<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON NOVEMBER 7, 1996
REGISTRATION NUMBER 333-
===============================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
PARALLEL PETROLEUM CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 75-1971716
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
ONE MARIENFELD PLACE, SUITE 465 LARRY C. OLDHAM
MIDLAND, TEXAS 79701 PRESIDENT
(915) 684-3727 ONE MARIENFELD PLACE, SUITE 465
(Address, including zip code, and telephone MIDLAND, TEXAS 79701
number, including area code, of registrant's (915) 684-3727
principal executive offices) (Name, address, including zip code, and
telephone number, including area code,
of agent for service)
</TABLE>
Copy to:
<TABLE>
<S> <C>
THOMAS W. ORTLOFF STEVEN A. MEIERS
LYNCH, CHAPPELL & ALSUP GIBSON, DUNN & CRUTCHER LLP
300 N. MARIENFELD, SUITE 700 333 SOUTH GRAND AVENUE
MIDLAND, TEXAS 79701 LOS ANGELES, CALIFORNIA 90071-3197
(915) 683-3351 (213) 229-7000
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable after this Registration Statement becomes
effective.
If any of the securities registered on this form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this form, check the following box. [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<S> <C> <C> <C> <C>
======================================================================================================
PROPOSED MAXIMUM
AMOUNT PROPOSED MAXIMUM AGGREGATE
TITLE OF EACH CLASS OF TO BE OFFERING PRICE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED(1) PER SHARE(2) PRICE(2) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value..... 2,875,000 $5.00 $14,375,000 $4,357
- ------------------------------------------------------------------------------------------------------
Common Stock Purchase Warrants... 143,750 $.01 $1,438 $1
- ------------------------------------------------------------------------------------------------------
Common Stock, $.01 par value per
share.......................... 143,750(3) $6.00 $862,500 $262
======================================================================================================
</TABLE>
(1) Includes 375,000 shares to cover the Underwriters' over-allotment option.
(2) Estimated solely for the purpose of calculating the registration fee based
upon the last sale price of a share of Common Stock on November 5, 1996.
(3) Issuable upon exercise of Warrants to be issued to the representative of
the Underwriters. In addition, this Registration Statement covers such
indeterminable number of shares of Common Stock as may be issued upon
exercise of the Warrants by reason of antidilution adjustments. Such
additional shares of Common Stock, if issued, will be issued for no
additional consideration, and therefore no additional registration fee is
required.
---------------------
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED NOVEMBER , 1996
2,500,000 SHARES
[PARALLEL PETROLEUM LOGO]
COMMON STOCK
All of the shares of Common Stock offered hereby are being sold by Parallel
Petroleum Corporation (the "Company"). The Company's Common Stock is traded on
the Nasdaq National Market under the symbol "PLLL." On November 5, 1996, the
last reported sale price of the Common Stock as reported by the Nasdaq National
Market was $5 per share. See "Price Range of Common Stock."
THE COMMON STOCK OFFERED HEREBY INVOLVES A HIGH DEGREE OF RISK. SEE
"RISK FACTORS" COMMENCING ON PAGE 7 OF THIS PROSPECTUS.
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>
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
- ----------------------------------------------------------------------------------------------
Per Share..................................... $ $ $
- ----------------------------------------------------------------------------------------------
Total(3)...................................... $ $ $
- ----------------------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------
</TABLE>
(1) Does not include a non-accountable expense allowance payable to the
Representative of the Underwriters or the value of a warrant to be issued to
the Representative to purchase up to 143,750 shares of Common Stock. The
Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $450,000, including the
Representative's non-accountable expense allowance, payable by the Company.
(3) The Company has granted to the Underwriters an option, exercisable within 45
days after the date hereof, to purchase up to 375,000 additional shares of
Common Stock at the Price to Public, less the Underwriting Discount, solely
to cover over-allotments, if any. If the Underwriters exercise this option
in full, the total Price to Public, Underwriting Discount and Proceeds to
Company will be $ , $ and $ respectively. See
"Underwriting."
The shares of Common Stock are offered by the several Underwriters named
herein subject to receipt and acceptance by them and subject to their right to
reject any order in whole or in part. It is expected that delivery of the
certificates representing such shares will be made against payment therefor at
the offices of Van Kasper & Company, San Francisco, California on or about
December , 1996.
VAN KASPER & COMPANY
DECEMBER , 1996
<PAGE> 3
IN CONNECTION WITH THIS OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMMON STOCK AT
A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN MARKET. SUCH
TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET OR OTHERWISE. SUCH
STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS MAY ENGAGE IN PASSIVE
MARKET MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ NATIONAL MARKET IN
ACCORDANCE WITH RULE 10B-6A UNDER THE SECURITIES EXCHANGE ACT OF 1934, AS
AMENDED.
[Two images of a three-dimensional seismic survey and bar graphs
showing (i) for the three years ended December 31, 1995 and the
nine-month periods ended September 30, 1995 and 1996, the Company's net
income, oil and gas revenues, oil and gas production, operating cash
flow, production costs, and general and administrative expense, and
(ii) for the three years ended December 31, 1995 and the nine-month
period ended September 30, 1996, the Company's pretax present value of
proved reserves and equivalent barrels of oil and gas reserves.]
A, B, C and D represent wells drilled in the Horseshoe Atoll Reef Trend of
West Texas. Other companies drilled wells A and B in 1953 and 1964, prior to the
development of 3-D seismic technology. Both were dry holes. The Company drilled
and completed wells C and D in 1993 based on a 3-D seismic survey. Wells C and D
have been producing since completion and, at September 30, 1996, had cumulative
production of approximately 136,000 barrels of oil and 907,000 Mcf of gas and
aggregate daily production rate of approximately 128 barrels of oil and 550 Mcf
of gas.
The image above, which was actually used by the Company in making its
decision to drill wells C and D, is from that 3-D seismic survey. The image on
the overleaf is another representation of the image above.
2
<PAGE> 4
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, including "Risk Factors," and the Company's Financial Statements
and the notes thereto, appearing elsewhere in this Prospectus. Except as
otherwise specified, all information in this Prospectus assumes no exercise of
the Underwriters' over-allotment option.
THE COMPANY
Parallel Petroleum Corporation (the "Company") is an independent energy
company engaged in the exploration for and the acquisition and development of
oil and gas properties. The Company's primary operations are conducted in the
Permian Basin and onshore Gulf Coast areas of Texas. The Company's strategy is
to increase reserves and production and improve financial results through
targeted exploration, development and exploitation of its existing properties,
opportunistic property acquisitions, and utilization of three-dimensional
("3-D") seismic survey technology, while maintaining its low administrative cost
structure.
RECENT DEVELOPMENTS -- SUCCESSFUL USE OF 3-D SEISMIC SURVEYS
The Company believes that, with strict quality control, utilizing 3-D
seismic surveys in areas meeting the Company's 3-D seismic prospect criteria can
result in achieving "exploratory drilling returns with developmental drilling
risks."
The Company first used 3-D seismic surveys in late 1992, beginning with a
small area in the Horseshoe Atoll Reef Trend in the Permian Basin of West Texas.
Based on the survey, the Company drilled one well -- which was a producing
well -- in the survey area. The Company then expanded its 3-D seismic activities
in the Horseshoe Atoll Reef Trend, achieving an 80% success ratio (productive
wells to total wells drilled). This success ratio is significantly in excess of
exploratory drilling results obtained using 2-D seismic survey technology and
other conventional methods.
The Company subsequently identified another area -- the Yegua/Frio Gas
Trend in Jackson and Wharton Counties in the onshore Gulf Coast area of
Texas -- that the Company believed was an excellent prospect for the use of 3-D
seismic surveys. The Company conducted a 3-D seismic survey covering 16,000
acres in this area. Based in substantial part on successful drilling in reliance
on this survey, subsequent 3-D seismic surveys and additional successful
drilling based on these surveys, the Company has entered into a series of
exploration (area of mutual interest) agreements covering approximately 268,000
acres and obtained leases or lease options on 130,555 gross (36,828 net) acres.
Through September 30, 1996, the Company had drilled 53 wells in a 97,000-acre
portion of this area, utilizing its 3-D seismic surveys, achieving an 81%
success ratio. The Company is in the process of conducting 3-D seismic surveys
on the remaining 171,000 acres. See "Use of Proceeds."
The Company evaluates substantially all of its exploratory prospects using
3-D seismic surveys. The following table reflects certain information with
respect to the wells drilled by the Company through September 30, 1996, using
3-D seismic surveys. Of the 51 productive wells reflected below, all but four
continue to be producing wells at September 30, 1996.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
WELLS ----------------------------------------------------
ACREAGE ----------------------------------- REALIZED FUTURE
3-D SEISMIC PROJECT -------------- PRO- SUCCESS TOTAL NET NET PRESENT
(YEAR SURVEY BEGAN) GROSS NET DRILLED DUCTIVE DRY RATIO INVESTMENT REVENUE* REVENUE* VALUE*
- --------------------- ------ ----- ------- -------- --- -------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Horseshoe Atoll Reef
Trend (1992)....... 960 720 10 8* 2 80% $ 3,305,000 $3,457,000 $ 5,990,000 $ 3,945,000
Yegua/Frio Gas Trend:
Phase I & II
(1993)........... 9,043 1,796 30 22* 8 73% 6,051,000 5,009,000 35,489,000 26,076,000
Phase III (1994)... 5,151 1,794 23 21 2 91% 1,056,000 485,000 5,607,000 3,635,000
------ ----- --- --- --- ----------- ---------- ----------- -----------
Total........ 14,194 3,590 53 43 10 81% 7,107,000 5,494,000 41,096,000 29,711,000
------ ----- --- --- --- ----------- ---------- ----------- -----------
Total................ 15,154 4,310 63 51 12 81% $10,412,000 $8,951,000 $47,086,000 $33,656,000
====== ===== === === === =========== ========== =========== ===========
</TABLE>
- ------------------------------
* See footnotes on page 21.
3
<PAGE> 5
RECENT FINANCIAL RESULTS AND OIL AND GAS DATA
As a result of its successful drilling efforts, the Company's reserves and
production have grown significantly and its financial results have improved
substantially. These increases are due in significant part to the substantial
number of productive wells completed during the first nine months of 1996 as a
result of drilling in the Yegua/Frio Gas Trend.
In the nine months ended September 30, 1996, compared to the comparable
period of 1995, the Company's revenues increased by 183% to $9.7 million, while
its general and administrative expenses and total costs and expenses increased
by only 23% to $400,000 and 98% to $4.9 million, respectively, and its pretax
income, net income and net income per share all increased over 1,700% to $3.9
million, $2.6 million, and $.17 per share, respectively.
At September 30, 1996, compared to December 31, 1995, the Company's future
net revenues (before income taxes) increased 75% to $82.0 million and the
present value of its future net revenues (before income taxes) increased 102% to
$52.3 million.
FUTURE PLANS AND STRATEGIES; USE OF PROCEEDS
Based on the favorable drilling results achieved using its 3-D seismic
surveys to date, the Company is currently conducting 3-D seismic surveys on
171,000 acres in the Yegua/Frio Gas Trend, as well as on certain of its Permian
Basin properties. The Company intends to continue to drill wells on formations
identified in the 3-D seismic surveys that meet the Company's drilling criteria.
The Company intends to use the net proceeds of this Offering to repay most
of the indebtedness outstanding under its $30 million revolving loan agreement
with Bank One, Texas, N.A. (the "Bank"). At September 30, 1996, $16.2 million,
bearing interest at 8.25%, was outstanding under the revolving loan agreement.
The Company intends to reborrow under the revolving loan agreement from
time-to-time as necessary, subject to borrowing base limitations, to fund 3-D
seismic surveys, lease option exercises and drilling activities on its
properties and optioned properties in the Yegua/Frio Gas Trend, enhancement
drilling on the Company's Permian Basin properties, other drilling expenditures
and acquisition opportunities and for general corporate purposes.
On October 31, 1996, the Company received notice from the Bank that the
borrowing base under the revolving loan agreement had been increased, effective
November 1, 1996, from $19.5 million to $22.0 million, subject to formal credit
approval, and that, upon successful completion of the offering made by this
Prospectus, the Bank intends to review and anticipates increasing further the
borrowing base, subject to formal credit approval.
4
<PAGE> 6
SUMMARY FINANCIAL AND OPERATING DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------- -----------------------
1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT PER SHARE AND UNIT DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas revenues.............................. $ 3,446 $ 4,693 $ 4,714 $ 3,420 $ 9,693
Costs and expenses:
Production costs................................ 1,305 1,427 1,468 1,066 1,902
General and administrative expense.............. 298 340 433 315 386
Depreciation, depletion and amortization........ 918 1,572 1,618 1,095 2,619
------- ---------- ---------- ---------- ----------
Total costs and expenses...................... 2,521 3,339 3,519 2,476 4,907
------- ---------- ---------- ---------- ----------
Operating income.................................. 925 1,354 1,195 944 4,786
------- ---------- ---------- ---------- ----------
Interest expense, net............................. 427 711 1,035 772 931
------- ---------- ---------- ---------- ----------
Pretax income..................................... 572 708 204 207 3,912
Income tax expense................................ 196 263 67 70 1,330
------- ---------- ---------- ---------- ----------
Income from continuing operations................. $ 376 $ 445 $ 137 $ 137 $ 2,582
------- ---------- ---------- ---------- ----------
Net income........................................ $ 328 $ 445 $ 137 $ 137 $ 2,582
Net income per share.............................. $ .02 $ .03 $ .01 $ .01 $ .17
Weighted average shares outstanding............... 13,467 14,815 15,557 15,308 15,579
OTHER DATA:
EBITDA(1)......................................... $ 1,917 $ 2,991 $ 2,857 $ 2,074 $ 7,462
Operating cash flow(2)............................ $ 1,490 $ 2,280 $ 1,822 $ 1,302 $ 6,531
OPERATING DATA:
Production:
Oil (Bbls)...................................... 106,000 149,000 133,000 102,000 163,000
Gas (Mcf)....................................... 889,000 1,391,000 1,616,000 1,138,000 2,673,000
EBO............................................. 254,000 381,000 402,000 292,000 609,000
Average sales price per unit:
Oil (per Bbl)................................... $ 16.86 $ 15.81 $ 17.26 $ 17.17 $ 21.00
Gas (per Mcf)................................... $ 1.86 $ 1.68 $ 1.50 $ 1.46 $ 2.34
EBO............................................. $ 13.54 $ 12.31 $ 11.72 $ 11.72 $ 15.93
Average costs per EBO:
Production costs................................ $ 5.14 $ 3.75 $ 3.65 $ 3.65 $ 3.12
General and administrative expense.............. $ 1.17 $ .89 $ 1.08 $ 1.08 $ .63
Depreciation, depletion and amortization........ $ 3.61 $ 4.13 $ 4.02 $ 3.75 $ 4.30
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
----------------------------
ACTUAL AS ADJUSTED(3)
------- --------------
(IN THOUSANDS)
<S> <C> <C> <C>
BALANCE SHEET DATA:
Working capital.............................................. $ 2,238 $ 2,238
Total assets................................................. $32,875 $ 32,875
Long-term debt............................................... $16,213 $ 5,025
Stockholders' equity......................................... $13,439 $ 24,627
</TABLE>
- ------------------------------
(1) EBITDA, or "earnings before interest, income taxes, depreciation, depletion,
and amortization," is included because it is used by some investors in
analyzing companies. EBITDA is not required by generally accepted accounting
principles and should not be construed as an alternative to operating
income, net income, net cash provided by operating activities or any other
measure of performance required by generally accepted accounting principles
or as an indicator of the Company's operating performance.
(2) Operating cash flow is net income plus the sum of (i) depreciation,
depletion and amortization, (ii) deferred taxes, and (iii) cumulative effect
of accounting change. Operating cash flow is a supplemental measure used by
the Company in the evaluation of its business and should not be construed as
an alternative to operating income or cash flow from operations and is
presented solely as supplemental disclosure.
(3) As adjusted to give effect to the sale of 2,500,000 shares of Common Stock
offered by the Company hereby and the application of the estimated net
proceeds therefrom. See "Use of Proceeds."
5
<PAGE> 7
SUMMARY OIL AND GAS RESERVE INFORMATION
The following table sets forth summary information with respect to the
Company's estimated proved oil and gas reserves at the end of and reserve
replacement data for the periods indicated. For additional information relating
to reserves, see "Business -- Oil and Gas Reserves."
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
----------- ----------- ----------- -------------
<S> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES:
Oil (Bbls)............................... 1,619,000 1,572,000 1,503,000 1,855,000
Gas (Mcf)................................ 19,096,000 21,611,000 26,124,000 32,831,000
EBO...................................... 4,802,000 5,174,000 5,857,000 7,327,000
Percent of proved developed reserves..... 76% 78% 81% 85%
Future net revenues (before income
taxes)................................. $36,657,000 $37,354,000 $46,835,000 $ 82,010,000
Present value of future net revenues
(before income taxes).................. $21,137,000 $20,462,000 $25,890,000 $ 52,297,000
Average reserve life (in years)(1)....... 18.91 13.58 14.56 9.02
RESERVE REPLACEMENT DATA:
Production replacement ratio(2).......... 363% 198% 270% 341%
Finding costs per EBO(3)................. $ 5.05 $ 6.90 $ 2.75 $ 3.71
</TABLE>
- ------------------------------
(1) Calculated by dividing period-end proved reserves by annualized production
for the most recent period.
(2) Calculated by dividing reserve additions through acquisitions of reserves,
extensions and discoveries and revisions during the period by production for
the period.
(3) Calculated by dividing costs incurred, excluding unproved property
acquisition costs, for the period by reserve additions through acquisitions,
extensions and discoveries, and revisions for such period.
THE OFFERING
Common Stock offered................ 2,500,000 shares of Common Stock of the
Company, $.01 par value. The Company
has granted the Underwriters an option
to purchase up to 375,000 additional
shares solely to cover over-allotments.
Common Stock to be outstanding after
the
Offering.......................... 17,396,358 shares(1).
Use of Proceeds..................... The proceeds of the offering will be
used to repay borrowings outstanding
under the Company's revolving loan
agreement. The Company anticipates
reborrowing to fund its 3-D seismic,
drilling, and other activities.
Nasdaq National Market symbol....... PLLL.
- ------------------------------
(1) Assumes all of the shares offered hereby are sold and excludes 1,541,665
shares issuable upon exercise of outstanding stock options and warrants.
6
<PAGE> 8
RISK FACTORS
An investment in the Common Stock offered hereby involves a high degree of
risk. Prior to making an investment decision, prospective purchasers of shares
of the Common Stock offered hereby should consider carefully, together with the
other information contained in this Prospectus, the matters set forth below.
DEPENDENCE ON KEY PERSONNEL; SMALL MANAGEMENT TEAM
The success of the Company's business is highly dependent upon the
services, efforts and abilities of Thomas R. Cambridge, the Chairman of the
Board of Directors and Chief Executive Officer of the Company, and Larry C.
Oldham, the President and a Director of the Company. The business of the Company
could be materially and adversely affected if Mr. Cambridge or Mr. Oldham were
to become unavailable for any reason. The Company also believes that its
operations are dependent to some degree upon the availability of outside
advisors and consultants, including geophysicists who provide 3-D seismic survey
expertise. The Company does not have employment agreements with any of its
officers or employees, nor does the Company have long term contractual
arrangements with its consultants. In periods of improving market conditions,
the Company's ability to obtain and retain qualified consultants on a timely
basis may be adversely affected. The Company intends, prior to the completion of
this offering, to purchase life insurance on the lives of Mr. Cambridge ($1
million) and Mr. Oldham ($5 million).
At November 1, 1996, the Company had five full-time employees. The
Company's future growth and profitability will also be dependent upon the
Company's ability to attract and retain other qualified management personnel and
to effectively manage its growth. There can be no assurance that the Company
will be successful in doing so.
VOLATILITY OF OIL AND GAS PRICES
The Company's revenues, cash flows and profitability are substantially
dependent upon prevailing prices for both oil and gas. Historically, oil and gas
prices and markets have been volatile, and they are likely to continue to be
volatile in the future. Prices for oil and gas are subject to wide 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 that are beyond the
control of the Company. These factors include, among others, political
conditions in the Middle East and other regions, the domestic and foreign supply
of oil and gas, the level of consumer demand, weather conditions, domestic and
foreign government regulations, the price and availability of alternative fuels
and overall economic conditions.
CAPITAL REQUIREMENTS AND LIQUIDITY
The oil and gas industry is capital intensive. The Company's cash flow from
operations and the continued availability of credit to it are subject to a
number of variables, including the Company's proved reserves and proved
developed reserves, the level of oil and gas the Company is able to produce from
existing wells, the prices at which oil and gas are sold and the Company's
ability to acquire, locate and produce new reserves, each of which can
materially affect the borrowing base availability under the Company's revolving
loan agreement, its only credit facility. The Company may from time to time seek
additional financing, either in the form of increased bank borrowings, sales of
the Company's securities or other forms of financing. Except for the Company's
revolving loan agreement, the Company has no agreements for any such financing
and there can be no assurance as to the availability or terms of any such
financing. To the extent the Company's resources and earnings are at any time
insufficient to fund its activities or repay its indebtedness as due, the
Company will need to raise additional funds through public or private financings
or additional borrowings. No assurance can be given as to the Company's ability
to obtain any such capital resources. If the Company is at any time not able to
obtain then necessary capital resources, its results of operations and financial
condition could be materially adversely affected. If, however, additional funds
are raised through the issuance of equity securities, the percentage ownership
of the Company's stockholders at that time could be diluted and, in addition,
such equity securities may have rights, preferences or privileges senior to
those of the Common Stock.
7
<PAGE> 9
REPLACEMENT OF RESERVES; DEPENDENCE ON EXPLORATORY DRILLING ACTIVITIES
The Company's reserves are depleted as it produces oil and gas. Therefore,
the Company's future success will depend upon its ability to find, develop or
acquire additional oil and gas reserves at prices that permit profitable
operations. Unless the Company conducts successful exploitation or exploration
activities or acquires properties containing reserves, the proved reserves of
the Company will decline. There can be no assurance that the Company's
acquisition, exploitation and exploration activities will result in additional
reserves, or that the Company will be able to drill productive wells at
acceptable costs.
The success of the Company is dependent upon the success of its exploratory
drilling activities. Exploratory drilling is subject to numerous risks,
including the risk that no commercially productive oil and gas reservoirs will
be encountered. The cost of drilling, completing and operating wells is often
uncertain, and drilling operations may be curtailed, delayed or canceled as a
result of a variety of factors, including encountering unexpected formations and
drilling conditions, equipment failures or accidents, as well as weather
conditions, compliance with governmental requirements, shortages or delays in
the delivery of equipment and the unavailability of qualified personnel.
Historically, a majority of the Company's wells have been drilled to depths of
less than 10,000 feet, but the Company also participates in the drilling of
deeper wells and may in the future participate in the drilling of additional
deep wells. Deeper drilling typically involves greater expense and risk.
OPERATING RISKS; RESULTS OF OPERATIONS
The Company's operations are subject to all of the operating hazards and
risks normally incident to drilling for and producing oil and gas, such as
encountering unusual or unexpected formations and pressures, explosions,
blowouts, fire, pipe and tubular failures, casing collapses, environmental
pollution, and other disasters, any one of which could result in environmental
damage, personal injury and other harm that could result in substantial
liabilities to the Company. As is customary in the industry, the Company
maintains insurance against some, but not all, of these risks. The Company
maintains general liability insurance and obtains insurance against blowouts on
a well-by-well basis, but it has not obtained insurance against operating
hazards such as environmental risks. Should the Company sustain an uninsured
liability, its ability to operate may be materially adversely affected. Drilling
activities may also be curtailed, delayed or canceled as a result of numerous
factors outside the Company's control, including but not limited to defects in
title to properties, weather conditions, compliance with governmental
requirements, mechanical difficulties, shortages or delays in the delivery of
drilling rigs or other equipment and the unavailability of qualified personnel.
No assurance can be given that the results of the Company's future drilling
efforts based on 3-D seismic surveys, whether in areas in which the Company has
used such surveys or elsewhere, will be as successful as its results employing
such surveys to date, or successful at all.
The Company's quarterly production and results of operations have varied
from quarter to quarter. Based on its scheduled drilling activities, the Company
does not currently anticipate that its production volumes in the fourth quarter
of 1996 will increase significantly compared to its production volumes in the
prior two quarters, and normal operating considerations and other factors could
result in decreased production volumes in the fourth or subsequent quarters.
CONCENTRATION OF PRODUCING PROPERTIES
Substantially all of the Company's producing properties are located in the
State of Texas and approximately 57% of the Company's proved reserves are
located in the Yegua/Frio Gas Trend onshore the Gulf Coast of Texas. At
September 30, 1996, the Company owned interests in 174 gross (94.36 net)
producing oil and gas wells. The Company has 25 gross producing wells that
represent approximately 63% of the discounted present value of the Company's
total proved reserves at September 30, 1996. Any material harm to the current
producing reservoirs or any significant governmental regulation with respect to
these wells, including any curtailment of production or interruption of
transportation of oil or gas produced from the wells, could have a material
adverse effect on the Company's liquidity and results of operations.
8
<PAGE> 10
COMPETITION; PROPERTY ACQUISITIONS
The Company operates in a highly competitive environment in all facets of
its operations. In seeking to acquire desirable properties suitable for
exploration or acquisition, the Company faces intense competition from both
major and independent oil and gas companies, as well as from numerous
individuals and drilling programs. Many of these competitors have financial and
other resources substantially in excess of those available to the Company. See
"Business -- Competition."
IMPRECISION OF OIL AND GAS RESERVE ESTIMATES
The proved developed and undeveloped oil and gas reserve figures included
in this Prospectus are estimates based on reserve reports prepared by
independent petroleum engineers. The estimation of reserves requires substantial
judgment on the part of the petroleum engineers and is based upon a number of
variable factors and assumptions, all of which are to some degree speculative,
resulting in imprecise determinations, particularly with respect to new
discoveries. Estimates of reserves, future net revenues and present values of
future net revenues prepared or based on reports by petroleum engineers are
estimates only, and different petroleum engineers' estimates may vary
substantially depending, in part, on the assumptions made and may be subject to
material adjustment either up or down in the future. Accordingly, actual
quantities of oil and gas may differ materially from the amounts set forth in
the engineers' reports.
The reserve information in this Prospectus is subject to further
uncertainty because 20 of the Company's producing wells have been completed
since January 1996 and, as a result, 44% of the present value of the Company's
proved reserves of oil and gas are based on limited production and reservoir
information. Further, actual production, revenues, taxes, development and
operating expenditures may not occur as estimated. For these and other reasons,
estimates of economically recoverable oil and gas reserves, future net revenues,
and present values of future net revenues may vary materially from actual
results. See "Business -- Oil and Gas Reserves."
GOVERNMENT REGULATION; ENVIRONMENTAL RISKS
The Company's business is subject to substantial regulation under local,
state and federal laws relating to the exploration for, and the development,
production, marketing, pricing, transportation and storage of, oil and gas, as
well as environmental and safety matters. In the past, prices of oil and gas
have been controlled by and subject to governmental regulation and there can be
no assurance that such price controls will not again be implemented in the
future. There can be no assurance that present or future regulation will not
adversely affect the operations of the Company. See "Business -- Regulation."
The oil and gas industry is also subject to substantial environmental
risks, such as oil spills, oil and gas leaks, ruptures, and discharges of oil
and toxic gases, which could expose the Company to substantial liability. The
Company believes that the oil and gas industry may experience increasing
liabilities and risks under the Comprehensive Environmental Response,
Compensation and Liability Act, as well as other federal, state and local
environmental laws, as a result of increased enforcement of environmental laws
by various regulatory agencies. Any such liabilities could be materially adverse
to the Company. New or different environmental standards imposed in the future
may also adversely affect the Company.
As an "owner" or "operator" of property where hazardous materials may exist
or be present, the Company, like others engaged in the petroleum industry, could
be liable for fines and "clean-up" or remediation costs, regardless of whether
the Company was responsible for the release of any hazardous substances.
Management of the Company does not believe that its environmental risks are
materially different from those of comparable companies engaged in similar
businesses. However, the Company has not obtained environmental compliance
surveys, including so-called "phase one" reports, which would disclose matters
of public record and could disclose evidence of environmental contamination
requiring remediation on any of its properties.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, the Company conducts only a
preliminary title examination at the time properties believed to be suitable for
drilling operations are acquired. Prior to the commencement of drilling
operations, a more extensive title examination of the properties in the drill
site tract believed to have higher values is generally conducted and title
documents for some other properties are examined to a lesser extent. However,
even the more extensive review would not necessarily reveal existing or
potential title defects.
9
<PAGE> 11
Accordingly, no assurance can be given that the Company could successfully or
economically defend title to its properties. See "Business -- Title to
Properties."
WELLS OPERATED UNDER JOINT OPERATING AGREEMENTS
Substantially all of the Company's business activities are conducted
through joint operating agreements in which the Company owns a partial interest
in oil and gas wells and the wells are operated by the Company or other joint
owners. At September 30, 1996, the Company owned interests in 85 gross (64.53
net) oil and gas wells where it is the operator (68% of its net wells) and 89
gross (29.83 net) oil and gas wells where it is not the operator (32% of its net
wells). To the extent the Company is not the operator, it has risks because it
must reimburse its share of costs, but does not have control over normal
operating procedures and expenditures. To the extent the Company is the
operator, it is at risk if one of the joint owners does not reimburse its share
of costs. Since the Company does not have a majority position with respect to
most wells in which it has an interest but is not the operator, the Company may
not be in a position to remove the operator in the event of poor performance.
BLANK CHECK PREFERRED STOCK
The Company is authorized to issue 40,000,000 shares of Preferred Stock,
none of which are outstanding. The Board of Directors has total discretion in
the issuance and the determination of the rights and privileges of any shares of
Preferred Stock which might be issued in the future, which rights and privileges
may be detrimental to the holders of the Common Stock. Also, the issuance of
Preferred Stock in the future could discourage or impede a tender offer, proxy
contest or other similar transaction involving a potential change in control of
the Company that might be viewed favorably by stockholders.
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of the Common Stock of the Company in the
public market following the offering made hereby could adversely affect the
market price for the Common Stock. After this offering, if all of the shares
offered hereby are sold, the Company will have outstanding 17,396,358 shares of
Common Stock (assuming no exercise of the Underwriters' over-allotment option).
Of the 14,896,358 shares of Common Stock outstanding at the date of this
Prospectus, 2,908,565 shares, which may not otherwise be publicly saleable, are
covered by effective registration statements permitting public resale. The
Company believes that approximately 1,600,000 of these shares have been sold in
the public market. The Company believes that no single person, except persons
who have agreed not to sell for 180 days, owns more than 100,000 of the shares
covered by these registration statements. The officers and directors of the
Company and certain of their affiliates, who in the aggregate beneficially own
3,084,531 shares of Common Stock (230,000 of which are covered by the
registration statements), have agreed that they will not sell any Common Stock
without the prior written consent of Van Kasper & Company for a period of 180
days from the date of this Prospectus. Upon expiration of these restrictions,
the officers and directors of the Company and their affiliates will be free to
sell the shares beneficially owned by them, subject to compliance with Rule 144
under the Securities Act of 1933, as amended. See "Shares Eligible For Future
Sale."
FORWARD LOOKING INFORMATION; CERTAIN CAUTIONARY STATEMENTS
Certain statements contained in this Prospectus are forward looking
statements. Included in these are statements with respect to the Company's oil
and gas reserves, future net revenues, present values of future net revenues,
and budgeted or anticipated expenses. All of these statements involve
assumptions of future events which may not prove to be accurate and risks and
uncertainties. These risks and uncertainties include risks associated with the
drilling of wells, competition, financing availability, fluctuations in prices
of oil and gas, governmental regulation, geological concentration of the
Company's reserves and the matters set forth under "Imprecision of Reserve
Estimates" above, elsewhere in the "Risk Factors" section and elsewhere in this
Prospectus. For these and other reasons, actual results may differ materially
from those projected or implied.
10
<PAGE> 12
USE OF PROCEEDS
The net proceeds to the Company from the sale of the shares of Common Stock
offered hereby are estimated to be approximately $11.2 million ($12.9 million,
if the Underwriters' over-allotment option is exercised in full), assuming an
offering price of $5.00 per share. The Company intends to use these net proceeds
to reduce the indebtedness outstanding under the Company's $30 million revolving
loan agreement with Bank One, Texas, N.A. (the "Bank"). At September 30, 1996,
$16.2 million, bearing interest at 8.25%, was outstanding under the revolving
loan agreement. The revolving loan agreement, which matures in July, 2001, is
secured by substantially all of the Company's oil and gas properties. These
borrowings under the revolving loan agreement were incurred to finance the
Company's property acquisition, 3-D seismic surveys, and enhancement and
drilling activities.
The Company intends to reborrow under the revolving loan agreement from
time-to-time as necessary, subject to borrowing base limitations, to fund 3-D
seismic surveys, lease option exercises and drilling activities on its
properties and optioned properties in the Yegua/Frio Gas Trend, enhancement
drilling on the Company's Permian Basin properties, other drilling expenditures
and acquisition opportunities and for general corporate purposes.
On October 31, 1996, the Company received notice from the Bank that the
borrowing base under the revolving loan agreement had been increased, effective
November 1, 1996, from $19.5 million to $22.0 million, subject to formal credit
approval, and that, upon successful completion of the offering made by this
Prospectus, the Bank intends to review and anticipates increasing further the
borrowing base, subject to formal credit approval. See "Management's Discussion
and Analysis of Financial Condition and Results of Operation -- Liquidity and
Capital Resources."
11
<PAGE> 13
CAPITALIZATION
The following table sets forth the capitalization of the Company at
September 30, 1996 and as adjusted to give effect to the sale of the shares of
Common Stock offered hereby and the anticipated use of the estimated net
proceeds therefrom, assuming no exercise of the Underwriters' over-allotment
option.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
---------------------------
ACTUAL AS ADJUSTED
------------ -----------
(IN THOUSANDS)
<S> <C> <C>
Current maturities of long term debt............................... $ -- $ --
=========== ===========
Long-term liabilities:
Revolving loan agreement(1)...................................... $ 16,213 $ 5,025
----------- -----------
Total long-term liabilities................................... 16,213 5,025
----------- -----------
Stockholders' equity:
Common stock, $.01 par value, 100,000,000 shares authorized;
14,866,358 shares issued and outstanding and 17,366,358 shares
as adjusted................................................... 149 174
Additional paid-in surplus....................................... 11,684 22,847
Retained earnings................................................ 1,606 1,606
----------- -----------
Total stockholders' equity.................................... 13,439 24,627
----------- -----------
Total capitalization........................................ $ 29,652 $29,652
=========== ===========
</TABLE>
- ------------------------------
(1) For information regarding terms and interest rates, see note 3 of notes to
the Financial Statements of the Company.
12
<PAGE> 14
PRICE RANGE OF COMMON STOCK
The Company's Common Stock commenced trading on the Nasdaq National Market
on June 1, 1994 and, prior to that time, was traded on the Nasdaq Small Cap
Market. The Common Stock trades under the symbol "PLLL." The following table
sets forth, on a per share basis for the periods indicated, the high and low bid
quotations for the Common Stock as reported by Nasdaq. The bid quotations
represent inter-dealer prices, without retail mark-up, mark-down or commission,
and do not necessarily represent actual transactions.
<TABLE>
<CAPTION>
HIGH LOW
------ ------
<S> <C> <C>
1994
First quarter...................................................... $ 4.69 $ 2.75
Second quarter..................................................... 4.75 3.38
Third quarter...................................................... 3.75 3.44
Fourth quarter..................................................... 3.50 2.88
1995
First quarter...................................................... 3.06 2.00
Second quarter..................................................... 2.06 1.38
Third quarter...................................................... 2.44 1.63
Fourth quarter..................................................... 1.97 1.38
1996
First quarter...................................................... 2.75 1.75
Second quarter..................................................... 4.00 2.50
Third quarter...................................................... 5.56 3.56
Fourth quarter (through November 5)................................ 5.44 4.63
</TABLE>
The last reported sale price of the Company's Common Stock on November 5,
1996, as reported by the Nasdaq National Market was $5.00 per share.
As of October 22, 1996, there were approximately 2,412 shareholders of
record of the Company's Common Stock. During the year ended December 31, 1995
and for the nine months ended September 30, 1996, the average daily trading
volume of the Common Stock was approximately 37,000 shares and 64,000 shares,
respectively.
DIVIDENDS
The Company has never paid any cash dividends on shares of its Common Stock
and does not anticipate paying any cash dividends on the Common Stock in the
future. The Company's revolving loan agreement prohibits the payment of cash
dividends.
13
<PAGE> 15
SELECTED FINANCIAL AND OIL AND GAS DATA
The following tables set forth selected financial and oil and gas data for
the Company as of the dates and for the periods indicated.
The financial data for the three years ended December 31, 1995 were derived
from the Financial Statements of the Company, which have been audited by KPMG
Peat Marwick LLP, independent auditors. The data for the nine months ended
September 30, 1995 and 1996 have been derived from unaudited financial
statements of the Company. In the opinion of management, all adjustments
(consisting of normal recurring adjustments) have been made that are necessary
for a fair presentation of the unaudited information presented. Results for the
nine-months ended September 30, 1996 are not necessarily indicative of results
to be expected for the full year because of, among other reasons, seasonal
fluctuations in demand, variations in production and possible changes in prices
for oil and gas. The data set forth in this table should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the Company's Financial Statements and related notes thereto,
appearing elsewhere in this Prospectus.
SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Oil and gas revenues..................... $ 3,446 $ 4,693 $ 4,714 $ 3,420 $ 9,693
Costs and expenses:
Production costs....................... 1,305 1,427 1,468 1,066 1,902
General and administrative expense..... 298 340 433 315 386
Depreciation, depletion and
amortization........................ 918 1,572 1,618 1,095 2,619
------ ------ ------ ------ ------
Total costs and expenses....... 2,521 3,339 3,519 2,476 4,907
------ ------ ------ ------ ------
Operating income......................... 925 1,354 1,195 944 4,786
Interest expense, net.................... 427 711 1,035 772 931
Other expense (income)................... (74) (65) (44) (35) (57)
------ ------ ------ ------ ------
Pretax income............................ 572 708 204 207 3,912
Income tax expense....................... 196 263 67 70 1,330
------ ------ ------ ------ ------
Income before cumulative effect of
accounting change...................... 376 445 137 137 2,582
Cumulative effect of accounting
change(1).............................. (48) -- -- -- --
------ ------ ------ ------ ------
Net income............................... $ 328 $ 445 $ 137 $ 137 $ 2,582
====== ====== ====== ====== ======
Net income per share..................... $ .02 $ .03 $ .01 $ .01 $ .17
Weighted average shares outstanding...... 13,467 14,815 15,557 15,308 15,579
OTHER DATA:
EBITDA(2)................................ $ 1,917 $ 2,991 $ 2,857 $ 2,074 $ 7,462
Operating cash flow(3)................... $ 1,490 $ 2,280 $ 1,822 $ 1,302 $ 6,531
</TABLE>
<TABLE>
<CAPTION>
AT SEPTEMBER 30,
-------------------
1995 1996
------- -------
(IN THOUSANDS)
<S> <C> <C>
BALANCE SHEET DATA:
Working capital.......................................... $ 243 $ 2,238
Total assets............................................. $22,493 $32,875
Long-term debt........................................... $10,439 $16,213
Stockholders' equity..................................... $10,824 $13,439
</TABLE>
- ------------------------------
See footnotes on page 15.
14
<PAGE> 16
SELECTED OIL AND GAS DATA
The following table contains certain selected information regarding oil and
gas production and, based upon independent engineers' reports, estimated proved
reserves of the Company.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
------------------------------------------ ---------------------------
1993 1994 1995 1995 1996
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
OPERATING DATA:
Production:
Oil (Bbls)................ 106,000 149,000 133,000 102,000 163,000
Gas (Mcf)................. 889,000 1,392,000 1,616,000 1,138,000 2,672,000
EBO....................... 254,000 381,000 402,000 292,000 609,000
Average sales price per
unit:
Oil (Bbls)................ $ 16.86 $ 15.81 $ 17.26 $ 17.17 $ 21.00
Gas (Mcf)................. $ 1.86 $ 1.68 $ 1.50 $ 1.46 $ 2.34
EBO....................... $ 13.54 $ 12.31 $ 11.72 $ 11.72 $ 15.93
Average costs per EBO:
Production costs.......... $ 5.14 $ 3.75 $ 3.65 $ 3.65 $ 3.12
General and administrative
expense................ $ 1.17 $ .89 $ 1.08 $ 1.08 $ .63
Depreciation, depletion
and amortization....... $ 3.61 $ 4.13 $ 4.02 $ 3.75 $ 4.30
RESERVE INFORMATION (AT END
OF PERIOD):
Proved reserves(4)
Oil (Bbls)................ 1,619,000 1,572,000 1,503,000 * 1,855,000
Gas (Mcf)................. 19,096,000 21,611,000 26,124,000 * 32,831,000
EBO....................... 4,801,000 5,174,000 5,857,000 * 7,327,000
Future net revenues (before
income taxes)(5)(6)....... $ 36,657,000 $ 37,354,000 $ 46,835,000 * $ 82,010,000
Future net revenues (net of
income taxes)(5)(7)....... $ 31,110,000 $ 33,032,000 $ 39,593,000 * $ 65,554,000
Present value of future net
revenues (before income
taxes)(5)(6).............. $ 21,137,000 $ 20,462,000 $ 25,890,000 * $ 52,297,000
Present value of future net
revenues (after income
taxes)(5)(7).............. $ 20,073,000 $ 20,462,000 $ 25,165,000 * $ 45,304,000
</TABLE>
- ------------------------------
Footnotes to table above and "Selected Financial Data" on page 14.
* The Company generally commissions reserve reports on an annual basis and did
not commission a reserve report at September 30, 1995.
(1) In February 1992, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 109, "Accounting for Income Taxes (FAS
109)." The Company adopted FAS 109 in the first quarter of 1993. Upon
adoption of FAS 109, a net deferred tax liability of $48,052 was recognized
at January 1, 1993, reflecting the effects of a net book over tax basis and
limited utilization of the net operating loss carryforward.
(2) EBITDA, or "earnings before interest, income taxes, and depreciation,
depletion, and amortization," is included because it is used by some
investors in analyzing companies. EBITDA is not required by generally
accepted accounting principles and should not be construed as an alternative
to operating income, net income, net cash provided by operating activities
or any other measure of performance required by generally accepted
accounting principles or as an indicator of the Company's operating
performance.
(3) Operating cash flow is net income plus the sum of (i) depreciation,
depletion and amortization, (ii) deferred taxes, and (iii) cumulative effect
of accounting change. Operating cash flow is a supplemental measure used by
the Company in the evaluation of its business and should not be construed as
an alternative to operating income or cash flow from operations and is
presented solely as supplemental disclosure.
(4) The components of the Company's reserves (different grades of oil and gas)
and period-end oil and gas prices can materially impact the information
shown.
(5) See "Supplemental Information About Oil and Gas Producing Activities
(unaudited)," note 13 of the notes to the financial statements of the
Company.
(6) Future net revenues (before income taxes) and the present value of future
net revenues (before income taxes) are based on reserve reports prepared by
independent petroleum engineers on a pre-tax basis using sales prices and
costs in effect as of the respective dates of the reports and a 10% discount
rate. See footnotes (5) and (7).
(7) Future net revenues (net of income taxes) and the present value of future
net revenues (net of income taxes) represent the estimated after-tax amounts
of the future net revenues (before income taxes) and the present value of
future net revenues (before income taxes) set forth above, applying the
statutory income tax rates in effect as of the dates for which the
information is presented, in accordance with Statement of Financial
Accounting Standards No. 69. See footnotes (5) and (6). Neither this
information, nor such information on a pre-tax basis (footnote (6)), should
be viewed as the current value of the Company.
15
<PAGE> 17
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with
the Company's Financial Statements and the related notes thereto.
OVERVIEW
The Company's long-term business strategy is to increase the Company's
reserve base by utilizing 3-D seismic technology to endeavor to obtain
exploratory drilling returns on capital invested with developmental drilling
risks.
The Company intends to exploit its existing properties and acquire those
properties which it believes can be exploited by developing reserves not
previously produced. The Company undertakes projects only when it believes the
project has the potential for initial cash flow adequate to return the project's
capital expenditures within a short period of time, generally less than 36
months. The Company also endeavors to maximize the present value of its projects
by accelerating production of its reserves consistent with prudent reservoir
management.
As part of this business strategy, the Company has made significant
acquisitions of oil and gas producing properties in the Permian Basin of West
Texas and has discovered oil and gas reserves through the use of 3-D seismic
technology in the Horseshoe Atoll Reef Trend of West Texas and the Yegua/Frio
Gas Trend onshore the Gulf Coast of Texas. Capital utilized to acquire such
reserves has been provided primarily by secured bank financing, sales of the
Company's equity securities and cash flow from operations. The Company currently
anticipates that its total capital expenditures over the next 12 months in
connection with the implementation of its business strategy will be
approximately $8.0 million. See "-- Liquidity and Capital Resources."
The Company's operating performance is influenced by several factors, the
most significant of which are the prices received for its oil and gas and the
Company's production volumes. The world price for oil has overall influence on
the prices that the Company receives for it oil production. The prices received
for different grades of oil are based upon the world price for oil, which is
then adjusted based upon the particular grade. Typically, light oil is sold at a
premium, while heavy grades of crude are discounted. Gas prices the Company
receives are primarily influenced by seasonal demand, weather, hurricane
conditions in the Gulf of Mexico, availability of pipeline transportation to end
users and proximity of the Company's wells to major transportation pipeline
infrastructure and, to a lesser extent, world oil prices. Additional factors
influencing operating performance include production expenses, overhead
requirements, and cost of capital.
The Company's oil and gas producing activities are accounted for using the
full cost method of accounting. Accordingly, the Company capitalizes all costs
incurred in connection with the acquisition of oil and gas properties and the
exploration for and development of oil and gas reserves. These costs include
lease acquisition costs, geological and geophysical expenditures, costs of
drilling both productive and non-productive wells, and overhead expenses
directly related to land acquisition and exploration and development activities.
Proceeds from the disposition of oil and gas properties are accounted for as a
reduction in capitalized costs, with no gain or loss recognized unless such
disposition involves a material change in reserves, in which case the gain or
loss is recognized.
Depletion of the capitalized costs of oil and gas properties, including
estimated future development costs, is provided using the equivalent
unit-of-production method based upon estimates of proved oil and gas reserves
and production, which are converted to a common unit of measure based upon their
relative energy content. Unproved oil and gas properties are not amortized but
are individually assessed for impairment. The cost of any impaired property is
transferred to the balance of oil and gas properties being depleted.
The Company's quarterly production and results of operations have varied
from quarter to quarter. Based on its scheduled drilling activities, the Company
does not currently anticipate that its production volumes in the fourth quarter
of 1996 will increase significantly compared to its production volumes in the
prior two quarters, and normal operating considerations and other factors could
result in decreased production volumes in the fourth or any subsequent quarters.
16
<PAGE> 18
RESULTS OF OPERATIONS
The following table sets forth for the periods indicated the percentage of
total revenues represented by each item reflected on the Company's statements of
operations.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- ---------------
1993 1994 1995 1995 1996
----- ----- ----- ----- -----
<S> <C> <C> <C> <C> <C>
Oil and gas revenues............................... 100.0% 100.0% 100.0% 100.0% 100.0%
Costs and expenses:
Production costs................................. 37.9 30.4 31.1 31.2 19.6
General and administrative expense............... 8.6 7.2 9.2 9.2 4.0
Depreciation, depletion and amortization......... 26.7 33.5 34.3 32.0 27.0
----- ----- ----- ----- -----
Total costs and expenses................. 73.2 71.1 74.6 72.4 50.6
----- ----- ----- ----- -----
Operating income................................... 26.8 28.9 25.4 27.6 49.4
----- ----- ----- ----- -----
Interest expense, net.............................. 12.4 15.2 22.0 22.6 9.6
Other expense (income)............................. (2.1) (1.3) (.9) (1.0) (.6)
----- ----- ----- ----- -----
Pretax income...................................... 16.6 15.1 4.3 6.1 40.4
Income tax expense................................. 5.7 5.6 1.4 2.0 13.7
----- ----- ----- ----- -----
Income before cumulative effect of accounting
change........................................... 10.9 9.5 2.9 4.0 26.7
Cumulative effect of accounting change............. (1.4) -- -- -- --
----- ----- ----- ----- -----
Net income......................................... 9.5% 9.5% 2.9% 4.0% 26.7%
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND SEPTEMBER 30, 1995
Oil and Gas Revenues. Oil and gas revenues increased $6.3 million, or 183%,
to $9.7 million for the nine months ended September 30, 1996, from $3.4 million
for the same period of 1995. The increase was primarily the result of a 317,000
EBO, or 109%, increase to 609,000 EBO in the Company's oil and gas production,
and an increase of 36% in the average sales price per EBO from $11.72 in the
nine months ended September 30, 1995 to $15.93 for the same period of 1996. Of
the $6.3 million increase in revenues, $3.7 million was attributable to
increased oil and gas production volume and $2.6 million was attributable to the
increase in average sales prices, primarily gas prices. Of the increase in
revenues, $4.4 million, or 70%, was due to production from the Yegua/Frio Gas
Trend properties which were drilled, completed and began production during 1996.
Production Costs. Production costs increased $836,000, or 78%, to $1.9
million for the nine months ended September 30, 1996, from $1.1 million for the
same period of 1995. The increase in production of 317,000 EBO was responsible
for the increase in production costs. Production costs as a percentage of
revenues declined primarily because of the 36% increase in the average sales
price per EBO. Additionally, average production costs per EBO declined 15% to
$3.12 in the first nine months of 1996 compared to $3.65 in the same period of
1995 as a result of new production from the Company's Yegua/Frio wells. At
September 30, 1996, substantially all of the Company's oil wells employed
artificial lift (pumping) and have higher associated production costs than its
gas wells, which flow. As a result of its successful drilling efforts in the
Yegua/Frio Gas Trend during the first nine months of 1996, the Company's
production became more weighted toward gas production.
General and Administrative Expenses. General and administrative expenses
increased $71,000, or 23%, to $386,000 for the first nine months of 1996, from
$315,000 for the same period of 1995. As a result of the Company's low
administrative cost structure and the increase in revenues, the Company's
general and administrative expenses as a percentage of revenues decreased from
9.2% for the nine months ended September 30, 1995 to 4.0% for the same period in
1996.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense increased $1.5 million, or 136%, to $2.6 million in the
nine months ended September 30, 1996, from $1.1 million for the same period of
1995. The decrease in depletion, depreciation and amortization as a percentage
of revenues is primarily a result of the increase in prices realized per EBO,
partially offset by an increase in the DD&A Rate to $4.30 in the nine months
ended September 30, 1996 from $3.75 in 1995. The increase in the DD&A Rate is
attributable to increased exploration and drilling activities. During the first
nine months of 1996, the Company added 1.5 million EBO to its reserve base, net
of 609,000 EBO of production, an increase of 31% to its net
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<PAGE> 19
reserves. Depreciation, depletion and amortization expenses increased only 15%
per EBO, reflecting the Company's success in its drilling activities.
Net Interest Expense. Interest expense increased $160,000, or 21%, to
$932,000 for the nine months ended September 30, 1996, from $773,000 for the
same period of 1995, due principally to increased borrowings under the Company's
revolving loan agreement, offset partially by a decrease in interest rates.
Income Tax Expense. The Company had an effective tax rate of 34% for the
nine month periods ended September 30, 1996 and 1995.
Net Income and Operating Cash Flow. Net income increased $2.4 million, or
1,785%, to $2.6 million for the nine months ended September 30, 1996, compared
to $137,000 for the nine months ended September 30, 1995. Operating cash flow
increased approximately $5.2 million, or 402%, to $6.5 million for the nine
months ended September 30, 1996 compared to $1.3 million for the nine months
ended September 30, 1995. The net income and operating cash flow increases are
primarily due to the 183% increase in oil and gas revenues and, due to the
Company's low administrative cost structure, costs not increasing in proportion
to the increase in revenues.
YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
Oil and Gas Revenues. Oil and gas revenues increased $21,000 in 1995,
compared to 1994. The increase was the result of a 5% increase in oil and gas
production from 381,000 EBO to 402,000 EBO, offset by a decrease of 5% in the
average sales price per EBO from $12.31 in 1994 to $11.72 in 1995.
Production Costs. Production costs increased $41,000, or 3%, to $1.5
million in 1995 compared to $1.4 million in 1994. While the average sales price
per EBO, which was slightly lower in 1995, accounted for the small increase in
production costs as a percentage of revenues, average production costs per EBO
were slightly lower at $3.65 in 1995 compared to $3.74 in 1994.
General and Administrative Expenses. General and administrative expenses
increased $93,000, or 27%, to $433,000 in 1995 from $340,000 in 1994.
Substantially all of this increase was attributable to the increase in staff of
one employee and overall increases in general corporate expenses.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense increased approximately $46,000, or 3%. The increase
was due to a 5% increase in production volumes sold in 1995 and the decline in
the DD&A Rate per EBO to $4.02 in 1995 from $4.13 in 1994.
Net Interest Expense. Interest expense increased $324,000, or 46%, to $1.0
million in 1995, compared to $711,000 in 1994, due primarily to increased
borrowings under the Company's revolving loan agreement.
Income Tax Expense. The Company had an effective tax rate of 34% for both
1995 and 1994.
Net Income and Operating Cash Flow. Net income decreased $308,000 to
$137,000 in 1995 compared to $445,000 in 1994 and operating cash flow from
operations, before working capital adjustments, decreased $458,000, or 20%, to
$1.8 million in 1995 compared to $2.3 million in 1994.
YEARS ENDED DECEMBER 31, 1994 AND DECEMBER 31, 1993
Oil and Gas Revenues. Oil and gas revenues increased $1.3 million, or 37%,
to $4.7 million in 1994 compared to $3.4 million in 1993. The increase was
primarily the result of a 50% increase in oil and gas production from 254,000
EBO to 381,000 EBO, offset by a decrease of 9% in the average price per EBO from
$13.54 in 1993 to $12.31 in 1994. Production increased because of the Company's
new discoveries in the Horseshoe Atoll Reef Trend of West Texas that were
located using 3-D seismic technology.
Production Costs. Production costs increased $122,000, or 9%, to $1.4
million in 1994 compared to $1.3 million in 1993. The increase in production of
127,000 EBO was responsible for the increase in production costs, partially
offsetting the decrease in the average price per EBO from oil and gas sales,
average production costs per EBO declined 27% to $3.75 in 1994 compared to $5.14
in 1993 as a result of new production from the Company's Horseshoe Atoll Reef
Trend flowing oil wells. At December 31, 1995, substantially all of the
Company's oil wells employed artificial lift (pumping) and have higher
production costs than its gas wells.
General and Administrative Expenses. General and administrative expense
increased $42,000, or 14%, to $340,000 in 1994 from $298,000 in 1993 due to the
increase in staff by one employee and overall increases in general corporate
expenses.
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<PAGE> 20
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization expense increased $652,000, or 71%, to $1.57 million in 1994
from $918,000 in 1993. Depreciation, depletion and amortization expense
increased 14% per EBO, reflecting the Company's success in drilling activities.
Interest Expense. Interest expense increased $284,000, or 67%, to $711,000
in 1994 from $427,000 in 1993, due principally to increased borrowings under the
Company's revolving loan agreement.
Income Tax Expense. The Company had an effective tax rate of 34% for 1994
and 1993.
Net Income and Operating Cash Flow. Net income increased $117,000 to
$445,000 in 1994 compared to $328,000 in 1993. Operating cash flow increased
$790,000, or 53%, to $2.3 million in 1994 compared to $1.49 million for 1993.
LIQUIDITY AND CAPITAL RESOURCES
As of November 1, 1996, the Company had budgeted expenditures of
approximately $8.0 million for 3-D seismic surveys, drilling and enhancement
activities in the ensuing 12 months, on the assumption that the 3-D seismic
surveys and results of drilling done from time to time will justify such
expenditures. Depending on the results of its 3-D seismic activities, the
Company may expend additional material amounts for drilling and completion
activities.
Upon completion of this Offering, after giving effect to the application of
the estimated net proceeds to repay most of the borrowings outstanding under its
revolving loan agreement, the Company believes that its borrowing capacity under
its revolving loan agreement, when combined with its currently budgeted cash
flows from operations, will be sufficient to fund its presently anticipated
working capital requirements and such capital expenditures through the next 12
months.
On July 1, 1996, the Company entered into its revolving loan agreement,
maturing in July 2001, with Bank One, Texas, N.A., to refinance the outstanding
indebtedness under its loan agreement with its former bank lender and to provide
funds for working capital. The Company may borrow up to the lesser of $30
million or the "borrowing base" in effect from time to time. The borrowing base
is redetermined by the bank semi-annually on or about April 1 and October 1 of
each year, or at such other times as the bank elects. At September 30, 1996, the
borrowing base and outstanding debt were $19.5 million and $16.3 million,
respectively.
The Company's operating activities during the nine month period ended
September 30, 1996, provided operating cash flow of $6.5 million. Net income of
$2.6 million, adjusted for non-cash charges (primarily depreciation, depletion
and amortization and deferred income taxes) of $3.9 million was the primary
source of this cash flow. Operating cash flow was $1.5 million for the nine
months ended September 30, 1995. Net income of $137,000, adjusted for non-cash
charges (primarily depreciation, depletion and amortization and deferred taxes)
of $1.2 million, was the principal source of operating cash flow for the nine
month period ended September 30, 1995.
Investing activities during the nine month period ended September 30, 1996
resulted in a net cash outflow of $9.2 million, all of which is attributable to
oil and gas property acquisition, development and exploration expenditures.
Investing activities during the nine month period ended September 30, 1995
resulted in a utilization of net cash of $1.3 million. Expenditures for oil and
gas property acquisitions and exploration and development activities were $2.5
million and sales of undeveloped oil and gas properties provided cash of $1.3
million in the nine months ended September 30, 1995.
Financing activities during the nine month period ended September 30, 1996,
which provided net cash flow of $4.6 million, consisted principally of
borrowings under the Company's revolving loan agreement. Financing activities
during the nine month period ended September 30, 1995, which provided net cash
flow of $797,000, consisted principally of activity on the Company's revolving
loan agreement and net proceeds of $1.3 million realized from the sale of shares
of the Company's Common Stock in a private placement.
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<PAGE> 21
BUSINESS
The Company is primarily engaged in the exploration for and development of
oil and gas properties. The Company's primary focus of activities is in the
Permian Basin of West Texas and the onshore Gulf Coast area of Texas,
particularly the Yegua/Frio Gas Trend and the Horseshoe Atoll Reef Trend. At
September 30, 1996, the Company had total estimated net proved reserves of
approximately 7.3 million EBO, consisting of 32.8 Bcf of gas and 1,855,000 Bbls
of oil having a future net revenue (before income taxes) of $82.0 million and a
present value (before income taxes) of $52.3 million. Approximately 75% of the
Company's proved reserves are gas and approximately 84% are proved developed.
The reserve life of the Company's proved reserves, at current production levels,
is approximately nine years.
The Company was incorporated in Texas in 1979 and reincorporated in
Delaware in 1984. The Company's offices are located at One Marienfeld Place,
Suite 465, Midland, Texas 79701 and its telephone number is (915) 684-3727.
RECENT DEVELOPMENTS
In 1989, the Company began acquiring producing properties in the Permian
Basin of West Texas. From 1989 through 1994, five major acquisitions were made.
In 1992, the Company first used 3-D seismic technology by applying it to a
small area in the Horseshoe Atoll Reef Trend, in which the Company had drilled a
discovery well in 1986. After commissioning a 3-D seismic survey of a small area
of this trend at minimal cost, the Company identified an undrilled feature.
Subsequently, the feature was drilled, resulted in a discovery and production
began from this well. Based upon this success, the Company then performed a
comprehensive geological review of the area and obtained seismic permits and
lease options on approximately 5,000 acres in the immediate area of the
discovery. The Company conducted a 3-D seismic survey on the area and, based on
the results of the survey, drilled nine additional wells. The Company achieved
an 80% success ratio in drilling these properties. While three of these wells
were subsequently plugged and abandoned due to marginal economics, the Company
was encouraged by this success in using 3-D seismic technology.
The Company believes 3-D seismic technology is not necessarily useful in
all areas. See "-- Use of 3-D Seismic Technology; Methodology." The Company
investigated several areas in which it believed the use of 3-D seismic
technology could provide the Company with a significant competitive advantage
and, in the Company's view, create the opportunity for "exploratory returns with
development risk."
Commencing in mid-1993, the Company investigated the Yegua/Frio Gas Trend
in Jackson and Wharton Counties, which are onshore in the Gulf Coast area of
Texas. The Company concluded that this area fit its 3-D seismic methodology
criteria because of the geology and production history of the area and because
portions of the area had been extensively drilled utilizing conventional 2-D
seismic surveys, providing reliable existing data for control and modeling
purposes. Once the Company determined that the area met its 3-D seismic prospect
criteria, the Company then conducted a 3-D seismic survey covering a 16,000-acre
area, investing approximately $500,000. Based on the favorable results of this
survey, the Company has entered into exploration (area of mutual interest)
agreements covering approximately 268,000 acres and, within these areas, has
obtained leases covering 35,353 gross (13,121 net) acres and lease options on
95,202 gross (23,707 net) acres in the Yegua/Frio Gas Trend. Through September
30, 1996, based on the results of its 3-D seismic surveys, the Company has
drilled 53 wells in the Yegua/Frio Gas Trend, achieving an 81% success rate.
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<PAGE> 22
The following table reflects certain information with respect to the wells
drilled by the Company through September 30, 1996 based on 3-D seismic surveys.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
WELLS ----------------------------------------------------
ACREAGE ---------------------------------- REALIZED FUTURE
3-D SEISMIC PROJECT -------------- PRO- SUCCESS TOTAL NET NET PRESENT
(YEAR SURVEY BEGAN) GROSS NET DRILLED DUCTIVE DRY RATIO INVESTMENT REVENUE(1) REVENUE(2) VALUE(3)
- ---------------------- ------ ----- ------- ------- --- -------- ----------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Horseshoe Atoll Reef
Trend (1992)........ 960 720 10 8(4) 2 80% $ 3,305,000 $3,457,000 $ 5,990,000 $ 3,945,000
Yegua/Frio Gas Trend:
Phase I & II
(1993)............ 9,043 1,796 30 22(5) 8 73% 6,051,000 5,009,000 35,489,000 26,076,000
Phase III (1994).... 5,151 1,794 23 21 2 91% 1,056,000 485,000 5,607,000 3,635,000
------ ----- --- --- --- ----------- ---------- ----------- -----------
Total......... 14,194 3,590 53 43 10 81% 7,107,000 5,494,000 41,096,000 29,701,000
------ ----- --- --- --- ----------- ---------- ----------- -----------
Totals................ 15,154 4,310 63 51 12 81% $10,412,000 $8,951,000 $47,086,000 $33,656,000
====== ===== === === === =========== ========== =========== ===========
</TABLE>
- ------------------------------
(1) Net of production costs, including severance taxes.
(2) Before income taxes.
(3) Present value of estimated future net revenues, before income taxes,
discounted at 10%.
(4) Three of these productive wells have been plugged and abandoned due to
marginal reserves and economics.
(5) One of these productive wells has been plugged and abandoned because it
became depleted and therefore, uneconomic.
Based on the favorable results achieved in its 3-D seismic surveys to date,
the Company is in the process of conducting 3-D seismic surveys on the 171,000
acres in the Yegua/Frio Gas Trend, as well as on certain of its Permian Basin
producing properties. The Company intends to continue to drill wells on
formations identified in the 3-D seismic surveys that meet the Company's
drilling criteria. See "Use of Proceeds."
USE OF 3-D SEISMIC TECHNOLOGY; METHODOLOGY
Before the use of 3-D seismic technology, it was difficult to locate
complex structural and stratigraphic traps. However, with 3-D seismic
technology, it has become possible to identify these geological features that
were previously undetected using conventional 2-D seismic technology. Use of 3-D
seismic technology has also enhanced the ability to fully develop acquired
producing properties. The use of 3-D seismic technology to select well locations
can also result in the Company drilling only one well to drain an entire
reservoir, rather than drilling two or more wells while attempting to delineate
the reservoir. However, quality control is essential at each step of the process
in order for the 3-D seismic data set to be economically useful.
The Company's 3-D seismic prospect criteria include identifying properties
which have the following characteristics:
- Attractive geological features and reservoir characteristics;
- Good seismic environment based on the analysis of conventional 2-D
seismic data;
- Production history in an area of interest that can be incorporated
into a 3-D seismic survey for control and modeling purposes; and
- Potential for economic impact based on the Company's investment.
After an area is selected utilizing these criteria, the Company will
determine ownership of the mineral rights to lands located within an area of
mutual interest. Once an oil and gas lease or seismic option is negotiated with
the mineral owners and a seismic permit is obtained from the surface owner, land
work is completed within the area of mutual interest and the land is ready to be
topographically surveyed in order to plan the actual 3-D seismic surveying.
The Company's consulting geophysicists design a 3-D seismic survey based in
large part on the following parameters: depth of target zone, well control in
the area that has acoustic log control, existing conventionally-
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<PAGE> 23
obtained 2-D seismic data, subsurface geology and existing reservoir information
from producing wells within the proposed survey area. Extensive quality control
is exercised in the design of the 3-D data set in order to ensure that it
acquires the information necessary to properly image the zone or zones of
interest. After the 3-D seismic survey has been designed, a land surveyor will
survey on the surface each source line and each receiver line on an exact "x/y"
coordinate, often times utilizing global positioning satellites. After the
surface survey is complete, the 3-D seismic survey is ready to be conducted or
"shot." Receiver lines are laid out with instrumentation that will record sound
waves once they have entered the ground from the source and returned to the
surface receiver and the 3-D survey is "shot" using dynamite or mechanical
vibration as the source of energy. As the 3-D survey is shot, the information is
recorded on field tapes and is sent to the seismic processor, who takes the
field data and organizes the information into a computerized data set. This data
is then analyzed and interpreted by the Company's consulting geophysicist using
sophisticated computer software and techniques. Once the data set is interpreted
and drillable features are identified, the Company, with the assistance of the
consulting geophysicist, will make an economic decision on whether or not to
drill.
STRATEGY
The Company's strategy is to continue to increase its reserves and
production and improve its financial results by emphasizing the strategies set
forth below.
Continue Focused Exploration Activities. The Company seeks to increase its
reserves and production through exploration. The Company primarily seeks
exploration prospects which (i) have known geological and reservoir
characteristics, (ii) are located near existing well bores that can be
correlated with seismic data for the prospect and (iii) could have a meaningful
impact on the Company's reserves. The Company intends to participate in several
moderate and high-potential exploration projects over the next 12 months which,
the Company believes, may significantly increase the Company's proved reserves
if successful. See "-- Use of 3-D Seismic Technology; Methodology."
Producing properties owned and operated by the Company are continually
subjected to rigorous production monitoring and evaluated for possible
enhancement opportunities. Enhancement activities include recompleting existing
well bores, identifying potential infill locations, and reviewing the
practicality of applying new drilling and production technologies that could
either improve recovery potential or result in the discovery of a new reservoir.
In connection with its enhancement operations, the Company routinely reviews the
economics of its oil and gas properties and, when deemed necessary, takes
corrective action, such as the shutting-in of temporarily uneconomic properties,
the plugging of wells deemed permanently impaired or depleted, the termination
of oil and gas leases deemed uneconomic under existing operating conditions and
the sale of properties to third parties.
Utilize Advanced Technology. The Company uses economically available
advanced technology in its exploration and development activities in order to
reduce risks, lower costs and more efficiently produce oil and gas from its
properties. The Company believes the availability of cost-effective 3-D seismic
surveys makes its use in exploration and development activities attractive from
a risk management perspective in certain areas and that the Company believes the
use of 3-D seismic surveys provides the Company with substantially more accurate
and comprehensive information for the evaluation of drilling prospects than does
conventional 2-D seismic and traditional evaluation methods. The Company
evaluates substantially all of its exploratory prospects using 3-D seismic
surveys.
In evaluating certain of its exploratory prospects, the Company also uses
amplitude versus offset ("AVO") analysis. AVO can show the high contrast between
the sand and shales and provides for better interpretation of the reservoir
sands to determine if the sands contain natural gas.
The Company believes that its use of 3-D seismic and AVO analysis provides
it with a competitive advantage over other companies that do not regularly use
such technology by increasing the Company's likelihood of exploration success.
Nevertheless, in evaluating exploratory prospects in areas in which the Company
believes that using 3-D seismic is not advantageous, the Company uses
conventional evaluation methods.
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<PAGE> 24
Pursue Opportunistic Acquisitions. The Company supplements its exploration
efforts with opportunistic acquisitions of producing properties. The Company
believes that, in certain circumstances, its small staff gives it a competitive
advantage in swiftly responding to acquisition opportunities.
The Company seeks to acquire producing properties that either are
underperforming relative to their potential or are suitable for analysis
utilizing 3-D seismic survey. The Company then seeks to reduce operating costs
and increase reserves and production. Enhancement activities include 3-D seismic
surveys, recompletions of existing wellbores, restimulations of producing
reservoirs, identification of potential infill drilling locations and mechanical
improvements to surface facilities and downhole equipment. When appropriate, the
Company may also renegotiate gas purchase contracts or reconfigure gathering
lines. See "-- 3-D Seismic Exploration Activities."
The Company continually screens, reviews and evaluates potential producing
property acquisitions presented by independent landmen, geologists and engineers
as well as properties available for purchase from major oil companies and other
independent oil and gas operators.
The operator of a well has significant control over its location and the
timing of its drilling. As operator, the Company, through consultants and
contractors, supervises the drilling and completion of wells and production
therefrom and the further development of surrounding properties. In addition,
the operator of a well receives fees from other working interest owners as
reimbursement for the general and administrative expenses attendant to the
operation of the wells. At September 30, 1996, the Company was serving as
operator of 85 gross (64.53 net) wells in which it owned interests.
Approximately 22% of the discounted present value of the Company's oil and gas
reserves at September 30, 1996 is attributable to wells operated by the Company.
Continue Emphasis on Cost Controls. Throughout its operations, the Company
strives to maintain low general and administrative expenses. The geographic
focus of the Company's operations allows it to manage a relatively large asset
base with a small number of employees. The Company believes this base of
operations enables the Company to add exploratory prospects and acquire
producing properties at relatively low incremental overhead costs.
The Company also pursues cost savings through the use of outside
consultants and contractors. The Company uses geological and geophysical
consultants for its exploration and development efforts and uses contractors for
much of its field operations.
3-D SEISMIC EXPLORATION ACTIVITIES
Of the Company's current 3-D seismic exploratory projects, the Company
believes its Yegua/Frio Gas Trend projects currently appear to have the greatest
potential for increasing the Company's reserve base. The Company plans to
aggressively develop its interests in this trend during the next two years.
Natural gas reserves in the trend are relatively long-lived and generally have
high levels of BTU content and associated condensate. When successful wells are
drilled, production sales generally commence within 60 days from the date
drilling is commenced.
Yegua/Frio Gas Trend
The Yegua/Frio Gas Trend runs through Lavaca, Jackson, Wharton and Victoria
Counties, Texas. Total production since the early 1980s in the Yegua/Frio Gas
Trend in Jackson, Wharton and Victoria Counties, Texas, has exceeded 500 Bcf.
Most of this production has been discovered based on conventional 2-D seismic
data. The trend is named after the Yegua formation, which is composed of
multiple layers of sand embedded in thick shales. Natural gas reserves are
generally found in sands that have been formed into a trap that can be either
structural or stratigraphic, or a combination of both. The traps are generally
40 to 400 acres in size but some are larger, such as the El Campo Field located
in eastern Wharton County and the Toro Grande Field located in western Jackson
County, which are several thousand acres in size.
Since October 1993, the Company has participated in the drilling of 53
wells in the Yegua/Frio Gas Trend. Of the 53 wells drilled, 43 were completed as
producers and ten were dry holes, for a success ratio of 81%. One of the
producers was plugged and abandoned due to depletion and marginal economics. See
table under
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<PAGE> 25
"-- Recent Developments" above. The Company has invested approximately $7.1
million for seismic, leasehold, drilling and completion costs in areas of mutual
interest totaling 97,000 acres in the Yegua/Frio Gas Trend. As of September 30,
1996, the Company had received approximately $5.5 million of net revenues from
the project and had net reserves of approximately 13.9 Bcf and 465 MBbls of oil,
with a future net revenue (before income taxes) of approximately $41.1 million
and a discounted future net revenues (before income taxes) of approximately
$29.7 million.
Since October 1993, the Company has entered into 11 exploration (area of
mutual interest) agreements with other participants to explore for gas in the
Yegua/Frio Gas Trend. These 11 agreements enable the Company to participate in
the acquisition and ownership of (i) 3-D seismic surveys, (ii) options to
acquire oil and gas leasehold interests and (iii) working interests in oil and
gas leases determined to have drillable features. While these agreements provide
for seismic operations on large blocks of acreage, the Company's actual working
interest ownership is less than the total area surveyed. These agreements and
the Company's participation under such agreements are referred to as Phase I,
II, III and IV.
Phase I -- Jackson County, Texas. Subsequent to the Company's successful
use of 3-D seismic technology in the Horseshoe Atoll Reef of West Texas, the
Company identified the Yegua/Frio Gas Trend as an area which would be conducive
to the use of 3-D seismic technology. The Company's initial area of activity in
the Yegua/Frio Gas Trend, referred to as Phase I, consists of an area of mutual
interest covering approximately 25 square miles (16,000 gross acres). Of the
16,000 acre area of mutual interest, the Company owned, at September 30, 1996,
working interests ranging from 12.5% to 17.5% in 519 gross (91 net) acres. More
than 40 wells had been drilled in this area by other operators before a 3-D
seismic survey had been performed. A 3-D seismic survey was performed, processed
and interpreted in late 1993 and early 1994. Since early 1994, the Company has
participated in the drilling of seven wells in Phase I. Five were completed as
producers and two were dry holes, for a 71% success ratio. One of the producers
was plugged and abandoned due to depletion and marginal economics. The Company
intends to attempt to acquire additional leasehold interests within the 16,000
acre area of mutual interest for future drilling activities.
Phase II -- Jackson and Wharton Counties, Texas. The experience and
knowledge gained by the Company from its use of 3-D seismic in Phase I provided
the basis for the Company's decision to expand its exploration activities into
Phase II and Phase III of the Yegua/Frio Gas Trend. In April 1994, the Company
committed to participate in Phase II, which is an area of mutual interest
covering approximately 86 square miles (55,000 gross acres) in which the Company
owns a 20% interest and on which five 3-D seismic surveys have been conducted.
Four surveys were completed in mid-1994 and one survey was completed in
mid-1995. Since September 1994, the Company has participated in the drilling of
23 wells in Phase II, of which 17 are producers and six were dry holes, for a
74% success ratio. In this 55,000 acre area of mutual interest, the Company
owned, at September 30, 1996, a 20% working interest in 8,524 gross (1,705 net)
acres. The Company intends to attempt to acquire additional leasehold interests
within this area of mutual interest for drilling in 1997.
Phase III -- Jackson County, Texas. Phase III of the Yegua/Frio Gas Trend
is an area of mutual interest covering approximately 40 square miles (26,000
gross acres) in Jackson County, Texas in which the Company owns a 33.825%
interest. A 3-D seismic survey of Phase III was conducted by the end of 1994
and, since September 1995, the Company has participated in the drilling of 23
wells in Phase III, of which 21 are producers and two were dry holes, for a
success ratio of 91%. Of the 26,000 acre area of mutual interest on which the
Company has performed 3-D seismic surveys, the Company owned, at September 30,
1996, a 33.825% working interest in 5,151 gross (1,794 net) acres.
Phase IV -- Lavaca, Jackson, Wharton and Victoria Counties, Texas. In early
1996, based on its successful drilling activities in Phase I, II and III and on
3-D seismic surveys, the Company extended its activities in the Yegua/Frio Gas
Trend by assembling eight additional separate projects comprised of
approximately 171,000 gross acres in eight areas of mutual interest known as
Phase IV. The Company has completed two 3-D seismic surveys that are currently
being interpreted and anticipates conducting the remaining six 3-D seismic
surveys in 1997. The Company owns interests ranging from 15% to 60% in each
project. The Company's currently estimated share of the 3-D seismic and
leaseholds costs is approximately $6.0 million, of which approximately 50% has
been funded to date. The Company's share of estimated drilling and completion
costs will be dependent on the number of drillable features identified, if any,
by the 3-D seismic survey. As of November 1, 1996, the
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<PAGE> 26
Company owned 21,159 gross (9,531 net) leasehold acres and 95,202 gross (23,707
net) option acres in this Phase IV project.
Horseshoe Atoll Reef Trend
The Horseshoe Atoll Reef Trend extends for approximately 175 miles into the
interior portion of the Midland Basin. Exploration of the trend began in 1948
with the discovery of the Kelly-Snyder Field. Since 1992, the Company has
drilled ten wells in the Horseshoe Atoll Reef Trend based on 3-D seismic
surveys, eight of which were completed as producers. Three of the producers have
been plugged and abandoned due to marginal reserves and economics. See table
under "-- Recent Developments." The Company has invested approximately $3.3
million for seismic, leasehold, drilling and completion costs in this project.
As of September 30, 1996 the Company had received approximately $3.46 million of
net revenues from the project and had estimated proved reserves of 738 MMcf of
gas and 242 MBbls of oil with a future net revenue (before income taxes) of
approximately $6.0 million and a present value (before income taxes) of
approximately $3.9 million.
The Company owns working interests ranging from 70% to 80% in 960 gross
(720 net) acres in Howard County, Texas. The Company conducted two 3-D seismic
surveys on approximately 5,000 acres in 1992 and identified several reefs which
the Company believes may contain gas.
ACQUISITION AND EXPLOITATION ACTIVITIES
Since 1989, the Company has acquired interests in five significant
producing properties in the Permian Basin of West Texas.
The following table sets forth a summary of certain information regarding
the Company's acquisition and enhancement activities in the Permian Basin of
West Texas.
<TABLE>
<CAPTION>
AT SEPTEMBER 30, 1996
---------------------------------------------------
ACREAGE WELLS REALIZED FUTURE
--------------- ------------- TOTAL NET NET PRESENT
FIELD (YEAR ACQUIRED) GROSS NET GROSS NET INVESTMENT REVENUE(1) REVENUE(2) VALUE(3)
- --------------------------------------- ------ ------ ----- ----- ---------- ---------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Page Field
Schleicher County (1989)............. 4,500 4,005 11 9.63 $1,671,000 $3,337,000 $ 5,909,000 $ 2,758,000
West World Strawn Field
Crockett County (1990)............... 5,538 4,846 13 11.38 1,296,000 2,000,000 13,511,000 6,230,000
Hulldale Penn Reef Field
Schleicher County (1991-92).......... 7,493 5,919 29 22.91 1,433,000 369,000 2,106,000 1,223,000
Chenot Gas Field
Pecos County (1993).................. 1,040 901 4 3.72 1,076,000 281,000 1,565,000 1,116,000
North Nena Lucia Unit
Nolan County (1992-96)............... 6,640 3,785 26 14.85 2,711,000 1,347,000 5,258,000 3,373,000
------ ------ -- ----- ---------- ---------- ---------- ----------
Total.......................... 25,211 19,456 83 62.49 $8,187,000 $7,334,000 $28,349,000 $14,700,000
====== ====== == ===== =========== ============ =========== ===========
</TABLE>
- ------------------------------
(1) At September 30, 1996, net of production costs, including severance taxes.
(2) Before income taxes.
(3) Present value of estimated future net cash flows, before income taxes,
discounted at 10%.
Page Field. In March 1989, the Company purchased an 89.0% working interest
in approximately 4,500 gross (4,005 net) acres in the Page Field of Schleicher
County, Texas, for $450,000. As part of the transaction, the Company also became
the operator of the Page Field. At the time of acquisition, the Page Field was
producing an aggregate of approximately 300 Mcf of gas and 30 Bbls of oil per
day. In order to exploit the potential of the Page Field, the Company
refurbished the gathering system and installed new compression equipment in the
field. At September 30, 1996 production in the Page Field was approximately 700
MMcf of gas and 26 Bbls of oil per day.
25
<PAGE> 27
Based upon an internal geological and engineering evaluation, the Company
drilled an infill well in October 1996. The well is in the process of being
completed and future development of the Page Field will be dependent on the
completion results of this initial well.
West World Strawn Field. In December 1990, the Company purchased a 78%
working interest in approximately 5,538 gross (4,846 net) acres in the West
World Strawn Field of Crockett County, Texas, for $435,000. The Company
subsequently acquired an additional 9.5% working interest for $20,000,
increasing its total working interest in the West World Strawn Field to 87.5%
and related net revenue interest to 76.5%. The West World Strawn Field was
producing approximately 160 Mcf of gas and 20 Bbls of oil per day when the
Company purchased its initial interest. Immediately after the acquisition, the
Company renegotiated its gas sales contract and commenced remedial and
production enhancement work, including the installation of additional
compression equipment. At December 30, 1996, gross production in the West World
Strawn Field was approximately 575 Mcf of gas and 47 Bbls of oil per day.
Currently, the Company is performing an extensive geological and
engineering evaluation of this property, and the Company has identified behind
pipe zones that it intends to rework with the objective of further improving the
daily production and extending the economic life of the field.
Hulldale Penn Reef Field. The Company owns a 79.08% working interest in
approximately 7,493 gross (5,919 net) acres in the Hulldale Penn Reef Field of
Schleicher County, Texas. The Company's interests in the field were acquired in
late 1991 and early 1992 for approximately $500,000. The Company has focused on
reducing costs and has not engaged in significant enhancement activities in this
field since acquisition. The current gross production in the field is
approximately 100 Mcf of gas and 26 Bbls of oil per day, compared to 100 Mcf of
gas and 50 Bbls of oil per day at the time of the Company's acquisition. The
Company has identified multiple shut-in wellbores that it intends to rework with
the objective of improving the daily production and extending the economic life
of the field.
Chenot Gas Field. In September 1993, the Company acquired working interests
totalling 97.5% in approximately 1,040 gross (901 net) acres in the Chenot Gas
Field in Pecos County, Texas, for approximately $475,000. The Company initiated
enhancement operations to improve compression and renegotiated a new gas sales
contract. When the Company acquired its interests, aggregate production from the
field was approximately 450 Mcf of gas per day. At September 30, 1996, aggregate
production was 1,175 Mcf of gas per day. During 1995, a 3-D seismic survey was
completed, and the Company drilled and completed one well in September 1996. The
well is currently producing at the rate of approximately 900 Mcf of gas per day.
The Company presently anticipates drilling two additional wells in early 1997.
North Nena Lucia Unit. Beginning in 1992, the Company has purchased working
interests in the aggregate amount of 56% in approximately 6,640 gross (3,785
net) acres in the North Nena Lucia Unit located in Nolan County, Texas, for the
aggregate amount of approximately $1.9 million. At September 30, 1996, gross
production in the field was approximately 1,170 Mcf of gas and 198 Bbls of oil
per day.
In December 1995, an infill well was drilled and completed and is currently
producing at a rate of approximately 50 Bbls of oil per day. Based upon the
results of this well, the Company is in the process of conducting a 3-D seismic
survey on the unit and expects the survey to be interpreted in 1997. The Company
presently anticipates that, if justified by the survey, drilling infill
locations may commence in 1997.
26
<PAGE> 28
OIL AND GAS RESERVES
The oil and gas reserves of the Company have been estimated as of September
30, 1996 by Joe C. Neal and Associates, Midland, Texas. At September 30, 1996,
the Company had proved reserves of 32.8 Bcf of gas and 1,855 MBbls of oil for a
total of 7.3 million EBO. The following table sets forth certain information
regarding the Company's proved reserves:
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED UNDEVELOPED TOTAL
----------- ---------- -----------
<S> <C> <C> <C>
Gas (Mcf).................................. 27,559,000 5,272,000 32,831,000
Oil (Bbls)................................. 1,603,000 252,000 1,855,000
Future Net Revenue (before income taxes)... $74,747,000 $7,263,000 $82,010,000
Present Value (before income taxes)........ $48,748,000 $3,549,000 $52,297,000
</TABLE>
Additional information concerning the Company's estimated proved oil and
gas reserves is included in note 13 of the notes to Financial Statements. See
"Risk Factors -- Imprecision of Oil and Gas Reserve Estimates" and "-- Risk
Factors -- Forward Looking Information; Certain Cautionary Statements."
WELLS DRILLED
The following table sets forth certain information concerning the number of
gross and net wells drilled by the Company during the three years ended December
31, 1993, 1994 and 1995 and the nine months ended September 30, 1996.
<TABLE>
<CAPTION>
EXPLORATORY WELLS(1) DEVELOPMENT WELLS(2)
------------------------------ -----------------------------
PRODUCTIVE DRY PRODUCTIVE DRY
------------- ------------- ------------- ------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Years Ended December 31:
1993.................................. 5.0 3.05 3.0 .65 -- -- -- --
1994.................................. 6.0 1.74 6.0 1.99 1.0 .81 -- --
1995.................................. 19.0 2.71 7.0 1.19 2.0 .40 -- --
Nine Months Ended September 30, 1996.... 18.0 4.95 5.0 .88 2.0 1.19 1.0 .42
</TABLE>
- ------------------------------
(1) An exploratory well is a well drilled to find and produce oil or gas in an
unproved area, to find a new reservoir in a field previously found to be
productive of oil or gas in another reservoir, or to extend a known
reservoir.
(2) A development well is a well drilled within the proved area of an oil or gas
reservoir to the depth of a stratigraphic horizon known to be productive.
All of the Company's drilling is performed on a contract basis by
independent drilling contractors. The Company owns no drilling equipment.
PRODUCING WELLS AND ACREAGE
The following table summarizes the gross and net producing oil and gas
wells and the gross and net developed and undeveloped acreage in which the
Company owned an interest at September 30, 1996. Acreage in which the Company's
interest is limited to royalty or similar interests is not included in the
following table.
<TABLE>
<CAPTION>
PRODUCING WELLS ACREAGE
-------------------------------- ------------------------------------
OIL GAS DEVELOPED UNDEVELOPED
-------------- -------------- ---------------- ----------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ----- ----- ----- ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
New Mexico.................... -- -- -- -- -- -- 11,357 354
Texas......................... 92 64.46 81 29.65 44,526 26,098 41,091 10,979
Oklahoma...................... -- -- 1 .25 320 80 -- --
Louisiana..................... -- -- -- -- -- -- 646 84
-- --
----- ----- ------ ------ ------ -----
Total............... 92 64.46 82 29.90 44,846 26,178 53,094 11,417
== ===== == ===== ====== ====== ====== ======
</TABLE>
27
<PAGE> 29
At September 30, 1996, in addition to the Company's interests in developed
and undeveloped acreage, the Company also owned options to acquire interests in
an additional 98,971 gross (25,310 net) acres in Texas.
Generally, developed oil and gas leases remain in force by virtue of, and
so long as, production from lands under lease is maintained. Undeveloped oil and
gas leaseholds are generally for a specified term, such as five or ten years,
with the payment of specified minimum delay rentals or extension by production.
VOLUMES, PRICES AND LIFTING COSTS
The following table sets forth, for the three years ended December 31, 1995
and the nine month periods ended September 30, 1995 and 1996, certain
information regarding volumes of the Company's net production of oil and gas,
the average sales prices per Bbl of oil and Mcf of gas produced, and the average
production (lifting) cost per unit of production.
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED SEPTEMBER 30,
-------------------------------------- -------------------------
1993 1994 1995 1995 1996
-------- ---------- ---------- ---------- ----------
<S> <C> <C> <C> <C> <C>
Production:
Oil (Bbls).......... 106,000 149,000 133,000 102,000 163,000
Gas (Mcf)........... 889,000 1,392,000 1,616,000 1,138,000 2,673,000
EBO................. 254,000 381,000 402,000 292,000 609,000
Average sales price
per unit:
Oil (per Bbl)....... $ 16.86 $ 15.81 $ 17.26 $ 17.17 $ 21.00
Gas (per Mcf)....... $ 1.86 $ 1.68 $ 1.50 $ 1.46 $ 2.34
EBO................. $ 13.54 $ 12.31 $ 11.72 $ 11.72 $ 15.93
Average costs per EBO:
Production costs.... $ 5.13 $ 3.74 $ 3.65 $ 3.65 $ 3.12
General and admin-
istrative
expense.......... $ 1.17 $ .89 $ 1.08 $ 1.08 $ .63
Depreciation,
depletion and
amortization..... $ 3.61 $ 4.12 $ 4.02 $ 3.75 $ 4.30
</TABLE>
The Company's gas sales for the year ended December 31, 1995 represented
approximately 52% of the Company's combined oil and gas sales for such period.
The Company's gas sales for the nine-month period ended September 30, 1996
represented approximately 65% of the Company's combined oil and gas sales for
such period.
MARKETS AND CUSTOMERS
Substantially all of the Company's oil and gas production is sold at the
well site on an "as produced" basis. During the year ended December 31, 1995,
purchases of the Company's oil and gas by Enron Oil Transportation & Trading
Company, Cox & Perkins Exploration, Inc., Texaco, Inc. and Patterson Petroleum
Corporation accounted for 28%, 16%, 10% and 10%, respectively, of the Company's
operating revenues for such period. The Company believes the loss of any one of
these purchasers would not materially affect its ability to sell oil or gas, due
to the availability of other purchasers in the Company's areas of operations.
The Company's gas and oil reserves and production are not subject to any
long-term supply or similar agreements with foreign governments or authorities.
TITLE TO PROPERTIES
As is customary in the oil and gas industry, the Company makes only a
cursory review of title to undeveloped oil and gas leases at the time they are
acquired by the Company. Such reviews, while consistent with industry practices,
are incomplete. The Company believes that it generally is not economically
feasible to review in depth every individual property that the Company acquires,
especially in the case of producing property acquisitions covering a large
number of leases. Ordinarily, when the Company acquires producing properties, it
will focus its review efforts on properties believed to have higher values and
will sample the remainder. However, even an in-depth review of all properties
and records may not necessarily reveal existing or potential defects nor will it
permit a buyer to become sufficiently familiar with the properties to assess
fully their deficiencies and
28
<PAGE> 30
capabilities. In the case of producing property acquisitions, inspections may
not always be performed on every well, and environmental problems, such as
ground water contamination, are not necessarily observable even when an
inspection is undertaken. However, in the case of undeveloped leases or
prospects acquired by the Company before drilling is commenced, the Company will
generally cause a more thorough title search to be conducted, and any material
defects in title disclosed as a result of the search are generally remedied
prior to the time actual drilling of a well on the lease is commenced. The
Company believes that it has good title to its oil and gas properties, some of
which are subject to immaterial encumbrances, easements and restrictions. The
oil and gas properties owned by the Company are also typically subject to
royalty and other similar non-cost bearing interests customary in the industry.
The Company does not believe that any of these encumbrances or burdens will
materially affect the Company's ownership or use of its properties.
OFFICE FACILITIES
The Company leases its corporate offices in Midland, Texas, which consist
of approximately 4,675 square feet of office space, at a rental rate of $2,725
per month. The lease agreement expires by its own terms in June 1999.
COMPETITION
The oil and gas industry is highly competitive, particularly with respect
to the acquisition of development prospects and producing properties.
Competition for the acquisition of oil and gas properties is principally based
upon the amount and terms of the consideration offered. Competitors include the
major oil companies, independent oil and gas concerns and individual producers
and operators, many of which have financial resources, staffs and facilities
substantially greater than those of the Company.
The principal raw materials and resources necessary for the exploration
for, and the acquisition, development, production and sale of, oil and gas are
leasehold prospects under which oil and gas reserves may be discovered, drilling
rigs and related equipment to explore for such reserves, and knowledgeable
personnel to conduct all phases of oil and gas operations. The Company must
compete for such raw materials and resources with both major companies and
independent oil and gas operators.
EMPLOYEES
At November 1, 1996, the Company had five full-time employees. The Company
also retains, from time to time, independent land, geological, geophysical and
engineering consultants and expects to continue to do so in the future.
Additionally, the Company retains seven contract pumpers on a month-to-month
basis. The Company considers its employee relations to be excellent. See
"Management and Principal Stockholders."
REGULATION
Regulation of Oil and Gas Production. Oil and gas production operations are
subject to various types of regulation by state and federal agencies.
Legislation affecting the oil and gas industry is under constant review for
amendment or expansion. Also, numerous governmental departments and agencies,
both federal and state, are authorized by statute to issue rules and regulations
binding on the oil and gas industry and its individual members, some of which
carry substantial penalties for failure to comply. The regulatory burden on the
oil and gas industry increases the Company's cost of doing business and,
consequently, affects its profitability.
Gas Price Controls. Prior to January 1993, certain gas sold by the Company
was subject to regulation by the Federal Energy Regulatory Commission ("FERC")
under the Natural Gas Act of 1938 ("NGA") and the Natural Gas Policy Act of 1978
("NGPA"). The NGPA prescribed maximum lawful prices for gas sales effective
December 1, 1978. None of the maximum lawful prices for gas set forth in the
NGPA could have been collected absent contractual authority to do so and only
after necessary approvals from the appropriate governmental agencies were
obtained. The NGPA also established phased-in deregulation of gas prices, which
have been further affected by the Natural Gas Wellhead Decontrol Act of 1989
(the "Decontrol Act"). Effective January 1, 1993, gas prices were completely
deregulated pursuant to the Decontrol Act, and sales of the Company's gas are no
longer subject to federal government price controls. As a result of the
enactment of the Decontrol Act, the remaining restrictions imposed by the NGA
and the NGPA with respect to "first sales" terminated on the earlier of January
1, 1993 or the expiration of the applicable contract. Any gas not otherwise
deregulated prior to
29
<PAGE> 31
January 1, 1993 was deregulated as of that date. The effect of the Decontrol Act
is to remove all remaining price controls under the NGPA and to remove all
remaining FERC certificate and abandonment jurisdiction otherwise applicable to
producers under the NGA.
Several major regulatory changes have been implemented by the FERC from
1985 to the present that affect the economics of gas production, transportation
and sales. In addition, the FERC continues to promulgate revisions to various
aspects of the rules and regulations affecting those segments of the gas
industry which remain subject to the FERC's jurisdiction. The stated purpose of
many of these regulatory changes is to promote competition among the various
sectors of the gas industry. The ultimate impact of the complex and overlapping
rules and regulations issued by the FERC since 1985 cannot be predicted. In
addition, many aspects of these regulatory developments have not become final
but are still pending final judicial and FERC decisions.
In April 1992, the FERC issued Order 636, a rule designed to restructure
the interstate gas transportation and marketing system to remove various
barriers and practices that have historically limited non-pipeline gas sellers,
including producers, from effectively competing with pipelines. Since the
issuance of Order 636, the FERC has issued several orders making minor
modifications to Order 636. The restructuring process will be implemented on a
pipeline-by-pipeline basis through negotiations in individual pipeline
proceedings. When the FERC issued Order 636, it recognized that in an effort to
enable non-pipeline gas sellers to compete more effectively with pipelines, it
should not allow pipelines to be penalized by their existing contracts which
require the pipelines to pay above-market prices for gas. The FERC recognized
that it did not have authority to nullify these contracts, and instead
encouraged pipeline companies and producers to negotiate in good faith to
terminate or amend these contracts to conform with market conditions. Under
Order 636, a pipeline company is permitted to pass through to certain of its
customers the costs incurred by the pipeline in terminating or amending these
agreements as "transition costs." Order 636 allows customers to challenge these
costs, in which case the pipeline company will be permitted to pass through
costs only to the extent the pipeline company establishes at a FERC hearing,
among other things, that the contract was prudent at the time it was entered
into, that the costs incurred in the settlement were prudent and that the costs
were incurred solely in response to Order 636. Several parties have already
filed for judicial review of Order 636. Because the restructuring requirements
that emerge from the lengthy administrative and judicial review process may be
significantly different from those currently in effect, and because
implementation of the restructuring may vary by pipeline, it is not possible to
predict what effect, if any, the restructuring resulting from compliance with
Order 636 will have on the Company.
Oil Price Controls. Sales of oil, condensate and gas liquids by the Company
are not currently regulated and are made at market prices.
State Regulation. Oil and gas operations are subject to a wide variety of
state regulations relating to virtually all aspects of the oil and gas business.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and gas. Such
states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and gas properties,
the establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. The statutes and
regulations of the State of Texas and certain other states limit the rate at
which oil and gas can be produced from the Company's properties.
Environmental Regulation. Various federal, state and local laws and
regulations covering the discharge of materials into the environment, or
otherwise relating to the protection of the environment, affect the Company's
operations and costs as a result of their effect on oil and gas exploration,
development and production operations. See "Risk Factors -- Government
Regulation; Environmental Risks."
30
<PAGE> 32
MANAGEMENT AND PRINCIPAL STOCKHOLDERS
Set forth below are the name and the office held by each director, officer
and key employee of the Company as of November 1, 1996, the Common Stock
ownership of each of them at that date and the aggregate compensation paid to
the Company's executive officers during the fiscal year ended December 31, 1995.
No other person owns of record or, to the knowledge of the Company, beneficially
5% or more of the Common Stock of the Company.
<TABLE>
<CAPTION>
COMMON STOCK
OWNERSHIP(3) 1995
----------------------- AGGREGATE
NAME POSITION SHARES % COMPENSATION
- ------------------------------- ----------------------- --------- ------- ------------
<S> <C> <C> <C> <C>
Thomas R. Cambridge............ Chairman of the Board 842,045(4) 5.6% $ 66,935(13)
of Directors and Chief
Executive Officer
Larry C. Oldham................ President and Director 806,090(5) 5.2% $108,717(14)
Danny H. Conklin(1)............ Director 120,624(6) *
Ernest R. Duke(1).............. Director 199,973(7) 1.3%
Myrle Greathouse(2)............ Director 1,020,304(8) 6.8%
Charles R. Pannill(2).......... Director 95,495(9) *
John S. Rutherford............. Manager of Land 5,250(10) *
Eric A. Bayley................. Manager of Engineering 73,990(11) *
Rebecca A. Burrell............. Manager of Accounting -- --
Diane Hurst.................... Accountant -- --
Thomas W. Ortloff.............. Secretary -- --
All Executive Officers and
Directors
as a Group (7 persons)....... 3,084,531(12) 19.75%
</TABLE>
- ------------------------------
* Less than one percent.
See footnotes on page 32.
Mr. Cambridge, age 61, has been a director of the Company since 1985. He is
an independent petroleum geologist engaged in the exploration for, development
and production of oil and gas. From 1970 until 1990, such activities were
carried out primarily through Cambridge & Nail Partnership, a Texas general
partnership. Since 1990, such oil and gas activities have been carried out
through Cambridge Production, Inc., a Texas corporation. Mr. Cambridge serves
the Company in the capacity of a consultant, not as a full-time employee. Mr.
Cambridge received a Bachelor of Science degree and a Master of Science degree
in Geology from the University of Nebraska in 1958 and 1960, respectively.
Mr. Oldham, age 43, a founder of the Company, has served as an officer and
director of the Company since its formation in 1979. Prior to the Company's
formation, Mr. Oldham was employed by Dorchester Gas Corporation during the
period from 1976 to 1979 and by KPMG Peat Marwick LLP during 1975 and 1976. Mr.
Oldham is a member of the American Institute of Certified Public Accountants and
a member of the Permian Basin Landman's Association. He received a Bachelor of
Business Administration degree from West Texas State University in 1975.
Mr. Conklin, age 61, has been a director of the Company since 1985. He is
an independent petroleum geologist and a principal partner in Philcon
Development Co., a privately held oil and gas exploration partnership. Mr.
Conklin is a director of Boatmens' First National Bank of Amarillo, Amarillo,
Texas, a director of Southwestern Public Service Company, Amarillo, Texas, and
former Chairman of the Independent Petroleum Association of America. Mr. Conklin
received a Bachelor of Science degree in Geology from Oklahoma State University
in 1957.
31
<PAGE> 33
Mr. Duke, age 69, has been a director of the Company since 1980. He is the
president and sole shareholder of Mustang Mud, Inc., a privately held oil field
service company. He received a Bachelor of Science degree in Geology from
Southern Methodist University in 1950.
Mr. Greathouse, age 74, has been a director of the Company since 1993. He
is the sole shareholder and chairman of the board of directors of Wes-Tex
Drilling Company ("Wes-Tex"), a corporation engaged in contract drilling of oil
and gas wells and, to a lesser extent, oil and gas exploration and production.
Mr. Greathouse graduated from the University of Oklahoma with a Bachelor's
degree in Business Administration in 1949.
Mr. Pannill, age 71, has been a director of the Company since 1982. Until
he retired in 1982, Mr. Pannill was employed by The Western Company of North
America for over thirty years where he served in various capacities, including
as an executive officer and director. Mr. Pannill received a Bachelor of Science
degree in Geology from Texas A&M University in 1950.
Mr. Rutherford, age 36, has been a full-time employee of the Company since
October 1993. From May 1991 to October 1993, Mr. Rutherford served as a
consultant to the Company, devoting substantially all of his consulting time to
the Company's business. From April 1988 to April 1991, Mr. Rutherford was a Vice
President in the energy lending division of Texas Commerce Bank, National
Association, Midland, Texas. Mr. Rutherford is a certified professional landman
and is a member of the Permian Basin Landman's Association and the American
Association of Professional Landmen. Mr. Rutherford graduated from Oral Roberts
University in 1982 with a degree in Education and he graduated from Baylor
University with a Master's of Business Administration degree in 1986.
Mr. Bayley, age 48, has been a full-time employee of the Company since
October, 1993. From December 1990 to October 1993, Mr. Bayley was an independent
consulting engineer and devoted substantially all of his consulting time to the
Company. Mr. Bayley graduated from Colorado School of Mines with a Bachelor of
Science degree in Mineral Engineering -- Chemistry in 1970, from Texas A&M
University with a Bachelor of Science degree in Petroleum Engineering in 1978,
and from the University of Texas of the Permian Basin with a Master of Business
Administration degree in 1984. Mr. Bayley is a member of the Society of
Petroleum Engineers and is a registered Professional Engineer.
Ms. Burrell, age 42, has been a full-time employee of the Company since
January, 1985. Ms. Burrell has worked in oil and gas accounting since 1978. Ms.
Burrell graduated from Jacksonville College with a degree in accounting in 1974.
Ms. Hurst, age 43, has been a full time employee of the Company since
August, 1994. Ms. Hurst attended West Texas State University and Midland
College. She has held various positions in oil and gas accounting since 1975.
Mr. Ortloff, age 48, has been the Secretary of the Company since October,
1994 and has been a partner and shareholder in the law firm of Lynch, Chappell &
Alsup, a professional corporation, in Midland, Texas, since 1981.
- ------------------------------
Footnotes to table on page 31.
(1) Member of Audit Committee.
(2) Member of Compensation Committee.
(3) Unless otherwise indicated, all shares of Common Stock are held directly
with sole voting and investment powers. Securities not outstanding, but
included in the beneficial ownership of each such person are deemed to be
outstanding for the purpose of computing the percentage of outstanding
securities of the class owned by such person, but are not deemed to be
outstanding for the purpose of computing the percentage of the class owned
by any other person.
(4) Includes 225,000 shares of Common Stock underlying presently exercisable
stock options.
(5) Includes 612,000 shares of Common Stock underlying presently exercisable
stock options.
(6) Includes 25,000 shares of Common Stock underlying a presently exercisable
stock option.
(7) Includes 74,395 shares held by Duke and Cain Partnership, a general
partnership in which Mr. Duke is a partner, and 10,000 shares held in the
name of Mr. Duke's wife. Mr. Duke has shared voting and investment powers
with respect to such shares. Also included are 12,500 shares of Common
Stock underlying a presently exercisable stock option.
32
<PAGE> 34
(8) Includes 972,488 shares of Common Stock held directly by Wes-Tex. Mr.
Greathouse is the chairman of the board of directors and sole shareholder
of Wes-Tex and, accordingly, has shared voting and investment powers with
respect to such shares. Also included are 25,000 shares of Common Stock
underlying a presently exercisable stock option, and 816 shares held by a
22 member investment club of which Mr. Greathouse is a member, and as to
which Mr. Greathouse has shared voting and investment powers. See note 10
below.
(9) Includes 25,000 shares of Common Stock underlying a presently exercisable
stock option. Also included are 1,300 shares held by Mr. Pannill as
custodian for the benefit of two minor grandchildren, and as to which Mr.
Pannill disclaims beneficial ownership.
(10) All of these shares may be acquired upon exercise of presently exercisable
stock options.
(11) Includes 57,500 shares underlying presently exercisable stock options.
(12) Includes 924,500 shares of Common Stock underlying presently exercisable
stock options.
(13) Includes consulting fees of $62,475; a cash bonus of $3,560; and a
non-accountable expense reimbursement of $900.
(14) Includes salary of $92,181; a cash bonus of $5,015; insurance premiums for
nondiscriminatory group life, medical, disability and dental insurance in
the amount of $9,171; $2,350 for medical reimbursement; and $2,765
contributed by the Company to Mr. Oldham's individual retirement account
maintained under the Company's 408(k) simplified employee pension plan.
CONSULTING ARRANGEMENTS
In addition to the services provided by Messrs. Cambridge and Oldham, the
Company also relies extensively on its employees and outside advisors and
consultants to provide technical and administrative services and support in the
operation of the Company's business.
Geological
Eugene R. Erwin, an independent consulting geologist, has provided
consulting services to the Company for approximately eight years and has devoted
substantially all of his consulting time to the business of the Company. As
partial payment for consulting services provided to the Company, Mr. Erwin has
been granted working interests and overriding royalty interests in certain of
the Company's prospects. Mr. Erwin graduated from the University of Nebraska in
1954 with a Bachelor of Science degree in Geology and a Master of Science degree
in Geology in 1958.
Geophysical
Gregory G. Chapel, President of Digital Prospectors, LLC, has provided
consulting services to the Company since 1994 in connection with the Company's
activities in the Permian Basin of West Texas and the onshore Gulf Coast area of
Texas. Mr. Chapel gained experience with 3-D seismic interpretation and computer
aided exploration through working on international and domestic projects with
UNOCAL from 1980 to 1991. Mr. Chapel has worked with computer workstations since
1985 and has worked 3-D seismic projects since 1980. In 1991, Mr. Chapel joined
Interactive Exploration Solutions, where he used his expertise in workstation
technology and 3-D seismic interpretation to develop and teach advanced 3-D
workstation interpretation techniques. He has provided interpretation consulting
services on numerous 3-D seismic projects in West Texas, onshore the Gulf Coast
of Texas, Venezuela, Nigeria, and Norway. Mr. Chapel graduated from the Colorado
School of Mines with a degree in Geophysical Engineering in 1980.
Bryan Charles "Chuck" Keller, President of Interactive Seismic Imaging, LLC
("ISI"), has 16 years of experience in design, acquisition and processing of
geophysical surveys. Mr. Keller has been providing such services to the Company
since 1994 in connection with the Company's activities in the Permian Basin and
onshore Gulf Coast of Texas. Prior to co-founding ISI in 1994, Mr. Keller worked
for Halliburton Geophysical Services and its predecessor Geophysical Service,
Inc. from 1980 to 1992. His assignments at Halliburton Geophysical Services
included Area Geophysicist for Mid-Continent and Western U.S. Land Districts and
Operations Manager for data processing and data acquisition of the U.S. Land
Division. Mr. Keller graduated from Pittsburg State University with a Bachelor's
degree in Mathematics in 1980.
Steven J. Pawalek, the founder of SJP Exploration, Inc. ("SJP"), has 16
years of experience in the design and interpretation of geophysical surveys. Mr.
Pawalek has been providing such services to the Company since 1994 in connection
with the Company's activities in the Yegua/Frio Gas Trend in connection with
Phase III and Phase IV activities. Prior to founding SJP in 1991, Mr. Pawalek
gained his experience with Clayton W. Williams, Jr. from 1980 to 1989 as an
exploration geophysicist on the Texas Gulf Coast and Christico Petroleum
33
<PAGE> 35
Company from 1989 to 1991 as a senior geophysicist responsible for prospect
generation. Mr. Pawalek graduated from Texas A & M University with a Bachelor of
Science degree in Geophysics in 1980.
Engineering
Tommy E. Zachry, a registered professional petroleum engineer, is relied on
extensively by the Company for the day-to-day operation, maintenance and field
supervision of the Page, West World Strawn and Hulldale Penn Reef Fields. The
Company has maintained its arrangement with Mr. Zachry since acquiring its
interest in the Page Field in 1989. Under its arrangement with Mr. Zachry, the
Company pays Mr. Zachry a fee of $4,000 per month for providing the necessary
oversite, maintenance and operation of the Company's interests in these three
fields. Mr. Zachry owns an 11% working interest in the Page Field, an 11%
working interest in the West World Strawn Field and an 11.63% working interest
in the Hulldale Penn Reef Field. The Company also reimburses Mr. Zachry for
direct expenses incurred by him in connection with services rendered on behalf
of the Company. He has been employed in the oil and gas industry in various
capacities in excess of fifteen years, including as a field engineer, production
engineer and operations engineer. Mr. Zachry is the owner of Zachry Oil and Gas
Properties, Midland, Texas, and provides consulting services to others, as well
as the Company. Mr. Zachry graduated from Texas Tech University with a Bachelor
of Science degree in Electrical Engineering on 1975.
34
<PAGE> 36
DESCRIPTION OF CAPITAL STOCK
The authorized capital stock of the Company consists of 100,000,000 shares
of Common Stock, par value $.01 per share, of which 14,896,358 shares were
outstanding at November 1, 1996 and 40,000,000 shares of preferred stock, $.10
par value, none of which are outstanding.
COMMON STOCK
Each share of Common Stock has one vote on all matters submitted to
stockholders. Subject to the rights and preferences of any series of preferred
stock which may be designated and issued, the holders of the Company's Common
Stock are entitled to receive dividends when and if declared by the Board of
Directors and upon liquidation to share pro rata in any and all assets remaining
after the payment of corporate liabilities and after satisfaction of any
liquidation preferences on any series of the Company's preferred stock. The
Company's Common Stock has no preemptive or other subscription rights, and the
outstanding shares of Common Stock are fully paid and nonassessable. There are
no conversion rights or redemption or sinking fund provisions with respect to
the Common Stock.
Since the Common Stock does not have cumulative voting rights, the holders
of more than 50% of the shares may, if they choose to do so, elect all the
directors of the Company and, in that event, the holders of the remaining shares
will not be able to elect any directors.
PREFERRED STOCK
The Board of Directors is empowered, without approval of the stockholders,
to cause shares of preferred stock to be issued in one or more series, with the
number of shares of each series and the rights, preferences and limitations of
each series to be determined by it. Among the specific matters that may be
determined by the Board of Directors are the rate of dividends, redemption and
conversion prices, terms and amounts payable in the event of liquidation and
voting rights. Issuance of shares of preferred stock could involve dilution of
the equity of the holders of Common Stock and further restrict the rights of
such stockholders to receive dividends.
REGISTRAR AND TRANSFER AGENT
The registrar and transfer agent for the Common Stock is American Stock
Transfer & Trust, Inc., Lakewood, Colorado.
35
<PAGE> 37
SHARES ELIGIBLE FOR FUTURE SALE
Sales of substantial amounts of Common Stock in the public market, or the
availability for sale of shares of Common Stock the sale of which would
otherwise be restricted, could adversely affect prevailing market prices and the
ability of the Company to raise equity capital in the future at a time and price
which it deems appropriate.
Upon completion of the offering the Company will have outstanding
17,396,358 shares of Common Stock (17,771,358 shares, if the Underwriters'
over-allotment option is exercised in full). All these shares of Common Stock
will be freely tradeable without restriction or limitation under the Act, except
to the extent such shares are subject to the agreement with the Underwriters
described below, and except for any shares held by "affiliates," as that term is
defined under the Securities Act of 1933, as amended (the "Securities Act"). The
shares held by affiliates may only be sold if they are registered under the Act
or unless an exemption from registration, such as the exemption provided by Rule
144 under the Securities Act ("Rule 144"), is available.
In general, under Rule 144 as currently in effect, a stockholder (or
stockholders whose shares are aggregated) who has beneficially owned shares
constituting "restricted securities" (generally defined as securities acquired
from the Company or an affiliate of the Company in a non-public transaction) for
at least two years, is entitled to sell within any three-month period a number
of shares that does not exceed the greater of one percent of the outstanding
common stock or the average weekly trading volume in the common stock during the
four calendar weeks preceding the date on which notice of such sale is filed
pursuant to Rule 144. Sales under Rule 144 also are subject to certain
provisions regarding the manner of sale, notice requirements and the
availability of current public information about the Company. A stockholder (or
stockholders whose shares are aggregated) who is not an affiliate of the Company
for at least 90 days prior to a proposed transaction and who has beneficially
owned "restricted securities" for at least three years is entitled to sell such
shares under Rule 144(k) without regard to the limitations described above. The
Securities and Exchange Commission has proposed amendments to Rule 144 that
would shorten these two and three year periods by one year each.
In October 1993 and February 1995, the Company privately placed 2,200,000
and 644,415 shares of Common Stock, respectively. In connection with the
February 1995 private placement, the Company also issued a common stock purchase
warrant to purchase 64,415 shares of the Company's Common Stock. All of such
shares of Common Stock are presently eligible for sale in the public market
pursuant to effective registration statements or Rule 144(k) under the Act.
Although the Company is not able to accurately determine the exact number of
shares of Common Stock that have previously been sold pursuant to such
registration statements or Rule 144(k), based on information available to the
Company, the Company believes that more than 1,600,000 shares of Common Stock
have been sold in the public market pursuant to such registration statements or
Rule 144 prior to the date of this Prospectus.
In addition, 1,512,250 shares of Common Stock are reserved for issuance
pursuant to the Company's stock option plans. At November 1, 1996, options for
the purchase of 1,207,250 shares of Common Stock were outstanding. When and if
issued on exercise of the option, these shares will be available for sale in the
public market from time to time upon registration or pursuant to available
exemptions from registration. See "Risk Factors -- Shares Eligible for Future
Sale."
36
<PAGE> 38
UNDERWRITING
Subject to the terms and conditions of the Underwriting Agreement, the
Underwriters named below, for which Van Kasper & Company is acting as
Representative, have severally agreed to purchase from the Company the number of
shares of Common Stock set forth opposite their names below:
<TABLE>
<CAPTION>
NUMBER
NAME OF SHARES
------ ---------
<S> <C>
Van Kasper & Company......................................................
---------
Total........................................................... 2,500,000
=========
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters are subject to certain conditions precedent and that the
Underwriters will purchase all of the shares of Common Stock offered hereby
(other than those subject to the Underwriters' over-allotment option described
below) if any are purchased.
Van Kasper & Company, the Representative of the several Underwriters, has
advised the Company that the Underwriters propose to offer the shares of Common
Stock directly to the public at the price to public set forth on the cover page
of this Prospectus and to certain dealers at this price less a discount not in
excess of $ per share. The Underwriters may allow and these dealers may
reallow a discount not in excess of $ per share to certain other dealers.
After the public offering of the shares of Common Stock, the offering price and
other selling terms may be changed by the Representative.
The Company has granted to the Underwriters an option, exercisable no later
than 45 days after the date of this Prospectus, to purchase up to 375,000
additional shares of Common Stock at the price to public set forth on the cover
page of this Prospectus, less the underwriting discount set forth on the cover
page of this Prospectus, solely to cover over-allotments. To the extent that the
Underwriters exercise this option, each of the Underwriters will have a firm
commitment to purchase approximately the same percentage thereof as the number
of shares of Common Stock to be purchased by it shown in the above table bears
to the total offering, and the Company will be obligated, pursuant to the
option, to sell such shares of Common Stock to the Underwriters.
In connection with the offering made hereby, the Company has agreed to sell
to the Representative, for nominal consideration, warrants to purchase from the
Company a number of shares of Common Stock equal to 5% of the number of shares
issued in the offering (the "Warrants"). The Warrants are exercisable, in whole
or in part, at an exercise price of 120% of the price to public set forth on the
cover page of this Prospectus at any time during the four-year period commencing
one year after the effective date of the Registration Statement of which this
Prospectus is a part. The warrant agreement pursuant to which the Warrants will
be issued will contain provisions providing for adjustment of the exercise price
and the number and type of securities issuable upon exercise of the Warrants
should any one or more of certain specified events occur. The Warrants grant to
the holders thereof certain rights of registration for the securities issuable
upon exercise of the Warrants.
At the closing of the offering, the Company will also pay to the
Representative a non-accountable expense allowance of $150,000.
The Underwriting Agreement contains covenants of indemnity between the
Underwriters and the Company against certain civil liabilities, including
liabilities under the Securities Act.
Pursuant to the terms of certain lock-up agreements, the Company's
directors and officers have agreed with the Underwriters that, for a period of
180 days after the date of this Prospectus, they will not offer to sell or
otherwise sell, dispose of or grant any rights with respect to any shares of
Common Stock, now owned or hereafter acquired directly by such holders or with
respect to which they have the power of disposition, without
37
<PAGE> 39
the prior written consent of Van Kasper & Company. The Company also has agreed
not to offer, sell, contract to sell or otherwise dispose of any shares of
Common Stock or any securities convertible into or exercisable or exchangeable
for Common Stock, or any options or warrants to purchase Common Stock other than
shares or options issued under the Company's stock option plans, for a period of
180 days after the date of this Prospectus, except with the prior written
consent of Van Kasper & Company.
CERTAIN LEGAL MATTERS
The validity of the Common Stock offered hereby will be passed upon for the
Company by Lynch, Chappell & Alsup, a Professional Corporation, The Summit,
Suite 700, 300 N. Marienfeld, Midland, Texas 79701. Thomas W. Ortloff, a
shareholder of the firm of Lynch, Chappell & Alsup, is Secretary of the Company.
Certain legal matters will be passed upon for the Underwriters by Gibson, Dunn &
Crutcher LLP, 333 South Grand Avenue, Los Angeles, California 90071.
EXPERTS
The financial statements of the Company as of December 31, 1994 and 1995,
and for each of the years in the three-year period ended December 31, 1995 have
been included in this Prospectus and in the Registration Statement in reliance
upon the reports 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 estimated reserves and related calculations of Joe C. Neal & Associates
set forth in this Prospectus have been included herein in reliance upon the
authority of said firm as experts in petroleum engineering.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy statements and other information with the
Commission. Such reports, proxy statements and other information filed by the
Company with the Commission can be inspected, without charge, and copies may be
obtained at prescribed rates, at the Public Reference Section of the Commission
at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549,
and the Regional Offices of the Commission at 500 West Madison Street, Chicago,
Illinois 60661 and 7 World Trade Center, New York, New York 10048. The
Commission maintains a Worldwide Web site on the Internet at http:// www.sec.gov
that contains reports, proxy and information statements and other information
regarding registrants that file electronically with the Commission.
The Company has filed with the Commission a Registration Statement under
the Securities Act with respect to the shares of Common Stock offered pursuant
to this Prospectus. This Prospectus, which constitutes part of the Registration
Statement, omits certain of the information contained in the Registration
Statement, the exhibits thereto and the documents incorporated therein by
reference. Statements contained in this Prospectus as to the contents of any
contract or other document referred to are not necessarily complete and in each
instance reference is made to the Registration Statement or the copy of such
contract or other documents filed as an exhibit to or incorporated by reference
in the Registration Statement, and each such statement is qualified in all
respects by such reference.
38
<PAGE> 40
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents that previously were, or are in the future, filed
with the Commission (File No. 0-13305) pursuant to the Exchange Act, are
incorporated herein by reference: (i) the Company's Annual Report on Form 10-K
for the year ended December 31, 1995; (ii) the Company's Quarterly Reports on
Form 10-Q for the quarters ended March 31, 1996, June 30, 1996 and September 30,
1996; (iii) the Company's Proxy Statement dated April 15, 1996; and (iv) all
documents filed by the Company pursuant to Sections 13(a), 13(c), 14 or 15(d) of
the Exchange Act subsequent to the date of this Prospectus and prior to the
termination of the offering made hereby.
Any statement contained in a document incorporated by reference herein
shall be deemed to be modified or superseded for purposes of this Prospectus to
the extent that such statement is modified or replaced by a statement contained
in this Prospectus or in any other subsequently filed document that also is or
is deemed to be incorporated by reference into this Prospectus. Any such
statement so modified or superseded shall not be deemed, except as so modified
or replaced, to constitute a part of this Prospectus. The Company will provide
without charge to each person to whom a copy of this Prospectus has been
delivered, upon the written or oral request of any such person, a copy of any or
all of the documents referred to above that have been or may be incorporated in
this Prospectus by reference, other than exhibits to such documents. Written or
oral requests for such copies should be directed to Rebecca A. Burrell, Parallel
Petroleum Corporation, One Marienfeld Place, Suite 465, Midland, Texas 79701
(telephone: (915) 684-3727).
GLOSSARY
As used in this Prospectus:
"Area of mutual interest" means, generally, an agreed upon area of land,
varying in size, included and described in an oil and gas exploration agreement
which participants agree will be subject to rights of first refusal as among
themselves, such that any participant acquiring any minerals, royalty,
overriding royalty, oil and gas leasehold estates or similar interests in the
designated area, is obligated to offer the other participants the opportunity to
purchase their agreed upon percentage share of the interest so acquired on the
same basis and cost as purchased by the acquiring participant. If the other
participants, after a specific time period, elect not to acquire their pro-rata
share, the acquiring participant is typically then free to retain or sell such
interests.
"Bbl" means barrel or barrels.
"Bcf" means billion cubic feet.
"DD&A Rate" means the amount of depreciation, depletion and amortization
per EBO production.
"Drillable feature" means a geologic anomaly which may contain hydrocarbons
that has been identified through the use of 3-D seismic surveys.
"EBO" means equivalent barrels of oil, determined using the ratio of six
Mcf of gas to one barrel of oil, condensate or gas liquids.
"Future net revenues (before income taxes)" means an estimate of future net
revenues from a property at a specified date, after deducting production and ad
valorem taxes, future capital costs and operating expenses, before deducting
income taxes. Future net revenues (before income taxes) should not be construed
as being the fair market value of the property.
"Future net revenues (net of income taxes)" means an estimate of future net
revenues from a property at a specified date, after deducting production and ad
valorem taxes, future capital costs and operating expenses, net of income taxes.
Future net revenues (net of income taxes) should not be construed as being the
fair market value of the property.
"Mcf" means thousand cubic feet.
"MMcf" means million cubic feet.
39
<PAGE> 41
"MBbl" means thousand barrels.
"Gross" oil and gas wells or "gross" acres is the number of wells or acres
in which the Company has an interest.
"Net" oil and gas wells or "net" acres are determined by multiplying
"gross" wells or acres by the Company's working interest in such wells or acres.
"Present value of future net revenues (before income taxes)" means future
net revenues (before income taxes) discounted at an annual rate of 10% to
determine their "present value." The present value is shown to indicate the
effect of time on the value of the revenue stream and should not be construed as
being the fair market value of the properties.
"Present value of future net revenues (net of income taxes)" means future
net revenues (net of income taxes) discounted at an annual rate of 10% to
determine their "present value." The present value is shown to indicate the
effect of time on the value of the revenue stream and should not be construed as
being the fair market value of the properties.
"Production costs" means lease operating expenses and severance and ad
valorem taxes on oil and gas production.
"Proved reserves" or "reserves" means gas and oil, condensate and gas
liquids on a net revenue interest basis, found to be commercially recoverable.
"Proved developed reserves" includes only those proved reserves expected to
be recovered from existing completion intervals in existing wells and those
reserves that exist behind the casing of existing wells when the cost of making
such reserves available for production is relatively small compared to the cost
of a new well.
"Proved undeveloped reserves" includes those proved reserves expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
"Trend" means a geographical area where similar geological, geophysical, or
oil and gas reservoir and production characteristics may exist.
40
<PAGE> 42
PARALLEL PETROLEUM CORPORATION
INDEX TO THE FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Independent Auditors' Report.......................................................... F-2
Financial Statements:
Balance Sheets as of December 31, 1994 and 1995, and September 30, 1996
(unaudited)..................................................................... F-3
Statements of Operations for the years ended December 31, 1993, 1994, and 1995,
and the nine months ended September 30, 1995 and 1996 (unaudited)............... F-4
Statements of Stockholders' Equity for the years ended December 31, 1993, 1994,
and 1995, and the nine months and 1996 (unaudited).............................. F-5
Statements of Cash Flows for the years ended December 31, 1993, 1994, and 1995,
and the nine months ended September 30, 1995 and 1996 (unaudited)............... F-6
Notes to Financial Statements.................................................... F-7
</TABLE>
F-1
<PAGE> 43
INDEPENDENT AUDITORS' REPORT
The Board of Directors
Parallel Petroleum Corporation:
We have audited the financial statements of Parallel Petroleum Corporation
as listed in the accompanying index. These financial statements are the
responsibility of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Parallel Petroleum
Corporation as of December 31, 1995 and 1994, and the results of its operations
and its cash flows for each of the years in the three-year period ended December
31, 1995, in conformity with generally accepted accounting principles.
As discussed in notes 1 and 5 to the financial statements, the Company
changed its method of accounting for income taxes in 1993 to adopt the
provisions of the Financial Accounting Standards Board's Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes".
KPMG PEAT MARWICK LLP
Midland, Texas
February 2, 1996
F-2
<PAGE> 44
PARALLEL PETROLEUM CORPORATION
BALANCE SHEETS
(IN THOUSANDS)
DECEMBER 31, 1994 AND 1995 AND SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
------------------- 1996
ASSETS 1994 1995 -------------
------- ------- (UNAUDITED)
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents................................ $ 598 $ 559 $ 416
Accounts Receivable:
Oil and gas........................................... 470 648 2,158
Others, net of allowance for doubtful accounts of $28
in 1994, 1995 and 1996.............................. 243 115 701
Affiliate............................................. 2 3 10
------- ------- -------
715 766 2,869
Prepaid expenses and other............................... 13 16 12
Undeveloped leases held for sale......................... 464 61 --
Deferred income taxes.................................... -- 114 210
------- ------- -------
Total current assets.................................. 1,790 1,516 3,507
------- ------- -------
Property and equipment, at cost:
Oil and gas properties, full cost method................. 27,658 30,880 40,362
Other.................................................... 298 316 372
------- ------- -------
27,956 31,196 40,734
Less accumulated depreciation and depletion.............. 7,232 8,838 11,457
------- ------- -------
Net property and equipment............................ 20,724 22,358 29,277
------- ------- -------
Other assets, net of accumulated amortization of $20 in
1994, $24 in 1995 and $40 in 1996........................ 247 41 91
------- ------- -------
Total assets.......................................... $22,761 $23,915 $32,875
======= ======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities:
Trade................................................. $ 1,696 856 $ 1,208
Affiliate............................................. 327 20 61
------- ------- -------
Total current liabilities........................... 2,023 876 1,269
------- ------- -------
Long-term debt............................................. 11,000 11,675 16,213
Deferred revenue........................................... 50 -- --
Deferred income taxes...................................... 359 528 1,954
Contingencies
Stockholders' equity:
Preferred stock -- par value of $.10 per share,
authorized 40,000 shares, none issued................. -- -- --
Common stock -- par value of $.01 per share, authorized
100,000 shares, issued and outstanding 14,175 in 1994,
14,854 in 1995 and 14,866 in 1996..................... 142 149 149
Additional paid-in surplus............................... 10,300 11,663 11,684
Retained earnings (deficit).............................. (1,113) (976) 1,606
------- ------- -------
Total stockholders' equity............................ 9,329 10,836 13,439
------- ------- -------
Total liabilities and stockholder's equity............ $22,761 $23,915 $32,875
======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE> 45
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Oil and gas revenues......................... $ 3,446 $ 4,693 $ 4,714 $ 3,420 $ 9,693
------- ------- ------- ------- -------
Costs and expenses:
Production costs........................... 1,305 1,427 1,468 1,066 1,902
General and administrative expense......... 298 340 433 315 386
Depreciation, depletion and amortization... 918 1,572 1,618 1,095 2,619
------- ------- ------- ------- -------
Total costs and expenses................ 2,521 3,339 3,519 2,476 4,907
------- ------- ------- ------- -------
Operating income........................ 925 1,354 1,195 944 4,786
------- ------- ------- ------- -------
Other (income) expense, net:
Interest expense........................... 427 711 1,035 772 931
Other expense (income)..................... (74) (65) (44) (35) (57)
------- ------- ------- ------- -------
Total other expense, net................ 353 646 991 737 874
------- ------- ------- ------- -------
Pretax income before cumulative effect of
accounting change.......................... 572 708 204 207 3,912
Income tax expense........................... 196 263 67 70 1,330
------- ------- ------- ------- -------
Income before cumulative effect of
accounting change.......................... 376 445 137 137 2,582
Cumulative effect of accounting change....... (48) -- -- -- --
------- ------- ------- ------- -------
Net income.............................. $ 328 $ 445 $ 137 $ 137 $ 2,582
======= ======= ======= ======= =======
Income per common share:
Income before cumulative effect of
accounting change....................... $ 0.03 $ 0.03 $ 0.01 $ 0.01 $ 0.17
Cumulative effect of accounting change..... (0.01) -- -- -- --
------- ------- ------- ------- -------
Net income per common share............. $ 0.02 $ 0.03 $ 0.01 $ 0.01 $ .17
======= ======= ======= ======= =======
Weighted average common shares and common
stock equivalents outstanding.............. 13,467 14,815 15,557 15,308 15,579
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE> 46
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1996
<TABLE>
<CAPTION>
COMMON STOCK
------------------ ADDITIONAL RETAINED TOTAL
NUMBER PAID-IN EARNINGS STOCKHOLDERS'
OF SHARES AMOUNT CAPITAL (DEFICIT) EQUITY
--------- ------ ---------- -------- -------------
<S> <C> <C> <C> <C> <C>
Balance at January 1, 1993..................... 11,772 $118 $ 7,109 $ (1,886) $ 5,341
Issuance of stock............................ 2,200 22 2,918 -- 2,940
Options exercised............................ 95 1 42 -- 43
Tax benefits related to options.............. -- -- 65 -- 65
Net income................................... -- -- -- 328 328
------ ---- ------- ------- -------
Balance at December 31, 1993................... 14,067 141 10,134 (1,558) 8,717
Options exercised............................ 108 1 83 -- 84
Tax benefits related to options.............. -- -- 83 -- 83
Net income................................... -- -- -- 445 445
------ ---- ------- ------- -------
Balance at December 31, 1994................... 14,175 142 10,300 (1,113) 9,329
Issuance of stock............................ 644 6 1,315 -- 1,321
Options exercised............................ 35 1 35 -- 36
Tax benefits related to options.............. -- -- 13 -- 13
Net income................................... -- -- -- 137 137
------ ---- ------- ------- -------
Balance at December 31, 1995................... 14,854 149 11,663 (976) 10,836
Options exercised (unaudited)................ 12 -- 21 -- 21
Net income (unaudited)....................... -- -- -- 2,582 2,582
------ ---- ------- ------- -------
Balance at September 30, 1996 (unaudited)...... 14,866 $149 $11,684 $ 1,606 $13,439
====== ==== ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE> 47
PARALLEL PETROLEUM CORPORATION
STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
----------------------------- -------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Cash flows from operating activities:
Net income................................... $ 328 $ 445 $ 137 $ 137 $ 2,582
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation, depletion and
amortization............................ 918 1,572 1,618 1,095 2,619
Cumulative effect of accounting change.... 48 -- -- -- --
Income taxes.............................. 196 263 67 70 1,330
Other, net................................... (7) (78) 8 174 (50)
Changes in assets and liabilities:
Decrease (increase) in trade
receivables............................. (138) 175 (51) (45) (2,103)
Decrease (increase) in prepaid expenses
and other............................... 15 (5) (3) (30) 4
Increase (decrease) in accounts payable
and accrued liabilities................. 727 (518) (281) (1,272) 163
------- ------- ------- ------- --------
Net cash provided by operating
activities........................... 2,087 1,854 1,495 129 4,545
------- ------- ------- ------- --------
Cash flows from investing activities:
Additions to property and equipment.......... (4,700) (6,317) (4,518) (2,488) (9,855)
Proceeds from disposition of property and
equipment................................. 402 572 597 1,261 608
Acquisition of undeveloped leases held for
sale...................................... (1,004) (772) (524) (106) --
Proceeds from disposition of undeveloped
leases held for sale...................... 381 12 731 -- --
------- ------- ------- ------- --------
Net cash used in investing activities..... (4,921) (6,505) (3,714) (1,333) (9,247)
------- ------- ------- ------- --------
Cash flows from financing activities:
Proceeds from the issuance of long-term
debt...................................... 2,625 5,191 2,285 1,050 19,607
Payments of long-term debt................... (3,036) -- (1,610) (1,610) (15,069)
Proceeds from exercise of options............ 43 84 36 36 21
Stock offering costs......................... -- (149) (142) (290) --
Proceeds from common stock issuance.......... 2,940 -- 1,611 1,611 --
------- ------- ------- ------- --------
Net cash provided by financing
activities.............................. 2,572 5,126 2,180 797 4,559
------- ------- ------- ------- --------
Net increase (decrease) in cash and cash
equivalents............................. (262) 475 (39) (407) (143)
Cash and cash equivalents, beginning of
period....................................... 385 123 598 598 559
------- ------- ------- ------- --------
Cash and cash equivalents, end of period....... $ 123 $ 598 $ 559 $ 191 $ 416
======= ======= ======= ======= ========
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE> 48
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of Operations
Parallel Petroleum Corporation, a Delaware corporation (the Company), is
primarily engaged in, and its only industry segment is, the acquisition of, and
the exploration for, development, production and sale of, crude oil and natural
gas. The Company's business activities are carried out primarily in Texas. The
Company's activities in Texas are focused in the onshore Gulf Coast area of
Jackson and Wharton Counties, Texas, and in the Permian Basin of West Texas.
Property and Equipment
The Company's oil and gas producing activities are accounted for using the
full cost method of accounting. Accordingly, the Company capitalizes all costs
incurred in connection with the acquisition of oil and gas properties and with
the exploration for and development of oil and gas reserves. Normal dispositions
of oil and gas properties are accounted for as adjustments to capitalized costs,
with no gain or loss recognized.
Certain directly identifiable internal costs of property acquisition,
exploration and development activities are capitalized. Such costs capitalized
in 1993, 1994, 1995 and for the period ended September 30, 1996 totaled
$375,898, $527,000, $512,000 and $427,800, respectively.
Depletion of such costs is provided using the units-of-production method
based upon estimates of proved oil and gas reserves with oil and gas production
being converted to a common unit of measure based upon their relative energy
content. Depreciation, depletion and amortization per equivalent unit of
production (EBO) was $3.61, $4.13, $4.02, and $4.30 for 1993, 1994, 1995 and for
the nine months ended September 30, 1996, respectively. Costs from unproved
properties are excluded from depletion until evaluated.
In accordance with the full cost method of accounting, the net capitalized
costs of oil and gas properties (full cost ceiling limitation) are not to exceed
their related estimated future net revenues discounted at 10%, and lower of cost
or estimated fair value of unproved properties, net of tax considerations.
Upon retirement or disposition of assets other than oil and gas properties,
the cost and related accumulated depreciation are removed from the accounts with
the resulting gains or losses, if any, reflected in results of operations.
Depreciation of other property and equipment is computed using the straight-line
method based on their estimated useful lives.
Maintenance and repairs are charged to operations; renewals and betterments
are charged to the appropriate property and equipment accounts.
Undeveloped Leases Held for Sale
Undeveloped leases held for sale represent unproven oil and gas properties
which the Company expects to sell within one year. Such properties are carried
at the lower of cost or net realizable value and are excluded from amortization.
Gains or losses upon disposition or impairment of such properties are treated as
an adjustment to the full cost pool with no gain or loss recognized.
Income Taxes
The Company accounts for federal income taxes using Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("FAS 109"), which
required a change from the deferred method of
F-7
<PAGE> 49
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
accounting for income taxes under Accounting Principles Board ("APB") Opinion 11
to the asset and liability method of accounting for income taxes. Under the
asset and liability method of Statement 109, deferred tax assets and liabilities
are recognized for the future tax consequences attributable to differences
between financial statement carrying amounts of existing assets and liabilities
and their respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the years in
which those temporary differences are expected to be recovered or settled. Under
FAS 109, the effect on previously recorded deferred tax assets and liabilities
resulting from a change in tax rates is recognized in earnings in the period in
which the change is enacted.
Pursuant to the deferred method of accounting for income taxes under APB
Opinion 11, which applied to 1992 and prior years, deferred income taxes were
recognized for income and expense items that are reported in different years for
financial and income tax reporting purposes using the tax rates applicable for
the year of the calculation. Under the deferred method, deferred taxes were not
adjusted for subsequent tax rate changes.
Environmental
The Company is subject to extensive Federal, state and local environmental
laws and regulations. These laws, which are constantly changing, regulate the
discharge of materials into the environment and may require the Company to
remove or mitigate the environmental effects of the disposal or release of
petroleum or chemical substances at various sites. Environmental expenditures
are expensed or capitalized depending on their future economic benefit.
Expenditures that relate to an existing condition caused by past operations and
that have no future economic benefits are expensed. Liabilities for expenditures
of a noncapital nature are recorded when environmental assessment and/or
remediation is probable, and the costs can be reasonably estimated.
Revenue Recognition
The Company uses the sales method of accounting for crude oil revenues. To
the extent that crude oil is produced but not sold, the oil in tanks is not
recorded as inventory on the financial statements. The oil in tanks at December
31, 1994 and 1995 was not material.
The Company uses the sales method of accounting for natural gas revenues.
Under this method, revenues are recognized based on actual volumes of gas sold
to purchasers.
Gas Balancing
Deferred income associated with gas balancing is accounted for on the
entitlements method and represents amounts received for gas sold under gas
balancing arrangements in excess of the Company's interest in properties covered
by such agreements. As of December 31, 1995, the Company had no significant
amounts outstanding under gas balancing arrangements.
Net Income Per Common Share
Net income per common share has been computed by dividing net earnings by
the weighted average number of shares and share equivalents, if more than 3%
dilutive, outstanding during the period. There were no significant differences
between the primary and fully dilutive earnings per share.
F-8
<PAGE> 50
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES -- (CONTINUED)
Use of Estimates in the Preparation of Financial Statements
Preparation of the accompanying financial statements in conformity with
generally accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
Cash Equivalents
For purposes of the statements of cash flows, the Company considers all
demand deposits, money market accounts and certificates of deposit purchased
with an original maturity of three months or less to be cash equivalents.
Interim Financial Statements
The interim financial information as of September 30, 1996, and for the
nine months ended September 30, 1995 and 1996, is unaudited. However, in the
opinion of management, these interim financial statements include all the
necessary adjustments to fairly present the results of the interim periods, and
all such adjustments are of a normal recurring nature. The interim financial
statements should be read in conjunction with the audited financial statements
for the years ended December 31, 1993, 1994 and 1995.
Reclassifications
Certain reclassifications have been made to the 1993 and 1994 amounts to
conform to the 1995 presentation.
(2) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS
The carrying amount of cash, accounts receivable, accounts payable, and
accrued liabilities approximates fair value because of the short maturity of
these instruments.
The carrying amount of long-term debt approximates fair value because the
Company's current borrowing rate does not differ from the existing rate on the
Company's long-term debt balance.
(3) LONG-TERM DEBT
Long-term debt consists of the following (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- ------- SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Note payable to bank, at the bank's prime rate plus
.75% (9.25% at December 31, 1995), secured by
substantially all of the Company's oil and gas
properties, due in forty-eight monthly payments
commencing June 1997.............................. $11,000 $11,675 $ --
Note payable to bank, at bank's base lending rate
(8.25% at September 30, 1996)(a).................. -- -- 16,213
Less: current maturities............................ -- -- --
------- ------- -------
$11,000 $11,675 $16,213
======= ======= =======
</TABLE>
- ---------------
(a) The note payable is classified as long-term due to a maturity date of July
1, 2001.
F-9
<PAGE> 51
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(3) LONG-TERM DEBT -- (CONTINUED)
On July 31, 1995 the Company amended and renewed its loan agreement. The
note provides for a two-year revolving line of credit of $25,000,000 with a
borrowing base of $12,000,000, followed by a four-year term loan requiring
forty-eight monthly principal payments beginning June 1997. The borrowing base
was subject to redetermination every six months with the latest redetermination
date on November 30, 1995. The note was secured by substantially all of the
Company's oil and gas properties. Commitment fees of .5% per annum on the
difference between the commitment and the average daily amount outstanding were
due quarterly.
The amended and renewed loan agreement contains various restrictive
covenants and compliance requirements, which include (1) maintenance of certain
financial ratios, (2) limiting the incurrence of additional indebtedness, and
(3) no payment of dividends.
On July 1, 1996, the Company entered into a new loan agreement to refinance
the outstanding indebtedness with its former lender and to provide funds for
working capital. The note provides for a revolving credit facility of
$30,000,000 with a borrowing base of $19,500,000. The note matures July 1, 2001.
The borrowing base is subject to redetermination every six months on October 1,
and April 1, with the latest redetermination date on August 12, 1996. The note
is secured by substantially all of the Company's oil and gas properties.
Commitment fees of .25% per annum on the difference between the commitment and
the average daily amount outstanding are due quarterly.
The unpaid principal balance on the note bears interest at the election of
the Company at a rate equal to (i) the bank's base lending rate or (ii) the
bank's eurodollar rate plus a margin of 2.5%. On September 30, 1996, the
interest rate in effect was the bank's base lending rate of 8.25%.
The new loan agreement contains various restrictive covenants and
compliance requirements, which include (1) maintenance of certain financial
ratios, (2) limiting the incurrence of additional indebtedness, and (3) no
payment of dividends.
(4) STOCK OPTIONS AND WARRANTS
As of September 30, 1996, the Company granted incentive stock options
covering a total of 85,000 shares of common stock to certain key employees of
the Company. The exercise price of $5.40 per share was not less than the
estimated fair market value of the shares at the date of the grant. The options
are exercisable at various times over periods commencing August 14, 1997 and
extending through August 14, 2006. Also as of September 30, 1996, certain
executive officers exercised options to purchase 12,250 shares of common stock
at $1.75 per share.
During 1995, the Company granted incentive stock options covering a total
of 70,000 shares of common stock to certain key employees of the Company. The
exercise price of $1.75 per share was not less than the estimated fair market
value of the shares at the date of the grant. The options are exercisable at
various times over periods commencing May 31, 1996 and extending through May 31,
2005. The same employees canceled incentive stock options during 1995 covering
70,000 shares of common stock at an exercise price of $3.94 per share, and
70,000 shares at $3.44 per share for a total of 140,000 shares. Also during
1995, an executive officer exercised options to purchase 35,000 shares of common
stock at $1.03 per share. Exercise of the nonqualified stock options resulted in
a deferred tax effect of $12,257.
During 1994, the Company granted incentive stock options covering a total
of 115,000 shares of common stock to certain key employees of the Company. The
exercise price of $3.44 per share was not less than the estimated fair market
value of the shares at the date of the grant. The options are exercisable at
various times over periods commencing October 6, 1995 and extending through
October 6, 2004. Also during 1994, executive
F-10
<PAGE> 52
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(4) STOCK OPTIONS AND WARRANTS -- (CONTINUED)
officers exercised options to purchase 20,000 shares of common stock at $.34 per
share; 37,500 shares of common stock at $.68 per share; and 50,000 shares at
$1.03 per share for a total of 107,500 shares. Exercise of the nonqualified
stock options resulted in a deferred tax effect of $83,391.
During 1993, the Company granted nonqualified and incentive stock options
covering a total of 340,000 shares of common stock to certain executive officers
and key employees of the Company. The exercise prices of $3.19 and $3.94 per
share were not less than the estimated fair market value of the shares at the
date of the grant. The options are exercisable at various times over periods
commencing October 18, 1994 and extending through October 18, 2003. Also during
1993, an executive officer exercised the option to purchase 80,000 shares of
common stock at $.34 per share and 15,000 shares at $1.03 per share for a total
of 95,000 shares. Exercise of the nonqualified stock options resulted in a
deferred tax effect of $65,552.
<TABLE>
<CAPTION>
NUMBER OF OPTION PRICE
SHARES PER SHARE
--------- --------------
<S> <C> <C>
Balance at January 1, 1993........................................ 987,000 $.34 to $1.03
Options granted................................................. 340,000 $3.19 to $3.94
Options exercised............................................... (95,000) $.34 to $1.03
---------
Balance at December 31, 1993...................................... 1,232,000 $.34 to $3.94
Options granted................................................. 115,000 $3.44
Options exercised............................................... (107,500) $.34 to $1.03
---------
Balance at December 31, 1994...................................... 1,239,500 $.34 to $3.94
Options granted................................................. 70,000 $1.75
Options exercised............................................... (35,000) $1.03
Options canceled................................................ (140,000) $3.44 to $3.94
---------
Balance at December 31, 1995...................................... 1,134,500 $.34 to $3.94
Options granted (unaudited)..................................... 85,000 $5.40
Options exercised (unaudited)................................... (12,250) $1.75
---------
Balance at September 30, 1996 (unaudited)......................... 1,207,250 $.34 to $5.40
=========
Options exercisable at September 30, 1996 (unaudited)............. 1,124,750 $.34 to $5.40
=========
</TABLE>
In connection with the private placement offering (See Note 9), a
broker-dealer responsible for introducing the Company to the Company's principal
placement agent received a five-year warrant to purchase 64,415 shares of common
stock at a price of $2.75 per share.
The Company had outstanding at December 31, 1994, 1995, and as of September
30, 1996, 300,000 warrants. Each warrant allows the holder to buy one share of
common stock for $6.00. The warrants were issued as part of the Company's
initial public offering in 1980 and are exercisable for a 30 day period
commencing on the date a registration statement covering exercise is declared
effective. The warrants contain antidilution provisions and in the event of
liquidation, dissolution, or winding up of the Company, the holders are not
entitled to participate in the assets of the Company.
(5) INCOME TAXES
As discussed in Note 1, effective January 1, 1993, the Company adopted FAS
109. The cumulative effective of this accounting change was a charge of $48,052
as of January 1, 1993 and is reported separately in the
F-11
<PAGE> 53
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(5) INCOME TAXES -- (CONTINUED)
accompanying statement of operations for the year ended December 31, 1993. Prior
years financial statements have not been restated to apply the provisions of FAS
109.
Federal income tax expense differs from the amount computed at the Federal
statutory rate as follows (in thousands):
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER
31,
---------------------
1993 1994 1995
---- ---- ---
<S> <C> <C> <C>
Income tax expense at statutory rate........................... $195 $240 $69
Nondeductible expenses and other............................... 1 23 (2)
---- ---- ---
Income tax expense............................................. $196 $263 $67
==== ==== ===
</TABLE>
The tax effect of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities at December 31
are as follows (in thousands):
<TABLE>
<CAPTION>
1994 1995
------ ------
<S> <C> <C>
CURRENT
-------
Deferred income tax assets:
Net operating loss carryforwards expected to be utilized in
1996.......................................................... $ -- $ 114
------ ------
Total current deferred tax assets................................ $ -- $ 114
====== ======
NONCURRENT
----------
Deferred income tax assets:
Net operating loss carryforwards................................. $3,537 $3,376
Statutory depletion carryforwards................................ 178 186
------ ------
Total noncurrent deferred income tax assets...................... 3,715 3,562
------ ------
Deferred income tax liabilities:
Property and equipment, principally due to differences in basis,
expensing of intangible drilling costs for tax purposes and
depletion..................................................... 4,066 4,090
Other.............................................................. 8 --
------ ------
Total deferred income tax liabilities............................ 4,074 4,090
------ ------
Net noncurrent deferred income tax liability..................... $ 359 $ 528
====== ======
</TABLE>
A valuation allowance is provided when it is more likely than not that some
portion of the deferred tax assets will not be realized. Based on expectations
for the future and the availability of certain tax planning strategies that
would generate taxable income to realize the net tax benefits, if implemented,
management has determined that taxable income of the Company will more likely
than not be sufficient to fully utilize available carryforwards prior to their
ultimate expiration.
F-12
<PAGE> 54
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(5) INCOME TAXES -- (CONTINUED)
As of December 31, 1995, the Company had investment tax credit and net
operating loss carryforwards for regular and alternative minimum tax purposes
available to reduce future taxable income and tax liability, respectively. These
carryforwards expire as follows (in thousands):
<TABLE>
<CAPTION>
ALTERNATIVE
MINIMUM
NET OPERATING INVESTMENT TAX TAX NET
LOSS CREDIT OPERATING LOSS
------------- -------------- --------------
<S> <C> <C> <C>
1996.......................................... $ 336 $14 $ --
1997.......................................... 779 37 --
1998.......................................... 598 -- --
1999.......................................... 852 -- --
2000.......................................... 562 -- --
2001.......................................... 684 -- 2,794
2002.......................................... 421 -- 291
2003.......................................... 138 -- 82
2004.......................................... 257 -- 48
2005.......................................... 69 -- --
2006.......................................... 1,011 -- --
2007.......................................... 792 -- --
2008.......................................... 1,596 -- 1,920
2009.......................................... 2,170 -- 1,974
------- --- ------
$10,265 $51 $7,109
======= === ======
</TABLE>
(6) MAJOR CUSTOMERS
The following purchasers accounted for 10% or more of the Company's oil and
gas sales for the periods ended:
<TABLE>
<CAPTION>
DECEMBER 31, NINE MONTHS
-------------------- ENDED
1993 1994 1995 SEPTEMBER 30,
---- ---- ---- 1996
-------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Purchaser A......................................... 31% 31% 28% 11%
Purchaser B......................................... 17% -- -- --
Purchaser C......................................... -- 10% 10% --
Purchaser D......................................... -- -- 10% --
Purchaser E......................................... 12% -- -- --
Purchaser F......................................... 11% -- -- --
Purchaser G......................................... -- -- 16% 57%
</TABLE>
(7) EMPLOYEE PENSION PLAN
Effective September 1, 1988, the Company established a simplified employee
pension plan covering all salaried employees of the Company. The employees
voluntarily contribute a portion of their eligible compensation, not to exceed
$7,000, adjusted for inflation beginning in 1988, to the plan. The Company's
contribution, including the employees contribution, cannot exceed the lesser of
$30,000 or 15% of compensation. During 1995 and 1994, the Company contributed an
aggregate of $6,739 and $2,626, respectively, of which $2,765 and
F-13
<PAGE> 55
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(7) EMPLOYEE PENSION PLAN -- (CONTINUED)
$1,129, respectively, was allocated to a Director of the Company. There were no
Company contributions during 1993. The Company has no obligation to make
contributions to the plan.
(8) STATEMENTS OF CASH FLOWS
During 1995, the Company transferred $148,115 of deferred stock offering
costs related to a private placement of common stock to additional paid-in
surplus. See Note 9.
During 1993, 1994, 1995 and as of September 30, 1996, $704,785, $338,821,
$196,582 and $60,413 were transferred from leases held for resale to oil and gas
properties, respectively. These transfers are considered non-cash transactions.
No Federal taxes were paid in 1993, 1994 and 1995 and for the nine months
ended September 30, 1996, as a result of net operating losses or loss
carryforwards. Payments of interest were $427,020, $703,775 and $1,027,461 in
1993, 1994 and 1995, respectively, and $913,805 for the nine months ended
September 30, 1996.
At December 31, 1994, 1995 and as of September 30, 1996, there were
$1,123,442, $257,863 and $487,814, respectively, of property additions accrued
in accounts payable.
(9) COMMON STOCK OFFERING
On February 7, 1995, the Company closed on a private placement offering
dated November 7, 1994. The Company sold 644,150 shares of its common stock at
$2.50 per share of which 50,000 shares were beneficially purchased by certain
directors of the Company. Proceeds received, net of related expenses, were
approximately $1,321,000.
(10) RELATED PARTY TRANSACTIONS
During 1994, 1995 and as of September 30, 1996, the Company was charged
$757,000, $4,200 and $260,000, respectively, for drilling services and lease
operating expenses by entities in which certain Directors are majority owners.
These Directors and their companies own interests in certain wells operated by
the Company. During 1994, 1995 and as of September 30, 1996, with respect to
these wells the Company charged $213,000, $40,800 and $77,000, respectively, for
the lease operating expenses and drilling costs and paid $184,000, $167,000 and
$102,000, respectively, in oil and gas revenues to these related parties with
respect to these wells. As of September 30, 1996, the Company received $10,100
in oil and gas revenues related to these wells.
An entity in which the Chief Executive Officer and Chairman of the Board is
the owner acted as the Company's agent in performing the routine day to day
operations of certain wells. In 1994, 1995 and as of September 30, 1996, the
Company was billed $189,000, $348,000 and $212,000, respectively, for the
Company's pro rata share of lease operating and drilling expenses and received
$287,000, $130,000 and $152,000 in 1994, 1995 and as of September 30, 1996,
respectively, in oil and gas revenues related to these wells.
F-14
<PAGE> 56
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(11) OIL AND GAS EXPENDITURES
The following table reflects capitalized costs related to the oil and gas
producing activities (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1994 1995
------- ------- SEPTEMBER 30,
1996
-------------
(UNAUDITED)
<S> <C> <C> <C>
Capitalized costs:
Proved properties................................. $24,038 $29,172 $40,175
Unproved properties............................... 3,620 1,708 187
------- ------- -------
27,658 30,880 40,362
Accumulated depletion.......................... 6,994 8,591 11,192
------- ------- -------
$20,664 $22,289 $29,170
======= ======= =======
</TABLE>
Costs of unproved properties are not being depleted at December 31, 1995
and were incurred primarily during 1994 and are expected to be evaluated in the
next two years.
The following table reflects costs incurred in oil and gas property
acquisition, exploration and development activities (in thousands):
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
---------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------ ------ ------ -------------
(UNAUDITED)
<S> <C> <C> <C> <C>
Transfers from undeveloped leases held for
sale...................................... $ 705 $ 339 $ 197 $ 60
Proved property acquisition costs........... 546 238 372 3,607
Unproved property acquisition costs......... 721 2,542 841 2,385
Exploration................................. 2,225 3,400 1,519 3,313
Development................................. 1,173 1,225 889 724
------ ------ ------ ----------
$5,370 $7,744 $3,818 $10,089
====== ====== ====== ==========
</TABLE>
(12) FOURTH QUARTER ADJUSTMENT
During the fourth quarter of 1994 and 1995, $155,000 and $157,000,
respectively, of depreciation, depletion, and amortization related to prior
quarters was recorded based on the December 31, 1994 and 1995 reserve study.
(13) SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED)
The estimates of the Company's proved oil and gas reserves, which are all
located in the United States, are prepared by independent petroleum engineers.
Reserves were estimated in accordance with guidelines established by the U.S.
Securities and Exchange Commission and the Financial Accounting Standards Board,
which require that reserve estimates be prepared under existing economic and
operating conditions with no provision for price and cost escalations except by
contractual arrangements. Information for oil is presented in barrels (BBL) and
for gas in thousands of cubic feet (MCF).
F-15
<PAGE> 57
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(13) SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED) -- (CONTINUED)
A summary of changes in reserve balances is presented below (in thousands):
<TABLE>
<CAPTION>
TOTAL PROVED PROVED DEVELOPED
---------------- ----------------
BBL MCF BBL MCF
----- ------ ----- ------
<S> <C> <C> <C> <C>
Reserves as of January 1, 1993............................ 1,297 17,120 1,063 11,666
Purchase of reserves in place........................... -- 1,418 -- 1,418
Extensions and discoveries.............................. 637 2,434 637 2,434
Revisions of previous estimates......................... (197) (961) (203) (918)
Sales of reserves in place.............................. (12) (26) (12) (26)
Production.............................................. (106) (889) (106) (889)
----- ------ ----- ------
Reserves as of December 31, 1993.......................... 1,619 19,096 1,379 13,685
Extensions and discoveries.............................. 134 2,920 134 2,920
Revisions of previous estimates......................... (32) 986 (34) 1,173
Production.............................................. (149) (1,391) (149) (1,391)
----- ------ ----- ------
Reserves as of December 31, 1994.......................... 1,572 21,611 1,330 16,387
Purchase of reserves in place........................... 5 147 5 147
Extensions and discoveries.............................. 147 7,097 147 7,097
Revisions of previous estimates......................... (88) (1,115) (94) (1,161)
Production.............................................. (133) (1,616) (133) (1,616)
----- ------ ----- ------
Reserves as of December 31, 1995.......................... 1,503 26,124 1,255 20,854
Purchase of reserves in place........................... 228 3,836 228 3,836
Extensions and discoveries.............................. 436 9,746 436 9,746
Revisions of previous estimates......................... (149) (4,202) (152) (4,204)
Production.............................................. (163) (2,673) (164) (2,673)
----- ------ ----- ------
Reserves as of September 30, 1996......................... 1,855 32,831 1,603 27,559
===== ====== ===== ======
</TABLE>
The following is a standardized measure of the discounted net future cash
flows and changes applicable to proved oil and gas reserves required by SFAS No.
69. The future cash flows are based on estimated oil and gas reserves utilizing
prices and costs in effect as of period end discounted at 10% per year and
assuming continuation of existing economic conditions.
The standardized measure of discounted future net cash flows, in
management's opinion, should be examined with caution. The basis for this table
are the reserve studies prepared by independent petroleum engineers, which
contain imprecise estimates of quantities and rates of production of reserves.
Revisions of previous year estimates can have a significant impact on these
results. Also, exploration costs in one year may lead to significant discoveries
in later years and may significantly change previous estimates of proved
reserves
F-16
<PAGE> 58
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(13) SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED) -- (CONTINUED)
and their valuation. Therefore, the standardized measure of discounted future
net cash flow is not necessarily a "best estimate" of the fair value of the
Company's proved oil and gas properties.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------------------- SEPTEMBER 30,
1993 1994 1995 1996
-------- -------- -------- -------------
<S> <C> <C> <C> <C>
Future cash flows............................ $ 56,693 $ 63,288 $ 75,044 $ 117,796
Future costs:
Production................................. (17,943) (23,559) (25,356) (32,929)
Development................................ (2,093) (2,375) (2,853) (2,857)
-------- -------- -------- --------
Future net cash flows before income taxes.... 36,657 37,354 46,835 82,010
Future income taxes.......................... (5,547) (4,322) (7,242) (16,456)
-------- -------- -------- --------
Future net cash flows........................ 31,110 33,032 39,593 65,554
10% annual discount for estimated timing of
cash flows................................. (11,037) (12,570) (14,428) (20,250)
-------- -------- -------- --------
Standardized measure of discounted net cash
flows...................................... $ 20,073 $ 20,462 $ 25,165 $ 45,304
======== ======== ======== ========
</TABLE>
F-17
<PAGE> 59
PARALLEL PETROLEUM CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
FOR THE YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1995 AND 1996
(THE INFORMATION AND AMOUNTS FOR INTERIM PERIODS ARE UNAUDITED)
(13) SUPPLEMENTAL OIL AND GAS RESERVE DATA (UNAUDITED) -- (CONTINUED)
CHANGES IN STANDARDIZED MEASURE OF
DISCOUNTED FUTURE NET CASH FLOWS FROM PROVED RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
NINE MONTHS
YEARS ENDED DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30,
1993 1994 1995 1996
------- ------- ------- -------------
<S> <C> <C> <C> <C>
Increase (decrease):
Purchase of minerals in place.................... $ 876 $ -- $ 182 $ 4,167
Extensions and discoveries and improved recovery,
net of future production and development
costs......................................... 7,586 3,514 9,222 23,176
Accretion of discount............................ 2,077 2,114 2,050 2,589
Net change in sales prices net of production
costs......................................... (3,884) (1,418) 35 7,285
Changes in estimated future development costs.... 224 (137) (323) --
Revisions of quantity estimates.................. (1,568) 574 (1,151) (4,905)
Net change in income taxes....................... 714 1,063 725 (6,267)
Sales, net of production costs................... (2,093) (3,202) (3,246) (7,791)
Sales of minerals-in-place....................... (227) -- -- --
Changes of production rates (timing) and other... (2,619) (2,119) (2,791) 1,885
------- ------- ------- -------
Net increase.................................. 1,086 389 4,703 20,139
Standardized measure of discounted future net cash
flows:
Beginning of year................................ 18,987 20,073 20,462 25,165
------- ------- ------- -------
End of year...................................... $20,073 $20,462 $25,165 $45,304
======= ======= ======= =======
</TABLE>
F-18
<PAGE> 60
================================================================================
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS IN CONNECTION WITH THIS OFFERING
OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS, 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 ANY OFFER TO BUY, ANY SECURITIES OTHER THAN THE
REGISTERED SECURITIES TO WHICH IT RELATES OR AN OFFER TO, OR A SOLICITATION OF,
ANY PERSON IN ANY JURISDICTION WHERE SUCH AN OFFER OR SOLICITATION WOULD BE
UNLAWFUL. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER
SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY 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
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Risk Factors........................... 7
Use of Proceeds........................ 11
Capitalization......................... 12
Price Range of Common Stock............ 13
Dividends.............................. 13
Selected Financial and Oil and Gas
Data................................. 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 16
Business............................... 20
Management and Principal
Stockholders......................... 31
Description of Capital Stock........... 35
Shares Eligible for Future Sale........ 36
Underwriting........................... 37
Certain Legal Matters.................. 38
Experts................................ 38
Available Information.................. 38
Incorporation of Certain Documents by
Reference............................ 39
Glossary............................... 39
Index to Financial Statements.......... F-1
</TABLE>
================================================================================
================================================================================
2,500,000 SHARES
[PARALLEL LOGO]
COMMON STOCK
------------------------------
PROSPECTUS
------------------------------
VAN KASPER & COMPANY
DECEMBER , 1996
================================================================================
<PAGE> 61
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The expenses of the offering are estimated to be as follows:
<TABLE>
<S> <C>
Securities and Exchange Commission Registration Fee....................... $ 4,620
National Association of Securities Dealers, Inc. Filing Fee............... 2,024
Nasdaq Listing Fee........................................................ 17,500
Legal Fees and Expenses................................................... 90,000
Accounting and Engineering Fees and Expenses.............................. 77,000
Blue Sky Fees and Expenses................................................ 5,000
Printing Costs............................................................ 100,000
Transfer Agent and Registrar Fees......................................... 2,000
Miscellaneous............................................................. 1,856
--------
TOTAL........................................................... $300,000
========
</TABLE>
- ------------------------------
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Registrant has authority under Section 145 of the General Corporation
Law of the State of Delaware to indemnify its officers, directors, employees and
agents to the extent provided in such statute. Article Fourteenth of the
Registrant's Certificate of Incorporation, referenced as Exhibit 3.1 hereto,
provides for indemnification of the Registrant's officers and directors to the
full extent provided in Section 145. Article X, Section 10.1, of the
Registrant's Bylaws referenced as Exhibit 3.2 hereto, also provides for
indemnification of the Registrant's officers, directors, employees and agents.
Section 102 of the General Corporation Law of the State of Delaware permits
the limitation of directors' personal liability to the corporation or its
stockholders for monetary damages for breach of fiduciary duties as a director
except in certain situations including the breach of a director's duty of
loyalty or acts or omissions not made in good faith. Article Fourteenth of the
Registrant's Certificate of Incorporation limits directors' personal liability
to the extent permitted by Section 102.
Article X, Section 10.2, of the Registrant's Bylaws provides that the
Registrant has the power to purchase and maintain insurance on behalf of any
person who is or was a director, trustee, officer, employee or agent of the
Registrant or is or was serving at the request of the Registrant as a director,
trustee, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, against any liability asserted against such
person and incurred by such person in any such capacity or arising out of such
person's status as such, whether or not the Registrant would have the power to
indemnify such person against such liability.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 (the "Act") may be permitted to directors, officers or persons
controlling the registrant pursuant to the foregoing provisions, the registrant
has been informed that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Act and is
therefore unenforceable.
ITEM 16. EXHIBITS
(a) Exhibits
<TABLE>
<C> <S>
*(1.1) -- Form of Underwriting Agreement
(3.1) -- Certificate of Incorporation of Registrant (Incorporated by reference
to Exhibit 3.1 to Form 10-K of the Registrant for the fiscal year
ended December 31, 1988)
</TABLE>
II-1
<PAGE> 62
<TABLE>
<C> <S>
(3.2) -- Bylaws of Registrant (Incorporated by reference to Exhibit 3.2 to
Form 10-K of the Registrant for the fiscal year ended December 31,
1995.)
(4.1) -- Certificate of Merger merging Parallel Petroleum Corporation, a Texas
corporation, into Registrant (Incorporated by reference to Exhibit
4.1 to Form 10-K of the Registrant as filed with the Securities and
Exchange Commission on April 1, 1985.)
(4.2) -- Agreement and Plan of Merger Dated July 17, 1984 between Parallel
Petroleum Corporation, a Texas corporation, and the Registrant
(Incorporated by reference to Exhibit 2.1 to Form S-1 of the
Registrant (File No. 2-92397) as filed with the Securities and
Exchange Commission on July 26, 1984, as amended by Amendments No. 1
and 2 on October 5, 1984 and October 25, 1984, respectively.)
*(4.3) -- Form of Warrant Agreement between Van Kasper & Company and the
Registrant, including form of stock purchase warrant.
*(5.1) -- Opinion and consent of Lynch, Chappell & Alsup.
Executive Compensation Plans and Arrangements (Exhibit No.'s 10.1
through 10.(6):
(10.1) -- 1981 Non-Qualified Stock Option Plan (Incorporated by reference to
Exhibit 10.1 to Form S-1 of the Registrant (File No. 2-92397) as
filed with the Securities and Exchange Commission on July 26, 1984,
as amended by Amendments No. 1 and 2 on October 5, 1984 and October
25, 1984, respectively.)
(10.2) -- 1983 Incentive Stock Option Plan (Incorporated by reference to
Exhibit 10.2 to Form S-1 of the Registrant (File No. 2-92397) as
filed with the Securities and Exchange Commission on July 26, 1984,
as amended by Amendments No. 1 and 2 on October 5, 1984 and October
25, 1984, respectively.)
(10.3) -- 1992 Stock Option Plan (Incorporated by reference to Exhibit 28.1 to
Form S-8 of the Registrant (File No. 33-57348) as filed with the
Securities and Exchange Commission on January 25, 1993.)
(10.4) -- Stock Option Agreement between the Registrant and Thomas R. Cambridge
dated December 11, 1991 (Incorporated by reference to Exhibit 10.4 of
Form 10-K of the Registrant for the fiscal year ended December 31,
1992.)
(10.5) -- Stock Option Agreement between the Registrant and Thomas R. Cambridge
dated October 18, 1993 (Incorporated by reference to Exhibit 10.4(e)
of Form 10-K of the Registrant for the fiscal year ended December 31,
1993.)
(10.6) -- Prototype Simplified Employee Pension Plan (Incorporated by reference
to Exhibit 10.6 of Form 10-K of the Registrant for the fiscal year
ended December 31, 1995.)
(10.7) -- Loan Agreement, dated July 1, 1996, between the Registrant and Bank
One, Texas, N.A. (Incorporated by reference to Exhibit 10.1 of Form
10-Q of the Registrant for the fiscal quarter ended June 30, 1996.)
*(23.1) -- Consent of Independent Auditors
*(23.2) -- Consent of Independent Petroleum Engineers
(24.1) -- Power of Attorney (contained on page II-4 hereof)
</TABLE>
- ------------------------------
* Filed herewith.
(b) Financial Statement Schedules, Years ended December 31, 1993, 1994 and 1995:
All schedules are omitted as the required information is inapplicable or
the information is presented in the Financial Statements or related notes.
II-2
<PAGE> 63
ITEM 17. UNDERTAKINGS
A. Insofar as indemnification for liabilities arising under the Securities
Act of 1933, as amended (the "Act"), may be permitted to directors, officers and
controlling persons of the Registrant pursuant to the foregoing provisions, or
otherwise, the Registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Act and is,
therefore, unenforceable. In the event that a claim for indemnification against
such liabilities (other than the payment by the Registrant of expenses incurred
or paid by a director, officer or controlling person of the Registrant of
expenses incurred or paid by a director, officer or controlling person of the
Registrant in the successful defense of any action, suit or proceeding) is
asserted by such director, officer or controlling person in connection with the
securities being registered, the Registrant will, unless in the opinion of its
counsel the matter has been settled by controlling precedent, submit to a court
of appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Act and will be governed by the final
adjudication of such issue.
B. The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Act, the
information omitted from the form of prospectus filed as part of this
registration statement in reliance upon Rule 430A and contained in a form
of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or
497(h) under the Act shall be deemed to be part of this registration
statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Act, each
post-effective amendment that contains a form of prospectus shall be deemed
to be a new registration statement related to the securities offered
therein, and the offering of such securities at that time shall be deemed
to be the initial bona fide offering thereof.
II-3
<PAGE> 64
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Midland, State of Texas on November 7, 1996.
PARALLEL PETROLEUM CORPORATION
By /s/ THOMAS R. CAMBRIDGE
-----------------------------------
Thomas R. Cambridge, Chairman of
the Board of Directors and Chief
Executive Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Thomas R. Cambridge and Larry C. Oldham, and each
of them, either one of whom may act without joinder of the other, his true and
lawful attorneys-in-fact and agents, with full power of substitution and
resubstitution, for him in his name, place and stead, in any and all capacities,
to sign any or all amendments to this Registration Statement, and to file the
same, with all exhibits thereto and other documents in connection therewith,
with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents, and each of them, or the substitute or substitutes
of any or all of them, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
/s/ THOMAS R. CAMBRIDGE Chairman of the Board of November 7, 1996
- --------------------------------------------- Directors and Chief
Thomas R. Cambridge Executive Officer (Principal
Executive Officer)
/s/ LARRY C. OLDHAM President and November 7, 1996
- --------------------------------------------- Treasurer/Controller
Larry C. Oldham (Principal Financial
Officer)
/s/ DANNY H. CONKLIN Director November 7, 1996
- ---------------------------------------------
Danny H. Conklin
/s/ E. R. DUKE Director November 7, 1996
- ---------------------------------------------
E. R. Duke
/s/ MYRLE GREATHOUSE Director November 7, 1996
- ---------------------------------------------
Myrle Greathouse
/s/ CHARLES R. PANNILL Director November 7, 1996
- ---------------------------------------------
Charles R. Pannill
</TABLE>
II-4
<PAGE> 65
INDEX TO EXHIBITS
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------- -----------
<C> <S>
*(1.1) -- Form of Underwriting Agreement
(3.1) -- Certificate of Incorporation of Registrant (Incorporated by reference
to Exhibit 3.1 to Form 10-K of the Registrant for the fiscal year
ended December 31, 1988)
(3.2) -- Bylaws of Registrant (Incorporated by reference to Exhibit 3.2 to
Form 10-K of the Registrant for the fiscal year ended December 31,
1995.)
(4.1) -- Certificate of Merger merging Parallel Petroleum Corporation, a Texas
corporation, into Registrant (Incorporated by reference to Exhibit
4.1 to Form 10-K of the Registrant as filed with the Securities and
Exchange Commission on April 1, 1985.)
(4.2) -- Agreement and Plan of Merger Dated July 17, 1984 between Parallel
Petroleum Corporation, a Texas corporation, and the Registrant
(Incorporated by reference to Exhibit 2.1 to Form S-1 of the
Registrant (File No. 2-92397) as filed with the Securities and
Exchange Commission on July 26, 1984, as amended by Amendments No. 1
and 2 on October 5, 1984 and October 25, 1984, respectively.)
*(4.3) -- Form of Warrant Agreement between Van Kasper & Company and the
Registrant, including form of stock purchase warrant.
*(5.1) -- Opinion and consent of Lynch, Chappell & Alsup.
Executive Compensation Plans and Arrangements (Exhibit No.'s 10.1
through 10.(6):
(10.1) -- 1981 Non-Qualified Stock Option Plan (Incorporated by reference to
Exhibit 10.1 to Form S-1 of the Registrant (File No. 2-92397) as
filed with the Securities and Exchange Commission on July 26, 1984,
as amended by Amendments No. 1 and 2 on October 5, 1984 and October
25, 1984, respectively.)
(10.2) -- 1983 Incentive Stock Option Plan (Incorporated by reference to
Exhibit 10.2 to Form S-1 of the Registrant (File No. 2-92397) as
filed with the Securities and Exchange Commission on July 26, 1984,
as amended by Amendments No. 1 and 2 on October 5, 1984 and October
25, 1984, respectively.)
(10.3) -- 1992 Stock Option Plan (Incorporated by reference to Exhibit 28.1 to
Form S-8 of the Registrant (File No. 33-57348) as filed with the
Securities and Exchange Commission on January 25, 1993.)
(10.4) -- Stock Option Agreement between the Registrant and Thomas R. Cambridge
dated December 11, 1991 (Incorporated by reference to Exhibit 10.4 of
Form 10-K of the Registrant for the fiscal year ended December 31,
1992.)
(10.5) -- Stock Option Agreement between the Registrant and Thomas R. Cambridge
dated October 18, 1993 (Incorporated by reference to Exhibit 10.4(e)
of Form 10-K of the Registrant for the fiscal year ended December 31,
1993.)
(10.6) -- Prototype Simplified Employee Pension Plan (Incorporated by reference
to Exhibit 10.6 of Form 10-K of the Registrant for the fiscal year
ended December 31, 1995.)
(10.7) -- Loan Agreement, dated July 1, 1996, between the Registrant and Bank
One, Texas, N.A. (Incorporated by reference to Exhibit 10.1 of Form
10-Q of the Registrant for the fiscal quarter ended June 30, 1996.)
*(23.1) -- Consent of Independent Auditors
*(23.2) -- Consent of Independent Petroleum Engineers
(24.1) -- Power of Attorney (contained on page II-4 hereof).
</TABLE>
- ------------------------------
* Filed herewith.
<PAGE> 1
EXHIBIT 1.1
PARALLEL PETROLEUM CORPORATION
UNDERWRITING AGREEMENT
December __, 1996
VAN KASPER & COMPANY
As Representative of the
Several Underwriters
600 California Street, Suite 1700
San Francisco, California 94111
Ladies and Gentlemen:
Parallel Petroleum Corporation, a Delaware corporation (the
"Company"), proposes to issue and sell to the several Underwriters named in
Schedule I hereto (the "Underwriters") an aggregate of 2,500,000 shares (the
"Firm Shares") of its authorized but unissued Common Stock, par value $0.01 per
share (the "Common Stock"). The Company also proposes to grant to the
Underwriters an option to purchase up to 375,000 additional shares of Common
Stock (the "Option Shares") for the sole purpose of covering over-allotments,
if any, in connection with the sale of the Firm Shares. The Firm Shares and
any Option Shares purchased pursuant to this Agreement are referred to below as
the "Shares." Van Kasper & Company is acting as representative of the several
Underwriters and in that capacity is referred to in this Agreement as the
"Representative."
The Company hereby confirms its agreement with the several
Underwriters as follows:
1. Representations and Warranties of the Company. The Company
hereby represents and warrants to and agrees with each Underwriter as follows:
(a) The Company meets the requirements for use of Form S-2 under the
Securities Act of 1933, as amended (the "Securities Act"), and a registration
statement (Registration No. 333-_____) on Form S-2 relating to the Shares,
including such amendments to such registration statement as may have been
required to the date of this Agreement, has been prepared by the Company under
and in conformity with the provisions of the Securities Act and the rules and
regulations (the "Rules and Regulations") of the Securities and Exchange
Commission (the "Commission") thereunder and has been filed with the
Commission. After the execution of this Agreement, the Company will file with
the Commission either (i) if such registration statement, as it may have been
amended, has been declared by the Commission to be effective under the
Securities Act, either (A) if the Company relies on Rule 434 under the
Securities Act, a Term Sheet (defined below) relating to the Shares, that
identifies the Preliminary Prospectus (defined below) that it supplements and
contains such information as is required or permitted by Rules 434, 430A and
424(b) of the Rules and Regulations or (B) if the Company does not rely on Rule
434 under the Securities Act, a prospectus in the form
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<PAGE> 2
most recently included in an amendment to such registration statement (or, if
no such amendment has been filed, in such registration statement), with such
changes or insertions as are required by Rule 430A of the Rules and Regulations
or permitted by Rule 424(b) of the Rules and Regulations, and in the case of
either (i)(A) or (i)(B) of this sentence, as has been provided to and approved
by the Representative prior to the execution of this Agreement, or (ii) if such
registration statement, as it may have been amended, has not been declared by
the Commission to be effective under the Securities Act, an amendment to such
registration statement, including a form of prospectus, a copy of which
amendment has been furnished to and approved by the Representative prior to the
execution of this Agreement. As used in this Agreement, the term "Registration
Statement" means such registration statement, as amended at the time when it
was or is declared effective, including all financial schedules and exhibits
thereto, any information omitted therefrom pursuant to Rule 430A of the Rules
and Regulations and included in the Prospectus (defined below) and further
including all filings or other documents incorporated therein; the term
"Preliminary Prospectus" means each prospectus subject to completion filed with
such registration statement or any amendment thereto (including the prospectus
subject to completion, if any, included in the Registration Statement or any
amendment thereto at the time it was or is declared effective and further
including all filings or documents incorporated therein); and the term
"Prospectus" means the following, including any filings or documents
incorporated therein:
(A) if the Company relies on Rule 434 under the Securities
Act, the Term Sheet relating to the Securities that is
first filed pursuant to Rule 424(b)(7) under the
Securities Act, together with the Preliminary Prospectus
identified therein that such Term Sheet supplements;
(B) if the Company does not rely on Rule 434 under the
Securities Act, the prospectus first filed with the
Commission pursuant to Rule 424(b) under the Securities
Act; or
(C) if the Company does not rely on Rule 434 under the
Securities Act and if no prospectus is required to be
filed pursuant to Rule 424(b) under the Securities Act,
the prospectus included in the Registration Statement;
provided that if any revised prospectus that is provided to the Underwriters by
the Company for use in connection with the offering of the Shares differs from
the prospectus on file with the Commission at the time the Registration
Statement became or becomes, as the case may be, effective, whether or not the
revised prospectus is required to be filed with the Commission pursuant to Rule
424(b)(3) of the Rules and Regulations, the term "Prospectus" shall mean such
revised prospectus (including all filings and documents incorporated therein)
from and after the time it is first provided to the Underwriters for such use.
The term "Term Sheet" as used in this Agreement means any term sheet that
satisfies the requirements of Rule 434 under the Securities Act. Any reference
in this Agreement to the "date" of a Prospectus that includes a Term Sheet
means the date of such Term Sheet.
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<PAGE> 3
(b) No order suspending the effectiveness of the Registration
Statement or preventing or suspending the use of any Preliminary Prospectus or
the Prospectus has been issued and no proceedings for that purpose are pending
or, to the best knowledge of the Company, threatened or contemplated by the
Commission; no stop order suspending the sale of the Shares in any jurisdiction
has been issued and no proceedings for that purpose are pending or, to the best
knowledge of the Company, threatened or contemplated, and any request of the
Commission for additional information (to be included in the Registration
Statement, any Preliminary Prospectus or the Prospectus or otherwise) has been
complied with.
(c) The Company has been duly incorporated and is validly existing
as a corporation in good standing under the laws of the jurisdiction of its
incorporation, has full power (corporate and other) and authority to own or
lease its properties and conduct its business as described in the Registration
Statement and the Prospectus and as is currently being conducted by it and is
duly qualified as a foreign corporation and in good standing in all
jurisdictions in which the character of the property owned or leased or the
nature of the business transacted by it makes qualification necessary (except
where the failure to be so qualified would not have a material adverse effect
on the business, properties, condition (financial or otherwise), results of
operations or prospects of the Company). The Company is in possession of and
operating in compliance with all authorizations, licenses, certificates,
consents, orders and permits from federal, state, local and other governmental
or regulatory authorities that are material to the conduct of its business, all
of which are valid and in full force and effect. The Company does not have any
"subsidiaries" (defined below) or own any equity securities of any other Entity
(defined below). As used in this Agreement, the word "subsidiary" means any
corporation, partnership, limited liability company or other entity (each an
"Entity") of which the Company directly or indirectly owns 50% or more of the
equity or that the Company directly or indirectly controls.
(d) When any Preliminary Prospectus was filed with the Commission it
(i) contained all statements required to be contained therein and complied in
all material respects with the requirements of the Securities Act, the Rules
and Regulations, the Securities Exchange Act of 1934, as amended (the "Exchange
Act") and the rules and regulations of the Commission thereunder (the "Exchange
Act Rules and Regulations") and (ii) did not include any untrue statement of a
material fact or omit to state any material fact necessary in order to make the
statements therein, in the light of the circumstances under which they were
made, not misleading. When the Registration Statement or any amendment thereto
was or is declared effective (the "Effective Date"), it (i) contained or will
contain all statements required to be contained therein and complied or will
comply in all material respects with the requirements of the Securities Act,
the Rules and Regulations, the Exchange Act and the Exchange Act Rules and
Regulations and (ii) did not or will not include any untrue statement of a
material fact or omit to state any material fact necessary to make the
statements therein not misleading. When the Prospectus or any Term Sheet that
is a part thereof or any amendment or supplement to the Prospectus is filed
with the Commission pursuant to Rule 424(b) (or, if the Prospectus or part
thereof or such amendment or supplement is not required to be so filed, when
the Registration Statement or the amendment thereto containing such amendment
or supplement to the Prospectus was or is declared effective) and on the
Closing Date (defined below) and any date
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<PAGE> 4
on which Option Shares are to be purchased, the Prospectus, as amended or
supplemented at any such time, (i) contained or will contain all statements
required to be contained therein and complied or will comply in all material
respects with the requirements of the Securities Act, the Rules and Regulations
and the Exchange Act Rules and Regulations and (ii) did not or will not include
any untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The foregoing
provisions of this paragraph (d) do not apply to statements or omissions made
in any Preliminary Prospectus, the Registration Statement or any amendment
thereto or the Prospectus or any amendment or supplement thereto in reliance
upon and in conformity with written information furnished to the Company by any
Underwriter through the Representative specifically for use therein.
(e) Since the respective dates as of which information is given in
the Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus), there has not been any
material loss or interference with the business of the Company from fire,
explosion, flood or other calamity, whether or not covered by insurance, or
from any court or governmental action, order or decree, or any changes in the
capital stock or long-term debt of the Company, or any dividend or distribution
of any kind declared, paid or made on the capital stock of the Company, or any
material change, or a development known to the Company that might cause or
result in a material change, in or affecting the business, properties,
condition (financial or otherwise), results of operations or prospects of the
Company, whether or not arising from transactions in the ordinary course of
business, in each case other than as may be set forth in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), and since such dates, except in the
ordinary course of business, the Company has not entered into any material
transaction not described in the Registration Statement and the Prospectus (or,
if the Prospectus is not in existence, the most recent Preliminary Prospectus).
(g) There is no agreement, contract, license, lease or other
document required to be described in the Registration Statement or the
Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus) or to be filed as an exhibit to the Registration
Statement which is not described or filed as required. All contracts described
in the Prospectus (or, if the Prospectus is not in existence, the most recent
Preliminary Prospectus), if any, are in full force and effect on the date
hereof, and neither the Company nor, to the best knowledge of the Company, any
other party, is in material breach of or default under any such contract.
(h) The authorized and outstanding capital stock of the Company is
set forth in the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus), and the description of the Common Stock
therein conforms with and accurately describes the rights set forth in the
instruments defining the Common Stock. The Shares are duly authorized and
will, when issued in accordance with the terms of this Agreement and against
payment therefor, be validly issued, fully paid and non-assessable, and the
issuance of the Shares is not subject to any preemptive or similar rights.
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<PAGE> 5
(i) All of the outstanding shares of capital stock of the Company
have been duly authorized and validly issued and are fully paid and
nonassessable, have been issued in compliance with all applicable federal and
state securities laws and were not issued in violation of or subject to any
preemptive rights or other rights to subscribe for or purchase securities. The
description of the Company's stock option, stock bonus and other stock plans or
arrangements, and the options or other rights granted or exercised thereunder,
set forth in the Prospectus (or, if the Prospectus is not in existence, in the
most recent Preliminary Prospectus), accurately and fairly present the
information required to be shown with respect to such plans, arrangements,
options and rights. Other than this Agreement, the "Warrant Agreement" (as
defined in Section 1(dd) below) and the options and warrants to purchase Common
Stock described in the Prospectus (or, if the Prospectus is not in existence,
the most recent Preliminary Prospectus), there are no options, warrants or
other rights outstanding to subscribe for or purchase any shares of the
Company's capital stock. There are no preemptive rights applicable to any
shares of capital stock of the Company. There are no restrictions upon the
voting or transfer of any of the Firm Shares or Option Shares pursuant to the
Company's Certificate of Incorporation, bylaws or other governing documents or
any agreement to which the Company is a party or by which it may be bound.
Except as is provided in the Warrant Agreement and for the Shares, neither the
filing of the Registration Statement nor the offering or sale of the Shares as
contemplated by this Agreement gives rise to any rights, other than those which
have been waived, for or relating to the registration of any securities (other
than the Shares) of or issued by the Company.
(j) The Company has full right, power and authority to enter into
and perform its obligations under this Agreement and the Warrant Agreement and
to issue, sell and deliver the Shares. This Agreement and the Warrant
Agreement have each been duly authorized, executed and delivered by the Company
and constitute the valid and binding agreements of the Company, and each is
enforceable against the Company in accordance with its terms except insofar as
enforceability may be affected by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights generally and except
insofar as the indemnification and contribution provisions of Section 7 and
Section 3(f) of the Warrant Agreement hereof may be affected by public policy
concerns.
(k) The Company is not, nor with the giving of notice or lapse of
time or both would it be, in violation of or in default under, nor will the
execution or delivery of this Agreement or the Warrant Agreement or the
consummation of the transactions contemplated by this Agreement or the Warrant
Agreement result in a violation of or constitute a breach of or a default
(including without limitation with the giving of notice, the passage of time or
otherwise) under the certificate of incorporation, bylaws or other governing
documents of the Company or any obligation, agreement, covenant or condition
contained in any bond, debenture, note or other evidence of indebtedness or in
any contract, indenture, mortgage, deed of trust, loan agreement, lease,
license, joint venture or other agreement or instrument to which the Company is
a party or by which any of its properties may be bound or affected. The
Company has not incurred any liability, direct or indirect, for any finders' or
similar fees payable on behalf of the Company or the Underwriters in connection
with the transactions contemplated by this Agreement. The performance by the
Company of its obligations under
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<PAGE> 6
this Agreement and the Warrant Agreement will not violate any law, ordinance,
rule or regulation (provided that no representation or warranty is made hereby
with respect to the effect, if any, of public policy concerns on the
indemnification and contribution provisions of Section 7 hereof and Section
3(f) of the Warrant Agreement), or any order, writ, injunction, judgment or
decree of any governmental agency or body or of any court having jurisdiction
over the Company or any of its properties, or result in the creation or
imposition of any lien, charge, claim or encumbrance upon any property of the
Company. Except for permits and similar authorizations required under the
Securities Act, the Exchange Act or under state securities or Blue Sky laws and
for such permits and authorizations that have been obtained, no consent,
approval, authorization or order of any court, governmental agency or body,
financial institution or any other person is required in connection with the
consummation of the transactions contemplated by this Agreement or the Warrant
Agreement.
(l) The Company owns, or has valid rights to use, all items of real
and personal property which are material to the business of the Company, free
and clear, except as described in the Registration Statement and the Prospectus
(or, if the Prospectus is not in existence, the most recent Preliminary
Prospectus), of all liens, encumbrances and claims that might materially
interfere with the business, properties, condition (financial or otherwise),
results of operations or prospects of the Company.
(m) The Company owns or possesses adequate rights to use all
material patents, patent rights, inventions, trade secrets, know-how,
trademarks, service marks, tradenames and copyrights described or referred to
in the Registration Statement and the Prospectus (or, if the Prospectus is not
in existence, the most recent Preliminary Prospectus) as owned by or used by
it, or which are necessary for the conduct of its business as described in the
Registration Statement and the Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus); and the Company has not
received any notice of infringement of or conflict with asserted rights of
others with respect to any patents, patent rights, inventions, trade secrets,
know-how, trademarks, service marks, tradenames or copyrights which, singly or
in the aggregate, if the subject of an unfavorable decision, ruling or finding,
might have a material adverse effect on the business, properties, condition
(financial or otherwise), results of operations or prospects of the Company.
(n) There is no litigation or governmental proceeding to which the
Company is a party or to which any property of the Company is subject which is
pending or, to the best knowledge of the Company, is threatened or contemplated
against the Company that might have a material effect on, or might result in
any material adverse change in the business, properties, condition (financial
or otherwise), results of operations or prospects of the Company, that might
prevent consummation of the transactions contemplated by this Agreement or the
Warrant Agreement or that is required to be disclosed in the Registration
Statement or Prospectus (or, if the Prospectus is not in existence, the most
recent Preliminary Prospectus) and are not so disclosed.
(o) The Company is not in violation of any law, order, ordinance,
rule or regulation, or any order, writ, injunction, judgment or decree of any
governmental agency or body or of
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<PAGE> 7
any court, to which it or its properties (whether owned or leased) may be
subject, which violation might have a material adverse effect on the business,
properties, condition (financial or otherwise), results of operations or
prospects of the Company.
(p) The Company has not taken and shall not take, directly or
indirectly, any action designed to cause or result in, or which has constituted
or which might reasonably be expected to cause or result in, under the Exchange
Act, the rules and regulations of the Commission under the Exchange Act or
otherwise, the stabilization or manipulation of the price of any security of
the Company to facilitate the sale or resale of the Shares. No bid or purchase
by the Company and, to the best knowledge of the Company, no bid or purchase
that could be attributed to the Company (as a result of bids or purchases by an
"affiliated purchaser" within the meaning of Rule 10b-6 under the Exchange Act)
for or of the Common Stock, any securities of the same class or series as the
Common Stock or any securities convertible into or exchangeable for or that
represent any right to acquire the Common Stock is now pending or in progress
or will have commenced at any time prior to the completion of the distribution
of the Shares.
(q) KPMG Peat Marwick LLP, whose report appears in the Registration
Statement and the Prospectus (or, if the Prospectus is not in existence, the
most recent Preliminary Prospectus) is, and during the periods covered by its
report in the Registration Statement was, independent accountants as required
by the Securities Act and the Rules and Regulations. The financial statements
and schedules included in the Registration Statement, each Preliminary
Prospectus and the Prospectus present fairly (or, if the Prospectus has not
been filed with the Commission, as to the Prospectus, will present fairly) the
financial condition, results of operations, cash flow and changes in
stockholders' equity of the Company at the dates and for the periods indicated,
and the financial statements and schedules included in the Registration
Statement present fairly the information required to be stated therein. Such
financial statements and schedules have been prepared in accordance with
generally accepted accounting principles applied on a consistent basis
throughout the periods presented, except as may be stated therein. The
selected and summary financial and statistical data included in the
Registration Statement and the Prospectus present fairly (or, if the Prospectus
has not been filed with the Commission, as to the Prospectus, will present
fairly) the information shown therein and have been compiled on a basis
consistent with the audited financial statements presented therein. No other
financial statements or schedules are required to be included in the
Registration Statement.
(r) Any pro forma financial or other information and related notes
included in the Registration Statement, each Preliminary Prospectus and the
Prospectus comply (or, if the Prospectus has not been filed with the
Commission, as to the Prospectus, will comply) in all material respects with
the requirements of the Securities Act and the Rules and Regulations and
present fairly the pro forma information shown, as of the dates and for the
periods covered by such pro forma information. Such pro forma information,
including any related notes and schedules, has been prepared on a basis
consistent with the historical financial statements and other historical
information, as applicable, included in the Registration Statement, the
Preliminary Prospectus and the Prospectus (if filed with the Commission),
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<PAGE> 8
except for the pro forma adjustments specified therein, and give effect to
assumptions made on a reasonable basis to give effect to historical and, if
applicable, proposed transactions described in the Registration Statement, each
Preliminary Prospectus and the Prospectus (if filed with the Commission).
(s) The statements in the Registration Statement, each Preliminary
Prospectus and the Prospectus concerning the reserve information of the Company
are (or, if the Prospectus has not been filed with the Commission, will, when
the Prospectus is so filed, be) correct in all material respects and do not
and, if applicable, will not omit to state a material fact necessary to make
the statements made in the Registration Statement, each Preliminary Prospectus
and the Prospectus not misleading.
(t) The books, records and accounts of the Company accurately and
fairly reflect, in reasonable detail, the transactions in and dispositions of
the assets of the Company. The systems of internal accounting controls
maintained by the Company are sufficient to provide reasonable assurances that:
(i) transactions are executed in accordance with management's general or
specific authorization; (ii) transactions are recorded as necessary (x) to
permit preparation of financial statements in conformity with generally
accepted accounting principles and (y) to maintain accountability for assets;
(iii) access to assets is permitted only in accordance with management's
general or specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals and
appropriate action is taken with respect to any differences.
(u) The Company has delivered to the Representative the written
agreement of each of its officers and directors and, to the knowledge of the
Company at the date of this Agreement, the beneficial owners of one percent or
more the of Common Stock (assuming for this purpose that all options and
convertible securities held by each beneficial owner, but not by any other
person, have been exercised or exchanged for or converted into Common Stock)
(collectively, "Material Holders"), other than _____________, _____________ to
the effect that each of the Material Holders will not, for a period of 180 days
following the date of this Agreement, without the prior written consent of the
Representative, offer, sell or contract to sell, or otherwise dispose of, or
announce the offer of, any Common Stock or options or convertible securities
exercisable or exchangeable for, or convertible into, Common Stock. In
addition and without limitation, to the extent the Company has the right, with
respect to its outstanding securities or registration statements (other than
the Registration Statement) to preclude sales of such securities or under such
registration statements, the Company has precluded such sales for the maximum
period(s) permitted (but not in excess of 75 days).
(v) No labor disturbance by the employees of the Company exists, is
imminent or, to the knowledge of the Company, is contemplated or threatened;
and the Company is not aware of an existing, imminent or threatened labor
disturbance by the employees of any principal suppliers, manufacturers,
contractors or others that might be expected to result in any material change
in the business, properties, condition (financial or otherwise), results of
operations or prospects of the Company. No collective bargaining agreement
exists with any of the
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<PAGE> 9
Company's employees and, to the best knowledge of the Company, no such
agreement is imminent.
(w) The Company has filed all federal, state, local and foreign tax
returns which are required to be filed or has requested extensions thereof and
has paid all taxes, including withholding taxes, penalties and interest,
assessments, fees and other charges to the extent that the same have become due
and payable. No tax assessment or deficiency has been made or proposed against
the Company nor has the Company received any notice of any proposed tax
assessment or deficiency.
(x) Except as set forth in the Prospectus (or, if the Prospectus not
in existence, the most recent Preliminary Prospectus), there are no outstanding
loans, advances or guaranties of indebtedness by the Company to or for the
benefit of any of (i) its "affiliates," as such term is defined in the Rules
and Regulations or (ii) any of the members of the families of any of them.
(y) The Company has not, directly or indirectly, at any time: (i)
made any contributions to any candidate for political office, or failed to
disclose fully any such contribution, in violation of law; (ii) made any
payment to any local, state, federal or foreign governmental officer or
official, or other person charged with similar public or quasi-public duties,
other than payments required or allowed by all applicable laws; or (iii)
violated any provision of the Foreign Corrupt Practices Act of 1977, as
amended.
(z) The Company has no liability, absolute or contingent, relating
to: (i) public health or safety; (ii) worker health or safety; (iii) product
defect or warranty (except, as to product defect or warranty, as is disclosed
in the Registration Statement and Prospectus (or, if the Prospectus is not in
existence, the most recent Preliminary Prospectus)); or (iv) pollution, damage
to or protection of the environment, including, without limitation, relating to
damage to natural resources, emissions, discharges, releases or threatened
releases of hazardous materials into the environment (including, further
without limitation, ambient air, surface water, groundwater, land surface or
subsurface strata) or otherwise relating to the manufacture, processing, use,
treatment, storage, generation, disposal, transport or handling of any
hazardous materials. As used herein, "hazardous material" includes chemical
substances, wastes, pollutants, contaminants, hazardous or toxic substances,
constituents, materials or wastes, whether solid, gaseous or liquid in nature.
(aa) The Company has not distributed and will not distribute prior
to the Closing Date or on or prior to any date on which the Option Shares are
to be purchased, as the case may be, any prospectus or other offering material
in connection with the offering and sale of the Shares other than the
Preliminary Prospectus(es), the Prospectus, the Registration Statement and any
other material which may be permitted by the Securities Act and the Rules and
Regulations.
(bb) The Common Stock is traded on and, subject to official notice
of issuance, the Shares have been approved for inclusion for quotation on the
Nasdaq National Market.
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<PAGE> 10
(cc) The Company is not now, and intends to conduct its affairs in
the future in such a manner so that it will not become, an investment company
within the meaning of the Investment Company Act of 1940, as amended.
(dd) The "Warrants" (as defined in the Warrant Agreement, dated as
of December __, 1996, between the Company and Van Kasper & Company (the
"Warrant Agreement")) have been duly and validly authorized by all requisite
corporate action of the Company and, when issued and delivered against payment
therefor as provided in Section 3(l) below, will be valid and binding
obligations of the Company in accordance with their terms; the "Warrant Shares"
(as defined in the Warrant Agreement) have been duly and validly authorized for
issuance upon exercise of the Warrants and when so issued against payment
therefor as provided in the Warrant Agreement will be validly issued, fully
paid and non-assessable; and no person has any preemptive rights with respect
to the Warrants or the Warrant Shares.
2. Purchase, Sale and Delivery of Shares.
(a) On the basis of the representations, warranties, covenants and
agreements of the Company contained in this Agreement and subject to the terms
and conditions set forth in this Agreement, the Company agrees to sell to the
several Underwriters, and each of the Underwriters agrees, severally and not
jointly, to purchase from the Company, at a purchase price of $___ per share,
the respective number of Firm Shares set forth opposite the name of such
Underwriter on Schedule I to this Agreement (subject to adjustment as provided
in Section 8 of this Agreement). (If a Pricing Agreement is used and the price
at which the Underwriters are to purchase the Firm Shares has not been agreed
upon and the Pricing Agreement has not been executed and delivered by all
parties thereto by the close of business on the fourth business day following
the date of this Agreement, this Agreement shall terminate forthwith, without
liability or other obligation of any party to the other party, provided that
the engagement letter, dated as of October 14, 1996, between the Company and
Van Kasper & Company will remain in full force and effect to the extent stated
in the next to the last paragraph of such letter).
(b) On the basis of the several (and not joint) covenants and
agreements of the Underwriters contained in this Agreement and subject to the
terms and conditions set forth in this Agreement, the Company grants an option
to the several Underwriters to purchase from the Company, severally and not
jointly, all or any portion of the Option Shares at the same price per share as
the Underwriters are to pay for the Firm Shares. This option may be exercised
only to cover over-allotments in the sale of the Firm Shares by the
Underwriters and may be exercised in whole or in part at any time (but not more
than once) on or before the 45th day after the date of the Prospectus upon
written, telecopied or telegraphic notice by the Representative to the Company
setting forth the aggregate number of Option Shares as to which the several
Underwriters are exercising the option and the settlement date. The Option
Shares shall be purchased severally, and not jointly, by each Underwriter, if
purchased at all, in the same proportion that the number of Firm Shares set
forth opposite the name of the Underwriter in Schedule I to this Agreement
bears to the total number of Firm Shares to be
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<PAGE> 11
purchased by the Underwriters under Section 2(a) above, subject to such
adjustments as the Representative in its absolute discretion shall make to
eliminate any fractional shares. Delivery of certificates for the Option
Shares, and payment therefor, shall be made as provided in Section 2(c) and
Section 2(d) below.
(c) Delivery of the Firm Shares and the Option Shares (if the option
granted by the Company in Section 2(b) above has been exercised not later than
6:30 a.m., San Francisco time, on the date two business days preceding the
Closing Date), and payment therefor, less the nonaccountable expense allowance
provided for in Section 4(a)(ii) of this Agreement, shall be made at the office
of Van Kasper & Company, 600 California Street, Suite 1700, San Francisco,
California 94108, at 6:30 a.m., San Francisco time, on December __, 1996, or at
such time on such other day, not later than seven full business days after such
date, as shall be agreed upon in writing by the Company and the Representative,
or as provided in Section 8 of this Agreement. The date and hour of delivery
and payment for the Firm Shares are referred to in this Agreement as the
"Closing Date." As used in this Agreement, "business day" means a day on which
the Nasdaq National Market is open for trading and on which banks in New York
and California are open for business and not permitted by law or executive
order to be closed.
(d) If the option granted by the Company in Section 2(b) above is
exercised after 6:30 a.m., San Francisco time, on the date two business days
preceding the Closing Date, delivery of the Option Shares and payment therefor,
less the applicable portion, if any, of the nonaccountable expense allowance
provided for in Section 4(a)(ii) of this Agreement, shall be made at the office
of Van Kasper & Company, 600 California Street, Suite 1700, San Francisco,
California 94108, at 6:30 a.m., San Francisco time, on the date specified by
the Representative (which shall be three or four, or fewer, business days after
the exercise of the option, but not in excess of the period of time specified
in the Rules and Regulations).
(e) Payment of the purchase price for the Shares by the several
Underwriters shall be made by certified or official bank check or checks drawn
in next-day funds, payable to the order of the Company. Such payment shall be
made upon delivery of certificates for the Shares to you for the respective
accounts of the several Underwriters. Certificates for the Shares to be
delivered to you shall be registered in such name or names and shall be in such
denominations as the Representative may request at least two business days
before the Closing Date, in the case of Firm Shares, and at least one business
day prior to the purchase of the Option Shares, in the case of the Option
Shares. Such certificates will be made available to the Underwriters for
inspection, checking and packaging at the offices of Alex Brown & Sons, New
York, New York, not less than one full business day prior to the Closing Date
or, in the case of the Option Shares, by 3:00 p.m., New York time, on the first
business day preceding the date of purchase.
It is understood that the Representative, individually and not on
behalf of the Underwriters, may (but shall not be obligated to) make payment to
the Company for Shares to be purchased by any Underwriter whose check shall not
have been received by the Representative on the Closing Date or any later date
on which Option Shares are purchased for
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<PAGE> 12
the account of such Underwriter. Any such payment shall not relieve such
Underwriter from any of its obligations hereunder.
(f) It is understood that the several Underwriters propose to offer
the Shares for sale to the public as soon as the Representative deem it
advisable to do so. The Firm Shares are to be initially offered to the public
at the public offering price set forth (or to be set forth) in the Prospectus.
The Representative may from time to time thereafter change the public offering
price and other selling terms.
(g) The information set forth in the last paragraph on the front
cover page (insofar as such information relates to the Underwriters), the
legend respecting stabilization set forth on the inside front cover page and
the statements set forth under the caption "Underwriting" in any Preliminary
Prospectus and in the final form of Prospectus filed pursuant to Rule 424(b)
constitute the only information furnished by the Underwriters to the Company
for inclusion in any Preliminary Prospectus, the Prospectus or the Registration
Statement.
3. Further Agreements of the Company. The Company covenants and
agrees with the several Underwriters as follows:
(a) The Company will use its best efforts to cause the Registration
Statement, and any amendment thereof, if not effective at the time of execution
of this Agreement, to become effective as promptly as possible. If the
Registration Statement has become or becomes effective pursuant to Rule 430A,
or filing of the Prospectus is otherwise required under Rule 424(b), the
Company will file the Prospectus, properly completed (and in form and substance
reasonably satisfactory to the Underwriters) pursuant to Rule 424(b) within the
time period prescribed and will provide evidence satisfactory to the
Representative of such timely filing. The Company will not file the
Prospectus, any amended Prospectus, any amendment (including post-effective
amendments) to the Registration Statement or any supplement to the Prospectus
without (i) advising the Representative of and, a reasonable time prior to the
proposed filing of such amendment or supplement, furnishing the Representative
with copies thereof and (ii) obtaining the prior consent of the Representative
to such filing. The Company will prepare and file with the Commission, promptly
upon the request of the Representative, any amendment to the Registration
Statement or supplement to the Prospectus that may be necessary or advisable in
connection with the distribution of the Shares by you and use its best efforts
to cause the same to become effective as promptly as possible.
(b) The Company will promptly advise the Representative (i) when the
Registration Statement becomes effective, (ii) when any amendment thereof
becomes effective, (iii) of any request by the Commission for any amendment of
or supplement to the Registration Statement or the Prospectus or for any
additional information, (iv) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (v) of the
receipt by the Company of any notification with respect to the suspension of
the registration, qualification or exemption from registration or qualification
of the Shares for sale in any jurisdiction or the initiation or threatening of
any proceeding for such purpose. The Company will use its best efforts to
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<PAGE> 13
prevent the issuance of any such stop order or suspension and, if issued, to
obtain as soon as possible the withdrawal thereof.
(c) The Company will (i) on or before the Closing Date, deliver to
you and your counsel a signed copy of the Registration Statement as originally
filed and of each amendment thereto filed prior to the time the Registration
Statement becomes effective and, promptly upon the filing thereof, a signed
copy of each post-effective amendment, if any, to the Registration Statement
(together with, in each case, all exhibits thereto unless and to the extent
previously furnished to you) and all documents filed by the Company with the
Commission under the Exchange Act and deemed to be incorporated by reference
into any Preliminary Prospectus or the Prospectus and will also deliver to you,
for distribution to the several Underwriters, a sufficient number of additional
conformed copies of each of the foregoing (excluding exhibits) so that one copy
of each may be distributed to each Underwriter, (ii) as promptly as possible
deliver to each of you and send to the several Underwriters, at such office or
offices as you may designate, as many copies of the Prospectus as you may
reasonably request and (iii) thereafter from time to time during the period in
which a prospectus is required by law to be delivered by an Underwriter or a
dealer, likewise send to the Underwriters as many additional copies of the
Prospectus and as many copies of any supplement to the Prospectus and of any
amended Prospectus, filed by the Company with the Commission, as you may
reasonably request for the purposes contemplated by the Securities Act.
(d) If at any time during the period in which a prospectus is
required by law to be delivered by an Underwriter or a dealer any event shall
occur as a result of which it is necessary to supplement or amend the
Prospectus in order to make the Prospectus not misleading or so that the
Prospectus will not omit to state a material fact necessary to be stated
therein, in each case at the time the Prospectus is delivered to a purchaser of
the Shares, or if it shall be necessary to amend or to supplement the
Prospectus to comply with the Securities Act or the Rules and Regulations, the
Company will forthwith prepare and file with the Commission a supplement to the
Prospectus or an amended Prospectus so that the Prospectus as so supplemented
or amended will not contain any untrue statement of a material fact or omit to
state any material fact necessary in order to make the statements therein not
misleading and so that it then will otherwise comply with the Securities Act
and the Rules and Regulations. If, after the public offering of the Shares by
the Underwriters and during such period, the Underwriters propose to vary the
terms of offering thereof by reason of changes in general market conditions or
otherwise, you will advise the Company in writing of the proposed variation and
if, in the opinion either of counsel for the Company or counsel for the
Underwriters, such proposed variation requires that the Prospectus be
supplemented or amended, the Company will forthwith prepare and file with the
Commission a supplement to the Prospectus or an amended Prospectus setting
forth such variation. The Company authorizes the Underwriters and all dealers
to whom any of the Shares may be sold by the Underwriters to use the
Prospectus, as from time to time so amended or supplemented, in connection with
the sale of the Shares in accordance with the applicable provisions of the
Securities Act and the Rules and Regulations for such period.
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<PAGE> 14
(e) The Company will cooperate with you and your counsel in the
qualification or registration of the Shares for offer and sale under the
securities or blue sky laws of such jurisdictions as you may designate and, if
applicable, in connection with exemptions from such qualification or
registration and, during the period in which a Prospectus is required by law to
be delivered by an Underwriter or a dealer, in keeping such qualifications,
registrations and exemptions in effect; provided, however, that the Company
shall not be obligated to file any general consent to service of process or to
qualify to do business as a foreign corporation in any jurisdiction in which it
is not so qualified. The Company will, from time to time, prepare and file
such statements, reports and other documents as are or may be required to
continue such qualifications, registrations and exemptions in effect for so
long a period as you may reasonably request for the distribution of the Shares.
(f) During a period of five years commencing with the date of this
Agreement, the Company will promptly furnish to you and to each Underwriter who
may so request in writing copies of (i) all periodic and special reports
furnished by it to shareholders of the Company, (ii) all information, documents
and reports filed by it with the Commission, Nasdaq National Market, any
securities exchange or the National Association of Securities Dealers, Inc.,
(iii) all press releases and material news items or articles in respect of the
Company, its products or affairs released or prepared by the Company (other
than promotional and marketing materials disseminated solely to customers and
potential customers of the Company in the ordinary course of business) and (iv)
any additional information concerning the Company or its business which the
Representative may reasonably request.
(g) As soon as practicable, but not later than the 45th day
following the end of the fiscal quarter first ending after the first
anniversary of the Effective Date, the Company will make generally available to
its securities holders and furnish to the Representative an earnings statement
or statements in accordance with Section 11(a) of the Securities Act and Rule
158 thereunder.
(h) The Company agrees that, without your prior written consent, the
Company will not and will cause the Material Holders to enter into agreements
with the Representative to the effect that they will not, in each case directly
or indirectly, sell, offer, contract to sell, grant any option to purchase or
otherwise dispose of any shares of Common Stock, or any securities convertible
into, exchangeable for or exercisable for Common Stock, or any rights to
purchase or acquire Common Stock, for a period of 180 days following the date
of this Agreement, excluding only (i) the sale of the Shares to be sold to the
Underwriters pursuant to this Agreement and (ii) the grant of options to
purchase Common Stock or the issuance of shares of Common Stock upon the
exercise of options granted under the Company's presently authorized employee
plans that are described in the Prospectus or in documents incorporated
therein, in accordance with the provisions of such plans as so authorized. In
addition and without limitation, to the extent the Company has the right, with
respect to its outstanding securities or registration statements (other than
the Registration Statement) to preclude sales of such securities or under such
registration statements, it has done so for the maximum period(s) permitted
(but not in excess of 75 days).
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<PAGE> 15
(i) The Company will apply the net proceeds from the offering
received by it in the manner set forth under the caption "Use of Proceeds" in
the Prospectus.
(j) The Company will, and at all times for a period of at least five
years after the date of this Agreement, unless such securities are then listed
on a national securities exchange, cause the Common Stock (including the
Shares) to be included for quotation on the Nasdaq National Market, and the
Company will comply with all registration, filing, reporting and other
requirements of the Exchange Act and the Nasdaq National Market which may from
time to time be applicable to the Company.
(k) The Company will use its best efforts to maintain insurance of
the types and in the amounts which it deems adequate for its business
consistent with insurance coverage maintained by companies of similar size and
engaged in similar businesses including, but not limited to, general liability
insurance covering all real and personal property owned or leased by the
Company against theft, damage, destruction, acts of vandalism and all other
risks customarily insured against.
(l) In accordance with the Warrant Agreement, which the Company has
executed and delivered, the Company agrees, upon its receipt of the purchase
price therefor (as specified in the Warrant Agreement), to deliver to Van
Kasper & Company (individually and not as the Representative of the
Underwriters) on the Closing Date and simultaneously with completion of the
purchase and sale of the Firm Shares and on the date the Option Shares are
purchased by the Underwriters pursuant to Section 2 of this Agreement, Warrants
(in the form attached as Exhibit A to the Warrant Agreement) representing the
right to purchase 125,000 shares and 5% of the number of Option Shares so
purchased, respectively, of Common Stock at a price equal to 120% of the
offering price per share to the public as set forth or to be set forth on the
Cover Page of the Prospectus or in the Term Sheet.
4. Fees and Expenses.
(a) The Company agrees with each Underwriter that:
(i) The Company will pay and bear all costs and expenses in
connection with: the preparation, printing and filing of the Registration
Statement (including financial statements, schedules and exhibits), Preliminary
Prospectuses and the Prospectus, any drafts of each of them and any amendments
or supplements to any of them; the duplication or, if applicable, printing
(including all drafts thereof) of this Agreement, the Agreement Among
Underwriters, any Selected Dealer Agreements, the Warrant Agreement, the
Preliminary Blue Sky Survey and any Supplemental Blue Sky Survey, the
Underwriters' Questionnaire and the Power of Attorney and the duplication and
printing (including of drafts thereof) of any other underwriting documents and
material (including but not limited to marketing memoranda and other marketing
material) in connection with the offering, purchase, sale and delivery of the
Shares; the issuance and delivery of the Shares under this Agreement to the
several Underwriters, including all expenses, taxes, duties, fees and
commissions on the purchase and sale of the Shares and Nasdaq National Market
brokerage and transaction levies with respect to
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<PAGE> 16
the purchase and, if applicable, the sale of the Shares (x) incident to the
sale and delivery of the shares by the Company to the Underwriters and (y)
incident to the sale and delivery of the Shares by the Underwriters to the
initial purchasers thereof; the cost of printing all stock certificates; the
Transfer Agents' and Registrars' fees; the fees and disbursements of counsel
for the Company; all fees and other charges of the Company's independent public
accountants and independent petroleum engineers and any other experts named in
the Prospectus; the cost of furnishing to the several Underwriters copies of
the Registration Statement (including appropriate exhibits), Preliminary
Prospectus(es) and the Prospectus, the agreements and other documents and
instruments referred to above and any amendments or supplements to any of the
foregoing; NASD filing fees and the cost of qualifying or registering the
Shares (or obtaining exemptions from qualification or registration) under the
laws of such jurisdictions as you may designate (including filing fees in
connection with such NASD filings and filing fees and fees and disbursements of
Underwriters' counsel in connection with such state securities or Blue Sky
qualifications, registrations and exemptions); all fees and expenses in
connection with qualification of the Shares for inclusion for quotation on the
Nasdaq National Market; advertising and roadshow expenses; and all other
expenses incurred by the Company in connection with the performance of its
obligations hereunder.
(ii) In addition to its obligations under Section 4(a)(i) above,
the Company agrees to pay the Representative a non-accountable expense
allowance equal to 1.5% of the public offering price of the Shares (but not to
exceed $150,000 in the aggregate). Such allowance shall be paid to the
Representative as provided in Sections 2(c) and 2(d) of this Agreement.
(iii) In addition to its obligations under Section 7(a) of this
Agreement, the Company agrees that, as an interim measure during the pendency
of any claim, action, investigation, inquiry or other proceeding arising out of
or based upon any loss, claim, damage or liability described in Section 7(a) of
this Agreement, it will reimburse or advance to or for the benefit of the
Underwriters, and each of them, on a monthly basis (or more often, if
requested) for all legal and other expenses incurred in connection with
investigating or defending any such claim, action, investigation, inquiry or
other proceeding, notwithstanding the absence of a judicial determination as to
the propriety and enforceability of the Company's obligation to reimburse or
advance for the benefit of the Underwriters for such expenses or the
possibility that such payments might later be held to have been improper by a
court of competent jurisdiction. To the extent that any portion, or all, of
any such interim reimbursement payments or advances are so held to have been
improper, the Underwriters receiving the same shall promptly return such
amounts to the Company together with interest, compounded daily, at the prime
rate (or other commercial lending rate for borrowers of the highest credit
standing) announced from time to time by Bank of America, NT&SA, San Francisco,
California (the "Prime Rate"), but not in excess of the maximum rate permitted
by applicable law. Any such interim reimbursement payments or advances that
are not made to or for the Underwriters within 30 days of a request for
reimbursement or for an advance shall bear interest at the Prime Rate, but not
in excess of the maximum rate permitted by applicable law, from the date of
such request until the date paid.
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<PAGE> 17
(b) In addition to their obligations under Section 7(b) of this
Agreement, the Underwriters severally and in proportion to their obligation to
purchase Firm Shares as set forth on Schedule I hereto, agree that, as an
interim measure during the pendency of any claim, action, investigation,
inquiry or other proceeding arising out of or based upon any loss, claim,
damage or liability described in Section 7(b) of this Agreement, they will
reimburse or advance to or for the benefit of the Company on a monthly basis
(or more often, if requested) for all legal and other expenses incurred by the
Company in connection with investigating or defending any such claim, action,
investigation, inquiry or other proceeding, notwithstanding the absence of a
judicial determination as to the propriety or enforceability of the
Underwriters' obligation to reimburse or advance for the benefit of the Company
for such expenses and the possibility that such payments or advances might
later be held to have been improper by a court of competent jurisdiction. To
the extent that any portion, or all, of any such interim reimbursement payments
or advances are so held to have been improper, the Company shall promptly
return such amounts to the Underwriters together with interest, compounded
daily, at the Prime Rate, but not in excess of the maximum rate permitted by
applicable law. Any such interim reimbursement payments or advances that are
not made to the Company within 30 days of a request for reimbursement or for an
advance shall bear interest at the Prime Rate, but not in excess of the maximum
rate permitted by applicable law, from the date of such request until the date
paid.
(c) It is agreed that any controversy arising out of the operation
of the interim reimbursement and advance arrangements set forth in Sections
4(a)(iii) and 4(b) above, including the amounts of any requested reimbursement
payments or advance, the method of determining such amounts and the basis on
which such amounts shall be apportioned among the indemnifying parties, shall
be settled by arbitration conducted under the provisions of the Constitution
and Rules of the Board of Governors of the New York Stock Exchange, Inc. or
pursuant to the Code of Arbitration Procedure of the NASD. Any such
arbitration must be commenced by service of a written demand for arbitration or
a written notice of intention to arbitrate, therein electing the arbitration
tribunal. If the party demanding arbitration does not make such designation of
an arbitration tribunal in such demand or notice, then the party responding to
the demand or notice is authorized to do so. Any such arbitration will be
limited to the interpretation and obligations of the parties under the interim
reimbursement and advance provisions contained in Sections 4(a)(iii) and 4(b)
above and will not resolve the ultimate propriety or enforceability of the
obligation to indemnify for or contribute to expenses that is created by the
provisions of Section 7 of this Agreement.
(d) If the sale of the Shares provided for herein is not consummated
because any condition to the obligations of the Underwriters set forth in
Section 5 of this Agreement is not satisfied, or because of any termination
pursuant to Section 9(b) of this Agreement, or because of any refusal,
inability or failure on the part of the Company to perform any covenant or
agreement set forth in this Agreement or to comply with any provision of this
Agreement other than by reason of a default by any of the Underwriters, the
Company agrees to reimburse the several Underwriters upon demand for all
out-of-pocket expenses (including fees and disbursements of counsel) that shall
have been incurred by any or all of them in connection
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<PAGE> 18
with investigating, preparing to market or marketing the Shares or otherwise in
connection with this Agreement.
5. Conditions of Underwriters' Obligations. The several obligations
of the Underwriters to purchase and pay for the Shares shall be subject, in the
sole discretion of the Representative, to the accuracy as of the date of
execution of this Agreement, the Closing Date and the date on which the Option
Shares are to be purchased, as the case may be, of the representations and
warranties of the Company set forth in this Agreement, to the accuracy of the
statements of the Company and its officers made in any certificate delivered
pursuant to this Agreement, to the performance by the Company of all of its
obligations to be performed under this Agreement at or prior to the Closing
Date or any later date on which Option Shares are to be purchased, as the case
may be, to the satisfaction of all conditions to be satisfied or performed by
the Company at or prior to that date and to the following additional
conditions:
(a) The Registration Statement shall have become effective (or, if a
post-effective amendment is required to be filed pursuant to Rule 430A under
the Act, such post-effective amendment shall become effective and the Company
shall have provided evidence satisfactory to the Representative of such filing
and effectiveness) not later than 5:00 p.m., New York time, on the date of this
Agreement or at such later date and time as you may approve in writing and, at
the Closing Date or, with respect to the Option Shares, the date on which such
Option Shares are to be purchased; no stop order suspending the effectiveness
of the Registration Statement or any qualification, registration or exemption
from qualification or registration for the sale of the Shares in any
jurisdiction shall have been issued and no proceedings for that purpose shall
have been instituted or threatened; and any request for additional information
on the part of the Commission shall have been complied with to the reasonable
satisfaction of the Representative and their counsel.
(b) The Representative shall have received from Gibson, Dunn &
Crutcher LLP, counsel for the Underwriters, an opinion, dated the Closing Date,
with respect to the issuance and sale of the Shares and such other related
matters as the Representative may reasonably require, and the Company shall
have furnished such counsel with all documents which they may request for the
purpose of enabling them to pass upon such matters.
(c) You shall have received on the Closing Date and on any later
date on which Option Shares are purchased, as the case may be, the opinion of
Lynch, Chappell & Alsup, counsel for the Company, addressed to the Underwriters
and dated the Closing Date or such later date, with reproduced copies or signed
counterparts thereof for each of the Underwriters, covering the matters set
forth in Annex A to this Agreement and in form and substance satisfactory to
you.
(d) You shall be satisfied that there has not been any material
change in the market for securities in general or in political, financial or
economic conditions as to render it impracticable in your sole judgment to make
a public offering of the Shares, or a material adverse change in market levels
for securities in general (or those of companies in particular) or financial or
economic conditions which render it inadvisable to proceed.
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<PAGE> 19
(e) You shall have received on the Closing Date and on any later
date on which Option Shares are purchased a certificate, dated the Closing Date
or such later date, as the case may be, and signed by the President and the
Chief Financial Officer of the Company stating that:
(i) the representations and warranties of the Company set
forth in Section 1 of this Agreement are true and correct
with the same force and effect as if expressly made at and
as of the Closing Date or such later date, and the Company
has complied with all the agreements and satisfied all the
conditions on its part to be performed or satisfied at or
prior to the Closing Date or such later date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued, and no proceedings
for that purpose have been instituted or are pending or
are threatened under the Securities Act; and
(iii) (A) the respective signers of the certificate have
carefully examined the Registration Statement in the form
in which it originally became effective and the Prospectus
and any supplements or amendments to any of them and, as
of the Effective Date, the statements made in the
Registration Statement and the Prospectus were true and
correct in all material respects and neither the
Registration Statement nor the Prospectus omitted to state
any material fact required to be stated therein or
necessary in order to make the statements therein not
misleading, (B) since the Effective Date, no event has
occurred that should have been set forth in an amendment
to the Registration Statement or a supplement or amendment
to the Prospectus that has not been set forth in such an
amendment or supplement, (C) since the respective dates as
of which information is given in the Registration
Statement in the form in which it originally became
effective and the Prospectus contained therein, there has
not been any material change or any development involving
a prospective material change in or affecting the
business, properties, condition (financial or otherwise),
results of operations or prospects of the Company, whether
or not arising from transactions in the ordinary course of
business, and, since such dates, except in the ordinary
course of business, the Company has not entered into any
material transaction not referred to in the Registration
Statement in the form in which it originally became
effective and the Prospectus contained therein, (D) there
are not any pending or known threatened legal proceedings
to which the Company is a party or of which property of
the Company is the subject which are material and which
are not disclosed in the Registration Statement and the
Prospectus and (E) there are not any license agreements,
contracts, leases or other documents that are required to
be filed as exhibits to the Registration Statement that
have not been filed as required.
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(f) You shall have received from KPMG Peat Marwick LLP a letter or
letters, addressed to the Underwriters and dated the Closing Date and any later
date on which Option Shares are purchased, confirming that they are independent
accountants with respect to the Company within the meaning of the Securities
Act and the applicable published Rules and Regulations thereunder and, based
upon the procedures described in their letter, referred to below, delivered to
you concurrently with the execution of this Agreement (the "Original Letter"),
but carried out to a date not more than five business days prior to the Closing
Date or such later date on which Option Shares are purchased, (i) confirming,
to the extent true, that the statements and conclusions set forth in the
Original Letter are accurate as of the Closing Date or such later date, as the
case may be, and (ii) setting forth any revisions and additions to the
statements and conclusions set forth in the Original Letter that are necessary
to reflect any changes in the facts described in the Original Letter since the
date of the Original Letter or to reflect the availability of more recent
financial statements, data or information. Such letters shall not disclose any
change, or any development involving a prospective change, in or affecting the
business, properties or condition (financial or otherwise), results of
operations or prospects of the Company which, in your sole judgment, makes it
impractical or inadvisable to proceed with the public offering of the Shares or
the purchase of the Option Shares as contemplated by the Prospectus (or, if the
Prospectus is not in existence, the most recent Preliminary Prospectus). In
addition, you shall have received from KPMG Peat Marwick LLP, on or prior to
the Closing Date, a letter addressed to the Company and made available to you
for the use of the Underwriters stating that their review of the Company's
system of internal controls, to the extent they deemed necessary in
establishing the scope of their examination of the Company's financial
statements as of December 31, 1995 or in delivering their Original Letter, did
not disclose any weaknesses in internal controls that they considered to be a
material weaknesses.
(g) Prior to the Closing Date, the Shares shall have been designated
national market system securities, duly authorized for quotation on the Nasdaq
National Market upon official notice of issuance.
(h) On or prior to the Closing Date, you shall have received from
all Material Holders executed agreements covering the matters described in
Section 3(l) of this Agreement.
(i) On or prior to the Closing Date, the Company shall have entered
into the Warrant Agreement, substantially in the form filed as Exhibit 4.3 to
the Registration Statement; and on the Closing Date, concurrently with the
purchase and sale of the Firm Shares and on the date any Option Shares are
purchased pursuant to this Agreement, the Company shall have issued, sold and
delivered the Warrants to Van Kasper & Company.
(j) On or prior to the Closing Date and on the date the Option
Shares are purchased, the Representative shall have received, from the
independent petroleum engineers whose reports are referred to in the
Prospectus, letter(s) confirming that they prepared the reports referred to in
the Prospectus or the Registration Statement as having been prepared by them
and that the statements in the Prospectus relating to the reserve information
in question,
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specifying such information, in their opinion accurately present the
information in their respective report(s).
(k) The Company shall have furnished to you such further
certificates and documents as you shall reasonably request (including
certificates of officers of the Company), as to the accuracy of the
representations and warranties of the Company set forth in this Agreement, the
performance by the Company of its obligations under this Agreement and the
other conditions concurrent and precedent to the obligations of the
Underwriters under this Agreement.
All the agreements, opinions, certificates and letters mentioned
above or elsewhere in this Agreement will be in compliance with the provisions
of this Agreement only if they are reasonably satisfactory to the
Representative. The Company will furnish you with such number of conformed
copies of such opinions, certificates, letters and documents as you shall
reasonably request.
If any of the conditions specified in this Section 5 shall not have
been fulfilled in all material respects when and as provided in this Agreement,
time being of the essence, or if any of the opinions and certificates mentioned
above or elsewhere in this Agreement shall not be in all material respects
reasonably satisfactory in form and substance to the Representative and its
counsel, this Agreement and all obligations of the Underwriters hereunder may
be canceled by the Representative at, or at any time prior to, the Closing Date
or (with respect to the Option Shares) prior to the date upon which the Option
Shares are to be purchased, as the case may be. Notice of such cancellation
shall be given to the Company in writing or by telephone, telecopy or telegraph
confirmed in writing. Any such termination shall be without liability of the
Company to the Underwriters (except as provided in Section 4 or Section 7 of
this Agreement) and without liability of the Underwriters to the Company
(except to the extent provided in Section 7 of this Agreement).
6. Conditions of the Obligation of the Company. The obligations of
the Company to sell and deliver the Shares required to be delivered as and when
specified in this Agreement shall be subject to the condition that, at the
Closing Date or (with respect to the Option Shares) the date upon which the
Option Shares are to be purchased, no stop order suspending the effectiveness
of the Registration Statement shall be in effect and no proceedings therefor
shall be pending or threatened by the Commission.
7. Indemnification and Contribution.
(a) The Company agrees to indemnify and hold harmless each
Underwriter and each person (including each partner or officer thereof) who
controls any Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act or other federal or state statute,
law or regulation, at common law or otherwise, specifically including but not
limited to losses, claims, damages or liabilities (or actions in respect
thereof) related to negligence on the part of any Underwriter, and the Company
agrees to reimburse each such Underwriter and controlling
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<PAGE> 22
person for any legal or other expenses (including, except as otherwise provided
below, settlement expenses and fees and disbursements of counsel) incurred by
the respective indemnified parties in connection with defending against any
such losses, claims, damages or liabilities or in connection with any
investigation or inquiry of, or other proceeding that may be brought against,
the respective indemnified parties, in each case insofar as such losses,
claims, damages or liabilities (or actions in respect thereof) arise out of or
are based upon, in whole or in part, (i) any breach of any representation,
warranty, covenant or agreement of the Company in this Agreement, (ii) any
untrue statement or alleged untrue statement of a material fact contained in
the Registration Statement in the form originally filed or in any amendment
thereto (including the Prospectus as part thereof) or any post-effective
amendment thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading or (iii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading or (iv) any untrue
statement or alleged untrue statement of a material fact contained in any
application or other document, or any amendment or supplement thereto, executed
by the Company or based upon written information furnished by or on behalf of
the Company filed in any jurisdiction in order to qualify or register the
Shares under the securities or Blue Sky laws thereof or to obtain an exemption
from such qualification or registration or filed with the Commission or any
securities association, the Nasdaq National Market, or any securities exchange,
or the omission or alleged omission to state therein a material fact required
to be stated therein or necessary to make the statements therein, in light of
the circumstances under which they were made, not misleading; provided,
however, that (1) the indemnity agreements of the Company contained in this
Section 7(a) shall not apply to any such losses, claims, damages, liabilities
or expenses if such statement or omission was made in reliance upon and in
conformity with information furnished in writing to the Company by or on behalf
of any Underwriter through the Representative specifically for use in the
Registration Statement, any Preliminary Prospectus or the Prospectus or any
such amendment thereof or supplement thereto and (2) the indemnity agreement
contained in this Section 7(a) with respect to any Preliminary Prospectus shall
not inure to the benefit of any Underwriter from whom the person asserting any
such losses, claims, damages, liabilities or expenses purchased the Shares that
are the subject thereof (or to the benefit of any person controlling such
Underwriter) if the Company can demonstrate that at or prior to the written
confirmation of the sale of such Shares a copy of the Prospectus (or the
Prospectus as amended or supplemented) (excluding the documents incorporated
therein by reference) was not sent or delivered to such person and the untrue
statement or omission of a material fact contained in such Preliminary
Prospectus was corrected in the Prospectus (or the Prospectus as amended or
supplemented), unless the failure is the result of noncompliance by the Company
with Section 3 of this Agreement. The indemnity agreements of the Company
contained in this Section 7(a) and the representations and warranties of the
Company contained in Section 1 of this Agreement shall remain
22
<PAGE> 23
operative and in full force and effect regardless of any investigation made by
or on behalf of any indemnified party and shall survive the delivery of and
payment for the Shares. This indemnity agreement shall be in addition to any
liabilities which the Company may otherwise have.
(b) Each Underwriter, severally and not jointly, agrees to indemnify
and hold harmless the Company, each of its officers who signs the Registration
Statement, each of its directors, each other Underwriter and each person
(including each partner or officer thereof) who controls the Company or any
such other Underwriter within the meaning of Section 15 of the Securities Act
from and against any and all losses, claims, damages or liabilities, joint or
several, to which such indemnified parties or any of them may become subject
under the Securities Act, the Exchange Act, or other federal or state statute,
law or regulation or at common law or otherwise and to reimburse each of them
for any legal or other expenses (including, except as otherwise hereinafter
provided, settlement expenses and fees and disbursements of counsel) incurred
by the respective indemnified parties in connection with defending against any
such losses, claims, damages or liabilities or in connection with any
investigation or inquiry of, or other proceeding that may be brought against,
the respective indemnified parties, in each case arising out of or based upon
(i) any breach of any representation, warranty, covenant or agreement of the
indemnifying Underwriter in this Agreement, (ii) any untrue statement or
alleged untrue statement of a material fact contained in the Registration
Statement (including the Prospectus as part thereof) or any post-effective
amendment thereto, or the omission or alleged omission to state therein a
material fact required to be stated therein or necessary to make the statements
therein, in the light of the circumstances under which they were made, not
misleading or (iii) any untrue statement or alleged untrue statement of a
material fact contained in any Preliminary Prospectus or the Prospectus (as
amended or as supplemented if the Company shall have filed with the Commission
any amendment thereof or supplement thereto) or the omission or alleged
omission to state therein a material fact required to be stated therein or
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading, but in each case
under clauses (i), (ii) and (iii) above, as the case may be, only if such
statement or omission was made in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of such
indemnifying Underwriter through the Representative specifically for use in the
Registration Statement, in any Preliminary Prospectus or the Prospectus or any
such amendment thereof or supplement thereto. The Company acknowledges and
agrees that the matters described in Section 2(g) of this Agreement constitute
the only information furnished in writing by or on behalf of the several
Underwriters for inclusion in the Registration Statement, any Preliminary
Prospectus or the Prospectus. The indemnity agreement of each Underwriter
contained in this Section 7(b) shall remain operative and in full force and
effect regardless of any investigation made by or on behalf of any indemnified
party and shall survive the delivery of and payment for the Shares. This
indemnity agreement shall be in addition to any liabilities which each
Underwriter may otherwise have.
(c) Each person or entity indemnified under the provisions of
Sections 7(a) and 7(b) above agrees that, upon the service of a summons or
other initial legal process upon it in any
23
<PAGE> 24
action or suit instituted against it or upon its receipt of written
notification of the commencement of any investigation or inquiry of, or
proceeding against, it in respect of which indemnity may be sought on account
of any indemnity agreement contained in such Sections, it will, if a claim in
respect thereunder is to be made against the indemnifying party or parties
under this Section 7, promptly give written notice (the "Notice") of such
service or notification to the party or parties from whom indemnification may
be sought hereunder. No indemnification provided for in Sections 7(a) or 7(b)
above shall be available to any person who fails to so give the Notice if the
party to whom such Notice was not given was unaware of the action, suit,
investigation, inquiry or proceeding to which the Notice would have related,
but only to the extent such party was materially prejudiced by the failure to
receive the Notice, and the omission so to notify such indemnifying party or
parties shall not relieve such indemnifying party or parties from any liability
which it or they may have to the indemnified party for contribution or
otherwise than on account of Sections 7(a) and 7(b). Any indemnifying party
shall be entitled at its own expense to participate in the defense of any
action, suit or proceeding against, or investigation or inquiry of, an
indemnified party. Any indemnifying party shall be entitled, if it so elects
within a reasonable time after receipt of the Notice by giving written notice
(the "Notice of Defense") to the indemnified party, to assume (alone or in
conjunction with any other indemnifying party or parties) the entire defense of
such action, suit, investigation, inquiry or proceeding, in which event such
defense shall be conducted, at the expense of the indemnifying party or
parties, by counsel chosen by such indemnifying party or parties and reasonably
satisfactory to the indemnified party or parties; provided, however, that (i)
if the indemnified party or parties reasonably determine that there may be a
conflict between the positions of the indemnifying party or parties and of the
indemnified party or parties in conducting the defense of such action, suit,
investigation, inquiry or proceeding or that there may be legal defenses or
rights available to such indemnified party or parties different from or in
addition to those available to the indemnifying party or parties, then separate
counsel for and selected by the indemnified party or parties shall be entitled
to conduct the defense of the indemnified parties to the extent determined by
such counsel to be necessary to protect the interests of the indemnified party
or parties, and (ii) provided, further, that the indemnifying party shall not
be liable for the fees and expenses of more than one separate counsel,
reasonably approved by the indemnifying party, for all of the indemnified
parties, plus, if applicable, local counsel in each jurisdiction. In addition,
in any event, the indemnified party or parties shall be entitled to have
counsel selected by such indemnified party or parties participate in, but not
conduct, the defense. If, within a reasonable time after receipt of the
Notice, an indemnifying party gives a Notice of Defense and, unless separate
counsel is to be chosen by the indemnified party or parties as provided above,
the counsel chosen by the indemnifying party or parties is reasonably
satisfactory to the indemnified party or parties, the indemnifying party or
parties will not be liable under Sections 7(a) through 7(c) for any legal
expenses subsequently incurred by the indemnified party or parties in
connection with the defense of the action, suit, investigation, inquiry or
proceeding, except that (A) the indemnifying party or parties shall bear and
pay the legal and other expenses incurred in connection with the conduct of the
defense as referred to in clause (i) of the proviso to the preceding sentence
and (B) the indemnifying party or parties shall bear and pay such other
expenses as it or they have authorized to be incurred by the indemnified party
24
<PAGE> 25
or parties. If, within a reasonable time after receipt of the Notice, no
Notice of Defense has been given, the indemnifying party or parties shall be
responsible for any legal or other expenses incurred by the indemnified party
or parties in connection with the defense of the action, suit, investigation,
inquiry or proceeding.
(d) In order to provide for just and equitable contribution in any
action in which a claim for indemnification is made pursuant to this Section 7
but is judicially determined (by the entry of a final judgment or decree by a
court of competent jurisdiction and the expiration of time to appeal or the
denial of the last right to appeal) that such indemnification may not be
enforced in such case notwithstanding the fact that this Section 7 provides for
indemnification in such case, each indemnifying party shall contribute to the
amount paid or payable by such indemnified party as a result of the losses,
claims, damages, liabilities and expenses referred to in Section 7(a) or 7(b)
above (i) in such proportion as is appropriate to reflect the relative benefits
received by each indemnifying party from the offering of the Shares or (ii) if
the allocation provided by clause (i) above is not permitted by applicable law,
in such proportion as is appropriate to reflect not only the relative benefits
referred to in clause (i) above but also the relative fault of each party in
connection with the statements or omissions that resulted in such losses,
claims, damages or liabilities, or actions in respect thereof, as well as any
other relevant equitable considerations. The relative benefits received by the
Company and the Underwriters shall be deemed to be in the same respective
proportions as the total proceeds from the offering of the Shares, net of the
underwriting discounts, received by the Company and the total underwriting
discount retained by the Underwriters bear to the aggregate public offering
price of the Shares. Relative fault shall be determined by reference to, among
other things, whether the untrue or alleged untrue statement of a material fact
or the omission or alleged omission to state a material fact relates to
information supplied by a party and the party's relative intent, knowledge,
access to information and opportunity to correct or prevent such untrue
statement or omission.
The parties agree that it would not be just and equitable if
contribution pursuant to this Section 7(d) were to be determined by pro rata
allocation (even if the Underwriters were treated as one entity for such
purpose) or by any other method of allocation which does not take into account
the equitable considerations referred to in the first sentence of this Section
7(d) and to the considerations referred to in the third sentence of the first
paragraph of this Section 7(d). The amount paid by an indemnified party as a
result of the losses, claims, damages or liabilities, or actions in respect
thereof, referred to in the first sentence of this Section 7(d) shall be deemed
to include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating, preparing to defend or defending
against any action or claim which is the subject of this Section 7(d).
Notwithstanding the provisions of this Section 7(d), no Underwriter shall be
required to contribute any amount in excess of the underwriting discount
applicable to the Shares purchased by that Underwriter. For purposes of this
Section 7(d), each person who controls an Underwriter within the meaning of the
Securities Act shall have the same rights to contribution as such Underwriter,
and each person who controls the Company within the meaning of the Securities
Act, each officer of the Company who signed the Registration Statement and each
director of the Company shall have the same rights to contribution as the
Company, subject in each case to
25
<PAGE> 26
the immediately preceding and immediately following sentences. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the Securities Act) shall be entitled to contribution from any person who was
not guilty of such fraudulent misrepresentation. The Underwriters' obligations
to contribute in this Section 7(d) are several in proportion to their
respective underwriting obligations and not joint.
Each party or other entity entitled to contribution agrees that upon
the service of a summons or other initial legal process upon it in any action
instituted against it in respect of which contribution may be sought, it will
promptly give written notice of such service to the party or parties from whom
contribution may be sought, but the omission so to notify such party or parties
of any such service shall not relieve the party from whom contribution may be
sought from any obligation it may have hereunder or otherwise (except as
specifically provided in Section 7(c) above). This Section 7(d) shall not be
operative as to any Underwriter to the extent that the Company is entitled to
receive or has received indemnity under this Section 7.
(e) The Company shall not, without the prior written consent of each
Underwriter, settle or compromise or consent to the entry of any judgment in
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not such
Underwriter or any person who controls such Underwriter within the meaning of
Section 15 of the Securities Act is a party to such claim, action, suit or
proceeding) unless such settlement, compromise or consent includes an
unconditional release of each such Underwriter and each such controlling person
from all liability arising out of such claim, action, suit or proceeding.
(f) No Underwriter shall, without the consent of the Company, settle
or compromise or consent to the entry of any judgment in any pending or
threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
Company is a party to such claim, action, suit or proceeding), which consent
shall not be unreasonably withheld, unless such settlement, compromise or
consent includes an unconditional release of the Company, each of its officers
who signed the Registration Statement, each of its directors and each person
who controls the Company within the meaning of Section 15 of the Securities
Act, from all liability arising out of such claim, action, suit or proceeding.
(g) The parties to this Agreement hereby acknowledge that they are
sophisticated business persons who were represented by counsel during the
negotiations regarding the provisions of this Agreement, including, without
limitation, the provisions of Sections 4(a)(iii), 4(b) and 4(c) and this
Section 7 of this Agreement and that they are fully informed regarding all such
provisions. They further acknowledge that the provisions of Sections
4(a)(iii), 4(b) and 4(c) and this Section 7 of this Agreement fairly allocate
the risks in light of the ability of the parties to investigate the Company and
its business in order to assure that adequate disclosure is made in the
Registration Statement, each Preliminary Prospectus and the Prospectus as
required by the Securities Act, the Rules and Regulations, the Exchange Act and
the rules and regulations of the Commission under the Exchange Act. The
parties are advised that federal or state policy, as interpreted by the courts
in certain jurisdictions, may be
26
<PAGE> 27
contrary to certain provisions of Sections 4(a)(iii), 4(b) and 4(c) and this
Section 7 of this Agreement and, to the extent permitted by law, the parties
hereto hereby expressly waive and relinquish any right or ability to assert
such public policy as a defense to a claim under Sections 4(a)(iii), 4(b) or
4(c) or this Section 7 of this Agreement and further agree not to attempt to
assert any such defense.
8. Substitution of Underwriters. If for any reason one or more of
the Underwriters fails or refuses (otherwise than for a reason sufficient to
justify the termination of this Agreement under the provisions of Section 5 or
Section 9 of this Agreement) to purchase and pay for the number of Firm Shares
agreed to be purchased by such Underwriter or Underwriters, the Company shall
immediately give notice thereof to the Representative and the non- defaulting
Underwriters shall have the right within 24 hours after the receipt by the
Representative of such notice to purchase, or procure one or more other
Underwriters to purchase, in such proportions as may be agreed upon among the
Representative and such purchasing Underwriter or Underwriters and upon the
terms set forth herein, all or any part of the Firm Shares that such defaulting
Underwriter or Underwriters agreed to purchase. If the non-defaulting
Underwriters fail to make such arrangements with respect to all such Shares,
the number of Firm Shares that each non-defaulting Underwriter is otherwise
obligated to purchase under this Agreement shall be automatically increased on
a pro rata basis to absorb the remaining Shares that the defaulting Underwriter
or Underwriters agreed to purchase; provided, however, that the non-defaulting
Underwriters shall not be obligated to purchase the Shares that the defaulting
Underwriter or Underwriters agreed to purchase if the aggregate number of such
Shares exceeds 10% of the total number of Firm Shares that all Underwriters
agreed to purchase under this Agreement. If the total number of Firm Shares
that the defaulting Underwriter or Underwriters agreed to purchase shall not be
purchased or absorbed in accordance with the two preceding sentences, the
Company shall have the right, within 24 hours next succeeding the first 24-hour
period above referred to, to make arrangements with other underwriters or
purchasers satisfactory to you for purchase of such Shares on the terms set
forth in this Agreement. In any such case, either you or the Company shall
have the right to postpone the Closing Date determined as provided in Section
2(c) of this Agreement for not more than seven business days after the date
originally fixed as the Closing Date pursuant to said Section 2(c) in order
that any necessary changes in the Registration Statement, the Prospectus or any
other documents or arrangements may be made.
If neither the non-defaulting Underwriters nor the Company makes
arrangements within the time periods provided in the first three sentences of
the first paragraph of this Section 8 for the purchase of all the Firm Shares
that the defaulting Underwriter or Underwriters agreed to purchase hereunder,
this Agreement shall be terminated without further act or deed and without any
liability on the part of the Company to any non-defaulting Underwriter (except
as provided in Section 4 or Section 7 of this Agreement) and without any
liability on the part of any non-defaulting Underwriter to the Company (except
to the extent provided in Section 7 of this Agreement). Nothing in this
Section 8, and no action taken hereunder, shall relieve any defaulting
Underwriter from liability, if any, to the Company or any non-defaulting
Underwriter for damages occasioned by its default under this Agreement.
27
<PAGE> 28
The term "Underwriter" in this Agreement shall include any persons substituted
for an Underwriter under this Section 8.
9. Effective Date of Agreement and Termination.
(a) If the Registration Statement has not been declared effective
prior to the date of this Agreement, this Agreement shall become effective at
such time, after notification of the effectiveness of the Registration
Statement has been released by the Commission, as you and the Company shall
agree upon the public offering price and the purchase price of the Shares. If
the public offering price and the purchase price of the Shares shall not have
been determined prior to 5:00 p.m., New York time, on the fifth full business
day after the Registration Statement has become effective, this Agreement shall
thereupon terminate without liability on the part of the Company to the
Underwriters (except as provided in Section 4 or Section 7 of this Agreement)
or the Underwriters to the Company (except as set forth in Section 7 of this
Agreement). By giving notice before the time this Agreement becomes effective,
you, as Representative of the several Underwriters, may prevent this Agreement
from becoming effective without liability of any party to the other party,
except that the Company shall remain obligated to pay costs and expenses to the
extent provided in Section 4 and Section 7 of this Agreement. If the
Registration Statement has been declared effective prior to the date of this
Agreement, this Agreement shall become effective upon execution and delivery by
you and the Company.
(b) This Agreement may be terminated by you in your absolute
discretion by giving written notice to the Company at any time on or prior to
the Closing Date or, with respect to the purchase of the Option Shares, on or
prior to any later date on which the Option Shares are to be purchased, as the
case may be, if prior to such time any of the following has occurred or, in
your opinion, is likely to occur: (i) after the respective dates as of which
information is given in the Registration Statement and the Prospectus, any
material adverse change or development involving a prospective adverse change
in or affecting particularly the business, properties, condition (financial or
otherwise), results of operations or prospects of the Company, whether or not
arising in the ordinary course of business, occurs which would, in your sole
judgment, make the offering or the delivery of the Shares impracticable or
inadvisable; or (ii) if there shall have been the engagement in hostilities or
an escalation of major hostilities by the United States or the declaration of
war or a national emergency by the United States on or after the date hereof,
or any outbreak of hostilities or other national or international calamity or
crisis or change in economic or political conditions, if the effect of such
outbreak, calamity, crisis or change in economic or political conditions on the
financial markets of the United States would, in your sole judgment, make the
offering or delivery of the Shares impracticable or inadvisable; or (iii) if
there shall have been suspension of trading in securities generally or a
material adverse decline in value of securities generally on the New York Stock
Exchange, the American Stock Exchange, the Nasdaq National Market, or
limitations on prices (other than limitations on hours or numbers of days of
trading) for securities on either such exchange or system; or (iv) if there
shall have been the enactment, publication, decree or other promulgation of any
federal or state statute, regulation, rule or order of, or commencement of any
proceeding or investigation by, any court, legislative body,
28
<PAGE> 29
agency or other governmental authority which in your sole judgment materially
and adversely affects or may materially and adversely affect the business,
properties, condition (financial or other otherwise), results of operations or
prospects of the Company; or (v) if there shall have been the declaration of a
banking moratorium by federal, New York, California or Texas state authorities;
or (vi) if there shall have been the taking of any action by any federal, state
or local government or agency in respect of its monetary or fiscal affairs
which in your sole judgment has a material adverse effect on the securities
markets in the United States; or (vii) existing international monetary
conditions or oil and gas prices shall have undergone a material change which,
in your sole judgment, makes the offering or delivery of the Shares
impracticable or inadvisable. If this Agreement shall be terminated pursuant
to this Section 9, there shall be no liability of the Company to the
Underwriters (except pursuant to Section 4 and Section 7 of this Agreement) and
no liability of the Underwriters to the Company (except to the extent provided
in Section 7 of this Agreement).
10. Notices. Except as otherwise provided herein, all
communications hereunder shall be in writing and, if to the Underwriters, shall
be mailed, telecopied or telegraphed or delivered to Van Kasper & Company, 600
California Street, Suite 1700, San Francisco, California 91111, Attention:
Syndicate Manager (telecopier: (415) 397-2744); and if to the Company, shall
be mailed, telecopied or delivered to it at its office at 110 North Marienfeld
Street, One Marienfeld Place, Suite 465, Midland, Texas 79701 (telecopier:
(915) 684-3905) Attention: President. All notices given by telecopy or
telegraph shall be promptly confirmed by letter.
11. Persons Entitled to the Benefit of this Agreement. This
Agreement shall inure to the benefit of the Company and the several
Underwriters and, with respect to the provisions of Section 4 and Section 7 of
this Agreement, the several parties (in addition to the Company and the several
Underwriters) indemnified under the provisions of Section 4 and Section 7, and
their respective personal representatives, successors and assigns. Nothing in
this Agreement is intended or shall be construed to give to any other person,
firm or corporation any legal or equitable remedy or claim under or in respect
of this Agreement or any provision contained herein. The term "successors and
assigns" as herein used shall not include any purchaser, as such purchaser, of
any of the Shares from the several Underwriters.
12. General. Notwithstanding any provision of this Agreement to the
contrary, the reimbursement, indemnification and contribution agreements
contained in this Agreement and the representations, warranties, covenants and
agreements in this Agreement shall remain in full force and effect regardless
of (a) any termination of this Agreement, (b) any investigation made by or on
behalf of any Underwriter or controlling person thereof or by or on behalf of
the Company or their respective directors or officers and (c) delivery and
payment for the Shares under this Agreement; provided, however, that if this
Agreement is terminated prior to the Closing Date, the provisions of Sections
3(f), 3(g), 3(h), 3(i), 3(j) and 3(k) of this Agreement shall be of no further
force or effect.
29
<PAGE> 30
This Agreement may be executed in two or more counterparts, each of
which shall constitute an original, but all of which together shall constitute
one and the same instrument, and may be delivered by facsimile transmission.
THIS AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH
THE INTERNAL LAWS, AND NOT THE LAWS PERTAINING TO CHOICE OR CONFLICT OF LAWS,
OF THE STATE OF CALIFORNIA.
13. Authority of the Representative. In connection with this
Agreement, the Representative will act for and on behalf of the several
Underwriters, and any action taken under this Agreement by the Representative,
as representative of the several Underwriters, will be binding on all the
Underwriters.
30
<PAGE> 31
If the foregoing correctly sets forth your understanding, please so
indicate by signing in the space provided below for that purpose, whereupon
this letter shall constitute a binding agreement among the Company and the
several Underwriters.
Very truly yours,
PARALLEL PETROLEUM CORPORATION
By:
---------------------------
Its:
--------------------------
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written.
On their behalf and on behalf of each of the
several Underwriters named in Schedule I
hereto
VAN KASPER & COMPANY
By:
--------------------------
Authorized Signatory
31
<PAGE> 32
SCHEDULE I
UNDERWRITERS
Number of
Firm Shares to
Underwriters be Purchased
- ------------ --------------
Van Kasper & Company . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,500,000
=========
I-1
<PAGE> 33
ANNEX A
MATTERS TO BE COVERED IN THE OPINION OF COUNSEL FOR THE COMPANY
(i) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws
of Delaware;
(ii) The Company has the corporate power to own, lease and
operate its properties and to conduct its business as
described in the Prospectus;
(iii) The Company is duly qualified to do business as a foreign
corporation and is in good standing in all jurisdictions
in the United States, if any, in which the ownership or
leasing of its properties or the conduct of its business
requires such qualification, except where the failure so
to qualify would not have a material adverse effect on the
business, properties, condition (financial or otherwise),
results of operations or prospects of the Company;
(iv) The authorized, issued and outstanding capital stock of
the Company is as set forth in the Prospectus under the
caption "Capitalization" as of the dates stated therein;
the issued and outstanding shares of capital stock of the
Company have been duly and validly authorized and issued,
are fully paid and nonassessable and, to the best
knowledge of such counsel, have not been issued in
violation of any preemptive right or other rights to
subscribe for or purchase securities or in violation of
any applicable federal or state securities laws;
(v) The Shares will, upon issuance and delivery against
payment therefor in accordance with the terms of the
Agreement, be duly authorized, validly issued, fully paid
and nonassessable and, to the best knowledge of such
counsel, will not have been issued in violation of any
preemptive right or other rights to subscribe for or
purchase securities;
(vi) The Company has corporate power and authority to enter
into the Agreement and to issue, sell and deliver the
Shares to the Underwriters;
(vii) The Agreement has been duly authorized by all necessary
corporate action on the part of the Company and has been
duly executed and delivered by the Company and, assuming
its due authorization, execution and delivery by you, is
the valid and binding agreement of the Company,
enforceable against the Company in accordance with its
terms, except insofar as the indemnification and
contribution provisions of the Agreement may be limited by
public policy concerns and except as enforceability may be
limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights
generally or by general equitable principles;
A-1
<PAGE> 34
(viii) The Registration Statement has become effective under the
Securities Act and, to the best knowledge of such counsel,
no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings
for that purpose have been instituted or are pending or
threatened under the Securities Act;
(ix) The Registration Statement and the Prospectus, and each
amendment or supplement thereto (other than the financial
statements, financial and engineering data and supporting
schedules included therein, as to which such counsel need
express no opinion), as of the effective date of the
Registration Statement, complied as to form in all
material respects with the requirements of the Securities
Act and the applicable Rules and Regulations;
(x) The terms and provisions of the capital stock of the
Company conform in all material respects to the
description thereof contained in the Registration
Statement and Prospectus, and the information in the
Prospectus under the caption "Description of Capital
Stock" to the extent it constitutes matters of law or
legal conclusions, has been reviewed by such counsel and
is correct and the forms of certificates evidencing the
Common Stock comply with Delaware law;
(xi) The description in the Registration Statement and the
Prospectus of the charter and bylaws of the Company and of
statutes and contracts are accurate in all material
respects and fairly present in all material respects the
information required to be presented by the Securities Act
and the Rules and Regulations;
(xii) To the best knowledge of such counsel, there are no
agreements, contracts, licenses, leases or documents of a
character required to be described or referred to in the
Registration Statement or Prospectus or to be filed as an
exhibit to the Registration Statement that are not
described or referred to therein and filed as required;
(xiii) The performance of the Agreement and the Warrant Agreement
and the consummation of the transactions contemplated by
each of them will not violate or result in the breach of
or a default (including without limitation with the giving
of notice, the passage of time or otherwise) of any of the
terms and provisions of the Company's Certificate of
Incorporation or Bylaws or any contract, indenture,
mortgage, deed of trust, loan agreement, lease, license,
joint venture or, without limitation, other agreement or
instrument known to such counsel to which the Company is a
party or by which any of its properties are bound or
(other than performance of the Company's indemnification
and contribution obligations under the Agreement,
concerning which no opinion need be expressed), any law,
ordinance, rule or regulation or, to the best knowledge of
such counsel, any
A-2
<PAGE> 35
order, writ, injunction, judgment or decree of any
governmental agency or body or of any court having
jurisdiction over the Company or over any of its
properties; provided, however, that no opinion need be
rendered concerning state securities or Blue Sky laws;
(xiv) No authorization, approval or consent of any governmental
authority or agency is necessary in connection with the
consummation of the transactions contemplated by the
Agreement or the Warrant Agreement, except such as have
been obtained under the Securities Act, are necessary
under the Securities Act in connection with the
registration of the Warrant Shares or as may be required
under state securities or Blue Sky laws in connection with
the purchase and the distribution of the Shares by the
Underwriters or the registration and sale of the Warrant
Shares;
(xv) To the best knowledge of such counsel, there are no legal
or governmental proceedings pending or threatened against
the Company of a character which are required to be
disclosed in the Registration Statement or the Prospectus
by the Securities Act or the applicable Rules and
Regulations, other than those described therein;
(xvi) To the best knowledge of such counsel, the Company is not
presently in breach of, or in default under, any bond,
debenture, note or other evidence of indebtedness or any
contract, indenture, mortgage, deed of trust, loan
agreement, lease, license or, without limitation, other
agreement or instrument to which the Company is a party or
by which any of its properties are bound which is material
to the business, properties, condition (financial or
otherwise), prospects or results of operations or
prospects of the Company;
(xvii) To the best knowledge of such counsel, except as set forth
in the Registration Statement and Prospectus, no holders
of Common Stock or, except as is provided in the Warrant
Agreement, other securities of the Company have
unexercised registration rights with respect to any
securities of the Company;
(xviii) The Warrant Agreement has been duly authorized by all
necessary corporate action on the part of the Company and
has been duly executed and delivered by the Company and,
assuming due authorization, execution and delivery by Van
Kasper & Company, is the valid and binding agreement of
the Company, enforceable against the Company in accordance
with its terms, except insofar as the indemnification and
contribution provisions of the Agreement may be limited by
public policy concerns and except as enforceability may be
limited by bankruptcy, insolvency, reorganization,
moratorium or similar laws affecting creditors' rights
generally or by general equitable principles;
A-3
<PAGE> 36
(xix) The Warrants have been duly and validly authorized and
constitute valid and binding obligations of the Company
enforceable in accordance with their terms (except as
enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium or similar laws affecting
creditors' rights generally or by general equitable
principles); the Warrant Shares have been duly and validly
authorized for issuance upon exercise of the Warrants
against payment therefor as provided in the Warrant
Agreement (including, as provided in the Warrant
Agreement, by surrender of Warrants) and, when so issued,
will be validly issued, fully paid and nonassessable; and
to the best knowledge of such counsel no stockholder has
any preemptive rights or other rights to subscribe for or
purchase with respect to the Warrants or the Warrant
Shares;
In addition, such counsel shall state that such counsel has
participated in conferences with officers and other representatives of the
Company, the independent public accountants of the Company, the Representative
and counsel to the Underwriters, at which conferences the contents of the
Registration Statement and the Prospectus and related matters were discussed
and, although they have not independently verified the accuracy, completeness
or fairness of the statements contained in the Registration Statement or the
Prospectus, nothing has come to the attention of such counsel that caused them
to believe that, at the time the Registration Statement became effective, the
Registration Statement (except as to financial statements, financial data and
supporting schedules contained therein, as to which such counsel need express
no opinion) contained any untrue statement of a material fact or omitted to
state a material fact required to be stated therein or necessary to make the
statements therein not misleading, or at the Closing Date or any later date on
which the Option Shares are to be purchased, as the case may be, the Prospectus
contained any untrue statement of a material fact or omitted to state a
material fact required to be stated therein or necessary to make the statements
therein, in light of the circumstances under which they were made, not
misleading.
Counsel rendering the foregoing opinion may rely as to questions of
law not involving the laws of the United States or the State of Texas on
opinions of local counsel (provided that such counsel states that they believe
they and the Underwriters are justified in relying thereon) and, as to
questions of fact, upon representations or certificates of officers of the
Company and government officials, in which case their opinion is explicitly to
state that they are so relying thereon and that they have no knowledge of any
material misstatement or inaccuracy in such opinions, representations or
certificate. Copies of any opinion, representation or certificate so relied
upon shall be delivered to you, as Representative of the Underwriters, and to
Underwriters' counsel. Insofar as the Underwriting Agreement is governed by
California law, counsel rendering the foregoing opinion may assume that
California and Texas law are the same.
A-4
<PAGE> 1
EXHIBIT 4.3
WARRANT AGREEMENT
Van Kasper & Company
600 California Street, Suite 1700
San Francisco, California 94111
Ladies and Gentlemen:
Parallel Petroleum Corporation, a Delaware corporation (the "Company"),
hereby agrees, on the terms and subject to the conditions of this Warrant
Agreement (the "Agreement"), to sell and deliver to Van Kasper & Company
("VKCO"), individually and not as Representative of the underwriters referred
to in the "Underwriting Agreement" (defined below), warrants to purchase a
number of shares of the "Common Stock" (defined below) equal to 5% (five
percent) of the aggregate number of shares (including "Option Shares" (defined
in the Underwriting Agreement)) of the Common Stock sold to the underwriters
pursuant to the Underwriting Agreement. VKCO agrees, on the terms and subject
to the conditions of this Agreement, to purchase such warrants from the
Company.
Each of the warrants will be exercisable by the "Holder" thereof
(defined below), as to all or any lesser number of shares of the Common Stock
covered by the Holder's warrants, at the "Exercise Price" per share (defined
below), at any time and from time to time beginning at 9:00 a.m., San Francisco
time, on the day that begins one year after the Closing Time (defined below)
and ending at 5:00 p.m., San Francisco time, on the day that is five years
after the Closing Time. The warrants shall be evidenced by instruments in the
form of Exhibit A hereto (those instruments and all instruments issued after
the date hereof in replacement thereof are referred to below as the
"Warrants").
The purchase price of the Warrants shall be $0.01 (one cent) for each
share of Common Stock purchasable on exercise of the Warrants. The delivery of
the Warrants and payment of the purchase price of the Warrants are to be made
on the "Closing Date" (defined in the Underwriting Agreement) or, to the extent
applicable, on the date the Option Shares are purchased pursuant to the
Underwriting Agreement, at the offices of VKCO at 600 California Street, Suite
1700, San Francisco, California, or such other time and place as may be agreed
upon between the Company and VKCO (the date(s) of such purchase of the Warrants
is referred to in this Agreement as the "Closing Time").
1. Definitions. As used in this Agreement, the following terms,
unless the context otherwise clearly requires,
<PAGE> 2
shall have for all purposes the following respective meanings, and capitalized
terms used herein without definition shall have the meanings ascribed to them
in the Underwriting Agreement:
(a) The term "Common Stock" refers to the Common Stock, par value $.01
per share, of the Company, and all other shares of any class or classes
(however designated) of the common equity of the Company, now or hereafter
authorized, the holders of which by operation of law shall have the right,
without limitation as to amount, either to all or to a part of the balance of
current dividends and liquidating dividends and distributions after the payment
of dividends and distributions on any shares entitled to preference and the
holders of which ordinarily, in the absence of contingency, shall be entitled
to vote for the election of the directors of the Company (even though the right
so to vote has been suspended by the occurrence of such a contingency), other
than those directors of the Company (constituting a portion of the Board of
Directors) who, pursuant to the Certificate of Incorporation or other charter
documents of the Company, are then to be elected by a designated class or
series of the capital stock of the Company.
(b) "Common Stock Outstanding" shall mean the aggregate of all Common
Stock outstanding plus all Common Stock issuable upon exercise of all
outstanding Options and conversion of all outstanding Convertible Securities.
(c) "Convertible Securities" shall mean any indebtedness, shares of
stock or other rights granted by the Company (other than Options) convertible
into or exchangeable for Common Stock.
(d) The term "Exercise Price" refers to the per share purchase price of
the Warrant Shares subject to this Warrant Agreement. The Exercise Price shall
initially be $ per share (120% of the initial per share price to the public
of the shares of Common Stock sold pursuant to the Underwriting Agreement),
subject to adjustment as provided in Section 6 below.
(e) The term "Holder", when used with respect to the Warrants or the
Warrant Shares, means the person registered on the books and records of the
Company as being the holder of record of the Warrants or the Warrant Shares, as
the case may be, and, so long as VKCO holds of record any Warrants or Warrant
Shares, it shall be included in the definition of "Holder," and any action to
be taken or approval to be given by the Holders shall, unless otherwise
provided in this Agreement, require the action by, or approval of, the Holder
or Holders of at least that number of Warrants and Warrant Shares which in the
aggregate shall constitute a majority of all Warrant Shares issued or issuable
under this Agreement.
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<PAGE> 3
(f) "Options" shall mean any warrants, options or, without limitation,
other rights granted by the Company to purchase Common Stock or Convertible
Securities.
(g) The term "Other Securities" refers to any stock (other than Common
Stock) and other securities of the Company or any other person (corporate or
otherwise) which the Holders of the Warrants at any time shall be entitled to
receive, or shall have received, upon the exercise of the Warrants, in lieu of
or in addition to Common Stock, or which at any time shall be issuable or shall
have been issued in exchange for or in replacement of Common Stock or Other
Securities, whether pursuant to Section 6 below or otherwise.
(h) The term "Prospectus" refers to the prospectus which is part of the
Company's Registration Statement on Form S-2 in the form first filed with the
Securities and Exchange Commission (the "Commission") pursuant to Rule 424(b)
of the applicable rules and regulations (the "Rules and Regulations") of the
Commission under the Securities Act of 1933, as amended (the "Act").
(i) The term "Registration Statement" refers to the Company's
Registration Statement on Form S-2 (No. 333-______), as amended, when it first
became effective under the Act.
(j) "Representative" means VKCO.
(k) The term "Warrant Shares" refers to the shares of Common Stock (or
Other Securities) issued or issuable upon the exercise, in whole or in part, of
any of the Warrants.
2.1 Representations and Warranties. The Company represents and
warrants to VKCO as follows:
(a) Corporate Action. The Company has all requisite power and
authority, and has taken all necessary action, to enter into and perform all of
its obligations under this Agreement, to issue and deliver the Warrants and to
authorize and reserve for issuance, and upon payment from time to time of the
Exercise Price in accordance with the terms of this Agreement, to issue and
deliver the Warrant Shares; and this Agreement has been duly authorized,
executed and delivered by the Company and constitutes the legal, valid and
binding agreement of the Company, enforceable against the Company in accordance
with its terms, except (i) as such enforceability may be subject to or limited
by bankruptcy, insolvency, reorganization, moratorium and other similar laws or
equitable principles now or hereafter in effect relating to or affecting
creditors' rights generally (collectively, "Equitable Defenses") and (ii)
insofar as the indemnification and contribution provisions hereof may be
limited under federal and state securities laws and the public policies
underlying such laws.
3
<PAGE> 4
(b) Outstanding Common Stock. The outstanding shares of Common Stock
have been duly and validly authorized and issued and are fully paid and
non-assessable and free of preemptive rights. The Warrant Shares (i) are duly
authorized by the Company's Certificate of Incorporation, (ii) have been duly
and validly authorized to be issued and adequately reserved by the Board of
Directors of the Company, (iii) will, when issued and delivered to the Holders
pursuant to this Agreement, be duly and validly issued, fully paid and
non-assessable and free and clear of all liens, charges, encumbrances or rights
of others except for those which may be created by the Holder, and (iv) and
have been approved for inclusion, when issued, in the Nasdaq National Market
System ("NASDAQ"). The holders of outstanding shares of capital stock of the
Company are not entitled to any preemptive or similar rights to subscribe for
or purchase Warrant Shares or other shares of capital stock of the Company and,
except as otherwise set forth or incorporated by reference in the Prospectus,
there are no outstanding rights, warrants or options to acquire, or instruments
convertible into or exchangeable for, or agreements or understandings with
respect to the sale or issuance of, any shares of capital stock of the Company.
(c) No Violation. None of the execution or delivery of this Agreement,
the consummation of the transactions contemplated by this Agreement or
compliance with the terms and provisions of this Agreement will (i) conflict
with or constitute a breach of, or a default (or default with notice, the
passage of time or otherwise) under any bond, debenture, note or other evidence
of indebtedness or any indenture, mortgage, deed of trust or any other
agreement or instrument to which the Company or any of its subsidiaries is a
party or by which any of them is bound or to which any of their respective
property or assets is subject, (ii) result in the imposition of a lien on any
properties of the Company or any of its subsidiaries or an acceleration of
indebtedness of the Company or any of its subsidiaries or (iii) result in a
violation of any law, administrative regulation or order of any court or
governmental agency or authority applicable to the Company or any of its
subsidiaries or to any of their respective properties or assets. No consent,
approval, authorization or other order of any regulatory body, administrative
agency or other governmental body is required for the valid issuance and sale
of the Warrant Shares to the Representatives or the other transactions
contemplated by this Agreement, except for registration under the federal
securities laws and for permits and similar authorizations required under state
blue sky laws or similar laws.
(d) Underwriting Agreement. All representations and warranties made by
the Company in Section 1 of the Underwriting Agreement, dated December __,
1996, by and among the Company and VKCO, as Representative of the several
underwriters named therein (the "Underwriting Agreement"), are and will be at
and as of the Closing Time true and correct and are hereby incorporated by
4
<PAGE> 5
reference into this Agreement as if such representations and warranties were
set forth in full herein.
2.2 Representations and Warranties of VKCO. VKCO represents and
warrants to the Company that it has all requisite corporate power and corporate
authority, and has taken all necessary corporate action, to enter into and
perform all of its obligations under this Agreement and that this Agreement has
been duly authorized, executed and delivered by it and constitutes its legal,
valid and binding agreement, enforceable against it in accordance with its
terms, except (i) as such enforceability may be subject to or limited by
Equitable Defenses and (ii) insofar as the indemnification and contribution
provisions hereof may be limited under federal and state securities laws and
the public policies underlying such laws.
3. Compliance with the Act.
(a) Transferability of Warrants. VKCO agrees that the Warrants may not
be transferred, sold, assigned or hypothecated except: (i) to its successors in
a merger or consolidation or other business combination; (ii) to purchasers of
all or substantially all of its assets; (iii) to any officers or partners of
VKCO; (iv) by operation of law; or (v) as permitted below in this Section 3.
VKCO further agrees that the Company shall have no obligation to effect any
transfer of the Warrants during the time period referred to above, unless the
transferee, purchaser, assignee or pledgee, as the case may be, has executed an
agreement obligating the transferee to comply with all terms and conditions of
this Warrant Agreement applicable to the transferor.
(b) Transferability of Warrant Shares.
(i) Except as otherwise provided in this Section 3(b), each
certificate for Warrant Shares initially issued upon the exercise of any
Warrants shall be stamped or otherwise imprinted with a legend in substantially
the following form:
"The Shares represented by this certificate are subject to the
conditions specified in a Warrant Agreement, dated December __,
1996, between Parallel Petroleum Corporation and Van Kasper &
Company. Except to the extent permitted by the Warrant Agreement,
no transfer, sale, pledge, hypothecation, encumbrance or other
disposition of the shares represented by this certificate shall be
valid or effective until registered under the Securities Act of
1933, as amended (or, if applicable, a successor law thereto) or
the Company has been advised by an opinion of counsel that such
shares will be transferred in a transaction exempt from such
5
<PAGE> 6
registration and until any applicable conditions contained in the
Warrant Agreement have been fulfilled. A copy of the Warrant
Agreement is on file at the offices of Parallel Petroleum
Corporation. The holder of this certificate, by acceptance of this
certificate, agrees to be bound by the provisions of the Warrant
Agreement."
(ii) Prior to any transfer, sale, pledge, assignment,
hypothecation or other disposition (each, a "Transfer") of any Warrant Shares,
the Holder of such Warrant Shares shall (a) give three business days prior
written notice (a "Transfer Notice") to the Company of such Holder's intention
to effect such Transfer, generally describing the manner and circumstances of
the proposed Transfer and (b) obtain from counsel to such Holder an opinion
reasonably satisfactory to the Company that the proposed Transfer of such
Warrant Shares may be effected without registration under the Act. Each
certificate evidencing such Warrant Shares issued upon such Transfer shall bear
the restrictive legend set forth in Section 3 (b)(i), unless in the opinion of
counsel to such Holder reasonably satisfactory to the Company that such legend
is not required in order to ensure compliance with the Act.
(iii) Notwithstanding the foregoing provisions of this Section
3(b), the restrictions imposed by subsections (i) and (ii) of this Section upon
the transferability of the Warrant Shares and the legend requirements of Section
3 (b)(i) shall terminate as to any particular Warrant Shares (A) when and so
long as the transfer, sale, pledge, hypothecation, encumbrance or other
disposition thereof, shall have been registered under the Act or (B) when the
Holder or Holders of any Warrants or Warrant Shares has delivered to the Company
the written opinion of counsel to such Holder or Holders, which shall be
reasonably satisfactory to the Company, stating that such legend is not required
in order to ensure compliance with the Act. Whenever the restrictions imposed
by this Section shall terminate as to any Warrant Shares, as provided above, the
Holder thereof shall be entitled to receive from the Company, at the Company's
expense, a new certificate representing such Warrant Shares not bearing the
restrictive legend set forth in Section 3(b)(i).
(c) Demand Registration. At any time after the day that begins one
year after the Closing Time and on or before the end of the day that is six
years after the Closing Time, upon written, or telegraphic or telephonic notice
followed as soon as practicable by written confirmation thereof, from any
Holder or Holders (the "Requesting Holders") of that number of Warrants and/or
Warrant Shares which in the aggregate shall constitute a majority of all
Warrant Shares issued or issuable under this Agreement (excluding Warrant
Shares which have been previously sold, transferred or otherwise disposed of in
a registered public offering, pursuant to Rule 144 under the Act, as such rule
may be amended from time to time, or pursuant to Regulation S under the
6
<PAGE> 7
Act, as such Regulation may be amended from time to time, or which in the
opinion of both counsel to the Company and counsel to the Requesting Holders
may otherwise then be publicly sold without registration under the Act), that
such Holder or Holders request the registration under the Act of any of the
Warrant Shares, the Company shall (i) immediately give notice to the other
Holders and afford them the opportunity to participate in the registration
statement and (ii) as promptly as possible after the receipt of such notice
from the Requesting Holders, but in any event within 45 days of the receipt of
such notice, and solely at its cost and expense, file a registration statement
with respect to the offering and sale or other disposition of the Warrant
Shares with respect to which it shall have received such notice. Such
registration statement may, if the Company satisfies the applicable
requirements, be made on Form S-3. If a registration requested pursuant to
this Section 3(c) is an underwritten registration, the Company and other
holders of securities of the Company may include securities in such
registration without the written consent of the Holders of the Warrant Shares
for which registration has been requested pursuant to this Section 3(c) if, but
only if, the managing underwriters of such registration advise the
participating Holders of Warrant Shares in writing that in their opinion such
inclusion will not materially affect the successful marketing of the Warrant
Shares. The Holders shall not be deemed to have effected a demand registration
pursuant to this Section 3(c) unless and until the registration statement is
declared effective. The Company shall be obligated to file only one
registration statement pursuant to this Section 3(c) which becomes effective,
whether or not the registration statement at the time it becomes effective
covers all or a portion of the Warrant Shares.
(d) Piggyback Registration. If, at any time during the period
commencing on the day that begins one year from the Closing Time and ending at
the end of the day that is six years after the Closing Time, the Company shall
propose to register any shares of Common stock or Other Securities (but
excluding any shares or securities being registered pursuant to Form S-8 or
Form S-4 or any successor form to either of them), the Company shall (i) give
each Holder written notice, or telecopy and telephonic notice followed as soon
as practicable by written confirmation thereof, of such proposed registration
at least 20 business days prior to the filing of such registration statement
and (ii) upon written notice, or telegraphic or telephonic notice followed as
soon as practicable by written confirmation thereof, given to the Company by
any Holder within 15 days after the giving of such written confirmation or
written notice by the Company, the Company shall include or cause to be
included in any such registration statement all or such portion of the Warrant
Shares as such Holder may request; provided, however, that the Company may at
any time withdraw or cease proceeding with any such registration if it shall at
the same time withdraw or cease proceeding with the registration of the Common
Stock or Other Securities originally proposed to be
7
<PAGE> 8
registered; and provided, further, that in connection with any registered
public offering involving an underwriting, the managing underwriter may (if in
its reasonable opinion marketing factors so require) limit the number of
securities (including any Warrants or Warrant Shares) included in such offering
(other than securities of the Company). In the event of any such limitation,
the total number of Warrant Shares to be offered for the account of the Holders
participating in the registration shall be reduced pro rata in proportion to
the respective number of shares requested to be included therein to the extent
necessary to reduce the total number of shares proposed to be registered to the
number of shares recommended by the managing underwriter; provided, however,
that if the amount or kind of securities to be offered for the accounts of
Holders shall be reduced in accordance with this sentence, the Company shall
not be permitted to include securities of any persons (other than the Company)
unless the Holders are permitted to participate on a pro rata basis with other
selling securityholders. Notwithstanding the foregoing, the Company shall not
be obligated to include Warrant Shares in more than two registration statements
pursuant to this Agreement.
(e) Company's Obligations in Registration. If any Holder timely elects
to participate in an offering by including Warrant Shares in a registration
statement pursuant to Section 3(c) or (d) above, the Company shall use its best
efforts to effect such registration to permit the sale of Warrant Shares in
accordance with the intended method or methods of disposition thereof and,
without limitation, pursuant thereto the Company shall:
(i) notify the Holders as to the filing of the registration
statement and of all amendments or supplements thereto filed prior to the
effective date thereof;
(ii) use its best efforts to cause any registration statement
filed under the Act pursuant to Section 3(c) or (d) above to become effective at
the earliest possible date after the filing thereof and to comply with all
applicable rules and regulations of the Commission in connection therewith;
provided, that before filing a registration statement or prospectus or any
amendments or supplements thereto, including documents which would be
incorporated or deemed to be incorporated by reference in the registration
statement after the initial filing of any registration statement, the Company
will furnish to the Holders, their respective counsel and the underwriters, if
any, to be engaged in connection with the offering and sale by the Company (for
purposes of this Section 3 (e) and Section 3(f), the "Underwriters"), copies of
all such documents proposed to be filed, which documents will be subject to the
review of the Holders, their respective counsel and the Underwriters, and the
Company will not file any registration statement, or amendment thereto, or any
prospectus or any supplement thereto relating in whole or in part to the
Holders'
8
<PAGE> 9
Warrant Shares (including such documents incorporated or deemed to be
incorporated by reference) to which the Holders or the Underwriters, if any,
shall reasonably object;
(iii) notify the Holders immediately, and confirm the notice in
writing, (1) when the registration statement or any post-effective amendment
thereto becomes effective, (2) when a prospectus or prospectus supplement or
post-effective amendment has been filed, (3) of any request by the Commission
for amendments, supplements or additional information related to a registration
statement or prospectus or otherwise, (4) of the issuance by the Commission of
any stop order or of the initiation, or the threatening, of any proceedings for
that purpose known to the Company, (5) of the receipt by the Company of any
notification with respect to the suspension of qualification of the Warrant
Shares for sale in any jurisdiction or of the initiation, or the threatening, of
any proceedings for that purpose known to the Company, (6) of the receipt of any
comments from the Commission or any state regulatory authority, (7) of the
happening of any event which requires the making of any changes in a
registration statement or the related prospectus or any prospectus supplement so
that such documents will not contain any untrue statement of a material fact or
omit to state any material fact required to be stated therein or necessary to
make the statements therein not misleading and (8) of the determination of the
Company that a post-effective amendment to a registration statement would be
necessary or appropriate;
(iv) make every reasonable effort to obtain the withdrawal of
any order suspending the effectiveness of a registration statement, or the
lifting of any suspension of the qualification (or exemption from qualification)
of any of the Warrant Shares for sale in any jurisdiction, at the earliest
possible moment;
(v) if reasonably requested by the Underwriters, if any, or the
Holders, immediately incorporate in a prospectus supplement or post-effective
amendment such information as the Holders and the Underwriters, if any, agree
should be included therein relating to the sale and distribution of the Warrant
Shares, including, without limitation, information with respect to the number of
Warrant Shares being sold to such Underwriters, the purchase price being paid
therefor by such Underwriters and with respect to any other terms of the
underwritten offering of the Warrant Shares to be sold in such offering; make
all required filings of such prospectus supplement or post-effective amendment
as soon as notified of the matters to be incorporated in such prospectus
supplement or post-effective amendment; and supplement or amend any registration
statement if reasonably requested by the Holders or any Underwriter of Warrant
Shares covered by such Warrant Shares;
(vi) furnish to each of the Holders whose Warrant Shares have
been included therein, their respective counsel and
9
<PAGE> 10
each Underwriter, if any, without charge, at least one manually executed copy
of any registration statement (including all amendments thereto) and any
post-effective amendment thereto, including financial statements and schedules,
all documents incorporated therein by reference and all exhibits (including
those incorporated by reference);
(vii) during the time when a prospectus is required to be
delivered under the Act in connection with the distribution of the Warrant
Shares, comply so far as it is able with all requirements imposed upon it by the
Act, as now and hereafter amended, and by the Rules and Regulations promulgated
by the Commission thereunder, as from time to time in force, so far as necessary
to permit the continuance of sales of or dealings in the Warrant Shares. If at
any time when a prospectus relating to the Warrant Shares is required to be
delivered under the Act any event shall have occurred as a result of which, in
the opinion of counsel for the Company or counsel for the Holders, the
prospectus relating to the Warrant Shares as then amended or supplemented
includes an untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary to make the statements therein
not misleading, or if it is necessary at any time to amend such prospectus to
comply with the Act, the Company will use its best efforts promptly to prepare
and file with the Commission an appropriate amendment or supplement in form and
substance reasonably satisfactory to the Holders;
(viii) make generally available to its security holders as soon
as practicable, but not later than 15 months following the effective date (and
each other deemed effective date) of such registration statement, an earnings
statement or statements of the Company and any subsidiaries it may then have
covering a period of at least 12 months beginning after the effective date of
the registration statement (but in no event commencing later than 90 days after
such date), which shall satisfy the provisions of Section 11(a) of the Act and
Rule 158 promulgated thereunder;
(ix) prepare and promptly file with the Commission such
amendments and post-effective amendments to each registration statement as may
be necessary to keep such registration statement continuously effective for a
period of nine months; cause the related prospectus to be supplemented by any
required prospectus supplement, and as so supplemented to be timely filed
pursuant to Rule 424 under the Act; and comply with the provisions of the Act
with respect to the disposition of all Warrant Shares covered by such
registration statement during the applicable period in accordance with the
intended methods of disposition as set forth in such registration statement or
supplement to such prospectus; and in these regards the Company shall not be
deemed to have used its best efforts to keep a registration statement effective
during the applicable period if it unreasonably takes any action that would
result in any Holder
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<PAGE> 11
whose Warrant Shares have been included therein not being able to sell such
Warrant Shares at any time during such period or for more than 30 days, whether
or not consecutive, in such period;
(x) deliver to each of the Holders, their respective counsel
and the Underwriters, if any, without charge, as many copies of the prospectus
or prospectuses (including each preliminary prospectus) and any amendment or
supplement thereto as such persons may reasonably request; and the Company
consents to the use of any such prospectus or any amendment or supplement
thereto by the Holders and each of the Underwriters, if any, in connection with
the offering and sale of the Warrant Shares covered by such prospectus or any
amendment or supplement thereto;
(xi) prior to any public offering of Warrant Shares, register
or qualify or cooperate with the Holders, the Underwriters, if any,
and their respective counsel in connection with the registration or
qualification (or exemption from such registration or qualification) of such
Warrant Shares for offer and sale under the securities or blue sky laws of such
jurisdictions as the Holders or any Underwriter reasonably requests in writing;
keep each such registration or qualification (or exemption therefrom) effective
during the period the applicable registration statement is required to be kept
effective and do any and all other acts or things necessary or advisable to
enable the disposition in such jurisdictions of the Warrant Shares covered by
the applicable registration statement; provided, that the Company will not be
required to qualify generally to do business in any jurisdiction where it is not
then so qualified or to take any action which would subject it to general
service of process in any such jurisdiction where it is not then so subject;
(xii) cooperate with the Holders and the Underwriters, if any,
to facilitate the timely preparation and delivery of certificates representing
Warrant Shares to be sold, which certificates shall not bear any restrictive
legends; and enable such Warrant Shares to be in such denominations and
registered in such names as the Underwriters may request at least two business
days prior to any sale of Warrant Shares to the Underwriters;
(xiii) use its best efforts to cause the Warrant Shares covered
by the applicable registration statement to be registered with or approved by
such other governmental agencies or authorities as may be necessary to enable
the Holders and the Underwriters, if any, to consummate the disposition of such
Warrant Shares;
(xiv) enter into such agreements in form and substance
reasonably acceptable to the Company and its counsel (including an underwriting
agreement) and take all such other actions in connection therewith as may be
necessary to expedite
11
<PAGE> 12
or facilitate the disposition of such Warrant Shares and, in such connection,
whether or not an underwriting agreement is entered into and whether or not the
registration is an underwritten registration: (1) make such representations
and warranties to the Holders with respect to the business of the Company and
any subsidiaries it may then have, the registration statement, the prospectus
(and, if applicable, prospectus supplement) and documents, if any, incorporated
or deemed to be incorporated by reference in the registration statement (and,
if applicable, prospectus supplement), in each case in such form, substance and
scope as are reasonably requested by the Holders and confirm the same if and
when requested; (2) obtain opinions of counsel to the Company and updates
thereof addressed to the Holders with respect to the matters referred to in the
preceding clause (1) in such form, scope and substance as are reasonably
requested by the Holders; (3) in the case of an underwritten offering, enter
into an underwriting agreement in form, scope and substance as is customary in
underwritten offerings and obtain (a) opinions of counsel to the Company and
updates thereof (which counsel and opinions (in form, scope and substance)
shall be reasonably satisfactory to the Underwriters) addressed to the
Underwriters covering the matters customarily covered in opinions requested by
underwriters in underwritten offerings and such other matters as may be
reasonably requested by the Underwriters and (b) obtain opinions of counsel to
the Company and updates thereof (which counsel and opinions (in form, scope and
substance) shall be reasonably satisfactory to the Holders) addressed to the
Holders covering matters reasonably requested by the Holders (whether or not
such matters are different from, or in addition to, the matters described in
subclause (a) of this subsection (xiv)(3); (4) obtain "comfort" letters and
updates thereof from the independent certified public accountants of the
Company (and, if necessary, any other independent certified public accountants
of any subsidiary of the Company or of any business acquired by the Company for
which financial statements and financial data is or is required to be included
in the registration statement), addressed to the Holders and each of the
Underwriters, if any, such letters to be in customary form and covering matters
of the type customarily covered in "comfort" letters to underwriters in
connection with underwritten offerings; (5) if an underwriting agreement is
entered into, the same shall set forth in full the indemnification and
contribution provisions and procedures of Section 3(f) hereof (or such other
indemnification and contribution provisions as shall be acceptable to the
Holders and the Underwriters of such underwritten offering) with respect to all
parties to be indemnified pursuant to said section; and (6) the Company shall
deliver such documents and certificates as may be requested by the Holders and
the Underwriters, if any, to evidence the continued validity of the
representations and warranties made pursuant to clause (1) above and to
evidence compliance with any customary conditions contained in the underwriting
agreement or other agreement entered into by the Company. Each of the above
shall be done at each closing under
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<PAGE> 13
such underwriting or similar agreement or as and to the extent required
thereunder;
(xv) make available for inspection by a representative of the
Holders or any Underwriter participating in any disposition pursuant to such
registration statement and any attorney or accountant retained by the Holders or
such Underwriter, all financial and other records, pertinent corporate documents
and properties of the Company and its subsidiaries and cause the officers,
directors and employees of and independent accountants and attorneys for the
Company and its subsidiaries personally to meet with and to supply all
information reasonably requested by any such representative, Underwriter,
attorney or accountant in connection with any registration of Warrant Shares;
provided, that any records, information or documents that are designated by the
Company in writing as confidential shall be kept confidential by such persons
unless (i) disclosure of such records, information or documents is required by
court or administrative order, (ii) disclosure of such records, information or
document is, in the opinion of counsel to the Holders or to any Underwriter,
required pursuant to the requirements of the Act or (iii) such records,
information or documents are otherwise publicly available;
(xvi) pay all costs and expenses incident to the performance of
the Company's obligations under Sections 3(c) and (d) above and under this
Section 3(e) (collectively "Registration Expenses"), including without
limitation the fees and disbursements of the Company's auditors, legal counsel,
any special legal counsel and of legal counsel (including, if applicable,
counsel to the Underwriters) responsible for qualifying the Warrant Shares under
state securities or blue sky laws, all filing fees and printing expenses, all
expenses in connection with the transfer and delivery of the Warrant Shares all
expenses in connection with the qualification or registration of the Warrant
Shares under applicable state securities or blue sky laws of such states as are
designated by the Holders (or obtaining exemptions from such qualification or
registration under state securities or blue sky laws) and, if applicable, the
fee of the National Association of Securities Dealers, Inc. in connection with
its review; provided, that in no event shall Registration Expenses include any
underwriting discounts, commissions or fees or the fees of counsel retained by
the Holders or, except with respect to such state securities blue sky matters,
Underwriters in connection with the sale of Warrant Shares pursuant to Section
3(c) or 3(d) above; and
(xvii) in connection with the filing of a registration
statement pursuant to Section 3(c) or (d) above, use its best efforts to obtain
indemnification of the Holders by the Underwriter to the same extent said
Underwriter provides indemnification to the Company.
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<PAGE> 14
As used in this Section 3(e), the term "Holders" refers only to those
Holders who have timely elected to sell Warrants Shares in an offering.
(f) Indemnification.
(i) The Company shall indemnify and hold harmless VKCO, the
Holders and any underwriter (as defined in the Act) for VKCO and the Holders,
and each person, if any, who respectively controls (within the meaning of
Section 15 of the Act) VKCO or any of the Holders or such underwriter against
any losses, claims, damages, liabilities (or actions in respect thereof) and
expenses whatsoever (including, but not limited to, any and all expense
whatsoever reasonably incurred in investigating, preparing or defending against
any litigation, commenced or threatened, or any claim whatsoever), joint or
several, to which VKCO, the Holders or such underwriter or such controlling
person becomes subject, under the Act, the Securities Exchange Act of 1934, as
amended (the "Exchange Act"), or other federal or state statute, law or
regulation, at common law or otherwise, specifically including but not limited
to losses, claims, damages or liabilities (or actions in respect thereof) or
expenses related to negligence on the part of any such indemnified party,
insofar as any such loss, claim, damage, liability or expense (or actions in
respect thereof) (1) arises out of or is based upon any breach of any
representation, warranty or covenant of the Company in this Agreement or upon
any untrue statement or alleged untrue statement of any material fact contained
in (A) Section 2 of this Agreement, (B) any registration statement covering the
Warrant Shares as originally filed or in any amendment thereof, in the
prospectus contained therein or in an amendment or supplement thereto or (C) in
any application or other document, or any amendment or supplement thereto (in
this Section collectively called "application") executed by or on behalf of the
Company or based upon written information furnished by or on behalf of the
Company filed in any jurisdiction in order to qualify or register the Warrant
Shares under the securities or blue sky laws thereof (or to obtain exemptions
from such qualifications or registration requirements) or filed with the
Commission or any securities association or securities exchange, or (2) arises
out of or is based upon the omission or alleged omission to state in any of the
documents described in subclauses (1)(A), (B) or (C) above, a material fact
required to be stated therein or necessary to make the statements therein not
misleading, and agrees to reimburse each such indemnified person, as incurred,
for any legal or other expenses reasonably incurred by them in connection with
investigation or defending any such loss, claim, damage, liability or action;
provided, however, that the Company shall not be obligated to indemnify in any
such case to the extent that any such loss, claim, damage, liability or expense
arises out of or is based upon any untrue statement or alleged untrue statement
or omission or alleged omission made therein in reliance upon, and in conformity
with, written information furnished to the Company by the indemnified person
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<PAGE> 15
specifically for use therein. The Company will not, without the prior written
consent of VKCO, settle or compromise or consent to the entry of any judgment
in any pending or threatened claim, action, suit or proceeding in respect of
which indemnification may be sought hereunder (whether or not VKCO is a party
to such claim, action, suit or proceeding), unless such settlement, compromise
or consent includes, without payment by VKCO, an unconditional release of all
indemnified parties from all liability arising out of such claim, action, suit
or proceeding, satisfactory in form and substance to VKCO.
(ii) Any Holder that includes all or a part of such Holder's
Warrant Shares in a registration statement pursuant to Sections 3 (c) or (d)
above agrees to indemnify and hold harmless the Company and each of its
directors and officers who have signed any such registration statement, any
other Holder of Warrant Shares included in such registration statement and any
underwriter (as defined in the Act) for the Company or the Holders of Warrant
Shares, and each person, if any, who controls (within the meaning of Section 15
of the Act) the Company or such underwriter to the same extent as the indemnity
by the Company in Section 3(f)(i), but only with respect to any untrue statement
or alleged untrue statement or omission or alleged omission, if any, made in
such registration statement, or any amendment or supplement thereto, or in any
application in reliance upon, and in conformity with, written information
furnished by the indemnifying Holder to the Company or such controlling person
expressly for use in the registration statement, or any amendment or supplement
thereto, or any such application, as the case may be. If any action shall be
brought in respect of which indemnity may be sought against any of the Holders,
such Holder(s) shall have the rights and duties given to the indemnifying party,
and the persons so indemnified shall have the rights and duties given to the
indemnified party, by the provisions of Section 3(f)(iii) below;
(iii) If any action is brought against a person in respect of
which indemnity may be sought hereunder against an indemnifying party, such
person shall promptly notify the indemnifying party in writing of the
institution of such action (but the failure to so notify shall not affect the
indemnification and other rights provided for herein except to the extent, if
any, that the indemnifying party is prejudiced by the failure to so give or
timely give such notice) and the indemnifying party shall assume the defense of
the action, including the employment of counsel satisfactory to the indemnified
person and payment as incurred of all fees and expenses related thereto. The
indemnified person shall have the right to employ its own counsel in any such
case, but the fees and expenses of such counsel shall be at the expense of such
indemnified person unless (1) the employment of such counsel and the payment of
fees and expenses thereof shall have been authorized in writing by the
indemnifying party in connection with the defense of the action, (2) the
indemnifying party shall
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<PAGE> 16
have failed promptly after notice by such indemnified person to assume the
defense of such action or proceeding and to employ counsel satisfactory to the
indemnified person in any such action or proceeding or (3) the named parties to
any such action or proceeding (including any impleaded parties) include both
such indemnified person and the indemnifying party, and such indemnified person
shall have been advised by counsel that there may be legal defenses or rights
available to such indemnified person which are different from or additional to
those available to the indemnifying party (in which case, if such indemnified
person notifies the indemnifying party in writing that it elects to employ
separate counsel at the expense of the indemnifying party, the indemnifying
party shall not have the right to assume the defense of such action, it being
understood, however, that the indemnifying party shall not, in connection with
any one such action or proceeding or separate but substantially similar or
related actions or proceedings in the same jurisdiction arising out of the same
general allegations or circumstances, be liable for the reasonable fees and
expenses of more than one separate firm of attorneys (together with appropriate
local counsel) at any time for such indemnified person. Anything in this
paragraph to the contrary notwithstanding, the indemnifying party shall not be
liable for any settlement of any claim or action effected without its written
consent. The indemnity agreements contained in this Section shall remain in
full force and effect regardless of any investigation made by or on behalf of
any indemnified person and shall survive any termination of this Agreement.
The indemnifying party agrees promptly to notify the indemnified party of the
commencement of any litigation or proceedings against the indemnifying party or
any of its officers or directors in connection with any registration statement
referred to in Section 3(c) or (d) above.
(iv) If the indemnification provided for in items (i), (ii) and
(iii) of this Section 3(f) from the indemnifying party is unavailable to an
indemnified party hereunder in respect of any losses, claims, damages,
liabilities or expenses referred to therein, then the indemnifying party, in
lieu of indemnifying such indemnified party, shall contribute to the amount paid
or payable by such indemnified party as a result of such losses, claims,
damages, liabilities or expenses in such proportion as is appropriate to reflect
not only the relative benefits received by the indemnified party and the
indemnifying party, but also the relative fault of the indemnifying party and
indemnified parties in connection with the actions which resulted in such
losses, claims, damages, liabilities or expenses, as well as any other relevant
equitable considerations. The relative fault of the indemnifying party and
indemnified parties shall be determined by reference to, among other things,
whether any action in question, including any untrue or alleged untrue statement
of a material fact or omission or alleged omission to state a material fact, has
been made by, or relates to information supplied by, the indemnifying party or
indemnified parties, and the parties' relative intent, knowledge, access to
information and opportunity
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<PAGE> 17
to correct or prevent such action. The amount paid or payable by a party as a
result of the losses, claims, damages, liabilities and expenses referred to
above shall be deemed to include, subject to the limitations set forth in
subparagraph (iii) of this Section 3(f), any legal or other fees or expenses
incurred by such party in connection with any investigation or proceeding. The
parties hereto agree that it would not be just and equitable if contribution
pursuant to this subparagraph (iv) of this Section 3(f) were determined by pro
rata allocation or by any other method of allocation which does not take
account of the equitable and other considerations referred to in this
paragraph. If the full amount of the contribution specified in this
subparagraph (iv) of this Section 3(f) is not permitted by law, then such
indemnified person shall be entitled to contribution from the indemnifying
party to the full extent permitted by law. Notwithstanding the provisions of
this Section 3(f)(iv), no Holder shall be required to contribute any amount in
excess of the amount by which the total price at which the Warrant Shares of
such Holder were sold to the public exceeds the amount of any damages which
such Holder has otherwise been required to pay by reason of such untrue
statement or omission. No party found guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Act) shall be entitled to
contribution from any party who was not found guilty of such fraudulent
misrepresentation.
(v) Whenever any indemnifying or contributing party is
requested by the indemnified party or the party entitled to contribution to make
a payment pursuant to the forgoing provisions of this Section 3(f), such payment
will be made within five business days after the request and, if not so paid,
the amount due will thereafter bear interest at ten percent per annum,
compounded annually (but not in excess of the maximum amount permitted by law).
4. Exercise of Warrants.
(a) Exercise of Warrants. The Warrants may be exercised from time to
time and in full or in part by the Holder thereof by surrender of the Warrants,
with the Election to Purchase attached thereto duly executed by such Holder, to
the Company at its offices at 110 North Marienfeld Street, One Marienfeld Place,
Suite 465, Midland, Texas 79701, or at such other office or agency as the
Company may from time to time designate in writing to each Holder, accompanied
by payment, in cash or by cashier's check payable to the order of the Company or
as provided in Section 4(c), in the amount obtained by multiplying the number of
Warrant Shares designated by the Holder in the Election to Purchase by the
Exercise Price per share. Exercise of any Warrant shall constitute an
acknowledgment by the purchasing Holder that it will not dispose of the Warrant
Shares acquired upon such exercise except in compliance with Section 3(b) hereof
and the Act. Upon any partial exercise of the Warrants, the Company at its
expense will forthwith issue and
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<PAGE> 18
deliver to the purchasing Holder a new Warrant, in the name of such Holder and
for the number of Warrant Shares equal to the number of shares called for by
the surrendered Warrant (after giving effect to any adjustment therein as
provided in Section 6 below) minus the number of such Warrant Shares (after
giving effect to such adjustment) purchased by the Holder pursuant to such
exercise.
(b) Company to Reaffirm Obligations. On the date of any exercise of any
Warrants (except that if, on that date, the stock transfer books of the Company
are closed, in which case on the next succeeding date on which such stock
transfer books are open) the Holder exercising the same shall be deemed to have
become, and thereafter shall be considered, a holder of record of the shares of
Common Stock purchased upon such exercise for all purposes. Holders of Warrants
shall have no rights of share ownership until they exercise their Warrants. The
Company will, at the time of any exercise of any Warrant, upon the request of
the Holder thereof, acknowledge in writing its continuing obligation to afford
to that Holder any rights (including without limitation any right to
registration of the Warrant Shares issued upon such exercise) to which the
Holder shall continue to be entitled after such exercise in accordance with the
provisions of this Agreement; provided, however, that if the Holder of a Warrant
shall fail to make any such request, such failure shall not affect the
continuing obligation of the Company to afford those rights to the Holder.
(c) Net Exercise of Warrants. Notwithstanding anything to the contrary
contained in this Section 4, any Holder may elect to exercise any Warrant in
whole or in part by receiving shares of Common Stock equal to the value
(determined below) of the Warrant (or any part hereof), upon surrender of the
Warrant (or any part thereof) at the office or agency described in Section 4(a)
above, together with notice of such election, specifying the part of the Warrant
so surrendered, in which event the Company shall issue and deliver to the Holder
a number of shares of Common Stock determined using the following formula:
X = (Y) (A-B)
---------
A
where
X = the number of shares of Common Stock to be issued
to the Holder;
Y = the number of shares of Common Stock purchasable
under the Warrant, or portion of the Warrant, surrendered;
A = the Current Market Price per share of the Common Stock,
determined pursuant to Section 6(d) of this Agreement; and
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<PAGE> 19
B = the then current Exercise Price per share of Common Stock.
5. Delivery of Stock Certificates, etc., on Exercise: No Fractional
Shares.
(a) Stock Certificates, Etc. As soon as practicable after the exercise
of any Warrants and in any event within five business days thereafter, the
Company, at its expense (including the payment by it of any applicable issue
taxes), will cause to be issued in the name of and delivered to the purchasing
Holder a certificate or certificates for the number of fully paid and
nonassessable Warrant Shares to which such Holder shall be entitled upon such
exercise, together with any Other Securities and property (including cash, where
applicable) to which such Holder is entitled upon such exercise pursuant to
Section 6 of this Agreement or otherwise.
(b) No Fractional Shares. The Company will not issue a fractional share
of Common Stock upon exercise of a Warrant. Rather, if a fractional share would
otherwise be issued, the Company will instead issue a number of whole shares
equal to the next lowest number of whole shares and shall pay to the exercising
Holder an amount in cash equal to amount obtained by multiplying (x) the
fractional shares not issued by (y) the Current Market Price (as defined in
Section 6(d)) per share of the Common Stock on the last trading day prior to the
exercise date.
6. Anti-dilution Provisions. The Warrants are subject to the following
additional terms and conditions:
(a) Adjustment for Change in Capital Stock. If, after the date of this
Agreement, the Company:
(1) pays a dividend or makes a distribution on its Common Stock
in shares of its capital stock (including Common Stock);
(2) subdivides its outstanding shares of Common Stock into a
greater number of shares;
(3) combines its outstanding shares of Common Stock into smaller
number of shares; or
(4) issues by reclassification of its Common Stock any shares of
its capital stock or Other Securities (including without
limitation any such reclassification in connection with a
consolidation or merger in which the Company is the continuing
entity);
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<PAGE> 20
then the Exercise Price in effect at the time of the record date of such
dividend, distribution, subdivision, combination or reclassification shall be
adjusted so that the Exercise Price shall be equal to the price determined by
multiplying the Exercise Price in effect immediately prior to such event by a
fraction, the numerator of which shall be (x) the total number of outstanding
shares of Common Stock of the Company immediately prior to such event and the
denominator of which shall be (y) the total number of outstanding shares of
Common Stock of the Company immediately after such event and, as so adjusted or
readjusted, the Exercise Price shall remain in effect until a further
adjustment or readjustment is required by this Section 6(b).
Whenever the Exercise Price payable upon exercise of each Warrant is
adjusted pursuant to this Section 6(a), the Warrant Shares shall simultaneously
be adjusted by multiplying the number of Warrant Shares issuable upon exercise
of each Warrant immediately prior to such event by the Exercise Price in effect
on the date thereof and dividing the product so obtained by the Exercise Price
as adjusted.
These adjustments referred to in the preceding paragraph shall become
effective on (x) in the case of a dividend or distribution, the earlier of the
record date thereof or the distribution date thereof and (y) in the case of a
subdivision, combination or reclassification, the earlier of the record date
thereof or the effective date thereof.
(b) Adjustments For Other Distributions. If, after the date of this
Agreement, the holders of Common Stock generally shall have received or, on or
after the record date fixed for the determination of eligible stockholders,
shall have become entitled to receive (i) securities other than capital stock,
(ii) evidences of its indebtedness, (iii) assets (including cash dividends or
distributions), (iv) rights, options, warrants or convertible or exchangeable
securities (other than Convertible Securities or Options) containing the right
to subscribe for or purchase securities of the Company, then and in each such
case the Holder of each Warrant, upon the exercise thereof as provided in
Section 4 above, shall be entitled to receive, in addition to the Warrant Shares
otherwise receivable on such exercise, the amount of securities, indebtedness,
assets (including cash in the case referred to in subdivision (iii) of this
Section 6(b)) and such rights, options, warrants or convertible or exchangeable
securities which such Holder would hold on the date of such exercise if on the
date of this Agreement such Holder had been the holder of record of the number
of shares of Common Stock called for by the Warrants held by such Holder and had
thereafter, during the period from the date of this Agreement to and including
the date of such exercise, retained such shares, giving effect to all
adjustments called for during such period by this Section 6.
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<PAGE> 21
(c) Adjustments For Sale or Other Issuance of Common Stock.
(i) If at any time prior to the exercise of the Warrants in
full, the Company shall issue or sell any Common Stock without
consideration or for consideration per share less than the Current Market Price
per share (as defined in Section 6(d)) on the date of such issuance or sale, the
Exercise Price shall be adjusted so that the Exercise Price shall equal the
price determined by multiplying the Exercise Price in effect immediately prior
to the date of such sale or issuance (which date in the event of distribution to
shareholders shall be deemed to be the record date set by the Company to
determine shareholders entitled to participate in such distribution) by a
fraction, the numerator of which shall be (i) the number of shares of Common
Stock outstanding on the date of such sale or issuance, plus (ii) the number of
additional shares of Common Stock which the aggregate consideration received by
the Company upon such issuance or sale would purchase at such Current Market
Price per share of the Common Stock and the denominator of which shall be (i)
the number of shares of Common Stock outstanding on the date of such issuance or
sale, plus (ii) the number of additional shares of Common Stock offered for
purchase. Any adjustments required by this Section 6(c) shall be made
immediately after such issuance or sale or record date, as the case may be. Such
adjustments shall be made successively whenever the event shall occur.
(ii) For the purpose of making any adjustment in the Exercise
Price, or number of shares of Common Stock purchasable upon exercise of the
Warrants, as provided above and in Section 6(c)(vii) below, the consideration
received by the Company for any issue or sale of securities shall:
(A) To the extent it consists of cash, be computed as the
gross amount of cash received by the Company before deduction of any
underwriting or similar commissions, compensation, discounts or concessions paid
or allowed by the Company in connection with such issue or sale and before
deduction of any other expenses payable in connection therewith.
(B) In case of the issuance (otherwise than upon
conversion or exchange of Convertible Securities) or sale of additional Common
Stock, Options or Convertible Securities for a consideration other than cash or
a consideration a part of which is other than cash, then for purposes of this
Section 6(c) the fair value of such consideration as determined by the Board of
Directors of the Company in the good faith exercise of its business judgment,
regardless of the accounting treatment thereof, shall be deemed to be the value
of the consideration other than cash received by the Company for such
securities.
(iii) Options and Convertible Securities. If the Company in
any manner issues or grants any Options or any
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<PAGE> 22
Convertible Securities -- but only to the extent (i) such Options are
exercisable at less than the Current Market Price at the date of issue of such
Options or (ii) the amount paid for such Convertible Securities per share plus
any additional amount payable per share upon conversion thereof is less than
the Current Market Price per share at the date of issue of the Convertible
Securities -- the total maximum number of shares of Common Stock issuable upon
the exercise of such Options or upon conversion or exchange of the total
maximum amount of such Convertible Securities at the time such Convertible
Securities first become convertible or exchangeable shall (as of the date of
issue or grant of such Options or, in the case of the issue or sale of
Convertible Securities other than where the same are issuable upon the exercise
of Options, as of the date of such issue or sale) be deemed to be issued and to
be outstanding for the purpose of this Section 6(c) and to have been issued for
the sum of the amount (if any) paid for such Options or Convertible Securities
and the amount (if any) payable upon the exercise of such Options or upon
conversion or exchange of such Convertible Securities at the time such
Convertible Securities first become convertible or exchangeable; provided that,
subject to the other provisions of this Section 6(c), no further adjustment of
the Exercise Price shall be made upon the actual issuance of any such Common
Stock or Convertible Securities or upon the conversion or exchange of any such
Convertible Securities.
(iv) Change in Option Price or Conversion Rate. If the
purchase price provided for in any Option referred to in Section 6(c)(iii), or
the rate or price at which any Convertible Securities referred to in Section
6(c)(iii) are convertible into or exchangeable for shares of Common Stock, shall
change at any time (other than under or by reason of conventional provisions
designed to protect against dilution), the Exercise Price in effect at the time
of such event shall forthwith be readjusted -- but only to the extent such
change does not result in either the per share Option exercise price or the
amount per share payable for such Convertible Securities plus the amount payable
per share on the conversion of such Convertible Securities to be greater than
the lesser of the Current Market Price per share at the time such Options or
Convertible Securities were issued, as referred to in Section 6(c)(iii), or the
Current Market Price at the effective date of such change -- to the Exercise
Price that would have been in effect at such time had such Options or
Convertible Securities then still outstanding provided for such changed purchase
price, additional consideration or conversion rate, as the case may be, at the
time initially granted, issued or sold. If the purchase price provided for in
any such Option, or the additional consideration (if any) payable upon the
conversion or exchange of any such Convertible Securities, or the rate or price
at which any such Convertible Securities are convertible into or exchangeable
for shares of Common Stock shall be changed at any time under or by reason of
conventional provisions designed to protect against dilution, then in case of,
but only to the extent
22
<PAGE> 23
of, the delivery of shares of Common Stock upon the exercise of any such Option
or upon conversion or exchange of any such Convertible Security, the Exercise
Price then in effect hereunder shall, upon issuance of such shares of Common
Stock, be adjusted -- but only to the extent such change does not result in
either the per share Option exercise price or the amount per share payable for
such Convertible Securities plus the amount payable per share on the conversion
of such Convertible Securities to be greater than the Current Market Price per
share at the time such Options or Convertible Securities were issued, as
referred to in Section 6(c)(iii) -- to such amount as would have obtained had
such Option or Convertible Security never been issued and had adjustments been
made based only upon the issuance of the shares of Common Stock for the
consideration actually received for such Option or Convertible Security and
such Common Stock.
(v) Expiration of Option or Conversion Rights. In the event of
the termination or expiration of any right to purchase Common Stock under any
Option or of any right to convert or exchange Convertible Securities, the
Exercise Price shall, upon such termination, be changed to the Exercise Price
that would have been in effect at the time of such expiration had such Option or
Convertible Security, to the extent outstanding immediately prior to such
expiration, never been issued, and the shares of Common Stock issuable
thereunder shall no longer be deemed to be Common Stock Outstanding. As used in
this Section 6.3(c)(v), the word "Expiration" includes a termination, without
payment of consideration by the Company, of a right to purchase, convert or
exchange.
(vi) Excluded Events. Notwithstanding anything in this Section
6 to the contrary, the Exercise Price shall not be adjusted by virtue of (i) the
Warrants or the existence or exercise of any options of the Company outstanding
on the date hereof and disclosed in the Prospectus or (ii) the issuance or sale
of, or the grant of Options to purchase, Common Stock to employees, directors,
or officers of the Company or its subsidiaries, if any, in each case who do not
beneficially own more than five percent of the Common Stock (assuming for this
purpose that all Options then held by the person, including new options then
being granted, but no other Option or Convertible Securities, have then been
exercised in full), or are not the children of such a five percent or greater
shareholder or the spouses of such children, pursuant to stock option plans
currently existing, or hereafter approved by the Board of Directors of the
Company, at a price which is less than the Current Market Price at the time of
such issuance or sale (all as determined in accordance with this Section 6(c)).
(vii) Adjustment in Number of Warrant Shares. Whenever the
Exercise Price payable upon exercise of a Warrant is adjusted pursuant to this
Section 6(c), the Warrant Shares issuable on exercise of the Warrant shall
simultaneously be adjusted by multiplying the number of the Warrant Shares
issuable
23
<PAGE> 24
upon exercise of the Warrant immediately prior to such event by the Exercise
Price in effect on the date thereof and dividing the product so obtained by the
Exercise Price, as adjusted.
(d) Current Market Price. For the purpose of any computation under
Section 6, the "Current Market Price" per share of Common Stock at any date
shall be the average of the daily closing prices for the 15 consecutive trading
days commencing 20 trading days before such date. The closing price for each
day shall be the last reported sale price, regular way or, in case no such
reported sale takes place on such day, the average of the closing bid and asked
prices, regular way, for such day, in either case on the principal national
securities exchange on which the shares are listed or admitted to trading, or if
they are not listed or admitted to trading on any national securities exchange,
but are traded in the NASDAQ, or if the shares are otherwise securities for
which transaction reports are required to be made on a real-time basis pursuant
to an effective transaction reporting plan under Rule 11a3-1 of the Rules of the
Commission under the Exchange Act, the last reported sales price or, if they are
not listed or admitted to trade, and if last sale data is not then available
from NASDAQ, but are traded in the over-the-counter market, the average of the
representative closing bid and asked quotations for the Common Stock on NASDAQ
or any comparable system, or if the Common Stock is not listed on NASDAQ or a
comparable system, the average of the closing bid and asked prices as furnished
by two members of the National Association of Securities Dealers, Inc. selected
from time to time by the independent members of the Board of Directors of the
Company for that purpose.
(e) Minimum Adjustment. No adjustment in the number of Warrant Shares
purchasable hereunder shall be required unless such adjustment would require an
increase or decrease of at least one percent in the number of Warrant Shares
purchasable upon the exercise of each Warrant. No adjustment in the Exercise
Price payable hereunder shall be required unless such adjustment would require
an increase or decrease in the Exercise Price of at least $.01 per share. Any
adjustments that by reason of this Section 6(e) are not required to be made
shall be carried forward and taken into account in any subsequent adjustment
and, notwithstanding the foregoing, all adjustments so carried forward shall be
made at the time of, and in connection with, each exercise of any of the
Warrants. All calculations shall be made to the nearest one-thousandth of a
share, or cent, as the case may be.
(f) Other Securities. If at any time, as a result of an adjustment made
pursuant to this Section 6, the Holders shall become entitled to purchase any
shares of capital stock or Other Securities of the Company other than shares of
Common Stock, thereafter the number of such Other Securities so purchasable upon
exercise of each Warrant and the Exercise Price for such securities shall be
subject to adjustment from time to time in a
24
<PAGE> 25
manner and on terms as nearly equivalent as practicable to the provisions with
respect to the Warrant Shares contained in this Section 6; and the provisions
of Sections 3, 4, 5 and 7, inclusive, with respect to the Warrant Shares, shall
apply on like terms to any such Other Securities.
(g) Consolidations, Mergers and Other Transactions. In case of any
consolidation of the Company with or merger of the Company into another
corporation or entity or in case of any sale or conveyance to another
corporation or entity of the property of the Company as an entirety or
substantially as an entirety, the Company or such successor or purchasing
corporation or entity, as the case may be, shall execute a binding agreement
agreeing that each Holder shall have the right thereafter upon payment of the
Exercise Price in effect immediately prior to such action to purchase upon
exercise of each Warrant the kind and amount of shares and other securities and
property which the Holder would have owned or have been entitled to receive
after the happening of such consolidation, merger, sale or conveyance had such
Warrant been exercised immediately prior to such action. The Company shall not
complete any such consolidation, merger, sale or conveyance unless the agreement
referred to in the foregoing sentence is executed and delivered, is binding and
the mailing thereof provided for in the next sentence is done at the time of
such completion. The Company shall mail by first class mail, postage prepaid,
to each Holder, notice of the execution of and a copy of such agreement. Such
agreement shall provide for adjustments, which shall be as nearly equivalent as
may be practicable to the adjustments provided for in this Section 6 and for
other protections and rights (including without limitation registration rights)
for the Holders as are as nearly equivalent as may be practical to those they
have under this Warrant Agreement. The provisions of this Section 6 shall
similarly apply to successive consolidations, mergers, sales or conveyances.
Each Holder of Warrants shall be under no duty or responsibility to determine
the correctness of any provisions contained in any such agreement relating
either to the kind or amount of shares of stock or Other Securities or property
receivable upon exercise of Warrants or with respect to the method employed and
provided therein for any adjustments.
(h) Notice of Adjustments. Whenever the Exercise Price or the kind or
amount of securities purchasable under the Warrants shall be adjusted pursuant
to any of the provisions of this Warrant Agreement, the Company shall forthwith
thereafter cause to be sent to VKCO and all other Holders a certificate setting
forth the adjustments in the Exercise Price and the number of shares and, in
addition, setting forth in detail the facts requiring such adjustments. In
addition, the Company at its expense shall within 90 days following the end of
each of its fiscal years during the term of this Agreement and promptly upon the
reasonable request of the Holders of at least ten percent of the Warrants in
connection with the exercise from time to time of all or any portion of any
Warrants, cause independent public
25
<PAGE> 26
accountants of nationally recognized standing selected by the Company to
compute any such adjustment in accordance with the terms of the Warrants and
prepare and deliver to the Holders a certificate setting forth such adjustment
and showing in detail the facts upon which the adjustment is based.
(i) Notice of Certain Events. In the event of (i) any taking by the
Company of a record of the holders of any class of securities for the purpose of
determining the holders thereof who are entitled to receive any dividend or
other distribution, or any right to subscribe for, purchase or otherwise acquire
any shares of stock of any class or any Other Securities or property, or to
receive any other right or (ii) any capital reorganization of the Company, any
reclassification or recapitalization of the capital stock of the Company or any
transfer of all or substantially all of the assets of the Company to, or
consolidation or merger of the Company with or into, any other corporation or
other entity or (iii) any voluntary or involuntary dissolution or liquidation of
the Company, then and in each such event the Company will mail or cause to be
mailed to each Holder and, in addition, on the same date as the earliest such
mailing, telecopied and mailed to VKCO, a notice specifying the date upon which
any such record date is to be taken for the purpose of such dividend,
distribution or right, stating the amount and character of such dividend,
distribution or right and the date on which any such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up is to take place and the time, if any, as
of which the holders of record of Common Stock (or Other Securities) shall be
entitled to exchange their shares of Common Stock (or Other Securities) for
securities or other property deliverable upon such reorganization,
reclassification, recapitalization, transfer, consolidation, merger,
dissolution, liquidation or winding-up. Such notice shall be mailed at least 15
business days prior to the proposed record date therefor.
(j) Other Events Altering Exercise Price. Upon the occurrence of any
event not specifically denominated in this Section 6 as altering the Exercise
Price and the amount of Common Stock purchasable upon the exercise of the
Warrants, if the reasonable exercise of the business judgment of the independent
members of the Board of Directors of the Company (or, if none, the Board of
Directors or the Company) requires, on equitable principles, the alteration of
the Exercise Price favorable to Holders and/or corresponding adjustment
favorable to Holders to the number of shares for which the Warrants are
exercisable, the Exercise Price and such number of shares shall be equitably
altered.
26
<PAGE> 27
7. Further Covenants of the Company. The Company hereby agrees as
follows:
(a) Reservation of Stock. The Company shall at all times reserve and
keep available, solely for issuance and delivery upon the exercise of the
Warrants, all Warrant Shares from time to time issuable upon the exercise of the
Warrants.
(b) Title to Stock. All of the Warrant Shares delivered upon the
exercise of the Warrants and payment of the Exercise Price (including for the
purpose by a net exercise of Warrants as permitted by Section 4(c)) shall be
validly issued, fully paid and nonassessable; each Holder of a Warrant shall
receive good and marketable title to the Warrant Shares, free and clear of all
voting and other trust arrangements, liens, encumbrances, equities, preemptive
rights and, without limitation, claims of any type whatsoever; and the Company
shall have paid all taxes, if any, in respect of the issuance thereof.
(c) Exchange of Warrants. Subject to Section 3(a) hereof, upon
surrender for exchange of any Warrant to the Company, the Company at its expense
will promptly issue and deliver to the Holder thereof a new Warrant or Warrants
of like tenor, in the name of such Holder, calling in the aggregate for the
number of Warrant Shares called by the Warrants so surrendered.
(d) Replacement of Warrants. Upon receipt of evidence reasonably
satisfactory to the Company of the loss, theft, destruction or mutilation of
Warrants and, in the case of any such loss, theft or destruction, upon delivery
of an indemnity agreement by the Warrant Holder reasonably satisfactory in form
and amount to the Company or, in the case of any such mutilation, upon surrender
by the Holder and cancellation of such Warrants, the Company at its expense will
execute and deliver, in lieu thereof, new Warrants of like tenor.
(e) Reporting by the Company. The Company agrees that, during the term
of the Warrants, it will use its best efforts to keep current in the filing of
all forms and other materials which it may be required to file with the
appropriate regulatory authority pursuant to the Exchange Act and all other
forms and reports required to be filed with any regulatory authority having
jurisdiction over the Company. The Company will take such further action as any
Holder may reasonably request, all to the extent required from time to time to
enable such Holder to sell Warrant Shares without registration under the Act
within the limitation of the exemptions provided by (a) Rule 144 under the Act,
as such Rule may be amended from time to time, or (b) any similar rule or
regulation hereafter adopted by the Commission.R
8. Other Holders. The Warrants are issued upon the following terms, to
all of which each Holder or owner thereof by
27
<PAGE> 28
the taking thereof consents and agrees: (a) any person who shall become a
transferee, within the limitations on transfer imposed by Section 3(a) hereof,
of a Warrant properly endorsed, shall take such Warrant subject to the
provisions of Sections 3(a) and 3(b) hereof and thereupon shall be authorized
to represent that such transferee is the absolute owner thereof and, subject to
the restrictions contained in this Warrant Agreement, shall be empowered to
transfer absolute title by endorsement and delivery thereof to a permitted bona
fide purchaser for value; and (b) each prior taker or owner waives and
renounces all equities or rights in such Warrant in favor of each such
permitted bona fide purchaser, and each such permitted bona fide purchaser
shall acquire absolute title thereto and to all rights presented thereby; and
(c) until such time as the respective Warrant is transferred on the books of
the Company, the Company may treat the registered Holder thereof as the
absolute owner thereof for all purposes, notwithstanding any notice to the
contrary.
9. General Provisions. All notices, certificates and other
communications from or at the request of the Company to the Holder of any
Warrant or Warrant Share as such shall be mailed by first class, registered or
certified mail, postage prepaid to the Holder, with a copy to each of Van Kasper
& Company, 600 California Street, Suite 1700, San Francisco, California 94111,
Attn.: President, or to such other address for itself as VKCO shall have
furnished to the Company in writing. This Warrant Agreement and any of the
terms hereof may be changed, waived, discharged or terminated only by an
instrument in writing signed by the party against which enforcement of such
change, waiver, discharge or termination is sought. In addition and
notwithstanding the foregoing, the provisions of Section 3(c) and (d) and
Section 6 hereof cannot be changed, waived, discharged or terminated in a manner
adverse to the Holders without the written consent of one or more Holder or
Holders who collectively own, of record, that number of Warrants and/or Warrant
Shares which in the aggregate shall constitute two-thirds of all Warrant Shares
issued or issuable under this Agreement (excluding Warrant Shares which have
been previously sold, transferred or otherwise disposed of in a registered
public offering, pursuant to Rule 144 under the Act, as such Rule may be amended
from time to time, or pursuant to Regulation S, as such regulation may be
amended from time to time). The headings in this Warrant Agreement are for
purposes of reference only and shall not limit or otherwise `affect any of the
terms hereof. This Warrant Agreement, together with the forms of instruments
annexed hereto, supersedes all prior negotiations and all prior written and
prior and contemporaneous oral agreements, representations, warranties and
inducements and constitutes the full and complete agreement of the parties
hereto with respect to the subject matter hereof.
10. GOVERNING LAW. THIS WARRANT AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE INTERNAL LAWS,
28
<PAGE> 29
AND NOT THE LAW PERTAINING TO CHOICE OR CONFLICT OF LAWS, OF THE STATE OF
DELAWARE.
PARALLEL PETROLEUM CORPORATION
By:
-----------------------------
Name:
Title:
The foregoing Agreement is hereby confirmed and accepted as of the date first
above written
VAN KASPER & COMPANY
By:
-------------------------
Name:
Title:
29
<PAGE> 30
Exhibit A
FORM OF WARRANT
THE WARRANTS REPRESENTED BY THIS CERTIFICATE ARE SUBJECT TO THE CONDITIONS
SPECIFIED IN A WARRANT AGREEMENT, DATED DECEMBER __, 1996, BETWEEN PARALLEL
PETROLEUM CORPORATION (THE "COMPANY") AND VAN KASPER & COMPANY. EXCEPT TO THE
EXTENT PERMITTED BY THE WARRANT AGREEMENT, NO TRANSFER, SALE, PLEDGE,
HYPOTHECATION, ENCUMBRANCE OR OTHER DISPOSITION OF THESE WARRANTS OR THE SHARES
OF COMMON STOCK OF THE COMPANY ACQUIRED ON EXERCISE OF THESE WARRANTS SHALL BE
VALID OR EFFECTIVE UNTIL REGISTERED UNDER THE SECURITIES ACT OF 1933, AS
AMENDED (OR, IF APPLICABLE, A SUCCESSOR LAW THERETO) OR THE COMPANY HAS BEEN
ADVISED BY AN OPINION OF COUNSEL THAT THESE WARRANTS OR SUCH SHARES OF COMMON
STOCK WILL BE TRANSFERRED IN A TRANSACTION EXEMPT FROM SUCH REGISTRATION AND
UNTIL ANY APPLICABLE CONDITIONS CONTAINED IN THE WARRANT AGREEMENT HAVE BEEN
FULFILLED. A COPY OF THE WARRANT AGREEMENT IS ON FILE AT THE OFFICES OF THE
COMPANY. THE HOLDER OF THIS CERTIFICATE, BY ACCEPTANCE OF THIS CERTIFICATE,
AGREES TO BE BOUND BY THE PROVISIONS OF THE WARRANT AGREEMENT.
No. ______________
Warrant to Purchase up to ______ Shares of Common Stock
EXERCISABLE COMMENCING 9:00 A.M., SAN FRANCISCO TIME, ON
DECEMBER __, 1997 AND ENDING 5:00 P.M., SAN FRANCISCO TIME,
ON DECEMBER __, 2001
PARALLEL PETROLEUM CORPORATION
COMMON STOCK PURCHASE WARRANT
This certifies that ___________________________, or registered assigns,
is the holder (the "Holder") of this Warrant to purchase, subject to adjustment,
the number of fully paid and nonassessable shares set forth above (the "Warrant
Shares") of Common Stock, par value $.01 per share (the "Common Stock"), of
Parallel Petroleum Corporation, a Delaware corporation (the "Company"), at the
per share exercise price, subject to adjustment (the "Exercise Price"), set
forth in the Warrant Agreement, dated December __, 1996 (the "Warrant
Agreement"), between the Company and VKCO, at any time prior to the Expiration
Date (defined below), by surrendering this Warrant, with the form of
subscription set forth hereon duly executed, to the Company at the Company's
offices at 110 North Marienfeld Street, One Marienfeld Place, Suite 465,
Midland, Texas 79701 or at such other office or agency as the Company may
designate and by paying in full, in the manner provided in Section 4 of the
Warrant Agreement, the Exercise Price for the Warrant Shares then purchased.
Payment of the Exercise Price may be made in cash or by cashier's check payable
to the order of the Company, or by surrender of a portion of this Warrant as
provided in Section 4(c) of the Warrant Agreement.
<PAGE> 31
This Warrant may be exercised at any time and from time to time, in
whole or in part, at the option of the Holder, commencing 9:00 a.m., San
Francisco time, on December __, 1996 until 5:00 p.m., San Francisco time, on
December __, 2000 (the "Expiration Date"). Upon the purchase of fewer than all
of the Warrant Shares, there shall be issued to the Holder a new Warrant
exercisable for the number of Warrant Shares for which this Warrant has not been
exercised or surrendered as payment. Prior to the Expiration Date, the Holder
shall be entitled to exchange this Warrant, without charge, for another Warrant
or Warrants exercisable for the same aggregate number of Warrant Shares.
Prior to the Expiration Date, subject to any applicable laws restricting
transferability and to any restriction on transferability that may appear on
this Warrant or in the Warrant Agreement, the Holder shall be entitled to
transfer this Warrant upon delivery thereof, duly endorsed by the Holder or by
his, her or its duly authorized attorney or representative, or accompanied by
proper evidence of succession, assignment or authority to transfer, with the
form of assignment set forth hereon duly executed. Upon any such transfer, a
new Warrant or Warrants exercisable for the same aggregate number of Warrant
Shares will be issued by the Company, without charge, in accordance with
instructions in the form of assignment.
This Warrant is issued under and in accordance with the Warrant
Agreement and, except as otherwise provided in this Warrant, is subject to the
terms and provisions contained therein. Upon certain events provided for in the
Warrant Agreement, the Exercise Price and the number of shares of Common Stock
issuable upon the exercise of this Warrant are subject to adjustment. No
fractional shares will be issued upon the exercise of a Warrant. Instead, the
Company shall pay the value of such fractional share to the Holder in cash, as
provided in the Warrant Agreement.
THIS WARRANT SHALL BE GOVERNED BY, AND CONSTRUED IN ACCORDANCE WITH, THE
INTERNAL LAWS AND NOT THE LAW PERTAININGS TO CHOICE OR CONFLICT OF LAWS, OF THE
STATE OF DELAWARE.
In witness whereof, the Company has caused this Warrant to be duly
executed.
PARALLEL PETROLEUM CORPORATION
By:
------------------------------
Name:
Title:
Attest:
------------------------------
Name:
Title: Secretary
2
<PAGE> 32
ELECTION TO PURCHASE
The undersigned hereby irrevocably elects to exercise this Warrant to
purchase ______________ shares of Common Stock, acknowledges that it will not
dispose of such shares except in compliance with Section 3(b) of the Warrant
Agreement and the Securities Act of 1933, as amended, and requests that
Certificates for such shares be issued and delivered as follows:
Issue to:
---------------------------------------------------
(Name)
---------------------------------------------------
(Address, including Zip Code)
---------------------------------------------------
(Social Security or Tax Identification Number)
Deliver to:
---------------------------------------------------
(Name)
---------------------------------------------------
(Address, including Zip Code)
In full payment of the aggregate purchase price with respect to the
number of shares being purchased upon exercise of this Warrant, the undersigned
hereby (check applicable payment method): (i) / / tenders payment of
$_________ by cashier's check payable to the order of Parallel Petroleum
Corporation or (ii) / / hereby surrenders to the Company, Warrants to purchase
________ shares of Common Stock. If the Warrant is exercised hereby (and, if
applicable, surrendered to purchase shares of Common Stock) so as to purchase
fewer than all the shares of Common Stock that may be purchased pursuant to
this Warrant, the undersigned requests that a new Warrant representing the
number of full shares for which the Warrant has not been exercised or
surrendered be issued and delivered as set forth below.
Name of Warrant holder or Assignee:
-----------------------------
(Please Print)
Address:
- -----------------------------------------------------------------
- -----------------------------------------------------------------
Signature Dated:
(Signature must conform in all respects to name of holder as specified
on the face of the Warrant)
3
<PAGE> 33
ASSIGNMENT
For value received, the undersigned hereby sells, assigns and transfers unto
the Assignee named below all of the rights of the undersigned represented by
the within Warrant, with respect to the number of shares of Common Stock set
forth below:
Number of Taxpayer
Shares of Identification
Name of Assignee Address Common Stock Number
- ----------------------- ------------------------- ------------ --------------
and does hereby irrevocably authorize the Company to make such transfer on the
Warrant Register maintained at the principal office of the Company and, if
applicable, to issue to the undersigned a Warrant for the portion of such
Warrant not so sold, assigned or transferred.
Dated: ,
-------------- ----- -------------------------------
Signature
(Signature must conform in all respects to name of holder as specified on the
face of the Warrant).
4
<PAGE> 1
[LYNCH, CHAPPELL & ALSUP LETTERHEAD]
EXHIBIT 5.1
November 7, 1996
Parallel Petroleum Corporation
One Marienfeld Place, Suite 465
Midland, Texas 79701
Gentlemen:
We have acted as counsel to Parallel Petroleum Corporation, a Delaware
corporation (the "Company"), in connection with the proposed issuance and sale
by the Company of 2,500,000 shares (or up to 2,875,000 shares if the
underwriters exercise their over-allotment option in full) of Common Stock, $.01
par value ("Common Stock"), and 143,750 shares of Common Stock issuable upon
exercise of Common Stock Purchase Warrants (the "Warrants"), of the Company
pursuant to a Registration Statement on Form S-2 to be filed by the Company with
the Securities and Exchange Commission (herein referred to as the "Registration
Statement").
We have made such inquiries and examined such documents as we have
considered necessary or appropriate for the purpose of giving the opinions
hereinafter set forth. We have assumed the genuineness and authenticity of all
signatures on all original documents, the authenticity of all documents
submitted to us as originals, the conformity to originals of all documents
submitted to us as copies and the due authorization, execution, delivery or
recordation of all documents where due authorization, execution or recordation
are prerequisites to the effectiveness thereof.
Based upon the foregoing, and having regard for such legal considerations
as we deem relevant, we are of the opinion that:
(i) the Company is a corporation duly organized, validly existing and
in good standing under the laws of the State of Delaware;
(ii) the authorized capital stock of the Company consists of
40,000,000 shares of Preferred Stock, $.10 par value, of which, as of the
date hereof, no shares are outstanding, and 100,000,000 shares of Common
Stock, $.01 par value, of which, as of the date hereof, 14,896,358 shares
are issued and outstanding; and
(iii) the 2,500,000 shares of Common Stock, and up to an aggregate of
375,000 additional shares of Common Stock to cover over-allotments (if
any), and the 143,750 shares of Common Stock issuable upon exercise of the
Warrants, proposed to be issued and sold by the Company pursuant to the
Registration Statement and the Underwriting Agreement with the underwriters
will, upon issuance and delivery against payment thereof, be duly
authorized and legally issued, fully paid and nonassessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
statements made regarding our Firm and to the use of our name under the heading
"Certain Legal Matters" in the prospectus constituting a part of the
Registration Statement.
Yours truly,
LYNCH, CHAPPELL & ALSUP,
a Professional Corporation
By: /s/ THOMAS W. ORTLOFF
---------------------------------
Thomas W. Ortloff, Vice President
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT AUDITORS
To The Board of Directors
Parallel Petroleum Corporation:
We consent to the use of our report included herein and to the reference to
our firm under the heading "Experts" in the Prospectus.
/s/ KPMG PEAT MARWICK LLP
Midland, Texas
November 7, 1996
<PAGE> 1
EXHIBIT 23.2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS
As independent petroleum engineers, Joe C. Neal & Associates hereby
consents to the use of our report dated October 31, 1996 entitled "Parallel
Petroleum Corporation Evaluation of Oil and Gas Reserves, Effective Date
September 30, 1996", and to all references to our firm included in or made a
part of this Registration Statement on Form S-2 to be filed with the Securities
and Exchange Commission pursuant to the Securities Act of 1933, as amended, and
the incorporation by reference into the Parallel Petroleum Corporation
Registration Statement on Form S-2 of all references to our firm included in or
made a part of the annual report on Form 10-K of Parallel Petroleum Corporation
for the fiscal year ended December 31, 1995.
/s/ JOE C. NEAL & ASSOCIATES
Midland, Texas
November 7, 1996
