<PAGE> 1
As filed with the Securities and Exchange Commission on October 16, 1996
Registration No. 333-________
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-----------------
REGISTRATION STATEMENT
ON FORM S-4
UNDER
THE SECURITIES ACT OF 1933
BENTON OIL AND GAS COMPANY
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE 1311 77-0196707
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of incorpo- Classification Code) Identification Number)
ration or organization)
---------------------------------------
1145 EUGENIA PLACE
SUITE 200
CARPINTERIA, CALIFORNIA 93013
(805) 566-5600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE OF
REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
-----------------
A.E. Benton, CEO
1145 Eugenia Place
Suite 200
Carpinteria, California 93013
(805) 566-5600
-----------------
WITH COPIES TO:
Jack A. Bjerke Allen G. Reeves, P.C.
Emens, Kegler, Brown, Hill & Ritter Co., L.P.A. 900 Equitable Building
65 East State Street, Suite 1800 730 Seventeenth Street
Columbus, Ohio 43215 Denver, Colorado 80202
(614) 462-5400 (303) 534-6278
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
If the securities being registered on this Form are to be offered in connection
with the formation of a holding company and there is compliance with General
Instruction G, check the following box. / /
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
- -------------------------------------------------------------------------------------------------------------------------------
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Per Aggregate Offering Amount of
Securities to be Registered Registered Share Price Registration Fee
<S> <C> <C> <C> <C>
- ------------------------------------- ----------------------- ----------------------- ----------------------- -----------------
Common Stock, par value $.01 per 611,940 $0.02(1) $14,279(1) $ 5.00
share
- ------------------------------------- ----------------------- ----------------------- ----------------------- -----------------
Options to purchase shares of 123,774 $7.00(2) $866,418(2) $263.00
Common Stock
- ------------------------------------- ----------------------- ----------------------- ----------------------- -----------------
Common Stock, par value $.01 per 123,774 -- -- $ 0
share(3)
- ------------------------------------- ----------------------- ----------------------- ----------------------- -----------------
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(2) where the securities are being issued in exchange for
other securities in connection with a merger and the target entity has an
accumulated capital deficit. Therefore, one-third of the par value of the
securities to be canceled in the exchange ($0.01 per share, 4,283,580 shares
outstanding) is used to compute the registration fee.
(2) Pursuant to Rule 457(f)(2) and (3), the options will be issued in exchange
for outstanding options of the target entity and if exercised, the registrant
will receive an exercise price of $7.00 per share of common stock.
(3) Issuable upon exercise of Options to purchase Common Stock and no additional
registration fee is payable pursuant to Rule 457(i) since the additional amount
to be received upon exercise has been included for calculation of the
registration fee above.
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 THAT SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(a) OF THE
SECURITIES ACT OF 1933 OR UNTIL THIS REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(a),
MAY DETERMINE.
================================================================================
1
<PAGE> 2
CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(b) OF REGULATION S-K SHOWING
THE LOCATION OF INFORMATION REQUIRED BY PART I OF
FORM S-4.
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
- -------- ------- ----------------------
<S> <C> <C>
Item 1. Forepart of Registration Statement and Outside Front Facing Page of Registration Statement;
Cover Page of Prospectus Outside Front Cover Page of Prospectus
Item 2. Inside Front and Outside Back Cover Pages of Prospectus Available Information; Incorporation of
Certain Documents by Reference
Item 3. Risk Factors, Ratio of Earnings to Fixed Charges and Outside Front Cover Page of Prospectus;
Other Information Available Information; Incorporation of
Certain Documents by Reference; Summary;
Risk Factors
Item 4. Terms of the Transaction Summary; Risk Factors; Background of the
Merger Proposal; The Proposed Merger;
Recommendation of the Crestone Board of
Directors; Failure to Approve the Merger
Proposal; Certain Federal Tax Consequences;
Crestone Special Meeting
Item 5. Pro Forma Financial Information *
Item 6. Material Contacts with the Company Being Acquired Summary; Background of the Merger Proposal;
The Proposed Merger
Item 7. Additional Information Required for Reoffering by *
Persons and Parties Deemed to be Underwriters
Item 8. Interests of Named Experts and Counsel *
Item 9. Disclosure of Commission Position on Indemnification *
for Securities Act Liabilities
Item 10. Information with Respect to S-3 Registrants Available Information; Incorporation of
Certain Documents by Reference; Summary;
Risk Factors; Price Range of Common Stock
and Dividends; Background of the Merger
Proposal; The Proposed Merger; Comparative
Rights of Security Holders; Information
Concerning Benton; Description of Securities
Item 11. Incorporation of Certain Information by Reference Incorporation of Certain Documents by
Reference
Item 12. Information with Respect to S-2 or S-3 Registrants *
Item 13. Incorporation of Certain Information by Reference *
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
ITEM NO. CAPTION LOCATION IN PROSPECTUS
- -------- ------- ----------------------
<S> <C> <C>
Item 14. Information with Respect to Registrants Other than S-2 *
or S-3 Registrants
Item 15. Information with Respect to S-3 Companies *
Item 16. Information with Respect to S-2 or S-3 Companies *
Item 17. Information with Respect to Companies other than S-2 or Summary; Price Range of Common Stock and
S-3 Companies Dividends; Background of the Merger
Proposal; The Proposed Merger;
Recommendation of the Crestone Board of
Directors; Failure to Approve the Merger
Proposal; Comparative Rights of Security
Holders; Information Concerning Crestone;
Management's Discussion and Analysis of
Financial Condition and Results of
Operations of Crestone; Financial Statements
of Crestone
Item 18. Information if Proxies, Consents or Authorizations are Summary; The Proposed Merger; Crestone
to be Solicited Special Meeting
Item 19. Information if Proxies, Consents or Authorizations are *
not to be Solicited or in an Exchange Offer
</TABLE>
* Omitted because the item is inapplicable or the answer is negative.
3
<PAGE> 4
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.
4
<PAGE> 5
CRESTONE ENERGY CORPORATION
303 EAST 17TH AVENUE
SUITE 810
DENVER, COLORADO 80203
TELEPHONE: (303) 831-1380
- --------------------------------------------------------------------------------
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS
- --------------------------------------------------------------------------------
To our Stockholders:
A Special Meeting of Stockholders of Crestone Energy Corporation, a
Colorado corporation ("Crestone") will be held at _____________________,
Denver, Colorado on the ____ day of ____________, 1996 at _____ a.m. for the
following purposes:
1. To consider and vote upon a proposal to merge CEC Acquisition
Corp. ("Merger Sub"), an indirect wholly owned subsidiary of Benton Oil
and Gas Company ("Benton") into Crestone pursuant to an Agreement and
Plan of Merger dated as of September 20, 1996 (the "Merger Agreement")
among Crestone, Benton and Merger Sub. A copy of the Merger Agreement is
attached as Exhibit A to the attached Proxy Statement/Prospectus. The
Merger Agreement provides for, among other things:
a. the Merger of Crestone with Merger Sub whereby Crestone
will become an indirect wholly-owned subsidiary of Benton, and
b. the conversion of each outstanding share of Crestone
Common Stock into the right to receive 0.1429 shares of Benton common
stock.
The Merger and other related matters are more fully-described in the
accompanying Proxy Statement/Prospectus and the Exhibits thereto which
form a part of this Notice.
2. To transact such other business as may properly come before the
Special Meeting or any adjournments thereof.
Only stockholders of record at the close of business on October 21, 1996
are entitled to notice of an to vote at the Special Meeting or any
adjournments thereof. The stock transfer books will not be closed.
By Order of the Board of Directors:
Denver, Colorado
______________, 1996 ___________________________________
Randall C. Thompson
Chairman of the Board and President
PLEASE VOTE, SIGN, DATE AND RETURN THE ENCLOSED PROXY AS PROMPTLY AS
POSSIBLE IN THE ENCLOSED POSTAGE-PAID, ADDRESSED ENVELOPE, WHETHER OR
NOT YOU PLAN TO ATTEND THE SPECIAL MEETING. IF YOU ATTEND THE SPECIAL
MEETING AND SO DESIRE, YOU MAY WITHDRAW YOUR PROXY AND VOTE IN PERSON.
<PAGE> 6
Subject to Completion
Dated October 16, 1996
PROXY STATEMENT/PROSPECTUS
BENTON OIL AND GAS COMPANY
611,940 SHARES OF COMMON STOCK AND
OPTIONS TO PURCHASE 123,774 SHARES OF COMMON STOCK
CRESTONE ENERGY CORPORATION
SPECIAL MEETING OF STOCKHOLDERS TO BE HELD
____________________, 1996
INTRODUCTION
This Proxy Statement/Prospectus is being furnished to holders of common
stock, $.01 par value per share (the "Crestone Common Stock") of Crestone Energy
Corporation, a Colorado corporation ("Crestone"), in connection with the
solicitation of proxies by the Board of Directors of Crestone for use at a
special meeting of stockholders of Crestone (the "Special Meeting") to be held
at _________________, Denver, Colorado on the _____ day of _________________,
1996 at ______ local time, or at any adjournments or postponements thereof. At
the Special Meeting, Crestone stockholders will consider and vote upon the
proposal (the "Merger Proposal") to merge CEC Acquisition Company, a Colorado
corporation ("Merger Sub"), which is an indirect wholly-owned subsidiary of
Benton Oil and Gas Company, a Delaware corporation ("Benton"), with and into
Crestone pursuant to an Agreement and Plan of Merger dated as of September 20,
1996 by and among Benton, Merger Sub and Crestone (the "Merger Agreement").
THE BENTON COMMON STOCK AND OPTIONS TO BE ISSUED PURSUANT TO THIS PROXY
STATEMENT/PROSPECTUS 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 PROXY STATEMENT/PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
Benton has filed a Registration Statement on Form S-4 (the
"Registration Statement") with the Securities and Exchange Commission (the
"SEC") registering the issuance of up to 611,940 shares of Benton Common Stock
and options to purchase up to 123,774 shares of Benton Common Stock. This Proxy
Statement/Prospectus constitutes the Prospectus of Benton, filed as a part of
the Registration Statement, with respect to such securities.
The Benton Common Stock covered by the Registration Statement will be
issued to holders of Crestone Common Stock in connection with the merger of
Merger Sub with and into Crestone (the "Merger"). Under the terms of the Merger
Agreement, each share of Crestone Common Stock, other than shares for which
dissenters' rights have been perfected, will be exchanged for and represent the
right to receive 0.1429 shares of Benton Common Stock upon consummation of the
Merger. In addition, each outstanding option to purchase a share of Crestone
Common Stock (the "Crestone Options") will be exchanged for and represents the
right to receive an option to purchase 0.1429 shares of Benton Common Stock at
an exercise price of $7.00 per share (the "Benton Options") upon consummation of
the Merger. On October 14, 1996, the closing price of Benton Common Stock on the
Nasdaq National Market was $21.38 per share.
THE SECURITIES TO BE ISSUED PURSUANT TO THIS PROXY STATEMENT/PROSPECTUS
INVOLVE CERTAIN RISKS AND TAX CONSEQUENCES. SEE "RISK FACTORS" BEGINNING ON PAGE
21 OF THIS PROXY STATEMENT/PROSPECTUS AND "CERTAIN FEDERAL TAX CONSEQUENCES."
This Proxy Statement/Prospectus was first mailed to Crestone
stockholders on or about ___________________, 1996.
The date of this Proxy Statement/Prospectus is
__________________, 1996.
5
<PAGE> 7
AVAILABLE INFORMATION
Benton 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 SEC.
Reports, proxy statements and other information filed by Benton with the SEC can
be inspected and copied at the public reference facilities maintained by the SEC
at Room 1024, 450 Fifth Street N.W., Washington, DC 20549, and should be
available at the SEC's regional offices at Seven World Trade Center, New York,
New York 10048, and 500 West Madison Street, 14th Floor, Chicago, Illinois
60661. Copies of such material may be obtained at prescribed rates from the
public reference section of the SEC at 450 Fifth Street N.W., Washington, DC
20549, or may be obtained through the Internet at http://www.bentonoil.com. The
Benton Common Stock is quoted on the Nasdaq National Market, and certain of
Benton's reports, proxy materials and other information may be available for
inspection at the offices of the National Association of Securities Dealers,
Inc., 1735 K Street, N.W., Washington, DC 20006.
Benton has filed the Registration Statement with the SEC under the
Securities Act of 1933, as amended (the "Securities Act"), with respect to the
Benton Common Stock and Benton Options to be issued in connection with the
Merger. This Proxy Statement/Prospectus does not contain all of the information
set forth in the Registration Statement and the Exhibits thereto, certain parts
of which are omitted in accordance with the rules and regulations of the SEC.
Such additional information may be obtained from the SEC's principal office in
Washington, DC.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents, heretofore filed by Benton with the SEC
pursuant to the Exchange Act, are hereby incorporated by reference, except as
superseded or modified herein: (i) Benton's Annual Report on Form 10-K for the
fiscal year ended December 31, 1995, as amended on Form 10-K/A on June 14, 1996;
(ii) Benton's quarterly report on Form 10-Q for the quarter ended March 31,
1996; (iii) Benton's quarterly report on Form 10-Q for the quarter ended June
30, 1996; (iv) Benton's Current Report on Form 8-K filed March 27, 1996; (v)
Benton's Current Report on Form 8-K filed January 12, 1996; (vi) Benton's
Current Report on Form 8-K filed January 8, 1996; (vii) the description of
Benton Common Stock set forth in Benton's Registration Statements and Amendments
filed pursuant to the Exchange Act on March 17, 1989, May 14, 1991 and May 15,
1992.
All documents and reports filed by Benton with the SEC pursuant to
Section 13(a), 13(c), 14 or 15(d) of the Exchange Act after the date of this
Proxy Statement/Prospectus and prior to the consummation of the Merger
(including its quarterly reports on Form 10-Q) shall be deemed to be
incorporated by reference in this Proxy Statement/Prospectus and to be a part
hereof from the dates of filing of such documents or reports. Any statement
contained in a document incorporated or deemed to be incorporated by reference
herein shall be deemed to be modified or superseded for purposes of this Proxy
Statement/Prospectus to the extent that a statement contained herein or in any
other subsequently filed document which also is or is deemed to be incorporated
by reference herein modifies or supersedes such statement. Any such statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Proxy Statement/Prospectus.
THIS PROXY STATEMENT/PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE
WHICH ARE NOT PRESENTED HEREIN OR DELIVERED HEREWITH. SUCH DOCUMENTS (OTHER THAN
EXHIBITS TO SUCH DOCUMENTS, UNLESS SUCH EXHIBITS ARE SPECIFICALLY INCORPORATED
BY REFERENCE INTO SUCH DOCUMENTS) ARE AVAILABLE, WITHOUT CHARGE, TO ANY PERSON,
INCLUDING ANY BENEFICIAL OWNER, TO WHOM THIS PROXY STATEMENT/PROSPECTUS IS
DELIVERED, ON WRITTEN OR ORAL REQUEST TO: BENTON OIL AND GAS COMPANY, 1145
EUGENIA PLACE, SUITE 200, CARPINTERIA, CALIFORNIA 93013, ATTENTION: CORPORATE
SECRETARY, TELEPHONE: (805) 566-5600. IN ORDER TO INSURE TIMELY DELIVERY OF THE
DOCUMENTS, ANY REQUESTS SHOULD BE RECEIVED BY ____________, 1996.
No person is authorized to give any information or to make any
representation not contained in this Proxy Statement/Prospectus or in the
documents incorporated herein by reference in connection with the solicitation
and the offering made hereby and, if given or made, such information or
representation should not be relied upon as having been authorized by Benton or
Crestone. This Proxy Statement/Prospectus does not constitute an offer to sell,
6
<PAGE> 8
or a solicitation of an offer to purchase, the securities offered by this Proxy
Statement/Prospectus, or the solicitation of a proxy by any person in any
jurisdiction in which such an offer, solicitation of an offer or proxy
solicitation is not authorized or in which the person making such offer,
solicitation of an offer or proxy solicitation is not qualified to do so or to
any person to whom it is unlawful to make such an offer, solicitation of an
offer, or proxy solicitation. Neither delivery of this Proxy
Statement/Prospectus nor any distribution of the securities made under this
Proxy Statement/Prospectus shall, under any circumstances, create an implication
that there has been no change in the affairs of Benton and/or Crestone since the
date of this Proxy Statement/Prospectus other than as set forth in the documents
incorporated herein by reference.
7
<PAGE> 9
TABLE OF CONTENTS
<TABLE>
<S> <C>
SUMMARY........................................................................................................ 10
General..................................................................................................... 10
The Parties................................................................................................. 10
Crestone Special Meeting.................................................................................... 11
The Merger Proposal......................................................................................... 12
Dissenters' Rights.......................................................................................... 12
Background and Alternatives to the Merger Proposal.......................................................... 12
Reasons for the Merger Proposal; Recommendation of the Crestone Board of Directors.......................... 13
Summary of Tax Consequences................................................................................. 13
Accounting Treatment........................................................................................ 13
Business of Benton and Crestone after Consummation of the Merger............................................ 13
Comparative Rights of Security Holders...................................................................... 14
Resale of Benton Common Stock............................................................................... 14
Description of Benton Options............................................................................... 14
Conditions to the Merger.................................................................................... 14
Regulatory Approvals........................................................................................ 14
Summary Historical Consolidated Financial Information of Benton............................................. 15
Summary Oil and Gas Reserve Information of Benton........................................................... 17
Summary Historical Financial Information of Crestone........................................................ 18
Summary Comparative Unaudited Per Share Data................................................................ 20
RISK FACTORS................................................................................................... 21
Risks Related to the Merger................................................................................. 21
Risks Related to Benton..................................................................................... 22
Risks Related to the Oil and Gas Industry................................................................... 25
PRICE RANGE OF COMMON STOCK AND DIVIDENDS...................................................................... 26
BACKGROUND OF THE MERGER PROPOSAL.............................................................................. 27
THE PROPOSED MERGER............................................................................................ 29
Description of the Merger Proposal.......................................................................... 29
Dissenters' Rights.......................................................................................... 30
Interests of Certain Persons in the Merger.................................................................. 33
Resale of Benton Common Stock............................................................................... 34
Accounting Treatment........................................................................................ 34
Operations After the Merger................................................................................. 34
Expenses; Fees.............................................................................................. 35
RECOMMENDATION OF THE CRESTONE BOARD OF DIRECTORS.............................................................. 35
Crestone Board of Directors' Reasons for the Merger Proposal................................................ 35
Crestone Board of Directors' Recommendation................................................................. 37
Benton Board of Directors' Reasons for the Merger Proposal.................................................. 37
CERTAIN FEDERAL TAX CONSEQUENCES............................................................................... 37
CRESTONE SPECIAL MEETING....................................................................................... 39
Matters to be Considered.................................................................................... 39
Voting Requirements......................................................................................... 39
Proxies..................................................................................................... 39
</TABLE>
8
<PAGE> 10
<TABLE>
<S> <C>
FAILURE TO APPROVE THE MERGER PROPOSAL......................................................................... 40
COMPARATIVE RIGHTS OF SECURITY HOLDERS......................................................................... 40
Description of Benton Capital Stock......................................................................... 40
Description of Crestone Capital Stock....................................................................... 40
Description of Benton Options............................................................................... 41
Comparison of Rights........................................................................................ 41
INFORMATION CONCERNING BENTON.................................................................................. 43
Information Incorporated by Reference....................................................................... 43
Business.................................................................................................... 43
INFORMATION CONCERNING CRESTONE................................................................................ 57
Description of Business..................................................................................... 57
Description of Property..................................................................................... 57
Competition................................................................................................. 59
Regulation.................................................................................................. 60
Legal Proceedings........................................................................................... 60
Security Ownership of Certain Beneficial Owners of Crestone................................................. 60
Selected Financial Data..................................................................................... 62
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS OF CRESTONE.............. 63
Overview.................................................................................................... 64
Liquidity and Capital Resources............................................................................. 64
Analysis of Results of Operations........................................................................... 65
Miscellaneous............................................................................................... 65
LEGAL MATTERS.................................................................................................. 66
EXPERTS........................................................................................................ 66
GLOSSARY....................................................................................................... 67
INDEX TO FINANCIAL STATEMENTS OF CRESTONE...................................................................... F-1
</TABLE>
EXHIBIT A: AGREEMENT AND PLAN OF MERGER
EXHIBIT B: COLORADO DISSENTERS' RIGHTS STATUTE
EXHIBIT C: BENTON 1995 ANNUAL REPORT TO STOCKHOLDERS
EXHIBIT D: BENTON'S QUARTERLY REPORTS ON FORM 10-Q FOR THE QUARTERS ENDED MARCH
31, 1996 AND JUNE 30, 1996
9
<PAGE> 11
SUMMARY
The following is a summary of certain information contained elsewhere in this
Proxy Statement/Prospectus. This summary is not intended to be a complete
description of the matters covered in this Proxy Statement/Prospectus and is
subject to and qualified in its entirety by reference to the more detailed
information and financial statements contained elsewhere in this Proxy
Statement/Prospectus, including Exhibits hereto and the documents incorporated
herein by reference. See Glossary included elsewhere in this Proxy
Statement/Prospectus for definitions of certain oil and gas terms.
GENERAL
At the Crestone Special Meeting, holders of Crestone Common Stock will be asked
to consider a proposal to merge Merger Sub with and into Crestone, pursuant to
the terms and conditions of the Agreement and Plan of Merger, dated as of
September 20, 1996, by and between Benton, Merger Sub and Crestone (the "Merger
Agreement"), as more particularly described herein. A copy of the Merger
Agreement is attached to this Proxy Statement/Prospectus as Exhibit A and is
incorporated herein by reference.
As a result of the Merger of Merger Sub and Crestone, each holder of Crestone
Common Stock, other than holders who perfect their dissenters' rights, will
receive, in exchange for each share of Crestone Common Stock, the right to
receive 0.1429 shares of Benton Common Stock and will receive cash in lieu of
fractional share interests, as more particularly described herein. In addition,
each outstanding Crestone Option will be exchanged for and represent the right
to receive a Benton Option to purchase 0.1429 shares of Benton Common Stock with
an exercise price of $7.00 per share, as more particularly described herein. A
Crestone stockholder who does not vote in favor of the merger and otherwise
perfects his dissenter's rights has the right to demand the fair cash value for
his shares of Crestone Common Stock. See "The Proposed Merger - Dissenters'
Rights."
THE PARTIES
Benton. Benton is an independent energy company which has been engaged in the
development and production of oil and gas properties since 1989. Although
originally active only in the United States, Benton has developed significant
interests in Venezuela and Russia, and recently sold substantially all of its
remaining United States oil and gas interests. Benton's operations are conducted
principally through its 80%-owned Venezuelan subsidiary, Benton-Vinccler, C.A.
("Benton-Vinccler"), which operates in the South Monagas Unit in Venezuela, and
its 34%-owned Russian joint venture, GEOILBENT, which operates in the North
Gubkinskoye Field in Siberia, Russia.
As of December 31, 1995, Benton had total assets of $214.8 million ($330.8
million at June 30, 1996), total estimated proved reserves of 96,212 MBOE, and a
standardized measure of discounted future net cash flow, before income taxes,
for total proved reserves of $372.3 million. For the year ended December 31,
1995 and the six months ended June 30, 1996, Benton had total revenues of $65.1
million and $74.8 million, respectively, and net income of $10.6 million and
$10.1 million, respectively.
Benton has been successful in increasing reserves, production, revenues and
earnings during the last two years. From year-end 1993 through 1995, estimated
proved reserves increased from 42,785 MBOE to 96,212 MBOE, and net production
increased from a total of 519 MBOE in 1993 to 6,647 MBOE in 1995. As production
has increased over this period, average lifting costs per Bbl have declined from
$7.26 to $1.19 in Venezuela, and from $16.22 to $5.63 in Russia. Between 1993
and 1995, Benton's annual revenues increased from $7.5 million to $65.1 million.
10
<PAGE> 12
The following table summarizes Benton's financial operating data, proved
reserves and production activity in Venezuela and Russia for each of the three
years ended December 31:
<TABLE>
<CAPTION>
VENEZUELA(1) RUSSIA
----------------------------- ------------------------------
Dollars in thousands 1993 1994 1995 1993 1994 1995(2)
---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C> <C>
Oil and Gas Revenues $ 1,333 $21,472 $49,174 $ 324 $ 3,513 $ 6,016
Expenses(3) 1,394 8,806 17,876 558 3,670 4,276
------- ------- ------- ------- ------- -------
Results of Operations from Oil
and Gas Producing Activities $ (61) $12,666 $31,298 $ (234) $ (157) $ 1,740
======= ======= ======= ======= ======= =======
Proved Reserves (MBOE) 19,389 60,707 73,593 10,121 17,540 22,618
Average Daily Production (BOE) 440 6,902 14,949 77 806 1,345
</TABLE>
(1) Includes 100% of the reserve information, production activity and
financial data, without deduction for minority interest. All Venezuelan
reserves are attributable to an operating service agreement between
Benton-Vinccler and Lagoven, S.A. ("Lagoven") an affiliate of the
national oil company, Petroleos de Venezuela, S.A. ("PDVSA"), under
which all mineral rights are owned by the Government of Venezuela. See
"Information Concerning Benton --Business--South Monagas Unit,
Venezuela" and "--Reserves."
(2) The financial information related to Russia and included in the 1995
presentation contains information for the nine months ended September
30, 1995, the end of the fiscal period for GEOILBENT.
(3) Expenses include lease operating costs and production taxes and
depletion.
Benton was incorporated in Delaware in September 1988. The principal executive
offices of Benton are located at 1145 Eugenia Place, Suite 200, Carpinteria,
California 93013, and its telephone number at that address is (805) 566-5600.
Benton Common Stock is quoted on the Nasdaq National Market under the symbol
"BNTN." See "Information Concerning Benton" for a more detailed discussion of
Benton.
Crestone. Crestone is an independent oil and gas company whose primary asset is
a petroleum contract (the "WAB-21 Contract") with China National Offshore Oil
Corporation ("CNOOC"). Crestone Common Stock is not actively traded on any
exchange and there is no quoted market price. At September 30, 1995, Crestone
had total assets of approximately $1.2 million ($0.8 million at June 30, 1996).
For the year ended September 30, 1995 and the nine months ended June 30, 1996,
Crestone had total revenues of $156,534 and $293,145, respectively, and a net
loss of $414,541 and $370,984, respectively. The executive offices of Crestone
are located at 303 East 17th Avenue, Suite 810, Denver, Colorado 80203, and its
telephone number at that address is (303) 831-1380. See "Information Concerning
Crestone" and "Management's Discussion and Analysis of Financial Condition and
Results of Operations of Crestone" for a more detailed discussion of Crestone.
Merger Sub. Merger Sub is an indirect wholly-owned subsidiary of Benton, has no
current business operations, and was formed solely to facilitate the Merger.
CRESTONE SPECIAL MEETING
The Crestone Special Meeting will be held on ____________, 1996 at ________
local time at ________________, Denver, Colorado. At the Crestone Special
Meeting, Crestone stockholders will consider and vote upon the approval of the
Merger Proposal. IF THE MERGER PROPOSAL IS NOT APPROVED BY THE STOCKHOLDERS OF
CRESTONE, THE MERGER AS DESCRIBED HEREIN CANNOT BE CONSUMMATED, NOR WILL ANY
SHARES OF BENTON COMMON STOCK BE ISSUED.
The record date for determining the holders of shares of Crestone Common Stock
entitled to notice of and to vote at the Crestone Special Meeting is October 21,
1996 (the "Record Date"). The affirmative vote of the holders of at least a
majority of the shares of Crestone Common Stock issued and outstanding and
entitled to vote on the subject matter is required for approval of the Merger
Proposal. As of the Record Date and assuming the exercise of the
11
<PAGE> 13
Crestone Options held by all officers and directors prior to the Record Date,
directors and executive officers of Crestone, together with their affiliates,
will hold approximately 60.57% of the outstanding shares of Crestone Common
Stock which are entitled to vote, and have indicated that they intend to vote
such shares in favor of the Merger Proposal. Such vote in favor of the Merger
Proposal by the Crestone directors and executive officers would assure its
approval by Crestone's stockholders without regard to the vote of any other
Crestone stockholder. See "Crestone special Meeting - Voting Requirements" and
"Information Concerning Crestone - Security Ownership of Certain Beneficial
Owners of Crestone."
THE MERGER PROPOSAL
At the Crestone Special Meeting, Crestone stockholders will consider and vote
upon approval of the Merger Proposal that provides for, among other things, (a)
the Merger of Merger Sub with and into Crestone, and (b) the cancellation,
conversion and exchange of each outstanding share of Crestone Common Stock,
other than shares for which dissenter's rights have been perfected, into the
right to receive 0.1429 shares of Benton Common Stock for each share of Crestone
Common Stock. See "The Proposed Merger - Description of the Merger Proposal" and
"Crestone Special Meeting." No fractional shares of Benton Common Stock will be
issued pursuant to the Merger. The Merger Agreement provides that each holder of
shares of Crestone Common Stock who would have otherwise been entitled to
receive fractional shares of Benton Common Stock will be entitled to receive, in
lieu thereof, cash (without interest) in an amount equal to the fraction of a
share to which such holder would otherwise have been entitled multiplied by
$21.00, the market value of Benton Common Stock for purposes of the Merger
Agreement.
In addition, each outstanding Crestone Option will be exchanged for and
represent the right to receive a Benton Option to purchase 0.1429 shares of
Benton Common Stock at an exercise price of $7.00 per share. No fractional
interests in Benton Options will be issued pursuant to the Merger. The Merger
Agreement provides that Benton Options issued in connection with the Merger will
be rounded to the nearest whole number of Benton Options, and no fractional
interest will be issued.
DISSENTERS' RIGHTS
Under Colorado law, Crestone stockholders who provide a written notice of
dissent to Crestone prior to the Special Meeting and neither vote in favor of
the Merger nor consent thereto in writing are entitled to receive fair value for
their shares of Crestone Common Stock and may be entitled to an appraisal by the
district court of the fair value of their shares of stock, provided that they
comply with all requirements under Colorado law. TO PERFECT THEIR DISSENTERS'
RIGHTS, CRESTONE STOCKHOLDERS MUST COMPLY WITH ALL CONDITIONS WHICH ARE
SUMMARIZED UNDER "THE PROPOSED MERGER - DISSENTERS' RIGHTS" AND SET FORTH IN
SECTIONS 7-113-101 THROUGH 7-113-302, INCLUSIVE, OF THE COLORADO BUSINESS
CORPORATION ACT, WHICH IS REPRODUCED AS EXHIBIT B TO THIS PROXY
STATEMENT/PROSPECTUS.
Benton stockholders are not entitled to any appraisal rights in connection with
the transactions set forth in this Proxy Statement/Prospectus.
BACKGROUND AND ALTERNATIVES TO THE MERGER PROPOSAL
Background. Crestone over the last few years has received several offers for its
primary asset, a large undeveloped acreage position in the South China Sea under
a Petroleum Contract with CNOOC for an area known as Wan'an Bei, WAB-21.
Crestone had reached the stage in its corporate history where consideration of
the Merger Proposal became appropriate. That determination was based on the
following factors:
Production Declines. Since 1986, Crestone's oil production volumes have
declined from peak levels reached in 1985. Gas production began to
decline in 1985 from peak levels reached in 1984. These reductions are
due to the natural declines occurring in Crestone's United States
properties. Production declines are expected to continue in subsequent
periods due to ongoing depletion of Crestone's wells. The decline in
production rates due to depletion of reserves is neither unusual nor
unexpected in the oil and gas industry.
12
<PAGE> 14
Going Concern Considerations. Crestone has experienced negative cash
flows from operating activities for the nine months ended June 30, 1996
and the years ended September 30, 1995 and 1994 and has current
liabilities in excess of current assets as of June 30, 1996. In
addition, Crestone has an aggregate investment in unproved oil and gas
properties of $534,232 as of June 30, 1996, the ultimate recoverability
of which is dependent upon Crestone obtaining the necessary financing
to develop these properties or generating sufficient proceeds from the
sale of these properties. These factors raise substantial doubt about
Crestone's ability to continue as a going concern.
REASONS FOR THE MERGER PROPOSAL; RECOMMENDATION OF THE CRESTONE BOARD OF
DIRECTORS
THE CRESTONE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT,
BELIEVES THAT THE APPROVAL OF THE MERGER PROPOSAL IS IN THE BEST INTERESTS OF
CRESTONE AND ITS STOCKHOLDERS, AND UNANIMOUSLY RECOMMENDS THAT CRESTONE
STOCKHOLDERS VOTE THEIR SHARES TO APPROVE THE MERGER PROPOSAL.
In reaching its decision to approve the Merger Agreement, the Board of Directors
considered: (i) that the Merger Agreement allows all of the Crestone
stockholders to participate in the exchange of Crestone's Common Stock; (ii) its
knowledge of the respective businesses of Crestone and Benton; (iii) that the
Merger would allow the stockholders of Crestone to continue to participate in
the oil and gas business; (iv) that the Merger permits Crestone stockholders to
participate directly in any production from the Wan'An Bei, WAB-21 Contract Area
(as defined herein) by participating in a shareholder trust (the "Shareholder
Trust") with a 4% of 8/8ths economic interest reserved; (v) the benefits to the
Crestone stockholders of being a part of the combined entity with larger
reserves and substantial production; (vi) the lack of acceptable offers received
for Crestone Common Stock; (vii) the terms of the Merger Agreement; and (viii)
that the Crestone stockholders will be relieved of bearing alone all the future
expense and overhead of Crestone.
Neither Benton nor Crestone has sought or obtained the opinion of any financial
advisor as to the fairness of the Merger Proposal. See "Recommendation of the
Crestone Board of Directors."
SUMMARY OF TAX CONSEQUENCES
Benton and Crestone have structured the Merger with the intention that it be
characterized as a tax-free reorganization under Section 368(a)(1) of the
Internal Revenue Code of 1986, as amended (the "Code"). Therefore, none of
Benton, Crestone or their respective stockholders will recognize gain or loss
for federal income tax purposes by reason of the Merger, other than in respect
of the interests in the Shareholder Trust distributed by Crestone to its
stockholders, cash received in lieu of fractional shares by Crestone
stockholders and cash received by Dissenting Stockholders. However, neither
Benton nor Crestone has requested a ruling from the Internal Revenue Service as
to any federal income tax consequences of the Merger. The foregoing summary of
certain federal income tax consequences is based upon advice and an opinion of
Emens, Kegler, Brown, Hill & Ritter Co., L.P.A. Holders of Crestone Common Stock
and Crestone Options are urged to read the more detailed discussion of federal
income tax consequences contained at "Certain Federal Tax Consequences" and are
also encouraged to consult their own tax advisors with respect to the specific
tax consequences to them of the Merger, including the application of federal,
state, local and foreign tax laws.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase by Benton. Accordingly, the
purchase price will be allocated to Crestone's assets and liabilities acquired
based on estimated fair values as of the date of acquisition.
BUSINESS OF BENTON AND CRESTONE AFTER CONSUMMATION OF THE MERGER
Benton and Crestone are independent oil and gas companies which are engaged in
the acquisition of producing properties and exploration, development and
production of oil and gas, internationally and domestically. Upon the
consummation of the Merger of Merger Sub and Crestone, Crestone will operate as
an indirect wholly owned subsidiary of Benton.
13
<PAGE> 15
Irrespective of whether or not the Merger is consummated, Crestone intends to
sell its interests in the United States properties. Crestone has solicited
indications of interest for the sale of these properties but there can be no
assurance that it will be able to sell the United States properties. Until such
properties are sold, Crestone, or Benton as the case may be, intends to continue
to operate such properties as are currently being operated by Crestone.
COMPARATIVE RIGHTS OF SECURITY HOLDERS
For a comparison of the rights of Benton stockholders under Delaware law and
Benton's Certificate of Incorporation and Bylaws with the rights of Crestone
stockholders under Colorado law and Crestone's Articles of Incorporation and
Bylaws, and for a description of provisions relating to a change of control of
Benton, see "Comparative Rights of Security Holders."
RESALE OF BENTON COMMON STOCK
The shares of Benton Common Stock that will be issued to Crestone stockholders
in connection with the Merger have been registered with the SEC under the
Securities Act. All shares of Benton Common Stock received by Crestone
stockholders in connection with the Merger will be freely tradable by those
stockholders, subject to certain limitations imposed by the Securities Act on
Affiliates, as defined, and limitations imposed upon the officers and directors
of Crestone pursuant to a lock up provision in the Merger Agreement. See "The
Proposed Merger - Resale of Benton Common Stock."
DESCRIPTION OF BENTON OPTIONS
Each outstanding Crestone Option will be exchanged for and represent the right
to receive an option to purchase 0.1429 shares of Benton Common Stock at an
exercise price of $7.00 per share. The Benton Options will be issued pursuant to
a Stock Option Plan and Stock Option Agreement. The Benton Options will expire
10 years from the date of issuance of the Crestone Option exchanged therefor.
The number of shares of Benton Common Stock and the exercise price of the Benton
Options is subject to adjustment under certain circumstances, as described
therein. The Benton Options are not subject to redemption or call by Benton. See
"Comparative Rights of Security Holders - Description of Benton Options."
CONDITIONS TO THE MERGER
The obligations of Benton and/or Crestone to consummate the Merger are subject
to certain conditions set forth in the Merger Agreement, including approval of
the Merger Proposal by the stockholders of Crestone, Benton's satisfaction with
respect to certain matters related to the WAB-21 Contract, not more than 2% of
the outstanding shares of Crestone Common Stock having perfected dissenters'
rights and Benton having received an opinion from a Chinese law firm that
practices law with the approval of the Ministry of Justice of The People's
Republic of China by October 15, 1996 that the WAB-21 Contract is valid, binding
and in full force and effect, and that the transactions contemplated by the
Merger Agreement do not violate the terms of such contract, and that no
approvals or consents need to be obtained with respect to the contemplated
transactions. Such opinion was received prior to October 15, 1996, the required
delivery date for such an opinion. See "The Proposed Merger Description of the
Merger Proposal - Condition to the Merger."
REGULATORY APPROVALS
No federal or state regulatory approval is required in connection with the
merger or the approval of the Merger Proposal by Crestone.
14
<PAGE> 16
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL INFORMATION OF BENTON
The following table sets forth summary historical consolidated financial
information of Benton and should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
Benton's Consolidated Financial Statements, related notes and other financial
data included elsewhere herein or incorporated herein by reference.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
--------------------------------- ------------------------
In thousands 1993 1994 1995(1) 1995 1996(1)
---- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS:
Total revenues(2) $ 7,503 $34,705 $65,068 $25,870 $74,828
Lease operating costs and
production taxes(2) 5,110 9,531 10,703 5,287 9,256
Depletion, depreciation
and amortization(2) 2,633 10,298 17,411 6,473 14,799
General and administrative
expense 2,631 5,242 9,411 3,884 8,951
Interest expense(2) 1,958 3,888 7,497 3,361 5,641
Litigation settlement and
partnership exchange
expenses -- -- 1,673 -- 2,140
------- ------- ------- ------- -------
Income (loss) before income
taxes and minority interest (4,829) 5,746 18,373 6,865 34,041
Income tax expense -- 698 2,478 1,971 9,442
------- ------- ------- ------- -------
Income (loss) before
minority interest (4,829) 5,048 15,895 4,894 24,599
Minority interest -- 2,094 5,304 1,742 4,399
------- ------- ------- ------- -------
Income (loss) before extraordinary charge $(4,829) $ 2,954 $10,591 $ 3,152 $20,200
======= ======= ======= ======= =======
Extraordinary charge for early retirement
of debt, net of tax benefit of $879,000 -- -- -- -- 10,075
------- ------- ------- ------- -------
Net income (loss) $(4,829) $ 2,954 $10,591 $ 3,152 $10,125
------- ------- ------- ------- -------
Net income (loss) per common share $ (0.26) $ 0.12 $ 0.40 $ 0.12 $ 0.34
------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31 SIX MONTHS ENDED JUNE 30
---------------------------------- ------------------------
1993 1994 1995(1) 1995 1996(1)
---- ---- ------ ---- ------
<S> <C> <C> <C> <C> <C>
OTHER DATA:
Net cash provided by (used in) operating
activities (1,790) 13,463 32,349 8,187 33,517
Net cash provided by (used in) investing
activities (18,619) (55,078) (53,644) (12,422) (99,181)
Net cash provided by (used in) financing
activities 43,044 19,500 13,282 15,458 73,269
</TABLE>
15
<PAGE> 17
<TABLE>
<CAPTION>
AT JUNE 30, 1996
----------------
<S> <C>
BALANCE SHEET DATA:
Working capital $110,431
Total assets 330,832
Long-term obligations, net of current portion 127,174
Stockholders' equity(3) 134,500
</TABLE>
(1) The financial information related to Russia and included in the year
end 1995 presentation contains information for the nine months ended
September 30, 1995, the end of the fiscal period for GEOILBENT.
Similarly, the 1996 presentation contains information at and for the
nine months ended June 30, 1996.
(2) Assuming the sale by Benton of substantially all of its U.S. property
interests, which occurred in April 1996 (the "U.S. Property Sale"), had
occurred on January 1, 1995, pro forma effects on the consolidated
statement of operations for the year ended December 31, 1995 would
include reductions in oil and gas revenues, lease operating costs and
production taxes, depletion and interest expense of $7.4 million, $1.0
million, $4.0 million and $2.7 million, respectively. The pro forma
effects on the consolidated statement of operations for the six months
ended June 30, 1996 would include reductions in oil and gas revenues,
lease operating costs and production taxes, depletion and interest
expense of $4.3 million, $0.5 million, $1.6 million and $0.7 million,
respectively.
(3) No cash dividends were paid during the periods presented.
16
<PAGE> 18
SUMMARY OIL AND GAS RESERVE INFORMATION OF BENTON
The following sets forth summary information with respect to the estimates of
Benton's proved oil and gas reserves at December 31, 1993, 1994 and 1995,
prepared by Benton and audited by Huddleston & Co., Inc., independent petroleum
engineers.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
Dollars in thousands 1993 1994 1995
---- ---- ----
<S> <C> <C> <C>
VENEZUELA(1):
Crude oil and condensate (MBbl) 19,389 60,707 73,593
Natural gas (Mmcf) -- -- --
Oil equivalent (MBOE) 19,389 60,707 73,593
RUSSIA:
Crude oil and condensate (MBbl) 10,121 17,540 22,618
Natural gas (Mmcf) -- -- --
Oil equivalent (MBOE) 10,121 17,540 22,618
UNITED STATES(2):
Crude oil and condensate (MBbl) 10,258 233 --
Natural gas (Mmcf) 18,099 16,077 6
Oil equivalent (MBOE) 13,275 2,913 1
TOTAL(1):
Crude oil and condensate (MBbl) 39,768 78,480 96,211
Natural gas (Mmcf) 18,099 16,077 6
Oil equivalent (MBOE) 42,785 81,160 96,212
Standardized measure of discounted future
net cash flows before provision for
income taxes(1)(3) $131,413 $336,320 $372,293
</TABLE>
(1) Includes 100% of the reserve information, without deduction for
minority interest. All Venezuelan reserves are attributable to an
operating service agreement between Benton-Vinccler and Lagoven under
which all mineral rights are owned by the Government of Venezuela.
(2) At December 31, 1995, substantially all of Benton's U.S. reserves and
acreage positions were held for sale pursuant to the U.S. Property
Sale, and accordingly all such reserves were excluded.
(3) Benton values its reserves as of December 31 of each year, based on oil
and natural gas prices as of that date. Market prices for both oil and
natural gas are subject to a significant degree of variation both in
domestic and international markets, and this variation will affect the
calculation of future net cash flows reported by Benton at any specific
date.
17
<PAGE> 19
SUMMARY HISTORICAL FINANCIAL INFORMATION OF CRESTONE
The following table sets forth, for the periods and at the dates indicated,
selected historical financial data of Crestone. The financial data for the nine
months ended June 30, 1996 and the years ended September 30, 1991, 1992, 1993,
1994 and 1995 are derived from Crestone's audited financial statements. The
financial data of Crestone for the nine months ended June 30, 1995 is derived
from Crestone's unaudited interim financial statements, which, in the opinion of
management of Crestone, have been prepared on the same basis as the audited
financial statements and include all adjustments (consisting only of normal
recurring adjustments) necessary for the fair presentation of the financial data
for such period. The results for the nine months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the full fiscal
year ending September 30, 1996. The summary financial information presented
below should be read in conjunction with Crestone's financial statements and
related notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations of Crestone" included elsewhere herein.
18
<PAGE> 20
<TABLE>
<CAPTION>
Year Ended September 30,
-------------------------------------------------------------------------------------------
1991 1992 1993 1994 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Statement of Operations:
Revenues:
Oil and gas sales $ 169,049 $ 150,787 $ 150,228 $ 108,005 $ 113,023
Gain on sales of
assets 190,072 -- -- 33,259 32,973
Other 85,789 46,479 34,431 18,657 10,538
----------- ----------- ----------- ----------- -----------
Total 444,910 197,266 184,659 159,921 156,534
Operating costs and
expenses 524,987 710,412 336,043 802,600 571,075
----------- ----------- ----------- ----------- -----------
Income tax benefit (24,167) (168,816) (3,894) -- --
----------- ----------- ----------- ----------- -----------
Net loss $ (55,910) $ (344,330) $ (147,490) $ (642,679) $ (414,541)
=========== =========== =========== =========== ===========
Per Share Data:
Net loss per common $ (0.01) $ (0.08) $ (0.04) $ (0.15) $ (0.10)
share =========== =========== =========== =========== ===========
Weighted average common
shares outstanding 4,200,000 4,200,000 4,200,000 4,200,000 4,200,000
=========== =========== =========== =========== ===========
Statement of Cash Flows Data:
Net cash provided by
(used in) operating
activities $ (484,784) $ 190,575 $ 108,158 $ (375,768) $ (213,121)
Proceeds from sale of
property and
equipment 431,814 16,311 245,725 282,015 254,734
Additions to property
and equipment (419,029) (391,026) (435,273) (161,227) (362,544)
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended
June 30,
-------------------------
1995 1996
---- ----
(unaudited)
<S> <C> <C>
Statement of Operations:
Revenues:
Oil and gas sales $ 68,836 $ 74,115
Gain on sales of
assets 7,477 214,252
Other 9,112 4,778
----------- -----------
Total 85,425 293,145
----------- -----------
Operating costs and
expenses 431,372 664,129
----------- -----------
Income tax benefit -- --
----------- -----------
Net loss $ (345,947) $ (370,984)
=========== ===========
Per Share Data:
Net loss per common $ (0.02) $ (0.09)
share =========== ===========
Weighted average common
shares outstanding 4,200,000 4,200,000
=========== ===========
Statement of Cash Flows Data:
Net cash provided by
(used in) operating
activities $ (162,545) $ (231,869)
Proceeds from sale of
property and
equipment 226,875 281,680
Additions to property
and equipment (289,660) (87,473)
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30, June 30,
------------------------------------------------------------------------------- ------------------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Working capital
(deficit) $1,013,253 $ 787,998 $ 648,314 $ 432,089 $ 1,756 $ (69,114)
Total assets 2,784,345 2,306,113 2,148,400 1,509,945 1,191,694 829,331
Stockholders' equity 2,616,049 2,271,719 2,124,229 1,481,550 1,067,009 696,025
</TABLE>
19
<PAGE> 21
SUMMARY COMPARATIVE UNAUDITED PER SHARE DATA
The following sets forth certain unaudited pro forma and pro forma equivalent
per share data for Benton for the six month period ended June 30, 1996 and for
the fiscal year ended December 31, 1995 and for Crestone for the nine month
period ended June 30, 1996 and for the fiscal year ended September 30, 1995.
Such data gives effect to the Merger as a purchase for accounting and financial
reporting purposes, and assumes the Merger had been effective during the periods
presented for the net income (loss) and dividends per common share data and
assumes the Merger took place on June 30, 1996 for the stockholders' equity per
common share. The following data is derived from and should be read in
conjunction with, the historical consolidated financial statements of Benton and
Crestone, and the related notes thereto, included elsewhere, or incorporated by
reference in the Proxy Statement/Prospectus. The pro forma financial data is
presented for informational purposes only, and is not necessarily indicative of
the results that actually would have occurred had the Merger been effective
during such periods or the results that may occur or be obtained in the future.
<TABLE>
<CAPTION>
AS OF AND FOR THE FOR
FOR THE YEAR ENDED SIX MONTH PERIOD THE NINE MONTH PERIOD
DECEMBER 31, 1995 ENDED ENDED
BENTON JUNE 30, 1996 JUNE 30, 1996
<S> <C> <C> <C>
Net Income Per Common Share and
Common Share Equivalent:
Historical .......................... $ 0.40 $ 0.34 $ 0.51
Pro Forma(1) ........................ $ 0.38 $ 0.32 $ 0.49
Dividend Per Common Share:
Historical .......................... $ 0 $ 0 $ 0
Pro Forma ........................... $ 0 $ 0 $ 0
Stockholders' Equity Per Common Share:
Historical ......................... $ 4.93
Pro Forma ...................... ... $ 5.37
</TABLE>
<TABLE>
<CAPTION>
AS OF AND FOR THE
NINE MONTH PERIOD
FOR THE YEAR ENDED ENDED
CRESTONE SEPTEMBER 30, 1995 JUNE 30, 1996
------------------ -------------
<S> <C> <C>
Net Income (loss) Per Common Share and
Common Share Equivalent:
Historical....................................... $(0.10) $ (0.09)
Pro Forma Equivalent (2) ........................ $ 0.05 $ 0.07
Dividend Per Common Share:
Historical....................................... $ 0 $ 0
Pro Forma Equivalent (2) ........................ $ 0 $ 0
Stockholders' Equity Per Common Share:
Historical ...................................... $ 0.17
Pro Forma Equivalent (2) ........................ $ 0.77
</TABLE>
- ----------------------------
(1) Pro forma net income per share assumes the issuance of 735,714 shares of
Benton Common Stock and net incremental expenses of $300,000, $150,000 and
$225,000 for the year ended December 31, 1995 and the six and nine months ended
June 30, 1996, respectively.
(2) Pro forma equivalent amounts per share are based on Benton's pro forma
amounts per share adjusted for the 1 for 7 exchange ratio.
20
<PAGE> 22
RISK FACTORS
RISKS RELATED TO THE MERGER
China Operations of Crestone
The most significant asset of Crestone is the WAB-21 Contract executed in 1992
between Crestone and CNOOC to explore and develop certain offshore acreage in
the South China Sea. The WAB-21 Contract covers approximately six million acres,
with an option for another one million acres under certain circumstances, and
lies within an area which is the subject of a territorial dispute between The
People's Republic of China and Vietnam. Vietnam has also executed an agreement
on a portion of the same offshore acreage with Conoco, a unit of DuPont
Corporation. The territorial dispute has existed for many years, and there has
been limited exploration and no development activity in the area under dispute.
It is uncertain when or how this dispute will be resolved, and under what terms
the various countries and parties to the agreements may participate in the
resolution, although certain proposed economic solutions currently under
discussion would result in Crestone's interest being reduced.
The WAB-21 Contract requires certain seismic survey activities to occur by May
1997. If such activities are not completed, the contract is subject to
cancellation. Because of the territorial dispute, no such activities have
occurred by Crestone and may not occur by May 1997. CNOOC has indicated in
writing a willingness to extend the seismic operation deadline for two years
because of the lack of resolution of the territorial dispute and has furnished
Crestone a letter wherein CNOOC has extended such deadline for an additional
period through June 1, 1999. There can be no assurance that the dispute will be
resolved within the period of this or any further extension. Additionally, the
WAB-21 Contract may be in a state of technical default because Crestone has not
registered to do business in China, and there has been no written waiver of such
default, although CNOOC has acknowledged that such a waiver is necessary.
Exploration and development of the area will require substantial capital
expenditures which Benton cannot provide from its cash flow from current
operations. Benton expects that it will be necessary to raise additional funds
from joint ventures or the sale of additional debt or equity or other
arrangements which may reduce its interest in the WAB-21 Contract. There can be
no assurance that such joint ventures can be formed or such funds can be raised
or such other arrangements made on terms acceptable to Benton.
There have been limited exploration activities in the WAB-21 Contract area.
There can be no assurance that oil or natural gas can be commercially produced
from the area. Natural gas is in plentiful supply in the region and currently
there is no ready market for additional natural gas supplies.
Value of Benton Common Stock
The exchange value that the Crestone stockholders will receive in connection
with the Merger has been fixed in accordance with the Merger Agreement. Each
Crestone stockholder (other than those who perfect dissenters' rights) will
receive 0.1429 shares of Benton Common Stock in exchange for each share of
Crestone Common Stock. Pursuant to the terms of the Merger Agreement, the
Crestone Board of Directors does not have the ability to terminate the Merger
Agreement if the market value of the Benton Common Stock fluctuates or
decreases. The actual value of the Benton Common Stock could fluctuate
significantly and the actual market value of the Benton Common Stock at
consummation of the Merger could be significantly less than the market value on
the date hereof. Accordingly, Crestone stockholders should assume for purposes
of voting on the Merger Proposal that the Benton Common Stock they receive could
have a significantly reduced market value, and Crestone stockholders are urged
to obtain current market quotations for the Benton Common Stock in connection
with voting on the Merger Proposal. See "Price Range of Common Stock and
Dividends."
21
<PAGE> 23
Tax Consequences of the Merger
Benton and Crestone have structured the Merger with the intention that it be
characterized as a tax free reorganization under the Code; however, Crestone
stockholders will have tax consequences from the distribution by Crestone of the
interests in the Shareholder Trust. Benton and Crestone have received advice and
an opinion from Emens, Kegler, Brown, Hill & Ritter, Co., L.P.A. regarding
certain federal income tax consequences of the Merger. However, neither Benton
nor Crestone has requested any ruling from the Internal Revenue Service as to
any federal income tax consequences of the Merger. In addition, other provisions
of the Code may, under certain circumstances and conditions, result in certain
stockholders of Crestone having federal income tax consequences from the Merger
even if it qualifies as a tax free reorganization under the Code. Accordingly,
no assurance can be given that Crestone stockholders who receive Benton Common
Stock pursuant to the Merger will not have any federal income tax consequences.
Additionally, Crestone anticipates distributing the interests in the Shareholder
Trust to the Crestone stockholders, as described herein. Crestone and Benton
have valued the Shareholder Trust at $200,000. Accordingly, Crestone
stockholders who receive the interests in the Shareholder Trust will have
federal income tax consequences related to his or her proportionate share of the
interests in the Shareholder Trust, based on the $200,000 attributed to such
asset by Crestone. There can be no assurance that the Internal Revenue Service
will not question or dispute the value of the Shareholder Trust, which could
result in increased taxes payable by Crestone and by Crestone's stockholders.
See "Certain Federal Tax Consequences."
No Fairness Opinion
Neither the Board of Directors of Benton nor the Board of Directors of Crestone
sought or obtained the opinion of an independent financial advisor as to the
fairness of the Merger Proposal from a financial point of view to its respective
corporation and stockholders. See "Recommendation of Crestone Board of
Directors."
No Fractional Shares
No fractional shares will be issued in connection with the Merger. A Crestone
stockholder who would otherwise be entitled to a fractional share of Benton
Common Stock will be paid cash in lieu of such fractional shares. Benton Options
issued in connection with the Merger will be rounded to the nearest whole number
of Benton Options, and no fractional interests will be issued.
Necessity for Effective Registration Statement for Exercise of Benton Options
A person who receives Benton Options in connection with the Merger and who
exercises those Benton Options will receive shares of Benton Common Stock which
will be subject to restrictions on transfer, unless Benton files and/or keeps
current a Registration Statement with the SEC to cover the issuance of Benton
Common Stock in connection with such exercises. If Crestone Options are
outstanding on the effective date of the Merger, Benton intends to file a
registration statement with the SEC covering the exercise of the Benton Options
and will take all reasonable steps to insure that such Registration Statement
remains effective throughout the term of the Benton Options. Certain holders of
Crestone Options have each expressed their intent to exercise all or part of
their Crestone Options prior to consummation of the Merger. If no Crestone
Options are outstanding on the effective date of the Merger, no Benton Options
will be issued.
RISKS RELATED TO BENTON
Risk from Substantial Concentration of Operations
Benton's cash flow-generating operations are substantially concentrated in
Venezuela. For 1995, Benton derived approximately 78% of its consolidated oil
and gas revenues and approximately 76% of its proved reserves from its
Venezuelan operations. If the Venezuelan operations are adversely affected, due
to Benton's concentration in and reliance on the Venezuelan operations, Benton
will experience an adverse impact on its financial condition and
22
<PAGE> 24
operations. There are significant operating and economic risks associated with
conducting business in Venezuela. See "--Risks Related to Benton--Political and
Economic Risks of International Operations--Venezuela."
Political and Economic Risks of International Operations--General
Substantially all of Benton's oil and gas producing operations and non-financial
assets are in Venezuela and Russia, and all operating income is expected to be
generated from these countries (absent any new investments). As a result, Benton
is subject to certain political, economic and other uncertainties including
risks of war, civil disturbance, expropriation, nationalization, renegotiation
or modification of existing contracts, taxation policies, foreign exchange
restrictions, international monetary fluctuations and other hazards arising out
of foreign governmental sovereignty over Benton's operations.
Political and Economic Risks of International Operations--Venezuela
Benton began to operate in Venezuela in 1992. For 1995, Benton derived
approximately 78% of its consolidated oil and gas revenues and approximately 76%
of its proved reserves from its Venezuelan operations. The petroleum industry in
Venezuela is highly regulated by the government with respect to such matters as
maximum daily production, methods of production and environmental matters, both
directly and indirectly through PDVSA. In addition, the timing and extent of
Benton's development activities are subject to the approval of Lagoven and the
Ministry of Energy and Mines. There can be no assurance that the government or
PDVSA will not impose significant new regulations regarding the petroleum
industry generally or that the development activities proposed by
Benton-Vinccler will receive the necessary approval. Benton also expects to
increase its exposure to Venezuela through the continued investment in
Benton-Vinccler and the Delta Centro consortium, which consists of Benton (30%),
Louisiana Land and Exploration and Norcen (35% each). While Benton-Vinccler has
never had a material dispute or payment interruption with Lagoven, PDVSA or the
Venezuelan government, the country of Venezuela has in recent years experienced
significant political and economic instability, high inflation, and shortages of
foreign currency.
Political and Economic Situation. In May 1993, the Venezuelan Senate voted to
authorize the impeachment of President Carlos Andres Perez. Subsequently, Rafael
Caldera was elected president and took office in February 1994. Upon assuming
the presidency, President Caldera was immediately faced with a solvency crisis
in the banking system which necessitated a government takeover of nine financial
institutions, including Banco Latino, one of the largest Venezuelan banks.
Consequently, the bolivar devalued sharply, inflation rose and gross domestic
product ("GDP") contracted. Though Venezuela experienced positive GDP growth for
1995, it was the first increase in three years, and the 1995 GDP figures did not
reflect the full effects of a currency devaluation at year end. Many independent
sources are predicting another GDP contraction in 1996. On April 22, 1996, the
Venezuelan government announced the lifting of controls on foreign exchange
transactions, having announced the lifting of controls on interest rates one
week earlier. The Venezuelan government also announced a $1.4 billion
preliminary loan accord with the International Monetary Fund. Although these
actions have led to the devaluation of the bolivar and a rise in interest rates
and are likely to lead to temporary increases in inflation, they are generally
viewed as likely to have a positive effect in the long term. There can be no
assurance, however, that such actions will be successful in resolving
Venezuela's economic difficulties.
Inflation and Currency Controls. Venezuela has experienced high levels of
inflation over the past decade. The consumer price inflation rate was
approximately 38% for calendar year 1993, 61% for 1994, and 60% for 1995. In
addition to increasing Benton's bolivar-denominated expenses with respect to its
Venezuelan operations, these high rates of inflation led the Venezuelan
government to devalue the bolivar by 41% on December 11, 1995. In July 1994, the
Venezuelan government imposed a program of currency exchange controls that was
lifted in April 1996. Although the lifting of currency controls is expected to
lead to increased economic stability in the long term, it is likely to lead to a
temporary rise in inflation in Venezuela. Pursuant to its agreement with
Lagoven, Benton-Vinccler receives its payments from Lagoven in U.S. dollars
deposited directly into a U.S. bank account.
Oil Production and OPEC. News reports speculate that Venezuela is currently
producing oil in excess of the output quota established by OPEC. While Venezuela
remains a member of OPEC and has yet to face any sanctions, there is a risk that
pressure from OPEC could cause Venezuela to cut oil production voluntarily to
comply with the established
23
<PAGE> 25
quotas or take action that could depress world oil prices. Such compliance could
require a significant reduction in Venezuelan oil production and could have a
material adverse impact on Benton-Vinccler.
Political and Economic Risks of International Operations--Russia
Since the dissolution of the Soviet Union in 1991, Russia has experienced
periods of political unrest and instability, high inflation, wide currency
exchange rate swings, contractions in GDP, volatile tariff and taxation
policies, and the lack of a clear and stable legal and administrative
environment governing oil and gas licensing and operations. There can be no
assurance that any of these factors in addition to other factors may not persist
or worsen and therefore negatively affect Benton's operations in Russia.
In addition to the factors discussed above, Russia established an export tariff
on all oil produced in and exported from Russia which, as imposed, has the
effect of reducing the potential profits to Benton and could render its proved
reserves attributable to Russia uneconomic. Russia has announced that effective
in July 1996, oil export tariffs were terminated in accordance with an IMF loan
condition. However, Russia has proposed that such tariffs be replaced by an
excise, pipeline or other tax on producers which may equal or exceed the export
tariff, but it is unclear how such other tax rates and regimes will be set and
administered. The legislative and regulatory environment in Russia continues to
be subject to frequent change and uncertainty.
Benton believes it will not receive any significant distributions from GEOILBENT
for several years because substantially all of the money received by GEOILBENT
from the North Gubkinskoye Field will be reinvested to fund development
activities.
Properties Under Development
As of December 31, 1995, approximately 65% of Benton's proved reserves were
undeveloped and required development activities, consisting primarily of
development drilling and construction of production facilities. As a result,
Benton will require substantial capital expenditures to develop all of its
proved reserves. At December 31, 1995, the anticipated future development costs
for proved reserves in Venezuela and Russia were $76.4 million and $36.7
million, respectively. Benton does not currently have the capital to develop all
of these reserves, and if such capital does not otherwise become available from
operational cash flow or other sources, Benton will either enter into joint
ventures to develop the projects, which will result in Benton retaining a
smaller interest, or not develop the reserves. There can be no certainty
regarding the commercial feasibility of developing these reserves, the
availability of financing, or the timing or costs associated therewith. If such
capital is available, there can be no assurance that Benton will be able to
develop and produce sufficient reserves to recover the costs expended and
operate the wells profitably.
Engineers' Estimates of Reserves and Future Net Revenue
Estimates of economically recoverable oil and gas reserves and of future net
cash flows are based upon a number of variable factors and assumptions, all of
which are to some degree speculative and may vary considerably from actual
results. Therefore, actual production, revenues, taxes, and development and
operating expenditures may not occur as estimated. Future results of operations
of Benton will depend upon its ability to develop, produce and sell its oil and
gas reserves. The reserve data included herein are estimates only and are
subject to many uncertainties. Actual quantities of oil and gas may differ
considerably from the amounts set forth herein. In addition, different reserve
engineers may make different estimates of reserve quantities and cash flows
based upon the same available data. See "Information Concerning Benton -
Business--Reserves."
Development of Additional Reserves
Benton's future success may also depend upon its ability to find or acquire
additional oil and gas reserves that are economically recoverable. Except to the
extent that Benton conducts successful exploration or development activities or
acquires properties containing proved reserves, the proved reserves of Benton
will generally decline as reserves are produced. There can be no assurance that
Benton will be able to discover additional commercial quantities of oil
24
<PAGE> 26
and gas, or that Benton will be able to continue to acquire interests in
under-developed oil and gas fields and enhance production and reserves by
drilling replacement wells and drilling development wells, or that Benton will
have continuing success drilling productive wells and acquiring under-developed
properties at low finding costs.
Retention and Attraction of Key Personnel
Benton depends to a large extent on the abilities and continued participation of
certain key employees, the loss of whose services could have a material adverse
effect on Benton's business. In an effort to minimize the risk, Benton has
entered into employment agreements with certain key employees. There can be no
assurance that Benton will be able to attract and retain such personnel on
acceptable terms, and the failure to do so could have a material adverse effect
on Benton.
Anti-Takeover Provisions
The Delaware General Corporation Law contains provisions which may delay or
prevent an attempt by a third party to acquire control of Benton. In addition,
Benton has adopted a Stockholders' Rights Plan designed to impede a hostile
attempt to acquire control of Benton. The severance provisions of employment
agreements with certain members of management could also impede an attempted
change of control of Benton.
Ability to Issue Preferred Stock
Benton may issue Preferred Stock in the future without stockholder approval and
upon such terms and conditions, and having such rights, privileges and
preferences, as the Board of Directors may determine. The rights of the holders
of Benton Common Stock will be subject and subordinate to, and may be adversely
affected by, the rights of the holders of any Preferred Stock that may be issued
in the future. The issuance of Preferred Stock could have the effect of making
it more difficult for a third party to acquire, or discouraging a third party
from acquiring, a majority of the outstanding voting stock of Benton. On the
date hereof, Benton has no outstanding Preferred Stock and no present plans to
issue any shares of Preferred Stock.
RISKS RELATED TO THE OIL AND GAS INDUSTRY
Risk of Oil and Gas Operations
Benton's operations are subject to all of the risks normally incident to the
operation and development of oil and gas properties and the drilling of oil and
gas wells, including encountering unexpected formations or pressures, blowouts,
cratering and fires, and, in horizontal wellbores, the increased risk of
mechanical failure and collapsed holes, the occurrence of any of which could
result in personal injuries, loss of life, environmental damage and other damage
to the properties of Benton or others. In addition, because Benton acquires
interests in under-developed oil and gas fields that have been operated by
others for many years, Benton may be liable for any damage or pollution caused
by any prior operations of such oil and gas fields. In accordance with customary
industry practice, Benton is not fully insured against these risks, nor are all
such risks insurable. Accordingly, there can be no assurance that such insurance
as Benton does maintain will be adequate to cover any losses or exposure for
liability.
Current Oil and Gas Industry Conditions
Historically, the markets for oil and natural gas have been volatile and are
likely to continue to be volatile in the future. Prices for oil and natural gas
are subject to wide fluctuation in response to relatively minor changes in
supply of and demand for oil and natural gas, market uncertainty and a variety
of additional factors that are beyond the control of Benton. These factors
include political conditions in the Middle East, the foreign supply of oil and
natural gas, the price of foreign imports, the level of consumer product demand,
weather conditions, domestic and foreign government regulations, the price and
availability of alternative fuels and overall economic conditions. Lower oil
prices also may reduce the amount of Benton's oil that is economic to produce.
In addition, the marketability of Benton's production depends upon the
availability and capacity of gathering systems and pipelines.
25
<PAGE> 27
Government Regulation; Environmental Risks
Benton's business is regulated by certain federal, state, local and foreign laws
and regulations relating to the development, production, marketing and
transmission of oil and gas, as well as environmental and safety matters. There
can be no assurance that laws and regulations enacted in the future will not
adversely affect Benton's exploration for, or the production and marketing of,
oil and gas.
Oil and gas operations are subject to extensive foreign, federal, state and
local laws regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. Numerous governmental
departments issue rules and regulations to implement and enforce such laws which
are often difficult and costly to comply with and which carry substantial
penalties for failure to comply. The regulatory burden on the oil and gas
industry increases its cost of doing business and consequently affects its
profitability. These laws, rules and regulations affect the operations of
Benton. Compliance with environmental requirements generally could have a
material adverse effect upon the capital expenditures, earnings or competitive
position of Benton.
Competition
The oil and gas exploration and production business is highly competitive. A
large number of companies and individuals engage in the drilling for oil and
gas, and there is a high degree of competition for desirable oil and gas
properties suitable for drilling and for materials and third-party services
essential for their exploration and development. Many of Benton's competitors
have greater financial and other resources than does Benton.
26
<PAGE> 28
PRICE RANGE OF COMMON STOCK AND DIVIDENDS
Benton Common Stock is traded on the Nasdaq National Market. Crestone is not
actively traded on any exchange. The following table sets forth for the calendar
years indicated, the high and low bid information for Benton Common Stock, as
furnished to Benton by the Nasdaq National Market. Because there is no active
trading market for Crestone Common Stock, no information regarding sales prices
of Crestone Common Stock can be provided.
<TABLE>
<CAPTION>
YEAR HIGH LOW
- ---- ---- ---
<S> <C> <C>
1995:
First Quarter $11.13 $8.63
Second Quarter $15.13 $10.25
Third Quarter $13.88 $9.50
Fourth Quarter $16.13 $10.13
1996:
First Quarter $16.63 $11.25
Second Quarter $22.13 $17.38
Third Quarter $25.38 $17.88
Fourth Quarter (through October 14) $25.13 $20.88
------ ------
</TABLE>
Benton's policy is to retain its earnings to support the growth of its business.
Accordingly, the Board of Directors of Benton has never declared cash dividends
on its Common Stock and does not anticipate doing so in the foreseeable future.
Furthermore, the terms of Benton's debt agreements restrict the payment of cash
dividends on Benton's Common Stock.
Crestone has never paid a dividend on its Common Stock, and Crestone's Board of
Directors does not anticipate paying any cash dividends in the foreseeable
future except for payments which may be made to the Shareholder Trust.
On September 23, 1996, the last full trading day preceding the announcement of
the Merger Agreement, the closing price of the Benton Common Stock on the Nasdaq
National Market was $20.13 per share. On October 14, 1996, the closing price of
the Benton Common Stock on the Nasdaq National Market was $21.38 per share.
Because the market price for Benton's Common Stock is subject to fluctuation,
the total market value which a Crestone stockholder will receive in connection
with the Merger may increase or decrease prior to consummation of the Merger.
Crestone stockholders are urged to obtain current market quotations for the
Benton Common Stock.
27
<PAGE> 29
BACKGROUND OF THE MERGER PROPOSAL
Background. Crestone over the last few years has received several offers for its
primary asset, a large undeveloped acreage position in the South China Sea under
the WAB-21 Contract with CNOOC for an area known as Wan'an Bei, WAB-21. Crestone
had reached the stage in its corporate history where consideration of the Merger
Proposal became appropriate. That determination was based on the following
factors:
Production Declines. Since 1986, Crestone's oil production volumes have
declined from peak levels reached in 1985. Gas production began to
decline in 1985 from peak levels reached in 1984. These reductions are
due to the natural declines occurring in Crestone's producing
properties which are exclusively in the United States. Production
declines are expected to continue in subsequent periods due to ongoing
depletion of Crestone's wells. The decline in production rates due to
depletion of reserves is neither unusual nor unexpected in the oil and
gas industry.
Going Concern Considerations. Crestone has experienced negative cash
flows from operating activities for the nine months ended June 30, 1996
and the years ended September 30, 1995 and 1994 and has current
liabilities in excess of current assets as of June 30, 1996. In
addition, Crestone has an aggregate investment in unproved oil and gas
properties of $534,232 as of June 30, 1996, the ultimate recoverability
of which is dependent upon the Company obtaining the necessary
financing to develop these properties or generating sufficient proceeds
from the sale of these properties. These factors raise substantial
doubt about Crestone's ability to continue as a going concern.
Background to the Merger Proposal. In June 1996, David Rasmussen, a geophysicist
consulting for Crestone, called Benton advising Benton that Crestone's South
China Sea WAB-21 Contract known as Wan'An Bei, WAB-21 was available for
farm-out. Benton at first declined any interest. Subsequently, explorationists
from Benton called back to inquire if WAB-21 was still available. After
discussions on the telephone and faxing various background information,
geologists and geophysicists from Benton's offices in California visited
Crestone's offices in Denver, Colorado on two occasions. They evaluated
Crestone's technical data on WAB-21 which Crestone had acquired pursuant to the
terms of the WAB-21 Contract with CNOOC. Additionally, the Benton scientists
reviewed similar data on other areas where Crestone had interests.
Subsequently, at Benton's invitation, Randall C. Thompson, President of
Crestone, visited Benton's offices in Carpenteria, California to become better
acquainted with Benton's technical expertise and financial ability to underwrite
an exploration program to develop WAB-21. Mr. Thompson met with A.E. Benton,
Chief Executive Officer of Benton, along with other senior management. This
meeting resulted in a Letter Agreement dated July 25, 1996 whereby the two
companies declared an intention to merge, with Crestone continuing as a
subsidiary of Benton. The Letter Agreement was unanimously approved by the
Crestone Board of Directors on August 2, 1996.
From July 25th until September 20, 1996, representatives of the two companies
had almost daily discussions by telephone or fax transmissions regarding the
implementation of the Merger Proposal and details of the Merger Agreement.
During this period the two companies pursued due diligence which included Mr.
Benton and other Benton executives accompanying Mr. Thompson on a trip to the
Philippines and China. That trip was preceded by Mr. Benton and three Benton
vice-presidents and their new ventures manager visiting Crestone's offices in
Denver at the same time that a vice president and three other executives of
CNOOC were meeting with Crestone.
Also during this period both companies engaged attorneys, accountants and other
professionals in connection with the negotiation and preparation of a definitive
Merger Agreement. During this time the Boards of both companies were kept
advised of developments and consulted at various stages during the negotiations,
to the end that both Boards approved the Merger Agreement which was executed at
Benton's offices in Carpenteria, California on September 20, 1996.
28
<PAGE> 30
THE PROPOSED MERGER
DESCRIPTION OF THE MERGER PROPOSAL
Terms of Merger. Upon consummation of the Merger, Merger Sub will merge with and
into Crestone, with Crestone as the surviving corporation, and each of the
outstanding shares of Crestone Common Stock will be exchanged for the right to
receive shares of Benton Common Stock. The Articles of Incorporation and Bylaws
of Crestone in effect at consummation of the Merger will govern the surviving
corporation until amended or repealed in accordance with applicable law.
Crestone, as an indirect wholly-owned subsidiary of Benton, will succeed to all
of the assets and liabilities of and will assume all of the ongoing
responsibilities of Crestone.
Upon consummation of the Merger, each share of Crestone Common Stock that is
issued and outstanding immediately prior to the effective time, other than
shares for which dissenters' rights have been perfected, shall, on such date, by
virtue of the Merger and without any action on behalf of the holders, be
automatically canceled and converted into and exchanged for the right to receive
0.1429 shares of Benton Common Stock. See "Comparative Rights of Security
Holders" for a description of the Benton Common Stock.
No fractional shares of Benton Common Stock will be issued pursuant to the
Merger. The Merger Agreement provides that each holder of shares of Crestone
Common Stock who would have otherwise been entitled to receive fractional shares
of Benton Common Stock will be entitled to receive, in lieu thereof, cash
(without interest) in an amount equal to the fraction of a share to which such
holder would otherwise have been entitled multiplied by $21.00, the market value
of Benton Common Stock for purposes of the Merger Agreement.
In addition, each outstanding Crestone Option will be exchanged for and
represent the right to receive an option to purchase 0.1429 shares of Benton
Common Stock at an exercise price of $7.00 per share. No fractional interests in
Benton Options will be issued pursuant to the Merger. The Merger Agreement
provides that Benton Options issued in connection with the Merger will be
rounded to the nearest whole number of Benton Options, and no fractional
interest will be issued.
Prior to the effective time of the Merger (as defined in the Merger Agreement)
Crestone will distribute and transfer a four percent (4%) of eight eighths
(8/8ths) economic interest (the "Economic Interest") in WAB-21, reduced to
reflect the possible joint development participation of The People's Republic of
China, to a stockholder trust, or other like entity for the benefit of the
Crestone stockholders, as they may exist on the Record Date for such
distribution and transfer, on a basis proportionate to such stockholders'
ownership of Common Stock in Crestone. Crestone and Benton agreed in the Merger
Agreement that the value of the Economic Interest is $200,000.
Effective Time of Merger. The Merger will become effective and the effective
time (the "Effective Time") will occur on the date and at the time that the
Articles of Merger are filed with the Secretary of State of the State of
Colorado, or at such later date and time as may be specified in the Articles of
Merger and will have been previously agreed to by Benton and Crestone. The
Merger Agreement provides that the Effective Time will occur as soon as
practicable after each of the conditions set forth in the Merger Agreement have
been satisfied or waived, including the approval of the Merger Proposal by the
stockholders of Crestone.
Conditions to the Merger. The obligation of Benton and/or Crestone to consummate
the Merger is subject to certain conditions set forth in the Merger Agreement,
including the following: (i) the approval of the Merger Proposal by the
stockholders of Crestone; (ii) other than with respect to Vietnam, no federal,
state, local or foreign law, statute, rule, regulation or action shall have been
enacted, issued, promulgated, enforced or entered, and no judgment, decree,
injunction or other order shall have been issued and remain in effect that would
prohibit, restrict or unreasonably delay the consummation of the Merger; (iii)
all required consents of government agencies or third parties shall have been
obtained; (iv) the Registration Statement shall have become effective under the
Securities Act and no stop orders suspending such effectiveness shall be in
effect or threatened; (v) the shares of Benton Common Stock to be issued
pursuant to the Merger shall have been approved for listing on the Nasdaq
National Market; (vi) Crestone shall have distributed, transferred and assigned
the WAB-21 Economic Interest; (vii) the holders of not
29
<PAGE> 31
more than 2%, or such lower percentage that, either alone or in combination with
other factors, would prevent the merger from being characterized as a tax-free
reorganization under the Code, of the outstanding shares of Crestone Common
Stock shall have dissented from the Merger and demanded payment for such shares
pursuant to Colorado law; (viii) Benton, through its chief executive officer,
shall be satisfied that with respect to WAB-21, (a) the relationship between
Crestone and CNOOC is as represented by Crestone, and (b) WAB-21 is as
represented to Benton as it relates to acreage, net revenue interests, work
program requirements, geological and geophysical studies, (ix) an opinion
shall have been received from a Chinese law firm that practices law with the
approval of the Ministry of Justice of the People's Republic of China by October
15, 1996 that the WAB-21 Contract is valid, binding and in full force and
effect, and that the transactions contemplated by the Merger Agreement do not
violate the terms of such contract, and that no approvals or consents need to be
obtained with respect to the contemplated transactions; and (x) certain other
conditions customary in transactions of this nature.
Termination of the Merger Agreement. The Merger Agreement may be terminated and
the Merger Proposal may be abandoned at any time prior to the Effective Time,
whether before or after adoption and approval of the Merger Proposal by the
Crestone stockholders, (i) by mutual written consent of Benton and Crestone;
(ii) by either Benton or Crestone if any court of competent jurisdiction,
arbitrator or other governmental authority shall have issued, enacted, entered,
promulgated or enforced any final and non-appealable order, judgment, decree,
injunction, ruling or other action restraining, enjoining or otherwise
prohibiting the Merger, or if there shall be any applicable federal, state,
local or foreign legal requirement that makes consummation of the Merger
illegal, other than with respect to Vietnam; (iii) by either Benton or Crestone
if the Crestone stockholders do not approve the Merger Proposal; (iv) by Benton
if Crestone fails to perform, satisfy or comply with any of its obligations,
agreements or covenants to be performed, satisfied or complied with pursuant to
the Merger Agreement; (v) by Crestone if Benton or Merger Sub shall have failed
to perform, satisfy or comply with any of their obligations, agreements or
covenants to be performed, satisfied or complied with pursuant to the Merger
Agreement; (vi) by Benton if there has been a breach by Crestone of any
covenant, representation or warranty of Crestone pursuant to the Merger
Agreement; (vii) by Crestone if there has been any breach by Benton or Merger
Sub of any covenant, representation or warranty by Benton or Merger Sub pursuant
to the Merger Agreement; (viii) by Benton for any other reason, or for no
reason, subject to Crestone's right to keep the $200,000 deposit paid by Benton
if the Merger Agreement is terminated pursuant to this provision; or (ix) by
either Benton or Crestone if, without the fault of the terminating party, the
Merger shall not have consummated on or before December 10, 1996.
DISSENTERS' RIGHTS
The following discussion of the provisions of Sections 7-113-101 through
7-113-302, inclusive, of the Colorado Business Corporation Act ("CBCA") is not
intended to be a complete statement of such provisions and is qualified in its
entirety by reference to the full text of those Sections, a copy of which is
attached as Exhibit B hereto.
Each Crestone stockholder who desires payment for his or her shares or appraisal
and follows the procedures specified in Sections 7-113-202 and 7-113-204 will be
entitled to have the Crestone Common Stock held of record by such stockholder
exchanged for cash or appraised by a district court in Colorado in a proceeding
conducted in accordance with Sections 7-113-301 and 7-113-302 of the CBCA and
receive a judgment for (i) the amount, if any, by which the court finds the fair
value of the dissenter's shares, plus interest, exceeds the amount paid by the
corporation, or (ii) for the fair value, plus interest, of the dissenter's
shares for which the corporation elected to withhold payment under section
7-113-208 of the CBCA, as determined by such court. THE PROCEDURES SET FORTH IN
SECTIONS 7-113-202 AND 7-113-204 OF THE CBCA SHOULD BE COMPLIED WITH STRICTLY.
FAILURE TO FOLLOW ANY OF SUCH PROCEDURES MAY RESULT IN THE TERMINATION OR WAIVER
OF DISSENTERS' RIGHTS. Crestone stockholders should note that failure to execute
and return a proxy or transmittal letter does not perfect dissenters' rights. In
addition, neither voting against the Merger Proposal nor abstaining from voting
will constitute a demand for payment. HOWEVER, VOTING IN FAVOR OF THE MERGER
PROPOSAL WILL WAIVE A STOCKHOLDER'S DISSENTERS' RIGHTS. IF A STOCKHOLDER RETURNS
A SIGNED PROXY CARD THAT DOES NOT SPECIFY A VOTE, THE PROXY WILL BE VOTED IN
FAVOR OF THE MERGER PROPOSAL WHICH WILL HAVE THE EFFECT OF WAIVING THE
STOCKHOLDER'S DISSENTERS' RIGHTS.
30
<PAGE> 32
Under Section 7-113-102 of the CBCA, a Crestone stockholder is entitled to
dissent and obtain payment of the fair value of his or her shares in the event
that (i) Crestone consummates a plan of merger to which Crestone is a party if
(1) approval by the stockholders of Crestone is required for the merger by
Sections 7-111-103 or 7-111-104 of the CBCA or by Crestone's Articles of
Incorporation, or (2) Crestone is a subsidiary that is merged with its parent
corporation under section 7-111-104, or (ii) the consummation of the plan of
share exchange to which Crestone is a party as the corporation whose shares will
be acquired. A stockholder is also entitled to dissent and obtain payment of the
fair value of the stockholder's shares in the event of any corporate action to
the extent provided by the bylaws or a resolution of the board of directors. A
stockholder who is entitled to dissent and obtain payment for his or her shares
under these sections may not challenge the corporate action creating such
entitlement unless the action is unlawful or fraudulent with respect to the
stockholder or the corporation.
Under Sections 7-113-202 and 7-113-204 of the CBCA, a Crestone stockholder who
desires to exercise dissenters' rights and who does not vote in favor of the
Merger may perfect such rights by delivering to Crestone, for receipt before the
taking of the vote on the Merger Proposal, written notice of the stockholder's
intention to demand payment for the stockholder's shares if the proposed
corporate action is effectuated. The written demand is separate from and in
addition to any proxy or vote against the Merger Proposal. Such written demand
for payment should be delivered either in person to the corporate secretary of
Crestone before the Crestone Special Meeting or at the Crestone Special Meeting
before the vote on the Merger Proposal, or by mail (certified mail, return
receipt requested, being the recommended form of transmittal), for receipt prior
to the vote on the Merger Proposal at the Crestone Special Meeting, delivered to
Crestone at the following Address: 303 East 17th Avenue, Suite 810, Denver
Colorado 80203, Attention: Richard A. Champion, Secretary.
Only a Crestone stockholder of record, or a person duly authorized and
explicitly purporting to act on his behalf, is entitled to exercise dissenters'
rights for Crestone Common Stock. A Crestone stockholder of record may assert
dissenters' rights as to fewer than all the shares registered in his name only
if he dissents with respect to all shares beneficially owned by any one person
and notifies Crestone in writing of the dissent and the name, address, and
federal taxpayer identification number, if any, of each person on whose behalf
the record stockholder asserts dissenters' rights.
A beneficial stockholder of Crestone Common Stock may assert dissenters' rights
as to the shares held on his behalf only if he submits to Crestone the written
consent of the stockholder of record to the dissent not later than the time the
beneficial stockholder asserts dissenters' rights and he does so with respect to
all shares beneficially owned by him. A person who owns Crestone Common Stock
beneficially, but not of record, and who desires to exercise his dissenters'
rights is, therefore, advised to consult promptly with the person or entity that
is the record holder of his dissenters' Common Stock in order to receive and
submit his written consent to the exercise of such rights and to ensure the
timely exercise of such rights.
If a proposed corporate action creating dissenters' rights is authorized,
Crestone shall give a written dissenters' notice to all stockholders who are
entitled to demand payment for their shares. The notice will be sent no later
than ten days after the Effective Time of the Merger and will provide
information regarding where and when the stockholder must deliver a demand for
payment. The notice will also supply a form for demanding payment. Crestone will
set a date by which it must receive such demand for payment and that date will
not be less than thirty (30) days after the date Crestone sends the written
dissenters' notice.
A Crestone stockholder who receives a dissenters' notice must demand payment in
writing for his shares of Crestone Common Stock. The Crestone stockholder who
demands payment will be required to deposit his stock certificates in accordance
with the Crestone dissenters' notice. A Crestone stockholder who demands payment
and deposits his certificates retains all other rights of a stockholder until
those rights are canceled or modified by the Merger. The demand for payment and
deposit of certificates is irrevocable. A CRESTONE STOCKHOLDER WHO DOES NOT
DEMAND PAYMENT AND DEPOSIT HIS CERTIFICATES AS REQUIRED BY THE DATE SPECIFIED IN
THE DISSENTERS' NOTICE, IS NOT ENTITLED TO PAYMENT FOR HIS SHARES OF CRESTONE
COMMON STOCK.
31
<PAGE> 33
Upon the Effective Time for the corporate action creating dissenters' rights or
upon receipt of a payment demand, whichever is later, Crestone shall pay each
dissenter who complied with section 7-113-204, at the address stated in the
payment demand, or if no such address is stated in the payment demand, at the
address shown on Crestone's current record of stockholders for the record
stockholder holding the dissenter's shares, the amount the corporation estimates
to be the fair value of the dissenter's shares, plus accrued interest. The
payment will be accompanied by certain financial information, Crestone's
estimate of the fair value of the shares, and explanations of how the interest
was calculated, a statement of the dissenter's right to demand payment under
section 7-113-209, and a copy of the CBCA sections governing dissenters' rights.
A dissenter may notify Crestone in writing of his own estimate of the fair value
of his shares of Crestone Common Stock and the amount of interest due, and
demand payment of his own estimate, less any payment made under section
7-113-206 of the CBCA. The dissenter may also elect to reject Crestone's offer
and demand payment of the fair value of the shares and interest due, if he
believes that the amount paid under section 7-113-206 or offered under section
7-113-208 is less than the fair value of the shares or that the interest due was
incorrectly calculated. If a demand for payment remains unresolved, Crestone
may, within sixty (60) days after receiving the payment demand, commence a
proceeding and petition the court to determine the fair value of the shares and
accrued interest. If Crestone does not commence the proceeding within the
sixty-day period, it shall pay to each dissenter whose demand remains unresolved
the amount demanded. The proceeding will be commenced in a district court in
Colorado, and the Court will determine the fair value of the share of Crestone
Common Stock and accrued interest.
In determining the fair value of the Crestone Common Stock, the court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value.
No representation can be made as to the outcome of an appraisal proceeding.
Stockholders also should be aware that the appraisal rights process is subject
to uncertainties and to the possibility of lengthy and expensive litigation that
could extend for a substantial period of time (without the stockholders having
received any money for their Crestone Common Stock during such period).
Stockholders also should recognize that an appraisal proceeding could result in
a determination of a fair value higher or lower than or equal to the per share
consideration which would otherwise be received in the Merger.
The costs of an appraisal proceeding may be determined by the court and taxed
upon the parties as the court deems equitable in the circumstances, to the
extent the court finds the dissenters acted arbitrarily, vexatiously, or not in
good faith in demanding payment under section 7-113-209. The court may also
assess the fees and expenses of counsel and experts for the respective parties,
in amounts the court finds equitable against the corporation or one or more
dissenters.
DISTRIBUTION OF BENTON COMMON STOCK AND BENTON OPTIONS
The Merger Agreement provides that at or prior to the Effective Time, Benton
will make available to the exchange agent appointed by Benton (which is expected
to be _______________), stock certificates representing Benton Common Stock and
cash in an amount sufficient to allow the exchange agent to make all deliveries
of Benton Common Stock and fractional share cash payments that may be required
pursuant to the Merger Agreement.
Promptly, but in no event not more than ten days after the Effective Time,
Benton will cause the exchange agent to mail or deliver to each person (other
than Dissenting Stockholders) who was, at the Effective Time, a holder of record
of Crestone Common Stock, a form (mutually agreed to by Benton and Crestone) of
letter of transmittal containing instructions for use in effecting the surrender
and exchange of stock certificates pursuant to the Merger Agreement. Upon
surrender to the exchange agent of the stock certificate representing Crestone
Common Stock for cancellation together with such letter of transmittal duly
executed and completed in accordance with the instructions thereto, the holder
of the Crestone Common Stock will be entitled to receive in exchange therefor a
stock certificate representing the shares of Benton Common Stock and a check in
an amount equal to the value of and in lieu of fractional shares to which the
holder is entitled pursuant to the Merger Agreement. Any stock certificate
32
<PAGE> 34
representing Crestone Common Stock so surrendered will be canceled. No interest
will be paid or will accrue on the amount payable upon surrender of the Crestone
Common Stock.
CRESTONE STOCKHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL AFTER THE
EFFECTIVE TIME AND UNTIL THEY RECEIVE THE LETTER OF TRANSMITTAL FORM AND
INSTRUCTIONS.
The Merger Agreement provides that, notwithstanding any other provisions of the
Merger Agreement, no dividends on Benton Common Stock will be paid to any person
holding a Crestone stock certificate until such Crestone stock certificate is
surrendered for exchange as provided therein. Subject to the effect of
applicable laws, following surrender of such Crestone stock certificate, there
will be paid to the holder of the Benton stock certificate issued in exchange
therefor, without interest, at the time of such surrender, the amount of
dividends or other distributions (without interest thereon), if any, having a
record date after the effective time theretofore payable with respect to the
shares of Benton Common Stock represented thereby and not previously paid, less
the amount of any withholding taxes that may be required thereon.
If any Benton stock certificate is to be issued in any name other than that in
which the Crestone stock certificate surrendered and exchanged therefor is
registered, it will be a condition of such exchange that the person requesting
such exchange pay any transfer or other taxes required by reason of the issuance
of such Benton stock certificates in a name other than that of the registered
holder of the Crestone stock certificates surrendered or establish to the
satisfaction of Benton that any such taxes have been paid or are not applicable.
Six months after the Effective Time, Benton will be entitled to cause the
exchange agent to deliver to it any Benton Common Stock and cash (including any
interest thereon) made available to the exchange agent that are unclaimed by the
former holders of Crestone Common Stock. Any former holders of Crestone Common
Stock who have not theretofore exchanged their Crestone stock certificates for
Benton stock certificates and cash, if appropriate, pursuant to the Merger
Agreement will thereafter be entitled to look exclusively to Benton for the
shares of Benton Common Stock and cash, if appropriate, to which they become
entitled upon exchange of their Crestone stock certificates pursuant to the
Merger Agreement. Notwithstanding the foregoing, neither the exchange agent nor
any party to the Merger Agreement will be liable to any former holder of shares
of Crestone Common Stock for any amount properly delivered to a public official
pursuant to applicable abandoned property, escheat or similar laws.
Promptly, but in no event not more than ten days after the Effective Time,
Benton will mail or deliver to each person who was, at the Effective Time, a
holder of record of Crestone Options, a form of letter of transmittal containing
instructions for use in effecting the surrender and exchange of option
certificates representing Crestone Options for option certificates representing
Benton Options pursuant to the Merger Agreement. Upon surrender to Benton of the
option certificate representing Crestone Options for cancellation together with
such letter of transmittal duly executed and completed in accordance with the
instructions thereto, the holder of the Crestone Option will be entitled to
receive in exchange therefore an option certificate representing the Benton
Options to which the holder is entitled pursuant to the Merger Agreement. Any
option certificate representing Crestone Options so surrendered will be
canceled.
INTERESTS OF CERTAIN PERSONS IN THE MERGER
Mr. Randall C. Thompson, Chairman and President of Crestone and its only
employee, will remain as President of Crestone. The Merger Agreement provides
that he sign an employment agreement with Benton under which he will remain as
President of Crestone for a period of two (2) years from the Effective Time for
an annual salary of $150,000 and with benefits comparable to the benefits
currently received by other employees of Benton, including participation in
Benton's profit sharing plan.
Mr. Reed Gilmore, a director of Crestone, through his affiliate Antelope Energy
Company LLC, has made an offer to Crestone to acquire its non-producing working
interest leases. Additionally, Mr. Gilmore is currently reviewing the
possibility of acquiring Crestone's producing working interest leases in the
United States. No formal agreement regarding the acquisition of such leases has
been finalized.
33
<PAGE> 35
Thompson Oil Company, wholly owned by Mr. Randall C. Thompson, as well as Mr.
Edwin T. Stitt, a director of Crestone, Antelope Energy Company LLC, controlled
by Mr. Reed Gilmore, a director of Crestone, and Mr. C.E. Chancellor, a director
of Crestone, of Chancellor Energy Company, participated, along with other
Crestone stockholders, with Crestone in drilling an exploratory test well on
certain undeveloped oil and gas leases in Nevada and are responsible for their
proportionate share of expenses and lease payments relating to such leases.
RESALE OF BENTON COMMON STOCK
The issuance of the shares of Benton Common Stock in connection with the Merger
has been registered under the Securities Act. Such shares may be traded freely
and without restriction under federal securities laws by those stockholders not
deemed to be "affiliates" of Crestone as that term is defined in Rules 144 and
145 under the Securities Act. "Affiliates" are generally defined as persons who
control, are controlled by, or are under common control with Crestone at the
time of the Crestone Special Meeting. Accordingly, affiliates of Crestone will
generally include the directors and executive officers of Crestone as well as
Crestone's largest stockholders. Shares of Benton Common Stock received by
affiliates of Crestone pursuant to the Merger may not be publicly resold without
registration under the Securities Act except pursuant to the volume and manner
of sale limitations and other requirements provided in Rules 144 and 145. This
Proxy Statement/Prospectus does not cover any resales of Benton Common Stock
received by affiliates of Crestone. Any owner of Crestone Common Stock who
becomes an affiliate of Benton will be subject to similar restrictions under
Rule 144. Pursuant to the Merger Agreement, each officer, director and other
affiliate of Crestone has agreed to a "lock-up" arrangement with Benton with
respect to the Benton Common Stock received in connection with the Merger. Each
officer, director and other affiliate of Crestone has agreed not to offer or
sell any Benton Common Stock received in connection with the Merger until 12
months after the Effective Time, except as follows: (i) each officer, director
and other affiliate of Crestone, other than Mr. Thompson, may offer and sell up
to 10% of the Benton Common Stock received in connection with the Merger at any
time and up to an additional 22 1/2% of the Benton Common Stock received in
connection with the Merger in each three month period after the Effective Time
(on a non-cumulative basis) and (ii) Mr. Thompson may offer and sell up to 10%
of the Benton Common Stock he receives in connection with the Merger at any
time, may offer and sell up to an additional 22 1/2% of the Benton Common Stock
he receives in connection with the Merger in each three month period commencing
one year from the Effective Time (on a non-cumulative basis), and may offer and
sell additional shares of Benton Common Stock received in connection with the
Merger during the two year period commencing at the Effective Time only in order
to offset or avoid adverse tax consequences in the reasonable discretion of
Benton. In the event that Mr. Thompson is terminated as an employee without
cause, the lock-up will no longer apply to Mr. Thompson and his shares may be
sold with prior notification to Benton and in compliance with the securities
laws. Except as provided herein, there will be no other restrictions on the
transfer of shares of Benton Common Stock issued by Benton pursuant to the
Merger.
ACCOUNTING TREATMENT
The Merger will be accounted for as a purchase by Benton for financial
accounting purposes. Accordingly, the purchase price will be allocated to
Crestone's assets and liabilities acquired based on their estimated fair values
as of the date of the Merger.
OPERATIONS AFTER THE MERGER
Benton and Crestone are independent oil and gas companies which are engaged in
the acquisition of producing properties and exploration, development and
production of oil and gas, internationally and domestically. Upon consummation
of the Merger, Crestone will operate as an indirect wholly-owned subsidiary of
Benton. If the Merger is consummated, Benton intends to sell the Crestone
interests in the United States properties. Crestone has solicited offers for the
sale of these properties but there can be no assurance that Crestone or Benton
will be able to sell the United States properties to the extent not previously
sold by Crestone prior to the Merger. Until such properties are sold, Benton
intends to continue to operate such properties as are currently being operated
by Crestone.
Crestone will pursue the sale of the U.S. property interests prior to the
effective date of the Merger. However, there can be no assurance that such a
sale can be consummated prior to the effective date.
34
<PAGE> 36
EXPENSES; FEES
Benton will pay all expenses including, without limitation, legal and accounting
fees and printing costs incurred by Benton or Crestone in connection with the
transaction contemplated by this Proxy Statement/Prospectus. Benton and Crestone
estimate that all such expenses will be approximately $400,000.
RECOMMENDATION OF THE CRESTONE BOARD OF DIRECTORS
CRESTONE BOARD OF DIRECTORS' REASONS FOR THE MERGER PROPOSAL
The Board of Directors of Crestone believes that the terms of the Merger
Agreement are in the best interests of Crestone and its stockholders, has
unanimously approved the Merger Agreement and the transactions contemplated
thereby, and unanimously recommends that the Crestone stockholders adopt and
approve the Merger Proposal and the transactions contemplated thereby. The
Crestone Board believes the Merger Proposal is the most beneficial alternative
for all stockholders because it provides the highest per share value of the
various alternatives considered by the Crestone Board. Five of the present
Crestone Directors were on the original Crestone Board of Directors. The factors
and alternatives considered by the Crestone Board in reaching its determination
were those set forth below.
Crestone was incorporated in 1981 with the goal of an initial public offering
("IPO") to provide more working capital and liquidity for its shareholders. Due
to a downturn in the oil and gas business and other reasons, those plans were
postponed.
Several years ago, the Board of Directors of Crestone decided to consult
investment bankers with respect to the possibility of a private placement of
Crestone Common Stock or an IPO of Common Stock. The President and several
Crestone Directors met with the investment bankers and were advised that
Crestone was not large enough to undertake a cost effective IPO or to attract
significant working capital on favorable terms.
The Crestone Board then resolved to make a determined effort to increase the
size of Crestone in terms of cash and other assets. To accomplish this, it
decided to pursue foreign exploration prospects where the risks are
significantly greater than domestic exploration prospects but the potential
reserves are correspondingly greater.
After acquiring its WAB-21 Contract, Crestone invested significant resources to
highgrade the exploration and technical merits of the WAB-21 Contract. In
connection therewith, Crestone contacted an estimated 150 companies by mail, by
telephone or by personal visits by the President and other representatives of
Crestone in the marketing and sale of the Contract. Although many of the
international companies contacted have been attracted by the technical merits of
the area (i.e., the possibility of finding large petroleum reserves), they have
been discouraged by the Vietnamese claim of sovereignty.
In June 1996, Crestone received an offer from a publicly traded independent oil
and gas company to purchase all the outstanding stock and stock options of
Crestone for $14,500,000 in three optional installments spread over two years.
That offer did not include any retained economic interest in the Wan'an Bei,
WAB-21 Contract Area by Crestone's stockholders. Also in June 1996, Crestone
received an offer from another independent company for a 50% participating
interest in Wan'an Bei, WAB-21 for $2,000,000 in three installments over a six
month period, subject to other conditions. The purchaser also offered to carry
Crestone's expenditure obligations during the first exploration period up to a
total of $2,500,000.
These and other offers to purchase varying interests in Crestone were rejected
by the Crestone Board because terms were not attractive or were insufficient to
make Crestone a viable exploration company and did not adequately enhance
shareholder value. None of the rejected offers provided for the ability of
Crestone's shareholders to retain a future economic interest in possible future
production.
Most Crestone shareholders have owned their stock for as long as 15 years
without receiving any dividend or having any liquidity. The expressed desire of
a number of shareholders for liquidity made the Benton offer attractive to the
35
<PAGE> 37
Crestone Board of Directors. The Merger will provide liquidity for those
shareholders who desire it while allowing the rest to retain their investment in
Crestone as an indirect wholly-owned subsidiary of Benton.
Benton was one of the many international oil companies contacted by Crestone
management. Benton's offer met three criteria the Crestone Board had set for an
acceptable offer for a sale of Crestone:
1) A minimum price of $3 per share.
2) That the price be payable either in cash or in stock of a
public company in a tax free exchange.
3) A reserved economic interest through a Shareholder Trust in
future revenues derived from WAB-21.
The Board also considered a variety of potentially negative factors in its
deliberations concerning the Merger including:
(i) the possibility that the Merger Proposal might not be consummated, and
the effect that the public announcement of the Merger Agreement might
have on the future prospects for selling Crestone.
(ii) the other risks described in "Risk Factors" above.
(iii) the risk that the potential benefits of the Merger may not be achieved
or fully realized.
(iv) the risk that the trading price of Benton Common Stock may decline.
The Board also took into consideration that Crestone has had significant
operating losses in the past several years and a working capital deficit at June
30, 1996 leading to a recent audit opinion by Price Waterhouse LLP containing a
going concern qualification.
In making its recommendation with respect to the Merger Proposal, the Board of
Directors of Crestone has not sought nor obtained the formal opinion of any
financial advisor with respect to the fairness of the financial terms of the
Merger Proposal to Crestone or its shareholders. The Crestone Board determined
that it would not be a prudent use of its limited funds to seek a formal opinion
of the fairness of the terms of the Merger Proposal when the offer reflected a
premium over the financial values previously placed on Crestone by unaffiliated
third party offerors and, at the same time, provided a vehicle for liquidity for
any shareholders concerned about Benton's long term value. The Crestone Board
also believes it has sufficient expertise to evaluate the Merger Proposal
because all of its Directors are experienced in the oil and gas industry and are
well aware of industry valuations placed on Crestone. They are also well aware
of the risk that the Vietnamese may interfere with the exploration and/or
drilling of WAB-21. For the foregoing reasons, the Crestone Board does not
believe the absence of an independent fairness opinion will have adverse
consequences to its shareholders.
In reaching the conclusion that the Crestone shareholders will receive fair
value in the Merger for the assets and business of Crestone being acquired in
the Merger, the Crestone Board considered management's knowledge of Benton's
business and discussions with Benton's management of their views concerning the
business, financial condition and prospects of Benton. The Crestone Board also
considered historical and current market price of Benton Common Stock and
concluded that the Benton Common Stock was trading in a reasonable range prior
to announcement of the Merger and prior to the execution of the Merger
Agreement. The Board further considered that if Benton's plans for increasing
its oil production and its plans for exploring and developing WAB-21 are
achieved in significant part, the market value of Benton Common Stock would
likely increase.
Based on these factors, the Board unanimously approved the Merger Agreement and
the transactions contemplated thereby on September 20, 1996.
36
<PAGE> 38
CRESTONE BOARD OF DIRECTORS' RECOMMENDATION
The Crestone Board of Directors has unanimously approved the Merger Agreement
and believes that approval of the Merger Proposal is in the best interests of
Crestone and its stockholders. The Crestone Board of Directors unanimously
recommends that Crestone stockholders vote their shares to approve the Merger
Proposal.
In reaching its decision to approve the Merger Agreement, the Board of Directors
considered: (i) that the Merger Agreement allows all of the Crestone Energy
Corporation stockholders to participate in the exchange of Crestone's Common
Stock; (ii) its knowledge of the respective businesses of Crestone and Benton;
(iii) that the Merger would allow the stockholders of Crestone to continue to
participate in the oil and gas business; (iv) that the Merger permits Crestone
stockholders to participate directly in any production from the Wan'an Bei,
WAB-21 Contract by participating in the proposed Shareholder Trust; (v) the
benefits to the Crestone stockholders of being a part of the combined entity
with large reserves and substantial production; (vi) the other offers and lack
of offers received for the Crestone Common Stock; (vii) the terms of the Merger
Agreement; and (viii) that the Crestone shareholders will be relieved of bearing
alone all the expense and overhead of Crestone.
BENTON BOARD OF DIRECTORS' REASONS FOR THE MERGER PROPOSAL
In considering the Merger, Benton took into account various advantages and
disadvantages of the Merger Proposal to Benton and its stockholders. Benton has
analyzed the terms of the Wan'an Bei, WAB-21 Contract, available geological and
geophysical data and available reserve and production information related to
fields in the vicinity of the Wan'an Bei, WAB-21 Contract Area. Based on its
review of such data and weighing the political, contractual and geological risks
associated with the Wan'an Bei, WAB-21 Contract, Benton's Board of Directors
determined that the Merger was in the best interest of Benton and its
stockholders.
CERTAIN FEDERAL TAX CONSEQUENCES
The following discussion summarizes the material federal income tax consequences
of the Merger. This summary reflects the opinion (the "opinion") of Emens,
Kegler, Brown, Hill & Ritter Co., L.P.A., counsel to Benton, in connection with
the Merger, which relies upon certain representations and warranties
(collectively, the "representations") noted in and attached to the opinion,
including without limitation, "continuity of interest," the extent to which
Crestone Common Stock is acquired and the extent to which consideration other
than Benton Common Stock is delivered by Benton in the Merger. A Crestone
Stockholder's individual circumstances may affect the federal income tax
consequences of the Merger to such stockholder. Moreover, this discussion does
not address (a) the federal income tax treatment of other transactions related
to or occurring contemporaneously with the Merger, (b) applicable tax
consequences under state, local or foreign laws, or any federal laws, other than
those pertaining to federal income tax, and (c) any other federal income tax
consequences, such as the carryover or availability of federal tax attributes,
other than those specifically addressed in the opinion.
EACH CRESTONE STOCKHOLDER IS ADVISED TO CONSULT WITH HIS OR HER OWN TAX ADVISOR
AS TO THE PARTICULAR TAX CONSEQUENCES TO HIM OR HER OF THE MERGER AND THE
RELATED TRANSACTIONS, INCLUDING APPLICABILITY AND EFFECT OF FEDERAL, STATE,
LOCAL, FOREIGN AND OTHER TAX LAWS.
The opinion holds that the Merger will be characterized as a tax-free
reorganization under Section 368(a)(1) of the Code. Benton and Crestone each
intend to treat the Merger as qualifying for tax-free reorganization treatment
for federal income tax purposes. However, no assurance can be given that the
reporting positions to be taken by Benton and Crestone regarding the
characterization of the Merger as a tax-free reorganization will not be
challenged by the Internal Revenue Service. The discussion below assumes that
the tax-free reorganization character of the Merger will be respected by the
Internal Revenue Service.
Neither Benton nor Crestone will recognize any income, gain or loss in
connection with the Merger, except as hereafter described. Crestone plans to
declare and distribute to the then holders of Crestone Common Stock, as of a
specified record date, a proportionate contractual economic interest in the
WAB-21 Contract (the "Interest"), which
37
<PAGE> 39
declaration and distribution are to occur immediately prior to the Effective
Time of the Merger. Benton and Crestone have valued the Interest at $200,000.
The excess of the value of the distributed Interest over Crestone's adjusted tax
basis in the Interest will constitute income to Crestone for federal income tax
purposes.
No gain, loss or income will be recognized by Crestone Stockholders who exchange
their Crestone Common Stock solely for shares of Benton Common Stock. The
distribution of the Interest discussed above will result in the Crestone
Stockholders' receipt of income for federal income tax purposes. The character
of such income is that of a taxable dividend.
The holding period for the shares of Benton Common Stock, including any
applicable fractional share interests in Benton Common Stock, received in the
Merger by a Crestone Stockholder will include the period during which the shares
of Crestone Common Stock exchanged therefor were held; provided, that, such
shares of Crestone Common Stock were held by the applicable Crestone Stockholder
as capital assets at the Effective Time of the Merger.
The aggregate adjusted tax basis of the shares of Benton Common Stock received
by each holder of shares of Crestone Common Stock pursuant to the Merger,
including a fractional share interest not actually received, will be, in each
instance, equal to the aggregate tax basis of the shares of Crestone Common
Stock exchanged therefor. The adjusted basis of such exchanged Crestone Common
Stock of a particular Crestone Stockholder will be allocated proportionately
among all the Benton Common Stock received, including the fractional share
interest.
The receipt by a former holder of Crestone Common Stock of cash in lieu of a
fractional share of Benton Common Stock will be treated as if such fractional
share interest had been first received by such holder in the Merger and then
redeemed by Benton. The holder of such fractional share interest will recognize
gain or loss equal to the difference between the amount of cash received and the
holder's basis in such fractional share, as determined above. The resulting gain
or loss will be a capital gain or loss; provided, that, the shares of Crestone
Common Stock were held by the applicable Crestone Stockholder as capital assets
at the Effective Time of the Merger. Such capital gain or loss will be accorded
long-term capital gain or loss treatment if the holding period for such
fractional share interest is more than one year, as determined above.
The receipt of cash from Crestone by a Dissenting Stockholder in exchange for
such stockholder's shares of Crestone Common Stock, rather than receiving shares
of Benton Common Stock, will be treated as a sale of the Dissenting
Stockholder's shares of Crestone Common Stock. The Dissenting Stockholder will
recognize gain or loss for federal income tax purposes equal to the difference
between the amount of cash received from Crestone in exchange therefor and the
Dissenting Stockholder's basis in such shares of Crestone Common Stock. The
resulting gain or loss will be a capital gain or loss if the shares of Crestone
Common Stock are held by such Dissenting Stockholder as capital assets at the
Effective Time of the Merger. Such capital gain or loss will be long-term
capital gain or loss if the holding period for the shares of Crestone Common
Stock for which such cash payment is received was more than one year, as
determined above.
Pursuant to the Merger, each then outstanding Crestone Option will be exchanged
for Benton Options. The economics, terms and benefits under the substituted
Benton Options will be no more favorable to the holders of the Crestone Options
exchanged therefor than existed under the Crestone Options. The holders of the
such exchanged Crestone Options will not recognize any income, gain or loss as a
result of the receipt of Benton Options in the Merger.
Neither Benton nor Crestone has requested an advance ruling from the Internal
Revenue Service as to the federal income tax consequences of the Merger. The
foregoing discussion is based on current law and the accuracy of the
representations. No assurance can be given that future legislation, regulations,
administrative pronouncements or court decisions will not significantly change
the law and materially affect the conclusion expressed herein. Any such change,
even though made after the consummation of the Merger, could be applied
retroactively.
38
<PAGE> 40
CRESTONE SPECIAL MEETING
MATTERS TO BE CONSIDERED
At the Crestone Special Meeting, Crestone stockholders will consider and vote
upon approval of the Merger Agreement that provides for, among other things, (a)
the merger of Merger Sub with and into Crestone, and (b) the cancellation,
conversion and exchange of each outstanding share of Crestone Common Stock,
other than shares for which dissenters' rights have been perfected, into the
right to receive 0.1429 shares of Benton Common Stock for each share of Crestone
Common Stock. At the Crestone Special Meeting, Crestone stockholders will also
consider such other business as may properly come before the meeting. The
Crestone Board of Directors is not aware of any such other business.
VOTING REQUIREMENTS
Only Crestone stockholders of record on October 21, 1996 are entitled to notice
of and to vote at the Crestone Special Meeting. On October 21, 1996, there were
______ shares of Crestone Common Stock issued, outstanding and entitled to vote,
held by _____ holders of record. Holders of record of Crestone Common Stock may
cast one vote per share, either in person or by proxy, upon each matter upon
which a vote is taken at the Crestone Special Meeting.
The presence, in person or by proxy, of the holders of a majority of the
aggregate number of shares of Crestone Common Stock entitled to vote at the
Crestone Special Meeting is necessary to constitute a quorum at the Crestone
Special Meeting. Approval of the Merger Proposal requires the affirmative vote
of the holders of a majority of the Crestone Common Stock, issued and
outstanding and entitled to vote on the subject matter. Abstentions and broker
non-votes on the Merger Proposal will be counted only for purposes of
determining whether a quorum is present at the Crestone Special Meeting. THE
BOARD OF DIRECTORS OF CRESTONE HAS UNANIMOUSLY APPROVED THE MERGER AGREEMENT,
HAS DETERMINED THAT THE MERGER IS IN THE BEST INTERESTS OF CRESTONE AND ITS
STOCKHOLDERS, AND HAS UNANIMOUSLY RECOMMENDED THAT CRESTONE STOCKHOLDERS VOTE
FOR THE APPROVAL OF THE MERGER PROPOSAL.
PROXIES
All shares of Crestone Common Stock represented at the Crestone Special Meeting
by properly executed proxies received prior to or at the Crestone Special
Meeting, unless the proxies have previously been revoked, will be voted in
accordance with the instructions on the proxies. If no instructions are given,
proxies will be voted FOR approval of the Merger Proposal.
Any proxy given pursuant to the solicitation may be revoked by the person giving
it at any time before it is voted. Proxies may be revoked by filing with the
corporate secretary of Crestone a written notice of revocation bearing a later
date than the proxy, by duly executing and delivering to the secretary of
Crestone a subsequent proxy relating to the same shares, or by attending the
Crestone Special Meeting and voting in person (although attendance at the
Crestone Special Meeting will not in and of itself constitute revocation of a
proxy). Any written notice revoking a proxy should be sent to Crestone Energy
Corporation, 303 East 17th Avenue, Suite 810, Denver, Colorado 80203, Attention:
Richard A. Champion.
Crestone will bear the cost of printing and mailing proxy material to Crestone
stockholders in connection with the Crestone Special Meeting. Crestone will
solicit proxies by mail and Crestone may request brokers and banks to forward
copies of this Proxy Statement/Prospectus and related materials to persons for
whom they hold Crestone Common Stock and to obtain authority for the execution
and delivery of proxies. Officers and employees of Crestone may, to a limited
extent, solicit proxies by personal delivery of the material and by telephone,
telegram or mail.
39
<PAGE> 41
FAILURE TO APPROVE THE MERGER PROPOSAL
In the event that the Crestone stockholders fail to approve the Merger Proposal,
as set forth in this Proxy Statement/Prospectus, the Merger as described herein
will not be consummated. However, all of Crestone's directors have agreed to
vote in favor of the Merger and since their collective holdings, including
holdings of their affiliates, of Crestone Common Stock exceed 50%, approval by
the shareholders of Crestone is assured. In the event that the Merger does not
proceed for any reason, Benton and Crestone would each continue in its
respective business as it did prior to the initiation of negotiations which
culminated in the Merger Agreement. However, it is also possible that a new
merger or other agreement might be negotiated between Benton and Crestone, or
other actions might be taken, to allow for a combination of their businesses on
other terms, as such other terms have been discussed or agreed upon.
In addition, the Crestone Board of Directors may also explore the possibility of
the combination of Crestone and another entity; however, there is no assurance
that such a combination would be feasible or that terms and conditions of such a
combination would be as favorable to Crestone or its stockholders as the terms
and conditions offered pursuant to the Merger Agreement.
COMPARATIVE RIGHTS OF SECURITY HOLDERS
DESCRIPTION OF BENTON CAPITAL STOCK
Benton is authorized to issue 40,000,000 shares of Common Stock, $0.01 par value
per share, and 5,000,000 shares of Preferred Stock, $0.01 par value per share.
Common Stock. The holders of Benton Common Stock are entitled to one vote per
share for each share held of record on all matters submitted to a vote of the
stockholders and are entitled to receive ratably such dividends as are declared
by the Benton Board of Directors out of funds legally available therefor. In
the event of a liquidation, dissolution or winding up of Benton, holders of
Benton Common Stock have the right to a ratable portion of the assets remaining
after payment of liabilities and liquidation preferences of any outstanding
shares of Preferred Stock. The holders of Benton Common Stock have no preemptive
right or rights to convert their Benton Common Stock into other securities and
are not subject to future calls or assessments by Benton. All outstanding shares
of Benton Common Stock are validly issued, fully paid and non-assessable. All
shares of Benton Common Stock to be issued in connection with the Merger will be
fully paid and non-assessable.
Preferred Stock. Under Benton's Certificate of Incorporation, the Board of
Directors has the power, without further action by the holders of Benton Common
Stock, to designate the relative rights and preferences of Benton's Preferred
Stock when and if issued. Such rights and preferences could include preferences
as to liquidation, redemption, and conversion rights, voting rights, dividends
or other preferences, any of which may be dilutive to the interest of the
holders of the Benton Common Stock. The issuance of Preferred Stock may have the
effect of delaying or preventing a change in control of Benton and may have an
adverse effect on the rights of the holders of Benton Common Stock. A total of
5,000,000 shares of the authorized Preferred Stock is designated Series B
Preferred Stock to be issued in connection with Benton's Stockholder Rights
Agreement. No Series B Preferred Stock is currently outstanding.
DESCRIPTION OF CRESTONE CAPITAL STOCK
The authorized capital stock of Crestone consists of 50,000,000 shares of Common
Stock, $0.01 par value per share, and 50,000,000 shares of Preferred Stock,
$0.01 par value per share. At October 7, 1996, a total of 4,283,580 shares of
Crestone Common Stock were issued and outstanding and held by 142 stockholders.
No shares of Preferred Stock were outstanding.
Holders of Crestone Common Stock are entitled to receive dividends, when and if
declared by the Crestone Board of Directors, out of funds legally available
therefore and, subject to the prior rights of any Preferred Stock then
40
<PAGE> 42
outstanding, to share ratably in the net assets of Crestone upon liquidation.
Holders of Crestone Common Stock do not have preemptive or other rights to
subscribe for additional shares, nor are there any redemption or sinking fund
provisions associated with the Crestone Common Stock.
Holders of Crestone Common Stock are entitled to one vote per share on all
matters requiring a vote of stockholders. Since Crestone does not have
cumulative voting rights in electing directors, the holders of more than a
majority of the outstanding shares of Crestone Common Stock voting for the
election of directors can elect all of the directors whose term expires that
year, if they choose to do so.
Under Crestone's Articles of Incorporation, the Crestone Board of Directors has
the power, without further action by the holders of the Crestone Common Stock,
to designate the relative rights and preferences of the Preferred Stock, when
and if issued. Such rights and preferences could include preferences as to
liquidation, redemption and conversion rights, voting rights, dividends or other
preferences, any of which may be dilutive to the interests of the holders of the
Crestone Common Stock. The Crestone Board of Directors, without stockholder
approval, may issue Preferred Stock with voting and conversion rights which
could also affect the voting power of the holders of Crestone Common Stock. The
issuance of Preferred Stock may have the effect of delaying or preventing a
change in control of Crestone and may have an adverse effect on the rights of
the holders of the Crestone Common Stock.
DESCRIPTION OF BENTON OPTIONS
Each outstanding Crestone Option will be exchanged for and represent the right
to receive an option to purchase 0.1429 shares of Benton Common Stock at an
exercise price of $7.00 per share. The Benton Options will be issued pursuant to
a Stock Option Plan and Stock Option Agreement. The Benton Options will expire
10 years from the date of issuance of the Crestone Option exchanged therefor.
The number of shares of Benton Common Stock and the exercise price of Benton
Options is subject to adjustment under certain circumstances, as described
therein. The Benton Options are not subject to redemption or call by Benton.
COMPARISON OF RIGHTS
The rights of holders of Crestone Common Stock and holders of Benton Common
Stock differ in some respects, based on differences in the respective
corporations' charters and bylaws. Additionally, Crestone is organized under the
laws of the State of Colorado and Benton is organized under the laws of the
State of Delaware. Because of the difference in domicile, there are several
differences in rights of the stockholders. The following is a summary comparison
of the rights of holders of Crestone Common Stock and holders of Benton Common
Stock.
General Voting Rights. Each share of Benton Common Stock has one vote on all
matters submitted to the stockholders. There is no other class of Benton stock
outstanding. Each share of Crestone Common Stock has one vote on all matters
submitted to the stockholders. There is no other class of Crestone stock
outstanding.
Cumulative Voting. Cumulative voting in the election of Directors is available
under Delaware law only if specifically provided for in a corporation's
certificate of incorporation. Benton's Certificate of Incorporation does not
provide for cumulative voting. Under Colorado law, unless otherwise provided for
in a company's articles of incorporation, stockholders have the right to
exercise cumulative voting in the election of directors. Crestone's Articles of
Incorporation provide that stockholders do not have cumulative voting.
Preemptive Rights. Preemptive rights to subscribe for additional shares of stock
are neither required nor prohibited under Delaware law. Colorado law permits
preemptive rights if provided for under the Articles of Incorporation. Neither
Benton's Certificate of Incorporation nor Crestone's Articles of Incorporation
provide for preemptive rights.
Dividend Rights. A Delaware corporation may pay dividends out of surplus legally
available therefor and also out of net profits legally available therefor for
the fiscal year in which declared or the preceding fiscal year, subject to any
restrictions contained in the Company's Certificate of Incorporation. A Colorado
corporation may not pay a dividend or make a distribution to stockholders if,
after giving it effect, the corporation would not be able to pay its debts as
they become due or, except as otherwise specifically allowed by the Articles of
Incorporation, if the
41
<PAGE> 43
corporation's total assets would be less than the sum of its total liabilities
plus the amount that would be needed, if the corporation were to be dissolved at
the time of distribution, to satisfy the preferential rights upon dissolution of
stockholders whose preferential rights are superior to those receiving the
distribution. Benton's Certificate of Incorporation does not include any
restrictions on dividends. Crestone's Articles of Incorporation do not include
any restrictions on payment of dividends or distributions to stockholders.
However, Benton is subject to other restrictions on the payment of dividends.
See "Price Range of Common Stock and Dividends."
Board of Directors. Both Delaware and Colorado law permit a corporation to
divide its Board of Directors into classes, such that the terms of office of the
directors continue for up to three years and end in staggered years. Benton's
Certificate of Incorporation does not provide for a classified Board of
Directors, but provides that each director will stand for election each year, to
serve a term of one year. Similarly, the Crestone Articles of Incorporation do
not provide for a staggered Board of Directors, but provide that each director
will stand for election each year, to serve a term of one year.
Certificate of Incorporation and Bylaws. Under Delaware law, a company's
Certificate of Incorporation may be amended by the affirmative vote of a
majority of the outstanding stock entitled to vote thereon, except as otherwise
provided therein. Benton's Certificate of Incorporation requires the approval of
the holders of a majority of the outstanding Benton Common Stock entitled to
vote in order to amend or repeal any provisions of the Certificate of
Incorporation. Colorado law provides that, generally, a majority of the voting
power of the corporation, subject to a class vote in certain circumstances, may
approve any amendment to the Articles of Incorporation, except as otherwise
provided therein. Crestone's Articles of Incorporation require the approval of
the holders of a majority of the shares of Crestone Common Stock then
outstanding to take any action, including any amendment, alteration or repeal of
the provisions of the Crestone Articles of Incorporation.
Delaware law permits a company's Certificate of Incorporation to give the Board
of Directors the power to adopt, amend or repeal bylaws; however, the
stockholders retain concurrent power to adopt, amend or repeal bylaws. Benton's
Certificate of Incorporation provides that the directors have the power to make,
alter or amend the bylaws but also provides that in the event that it is
required or demanded that the stockholders vote on an amendment or repeal of any
provision of the bylaws, such amendment or repeal shall require the approval of
the holders of a majority of the outstanding Benton Common Stock entitled to
vote. Under Colorado law, directors or stockholders may generally amend the
bylaws of the corporation. Crestone's Articles of Incorporation provide that the
Board of Directors is authorized to alter, amend or repeal the bylaws or to
adopt new bylaws, subject to repeal or change by action of the stockholders. The
Crestone Bylaws may be repealed or changed by the vote of the holders of not
less than a majority of the outstanding shares entitled to vote on such action.
Mergers, Consolidations and Sales of Assets. Delaware law provides that a
merger, consolidation or sale of all or substantially all of a corporation's
assets must be approved by a majority of all the outstanding shares of common
stock entitled to vote, unless a company's certificate of incorporation requires
approval by the vote of a larger percentage. Benton's Certificate of
Incorporation requires the approval of the holders of a majority of the
outstanding shares entitled to vote in order to consolidate or merge, or to
sell, transfer, exchange or otherwise dispose of all, or substantially all, of
its assets.
Under Colorado law, a merger, dissolution, or disposition of all of a
corporation's assets must be adopted by the affirmative vote of the holders of a
majority of the stock entitled to vote thereon, or by a greater vote as provided
in the Articles of Incorporation. Crestone's Articles of Incorporation require
approval by the holders of not less than a majority of the outstanding shares
entitled to vote to take any action which requires approval by the stockholders,
including a merger, dissolution or disposition of all of Crestone's assets.
State Takeover Statutes. Delaware law provides that a Delaware corporation may
not engage in certain "business combinations" with any "interested stockholder"
for a period of three years following the date that such stockholder became an
interested stockholder, unless: (1) prior to such date the Board of Directors of
the corporation approved either the business combination or the transaction
which resulted in the stockholder becoming an interested stockholder; or (2)
upon consummation of the transaction which resulted in the stockholder becoming
an interested
42
<PAGE> 44
stockholder, the interested stockholder owned at least 85% of the voting stock
of the corporation outstanding at the time the transaction commenced, excluding
for purposes of determining the number of shares outstanding those shares owned
by persons who are directors and also officers and employee stock plans in which
employee participants do not have the right to determine whether shares held
subject to the plan will be tendered in a tender or exchange offer; or (3) on or
subsequent to such date the business combination is approved by the Board of
Directors and authorized in an annual or special meeting of stockholders, and
not by written consent, by the affirmative vote of at least 66 2/3% of the
outstanding voting stock which is not owned by the interested stockholder. The
above restrictions do not apply if the corporation's original certificate of
incorporation contains a provision expressly electing not to be governed by the
statute or if the corporation, by action of the stockholders, adopts an
amendment to its certificate of incorporation or bylaws expressly electing not
to be governed by this statute.
This statute applies to any Delaware corporation that has a class of voting
stock listed on a national securities exchange, authorized for quotation on an
inter-dealer quotation system of a registered national securities association or
is held of record by more than 2,000 stockholders. Neither the Benton
Certificate of Incorporation nor Bylaws elects to operate outside of this
section of the Delaware law.
Colorado does not have any law which could be construed as an anti-takeover
statute comparable to Delaware law.
INFORMATION CONCERNING BENTON
INFORMATION INCORPORATED BY REFERENCE
The following documents filed with the SEC by Benton are hereby incorporated by
reference in this Prospectus:
(a) Benton's Annual Report on Form 10-K for the fiscal year ended
December 31, 1995, as amended on Form 10-K/A dated June 14,
1996.
(b) Benton's Quarterly Report on Form 10-Q for the quarter ended
March 31, 1996.
(c) Benton's Quarterly Report on Form 10-Q for the quarter ended
June 30, 1996.
(d) All documents subsequently filed by Benton pursuant to Section
13(a), 13(c), 14 or 15(d) of the Exchange Act prior to the
Effective Date.
This Proxy Statement/Prospectus is also furnished to Crestone stockholders by
Benton as a Prospectus in connection with Benton's offering of Benton Common
Stock and Benton Options issuable in the Merger. The information contained in
this Proxy Statement relating to Benton has been supplied by Benton and the
information relating to Crestone has been provided by Crestone.
BUSINESS
General
Benton is an independent energy company which has been engaged in the
development and production of oil and gas properties since 1989. Although
originally active only in the United States, Benton has developed significant
interests in Venezuela and Russia, and recently sold substantially all of its
remaining United States oil and gas interests. Benton's operations are conducted
principally through its 80%-owned Venezuelan subsidiary, Benton-Vinccler, which
operates in the South Monagas Unit in Venezuela, and its 34%-owned Russian joint
venture, GEOILBENT, which operates in the North Gubkinskoye Field in Siberia,
Russia.
As of December 31, 1995, Benton had total assets of $214.8 million ($330.8
million at June 30, 1996), total estimated proved reserves of 96,212 MBOE, and a
standardized measure of discounted future net cash flow, before income taxes,
for total proved reserves of $372.3 million. For the year ended December 31,
1995 and the six months ended June 30,
43
<PAGE> 45
1996, Benton had total revenues of $65.1 million and $74.8 million, respectively
and net income of $10.6 million and $10.1 million, respectively.
Benton has been successful in increasing reserves, production, revenues and
earnings during the last two years. From year end 1993 through 1995, estimated
proved reserves increased from 42,785 MBOE to 96,212 MBOE and net production
increased from a total of 519 MBOE in 1993 to 6,647 MBOE in 1995. As production
has increased over this period, average lifting costs per Bbl have declined from
$7.26 to $1.19 in Venezuela, and from $16.22 to $5.63 in Russia. Over the same
period, earnings per share have increased from a loss of $0.26 per share in 1993
to income of $0.40 per share for the year ended December 31, 1995.
Benton was incorporated in Delaware in September 1988. Its principal executive
offices are located at 1145 Eugenia Place, Suite 200, Carpinteria, California
93013, and its telephone number is (805) 566-5600.
Business Strategy
Benton's business strategy is to identify and exploit new oil and gas reserves
in under-developed areas while seeking to minimize the associated risk of such
activities. Specifically, Benton endeavors to minimize risk by employing the
following strategies in its business activities: (i) seek new reserves in areas
of low geologic risk; (ii) use proven advanced technology in both exploration
and development to maximize recovery; (iii) establish a local presence through
joint venture partners and the use of local personnel; (iv) commit capital in a
phased manner to limit total commitments at any one time; and (v) reduce foreign
exchange risks through receipt of revenues in U.S. currency.
SEEK NEW RESERVES IN AREAS OF LOW GEOLOGIC RISK. Benton has had significant
success in identifying under-developed reserves in the U.S. and internationally.
In particular, Benton has notable experience and expertise in seeking and
developing new reserves in countries where perceived potential political and
operating difficulties have sometimes discouraged other energy companies from
competing. As a result, Benton has established operations in Venezuela and
Russia which have significant reserves that have been acquired and developed at
relatively low costs. Benton is seeking similar opportunities in other countries
and areas which it believes have high potential.
USE OF PROVEN ADVANCED TECHNOLOGY IN BOTH EXPLORATION AND DEVELOPMENT. Benton's
use of 3-D seismic technology, in which a three dimensional image of the earth's
subsurface is created through the computer interpretation of seismic data,
combined with its experience in designing the seismic surveys and interpreting
and analyzing the resulting data, allow for a more detailed understanding of the
subsurface than do conventional surveys. Such technology contributes
significantly to field appraisal, development and production. The 3-D seismic
information, in conjunction with subsurface geologic data from previously
drilled wells, is used by Benton's experienced in-house technical team to
identify previously undetected reserves. The 3-D seismic information can also be
used to guide drilling on a real-time basis, and has been especially helpful in
the horizontal drilling done in Venezuela in order to take advantage of
oil-trapping faults.
ESTABLISH A LOCAL PRESENCE THROUGH JOINT VENTURE PARTNERS AND THE USE OF LOCAL
PERSONNEL. Benton has sought to establish a local presence where it does
business to facilitate stronger relationships with local government and labor
through joint venture arrangements with local partners. Moreover, Benton employs
almost exclusively local personnel to run foreign operations both to take
advantage of local knowledge and experience and to minimize cost. These efforts
have created an expertise within Company management in forming effective foreign
partnerships and operating abroad. Benton believes that it has gained access to
new development opportunities as a result of its reputation as a dependable
partner.
COMMIT CAPITAL IN A PHASED MANNER TO LIMIT TOTAL COMMITMENTS AT ANY ONE TIME.
While Benton typically has agreed to a minimum capital expenditure or
development commitment at the outset of new projects, expenditures to fulfill
these commitments are phased over time. In addition, Benton seeks, where
possible, to use internally generated funds for further capital expenditures and
to invest in projects which provide the potential for an early return to Benton.
44
<PAGE> 46
REDUCE FOREIGN EXCHANGE RISKS. Benton seeks to reduce foreign currency exchange
risks by providing for the receipt of revenues by Benton in U.S. dollars while
most operating costs are incurred in local currency. Pursuant to the operating
agreement between Benton-Vinccler and Lagoven, the operating fees earned by
Benton-Vinccler are paid directly to Benton-Vinccler's bank account in the U.S.
in U.S. dollars. GEOILBENT receives revenues from export sales in U.S. dollars
paid to its account in Moscow. As Benton expands internationally, it will seek
to establish similar arrangements for new operations.
45
<PAGE> 47
Principal Areas of Activity
The following table summarizes Benton's proved reserves, drilling and production
activity, and financial operating data by principal geographic area at and for
each of the years ended December 31:
<TABLE>
<CAPTION>
VENEZUELA(1) RUSSIA(2) UNITED STATES(3)
------------ ------ -------------
1993 1994 1995 1993 1994 1995 1993 1994 1995
---- ---- ---- ---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Dollars in Thousands
RESERVE INFORMATION:
Proved Reserves (MBOE) 19,389 60,707 73,593 10,121 17,540 22,618 13,275 2,913 1
Discounted Future Net Cash Flows
Before Income Taxes $ 72,206 $268,830 $286,916 $ 24,237 $ 48,833 $ 85,361 $ 34,970 $ 18,657 $ 16
Standardized Measure of Future
Net Cash Flows $ 50,958 $172,703 $206,545 $ 19,512 $ 32,398 $ 55,434 $ 32,046 $ 18,286 $ 16
DRILLING AND PRODUCTION ACTIVITY:
Gross Wells Drilled 5 11 19 4 9 25 9 5 5
Average Daily Production (BOE) 440 6,902 14,949 77 806 1,345 907 1,561 1,917
FINANCIAL DATA:
Oil and Gas Revenues $ 1,333 $ 21,472 $ 49,174 $ 324 $ 3,513 $ 6,016 $ 5,565 $ 7,287 $ 7,683
Expenses:
Lease Operating Costs and
Production Taxes 1,165 3,808 6,483 458 2,832 2,764 3,487 2,891 1,456
Depletion 229 4,998 11,393 99 838 1,512 2,142 4,248 4,188
-------- -------- -------- -------- -------- -------- -------- -------- --------
Total Expenses 1,394 8,806 17,876 557 3,670 4,276 5,629 7,139 5,644
-------- -------- -------- -------- -------- -------- -------- -------- --------
Results of Operations from
Oil and Gas Producing Activities $ (61) $ 12,666 $ 31,298 $ (233) $ (157) $ 1,740 $ (64) $ 148 $ 2,039
======== ======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
(1) Includes 100% of the reserve information, drilling and production
activity and financial data, without deduction for minority interest.
All Venezuelan reserves are attributable to an operating service
agreement between Benton-Vinccler and Lagoven under which all mineral
rights are owned by the Government of Venezuela. See "--South Monagas
Unit, Venezuela" and "--Reserves."
(2) The financial information for Russia for the 1995 presentation includes
information for the nine months ended September 30, 1995, the end of
the fiscal period for GEOILBENT. Results of operations in Russia
reflect the twelve months ended December 31, 1993 and 1994 and the nine
months ended September 30, 1995.
(3) In April 1996, Benton sold substantially all its U.S. reserves and
related acreage positions. See "--Other Properties." The 1995 Reserve
Information excludes the reserves which were sold.
South Monagas Unit, Venezuela
General. In July 1992, Benton and Vinccler, a Venezuelan construction
and engineering company, signed a 20-year operating service agreement
with Lagoven, an affiliate of the national oil company, PDVSA, to
reactivate and further develop the Uracoa, Tucupita and Bombal Fields,
which are a part of the South Monagas Unit (the "Unit"). At that time,
Benton was one of three foreign companies ultimately awarded an
operating service agreement to reactivate existing fields by PDVSA, and
was the first U.S. company since 1976 to be granted such an oil field
development contract in Venezuela.
The oil and gas operations in the Unit are conducted by
Benton-Vinccler, Benton's 80%-owned subsidiary. The remaining 20% of
the outstanding capital stock of Benton-Vinccler is owned by Vinccler.
Benton, through its majority ownership of stock in Benton-Vinccler,
makes all operational and corporate decisions related to
Benton-Vinccler, subject to certain super-majority provisions of
Benton-Vinccler's charter documents related to mergers, consolidations,
sales of substantially all of its corporate assets, change of business
and similar major corporate events. Vinccler has an extensive operating
history in Venezuela. It provided Benton with initial financial
assistance and continues to provide ongoing assistance with
construction services and governmental and labor relations.
46
<PAGE> 48
Under the terms of the operating service agreement, Benton-Vinccler is a
contractor for Lagoven and is responsible for overall operations of the South
Monagas Unit, including all necessary investments to reactivate and develop the
fields comprising the Unit. The Venezuelan government maintains full ownership
of all hydrocarbons in the fields. In addition, Lagoven maintains full ownership
of equipment and capital infrastructure following its installation.
Benton-Vinccler invoices Lagoven each quarter based on Bbls of oil accepted by
Lagoven during the quarter, using quarterly adjusted contract service fees per
Bbl, and receives its payments from Lagoven in U.S. dollars deposited directly
into a U.S. bank account. The operating service agreement provides for
Benton-Vinccler to receive an operating fee for each Bbl of crude oil delivered
and a capital recovery fee for certain of its capital expenditures, provided
that such operating fee and capital recovery fee cannot exceed the maximum total
fee per Bbl set forth in the agreement. The operating fee is subject to periodic
adjustments to reflect changes in the special energy index of the U.S. Consumer
Price Index, and the maximum total fee is subject to periodic adjustments to
reflect changes in the average of certain world crude oil prices. Benton cannot
predict the extent to which future maximum total fee adjustments will provide
for capital recovery components in the fees it receives, and has recorded no
income or asset for capital recovery fees.
Under the terms of the operating service agreement, Benton-Vinccler was
obligated to make certain capital and operating expenditures prior to December
31, 1995. Benton-Vinccler has satisfied all such obligations under the operating
service agreement, and no further capital commitments are contractually
required. However, in order to expand operations, Benton will need to continue
to make capital expenditures. See "--South Monagas Unit, Venezuela--Drilling and
Development Activity."
Since 1992, when Venezuela solicited initial calls for indications of interest
related to the reactivation and further development of certain fields in
Venezuela, the country has continued to invite foreign participation in
Venezuelan oil and gas exploration, development and production. Management
believes that Venezuela continues to provide potential business opportunities
for Benton. See "--Delta Centro Block, Venezuela."
Location and Geology. The Unit is located in the southeastern part of the state
of Monagas in eastern Venezuela. The Unit is approximately 51 miles long and
eight miles wide and consists of 157,843 acres, of which the fields comprise
approximately one-half. At December 31, 1995, proved reserves attributable to
Benton's Venezuelan operations were 73,593 MBOE, which represented approximately
76% of Benton's proved reserves. Benton-Vinccler is currently developing the
Oficina sands in the Uracoa Field, which contain 92.4% of the Unit's proved
reserves. The associated natural gas which is produced is currently being
reinjected into the field, as no ready market exists for the natural gas.
Drilling and Development Activity. Uracoa Field. Benton-Vinccler has been
developing the Uracoa Field since 1992. During September 1996, approximately 68
wells were producing an average of approximately 38.4 MBbls of oil per day in
the Uracoa Field. The following table sets forth Uracoa drilling activity and
production information for each of the quarters presented:
<TABLE>
<CAPTION>
AVERAGE DAILY
WELLS DRILLED PRODUCTION
VERTICAL HORIZONTAL FROM FIELD (Bbls)
1994:
<S> <C> <C> <C>
First Quarter 5 0 3,400
Second Quarter 0 0 6,700
Third Quarter 3 0 7,200
Fourth Quarter 0 3 10,200
1995:
First Quarter 1 1 11,800
Second Quarter 1 2 11,300
Third Quarter 3 2 15,800
Fourth Quarter 1 8 20,800
1996:
First Quarter 2 8 29,000
Second Quarter 5 4 33,100
</TABLE>
47
<PAGE> 49
<TABLE>
<S> <C> <C> <C>
Third Quarter 3 7 37,300
</TABLE>
Benton-Vinccler contracts with third parties for drilling and completion of
wells. Currently, Helmerich & Payne International Drilling Co. is performing
drilling services for Benton-Vinccler under contract. Benton's technical
personnel identify drilling locations, specify the drilling program and
equipment to be used and monitor the drilling activities. To date, 14 previously
drilled wells have been reactivated and 55 new wells have been drilled in the
Uracoa Field using modern drilling and completion techniques that had not
previously been utilized on the field, with 54, or 98%, completed and placed on
production. Two drilling rigs are currently working in the Unit. In Benton's
recent experience, each vertical deviated well, drilled to an average depth of
5,600 feet, has been drilled in approximately 10 days and completed in
approximately six days, and each horizontal well, drilled to an average depth of
6,500 feet, has been drilled in 20 days and completed in three days.
Benton-Vinccler plans to drill approximately seven vertical and 26 horizontal
wells, two injection wells and one step-out well adjacent to the Uracoa Field
during 1996, at an anticipated cost of $40-45 million.
In December 1993, Benton-Vinccler commenced drilling the first horizontal well
in the Uracoa Field. Since the completion of this well, Benton has successfully
integrated modern technology and modern drilling and completion techniques to
improve the ultimate recovery. Benton has conducted a 3-D seismic survey and
interpreted the seismic data over the Uracoa Field. As a horizontal well is
drilled, information regarding formations encountered by the drill bit is
transmitted to Benton. Geologists, engineers and geophysicists at Benton can
determine the location of the drill bit by comparing the information about the
formations being drilled with the 3-D seismic data. Benton then directs the
movement of the drill bit to more accurately direct the well to the expected
reservoir. Benton intends to continue this method of horizontal drilling in the
development of the field.
Once oil is produced in the Uracoa Field, it is transported to production
facilities which were designed in the United States and installed by
Benton-Vinccler. These production facilities are of the type commonly used in
heavy oil production in the United States, but not previously used extensively
in Venezuela to process crude oil of similar gravity or quality. The current
production facilities are capable of processing 40 MBbls of oil per day.
Tucupita and Bombal Fields. Before becoming inactive, only Tucupita had been
substantially developed and produced; relatively few wells had been drilled at
Uracoa and Bombal. Benton-Vinccler has completed a 67-square mile 3-D seismic
survey over portions of the Unit and is currently interpreting the data. Based
on the interpretations of the seismic data, Benton-Vinccler may drill one or
more wells to extend the boundaries of the three known fields or to confirm the
existence of additional fields previously undetected in the area. Further
analysis of the Unit indicates that significant reserves may remain in the
Tucupita Field. Benton-Vinccler intends to evaluate the potential of the
Tucupita Field in 1996 by drilling one oil well and will expand existing
production facilities in such field. Based on the performance of this pilot oil
well, and if Benton's assumptions prove to be correct, the production facilities
will be further expanded. Benton-Vinccler currently plans to begin work on the
Bombal Field beginning in late 1996. During 1996, Benton expects capital
expenditures of $5-7 million for drilling and construction of facilities in the
Tucupita and Bombal Fields.
Customers and Market Information. Oil produced in Venezuela is delivered to
Lagoven under the terms of an operating service agreement for an operating
service fee. Benton-Vinccler has constructed a 25-mile oil pipeline from its oil
processing facilities at Uracoa to Lagoven's storage facility, which is the
custody transfer point. The service agreement specifies that the oil stream may
contain no more than 1% base sediment and water, and quality measurements are
conducted both at Benton-Vinccler's facilities and at Lagoven's storage
facility. A continuous flow measuring unit is installed at Benton-Vinccler's
facility, so that quantity is monitored constantly. Lagoven provides
Benton-Vinccler with a daily acknowledgment regarding the amount of oil accepted
the previous day, which is reconciled to Benton-Vinccler's measurement. At the
end of each quarter, Benton-Vinccler prepares an invoice to Lagoven for that
quarter's deliveries. Lagoven pays the invoice at the end of the second month
after the end of the quarter. Invoice amounts and payments are denominated in
U.S. dollars. Payments are wire transferred into Benton-Vinccler's account in
New York.
Employees; Community Relations. Benton-Vinccler seeks to employ nationals rather
than bring expatriates into the country. Presently, there are five full-time
expatriates working with Benton-Vinccler and 121 local employees.
48
<PAGE> 50
Benton-Vinccler also conducts ongoing community relations programs, providing
medical care, training, equipment and supplies, and support for local schools,
in both states in which the South Monagas Unit falls.
Delta Centro Block, Venezuela
General. In January 1996, Benton and its bidding partners, LL&E and Norcen were
awarded the right to explore and develop the Delta Centro Block in Venezuela.
The contract requires a minimum exploration work program consisting of
completing a 1,300 kilometer seismic survey and drilling three wells to depths
of 12,000 to 18,000 feet within five years. PDVSA estimates that this minimum
exploration work program will cost $60 million, and will require that Benton,
LL&E and Norcen each post a performance surety bond or standby letter of credit
for its pro rata share of the estimated work commitment expenditures. Benton
will have a 30% interest in the exploration venture, with LL&E and Norcen each
owning a 35% interest. Under the proposed terms of the operating agreement,
which establishes the management company for the project, LL&E will be the
operator of the field and therefore Benton will not be able to exercise control
of the operations of the venture. It is currently anticipated that Corporation
Venezolana del Petroleo, S.A. ("CVP"), an affiliate of the national oil company,
will have up to a 35% interest in the management company, which will dilute the
voting power of the partners on a pro rata basis.
If areas within the block are deemed to be commercially viable, then the group
has the right to enter into further agreements with CVP to develop those areas
during the next 20-25 years. CVP would participate in the revenues and costs
with an interest between 1-35%, at CVP's discretion. Any oil and gas produced by
the Delta Centro consortium will be sold at market prices and will be subject to
the oil and gas taxation regime in Venezuela and to the terms of a profit
sharing agreement with PDVSA. Under the current oil and gas tax law, a royalty
of up to 16.67% will be paid to the state. Under the contract bid terms, 41% of
the pre-tax income will be shared with PDVSA for the period during which the
first $1 billion of revenues is produced; thereafter, the profit sharing amount
may increase up to 50% according to a formula based on return on assets.
Currently, the statutory income tax rate for oil and gas enterprises is 66.7%.
Royalties and shared profits are currently deductible for tax purposes.
Location and Geology. The Delta Centro block consists of approximately 2,100
square kilometers (526,000 acres) located in the delta of the Orinoco River in
the eastern part of Venezuela. Although no significant exploratory activity has
been conducted on the block, PDVSA has estimated that the area may contain
recoverable reserves of as much as 820 MMBbls, and may be capable of producing
up to 160 MBbls of oil per day. The general area of Venezuela in which the Delta
Centro Block is located is known to be a significant source of hydrocarbons,
evidenced by the Orinoco tar sands to the south and the recently discovered El
Furrial light oil trend to the north. Based on its geological studies of the
basins in this area, Benton's technical staff believes that hydrocarbons have
essentially migrated over time from the deeper Maturin basin area of Venezuela
southward toward the shallower Orinoco tar belt area. If so, then potential
trapping structures and/or faults in the path of the migrating oil would serve
as traps for the migrating oil and have the opportunity to be filled to their
spill points. Delta Centro is directly in line with this migration path, making
it an attractive exploration area. The area is mostly swampy in nature, with
terrain ranging from forest in the north to savannah in the south. The
marshlands in the block are similar to the transition zone areas in the Gulf of
Mexico in which Benton has significant experience in seismic and drilling
operations.
Drilling and Development Activity. The venture intends to conduct a 3-D seismic
survey over the southwestern portion of the Delta Centro Block beginning in
1996, at an expected total cost to Benton of approximately $6-7 million, of
which $2 million is expected to be spent in 1996. Following the initial
interpretation of the seismic data, the venture intends to drill an initial
exploration well during 1997, at a cost to Benton of approximately $1.5-2
million. Seismic and drilling programs during 1998-2000 will be based on the
results of the 1996-1997 activity.
Overview of Venezuelan Oil and Gas Industry
Oil and gas is a vital industry in Venezuela, currently representing 25% of the
economy. Estimates by the Economist Intelligence Unit indicate that the oil
sector grew 6.0% in 1995 and 4.6% in 1994. Oil, gas and petroleum product
exports for 1995 reached $13.3 billion, accounting for almost 73% of total
exports. In addition, such estimates indicate that PDVSA expects oil and gas
product exports to total approximately $15.6 billion in 1996.
49
<PAGE> 51
PDVSA is one of the largest oil companies in the world based on several factors,
including reserves, production capacity and product sales. At the end of 1995,
PDVSA's proved crude oil reserves were approximately 64 BBbls, more reserves
than any other company or country in the Western hemisphere. PDVSA is seeking to
double its current production capacity over the next ten years, with private
investment as a key source of capital to achieve such growth.
In 1992, Venezuela initiated a field re-activation program, which was an
important first step for the reentrance of private investment to the oil and gas
sector. Service contracts for 15 underdeveloped units were awarded, nine of
which currently produce a total of 100 MBbls per day. Benton-Vinccler currently
provides approximately 30% of this total production. In the beginning of 1996,
Venezuela opened the oil and gas sector for profit sharing contracts. Ten areas
were offered for auction at the end of January, marking the first time that
exploration and production rights had been officially offered to the private
sector since the nationalization of the oil industry in 1976. The Delta Centro
consortium was one of the successful bidders.
North Gubkinskoye, Russia
General. In December 1991, the joint venture agreement forming GEOILBENT among
Benton (34% interest) and two Russian partners, Purneftegasgeologia and
Purneftegas (each having a 33% interest), was registered with the Ministry of
Finance of the USSR. In November 1993, the agreement was registered with the
Russian Agency for International Cooperation and Development. Although GEOILBENT
may only take action through the unanimous vote of the partners, Benton believes
that it has developed a good relationship with its partners and has not
experienced any disagreement with its partners on major operational matters. Mr.
A.E. Benton, Chief Executive Officer of Benton, serves as Chairman of the Board
of GEOILBENT.
Location and Geology. GEOILBENT develops, produces and markets crude oil from
the North Gubkinskoye Field in the West Siberia region of Russia, located
approximately 2,000 miles northeast of Moscow. The field, which covers an area
approximately 15 miles long and 4 miles wide, has been delineated with over 60
exploratory wells (which tested 26 separate reservoirs) and is surrounded by
large proven fields. Before commencement of GEOILBENT's operations, North
Gubkinskoye was one of the largest oil and gas fields in the region not under
commercial production. The field is a large anticlinal structure with multiple
pay sands. The development to date has focused on the BP 8, 9, 10, 11 and 12
reservoirs. The natural gas which is produced is currently being flared in
accordance with environmental regulations.
Drilling and Development Activity. GEOILBENT commenced initial operations in the
field during the third quarter of 1992 with the construction of a 37-mile oil
pipeline and installation of temporary production facilities. During September
1996, approximately 38 wells were producing an average of approximately 6.8
MBbls of oil per day.
The following table sets forth drilling activity and production information for
each of the quarters presented:
<TABLE>
<CAPTION>
AVERAGE DAILY
PRODUCTION
WELLS DRILLED FROM FIELD (Bbls)
------------- -----------------
1994:
<S> <C> <C>
First Quarter 1 1,000
Second Quarter 1 2,400
Third Quarter 2 2,200
Fourth Quarter 5 4,900
1995:
First Quarter 4 4,300
Second Quarter 1 5,600
Third Quarter 9 7,800
Fourth Quarter 11 7,900
1996:
</TABLE>
50
<PAGE> 52
<TABLE>
<S> <C> <C>
First Quarter 4 8,500
Second Quarter 1 7,200
Third Quarter 0 7,000
</TABLE>
GEOILBENT contracts with third parties for drilling and completion of wells.
Supervised by a joint American and Russian management team, GEOILBENT identifies
drilling locations, then uses Russian drilling rigs, upgraded by certain western
technology and materials including shaker screens, monitoring equipment and
drilling and completion fluids, to drill and complete a well. To date, 12
previously drilled wells have been reactivated and 38 wells have been drilled in
the field, with 37, or 97%, completed and placed on production. Each well is
drilled to an average depth of approximately 10,000 feet measured depth and
8,000 feet true depth.
Once oil is produced from the North Gubkinskoye Field, it is transported to
production facilities constructed and owned by GEOILBENT. Oil is then
transferred to GEOILBENT's 37-mile pipeline which transports the oil from the
North Gubkinskoye Field south to the main Russian oil pipeline network.
The current production facilities are operating at or near capacity and would
need to be expanded to accommodate any increased production. Subject to
obtaining financing, GEOILBENT has a 1997 capital expenditure budget of
approximately $35 million, of which $21 million would be used to drill
approximately 36 wells in the North Gubkinskoye Field and $14 million for
construction of production facilities. GEOILBENT and Benton have negotiated a
$55 million credit facility with the European Bank for Reconstruction and
Development, which would be non-recourse to Benton, to be used for development
of the North Gubkinskoye Field, including the production facility expansion and
the drilling of additional wells.
Customers and Market Information. GEOILBENT's 37-mile pipeline runs from the
field to the main pipeline in the area where GEOILBENT transfers the oil to
Transneft, the state oil pipeline monopoly. Transneft can transport the oil to
the western border of Russia. All oil production is for export, and all oil
sales are handled by trading companies such as Russoil or NAFTA Moscow. During
1995, most of GEOILBENT's crude sales were made to purchasers in Germany. All
sales have been paid in U.S. dollars into GEOILBENT's account in Moscow.
Employees; Community and Country Relations. Having access to the oilfield labor
base in West Siberia, GEOILBENT employs Russian nationals almost exclusively.
Presently, there are three full-time expatriates working with GEOILBENT and over
200 local employees. Benton conducts an ongoing community relations program in
Russia, providing medical care, training, equipment and supplies in towns in
which GEOILBENT personnel reside and also for the nomadic indigenous population
which resides in the area of oilfield operations.
Alternatives for Natural Gas Reserves. Benton and GEOILBENT estimate that
substantial recoverable associated gas and condensate reserves exist in the
North Gubkinskoye Field. In addition, there are substantial non-associated
natural gas reserves in the field. Currently, there exists no ready market for
these reserves, and therefore there are no plans to produce these gas and
condensate reserves. Associated gas and condensate are flared in allowable
amounts under permits with the Ministry of Fuel and Energy. If no market
develops for the gas and condensate, then over time GEOILBENT plans to begin
reinjecting them back into the reservoirs. GEOILBENT currently has no rights to
develop the gas caps in the field. However, GEOILBENT has recently entered into
discussions with Gazprom, the state natural gas monopoly, for development and
production of the solution gas, which is estimated by Benton to be 550-600 Bcf.
Implementation of such a development plan would include construction of
processing facilities and of a natural gas pipeline from the field area to the
main transmission pipeline. Feasibility studies are currently in process and
anticipated to be completed by year end 1996. Further development, subject to
approval of all parties, will depend upon available financing.
Importance of Russian Oil and Gas Industry. Although estimates vary widely, it
is believed that a substantial amount of oil and natural gas reserves are
located in Russia. In 1994 and 1995, energy and fuels (including primarily oil,
oil products, natural gas, and hard coal) accounted for approximately 45% and
41%, respectively, of total Russian exports, as reported by the Economist
Intelligence Unit. These fuel and energy exports are important sources of hard
currency.
51
<PAGE> 53
In the last several years, the Russian oil and gas industry has attracted a
notable amount of foreign investment, including that of Benton.
Other Properties
Prior to 1996, Benton had successfully pursued acquisition and joint venture
opportunities in the United States as major oil and gas companies continued to
consolidate operations and focus exploration and development activities outside
the United States. Substantially all of Benton's domestic activities were
located in the Louisiana Gulf Coast at the West Cote Blanche Bay, Rabbit Island
and Belle Isle Fields. Benton entered into agreements with Texaco, Inc.
("Texaco") and Oryx Energy Company ("Oryx") to produce the fields by using 3-D
seismic technology integrated with subsurface geologic data from previously
drilled wells. In addition, Benton entered into certain agreements with Tenneco
Ventures Corporation ("Tenneco") whereby Tenneco purchased certain interests in
Benton's operations in the three fields and was given the right to participate
as a 50% partner in certain of Benton's future activities in the Gulf Coast for
the next five years.
In March 1995, Benton and its affiliates and Tenneco sold to WRT Energy
Corporation a 43.75% working interest in the shallower depths (above
approximately 10,575 feet) in the West Cote Blanche Bay Field for an aggregate
purchase price of $20 million. Of this aggregate purchase price, Benton received
$14.9 million.
On April 12, 1996, Benton sold to Shell all of its interests in the West Cote
Blanche Bay, Rabbit Island and Belle Isle Fields, effective December 31, 1995,
for a purchase price of $35.4 million. Because the properties were held for
sale, Benton's reserve report excludes all reserves attributable to these
properties.
At December 31, 1995, Benton had proved reserves of 1 MBOE in the Scott Field in
Louisiana.
Evaluation of Additional Opportunities
Benton continues to evaluate and pursue additional international opportunities
which fit within Benton's business strategy. Benton is currently evaluating
certain development and/or acquisition opportunities, but it is not presently
known whether, or on what terms, such evaluations will result in future
agreements or acquisitions.
Reserves
The following table sets forth information regarding estimates of proved
reserves at December 31, 1995 prepared by Benton and audited by Huddleston &
Co., Inc., independent petroleum engineers:
<TABLE>
<CAPTION>
CRUDE OIL AND NATURAL
CONDENSATE GAS
(MBbl) (Mmcf)
------------------------ --------------------------
Developed Undeveloped Total Developed Undeveloped Total
--------- ----------- ------ --------- ----------- -----
<S> <C> <C> <C> <C> <C> <C>
Venezuela(1) 30,032 43,561 73,593 -- -- --
Russia(2) 3,475 19,143 22,618 -- -- --
Unitred States(3) -- -- -- 6 -- 6
------ ------ ------ ----- ----- -----
Total 33,507 62,704 96,211 6 0 6
====== ====== ====== ===== ===== =====
</TABLE>
(1) Includes 100% of the reserve information, without deduction for minority
interest. All Venezuelan reserves are attributable to an operating service
agreement between Benton-Vinccler and Lagoven, under which all mineral rights
are owned by the Government of Venezuela. See "--South Monagas Unit, Venezuela."
52
<PAGE> 54
(2) Although Benton estimates that there are substantial natural gas reserves in
the North Gubkinskoye Field, no natural gas reserves have been recorded because
of a lack of a ready market.
(3) Benton has sold substantially all of its U.S. reserves and acreage
positions. See "--Other Properties." The table excludes the reserves to be sold.
Estimates of commercially recoverable oil and gas reserves and of the future net
cash flows derived therefrom are based upon a number of variable factors and
assumptions, such as historical production from the subject properties,
comparison with other producing properties, the assumed effects of regulation by
governmental agencies and assumptions concerning future operating costs,
severance and excise taxes, export tariffs, abandonment costs, development costs
and workover and remedial costs, all of which may vary considerably from actual
results. All such estimates are to some degree speculative, and various
classifications of reserves are only attempts to define the degree of
speculation involved. For these reasons, estimates of the commercially
recoverable reserves of oil attributable to any particular property or group of
properties, the classification, cost and risk of recovering such reserves and
estimates of the future net cash flows expected therefrom, prepared by different
engineers or by the same engineers at different times, may vary substantially.
The difficulty of making precise estimates is accentuated by the fact that 65%
of Benton's total proved reserves were non-producing as of December 31, 1995.
Therefore, Benton's actual production, revenues, severance and excise taxes,
export tariffs, development expenditures, workover and remedial expenditures,
abandonment expenditures and operating expenditures with respect to its reserves
will likely vary from estimates, and such variances may be material.
In addition, actual future net cash flows will be affected by factors such as
actual production, supply and demand for oil, availability and capacity of
gathering systems and pipelines, changes in governmental regulations or taxation
and the impact of inflation on costs. The timing of actual future net revenue
from proved reserves, and thus their actual present value, can be affected by
the timing of the incurrence of expenditures in connection with development of
oil and gas properties. The 10% discount factor, which is required by the
Commission to be used to calculate present value for reporting purposes, is not
necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with the oil and gas industry.
Discounted present value, no matter what discount rate is used, is materially
affected by assumptions as to the amount and timing of future production, which
may and often do prove to be inaccurate.
Production, Prices and Lifting Cost Summary
The following table sets forth by country net production, average sales prices
and average lifting costs of Benton for the six months ended June 30, 1995 and
1996 and the years ended December 31, 1993, 1994 and 1995:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
----------------
YEARS ENDED DECEMBER 31 JUNE 30
----------------------- -------
VENEZUELA 1993 1994 1995 1995 1996
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Crude Oil Production (Bbl) 160,425 2,519,514 5,456,473 2,088,464 5,634,599
Average Crude Oil Sales Price
($ per Bbl) $ 8.31 $ 8.52 $ 9.01 $ 9.32 $ 10.00
Average Lifting Costs ($ per Bbl) 7.26 1.51 1.19 1.43 .92
RUSSIA (1)
Net Crude Oil Production (Bbl) 28,263 294,364 490,960 273,904 396,858
Average Crude Oil Sales Price
($ per Bbl) $ 11.46 $ 11.93 $ 12.25 $ 13.20 $ 11.87
Average Lifting Costs ($ per Bbl) 16.22 9.62 5.63 5.24 9.10
UNITED STATES
Net Production:
Crude oil and condensate (Bbl) 292,266 225,954 68,975 44,960 5,876
Natural Gas (Mcf) 232,677 2,061,892 3,784,830 899,586 1,443,834
Average Sales Price:
Crude oil and condensate ($ per Bbl) $ 17.30 $ 14.46 $ 15.79 $ 16.27 $ 20.18
Natural Gas ($ per Mcf) 2.19 1.79 1.77 1.64 2.92
Average Lifting Costs ($ per BOE) 10.53 5.08 2.08 4.43 1.85
</TABLE>
53
<PAGE> 55
(1) The December 31, 1995 presentation includes information for the nine
months ended September 30, 1995, the end of the fiscal period for
GEOILBENT. Similarly, the 1996 presentation includes information for
the six months ended March 31, 1996.
Regulation
General. Benton's operations are affected by political developments and laws and
regulations in the areas in which it operates. In particular, oil and gas
production operations and economics are affected by price controls, tax and
other laws relating to the petroleum industry, by changes in such laws and by
changing administrative regulations and the interpretations and application of
such rules and regulations. In addition, various federal, state, local and
international laws and regulations covering the discharge of materials into the
environment, the disposal of oil and gas wastes, or otherwise relating to the
protection of the environment, may affect Benton's operations and costs. Oil and
gas industry legislation and agency regulation is periodically changed for a
variety of political, economic, environmental and other reasons. Numerous
governmental departments and agencies issue rules and regulations binding on the
oil and gas industry, some of which carry substantial penalties for the failure
to comply. The regulatory burden on the oil and gas industry increases Benton's
cost of doing business.
Venezuela. Venezuela requires environmental and other permits for certain
operations conducted in oil field development, such as site construction,
drilling, and seismic activities. As a contractor to Lagoven, Benton-Vinccler
submits capital and operating budgets to Lagoven for approval. Capital
expenditures to comply with Venezuelan environmental regulations relating to the
reinjection of gas in the field and water disposal are expected to approximate
$7.8 million in 1996 and $14.4 million in 1997, respectively. Benton-Vinccler
also submits requests for permits for drilling, seismic and operating activities
to Lagoven, which then obtains such permits from the Ministry of Energy and
Mines and Ministry of Environment, as required. Benton-Vinccler is also subject
to income, municipal and value added taxes, and must file certain monthly and
annual compliance reports with SENIAT (the national tax administration) and with
various municipalities.
Russia. GEOILBENT submits annual production and development plans, which include
information necessary for permits and approvals for its planned drilling,
seismic and operating activities, to local and regional governments and to the
Ministry of Fuel and Energy, Committee of Geology and Ministry of Economy.
GEOILBENT also submits annual production targets and quarterly export
nominations for oil pipeline transportation capacity to the Ministry of Fuel and
Energy. GEOILBENT is subject to customs, value added, and municipal and income
taxes. Various municipalities and regional tax inspectorates are involved in the
assessment and collection of these taxes. GEOILBENT must file operating and
financial compliance reports with several bodies, including the Ministries of
Fuel and Energy, Committee of Geology, Committee for Technical Mining
Monitoring, the Ministry of Ecology, and the State Customs Committee.
Drilling, Acquisition and Finding Costs
During the years ended December 31, 1993, 1994 and 1995, Benton spent
approximately $26 million, $53 million, and $74 million, respectively, for
acquisitions of leases and producing properties, development and exploratory
drilling, production facilities and additional development activities such as
workovers and recompletions.
Benton has drilled or participated in the drilling of wells as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31
-----------------------
1993 1994 1995
---- ---- ----
WELLS DRILLED: GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C>
Exploratory:
Crude oil 1 .435 -- -- 3 1.020
Natural gas -- -- 2 .875 3 .970
Dry holes 2 .869 2 .869 1 .375
Development:(1)(2)(3)
</TABLE>
54
<PAGE> 56
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Crude oil 13 5.693 20 11.860 41 22.680
Natural Gas -- -- 1 .435 1 .220
Dry Holes 2 .840 -- -- 1 .800
--- ------ -- ------ -- ------
TOTAL 18 7.837 25 14.039 50 26.065
=== ======= === ====== == ======
AVERAGE DEPTH OF WELLS (FEET) 5,100 7,266 7,847
PRODUCING WELLS (4):
Crude Oil 106 42.942 112 46.796 77 44.701
Natural Gas 6 1.271 4 .822 8 2.024
</TABLE>
(1) In addition to the activities set forth in the table, at the West Cote
Blanche Bay Field during the year ended December 31, 1994, Benton
participated in the successful recompletion of 13 gross (4.247 net) oil
wells and one gross (.327 net) gas well. During the year ended December
31, 1993, Benton participated in the recompletion of 13 gross (5.650
net) oil wells, of which 11 gross (4.781 net) were completed as
producers, and one gross (.435 net) gas well, which was completed as a
producer. In March 1995, Benton sold certain of its interests in the
field, a result of which was to substantially eliminate Benton's future
participation in recompletion and redrilling activities and in April
1996, Benton sold the remainder of its interests in the field. See
"--Other Properties."
(2) In addition to the activities set forth in the table, Benton
participated in the successful recompletion of five gross (4.0 net) oil
wells in Venezuela during the year ended December 31, 1994. Benton
participated in the successful reactivation of nine gross (4.5 net) oil
wells in Venezuela during the year ended December 31, 1993.
(3) In addition to the activities set forth in the table, Benton
participated in the successful reactivation of one gross (.34 net) oil
well in Russia during the year ended December 31, 1995. Benton
participated in the successful reactivation of six gross (2.04 net) oil
wells in Russia during the year ended December 31, 1994. Benton
participated in the successful reactivation of four gross (1.36 net)
oil wells in Russia during the year ended December 31, 1993.
(4) The information related to producing wells reflects wells Benton
drilled, wells Benton participated in drilling and producing wells
Benton acquired.
At December 31, 1995, Benton was participating in the drilling of 2 wells in
Venezuela, and 4 wells in Russia.
All of Benton's drilling activities are conducted on a contract basis with
independent drilling contractors. Benton does not own any drilling equipment.
From commencement of operations through December 31, 1995, Benton added, net of
production and property sales, approximately 96,180 MBOE of proved reserves
through purchases of reserves-in-place, discoveries of oil and natural gas
reserves, extensions of existing producing fields and revisions of previously
estimated reserves. Benton's finding and development costs for its proved
reserves from inception to December 31, 1995 were $1.75 per BOE. Benton's
estimate of future development costs for its undeveloped proved reserves at
December 31, 1995 was $1.80 per BOE. The estimated future development costs are
based upon Benton's anticipated cost of developing its non-producing proved
reserves, which costs are calculated using historical costs for similar
activities.
Acreage
The following table summarizes the developed and undeveloped acreage owned,
leased or under concession as of December 31, 1995. See "-- Other Properties."
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
GROSS NET GROSS NET
----- --- ----- ---
<S> <C> <C> <C> <C>
Venezuela 7,480 5,984 150,363 120,290
Russia 16,080 5,467 149,680 50,891
United States(1) 5,002 1,689 10,000 6,862
------ ------ ------- -------
</TABLE>
55
<PAGE> 57
<TABLE>
<S> <C> <C> <C> <C>
Total 28,562 13,140 310,043 178,043
====== ====== ======= =======
</TABLE>
(1) Benton sold substantially all of its U.S. reserves and related acreage
positions. The table excludes the acreage sold. See "-- Other
Properties."
Competition
Benton encounters strong competition from major oil and gas companies and
independent operators in acquiring properties and leases for exploration for
crude oil and natural gas. The principal competitive factors in the acquisition
of such oil and gas properties include the staff and data necessary to identify,
investigate and purchase such leases, and the financial resources necessary to
acquire and develop such leases. Many of Benton's competitors have financial
resources, staffs and facilities substantially greater than those of Benton.
Employees and Consultants
At December 31, 1995, Benton had 43 employees and one independent consultant.
Benton-Vinccler had 109 employees and GEOILBENT had 220 employees.
Title to Developed and Undeveloped Acreage
All Venezuelan reserves are attributable to an operating service agreement
between Benton-Vinccler and Lagoven, under which all mineral rights are owned by
the Government of Venezuela. With regard to Russian acreage, GEOILBENT has
obtained certain documentation from appropriate regulatory bodies in Russia
which Benton believes is adequate to establish GEOILBENT's right to develop,
produce and market oil and gas from the North Gubkinskoye Field in Russia.
At the time of acquisition of undeveloped acreage in the United States, Benton
conducted a limited title investigation. A title opinion from a qualified law
firm was obtained prior to drilling any given U.S. prospect. Title to presently
producing properties had been investigated by a qualified law firm prior to
purchase. Benton believes its method of investigating the title to these
domestic properties was consistent with general practices in the oil and gas
industry and was designed to enable Benton to acquire title which was generally
considered to be acceptable in the oil and gas industry.
Legal Proceedings
On June 13, 1994, Charles Agnew and other limited partners in several limited
partnerships formed by Benton brought an action in the Superior Court of
California, County of Ventura, against Benton for alleged actions and omissions
of Benton in operating the partnerships and alleged misrepresentations made by
Benton in selling the limited partnership interests. The claimants seek an
unspecified amount of actual and punitive damages. On May 17, 1995, Benton
agreed to a binding arbitration proceeding with respect to such claims, which is
currently in the discovery stage. Benton will be forced to spend time and
financial resources to defend or resolve these matters. In January 1996, Benton
acquired all of the interests in three of the limited partnerships which are the
subject of the arbitration, in exchange for shares of, and warrants to purchase
shares of, Benton's common stock. In the arbitration proceeding, if any
liability is found to exist, the arbitrator will determine the amount of any
damages, and may consider all distributions made to the partners, including the
consideration received in the exchange offer, in determining the extent of
damages, if any. However, there can be no assurance that an arbitrator will
consider such factors in his or her determination of damages if the allegations
are found to be true and damages are awarded.
Benton is also subject to ordinary litigation that is incidental to its
business.
56
<PAGE> 58
INFORMATION CONCERNING CRESTONE
Crestone was incorporated in Denver, Colorado in March 1981 as a Colorado
corporation for the primary purpose of engaging in the acquisition, exploration
and development of oil and gas properties. Crestone's initial capitalization was
accomplished in two private placements of its common stock for producing and
non-producing oil and gas properties valued at $11,853,932, and for $1,049,947
in cash. On July 22, 1990 Crestone completed its third private placement with
certain existing shareholders and other private investors for an additional
710,014 shares. As of October 7, 1996, there were 4,283,580 shares of Common
Stock issued and outstanding and options to purchase an additional 866,420
shares.
DESCRIPTION OF BUSINESS
Crestone presently owns interests in approximately 270 gross producing oil
and/or gas wells located entirely in the United States. Crestone is receiving
production revenue from its share of interests in its producing oil and/or gas
wells in twelve states. Additionally, Crestone has an inventory of mineral
rights, overriding royalty interests, perpetual royalties and working interest
lease positions located primarily in the Rocky Mountain region. Crestone does
not operate any producing wells and the interests held by Crestone collectively
do not represent a material amount of the Company's value.
The majority of Crestone's domestic leasing activity was concentrated on oil
prospects in Colorado, Wyoming, North Dakota, Nevada and Utah. Crestone has
either purchased, participated in, or bought leases on approximately 150 oil and
gas plays and prospects in the United States.
In recent years Crestone has emphasized its international ventures. In 1988,
Crestone initiated its first international negotiations and acquired Geophysical
Survey and Exploration Contract ("GSEC") 54 from The Republic of the
Philippines. This GSEC granted exploration rights to 3.7 million acres in the
South China Sea offshore Palawan Island. This prospect was subsequently
farmed-out to and drilled by British Petroleum. At September 30, 1996, Crestone
had no remaining oil and gas interests in the Philippines.
In July, 1990, Crestone purchased an interest in a Production Sharing Agreement
("PSA") covering 690,000 acres in Central America granted by the government of
Belize. This prospect was recently farmed-out. Crestone retained an overriding
royalty interest ("ORRI") of .48% before payout (cost recovery) ("BPO") or 1.5%
after payout (cost recovery)("APO"), based on oil production and in the event of
a commercial natural gas discovery, Crestone's ORRI is .25% BPO and .50% APO. A
well is scheduled to be drilled in the fourth quarter of 1996.
In May, 1992, Crestone signed a Petroleum Contract with CNOOC covering 6.2
million acres in the Southwest part of the South China Sea under a contract
known as WAB-21. During the past four years, the primary business of Crestone
has been to further the exploration activities and work program of WAB-21 and
preparing to sell its interest to a larger oil company.
Crestone typically does not drill or operate its prospects. Instead, it presents
them to larger companies with a view to promoting the drilling of a well by the
larger company with Crestone receiving a cash bonus to recover its initial cost
investment as well as the larger company bearing Crestone's reserved share of
drilling costs in the well.
DESCRIPTION OF PROPERTY
Crestone is leasing its corporate office in Denver which expires on December 31,
1996. Crestone owns varying interests in domestic oil and gas wells and leases
that are not material to its operations or planned activities. Foreign interests
include the WAB-21 Contract issued by CNOOC and an overriding royalty interest
in an offshore Belize PSA to be drilled in late 1996. Crestone also owns a
working interest in a second offshore Belize PSA known as Block 13.
57
<PAGE> 59
Belize, Central America
Crestone has retained an overriding royalty interest of .48% before payout or
1.5% after payout, based on oil production and .25% before payout and .50% after
payout, based upon gas production, of a well to be drilled offshore Belize later
in 1996. The drilling is expected to occur in the 1,430 square kilometer
concession, which largely covers the Gladden Basin, a subdivision off of the
greater southern Gulf of Mexico Basin.
Participants in the venture are Dover Technology, Inc. (operator), Fina
Exploration Belize B.V., Deminex Belize Petroleum Ltd., Mountain States
Petroleum Corporation, Mallon Production Co. and Magellan Petroleum Corporation.
WAB-21 - South China Sea, The People's Republic of China
The WAB-21 Contract Area (the "Contract Area") is located approximately 50 miles
east of the Dai Hung (Big Bear) Oil Field. Big Bear has recoverable oil reserves
estimated to be 100 MMBbl. The WAB-21 Contract Area covers several similar
structural trends each with potential for large hydrocarbon reserves in possible
multiple pay zones.
The WAB-21 block is located northwest of Zengmu Basin (Offshore Sarawak), where
two Chinese institutions have already conducted geophysical seismic surveys.
Based on the multi-disciplinary data available from Zengmu Basin to the
southeast, East Natuna Basin to the south and southwest, and WAN'AN (Con Son)
Basin to the west and northwest there is substantial evidence of significant
hydrocarbon potential in the Contract Area. Crestone's geophysical data
indicates several geologic horizons of complete assemblages of source rocks,
reservoir rocks and cap rocks.
Structural anomalies in the basin include compressional anticlines, drape-over
traps on basement highs related to growth faults, and wrench zones with many
separate exploration targets. Several potential prospects in the Contract Area
have been identified as the first priority for oil and gas exploration. This
identification was made by using regional sedimentary basin analyses and
estimating the distribution of the thickness of Cenozoic strata. The reservoir
rocks include: Shelf margin carbonates of Mid-Miocene to Pliocene ages, possibly
weathered and fractured basement highs, which are reservoir rocks in White Tiger
(Bach Ho) Field and possibly in the Big Bear Oil Field and the Wan'An basin as
well. Based upon well information west of WAB-21, sandstones are also well
developed and deposited by prograding deltaic sand bodies during various sea
level low stand cycles. The hydrocarbon source rocks in the basin consist mainly
of Oligocene and Lower Miocene marine shales, Bio-Limestones and organic-rich
siltstones and mudstones. Mudstones of Upper Miocene to Holocene serve as
favorable regional and local seals and traps for any hydrocarbon accumulations.
The WAN'AN Basin holds promise as one of the large frontier areas in the world.
Recent discoveries of large gas and oil reserves nearby, to the south and west,
encourage exploration and development. This proximity to these discoveries adds
considerable value to this large prospective geologic province if transportation
and processing infrastructure are built and if a resolution of competing claims
of sovereignty can be achieved.
Multi-national oil companies have long viewed the WAB-21 Contract Area as being
in one of the most prospective basins in the South China Sea. This Contract Area
has been granted to Crestone by China, but the area is also claimed by Vietnam.
Crestone has proposed to Vietnam with China's endorsement to jointly and
commercially develop the disputed area. Vietnam has so far declined to
participate in discussions leading to a resolution through a joint development
economic area. Vietnam has strongly protested the issuance and validity of
Crestone's WAB-21 Contract.
To further evaluate the exploration prospects in the Contract Area, Crestone has
previously contracted with The South China Sea Institute of Oceanology, Academia
Sinica ("Academia Sinica"), to conduct a seismic acquisition project over the
Contract Area. The technical data would have further defined the large
prospective geologic structures already mapped. Academia Sinica's seismic survey
vessel was in position to complete the seismic acquisition in April 1994, but
was unable to complete the work program due to interference from Vietnam.
58
<PAGE> 60
Political Considerations and Risks
While aware of Vietnam's claim to the Contract Area, Crestone sought the WAB-21
Contract from China only after considerable study and consultation with experts
including a research associate formerly with the East-West Center in Honolulu,
Hawaii. Prior to being with the East-West Center, Crestone's consultant worked
for the U.S. State Department.
China's claim of ownership of the area results from China's discovery and
China's use and historic administration of the area. This claim also includes
third party and official foreign government recognition of China's sovereignty
and jurisdiction over the Contract Area.
Chinese ancestors began sailing this area more than two thousand years ago and
were the discoverers and first inhabitants of the nearby Nansha Islands
(Spratlys). Mengliang notes, written during the Song Dynasty (960-1279 AD), and
many other materials recorded the activities of fishing, navigation and life of
Chinese residents on the islands.
The islands were formally placed under Chinese administration during the Ming
Dynasty (1368-1644 AD). In 1883, Germans were banned from geologically surveying
the area by the Quing court, based on Chinese sovereignty over the region. Since
the establishment of Chinese governmental jurisdiction over the area several
hundred years ago, the Nansha Islands have long been recognized as being Chinese
territory. Additionally, Russian and Vietnamese maps have historically shown
this area as Chinese. Significantly, even Vietnam recognized China's sovereignty
of the islands from 1956 until 1975. Crestone's research reveals that Vietnam's
former Premier Van Dong acknowledged China's Nansha Island sovereignty in a
diplomatic note in 1958.
Vietnam's 1977 declaration and its straight baseline delimitation of November
12, 1982 appear to Crestone to contradict Vietnam's claim to the Contract Area
by citing the 1887 Sino-French treaty. This treaty fixes the frontier boundary
line between China and Vietnam at 105 degrees, 43 minutes east of the Paris
meridian. The Contract Area is on the Chinese side of the boundary line.
It is Crestone's belief that China established sovereignty at an early date over
the island chains in the South China Sea, and has never deviated from it.
China's sovereignty rights established by both historical and legal merits
pre-date Vietnam's claims made in 1977 and 1982.
While there are no assurances that China's claim to the Contract Area will
prevail, Crestone has continually received assurances from numerous Chinese
governmental agencies, including the Ministry of Foreign Affairs, that China
will fulfill its contractual requirement to protect Crestone and its partners in
meeting their contractual obligations.
In April 1994, a Chinese seismic survey ship contracted by Crestone was
intercepted by Vietnamese boats in Crestone's Contract Area while attempting to
conduct seismic acquisition operations. The Chinese ship returned to its port
without commencing its seismic work program. China subsequently denounced
Vietnam's action in a sharply worded statement carried in China's leading
newspaper.
Since 1994 China has maintained publicly that it is willing to discuss the joint
development of the Contract Area with the Vietnamese government. Thus far
Vietnam has not responded favorably. Instead, Vietnam granted exploration and
development rights to parts of the Contract Area to Conoco, a division of DuPont
Corporation, and it is also reported that PetroStar Energy received an interest
from Vietnam in Crestone's Contract Area. Diplomatic efforts have been conducted
to resolve the territorial dispute but have thus far been unsuccessful. The
United States has maintained a strictly neutral position, but has encouraged all
parties to peacefully resolve the territorial issue.
COMPETITION
Competition in the oil and gas industry is intense with many companies and
individuals attempting to acquire prospective oil and gas leases, other mineral
interests and exploration funding. Some are very large, well-established
59
<PAGE> 61
companies with substantial operating staffs, capital resources and long earnings
records. Crestone is at a competitive disadvantage in competing with these
larger entities.
The production and marketing of oil and gas is affected by a number of factors
which are beyond Crestone's control and the effects of which cannot be predicted
accurately. These factors include crude oil imports, actions by foreign
oil-producing nations, the availability of adequate pipeline and other
transportation facilities, the marketing of competitive fuels and other matters
affecting the availability of a ready market, such as fluctuating supply and
demand. The oil and gas industry is currently faced with uncertain oil and gas
prices and reduced expenditures by most investors and other entities which have
typically provided funding for oil and gas exploration and development
activities. At present, Crestone sells all of its production to traditional
industry purchasers who have the facilities to transport the oil and gas from
the wellsite.
Gas contracts may be generally renewed each year to allow for yearly price and
volume adjustments. Purchasers generally agree to take gas as contracted for on
a best efforts basis and Crestone agrees to supply gas in the same manner.
REGULATION
The production and sale of crude oil and natural gas are currently subject to
extensive regulation under both federal and state authorities in the United
States and other countries. In addition to environmental and price regulations,
most states in the U.S. have regulations that pertain to spacing of wells,
preventing waste of oil and natural gas, limiting production rates, prorating
production, preventing and cleaning-up of pollution and similar matters.
Although compliance with these laws and regulations has not had a material
adverse effect on Crestone's operations, Crestone cannot predict whether such
laws and regulations will have a material adverse effect on its future
operations.
Because of its policy of farming-out its properties for drilling, Crestone is
typically not exposed to the normal risks of operations such as environmental
problems, marketing, rules and regulations of domestic and foreign governmental
entities and agencies.
Although approximately 95% of Crestone's resources, both personnel and
financial, are committed to foreign activities, it has no foreign production.
LEGAL PROCEEDINGS
There are no material legal proceedings pending or, to the best knowledge of the
management of Crestone, threatened against Crestone.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS OF CRESTONE
The following table sets forth the beneficial ownership of shares of Crestone's
Common Stock as of October 7, 1996, of (a) each person known to Crestone to be
the beneficial owner of more than five percent of Crestone's issued and
outstanding Common Stock, its only outstanding class of capital stock, (b) each
current director and (c) all current officers and directors as a group. Unless
otherwise noted, each person has direct ownership, sole voting power and sole
investment power with respect to the shares listed opposite the person's name.
The directors and certain employees have stock options, all of which are
exercisable, a portion of which have been exercised.
<TABLE>
<CAPTION>
Beneficial Percent
Name and Address Position Ownership of Shares(1) of Ownership(1)
- ---------------- -------- ---------------------- ---------------
<S> <C> <C> <C>
Randall C. Thompson Chairman of 1,589,402(2) 34.68%
5945 S. Fairfax Court the Board, President
Littleton, CO 80121 and Director
Reed Gilmore Director 454,754(3) 10.37%
</TABLE>
60
<PAGE> 62
<TABLE>
<S> <C> <C> <C>
112 W. Second Street
Kimball, NE 69145
Edwin T. Stitt Director & 301,034(4) 6.82%
612 Country Club Road Assistant Secretary
Fairmont, WV 26554
Charles W. Chancellor Director 505,000(5) 11.52%
165 S. Union Boulevard
Suite 356
Lakewood, CO 80228
Richard A. Champion Director & 170,000(6) 3.86%
First Interstate Tower So. Secretary
621 17th Street, Suite 1043
Denver, CO 80293
Robert L. Butts Director 80,000(7) 1.83%
6025 South Chester Way
Englewood, CO 80111 ____________ _______
All Executive Officers and
Directors as a group Total: 3,100,190(8) 60.57%(8)
============ ======
</TABLE>
(1) Calculated pursuant to Rule 13d-3(d) of the Securities Exchange Act of
1934. Unless otherwise stated below, each such person has sole voting
and investment power with respect to all such shares. Under Rule
13d-3(d), shares not outstanding which are subject to options,
warrants, rights or conversion privileges exercisable within 60 days
are deemed outstanding for the purpose of calculating the number and
percentage owned by such person, but are not deemed outstanding for the
purpose of calculating the percentage owned by each other person
listed.
(2) Includes 166,045 shares owned by Thompson Oil Company and 160,216
shares owned by Thompson Oil Company Pension Trust, both of which are
controlled by Randall C. Thompson. Also includes options to purchase
300,000 shares of Common Stock.
(3) Includes 239,754 shares owned by Antelope Production Company, which is
partially controlled by Reed Gilmore. Also includes options to purchase
100,000 shares of Common Stock.
(4) Includes 64,784 shares owned by Royal Resources Corporation, which is
controlled by Edwin T. Stitt. Also includes options to purchase 130,000
shares of Common Stock.
(5) Includes 250,000 shares owned by Mona Chancellor, wife of Charles E.
Chancellor. Mr. Chancellor disclaims all beneficial ownership in such
shares. Also includes options to purchase 100,000 shares of Common
Stock.
(6) Includes 30,000 shares owned by Champion Resources, Inc., which is
controlled by Richard A. Champion. Also includes options to purchase
125,000 shares of Common Stock.
(7) Consists of options to purchase 80,000 shares of Common Stock.
(8) Includes options to purchase an aggregate of 835,000 shares of Common
Stock.
61
<PAGE> 63
SELECTED FINANCIAL DATA
The following table sets forth, for the periods and at the dates indicated,
selected historical financial data of Crestone. The financial data for the nine
months ended June 30, 1996 and the years ended September 30, 1995, 1994, 1993,
1992 and 1991 are derived from Crestone's audited financial statements. The
financial data of Crestone for the nine months ended June 30, 1995 is derived
from Crestone's unaudited interim financial statements, which, in the opinion of
management of Crestone, have been prepared on the same basis as the audited
financial statements and include all adjustments (consisting only of normal
recurring adjustments) necessary for the fair presentation of the financial data
for such period. The results for the nine months ended June 30, 1996 are not
necessarily indicative of the results that may be expected for the full fiscal
year ending September 30, 1996. The summary financial information presented
below should be read in conjunction with Crestone's financial statements and
related notes thereto and "Information Concerning Crestone Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included elsewhere herein.
62
<PAGE> 64
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30, June 30,
------------------------------------------------------------------- --------------------------
1991 1992 1993 1994 1995 1995 1996
---- ---- ---- ---- ---- ---- ----
(unaudited)
Statement of Operations:
Revenues:
<S> <C> <C> <C> <C> <C> <C> <C>
Oil and gas sales $ 169,049 $ 150,787 $ 150,228 $ 108,005 $ 113,023 $ 68,836 $ 74,115
Gain on sales of
assets 190,072 -- -- 33,259 32,973 7,477 214,252
Other 85,789 46,479 34,431 18,657 10,538 9,112 4,778
----------- ----------- ----------- ----------- ----------- ----------- -----------
Total 444,910 197,266 184,659 159,921 156,534 85,425 293,145
----------- ----------- ----------- ----------- ----------- ----------- -----------
Operating costs and
expenses 524,987 710,412 336,043 802,600 571,075 431,372 664,129
----------- ----------- ----------- ----------- ----------- ----------- -----------
Income tax benefit (24,167) (168,816) (3,894) -- -- -- --
----------- ----------- ----------- ----------- ----------- ----------- -----------
Net loss $ (55,910) $ (344,330) $ (147,490) $ (642,679) $ (414,541) $ (345,947) $ (370,984)
=========== =========== =========== =========== =========== =========== ===========
Per Share Data:
Net loss per common
share $ (0.01) $ (0.08) $ (0.04) $ (0.15) $ (0.10) $ (0.02) $ (0.09)
=========== =========== =========== =========== =========== =========== ===========
Weighted average common
shares outstanding 4,200,000 4,200,000 4,200,000 4,200,000 4,200,000 4,200,000 4,200,000
=========== =========== =========== =========== =========== =========== ===========
Statement of Cash Flows Data:
Net cash provided by
(used in) operating
activities $ (484,784) $ 190,575 $ 108,158 $ (375,768) $ (213,121) $ (162,545) $ (231,869)
Proceeds from sale of
property and
equipment 431,814 16,311 245,725 282,015 254,734 226,875 281,680
Additions to property
and equipment (419,029) (391,026) (435,273) (161,227) (362,544) (289,660) (87,473)
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended September 30, June 30,
--------------------------------------------------------------------------------- -----------------
1991 1992 1993 1994 1995 1996
---- ---- ---- ---- ---- ----
Working capital
<S> <C> <C> <C> <C> <C> <C>
(deficit) $ 1,013,253 $ 787,998 $ 648,314 $ 432,089 $ 1,756 $ (69,114)
Total assets 2,784,345 2,306,113 2,148,400 1,509,945 1,191,694 829,331
Stockholders' equity 2,616,049 2,271,719 2,124,229 1,481,550 1,067,009 696,025
</TABLE>
63
<PAGE> 65
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS OF CRESTONE
The following discussion is intended to assist in understanding Crestone's
financial position at June 30, 1996 and September 30, 1995 and 1994 and results
of operations and cash flows for the nine month periods ended June 30, 1996 and
1995 and for the years ended September 30, 1995 and 1994. The following
discussion should be read in conjunction with Crestone's financial statements
and notes thereto included elsewhere herein.
OVERVIEW
While Crestone has interests in over 270 domestic oil and gas wells, for the
past several years Crestone's primary focus has been on international oil and
gas prospects, primarily a 1992 Petroleum Contract with CNOOC, a Geophysical
Survey and Exploration Contract ("GSEC") with the Philippines and a Production
Sharing Agreement ("PSA") with the Government of Belize.
During the nine months ended June 30, 1996, Crestone's GSEC expired and its
application for a new GSEC in a different area in the Philippines was denied.
All oil and gas sales result from Crestone's domestic interests.
LIQUIDITY AND CAPITAL RESOURCES
The generation and development of international oil and gas prospects requires
long lead times with significantly greater expenditures for travel, seismic
lines, consulting geologists, geophysicists and promotion. Accordingly, Crestone
has experienced negative cash flows from operating activities for the nine
months ended June 30, 1996 and 1995 and the years ended September 30, 1995 and
1994 of $231,869, $162,545, $213,121, and $375,768, respectively, which have
been partially offset by net cash provided by investing activities for the nine
months ended June 30, 1996 of $194,207 and for the year ended September 30, 1994
of $132,402 primarily from the sale of interests in Crestone's international
prospects. However, in the nine months ended June 30, 1995, and the year ended
September 30, 1995, the Company used cash in the amounts of $39,578 and $7,783,
respectively, in investing activities.
The decrease in joint interest accounts receivable of $74,796 in 1995 is
primarily due to the collection of past due receivables which were due from two
joint interest partners of Crestone in the Philippines.
Additions to property and equipment for the nine months ended June 30, 1996 and
1995 and the years ended September 30, 1995 and 1994 of $87,473, $289,660,
$362,544 and $161,227, respectively, include geological and geophysical
consulting, license renewal fees and other expenditures capitalized on
international prospects and Crestone's share of non-operated development wells
for a field located in western Colorado.
As a result of the decreases in cash and cash equivalents resulting from the
activities described above, at June 30, 1996 Crestone had a working capital
deficit of $69,114 and there is substantial doubt about Crestone's ability to
continue as a going concern. Crestone is actively marketing its remaining
interests in oil and gas properties with the objective of raising sufficient
funds to maintain current international operations. However, there can be no
assurance that such marketing efforts will be successful. Furthermore,
Crestone's management intends to limit expenditures as necessary to maintain the
existence of the corporation.
On August 2, 1996, Crestone's Board of Directors approved a Letter Agreement
dated July 25, 1996 between Crestone and Benton in which Benton stated its
intent to acquire all of the outstanding shares of Crestone Common Stock and
Crestone Options. The significant terms of such letter and a subsequent Merger
Agreement include:
a. An earnest money deposit of $200,000 paid to Crestone in
August.
b. Benton will offer one share of its common stock for each seven
shares of Crestone's Common Stock.
c. Benton will pay all costs incurred in conjunction with this
transaction.
d. Benton paid $30,000 for a farmout drilling package, 50% of
which will be paid to CNOOC's Exploration and Development
Research Center.
64
<PAGE> 66
e. Benton will issue options to purchase shares of Benton Common
Stock in exchange for granted and unexercised options to
purchase Crestone's Common Stock.
f. A Shareholder Trust will be established which will have an
economic interest in Crestone's WAB-21 Contract for the
benefit of Crestone's current stockholders.
ANALYSIS OF RESULTS OF OPERATIONS
Nine Months Ended June 30, 1996 compared to Nine Months Ended June 30, 1995
Revenues. Oil and gas sales increased from $68,836 in 1995 to $74,115 in 1996.
Such increase is primarily attributable to increased production from Crestone's
western Colorado development gas wells. Interest income decreased from $8,517 in
1995 to $4,738 in 1996 primarily due to a decrease in cash invested. During the
nine months ended June 30, 1996, Crestone sold its remaining participating
interest in its PSA in Belize for $255,000. As such proceeds exceeded the Belize
full cost pool at the date of sale, Crestone recorded a gain on sale of
$214,252. Crestone recorded a $7,477 gain from the sale of miscellaneous
marketable securities during the nine months ended June 30, 1995.
Operating Costs and Expenses. Crestone's 1996 lease operating expenses of
$11,174 and production taxes of $6,514 decreased slightly when compared to the
same period in 1995. Depreciation, depletion and amortization related to oil and
gas producing activities increased from $38,820 in 1995 to $43,946 in 1996
commensurate with the increase in production for such period. During the nine
months ended June 30, 1996, Crestone wrote off its entire investment in the
Philippines of $232,604 for the reasons previously discussed. Crestone recorded
impairments of its U.S. full cost pool in the 1996 and 1995 periods of $43,474
and $26,560, respectively. General and administrative expenses decreased from
$341,534 in 1995 to $326,282 in 1996 as a result of Crestone's efforts to reduce
corporate overhead expenses, partially offset by an increase in general and
administrative expenses incurred directly on behalf of Crestone's oil and gas
prospects.
Year Ended September 30, 1995 compared to Year Ended September 30, 1994
Revenues. Oil and gas revenues for the year ended September 30, 1995 increased
from $108,005 in 1994 to $113,023 primarily due to certain western Colorado
development gas wells coming on to production in the fourth fiscal quarter of
1995. Interest income decreased $6,360 to $9,943 in 1995 primarily due to a
decrease in invested cash. Gains on the sale of marketable securities of $15,473
and $24,991 in 1995 and 1994, respectively, relate to the liquidation of
Crestone's marketable securities portfolio. The 1995 gain on sale of other
assets of $17,500 resulted from the sale of a non-operating asset. During 1994,
Crestone sold 25% of its participating interest in the Belize PSA for $65,000,
resulting in a gain of $8,268.
Operating Costs and Expenses. Crestone's lease operating expenses of $19,386 in
1995 increased $2,601 from 1994 primarily due to expenses incurred for the
western Colorado development wells in the fourth quarter of fiscal 1995.
Production taxes decreased in 1995 to $9,421 from $10,751 in 1994. Depreciation,
depletion and amortization decreased from $65,090 in 1994 to $52,377 in 1995
primarily due to impairments recorded for the U.S. full cost pool in 1994.
Impairments of $26,560 and $73,075 were recorded for the U.S. full cost pool for
1995 and 1994, respectively. In 1994, Crestone wrote off its remaining
investment in Peru of $176,653 as Crestone decided to no longer pursue an
interest in this area. General and administrative expenses increased to $457,802
in 1995 from $453,629 in 1994. Increases in salaries and benefits paid to
Crestone's President were offset by a decrease in general and administrative
expenses incurred directly on Crestone's oil and gas prospects.
MISCELLANEOUS
At June 30, 1996, the Company had net operating loss ("NOL") carryforwards for
Federal income tax purposes of $1,343,828 which will begin to expire in 2008.
The amount and availability of a NOL carryforward is subject to a variety of
interpretations and restrictions. Under a provision of the United States
Internal Revenue Code, a corporation's ability to utilize an NOL carryforward to
offset taxable income following an "ownership change" is limited. If an
ownership change occurs, the ability of Crestone to use its NOL carryforward
will be limited so that a portion of Crestone's NOL carryforward may not be
available to offset Crestone's future taxable income in a particular year.
65
<PAGE> 67
LEGAL MATTERS
The validity of the issuance of the Benton Common Stock and Benton Options, and
certain federal income tax matters related to the Merger, will be passed upon
for Benton by Emens, Kegler, Brown, Hill & Ritter, Co., L.P.A., Columbus, Ohio.
EXPERTS
The financial statements incorporated in this registration statement by
reference from Benton's Annual Report on Form 10-K for the year ended December
31, 1995 have been audited by Deloitte & Touche LLP, independent auditors, as
stated in their report, which is incorporated herein by reference, and have been
so incorporated in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The information appearing herein or incorporated herein with respect to proved
oil and gas reserves of Benton at December 31, 1994 and 1995, to the extent
stated herein, was estimated by Benton and audited by Huddleston & Co., Inc.,
independent petroleum engineers, and is included herein on the authority of such
firm as experts in petroleum engineering.
The financial statements of Crestone as of June 30, 1996 and September 30, 1995
and 1994 and for the nine months ended June 30, 1996 and the years ended
September 30, 1995 and 1994 included in this Proxy Statement/Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
66
<PAGE> 68
GLOSSARY
When the following terms are used in the text they have the meanings indicated.
MCF. "Mcf" means thousand cubic feet. "Mmcf" means million cubic feet. "Bcf"
means billion cubic feet. "Tcf" means trillion cubic feet.
BBL. "Bbl" means barrel. "MBbl" means thousand barrels. "MMBbl" means million
barrels. "BBbl" means billion barrels.
BOE. "BOE" means barrels of oil equivalent, which are determined using the ratio
of one barrel of crude oil, condensate or natural gas liquids to six Mcf of
natural gas so that six Mcf of natural gas is referred to as one barrel of oil
equivalent or "BOE". "MBOE" means thousands of barrels of oil equivalent.
"MMBOE" means millions of barrels of oil equivalent.
CAPITAL EXPENDITURES. "Capital Expenditures" means costs associated with
exploratory and development drilling (including exploratory dry holes);
leasehold acquisitions; seismic data acquisitions; geological, geophysical and
land-related overhead expenditures; delay rentals; producing property
acquisitions; and other miscellaneous capital expenditures.
COMPLETION COSTS. "Completion Costs" means, as to any well, all those costs
incurred after the decision to complete the well as a producing well. Generally,
these costs include all costs, liabilities and expenses, whether tangible or
intangible, necessary to complete a well and bring it into production, including
installation of service equipment, tanks, and other materials necessary to
enable the well to deliver production.
DEVELOPMENT WELL. A "Development Well" is a well drilled as an additional well
to the same reservoir as other producing wells on a lease, or drilled on an
offset lease not more than one location away from a well producing from the same
reservoir.
EXPLORATORY WELL. An "Exploratory Well" is a well drilled in search of a new and
as yet undiscovered pool of oil or gas, or to extend the known limits of a field
under development.
FINDING COST. "Finding Cost", expressed in dollars per BOE, is calculated by
dividing the amount of total capital expenditures related to acquisitions,
exploration and development costs (reduced by proceeds for any sale of oil and
gas properties) by the amount of total net reserves added or reduced as a result
of property acquisitions and sales, drilling activities and reserve revisions
during the same period.
FUTURE DEVELOPMENT COST. "Future Development Cost" of proved nonproducing
reserves, expressed in dollars per BOE, is calculated by dividing the amount of
future capital expenditures related to development properties by the amount of
total proved non-producing reserves associated with such activities.
GROSS ACRES OR WELLS. "Gross Acres or Wells" are the total acres or wells, as
the case may be, in which an entity has an interest, either directly or through
an affiliate.
LIFTING COSTS. "Lifting Costs" are the expenses of lifting oil from a producing
formation to the surface, consisting of the costs incurred to operate and
maintain wells and related equipment and facilities, including labor costs,
repair and maintenance, supplies, insurance, production, severance and windfall
profit taxes.
NET ACRES OR WELLS. A party's "Net Acres" or "Net Wells" are calculated by
multiplying the number of gross acres or gross wells in which that party has an
interest by the fractional interest of the party in each such acre or well.
PRODUCING PROPERTIES OR RESERVES. "Producing Reserves" are Proved Developed
Reserves expected to be produced from existing completion intervals now open for
production in existing wells. "Producing Properties" are properties to which
Producing Reserves have been assigned by an independent petroleum engineer.
67
<PAGE> 69
PROVED DEVELOPED RESERVES. "Proved Developed Reserves" are Proved Reserves which
can be expected to be recovered through existing wells with existing equipment
and operating methods.
PROVED RESERVES. "Proved Reserves" are the estimated quantities of crude oil,
natural gas and natural gas liquids which geological and engineering data
demonstrate with reasonable certainty to be recoverable in future years from
known oil and gas reservoirs under existing economic and operating conditions,
that is, on the basis of prices and costs as of the date the estimate is made
and any price changes provided for by existing conditions.
PROVED UNDEVELOPED RESERVES. "Proved Undeveloped Reserves" are Proved Reserves
which can be expected to be recovered from new wells on undrilled acreage, or
from existing wells where a relatively major expenditure is required for
recompletion.
RESERVES. "Reserves" means crude oil and natural gas, condensate and natural gas
liquids, which are net of leasehold burdens, are stated on a net revenue
interest basis, and are found to be commercially recoverable.
ROYALTY INTEREST. A "Royalty Interest" is an interest in an oil and gas property
entitling the owner to a share of oil and gas production (or the proceeds of the
sale thereof) free of the costs of production.
STANDARDIZED MEASURE OF FUTURE NET CASH FLOWS. The "Standardized Measure of
Future Net Cash Flows" is a method of determining the present value of Proved
Reserves. The future net revenues from Proved Reserves are estimated assuming
that oil and gas prices and production costs remain constant. The resulting
stream of revenues is then discounted at the rate of 10% per year to obtain a
present value.
3-D SEISMIC. "3-D Seismic" is the method by which a three dimensional image of
the earth's subsurface is created through the interpretation of seismic data.
3-D surveys allow for a more detailed understanding of the subsurface than do
conventional surveys and contribute significantly to field appraisal,
development and production.
UNDEVELOPED ACREAGE. "Undeveloped Acreage" is oil and gas acreage (including, in
applicable instances, rights in one or more horizons which may be penetrated by
existing wellbores, but which have not been tested) to which Proved Reserves
have not been assigned by independent petroleum engineers.
68
<PAGE> 70
INDEX TO FINANCIAL STATEMENTS OF CRESTONE
Report of Independent Accountants.......................................... F-2
Balance Sheet at June 30, 1996 and September 30, 1994...................... F-3
Statement of Operations and Accumulated Deficit for the Nine Months Ended
June 30, 1996 and 1995 and the Years Ended September 30, 1995 and 1994.....
F-5
Statement of Cash Flows for the Nine Months Ended June 30, 1996 and 1995
and the Years Ended September 30, 1995 and 1994............................ F-6
Notes to Financial Statements.............................................. F-7
F-1
<PAGE> 71
REPORT OF INDEPENDENT ACCOUNTANTS
September 19, 1996
To the Board of Directors and
Stockholders of Crestone Energy Corporation
In our opinion, the accompanying balance sheets and the related statements of
operations and accumulated deficit and of cash flows present fairly, in all
material respects, the financial position of Crestone Energy Corporation at June
30, 1996 and September 30, 1995 and 1994 and the results of its operations and
its cash flows for the nine months ended June 30, 1996 and the years ended
September 30, 1995 and 1994, in conformity with generally accepted accounting
principles. 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 of these statements in
accordance with generally accepted auditing standards which 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, assessing the accounting principles used and significant estimates
made by management, and evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for the opinion expressed
above.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 2, the Company
has experienced negative cash flows from operations for the nine months ended
June 30, 1996 and the years ended September 30, 1995 and 1994 and has current
liabilities in excess of current assets as of June 30, 1996. In addition, the
Company has an aggregate investment in unproved oil and gas properties of
$534,232 as of June 30, 1996, the ultimate recoverability of which is dependent
upon the Company obtaining the necessary financing to develop these properties
or generating sufficient proceeds from the sale of these properties. These
factors raise substantial doubt about the Company's ability to continue as a
going concern. Management's plans with regard to these uncertainties are also
discussed in Note 2. The financial statements do not include any adjustments
that might result from the outcome of these uncertainties.
PRICE WATERHOUSE LLP
Denver, Colorado
F-2
<PAGE> 72
CRESTONE ENERGY CORPORATION
Balance Sheet
<TABLE>
<CAPTION>
June 30, September 30,
Assets 1996 1995 1994
------ ---------- ---------- ----------
<S> <C> <C> <C>
Current assets:
Cash and cash equivalents $ 48,603 $ 86,265 $ 307,169
Marketable securities -- -- 59,502
Accounts receivable:
Joint interest 529 386 75,182
Oil and gas purchasers 9,249 29,721 9,533
Other 5,811 10,069 9,098
---------- ---------- ----------
Total current assets 64,192 126,441 460,484
---------- ---------- ----------
Property and equipment, at cost:
Oil and gas properties, accounted
for using the full cost method
(net of $1,607,284, $1,331,206
and $1,304,646 cumulative
writedowns at June 30, 1996,
September 30, 1995 and 1994) 2,226,373 2,482,406 2,405,824
Office furniture, equipment and
leasehold improvements 73,595 73,595 73,252
---------- ---------- ----------
2,299,968 2,556,001 2,479,076
Less accumulated depreciation,
depletion and amortization 1,534,829 1,490,748 1,441,313
---------- ---------- ----------
Net property and equipment 765,139 1,065,253 1,037,763
---------- ---------- ----------
Other assets -- -- 11,698
---------- ---------- ----------
$ 829,331 $1,191,694 $1,509,945
========== ========== ==========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-3
<PAGE> 73
CRESTONE ENERGY CORPORATION
Balance Sheet (continued)
<TABLE>
<CAPTION>
June 30, September 30,
Liabilities and Stockholders' Equity 1996 1995 1994
- ------------------------------------ ------------ ------------ ----------
<S> <C> <C> <C>
Current liabilities:
Accounts payable $ 131,149 $ 109,946 $ 12,635
Accrued liabilities 2,157 14,739 15,760
------------ ----------- -----------
Total current liabilities 133,306 124,685 28,395
------------ ----------- -----------
Stockholders' equity:
Preferred stock, $.01 par value;
authorized 50,000,000 shares;
issued -0- shares -- -- --
Common stock, $.01 par value;
authorized 50,000,000 shares;
issued and outstanding 4,200,000
shares in 1996, 1995 and 1994 42,000 42,000 42,000
Additional paid-in capital 2,558,506 2,558,506 2,558,506
Accumulated deficit (1,904,481) (1,533,497) (1,118,956)
----------- ----------- -----------
Total stockholders' equity 696,025 1,067,009 1,481,550
------------ ----------- -----------
$ 829,331 $ 1,191,694 $ 1,509,945
============ =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-4
<PAGE> 74
CRESTONE ENERGY CORPORATION
Statement of Operations and Accumulated Deficit
<TABLE>
<CAPTION>
Nine Months Ended June 30, Year Ended
September 30,
1996 1995 1995 1994
----------- ------------ ----------- -----------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Oil and gas sales $ 74,115 $ 68,836 $ 113,023 $ 108,005
Interest income 4,738 8,517 9,943 16,303
Other income 40 595 595 2,354
Gain on sale of marketable
securities -- 7,477 15,473 24,991
Gain on sale of other asset -- -- 17,500 --
Gain on sale of production
sharing agreement 214,252 -- -- 8,268
----------- ----------- --------- ----------
Total revenues 293,145 85,425 156,534 159,921
----------- ----------- --------- ----------
Operating costs and expenses:
Lease operating 11,174 12,799 19,386 16,785
Production taxes 6,514 7,231 9,421 10,751
Depreciation, depletion and
amortization 44,081 43,248 57,906 71,707
Impairment of oil and gas
properties 276,078 26,560 26,560 249,728
General and administrative 326,282 341,534 457,802 453,629
---------- ----------- --------- ----------
Total operating costs and
expenses 664,129 431,372 571,075 802,600
---------- ----------- --------- ----------
Net loss (370,984) (345,947) (414,541) (642,679)
Accumulated deficit, beginning
of period (1,533,497) (1,118,956) (1,118,956) (476,277)
---------- ---------- ---------- -----------
Accumulated deficit, end of
period $(1,904,481) $(1,464,903) $(1,533,497) $(1,118,956)
=========== =========== =========== ===========
Net loss per common share $ (0.09) $ (0.02) $ (0.10) $ (0.15)
=========== =========== =========== ===========
Weighted average common shares outstanding 4,200,000 4,200,000 4,200,000 4,200,000
=========== =========== =========== ===========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-5
<PAGE> 75
CRESTONE ENERGY CORPORATION
Statement of Cash Flows
<TABLE>
<CAPTION>
Nine Months Ended June 30, Year Ended
September 30,
1996 1995 1995 1994
--------- --------- -------- ---------
(Unaudited)
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(370,984) $(345,947) $(414,541) $(642,679)
Adjustments to reconcile net loss
to net cash used in operating activities:
Depreciation, depletion and amortization 44,081 43,248 57,906 71,707
Impairment of oil and gas properties 276,078 26,560 26,560 249,728
Gain on sale of production
sharing agreement (214,252) -- -- (8,268)
Gain on sale of marketable securities -- (7,477) (15,473) (24,991)
Gain on sale of other asset -- -- (17,500) --
Decrease (increase) in accounts receivable 20,329 40,586 54,608 (22,525)
Decrease (increase) in other current assets 4,258 2,088 (971) (2,963)
Increase (decrease) in accounts payable 21,203 90,462 97,311 10,427
Increase (decrease) in accrued liabilities (12,582) (12,065) (1,021) 2,049
Decrease in advances from
joint interest partners -- -- -- (8,253)
--------- --------- -------- ---------
Net cash used in operating activities (231,869) (162,545) (213,121) (375,768)
--------- --------- -------- ---------
Cash flows from investing activities:
Proceeds from sale of property and equipment 281,680 226,875 254,734 282,015
Proceeds from sale of marketable securities -- 24,977 74,975 71,116
Proceeds from sale of other asset -- -- 22,500 --
Purchase of marketable securities -- -- -- (52,002)
Additions to property and equipment (87,473) (289,660) (362,544) (161,227)
Other -- (1,770) 2,552 (7,500)
--------- --------- -------- ---------
Net cash provided by (used in) investing activities 194,207 (39,578) (7,783) 132,402
--------- --------- -------- ---------
Decrease in cash and cash equivalents (37,662) (202,123) (220,904) (243,366)
Cash and cash equivalents, beginning of period 86,265 307,169 307,169 550,535
--------- ---------- --------- ---------
Cash and cash equivalents, end of period $ 48,603 $ 105,046 $ 86,265 $ 307,169
========= =========== ========= =========
</TABLE>
SEE NOTES TO FINANCIAL STATEMENTS.
F-6
<PAGE> 76
CRESTONE ENERGY CORPORATION
Notes to Financial Statements
(Disclosures for the Nine Months Ended June 30, 1995 are unaudited)
(1) Summary of Significant Accounting Policies
Nature of Operations
Crestone Energy Corporation ("the Company") is engaged in the
acquisition, exploration and development of oil and gas properties with
its primary asset being a large undeveloped acreage position in the
South China Sea under a petroleum contract with the China National
Offshore Oil Corporation ("CNOOC") for an area known as Wan'an Bei,
WAB-21. The area is located southwest of the Spratly Islands in the
South China Sea, approximately 205 miles southeast of the mouth of the
Mekong River Delta in Vietnam.
The Company was incorporated in March 1981 under the laws of Colorado
and also has domestic oil and gas interests in Colorado, Wyoming, North
Dakota, Nevada, Utah and other states, and international operations
in Southeast Asia and Belize in Central America.
Financial information for the nine months ended June 30, 1995 is
unaudited which, in the opinion of management, contains all adjustments
necessary for a fair presentation of the results of operations for the
period. Operating results for the nine months ended June 30, 1996 are
not necessarily indicative of the results that may be expected for the
full year ended September 30, 1996.
Use of Estimates
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires management to
make estimates and assumptions that affect the amounts reported. Actual
results could differ from such estimates.
Cash and Cash Equivalents
The Company includes in cash and cash equivalents immediately available
funds and investments with original maturity dates of 90 days or less.
Fair Value of Financial Instruments
The carrying amounts of the Company's financial instruments, namely
cash and cash equivalents, accounts receivable and accounts payable,
approximate their fair values because of the short maturity of these
instruments.
Property and Equipment
The Company uses the full cost method of accounting for its oil and gas
properties. Accordingly, costs relating to the acquisition, exploration
and development of proved and unproved properties are capitalized. A
separate cost center is maintained for expenditures applicable to each
country in which the Company conducts exploration and/or production
activities. Amortization of proved oil and gas properties is computed
by cost center using the units-of-production method, based on proved
reserves of oil and gas. Estimated dismantlement, restoration and
abandonment costs and estimated residual values are taken into account
in determining amortization and depreciation provisions.
The cost of unproved properties is excluded from amortization pending a
determination of the existence of proved reserves. Such unproved
properties are assessed periodically for impairment.
F-7
<PAGE> 77
CRESTONE ENERGY CORPORATION
Notes to Financial Statements - (Continued)
Capitalized costs, by cost center, less related accumulated
amortization, may not exceed the sum of: (1) the present value of
future net revenues from estimated production of proved oil and gas
reserves; plus (2) the cost of properties not being amortized; plus (3)
the lower of cost or estimated fair value of unproved properties
included in the costs being amortized; less (4) income tax effects
related to differences between the book and tax bases of oil and gas
properties.
Impairments of properties in the amounts of $276,078, $26,560,
$26,560, and $249,728, were recorded during the nine months ended June
30, 1996 and 1995 and the years ended September 30, 1995 and 1994.
Provision is made for depreciation of other property and equipment by
using the straight-line method over estimated useful lives ranging from
three to ten years.
Normal dispositions of oil and gas properties are accounted for as
adjustments to capitalized costs, with no gain or loss recognized until
all costs are recovered or the entire interest is disposed of. Gain or
loss is recognized only upon the sale of oil and gas properties
involving significant reserves, or when the proceeds from sales exceed
the respective cost center's aggregate capitalized costs at the date of
sale.
Revenue Recognition
Revenue is recognized upon delivery of crude oil and natural gas to the
purchaser.
Income Taxes
Deferred income taxes are provided for the tax consequences of
differences between the financial statement and tax bases of assets and
liabilities.
Foreign Currency Translation
Monetary items are translated at the exchange rate in effect at the
balance sheet date; revenue and expense items are translated at
exchange rates prevailing on the dates of the transactions.
Stock-Based Compensation
SFAS No, 123, "Accounting for Stock-Based Compensation," was issued in
1995 with a disclosure effective date of fiscal years beginning after
December 15, 1995. The Company has elected that upon adoption, it will
continue to measure compensation costs using the intrinsic value based
method of accounting perscribed by APB Opinion No. 25, "Accounting for
Stock Issued to Employees," and will make pro forma disclosures of net
income and earnings per share as if the fair value based method of
accounting as defined in SFAS No. 123 had been applied.
(2) Going Concern Considerations and Management's Plans
The Company has experienced negative cash flows from operating
activities for the nine months ended June 30, 1996 and the years ended
September 30, 1995 and 1994 and has current liabilities in excess of
current assets as of June 30, 1996. In addition, the Company has an
aggregate investment in unproved oil and gas properties of $534,232 as
of June 30, 1996, the ultimate recoverability of which is dependent
upon the Company obtaining the necessary financing to develop these
properties or generating sufficient proceeds from the sale of these
properties. These factors raise substantial doubt about the Company's
ability to continue as a going concern.
Management is actively marketing interests in its oil and gas
properties with the objective of raising sufficient funds to maintain
current operations. However, there can be no assurance that such
marketing efforts will be successful. Furthermore, management intends
to limit expenditures as necessary to maintain the existence of the
corporation.
On August 2, 1996 the Company's Board of Directors approved a Letter
Agreement dated July 25, 1996 between the Company and Benton Oil and
Gas Company ("Benton") in which Benton stated its intent to acquire all
of the outstanding shares and options to purchase common shares of the
Company. The terms of such letter include:
F-8
<PAGE> 78
CRESTONE ENERGY CORPORATION
Notes to Financial Statements - (Continued)
a. An earnest money deposit of $200,000 paid to the Company in
August.
b. Benton will offer 1 share of its common stock for each 7 shares
of the Company's Common stock.
c. Benton will pay all costs incurred in conjunction with this
transaction.
d. Benton paid $30,000 for a farmout drilling package, 50% of which
will be paid to China National Offshore Oil Corporation's
Exploration and Development Research Center ("EDRC")(see note
3).
e. Benton will issue options to purchase shares of Benton Common
Stock in exchange for granted and unexercised options to
purchase the Company's Common Stock.
f. A Shareholders Trust will be established which will have an
economic interest in the Company's WAB-21 Contract for the
benefit of the Company's shareholder.
The acquisition of all outstanding shares and options of the Company by
Benton is subject to certain conditions including the signing of a
definitive merger agreement.
(3) China Contract
On May 8, 1992, the Company signed a Petroleum Contract with CNOOC with
an effective date of June 1, 1992 for a Contract Area in the South
China Sea comprising 25,155 square kilometers (6,215,907 acres). The
terms of such contract, as agreed to be amended in 1996, require the
Company to spend a minimum of $800,000 on exploration and to acquire
1,000 km of new geophysical seismic data over the seven year period
ending June 1, 1999. The Company, at its option, can extend the
contract for an additional two years if it elects to drill an
exploratory well at a minimum cost of $2.0 million.
The Company has granted interests in net cash proceeds from the sale of
the Petroleum Contract totaling 1.1% to a former employee and a former
consultant of the Company. Such interests do not include an interest in
future production, if any.
Pursuant to an agreement dated June 6, 1995 the Company granted to EDRC
a 10% interest in any net cash proceeds from the sale of the Petroleum
Contract. If EDRC locates a buyer and is directly instrumental in
effecting a sale EDRC earns an additional 15% for a total 25% of such
net cash proceeds. Net cash proceeds is defined as gross proceeds less
inception-to-date costs incurred by the Company with respect to this
contract. Such interest does not include an interest in future
production, if any. Such agreement also provides for the Company to
receive 50% of the sales proceeds derived from the sales of copies of a
farmout drilling package jointly developed by the Company and EDRC.
The Socialist Republic of Vietnam has protested the Petroleum Contract
claiming the Contract Area is within Vietnam's territorial waters and
on Vietnam's continental shelf as well as within their exclusive
economic zone. The Company has been advised by CNOOC that China's claim
to the Contract Area is superior to Vietnam's claim for the same area.
No assurance can be given, however, as to the ultimate resolution of
these conflicting claims.
Prior to September 30, 1993, the Company's activities in China were
related to formulation and generation of the Petroleum Contract.
Accordingly, the Company capitalized substantially all of its overhead
directly related to its China Petroleum Contract through September 30,
1993. Subsequent to September 30, 1993, the Company has expensed
substantially all of its general and administrative costs related to
China.
(4) Philippines Contract
During 1996, the Company's application for a Geophysical Survey and
Exploration Contract ("GSEC") in the Sulu Sea was denied and GSEC 64,
in which the Company had an interest, expired. Accordingly, during
1996, the Company has written off its $232,604 investment in the
Philippines.
F-9
<PAGE> 79
CRESTONE ENERGY CORPORATION
Notes to Financial Statements - (Continued)
(5) Belize Production Sharing Agreement
During 1996, the Company sold its remaining working interest in its
Belize Production Sharing Agreement ("PSA") for $255,000 and retained
an overriding royalty interest ("ORRI") of .48% before payout (cost
recovery)("BPO") or 1.5% after payout (cost recovery)("APO"), based on
oil production and in the event of a commercial natural gas discovery,
the Company's ORRI is .25% BPO and .50% APO. As the proceeds from the
PSA sale exceeded the Belize full cost pool at the date of sale, the
Company recorded a gain of $214,252.
During 1994 the Company sold 20% of its interest in the PSA for
$65,000. Because such proceeds exceeded the related capitalized costs
at the date of sale, the Company recorded a gain of $8,268.
During 1996, the Company also agreed to a 7% participation in an
application for a new PSA, Block 13, offshore Belize. As of June 30,
1996 the Company had a total investment of $24,741 in Block 13.
(6) Transactions with Related Parties
A portion of the exploration and development operations of the Company
is conducted with, and includes as participants, certain stockholders,
employees, officers and directors of the Company, or their affiliates.
Amounts due the Company and amounts due directors and stockholders, or
their affiliates, from such participation were insignificant at June
30, 1996, September 30, 1995 and 1994, as were amounts paid for the
nine months ended June 30, 1996 and for each of the two years in the
period ended September 30, 1995.
(7) Significant Customers
Oil and gas sales for the nine months ended June 30, 1996 include sales
to one purchaser representing 20% of oil and gas sales. Oil and gas
sales for 1995 include sales to one purchaser representing 33% of oil
and gas sales. Oil and gas sales for 1994 include sales to one
purchaser representing 35% of oil and gas sales.
(8) Commitments and Contingencies
Development costs of $97,000 incurred during 1996 and 1995 have not
been paid as of June 30, 1996. The operator of the property has a lien
on such oil and gas wells in Rio Blanco County, Colorado to secure
payment of such amounts.
(9) Income Taxes
The tax effects of significant temporary differences representing
deferred tax assets are as follows at June 30, 1996, September 30, 1995
and 1994:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Property and equipment $100,598 $ 217,878 $ 90,935
Loss carryforwards 501,248 258,985 230,232
-------- --------- ---------
Gross deferred tax assets 601,846 476,863 321,167
Valuation allowance (601,846) (476,863) (321,167)
-------- --------- ---------
$ -- $ -- $ --
======== ========= =========
</TABLE>
Full valuation allowances of $601,846, $476,863 and $321,167 at June
30, 1996, September 30, 1995 and 1994 were provided as the Company
historically has not generated sufficient taxable income to
demonstrate that it is more likely than not that the deferred tax
assets will be utilized.
F-10
<PAGE> 80
The Company has the following net operating loss carryforwards
available at June 30, 1996:
<TABLE>
<CAPTION>
Expiration
Year
<S> <C> <C>
2008 $ 121,919
2009 466,909
2010 105,501
2011 649,499
----------
$1,343,828
</TABLE>
A reconciliation of income tax benefit at the federal statutory rate
to the Company's actual income tax benefit is as follows:
<TABLE>
<CAPTION>
Nine Months Ended Years Ended
June 30, September 30,
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Tax benefit by applying the statutory
federal income tax rate
to pretax accounting loss $(126,135) $(117,622) $(140,944) $(218,510)
Increase (decrease) in tax from:
State tax benefit (12,242) (11,644) (13,953) (32,777)
Change in valuation allowance 124,983 129,266 155,696 287,942
Other 13,394 -- (799) (36,655)
--------- --------- --------- ---------
$ -- $ -- $ -- $ --
========= ========= ========= =========
</TABLE>
(10) Money Purchase Pension Plan and Profit Sharing Plan
The Company presently maintains a Money Purchase Pension Plan and a
Profit Sharing Plan for the benefit of all eligible employees.
Employees of the Company who have reached age 21 and who have
performed at least two years of service to the Company are eligible to
participate in such plans. Contributions to the Money Purchase Pension
Plan are set at 10% of eligible compensation. Contributions to the
Profit Sharing Plan are discretionary in an amount, if any, determined
by the Company. Participants in the plans who have rendered at least
1,000 hours of service during the plan year are entitled to a
proportionate share of any contributions made by the Company for such
plan year. All participant accounts under the plans are fully vested
at all times. The Company's total contributions to the plans for the
nine months ended June 30, 1996 and 1995 and the years ended September
30, 1995 and 1994 were $24,115, $23,436, $30,000 and $18,308,
respectively.
(11) Stock Option Plan
On October 31, 1990 the Company's stockholders approved the 1990 Stock
Option Plan (the "Plan"). Options to purchase up to 950,000 shares of
common stock are available for exercise upon the issuance of options
granted under the Plan. On October 31, 1990 options to purchase
750,000 shares were granted to all Directors and the President of the
Company at $1.00 per share. As of June 30, 1996, all of such 750,000
options to purchase shares were exercisable, of which none had been
exercised.
On March 24, 1994, options to purchase an aggregate of 189,420 shares
were granted to all Directors of the Company, a former employee of the
Company and two consultants, under the Plan at a price of $1.00 per
share. At June 30, 1996, all 189,420 of such options were exercisable,
of which none had been exercised.
On January 4, 1995 the remaining 10,580 options to purchase common
stock available under the Plan were granted at a price of $1.00, all
of which were exercisable and none of which had been exercised at June
30, 1996.
F-11
<PAGE> 81
CRESTONE ENERGY CORPORATION
Notes to Financial Statements - (Continued)
(12) Supplemental Information on Oil and Gas Activities
Capitalized costs related to oil and gas producing activities as of
June 30, 1996, September 30, 1995 and 1994 were:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Proved oil and gas
properties - United States $1,692,141 $1,677,814 $1,612,125
Unproved oil and gas
properties:
United States 61,906 119,746 137,403
Foreign:
China 447,585 446,322 593,075
Philippines -- 213,395 55,738
Belize 24,741 25,129 --
Other -- -- 7,483
---------- ---------- ----------
Total oil and gas
properties 2,226,373 2,482,406 2,405,824
Less accumulated depreciation,
depletion and amortization 1,466,011 1,422,065 1,369,688
---------- ---------- ----------
Net capitalized costs $ 760,362 $1,060,341 $1,036,136
========== ========== ==========
</TABLE>
Costs Incurred in Property Acquisition, Exploration and Development
Activities Costs incurred in oil and gas producing activities were:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
June 30, September 30,
------------------------------ ------------------------
1996 1995 1995 1994
---------- ----------- ---------- -------
U.S. Foreign U.S. Foreign U.S. Foreign U.S. Foreign
---- ------- ---- ------- ---- ------- ---- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Unproved property
acquisition costs $ 44 $ -- $ 6,326 $ -- $ 6,557 $ -- $ 8,926 $ --
Exploration costs 2,364 71,148 3,781 197,168 4,597 263,408 14,511 463,897
Development costs 13,917 -- 82,385 -- 82,793 -- -- --
</TABLE>
F-12
<PAGE> 82
CRESTONE ENERGY CORPORATION
Notes to Financial Statements - (Continued)
Results of Operations from Oil and Gas Producing Activities
Results of operations from oil and gas producing activities, all of
which occurred within the United States (except for impairments of
$232,604 for the Philippines in 1996 and $179,653 in 1994 for Peru)
were:
<TABLE>
<CAPTION>
Nine Months Ended Year Ended
June 30, September 30
--------------------- ----------------
1996 1995 1995 1994
---- ---- ---- ----
<S> <C> <C> <C> <C>
Oil and gas sales $ 74,115 $ 68,836 $ 113,023 $ 108,005
Gain on sale of production sharing agreement 214,252 -- -- 8,268
Production costs:
Lease operating (11,174) (12,799) (19,386) (16,785)
Production taxes (6,514) (7,231) (9,421) (10,751)
Impairment of oil and gas properties (276,078) (26,560) (26,560) (249,728)
Depreciation, depletion and amortization (43,946) (38,820) (52,377) (65,090)
-------- --------- --------- ----------
Results of operations from oil and
gas producing activities $ (49,345) $ (16,574) $ 5,279 $ (226,081)
========= ========= ========= ==========
</TABLE>
No income taxes are reflected in the results of operations from oil
and gas producing activities summarized above due to the effects of
net operating loss carryforwards, investment tax credits and
percentage depletion related to oil and gas operations.
F-13
<PAGE> 83
EXHIBIT A
AGREEMENT AND PLAN OF MERGER
<PAGE> 84
AGREEMENT AND PLAN OF MERGER
Dated As Of
SEPTEMBER 20, 1996
By And Among
BENTON OIL AND GAS COMPANY,
CEC ACQUISITION COMPANY
And
CRESTONE ENERGY CORPORATION
<PAGE> 85
TABLE OF CONTENTS
<TABLE>
<S> <C>
ARTICLE I THE MERGER.......................................................................................... 1
Section 1.1 The Merger..................................................................................... 1
Section 1.2 Effective Time................................................................................. 1
Section 1.3 Effect of Merger............................................................................... 2
Section 1.4 Articles of Incorporation of Surviving Corporation............................................. 2
Section 1.5 Bylaws of the Surviving Corporation............................................................ 2
Section 1.6 Directors and Officers......................................................................... 2
Section 1.7 Tax Consequences............................................................................... 2
Section 1.8 Further Assurances............................................................................. 2
ARTICLE II STATUS AND CONVERSION OF SECURITIES................................................................. 3
Section 2.1 Conversion of Securities....................................................................... 3
Section 2.2 Exchange Ratio Adjustment...................................................................... 4
Section 2.3 Fractional Shares.............................................................................. 4
Section 2.4 Dissenting Shares.............................................................................. 5
Section 2.5 Exchange of Certificates....................................................................... 5
ARTICLE III REPRESENTATIONS AND WARRANTIES OF THE COMPANY....................................................... 7
Section 3.1 Organization................................................................................... 7
Section 3.2 Subsidiaries................................................................................... 7
Section 3.3 Capitalization................................................................................. 7
Section 3.4 Power and Authority............................................................................ 8
Section 3.5 Enforceability................................................................................. 8
Section 3.6 No Conflicts................................................................................... 8
Section 3.7 Consents....................................................................................... 9
Section 3.8 Articles of Incorporation, Bylaws and Minute Book.............................................. 9
Section 3.9 Financial Statements........................................................................... 9
Section 3.10 Absence of Undisclosed Liabilities............................................................ 10
Section 3.11 Litigation.................................................................................... 10
Section 3.12 Taxes......................................................................................... 10
Section 3.13 Environmental Laws............................................................................ 11
Section 3.14 Certain Actions............................................................................... 12
Section 3.15 Brokers' Fee.................................................................................. 12
Section 3.16 Dividends..................................................................................... 12
Section 3.17 Stockholder Vote Required..................................................................... 12
Section 3.18 Earnest Money................................................................................. 13
Section 3.19 Complete Disclosure........................................................................... 13
</TABLE>
i
<PAGE> 86
<TABLE>
<S> <C>
ARTICLE IV REPRESENTATIONS AND WARRANTIES OF PURCHASER
AND MERGER SUB.............................................................................................. 13
Section 4.1 Organization of Purchaser..................................................................... 13
Section 4.2 Organization of Merger Sub.................................................................... 13
Section 4.3 Organization of Merger Parent................................................................. 13
Section 4.4 Capitalization................................................................................ 13
Section 4.5 Investment Intention.......................................................................... 13
Section 4.6 Status of Shares to be Issued................................................................. 14
Section 4.7 Power and Authority........................................................................... 14
Section 4.8 Enforceability................................................................................ 14
Section 4.9 No Conflicts.................................................................................. 14
Section 4.10 Consents...................................................................................... 15
Section 4.11 Securities Filings; Financial Statements...................................................... 15
Section 4.12 Absence of Undisclosed Liabilities............................................................ 15
Section 4.13 Litigation.................................................................................... 16
Section 4.14 Absence of Adverse Changes.................................................................... 16
Section 4.15 Brokers' Fee.................................................................................. 16
ARTICLE V COVENANTS OF THE PARTIES............................................................................ 16
Section 5.1 Conduct of Business of the Company............................................................ 16
Section 5.2 Access........................................................................................ 18
Section 5.3 Registration Statement; Proxy Statement-Prospectus............................................ 18
Section 5.4 Stockholder Approval.......................................................................... 19
Section 5.5 Consents...................................................................................... 20
Section 5.6 No Shopping................................................................................... 20
Section 5.7 Tax Treatment................................................................................. 20
Section 5.8 Best Efforts.................................................................................. 20
Section 5.9 Public Announcements.......................................................................... 20
Section 5.10 Notification of Certain Matters............................................................... 21
Section 5.11 Expenses...................................................................................... 21
Section 5.12 Takeover Statutes............................................................................. 22
Section 5.13 Affiliates' Letters........................................................................... 22
Section 5.14 Company Financial Statements.................................................................. 22
Section 5.15 Comfort Letters............................................................................... 22
Section 5.16 Employment Agreement.......................................................................... 22
Section 5.17 Surviving Corporation Capital................................................................. 23
Section 5.18 Shareholder Trust in WAB-21................................................................... 23
Section 5.19 Lock-up....................................................................................... 23
Section 5.20 Undertakings in Connection with Tax Opinion................................................... 23
Section 5.21 Update of the Company's Representations, Warranties and Disclosure Schedule................... 23
Section 5.22 Company Employee Benefit Plans................................................................ 24
</TABLE>
ii
<PAGE> 87
<TABLE>
<S> <C>
ARTICLE VI CONDITIONS......................................................................................... 24
Section 6.1 Conditions to the Obligations of Each Party................................................... 24
Section 6.2 Conditions to the Obligations of the Company.................................................. 25
Section 6.3 Conditions to the Obligations of Purchaser and Merger Sub..................................... 26
ARTICLE VII CLOSING........................................................................................... 28
Section 7.1 Date and Place................................................................................ 28
Section 7.2 Deliveries by the Company..................................................................... 28
Section 7.3 Deliveries by Purchaser....................................................................... 29
Section 7.4 Effectiveness of Closing...................................................................... 30
ARTICLE VIII TERMINATION...................................................................................... 30
Section 8.1 Termination................................................................................... 30
Section 8.2 Effect of Termination......................................................................... 31
Section 8.3 Confidentiality............................................................................... 31
Section 8.4 Extension of Time; Waivers.................................................................... 31
ARTICLE IX MISCELLANEOUS...................................................................................... 32
Section 9.1 Nonsurvival of Representations and Warranties................................................. 32
Section 9.2 Amendments.................................................................................... 32
Section 9.3 Notices....................................................................................... 32
Section 9.4 Specific Performance.......................................................................... 33
Section 9.5 Governing Law................................................................................. 33
Section 9.6 Successors and Assigns........................................................................ 33
Section 9.7 No Third Party Beneficiaries.................................................................. 33
Section 9.8 Mutual Drafting............................................................................... 33
Section 9.9 Pronouns, Etc................................................................................. 34
Section 9.10 Headings..................................................................................... 34
Section 9.11 Waiver....................................................................................... 34
Section 9.12 Severability................................................................................. 34
Section 9.13 Schedules.................................................................................... 34
Section 9.14 Counterparts................................................................................. 34
Section 9.15 Entire Agreement............................................................................. 34
</TABLE>
SCHEDULES
1.6 Directors and Officers of Surviving Corporation
4.4 Capitalization of Purchaser
Disclosure Schedule of the Company
iii
<PAGE> 88
AGREEMENT AND PLAN OF MERGER
THIS AGREEMENT AND PLAN OF MERGER (this "Agreement"), dated as of
September 20____ , 1996, is made and entered into by and among Benton Oil and
Gas Company, a Delaware corporation ("Purchaser"), CEC Acquisition Company, a
Colorado corporation and indirect wholly-owned subsidiary of Purchaser ("Merger
Sub"), and Crestone Energy Corporation, a Colorado corporation ("Company").
Merger Sub and the Company are sometimes hereinafter collectively referred to as
the "Constituent Corporations."
WHEREAS, the parties hereto intend to effect the merger ("Merger") of
Merger Sub with and into the Company with the Company being the corporation
surviving the Merger, in accordance with the provisions of the Colorado Business
Corporation Act ("Colorado Law"); and
WHEREAS, the parties hereto intend for the Merger to qualify as a
tax-free "reorganization" within the meaning of Section 368(a)(1) of the
Internal Revenue Code of 1986, as amended ("Code"); and
WHEREAS, the respective Boards of Directors of Purchaser, Merger Sub
and the Company have determined that this Agreement is desirable and in the best
interests of each and of its respective stockholders, and have each duly
approved this Agreement upon the terms and subject to the conditions set forth
herein;
NOW, THEREFORE, in consideration of the premises, and of the
representations, warranties, covenants and agreements set forth herein, the
parties hereto, intending to be legally bound hereby, agree as follows:
ARTICLE I
THE MERGER
Section 1.1 The Merger. At the Effective Time (as defined in Section
1.2 hereof), upon the terms and subject to the conditions set forth in this
Agreement, and in accordance with the provisions of Colorado Law, Merger Sub
shall be merged with and into the Company, whereupon the separate corporate
existence of Merger Sub (except insofar as it may be continued by applicable
law) shall cease and the Company shall be the surviving corporation in the
Merger and shall continue to be governed by the laws of the State of Colorado.
The Company as it shall exist immediately after the Effective Time is sometimes
hereinafter referred to as the "Surviving Corporation." The name of the
Surviving Corporation shall be "Crestone Energy Corporation," unless later
changed in accordance with Colorado Law.
Section 1.2 Effective Time. As soon as practicable after each of the
conditions set forth in Article VI hereof have been satisfied or waived, the
parties hereto shall cause the Merger to be consummated by executing and filing
with the Secretary of State of the State of Colorado Articles of Merger in
accordance with the provisions of Section 7-111-105 of the Colorado Law
("Articles of Merger"). The Merger shall become effective on the date and at the
time when the Articles of Merger
1
<PAGE> 89
have been filed with the Secretary of State of the State of Colorado, or at such
later date and time specified in the Articles of Merger if agreed to by the
parties hereto, in accordance with the provisions of Colorado Law. The date and
time at which the Merger becomes effective is herein referred to as the
"Effective Time."
Section 1.3 Effect of Merger. The Merger shall have the effects set
forth in Section 7-111-106(1) of the Colorado Law. Without limiting the
generality of the foregoing, and subject thereto, from and after the Effective
Time, except as specifically set forth herein, the identity, existence,
corporate organization, purposes, properties, objects, franchises, privileges,
rights, powers and franchises of the Company and Merger Sub shall continue in
full force and effect and be unimpaired by the Merger, and the Surviving
Corporation shall succeed to, possess and be vested in, without further action
of any person, all of the properties, rights, privileges, powers and franchises
of the Company and Merger Sub, including, without limitation, all property,
real, personal and mixed, wherever located, and all and every other interest of
every kind and nature, and the Surviving Corporation shall be subject to all of
the debts, liabilities, restrictions, disabilities and duties of the Company and
Merger Sub in the same manner as if the Surviving Corporation had itself
incurred them.
Section 1.4 Articles of Incorporation of Surviving Corporation. The
Restated Articles of Incorporation of the Company shall be the Articles of
Incorporation of the Surviving Corporation until amended in accordance with the
provisions thereof and applicable law.
Section 1.5 Bylaws of the Surviving Corporation. The Restated Bylaws of
the Company shall be the Bylaws of the Surviving Corporation, until amended in
accordance with the provisions thereof and applicable law.
Section 1.6 Directors and Officers. The directors and officers set
forth on Schedule 1.6 hereto shall be the initial directors and officers,
respectively, of the Surviving Corporation, each to hold office until his
respective successor is duly elected or appointed and qualified in accordance
with the provisions of the Restated Articles of Incorporation and Restated
Bylaws of the Surviving Corporation and of applicable law, or until his earlier
death, resignation or removal.
Section 1.7 Tax Consequences. The parties hereto intend for the Merger
to constitute a tax-free "reorganization" within the meaning of Section
368(a)(1) of the Code.
Section 1.8 Further Assurances. If, at any time after the Effective
Time, any further action is necessary, convenient or desirable to carry out the
purposes of this Agreement or to vest, perfect or confirm, of record or
otherwise, in the Surviving Corporation the full right, title, interest and
possession of all assets, properties, rights, privileges, powers and franchises
of the Company and Merger Sub or to otherwise carry out the provisions of this
Agreement, the officers and directors of the Company and Merger Sub are fully
authorized in the names of and on behalf of their respective corporations or
otherwise to take all such lawful actions including, without limitation, the
execution, delivery and filing of all deeds, bills of sale, assignments,
assurances, and other documents, instruments and agreements as may be necessary,
convenient or desirable to effect the same.
2
<PAGE> 90
ARTICLE II
STATUS AND CONVERSION OF SECURITIES
Section 2.1 Conversion of Securities. Except as set forth in Section
2.3 or Section 2.4 hereof, at the Effective Time, by virtue of the Merger and
without any action on the part of Purchaser, Merger Sub, the Company or any
holder of any of the following securities:
(a) Company Common Stock. Each share of common stock, par value $ .01
per share, of the Company ("Company Common Stock") issued and outstanding
immediately prior to the Effective Time shall be canceled and retired and cease
to exist and shall be simultaneously converted into and exchanged for
one-seventh (1/7) ("Exchange Ratio") of a duly authorized, validly issued, fully
paid and non-assessable share of common stock, par value $ .01 per share, of
Purchaser ("Purchaser Common Stock").
(b) Company Treasury Stock. Each share of Company Common Stock held in
the Company's treasury shall be canceled and retired without payment of any
consideration therefor and shall cease to exist.
(c) Company Stock Options. Each option to purchase shares of Company
Common Stock ("Company Stock Option") granted under the Crestone Energy
Corporation 1990 Stock Option Plan ("Company Option Plan") which is outstanding
and unexercised immediately prior to the Effective Time shall be replaced by a
substitute option ("Substitute Purchaser Option") granted under a Purchaser
stock option plan, which Substitute Purchaser Option shall (i) be exercisable
for that number of whole shares of Purchaser Common Stock determined by
multiplying the number of shares of Company Common Stock subject to such Company
Stock Option by the Exchange Ratio (subject to adjustment as provided in Section
2.2(f) hereof), rounding up or down to the nearest whole share, (ii) have an
exercise price per share of Purchaser Common Stock issuable upon the exercise
thereof determined by dividing the exercise price per share of the Company Stock
Option by the Exchange Ratio, rounding up or down to the nearest whole cent,
(iii) otherwise replicate the terms and conditions of the Company Stock Option
it replaces, and (iv) in no event confer upon or extend to the optionee any
rights or benefits, whether economic or otherwise, which were not enjoyed or
available to any optionee under the Company Option Plan.
(d) Merger Sub Common Stock. Each share of common stock, par value $
.01 per share, of Merger Sub ("Merger Sub Common Stock") issued and outstanding
immediately prior to the Effective Time shall be converted into and become one
duly authorized, validly issued, fully paid and non-assessable share of common
stock, par value $ .01 per share, of the Surviving Corporation ("Surviving
Corporation Common Stock"). Each stock certificate of Merger Sub evidencing
ownership of any shares of Merger Sub Common Stock shall continue to evidence
ownership of a like number of shares of Surviving Corporation Common Stock at
and after the Effective Time.
(e) Purchaser Common Stock. All shares of Purchaser Common Stock issued
and outstanding immediately prior to the Effective Time shall remain issued and
outstanding after, and shall be unimpaired by, the Merger.
3
<PAGE> 91
Section 2.2 Exchange Ratio Adjustment. The Exchange Ratio shall be
adjusted to reflect any of the following events or circumstances, with any such
adjustment to be mutually satisfactory to Purchaser and the Company:
(a) If the Company's actual interest as the foreign contractor in The
People's Republic of China's Petroleum Contract WAN'AN BEI, WAB-21 Area
("WAB-21") is less than 100%; or
(b) If the Company's overriding royalty interest in Belize is less than
0.48% before payout ("BPO") (cost recovery) or 1.50% after payout ("APO") (cost
recovery) based on oil production and in the event of a commercial natural gas
discovery, the Company's overriding royalty interest is 0.25% BPO or 0.50% APO;
or
(c) If any of the Company's contractual rights or obligations, in any
of the Company's United States or foreign properties ("Properties") or
otherwise, are less than as presented in the Disclosure Schedule delivered by
the Company to Purchaser contemporaneously with the execution of this Agreement
and updated as of the Closing Date ("Disclosure Schedule"), such that the
difference or differences, individually or in the aggregate, could result in a
Material Adverse Effect (as defined in Section 3.1 hereof) on the Company; or
(d) If the number of shares of Company Common Stock issued and
outstanding as of Effective Time is greater than 4,200,000 shares, or if the
number of Company Stock Options (or additional Company Common Stock if the
Options are exercised) outstanding as of the Effective Time is greater than an
aggregate of 950,000; or
(e) If there are any mortgages, security interests, pledges, claims,
encumbrances or other liens, on any of the Company's Properties, the performance
or breach of which by the Company could have a Material Adverse Effect on the
Company, other than as set forth in the Disclosure Schedule, or the audited
financial statements for the period ended June 30, 1996, or if the Company has
any Liability (as defined in Section 3.10 hereof) of any kind or nature at the
Effective Time (including, without limitation, any pending or threatened legal
proceedings or any non-compliance with any applicable law, code, regulation,
court or arbitration order or other governmental proceeding) not disclosed in
the Disclosure Schedule; or
(f) If the Company's net book value, financial condition or accounting
procedures are other than as set forth in the financial statements of the
Company as of and for the period ended June 30, 1996, as audited by Price
Waterhouse, other than as disclosed in the Disclosure Schedule.
Section 2.3 Fractional Shares. Notwithstanding any provision of Section
2.1 hereof to the contrary, no fractional shares of Purchaser Common Stock shall
be issued pursuant to Section 2.1 hereof, but in lieu thereof, each holder of
Company Common Stock who, except for the provisions of this Section 2.3, would
be entitled to receive a fractional share of Purchaser Common Stock shall, upon
surrender of the certificate or certificates representing shares of Company
Common Stock, be entitled to receive an amount of cash (rounded to the nearest
whole cent), without interest, equal to the product of such fraction multiplied
by $21.00.
4
<PAGE> 92
Section 2.4 Dissenting Shares. Notwithstanding any provision of
Section 2.1 hereof to the contrary, shares of Company Common Stock which are
held by holders of such shares who have not voted in favor of the Merger and who
have delivered a written notice of intent to demand payment for such shares in
the manner provided in Article 113 of the Colorado Law ("Dissenting Shares"),
shall not be converted into or exchanged for or represent the right to receive
any shares of Purchaser Common Stock, unless such holder fails to perfect or
effectively withdraws or loses such rights to payment. If, after the Effective
Time, such holder fails to perfect or effectively withdraws or loses such right
to payment, then such Dissenting Shares shall thereupon be deemed to have been
converted into and exchanged pursuant to Section 2.1 hereof, as of the Effective
Time, for the right to receive shares of Purchaser Common Stock issued in the
Merger to which the holder of such shares of Company Common Stock is entitled,
without any interest thereon. The Company shall give Purchaser prompt notice of
any notices and demands received by the Company for payment for shares of
Company Common Stock, and Purchaser shall have the right to participate in all
negotiations and proceedings with respect to such notices and demands. The
Company shall not, except with the prior written consent of Purchaser, make any
payment with respect to, or settle or offer to settle, any such demands. Under
no circumstances shall either Purchaser or Merger Sub pay directly or provide
funds to the Company to make payment upon any Dissenting Shares.
Section 2.5 Exchange of Certificates.
(a) Exchange Procedures. Prior to the Effective Time, Purchaser shall
cause its stock transfer agent ("Exchange Agent") to mail to each holder of
record of a certificate ("Old Certificate") which prior to the Effective Time
represents outstanding shares of Company Common Stock, a letter of transmittal
(together with any other requisite documents) mutually acceptable to Purchaser
and the Company containing instructions for use in effecting the surrender of
the Old Certificates in exchange for certificates representing shares of
Purchaser Common Stock ("New Certificates"). Risk of loss and title to the Old
Certificates shall pass only upon proper delivery of the Old Certificates and
the letter of transmittal to the Exchange Agent. Purchaser will make available
for delivery at the Closing one or more New Certificates to each holder of
Company Common Stock who has surrendered to Purchaser, at least ten (10)
business days prior to the Closing Date, his Old Certificates, together with a
duly executed letter of transmittal (which shall expressly state that such Old
Certificates will be returned to the holders thereof in the event the Merger is
not consummated) and other requisite documents. After the Effective Time, upon
surrender of an Old Certificate for cancellation, together with a duly executed
letter of transmittal and other requisite documents, the holder of such Old
Certificate shall be entitled to receive in exchange therefor one or more New
Certificates, representing the number of shares of Purchaser Common Stock which
such holder has the right to receive pursuant to Section 2.1 hereof, and the Old
Certificate so surrendered shall be canceled. Until so surrendered, each
outstanding Old Certificate shall be deemed from and after the Effective Time
for all purposes to represent only the right to receive upon such surrender a
New Certificate representing the number of shares of Purchaser Common Stock into
which the shares of Company Common Stock theretofore represented by the Old
Certificate shall have been converted and cash in lieu of any fractional shares
in accordance with the provisions of Sections 2.1 and 2.3 hereof.
5
<PAGE> 93
(b) Special Issuance or Delivery. If any New Certificate is to be
issued in a name or delivered to a person other than the registered holder of
the Old Certificate surrendered in exchange therefor, it shall be a condition to
such exchange that the Old Certificate shall be properly endorsed or be
otherwise in proper form for transfer and that the person requesting such
exchange shall pay any transfer or other taxes required as a result of the
issuance in a name or delivery to a person other than the registered holder or
shall establish to the satisfaction of Exchange Agent that such has been paid or
is not applicable.
(c) Distributions with Respect to Unexchanged Shares. No dividends or
other distributions, if any, payable to the holders of record of Company Common
Stock as of any date subsequent to the Effective Time shall be paid to any
holder of any outstanding Old Certificate until the holder thereof surrenders
such Old Certificate as provided herein, subject to applicable law. Subject to
applicable law, following surrender of any such Old Certificates, there shall be
paid to the record holders of the New Certificates issued in exchange therefor,
without interest, at the time of such surrender, the amount of dividends and
other distributions, if any, with a record date after the Effective Time,
theretofore payable with respect to the shares of Purchaser Common Stock
represented thereby and not previously paid. Subject to applicable law, no
holder of an unsurrendered Old Certificate shall be entitled, until the
surrender of such certificate, to vote the shares of Purchaser Common Stock into
which such holder's Company Stock is convertible or to exercise any other rights
of a stockholder of Purchaser.
(d) Liability. Any holder of shares of Company Common Stock who has not
exchanged his Old Certificate(s) for New Certificate(s) pursuant to this Article
II shall have no claims upon the Exchange Agent, but shall be entitled to look
exclusively to Purchaser (and only as a general creditor thereof) for the shares
of Purchaser Common Stock to which such holder became entitled upon surrender of
the Old Certificate in accordance herewith. Notwithstanding the foregoing, none
of Purchaser, Merger Sub or the Surviving Corporation shall be liable to any
holder of Company Common Stock for any amount properly delivered to a public
official pursuant to any abandoned property, escheat or similar laws.
(e) Lost, Stolen and Destroyed Certificates. In the event any Old
Certificate shall have been lost, stolen or destroyed, upon the making of an
affidavit of that fact by the person claiming such Old Certificate to be lost,
stolen or destroyed, and, if required by the Surviving Corporation or the
Exchange Agent, the posting by such person of a bond in such reasonable amount
as the Surviving Corporation or Exchange Agent may direct as indemnity against
any claim that may be made against it with respect to the Old Certificates, the
Exchange Agent shall, in exchange for such lost, stolen or destroyed Old
Certificate, issue the shares of Purchaser Common Stock and cash in lieu of
fractional shares (and any dividends or distributions with respect thereto as
provided in Section 2.1(c) above) deliverable in respect thereof in accordance
with the provisions of Section 2.1 hereof.
(f) No Further Transfers. At and after the Effective Time, there shall
be no further registration of transfers on the stock transfer books of the
Surviving Corporation of the shares of Company Common Stock which were
outstanding immediately prior to the Effective Time. If, after the Effective
Time, certificates are presented to the Surviving Corporation for any reason,
they shall be canceled and exchanged as provided in this Article II.
6
<PAGE> 94
ARTICLE III
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
The Company hereby represents and warrants to and for the benefit of
Purchaser and Merger Sub the following, except as otherwise set forth in the
Disclosure Schedule, which shall be updated at the Closing Date, and which shall
specifically reference the sections of this Agreement to which it applies:
Section 3.1 Organization. The Company is a corporation duly organized,
validly existing and in good standing under the laws of the State of Colorado
and is duly qualified or licensed to do business and in good standing as a
foreign corporation in each jurisdiction where the nature of the business
conducted by it or the character of the properties it owns, leases or operates
makes such qualification or licensing necessary, except where any such failure
to be so qualified or in good standing in such jurisdiction would not be
reasonably likely to have a Material Adverse Effect. As used herein, the term
"Material Adverse Effect" means an effect which would be materially adverse to
the assets, properties, business, affairs, operations, condition (financial or
otherwise) or prospects of the Company (or Purchaser, as the context may
dictate) that results or is reasonably likely to result in expenses, fees,
losses, liabilities, claims, actions or other damages in excess of $250,000.00.
Except for the jurisdictions in which the Company is incorporated or is
qualified or licensed as a foreign corporation, and except to the extent any of
the following could not be reasonably expected to have a Material Adverse Effect
on the Company, (i) no other jurisdiction has claimed, in writing or otherwise,
that the Company is required to qualify or otherwise be authorized as a foreign
corporation therein, (ii) the Company has filed no franchise, income or other
tax returns in other jurisdictions based upon the ownership or use of property
therein or the derivation of income therefrom, and (iii) the Company does not
own, lease or operate property in any other jurisdiction in the United States.
Section 3.2 Subsidiaries. The Company does not own or hold, directly or
indirectly, any shares of capital stock or any equity, voting or other ownership
or management interest in any corporation, partnership, limited liability
company, joint venture, trust, estate or other business entity or association
("Entity") that has conducted any business activities, acquired any rights,
interests or properties or incurred any Liabilities other than routine entity
formation and organizational actions ("Subsidiaries").
Section 3.3 Capitalization. As of the date of this Agreement, the
authorized capital stock of the Company consists of (i) 50,000,000 shares of
Common Stock, par value $ .01 per share, of which 4,200,000 shares are issued
and outstanding, 950,000 shares were reserved for issuance upon the exercise of
stock options and no other shares were reserved for any purpose, and (ii)
50,000,000 shares of Preferred Stock, par value $.01 per share, none of which
are issued and outstanding or reserved for any purpose, and (iii) no shares of
capital stock of any other class are issued and outstanding. The Company has no
other equity securities of any class or series authorized, issued, reserved for
issuance or outstanding, and has no outstanding securities, bonds, debentures,
notes or other rights, obligations or instruments the holders of which have the
right to vote on any matter with the holders of Company Common Stock, or which
are convertible into or exchangeable or exercisable for shares of Company Common
Stock or any other capital stock or for any other securities having
7
<PAGE> 95
such right to vote with the Company Common Stock. All of the issued and
outstanding shares of capital stock of the Company have been duly authorized and
validly issued, are fully paid and nonassessable, are free of preemptive rights
with no personal liability attached to the ownership thereof, and have been
offered, sold and issued in full compliance with all applicable federal and
state and foreign securities laws. Other than the Company Stock Options which
represent the right to purchase an aggregate of 950,000 shares of Company Common
Stock, there are no outstanding options, warrants, offers, conversion rights or
other rights (contingent or otherwise) to subscribe for or to purchase from the
Company, or obligations, agreements, arrangements, understandings or commitments
of any nature (contingent or otherwise) by the Company to issue, transfer, sell,
repurchase or redeem, any capital stock or other securities of the Company, or
any right to be paid cash or other property on the basis of a valuation of
Company Common Stock. All Company Stock Options have been duly authorized by all
requisite action, corporate or otherwise, on the part of the Company, none of
which were authorized or granted in contemplation of the Merger. Neither the
Company nor, to the best of its knowledge, any of its stockholders, is a party
to any voting trust, voting agreement, proxy or other agreement or arrangement
with respect to the voting, transferability, purchase or redemption of any
capital stock of the Company. No person or entity has any preemptive or similar
rights with respect to the issuance of any of the Company's capital stock. The
Company has not agreed, and is not otherwise obligated, to register the offer or
sale of any of its securities under the Securities Act of 1933, as amended
("Securities Act"), or the securities laws of any state. To the best of the
Company's knowledge, no stockholder of the Company has granted options or other
rights to purchase any capital stock of the Company from such stockholder. The
names, addresses and holdings of each stockholder and each option holder of the
Company are set forth in the Disclosure Schedule.
Section 3.4 Power and Authority. The Company has all requisite right,
capacity, power and authority, corporate or otherwise, to conduct its business
as and where presently conducted, to own, lease and operate the assets and
properties that it owns, leases and operates, and, subject to the approval of
its stockholders, to execute, deliver and perform its obligations under this
Agreement and the other agreements contemplated hereby. Subject to the requisite
approval of its stockholders, the execution and delivery by the Company of this
Agreement and the other agreements contemplated hereby and the performance by
the Company of its obligations hereunder and thereunder have been duly
authorized and approved by all requisite action, corporate or otherwise, of the
Company.
Section 3.5 Enforceability. This Agreement has been duly and validly
executed and delivered on behalf of the Company and constitutes the legal, valid
and binding obligation of the Company, enforceable against the Company in
accordance with its terms except as such enforcement may be limited by
applicable bankruptcy, insolvency, receivership, moratorium and other similar
laws relating to the enforcement of creditors' rights and remedies generally and
by general principles of equity, whether applied in a proceeding in equity or at
law.
Section 3.6 No Conflicts. The execution and delivery by the Company of
this Agreement and the consummation by the Company of the transactions
contemplated hereby do not and will not, directly or indirectly violate,
conflict with, or constitute a breach of or a default (or an event that, after
the giving of notice or the lapse of time or both, would constitute a default)
under any provision of (a) the Restated Articles of Incorporation, Restated
Bylaws or other charter or organizational documents of the Company, (b) any
resolution adopted by the board of directors (or any committee thereof) or the
8
<PAGE> 96
stockholders of the Company, or (c) any agreement between the Company and its
stockholders or, to the best knowledge of the Company, among the stockholders of
the Company.
Section 3.7 Consents. No consent, authorization, permit or approval of,
notice or report to, filing or registration with, waiver by or other action
("Consents") in respect of any domestic governmental, quasi-governmental,
administrative or regulatory body, authority or agency ("Governmental
Authority"), Entity or individual (collectively, "Persons") is necessary for the
Company to execute and deliver this Agreement and the other agreements
contemplated hereby, and to perform its obligations hereunder and thereunder,
other than (i) as may be required pursuant to the Securities Act, the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), or applicable state
securities laws, (ii) the filing of the Articles of Merger, (iii) the approval
by the Company's stockholders, and (iv) the opinion contemplated by Section
6.3(m) hereof.
Section 3.8 Articles of Incorporation, Bylaws and Minute Book. The
Company has furnished to Purchaser true and complete copies of the Restated
Articles of Incorporation and Restated Bylaws of the Company as in effect on the
date hereof. The corporate minute books of the Company delivered to Purchaser
contain true and complete records of all meetings and proceedings of directors,
committees and stockholders, all of which meetings and proceedings were duly
called and held, and all consents in lieu of meetings, which records are
accurate in all material respects. No Person holds or has a written or oral
power of attorney or similar instrument from the Company that remains in effect.
The stock transfer books of the Company furnished to Purchaser contain a true
and complete record of all transfers of any capital stock of the Company and the
ownership of such capital stock as of the date hereof.
Section 3.9 Financial Statements. The Company has delivered to
Purchaser true and complete copies of the Company's audited balance sheets as of
June 30, 1996, September 30, 1995 and September 30, 1994 and the related
statements of operations and accumulated deficit and of cash flows for the nine
(9) months ended June 30, 1996 and for the years ended September 30, 1995, 1994
and 1993 (together with the reports thereon of Price Waterhouse L.L.P. and Quinn
& Associates P.C., independent certified public accountants, and the notes
thereto) (collectively, the "Financial Statements"). Other than any inaccuracies
in any of the representations and warranties in this Section 3.9 that do not or
will not have a Material Adverse Effect on the Company, each of such Financial
Statements and all related schedules and notes thereto (i) presents fairly the
financial condition and results of operations and accumulated deficit and cash
flow of the Company as of the specified dates thereof and for the periods
covered thereby; (ii) has been prepared in accordance with generally accepted
accounting principles consistently applied throughout the periods indicated and
with prior periods (except for changes specifically noted therein); (iii) has
been prepared in accordance and consistent with the books and records of the
Company, which have been maintained in accordance with sound business practices,
including the maintenance of a limited system of internal controls appropriate
for a company of its size and of its number of employees; and (iv) reflects
reserves which are reasonably adequate for all known or reasonably contemplated
liabilities or obligations of any nature, whether accrued, absolute, fixed,
contingent or otherwise and whether due or to become due, and all reasonably
anticipated losses. Since June 30, 1996, there has not been any material change
in the Company's accounting methods, principles or practices.
9
<PAGE> 97
Section 3.10 Absence of Undisclosed Liabilities. The Company does not
have any debt, liability, guarantee, demand or obligation of any nature
whatsoever, accrued, absolute, contingent or otherwise and whether due or to
become due ("Liability") that is, individually or in aggregate, reasonably
likely to have a Material Adverse Effect on the Company, that is not fully
reflected or reserved against in the Latest Financial Statements, except for
Liabilities that have been incurred after the date of the Latest Financial
Statements in the ordinary course of business and are usual and normal in
amount, both individually and in the aggregate. The Company has no knowledge of
any circumstance, condition, event or arrangement that may hereafter give rise
to any Liabilities that are, either individually or in the aggregate, reasonably
likely to have a Material Adverse Effect on the Company.
Section 3.11 Litigation. To the best knowledge of the Company, there
are no actions, suits, claims, investigations, arbitrations, hearings or other
proceedings (whether civil, criminal, administrative, investigative or informal)
("Proceedings") pending or threatened by, before or involving any federal,
state, local or foreign court, arbitrator or Governmental Authority against or
affecting the Company or its business, properties, assets, condition (financial
or otherwise), results of operations or prospects (i) in which it is or will be
sought to restrain or prohibit, or to obtain damages or other relief in
connection with, or which questions the legality or validity of, this Agreement
or the transactions contemplated hereby, (ii) which if determined adversely to
the Company could reasonably be expected to have a Material Adverse Effect on
the Company or (iii) involve the issue of criminal liability. To the best
knowledge of the Company, no event has occurred and no circumstance exists that
could be reasonably expected to give rise to or serve as the basis for any such
Proceeding, including, without limitation, any Proceeding relating to any
federal or state securities law violation which could have a Material Adverse
Effect on the Company. Neither the Company nor any of its assets or properties
is subject to any outstanding judgment, order, writ, injunction or decree of any
federal, state, local or foreign court, arbitrator or Governmental Authority.
Section 3.12 Taxes. Except to the extent that any inaccuracies in any
of the following representations and warranties set forth in this Section 3.12
would not reasonably be expected to have a Material Adverse Effect on the
Company, (i) within the times (or if later all penalties and interest related
thereto having been paid in full) and in the manner prescribed, the Company has
accurately prepared in good faith and timely filed all federal, state and local
tax returns, reports and forms required by law, rule, regulation or otherwise to
be filed and has paid all taxes, assessments and penalties due and payable; (ii)
all tax returns, reports and forms filed by the Company accurately set forth all
items (to the extent required to be included or reflected in such returns)
relevant to its future tax liabilities, including the tax bases of its assets
and properties; (iii) there are no disputes pending or overtly threatened by any
taxing authority as to taxes of any nature payable by the Company; (iv) the
Company has not waived or extended any applicable statute of limitations
relating to the assessment of federal, state or local taxes; (v) no examinations
or audits of the federal, state or local tax returns of the Company are
currently in progress and no such examination is threatened; (vi) no unresolved
deficiency or adjustment for any tax has been claimed, proposed or assessed
against the Company by any taxing authority; (vii) the Company has paid or has
made adequate provision in the Latest Financial Statements for all federal,
state or local taxes for the period ending on the date of the Latest Financial
Statements and for all subsequent periods in the current fiscal year; (viii) the
Company has timely collected, withheld and paid over all taxes required to be
withheld by any federal, state and local taxing
10
<PAGE> 98
authority and complied with all information reporting requirements related
thereto; (ix) the Company is not a party to any tax indemnity, tax sharing or
tax allocation agreement; (x) the Company has not filed and will not file any
consent agreement under Section 341(f) of the Code or agreed to have Section
341(f) of the Code apply to any disposition of subsection (f) assets (as such
term is defined in Section 341(f)(4) of the Code) owned by the Company; and (xi)
the Company has not filed an election under Section 338(g) or Section 338(b)(10)
of the Code or caused to deem an election under Section 338(e) thereof.
Section 3.13 Environmental Laws. To the best knowledge of the Company,
except to the extent that any inaccuracies in any of the following
representations and warranties set forth in this Section 3.13 would not be
reasonably expected to have a Material Adverse Effect on the Company:
(a) The Company is, and at all times has been, in compliance in all
material respects with all federal, state, local and foreign laws, statutes,
codes, rules, regulations, orders, injunctions, decrees, judgments, common law,
legal doctrine, plans, demand letters, agreements with any Governmental
Authorities and all other requirements relating to the pollution or the
protection of health, safety or the environment, including without limitation
the release, discharge or emission of any pollutants, contaminants, chemicals or
industrial, toxic or hazardous substances or wastes into the environment
(including, without limitation ambient air, surface water, ground water, land
surface, or subsurface strata) or otherwise relating to the manufacture,
processing, distribution, use, treatment, storage, disposal, transport or
handling of pollutants, contaminants, chemicals or industrial, toxic or
hazardous materials, substances or wastes ("Environmental Laws") resulting from
the operation of the Company's business or the ownership of the Company's
properties or assets.
(b) The Company has not received any notices, demand letters,
complaints or requests for information from, and no action, suit, hearing,
investigation or other proceeding is pending or, to the best knowledge of the
Company, threatened by or before any governmental or regulatory authority or
third party regarding any violation of or any liability under any Environmental
Law. The Company is not subject to any judicial, executive, legislative,
regulatory or administrative order, ruling or decree arising under or relating
to any Environmental Law.
(c) The Company has timely obtained, currently holds and is in
compliance in all material respects with the provisions of all licenses,
permits, authorizations and approvals required in connection with the operation
of its business and the ownership, leasing or use of its properties under all
Environmental Laws.
(d) The Company is not aware of any event, condition, circumstance,
activity, practice, action or plan which is reasonably likely to prevent
continued compliance with the foregoing for which would give rise to any
liability under any Environmental Law, based or resulting from the Company's
manufacturing, processing, distribution, use, treatment, storage, disposal,
transport or handling, or the emission, discharge or release into the
environment of any Hazardous Substance.
(e) No Hazardous Substance has been used, stored, placed, treated,
transported, manufactured, generated, process, distributed, handled, placed,
deposited, spilled, discharged or disposed of on or under any property of the
Company, and there is no underground or above-ground
11
<PAGE> 99
storage tank located on or under, or any asbestos located on, any real property
or structure owned or leased by the Company.
(f) For purposes of this Section 3.13, the term "Hazardous Substance"
means and includes (i) any substance heretofore or hereafter designated as
"hazardous" or "toxic" under the Resource Conservation and Recovery Act, 42
U.S.C. Sections 6901, et seq., the Federal Water Pollution Control Act, 33
U.S.C. Sections 1251, et seq., the Clean Air Act, 42 U.S.C. Sections 7401, et
seq., or the Comprehensive Environmental Response Compensation and Liability Act
of 1980, 42 U.S.C. Sections 9601, et seq., or the Hazardous Materials
Transportation Act, 49 U.S.C. Section 1801 et seq., all as amended and in the
regulations promulgated thereunder or pursuant thereto; (ii) ANY "solid waste,"
"hazardous waste," or "infectious waste," as such terms are defined in any other
Environmental Law at such time; (iii) asbestos, urea-formaldehyde,
polychlorinated biphenyls ("PCBs"), methylene chloride, trichloroethylene, 1,2 -
transichloreoethylne, dioxins, dibenzofurans, nuclear fuel or material, chemical
waste, radioactive material, explosives, known carcinogens, petroleum products
and by-products, and other dangerous, toxic or hazardous pollutants,
contaminants, chemicals, materials or substances listed or identified in, or
regulated by, any Environmental Law; (iv) any substances listed in the United
States Department of Transportation Table (49 C.F.R. 172,101 and amendments
thereto) or by the Environmental Protection Agency (or any successor agency) as
hazardous substances (40 C.F.R. 302 and amendments thereto); and (v) any
additional substances or materials which at such time are classified or
considered to be hazardous or toxic under any Environmental Law.
(g) The Company has no knowledge of any facts or circumstances which
could adversely affect or render significantly more costly in the future the
Company's compliance with existing Environmental Laws.
Section 3.14 Certain Actions. Neither the Company, nor to the knowledge
of the Company, any of its directors, officers, stockholders or other affiliates
has taken or agreed to take any action that would prevent the Merger from
qualifying as a tax-free reorganization under Section 368(a)(1) of the Code.
Section 3.15 Brokers' Fee. There is no investment banker, broker,
finder or other intermediary which has been retained by or on behalf of the
Company which is entitled to any fees, commissions or other remuneration in
connection with the Merger or the transactions contemplated thereby based upon
arrangements made by or on behalf of the Company.
Section 3.16 Dividends. The Company has no liability or indebtedness
for dividends or other distributions declared, set aside or accumulated but
unpaid with respect to any of its outstanding capital stock. The Company has not
declared, set aside or paid and pursuant to Section 5.1 hereof, will not
declare, set aside or pay dividends or other distributions to the stockholders
of the Company, except as provided in Section 5.18 hereof.
Section 3.17 Stockholder Vote Required. The only vote of the holders of
any class or series of capital stock or other securities of the Company
necessary to approve and authorize the Merger is the affirmative vote by the
holders of a majority of the outstanding shares of the Company Common Stock to
adopt this Agreement and the transactions contemplated hereby.
12
<PAGE> 100
Section 3.18 Earnest Money. No portion of the "Earnest Money" referred
to in Section 8.2(b) hereof has been or shall be distributed to the stockholders
of the Company or used, directly or indirectly, to pay any expenses of the
Company arising solely or directly from the Merger or the other transactions
contemplated by this Agreement.
Section 3.19 Complete Disclosure. No representation or warranty
contained in this Agreement, and no document or other paper furnished by or on
behalf of the Company to Purchaser pursuant to this Agreement or in connection
with the transactions contemplated hereby, contains any untrue statement of a
material fact or omits to state any material fact required to be stated therein
or necessary to make the statements made, in light of the circumstances in which
they were made, not false or misleading and reasonably likely to have a Material
Adverse Effect on the Company or to materially adversely affect the ability of
the Company to perform its obligations under this Agreement.
ARTICLE IV
REPRESENTATIONS AND WARRANTIES OF PURCHASER AND MERGER SUB
Purchaser and Merger Sub hereby represent and warrant to and for the
benefit of the Company as follows:
Section 4.1 Organization of Purchaser. Purchaser is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and is duly qualified or licensed to do business and in good standing
as a foreign corporation in each jurisdiction where the nature of the business
conducted by it or the character of the properties it owns, leases or operates
makes such qualification or licensing necessary, except where any such failure
to be so qualified or in good standing in such jurisdiction would not be
reasonably likely to have a Material Adverse Effect.
Section 4.2 Organization of Merger Sub. Merger Sub is a corporation
duly organized, validly existing and in good standing under the laws of the
State of Colorado and is duly qualified or licensed to do business and in good
standing as a foreign corporation in each jurisdiction where the nature of the
business conducted by it or the character of the properties it owns, leases or
operates makes such qualification or licensing necessary, except where any such
failure to be so qualified or in good standing in such jurisdiction would not be
reasonably likely to have a Material Adverse Effect.
Section 4.3 Organization of Merger Parent. CEC Holding Company ("Merger
Parent"), a wholly-owned subsidiary of Purchaser and the sole stockholder of
Merger Sub, is a corporation duly organized, validly existing and in good
standing under the laws of the State of Delaware and is duly qualified or
licensed to do business and in good standing as a foreign corporation in each
jurisdiction where the nature of the business conducted by it or the character
of the properties it owns, leases or operates makes such qualification or
licensing necessary, except where any such failure to be so qualified or in good
standing in such jurisdiction would not be reasonably likely to have a Material
Adverse Effect.
Section 4.4 Capitalization. As of June 30, 1996, the authorized capital
stock of Purchaser consisted of (i) 40,000,000 shares of Common Stock, par value
$ .01 per share, of which 27,305,825
13
<PAGE> 101
shares were issued and outstanding, ______ shares were reserved for issuance
upon the exercise of stock options, and ______ shares were reserved for issuance
upon the exercise of warrants; and (ii) 5,000,000 shares of Preferred Stock, par
value $ .01 per share, none of which were issued and outstanding. Other than as
set forth in Schedule 4.4 hereto, there has been no material change in
Purchaser's capitalization from the description thereof in Purchaser's SEC
Reports (as defined in Section 4.10 hereof).
Section 4.5 Investment Intention. Purchaser acquired the shares of
Merger Parent, and Merger Parent acquired the shares of Merger Sub, for
investment purposes without a view to the resale or distribution of such shares.
Section 4.6 Status of Shares to be Issued. The shares of Purchaser
Common Stock to be issued pursuant to the Merger or upon exercise of the
Substitute Purchaser Options, when issued by Purchaser pursuant to the terms of
this Agreement or the terms of the Substitute Purchaser Options, will be duly
authorized, validly issued, fully paid and nonassessable, will have been issued
in compliance with all applicable federal and state securities laws, and will
not be subject to any preemptive or similar rights. Persons receiving shares of
Purchaser Common Stock pursuant to the Merger or upon exercise of the Substitute
Purchaser Options shall acquire good and valid title thereto, free and clear of
any and all restrictions on transfer (other than restrictions under the
Securities Act or applicable state securities laws or as otherwise set forth
herein) and liens, and there are no outstanding options, warrants, preemptive or
other rights to purchase any such shares.
Section 4.7 Power and Authority. Purchaser, Merger Parent and Merger
Sub each has all requisite right, capacity, power and authority, corporate or
otherwise, to conduct its business as and where presently conducted, to own,
lease and operate its assets and properties, and, in the case of Purchaser and
Merger Sub, to execute, deliver and perform its obligations under this Agreement
and the other agreements contemplated hereby. The execution and delivery by
Purchaser and Merger Sub of this Agreement and the other agreements contemplated
hereby and the performance by Purchaser and Merger Sub of their obligations
hereunder and thereunder have been duly authorized by all requisite action,
corporate or otherwise, of Purchaser and Merger Sub.
Section 4.8 Enforceability. This Agreement has been duly and validly
executed and delivered on behalf of Purchaser and Merger Sub and constitutes a
legal, valid and binding obligation of Purchaser and Merger Sub, enforceable
against Purchaser and Merger Sub in accordance with its terms, except as such
enforcement may be limited by applicable bankruptcy, insolvency, receivership,
moratorium and other similar laws relating to the enforcement of creditors'
rights and remedies generally and by general principles of equity, whether
applied in a proceeding, in equity or at law.
Section 4.9 No Conflicts. The execution and delivery by Purchaser and
Merger Sub of this Agreement and the consummation by Purchaser and Merger Sub of
the transactions contemplated hereby do not and will not, directly or indirectly
violate, conflict with, or constitute a breach of or a default (or an event
that, after the giving of notice or the lapse of time or both, would constitute
a default) under any provision of (a) the certificate of incorporation or bylaws
of Purchaser, Merger Parent or Merger Sub, (b) any resolutions adopted by the
board of directors (or any committee
14
<PAGE> 102
thereof) or stockholders of Purchaser, Merger Parent or Merger Sub, or (c) any
agreement between Purchaser, Merger Parent or Merger Sub and its stockholders.
Section 4.10 Consents. No Consent of any domestic Governmental
Authority or any other Person is necessary for Purchaser and Merger Sub to
execute and deliver this Agreement and to perform their obligations hereunder,
other than (i) as may be required to comply with the Securities Act, the
Exchange Act and state securities laws, and (ii) the filing of the Articles of
Merger, and (iii) the opinion contemplated by Section 6.3(n) hereof.
Section 4.11 Securities Filings; Financial Statements. Purchaser has
timely filed with the Securities and Exchange Commission ("SEC"), and has
delivered to Company true and correct copies of, all forms, reports and other
documents required pursuant to the Securities Act and the Exchange Act to be
filed by it since January 1, 1994 (collectively, the "SEC Reports"), all of
which have complied in all material respects with the applicable requirements of
the Securities Act and the Exchange Act, as the case may be, and the rules and
regulations thereunder. As of their respective dates, none of the SEC Reports
(including, without limitation, any financial statements or schedules included
or incorporated by reference therein) contained any untrue statement of a
material fact or omitted to state a material fact required to be stated or
incorporated by reference therein or necessary in order to make the statements
therein, in light of the circumstances under which they were made, not
misleading in any material respect, except to the extent any such statement or
omission was superseded by a later-dated SEC Report. In all material respects,
the audited consolidated financial statements and unaudited consolidated interim
financial statements of Purchaser contained in the SEC Reports have been
prepared in accordance with generally accepted accounting principles applied on
a consistent basis during the periods involved (except as disclosed in such
financial statements), and fairly present the consolidated financial condition
of Purchaser as of the dates thereof and the consolidated results of Purchaser's
operations and changes in financial position for the periods then ended
(subject, in the case of any unaudited interim financial statements, to the
omission of certain notes not ordinarily accompanying such unaudited financial
adjustments and to normal year-end adjustments).
Section 4.12 Absence of Undisclosed Liabilities. Purchaser does not
have any Liability that is, individually or in aggregate, reasonably likely to
have a Material Adverse Effect on Purchaser, that is not fully reflected or
reserved against in Purchaser's financial statements included in the SEC
Reports, except for those that (i) are not required to be included in
Purchaser's financial statements under generally accepted accounting procedures,
(ii) have been incurred after June 30, 1996 in the ordinary course of business
and are usual and normal in amount, both individually and in the aggregate, and
(iii) have been incurred in connection with this Agreement. Purchaser has no
knowledge of any circumstance, condition, event or arrangement that may
hereafter give rise to any new Liabilities that are, either individually or in
the aggregate, reasonably likely to have a Material Adverse Effect on Purchaser.
15
<PAGE> 103
Section 4.13 Litigation. Except as described in the SEC Reports, to the
best knowledge of Purchaser, there are no Proceedings pending or threatened by
or before any court, arbitrator or Governmental Authority against or affecting
Purchaser or its business, properties, assets, condition (financial or
otherwise), results of operations or prospects (i) in which it is or will be
sought to restrain or prohibit, or to obtain damages or other relief in
connection with, or which questions the legality or validity of, this Agreement
or the transactions contemplated hereby, (ii) which if determined adversely to
Purchaser would be reasonably expected to have a Material Adverse Effect on
Purchaser, or (iii) involve the issue of criminal liability.
Section 4.14 Absence of Adverse Changes. Except as set forth in its SEC
Reports, since June 30, 1996, the business of Purchaser has been conducted only
in its ordinary course, consistent with past practices, and there has not been
(i) any material adverse change in the assets, business, affairs, operations,
condition (financial or otherwise) or prospects of Purchaser, or (ii) any event,
change or development or combination thereof (or any worsening of any condition
currently existing) relating to or affecting Purchaser that individually or in
the aggregate, has materially and adversely affected, or insofar as can be
reasonably foreseen will materially and adversely affect, the assets, business,
affairs, condition (financial or otherwise), results of operations or prospects
of Purchaser, other than changes which have resulted from developments affecting
the oil and gas industry or political developments in Venezuela and Russia
generally.
Section 4.15 Brokers' Fee. There is no investment banker, broker,
finder or other intermediary which is entitled to any fees, commissions or other
remuneration in connection with the Merger or the transactions contemplated
thereby based upon arrangements made by or on behalf of Purchaser, Merger Parent
or Merger Sub.
ARTICLE V
COVENANTS OF THE PARTIES
Section 5.1 Conduct of Business of the Company. Except as set forth in
the Disclosure Schedule, from the date of this Agreement until the Effective
Time, the Company shall (i) conduct its business only in the ordinary course
consistent with past practices, using its best efforts to preserve intact its
business organization and good will and the relationships with its suppliers,
customers, lenders, licensors, licensees and others having business
relationships with it keeping available the services of its officers and key
employees, and (ii) report, advise and consult periodically (but not less than
weekly) with Purchaser on the state of the Company's business, affairs, assets,
properties, condition (financial or otherwise) and/or results of operations and
prospects. Unless Purchaser shall otherwise agree in writing or as otherwise
contemplated by this Agreement or set forth in the Disclosure Schedule, and
without limiting the generality of the foregoing, the Company shall not from the
date hereof to the Effective Time:
(a) make, suffer or incur any change in the conduct of its business or
operations or enter into or carry out any transactions other than in the
ordinary course of business consistent with past practice that could be
reasonably expected to have a Material Adverse Effect on the Company;
(b) make, adopt or authorize any change in its Articles of
Incorporation or Bylaws;
16
<PAGE> 104
(c) (i) issue or sell any additional shares of capital stock or other
securities, or obligations convertible into or exchangeable or exercisable for
any such shares, except pursuant to the exercise of outstanding options, (ii)
grant any option, warrant or right to acquire shares of capital stock, (iii)
alter the terms of any of its outstanding securities, (iv) adjust, split,
combine or reclassify its shares of capital stock, or (v) make, declare, set
aside or pay any dividends or distributions or redeem, purchase, retire or
otherwise acquire any of its shares of capital stock or any securities or
obligations convertible into or exchangeable for any such shares of capital
stock;
(d) incur, create, assume, guarantee the indebtedness of any third
party, or otherwise become liable for any indebtedness for borrowed money, other
than with respect to trade payables incurred in the ordinary course of business
in customary amounts and the reasonable transaction costs and expenses of the
Merger;
(e) sell, transfer, pledge, assign, encumber or otherwise dispose of,
or subject to any lien, any of its property or assets, other than sales of oil
and gas in the ordinary course of business, except for the Trust Interest
contemplated by Section 5.18 hereof;
(f) merge, consolidate combine or enter into a share exchange with any
other Person or, except in the ordinary course of business, acquire any equity
interest or any significant amount of assets of any Person;
(g) purchase, lease or otherwise acquire any fixed assets or oil and
gas rights, interests or properties other than refiling on the two (2)
Philippine properties in which the Company previously owned an interest;
(h) create any Subsidiaries;
(i) enter into or modify any employment, severance, termination or
similar agreement or arrangement with regard to any bonus, salary, severance or
termination pay to any officer, director, consultant or employee or otherwise
increase the compensation payable to any such person;
(j) change any method or principle of accounting in a manner
inconsistent with past practice;
(k) initiate, prosecute, settle or compromise any proceedings, claims,
or other rights or actions, whether now pending or hereafter brought;
(l) amend, modify, terminate, waive or compromise any right under, any
contract or other obligation or arrangement to which it is a party or by which
it or any of its assets or properties are bound, other than in the ordinary
course of business;
(m) enter into any contract, lease, mortgage, bond, indenture or other
agreement, understanding, arrangement or transaction not in the ordinary course
of business;
17
<PAGE> 105
(n) distribute, directly or indirectly, any portion of the "Earnest
Money" referred to in Section 8.2(b) hereof to any stockholders of the Company
or use any part of the Earnest Money to pay any expenses attributable to the
Merger; or
(o) agree or commit to any of the foregoing.
Section 5.2 Access. From the date of this Agreement until the Effective
Time (or the earlier termination of this Agreement), the Company shall provide
to Purchaser and its directors, officers, employees, counsel, accountants,
financial advisors and other authorized representatives full access to the
Company's offices, properties (including, without limitation, the Company's best
efforts to provide access to all of its field locations), books, records,
contracts, tax records, documents, officers, employees and agents and shall
furnish promptly to Purchaser all information concerning the Company's
properties, business, affairs and personnel as may be reasonably requested. The
Company shall cause its officers, employees, consultants, accountants,
attorneys, financial advisors and other authorized representatives to cooperate
fully with any investigation pursuant to this Section 5.2. The Company has
obtained, and will use its best efforts to maintain, the approval of the China
National Offshore Oil Company ("CNOOC") to obtain and share with Purchaser data
in connection with WAB-21. No investigation by Purchaser pursuant to this
Section 5.2 shall diminish or be deemed to modify any representation or warranty
herein made by the Company. Purchaser shall not, and shall cause its respective
representatives not to, use any information obtained pursuant to this Section
5.2 for any purpose unrelated to the consummation of the transactions
contemplated by this Agreement. Pending consummation of the transactions
contemplated hereby, each party conducting any investigation under the Agreement
or otherwise shall keep confidential and use its best efforts to cause its
representatives to keep confidential all information and documents obtained from
the other party, except for disclosure of such information to such party's
advisors and representatives. If for any reason the transactions contemplated by
this Agreement are not consummated, each of the parties hereto shall keep
confidential any information obtained from any other party (except information
publicly available or in such party's possession prior to July 15, 1996, the
date of the Confidentiality Agreement between Purchaser and the Company
("Confidentiality Agreement"), and except as required by court order) and shall
promptly return to the other parties all non-public documents, instruments, work
papers or other information without retaining copies thereof, previously
furnished by it as a result of this Agreement or in connection herewith, and
shall destroy all notes, memoranda and other documents in the possession of it
or any of its representatives containing or reflecting any non-public
information obtained from the other party.
Section 5.3 Registration Statement; Proxy Statement -Prospectus.
(a) As promptly as practicable after the execution of this Agreement,
the parties hereto shall prepare a Proxy Statement - Prospectus in compliance
with all applicable requirements under federal and state securities laws, and
Purchaser shall file at its sole cost and expense with the SEC the Registration
Statement in compliance with the requirements of the Securities Act and the
rules and regulations thereunder. The parties shall cooperate with each other in
providing any information that Purchaser may reasonably request to aid in the
preparation of the Proxy Statement-Prospectus and the Registration Statement.
The parties will use all reasonable efforts to respond to the comments of the
SEC on the Proxy Statement-Prospectus and the Registration Statement, and shall
make any further
18
<PAGE> 106
filings (including amendments and supplements) in connection therewith that may
be necessary, proper or advisable. Purchaser and the Company will each provide
the other with whatever information and assistance in connection with the
foregoing filings that may reasonably be requested. The parties hereto shall use
all reasonable efforts to have the Registration Statement declared effective by
the SEC as promptly as practicable and to maintain the effectiveness of the
Registration Statement through the Effective Time.
(b) The Company agrees to promptly, fully and accurately furnish
Purchaser with all financial information and all other information regarding its
assets, properties, business, affairs, operations, condition (financial or
otherwise), prospects and corporate organization as shall be required by the
rules and regulations under the Securities Act or by the SEC for inclusion in
the Registration Statement and shall otherwise use its best efforts to assist
Purchaser in the preparation and filing of the Registration Statement.
(c) Each of the parties hereto agree that none of the information
supplied by it for inclusion or incorporation by reference in the Registration
Statement shall, at the time of the Registration Statement and each amendment
and supplement thereto, if any, becomes effective under the Securities Act, at
the date of mailing to the Company's stockholders and at the time of the meeting
of the Company's stockholders or at the Effective Time, contain any untrue
statement of a material fact or omit to state any material fact necessary in
order to make the statements therein, in light of the circumstances under which
they were made, not false or misleading. If at any time prior to the Effective
Time any event or circumstance relating to the parties or any of their
respective affiliates or officers or directors should be discovered which shall
be set forth in an amendment to the Registration Statement or a supplement to
the Proxy Statement-Prospectus, the party learning of such discovery shall
promptly inform the other party.
(d) Purchaser shall use its best efforts to cause all shares of
Purchaser Common Stock to be issued pursuant to the Merger to be approved for
listing on the Nasdaq National Market upon official notice of issuance.
Purchaser shall also take such other action (other than qualifying to do
business in any jurisdiction in which it is not so qualified) reasonably
required to be taken under any applicable state securities laws to permit the
issuance of Purchaser Common Stock in the Merger.
(e) The Company shall mail to its stockholders the Proxy
Statement-Prospectus as soon as practicable after the Registration Statement has
become effective.
Section 5.4 Stockholder Approval. The Company shall take all action
necessary in accordance with applicable law and its Articles of Incorporation
and Bylaws to duly convene a special meeting of its stockholders, to be held as
promptly as practicable after the Registration Statement is declared effective
by the SEC, to consider and vote upon the adoption and approval of this
Agreement and the transactions contemplated hereby. The Board of Directors of
the Company shall recommend that its stockholders adopt and approve this
Agreement and the transactions contemplated hereby and shall take all lawful
action (including the solicitation of proxies in favor of such adoption and
approval) to secure the vote or consent of stockholders required to adopt and
approve the Agreement and the transactions contemplated hereby.
19
<PAGE> 107
Section 5.5 Consents. Each of the parties shall use its best efforts
promptly after the date hereof to take all action that may be necessary,
convenient or desirable to obtain, give and make all Consents necessary for the
parties hereto to consummate the transactions contemplated by this Agreement.
Each party hereto shall reasonably cooperate with and assist each other party
hereto in obtaining, giving and making such Consents; provided, however, that no
party shall be obligated hereunder to execute any guarantee, assumption of
liability or other document or instrument requiring it to assume obligations not
contemplated by this Agreement.
Section 5.6 No Shopping. From the date hereof until the Effective Time,
the Company shall not, and shall use its best efforts to cause its officers,
directors, employees and agents to not, directly or indirectly, take any action
to make, solicit, initiate or encourage any inquiries, proposals or offers to
provide information to, enter into any agreement with, participate in any
discussions or negotiations with, or provide any information to, any Person
regarding any merger, reorganization, recapitalization, acquisition,
consolidation, combination, share exchange, sale of all or any significant
portion of assets or of any equity securities or sale of any oil and gas
interests or other properties or assets or rights or interests of the Company or
any similar transaction, other than as set forth on the Disclosure Schedule. The
Company shall immediately notify Purchaser of any such inquiry or proposal it
receives and of the terms thereof and shall immediately deliver to Purchaser any
information furnished by any such third party.
Section 5.7 Tax Treatment. Each of the parties hereto agrees not to,
and to use its best efforts to cause its officers, directors, employees and
agents not to, and Purchaser shall use its best efforts to cause Merger Parent
and Merger Sub not to, take any actions subsequent to the date of this Agreement
that would adversely affect the ability of the Merger to be characterized for
federal income tax purposes as a tax-free reorganization under Section 368(a)(1)
of the Code, and each of the parties hereto agrees to take such action, and to
use its best efforts to cause its directors, officers, employees and agents to
take such action, and Purchaser agrees to use its best efforts to cause Merger
Parent and Merger Sub to take such action, as may be reasonably required, if
such action may be reasonably taken, to reverse the impact of any past actions
which would adversely impact the ability of the Company to be characterized as a
tax-free reorganization under Section 368(a)(1) of the Code for federal income
tax purposes. Merger Parent will acquire the shares of the Surviving Corporation
for investment purposes without a view to the resale or distribution thereof.
Section 5.8 Best Efforts. Upon the terms and subject to the conditions
set forth in this Agreement, each of the parties hereto shall use its best
efforts to take, or cause to be taken, as promptly as practicable, all such
actions and to do, and to cause to be done, all other things necessary,
convenient or desirable in order to carry out the obligations under this
Agreement and under all other agreements contemplated hereby and to consummate
and make effective the transactions contemplated hereby and thereby.
Section 5.9 Public Announcements. The Company and Purchaser shall each
consult with the other before issuing any press releases or otherwise making any
public statements or disclosures with respect to the Merger and the other
transactions contemplated hereby and shall not issue any such press release or
make any such public statement or disclosure without the prior consent of the
other, which consent shall not be unreasonably withheld or delayed, provided
that either may make any
20
<PAGE> 108
disclosure it believes in good faith, based upon the opinion of its counsel, is
required by applicable law or the rules or policies of the Nasdaq Stock Market
after informing the other of such disclosure.
Section 5.10 Notification of Certain Matters. From the date hereof
until the Effective Time, Purchaser and the Company shall each give prompt
written notice to the other of:
(a) The occurrence, or failure to occur, of any event or change in
circumstances where such occurrence or failure to occur would be reasonably
likely to cause any representation or warranty set forth in this Agreement to be
untrue or inaccurate in any material respect or that is reasonably likely to
result in any Material Adverse Effect on it at any time from the date hereof to
the Effective Time;
(b) Any material failure of such party to perform, comply with or
satisfy any covenant, condition or agreement to be performed, complied with or
satisfied by it hereunder;
(c) Any Proceeding commenced or, to its knowledge, threatened against,
relating to or involving or otherwise affecting it which is reasonably likely to
have a Material Adverse Effect on it or to materially and adversely affect its
ability to consummate the transactions contemplated hereby;
(d) Any fact or event that would make it necessary to amend the
Registration Statement or the Proxy Statement-Prospectus to render the
statements therein not misleading or to comply with applicable law; and
(e) Any notice or other communication from (i) any Governmental
Authority in connection with the transactions contemplated hereby or (ii) any
Person alleging that the Consent of such Person (or of any other Person) is or
may be required in connection with the transactions contemplated by this
Agreement.
Section 5.11 Expenses. Subject to prior written approval by Purchaser,
before the encumbrance of any expenses which in the aggregate exceed $50,000,
Purchaser shall pay all reasonable out-of-pocket outside legal fees and expenses
(excluding the fees and expenses of Price Waterhouse in rendering the "comfort"
letter referred to in Section 5.15(b) hereof, as well as the audit fees of Price
Waterhouse and the associated accounting fees of Quinn & Associates P.C.
relating to such audit, which shall be paid directly by Purchaser) which are
solely and directly related to the Merger, which are not the expenses of any
stockholders of the Company, and which are actually and reasonably incurred by
the Company (in the determination and upon the approval of Purchaser) promptly
after receiving invoices therefor, in connection with the negotiation,
preparation, execution, delivery and performance of this Agreement and the
consummation of the transactions contemplated hereby; however, (i) whether or
not the Merger is consummated, the Company shall pay, and shall defend,
reimburse, indemnify and hold harmless Purchaser from any brokers', bankers' or
finders' fees or commissions or similar payments due to any arrangement made by
or on behalf of the Company, and (ii) in the event the Merger is not consummated
for any reason, Purchaser shall not be obligated to pay any of the
aforementioned fees and expenses of the Company unless Purchaser has received
valid invoices, within ten (10) days of the date of termination, for services
performed prior to the termination.
21
<PAGE> 109
Section 5.12 Takeover Statutes. If any Takeover Statute is or may
become applicable to the transactions contemplated hereby, each of the parties
hereto and the members of their respective boards of directors will grant such
approvals and take such actions as are necessary so that the transactions
contemplated by this Agreement may be consummated as promptly as practicable
under the terms contemplated hereby and thereby and otherwise act to eliminate
or minimize the effects of any Takeover Statute on any of the transactions
contemplated by this Agreement.
Section 5.13 Affiliates' Letters. As soon as practicable, the Company
shall identify to Purchaser all persons who are likely to be, at the time of the
Company's stockholder meeting, "affiliates" of the Company as that term is used
in Rule 145 under the Securities Act ("Affiliates"). The Company shall use its
best efforts to cause each such person who is so identified as an Affiliate to
execute and deliver to Purchaser at or prior to the Effective Time the written
undertakings set forth in an "affiliates' letter" and tax representation
certificates of a kind customary in a merger intended to qualify as a tax-free
reorganization.
Section 5.14 Company Financial Statements. The Company will prepare,
and will use its best efforts to cause Price Waterhouse and associated
accounting firms to take appropriate action with respect to, all financial
statements of the Company as are required to be included in or are necessary for
inclusion in the Proxy Statement-Prospectus and the Registration Statement, all
at the expense of Purchaser.
Section 5.15 Comfort Letters.
(a) Purchaser shall use its best efforts to cause to be delivered to
the Company a letter of Deloitte & Touche LLP dated within five (5) business
days before the date on which the Registration Statement shall become effective
and addressed to the Company, in form and substance reasonably satisfactory to
the Company and customary in scope and substance for "comfort" letters delivered
by independent public accountants in connection with registration statements and
proxy statements similar to the Registration Statement and Proxy
Statement-Prospectus.
(b) The Company shall use its best efforts to cause to be delivered to
Purchaser a letter of Price Waterhouse dated within five (5) business days
before the date on which the Registration Statement shall become effective and
addressed to Purchaser, in form and substance reasonably satisfactory to
Purchaser and customary in scope and substance for "comfort" letters delivered
by independent public accountants in connection with registration statements and
proxy statements similar to the Registration Statement and Proxy
Statement-Prospectus, all at Purchaser's expense and without inclusion in the
$50,000 limitation set forth in Section 5.11 hereof.
Section 5.16 Employment Agreement. Purchaser shall, and the Company
shall use its best efforts to cause Randall C. Thompson to, enter into a
mutually acceptable employment agreement ("Employment Agreement") providing for
the employment of Mr. Thompson as the President of the Surviving Corporation for
a period of two (2) years from the Effective Time, which period shall be
renewable by mutual consent, for an annual salary of $150,000 and for benefits
comparable to the benefits currently received by other employees of Purchaser,
including participation in Purchaser's profit-sharing plan.
22
<PAGE> 110
Section 5.17 Surviving Corporation Capital. After the Effective Time,
Purchaser shall use its reasonable efforts, in light of the circumstances of
Purchaser, the Surviving Corporation, the oil and gas industry, the economy and
the international climate then existing, to provide capital to the Surviving
Corporation in an amount intended to permit the Surviving Corporation to remain
viable.
Section 5.18 Shareholder Trust in WAB-21 . Prior to the Effective Time,
the Company shall distribute and transfer a four percent (4%) of an eight
eighths (8/8ths) economic interest in WAB-21 proportionately reduced to reflect
the participation of The People's Republic of China ("Shareholder Trust in
WAB-21") to a stockholder trust, or other like entity, for the benefit of the
stockholders of the Company on a basis proportionate to their stockholdings in
the Company. Purchaser and the Company hereby agree that the value of the
Shareholder Trust in WAB-21 interest is $200,000, and each covenants and agrees
that it will not take any position on any income tax return, before any
Governmental Authority or in any judicial proceeding, or make any public
statement or statement to its stockholders or option holders that is in any way
inconsistent with such valuation.
Section 5.19 Lock-up. Each officer, director and other Affiliate of the
Company ("Company Insider") who receives Purchaser Common Stock pursuant to the
Merger in exchange for shares of Company Common Stock beneficially owned by him
or issuable upon the exercise of Substitute Purchaser Options ("Merger Shares")
shall be subject to a "lock-up" arrangement with respect to such Merger Shares
and, as a condition to receiving the Merger Shares, shall agree in a "lock-up
letter" not to offer or sell any Merger Shares until twelve (12) months after
the Effective Time, except as follows: (i) each Company Insider other than Mr.
Thompson may offer and sell up to ten percent (10%) of the Merger Shares at any
time and up to an additional twenty-two and one-half percent (22.5%) of the
Merger Shares in each three-month period after the Effective Time (on a
non-cumulative basis); and (ii) Mr. Thompson may offer and sell up to ten
percent (10%) of the Merger Shares at any time, may offer and sell up to (but
not more than) an additional twenty-two and one-half percent (22.5%) of the
Merger Shares in each three-month period commencing one year from the Effective
Time (on a non-cumulative basis), and may offer and sell additional Merger
Shares during the two-year period commencing at the Effective Time only in order
to offset or avoid adverse tax consequences in the reasonable discretion of
Purchaser. In the event that Mr. Thompson is terminated as an employee without
cause the lock-up will no longer apply to Mr. Thompson and his shares may be
sold with prior notification to Purchaser and in compliance with applicable
securities laws.
Section 5.20 Undertakings in Connection with Tax Opinion. The Company
shall, and shall use its best efforts to cause its officers, directors and other
Affiliates to, as promptly as practicable following Purchaser's request
therefor, supply Purchaser and its counsel with representations, warranties and
other appropriate undertakings in connection with rendering the tax opinions
referred to in Section 6.2(e) and 6.3(f) hereof.
Section 5.21 Update of the Company's Representations, Warranties and
Disclosure Schedule. The Company shall promptly disclose to Purchaser in writing
(i) any information set forth in any representation or warranty of the Company
or in the Disclosure Schedule that is no longer accurate in any material
respect, and (ii) any information of the nature of that set forth in Article III
hereof or the Disclosure Schedule that arises between the date hereof and the
Closing that would have been required to be included in the Disclosure Schedule
or would have made any representation or warranty in Article III hereof
incorrect in any material respect, if such information had existed and been
23
<PAGE> 111
known or available on the date hereof, provided that any such information shall
be deemed to be "material" for purposes of this Section 5.21 if, as a result of
the inaccuracy or the new or changed information the Company could suffer a
Material Adverse Effect, whether or not the inaccuracy or the new or changed
information is itself material. At the Closing, the Company shall deliver to
Purchaser an updated current and accurate Disclosure Schedule.
Section 5.22 Company Employee Benefit Plans. The Company shall either,
at Purchaser's sole discretion, (a) terminate all of its employee benefit plans
at the Effective Time in such a manner that neither Purchaser nor the Surviving
Corporation shall have any obligations (including to make payments) under or to
any employee benefit plans after the Effective Time, or (b) merge, after the
Effective Time, its employee benefit plans with and into the employee benefit
plans maintained by Purchaser.
ARTICLE VI
CONDITIONS
Section 6.1 Conditions to the Obligations of Each Party. The respective
obligations of the parties hereto to consummate the Merger and the other
transactions contemplated by this Agreement are subject to the satisfaction (or
waiver in the sole discretion of such parties) on or prior to the Effective Time
of the following conditions:
(a) Stockholder Approval. This Agreement and the transactions
contemplated hereby shall have been duly adopted and approved by the requisite
vote of the stockholders of the Company, including any required class or series
vote, in accordance with the provisions of Colorado Law and other applicable
laws and the Articles of Incorporation and Bylaws of the Company.
(b) Prohibition of Transactions. Other than with respect to Viet Nam,
no federal, state, local or foreign law, statute, rule, regulation or action
shall have been enacted, issued, promulgated, enforced or entered, and no
judgment, decree, injunction or other order (whether temporary, preliminary or
permanent) shall have been issued and remain in effect, and no Proceeding by or
before any Governmental Authority shall be pending that would, if adversely
decided against any party hereto, prohibit, restrict or unreasonably delay the
consummation of the transactions contemplated by this Agreement.
(c) Consents. All Consents required to be obtained, given and made
prior to the Effective Time in connection with the Merger and the other
transactions contemplated hereby shall have been duly obtained, given and made.
(d) Registration Statement. The Registration Statement shall have
become effective under the Securities Act and no stop orders or similar
restraining orders suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have been
initiated or threatened by the SEC.
(e) Blue Sky Approvals. Purchaser shall have received all state
securities permits and other authorizations and approvals necessary to
consummate the Merger and the other transactions
24
<PAGE> 112
contemplated hereby, and no order restraining the ability of Purchaser to issue
shares of Purchaser Common Stock pursuant to the Merger shall have been issued
and no proceedings for that purpose shall have been initiated or threatened by
any state securities commissioner.
(f) Nasdaq Listing. The shares of Purchaser Common Stock to be issued
by Purchaser pursuant to the Merger shall have been approved for listing on
Nasdaq National Market, subject to official notice of issuance.
(g) Shareholder Trust in WAB-21. The Company shall have distributed and
transferred the WAB-21 interest as provided in Section 5.18 hereof.
(h) Dissenter's Rights. The holders of not more than 2%, or such lower
percentage that, either alone or in combination with other factors, would
prevent the Merger from being characterized as a tax-free reorganization within
the meaning of Section 368(a) of the Code, of the outstanding shares of Company
Common Stock shall have dissented from the Merger and demanded payment for such
shares pursuant to Colorado Law.
Section 6.2 Conditions to the Obligations of the Company. The
obligations of the Company to consummate the Merger and the other transactions
contemplated by this Agreement are subject to the satisfaction (or waiver in the
sole discretion of the Company) on or prior to the Effective Time of the
following conditions:
(a) Accuracy of Representations and Warranties. The representations and
warranties of each of Purchaser and Merger Sub set forth in Article IV hereof
shall be true and correct as of the date of this Agreement and as of the Closing
Date as though made on and as of the Closing Date (except for representations
and warranties made as of a specified date, which shall be true and correct as
of the specified date).
(b) Performance of Covenants. Purchaser and Merger Sub shall have
performed and satisfied all agreements, obligations, covenants and conditions
required to be performed and satisfied by them under this Agreement at or prior
to the Effective Time.
(c) No Proceedings. No Proceeding shall be pending or overtly
threatened by, before or involving any court, arbitrator or Governmental
Authority in which is sought the restraint, prohibition or the obtaining of
damages or other relief in connection with, or which challenges the validity or
legality of, this Agreement or the consummation of the transactions contemplated
hereby, or which, if decided adversely to Purchaser or Merger Sub, would be
reasonably likely to have a Material Adverse Effect on Purchaser.
(d) Deliveries at Closing. Purchaser and Merger Sub shall have
delivered to the Company at the Closing each of the agreements, certificates,
instruments, documents and writings required by Section 7.3 or otherwise
hereunder.
(e) Tax Opinion. The Company shall have received the opinion of Emens,
Kegler, Brown, Hill & Ritter Co., L.P.A., counsel to Purchaser, to the effect
that for federal income tax purposes the
25
<PAGE> 113
Merger will constitute a tax-free reorganization under Section 368(a)(1) of the
Code. In preparing such opinion, counsel may rely on reasonable representations
related thereto made by the parties hereto and their officers, directors,
stockholders and affiliates.
(f) Legal Opinion. The Company shall have received a legal opinion,
dated as of the Closing Date, of Emens, Kegler, Brown, Hill & Ritter Co.,
L.P.A., counsel to Purchaser, Merger Parent and Merger Sub, concerning the legal
matters set forth in Section 4.1 through 4.10 of this Agreement and such other
legal matters relating to the Merger as are customarily obtained in transactions
of a type similar to the Merger as the Company may reasonably request.
(g) Officer's Certificate. The Company shall have received a
certificate dated as of the Closing Date signed by an executive officer of each
of Purchaser and Merger Sub to the effect that the conditions set forth in this
Article VI have been satisfied.
(h) Employment Agreement. Purchaser shall have entered into the
Employment Agreement with Mr. Thompson as provided in Section 5.16 hereof.
Section 6.3 Conditions to the Obligations of Purchaser and Merger Sub.
The obligations of Purchaser and Merger Sub to consummate the Merger and the
other transactions contemplated by this Agreement are subject to the
satisfaction (or waiver in the sole discretion of Purchaser and Merger Sub) on
or prior to the Effective Time of the following conditions:
(a) Accuracy of Representations and Warranties. The representations and
warranties of the Company set forth in Article III hereof shall be true and
correct as of the date of this Agreement and as of the Closing Date as though
made on and as of the Closing Date (except for representations and warranties
made as of a specified date, which shall be true and correct as of the specified
date).
(b) Performance of Covenants. The Company shall have performed or
satisfied all agreements, obligations, covenants and conditions required to be
performed or satisfied by it under this Agreement at or prior to the Effective
Time.
(c) No Proceeding. No Proceeding shall be pending or overtly threatened
by, before or involving any court, arbitrator or Governmental Authority in which
is sought the restraint, prohibition or the obtaining of damages or other relief
in connection with, or which challenges the validity or legality of, this
Agreement or the consummation of the transactions contemplated hereby, or which,
if decided adversely to the Company, would be reasonably likely to have a
Material Adverse Effect on the Company. (d) Deliveries at Closing. The Company
shall have delivered to Purchaser at the Closing each of the agreements,
certificates, instruments, documents and writings required by Section 7.2 or
otherwise hereunder.
(e) No Changes. After the date hereof until the Effective Time there
shall not have occurred (unless otherwise set forth on the Disclosure Schedule):
26
<PAGE> 114
(i) any material change, or any development involving a
prospective material change, in either the properties, business, affairs,
condition (financial or otherwise), operations or prospects of the Company, or
in the financial or market conditions or circumstances in the United States or
China, in either case which in Purchaser's reasonable judgment is a Material
Adverse Effect and makes it impracticable or inadvisable to proceed with the
Merger or the other transactions contemplated hereby; or
(ii) any imposition of a new legal or regulatory restriction
not in effect as of the date hereof, or any change in the interpretation of
existing legal or regulatory restrictions, which has a Material Adverse Effect
on the Company or the transactions contemplated by this Agreement; or
(iii) any event specified in Section 5.1 hereof which results
in a Material Adverse Effect.
(f) Tax Opinion. Purchaser shall have received the opinion of Emens,
Kegler, Brown, Hill & Ritter Co., L.P.A., counsel to Purchaser, to the effect
that for federal income tax purposes the Merger will constitute a tax-free
reorganization under Section 368(a)(1) of the Code.
(g) Affiliates Letters. The Company shall have received, and forwarded
written copies to Purchaser of, the "Affiliates Letters" pursuant to Section
5.13 hereof.
(h) Lock-Up Letters. The Company shall have received, and forwarded
written copies to Purchaser of, the "lock-up letters" pursuant to Section 5.19
hereof.
(i) Legal Opinion of Company Counsel. Purchaser shall have received a
legal opinion, dated as of the Closing Date, of Allen G. Reeves, counsel to the
Company, addressed to Purchaser and Merger Sub, concerning the matters set forth
in Sections 3.1 through 3.7, 3.11 and 3.17 of this Agreement, the validity of
the Merger under Colorado Law, the status of the Company under certain federal
statutes, the inapplicability of any anti-takeover statutes to the Merger, and
such other legal matters relating to the Merger as are customarily obtained in
transactions of a type similar to the Merger as Purchaser may reasonably request
at Purchaser's sole expense.
(j) Officer's Certificate. Purchaser shall have received a certificate
dated as of the Closing Date signed by an executive officer of the Company to
the effect that the conditions set forth in Article VI of this Agreement have
been satisfied.
(k) Termination of Agreements. The Company shall have delivered to
Purchaser instruments terminating any and all agreements by and between the
Company and its stockholders including, without limitation, any stockholder
agreements, registration rights agreements and stock option agreements and
releasing the Company, the Surviving Corporation and Purchaser from any
liability or obligation thereunder whatsoever.
(l) Employment Agreement. Mr. Thompson shall have entered into the
Employment Agreement with Purchaser as contemplated in Section 5.16 hereof.
27
<PAGE> 115
(m) Legal Opinion Regarding WAB-21. An opinion shall have been received
by the Purchaser prior to October 15, 1996 of counsel from the legal counsel for
the Ministry of Foreign Trade and Economic Cooperation in form and substance
satisfactory to Purchaser that the Company's Petroleum Contract dated May 8,
1992 entered into between the Company and CNOOC with respect to the WAB-21 is
valid, binding and in full force and effect, that the transactions contemplated
by this Agreement do not violate the terms of such contract, and that no
approvals or consents need to be obtained with respect to the contemplated
transactions. If such opinion is not received by October 15, 1996, this
condition shall be deemed waived by the Purchaser.
ARTICLE VII
CLOSING
Section 7.1 Date and Place. The consummation of the Merger and the
other transactions contemplated hereby (the "Closing") shall be held as soon as
practicable (but in any event within five (5) business days) following the date
upon which all conditions set forth in Article VI hereof have been satisfied or
waived ("Closing Date"), at the offices of the Company, or at such other time,
date or place as the Company and Purchaser shall mutually agree.
Section 7.2 Deliveries by the Company. At the Closing, the Company
shall deliver to Purchaser, in form reasonably acceptable to Purchaser's
counsel:
(a) True and complete copies of corporate resolutions, certified as of
the Closing Date by the Secretary of the Company as having been duly adopted by
the Board of Directors and stockholders of the Company as in effect on the
Closing Date, authorizing the Company's execution and delivery of this Agreement
and consummation of the Merger and the other transactions contemplated hereby.
(b) The Company's Articles of Incorporation and Bylaws as in effect on
the Closing Date, certified by the Secretary of the Company.
(c) A certificate duly executed by the President of the Company, dated
as of the Closing Date, certifying that, (i) the Company has fully performed,
satisfied and complied with all agreements, obligations, covenants and
conditions required by this Agreement to be performed, satisfied or complied
with at or prior to the Closing, and (ii) all of the representations and
warranties of the Company set forth in Article III of this Agreement (as
modified by the Disclosure Schedule) are true and correct as of the Closing
Date.
(d) Certificates of Good Standing of the Company, dated within five
business days of the Closing Date, issued by the Secretary of State of the state
in which the Company is incorporated as to the legal existence and good standing
of the Company as of such date.
(e) An opinion of counsel of the Company, dated as of the Closing Date,
in the form provided in Section 6.3(i) hereof.
(f) Counterparts of the Employment Agreement, duly executed by Mr.
Thompson.
28
<PAGE> 116
(g) Executed copies of the "affiliates letters" in accordance with
Section 5.13 hereof.
(h) Executed copies of the "lock-up letters" in accordance with Section
5.19 hereof.
(i) All other items required to be delivered by the Company to
Purchaser and Merger Sub hereunder.
(j) Such other documents, instruments and certificates relating to the
transactions contemplated hereby as Purchaser may reasonably request at least
three (3) business days prior to the Closing Date.
Section 7.3 Deliveries by Purchaser. At the Closing, Purchaser and
Merger Sub shall deliver to the Company, in form reasonably acceptable to the
Company's counsel:
(a) True and complete copies of corporate resolutions, certified as of
the Closing Date by the Secretary of Purchaser and Merger Sub as having been
duly adopted by the Board of Directors and Stockholders of Purchaser and Merger
Sub as in effect on the Closing Date, authorizing Purchaser's and Merger Sub's
execution and delivery of this agreement and consummation of the Merger and the
other transactions contemplated hereby.
(b) The Certificate or Articles of Incorporation, as the case may be,
and the Bylaws of Purchaser, Merger Parent and Merger Sub, each as in effect on
the Closing Date, certified by the Secretary of each of Purchaser, Merger Parent
and Merger Sub respectively.
(c) A certificate duly executed by the President of each of Purchaser
and Merger Sub, dated as of the Closing Date, certifying that, (i) Purchaser or
Merger Sub, as the case may be, have fully performed, satisfied and complied
with all agreements, obligations, covenants and conditions required by this
Agreement to be performed, satisfied or complied with at or prior to the
Closing, and (ii) all of the representations and warranties of Purchaser or the
Merger Sub, as the case may be, set forth in Article IV of this Agreement are
true and correct as of the Closing Date.
(d) Certificates of Good Standing of Purchaser, Merger Parent and
Merger Sub, dated within five business days of the Closing Date, issued by the
Secretary of State of each state in which Purchaser or its Subsidiaries is
incorporated, as to the legal existence and good standing of the party as of
such date.
(e) An opinion of counsel of Purchaser, dated as of the Closing Date,
in the form provided in Section 6.2(f) hereof.
(f) Counterparts of the Employment Agreement, duly executed by
Purchaser.
(g) All other items required to be delivered by Purchaser or Merger Sub
to the Company hereunder.
29
<PAGE> 117
(h) Such other documents, instruments and certificates relating to the
transactions contemplated hereby as the Company may reasonably request at least
three (3) business days prior to the Closing Date.
Section 7.4 Effectiveness of Closing. No action to be taken or delivery
to be made at the Closing shall be effective until all of the actions to be
taken and all of the deliveries to be made at the Closing are complete.
ARTICLE VIII
TERMINATION
Section 8.1 Termination. This Agreement may be terminated and the
Merger may be abandoned at any time prior to the Effective Time, before or after
adoption and approval of this Agreement by the stockholders of the Company:
(a) By mutual written consent of the Company and Purchaser.
(b) By either Purchaser or the Company if any court of competent
jurisdiction, arbitrator or other Governmental Authority shall have issued,
enacted, entered, promulgated or enforced any final and nonappealable order,
judgment, decree, injunction, ruling or other action restraining, enjoining or
otherwise prohibiting the Merger, or if there shall be any applicable federal,
state, local or foreign legal requirement that makes consummation of the Merger
illegal, other than with respect to Viet Nam.
(c) By either Purchaser or the Company, if the required approval of the
stockholders of the Company referred to in Section 5.4 hereof shall not have
been obtained by reason of the failure to obtain the requisite vote at a duly
held meeting of stockholders called for that purpose, or by Purchaser, if the
Board of Directors of the Company cancels or adjourns such stockholders meeting
before the stockholders of the Company vote on this Agreement and the Merger.
(d) By Purchaser, if any of the conditions to Purchaser's or Merger
Sub's obligations set forth in Article VI hereof shall not have been satisfied
or waived or if the Company shall have failed to perform, satisfy or comply with
any of its obligations, agreements or covenants to be performed, satisfied or
complied with prior to the Closing.
(e) By the Company, if any of the conditions to the Company's
obligations set forth in Article VI hereof shall not have been satisfied or
waived or if Purchaser or Merger Sub shall have failed to perform, satisfy or
comply with any of its obligations, agreements or covenants to be performed,
satisfied or complied with prior to the Closing.
(f) By Purchaser, if there has been a breach by the Company of any
covenant, representation or warranty of the Company set forth in this Agreement.
(g) By the Company, if there has been any breach by Purchaser or the
Merger Sub of any covenant, representation or warranty of the Purchaser and the
Merger Sub set forth in this Agreement.
30
<PAGE> 118
(h) By Purchaser for any other reason, or for no reason, subject to its
obligations set forth in Section 8.2 hereof.
(i) By either Purchaser or the Company, if, without the fault of the
terminating party, the Merger shall not have been consummated on or before
December 10, 1996 (or such later date as extended by mutual agreement of
Purchaser and the Company).
Section 8.2 Effect of Termination.
(a) Except as set forth in paragraph (b) of this Section 8.2, in the
event this Agreement is terminated and the Merger is abandoned pursuant to
Section 8.1 hereof, this Agreement shall become null and void and have no effect
(except that the agreements set forth in Sections 5.11 and 8.3 hereof shall
survive the termination hereof), without any liability on the part of any party
hereof or its directors, officers, stockholders or agents.
(b) If Purchaser terminates this Agreement pursuant to subsections (e),
(g) or (h) of Section 8.1 hereof, then the Company shall be entitled to retain
the sum of $200,000 "Earnest Money" paid by Purchaser to the Company as earnest
money upon execution of the Letter Agreement, dated July 15, 1996, between the
Company and Purchaser. If this Agreement is terminated by either the Company or
Purchaser pursuant to any of subsections (a), (b), (c), (d) or (f) of Section
8.1 hereof, then the Company shall, immediately upon such termination, return
the Earnest Money to Purchaser.
Section 8.3 Confidentiality. Notwithstanding the provisions of Section
8.1 hereof, if for any reason the transactions contemplated by this Agreement
are not consummated, each of the parties hereto shall keep confidential any
information obtained from any other party hereto (except information publicly
available or in such party's domain prior to July 15, 1996, the date of the
Confidentiality Agreement, and except as required by court order) and shall
promptly return to the other parties all schedules, documents, instruments, work
papers or other written information, without retaining copies thereof,
previously furnished by it as a result of this Agreement or in connection
herewith.
Section 8.4 Extension of Time; Waivers. At any time prior to the
Effective Time, Purchaser and the Company may, to the extent legally allowed,
(a) extend the time for the performance of any of the obligations of the other
party, (b) waive any inaccuracy in the representations and warranties set forth
herein or in any document delivered pursuant hereto both by the other party, and
(c) waive compliance with any of the agreements or conditions set forth herein
by the other party. Any agreement on the part of a party hereto to any such
extension or waiver shall be valid only if set forth in a written instrument
signed on behalf of such party.
31
<PAGE> 119
ARTICLE IX
MISCELLANEOUS
Section 9.1 Nonsurvival of Representations and Warranties. None of the
representations, warranties, covenants or agreements set forth herein shall
survive the Effective Time, except for Article I, Sections 2.5, 5.7, 5.11, 5.17,
5.18 and 8.3, this Article IX, and the agreements of the Affiliates in the
"affiliates' letters" delivered pursuant to Section 5.13 hereof and of the
officers, directors and Affiliates of the Company in the "lock up letters"
pursuant to Section 5.19 hereof and the employment agreement referred to in
Section 5.18.
Section 9.2 Amendments. Subject to the applicable provisions of
Colorado Law, this Agreement may be amended by the parties hereto, by action
taken or authorized by the respective boards of directors, at any time before or
after adoption and approval of this Agreement by the stockholders of the
Company, but, after any such stockholder approval, no amendment shall be made
which by law requires further approval by such stockholders without such further
approval. Notwithstanding the foregoing, this Agreement may not be amended
except by an instrument in writing signed on behalf of each of the parties
hereto.
Section 9.3 Notices. All notices, requests, demands and other
communications required or permitted to be given hereunder shall be deemed to
have been duly given if in writing and delivered personally or by facsimile
transmission (upon confirmation of receipt), or on the first business day
following the date of dispatch if delivered by a nationally recognized next-day
courier service or on the third business day after being sent by registered or
certified mail, return receipt requested, postage pre-paid, to the parties of
the following addresses:
If to Purchaser: Benton Oil and Gas Company
1145 Eugenia Place, Suite 200
Carpinteria, CA 93013
Attention: Gregory S. Grabar
Telephone: (805) 566-5600
Facsimile: (805) 566-5610
With a copy to: Jack A. Bjerke, Esq.
Emens, Kegler, Brown, Hill & Ritter Co., L.P.A.
65 East State Street, Suite 1800
Columbus, Ohio 43215
Telephone: (614) 462-5400
Facsimile: (614) 464-2634
If to the Company: Crestone Energy Corporation
303 East 17th Avenue, Suite 810
Denver, CO 80203
Attention: Randall C. Thompson
Telephone: (303) 831-1380
Facsimile: (303) 831-1381
32
<PAGE> 120
With a copy to: Allen G. Reeves
900 Equitable Building
730 17th Street
Denver, Colorado 80202
Telephone: (303) 534-6278
Facsimile: (303) 825-9147
Any party may change its designated address by giving written notice
thereof to all other parties hereto.
Section 9.4 Specific Performance. The parties hereto acknowledge and
agree that the transactions contemplated by this Agreement are unique in that
remedies at law for any breach or threatened breach of this Agreement would be
an inadequate remedy for any loss, and that any defense in any action for
specific performance that a remedy at law would be adequate is waived.
Accordingly, in the event of any actual or threatened breach to any of the terms
of this Agreement, the non-breaching party shall have the right of specific
performance and injunctive relief giving effect to its rights under this
Agreement, in addition to any and all other rights or remedies at law or in
equity, and all such rights and remedies shall be cumulative.
Section 9.5 Governing Law. This Agreement shall in all respects be
governed by and construed and enforced in accordance with the internal
substantive laws of the State of Delaware, without giving effect to any
principle or rule of conflicts or choice of laws.
Section 9.6 Successors and Assigns. The provisions of this Agreement
shall inure to the benefit of and be binding upon the parties hereto and any
respective successors and permitted assigns; provided, however, that no party
shall assign or otherwise transfer this Agreement or any of its rights,
interests or obligations hereunder (whether by operation of law or otherwise)
without the prior written consent of the other parties hereto.
Section 9.7 No Third Party Beneficiaries. Nothing in this Agreement,
express or implied, is intended or shall be construed to provide, create or
confer upon any person or entity other than the parties hereto and their
successors and permitted assigns any right, benefit or remedies, except as
expressly provided herein.
Section 9.8 Mutual Drafting. The parties hereto have participated
jointly in the negotiation and drafting of this Agreement. In the event an
ambiguity or question of intent or interpretation arises, this Agreement shall
be construed as if drafted jointly by the parties hereto and no presumption or
burden of proof shall arise favoring or disfavoring any party hereto by virtue
of the authorship of any of the provisions of this Agreement.
Section 9.9 Pronouns, Etc. The number and gender of each pronoun used
in this Agreement and the term "person" or "persons" or the like shall be
construed to mean both the number and gender of the individual, corporation,
partnership, firm, trust, agency or other entity as the context,
33
<PAGE> 121
circumstance or its antecedent may require. The terms "herein," "hereof,"
"hereto" and the like refer to this Agreement as a whole.
Section 9.10 Headings. The headings used in this Agreement are solely
for convenience of reference and shall be given no effect in the construction
and interpretation of this Agreement.
Section 9.11 Waiver. Except as otherwise specifically provided herein,
the obligations of any party hereto may be waived only with the written consent
of the parties giving the waiver. Any waiver by any party or a breach or
violation of any provision of this Agreement shall not operate or be construed
to be a waiver of any other breach or violation of that provision or of any
breach or violation of any other provision of this Agreement. The failure of a
party to insist upon strict adherence to any provision of this Agreement on one
or more occasions shall not be considered a continuing waiver or deprive that
party of the right thereafter to insist upon strict adherence to that provision
or any other provision of this Agreement.
Section 9.12 Severability. If any provision of this Agreement is held
to be invalid, illegal or unenforceable in any situation, the remaining
provisions hereof shall remain in full force and effect so long as the economic
and legal substance of the transactions contemplated hereby are not affected in
any manner materially adverse to any party.
Section 9.13 Schedules . The Disclosure Schedule and all other
Schedules attached to this Agreement are incorporated into and made a part of
this Agreement as if they were fully set forth herein.
Section 9.14 Counterparts. This Agreement may be executed in one or
more counterparts (including counterparts executed by less than all of the
parties hereto), each of which shall be deemed an original, but all of which
together shall constitute one and the same agreement.
Section 9.15 Entire Agreement. Except with respect to the
Confidentiality Agreement, this Agreement (including the Disclosure Schedule and
the other Schedules referred to herein) constitute the entire agreement and
understanding of the parties hereto with respect to the subject matter hereof
and supersedes in their entirety all prior and contemporaneous negotiations,
communications, agreements and understandings, whether written or oral
(including, without limitation, the Letter Agreement dated July 25, 1996 between
Purchaser and the Company), among the parties hereto (or any two of them) in
connection with the subject matter hereof.
*****
34
<PAGE> 122
IN WITNESS WHEREOF, the parties hereto have caused this Agreement and
Plan of Merger to be executed and delivered by their duly authorized officers as
of the date first above written.
CRESTONE ENERGY CORPORATION
By: /s/ Randall C. Thompson
---------------------------------------------------------
Randall C. Thompson, Chairman of the Board and President
BENTON OIL AND GAS COMPANY
By: /s/ A.E. Benton
--------------------------------------
A.E. Benton, Chairman of the Board and
Chief Executive Officer
CEC ACQUISITION COMPANY
By: /s/ A.E. Benton
-----------------------------
A.E. Benton, Chairman of the Board
35
<PAGE> 123
EXHIBIT B
COLORADO DISSENTERS' RIGHTS STATUTE
<PAGE> 124
7-113-102 RIGHT TO DISSENT. - (1) A shareholder, whether or not
entitled to vote, is entitled to dissent and obtain payment of the fair value of
his or her shares in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party if: (I) Approval by the shareholders of that corporation is required for
the merger by section 7-111-103 or 7-111-104 or by the articles of
incorporation, or
(II) The corporation is a subsidiary that is merged with its parent
corporation under section 7-111-104;
(b) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired;
(c) Consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of the corporation for which a
shareholder vote is required under section 7-112-102(1); and
(d) Consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of an entity controlled by the
corporation if the shareholders of the corporation were entitled to vote upon
the consent of the corporation to the disposition pursuant to section
7-112-102(2).
(2) A shareholder, whether or not entitled to vote, is entitled to
dissent and obtain payment of the fair value of the shareholder's shares in the
event of:
(a) An amendment to the articles of incorporation that materially and
adversely affects rights in respect of the shares because it:
(I) Alters or abolishes a preferential right of the shares; or
(II) Creates, alters, or abolishes a right in respect of redemption of
the shares, including a provision respecting a sinking fund for their redemption
or repurchase; or
(b) An amendment to the articles of incorporation that affects rights
in respect of the shares because it:
(I) Excludes or limits the right of the shares to vote on any matter,
or to cumulate votes, other than a limitation by dilution through issuance of
shares or other securities with similar voting rights; or
(II) Reduces the number of shares owned by the shareholder to a
fraction of a share or to scrip if the fractional share or scrip so created is
to be acquired for cash or the scrip is to be voided under section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair
value of the shareholder's shares in the event of any corporate action to the
extent provided by the bylaws or a resolution of the board of directors.
(4) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this article may not challenge the corporate action
creating such entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
7-113-103 DISSENT BY NOMINEES AND BENEFICIAL OWNERS. (1) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the record shareholder's name only if the record shareholder
dissents with respect to all shares beneficially owned by any one person and
causes the corporation to receive written notice which states such dissent and
the name, address, and federal taxpayer identification number, if any, of each
person on whose behalf the record shareholder asserts dissenters' rights. The
rights of a
<PAGE> 125
record shareholder under this subsection (1) are determined as if the shares as
to which the record shareholder dissents and the other shares of the record
shareholder were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the
shares held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder causes the corporation to receive the
record shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder dissents with respect to all shares
beneficially owned by the beneficial shareholder.
(3) The corporation may require that, when a record shareholder
dissents with respect to the shares held by any one or more beneficial
shareholders, each such beneficial shareholder must certify to the corporation
that the beneficial shareholder and the record shareholder or record
shareholders of all shares owned beneficially by the beneficial shareholder have
asserted, or will timely assert, dissenters' rights as to all such shares as to
which there is no limitation on the ability to exercise dissenters' rights. Any
such requirement shall be stated in the dissenters' notice given pursuant to
section 7-113-203.
PART 2
PROCEDURE FOR EXERCISE OF DISSENTERS' RIGHTS
7-113-201 NOTICE OF DISSENTERS' RIGHTS. - (1) If a proposed corporate
action creating dissenters' rights under section 7-113-102 is submitted to a
vote at a shareholders' meeting, the notice of the meeting shall be given to all
shareholders, whether or not entitled to vote. The notice shall state that
shareholders are or may be entitled to assert dissenters' rights under this
article and shall be accompanied by a copy of this article and the materials, if
any, that, under articles 101 to 117 of this title, are required to be given to
shareholders entitled to vote on the proposed action at the meeting. Failure to
give notice as provided by this subsection (1) to shareholders not entitled to
vote shall not affect any action taken at the shareholders' meeting for which
the notice was to have been given.
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104, any written or oral solicitation of a shareholder to execute
a writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection (2)
to shareholders not entitled to vote shall not affect any action taken pursuant
to section 7-107-104 for which the notice was to have been given.
7-113-202 NOTICE OF INTENT TO DEMAND PAYMENT. - (1) If a proposed
corporate action creating dissenters' rights under section 7-113-102 is
submitted to a vote at a shareholders' meeting, a shareholder who wishes to
assert dissenters' rights shall:
2
<PAGE> 126
(a) Cause the corporation to receive, before the vote is taken, written
notice of the shareholder's intention to demand payment of the shareholder's
shares if the proposed corporate action is effectuated; and
(b) Not vote the shares in favor of the proposed corporate action.
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders' pursuant to
section 7-107-104, a shareholder who wishes to assert dissenters' rights shall
not execute a writing consenting to the proposed corporate action.
(3) A shareholder who does not satisfy the requirements of subsection
(1) or (2) of this section is not entitled to demand payment for the
shareholder's shares under this article.
7-113-203 DISSENTER'S NOTICE. - (1) If a proposed corporate action
creating dissenters' rights under section 7-113-102 is authorized, the
corporation shall give a written dissenters' notice to all shareholders who are
entitled to demand payment for their shares under this article.
(2) The dissenters' notice required by subsection (1) of this section
shall be given no later than ten days after the effective date of the corporate
action creating dissenters' rights under section 7-113-102 and shall:
(a) State that the corporate action was authorized and state the
effective date or proposed effective date of the corporate action;
(b) State an address at which the corporation will receive payment
demands and the address of a place where certificates for certificated shares
must be deposited;
(c) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(d) Supply a form for demanding payment, which form shall request a
dissenter to state an address to which payment is to be made;
(e) Set the date by which the corporation must receive the payment
demand and certificates for certificated shares, which date shall not be less
than thirty days after the date the notice required by subsection (1) of this
section is given;
(f) State the requirement contemplated in section 7-113-103(3), if such
requirement is imposed; and
(g) Be accompanied by a copy of this article.
7-113-204 PROCEDURE TO DEMAND PAYMENT. - (1) A shareholder who is given
a dissenters' notice pursuant to section 7-113-203 and who wishes to assert
dissenters' rights shall, in accordance with the terms of the dissenters'
notice:
(a) Cause the corporation to receive a payment demand, which may be the
payment demand form contemplated in section 7-113-203(2)(d), duly completed, or
may be stated in another writing; and
(b) Deposit the shareholder's certificates for certificated shares.
(2) A shareholder who demands payment in accordance with subsection (1)
of this section retains all rights of a shareholder, except the right to
transfer the shares, until the effective date of the proposed corporate action
giving rise to the shareholder's exercise of dissenters' rights and has only the
right to receive payment for the shares after the effective date of such
corporate action.
3
<PAGE> 127
(3) Except as provided in section 7-113-207 or 7-113-209(1)(b), the
demand for payment and deposit of certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the
shareholder's share certificates as required by the date or dates set in the
dissenters' notice is not entitled to payment for the shares under this article.
7-113-205 UNCERTIFICATED SHARES. - (1) Upon receipt of a demand for
payment under section 7-113-204 from a shareholder holding uncertificated
shares, and in lieu of the deposit of certificates representing the shares, the
corporation may restrict the transfer thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
7-113-206 PAYMENT. - (1) Except as provided in section 7-113-208, upon
the effective date of the corporate action creating dissenters' rights under
section 7-113-102 or upon receipt of a payment demand pursuant to section
7-113-204, whichever is later, the corporation shall pay each dissenter who
complied with section 7-113-204, at the address stated in the payment demand, or
if no such address is stated in the payment demand, at the address shown on the
corporation" current record of shareholders for the record shareholder holding
the dissenter "shares, the amount the corporation estimates to be the fair value
of the dissenter's shares, plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall
be accompanied by:
(a) The corporation's balance sheet as of the end of its most recent
fiscal year or, if that is not available, the corporation's balance sheet as of
the end of a fiscal year ending not more than sixteen months before the date of
payment, an income statement for that year, and, if the corporation customarily
provides such statements to shareholders, a statement of changes in
shareholders' equity for that year and a statement of cash flow for that year,
which balance sheet and statements shall have been audited if the corporation
customarily provides audited financial statements to shareholders, as well as
the latest available financial statements, if any, for the interim or full-year
period, which financial statements need not be audited;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under
section 7-113-209; and
(e) A copy of this article.
7-113-207 FAILURE TO TAKE ACTION. - (1) If the effective date of the
corporate action creating dissenters' rights under section 7-113-102 does not
occur within sixty days after the date set by the corporation by which the
corporation must receive the payment demand as provided in section 7-113-203,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
7-113-108 SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER
ANNOUNCEMNET OF PROPOSED CORPORATE ACTION. - (1) The
4
<PAGE> 128
corporation may, in or with the dissenters' notice given pursuant to section
7-113-203, state the date of the first announcement to news media or to
shareholders of the terms of the proposed corporate action creating dissenters'
rights under section 7-113-102 and state that the dissenter shall certify in
writing, in or with the dissenter's payment demand under section 7-113-204,
whether or not the dissenter (or the person on whose behalf dissenters' rights
are asserted) acquired beneficial ownership of the shares before that date. With
respect to any dissenter who does not so certify in writing, in or with the
payment demand, that the dissenter or the person on whose behalf the dissenter
asserts dissenters' rights acquired beneficial ownership of the shares before
such date, the corporation may, in lieu of making the payment provided in
section 7-113-206, offer to make such payment if the dissenter agrees to accept
it in full satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by section 7-113-206(2).
7-113-209 PROCEDURE IF DISSENTER IS DISSATISFIED WITH PAYMENT OR OFFER.
- - (1) A dissenter may give notice to the corporation in writing of the
dissenter's estimate of the fair value of the dissenter's shares and of the
amount of interest due and may demand payment of such estimate, less any payment
made under section 7-113-206, or reject the corporation's offer under section
7-113-208 and demand payment of the fair value of the shares and interest due,
if:
(a) The dissenter believes that the amount paid under section 7-113-206
or offered under section 7-113-208 is less than the fair value of the shares or
that the interest due was incorrectly calculated;
(b) The corporation fails to make payment under section 7-113-206
within sixty days after the date set by the corporation by which the corporation
must receive the payment demand; or
(c) The corporation does not return the deposited certificates or
release the transfer restrictions imposed on uncertificated shares as required
by section 7-113-207(1).
(2) A dissenter waives the right to demand payment under this section
unless the dissenter causes the corporation to receive the notice required by
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
PART 3
JUDICIAL APPRAISAL OF SHARES
7-113-301 COURT ACTION - (1) If a demand for payment under section
7-113-209 remains unresolved, the corporation may, within sixty days after
receiving the payment demand, commence a proceeding and petition the court to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the sixty-day period, it shall pay to
each dissenter whose demand remains unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in
subsection (1) of this section in the district court of the county in this state
where the corporation's principal office is located or, if it has no principal
office in this state, in the district court of the county in which its
registered office is located. If the corporation is a foreign corporation
without a registered office
5
<PAGE> 129
in this state, it shall commence the proceeding in the county in this state
where the registered office of the domestic corporation merged into, or whose
shares were acquired by, the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unresolved parties to the proceeding
commenced under subsection (2) of this section as in an action against their
shares, and all parties shall be served with a copy of the petition. Service on
each dissenter shall be by registered or certified mail, to the address stated
in such dissenter's payment demand, or if no such address is stated in the
payment demand, at the address shown on the corporation's current record of
shareholders for the record shareholder holding the dissenter's shares, or as
provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the powers described
in the order appointing them, or in any amendment to such order. The parties to
the proceeding are entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding commenced under
subsection (2) of this section is entitled to judgment for the amount, if any,
by which the court finds the fair value of the dissenter's shares, plus
interest, exceeds the amount paid by the corporation, or the fair value, plus
interest, of the dissenter's shares for which the corporation elected to
withhold payment under section 7-113-208.
7-113-302 COURT COSTS AND COUNSEL FEES. - (1) The court in an appraisal
proceeding commenced under section 7-113-301 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation; except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under section 7-113-209.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
(a) Against the corporation and in favor of any dissenters if the court
finds the corporation did not substantially comply with the requirements of part
2 of this article; or
(b) Against either the corporation or one or more dissenters, in favor
of any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to said counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefited.
6
<PAGE> 130
EXHIBIT C
BENTON 1995 ANNUAL REPORT TO STOCKHOLDERS
<PAGE> 131
THE COMPANY
- --------------------------------------------------------------------------------
Benton Oil and Gas Company is an independent energy company which has been
engaged in the development and production of oil and gas properties since 1989.
Although originally active only in the United States, the Company has developed
significant interests in Venezuela and Russia, and recently sold substantially
all of its remaining United States oil and gas interests. The Company's
operations are conducted principally through its 80% owned Venezuelan
subsidiary, Benton-Vinccler which operates in the South Monagas Unit in
Venezuela, and its 34% owned Russian joint venture, GEOILBENT, which operates in
the North Gubkinskoye Field in West Siberia, Russia. The Company's business
strategy is to identify and exploit oil and gas reserves in under-developed
areas while seeking to minimize the associated risk of such activities.
ON THE COVER
- --------------------------------------------------------------------------------
As part of the Venezuelan development program, Benton-Vinccler conducted a 3-D
seismic survey over a portion of the South Monagas Unit. On the cover is a 3-D
seismic cube from the survey which highlights one of the known productive
reservoirs.
<TABLE>
<CAPTION>
TABLE OF CONTENTS ABBREVIATION GUIDE
<S> <C> <C>
Financial Highlights 1 Bbl = Barrel of Oil
Letter to Stockholders 2 Bbls = Barrels of Oil
Corporate Business Strategy 4 MBbls = Thousand Barrels
Mcf = Thousand Cubic Feet
Operations Review MMcf = Million Cubic Feet
Russia 6 BOE = Barrel of Oil Equivalent
Venezuela 10 MBOE = Thousand Barrels of Oil Equivalent
BOPD = Barrels of Oil Per Day
Humanitarian Aid 18 ECU = European Currency Unit
Corporate Directory 20
Financial Statements 21
</TABLE>
<PAGE> 132
FINANCIAL HIGHLIGHTS
- -------------------------------------------------------------------------------
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
1995 1994 1993
(amounts in thousand of dollars, except per share data as noted)
FINANCIAL:
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Total Revenues $ 65,068 $ 34,705 $ 7,504
Net Income (Loss) 10,591 2,954 (4,829)
Per Share 0.40 0.12 (0.26)
Cash Flow (Deficit) From Operations (1) 33,449 15,397 (2,000)
Per Share (1) 1.25 0.62 (0.11)
Total Assets 214,750 162,561 108,635
Long Term Debt (2) 49,486 31,911 11,788
Stockholders' Equity 103,681 88,259 84,021
Average Shares Outstanding 26,673 24,851 18,609
OPERATIONAL:
- --------------------------------------------------------------------------------------------------------
Oil and Gas Capital Expenditures $ 73,511 $ 53,456 $ 25,953
Total Production:
Crude Oil and Condensate (MBbls) 6,016 3,040 480
Natural Gas (MMcf) 3,785 2,062 233
Oil Equivalents (MBOE) 6,647 3,384 519
Total Proved Reserves (3):
Crude Oil and Condensate (MBbls) 81,493 66,339 39,768
Natural Gas (MMcf) 6 16,077 18,099
Oil Equivalent (MBOE) 81,494 69,019 42,785
Total Finding and Development Costs:
Average Finding Costs (BOE) $ 1.75 $ 1.35 $ 1.73
Future Development Costs (BOE) 1.80 1.23 2.04
Total F and D Costs (BOE) $ 3.55 $ 2.58 $ 3.77
Present Value of Reserves (3) (4) $314,911 $282,554 $131,413
- --------------------------------------------------------------------------------------------------------
<FN>
(1) Before working capital changes.
(2) Net of current portion.
(3) 1995 proved reserves and present value of reserves are adjusted to reflect
80% ownership in Benton-Vinccler. All mineral rights are owned by the
Venezuelan government.
(4) Future net cash flows before income taxes discounted at 10%.
</TABLE>
<TABLE>
<CAPTION>
[GRAPH] [GRAPH] [GRAPH]
AVERAGE DAILY PRODUCTION EARNINGS PER SHARE CASH FLOW PER SHARE
(MBOE)
<S> <C> <C> <C> <C> <C>
1st Q 1995 14.1 1st Q 1995 $0.08 1st Q 1995 $0.23
2nd Q 1995 14.1 2nd Q 1995 $0.04 2nd Q 1995 $0.20
3rd Q 1995 20.5 3nd Q 1995 $0.11 3rd Q 1995 $0.34
4th Q 1995 24.0 4th Q 1996 $0.17 4th Q 1995 $0.48
</TABLE>
<PAGE> 133
LETTER TO STOCKHOLDERS
- -------------------------------------------------------------------------------
[3-Photos: Photo of A.E. Benton with Russian Nentse Chief; Photo of A.E.
Benton with two Venezuelan governors; Photo of A.E. Benton]
A.E. Benton meeting with the Nentse Chief in West Siberia (left) and with the
Governers of Delta Amacuro and Monogas, Venezuela (center).
To Our Stockholders:
In 1995, Benton Oil and Gas Company posted another record year. Compared to
1994:
- - Production was up 96% to 6.6 million barrels of oil equivalent
- - Revenues rose 87% to $65.1 million
- - Net earnings increased 259% to $10.6 million
- - Cash flow rose 117% to $33.4 million
- - Reserves grew by 18% to 81.5 million barrels of oil equivalent
These achievements reflect the success of the Company's development projects in
Venezuela and Russia. While the Company is proud of its accomplishments,
Benton's rapid growth is only partially reflected in these results - - - - daily
production at year end was approximately double the 1995 average, and gains in
production continue in 1996.
One of Benton's primary goals is the creation of stockholder value. As described
in the "Corporate Business Strategy" section of this report, the Company has
clearly defined business strategies to identify and exploit new oil and gas
reserves in under-developed areas of the world while seeking to minimize the
associated risks.
Currently, the Company's primary projects are in Venezuela. Through its 80%
owned Venezuelan subsidiary, Benton has the right to develop the South Monagas
Unit, a 158,000 acre block in the eastern part of the country which has three
fields: Uracoa, Tucupita and Bombal. Development began in 1993 at Uracoa, the
largest of the three fields. Average daily production in 1995 rose to 14,900
barrels of oil from 6,900 barrels in 1994 and just 900 barrels in 1993. As a
result of a successful drilling program, daily production reached 34,000 barrels
of oil per day in May 1996. Currently, two expansions are planned for the Uracoa
production facilities. The first is scheduled for the second quarter of 1996 and
will increase production capacity to 45,000 barrels per day. The second is
scheduled for the first half of 1997 and will increase capacity to 60,000
barrels per day.
On January 29, 1996, Benton, in partnership with The Louisiana Land and
Exploration Company and Norcen Energy Resources, won the rights to explore the
Delta Centro exploration block, located just 10 miles north of the South Monagas
Unit. A 3-D seismic program will begin by mid-year, and an initial well is
expected to be drilled in 1997. Management believes that Delta Centro has the
potential to add to Benton's oil production over the next five years.
2
<PAGE> 134
GEOILBENT, the Russian joint venture in which Benton has a 34% interest, is
currently producing approximately 8,400 barrels of oil per day from the North
Gubkinskoye Field in West Siberia. Negotiations are proceeding with the European
Bank for Reconstruction and Development for non-recourse financing to accelerate
full field development. If such financing is put in place, a five rig drilling
program will commence, and oil production could dramatically increase.
Benton was early in recognizing the enormous Russian oil and gas opportunities
and is fully aware of the associated financial and political uncertainties.
Management believes that these concerns are more than offset by the low
geological risk of the North Gubkinskoye Field. Over the four years that the
joint venture has been in existence, there has been considerable turmoil,
including the fall of the Soviet Union, ongoing political changes, a radical
shift in economic policies and continued uncertainty over tax laws. Yet Benton's
joint venture with its two local partners has endured, operations have grown
substantially and with proper financing, the Company believes that future
prospects are excellent.
Over the past three years, the Company has developed a number of high potential
3-D prospects and enjoyed a series of drilling successes in the U.S. Gulf Coast.
In accordance with its strategy of limiting initial risk and capital investment,
the Company drilled the less costly and less risky opportunities. The remaining
prospects, while having high potential, are more expensive and quite risky. In
early 1996, Benton received a very attractive offer for its oil and gas
interests in Louisiana, and in April 1996, the properties were sold for $35.4
million to Shell Offshore Inc., a unit of Shell Oil Company. The proceeds were
used to reduce outstanding debt and for working capital purposes. Management's
decision to sell these properties was based solely on financial and risk/reward
considerations and did not represent an unfavorable strategic assessment of the
U.S. On the contrary, Benton continues to evaluate potential projects in the
U.S. as well as other places in the world.
As the Company has grown, so has the need to adjust and expand its management
capabilities. In December, William H. Gumma, Senior Vice President, was named
Managing Director of Benton's Venezuelan projects and moved to Maturin,
Venezuela, where he is managing the daily operations and developing new business
opportunities. In January 1996, Michael B. Wray, a Director of Benton since
November 1988, was appointed President and Chief Financial Officer of the
Company. Also in January 1996, Garry Garrettson was appointed to the Board of
Directors. Mr. Garrettson currently serves as Chief Executive Officer and
President of Spectrian Corporation.
Early in May 1996, in an effort to restructure long term debt and position the
Company to take advantage of exploration and development opportunities, the
Company closed a $125 million offering of 11.625% senior notes. A portion of the
proceeds from this financing was used to repay $28.4 million in outstanding 13%
debt, including accrued interest and related costs, and approximately $6.9
million in trade and vendor financing. The majority of the proceeds will be
invested in ongoing and new exploration and development programs.
1995 was a record year for Benton Oil and Gas, and 1996 has the potential of
being substantially better. The Company entered 1996 with tremendous momentum
and improving prospects. Our Venezuelan operations are growing rapidly. With
proper financing we believe development in Russia can be accelerated, which
could allow us to realize substantial potential there as well. At the same time,
we are evaluating new opportunities to insure that our growth can continue for
many years to come. Creating value for stockholders is one of the cornerstones
of Benton Oil and Gas Company. In addition, the Company believes that it has a
responsibility to its employees as well as the communities in which it conducts
business. For sometime, Benton Oil and Gas has been making an investment in the
communities in which it operates and plans to continue this practice in the
future.
/s/ A.E. Benton
A.E. Benton
Chairman of the Board and
Chief Executive Officer
May 3, 1996
<PAGE> 135
CORPORATE BUSINESS STRATEGY
- -------------------------------------------------------------------------------
Benton Oil and Gas Company's business strategy is to identify and exploit oil
and gas reserves in under-developed areas while seeking to minimize the
associated risks. Specifically, the Company's strategy is to:
- - SEEK NEW RESERVES IN AREAS OF LOW GEOLOGIC RISK. The Company has had
significant success in identifying under-developed reserves in the U.S. and
internationally. In particular, the Company has notable experience in seeking
and developing new reserves in areas where perceptions of potential political
and operating difficulties have sometimes discouraged other energy companies
from competing. As a result, the Company has established operations in
Venezuela and Russia, where significant reserves have been acquired and
developed at relatively low costs. The Company is seeking similar
opportunities in other countries and areas where it believes there is high
potential.
- - USE PROVEN ADVANCED TECHNOLOGY IN BOTH EXPLORATION AND DEVELOPMENT. The
Company's use of 3-D seismic technology, combined with its experience in
designing seismic surveys and analyzing the resulting data, allows for a more
detailed understanding of the subsurface than do conventional surveys. The
3-D seismic information, in conjunction with subsurface geologic data from
previously drilled wells, is used by the Company's experienced in-house
technical team to identify previously undetected reserves. In addition, this
technology contributes significantly to optimum field appraisal, development
and production. In Venezuela, 3-D seismic information has been used to guide
horizontal drilling on a real-time basis in order to better take advantage of
oil-trapping faults.
- - ESTABLISH A LOCAL PRESENCE THROUGH JOINT VENTURE PARTNERS AND THE USE OF
LOCAL PERSONNEL. The Company has sought to establish a local presence where
it does business to facilitate stronger relationships with local government
and labor as well as with local partners. Moreover, the Company employs local
personnel almost exclusively to run its foreign operations, both to take
advantage of local knowledge and experience and to minimize cost. These
efforts have created an expertise within the Company in forming effective
foreign partnerships and operating abroad. The Company believes that its
reputation as a dependable and considerate partner has allowed it to gain
access to new development opportunities.
- - COMMIT CAPITAL IN A PHASED MANNER TO LIMIT TOTAL COMMITMENTS AT ANY ONE TIME.
While the Company typically agrees to a minimum capital expenditure or
development commitment at the onset of a new project, expenditures to fulfill
these commitments are phased in over time. In addition, the Company seeks to
invest in projects that provide the potential for an early return of capital
to the Company and to use internally generated funds, where possible, for
subsequent capital expenditures.
- - REDUCE FOREIGN EXCHANGE RISK. The Company seeks to reduce foreign currency
exchange risks by providing for the receipt of revenues by the Company in
U.S. dollars, while most operating costs are paid in local currency. Pursuant
to the operating agreement between the Company's Venezuelan subsidiary and
the state oil company, the operating fees earned in Venezuela are paid in
U.S. dollars and deposited directly into the subsidiary's bank account in the
U.S. The Company's Russian partnership receives revenues from export sales in
U.S. dollars deposited directly into its account in Moscow. As the Company
expands internationally, it will seek to establish similar arrangements for
any new operations.
[PHOTO of two computer workstations]
One of several work stations at Benton Oil and Gas where 3-D seismic surveys are
analyzed and interpreted. (opposite).
4
<PAGE> 136
[PHOTO--graphic seismic information]
The Company has conducted and interpreted a 3-D seismic survey over the Uracoa
Field in Venezuela. As a horizontal well is drilled (i.e. the UM-55 well
pictured in the insert), information regarding formations encountered by the
drill bit is transmitted from the wellsite to the Company's California
headquarters. Using 3-D seismic data, Benton's technical staff then directs the
movement of the drill bit to more accurately target the potential reservoir.
5
<PAGE> 137
RUSSIA
- --------------------------------------------------------------------------------
In 1991, Benton Oil and Gas became one of the first foreign oil companies to
receive approval to develop a new oil and gas field in Russia. The Company is a
34% partner in GEOILBENT, a Russian joint venture formed to develop and operate
the North Gubkinskoye Field in the West Siberia region of Russia, approximately
2,000 miles northeast of Moscow. The Purovskiy district, where North Gubkinskoye
is located, is one of the most prolific oil and gas regions in Russia.
The North Gubkinskoye Field is approximately 15
miles long and four miles wide and is 166,000
acres. The field had been extensively evaluated
[PHOTO--castle] prior to GEOILBENT's formation, with 60
exploratory wells drilled in the field and 26
productive formations tested. However, the
field was never developed. GEOILBENT currently
estimates that the field contains over 300
million barrels of recoverable oil reserves,
and over 40 million barrels of condensate and
substantial quantities of natural gas.
Benton is fortunate to have two local partners
in GEOILBENT: Purneftegasgeologia and
Purneftegas. By combining Benton's technical
expertise and financial resources with the
geological and operating expertise and strong
local relationships of its partners, GEOILBENT is well positioned to participate
in the growth of this important region.
Purneftegasgeologia was established as an affiliate of the Ministry of Geology
of the USSR to evaluate the oil and gas potential of the Purovskiy district.
Over its 15 year history, Purneftegasgeologia discovered 56 oil and gas fields
and has conducted operations that span an area of more than 46,000 square miles.
Purneftegasgeologia is experienced in working under the severe conditions
encountered in West Siberia. Gazprom, the Russian gas monopoly, owns a 20%
interest in Purneftegasgeologia.
Purneftegas was formed in 1986 and currently operates 1,750 wells in 14 oil and
gas fields in West Siberia. Purneftegas has more than 15,000 employees and is
well known in western financial markets, where it has raised capital through
U.S. investment banking firms and the European Bank for Reconstruction and
Development.
In 1992 and 1993, GEOILBENT made significant front-end investments to develop
the necessary infrastructure to begin production from the North Gubkinskoye
field, including surface facilities and a 37 mile, 75,000 BOPD pipeline
connecting the field to the main Russian oil pipeline network. Production
commenced in the second half of 1993 from recompleted wells and rose steadily as
new wells were drilled, averaging 2,400 BOPD during 1994.
A reindeer herd, natural inhabitants of
the West Siberian terrain, are the life
support system for the Nentse Indians. The
Nentses are indigenous people who live on
the land surrounding the North Gubkinskoye
Field.
6
<PAGE> 138
[PHOTOS--reindeer herd and inset maps of Russia and regional map showing
location of North Gubkinskoye Field]
7
<PAGE> 139
In 1995, GEOILBENT had 4 drilling rigs under contract and drilled 25 new wells,
compared to 9 wells in 1994. As a result of these activities, average production
rose throughout 1995 and averaged approximately 8,400 BOPD in March 1996. Once
oil is produced, it is shipped by Transneft, the state-owned oil pipeline
company. Monthly sales are made to the European market for payment in U.S.
dollars.
GEOILBENT is currently in discussions with the European Bank for Reconstruction
and Development regarding non-recourse financing for the project. If such
financing is secured, a five rig, 300-well, drilling program will commence to
completely develop the field.
GEOILBENT estimates that substantial recoverable gas and condensate reserves
exist in the North Gubkinskoye Field. Currently, associated gas is utilized in
field operations and the balance is flared in an amount allowed under permits
with the Ministry of Fuel and Energy. Recently, GEOILBENT entered into
discussions with Gazprom regarding development, production and marketing of the
gas. Feasibility studies are in progress and are anticipated to be completed by
year-end 1996. Implementation of a development plan would include construction
of processing facilities and a natural gas pipeline from the field to the main
transmission pipeline. Development of the reserves, however, will depend on the
market for natural gas, mutually acceptable contract terms and the availability
of financing.
[PHOTO]
Aerial photo of North Gubkinskoye main production facilities.
One of 4 Russian drilling rigs under contract in 1995 (opposite).
8
<PAGE> 140
[PHOTO--Russian drilling rig]
9
<PAGE> 141
VENEZUELA
- --------------------------------------------------------------------------------
Venezuela represents one of the most attractive countries in Latin America for
oil and gas development. According to PDVSA, the national oil company, Venezuela
contains an estimated 64 billion barrels of proven reserves. The operating
environment is excellent because of well developed infrastructure and access to
oil field service suppliers. Labor conditions are favorable because there is a
large pool of well trained energy professionals. Most importantly, PDVSA and its
affiliates are increasingly encouraging foreign investment into the country.
In 1992, Benton became the first U.S.
exploration and production company since
[PHOTO -- showing Venezuelan 1976 to gain the right to develop a
oil fields and total estimated Venezuelan oil field. The Company and
proved reserves by area] Vinccler, a Venezuelan construction and
VENEZUELA'S ESTIMATED PROVED OIL engineering company, signed a 20-year
RESERVES - 64 BILLION BARRELS operating service agreement with Lagoven,
an affiliate of PDVSA, to develop the South
Monagas Unit. The oil and gas operations in
the unit are conducted by Benton-Vinccler,
the Company's 80% owned subsidiary. It took Benton-Vinccler less than one year
to commence production. The momentum in production growth began in 1994 and
continued into 1995 as Benton-Vinccler registered dramatic gains in output. By
May 1996, production reached 34,000 BOPD. Benton's success in Venezuela is the
result of its aggressive approach to project development, strong technical and
operating capabilities, innovative ideas and good working relationships with
PDVSA, Lagoven and the Venezuelan government agencies. The Company works closely
with local authorities and conducts ongoing community relations programs,
providing medical care, equipment and supplies.
In January 1996, Venezuela's first exploration and development licensing
competition since the 1970's, underscored the country's attraction for oil and
gas development. Fourteen U.S. and international companies bid more than $245
million in bonuses and committed to hundreds of millions of dollars in
exploration investment on eight blocks. Benton expanded its presence in
Venezuela when a consortium it formed with The Louisiana Land and Exploration
Company and Norcen Energy Resources won the rights to explore and develop the
Delta Centro Block.
Covering a portion of the South Monagas
Unit are environmentally protected Morichal
palms and rivers. A map illustrating the
location of the South Monagas Unit and its
three oil fields (insert).
SOUTH MONAGAS UNIT
- --------------------------------------------------------------------------------
The South Monagas Unit is a 158,000 acre block in eastern Venezuela. The block
contains three identified oil fields: Uracoa, Tucupita and Bombal. Under the
operating service agreement, Benton-Vinccler operates as contractor for Lagoven
and is responsible for all development and operations of the unit through July
2012. In return, Benton-Vinccler receives a per barrel fee for each barrel
delivered to Lagoven, from which it pays all expenditures, including capital and
operating costs.
10
<PAGE> 142
[PHOTO -- environmentally protected areas
of Venezuela with inset map Venezuela and
map showing location of Benton Venezuelan operations]
11
<PAGE> 143
URACOA
- --------------------------------------------------------------------------------
Benton-Vinccler began a reactivation program in the Uracoa Field in 1993. Uracoa
has to date far exceeded the production and reserve potential originally
estimated, resulting in a series of expansions to the development plans for the
field and the unit. In 1992, the initial phase included the reworking of certain
existing wells in the field and selective drilling of new wells, with targeted
peak production of approximately 15,000 BOPD. During 1994, Benton-Vinccler began
drilling horizontal wells to determine whether production and reserve recovery
could be enhanced on an economical basis. The production performance of these
horizontal wells was excellent, with initial rates per well of 1,500 to 2,500
BOPD. As a result, a second phase was added to the Uracoa development program
that included an aggressive horizontal drilling program and installation of
production facilities capable of processing an additional 20,000 BOPD. Targeted
peak production was increased to 30,000 BOPD to reflect the expanded development
program.
In 1995, Benton-Vinccler drilled 19 wells, including 13 horizontal wells, and
recompleted three existing wells, compared to 11 new wells, including three
horizontal wells, and 12 recompletions in 1994. The second phase production
facilities were installed and became operational in the second quarter of the
year. As a result, 1995 production averaged over 14,900 BOPD, compared to 6,900
BOPD in 1994. Benton-Vinccler has had two drilling rigs operating continuously
since the third quarter of 1995. Production rose dramatically during the second
half of 1995, reaching an average of 20,800 BOPD in the fourth quarter. In the
first quarter of 1996, production averaged 29,100 BOPD.
A third development phase is currently underway to increase the capacity of
production facilities to 45,000 BOPD. An additional water treatment unit has
been delivered, and installation is expected to be completed early in the third
quarter of 1996. Until then, production is expected to be limited to 36,000 BOPD
due to water treatment capacity. A fourth development phase, scheduled for 1997,
will increase production capacity to 60,000 BOPD and will handle additional
production from Uracoa and new production from other fields in the South Monagas
Unit.
At year-end 1995, Uracoa was producing from a total of 15 reactivated wells and
34 new wells, 16 of which were horizontal completions. Benton-Vinccler currently
plans to drill a combined total of approximately 50 wells in 1996 and 1997,
which should fully develop the Uracoa Field. However, Benton-Vinccler believes
that there is substantial potential in and around Uracoa for additional reserves
and production not currently in the development plan.
Several sands have not been fully evaluated, and new
fault blocks and other leads identified from the
new 3-D survey could substantially extend the
development program. Benton-Vinccler plans to begin
evaluation of these new opportunities during 1996.
[PHOTO]
New well test manifold
Benton-Vinccler continued to increase efficiency and (above).
reduce costs in the Uracoa Field. Lease operating costs
averaged $1.19 per barrel in 1995 compared to $1.51 Uracoa production
per barrel in 1994, reflecting economies of scale from facilities (opposite).
increased production volumes and higher productivity
from the horizontal wells. In addition, drilling
time has been reduced by approximately 35% as a result
of incentive programs for contractors.
12
<PAGE> 144
[PHOTO -- 3-D seismic cube]
As part of the 1995 Uracoa development program, Benton-Vinccler conducted a $6
million, 67 square mile, 3-D seismic survey over the field and adjacent acreage
to the east in order to optimize development well locations and identify new
fault blocks. Above is a 3-D seismic cube extracted from the survey illustrating
the location of four producing wells from the Oficina C sand in the Uracoa
Field. The bright color illustrated on the cube is an amplitude anomaly
indicating the potential accumulation of hydrocarbons in the reservoir.
13
<PAGE> 145
[PHOTO -- Venezuelan production facilities]
<PAGE> 146
[PHOTO -- Venezuelan production facilities]
15
<PAGE> 147
TUCUPITA
- --------------------------------------------------------------------------------
Tucupita was discovered in 1945. During the following three decades, the field
produced 66 million barrels of oil, with production reaching a peak of 20,000
BOPD in the 1960's. The field was shut-in while producing approximately 3,000
BOPD in 1976. When Benton-Vinccler was originally evaluating the South Monagas
Unit, it assigned no value to this field because of its extensive production
history.
However, further analysis indicates that significant reserves may remain in the
Tucupita Field. Benton-Vinccler intends to evaluate the potential of the
Tucupita Field beginning in 1996 by drilling a pilot oil well, drilling a water
disposal well and expanding existing production facilities. Production from the
pilot oil well will be monitored for up to one year before additional
development work is commenced. Based on the performance of this pilot oil well,
and if the Company's new engineering assumptions prove to be correct, six
additional oil wells and six additional water disposal wells will be drilled,
production facilities will be further expanded, and a 26 mile pipeline to the
Uracoa Field will be constructed.
[PHOTO]
Existing Tucupita production facilities.
BOMBAL
- --------------------------------------------------------------------------------
Development of the Bombal Field, which lies between the two fields, will begin
in 1996. Currently, the development program contemplates the drilling of up to
29 wells.
OTHER
- --------------------------------------------------------------------------------
With the development of the Uracoa Field and evaluation of new seismic and well
data, additional potential has been identified in the South Monagas Unit.
Benton-Vinccler believes that there may be important new fault blocks that could
add to proven reserves.
16
<PAGE> 148
DELTA CENTRO
- --------------------------------------------------------------------------------
In January 1996, Benton and its bidding partners, The Louisiana Land and
Exploration Company and Norcen Energy Resources, were awarded the rights to
explore and develop the Delta Centro Block in Venezuela. The Company will have a
30% interest in the exploration venture, with Louisiana Land and Norcen each
owning a 35% interest. The 526,000 acre block is located approximately 10 miles
north of the South Monagas Unit.
[PHOTO--MAPS SHOWING LOCATION OF VENEZUELAN OPERATION AREAS]
The Delta Centro Block is located in an area of Venezuela that is considered to
be a significant source of hydrocarbons as evidenced by the Orinoco tar sands to
the south and the recently discovered El Furrial light oil trend to the north.
Based on its geological studies of the basins in the area, the Company's
technical staff believes that hydrocarbons migrated from the deeper Maturin
basin of Venezuela southward toward the shallower Orinoco tar belt area, and any
faults in the path of the migrating oil should have served as traps. Delta
Centro is directly in line with this migration path, making it an attractive
exploration area.
As part of the exploration agreement, the group has committed to a work program
that includes the acquisition of seismic data and the drilling of three
exploration wells. Under the terms of the tender, the consortium will invest an
estimated $60 million over the next five years to explore the tract. Because of
the block's proximity to the South Monagas Unit, the Company will be able to
apply its considerable operating experience, technical expertise and significant
database to maximize results. In addition,
both Benton and Louisiana Land are
experienced operators in the marshy
environment that covers a majority of the
block. Plans are to conduct a 3-D seismic
program in 1996 and 1997 and drill an
initial exploration well in 1997.
[PHOTO]
Aerial photo of Delta
Centro Block. The Delta Centro Block adds to Benton's
reserve and production potential in
Venezuela. From limited available seismic
data, at least 13 prospect leads have
already been identified in the block at
depths from 8,500 to 18,000 feet.
17
<PAGE> 149
HUMANITARIAN AID
- --------------------------------------------------------------------------------
Benton Oil and Gas Company has provided community assistance and humanitarian
aid in California, Venezuela and West Siberia. The projects have been sponsored
by Benton Oil and Gas and Benton-Vinccler in cooperation with New Horizons
Outreach, Inc.; SEE International, Inc.; and Direct Relief International, Inc.
These organizations are nonprofit corporations specializing in humanitarian
assistance.
The California projects have focused on
comprehensive dental care for children in
Carpinteria and Santa Barbara county public
schools who have had limited access to dental care
[PHOTO--NENTSE WOMAN in the past. Dental procedures have been performed
IN RUSSIA] on these children in various clinics as well as
comprehensive instruction in personal dental care
and prophylaxis. Procedures included root canals,
crowns, extractions and the application of cavity
preventing sealants. The field-operated clinics
enlisted the assistance of the faculty and senior
dental students of the University of Southern
California School of Dentistry.
A March 1996 eye surgical project in Maturin, Venezuela was an outreach program
for Venezuelans from the towns of Temblador, Uracoa, Tucupita and Maturin who
would not have received this surgical care through existing national health
program resources. A total of 109 surgeries were performed on 83 patients
ranging in age from two to 85 years. The cases included crossed eyes
corrections, cataract extraction with intraocular lens placement, tumor
excisions and corneal transplants. Local Venezuelan ophthalmologists worked side
by side with the Benton-Vinccler sponsored team from the United States utilizing
difficult to obtain surgical supplies provided by SEE International, Inc. The
eye surgical project was immediately followed by a medical seminar attended by
over 250 Venezuelan physicians. The faculty, sponsored by Benton-Vinccler,
included medical experts from the United States, Caracas, and Maturin. Both
projects were extremely successful and well received.
Additional humanitarian assistance has included the sponsorship and delivery of
medical supplies, prescription pharmaceuticals, intravenous fluids, medical
equipment and medical and surgical instruments.
This critically needed aid has been provided to [PHOTO]
hospitals and clinics in Tarko Sale, Purovskiy Nentse children in Tarko
District, West Siberia; Maturin, Temblador and Sale, West Siberia with
Uracoa, Monagas State, Venezuela; and Tucupita, their school director
Delta Amacuro State, Venezuela. All of these (large photo opposite).
humanitarian programs are closely coordinated Dental care photos with
with regional authorities and the governors of Santa Barbara school
each state, local medical officials and practicing children (opposite right)
physicians. Venezuelan eye surgical
program (opposite left).
Future assistance will continue because of
Benton Oil and Gas Company's commitment to
the communities in which it operates.
18
<PAGE> 150
[PHOTO--NENTSE CHILDREN; DENTAL CARE PHOTOS; VENEZUELAN EYE SURGICAL PROGRAM]
19
<PAGE> 151
CORPORATE DIRECTORY
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Executive Officers Directors
<S> <C>
A.E. Benton A.E. Benton (3)
Chairman of the Board and Chairman of the Board and
Chief Executive Officer Chief Executive Officer
Benton Oil and Gas Company
Michael B. Wray
President and Richard W. Fetzner (1)(2)
Chief Financial Officer Associate Professor
California Lutheran University
William H. Gumma
Senior Vice President Garrett A. Garrettson
Managing Director of Benton-Vinccler Chief Executive Officer and President
Spectrian Corporation
Joesph C. White
Vice President-Operations William H. Gumma
Senior Vice President
E. Sven Hagen Benton Oil and Gas Company
Vice President-Exploration and Development Managing Director Benton-Vinccler
Clarence Cottman III Bruce M. McIntyre (1)(2)(3)
Vice President-Business Development Private Investor;
Oil and Gas Consultant
David H. Pratt
Vice President-International Finance Michael B. Wray (3)
President and
Gregory S. Grabar Chief Financial Officer
Vice President-Corporate Development and Benton Oil and Gas Company
Administration
Chris C. Hickok
Vice President-Controller
Chief Accounting Officer
<FN>
(1) Member of Audit Committee
(2) Member of Compensation Committee
(3) Member of Finance Committee
</TABLE>
20
<PAGE> 152
TABLE OF CONTENTS TO FINANCIAL STATEMENTS
Selected Consolidated Financial Data 22
Management's Discussion and Analysis 23
Independent Auditors' Report 29
Consolidated Balance Sheets 30
Consolidated Statements of Operations 31
Consolidated Statements of Stockholders' Equity 32
Consolidated Statements of Cash Flows 33
Notes to Consolidated Financial Statements 35
Stockholder Information 52
21
<PAGE> 153
SELECTED CONSOLIDATED FINANCIAL DATA
<TABLE>
<CAPTION>
Years Ended December 31,
1995(5) 1994 1993 1992 1991(3)
-----------------------------------------------------------------------
(amounts in thousands, except per share data)
STATEMENT OF OPERATIONS:
- ------------------------
<S> <C> <C> <C> <C> <C>
Total revenues $ 65,068 $ 34,705 $ 7,503 $ 8,622 $ 11,513
Lease operating costs and production taxes 10,703 9,531 5,110 4,414 4,209
Depletion, depreciation and amortization 17,411 10,298 2,633 3,041 3,058
General and administrative expense 9,411 5,242 2,631 2,245 1,998
Interest expense 7,497 3,888 1,958 1,831 1,736
Litigation settlement expenses 1,673 -- -- -- --
-------- --------- -------- -------- --------
Income (loss) before income taxes and
minority interest 18,373 5,746 (4,829) (2,909) 512
Income tax expense 2,478 698 -- -- --
-------- --------- -------- -------- --------
Income (loss) before minority interest 15,895 5,048 (4,829) (2,909) 512
Minority interest 5,304 2,094 -- -- --
-------- --------- -------- -------- --------
Net income (loss) $ 10,591 $ 2,954 $ (4,829) $ (2,909) $ 512
======== ========= ======== ======== ========
Net income (loss) per common share (1) $ 0.40 $ 0.12 $ (0.26) $ (0.22) $ 0.04
Weighted average common shares
outstanding (1)(2) 26,673 24,851 18,609 12,981 11,838
</TABLE>
<TABLE>
<CAPTION>
At December 31,
1995(5) 1994 1993 1992 1991
--------------------------------------------------------------------
(amounts in thousands)
BALANCE SHEET DATA:
- -------------------
<S> <C> <C> <C> <C> <C>
Working capital (deficit) $ (2,888) $ 21,785 $ 26,635 $ 10,486 $(14,777)
Total assets 214,750 162,561 108,635 68,217 49,386
Long-term obligations, net of current portion 49,486 31,911 11,788 13,463 7,422
Stockholders' equity (4) 103,681 88,259 84,021 50,468 20,209
- ----------------------
<FN>
(1)The share information for the Company has been adjusted to reflect a
two-for-one stock split in the form of a 100% stock dividend effective
February 26, 1991.
(2)The weighted average common shares outstanding for the Company have been
adjusted for the effect of common stock equivalents for the years ended
December 31, 1995 and 1991.
(3)For the year ended December 31, 1991 the Company recorded income tax expense
of $174,000 and an extraordinary item for the utilization of loss
carryforward for the same amount.
(4) No cash dividends were paid during any period presented.
(5)The financial information related to Russia and included in the 1995
presentation contains information at, and for the nine months ended,
September 30, 1995, the end of the fiscal period for GEOILBENT. See Note 15
to the Consolidated Financial Statements.
</TABLE>
22
<PAGE> 154
MANAGEMENT'S DISCUSSION AND
ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
- --------------------------------------------------------------------------------
PRINCIPLES OF CONSOLIDATION AND ACCOUNTING METHODS
- --------------------------------------------------
The Company has included the results of operations of Benton-Vinccler in its
consolidated statement of operations since January 1, 1994 and has reflected the
50% ownership interest of Vinccler during January and February 1994 and the 20%
ownership interest of Vinccler subsequent thereto as a minority interest. Prior
to 1994, Benton-Vinccler was proportionately consolidated based on the Company's
50% ownership interest. Beginning in 1995, GEOILBENT has been included in the
consolidated financial statements based on a fiscal period ending September 30.
Results of operations in Russia reflect the twelve months ended December 31,
1993 and 1994 and the nine months ended September 30, 1995. The Company's
investment in GEOILBENT is proportionately consolidated based on the Company's
ownership interest, and for oil and gas reserve information, the Company reports
its 34% share of the reserves attributable to GEOILBENT.
The Company follows the full-cost method of accounting for its investments in
oil and gas properties. The Company capitalizes all acquisition, exploration,
and development costs incurred. The Company accounts for its oil and gas
properties using cost centers on a country by country basis. Proceeds from sales
of oil and gas properties are credited to the full-cost pools. Capitalized costs
of oil and gas properties are amortized within the cost centers on an overall
unit-of-production method using proved oil and gas reserves as audited by
independent petroleum engineers. Costs amortized include all capitalized costs
(less accumulated amortization), the estimated future expenditures (based on
current costs) to be incurred in developing proved reserves, and estimated
dismantlement, restoration and abandonment costs. See Note 1 to the Company's
Consolidated Financial Statements.
The following discussion of the results of operations and financial condition
for the years ended December 31, 1995 and 1994 and for each of the years in the
three year period ended December 31, 1995, respectively, should be read in
conjunction with the Company's Consolidated Financial Statements and related
Notes thereto.
RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
The following table presents the Company's consolidated income statement items
as a percentage of total revenues:
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
-----------------------------------------------
<S> <C> <C> <C>
Oil and Gas Sales 95.5% 92.0% 96.3%
Net Gain (Loss) on Exchange Rates 1.6 4.2 (2.8)
Investment Earnings 2.7 3.4 5.2
Other 0.2 0.4 1.3
----- ----- -----
Total Revenues 100.0 100.0 100.0
----- ----- -----
Lease Operating Costs and Production Taxes 16.4 27.4 68.1
Depletion, Depreciation and Amortization 26.8 29.7 35.1
General and Administrative 14.5 15.1 35.0
Interest 11.5 11.2 26.1
Litigation Settlement Expenses 2.6 -- --
----- ----- -----
Total Expenses 71.8 83.4 164.3
----- ----- -----
Income (Loss) Before Income Taxes and Minority Interest 28.2 16.6 (64.3)
Income Tax Expense 3.8 2.0 --
Minority Interest 8.1 6.1 --
----- ----- -----
Net Income (Loss) 16.3% 8.5% (64.3)%
===== ===== =====
</TABLE>
23
<PAGE> 155
YEARS ENDED DECEMBER 31, 1995 AND 1994
- --------------------------------------
The Company had revenues of $65.1 million for the year ended December 31, 1995.
Expenses incurred during the period consisted of lease operating costs and
production taxes of $10.7 million, depletion, depreciation and amortization
expense of $17.4 million, general and administrative expense of $9.4 million,
interest expense of $7.5 million, litigation settlement expenses of $1.7
million, income tax expense of $2.5 million and a minority interest of $5.3
million. Net income for the period was $10.6 million or $0.40 per share.
By comparison, the Company had revenues of $34.7 million for the year ended
December 31, 1994. Expenses incurred during the period consisted of lease
operating costs and production taxes of $9.5 million, depletion, depreciation
and amortization expense of $10.3 million, general and administrative expense of
$5.2 million, interest expense of $3.9 million, income tax expense of $0.7
million and a minority interest of $2.1 million. The net income for the period
was $3.0 million or $0.12 per share.
Revenues increased $30.4 million, or 87%, during the year ended December 31,
1995 compared to the corresponding period of 1994 primarily due to increased oil
sales in Venezuela. Sales quantities for the year ended December 31, 1995 from
Venezuela and Russia were 5,456,473 and 490,960 Bbls, respectively, compared to
2,519,514 and 294,364 Bbls, respectively, for the year ended December 31, 1994.
Prices per Bbl for crude oil averaged $9.01 (pursuant to terms of an operating
service agreement) from Venezuela and $12.25 from Russia for the year ended
December 31, 1995 compared to $8.52 and $11.93 from Venezuela and Russia,
respectively, for the year ended December 31, 1994. Domestic sales quantities
for the year ended December 31, 1995 were 68,975 Bbls of crude oil and
condensate and 3,784,830 Mcf of natural gas compared to 225,954 Bbls of crude
oil and 2,061,892 Mcf of natural gas for the year ended December 31, 1994.
Domestic prices for crude oil and natural gas averaged $15.79 per Bbl and $1.77
per Mcf during the year ended December 31, 1995 compared to $14.46 per Bbl and
$1.79 per Mcf during the year ended December 31, 1994. Revenues for the year
ended December 31, 1995 were reduced by a loss of $0.7 million related to a
commodity hedge agreement compared to a loss of $0.3 million in 1994. Revenues
for the year ended December 31, 1995 were increased by a foreign exchange gain
of $1.0 million compared to a gain of $1.4 million in 1994.
Lease operating costs and production taxes increased $1.2 million, or 12%,
during the year ended December 31, 1995 compared to 1994 primarily due to the
growth of the Company's Venezuelan operations, partially offset by the sale of
certain of the Company's interests in the West Cote Blanche Bay Field.
Depletion, depreciation and amortization increased $7.1 million, or 69%, during
the year ended December 31, 1995 compared to the corresponding period in 1994
primarily due to the increased oil production in Venezuela. Depletion expense
per barrel of oil equivalent produced from Venezuela, United States and Russia
during the year ended December 31, 1995 was $2.09, $5.98 and $3.08,
respectively, compared to $1.98, $7.46 and $2.85, respectively, during the
previous year. The increase in general and administrative expenses of $4.2
million, or 80%, during the year ended December 31, 1995 compared to 1994 was
primarily due to the Company's increased corporate activity associated with the
growth of the Company's business. The Company incurred litigation settlement
expenses of $1.7 million during the year ended December 31, 1995 as a result of
a settlement agreement reached with investors in partnerships which were
sponsored by a third party. See Note 5 to the Company's Consolidated Financial
Statements. Interest expense increased $3.6 million, or 93%, in 1995 compared to
1994 primarily due to increased borrowing to fund operations in Venezuela and
Russia. Income tax expense increased $1.8 million, or 255%, during the year
ended December 31, 1995 compared to 1994 primarily due to increased income taxes
in Venezuela and Russia. The net income attributable to the minority interest
increased $3.2 million, or 153%, for 1995 compared to 1994 as a result of the
increased profitability of Benton-Vinccler's operations in Venezuela.
YEARS ENDED DECEMBER 31, 1994 AND 1993
- --------------------------------------
The Company had revenues of $34.7 million for the year ended December 31, 1994.
Expenses incurred during the period consisted of lease operating costs and
production taxes of $9.5 million, depletion, depreciation and amortization
expense of $10.3 million, general and administrative expense of $5.2 million,
interest expense of $3.9 million, income tax expense of $0.7 million, and a
minority interest of $2.1 million. The net income for the period was $3.0
million or $0.12 per share.
By comparison, the Company had revenues of $7.5 million for the year ended
December 31, 1993. Expenses incurred during the period consisted of lease
operating costs and production taxes of $5.1 million, depletion, depreciation
and amortization expense of $2.6 million, general and administrative expense of
$2.6 million and interest expense of $2.0 million. The net loss for the period
was $4.8 million or $0.26 per share.
24
<PAGE> 156
Revenues increased $27.2 million, or 362%, during the year ended December 31,
1994 compared to the corresponding period of 1993 primarily due to increased
revenues from Benton-Vinccler's operations in Venezuela, the Company's increased
ownership of Benton-Vinccler, the initiation of oil sales in Russia in late
1993, gain on exchange rates in Venezuela and Russia, gas sales from the #831
well in the West Cote Blanche Bay Field and increased investment earnings. The
increase was partially offset by lower oil sales from the West Cote Blanche Bay
Field, lower sales prices and the sale of the Company's interest in the Pershing
property in 1993. Sales quantities for the year ended December 31, 1994 from
Venezuela and Russia were 2,519,514 and 294,364 Bbls, respectively, compared to
160,425 and 28,263 Bbls, respectively, for the year ended December 31, 1993.
Prices per Bbl for crude oil averaged $8.52 (pursuant to terms of an operating
service agreement) from Venezuela and $11.93 from Russia for the year ended
December 31, 1994 compared to $8.31 and $11.46 from Venezuela and Russia,
respectively, for the year ended December 31, 1993. Domestic sales quantities
for the year ended December 31, 1994 were 225,954 Bbls of crude oil and
condensate and 2,061,892 Mcf of natural gas compared to 292,266 Bbls of crude
oil and condensate and 232,677 Mcf of natural gas for the year ended December
31, 1993. Domestic prices for crude oil and natural gas averaged $14.46 per Bbl
and $1.79 per Mcf during the year ended December 31, 1994 compared to $17.30 per
Bbl and $2.19 per Mcf during the year ended December 31, 1993. The Company has
realized net foreign exchange gains during 1994 primarily as a result of the
decline in the value of the Venezuelan bolivar and Russian rouble during periods
when Benton-Vinccler and GEOILBENT had substantial net monetary liabilities
denominated in bolivares and roubles.
Lease operating costs and production taxes increased $4.4 million, or 87%,
during the year ended December 31, 1994 compared to 1993 primarily due to the
growth of the Company's Venezuelan and Russian operations and were partially
offset by the sale of the Company's interest in certain property in 1993 and
reduced operating costs at the West Cote Blanche Bay Field. Depletion,
depreciation and amortization increased $7.7 million, or 291%, during the year
ended December 31, 1994 compared to 1993 primarily due to increased oil
production in Venezuela, gas sales from the #831 well in the West Cote Blanche
Bay Field and the initiation of oil production in Russia. Depletion expense per
BOE produced from the United States, Venezuela and Russia during the year ended
December 31, 1994 was $7.46, $1.98 and $2.85, respectively, compared to $6.47,
$1.43 and $3.51 during 1993. The increase in general and administrative expense
of $2.6 million, or 99%, in 1994 compared to 1993 was primarily due to the
growth of and the Company's increased ownership of Benton-Vinccler, the
commencement of operations in Russia and increased corporate activity associated
with the growth of the Company's business. Interest expense increased $1.9
million, or 99%, in 1994 compared to 1993 primarily due to increased borrowing
to fund operations in Venezuela and Russia.
The Company has included the results of operations of Benton-Vinccler in its
consolidated statement of income since January 1, 1994 and has reflected the 50%
ownership interest of Vinccler during January and February and the 20% ownership
interest of Vinccler thereafter as a minority interest. For the year ended
December 31, 1994, net income attributable to the minority interest was $2.1
million.
INTERNATIONAL OPERATIONS
- --------------------------------------------------------------------------------
The Company's costs of operations in Venezuela and Russia in 1993, 1994 and 1995
include certain fixed or minimum office, administrative, legal and personnel
related costs and certain start up costs, including short term facilities
rentals, organizational costs, contract services and consultants. Such costs are
expected to grow over time as operations increase. In the last two years such
costs have become less significant on a unit of production basis, but such costs
can be expected to fluctuate in the future based upon a number of factors. In
Venezuela, for the year ended December 31, 1993, the operating costs and general
and administrative expenses were $7.26 and $2.25 per Bbl, respectively. For the
year ended December 31, 1995, the operating costs and general and administrative
expenses for Venezuela decreased to $1.19 and $0.63 per Bbl, respectively. The
Company's Venezuelan operations grew considerably during 1994 and 1995, and are
expected to continue to grow, and its operating costs and general and
administrative expenses are expected to increase both in the aggregate and on a
per unit basis. In Russia, for the year ended December 31, 1993, the operating
costs and general and administrative expenses were $16.22 and $12.96 per Bbl,
respectively, decreasing to $5.63 and $1.16 per Bbl, respectively, for the year
ended December 31, 1995. The Company's Russian operations grew less
significantly than the Venezuelan operations during 1994 and 1995. Capital
expenditures through 1993 in both Venezuela and Russia focused on start-up
infrastructure items such as roads, pipelines, and facilities rather than
drilling. Beginning in 1994, a higher proportion of capital expenditures have
been and will continue to be spent on drilling and production activities.
25
<PAGE> 157
As a private contractor, Benton-Vinccler is subject to a statutory income tax
rate of 34%. However, Benton-Vinccler reported significantly lower effective tax
rates for 1994 and 1995 due to significant non-cash tax deductible expenses
resulting from devaluations in Venezuela when Benton-Vinccler had net monetary
liabilities in U.S. dollars. The Company cannot predict the timing or impact of
future devaluations in Venezuela. Any Company operations related to Delta Centro
will be subject to profit sharing, royalties and oil and gas industry taxation.
GEOILBENT is subject to a statutory income tax rate of 35%. GEOILBENT has also
been subject to various other tax burdens, including an oil export tariff. The
export tariff was 30 ECU's per ton through 1995, although GEOILBENT obtained an
exemption from such tariff for 1995. The tariff was reduced to 20 ECU's per ton
in January 1996, and Russia has recently announced that effective July 1996, oil
export tariffs will be terminated. The Company anticipates that the tariff on
oil exporters may be replaced by an excise, pipeline or other tax levied on all
oil producers, but it is currently unclear how such other tax rates and regimes
will be set and administered.
EFFECTS OF CHANGING PRICES, FOREIGN EXCHANGE RATES AND INFLATION
- --------------------------------------------------------------------------------
The Company's results of operations and cash flow are affected by changing oil
and gas prices. However, the Company's Venezuelan revenues are based on a fee
adjusted quarterly by the percentage change of a basket of crude oil prices
instead of by absolute dollar changes, which dampens both any upward and
downward effects of changing prices on the Company's Venezuelan revenues and
cash flows. If the price of oil and gas increases, there could be an increase in
the cost to the Company for drilling and related services because of increased
demand, as well as an increase in revenues. Fluctuations in oil and gas prices
may affect the Company's total planned development activities and capital
expenditure program.
Effective May 1, 1994, the Company entered into a commodity hedge agreement with
Morgan Guaranty Trust Company of New York ("Morgan Guaranty") designed to reduce
a portion of the Company's risk from oil price movements. Pursuant to the hedge
agreement, with respect to the period from May 1, 1994 through the end of 1996,
the Company will receive from Morgan Guaranty $16.82 per Bbl and the Company
will pay to Morgan Guaranty the average price per Bbl of West Texas Intermediate
Light Sweet Crude Oil ("WTI") determined in the manner set forth in the hedge
agreement. Such payments will be made with respect to production of 1,000 Bbls
of oil per day for 1994, 1,250 Bbls of oil per day for 1995, and 1,500 Bbls of
oil per day for 1996. During the quarter ended December 31, 1995, the average
price per Bbl of WTI was $18.12 and the Company's net exposure for the quarter
was $0.1 million. The Company's total exposure for the year ended December 31,
1995, under the hedge agreement was $0.7 million. The Company's oil production
is not materially affected by seasonality. The returns under the hedge agreement
are affected by world-wide crude oil prices, which are subject to wide
fluctuation in response to a variety of factors that are beyond the control of
the Company.
There are presently no restrictions in either Venezuela or Russia that restrict
converting U.S. dollars into local currency and no exchange controls that
restrict conversion of local currency into U.S. dollars.
Within the United States, inflation has had a minimal effect on the Company, but
is potentially an important factor in results of operations in Venezuela and
Russia. With respect to Benton-Vinccler and GEOILBENT, substantially all of the
sources of funds, including the proceeds from oil sales, the Company's
contributions and credit financings, are denominated in U.S. dollars, while
local transactions in Russia and Venezuela are conducted in local currency.
Following the announcement of Venezuela's preliminary loan accord with the IMF
and the lifting of exchange controls, inflation will likely rise temporarily in
Venezuela and could be expected to have an adverse effect on Benton-Vinccler.
During the year ended December 31, 1995, the Company realized net foreign
exchange gains, primarily as a result of the decline in the value of the
Venezuelan bolivar and the Russian rouble during periods when Benton-Vinccler
and GEOILBENT had substantial net monetary liabilities denominated in bolivares
and roubles. During the year ended December 31, 1995, the Company's net foreign
exchange gains attributable to its Venezuelan operations were $1.0 million and
net foreign exchange losses attributable to its Russian operations were $0.1
million. However, there are many factors affecting foreign exchange rates and
resulting exchange gains and losses, many of which are beyond the influence of
the Company. The Company has recognized significant exchange gains and losses in
the past, resulting from fluctuations in the relationship of the Venezuelan and
Russian currencies to the U.S. dollar. It is not possible to predict the extent
to which the Company may be affected by future changes in exchange rates and
exchange controls.
26
<PAGE> 158
CAPITAL RESOURCES AND LIQUIDITY
- --------------------------------------------------------------------------------
The oil and gas industry is a highly capital intensive business. The Company
requires capital principally to fund the following costs: (i) drilling and
completion costs of wells and the cost of production and transportation
facilities; (ii) geological, geophysical and seismic costs; and (iii)
acquisition of interests in oil and gas properties. The amount of available
capital will affect the scope of the Company's operations and the rate of its
growth.
The net funds raised and/or used in each of the operating, investing and
financing activities for each of the years in the three year period ended
December 31, 1995 are summarized in the following table and discussed in further
detail below:
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
-----------------------------------------------
(amounts in thousands)
<S> <C> <C> <C>
Net cash provided by (used in)
operating activities $ 32,349 $ 13,462 $ (1,790)
Net cash used in investing activities (53,644) (55,078) (18,619)
Net cash provided by financing
activities 13,282 19,500 43,044
-------- --------- --------
Net increase (decrease) in cash $ (8,013) $ (22,116) $ 22,635
======== ========= ========
</TABLE>
At December 31, 1995, the Company had current assets of $51.6 million (including
$19.3 million of cash restricted as collateral for a loan to Benton-Vinccler),
and current liabilities of $54.5 million (including a $19.3 million loan
collateralized by restricted cash), resulting in a working capital deficit of
$2.9 million and a current ratio of .95:1. This compares to the Company's
working capital of $21.8 million at December 31, 1994. The decrease of $24.7
million was due primarily to the use of working capital for capital expenditures
in Venezuela.
CASH FLOW FROM OPERATING ACTIVITIES. During 1995 and 1994, net cash provided by
operating activities was approximately $32.4 million and $13.5 million,
respectively, and during 1993, net cash used in operating activities was
approximately $1.8 million. Cash flow from operating activities increased by
$18.9 million and $15.3 million in 1995 and 1994, respectively, over the prior
year due primarily to increased oil production in Venezuela.
CASH FLOW FROM INVESTING ACTIVITIES. During 1995, 1994 and 1993, the Company had
drilling and production related capital expenditures of approximately $68.3
million, $39.6 million and $26.2 million, respectively. Of the 1995
expenditures, $49.0 million was attributable to the development of the South
Monagas Unit in Venezuela, $12.4 million related to the development of the North
Gubkinskoye Field in Russia, $6.0 million related to drilling activity in the
West Cote Blanche Bay, Rabbit Island and Belle Isle Fields in Louisiana, and
$0.9 million was attributable to other projects. The Company also sold certain
oil and gas properties for net proceeds of approximately $15.4 million, $5.8
million and $7.8 million in 1995, 1994 and 1993, respectively.
In April 1996, the Company sold to Shell all of its interests in the West Cote
Blanche Bay, Rabbit Island and Belle Isle Fields for a purchase price of $35.4
million. Proceeds of the sale will be used to repay debt as described below and
for working capital purposes in Venezuela and other international activities.
CASH FLOW FROM FINANCING ACTIVITIES. On June 30, 1995, the Company issued $20
million in senior unsecured notes due June 30, 2007, with interest at 13% per
annum, payable semi-annually on June 30 and December 31. Annual principal
payments of $4 million are due on June 30 of each year beginning on June 30,
2003. Early payment of the notes would result in a substantial prepayment
premium. The note agreement contains financial covenants including a minimum
ratio of current assets to current liabilities and a maximum ratio of funded
liabilities to net worth and to domestic oil and gas reserves. The note
agreement also provides for limitations on liens, additional indebtedness,
certain capital expenditures, dividends, sales of assets and mergers.
Additionally, in connection with the issuance of the notes, the Company issued
warrants entitling the holder to purchase 125,000 shares of common stock at
$17.09 per share, subject to adjustment in certain circumstances, that are
exercisable on or before June 30, 2007. Upon consummation of the sale of the
U.S. properties to Shell, the Company refinanced these senior unsecured notes
and paid a prepayment premium of approximately $7.5 million. The holders of the
senior notes provided consent to the sale of the U.S. properties and such
consent requires payment of the notes on or before June 30, 1996.
27
<PAGE> 159
On September 30, 1994, the Company issued $15 million in senior unsecured notes
due September 30, 2002, with interest at 13% per annum. The note agreement
contained financial covenants and provided for limitations on sales of assets.
Upon consummation of the sale of the U.S. properties to Shell, the Company
prepaid the outstanding principal and accrued interest on these senior notes,
with a prepayment premium of approximately $3.2 million.
On December 27, 1994, the Company entered into a revolving secured credit
facility with a commercial bank. Under the terms of the credit agreement, the
Company could borrow up to $15 million, with the initial available principal
limited to $10 million. The credit facility was secured by the U.S. properties.
The Company repaid the principal outstanding of approximately $5 million, with
accrued interest, and made a payment for the net profits interest of $1.8
million upon closing the sale of the U.S. properties.
In February 1994, the Company and Benton-Vinccler entered into a six month loan
arrangement with Morgan Guaranty to repay commercial paper and for working
capital requirements, which has subsequently been renewed on a monthly basis.
Under such arrangement, Benton-Vinccler may borrow up to $25 million, of which
$10 million may be borrowed on a revolving basis. Borrowings under this loan
arrangement are secured by cash collateral in the form of a time deposit from
the Company. The loan arrangement contains no restrictive covenants and no
financial ratio requirements. The principal amount of such loan outstanding at
December 31, 1995 was $19.3 million. Benton-Vinccler can borrow an additional
$5.7 million under the loan arrangement if the Company provides a time deposit
to secure such additional borrowings.
In October 1995, the Company and GEOILBENT entered into a loan arrangement with
Morgan Guaranty for working capital requirements. Under such arrangement,
GEOILBENT may borrow up to $10 million on a revolving basis. Borrowings under
this loan arrangement are secured by cash collateral in the form of a time
deposit by the Company. The loan arrangement contains no restrictive covenants
and no financial ratio requirements. The principal amount of such loan
outstanding at December 31, 1995 was $0.6 million.
On March 14, 1996, the Company accepted a commitment from Morgan Guaranty Trust
Company for a $50 million facility secured by payments made under the operating
service agreement with Lagoven. Availability of the facility is subject to
agreement on specific terms and completion of loan documentation. Of the
proposed facility, $18 million will represent a 5-year standby letter of credit
for performance under the Delta Centro exploration agreements. If the facility
is completed, any loans drawn on the $32 million, 12-month credit facility will
bear interest for the first six months of the loan at an annual rate of LIBOR
plus 3% and for the second six months of the loan at an annual rate of LIBOR
plus 3.75%. The loan agreement is expected to contain financial covenants and
limitations customary in similar loan transactions. In connection with the loan
agreement, the Company has agreed to pay to Morgan Guaranty an arrangement fee.
The Company expects 1996 capital expenditures to be approximately $100 million,
including $12 million in expenditures for Russia (net to the Company's
interest), which is dependent on proposed EBRD or other financing, which may or
may not be obtained. Funding is expected to come from the issuance of debt or
equity securities, cash flow from operations, sales of property interests, or
project and trade financing sources. There can be no assurance that such
financing will become available under terms and conditions acceptable to the
Company, which may result in reduced capital expenditures in the Company's
principal areas of operations.
28
<PAGE> 160
INDEPENDENT AUDITORS' REPORT
- --------------------------------------------------------------------------------
Board of Directors and Stockholders
Benton Oil and Gas Company
Carpinteria, California
We have audited the accompanying consolidated balance sheets of Benton Oil and
Gas Company and subsidiaries (the "Company") as of December 31, 1995 and 1994,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1995.
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, such consolidated financial statements present fairly, in all
material respects, the financial position of Benton Oil and Gas Company and
subsidiaries as of December 31, 1995 and 1994, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1995 in conformity with generally accepted accounting principles.
/s/ DE LOITTE & TOUCHE LLP
Los Angeles, California
March 20, 1996
29
<PAGE> 161
BENTON OIL AND GAS COMPANY
- ---------------------------CONSOLIDATED BALANCE SHEETS--------------------------
<TABLE>
<CAPTION>
December 31,
1995 1994
------------------------------------------
ASSETS
- ------
<S> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents $ 6,179,998 $ 14,192,568
Restricted cash (Note 4) 20,314,000 19,550,000
Accounts receivable:
Accrued oil and gas revenue 22,069,217 9,357,782
Joint interest and other (Note 11) 2,869,962 3,880,808
Property held for sale (Note 2) 14,887,700
Prepaid expenses and other 214,622 563,839
-------------- ------------
TOTAL CURRENT ASSETS 51,647,799 62,432,697
OTHER ASSETS (Notes 3 and 11) 3,434,760 1,305,997
PROPERTY AND EQUIPMENT (Notes 2, 3, 5, 10, 14 and 15):
Oil and gas properties (full cost method - costs of
$17,925,371 and $16,695,284 excluded from
amortization in 1995 and 1994, respectively) 177,110,550 117,454,164
Furniture and fixtures 2,539,233 1,439,484
-------------- ------------
179,649,783 118,893,648
Accumulated depletion and depreciation (19,982,244) (20,071,223)
-------------- ------------
159,667,539 98,822,425
-------------- ------------
$ 214,750,098 $ 162,561,119
============== =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable:
Revenue distribution $ 2,692,751 $ 594,782
Trade and other 19,777,018 11,426,105
Accrued interest payable, payroll and related taxes 1,687,648 1,199,096
Income taxes payable 1,039,166
Short term borrowings (Note 4) 21,905,480 21,035,401
Current portion of long term debt (Notes 3 and 14) 7,433,339 6,392,114
-------------- -------------
TOTAL CURRENT LIABILITIES 54,535,402 40,647,498
LONG TERM DEBT (Notes 3 and 14) 49,486,306 31,911,164
MINORITY INTEREST (Note 10) 7,047,791 1,743,660
COMMITMENTS AND CONTINGENCIES (Notes 5, 14 and 15)
STOCKHOLDERS' EQUITY (Notes 2, 3, 7, 8, and 10):
Preferred stock, par value $0.01 a share;
authorized 5,000,000 shares; outstanding, none
Common stock, par value $0.01 a share;
authorized 40,000,000 shares; issued and
outstanding 25,508,605 and 24,899,848 shares at
December 31, 1995 and 1994, respectively 255,086 248,998
Additional paid-in capital 97,745,794 92,921,115
Retained earnings (deficit) 5,679,719 (4,911,316)
-------------- -------------
TOTAL STOCKHOLDERS' EQUITY 103,680,599 88,258,797
-------------- -------------
$ 214,750,098 $ 162,561,119
============== ==============
</TABLE>
See notes to consolidated financial statements.
30
<PAGE> 162
BENTON OIL AND GAS COMPANY
- ----------------------CONSOLIDATED STATEMENTS OF OPERATIONS---------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
-------------------------------------------------
REVENUES
<S> <C> <C> <C>
Oil and gas sales (Notes 13 and 15) $ 62,156,694 $ 31,942,810 $ 7,222,310
Net gain (loss) on exchange rates 997,820 1,445,307 (206,481)
Investment earnings 1,770,512 1,180,824 393,843
Other 142,632 135,865 94,124
------------ ------------ -----------
65,067,658 34,704,806 7,503,796
------------ ------------ -----------
EXPENSES
Lease operating costs and production taxes 10,702,797 9,531,264 5,110,264
Depletion, depreciation and amortization 17,411,089 10,298,112 2,632,924
General and administrative 9,410,187 5,241,295 2,631,445
Interest 7,497,187 3,887,961 1,957,753
Litigation settlement expenses (Note 5) 1,673,272
------------ ------------ -----------
46,694,532 28,958,632 12,332,386
------------ ------------ -----------
INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST 18,373,126 5,746,174 (4,828,590)
INCOME TAX EXPENSE (Note 6) 2,477,960 697,802
------------ ------------ -----------
INCOME (LOSS) BEFORE MINORITY INTEREST 15,895,166 5,048,372 (4,828,590)
MINORITY INTEREST (Note 10) 5,304,131 2,094,211
------------ ------------ -----------
NET INCOME (LOSS) $ 10,591,035 $ 2,954,161 $(4,828,590)
============ ============ ============
NET INCOME (LOSS) PER COMMON SHARE (Note 12) $ 0.40 $ 0.12 $ (0.26)
============ ============ ===========
</TABLE>
See notes to consolidated financial statements.
31
<PAGE> 163
BENTON OIL AND GAS COMPANY
- -----------------CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY----------------
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
<TABLE>
<CAPTION>
COMMON ADDITIONAL RETAINED
SHARES COMMON PAID-IN EARNINGS
ISSUED STOCK CAPITAL (DEFICIT) TOTAL
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 17,441,397 $ 174,414 $ 53,330,742 $ (3,036,887) $ 50,468,269
Issuance of common shares:
Exercise of warrants 2,500 25 18,225 18,250
Exercise of stock options 284,211 2,842 540,490 543,332
Sale of common stock 7,000,000 70,000 35,585,406 35,655,406
Redeemable common stock 2,022,323 2,022,323
Retirement of stock (51,260) (513) (513)
Compensation expense
attributed to stock options 142,420 142,420
Net loss for the year (4,828,590) (4,828,590)
---------- --------- ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1993 24,676,848 246,768 91,639,606 (7,865,477) 84,020,897
Issuance of common shares:
Exercise of stock options 23,000 230 83,509 83,739
Acquisitions 200,000 2,000 1,198,000 1,200,000
Net income for the year 2,954,161 2,954,161
---------- --------- ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1994 24,899,848 248,998 92,921,115 (4,911,316) 88,258,797
Issuance of common shares:
Exercise of warrants 3,155 32 28,663 28,695
Exercise of stock options 272,580 2,726 1,335,330 1,338,056
Conversion of notes and
debentures 333,022 3,330 3,506,713 3,510,043
Securities registration costs (46,027) (46,027)
Net income for the year 10,591,035 10,591,035
---------- --------- ------------ ------------ ------------
BALANCE AT DECEMBER 31, 1995 25,508,605 $ 255,086 $ 97,745,794 $ 5,679,719 $103,680,599
========== ========= ============ ============ ============
</TABLE>
See notes to consolidated financial statements.
32
<PAGE> 164
BENTON OIL AND GAS COMPANY
- ----------------------CONSOLIDATED STATEMENTS OF CASH FLOWS---------------------
<TABLE>
<CAPTION>
Years Ended December 31,
1995 1994 1993
--------------------------------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES:
<S> <C> <C> <C>
Net Income (loss) $ 10,591,035 $ 2,954,161 $ (4,828,590)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities:
Depletion, depreciation and amortization 17,411,089 10,298,112 2,632,924
Compensation expense attributed to stock options 142,420
Net earnings from limited partnerships (57,685) (63,486) (106,230)
Amortization of financing costs 184,447 114,311 139,444
Interest paid in stock 20,145
Loss on disposal of assets 16,211
Minority interest in undistributed earnings of subsidiary 5,304,131 2,094,211
Increase in accounts receivable (12,882,072) (10,384,670) (1,465,725)
(Increase) decrease in prepaid expenses and other 349,217 (84,905) (288,217)
Increase in accounts payable 9,905,365 7,974,335 1,759,747
Increase in accrued interest payable, payroll
and related taxes 488,552 560,720 204,117
Increase in income taxes payable 1,039,166
------------ ------------- ------------
TOTAL ADJUSTMENTS 21,758,421 10,508,628 3,038,625
NET CASH PROVIDED BY (USED IN) ------------ ------------- -------------
OPERATING ACTIVITIES 32,349,456 13,462,789 (1,789,965)
------------ ------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 15,408,368 5,803,215 7,822,120
Additions of property and equipment (68,288,101) (39,631,547) (26,169,581)
Increase in restricted cash (764,000) (19,250,000) (300,000)
Distributions from limited partnerships 502,167 28,667
Payment for purchase of Benton-Vinccler, net of
cash acquired (2,501,973)
------------ ------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (53,643,733) (55,078,138) (18,618,794)
------------ ------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from sale of common stock 36,120,000
Direct offering costs (464,594)
Net proceeds from exercise of stock options and warrants 1,319,767 83,740 561,582
Proceeds from issuance of notes payable 22,157,500 21,360,000
Proceeds from short term borrowings 2,400,000 23,217,775 7,668,588
(Increase) decrease in other assets (596,224) (455,358) 3,460
Payments on short term borrowings and notes payable (11,999,336) (24,706,358) (672,230)
Deficiency payments on redeemable common stock (172,917)
------------ ------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 13,281,707 19,499,799 43,043,889
------------ ------------- ------------
NET INCREASE (DECREASE) IN CASH (8,012,570) (22,115,550) 22,635,130
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 14,192,568 36,308,118 13,672,988
------------ ------------- ------------
CASH AND CASH EQUIVALENTS AT END OF YEAR $ 6,179,998 $ 14,192,568 $ 36,308,118
============ ============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the year for interest expense $ 7,011,623 $ 3,299,189 $ 1,838,848
============ ============= ============
Cash paid during the year for income taxes $ 1,885,291 $ 715,507 --
============ ============= ============
</TABLE>
33
<PAGE> 165
BENTON OIL AND GAS COMPANY
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
- --------------------------------------------------------------------------------
During the year ended December 31, 1995, $1,393,000 of the Company's 8%
convertible notes and $2,118,000 of the Company's 8% convertible debentures were
retired in exchange for 118,785 and 214,237 shares of the Company's common
stock, respectively.
During the year ended December 31, 1995, the Company financed the purchase of
oil and gas equipment and services in the amount of $10,384,809 and leased
office equipment in the amount of $54,473. Also during 1995, the Company
acquired residential real estate for $1,725,000 in exchange for accounts and
notes receivable from an officer of the Company totaling $1,181,483 resulting in
an account payable of $543,517 (see Note 11).
During the year ended December 31, 1994, the Company converted $143,658 of
accounts payable into a note payable, financed the purchase of computer
equipment in the amount of $105,000 and financed the purchase of oil and gas
equipment in the amount of $1,733,675.
On March 4, 1994, the Company acquired capital stock from Vinccler representing
an additional 30% ownership interest in Benton-Vinccler for $3 million in cash,
$10 million in non-interest bearing notes payable (with a present value of $9.2
million assuming a 10% interest rate) and 200,000 shares of the Company's common
stock. The excess of the purchase price over the net book value of assets
acquired was $13,880,100, which was allocated to oil and gas properties.
During the year ended December 31, 1993, the Company converted $2,113,429 of
accounts payable into a note payable and entered into capital lease agreements
for the purchase of furniture and fixtures in the amount of $79,521.
See notes to consolidated financial statements.
34
<PAGE> 166
BENTON OIL AND GAS COMPANY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
- --------------------------------------------------------------------------------
ORGANIZATION
Benton Oil and Gas Company (the "Company") engages in the exploration,
development, production and management of oil and gas properties.
The Company and its subsidiary, Benton Oil and Gas Company of Louisiana,
participated as the managing general partner of three oil and gas limited
partnerships formed during 1989 through 1991. Under the provisions of the
limited partnership agreements, the Company received compensation as stipulated
therein, and functioned as an agent for the partnerships to arrange for the
management, drilling, and operation of properties, and assumed customary
contingent liabilities for partnership obligations. In November 1995, the
Company made an offer to holders of the limited partnership interests to
exchange their interests for an aggregate of 168,362 shares of common stock and
warrants to purchase 587,783 shares of common stock at $11 per share. The
exchange was completed in January 1996 and the partnerships were liquidated (see
Note 14).
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The Company's investments in limited partnerships, the Russia
joint venture ("GEOILBENT") and the Venezuela joint venture (through December
31, 1993) are proportionately consolidated based on the Company's ownership
interest. Effective January 1, 1994, the Venezuela joint venture was
incorporated and, as a result of the Company's acquisition of additional capital
stock of such corporation (see Note 10), has been fully consolidated. Beginning
in 1995, GEOILBENT (owned 34% by the Company) has been included in the
consolidated financial statements based on a fiscal period ending September 30.
This change was made to provide adequate time for the accumulation and review of
financial information from the joint venture for both quarterly and annual
reporting purposes. This change did not have a material effect on the
consolidated financial statements (see Note 15). All material intercompany
profits, transactions and balances have been eliminated.
CASH AND CASH EQUIVALENTS
Cash equivalents include money market funds and short term certificates of
deposit with original maturity dates of less than three months.
ACCOUNTS RECEIVABLE
The Company's accounts receivable are considered fully collectible; therefore,
no allowance is considered necessary.
OTHER ASSETS
Other assets consist principally of costs associated with the issuance of long
term debt and at December 31, 1995 residential real estate held for sale which
the Company expects to sell in 1996. Debt issue costs are amortized on a
straight-line basis over the life of the debt.
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with the acquisition, exploration,
and development of oil and gas reserves are capitalized as incurred, including
exploration overhead of $2,282,194, $1,696,330 and $1,736,678 for the years
ended December 31, 1995, 1994 and 1993, respectively. Only overhead which is
directly identified with acquisition, exploration or development activities is
capitalized. All costs related to production, general corporate overhead and
similar activities are expensed as incurred. The costs of oil and gas properties
are accumulated in cost centers on a country by country basis, subject to a cost
center ceiling (as defined by the Securities and Exchange Commission).
All capitalized costs of oil and gas properties (excluding unevaluated property
acquisition and exploration costs) and the estimated future costs of developing
proved reserves, are depleted over the estimated useful lives of the properties
by application of the unit-of-production method using only proved oil and gas
reserves. Depletion expense attributable to the Venezuelan cost center for the
years ended December 31, 1995, 1994 and 1993 was $11,392,777, $4,998,213 and
35
<PAGE> 167
BENTON OIL AND GAS COMPANY
$229,080 ($2.09, $1.98 and $1.43 per equivalent barrel), respectively. Depletion
expense attributable to the Russian cost center for the years ended December 31,
1995, 1994 and 1993 was $1,512,821, $837,818 and $99,207 ($3.08, $2.85 and $3.51
per equivalent barrel), respectively. Depletion expense attributable to the
United States cost center for the years ended December 31, 1995, 1994 and 1993
was $4,187,440, $4,247,303 and $2,142,133 ($5.98, $7.46 and $6.47 per equivalent
barrel), respectively. Depreciation of furniture and fixtures is computed using
the straight-line method, with depreciation rates based upon the estimated
useful life applied to the cost of each class of property. Depreciation expense
was $310,038, $185,336 and $123,623 for the years ended December 31, 1995, 1994
and 1993, respectively.
TAXES ON INCOME
Deferred income taxes reflect the net tax effects, calculated at currently
effective rates, of (a) future deductible/taxable amounts attributable to events
that have been recognized on a cumulative basis in the financial statements and
(b) operating loss and tax credit carryforwards. A valuation allowance is
recorded, if necessary, to reduce net deferred income tax assets to the amount
expected to be recoverable.
FOREIGN CURRENCY
The Company has significant operations outside of the United States, principally
in Russia and Venezuela. Both Russia and Venezuela are considered highly
inflationary economies and, as a result, operations in those countries are
remeasured in United States dollars and any currency gains or losses are
recorded in the statement of operations. The Company attempts to manage its
operations in a manner to reduce its exposure to foreign exchange losses;
however, there are many factors which affect foreign exchange rates and
resulting exchange gains and losses, many of which are beyond the influence of
the Company. The Company has recognized significant exchange gains and losses in
the past, resulting from fluctuations in the relationship of the Venezuelan and
Russian currencies to the United States dollar. It is not possible to predict
the extent to which the Company may be affected by future changes in exchange
rates.
FAIR VALUE OF FINANCIAL INSTRUMENTS
The Company's financial instruments consist primarily of cash and cash
equivalents, accounts receivable and payable, commercial paper and other short
term borrowings and debt instruments. In addition, in 1994 the Company entered
into a commodity hedge agreement (see Note 15). The book values of all financial
instruments, other than debt instruments, are representative of their fair
values due to their short term maturity. The book values of the Company's debt
instruments, except the convertible subordinated debentures and notes, are
considered to approximate their fair values because the interest rates of these
instruments are based on current rates offered to the Company. Based on the last
trading sale price on December 31, 1995 and 1994, the convertible subordinated
debentures had a fair value of approximately $5,948,000 and $6,685,000,
respectively. As discussed in Note 3, substantially all of the notes were
converted early in 1996. There was no active market for the convertible
subordinated notes. Based on discounting the future cash flows related to the
notes at interest rates currently offered to the Company, approximately 13%, the
notes would have had a fair value of approximately $3,600,000 at December 31,
1994. The fair value of the hedge agreement is the estimated amount the Company
would have to pay to terminate the agreement, taking into account current oil
prices and the current creditworthiness of the hedge counterparties. The
estimated termination cost associated with the hedge agreement at December 31,
1995 and 1994 is approximately $834,000 and $1,132,000, respectively.
STOCK OPTIONS
Statement of Financial Accounting Standards No. 123 regarding accounting for
stock-based compensation is effective for the Company beginning January 1, 1995.
SFAS 123 requires expanded disclosures of stock-based compensation arrangements
and encourages (but does not require) compensation cost to be measured based on
the fair value of the equity instrument awarded. The Company will continue to
apply APB Opinion No. 25 to its stock-based compensation awards to employees and
will disclose the required pro forma effect on net income and earnings per
share.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
RECLASSIFICATIONS
Certain items in 1994 and 1993 have been reclassified to conform to the 1995
financial statement presentation.
36
<PAGE> 168
BENTON OIL AND GAS COMPANY
NOTE 2 - ACQUISITIONS AND SALES
- --------------------------------------------------------------------------------
In June 1993, the Company sold 50% of its interests in the Belle Isle and Rabbit
Island Fields in exchange for reimbursement of certain expenditures incurred
through the closing date plus the additional reimbursement of certain future
costs as incurred. As of December 31, 1995, $6.6 million of the Company's costs
have been reimbursed. Additionally, in May 1993, the Company sold its interest
in the South Scott Prospect in Lafayette Parish, Louisiana for $1.5 million. The
proceeds from these sales were used for working capital purposes.
In March 1994, the Company acquired capital stock from Vinccler representing an
additional 30% ownership interest in Benton-Vinccler for $3 million in cash, $10
million in non-interest bearing notes payable (with a present value of $9.2
million assuming a 10% interest rate) payable in various installments over 24
months and 200,000 shares of the Company's common stock. The excess of the
purchase price over the book value of the 30% interest was allocated to oil and
gas properties.
In November 1994, the Company sold a 10.8% working interest (24.9% of the
Company's 43.3% working interest) in the West Cote Blanche Bay Field for
approximately $5.8 million.
In March 1995, the Company sold its 32.5% working interest in certain depths
(above approximately 10,575 feet) in the West Cote Blanche Bay Field for a
purchase price of approximately $14.9 million. The sales price has been
reflected as property held for sale at December 31, 1994.
In March 1996, the Company entered into an agreement to sell to Shell Offshore
Inc. ("Shell") all of its interests in the West Cote Blanche Bay, Rabbit Island
and Belle Isle Fields effective December 31, 1995, for a purchase price of
approximately $35.4 million (see Notes 14 and 15).
NOTE 3 - LONG TERM DEBT
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Long term debt consists of the following at December 31:
1995 1994
-------------------------------------
<S> <C> <C>
Senior unsecured notes with interest at 13%.
See description below. $35,000,000 $15,000,000
Revolving secured credit facility. Interest payments
due quarterly beginning March 31, 1995. Principal
payments due quarterly beginning March 31, 1997.
See description below. 5,000,000 5,000,000
Convertible subordinated debentures with interest at 8%.
See description below. 4,310,000 6,428,000
Convertible subordinated notes with interest at 8%.
See description below. 3,269,000 4,662,000
Non-interest bearing promissory notes. See Note 10. 1,000,000 5,747,878
Vendor financing with interest ranging from 10.5 - 13.5%.
Principal and interest payments are due in varying
installments through April 1997. Unsecured. 6,234,357
Bank financing with interest at LIBOR plus
7.5%. Secured by certain GEOILBENT
oil export proceeds. See description below. 850,000 1,292,000
Bank financing with interest at 8.875%. Principal
and interest due in monthly installments of $9,156
with the unpaid balance due January 5, 1998. Secured
by residential real estate. 1,137,500
Other--various equipment purchases and leases with
principal and interest payments due monthly from
$180 to $3,381. Interest rates vary from 10.0% to 16.91%.
Notes and leases mature from March 1996 to March 2000. 118,788 173,400
----------- -----------
56,919,645 38,303,278
Less current portion 7,433,339 6,392,114
----------- -----------
$49,486,306 $31,911,164
=========== ===========
</TABLE>
37
<PAGE> 169
BENTON OIL AND GAS COMPANY
On June 30, 1995, the Company issued $20 million in senior unsecured notes due
June 30, 2007, with interest at 13% per annum, payable semi-annually on June 30
and December 31. Annual principal payments of $4 million are due on June 30 of
each year beginning on June 30, 2003. Early payment of the notes could result in
a substantial prepayment penalty. The note agreement contains financial
covenants including a minimum ratio of current assets to current liabilities and
a maximum ratio of funded liabilities to net worth and to domestic oil and gas
reserves. The note agreement also provides for limitations on liens, additional
indebtedness, certain capital expenditures, dividends, sales of assets and
mergers. Additionally, in connection with the issuance of the notes, the Company
issued warrants entitling the holder to purchase 125,000 shares of common stock
at $17.09 per share, subject to adjustment in certain circumstances, that are
exercisable on or before June 30, 2007. In March 1996, in conjunction with the
sale of the Company's Gulf Coast properties, the Company agreed to prepay the
notes and corresponding prepayment premiums, which are estimated to be
approximately $7.7 million (see Note 14). At December 31, 1995, the Company was
in default on certain financial covenants. The lender has waived any defaults
under the financial covenants until the completion of refinancing arrangements
or June 30, 1996, whichever is earlier.
On September 30, 1994, the Company issued $15 million in senior unsecured notes
due September 30, 2002, with interest at 13% per annum. Interest is payable
semi-annually on March 30 and September 30 beginning March 30, 1995. Annual
principal payments of $3 million are due on September 30 of each year beginning
on September 30, 1998. Early payment of the notes could result in a substantial
prepayment penalty. The note agreement contains financial covenants including a
minimum ratio of current assets to current liabilities and a maximum ratio of
liabilities to net worth or domestic oil and gas reserves. The note agreement
also provides for limitations on liens, additional indebtedness, certain capital
expenditures, dividends, sales of assets and mergers. Additionally, in
connection with the issuance of the notes, the Company issued warrants entitling
the holder to purchase 250,000 shares of common stock at $9.00 per share,
subject to adjustment in certain circumstances, that are exercisable on or
before September 30, 2002. In March 1996, in conjunction with the sale of the
Company's Gulf Coast properties, the Company agreed to prepay the notes and
corresponding prepayment premiums, which are estimated to be approximately $3.4
million (see Note 14). At December 31, 1995, the Company was in default on
certain financial covenants. The lender has waived any defaults under the
financial covenants until the date of sale of the properties or April 30, 1996,
whichever is earlier.
On December 27, 1994, the Company entered into a revolving secured credit
facility. Under the credit agreement, the Company may borrow up to $15 million,
with the initial available principal limited to $10 million, on a revolving
basis for two years, at which time the facility will become a term loan due
December 31, 1999. Borrowings under the credit agreement are secured in part by
mortgages on the Company's U.S. properties and in part by a guarantee provided
by the financial institution which arranged the credit facility. Interest on
borrowings under the credit agreement accrues, at the Company's option, at
either a floating rate (higher of prime rate plus 3% or the Federal Funds Rate
plus 5%) or a fixed rate (rate of interest at which deposits of dollars are
available to lender in the interbank eurocurrency market plus 4.5%). At December
31, 1995 and 1994, the rates in effect were 10.2% and 11.1%, respectively. The
floating rate borrowings may be prepaid at any time without penalty and the
fixed rate borrowings may be repaid on the last day of an interest period
without penalty, or at the option of the Company during an interest period upon
payment of a make-whole premium. The credit agreement contains financial
covenants including a minimum ratio of current assets to current liabilities and
maximum ratio of liabilities to net worth or domestic oil and gas reserves, and
also provides for limitations on liens, dividends, sales of assets and mergers.
Additionally, in exchange for the credit enhancement, the arranging financial
institution and commercial bank received warrants entitling the holder to
purchase 50,000 shares of common stock at $12.00 per share, subject to
adjustment in certain circumstances, that are exercisable on or before December
2004, and the arranging institution receives a 5% net profits interest in the
Company's properties whose development is financed by the facility. The Company
will repay borrowings under the credit facility in conjunction with the sale of
the Company's Gulf Coast properties (see Note 14). At December 31, 1995, the
Company was in default on certain financial covenants. The lender has waived any
defaults under the financial covenants until the date of sale of the properties
or April 30, 1996, whichever is earlier.
In May 1992, the Company issued $6,428,000 aggregate principal amount of
publicly offered 8% Convertible Subordinated Debentures ("Debentures") due May
1, 2002, convertible at the option of the holder at 101.157 shares per $1,000
principal amount with interest payments due May 1 and November 1. Net proceeds
to the Company were approximately $5,711,000 and were used primarily to repay
certain indebtedness. At the Company's option, it may redeem the Debentures in
whole or in part at any time on or after May 1, 1994, at 105% of par plus
accrued interest, declining annually to par on May 1, 1999. The Debentures also
provide that the holders can redeem their Debentures following a change in
control (as defined) of the Company. The Company has the option to pay the
repurchase price
38
<PAGE> 170
BENTON OIL AND GAS COMPANY
in cash or shares of its common stock. During 1995, holders of Debentures with a
par value of $2,118,000 elected to convert their Debentures for 214,237 shares
of common stock.
In October 1991, the Company issued $4,662,000 aggregate principal amount of
privately placed 8% Convertible Subordinated Notes ("Notes") due October 1,
2001, convertible at the option of the Note holder at 85.259 shares per $1,000
principal amount with interest payments due April 1 and October 1. Net proceeds
to the Company were approximately $4,237,000. The Company had the option to
prepay the Notes in whole or in part at any time on or after October 1, 1993 at
105% of the principal amount plus accrued interest declining annually to the
principal amount on October 1, 1998. The Notes also provided that the holders
could redeem their Notes in cash following a change in control (as defined) of
the Company. In December 1995, the holders of the Notes were notified of the
Company's intention to prepay the Notes on February 12, 1996 at 103% of the
principal amount plus accrued interest. As a result, holders of all except
$43,000 principal amount of unconverted Notes elected to convert their Notes for
shares of common stock and on February 12, 1996, the Company prepaid the
remaining Note principal of $43,000 plus premium and accrued interest.
Accordingly, at December 31, 1995, $43,000 is reflected as current portion of
long term debt and the remaining balance of $3,226,000 representing Notes
converted to common shares is reflected in long term debt. During 1995, holders
of a total of $1,393,000 of Notes elected to convert their Notes for 118,785
shares of common stock.
In August 1994, GEOILBENT entered into an agreement with International Moscow
Bank for a $4 million loan with the following terms: 14 monthly payments,
interest at LIBOR plus 7.5%, with interest only payments for the first four
months and monthly principal and interest payments thereafter. In connection
with this agreement, the Company provided to International Moscow Bank a
guarantee of payment under which the Company has agreed to pay such loan in full
if GEOILBENT fails to make the scheduled payments. In March 1995, GEOILBENT's
credit facility with International Moscow Bank was expanded to $6 million with
interest only payments for three months and monthly principal and interest
payments thereafter. The Company has guaranteed this indebtedness. At December
31, 1995 and 1994, the Company's share of the outstanding balance was $0.9 and
$1.3 million, respectively.
The principal requirements for the long term debt outstanding at December 31,
1995 are due as follows for the years ending December 31:
<TABLE>
<S> <C>
1996 $ 7,433,339
1997 2,467,311
1998 5,800,410
1999 4,679,978
2000 3,002,607
Subsequent Years 30,310,000
------------
$ 53,693,645
============
</TABLE>
NOTE 4 - SHORT TERM BORROWINGS
- --------------------------------------------------------------------------------
In 1994, Benton-Vinccler borrowed $22 million from Morgan Guaranty Trust Company
of New York ("Morgan Guaranty") to repay commercial paper and for working
capital requirements. The credit facility is collateralized in full by time
deposits from the Company, bears interest at LIBOR plus 3/4% (6.5% and 6.7% at
December 31, 1995 and 1994, respectively) and is renewed on a monthly basis.
Under the loan arrangement, Benton-Vinccler may borrow up to $25 million, of
which $10 million may be borrowed on a revolving basis. The loan arrangement
contains no restrictive covenants and no financial ratio covenants.
Benton-Vinccler made a payment of $2.75 million in September 1994, leaving a
balance of $19.25 million. The Company is presently pursuing several options for
long term financing for Benton-Vinccler.
During the fourth quarter of 1994 and the year ending December 31, 1995,
Benton-Vinccler acquired approximately $4.1 million of drilling and production
equipment from trading companies and suppliers under terms which include
repayment within a 12-month period in monthly and quarterly installments at
interest rates from 6.7% to 10.75%. At December 31, 1995 and 1994, approximately
$0.7 and $1.5 million related to these loans was outstanding, respectively.
In June 1994, GEOILBENT entered into a payment advance agreement with NAFTA
Moscow, the export agency which markets GEOILBENT's oil production to purchasers
in Europe. The payment advance of $2.5 million against future oil shipments,
which bore an effective discount rate of 12%, was repaid through withholdings
from oil sales on a monthly
39
<PAGE> 171
BENTON OIL AND GAS COMPANY
basis through December 1994. In March and August 1995, GEOILBENT received $3.0
million and $2.0 million, respectively, in production payment advances pursuant
to similar agreements with NAFTA Moscow containing similar terms. At December
31, 1995, the Company's share of the outstanding liability was approximately
$1.0 million. Additionally, the Company has other short term borrowings which
aggregate approximatley $1.0 million at December 31, 1995.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
- --------------------------------------------------------------------------------
The state leases relating to the West Cote Blanche Bay Field, the portion of the
Belle Isle Field owned by Texaco and the Rabbit Island Field, were the subject
of litigation between Texaco and the State of Louisiana. The Company's interests
in the Fields, which include substantially all of the Company's domestic
reserves, were originally owned by Texaco under certain leases granted by the
State. Although the Company was not a party to this litigation, its interests in
the Fields were subject to the litigation. In February 1994, the State and
Texaco entered into a Global Settlement Agreement to settle all disputes related
to this litigation. As a result of this agreement, Texaco has committed to
certain acreage development and drilling obligations which may affect the
Company and certain of its Louisiana properties. The Company believes that the
settlement and the subsequent sale of the working interest by Texaco to Apache
Corporation should have no effect on its proved reserves and should have no
material adverse effect on the Company.
Investors in partnerships which were sponsored by a third party have sued the
Company on the theory that since it provided oil and gas drilling prospects to
those partnerships and operated substantially all of their properties, it was
responsible for alleged violations of securities laws in connection with the
offer and sale of interests, contractual breach of fiduciary duty and fraud. The
Company has entered into a settlement agreement related to these claims, whereby
the Company has paid $990,000 to the plaintiffs in full settlement of these
claims. Legal fees of $683,272 in addition to the settlement amount have been
included in litigation settlement expenses for the year ended December 31, 1995.
In the normal course of its business, the Company may periodically become
subject to actions threatened or brought by its investors or partners in
connection with the operation or development of its properties or the sale of
securities. Prior to 1992, the Company was engaged in the formation and
operation of oil and gas limited partnership interests. In 1992, the Company
ceased raising funds through such sales. Certain of such limited partners in the
Company's partnerships brought an action against the Company in connection with
the Company's operation of the limited partnerships as managing general partner.
The parties have agreed to submit claims to binding arbitration. The arbitration
is currently in the discovery stage. The plaintiffs seek actual and punitive
damages for alleged actions and omissions by the Company in operating the
partnerships and alleged misrepresentations made by the Company in selling the
limited partnership interests. The Company intends to vigorously defend this
action and does not believe the claims raised are meritorious. However, new
developments could alter this conclusion at any time. The Company will be forced
to expend time and financial resources to defend or resolve any such matters.
The Company is also subject to ordinary litigation that is incidental to its
business. None of the above matters are expected to have a material adverse
effect on the Company.
The Company's aggregate rental commitments and related sub-leases for
noncancellable agreements at December 31, 1995, are as follows:
<TABLE>
<CAPTION>
Rental Commitments Sub-leases
------------------ ----------
<S> <C> <C>
1996 $ 462,409 $(171,224)
1997 315,991
1998 319,160
1999 314,329
2000 308,652
Thereafter 1,234,608
---------- ----------
$2,955,149 $(171,224)
========== =========
</TABLE>
Rental expense was $1,981,253, $255,650 and $233,934 for the years ended
December 31, 1995, 1994 and 1993, respectively.
40
<PAGE> 172
BENTON OIL AND GAS COMPANY
NOTE 6 - TAXES ON INCOME
- --------------------------------------------------------------------------------
The tax effects of significant items comprising the Company's net deferred
income taxes as of December 31, 1995 and 1994 are as follows:
<TABLE>
<CAPTION>
1995 1994
---------------------------------------
<S> <C> <C>
Deferred tax assets:
Operating loss carryforwards $16,400,000 $13,509,000
Foreign tax credit carryforwards 2,500,000 549,000
Valuation allowance (4,000,000) (6,231,000)
----------- -----------
Total 14,900,000 7,827,000
----------- -----------
Deferred tax liabilities:
Difference in basis of property 3,500,000 4,704,000
Undistributed earnings of foreign subsidiaries 11,400,000 3,123,000
----------- -----------
Total 14,900,000 7,827,000
----------- -----------
Net deferred tax liability $ -- $ --
=========== ===========
</TABLE>
A comparison of the income tax expense at the federal statutory rate to the
Company's provision for income taxes is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
---------------------------------------------------------
<S> <C> <C> <C>
Income (loss) before income taxes:
United States $(9,500,000) $(4,363,000) $(2,988,000)
Foreign 27,873,000 10,109,000 (1,841,000)
----------- ----------- -----------
Total $18,373,000 $ 5,746,000 $(4,829,000)
=========== =========== ===========
Computed tax expense at the statutory rate $ 6,431,000 $ 2,011,000 $(1,690,000)
State income taxes, net of federal effect 919,000 287,000
Minority interest (2,229,000) (907,000)
Other (412,000) 76,000
Change in valuation allowance (2,231,000) (769,000) 1,690,000
----------- ----------- -----------
Provision for income taxes $ 2,478,000 $ 698,000 $ --
=========== =========== ===========
</TABLE>
The provisions for income taxes for 1995 and 1994 consist primarily of foreign
income taxes currently payable. The Company is providing for deferred income
taxes on undistributed earnings of foreign subsidiaries.
The Company has provided a valuation allowance for the excess benefits of
operating loss and tax credit carryforwards. As of December 31, 1995, the
Company had, for federal income tax purposes, operating loss carryforwards of
approximately $41.0 million, expiring in the years 2003 through 2010. If the
carryforwards are ultimately realized, approximately $3.0 million will be
credited to additional paid-in capital for tax benefits associated with
deductions for income tax purposes related to stock options.
NOTE 7 - STOCK OPTIONS
- --------------------------------------------------------------------------------
The Company adopted its 1988 Stock Option Plan in December 1988 authorizing
options to acquire up to 418,824 shares of common stock. Under the plan,
incentive stock options were granted to key employees and other options, stock
or bonus rights were granted to key employees, directors, independent
contractors and consultants at prices equal to or below market price,
exercisable over various periods.
The Company adopted its 1989 Nonstatutory Stock Option Plan during 1989 covering
2,000,000 shares of common stock which were granted to key employees, directors,
independent contractors and consultants at prices equal to or below market
prices, exercisable over various periods. The plan was amended during 1990 to
add 1,960,000 shares of common stock to the plan.
As shares became exercisable under the 1988 and 1989 plans, the Company recorded
compensation expense (a portion of which is associated with exploration overhead
and is therefore capitalized) to the extent that the market price on
41
<PAGE> 173
BENTON OIL AND GAS COMPANY
the date of grant exceeded the option price. For the year ended December 31,
1993, compensation expense of $142,420 was recorded.
In September 1991, the Company adopted the 1991-1992 Stock Option Plan and the
Directors' Stock Option Plan. The 1991-1992 Stock Option Plan permits the
granting of stock options to purchase up to 2,500,000 shares of the Company's
common stock in the form of incentive stock options ("ISOs") and nonqualified
stock options ("NQSOs") to officers and employees of the Company. Options may be
granted as ISOs, NQSOs or a combination of each, with exercise prices not less
than the fair market value of the common stock on the date of the grant. The
amount of ISOs that may be granted to any one participant is subject to the
dollar limitations imposed by the Internal Revenue Code of 1986, as amended. In
the event of a change in control of the Company, all outstanding options become
immediately exercisable to the extent permitted by the 1991-1992 Stock Option
Plan. All options granted to date under the 1991-1992 Stock Option Plan vest
ratably over a three-year period from their dates of grant.
The Directors' Stock Option Plan permits the granting of nonqualified stock
options ("Director NQSOs") to purchase up to 400,000 shares of common stock to
nonemployee directors of the Company. Upon election as a director and annually
thereafter, each individual who serves as a nonemployee director automatically
is granted an option to purchase 10,000 shares of common stock at a price not
less than the fair market value of common stock on the date of grant. All
Director NQSOs vest automatically on the date of the grant of the options.
<TABLE>
<CAPTION>
1989 Nonstatutory
1988 Stock Option Plan Stock Option Plan
------------------------------------------------------------------------------------------
Option Option Currently Option Option Currently
Prices Shares Exercisable Prices Shares Exercisable
------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $1.17 to $4.89 113,633 113,633 $1.39 to $11.75 1,252,146 852,148
Options cancelled ======= $2.55 (40,000) =======
Options exercised $1.17 (33,633) $1.39 to $4.89 (250,579)
------- --------
BALANCE AT DECEMBER 31, 1993 80,000 80,000 961,567 951,567
Options exercised ======= $2.81 to $4.89 (23,000) =======
------- --------
BALANCE AT DECEMBER 31, 1994 $4.89 80,000 80,000 938,567 938,567
Options exercised $4.89 (80,000) ======= $1.39 to $4.89 (82,900) =======
------- --------
BALANCE AT DECEMBER 31, 1995 0 0 $1.39 to $11.75 855,667 855,667
======= ======= ======= =======
</TABLE>
<TABLE>
<CAPTION>
1991 - 1992
Stock Option Plan Directors' Stock Option Plan
--------------------------------------------------------------------------------------------
Option Option Currently Option Option Currently
Prices Shares Exercisable Prices Shares Exercisable
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BALANCE AT JANUARY 1, 1993 $5.25 to $10.125 838,000 109,334 $6.25 to $10.25 80,000 9,999
Options granted $8.13 to $8.75 345,000 ======= $7.00 40,000 =======
Options cancelled $7.75 to $10.125 (70,000)
--------- -------
BALANCE AT DECEMBER 31, 1993 1,113,000 365,332 120,000 36,667
Options granted $5.63 to $9.125 825,000 ======= $6.813 40,000 =======
Options cancelled $10.125 (3,000)
--------- -------
BALANCE AT DECEMBER 31, 1994 1,935,000 733,334 160,000 160,000
Options granted $9.00 to $15.25 527,500 ======= $11.50 30,000 =======
Options cancelled $5.25 to $7.00 (56,667)
Options exercised $5.25 to $10.125 (109,680)
--------- -------
BALANCE AT DECEMBER 31, 1995 $5.50 to $15.25 2,296,153 1,163,655 $6.25 to $11.50 190,000 190,000
========= ========= ======= =======
</TABLE>
In addition to options issued pursuant to the plans, options for 80,000 and
135,000 shares of common stock were issued in 1994 and 1993, respectively, to
individuals other than officers, directors or employees of the Company at prices
ranging from $5.63 to $10.25. The options vest over three to four years and at
December 31, 1995, 234,000 options were outstanding of which 140,667 options
were vested.
42
<PAGE> 174
BENTON OIL AND GAS COMPANY
NOTE 8 - STOCK WARRANTS
- --------------------------------------------------------------------------------
During the years ended December 31, 1991, 1992, 1994 and 1995, the Company
issued a total of 690,793, 658,617, 450,000 and 125,000 warrants, respectively.
Each warrant entitles the holder to purchase one share of common stock at the
exercise price of the warrant. Substantially all the warrants are immediately
exercisable upon issuance.
In April 1991, 655,813 warrants were issued in connection with the privately
placed sale of the Company's common stock. In October 1991, the Company issued
34,980 warrants to a placement agent who marketed the Company's 8% convertible
subordinated notes.
In January 1992, 29,841 warrants were issued to a placement agent who sold
shares in the public offering of the Company's stock. In February 1992, 37,118
warrants were issued in connection with the marketing of working interests in a
well the Company drilled. Also in February 1992, 25,000 warrants were issued in
connection with an acquisition of a working interest in a well of which 155 were
exercised during the year ended December 31, 1995. In April 1992, 31,400
warrants were issued to a placement agent who marketed the Company's 8%
convertible subordinated debentures and in July 1992, 5,000 warrants were issued
to a consultant to the Company of which 2,500 and 1,000 were exercised during
the years ended December 31, 1993 and 1995, respectively. The Company was the
managing general partner of two limited partnerships that were liquidated in
November 1992. In October 1992, 530,258 warrants were issued to the partners in
these partnerships in connection with the liquidation of which 2,000 were
exercised during the year ended December 31, 1995.
In September 1994, 250,000 warrants were issued in connection with the issuance
of $15 million in senior unsecured notes and in December 1994, 50,000 warrants
were issued in connection with a revolving secured credit facility.
In July 1994, the Company issued warrants entitling the holder to purchase a
total of 150,000 shares of common stock at $7.50 per share, subject to
adjustment in certain circumstances, that are exercisable on or before July
2004. 50,000 warrants were immediately exercisable, and 50,000 warrants become
exercisable each July in 1995 and 1996.
In June 1995, 125,000 warrants were issued in connection with the issuance of
$20 million in senior unsecured notes.
The dates the warrants were issued, the expiration dates, the exercise prices
and the number of warrants issued and outstanding at December 31, 1995 were:
<TABLE>
<CAPTION>
Date Issued Expiration Date Exercise Price Issued Outstanding
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
April 1991 April 1996 $14.41* 592,786 592,786
April 1991 April 1996 11.56* 63,027 63,027
October 1991 October 1996 14.07 34,980 34,980
January 1992 January 1997 12.03 29,841 29,841
February 1992 February 1997 14.63* 37,118 37,118
February 1992 February 1997 9.00 25,000 24,845
April 1992 April 1997 10.30 31,400 31,400
July 1992 July 1997 7.30 5,000 1,500
October 1992 October 1997 10.00 530,258 528,258
July 1994 July 2004 7.50 150,000 150,000
September 1994 September 2002 9.00 250,000 250,000
December 1994 December 2004 12.00 50,000 50,000
June 1995 June 2007 17.09 125,000 125,000
--------- ---------
1,924,410 1,918,755
========= =========
<FN>
* Price represents weighted average price.
</TABLE>
NOTE 9 - RUSSIAN EXPORT TARIFF
- --------------------------------------------------------------------------------
For the year ended December 31, 1994, the Company recorded an expense for the
Russian export tariff of $1,397,317 which is included in lease operating
expenses and production taxes. GEOILBENT received a waiver from the export
tariff for 1995. Russia has recently announced that, in July 1996, such oil
export tariffs will be terminated in conjunction with a loan agreement with the
International Monetary Fund. It is anticipated that the tariff on oil exporters
may be replaced by an excise, pipeline or other tax levied on all oil producers,
but it is currently unclear how such other tax
43
<PAGE> 175
BENTON OIL AND GAS COMPANY
rates and regimes will be set and administered. The Russian regulatory
environment continues to be volatile and the Company is unable to predict the
availability of the waiver for the future.
NOTE 10 - VENEZUELA OPERATIONS
- --------------------------------------------------------------------------------
On July 31, 1992, the Company and its partner, Venezolana de Inversiones y
Construcciones Clerico, C.A. ("Vinccler"), signed an operating service agreement
to reactivate and further develop three Venezuelan oil fields with Lagoven,
S.A., an affiliate of the national oil company, Petroleos de Venezuela, S.A. The
operating service agreement covers the Uracoa, Bombal and Tucupita fields that
comprise the South Monagas unit. Under the terms of the operating service
agreement, Benton-Vinccler, a corporation owned 80% by the Company and 20% by
Vinccler, is a contractor for Lagoven and is responsible for overall operations
of the South Monagas unit, including all necessary investments to reactivate and
develop the fields comprising the unit. Benton-Vinccler receives an operating
fee in U.S. dollars deposited into a U.S. commercial bank account for each
barrel of crude oil produced (subject to periodic adjustments to reflect changes
in a special energy index of the U.S. Consumer Price Index) and is reimbursed
according to a prescribed formula in U.S. dollars for its capital costs,
provided that such operating fee and cost recovery fee cannot exceed the maximum
dollar amount per barrel set forth in the agreement (which amount is
periodically adjusted to reflect changes in the average of certain world crude
oil prices). The Venezuelan government maintains full ownership of all
hydrocarbons in the fields.
Pursuant to the original joint venture agreement, the Company and Vinccler each
owned a 50% interest in a joint venture which operated the South Monagas unit.
Effective January 1, 1994, the operating service agreement and the joint venture
assets and liabilities were transferred to Benton-Vinccler, a corporation in
which the Company and Vinccler each owned 50% of the capital stock. On March 4,
1994, the Company acquired capital stock from Vinccler representing an
additional 30% ownership interest in Benton-Vinccler for $3 million in cash, $10
million in non-interest bearing notes payable (with a present value of $9.2
million assuming a 10% interest rate) payable in various installments over 24
months and 200,000 shares of the Company's common stock. The excess of the
purchase price over the book value of the 30% interest was allocated to oil and
gas properties. The final installment on the non-interest bearing notes of $1
million, originally due in January 1996, has been extended to July 1996, with
interest at 13% during the extension period.
Prior to the acquisition of the additional 30% interest in Benton-Vinccler, the
Company's interest in the Venezuelan joint venture was proportionately
consolidated based on its ownership interest. Effective with the acquisition of
the additional 30% interest in Benton-Vinccler, the Company has included
Benton-Vinccler in its consolidated financial statements, with the 20% owned by
Vinccler reflected as a minority interest.
NOTE 11 - RELATED PARTY TRANSACTIONS
- --------------------------------------------------------------------------------
On December 31, 1993, the Company guaranteed a loan made to Mr. A.E. Benton, its
Chief Executive Officer, for $300,000. In January 1994, the Company loaned
$800,000 to Mr. Benton with interest at prime plus 1%; in September 1994, Mr.
Benton made a payment of $207,014 against this loan. In December 1995, the
Company purchased a home from Mr. Benton for $1.73 million, based on independent
appraisals, and from the proceeds Mr. Benton repaid the balance owed to the
Company of $592,986 plus accrued interest and the $300,000 loan guaranteed by
the Company. The home, which the Company anticipates selling in 1996, has been
included in other assets as of December 31, 1995.
NOTE 12 - EARNINGS PER SHARE
- --------------------------------------------------------------------------------
Primary earnings per common share are computed by dividing net income (loss) by
the weighted average number of common and common equivalent shares outstanding.
Common equivalent shares are shares which may be issuable upon exercise of
outstanding stock options and warrants; however, they are not included in the
computation for the year ended December 31, 1993, since their effect would be to
reduce the net loss per share and for the year ended December 31, 1994, because
their effect would result in dilution of less than 3%. Fully diluted earnings
per share are not presented because they are not materially different from
primary earnings per share. Total weighted average shares outstanding during the
years ended December 31, 1995, 1994 and 1993 were 26,673,483, 24,850,922 and
18,608,770, respectively.
44
<PAGE> 176
BENTON OIL AND GAS COMPANY
NOTE 13 - MAJOR CUSTOMERS
- --------------------------------------------------------------------------------
The Company is principally involved in the business of oil and gas exploration
and production. Oil and gas purchasers that represented more than 10% of oil and
gas revenues were Lagoven, S.A. (79%) for the year ended December 31, 1995;
Lagoven, S.A. (67%) and Texon Corporation (10%) for the year ended December 31,
1994; and Texon Corporation (63%) and Lagoven, S.A. (18%) for the year ended
December 31, 1993.
NOTE 14 - SUBSEQUENT EVENTS
- --------------------------------------------------------------------------------
SALE OF GULF COAST PROPERTIES
In March 1996, the Company entered into an agreement with Shell to sell its Gulf
Coast properties for approximately $35.4 million. The sale, which includes
virtually all of the Company's United States oil and gas reserves, is expected
to close in April 1996 and result in a gain of approximately $7.5 million after
adjustments for revenues and expenses subsequent to the effective date of
December 31, 1995. In conjunction with this sale, the Company agreed to repay
$35 million in senior unsecured notes (see Note 3). Repayment of the notes,
which is contingent on the closing of the sale, will include estimated
prepayment premiums of approximately $11.1 million. The repayment will be made
$18.4 million at the closing of the sale and the balance of $27.7 million on the
completion of certain refinancing arrangements, required to be no later than
June 30, 1996. Additionally, with respect to a revolving credit facility secured
by these properties, the Company will repay $5.0 million to the lending
institution and up to $1.8 million to the arranging financial institution
pursuant to a credit enhancement agreement. Assuming the sale closes in April,
the gain on sale of properties will be recorded in the second quarter of 1996.
The debt prepayment premiums and related costs will be recognized as an
extraordinary loss, also in the second quarter of 1996.
Had the sale occurred on December 31, 1995, the pro forma effects of the
transaction on the consolidated balance sheet as of December 31, 1995 would be
an increase in cash of $9.6 million and reductions in oil and gas properties of
$22.9 million, other assets of $0.3 million and long term debt of $12.3 million.
Retained earnings after giving effect to the sale would decrease by $1.3
million.
Assuming the sale had occured on January 1, 1995, pro forma effects on the
consolidated statement of operations for the year ended December 31, 1995 would
include reductions in oil and gas revenues, lease operating costs and production
taxes and depletion of $7.4 million, $1.0 million and $4.0 million,
respectively. Interest expense would also be reduced by $2.7 million. Income
from continuing operations and earnings per share, before charges and credits
related to this transaction, would increase $0.2 million and $.01, respectfully.
PARTNERSHIP EXCHANGE OFFER AND SALE OF PROPERTIES
In January 1996, the Company completed an exchange offer under which it issued
168,362 shares of common stock and warrants to purchase 587,783 shares of common
stock in exchange for the outstanding limited partnership interests in the three
remaining limited partnerships. The shares of common stock were valued at $1.9
million, which was allocated to oil and gas properties. The oil and gas
properties were immediately sold at their approximate book value. The warrants,
which were issued as an inducement to the participants to accept the Exchange
Offer, were valued at $3.64 each, or a total of $2.1 million, and will be
charged to expense in the first quarter of 1996.
45
<PAGE> 177
BENTON OIL AND GAS COMPANY
NOTE 15 - OIL AND GAS ACTIVITIES
- --------------------------------------------------------------------------------
Total costs incurred in oil and gas acquisition, exploration and development
activities were:
<TABLE>
<CAPTION>
Venezuela Russia United States Total
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Property acquisition costs $ 435,575 $ 435,575
Development costs $ 54,533,329 $ 12,373,856 5,463,239 72,370,424
Exploration costs 112,054 593,367 705,421
------------ ------------ ------------- -------------
$ 54,645,383 $ 12,373,856 $ 6,492,181 $ 73,511,420
============ ============ ============= ============
YEAR ENDED DECEMBER 31, 1994
Property acquisition costs $ 13,446,757 $ 875,129 $ 14,321,886
Development costs 24,676,748 $ 8,654,730 2,993,728 36,325,206
Exploration costs 265,856 2,542,935 2,808,791
------------ ------------ ------------- ------------
$ 38,389,361 $ 8,654,730 $ 6,411,792 $ 53,455,883
============ ============ ============= ============
YEAR ENDED DECEMBER 31, 1993
Property acquisition costs $ 380,178 $ 380,178
Development costs $ 6,307,756 $ 10,483,807 2,149,632 18,941,195
Exploration costs 373,348 6,258,127 6,631,475
------------ ------------ ------------- ------------
$ 6,681,104 $ 10,483,807 $ 8,787,937 $ 25,952,848
============ ============ ============= ============
</TABLE>
The Company's aggregate amount of capitalized costs related to oil and gas
producing activities consists of the following at December 31:
<TABLE>
<CAPTION>
Venezuela Russia United States Total
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
DECEMBER 31, 1995
Proved property costs $ 93,910,671 $ 37,070,018 $130,980,689
Costs excluded from amortization 14,001,386 3,214,849 $ 709,136 17,925,371
Properties held for sale (net of
accumulated depletion of $8,344,830) 22,885,176 22,885,176
Oilfield inventories 5,306,735 12,579 5,319,314
Less accumulated depletion (16,620,070) (2,449,846) (19,069,916)
------------ ------------ ------------ ------------
$ 96,598,722 $ 37,835,021 $ 23,606,891 $158,040,634
============ ============ ============ ============
DECEMBER 31, 1994
Proved property costs $ 46,523,663 $ 25,482,193 $ 27,508,414 $ 99,514,270
Costs excluded from amortization 6,743,012 2,428,818 7,523,454 16,695,284
Oilfield inventories 1,228,225 16,385 1,244,610
Less accumulated depletion (5,227,293) (937,025) (13,278,505) (19,442,823)
------------ ------------ ------------ ------------
$ 49,267,607 $ 26,973,986 $ 21,769,748 $ 98,011,341
============ ============ ============ ============
DECEMBER 31, 1993
Proved property costs $ 8,074,023 $ 16,832,410 $ 40,197,929 $ 65,104,362
Costs excluded from amortization 2,423,871 9,551,744 11,975,615
Less accumulated depletion (229,080) (99,207) (9,031,202) (9,359,489)
------------ ------------ ------------ ------------
$ 7,844,943 $ 19,157,074 $ 40,718,471 $ 67,720,488
============ ============ ============ ============
</TABLE>
The Company regularly evaluates its unproved properties to determine whether
impairment has occurred. The Company has excluded from amortization its interest
in unproved properties, the cost of uncompleted exploratory activities, and
portions of major development costs. The principal portion of such costs are
expected to be included in amortizable costs during the next two years.
46
<PAGE> 178
BENTON OIL AND GAS COMPANY
Excluded costs at December 31, 1995 consisted of the following by year incurred:
<TABLE>
<CAPTION>
Total 1995 1994 1993 Prior to 1993
--------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Property acquisition costs $ 1,412,850 $ 786,032 $ 4,947 $ 7,164 $ 614,707
Development costs 15,656,320 7,345,220 6,509,100 1,802,000
Exploration costs 856,201 513,417 342,784
----------- ---------- ----------- ----------- -----------
$17,925,371 $8,644,669 $ 6,856,831 $ 1,809,164 $ 614,707
=========== ========== =========== =========== ===========
</TABLE>
Results of operations for oil and gas producing activities were:
<TABLE>
<CAPTION>
Venezuela Russia United States Total
-----------------------------------------------------------------------
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Oil and gas revenues $ 49,173,832 $ 6,016,297 $ 7,682,768 $ 62,872,897
Expenses:
Lease operating costs and production taxes 6,482,775 2,763,860 1,456,162 10,702,797
Depletion 11,392,777 1,512,821 4,187,440 17,093,038
------------- ------------ ------------ ------------
Total expenses 17,875,552 4,276,681 5,643,602 27,795,835
------------- ------------ ------------ ------------
Results of operations from oil and gas
producing activities $ 31,298,280 $ 1,739,616 $ 2,039,166 $ 35,077,062
============= ============ ============ ============
YEAR ENDED DECEMBER 31, 1994
Oil and gas revenues $ 21,472,015 $ 3,512,940 $ 7,286,723 $ 32,271,678
Expenses:
Lease operating costs and production taxes 3,807,434 2,832,621 2,891,209 9,531,264
Depletion 4,998,213 837,818 4,247,303 10,083,334
------------- ------------ ------------ ------------
Total expenses 8,805,647 3,670,439 7,138,512 19,614,598
------------- ------------ ------------ ------------
Results of operations from oil and gas
producing activities $ 12,666,368 $ (157,499) $ 148,211 $ 12,657,080
============= ============ ============ ============
YEAR ENDED DECEMBER 31, 1993
Oil and gas revenues $ 1,332,927 $ 323,928 $ 5,565,455 $ 7,222,310
Expenses:
Lease operating costs and production taxes 1,164,453 458,301 3,487,510 5,110,264
Depletion 229,080 99,207 2,142,133 2,470,420
------------- ------------ ------------ ------------
Total expenses 1,393,533 557,508 5,629,643 7,580,684
------------- ------------ ------------ ------------
Results of operations from oil and gas
producing activities $ (60,606) $ (233,580) $ (64,188) $ (358,374)
============= ============ ============ ============
</TABLE>
Results of operations in Russia reflect the twelve months ended December 31,
1993 and 1994 and the nine months ended September 30, 1995 (see Note 1). The
Company estimates that oil and gas revenues and expenses for the quarter ended
December 31, 1995 would both amount to approximately $2.5 million, and will be
included in the Company's consolidated results of operations for the first
quarter of 1996.
In May 1994, the Company entered into a commodity hedge agreement designed to
reduce a portion of the Company's risk from oil price movements. Pursuant to the
hedge agreement, the Company will receive $16.82 per Bbl and will pay the
average price per Bbl of West Texas Intermediate Light Sweet Crude Oil. Such
terms apply to production of 1,000 Bbl of oil per day for 1994, 1,250 Bbl of oil
per day in 1995 and 1,500 Bbl of oil per day for 1996. During the years ended
December 31, 1995 and 1994, respectively, the Company incurred losses of
$716,203 and $328,868, respectively, under the hedge agreement which reduced oil
and gas sales. The Company is exposed to credit loss in the event of
non-performance by the counterparty. The Company anticipates, however, that the
counterparty will be able to fully satisfy its obligation under the contract.
QUANTITIES OF OIL AND GAS RESERVES (UNAUDITED)
- --------------------------------------------------------------------------------
Proved reserves are estimated quantities of crude oil, natural gas, and natural
gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable from known reservoirs under existing economic and
operating conditions. Proved developed reserves are those which are expected to
be recovered through existing wells with existing equipment and operating
methods. All Venezuelan reserves are attributable to an operating service
agreement between the Company and Lagoven, S.A., under which all mineral rights
are owned by the government of Venezuela. Sales of reserves in place in 1994 and
1995 include reserves related to the United States properties sold in March 1995
(see Note 2) and in March 1996 (see Note 14), respectively.
47
<PAGE> 179
BENTON OIL AND GAS COMPANY
The evaluations of the oil and gas reserves as of December 31, 1995, 1994, 1993
and 1992 were audited by Huddleston & Co., Inc., independent petroleum
engineers.
<TABLE>
<CAPTION>
Minority
United Interest in
Venezuela Russia States Total Venezuela Net Total
--------------------------------------------------------------------------
PROVED RESERVES - CRUDE OIL, CONDENSATE,
AND GAS LIQUIDS (MBBLS)
<S> <C> <C> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Proved reserves beginning of year 60,707 17,540 233 78,480 (12,141) 66,339
Revisions of previous estimates (12,877) (107) (12,984) 2,575 (10,409)
Extensions, discoveries and improved recovery 31,219 5,569 91 36,879 (6,243) 30,636
Production (5,456) (491) (69) (6,016) 1,091 (4,925)
Sales of reserves in place (148) (148) (148)
------ ------ ------- ------ ------- -------
Proved reserves end of year 73,593 22,618 0 96,211 (14,718) 81,493
====== ====== ======= ====== ======= =======
YEAR ENDED DECEMBER 31, 1994
Proved reserves beginning of year 19,389 10,121 10,258 39,768 39,768
Revisions of previous estimates (2,583) (201) 1,819 (965) 517 (448)
Purchases of reserves in place 19,389 19,389 (7,756) 11,633
Extensions, discoveries and improved recovery 27,032 7,914 152 35,098 (5,406) 29,692
Production (2,520) (294) (226) (3,040) 504 (2,536)
Sales of reserves in place (11,770) (11,770) (11,770)
------ ------ ------- ------ ------- -------
Proved reserves end of year 60,707 17,540 233 78,480 (12,141) 66,339
====== ====== ======= ====== ======= =======
YEAR ENDED DECEMBER 31, 1993
Proved reserves beginning of year 8,966 8,133 13,194 30,293 30,293
Revisions of previous estimates 32 259 (2,490) (2,199) (2,199)
Extensions, discoveries and improved recovery 10,551 1,757 132 12,440 12,440
Production (160) (28) (292) (480) (480)
Sales of reserves in place (286) (286) (286)
------ ------ ------- ------ -------
Proved reserves end of year 19,389 10,121 10,258 39,768 39,768
====== ====== ======= ====== =======
PROVED DEVELOPED RESERVES AT:
December 31, 1995 30,032 3,475 33,507 (6,006) 27,501
December 31, 1994 12,580 2,772 155 15,507 (2,516) 12,991
December 31, 1993 3,999 400 8,153 12,552 12,552
January 1, 1993 2,269 10,905 13,174 13,174
PROVED RESERVES - NATURAL GAS (MMCF)
YEAR ENDED DECEMBER 31, 1995
Proved reserves beginning of year 16,077 16,077 16,077
Revisions of previous estimates (5,395) (5,395) (5,395)
Extensions, discoveries and improved recovery 12,927 12,927 12,927
Production (3,785) (3,785) (3,785)
Sales of reserves in place (19,818) (19,818) (19,818)
------- ------- -------
Proved reserves end of year 6 6 6
======= ======== =======
YEAR ENDED DECEMBER 31, 1994
Proved reserves beginning of year 18,099 18,099 18,099
Revisions of previous estimates (1,120) (1,120) (1,120)
Extensions, discoveries and improved recovery 9,153 9,153 9,153
Production (2,062) (2,062) (2,062)
Sales of reserves in place (7,993) (7,993) (7,993)
------- ------- -------
Proved reserves end of year 16,077 16,077 16,077
======= ======== =======
YEAR ENDED DECEMBER 31, 1993
Proved reserves beginning of year 19,455 19,455 19,455
Revisions of previous estimates (3,400) (3,400) (3,400)
Extensions, discoveries and improved recovery 2,820 2,820 2,820
Production (233) (233) (233)
Sales of reserves in place (543) (543) (543)
------- ------- -------
Proved reserves end of year 18,099 18,099 18,099
======= ======== =======
PROVED DEVELOPED RESERVES AT:
December 31, 1995 6 6 6
December 31, 1994 8,385 8,385 8,385
December 31, 1993 6,584 6,584 6,584
January 1 , 1993 9,930 9,930 9,930
</TABLE>
48
<PAGE> 180
BENTON OIL AND GAS COMPANY
(1) The Securities and Exchange Commission requires the reserve presentation
to be calculated using year-end prices and costs and assuming a
continuation of existing economic conditions. Proved reserves cannot be
measured exactly, and the estimation of reserves involves judgmental
determinations. Reserve estimates must be reviewed and adjusted
periodically to reflect additional information gained from reservoir
performance, new geological and geophysical data and economic changes.
The above estimates are based on current technology and economic
conditions, and the Company considers such estimates to be reasonable
and consistent with current knowledge of the characteristics and extent
of production. The estimates include only those amounts considered to be
Proved Reserves and do not include additional amounts which may result
from new discoveries in the future, or from application of secondary and
tertiary recovery processes where facilities are not in place.
(2) Proved Developed Reserves are reserves which can be expected to be
recovered through existing wells with existing equipment and operating
methods. This classification includes:
(a) Proved developed producing reserves which are reserves expected to
be recovered through existing completion intervals now open for
production in existing wells; and
(b) Proved developed nonproducing reserves which are reserves that exist
behind the casing of existing wells which are expected to be
produced in the predictable future, where the cost of making such
oil and gas available for production should be relatively small
compared to the cost of a new well.
Any reserves expected to be obtained through the application of fluid
injection or other improved recovery techniques for supplementing
primary recovery methods are included as Proved Developed Reserves only
after testing by a pilot project or after the operation of an installed
program has confirmed through production response that increased
recovery will be achieved.
(3) Proved Undeveloped Reserves are Proved Reserves which are expected to be
recovered from new wells on undrilled acreage or from existing wells
where a relatively major expenditure is required for recompletion.
Reserves on undrilled acreage are limited to those drilling units
offsetting productive units, which are reasonably certain of production
when drilled.
Proved Reserves for other undrilled units are claimed only where it can
be demonstrated with certainty that there is continuity of production
from the existing productive formation. No estimates for Proved
Undeveloped Reserves are attributable to or included in this table for
any acreage for which an application of fluid injection or other
improved recovery technique is contemplated unless proved effective by
actual tests in the area and in the same reservoir.
(4) The Company's engineering estimates indicate that a significant quantity
of natural gas reserves (net to the Company's interest) will be
developed and produced in association with the development and
production of the Company's proved oil reserves in Russia. The Company
expects that, due to current market conditions, it will initially
reinject or flare such associated natural gas production, and
accordingly, no future net revenue has been assigned to these reserves.
Under the joint venture agreement, such reserves are owned by the
Company in the same proportion as all other hydrocarbons in the field,
and subsequent changes in conditions could result in the assignment of
value to these reserves.
(5) Changes in previous estimates of proved reserves result from new
information obtained from production history and changes in economic
factors.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVE QUANTITIES (UNAUDITED)
- --------------------------------------------------------------------------------
The standardized measure of discounted future net cash flows is presented in
accordance with the provisions of SFAS No. 69. In preparing this data,
assumptions and estimates have been used, and the Company cautions against
viewing this information as a forecast of future economic conditions.
Future cash inflows were estimated by applying year-end prices, adjusted for
fixed and determinable escalations provided by contract, to the estimated future
production of year-end proved reserves. Future cash inflows were reduced by
estimated future production and development costs to determine pre-tax cash
inflows. Future income taxes were estimated by applying the year-end statutory
tax rates to the future pre-tax cash inflows, less the tax basis of the
properties involved, and adjusted for permanent differences and tax credits and
allowances. The resultant future net cash inflows are discounted using a ten
percent discount rate.
49
<PAGE> 181
BENTON OIL AND GAS COMPANY
Russia has established an export tariff on all oil produced in and exported from
Russia. GEOILBENT received a waiver from the export tariff for 1995. For
purposes of estimating future net cash flows, the export tariff was applied to
the Company's Russian production for the remainder of the life of the operations
after 1995, although the Company believes that additional waivers may be
obtained in the future. The discounted value of the waiver net to the Company's
interest as of December 31, 1994 was approximately $3 million. Russia has
recently announced that in July 1996, such oil export tariffs will be terminated
in conjunction with a loan agreement with the International Monetary Fund. It is
anticipated that the tariff on oil exporters may be replaced by an excise or
other duty levied on all oil producers, but it is currently unclear how such
other tax rates and regimes will be set and administered. For purposes of
estimating future net cash flows, a tariff of approximately $1.84 per Bbl has
been applied to all future production.
STANDARDIZED MEASURE
- --------------------
<TABLE>
<CAPTION>
Minority
United Interest in
Venezuela Russia States Total Venezuela Net Total
------------------------------------------------------------------------------------
(amounts in thousands)
<S> <C> <C> <C> <C> <C> <C>
DECEMBER 31, 1995
Future cash inflow $ 652,110 $ 283,630 $ 19 $ 935,759 ($ 130,422) $ 805,337
Future production costs (170,328) (102,783) (2) (273,113) 34,066 (239,047)
Other related future costs (76,368) (36,686) 0 (113,054) 15,274 (97,780)
--------- --------- ---------- --------- ---------- ---------
Future net revenue before income taxes 405,414 144,161 17 549,592 (81,082) 468,510
10% annual discount for estimated
timing of cash flows (118,498) (58,800) (1) (177,299) 23,700 (153,599)
--------- --------- ---------- --------- ---------- ---------
Discounted future net cash flows
before income taxes 286,916 85,361 16 372,293 (57,382) 314,911
Future income taxes, discounted at
10% per annum (80,371) (29,927) 0 (110,298) 16,074 (94,224)
--------- --------- ---------- --------- ---------- ---------
Standardized measure of discounted
future net cash flows $ 206,545 $ 55,434 $ 16 $ 261,995 ($ 41,308) $ 220,687
========= ========= ========== ========= ========== =========
DECEMBER 31, 1994
Future cash inflow $528,214 $204,520 $32,091 $ 764,825 $(105,643) $ 659,182
Future production costs (64,950) (98,767) (3,760) (167,477) 12,990 (154,487)
Other related future costs (79,486) (25,378) (2,002) (106,866) 15,897 (90,969)
--------- --------- ---------- --------- --------- ---------
Future net revenue before income taxes 383,778 80,375 26,329 490,482 (76,756) 413,726
10% annual discount for estimated
timing of cash flows (114,948) (31,542) (7,672) (154,162) 22,990 (131,172)
--------- --------- ---------- --------- --------- ---------
Discounted future net cash flows
before income taxes 268,830 48,833 18,657 336,320 (53,766) 282,554
Future income taxes, discounted at
10% per annum (96,127) (16,435) (371) (112,933) 19,225 (93,708)
--------- --------- ---------- --------- --------- ---------
Standardized measure of discounted
future net cash flows $ 172,703 $ 32,398 $ 18,286 $ 223,387 $ (34,541) $ 188,846
========= ========= ========== ========= ========= =========
DECEMBER 31, 1993
Future cash inflow $148,130 $ 111,333 $183,911 $ 443,374
Future production costs (16,952) (55,461) (65,224) (137,637)
Other related future costs (19,841) (16,370) (54,733) (90,944)
--------- --------- ---------- ---------
Future net revenue before income taxes 111,337 39,502 63,954 214,793
10% annual discount for estimated
timing of cash flows (39,131) (15,265) (28,984) (83,380)
--------- --------- ---------- ---------
Discounted future net cash flows
before income taxes 72,206 24,237 34,970 131,413
Future income taxes, discounted at
10% per annum (21,248) (4,725) (2,924) (28,897)
--------- --------- ---------- ---------
Standardized measure of discounted
future net cash flows $ 50,958 $ 19,512 $ 32,046 $ 102,516
========= ========= ========== =========
</TABLE>
50
<PAGE> 182
BENTON OIL AND GAS COMPANY
<TABLE>
<CAPTION>
Years Ended December 31,
CHANGES IN STANDARDIZED MEASURE 1995 1994 1993
------------------------------------------------------------
(amounts in thousands)
<S> <C> <C> <C>
BALANCE, JANUARY 1 $ 223,387 $102,516 $ 104,010
Changes resulting from:
Sales of oil and gas, net of related costs (52,170) (22,741) (2,112)
Revisions to estimates of proved reserves:
Pricing (6,990) (6,243) (52,239)
Quantities (63,802) (4,150) (6,292)
Sales of reserves in place (28,102) (28,664) (1,735)
Extensions, discoveries and improved recovery,
net of future costs 170,037 169,860 47,700
Purchases of reserves in place 72,206
Accretion of discount 33,632 13,142 14,181
Change in income taxes 2,635 (84,036) 8,903
Development costs incurred 47,657 13,365 10,480
Changes in timing and other (64,289) (1,868) (20,380)
--------- -------- ---------
BALANCE, DECEMBER 31 $ 261,995 $223,387 $ 102,516
========= ======== =========
</TABLE>
NOTE 16 - QUARTERLY FINANCIAL DATA (UNAUDITED)
- --------------------------------------------------------------------------------
Summarized quarterly financial data is as follows:
<TABLE>
<CAPTION>
Quarter Ended
March 31 June 30 September 30 December 31 (a)
---------------------------------------------------------------------
(amounts in thousands, except per share data)
<S> <C> <C> <C> <C>
YEAR ENDED DECEMBER 31, 1995
Revenues $ 12,661 $ 13,209 $ 18,290 $ 20,908
Expenses 8,678 10,327 12,735 14,955
-------- -------- -------- --------
Income before income taxes and minority interest 3,983 2,882 5,555 5,953
Income taxes 1,079 892 1,308 (801)
-------- -------- -------- --------
2,904 1,990 4,247 6,754
Minority interest 863 880 1,343 2,218
-------- -------- -------- --------
Net income $ 2,041 $ 1,110 $ 2,904 $ 4,536
======== ======== ======== ========
Net income per common share $ 0.08 $ 0.04 $ 0.11 $ 0.17
======== ======== ======== ========
YEAR ENDED DECEMBER 31, 1994
Revenues $ 3,755 $ 8,478 $ 9,573 $ 12,899
Expenses 4,834 6,649 6,726 10,750
-------- -------- -------- --------
Income (loss) before income taxes and minority interest (1,079) 1,829 2,847 2,149
Income taxes -- -- 270 428
-------- -------- -------- --------
(1,079) 1,829 2,577 1,721
Minority interest 63 685 751 595
-------- -------- -------- --------
Net income (loss) $ (1,142) $ 1,144 $ 1,826 $ 1,126
======== ======== ======== ========
Net income (loss) per common share $ (0.05) $ 0.05 $ 0.07 $ 0.05
======== ======== ======== ========
<FN>
(a) The quarter ended December 31, 1995 does not include revenues and expenses
related to GEOILBENT (see Note 15).
</TABLE>
51
<PAGE> 183
BENTON OIL AND GAS COMPANY
STOCKHOLDER INFORMATION
- --------------------------------------------------------------------------------
STOCK PRICE INFORMATION
- -----------------------
The Company's common stock is listed on the NASDAQ under the symbol BNTN. The
table below reflects the high, low and closing prices as well as the average
daily volume for each quarter of 1994 and 1995.
<TABLE>
<CAPTION>
Quarter Ended High Low Last Avg. Daily Volume
--------------------------------------------------------
1994
<S> <C> <C> <C> <C>
First Quarter 7.00 4.25 5.63 238,900
Second Quarter 7.63 5.38 7.25 145,000
Third Quarter 7.75 6.50 7.19 140,100
Fourth Quarter 9.13 7.00 9.13 131,400
1995
First Quarter 11.13 8.63 11.00 146,900
Second Quarter 15.13 10.25 13.88 277,000
Third Quarter 13.88 9.50 11.13 197,100
Fourth Quarter 16.13 10.13 15.00 245,700
</TABLE>
<TABLE>
<CAPTION>
DIVIDEND POLICY INDEPENDENT PUBLIC ACCOUNTANTS
- --------------- ------------------------------
<S> <C>
The company paid no cash dividends in 1994 and 1995. It Deloitte & Touche LLP
is anticipated that all earnings will be retained for the 1000 Wilshire Boulevard
growth of the Company's business and that cash dividends Los Angeles, CA 90017-2472
will not be declared in the foreseeable future.
LEGAL COUNSEL - CORPORATE
-------------------------
STOCK TRANSFER AGENT AND REGISTRAR Emens, Kegler, Brown, Hill & Ritter Co., L.P.A.
- ---------------------------------- 65 East State Street, Suite 1800
Stockholders should refer specific questions concerning Columbus, Ohio 43215
their stock certificates directly to the Transfer Agent and
Registrar. LEGAL COUNSEL - INTERNATIONAL
-----------------------------
Wells Fargo Bank, N.A. Baker & McKenzie
707 Wilshire Boulevard, 11th Floor Two Embarcadero Center, 24th Floor
Los Angeles, CA90017 San Francisco, CA 94111
(213) 614-5205
INDEPENDENT PETROLEUM ENGINEERS
-------------------------------
STOCK HELD IN "STREET NAME" Huddleston & Co., Inc.
- -------------------------- 111 Fannin, Suite 1700
The Company maintains a direct mailing list to ensure that Houston, TX 77002
stockholders with stock held in brokerage accounts
receive information on a timely basis. Stockholders INVESTOR INFORMATION
wanting their names added to this list should contact our --------------------
Investor Relations Department at (805) 566-5600. A copy of the Company's annual report on Form 10-K or
quarterly reports on Form 10-Q, as filed with the Securities
ANNUAL MEETING and Exchange Commission, are available at no charge
- -------------- upon written request to:
The Annual Meeting of Stockholders will be held:
Wednesday, July 10, 1996 at 10:00 a.m. Benton Oil and Gas Company
Four Seasons Biltmore Hotel Investor Relations
1260 Channel Drive 1145 Eugenia Place, Suite 200
Santa Barbara, CA 93108 Carpinteria, CA 93013
(805) 566-5600
</TABLE>
52
<PAGE> 184
[PHOTO]
The Company cautions that any forward-looking statements (as such term is
defined in the Private Securities Litigation Reform Act of 1955) contained in
this Report or made by management of the Company involve risks and
uncertainties, and are subject to change based on various important factors. The
following factors, among others, in some cases have affected and could cause
actual results and plans for future periods to differ materially from those
expressed or implied in any such forward-looking statements: fluctuations in oil
and gas prices, changes in operating cost, overall economic conditions,
political stability, currency and exchange risk, changes in existing or
potential tariffs, duties or quotas, availability of additional exploration and
development opportunities, availability of sufficient financing, changes in
weather conditions, and ability to hire and train personnel.
Design by: Gray Design Associates, Westlake Village
Printing by: T/O Printing, Westlake Village
<PAGE> 185
EXHIBIT D
BENTON'S QUARTERLY REPORTS ON FORM 10-Q
FOR THE QUARTERS ENDED
MARCH 31, 1996 AND JUNE 30, 1996
<PAGE> 186
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Under Section 13 or 15(d)
[X] of the Securities Exchange Act of 1934
For the Quarterly Period Ended March 31, 1996 or
Transition Report Pursuant to Section 13 or 15(d)
[ ] of the Securities Act of 1934 for the
Transition Period from __________ to ___________
COMMISSION FILE NO. 1-10762
________________________________________
BENTON OIL AND GAS COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0196707
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
1145 EUGENIA PLACE, SUITE 200
CARPINTERIA, CALIFORNIA 93013
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (805) 566-5600
___________________________________________
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes X No _____
___________________________________________
At May 10, 1996, 26,699,571 shares of the
Registrant's Common Stock were outstanding.
<PAGE> 187
<TABLE>
2
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
<CAPTION>
PART I. FINANCIAL INFORMATION
<S> <C> <C>
Item 1. FINANCIAL STATEMENTS
Consolidated Balance Sheets at March 31, 1996
(Unaudited) and December 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . 3
Consolidated Statements of Operations for the Three
Months Ended March 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . 4
Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 1996 and 1995 (Unaudited) . . . . . . . . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . 7
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . 12
PART II. OTHER INFORMATION
Signatures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 18
</TABLE>
<PAGE> 188
<TABLE>
3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<CAPTION>
March 31, December 31,
1996 1995
---------- -------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $7,803,966 $ 6,179,998
Restricted cash (Note 4) 21,314,000 20,314,000
Accounts receivable:
Accrued oil and gas revenue 29,854,256 22,069,217
Joint interest and other 4,572,824 2,869,962
Prepaid expenses and other 653,255 214,622
-------------- --------------
TOTAL CURRENT ASSETS 64,198,301 51,647,799
OTHER ASSETS 2,763,150 3,434,760
PROPERTY AND EQUIPMENT (Notes 3, 5 and 8):
Oil and gas properties (full cost method - costs of
$18,830,911 and $17,925,371 excluded from
amortization in 1996 and 1995, respectively) 192,853,214 177,110,550
Furniture and fixtures 2,792,878 2,539,233
-------------- --------------
195,646,092 179,649,783
Accumulated depletion and depreciation (27,714,584) (19,982,244)
-------------- -------------
167,931,508 159,667,539
------------- ------------
$234,892,959 $214,750,098
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable:
Revenue distribution $5,782,376 $ 2,692,751
Trade and other 18,903,497 19,777,018
Accrued interest payable, payroll and related taxes 2,421,223 1,687,648
Income taxes payable 4,919,607 1,039,166
Short term borrowings (Note 4) 21,307,604 21,905,480
Current portion of long term debt (Note 3) 8,137,779 7,433,339
-------------- --------------
TOTAL CURRENT LIABILITIES 61,472,086 54,535,402
LONG TERM DEBT (Note 3) 46,050,082 49,486,306
MINORITY INTEREST (Note 8) 9,374,400 7,047,791
COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 7 and 9)
STOCKHOLDERS' EQUITY (Notes 3 and 8):
Preferred stock, par value $0.01 a share;
authorized 5,000,000 shares; outstanding, none
Common stock, par value $0.01 a share;
authorized 40,000,000 shares; issued and
outstanding 26,092,559 and 25,508,605 shares at
March 31, 1996 and December 31, 1995, respectively 260,926 255,086
Additional paid-in capital 105,745,506 97,745,794
Retained earnings 11,989,959 5,679,719
------------ -------------
TOTAL STOCKHOLDERS' EQUITY 117,996,391 103,680,599
------------ ------------
$234,892,959 $214,750,098
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 189
<TABLE>
4
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited)
<CAPTION>
THREE MONTHS ENDED MARCH 31,
-----------------------------------
1996 1995
----------- ------------
<S> <C> <C>
REVENUES
Oil and gas sales $31,284,923 $12,080,479
Gain on exchange rates 1,127,715 131,717
Investment earnings and other 526,109 448,970
----------- ------------
32,938,747 12,661,166
----------- ------------
EXPENSES
Lease operating costs and production taxes 4,072,520 2,246,002
Depletion, depreciation and amortization 7,732,801 3,145,067
General and administrative 3,647,460 1,668,772
Interest 2,259,995 1,618,126
Partnership exchange expenses (Note 2) 2,139,655
----------- ------------
19,852,431 8,677,967
----------- ------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 13,086,316 3,983,199
INCOME TAX EXPENSE 4,449,467 1,079,416
----------- ------------
INCOME BEFORE MINORITY INTEREST 8,636,849 2,903,783
MINORITY INTEREST (Note 8) 2,326,609 862,675
----------- ------------
NET INCOME FROM OPERATIONS $ 6,310,240 $ 2,041,108
============ ============
NET INCOME PER COMMON SHARE:
Primary $ 0.23 $ 0.08
============ ============
Fully Diluted $ 0.22 $ 0.08
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 190
<TABLE>
5
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited)
<CAPTION>
THREE MONTHS ENDED MARCH 31,
----------------------------------
1996 1995
------------ -------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 6,310,240 $ 2,041,108
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation and amortization 7,732,801 3,145,067
Net earnings from limited partnerships (3,511)
Amortization of financing costs 281,061 28,578
Loss on disposition of assets 10,632
Partnership exchange expenses 2,139,655
Minority interest in undistributed earnings of subsidiary 2,326,609 862,675
Increase in accounts receivable (9,609,456) (583,664)
Increase in prepaid expense and other (438,633) (576,793)
Increase in accounts payable 2,419,608 67,530
Increase (decrease) in accrued interest payable, payroll and related taxes 733,575 (390,996)
Increase in income taxes payable 3,880,440 788,068
------------ -------------
TOTAL ADJUSTMENTS 9,465,660 3,347,586
------------ -------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 15,775,900 5,388,694
------------ -------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 1,317,582 14,713,894
Additions of property and equipment (15,530,353) (11,130,286)
Increase in restricted cash (1,000,000)
Distributions from limited partnerships 264,114
------------ -------------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES (14,948,657) 3,583,608
------------ -------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 1,070,820 188,890
Proceeds from other short term borrowings 1,552,106
Proceeds from issuance of notes payable 1,691,754 2,040,000
Payments on other short term borrowings and notes payable (3,562,175) (4,025,520)
Decrease (increase) in other assets 44,220 (159,465)
------------ -------------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES 796,725 (1,956,095)
------------ -------------
NET INCREASE IN CASH 1,623,968 7,016,207
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,179,998 14,192,568
------------ -------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 7,803,966 $ 21,208,775
============ =============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest expense $ 1,726,938 $ 1,832,229
============ =============
Cash paid during the period for income taxes $ 424,706 $ 176,825
============ =============
</TABLE>
<PAGE> 191
6
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the three months ended March 31, 1995, the Company financed the purchase
of oil and gas equipment in the amount of $2,337,860 and leased office
equipment in the amount of $54,473.
During the three months ended March 31, 1996, $3,226,000 principal amount of
the Company's 8% convertible notes and $58,000 principal amount of the
Company's 8% convertible debentures were retired upon conversion into 275,082
and 5,865 shares of the Company's common stock, respectively.
During the three months ended March 31, 1996, the Company financed the purchase
of oil and gas equipment and services in the amount of $272,655. Also during
the three months ended March 31, 1996, the Company acquired the partners'
interests in each of the three limited partnerships sponsored by the Company in
exchange for an aggregate of 168,362 shares of the Company's common stock and
warrants to purchase 587,783 shares of common stock at $11.00 per share, with a
total value of $3,996,601.
See notes to consolidated financial statements.
<PAGE> 192
7
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
THREE MONTHS ENDED MARCH 31, 1996 (UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Benton Oil and Gas Company (the "Company") engages in the exploration,
development, production and management of oil and gas properties.
The Company and its former subsidiary, Benton Oil and Gas Company of Louisiana,
participated as the managing general partner of three oil and gas limited
partnerships formed during 1989 through 1991. Under the provisions of the
limited partnership agreements, the Company received compensation as stipulated
therein, and functioned as an agent for the partnerships to arrange for the
management, drilling, and operation of properties, and assumed customary
contingent liabilities for partnership obligations. In January 1996, the
Company issued an aggregate of 168,362 shares of common stock and warrants to
purchase 587,783 shares of common stock at $11 per share in exchange for all
outstanding limited partnership interests and liquidated the partnerships. (See
Note 2.)
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The Company's investment in the Russia joint venture
("GEOILBENT") is proportionately consolidated based on the Company's ownership
interest. Beginning in 1995, GEOILBENT (owned 34% by the Company) has been
included in the consolidated financial statements based on a fiscal period
ending September 30. This change was made to provide adequate time for the
accumulation and review of financial information from the joint venture for
both quarterly and annual reporting purposes. This change did not have a
material effect on the consolidated financial statements. All material
intercompany profits, transactions and balances have been eliminated.
INTERIM REPORTING
In the opinion of the Company, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
March 31, 1996, and the results of operations for the three month periods ended
March 31, 1996 and 1995. The unaudited financial statements are presented in
accordance with the requirements of Form 10-Q and do not include all
disclosures normally required by generally accepted accounting principles.
References should be made to the Company's consolidated financial statements
and notes thereto included in the Company's annual report on Form 10-K for the
year ended December 31, 1995 for additional disclosures, including a summary of
the Company's accounting policies.
The results of operations for the three month period ended March 31, 1996 are
not necessarily indicative of the results to be expected for the full year.
EARNINGS PER SHARE
Earnings per common share are computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares are shares which may be issuable upon exercise of outstanding
stock options and warrants. Total weighted average common stock equivalent
shares used to calculate primary earnings per common share for the three months
ended March 31, 1996 and 1995 were 27,674,188 and 26,037,055, respectively.
Total weighted average common stock equivalent shares used to calculate fully
diluted earnings per share for the three months ended March 31, 1996 and 1995
were 28,747,580 and 27,403,209, respectively.
<PAGE> 193
8
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with the acquisition,
exploration, and development of oil and gas reserves are capitalized as
incurred, including exploration overhead of $452,937 and $526,161 for the three
months ended March 31, 1996 and 1995, respectively. Only overhead which is
directly identified with acquisition, exploration or development activities is
capitalized. All costs related to production, general corporate overhead and
similar activities are expensed as incurred. The costs of oil and gas
properties are accumulated in cost centers on a country by country basis,
subject to a cost center ceiling (as defined by the Securities and Exchange
Commission).
All capitalized costs of oil and gas properties (excluding unevaluated property
acquisition and exploration costs) and the estimated future costs of developing
proved reserves, are depleted over the estimated useful lives of the properties
by application of the unit-of-production method using only proved oil and gas
reserves. Excluded costs attributable to the Venezuelan, Russian and other
cost centers at March 31, 1996 were $14,536,008, $3,366,031, and $928,872,
respectively. Excluded costs attributable to the Venezuelan, Russian and other
cost centers at December 31, 1995 were $14,001,386, $3,214,849 and $709,136,
respectively. Depletion expense attributable to the Venezuelan, Russian and
other cost centers for the three months ended March 31, 1996 was $5,475,593,
$786,140 and $1,380,070 ($2.09, $3.52 and $6.47 per equivalent barrel),
respectively. Depletion expense attributable to the Venezuelan, Russian and
United States cost centers for the three months ended March 31, 1995 was
$2,109,428, $328,136 and $628,270 ($1.99, $2.76 and $6.97 per equivalent
barrel), respectively. Depreciation of furniture and fixtures is computed
using the straight-line method, with depreciation rates based upon the
estimated useful life applied to the cost of each class of property.
Depreciation expense was $90,537 and $57,477 for the three months ended March
31, 1996 and 1995, respectively.
RECLASSIFICATIONS
Certain items in 1995 have been reclassified to conform to the 1996 financial
statement presentation.
NOTE 2 - PROPERTY SALES AND PARTNERSHIP EXCHANGE OFFER
In March 1995, the Company sold its 32.5% working interest in certain depths
(above approximately 10,575 feet) in the West Cote Blanche Bay Field for
approximately $14.9 million. In April 1996, the Company sold its remaining
interests in the West Cote Blanche Bay, Rabbit Island and Belle Isle Fields
located in the Gulf Coast of Louisiana for approximately $35.4 million,
resulting in a gain of approximately $7.5 million after adjustments for
revenues and expenses subsequent to the effective date of December 31, 1995 and
satisfaction of a net profits interest associated with the properties. The
gain on the sale of properties will be recorded in the second quarter of 1996.
In conjunction with this sale and to obtain the required consents for such
sale, the Company agreed to repay $35 million in senior unsecured notes and a
$5 million revolving credit facility which was secured by these properties.
Debt prepayment premiums and related costs totalling approximately $10.4
million will be recognized as an extraordinary loss in the second quarter of
1996. (See Note 3.)
In January 1996, the Company completed an exchange offer under which it issued
an aggregate of 168,362 shares of common stock and warrants to purchase
587,783 shares of common stock at $11 per share in exchange for all outstanding
limited partnership interests in the three remaining limited partnerships
sponsored by the Company. The shares of common stock were valued at $1.9
million (based upon the current market price at the time of the offer), which
was allocated to oil and gas properties. Substantially all of the oil and gas
properties were immediately sold at their approximate book value. The
warrants, issued as an inducement to the participants to accept the Exchange
Offer, were valued at $3.64 each, for a total of $2.1 million, which was
charged to expense in the first quarter of 1996.
<PAGE> 194
<TABLE>
9
NOTE 3 - LONG TERM DEBT
Long term debt consists of the following:
<CAPTION>
MARCH 31 DECEMBER 31,
1996 1995
----------- -----------
<S> <C> <C>
Senior unsecured notes with interest at 13.0%.
See description below. $35,000,000 $35,000,000
Revolving secured credit facility. Interest
payments due quarterly beginning
March 31, 1995. Principal payments due
quarterly beginning March 31, 1997.
See description below. 5,000,000 5,000,000
Convertible subordinated debentures with
interest at 8.0%. 4,252,000 4,310,000
Convertible subordinated notes with interest
at 8.0%. See description below. 3,269,000
Promissory note due on July 1, 1996 with
interest at 13.0% from January 1, 1996.
Unsecured 1,000,000 1,000,000
Vendor financing with interest ranging from 10.5 - 13.5%.
Principal and interest payments are due in varying
installments through April 1997. Unsecured. 5,840,562 6,234,357
Bank financing with interest at LIBOR plus
7.5% to 8.0%. Secured by certain GEOILBENT
oil export proceeds. See description below. 1,861,754 850,000
Bank financing with interest at 8.875%. Principal
and interest due in monthly installments of $9,156
with the unpaid balance due January 5, 1998. Secured
by residential real estate. 1,136,011 1,137,500
Other--various equipment purchases and
leases with principal and interest
payments due monthly from $180 to $3,381.
Interest rates vary from 10.0% to 16.91%.
Notes and leases mature from March 1996 to
March 2000. 97,534 118,788
----------- -----------
54,187,861 56,919,645
Less current portion 8,137,779 7,433,339
----------- -----------
$46,050,082 $49,486,306
=========== ===========
</TABLE>
In September 1994 and June 1995, the Company issued $15 million and $20 million
in 13% senior unsecured notes due 2002 and 2007, respectively. Additionally,
in connection with the issuance of the notes, the Company issued warrants
entitling the holder to purchase 250,000 shares of common stock at $9.00 per
share and 125,000 shares at $17.09 per share, subject to adjustment in certain
circumstances, that are exercisable on or before September 30, 2002 and June
30, 2007, respectively. In April and May 1996, in conjunction with the sale of
the Company's Gulf Coast properties and the issuance of $125 million in 11.625%
senior unsecured notes due 2003, the Company repaid the outstanding 13% notes,
accrued interest, and corresponding prepayment premiums of approximately $10.4
million. (See Notes 2 and 9.)
In December 1994, the Company entered into a revolving credit facility, secured
in part by mortgages on the Company's U.S. properties and in part by a
guarantee provided by the financial institution which arranged the credit
facility. The initial available principal under the facility was set at $10
million. Additionally, in exchange for the credit enhancement, the Company
issued to the arranging financial institution and lending commercial bank
warrants entitling the holders to purchase 50,000 shares of common stock at
$12.00 per share, subject to adjustment in certain circumstances, that are
exercisable on or before December 2004, and the Company granted to the
arranging institution a 5% net profits interest in the Company's properties
whose development is financed by the facility. At March 31, 1996 and 1995,
the interest rates under this facility were 10.2% and 8.9%, respectively. In
conjunction with the sale of the Company's Gulf Coast properties in April 1996,
the Company repaid the outstanding balance of $5.0 million to the lending
institution. (See Note 2.)
In October 1991, the Company issued $4,662,000 aggregate principal amount of
privately placed 8% convertible subordinated notes due October 1, 2001,
convertible at the option of the note holders at 85.259 shares per $1,000
principal amount. In December 1995, the holders of the notes were notified of
the Company's intention to prepay the notes on February 12, 1996 at 103% of the
principal amount plus accrued interest. As a result, substantially all
<PAGE> 195
10
of the holders elected to convert their notes for shares of common stock.
During the first quarter of 1996, the Company issued an aggregate of 275,081
shares of common stock upon the conversion of notes with a principal amount of
$3,226,000 and prepaid the remaining note principal of $43,000 plus premium and
accrued interest.
In August 1994, GEOILBENT entered into an agreement with International Moscow
Bank for a $4 million loan with the following terms: 14 monthly payments,
interest at LIBOR plus 7.5%, with interest only payments for the first four
months and monthly principal and interest payments thereafter. In March 1995,
this credit facility was expanded to $6 million with interest only payments for
three months and monthly principal and interest payments thereafter. In
connection with this agreement, the Company provided to International Moscow
Bank a guarantee of payment under which the Company has agreed to pay such loan
in full if GEOILBENT fails to make the scheduled payments. In December 1995,
GEOILBENT entered into a new loan agreement with International Moscow Bank for
$5.0 million, the repayment of which was not guaranteed by the Company, payable
over 17 months with interest at LIBOR plus 8.0%. At March 31, 1996 and
December 31, 1995, the Company's proportionate share of the outstanding
balances was $1.9 million and $0.9 million, respectively.
NOTE 4 - SHORT TERM BORROWINGS
In 1994, Benton-Vinccler entered into a $25 million credit facility with
Morgan Guaranty Trust Company of New York ("Morgan Guaranty") to repay
commercial paper and for working capital requirements. The credit facility is
collateralized in full by time deposits from the Company, bears interest at
LIBOR plus 3/4% (5.3% and 6.1% at March 31, 1996 and 1995, respectively) and
is renewed on a monthly basis. The loan arrangement contains no restrictive
covenants and no financial ratio covenants. The outstanding balance under the
credit facility at March 31, 1996 and December 31, 1995 was $19.25 million.
Beginning in the fourth quarter of 1994, Benton-Vinccler acquired approximately
$4.1 million of drilling and production equipment from trading companies and
suppliers under terms which include repayment within a 12-month period in
monthly and quarterly installments at interest rates from 6.7% to 10.75%. At
March 31, 1996 and December 31, 1995, approximately $0.7 million related to
these loans was outstanding.
In June 1994, GEOILBENT entered into a payment advance agreement with NAFTA
Moscow, the export agency which markets GEOILBENT's oil production to
purchasers in Europe. The payment advance of $2.5 million against future oil
shipments, which bore an effective discount rate of 12%, was repaid through
withholdings from oil sales on a monthly basis through December 1994. In March
and August 1995, GEOILBENT received $3.0 million and $2.0 million,
respectively, in production payment advances pursuant to similar agreements
with NAFTA Moscow containing similar terms. During the period ended March 31,
1996, GEOILBENT repaid most of the original NAFTA Moscow advances. Funding for
these repayments was provided largely by entering into other similar short term
borrowings and oil payment advance arrangements with Russian commercial banks
and with another oil purchaser. GEOILBENT also entered into an agreement with
Morgan Guaranty for a short term credit facility under which the Company
provides cash collateral for the loans to GEOILBENT. GEOILBENT's obligations
under the new agreements with the Russian commercial banks and oil purchaser
are not guaranteed by the Company. At March 31, 1996, the Company's
proportionate share of the outstanding liabilities of GEOILBENT was $1.4
million, $0.6 million of which was cash collateralized by the Company.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In the normal course of its business, the Company may periodically become
subject to actions threatened or brought by its investors or partners in
connection with the operation or development of its properties or the sale of
securities. Prior to 1992, the Company was engaged in the formation and
operation of oil and gas limited partnership interests. In 1992, the Company
ceased raising funds through such sales. In connection with its continuing
role as managing general partner of certain limited partnerships, the Company
may become subject to actions brought by limited partners of these
partnerships. Certain of such limited partners have brought an action against
the Company in connection with the Company's operation of the limited
partnerships as managing general partner. The plaintiffs seek actual and
punitive damages for alleged actions and omissions by the Company in operating
the partnerships and alleged misrepresentations made by the Company in selling
the limited partnership interests. In May 1995, the Company agreed to a
binding arbitration proceeding with respect to such claims. In April 1996, the
plaintiffs delivered a letter to the arbitrator instructing the arbitrator to
place such action in abeyance. The Company intends
<PAGE> 196
11
to vigorously defend this action and does not believe the claims raised are
meritorious. However, new developments could alter this conclusion at any
time. The Company will be forced to expend time and financial resources to
defend or resolve any such matters. The Company is also subject to ordinary
litigation that is incidental to its business. None of the above matters are
expected to have a material adverse effect on the Company.
NOTE 6 - TAXES ON INCOME
As of December 31, 1995, for federal income tax purposes the Company had
operating loss carryforwards of approximately $41.0 million, expiring in the
years 2003 through 2010. If the carryforwards are ultimately realized,
approximately $3.0 million will be credited to additional paid-in capital for
tax benefits associated with deductions for income tax purposes related to
stock options. The provisions for income taxes for 1996 and 1995 consist
primarily of foreign taxes currently payable.
NOTE 7 - RUSSIAN EXPORT TARIFF
GEOILBENT received a waiver from the export tariff for 1995. Russia has
recently announced that, in July 1996, such oil export tariffs will be
terminated in conjunction with a loan agreement with the International Monetary
Fund. It is anticipated that the tariff on oil exporters may be replaced by an
excise or other duty levied on all oil producers, but it is currently unclear
how such other tax rates and regimes will be set and administered. The Russian
regulatory environment continues to be volatile and the Company is unable to
predict the impact of such changes in tariffs, taxes and duties.
NOTE 8 - VENEZUELA OPERATIONS
On July 31, 1992, the Company and its partner, Venezolana de Inversiones y
Construcciones Clerico, C.A. ("Vinccler"), signed an operating service
agreement to reactivate and further develop three Venezuelan oil fields with
Lagoven, S.A., an affiliate of the national oil company, Petroleos de
Venezuela, S.A. The operating service agreement covers the Uracoa, Bombal and
Tucupita fields that comprise the South Monagas Unit. Under the terms of the
operating service agreement, Benton-Vinccler, a corporation owned 80% by the
Company and 20% by Vinccler, is a contractor for Lagoven and is responsible for
overall operations of the South Monagas unit, including all necessary
investments to reactivate and develop the fields comprising the unit.
Benton-Vinccler receives an operating fee in U.S. dollars deposited into a U.S.
commercial bank account for each barrel of crude oil produced (subject to
periodic adjustments to reflect changes in a special energy index of the U.S.
Consumer Price Index) and is reimbursed according to a prescribed formula in
U.S. dollars for its capital costs, provided that such operating fee and cost
recovery fee cannot exceed the maximum dollar amount per barrel set forth in
the agreement (which amount is periodically adjusted to reflect changes in the
average of certain world crude oil prices). The Venezuelan government
maintains full ownership of all hydrocarbons in the fields.
NOTE 9 - SUBSEQUENT EVENTS
In May, 1996, the Company issued $125 million in 11.625% senior unsecured notes
due May 1, 2003. Interest on the notes is due May 1 and November 1 of each
year, beginning November 1, 1996. The indenture agreement provides for
limitations on liens, additional indebtedness, certain capital expenditures,
dividends, sales of assets and mergers. Pursuant to the terms of the senior
unsecured notes, the Company has agreed to file a registration statement to
exchange such notes. In the event that the Company does not file such a
registration statement and/or consummate an exchange offer within the time
periods prescribed, then additional interest (in addition to the interest
otherwise due on the notes) will accrue at an annual rate of 0.50% until such
exchange offer is consummated. A portion of the proceeds from this offering
was used to repay certain long term indebtedness and the remainder will be used
for repayment of certain short term obligations and for capital expenditure and
working capital purposes. (See Note 2.)
<PAGE> 197
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
PRINCIPLES OF CONSOLIDATION AND ACCOUNTING METHODS
The Company has included the results of operations of Benton-Vinccler in its
consolidated statement of operations and has reflected the 20% ownership
interest of Vinccler as a minority interest. Beginning in 1995, GEOILBENT has
been included in the consolidated financial statements based on a fiscal period
ending September 30. Results of operations reported in the first quarter of
1996 for Russia reflect the three months ended December 31, 1995. The
Company's investment in GEOILBENT is proportionately consolidated based on the
Company's ownership interest, and for oil and gas reserve information, the
Company reports its 34% share of the reserves attributable to GEOILBENT.
The Company follows the full-cost method of accounting for its investments in
oil and gas properties. The Company capitalizes all acquisition, exploration,
and development costs incurred. The Company accounts for its oil and gas
properties using cost centers on a country by country basis. Proceeds from
sales of oil and gas properties are credited to the full-cost pools.
Capitalized costs of oil and gas properties are amortized within the cost
centers on an overall unit-of-production method using proved oil and gas
reserves as determined by independent petroleum engineers. Costs amortized
include all capitalized costs (less accumulated amortization), the estimated
future expenditures (based on current costs) to be incurred in developing
proved reserves, and estimated dismantlement, restoration and abandonment
costs. See Note 1 of Notes to Consolidated Financial Statements.
The following discussion of the Company's results of operations for the three
months ended March 31, 1996 and 1995 and financial condition at March 31, 1996
and December 31, 1995 should be read in conjunction with the Company's
Consolidated Financial Statements and related notes thereto included in PART I,
Item 1, "Financial Statements."
RESULTS OF OPERATIONS
The following table presents the Company's consolidated income statement items
as a percentage of total revenues:
<TABLE>
<CAPTION>
Three Months Ended March 31,
----------------------------
1996 1995
----- -----
<S> <C> <C>
Oil and Gas Sales 95.0% 95.4%
Net Gain on Exchange Rates 3.4 1.0
Investment Earnings and Other 1.6 3.6
----- -----
Total Revenues 100.0 100.0
----- -----
Lease Operating Costs and Production Taxes 12.4 17.7
Depletion, Depreciation and Amortization 23.5 24.8
General and Administrative 11.0 13.2
Interest 6.9 12.8
Partnership Exchange Expenses 6.5 --
----- -----
Total Expenses 60.3 68.5
----- -----
Income Before Income Taxes and Minority Interest 39.7 31.5
Income Tax Expense 13.5 8.6
Minority Interest 7.0 6.8
----- -----
Net Income 19.2% 16.1%
===== =====
</TABLE>
<PAGE> 198
13
THREE MONTHS ENDED MARCH 31, 1996 AND 1995
The Company had revenues of $32.9 million for the three months ended March 31,
1996. Expenses incurred during the period consisted of lease operating costs
and production taxes of $4.1 million, depletion, depreciation and amortization
expense of $7.7 million, general and administrative expense of $3.7 million,
interest expense of $2.3 million, partnership exchange expense of $2.1 million,
income tax expense of $4.4 million and a minority interest of $2.3 million.
Net income for the period was $6.3 million or $0.22 per share.
By comparison, the Company had revenues of $12.7 million for the three months
ended March 31, 1995. Expenses incurred during the period consisted of lease
operating costs and production taxes of $2.2 million, depletion, depreciation
and amortization expense of $3.1 million, general and administrative expense
of $1.7 million, interest expense of $1.6 million, income tax expense of $1.1
million and a minority interest of $0.9 million. Net income for the period was
$2.0 million or $0.08 per share.
Revenues increased $20.2 million, or 159%, during the three months ended March
31, 1996 compared to the corresponding period of 1995 primarily due to
increased oil sales in Venezuela. Sales quantities for the three months ended
March 31, 1996 from Venezuela and Russia were 2,623,444 and 223,397 Bbl,
respectively, compared to 1,062,093 and 118,864 Bbl, respectively, for the
three months ended March 31, 1995. Prices for crude oil averaged $9.63 per Bbl
(pursuant to terms of an operating service agreement) from Venezuela and $10.32
per Bbl from Russia for the three months ended March 31, 1996 compared to $9.02
per Bbl from Venezuela and $13.12 per Bbl from Russia for the corresponding
period of 1995. Domestic sales quantities for the three months ended March 31,
1996 were 5,163 Bbl of crude oil and condensate and 1,249,128 Mcf of natural
gas compared to 32,317 Bbl of crude oil and condensate and 346,548 Mcf of
natural gas for the three months ended March 31, 1995. Domestic prices for
crude oil and natural gas averaged $19.94 per Bbl and $3.26 per Mcf during the
three months ended March 31, 1996 compared to $17.10 per Bbl and $1.62 per Mcf
during the corresponding period of 1995. Revenues for the three months ended
March 31, 1996 were reduced by a loss of $0.4 million related to a commodity
hedge agreement compared to a loss of $0.2 million during the corresponding
period of 1995. Revenues for the three months ended March 31, 1996 were
increased by a foreign exchange gain of $1.1 million compared to a gain of $0.1
million during the corresponding period of 1995.
Lease operating costs and production taxes increased $1.9 million, or 86%,
during the three months ended March 31, 1996 compared to the three months ended
March 31, 1995 primarily due to the growth of the Company's Venezuelan
operations, but decreased as a percentage of total revenues. Depletion,
depreciation and amortization increased $4.6 million, or 148%, during the three
months ended March 31, 1996 compared to the corresponding period of 1995
primarily due to the increased oil production in Venezuela, but decreased as a
percentage of total revenues. Depletion expense per barrel of oil equivalent
produced from Venezuela, Russia and the United States during the three months
ended March 31, 1996 was $2.09, $3.52 and $6.47, respectively, compared to
$1.99, $2.76 and $6.97, respectively, during the corresponding period of the
previous year. General and administrative expenses increased $2.0 million, or
118%, during the three months ended March 31, 1996 compared to the
corresponding period of 1995 was primarily due to the implementation of certain
consulting and related arrangements among Benton-Vinccler, the Company and
Vinccler, Venezuelan municipal taxes (which are a function of growing oil
revenues) and the Company's increased corporate activity associated with the
growth of the Company's business; but decreased slightly as a percentage of
total revenues. Interest expense increased $0.7 million, or 44%, during the
three months ended March 31, 1996 compared to the three months ended March 31,
1995 primarily due to increased borrowing to fund operations in Venezuela and
Russia, but decreased substantially as a percentage of total revenues. The
Company incurred partnership exchange expenses of $2.1 million during the three
months ended March 31, 1996 as a result of the completion of an exchange offer
resulting in the liquidation of three limited partnerships. Income tax expense
increased $3.3 million, or 300%, during the three months ended March 31, 1996
compared to the corresponding period of 1995 due primarily to increases in
profitability in Venezuela, the United States and Russia. The net income
attributable to the minority interest increased $1.4 million, or 156%, for the
three months ended March 31, 1996 compared to the three months ended March 31,
1995 as a result of the increased profitability of Benton-Vinccler's operations
in Venezuela.
<PAGE> 199
14
INTERNATIONAL OPERATIONS
The Company's costs of operations in Venezuela and Russia beginning in 1993
have included certain fixed or minimum office, administrative, legal and
personnel related costs and certain start up costs, including short term
facilities rentals, organizational costs, contract services and consultants.
Such costs are expected to grow over time as operations increase. In the last
two years such costs have become less significant on a unit of production
basis, but such costs can be expected to fluctuate in the future based upon a
number of factors. In Venezuela, for the year ended December 31, 1993, the
operating costs and general and administrative expenses were $7.26 and $2.25
per Bbl, respectively. For the three months ended March 31, 1996 the operating
costs and general and administrative expenses for Venezuela decreased to $0.88
and $1.29 per Bbl, respectively. The Company's Venezuelan operations have
grown considerably since inception, and are expected to continue to grow, and
its operating costs and general and administrative expenses are expected to
increase both in the aggregate and on a per unit basis. In Russia, for the
year ended December 31, 1993, the operating costs and general and
administrative expenses were $16.22 and $12.96 per Bbl, respectively,
decreasing to $6.72 and $1.70 per Bbl, respectively, for the three months ended
March 31, 1996. The Company's Russian operations have grown less significantly
than the Venezuelan operations. Capital expenditures through 1993 in both
Venezuela and Russia focused on start-up infrastructure items such as roads,
pipelines, and facilities rather than drilling. Beginning in 1994, a higher
proportion of capital expenditures have been and will continue to be spent on
drilling and production activities.
In January 1996, a consortium consisting of the Company (30%) and two bidding
partners (35% each) were awarded the right to explore and develop the Delta
Centro Block in Venezuela. The contract requires a minimum exploration work
program consisting of completing a 1,300 kilometer seismic survey and drilling
three wells to depths ranging from 12,000 to 18,000 feet, within the next five
years. PDVSA estimates that such work will cost $60 million. The Company and
its partners will have to provide performance guarantees or letters of credit
for their pro rata shares of the minimum work program. The venture will be
operated by one of the Company's partners, The Louisiana Land and Exploration
Company. The venture intends to conduct a 3-D seismic survey beginning in 1996
at a total cost to the Company of $6-7 million. The first well is tentatively
scheduled for 1997 at a cost of $1.5-2.0 million to the Company. Future
seismic and drilling programs will be based on the results of 1996-97 activity.
If commercial production results from exploration activities at Delta Centro,
then an affiliate of PDVSA will participate in the venture at an interest
ranging from 1 to 35% at its discretion. Any oil and gas produced at Delta
Centro will be sold at market prices and will be subject to the oil and gas
taxation regime in Venezuela and to the terms of a profit sharing agreement
with PDVSA. Under current oil and gas tax law, a royalty of 16.7% will be paid
to the state, and an income tax rate of 66.7% will be applied to the venture's
pre-tax profits. Under the terms of the profit sharing agreement, the venture
will share 41% of pre-tax income with PDVSA for the period of time during which
the first $1 billion of revenues is produced; thereafter, the profit sharing
may increase to up to 50% according to a formula based on return on assets.
As a private contractor, Benton-Vinccler is subject to a statutory income tax
rate of 34%. However, Benton-Vinccler reported lower effective tax rates due
to significant non-cash tax deductible expenses resulting from devaluations in
Venezuela when Benton-Vinccler had net monetary liabilities in U.S. dollars.
The Company cannot predict the timing or impact of future devaluations in
Venezuela. Any Company operations related to Delta Centro will be subject to
oil and gas industry taxation, which currently provides for royalties of 16.67%
and income taxes of 66.67%.
GEOILBENT is subject to a statutory income tax rate of 35%. GEOILBENT has also
been subject to various other tax burdens, including an oil export tariff. The
export tariff was 30 ECU's per ton through 1995, although GEOILBENT obtained an
exemption from such tariff for 1995. The tariff was reduced to 20 ECU's per
ton in January 1996, and Russia has recently announced that effective July
1996, oil export tariffs will be terminated. The Company anticipates that the
tariff on oil exporters may be replaced by an excise, pipeline or other tax
levied on all oil producers, but it is currently unclear how such other tax
rates and regimes will be set and administered.
EFFECTS OF CHANGING PRICES, FOREIGN EXCHANGE RATES AND INFLATION
The Company's results of operations and cash flow are affected by changing oil
and gas prices. However, the Company's Venezuelan revenues are based on a fee
adjusted quarterly by the percentage change of a basket of crude oil prices
instead of by absolute dollar changes, which dampens both any upward and
downward effects of changing prices on the Company's Venezuelan revenues and
cash flows. If the price of oil and gas increases, there
<PAGE> 200
15
could be an increase in the cost to the Company for drilling and related
services because of increased demand, as well as an increase in revenues.
Fluctuations in oil and gas prices may affect the Company's total planned
development activities and capital expenditure program.
Effective May 1, 1994, the Company entered into a commodity hedge agreement
with Morgan Guaranty designed to reduce a portion of the Company's risk from
oil price movements. Pursuant to the hedge agreement, with respect to the
period from May 1, 1994 through the end of 1996, the Company will receive from
Morgan Guaranty $16.82 per Bbl and the Company will pay to Morgan Guaranty the
average price per Bbl of West Texas Intermediate Light Sweet Crude Oil ("WTI")
determined in the manner set forth in the hedge agreement. Such payments will
be made with respect to production of 1,000 Bbl of oil per day for 1994, 1,250
Bbl of oil per day for 1995, and 1,500 Bbl of oil per day for 1996. During the
quarter ended March 31, 1996, the average price per Bbl of WTI was $19.57 and
the Company's net exposure for the quarter was $0.4 million. The Company's oil
production is not materially affected by seasonality. The returns under the
hedge agreement are affected by world-wide crude oil prices, which are subject
to wide fluctuation in response to a variety of factors that are beyond the
control of the Company.
There are presently no restrictions on conversion of currency in either
Venezuela or Russia. However, from June 1994 through April 1996, Venezuela
implemented exchange controls which significantly limit the ability to convert
local currency into U.S. dollars. Because payments made to Benton-Vinccler are
made in U.S. dollars into its United States bank account, and Benton-Vinccler
is not subject to regulations requiring the conversion or repatriation of those
dollars back into the country, the exchange controls have not had a material
adverse effect on Benton-Vinccler or the Company.
Within the United States, inflation has had a minimal effect on the Company,
but is potentially an important factor in results of operations in Venezuela
and Russia. With respect to Benton-Vinccler and GEOILBENT, substantially all
of the sources of funds, including the proceeds from oil sales, the Company's
contributions and credit financings, are denominated in U.S. dollars, while
local transactions in Russia and Venezuela are conducted in local currency.
Following the announcement of a Venezuelan preliminary loan accord with the IMF
and the lifting of certain exchange and price controls, inflation could be
expected to have an adverse effect on Benton-Vinccler.
During the quarter ended March 31, 1996, the Company realized net foreign
exchange gains, primarily as a result of the decline in the value of the
Venezuelan bolivar during periods when Benton-Vinccler had substantial net
monetary liabilities denominated in bolivares. However, there are many factors
affecting foreign exchange rates and resulting exchange gains and losses, many
of which are beyond the influence of the Company. The Company has recognized
significant exchange gains and losses in the past, resulting from fluctuations
in the relationship of the Venezuelan and Russian currencies to the U.S.
dollar. It is not possible to predict the extent to which the Company may be
affected by future changes in exchange rates and exchange controls.
CAPITAL RESOURCES AND LIQUIDITY
The oil and gas industry is a highly capital intensive business. The Company
requires capital principally to fund the following costs: (i) drilling and
completion costs of wells and the cost of production and transportation
facilities; (ii) geological, geophysical and seismic costs; and (iii)
acquisition of interests in oil and gas properties. The amount of available
capital will affect the scope of the Company's operations and the rate of its
growth.
The net funds raised and/or used in each of the operating, investing and
financing activities for the three months ended March 31, 1996 and 1995 are
summarized in the following table and discussed in further detail below:
<TABLE>
<CAPTION>
THREE MONTHS YEARS ENDED MARCH 31,
---------------------------------------
1996 1995
------------- --------------
<S> <C> <C>
Net cash provided by operating activities $ 15,775,900 $ 5,388,694
Net cash provided by (used in)
investing activities (14,948,657) 3,583,608
Net cash provided by (used in)
financing activities 796,725 (1,956,095)
------------- --------------
Net increase in cash $ 1,623,968 $ 7,016,207
============= ==============
</TABLE>
<PAGE> 201
16
At March 31, 1996, the Company had current assets of $64.2 million (including
$19.3 million and $2.0 million of cash restricted as collateral for loans to
Benton-Vinccler and GEOILBENT, respectively), and current liabilities of $61.5
million (including loans of $19.3 million and $0.6 million collateralized by
restricted cash), resulting in working capital of $2.7 million and a current
ratio of 1.04:1. This compares to the Company's working capital deficit of
$2.9 million at March 31, 1995. The increase of $5.6 million was due primarily
to working capital generated from operations in excess of capital expenditures.
CASH FLOW FROM OPERATING ACTIVITIES. During the three months ended March 31,
1996 and 1995, respectively, net cash provided by operating activities was
approximately $15.8 million and $5.4 million, respectively. Cash flow from
operating activities increased by $10.4 million during the three months ended
March 31, 1996 over the corresponding period of the prior year due primarily to
increased oil and gas production in Venezuela.
CASH FLOW FROM INVESTING ACTIVITIES. During the three months ended March 31,
1996 and 1995, the Company had drilling and production related capital
expenditures of approximately $17.4 million and $13.5 million, respectively.
Of the 1996 expenditures, $12 million was attributable to the development of
the South Monagas Unit in Venezuela, $1.8 million related to the development of
the North Gubkinskoye Field in Russia, $1.7 million related to drilling
activity in the West Cote Blanche Bay, Rabbit Island and Belle Isle Fields in
Louisiana, and $1.9 million was attributable to other projects. The Company
also sold certain oil and gas properties for net proceeds of approximately $1.3
million and $14.7 million in the three months ended March 31, 1996 and 1995,
respectively.
In April 1996, the Company sold all of its interests in the West Cote Blanche
Bay, Rabbit Island and Belle Isle Fields for a purchase price of $35.4 million.
Proceeds of the sale will be used for repayment of certain indebtedness and
capital expenditures as described below.
CASH FLOW FROM FINANCING ACTIVITIES. In May 1996, the Company issued $125
million in 11.625% senior unsecured notes due May 1, 2003. A portion of the
proceeds were used to repay certain long term indebtedness and the remainder
will be used for repayment of certain short term obligations and for capital
expenditure and working capital purposes.
The Company expects 1996 capital expenditures to be approximately $100 million,
including $12 million in expenditures for Russia (net to the Company's
interest), which is dependent on proposed EBRD or other financing, which may or
may not be obtained. Funding for the 1996 and subsequent capital expenditure
programs is expected to come from the Company's recent issuance of senior
unsecured notes and sale of property interests, its cash flow from operations,
future sales of property interests, or issuance of debt or equity securities.
<PAGE> 202
17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of per share earnings.
(b) Reports on Form 8-K.
On January 8, 1996, the Company filed a report on Form 8-K,
under Item 5. "Other Events" regarding a press release related
to the settlement of certain litigation, such release
disseminated on January 8, 1996.
On January 12, 1996, the Company filed a report on Form 8-K,
under Item 5. "Other Events" regarding a press release related
to the execution of a non-binding letter of intent related to
the sale of the Company's wholly-owned subsidiary, such
release disseminated on January 11, 1996.
On March 27, 1996, the Company filed a report on Form 8-K,
under Item 5. "Other Events" regarding the Company press
release of 1995 and fourth quarter 1995 earnings, such release
disseminated on March 20, 1996; and regarding the agreement
reached to sell the Company's wholly owned subsidiary, Benton
Oil and Gas Company of Louisiana, and related exhibits.
<PAGE> 203
18
SIGNATURES
Pursuant to the requirements of Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.
<TABLE>
<S> <C> <C>
BENTON OIL AND GAS COMPANY
Dated: May 13, 1996 By: /S/A. E. Benton
------------------------------
A. E. Benton,
Chairman and Chief Executive Officer
Dated: May 13, 1996 By: /S/Michael B. Wray
-----------------------------
Michael B. Wray
President and Chief Financial Officer
</TABLE>
<PAGE> 204
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(Mark One)
Quarterly Report Under Section 13 or 15(d)
[X] of the Securities Exchange Act of 1934
For the Quarterly Period Ended June 30, 1996 or
Transition Report Pursuant to Section 13 or 15(d)
[ ] of the Securities Act of 1934 for the
Transition Period from ___________to_____________
COMMISSION FILE NO. 1-10762
_______________________
BENTON OIL AND GAS COMPANY
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
DELAWARE 77-0196707
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification Number)
1145 EUGENIA PLACE, SUITE 200
CARPINTERIA, CALIFORNIA 93013
(Address of principal executive offices) (Zip Code)
</TABLE>
Registrant's telephone number, including area code (805) 566-5600
_______________________
Indicate by check mark whether the Registrant (1) has
filed all reports required to be filed by Section 13 or
15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90
days.
Yes X No
----- -----
_______________________
At August 12, 1996, 27,577,638 shares of
the Registrant's Common Stock were outstanding.
<PAGE> 205
2
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
<TABLE>
<CAPTION>
Page
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<S> <C> <C> <C>
Consolidated Balance Sheets at June 30, 1996
(Unaudited) and December 31, 1995................................................... 3
Consolidated Statements of Income for the Three
Months Ended June 30, 1996 and 1995 (Unaudited)..................................... 4
Consolidated Statements of Income for the Six
Months Ended June 30, 1996 and 1995 (Unaudited)..................................... 5
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 1996 and 1995 (Unaudited)..................................... 6
Notes to Consolidated Financial Statements............................................... 8
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS......................................................... 14
PART II. OTHER INFORMATION
Signatures...................................................................................................... 21
</TABLE>
<PAGE> 206
3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
---------------------------
<TABLE>
<CAPTION>
JUNE 30, DECEMBER 31,
1996 1995
------------- -------------
(unaudited)
<S> <C> <C>
ASSETS
- ------
CURRENT ASSETS:
Cash and cash equivalents $ 13,785,231 $ 6,179,998
Restricted cash (Notes 3, 4 and 5) 38,314,000 20,314,000
Marketable securities 79,909,144
Accounts receivable:
Accrued oil and gas revenue 31,546,475 22,069,217
Joint interest and other 3,900,629 2,869,962
Prepaid expenses and other 686,748 214,622
------------- -------------
TOTAL CURRENT ASSETS 168,142,227 51,647,799
OTHER ASSETS 5,847,917 3,434,760
PROPERTY AND EQUIPMENT (Notes 3 and 5):
Oil and gas properties (full cost method - costs of
$19,965,879 and $17,925,371 excluded from
amortization in 1996 and 1995, respectively) 186,767,248 177,110,550
Furniture and fixtures 3,262,018 2,539,233
------------- -------------
190,029,266 179,649,783
Accumulated depletion and depreciation (33,187,314) (19,982,244)
------------- -------------
156,841,952 159,667,539
------------- -------------
$ 330,832,096 $ 214,750,098
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
- ------------------------------------
CURRENT LIABILITIES:
Accounts payable:
Revenue distribution $ 868,810 $ 2,692,751
Trade and other 19,655,776 19,777,018
Accrued interest payable, payroll and related taxes 5,295,130 1,687,648
Income taxes payable 9,042,995 1,039,166
Short term borrowings (Note 4) 21,371,228 21,905,480
Current portion of long term debt (Note 3) 1,477,355 7,433,339
------------- -------------
TOTAL CURRENT LIABILITIES 57,711,294 54,535,402
LONG TERM DEBT (Note 3) 127,173,617 49,486,306
MINORITY INTEREST (Note 8) 11,447,056 7,047,791
COMMITMENTS AND CONTINGENCIES (Notes 3, 5, 7 and 9)
STOCKHOLDERS' EQUITY (Note 3):
Preferred stock, par value $0.01 a share;
authorized 5,000,000 shares; outstanding, none
Common stock, par value $0.01 a share;
authorized 40,000,000 shares; issued and
outstanding 27,305,825 and 25,508,605 shares at
June 30, 1996 and December 31, 1995, respectively 273,058 255,086
Additional paid-in capital 118,422,354 97,745,794
Retained earnings 15,804,717 5,679,719
------------- -------------
TOTAL STOCKHOLDERS' EQUITY 134,500,129 103,680,599
------------- -------------
$ 330,832,096 $ 214,750,098
============= =============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 207
4
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30,
------------------------------
1996 1995
------------ ------------
<S> <C> <C>
REVENUES
Oil and gas sales $ 33,086,049 $ 12,748,781
Gain on sale of properties (Note 2) 7,153,253
Gain (loss) on exchange rates 528,205 (12,931)
Investment earnings and other 1,122,166 473,380
------------ ------------
41,889,673 13,209,230
------------ ------------
EXPENSES
Lease operating costs and production taxes 5,183,497 3,041,069
Depletion, depreciation and amortization 7,066,905 3,328,335
General and administrative 5,303,675 2,214,834
Interest 3,380,877 1,742,915
------------ ------------
20,934,954 10,327,153
------------ ------------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 20,954,719 2,882,077
INCOME TAX EXPENSE 4,992,506 891,686
------------ ------------
INCOME BEFORE MINORITY INTEREST 15,962,213 1,990,391
MINORITY INTEREST (Note 8) 2,072,656 879,898
------------ ------------
INCOME BEFORE EXTRAORDINARY CHARGE 13,889,557 1,110,493
EXTRAORDINARY CHARGE FOR EARLY RETIREMENT OF
DEBT, NET OF TAX BENEFIT OF $879,000. (Note 2) 10,074,799
------------ ------------
NET INCOME $ 3,814,758 $ 1,110,493
============ ============
INCOME (LOSS) PER COMMON SHARE:
Primary:
Income before extraordinary charge $ 0.47 $ 0.04
Extraordinary charge (0.34) --
------------ ------------
Net Income $ 0.13 $ 0.04
============ ============
Fully Diluted:
Income before extraordinary charge $ 0.46 $ 0.04
Extraordinary charge (0.33) --
------------ ------------
Net Income $ 0.13 $ 0.04
============ ============
</TABLE>
See notes to consolidated financial statements.
<PAGE> 208
5
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
---------------------------------
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
---------------------------
1996 1995
------------ -----------
<S> <C> <C>
REVENUES
Oil and gas sales $ 64,370,972 $24,829,260
Gain on sale of properties (Note 2) 7,153,253
Gain on exchange rates 1,655,920 118,786
Investment earnings and other 1,648,275 922,350
------------ -----------
74,828,420 25,870,396
------------ -----------
EXPENSES
Lease operating costs and production taxes 9,256,017 5,287,071
Depletion, depreciation and amortization 14,799,706 6,473,402
General and administrative 8,951,135 3,883,606
Interest 5,640,872 3,361,041
Partnership exchange expenses (Note 2) 2,139,655
------------ -----------
40,787,385 19,005,120
------------ -----------
INCOME BEFORE INCOME TAXES
AND MINORITY INTEREST 34,041,035 6,865,276
INCOME TAX EXPENSE 9,441,973 1,971,102
------------ -----------
INCOME BEFORE MINORITY INTEREST 24,599,062 4,894,174
MINORITY INTEREST (Note 8) 4,399,265 1,742,573
------------ -----------
INCOME BEFORE EXTRAORDINARY CHARGE 20,199,797 3,151,601
EXTRAORDINARY CHARGE FOR EARLY RETIREMENT OF
DEBT, NET OF TAX BENEFIT OF $879,000. (Note 2) 10,074,799
------------ -----------
NET INCOME $ 10,124,998 $ 3,151,601
============ ===========
INCOME (LOSS) PER COMMON SHARE:
Primary:
Income before extraordinary charge $ 0.70 $ 0.12
Extraordinary charge (0.35) --
------------ -----------
Net Income $ 0.35 $ 0.12
============ ===========
Fully Diluted:
Income before extraordinary charge $ 0.67 $ 0.12
Extraordinary charge (0.33) --
------------ -----------
Net Income $ 0.34 $ 0.12
============ ===========
</TABLE>
See notes to consolidated financial statements.
<PAGE> 209
6
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
-------------------------------------
(unaudited)
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-----------------------------
1996 1995
------------- ------------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Income $ 10,124,998 $ 3,151,601
Adjustments to reconcile net income to net cash
provided by operating activities:
Depletion, depreciation and amortization 14,799,706 6,473,402
Net earnings from limited partnerships (20,435)
Amortization of financing costs 139,053 90,640
(Gain) loss on disposition of assets (6,928,253) 10,632
Partnership exchange expenses 2,139,655
Minority interest in undistributed earnings of subsidiary 4,399,265 1,742,573
Extraordinary charge for early retirement of debt 10,074,799
Increase in accounts receivable (10,629,480) (1,919,152)
Increase in prepaid expense and other (472,126) (1,339,986)
Decrease in accounts payable (1,741,679) (1,562,974)
Increase (decrease) in accrued interest payable,
payroll and related taxes 3,607,482 (25,497)
Increase in income taxes payable 8,003,829 1,586,616
------------- ------------
TOTAL ADJUSTMENTS 23,392,251 5,035,819
------------- ------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 33,517,249 8,187,420
------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of property and equipment 34,726,680 14,708,863
Additions of property and equipment (36,276,443) (27,130,397)
Increase in restricted cash (18,000,000)
Increase in marketable securities (79,909,144)
Distributions from limited partnerships 277,469
------------- ------------
NET CASH USED IN INVESTING ACTIVITIES (99,181,438) (12,421,534)
------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants 11,811,229 611,738
Proceeds from issuance of notes payable 129,603,228 22,040,000
Payments on short term borrowings
and notes payable (52,992,808) (6,980,406)
Prepayment premiums on debt retirement, net of tax (10,074,799)
Increase in other assets (5,077,428) (213,664)
------------- ------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 73,269,422 15,457,668
------------- ------------
NET INCREASE (DECREASE) IN CASH 7,605,233 11,223,554
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 6,179,998 14,192,568
------------- ------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 13,785,231 $ 25,416,122
============= ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
Cash paid during the period for interest expense $ 3,888,311 $ 3,215,165
============= ============
Cash paid during the period for income taxes $ 645,841 $ 368,427
============= ============
</TABLE>
(continued)
<PAGE> 210
7
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
During the six months ended June 30, 1996, $3,226,000 principal amount of the
Company's 8% convertible notes and $2,460,000 principal amount of the Company's
8% convertible debentures were retired upon conversion into 275,081 and 248,793
shares of the Company's common stock, respectively.
During the six months ended June 30, 1996, the Company financed the purchase of
oil and gas equipment and services in the amount of $272,655. Also during the
six months ended June 30, 1996, the Company acquired the partners' interests in
each of the three limited partnerships sponsored by the Company in exchange for
an aggregate of 168,362 shares of the Company's common stock and warrants to
purchase 587,783 shares of common stock at $11.00 per share, with a total value
of $3,996,601.
During the six months ended June 30, 1995, $117,000 of the Company's 8%
convertible notes and $670,000 of the Company's 8% convertible debentures were
retired in exchange for 9,975 and 67,768 shares of the Company's common stock,
respectively.
During the six months ended June 30, 1995, the Company financed the purchase of
oil and gas equipment and services in the amount of $7,029,985 and leased office
equipment in the amount of $54,473.
See notes to consolidated financial statements.
<PAGE> 211
8
BENTON OIL AND GAS COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
------------------------------------------
SIX MONTHS ENDED JUNE 30, 1996 (UNAUDITED)
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
ORGANIZATION
Benton Oil and Gas Company (the "Company") engages in the exploration,
development, production and management of oil and gas properties.
The Company and its former subsidiary, Benton Oil and Gas Company of Louisiana,
participated as the managing general partner of three oil and gas limited
partnerships formed during 1989 through 1991. Under the provisions of the
limited partnership agreements, the Company received compensation as stipulated
therein, and functioned as an agent for the partnerships to arrange for the
management, drilling, and operation of properties, and assumed customary
contingent liabilities for partnership obligations. In January 1996, the Company
issued an aggregate of 168,362 shares of common stock and warrants to purchase
587,783 shares of common stock at $11 per share in exchange for all outstanding
limited partnership interests and liquidated the partnerships.(See Note 2.)
The consolidated financial statements include the accounts of the Company and
its subsidiaries. The Company's investment in the Russia joint venture
("GEOILBENT") is proportionately consolidated based on the Company's ownership
interest. Beginning in 1995, GEOILBENT (owned 34% by the Company) has been
included in the consolidated financial statements based on a fiscal period
ending September 30. This change was made to provide adequate time for the
accumulation and review of financial information from the joint venture for both
quarterly and annual reporting purposes. This change did not have a material
effect on the consolidated financial statements. All material intercompany
profits, transactions and balances have been eliminated.
INTERIM REPORTING
In the opinion of the Company, the accompanying unaudited consolidated financial
statements contain all adjustments (consisting of only normal recurring
accruals) necessary to present fairly the financial position as of June 30,
1996, and the results of operations for the three and six month periods ended
June 30, 1996 and 1995. The unaudited financial statements are presented in
accordance with the requirements of Form 10-Q and do not include all disclosures
normally required by generally accepted accounting principles. References should
be made to the Company's consolidated financial statements and notes thereto
included in the Company's annual report on Form 10-K for the year ended December
31, 1995 for additional disclosures, including a summary of the Company's
accounting policies.
The results of operations for the six month period ended June 30, 1996 are not
necessarily indicative of the results to be expected for the full year.
EARNINGS PER SHARE
Earnings per common share are computed by dividing net income by the weighted
average number of common and common equivalent shares outstanding. Common
equivalent shares are shares which may be issuable upon exercise of outstanding
stock options and warrants. Total weighted average common stock equivalent
shares used to calculate earnings per common share were:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
---------------------------------- ----------------------------------
1996 1995 1996 1995
---- ---- ---- ----
<S> <C> <C> <C> <C>
Primary shares 29,371,716 26,880,445 28,522,953 26,459,123
Fully diluted shares 30,314,901 26,880,445 30,097,576 26,459,123
</TABLE>
<PAGE> 212
9
PROPERTY AND EQUIPMENT
The Company follows the full cost method of accounting for oil and gas
properties. Accordingly, all costs associated with the acquisition, exploration,
and development of oil and gas reserves are capitalized as incurred, including
exploration overhead of $528,893 and $1,090,375 for the six months ended June
30, 1996 and 1995, respectively. Only overhead which is directly identified with
acquisition, exploration or development activities is capitalized. All costs
related to production, general corporate overhead and similar activities are
expensed as incurred. The costs of oil and gas properties are accumulated in
cost centers on a country by country basis, subject to a cost center ceiling (as
defined by the Securities and Exchange Commission).
All capitalized costs of oil and gas properties (excluding unevaluated property
acquisition and exploration costs) and the estimated future costs of developing
proved reserves, are depleted over the estimated useful lives of the properties
by application of the unit-of-production method using only proved oil and gas
reserves. Excluded costs attributable to the Venezuelan, Russian and other cost
centers at June 30, 1996 were $16,361,568, $2,611,279, and $993,032,
respectively. Excluded costs attributable to the Venezuelan, Russian and other
cost centers at December 31, 1995 were $14,001,386, $3,214,849 and $709,136,
respectively. Depletion expense attributable to the Venezuelan, Russian and
United States cost centers for the six months ended June 30, 1996 was
$11,643,621, $1,348,231 and $214,571 ($2.07, $3.40 and $6.47 per equivalent
barrel), respectively. Depletion expense attributable to the Venezuelan, Russian
and United States cost centers for the six months ended June 30, 1995 was
$4,147,913, $785,008 and $1,389,665 ($1.99, $2.87 and $7.13 per equivalent
barrel), respectively. Depreciation of furniture and fixtures is computed using
the straight-line method, with depreciation rates based upon the estimated
useful life applied to the cost of each class of property. Depreciation expense
was $212,409 and $143,724 for the six months ended June 30, 1996 and 1995,
respectively.
MARKETABLE SECURITIES
Marketable securities are carried at the lower of their aggregate cost or market
value. They are comprised of high-grade debt instruments, demand or time
deposits, bankers' acceptances and certificates of deposit or acceptances of
large U.S. financial institutions and commercial paper of highly rated U.S.
corporations; all having maturities of no more than 180 days.
RECLASSIFICATIONS
Certain items in 1995 have been reclassified to conform to the 1996 financial
statement presentation.
NOTE 2 - PROPERTY SALES AND PARTNERSHIP EXCHANGE OFFER
In March 1995, the Company sold its 32.5% working interest in certain depths
(above approximately 10,575 feet) in the West Cote Blanche Bay Field for
approximately $14.9 million. In April 1996, the Company sold its remaining
interests in the West Cote Blanche Bay, Rabbit Island and Belle Isle Fields
located in the Gulf Coast of Louisiana for approximately $35.4 million,
resulting in a gain of approximately $7.2 million after adjustments for revenues
and expenses subsequent to the effective date of December 31, 1995 and
satisfaction of a net profits interest associated with the properties. In
conjunction with this sale and to obtain the required consents for such sale,
the Company agreed to repay $35 million in senior unsecured notes and a $5
million revolving credit facility which was secured in part by these properties.
Debt prepayment premiums and related costs totalling approximately $11.0 million
($10.1 million net of tax benefits) have been recognized as an extraordinary
loss in the second quarter of 1996. (See Note 3.)
In January 1996, the Company completed an exchange offer under which it issued
an aggregate of 168,362 shares of common stock and warrants to purchase 587,783
shares of common stock at $11 per share in exchange for all outstanding limited
partnership interests in the three remaining limited partnerships sponsored by
the Company. The shares of common stock were valued at $1.9 million (based upon
the current market price at the time of the offer), which was allocated to oil
and gas properties. Substantially all of the oil and gas properties were
immediately sold at their approximate book value. The warrants, issued as an
inducement to the participants to accept the exchange offer, were valued at
$3.64 each for a total of $2.1 million, which was charged to expense in the
first quarter of 1996.
<PAGE> 213
10
NOTE 3 - LONG TERM DEBT
Long term debt consists of the following:
<TABLE>
<CAPTION>
JUNE 30 DECEMBER 31,
1996 1995
---------------- ---------------
<S> <C> <C>
Senior unsecured notes with interest at 11.625%.
See description below. $125,000,000
Senior unsecured notes with interest at 13.0%.
See description below. $35,000,000
Revolving secured credit facility. Interest
payments due quarterly beginning
March 31, 1995. Principal payments due
quarterly beginning March 31, 1997.
See description below. 5,000,000
Convertible subordinated debentures with
interest at 8.0%. See description below. 1,850,000 4,310,000
Convertible subordinated notes with interest
at 8.0%. See description below. 3,269,000
Promissory note due on July 1, 1996 with
interest at 13.0% from January 1, 1996.
Unsecured. 1,000,000
Vendor financing with interest ranging from 10.5 - 13.5%.
Principal and interest payments are due in varying
installments through April 1997. Unsecured. 6,234,357
Bank financing with interest at LIBOR plus
7.5% to 8.0%. Secured by certain GEOILBENT
oil export proceeds. See description below. 1,717,000 850,000
Other--various equipment leases and bank financing with
interest and/or principal payments due monthly from
$180 to $3,381. Interest rates vary from 9.75% to
16.91%. Notes and leases mature from March 1997 to
March 2000.
Secured by equipment and residential real estate. 83,972 1,256,288
--------------- -------------
128,650,972 56,919,645
Less current portion 1,477,355 7,433,339
-------------- ------------
$127,173,617 $49,486,306
============ ===========
</TABLE>
In May 1996, the Company issued $125 million in 11.625% senior unsecured notes
due May 1, 2003. Interest on the notes is due May 1 and November 1 of each year,
beginning November 1, 1996. The indenture agreement provides for certain
limitations on liens, additional indebtedness, certain capital expenditures,
dividends, mergers and sales of assets. Pursuant to the terms of the senior
unsecured notes, the Company has filed a registration statement to exchange such
notes. In the event that the Company does not consummate an exchange offer
within the time periods prescribed, additional interest (in addition to the
interest otherwise due on the notes) will accrue at an annual rate of 0.50%
until such exchange offer is consummated. A portion of the proceeds from the
notes was used to repay certain long term indebtedness and certain short term
obligations and the remainder will be used for capital expenditure and working
capital purposes.
In September 1994 and June 1995, the Company issued $15 million and $20 million
in 13% senior unsecured notes due 2002 and 2007, respectively. Additionally, in
connection with the two issuances of notes, the Company issued warrants
entitling the holder to purchase 250,000 shares of common stock at $9.00 per
share and 125,000 shares at $17.09 per share, subject to adjustment in certain
circumstances, that are exercisable on or before September 30, 2002 and June 30,
2007, respectively. In April and May 1996, in conjunction with the sale of the
Company's Gulf Coast properties and the issuance of $125 million of debt, the
Company repaid the outstanding 13% notes, accrued interest, and corresponding
prepayment premiums of $11.0 million. (See Note 2.)
In December 1994, the Company entered into a $10 million revolving credit
facility, secured in part by mortgages on the Company's U.S. properties and in
part by a guarantee provided by the financial institution which arranged the
credit facility. In exchange for the credit enhancement, the Company issued to
the arranging financial institution
<PAGE> 214
11
and lending commercial bank warrants entitling the holders to purchase 50,000
shares of common stock at $12.00 per share, subject to adjustment in certain
circumstances, that are exercisable on or before December 2004, and the Company
granted to the arranging institution a 5% net profits interest in the Company's
properties whose development was financed by the facility. In conjunction with
the sale of the Company's Gulf Coast properties in April 1996, the Company
repaid the outstanding balance of $5.0 million to the lending institution. (See
Note 2.)
In May 1992, the Company issued $6,428,000 aggregate principal amount of
publicly offered 8% convertible subordinated debentures due May 1, 2002,
convertible at the option of the note holders at 101.157 shares per $1,000
principal amount. As of March 31, 1996, $4,252,000 of the debentures were
outstanding. In May 1996, the holders of the notes were notified of the
Company's intention to prepay the debentures on July 23, 1996 at 103% of the
principal amount plus accrued interest. As a result, during the three months
ended June 30, 1996, holders of debentures with a principal amount of $2,402,000
elected to convert their notes for 242,928 shares of common stock. Subsequent to
June 30, 1996, the Company issued an aggregate of 187,079 shares of common stock
upon the conversion of the remaining debentures.
In October 1991, the Company issued $4,662,000 aggregate principal amount of
privately placed 8% convertible subordinated notes due October 1, 2001,
convertible at the option of the note holders at 85.259 shares per $1,000
principal amount. In December 1995, the holders of the notes were notified of
the Company's intention to prepay the notes on February 12, 1996 at 103% of the
principal amount plus accrued interest. As a result, substantially all of the
holders elected to convert their notes for shares of common stock. During the
first quarter of 1996, the Company issued an aggregate of 275,081 shares of
common stock upon the conversion of notes with a principal amount of $3,226,000
and prepaid the remaining note principal of $43,000 plus premium and accrued
interest.
Beginning in August 1994, GEOILBENT had entered into various agreements with
International Moscow Bank ("IMB") for credit facilities with the following
terms: amounts of $4-6 million, repayment over 14 to 17 months, and interest at
LIBOR plus 7.5 to 8.0%. In December 1995, GEOILBENT signed a new credit facility
with IMB for $5 million, payable over 17 months with interest at LIBOR plus
8.0%. At June 30, 1996 and December 31, 1995, the Company's proportionate share
of the outstanding balances was $1.7 million and $0.9 million, respectively.
While the repayment of loans under earlier agreements was guaranteed by the
Company, repayment under the current agreement is not.
NOTE 4 - SHORT TERM BORROWINGS
In 1994, Benton-Vinccler entered into a $25 million credit facility with Morgan
Guaranty Trust Company of New York ("Morgan Guaranty") to repay commercial paper
and for working capital requirements. The credit facility is collateralized in
full by time deposits from the Company, bears interest at LIBOR plus 3/4% (6.2%
and 6.9% at June 30, 1996 and 1995, respectively) and is renewed on a monthly
basis. The loan arrangement contains no restrictive covenants and no financial
ratio covenants. The outstanding balance under the credit facility at June 30,
1996 and December 31, 1995 was $19.25 million. In August 1996 the facility was
replaced by a long term agreement for $50 million. (See Note 9.)
Beginning in the fourth quarter of 1994, Benton-Vinccler acquired approximately
$4.1 million of drilling and production equipment from trading companies and
suppliers under terms which include repayment within a 12-month period in
monthly and quarterly installments at interest rates from 6.7% to 10.75%. In
June 1996, the Company paid the balance remaining on these purchases with
proceeds from the issuance in May 1996 of $125 million of debt. (See Note 3.) At
December 31, 1995, approximately $0.7 million related to these loans was
outstanding.
In June 1994, GEOILBENT entered into a payment advance agreement with NAFTA
Moscow, the export agency which markets GEOILBENT's oil production to purchasers
in Europe. The payment advance of $2.5 million against future oil shipments,
which bore an effective discount rate of 12%, was repaid through withholdings
from oil sales on a monthly basis through December 1994. In March and August
1995, GEOILBENT received $3.0 million and $2.0 million, respectively, in
production payment advances pursuant to similar agreements with NAFTA Moscow
containing similar terms. During the period ended June 30, 1996, GEOILBENT
repaid the original NAFTA Moscow advances. Funding for the repayment was
provided largely by entering into other oil payment advance arrangements and
similar short term borrowings with other oil purchasers and with Russian
commercial banks. GEOILBENT also entered into an agreement with Morgan Guaranty
for a short term credit facility under which the Company provides cash
collateral for the loans to GEOILBENT. GEOILBENT's obligations under the new
agreements with the Russian commercial
<PAGE> 215
12
banks and oil purchaser are not guaranteed by the Company. At June 30, 1996, the
Company's proportionate share of the outstanding liabilities of GEOILBENT was
$2.1 million, $1.1 million of which was cash collateralized by the Company.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
In May 1996, the Company entered into an agreement with Morgan Guaranty which
provides for a $20 million revolving credit facility and an $18 million cash
collateralized 5-year letter of credit to secure the Company's performance of
the minimum exploration work program required in the Delta Centro Block in
Venezuela. The revolving credit facility can be drawn upon until December 1996,
and calls for interest at LIBOR plus 3% through June 1997 and LIBOR plus 3.75%
thereafter. Any amount outstanding at the end of the revolving period will
automatically convert into a term loan due 15 months thereafter. The credit
facility contains financial covenants requiring that the Company maintain a
current ratio of at least 1.1 to 1.0 and a minimum net worth of $100 million at
the end of each fiscal quarter.
In the normal course of its business, the Company may periodically become
subject to actions threatened or brought by its investors or partners in
connection with the operation or development of its properties or the sale of
securities. Prior to 1992, the Company was engaged in the formation and
operation of oil and gas limited partnership interests. In 1992, the Company
ceased raising funds through such sales. Certain limited partners in limited
partnerships sponsored by the Company have brought an action against the Company
in connection with the Company's operation of the limited partnerships as
managing general partner. The plaintiffs seek actual and punitive damages for
alleged actions and omissions by the Company in operating the partnerships and
alleged misrepresentations made by the Company in selling the limited
partnership interests. In May 1995, the Company agreed to a binding arbitration
proceeding with respect to such claims. As of June 30, 1996, the plaintiffs had
not commenced discovery. The Company intends to vigorously defend this action
and does not believe the claims raised are meritorious. However, new
developments could alter this conclusion at any time. The Company will be forced
to expend time and financial resources to defend or resolve any such matters.
The Company is also subject to ordinary litigation that is incidental to its
business. None of the above matters are expected to have a material adverse
effect on the Company.
NOTE 6 - TAXES ON INCOME
As of December 31, 1995, for federal income tax purposes the Company had
operating loss carryforwards of approximately $41.0 million, expiring in the
years 2003 through 2010. If the carryforwards are ultimately realized,
approximately $3.0 million will be credited to additional paid-in capital for
tax benefits associated with deductions for income tax purposes related to stock
options. The provisions for income taxes for 1996 and 1995 consist primarily of
foreign taxes currently payable.
NOTE 7 - RUSSIAN EXPORT TARIFF
GEOILBENT received a waiver from the Russian oil export tariff for 1995. In July
1996, the oil export tariff was terminated. The Company anticipates that the
tariff on oil exporters will be replaced by an excise, pipeline or other tax
levied on all oil producers, but it is currently unclear how such other tax
rates and regimes will be set and administered. The Russian regulatory
environment continues to be volatile and the Company is unable to predict the
impact of such changes in tariffs, taxes and duties.
<PAGE> 216
13
NOTE 8 - VENEZUELA OPERATIONS
On July 31, 1992, the Company and its partner, Venezolana de Inversiones y
Construcciones Clerico, C.A. ("Vinccler"), signed an operating service agreement
to reactivate and further develop three Venezuelan oil fields with Lagoven,
S.A., an affiliate of the national oil company, Petroleos de Venezuela, S.A. The
operating service agreement covers the Uracoa, Bombal and Tucupita fields that
comprise the South Monagas Unit. Under the terms of the operating service
agreement, Benton-Vinccler, a corporation owned 80% by the Company and 20% by
Vinccler, is a contractor for Lagoven and is responsible for overall operations
of the South Monagas unit, including all necessary investments to reactivate and
develop the fields comprising the unit. Benton-Vinccler receives an operating
fee in U.S. dollars deposited into a U.S. commercial bank account for each
barrel of crude oil produced (subject to periodic adjustments to reflect changes
in a special energy index of the U.S. Consumer Price Index) and is reimbursed
according to a prescribed formula in U.S. dollars for its capital costs,
provided that such operating fee and cost recovery fee cannot exceed the maximum
dollar amount per barrel set forth in the agreement (which amount is
periodically adjusted to reflect changes in the average of certain world crude
oil prices). The Venezuelan government maintains full ownership of all
hydrocarbons in the fields.
NOTE 9 - SUBSEQUENT EVENTS
In August 1996, Benton-Vinccler entered into a $50 million, 2 year credit
facility with Morgan Guaranty to repay the balance outstanding under a short
term credit facility (See Note 4) and to repay certain advances received from
the Company. The credit facility is collateralized in full by a time deposit of
the Company and bears interest at LIBOR plus 6%. The Company will receive
interest on its time deposit and a security fee on the outstanding principal of
the loan, for a combined total of approximately LIBOR plus 5.75%. The loan
arrangement contains no restrictive covenants and no financial ratio covenants.
<PAGE> 217
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
PRINCIPLES OF CONSOLIDATION AND ACCOUNTING METHODS
The Company has included the results of operations of Benton-Vinccler in its
consolidated statement of operations and has reflected the 20% ownership
interest of Vinccler as a minority interest. Beginning in 1995, GEOILBENT has
been included in the consolidated financial statements based on a fiscal period
ending September 30. Results of operations reported in the first half of 1996
for Russia reflect the six months ended March 31, 1996. The Company's investment
in GEOILBENT is proportionately consolidated based on the Company's ownership
interest, and for oil and gas reserve information, the Company reports its 34%
share of the reserves attributable to GEOILBENT.
The Company follows the full-cost method of accounting for its investments in
oil and gas properties. The Company capitalizes all acquisition, exploration,
and development costs incurred. The Company accounts for its oil and gas
properties using cost centers on a country by country basis. Proceeds from sales
of oil and gas properties are credited to the full-cost pools. Capitalized costs
of oil and gas properties are amortized within the cost centers on an overall
unit-of-production method using proved oil and gas reserves as determined by
independent petroleum engineers. Costs amortized include all capitalized costs
(less accumulated amortization), the estimated future expenditures (based on
current costs) to be incurred in developing proved reserves, and estimated
dismantlement, restoration and abandonment costs. See Note 1 to Consolidated
Financial Statements.
The following discussion of the Company's results of operations for the six
months ended June 30, 1996 and 1995 and financial condition at June 30, 1996 and
December 31, 1995 should be read in conjunction with the Company's Consolidated
Financial Statements and related notes thereto included in PART I, Item 1,
"Financial Statements."
RESULTS OF OPERATIONS
The Company's results of operations for the three and six months ended June 30,
1996 reflect the substantial growth of Benton Vinccler, C.A. in Venezuela, the
relative slow growth of GEOILBENT in Russia, and the sale of the Company's U.S.
operations. Benton-Vinccler accounted for more than 85% of the Company's
production, oil and gas sales and net income for the first half of 1996, and
reported increases of more than 150% in these areas over the corresponding
period of 1995. Benton Vinccler's significant growth has resulted in increases
in both oil and gas sales and expenses compared to the corresponding period in
1995, although expenses have declined both on a per barrel basis and as a
percent of oil and gas sales as production volumes have increased. Other major
influences on the Company's results of operations during the second quarter of
1996 were the sale of its Gulf Coast operations, resulting in a gain of $7.2
million and the restructuring of its long term debt, resulting in the issuance
of $125 million of senior unsecured notes and an extraordinary charge of $11.0
million ($10.1 million net of tax benefits) against earnings for the early
retirement of certain privately placed notes. In the first quarter of 1996, the
Company completed a partnership exchange offer, resulting in a noncash charge
of $2.1 million related to the issuance of certain warrants.
The following table presents selected expense items from the Company's
consolidated income statement as a percentage of oil and gas sales:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, SIX MONTHS ENDED JUNE 30,
--------------------------- ---------------------------
1996 1995 1996 1995
---------- --------- --------- --------
<S> <C> <C> <C> <C>
Lease Operating Costs and Production Taxes 15.7% 23.9% 14.4% 21.3%
Depletion, Depreciation and Amortization 21.4 26.1 23.0 26.1
General and Administrative 16.0 17.4 13.9 15.6
Interest 10.2 13.7 8.8 13.5
</TABLE>
<PAGE> 218
15
THREE MONTHS ENDED JUNE 30, 1996 AND 1995
The Company had revenues of $41.9 million for the three months ended June 30,
1996. Expenses incurred during the period consisted of lease operating costs and
production taxes of $5.2 million, depletion, depreciation and amortization
expense of $7.1 million, general and administrative expense of $5.3 million,
interest expense of $3.4 million, income tax expense of $5.0 million, minority
interest of $2.1 million and an extraordinary charge for early retirement of
debt, net of tax benefit, of $10.1 million. Income before extraordinary charge
for the period was $13.9 million or $0.46 per share. Net income was $3.8 million
or $0.13 per share.
By comparison, the Company had revenues of $13.2 million for the three months
ended June 30, 1995. Expenses incurred during the period consisted of lease
operating costs and production taxes of $3.0 million, depletion, depreciation
and amortization expense of $3.3 million, general and administrative expense of
$2.2 million, interest expense of $1.7 million, income tax expense of $0.9
million and minority interest of $0.9 million. Net income for the period was
$1.1 million or $0.04 per share.
Revenues increased $28.7 million, or 217%, during the three months ended June
30, 1996 compared to the corresponding period of 1995 primarily due to increased
oil sales in Venezuela and a $7.2 million gain on the sale of properties. Sales
quantities for the three months ended June 30, 1996 from Venezuela and Russia
were 3,011,155 Bbl and 173,461 Bbl, respectively, compared to 1,026,371 Bbl and
155,040 Bbl, respectively, for the three months ended June 30, 1995. Prices for
crude oil averaged $10.32 per Bbl (pursuant to terms of an operating service
agreement) from Venezuela and $13.85 per Bbl from Russia for the three months
ended June 30, 1996 compared to $9.63 per Bbl from Venezuela and $13.26 per Bbl
from Russia for the corresponding period of 1995. Domestic sales quantities for
the three months ended June 30, 1996 were 713 Bbl of crude oil and condensate
and 194,706 Mcf of natural gas compared to 12,643 Bbl of crude oil and
condensate and 553,038 Mcf of natural gas for the three months ended June 30,
1995. Domestic prices for crude oil and natural gas averaged $21.94 per Bbl and
$1.63 per Mcf during the three months ended June 30, 1996 compared to $14.14 per
Bbl and $1.65 per Mcf during the corresponding period of 1995. The decrease in
domestic production is primarily due to the sale of substantially all of the
Company's domestic properties in two separate transactions in March 1995 and
April 1996. (See Note 2.) Revenues for the three months ended June 30, 1996 were
reduced by a loss of $0.7 million related to a commodity hedge agreement
compared to a loss of $0.3 million during the corresponding period of 1995.
Investment earnings increased $0.6 million, or 137%, during the three months
ended June 30, 1996 compared to the three months ended June 30, 1995 due to
increased cash and marketable securities resulting primarily from the issuance
of senior unsecured notes in May 1996 and sale of property interests in
Louisiana. Revenues for the three months ended June 30, 1996 were increased by a
foreign exchange gain of $0.5 million compared to an insignificant loss during
the corresponding period of 1995.
Lease operating costs and production taxes increased $2.2 million, or 70%,
during the three months ended June 30, 1996 compared to the three months ended
June 30, 1995 primarily due to the growth of the Company's Venezuelan operations
and the payment of the export tariff in Russia, but decreased substantially as a
percentage of oil and gas sales. Depletion, depreciation and amortization
increased $3.8 million, or 112%, during the three months ended June 30, 1996
compared to the corresponding period of 1995 primarily due to the increased oil
production in Venezuela, but decreased as a percentage of oil and gas sales.
Depletion expense per barrel of oil equivalent produced from Venezuela, Russia
and the United States during the three months ended June 30, 1996 was $2.05,
$3.24 and $6.47, respectively, compared to $1.99, $2.95 and $7.26, respectively,
during the corresponding period of the previous year. General and administrative
expenses increased $3.1 million, or 139%, during the three months ended June 30,
1996 compared to the corresponding period of 1995 primarily due to the
implementation of certain consulting and related arrangements among
Benton-Vinccler, the Company and Vinccler, Venezuelan municipal taxes (which are
a function of growing oil revenues) and the Company's increased corporate
activity associated with the growth of the Company's business; but decreased
slightly as a percentage of oil and gas sales. Interest expense increased $1.7
million, or 94%, during the three months ended June 30, 1996 compared to the
three months ended June 30, 1995 primarily due to increased borrowing to fund
operations in Venezuela and Russia, but decreased slightly as a percentage of
oil and gas sales. Income tax expense increased $4.1 million, or 460%, during
the three months ended June 30, 1996 compared to the corresponding period of
1995 due primarily to increases in profitability in Venezuela. Net income
attributable to minority interest increased $1.2 million, or 136%, for the three
months ended June 30, 1996 compared to the three months ended June 30, 1995 as a
result of the increased profitability of Benton-Vinccler's operations in
Venezuela. The Company recorded an extraordinary charge for early retirement of
debt, net of tax benefit, of $10.1 million during the three months ended June
30, 1996 as a result of prepayment premiums due upon the early repayment of
senior unsecured notes. (See Note 2.)
<PAGE> 219
16
SIX MONTHS ENDED JUNE 30, 1996 AND 1995
The Company had revenues of $74.8 million for the six months ended June 30,
1996. Expenses incurred during the period consisted of lease operating costs and
production taxes of $9.3 million, depletion, depreciation and amortization
expense of $14.8 million, general and administrative expense of $9.0 million,
interest expense of $5.6 million, partnership exchange expense of $2.1 million,
income tax expense of $9.4 million, minority interest of $4.4 million and an
extraordinary charge for early retirement of debt, net of tax benefit, of $10.1
million. Income before extraordinary charge for the period was $20.2 million or
$0.67 per share. Net income was $10.1 million or $0.34 per share.
By comparison, the Company had revenues of $25.9 million for the six months
ended June 30, 1995. Expenses incurred during the period consisted of lease
operating costs and production taxes of $5.3 million, depletion, depreciation
and amortization expense of $6.5 million, general and administrative expense of
$3.9 million, interest expense of $3.4 million, income tax expense of $2.0
million and minority interest of $1.7 million. Net income for the period was
$3.2 million or $0.12 per share.
Revenues increased $48.9 million, or 189%, during the six months ended June 30,
1996 compared to the corresponding period of 1995 primarily due to increased oil
sales in Venezuela and a $7.2 million gain on the sale of properties. Sales
quantities for the six months ended June 30, 1996 from Venezuela and Russia were
5,634,599 Bbl and 396,858 Bbl, respectively, compared to 2,088,464 Bbl and
273,904 Bbl, respectively, for the six months ended June 30, 1995. Prices for
crude oil averaged $10.00 per Bbl (pursuant to terms of an operating service
agreement) from Venezuela and $11.87 per Bbl from Russia for the six months
ended June 30, 1996 compared to $9.32 per Bbl from Venezuela and $13.20 per Bbl
from Russia for the corresponding period of 1995. Domestic sales quantities for
the six months ended June 30, 1996 were 5,876 Bbl of crude oil and condensate
and 1,443,834 Mcf of natural gas compared to 44,960 Bbl of crude oil and
condensate and 899,586 Mcf of natural gas for the six months ended June 30,
1995. Domestic prices for crude oil and natural gas averaged $20.18 per Bbl and
$2.92 per Mcf during the six months ended June 30, 1996 compared to $16.27 per
Bbl and $1.64 per Mcf during the corresponding period of 1995. Revenues for the
six months ended June 30, 1996 were reduced by a loss of $1.0 million related to
a commodity hedge agreement compared to a loss of $0.5 million during the
corresponding period of 1995. Investment earnings increased $0.7 million, or
79%, during the six months ended June 30, 1996 compared to the six months ended
June 30, 1995 due to increased cash and marketable securities resulting
primarily from the issuance of senior unsecured notes in May 1996 and sale of
property interests in Louisiana. Revenues for the six months ended June 30, 1996
were increased by a foreign exchange gain of $1.7 million compared to a gain of
$0.1 million during the corresponding period of 1995.
Lease operating costs and production taxes increased $4.0 million, or 75%,
during the six months ended June 30, 1996 compared to the six months ended June
30, 1995 primarily due to the growth of the Company's Venezuelan operations, but
decreased substantially as a percentage of oil and gas sales. Depletion,
depreciation and amortization increased $8.3 million, or 129%, during the six
months ended June 30, 1996 compared to the corresponding period of 1995
primarily due to the increased oil production in Venezuela, but decreased as a
percentage of oil and gas sales. Depletion expense per barrel of oil equivalent
produced from Venezuela, Russia and the United States during the six months
ended June 30, 1996 was $2.07, $3.40 and $6.47, respectively, compared to $1.99,
$2.87 and $7.13, respectively, during the corresponding period of the previous
year. General and administrative expenses increased $5.1 million, or 130%,
during the six months ended June 30, 1996 compared to the corresponding period
of 1995 primarily due to the implementation of certain consulting and related
arrangements among Benton-Vinccler, the Company and Vinccler, Venezuelan
municipal taxes (which are a function of growing oil revenues) and the Company's
increased corporate activity associated with the growth of the Company's
business; but decreased slightly as a percentage of oil and gas sales. Interest
expense increased $2.2 million, or 68%, during the six months ended June 30,
1996 compared to the six months ended June 30, 1995 primarily due to increased
borrowing to fund operations in Venezuela and Russia, but decreased
substantially as a percentage of oil and gas sales. The Company incurred
partnership exchange expenses of $2.1 million during the six months ended June
30, 1996 as a result of the completion of an exchange offer resulting in the
liquidation of three limited partnerships. Income tax expense increased $7.4
million, or 379%, during the six months ended June 30, 1996 compared to the
corresponding period of 1995 due primarily to increases in profitability in
Venezuela. Net income attributable to minority interest increased $2.7 million,
or 152%, for the six months ended June 30, 1996 compared to the six months ended
June 30, 1995 as a result of the increased profitability of Benton-Vinccler's
operations in Venezuela. The Company recorded an extraordinary charge for early
retirement of debt, net of tax benefit, of $10.1 million during the six months
ended June 30, 1996 as a result of prepayment premiums due upon the early
repayment of senior unsecured notes. (See Note 2.)
<PAGE> 220
17
INTERNATIONAL OPERATIONS
The Company's costs of operations in Venezuela and Russia beginning in 1993 have
included certain fixed or minimum office, administrative, legal and personnel
related costs and certain start up costs, including short term facilities
rentals, organizational costs, contract services and consultants. Such costs are
expected to grow over time as operations increase. In the last two years such
costs have become less significant on a unit of production basis, but such costs
can be expected to fluctuate in the future based upon a number of factors. For
the six months ended June 30, 1996, the operating costs and general and
administrative expenses for Venezuela were $0.92 and $0.51 per Bbl,
respectively. For the six months ended June 30, 1995, the operating costs and
general and administrative expenses for Venezuela were $1.43 and $0.57 per Bbl,
respectively. The Company's Venezuelan operations have grown considerably since
inception, and are expected to continue to grow, and its operating costs and
general and administrative expenses are expected to increase both in the
aggregate and on a per unit basis. In Russia, for the six months ended June 30,
1996, the operating costs and general and administrative expenses were $9.10 and
$1.81 per Bbl, respectively. For the six months ended June 30, 1995, the
operating costs and general and administrative expenses for Russia were $5.24
and $1.24 per Bbl, respectively. The Company's Russian operations have grown
less significantly than the Venezuelan operations. Capital expenditures through
1993 in both Venezuela and Russia focused on start-up infrastructure items such
as roads, pipelines, and facilities rather than drilling. Beginning in 1994, a
higher proportion of capital expenditures have been and will continue to be
spent on drilling and production activities.
As a private contractor, Benton-Vinccler is subject to a statutory income tax
rate of 34%. However, Benton-Vinccler reported lower effective tax rates due to
significant non-cash tax deductible expenses resulting from devaluations in
Venezuela when Benton-Vinccler had net monetary liabilities in U.S. dollars. The
Company cannot predict the timing or impact of future devaluations in Venezuela.
GEOILBENT is subject to a statutory income tax rate of 35%. GEOILBENT has also
been subject to various other tax burdens, including an oil export tariff. The
export tariff was 30 ECU's per ton through 1995, although GEOILBENT obtained an
exemption from such tariff for 1995. The tariff was reduced to 20 ECU's per ton
in January 1996 and terminated effective July 1996 . The Company anticipates
that the tariff on oil exporters will be replaced by an excise, pipeline or
other tax levied on all oil producers, but it is currently unclear how such
other tax rates and regimes will be set and administered.
In January 1996, a consortium consisting of the Company (30%) and two bidding
partners (35% each) were awarded the right to explore and develop the Delta
Centro Block in Venezuela. Formal agreements were finalized and executed in July
1996. The agreements require a minimum exploration work program consisting of
completing a 1,300 kilometer seismic survey and drilling three wells to depths
ranging from 12,000 to 18,000 feet, within the next five years. PDVSA estimates
that such work will cost $60 million. The Company and its partners have provided
performance guarantees or letters of credit for their pro rata shares of the
minimum work program. The venture will be operated by one of the Company's
partners, Louisiana Land and Exploration Company. The venture intends to conduct
a 3-D seismic survey beginning in 1996 at a total cost to the Company of $4-6
million. The first well is tentatively scheduled for 1997 at a cost of $1.5-2.0
million to the Company. Future seismic and drilling programs will be based on
the results of 1996-97 activity.
If commercial production results from exploration activities at Delta Centro,
then an affiliate of PDVSA will participate in the venture at an interest
ranging from 1 to 35% at its discretion. Any oil and gas produced at Delta
Centro will be sold at market prices and will be subject to the oil and gas
taxation regime in Venezuela and to the terms of a profit sharing agreement with
PDVSA. Under current oil and gas tax law, a royalty of 16.7% will be paid to the
state, and an income tax rate of 66.7% will be applied to the venture's pre-tax
profits. Under the terms of the profit sharing agreement, the venture will share
41% of pre-tax income with PDVSA for the period of time during which the first
$1 billion of revenues is produced; thereafter, the profit sharing may increase
to up to 50% according to a formula based on return on assets.
EFFECTS OF CHANGING PRICES, FOREIGN EXCHANGE RATES AND INFLATION
The Company's results of operations and cash flow are affected by changing oil
and gas prices. However, the Company's Venezuelan revenues are based on a fee
adjusted quarterly by the percentage change of a basket of crude oil prices
instead of by absolute dollar changes, which dampens both any upward and
downward effects of changing prices on the Company's Venezuelan revenues and
cash flows. If the price of oil and gas increases, there
<PAGE> 221
18
could be an increase in the cost to the Company for drilling and related
services because of increased demand, as well as an increase in revenues.
Fluctuations in oil and gas prices may affect the Company's total planned
development activities and capital expenditure program.
Effective May 1, 1994, the Company entered into a commodity hedge agreement with
Morgan Guaranty designed to reduce a portion of the Company's risk from oil
price movements. Pursuant to the hedge agreement, through the end of 1996 the
Company will receive from Morgan Guaranty $16.82 per Bbl and the Company will
pay to Morgan Guaranty the average price per Bbl of West Texas Intermediate
Light Sweet Crude Oil ("WTI") determined in the manner set forth in the hedge
agreement. Such payments will be made with respect to production of 1,500 Bbl of
oil per day for 1996. During the six months ended June 30, 1996, the average
price per Bbl of WTI was $19.57 and the Company's net exposure for the six
months was $1.0 million. The Company's oil production is not materially affected
by seasonality. The returns under the hedge agreement are affected by world-wide
crude oil prices, which are subject to wide fluctuation in response to a variety
of factors that are beyond the control of the Company.
There are presently no restrictions on conversion of currency in either
Venezuela or Russia. However, from June 1994 through April 1996, Venezuela
implemented exchange controls which significantly limited the ability to convert
local currency into U.S. dollars. Because payments made to Benton-Vinccler are
made in U.S. dollars into its United States bank account, and Benton-Vinccler is
not subject to regulations requiring the conversion or repatriation of those
dollars back into the country, the exchange controls did not have a material
adverse effect on Benton-Vinccler or the Company.
Within the United States, inflation has had a minimal effect on the Company, but
is potentially an important factor in results of operations in Venezuela and
Russia. With respect to Benton-Vinccler and GEOILBENT, substantially all of the
sources of funds, including the proceeds from oil sales, the Company's
contributions and credit financings, are denominated in U.S. dollars, while
local transactions in Russia and Venezuela are conducted in local currency.
Following the announcement of a Venezuelan preliminary loan accord with the IMF
and the lifting of certain exchange and price controls, inflation could be
expected to have an adverse effect on Benton-Vinccler if devaluation of the
local currency does not substantially offset the effects of inflation.
During the six months ended June 30, 1996, the Company realized net foreign
exchange gains, primarily as a result of the decline in the value of the
Venezuelan bolivar during periods when Benton-Vinccler had substantial net
monetary liabilities denominated in bolivares. The Company has recognized
significant exchange gains and losses in the past, resulting from fluctuations
in the relationship of the Venezuelan and Russian currencies to the U.S. dollar.
However, there are many factors affecting foreign exchange rates and resulting
exchange gains and losses, many of which are beyond the influence of the
Company. It is not possible to predict the extent to which the Company may be
affected by future changes in exchange rates and exchange controls.
CAPITAL RESOURCES AND LIQUIDITY
The oil and gas industry is a highly capital intensive business. The Company
requires capital principally to fund the following costs: (i) drilling and
completion costs of wells and the cost of production and transportation
facilities; (ii) geological, geophysical and seismic costs; and (iii)
acquisition of interests in oil and gas properties. The amount of available
capital will affect the scope of the Company's operations and the rate of its
growth.
The net funds raised and/or used in each of the operating, investing and
financing activities for the six months ended June 30, 1996 and 1995 are
summarized in the following table and discussed in further detail below:
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30,
-------------------------------------------
1996 1995
------------- --------------
<S> <C> <C>
Net cash provided by operating activities $ 33,517,249 $ 8,187,420
Net cash used in investing activities (99,181,438) (12,421,534)
Net cash provided by financing activities 73,269,422 15,457,668
------------- --------------
Net increase in cash $ 7,605,233 $ 11,223,554
============= ==============
</TABLE>
At June 30, 1996, the Company had current assets of $168.1 million (including
$19.3 million and $1.1 million of cash restricted as collateral for loans to
Benton-Vinccler and GEOILBENT, respectively, and $18 million of cash restricted
as collateral for the Delta Centro letter of credit), and current liabilities of
$57.7 million (including loans of $19.3 million and $2.1 million collateralized
by restricted cash), resulting in working capital of $110.4 million and a
current
<PAGE> 222
19
ratio of 2.9:1. This compares to the Company's working capital deficit of $2.9
million at December 31, 1995. The increase of $113.3 million was due primarily
to increased cash as a result of the issuance of $125 million in senior
unsecured notes and the sale of property interests in the Gulf Coast of
Louisiana. (See Notes 2 and 3.)
CASH FLOW FROM OPERATING ACTIVITIES. During the six months ended June 30, 1996
and 1995, respectively, net cash provided by operating activities was
approximately $33.5 million and $8.2 million, respectively. Cash flow from
operating activities increased by $25.3 million during the six months ended June
30, 1996 over the corresponding period of the prior year due primarily to
increased oil and gas production in Venezuela.
CASH FLOW FROM INVESTING ACTIVITIES. During the six months ended June 30, 1996
and 1995, the Company had drilling and production related capital expenditures
of approximately $38.4 million and $34.2 million, respectively. Of the 1996
expenditures, $30.0 million was attributable to the development of the South
Monagas Unit in Venezuela, $3.0 million related to the development of the North
Gubkinskoye Field in Russia, $2.0 million related to drilling activity in the
West Cote Blanche Bay, Rabbit Island and Belle Isle Fields in Louisiana, and
$3.4 million was attributable to other projects. The Company received proceeds
from the sale of property and equipment of $34.7 million during the six months
ended June 30, 1996, primarily as a result of the sale of all of its remaining
interest in the West Cote Blanche Bay, Rabbit Island and Belle Isle Fields; the
Company received $14.7 million during the six months ended June 30, 1995, from
the sale of its working interest in certain depths in the West Cote Blanche Bay
Field. (See Note 2.)
CASH FLOW FROM FINANCING ACTIVITIES. In May 1996, the Company issued $125
million in 11.625% senior unsecured notes due May 1, 2003. A portion of the
proceeds were used to repay certain long term indebtedness and certain short
term obligations. The remainder will be used for capital expenditure and working
capital purposes.
(See Note 3.)
The Company expects 1996 capital expenditures of approximately $110-125 million.
Funding for the 1996 and subsequent capital expenditure programs is expected to
come from the Company's recent issuance of senior unsecured notes and sale of
property interests, its cash flow from operations, future sales of property
interests, or issuance of debt or equity securities. Included in the 1996 budget
are approximately $12 million in expenditures for Russia (net to the Company's
interest), which are dependent on proposed nonrecourse financing from the
European Bank for Reconstruction and Development ("EBRD"). Negotiations are
currently underway with EBRD, but there can be no assurance that such financing
will become available under terms and conditions acceptable to GEOILBENT or the
Company.
<PAGE> 223
20
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
11.1 Computation of per share earnings.
(b) Reports on Form 8-K.
None.
<PAGE> 224
21
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BENTON OIL AND GAS COMPANY
Dated: August 14, 1996 By: /S/ A. E. Benton
---------------
A. E. Benton,
Chairman and Chief Executive Officer
Dated: August 14, 1996 By: /S/ Michael B. Wray
------------------
Michael B. Wray
President and Chief Financial Officer
<PAGE> 225
PART II
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
Under provisions of the Certificate of Incorporation and Bylaws of the Company,
each person who is or was a director or officer of the Company shall be
indemnified by the Company as a matter of right to the full extent permitted or
authorized by law. The effects of the Certificate of Incorporation, Bylaws and
General Corporation Law of Delaware may be summarized as follows:
(a) Under Delaware law, to the extent that such a person is
successful on the merits in defense of a suit or proceeding brought
against him by reason of the fact that he is a director or officer of
the Company, he shall be indemnified against expenses (including
attorneys' fees) reasonably incurred in connection with such action.
(b) If unsuccessful in defense of a third-party civil suit or
a criminal suit, or if such a suit is settled, such a person shall be
indemnified under such law against both (1) expenses (including
attorneys' fees) and (2) judgments, fines and amounts paid in
settlement if he acted in good faith and in a manner he reasonably
believed to be in, or not opposed to, the best interests of the
Company, and with respect to any criminal action, had no reasonable
cause to believe his conduct was unlawful.
(c) If unsuccessful in defense of a suit brought by or in the
right of the Company, or if such suit is settled, such a person shall
be indemnified under such law only against expenses (including
attorneys' fees) incurred in the defense or settlement of such suit if
he acted in good faith and in a manner he reasonably believed to be
in, or not opposed to, the best interests of the Company except that
if such a person is adjudged to be liable in a suit in the performance
of his duty to the Company, he cannot be made whole even for expenses
unless the court determines that he is fairly and reasonably entitled
to indemnity for such expenses.
(d) The Company may not indemnify a person in respect of a
proceeding described in (b) or (c) above unless it is determined that
indemnification is permissible because the person has met the
prescribed standard of conduct by any one of the following: (i) the
Board of Directors, by a majority vote of a quorum consisting of
directors not at the time parties to the proceeding, (ii) if a quorum
of directors not parties to the proceeding cannot be obtained, or, if
obtainable but the quorum so directs, by independent legal counsel
selected by the Board of Directors or the committee thereof; or (iii)
by the stockholders.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
<TABLE>
<CAPTION>
(a) Exhibits.
<S> <C>
2.1 Agreement and Plan of Merger dated as of September 20, 1996 by and
between the Benton Oil and Gas Company, CEC Acquisition Corp., and
Crestone Energy Corporation (incorporated by reference to Exhibit A to
the Proxy Statement/Prospectus comprising of part of this Registration
Statement).
4.1 Form of Benton Stock Option Plan and Stock Option Agreement.
5.1 Form of Opinion of Emens, Kegler, Brown, Hill & Ritter Co., LPA as to
the legality of the securities being registered.
8.1 Form of Opinion of Emens, Kegler, Brown, Hill & Ritter Co., L.P.A.
regarding certain tax matters.
11.1 Statement regarding computation of per share earnings (incorporated by
reference to Exhibit 11.1 to the Company's 10-K for the year ended
December 31, 1995 and to Exhibit 11.1 to the Company's Form 10-Q for
the quarter ended June 30, 1996).
23.1 Consent of Deloitte & Touche LLP.
</TABLE>
II-1
<PAGE> 226
<TABLE>
<CAPTION>
<S> <C>
23.2 Consent of Emens, Kegler, Brown, Hill & Ritter Co., LPA.
23.3 Consent of Huddleston & Co., Inc.
23.4 Consent of Price Waterhouse LLP.
24.1 Power of Attorney (included on signature page).
99.1 Form of Proxy.
</TABLE>
(b) Financial Statement Schedules.
All schedules have been omitted because the required information is not
significant or included in the financial statements or the notes thereto, or is
not applicable.
ITEM 22. UNDERTAKINGS.
a. The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are
being made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section
10(a)(3) of the Securities Act of 1993;
(ii) To reflect in the prospectus any facts or events
arising after the effective date of the registration statement
(or the most recent post-effective amendment thereof) which,
individually or in the aggregate, represents a fundamental
change in the information set forth in the registration
statement;
(iii) To include any material information with
respect to the plan of distribution not previously disclosed
in the registration statement or any material change to such
information in the registration statement;
(2) That, for the purpose of determining any liability under
the Securities Act of 1933, each such post-effective amendment shall
be deemed to be a new registration statement relating 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.
(3) To remove from registration by means of a post-effective
amendment any of the securities being registered which remain unsold at
the termination of the offering.
b. The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plans' annual report pursuant to Section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
Registration Statement shall be deemed to be a new registration statement
relating 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.
c. The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request and to send the incorporated documents by first class mail or other
equally prompt means. This includes information contained in documents filed
subsequent to the effective date of the registration statement through the date
of responding to the request.
II-2
<PAGE> 227
d. The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
e. Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the 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, offer 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.
II-3
<PAGE> 228
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrant has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of
Carpinteria, State of California, on the 30th day of September, 1996.
BENTON OIL AND GAS COMPANY
By: /s/ A.E. Benton
------------------------------------------
A. E. Benton, Chief Executive Officer
Each person whose signature appears below appoints A.E. Benton, Michael B. Wray,
Gregory S. Grabar, Jack A. Bjerke and Amy M. Shepherd, and all five of them,
any of whom may act without the joinder of the others, as his true and lawful
attorney-in-fact and agent, with full power of substitution and resubstitution,
for him, and in his stead, in any capacities to sign any and all amendments,
including post-effective amendments to this Registration Statement, and to file
the same, with all exhibits thereto and all other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorney-in-fact and agent full power and authority to do and perform each and
every act and thing requisite and necessary to be done, as fully to all intents
and purposes as he might or could do in person, hereby ratifying and confirming
all that said attorney-in-fact and agent or their substitute or substitutes may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, as amended, this
Registration Statement has been signed on September 30, 1996 by the following
persons in the capacities indicated:
<TABLE>
<CAPTION>
SIGNATURE TITLE
<S> <C>
/s/ A. E. Benton
- -----------------------------
A.E. Benton Chief Executive Officer and Director
/s/ Michael B. Wray
- -----------------------------
Michael B. Wray Principal Financial Officer and Director
/s/ Chris C. Hickok
- -----------------------------
Chris C. Hickok Principal Accounting Officer
/s/ Garret A. Garretson
- -----------------------------
Garret A. Garretson Director
/s/ William H. Gumma
- -----------------------------
William H. Gumma Director
/s/ Richard W. Fetzner
- -----------------------------
Richard W. Fetzner Director
/s/ Bruce M. McIntyre
- -----------------------------
Bruce M. McIntyre Director
</TABLE>
II-4
<PAGE> 1
Exhibit 4.1
CRESTONE ENERGY CORPORATION
1996 STOCK OPTION PLAN
SECTION 1: PURPOSE
The purpose of the Crestone Energy Corporation 1996 Stock Option Plan
(the "Plan") is to further the growth and development of Crestone Energy
Corporation (the "Company") by affording an opportunity for stock ownership in
Benton Oil and Gas Company ("Benton"), which is the ultimate corporate parent of
the Company, to selected employees, directors and consultants of the Company and
its Subsidiaries who are responsible for the conduct and management of its
business or who are involved in endeavors significant to its success.
SECTION 2: DEFINITIONS
Unless otherwise indicated, the following words when used herein shall
have the following meanings:
(a) "Board of Directors" shall mean the Board of Directors of
Benton.
(b) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.
(c) "Common Stock" shall mean the common stock, par value $.01 per
share, of Benton and any share or shares of Benton's stock
hereafter issued or issuable in substitution for such Common
Stock.
(d) "Director" shall mean a member of the Board of Directors.
(e) "Incentive Stock Option" shall mean any option granted to an
eligible employee under the Plan, which the Company intends at
the time the option is granted to be an Incentive Stock Option
within the meaning of Section 422 of the Code.
(f) "Merger" shall mean the merger of CEC Acquisition Company
("CEC"), an indirect wholly-owned subsidiary of Benton, with
and into the Company, of which the Company is the surviving
corporation.
(g) "Merger Agreement" shall mean the Agreement and Plan of
Merger, dated as of September 20, 1996, by and among Benton,
CEC and the Company, as from time to time amended.
<PAGE> 2
(h) "Nonqualified Stock Option" shall mean any option granted to
an eligible employee, director or consultant of the Company
and its Subsidiaries under the Plan which is not an Incentive
Stock Option.
(i) "Option" shall mean and refer collectively to Incentive Stock
Options and Nonqualified Stock Options.
(j) "Optionee" shall mean any employee, Director or consultant who
is granted an Option under the Plan. "Optionee" shall also
mean the personal representative of an Optionee and any other
person who acquires the right to exercise an Option by bequest
or inheritance.
(k) "Subsidiary" shall mean a subsidiary corporation of Benton or
the Company, as the context requires, as defined in Section
425(f) of the Code.
SECTION 3: EFFECTIVE DATE
The effective date of the Plan is the effective date of the Merger;
provided, however, that if any Incentive Stock Options are granted under the
Plan, then the Plan must be adopted, approved and ratified by the stockholders
of Benton within twelve (12) months of the first grant of Incentive Stock
Options.
SECTION 4: ADMINISTRATION
4.1 Administrative Committee. The Plan shall be administered by a
committee appointed by and serving at the pleasure of the Board of Directors,
consisting of not less than two Directors who are not officers or otherwise
employed by Benton, the Company or any of their Subsidiaries (the "Committee").
The Board of Directors may from time to time remove members from or add members
to the Committee, and vacancies on the Committee, howsoever caused, shall be
filled by the Board of Directors. If there are less than two Directors who are
eligible to serve on the Committee, the Board of Directors shall appoint a
Committee composed of all Directors who are eligible to serve and one or more
other persons who would be eligible to serve if they were Directors.
4.2 Committee Meetings and Actions. The Committee shall hold meetings
at such times and places as it may determine. A majority of the members of the
Committee shall constitute a quorum, and the acts of the majority of the
members present at a meeting or a consent in writing signed by all members of
the Committee shall be the acts of the Committee and shall be final, binding
and conclusive upon all persons, including Benton, the Company, their
Subsidiaries, their shareholders, and all persons having any interest in
Options which may be or have been granted pursuant to the Plan.
2
<PAGE> 3
4.3 Powers of Committee. The Committee shall have the full and
exclusive right to grant and determine terms and conditions of all Options
granted under the Plan and to prescribe, amend and rescind rules and regulations
for administration of the Plan. In granting Options, the Committee shall take
into consideration the contribution the Optionee has made or may take to the
success of the Company or its Subsidiaries and such other factors as the
Committee shall determine.
4.4 Interpretation of the Plan. The determination of the Committee as
to any disputed question arising under the Plan, including questions of
construction and interpretation, shall be final, binding and conclusive upon all
persons, including Benton, the Company, their Subsidiaries, their shareholders,
and all persons having any interest in Options which may be or have been granted
pursuant to the Plan.
4.5 Indemnification. Each person who is or shall have been a member of
the Committee or of the Board of Directors shall be indemnified and held
harmless by Benton and the Company against and from any loss, cost, liability or
expense that may be imposed upon or reasonably incurred by him in connection
with or resulting from any claim, action, suit or proceeding to which he may be
a party or in which he may be involved by reason of any action taken or failure
to act under the Plan and against and from any and all amounts paid by him in
settlement thereof, with the Company's and Benton's approval, or paid by him in
satisfaction of a judgment in any such action, suit or proceeding against him,
provided he shall give the Company and Benton an opportunity, at its own
expense, to handle and defend the same before he undertakes to handle and defend
it on his own behalf. The foregoing right of indemnification shall not be
exclusive of, and is in addition to, any other rights of indemnification to
which any person may be entitled under the Articles or Certificate of
Incorporation or Bylaws of the Company or Benton, as a matter of law or
otherwise, or any power that the Company or Benton may have to indemnify them or
hold them harmless.
SECTION 5: STOCK SUBJECT TO THE PLAN
5.1 Number. The aggregate number of shares of Common Stock which may be
issued under Options granted pursuant to the Plan shall not exceed 135,714
shares. Shares which may be issued under Options may consist, in whole or in
part, of authorized but unissued stock or treasury stock of Benton not reserved
for any other purpose.
5.2 Unused Stock. If any outstanding Option under the Plan expires or
for any other reason ceases to be exercisable, in whole or in part, the shares
which were subject to such Option and as to which the Option had not been
exercised shall no longer be available under the Plan.
5.3 Adjustment for Change in Outstanding Shares. If there is any
change, increase or decrease, in the outstanding shares of Common Stock which is
effected without receipt of additional consideration by Benton, by reason of a
stock dividend,
3
<PAGE> 4
recapitalization, merger, consolidation, stock split, combination or exchange of
stock, or other similar circumstances, or if there is any corporate transaction,
such as a spin-off or other distribution of stock or property by Benton or any
of its Subsidiaries or any complete or partial liquidation of Benton, then in
each such event the Committee shall make an appropriate adjustment in the
aggregate number of shares of stock available under the Plan, the number of
shares of stock subject to each outstanding Option and the option prices;
provided, however, that fractional shares shall be rounded to the nearest whole
share. The Committee's determinations in making adjustments shall be final and
conclusive.
5.4 Reorganization or Sale of Assets. If Benton is merged or
consolidated with another corporation and Benton is not the surviving
corporation, or if all or substantially all (which for purposes of this Section
5.4 shall include without limitation more than 50% in fair market value; of the
assets of Benton are acquired by another entity, or if Benton is liquidated or
reorganized, the Committee shall, as to outstanding Options, either (1) make
appropriate provision for the protection of any such outstanding Options by the
substitution on an equitable basis of appropriate stock of Benton, or of the
merged, consolidated or otherwise reorganized corporation which will be issuable
in respect of the Common Stock, provided that no additional benefits shall be
conferred upon Optionees as a result of such substitution, and the excess of
the aggregate fair market value of the shares subject to the Options immediately
after such substitution over the purchase prices thereof is not more than the
excess of the aggregate fair market value of the shares subject to such Options
immediately before such substitution over the purchase price thereof, or (2)
upon written notice to the Optionees, provide that all unexercised Options must
be exercised within a specified number of days of the date of such notice or
they will be terminated.
SECTION 6: ELIGIBILITY
All full or part-time employees of the Company and its Subsidiaries who
are responsible for the conduct and management of its business or who are
involved in endeavors significant to its success shall be eligible to receive
both Incentive Stock Options and Nonqualified Stock Options under the Plan.
Consultants and directors of the Company who are neither full nor part-time
employees of the Company or its Subsidiaries but who are involved in endeavors
significant to its success shall be eligible to receive Nonqualified Stock
Options, but not Incentive Stock Options, under the Plan.
SECTION 7: GRANT OF OPTIONS
7.1 Grant of Options. The Committee may from time to time in its
discretion determine which of the eligible employees, directors and consultants
of the Company or its Subsidiaries should receive Options, the type of Options
to be granted (whether Incentive Stock Options or Nonqualified Stock Options),
the number of shares subject to such Options, the Option price (subject to the
limitations of Sections 7.3 and 7.6), the
4
<PAGE> 5
term of the Options, and the dates on which such Options are to be granted. No
employee may be granted Incentive Stock Options to the extent that the aggregate
fair market value (determined as of the time each Option is granted) of the
Common Stock with respect to which any such Options are exercisable for the
first time during a calendar year (under all incentive stock option plans of the
Company and its Subsidiaries) would exceed $100,000.
7.2 Option Agreement. Each Option granted under the Plan shall be
evidenced by a written Option Agreement setting forth the terms upon which the
Option is granted. Each Option Agreement shall designate the type of Options
being granted (whether Incentive Stock Options or Nonqualified Stock Options)
and shall state the number of shares of Common Stock, as designated by the
Committee, to which that Option pertains. More than one Option may be granted to
an eligible person.
7.3 Option Price. The option price per share of Common Stock under each
Option shall be $7.00.
7.4 Duration of Options. Each Option shall be of a duration as
specified in the Option Agreement; provided, however, that the term of each
Option shall be no more than ten years from the date on which the Option is
granted and shall be subject to early termination as provided herein.
7.5 Additional Limitations on Grant. No Incentive Stock Option shall be
granted to an employee who, at the time the Incentive Stock Option is granted,
owns stock (as determined in accordance with Section 425(d) of the Code)
representing more than 10% of the total combined voting power of all classes of
stock of Benton, unless the option price of such Incentive Stock Option is at
least 110% of the fair market value (determined as of the day the Incentive
Stock Option is granted) of the stock subject to the Incentive Stock Option and
the Incentive Stock Option by its terms and is not exercisable more than five
years from the date it is granted.
7.6 Other Terms and Conditions. Options may contain such other
provisions, which shall not be inconsistent with the Plan, as the Committee
shall deem appropriate, including, without limitation, provisions that relate
the Optionee's ability to exercise an Option to the passage of time or the
achievement of specific goals established by the Committee.
SECTION 8: EXERCISE OF OPTIONS
8.1 Manner of Exercise. Subject to the limitations and conditions of
the Plan or the Option Agreement, an Option shall be exercisable, in whole or in
part, from time to time, by giving written notice of exercise to the Secretary
of Benton, which notice shall specify the number of shares of Common Stock to be
purchased and shall be accompanied by (1) payment in full to Benton of the
purchase price of the shares to be purchased, plus (2) payment of such amounts
as Benton shall determine to be
5
<PAGE> 6
sufficient to satisfy any liability it may have for any withholding of federal,
state or local income or other taxes incurred by reason of the exercise of the
Option, (3) a representation meeting the requirements of Section 11.2 if
requested by Benton, and (4) a Stock Restriction Agreement meeting the
requirements of Section 11.3 if requested by Benton. Payment for shares shall be
in the form of either (A) cash, (B) a personal, certified or bank cashier's
check to the order of Benton, (C) shares of the Common Stock, properly endorsed
to Benton, in an amount the fair market value of which on the date of receipt by
Benton (as determined in accordance with Section 7.4) equals or exceeds the
aggregate option price of the shares with respect to which the Option is being
exercised, or (D) in any combination thereof; provided, however, that payment
shall be in such form as the Committee may from time to time determine, whether
before or after exercise of the Option.
8.2 Acceleration of Exercise Period. Notwithstanding any vesting
requirements contained in any Option Agreement, all outstanding Options shall
become immediately exercisable (1) at such time as a third person, including a
"group" as defined in Section 13(d)(3) of the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), becomes the beneficial owner of shares of
Benton having 50% or more of the total number of votes that may be cast for the
election of Directors of Benton, or (2) on the date on which the stockholders of
Benton approve (i) any agreement for a merger or consolidation in which Benton
will not survive as an independent corporation or (ii) any sale, exchange or
other disposition of all or substantially all of Benton's assets, or (3) on the
effective date of any sale, exchange or other disposition of greater than 50% in
fair market value of the Benton's assets. The Committee's reasonable
determination as to whether such an event has occurred shall be final and
conclusive.
SECTION 9: TERMINATION OF EMPLOYMENT
9.1 Termination Other than upon Death. Except as provided
in Section 9.2 hereof, the termination of an Optionee's employment with the
Company or a Subsidiary shall not cause the early termination of an Option or
otherwise affect the period of time the Option remains exercisable. Any Options
exercisable as of the date of termination shall remain exercisable after
termination for the term of the Option, subject to Section 9.2 hereof. For
purposes of this Section 9.1, the termination of employment shall be deemed to
include the termination of a director's service as a member of the board of
directors of the Company and the termination of a consulting arrangement in the
case of consultants.
9.2 Termination By Death of Optionee. Upon the death of an Optionee,
the personal representatives of the Optionee's estate or the person or persons
who shall have acquired the Option from the Optionee by bequest or inheritance
may exercise the Option at any time within the year after the date of death but
not later than the expiration date of the Option, to the extent the Optionee was
entitled to do so on the date of death. Any Options not exercisable as of the
date of death and any Options or
6
<PAGE> 7
portions of Options of deceased Optionees not exercised as provided herein shall
terminate.
SECTION 10: NON-TRANSFERABILITY OF OPTION
Options granted pursuant to the Plan are not transferable by the
Optionee other than by will or the laws of descent and distribution and Options
shall be exercisable during the Optionee's lifetime only by the Optionee. Upon
any attempt to transfer, assign, pledge, hypothecate or otherwise dispose of the
Option contrary to the provisions hereof, or upon the levy of any attachment or
similar process upon the Option, the Option shall immediately become null and
void.
SECTION 11: ISSUANCE OF SHARES
11.1 Transfer of Shares to Optionee. As soon as practicable after the
Optionee has given Benton written notice of exercise of an Option and has
otherwise met the requirements of Section 8.1, Benton shall issue or transfer to
the Optionee the number of shares of Common Stock as to which the Option has
been exercised and shall deliver to the Optionee a certificate or certificates
therefor, registered in the Optionee's name. In no event shall Benton be
required to transfer fractional shares to the Optionee, and in lieu thereof,
Benton may pay an amount in cash equal to the fair market value of such
fractional shares on the date of exercise. If the issuance or transfer of
shares by Benton would for any reason, in the opinion of counsel for Benton,
violate any applicable federal or state laws or regulations, Benton may delay
issuance or transfer of such shares to the Optionee until compliance with such
laws can reasonably be obtained.
11.2 Investment Representation. Upon demand by Benton, the Optionee
shall deliver to the Company a representation in writing that the purchase of
all shares with respect to which notice of exercise of the Option has been given
by the Optionee is being made for investment only and not for resale or with a
view to distribution, and containing such other representations and provisions
with respect thereto as Benton may require. Upon such demand, delivery of such
representation promptly and prior to the transfer or delivery of any such shares
and prior to the expiration of the option period shall be a condition precedent
to the right to purchase such shares.
11.3 Stock Restriction Agreement. Upon demand by Benton, the Optionee
shall execute and deliver to Benton a Stock Restriction Agreement in such form
as Benton may provide at the time of exercise of the Option. Such Agreement may
include, without limitation, restrictions upon the Optionee's right to transfer
shares, including the creation of an irrevocable right of first refusal in
Benton and its designees, and provisions requiring the Optionee to transfer the
shares to Benton or Benton's designees upon a termination of employment. Upon
such demand, execution of the Stock Restriction Agreement by the Optionee prior
to the transfer or delivery of any shares and prior to the expiration of the
option period shall be a condition precedent to
7
<PAGE> 8
the right to purchase such shares, unless such condition is expressly waived in
writing by the Company.
SECTION 12: AMENDMENTS
The Board of Directors may at any time and from time to time alter,
amend, suspend or terminate the Plan or any part thereof as it may deem proper,
except that no such action shall diminish or impair the rights under an Option
previously granted, and except that such alteration, amendment, suspension or
termination of the Plan shall be subject to the approval of the Benton's
stockholders within one year after such action by the Board of Directors if such
stockholder approval is required by any federal or state law or regulation or
the rules of any stock exchange or stock market on which the Common Stock may be
listed or quoted, or if the Board of Directors in its discretion determines that
obtaining such stockholder approval is for any reason advisable. Unless the
stockholders of Benton shall have given their approval (if such approval is
required or desired as provided in the immediately preceding sentence), the
total number of shares for which Options may be issued under the Plan shall not
be increased, except as provided in Section 5.3, and no amendment shall be made
which reduces the price at which the Common Stock may be offered under the Plan
below the minimum required by 7.3, except as provided in Section 5.3, or which
materially modifies the requirements as to eligibility for participation in the
Plan. Subject to the terms and conditions of the Plan, the Board of Directors
may modify, extend or renew outstanding options granted under the Plan, or
accept the surrender of outstanding Options to the extent not theretofore
exercised and authorize the granting of new Options in substitution therefor,
except that no such action shall diminish or impair the rights under an Option
previously granted with the consent of the Optionee.
SECTION 13: TERM OF PLAN
This Plan shall terminate on October 14, 2000; provided, however, that
the Board of Directors may at any time prior thereto suspend or terminate the
Plan.
SECTION 14: RIGHTS AS STOCKHOLDER
An Optionee shall have no rights as a stockholder of Benton with
respect to any shares of Common Stock covered by an Option until the date of the
issuance of the stock certificate for such shares.
SECTION 15: NO SPECIAL EMPLOYMENT RIGHTS
Nothing contained in this Plan or in any Option granted under the Plan
shall confer upon any Optionee any right with respect to the continuation of
such Optionee's employment by the Company or any Subsidiary or interfere in any
way with the right of the Company or any Subsidiary, subject to the terms of any
separate employment agreement to the contrary, at any time to terminate such
employment or to increase or
8
<PAGE> 9
decrease the compensation of the Optionee from the rate in existence at the time
of the grant of the Option.
SECTION 16: GOVERNING LAW
Options granted under this Plan shall be construed and shall take
effect in accordance with the laws of the State of Colorado.
SECTION 17: COMPLIANCE WITH RULE 16b-3
It is the intent of Benton that the Plan comply in all respects with
Rule 16b-3 under the Exchange Act in connection with any award granted to a
person who is subject to Section 16 of the Exchange Act. Accordingly, if any
provision of the Plan or any agreement hereunder does not comply with the
requirements of Rule 16b-3 as then applicable to any such person, such provision
shall be construed or deemed amended to the extent necessary to conform to such
requirements with respect to such person.
9
<PAGE> 1
Exhibit 5.1
[EMENS, KEGLER, BROWN, HILL & RITTER LETTERHEAD]
October 15, 1996
FORM OF OPINION
Benton Oil and Gas Company
1145 Eugenia Place
Suite 200
Carpinteria, California 93013
Gentlemen:
We have acted as counsel for Benton Oil and Gas Company (the "Company") in
connection with the registration under the Securities Act of 1933, as amended,
of up to 735,714 shares of common stock, $0.01 par value per share (the
"Shares"), and options to purchase up to 123,774 shares of common stock (the
"Options"), to be offered to holders of common stock and/or options of Crestone
Energy Corporation, a Colorado corporation ("Crestone") in connection with the
merger of Crestone with a subsidiary of the Company. In this connection, we have
examined the Certificate of Incorporation, the Bylaws and the respective
amendments thereto, the directors' and stockholders' minutes, and the
Registration Statement filed with the Securities and Exchange Commission, and
exhibits thereto, and such other documents that we have deemed necessary to the
opinion hereinafter expressed.
We are of the opinion that the Shares are validly authorized and upon
their issuance in exchange for shares of common stock of Crestone, as
contemplated by the Registration Statement, will be legally issued, fully paid,
and non-assessable.
We are of the opinion that the Options are validly authorized and upon
their issuance in exchange for options to purchase common stock of Crestone will
be legally issued.
We are of the opinion that the Shares issued upon exercise of the Options
as contemplated by the Stock Option Plan and Stock Option Agreements will be
validly authorized, legally issued, fully paid, and non-assessable.
We hereby consent to the reference to Emens, Kegler, Brown, Hill & Ritter
Co., L.P.A. appearing under the heading "Legal Matters" in the Registration
Statement and any amendments thereto and the Prospectus of the Company relating
to the proposed exchange of the Shares and Warrants.
Very truly yours,
EMENS, KEGLER, BROWN, HILL & RITTER CO., L.P.A.
By:_____________________________________________
<PAGE> 2
Exhibit 8.1
[EMENS, KEGLER, BROWN, HILL & RITTER LETTERHEAD]
-----------------------------------
FORM OF OPINION
-----------------------------------
Crestone Energy Corporation
ATTN: Randall C. Thompson
303 East 17th Avenue, STE 810
Denver, CO 80203
Re: The Merger of CEC Acquisition Company With and Into Crestone
Energy Corporation--Federal Income Tax Opinion
Gentlemen:
Pursuant to Section 6.2(e) of the Agreement (defined below), you have
requested our opinion respecting certain of the material federal income tax
consequences attendant with the Transaction (also defined below). Pursuant to
the Agreement and Plan of Merger, dated September 20, 1996 (the "Agreement"),
by and among Benton Oil and Gas Company, a Delaware corporation ("Benton"), CEC
Acquisition Company, a Colorado corporation and an indirect, wholly-owned
subsidiary of Benton (the "Merger Sub") and Crestone Energy Corporation, a
Colorado corporation ("Crestone"), the Merger Sub shall merge with and into
Crestone. Pursuant to the Agreement, all the issued and outstanding common stock
of Crestone (the "Crestone Stock") shall be canceled and converted into shares
of common stock, par value $0.01, per share, of Benton (the "Benton Stock"). In
addition, pursuant to the Agreement, Benton shall substitute its stock option,
exercisable for shares of Benton Stock (the "Replacement Options") all of the
outstanding Crestone stock options (the "Crestone Options"). The merger of the
Merger Sub with and into Crestone, the substitution of the Replacement Options
for the Crestone Options and the other transactions contemplated by the
Agreement shall constitute the "Transaction".
Except as otherwise provided in our opinion, capitalized terms not
otherwise defined herein shall have the meanings set forth in the Agreement or
in the certificates delivered to our firm by Benton, Merger Parent, Merger Sub
and Crestone containing certain representations of Benton, Merger Parent, Merger
Sub, Crestone and certain Crestone Stockholders (the "Representation
Certificates"). All section references, unless otherwise indicated, are to the
Internal Revenue Code of 1986, as amended (the "Code"). We have acted as counsel
to Benton, Merger Parent, and Merger Sub in connection with the negotiation,
preparation, execution and delivery of the Agreement, and the related
transactions contemplated by the Agreement.
<PAGE> 3
[EMENS, KEGLER, BROWN, HILL & RITTER LETTERHEAD]
Crestone Energy Corporation
______________, 1996
Page 2
DOCUMENTS EXAMINED
In connection with rendering our opinion, we have examined the following:
1. The Agreement,
2. The Crestone Energy Corporation 1990 Stock Option Plan (the
"Crestone Option Plan"), and
3. Such other documents, records and matters of law as we have
deemed necessary or appropriate in connection with rendering our opinion
(collectively, the "Examined Documents").
In our review and examination of each of the foregoing, we have assumed,
without independent investigation or examination, (a) the genuineness of all
signatures, the authenticity of all documents submitted to us, the conformity to
all original documents of all documents submitted to us as certified or
photostatic copies, and the authenticity of all such originals of such latter
documents; (b) the due execution, completion, acknowledgment and public filing,
where applicable, of any of the Examined Documents, as indicated in such
documents, and the delivery of all documents and instruments and the
consideration recited in such documents by all parties; (c) that all parties
have the necessary power and authority, corporate or otherwise, to execute and
deliver the Examined Documents, and documents attendant therewith, to which they
are a party and to perform their obligations under such documents, and that all
such actions have been duly and validly authorized by all necessary proceedings;
(d) that the Examined Documents and the documents attendant therewith,
constitute legal, valid and binding obligations to each party thereto
enforceable against each party in accordance with their respective terms, except
(i) as enforcement of such documents may be limited by applicable bankruptcy,
insolvency, reorganization, receivership, moratorium, and other similar laws,
both state and federal, affecting the enforcement of creditors' rights or
remedies in general, from time to time in effect; (ii) subject to general
principles of equity, regardless of whether such enforceability is considered in
a proceeding in equity or at law and the availability of equitable remedies; and
(iii) subject to implied covenants of good faith, fair dealing and commercially
reasonable conduct, judicial discretion and instances of multiple or equitable
remedies and applicable public policies and laws.
<PAGE> 4
[EMENS, KEGLER, BROWN, HILL & RITTER LETTERHEAD]
Crestone Energy Corporation
______________, 1996
Page 3
FACTUAL ASSUMPTIONS
In rendering our opinion, we have made the following factual assumptions:
1. The factual representations and warranties of the Parties contained in
the Representation Certificates, which we may deem material to our opinion, are
all true in all respects as of the date of our opinion, except as may otherwise
be set forth in or contemplated by, any of the Examined Documents.
2. The factual representations and warranties, other than those matters
about which we specifically opine, of the parties contained in the Examined
Documents, which we may deem material to our opinion, are all true in all
respects as of the date hereof, except as may be otherwise set forth in or
contemplated by the Examined Documents.
3. The transaction contemplated by the Examined Documents and all the
transactions related thereto or contemplated thereby shall be consummated in
accordance with the terms and conditions of such documents, except as may be set
forth in and or contemplated by any closing document delivered by the parties at
the closing of the Transaction.
4. Each document derived from a public authority is accurate, complete and
authentic and all official records (including their proper indexing and filing)
are accurate and complete.
5. There are no agreements or understandings among the parties, written or
oral, and there is no usage of trade or course of prior dealings among any of
the foregoing which would, in any case, define, supplement or qualify the terms
of the Examined Documents.
LIMITATIONS ON OUR OPINION
The following limitations shall apply with respect to our opinion:
1. Our opinion is based upon the various provisions of the Code, the
Treasury Regulations promulgated thereunder and the interpretations thereof by
the Internal Revenue Service and the courts having jurisdiction over such
matters as of the date hereof, all of which are subject to change either
prospectively or retroactively.
<PAGE> 5
[EMENS, KEGLER, BROWN, HILL & RITTER LETTERHEAD]
Crestone Energy Corporation
______________, 1996
Page 4
No opinion is rendered with respect to the effect, if any, of any pending or
future legislation, judicial or administrative regulations or rulings, which may
have a bearing on any of the foregoing. We have not been asked to render an
opinion with respect to any federal income tax matters except those set forth
below. Likewise, we have not been asked to render any opinion with respect to
any foreign, local or state income tax consequences of the Transaction. By
rendering our opinion, we undertake no responsibility to advise you of any new
developments in the application or interpretation of the federal income tax
laws. Accordingly, our opinion should not be construed as applying in any manner
to any aspect of the transactions contemplated by the Examined Documents, other
than as set forth below.
2. Our opinion does not consider the possible application of the "golden
parachute" provisions of Sections 280(G), 3121(v)(2) and 4999 of the Code or
Sections 305, 306 and 357 of the Code or the regulations promulgated thereunder
or the effect of the classification of Benton, Merger Parent, Merger Sub or
Crestone as a collapsible corporation within the meaning of Section 341 of the
Code.
3. Our opinion does not consider the survival and/or availability to
Benton or Crestone after the Transaction of any Crestone federal income tax
attributes, including any net operating loss carryforward, after application of
any provision of the Code, as well as the regulations promulgated thereunder.
Our opinion does not consider the tax consequences of the Transaction that may
be relevant to particular security holders and companies, such as dealers in
securities, foreign persons, holders of the Crestone Options, except as
specifically set forth in our Opinion No. 7, or warrants, or holders of shares
acquired upon the exercise of stock options or in other compensatory
arrangements.
5. Our opinion does not consider the tax consequences to Crestone
Shareholders of other transactions effected prior to or after the Transaction
(whether or not such transactions are consummated in connection with the
Transaction).
6. All the factual assumptions set forth above are material for our
opinion and have been relied upon by us in rendering our opinion. Any material
inaccuracy of any one or more of the above set out factual assumptions may
render all or a part of the opinion inapplicable to the transactions
contemplated by the Examined Documents.
<PAGE> 6
[EMENS, KEGLER, BROWN, HILL & RITTER LETTERHEAD]
Crestone Energy Corporation
______________, 1996
Page 5
OPINION
Based upon the foregoing and subject to the qualifications set
forth herein, it is our opinion that:
1. The Transaction shall be characterized as a
"reorganization" within the meaning of Section 368(a)(1) of the
Code.
2. No gain or loss shall be recognized by Crestone
Stockholders who exchange their Crestone Stock solely for shares of
Benton Stock pursuant to the Agreement.
3. The aggregate bases of the shares of Benton Stock to be
received by each Crestone Stockholder, including a fractional share
interest not actually received, shall be the same, in each instance,
as the basis of the Crestone Stock surrendered in exchange therefor.
4. The holding period of the shares of Benton Stock to be
received by each Crestone Stockholder in the Transaction shall
include the period during which the Crestone Stock surrendered in
exchange therefor was held; provided, that, such Crestone Stock was
held as a capital asset in the hands of such Crestone Stockholder.
5. Crestone Stockholders who exercise dissenters' rights with
respect to their Crestone Stock and who receive cash payments for
such shares from Crestone shall generally recognize capital gain or
loss for federal income tax purposes, measured by the difference
between such Crestone Stockholder's basis in such Crestone Stock and
the amount of cash received therefor; provided, that, such Crestone
Stock was held by such dissenting Crestone Stockholder as a capital
asset at the time of the Transaction.
6. Cash payments in lieu of fractional share interests of
Benton Stock shall be treated as if such fractional shares had been
received in the Transaction, and then redeemed by Benton. A Crestone
Stockholder receiving such cash shall recognize gain or loss upon
such payment equal to the difference between such Crestone
Stockholder's basis in the fractional share interest, and the amount
of cash received in exchange therefor. The resulting gain or loss
shall be capital gain or
<PAGE> 7
[EMENS, KEGLER, BROWN, HILL & RITTER LETTERHEAD]
Crestone Energy Corporation
______________, 1996
Page 6
loss if such Crestone Stock exchanged for such fractional share
interest was held as a capital asset by such Crestone Stockholder
on the effective date of the Transaction.
7. The holders of the Crestone Options shall not recognize any
gain or loss solely as a result of the substitution of the
Replacement Options for the Crestone Options.
Our opinion represents our firm's best judgment regarding the federal
income tax consequences of the Transaction. Our opinion is not binding upon the
Internal Revenue Service or any courts. Our opinion may not be distributed or
otherwise made available to any other person or entity without our firm's prior
written consent.
Very truly yours,
EMENS, KEGLER, BROWN, HILL & RITTER
CO., L.P.A.
By:______________________________________
Larry K. Carnahan, Vice President
LKC:mec
<PAGE> 1
Exhibit 23.1
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in this Registration Statement of
Benton Oil and Gas Company on Form S-4 of our report dated March 20, 1996,
appearing in the Annual Report on Form 10-K of Benton Oil and Gas Company for
the year ended December 31, 1995, and to the reference to us under the heading
"Experts" in the Prospectus, which is party of this Registration Statement.
Deloitte & Touche LLP
Los Angeles, California
October 11, 1996
<PAGE> 1
Exhibit 23.2
[EMENS, KEGLER, BROWN, HILL & RITTER LETTERHEAD]
CONSENT OF
EMENS, KEGLER, BROWN, HILL & RITTER CO., L.P.A.
We hereby consent to the reference to Emens, Kegler, Brown, Hill &
Ritter Co., L.P.A., appearing under the headings "Certain Federal Tax
Consequences" and "Legal Matters", in the Registration Statement and in any and
all amendments thereto and the Prospectus of the Company relating to the
exchange of Common Stock and Options of Benton Oil and Gas Company for common
stock and options of Crestone Energy Corporation pursuant to the terms set forth
in the Registration Statement.
Very truly yours,
EMENS, KEGLER, BROWN, HILL & RITTER CO., L.P.A.
By: /s/ Jack A. Bjerke
-----------------------------------------------
Jack A. Bjerke, Vice President
<PAGE> 1
Exhibit 23.3
HUDDLESTON & CO. INC.
PETROLEUM AND GEOLOGICAL ENGINEERS
1111 FANNIN - SUITE 1700
HOUSTON, TEXAS 77002
-------
(713) 209-1100
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
Gentlemen:
Huddleston & Co., Inc. hereby consents to the use of its name, use of its audit
report, and reference to it regarding its audit of the Benton Oil and Gas
Company Reserve Reports, prepared by Benton Oil and Gas Company, dated February
9, 1996, in the Form S-4 Registration Statement of Benton Oil and Gas Company
registering the issuance of shares of its common stock in exchange for shares of
common stock of Crestone Energy Corporation.
HUDDLESTON & CO., INC.
/s/ Peter D. Huddleston
----------------------------------------
Peter D. Huddleston, P.E.
President
October 14, 1996
<PAGE> 1
Exhibit 23.4
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Proxy Statement/Prospectus constituting
part of this Registration Statement on Form S-4 of Benton Oil and Gas Company
of our report dated September 19, 1996 relating to the financial statements of
Crestone Energy Corporation, which appears in such Proxy Statement/Prospectus.
We also consent to the reference to us under the heading "Experts" in such
Proxy Statement/Prospectus.
Price Waterhouse LLP
Denver, Colorado
October 17, 1996
<PAGE> 1
PROXY
CRESTONE ENERGY CORPORATION
PROXY SOLICITED BY THE BOARD OF DIRECTORS
FOR THE SPECIAL MEETING OF STOCKHOLDERS
, 1996
-------------------
The undersigned hereby appoints Randall C. Thompson, with full power of
substitution, as proxy to represent the undersigned at the Special Meeting of
Stockholders of Crestone Energy Corporation (the "Company") and any adjournments
or postponements thereof and to vote all shares of common stock the undersigned
would be entitled to vote as indicated upon all matters referred to herein and
in his discretion upon any other matters which may properly come before the
meeting.
1. TO APPROVE THE MERGER OF CRESTONE WITH A SUBSIDIARY OF BENTON OIL AND GAS
COMPANY, ON THE TERMS OF THE AGREEMENT AND PLAN OF MERGER DELIVERED WITH THE
NOTICE OF SPECIAL MEETING OF STOCKHOLDERS.
/ / FOR / / AGAINST / / ABSTAIN
2. TO TRANSACT SUCH OTHER BUSINESS AS MAY PROPERLY COME BEFORE THE SPECIAL
MEETING OR ANY ADJOURNMENT OR POSTPONEMENT THEREOF.
(Continued and to be signed on other side)
THE SHARES REPRESENTED BY THIS PROXY WILL BE VOTED AS DIRECTED. IF NO DIRECTION
IS INDICATED, THE SHARES WILL BE VOTED "FOR" PROPOSAL 1.
Number of Shares Dated: , 1996
--------------------- --------------
------------------------------------ ----------------------------------
(Print Name) (Signed)
------------------------------------ ----------------------------------
(Print Name) (Signed)
If the shares are issued in the
name of two or more persons,
each person should sign the Proxy.
If the shares are issued in the
name of a corporation or a
partnership, please sign in the
corporate name, by president or
other authorized officer, or in
the partnership name, by an
authorized person.
Please sign exactly as your name
appears and return this Proxy
promptly in the accompanying
postage-paid envelope. When
signing as Attorney, Executor,
Administrator, Trustee, Guardian
or in any other representative
capacity, please give your full
title as such.
PLEASE DATE, SIGN AND MAIL YOUR PROXY PROMPTLY
