarantee
and related obligations set forth in the Indenture for so long as it remains an
Unrestricted Subsidiary.
The obligations of each Subsidiary Guarantor under its Subsidiary Guarantee are
subordinated to the prior payment in full of all Guarantor Senior Indebtedness
of such Subsidiary Guarantor (including its guarantee of Indebtedness of the
Company under the New Credit Facility) to substantially the same extent as the
Notes are subordinated to Senior Indebtedness. The Subsidiary Guarantees will be
structurally subordinated to all existing and future liabilities of Subsidiaries
of Subsidiary Guarantors that are not also Subsidiary Guarantors. At December
31, 1996, after giving PRO FORMA effect to the Transactions and the application
of the net proceeds therefrom as described in "Use of Proceeds", the aggregate
principal amount of Guarantor Senior Indebtedness outstanding would have been
approximately $35.9 million.
Although the Indenture does not contain any requirement that any Subsidiary
(other than Odyssey Petroleum Company) execute and deliver a Subsidiary
Guarantee, certain covenants described below require a future Restricted
Subsidiary to execute and deliver a Subsidiary Guarantee prior to the guarantee
of other Indebtedness. See "Certain Covenants -- Limitation on Guarantees of
Indebtedness by Restricted Subsidiaries."
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OPTIONAL REDEMPTION
The Notes will not be redeemable at the Company's option prior to April 1, 2002.
Thereafter, the Notes will be subject to redemption at the option of the
Company, in whole or in part, upon not less than 30 or more than 60 days'
notice, at the redemption prices (expressed as percentages of principal amount)
set forth below plus accrued and unpaid interest to the applicable redemption
date, if redeemed during the twelve-month period beginning on April 1 of the
years indicated below:
-----------
YEAR PERCENTAGE
- ------------------------------------- -----------
2002................................. 105.4375%
2003................................. 103.6250%
2004................................. 101.8125%
2005 and thereafter.................. 100.0000%
If less than all the Notes are to be redeemed at any time, selection of Notes
for redemption will be made by the Trustee on a pro rata basis, provided that no
Notes of $1,000 or less shall be redeemed in part. Notices of redemption shall
be mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon surrender
of the original Note. On and after the redemption date, interest ceases to
accrue on Notes or portions of them called for redemption.
MANDATORY REDEMPTION
The Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each Holder of Notes will have the
right to require the Company to repurchase all or any part (equal to $1,000 or
an integral part thereof) of such Holder's Notes pursuant to the offer described
below (the "Change of Control Offer") at an offer price in cash equal to 101%
of the aggregate principal amount thereof plus accrued and unpaid interest (the
"Change of Control Purchase Price") to the date of purchase (the "Change of
Control Payment Date"). Within 30 days following any Change of Control, the
Company will mail a notice to the Trustee and each Holder describing the
transaction or transactions that constitute the Change of Control and offering
to repurchase Notes pursuant to the procedures required by the Indenture and
described in such notice. The Change of Control Payment Date shall be a Business
Day not less than 30 days nor more than 60 days after such notice is mailed. The
Company will comply with the requirements of Rule 14e-1 under the Exchange Act
and any other securities laws and regulations thereunder to the extent such laws
and regulations are applicable in connection with the repurchase of the Notes as
a result of a Change of Control. To the extent that the provisions of any
securities laws or regulations conflict with the provisions relating to the
Change of Control Offer, the Company will comply with the applicable securities
laws and regulations and will not be deemed to have breached its obligations
described herein by virtue thereof.
On the Change of Control Payment Date, the Company will, to the extent lawful,
(i) accept for payment all Notes or portions thereof properly tendered pursuant
to the Change of Control Offer, (ii) deposit with the Paying Agent an amount
equal to the Change of Control Purchase Price in respect of all Notes or
portions thereof so accepted and (iii) deliver or cause to be delivered to the
Trustee the Notes so accepted together with an Officers' Certificate stating the
aggregate principal amount of Notes or portions thereof being purchased by the
Company. The Paying Agent will promptly mail to each Holder of Notes so accepted
the Change of Control Payment for such Notes, and the Trustee will promptly
authenticate and mail (or cause to be transferred by book entry) to each Holder
a new Note equal in principal amount to any unpurchased portion of the Notes
surrendered, if any; PROVIDED that each such new Note will be in a principal
amount of $1,000 or an integral multiple thereof. The Indenture will provide
that, prior to complying with the provisions of this covenant, but in any event
within 30 days following a Change of Control, the Company will either repay all
outstanding Senior Indebtedness or obtain the requisite consents, if any, under
all agreements governing outstanding
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Senior Indebtedness to permit the repurchase of Notes required by this covenant.
The Company will publicly announce the results of the Change of Control Offer on
or as soon as practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the Indenture
will not contain provisions that permit the Holders of the Notes to require that
the Company repurchase or redeem the Notes in the event of a takeover,
recapitalization or similar restructuring.
If a Change of Control offer is made, there can be no assurance that the Company
will have available funds sufficient to pay the Change of Control Purchase Price
for all of the Notes that might be delivered by the Holders of Notes seeking to
accept the Change of Control Offer. The New Credit Facility provides that
certain change of control events with respect to the Company would constitute a
default thereunder. Any future credit agreements or other agreements relating to
Senior Indebtedness to which the Company becomes a party may contain similar
restrictions and provisions. In the event a Change of Control occurs at a time
when the Company is prohibited from purchasing Notes, the Company could seek the
consent of its lenders to the purchase of Notes or could attempt to refinance
the borrowings that contain such prohibition. If the Company does not obtain
such a consent or repay such borrowings, the Company will remain prohibited from
purchasing Notes. In such case, the Company's failure to purchase tendered Notes
would constitute an Event of Default under the Indenture which would, in turn,
constitute a default under the New Credit Facility. In such circumstances, the
subordination provisions in the Indenture would likely restrict payments to the
Holders of Notes. The definition of Change of Control includes an event by which
the Company sells, assigns, conveys, transfers or leases all or substantially
all of its properties to any Person; the phrase "all or substantially all" is
subject to applicable legal precedent and as a result in the future there may be
uncertainty as to whether a Change of Control has occurred.
The Company will not be required to make a Change of Control Offer upon a Change
of Control if a third party makes the Change of Control Offer at the same or a
higher purchase price, at the same times and otherwise in substantial compliance
with the requirements applicable to a Change of Control Offer made by the
Company and purchases all Notes validly tendered and not withdrawn under such
Change of Control Offer.
ASSET SALES
The Indenture will provide that the Company will not and will not permit any
Restricted Subsidiary to, engage in any Asset Sale unless (i) the Company or
such Restricted Subsidiary, as the case may be, receives consideration at the
time of such Asset Sale at least equal to the fair market value of the assets
and properties sold or otherwise disposed of pursuant to the Asset Sale (as
determined by the Board of Directors of the Company, whose determination shall
be conclusive and evidenced by a Board Resolution), (ii) at least 80% of the
consideration received by the Company or the Restricted Subsidiary, as the case
may be, in respect of such Asset Sale consists of cash, Cash Equivalents or
properties used in the Oil and Gas Business of the Company or its Restricted
Subsidiaries and (iii) the Company delivers to the Trustee an Officers'
Certificate which Officers' Certificate shall be conclusive certifying that such
Asset Sale complies with clauses (i) and (ii). The amount (without duplication)
of any Indebtedness (other than Subordinated Indebtedness or Pari Passu
Indebtedness) of the Company or such Restricted Subsidiary that is expressly
assumed by the transferee in such Asset Sale and with respect to which the
Company or such Restricted Subsidiary, as the case may be, is unconditionally
released by the holder of such Indebtedness shall be deemed to be cash or Cash
Equivalents for purposes of clause (ii) and shall also be deemed to constitute a
repayment of, and a permanent reduction in, the amount of such Indebtedness for
purposes of the following paragraph.
If the Company or any Restricted Subsidiary engages in an Asset Sale, the
Company or such Restricted Subsidiary may either, no later than 365 days after
such Asset Sale, (i) apply all or any of the Net Cash Proceeds therefrom to
repay Indebtedness (other than Subordinated Indebtedness or Pari Passu
Indebtedness) of the Company or any Restricted Subsidiary, provided in each
case, that the related loan commitment (if any) is thereby permanently reduced
by the amount of such Indebtedness so repaid, or (ii) invest all or any part of
the Net Cash Proceeds thereof in properties and assets that will be used in the
Oil and Gas Business of the Company or its Restricted Subsidiaries, as the case
may be. The amount of such Net Cash Proceeds not applied or invested as provided
in this paragraph (after the period specified in the paragraph) will constitute
"Excess Proceeds."
When the aggregate amount of Excess Proceeds equals or exceeds $10,000,000, the
Company shall make an offer to purchase, from all Holders of the Notes and
holders of any then outstanding Pari Passu Indebtedness required to be
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repurchased or repaid on a permanent basis in connection with an Asset Sale, an
aggregate principal amount of Notes and any such Pari Passu Indebtedness equal
to such Excess Proceeds as follows:
(i) The Company will make an offer to purchase (a "Net Proceeds Offer")
from all Holders of the Notes in accordance with the procedures set forth in the
Indenture the maximum principal amount (expressed as a multiple of $1,000) of
Notes that may be purchased out of an amount (the "Payment Amount") equal to
the product of such Excess Proceeds multiplied by a fraction, the numerator of
which is the outstanding principal amount of the Notes and the denominator of
which is the sum of the outstanding principal amount of the Notes and any such
Pari Passu Indebtedness (subject to proration in the event such amount is less
than the aggregate Offered Price (as defined in clause (ii) below) of all Notes
tendered), and to the extent required by any such Pari Passu Indebtedness and
provided there is a permanent reduction in the principal amount of such Pari
Passu Indebtedness, the Company shall make an offer to purchase such Pari Passu
Indebtedness (a "Pari Passu Offer") in an amount (the "Pari Passu
Indebtedness Amount") equal to the excess of the Excess Proceeds over the
Payment Amount.
(ii) The offer price for the Notes shall be payable in cash in an amount
equal to 100% of the aggregate principal amount of the Notes tendered pursuant
to a Net Proceeds Offer, plus accrued and unpaid interest, if any, to the date
such Net Proceeds Offer is consummated (the "Offered Price"), in accordance
with the procedures set forth in the Indenture. If the aggregate Offered Price
of Notes validly tendered and not withdrawn by Holders thereof exceeds the
Payment Amount, Notes to be purchased will be selected on a pro rata basis. To
the extent that the aggregate Offered Price of the Notes tendered pursuant to a
Net Proceeds Offer is less than the Payment Amount relating thereto or the
aggregate amount of the Pari Passu Indebtedness that is purchased or repaid
pursuant to the Pari Passu Offer is less than the Pari Passu Indebtedness Amount
(such shortfall constituting a "Net Proceeds Deficiency"), the Company may use
such Net Proceeds Deficiency, or a portion thereof, for general corporate
purposes, subject to the limitations of the "Restricted Payments" covenant.
(iii) Upon completion of such Net Proceeds Offer and Pari Passu Offer, the
amount of Excess Proceeds shall be reset to zero.
The Company will not and will not permit any Restricted Subsidiary to enter into
or suffer to exist any agreement that would place any restriction of any kind
(other than pursuant to law or regulation) on the right of the Company to make a
Net Proceeds Offer following any Asset Sale. The Company will comply with the
requirements of Rule 14e-1 under the Exchange Act and any other securities laws
and regulations thereunder, if applicable, in the event that an Asset Sale
occurs and the Company is required to purchase Notes as described above. To the
extent that the provisions of any securities laws or regulations conflict with
the provisions relating to the Net Proceeds Offer, the Company will comply with
the applicable securities laws and regulations and will not be deemed to have
breached its obligations described above by virtue thereof.
CERTAIN COVENANTS
INCURRENCE OF INDEBTEDNESS
The Indenture will provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, create, incur, assume, guarantee or otherwise
become directly or indirectly liable for the payment of (collectively,
"incur") any Indebtedness (including any Acquired Indebtedness), other than
Permitted Indebtedness, unless (i) at the time of such event and after giving
effect thereto on a PRO FORMA basis the Company's Consolidated Fixed Charge
Coverage Ratio for the four full fiscal quarters immediately preceding such
event, taken as one period, would have been at least equal to 2.5 to 1.0 and
(ii) no Default or Event of Default shall have occurred and be continuing at the
time such additional Indebtedness is incurred or would occur as a consequence of
the incurrence of the additional Indebtedness.
RESTRICTED PAYMENTS
(i) The Indenture will provide that the Company will not, and will not
permit any Restricted Subsidiary to, directly or indirectly, take the following
actions:
(a) declare or pay any dividend or make any distribution on account of the
Company's Capital Stock (other than dividends or distributions payable solely in
shares of Qualified Capital Stock of the Company or in options, warrants or
other rights to purchase Qualified Capital Stock of the Company);
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(b) purchase, redeem or otherwise acquire or retire for value any Capital
Stock of the Company or any Affiliate thereof (other than any Wholly Owned
Restricted Subsidiary) or any options, warrants or other rights to acquire such
Capital Stock;
(c) make any principal payment on, or repurchase, redeem, defease or
otherwise acquire or retire for value, prior to any scheduled principal payment,
scheduled sinking fund payment or maturity, any Pari Passu Indebtedness or
Subordinated Indebtedness, except (1) pursuant to a Pari Passu Offer or out of a
Net Proceeds Deficiency in compliance with the "Asset Sales" covenant
described above, or (2) upon a Change of Control to the extent (and only to the
extent) required by the indenture or other agreement or instrument pursuant to
which such Pari Passu Indebtedness or Subordinated Indebtedness was issued,
PROVIDED the Company is then in compliance with the "Change of Control"
covenant described above;
(d) declare or pay any dividend on, or make any distribution to the
holders of, any shares of Capital Stock of any Restricted Subsidiary (other than
payments made pro rata to all holders of such Capital Stock) or purchase, redeem
or otherwise acquire or retire for value any Capital Stock of any Restricted
Subsidiary or any options, warrants or other rights to acquire any such Capital
Stock (other than with respect to any such Capital Stock held by the Company or
any Wholly Owned Restricted Subsidiary of the Company); or
(e) make any Investment (other than any Permitted Investment);
(such payments or other actions described in (but not excluded from)
clauses (a) through (e) are collectively referred to as "Restricted
Payments"), unless at the time of and after giving effect to the proposed
Restricted Payment (the amount of any such Restricted Payment, if other than
cash, shall be the amount determined by the Board of Directors of the Company,
whose determination shall be conclusive and evidenced by a Board Resolution),
(1) no Default or Event of Default shall have occurred and be continuing, (2)
the Company could incur $1.00 of additional Indebtedness (excluding Permitted
Indebtedness) in accordance with the covenant described under "Incurrence of
Indebtedness," and (3) the aggregate amount of all Restricted Payments declared
or made after the date of the Indenture shall not exceed the sum (without
duplication) of the following:
(A) 50% of the aggregate Consolidated Net Income of the Company accrued on
a cumulative basis during the period beginning on the first day of the month in
which the Indenture is signed and ending on the last day of the Company's last
fiscal quarter ending prior to the date of such proposed Restricted Payment (or,
if such aggregate Consolidated Net Income shall be a loss, minus 100% of such
loss), plus
(B) the aggregate net cash proceeds received after the date of the
Indenture by the Company as capital contributions to the Company (other than
from any Restricted Subsidiary), plus
(C) the aggregate net cash proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of its
Restricted Subsidiaries) of shares of Qualified Capital Stock of the Company or
any option, warrants or rights to purchase such shares of Qualified Capital
Stock of the Company, plus
(D) the aggregate net cash proceeds received after the date of the
Indenture by the Company (other than from any of its Restricted Subsidiaries)
upon the exercise of any options, warrants or rights to purchase shares of
Qualified Capital Stock of the Company, plus
(E) the aggregate net cash proceeds received after the date of the
Indenture by the Company from the issuance or sale (other than to any of its
Restricted Subsidiaries) of debt securities or shares of Redeemable Capital
Stock that have been converted into or exchanged for Qualified Capital Stock of
the Company, together with the aggregate cash received by the Company at the
time of such conversion or exchange, plus
(F) to the extent not otherwise included in the Company's Consolidated Net
Income, an amount equal to the net reduction in any investment made by the
Company and its Restricted Subsidiaries subsequent to the date of the Indenture
in any Person resulting from (i) payments of interest on debt, dividends,
repayments of loans or advances, or other transfers or distributions of
property, in each case to the Company or any Restricted Subsidiary from any
Person, and in an amount not to exceed the book value of such investment
previously made in such Person that was treated as Restricted Payments, or (ii)
the designation of any Unrestricted Subsidiary as a Restricted Subsidiary, in
each case in an amount not to exceed the lesser of (x) the book value of such
investment previously made in such Unrestricted Subsidiary that was treated as
Restricted Payments, and (y) the fair market value of such Unrestricted
Subsidiary, plus
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(G) $10,000,000.
(ii) Notwithstanding paragraph (i) above, the Company and its Restricted
Subsidiaries may take the following actions (so long as in the case of clauses
(b), (c), and (d) below no Default or Event of Default shall have occurred and
be continuing):
(a) the payment of any dividend on any Capital Stock of the Company or any
Restricted Subsidiary within 60 days after the date of declaration thereof, if
at such declaration date such declaration complied with the provisions of
paragraph (i) above (and such payment shall be deemed to have been paid on such
date of declaration for purposes of any calculation required by the provisions
of paragraph (i) above);
(b) the repurchase, redemption or other acquisition or retirement of any
shares of any class of Capital Stock of the Company or any Restricted
Subsidiary, in exchange for, or out of the aggregate net cash proceeds of, a
substantially concurrent issue and sale (other than to a Restricted Subsidiary)
of shares of Qualified Capital Stock of the Company;
(c) the repurchase, redemption, repayment, defeasance or other acquisition
or retirement for value of any Pari Passu Indebtedness or Subordinated
Indebtedness (other than Redeemable Capital Stock) in exchange for, or out of
the aggregate net cash proceeds of, a substantially concurrent issue and sale
(other than to a Restricted Subsidiary) of shares of Qualified Capital Stock of
the Company; and
(d) the purchase, redemption, repayment, defeasance or other acquisition
or retirement for value of Pari Passu Indebtedness or Subordinated Indebtedness
in exchange for, or out of the aggregate net cash proceeds of, a substantially
concurrent incurrence (other than to a Restricted Subsidiary) of, Pari Passu
Indebtedness or Subordinated Indebtedness so long as (A) the principal amount of
such new Indebtedness does not exceed the principal amount (or, if such Pari
Passu Indebtedness or Subordinated Indebtedness being refinanced provides for an
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration thereof, such lesser amount as of the date of
determination) of the Indebtedness being so purchased, redeemed, repaid,
defeased, acquired or retired, plus the amount of any premium required to be
paid in connection with such refinancing pursuant to the terms of the
Indebtedness refinanced or the amount of any premium reasonably determined by
the Company as necessary to accomplish such refinancing plus the amount of
expenses of the Company incurred in connection with such refinancing, (B) such
new Indebtedness is PARI PASSU with or subordinated to the Notes at least to the
same extent as such Indebtedness so purchased, redeemed, repaid, defeased,
acquired or retired, and (C) such new Indebtedness has an Average Life to Stated
Maturity that is longer than the Average Life to Stated Maturity of the Notes
and such new Indebtedness has a Stated Maturity for its final scheduled
principal payment that is at least 91 days later than the Stated Maturity for
the final scheduled principal payment of the Notes.
The actions described in clauses (a) and (c) of this paragraph (ii) shall be
Restricted Payments that shall be permitted to be taken in accordance with this
paragraph (ii) but shall reduce the amount that would otherwise be available for
Restricted Payments under clause (3) of paragraph (i) (provided that any
dividend paid pursuant to clause (a) of this paragraph (ii) shall reduce the
amount that would otherwise be available under clause (3) of paragraph (i) when
declared, but not also when subsequently paid pursuant to such clause (a)), and
the actions described in clauses (b) and (d) of this paragraph (ii) shall be
Restricted Payments that shall be permitted to be taken in accordance with this
paragraph and shall not reduce the amount that would otherwise be available for
Restricted Payments under clause (3) of paragraph (i). Further, the Company or
any Restricted Subsidiary may make a Restricted Payment, if at the time the
Company or any Restricted Subsidiary first incurred a commitment for such
Restricted Payment such Restricted Payment could have been made in accordance
with the Indenture; PROVIDED THAT all commitments incurred and outstanding shall
be treated as if such commitments were Restricted Payments expended by the
Company or a Restricted Subsidiary at the time the commitments were incurred,
except that commitments incurred and outstanding which are treated as a
Restricted Payment expended by the Company or a Restricted Subsidiary and which
are terminated shall no longer be treated as a Restricted Payment expended by
the Company or a Restricted Subsidiary upon the termination of such commitment
for such purposes; and PROVIDED FURTHER, that at the time such Restricted
Payment is made no Default or Event of Default shall have occurred and be
continuing and the Company could incur $1.00 of additional Indebtedness
(excluding Permitted Indebtedness) in accordance with the "Incurrence of
Indebtedness" covenant.
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TRANSACTIONS WITH AFFILIATES
The Indenture will provide that the Company will not, and will not permit any of
its Restricted Subsidiaries to, directly or indirectly, enter into or suffer to
exist any transaction or series of related transactions (including, without
limitation, the sale, purchase, exchange or lease of assets, property or
services) with any Affiliate of the Company (other than the Company or a
Restricted Subsidiary) unless (i) such transaction or series of related
transactions is on terms that are no less favorable to the Company or such
Restricted Subsidiary, as the case may be, than would be available in a
comparable transaction in arm's length dealings with an unrelated third party,
(ii) with respect to a transaction or series of related transactions involving
payments in excess of $1,000,000 in the aggregate, the Company delivers an
Officers' Certificate to the Trustee certifying that such transaction complies
with clause (i) above, (iii) with respect to a transaction or series of
transactions involving payments in excess of $5,000,000 but less than
$15,000,000 in the aggregate, the Company delivers an Officers' Certificate to
the Trustee certifying that (a) such transaction or series of related
transactions complies with clause (i) above and (b) such transaction or series
of related transactions shall have been approved by a majority of the
independent directors of the Board of Directors of the Company and (iv) with
respect to a transaction or series of transactions involving payments of
$15,000,000 or more in the aggregate, the Company delivers an Officers'
Certificate to the Trustee certifying that (a) such transaction or series of
related transactions complies with clause (i) above, (b) such transaction or
series of related transactions shall have been approved by a majority of the
independent directors of the Board of Directors of the Company and (c) the
Company shall have received the written opinion of a firm of investment bankers
nationally recognized in the United States that such transaction or series of
transactions is fair, from a financial point of view, to the Company or such
Restricted Subsidiary; PROVIDED, HOWEVER, that the foregoing restriction shall
not apply to (1) the provision of services and payments under the Administrative
Services Agreement so long as such agreement (including any modifications
thereof or amendments thereto entered into on or after the date of the
Indenture) has been approved by a majority of the independent directors of the
Board of Directors of the Company, (2) loans or advances to officers, directors
and employees of the Company or any Restricted Subsidiary made in the ordinary
course of business and consistent with past practices of the Company and its
Restricted Subsidiaries in an aggregate amount not to exceed $3,000,000
outstanding at any one time, (3) the payment of reasonable and customary regular
fees to directors of the Company or any of its Restricted Subsidiaries who are
not employees of the Company or any Affiliate, (4) the Company's employee
compensation and other benefit arrangements, or (5) indemnities of officers and
directors of the Company or any Subsidiary consistent with such Person's bylaws
and applicable statutory provisions.
LIENS
The Indenture will provide that the Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create, incur, assume or
suffer to exist any Lien of any kind, except for Permitted Liens, upon any of
their respective assets or properties, whether now owned or acquired after the
date of the Indenture, or any income or profits therefrom to secure any Pari
Passu Indebtedness or Subordinated Indebtedness, unless prior to or
contemporaneously therewith the Notes are directly secured equally and ratably,
provided that (i) if such secured Indebtedness is Pari Passu Indebtedness, the
Lien securing such Pari Passu Indebtedness shall be subordinate and junior to,
or PARI PASSUwith, the Lien securing the Notes and (ii) if such secured
Indebtedness is Subordinated Indebtedness, the Lien securing such Subordinated
Indebtedness shall be subordinate and junior to the Lien securing the Notes at
least to the same extent as such Subordinated Indebtedness is subordinated to
the Notes.
LIMITATION ON GUARANTEES OF INDEBTEDNESS BY RESTRICTED SUBSIDIARIES
The Indenture will provide that the Company will not permit any Restricted
Subsidiary that is not a Subsidiary Guarantor to guarantee the payment of any
Indebtedness of the Company unless (a)(1) such Restricted Subsidiary
simultaneously executes and delivers a supplemental indenture to the Indenture
providing for a Subsidiary Guarantee of the Notes by such Restricted Subsidiary,
which Subsidiary Guarantee will be subordinated to Guarantor Senior Indebtedness
(but no other Indebtedness) to the same extent that the Notes are subordinated
to Senior Indebtedness and (2) with respect to any guarantee of Subordinated
Indebtedness by a Restricted Subsidiary, any such guarantee shall be
subordinated to such Restricted Subsidiary's Subsidiary Guarantee at least to
the same extent as such Subordinated Indebtedness is subordinated to the Notes;
(b) such Restricted Subsidiary waives and agrees not in any manner whatsoever to
claim or take the benefit or advantage of, any rights of reimbursement,
indemnity or subrogation or any other rights against the Company or any other
Restricted Subsidiary as a result of any payment by such Restricted Subsidiary
under its
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Subsidiary Guarantee until such time as the obligations guaranteed thereby are
paid in full; and (c) such Restricted Subsidiary shall deliver to the Trustee an
opinion of counsel to the effect that such Subsidiary Guarantee has been duly
executed and authorized and constitutes a valid, binding and enforceable
obligation of such Restricted Subsidiary, except insofar as enforcement thereof
may be limited by bankruptcy, involvency or similar laws (including, without
limitation, all laws relating to fraudulent transfers) and except insofar as
enforcement thereof is subject to general principles of equity; PROVIDED that
this paragraph (i) shall not be applicable to any guarantee by any Restricted
Subsidiary that (x) existed at the time such Person became a Restricted
Subsidiary of the Company and (y) was not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary of the Company.
Any Subsidiary Guarantee incurred by a Restricted Subsidiary shall be deemed
released upon the release or discharge of the guarantee which resulted in the
creation of such Subsidiary Guarantee of the Notes, except a discharge or
release by or as a result of payment under such guarantee.
DIVIDENDS AND OTHER PAYMENT RESTRICTIONS AFFECTING RESTRICTED SUBSIDIARIES
The Indenture will provide that the Company will not, and will not permit any
Restricted Subsidiary to, directly or indirectly, create or otherwise cause or
suffer to exist or become effective any consensual encumbrance or restriction of
any kind on the ability of any Restricted Subsidiary to (i) pay dividends, in
cash or otherwise, or make any other distributions on or in respect of its
Capital Stock to the Company or any other Restricted Subsidiary, (ii) pay any
Indebtedness owed to the Company or any other Restricted Subsidiary, (iii) make
an Investment in the Company or any other Restricted Subsidiary or (iv) transfer
any of its properties or assets to the Company or any other Restricted
Subsidiary, except in each instance for such encumbrances or restrictions
pursuant to (a) the Indenture or the New Credit Facility, (b) any other
agreement in effect as of the date of the Indenture, (c) any agreement or other
instrument of a Person acquired by the Company or any Restricted Subsidiary in
existence at the time of such acquisition (but not created in contemplation
thereof), which encumbrance or restriction is not applicable to any other
Person, or the properties or assets or any other Person, other than the Person,
or the property or assets of the Person, so acquired, (d) customary restrictions
in leases and licenses relating to the property covered thereby and entered into
in the ordinary course of business or (e) any agreement that extends, renews,
refinances or replaces the agreements containing the restrictions in the
foregoing clauses (a) through (d), PROVIDED THAT in the case of such agreements
in clauses (b) through (d), the terms and conditions of any such restrictions
are not materially less favorable to the Holders of the Notes than those under
or pursuant to the agreement evidencing such Indebtedness so extended, renewed,
refinanced or replaced, and except with respect to clause (iv) only, (1)
restrictions in the form of Liens which are not prohibited as described in the
"Liens" covenant and which contain customary limitations on the transfer of
collateral and (2) customary restrictions contained in asset sale agreements
limiting the transfer of such assets pending the closing of such sale.
OWNERSHIP OF CAPITAL STOCK
The Indenture will provide that the Company (i) will not permit any Restricted
Subsidiary to issue any Capital Stock (other than to the Company or a Restricted
Subsidiary) and (ii) will not permit any Person (other than the Company or a
Restricted Subsidiary) to own any Capital Stock of any Restricted Subsidiary,
except, in each case, for (a) directors' qualifying shares, (b) Capital Stock of
a Restricted Subsidiary organized in a foreign jurisdiction required to be
issued to, or owned by, the government of such foreign jurisdiction or
individual or corporate citizens of such foreign jurisdiction in order for such
Restricted Subsidiary to transact business in such foreign jurisdiction, (c) a
sale of Capital Stock of a Restricted Subsidiary effected in accordance with the
"Asset Sales" and "Restricted Payments" covenants, (d) the issuance of
Capital Stock by a Restricted Subsidiary to a Person other than the Company or a
Restricted Subsidiary which issuance was made in accordance with the "Asset
Sales" and "Restricted Payments" covenants and (e) the Capital Stock of a
Restricted Subsidiary owned by a Person at the time such Restricted Subsidiary
became a Restricted Subsidiary or acquired by such Person in connection with the
formation of the Restricted Subsidiary; PROVIDED, HOWEVER, that any Capital
Stock retained by the Company or a Restricted Subsidiary in the case of clauses
(c), (d) or (e) shall be treated as an Investment for purposes of the
"Restricted Payments" covenant, if the amount of such Capital Stock represents
less than a majority of the Voting Stock of such Restricted Subsidiary.
LIMITATION ON LAYERING DEBT
The Indenture will provide that (i) the Company will not incur, or permit to
remain outstanding, any Indebtedness (including Acquired Indebtedness and
Permitted Indebtedness) other than the Notes, that is subordinated in right of
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payment to any Senior Indebtedness, unless such Indebtedness is also PARI PASSU
with, or subordinated in right of payment to, the Notes pursuant to
subordination provisions substantially similar to those contained in the
Indenture and (ii) the Company will not permit any Subsidiary Guarantor to
incur, or to permit to remain outstanding, any Indebtedness (including Acquired
Indebtedness and Permitted Indebtedness) other than such Subsidiary Guarantor's
Subsidiary Guaranty, that is subordinated in right of payment to any Guarantor
Senior Indebtedness unless such Indebtedness is also PARI PASSU with, or
subordinated in right of payment to, such Subsidiary Guarantee pursuant to
subordination provisions substantially similar to those contained in the
Indenture.
REPORTS
The Indenture will require that the Company file on a timely basis with the
Securities and Exchange Commission ("Commission"), to the extent such filings
are accepted by the Commission and whether or not the Company has a class of
securities registered under the Exchange Act, the annual reports, quarterly
reports and other documents that the Company would be required to file if it
were subject to Section 13 or 15 of the Exchange Act. The Company will also be
required (a) to file with the Trustee (with exhibits), and provide to each
Holder of Notes (without exhibits), without cost to such Holder, copies of such
reports and documents within 30 days after the date on which the Company files
such reports and documents with the Commission or the date on which the Company
would be required to file such reports and documents if the Company were so
required and (b) if filing such reports and documents with the Commission is not
accepted by the Commission or is prohibited under the Exchange Act, to supply at
its cost copies of such reports and documents (including any exhibits thereto)
to any Holder of Notes, securities analyst or prospective investor promptly upon
written request.
MERGER, CONSOLIDATION OR SALE OF ASSETS
The Indenture will provide that the Company will not, in any single transaction
or series of related transactions, consolidate or merge with or into any other
Person, or sell, assign, convey, transfer, lease or otherwise dispose of all or
substantially all of the properties and assets of the Company and its Restricted
Subsidiaries on a consolidated basis to any Person or group of Affiliated
Persons, and the Company will not permit any of its Restricted Subsidiaries to
enter into any such transaction or series of transactions if such transaction or
series of transaction, in the aggregate, would result in a sale, assignment,
conveyance, transfer, lease or other disposition of all or substantially all of
the properties and assets of the Company and its Restricted Subsidiaries on a
consolidated basis to any other Person or group of Affiliated Persons, unless at
the time and after giving effect thereto (i) either (a) if the transaction is a
merger or consolidation, the Company shall be the surviving Person of such
merger or consolidation, or (b) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or to which the
properties and assets of the Company or its Restricted Subsidiaries, as the case
may be, are sold, assigned, conveyed, transferred, leased or otherwise disposed
of (any such surviving Person or transferee Person being the "Surviving
Entity") shall be a corporation organized and existing under the laws of the
United States of America, any state thereof or the District of Columbia and
shall, in either case, expressly assume by a supplemental indenture to the
Indenture executed and delivered to the Trustee, in form satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture,
and, in each case, the Indenture shall remain in full force and effect; (ii)
immediately before and immediately after giving effect to such transaction or
series of transactions on a pro forma basis (and treating any Indebtedness not
previously an obligation of Company or any of its Restricted Subsidiaries in
connection with or as a result of such transaction or transactions as having
been incurred at the time of such transaction), no Default or Event of Default
shall have occurred and be continuing; (iii) except in the case of the
consolidation or merger of any Restricted Subsidiary with or into the Company,
immediately after giving effect to such transaction or transactions on a pro
forma basis, the Consolidated Net Worth of the Company (or the Surviving Entity
if the Company is not the continuing obligor under the Indenture) is at least
equal to the Consolidated Net Worth of the Company immediately before such
transaction or transactions; (iv) except in the case of the consolidation or
merger of the Company with or into a Wholly Owned Restricted Subsidiary or any
Restricted Subsidiary with or into the Company or any Wholly Owned Restricted
Subsidiary, immediately before and immediately after giving effect to such
transaction or transactions on a pro forma basis (on the assumption that the
transaction or transactions occurred on the first day of the period of four
fiscal quarters ending immediately prior to the consummation of such transaction
or transactions, with the appropriate adjustments with respect to the
transaction or transactions being included in such pro forma calculation) the
Company (or the Surviving Entity if the Company is not the continuing obligor
under the Indenture) could incur $1.00 of additional Indebtedness (excluding
Permitted
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Indebtedness) pursuant to the covenant described under "-- Incurrence of
Indebtedness"; (v) if any of the properties or assets of the Company or any of
its Restricted Subsidiaries would upon such transaction or series of related
transactions become subject to any Lien (other than a Permitted Lien), the
creation and imposition of such Lien shall have been in compliance with the
"Liens" covenant; (vi) if the Company is not the continuing obligor under the
Indenture, then any Subsidiary Guarantor, unless it is the Surviving Entity,
shall have by supplemental indenture to the Indenture confirmed that its
Subsidiary Guarantee of the Notes shall apply to the Surviving Entity's
obligations under the Indenture and the Notes; and (vii) the Company (or the
Surviving Entity if the Company is not the continuing obligor under the
Indenture) shall have delivered to the Trustee, in form and substance reasonably
satisfactory to the trustee, (a) an Officers' Certificate stating that such
consolidation, merger, transfer, lease or other disposition and the supplemental
indenture, if any, in respect thereto comply with the requirements under the
Indenture and (b) an Opinion of Counsel stating that the requirements of clause
(i) of this paragraph have been satisfied.
Upon any consolidation or merger or any sale, assignment, conveyance, transfer,
lease or other disposition of all or substantially all of the properties and
assets of the Company and its Restricted Subsidiaries on a consolidated basis in
accordance with the foregoing, in which the Company is not the continuing
corporation, the Surviving Entity shall succeed to, and be substituted for, and
may exercise every right and power of, the Company under the Indenture with the
same effect as if the Surviving Entity had been named as the Company therein,
and thereafter the Company, except in the case of a lease, will be discharged
from all obligations and covenants under the Indenture and the Notes and may be
dissolved and liquidated.
EVENTS OF DEFAULT AND REMEDIES
The Indenture will provide that each of the following constitutes an "Event of
Default":
(i) default for 30 days in the payment when due of interest on the Notes;
or
(ii) default in the Payment when due of the principal of or premium, if
any, on the Notes, whether such payment is due at maturity, upon redemption,
upon repurchase pursuant to a Change of Control Offer or a Net Proceeds Offer,
upon acceleration or otherwise; or
(iii) default in the performance or breach of the provisions described
under the "Merger, Consolidation or Sale of Assets" covenant, the failure to
make or consummate a Change of Control Offer in accordance with the provisions
of the "Change of Control" covenant or the failure to make or consummate a Net
Proceeds Offer in accordance with the provisions of the "Asset Sales"
covenant; or
(iv) failure by the Company or any Subsidiary Guarantor to comply with any
other term, covenant or agreement contained in the Notes, any Subsidiary
Guarantee or the Indenture (other than a default specified in (i), (ii) or (iii)
above) for a period of 60 days after written notice of such failure stating that
it is a "notice of default" under the Indenture and requiring the Company or
such Subsidiary Guarantor, as the case may be, to remedy the same shall have
been given (a) to the Company by the Trustee or (b) to the Company and the
Trustee by the Holders of at least 25% in aggregate principal amount of the
Notes then outstanding; or
(v) the occurrence and continuation beyond any applicable grace period of
any default in the payment when due on final maturity of the principal of or
premium, if any, on or interest on any Indebtedness of the Company (other than
the Notes) or any Restricted Subsidiary for money borrowed (other than
Non-Recourse Indebtedness) or any other default resulting in acceleration of any
Indebtedness of the Company or any Restricted Subsidiary for money borrowed
(other than Non-Recourse Indebtedness) PROVIDED that the aggregate principal
amount of such Indebtedness shall exceed $10,000,000, and PROVIDED FURTHER, that
if any such default is cured or waived or any such acceleration rescinded, or
such Indebtedness is repaid, within a period of 10 days from the continuation of
such default beyond the applicable grace period or the occurrence of such
acceleration, as the case may be, such Event of Default under the Indenture and
any consequential acceleration of the Notes shall be automatically rescinded, so
long as such rescission does not conflict with any judgment or decree; or
(vi) any Subsidiary Guarantee shall for any reason cease to be, or be
asserted by the Company or any Subsidiary Guarantor, as applicable, not to be,
in full force and effect, enforceable in accordance with its terms (except
pursuant to the release or termination of any such Subsidiary Guarantee in
accordance with the Indenture); or
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(vii) final judgments or orders rendered against the Company or any
Restricted Subsidiary that are unsatisfied and that require the payment in
money, either individually or in an aggregate amount, that is more than
$10,000,000 over the coverage under applicable insurance policies and either (a)
commencement by any creditor of an enforcement proceeding upon such judgment
(other than a judgment that is stayed by reason of pending appeal or otherwise)
or (b) the occurrence of a 60-day period during which a stay of such judgment or
order, by reason of pending appeal or otherwise, was not in effect; or
(viii) the entry of a decree or order by a court having jurisdiction in
the premises (a) for relief in respect of the Company or any Material Subsidiary
in an involuntary case or proceeding under any applicable federal or state
bankruptcy, insolvency, reorganization or other similar law or (b) adjudging the
Company or any Material Subsidiary bankrupt or insolvent, or approving a
petition seeking reorganization, arrangement, adjustment or composition of the
Company or any Material Subsidiary under any applicable federal or state law, or
appointing under any such law a custodian, receiver, liquidator, assignee,
trustee, sequestrator or other similar official of the Company or any Material
Subsidiary or of a substantial part of its consolidated assets, or ordering the
winding up or liquidation of its affairs, and the continuance of any such decree
or order for relief or any such other decree or order unstayed and in effect for
a period of 60 consecutive days; or
(ix) the commencement by the Company or any Material Subsidiary of a
voluntary case or proceeding under any applicable federal or state bankruptcy,
insolvency, reorganization or other similar law or any other case or proceeding
to be adjudicated bankrupt or insolvent, or the consent by the Company or any
Material Subsidiary to the entry of a decree or order for relief in respect
thereof in an involuntary case or proceeding under any applicable federal or
state bankruptcy, insolvency, reorganization or other similar law or to the
commencement of any bankruptcy or insolvency case or proceeding against it, or
the filing by the Company or any Material Subsidiary of a petition or consent
seeking reorganization or relief under any applicable federal or state law, or
the consent by it under any such law to the filing of any such petition or to
the appointment of or taking possession by a custodian, receiver, liquidator,
assignee, trustee or sequestrator (or other similar official) of any of the
Company or any Material Subsidiary or of any substantial part of its
consolidated assets, or the making by it of an assignment for the benefit of
creditors under any such law, or the admission by it in writing of its inability
to pay its debts generally as they become due or the taking of corporate action
by the Company or any Material Subsidiary in furtherance of any such action.
If any Event of Default (other than as specified in clause (viii) or (ix) above)
occurs and is continuing, the Trustee, by written notice to the Company, or the
Holders of at least 25% in aggregate principal amount of the Notes then
outstanding, by notice to the Trustee and the Company, may, and the Trustee upon
the request of the Holders of not less than 25% in aggregate principal amount of
the Notes then outstanding shall, declare the principal of, premium, if any, and
accrued interest on all of the Notes due and payable immediately, upon which
declaration all amounts payable in respect of the Notes shall be immediately due
and payable; PROVIDED, HOWEVER, that if any Senior Indebtedness is outstanding
pursuant to the New Credit Facility on the date of any such declaration, such
acceleration shall not be effective and such amounts shall not be payable until
the earlier of (i) the day which is five business days after notice of
acceleration is given to the Company and the Credit Facility Agent (unless such
Event of Default is cured or waived prior to such date) and (ii) the date of
acceleration of the Senior Indebtedness under the New Credit Facility. If an
Event of Default specified in clause (viii) or (ix) above occurs and is
continuing, then the principal of, premium, if any, and accrued interest on all
of the Notes shall automatically become and be immediately due and payable
without any declaration, notice or other act on the part of the Trustee or any
Holder.
After a declaration of acceleration under the Indenture, but before a judgment
or decree for payment of the money due has been obtained by the Trustee, the
Holders of a majority in aggregate principal amount of the outstanding Notes, by
written notice to the Company, the Subsidiary Guarantors and the Trustee, may
rescind such declaration if (i) the Company or any Subsidiary Guarantor has paid
or deposited with the Trustee a sum sufficient to pay (a) all sums paid or
advanced by the Trustee under the Indenture and the reasonable compensation,
expenses, disbursements and advances of the Trustee, its agents and counsel, (b)
all overdue interest on all Notes, (c) the principal of (and premium, if any,
on) any Notes which have become due otherwise than by such declaration of
acceleration and interest thereon at the rate borne by the Notes, and (d) to the
extent that payment of such interest is lawful, interest upon overdue interest
and overdue principal at the rate borne by the Notes (without duplication of any
amount paid or deposited pursuant to clause (b) or (c) ); (ii) the rescission
would not conflict with any judgment or decree of a court of competent
jurisdiction as
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certified to the Trustee by the Company; and (iii) all Events of Default, other
than the nonpayment of principal of (and premium, if any, on) or interest on the
Notes that has become due solely by such declaration of acceleration, have been
cured or waived.
No Holder of any of the Notes will have any right to institute any proceeding
with respect to the Indenture or any remedy thereunder, unless such Holder has
notified the Trustee of a continuing Event of Default and the Holders of at
least 25% in aggregate principal amount of the outstanding Notes have made
written request, and offered reasonable indemnity, to the Trustee to institute
such proceeding as Trustee under the Notes and the Indenture, the Trustee has
failed to institute such proceeding within 60 days after receipt of such notice
and the Trustee, within such 60-day period, has not received directions
inconsistent with such written request by Holders of a majority in aggregate
principal amount of the outstanding Notes. Such limitations will not apply,
however, to a suit instituted by a Holder of a Note for the enforcement of the
payment of the principal of (or premium, if any, on) or interest on such Note on
or after the respective due dates expressed in such Note.
During the existence of an Event of Default, the Trustee will be required to
exercise such rights and powers vested in it under the Indenture and use the
same degree of care and skill in its exercise thereof as a prudent person would
exercise under the circumstances in the conduct of such person's own affairs.
Subject to the provisions of the Indenture relating to the duties of the Trustee
in case an Event of Default shall occur and be continuing, the Trustee will not
be under any obligation to exercise any of its rights or powers under the
Indenture at the request or direction of any of the Holders of Notes unless such
Holders shall have offered to the Trustee reasonable security or indemnity.
Subject to certain provisions concerning the rights of the Trustee, the Holders
of a majority in aggregate principal amount of the outstanding Notes will have
the right to direct the time, method and place of conducting any proceeding for
any remedy available to the Trustee, or exercising any trust or power conferred
on the Trustee under the Indenture.
If a Default or an Event of Default occurs and is continuing and is known to the
Trustee, the Trustee shall mail to each Holder of Notes notice of the Default or
Event of Default within 60 days after the occurrence thereof. Except in the case
of a Default or an Event of Default in payment of principal of (or premium, if
any, on) or interest on any Notes, the Trustee may withhold the notice to the
Holders of Notes if the Trustee determines in good faith that withholding the
notice is in the interest of such Holders.
The Company is required to deliver to the Trustee annual and quarterly
statements regarding compliance with the Indenture, and the Company will also be
required, upon becoming aware of any Default or Event of Default, to deliver to
the Trustee a statement specifying such Default or Event of Default.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of the
obligations of the Company and the Subsidiary Guarantors discharged with respect
to the outstanding Notes ("Legal Defeasance"). Such Legal Defeasance means
that the Company and the Subsidiary Guarantors shall be deemed to have paid and
discharged the entire Indebtedness represented by the outstanding Notes and to
have been discharged from all their other obligations with respect to such Notes
and the Subsidiary Guarantees, except for (i) the rights of Holders of
outstanding Notes to receive payment in respect of the principal of and premium,
if any, and interest on such Notes when such payments are due, (ii) the
Company's obligations to replace any temporary Notes, register the transfer or
exchange of any Notes, replace mutilated, destroyed, lost or stolen Notes and
maintain an office or agency for payments in respect of the Notes, (iii) the
rights, powers, trusts, duties and immunities of the Trustee, and (iv) the Legal
Defeasance provisions of the Indenture. In addition, the Company may, at its
option and at any time, elect to have the obligations of the Company and each
Subsidiary Guarantor released with respect to certain covenants that are
described in the Indenture, some of which are described under "-- Certain
Covenants" above, and thereafter any omission to comply with such obligations
shall not constitute a Default or an Event of Default with respect to the Notes
("Covenant Defeasance"). In the event Covenant Defeasance occurs, certain
events (not including nonpayment, bankruptcy, insolvency and reorganization
events) described under "Events of Default and Remedies" will no longer
constitute an Event of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i) the
Company or any Subsidiary Guarantor must irrevocably deposit with the Trustee,
in trust, for the benefit of the Holders of the Notes, cash in United States
dollars, U.S. Government Obligations (as defined in the Indenture), or a
combination thereof, in such amounts as will be sufficient, in the opinion of a
nationally recognized firm of independent public accountants, to pay the
principal of (and
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premium, if any, on) and interest on the outstanding Notes to redemption or
maturity; (ii) the Company shall have delivered to the Trustee an Opinion of
Counsel to the effect that the Holders of the outstanding Notes will not
recognize income, gain or loss for federal income tax purposes as a result of
such Legal Defeasance or Covenant Defeasance and will be subject to federal
income tax on the same amounts, in the same manner and at the same times as
would have been the case if such Legal Defeasance or Covenant Defeasance had not
occurred (in the case of Legal Defeasance, such opinion must refer to and be
based upon a published ruling of the Internal Revenue Service or a change in
applicable federal income tax laws); (iii) no Default or Event of Default shall
have occurred and be continuing on the date of such deposit or insofar as
clauses (viii) and (ix) under the first paragraph under "Events of Default and
Remedies" are concerned, at any time during the period ending an the 91st day
after the date of deposit; (iv) such Legal Defeasance or Covenant Defeasance
shall not cause the Trustee to have a conflicting interest under the Indenture
or the Trust Indenture Act with respect to any securities of the Company or any
Subsidiary Guarantor; (v) such Legal Defeasance or Covenant Defeasance shall not
result in a breach or violation of, or constitute a default under, any material
agreement or instrument to which the Company or any Subsidiary Guarantor is a
party or by which it is bound, and (vi) the Company shall have delivered to the
Trustee an Officers' Certificate and an Opinion of Counsel, which, taken
together, state that all conditions precedent under the Indenture to either
Legal Defeasance or Covenant Defeasance, as the case may be, have been complied
with.
SATISFACTION AND DISCHARGE
The Indenture will be discharged and will cease to be of further effect (except
as to surviving rights of registration of transfer or exchange of the Notes, as
expressly provided for in the Indenture) as to all outstanding Notes when (i)
either (a) all the Notes theretofore authenticated and delivered (except lost,
stolen or destroyed Notes which have been replaced or paid and Notes for whose
payment money or certain United States governmental obligations have theretofore
been deposited in trust or segregated and held in trust by the Company and
thereafter repaid to the Company or discharged from such trust) have been
delivered to the Trustee for cancellation or (b) all Notes not theretofore
delivered to the Trustee for cancellation have become due and payable or will
become due and payable at their Stated Maturity within one year, or are to be
called for redemption within one year under arrangements satisfactory to the
Trustee for the serving of notice of redemption by the Trustee in the name, and
at the expense, of the Company, and the Company has irrevocably deposited or
caused to be deposited with the Trustee funds in an amount sufficient to pay and
discharge the entire indebtedness on the Notes not theretofore delivered to the
Trustee for cancellation, for principal of (and premium, if any, on) and
interest on the Notes to the date of deposit (in the case of Notes which have
become due and payable) or to the Stated Maturity or Redemption Date, as the
case may be, together with instructions from the Company irrevocably directing
the Trustee to apply such funds to the payment thereof at maturity or
redemption, as the case may be; (ii) the Company has paid all other sums then
due and payable under the Indenture by the Company; and (iii) the Company has
delivered to the Trustee an Officers' Certificate and an Opinion of Counsel,
which, taken together, state that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or the
Notes may be amended or supplemented with the consent of the Holders of at least
a majority in principal amount of the Notes then outstanding (including consents
obtained in connection with a tender offer or exchange offer for Notes), and any
existing default or compliance with any provision of the Indenture or the Notes
may be waived with the consent of the Holders of a majority in principal amount
of the then outstanding Notes (including consents obtained in connection with a
tender offer or exchange offer for Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a nonconsenting Holder): (i) reduce the
principal amount of Notes whose Holders must consent to an amendment, supplement
or waiver, (ii) reduce the principal of or change the Stated Maturity of any
Note or alter the provisions with respect to the redemption of the Notes (other
than provisions relating to the covenants described above under the caption
"Repurchase at the Option of Holders"), (iii) reduce the rate of or change the
time for payment of interest on any Note, (iv) waive a Default or Event of
Default in the payment of principal of (or the premium, if any, on) or interest
on the Notes (except a rescission of acceleration of the Notes by the Holders of
at least a majority in aggregate principal amount of the Notes and a waiver of
the payment default that resulted from such acceleration), (v) make any Note
payable in
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money other than that stated in the Notes, (vi) make any change in the
provisions of the Indenture relating to waivers of past Defaults or the rights
of Holders of Notes to receive payments of principal of or premium, if any, or
interest on the Notes, (vii) waive a redemption payment with respect to any Note
(other than a payment required by one of the covenants described above under the
caption "Repurchase at the Option of Holders"), (viii) reduce the relative
ranking of any Notes or Subsidiary Guarantees or (ix) make any change in the
foregoing amendment and waiver provisions.
Notwithstanding the foregoing, without the consent of any Holder of Notes, the
Company, the Subsidiary Guarantors and the Trustee may amend or supplement the
Indenture or the Notes to cure any ambiguity, defect or inconsistency, to add or
release any Subsidiary Guarantor pursuant to the terms of the Indenture, to
provide for uncertificated Notes in addition to or in place of certificated
Notes, to provide for the assumption of the Company's obligations to Holders of
Notes in the case of a merger or consolidation, to make any change that would
provide any additional rights or benefits to the Holders of Notes or that does
not adversely affect the interests of any such Holder in any material respect,
or to comply with requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
BANK OF MONTREAL TRUST COMPANY will serve as trustee under the Indenture. The
Trustee maintains normal banking relationships with the Company and its
Subsidiaries and may perform certain services for and transact other business
with the Company or its Subsidiaries from time to time in the ordinary course of
business.
The Indenture (including the provisions of the Trust Indenture Act incorporated
by reference therein) will contain limitations on the rights of the Trustee
thereunder, should it become a creditor of the Company, to obtain payment of
claims in certain cases or to realize on certain property received by it in
respect of any such claims, as security or otherwise. The Indenture will permit
the Trustee to engage in other transactions; PROVIDED, HOWEVER, if it acquires
any conflicting interest (as defined in the Trust Indenture Act) it must
eliminate such conflict or resign.
GOVERNING LAW
The Indenture, the Notes and the Subsidiary Guarantees will be governed by the
laws of the State of New York, without regard to the principles of conflicts of
law.
BOOK-ENTRY, DELIVERY AND FORM
The Notes will be issued in the form of a fully registered Global Certificate.
The Global Certificate will be deposited with, or on behalf of, The Depository
Trust Company, New York, New York (the "Depositary") and registered in the
name of the Depositary's nominee.
Except as set forth below, the Global Certificate may be transferred, in whole
and not in part, only to another nominee of the Depositary or to a successor of
the Depositary or its nominee.
The Depositary has advised the Company and the Underwriters as follows: It is a
limited-purpose trust company which was created to hold securities for its
participating organizations (the "Participants") and to facilitate the
clearance and settlement of transactions such securities between Participants
through electronic book-entry changes in accounts of its Participants.
Participants include securities brokers and dealers (including the
Underwriters), banks, trust companies, clearing corporations and certain other
organizations. Access to the Depositary's book-entry system is also available to
others, such as banks, brokers, dealers and trust companies that clear through
or maintain a custodial relationship with a Participant, either directly or
indirectly ("Indirect Participants"). Persons who are not Participants may
beneficially own securities held by the Depositary only through Participants or
indirect Participants.
The Depositary has also advised that pursuant to procedures established by it
(i) upon the issuance by the Company of the Notes, the Depositary will credit
the accounts of Participants designated by the Underwriters with the principal
amount of the Notes purchased by the Underwriters, and (ii) ownership of
beneficial interests in the Global Certificate will be shown on, and the
transfer of that ownership will be effected only through, records maintained by
the Depositary (with respect to Participants' interests), the Participants and
the Indirect Participants. The laws of some states require that certain persons
take physical delivery in definitive form of securities which they own.
Consequently, the ability to transfer beneficial interests in the Global
Certificate is limited to such extent.
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So long as a nominee of the Depositary is the registered owner of the Global
Certificate, such nominee will be considered the sole owner or holder of the
Notes for all purposes under the Indenture. Except as provided below, owners of
beneficial interests in the Global Certificate will not be entitled to have
Notes registered in their names, will not receive or be entitled to receive
physical delivery of Notes in definitive form and will not be considered the
owners or holders thereof under the Indenture.
Neither the Company, the Trustee, the paying agent, nor the Notes registrar will
have any responsibility or liability for any aspect of the records relating to
or payments made on account of beneficial ownership interests in the Global
Certificate, or for maintaining, supervising or reviewing any records relating
to such beneficial ownership interests.
Principal and interest payments on the Global Certificate registered in the name
of the Depositary's nominee will be made by the Company, either directly or
through a paying agent, to the Depositary's nominee as the registered owner of
the Global Certificate. Under the terms of the Indenture, the Company and the
Trustee will treat the persons in whose names the Notes are registered as the
owners of such Notes for the purpose of receiving payments of principal and
interest on such Notes and for all other purposes whatsoever. Therefore, neither
the Company, the Trustee nor any paying agent has any direct responsibility or
liability for the payment of principal or interest on the Notes to owners of
beneficial interests in the Global Certificate. The Depositary has advised the
Company and the Trustee that its present practice is, upon receipt of any
payment of principal or interest, to credit immediately the accounts of the
Participants with payment in amounts proportionate to their respective holdings
in principal amount of beneficial interests in the Global Certificate as shown
on the records of the Depositary. Payments by Participants and Indirect
Participants to owners of beneficial interests in the Global Certificate will be
governed by standing instructions and customary practices, as is now the case
with securities held for the accounts of customers in bearer form or registered
in "street name" and will be the responsibility of such Participants or
Indirect Participants.
As long as the Notes are represented by a Global Certificate, the Depositary's
nominee will be the holder of the Notes and therefore will be the only entity
that can exercise a right to repayment or repurchase of the Notes. See " --
Repurchase at the Option of Holders -- Change of Control" and " -- Asset
Sales." Notice by Participants or Indirect Participants or by owners of
beneficial interests in a Global Certificate held through such Participants or
Indirect Participants of the exercise of the option to elect repayment of
beneficial interests in Notes represented by a Global Certificate must be
transmitted to the Depositary in accordance with its procedures on a form
required by the Depositary and provided to Participants. In order to ensure that
the Depositary's nominee will timely exercise a right to repayment with respect
to a particular Note, the beneficial owner of such Note must instruct the broker
or other Participant or Indirect Participant through which it holds an interest
in such Note to notify the Depositary of its desire to exercise a night to
repayment. Different firms have cut-off times for accepting instructions from
their customers and, accordingly, each beneficial owner should consult the
broker or other Participant or Indirect Participant through which it holds an
interest in a Note in order to ascertain the cut-off time by which such an
instruction must be given in order for timely notice to be delivered to the
Depositary. The Company will not be liable for any delay in delivery of notices
of the exercise of the option to elect repayment.
The Company will issue Notes in definitive form in exchange for the Global
Certificate if, and only if, either (1) the Depositary is at any time unwilling
or unable to continue as depositary and a successor depositary is not appointed
by the Company within 90 days, or (2) an Event of Default has occurred and is
continuing and the Notes registrar has received a request from the Depositary to
issue Notes in definitive form in lieu of all or a portion of the Global
Certificate. In either instance, an owner of a beneficial interest in the Global
Certificate will be entitled to have Notes equal in principal amount to such
beneficial interest registered in its name and will be entitled to physical
delivery of such Notes in definitive form. Notes so issued in definitive form
will be issued in denominations of $1,000 and integral multiples thereof and
will be issued in registered form only, without coupons.
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CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference is
made to the Indenture for a full disclosure of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"ACQUIRED INDEBTEDNESS" means Indebtedness of a Person (a) assumed in
connection with an acquisition of properties or assets from such Person or (b)
outstanding at the time such Person becomes a Subsidiary of any other Person
(other than any Indebtedness incurred in connection with, or in contemplation
of, such acquisition or such Person becoming such a Subsidiary). Acquired
Indebtedness shall be deemed to be incurred on the date of the related
acquisition of properties or assets from any Person or the date the acquired
Person becomes a Subsidiary.
"ADJUSTED NET ASSETS" of a Subsidiary Guarantor at any date means the amount
by which the fair value of the properties and assets of such Subsidiary
Guarantor exceeds the total amount of liabilities, including, without
limitation, contingent liabilities (after giving effect to all other fixed and
contingent liabilities incurred or assumed on such date), but excluding
liabilities under its Subsidiary Guarantee, of such Subsidiary Guarantor at such
date.
"ADMINISTRATIVE SERVICES AGREEMENT" means the Administrative Services
Agreement, effective as of January 1, 1994, between the Company and Torch and
any other agreements with Torch or its subsidiaries relating to oil and gas
marketing services or contract operations.
"AFFILIATE" of any specified Person means (i) any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person or (ii) any other Person who is a director or
executive officer of (a) such specified Person or (b) any Person described in
the preceding clause (i) For the purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled
by" and "under common control with") as used with respect to any Person,
shall mean the possession, directly or indirectly, of the power to direct or
cause the direction of the management or policies of such Person, whether
through the ownership of voting securities, by agreement or otherwise; PROVIDED
that beneficial ownership of 10% or more of the Voting Stock of a Person shall
be deemed to be control.
"ASSET SALE" means any sale, issuance, conveyance, transfer, lease or other
disposition to any Person other than the Company or any of its Restricted
Subsidiaries (including, without limitation, by way of merger or consolidation)
(collectively, for purposes of this definition, a "transfer"), directly or
indirectly, in one or a series of related transactions, of (i) any Capital Stock
of any Restricted Subsidiary held by the Company or any Restricted Subsidiary,
(ii) all or substantially all of the properties and assets of the Company or any
of its Restricted Subsidiaries or (iii) any other properties or assets of the
Company or any of its Restricted Subsidiaries (including Production Payments)
other than (a) a disposition of hydrocarbons or other mineral products (other
than Production Payments), inventory, accounts receivable, cash, Cash
Equivalents or other property in the ordinary course of business, (b) any lease,
abandonment, disposition, relinquishment or farm-out of any oil and gas property
in the ordinary course of business, (c) the liquidation of property or assets
received in settlement of debts owing to the Company or any Restricted
Subsidiary as a result of foreclosure, perfection or enforcement of any Lien or
debt, which debts were owing to the Company or any Restricted Subsidiary in the
ordinary course of business of the Company or such Restricted Subsidiary, (d)
any transfer of properties or assets that are governed by, and made in
accordance with, the provisions described under "-- Merger, Consolidation or
Sale of Assets," (e) any transfer of properties or assets to an Unrestricted
Subsidiary or other Person, if permitted under the "Restricted Payments"
covenant, (f) any Production Payment created, incurred, issued, assumed or
guaranteed in connection with the financing of, and within 60 days after, the
acquisition of the Property that is subject thereto, where the holder of such
interest has recourse solely to such production or proceeds of production,
subject to the obligation of the grantor or transferor to operate and maintain,
or cause the subject interest to be operated and maintained, in a reasonably
prudent manner or other customary standard or subject to the obligation of the
grantor or transferor to indemnify for environmental, title or other matters
customary in the Oil and Gas Business, or (g) any transfer, in one or a series
of related Transactions, of properties or assets having a fair market value of
less than $2,000,000.
"AVERAGE LIFE" means, with respect to any Indebtedness, as at any date of
determination, the quotient obtained by dividing (i) the sum of the products of
(a) the number of years (and any portion thereof) from the date of determination
to the date or dates of each successive scheduled principal payment (including,
without limitation, any sinking fund or mandatory redemption payment
requirements) of such Indebtedness multiplied by (b) the amount of each such
principal payment by (ii) the sum of all such principal payments.
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"CAPITAL STOCK" means, with respect to any Person, any and all shares,
interests, participations, rights in or other equivalents in the equity
interests (however designated) in such Person, and any rights (other than debt
securities convertible into an equity interest), warrants or options exercisable
for, exchangeable for or convertible into such an equity interest in such
Person.
"CAPITALIZED LEASE OBLIGATION" means any obligation to pay rent or other
amounts under a lease of (or other agreement conveying the right to use) any
property (whether real, personal or mixed) that is required to be classified and
accounted for as a capital lease obligation under GAAP, and, for the purpose of
the Indenture, the amount of such obligation at any date shall be the
capitalized amount thereof at such date, determined in accordance with GAAP.
"CASH EQUIVALENTS" means (i) any evidence of Indebtedness with a maturity of
180 days or less issued or directly and fully guaranteed or insured by the
United States of America or any agency or instrumentality thereof (provided that
the full faith and credit of the United States of America is pledged in support
thereof); (ii) demand and time deposits and certificates of deposit or
acceptances with a maturity of 180 days or less of any financial institution
that is a member of the Federal Reserve System having combined capital and
surplus and undivided profits of not less than $500,000,000; (iii) commercial
paper with a maturity of 180 days or less issued by a corporation that is not an
Affiliate of the Company and is organized under the laws of any state of the
United States or the District of Columbia and rated at least A-1 by S&P or at
least P-1 by Moody's; (iv) repurchase obligations with a term of not more than
seven days for underlying securities of the types described in clause (i) above
entered into with any commercial bank meeting the specifications of clause (ii)
above; (v) overnight bank deposits and bankers' acceptances at any commercial
bank meeting the qualifications specified in clause (ii) above; (vi) deposits
available for withdrawal on demand with any commercial bank not meeting the
qualifications specified in clause (ii) above but which is organized under the
laws of any country in which the Company or any Restricted Subsidiary maintains
an office or is engaged in the Oil and Gas Business, PROVIDED that (a) all such
deposits are required to be made in such accounts in the ordinary course of
business, (b) such deposits do not at any one time exceed $5,000,000 in the
aggregate and (c) no funds so deposited remain on deposit in such bank for more
than 30 days; (vii) deposits available for withdrawal on demand with any
commercial bank not meeting the qualifications specified in clause (ii) above
but which is a lending bank under any of the Company's or any Restricted
Subsidiary's credit facilities, provided all such deposits do not exceed
$5,000,000 in the aggregate at any one time; and (viii) investments in money
market funds substantially all of whose assets comprise securities of the types
described in clauses (i) through (v).
"CHANGE OF CONTROL" means the occurrence of any of the following events: (i)
any "person" or "group" (as such terms are used in Sections 13(d) and 14(d)
of the Exchange Act) is or becomes the "beneficial owner" (as defined in Rule
13d-3 under the Exchange Act), directly or indirectly, of more than 50% of the
total voting power of the outstanding Voting Stock of the Company; (ii) the
Company is merged with or into or consolidated with another Person and,
immediately after giving effect to the merger or consolidation, (a) less than
50% of the total voting power of the outstanding Voting Stock of the surviving
or resulting Person is then "beneficially owned" (within the meaning of Rule
13d-3 under the Exchange Act) in the aggregate by the stockholders of the
Company immediately prior to such merger or consolidation, and (b) any
"person" or "group" (as defined in Section 13(d) (3) or 14(d) (2) of the
Exchange Act) has become the direct or indirect "beneficial owner" (as defined
in Rule 13d-3 under the Exchange Act) of more than 50% of the total voting power
of the Voting Stock of the surviving or resulting Person; (iii) the Company,
either individually or in conjunction with one or more Restricted Subsidiaries,
sells, assigns, conveys, transfers, leases or otherwise disposes of, or one or
more Restricted Subsidiaries sells, assigns, conveys, transfers, leases or
otherwise disposes of, all or substantially all of the properties and assets of
the Company and the Restricted Subsidiaries, taken as a whole (either in one
transaction or a series of related transactions), including Capital Stock of the
Restricted Subsidiaries, to any Person (other than the Company or a Wholly Owned
Restricted Subsidiary); (iv) during any consecutive two-year period, individuals
who at the beginning of such period constituted the Board of Directors of the
Company (together with any new directors whose election by such Board of
Directors or whose nomination for election by the stockholders of the Company
was approved by a vote of a majority of the directors then still in office who
were either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any reason to
constitute a majority of the Board of Directors of the Company then in office;
or (v) the liquidation or dissolution of the Company.
"COMMON STOCK" of any Person means Capital Stock of such Person that does not
rank prior, as to the payment of dividends or as to the distribution of assets
upon any voluntary or involuntary liquidation, dissolution or winding-up of such
Person, to shares of Capital Stock of any other class of such Person.
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"CONSOLIDATED FIXED CHARGE COVERAGE RATIO" means, for any period, the ratio of
(i) the sum of Consolidated Net Income, Consolidated Interest Expense,
Consolidated Income Tax Expense and Consolidated Non-cash Charges deducted in
computing Consolidated Net Income, in each case, for such period, of the Company
and its Restricted Subsidiaries on a consolidated basis, all determined in
accordance with GAAP, decreased (to the extent included in determining
Consolidated Net Income) by the sum of (a) the amount of deferred revenues that
are amortized during such period and are attributable to reserves that are
subject to Volumetric Production Payments and (b) amounts recorded in accordance
with GAAP as repayments of principal and interest pursuant to Dollar-Denominated
Production Payments, to (ii) the sum of such Consolidated Interest Expense for
such period; PROVIDED, HOWEVER, that (a) the Consolidated Fixed Charge Coverage
Ratio shall be calculated on the assumption that (1) the Indebtedness to be
incurred (and all other Indebtedness incurred after the first day of such period
of four full fiscal quarters referred to in the covenant described under
" -- Certain Covenants -- Incurrence of Indebtedness" through and including
the date of determination) and (if applicable) the application of the net
proceeds therefrom (and from any other such Indebtedness), including to
refinance other Indebtedness, had been incurred on the first day of such
four-quarter period and, in the case of Acquired Indebtedness, on the assumption
that the related transaction (whether by means of purchase, merger or otherwise)
also had occurred on such date with the appropriate adjustments with respect to
such acquisition being included in such pro forma calculation and (2) any
acquisition or disposition by the Company or any Restricted Subsidiary of any
properties or assets outside the ordinary course of business, or any repayment
of any principal amount of any Indebtedness of the Company or any Restricted
Subsidiary prior to the Stated Maturity thereof, in either case since the first
day of such period of four full fiscal quarters through and including the date
of determination, had been consummated on such first day of such four-quarter
period, (b) in making such computation, the Consolidated Interest Expense
attributable to interest on any Indebtedness required to be computed on a pro
forma basis in accordance with the covenant described under " -- Certain
Covenants -- Incurrence of Indebtedness" and (1) bearing a floating interest
rate shall be computed as if the rate in effect on the date of computation had
been the applicable rate for the entire period and (2) which was not outstanding
during the period for which the computation is being made but which bears, at
the option of the Company, a fixed or floating rate of interest, shall be
computed by applying, at the option of the Company, either the fixed or floating
rate, (c) in making such computation, the Consolidated Interest Expense
attributable to interest on any Indebtedness under a revolving credit facility
required to be computed on a pro forma basis in accordance with the covenant
described under " -- Certain Covenants -- Incurrence of Indebtedness" shall be
computed based upon the average daily balance of such Indebtedness during the
applicable period, PROVIDED THAT such average daily balance shall be reduced by
the amount of any repayment of Indebtedness under a revolving credit facility
during the applicable period, which repayment permanently reduced the
commitments or amounts available to be reborrowed under such facility, (d)
notwithstanding clauses (b) and (c) of this proviso, interest on Indebtedness
determined on a fluctuating basis, to the extent such interest is covered by
agreements relating to Interest Rate Protection Obligations, shall be deemed to
have accrued at the rate per annum resulting after giving effect to the
operation of such agreements, (e) in making such calculation, Consolidated
Interest Expense shall exclude interest attributable to Dollar-Denominated
Production Payments, and (f) if after the first day of the period referred to in
clause (i) of this definition the Company has retired any Indebtedness out of
the net cash proceeds of the issue and sale of shares of Qualified Capital Stock
of the Company within 30 days of such issuance and sale, Consolidated Interest
Expense shall be calculated on a pro forma basis as if such Indebtedness had
been retired on the first day of such period.
"CONSOLIDATED INCOME TAX EXPENSE" means, for any period, the provision for
federal, state, local and foreign income taxes (including any state franchise
taxes accounted for as income taxes in accordance with GAAP) of the Company and
its Restricted Subsidiaries for such period as determined on a consolidated
basis in accordance with GAAP.
"CONSOLIDATED INTEREST EXPENSE" means, for any period, without duplication,
(i) the sum of (a) the interest expense of the Company and its Restricted
Subsidiaries for such period as determined on a consolidated basis in accordance
with GAAP, including, without limitation, (1) any amortization of debt discount,
(2) the net cost under Interest Rate Protection Obligations (including any
amortization of discounts), (3) the interest portion of any deferred payment
obligation constituting Indebtedness, (4) all commissions, discounts and other
fees and charges owed with respect to letters of credit and bankers' acceptance
financing and (5) all accrued interest, in each case to the extent attributable
to such period, (b) to the extent any Indebtedness of any Person (other than the
Company or a Restricted Subsidiary) is guaranteed by the Company or any
Restricted Subsidiary, the aggregate amount of interest paid (to the extent not
accrued in a prior period) or accrued by such other Person during such period
attributable to any such Indebtedness, in each case to the extent
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attributable to that period, (c) the aggregate amount of the interest component
of Capitalized Lease Obligations paid (to the extent not accrued in a prior
period), accrued and/or scheduled to be paid or accrued by the Company and its
Restricted Subsidiaries during such period as determined on a consolidated basis
in accordance with GAAP and (d) the aggregate amount of dividends paid (to the
extent not accrued in a prior period) or accrued on Redeemable Capital Stock of
the Company and its Restricted Subsidiaries, to the extent such Redeemable
Capital Stock is owned by Persons other than the Company or its Restricted
Subsidiaries, and to the extent such dividends are not paid in Common Stock,
less (ii) to the extent included in (i) above, amortization of capitalized debt
issuance costs of the Company and its Restricted Subsidiaries during such
period.
"CONSOLIDATED NET INCOME" means, for any period, the consolidated net income
(or loss) of the Company and its Restricted Subsidiaries for such period as
determined in accordance with GAAP, adjusted by excluding (i) net after-tax
extraordinary gains or losses (less all fees and expenses relating thereto),
(ii) net after-tax gains or losses (less all fees and expenses relating thereto)
attributable to Asset Sales, (iii) the net income (or net loss) of any Person
(other than the Company or any of its Restricted Subsidiaries), in which the
Company or any of its Restricted Subsidiaries has an ownership interest, except
to the extent of the amount of dividends or other distributions or interest on
indebtedness actually paid to the Company or any of its Restricted Subsidiaries
in cash by such other Person during such period (regardless of whether such cash
dividends, distributions or interest on indebtedness is attributable to net
income (or net loss) of such Person during such period or during any prior
period), (iv) net income (or net loss) of any Person combined with the Company
or any of its Restricted Subsidiaries on a "pooling of interests" basis
attributable to any period prior to the date of combination and (v) the net
income of any Restricted Subsidiary to the extent that the declaration or
payment of dividends or similar distributions by that Restricted Subsidiary is
not at the date of determination permitted, directly or indirectly, by operation
of the terms of its charter or any agreement, instrument, judgment, decree,
order, statute, rule or governmental regulation applicable to that Restricted
Subsidiary or its stockholders.
"CONSOLIDATED NET WORTH" means, at any date, the consolidated stockholders'
equity of the Company and its Restricted Subsidiaries less the amount of such
stockholders' equity attributable to Redeemable Capital Stock or treasury stock
of the Company and its Restricted Subsidiaries, as determined in accordance with
GAAP.
"CONSOLIDATED NON-CASH CHARGES" means, for any period, the aggregate
depreciation, depletion, amortization and other non-cash expenses of the Company
and its Restricted Subsidiaries reducing Consolidated Net Income for such
period, determined on a consolidated basis in accordance with GAAP (excluding
any such non-cash charge which requires an accrual of or reserve for cash
charges for any future period).
"CREDIT FACILITY AGENT" means the "Agent" under the New Credit Facility,
initially Morgan Guaranty Trust Company of New York, and thereafter any Person
succeeding to substantially such function and notified to the Company as the new
Credit Facility Agent by the Person then acting in such capacity.
"DEFAULT" means any event that is or with the passage of time or the giving of
notice or both would be an Event of Default.
"DOLLAR-DENOMINATED PRODUCTION PAYMENTS" means production payment obligations
recorded as liabilities in accordance with GAAP, together with all undertakings
and obligations in connection therewith.
"EVENT OF DEFAULT" has the meaning set forth above under the caption "Events
of Default and Remedies."
"GAAP" means generally accepted accounting principles, consistently applied,
that are set forth in the opinions and pronouncements of the Accounting
Principles Board of the American Institute of Certified Public Accountants and
statements and pronouncements of the Financial Accounting Standards Board or in
such other statements by such other entity as may be approved by a significant
segment of the accounting profession of the United States of America, which are
effective on the date of the Indenture.
The term "GUARANTEE" means, as applied to any obligation, (i) a guarantee
(other than by endorsement of negotiable instruments or documents for collection
in the ordinary course of business), direct or indirect, in any manner, of any
part or all of such obligation and (ii) an agreement, direct or indirect,
contingent or otherwise, the practical effect of which is to assure in any way
the payment or performance (or payment of damages in the event of
nonperformance) of all or any part of such obligation, including, without
limiting the foregoing, the payment of amounts drawn down by letters of credit;
PROVIDED, HOWEVER, that a guarantee by any Person shall not include a
contractual commitment by one Person to invest in
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another Person PROVIDED that such Investment is otherwise permitted by the
Indenture. When used as a verb, "guarantee" shall have a corresponding
meaning.
"GUARANTOR SENIOR INDEBTEDNESS" means the principal of (and premium, if any,
on) and interest on (including interest accruing after the filing of a petition
initiating any proceeding pursuant to any bankruptcy law) and other amounts due
on or in connection with (including any fees, premiums, expenses, including
costs of collection, and indemnities) any Indebtedness of a Subsidiary
Guarantor, whether outstanding on the date of the Indenture or thereafter
created, incurred or assumed, unless, in the case of any particular
Indebtedness, the instrument creating or evidencing the same or pursuant to
which the same is outstanding expressly provides that such Indebtedness will be
PARI PASSU with or subordinated in right of payment to its Subsidiary Guarantee.
Notwithstanding the foregoing, Guarantor Senior Indebtedness of a Subsidiary
Guarantor will not include (i) Indebtedness of such Subsidiary Guarantor
evidenced by its Subsidiary Guarantee, (ii) Indebtedness of such Subsidiary
Guarantor that is expressly PARI PASSU with its Subsidiary Guarantee or is
expressly subordinated in right of payment to any other Indebtedness of such
Subsidiary Guarantor or its Subsidiary Guarantee, (iii) Indebtedness of such
Subsidiary Guarantor to the extent incurred in violation of the "Incurrence of
Indebtedness" covenant of the Indenture, (iv) Indebtedness of such Subsidiary
Guarantor to the Company or any of the Company's other Subsidiaries or to any
Affiliate of the Company or any Subsidiary of such Affiliate and (v) any
Indebtedness which when incurred and without regard to any election under
Section 1111 (b) of the Federal Bankruptcy Code is without recourse to such
Subsidiary Guarantor.
"HOLDER" means a Person in whose name a Note is registered in the Note
Register.
"INDEBTEDNESS" means, with respect to any Person, without duplication, (i) all
liabilities of such Person for borrowed money or for the deferred purchase price
of property or services (excluding any trade accounts payable and other accrued
current liabilities incurred in the ordinary course of business), and all
liabilities of such Person incurred in connection with any letters of credit,
bankers' acceptances or other similar credit transactions or any agreement to
purchase, redeem, exchange, convert or otherwise acquire for value any Capital
Stock of such Person or any warrants, rights or options to acquire such Capital
Stock outstanding on the date of the Indenture or thereafter, if, and to the
extent, any of the foregoing would appear as a liability upon a balance sheet of
such Person prepared in accordance with GAAP, (ii) all obligations of such
Person evidenced by bonds, notes, debentures or other similar instruments, if,
and to the extent, any of the foregoing would appear as a liability upon a
balance sheet of such Person prepared in accordance with GAAP, (iii) all
Indebtedness of such Person created or arising under any conditional sale or
other title retention agreement with respect to property acquired by such Person
(even if the rights and remedies of the seller or lender under such agreement in
the event of default are limited to repossession or sale of such property), but
excluding trade accounts payable arising in the ordinary course of business,
(iv) all Capitalized Lease Obligations of such Person, (v) all Indebtedness
referred to in the preceding clauses of other Persons and all dividends of other
Persons, the payment of which is secured by (or for which the holder of such
Indebtedness has an existing right to be secured by) any Lien upon property
(including, without limitation, accounts and contract rights) owned by such
Person, even though such Person has not assumed or become liable for the payment
of such Indebtedness (the amount of such obligation being deemed to be the
lesser of the value of such property or asset or the amount of the obligation so
secured), (vi) all guarantees by such Person of Indebtedness referred to in this
definition (including, with respect to any Production Payment, any warranties or
guaranties of production or payment by such Person with respect to such
Production Payment but excluding other contractual obligations of such Person
with respect to such Production Payment), (vii) all Redeemable Capital Stock of
such Person valued at the greater of its voluntary or involuntary maximum fixed
repurchase price plus accrued dividends and (viii) all obligations of such
Person under or in respect of currency exchange contracts, oil or natural gas
price hedging arrangements and Interest Rate Protection Obligations. For
purposes hereof, the "maximum fixed repurchase price" of any Redeemable
Capital Stock which does not have a fixed repurchase price shall be calculated
in accordance with the terms of such Redeemable Capital Stock as if such
Redeemable Capital Stock were purchased on any date on which Indebtedness shall
be required to be determined pursuant to the Indenture, and if such price is
based upon, or measured by, the fair market value of such Redeemable Capital
Stock, such fair market value shall be determined in good faith by the board of
directors of the issuer of such Redeemable Capital Stock; PROVIDED, HOWEVER,
that if such Redeemable Capital Stock is not at the date of determination
permitted or required to be repurchased, the "maximum fixed repurchase price"
shall be the book value of such Redeemable Capital Stock. Subject to clause (vi)
of the first sentence of this definition, neither Dollar-Denominated Production
Payments nor Volumetric Production Payments shall be deemed to be Indebtedness.
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"INTEREST RATE PROTECTION OBLIGATIONS" means the obligations of any Person
pursuant to any arrangement with any other Person whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such Person
calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements or arrangements designed to protect
against or manage such Person's and any of its Subsidiaries' exposure to
fluctuations in interest rates.
"INVESTMENT" means, with respect to any Person, any direct or indirect
advance, loan, guarantee of Indebtedness or other extension of credit or capital
contribution to (by means of any transfer of cash or other property or assets to
others or any payment for property, assets or services for the account or use of
others), or any purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities (including derivatives) or
evidences of Indebtedness issued by, any other Person. In addition, (i) the fair
market value of the net assets of any Restricted Subsidiary at the time that
such Restricted Subsidiary is designated an Unrestricted Subsidiary shall be
deemed to be an "Investment" made by the Company in such Unrestricted
Subsidiary at such time and (ii) the fair market value of Capital Stock retained
by the Company or a Restricted Subsidiary in connection with the sale or
issuance of Capital Stock of a Restricted Subsidiary in accordance with the
"Ownership of Capital Stock" covenant that, as a result of such transaction,
is no longer a Restricted Subsidiary shall be deemed to be an "Investment"
made at the time of such transaction. "Investments" shall exclude (a)
extensions of trade credit under a joint operating agreement or otherwise in the
ordinary course of business, workers' compensation, utility, lease and similar
deposits and prepaid expenses made in the ordinary course of business, (b)
Interest Rate Protection Obligations entered into in the ordinary course of
business or as required by any Permitted Indebtedness or any other Indebtedness
incurred in compliance with the "Incurrence of Indebtedness" covenant, but
only to the extent that the stated aggregate notional amounts of such Interest
Rate Protection Obligations do not exceed 105% of the aggregate principal amount
of such Indebtedness to which such Interest Rate Protection Obligations relate,
(c) bonds, notes, debentures or other securities received in compliance with the
"Asset Sales" covenant, and (d) endorsements of negotiable instruments and
documents for collection in the ordinary course of business.
"LIEN" means any mortgage, charge, pledge, lien (statutory or other), security
interest, hypothecation, assignment for security, claim, or preference or
priority or other encumbrance or similar agreement or preferential arrangement
of any kind or nature whatsoever (including, without limitation, any agreement
to give or grant a Lien or any lease, conditional sale or other title retention
agreement having substantially the same economic effect as any of the foregoing)
upon or with respect to any property of any kind. A Person shall be deemed to
own subject to a Lien any property which such Person has acquired or holds
subject to the interest of a vendor or lessor under any conditional sale
agreement, capital lease or other title retention agreement.
"MATERIAL SUBSIDIARY" means, at any particular time, any Restricted Subsidiary
that, together with its Subsidiaries, (a) accounted for more than 5% of the
consolidated revenues of the Company and its Restricted Subsidiaries for the
most recently completed fiscal year of the Company, or (b) was the owner of more
than 5% of the consolidated assets of the Company and its Restricted
Subsidiaries at the end of such fiscal year, all as shown in the case of (a) and
(b) on the consolidated financial statements of the Company and its Restricted
Subsidiaries for such fiscal year.
"MATURITY" means, with respect to any Note, the date on which any principal of
such Note becomes due and payable as provided therein or in the Indenture,
whether at the Stated Maturity with respect to such principal or by declaration
of acceleration, call for redemption or purchase or otherwise.
"MOODY'S" means Moody's Investors Service, Inc. and its successors.
"NET CASH PROCEEDS" means, with respect to any Asset Sale, the proceeds
thereof in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents (except to the extent that such obligations are financed or sold
with recourse to the Company or any Restricted Subsidiary), net of (i) brokerage
commissions and other fees and expenses (including fees and expenses of legal
counsel and investment banks) related to such Asset Sale, (ii) provisions for
all taxes payable as a result of such Asset Sale, (iii) amounts required to be
paid to any Person (other than the Company or any Restricted Subsidiary) owning
a beneficial interest in the assets subject to the Asset Sale and (iv)
appropriate amounts to be provided by the Company or any Restricted Subsidiary,
as the case may be, as a reserve required in accordance with GAAP consistently
applied against any liabilities associated with such Asset Sale and retained by
the Company or any Restricted Subsidiary, as the case may be, after such Asset
Sale, including, without limitation, pension and other post-employment benefit
liabilities,
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liabilities related to environmental matters and liabilities under any
indemnification obligations associated with such Asset Sale, all as reflected in
an Officers' Certificate delivered to the Trustee; PROVIDED, HOWEVER, that any
amounts remaining after adjustments, revaluations or liquidations of such
reserves shall constitute Net Cash Proceeds.
"NEW CREDIT FACILITY" means that certain Credit Agreement, to be dated as of
April 9, 1997, among the Company, certain Subsidiaries of the Company, the
Credit Facility Agent, and certain lenders named therein, as the same may be
amended, modified, supplemented, extended, restated, replaced, renewed or
refinanced from time to time.
"NON-PAYMENT EVENT OF DEFAULT" means any event (other than a Payment Event of
Default), the occurrence of which (with or without notice or the passage of
time) entitles one or more Persons to accelerate the maturity of any Specified
Senior Indebtedness.
"NON-RECOURSE INDEBTEDNESS" means indebtedness of the Company or any
Restricted Subsidiary incurred in connection with the acquisition by the Company
or such Restricted Subsidiary of any property with respect to which (i) the
holders of such indebtedness agree that they will look solely to the property so
acquired and securing such indebtedness, and neither the Company nor any
Restricted Subsidiary (a) provides direct or indirect credit support, including
any undertaking, agreement or instrument that would constitute indebtedness
(other than the grant of a Lien on such acquired property) or (b) is directly or
indirectly liable for such indebtedness, and (ii) no default with respect to
such indebtedness would cause, or permit (after notice or passage of time or
otherwise), according to the terms thereof, any holder (or any representative of
any such holder) of any other indebtedness of the Company or a Restricted
Subsidiary to declare a default on such other indebtedness or cause the payment,
repurchase, redemption, defeasance or other acquisition or retirement for value
thereof to be accelerated or payable prior to any scheduled principal payment,
scheduled sinking fund payment or maturity.
"NOTE REGISTER" means the register maintained by or for the Company in which
the Company shall provide for the registration of the Notes and of transfer of
the Notes.
"OIL AND GAS BUSINESS" means (i) the acquisition, exploration development,
operation and disposition of interests in oil, gas and other hydrocarbon
properties, (ii) the gathering, marketing, treating, processing, storage,
selling and transporting of any production from such interests or properties,
(iii) any business relating to or arising from exploration for or development,
production, treatment, processing, storage, transportation or marketing of oil,
gas, hydrocarbons and other minerals and products produced in association
therewith and (iv) any activity necessary, appropriate or incidental to the
activities described in the foregoing clauses (i) through (iii) of this
definition.
"PARI PASSU INDEBTEDNESS" means any Indebtedness of the Company that is PARI
PASSU in right of payment to the Notes.
"PAYMENT EVENT OF DEFAULT" means any default in the payment or required
prepayment of principal of (or premium, if any, on) or interest on any Specified
Senior Indebtedness when due (whether at final maturity, upon scheduled
installment, upon acceleration or otherwise).
"PERMITTED INDEBTEDNESS" means any of the following:
(i) Indebtedness under the New Credit Facility in an aggregate principal
amount at any one time outstanding not to exceed $90,000,000 (less any amounts
applied to repay or prepay permanently any such Indebtedness in accordance with
the "Asset Sales" covenant), and any guarantee of any such Indebtedness
(including by any Subsidiary) and any fees, premiums, expenses (including costs
of collection), indemnities and other amounts payable in connection with such
Indebtedness;
(ii) Indebtedness under the Notes and the Subsidiary Guarantees;
(iii) Indebtedness outstanding on the date of the Indenture (and not
repaid or defeased with the proceeds of the offering of the Notes);
(iv) obligations of the Company or a Restricted Subsidiary pursuant to
Interest Rate Protection Obligations, but only to the extent that the stated
aggregate notional amounts of such obligations do not exceed 105% of the
aggregate principal amount of the Indebtedness covered by such Interest Rate
Protection Obligations; obligations under currency exchange contracts entered
into in the ordinary course of business; and hedging arrangements that the
Company or a Restricted Subsidiary enters into in the ordinary course of
business for the purpose of protecting its production against fluctuations in
oil or natural gas prices;
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(v) Indebtedness of the Company to a Wholly Owned Restricted Subsidiary
and Indebtedness of a Restricted Subsidiary to the Company or a Wholly Owned
Restricted Subsidiary; PROVIDED, HOWEVER, that upon any subsequent issuance or
transfer of any Capital Stock or any other event which results in any such
Wholly Owned Restricted Subsidiary ceasing to be a Wholly Owned Restricted
Subsidiary or any other subsequent transfer of any such Indebtedness (except to
the Company or a Wholly Owned Restricted Subsidiary), such Indebtedness shall be
deemed, in each case, to be incurred and shall be treated as an incurrence for
purposes of the "Incurrence of Indebtedness" covenant at the time the Wholly
Owned Restricted Subsidiary in question ceased to be a Wholly Owned Restricted
Subsidiary;
(vi) in-kind obligations relating to net gas balancing positions arising
in the ordinary course of business and consistent with past practice;
(vii) Indebtedness in respect of bid, performance or surety bonds issued
for the account of the Company or any Restricted Subsidiary in the ordinary
course of business, including guaranties and letters of credit supporting such
bid, performance or surety obligations (in each case other than for an
obligation for money borrowed);
(viii) any guarantee of Senior Indebtedness or Guarantor Senior
Indebtedness, incurred in compliance with the "Limitation on Indebtedness"
covenant, by a Restricted Subsidiary or the Company;
(ix) any renewals, substitutions, refinancings or replacements (each, for
purposes of this clause, a "refinancing") by the Company or a Restricted
Subsidiary of any Indebtedness incurred pursuant to clause (ii) or (iii) of this
definition, including any successive refinancings by the Company or such
Restricted Subsidiary, so long as (a) any such new Indebtedness shall be in a
principal amount that does not exceed the principal amount (or, if such
Indebtedness being refinanced provides for an amount less than the principal
amount thereof to be due and payable upon a declaration of acceleration thereof,
such lesser amount as of the date of determination) so refinanced plus the
amount of any premium required to be paid in connection with such refinancing
pursuant to the terms of the Indebtedness refinanced or the amount of any
premium reasonably determined by the Company or such Restricted Subsidiary as
necessary to accomplish such refinancing, plus the amount of expenses of the
Company or such Restricted Subsidiary incurred in connection with such
refinancing, and (b) in the case of any refinancing of Indebtedness of the
Company that is not Senior Indebtedness, such new Indebtedness is either PARI
PASSU with the Notes or subordinated to the Notes at least to the same extent as
the Indebtedness being refinanced and (c) such new Indebtedness has an Average
Life equal to or longer than the Average Life of the Indebtedness being
refinanced and a final Stated Maturity equal to or later than the final Stated
Maturity of the Indebtedness being refinanced; and
(x) any additional Indebtedness in an aggregate principal amount not in
excess of $15,000,000 at any one time outstanding.
"PERMITTED INVESTMENTS" means any of the following: (i) Investments in Cash
Equivalents; (ii) Investments in the Company or any of its Restricted
Subsidiaries; (iii) Investments by the Company or any of its Restricted
Subsidiaries in another Person, if as a result of such Investment (a) such other
Person becomes a Restricted Subsidiary or (b) such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all of
its properties and Assets to, the Company or a Restricted Subsidiary; (iv)
Investments and expenditures made in the ordinary course of, and of a nature
that is or shall have become customary in, the Oil and Gas Business as a means
of actively exploiting, exploring for, acquiring, developing, processing,
gathering, marketing or transporting oil and gas through agreements,
transactions, interests or arrangements which permit a Person to share risks or
costs, comply with regulatory requirements regarding local ownership or satisfy
other objectives customarily achieved through the conduct of Oil and Gas
Business jointly with third parties, including, without limitation, (a)
ownership interests in oil and gas properties or gathering systems and (b)
Investments and expenditures in the form of or pursuant to operating agreements,
processing agreements, farm-in agreements, farm-out agreements, development
agreements, area of mutual interest agreements, unitization agreements, pooling
arrangements, joint bidding agreements, service contracts, joint venture
agreements, partnership agreements (whether general or limited), limited
liability company agreements, subscription agreements, stock purchase agreements
and other similar agreements with third parties (including Unrestricted
Subsidiaries); (v) entry into any hedging arrangements in the ordinary course of
business for the purpose of protecting the Company's or any Restricted
Subsidiary's production against fluctuations in oil or natural gas prices; (vi)
entry into any currency exchange contract in the ordinary course of business;
and (vii) Investments in stock, obligations or securities received in settlement
of debts owing to the Company or a Restricted Subsidiary as a result of
bankruptcy or insolvency proceedings or upon the
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foreclosure, perfection or enforcement of any Lien in favor of the Company or a
Restricted Subsidiary, in each case as to debt owing to the Company or a
Restricted Subsidiary that arose in the ordinary course of business of the
Company or any such Restricted Subsidiary.
"PERMITTED JUNIOR SECURITIES" means any equity securities or subordinated debt
securities of the Company or any successor obligor with respect to the Senior
Indebtedness provided for by a plan of reorganization or readjustment that, in
the case of any such subordinated debt securities, are subordinated in right of
payment to all Senior Indebtedness that may at the time be outstanding to
substantially the same degree as, or to a greater extent than, the Notes are so
subordinated as provided in the Indenture.
"PERMITTED LIENS" means any and all of the following: (i) Liens existing as of
the date the Notes are first issued; (ii) Liens securing the Notes, the
Subsidiary Guaranties and other obligations arising under the Indenture; (iii)
any lien existing on any property of a Person at the time such Person is merged
or consolidated with or into the Company or a Subsidiary Guarantor or becomes a
Restricted Subsidiary that is a Subsidiary Guarantor (and not incurred in
anticipation of such transaction), PROVIDED that such Liens are not extended to
other property of the Company or the Subsidiary Guarantors; (iv) any Lien
existing on any property or assets at the time of the acquisition thereof (and
not incurred in anticipation of such transaction), PROVIDED that such Liens are
not extended to other property or assets of the Company or the Subsidiary
Guarantors; (v) Liens to secure any permitted extension, renewal, refinancing,
refunding or exchange (or successive extensions, renewals, refinancings,
refundings or exchanges), in whole or in part, of or for any indebtedness
secured by Liens referred to in clauses (i), (ii), (iii) and (iv) above;
PROVIDED, HOWEVER, that (a) such new Lien shall be limited to all or part of the
same property that secured the original Lien, plus improvements on such property
and (b) the Indebtedness secured by such Lien at such time is not increased to
any amount greater than the sum of (1) the outstanding principal amount of the
indebtedness secured by such original Lien immediately prior to such extension,
renewal, refinancing, refunding or exchange and (2) an amount necessary to pay
any fees and expenses, including premiums, related to such refinancing,
refunding, extension, renewal or replacement; and (vi) Liens in favor of the
Company.
"PERSON" means any individual, corporation, limited liability company,
partnership, joint venture, association, joint stock company, trust,
unincorporated organization or government or any agency or political subdivision
thereof.
"PREFERRED STOCK" means, with respect to any Person, any and all shares,
interests, participations or other equivalents (however designated) of such
Person's preferred or preference stock, whether now outstanding or issued after
the date of the Indenture, including, without limitation, all classes and series
of preferred or preference stock of such Person.
"PRODUCTION PAYMENTS" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"QUALIFIED CAPITAL STOCK" of any Person means any and all Capital Stock of
such Person other than Redeemable Capital Stock.
"REDEEMABLE CAPITAL STOCK" means any Capital Stock that, either by its terms,
by the terms of any security into which it is convertible or exchangeable or by
contract or otherwise, is, or upon the happening of an event or passage of time
would be, required to be redeemed prior to the final Stated Maturity of the
Notes or is redeemable at the option of the holder thereof at any time prior to
such final Stated Maturity, or is convertible into or exchangeable for debt
securities at any time prior to such final Stated Maturity.
"RESTRICTED SUBSIDIARY" means any Subsidiary of the Company, whether existing
on or after the date of the Indenture, unless such Subsidiary of the Company is
an Unrestricted Subsidiary or is designated as an Unrestricted Subsidiary
pursuant to the terms of the Indenture.
"S&P" means Standard and Poor's Ratings Service, a division of McGraw-Hill,
Inc., and its successors.
"SENIOR INDEBTEDNESS" means the principal of (and premium, if any, on) and
interest on (including interest accruing after the filing of a petition
initiating any proceeding pursuant to any bankruptcy law, whether or not payable
or allowable in such proceeding) and other amounts due on or in connection with
(including any fees, premiums, expenses, including costs of collection, and
indemnities) any Indebtedness of the Company, whether outstanding on the date of
the Indenture or thereafter created, incurred or assumed, unless, in the case of
any particular Indebtedness, the instrument creating or evidencing the same or
pursuant to which the same is outstanding expressly provides that such
Indebtedness will be PARI PASSU with or subordinated in right of payment to the
Notes. Notwithstanding the foregoing, "Senior Indebtedness" will not
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include (i) Indebtedness evidenced by the Notes, (ii) Indebtedness of the
Company that is Pari Passu Indebtedness or is expressly subordinated in right of
payment to any other Indebtedness of the Company, (iii) Indebtedness that is
represented by Redeemable Capital Stock, (iv) Indebtedness of the Company to the
extent incurred in violation of the covenant described under
"-- Covenants -- Incurrence of Indebtedness, (v) Indebtedness of the Company to
any Subsidiary of the Company or any other Affiliate of the Company or any
subsidiary of such Affiliate and (vi) Indebtedness which when incurred and
without regard to any election under Section 1111(b) of the Federal Bankruptcy
Code is without recourse to the Company.
"SPECIFIED SENIOR INDEBTEDNESS" means (i) for so long as any Senior
Indebtedness is outstanding under the New Credit Facility, all Senior
Indebtedness of the Company in respect of the New Credit Facility and any
renewals, amendments, extensions, supplements, modifications, deferrals,
refinancings, or replacements (each, for purposes of this definition, a
"refinancing") thereof by the Company, including any successive refinancings
thereof by the Company and (ii) any other Senior Indebtedness and any
refinancings thereof by the Company having a principal amount of at least
$10,000,000 as of the date of determination and PROVIDED that the agreements,
indentures or other instruments evidencing such Senior Indebtedness or pursuant
to which such Senior Indebtedness was issued specifically designates such Senior
Indebtedness as "Specified Senior Indebtedness" for purposes of the Indenture.
For purposes of this definition, a refinancing of any Specified Senior
Indebtedness shall be treated as Specified Senior Indebtedness only if the
Indebtedness issued in such refinancing ranks or would rank PARI PASSU with the
Specified Senior Indebtedness refinanced and only if Indebtedness issued in such
refinancing is permitted by the covenant described under
"-- Covenants -- Incurrence of Indebtedness."
"STATED MATURITY" means, when used with respect to any Note or any installment
of interest thereon, the date specified in such Note as the fixed date on which
the principal of such Note or such installment of interest is due and payable,
and, when used with respect to any other Indebtedness or any installment of
interest thereon, means the date specified in the instrument evidencing or
governing such Indebtedness as the fixed date on which the principal of such
Indebtedness or such installment of interest is due and payable.
"SUBORDINATED INDEBTEDNESS" means Indebtedness of the Company which is
expressly subordinated in right of payment to the Notes.
"SUBSIDIARY" means, with respect to any Person, (i) a corporation a majority
of whose Voting Stock is at the time, directly or indirectly, owned by such
Person, by one or more Subsidiaries of such Person or by such Person and one or
more Subsidiaries thereof or (ii) any other Person (other than a corporation,
including, without limitation, a joint venture, in which such Person, one or
more Subsidiaries thereof or such Person and one or more Subsidiaries thereof,
directly or indirectly, at the date of determination thereof, have at least
majority ownership interest entitled to vote in the election of directors,
managers or trustees thereof (or other Persons performing similar functions).
"SUBSIDIARY GUARANTEE" means any guarantee of the Notes by any Subsidiary
Guarantor in accordance with the provisions set forth in "-- Senior
Subordinated Guarantee of Notes."
"SUBSIDIARY GUARANTOR" means (i) initially the several Restricted Subsidiaries
named in the Indenture as a party thereto, (ii) each of the other Restricted
Subsidiaries, if any, executing a supplemental indenture in compliance with the
provisions described under "-- Limitation on Guarantees of Indebtedness by
Restricted Subsidiaries" and (iii) any Person that becomes a successor
guarantor of the Notes in compliance with the provisions described under
"Senior Subordinated Guarantee of Notes."
"UNRESTRICTED SUBSIDIARY" means (i) any Subsidiary of the Company that at the
time of determination is designated an Unrestricted Subsidiary by the Board of
Directors of the Company as provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors of the Company may designate any
Subsidiary of the Company as an Unrestricted Subsidiary so long as (a) neither
the Company nor any Restricted Subsidiary is directly or indirectly liable
pursuant to the terms of any Indebtedness of such Subsidiary; (b) no default
with respect to any Indebtedness of such Subsidiary would permit (upon notice,
lapse of time or otherwise) any holder of any other Indebtedness of the Company
or any Restricted Subsidiary to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its Stated
Maturity; (c) neither the Company nor any Restricted Subsidiary has made an
Investment in such Subsidiary unless such Investment was made pursuant to, and
in accordance with, the "Restricted Payments" covenant (other than Investments
of the type described in clause (iv) of the definition of Permitted
Investments); and (d) such designation shall not result in the creation or
imposition of any Lien on any of the properties or assets of the
88
<PAGE>
Company or any Restricted Subsidiary (other than any Permitted Lien or any Lien
the creation or imposition of which shall have been in compliance with the
"Liens" covenant); PROVIDED, HOWEVER, that with respect to clause (a), the
Company or a Restricted Subsidiary may be liable for Indebtedness of an
Unrestricted Subsidiary if (x) such liability constituted a Permitted Investment
or a Restricted Payment permitted by the "Restricted Payments" covenant, in
each case at the time of incurrence, or (y) the liability would be a Permitted
Investment at the time of designation of such Subsidiary as an Unrestricted
Subsidiary. Any such designation by the Board of Directors of the Company shall
be evidenced to the Trustee by filing a Board Resolution with the Trustee giving
effect to such designation. The Board of Directors of the Company may designate
any Unrestricted Subsidiary as a Restricted Subsidiary if, immediately after
giving effect to such designation, (i) no Default or Event of Default shall have
occurred and be continuing, (ii) the Company could incur $1.00 of additional
Indebtedness (other than Permitted Indebtedness) under the "Incurrence of
Indebtedness" covenant and (iii) if any of the properties or assets of the
Company or any of its Restricted Subsidiaries would upon such designation become
subject to any Lien (other than a Permitted Lien), the creation or imposition of
such Lien shall have been in compliance with the "Liens" covenant.
"VOLUMETRIC PRODUCTION PAYMENTS" means production payment obligations recorded
as deferred revenue in accordance with GAAP, together with all undertakings and
obligations in connection therewith.
"VOTING STOCK" means any class or classes of Capital Stock pursuant to which
the holders thereof have the general voting power under ordinary circumstances
to elect at least a majority of the board of directors, managers or trustees of
any Person (irrespective of whether or not, at the time, stock of any other
class or classes shall have, or might have, voting power by reason of the
happening of any contingency).
"WHOLLY OWNED RESTRICTED SUBSIDIARY" means any Restricted Subsidiary to the
extent (i) all of the Capital Stock or other ownership interests in such
Restricted Subsidiary, other than any directors' qualifying shares mandated by
applicable law, is owned directly or indirectly by the Company or (ii) such
Restricted Subsidiary is organized in a foreign jurisdiction and is required by
the applicable laws and regulations of such foreign jurisdiction to be partially
owned by the government of such foreign jurisdiction or individual or corporate
citizens of such foreign jurisdiction in order for such Restricted Subsidiary to
transact business in such foreign jurisdiction, PROVIDED that the Company,
directly or indirectly, owns the remaining Capital Stock or ownership interest
in such Restricted Subsidiary and, by contract or otherwise, controls the
management and business of such Restricted Subsidiary and derives the economic
benefits of ownership of such Restricted Subsidiary to substantially the same
extent as if such Restricted Subsidiary were a wholly owned Subsidiary.
89
<PAGE>
UNDERWRITING
Under the terms and subject to the conditions contained in the Underwriting
Agreement dated April 3, 1997 (the "Underwriting Agreement"), J.P. Morgan
Securities Inc. and Chase Securities Inc. (collectively, the "Underwriters")
have severally agreed to purchase from the Company, and the Company has agreed
to sell to them, severally, the principal amount of Notes set forth opposite
their names below. Under the terms and conditions of the Underwriting Agreement,
the Underwriters are obligated to take and pay for the entire principal amount
of the Notes, if any Notes are purchased.
----------------
PRINCIPAL AMOUNT
----------------
J.P. Morgan Securities Inc........... 70,000,000
Chase Securities Inc................. 30,000,000
----------------
Total................. $100,000,000
================
The Underwriters propose initially to offer the Notes directly to the public at
the price set forth on the cover page of this Prospectus and to certain dealers
at such price less a concession not in excess of 1.50% of the principal amount
of the Notes. The Underwriters may allow, and such dealers may re-allow, a
concession not in excess of 0.25% of the principal amount of the Notes to
certain other dealers. After the initial public offering of the Notes, the
initial public offering price and such concession may be changed.
The Company has 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.
J.P. Morgan Securities Inc. ("JPMSI") and certain of its affiliates have
provided and may in the future provide investment banking and commercial banking
services to the Company. Morgan Guaranty Trust Company of New York ("Morgan"),
an affiliate of JPMSI, is the agent bank and lender under the New Credit
Facility. See "Description of New Credit Facility." Chase Securities Inc. and
certain of its affiliates, including The Chase Manhattan Bank ("Chase"), have
provided and may in the future provide investment banking and commercial banking
services to the Company. Both Morgan and Chase have committed to provide the
Company with financing in the event the Offerings are not completed to fund the
Pending Acquisition and will receive customary fees in connection with such
commitment.
In connection with the Notes Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may overallot the Notes Offering, creating
a syndicate short position. In addition, the Underwriters may bid for, and
purchase, Notes in the open market to cover syndicate shorts or to stabilize the
price of the Notes. Finally, the underwriting syndicate may reclaim selling
concessions allowed for distributing in the Notes Offering, if the syndicate
repurchases previously distributed Notes in syndicate covering transactions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of Notes above independent market levels. The
Underwriters are not required to engage in these activities and may end any of
these activities at any time.
There is currently no trading market for the Notes, and the Company does not
intend to apply for listing of the Notes on a national securities exchange. The
Company has been advised by the Underwriters that the Underwriters currently
intend to make a market in the Notes; however, the Underwriters are not
obligated to do so and may discontinue any such market-making at any time
without notice. No assurance can be given as to the development or liquidity of
any trading market for the Notes.
90
<PAGE>
LEGAL MATTERS
The validity of the Common Stock and the Notes will be passed upon by Butler &
Binion, L.L.P., Houston, Texas. Certain legal matters with respect to such
securities will be passed upon for the Underwriters by Baker & Botts, L.L.P.,
Dallas, Texas.
EXPERTS
The financial statements of the Company included in this Prospectus have been
audited by Deloitte & Touche LLP, independent auditors as stated in their
reports appearing herein, and are included in reliance upon the reports of such
firm given their authority as experts in accounting and auditing. The statements
of assets acquired (other than oil and gas properties) and liabilities as of
December 31, 1995 and 1996 and the related statements of revenues and direct
operating expenses of the Acquired Properties for each of the years in the
three-year period ended December 31, 1996, have been included herein and in the
registration statement in reliance upon the report of KPMG Peat Marwick LLP,
independent certified public accountants, appearing elsewhere herein, and upon
the authority of said firm as experts in accounting and auditing.
The information appearing in this Prospectus regarding historical quantities of
reserves of oil and gas and the future net cash flows and the present values
thereof of the Company as of June 30, 1996 is based on estimates of such
reserves and present values prepared by Williamson Petroleum Consultants Inc.,
independent petroleum engineers, and are included herein in reliance upon the
authority of said firm as experts in estimating such reserves and cash flows.
The report of Williamson is included herein as Exhibit A. The information
appearing in this Prospectus regarding quantities of reserves of oil and gas and
the future net cash flows and present value thereof attributable to the Acquired
Properties as of June 30, 1996 were prepared by Bellwether and audited by Ryder
Scott. The audit reports of Ryder Scott is attached as Exhibit B to this
Prospectus and is included herein in reliance upon the authority of such firm as
experts in estimating reserves and cash flows.
91
<PAGE>
GLOSSARY
The following definitions shall apply to the technical terms used in this
Prospectus.
"Bbls" means barrels of oil or other liquids, approximately 42 U.S. gallons.
"Bbls/d" means barrels per day.
"Bcf" means billion cubic feet.
"BOE" means barrel of oil equivalent, comparing an Mcf of gas to a Bbl of oil
at a rate of 6 to 1.
"BOE/d" means barrel of oil equivalent per day.
"Btu" means British thermal unit. A Btu is the heat required to raise the
temperature of a one-pound mass of water from 59.5 to 60.5 degrees Fahrenheit
under specified conditions.
"Gross" means the number of wells or acres in which the Company has an
interest.
"MBbls" means thousands of barrels.
"Mcf" means thousands of cubic feet. Gas volumes are stated at the legal
pressure base of the state or area in which the reserves are located at 60
degrees Fahrenheit.
"Mcf/d" means thousand cubic feet per day.
"MBOE/d" means thousand Bbls of oil equivalent per day.
"MBOE" means thousand barrels of oil equivalent, determined using the ratio of
six Mcf of gas to one barrel of oil, condensate or natural gas liquids.
"MMBbls" means millions of barrels.
"MMBtu" means million British thermal units.
"MMcf" means millions of cubic feet.
"MMcf/d" means million cubic feet of gas per day.
"MMBOE" means millions of barrels of oil equivalent, determined using the
ratio of six Mcf of gas to one barrel of oil, condensate or natural gas liquids.
"Net" is determined by multiplying gross wells or acres by the Company's
working interest in such wells or acres.
"PV-10 Value" means the pre-tax, present value, discounted at 10%, of future
net cash flows from estimated proved reserves, calculated holding prices and
costs constant at amounts in effect on the date of the report (unless such
prices or costs are subject to change pursuant to contractual provisions).
92
INDEX TO FINANCIAL STATEMENTS
PAGE
-----
Bellwether Exploration Company
Historical Consolidated Financial
Statements:
Independent Auditors' Report.... F-2
Consolidated Balance Sheets as
of June 30, 1995 and 1996...... F-3
Consolidated Statements of
Operations for the Years Ended
June 30, 1994, 1995 and
1996........................... F-5
Consolidated Statements of
Changes in Stockholders' Equity
for the Years Ended
June 30, 1994, 1995, and
1996........................... F-6
Consolidated Statements of Cash
Flows for the Years Ended
June 30, 1994, 1995 and
1996........................... F-7
Notes to Consolidated Financial
Statements..................... F-8
Condensed Consolidated Balance
Sheets as of June 30, 1996 and
December 31, 1996
(unaudited).................... F-23
Condensed Consolidated
Statements of Operations for
the Six Months Ended
December 31, 1995 (unaudited)
and December 31, 1996
(unaudited).................... F-24
Condensed Consolidated
Statements of Changes in
Stockholders' Equity for the
Six Months Ended December 31,
1996 (unaudited)............... F-25
Condensed Consolidated
Statements of Cash Flows for
the Six Months Ended
December 31, 1995 (unaudited)
and December 31, 1996
(unaudited).................... F-26
Notes to Condensed Consolidated
Financial Statements........... F-27
Acquired Properties -- Statements of
Assets Acquired (Other than
Productive Oil and Gas Properties)
and Liabilities and related
Statements of Revenues and Direct
Operating Expenses:
Independent Auditors' Report.... F-30
Statements of Assets Acquired
(Other than Productive Oil and
Gas Properties) and Liabilities
as of December 31, 1994, 1995
and 1996....................... F-31
Statements of Revenues and
Direct Operating Expenses for
the
Years Ended December 31, 1994,
1995 and 1996.................. F-32
Notes to Statements of Assets
Acquired (Other than Productive
Oil and Gas Properties) and
Liabilities and related
Statements of Revenues and
Direct Operating Expenses...... F-33
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders of
Bellwether Exploration Company and Subsidiaries:
We have audited the accompanying consolidated balance sheets of Bellwether
Exploration Company and subsidiaries as of June 30, 1995 and 1996, and the
related consolidated statements of operations, changes in stockholders' equity
and cash flows for each of the three years in the period ended June 30, 1996.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all
material respects, the financial position of Bellwether Exploration Company and
subsidiaries as of June 30, 1995 and 1996, and the results of their operations
and their cash flows for each of the three years in the period ended June 30,
1996, in conformity with generally accepted accounting principles.
DELOITTE & TOUCHE LLP
Houston, Texas
March 11, 1997
F-2
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, JUNE 30,
1995 1996
--------- ---------
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents............ $ 1,088 $ 783
Accounts receivable and accrued
revenues............................. 5,322 5,990
Accounts receivable -- related
parties.............................. -- 1,417
Prepaid expenses..................... 217 314
--------- ---------
Total current assets............ 6,627 8,504
--------- ---------
Property, Plant and Equipment, at
cost:
Oil and gas properties (full cost
method) including $13,453 and
$15,125 of unproved properties
which are excluded from
amortization in 1996 and 1995,
respectively....................... 71,426 76,043
Gas gathering system and gas plant
facilities........................... 19,060 12,840
--------- ---------
90,486 88,883
Less accumulated depreciation,
depletion and amortization........... (23,291) (30,748)
--------- ---------
67,195 58,135
--------- ---------
Other Assets......................... 828 586
--------- ---------
$ 74,650 $ 67,225
========= =========
See Notes to Consolidated Financial Statements.
F-3
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (CONTINUED)
JUNE 30, JUNE 30,
1995 1996
--------- ---------
(IN THOUSANDS, EXCEPT SHARES)
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable and accrued
liabilities........................ $ 1,774 $ 2,634
Accounts payable -- related
parties............................ 76 702
Current maturities of long-term
debt............................... 6,023 --
--------- ---------
Total current liabilities....... 7,873 3,336
--------- ---------
Long-term debt, excluding current
maturities......................... 18,525 13,048
Deferred income taxes................ 2,400 2,861
Other liabilities.................... 151 1,383
Minority interest in gas plant
ventures........................... 254 --
Contingencies........................ -- --
Stockholders' Equity:
Preferred stock, $0.01 par value,
1,000,000 shares authorized, none
issued
or outstanding..................... -- --
Common stock, $0.01 par value,
15,000,000 shares authorized,
9,045,479 and 9,075,479 shares
issued and outstanding at June 30,
1995 and 1996, respectively........ 90 91
Additional paid-in capital........... 41,472 41,639
Retained earnings.................... 3,885 4,867
--------- ---------
Total stockholders' equity...... 45,447 46,597
--------- ---------
$ 74,650 $ 67,225
========= =========
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
YEARS ENDED JUNE 30,
----------------------------------
1994 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
Revenues:
Gas revenues....................... $ 2,620 $ 4,864 $ 9,856
Oil revenues....................... 1,086 3,643 5,810
Gas plant and gas gathering
revenues.......................... 6,930 10,705 8,719
Interest and other income.......... 63 97 116
---------- ---------- ----------
10,699 19,309 24,501
---------- ---------- ----------
Costs And Expenses:
Production expenses................ 1,294 2,856 5,317
Gas plant and gas gathering
expenses.......................... 4,013 6,078 5,185
General and administrative
expenses.......................... 1,234 2,739 3,013
Depreciation, depletion and
amortization...................... 2,489 5,269 8,148
Interest expense................... 721 1,245 1,657
Other expenses..................... -- -- 153
---------- ---------- ----------
9,751 18,187 23,473
---------- ---------- ----------
Income before income taxes and minority
interest.............................. 948 1,122 1,028
Provision for income taxes.............. -- 9 46
Minority interest in gas plant
ventures.............................. 134 172 --
Net income......................... $ 814 $ 941 $ 982
========== ========== ==========
Net income per share.................... $ 0.27 $ 0.12 $ 0.11
========== ========== ==========
Weighted average common and common
equivalent shares
outstanding........................... 3,006 7,713 9,052
========== ========== ==========
See Notes to Consolidated Financial Statements.
F-5
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL TREASURY STOCK
------------------ ------------------ PAID-IN RETAINED ----------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993.................. 2,318 $ 1,156 -- -- $ 7,598 $ 2,130 29 $(115)
Shares issued in merger with Associated
Gas Resources, Inc.................... 1,419 708 -- -- 6,066 -- -- --
To change par value per share........... -- (1,827) -- -- 1,827 -- -- --
Other................................... -- -- -- -- (1) -- (14) 16
Net earnings............................ -- -- -- -- -- 814 -- --
------ -------- ------ -------- ---------- -------- ------ ------
Balance, June 30, 1994.................. 3,737 37 -- -- 15,490 2,944 15 (99)
Shares issued in public stock
offering.............................. 3,400 34 -- -- 17,204 -- -- --
Cancellation of treasury stock.......... (15) -- -- -- -- -- (15) 99
Shares issued in merger with Odyssey
Partners, Ltd......................... 917 9 -- -- 3,944 -- -- --
Shares issued in merger with Hampton
Resources
Corporation........................... 1,006 10 -- -- 4,834 -- -- --
Net earnings............................ -- -- -- -- -- 941 -- --
------ -------- ------ -------- ---------- -------- ------ ------
Balance, June 30, 1995.................. 9,045 90 -- -- 41,472 3,885 -- --
Stock options exercised................. 30 1 -- -- 167 -- -- --
Net earnings............................ -- -- -- -- -- 982 -- --
------ -------- ------ -------- ---------- -------- ------ ------
Balance, June 30, 1996.................. 9,075 $ 91 -- -- $ 41,639 $ 4,867 -- $--
====== ======== ====== ======== ========== ======== ====== ======
</TABLE>
TOTAL
Balance, June 30, 1993.................. $ 10,769
Shares issued in merger with Associated
Gas Resources, Inc.................... 6,774
To change par value per share........... --
Other................................... 15
Net earnings............................ 814
--------
Balance, June 30, 1994.................. 18,372
Shares issued in public stock
offering.............................. 17,238
Cancellation of treasury stock.......... 99
Shares issued in merger with Odyssey
Partners, Ltd......................... 3,953
Shares issued in merger with Hampton
Resources
Corporation........................... 4,844
Net earnings............................ 941
--------
Balance, June 30, 1995.................. 45,447
Stock options exercised................. 168
Net earnings............................ 982
--------
Balance, June 30, 1996.................. $ 46,597
========
See Notes to Consolidated Financial Statements.
F-6
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEARS ENDED JUNE 30,
------------------------------------
1994 1995 1996
(IN THOUSANDS)
Cash Flows From Operating Activities:
Net Income.............................. $ 814 $ 941 $ 982
Adjustments to reconcile net income to
net cash provided by operating
activities:
Depreciation, depletion and
amortization...................... 2,530 5,382 8,273
Minority interest in gas plant
ventures.......................... 120 120 --
Deferred taxes..................... -- -- 183
Change in assets and liabilities, net of
acquisition effects:
Accounts receivable and accrued
revenues.......................... (73) 1,548 (668)
Prepaid expenses................... -- 117 25
Accounts payable and accrued
expenses.......................... (464) (2,047) 84
Due (to) from affiliates........... 750 (633) (791)
Other.............................. (555) (145) (603)
---------- ----------- -----------
Net Cash Flows Provided by Operating
Activities............................ 3,122 5,283 7,485
---------- ----------- -----------
Cash Flows From Investing Activities:
Additions to oil and gas properties..... (782) (27,039) (6,934)
Proceeds from sales of properties....... 36 265 644
Additions to gas plant facilities and
gas gathering system.................. (8,649) (225) (65)
Proceeds from gas contract assignment... -- -- 9,875
Other................................... (28) (290) 22
---------- ----------- -----------
Net Cash Flows (Used In) Provided by
Investing Activities.................. (9,423) (27,289) 3,542
---------- ----------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowings................ 8,471 25,860 --
Net proceeds from issuance of common
stock................................. -- 17,238 168
Payments of long-term debt.............. (1,151) (21,456) (11,500)
Other................................... 14 -- --
---------- ----------- -----------
Net Cash Flows Provided By (Used In)
Financing Activities.................. 7,334 21,642 (11,332)
---------- ----------- -----------
Net increase (decrease) in cash and cash
equivalents........................... 1,033 (364) (305)
Cash and cash equivalents at beginning
of year............................... 419 1,452 1,088
---------- ----------- -----------
Cash and cash equivalents at end of
year.................................. $ 1,452 $ 1,088 $ 783
========== =========== ===========
See Notes to Consolidated Financial Statements.
F-7
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION
Bellwether Exploration Company ("the Company") was formed as a Delaware
corporation in 1994 to succeed to the business and properties of its predecessor
company pursuant to a merger, the primary purpose of which was to change the
predecessor company's state of incorporation from Colorado to Delaware. The
predecessor company was formed in 1980 from the consolidation of the business
and properties of related oil and gas limited partnerships. References to
Bellwether or the Company include the predecessor company, unless the context
requires otherwise.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of Bellwether
Exploration Company and its wholly-owned subsidiaries. Snyder Gas Plant Venture
and NGL/Torch Gas Plant Venture and their 11.98% and 35.78% investments in the
Snyder and Diamond M-Sharon Ridge Gas Plants have been pro rata consolidated.
Minority interests have been deducted from results of operations and
stockholders' equity in the appropriate period. All significant intercompany
accounts and transactions have been eliminated in consolidation.
OIL AND GAS PROPERTIES
The Company utilizes the full cost method to account for its investment in oil
and gas properties. Under this method, all costs of acquisition, exploration and
development of oil and gas reserves (including such costs as leasehold
acquisition costs, geological expenditures, dry hole costs and tangible and
intangible development costs) are capitalized as incurred. Oil and gas
properties, the estimated future expenditures to develop proved reserves, and
estimated future abandonment, site remediation and dismantlement costs are
depleted and charged to operations using the unit-of-production method based on
the ratio of current production to proved oil and gas reserves as estimated by
independent engineering consultants. Costs directly associated with the
acquisition and evaluation of unproved properties are excluded from the
amortization computation until it is determined whether or not proved reserves
can be assigned to the properties or whether impairment has occurred. Depletion
expense per equivalent barrel of production was approximately $5.86 in 1996,
$5.52 in 1995 and $5.71 in 1994. Dispositions of oil and gas properties are
recorded as adjustments to capitalized costs, with no gain or loss recognized
unless such adjustments would significantly alter the relationship between
capitalized costs and proved reserves of oil and gas. To the extent that
capitalized costs of oil and gas properties, net of accumulated depreciation,
depletion and amortization, exceed the discounted future net revenues of proved
oil and gas reserves net of deferred taxes, such excess capitalized costs would
be charged to operations. No such write-down in book value was required in 1996,
1995 and 1994.
Any reference to oil and gas reserve information in the Notes to Consolidated
Financial Statements is unaudited.
GAS PLANTS AND GAS GATHERING SYSTEM
Gas plant facilities include the costs to acquire certain gas plants and to
secure rights-of-way. Capitalized costs associated with gas plants facilities
are amortized primarily over the estimated useful lives of the various
components of the facilities utilizing the straight-line method. The estimated
useful lives of such assets range from four to fifteen years.
The Company's gas gathering subsidiary and certain third parties were the
beneficiaries of an agreement whereby another party had an obligation to
purchase, until May 31, 1999, the gas produced by the Company and such third
parties from the West Monroe field in Union Parish, Louisiana at a price of
$4.50 per MMBTU. Bellwether owned a large majority of the gas produced and sold
pursuant to the Purchase Agreement. In March 1996, in exchange for Bellwether's
agreement to assume the purchase obligations under the gas purchase contract,
Bellwether was paid $9.9 million. As a result of this transaction, the Company
has written off the remaining book value of the gas gathering system and has
recorded a liability to cover the estimated future
F-8
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
losses under the contract. Gas gathering operations of the subsidiary and
payments to third parties are charged to the liability as incurred. From the
proceeds, $9.5 million was paid on the Company's credit facility.
GAS IMBALANCES
The Company uses the sales method of accounting for gas imbalances. Under this
method, gas sales are recorded when revenue checks are received or are
receivable on the accrual basis. The Company's imbalance was immaterial at June
30, 1996 and 1995.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 121
In March 1995, the Financial Accounting Standards Board ("FASB") issued
Statement No. 121 ("SFAS 121") "Accounting for the Impairment of Long-Lived
Assets and Long-Lived Assets to Be Disposed Of." SFAS 121 is effective
beginning July 1, 1996 and establishes guidelines for determining and measuring
asset impairment and the required timing of asset impairment evaluations.
Management has addressed the requirements of this statement and believes that it
will not have a significant effect on the financial condition and results of
operations of the Company based upon current economic conditions.
FINANCIAL ACCOUNTING STANDARDS BOARD STATEMENT NO. 123
In October 1995, the FASB issued Statement No. 123 ("SFAS 123"), "Accounting
for Stock-Based Compensation," which is effective for the Company beginning
July 1, 1996. SFAS 123 permits, but does not require, a fair-value-based method
of accounting for employee stock option plans which results in compensation
expense being recognized in the results of operations when stock options are
granted. The Company plans to continue to use the current intrinsic-value-based
method of accounting for such plans where no compensation expense is recognized.
However, as required by SFAS 123, the Company will provide pro forma disclosure
of net income and earnings per share in the notes to the consolidated financial
statements as if the fair-value-based method of accounting had been applied.
NATURAL GAS AND CRUDE OIL HEDGING
The Company participated in certain crude oil and natural gas price swaps to
reduce its exposure to price fluctuations on sales during fiscal 1996.
Settlement of gains and losses on price swap contracts are realized monthly,
generally based upon the difference between the contract price and the average
closing New York Mercantile Exchange ("NYMEX") price and are reported as a
component of oil and gas revenues.
EARNINGS PER SHARE
Earnings per share calculations are based on the weighted average number of
common shares and common share equivalents and earnings attributable to common
stockholders. Common share equivalents include dilutive common stock options.
Such options do not have a material effect in the calculations of earnings per
share.
INCOME TAXES
Deferred taxes are accounted for under the asset and liability method of
accounting for income taxes. Under this method, deferred income taxes are
recognized for the tax consequences of "temporary differences" by applying
enacted statutory tax rates applicable to future years to differences between
the financial statement carrying amounts and the tax basis of existing assets
and liabilities. The effect on deferred taxes of a change in tax rates is
recognized in income in the period the change occurs.
F-9
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STATEMENTS OF CASH FLOWS
For cash flow presentation purposes, the Company considers all highly liquid
debt instruments purchased with an original maturity of three months or less to
be cash equivalents. Interest paid in cash for 1996, 1995 and 1994 was $1.6
million, $1.2 million and $0.7 million, respectively. Income taxes paid in cash
for 1996 and 1995 were $162,000 and $9,000, respectively. During 1995 and 1994,
a portion of the mergers with Associated Gas Resources Inc. ("AGRI"), Odyssey
Partners, Ltd. ("Odyssey") and Hampton Resources Corporation ("Hampton"),
collectively the ("Mergers") was financed by assumption of debt of $6.1
million for AGRI, $1.4 million for Odyssey and $4.1 million for Hampton. Common
stock with a value of $4.0 million and $4.8 million was issued as part of the
costs of the Odyssey and Hampton mergers in 1995, respectively. In 1994, common
stock with a value of $6.8 million was issued in the AGRI merger.
USE OF ESTIMATES
Management of the Company has made a number of estimates and assumptions
relating to the reporting of assets and liabilities and the disclosure of
contingent assets and liabilities as well as reserve information which affects
the depletion calculation and the computation of the full cost ceiling
limitation to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from these
estimates.
RECLASSIFICATIONS
Certain reclassifications of prior period statements have been made to conform
with current reporting practices.
3. AGING OF UNEVALUATED PROPERTIES
Oil and natural gas properties not subject to amortization consist of the cost
of undeveloped leaseholds, exploratory and developmental wells in progress, and
secondary recovery projects before the assignment of proved reserves. These
costs are reviewed periodically by management for impairment, with the
impairment provision included in the cost of oil and natural gas properties
subject to amortization. Factors considered by management in its impairment
assessment include drilling results by the Company and other operators, the
terms of oil and gas leases not held by production, production responses to
secondary recovery activities and available funds for exploration and
development. The following table summarizes the cost of properties not subject
to amortization for the year the cost was incurred (000s):
JUNE 30,
----------------------
1995 1996
Year cost incurred:
Remainder
1994....................... $ 360 $ 360
1995....................... 14,765 12,139
1996....................... -- 954
---------- ----------
$ 15,125 $ 13,453
========== ==========
The principal acquisitions of undeveloped acreage were received in the Odyssey
acquisition of the Fausse Pointe field and the Hampton acquisition which
included the Cove field and the Ft. Trinidad waterflood project. In 1996, $2.5
million was included in oil and gas properties subject to amortization from
drilling in the Cove and Fausse Pointe fields.
F-10
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
4. ACQUISITIONS AND MERGERS
During the last three years, the Company has completed the following mergers and
acquisitions:
On February 28, 1995, the Company acquired Hampton in exchange for $17.0 million
in cash and 1,006,458 shares of the Company's common stock. The Company had paid
previous to the merger $2.7 million to acquire common and preferred stock of
Hampton and incurred $1.4 million in expenses in arranging the merger. The total
cost of the Hampton acquisition was $25.9 million, consisting of $21.1 million
in cash and $4.8 million in common stock. Hampton was an energy company engaged
in the exploration, acquisition and production of oil and natural gas, primarily
in the onshore Gulf Coast region and offshore in Texas state waters.
On August 26, 1994, the Company acquired Odyssey in exchange for $5.6 million in
cash (funded from a common stock offering which closed on the same date) and
916,665 shares of the Company's common stock, for a total cost of $9.6 million.
Odyssey is an exploration company which assembles, exploits and operates oil and
gas properties using state-of-the-art 3-D seismic and computer-aided exploration
technology. Odyssey's primary areas of operation have been the onshore Gulf
Coast region and the Permian Basin area of West Texas and Southeast New Mexico.
On December 31, 1993, AGRI merged into the Company in consideration of the
issuance of 1,419,726 shares of the Company's common stock and cash payments of
$232,000, for a total cost of $7.0 million. AGRI's principal assets are a gas
gathering system located in Union Parish, Louisiana (the "Gathering System");
a 4.12% interest in the Snyder Gas Plant; a 12.52% interest in the Diamond
M-Sharon Ridge Gas Plant (the "Gas Plants"); working interests in
approximately 828 wells in Union, Morehouse and Ouachita Parishes, Louisiana;
and small non-operated working interests in approximately 137 gas wells in
Oklahoma.
On July 30, 1993 the Company acquired certain interests in the Gas Plants, both
in Scurry County, Texas, for a purchase price of $8.5 million.
5. RELATED PARTY TRANSACTIONS
The Company is a party to a management agreement with Torch Energy Advisors
Incorporated ("Torch") which was renewed for one year on September 1, 1993 and
amended effective January 1, 1994. Torch is currently an affiliate of Torchmark
Corporation ("Torchmark"), an insurance and diversified financial services
holding company and the parent corporation of Torch. The management agreement
requires Torch to administer the business activities of the Company for a
monthly fee equal to the sum of one-twelfth of 2% of the average of the book
value of the Company's total assets, excluding cash, plus reimbursement of
certain costs incurred on behalf of the Company for the management of its oil
and gas properties, plus 2% of annual operating cash flows (as defined) during
the period in which the services are rendered. The initial term of this
agreement (as amended) is six years. Thereafter, the agreement renews
automatically for successive one-year periods until terminated by either party
in accordance with the applicable provisions of the agreement. For the years
ended June 30, 1996, 1995 and 1994, management fees paid to Torch amounted to
$1.5 million, $1.2 million and $0.6 million, respectively. Additionally, in the
ordinary course of business, the Company incurs intercompany balances resulting
from the payment of costs and expenses by affiliated entities on behalf of the
Company. Torch may charge interest on any unpaid balances not paid within 30
days, however, no such interest has been charged by Torch since the inception of
the agreement. In December 1993, Torch was issued a warrant to purchase 187,500
shares of the Company's common stock at a price of $6.40 per share for its
services in identifying and negotiating the AGRI merger.
A subsidiary of Torch markets oil and natural gas production from certain oil
and gas properties in which the Company owns an interest. The Company pays fees
of 2% of revenues for such marketing services. Such charges were $114,000,
$12,000 and $3,000 in 1996, 1995 and 1994, respectively.
F-11
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs of the evaluation of potential property acquisitions and due diligence
conducted in conjunction with acquisitions closed are incurred by Torch at the
Company's request. The Company was charged $74,000 and $193,000 for these costs
in 1996 and 1995, respectively.
Torch operates certain oil and gas interests owned by the Company. The Company
is charged, on the same basis as other third parties, for all customary expenses
and cost reimbursements associated with these activities. Operator's overhead
charged for these activities for the years ended June 30, 1996, 1995 and 1994
was $367,000, $164,000 and $45,000, respectively.
Torch became the operator of the Gas Plants on December 1, 1993. In fiscal 1996,
1995 and 1994, the fees paid by the Company to Torch were $83,000, $71,000 and
$38,000, respectively.
6. STOCKHOLDERS' EQUITY
COMMON AND PREFERRED STOCK
The Certificate of Incorporation of the Company authorizes the issuance of up to
15,000,000 shares of common stock and 1,000,000 shares of preferred stock, the
terms, preferences, rights and restrictions of which are established by the
Board of Directors of the Company. Certain restrictions contained in the
Company's loan agreements limit the amount of dividends which may be declared.
There is no present plan to pay dividends on common stock as the Company intends
to reinvest its cash flows for continued growth of the Company.
On April 4, 1994, shareholders approved the merger of Bellwether Exploration
Company, a Delaware corporation, into the Company. The common stock of the
Company was converted into one-eighth share of the newly formed Company's common
stock.
During the first quarter of fiscal 1995, the Company consummated the sale of
3,650,000 shares of common stock. The net proceeds to the Company were $17.3
million which were used for the Odyssey and Hampton mergers and general
corporate purposes. Of the shares sold, 3,400,000 were newly-issued by the
Company and 250,000 were sold by certain stockholders.
STOCK INCENTIVE PLANS
The Company has stock option plans that provide for granting of options for the
purchase of common stock to directors, officers and key employees of the Company
and Torch. These stock options may be granted subject to terms ranging from 6 to
10 years at a price equal to the fair market value of the stock at the date of
grant. At June 30, 1996, options under the plans available for future grants
were 18,000.
F-12
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of activity in the stock option plans is set forth below:
NUMBER OPTION
OF SHARES PRICE RANGE
Balance at June 30, 1993............. 151,715 $3.00 - $5.25
Granted......................... 456,950 $4.88 - $7.00
Surrendered..................... (114,450) $4.50
Exercised....................... (22,890) $3.25
--------- -----------------
Balance at June 30, 1994............. 471,325 $3.00 - $7.00
Granted......................... 450,000 $5.56 - $5.94
--------- -----------------
Balance at June 30, 1995............. 921,325 $3.00 - $7.00
Granted......................... 27,000 $4.375 - $6.375
Surrendered..................... (10,000) $5.75
Exercised....................... (30,000) $5.625
--------- -----------------
Balance at June 30, 1996............. 908,325 $3.00 - $7.00
========= =================
Exercisable at June 30, 1996......... 830,917 $3.00 - $7.00
========= =================
7. DERIVATIVE FINANCIAL INSTRUMENTS
The Company periodically uses derivative financial instruments to manage oil and
gas price risk. As of June 30, 1996, the Company was a party to an oil swap
price agreement for the month of July for 9,300 barrels of crude oil with a
price of $18.25 per barrel. This contract is accounted for as a hedge for
financial reporting purposes and, accordingly, is deferred until the related
sales are made.
8. LONG-TERM DEBT
Long-term debt is comprised of the following at June 30, 1996 and 1995 (in
thousands):
1995 1996
Bank credit facility................. $ 24,548 $ 13,048
Less current maturities.............. (6,023) --
---------- ----------
Long-term debt....................... $ 18,525 $ 13,048
========== ==========
On February 28, 1995, the Company entered into a credit facility ("Credit
Facility") with a commercial bank providing for an initial borrowing base of
$29.8 million. The borrowing base is reviewed semiannually. Borrowings under the
Credit Facility are secured by the Company's interests in oil and gas properties
and in the Gathering System and the Gas Plant. The maturity date for the credit
facility as modified in the second quarter, fiscal 1996 is March 31, 2001. A
principal payment of $9.5 million made in the third quarter, fiscal 1996
extinguished all current maturities. The interest rate is either the agent
bank's prime rate or the adjusted Eurodollar Rate plus 1 1/4% at the Company's
option. A commitment fee of three-eighths of one percent (0.375%) per annum is
charged on the unused portion of the Credit Facility. The interest rate on the
Company's borrowings at June 30, 1996 was approximately 7.275%.
F-13
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Debt maturities by fiscal year are as follows (in thousands):
Year ending June 30, 1997............... $ --
Year ending June 30, 1998............... 1,929
Year ending June 30, 1999............... 4,766
Year ending June 30, 2000............... 4,170
Year ending June 30, 2001............... 2,183
----------
$ 13,048
==========
The Credit Facility has various covenants including certain required financial
measurements for a current ratio, consolidated tangible net worth and a ratio of
consolidated liabilities to consolidated tangible net worth. In addition, the
Company may not pay dividends of greater than 20% of its consolidated after-tax
net income in any fiscal year or make any other payment on account of its
capital stock or redeem or repurchase any of its capital stock.
Currently, the Company is negotiating a syndicated credit facility in an amount
up to $50 million, with the original borrowing base of $27 million, to be
redetermined semi-annually. The interest rate, at the Company's option will
vary, based upon borrowing base usage, from LIBOR plus 7/8% to LIBOR plus
1 1/4%, or the greater of the prime rate or Fed Funds plus 1/2%. The debt
facility will have a termination date four years from closing.
9. GUARANTOR FINANCIAL STATEMENTS
The guarantor consolidating financial statements for the years ended June 30,
1995 and 1996 are as follows:
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 1995
(IN THOUSANDS)
<TABLE>
<CAPTION>
BELLWETHER ODYSSEY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Total current assets................. $ 6,001 $ 626 $ -- $ 6,627
Net property, plant and equipment.... 56,273 10,922 -- 67,195
Total other assets................... 10,518 47 (9,737) 828
---------- -------- ------------ ------------
Total assets.................... $ 72,792 $ 11,595 $ (9,737) $ 74,650
========== ======== ============ ============
Total current liabilities............ $ 6,393 $ 1,480 $ -- $ 7,873
Long-term debt....................... 18,525 -- -- 18,525
Deferred taxes....................... 2,260 140 -- 2,400
Other long-term liabilities.......... 405 -- -- 405
Total stockholders' equity........... 45,209 9,975 (9,737) 45,447
---------- -------- ------------ ------------
Total liabilities and
stockholders' equity.......... $ 72,792 $ 11,595 $ (9,737) $ 74,650
========== ======== ============ ============
</TABLE>
F-14
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING INCOME STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1995
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
Revenues............................. $ 16,582 $ 2,727 $ 19,309
Expenses............................. 16,010 2,349 18,359
---------- ------- ------------
Net earnings before income taxes..... 572 378 950
---------- ------- ------------
Income taxes......................... (131) 140 9
---------- ------- ------------
Net earnings......................... $ 703 $ 238 $ 941
========== ======= ============
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1995
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 703 $ 238 $ 941
Non-cash adjustments............ 4,393 1,109 5,502
Change in assets and
liabilities.................... (3,725) 2,565 (1,160)
---------- -------- ------------
Net cash provided by operating
activities..................... 1,371 3,912 5,283
---------- -------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil & gas
properties..................... (24,786) (2,478) (27,264)
Proceeds from sale of
properties..................... 265 -- 265
Additions to other properties
and other...................... (292) 2 (290)
---------- -------- ------------
Net cash used in investing
activities..................... (24,813) (2,476) (27,289)
---------- -------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings........ 25,860 -- 25,860
Payments of long-term debt...... (20,031) (1,425) (21,456)
Net proceeds from issuance of
common stock................... 17,238 -- 17,238
---------- -------- ------------
Net cash provided by (used in)
financing activities........... 23,067 (1,425) 21,642
---------- -------- ------------
Net increase (decrease) in cash
and cash equivalents........... (375) 11 (364)
Cash and cash equivalents at
beginning of period............ 1,452 -- 1,452
---------- -------- ------------
Cash and cash equivalents at end
of period...................... $ 1,077 $ 11 $ 1,088
========== ======== ============
F-15
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING BALANCE SHEETS
AS OF JUNE 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BELLWETHER ODYSSEY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Total current assets................. $ 7,617 $ 887 $ -- $ 8,504
Net property, plant and equipment.... 47,130 11,005 -- 58,135
Total other assets................... 10,298 25 (9,737) 586
---------- -------- ------------ ------------
Total assets.................... $ 65,045 $ 11,917 $ (9,737) $ 67,225
========== ======== ============ ============
Total current liabilities............ $ 2,291 $ 1,045 $ -- $ 3,336
Long-term debt....................... 13,048 -- -- 13,048
Deferred taxes....................... 2,449 412 -- 2,861
Other long-term liabilities.......... 1,383 -- -- 1,383
Total stockholders' equity........... 45,874 10,460 (9,737) 46,597
---------- -------- ------------ ------------
Total liabilities and
stockholders' equity.......... $ 65,045 $ 11,917 $ (9,737) $ 67,225
========== ======== ============ ============
</TABLE>
CONDENSED CONSOLIDATING INCOME STATEMENTS
FOR THE YEAR ENDED JUNE 30, 1996
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
Revenues............................. $ 20,902 $ 3,599 $ 24,501
Expenses............................. 20,644 2,829 23,473
---------- ------- ------------
Net earnings before income taxes..... 258 770 1,028
---------- ------- ------------
Income taxes......................... (239) 285 46
---------- ------- ------------
Net earnings......................... $ 497 $ 485 $ 982
========== ======= ============
F-16
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED JUNE 30, 1996
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 497 $ 485 $ 982
Non-cash adjustments............ 6,950 1,506 8,456
Change in assets and
liabilities.................... (1,709) (244) (1,953)
---------- -------- ------------
Net cash provided by operating
activities..................... 5,738 1,747 7,485
---------- -------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil & gas
properties..................... (5,432) (1,567) (6,999)
Proceeds from sale of
properties..................... 644 -- 644
Proceeds from gas contract
assumption..................... 9,875 -- 9,875
Additions to other properties
and other...................... 22 -- 22
---------- -------- ------------
Net cash provided by (used in)
investing activities........... 5,109 (1,567) 3,542
---------- -------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt...... (11,500) -- (11,500)
Net proceeds from issuance of
common stock................... 168 -- 168
---------- -------- ------------
Net cash used in financing
activities..................... (11,332) -- (11,332)
---------- -------- ------------
Net increase (decrease) in cash
and cash equivalents........... (485) 180 (305)
Cash and cash equivalents at
beginning of period............ 1,077 11 1,088
---------- -------- ------------
Cash and cash equivalents at end
of period...................... $ 592 $ 191 $ 783
========== ======== ============
10. INCOME TAXES
Income tax expense is summarized as follows (in thousands):
YEARS ENDED JUNE 30,
-------------------------------
1994 1995 1996
Current
Federal............................ $ -- $ 9 $ 126
State.............................. -- -- 103
Deferred -- Federal and State........... -- -- (183)
--------- --------- ---------
Total income tax expense................ $ -- $ 9 $ 46
========= ========= =========
The balances for deferred tax assets and liabilities were modified as of the
effective date of the Hampton merger based on the allocation of the purchase
price.
F-17
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The tax effect of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at June 30, 1996 and 1995 are as
follows:
AT JUNE 30,
-----------------------
1995 1996
Net operating loss carryforwards........ $ 8,858 $ 8,922
Percentage depletion carryforwards...... 271 271
Alternative minimum tax credit
carryforwards......................... -- 126
----------- ----------
Total deferred income tax assets........ 9,129 9,319
----------- ----------
Plant, property and equipment........... (11,529) (8,841)
State income taxes...................... -- (446)
----------- ----------
Total deferred income tax liabilities... (11,529) (9,287)
Valuation allowances.................... -- (2,893)
----------- ----------
Net deferred income tax liability....... $ (2,400) $ (2,861)
=========== ==========
The Company files a consolidated federal income tax return. Deferred income
taxes are provided for transactions which are recognized in different periods
for financial and tax reporting purposes. Such temporary differences arise
primarily from the deduction for tax purposes of certain oil and gas development
costs which are capitalized for financial statement purposes. In the years ended
June 30, 1995 and 1994, the Company did not provide a provision for deferred
income taxes due to the availability of sufficient net operating losses
("NOLs") to offset net income.
Total income tax differs from the amount computed by applying the Federal income
tax rate to income before income taxes and minority interest. The reasons for
the differences are as follows:
AT JUNE 30,
--------------------
1995 1996
Statutory Federal income tax rate....... 34.0% 34.0%
Increase (Decrease) in tax rate
resulting from:
State income taxes, net of federal
benefit........................... 0.0 7.0
Nondeductable travel and
entertainment......................... 1.2 .3
Reduction of valuation allowance due to
utilization
of net operating loss carryforwards... (34.2) (36.5)
--------- ---------
1.0% 4.8%
========= =========
The Company issued 3,400,000 shares of its common stock on July 20, 1994. As a
result of the common stock issuance, the Company has undergone an ownership
change. Therefore, the Company's ability to use its NOL for federal income tax
purposes is subject to significant restrictions.
Section 382 of the Internal Revenue Code significantly limits the amount of NOL
and investment tax credit carryforwards that are available to offset future
taxable income and related tax liability when a change in ownership occurs after
December 31, 1986.
At June 30, 1996, the Company had NOLs of approximately $26.2 million which will
expire in future years beginning in 1997. Due to provisions of Section 382, the
Company is limited to approximately $4.6 million utilization of NOL per year.
F-18
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
11. SEGMENT INFORMATION
The Company's operations are concentrated in two segments. The results of
operations of these business segments are as follows (in thousands):
YEARS ENDED JUNE 30,
----------------------------------
1994 1995 1996
Revenues:
Oil............................. $ 2,620 $ 4,864 $ 5,810
Gas............................. 1,086 3,643 9,856
Gas plants and gas gathering.... 6,930 10,705 8,719
Other revenues.................. 63 97 116
---------- ---------- ----------
Total revenues............. $ 10,699 $ 19,309 $ 24,501
========== ========== ==========
Operating profit before income tax:
Oil and gas..................... $ 859 $ 1,758 $ 3,416
Gas plants and gas gathering.... 1,847 3,251 2,319
---------- ---------- ----------
2,706 5,009 5,735
Unallocated corporate expenses....... 1,172 2,823 2,943
Other expenses....................... -- -- 153
Interest expense..................... 721 1,245 1,657
---------- ---------- ----------
Income before taxes.................. $ 813 $ 941 $ 982
========== ========== ==========
Identifiable assets:
Oil and gas..................... $ 13,763 $ 53,218 $ 47,727
Gas plants and gas gathering.... 19,285 18,289 10,408
---------- ---------- ----------
33,048 71,507 58,135
Corporate assets..................... 2,822 3,143 9,090
---------- ---------- ----------
Total assets............... $ 35,870 $ 74,650 $ 67,225
========== ========== ==========
Capital expenditures:
Oil and gas..................... $ 3,199 $ 41,676 $ 6,934
Gas plants and gas gathering.... 18,835 225 65
---------- ---------- ----------
$ 22,034 $ 41,901 $ 6,999
========== ========== ==========
Depreciation, depletion and
amortization:
Oil and gas..................... $ 1,553 $ 3,893 $ 6,933
Gas plants and gas gathering......... 936 1,376 1,215
---------- ---------- ----------
$ 2,489 $ 5,269 $ 8,148
========== ========== ==========
In 1996, 1995 and 1994, the Company had 3 customers which accounted for 33% of
its revenues, two customers which accounted for 42% of its revenues and three
customers which accounted for 58% of its revenues, respectively.
12. CONTINGENCIES
The Company has been named as a defendant in certain lawsuits incidental to its
business. Management does not believe that the outcome of such litigation will
have a material adverse impact on the Company.
F-19
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
13. SELECTED QUARTERLY FINANCIAL DATA (AMOUNTS IN THOUSANDS,
EXCEPT PER SHARE DATA) (UNAUDITED):
<TABLE>
<CAPTION>
QUARTER ENDED
------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1994(1) 1994 1995(2) 1995
<S> <C> <C> <C> <C>
Revenues............................. $ 3,997 $ 4,186 $ 4,783 $ 6,343
Operating Income..................... $ 424 $ 272 $ 238 $ 188
Net income........................... $ 378 $ 224 $ 199 $ 140
Earnings per common equivalent
share................................ $ 0.07 $ 0.03 $ 0.02 $ 0.02
QUARTER ENDED
------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, MARCH 31, JUNE 30,
1995 1995 1996 1996
Revenues............................. $ 5,678 $ 6,444 $ 6,338 $ 6,041
Operating Income..................... $ 38 $ 95 $ 542 $ 353
Net income (loss).................... $ 13 $ (12) $ 557 $ 424
Earnings per common equivalent
share................................ $ 0.00 $ 0.00 $ 0.06 $ 0.05
</TABLE>
- ------------
(1) Includes the acquisition of Odyssey on August 26, 1994.
(2) Includes the acquisition of Hampton on February 28, 1995.
14. SUPPLEMENTAL INFORMATION -- (UNAUDITED)
OIL AND GAS PRODUCING ACTIVITIES
Included herein is information with respect to oil and gas acquisition,
exploration, development and production activities, which is based on estimates
of year-end oil and gas reserve quantities and estimates of future development
costs and production schedules. Reserve quantities and future production are
based primarily upon reserve reports prepared by the Company's independent
petroleum engineering firms. These estimates are inherently imprecise and
subject to substantial revision.
Estimates of future net cash flows from proved reserves of gas, oil, condensate
and natural gas liquids were made in accordance with Statement of Financial
Accounting Standards No. 69, "Disclosures about Oil and Gas Producing
Activities." The estimates are based on prices at year-end. Estimated future
cash inflows are reduced by estimated future development and production costs
based on year-end cost levels, assuming continuation of existing economic
conditions, and by estimated future income tax expense. Tax expense is
calculated by applying the existing statutory tax rates, including any known
future changes, to the pre-tax net cash flows, less depreciation of the tax
basis of the properties and depletion allowances applicable to the gas, oil,
condensate and NGL production. The results of these disclosures should not be
construed to represent the fair market value of the Company's oil and gas
properties. A market value determination would include many additional factors
including: (i) anticipated future increases or decreases in oil and gas prices
and production and development costs; (ii) an allowance for return on
investment; (iii) the value of additional reserves, not considered proved at the
present, which may be recovered as a result of further exploration and
development activities; and (iv) other business risks.
F-20
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
COSTS INCURRED
The following table sets forth the costs incurred in property acquisition and
development activities (in thousands):
YEARS ENDED JUNE 30,
--------------------------------
1994 1995 1996
Property acquisition:
Proved properties............... $ 1,896 $ 25,072 $ 128
Unproved properties............. 295 13,233 424
Exploration.......................... 364 530 824
Development.......................... 644 2,841 5,558
--------- ---------- ---------
$ 3,199 $ 41,676 $ 6,934
========= ========== =========
CAPITALIZED COSTS
The following table sets forth the capitalized costs relating to oil and gas
activities and the associated accumulated depreciation, depletion and
amortization (in thousands):
YEARS ENDED JUNE 30,
-------------------------------------
1994 1995 1996
Proved properties....................... $ 28,917 $ 56,300 $ 62,590
Unproved properties..................... 832 15,125 13,453
----------- ----------- -----------
Total capitalized costs................. 29,749 71,425 76,043
Accumulated depreciation, depletion and
amortization.......................... (17,043) (20,983) (28,316)
----------- ----------- -----------
Net capitalized costs................... $ 12,706 $ 50,442 $ 47,727
=========== =========== ===========
RESULTS OF OPERATIONS FOR PRODUCING ACTIVITIES (IN THOUSANDS):
YEARS ENDED JUNE 30,
--------------------------------
1994 1995 1996
Revenues from oil and gas producing
activities............................ $ 3,706 $ 8,507 $ 15,666
Production costs........................ 1,294 2,856 5,317
Depreciation, depletion and
amortization.......................... 1,553 3,893 6,933
--------- --------- ----------
Results of operations from producing
activities (excluding corporate
overhead and interest costs).......... $ 859 $ 1,758 $ 3,416
========= ========= ==========
PER UNIT SALES PRICES AND COSTS:
YEARS ENDED JUNE 30,
-------------------------------
1994 1995 1996
Average sales price:(1)
Oil (per barrel)................... $ 15.27 $ 16.89 $ 17.81
Gas (per MCF)...................... 2.17 1.66 2.02
Average production cost per equivalent
barrel................................ 4.75 4.05 4.49
Average unit depletion rate per
equivalent barrel..................... 5.71 5.52 5.86
- ------------
(1) Average sales price is exclusive of the effect of natural gas and crude oil
price swaps.
F-21
<PAGE>
BELLWETHER EXPLORATION COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
RESERVES:
The Company's estimated total proved and proved developed reserves of oil and
gas are as follows:
<TABLE>
<CAPTION>
YEARS ENDED JUNE 30,
-----------------------------------------------------------
1994 1995 1996
----------------- ----------------- -----------------
OIL GAS OIL GAS OIL GAS
DESCRIPTION (MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
<S> <C> <C> <C> <C> <C> <C>
Proved reserves at beginning of year.... 438 7,202 393 10,671 2,597 30,159
Revisions of previous estimates......... (44) 58 (61 ) (988) (534 ) 2,855
Extensions and discoveries.............. -- -- 724 1,179 89 7,128
Production.............................. (71) (1,206) (216 ) (2,932) (334 ) (5,099)
Sales of reserves in-place.............. -- -- (1 ) (3) (14 ) (2,023)
Purchases of reserves in-place.......... 67 287 -- 163 4 176
Reserves added in Mergers............... 3 4,330 1,758 22,069 -- --
------ ------- ------ ------- ------ -------
Proved reserves at end of year.......... 393 10,671 2,597 30,159 1,808 33,196
====== ======= ====== ======= ====== =======
Proved developed reserves --
Beginning of year.................. 410 7,151 361 9,154 1,891 23,795
====== ======= ====== ======= ====== =======
End of year........................ 361 9,154 1,891 23,795 1,494 22,698
====== ======= ====== ======= ====== =======
</TABLE>
The standardized measure of discounted future net cash flows and changes therein
related to proved oil and gas reserves are shown below:
YEARS ENDED JUNE 30,
-------------------------------------
1994 1995 1996
(IN THOUSANDS)
Future cash inflows.................. $ 31,180 $ 96,738 $ 113,554
Future production costs.............. (11,462) (34,093) (33,131)
Future income taxes.................. -- -- (11,095)
Future development costs............. (402) (7,738) (8,961)
----------- ----------- -----------
Future net cash flows................ 19,316 54,907 60,367
10% discount factor.................. (7,272) (17,616) (15,191)
----------- ----------- -----------
Standardized measure of discounted
future net cash
flows.............................. $ 12,044 $ 37,291 $ 45,176
=========== =========== ===========
The following are the principal sources of change in the standardized measure of
discounted future net cash flows:
YEARS ENDED JUNE 30,
-------------------------------------
1994 1995 1996
(IN THOUSANDS)
Standardized measure -- beginning of
year................................. $ 10,519 $ 12,044 $ 37,291
Sales, net of production costs....... (2,412) (5,651) (10,349)
Purchases of reserves in-place....... 566 162 246
Reserves received in Mergers......... 3,598 34,039 --
Net change in prices and production
costs.............................. (1,500) (8,326) 11,458
Net change in income taxes........... -- -- (2,958)
Extensions, discoveries and improved
recovery, net of future production
and development costs.............. -- 5,085 7,709
Changes in estimated future
development costs.................. (163) (3,148) 497
Development costs incurred during the
period............................. 644 629 883
Revisions of quantity estimates...... (194) (4) (438)
Accretion of discount................ 1,052 1,204 3,729
Sales of reserves in-place........... -- (5) (1,614)
Changes in production rates and
other.............................. (66) 1,262 (1,278)
----------- ----------- -----------
Standardized measure -- end of
year............................... $ 12,044 $ 37,291 $ 45,176
=========== =========== ===========
F-22
<PAGE>
BELLWETHER EXPLORATION COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
1996 1996
--------- ------------
(UNAUDITED)
(IN THOUSANDS)
ASSETS
Current Assets:
Cash and cash equivalents............... $ 783 $ 450
Accounts receivable and accrued
revenues.............................. 5,990 7,296
Accounts receivable -- related
parties............................... 1,417 303
Prepaid expenses and other.............. 314 586
--------- ------------
Total current assets............... 8,504 8,635
--------- ------------
Property, Plant and Equipment, at cost:
Oil and gas properties (full cost
method)............................... 76,043 83,473
Gas plant facilities and gas gathering
system................................ 12,840 12,843
--------- ------------
88,883 96,316
Accumulated depreciation, depletion and
amortization.......................... (30,748) (36,561)
--------- ------------
58,135 59,755
--------- ------------
Other Assets............................ 586 592
--------- ------------
$ 67,225 $ 68,982
========= ============
Current Liabilities:
Accounts payable and accrued
liabilities........................... $ 2,634 $ 3,867
Due to affiliates....................... 702 411
Current maturities of long-term debt.... -- --
--------- ------------
Total current liabilities.......... 3,336 4,278
--------- ------------
Long-term debt, excluding current
maturities............................ 13,048 11,000
Deferred income taxes................... 2,861 3,805
Other liabilities....................... 1,383 1,148
Stockholders' Equity:
Preferred stock, $0.01 par value,
1,000,000 shares authorized, none
issued or outstanding at June 30, 1996
and December 31, 1996................. -- --
Common stock, $0.01 par value,
15,000,000 shares authorized,
9,075,479
and 9,152,979 shares issued and
outstanding at June 30, 1996 and
December 31, 1996, respectively....... 91 92
Additional paid-in capital.............. 41,639 42,059
Retained earnings....................... 4,867 6,600
--------- ------------
Total stockholders' equity......... 46,597 48,751
--------- ------------
$ 67,225 $ 68,982
========= ============
See Notes to Condensed Consolidated Financial Statements.
F-23
<PAGE>
BELLWETHER EXPLORATION COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS -- UNAUDITED
<TABLE>
<CAPTION>
THREE MONTHS ENDED SIX MONTHS ENDED
DECEMBER 31, DECEMBER 31,
-------------------- ----------------------
1995 1996 1995 1996
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas revenues............... $ 3,853 $ 5,383 $ 7,142 $ 9,846
Gas plant and gas gathering
revenues......................... 2,555 2,158 4,923 3,879
Interest and other income.......... 36 26 57 53
--------- --------- ---------- ----------
6,444 7,567 12,122 13,778
--------- --------- ---------- ----------
Costs and Expenses:
Lease operating expenses........... 1,347 1,696 2,447 3,061
Gas plant and gas gathering
expenses......................... 1,549 934 3,006 1,827
Depreciation, depletion and
amortization..................... 1,979 2,173 3,866 4,167
General and administrative
expenses......................... 859 761 1,559 1,452
Interest expense................... 472 232 956 520
Other expense...................... 143 -- 155 --
--------- --------- ---------- ----------
6,349 5,796 11,989 11,027
--------- --------- ---------- ----------
Income before income taxes.............. 95 1,771 133 2,751
Provision for income taxes.............. 107 655 132 1,018
--------- --------- ---------- ----------
Net income......................... $ (12) $ 1,116 $ 1 $ 1,733
========= ========= ========== ==========
Net income per share.................... $ -- $ 0.12 $ 0.00 $ 0.19
========= ========= ========== ==========
Weighted average common and common
equivalent shares outstanding......... 9,045 9,145 9,045 9,118
========= ========= ========== ==========
</TABLE>
See Notes to Condensed Consolidated Financial Statements.
F-24
<PAGE>
BELLWETHER EXPLORATION COMPANY
CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK PREFERRED STOCK ADDITIONAL TREASURY STOCK
------------------ ------------------ PAID-IN RETAINED ----------------
SHARES AMOUNT SHARES AMOUNT CAPITAL EARNINGS SHARES AMOUNT
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, June 30, 1993.................. 2,318 $ 1,156 -- -- $ 7,598 $ 2,130 29 $(115)
Shares issued in merger with Associated
Gas Resources, Inc.................... 1,419 708 -- -- 6,066 -- -- --
To change par value per share........... -- (1,827) -- -- 1,827 -- -- --
Other................................... -- -- -- -- (1) -- (14) 16
Net earnings............................ -- -- -- -- -- 814 -- --
------ -------- ------ -------- ---------- -------- ------ ------
Balance, June 30, 1994.................. 3,737 37 -- -- 15,490 2,944 15 (99)
Shares issued in public stock
offering.............................. 3,400 34 -- -- 17,204 -- -- --
Cancellation of treasury stock.......... (15 ) -- -- -- -- -- (15) 99
Shares issued in merger with Odyssey
Partners, Ltd......................... 917 9 -- -- 3,944 -- -- --
Shares issued in merger with Hampton
Resources Corporation................. 1,006 10 -- -- 4,834 -- -- --
Net earnings............................ -- -- -- -- -- 941 -- --
------ -------- ------ -------- ---------- -------- ------ ------
Balance, June 30, 1995.................. 9,045 90 -- -- 41,472 3,885 -- --
Stock options exercised................. 30 1 -- -- 167 -- -- --
Net earnings............................ -- -- -- -- -- 982 -- --
------ -------- ------ -------- ---------- -------- ------ ------
Balance, June 30, 1996.................. 9,075 91 -- -- 41,639 4,867 -- --
Stock options exercised................. 70 1 420
Net earnings............................ -- -- -- -- -- 1,733 -- --
------ -------- ------ -------- ---------- -------- ------ ------
Balance, December 31, 1996
(unaudited)........................... 9,145 $ 92 -- -- $ 42,059 $ 6,600 -- $--
====== ======== ====== ======== ========== ======== ====== ======
</TABLE>
TOTAL
Balance, June 30, 1993.................. $ 10,769
Shares issued in merger with Associated
Gas Resources, Inc.................... 6,774
To change par value per share........... --
Other................................... 15
Net earnings............................ 814
--------
Balance, June 30, 1994.................. 18,372
Shares issued in public stock
offering.............................. 17,238
Cancellation of treasury stock.......... 99
Shares issued in merger with Odyssey
Partners, Ltd......................... 3,953
Shares issued in merger with Hampton
Resources Corporation................. 4,844
Net earnings............................ 941
--------
Balance, June 30, 1995.................. 45,447
Stock options exercised................. 168
Net earnings............................ 982
--------
Balance, June 30, 1996.................. 46,597
Stock options exercised................. 421
Net earnings............................ 1,733
--------
Balance, December 31, 1996
(unaudited)........................... $ 48,751
========
See Notes to Condensed Consolidated Financial Statements.
F-25
<PAGE>
BELLWETHER EXPLORATION COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS -- UNAUDITED
SIX MONTHS
ENDED
DECEMBER 31,
-----------------------
1995 1996
(IN THOUSANDS)
Net Income........................... $ 1 $ 1,733
Adjustments to reconcile net income
to net cash provided by operating
activities:
Depreciation, depletion and
amortization................... 3,897 4,308
Deferred taxes and other........ -- 951
Change in assets and liabilities:
Accounts receivable and accrued
revenues........................ (439) (1,306)
Accounts payable and other
liabilities..................... 405 999
Due (to) from affiliates........ (158) 823
Other........................... (210) (403)
---------- -----------
Net Cash Flows Provided by Operating
Activities......................... 3,496 7,105
---------- -----------
Cash Flows From Investing Activities:
Additions to oil and gas
properties...................... (1,133) (7,430)
Proceeds from sales of
properties...................... -- 1,665
Other........................... (41) (45)
---------- -----------
Net Cash Flows Used In Investing
Activities......................... (1,174) (5,810)
---------- -----------
Cash Flows From Financing Activities:
Proceeds from borrowings........ -- 13,000
Payments of long-term debt...... (1,000) (15,048)
Net proceeds from issuance of
common stock.................... -- 420
---------- -----------
Net Cash Flows (Used In) Provided by
Financing Activities............... (1,000) (1,628)
---------- -----------
Net increase (decrease) in cash
and cash equivalents............ 1,322 (333)
Cash and cash equivalents at
beginning of period............ 1,088 783
---------- -----------
Cash And Cash Equivalents At End of
Period............................. $ 2,410 $ 450
========== ===========
Supplemental Disclosures Of Cash Flow
Information:
Cash paid during the period for:
Interest........................ $ 480 $ 348
Income taxes (net of refund).... 127 63
See Notes to Condensed Consolidated Financial Statements.
F-26
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with instructions to Form 10-Q and, therefore, do not
include all disclosures required by generally accepted accounting principles.
However, in the opinion of management, these statements include all adjustments,
which are of a normal recurring nature, necessary to present fairly the
financial position at December 31, 1996, and June 30, 1996, and the results of
operations and changes in cash flows for the periods ended December 31, 1996,
and 1995. These financial statements should be read in conjunction with the
consolidated financial statements and notes to the consolidated financial
statements in the 1996 Form 10-K of Bellwether Exploration Company ("the
Company") that was filed with the Securities and Exchange Commission.
2. INDUSTRY SEGMENT INFORMATION
The Company's operations are concentrated primarily in two segments; the
exploration and production of oil and natural gas and gas plants and gas
gathering operations.
FOR THE SIX MONTHS
ENDED
DECEMBER 31,
----------------------
1995 1996
(IN THOUSANDS)
Sales to unaffiliated customers:
Oil and gas..................... $ 7,142 $ 9,846
Gas plants and gas gathering.... 4,923 3,879
Other revenues.................. 57 53
---------- ----------
Total revenues............. 12,122 13,778
========== ==========
Operating profit before income tax:
Oil and gas..................... 1,520 3,059
Gas plants and gas gathering.... 1,226 1,611
---------- ----------
2,746 4,670
---------- ----------
Unallocated corporate expenses....... 1,657 1,399
Interest expense..................... 956 520
---------- ----------
Income before taxes........ 133 2,751
========== ==========
Depreciation, depletion and
amortization:
Oil and gas..................... 3,175 3,726
Gas plants and gas gathering.... 691 441
---------- ----------
$ 3,866 $ 4,167
========== ==========
3. LONG TERM DEBT
On February 28, 1995, the Company entered into a credit facility ("Credit
Facility") with a commercial bank providing an initial borrowing base of $29.8
million. The borrowing base is reviewed semi-annually. The borrowings under the
Credit Facility are secured by the Company's interest in oil and gas properties
and in the Gathering System and the Gas Plant. The maturity date, as modified in
the second quarter, fiscal 1996 is March 31, 2001, and the borrowing base is
$20.1 million. The Credit Facility was retired in October 1996.
In October 1996 the Company entered into a syndicated credit facility ("New
Credit Facility") in an amount up to $50 million with an initial borrowing base
of $27 million, to be determined semi-annually. The interest rate, at the
Company's option, will vary, based upon borrowing base usage, from LIBOR plus
7/8% to LIBOR plus 1 1/4%, or the greater of the prime rate or Fed Funds plus
1/2%. The New Credit Facility is unsecured with respect to oil and gas assets
and has a termination date of October 15, 2000.
F-27
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (CONTINUED)
The New Credit Facility contains various covenants including certain required
financial measurements for a current ratio, consolidated tangible net worth, and
interest coverage ratio. In addition, the New Credit Facility includes certain
limitations on restricted payments and dividends, incurrence of additional
funded indebtedness/guarantees and asset sales.
4. GAS CONTRACT LIABILITY
The Company and certain third parties were the beneficiaries of an agreement
("Purchase Agreement") whereby another party had an obligation to purchase,
until May 1999, the gas produced by the Company and such third parties from the
West Monroe field in Union Parish, Louisiana, at a price of $4.50 per MMBTU.
Bellwether owned a large majority of the gas produced and sold pursuant to the
Purchase Agreement. In March 1996, in exchange for Bellwether's agreement to
assume this obligation to purchase gas under the Purchase Agreement, Bellwether
was paid $9.9 million. As a result of this transaction, the Company has written
off the book value of the gas gathering system and has recorded a liability of
$2.0 million to cover estimated liabilities under the contract. Gas gathering
operations of the subsidiary and payments to third parties are charged to the
liability as incurred. From the proceeds, $9.5 million was paid on the Company's
credit facility.
5. GUARANTOR FINANCIAL STATEMENTS
CONDENSED CONSOLIDATING BALANCE SHEETS -- UNAUDITED
AS OF DECEMBER 31, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
BELLWETHER ODYSSEY ELIMINATIONS CONSOLIDATED
<S> <C> <C> <C> <C>
Total current assets................. $ 7,595 $ 1,040 $ -- $ 8,635
Net property, plant and equipment.... 47,385 12,370 -- 59,755
Total other assets................... 10,314 15 (9,737) 592
---------- -------- ------------ ------------
Total assets.................... $ 65,294 $ 13,425 $ (9,737) $ 68,982
========== ======== ============ ============
Total current liabilities............ $ 2,254 $ 2,024 $ -- $ 4,278
Long-term debt....................... 11,000 -- -- 11,000
Deferred taxes....................... 3,202 603 -- 3,805
Other long-term liabilities.......... 1,148 -- -- 1,148
Total stockholders' equity........... 47,690 10,798 (9,737) 48,751
---------- -------- ------------ ------------
Total liabilities and
stockholders' equity.......... $ 65,294 $ 13,425 $ (9,737) $ 68,982
========== ======== ============ ============
</TABLE>
CONDENSED CONSOLIDATING INCOME STATEMENTS-- UNAUDITED
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
Revenues............................. $ 11,970 $ 1,808 $ 13,778
Expenses............................. 9,736 1,291 11,027
---------- ------- ------------
Net earnings before income taxes..... 2,234 517 2,751
---------- ------- ------------
Income taxes......................... 839 179 1,018
---------- ------- ------------
Net earnings......................... $ 1,395 $ 338 $ 1,733
========== ======= ============
F-28
<PAGE>
BELLWETHER EXPLORATION COMPANY
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- UNAUDITED -- (CONTINUED)
CONDENSED CONSOLIDATING STATEMENT OF CASH FLOWS
FOR THE SIX MONTHS ENDED DECEMBER 31, 1996
(IN THOUSANDS)
BELLWETHER ODYSSEY CONSOLIDATED
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income...................... $ 1,395 $ 338 $ 1,733
Non-cash adjustments............ 4,670 589 5,259
Change in assets and
liabilities.................... (804) 917 113
---------- -------- ------------
Net cash provided by operating
activities..................... 5,261 1,844 7,105
---------- -------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to oil & gas
properties..................... (5,487) (1,943) (7,430)
Proceeds from sale of
properties..................... 1,665 -- 1,665
Additions to other properties
and other...................... (45) -- (45)
---------- -------- ------------
Net cash used in investing
activities..................... (3,867) (1,943) (5,810)
---------- -------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from borrowings........ 13,000 -- 13,000
Payments of long-term debt...... (15,048) -- (15,048)
Net proceeds from issuance of
common stock................... 420 -- 420
---------- -------- ------------
Net cash provided by in
financing activities........... (1,628) -- (1,628)
---------- -------- ------------
Net increase (decrease) in cash
and cash equivalents........... (234) (99) (333)
Cash and cash equivalents at
beginning of period............ 592 191 783
---------- -------- ------------
Cash and cash equivalents at end
of period...................... $ 358 $ 92 $ 450
========== ======== ============
6. OTHER MATTERS -- (UNAUDITED)
In February 1997, the Company filed a registration statement with the SEC with
regard to an offering by the Company of 4,400,000 shares of common stock
("Common Stock Offering") and $100.0 million in Senior Subordinated Notes
("Notes Offering"), the proceeds of which are to be used to purchase oil and
gas properties and an estimated $18.0 million of working capital for $188.3
million, plus a contingent payment of up to $9.0 million, the actual amount of
which will be based on 1997 gas prices (the "Contingent Payment"). The
effective date of the pending acquisition is July 1, 1996 and the estimated net
adjusted purchase price assuming an April 9, 1997 closing date is $141.8 million
plus the Contingent Payment. As of June 30, 1996, estimated net proved reserves
attributable to the properties were 39.2 MMBOE (89% developed and 59% gas) with
a PV-10 Value (pre-tax) of $212.0 million. The Company is also negotiating a new
$90 million credit facility ("New Credit Facility") with a group of banks. The
Company will finance the cash portion of the acquisition and related fees,
estimated to aggregate $173.2 million, including repayment of an estimated $12.0
million of existing indebtedness with advances under the New Credit Facility and
the proceeds of the Common Stock Offering and the Notes Offering.
F-29
<PAGE>
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Torch Energy Advisors Incorporated:
We have audited the accompanying statements of assets (other than productive oil
and gas properties) and liabilities as of December 31, 1995 and 1996 to be
acquired by Bellwether Exploration Company (Acquired Properties) as described in
Note 1 and the related statements of revenues and direct operating expenses for
each of the years in the three-year period ended December 31, 1996. These
financial statements are the responsibility of Torch Energy Advisors
Incorporated's management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
The accompanying statements were prepared as described in Note 1 for the purpose
of complying with certain rules and regulations of the Securities and Exchange
Commission ("SEC") for inclusion in certain SEC regulatory reports and filings
and are not intended to be a complete financial presentation.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the assets (other than productive oil and gas properties)
and liabilities of the Acquired Properties as of December 31, 1995 and 1996 and
the related revenues and direct operating expenses for each of the years in the
three-year period ended December 31, 1996, in conformity with generally accepted
accounting principles.
KPMG PEAT MARWICK LLP
Houston, Texas
March 11, 1997
F-30
<PAGE>
THE ACQUIRED PROPERTIES
STATEMENTS OF ASSETS ACQUIRED (OTHER THAN PRODUCTIVE OIL
AND GAS PROPERTIES) AND LIABILITIES (NOTE 1)
(IN THOUSANDS)
DECEMBER 31,
----------------------
1995 1996
Assets acquired (other than productive
oil and gas properties)
Cash and cash equivalents.......... $ 603 $ 79
Accounts receivable and other...... 19,291 23,428
Due from affiliates................ 5,798 3,954
Liabilities
Accounts payable and accrued
liabilities....................... (8,968) (9,050)
Due to affiliates.................. (30) (375)
---------- ----------
Excess of assets acquired (other
than productive oil and gas
properties) over liabilities
assumed........................... $ 16,694 $ 18,036
========== ==========
See accompanying notes.
F-31
<PAGE>
THE ACQUIRED PROPERTIES
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
(IN THOUSANDS)
YEARS ENDED DECEMBER 31,
-------------------------------------
1994 1995 1996
REVENUES:
Oil revenues....................... $ 42,215 $ 43,424 $ 42,842
Gas revenues....................... 60,129 49,354 58,132
Natural gas processing income...... 114 126 49
Other oil and gas income........... 655 19,363 1,338
----------- ----------- -----------
103,113 112,267 102,361
----------- ----------- -----------
DIRECT OPERATING EXPENSES:
Lease operating expenses........... $ 26,890 $ 28,894 $ 24,733
Production taxes................... 3,511 2,238 3,081
----------- ----------- -----------
Direct operating expenses.......... 30,401 31,132 27,814
----------- ----------- -----------
REVENUES IN EXCESS OF DIRECT OPERATING
EXPENSES.............................. $ 72,712 $ 81,135 $ 74,547
=========== =========== ===========
See accompanying notes.
F-32
<PAGE>
THE ACQUIRED PROPERTIES
NOTES TO STATEMENTS OF ASSETS ACQUIRED (OTHER THAN PRODUCTIVE OIL AND GAS
PROPERTIES) AND LIABILITIES AND STATEMENTS OF REVENUES AND DIRECT OPERATING
EXPENSES
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying statements present the assets (other than productive oil and
gas properties) and liabilities to be acquired and the related revenues and
direct operating expenses of oil and gas properties (the "Acquired
Properties") to be acquired by Bellwether Exploration Company from Torch Energy
Advisors Incorporated ("Torch") and certain partnerships and other entities
managed or sponsored by Torch (collectively, the "Partnerships"). The Acquired
Properties are primarily located in Texas, Louisiana, California and the Gulf of
Mexico.
The accompanying financial statements were derived from the historical
accounting records from the Partnerships. Direct operating expenses include
payroll, lease and well repairs, maintenance and other direct operating
expenses.
OMITTED HISTORICAL FINANCIAL INFORMATION
Full historical financial statements, including general and administrative
expense, income tax expense and interest expense have not been presented
historically because the above properties were not accounted for or operated as
a separate division by the Partnerships. Historical depletion expense, including
abandonment provision, also has not been included as the basis in the properties
will be adjusted in the purchase price allocation when they are sold; therefore,
historical depletion no longer will be relevant.
ACCRUAL BASIS STATEMENTS
Memorandum adjustments have been made to the financial information in order to
present the accompanying financial statements in accordance with generally
accepted accounting principles.
CASH AND CASH EQUIVALENTS
The Partnerships consider all highly liquid debt instruments purchased with an
original maturity date of three months or less to be cash equivalents.
GAS BALANCING
Certain Partnerships use the entitlement method for recording sales of natural
gas. Under the entitlement method of accounting, revenue is recorded based on
the Partnerships' net revenue interest in production. Deliveries of natural gas
in excess of the Partnerships' revenue interests are recorded as liabilities and
under-deliveries are recorded as assets. Production imbalances are recorded at
the lower of the sales price in effect at the time of production or the current
market value. At December 31, 1995 and 1996 the Partnerships' aggregate net
receivable was $781,705 and $1,174,950, respectively. Such amounts have been
included in accounts receivable and accounts payable and accrued liabilities as
it is expected that a substantial portion of the production imbalances will be
settled with production in the upcoming year.
Certain other Partnerships use the sales method for recording sales of natural
gas. Under the sales method of accounting, revenue is recorded based on the
Partnerships' sales of production. Substantially all such gas imbalances are
anticipated to be settled with production in future periods. If such
Partnerships had used the entitlement method of recording sales of natural gas,
there would have been no significant impact on the financial statements.
USE OF ESTIMATES
A number of estimates and assumptions relating to the reporting of assets and
liabilities and to the disclosure of contingent assets and liabilities have been
made by Torch to prepare these financial statements in conformity with generally
accepted accounting principles. Actual results could differ from those
estimates.
F-33
<PAGE>
THE ACQUIRED PROPERTIES
NOTES TO STATEMENTS OF ASSETS ACQUIRED (OTHER THAN PRODUCTIVE OIL AND GAS
PROPERTIES) AND LIABILITIES AND STATEMENTS OF REVENUES AND DIRECT OPERATING
EXPENSES -- (CONTINUED)
DETERMINATION OF FAIR VALUE OF FINANCIAL INSTRUMENTS
Fair value for cash, receivables, and payables approximates carrying value.
2. OTHER OIL AND GAS REVENUES
Included in revenues are $0.6 million, $18.2 million and $0.4 million during
1994, 1995 and 1996, respectively, which were received from various bankruptcy
and contract pricing settlements. Also included in revenues are payments in lieu
of tax credits of $66,000, $0.8 million and $1.0 million, during 1994, 1995 and
1996, respectively.
3. RELATED PARTY TRANSACTIONS
An affiliate of Torch operates certain oil and gas wells included in the
Acquired Properties. Fees under joint operating agreements related to such wells
in the amount of $1.8 million, $1.8 million and $1.7 million were incurred the
years ended December 31, 1994, 1995 and 1996, and are included in direct
operating expenses. In addition, an affiliate of Torch marketed a portion of the
production of the Acquired Properites, for which service it charged the
Partnerships marketing fees on the same basis as other third parties. The amount
of such fees charged to the Partnerships during 1994, 1995 and 1996 was $1.4
million, $1.5 million and $1.6 million, respectively. Such amounts are included
as a reduction to oil and gas revenues.
4. CAPITAL EXPENDITURES
Direct operating expenses do not include exploration and development
expenditures related to the properties which totaled approximately $14.9
million, $14.0 million and $7.5 million in 1994, 1995 and 1996, respectively.
5. COMMITMENTS AND CONTINGENCIES
Management is unaware of any legal, environmental or other contingencies that
would be materially important in relation to these financial statements.
6. SUPPLEMENTAL OIL AND GAS RESERVE INFORMATION (UNAUDITED)
Total proved and proved developed oil and gas reserves of the Acquired
Properties at December 31, 1996 have been estimated based on reserve estimates
prepared by the Company and audited by Ryder Scott Company Petroleum Engineers
as of June 30, 1996, adjusted for production from June 30, 1996 to December 31,
1996. No comparable estimates were available for subsequent or prior periods.
Therefore, reserves for December 31, 1994, 1995 and 1996 have been calculated by
adjusting the June 30, 1996 amounts for the respective period's activities and,
consequently, no revisions of previous estimates have been reflected. All
reserve estimates are based on economic and operating conditions existing at
June 30, 1996. The future net cash flows from production of these proved reserve
quantities were computed by applying current prices of oil and gas, averaging
$16.17 per barrel of oil and $2.22 per thousand cubic foot of gas (with
consideration of price changes only to the extent provided by contractual
arrangements) as of June 30, 1996 to estimated future production of proved oil
and gas reserves less the estimated future expenditures (based on current costs)
as of June 30, 1996, to be
F-34
<PAGE>
THE ACQUIRED PROPERTIES
NOTES TO STATEMENTS OF ASSETS ACQUIRED (OTHER THAN PRODUCTIVE OIL AND GAS
PROPERTIES) AND LIABILITIES AND STATEMENTS OF REVENUES AND DIRECT OPERATING
EXPENSES -- (CONTINUED)
incurred in developing and producing the proved reserves. The Acquired
Properties are located primarily in Texas, Louisiana, Alabama, California and
the Gulf of Mexico.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------------------------
1994 1995 1996
---------------------- ---------------------- ----------------------
OIL GAS OIL GAS OIL GAS
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
<S> <C> <C> <C> <C> <C> <C>
Proved reserves:
Beginning of year............... 23,341 215,441 20,422 181,139 17,351 151,297
Production...................... (2,919) (34,302) (3,071) (29,842) (2,460) (22,387)
---------- ---------- ---------- ---------- ---------- ----------
End of Year..................... 20,422 181,139 17,351 151,297 14,891 128,910
========== ========== ========== ========== ========== ==========
Proved developed reserves:
Beginning of year............... 20,827 204,626 17,908 170,324 14,837 140,482
---------- ---------- ---------- ---------- ---------- ----------
End of year..................... 17,908 170,324 14,837 140,482 12,377 118,095
========== ========== ========== ========== ========== ==========
</TABLE>
Standardized Measure of Discounted Future Net Cash Flows Relating to Proved Oil
& Gas Reserves (in thousands):
AS OF
DECEMBER 31,
1996
------------
Future cash inflows..................... $ 513,741
Future production costs................. (195,576)
Future development costs................ (40,450)
------------
Future net inflows before income
taxes................................. 277,715
Income taxes............................ (54,913)
------------
Future net cash flows................... 222,802
10% discount factor..................... (70,403)
------------
Standardized measure of discounted
future net cash flows................. $ 152,399
============
Changes to Standardized Measure of Discounted Future Net Cash Flows Relating to
Proved Oil and Gas Reserves (in thousands):
Standardized measure, beginning of
year.................................. $ 182,057
Sales, net of production costs..... (73,160)
Net change in income taxes......... 17,418
Net change in future development
costs............................. 4,336
Accretion of discount.............. 18,206
Net change in timing and other..... 3,542
------------
Standardized measure, end of year....... $ 152,399
============
F-35
EXHIBIT A
Williamson Petroleum Consultants, Inc.
March 12, 1997
Bellwether Exploration Company
1221 Lamar, Suite 1600
Houston, Texas 77010
Attention Mr. J. Darby Sere'
Gentlemen:
Subject: Revision to the Williamson Petroleum Consultants, Inc. Report Entitled
"Evaluation of Oil and Gas Reserves to the Interests of Bellwether
Exploration Company in Certain Properties, Effective June 30, 1996,
for Disclosure to the Securities and Exchange Commission, Williamson
Project 6.8369"
At your request, Williamson Petroleum Consultants, Inc. (Williamson) has
prepared a revision to the Williamson report entitled "Evaluation of Oil and Gas
Reserves to the Interests of Bellwether Exploration Company in Certain
Properties, Effective June 30, 1996, for Disclosure to the Securities and
Exchange Commission, Williamson Project 6.8369" dated August 20, 1996 (the
August 20, 1996 report). Revisions were made for three properties in the South
Bullocks Church field, Victoria County, Texas and four properties in the Fort
Trinidad field, Houston and Madison Counties, Texas. These revisions were small
increases in ownership interests which resulted in a minor increase in net
reserves and associated future net revenues. All other data, definitions, and
assumptions are as stated in the August 20, 1996 report. The following is a
revised summary of the evaluation effective June 30, 1996:
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED DEVELOPED PROVED TOTAL
PRODUCING NONPRODUCING UNDEVELOPED PROVED
---------- --------- ---------- ----------
Net Reserves to the
Evaluated Interests:
<S> <C> <C> <C> <C>
Oil/Condensate, BBL ............................ 1,380,372 113,323 314,658 1,808,353
Gas, MCF ....................................... 17,436,973 5,260,717 10,497,974 33,195,664
Future Net Revenue, $:
Undiscounted ................................... 43,372,307 10,276,435 17,813,708 71,462,450
Discounted Per Annum
at 10.00 Percent ............................... 30,650,666 6,224,432 11,264,518 48,139,616
</TABLE>
A-1
<PAGE>
The total company, state, and field reserves category summaries and individual
lease reserves and economics that were revised are attached.
If you have any questions, please call me at 713-750-7215.
Yours very truly,
/s/ WILLIAMSON PETROLEUM CONSULTANTS, INC.
WILLIAMSON PETROLEUM CONSULTANTS, INC.
JDS/jek
Attachments
A-2
<PAGE>
EXHIBIT B
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS FAX (403) 262-2790
1610, 855-2ND STREET S.W. CALGARY, ALBERTA T2P 2P2 TELEPHONE (403) 262-2799
February 7, 1997
Mr. Darby Sere
Bellwether Exploration Company
1221 Lamar, Suite 1600
Houston, TX 77010
Gentlemen:
At your request, we have reviewed the estimates of the remaining proved reserves
and future net income attributable to certain properties being considered for
purchase by Bellwether Exploration Company (Bellwether), as of July 1, 1996, as
prepared by the engineering and geological consultants to Bellwether and based
on Securities and Exchange Commission (SEC) guidelines for future cost and price
parameters.
The properties that we reviewed represent 84 percent of the total proved
discounted future net income based on constant pricing and costs as taken from
reserve and income projections prepared by Bellwether as of July 1, 1996.
The estimated reserves presented in this report are related to hydrocarbon
prices. June 1996 hydrocarbon prices were used in the preparation of this report
as required by SEC guidelines. However, actual future prices may vary
significantly from those used. Therefore, volumes of reserves actually recovered
and the amounts of income actually received may differ significantly from the
estimated quantities presented in this report. The estimated net reserves and
future net income attributable to the properties being considered for purchase
are summarized as follows:
SEC PARAMETERS
Estimated Net Remaining Reserves and Income Data
Attributable to Certain Properties Considered for Purchase by
BELLWETHER EXPLORATION COMPANY
As of July 1, 1996
<TABLE>
<CAPTION>
Proved
---------------------------------------------------------------------------------
Developed
--------------------------------------------- Proved Total
Producing Non-Producing Undeveloped Costs Proved
----------- ------------- ----------- ------- ------------
NET RESERVES OF PROPERTIES
REVIEWED BY RYDER SCOTT
<S> <C> <C> <C> <C> <C>
Oil/Condensate - Barrels .................. 11,635,800 623,900 2,100,600 0 14,360,400
Gas - MMcf ................................ 103,109 25,134 10,815 0 139,057
Plant Products - Bbls ..................... 1,082,500 193,800 413,100 0 1,689,400
PV(10) Future Net Income ($M) ............. $ 181,897 $ 26,171 $ 19,609 ($15,686) $ 211,992
</TABLE>
<PAGE>
Liquid hydrocarbons are expressed in standard 42 gallon barrels. All gas volumes
are expressed in millions of cubic feet (MMCF) at the official temperature and
pressure bases of the areas in which the gas reserves are located.
The proved developed non-producing reserves attributable to the reviewed
properties are comprised of shut-in and behind pipe reserves.
The proved reserves, which are attributable to the properties that we reviewed,
conform to the definition as set forth in the Securities and Exchange
Commission's Regulation S-X Part 210.4-10(a) as clarified by subsequent
Commission Staff Accounting Bulletins. The proved reserves are defined as
follows:
PROVED RESERVES of crude oil, condensate, natural gas and natural gas
liquids are estimated quantities that geological and engineering data
demonstrate with reasonable certainty to be recoverable in the future from
known reservoirs under existing conditions. Reservoirs are considered proved
if economic producibility is supported by actual production or formation
tests. In certain instances, proved reserves are assigned on the basis of a
combination of core analysis and electrical and other type logs which
indicate the reservoirs are analogous to reservoirs in the same field which
are producing or have demonstrated the ability to produce on a formation
test. The area of a reservoir considered proved includes (1) that portion
delineated by drilling and defined by fluid contacts, if any, and (2) the
adjoining portions not yet drilled that can be reasonably judged as
economically productive on the basis of available geological and engineering
data. In the absence of data on fluid contacts, the lowest known structural
occurrence of hydrocarbons controls the lower proved limit of the reservoir.
Proved reserves are estimates of hydrocarbons to be recovered from a given
date forward. They may be revised as hydrocarbons are produced and
additional data become available. Proved natural gas reserves are comprised
of non-associated, associated, and dissolved gas. An appropriate reduction
in gas reserves has been made for the expected removal of liquids, for lease
and plant fuel, and the exclusion of non-hydrocarbon gases if they occur in
significant quantities and are removed prior to sale. Reserves that can be
produced economically through the application of established improved
recovery techniques are included in the proved classification when these
qualifications are met: (1) successful testing by a pilot project or the
operation of an installed program in that reservoir or one in the immediate
area with similar rock and fluid properties provides support for the
engineering analysis on which the project or program was based, and (2) it
is reasonably certain the project will proceed. Reserves to be recovered by
improved recovery techniques that have yet to be established through
repeated economically successful applications are included in the proved
category only after testing by a pilot project or after the operation of an
installed program in the reservoir provides support for the engineering
analysis on which the project or program was based. Improved recovery
includes all methods for supplementing natural reservoir forces and energy,
or otherwise increasing ultimate recovery from a reservoir, including (1)
pressure maintenance, (2) cycling, and (3) secondary recovery in its
original sense. Improved recovery also includes the enhanced recovery
methods of thermal, chemical flooding, and the use of miscible and
immiscible displacement fluids. Estimates of proved reserves do not include
crude oil, condensate, natural gas or natural gas liquids being held in
B-2
<PAGE>
underground storage. Depending on the status of development, these proved
reserves are further subdivided into:
1) "developed reserves" which are those proved reserves reasonably
expected to be recovered through existing wells with existing
equipment and operating methods, including (a) "developed producing
reserves" which are those proved developed reserves reasonably
expected to be produced from existing completion intervals now open
for production in existing wells, and (b) "developed non-producing
reserves" which are those proved developed reserves which exist
behind the casing of existing wells which are reasonably expected to
be produced through these wells in the predictable future where the
cost of making such hydrocarbons available for production should be
relatively small compared to the cost of a new well; and
2) "undeveloped reserves" which are those proved reserves reasonably
expected to be recovered from new wells on undrilled acreage, from
existing wells where a relatively large expenditure is required and
from acreage for which an application of fluid injection or other
improved recovery technique is contemplated where the technique has
been proved effective by actual tests in the area in the same
reservoir or one with similar rock and fluid properties. Reserves
from undrilled acreage are limited to those drilling units
offsetting productive units that are reasonably certain of
production when drilled. Proved reserves for other undrilled units
are included only where it can be demonstrated with reasonable
certainty that there is continuity of production from the existing
formation.
REVIEWED PROCEDURE AND OPINION
In performing our review, we have relied upon data furnished by Bellwether with
respect to property interests owned, production and well tests from examined
wells, geological structural and isopach maps, well logs, core analyses, and
pressure measurements. These data were accepted as authentic and sufficient for
determining the reserves unless, during the course of our examination, a matter
of question came to our attention in which case the data were not accepted until
all questions were satisfactorily resolved. Our review included such tests and
procedures as we considered necessary under the circumstances to render the
conclusions set forth herein.
In our opinion, estimates of future reserves for the reviewed properties were
prepared in accordance with generally accepted procedures for the estimation of
future reserves, and we found no bias in the utilization and analysis of data in
estimates for these properties. In general, we were in reasonable agreement with
Bellwether's estimates of remaining proved reserves for the properties which
were reviewed; however, in certain cases there was more than an acceptable
variance in Bellwether's estimates and our estimates due to a difference in
interpretation of data or due to our having access to data which were not
available to Bellwether when its reserve estimates were prepared. In these
cases, Bellwether revised its estimates to conform to our estimates. As a
consequence, it is our opinion that the data presented herein
B-3
<PAGE>
for the properties that we reviewed fairly reflect the estimated net reserves
owned by Bellwether.
Certain technical consultants to Bellwether are responsible for the preparation
of reserve estimates on new properties and for the preparation of revised
estimates, when necessary, on old properties. These personnel assembled the
necessary data and maintained the data and work papers in an orderly manner. We
consulted with these technical personnel and had access to their workpapers and
supporting data in the course of our review.
RESERVES ESTIMATES
The reserves for the properties that we reviewed were estimated by performance
methods or the volumetric method. The reserve estimates by performance method
utilized extrapolations of various historical data in those cases where such
data were definitive. Reserves were estimated by the volumetric method in those
cases where there were inadequate historical data to establish a definitive
trend or where the use of production performance data as a basis for the
reserves estimates was considered to be inappropriate and the volumetric data
were adequate for a reasonable estimate.
The reserves presented herein, as estimated by Bellwether and reviewed by us,
are estimates only and should not be construed as being exact quantities.
Moreover, estimates of reserves may increase or decrease as a result of future
operations.
ECONOMIC EVALUATIONS
Bellwether provided the economic evaluations associated with their reserve
estimates and projections. They also provided the operating and development
costs used in these evaluations. We reviewed these costs for reasonableness, but
did not compare them against actual detailed lease operating expense statements.
We found these provided costs to be within acceptable ranges generally
experienced in their respective areas.
Bellwether provided the initial hydrocarbon prices used in this evaluation. We
have not compared the initial prices provided by Bellwether with actual prices
being received at the effective date of their evaluation.
The cashflow evaluations provided by Belllwether were produced by economic
software not internally authored by Ryder Scott Company. We therefore, cannot
comment as to the accuracy of the internal calculations associated with this
software. It is, however, a widely used and accepted commercial software
package. These economic evaluations, as provided by Bellwether, have not been
reviewed in detail by Ryder Scott.
B-4
<PAGE>
GENERAL
In general, the reserve estimates for the properties that we reviewed are based
on data generally available through June 1996. Gas imbalances, if any, were not
taken into account in the gas reserves estimates reviewed.
Neither we nor any of our employees have any interest in the subject properties
and neither the employment to do this work nor the compensation is contingent on
our estimates of reserves for the properties which were reviewed.
This report was prepared for the exclusive use of Bellwether. The data and work
papers used in the preparation of this report are available for examination by
authorized parties in our offices. Please contact us if we can be of further
service.
Yours very truly,
RYDER SCOTT COMPANY
PETROLEUM ENGINEERS
/s/ DOUGLAS G. MANNER
Douglas G. Manner, P.E.
Senior Vice President,
DGM/jkl
[SEAL]
B-5
