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As filed with the Securities and Exchange Commission on October 23, 1997
Registration No. 333-31149
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM S-4/A-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
MAGNUM HUNTER RESOURCES, INC.
(Exact name of registrants as specified in their charters)
Nevada
1311
87-0462881
(State or other jurisdiction of
incorporation or organization)
(Primary Standard Industrial
Classification Code Number)
(I.R.S. Employer
Identification No.)
File No.333-31149-1 File No.333-31149-2
MAGNUM HUNTER PRODUCTION, INC. HUNTER GAS GATHERING, INC.
(Exact name of registrants (Exact name of registrants
as specified in their charters) as specified in their charters)
Texas Texas
(State or other jurisdiction (State or other jurisdiction
of incorporation or organization) of incorporation or organization)
75-2589131 75-1222501
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
File No.333-31149-3 File No.333-31149-4
GRUY PETROLEUM MANAGEMENT, CO. CONMAG ENERGY CORPORATION
(Exact name of registrants (Exact name of registrants
as specified in their charters) as specified in their charters)
Texas Texas
(State or other jurisdiction (State or other jurisdiction
of incorporation or organization) of incorporation or organization)
75-1074365 75-2715164
(I.R.S. Employer Identification No.) (I.R.S. Employer Identification No.)
File No.333-31149-5
RAMPART PETROLEUM, INC.
(Exact name of registrants
as specified in their charters)
Texas
(State or other jurisdiction
of incorporated or organization)
75-1896997
(I.R.S. Employer Identification No.)
600 East Las Colinas Blvd., Suite 1200,
Irving, Texas 75039
(972) 401-0752
(Address, including zip code, and telephone number, including area code,
of Registrant's principal executive offices)
Morgan F. Johnston, Esq.
600 East Las Colinas Blvd., Suite 1200
Irving, Texas 75039
(972) 401-0752
(Name, address, including zip code, and telephone number, including area code,
of agent for service)
Copies to:
David E. Morrison, Esq.
Thompson & Knight, P.C.
1700 Pacific Avenue, Suite 3300
Dallas, Texas 75201
(214) 969-1700
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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 being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
The Co-Registrants hereby amend this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Co-Registrants
shall file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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PROSPECTUS
Magnum Hunter Resources, Inc.
Offer to Exchange its
10% Senior Notes due 2007, That Have
Been Registered under the Securities Act of 1933,
As Amended, for Any and All of its Outstanding
10% Senior Notes due 2007
The Exchange Offer and Withdrawal Rights Will Expire at 5:00 p.m., New York
City Time, on December 2, 1997, Unless Extended (the "Expiration Date")
Magnum Hunter Resources, Inc., a Nevada corporation (the "Company"), hereby
offers, upon the terms and subject to the conditions set forth in this
Prospectus (as the same may be amended or supplemented from time to time, this
"Prospectus") and in the accompanying Letter of Transmittal (which together
constitute the "Exchange Offer"), to exchange up to $140,000,000 aggregate
principal amount of its 10% Senior Notes due 2007 (the "Exchange Notes") that
have been registered under the Securities Act of 1933, as amended (the
"Securities Act"), pursuant to a Registration Statement (as defined herein) of
which this Prospectus constitutes a part, for a like aggregate principal amount
of its outstanding 10% Senior Notes due 2007 (the "Outstanding Notes" and,
together with the Exchange Notes and the Private Exchange Notes (as defined), if
any, the "Notes"), of which $140,000,000 aggregate principal amount is
outstanding.
The terms of the Exchange Notes are identical in all material respects to
the terms of the Outstanding Notes, except that (i) the Exchange Notes have been
registered under the Securities Act and therefore will not be subject to certain
restrictions on transfer applicable to the Outstanding Notes and generally will
not be entitled to registration rights, and (ii) the Exchange Notes generally
will not provide for any increase in the interest rate thereon related to such
registration rights. See "Description of the Exchange Notes" and "Description of
the Outstanding Notes." The Outstanding Notes were sold by the Company on May
29, 1997 to BT Securities Corporation, First Union Capital Markets Corp.,
Paribas Corporation and PaineWebber Incorporated (collectively, the "Initial
Purchasers") pursuant to an offering exempt from registration under the
Securities Act (the "Offering").
The Exchange Notes are being offered for exchange in order to satisfy
certain obligations of the Company and the Subsidiary Guarantors (as defined)
under the Registration Rights Agreement dated May 29, 1997 (the "Registration
Agreement") among the Company, the Subsidiary Guarantors and the Initial
Purchasers. Upon request of certain holders of Outstanding Notes, the Company
shall exchange for certain Outstanding Notes other notes (the "Private Exchange
Notes") identical to the Exchange Notes in all material respects, except for the
placement of a legend on such Private Exchange Notes. See "Description of the
Exchange Notes-Registration Agreement." The Exchange Notes will be issued under
the same Indenture (as defined) as the Outstanding Notes, and the Exchange
Notes, the Private Exchange Notes, if any, and the Outstanding Notes will
constitute a single series of debt securities under the Indenture. In the event
that the Exchange Offer is consummated, any Outstanding Notes that remain
outstanding after consummation of the Exchange Offer, the Exchange Notes issued
in the Exchange Offer and the Private Exchange Notes, if any, will vote together
as a single class for purposes of determining whether holders of the requisite
percentage in outstanding principal amount of Notes have taken certain actions
or exercised certain rights under the Indenture.
Interest on the Notes will accrue from their date of original issuance
(the "Issue Date") and will be payable semi-annually in arrears on June 1 and
December 1 of each year, commencing on December 1, 1997, at the rate of 10% per
annum. The Notes will be redeemable, in whole or in part, at the option of the
Company on or after June 1, 2002, at the redemption prices set forth herein,
plus accrued interest to the date of redemption. In addition, at any time on or
prior to June 1, 2000, the Company may, at its option, redeem up to 35% of the
aggregate principal amount of the Notes originally issued with the net cash
proceeds of one or more Equity Offerings (as defined), at a redemption price
equal to 110% of the aggregate principal amount of the Notes to be redeemed plus
accrued interest to the date of redemption; provided, however, that after giving
effect to any such redemption, at least 65% of the aggregate principal amount of
the Notes originally issued remains outstanding. Upon a Change of Control (as
defined), each holder of the Notes will have the right to require the Company to
repurchase such holder's Notes at a price equal to 101% of the principal amount
thereof, plus accrued interest to the date of repurchase. In addition, the
Company will be obligated to offer to repurchase the Notes at 100% of the
principal amount thereof plus accrued interest to the date of repurchase in the
event of certain Asset Sales (as defined). See "Description of the Exchange
Notes" and "Description of the Outstanding Notes."
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The Outstanding Notes are and the Exchange Notes will be general unsecured
obligations of the Company, ranking pari passu with any unsubordinated
indebtedness of the Company and senior in right of payment to all subordinated
obligations of the Company. The Outstanding Notes are and the Exchange Notes
will be unconditionally guaranteed (the "Guarantees") on a senior basis by
certain of the Company's subsidiaries (the "Subsidiary Guarantors"). The
Guarantees are general unsecured obligations of the Subsidiary Guarantors and
rank pari passu with any unsubordinated indebtedness of the Subsidiary
Guarantors and senior in right of payment to all subordinated obligations of the
Subsidiary Guarantors. The Outstanding Notes are and the Exchange Notes will be
effectively subordinated to all secured indebtedness of the Company and the
Subsidiary Guarantors to the extent of the value of the assets securing such
indebtedness. As of September 30, 1997, the Company had approximately $48
million of secured indebtedness outstanding (excluding unused commitments of $12
million under the New Credit Facility (as defined)), all of which is guaranteed
by the Subsidiary Guarantors.
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Outstanding
Notes where such Outstanding Notes were acquired by such broker-dealer as a
result of market-making activities or other trading activities. The Company has
agreed that it will make this Prospectus available to any broker-dealer for such
period of time as is necessary to comply with applicable law in connection with
any such resale, provided that such time period generally not exceed 180 days
after the Registration Statement is declared effective.
See "Risk Factors" beginning on page 20 for a discussion of certain
factors that should be considered in connection with the Exchange Offer.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION PASSED UPON THE ACCURACY
OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO
THE CONTRARY IS A CRIMINAL OFFENSE.
The date of this Prospectus is October 24, 1997.
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 (the "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
such State.
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THIS PROSPECTUS INCORPORATES DOCUMENTS BY REFERENCE THAT ARE NOT PRESENTED
HEREIN OR DELIVERED HEREWITH. THESE DOCUMENTS ARE AVAILABLE UPON REQUEST FROM
MORGAN F. JOHNSTON, SECRETARY, MAGNUM HUNTER RESOURCES, INC., 600 EAST LAS
COLINAS BLVD., IRVING, TEXAS 75039 TELEPHONE (972) 401-0752. IN ORDER TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY NOVEMBER 17,
1997.
The Company is making the Exchange Offer in reliance on a position of the
staff of the Division of Corporation Finance of the Commission as set forth in
certain interpretive letters addressed to third parties in other transactions.
However, the Company has not sought its own interpretive letter and there can be
no assurance that the staff of the Division of Corporation Finance of the
Commission would make a similar determination with respect to the Exchange Offer
as it has in such interpretive letters to third parties. Based on these
interpretations by the staff of the Division of Corporation Finance, and subject
to the three immediately following sentences, the Company believes that the
Exchange Notes issued pursuant to this Exchange Offer in exchange for
Outstanding Notes may be offered for resale, resold and otherwise transferred by
a holder thereof (other than a holder who is a broker-dealer) without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that (i) such Exchange Notes are acquired in the
ordinary course of such holder's business and (ii) such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution (within the meaning of the Securities Act) of
such Exchange Notes. However, any holder of the Outstanding Notes who is an
"affiliate" of the Company within the meaning of Rule 405 under the Securities
Act or any broker-dealer who purchased Outstanding Notes from the Company to
resell pursuant to Rule 144A under the Securities Act ("Rule 144A") or any other
available exemption under the Securities Act, (a) will not be able to rely on
the interpretations of the staff of the Division of Corporation Finance of the
Commission set forth in the above mentioned interpretive letters, (b) will not
be permitted or entitled to tender such Outstanding Notes in the Exchange Offer
and (c) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or other transfer of such
Outstanding Notes unless such sale or transfer is made pursuant to an exemption
from such requirements. In addition, any holder who tenders Outstanding Notes in
the Exchange Offer with the intention or for the purpose of participating in a
distribution of the Exchange Notes cannot rely on such interpretations of the
staff of the Division of Corporation Finance of the Commission referred to above
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction. A
broker-dealer who is not an "affiliate" of the Company may participate in the
Exchange Offer with respect to Outstanding Notes acquired for its own account as
a result of market-making activities or other trading activities, provided that
(i) in connection with any resales of Exchange Notes received by the
broker-dealer in exchange for such Outstanding Notes, the broker-dealer delivers
a prospectus meeting the requirements of the Securities Act, and (ii) the
broker-dealer has not entered into any arrangement or understanding with any
person to participate in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. In the event that applicable interpretations by the
staff of the Division of Corporation Finance of the Commission change or
otherwise do not permit resales of the Exchange Notes without compliance with
the registration and prospectus delivery requirements of the Securities Act,
holders of Exchange Notes who transfer Exchange Notes in violation of the
prospectus delivery provisions of the Securities Act or without an exemption
from registration thereunder may incur liability thereunder.
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Each holder of Outstanding Notes who wishes to exchange such Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to represent
that (i) it is not an "affiliate" of the Company, (ii) any Exchange Notes to be
received by it are being acquired in the ordinary course of its business, and
(iii) at the time of consummation of the Exchange Offer such holder will have no
arrangement or understanding with any person to participate in a distribution
(within the meaning of the Securities Act) of such Exchange Notes in violation
of the Securities Act. Each broker-dealer that receives Exchange Notes for its
own account in exchange for Outstanding Notes pursuant to the Exchange Offer
must acknowledge that it acquired the Outstanding Notes for its own account as a
result of market-making activities or other trading activities (a "Participating
Broker-Dealer"), and must agree that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. The Letter of Transmittal states that by so acknowledging and by
delivering a prospectus, a broker-dealer will not be deemed to admit that it is
an "underwriter" within the meaning of the Securities Act. Based on the position
taken by the staff of the Division of Corporation Finance of the Commission in
the interpretive letters referred to above, the Company believes that
Participating Broker-Dealers may fulfill the prospectus delivery requirements
with respect to the Exchange Notes received upon exchange of such Outstanding
Notes (other than Outstanding Notes that represent an unsold allotment from the
original sale of the Outstanding Notes) with a prospectus meeting the
requirements of the Securities Act that may be the prospectus prepared for an
exchange offer so long as it contains a description of the plan of distribution
with respect to the resale of such Exchange Notes. Accordingly, this Prospectus
may be used by a Participating Broker-Dealer during the period referred to below
in connection with resales of Exchange Notes received in exchange for
Outstanding Notes where such Outstanding Notes were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities. Subject to certain provisions set forth in the
Registration Agreement, the Company has agreed that this Prospectus may be used
by a Participating Broker-Dealer for such period of time as is necessary to
comply with applicable law in connection with resales of such Exchange Notes,
provided that such time period generally not exceed 180 days after the
Registration Statement is declared effective. Any Participating Broker-Dealer
who is an "affiliate" of the Company may not rely on such interpretive letters
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with any resale transaction. See "Plan of
Distribution" and "The Exchange Offer - Resales of Exchange Notes."
Each Participating Broker-Dealer will be deemed to have agreed, by its
acquisition of the Outstanding Notes or Exchange Notes to be sold by such
Participating Broker-Dealer, that, upon receipt of notice from the Company of
the occurrence of any event or the discovery of any fact which makes untrue in
any material respect or which causes this Prospectus to omit to state a material
fact necessary in order to make the statements contained or incorporated by
reference herein, in light of the circumstances under which they were made, not
misleading or of the occurrence of certain other events specified in the
Registration Agreement, such Participating Broker-Dealer will suspend the sale
of Exchange Notes pursuant to this Prospectus until the Company has amended or
supplemented this Prospectus to correct such misstatement or omission and has
furnished copies of the amended or supplemented Prospectus to each such
Participating Broker-Dealer or until the Company has given notice that the sale
of Exchange Notes may be resumed, as the case may be. If the Company gives such
notice to suspend the sale of the Exchange Notes, it shall extend the 180 day
period referred to above during which Participating Broker-Dealers are entitled
to use this Prospectus in connection with the resale of Exchange Notes by the
number of days during the period from and including the date of the giving of
such notice to and including the date when Participating Broker-Dealers shall
have received copies of the amended or supplemented Prospectus necessary to
permit resales of the Exchange Notes, or to and including the date on which the
Company has given notice that the sale of Exchange Notes may be resumed, as the
case may be.
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Prior to the Exchange Offer, there has been only a limited secondary
market and no public market for the Outstanding Notes. The Exchange Notes will
be a new issue of securities for which there is currently no market. While the
Company does intend to apply for listing of the Exchange Notes on the American
Stock Exchange, there can be no assurance as to the development or liquidity of
any market for the Exchange Notes. Although the Initial Purchasers have informed
the Company that they each currently intend to make a market in the Exchange
Notes, they are not obligated to do so, and any such market-making may be
discontinued at any time without notice. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Exchange Notes.
Any Outstanding Notes not tendered or accepted in the Exchange Offer will
remain outstanding and will be entitled to all the same rights and will be
subject to the same limitations applicable thereto under the Indenture (except
for those rights that terminate upon the consummation of the Exchange Offer).
Following consummation of the Exchange Offer, the holders of Outstanding Notes
will continue to be subject to the existing restrictions upon transfer thereof
and the Company will have no further obligation to such holders (other than
under certain limited circumstances primarily relating to holders who are not
eligible to participate in the Exchange Offer) to provide the registration under
the Securities Act of the Outstanding Notes held by them. If Outstanding Notes
are tendered and accepted in the Exchange Offer, the trading market for
untendered Outstanding Notes is likely to diminish; accordingly, holders who do
not tender their Outstanding Notes may encounter difficulties in selling such
notes following the Exchange Offer. See "Risk Factors - Consequences of a
Failure to Exchange Outstanding Notes."
THIS PROSPECTUS AND THE RELATED LETTER OF TRANSMITTAL CONTAIN IMPORTANT
INFORMATION. HOLDERS OF OUTSTANDING NOTES ARE URGED TO READ THIS PROSPECTUS AND
THE RELATED LETTER OF TRANSMITTAL CAREFULLY BEFORE DECIDING WHETHER TO TENDER
THEIR OUTSTANDING NOTES PURSUANT TO THE EXCHANGE OFFER.
Outstanding Notes may be tendered for exchange on or prior to 5:00 p.m.,
New York City time, on December 2, 1997, unless the Exchange Offer is extended
by the Company (the "Expiration Date"). Tenders of Outstanding Notes may be
withdrawn at any time thereafter on or prior to the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of
Outstanding Notes being tendered for exchange. Outstanding Notes may be tendered
in whole or in part in a principal amount of $1,000 and integral multiples
thereof.
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Each Exchange Note will bear interest from the most recent date to
which interest has been paid or duly provided for on the Outstanding Note
surrendered in exchange for such Exchange Note or, if no such interest has been
paid or duly provided for on such Outstanding Note, from May 29, 1997. Holders
of the Outstanding Notes whose Outstanding Notes are accepted for exchange will
not receive accrued interest on such Outstanding Notes for any period from and
after the last interest payment date to which interest has been paid or duly
provided for on such Outstanding Notes prior to the original issue date of the
Exchange Notes or, if no such interest has been paid or duly provided for, will
not receive any accrued interest on such Outstanding Notes, and will be deemed
to have waived the right to receive any interest on such Outstanding Notes
accrued from and after such interest payment date or, if no such interest has
been paid or duly provided for, from and after May 29, 1997.
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. See "Use of Proceeds." No dealer-manager is being
used in connection with this Exchange Offer. See "Plan of Distribution."
Solicitation of tenders of Outstanding Notes may be made in person or by mail,
telephone or telecopy, by directors, officers and regular employees of the
Company. Such persons will receive no additional compensation for any
solicitation activities. The Company may employ third-party agents to solicit
tenders of Outstanding Notes, for which services such agents would be paid their
usual and customary fee. The Company has agreed to pay the expenses of the
Exchange Offer.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER OF ANY SECURITIES
OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO ANY PERSON IN ANY
JURISDICTION WHERE SUCH OFFER WOULD BE UNLAWFUL. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
ANY IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE AFFAIRS OF THE COMPANY
OR ITS SUBSIDIARIES SINCE THE DATE HEREOF.
This Prospectus, together with the Letter of Transmittal, is being sent to
all registered holders of the Outstanding Notes as of October 27, 1997.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information, financial statements, and other data appearing elsewhere or
incorporated by reference in this Prospectus. Unless the context otherwise
requires, all references herein to "Magnum Hunter" or the "Company" include
Magnum Hunter Resources, Inc., formerly known as Magnum Petroleum, Inc., and its
consolidated subsidiaries. Except as otherwise indicated herein, each reference
herein to on a "pro forma basis" shall mean that the results for the stated
period or other information has been adjusted to reflect the consummation of the
Transactions (as defined herein). Certain capitalized terms relating to the oil
and natural gas business are defined in the "Glossary." The Company maintains
its corporate headquarters at 600 East Las Colinas Blvd., Suite 1200, Irving,
Texas 75039 and its telephone number is (972) 401-0752.
The Company
Magnum Hunter is an independent energy company engaged in the
exploitation and development, acquisition, exploration and operation of oil and
natural gas properties with a focus on Texas, Oklahoma and New Mexico. In
December 1995, Magnum Petroleum, Inc. and Hunter Resources, Inc. ("Hunter")
combined their oil and natural gas reserves and other assets (the "Magnum Hunter
Combination"), whereby the management of Hunter assumed operating control of the
Company. The new management implemented a business strategy emphasizing
acquisitions of long-lived Proved Reserves with significant exploitation and
development opportunities where the Company generally can control operations of
the properties. As part of this strategy, in June 1996 the Company acquired from
a subsidiary of Burlington Resources, Inc. ("Burlington") property interests
located in the Texas Panhandle and western Oklahoma (the "Panoma Properties")
for $34.7 million. Additionally, in April 1997, the Company acquired from
Burlington property interests located in west Texas and southeast New Mexico
(the "Permian Basin Properties") for a net purchase price of $133.0 million.
While the Company is considering further acquisitions and, to a lesser extent,
plans to pursue selected exploratory drilling opportunities, the Company intends
to focus its efforts on the substantial inventory of exploitation and
development opportunities arising from the acquisitions.
The Company is a holding company that operates through three primary
subsidiaries: (i) Gruy Petroleum Management Co. ("Gruy"), which conducts the
Company's operations; (ii) Magnum Hunter Production, Inc., which owns the
Company's oil and natural gas assets; and (iii) Hunter Gas Gathering, Inc.,
which owns the Company's gas gathering and processing facilities.
On a pro forma basis at December 31, 1996, the Company had an interest
in 2,581 wells and had estimated Proved Reserves of 314.2 Bcfe with an SEC PV-10
of $408.0 million. As adjusted to use market prices in effect on March 31, 1997,
the Proved Reserves were 300.5 Bcfe with an SEC PV-10 of $224.8 million on a pro
forma basis at December 31, 1996. Approximately 68% of these reserves were
classified as Proved Developed Producing Reserves and 86% were attributable to
the Panoma Properties and the Permian Basin Properties. On a pro forma basis at
December 31, 1996, the Company's Proved Reserves had an estimated Reserve Life
of 14.6 years and were 61% natural gas. The Company serves as operator for
approximately 71% of its properties. Additionally, the Company owns over 500
miles of gas gathering systems and a 50% interest in a gas processing plant that
is connected to the gas gathering system purchased with the Panoma Properties.
In 1996, on a pro forma basis, the Company had revenues of $63.6 million and
EBITDA (as defined) of $38.3 million.
Beginning with the Magnum Hunter Combination in December 1995, the
Company has made nine acquisitions for an aggregate net purchase price of $185.4
million. This strategy has added approximately 305.6 Bcfe of reserves
(determined as of the respective times of their acquisition) at an average cost
of $0.61 per Mcfe, as well as a 427 mile gas gathering system and a 50% interest
in a gas processing plant. As a result of its acquisitions, the Company has
achieved substantial growth as described below (comparing 1996 pro forma data to
1995 historical data):
o Proved reserves increased to 314.2 Bcfe at year end 1996
(300.5 Bcfe as adjusted for March 31, 1997 market prices) from
36.7 Bcfe at year end 1995;
o Annual production increased to 20.4 Bcfe in 1996 from 0.3 Bcfe
in 1995;
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o SEC PV-10 increased to $408.0 million at year end 1996 ($224.8
million as adjusted for March 31, 1997 market prices) from
$37.2 million at year end 1995; and
o EBITDA increased to $38.3 million in 1996 from $(0.5) million
in 1995.
The Permian Basin Acquisition
On April 30, 1997, the Company acquired the Permian Basin Properties
from Burlington effective as of January 1, 1997 (the "Permian Basin
Acquisition"). The Permian Basin Properties consist of 47 field areas in west
Texas and southeast New Mexico. The net purchase price was $133.0 million after
adjustments of $10.5 million for production cash flow from January 1, 1997 to
the closing date and other minor adjustments.
The Permian Basin Properties include 1,852 producing oil and natural
gas wells on approximately 113,810 gross acres (82,175 net acres), which the
Company believes have significant additional exploitation, development and
exploration opportunities. Approximately 66% of the wells acquired are operated
by the Company. Among other opportunities, the Company has identified
approximately 250 drilling locations, including production and injection wells,
to further develop an existing waterflood in the Westbrook Field in Mitchell
County, Texas. The proposed waterflood project is estimated to cost
approximately $38.1 million over a four-year period. While the reserve report
for the Permian Basin Properties assumes approximately $6.6 million of
development expenditures during 1997 to enhance this waterflood project, the
Company is evaluating the timing of these development expenditures relative to
the Company's other capital expenditure requirements. The Company has initially
budgeted approximately $5.0 million for development expenditures on the Permian
Basin Properties for 1997.
According to Ryder Scott Co., independent petroleum engineers engaged
by the Company to evaluate the Permian Basin Properties ("Ryder Scott"), the
Proved Reserves attributable to the Permian Basin Properties as of December 31,
1996 aggregated 191.6 Bcfe with an SEC PV-10 of $243.3 million, including 60.4
Bcfe of Proved Undeveloped Reserves. At December 31, 1996, on a pro forma basis,
the Permian Basin Acquisition increased the Company's Proved Reserves to 314.2
Bcfe with an SEC PV-10 of $408.0 million as compared to Proved Reserves of 122.6
Bcfe with an SEC PV-10 of $164.8 on a historical basis at December 31, 1996. As
adjusted to use market prices in effect on March 31, 1997, the Proved Reserves
attributable to the Permian Basin Properties as of December 31, 1996 aggregated
181.6 Bcfe with an SEC PV-10 of $139.6 million, including 60.3 Bcfe of Proved
Undeveloped Reserves.
The Company financed the acquisition of the Permian Basin Properties
with a new $130.0 million credit facility (the "New Credit Facility") and a
senior subordinated credit facility of $60.0 million (the "Term Loan Facility").
Borrowings of $119.5 million under the New Credit Facility and $60.0 million
under the Term Loan Facility were used to pay the $123.0 million balance of the
$133.0 million net purchase price for the Permian Basin Properties, to repay the
$53.7 million in outstanding indebtedness as of April 30, 1997 under the
Company's previous $100.0 million credit facility (the "Previous Credit
Facility") and to pay the costs associated with the Permian Basin Acquisition
and the related financings. Upon the closing of the Offering, the Company used
the net proceeds from the Outstanding Notes to repay the outstanding
indebtedness under the Term Loan Facility and to reduce indebtedness under the
New Credit Facility by approximately $75.5 million.
The Panoma Acquisition
In June 1996, the Company purchased the Panoma Properties from
Burlington for $34.7 million (the "Panoma Acquisition") using borrowings under
the Previous Credit Facility. Assets acquired in the Panoma Acquisition included
interests in 520 natural gas wells in the Texas Panhandle and western Oklahoma
and an associated 427 mile gas gathering system. The Company now operates the
gas gathering system and approximately 90% of the acquired natural gas wells.
According to Gaffney, Cline & Associates, independent petroleum
engineers engaged by the Company to evaluate the Panoma Properties ("Gaffney,
Cline"), the Proved Reserves attributable to the Panoma Properties as of
-8-
<PAGE>
December 31, 1996 aggregated 77.3 Bcfe with an SEC PV-10 of $111.0 million. As
adjusted to use market prices in effect on March 31, 1997, the Proved Reserves
attributable to the Panoma Properties as of December 31, 1996 aggregated 74.2
Bcfe with an SEC PV-10 of $53.3 million.
The Company plans to drill over 80 in-fill wells on the Panoma Properties
based on the greater well density of nearby analogous fields. The Company has
budgeted approximately $5.0 million to drill 40 of these natural gas wells
during 1997. During the first nine months of 1997, the Company completed
approximately half of these wells. The Company has increased the natural gas
flow through the gas gathering system by installing new compressor units and
reconfiguring the compression system.
McLean Plant Acquisition
In January 1997, the Company acquired for $2.5 million a 50% ownership
interest in the McLean gas processing plant (the "McLean Gas Plant"), which
currently processes 100% of the natural gas produced from the Panoma Properties
(the "McLean Plant Acquisition"). The Company receives 100% of the net profits
from the McLean Gas Plant until it recoups the $2.5 million purchase price,
after which time it will receive 50% of the net profits. Management believes
that the McLean Plant Acquisition allows the Company to capture a portion of the
processing profits on natural gas produced at the Panoma Properties that would
otherwise go to third party processors.
Other Development and Exploration Activities
Apart from the Permian Basin and Panoma Properties, the Company has
identified a number of development opportunities on its other properties for
which it has budgeted approximately $7.0 million to be spent during 1997. The
Company believes it can enhance the value of selected west Texas fields through
in-fill drilling and enhanced recovery projects, and it also plans to
participate in the drilling of up to 16 new lateral extensions from existing
well bores in the Austin Chalk formation in Fayette County in central Texas. The
Company also plans to participate in drilling approximately seven exploratory
wells during 1997, for which it has budgeted approximately $3.0 million. The
Company has participated in a successful exploratory gas discovery in Oklahoma
and is presently testing another exploratory well drilled earlier this year. The
Company plans to drill additional exploratory wells in 1997 on properties near
the Texas Gulf Coast and in southwest Texas.
Company Strengths
o Quality of Reserves. The Company has a high quality reserve base. The
majority of the reserves are in the Permian Basin and Hugoton Embayment, both of
which are well-known, mature oil and natural gas producing regions. The fields
in which the properties are located generally have significant production
history and performance data. In addition, approximately 68% of the Company's
Proved Reserves were classified as Proved Developed Producing Reserves on a pro
forma basis at December 31, 1996. These attributes reduce the risks associated
with determining remaining reserves and forecasting future production from the
properties. The properties are also long-lived with an estimated Reserve Life on
a pro forma basis at December 31, 1996 of 14.6 years.
o Substantial Inventory of Exploitation and Development Projects. The
Company has identified over 400 development drilling locations on its
properties. The Company believes that the majority of these locations are
low-risk in-fill drilling opportunities which should add incremental reserves
and increase production rates. In addition to drilling opportunities, the
Company has identified several enhanced recovery projects which will include the
use of waterflood and tertiary recovery methods.
o Significant Operating Control. Through its Gruy subsidiary, the Company
operates approximately 71% of the properties in which it owns an interest. This
level of operating control benefits the Company in numerous ways by enabling the
Company to (i) control the timing and nature of capital expenditures, (ii)
identify and implement cost control programs, (iii) respond quickly to operating
problems and (iv) receive overhead reimbursements from other working interest
owners.
-9-
<PAGE>
o Experienced Management. The Company's three senior managers have over 82
combined years of direct oil and natural gas experience in the areas of drilling
and completions, production operations, acquisitions and divestitures and
reservoir engineering. Most members of the Company's technical staff, having
spent their entire careers specializing in these regions, have in-depth
knowledge of the Company's core operating regions.
o Balanced Reserve Mix. On a pro forma basis at December 31, 1996, the
Company's reserve mix was approximately 39% oil and 61% natural gas. This
balanced portfolio reduces the Company's exposure to a single product's price
volatility.
Business Strategy
The Company's objective is to aggressively grow its reserves,
production, cash flow and earnings utilizing a balanced program of (i)
exploitation and development of acquired properties, including development
drilling, workovers and cost reduction programs, (ii) strategic acquisitions,
and (iii) a selective exploration program. Since the Magnum Hunter Combination,
the Company has acquired long-lived properties with significant exploitation and
development potential where the Company can control operations on a high
percentage of the properties. The Company is now focusing its efforts on fully
developing the large inventory of properties arising from its acquisitions and,
to a lesser extent, is identifying and participating in selected exploratory
prospects. The Company is also evaluating several smaller strategic acquisitions
which fit the Company's objectives of having long-lived Proved Reserves with
exploitation and development potential and operating control.
The following are key elements of the Company's strategy:
o Exploitation and Development of Existing Properties. The Company has a
substantial inventory of exploitation projects including development drilling,
workovers and recompletions and cost reduction programs. As of December 31,
1996, on a pro forma basis, 32% (100.0 Bcfe) of the Company's total Proved
Reserves were classified as Proved Undeveloped Reserves. The Company seeks to
maximize the value of the properties through development activities including
in-fill drilling, waterflooding and other enhanced recovery techniques.
Management believes that the proximity of these Proved Undeveloped Reserves to
existing production makes development of these projects less risky and more cost
effective than other drilling opportunities available to the Company.
o Operating Cost Management. The Company emphasizes strict cost controls in
all aspects of its business, and seeks to operate its properties wherever
possible. By operating approximately 71% of its properties, the Company is
generally able to control direct operating and drilling costs as well as to
manage the timing of development and exploration activities. For example,
following the Panoma Acquisition, the Company increased operating margins by
restoring shut-in wells to production, reducing the number of field employees,
implementing compression and other improvements on the Panoma gas gathering
system and purchasing a 50% interest in the McLean Gas Plant. Management
believes it can also reduce operating costs on the Permian Basin Properties by
reducing the number of field employees, using contract pumpers and implementing
other efficiencies. Moreover, as a result of its acquisition of the Permian
Basin Properties, the Company expects only a moderate increase in its general
and administrative expenses in relation to the large number of properties
acquired. Therefore, the Company anticipates that such expenses will decline on
a per Mcfe basis.
o Strategic Acquisitions. Although the Company has an extensive inventory
of exploitation and development opportunities, it is continuing to pursue
smaller strategic acquisitions in its existing areas of operations which fit its
objectives of having long-lived Proved Reserves with development potential and
operating control.
-10-
<PAGE>
o Expansion of Gas Gathering and Marketing Operations. The Company has
implemented several programs to expand and increase the efficiency of its gas
gathering systems. The Company owns over 75% and markets 100% of the natural gas
that moves through its gas gathering systems and, therefore, directly benefits
from any cost and productivity improvements. Since the Company believes that its
gas gathering systems have significant underutilized throughput capacity, it is
actively pursuing several opportunities to add new Company and third party well
connections. The Company is also considering opportunities to acquire
complementary gas gathering systems and to form joint ventures with other
operators. In addition, the Company believes that its acquisition of a 50%
interest in the McLean Gas Plant allows the Company to capture a portion of the
processing profits on natural gas produced at the Panoma Properties that would
otherwise go to third party processors.
Recent Financing Activities
TCW Preferred Stock. In December 1996, the Company sold $10.0 million
of its 1996 Series A Convertible Preferred Stock (the "TCW Preferred Stock") in
a private placement to funds managed by Trust Company of the West (collectively,
"TCW"). The purpose of the private placement was to fund the capital costs
necessary to develop certain developmental drilling and secondary recovery
projects. The proceeds were initially used to reduce the Company's outstanding
indebtedness under the Previous Credit Facility.
New Credit Facility and Term Loan Facility. On April 30, 1997, the
Company entered into the New Credit Facility (which replaced the Previous Credit
Facility) and the Term Loan Facility. On such date, the Company borrowed $119.5
million and $60.0 million under the New Credit Facility and the Term Loan
Facility, respectively, to fund the balance due on the purchase price of the
Permian Basin Acquisition, to repay the outstanding indebtedness under the
Previous Credit Facility and to pay the costs associated with the Permian Basin
Acquisition and the related financings.
Offering of Senior Notes. On May 29, 1997, the Company completed an
offering of $140,000,000 aggregate principal amount of its Outstanding Notes
(the "Offering"). Interest on the Notes accrues from their date of original
issuance and is payable semi-annually in arrears on June 1 and December 1 of
each year, commencing on December 1, 1997, at the rate of 10% per annum. In
general, the Notes will be redeemable, in whole or in part, at the option of the
Company on or after June 1, 2002, at the redemption prices set forth herein,
plus accrued interest to the date of redemption. The Outstanding Notes are and
the Exchange Notes will be general unsecured obligations of the Company, ranking
pari passu with any unsubordinated indebtedness of the Company and senior in
right of payment to all subordinated obligations of the Company. The net
proceeds from the Offering were approximately $135.5 million after deducting
fees and expenses of $4.5 million payable by the Company. The Company utilized
the net proceeds to repay the $60.0 million of outstanding indebtedness under
the Term Loan Facility and to reduce indebtedness under the New Credit Facility
by approximately $75.5 million. As of September 30, 1997, the Company had
approximately $48 million of secured indebtedness outstanding (excluding unused
commitments of $12 million under the New Credit Facility).
The Transactions
The Offering and the application of the net proceeds thereof, the
Permian Basin Acquisition (including the incurrence of indebtedness under the
New Credit Facility and the Term Loan Facility and the use of proceeds
therefrom), the Panoma Acquisition, the McLean Plant Acquisition, the issuance
of the TCW Preferred Stock and the conversion or redemption of the Company's
Series B and Series C Preferred Stock into Common Stock, each as more fully
described in the "Unaudited Pro Forma Combined Financial Data" and the notes
thereto, are collectively referred to herein as the "Transactions."
-11-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
Summary Description of the Exchange Offer and Exchange Notes
Exchange Offer................................ Up to $140,000,000 aggregate principal amount of Exchange
Notes are being offered in exchange for like aggregate
principal amount of Outstanding Notes. Outstanding Notes
may be tendered for exchange in whole or in part in a
principal amount of $1,000 and integral multiples thereof.
The Company is making the Exchange Offer in order to
satisfy its obligations under the Registration Agreement
relating to the Outstanding Notes. The Company will issue
the Exchange Notes to tendering holders of the Outstanding
Notes promptly following the Expiration Date.
Registration Agreement........................... The Outstanding Notes were sold by the Company on May 29,
1997 to BT Securities Corporation, First Union Capital
Markets Corp., Paribas Corporation and PaineWebber
Incorporated, which placed the Outstanding Notes in
the United States with Qualified Institutional Buyers
("QIBs") in reliance on Rule 144A under the Securities Act
and institutional accredited investors. In connection
therewith, the Company, the Subsidiary Guarantors
and the Initial Purchasers executed and delivered for the
benefit of the holders of the Outstanding Notes the
Registration Agreement providing for, among other things,
the Exchange Offer.
Expiration Date.................................. 5:00 p.m., New York City time, on December 2, 1997
unless the Exchange Offer is extended by the Company. See
"The Exchange Offer - Terms of the Exchange."
Procedures for Tendering Outstanding
Notes......................................... Each holder of Outstanding Notes wishing to accept the
Exchange Offer must either (i) complete, sign and date the
Letter of Transmittal, or a facsimile thereof,in accordance
with the instructions contained herein and therein, and
mail or otherwise deliver such Letter of Transmittal,
or such facsimile, together with either the certificates
for such Outstanding Notes or, if such procedure is
available, a Book-Entry Confirmation of such Outstanding
Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility, or (ii) deliver such a Book-Entry
Confirmation together with an Agent's Message (whereby the
holder acknowledges its receipt of and agrees to be
bound by the Letter of Transmittal), and any other required
documentation to the Exchange Agent at the address set
forth herein. By executing the Letter of Transmittal or
delivering an Agent's Message each holder of Outstanding
Notes will represent to the Company that, among other
things, (i) the Exchange Notes acquired pursuant to the
Exchange Offer by the holder and any beneficial owners of
such Outstanding Notes are being acquired in the ordinary
course of business of the person receiving such Exchange
Notes, (ii) at the time of the consummation of the Exchange
Offer such holder will have no arrangement or understanding
with any person to participate in the distribution of such
Exchange Notes in violation of the Securities Act and (iii)
neither the holder nor such beneficial owner is an
"affiliate," as defined in Rule 405 under the Securities
Act, of the Company.
-12-
<PAGE>
A Participating Broker-Dealer that receives Exchange Notes
for its own account in exchange for Outstanding Notes may
participate in the Exchange Offer but may be deemed an
"underwriter" under the Securities Act and, therefore, must
acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any
resale of such Exchange Notes. The Company has undertaken,
for a period of 180 days after its Registration Statement
of which this Prospectus is a part is declared effective,
to maintain the effectiveness of the Registration Statement
for use in satisfaction of such persons' obligations to
deliver a prospectus. The Letter of Transmittal states
that by so acknowledging and by delivering a prospectus, a
Participating Broker-Dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities
Act. See "The Exchange Offer-Resales of Exchange Notes" and
"Plan of Distribution."
Special Procedures for Beneficial
Owners........................................ Any beneficial owner whose Outstanding Notes are registered
in the name of a broker, dealer, commercial bank, trust
company or other nominee and who wishes to tender such
Outstanding Notes in the Exchange Offer should contact such
registered holder promptly and instruct such registered
holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on its own behalf, such
owner must, prior to completing and executing the Letter of
Transmittal and delivering its Outstanding Notes, either
make appropriate arrangements to register ownership of the
Outstanding Notes in such owner's name or obtain a properly
completed bond power from the registered holder.The transfer
of registered ownership may take considerable time and may
not be able to be completed prior to the Expiration Date.
Guaranteed Delivery
Procedures.................................... Holders of Outstanding Notes who wish to tender their
Outstanding Notes and whose Outstanding Notes are not
immediately available or who cannot complete the procedures
for book-entry transfer of such Outstanding Notes or deliver
their Outstanding Notes, the Letter of Transmittal or any
other required documents to the Exchange Agent prior to the
Expiration Date must tender their Outstanding Notes
according to the guaranteed delivery procedures set forth
in "The Exchange Offer- Procedures for Tendering Outstanding
Notes - Guaranteed Delivery."
Withdrawal Rights................................ Tenders may be withdrawn at any time prior to the Expiration
Date. See "The Exchange Offer -Withdrawal Rights."
Certain Federal Income Tax
Considerations.............................. The exchange of the Outstanding Notes for Exchange Notes by
tendering holders should not be a taxable exchange for U.S.
federal income tax purposes, and such holders should not
recognize any taxable gain or loss for U.S. federal income
tax purposes as a result of such exchange. Holders of
Exchange Notes will continue to be required to include
interest received on such Exchange Notes in gross income in
accordance with their method of accounting for U.S. federal
income tax purposes. Holders should review the information
set forth under "Certain Federal Income Tax Considerations"
for a discussion of certain U.S. federal income tax
considerations relating to the Exchange Notes prior to
tendering the Outstanding Notes in the Exchange Offer.
Exchange Agent................................... First Union National Bank of North Carolina is serving as
Exchange Agent in connection with the Exchange Offer. See
"The Exchange Offer - Exchange Agent."
-13-
<PAGE>
The Exchange Notes............................... $140,000,000 in aggregate principal amount of 10% Senior
Notes due 2007. The form and terms of the Exchange Notes are
identical in all material respects to the terms of the
respective Outstanding Notes for which they may be exchanged
pursuant to the Exchange Offer, except for certain transfer
restrictions and registration rights relating to the
Outstanding Notes and except for certain interest provisions
relating to such registration rights. See "Description of
the Exchange Notes."
Maturity......................................... June 1, 2007.
Interest on the Exchange Notes................... The Exchange Notes will bear interest at the rate of 10% per
annum, payable semiannnually on June 1 and December 1 of
each year, commencing December 1, 1997. Each Exchange Note
will bear interest from the most recent date to which
interest has been paid or duly provided for on the
Outstanding Note surrendered in exchange for such Exchange
Note or, if no such interest has been paid or duly provided
for on such Outstanding Note, from May 29, 1997. Interest on
the Outstanding Notes accepted for exchange will cease to
accrue upon issuance of the Exchange Notes.
Ranking.......................................... The Exchange Notes will be general unsecured obligations of
the Company and will rank pari passu with any unsubordinated
indebtedness of the Company and will rank senior in right of
payment to all subordinated obligations of the Company. The
Exchange Notes will be effectively subordinated to all
secured indebtedness of the Company to the extent of the
value of the assets securing such indebtedness. As of
September 30, 1997, the Company had approximately $48
million of secured indebtedness outstanding (excluding
unused commitments of $12 million under the New Credit
Facility), all of which is guaranteed by the Subsidiary
Guarantors.
Guarantees....................................... The Exchange Notes will be unconditionally guaranteed on
a senior basis by the Subsidiary Guarantors. The Guarantees
will be general unsecured obligations of the Subsidiary
Guarantors and will rank pari passu with any unsubordinated
indebtedness of the Subsidiary Guarantors and will rank
senior in right of payment to all subordinated obligations
of the Subsidiary Guarantors. The Guarantees will be
effectively subordinated to all secured indebtedness of the
Subsidiary Guarantors to the extent of the value of the
assets securing such indebtedness.
Optional Redemption.............................. The Exchange Notes will be redeemable, in whole or in part,
at the option of the Company on or after June 1, 2002 at
the redemption prices set forth herein, plus accrued interest
to the date of redemption. In addition, at any time on or
prior to June 1, 2000, the Company may, at its option, redeem
up to 35% of the aggregate principal amount of the Notes
originally issued with the net cash proceeds of one or
more Equity Offerings, at a redemption price equal to 110% of
the aggregate principal amount of the Notes to be redeemed
plus accrued interest to the date of redemption; provided,
however, that, after giving effect to any such redemption, at
least 65% of the aggregate principal amount of the Notes
originally issued remains outstanding.
Change of Control................................ Upon a Change of Control, each holder will have the right to
require the Company to repurchase such holder's Exchange Notes
at a price equal to 101% of the principal amount thereof plus
accrued interest to the date of repurchase.
-14-
<PAGE>
Certain Covenants................................ The Indenture governing the Exchange Notes (the "Indenture")
contains certain covenants that limit the ability of the Company
and its Restricted Subsidiaries (as defined) to, among other
things, incur additional indebtedness, pay dividends or make
certain other restricted payments, consummate certain asset
sales, enter into certain transactions with affiliates, incur
liens, impose restrictions on the ability of a Restricted
Subsidiary to pay dividends or make certain payments to the
Company and its Restricted Subsidiaries, merge or consolidate
with any other person or sell, assign, transfer,lease, convey or
otherwise dispose of all or substantially all of the assets of
the Company. In addition, under certain circumstances, the
Company will be required to offer to purchase the Exchange Notes,
in whole or in part, at a purchase price equal to 100% of the
principal amount thereof plus accrued interest to the date of
repurchase, with the proceeds of certain Asset Sales (as defined).
Listing.......................................... The Company has applied for listing of the Exchange Notes on the
American Stock Exchange. See "Risk Factors - Lack of Public
Market."
Sinking Fund..................................... None.
For additional information regarding the Exchange Notes, see "Description of the Exchange Notes."
</TABLE>
Use of Proceeds
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby.
Risk Factors
See "Risk Factors" for a discussion of certain factors that should be
considered in evaluating an investment in the Exchange Notes.
-15-
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following table sets forth summary historical consolidated financial
data of the Company as of and for the three years ended December 31, 1996, for
the six months ended June 30, 1996 and 1997 and as of June 30, 1997, which have
been derived from the Company's consolidated financial statements, and unaudited
summary pro forma data as of and for the six months ended June 30, 1997. The
historical financial data of the Company for the six months ended June 30, 1996
and 1997 and as of June 30, 1997 have been derived from the Company's unaudited
interim consolidated financial statements. The pro forma data give effect to the
consummation of the Transactions. The pro forma income statement data and other
data for the six months ended June 30, 1997 reflect such adjustments as if the
Transactions had occurred on January 1, 1997. The pro forma financial data do
not purport to represent what the Company's financial position or results of
operations would actually have been had the Transactions in fact occurred on the
assumed dates and are not necessarily indicative of future operating results or
financial position. The information contained in this table should be read in
conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations," "Selected Consolidated Financial Data," the
Consolidated Financial Statements and the notes thereto and the "Unaudited Pro
Forma Combined Financial Data" and the notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Six Months
Year Ended December 31, Ended June 30,
------------------------------------ -----------------------------------------
Pro-forma
1994 1995 1996 1996 1997 1997
------------ ----------- ----------- ---------- ------------ -------------
(dollars in thousands)
Income Statement Data:
Operating revenues:
Oil and natural gas...................... $ 729 $ 617 $ 10,248 $ 2,821 $ 11,791 $ 24,418
Gas gathering, marketing and processing.. - - 5,768 1,528 5,283 5,283
Oil field services and international sales 16 32 396 201 3,606 3,606
----------- ----------- ----------- ----------- ----------- -------------
Total operating revenues.............. 745 649 16,412 4,550 20,680 33,307
Operating costs and expenses:
Oil and natural gas production........... 318 268 4,390 1,126 4,740 7,779
Gas gathering, marketing and processing.. - - 4,708 1,314 3,938 3,938
Oil field services and international sales 6 26 267 327 3,424 3,424
Depreciation and depletion............... 243 421 2,951 1,084 4,460 8,089
General and administrative............... 769 977 1,225 443 651 701
----------- ----------- ----------- ----------- ----------- -------------
Total operating costs and expenses.... 1,336 1,692 13,541 4,294 17,213 23,931
----------- ----------- ----------- ----------- ----------- -------------
Operating profit (loss)..................... (591) (1,043) 2,871 256 3,467 9,376
Other income............................. 52 77 344 186 155 155
Interest expense......................... (7) (2) (2,394) (499) (4,758) (9,258)
Provision for deferred income taxes...... - - (312) - 432 (97)
Minority interest in subsidiary earnings. - - - - (20) (20)
----------- ----------- ----------- ----------- ----------- -------------
Net income (loss) before extraordinary loss. (547) (968) 509 (57) (724) 156
Extraordinary Loss from Early
Extinguishment of Debt................. - - - - (1,384) -
--------- ---------- ---------- ---------- --------- -------------
Net Income (loss)........................... (547) (968) 509 (57) (2,108) 156
Dividends applicable to preferred shares. (579) (617) (406) (340) (438) (438)
--------- ---------- ---------- ----------- --------- -------------
Net income (loss) applicable to
common shares.......................... $ (1,126) $ (1,585) $ 103 $ (397) $(2,546) (282)
Other Data:
EBITDA(1)................................... $(297) $(545) $6,166 $ 1,526 $ 8,082 $ 17,620
Cash interest expense(2).................... 7 2 2,347 485 4,605 9,123
Capital expenditures(3)..................... 1,945 1,244 41,471 37,301 141,677 141,677
Ratio of EBITDA to cash interest expense and
preferred share dividends(4)............. - - 2.24x 1.85x 1.60x 1.84x
Ratio of earnings to fixed charges(5)....... - - 1.15x - - -
</TABLE>
-16-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31, June 30, 1997
---------------------------------- -------------
1994 1995 1996 Actual
------ ------- -------- --------
(dollars in thousands)
Balance Sheet Data:
Working capital...................................... $1,197 $ (916) $ 2,279 $ 4,170
Property, plant and equipment, net................... 7,255 36,405 73,648 210,397
Total assets......................................... 9,575 40,065 83,072 231,670
Total debt(6)........................................ 186 9,612 38,766 187,055
Stockholders' equity................................. 8,645 24,496 35,154 32,253
ACNTA(7)............................................. - - - 236,478
Ratio of ACNTA to total debt(6)...................... - - - 1.26x
- - -----------
</TABLE>
(1) EBITDA is defined as net income (loss) before income taxes and minority
interest, plus the sum of depletion and depreciation and interest expense.
EBITDA is not a measure of cash flow as determined by generally accepted
accounting principles. The Company has included information concerning EBITDA
because EBITDA is a measure used by certain investors in determining the
Company's historical ability to service its indebtedness. EBITDA should not be
considered as an alternative to, or more meaningful than, net income or cash
flows as determined in accordance with generally accepted accounting principles
or as an indicator of the Company's operating performance or liquidity.
(2) Cash interest expense consists of interest expense less amortization of
debt issuance costs.
(3) Capital expenditures include cash expended for acquisitions plus normal
additions to oil and natural gas properties and other fixed assets.
(4) For purposes of calculating the ratio of EBITDA to cash interest
expense and preferred share dividends, cash interest expense consists of
interest expense less amortization of debt issuance costs. EBITDA for the years
ended December 31, 1994 and 1995 would have been inadequate to cover cash
interest expense and preferred share dividends by approximately $883,000 and
$1,164,000 respectively.
(5) For purposes of calculating the ratio of earnings to fixed charges,
earnings consist of income (loss) applicable to common shares plus extraordinary
loss, plus provision for income taxes, plus fixed charges. Fixed charges consist
of interest expense (which includes amortization of deferred debt issuance
costs), plus the portion of rental expense under operating leases which has been
deemed by the Company to be representative of an appropriate interest factor,
plus preferred share dividends. Earnings for the years ended December 31, 1994
and 1995 and the six months ended June 30, 1996 and 1977 would have been
inadequate to cover fixed charges by approximately $1,126,000, $1,585,000,
$397,000 and $1,593,000, respectively. EBITDA for the six months ended June 30,
1997 on a pro forma basis would have been inadequate to cover cash interest
expenses and preferred dividends by $185,000.
(6) Consists of long-term debt, including current maturities of long-term
debt, and excluding production payment liabilities of $288,000, $937,000 and
$831,000 as of December 31, 1995 and 1996 and June 30, 1997, respectively.
(7) Adjusted Consolidated Net Tangible Assets ("ACNTA"). ACNTA includes:
$221,771,000 of adjusted SEC PV-10, $4,170,000 of working capital, $10,577,000
of book value for other tangible assets and less $40,000 of book value for
minority interest.
-17-
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA OPERATING, RESERVE AND WELL DATA
The following table sets forth certain summary information with respect
to the Company's operations for the periods indicated and summary information
with respect to the Company's estimated proved oil and natural gas reserves. The
pro forma operating data for the year ended December 31, 1996 give effect to the
Transactions as if they had occurred on January 1, 1996, and the pro forma
reserve and well data at December 31, 1996 give effect to the Transactions as if
they had occurred on December 31, 1996. The information contained in this table
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations," the Consolidated Financial
Statements and the notes thereto, the "Unaudited Pro Forma Combined Financial
Data" and the notes thereto and "Business and Properties" included elsewhere in
this Prospectus.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Year Ended December 31, Six Months
Ended
June 30,
------------------------------------------------- ---------------------
Pro Forma
1994 1995 1996 1996 1996 1997
---------- ---------- ----------- --------------- ---------- -------
(dollars in thousands)
Operating Data:
Production:
Oil (MBbl)................................ 42 30 191 1,105 90 240
Natural gas (MMcf)........................ 88 102 2,675 13,811 488 3,332
Natural Gas Equivalents (MMcfe)........... 340 282 3,821 20,442 1,027 4,771
Average sales price:
Oil (per Bbl)............................. $14.20 $15.60 $20.46 $20.15 $19.32 $18.33
Natural gas (per Mcf)..................... 1.53 1.46 2.37 2.22 2.23 2.22
Natural Gas Equivalents (Mcfe)............ 2.15 2.19 2.68 2.59 2.75 2.47
Average oil and natural gas production
expense (per Mcfe) (1).................... $0.94 $0.95 $1.15 $0.84 $ 1.10 $ .99
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
December 31, Pro Forma 1996
----------------------------------- ----------------------------------
Dec. 31, 1996 Mar. 31, 1997
1994 1995 1996 Prices Prices (2)
----------------------------------- ----------------------------------
Reserve and Well Data (3):
Proved Reserves:
Oil (MBbl)........................... 1,261 3,768 5,338 20,629 19,851
Natural gas (MMcf)................... 4,914 14,072 90,566 190,442 181,363
Natural Gas Equivalents (MMcfe)...... 12,477 36,678 122,596 314,218 300,470
Percent Proved Developed Reserves....... 15% 51% 68% 68% 67%
Percent natural gas reserves............ 39% 38% 74% 61% 60%
Reserve Life (years).................... 10.9 16.2 16.6 14.6 14.0
Estimated future net cash flows before tax
(thousands).......................... $12,209 $45,940 $353,542 $822,385 $447,932
SEC PV-10 (thousands)................... $7,775 $37,209 $164,766 $408,049 $224,831
Producing wells:
Gross................................ 51 462 729 2,581 2,581
Net.................................. 31 130 569 1,436 1,436
Average Working Interest............. 61% 28% 78% 56% 56%
Operated wells (4)...................... 27 130 609 1,833 1,833
- - -----------
</TABLE>
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(1) Includes lease operating expenses and production and ad valorem taxes, if
applicable. For the years ended December 31, 1996 on a historical basis and
December 31, 1996 on a pro forma basis and the six months ended June 30,
1997, includes internal transfer price expenses for gas gathering and
overhead costs of $0.23 per Mcfe, $0.04 per Mcfe and $0.19 per Mcfe,
respectively.
(2) Proved Reserves, future net cash flows before tax and SEC PV-10 have been
estimated as of December 31, 1996 using March 31, 1997 market prices of
$20.41 per Bbl of oil and $2.30 per Mcf of natural gas (with appropriate
adjustments for Btu content) and have not been adjusted for production for
the three-month period ended March 31, 1997.
(3) For limitations on the accuracy and reliability of reserves and future net
cash flow estimates, see "Risk Factors -- Uncertainty of Estimates of
Reserves and Future Net Cash Flows." For reserve pricing information, see
"Business and Properties -- Oil and Natural Gas Reserves."
(4) Includes wells operated for third parties.
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<PAGE>
RISK FACTORS
Information contained or incorporated by reference in this Prospectus may
contain "forward-looking statements" within the meaning of the Private
Securities Litigation Reform Act of 1995, which can be identified by the use of
forward-looking terminology such as "may," "expect," "intend," "anticipate,"
"estimate" or "continue" or the negative thereof or other variations thereon or
comparable terminology. The following matters and certain other factors noted
throughout this Prospectus constitute cautionary statements identifying
important factors with respect to any such forward-looking statements, including
certain risks and uncertainties, that could cause actual results to differ
materially from those in such forward-looking statements.
Prior to making an investment decision, prospective investors should
carefully consider, together with the other information contained in this
Prospectus, the following risk factors:
Substantial Leverage; Ability to Service Debt
The Company is highly leveraged, with outstanding long-term indebtedness of
approximately $187 million and stockholders' equity of $32.2 million as of June
30, 1997. The Company's level of indebtedness has several important effects on
its future operations, including (i) a substantial portion of the Company's cash
flow from operations is dedicated to the payment of interest on its indebtedness
and is not available for other purposes, (ii) the covenants contained in the New
Credit Facility require the Company to meet certain financial tests and limit
the Company's ability to borrow additional funds or to acquire or dispose of
assets, and (iii) the Company's ability to obtain additional financing in the
future may be impaired. Additionally, the senior (as opposed to subordinated)
status of the Notes, the Company's high debt to equity ratio, and the use of
substantially all of the Company's assets as collateral for the New Credit
Facility will for the present time make it difficult for the Company to obtain
financing on an unsecured basis or to obtain secured financing other than
certain "purchase money" indebtedness collateralized by the acquired assets.
Although the Company reported an operating profit for fiscal 1996, at
December 31, 1996 the Company had an accumulated deficit of $5.1 million due to
operating losses incurred in prior years. The Company's ability to meet its
financial covenants and to make scheduled payments of principal and interest to
repay its indebtedness, including the Notes, is dependent upon its operating
results and its ability to obtain financing. However, there can be no assurance
that the Company's business will generate sufficient cash flow from operations
or that future bank credit will be available in an amount sufficient to enable
the Company to service its indebtedness, including the Notes, or make necessary
capital expenditures. In such event, the Company would be required to obtain
such financing from the sale of equity securities or other debt financing. There
can be no assurance that any such financing will be available on terms
acceptable to the Company. Should sufficient capital not be available, the
Company may not be able to continue to implement its strategy.
The New Credit Facility limits the Company's borrowings to amounts
determined by the lenders, in their sole discretion, based upon a variety of
factors including the amount of indebtedness which can be adequately supported
by the value of oil and natural gas reserves and assets, contracts and
throughput attributable to the gas gathering systems and processing plant, and
assets owned by the Company (the "Borrowing Base"). As of September 30, 1997,
the Company had $12.0 million borrowing availability under the Borrowing Base of
the New Credit Facility. If oil or natural gas prices decline below their
current levels, the availability of funds under the New Credit Facility could be
materially adversely affected.
The New Credit Facility also requires the Company to satisfy certain
financial ratios in the future. One covenant requires the Company to maintain a
ratio of the Company's funded indebtedness divided by the sum of funded
indebtedness plus equity (the "Debt to Capitalization Ratio") of not more than
0.86 from the closing of the New Credit Facility until March 31, 1998, not more
than 0.75 from April 1, 1998 until September 30, 1998, and not more than 0.70
thereafter. At June 30, 1997, the Company had a debt to Capitalization Ratio of
0.86. Another covenant requires the Company to maintain a ratio of Consolidated
EBITDA to Interest Expense (as defined in the New Credit Facility) of not less
than 2.00 to 1 through June 30, 1998, not less than 2.50 to 1 from July 1, 1998
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<PAGE>
through December 31, 1998 and not less than 2.75 to 1 thereafter. The Company
had a ratio of Consolidated EBITDA to Interest Expense of 2.21 to 1 as of June
30, 1997. The failure to satisfy these covenants or any of the other covenants
in the New Credit Facility would constitute an event of default thereunder and,
subject to certain grace periods, may permit the lenders to accelerate the
indebtedness then outstanding under the New Credit Facility and demand immediate
repayment thereof. See "Description of New Credit Facility."
The agreement with TCW relating to the TCW Preferred Stock requires the
Company to raise an aggregate of $15.0 million in additional equity by December
31, 1997 or the Company will be required to redeem 333,333 shares of the TCW
Preferred Stock on June 30 of each of the years 2006, 2007 and 2008 for an
aggregate purchase price of $10.0 million plus any accrued and unpaid dividends
and interest thereon. Such a mandatory redemption obligation of the Company
could have negative implications under the Company's credit arrangements and
could negatively affect financial covenants under future credit facilities and
affect the Company's ability to raise debt or equity capital in the future.
Holding Company Structure; Effective Subordination of Exchange Notes
The Company is a holding company, the principal assets of which consist of
equity interests in its subsidiaries. The Outstanding Notes are and the Exchange
Notes will be a direct unsecured obligation of the Company, which derives all of
its revenues from the operations of its subsidiaries. As a result, the Company
will be dependent on the earnings and cash flow of, and dividends and
distributions or advances from, its subsidiaries to provide the funds necessary
to meet its debt service obligations, including the payment of principal of and
interest on the Notes. The payment of dividends from the subsidiaries to the
Company and the payment of any interest on or the repayment of any principal of
any loans or advances made by the Company to any of its subsidiaries may be
subject to statutory restrictions and are contingent upon the earnings of such
subsidiaries.
The Outstanding Notes are and the Exchange Notes will be general unsecured
obligations of the Company, ranking pari passu in right of payment to all
unsubordinated indebtedness of the Company and senior in right of payment to all
subordinated indebtedness of the Company. The Outstanding Notes are and the
Exchange Notes will be unconditionally guaranteed, jointly and severally, by
each of the Subsidiary Guarantors. The Guarantees are general unsecured
obligations of the Subsidiary Guarantors, ranking pari passu in right of payment
to all unsubordinated indebtedness of the Subsidiary Guarantors and senior in
right of payment to all subordinated indebtedness of the Subsidiary Guarantors.
However, the Notes are effectively subordinated to secured indebtedness of the
Company and the Subsidiary Guarantors to the extent of the value of the assets
securing such indebtedness. In the event of a default on such secured
indebtedness, or a bankruptcy, liquidation or reorganization of the Company and
its subsidiaries, such assets will be available to satisfy obligations with
respect to the secured indebtedness before any payment therefrom will be made on
the Notes. As of September 30, 1997, the Company had approximately $48 million
of secured indebtedness outstanding (excluding unused commitments of $12 million
under the New Credit Facility). The Company's subsidiaries are also guarantors
of the New Credit Facility. The Outstanding Notes are and the Exchange Notes
will not be secured by any of the assets of the Company or its subsidiaries. The
indebtedness incurred under the New Credit Facility is secured by liens against
substantially all of the Company's and its subsidiaries' assets.
Consequences of a Failure to Exchange Outstanding Notes
The Outstanding Notes have not been registered under the Securities Act or
any state securities laws, and therefore, may not be offered, sold or otherwise
transferred except in compliance with the registration requirements of the
Securities Act and any other applicable securities laws, or pursuant to an
exemption therefrom or in a transaction not subject thereto, and in each case in
compliance with certain other conditions and restrictions, including the
Company's and the Trustee's right in certain cases to require the delivery of
opinions of counsel, certifications and other information prior to any such
transfer. Outstanding Notes that remain outstanding after the consummation of
the Exchange Offer will continue to bear a legend reflecting such restrictions
on transfer. In addition, upon consummation of the Exchange Offer, holders of
Outstanding Notes that remain outstanding will not be entitled to any rights to
have such Outstanding Notes registered under the Securities Act or to any
similar rights under the Registration Agreement (subject to certain limited
exceptions). The Company currently intends to register under the
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<PAGE>
Securities Act Outstanding Notes that remain outstanding after consummation
of the Exchange Offer only if such Outstanding Notes are held by Initial
Purchasers and persons ineligible to participate in the Exchange Offer (other
than due solely to the status of such person as an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act). See "Description of
the Exchange Notes - Registration Agreement". If Outstanding Notes are tendered
and accepted in the Exchange Offer, the trading market for untendered
Outstanding Notes is likely to diminish; accordingly, holders who do not tender
their Outstanding Notes may encounter difficulties in selling such notes
following the Exchange Offer. The Exchange Notes, the Private Exchange Notes, if
any, and any Outstanding Notes that remain outstanding after consummation of the
Exchange Offer will constitute a single series of debt securities under the
Indenture and, accordingly, will vote together as a single class for purposes of
determining whether holders of the requisite percentage in outstanding principal
amount thereof have taken certain actions or exercised certain rights under the
Indenture.
The Indenture provides that, with respect to the Outstanding Notes, if the
Company or the Subsidiary Guarantors fail to comply with certain provisions
concerning registration rights, specifically the timing of the Exchange Offer,
Additional Interest (as defined herein) will accrue and be payable until such
time as such registration defaults have been cured. Following consummation of
the Exchange Offer, neither the Outstanding Notes nor the Exchange Notes will be
entitled to any increase in the interest rate thereon (subject to certain
limited exceptions.) See "Description of the Outstanding Notes" and "Description
of the Exchange Notes - Registration Agreement."
Volatility of Oil and Natural Gas Prices
The Company's revenues, profitability and the carrying value of its oil
and natural gas properties are substantially dependent upon prevailing prices
of, and demand for, oil and natural gas and the costs of acquiring, finding,
developing and producing reserves. The Company's ability to maintain or increase
its borrowing capacity, to repay the Exchange Notes and outstanding indebtedness
under any current or future credit facility, and to obtain additional capital on
attractive terms is also substantially dependent upon oil and natural gas
prices. 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 fluctuations in response to: (i) relatively minor
changes in the supply of, and demand for, oil and natural gas; (ii) market
uncertainty; and (iii) a variety of additional factors, all of which are beyond
the Company's control. These factors include domestic and foreign political
conditions, the price and availability of domestic and imported oil and natural
gas, the level of consumer and industrial demand, weather, domestic and foreign
government relations, the price and availability of alternative fuels and
overall economic conditions. The Company's production is predominantly weighted
toward natural gas, making earnings and cash flow more sensitive to natural gas
price fluctuations. For 1996, the Company has estimated that a $0.10 per Mcf
change in natural gas prices would have resulted in a $250,000 difference in
EBITDA, and a $1.00 per Bbl change in oil prices would have resulted in a
$182,000 difference in EBITDA. On a pro forma basis for the Permian Basin
Acquisition for 1996, the Company has estimated that a $0.10 per Mcf change in
natural gas prices would have resulted in a $1,275,000 difference in EBITDA, and
a $1.00 per Bbl change in oil prices would have resulted in a $1,055,000
difference in EBITDA. Furthermore, the marketability of the Company's production
depends in part upon the availability, proximity and capacity of gathering
systems, pipelines and processing facilities. Volatility in oil and natural gas
prices could affect the Company's ability to market its production through such
systems, pipelines or facilities.
Under full cost accounting, the Company would be required to take a
non-cash charge against earnings to the extent capitalized costs of acquisition,
exploration and development (net of depletion and depreciation), less deferred
income taxes, exceed the SEC PV-10 of its Proved Reserves and the lower of cost
or fair value of unproved properties after income tax effects. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Background."
Uncertainty of Estimates of Reserves and Future Net Cash Flows
This Prospectus contains estimates of the Company's oil and natural gas
reserves and the future net cash flows from those reserves, which have been
prepared or audited by certain independent petroleum consultants. There are
numerous uncertainties inherent in estimating quantities of Proved Reserves of
oil and natural gas and in projecting
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<PAGE>
future rates of production and the timing of development expenditures, including
many factors beyond the Company's control. The estimates in this Prospectus are
based on various assumptions, including, for example, constant oil and natural
gas prices, operating expenses, capital expenditures and the availability of
funds, and, therefore, are inherently imprecise indications of future net cash
flows. Actual future production, cash flows, taxes, operating expenses,
development expenditures and quantities of recoverable oil and natural gas
reserves may vary substantially from those assumed in the estimates. Any
significant variance in these assumptions could materially affect the estimated
quantity and value of reserves set forth in this Prospectus. Additionally, the
Company's reserves may be subject to downward or upward revision based upon
actual production performance, results of future development and exploration,
prevailing oil and natural gas prices and other factors, many of which are
beyond the Company's control. See "Business and Properties -- Oil and Natural
Gas Reserves."
The SEC PV-10 of Proved Reserves referred to in this Prospectus should not
be construed as the current market value of the estimated Proved Reserves of oil
and natural gas attributable to the Company's properties. In accordance with
applicable requirements of the Commission, the estimated discounted future net
cash flows from Proved Reserves are generally based on prices and costs as of
the date of the estimate, whereas actual future prices and costs may be
materially higher or lower. The calculation of the SEC PV-10 of the Company's
oil and natural gas reserves on a pro forma basis at December 31, 1996 is based
on average prices at December 31, 1996 of $24.18 per Bbl of oil and $4.05 per
Mcf of natural gas. These prices were higher than the market prices of $20.41
per Bbl of oil and $2.30 per Mcf of natural gas (with appropriate adjustments
for Btu content) at March 31, 1997 and are higher than historical prices used in
recent years to estimate the SEC PV-10 of the Company's reserves. These numbers
compare to the Company's pro forma average product prices of $20.15 per Bbl of
oil and $2.22 per Mcf of natural gas, which are based on the average of the
actual prices received at the respective properties during 1996. Actual future
net cash flows also will be affected by (i) the timing of both production and
related expenses; (ii) changes in consumption levels and (iii) governmental
regulations or taxation. In addition, the calculation of the present value of
the future net cash flows using a 10% discount as required by the Commission is
not necessarily the most appropriate discount factor based on interest rates in
effect from time to time and risks associated with the Company's reserves or the
oil and gas industry in general. Furthermore, the Company's reserves may be
subject to downward or upward revision based upon actual production, results of
future development, supply and demand for oil and natural gas, prevailing oil
and natural gas prices and other factors. See "Business and Properties -- Oil
and Natural Gas Reserves."
Finding and Acquiring Additional Reserves; Depletion
The Company's future success depends upon its ability to find or acquire
additional oil and natural gas reserves that are economically recoverable.
Except to the extent the Company conducts successful exploration or development
activities or acquires properties containing Proved Reserves, the Proved
Reserves of the Company will generally decline as they are produced. The decline
rate varies depending upon reservoir characteristics and other factors. The
Company's future oil and natural gas reserves and production, and, therefore,
cash flow and income, are highly dependent upon the Company's level of success
in exploiting its current reserves and acquiring or finding additional reserves.
There can be no assurance that the Company's planned development projects and
acquisition activities will result in significant additional reserves or that
the Company will have success drilling productive wells at economic returns to
replace its current and future production.
Acquisition Risks
The Company has grown primarily through acquisitions and intends to
continue acquiring oil and natural gas properties. Although the Company performs
a review of the properties proposed to be acquired, such reviews are subject to
uncertainties. It generally is not feasible to review in detail every individual
property involved in an acquisition. Ordinarily, review efforts are focused on
the higher-valued properties. However, even a detailed review of all properties
and records may not reveal existing or potential problems; nor will it permit
the Company to become sufficiently familiar with the properties to assess fully
their deficiencies and capabilities. Inspections are not always performed on
every well, and potential problems, such as mechanical integrity of equipment
and environmental conditions that may require significant remedial expenditures,
are not necessarily observable even when an inspection is undertaken.
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<PAGE>
The Company has recently begun to focus its acquisition efforts on larger
packages of oil and natural gas properties, such as the properties involved in
the Panoma and Permian Basin Acquisitions. The acquisition of larger oil and gas
properties may involve substantially higher costs and may pose additional issues
regarding operations and management. There can be no assurance that oil and
natural gas properties acquired by the Company will be successfully integrated
into the Company's operations or will achieve desired profitability objectives.
See "Business and Properties -- Recent Acquisitions."
Exploration and Development Risks; Waterflood Projects
The Company intends to increase its development and exploration
activities. Exploration drilling and, to a lesser extent, development drilling
of oil and natural gas reserves involve a high degree of risk that no commercial
production will be obtained and/or that production will be insufficient to
recover drilling and completion costs. The cost of drilling, completing and
operating wells is often uncertain. The Company's drilling operations may be
curtailed, delayed or canceled as a result of numerous factors, including title
problems, weather conditions, compliance with governmental requirements and
shortages or delays in the delivery of equipment. Furthermore, completion of a
well does not assure a profit on the investment or a recovery of drilling,
completion and operating costs. See "Business and Properties -- Development and
Exploration Activities."
There are certain risks associated with secondary recovery operations,
especially the use of waterflooding techniques, and drilling activities in
general. Part of the Company's inventory of development prospects consists of
waterflood projects. With respect to the Permian Basin Properties, the Company
has identified significant potential expenditures related to further developing
an existing waterflood. The proposed waterflood project is estimated to cost an
aggregate of $38.1 million over a four-year period, which costs are reflected in
the Company's reserve reports. While the reserve report for the Permian Basin
Properties assumes approximately $6.6 million of development expenditures in
1997 to enhance this waterflood, the Company is evaluating the timing of these
development expenditures relative to the Company's other capital expenditure
requirements. The Company has initially budgeted approximately $5.0 million for
development expenditures on the Permian Basin Properties for 1997. Waterflooding
involves significant capital expenditures and uncertainty as to the total amount
of secondary reserves that can be recovered. In waterflood operations, there is
generally a delay between the initiation of water injection into a formation
containing hydrocarbons and any increase in production that may result. The
operating cost per unit of production of waterflood projects is generally higher
during the initial phases of such projects due to the purchase of injection
water and related costs, as well as during the later stages of the life of the
project as production declines. The degree of success, if any, of any secondary
recovery program depends on a large number of factors, including the porosity of
the formation, the technique used and the location of injector wells. See
"Business and Properties -- Development and Exploration Activities."
Operating Hazards and Uninsured Risks; Production Curtailments
The Company's oil and natural gas business involves a variety of operating
risks, including, but not limited to, unexpected formations or pressures,
uncontrollable flows of oil, gas, brine or well fluids into the environment
(including groundwater contamination), blowouts, fires, explosions, pollution
and other risks, any of which could result in personal injuries, loss of life,
damage to properties and substantial losses. Although the Company carries
insurance at levels which it believes are reasonable, it is not fully insured
against all risks. The Company does not carry business interruption insurance.
Losses and liabilities arising from uninsured or under-insured events could have
a material adverse effect on the financial condition and operations of the
Company.
From time to time, due primarily to contract terms, pipeline interruptions
or weather conditions, the producing wells in which the Company owns an interest
have been subject to production curtailments. The curtailments range from
production being partially restricted to wells being completely shut-in. The
duration of curtailments varies from a few days to several months. In most cases
the Company is provided only limited notice as to when production will be
curtailed and the duration of such curtailments. The Company is not currently
experiencing any material curtailment on its production.
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<PAGE>
Marketing Risks
For the year ended December 31, 1996, natural gas revenues comprised
approximately 62% of total oil and natural gas revenues on a historical basis
and approximately 58% on a pro forma basis. The types of natural gas contracts
under which production is sold vary, but generally can be grouped into three
categories: (i) life-of-well, (ii) long-term (one year or longer), and (iii)
short-term contracts. Short-term contracts are defined as contracts which may
have a primary term of less than one year, but which are cancelable at either
party's discretion in 30 to 120 days. Substantially all of the Company's natural
gas production is currently sold to gas marketing firms or end users either on
the spot market on a month-to-month basis at prevailing spot market prices or
under long-term contracts based on current spot market prices. For the year
ended December 31, 1996, one purchaser accounted for approximately 91% of the
Company's natural gas revenues. The Company does not believe that any
discontinuation of its sales arrangement with such firm would be disruptive to
the Company's natural gas marketing operations. See "Business and Properties --
Marketing of Production."
Approximately 5% of the estimated natural gas reserves in the Permian
Basin Properties are served by a single gas gathering system operated by
Burlington Resources Oil and Gas Company, a Burlington affiliate. Burlington has
agreed, however, that it will deliver the natural gas at a sufficient pressure
to enter at least one third party gas transmission system and that it will only
impose any natural gas curtailments in the same proportion as its own natural
gas. The Company is not otherwise protected from increased gas gathering charges
that would make it uneconomic to continue production in times of low natural gas
prices.
Hedging Risks
As of March 31, 1997 on an historical basis, the Company had hedged
approximately (i) 50% of its natural gas production through January 1998, and
(ii) 85% of its oil production through August 1997. As of June 30, 1997, the
Company had hedged approximately 16% of its oil production and 50% of its
natural gas production. These hedges have in the past involved fixed price
arrangements and other price arrangements at a variety of prices, floors and
caps. The Company is currently evaluating the use of hedges on the oil and
natural gas produced from the Permian Basin Properties. The Company has in the
past and may in the future enter into oil and natural gas futures contracts,
options and swaps. The Company's hedging activities, while intended to reduce
the Company's sensitivity to changes in market prices of oil and natural gas,
are subject to a number of risks including instances in which the Company or the
counterparties to its futures contracts could fail to purchase the contracted
quantities of oil or natural gas. Additionally, the fixed price sales and
hedging contracts limit the benefits the Company will realize if actual prices
rise above the contract prices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Hedging Activity" and Note 14 to the Company's Consolidated Financial
Statements.
Laws and Regulations
The Company's operations are affected by extensive regulation pursuant to
various federal, state and local laws and regulations relating to the
exploration for and development, production, gathering and marketing of oil and
natural gas. Matters subject to regulation include discharge permits for
drilling operations, drilling and abandonment bonds or other financial
responsibility requirements, reports concerning operations, the spacing of
wells, unitization and pooling of properties, and taxation. From time to time,
regulatory agencies have imposed price controls and limitations on production by
restricting the rate of flow of oil and natural gas wells below actual
production capacity in order to conserve supplies of oil and natural gas.
Operations of the Company are also subject to numerous environmental laws,
including but not limited to, those governing management of waste, protection of
water, air quality, the discharge of materials into the environment, and
preservation of natural resources. Non-compliance with environmental laws and
the discharge of oil, natural gas, or other materials into the air, soil or
water may give rise to liabilities to the government and third parties,
including civil and criminal penalties, and may require the Company to incur
costs to remedy the discharge. Laws and regulations protecting the environment
have become more stringent in recent years, and may in certain circumstances
impose
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retroactive, strict, and joint and several liability rendering entities liable
for environmental damage without regard to negligence or fault. From time to
time the Company has agreed to indemnify sellers of producing properties from
whom the Company has acquired reserves against certain liabilities for
environmental claims associated with such properties. There can be no assurance
that new laws or regulations, or modifications of or new interpretations of
existing laws and regulations, will not increase substantially the cost of
compliance or otherwise adversely affect the Company's oil and natural gas
operations and financial condition or that material indemnity claims will not
arise against the Company with respect to properties acquired by the Company.
While the Company does not anticipate incurring material costs in connection
with environmental compliance and remediation, it cannot guarantee that material
costs will not be incurred. See "Business and Properties -- Regulation."
Competition
The Company encounters substantial competition in acquiring properties,
marketing oil and natural gas, securing trained personnel and operating its
properties. Many competitors have financial and other resources that
substantially exceed those of the Company. The Company's competitors in
acquisitions, development, exploration and production include major oil
companies, numerous independents, individual proprietors and others. Therefore,
competitors may be able to pay more for desirable leases and to evaluate, bid
for and purchase a greater number of properties or prospects than the financial
or personnel resources of the Company will permit. See "Business and Properties
- - -- Competition."
Dependence Upon Key Personnel
The Company is substantially dependent upon three key individuals within
its management, Gary C. Evans, Matthew C. Lutz and Richard R. Frazier, all of
whom were executives of Hunter prior to the Magnum Hunter Combination. The loss
of the services of any one of these individuals could have a material adverse
impact upon the Company. See "Management."
Change of Control
Upon the occurrence of a Change of Control, the Company will be required
to offer to repurchase all or a portion of the outstanding Notes at 101% of the
principal amount thereof, plus accrued and unpaid interest to the date of
repurchase. The source of funds for any such payment at maturity or earlier
repurchase will be the Company's available cash or cash generated from operating
or other sources, including, without limitation, borrowings or sales of assets
or equity securities of the Company. There can be no assurance that sufficient
funds will be available at the time of any such event to pay such principal or
to make any required repurchase. If an offer to repurchase is required to be
made and the Company does not have available funds sufficient to pay for Notes
tendered for repurchase, an event of default would occur under the Indenture.
The occurrence of an event of default could result in acceleration of maturity
of the Notes and all amounts due under the New Credit Facility. See "Description
of Exchange Notes."
Lack of Public Market
The Outstanding Notes were issued to, and the Company believes are
currently owned by, a relatively small number of beneficial owners. The
Outstanding Notes have not been registered under the Securities Act and will
continue to be subject to restrictions on transferability to the extent that
they are not exchanged for Exchange Notes. See "-- Consequences of a Failure to
Exchange Outstanding Notes." Although the Exchange Notes will generally be
permitted to be resold or otherwise transferred by the holders (who are not
affiliates of the Company or broker-dealers) without compliance with the
registration and prospectus delivery requirements under the Securities Act, they
will constitute a new issue of securities with no established trading market.
The Company has been advised by the Initial Purchasers that the Initial
Purchasers presently intend to make a market in the Exchange Notes. However, the
Initial Purchasers are not obligated to do so and any market making activity
with respect to the Exchange Notes may be discontinued at any time without
notice. In addition, such market making activity will be subject to the limits
imposed by the Securities Act and the Exchange Act and may be limited during the
Exchange Offer. If the Exchange Notes are traded after their initial issuance,
they may trade at a discount from their initial offering price, depending upon
prevailing interest rates,
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the market for similar securities and other factors including general economic
conditions and the financial condition of the Company. While the Company does
intend to apply for a listing of the Exchange Notes on the American Stock
Exchange, there can be no assurance as to the development or liquidity of any
market for the Exchange Notes. The liquidity of, and trading market for, the
Notes also may be adversely affected by general declines in the market for
similar securities. Such a decline may adversely affect such liquidity and
trading markets independent of the financial performance of, and prospects for,
the Company.
Notwithstanding the registration of the Exchange Notes in the Exchange
Offer, holders who are "affiliates" (as defined in Rule 405 under the Securities
Act) of the Company may publicly offer for sale or resell the Exchange Notes
only in compliance with the provisions of Rule 144 under the Securities Act.
Each broker-dealer that receives Exchange Notes for its own account in exchange
for Outstanding Notes, where such Outstanding Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus meeting the
requirements of the Securities Act in connection with any resale of such
Exchange Notes. Subject to certain provisions set forth in the Registration
Agreement, the Company has agreed that, for a period of up to 180 days after the
Registration Statement is declared effective, it will make this Prospectus
available to any Participating Broker-Dealer for use in connection with any such
resale. However, under certain circumstances, the Company has the right to
require that Participating Broker-Dealers suspend the resale of Exchange Notes
pursuant to this Prospectus. See "The Exchange Offer -- Resales of Exchange
Notes."
Exchange Offer Procedures
Any holder of the Outstanding Notes who is an "affiliate" of the Company
within the meaning of Rule 405 under the Securities Act or any broker-dealer who
purchased Outstanding Notes from the Company to resell pursuant to Rule 144A or
any other available exemption under the Securities Act will not be permitted or
entitled to tender such Outstanding Notes in the Exchange Offer and must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any sale or other transfer of such Outstanding Notes unless
such sale or transfer is made pursuant to an exemption from such requirements.
See "The Exchange Offer -- Resales of Exchange Notes."
Each holder of Outstanding Notes who wishes to exchange its Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company set forth in "The Exchange Offer -- Acceptance
for Exchange and Issuance of Exchange Notes."
Issuance of the Exchange Notes in exchange for the Outstanding Notes
pursuant to the Exchange Offer will be made only after timely receipt by the
Company of such Outstanding Notes, a properly completed and duly executed Letter
of Transmittal and all other required documents. Therefore, holders of the
Outstanding Notes desiring to tender such Outstanding Notes in exchange for
Exchange Notes should allow sufficient time to ensure timely delivery. The
Company is under no duty to give notification of defects or irregularities with
respect to tenders of Outstanding Notes for exchange. See "The Exchange
Offer -- Procedures for Tendering Outstanding Notes."
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Fraudulent Conveyance
Various fraudulent conveyance laws enacted for the protection of creditors
may apply to the Subsidiary Guarantors' issuance of the Guarantees. To the
extent that a court were to find that (x) a Guarantee was incurred by a
Subsidiary Guarantor with intent to hinder, delay or defraud any present or
future creditor or the Subsidiary Guarantor contemplated insolvency with a
design to prefer one or more creditors to the exclusion in whole or in part of
others or (y) a Subsidiary Guarantor did not receive fair consideration or
reasonably equivalent value for issuing its Guarantee and such Subsidiary
Guarantor (i) was insolvent, (ii) was rendered insolvent by reason of the
issuance of such Guarantee, (iii) was engaged or about to engage in a business
or transaction for which the remaining assets of such Subsidiary Guarantor
constituted unreasonably small capital to carry on its business or (iv) intended
to incur, or believed that it would incur, debts beyond its ability to pay such
debts as they matured, the court could avoid or subordinate such Guarantee in
favor of the Subsidiary Guarantor's creditors. Among other things, a legal
challenge of a Guarantee on fraudulent conveyance grounds may focus on the
benefits, if realized by the Subsidiary Guarantor as a result of the issuance by
the Company of the Notes. The Indenture contains a savings clause, which
generally limits the obligations of each Subsidiary Guarantor under its
Guarantee to the maximum amount as will, after giving effect to all of the
liabilities of such Subsidiary Guarantor, result in such obligations not
constituting a fraudulent conveyance. To the extent a Guarantee of any
Subsidiary Guarantor was avoided as a fraudulent conveyance or held
unenforceable for any other reason, holders of the Notes would cease to have any
claim against such Subsidiary Guarantor and would be creditors solely of the
Company and any Subsidiary Guarantor whose Guarantee was not avoided or held
unenforceable. In such event, the claims of the holders of the Notes against the
issuer of an invalid Guarantee would be subject to the prior payment of all
liabilities of such Subsidiary Guarantor. There can be no assurance that, after
providing for all prior claims, there would be sufficient assets to satisfy the
claims of the holders of the Notes relating to any avoided portions of any of
the Guarantees.
The measure of insolvency for purposes of the foregoing considerations
will vary depending upon the law applied in any such proceeding. Generally,
however, a Subsidiary Guarantor may be considered insolvent if the sum of its
debts, including contingent liabilities, was greater than the fair marketable
value of all of its assets at a fair valuation or if the present fair marketable
value of its assets was less than the amount that would be required to pay its
probable liability on its existing debts, including contingent liabilities, as
they become absolute and mature.
Based upon financial and other information, the Company and the Subsidiary
Guarantors believe that the Guarantees are being incurred for proper purposes
and in good faith and that the Company and each Subsidiary Guarantor is solvent
and will continue to be solvent, will have sufficient capital for carrying on
its business after such issuance and will be able to pay its debts as they
mature. There can be no assurance, however, that a court passing on such
standards would agree with the Company.
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USE OF PROCEEDS
At April 30, 1997, following the closing of the Permian Basin Acquisition,
the Company's outstanding indebtedness under the New Credit Facility was $119.5
million and under the Term Loan Facility was $60.0 million. The indebtedness
under the New Credit Facility and the Term Loan Facility was incurred to pay the
$123.0 million balance of the $133.0 million net purchase price in the Permian
Basin Acquisition, to repay the approximately $53.7 million outstanding
indebtedness under the Previous Credit Facility as of April 30, 1997, and to pay
the costs associated with the Permian Basin Acquisition and the related
financings. The New Credit Facility currently bears interest at 7.4375% per
annum and matures on April 30, 2002. See "Description of New Credit Facility."
On May 29, 1997, the Company completed an offering of $140.0 million
aggregate principal amount of its 10% Senior Notes due 2007. Interest on the
Notes will accrue from their date of original issuance and will be payable
semi-annually in arrears on June 1 and December 1 of each year, commencing on
December 1, 1997, at the rate of 10% per annum. In general, the Notes will be
redeemable, in whole or in part, at the option of the Company on or after June
1, 2002, at the redemption prices set forth herein, plus accrued interest to the
date of redemption. The Notes will be general unsecured obligations of the
Company and will rank pari passu with any unsubordinated indebtedness of the
Company and will rank senior in right of payment to all subordinated obligations
of the Company. The net proceeds from the Offering were approximately $135.5
million after deducting fees and expenses of approximately $4.5 million paid by
the Company. The Company utilized the net proceeds to repay the $60.0 million of
outstanding indebtedness under the Term Loan Facility and to reduce indebtedness
under the New Credit Facility by approximately $75.5 million. As of September
30, 1997, the Company had approximately $48.0 million of secured indebtedness
outstanding (excluding unused commitments of $12.0 million under the New Credit
Facility).
The Exchange Offer is intended to satisfy certain of the Company's
obligations under the Registration Agreement. The Company will not receive any
cash proceeds from the issuance of the Exchange Notes in the Exchange Offer. In
consideration for issuing the Exchange Notes as contemplated in this Prospectus,
the Company will receive Outstanding Notes in like principal amount. The form
and terms of the Exchange Notes are identical in all material respects to the
form and terms of the Outstanding Notes, except certain transfer restrictions
and registration rights relating to the Outstanding Notes and except for certain
interest provisions relating to such registration rights. See "Description of
the Exchange Notes." The Outstanding Notes surrendered in exchange for the
Exchange Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any increase in the
outstanding debt of the Company.
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THE EXCHANGE OFFER
Purpose and Effect of the Exchange Offer
In connection with the sale of the Outstanding Notes, the Company and the
Subsidiary Guarantors entered into the Registration Agreement with the Initial
Purchasers, pursuant to which the Company and the Subsidiary Guarantors agreed
to file and to use their best efforts to cause to become effective with the
Commission a registration statement with respect to the exchange of the
Outstanding Notes for debt securities with terms identical in all material
respects (subject to certain exceptions) to the terms of the Outstanding Notes.
A copy of the Registration Agreement has been filed as an Exhibit to the
Registration Statement of which this Prospectus is a part.
The Exchange Offer is being made to satisfy the contractual obligations of
the Company and the Subsidiary Guarantors under the Registration Agreement. The
form and terms of the Exchange Notes are the same as the form and terms of the
Outstanding Notes except that: (i) the Exchange Notes have been registered under
the Securities Act and therefore will not be subject to certain restrictions on
transfer applicable to the Outstanding Notes and will not be entitled to resale
registration under the Registration Agreement (subject to certain exceptions),
although the Registration Agreement does provide for prospectus delivery
procedures to assist resales of Exchange Notes, and (ii) the Exchange Notes
generally will not provide for any increase in the interest rate thereon. In
that regard, the Outstanding Notes provide that if the Company or the Subsidiary
Guarantors fail to comply with certain provisions concerning registration
rights, specifically the timing of the Exchange Offer, Additional Interest will
accrue and be payable until such time as such registration defaults have been
cured. Additional Interest will accrue and be payable semi-annually until such
time as all Registration Defaults have been cured. See "Description of the
Outstanding Notes" and "Risk Factors -- Consequences of a Failure to Exchange
Outstanding Notes."
The Exchange Offer is not being made to, nor will the Company accept
tenders for exchange from, holders of Outstanding Notes in any jurisdiction in
which the Exchange Offer or the acceptance thereof would not be in compliance
with the securities or blue sky laws of such jurisdiction.
Unless the context requires otherwise, the term "holder" with respect to
the Exchange Offer means any person in whose name the Outstanding Notes are
registered on the books of the Company or any other person who has obtained a
properly completed bond power from the registered holder, or any person whose
Outstanding Notes are held of record by the Depository who desires to deliver
such Outstanding Notes by book-entry transfer at the Depository. Persons holding
Outstanding Notes through the Depository and wishing to accept the Exchange
Offer must do so pursuant to the Depository's Automated Tender Offer Program.
See "-- Procedures for Tendering Outstanding Notes -- Book Entry Transfer."
Terms of the Exchange Offer
The Company hereby offers, upon the terms and subject to the conditions set
forth in this Prospectus and in the accompanying Letter of Transmittal, to
exchange up to $140 million aggregate principal amount of Exchange Notes for a
like aggregate principal amount of Outstanding Notes properly tendered on or
prior to the Expiration Date and not properly withdrawn in accordance with the
procedures described below. The Company will issue, promptly after the
Expiration Date, an aggregate principal amount of up to $140 million of Exchange
Notes in exchange for a like principal amount of Outstanding Notes tendered and
accepted in connection with the Exchange Offer. The term "Expiration Date" means
5:00 p.m., New York City time, on December 2, 1997 unless the Exchange Offer is
extended by the Company (in which case the term "Expiration Date" shall mean the
latest date and time to which the Exchange Offer is extended). Holders may
tender their Outstanding Notes in whole or in part in a principal amount of
$1,000 and integral multiples thereof. The Exchange Offer is not conditioned
upon any minimum number of Outstanding Notes being tendered. As of the date of
this Prospectus, $140 million aggregate principal amount of the Outstanding
Notes is outstanding.
Holders of Outstanding Notes do not have any appraisal or dissenters'
rights in connection with the Exchange Offer. Outstanding Notes that are not
tendered for or are tendered but not accepted in connection with the Exchange
Offer will remain outstanding and be entitled to the benefits of the Indenture,
but will not be entitled to any further registration rights under the
Registration Agreement, except under limited circumstances. See "Risk Factors --
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<PAGE>
Consequences of a Failure to Exchange Outstanding Notes," "Description of the
Exchange Notes" and "Description of the Outstanding Notes."
If any tendered Outstanding Notes are not accepted for exchange because of
an invalid tender, the occurrence of certain other events set forth herein or
otherwise, certificates for any such unaccepted Outstanding Notes will be
returned, without expense, to the tendering holder thereof (or, in the case of
Outstanding Notes tendered pursuant to the procedures for book-entry transfer
described below, such Outstanding Notes will be credited to an account
maintained with the Depository for the Outstanding Notes) promptly after the
Expiration Date. Holders who tender Outstanding Notes in connection with the
Exchange Offer will not be required to pay brokerage commissions or fees or,
subject to the instructions herein and in the Letter of Transmittal, transfer
taxes with respect to the exchange of Outstanding Notes in connection with the
Exchange Offer. The Company will pay all charges and expenses, other than
certain applicable taxes described below, in connection with the Exchange Offer.
See "-- Fees and Expenses."
NEITHER THE BOARD OF DIRECTORS OF THE COMPANY NOR THE COMPANY MAKES ANY
RECOMMENDATION TO HOLDERS OF OUTSTANDING NOTES AS TO WHETHER TO TENDER OR
REFRAIN FROM TENDERING ALL OR ANY PORTION OF THEIR OUTSTANDING NOTES PURSUANT TO
THE EXCHANGE OFFER. IN ADDITION, NO ONE HAS BEEN AUTHORIZED TO MAKE ANY SUCH
RECOMMENDATION. HOLDERS OF OUTSTANDING NOTES MUST MAKE THEIR OWN DECISION
WHETHER TO TENDER PURSUANT TO THE EXCHANGE OFFER AND, IF SO, THE AGGREGATE
AMOUNT OF OUTSTANDING NOTES TO TENDER AFTER READING THIS PROSPECTUS AND THE
LETTER OF TRANSMITTAL AND CONSULTING WITH THEIR ADVISERS, IF ANY, BASED ON THEIR
OWN FINANCIAL POSITION AND REQUIREMENTS.
Acceptance for Exchange and Issuance of Exchange Notes
Upon the terms and subject to the conditions of the Exchange Offer, the
Company will exchange, and will issue to the Exchange Agent, Exchange Notes for
Outstanding Notes validly tendered and not withdrawn (pursuant to the withdrawal
rights described under "-- Withdrawal Rights") promptly after the Expiration
Date. In all cases, delivery of Exchange Notes in exchange for Outstanding Notes
tendered and accepted for exchange pursuant to the Exchange Offer will be made
only after timely receipt by the Exchange Agent of (i) Outstanding Notes or a
book-entry confirmation of a book-entry transfer (a "Book-Entry Confirmation")
of such Outstanding Notes into the Exchange Agent's account at the Depository's
book-entry transfer facility system (the "Book-Entry Transfer Facility"),
pursuant to the procedures for book-entry transfer described under "--
Procedures for Tendering Outstanding Notes -- Book-Entry Transfer," if
available, (ii) the Letter of Transmittal (or facsimile thereof), properly
completed and duly executed, with any required signature guarantees, or an
Agent's Message and (iii) any other documents required by the Letter of
Transmittal. The term "Agent's Message" means a message, transmitted by the
Book-Entry Transfer Facility to, and received by, the Exchange Agent and forming
a part of a Book-Entry Confirmation, which states that the Book-Entry Transfer
Facility has received an express acknowledgment from the participant in the
Book-Entry Transfer Facility tendering Outstanding Notes which are the subject
of such Book-Entry Confirmation that such participant has received and agrees to
be bound by the terms of the Letter of Transmittal, and that the Company may
enforce such agreement against the participant.
Subject to the terms and conditions of the Exchange Offer, the Company
will be deemed to have accepted for exchange, and thereby exchanged, Outstanding
Notes validly tendered and not withdrawn as, if and when the Company gives oral
or written notice to the Exchange Agent of the Company's acceptance of such
Outstanding Notes for exchange pursuant to the Exchange Offer. The Exchange
Agent will act as agent for the Company for the purpose of receiving tenders of
Outstanding Notes, Letters of Transmittal and related documents, and as agent
for tendering holders for the purpose of receiving Outstanding Notes, Letters of
Transmittal and related documents and transmitting Exchange Notes to validly
tendering holders. Such exchange will be made promptly after the Expiration
Date. If for any reason whatsoever, acceptance for exchange or the exchange of
any Outstanding Notes tendered pursuant to the Exchange Offer is delayed
(whether before or after the Company's acceptance for exchange of Outstanding
Notes) or the Company extends the Exchange Offer or is unable to accept for
exchange or exchange Outstanding Notes tendered pursuant to the Exchange Offer,
then, without prejudice to the Company's rights set forth herein, the Exchange
Agent may, nevertheless, on behalf of the Company and subject to Rule 14e-1(c)
under the Exchange Act, retain tendered Outstanding Notes and such Outstanding
Notes may not be withdrawn except to the extent tendering holders are entitled
to withdrawal rights as described under "-- Withdrawal Rights."
A holder of Outstanding Notes will warrant and agree in the Letter of
Transmittal that (i) it has full power and authority to tender, exchange, sell,
assign and transfer Outstanding Notes and to acquire the Exchange Notes issuable
upon exchange thereof, (ii) that the Company will acquire good, marketable and
unencumbered title to the tendered Outstanding Notes, free and clear of all
liens, restrictions, charges and encumbrances, and (iii) the Outstanding Notes
tendered for exchange are not subject to any adverse claims or proxies.
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In addition, the holder will represent to the Company in the Letter of
Transmittal that (i) the Exchange Notes acquired pursuant to the Exchange Offer
by the holder of the tendered Outstanding Notes are being acquired in the
ordinary course of business of the person receiving such Exchange Notes, (ii)
the holder will have no arrangement or understanding with any person to
participate in a distribution of such Exchange Notes in violation of the
provisions of the Securities Act and (iii) the holder is not an "affiliate," as
defined in Rule 405 under the Securities Act of the Company. See "--Resales of
Exchange Notes." The holder also will warrant and agree that it will, upon
request, execute and deliver any additional documents deemed by the Company or
the Exchange Agent to be necessary or desirable to complete the exchange, sale,
assignment, and transfer of the Outstanding Notes tendered pursuant to the
Exchange Offer.
Procedures for Tendering Outstanding Notes
Valid Tender
In order for Outstanding Notes to be validly tendered pursuant to the
Exchange Offer, (a) the Exchange Agent must receive prior to the Expiration Date
a properly completed and duly executed Letter of Transmittal (or facsimile
thereof), with any required signature guarantees and any other required
documents, and either (i) the certificates for such Outstanding Notes or (ii) a
Book-Entry Confirmation of such Outstanding Notes into the Exchange Agent's
account at the Book-Entry Transfer Facility pursuant to the procedures for
book-entry transfer described below, if available, or (b) the Exchange Agent
must receive prior to the Expiration Date a Book-Entry Confirmation of such
Outstanding Notes into the Exchange Agent's account at the Book-Entry Transfer
Facility with an Agent's Message and any other required documents or (c) the
holder must comply with the guaranteed delivery procedures set forth below.
Delivery of all documents must be made to the Exchange Agent at its address set
forth herein. Holders may also request that their respective brokers, dealers,
commercial banks, trust companies or nominees effect such tender for such
holders.
If less than all of the Outstanding Notes are tendered, a tendering holder
should fill in the amount of Outstanding Notes being tendered in the appropriate
box on the Letter of Transmittal. The entire amount of Outstanding Notes
delivered to the Exchange Agent will be deemed to have been tendered unless
otherwise indicated.
THE METHOD OF DELIVERY OF CERTIFICATES, THE LETTER OF TRANSMITTAL AND ALL
OTHER REQUIRED DOCUMENTS ARE AT THE OPTION AND SOLE RISK OF THE TENDERING
HOLDER, AND DELIVERY WILL BE DEEMED MADE ONLY WHEN ACTUALLY RECEIVED BY THE
EXCHANGE AGENT. IF DELIVERY IS BY MAIL, REGISTERED MAIL, RETURN RECEIPT
REQUESTED, PROPERLY INSURED, OR AN OVERNIGHT DELIVERY SERVICE IS RECOMMENDED. IN
ALL CASES, SUFFICIENT TIME SHOULD BE ALLOWED TO ENSURE TIMELY DELIVERY.
Book-Entry Transfer
The Exchange Agent will establish an account with respect to the
Outstanding Notes at the Book-Entry Transfer Facility for purposes of the
Exchange Offer within two business days after the date of this Prospectus. Any
financial institution that is a participant in the Book-Entry Transfer Facility
may make a book-entry delivery of the Outstanding Notes by causing the
Depository to transfer such Outstanding Notes into the Exchange Agent's account
at the Book-Entry Transfer Facility in accordance with the Depository's
procedures for transfers. However, although delivery of Outstanding Notes may be
effected through book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility, the Letter of Transmittal or an Agent's Message
must in any case be delivered to and received by the Exchange Agent at one of
the Exchange Agent's addresses set forth under "-- Exchange Agent" on or prior
to the Expiration Date, or the guaranteed delivery procedure set forth below
must be complied with. The Depository's Automated Tender Offer Program ("ATOP")
is the only method of processing exchange offers through the Book-Entry Transfer
Facility. To accept the Exchange Offer through ATOP, participants in the
Book-Entry Transfer Facility must send electronic instructions to the Depository
through the Depository's communication system in place of sending a signed, hard
copy Letter of Transmittal. The Depository is obligated to communicate those
electronic instructions to the Exchange Agent. To tender Outstanding Notes
through ATOP, the electronic instructions sent to the Depository and transmitted
by the Depository to the Exchange Agent must contain the character (i.e., the
Agent's Message) by which the participant acknowledges its receipt of and agrees
to be bound by the Letter of Transmittal.
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DELIVERY OF DOCUMENTS TO THE DEPOSITORY IN ACCORDANCE WITH THE
DEPOSITORY'S PROCEDURES DOES NOT CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. THE
LETTER OF TRANSMITTAL MUST BE RECEIVED BY THE EXCHANGE AGENT ON OR PRIOR TO
DECEMBER 2, 1997.
Signature Guarantees
Certificates for the Outstanding Notes need not be endorsed and signature
guarantees on the Letter of Transmittal are unnecessary unless (a) a certificate
for the Outstanding Notes is registered in a name other than that of the person
surrendering the certificate or (b) such registered holder completes the box
entitled "Special Issuance Instructions" or "Special Delivery Instructions" in
the Letter of Transmittal. In the case of (a) or (b) above, such certificates
for Outstanding Notes must be duly endorsed or accompanied by a properly
executed bond power, with the endorsement or signature on the bond power and on
the Letter of Transmittal guaranteed by a firm or other entity identified in
Rule 17Ad-15 under the Exchange Act as an "eligible guarantor" institution,
including (as such terms are defined therein): (i) a bank; (ii) a broker,
dealer, municipal securities broker or dealer or government securities broker or
dealer; (iii) a credit union; (iv) a national securities exchange, registered
securities association or clearing agency; or (v) a savings association that is
a participant in a Securities Transfer Association (collectively, an "Eligible
Institution"), unless surrendered on behalf of such Eligible Institution. See
Instruction 5 to the Letter of Transmittal.
Guaranteed Delivery
If a holder desires to tender Outstanding Notes pursuant to the Exchange
Offer and (i) the certificates for such Outstanding Notes are not immediately
available, (ii) such holder cannot complete the procedures for book-entry
transfer of the Outstanding Notes on a timely basis or (iii) time will not
permit the Letter of Transmittal or other required documents to reach the
Exchange Agent on or before the Expiration Date, such Outstanding Notes may
nevertheless be tendered, provided that all of the following guaranteed delivery
procedures are complied with:
(i) such tenders are made by or through an Eligible Institution;
(ii) a properly completed and duly executed Notice of Guaranteed
Delivery, substantially in the form accompanying the Letter of
Transmittal, is received by the Exchange Agent, as provided below,
on or prior to the Expiration Date; and
(iii) the certificates representing all tendered Outstanding Notes, in
proper form for transfer, or a Book-Entry Confirmation with respect
to such Outstanding Notes, together with a properly completed and
duly executed Letter of Transmittal, or Agent's Message and any
other required documents, are received by the Exchange Agent within
five American Stock Exchange trading days after the date of
execution of such Notice of Guaranteed Delivery.
The Notice of Guaranteed Delivery may be delivered by hand, or transmitted by
facsimile, overnight courier or mail to the Exchange Agent and must include a
guarantee by an Eligible Institution in the form set forth in such notice.
Notwithstanding any other provision hereof, the delivery of Exchange Notes
in exchange for Outstanding Notes tendered and accepted for exchange pursuant to
the Exchange Offer will in all cases be made only after timely receipt by the
Exchange Agent of (i) Outstanding Notes, or a Book-Entry Confirmation with
respect to such Outstanding Notes, (ii) a properly completed and duly executed
Letter of Transmittal (or facsimile thereof) or an Agent's Message and (iii) any
other required documents. Accordingly, the delivery of Exchange Notes might not
be made to all tendering holders at the same time, and will depend upon when
Outstanding Notes, book-entry confirmations with respect to Outstanding Notes
and other required documents are received by the Exchange Agent. The Company's
acceptance for exchange of Outstanding Notes tendered pursuant to any of the
procedures described above will constitute a binding agreement between the
tendering holder and the Company upon the terms and subject to the conditions of
the Exchange Offer.
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Determination of Validity
All questions as to the form of documents, validity, eligibility
(including time of receipt) and acceptance for exchange of any tendered
Outstanding Notes will be determined by the Company, in its sole discretion,
whose determination shall be final and binding on all parties. The Company
reserves the absolute right, in its sole and absolute discretion, to reject any
and all tenders determined by it not to be in proper form or the acceptance of
which, or exchange for, may, in the view of counsel to the Company, be unlawful.
No tender of Outstanding Notes will be deemed to have been validly made until
all irregularities with respect to such tender have been cured or waived.
Neither the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in tenders or incur any liability for failure to give any
such notification. The Company also reserves the absolute right, subject to
applicable law, to waive any condition or irregularity in any tender of
Outstanding Notes of any particular holder whether or not similar conditions or
irregularities are waived in the case of other holders.
A beneficial owner of Outstanding Notes that are held by or registered in
the name of a broker, dealer, commercial bank, trust company or other nominee or
custodian is urged to contact such entity promptly if such beneficial holder
wishes to participate in the Exchange Offer. If such beneficial owner wishes to
tender directly, such beneficial owner must, prior to completing and executing
the Letter of Transmittal and delivering its Outstanding Notes, either make
appropriate arrangements to register ownership of the Outstanding Notes in such
beneficial owner's name or obtain a properly completed bond power from the
registered holder. The transfer of record ownership may take considerable time.
If the Letter of Transmittal is signed by the record holder(s) of the
Outstanding Notes tendered thereby, the signature must correspond with the
name(s) written on the face of the Outstanding Notes without alteration,
enlargement or any change whatsoever. If the Letter of Transmittal is signed by
a participant in the Book-Entry Transfer Facility, the signature must correspond
with the name as it appears on the security position listing as the holder of
the Outstanding Notes. If any Letter of Transmittal, endorsement, bond power,
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power of attorney, or any other document required by the Letter of Transmittal
is signed by a trustee, executor, administrator, guardian, attorney-in-fact,
officer of a corporation or other person acting in a fiduciary or representative
capacity such person should so indicate when signing, and unless waived by the
Company, proper evidence satisfactory to the Company, in its sole discretion, of
such person's authority to so act must be submitted.
Resales of Exchange Notes
The Company is making the Exchange Offer in reliance on a position of the
staff of the Division of Corporation Finance of the Commission as set forth in
certain interpretive letters addressed to third parties in other transactions.
However, the Company has not sought its own interpretive letter and there can be
no assurance that the staff of the Division of Corporation Finance of the
Commission would make a determination with respect to the Exchange Offer similar
to that made in such interpretive letters to third parties. Based on these
interpretations by the staff of the Division of Corporation Finance, and subject
to the three immediately following sentences, the Company believes that Exchange
Notes issued pursuant to this Exchange Offer in exchange for Outstanding Notes
may be offered for resale, resold and otherwise transferred by a holder thereof
(other than a holder who is a broker-dealer) without further compliance with the
registration and prospectus delivery requirements of the Securities Act,
provided that (i) such Exchange Notes are acquired in the ordinary course of
such holder's business and (ii) such holder is not participating, and has no
arrangement or understanding with any person to participate, in a distribution
(within the meaning of the Securities Act) of such Exchange Notes. However, any
holder of Outstanding Notes who is an "affiliate" of the Company within the
meaning of Rule 405 under the Securities Act, or any broker-dealer who purchased
Outstanding Notes from the Company to resell pursuant to Rule 144A or any other
available exemption under the Securities Act, (a) will not be able to rely on
the interpretations of the staff of the Division of Corporation Finance of the
Commission set forth in the above-mentioned interpretive letters, (b) will not
be permitted or entitled to tender such Outstanding Notes in the Exchange Offer
and (c) must comply with the registration and prospectus delivery requirements
of the Securities Act in connection with any sale or other transfer of such
Outstanding Notes unless such sale or transfer is made pursuant to an exemption
from such requirements. In addition, any holder who tenders Outstanding Notes in
the Exchange Offer with the intention or for the purpose of participating in a
distribution of the Exchange Notes cannot rely on such interpretations of the
staff of the Division of Corporation Finance of the Commission referred to above
and must comply with the registration and prospectus delivery requirements of
the Securities Act in connection with a secondary resale transaction. A
broker-dealer who is not an "affiliate" of the Company may participate in the
Exchange Offer with respect to Outstanding Notes acquired for its own account as
a result of market-making activities or other trading activities, provided that
(i) in connection with any resales of Exchange Notes received by the
broker-dealer in exchange for such Outstanding Notes, the broker-dealer delivers
a prospectus meeting the requirements of the Securities Act, and (ii) the
broker-dealer has not entered into any arrangement or understanding with any
person to participate in a distribution (within the meaning of the Securities
Act) of such Exchange Notes. In the event that applicable interpretations by the
staff of the Division of Corporate Finance of the Commission change or otherwise
do not permit resales of the Exchange Notes without compliance with the
registration and prospectus delivery requirements of the Securities Act, holders
of Exchange Notes who transfer Exchange Notes in violation of the prospectus
delivery provisions of the Securities Act or without an exemption from
registration thereunder may incur liability thereunder.
-35-
<PAGE>
Each holder of Outstanding Notes who wishes to exchange such Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to represent
that (i) it is not an "affiliate" of the Company, (ii) any Exchange Notes to be
received by it are being acquired in the ordinary course of its business, and
(iii) at the time of consummation of the Exchange Offer such holder will have no
arrangement or understanding with any person to participate in a distribution
(within the meaning of the Securities Act) of such Exchange Notes in violation
of the Securities Act. Each Participating Broker-Dealer must acknowledge that it
acquired the Outstanding Notes for its own account as the result of
market-making activities or other trading activities and must agree that it will
deliver a prospectus meeting the requirements of the Securities Act in
connection with any resale of such Exchange Notes. The Letter of Transmittal
states that by so acknowledging and by delivering a prospectus, a Participating
Broker-Dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. Based on the position taken by the staff of the
Division of Corporation Finance of the Commission in the interpretive letters
referred to above, the Company believes that Participating Broker-Dealers may
fulfill their prospectus delivery requirements with respect to the Exchange
Notes received upon exchange of such Outstanding Notes (other than Outstanding
Notes which represent an unsold allotment from the original sale of the
Outstanding Notes) with a prospectus meeting the requirements of the Securities
Act that may be the prospectus prepared for an exchange offer so long as it
contains a description of the plan of distribution with respect to the resale of
such Exchange Notes. Accordingly, this Prospectus may be used by a Participating
Broker-Dealer during the period referred to in the immediately following
sentence in connection with resales of Exchange Notes received in exchange for
Outstanding Notes where such Outstanding Notes were acquired by such
Participating Broker-Dealer for its own account as a result of market-making or
other trading activities. Subject to certain provisions set forth in the
Registration Agreement, the Company has agreed that this Prospectus may be used
by a Participating Broker-Dealer for such period of time as is necessary to
comply with applicable law in connection with resales of such Exchange Notes,
provided that such time period not exceed 180 days after the Registration
Statement is declared effective. Any Participating Broker-Dealer who is an
"affiliate" of the Company may not rely on such interpretive letters and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction. See "Plan of
Distribution."
Each Participating Broker-Dealer will be deemed to have agreed, by its
acquisition of the Outstanding Notes or Exchange Notes to be sold by such
Participating Broker-Dealer, that, upon receipt of notice from the Company of
the occurrence of any event or the discovery of any fact which makes any
statement contained or incorporated by reference in this Prospectus untrue in
any material respect or which causes this Prospectus to omit to state a material
fact necessary in order to make the statements contained or incorporated by
reference herein, in light of the circumstances under which they were made, not
misleading or of the occurrence of certain other events specified in the
Registration Agreement, such Participating Broker-Dealer will suspend the sale
of Exchange Notes pursuant to this Prospectus until the Company has amended or
supplemented this Prospectus to correct such misstatement or omission and has
furnished copies of the amended or supplemented Prospectus to such Participating
Broker-Dealer or the Company has given notice that the sale of the Exchange
Notes may be resumed, as the case may be. If the Company gives such notice to
suspend the sale of the Exchange Notes, it shall extend the 180-day period
referred to above during which Participating Broker-Dealers are entitled to use
this Prospectus in connection with the resale of Exchange Notes by the number of
days during the period from and including the date of the giving of such notice
to and including the date when Participating Broker-Dealers shall have received
copies of the amended or supplemented Prospectus necessary to permit resales of
the Exchange Notes or to and including the date on which the Company has given
notice that the sale of Exchange Notes may be resumed, as the case may be.
-36-
<PAGE>
Withdrawal Rights
Except as otherwise provided herein, tenders of Outstanding Notes may be
withdrawn at any time on or prior to the Expiration Date. In order for a
withdrawal to be effective a written, telegraphic, telex or facsimile
transmission or (for participants in the Book-Entry Transfer Facility)
electronic ATOP transmission of notice of withdrawal must be timely received by
the Exchange Agent at one of its addresses set forth under "-- Exchange Agent"
on or prior to the Expiration Date. Any such notice of withdrawal must specify
the name of the person who tendered the Outstanding Notes to be withdrawn, the
aggregate principal amount of Outstanding Notes to be withdrawn, and (if
certificates for such Outstanding Notes have been tendered) the name of the
registered holder of the Outstanding Notes as set forth on the Outstanding
Notes, if different from that of the person who tendered such Outstanding Notes.
If Outstanding Notes have been delivered or otherwise identified to the Exchange
Agent, then prior to the physical release of such Outstanding Notes, the
tendering holder must submit the serial numbers shown on the particular
Outstanding Notes to be withdrawn and the signature on the notice of withdrawal
must be guaranteed by an Eligible Institution, except in the case of Outstanding
Notes tendered for the account of an Eligible Institution. If Outstanding Notes
have been tendered pursuant to the procedures for book-entry transfer set forth
in "-- Procedures for Tendering Outstanding Notes," the notice of withdrawal
must specify the name and number of the account at the Book-Entry Transfer
Facility to be credited with the withdrawn Outstanding Notes and otherwise
comply with the procedures of such facility. Withdrawals of tenders of
Outstanding Notes may not be rescinded. Outstanding Notes properly withdrawn
will not be deemed validly tendered for purposes of the Exchange Offer, but may
be retendered at any subsequent time on or prior to the Expiration Date by
following any of the procedures described above under " -- Procedures for
Tendering Outstanding Notes."
All questions as to the validity, form and eligibility (including time of
receipt) of such withdrawal notices will be determined by the Company, in its
sole discretion, whose determination shall be final and binding on all parties.
Neither the Company, any affiliates or assigns of the Company, the Exchange
Agent nor any other person shall be under any duty to give any notification of
any irregularities in any notice of withdrawal or incur any liability for
failure to give any such notification. Any Outstanding Notes which have been
tendered but which are withdrawn will be returned to the holder thereof (or, in
the case of Outstanding Notes tendered pursuant to the procedures for book-entry
transfer described above, such Outstanding Notes will be credited to the
account, at the Book-Entry Transfer Facility specified in the notice of
withdrawal) promptly after withdrawal.
-37-
<PAGE>
Interest on the Exchange Notes
Each Exchange Note will bear interest at the rate of 10% per annum from
the most recent date to which interest has been paid or duly provided for on the
Outstanding Note surrendered in exchange for such Exchange Note or, if no
interest has been paid or duly provided for on such Outstanding Note, from May
29, 1997 (the date of original issuance of such Outstanding Notes). Interest on
the Exchange Notes will be payable semiannually on June 1 and December 1 of each
year, commencing on December 1, 1997.
Holders of Outstanding Notes whose Outstanding Notes are accepted for
exchange will not receive accrued interest on such Outstanding Notes for any
period from and after the last interest payment date to which interest has been
paid or duly provided for on such Outstanding Notes prior to the original issue
date of the Exchange Notes or, if no such interest has been paid or duly
provided for, will not receive any accrued interest on such Outstanding Notes,
and will be deemed to have waived the right to receive any interest on such
Outstanding Notes accrued from and after such interest payment date or, if no
such interest has been paid or duly provided for, from and after May 29, 1997.
Exchange Agent
First Union National Bank of North Carolina (the "Exchange Agent") has
been appointed as Exchange Agent for the Exchange Offer. Delivery of the Letters
of Transmittal and any other required documents, questions, requests for
assistance, and requests for additional copies of this Prospectus or of the
Letter of Transmittal should be directed to the Exchange Agent as follows:
First Union National Bank
1525 W.T. Harris Blvd.
C3C/NC 1179
Charlotte, North Carolina 28288
Attn: Mr. Mike Klotz -- Reorg
By Facsimile Transmission:
(for Eligible Institutions Only)
First Union National Bank
1525 W.T. Harris Blvd.
C3C/NC 1179
Charlotte, North Carolina 28288
Fax Number: (704) 590-2786
Confirm by Telephone:
(800) 665-9343
Delivery to other than the above addresses or facsimile number will not
constitute a valid delivery.
-38-
<PAGE>
Certain Conditions to the Exchange Offer
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange, or exchange any Exchange Notes for any
Outstanding Notes, and may terminate the Exchange Offer as provided herein
before the acceptance of any Outstanding Notes for exchange, if:
(a) any action or proceeding is instituted or threatened in any court
or by any governmental agency with respect to the Exchange Offer
which might materially impair the ability of the Company to
proceed with the Exchange Offer or a material adverse development
shall have occurred in any existing action or proceeding with
respect to the Company or the Subsidiary Guarantors; or
(b) any law, statute, rule or regulation is adopted or enacted, or
any existing law, statute, rule or regulation is interpreted by
the staff of the Commission which might materially impair the
ability of the Company to proceed with the Exchange Offer; or
(c) any governmental approval has not been obtained, which approval
the Company shall deem necessary for the consummation of the
Exchange Offer as contemplated hereby.
The Company expressly reserves the right, at any time or from time to time,
to extend the period of time during which the Exchange Offer is open, and
thereby delay acceptance for exchange of any Outstanding Notes, by giving oral
or written notice of such extension to the holders thereof. During any such
extensions, all Outstanding Notes previously tendered will remain subject to the
Exchange Offer and may be accepted for exchange by the Company. Any Outstanding
Notes not accepted for exchange for any reason will be returned without expense
to the tendering holder thereof as promptly as practicable after the expiration
or termination of the Exchange Offer.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Outstanding Notes not theretofore
accepted for exchange, upon the occurrence of any of the conditions of the
Exchange Offer specified above under "--Certain Conditions to the Exchange
Offer." The Company will give oral or written notice of any extensions,
amendment, non-acceptance or termination to the holders of the Outstanding Notes
as promptly as practicable, such notice in the case of any extension to be
issued no later than 9:00 a.m., New York City time, on the next business day
after the previously scheduled Expiration Date.
The foregoing conditions are for the sole benefit of the Company and may be
asserted by the Company regardless of the circumstances giving rise to any such
condition or may be waived by the Company in whole or in part at any time and
from time to time in its sole discretion. The failure by the Company at any time
to exercise any of the foregoing rights shall not be deemed a waiver of any such
right and each such right shall be deemed an ongoing right which may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Outstanding Notes
tendered, and no Exchange Notes will be issued in exchange for any such
Outstanding Notes, if at such time any stop order shall be threatened or in
effect with respect to the Registration Statement of which this Prospectus
constitutes a part or the qualification of the Indenture under the Trust
Indenture Act of 1939, as amended.
Fees and Expenses; Transfer Taxes
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telecopy, telephone, or in person by officers and regular
employees of the Company. No additional compensation will be paid to any such
officers and employees who engage in soliciting tenders.
-39-
<PAGE>
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, has agreed
to pay the Exchange Agent reasonable and customary fees for its services and
will reimburse it for its reasonable out-of-pocket expenses in connection
therewith.
The expenses to be incurred in connection with the Exchange Offer will be
paid by the Company. Such expenses include fees and expenses of the Exchange
Agent, accounting and legal fees and printing costs, among others.
Holders who tender their Outstanding Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith. If, however,
Exchange Notes are to be delivered to, or are to be issued in the name of, any
person other than the registered holder of the Outstanding Notes tendered, or if
a transfer tax is imposed for any reason other than the exchange of Outstanding
Notes in connection with the Exchange Offer, then the amount of any such
transfer taxes (whether imposed on the registered holder or any other persons)
will be payable by the tendering holder. If satisfactory evidence of payment of
such taxes or exemption therefrom is not submitted with the Letter of
Transmittal, the amount of such transfer taxes will be billed directly to such
tendering holder.
Certain Federal Income Tax Considerations
The exchange of the Outstanding Notes for Exchange Notes by tendering
holders should not be a taxable exchange for United States federal income tax
purposes, and such holders should not recognize any taxable gain or loss for
United States federal income tax purposes as a result of such exchange. Holders
of Exchange Notes will continue to be required to include interest on the
Exchange Notes in gross income in accordance with their method of accounting for
United States federal income tax purposes. HOLDERS SHOULD REVIEW THE INFORMATION
SET FORTH UNDER "CERTAIN FEDERAL INCOME TAX CONSIDERATIONS" FOR A DISCUSSION OF
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSIDERATIONS RELATING TO THE EXCHANGE
NOTES PRIOR TO TENDERING THE OUTSTANDING NOTES IN THE EXCHANGE OFFER.
-40-
<PAGE>
CAPITALIZATION
The following table sets forth the capitalization of the Company at June
30, 1997. This table should be read in conjunction with the Consolidated
Financial Statements and related notes thereto included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
<S> <C>
June 30, 1997
---------------
(dollars in thousands)
Long term debt, including current maturities:
Credit facility(1)......................................... $ 47,055
10% Senior Notes due 2007.................................. 140,000
----------
Total long-term debt.................................. 187,055
---------
Production payment liability.................................. 831
Stockholders' equity:
Preferred Stock, $.001 par value, 10,000,000 shares
authorized: 80,000 shares issued and outstanding of Series A
Preferred Stock (no liquidation preference) and
1,000,000 shares issued and outstanding of TCW Preferred
Stock(2) ($10 liquidation preference per share)......... 1
Common Stock, $.002 par value, 50,000,000 shares
authorized: 14,252,822 shares issued and 13,596,883 shares 29
outstanding.............................................
Additional paid-in capital................................. 39,782
Accumulated deficit........................................ (7,688)
Unrealized gain on investments............................. 130
Less treasury stock (655,939 shares of Common Stock)....... (1)
--------------
Total stockholders' equity............................ 32,253
------------
Total capitalization.................................. $ 231,670
------------
------------
- - -----------
</TABLE>
(1) For a discussion of the New Credit Facility, see "Description of New
Credit Facility."
(2) TCW Preferred Stock refers to the 1996 Series A Convertible Preferred
Stock issued to TCW.
-41-
<PAGE>
UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
The following unaudited pro forma combined financial data are derived from
the Consolidated Financial Statements of the Company set forth elsewhere in this
Prospectus and certain historical financial data in respect of various assets
acquired by the Company. The historical revenues and oil and gas production and
gas gathering and marketing expenses of the McLean Gas Plant, the Panoma
Properties and the Permian Basin Properties represent amounts recorded with
respect to such properties for the period indicated. The Unaudited Pro Forma
Income Statement for the year ended December 31, 1996 has been prepared assuming
the Panoma Acquisition, the issuance of the TCW Preferred Stock, the McLean
Plant Acquisition, the conversion of the Series B and Series C Preferred Stock
into Common Stock, the Permian Basin Acquisition (including the incurrence of
indebtedness under the New Credit Facility and the Term Loan Facility and the
use of proceeds therefrom) and the Offering and the application of the net
proceeds therefrom had been consummated as of January 1, 1996. The Unaudited Pro
Forma Income Statement for the six months ended June 30, 1997 has been prepared
assuming the Permian Basin Acquisition (including the incurrence of indebtedness
under the New Credit Facility and the Term Loan Facility and the use of proceeds
therefrom) and the Offering and the application of the net proceeds therefrom
had been consummated as of January 1, 1997. The pro forma adjustments set forth
on the attached Unaudited Pro Forma Income Statements reflect the following as
if they occurred on the dates hereinabove set forth:
(1) Recent Transactions. The Panoma Acquisition completed in July 1996; the
conversion or redemption of the Series B and Series C Preferred Stock in
1996; the issuance of the TCW Preferred Stock in December 1996; and the
McLean Plant Acquisition in January 1997.
(2) Permian Basin Acquisition. The Permian Basin Acquisition completed in
April 1997 (including the incurrence of indebtedness under the New Credit
Facility and the Term Loan Facility to finance the Permian Basin
Acquisition and repay the indebtedness under the Previous Credit
Facility).
(3) The Offering. The Offering and the application of the net proceeds
therefrom as described in "Use of Proceeds."
The unaudited pro forma combined financial data should be read in
conjunction with the notes thereto and with the Consolidated Financial
Statements of the Company and the notes thereto and the historical summaries of
revenues and direct operating expenses of the Permian Basin Properties, all of
which are included elsewhere in this Prospectus.
The unaudited pro forma combined financial data are not indicative of the
financial position or results of operations of the Company which would actually
have occurred if the transactions described above had occurred at the dates
presented or which may be obtained in the future. In addition, future results
may vary significantly from the results reflected in such statements due to
normal oil and natural gas production declines, changes in prices paid for oil
and natural gas, future acquisitions, drilling activity and other factors.
-42-
<PAGE>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
Year Ended December 31, 1996
(dollars in thousands)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Pro Forma Pro Forma Recent
Pro Forma Pro Forma Pro Forma Recent Adjustments Transactions,
Magnum Adjustments Adjustments for Transactions and for Offering Permian Basin
Hunter for Recent Permian Basin Permian Basin Acquisition and
Historical Transactions Acquisition Acquisition Offering
------------- -------------- ----------------- ------------------ -------------- -----------------
Operating Revenues:
Oil and gas sales........ $10,248 $3,267 (1) $39,433 (10) $52,948 $ - $52,948
Gas gathering, marketing
and processing....... 5,768 3,562 (2) - 10,304 - 10,304
974 (1)
Oil field services and
international sales.. 396 - - 396 - 396
---------- ------------- ----------------- ------------------ -------------- -----------------
Total operating
revenue......... 16,412 7,803 39,433 63,648 - 63,648
Operating Costs and
Expenses:
Oil and gas production... 4,390 1,049 (1) 11,646 (10) 17,085 - 17,085
Gas gathering, marketing
and processing....... 4,708 1,476 (2) - 6,879 - 6,879
695 (1)
Oil field services and
international sales.. 267 267 - 267
Depreciation and
depletion............ 2,951 1,203 (3) 12,961 (11) 17,282 - 17,282
167 (4)
General and
administrative....... 1,225 100 (5) 150 (12) 1,475 - 1,475
--------- ------------- ----------------- ------------------ ---------------- ---------------
Total operating costs
and expenses.... 13,541 4,690 24,757 42,988 - 42,988
---------- ------------- ----------------- ------------------ ---------------- ---------------
Operating profit.............. 2,871 3,113 14,676 20,660 - 20,660
Other income............. 344 - - 344 - 344
Interest expense......... (2,394) (1,555) (6) (14,059)(13) (18,008) 262 (14) (17,746)
---------- ------------- ----------------- ------------------ ---------------- ---------------
Income before tax,minority
interest and
extraordinary item....... 821 1,558 617 2,996 262 3,258
Provisions for deferred
income taxes......... (312) (584) (7) (231) (7) (1,127) (98)(7) (1,225)
---------- ------------- ----------------- ------------------ ---------------- --------------
Income before extraordinary
item................... 509 974 386 1,869 164 2,033
Dividends applicable to
preferred shares..... (406) 389 (8) - (875) - (875)
(858) (8)
---------- ------------- ----------------- ------------------ ---------------- --------------
Income applicable
to common shares
before extraordinary item $ 103 $ 505 $ 386 $ 994 $ 164 $ 1,158
========== ============= ================= ================== ================ =============
Income per share
before extraordinary item $ .01 $ .03 $ .03 $ .07 $ .01 $ .08
======== ========== ========= ========= ========= ==========
Other Data:
EBITDA(15)............... $6,166 $4,483 $ 27,637 $ 38,286 $ - $ 38,286
Cash interest expense(9) 2,347 1,512 13,794 17,653 (312) 17,341
Capital expenditures..... $41,471 $2,500 $133,000 $176,971 $ - $176,971
See accompanying notes to Unaudited Pro Forma Combined Financial Data.
</TABLE>
-43-
<PAGE>
UNAUDITED PRO FORMA COMBINED INCOME STATEMENT
Six Months Ended June 30, 1997
(dollars in thousands)
<TABLE>
<CAPTION>
Pro Forma Pro Forma
Magnum Adjustments for Pro Forma Pro Forma Permian Basin
Hunter Permian Basin Permian Basin Adjustments Acquisition and
Historical Acquisition Acquisition For Offering Offering
----------- --------------- --------------- ---------------- ----------------
<S> <C> <C> <C> <C> <C>
Operating Revenues:
Oil and gas sales............... $11,791 $ 12,627 (10) $24,418 $ - $ 24,418
Gas gathering, marketing
and processing.................. 5,283 - 5,283 - 5,283
Oil field services and
international sales................. 3,606 - 3,606 - 3,606
------------- -------------- --------------- ----------------- ---------------
Total operating revenue................ 20,680 12,627 33,307 - 33,307
Operating Costs and Expenses:
Oil and gas production................. 4,740 3,039 (10) 7,779 - 7,779
Gas gathering, marketing and
processing.................... 3,938 - 3,938 - 3,938
Oil field services and international
sales......................... 3,424 - 3,424 - 3,424
Depreciation and depletion............. 4,460 3,629 (11) 8,089 - 8,089
General and administrative............. 651 50 (12) 701 - 701
------------- -------------- --------------- ------------------ ---------------
Total operating costs and expenses..... 17,213 6,718 23,931 - 23,931
------------- -------------- --------------- ------------------ ---------------
Operating profit....................... 3,467 5,909 9,376 - 9,376
Other income.................. 155 - 155 - 155
Interest expense.............. (4,758) (4,587) (13) (9,345) 87 (14) (9,258)
------------- -------------- --------------- ------------------- ---------------
Income before tax, minority interest and
extraordinary item.................. (1,136) 1,322 186 87 273
Income tax (expense) benefit.. 432 (497) (7) (65) (32) (7) (97)
Minority interest in
subsidiary earnings........... (20) - (20) - (20)
------------ ------------- --------------- ------------------ ---------------
Income before extraordinary item....... (724) 825 101 55 156
Dividends applicable to
preferred shares.............. (438) - (438) - (438)
------------ ------------- ---------------- ------------------- --------------
Income (loss) applicable to common
shares before extraordinary
item.......................... $(1,162) $ 825 $(337) $ 55 $ (282)
============ ============= ============== ================== ==============
Income (loss) per share
before extraordinary item..... $(0.09) $0.07 $(0.02) $ - $ (0.02)
============ ============== =============== =================== ==============
Other Data:
EBITDA (15) $8,082 $9,538 $17,620 $ - $ 17,620
See accompanying notes to Unaudited Pro Forma Combined Financial Data.
</TABLE>
-44-
<PAGE>
NOTES TO UNAUDITED PRO FORMA COMBINED FINANCIAL DATA
(dollars in thousands)
(1) To record the operating revenues and oil and natural gas production
expenses and gas gathering and marketing expenses for the first six
months of 1996 for the Panoma Properties that were acquired effective
July 1, 1996 as if the Panoma Acquisition had occurred on January 1,
1996.
(2) To record operating revenues and gas gathering and marketing expenses
related to the Company's 50% interest in the McLean Gas Plant,
which was acquired for $2,500 in January 1997, for the year ended
December 31, 1996 as if the McLean Gas Plant had been acquired on
January 1, 1996. The Company will receive 100% of the net profits
generated by the facility until the $2,500 purchase price is recovered,
after which it will receive 50% of the net profits. If the Company had
received 50% of the net profits generated by the McLean Gas Plant
during the pro forma period presented, its gross margin would have
been reduced by $1,043.
(3) To record the pro forma depletion adjustment to reflect the Company's
depletion expense as if the Panoma Properties that were acquired
effective July 1, 1996 had been acquired on January 1, 1996.
(4) To record one year of depreciation expense on the McLean Gas Plant
(depreciable life is 15 years) as if the McLean Gas Plant had been
acquired on January 1, 1996.
(5) To record estimated additional general and administrative expenses that
would have been incurred if the Panoma Properties that were acquired
effective July 1, 1996 had been acquired on January 1, 1996.
(6) To record interest expense as if the McLean Plant Acquisition and the
Panoma Acquisition had occurred on January 1, 1996 as set forth below.
These acquisitions were assumed to be financed by the Previous Credit
Facility with an average interest rate during 1996 of 7.625%.
McLean Gas Plant-interest...............................................$ 191
Panoma Properties-interest.............................................. 1,321
Panoma Properties-amortization of associated debt issuance costs........ 43
----------
$ 1,555
==========
(7) To record the effect of the pro forma adjustments on deferred and
current federal and state income taxes at an assumed tax rate of 37.5%
after consideration of available net operating losses and other
carryforwards.
(8) To remove the $389 of dividends applicable to Series B and Series C
Preferred Stock that was redeemed or converted to Common Stock in late
1996 as if the redemption or conversion had occurred on January 1,
1996, and to record dividends at a rate of 8.75% on the TCW Preferred
Stock issued in December 1996 as if it had been outstanding since
January 1, 1996.
(9) Cash interest expense consists of interest expense less amortization
of debt issuance costs, and excludes an extraordinary charge of $1,800
relating to debt issuance cost in connection with repayment of the
Term Loan Facility.
(10) To record the Permian Basin Properties operating revenues and oil and
gas production expenses as if the Permian Basin Acquisition had
occurred on January 1, 1996 for the December 31, 1996 pro forma income
statement and on January 1, 1997 for the Pro Forma June 30, 1997
income statement.
-45-
<PAGE>
(11) To record the pro forma depletion adjustment to reflect the Company's
depletion expense as if the Permian Basin Properties had been acquired
on January 1, 1996 for the December 31, 1996 pro forma income
statement and on January 1, 1997 for the Pro Forma June 30, 1997
income statement.
(12) To record the Company's estimates of general and administrative
expenses that would have been incurred if the Permian Basin Properties
had been acquired on January 1, 1996 for the December 31, 1996 pro
forma income statement and on January 1, 1997 for the June 30,
1997 income statement, net of estimated fees that would have been
earned by the Company from third parties on the properties it operates,
as follows:
1996 1997
---------- ----------
Additional general and administrative expenses...... $ 702 $ 235
Operating fees earned from third parties............ (552) (185)
---------- ----------
$ 150 $ 50
========== ==========
(13) To record the interest expense associated with the borrowing of
$119,500 under the New Credit Facility and $60,000 under the Term Loan
Facility to complete the Permian Basin Acquisition and to refinance the
Previous Credit Facility as if the acquisition and refinancing had
closed on the beginning of the respective periods.
The New Credit Facility and the Term Loan Facility are assumed to have
interest rates of 9.0% and 11.5%, respectively. The debt issuance costs
associated with the facilities are as follows:
New Credit Facility debt issuance costs.................. $ 700
Term Loan Facility debt issuance costs................... 1,800
----------
$2,500
==========
<TABLE>
<CAPTION>
The components of this interest expense adjustment are as follows:
<S> <C> <C>
1996 1997
---------- ---------
Elimination of pro forma interest adjustments for McLean Plant Acquisition and Panoma
Acquisition and amortization of associated debt issuance costs................................ $(1,555) $ -
Elimination of historical interest expense on Previous Credit Facility........................... (2,394) (1,415)
Interest on New Credit Facility.................................................................. 10,755 3,385
Amortization of debt issuance costs on New Credit Facility....................................... 133 44
Interest on Term Loan Facility................................................................... 6,900 2,300
Amortization of debt issuance costs on Term Loan Facility........................................ 220 73
---------- ----------
$14,059 $ 4,587
========== ==========
</TABLE>
-46-
<PAGE>
(14) To adjust interest expense to reflect the repayment of the Term Loan
Facility and repayment of $75,500 of indebtedness under the New Credit
Facility with the net proceeds of the Offering. The assumed interest
rate on the Notes is 10.0%. After repayment of the Term Loan Facility,
using the net proceeds of the Offering, the New Credit Facility will
bear interest on an assumed interest rate of 7.6% per annum. The $4,500
of estimated debt issuance costs are amortized using the effective
yield method over the life of the Notes. This adjustment excludes
an extraordinary charge to expense of $1,800 debt issuance costs
associated with repayment of the Term Loan Facility. The components of
the interest expense adjustment are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1997
--------- --------
Interest on the Notes............................................................................ $ 14,000 $ 4,667
Amortization of debt issuance costs on Notes..................................................... 270 90
Elimination of interest on $75,500 of debt under New Credit Facility and effect of reduction
of interest rate on New Credit Facility following repayment of Term Loan Facility............. (7,412) (2,471)
Elimination of interest and amortization of associated debt issuance costs on Term Loan
Facility...................................................................................... (7,120) (2,373)
---------- ----------
$ (262) $ (87)
========== ==========
</TABLE>
(15) EBITDA is defined as net income (loss) before income taxes and minority
interest, plus the sum of depletion and depreciation and interest
expense.EBITDA is not a measure of cash flow as determined by generally
accepted accounting principles. The Company has included information
concerning EBITDA because EBITDA is a measure used by certain investors
in determining the Company's historical ability to service its
indebtedness. EBITDA should not be considered as an alternative to, or
more meaningful than, net income or cash flows as determined in
accordance with generally accepted accounting principles or as an
indicator of the Company's operating performance or liquidity.
-47-
<PAGE>
SELECTED CONSOLIDATED FINANCIAL DATA
The following historical selected consolidated financial data of the
Company are derived from, and qualified by reference to, the Company's
Consolidated Financial Statements and the notes thereto. The income statement
data for the six months ended June 30, 1997 are not necessarily indicative of
results for a full year. The historical selected financial data for the three
years ended December 31, 1996 were derived from the Company's audited
consolidated financial statements. The selected financial data for the six
months ended June 30, 1996 and 1997 have been derived from the Company's
unaudited interim consolidated financial statements and include, in the opinion
of the Company's management, all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the data for such periods.
The information contained in this table should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations," and the Consolidated Financial Statements of the Company and the
notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Six Months
Ended
Year Ended December 31, June 30,
------------------------------------- -------------------
1994 1995 1996 1996 1997
-----------------------------------------------------------
(dollars in thousands)
Income Statement Data:
Operating revenues:
Oil and natural gas..................................... $ 729 $ 617 $ 10,248 $ 2,821 $ 11,791
Gas gathering, marketing and processing................. - - 5,768 1,528 5,283
Oil field services and international sales.............. 16 32 396 201 3,606
---------- ---------- ---------- ---------- ---------
Total operating revenues............................. 745 649 16,412 4,550 20,680
---------- ---------- ---------- ---------- ---------
Operating costs and expenses:
Oil and natural gas production.......................... 318 268 4,390 1,126 4,740
Gas gathering, marketing and processing................. - - 4,708 1,314 3,938
Oil field services and international sales.............. 6 26 267 327 3,424
Depreciation and depletion.............................. 243 421 2,951 1,084 4,460
General and administrative.............................. 769 977 1,225 443 651
--------- ---------- ---------- ----------- ---------
Total operating costs and expenses................... 1,336 1,692 13,541 4,294 17,213
--------- ---------- ---------- ----------- ---------
Operating profit (loss).................................... (591) (1,043) 2,871 256 3,467
Other income............................................ 51 77 344 186 155
Interest expense........................................ (7) (2) (2,394) (499) (4,758)
--------- ---------- ---------- ----------- ---------
Net income (loss) before income tax and minority interest.. (547) (968) 821 (57) (1,136)
Provision for deferred income taxes..................... - - (312) - 432
--------- ---------- ---------- ----------- ---------
Net income (loss) before minority interest................. (547) (968) 509 (57) (704)
Minority interest in subsidiary earnings................ - - - - (20)
--------- ---------- ---------- ---------- ---------
Net income (loss) before extraordinary loss................ (547) (968) 509 (57) (724)
Extraordinary loss from early extinguishment of debt....... - - - - (1,384)
--------- ---------- ---------- ---------- ---------
Net Income (loss).......................................... (547) (968) 509 (57) (2,108)
Dividends applicable to preferred shares................ (579) (617) (406) (340) (438)
--------- ---------- ---------- ----------- ---------
Net income (loss) applicable to common shares.............. $ (1,126) $ (1,585) $ 103 $ (397) $(2,546)
Income (loss) per common share
Before extraordinary loss............................. $(0.27) $(0.28) $0.01 $(0.03) $(0.09)
Extraordinary loss.................................... - - - - (0.10)
--------- ---------- ---------- ---------- ---------
After Extraordinary loss............................. $(0.27) $(0.28) $0.01 $(0.03) $(0.19)
Common shares used in per share calculation (in thousands). 4,167 5,607 12,486 11,659 13,645
Other Data:
EBITDA(1).................................................. $ (297) $ (545) $ 6,166 $ 1,526 $ 8,082
Cash interest expense(2)................................... 7 2 2,347 485 4,605
Capital expenditures(3).................................... 1,945 1,244 41,471 37,301 141,667
</TABLE>
-48-
<PAGE>
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
December 31,
------------------------------------ June 30,
1994 1995 1996 1997
------------------------------------- --------------
(dollars in thousands)
Balance Sheet Data:
Working capital............................................... $1,197 $(916) $2,279 $ 4,170
Property, plant and equipment, net............................ 7,255 36,405 73,648 210,397
Total assets.................................................. 9,575 40,065 83,072 231,670
Total debt(4)................................................. 186 9,612 38,766 187,055
Stockholders' equity.......................................... 8,645 24,496 35,154 32,253
- - -----------
</TABLE>
(1) EBITDA is defined as net income (loss) before income taxes and minority
interest, plus the sum of depletion and depreciation and interest expense.
EBITDA is not a measure of cash flow as determined by generally accepted
accounting principles. The Company has included information concerning EBITDA
because EBITDA is a measure used by certain investors in determining the
Company's historical ability to service its indebtedness. EBITDA should not be
considered as an alternative to, or more meaningful than, net income or cash
flows as determined in accordance with generally accepted accounting principles
or as an indicator of the Company's operating performance or liquidity.
(2) Cash interest expense consists of interest expense less amortization of
debt issuance costs.
(3) Capital expenditures include cash expended for acquisitions plus normal
additions to oil and natural gas properties and other fixed assets.
(4) Consists of long-term debt, including current maturities of long-term
debt, and excluding production payment liabilities of $288,000, $937,000 and
$831,000 as of December 31, 1995 and 1996 and June 30, 1997, respectively.
-49-
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should be read in conjunction with the
Company's Consolidated Financial Statements, "Selected Consolidated Financial
Data" and respective notes thereto, included elsewhere herein. The information
below should not be construed to imply that the results discussed herein will
necessarily continue into the future or that any conclusion reached herein will
necessarily be indicative of actual operating results in the future. Such
discussion represents only the best present assessment of management of the
Company. Because of the size and scope of the Company's recent acquisitions and
the relatively small scale of the Company's operations prior to 1996, the
results of operations from period to period are not necessarily comparative.
Background
In December 1995, the Company entered into the Magnum Hunter
Combination pursuant to which the Company issued to Hunter 5,085,077 shares of
Common Stock and 111,825 shares of Series C Preferred Stock (which were
subsequently converted into 335,475 shares of Common Stock) and assumed certain
liabilities in exchange for all the capital stock of Hunter's subsidiaries (the
"Hunter Subsidiaries"). The acquired assets included developed and undeveloped
oil and natural gas properties, a gas gathering system, and an established oil
and gas consulting and operating company, and were valued at $12.5 million at
the time of acquisition based upon the then current stock price. In connection
with the Magnum Hunter Combination, the management of Hunter assumed operating
control of the Company.
The new management implemented a business strategy emphasizing
acquisition of long-lived, Proved Reserves with significant exploitation and
development opportunities that management considered to have a lower risk
profile than the Company's historic projects. The Company also participates to a
lesser extent in selected exploration projects on a controlled risk basis. Prior
to the Magnum Hunter Combination, the Company was primarily focused on
developing and selling higher risk, non-operated exploratory and development
projects and did not focus on acquisitions. In order to improve the economics of
the acquisitions, the Company emphasizes strict cost control in all aspects of
its business and seeks to operate its properties wherever possible.
-50-
<PAGE>
As a part of the Company's new strategy, in June 1996 the Company
acquired the Panoma Properties, which include interests in 520 natural gas wells
in the Texas Panhandle and western Oklahoma and an associated 427 mile gas
gathering system, from Burlington for $34.7 million. The Company assumed
operations of approximately 90% of the wells and of the gathering system and
began planning for increased density development drilling on the Panoma
Properties.
In January 1997, the Company purchased for $2.5 million a 50% interest
in a natural gas processing plant, the McLean Gas Plant, which currently
processes 100% of the natural gas from the Panoma Properties. The Company
receives 100% of the net profits of the plant until it recoups its investment,
after which time the Company will receive 50% of the net profits. Management
believes that the acquisition of the McLean Gas Plant allows the Company to
capture a portion of the processing profits on the natural gas produced at the
Panoma Properties that would otherwise go to third party processors.
In April 1997, the Company purchased the Permian Basin Properties from
Burlington for a net purchase price of $133.0 million, after purchase price
adjustments of $10.5 million to take into account production cash flow from
January 1, 1997 to the closing date and other minor adjustments. These
properties consist of approximately 1,852 producing oil and natural gas wells
and associated acreage in west Texas and southeast New Mexico. This acquisition
substantially increased the Company's cash flow and inventory of exploitation,
development and exploration opportunities.
On April 29, 1997, the Company received and accepted two new loan
commitments from Bankers Trust Company, as Agent, and Banque Paribas and First
Union National Bank of North Carolina for senior credit facilities for the
Company and several of its subsidiaries. The two new senior credit facilities
were structured as a $130 million revolving line of credit with a term of five
years and a $60 million one year senior subordinated bridge facility convertible
into a five year term loan. The new credit facilities were conditioned, among
other things, upon the closing of the Permian Basin Acquisition from Burlington,
which took place April 30, 1997. The revolving line of credit gives the Company
the flexibility of choosing a range of either "LIBOR" or "Prime" based interest
rate options. This new credit facility replaced the previously existing $100
million revolving credit facility.
On May 29, 1997, the Company placed, through a Rule 144A private placement
offering, $140 million in Senior Notes due 2007. Net proceeds from the sale of
the Senior Notes were used to completely repay the Company's outstanding bridge
loan facility in the principal amount of $60 million with the remaining proceeds
used to repay a substantial portion of the Company's outstanding revolving
credit facility. The Notes have a 10% coupon, with interest payable on June 1
and December 1, commencing on December 1, 1997.
While the Company is considering acquisitions and, to a lesser extent,
plans to pursue selected exploratory drilling, the Company intends to focus its
current efforts on the substantial inventory of exploitation and development
opportunities arising from its recent acquisitions. Prior to the Permian Basin
Acquisition, the Company approved a
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<PAGE>
$15.0 million capital budget to be spent during 1997, of which $12.0 million is
allocated for development drilling and $3.0 million is allocated for several
exploration projects. To facilitate its development drilling program, in
December 1996 the Company issued $10.0 million of TCW Preferred Stock.
Subsequent to the Permian Basin Acquisition, the Company has initially budgeted
approximately $5.0 million for development expenditures on the Permian Basin
Properties for 1997.
The Company uses the full cost method of accounting for its investment
in oil and natural gas properties. Under the full cost method of accounting, all
costs of acquisition, exploration and development of oil and natural gas
reserves are capitalized into a "full cost pool" as incurred, and properties in
the pool are depleted and charged to operations using the unit-of-production
method based on the ratio of current production to total proved oil and natural
gas reserves. To the extent that such capitalized costs (net of accumulated
depreciation, depletion and amortization) less deferred taxes exceed the SEC
PV-10 of estimated future net cash flow from Proved Reserves of oil and natural
gas, and the lower of cost or fair value of unproved properties after income tax
effects, such excess costs are charged to operations. Once incurred, a
write-down of oil and natural gas properties is not reversible at a later date
even if oil or natural gas prices increase. While the Company has never been
required to write-down its asset base, significant downward revisions of
quantity estimates or declines in oil and gas prices from those in effect on
December 31, 1996 which are not offset by other factors could result in a
write-down for impairment of oil and gas properties.
Comparison of Six Months Ended June 30, 1997 to Six Months Ended June 30,
1996
As discussed above, the Company acquired the Panoma Properties in June
1996, the McLean Gas Plant in January 1997, and the Permian Basin Properties in
April 1997. As such, the results of operations for the six month period ended
June 30, 1997, included six months of operations for Panoma and McLean and two
months for Permian Basin, while the corresponding period in 1996 contained no
results related to these properties. Unless otherwise stated, the increases in
the 1997 interim period over the 1996 period were a result of these
acquisitions.
Oil and natural gas sales were $11,791,000 in 1997, a 318% increase over
1996. The Company sold 239,752 barrels of oil, a 167% increase, and 3,332,349
Mcf of gas, a 583% increase, in 1997. The price received for oil was $18.33 per
barrel and for gas was $2.22 per Mcf in 1997, representing a 5% decrease in oil
price and a 1% decrease in gas price compared to 1996. Oil and natural gas
production costs increased 321% to $4,740,000 in 1997 over 1996. The gross
operating margin from oil and natural gas production was $7,051,000 in 1997, a
316% increase over 1996. On an equivalent unit basis, the gross margin was $1.48
per Mcfe in 1997 versus $1.65 in 1996, a 10% decrease. The sales price declined
10% to $2.47 per Mcfe while production costs also declined 10% to $0.99 per Mcfe
from 1996 to 1997. These production costs are inclusive of gathering and
overhead charges of $0.19 per Mcfe. The sales price decline was caused by lower
oil and gas prices in 1997, while the lower unit production costs were the
result of lower Permian Basin Properties unit costs, principally gas gathering
fees, compared to the unit costs of the Company's other properties. The overall
increase in the gross operating margin from 1996 to 1997 was principally due to
the 364% increase in Mcfe sold, from 1,027,182 Mcfe to 4,770,861 Mcfe.
-52-
<PAGE>
Gas gathering, marketing, and processing revenues were $5,283,000 in the
1997 period, a 246% increase over 1996, principally as a result of the
acquisition of the Panoma Gas Gathering System and the McLean Gas Plant. Costs
from these activities were $3,938,000 in 1997, a 200% increase over 1996. Gross
operating margin was $1,345,000 in 1997 versus $214,000 in 1996, a 529%
increase. As a result of the acquisition of the Panoma System, gathering system
throughput increased 385% to 21,057 Mcf per day in 1997 compared with 4,344 Mcf
per day in 1996. Due to the McLean Plant acquisition, natural gas plant
processing throughput was 15,303 Mcf per day in 1997 versus none reported in
1996. Gross operating margin from gathering operations was $787,000, or $0.22
per Mcf of throughput, in 1997 versus $214,000, or $0.27 per Mcf in 1996. The
gross operating margin from natural gas processing was $558,000, or $0.22 per
Mcf of throughput versus none reported in 1996.
Revenues from oil field services and international sales were $3,606,000 in
1997, a $3,405,000 increase over 1996, principally due to an increase in sales
of Hunter Butcher International, L.L.C. in the amount of $3,398,000. Operating
costs increased 947% to $3,424,000 in 1997 from 1996, also principally due to
Hunter Butcher in the amount of $3,338,000. The gross operating margin from
these activities was $182,000 in 1997 versus a loss of $126,000 in the 1996
period. The margin from Hunter Butcher operations was $60,000 in 1997 versus
$32,000 in 1996. Oil field services produced an operating margin of $122,000 in
1997 versus a loss of $158,000 in 1996.
Depreciation and depletion expense increased 311% to $4,460,000 in 1997 due
to the acquisitions. Depletion expense on oil and gas production was $4,080,000,
or $0.86 per Mcfe, in 1997 versus $975,000, or $0.95 per Mcfe in 1996. General
and administrative expense was $651,000 in 1997, a 47% increase over 1996, due
to increased staffing and other costs as a result of the acquisitions.
Operating profit increased to $3,467,000 in 1997 from $256,000 in 1996, a
1,245% increase. Interest expense increased to $4,758,000 in 1997 from $499,000
in 1996, an increase of 854%, due to increased levels of borrowing under the
Company's revolving credit lines with banks, the 10% Senior Notes, and bridge
financing used to fund the acquisitions previously mentioned. The Company
incurred a net loss before income tax and minority interest of $1,136,000 in
1997, versus a $57,000 loss in 1996, principally due to interest expense on the
acquisitions exceeding operating income and due to the higher charge for
depreciation and depletion. The Company provided for a deferred income tax
benefit of $432,000 on this loss in 1997. After recording a $20,000 minority
interest in Hunter Butcher, the Company reported a net loss before extraordinary
item of $724,000, or $0.09 per common share, in 1997 versus a $57,000 loss, or
$0.03 per common share, in 1996.
-53-
<PAGE>
The Company realized an extraordinary loss of $1,384,000 ($0.10 per common
share) as required under Accounting Principles Board ("APB") Statement No. 26
and Statement of Financial Accounting Standards ("SFAS") No. 4, from the early
extinguishment of bank debt. The early extinguishment was a result of the new
10% Senior Notes financing and amended revolving credit agreements with banks
arranged to facilitate the $133 million purchase of the Permian Basin Properties
from Burlington. The net loss, after the extraordinary charge, applicable to
common shares was $2,546,000 ($0.19 per share) in 1997 compared to a loss of
$397,000 ($0.03 per share) in 1996. The Company accrued $436,000 in dividends on
its preferred stock in 1997 versus $340,000 in 1996.
Results of Operations for the Three Month Periods ended June 30, 1997 and 1996
The results of operations for the three month period ended June 30, 1997,
included three months of operations for the Panoma Properties and the McLean Gas
Plant and two months for the Permian Basin Properties, while the corresponding
period in 1996 contained no results related to these properties. Unless
otherwise stated, the increases in the 1997 interim period over the 1996 period
were a result of these acquisitions.
Oil and natural gas sales were $8,528,000 in 1997, a 492% increase over
1996. The Company sold 193,735 barrels of oil, a 326% increase, and 2,359,969
Mcf of gas, a 915% increase, in 1997. The price received for oil was $17.76 per
barrel and for gas was $2.16 per Mcf in 1997, representing an 11% decrease in
oil price and a 5% decrease in gas price in 1997 compared to 1996. Oil and
natural gas production costs increased 460% to $3,143,000 in 1997 over 1996. The
gross operating margin from oil and natural gas production was $5,385,000 in
1997, a 512% increase over 1996. On an equivalent unit basis, the gross margin
was $1.53 per Mcfe in 1997 versus $1.74 in 1996, a 12% decrease. The sales price
for natural gas declined 15% to $2.42 per Mcfe while production costs also
declined 20% to $0.89 per Mcfe from 1996 to 1997. These production costs are
inclusive of gathering and overhead charges of $0.09 per Mcfe. The sales price
decline was caused by lower oil and gas prices in 1997, while the lower unit
production costs were the result of lower Permian Basin Properties unit costs,
principally gas gathering fees, compared to the unit costs of the Company's
other properties. The overall increase in the gross operating margin from 1996
to 1997 was principally due to the 597% increase in Mcfe sold, from 505,136 Mcfe
to 3,522,379 Mcfe.
Gas gathering, marketing, and processing revenues were $1,391,000 in the
1997 period, an 80% increase over 1996, principally as a result of the
acquisition of the Panoma gas gathering system and the McLean Gas Plant. Costs
from these activities were $978,000 in 1997, a 46% increase over 1996. Gross
operating margin was $413,000 in 1997 versus $101,000 in 1996, a 309% increase.
As a result of the acquisition of the Panoma system, gathering system throughput
increased 338% to 18,796 Mcf per day in 1997 compared with 4,287 Mcf per day in
1996. Due to the McLean Gas Plant acquisition, natural gas plant processing
throughput was 12,614 Mcf per day in 1997 versus none in 1996. Gross operating
margin from gathering operations was $179,414, or $0.10 per Mcf of throughput,
in 1997 versus $101,000, or $0.26 per Mcf in 1996. The gross operating margin
from natural gas processing was $234,000, or $0.20 per Mcf of throughput in 1997
versus none in 1996.
Revenues from oil field services and international sales were $135,000 in
1997, a 36% increase over 1996, principally due to increased operator fees on
oil and gas properties. Operating costs decreased 46% to $86,000 in 1997 from
1996 due to an increased allocation of operating costs to oil and gas production
costs. The gross operating margin from these activities was $49,000 in 1997
versus a loss of $61,000 in the 1996 period.
Depreciation and depletion expense increased 485% to $3,379,000 in 1997 due
to the acquisitions. Depletion expense on oil and gas production was $3,184,000,
or $0.90 per Mcfe, in 1997 versus $505,000, or $1.00 per Mcfe, in 1996. General
and administrative expense was $429,000 in 1997, a 94% increase over 1996, due
to increased staffing and other costs as a result of the acquisitions.
-54-
<PAGE>
Operating profit increased to $2,039,000 in 1997 from $121,000 in 1996, a
1,585% increase. Interest expense increased to $3,690,000 in 1997 from $245,000
in 1996, an increase of 1,406%, due to increased levels of borrowing under the
Company's revolving credit lines with banks, the 10% Senior Notes, and bridge
financing used to fund the acquisitions previously mentioned. The Company
incurred a net loss before income tax and minority interest of $1,568,000 in
1997, versus income of $36,000 in 1996, principally due to interest expense on
the acquisitions exceeding operating income (inclusive of depreciation and
depletion in the total amount of $3,379,000). The Company provided for a
deferred income tax benefit of $596,000 on this loss in 1997. The Company
reported a net loss before extraordinary item of $974,000, or $0.09 per common
share, in 1997 versus income of $36,000 in 1996.
The Company realized an extraordinary loss of $1,384,000 ($0.10 per common
share) as required under Accounting Principles Board ("APB") Statement No. 26
and Statement of Financial Accounting Standards ("SFAS") No. 4, from the early
extinguishment of bank debt. The early extinguishment was a result of the new
10% Senior Notes financing and amended revolving credit agreements with banks
arranged to facilitate the $133 million purchase of the Permian Basin Properties
from Burlington Resources Inc. The net loss, after the extraordinary charge,
applicable to common shares was $2,577,000 ($0.19 per share) in 1997 compared to
a loss of $132,000 ($0.03 per share) in 1996. The Company accrued $219,000 in
dividends on its preferred stock in 1997 versus $168,000 in 1996.
Comparison of Year Ended December 31, 1996 to Year End December 31, 1995
After deduction for preferred dividends, the Company reported net
income applicable to common shares for the year ended December 31, 1996 of $0.1
million, a $1.7 million increase as compared to the net loss of $1.6 million for
the year ended December 31, 1995. Prior to the preferred dividends in both
periods, the Company reported net income of $0.5 million in 1996, a $1.5 million
increase over 1995. Net income per common share was $0.01 for 1996, a $0.29 per
share increase over 1995. This increase was the result of higher production
volumes in 1996 from (i) acquisition activities, which included the Magnum
Hunter Combination in December 1995 and the Panoma Acquisition in July 1996,
(ii) increased prices received for oil and natural gas products, (iii) the
acquisition of gas gathering systems in the Panoma Acquisition, and (iv) natural
gas marketing activity. During 1996, oil and natural gas production volumes
increased significantly to 3.8 Bcfe, an average of 10,470 Mcfe/d, as compared to
0.3 Bcfe, an average of 773 Mcfe/d, in 1995. The increased revenues recognized
from production volumes were aided by a 22% increase in the average price
received per Mcfe of production to $2.68 during 1996. The average oil price
increased 31% to $20.46 per Bbl in 1996, as compared to $15.60 per Bbl in 1995,
while average natural gas prices increased 62% to $2.37 per Mcf in 1996 as
compared to $1.46 per Mcf in 1995.
As a result of the acquisition activity and higher prices, total revenues
in 1996 were $16.4 million, a $15.8 million increase over 1995. This increase
consisted of an increase in oil and natural gas sales of $9.6 million from 1995
to 1996 and an increase in gas gathering, marketing and services revenue of $6.1
million over the same period. After the Panoma Acquisition in July 1996, the
percentage of the Company's reserves attributable to natural gas was 74% as
compared to 38% at the end of 1995. Due to the Company's owning more properties
and larger volume of production, oil and natural gas production expenses
increased $4.1 million to $4.4 million in 1996 versus $0.3 million in 1995. The
average cost of oil and natural gas produced per Mcfe was $1.15 in 1996, an
increase of $0.20 per Mcfe, due to costs of startup of operations at the Panoma
Properties.
Gross margin from oil and natural gas production increased $5.5 million
to $5.9 million in 1996 from $0.4 million in 1995. Gross margins from gas
gathering, marketing, and services increased to $1.1 million in 1996, from $0.0
million in 1995.
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<PAGE>
Depreciation and depletion expense increased to $3.0 million in 1996, a
$2.5 million increase over 1995, as a result of the Panoma Acquisition and the
Magnum Hunter Combination. The Company-wide depreciation and depletion rate was
$0.77 per Mcfe in 1996 versus $1.49 per Mcfe in 1995. General and administrative
expense increased to $1.2 million in 1996, a $0.2 million increase over 1995,
due to higher operational staffing and associated costs as a result of expanded
operations, partially offset by a reduction in promotional and related expenses.
Other income increased to $0.3 million in 1996 due to a gain on sale of assets.
Interest expense increased to $2.4 million due to increased financing costs
incurred as a result of the Magnum Hunter Combination and the Panoma
Acquisition.
The Company made a provision for deferred income taxes of $0.3 million
in 1996. No income taxes were due for 1996 as a result of utilization of net
operating loss carryforwards. At December 31, 1996 the Company had $6.9 million
available in such carryforwards to offset against future income. Dividends
applicable to preferred stock were $0.4 million for 1996, a $0.2 million
decrease from 1995, due to the redemption of the Series B and Series C Preferred
Stock during 1996, offset by the effect of the issuance of the TCW Preferred
Stock at the end of 1996.
Comparison of Year Ended December 31, 1995 to Year Ended December 31, 1994
After deduction for preferred dividends, the Company reported a net loss
applicable to common shares for the year ended December 31, 1995 of $1.6
million, an increased loss of $0.5 million as compared to 1994. Prior to the
preferred dividends in both periods, the Company reported a net loss for 1995 of
$1.0 million, a $0.4 million increase in net loss over 1994. On a per share
basis, the net loss was $0.28 and $0.27, respectively, for 1995 and 1994. The
increased loss in 1995 as compared to 1994 was primarily due to higher general
and administrative expenses in anticipation of the Magnum Hunter Combination and
a higher depletion rate on the Company's pre-existing properties after an
evaluation of such reserves by the new management at year end 1995.
Total revenues were $0.6 million in 1995, a $0.1 million decrease from
1994. This was the result of a decrease in oil and natural gas sales. The
Company's production in 1995 decreased to 282 MMcfe, a 58 MMcfe decrease from
1994, although the average price received per Mcfe increased in 1995 to $2.19, a
$0.04 per Mcfe increase from 1994. Gross margin from oil and natural gas
production was $0.3 million in 1995, a $0.1 million decrease from 1994. The
decline in oil and natural gas production and margin was largely attributable to
a decline in oil production volumes from the South Tonkawa prospect after
initial flush production in 1994. The average cost of oil and natural gas
produced per Mcfe in 1995 was $0.95, an increase of $0.01 per Mcfe over 1994.
Gross margin from services was essentially flat in 1995 compared to 1994.
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<PAGE>
Depreciation and depletion expense increased to $0.4 million in 1995, a
$0.2 million increase over 1994, as a result of an increase in depletable book
value of the Company's properties and a reduction of the estimated proved
undeveloped reserves of two of the Company's base properties after further
evaluation by the new Hunter management at year end 1995. General and
administrative expense increased to $1.0 million in 1995, a $0.2 million
increase over 1994, due to an increase in staffing levels in anticipation of the
Magnum Hunter Combination in December 1995. Other income and interest expense
were essentially unchanged in 1995 from 1994.
The Company made no provision for deferred income taxes in 1995. No
income taxes were due for 1995 as a result of net operating loss carryforwards.
Dividends applicable to preferred stock were $0.6 million, essentially unchanged
from 1994.
Liquidity and Capital Resources
The Company has three principal operating sources of operating cash: (i)
sales of oil and natural gas, (ii) revenues from gas gathering, processing, and
marketing, and (iii) revenues from petroleum management and consulting services.
The Company's cash flow is highly dependent upon oil and natural gas prices.
Decreases in the market price of oil and natural gas could result in reductions
of both cash flow and the Borrowing Base under the Company's New Credit
Facility, which would result in decreased funds available, including funds for
capital expenditures.
On April 30, 1997, the Company closed on the acquisition of the Permian
Basin Properties for a net purchase price of approximately $133 million. At the
same time, the Company's $100 million Previous Credit Facility was replaced by
two new credit facilities, a revolving New Credit Facility of $130 million and a
Term Loan Facility of $60 million, for a total of $190 million. The initial
advances under these new facilities totaled $179.5 million, including funds to
complete the Permian Basin Acquisition, to pay principal and accrued interest
remaining on the $100 million Previous Credit Facility, and to provide cash for
working capital purposes.
On May 29, 1997, the Company sold, through a Rule 144A private placement
offering, $140 million in Senior Notes due 2007. Net proceeds from the sale of
the Senior Notes were used to completely repay the Company's Term Loan Facility
in the principal amount of $60 million with the remaining proceeds used to repay
a substantial portion of the Company's outstanding New Credit Facility. The
Notes have a 10% coupon, with interest payable on June 1 and December 1,
commencing on December 1, 1997. After paydown, the New Credit Facility was
reduced from $130 million to $75 million, with a current borrowing base of $60
million. Total long-term debt under the New Credit Facility at June 30, 1997 was
$47 million, leaving $13 million available to draw at such time, prior to the
next borrowing base redetermination occurring during the third quarter. At June
30, 1997, the Company had $1.6 million in cash and cash equivalents and $4.2
million in net working capital, in addition to the funds available under the
revolving line of credit.
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For fiscal 1997, the Company is currently projecting that it will spend
approximately $20 million on development and exploration activities, of which $3
million is budgeted on exploration projects. In addition, with respect to the
recently closed Permian Basin Properties acquisition, the Company projects to
spend approximately $40 million in a development program to enhance an existing
waterflood project in the Westbrook Field located in Mitchell County, Texas.
This capital expenditure is budgeted over a four year period beginning in 1997.
Based upon the Company's anticipated level of operations, management believes
that cash flow from operations together with the availability under the New
Credit Facility will be adequate to meet its anticipated requirements for
working capital, capital expenditures and scheduled interest payments for the
foreseeable future. The Company may seek to increase it liquidity through the
sale of common equity and/or the exercise of its publicly traded warrants. A
depressed price for oil or natural gas would have a material adverse effect on
the Company's cash flow from operations and could cause the Company to alter its
planned capital expenditures.
For 1996, the Company had a net increase in cash of $143,000. The
Company's operating activities provided net cash of $3,028,000, principally from
operating income before depreciation, depletion and deferred taxes, reduced by a
net increase in accounts receivable over accounts payable. The Company used
$41,738,000 in investing activities, principally for additions to property and
equipment of $41,471,000, as well as increases in deposits and other assets.
Financing activities provided $38,853,000 of cash, principally from the
aggregate proceeds from the issuance of long-term debt of $56,512,000 and
production payments of $750,000, less payments on such debt and production
payments of $27,459,000, as well as proceeds from the issuance of preferred
stock of $9,796,000. The Company also paid $295,000 to redeem a portion of the
outstanding Series C Preferred Stock and $438,000 to pay dividends on preferred
stock.
For 1995, the Company had a net decrease in cash of $101,000 as the
proceeds received from the sale of preferred stock were principally used for oil
and natural gas acquisition and development activity and for the payment of
dividends and payables. The Company's operating activities used net cash of
$849,000, principally as a result of the net loss from operations and the payoff
of a substantial amount of accounts payable. Investing activities used net cash
of $2,007,000, largely from acquisition and development of oil and gas
properties. Financing activities accounted for net cash provided of $2,755,000,
principally from the proceeds received due to the issuance of preferred stock
mentioned above. Partially offsetting the proceeds from the stock issuances were
advances made to Magnum Hunter Production, Inc. for acquisition costs and
working capital of $1,034,000, prior to the Magnum Hunter Combination and the
ultimate consolidation, and the payment of preferred dividends of $583,000.
Capital Requirements
Prior to the Permian Basin Acquisition, the Company approved a $15.0
million capital budget to be spent during 1997, of which $12.0 million is
allocated for development drilling and $3.0 million is allocated for several
exploration projects. To facilitate its development drilling program, in
December 1996 the Company issued $10.0 million of TCW Preferred Stock.
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On April 30, 1997, the Company acquired from Burlington, effective as of
January 1, 1997, the Permian Basin Properties. The net purchase price was $133.0
million after adjustments of $10.5 million for production cash flow from January
1, 1997 to the closing date and other minor adjustments. The Company financed
the acquisition of the Permian Basin Properties with the $130.0 million New
Credit Facility and the $60.0 million Term Loan Facility. The New Credit
Facility and the Term Loan Facility were used to pay the $123.0 million balance
of the net purchase price, to repay the $53.7 million in outstanding
indebtedness under the Previous Credit Facility and to pay costs associated with
the Permian Basin Acquisition and the related financings. In addition to
providing the Company with significant new sources of earnings and operating
cash flow, management of the Company believes the Permian Basin Properties will
provide significant opportunities for exploitation and development of both oil
and natural gas reserves through a combination of enhanced recovery projects and
new drilling projects. The Company has initially budgeted approximately $5.0
million for development expenditures on the Permian Basin Properties for 1997.
The Company has adopted a "controlled risk" approach to its exploratory
drilling activity by concentrating in specific regions in the United States
(primarily Oklahoma and Texas) where the Company's technical staff has
considerable experience and near proved producing properties where the potential
for significant reserve additions exists. To the extent feasible, the Company
reduces its exploration risk by diversifying through investment in multiple
prospects, by farming out (promoting out) interests to industry partners and by
utilizing 3-D seismic surveys and other advanced technologies.
As the Company continues to increase its asset base, management plans to
expand the scope of its oil and natural gas activities, including the Company's
possible participation in foreign energy prospects. The Company believes that
Latin America offers significantly greater hydrocarbon reserve potential with
less competition than in the United States. The Company does not plan to invest
in any foreign prospects during 1997. However, the Company anticipates that,
should it decide in the future to expand into Mexico, Central America or South
America, any such investment would be made in an arrangement that shares the
risks with one or more additional partners.
Based upon the Company's anticipated level of operations, the Company
believes that cash flow from operations together with the availability under the
New Credit Facility (approximately $12.0 million as of September 30, 1997) will
be adequate to meet its anticipated requirements for working capital, capital
expenditures and scheduled interest payments for the foreseeable future. The
Company may seek to increase its liquidity through the sale of common equity
and/or the exercise of its publicly traded warrants. A depressed price for oil
or natural gas would have a material adverse effect on the Company's cash flow
from operations and could cause the Company to alter its planned capital
expenditures.
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Inflation and Changes in Prices
During the past several years, the Company has experienced some inflation
in oil and natural gas prices with moderate increases in property acquisition
and development costs. During 1996, the Company received somewhat higher
commodity prices for the natural resources produced from its properties. The
results of operations and cash flow of the Company have been, and will continue
to be, affected to a certain extent by the volatility in oil and natural gas
prices. Should the Company experience a significant increase in oil and natural
gas prices that is sustained over a prolonged period, it would expect that there
would also be a corresponding increase in oil and natural gas finding costs,
lease acquisition costs, and operating expenses. Periodically the Company enters
into futures, options, and swap contracts to reduce the effects of fluctuations
in crude oil and natural gas prices. It is policy of the Company not to enter
any such arrangements which exceed 50% of the Company's oil and natural gas
production during the next 12 months.
The Company markets natural gas for its own account, which exposes the
Company to the attendant commodities risk. Hunter Gas Gathering, Inc., a
subsidiary of the Company, currently sells the majority of its natural gas to
Crosstex Energy Services ("Crosstex"), a gas marketing firm located in Dallas,
Texas that was formed in January 1997 when Comstock Natural Gas, Inc.
("Comstock") sold its gas gathering, processing and marketing operations.
Although the Company sold approximately 91% of its natural gas to Comstock in
1996 and has sold a comparable percentage to Crosstex to date in 1997, the
Company does not believe that any discontinuation of such sales arrangement
would be disruptive to the Company's gas marketing operations. The Company
typically obtains letters of credit guaranteeing the payment of the purchase
price for its natural gas.
Hedging Activity
Periodically, the Company enters into futures, options, and swap contracts
to reduce the effects of fluctuations in crude oil and natural gas prices. As of
June 30, 1997, the Company had 16% of its oil production and 17% of its natural
gas production hedged. At June 30, 1997, the Company had open contracts for oil
price collars of 15,000 Bbls of oil per month (with cap and floor prices of
$25.10 and $20.00, respectively) through August 1997. At March 31, 1997, the
Company had open contracts for natural gas price swaps of 100,000 MMBtu of gas
per month at $1.905 per MMBtu through January 1998, and another 100,000 MMBtu of
natural gas per month at $1.770 per MMBtu through January 1998. These contracts
expire monthly. The Company has also entered into a hedge agreement to fix the
differential between the New York Mercantile Exchange ("NYMEX") price and the El
Paso Permian Basin Index at $0.20 per MMBtu for 100,000 MMBtu per month for the
six-month period commencing May 1, 1997. The gains or losses on the Company's
hedging transactions are determined as the difference between the contract price
and a reference price, generally closing prices on NYMEX. The resulting
transaction gains and losses are determined monthly and are included in the
period the hedged production or inventory is sold. Net gains or losses relating
to these derivatives for the years ended December 31, 1994, 1995, and 1996 were
$0.0, $0.0, and $(0.3) million, respectively.
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<PAGE>
BUSINESS AND PROPERTIES
The Company
Magnum Hunter is an independent energy company engaged in the exploitation
and development, acquisition, exploration and operation of oil and natural gas
properties with a focus on Texas, Oklahoma and New Mexico. In December 1995, the
Company consummated the Magnum Hunter Combination, whereby the management of
Hunter assumed operating control of the Company. The new management implemented
a business strategy emphasizing acquisitions of long-lived Proved Reserves with
significant exploitation and development opportunities where the Company
generally can control the operations of the properties. As part of this
strategy, in June 1996 the Company acquired the Panoma Properties from
Burlington for $34.7 million. Additionally, in April 1997, the Company acquired
the Permian Basin Properties from Burlington for a net purchase price of $133.0
million. While the Company is considering further acquisitions and, to a lesser
extent, plans to pursue selected exploratory drilling opportunities, the Company
intends to focus its efforts on the substantial inventory of exploitation and
development opportunities arising from the acquisitions.
The Company is a holding company that operates through three primary
subsidiaries: (i) Gruy, which conducts the Company's operations; (ii) Magnum
Hunter Production, Inc., which owns the Company's oil and natural gas assets;
and (iii) Hunter Gas Gathering, Inc., which owns the Company's gas gathering and
processing facilities.
On a pro forma basis at December 31, 1996, the Company had an interest in
2,581 wells and had estimated Proved Reserves of 314.2 Bcfe with a SEC PV-10 of
$408.0 million. As adjusted to use market prices in effect on March 31, 1997,
the Proved Reserves were 300.5 Bcfe with an SEC PV-10 of $224.8 million on a pro
forma basis at December 31, 1996. Approximately 68% of these reserves were
Proved Developed Producing Reserves and 86% were attributable to the Panoma
Properties and the Permian Basin Properties. On a pro forma basis at December
31, 1996, the Company's Proved Reserves had an estimated Reserve Life of 14.6
years and were 61% natural gas. The Company serves as operator for approximately
71% of its properties (based on the number of producing wells in which the
Company owns an interest). Additionally, the Company owns over 500 miles of gas
gathering systems and a 50% interest in a gas processing plant that is connected
to the gas gathering system purchased with the Panoma Properties. In 1996, on a
pro forma basis, the Company had revenues of $63.6 million and EBITDA of $38.3
million.
Beginning with the Magnum Hunter Combination in December 1995, the Company
has made nine acquisitions for an aggregate net purchase price of $185.4
million. This strategy has added approximately 305.6 Bcfe of reserves
(determined as of the respective times of their acquisition) at an average cost
of $0.61 per Mcfe, as well as a 427 mile gas gathering system and a 50% interest
in the McLean Gas Plant. As a result of its acquisitions, the Company has
achieved substantial growth as described below (comparing 1996 pro forma data to
1995 historical data):
o Proved Reserves increased to 314.2 Bcfe at year end 1996 (300.5 Bcfe as
adjusted for March 31, 1997 market prices) from 36.7 Bcfe at year end
1995;
o Annual production increased to 20.4 Bcfe in 1996 from 0.3 Bcfe in 1995;
o SEC PV-10 increased to $408.0 million at year end 1996 ($224.8 million
as adjusted for March 31, 1997 market prices) from $37.2 million at year
end 1995; and
o EBITDA increased to $38.3 million in 1996 from $(0.5) million in 1995.
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Company Strengths
o Quality of Reserves. The Company has a high quality reserve base. The
majority of the reserves are in the Permian Basin and Hugoton Embayment,
both of which are well-known, mature oil and natural gas producing
regions. The fields in which the properties are located generally have
significant production history and performance data. In addition,
approximately 68% of the Company's Proved Reserves were classified as
Proved Developed Producing Reserves on a pro forma basis at December 31,
1996. These attributes reduce the risks associated with determining
remaining reserves and forecasting future production from the properties
The properties are also long-lived with an estimated Reserve Life on a
pro forma basis at December 31, 1996 of 14.6 years.
o Substantial Inventory of Exploitation and Development Projects. The
Company has identified over 400 development drilling locations on its
properties. The Company believes the majority of these locations are
low-risk in-fill drilling opportunities which should add incremental
reserves and increase production rates. In addition to drilling
opportunities, the Company has identified several enhanced recovery
projects which will include the use of waterflood and tertiary recovery
methods.
o Significant Operating Control. Through its Gruy subsidiary, the Company
operates approximately 71% of the properties in which it owns an
interest. This level of operating control benefits the Company in
numerous ways by enabling the Company to: (i) control the timing and
nature of capital expenditures, (ii) identify and implement cost control
programs, (iii) respond quickly to operating problems and (iv) receive
overhead reimbursements from other working interest owners.
o Experienced Management. The Company's three senior managers have over 82
combined years of direct oil and natural gas experience in the areas of
drilling and completions, production operations, acquisitions and
divestitures and reservoir engineering. Most members of the Company's
technical staff, having spent their entire careers specializing in these
regions, have in-depth knowledge of the Company's core operating
regions.
o Balanced Reserve Mix. On a pro forma basis at December 31, 1996, the
Company's reserve mix was approximately 39% oil and 61% natural gas.
This balanced portfolio reduces the Company's exposure to a single
product's price volatility.
Business Strategy
The Company's objective is to aggressively grow its reserves, production,
cash flow and earnings utilizing a balanced program of (i) exploitation and
development of acquired properties, including development drilling, workovers
and cost reduction programs, (ii) strategic acquisitions and (iii) a selective
exploration program. Since the Magnum Hunter Combination, the Company has
acquired long-lived properties with significant exploitation and development
potential where the Company can control operations on a high percentage of the
properties. The Company is now focusing its efforts on fully developing the
large inventory of properties arising from its acquisitions and, to a lesser
extent, is identifying and participating in selected exploratory prospects. The
Company is also evaluating several smaller strategic acquisitions which fit the
Company's objectives of having long-lived Proved Reserves with exploitation and
development potential and operating control.
The following are key elements of the Company's strategy:
o Exploitation and Development of Existing Properties. The Company has a
substantial inventory of exploitation projects including development
drilling, workovers and recompletions and cost reduction programs. As of
December 31, 1996, on a pro forma basis, 32% (100.0 Bcfe) of the
Company's total Proved Reserves were classified as Proved Undeveloped
Reserves. The Company seeks to maximize the value of the properties
through development activities including in-fill drilling, waterflooding
and other enhanced recovery techniques. Management believes that the
proximity of these Proved Undeveloped Reserves to existing
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production makes development of these projects less risky and more cost
effective than other drilling opportunities available to the Company.
o Operating Cost Management. The Company emphasizes strict cost controls
in all aspects of its business, and seeks to operate its properties
wherever possible. By operating approximately 71% of its properties, the
Company is generally able to control direct operating and drilling costs
as well as to manage the timing of development and exploration
activities. For example, following the Panoma Acquisition, the Company
increased operating margins by restoring shut-in wells to production,
reducing the number of field employees, implementing compression and
other improvements on the Panoma gas gathering system and purchasing a
50% interest in the McLean Gas Plant. Management believes it can also
reduce operating costs on the Permian Basin Properties by reducing the
number of field employees, using contract pumpers and implementing other
efficiencies. Moreover, as a result of its acquisition of the Permian
Basin Properties, the Company expects only a moderate increase in its
general and administrative expenses in relation to the large number of
properties acquired. Therefore, the Company anticipates that such
expenses will decline on a per Mcfe basis.
o Strategic Acquisitions. Although the Company has an extensive inventory
of exploitation and development opportunities, it is continuing to
pursue smaller strategic acquisitions in its existing areas of
operations which fit its objectives of having long-lived Proved Reserves
with development potential and operating control.
o Expansion of Gas Gathering and Marketing Operations. The Company has
implemented several programs to expand and increase the efficiency of
its gas gathering systems. The Company owns over 75% and markets 100% of
the natural gas that moves through its gas gathering systems and,
therefore,directly benefits from any cost and productivity improvements.
Since the Company believes that its gas gathering systems have
significant underutilized throughput capacity, it is actively pursuing
several opportunities to add new Company and third party well
connections. The Company is also considering opportunities to acquire
complementary gas gathering systems and to form joint ventures with
other operators. In addition, the Company believes that its acquisition
of a 50% interest in the McLean Gas Plant allows the Company to capture
a portion of the processing profits on natural gas produced at the
Panoma Properties that would otherwise go to third party processors.
Recent Acquisitions
The most significant of the Company's completed acquisitions are the
Permian Basin Acquisition, the Panoma Acquisition, the Magnum Hunter Combination
and the McLean Plant Acquisition.
Permian Basin Acquisition
On April 30, 1997, the Company acquired from Burlington, effective as of
January 1, 1997, the Permian Basin Properties, consisting of 25 field areas in
west Texas and 22 field areas in southeast New Mexico, for a net purchase price
of $133.0 million after adjustments of $10.5 million for production cash flow
from January 1, 1997 to the closing date and other minor adjustments. The
primary producing formations include the Yates, Seven Rivers and Queen in Lea
and Eddy Counties, New Mexico; the Atoka in the Brunson Ranch Field in Loving
County, Texas; the Clearfork in the Westbrook Field in Mitchell County, Texas;
the San Andres in the Levelland/Slaughter Field in Cochran County, Texas; and
the Canyon Sand in Sutton County, Texas. The Permian Basin Properties include
1,852 producing oil and natural gas wells on approximately 113,810 gross acres
(82,175 net acres). One of the Company's subsidiaries, Gruy, serves as operator
on approximately 66% of the wells on the Permian Basin Properties. Management of
the Company believes the Permian Basin Properties provide significant
opportunities for exploitation and development of both oil and natural gas
through enhanced recovery projects and drilling.
During 1996, daily net production from the Permian Basin Properties was
25.8 MMcf per day of natural gas and over 2,500 Bbl/d of oil. According to Ryder
Scott, independent petroleum engineers engaged by the Company to evaluate the
Permian Basin Properties, as of December 31, 1996, the Permian Basin Properties
had Proved Reserves of 15.3 MMBbl of oil and 99.9 Bcf of natural gas, or on a
Natural Gas Equivalent Basis, 191.6 Bcfe. Ryder Scott
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further estimated the future net cash flows and the SEC PV-10 for the Permian
Basin Properties to be $468.8 million and $243.3 million, respectively, as of
December 31, 1996 based on prices of $23.61 per Bbl of oil and $4.12 per Mcf of
natural gas at December 31, 1996. Based on market prices of $20.41 per Bbl of
oil and $2.30 per Mcf of natural gas at March 31, 1997, future net cash flows
and the SEC PV-10 for the Permian Basin Properties would be $267.3 million and
$139.6 million, respectively, as of December 31, 1996. As of December 31, 1996,
approximately 68% of the Proved Reserves were classified as Proved Developed
Producing Reserves. See "-- Oil and Natural Gas Reserves." Based on the $143.5
million gross purchase price and Proved Reserves of 191.6 Bcfe as of December
31, 1996, the Company paid approximately $0.75 per Mcfe for the Permian Basin
Properties.
The major fields in the Permian Basin Properties are the Westbrook,
Levelland/Slaughter, Lea County Shallow Properties and the Brunson Ranch.
Westbrook. The Westbrook Field consists of 431 wells that cover approximately
45 square miles in Mitchell County, Texas and produce from the Clearfork
formation at a depth of approximately 3,200 feet. The interests acquired in
the Permian Basin Acquisition include the following three properties in the
Westbrook Field:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net Revenue Gross Oil Production
Property Operator Well Count Working Interest Interest (Bbl/d)
- - ------------------------ -------------- -------------- ----------------- ------------- ----------------------
Southwest Westbrook Unit Company 135 89.9% 77.1% 560
Morrison "G" Lease Company 2 83.8% 72.9% 10
North Westbrook Unit Third Party 294 2.0% 1.6% 1,560
</TABLE>
Most of the leases and units in the field had waterflood projects
initiated in the 1960's and those projects are still active. The
Company plans to initiate waterflood enhancement operations on the
Southwest Westbrook Unit and the Morrison "G" Lease.
Ryder Scott attributed approximately 10.0%, or $24.3 million, of the
SEC PV-10 at December 31, 1996 (9.9%, or $13.8 million, at such date
using March 31, 1997 market prices) to a four year enhancement program,
commencing in 1997, on an existing waterflood project on the Westbrook
Field in Mitchell County, Texas. The Company has identified
approximately 250 drilling locations, including production and
injection wells, to further develop the fields at a cost of
approximately $38.1 million. When completed, the properties will be
fully developed on a ten acre, line drive waterflood pattern, as
opposed to the current 28 acre, five-spot pattern. While the Ryder
Scott report assumes approximately $6.6 million of development
expenditures on this waterflood enhancement program in 1997, the
Company is evaluating the timing of these development expenditures
relative to its other capital expenditure requirements. The Company has
initially budgeted approximately $5.0 million for development
expenditures on the Permian Basin Properties for 1997.
Levelland/Slaughter. The Levelland and Slaughter Fields consist of 155
wells located in Cochran County, Texas that produce from the San Andres
formation at a depth of 5,000 feet. The interests acquired in the
Permian Basin Acquisition include the following three properties in the
Levelland and Slaughter Fields:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Net Revenue Gross Oil Production
Property Operator Well Count Working Interest Interest (Bbl/d)
- - ------------------- ----------- ---------- ------------------ ------------ ---------------------
TLB Unit Company 52 100.0% 87.3% 90
Veal Lease Company 20 100.0% 87.1% 250
NW Slaughter Unit Company 83 74.9% 62.8% 310
</TABLE>
Discovered in the 1930's, all three properties have been actively
waterflooded since the 1970's. While the projects are mature,
additional drilling and waterflood enhancement is likely. No Proved
Undeveloped Reserves were assigned by Ryder Scott to either the Veal
Lease or the TLB Unit. Proved Undeveloped Reserves were assigned by
Ryder Scott to the NW Slaughter Unit in contemplation of a carbon
dioxide
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injection project which is anticipated for that property. The operator
of an adjacent property has been successfully injecting carbon dioxide
for several years to enhance production.
Lea County Shallow Properties. The Lea County Shallow Properties
consist of approximately 300 wells in Lea County, New Mexico which are
in the Rhodes, Jalmat, Monument, Langlia Mattix, Eumont and Eunice
Fields. The fields produce from the Yates, Seven Rivers, Queen and
other formations at depths generally shallower than 3,000 feet.
Production is generally high Btu gas, which produces into low pressure
gathering systems. No Proved Undeveloped Reserves have been assigned by
Ryder Scott to the properties, but the Company anticipates that
numerous recompletion, stimulation, workover or development drilling
opportunities will result from detailed geological and engineering
studies which are planned.
Brunson Ranch. The Brunson Ranch Field consists of three wells located
in Loving County, Texas in the deep Delaware Basin geological province
of the Permian Basin. Three wells are currently producing a total of
approximately 2.4 MMcf of natural gas per day from the Atoka formation
at a depth of approximately 16,000 feet. Undeveloped potential exists
on the properties through redrilling the Atoka formation and completing
such wells using technology designed for high bottom hole pressure
conditions.
Burlington has agreed to indemnify the Company for breaches by
Burlington of the purchase agreement as well as any claims attributable to or
arising out of acts or omissions of Burlington (including, but not limited to,
environmental claims) occurring before January 1, 1997. There are certain
limitations on the amount of, and time period for bringing, a claim for
indemnity made by the Company. Burlington is a defendant in two actions claiming
that Burlington underpaid royalty owners on properties in New Mexico and Texas,
including properties that are a part of the Permian Basin Properties. The
plaintiffs in the New Mexico action are seeking class certification while the
Texas action has been certified as a class action. Burlington's indemnity would
hold the Company harmless from any of these claims arising prior to January 1,
1997. The Company has also agreed, subject to certain limitations, to indemnify
Burlington for matters arising subsequent to January 1, 1997 as well as for
certain liabilities and obligations assumed by the Company as part of the
purchase transaction.
Panoma Acquisition
On June 28, 1996, the Company purchased interests in 520 natural gas
wells in the Texas Panhandle and western Oklahoma (469 of which are operated by
the Company) and the associated 427 mile gas gathering system from Burlington.
The net purchase price, after certain purchase price adjustments, was $34.7
million, funded by borrowings under the Company's Previous Credit Facility. Gruy
is the operator of the gas gathering system and the wells that were previously
operated by Burlington. According to Gaffney, Cline, independent petroleum
engineers engaged by the Company to evaluate the Panoma Properties, the Proved
Reserves attributable to the Panoma Properties as of December 31, 1996
aggregated 77.3 Bcfe with an SEC PV-10 of $111.0 million. As adjusted to use
market prices in effect on March 31, 1997, the Proved Reserves attributable to
the Panoma Properties as of December 31, 1996 aggregated 74.2 Bcfe with an SEC
PV-10 of $53.3 million.
The Panoma Properties consist of approximately 520 natural gas wells in
the West Panhandle, East Panhandle, and South Erick Fields along a corridor 65
miles long and 20 miles wide stretching from Beckham County, Oklahoma to Gray
County, Texas. All wells are less than 2,800 feet deep and produce dry natural
gas from the Granite Wash and/or Brown Dolomite formations. The easternmost
fields are developed on 160 acre spacing because the original spacing of 640
acres proved inadequate to drain reserves efficiently. In-fill development is
underway in the westernmost field with ten wells of a 40 well program having
been completed during the first six months of 1997. The success of, and
information obtained from, these first wells will determine the locations and
timing of the remaining wells for 1997.
Magnum Hunter Combination
The recent growth experienced by the Company commenced with the Magnum
Hunter Combination in December 1995. In that transaction, the Company assumed
certain liabilities and issued an aggregate value of
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<PAGE>
$12.5 million of stock consisting of 5,085,077 shares of Common Stock and
111,825 shares of the Company's Series C Preferred Stock, which were
subsequently converted into 335,475 shares of Common Stock. In connection with
the Magnum Hunter Combination, management of the Company was replaced by
Hunter's management team. The acquisition of the Hunter Subsidiaries
significantly increased the size and expanded the nature of the Company's
business. The Hunter Subsidiaries were engaged in: (i) the acquisition,
production and sale of crude oil; (ii) the gathering, transmission and marketing
of natural gas; (iii) the management and operation of producing oil and natural
gas properties for interest owners; and (iv) the provision of consulting and
U.S. export services to facilitate Latin American trade in energy products. The
acquisition of Gruy, a Hunter Subsidiary that specializes in the management of
producing properties, has enabled the Company to gain a higher level of
expertise in operating oil and natural gas properties. Estimated Proved Reserves
for the properties acquired in the Magnum Hunter Combination were 3.1 MMBbl of
oil and 11.0 Bcf of natural gas as of December 31, 1995.
McLean Plant Acquisition
On January 1, 1997, the Company complemented its Panoma Acquisition by
purchasing for $2.5 million a 50% ownership interest in the McLean Gas Plant,
which is connected to the Panoma gas gathering system, and a related products
pipeline. The Company receives 100% of the net profits from the McLean Gas Plant
until it recoups the $2.5 million purchase price, after which time it will
receive 50% of the net profits. See "Business and Properties - Gathering
and Processing of Natural Gas."
Development and Exploration Activities
Overview
While the Company is considering further acquisitions and, to a lesser
extent, plans to pursue exploratory drilling opportunities, the Company intends
to focus its current efforts on the substantial inventory of development
opportunities arising from its recent acquisitions.
The Company seeks to minimize its overhead and capital expenditures by
subcontracting the drilling, redrilling and workover of wells to independent
drilling contractors and by outsourcing other services. The Company typically
compensates its drilling subcontractors on a turnkey (fixed price), footage or
day rate basis depending on the Company's assessment of risk and cost
considerations.
Development Drilling
The Company's development strategy focuses on maximizing the value and
productivity of its oil and natural gas asset base through development drilling
and enhanced recovery techniques. The Company has identified over 400
development drilling locations on its properties. In particular, the Company
plans (i) to emphasize in-fill drilling on its Panoma Properties and several of
its west Texas properties, (ii) to initiate waterflood projects on selected west
Texas properties and (iii) to drill lateral re-entry wells in its Austin Chalk
properties. In-fill drilling is the process of drilling a well between producing
wells to better exploit the reservoir. In a waterflood, water is injected into a
producing formation to enhance recovery by forcing oil into the producing well
bores. Lateral re-entry wells are wells drilled horizontally from existing bore
holes into undrained areas of the reservoir. In exploiting its producing
properties, the Company relies upon its in-house technical staff of petroleum
engineering and geological professionals and utilizes the services of outside
consultants on a selective basis.
Panoma Properties. The Company believes that developmental drilling can
enhance the value of its recently acquired Panoma Properties, which
produce from the Brown Dolomite and Granite Wash formations in the
Texas Panhandle and western Oklahoma. The Company has identified over
80 in-fill drilling prospects on the Panoma Properties, and subject to
receiving density approvals from the Texas Railroad Commission (the
state oil and gas regulatory agency), the Company plans to drill 40
in-fill wells on the West Panhandle Field through the end of 1997. As
of September 30, 1997, the Company had completed approximately half of
these wells. Wells in the West
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<PAGE>
Panhandle Field are currently drilled on 640-acre spacing as compared
to 160-acre spacing for wells drilled in a neighboring field in the
same geologic trend.
West Texas. The Company believes it can enhance the value of selected
west Texas fields through in-fill drilling and enhanced recovery
projects, including several waterflood projects. While waterfloods
typically take considerable time to respond to fluid injection, the
west Texas properties have in-fill drilling potential that management
believes could result in a somewhat faster increase in production and
cash flow.
Austin Chalk. The Company believes that horizontal drilling can be
successfully used to augment the value of the Company's properties in
the Austin Chalk formation of central Texas, an area where wells
typically have high initial rates of production. The Company owns a 25%
working interest in 38 producing wells on approximately 12,000 lease
acres in Fayette and Gonzales Counties. The Company drilled one lateral
well in the Austin Chalk formation in 1996, which was successfully
completed as an oil well. Geological studies indicate the potential for
up to 16 new lateral locations to be drilled from existing bore holes
into undrained areas of the reservoir. Drilling laterally from existing
bore holes is advantageous, as the cost is approximately one-third of
the expenditure required for a new well.
Permian Basin Properties. In evaluating the Permian Basin Properties,
the Company believes there are many development opportunities. The
Company has identified approximately 275 drilling locations, including
production and injection wells, on the Permian Basin Properties.
Engineering and geological studies are being initiated to more
precisely identify specific development locations. In addition, in
evaluating the Permian Basin Properties, Ryder Scott attributed
approximately 10.0%, or $24.3 million, of their SEC PV-10 at December
31, 1996 (9.9%, or $13.8 million, at such date using March 31, 1997
prices) to a four-year enhancement program, commencing in 1997, on an
existing waterflood on the Westbrook Field in Mitchell County, Texas.
The proposed waterflood project is estimated to cost an aggregate of
$38.1 million. While the reserve report for the Permian Basin
Properties assumes approximately $6.6 million of development
expenditures during 1997 to enhance this waterflood project, the
Company is evaluating the timing of these development expenditures
relative to its other capital expenditure requirements.
Exploratory Drilling
The Company attempts to lessen the risks inherent in exploratory
drilling by (i) concentrating in specific areas in the United States where the
Company's technical staff has considerable experience and which are in known
onshore producing trends where the potential for significant reserves exists;
(ii) diversifying through investment in multiple prospects; (iii) utilizing 3-D
seismic surveys and other advanced technologies; and (iv) promoting out
interests to industry partners.
The Company was successful in completing four out of the eight
exploratory wells it drilled in 1996. The remaining four wells were not
commercially productive. The exploratory wells drilled by the Company have
ranged in cost from approximately $75,000 to $500,000 on a dry hole basis, with
an average of approximately $150,000 each. The Company plans to spend
approximately $3.0 million out of its $20.0 million 1997 capital budget on
exploratory drilling.
The Company participates in a successful exploratory gas discovery in the
Douglas formation in western Oklahoma where a confirmation well is scheduled to
commence in the fourth quarter of 1997. The Company is presently testing another
exploratory well drilled earlier this year in the Austin Chalk formation in
Fayette County, Texas. This potential oil well is the Company's first
exploratory horizontal well. The Company's interests in these two wells are 25%
and 20%, respectively. The Company also plans to drill four or five additional
exploratory wells in 1997, including a prospect identified by 3-D seismic
surveys in Victoria County on the Texas Gulf Coast and two or three other
potential oil and natural gas wells on the Texas Gulf Coast. The Company is also
reviewing other exploration opportunities, including potential prospects on the
Permian Basin Properties.
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<PAGE>
Gathering and Processing of Natural Gas
Hunter Gas Gathering, Inc., a wholly owned subsidiary of the Company,
owns four gas gathering systems located in Oklahoma, Texas and Louisiana, none
of which are subject to regulation by the Federal Energy Regulatory Commission
("FERC"), and a 50% interest in the McLean Gas Plant in the Texas Panhandle. Two
of the gas gathering systems, Panoma and North Appleby, account for more than
90% of the throughput from the Company's four systems. Gruy operates all four
gas gathering systems.
Generally, the gathering systems transport the natural gas to a common
point where it is dehydrated prior to redelivery to downstream pipelines. In
managing its gas gathering systems, the Company has emphasized operating
efficiency and overhead management and introduced a program which ties
throughput costs to volume transported rather than to compression capacity. The
Company believes that its focus on volume-based pricing reduces the potential
financial impact of a decline in actual throughput.
The Panoma system, the largest of the Company's four gas gathering
systems, consists of approximately 427 total miles of pipeline. The main
trunklines run east to west for approximately 66 miles with the east end
starting in Beckham County, Oklahoma and the west end starting in Gray County,
Texas. Natural gas throughput for the Panoma gas gathering system is
approximately 16.5 MMcf per day. The Panoma gas gathering system currently
delivers natural gas to El Paso Natural Gas Company for transport to markets in
western Oklahoma and the West Coast, although the Company is actively seeking
additional markets for such natural gas. The Company, which operates
approximately 489 of the approximately 540 wells connected to the Panoma system,
is also actively seeking to add new wells to such system through acquisition,
development or arrangements with third party producers.
The Company's North Appleby gas gathering system is located primarily
in Nacogdoches County in east Texas. Approximately 39 wells are connected to the
system, which delivers approximately 3.0 MMcf per day for third parties to
Natural Gas Pipeline Co. for transportation to other markets. The Company's
other two systems deliver an aggregate of 1.5 MMcf per day for third parties
from 66 wells into various markets. The Company is presently negotiating a
possible sale of one such system.
Effective January 1, 1997, the Company purchased for $2.5 million a 50%
interest in the McLean Gas Plant, the gas processing facility connected to the
Company's Panoma gas gathering system. The purchase also included a 23-mile
products pipeline between the McLean Gas Plant and the Koch Pipeline at Lefors,
Texas and all natural gas and product purchase and sales agreements related to
the plant. The McLean Gas Plant is a modern cryogenic gas processing plant with
a capacity of 23.0 MMcf per day with a current throughput of 16.5 MMcf per day.
The Company acquired its 50% interest in the plant from Carrera Gas Company,
L.L.C. ("Carrera") of Tulsa, Oklahoma, which owns the remaining 50% of the plant
and operates such facility. Under terms of the Company's operating agreement
with Carrera, the Company receives 100% of the net profits from the McLean Gas
Plant until it recoups the $2.5 million purchase price, at which point net
profits will be divided equally between the Company and Carrera.
Marketing of Production
General
The Company markets all of its natural gas production as well as
natural gas it purchases from third parties to gas marketing firms or end users
either on the spot market on a month-to-month basis at prevailing spot market
prices or at negotiated prices under long-term contracts. Marketing natural gas
for its own account exposes the Company to the attendant commodities risk. The
Company currently sells most of its natural gas to Crosstex, a gas marketing
firm in Dallas, Texas formed in January 1997 when Comstock sold its gas
gathering, processing and marketing operations. Although the Company sold
approximately 91% of its natural gas to Comstock in 1996 and has sold a
comparable percentage to Crosstex to date in 1997, the Company does not believe
that any discontinuation of such sales arrangement would be disruptive to the
Company's natural gas marketing operations. The Company typically obtains
letters of credit guaranteeing the payment of the purchase price for its natural
gas.
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<PAGE>
The Company normally sells its own oil under month-to-month contracts with
a variety of purchasers. Oil is usually sold for the Company's own account
through Enmark Services, a marketing agent in Dallas, Texas. While the Company
has historically been able to sell oil above posted prices, it is also exposed
to the commodities risk inherent in short-term contracts. For a discussion of
the Company's hedging activities, see "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital Resources
- -- Hedging Activity" and Note 14 to the Company's Consolidated Financial
Statements.
The market for oil and natural gas produced by the Company depends on
factors beyond its control, including the extent of domestic production and
imports of oil and natural gas, the proximity and capacity of natural gas
pipelines and other transportation facilities, weather, demand for oil and
natural gas, the marketing of competitive fuels and the effects of state and
federal regulation. The oil and natural gas industry also competes with other
industries in supplying the energy and fuel requirements of industrial,
commercial and individual consumers.
Petroleum Management and Consulting Services; Other Activities
Gruy
The Company acquired Gruy in the Magnum Hunter Combination in December
1995. Gruy, which conducts operations for both the Company and third parties,
has a 37-year history of managing properties for third parties, which include
banks, financial institutions, bankruptcy trustees, estates, individual
investors, trusts and independent oil and natural gas companies. Gruy provides
drilling, completion and other well-site services; advice regarding
environmental and other regulatory compliance; receipt and disbursement
functions and other managerial services; petroleum engineering services; and
consultation as an expert witness. Gruy manages, operates and provides
consulting services on oil and natural gas properties located in Texas,
Oklahoma, Mississippi, Louisiana, New Mexico and Kansas. Gruy is an important
component of the Company's acquisition program. As the operator of wells for
third parties and as a provider of consulting services for the energy industry,
Gruy is often able to identify attractive acquisition opportunities.
Hunter Butcher
The Company provides consulting services to Latin American energy
companies through Hunter Butcher. Hunter Butcher has primarily focused on
assisting energy-related Mexican companies in obtaining financing for their
purchases in the United States of products for export to Mexico. This is
accomplished through a commercial bank credit facility established to facilitate
short and medium term credit for Hunter Butcher to purchase these products and
resell them to its clients at a slight premium. The credit risk to Hunter
Butcher on such resales is lessened by partial guarantees of approximately 85%
to 90% of such borrowings by the Export Import Bank of the United States (the
"ExIm Bank"), by credit insurance and through deposits by Hunter Butcher's
clients to secure the unguaranteed portion of the indebtedness and certain
interest. Hunter Butcher could, however, incur a loss under such arrangement in
repaying indebtedness under the credit facility since the applicable ExIm Bank
guaranty and deposit would not be adequate to pay interest under the credit
facility at the default rate or cover other possible losses. In addition, the
Company itself may from time to time guarantee the indebtedness incurred under
the credit facility by Hunter Butcher for its clients, but the New Credit
Facility limits the Company to guaranteeing not more than $3.0 million of such
indebtedness at any time.
Possible Foreign Activities
As the Company continues to increase its asset base, management plans to
expand the scope of its oil and natural gas activities, including the Company's
acquisition of or possible participation in foreign prospects. The Company
believes that Latin America offers greater hydrocarbon reserve potential with
less competition than in North America. In expanding into Mexico, Central
America or South America, the Company anticipates that any investment would be
made in partnership with one or more partners with which it had previously
worked within the United States. The Company does not plan to invest in any
foreign prospects during 1997.
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<PAGE>
Oil and Natural Gas Reserves
General
All information set forth in this Prospectus regarding estimated proved
reserves, related estimated future net cash flows and SEC PV-10 of the Company's
oil and natural gas interests is taken from reports prepared (i) by Gaffney,
Cline and Glenn Harrison Petroleum Consultants, Inc. ("Glenn Harrison"), both
independent petroleum engineers in Dallas, Texas with respect to the Company's
interests at December 31, 1996 (using oil and natural gas prices at both
December 31, 1996 and March 31, 1997), (ii) by the engineers named in the
footnotes to the tables below with respect to the Company's interests at
December 31, 1994 and 1995 and (iii) by Ryder Scott with respect to the Permian
Basin Properties at December 31, 1996 (using oil and natural gas prices at both
December 31, 1996 and March 31, 1997). The estimates of these independent
petroleum engineers were based upon their review of production histories and
other geological, economic, ownership and engineering data provided by the
Company, and, in the case of Ryder Scott's report, by Burlington and the
Company.
In accordance with Commission guidelines (and except for the
alternative estimates of future net cash flows and SEC PV-10 as of December 31,
1996 using March 31, 1997 prices), the estimates of future net cash flows from
Proved Reserves and their SEC PV-10 are made using oil and natural gas sales
prices in effect as of the dates of such estimates and are held constant
throughout the life of the properties. The Company's estimates of Proved
Reserves, future net cash flows and SEC PV-10 were estimated using the following
weighted average prices (other than prices at March 31, 1997, which are market
prices as adjusted for Btu content), before deduction of production taxes:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Prices Used in Reserve Reports
At December 31,
----------------------------------------------------------------------------
Pro Forma 1996 (1)
--------------------------------------
December 31, 1996 March 31, 1997
1994 1995 1996 Prices (2) Prices (3)
------------ ----------- ----------- ----------------------- ----------------
Natural gas (per Mcf).............. $ 1.53 $ 1.46 $ 4.03 $ 4.05 $ 2.30
Oil (per Bbl)...................... $14.20 $15.60 $24.37 $24.18 $20.41
- - -----------
</TABLE>
(1) Gives effect to the Permian Basin Acquisition as if it had occurred on
December 31, 1996.
(2) Proved Reserves attributable to the Permian Basin Properties at
December 31, 1996 were estimated based upon weighted average prices
(before deduction of production taxes) of $4.12 per Mcf of natural gas
and $23.61 per Bbl of oil.
(3) Proved Reserves attributable to the Permian Basin Properties at
December 31, 1996 using prices at March 31, 1997 were based upon market
prices (before deduction of production taxes) of $2.30 per Mcf of
natural gas and $20.41 per Bbl of oil.
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<PAGE>
All reserves are evaluated at contract temperature and pressure which
can affect the measurement of natural gas reserves. Operating costs, development
costs and certain production-related and ad valorem taxes were deducted in
arriving at the estimated future net cash flows. No provision was made for
income taxes. The following estimates set forth reserves considered to be
economically recoverable under normal operating methods and existing conditions
at the prices and operating costs prevailing at the dates indicated above. The
estimates of the SEC PV-10 from future net cash flows differ from the
standardized measure of discounted future net cash flows set forth in the notes
to the Consolidated Financial Statements of the Company, which is calculated
after provision for future income taxes. There can be no assurance that these
estimates are accurate predictions of future net cash flows from oil and natural
gas reserves or their present value.
Proved Reserves are estimates of oil and natural gas to be recovered in the
future. Reservoir engineering is a subjective process of estimating the sizes of
underground accumulations of oil and natural gas that cannot be measured in an
exact way. The accuracy of any reserves estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment.
Reserve reports of other engineers might differ from the reports contained
herein. Results of drilling, testing, and production subsequent to the date of
the estimate may justify revision of such estimate. Future prices received for
the sale of oil and natural gas may be different from those used in preparing
these reports. The amounts and timing of future operating and development costs
may also differ from those used. Accordingly, reserve estimates are often
different from the quantities of oil and natural gas that are ultimately
recovered. See "Risk Factors-Uncertainty of Estimates of Reserves and Future Net
Cash Flows."
Except for the effect of the decrease in oil and natural gas prices, no
major discovery or other favorable or adverse event is believed to have caused a
significant change in these estimates of the Company's proved reserves since
December 31, 1996.
No estimates of Proved Reserves of oil and natural gas have been filed
by the Company with, or included in any report to, any United States authority
or agency since January 1, 1996.
Company Reserves
The following tables set forth the estimated Proved Reserves of oil and
natural gas of the Company and the SEC PV-10 thereof on (i) an actual basis for
each year in the three-year period ended December 31, 1996 and (ii) a pro forma
basis giving effect to the Permian Basin Acquisition.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Estimated Proved Oil and Natural Gas Reserves(1)
At December 31,
-----------------------------------------------------------------------------------
Pro Forma 1996 (4)
---------------------------------------
December 31, 1996 March 31, 1997
1994 1995 (2) 1996(3) Prices Prices(5)
----------- ----------- --------- ---------------- ---------------
Net natural gas reserves (Mcf):
Proved Developed Producing
Reserves...................... 394,872 8,796,748 71,166,555 148,486,702 139,410,816
Proved Developed Non-Producing
Reserves...................... 0 0 108,586 161,546 160,960
Proved Undeveloped Reserves...... 4,519,335 5,275,168 19,290,856 41,793,954 41,791,208
------------ ---------- ------------ ----------------- ----------------
Total Proved Reserves of
natural gas................. 4,914,207 14,071,916 90,565,997 190,442,202 181,362,984
----------- ---------- ------------ ----------------- ----------------
Net oil reserves (Bbl):
Proved Developed Producing
Reserves...................... 239,795 1,681,841 1,849,846 10,804,735 10,050,370
Proved Developed Non-Producing
Reserves...................... 0 0 112,338 125,979 119,641
Proved Undeveloped Reserves...... 1,020,725 2,085,898 3,376,071 9,698,562 9,681,158
--------- ---------- ------------ ----------------- ----------------
Total Proved Reserves of oil.. 1,260,520 3,767,739 5,338,255 20,629,276 19,851,169
--------- ---------- ------------ ----------------- ----------------
Total Proved Reserves (Mcfe).. 12,477,327 36,678,350 122,595,527 314,217,858 300,469,998
========== =========== ============ ================= ===============
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<PAGE>
Estimated SEC PV-10 of Proved Reserves(1)
At December 31,
---------------------------------------------------------------------------------
Pro Forma 1996 (4)
---------------------------------------
December 31, 1996 March 31, 1997
1994 1995 (2) 1996(3) Prices Prices(5)
----------- ------------- --------------- ---------------------------------------
Estimated SEC PV-10(6):
Proved Developed Producing
Reserves...................... $5,337,427 $19,036,205 $115,858,134 $295,509,505 $161,683,897
Proved Developed Non-Producing
Reserves...................... 0 0 664,308 987,032 682,003
Proved Undeveloped Reserves...... 2,437,383 18,173,125 48,244,017 111,552,418 62,465,119
---------- ------------- -------------- -------------- ---------------
Total SEC PV-10 of Proved
Reserves...................... $7,774,810 $37,209,330 $164,766,459 $408,048,955 $224,831,019
========= =========== ============ ============ ==============
</TABLE>
(1) Based upon reserve reports at December 31, 1994 prepared by Hensley
Consultants, Inc., independent petroleum consultants in Tulsa, Oklahoma;
reserve reports at December 31, 1994 and 1995 prepared by James J.
Weisman, Jr.; and reserve reports at December 31, 1996 prepared by
Gaffney, Cline and Glenn Harrison. Reserve information relating to the
Permian Basin Properties is based upon reserve reports at December 31,
1996 prepared by Ryder Scott.
(2) Includes reserves acquired in the Magnum Hunter Combination. See "Business
and Properties -- Recent Acquisitions."
(3) Includes reserves acquired in the Panoma Acquisition. See "Business and
Properties -- Recent Acquisitions."
(4) Gives effect to the Permian Basin Acquisition as if it had occurred on
December 31, 1996.
(5) Proved Reserves and SEC PV-10 have been estimated as of December 31, 1996
using March 31, 1997 market prices of $20.41 per Bbl of oil and $2.30 per
Mcf of natural gas. Such Proved Reserves and SEC PV-10 have not been
adjusted for production for the three-month period ended March 31, 1997.
(6) SEC PV-10 differs from the standardized measure of discounted future net
cash flows set forth in the notes to the Consolidated Financial Statements
of the Company, which is calculated after provision for future income
taxes.
Significant Properties
On December 31, 1996, after giving pro forma effect to the Permian Basin
Acquisition, 86% of the Company's Proved Reserves on a Bcfe basis were located
in the Permian Basin Properties and the Panoma Properties. On such date the
Company's properties included, on a pro forma basis, working interests in 2,581
gross (1,436 net) productive oil and natural gas wells. The Company also held
interests in 10,992 gross (5,003 net) undeveloped acres on a pro forma basis at
December 31, 1996.
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<PAGE>
The following table sets forth summary information with respect to the
Company's estimated Proved Reserves of oil and natural gas on a pro forma basis
at December 31, 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
SEC PV-10 (1)
---------------------------- Natural Gas
% of Oil Natural Gas Equivalent
Amount Total (Bbl) (Mcf) (Mcfe)
---------------- ---------- ------------ -------------- ------------------
Permian Basin Properties(2)(3)......... $243,282 59.6% 15,291,021 99,876,205 191,622,331
Panoma Properties(4)................... 111,030 27.2% 28,531 77,114,928 77,286,115
Other(5)............................... 53,736 13.2% 5,309,724 13,451,068 45,309,412
---------------- ---------- ------------ -------------- ------------------
Total(2)......................... $408,048 100.0% 20,629,276 190,442,202 314,217,858
================ ========== ============= ============== ==================
- - -----------
</TABLE>
(1) SEC PV-10 differs from the standardized measure of discounted future
net cash flows set forth in the Notes to the Consolidated Financial
Statements of the Company, which is calculated after provision for
future income taxes.
(2) Gives effect to the Permian Basin Acquisition as if it had occurred on
December 31, 1996.
(3) Based on a reserve report at December 31, 1996 prepared by Ryder Scott.
(4) Based on a reserve report at December 31, 1996 prepared by Gaffney,
Cline.
(5) Based on reserve reports at December 31, 1996 prepared by Gaffney,
Cline and by Glenn Harrison.
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<PAGE>
Permian Basin Reserves
The following tables set forth as of December 31, 1996 the estimated
Proved Reserves and the SEC PV-10 thereof for the Permian Basin Properties.
<TABLE>
<CAPTION>
<S> <C> <C>
Estimated Proved Oil and Natural Gas Reserves
of the Permian Basin Properties(1)
At December 31, 1996
-----------------------------------------
December 31, 1996 March 31, 1997
Prices Prices(2)
-----------------------------------------
Net natural gas reserves (Mcf):
Proved Developed Producing Reserves................... 77,320,147 71,319,816
Proved Developed Non-Producing Reserves............... 52,960 52,960
Proved Undeveloped Reserves........................... 22,503,098 22,503,098
------------------- ----------------
Total Proved Reserves of natural gas......... 99,876,205 93,875,874
------------------- ----------------
Net oil reserves (Bbl):
Proved Developed Producing Reserves................... 8,954,889 8,296,370
Proved Developed Non-Producing Reserves............... 13,641 13,641
Proved Undeveloped Reserves........................... 6,322,491 6,304,139
------------------- -----------------
Total Proved Reserves of oil................. 15,291,021 14,614,150
------------------- -----------------
Total Proved Reserves (Mcfe)................. 191,622,331 181,560,774
================== ================
</TABLE>
<TABLE>
<S> <C> <C>
Estimated SEC PV-10 of Proved Reserves
of the Permian Basin Properties(1)
At December 31, 1996
---------------------------------------------------
December 31, 1996 March 31, 1997
Prices Prices(2)
---------------------------------------------------
Estimated SEC PV-10(3):
Proved Developed Producing Reserves.................... $179,651,371 $103,553,897
Proved Developed Non-Producing Reserves................ 322,724 232,003
Proved Undeveloped Reserves............................ 63,308,400 35,782,169
--------------------------- ----------------------
Total SEC PV-10 of Proved Reserves............ $243,282,495 $139,568,069
=========================== ======================
</TABLE>
- -----------
(1) Based upon reserve reports at December 31,1996 prepared by Ryder Scott.
(2) Proved Reserves and SEC PV-10 have been estimated as of December 31,
1996 using March 31, 1997 market prices of $20.41 per Bbl of oil and
$2.30 per Mcf of natural gas at the Permian Basin Properties. Such
Proved Reserves and SEC PV-10 have not been adjusted for production for
the three-month period ended March 31, 1997.
(3) SEC PV-10 differs from the standardized measure of discounted future
net cash flows set forth in the notes to the Consolidated Financial
Statements of the Company, which is calculated after provision for
future income taxes.
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<PAGE>
Oil and Natural Gas Production, Prices and Costs
The following table shows the approximate net production attributable
to the Company's oil and natural gas interests, the average sales price and the
average production expense attributable to the Company's oil and natural gas
production for the periods indicated. Except for pro forma data, production and
sales information relating to properties acquired or disposed of is reflected in
this table only since or up to the closing date of their respective acquisition
or sale and may affect the comparability of the data between the periods
presented.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Six Months
Year Ended December 31, Ended June 30,
----------------------------------------------- ------------------
Pro Forma
1994 1995 1996 1996 (1) 1996 1997
----------- ---------- ----------- ------------ ---------- -------
Oil and natural gas production:
Oil (MBbl).............................. 42 30 191 1,105 90 240
Natural gas (MMcf)...................... 88 102 2,675 13,811 488 3,332
Natural Gas Equivalents (MMcfe)......... 340 282 3,821 20,442 1,027 4,771
Average sales price(2):
Oil (per Bbl)........................... $14.20 $15.60 $20.46 $20.15 $19.32 $18.33
Natural gas (per Mcf)................... 1.53 1.46 2.37 2.22 2.23 2.22
Natural Gas Equivalents (per Mcfe)...... 2.15 2.19 2.68 2.59 2.75 2.47
Oil and natural gas production expense
(per Mcfe)(3)........................... $0.94 $0.95 $1.15 $0.83 $1.10 $0.99
- - -----------
</TABLE>
(1) Gives effect to the Permian Basin Acquisition as if it had occurred on
January 1, 1996.
(2) Before deduction of production taxes and net of hedging results for the
three years ended December 31, 1996.
(3) Includes lease operating expenses and production and ad valorem taxes, if
applicable. For the years ended December 31, 1996 on a historical basis and
December 31, 1996 on a pro forma basis and the six months ended June 30,
1997, includes internal transfer price expenses for gas gathering and
overhead costs of $0.23 per Mcfe, $0.04 per Mcfe and $0.19 per Mcfe,
respectively.
Drilling Activity
The following table sets forth the results of the Company's drilling
activities during the three fiscal years ended December 31, 1996 and the period
from January 1, 1997 through June 30, 1997.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C> <C>
Gross Wells (1) Net Wells (2)
------------------------------------------ ---------------------------------------
Year Type of Well Producing (3) Dry (4) Total Producing (3) Dry (4) Total
- - ------------- --------------------- ------------------ ------------- --------- ------------------ ------------- -------
1994 Exploratory - - - - - -
Development 2 1 3 0.50 0.25 0.75
1995 Exploratory 2 - 2 0.55 - 0.55
Development - - - - - -
1996 Exploratory 4 4 8 2.63 2.60 5.23
Development 3 - 3 0.66 - 0.66
1997(5) Exploratory - - - - - -
Development 4 - 4 3.40 - 3.40
- - -----------
</TABLE>
(1) The number of gross wells is the total number of wells in which a
working interest is owned. Fluid injection wells for waterflood and
other enhanced recovery projects are not included as gross wells.
(2) The number of net wells is the sum of fractional working interests
owned in gross wells expressed as whole numbers and fractions thereof.
(3) A producing well is an exploratory or development well found to be
capable of producing either oil or natural gas in sufficient quantities
to justify completion as an oil or natural gas well.
(4) A dry well is an exploratory or development well that is not a
producing well.
(5) Based on wells completed through June 30, 1997.
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<PAGE>
Oil and Natural Gas Wells
The following table sets forth the number of productive oil and natural
gas wells in which the Company had a working interest at December 31, 1996.
<TABLE>
<S> <C> <C> <C> <C> <C> <C>
Productive Wells
As of December 31, 1996
-------------------------------------------------------
Gross (1) Net (2)
-------------------------------------------------------
Oil Gas Total Oil Gas Total
-------------------------------------------------------
Texas......................................................... 113 447 560 53.35 381.72 435.07
Oklahoma...................................................... 26 117 143 21.85 103.09 124.94
Mississippi................................................... 4 - 4 2.98 - 2.98
New Mexico.................................................... 3 3 6 2.48 0.64 3.12
California.................................................... 14 - 14 1.05 - 1.05
Kansas........................................................ 2 - 2 1.90 - 1.90
------- ------- -------- -------- -------- --------
Total ................................... 162 567 729 83.61 485.45 569.06
======= ======= ======== ======== ======== ========
- - -----------
</TABLE>
(1) The number of gross wells is the total number of wells in which a
working interest is owned. Well counts include wells with multiple
completions, but do not include injector wells.
(2) The number of net wells is the sum of fractional working interests
owned in gross wells expressed as whole numbers and fractions thereof.
On a pro forma basis at December 31, 1996, the Company had a working
interest in 2,581 gross (1,436 net) productive oil and natural gas wells.
Oil and Natural Gas Acreage
The following table summarizes the Company's developed and undeveloped
leasehold acreage at December 31, 1996.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Developed Undeveloped
----------------------------------------------------
Location Gross (1) Net (2) Gross (1) Net (2)
- - -------- ------------- ----------- ------------- ----------
Texas......................................................... 167,216 151,293 10,432 4,711
Oklahoma...................................................... 45,610 42,982 - -
Mississippi................................................... 528 452 - -
New Mexico.................................................... 840 702 - -
California.................................................... 509 38 - -
Kansas........................................................ 80 69 - -
------------- ------------ ------------ --------
Total................................................... 214,783 195,536 10,432 4,711
</TABLE>
- - -----------
(1) The number of gross acres is the total number of acres in which a
working interest is owned.
(2) The number of net acres is the sum of fractional working interests
owned in gross acres expressed as whole numbers and fractions thereof.
On a pro forma basis at December 31, 1996, the Company held interests
in 328,033 gross (277,419 net) developed acres and 10,992 gross (5,003 net)
undeveloped acres.
Substantially all of the Company's interests are leasehold working
interests or overriding royalty interests (as opposed to mineral or fee
interests) under standard onshore oil and natural gas leases. As is customary in
the industry, the Company generally acquires oil and natural gas acreage without
any warranty of title except as to claims made by, through or under the
transferor. Although the Company has title examined prior to acquisition of
developed acreage in those cases in which the economic significance of the
acreage justifies the cost, there can be no assurance
-76-
<PAGE>
that losses will not result from title defects or from defects in the assignment
of leasehold rights. In many instances, title opinions may not be obtained if in
the Company's judgment it would be uneconomical or impractical to do so.
Competition
The oil and gas industry is highly competitive. Competitors of the
Company include major oil companies, other independent oil and natural gas
concerns, and individual producers and operators, many of which have
substantially greater financial resources and larger staffs and facilities than
those of the Company. In addition, the Company frequently encounters competition
in the acquisition of oil and natural gas properties and gas gathering systems,
and in its management and consulting business. The principal means of such
competition are the amount and terms of the consideration offered. The principal
means of such competition with respect to the sale of oil and natural gas
production are product availability and price. The price at which the Company's
natural gas may be sold will continue to be affected by a number of factors,
including the price of alternate fuels such as oil and coal and competition
among various natural gas producers and marketers. See "Risk
Factors -- Competition."
Regulation
General Federal and State Regulation
The Company's oil and natural gas exploration, production and related
operations are subject to extensive rules and regulations promulgated by federal
and state agencies. Failure to comply with such rules and regulations can result
in substantial penalties. The regulatory burden on the oil and natural gas
industry increases the Company's cost of doing business and affects its
profitability. Because such rules and regulations are frequently amended or
reinterpreted, the Company is unable to predict the future cost or impact of
complying with such laws.
The State of Texas and many other states require permits for drilling
operations, drilling bonds and reports concerning operations and impose other
requirements relating to the exploration and production of oil and natural gas.
Such states also have statutes or regulations addressing conservation matters,
including provisions for the unitization or pooling of oil and natural gas
properties, the establishment of maximum rates of production from wells, and the
regulation of spacing, plugging and abandonment of such wells. Many states
restrict production to the market demand for oil and natural gas. Some states
have enacted statutes prescribing ceiling prices for natural gas sold within
their states.
FERC regulates interstate natural gas transportation rates and service
conditions, which affect the marketing of natural gas produced by the Company,
as well as the revenues received by the Company for sales of such production.
Since the mid-1980s, FERC has issued a series of orders, culminating in Order
Nos. 636, 636-A and 636-B ("Order 636"), that have significantly altered the
marketing and transportation of natural gas. Order 636 mandates a fundamental
restructuring of interstate pipeline sales and transportation service, including
the unbundling by interstate pipelines of the sale, transportation, storage and
other components of the city-gate sales services such pipelines previously
performed. One of FERC's purposes in issuing the orders is to increase
competition within all phases of the natural gas industry. Order 636 and
subsequent FERC orders on rehearing have been appealed and are pending judicial
review. Because these orders may be modified as a result of the appeals, it is
difficult to predict the ultimate impact of the orders on the Company and its
natural gas marketing efforts. Generally, Order 636 has eliminated or
substantially reduced the interstate pipelines' traditional role as wholesalers
of natural gas, and has substantially increased competition and volatility in
natural gas markets.
-77-
<PAGE>
The price the Company receives from the sale of oil and natural gas liquids
is affected by the cost of transporting products to market. Effective January 1,
1995, FERC implemented regulations establishing an indexing system for
transportation rates for oil pipelines, which, generally, would index such rates
to inflation, subject to certain conditions and limitations. The Railroad
Commission of the State of Texas is considering adopting rules to prevent
discriminatory transportation practices by intrastate gas gatherers and
transporters by requiring the disclosure of rate information under varying
conditions of service. The Company is not able to predict with certainty the
effects, if any, of these regulations on its operations. However, the
regulations may increase transportation costs or reduce wellhead prices for oil
and natural gas liquids.
Finally, from time to time regulatory agencies have imposed price
controls and limitations on production by restricting the rate of flow of oil
and natural gas wells below natural production capacity in order to conserve
supplies of oil and natural gas. See "Risk Factors -- Laws and Regulations."
Environmental Regulation
The Company's exploration, development, and production of oil and
natural gas, including its operation of saltwater injection and disposal wells,
are subject to various federal, state and local environmental laws and
regulations. Such laws and regulations can increase the costs of planning,
designing, installing and operating oil and natural gas wells. The Company's
domestic activities are subject to a variety of environmental laws and
regulations, including but not limited to, the Oil Pollution Act of 1990
("OPA"), the Clean Water Act ("CWA"), the Comprehensive Environmental Response,
Compensation and Liability Act ("CERCLA"), the Resource Conservation and
Recovery Act ("RCRA"), the Clean Air Act ("CAA"), and the Safe Drinking Water
Act ("SDWA"), as well as state regulations promulgated under comparable state
statutes. The Company also is subject to regulations governing the handling,
transportation, storage, and disposal of naturally occurring radioactive
materials that are found in its oil and natural gas operations. Civil and
criminal fines and penalties may be imposed for non-compliance with these
environmental laws and regulations. Additionally, these laws and regulations
require the acquisition of permits or other governmental authorizations before
undertaking certain activities, limit or prohibit other activities because of
protected areas or species, and impose substantial liabilities for cleanup of
pollution.
Under the OPA, a release of oil into water or other areas designated by
the statute could result in the Company being held responsible for the costs of
remediating such a release, certain OPA specified damages, and natural resource
damages. The extent of that liability could be extensive, as set forth in the
statute, depending on the nature of the release. A release of oil in harmful
quantities or other materials into water or other specified areas could also
result in the Company being held responsible under the CWA for the costs of
remediation, and civil and criminal fines and penalties.
CERCLA and comparable state statutes, also known as "Superfund" laws,
can impose joint and several and retroactive liability, without regard to fault
or the legality of the original conduct, on certain classes of persons for the
release of a "hazardous substance" into the environment. In practice, cleanup
costs are usually allocated among various responsible parties. Potentially
liable parties include site owners or operators, past owners or operators under
certain conditions, and entities that arrange for the disposal or treatment of,
or transport hazardous substances found at the site. Although CERCLA, as
amended, currently exempts petroleum, including but not limited to, crude oil,
natural gas and natural gas liquids from the definition of hazardous substance,
the Company's operations may involve the use or handling of other materials that
may be classified as hazardous substances under CERCLA. Furthermore, there can
be no assurance that the exemption will be preserved in future amendments of the
act, if any.
-78-
<PAGE>
RCRA and comparable state and local requirements impose standards for
the management, including treatment, storage, and disposal of both hazardous and
nonhazardous solid wastes. The Company generates hazardous and nonhazardous
solid waste in connection with its routine operations. From time to time,
proposals have been made that would reclassify certain oil and natural gas
wastes, including wastes generated during pipeline, drilling, and production
operations, as "hazardous wastes" under RCRA which would make such solid wastes
subject to much more stringent handling, transportation, storage, disposal, and
clean-up requirements. This development could have a significant impact on the
Company's operating costs. While state laws vary on this issue, state
initiatives to further regulate oil and natural gas wastes could have a similar
impact.
Because oil and natural gas exploration and production, and possibly other
activities, have been conducted at some of the Company's properties by previous
owners and operators, materials from these operations remain on some of the
properties and in some instances require remediation. In addition, the Company
has agreed to indemnify sellers of producing properties from whom the Company
has acquired reserves against certain liabilities for environmental claims
associated with such properties. While the Company does not believe that costs
to be incurred by the Company for compliance and remediating previously or
currently owned or operated properties will be material, there can be no
guarantee that such costs will not result in material expenditures.
Additionally, in the course of the Company's routine oil and natural
gas operations, surface spills and leaks, including casing leaks, of oil or
other materials occur, and the Company incurs costs for waste handling and
environmental compliance. Moreover, the Company is able to control directly the
operations of only those wells for which it acts as the operator.
Notwithstanding the Company's lack of control over wells owned by the Company
but operated by others, the failure of the operator to comply with applicable
environmental regulations may, in certain circumstances, be attributable to the
Company. The Company currently expects to spend approximately $725,000 over the
next five years in connection with remediation and environmental compliance,
including $75,000 for the remainder of 1997, $200,000 in 1998 and $150,000 in
1999.
It is not anticipated that the Company will be required in the near
future to expend amounts that are material in relation to its total capital
expenditures program by reason of environmental laws and regulations, but
inasmuch as such laws and regulations are frequently changed, the Company is
unable to predict the ultimate cost of compliance. There can be no assurance
that more stringent laws and regulations protecting the environment will not be
adopted or that the Company will not otherwise incur material expenses in
connection with environmental laws and regulations in the future. See "Risk
Factors-Laws and Regulations."
Employees
At June 30, 1997, the Company had 50 full-time employees of which nine were
management, 15 were administrative and 26 were field employees. None of the
Company's employees are represented by a union. Management considers its
relations with employees to be good.
Facilities
The Company occupies approximately 11,590 square feet of office space at
600 East Las Colinas Boulevard, Suite 1200, Irving, Texas, under a lease that
expires in November 2001. The Company owns a field office and production yard in
Shamrock, Texas, consisting of approximately four acres of land.
Legal Proceedings
No legal proceedings are pending other than ordinary routine litigation
incidental to the Company's business, the outcome of which management believes
will not have a material adverse effect on the Company.
-79-
<PAGE>
MANAGEMENT
The following table sets forth the directors, executive officers and
other significant employees of the Company, their ages, and all offices and
positions with the Company. Each director is elected for a period of one year
and thereafter serves until his successor is duly elected by the stockholders of
the Company and qualifies.
<TABLE>
<CAPTION>
<S> <C> <C>
Name Age Title
---- --- -----
Gary C. Evans............................ 40 Director, President and Chief Executive Officer
of the Company
Matthew C. Lutz.......................... 63 Chairman and Executive Vice President of Exploration and
Business Development of the Company
Chris Tong............................... 41 Senior Vice President and Chief Financial Officer of the Company
David S. Krueger......................... 47 Vice President and Chief Accounting Officer of the Company
Morgan F. Johnston....................... 36 Vice President, General Counsel and Secretary of the Company
Richard R. Frazier....................... 50 President and Chief Operating Officer of Magnum Hunter
Production, Inc. and Chief Operating Officer of Gruy
R. Renn Rothrock, Jr..................... 54 President of both Hunter Gas Gathering, Inc. and Gruy and
Executive Vice President of Magnum Hunter Production, Inc.
Gerald W. Bolfing........................ 68 Director of the Company
Oscar C. Lindemann....................... 74 Director of the Company
John H. Trescot, Jr...................... 72 Director of the Company
James E. Upfield......................... 75 Director of the Company
</TABLE>
Gary C. Evans has served as President, Chief Executive Officer and a
director of the Company since December 31, 1995 and Chairman and Chief Executive
Officer of all of the Hunter Subsidiaries since their formation or acquisition.
He served as Chief Financial Officer from January 1997 to September 1997. He
acted as Chairman, President and Chief Executive Officer of Hunter from
September 1992 until October 1996. Previously, he was President and Chief
Operating Officer of Hunter from December 1990 to September 1992. From 1985 to
1990, Mr. Evans was Chairman, President and Chief Executive Officer of Sunbelt
Energy, Inc. and its subsidiaries, which were merged with Hunter. From 1981 to
1985, Mr. Evans was associated with the Mercantile Bank of Canada where he held
various positions including Vice President and Manager of the Energy Division of
the Southwestern United States. From 1978 to 1981, he served in various
capacities with National Bank of Commerce (now BancTexas, N.A.) including Credit
Manager and Credit Officer. Mr. Evans serves on the Board of Directors of Karts
International Incorporated, an OTC traded company, and Digital Communications
Technology Corporation, an American Stock Exchange listed company.
Matthew C. Lutz became Chairman as of March 31, 1997 after having
served as Vice Chairman of the Company since December 31, 1995. Mr. Lutz has
also served as Executive Vice President of Exploration and Business Development
since December 31, 1995. Mr. Lutz held similar positions with Hunter from
September 1993 until October 1996. From 1984 through 1992, Mr. Lutz was Senior
Vice President of Exploration and on the Board of Directors of Enserch
Exploration, Inc. with responsibility for such company's worldwide oil and gas
exploration and development program. Prior to joining Enserch, Mr. Lutz spent 28
years with Getty Oil Company. He advanced through several technical, supervisory
and managerial positions which gave him various responsibilities including
exploration, production, lease acquisition, administration and financial
planning.
Chris Tong became Senior Vice President and Chief Financial Officer as of
August 18, 1997. Previously, Mr. Tong was Senior Vice President of Finance of
Tejas Acadian Holding Company and its subsidiaries including Tejas Gas Corp.,
Acadian Gas Corporation and Transok, Inc., all of which are wholly-owned
subsidiaries of Tejas Gas Corporation. Mr. Tong held these positions since
August 1996, and served in other treasury positions with Tejas beginning August
1989. He is also responsible for managing Tejas' property and liability
insurance. From 1980 to 1989, Mr. Tong served in various energy lending
capacities with Canadian Imperial Bank of Commerce, Post Oak Bank, and Bankers
Trust Company in Houston, Texas. Prior to his banking career, Mr. Tong also
served over a year with Superior Oil Company as a Reservoir Engineering
Assistant. Mr. Tong is a Summa Cum Laude graduate of the University of
Southwestern Louisiana with a Bachelor of Arts degree in Economics and a minor
in Mathematics.
David S. Krueger has served as Chief Accounting Officer of the Company
since January 1997. Mr. Krueger acted as Vice President-Finance of Cimarron Gas
Holding Co., a natural gas processing and natural gas liquids marketing company
in Tulsa, Oklahoma, from April 1992 until January 1997. He served as Vice
President/Controller of American Central Gas Companies, Inc., a natural gas
gathering, processing and marketing company from May 1988 until April 1992. From
1974 to 1986, Mr. Krueger served in various managerial capacities for Southland
Energy Corporation. From 1971 to 1973, Mr. Krueger was a staff accountant with
Arthur Andersen LLP. Mr. Krueger, a certified public accountant, graduated from
the University of Arkansas with a B.S./B.A. degree in Business Administration
and earned his M.B.A. from the University of Tulsa.
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<PAGE>
Morgan F. Johnston has served as Vice President and General Counsel
since April 1, 1997 and has served as the Company's Secretary since May 1, 1996.
Mr. Johnston was in private practice as a sole practitioner from May 1, 1996 to
April 1, 1997, specializing in corporate and securities law. From February 1994
to May 1996, Mr. Johnston served as general counsel for Millennia, Inc.
(formerly known as SOI Industries, Inc.) and Digital Communications Technology
Corporation, two American Stock Exchange listed companies. He also served as
general counsel to Halter Capital Corporation, a private consulting firm from
August 1991 to May 1996. For the two years prior to August 1, 1991 he was
securities counsel for Motel 6 L.P., a New York Stock Exchange listed company.
Mr. Johnston graduated cum laude from Texas Tech Law School in May 1986 and is
licensed to practice law in the State of Texas.
Richard R. Frazier has been President of Magnum Hunter Production, Inc. and
Chief Operating Officer of Magnum Hunter Production, Inc. and Gruy since January
1994. From 1977 to 1993, Mr. Frazier was with Edisto Resources Corporation in
Dallas, serving as Executive Vice President Exploration and Production from 1983
to 1993, where he had overall responsibility for its property acquisition,
exploration, drilling, production, gas marketing and engineering functions. From
1972 to 1976, Mr. Frazier served as District Production Superintendent and
Petroleum Engineer with HNG Oil Company (now Enron Oil & Gas Company) in
Midland, Texas. Mr. Frazier's initial employment, from 1968 to 1971, was with
Amerada Hess Corporation as a petroleum engineer involved in numerous projects
in Oklahoma and Texas. Mr. Frazier graduated in 1970 from the University of
Tulsa with a Bachelor of Science Degree in Petroleum Engineering. He is a
registered Professional Engineer in Texas and a member of the Society of
Petroleum Engineers and many other professional organizations.
R. Renn Rothrock, Jr. has been President of both Hunter Gas Gathering, Inc.
and Gruy and Executive Vice President of Magnum Hunter Production, Inc. since
January 1994. He served as Executive Vice President and Chief Operating Officer
of Gruy from May 1988 until January 1994. Mr. Rothrock was Executive Vice
President and General Manager of Gruy Engineering Corporation from 1986 until
May 1988. Over his 28-year career, Mr. Rothrock has also served as a reservoir
engineer and operations research engineer at Skelly Oil Company and as an area
engineer at Amerada Petroleum Corporation; the Engineering Editor of Petroleum
Engineer International Magazine; Vice President and Energy Manager of the First
National Bank of Mobile, Alabama; Executive Vice President of Energy Assets
International Corporation, a public company that financed oil and gas ventures;
and the producer and operator of his own gas gathering and transportation system
Mr. Rothrock earned a B.S. degree in Petroleum Engineering and an M.S. degree in
Engineering from the University of Oklahoma. He is a member of the Society of
Professional Engineers, the National Society of Professional Engineers, the
National Academy of Forensic Engineers and the Texas Society of Professional
Engineers. Mr. Rothrock is a registered Professional Engineer in Texas and
Oklahoma.
Gerald W. Bolfing has been a director of the Company since December 31,
1995. Mr. Bolfing was appointed a director of Hunter in August 1993. He is an
investor in the oil and gas business and a past officer of one of Hunter's
former subsidiaries. From 1962 to 1980, Mr. Bolfing was a partner in Bolfing
Food Stores in Waco, Texas. During this time, he also joined American Service
Company in Atlanta, Georgia from 1964 to 1965, and was active with Cable
Advertising Systems, Inc. of Kerrville, Texas from 1978 to 1981. He joined a
Hunter subsidiary in the well servicing business in 1981 where he remained
active until its divestiture in 1992. Mr. Bolfing is on the board of directors
of Capital Marketing Corporation of Hurst, Texas.
Oscar C. Lindemann has served as a director of the Company since December
31, 1995. Mr. Lindemann was previously a director of Hunter, having been
appointed in November 1995. Mr. Lindemann has over 40 years experience in the
financial industry. Mr. Lindemann began his banking career with the Texas Bank
and Trust in Dallas, Texas in 1951. He served the bank until 1977 in many
capacities, including Chief Executive Officer and Chairman of the Board. Since
leaving Texas Bank and Trust, he has served as Vice Chairman of both the United
National Bank and the National Bank of Commerce, also in Dallas. Mr. Lindemann
has also served as a consultant to the banking industry. He retired from
commercial banking in 1987. Mr. Lindemann is a former President of the Texas
Bankers Association, and a former state representative to the American Bankers
Association. He was a Founding Director and Board Member of VISA, and a member
of the Reserve City Bankers Association. He has served as an instructor at both
the Southwestern Graduate School of Banking at Southern Methodist University and
the School of Banking
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<PAGE>
of the South at Louisianna State University. He has also served as a
faculty member for four years in the College of Business Administration at the
University of Texas in Austin teaching various banking subjects.
John W. Trescot, Jr. has served as a director of the Company since June 5,
1997. For the last five years, Mr. Trescot has been a principal of AWA
Management Corporation, a professional consulting firm specializing in oil,
timber, pulp and paper, and financial management. Early in his career, Mr.
Trescot held various positions in woodlands, and pulp and paper, advancing to
the position of Senior Vice President, Southern Operations at Hudson Pulp &
Paper Corp. (now part of Georgia Pacific Corp.) Later Mr. Trescot became Vice
President of The Charter Company, a corporation with operations in oil,
communications and insurance. In 1979, Mr. Trescot became the Chief Executive
Officer of "Jari" Florestal e Agropecuaria, Ltda., a pulp, timber, rice and
kaolin operation in the Amazon Basin of Brazil owned by D.K. Ludwig. In 1981,
Mr. Trescot became the Chief Executive Officer of TOT Drilling Corp., a contract
drilling company drilling in west Texas and New Mexico.
James E. Upfield has served as a director of the Company since December
31, 1995. Mr. Upfield was appointed a director of Hunter in August 1992. Mr.
Upfield is Chairman of Temtex Industries, Inc. based in Dallas, Texas, a public
company that produces consumer hard goods and building materials. In 1969, Mr.
Upfield served on a select Presidential Committee serving postal operations of
the United States of America. He later accepted the responsibility for the
Dallas region, which encompassed Texas and Louisiana. From 1959 to 1967, Mr.
Upfield was President of Baifield Industries, Inc. ("Baifield") and its
predecessor, a company he founded in 1949 which merged with Baifield in 1963.
Baifield was engaged in prime government contracts for military systems and
sub-systems in the production of high-strength, light-weight metal products. In
1967, Baifield was acquired by Automatic Sprinkler Corporation of America, where
Mr. Upfield remained until resigning in 1968 to pursue other business
opportunities.
Significant Officers of Subsidiaries
R. Douglas Cronk, age 50, has been Vice President of Operations for
Magnum Hunter Production, Inc. since May 1996, at which time the Company had
acquired from Mr. Cronk 100% of the capital stock of Rampart Petroleum, Inc.,
based in Abilene, Texas. Rampart has been an active operating and exploration
company in the north central and west Texas region since 1983. Prior to the
formation of Rampart, Mr. Cronk was an independent oil and gas consultant in
Houston, Texas for approximately two years. From 1974 to 1981, Mr. Cronk held
various positions with subsidiaries of Deutsch Corporation of Tulsa, Oklahoma,
including Southland Drilling and Production where he became Vice President of
Drilling and Production. Mr. Cronk is a Chemical Engineer graduate from the
University of Tulsa.
Russell A. Talley, age 64, has been Executive Vice President and Drilling
Manager of Gruy Company since January 1991. From 1959 to 1970, Mr. Talley worked
for Diamond Shamrock Oil & Gas Company in Amarillo, Texas, where he had
substantial responsibilities in drilling, production and workover programs. From
1970 to 1985, Mr. Talley worked for Samedan Oil Corporation in Houston, Texas,
where he became the Manager of Offshore Drilling and Production. He managed all
domestic and Canadian drilling operations and supervised international
operations in Ecuador, the North Sea and Canada. From 1985 to 1987, Mr. Talley
was Vice President of Operations for Seagull Energy E & P, Inc. in Houston,
where he was responsible for all onshore and offshore drilling operations. In
1988 he established Texstar Energy Operators, Inc., which was acquired by Gruy
in 1991.
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<PAGE>
PRINCIPAL STOCKHOLDERS
AND SHARE OWNERSHIP OF MANAGEMENT
Security Ownership
The following table sets forth certain information as of June 30, 1997,
regarding the share ownership of the Company by (i) each person known to the
Company to be the beneficial owner of more than 5% of the outstanding shares of
Common Stock of the Company, (ii) each director, (iii) the Company's Chief
Executive Officer and the two other most highly compensated executive officers
of the Company, and (iv) all directors and executive officers of the Company, as
a group. None of the directors or executive officers named below owned, as of
June 30, 1997, any shares of the Company's Series A Preferred Stock or its TCW
Preferred Stock. The business address of each officer and director listed below
is: c/o Magnum Hunter Resources, Inc., 600 East Las Colinas Blvd., Suite 1200,
Irving, Texas 75039.
<TABLE>
<CAPTION>
<S> <C> <C>
Common Stock
Beneficially Owned
Percent
Number of of
Shares Class (1)
----------- ----------
Directors and Executive Officers
Gary C. Evans..................................................................... 1,653,060 (2) 12.1%
Matthew C. Lutz................................................................... 145,460 1.1
Gerald W. Bolfing................................................................. 323,144 2.4
Oscar C. Lindemann................................................................ 1,185 *
John H. Trescot, Jr............................................................... 20,837 *
James E. Upfield.................................................................. 29,268 *
Richard R. Frazier................................................................ 47,745 *
------------ ----------
All directors and executive officers as a group (8 persons)....................... 2,220,699 16.3%
Beneficial owners of 5% or more (excluding persons named above)
TCW Group, Inc.
865 South Figueroa Street
Los Angeles, CA 90017............................................................. 1,702,127 (3) 11.1%
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* Less than 1%
(1) The number of shares outstanding was calculated in accordance with Rule
13d-3(d) promulgated under the Exchange Act.
(2) Includes 17,024 shares held in the name of Jacquelyn Evelyn Enterprises
Inc., a corporation whose sole shareholder is Mr. Evans'wife. Mr. Evans
disclaims any ownership in such securities other than those in which he
has an economic interest.
(3) Consists of shares attributable to shares of Common Stock issuable upon
conversion of 1,000,000 shares of the Company's TCW Preferred Stock.
CERTAIN TRANSACTIONS
During 1996, as part of the Company's overall compensation package, the
Company's officers and directors were granted rights to participate in certain
development and exploration projects of the Company on a promoted basis. As of
December 31, 1996, 11 of the Company's officers and directors as a group spent
an aggregate of $137,340 participating in six wells. The Company discontinued
this program as of January 1, 1997.
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DESCRIPTION OF NEW CREDIT FACILITY
On April 30, 1997, the Company entered into a $130.0 million revolving
credit facility (the "New Credit Facility") with Bankers Trust Company, as
Administrative Agent, Banque Paribas and First Union National Bank of North
Carolina (collectively, the "Lenders"). The purpose of the New Credit Facility
was to (i) repay the remaining $53.7 million of indebtedness under the Previous
Credit Facility, (ii) partially finance the Permian Basin Acquisition, and (iii)
provide funds for working capital support and general corporate purposes. A
$20.0 million letter of credit sub-facility is available as support for purposes
approved by the Lenders.
The New Credit Facility is subject to a Borrowing Base determination
established on October 1 and April 1 of each year by the Lenders. The current
Borrowing Base is $60.0 million. The Borrowing Base was reduced to this level on
May 29, 1997, due to the issuance of the Outstanding Notes. On such date the
Company applied approximately $75.5 million of the proceeds of the Offering of
the Outstanding Notes to reduce indebtedness under the New Credit Facility to
$44 million, with First Union National Bank of North Carolina's participation in
such loan being repaid and it ceasing to be a Lender.
Under the terms of the New Credit Facility, the Company must maintain a
Debt to Capitalization Ratio of not more than 0.86 until March 31, 1998, not
more than 0.75 from April 1, 1998 until September 30, 1998 and not more than
0.70 thereafter. Another covenant requires the Company to maintain a ratio of
Consolidated EBITDA to Interest Expense of not less than 2.00 to 1 through June
30, 1998, not less than 2.50 to 1 from July 1, 1998 until December 31, 1998 and
not less than 2.75 to 1 thereafter.
The Company may select an interest rate equal to the Base Rate (defined
in the New Credit Facility as the higher of (i) the prime rate of Bankers Trust
Company or (ii) the sum of the overnight rate on federal funds transactions plus
0.50%) or a LIBOR-based rate, which varies depending upon the Company's usage of
its Borrowing Base. The LIBOR-based interest rate will range from LIBOR plus
1.00% if less than 25% of the Borrowing Base is used to LIBOR plus 1.75% if at
least 75% of the Borrowing Base is used. The New Credit Facility currently bears
interest at 7.4375% per annum.
The New Credit Facility has a maturity of five years with no required
principal payments until maturity, provided that the outstanding principal
balance does not exceed the Borrowing Base determinations established from time
to time by the Lenders. Indebtedness under the New Credit Facility constitutes
Senior Indebtedness. Outstanding indebtedness is secured by a first priority
security interest taken by the Lenders in substantially all assets owned now or
in the future by the Company (including its subsidiaries). All of the capital
stock of all wholly owned material subsidiaries of the Company is pledged
pursuant to the New Credit Facility. Each of the Company's wholly owned
subsidiaries has guaranteed the New Credit Facility.
The representations and warranties, conditions to extensions of credit,
events of default and indemnifications are substantially the same as under the
Previous Credit Facility. The New Credit Facility also contains certain
financial and other covenants, which include a minimum tangible net worth test,
a minimum current ratio and other covenants in addition to the Debt to
Capitalization Ratio and the ratio of Consolidated EBITDA to Interest Expense.
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DESCRIPTION OF THE EXCHANGE NOTES
The Exchange Notes will be issued under an indenture (the "Indenture")
dated as of May 29, 1997 by and among the Company, the Subsidiary Guarantors and
First Union National Bank of North Carolina, as Trustee (the "Trustee"). Upon
the issuance of the Exchange Notes, the Indenture will be subject to and
governed by the provisions of the Trust Indenture Act of 1939, as amended (the
"TIA").
The Exchange Notes will be issued under the same Indenture as the
Outstanding Notes, and the Exchange Notes, the Private Exchange Notes (if any)
and the Outstanding Notes will constitute a single series of debt securities
under the Indenture. In the event that the Exchange Offer is consummated, any
Outstanding Notes that remain outstanding after consummation of the Exchange
Offer, the Private Exchange Notes and the Exchange Notes issued in the Exchange
Offer will vote together as a single class for purposes of determining whether
holders of the requisite percentage in outstanding principal amount of Notes
have taken certain actions or exercised certain rights under the Indenture. The
Exchange Notes, the Private Exchange Notes and the Outstanding Notes are
sometimes collectively referred to herein as the "Notes."
The following summary of certain provisions of the Indenture does not
purport to be complete and is subject to, and is qualified in its entirety by
reference to, the TIA and all of the provisions of the Indenture, including the
definitions of certain terms therein and those terms made a part of the
Indenture by reference to the TIA as in effect on the date of the Indenture. A
copy of the form of Indenture may be obtained from the Company. The definitions
of certain capitalized terms used in the following summary are set forth below
under "-- Certain Definitions." Capitalized terms used in this summary and not
otherwise defined below have the meaning assigned to them in the Indenture. For
purposes of this "Description of the Exchange Notes" section, references to the
"Company" include only Magnum Hunter Resources, Inc. and not its Subsidiaries.
The Outstanding Notes are and the Exchange Notes will be general unsecured
obligations of the Company ranking pari passu in right of payment to all
unsubordinated indebtedness of the Company and will rank senior in right of
payment to all subordinated indebtedness of the Company. The Guarantees will be
general unsecured obligations of the Subsidiary Guarantors and will rank pari
passu in right of payment to all unsubordinated indebtedness of the Subsidiary
Guarantors and will rank senior in right of payment to all subordinated
indebtedness of the Subsidiary Guarantors. However, the Notes will be
effectively subordinated to secured indebtedness of the Company and the
Subsidiary Guarantors to the extent of the value of the assets securing such
indebtedness. As of September 30, 1997, the Company had approximately $48
million of secured indebtedness outstanding.
The Exchange Notes will be issued in fully registered form only, without
coupons, in denominations of $1,000 and integral multiples thereof. Initially,
the Trustee will act as paying agent and registrar for the Exchange Notes. The
Exchange Notes may be presented for registration of transfer and exchange at the
offices of the registrar, which initially will be the Trustee's corporate trust
office. The Company may change any paying agent and registrar without notice to
holders of the Notes (the "Holders"). The Company will pay principal (and
premium, if any) on the Exchange Notes at the Trustee's corporate office in New
York, New York. At the Company's option, interest may be paid at the Trustee's
corporate trust office or by check mailed to the registered addresses of the
Holders. Any Outstanding Notes that remain outstanding after the completion of
the Exchange Offer, together with the Exchange Notes and the Private Exchange
Notes issued in connection with the Exchange Offer, will be treated as a single
class of securities under the Indenture. See "The Exchange Offer."
Principal, Maturity and Interest
The Notes are limited in aggregate principal amount to $140 million and
will mature on June 1, 2007. Interest on the Notes generally will accrue at the
rate of 10% per annum and will be payable semi-annually in cash on each June 1
and December 1, commencing on December 1, 1997, to the Persons who are
registered Holders at the close of business on the May 15 and November 15,
respectively, immediately preceding the applicable interest payment date.
Interest on the Notes will accrue from and including the most recent date to
which interest has been paid or, if no interest has been paid, from and
including the date of issuance. Interest generally will be computed on the basis
of a 365 day year.
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The Exchange Notes will not be entitled to the benefit of any mandatory
sinking fund.
Redemption
Optional Redemption. The Notes will be redeemable, at the Company's
option, in whole at any time or in part from time to time, on and after June 1,
2002, upon not less than 30 nor more than 60 days' notice, at the following
redemption prices (expressed as percentages of the principal amount thereof) if
redeemed during the 12-month period commencing on June 1 of the years set forth
below, plus, in each case, accrued interest, if any, thereon to the date of
redemption:
Year Percentage
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2002.................................................... 105.000%
2003.................................................... 103.333%
2004.................................................... 101.667%
2005 and thereafter..................................... 100.000%
Optional Redemption upon Equity Offerings. At any time, or from time
to time, on or prior to June 1, 2000, the Company may, at its option, use all or
a portion of the net cash proceeds of one or more Equity Offerings (as defined)
to redeem up to 35% of the aggregate principal amount of the Notes originally
issued at a redemption price equal to 110% of the aggregate principal amount of
the Notes to be redeemed, plus accrued interest, if any, thereon to the date of
redemption; provided, however, that at least 65% of the aggregate principal
amount of Notes originally issued remains outstanding immediately after giving
effect to any such redemption. In order to effect the foregoing redemption with
the proceeds of any Equity Offering, the Company shall make such redemption not
more than 60 days after the consummation of any such Equity Offering.
Selection and Notice of Redemption
In the event that less than all of the Notes are to be redeemed at any
time, selection of such Notes, or portions thereof, for redemption will be made
by the Trustee in compliance with the requirements of the principal national
securities exchange, if any, on which the Notes are listed or, if the Notes are
not then listed on a national securities exchange, on a pro rata basis, by lot
or by such other method as the Trustee shall deem fair and appropriate;
provided, however, that no Notes of a principal amount of $1,000 or less shall
be redeemed in part; and provided, further, that if a partial redemption is made
with the proceeds of an Equity Offering, selection of the Notes or portions
thereof for redemption shall be made by the Trustee only on a pro rata basis or
on as nearly a pro rata basis as is practicable (subject to the procedures of
DTC), unless such method is otherwise prohibited. Notice of redemption shall be
mailed by first-class mail at least 30 but not more than 60 days before the
redemption date to each Holder of Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in a principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the applicable redemption date,
interest will cease to accrue on Notes or portions thereof called for redemption
as long as the Company has deposited with the paying agent for the Notes funds
in satisfaction of the applicable redemption price pursuant to the Indenture.
Guarantees
Each Subsidiary Guarantor will unconditionally guarantee, on a senior
basis, jointly and severally, to each Holder and the Trustee, the full and
prompt performance of the Company's obligations under the Indenture and the
Notes, including the payment of principal of and interest on the Notes.
The obligations of each Subsidiary Guarantor will be limited to the
maximum amount which, after giving effect to all other contingent and fixed
liabilities of such Subsidiary Guarantor and after giving effect to any
collections from or payments made by or on behalf of any other Subsidiary
Guarantor in respect of the obligations of such other Subsidiary Guarantor under
its Guarantee or pursuant to its contribution obligations under the Indenture,
will result
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in the obligations of such Subsidiary Guarantor under its Guarantee not
constituting a fraudulent conveyance or fraudulent transfer under federal or
state law. Each Subsidiary Guarantor that makes a payment or distribution under
its Guarantee shall be entitled to a contribution from each other Subsidiary
Guarantor in an amount pro rata, based on the net assets of each Subsidiary
Guarantor, determined in accordance with GAAP.
Each Subsidiary Guarantor may consolidate with or merge into or sell
its assets to the Company or another Subsidiary Guarantor that is a Wholly Owned
Restricted Subsidiary without limitation, or with or to other Persons upon the
terms and conditions set forth in the Indenture. See "-Certain Covenants-Merger,
Consolidation and Sale of Assets." In the event all of the Capital Stock of a
Subsidiary Guarantor is sold by the Company and/or one or more of its Restricted
Subsidiaries and the sale complies with the provisions set forth in "-Certain
Covenants-Limitation on Asset Sales," such Subsidiary Guarantor's Guarantee will
be released.
Separate financial statements of the Subsidiary Guarantors are not
included herein because such Subsidiary Guarantors are jointly and severally
liable with respect to the Company's obligations under the Indenture and the
Notes, and the aggregate net assets, earnings and equity of the Subsidiary
Guarantors and the Company are substantially equivalent to the net assets,
earnings and equity of the Company on a consolidated basis.
If the Non-Guarantor Subsidiaries (as defined), individually or in the
aggregate, and any such direct or indirect subsidiaries of the Company that are
created, acquired or owned in the future, ceases to be inconsequential to the
Company on a consolidated basis, the Company will either: (i) present in a
footnote to its consolidated financial statements in future Exchange Act reports
condensed consolidated financial information for the Company, the combined
Guarantors and the combined Non-Guarantor Subsidiaries as of the same dates and
for the same periods as the consolidated financial statements for so long as any
subsidiary guarantees remain outstanding; or (ii) request additional relief from
the Division with respect to the filing obligations of the Guarantors.
Holding Company Structure
The Company is a holding company for its Subsidiaries, with no material
operations of its own. Accordingly, the Company is dependent upon the
distribution of the earnings of its Subsidiaries, whether in the form of
dividends, advances or payments on account of intercompany obligations, to
service its debt obligations. In addition, the claims of the Holders of Notes
are subject to the prior payment of all secured indebtedness of the Guarantors.
There can be no assurance that, after providing for all such secured claims,
there would be sufficient assets available from the Company and its Subsidiaries
to satisfy the claims of the Holders of Notes. See "Risk Factors-Holding Company
Structure; Effective Subordination of Notes."
Change of Control
The Indenture provides that upon the occurrence of a Change of Control,
each Holder will have the right to require that the Company purchase all or a
portion of such Holder's Notes pursuant to the offer described below (the
"Change of Control Offer"), at a purchase price equal to 101% of the principal
amount thereof, plus accrued interest, if any, thereon to the date of purchase.
Within 30 days following the date upon which the Change of Control
occurred, the Company must send, by first class mail, a notice to each Holder,
with a copy to the Trustee, which notice shall govern the terms of the Change of
Control Offer. Such notice shall state, among other things, the purchase date,
which must be no earlier than 30 days nor later than 45 days from the date such
notice is mailed, other than as may be required by law (the "Change of Control
Payment Date"). A Change of Control Offer shall remain open for a period of 20
Business Days or such longer period as may be required by law. Holders electing
to have a Note purchased pursuant to a Change of Control Offer will be required
to surrender the Note, with the form entitled "Option of Holder to Elect
Purchase" on the reverse of the Note completed, to the paying agent for the
Notes at the address specified in the notice prior to the close of business on
the third Business Day prior to the Change of Control Payment Date.
If a Change of Control Offer is made, there can be no assurance that
the Company will have available funds sufficient to pay the Change of Control
purchase price for all the Notes that might be delivered by Holders seeking to
accept the Change of Control Offer. In the event the Company is required to
purchase outstanding Notes pursuant to a Change of Control Offer, the Company
expects that it would seek third party financing to the extent it does not have
available funds to meet its purchase obligations. However, there can be no
assurance that the Company would be able to obtain such financing. Additionally,
the occurrence of a Change of Control would constitute an event of default under
the Senior Credit Facility which would permit the lenders thereunder to
accelerate all indebtedness under the Senior Credit Facility.
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Neither the Board of Directors of the Company nor the Trustee may waive
the covenant relating to the Company's obligation to make a Change of Control
Offer. Restrictions in the Indenture described herein on the ability of the
Company and its Restricted Subsidiaries to incur additional Indebtedness, to
grant liens on their property, to make Restricted Payments and to make Asset
Sales may also make more difficult or discourage a takeover of the Company,
whether favored or opposed by the management of the Company. Consummation of any
such transaction in certain circumstances may require repurchase of the Notes,
and there can be no assurance that the Company or the acquiring party will have
sufficient financial resources to effect such repurchase. Such restrictions and
the restrictions on transactions with Affiliates may, in certain circumstances,
make more difficult or discourage any leveraged buyout of the Company by the
management of the Company. While such restrictions cover a wide variety of
arrangements which have traditionally been used to effect highly leveraged
transactions, the Indenture may not afford the Holders of Notes protection in
all circumstances from the adverse aspects of a highly leveraged transaction,
reorganization, restructuring, merger or similar transaction.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Change of Control Offer. To the extent that
the provisions of any securities laws or regulations conflict with the "Change
of Control" provisions of the Indenture, the Company shall comply with the
applicable securities laws and regulations and shall not be deemed to have
breached its obligations under the "Change of Control" provisions of the
Indenture by virtue thereof.
Certain Covenants
The Indenture contains, among others, the following covenants:
Limitation on Incurrence of Additional Indebtedness. Other than
Permitted Indebtedness, the Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur,
assume, guarantee, acquire, become liable, contingently or otherwise, with
respect to, or otherwise become responsible for payment of (collectively,
"incur") any Indebtedness (including, without limitation, Acquired
Indebtedness); provided, however, that if no Default or Event of Default shall
have occurred and be continuing at the time of or as a consequence of the
incurrence of any such Indebtedness, the Company and the Restricted Subsidiaries
or any of them may incur Indebtedness, in each case, if on the date of the
incurrence of such Indebtedness, after giving pro forma effect to the incurrence
thereof and the receipt and application of the proceeds therefrom, both (a) the
Company's Consolidated EBITDA Coverage Ratio would have been greater than 2.25
to 1.0 if such proposed incurrence is on or prior to June 30, 1998 and at least
equal to 2.5 to 1.0 if such proposed incurrence is thereafter and (b) the
Company's Adjusted Consolidated Net Tangible Assets are equal to or greater than
150% of the aggregate consolidated Indebtedness of the Company and its
Restricted Subsidiaries.
For purposes of determining any particular amount of Indebtedness under
this covenant, guarantees of Indebtedness otherwise included in the
determination of such amount shall not also be included.
Indebtedness of a Person existing at the time such Person becomes a
Restricted Subsidiary (whether by merger, consolidation, acquisition of Capital
Stock or otherwise) or is merged with or into the Company or any Restricted
Subsidiary or which is secured by a Lien on an asset acquired by the Company or
a Restricted Subsidiary (whether or not such Indebtedness is assumed by the
acquiring Person) shall be deemed incurred at the time the Person becomes a
Restricted Subsidiary or at the time of the asset acquisition, as the case may
be.
The Company will not, and will not permit any Subsidiary Guarantor to,
incur any Indebtedness which by its terms (or by the terms of any agreement
governing such Indebtedness) is subordinated in right of payment to any
Indebtedness of the Company or such Subsidiary Guarantor, as the case may be,
other than the Notes and the Guarantees unless such Indebtedness is also by its
terms (or by the terms of any agreement governing such Indebtedness) made
expressly subordinate in right of payment to the Notes or the Guarantee of such
Subsidiary Guarantor, as the case may be, pursuant to subordination provisions
that are substantially identical to the subordination
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provisions of such Indebtedness (or agreement) that are most favorable to the
holders of such other Indebtedness of the Company or such Subsidiary Guarantor,
as the case may be.
Limitation on Restricted Payments. The Company will not, and will not
cause or permit any of its Restricted Subsidiaries to, directly or indirectly,
(a) declare or pay any dividend or make any distribution (other than dividends
or distributions made to the Company or any Wholly Owned Restricted Subsidiary
and other than any dividends or distributions payable solely in Qualified
Capital Stock of the Company or warrants, rights or options to purchase or
acquire shares of Qualified Capital Stock of the Company) on or in respect of
shares of the Capital Stock of the Company or any Restricted Subsidiary to
holders of such Capital Stock, (b) purchase, redeem or otherwise acquire or
retire for value any Capital Stock of the Company or any Restricted Subsidiary
or any warrants, rights or options to purchase or acquire shares of any class of
such Capital Stock other than through the exchange therefor solely of Qualified
Capital Stock of the Company or warrants, rights or options to purchase or
acquire shares of Qualified Capital Stock of the Company, (c) make any principal
payment on, purchase, defease, redeem, prepay, decrease or otherwise acquire or
retire for value, prior to any scheduled final maturity, scheduled repayment or
scheduled sinking fund payment, any Indebtedness of the Company or a Subsidiary
Guarantor that is subordinate or junior in right of payment to the Notes or such
Subsidiary Guarantor's Guarantee, as the case may be, or (d) make any Investment
(other than a Permitted Investment) (each of the foregoing actions set forth in
clauses (a), (b), (c) and (d) being referred to as a "Restricted Payment"), if
at the time of such Restricted Payment or immediately after giving effect
thereto, (i) a Default or an Event of Default shall have occurred and be
continuing or (ii) the Company is not able to incur at least $1.00 of additional
Indebtedness (other than Permitted Indebtedness) in compliance with "-Limitation
on Incurrence of Additional Indebtedness" above or (iii) the aggregate amount of
Restricted Payments (including such proposed Restricted Payment) made subsequent
to the Issue Date (the amount expended for such purposes, if other than in cash,
being the fair market value of such property as determined reasonably and in
good faith by the Board of Directors of the Company) shall exceed the sum of:
(A) 50% of the cumulative Consolidated Net Income (or if cumulative Consolidated
Net Income shall be a loss, minus 100% of such loss) of the Company earned
subsequent to the Issue Date and on or prior to the last date of the Company's
fiscal quarter immediately preceding such Restricted Payment (the "Reference
Date") (treating such period as a single accounting period); plus (B) 100% of
the aggregate net cash proceeds received by the Company from any Person (other
than a Restricted Subsidiary of the Company) from the issuance and sale
subsequent to the Issue Date and on or prior to the Reference Date of Qualified
Capital Stock of the Company; plus (C) without duplication of any amounts
included in clause (iii)(B) above, 100% of the aggregate net cash proceeds of
any equity contribution received by the Company from a holder of the Company's
Capital Stock (excluding, in the case of clauses (iii)(B) and (C), any net cash
proceeds from an Equity Offering to the extent used to redeem the Notes); plus
(D) an amount equal to the net reduction in Investments in Unrestricted
Subsidiaries resulting from dividends, interest payments, repayments of loans or
advances, or other transfers of cash, in each case to the Company or to any
Restricted Subsidiary of the Company from Unrestricted Subsidiaries (but without
duplication of any such amount included in calculating cumulative Consolidated
Net Income of the Company), or from redesignations of Unrestricted Subsidiaries
as Restricted Subsidiaries (in each case valued as provided in "-Limitation on
Designation of Unrestricted Subsidiaries" below), not to exceed, in the case of
any Unrestricted Subsidiary, the amount of Investments previously made by the
Company or any Restricted Subsidiary in such Unrestricted Subsidiary and which
was treated as a Restricted Payment under the Indenture; plus (E) without
duplication of the immediately preceding subclause (D), an amount equal to the
lesser of the cost or net cash proceeds received upon the sale or other
disposition of any Investment made after the Issue Date which had been treated
as a Restricted Payment (but without duplication of any such amount included in
calculating cumulative Consolidated Net Income of the Company).
Notwithstanding the foregoing, the provisions set forth in the
immediately preceding paragraph shall not prohibit: (1) the payment of any
dividend or redemption payment within 60 days after the date of declaration of
such dividend or the applicable redemption if the dividend or redemption
payment, as the case may be, would have been permitted on the date of
declaration; (2) if no Default or Event of Default shall have occurred and be
continuing, the acquisition of any shares of Capital Stock of the Company,
through the application of net proceeds of a substantially concurrent sale for
cash (other than to a Restricted Subsidiary of the Company) of shares of
Qualified Capital Stock of the Company; (3) if no Default or Event of Default
shall have occurred and be continuing, the acquisition of any Indebtedness of
the Company or Subsidiary Guarantor that is subordinate or junior in right of
payment to the Notes
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or such Subsidiary Guarantor's Guarantee, as the case may be, either (A) solely
in exchange for shares of Qualified Capital Stock of the Company or warrants,
rights or options to purchase or acquire shares of Qualified Capital Stock of
the Company, or (B) through the application of net proceeds of a substantially
concurrent sale for cash (other than to a Restricted Subsidiary of the Company)
of (I) shares of Qualified Capital Stock of the Company or (II) Refinancing
Indebtedness; (4) if no Default or Event of Default shall have occurred and be
continuing, the redemption of the TCW Preferred Stock to the extent required
pursuant to the terms thereof as a result of the Company not having received at
least $15 million of net cash proceeds from the issuance and sale by the Company
of Common Stock; (5) if no Default or Event of Default shall have occurred and
be continuing, the payment of dividends on the TCW Preferred Stock; and (6) the
initial designation of Hunter Butcher International Limited Liability Company as
an Unrestricted Subsidiary. In determining the aggregate amount of Restricted
Payments made subsequent to the Issue Date in accordance with clause (iii) of
the immediately preceding paragraph, amounts expended pursuant to clauses (1),
(2), (4), (5) and (6) shall be included in such calculation.
Limitation on Asset Sales. The Company will not, and will not cause or
permit any of its Restricted Subsidiaries to, consummate an Asset Sale unless
(a) the Company or the applicable Restricted Subsidiary, as the case may be,
receives consideration at the time of such Asset Sale at least equal to the fair
market value of the assets sold or otherwise disposed of (as determined in good
faith by the Company's Board of Directors or senior management of the Company);
(b) (i) at least 85% of the consideration received by the Company or such
Restricted Subsidiary, as the case may be, from such Asset Sale shall be in the
form of cash or Cash Equivalents and is received at the time of such
disposition; and (c) upon the consummation of an Asset Sale, the Company shall
apply, or cause such Restricted Subsidiary to apply, the Net Cash Proceeds
relating to such Asset Sale within 270 days of receipt thereof either (i) to
repay or prepay Indebtedness outstanding under the Senior Credit Facility,
including, without limitation, a permanent reduction in the related commitment,
(ii) to repay or prepay any Indebtedness of the Company that is secured by a
Lien permitted to be incurred pursuant to "-Limitation on Liens" below, (iii) to
make an investment in properties or assets that replace the properties or assets
that were the subject of such Asset Sale or in properties or assets that will be
used in the business of the Company and its Restricted Subsidiaries as existing
on the Issue Date or in businesses reasonably related thereto ("Replacement
Assets"), (iv) to an investment in Crude Oil and Natural Gas Related Assets or
(v) a combination of prepayment and investment permitted by the foregoing
clauses (c)(i) through (c)(iv). On the 271st day after an Asset Sale or such
earlier date, if any, as the Board of Directors of the Company determines not to
apply the Net Cash Proceeds relating to such Asset Sale as set forth in clauses
(c)(i) through (c)(iv) of the next preceding sentence (each a "Net Proceeds
Offer Trigger Date"), such aggregate amount of Net Cash Proceeds which have been
received by the Company or such Restricted Subsidiary but which have not been
applied on or before such Net Proceeds Offer Trigger Date as permitted in
clauses (c)(i) through (c)(iv) of the next preceding sentence (each a "Net
Proceeds Offer Amount") shall be applied by the Company or such Restricted
Subsidiary, as the case may be, to make an offer to purchase (a "Net Proceeds
Offer") on a date (the "Net Proceeds Offer Payment Date") not less than 30 nor
more than 45 days following the applicable Net Proceeds Offer Trigger Date, from
all Holders on a pro rata basis, that principal amount of Notes purchasable with
the Net Proceeds Offer Amount at a price equal to 100% of the principal amount
of the Notes to be purchased, plus accrued and unpaid interest, if any, thereon
to the date of purchase; provided, however, that if at any time any non-cash
consideration received by the Company or any Restricted Subsidiary, as the case
may be, in connection with any Asset Sale is converted into or sold or otherwise
disposed of for cash (other than interest received with respect to any such
non-cash consideration), then such conversion or disposition shall be deemed to
constitute an Asset Sale hereunder and the Net Cash Proceeds thereof shall be
applied in accordance with this covenant. The Company may defer the Net Proceeds
Offer until there is an aggregate unutilized Net Proceeds Offer Amount equal to
or in excess of $5 million resulting from one or more Asset Sales (at which
time, the entire unutilized Net Proceeds Offer Amount, and not just the amount
in excess of $5 million, shall be applied as required pursuant to this
paragraph).
In the event of the transfer of substantially all (but not all) of the
property and assets of the Company and its Restricted Subsidiaries as an
entirety to a Person in a transaction permitted under "--Merger, Consolidation
and Sale of Assets," the successor corporation shall be deemed to have sold the
properties and assets of the Company and its Restricted Subsidiaries not so
transferred for purposes of this covenant, and shall comply with the provisions
of this covenant with respect to such deemed sale as if it were an Asset Sale.
In addition, the fair market value of such
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properties and assets of the Company or its Restricted Subsidiaries deemed to be
sold shall be deemed to be Net Cash Proceeds for purposes of this covenant.
Notwithstanding the two immediately preceding paragraphs, the Company
and its Restricted Subsidiaries will be permitted to consummate an Asset Sale
without complying with such paragraphs to the extent (a) the consideration for
such Asset Sale constitutes Replacement Assets and/or Crude Oil and Natural Gas
Related Assets and (b) such Asset Sale is for fair market value; provided,
however, that any consideration not constituting Replacement Assets and Crude
Oil and Natural Gas Related Assets received by the Company or any of its
Restricted Subsidiaries in connection with any Asset Sale permitted to be
consummated under this paragraph shall constitute Net Cash Proceeds subject to
the provisions of the two immediately preceding paragraphs.
Notice of each Net Proceeds Offer will be mailed to the record Holders
as shown on the register of Holders within 30 days following the Net Proceeds
Offer Trigger Date, with a copy to the Trustee, and shall comply with the
procedures set forth in the Indenture. Upon receiving notice of the Net Proceeds
Offer, Holders may elect to tender their Notes in whole or in part in integral
multiples of $1,000 in exchange for cash. To the extent Holders properly tender
Notes with an aggregate principal amount exceeding the Net Proceeds Offer
Amount, Notes of tendering Holders will be purchased on a pro rata basis (based
on principal amounts tendered). A Net Proceeds Offer shall remain open for a
period of 20 Business Days or such longer period as may be required by law.
The Company's ability to repurchase Notes in a Net Proceeds Offer is
restricted by the terms of the Senior Credit Facility and may be prohibited or
otherwise limited by the terms of any then existing borrowing arrangements and
the Company's financial resources.
The Company will comply with the requirements of Rule 14e-1 under the
Exchange Act and any other securities laws and regulations thereunder to the
extent such laws and regulations are applicable in connection with the
repurchase of Notes pursuant to a Net Proceeds Offer. To the extent that the
provisions of any securities laws or regulations conflict with the "Asset Sale"
provisions of the Indenture, the Company shall comply with the applicable
securities laws and regulations and shall not be deemed to have breached its
obligations under the "Asset Sale" provisions of the Indenture by virtue
thereof.
Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries. The Company will not, and will not cause or permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or permit to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (a) pay dividends or make any other
distributions on or in respect of its Capital Stock; (b) make loans or advances,
or to pay any Indebtedness or other obligation owed, to the Company or any other
Restricted Subsidiary; (c) guarantee any Indebtedness or any other obligation of
the Company or any Restricted Subsidiary; or (d) transfer any of its property or
assets to the Company or any other Restricted Subsidiary (each such encumbrance
or restriction, a "Payment Restriction"), except for such encumbrances or
restrictions existing under or by reason of: (i) applicable law; (ii) the
Indenture; (iii) the Senior Credit Facility; (iv) customary non-assignment
provisions of any contract or any lease governing a leasehold interest of any
Restricted Subsidiary; (v) any instrument governing Acquired Indebtedness, which
encumbrance or restriction is not applicable to such Restricted Subsidiary, or
the properties or assets of such Restricted Subsidiary, other than the Person or
the properties or assets of the Person so acquired; (vi) agreements existing on
the Issue Date to the extent and in the manner such agreements are in effect on
the Issue Date; (vii) customary restrictions with respect to a Restricted
Subsidiary of the Company pursuant to an agreement that has been entered into
for the sale or disposition of Capital Stock or assets of such Restricted
Subsidiary to be consummated in accordance with the terms of the Indenture
solely in respect of the assets or Capital Stock to be sold or disposed of;
(viii) any instrument governing a Permitted Lien, to the extent and only to the
extent such instrument restricts the transfer or other disposition of assets
subject to such Permitted Lien; or (ix) an agreement governing Refinancing
Indebtedness incurred to Refinance the Indebtedness issued, assumed or incurred
pursuant to an agreement referred to in clause (ii), (iii), (v) or (vi) above;
provided, however, that the provisions relating to such encumbrance or
restriction contained in any such Refinancing Indebtedness are no less favorable
to the Holders in any material respect as determined by the Board of Directors
of the Company in their reasonable and good faith judgment than the
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provisions relating to such encumbrance or restriction contained in the
applicable agreement referred to in such clause (ii), (iii), (v) or (vi).
Limitation on Preferred Stock of Restricted Subsidiaries. The Company
will not cause or permit any of its Restricted Subsidiaries to issue any
Preferred Stock (other than to the Company or to a Wholly Owned Restricted
Subsidiary) or permit any Person (other than the Company or a Wholly Owned
Restricted Subsidiary) to own any Preferred Stock of any Restricted Subsidiary.
Limitation on Liens. Other than Permitted Liens, the Company will not,
and will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, create, incur, assume or permit or suffer to exist any Liens of any
kind against or upon any property or assets of the Company or any of its
Restricted Subsidiaries (whether owned on the Issue Date or acquired after the
Issue Date) or any proceeds therefrom, or assign or otherwise convey any right
to receive income or profits therefrom unless (a) in the case of Liens securing
Indebtedness that is expressly subordinate or junior in right of payment to the
Notes or any Guarantee, the Notes or such Guarantee, as the case may be, are
secured by a Lien on such property, assets or proceeds that is senior in
priority to such Liens at least to the same extent as the Notes are senior in
priority to such Indebtedness and (b) in all other cases, the Notes and the
Guarantees are equally and ratably secured.
Merger, Consolidation and Sale of Assets. The Company will not, in a
single transaction or series of related transactions, consolidate or merge with
or into any Person, or sell, assign, transfer, lease, convey or otherwise
dispose of (or cause or permit any Restricted Subsidiary to sell, assign,
transfer, lease, convey or otherwise dispose of) all or substantially all of the
Company's assets (determined on a consolidated basis for the Company and its
Restricted Subsidiaries), whether as an entirety or substantially as an entirety
to any Person unless: (a) either (i) the Company shall be the surviving or
continuing corporation or (ii) the Person (if other than the Company) formed by
such consolidation or into which the Company is merged or the Person which
acquires by sale, assignment, transfer, lease, conveyance or other disposition
the properties and assets of the Company and its Restricted Subsidiaries
substantially as an entirety (the "Surviving Entity") (x) shall be a corporation
organized and validly existing under the laws of the United States or any state
thereof or the District of Columbia and (y) shall expressly assume, by
supplemental indenture (in form and substance satisfactory to the Trustee),
executed and delivered to the Trustee, the due and punctual payment of the
principal of, premium, if any, and interest on all of the Notes and the
performance of every covenant of the Notes, the Indenture and the Registration
Rights Agreement on the part of the Company to be performed or observed; (b)
immediately after giving effect to such transaction and the assumption
contemplated by clause (a)(ii)(y) above (including giving effect to any
Indebtedness incurred or anticipated to be incurred in connection with or in
respect of such transaction), the Company or such Surviving Entity, as the case
may be, (i) shall have a Consolidated Net Worth equal to or greater than the
Consolidated Net Worth of the Company immediately prior to such transaction and
(ii) shall be able to incur at least $1.00 of additional Indebtedness (other
than Permitted Indebtedness) pursuant to "-Limitation on Incurrence of
Additional Indebtedness" above; (c) immediately before and immediately after
giving effect to such transaction and the assumption contemplated by clause
(a)(ii)(y) above (including, without limitation, giving effect to any
Indebtedness incurred or anticipated to be incurred and any Lien granted in
connection with or in respect of the transaction), no Default or Event of
Default shall have occurred or be continuing; and (d) the Company or the
Surviving Entity, as the case may be, shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that such
consolidation, merger, sale, assignment, transfer, lease, conveyance or other
disposition and, if a supplemental indenture is required in connection with such
transaction, such supplemental indenture comply with the applicable provisions
of the Indenture and that all conditions precedent in the Indenture relating to
such transaction have been satisfied; provided, however, that such counsel may
rely, as to matters of fact, on a certificate or certificates of officers of the
Company.
For purposes of the foregoing, the transfer (by lease, assignment, sale
or otherwise, in a single transaction or series of transactions) of all or
substantially all of the properties or assets of one or more Restricted
Subsidiaries the Capital Stock of which constitutes all or substantially all of
the properties and assets of the Company, shall be deemed to be the transfer of
all or substantially all of the properties and assets of the Company.
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Upon any consolidation, combination or merger or any transfer of all or
substantially all of the assets of the Company in accordance with the foregoing,
in which the Company is not the continuing corporation, the successor Person
formed by such consolidation or into which the Company is merged or to which
such conveyance, lease or transfer is made shall succeed to, and be substituted
for, and may exercise every right and power of, the Company under the Indenture
and the Notes with the same effect as if such surviving entity had been named as
such.
Each Subsidiary Guarantor (other than any Subsidiary Guarantor whose
Guarantee is to be released in accordance with the terms of the Guarantee and
the Indenture in connection with any transaction complying with the provisions
of the Indenture described under "-Limitation on Asset Sales") will not, and the
Company will not cause or permit any Subsidiary Guarantor to, consolidate with
or merge with or into any Person other than the Company or another Subsidiary
Guarantor that is a Wholly Owned Restricted Subsidiary unless: (a) the entity
formed by or surviving any such consolidation or merger (if other than the
Subsidiary Guarantor) or to which such sale, lease, conveyance or other
disposition shall have been made is a corporation organized and existing under
the laws of the United States or any state thereof or the District of Columbia;
(b) such entity assumes by execution of a supplemental indenture all of the
obligations of the Subsidiary Guarantor under its Guarantee; (c) immediately
after giving effect to such transaction, no Default or Event of Default shall
have occurred and be continuing; and (d) immediately after giving effect to such
transaction and the use of any net proceeds therefrom on a pro forma basis, the
Company could satisfy the provisions of clause (b) of the first paragraph of
this covenant. Any merger or consolidation of a Subsidiary Guarantor with and
into the Company (with the Company being the surviving entity) or another
Subsidiary Guarantor that is a Wholly Owned Restricted Subsidiary need only
comply with clause (d) of the first paragraph of this covenant.
Limitations on Transactions with Affiliates. (a) The Company will not,
and will not cause or permit any of its Restricted Subsidiaries to, directly or
indirectly, enter into, amend or permit or suffer to exist any transaction or
series of related transactions (including, without limitation, the purchase,
sale, lease or exchange of any property, the guaranteeing of any Indebtedness or
the rendering of any service) with, or for the benefit of, any of their
respective Affiliates (each an "Affiliate Transaction"), other than (i)
Affiliate Transactions permitted under paragraph (b) of this covenant and (ii)
Affiliate Transactions that are on terms that are fair and reasonable to the
Company or the applicable Restricted Subsidiary and are no less favorable to the
Company or the applicable Restricted Subsidiary than those that might reasonably
have been obtained in a comparable transaction at such time on an arm's-length
basis from a Person that is not an Affiliate of the Company or such Restricted
Subsidiary. All Affiliate Transactions (and each series of related Affiliate
Transactions which are similar or part of a common plan) involving aggregate
payments or other property with a fair market value in excess of $1 million
shall be approved by the Board of Directors of the Company, such approval to be
evidenced by a Board Resolution stating that such Board of Directors has
determined that such transaction complies with the foregoing provisions. If the
Company or any Restricted Subsidiary enters into an Affiliate Transaction (or a
series of related Affiliate Transactions related to a common plan) that involves
an aggregate fair market value of more than $10 million, the Company shall,
prior to the consummation thereof, obtain a favorable opinion as to the fairness
of such transaction or series of related transactions to the Company or the
relevant Restricted Subsidiary, as the case may be, from a financial point of
view, from an Independent Advisor and file the same with the Trustee.
(b) The restrictions set forth in clause (a) shall not apply to (i)
reasonable fees and compensation paid to and indemnity provided on behalf of,
officers, directors, employees or consultants of the Company or any Restricted
Subsidiary as determined in good faith by the Board of Directors or senior
management of the Company or such Restricted Subsidiary, as the case may be;
(ii) transactions exclusively between or among the Company and any of its
Restricted Subsidiaries or exclusively between or among such Restricted
Subsidiaries; provided, however, that such transactions are not otherwise
prohibited by the Indenture; and (iii) Restricted Payments permitted by the
Indenture.
Limitation on Restricted and Unrestricted Subsidiaries. The Board of
Directors of the Company may, if no Default or Event of Default shall have
occurred and be continuing or would arise therefrom, designate an Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that (i) any such
redesignation shall be deemed to be an incurrence as of the date of such
redesignation by the Company and its Restricted Subsidiaries of the Indebtedness
(if any) of such redesignated Subsidiary for purposes of "--Limitation on
Incurrence of Additional Indebtedness" above,
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(ii) unless such redesignated Subsidiary shall not have any Indebtedness
outstanding, other than Indebtedness which would be Permitted Indebtedness, no
such designation shall be permitted if immediately after giving effect to such
redesignation and the incurrence of any such additional Indebtedness the Company
could not incur $1.00 of additional Indebtedness (other than Permitted
Indebtedness) pursuant to "-Limitation on Incurrence of Additional Indebtedness"
above and (iii) such Subsidiary assumes by execution of a supplemental indenture
all of the obligations of a Subsidiary Guarantor under a Guarantee.
The Board of Directors of the Company also may, if no Default or Event
of Default shall have occurred and be continuing or would arise therefrom,
designate any Restricted Subsidiary to be an Unrestricted Subsidiary if (i) such
designation is at that time permitted under "-Limitation on Restricted Payments"
above and (ii) immediately after giving effect to such designation, the Company
could incur $1.00 of additional Indebtedness (other than Permitted Indebtedness)
pursuant to "-Limitation on Incurrence of Additional Indebtedness" above. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
the filing with the Trustee of a certified copy of the resolution of the Board
of Directors giving effect to such designation or redesignation and an Officers'
Certificate certifying that such designation or redesignation complied with the
foregoing conditions and setting forth in reasonable detail the underlying
calculations. In the event that any Restricted Subsidiary is designated an
Unrestricted Subsidiary in accordance with this covenant, such Restricted
Subsidiary's Guarantee will be released.
For purposes of the covenant described under "-Limitation on Restricted
Payments" above, (i) an "Investment" shall be deemed to have been made at the
time any Restricted Subsidiary is designated as an Unrestricted Subsidiary in an
amount (proportionate to the Company's equity interest in such Subsidiary) equal
to the net worth of such Restricted Subsidiary at the time that such Restricted
Subsidiary is designated as an Unrestricted Subsidiary; (ii) at any date the
aggregate amount of all Restricted Payments made as Investments since the Issue
Date shall exclude and be reduced by an amount (proportionate to the Company's
equity interest in such Subsidiary) equal to the net worth of any Unrestricted
Subsidiary at the time that such Unrestricted Subsidiary is designated a
Restricted Subsidiary, not to exceed, in the case of any such redesignation of
an Unrestricted Subsidiary as a Restricted Subsidiary, the amount of Investments
previously made by the Company and its Restricted Subsidiaries in such
Unrestricted Subsidiary (in each case (i) and (ii) "net worth" to be calculated
based upon the fair market value of the assets of such Subsidiary as of any such
date of designation); and (iii) any property transferred to or from an
Unrestricted Subsidiary shall be valued at its fair market value at the time of
such transfer.
Notwithstanding the foregoing, the Board of Directors may not designate
any Subsidiary of the Company to be an Unrestricted Subsidiary if, after such
designation, (a) the Company or any Restricted Subsidiary (i) provides credit
support for, or a guarantee of, any Indebtedness of such Subsidiary (including
any undertaking, agreement or instrument evidencing such Indebtedness) or (ii)
is directly or indirectly liable for any Indebtedness of such Subsidiary or (b)
such Subsidiary owns any Capital Stock of, or owns or holds any Lien on any
property of, any Restricted Subsidiary which is not a Subsidiary of the
Subsidiary to be so designated.
Subsidiaries of the Company that are not designated by the Board of
Directors as Restricted or Unrestricted Subsidiaries will be deemed to be
Restricted Subsidiaries. Notwithstanding any provisions of this covenant, all
Subsidiaries of an Unrestricted Subsidiary will be Unrestricted Subsidiaries.
Additional Subsidiary Guarantees. If the Company or any of its
Restricted Subsidiaries transfers or causes to be transferred, in one
transaction or a series of related transactions, any property to any Restricted
Subsidiary that is not a Subsidiary Guarantor, or if the Company or any of its
Restricted Subsidiaries shall organize, acquire or otherwise invest in or hold
an Investment in another Restricted Subsidiary that causes the total
consolidated assets owned by all Restricted Subsidiaries that are not Subsidiary
Guarantors to exceed in the aggregate 1% of the total consolidated assets of the
Company, then the Company shall cause one or more of such transferees or
acquired or other Restricted Subsidiaries to become Subsidiary Guarantors to the
extent necessary to cause the total consolidated assets owned by all Restricted
Subsidiaries that are not Subsidiary Guarantors not to exceed in the aggregate
1% of the total consolidated assets of the Company. If required to become a
Subsidiary Guarantor pursuant to the immediately preceding sentence, such
transferee or acquired or other Restricted Subsidiary shall (a) execute and
deliver to the Trustee a supplemental indenture in form reasonably satisfactory
to the Trustee pursuant to which such
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Restricted Subsidiary shall unconditionally guarantee all of the Company's
obligations under the Notes and the Indenture on the terms set forth in the
Indenture and (b) deliver to the Trustee an opinion of counsel that such
supplemental indenture has been duly authorized, executed and delivered by such
Restricted Subsidiary and constitutes a legal, valid, binding and enforceable
obligation of such Restricted Subsidiary. Thereafter, such Restricted Subsidiary
shall be a Subsidiary Guarantor for all purposes of the Indenture.
Limitation on Conduct of Business. The Company will not, and will not
permit any of its Restricted Subsidiaries to, engage in the conduct of any
business other than the Crude Oil and Natural Gas Business.
Reports to Holders. The Company will deliver to the Trustee within 15
days after the filing of the same with the Commission, copies of the quarterly
and annual reports and of the information, documents and other reports, if any,
which the Company is required to file with the Commission pursuant to Section 13
or 15(d) of the Exchange Act. Notwithstanding that the Company may not be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company will file with the Commission, to the extent permitted, and
provide the Trustee and Holders with such annual reports and such information,
documents and other reports specified in Sections 13 and 15(d) of the Exchange
Act. The Company will also comply with the other provisions of 314(a) of the
TIA.
Events of Default
The following events are defined in the Indenture as "Events of
Default":
(a) the failure to pay interest (including any Additional
Interest) on any Notes when the same becomes due and payable and the
default continues for a period of 30 days;
(b) the failure to pay the principal on any Notes, when such
principal becomes due and payable, at maturity, upon redemption or
otherwise (including the failure to make a payment to purchase Notes
tendered pursuant to a Change of Control Offer or a Net Proceeds
Offer);
(c) a default in the observance or performance of any other
covenant or agreement contained in the Indenture which default
continues for a period of 45 days after the Company receives written
notice specifying the default (and demanding that such default be
remedied) from the Trustee or the Holders of at least 25% of the
outstanding principal amount of the Notes (except in the case of a
default with respect to observance or performance of any of the terms
or provisions of "-Change of Control" or "Certain Covenants - Merger,
Consolidation and Sale of Assets" or "-Limitation on Asset Sales" which
will constitute an Event of Default with such notice requirement but
without such passage of time requirement);
(d) a default under any mortgage, indenture or instrument
under which there may be issued or by which there may be secured or
evidenced any Indebtedness of the Company or of any Restricted
Subsidiary (or the payment of which is guaranteed by the Company or any
Restricted Subsidiary), whether such Indebtedness now exists or is
created after the Issue Date, which default (i) is caused by a failure
to pay principal of or premium, if any, or interest on such
Indebtedness after any applicable grace period provided in such
Indebtedness on the date of such default (a "payment default") or (ii)
results in the acceleration of such Indebtedness prior to its express
maturity and, in each case, the principal amount of any such
Indebtedness, together with the principal amount of any other such
Indebtedness under which there has been a payment default or the
maturity of which has been so accelerated, aggregates at least $5
million;
(e) one or more judgments in an aggregate amount in excess of
$5 million (unless covered by insurance by a reputable insurer as to
which the insurer has not disclaimed coverage) shall have been rendered
against the Company or any of its Restricted Subsidiaries and such
judgments remain undischarged, unpaid or unstayed for a period of 60
days after such judgment or judgments become final and non-appealable;
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(f) certain events of bankruptcy affecting the Company or
any of its Significant Subsidiaries; or
(g) any of the Guarantees cease to be in full force and effect
or any of the Guarantees are declared to be null and void or invalid
and unenforceable or any of the Subsidiary Guarantors denies or
disaffirms its liability under its Guarantees (other than by reason of
release of a Subsidiary Guarantor in accordance with the terms of the
Indenture).
The Indenture provides that, if an Event of Default (other than an
Event of Default specified in clause (f) above relating to the Company) shall
occur and be continuing, the Trustee or the Holders of at least 25% in principal
amount of outstanding Notes may declare the principal of, premium, if any, and
accrued and unpaid interest on all the Notes to be due and payable by notice in
writing to the Company and the Trustee specifying the Event of Default and that
it is a "notice of acceleration", and the same shall become immediately due and
payable. If an Event of Default specified in clause (f) above relating to the
Company occurs and is continuing, then all unpaid principal of, and premium, if
any, and accrued and unpaid interest on all of the outstanding Notes shall ipso
facto become and be immediately due and payable without any declaration or other
act on the part of the Trustee or any Holder.
The Indenture provides that, at any time after a declaration of
acceleration with respect to the Notes as described in the preceding paragraph,
the Holders of a majority in principal amount of the Notes may rescind and
cancel such declaration and its consequences (a) if the rescission would not
conflict with any judgment or decree, (b) if all existing Events of Default have
been cured or waived except nonpayment of principal or interest that has become
due solely because of such acceleration, (c) to the extent the payment of such
interest is lawful, interest on overdue installments of interest and overdue
principal, which has become due otherwise than by such declaration of
acceleration, has been paid, (d) if the Company has paid the Trustee its
reasonable compensation and reimbursed the Trustee for its expenses,
disbursements and advances and (e) in the event of the cure or waiver of an
Event of Default of the type described in clause (f) of the description of
Events of Default above, the Trustee shall have received an officers'
certificate and an opinion of counsel that such Event of Default has been cured
or waived; provided, however, that such counsel may rely, as to matters of fact,
on a certificate or certificates of officers of the Company. No such rescission
shall affect any subsequent Default or impair any right consequent thereto.
The Indenture provides that, at any time prior to the declaration of
acceleration of the Notes, the Holders of a majority in principal amount of the
Notes may waive any existing Default or Event of Default under the Indenture,
and its consequences, except a default in the payment of the principal of or
interest on any Notes.
The Indenture provides that, Holders of the Notes may not enforce the
Indenture or the Notes except as provided in the Indenture and under the TIA.
During the existence of an Event of Default, the Trustee is required to exercise
such rights and powers vested in it under the Indenture and use the same degree
of care and skill in its exercise thereof as a prudent man would exercise or use
under the circumstances in the conduct of his own affairs. Subject to the
provisions of the Indenture relating to the duties of the Trustee, whether or
not an Event of Default shall occur and be continuing, the Trustee is under no
obligation to exercise any of its rights or powers under the Indenture at the
request, order or direction of any of the Holders, unless such Holders have
offered to the Trustee reasonable indemnity. Subject to all provisions of the
Indenture and applicable law, the Holders of a majority in aggregate principal
amount of the then outstanding Notes have the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or exercising any trust or power conferred on the Trustee.
Under the Indenture, the Company is required to provide an officers'
certificate to the Trustee promptly upon any such officer obtaining knowledge of
any Default or Event of Default (provided that such officers shall provide such
certification at least annually whether or not they know of any Default or Event
of Default) that has occurred and, if applicable, describe such Default or Event
of Default and the status thereof.
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Legal Defeasance and Covenant Defeasance
The Company may, at its option and at any time, elect to have its
obligations and the corresponding obligations of the Subsidiary Guarantors
discharged with respect to the outstanding Notes ("Legal Defeasance"). Such
Legal Defeasance means that the Company shall be deemed to have paid and
discharged the entire indebtedness represented by the outstanding Notes, and
satisfied all of its obligations with respect to the Notes, except for (a) the
rights of Holders to receive payments in respect of the principal of, premium,
if any, and interest on the Notes when such payments are due, (b) the Company's
obligations with respect to the Notes concerning issuing temporary Notes,
registration of Notes, mutilated, destroyed, lost or stolen Notes and the
maintenance of an office or agency for payments, (c) the rights, powers, trust,
duties and immunities of the Trustee and the Company's obligations in connection
therewith and (d) the Legal Defeasance provisions of the Indenture. In addition,
the Company may, at its option and at any time, elect to have the obligations of
the Company released with respect to certain covenants that are described in the
Indenture ("Covenant Defeasance") and thereafter any omission to comply with
such obligations shall not constitute a Default or Event of Default with respect
to the Notes. In the event Covenant Defeasance occurs, certain events (other
than non-payment, bankruptcy, receivership, reorganization and insolvency
events) described under "-Events of Default" will no longer constitute an Event
of Default with respect to the Notes.
In order to exercise either Legal Defeasance or Covenant Defeasance,
(a) the Company must irrevocably deposit with the Trustee, in trust, for the
benefit of the Holders cash in United States dollars, non-callable United States
government obligations, or a combination thereof, in such amounts as will be
sufficient, in the opinion of a nationally recognized firm of independent public
accountants, to pay the principal of, premium, if any, and interest on the Notes
on the stated date for payment thereof or on the applicable redemption date, as
the case may be; (b) in the case of Legal Defeasance, the Company shall have
delivered to the Trustee an opinion of counsel in the United States reasonably
acceptable to the Trustee confirming that (i) the Company has received from, or
there has been published by, the Internal Revenue Service a ruling or (ii) since
the date of the Indenture, there has been a change in the applicable federal
income tax law, in either case to the effect that, and based thereon such
opinion of counsel shall confirm that, the Holders will not recognize income,
gain or loss for federal income tax purposes as a result of such Legal
Defeasance and will be subject to federal income tax on the same amounts, in the
same manner and at the same times as would have been the case if such Legal
Defeasance had not occurred, (c) in the case of Covenant Defeasance, the Company
shall have delivered to the Trustee an opinion of counsel in the United States
reasonably acceptable to the Trustee confirming that the Holders will not
recognize income, gain or loss for federal income tax purposes as a result of
such Covenant Defeasance and will be subject to federal income tax on the same
amounts, in the same manner and at the same times as would have been the case if
such Covenant Defeasance had not occurred; (d) no Default or Event of Default
shall have occurred and be continuing on the date of such deposit or insofar as
Events of Default from bankruptcy or insolvency events are concerned, at any
time in the period ending on the 91st day after the date of deposit; (e) such
Legal Defeasance or Covenant Defeasance shall not result in a breach or
violation of, or constitute a default under the Indenture or any other agreement
or instrument to which the Company or any of its Restricted Subsidiaries is a
party or by which the Company or any of its Restricted Subsidiaries is bound;
(f) the Company shall have delivered to the Trustee an officers' certificate
stating that the deposit was not made by the Company with the intent of
preferring the Holders over any other creditors of the Company or with the
intent of defeating, hindering, delaying or defrauding any other creditors of
the Company or others; (g) the Company shall have delivered to the Trustee an
officers' certificate and an opinion of counsel, each stating that all
conditions precedent provided for or relating to the Legal Defeasance or the
Covenant Defeasance, as the case may be, have been complied with; provided,
however, that such counsel may rely, as to matters of fact, on a certificate or
certificates of officers of the Company; (h) the Company shall have delivered to
the Trustee an opinion of counsel to the effect that after the 91st day
following the deposit, the trust funds will not be subject to the effect of any
applicable bankruptcy, insolvency, reorganization or similar laws affecting
creditors' rights generally; provided, however, that such counsel may rely, as
to matters of fact, on a certificate or certificates of officers of the Company;
and (i) certain other customary conditions precedent are satisfied.
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Satisfaction and Discharge
The Indenture will be discharged and will cease to be of further effect
(except as to surviving rights of registration of transfer or exchange of the
Notes, as expressly provided for in the Indenture) as to all outstanding Notes
when (a) either (i) all the Notes, theretofore authenticated and delivered
(except lost, stolen or destroyed Notes which have been replaced or paid and
Notes for whose payment money has theretofore been deposited in trust or
segregated and held in trust by the Company and thereafter repaid to the Company
or discharged from such trust) have been delivered to the Trustee for
cancellation or (ii) all Notes not theretofore delivered to the Trustee for
cancellation have become due and payable and the Company has irrevocably
deposited or caused to be deposited with the Trustee funds in an amount
sufficient to pay and discharge the entire Indebtedness on the Notes not
theretofore delivered to the Trustee for cancellation, for principal of,
premium, if any, and interest on the Notes to the date of deposit together with
irrevocable instructions from the Company directing the Trustee to apply such
funds to the payment thereof at maturity or redemption, as the case may be; (b)
the Company has paid all other sums payable under the Indenture by the Company;
and (c) the Company has delivered to the Trustee an officers' certificate and an
opinion of counsel stating that all conditions precedent under the Indenture
relating to the satisfaction and discharge of the Indenture have been complied
with; provided, however, that such counsel may rely, as to matters of fact, on a
certificate or certificates of officers of the Company.
Modification of the Indenture
From time to time, the Company, the Subsidiary Guarantors and the
Trustee, without the consent of the Holders, may amend the Indenture for certain
specified purposes, including curing ambiguities, defects or inconsistencies, to
comply with any requirements of the Commission in order to effect or maintain
the qualification of the Indenture under the TIA or to make any change that
would provide any additional benefit or rights to the Holders or that does not
adversely affect the rights of any Holder. In formulating its opinion on such
matters, the Trustee will be entitled to rely on such evidence as it deems
appropriate, including, without limitation, solely on an opinion of counsel;
provided, however, that in delivering such opinion of counsel, such counsel may
rely, as to matters of fact, on a certificate or certificates of officers of the
Company. Other modifications and amendments of the Indenture may be made with
the consent of the Holders of a majority in principal amount of the then
outstanding Notes issued under the Indenture, except that, without the consent
of each Holder affected thereby, no amendment may: (a) reduce the amount of
Notes whose Holders must consent to an amendment; (b) reduce the rate of or
change or have the effect of changing the time for payment of interest,
including defaulted interest, on any Notes; (c) reduce the principal of or
change or have the effect of changing the fixed maturity of any Notes, or change
the date on which any Notes may be subject to redemption or repurchase, or
reduce the redemption or repurchase price therefor; (d) make any Notes payable
in money other than that stated in the Notes; (e) make any change in provisions
of the Indenture protecting the right of each Holder to receive payment of
principal of and interest on such Note on or after the due date thereof or to
bring suit to enforce such payment, or permitting Holders of a majority in
principal amount of Notes to waive Defaults or Events of Default; (f) amend,
change or modify in any material respect the obligation of the Company to make
and consummate a Change of Control Offer in the event of a Change of Control or
make and consummate a Net Proceeds Offer with respect to any Asset Sale that has
been consummated or modify any of the provisions or definitions with respect
thereto; (g) modify or change any provision of the Indenture or the related
definitions affecting the ranking of the Notes or any Guarantee in a manner
which adversely affects the Holders; or (h) release any Subsidiary Guarantor
from any of its obligations under its Guarantee or the Indenture otherwise than
in accordance with the terms of the Indenture.
Governing Law
The Indenture provides that the Indenture, the Notes and the Guarantees
will be governed by, and construed in accordance with, the laws of the State of
New York but without giving effect to applicable principles of conflicts of law
to the extent that the application of the law of another jurisdiction would be
required thereby.
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The Trustee
First Union National Bank is the Trustee under the Indenture and has been
appointed Exchange Agent for the Exchange Offer.
The Indenture provides that, except during the continuance of an Event
of Default, the Trustee will perform only such duties as are specifically set
forth in the Indenture. During the existence of an Event of Default, the Trustee
will exercise such rights and powers vested in it by the Indenture, and use the
same degree of care and skill in its exercise as a prudent man would exercise or
use under the circumstances in the conduct of his own affairs.
The Indenture and the provisions of the TIA contain certain limitations
on the rights of the Trustee, should it become a creditor of the Company or a
Subsidiary Guarantor, to obtain payments of claims in certain cases or to
realize on certain property received in respect of any such claim as security or
otherwise. Subject to the TIA, the Trustee will be permitted to engage in other
transactions; provided, however, that if the Trustee acquires any conflicting
interest as described in the TIA, it must eliminate such conflict or resign.
Registration Agreement
The Company, the Subsidiary Guarantors and the Initial Purchasers entered
into the Registration Agreement on May 29, 1997, which required the Company and
the Subsidiary Guarantors, among other things, to commence the Exchange Offer
and maintain the effectiveness of the Registration Statement on the terms set
forth herein. In addition to their obligations in connection with the Exchange
Offer (and assuming the Exchange Offer is consummated by December 10, 1997), the
Company and the Subsidiary Guarantors will have a continuing obligation to
register Notes for resale under a Form S-3 Registration Statement (the "Shelf
Registration Statement") if either (i) any Holder of Private Exchange Notes so
requests in writing to the Company within 60 days after the consummation of the
Exchange Offer or (ii) in the case of any Holder that participates in the
Exchange Offer, such Holder does not receive Exchange Notes on the date of the
exchange that may be sold without restriction under state and federal securities
laws (other than due solely to the status of such Holder as an affiliate of the
Company within the meaning of the Securities Act). If the Company and the
Subsidiary Guarantors are required to file the Shelf Registration Statement,
they must keep the Shelf Registration Statement effective under the Securities
Act, subject to certain exceptions, until May 29, 1999 or such shorter period
ending when all of the Notes covered by such Shelf Registration Statement have
been sold. The Company and the Subsidiary Guarantors are required to pay certain
additional interest (the "Additional Interest") on the Notes if a required Shelf
Registration Statement is not filed with, or declared effective by, the
Commission within the prescribed time periods.
In the event of the filing of a Shelf Registration Statement or if this
Prospectus is required to be delivered under the Securities Act by any
Participating Broker-Dealer who seeks to sell Exchange Notes during the 180-day
period following the effectiveness of the Registration Statement of which this
Prospectus is a part, the Company will provide to each Holder of the Notes or
such Participating Broker-Dealer copies of, respectively, this Prospectus or the
prospectus which is part of the Shelf Registration Statement. A Holder of Notes
that sells such Notes pursuant to the Shelf Registration Statement generally
will be required to be named as a selling security holder in the related
prospectus and to deliver a prospectus to purchasers, will be subject to certain
of the civil liability provisions of the Securities Act in connection with such
sales and will be bound by the provisions of the Registration Agreement which
are applicable to such Holder (including certain indemnification obligations).
In addition, each Holder of Notes to be covered by the Shelf Registration
Statement will be required to furnish to the Company such information regarding
such Holder and the proposed distribution of its Notes as the Company may
reasonably request in order for such Holder to have its Notes included in the
Shelf Registration Statement.
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Pursuant to the Registration Agreement, each Holder of Notes to be covered
by the Shelf Registration Statement and each Participating Broker-Dealer agrees
by its acquisition of such Notes that, upon actual receipt of any notice from
the Company of (i) the issuance by the Commission of any stop order suspending
the effectiveness of the Registration Statement of which this Prospectus is a
part or the Shelf Registration Statement, as appropriate, (ii) the receipt by
the Company of any notification of the suspension of the qualification or the
exemption from qualification of such Registration Statement or the Shelf
Registration Statement, as appropriate, or the Notes in any jurisdiction,
(iii) the occurrence of an event, the existence of any condition or any
information becoming known which causes this Prospectus or the prospectus in the
Shelf Registration Statement to contain an untrue statement of a material fact
or omit to state a material fact required to be stated therein or necessary to
make the statements therein not misleading or (iv) the Company's determination
that a post-effective amendment is appropriate, each Holder (or Participating
Broker-Dealer, as the case may be) will discontinue its sale of Notes until the
Company has amended or supplemented the applicable prospectus or advised such
Holder (or Participating Broker-Dealer) that the use of the applicable
prospectus may be resumed, as the case may be. If the Company suspends the sale
of Notes under such circumstances, the relevant period during which this
Registration Statement or the Shelf Registration Statement, as the case may be,
must remain effective shall be correspondingly extended.
This summary of certain provisions of the Registration Agreement is not
complete and is subject to, and is qualified in its entirety by, the provisions
of the Registration Agreement, a copy of which has been filed as an exhibit to
the Registration Statement of which this Prospectus is a part.
Certain Definitions
Set forth below is a summary of certain of the defined terms to be used
in the Indenture. Reference is made to the form of Indenture for the full
definition of all such terms, as well as any other terms used herein for which
no definition is provided.
"Acquired Indebtedness" means Indebtedness of a Person or any of its
Subsidiaries (i) existing at the time such Person becomes a Restricted
Subsidiary or at the time it merges or consolidates with the Company or any of
its Restricted Subsidiaries or (ii) which becomes Indebtedness of the Company or
a Restricted Subsidiary in connection with the acquisition of assets from such
Person, in each case not incurred in connection with, or in anticipation or
contemplation of, such Person becoming a Restricted Subsidiary or such
acquisition, merger or consolidation.
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"Adjusted Consolidated Net Tangible Assets" means (without
duplication), as of the date of determination, (a) the sum of (i) discounted
future net revenues from proved oil and gas reserves of the Company and its
consolidated Subsidiaries, calculated in accordance with Commission guidelines
(before any state or federal income tax), as estimated by a nationally
recognized firm of independent petroleum engineers as of a date no earlier than
the date of the Company's latest annual consolidated financial statements, as
increased by, as of the date of determination, the estimated discounted future
net revenues from (A) estimated proved oil and natural gas reserves acquired
since the date of such year-end reserve report, and (B) estimated oil and
natural gas reserves attributable to upward revisions of estimates of proved oil
and gas reserves since the date of such year-end reserve report due to
exploration, development or exploitation activities, in each case calculated in
accordance with Commission guidelines (utilizing the prices utilized in such
year-end reserve report), and decreased by, as of the date of determination, the
estimated discounted future net revenues from (C) estimated proved oil and gas
reserves produced or disposed of since the date of such year-end reserve report
and (D) estimated oil and natural gas reserves attributable to downward
revisions of estimates of proved oil and natural gas reserves since the date of
such year-end reserve report due to changes in geological conditions or other
factors which would, in accordance with standard industry practice, cause such
revisions, in each case calculated in accordance with Commission guidelines
(utilizing the prices utilized in such year-end reserve report); provided,
however, that, in the case of each of the determinations made pursuant to
clauses (A) through (D), such increases and decreases shall be as estimated by
the Company's petroleum engineers, unless in the event that there is a Material
Change as a result of such acquisitions, dispositions or revisions, then the
discounted future net revenues utilized for purposes of this clause (a)(i) shall
be confirmed in writing, by a nationally recognized firm of independent
petroleum engineers (which may be the Company's independent petroleum engineers
who prepare the Company's annual reserve report) plus (ii) the capitalized costs
that are attributable to oil and natural gas properties of the Company and its
Subsidiaries to which no proved oil and gas reserves are attributable, based on
the Company's books and records as of a date no earlier than the date of the
Company's latest annual or quarterly financial statements, plus (iii) the Net
Working Capital on a date no earlier than the date of the Company's latest
consolidated annual or quarterly financial statements plus (iv) with respect to
each other tangible asset of the Company or its consolidated Restricted
Subsidiaries specifically including, but not to the exclusion of any other
qualifying tangible assets, the Company's or its consolidated Restricted
Subsidiaries' gas gathering and processing facilities and unproved oil and
natural gas properties (less any remaining deferred income taxes which have been
allocated to such
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gas gathering and processing facilities in connection with the acquisition
thereof), land, equipment, leasehold improvements, investments carried on the
equity method, restricted cash and the carrying value of marketable securities,
the greater of (A) the net book value of such other tangible asset on a date no
earlier than the date of the Company's latest consolidated annual or quarterly
financial statements or (B) the appraised value, as estimated by a qualified
Independent Advisor, of such other tangible assets of the Company and its
Restricted Subsidiaries, as of a date no earlier than the date of the Company's
latest audited financial statements minus (b) minority interests and, to the
extent not otherwise taken into account in determining Adjusted Consolidated Net
Tangible Assets, any natural gas balancing liabilities of the Company and its
consolidated Restricted Subsidiaries reflected in the Company's latest audited
financial statements. In addition to, but without duplication of, the foregoing,
for purposes of this definition, "Adjusted Consolidated Net Tangible Assets"
shall be calculated after giving effect, on a pro forma basis, to (1) any
Investment not prohibited by the Indenture, to and including the date of the
transaction giving rise to the need to calculate Adjusted Consolidated Net
Tangible Assets (the "Assets Transaction Date"), in any other Person that, as a
result of such Investment, becomes a Restricted Subsidiary of the Company, (2)
the acquisition, to and including the Assets Transaction Date (by merger,
consolidation or purchase of stock or assets), of any business or assets,
including, without limitation, Permitted Industry Investments, and (3) any sales
or other dispositions of assets permitted by the Indenture (other than sales of
Hydrocarbons or other mineral products in the ordinary course of business)
occurring on or prior to the Assets Transaction Date.
"Affiliate" means, with respect to any specified Person, (a) any other
Person who directly or indirectly through one or more intermediaries controls,
or is controlled by, or under common control with, such specified Person and (b)
any Related Person of such Person. The term "control" means the possession,
directly or indirectly, of the power to direct or cause the direction of the
management and policies of a Person, whether through the ownership of voting
securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative of the foregoing.
"Affiliate Transaction" has the meaning set forth under "Certain
Covenants-Limitation on Transactions with Affiliates."
"Asset Acquisition" means (a) an Investment by the Company or any
Restricted Subsidiary in any other Person pursuant to which such Person shall
become a Restricted Subsidiary, or shall be merged with or into the Company or
any Restricted Subsidiary, or (b) the acquisition by the Company or any
Restricted Subsidiary of the assets of any Person (other than a Restricted
Subsidiary) which constitute all or substantially all of the assets of such
Person or comprises any division or line of business of such Person or any other
properties or assets of such Person other than in the ordinary course of
business.
"Asset Sale" means any direct or indirect sale, issuance, conveyance,
transfer, exchange, lease (other than operating leases entered into in the
ordinary course of business), assignment or other transfer for value by the
Company or any of its Restricted Subsidiaries (including any Sale and Leaseback
Transaction) to any Person other than the Company or a Restricted Subsidiary of
(a) any Capital Stock of any Restricted Subsidiary; or (b) any other property or
assets (including any interests therein) of the Company or any Restricted
Subsidiary, including any disposition by means of a merger, consolidation or
similar transaction; provided, however, that Asset Sales shall not include (i)
the sale, lease, conveyance, disposition or other transfer of all or
substantially all of the assets of the Company in a transaction which is made in
compliance with the provisions of "-Certain Covenants-Merger, Consolidation and
Sale of Assets," (ii) any Investment in an Unrestricted Subsidiary which is made
in compliance with the provisions of "-Certain Covenants-Limitation on
Restricted Payments" above, (iii) disposals or replacements of obsolete
equipment in the ordinary course of business, (iv) the sale, lease, conveyance,
disposition or other transfer (each, a "Transfer") by the Company or any
Restricted Subsidiary of assets or property to the Company or one or more
Restricted Subsidiaries, (v) any disposition of Hydrocarbons or other mineral
products for value in the ordinary course of business and (vi) the Transfer by
the Company or any Restricted Subsidiary of assets or property in the ordinary
course of business; provided, however, that the aggregate amount (valued at the
fair market value of such assets or property at the time of such Transfer) of
all such assets and property Transferred since the Issue Date pursuant to this
clause (vi) shall not exceed $1 million in any one year.
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"Board of Directors" means, as to any Person, the board of directors of
such Person or any duly authorized committee thereof.
"Board Resolution" means, with respect to any Person, a copy of a
resolution certified by the Secretary or an Assistant Secretary of such Person
to have been duly adopted by the Board of Directors of such Person and to be in
full force and effect on the date of such certification, and delivered to the
Trustee.
"Business Day" means any day other than a Saturday, Sunday or any other
day on which banking institutions in the City of New York are required or
authorized by law or other governmental action to be closed.
"Capital Stock" means (a) with respect to any Person that is a
corporation, any and all shares, interests, participations or other equivalents
(however designated and whether or not voting) of corporate stock, including
each class of Common Stock and Preferred Stock of such Person and including any
warrants, options or rights to acquire any of the foregoing and instruments
convertible into any of the foregoing and (b) with respect to any Person that is
not a corporation, any and all partnership or other equity interests of such
Person.
"Capitalized Lease Obligation" means, as to any Person, the discounted
present value of the rental obligations of such Person under a lease of (or
other agreement conveying the right to use) any property (whether real, personal
or mixed) that is required to be classified and accounted for as a capital lease
obligation at such date, determined in accordance with GAAP.
"Cash Equivalents" means (a) marketable direct obligations issued by,
or unconditionally guaranteed by, the United States Government or issued by any
agency thereof and backed by the full faith and credit of the United States, in
each case maturing within one year from the date of acquisition thereof; (b)
marketable direct obligations issued by any state of the United States or any
political subdivision of any such state or any public instrumentality thereof
maturing within one year from the date of acquisition thereof and, at the time
of acquisition, having one of the two highest ratings obtainable from either
Standard & Poor's Corporation ("S&P") or Moody's Investors Service, Inc.
("Moody's"); (c) commercial paper maturing no more than one year from the date
of creation thereof and, at the time of acquisition, having a rating of at least
A-1 from S&P or at least P-1 from Moody's; (d) certificates of deposit or
bankers' acceptances maturing within one year from the date of acquisition
thereof issued by any bank organized under the laws of the United States or any
state thereof or the District of Columbia or any United States branch of a
foreign bank having at the date of acquisition thereof combined capital and
surplus of not less than $250 million; (e) repurchase obligations with a term of
not more than seven days for underlying securities of the types described in
clause (a) above entered into with any bank meeting the qualifications specified
in clause (d) above and (f) money market mutual or similar funds having assets
in excess of $100 million.
"Change of Control" means the occurrence of one or more of the
following events: (a) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all of
the assets of the Company to any Person or group of related Persons for purposes
of Section 13(d) of the Exchange Act (a "Group") (whether or not otherwise in
compliance with the provisions of the Indenture); (b) the approval by the
holders of Capital Stock of the Company of any plan or proposal for the
liquidation or dissolution of the Company (whether or not otherwise in
compliance with the provisions of the Indenture); (c) any Person or Group shall
become the owner, directly or indirectly, beneficially or of record, of shares
representing more than 40% of the aggregate ordinary voting power represented by
the issued and outstanding Capital Stock of the Company; or (d) the replacement
of a majority of the Board of Directors of the Company over a two-year period
from the directors who constituted the Board of Directors of the Company at the
beginning of such period with directors whose replacement shall not have been
approved (by recommendation, nomination or election, as the case may be) by a
vote of at least a majority of the Board of Directors of the Company then still
in office who either were members of such Board of Directors at the beginning of
such period or whose election as a member of such Board of Directors was
previously so approved.
"Change of Control Offer" has the meaning set forth under "-Change of
Control."
"Change of Control Payment Date" has the meaning set forth under
"-Change of Control."
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"Common Stock" of any Person means any and all shares, interests or
other participations in, and other equivalents (however designated and whether
voting or non-voting) of such Person's common stock, whether outstanding on the
Issue Date or issued after the Issue Date, and includes, without limitation, all
series and classes of such common stock.
"Commission" means the Securities and Exchange Commission.
"Company Properties" means all Properties, and equity, partnership or
other ownership interests therein, that are related or incidental to, or used or
useful in connection with, the conduct or operation of any business activities
of the Company or the Subsidiaries, which business activities are not prohibited
by the terms of the Indenture.
"Consolidated EBITDA" means, for any period, the sum (without
duplication) of (a) Consolidated Net Income and (b) to the extent Consolidated
Net Income has been reduced thereby, (i) all income taxes of the Company and its
Restricted Subsidiaries paid or accrued in accordance with GAAP for such period
(other than income taxes attributable to extraordinary, unusual or nonrecurring
gains or losses or taxes attributable to sales or dispositions outside the
ordinary course of business), (ii) Consolidated Interest Expense, (iii) the
amount of any Preferred Stock dividends paid by the Company and its Restricted
Subsidiaries and (iv) Consolidated Non-cash Charges, less any non-cash items
increasing Consolidated Net Income for such period, all as determined on a
consolidated basis for the Company and its Restricted Subsidiaries in accordance
with GAAP.
"Consolidated EBITDA Coverage Ratio" means, with respect to the
Company, the ratio of (a) Consolidated EBITDA of the Company during the four
full fiscal quarters for which financial information in respect thereof is
available (the "Four Quarter Period") ending on or prior to the date of the
transaction giving rise to the need to calculate the Consolidated EBITDA
Coverage Ratio (the "Transaction Date") to (b) Consolidated Fixed Charges of the
Company for the Four Quarter Period. In addition to and without limitation of
the foregoing, for purposes of this definition, "Consolidated EBITDA" and
"Consolidated Fixed Charges" shall be calculated after giving effect (without
duplication) on a pro forma basis for the period of such calculation to (a) the
incurrence or repayment of any Indebtedness of the Company or any of its
Restricted Subsidiaries (and the application of the proceeds thereof) giving
rise to the need to make such calculation and any incurrence or repayment of
other Indebtedness (and the application of the proceeds thereof), other than the
incurrence or repayment of indebtedness in the ordinary course of business for
working capital purposes pursuant to working capital facilities, occurring
during the Four Quarter Period or at any time subsequent to the last day of the
Four Quarter Period and on or prior to the Transaction Date, as if such
incurrence or repayment, as the case may be (and the application of the proceeds
thereof), occurred on the first day of the Four Quarter Period and (b) any Asset
Sales or Asset Acquisitions (including, without limitation, any Asset
Acquisition giving rise to the need to make such calculation as a result of the
Company or one of its Restricted Subsidiaries (including any Person who becomes
a Restricted Subsidiary as a result of the Asset Acquisition) incurring,
assuming or otherwise being liable for Acquired Indebtedness, and also
including, without limitation, any Consolidated EBITDA attributable to the
assets which are the subject of the Asset Acquisition or Asset Sale during the
Four Quarter Period) occurring during the Four Quarter Period or at any time
subsequent to the last day of the Four Quarter Period and on or prior to the
Transaction Date, as if such Asset Sale or Asset Acquisition (including the
incurrence, assumption or liability for any such Acquired Indebtedness) occurred
on the first day of the Four Quarter Period. If the Company or any of its
Restricted Subsidiaries directly or indirectly guarantees Indebtedness of a
third Person, the preceding sentence shall give effect to the incurrence of such
guaranteed Indebtedness as if the Company or the Restricted Subsidiary, as the
case may be, had directly incurred or otherwise assumed such guaranteed
Indebtedness. Furthermore, in calculating "Consolidated Fixed Charges" for
purposes of determining the denominator (but not the numerator) of this
"Consolidated EBITDA Coverage Ratio," (i) interest on outstanding Indebtedness
determined on a fluctuating basis as of the Transaction Date and which will
continue to be so determined thereafter shall be deemed to have accrued at a
fixed rate per annum equal to the rate of interest on such Indebtedness in
effect on the Transaction Date; (ii) if interest on any Indebtedness actually
incurred on the Transaction Date may optionally be determined at an interest
rate based upon a factor of a prime or similar rate, a eurocurrency interbank
offered rate, or other rates, then the interest rate in effect on the
Transaction Date will be deemed to have been in effect during the Four Quarter
Period; (iii) notwithstanding clauses (i) and (ii) above, interest on
Indebtedness determined on a fluctuating basis, to the extent such interest is
covered by agreements relating to Interest Swap
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Obligations, shall be deemed to accrue at the rate per annum resulting after
giving effect to the operation of such agreements.
"Consolidated Fixed Charges" means, with respect to the Company for any
period, the sum, without duplication, of (a) Consolidated Interest Expense
(including any premium or penalty paid in connection with redeeming or retiring
Indebtedness of the Company and its Restricted Subsidiaries prior to the stated
maturity thereof pursuant to the agreements governing such Indebtedness), plus
(b) the product of (i) the amount of all dividend payments on any series of
Preferred Stock of the Company (other than dividends paid in Qualified Capital
Stock) paid, accrued or scheduled to be paid or accrued during such period times
(ii) a fraction, the numerator of which is one and the denominator of which is
one minus the then current effective consolidated federal, state and local
income tax rate of such Person, expressed as a decimal.
"Consolidated Interest Expense" means, with respect to the Company for
any period, the sum of, without duplication: (a) the aggregate of the interest
expense of the Company and its Restricted Subsidiaries for such period
determined on a consolidated basis in accordance with GAAP, including without
limitation, (i) any amortization of original issue discount, (ii) the net costs
under Interest Swap Obligations, (iii) all capitalized interest and (iv) the
interest portion of any deferred payment obligation; and (b) the interest
component of Capitalized Lease Obligations paid, accrued and/or scheduled to be
paid or accrued by the Company and its Restricted Subsidiaries during such
period, as determined on a consolidated basis in accordance with GAAP.
"Consolidated Net Income" means, with respect to the Company for any
period, the aggregate net income (or loss) of the Company and its Restricted
Subsidiaries for such period on a consolidated basis, determined in accordance
with GAAP; provided, however, that there shall be excluded therefrom (a)
after-tax gains from Asset Sales or abandonments or reserves relating thereto,
(b) after-tax items classified as extraordinary or nonrecurring gains, (c) the
net income of any Person acquired in a "pooling of interests" transaction
accrued prior to the date it becomes a Restricted Subsidiary or is merged or
consolidated with the Company or any Restricted Subsidiary, (d) the net income
(but not loss) of any Restricted Subsidiary to the extent that the declaration
of dividends or similar distributions by that Restricted Subsidiary of that
income is restricted by charter, contract, operation of law or otherwise, (e)
the net income of any Person in which the Company has an interest, other than a
Restricted Subsidiary, except to the extent of cash dividends or distributions
actually paid to the Company or to a Restricted Subsidiary by such Person, (f)
income or loss attributable to discontinued operations (including, without
limitation, operations disposed of during such period whether or not such
operations were classified as discontinued) and (g) in the case of a successor
to the Company by consolidation or merger or as a transferee of the Company's
assets, any net income (or loss) of the successor corporation prior to such
consolidation, merger or transfer of assets.
"Consolidated Net Worth" of any Person as of any date means the
consolidated stockholders' equity of such Person, determined on a consolidated
basis in accordance with GAAP, less (without duplication) amounts attributable
to Disqualified Capital Stock of such Person.
"Consolidated Non-cash Charges" means, with respect to the Company, for
any period, the aggregate depreciation, depletion, amortization and other
non-cash expenses of the Company and its Restricted Subsidiaries reducing
Consolidated Net Income of the Company for such period, determined on a
consolidated basis in accordance with GAAP (excluding any such charges
constituting an extraordinary item or loss or any such charge which requires an
accrual of or a reserve for cash charges for any future period).
"Consolidation" means, with respect to any Person, the consolidation of
the accounts of the Restricted Subsidiaries of such Person with those of such
Person, all in accordance with GAAP; provided, however, that "consolidation"
will not include consolidation of the accounts of any Unrestricted Subsidiary of
such Person with the accounts of such Person. The term "consolidated" has a
correlative meaning to the foregoing.
"Covenant Defeasance" has the meaning set forth under "-Legal Defeasance
and Covenant Defeasance."
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"Crude Oil and Natural Gas Business" means (i) the acquisition,
exploration, development, operation and disposition of interests in oil, natural
gas and other Hydrocarbon properties located in the Western Hemisphere, (ii) the
gathering, marketing, treating, processing, storage, selling and transporting of
any production from such interests or properties of the Company or of others and
(iii) activities incidental to the foregoing.
"Crude Oil and Natural Gas Hedge Agreements" means, with respect to any
Person, any oil and gas agreements and other agreements or arrangements or any
combination thereof entered into by such Person in the ordinary course of
business and that are designed to provide protection against oil and natural gas
price fluctuations.
"Crude Oil and Natural Gas Properties" means all Properties, including
equity or other ownership interests therein, owned by any Person which have been
assigned "proved oil and gas reserves" as defined in Rule 4-10 of Regulation S-X
of the Securities Act as in effect on the Issue Date.
"Crude Oil and Natural Gas Related Assets" means any Investment or
capital expenditure (but not including additions to working capital or
repayments of any revolving credit or working capital borrowings) by the Company
or any Subsidiary of the Company which is related to the business of the Company
and its Subsidiaries as it is conducted on the date of the Asset Sale giving
rise to the Net Cash Proceeds to be reinvested.
"Currency Agreement" means any foreign exchange contract, currency swap
agreement or other similar agreement or arrangement designed to protect the
Company or any Restricted Subsidiary of the Company against fluctuations in
currency values.
"Default" means an event or condition the occurrence of which is, or
with the lapse of time or the giving of notice or both would be, an Event of
Default.
"Disqualified Capital Stock" means that portion of any Capital Stock
which, by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable), or upon the happening of any
event, matures or is mandatorily redeemable, pursuant to a sinking fund
obligation or otherwise, or is mandatorily redeemable at the sole option of the
holder thereof, in whole or in part, in either case, on or prior to the final
maturity of the Notes.
"Equity Offering" means an offering of Qualified Capital Stock of the
Company.
"Exchange Act" means the Securities Exchange Act of 1934, as amended,
or any successor statute or statutes thereto.
"fair market value" means, with respect to any asset or property, the
price which could be negotiated in an arm's-length, free market transaction, for
cash, between an informed and willing seller and an informed and willing buyer,
neither of whom is under undue pressure or compulsion to complete the
transaction. Fair market value shall be determined by the Board of Directors of
the Company acting reasonably and in good faith and shall be evidenced by a
Board Resolution of the Company delivered to the Trustee; provided, however,
that (A) if the aggregate non-cash consideration to be received by the Company
or any Restricted Subsidiary from any Asset Sale shall reasonably be expected to
exceed $5 million or (B) if the net worth of any Restricted Subsidiary to be
designated as an Unrestricted Subsidiary shall reasonably be expected to exceed
$10 million, then fair market value shall be determined by an Independent
Advisor.
"GAAP" means generally accepted accounting principles set forth in the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants and statements and pronouncements of
the Financial Accounting Standards Board as of any date of determination.
"Holder" means any Person holding a Note.
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"Hydrocarbons" means oil, natural gas, casinghead gas, drip gasoline,
natural gasoline, condensate, distillate, liquid hydrocarbons, gaseous
hydrocarbons and all constituents, elements or compounds thereof and products
processed therefrom.
"Incur" has the meaning set forth under "-Certain Covenants- Limitation
on Incurrence of Additional Indebtedness."
"Indebtedness" means with respect to any Person, without duplication,
(a) all Obligations of such Person for borrowed money, (b) all Obligations of
such Person evidenced by bonds, debentures, notes or other similar instruments,
(c) all Capitalized Lease Obligations of such Person, (d) all Obligations of
such Person issued or assumed as the deferred purchase price of property, all
conditional sale obligations and all Obligations under any title retention
agreement (but excluding trade accounts payable), (e) all Obligations for the
reimbursement of any obligor on a letter of credit, banker's acceptance or
similar credit transaction, (f) guarantees and other contingent obligations in
respect of Indebtedness referred to in clauses (a) through (e) above and clause
(h) below, (g) all Obligations of any other Person of the type referred to in
clauses (a) through (f) above which are secured by any Lien on any property or
asset of such Person, the amount of such Obligation being deemed to be the
lesser of the fair market value of such property or asset or the amount of the
Obligation so secured, (h) all Obligations under Crude Oil and Natural Gas Hedge
Agreements, Currency Agreements and Interest Swap Obligations and (i) all
Disqualified Capital Stock issued by such Person with the amount of Indebtedness
represented by such Disqualified Capital Stock being equal to the greater of its
voluntary or involuntary liquidation preference and its maximum fixed redemption
price or repurchase price. For purposes hereof, the "maximum fixed repurchase
price" of any Disqualified Capital Stock which does not have a fixed repurchase
price shall be calculated in accordance with the terms of such Disqualified
Capital Stock as if such Disqualified Capital Stock were purchased on any date
on which Indebtedness shall be required to be determined pursuant to the
Indenture, and if such price is based upon, or measured by, the fair market
value of such Disqualified Capital Stock, such fair market value shall be
determined reasonably and in good faith by the Board of Directors of the
Company. The "amount" or "principal amount" of Indebtedness at any time of
determination as used herein represented by (a) any Indebtedness issued at a
price that is less than the principal amount at maturity thereof shall be the
face amount of the liability in respect thereof, (b) any Capitalized Lease
Obligation shall be the amount determined in accordance with the definition
thereof, (c) any Interest Swap Obligations included in the definition of
Permitted Indebtedness shall be zero, (d) all other unconditional obligations
shall be the amount of the liability thereof determined in accordance with GAAP
and (e) all other contingent obligations shall be the maximum liability at such
date of such Person.
"Independent Advisor" means a reputable accounting, appraisal or
nationally recognized investment banking, engineering or consulting firm (a)
which does not, and whose directors, officers and employees or Affiliates do
not, have a direct or indirect material financial interest in the Company and
(b) which, in the judgment of the Board of Directors of the Company, is
otherwise disinterested, independent and qualified to perform the task for which
it is to be engaged.
"Interest Swap Obligations" means the obligations of any Person
pursuant to any arrangement with any other Person, whereby, directly or
indirectly, such Person is entitled to receive from time to time periodic
payments calculated by applying either a floating or a fixed rate of interest on
a stated notional amount in exchange for periodic payments made by such other
Person calculated by applying a fixed or a floating rate of interest on the same
notional amount and shall include, without limitation, interest rate swaps,
caps, floors, collars and similar agreements.
"Investment" means, with respect to any Person, any direct or indirect
(i) loan, advance or other extension of credit (including, without limitation, a
guarantee) or capital contribution to (by means of any transfer of cash or other
property (valued at the fair market value thereof as of the date of transfer)
others or any payment for property or services for the account or use of
others), (ii) purchase or acquisition by such Person of any Capital Stock,
bonds, notes, debentures or other securities or evidences of Indebtedness issued
by, any Person (whether by merger, consolidation, amalgamation or otherwise and
whether or not purchased directly from the issuer of such securities or
evidences of Indebtedness), (iii) guarantee or assumption of the Indebtedness of
any other Person (other than the guarantee or assumption of Indebtedness of such
Person or a Restricted Subsidiary of such Person which guarantee
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or assumption is made in compliance with the provisions of "-Certain
Covenants-Limitation on Incurrence of Additional Indebtedness" above), and (iv)
other items that would be classified as investments on a balance sheet of such
Person prepared in accordance with GAAP. Notwithstanding the foregoing,
"Investment" shall exclude extensions of trade credit by the Company and its
Restricted Subsidiaries on commercially reasonable terms in accordance with
normal trade practices of the Company or such Restricted Subsidiary, as the case
may be. The amount of any Investment shall not be adjusted for increases or
decreases in value, or write- ups, write-downs or write-offs with respect to
such Investment. If the Company or any Restricted Subsidiary sells or otherwise
disposes of any Capital Stock of any Restricted Subsidiary such that, after
giving effect to any such sale or disposition, it ceases to be a Subsidiary of
the Company, the Company shall be deemed to have made an Investment on the date
of any such sale or disposition equal to the fair market value of the Capital
Stock of such Restricted Subsidiary not sold or disposed of.
"Issue Date" means the date of original issuance of the Notes.
"Legal Defeasance" has the meaning set forth under " -Legal Defeasance
and Covenant Defeasance."
"Lien" means any lien, mortgage, deed of trust, pledge, security
interest, charge or encumbrance of any kind (including any conditional sale or
other title retention agreement, any lease in the nature thereof and any
agreement to give any security interest).
"Material Change" means an increase or decrease of more than 10% during
a fiscal quarter in the discounted future net cash flows (excluding changes that
result solely from changes in prices) from proved oil and natural gas reserves
of the Company and consolidated Subsidiaries (before any state or federal income
tax); provided, however, that the following will be excluded from the Material
Change calculation: (i) any acquisitions during the quarter of oil and natural
gas reserves that have been estimated by independent petroleum engineers and on
which a report or reports exist, (ii) any disposition of properties existing at
the beginning of such quarter that have been disposed of as provided in
"Limitation on Asset Sales" and (iii) any reserves added during the quarter
attributable to the drilling or recompletion of wells not included in previous
reserve estimates, but which will be included in future quarters.
"Net Cash Proceeds" means, with respect to any Asset Sale, the proceeds
in the form of cash or Cash Equivalents including payments in respect of
deferred payment obligations when received in the form of cash or Cash
Equivalents received by the Company or any of its Restricted Subsidiaries from
such Asset Sale net of (a) reasonable out-of-pocket expenses and fees relating
to such Asset Sale (including, without limitation, legal, accounting and
investment banking fees and sales commissions), (b) taxes paid or payable after
taking into account any reduction in consolidated tax liability due to available
tax credits or deductions and any tax sharing arrangements, (c) repayment of
Indebtedness that is required to be repaid in connection with such Asset Sale
and (d) appropriate amounts (determined by the Chief Financial Officer of the
Company) to be provided by the Company or any Restricted Subsidiary, as the case
may be, as a reserve, in accordance with GAAP, against any post closing
adjustments or liabilities associated with such Asset Sale and retained by the
Company or any Restricted Subsidiary, as the case may be, after such Asset Sale,
including, without limitation, pension and other post-employment benefit
liabilities, liabilities related to environmental matters and liabilities under
any indemnification obligations associated with such Asset Sale (but excluding
any payments which, by the terms of the indemnities will not be made during the
term of the Notes).
"Net Proceeds Offer" has the meaning set forth under "-Certain
Covenants-Limitation on Asset Sales."
"Net Proceeds Offer Amount" has the meaning set forth under "-Certain
Covenants-Limitation on Asset Sales."
"Net Proceeds Offer Payment Date" has the meaning set forth under
"-Certain Covenants--Limitation on Asset Sales."
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"Net Proceeds Offer Trigger Date" has the meaning set forth under
"-Certain Covenants-Limitation on Asset Sales."
"Net Working Capital" means (i) all current assets of the Company and
its consolidated Subsidiaries, minus (ii) all current liabilities of the Company
and its consolidated Subsidiaries, except current liabilities included in
Indebtedness, in each case as set forth in financial statements of the Company
prepared in accordance with GAAP.
"Obligations" means all obligations for principal, premium, interest,
penalties, fees, indemnifications, reimbursements, damages and other liabilities
payable under the documentation governing any Indebtedness.
"Payment Restriction" has the meaning set forth under "-Certain
Covenants-Limitation on Dividend and Other Payment Restrictions Affecting
Restricted Subsidiaries."
"Permitted Indebtedness" means, without duplication, each of the
following:
(a) the Exchange Notes, the Private Exchange Notes, if any,
and the Guarantees;
(b) Indebtedness incurred pursuant to the Senior Credit
Facility in an aggregate principal amount at any time outstanding not
to exceed $60.0 million reduced by any required permanent repayments
(which are accompanied by a corresponding permanent commitment
reduction) thereunder (it being recognized that a reduction in the
borrowing base in and of itself shall not be deemed a required
permanent repayment);
(c) Interest Swap Obligations of the Company or a Restricted
Subsidiary covering Indebtedness of the Company or any of its
Restricted Subsidiaries; provided, however, that such Interest Swap
Obligations are entered into to protect the Company and its Restricted
Subsidiaries from fluctuations in interest rates on Indebtedness
incurred in accordance with the Indenture to the extent the notional
principal amount of such Interest Swap Obligations does not exceed the
principal amount of the Indebtedness to which such Interest Swap
Obligation relates;
(d) Indebtedness of a Restricted Subsidiary to the Company or
to a Wholly Owned Restricted Subsidiary for so long as such
Indebtedness is held by the Company or a Wholly Owned Restricted
Subsidiary, in each case subject to no Lien held by a Person other than
the Company or a Wholly Owned Restricted Subsidiary; provided, however,
that if as of any date any Person other than the Company or a Wholly
Owned Restricted Subsidiary owns or holds any such Indebtedness or
holds a Lien in respect of such Indebtedness, such date shall be deemed
the incurrence of Indebtedness not constituting Permitted Indebtedness
by the issuer of such Indebtedness;
(e) Indebtedness of the Company to a Wholly Owned Restricted
Subsidiary for so long as such Indebtedness is held by a Wholly Owned
Restricted Subsidiary, in each case subject to no Lien; provided,
however, that (i) any Indebtedness of the Company to any Wholly Owned
Restricted Subsidiary that is not a Subsidiary Guarantor is unsecured
and subordinated, pursuant to a written agreement, to the Company's
obligations under the Indenture and the Notes and (ii) if as of any
date any Person other than a Wholly Owned Restricted Subsidiary owns or
holds any such Indebtedness or holds a Lien in respect of such
Indebtedness, such date shall be deemed the incurrence of Indebtedness
not constituting Permitted Indebtedness by the Company;
(f) Indebtedness arising from the honoring by a bank or other
financial institution of a check, draft or similar instrument
inadvertently (except in the case of daylight overdrafts) drawn against
insufficient funds in the ordinary course of business; provided,
however, that such Indebtedness is extinguished within two Business
Days of incurrence;
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(g) Indebtedness of the Company or any of its Restricted
Subsidiaries represented by letters of credit for the account of the
Company or such Restricted Subsidiary, as the case may be, in order to
provide security for workers' compensation claims, payment obligations
in connection with self-insurance, bid, performance on surety bonds or
completion guarantees or similar requirements in the ordinary course of
business;
(h) Refinancing Indebtedness;
(i) Capitalized Lease Obligations and Purchase Money
Indebtedness of the Company or any of its Restricted Subsidiaries not
to exceed $5 million at any one time outstanding;
(j) Obligations arising in connection with Crude Oil and
Natural Gas Hedge Agreements of the Company or a Restricted Subsidiary;
(k) Indebtedness under Currency Agreements; provided, however,
that in the case of Currency Agreements which relate to Indebtedness,
such Currency Agreements do not increase the Indebtedness of the
Company and its Restricted Subsidiaries outstanding other than as a
result of fluctuations in foreign currency exchange rates or by reason
of fees, indemnities and compensation payable thereunder;
(l) additional Indebtedness of the Company or any of its
Restricted Subsidiaries in an aggregate principal amount at any time
outstanding not to exceed the greater of (i) $10.0 million or (ii) 5.0%
of Adjusted Consolidated Net Tangible Assets of the Company; and
(m) Indebtedness owed by the Company in connection with its
guaranty of the obligations of Hunter Butcher International Limited
Liability Company to Wells Fargo HSBC Trade Bank N.A., provided that
the amount guaranteed by the Company does not exceed $3.0 million.
"Permitted Industry Investments" means (i) capital expenditures,
including, without limitation, acquisitions of Company Properties and interests
therein; (ii) (a) entry into operating agreements, joint ventures, working
interests, royalty interests, mineral leases, unitization agreements, pooling
arrangements or other similar or customary agreements, transactions, properties,
interests or arrangements, and Investments and expenditures in connection
therewith or pursuant thereto, in each case made or entered into in the ordinary
course of the oil and natural gas business, and (b) exchanges of Company
Properties for other Company Properties of at least equivalent value as
determined in good faith by the Board of Directors of the Company; and (iii)
Investments of operating funds on behalf of co-owners of Crude Oil and Natural
Gas Properties of the Company or the Subsidiaries pursuant to joint operating
agreements.
"Permitted Investments" means (a) Investments by the Company or any
Restricted Subsidiary in any Person that is or will become immediately after
such Investment a Restricted Subsidiary or that will merge or consolidate into
the Company or a Restricted Subsidiary that is not subject to any Payment
Restriction; (b) Investments in the Company by any Restricted Subsidiary;
provided, however, that any Indebtedness evidencing any such Investment held by
a Restricted Subsidiary that is not a Subsidiary Guarantor is unsecured and
subordinated, pursuant to a written agreement, to the Company's obligations
under the Notes and the Indenture; (c) Investments in cash and Cash Equivalents;
(d) Investments made by the Company or its Restricted Subsidiaries as a result
of consideration received in connection with an Asset Sale made in compliance
with "-Certain Covenants-Limitation on Asset Sales" above; (e) Permitted
Industry Investments; and (f) additional Investments in Unrestricted
Subsidiaries in an aggregate amount not to exceed $5 million at any one time.
"Permitted Junior Securities" means any securities of the Company or
any other Person that are (i) equity securities without special covenants or
(ii) subordinated in right of payment to all Senior Indebtedness that may at the
time be outstanding, to substantially the same extent as, or to a greater extent
than, the Notes are subordinated as provided in the Indenture, in any event
pursuant to a court order so providing and as to which (a) the rate of interest
on such securities shall not exceed the effective rate of interest on the Notes
on the date of the Indenture, (b) such
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securities shall not be entitled to the benefits of covenants or defaults
materially more beneficial to the holders of such securities than those in
effect with respect to the Notes on the date of the Indenture and (c) such
securities shall not provide for amortization (including sinking fund and
mandatory prepayment provisions) commencing prior to the date six months
following the final scheduled maturity date of the Senior Indebtedness (as
modified by the plan of reorganization of readjustment pursuant to which such
securities are issued).
"Permitted Liens" means each of the following types of Liens:
(a) Liens existing as of the Issue Date to the extent and in
the manner such Liens are in effect on the Issue Date (and any
extensions, replacements or renewals thereof covering property or
assets secured by such Liens on the Issue Date);
(b) Liens securing Indebtedness outstanding under the
Senior Credit Facility;
(c) Liens securing the Notes and the Guarantees;
(d) Liens of the Company or a Restricted Subsidiary
on assets of any Restricted Subsidiary;
(e) Liens securing Refinancing Indebtedness which is incurred
to Refinance any Indebtedness which has been secured by a Lien
permitted under the Indenture and which has been incurred in accordance
with the provisions of the Indenture; provided, however, that such
Liens (x) are no less favorable to the Holders and are not more
favorable to the lienholders with respect to such Liens than the Liens
in respect of the Indebtedness being Refinanced and (y) do not extend
to or cover any property or assets of the Company or any of its
Restricted Subsidiaries not securing the Indebtedness so Refinanced;
(f) Liens for taxes, assessments or governmental charges or
claims either (i) not delinquent or (ii) contested in good faith by
appropriate proceedings and as to which the Company or a Restricted
Subsidiary, as the case may be, shall have set aside on its books such
reserves as may be required pursuant to GAAP;
(g) statutory and contractual Liens of landlords to secure
rent arising in the ordinary course of business to the extent such
Liens relate only to the tangible property of the lessee which is
located on such property and Liens of carriers, warehousemen,
mechanics, suppliers, materialmen, repairmen and other Liens imposed by
law incurred in the ordinary course of business for sums not yet
delinquent or being contested in good faith, if such reserve or other
appropriate provision, if any, as shall be required by GAAP shall have
been made in respect thereof;
(h) Liens incurred or deposits made in the ordinary course of
business (i) in connection with workers' compensation, unemployment
insurance and other types of social security, including any Lien
securing letters of credit issued in the ordinary course of business
consistent with past practice in connection therewith, or (ii) to
secure the performance of tenders, statutory obligations, surety and
appeal bonds, bids, leases, government contracts, performance and
return-of-money bonds and other similar obligations (exclusive of
obligations for the payment of borrowed money);
(i) judgment and attachment Liens not giving rise to an Event
of Default;
(j) easements, rights-of-way, zoning restrictions, restrictive
covenants, minor imperfections in title and other similar charges or
encumbrances in respect of real property not interfering in any
material respect with the ordinary conduct of the business of the
Company or any of its Restricted Subsidiaries;
(k) any interest or title of a lessor under any Capitalized
Lease Obligation; provided that such Liens do not extend to any
property or assets which are not leased property subject to such
Capitalized Lease Obligation;
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(l) Liens securing Purchase Money Indebtedness of the Company
or any Restricted Subsidiary; provided, however, that (i) the Purchase
Money Indebtedness shall not be secured by any property or assets of
the Company or any Restricted Subsidiary other than the property and
assets so acquired or constructed (except for proceeds, improvements,
rents and similar items relating to the property or assets so acquired)
and (ii) the Lien securing such Indebtedness shall be created within 90
days of such acquisition or construction;
(m) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other
property relating to such letters of credit and products and proceeds
thereof;
(n) Liens encumbering deposits made to secure obligations
arising from statutory, regulatory, contractual, or warranty
requirements of the Company or any of its Restricted Subsidiaries,
including rights of offset and set-off;
(o) Liens securing Interest Swap Obligations which Interest
Swap Obligations relate to Indebtedness that is otherwise permitted
under the Indenture and Liens securing Crude Oil and Natural Gas Hedge
Agreements;
(p) Liens securing Acquired Indebtedness incurred in
accordance with "--Certain Covenants-Limitation on Incurrence of
Additional Indebtedness" above; provided, however, that (i) such Liens
secured such Acquired Indebtedness at the time of and prior to the
incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary and were not granted in connection with, or in anticipation
of, the incurrence of such Acquired Indebtedness by the Company or a
Restricted Subsidiary and (ii) such Liens do not extend to or cover any
property or assets of the Company or of any of its Restricted
Subsidiaries other than the property or assets that secured the
Acquired Indebtedness prior to the time such Indebtedness became
Acquired Indebtedness of the Company or a Restricted Subsidiary (except
for proceeds, improvements, rents and similar items relating to the
property or assets so secured) and are no more favorable to the
lienholders than those securing the Acquired Indebtedness prior to the
incurrence of such Acquired Indebtedness by the Company or a Restricted
Subsidiary;
(q) Liens on, or related to, properties and assets of the
Company and its Subsidiaries to secure all or a part of the costs
incurred in the ordinary course of business of exploration, drilling,
development, production, processing, gas gathering, transportation,
marketing or storage, or operation thereof;
(r) Liens on pipeline or pipeline facilities, Hydrocarbons or
properties and assets of the Company and its Subsidiaries which arise
out of operation of law;
(s) royalties, overriding royalties, revenue interests, net
revenue interests, net profit interests, reversionary interests,
production payments, production sales contracts, preferential rights of
purchase, operating agreements, working interests and other similar
interests, properties, arrangements and agreements, all as ordinarily
exist with respect to Properties and assets of the Company and its
Subsidiaries or otherwise as are customary in the oil and gas business;
(t) with respect to any Properties and assets of the Company
and its Subsidiaries, Liens arising under, or in connection with, or
related to, farm-out, farm-in, joint operation, area of mutual interest
agreements and/or other similar or customary arrangements, agreements
or interests that the Company or any Subsidiary determines in good
faith to be necessary for the economic development of such Property;
(u) any (a) interest or title of a lessor or sublessor under
any lease, (b) restriction or encumbrance that the interest or title of
such lessor or sublessor may be subject to (including, without
limitation, ground leases or other prior leases of the demised
premises, mortgages, mechanics' liens, tax liens, and easements), or
(c) subordination of the interest of the lessee or sublessee under such
lease to any restrictions or encumbrance referred to in the preceding
clause (b);
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(v) Liens in favor of collecting or payor banks having a right
of setoff, revocation, refund or chargeback with respect to money or
instruments of the Company or any Restricted Subsidiary on deposit with
or in possession of such bank; and
(w) Liens incurred in the ordinary course of business and
not exceeding $2.0 million in the aggregate at any one time.
"Person" means an individual, partnership, corporation, unincorporated
organization, limited liability company, trust, estate, or joint venture, or a
governmental agency or political subdivision thereof.
"Preferred Stock" of any Person means any Capital Stock of such Person
that has preferential rights to any other Capital Stock of such Person with
respect to dividends or redemptions or upon liquidation.
"Property" means, with respect to any Person, any interests of such
Person in any kind of property or asset, whether real, personal or mixed, or
tangible or intangible, including, without limitation, Capital Stock,
partnership interests and other equity or ownership interests in any other
Person.
"Private Exchange Notes" means senior notes of the Company, guaranteed
by the Subsidiary Guarantors, issued in exchange for the Notes and identical in
all material respects to the Exchange Notes, except for the placement of a
restrictive legend on such Private Exchange Notes.
"Purchase Money Indebtedness" means Indebtedness the net proceeds of
which are used to finance the cost (including the cost of construction) of
property or assets acquired in the normal course of business by the Person
incurring such Indebtedness.
"Qualified Capital Stock" means any Capital Stock that is not
Disqualified Capital Stock.
"Reference Date" has the meaning set forth under "- Certain Covenants -
Limitation on Restricted Payments."
"Refinance" means, in respect of any security or Indebtedness, to
refinance, extend, renew, refund, repay, prepay, redeem, defease or retire, or
to issue a security or Indebtedness in exchange or replacement for, such
security or Indebtedness in whole or in part. "Refinanced" and "Refinancing"
shall have correlative meanings.
"Refinancing Indebtedness" means any Refinancing by the Company or any
Restricted Subsidiary of the Company of Indebtedness incurred in accordance with
"- Certain Covenants - Limitation on Incurrence of Additional Indebtedness"
above (other than pursuant to clause (b), (c), (d), (e), (f), (g), (i), (j),
(k), (l) or (m) of the definition of Permitted Indebtedness), in each case that
does not (i) result in an increase in the aggregate principal amount of
Indebtedness of such Person as of the date of such proposed Refinancing (plus
the amount of any premium required to be paid under the terms of the instrument
governing such Indebtedness and plus the amount of reasonable expenses incurred
by the Company and its Restricted Subsidiaries in connection with such
Refinancing) or (ii) create Indebtedness with (x) a Weighted Average Life to
Maturity that is less than the Weighted Average Life to Maturity of the
Indebtedness being Refinanced or (y) a final maturity earlier than the final
maturity of the Indebtedness being Refinanced; provided, however, that (1) if
such Indebtedness being Refinanced is Indebtedness of the Company or a
Subsidiary Guarantor, then such Refinancing Indebtedness shall be Indebtedness
solely of the Company and/or such Subsidiary Guarantor and (2) if such
Indebtedness being Refinanced is subordinate or junior to the Notes or a
Guarantee, then such Refinancing Indebtedness shall be subordinate to the Notes
or such Guarantee, as the case may be, at least to the same extent and in the
same manner as the Indebtedness being Refinanced.
"Registration Rights Agreement" means the Registration Rights Agreement
dated as of the Issue Date among the Company, the Subsidiary Guarantors and the
Initial Purchasers.
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"Related Person" of any Person means any other Person directly or
indirectly owning 10% or more of the outstanding voting Common Stock of such
Person (or, in the case of a Person that is not a corporation, 10% or more of
the equity interest in such Person).
"Replacement Assets" has the meaning set forth under "-Certain
Covenants - Limitation on Asset Sales."
"Restricted Payment" has the meaning set forth under "- Certain
Covenants - Limitation on Restricted Payments."
"Restricted Subsidiary" means any Subsidiary of the Company that has
not been designated by the Board of Directors of the Company, by a Board
Resolution delivered to the Trustee, as an Unrestricted Subsidiary pursuant to
and in compliance with "- Certain Covenants - Limitation on Restricted and
Unrestricted Subsidiaries" above. Any such designation may be revoked by a Board
Resolution of the Company delivered to the Trustee, subject to the provisions of
such covenant.
"Sale and Leaseback Transaction" means any direct or indirect
arrangement with any Person or to which any such Person is a party, providing
for the leasing to the Company or a Restricted Subsidiary of any Property,
whether owned by the Company or any Restricted Subsidiary at the Issue Date or
later acquired which has been or is to be sold or transferred by the Company or
such Restricted Subsidiary to such Person or to any other Person from whom funds
have been or are to be advanced by such Person on the security of such Property.
"Senior Credit Facility" means the Amended and Restated Credit
Agreement dated as of April 30, 1997, by and among the Company, Bankers Trust
Company, as Administrative Agent and as Issuing Bank, First Union National Bank
of North Carolina, as Syndication Agent and Collateral Agent, Banque Paribas, as
Documentation Agent, and each of the Lenders named therein, or any successor or
replacement agreement and whether by the same or any other agent, lender or
group of lenders, together with the related documents thereto (including,
without limitation, any guarantee agreements and security documents), in each
case as such agreements may be amended (including any amendment and restatement
thereof), supplemented or otherwise modified from time to time, including any
agreements extending the maturity of, refinancing, replacing, increasing or
otherwise restructuring all or any portion of the Indebtedness under such
agreements.
"Significant Subsidiary" shall have the meaning set forth in Rule
1.02(w) of Regulation S-X under the Securities Act.
"Subsidiary", with respect to any Person, means (a) any corporation of
which the outstanding Capital Stock having at least a majority of the votes
entitled to be cast in the election of directors under ordinary circumstances
shall at the time be owned, directly or indirectly, by such Person or (b) any
other Person of which at least a majority of the voting interests under ordinary
circumstances is at the time, directly or indirectly, owned by such Person.
"Subsidiary Guarantor" means (a) each of the Company's Restricted
Subsidiaries as of the Issue Date and (b) each of the Company's Restricted
Subsidiaries that in the future executes a supplemental indenture in which such
Restricted Subsidiary agrees to be bound by the terms of the Indenture as a
Subsidiary Guarantor; provided, however, that any Person constituting a
Subsidiary Guarantor as described above shall cease to constitute a Subsidiary
Guarantor when its Guarantee is released in accordance with the terms of the
Indenture.
"Surviving Entity" has the meaning set forth under "- Certain Covenants
- Merger, Consolidation and Sale of Assets."
"TCW Preferred Stock" means the one million shares of the Company's
1996 Series A Convertible Preferred Stock, $0.001 par value per share and a
$10.00 stated value per share with a quarterly dividend rate of $0.21875 per
share.
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"Unrestricted Subsidiary" means any Subsidiary of the Company
designated as such pursuant to and in compliance with " - Certain Covenants -
Limitation on Restricted and Unrestricted Subsidiaries" above; provided,
however, the Unrestricted Subsidiaries shall initially include Hunter Butcher
International Limited Liability Company. Any such designation may be revoked by
a Board Resolution of the Company delivered to the Trustee, subject to the
provisions of such covenant.
"Weighted Average Life to Maturity" means, when applied to any
Indebtedness at any date, the number of years obtained by dividing (a) the then
outstanding aggregate principal amount of such Indebtedness into (b) the sum of
the total of the products obtained by multiplying (i) the amount of each then
remaining installment, sinking fund, serial maturity or other required payment
of principal, including payment at final maturity, in respect thereof, by (ii)
the number of years (calculated to the nearest one-twelfth) which will elapse
between such date and the making of such payment.
"Wholly Owned Restricted Subsidiary" means any Restricted Subsidiary of
which all the outstanding voting securities normally entitled to vote in the
election of directors are owned by the Company or another Wholly Owned
Restricted Subsidiary.
DESCRIPTION OF THE OUTSTANDING NOTES
The terms of the Outstanding Notes are identical in all material respects
to the Exchange Notes, except that the Outstanding Notes have not been
registered under the Securities Act, are subject to certain restrictions on
transfer and are entitled to certain registration rights under the Registration
Agreement (which rights terminate upon the consummation of the Exchange Offer,
except under limited circumstances) (see "Description of the Exchange
Notes-Registration Agreement"). In addition, the Outstanding Notes provide that
if the Company or the Subsidiary Guarantors fail to comply with certain
provisions concerning registration rights, primarily the timing of the Exchange
Offer, Additional Interest will accrue and be payable until such time as such
registration defaults have been cured. The Exchange Notes generally are not
entitled to any such Additional Interest. The Outstanding Notes and the Exchange
Notes will constitute a single series of debt securities under the Indenture.
See "Description of the Exchange Notes."
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following summary describes certain United States federal income tax
consequences generally applicable to a holder that exchanges Outstanding Notes
for Exchange Notes pursuant to the Exchange Offer, but does not purport to be a
complete analysis of all the potential tax considerations relating thereto. This
summary is based on the Internal Revenue Code of 1986, as amended (the "Code"),
existing, temporary and proposed Treasury Regulations, Internal Revenue Service
("IRS") rulings and judicial decisions now in effect, all of which are subject
to change (possibly with retroactive effect) or different interpretations. This
summary deals (i) only with holders ("Holders") that hold Outstanding Notes and
will hold Exchange Notes received therefor as "capital assets" (within the
meaning of Section 1221 of the Code) and (ii) primarily with Holders that are
citizens or residents of the United States, or any state thereof, or a
corporation or other entity created or organized under the laws of the United
States, or any political subdivision thereof, an estate the income of which is
subject to United States federal income tax regardless of source or that is
otherwise subject to United States federal income tax on a net income basis in
respect of the Notes, or a trust whose administration is subject to the primary
supervision of a United States court and which has one or more United States
fiduciaries who have the authority to control all substantial decisions of the
trust ("U.S. Holders"). This summary does not address tax considerations arising
under the laws of any foreign, state or local jurisdiction or applicable to
investors that may be subject to special tax rules, such as banks, tax-exempt
organizations, insurance companies, dealers in securities or currencies or
persons that will hold Outstanding Notes and Exchange Notes as a position in a
hedging transaction, "straddle" or "conversion transaction" or other integrated
investment transaction for tax purposes. The Company has not sought any ruling
from the IRS with respect to the statements made and the conclusions reached in
the following summary, and there can be no assurance that the IRS will agree
with such statements and conclusions.
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INVESTORS CONSIDERING THE EXCHANGE OF OUTSTANDING NOTES FOR EXCHANGE
NOTES PURSUANT TO THE EXCHANGE OFFER SHOULD CONSULT THEIR OWN TAX ADVISERS
REGARDING THE FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THEIR
PARTICIPATION IN THE EXCHANGE OFFER AND THEIR OWNERSHIP AND DISPOSITION OF THE
EXCHANGE NOTES, AND THE EFFECT THAT THEIR PARTICULAR CIRCUMSTANCES MAY HAVE ON
SUCH TAX CONSEQUENCES.
The Exchange Offer
Pursuant to recently issued Treasury Regulations, the exchange of
Outstanding Notes for Exchange Notes pursuant to the Exchange Offer should not
constitute a significant modification of the terms of the Outstanding Notes and,
accordingly, such exchange should not be treated as a taxable event for federal
income tax purposes. Therefore, such exchange should have no federal income tax
consequences to U.S. Holders of Outstanding Notes, and each U.S. Holder of
Exchange Notes will continue to be required to include interest on the Exchange
Notes in its gross income in accordance with its method of accounting for
federal income tax purposes.
Payment of Interest and Additional Interest
Interest on an Outstanding Note or Exchange Note generally will be
includable in the income of a U.S. Holder as ordinary income at the time such
interest is received or accrued, in accordance with such U.S. Holder's method of
accounting for United States federal income tax purposes. The Outstanding Notes
were treated by the Company as issued without original issue discount ("OID")
within the meaning of the Code. Had the Company failed to effect the Exchange
Offer on a timely basis, Additional Interest would have accrued on the
Outstanding Notes. Because the Company determined that, when the Outstanding
Notes were issued, there was only a remote possibility that events would occur
which would cause the Additional Interest to accrue on the Outstanding Notes,
the Company determined that the Additional Interest should not be taken into
account in concluding that the Outstanding Notes were issued without OID.
Sale, Exchange or Redemption of the Notes
Subject to the discussion of the Exchange Offer above, upon the sale,
exchange or redemption of an Outstanding Note or Exchange Note, a U.S. Holder
generally will recognize capital gain or loss equal to the difference between
(i) the amount of cash proceeds and the fair market value of any property
received on the sale, exchange or redemption (except to the extent such amount
is attributable to accrued interest income or market discount not previously
included in income which is taxable as ordinary income) and (ii) such U.S.
Holder's adjusted tax basis in the Outstanding Note or Exchange Note. A U.S.
Holder's adjusted tax basis in an Outstanding Note or Exchange Note generally
will equal the cost of the Outstanding Note or Exchange Note to such U.S. Holder
increased by the amount of interest income on the Outstanding Note or Exchange
Note previously taken into income by the U.S. Holder but not yet received by the
U.S. Holder and by the amount of any market discount previously taken into
income by the U.S. Holder, and reduced by the amount of any bond premium
amortized by the U.S. Holder with respect to the Outstanding Notes or Exchange
Notes and by any principal payments on the Outstanding Notes or Exchange Notes.
Except to the extent that an intention to call the Outstanding Notes or Exchange
Notes prior to their maturity existed at the time of their original issue as an
agreement or understanding between the Company and the original holders of a
substantial amount of the Outstanding Notes or Exchange Notes (which is
unlikely), gain or loss realized by a U.S. Holder on the sale, exchange,
redemption or other disposition of an Outstanding Note or an Exchange Note
generally will be long-term capital gain or loss if the U.S. Holder's holding
period in the Outstanding Note or Exchange Note is more than one year at the
time of disposition (subject to the market discount rules discussed below).
Amortizable Bond Premium
Generally, the excess of a U.S. Holder's tax basis in an Outstanding
Note or Exchange Note over the amount payable at maturity is bond premium that
the U.S. Holder may elect to amortize under Section 171 of the Code on a yield
to maturity basis over the period from the U.S. Holder's acquisition date to the
maturity date of the Outstanding Note or Exchange Note. The amortizable bond
premium is treated as an offset to interest income on the Outstanding Note or
Exchange Note for United States federal income tax purposes. A U.S. Holder who
elects to
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amortize bond premium must reduce its tax basis in the Outstanding Note or
Exchange Note by the deductions allowable for amortizable bond premium. An
election to amortize bond premium is revocable only with the consent of the IRS
and applies to all obligations owned or acquired by the U.S. Holder on or after
the first day of the taxable year to which the election applies.
An Outstanding Note or Exchange Note may be called or submitted for
redemption at a premium prior to maturity. See "Description of the Exchange
Notes--Optional Redemption." An earlier call date is treated as the maturity
date of the Outstanding Note or Exchange Note and the amount of bond premium is
determined by treating the amount payable on such call date as the amount
payable at maturity, if such a calculation produces a smaller bond premium than
the method described in the preceding paragraph. If a U.S. Holder is required to
amortize and deduct the bond premium by reference to a certain call date, the
Outstanding Note or Exchange Note will be treated as maturing on that date for
the amount then payable. If the Outstanding Note or Exchange Note is not
redeemed on that call date, the Outstanding Note or Exchange Note will be
treated as reissued on that date for the amount of the call price on that date.
If an Outstanding Note or Exchange Note purchased at a premium is redeemed prior
to its maturity, a U.S. Holder who has elected to deduct the bond premium may be
permitted to deduct any remaining unamortized bond premium as an ordinary loss
in the taxable year of the redemption.
Market Discount
The resale of Outstanding Notes or Exchange Notes may be affected by
the market discount provisions of the Code. A U.S. Holder has market discount if
an Outstanding Note or Exchange Note is purchased (other than at original issue)
at an amount below the stated redemption price at maturity of the Outstanding
Note or Exchange Note. A de minimis amount of market discount is ignored. A U.S.
Holder of an Outstanding Note or Exchange Note with market discount must either
elect to include market discount in income as it accrues or treat a portion of
the gain recognized on the disposition or retirement of the Outstanding Note or
Exchange Note as ordinary income. The amount of gain treated as ordinary income
would equal the lesser of (i) the gain recognized (or the appreciation, in the
case of a nontaxable transaction such as a gift) or (ii) the portion of the
market discount that accrued on a ratable basis (or, if elected, on a constant
interest rate basis) while the Outstanding Note or Exchange Note was held by the
U.S. Holder.
A U.S. Holder who acquires an Outstanding Note or Exchange Note at a
market discount also may be required to defer a portion of any interest expense
that otherwise may be deductible on any indebtedness incurred or maintained to
purchase or carry such Outstanding Note or Exchange Note until the U.S. Holder
disposes of the Outstanding Note or Exchange Note in a taxable transaction.
Moreover, to the extent of any accrued market discount on such Outstanding Note
or Exchange Note, any partial principal payment with respect to an Outstanding
Note or Exchange Note will be includable as ordinary income upon receipt, as
will the fair market value of the Outstanding Note or Exchange Note on certain
otherwise non-taxable transfers (such as gifts).
A U.S. Holder of Outstanding Notes or Exchange Notes acquired at a
market discount may elect for United States federal income tax purposes to
include market discount in gross income as the discount accrues, either on a
straight-line basis or on a constant interest rate basis. This current inclusion
election, once made, applies to all market discount obligations acquired by the
U.S. Holder on or after the first day of the first taxable year to which the
election applies, and may not be revoked without the consent of the IRS. If a
U.S. Holder of Outstanding Notes or Exchange Notes makes such an election, the
foregoing rules with respect to the recognition of ordinary income on sales and
other dispositions of such debt instruments and on any partial principal payment
with respect to the Outstanding Notes or Exchange Notes, and the deferral of
interest deductions on indebtedness incurred or maintained to purchase or carry
such debt instruments, would not apply.
Non-U.S. Holders
Under present United States federal income and estate tax law and
subject to the discussion of backup withholding below:
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(a) Payments of interest on the Outstanding Notes or the
Exchange Notes by the Company or any agent of the Company to any holder
of an Outstanding Note or an Exchange Note that is not a U.S. Holder (a
"Non-U.S. Holder") will not be subject to United States federal
withholding tax, provided that such interest income is not effectively
connected with a United States trade or business of the Non-U.S. Holder
and provided that (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total combined voting power of
all classes of stock of the Company entitled to vote; (ii) the Non-U.S.
Holder is not a controlled foreign corporation that is related to the
Company through stock ownership; (iii) either (A) the beneficial owner
of the Outstanding Notes or the Exchange Notes certifies (by submitting
to the Company or its agent a Form W-8 (or a suitable substitute form))
in compliance with applicable laws and regulations to the Company or
its agent, under penalties of perjury, that it is not a "United States
person" as defined in the Code and provides its name and address or (B)
a securities clearing organization, bank or other financial institution
that holds customers' securities in the ordinary course of its trade or
business (a "financial institution"), that holds the Outstanding Notes
on behalf of the beneficial owner, and that provides a statement to the
Company or its agent in which it certifies that a Form W-8 (or a
suitable substitute form) has been received from the beneficial owner
by it or by a financial institution between it and the beneficial owner
and furnishes the payor with a copy thereof; and (iv) the Non-U.S.
Holder is not a bank which acquired the Outstanding Notes or Exchange
Notes in consideration for an extension of credit made pursuant to a
loan agreement entered into in the ordinary course of business. A Non
-U.S. Holder that is not exempt from tax under these rules generally
will be subject to United States federal income tax withholding at
a rate of 30% unless the interest is effectively connected with the
conduct of a United States trade or business, in which case the
interest will be subject to the United States federal income tax on
net income that applies to United States persons generally. Non-
U.S. Holders should consult applicable income tax treaties, which
may include different rules.
(b) A Non-U.S. Holder generally will not be subject to United
States federal withholding tax on gain realized on the sale, exchange
or redemption of an Outstanding Note or an Exchange Note unless (i) the
gain is effectively connected with a United States trade or business of
the Non-U.S. Holder, (ii) in the case of a Non-U.S. Holder who is an
individual, such Holder is present in the United States for a period or
periods aggregating 183 days or more during the taxable year of the
disposition or (iii) the Holder is subject to tax pursuant to the
provisions of the Code applicable to certain United States expatriates.
If the Company is a "United States real property holding corporation"
within the meaning of the Code, a Non-U.S. Holder may be subject to
United States federal income tax with respect to gain realized on the
disposition, which tax may be required to be withheld. The amount
withheld in accordance with these rules will be creditable against the
Non-U.S. Holder's United States federal income tax liability and may
entitle the Non-U.S. Holder to a refund upon furnishing the required
information to the IRS. Non-U.S. Holders should consult applicable
income tax treaties, which may provide different rules.
(c) An Outstanding Note or an Exchange Note held by an
individual who at the time of death is not a citizen or resident of the
United States will not be subject to United States federal estate tax
as a result of such individual's death if, at the time of such death,
the individual did not actually or constructively own 10% or more of
the total combined voting power of all classes of stock of the Company
entitled to vote and the income on the Outstanding Notes or the
Exchange Notes would not have been effectively connected with the
conduct of a trade or business by the individual in the United States
had such income been received by the decedent at the time of his death.
<PAGE>
Recently proposed Treasury regulations that would be effective January
1, 1998, provide for several alternative methods for Non-U.S. Holders or
"qualified intermediaries" who hold the Outstanding Notes or the Exchange Notes
on behalf of Non-U.S. Holders to obtain an exemption from withholding on
interest payments. The proposed Treasury regulations also would require, in the
case of Outstanding Notes or Exchange Notes held by a foreign partnership, that
(i) the certification described in clause (a) (iii) of the preceding paragraph
be provided by the partners rather than by the foreign partnership and (ii) the
partnership provide certain information to the payor, including a United States
taxpayer identification number. A look-through rule would apply in the case of
tiered partnerships. There can be no assurance as to whether the proposed
Treasury regulations will be adopted or as to the provisions that they will
include if and when adopted in temporary or final form.
Except to the extent that an applicable treaty otherwise provides, a
Non-U.S. Holder generally will be taxed in the same manner as a U.S. Holder with
respect to interest if the interest income is effectively connected with a
United States trade or business of the Non-U.S. Holder. Effectively connected
interest received by a corporate Non-U.S. Holder may also, under certain
circumstances, be subject to an additional "branch profits tax" at a 30% rate
(or, if applicable, a lower treaty rate). Even through such effectively
connected interest is subject to income tax, and may be subject to the branch
profits tax, it is not subject to withholding tax if the Non-U.S. Holder
delivers a properly executed IRS Form 4224 to the payor.
Information Reporting and Backup Withholding Tax
In general, information reporting requirements may apply to principal
and interest payments on an Outstanding Note or Exchange Note and to payments of
the proceeds of the sale of an Outstanding Note or Exchange Note. A 31% backup
withholding tax may apply to such payments unless the Holder (i) is a
corporation, Non-U.S. Holder or comes within certain other exempt categories
and, when required, demonstrates its exemption, or (ii) provides a correct
taxpayer identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A Holder of an Outstanding Note or Exchange Note who does not
provide the Company with the Holder's correct taxpayer identification number may
be subject to penalties imposed by the IRS. Any amounts withheld under the
backup withholding rules from a payment to a Holder will be allowed as a credit
against such Holder's United States federal income tax, provided that the
required information is furnished to the IRS.
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BOOK-ENTRY; DELIVERY AND FORM
The Outstanding Notes and the related guarantees are and the Exchange Notes
(and related guarantees) initially will be represented by one or more permanent
global certificates in definitive, fully registered form (the "Global Notes").
The Global Notes will be deposited on the Issue Date with, or on behalf of, The
Depository Trust Company, New York, New York (the "Depository") and registered
in the name of a nominee of the Depository.
The Global Notes. The Company expects that pursuant to procedures
established by the Depository (i) upon the issuance of the Global Notes, the
Depository or its custodian will credit, on its internal system, the principal
amount of Notes of the individual beneficial interests represented by such
Global Notes to the respective accounts of persons who have accounts with such
depositary and (ii) ownership of beneficial interests in the Global Notes will
be shown on, and the transfer of such ownership will be effected only through,
records maintained by the Depository or its nominee (with respect to interests
of participants) and the records of participants (with respect to interests of
persons other than participants). Such accounts initially will be designated by
or on behalf of the Initial Purchasers and ownership of beneficial interests in
the Global Notes will be limited to persons who have accounts with the
Depository ("participants") or persons who hold interests through participants.
QIBs and institutional Accredited Investors who are not QIBs may hold their
interests in the Global Notes directly through the Depository if they are
participants in such system, or indirectly through organizations which are
participants in such system.
So long as the Depository, or its nominee, is the registered owner or
holder of the Notes, the Depository or such nominee, as the case may be, will be
considered the sole owner or holder of the Notes represented by such Global
Notes for all purposes under the Indenture. No beneficial owner of an interest
in the Global Notes will be able to transfer that interest except in accordance
with the Depository's procedures, in addition to those provided for under the
Indenture with respect to the Notes.
Payments of the principal of, premium (if any), interest (including
Additional Interest) on, the Global Notes will be made to the Depository or its
nominee, as the case may be, as the registered owner thereof. None of the
Company, the Trustee or any Paying Agent will have any responsibility or
liability for any aspect of the records relating to or payments made on account
of beneficial ownership interests in the Global Notes or for maintaining,
supervising or reviewing any records relating to such beneficial ownership
interest.
The Company expects that the Depository or its nominee, upon receipt of any
payment of principal, premium, if any, interest (including Additional Interest)
on the Global Notes, will credit participants' accounts with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of the Global Notes as shown on the records of the Depository or its nominee.
The Company also expects that payments by participants to owners of beneficial
interests in the Global Notes held through such participants will be governed by
standing instructions and customary practice, as is now the case with securities
held for the accounts of customers registered in the names of nominees for such
customers. Such payments will be the responsibility of such participants.
Transfers between participants in the Depository will be effected in the
ordinary way through the Depository's same-day funds system in accordance with
the Depository rules and will be settled in same day funds. If a holder requires
physical delivery of
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a Certificated Security for any reason, including to sell Notes to persons
in states which require physical delivery of the Notes, or to pledge such
securities, such holder must transfer its interest in a Global Note, in
accordance with the normal procedures of the Depository and with the procedures
set forth in the Indenture.
The Depository has advised the Company that it will take any action
permitted to be taken by a holder of Notes (including the presentation of Notes
for exchange as described below) only at the direction of one or more
participants to whose account the the Depository interests in the Global Notes
are credited and only in respect of such portion of the aggregate principal
amount of Notes as to which such participant or participants has or have given
such direction. However, if there is an Event of Default under the Indenture,
the Depository will exchange the Global Notes for Certificated Securities, which
it will distribute to its participants.
The Depository has advised the Company as follows: the Depository is a
limited purpose trust company organized under the laws of the State of New York,
a member of the Federal Reserve System, a "clearing corporation" within the
meaning of the Uniform Commercial Code and a "Clearing Agency" registered
pursuant to the provisions of Section 17A of the Securities Exchange Act of
1934, as amended (the "Exchange Act"). The Depository was created to hold
securities for its participants and facilitate the clearance and settlement of
securities transactions between participants through electronic book-entry
changes in accounts of its participants, thereby eliminating the need for
physical movement of certificates. Participants include securities brokers and
dealers, banks, trust companies and clearing corporations and certain other
organizations. Indirect access to the the Depository system is available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, either directly or
indirectly ("indirect participants").
Although the Depository has agreed to the foregoing procedures in order to
facilitate transfers of interests in the Global Notes among participants of the
Depository, it is under no obligation to perform such procedures, and such
procedures may be discontinued at any time. Neither the Company nor the Trustee
will have any responsibility for the performance by the Depository or its
participants or indirect participants of their respective obligations under the
rules and procedures governing their operations.
Certificated Securities. If (i) the Depository is at any time unwilling or
unable to continue as a depositary for the Global Note and a successor
depositary is not appointed by the Company within 90 days or (ii) an Event of
Default has occurred and is continuing and the Registrar (as defined in the
Indenture) has received a written request from the Depository to issue
certificated securities, permanent certificated securities will be issued in
exchange for the Global Notes.
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PLAN OF DISTRIBUTION
Based on interpretations of the staff of the Division of Corporation
Finance of the Commission set forth in no-action letters issued to third
parties, the Company believes that, except as described below, Exchange Notes
issued pursuant to the Exchange Offer may be offered for resale, resold and
otherwise transferred by the respective holders thereof without further
compliance with the registration and prospectus delivery requirements of the
Securities Act, provided that (i) such Exchange Notes are acquired in the
ordinary course of such holder's business and (ii) such holder is not
participating, and has no arrangement or understanding with any person to
participate, in a distribution of the Exchange Notes. A holder of Outstanding
Notes that is an "affiliate" of the Company within the meaning of Rule 405 under
the Securities Act or that is a broker-dealer that purchased Outstanding Notes
from the Company to resell pursuant to an exemption from registration under the
Securities Act (a) cannot rely on such interpretations by the staff of the
Division of Corporation Finance of the Commission, (b) will not be permitted or
entitled to tender such Outstanding Notes in the Exchange Offer and (c) must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any sale or other transfer of such Outstanding
Notes unless such sale or transfer is made pursuant to an exemption from such
requirements. In addition, any holder who tenders Outstanding Notes in the
Exchange Offer with the intention or for the purpose of participating in a
distribution of the Exchange Notes cannot rely on such interpretation by the
staff of the Commission and must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with a secondary
resale transaction. Unless an exemption from registration is otherwise
available, any such resale transaction should be covered by an effective
registration statement containing selling security holders information required
by Item 507 of Regulation S-K under the Securities Act. To date, the staff of
the Commission has taken the position that a broker-dealer that has acquired
securities in exchange for securities that were acquired by such broker-dealer
as a result of market-making activities or other trading activities may fulfill
its prospectus delivery requirements with the prospectus contained in an
exchange offer registration statement.
Each holder of Outstanding Notes who wishes to exchange its Outstanding
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations to the Company set forth in "The Exchange Offer - Acceptance for
Exchange and Issuance of Exchange Notes."
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus meeting the requirements of the Securities Act in connection with any
resale of such Exchange Notes. This Prospectus may be used by a broker-dealer in
connection with resales of Exchange Notes received in exchange for Outstanding
Notes where such Outstanding Notes were acquired as a result of market-making
activities or other trading activities. The Company has agreed that, starting on
the date the Registration Statement is declared effective and generally ending
on the close of business on the 180th day following such date, it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. See "The Exchange Offer - Resales of Exchange Notes."
-121
<PAGE>
The Company will not receive any proceeds from any sale of Exchange
Notes by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer and/or the purchasers of any such Exchange Notes. Any
broker-dealer that resells Exchange Notes that were received by it for its own
account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the Securities Act and any profit from any
such resale of Exchange Notes and any commissions or concessions received by any
such persons may be deemed to be underwriting compensation under the Securities
Act. The Letter of Transmittal states that by acknowledging that it will deliver
and by delivering a prospectus, a broker-dealer will not be deemed to admit that
it is an "underwriter" within the meaning of the Securities Act.
In general, for a period of 180 days after the date the Registration
Statement is declared effective, the Company will promptly send additional
copies of this Prospectus and any amendment or supplement to this Prospectus to
any Participating Broker-Dealer that requests such documents in the Letter of
Transmittal. The Company and the Subsidiary Guarantors has agreed to pay the
expenses incident to the Exchange Offer, other than any discounts or commissions
incurred upon the sale of the Notes. The Company and the Subsidiary Guarantors
will indemnify the holders of the Outstanding Notes and each Participating
Broker-Dealer selling Exchange Notes during a period generally not to exceed 180
days after the effective date of the Registration Statement against certain
liabilities, including liabilities under the Securities Act.
-122-
<PAGE>
LEGAL MATTERS
The validity of the Exchange Notes issued in the Exchange Offer will be
passed upon for the Company by Thompson & Knight, P.C., Dallas, Texas.
EXPERTS
The consolidated balance sheet of Magnum Hunter Resources, Inc. as of
December 31, 1996 and the related consolidated statements of operations,
stockholders' equity and cash flows for the year then ended, included elsewhere
and incorporated by reference in this Prospectus, have been audited by Deloitte
& Touche LLP, independent auditors, as stated in their report which is included
and incorporated by reference herein and have been so included in reliance upon
the report of such firm given upon their authority as experts in accounting and
auditing.
The financial statements of the Company as of December 31, 1995 and for the
year then ended have been audited by Hein + Associates LLP, independent
certified public accountants, as stated in their report which is included and
incorporated by reference herein and have been so included in reliance upon the
report of such firm given upon their authority as experts in accounting and
auditing. The change in accountants from Hein + Associates LLP to Deloitte &
Touche LLP was effective for fiscal 1996 and was not due to any disagreements
between the Company and Hein + Associates LLP.
The historical summaries of revenues and direct operating expenses of the
Permian Basin Properties for the years ended December 31, 1996, 1995 and 1994
and the Properties Acquired June 28, 1996 have been audited by Hein + Associates
LLP, independent certified public accountants, as stated in their reports, the
first of which is included and incorporated by reference herein and the second
of which is incorporated by reference herein and have been so included in
reliance upon the report of such firm given upon their authority as experts in
accounting and auditing.
The reference to the report of Ryder Scott Co., independent petroleum
consultants, contained herein estimating the Proved Reserves, future net cash
flows from such Proved Reserves and the SEC PV-10 of such estimated future net
cash flows for the Permian Basin Properties as of December 31, 1996 is made in
reliance upon the authority of such firm as an expert with respect to such
matters.
The reference to the report of Gaffney, Cline & Associates Inc.,
independent petroleum consultants, contained herein estimating the Proved
Reserves, future net cash flows from such Proved Reserves and the SEC PV-10 of
such estimated future net cash flows for the Company's properties (other than
certain west Texas properties) as of December 31, 1996 is made in reliance upon
the authority of such firm as experts with respect to such matters.
The reference to the report of Glenn Harrison Petroleum Consultants,
Inc., independent petroleum consultants, contained herein estimating the
Company's Proved Reserves, future net cash flows from such Proved Reserves and
the SEC PV-10 of such estimated future net cash flows for certain west Texas
properties as of December 31, 1996 is made in reliance upon the authority of
such firm as experts with respect to such matters.
The reference to the reports of James J. Weisman, Jr., an independent
petroleum engineer, contained herein auditing the Company's estimates of its
Proved Reserves, the estimated future net cash flows from such Proved Reserves,
and the SEC PV-10 of such estimated future net cash flows as of December 31,
1995 and estimating Hunter's Proved Reserves, the estimated net cash flows from
such Proved Reserves, and the SEC PV-10 of such
-123-
<PAGE>
future net cash flows as of December 31, 1994 is made in reliance upon the
authority of such individual as an expert with respect to such matters.
The reference to the report of Hensley Consultants, Inc., independent
petroleum consultants, contained herein estimating the Company's Proved
Reserves, the estimated future net cash flows from such Proved Reserves, and the
SEC PV-10 of such estimated future net cash flows as of December 31, 1994 is
made in reliance upon the authority of such firm as experts with respect to such
matters.
AVAILABLE INFORMATION
The Company is subject to the informational requirements of the
Exchange Act and, in accordance therewith, files reports, proxy statements and
other information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the office of the Commission at Room
1024, Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, as well
as the regional offices of the Commission at Citicorp Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661, and Seven World Trade Center, 13th
Floor, New York, New York 10048. Copies of such information can be obtained by
mail from the Public Reference Section of the Commission at Judiciary Plaza, 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. Additionally,
the Commission maintains a web site that contains reports, proxy statements and
other information regarding registrants that file electronically with the
Commission. The address of the Commission's web site is http://www.sec.gov. The
Company's Common Stock is listed on the American Stock Exchange and copies of
reports, proxy statements and other information concerning the Company also can
be inspected at the offices of the American Stock Exchange, 86 Trinity Place,
New York, New York 10006-1881.
In addition, the Company has agreed that, whether or not it is required to
do so by the rules and regulations of the Commission, for so long as any Notes
remain outstanding, it will furnish to the holders of the Notes and, to the
extent permitted by applicable law or regulation, file with the Commission (i)
all quarterly and annual financial information that would be required to be
contained in a filing with the Commission on Forms 10-Q and 10-K (or, if
permitted, Forms 10-QSB and 10-KSB) if the Company were required to file such
Forms, including for each a "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and, with respect to the annual information
only, a report thereof by the Company's independent certified public accountants
and (ii) all reports that would be required to be filed on Form 8-K if it were
required to file such reports. In addition, for so long as any of the Notes
remain outstanding, the Company has agreed to make available to any prospective
purchaser of the Notes or beneficial owner of the Notes, in connection with any
sale thereof, the information required by Rule 144A(d)(4) under the Securities
Act. Any such request should be directed to the Company at the address and phone
number set forth below.
This Prospectus constitutes a part of a registration statement on Form
S-4 (the "Registration Statement") filed by the Company with the Commission
under the Securities Act. This Prospectus does not contain all the information
set forth in the Registration Statement, certain parts of which are omitted in
accordance with the rules and regulations of the Commission, and reference is
hereby made to the Registration Statement and to the exhibits relating thereto
for further information with respect to the Company and the Notes. Any
statements contained herein concerning the provisions of any document are not
necessarily complete, and, in each instance, reference is made to a copy of such
document filed as an exhibit to the Registration Statement or otherwise filed
with the Commission. Each such statement is qualified in its entirety by such
reference.
The Company, a corporation organized under the laws of Nevada, has its
principal executive offices located at 600 East Las Colinas Blvd., Suite 1200,
Irving, Texas 75039; its telephone number is (972) 401-0752.
-124-
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents and information heretofore filed with the
Commission by the Company are hereby incorporated by reference into this
Prospectus:
1. The Company's Annual Report on Form 10-KSB for the year ended December
31, 1996, as amended by Form 10-KSB/A filed June 27, 1997;
2. An amendment to the Company's Quarterly Report on Form 10-QSB/A for the
quarter ended September 30, 1996, filed on March 18, 1997;
3. The Company's Quarterly Report on Form 10-QSB for the quarters ended
March 31, 1997, as amended by Form 10-QSB/A filed on May 21, 1997, and
June 30, 1997; and
4. The Company's Current Reports on Form 8-K dated June 28, 1996 (as
amended by Forms 8-K/A filed on August 13, 1996 and August 16, 1996),
December 23, 1996, January 20, 1997 (as amended by Form 8-K/A filed on
February 5, 1997), February 28, 1997, May 20, 1997 and May 29, 1997.
All documents subsequently filed by the Company pursuant to Sections
13(a), 13(c), 14 or 15(d) of the Securities Exchange Act of 1934, as amended
(the "Exchange Act"), prior to the termination of the Offering shall be deemed
to be incorporated by reference into this Prospectus and to be a part hereof
from the date of filing of such documents. 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 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 statement so modified or superseded shall not be
deemed, except as so modified or superseded, to constitute a part of this
Prospectus.
The Company will provide without charge to each person, including any
beneficial owner, to whom this Prospectus is delivered, on the written or oral
request of any such person, a copy of any and all of the documents incorporated
by reference herein (other than exhibits to such documents which are not
specifically incorporated by reference in such documents). Written requests for
such copies should be directed to the Company, 600 East Las Colinas Blvd., Suite
1200, Irving, Texas 75039, Attention: Morgan F. Johnston, Vice President,
General Counsel and Secretary. Telephone requests may be directed to Mr.
Johnston at (972) 401-0752.
-125-
<PAGE>
GLOSSARY
The terms defined in this glossary are used throughout this Prospectus.
Bbl. One stock tank barrel, or 42 U.S. gallons
liquid volume, used herein in reference to
oil or other liquid hydrocarbons.
Bbl/d. One billion cubic feet of natural gas per
day.
Bcf. One billion cubic feet of natural gas.
Bcfe. One billion cubic feet of natural gas
equivalents converting one Bbl of oil to six
Mcf of natural gas.
Btu. British Thermal Unit, the quantity of heat
required to raise one pound of water by one
degree Fahrenheit.
Developed Acreage. The number of acres which are allocated or
assignable to producing wells or wells
capable of production.
Development Well. A well drilled within the proved area of an
oil or gas reservoir to the depth of a
stratigraphic horizon known to be productive
Dry Hole. A well found to be incapable of producing
either oil or natural gas in sufficient
quantities to justify completion as an oil
or natural gas well.
Exploratory Well. A well drilled to find and produce oil or
gas in an unproved area, to find a new
reservoir in a field previously found to be
productive of oil or gas in another
reservoir, or to extend a known reservoir.
Gross acres or gross wells. The total acres or wells, as the case may
be, in which a working interest is owned.
In-fill Well. A well drilled between known producing
wells to better exploit the reservoir.
MBbl. One thousand barrels of oil or other liquid
hydrocarbons.
Mcf. One thousand cubic feet of natural gas.
Mcfe. One thousand cubic feet of natural gas
equivalents converting one Bbl of oil to six
Mcf of natural gas.
Mcfe/d. Mcfe per day.
MMBbl. One million barrels of oil or other liquid
hydrocarbons.
MMBtu. One million Btu.
MMcf. One million cubic feet of natural gas.
MMcfe. One million cubic feet of natural gas
equivalents converting one Bbl of oil to six
Mcf of natural gas.
-126-
<PAGE>
MMcf/d. One million cubic feet of natural gas per
day.
Natural Gas Equivalent. The amount of natural gas having the same
Btu content as a given quantity of oil,
with one Bbl of oil being converted to six
Mcf of natural gas.
Net Acres or Net Wells. The sum of the fractional working interests
owned in gross acres or gross wells.
Net Oil and Gas Sales. Oil and natural gas sales less oil and
natural gas production expenses.
Net Revenue Interest. A share of the Working Interest that does
not bear any portion of the expense of
drilling and completing a well and that
represents the holder's share of production
after satisfaction of all royalty,overriding
royalty, oil payments and other nonoperating
interests.
Productive Well. A well that is producing oil or natural gas
or that is capable of production in
paying quantities.
Proved Developed
Non-Producing Reserves. Reserves that consist of (i) proved reserves
from wells which have been completed and
tested but are not producing due to lack of
market or minor completion problems which
are expected to be corrected and (ii) proved
reserves currently behind the pipe in
existing wells and which are expected to be
productive due to both the well log
characteristics and analogous production in
the immediate vicinity of the wells.
Proved Developed
Producing Reserves. Reserves that can be expected to be
recovered from currently producing zones
under the continuation of present operating
methods.
Proved Developed Reserves. Reserves that can be expected to be
recovered through existing wells with
existing equipment and operating methods.
Proved Reserves. The estimated quantities of oil,
natural gas and natural gas liquids which
geological and engineering data demonstrate
with reasonable certainty to be recoverable
in future years from known reservoirs under
existing economic and operating conditions.
Proved Undeveloped Reserves. Proved reserves that are expected to be
recovered from new wells on undrilled
acreage, or from existing wells
where a relatively major expenditure is
required for recompletion.
-127-
<PAGE>
Recompletion. The completion for production of an existing
wellbore in a different formation or
producing horizon from that in which the
well was previously completed.
Reserve Life. The estimated productive life of a
proved reservoir based upon the economic
limit of such reservoir producing
hydrocarbons in paying quantities assuming
certain price and cost parameters. For
purposes of this Prospectus, reserve life is
calculated by dividing the Proved Reserves
(on an Mcfe basis) at the end of the period
by projected production volumes for the next
12 months.
Royalty Interest. An interest in an oil and natural gas
property entitling the owner to a share of
oil and natural gas production free of cost
of production.
SEC PV-10. The present value of proved reserves is an
estimate of the discounted future net cash
flows from each of the properties at
December 31, 1996, or as otherwise
indicated. Net cash flow is defined as net
revenues less, after deducting production
and ad valorem taxes, future capital costs
and operating expenses, but before deducting
federal income taxes. As required by rules
of the Commission, the future net cash flows
have been discounted at an annual rate of
10% to determine their "present value." The
present value is shown to indicate the
effect of time on the value of the revenue
stream and should not be construed as being
the fair market value of the properties. In
accordance with Commission rules, estimates
have been made using constant oil and gas
prices and operating costs, at December 31,
1996, or as otherwise indicated.
Undeveloped Acreage. Lease acreage on which wells have
not been drilled or completed to a point
that would permit the production of
commercial quantities of oil and natural gas
regardless of whether such acreage contains
proved reserves.
Working Interest. The operating interest that gives
the owner the right to drill, produce and
conduct operating activities on the property
and a share of production, subject to all
royalties, overriding royalties and other
burdens and to all costs of exploration,
development and operations and all risks in
connection therewith.
-128-
<PAGE>
<TABLE>
<CAPTION>
<S> <C>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Audited Financial Statements
Independent Auditors' Report-Deloitte & Touche LLP..................................................... F-2
Independent Auditors' Report-Hein + Associates LLP..................................................... F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995........................................... F-4
Consolidated Statements of Operations for the years ended December 31, 1996 and 1995................... F-6
Consolidated Statements of Stockholders' Equity for the years ended December 31, 1996 and 1995......... F-7
Consolidated Statements of Cash Flows for the years ended December 31, 1996 and 1995................... F-9
Notes to Consolidated Financial Statements............................................................. F-10
Supplemental Information on Oil and Gas Producing Activities (Unaudited)............................... F-27
Unaudited Consolidated Financial Statements
Consolidated Balance Sheet as of June 30, 1997 (Unaudited) ........................................... F-30
Consolidated Statements of Operations for the three months ended June 30, 1997 and 1996
and the six months ended June 30, 1997 and 1996 (Unaudited)......................................... F-31
Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and 1996
(Unaudited)......................................................................................... F-32
Notes to Consolidated Financial Statements (Unaudited)................................................. F-33
Financial Statements of Permian Basin Properties
Independent Auditors' Report-Hein + Associates LLP..................................................... F-35
Historical Summaries of Revenues and Direct Operating Expenses of the Permian Basin Properties
for the years ended December 31, 1996, 1995 and 1994 and for the four month periods ended April 30,
1997 and 1996....................................................................................... F-36
Notes to Historical Summaries of Revenues and Direct Operating Expenses for the years ended
December 31, 1996, 1995 and 1994 and for the four month periods ended April 30, 1997 and 1996....... F-37
</TABLE>
F-1
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Magnum Hunter Resources, Inc.
We have audited the accompanying consolidated balance sheet of Magnum Hunter
Resources, Inc. and Subsidiaries as of December 31, 1996, and the related
consolidated statements of operations, stockholders' equity, and cash flows for
the year then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.
We conducted our audit in accordance with 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
misstatements. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Magnum Hunter Resources, Inc.
and Subsidiaries as of December 31, 1996, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
Deloitte & Touche LLP
Dallas, Texas
March 14, 1997 (April 30, 1997 as to Note 16)
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors and Stockholders
Magnum Hunter Resources, Inc.
We have audited the accompanying consolidated balance sheet of Magnum Hunter
Resources, Inc. (formerly Magnum Petroleum, Inc.) and Subsidiaries as of
December 31, 1995, and the related consolidated statements of operations, cash
flows, and stockholders' equity for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with 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
misstatements. 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 audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Magnum Hunter Resources, Inc.
and Subsidiaries as of December 31, 1995, and the results of their operations
and their cash flows for the year then ended, in conformity with generally
accepted accounting principles.
As discussed in Note 2 to the financial statements, the Company changed its
method of accounting for oil and gas producing operations from the successful
efforts method to the full cost method.
HEIN + ASSOCIATES LLP
Dallas, Texas
April 3, 1996
F-3
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands of dollars)
<TABLE>
<CAPTION>
December 31, December 31,
1996 1995
-----------------------------------------
<S> <C> <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,687 $ 1,544
Securities available for sale 233 101
Accounts receivable:
Trade, net of allowance of $132 and $134 4,372 1,247
Due from affiliates 241 116
Notes receivable from affiliate 264 121
Current portion of long-term note receivable 198 201
Prepaid and other 52 22
-----------------------------------------
TOTAL CURRENT ASSETS 7,047 3,352
-----------------------------------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method:
Unproved 459 843
Proved 70,575 36,257
Pipelines 7,102 1,087
Other property 381 146
---------------------------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 78,517 38,333
Accumulated depreciation, depletion and impairment (4,869) (1,928)
---------------------------------------
NET PROPERTY, PLANT AND EQUIPMENT 73,648 36,405
---------------------------------------
OTHER ASSETS
Deposits and other assets 645 118
Long-term notes receivable, net of imputed interest 1,732 190
---------------------------------------
TOTAL ASSETS $ 83,072 $ 40,065
================= ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-4
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (continued)
(in thousands of dollars)
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade accounts payable and accrued liabilities $ 3,698 $ 1,283
Gas imbalance payable 242
Dividends payable 22 177
Suspended revenue payable 784 794
Current maturities of long-term debt 22 2,014
----------------------------------------
TOTAL CURRENT LIABILITIES 4,768 4,268
----------------------------------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities 38,744 7,598
Production payment liability 937 288
Other - 290
Deferred income taxes 3,469 3,125
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 shares authorized
216,000 designated as Series A; 80,000 and 80,000 issued and outstanding, respectively,
liquidation amount $0 - -
925,000 designated as Series B; none and 62,050 issued and outstanding, respectively - -
625,000 designated as Series C; none and 625,000 shares issued and outstanding,
respectively - 1
1,000,000 designated as 1996 Series A Convertible ; 1,000,000 and none issued and
outstanding, respectively, liquidation amount $10,000,000 1 -
Common stock - $.002 par value; 50,000,000 shares authorized;
14,252,822 issued and 11,598,183 shares issued and outstanding, respectively 29 23
Additional paid-in capital 40,216 29,660
Accumulated deficit (5,142) (5,245)
Unrealized gain on investments 51 57
----------------------------------------
35,155 24,496
Treasury stock (544,495 shares of common stock) (1) -
-----------------------------------------
TOTAL STOCKHOLDERS' EQUITY 35,154 24,496
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 83,072 $ 40,065
================= ==============
The accompanying notes are an integral part of these consolidated financial statements.
F-5
</TABLE>
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except for per share amounts)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
---------------------------
1996 1995
---------------------------
<S> <C> <C>
OPERATING REVENUE
Oil and gas sales $ 10,248 $ 617
Gas gathering and marketing 5,768 -
Oil field services and commissions 396 32
---------------------------
TOTAL OPERATING REVENUE 16,412 649
---------------------------
OPERATING COSTS AND EXPENSES
Oil and gas production 4,390 268
Gas gathering and marketing 4,708 -
Costs related to other services 267 26
Depreciation and depletion 2,951 421
General and administrative 1,225 977
---------------------------
TOTAL OPERATING COSTS AND EXPENSES 13,541 1,692
---------------------------
OPERATING PROFIT (LOSS) 2,871 (1,043)
OTHER INCOME 344 77
INTEREST EXPENSE (2,394) (2)
---------------------------
NET INCOME (LOSS) BEFORE INCOME TAXES 821 (968)
Provision for deferred income taxes (312) -
---------------------------
NET INCOME (LOSS) 509 (968)
DIVIDENDS APPLICABLE TO PREFERRED SHARES (406) (617)
---------------------------
INCOME (LOSS) APPLICABLE TO COMMON SHARES $ 103 $ (1,585)
============= ===========
INCOME (LOSS) PER COMMON SHARE $ 0.01 $ (0.28)
============= ===========
COMMON SHARES USED IN PER SHARE CALCULATION 12,485,893 5,606,669
============= ===========
The accompanying notes are an integral part of these consolidated financial statements
F-6
</TABLE>
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995
(in thousands of dollars)
<TABLE>
<CAPTION>
Additional
Preferred Stock Common Stock Treasury Stock Paid-In
Shares Amount Shares Amount Shares Amount Capital
-----------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 645,775 $ 1 4,537,045 $9 $12,606
-----------------------------------------------------------------------------
Conversion of preferred stock to common stock (11,300) - 28,900 -
Issuance and costs from exercise of warrants 20,750 - 833,324 2 2,841
Issuance of Series C preferred stock 249
Issuance of common stock to acquire oil and gas
properties 386,615 1 1,378
Issuance of common stock for services 602,222 1 1,370
Issued to directors for collateral 125,000 -
Sale of investment shares
Payments received on receivable from stockholders
Acquisition of Hunter Resources, Inc. for Series C
preferred stock and common stock 111,825 - 5,085,077 10 11,216
Dividends declared on preferred stock
Net loss from operations
Unrealized gain on investments
-----------------------------------------------------------------------------
Balance at December 31, 1995 767,050 $ 1 11,598,183 $23 - - $29,660
-----------------------------------------------------------------------------
Conversion of preferred stock to common stock (658,934) (1) 1,821,638 4 (3)
Redemption of 28,116 shares of Series C preferred stock (28,116) (294)
Issuance of 1996 Series A convertible preferred stock,
net of offering costs 1,000,000 1 9,785
Shares issued as collateral, returned and held
as treasury stock 610,170 1 (610,170) (1) (1)
Exercise of employees' common stock options - - 12,258 - 9
Issuance of common stock to acquire oil and gas properties 188,410 1 51,300 - 938
Sale of investment shares
Dividends declared on preferred stock 34,421 - 2,117 - 122
Net income from operations
Unrealized gain on investments
-----------------------------------------------------------------------------
Balance at December 31, 1996 1,080,000 $ 1 14,252,822 $ 29 (544,495) $(1) $40,216
========= ====== ========== ======= ========= ===== ========
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-7
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995 (continued)
(in thousands of dollars)
<TABLE>
<CAPTION>
Unrealized Gain
Deferred Costs Receivable (Loss) On
of Warrant Accumulated from Investments
Offerings Deficit Stockholder
-------------------------------------------------------------
<S> <C> <C> <C> <C>
Balance at December 31, 1994 $(240) $(3,659) $(63) $ (9)
-------------------------------------------------------------
Conversion preferred stock to common stock
Issuance and costs from exercise of warrants 240
Issuance of Series C preferred stock
Issuance of common stock for services and
to acquire oil and gas properties
Issued to directors for collateral
Sale of investment shares 9
Payments received on receivable from stockholders 63
Acquisition of Hunter Resources, Inc. for Series C
preferred stock and common stock
Dividends declared on preferred stock (618)
Net income from operations (968)
Unrealized gain on investments 57
--------------------------------------------------------------
Balance at December 31, 1995 $ - $(5,245) $ - $ 57
--------------------------------------------------------------
Conversion of preferred stock to common stock
Redemption of 28,116 shares of Series C preferred stock
Issuance of 1996 Series A convertible preferred stock,
net of offering costs
Shares issued as collateral, returned and held
as treasury stock
Exercise of employees' common stock options
Issuance of common stock to acquire oil and gas
properties
Sale of investment shares (57)
Dividends declared on preferred stock (406)
Net income from operations 509
Unrealized gain on investments 51
--------------------------------------------------------------
Balance at December 31, 1996 $ - $(5,142) $ - $ 51
========= ======= ========= =====
The accompanying notes are an integral part of these consolidated financial statements
</TABLE>
F-8
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands of dollars)
<TABLE>
<CAPTION>
For the Years Ended
December 31,
------------------------------
1996 1995
------------------------------
<S> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ 509 $ (968)
Adjustments to reconcile net income (loss) to cash provided by (used for)
operating activities:
Depreciation and depletion 2,951 421
Deferred income taxes 312 -
Common stock issued for services - 102
(Gain) Loss on sale of assets (143) 76
Other 32 15
Changes in certain assets and liabilities:
Accounts receivable (3,250) (37)
Costs in excess of billings on uncompleted drilling contracts - 55
Deposits and other assets (30) -
Accounts payable and accrued liabilities 2,647 (513)
------------------------------
Net Cash Provided By (Used By) Operating Activities $ 3,028 $ (849)
------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sale of assets 318 88
Additions to property and equipment (41,471) (1,244)
Increase in deposits and other assets (527) -
Loan made for promissory note receivable (58) (121)
Payments received on promissory notes receivable - 334
Purchase of securities available for sale - (30)
Obligations and property acquisitions funded in Hunter acquisition - (1,034)
------------------------------
Net Cash Used By Investing Activities (41,738) (2,007)
------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and production payment 57,262 -
Payments of principal on long-term debt and production payment (27,459) (186)
Payments on other liabilities (290) -
Proceeds from issuance of common and preferred stock,
net of offering costs 9,796 3,332
Redemption of preferred stock (295) -
Payments received on notes receivable 277 62
Increase in segregated funds for payments of notes payable - 130
Dividends paid (438) (583)
-------------------------------
Net Cash Provided By Financing Activities 38,853 2,755
-------------------------------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS 143 (101)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,544 1,645
------------------------------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 1,687 $ 1,544
============ ==========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements
F-9
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1-SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization and Nature of Operations
Magnum Hunter Resources, Inc. (the "Company"), formerly Magnum
Petroleum, Inc., is incorporated under the laws of the state of Nevada. The
Company is engaged in the acquisition, operation and development of oil and gas
properties, the gathering, transmission and marketing of natural gas, providing
management and advisory consulting services on oil and gas properties for third
parties, and providing consulting and U.S. export services to facilitate Latin
American trade in energy products. In conjunction with the above activities, the
Company owns and operates oil and gas properties in six states, predominantly in
the Southwest region of the United States. In addition, the Company owns and
operates four gathering systems located in Texas, Louisiana and Oklahoma.
Merger and Consolidation
The accompanying consolidated financial statements include the accounts
of the Company and its existing wholly-owned subsidiaries, Gruy Petroleum
Management Company, Hunter Gas Gathering, Inc., Inesco Corporation, Magnum
Hunter Production, Inc., Midland Hunter Petroleum Limited Liability Company, and
SPL Gas Marketing, Inc. and its 51% owned subsidiary, Hunter Butcher
International Limited Liability Company. As more fully discussed in Note 3, the
Company entered into an amended definitive agreement on December 19, 1995 to
acquire all of the assets, subject to the existing liabilities, of Hunter
Resources, Inc. ("Hunter"). The purchase was accounted for by the purchase
method effective December 31, 1995. As such, the accompanying consolidated
financial statements for 1995 include the balance sheet accounts of Hunter.
However, the Statement of Operations for 1995 does not include the operations of
Hunter for that fiscal year. All significant intercompany accounts and
transactions have been eliminated in consolidation. Certain reclassifications
have been made to the consolidated financial statements of the prior year to
conform with the current presentation.
Cash and Cash Equivalents
The Company considers all highly liquid debt instruments purchased with
a maturity of three months or less to be cash equivalents. The Company has cash
deposits in excess of federally insured limits.
Investments
In 1994, the Company adopted Statement of Financial Accounting
Standards No. 115, Accounting for Certain Investments in Debt and Equity
Securities. Under this standard, the equity securities held by the Company that
have readily determinable fair values are classified as current assets
available-for-sale and are measured at fair value. Unrealized gains and losses
for these investments are reported as a separate component of stockholders'
equity. In 1994, investments in equity securities for which sale within one year
was restricted by governmental securities regulations were classified as
non-current assets.
At December 31, 1996, the Company's available for sale securities had
an amortized cost basis of $150,000, gross unrealized gains reported in equity
of $51,150 and a fair market value of $232,500. During 1996, securities were
sold for gross proceeds of $187,312 and the Company realized a gain of $142,872.
F-10
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 1995, the Company's available for sale securities had
an amortized cost basis of $44,440, gross unrealized gains reported in equity of
$57,200 and a fair market value of $101,640. During 1995, securities were sold
for gross proceeds of $73,083 and the Company realized a gain of $19,370.
Suspended Revenues
Suspended revenue interests represent oil and gas sales payable to
third parties largely on properties operated by the Company. The Company
distributes such amounts to third parties upon receipt of signed division orders
or resolution of other legal matters.
Oil and Gas Producing Operations
The Company follows the full-cost method of accounting for oil and gas
properties, as prescribed by the Securities and Exchange Commission ("SEC").
Accordingly, all costs associated with acquisition, exploration and development
of oil and gas reserves, including directly related overhead costs, are
capitalized.
All capitalized costs of oil and gas properties, including the
estimated future costs to develop proved reserves, are amortized on the
unit-of-production method using estimates of proved reserves. Cost directly
associated with the acquisition and evaluation of unproved properties are
excluded from the amortization base until the related properties are evaluated.
Such unproved properties are assessed periodically and any provision for
impairment is transferred to the full-cost amortization base. Sales of oil and
gas properties are credited to the full-cost pool unless the sale would have a
significant effect on the amortization rate. Abandonments of properties are
accounted for as adjustments to capitalized costs with no loss recognized. The
Company's unproved properties excluded from the amortization base were $459,000,
$843,000, and $700,000 at December 31, 1996, 1995, and 1994, respectively. These
costs arose in 1995 and 1994 and are expected to be evaluated and transferred
into the amortization base over the next twelve months.
The net capitalized costs are subject to a "ceiling test," which
generally limits such costs to the aggregate of the estimated present value of
future net revenues from proved reserves discounted at ten percent based on
current economic and operating conditions.
Drilling Operations
Fees from fixed-price contracts with other working interest owners to
drill, complete and place oil and gas wells into production, less related costs,
are accounted for as adjustments to oil and gas properties.
Pipelines
Pipelines are carried at cost. Depreciation is provided using the
straight-line method over an estimated useful life of 15 years. Gain or loss on
retirement or sale or other disposition of assets is included in results of
operations in the period of disposition.
F-11
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Other Property
Other property and equipment are carried at cost. Depreciation is
provided using the straight-line method over estimated useful lives ranging from
five to ten years. Gain or loss on retirement or sale or other disposition of
assets is included in results of operations in the period of disposition.
Other Oil and Gas Related Services
Other oil and gas related services consist largely of fees earned from
the Company's salt water disposal facility. Such fees are recognized in the
month the disposal service is provided.
Impact of Recently Issued Pronouncements
The Financial Accounting Standards Board has issued Statement No. 121,
("SFAS No. 121") "Accounting for Impairments of Long-Lived Assets and Assets to
be Disposed of", and Statement No. 123,"Accounting For Stock-Based Compensation"
("SFAS No. 123"). The Company adopted the provisions of SFAS No.121 in 1996 but
it did not have any effect on the Company's consolidated financial statements,
and it adopted the disclosures only portion of SFAS No. 123 as it continued to
follow the provisions of APB No. 25 which is the intrinsic value method of
accounting for stock-based compensation. See Note 15 which follows for the
effect of stock based compensation on a pro forma basis.
Income Taxes
The Company files a consolidated federal income tax return. Income
taxes are provided for the tax effects of transactions reported in the financial
statements and consist of taxes currently due, if any, plus net deferred taxes
related primarily to differences between the basis of assets and liabilities for
financial and income tax reporting. Deferred tax assets and liabilities
represent the future tax return consequences of those differences, which will
either be taxable or deductible when the assets and liabilities are recovered or
settled. Deferred tax assets include recognition of operating losses that are
available to offset future taxable income and tax credits that are available to
offset future income taxes. Valuation allowances are recognized to limit
recognition of deferred tax assets where appropriate. Such allowances may be
reversed when circumstances provide evidence that the deferred tax assets will
more likely than not be realized.
Income or Loss Per Common Share
Income or loss per common share is based on the weighted average number
of shares of common stock outstanding. Convertible securities and warrants were
anti-dilutive at December 31, 1996, 1995, and 1994 and were not included in the
calculation of income or loss per common share.
Deferred Cost of Warrant Exercise Offering
The Company incurred costs to update its registration statement
relating to Series C preferred stock that is convertible into common stock and
relating to common stock purchase warrants. The Company made an offer to the
warrant holders allowing them to exercise their warrants at a discount through
February 16, 1995. As presented in Note 9, certain of the common stock purchase
warrants were exercised prior to the expiration of the discount period. The
Company had deferred direct costs as of December 31, 1994 of $240,281 related to
the discounted warrant
F-12
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
exercise offering. Such costs and $250,488 incurred in 1995 were offset against
the proceeds received in 1995 from the exercise of the warrants. There were no
warrants exercised during 1996.
Use of Estimates and Certain Significant Estimates
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires the Company's management
to make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates. Significant assumptions are required in the valuation of proved
oil and gas reserves, which as described above may affect the amount at which
oil and gas properties are recorded. It is at least reasonably possible those
estimates could be revised in the near term and those revisions could be
material.
NOTE 2-CHANGE IN ACCOUNTING METHOD
The Company accounted for its oil and gas producing activities using
the successful efforts method from inception through June 30, 1995. However, the
full cost method has subsequently been adopted. The Company is of the opinion
that the full cost method of accounting is preferable to the successful efforts
method of accounting for its oil and gas activities for the following reasons:
(1) The Company recently acquired the subsidiaries of Hunter (See note
3),which comprise corporations engaged in oil and gas related activities and
which utilize the full cost method of accounting for these activities. For both
legal and accounting purposes, the Company is the acquiring entity; however, the
subsidiaries are increasing their oil and gas activities and have more proved
oil and gas reserves than the Company. Furthermore, management of Hunter became
the management of the Company upon completion of the acquisition. One of the
Hunter subsidiaries specializes in the management of oil and gas properties and
all accounting functions and financial reporting have been undertaken by the
subsidiary's personnel. The individuals employed by the subsidiaries have
comprised the vast majority of the Company's employees and the Company believes
that by allowing these employees and Hunter's management to continue to use the
full cost method, it would greatly benefit in accurately reporting on its oil
and gas operations.
(2) The subsidiaries have established relationships with lending sources
which the Company intends to continue to utilize and expand upon. These sources
are accustomed to evaluating the subsidiaries' financial statements on the full
cost method of accounting. The Company intends to request additional borrowing
arrangements from these lenders and believes that it is desirable for these
lending sources to review financial statements prepared on a consistent basis.
The accompanying financial statements have been restated to apply the
full cost method retroactively. This change in accounting principle has no
significant effect on income taxes. The effect of the accounting change on net
loss and accumulated deficit as previously reported for the respective periods
is:
<TABLE>
<CAPTION>
<S> <C>
Year Ended
December 31, 1994
---------------------
Statement of Operations:
Net Loss as Previously Recorded............................................................ $(1,258,808)
Adjustment for Effect of Change in Accounting Principle that is Applied Retroactively...... $712,426
Net Loss as Adjusted....................................................................... $(546,382)
Per Share Amounts:
Net Loss as Previously Reported............................................................ $(.44)
Adjustment for Effect of Change in Accounting Principle that is Applied Retroactively...... $(.17)
Net Loss as Adjusted....................................................................... $(.27)
Common Shares Used in Per Share Calculation................................................ 4,166,822
</TABLE>
F-13
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
<S> <C> <C>
Year Ended December 31,
-----------------------
1995 1994
---- ----
Statement of Accumulated Deficit:
Balance at Beginning of Period as Previously Reported........................... $(4,166,058) $(2,327,925)
Add Adjustment for the Cumulative Effect on Prior Years of Applying
Retroactively the Full Cost Method............................................ 506,651 (205,775)
----------------- -------------
Balance at Beginning of Period, as Adjusted..................................... (3,659,407) (2,533,700)
Net Loss........................................................................ (968,272) (546,382)
Preferred Dividends............................................................. (617,220) (579,325)
----------------- --------------
Balance at End of Year.......................................................... $(5,244,899) $(3,659,407)
================= ==============
</TABLE>
The effect on 1995 operations of changing the accounting method was to
increase net loss and net loss per share by $307,000 and $.05, respectively.
NOTE 3-ACQUISITIONS AND DISPOSITIONS
During the year ended December 31, 1994, the Company acquired three
properties through the issuance of both cash and common stock. One property was
acquired for $888,000, for which the Company paid $200,000 cash and issued
343,000 shares of its common stock, based on a value of $2.00 per share or
$686,000. Two other properties were acquired for a total of $692,500. In one
transaction, 150,000 shares were issued at $1.25 per share for $187,500 and in
the other transaction, 120,000 shares were issued at $3.00 per share for
$360,000. In the latter transaction, the Company committed to file a
registration statement relating to 40,000 shares, and has agreed to pay all
costs relating to the registration of these shares.
During 1994, the Company sold a 20% working interest in unproved oil
and gas mineral leases in which the Company has acquired an interest. The
Company received cash and 22,220 shares of common stock of a publicly traded
corporation.
During March 1995, the Company acquired an additional fifty percent
(50%) working interest (for a total of 100% working interest) in a proved
undeveloped oil and gas property on which one well is located. The acquisition
cost of this additional interest was $410,000, of which $130,000 was paid in
cash and 80,000 shares of the Company's restricted common stock, valued at $3.50
per share, were issued. During April 1995, the Company also acquired an
additional 40 percent (40%) working interest (for a total of ninety percent
(90%) working interest) in a proved undeveloped property on which one well is
located. The acquisition cost of this additional interest was $480,000, of which
$20,000 was paid in cash and 125,000 shares of the Company's restricted common
stock were issued, valued at $3.50 per share, and the transfer of securities
held by the Company as an investment in equity securities at December 31, 1994.
In October 1995, the Company issued 85,131 shares of restricted common
stock, valued at $3.52 per share, in an acquisition completed by a Hunter
subsidiary for the remaining stock ownership interest in a limited liability
company. Also, in October 1995, the Company issued 64,176 shares of restricted
common stock, valued at $4.00 per share, in an acquisition of oil and gas
properties completed by a Hunter subsidiary. In December 1995, the Company
issued 32,308 shares of restricted common stock, valued at $3.25 per share, in
an acquisition of a proven undeveloped property by a Hunter subsidiary.
F-14
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company executed a definitive agreement on July 21, 1995 to acquire
all of the assets, subject to the existing liabilities of Hunter Resources, Inc.
("Hunter"). Pursuant to the agreement, the Company issued, subject to
shareholder approval, 2,750,000 shares of its restricted common stock to Hunter
in exchange for the assets acquired. In addition, 575,000 shares of restricted
common stock were issued to a third party as an additional cost of the
acquisition. The third party distributed a total of 250,000 of the shares to a
former director and a former officer of the Company for their assistance in
completing the acquisition.
On December 19, 1995 to be effective December 22, 1995, the Company and
Hunter entered into an amended agreement. Under the terms of the amendment,
which was executed by Hunter shareholders representing over fifty percent (50%)
of the common stock of Hunter, an additional 2,335,077 shares of restricted
common stock and 111,825 shares of Series C preferred stock were issued to
Hunter. The acquisition was recorded under the "purchase method" of accounting,
based upon the estimated value of the shares issued of $12,495,005. The
operations of Hunter have been consolidated with those of the Company beginning
on December 31, 1995.
On June 28, 1996, the Company purchased 469 natural gas wells and
approximately 427 miles of a gas gathering pipeline system for a net purchase
price of $34,652,395. The properties are located in the Panhandle of Texas and
Western Oklahoma and are referred to as the "Panoma Properties." As the purchase
was not completed until the end of the second quarter of 1996, the consolidated
financial statements for 1996 include the operating results of the Panoma
Properties for only the last six months of the year.
On November 4, 1996, the Company entered into an agreement to sell
certain oil and gas properties for $1,850,000, including $150,000 of restricted
securities of an American Stock Exchange listed company and a $1,700,000
promissory note payable out of 100% of the net oil and gas income of the
properties. The agreement calls for the Company's subsidiary to continue to
operate the properties for a monthly management fee.
The following summary, prepared on a pro forma basis, presents the
results of operations for the years ended December 31, 1996 and 1995, as if the
acquisitions occurred as of the beginning of the respective years. The pro forma
information includes the effects of adjustments for increased general and
administrative expense, interest expense, depreciation, depletion and income
taxes:
1996 1995
---- ----
(Unaudited)
Revenue......................................... $20,653,000 $12,515,000
Net Income (Loss) Applicable to Common Stock.... (304,000) (4,403,000)
Net Income (Loss) Per Common Share.............. $(.02) $(.79)
Average shares outstanding...................... 12,485,893 5,606,669
NOTE 4-NOTES RECEIVABLE
During July of 1994, the Company received an interest bearing note due
on May 1, 1995, in exchange for $319,206 paid by the Company. Interest in the
amount of $3,000 per month accrued through February 28, 1995 and was paid in
March 1995. For the remaining two months, interest in the amount of $4,500 per
month was accrued which, along with the principal amount, was paid during May
1995. The note was collateralized by securities, the fair market value of which
was less than the amount of the note.
On July 28, 1995, the Company received a non-interest bearing note
receivable in the amount of $223,500 in exchange for its interest in an oil and
gas property. Interest at 10 percent was imputed on the note resulting in a
discount of $28,366. The note provides for payments of $7,000 per month which
were received timely in 1996. As of December 31, 1996, the unpaid balance, net
of discount, is $112,288.
F-15
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On November 4, 1996, the Company received an interest bearing note due
on November 1, 1999, in exchange for its interest in oil and gas properties.
Interest is at the rate of 12% per annum. The note is collateralized by stock in
an American Stock Exchange listed company and the oil and gas properties sold.
As of December 31, 1996, the unpaid balance is $1,627,534.
NOTE 5-RELATED PARTY TRANSACTIONS
During June of 1993, the Company sold 250,000 shares of its common
stock at $2.00 per share for a total of $500,000. The purchasers made a 10% down
payment of $50,000 and executed notes for $450,000, payable in one year and
bearing interest at 6% per annum. During June of 1994, the Company renegotiated
the notes and entered into a verbal agreement with another individual whereby
$27,000 of interest due on the previous notes was accrued and a new principal
amount of $289,500, being a reduction of $160,500 from the original notes, was
agreed upon as the amount due to the Company. Additionally, the Company sold
this individual 40,000 shares of the Company's common stock at $1.25 per share
for net proceeds of $50,000. The full amount of the reduced purchase price was
paid during the third quarter of 1994; however, no interest was paid. The
Company does not intend to pursue the collection of the unpaid interest from any
of the parties involved. The net effect of the above transactions was that the
Company sold 300,000 shares of its common stock for $350,000, or approximately
$1.17 per share.
During June of 1994, the Company also issued 110,000 shares of its
common stock pursuant to an agreement to pay the Company within one year of the
issuance of the shares, $137,500 and interest at the rate of 5% per annum, which
is equivalent to $1.25 per share. Prior to December 31, 1994, the Company had
collected $75,000 and subsequently the balance of the note was paid. The Company
did not collect any interest due on the Note and does not intend to pursue the
collection thereof.
In conjunction with the acquisition of Hunter, the Company assumed a
note receivable with a balance of $178,527 and $120,758 at December 31, 1996 and
1995 respectively, from an owner in an affiliated limited liability company. The
note provides for interest at ten percent and has a due date of January 31,
1997.
In connection with the acquisition of Hunter, the Company assumed a
note receivable from a company affiliated with the President of the Company in
the amount of $54,615 at December 31, 1996 and 1995. This note bears interest at
ten percent and is due on demand. Additionally, trade accounts receivable from
this affiliated company were $30,761 and $51,346 at December 31, 1996 and 1995,
respectively.
In connection with the acquisition of Hunter, the Company assumed
unsecured accounts receivable from the President personally in the amount of
$10,000 as of December 31, 1995, which amount has been subsequently repaid.
A company owned by two former directors of the Company previously
operated several of the wells in which the Company owned an interest. Operating
fees paid this company were $35,519 in 1995. The operations of these wells were
transferred to a subsidiary of Hunter during 1995. In addition, the related
company received a commission of $25,000 from the sale of an oil and gas
property to the Company in 1995.
During 1996, as part of the Company's overall compensation package, the
Company's officers and directors were granted the right to participate in
certain development and exploration projects of the Company on a promoted basis.
As of December 31, 1996, eleven (11) of the Company's officers and directors as
a group spent an aggregate of $137,340 participating in 6 wells. The Company
discontinued this program as of January 1, 1997.
NOTE 6-LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995 consisted of the
following:
F-16
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995
--------------- ---------------- ---
Banks
Revolving promissory note, collateralized by pipeline and oil and gas
properties, due June 30, 2001, interest at LIBOR + 2.25% (total of
7.625% at December 31, 1996)(1)....................................... $38,700,000 $ -
Promissory note, collateralized by pipelines and oil and gas properties,
payable in monthly installments for 1996 of $174,000 through October 1, 1996,
then $171,000 thereafter plus interest at prime plus one percent (total of
9.75% at December 31, 1995), assumed in
Hunter acquisition(2)................................................. - 9,555,000
Note payable, payable in monthly installments of $498 through
July 1996 plus interest at 7.25 percent, collateralized by truck...... - 3,000
Note payable to bank collateralized by vehicle payable in monthly
installments of $1,031 including interest at 8.5% through
February 1999......................................................... 24,000 -
Other
Notes payable, non-interest bearing and uncollateralized, payable in monthly
installments of $1,000 through July 1, 2000, assumed in
Hunter acquisition.................................................... 42,000 54,000
---------------- ----------------
Total Long-Term Debt..................................................... 38,766,000 9,612,000
Less Current Portion..................................................... 22,000 2,014,000
---------------- ----------------
Long-Term Debt........................................................... $38,744,000 $7,598,000
================ ===============
</TABLE>
NOTE 6-LONG-TERM DEBT
Maturities of long-term debt based on contractual requirements for the
years ending December 31, are as follows:
1997........................................................... $ 22,000
1998........................................................... 24,000
1999........................................................... 14,000
2000........................................................... 6,000
2001........................................................... 38,700,000
----------------
$ 38,766,000
================
- - -----------
(1) The revolving promissory note to the banks is a borrowing under a
$100,000,000 line of credit on which there existed a borrowing base of
$55,000,000 at December 31, 1996. The level of the borrowing base is
dependent on the valuation of the assets pledged, primarily oil and gas
reserve values. The line of credit includes covenants, the most
restrictive of which require maintenance of a current ratio, interest
coverage ratio, and tangible net worth, as specified in the loan
agreement. The bank group must approve all dividends paid on common
stock.
(2) The promissory note to bank was a borrowing under a $20,000,000 line of
credit on which there existed a borrowing base of approximately $8.7
million at December 31, 1995. The balance at December 31, 1995 included
$1,125,000 due to the seller of certain oil and gas properties which
was refinanced in February,
F-17
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1996 under the line of credit. The final principal payments under the
line of credit were due June 1, 2000. The amount that could be borrowed
under the line of credit was based upon a designated percentage of oil
and gas reserve values. The line of credit included covenants, the most
restrictive of which require maintenance of a current ratio and
tangible net worth, as specifically defined in the loan agreement.
NOTE 7-PRODUCTION PAYMENT LIABILITY
As a result of the merger with Hunter in 1995, the Company assumed an
obligation under a production payment conveyance. The conveyance provides for a
royalty payment equal to 50% of the monthly net revenue proceeds received by the
Company in certain oil and gas properties. The balance owed under the conveyance
bears interest at 15% per annum and is non-recourse to the Company. The balance
owed under this conveyance was $210,000 and $288,000 at December 31, 1996 and
1995, respectively.
In November, 1996, the Company entered into a second production payment
conveyance with the same party. The Company received a production payment amount
of $750,000 and agreed to make royalty payments of up to 50% of the monthly net
revenue proceeds received from certain oil and gas properties. The balance owed
under the conveyance was $726,000 at December 31, 1996. The production payment
bears interest at the rate of 13.5% per annum and is non-recourse to the
Company.
NOTE 8-INCOME TAXES
The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Taxes, which
requires the recognition of a liability or asset, net of a valuation allowance,
for the deferred tax consequences of all temporary differences between the tax
bases and the reported amounts of assets and liabilities, and for the future
benefit of operating loss carryforwards. The following is a reconciliation of
income tax expense reported in the statement of operations:
1996
------------
Tax expense at statutory rates............................ $279,000
State taxes............................................... 24,000
Other..................................................... 9,000
------------
Total............................................... $312,000
============
The tax effects of significant temporary differences and carryforwards
are as follows:
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Property and equipment, including intangible
drilling costs................................... $(6,381,000) $(5,890,000) $(218,000)
Annualized gain on investment....................... (32,000) - -
------------------ ------------------ ------------------
Total deferred tax liability........................ (6,413,000) (5,890,000) (218,000)
----------------- ------------------ ------------------
Allowance for doubtful accounts..................... 49,000 50,000 -
Depletion carryforwards............................. 361,000 365,000 -
Operating loss carryforwards........................ 2,534,000 2,350,000 1,135,000
----------------- ------------------ ------------------
Total deferred tax assets........................... 2,944,000 2,765,000 1,135,000
----------------- ------------------ ------------------
Valuation allowance................................. - - (917,000)
----------------- ------------------ ------------------
Net Deferred Tax Liability.......................... $(3,469,000) $(3,125,000) $ -
================= ================== ===================
</TABLE>
F-18
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company and its subsidiaries have net operating loss carryforwards
(NOL) of approximately $6,900,000 that expire, if unused, in years through 2011,
none in 1997. Approximately $1,700,000 of the NOL carries a limitation of
approximately $200,000 per year. In addition, the Company has depletion
carryforwards of approximately $1,000,000.
NOTE 9-STOCKHOLDERS' EQUITY
Shares of preferred stock may be issued in such series, with such
designations, preferences, stated values, rights, qualifications or limitations
as determined solely by the Board of Directors. Of the 10,000,000 shares of
$.001 par value preferred stock the Company is authorized to issue, 216,000
shares have been designated as Series A Preferred Stock, 925,000 shares have
been designated as Series B Preferred Stock, 625,000 shares have been designated
as Series C Preferred Stock and 1,000,000 shares have been designated as 1996
Series A Convertible Preferred Stock. Thus, 7,234,000 preferred shares have been
authorized for issuance but have not been issued nor have the rights of these
preferred shares been designated. No dividends can be paid on the common stock
until the dividend requirements of the preferred shares have been satisfied.
Holders of the Series A Preferred Stock are entitled to receive
dividends only to the extent that funds are available from the West Dilley
Prospect. Such dividends are limited to $7.50 per share, in the aggregate.
Dividend payments to Series A preferred shareholders will be based on fifty
percent (50%) of the net operating revenue received by the working interest
owners of the West Dilley Prospect. Due to a decline in production from the well
located on this prospect, the Company has shut this well in and is no longer
producing the property. The Series A dividends are not cumulative except for
unpaid amounts due from this calculation. No dividends have been paid on the
Series A preferred stock. There is no aggregate annual dividend requirement for
the Series A preferred stock.
The Series B Preferred Stock was issued as a unit, comprised of 1,000
shares of Series B Preferred Stock and two production certificates. The Series B
preferred stockholders are entitled to receive cumulative dividends of $0.35
annually per share, payable quarterly. The holders of the units are entitled to
receive $10,000 per unit in dividends and in production payments. The production
payments were derived from 50% of the Company's net revenue from production of
oil and gas. The Board of Directors declared dividends on the Series B preferred
stock of $21,893 and $25,172 for the years ended December 31, 1995 and 1994
respectively. Beginning June 15, 1994, the Company offered to exchange (the
"Exchange Offer") 1,250 shares of common stock for each Series B production
certificate. During 1994, 141.1 production certificates were exchanged for
176,375 shares of common stock and the Series B preferred shareholders agreed to
convert their Series B preferred shares into common stock at December 31, 1995
if all dividends were paid through that date. All of the shares were converted
to common stock during 1996.
Separate and apart from the Exchange Offer, two of the Company's
officers and directors (the "Officers") set aside 125,000 shares (the "Stock")
of their own common stock of the Company for a single individual (the
"Individual") who owned approximately 55% of the Series B Production
certificates that were exchanged. The Stock was being held by an independent
party to this transaction until fair market value of the Exchange Shares, when
the Exchange Shares become eligible for sale pursuant to Rule 144 of the
Securities Act of 1933, is determined. The Company issued 125,000 shares of its
common stock to the Officers in exchange for their assignment to the Company of
all of the Officers' rights, title and interest in the Stock. The Company has
recorded the new shares issued at par value. The value of the exchange shares
were determined in 1996, and the Company issued 5,000 shares of its common stock
to the Individual. Subsequent to year-end, the 125,000 shares being held were
returned to the Company and are being held as treasury stock.
The Series C preferred stock was convertible at the option of the
holder at any time into three shares of common stock and, after November 12,
1994, would automatically convert into common stock anytime the closing bid
price of the common stock equals or exceeds $5.00 per share for twenty
consecutive trading days. The Series C
F-19
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
preferred stock was redeemable by the Company beginning November 12, 1995, at
$10.50 per share plus accrued and unpaid dividends. If declared by the Board of
Directors, dividends accrue at the annual rate of $1.10 per share, are
cumulative from the date of first issuance and are paid quarterly in arrears.
The Board of Directors declared dividends on the Series C preferred stock of
$554,153, $595,327, and $339,827 for the years ended December 31, 1994, 1995,
and 1996, respectively. During 1994, 40,025 Series C preferred shares were
converted into 120,075 shares of common stock and 24,250 shares of Series C
preferred stock were issued upon exercise of representatives' warrants. The
aggregate annual dividend requirements for the 625,000 shares of Series C
preferred stock outstanding at December 31, 1995 and 1996 amounts to $687,500
and none, respectively. As of December 31, 1996, all Series C preferred stock
had been redeemed or converted to common stock.
On December 6, 1996, the Company entered into an agreement to issue
1,000,000 shares of new Series A preferred stock, known as the 1996 Series A
Convertible Preferred Stock, in a private placement. The shares have a stated
and liquidation value of $10 per share and pay a fixed annual cumulative
dividend of eight and three quarters percent (8.75%) payable quarterly in
arrears beginning December 31, 1996. The shares are convertible into shares of
common stock at a conversion price of $5.875 per share. Beginning in December
1998, the Company has an option to exchange the stock into convertible
subordinated debentures of equivalent value. The purpose of the private
placement was to fund the capital cost necessary to drill certain development
projects and to fund the capital costs of several West Texas waterflood
projects. Proceeds from the offering were initially used to reduce the Company's
existing bank indebtedness. Certain capital expenditure requirements for
developmental drilling and waterflood projects are required under the agreement
whereby this stock was issued. In addition, under the terms of the preferred
stock, the Company is required to raise an aggregate of $15 million of
additional equity by March 31, 1998 or the Company is required to redeem on June
30 of each of the years 2006, 2007, and 2008, 333,333 shares of preferred stock.
On December 23, 1996, the 1996 Series A Convertible Preferred Stock was issued,
resulting in net proceeds to the Company after offering costs of $9,787,000.
Dividends of $22,000 were declared in 1996 and paid subsequent to year end.
The preferred shareholders are not entitled to vote except on those
matters in which the consent of the holders of preferred stock is specifically
required by Nevada law. If the Company were to liquidate prior to payment of the
full dividend requirements on the preferred stock, the preferred stock would
receive a liquidation preference from the liquidation proceeds. The Series A
preferred shareholders would receive an amount equal to the lesser of the
proceeds from the liquidation of the West Dilley Prospect or the remaining
unpaid dividend. The 1996 Series A Convertible Preferred Stock would receive an
amount of $10 per share. On liquidation, holders of all series of the preferred
stock would be entitled to receive the par value, $.001 per share, in preference
to the common stock shareholders.
The Series C preferred stock was originally issued as a unit comprised
of one share of Series C preferred stock and warrants to purchase three (3)
shares of common stock. A total of 1,687,500 warrants were issued and are
exercisable at $5.50 per share through November 12, 1998. The Company offered
the holders of the warrants a discount period commencing November 15, 1994 and
ending February 16, 1995 during which time the warrants could be exercised at
$4.00. During this time, warrants were exercised for 833,324 shares of common
stock. The exercise of these warrants resulted in cash proceeds of $3,333,298 to
the Company. The warrants are redeemable by the Company at $0.02 per warrant
upon 30 day notice at any time after November 12, 1995 or earlier if the closing
bid price of the common stock equals or exceeds $6.75 for five consecutive
trading days. At December 31, 1995, 854,176 of the warrants remained
outstanding.
The Company granted an unrelated company the right to acquire 100,000
shares of common stock under the terms of a consulting agreement. The rights
became exercisable at the rate of 3,325 shares in November 1994, 8,335 shares
per month from December 1994 through October 1995 and 4,990 shares in November
1995. The rights are exercisable at $4.125 per share. The rights expire in June
1997.
F-20
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In October 1995, in connection with an acquisition of oil and gas
properties, the Company issued 25,000 warrants with an exercise price of $4.00
per share, and 25,000 warrants with an exercise price of $4.50 per share with
each such warrant expiring in October 1997. In December 1995 the Company issued
37,500 warrants at an exercise price of $3.00 per share to an unaffiliated third
party for services rendered. The warrants expire in December 1997.
During 1995, 20,750 representatives' warrants were exercised at $12.00
per warrant resulting in $249,000 of proceeds to the Company. Each warrant
entitles the holder to receive one share of Series C preferred stock and three
(3) common stock warrants exercisable at $4.00 per share through February 1995
and $5.50 thereafter. 9,300 shares of Series C preferred stock and 2,000 shares
of Series B preferred stock have also been converted into 28,900 shares of
common stock. The Company issued 5,000 shares of common stock, valued at $3.50
per share to its directors, which resulted in $17,500 of compensation expense in
1995. Also, 22,222 shares of common stock with a value of $3.80 per share were
issued for services rendered in 1995.
In January, 1996, 60,000 warrants were issued at an exercise price of
$3.375 per share and expiring in January 1999. At December 31, 1996, 45,000 of
these warrants had been earned. In connection with the receipt of a production
payment, in October 1996 the Company issued 25,000 warrants with an exercise
price of $5.18 expiring October 1999, 25,000 warrants with an exercise price of
$5.65 expiring October 2000 and 25,000 warrants with an exercise price of $6.13
expiring October 2001. No warrants were exercised in 1996.
At December 31, 1996, the Company had 1,176,676 total warrants issued,
including the publicly traded warrants. Additionally, in 1996, 610,170 shares of
the Company's common stock that had been held as collateral were returned and
held in the treasury, 12,258 shares of common stock were issued upon exercise of
employees stock options, 239,710 shares of common stock, valued at $939,000,
were issued to acquire oil and gas properties, and 36,538 shares of common stock
were issued as dividends on the Company's Series C Preferred Stock.
NOTE 10-SUPPLEMENTAL CASH FLOW INFORMATION
During 1994, the Company purchased oil and gas properties by issuing
613,000 shares of common stock valued at $1,233,500 along with cash in the
amount of $200,000. The Company issued 176,375 shares of its common stock,
valued at $584,016, in exchange for the production payment interests held by
production certificate holders. Shareholders converted 10,500 shares of Series B
preferred stock and 40,250 shares of Series C preferred stock into 5,250 and
120,075 shares of common stock, respectively. A vehicle with a carrying value of
$10,923 was sold to an officer of the Company with the officer assuming a
related note payable in the amount of $10,923. The Company received equity
securities with a fair value of $66,660 as partial payment for the sale of
property interests. The Company granted shareholders a $187,500 adjustment to
the price of common stock previously sold by reducing notes receivable from the
shareholders by that amount. Also in 1994, the Company issued 150,000 shares of
common stock in exchange for notes receivable from the purchasing shareholders
in the amount of $187,500.
During 1995, as more fully described in Note 3, the Company issued
common stock and preferred stock valued at $12,495,005 in the acquisition of the
assets from Hunter Resources, Inc. Oil and gas properties were acquired by
issuing $1,379,204 of common stock and $22,220 of marketable securities;
preferred stock was converted to common stock; and common stock was issued,
creating a receivable from a shareholder of $250. In addition $17,500 of common
stock was issued as compensation to directors and $84,444 of common stock was
issued for services rendered in 1995.
During 1996, the Company purchased oil and gas properties by issuing
239,710 shares of its common stock, valued at $938,444. The Company converted
658,934 shares of Series B and Series C preferred stock into 1,821,638 shares of
common stock. 36,538 shares of common stock valued at $121,700 were issued in
lieu of cash dividends
F-21
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
on preferred stock. The Company received equity securities with a fair value of
$150,000 as partial payment for the sale of property interests. Interest paid in
1996 was $2,344,308.
NOTE 11-ENVIRONMENTAL ISSUES
Being engaged in the oil and gas exploration and development business,
the Company may become subject to certain liabilities as they relate to
environmental clean up of well sites or other environmental restoration
procedures as they relate to the drilling of oil and gas wells and the operation
thereof. In the Company's acquisition of existing or previously drilled well
bores, the Company may not be aware of what environmental safeguards were taken
at the time such wells were drilled or during the time that such wells were
operated. Should it be determined that a liability exists with respect to any
environmental clean up or restoration, the liability to cure such a violation
would most likely fall upon the Company. In certain acquisitions, the Company
has received contractual warranties that no such violations exist, while in
other acquisitions the Company has waived its rights to pursue a claim for such
violations from the selling party. No claim has been made nor has a claim been
asserted, nor is the Company aware of the existence of any material liability
which the Company may have, as it relates to any environmental clean up,
restoration or the violation of any rules or regulations relating thereto.
NOTE 12-COMMITMENTS AND CONTINGENCIES
The Company assumed in the Hunter acquisition lease agreements for the
use of office space and office equipment. The office space lease extends through
November 2001 with an option to renew the lease for a three year term. The
various office equipment leases extend until 1999. The leases have been
classified as operating leases. The following is a schedule by years of future
minimum lease payments required under the operating lease agreements:
Year Ended December 31:
1997............................................................ $183,046
1998............................................................ 173,168
1999............................................................ 169,815
2000............................................................ 173,711
2001............................................................ 159,235
Thereafter...................................................... 0
------------
Total Minimum Payments Required................................. $858,975
============
Rental expense was $129,169, $61,191 and $21,283 for 1996, 1995, and
1994 respectively.
At December 31, 1996, the Company is involved in litigation proceedings
arising in the normal course of business. The Company has accrued $87,750 as of
December 31, 1996 for potential expenses to be incurred in settlement of the
litigation. In the opinion of management, any additional liabilities resulting
from such litigation would not have a material effect on the Company's financial
condition, cash flows or results of operations.
NOTE 13-FINANCIAL INSTRUMENTS AND CONCENTRATION OF CREDIT RISK
Financial instruments that subject the Company to credit risk consist
principally of accounts and notes receivable. The receivables are primarily from
companies in the oil and gas business or from individual oil and gas investors.
These parties are primarily located in the Southwestern regions of the United
States. No single receivable is considered to be sufficiently material as to
constitute a concentration. The Company does not ordinarily require collateral,
but in the case of receivables for joint operations, the Company often has the
ability to offset amounts due
F-22
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
against the participant's share of production from the related property. The
Company believes the allowance for doubtful accounts at December 31, 1996, 1995,
and 1994 is adequate.
Management estimates the market values of notes receivable and payable
based on expected cash flows and believes those market values approximate
carrying values at December 31, 1996, 1995, and 1994. The market values of
equity investments are based upon quoted prices (see Note 1).
NOTE 14-COMMODITY DERIVATIVES AND HEDGING ACTIVITIES
Periodically, the Company enters into futures, options, and swap
contracts to reduce the effects of fluctuations in crude oil and natural gas
prices. At December 31, 1996, the Company had open contracts for oil price
collars on 12,000 barrels of oil per month (with cap and floor prices of $22.20
and $18.00, respectively) through February 1997 and 15,000 barrels of oil per
month (with cap and floor prices of $25.10 and $20.00, respectively) from March
1997 through August, 1997. At December 31, 1996, the Company had open contracts
for gas prices swaps of 302,000 Mmbtu of gas per month at $2.16 per Mmbtu during
January 1997, 100,000 Mmbtu of gas per month at $1.905 per Mmbtu from February
1997 through January 1998 and another 100,000 Mmbtu of gas per month at $1.77
per Mmbtu from February 1997 through January 1998. These contracts expire
monthly as indicated above. The gains or losses on the Company's hedging
transactions are determined as the difference between the contract price and a
reference price, generally closing prices on the NYMEX. The resulting
transaction gains and losses are determined monthly and are included in the
period the hedged production or inventory is sold. Net losses relating to these
derivatives for the years ended December 31, 1996, 1995, and 1994 were $272,000,
none, and none, respectively.
NOTE 15-STOCK COMPENSATION PLAN
The Company adopted in 1996 two stock compensation plans for its
employees and directors, (i) the Magnum Hunter Resources Employee Stock
Ownership Plan, (the "ESOP"), and (ii) the Magnum Hunter Resources, Inc. 1996
Incentive Stock Option Plan. In addition, the Company authorized the issuance of
its common stock to participants in the Magnum Hunter Resources, Inc. 401(k)
plan in an amount that matched employee contributions up to one hundred percent
(100%). The cost of this matching contribution was $59,000 in 1996.
ESOP
The Company established an ESOP and a related trust as a long-term
benefit for its employees. Under terms of the plan, eligible participants may
elect to make elective deferred contributions of not less than 1% of more than
15% of their annual compensation, limited in combination with the 401(k) plan to
the maximum allowable per year by the Internal Revenue Code. The plan also
allows for the Company to make Discretionary Contributions to the ESOP, but it
is not the intent of the Company to do so. It is also the Company's intent to
invest all contributions in Employer Stock. In this regard, on October 11, 1996,
the Plan purchased 22,556 shares of the Company's common stock for $3.75 per
share from a third party. To fund this purchase, the Plan borrowed $84,585 from
a bank. Participant contributions will be used to acquire shares at the price
stated above by retiring the principal and interest of this debt. As of December
31, 1996, no Participant contributions had been made to the ESOP.
F-23
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
1996 Incentive Stock Option Plan
The Company established this plan effective April 1, 1996, and is
governed by Section 422 of the Internal Revenue Code, and Section 16(b) of the
Securities Exchange Act of 1934. The Plan covers 1,200,000 shares of the
Company's Common Stock. Eligibility is limited to employees and directors of the
Company and its subsidiaries. The actual selection of grantees is made by the
Board of Directors. The term of the plan is 10 years, and the term of the
options is at the discretion of the Board, with a term of 5 years. All options
are fully vested and exercisable when granted. The exercise price is fair market
value at the date of grant, except for individuals who own 10% or more of the
Company's stock.
Prior to 1995, Hunter had granted certain of its employees and
directors options to purchase its common shares. In connection with the merger,
the Company has substituted the Hunter options with 264,558 options under the
Plan, 239,022 of which have an exercise price of $.73425 per share and 25,536 of
which have an exercise price of $1.65 per share. During 1996, 12,258 of these
options were exercised. In addition, during 1996, the Board granted the
remaining 935,442 options to employees and directors at an exercise price of
$4.50 per share.
The following is a summary of stock option activity under the Plan:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Weighted Average Weighted Average
Shares Exercise Price Shares Exercise Price
--------------- -------------------- ------------ -----------------
Outstanding-Beginning of Year......... 264,558 $0.82 264,558 $0.82
Granted............................... 935,442 4.50 - -
Exercised............................. (12,258) .73 - -
Cancelled............................. - - - -
--------------- -------------------- ------------ -----------------
Outstanding-End of Year............... 1,187,742 $3.72 264,558 $0.82
=============== ==================== ============ =================
</TABLE>
The following is a summary of plan stock options outstanding at
December 31, 1996:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Number of
Options Weighted Average Remaining
Exercise Price Outstanding Contractual Life (Years) Number of Exercisable Options
-------------- ---------------- --------------------------- ---------------------------
$ .73 226,764 1.0 35,242
1.65 25,536 3.0 -
4.50 935,442 4.3 935,442
---------------- ---------------------------
1,187,742 970,684
================ ===========================
</TABLE>
The Company adopted the disclosures only portion of SFAS No. 123 as it
continued to follow the provisions of APB No. 25, which is the intrinsic value
method of accounting for stock-based compensation.
On a pro forma basis, the effect of stock based compensation had the
Company adopted Statement No. 123 is as follows:
1996
---------
Net Income (Loss): As reported $103,000
Pro Forma (1,540,000)
Primary Earnings per Share: As reported .01
Pro Forma (.12)
Fully Diluted Earnings per Share: As reported .01
Pro Forma (.12)
F-24
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The weighted average grant date fair value of options granted was $2.56
and of warrants granted was $1.09 during 1996. Fair value of options and
warrants was calculated by using the Black-Scholes options pricing model using
the following weighted average assumptions for 1996 activity: risk free interest
rate of 5.74%, expected life of 4.28 years, expected volatility of 60.8% and no
dividend yield.
NOTE 16-SUBSEQUENT EVENTS
In January, 1997, the Company purchased a fifty percent (50%) interest
in the McLean Gas Plant, the gas processing facility connected to the Company's
Panoma gas gathering system for $2.5 million. Under the terms of the purchase
agreement, the Company will receive 100% of the net profits of the plant until
it receives the $2.5 million purchase price, at which point its net profits
interest will revert to fifty percent (50%), the Company's ownership position.
The acquisition was funded through the Company's revolving credit agreement with
certain banks.
On April 30, 1997, the Company acquired from a subsidiary of Burlington
Resources, Inc., effective as of January 1, 1997, the Permian Basin Properties,
consisting of 25 field areas in west Texas and 22 field areas in southeast New
Mexico, for a net purchase price of $133.0 million after adjustments of $10.5
million for production cash flow from January 1, 1997 to the closing date and
other minor adjustments.
The Company financed the acquisition of the Permian Basin Properties
with a new $130.0 million credit facility (the "New Credit Facility") and a
senior subordinated credit facility of $60.0 million (the "Term Loan Facility").
Borrowings of $119.5 million under the New Credit Facility and $60.0 million
under the Term Loan Facility were used to pay the $123.0 million balance of the
$133.0 million net purchase price for the Permian Basin Properties, to repay the
$53.7 million in outstanding indebtedness as of April 30, 1997 under the
Company's previous $100.0 million credit facility (the "Previous Credit
Facility") and to pay the costs associated with the Permian Basin Acquisition
and the related financings. The New Credit Facility currently bears interest at
9.0% per annum. After repayment of the Term Loan Facility using the proceeds of
a $125 million offering of Senior Subordinated Notes due 2007, the New Credit
Facility will initially bear interest at LIBOR plus 1.75% per annum, which would
be 7.6% based on the LIBOR rate at April 30, 1997. The unpaid principal amount
under the New Credit Facility matures on April 30, 2002. At April 30, 1997, the
interest rate on the Term Loan Facility was 11.5% per annum. The Term Loan
Facility initially matures on April 30, 1998, at which time the Company has the
option to extend such facility for an additional five years.
In the event that the borrowings under the New Credit Facility are not
less than $75.0 million on July 15, 1997, the Company is obligated to pay the
lenders an additional fee. In addition, if borrowings under the Term Loan
Facility have not been repaid beginning August 28, 1997, the Company, at various
dates thereafter within the initial one-year term, will incur an increase in
interest rates and be obligated to pay the lenders additional fees and/or
warrants to purchase common stock of the Company. More specifically, the
interest rate under the Term Loan Facility increases by 1.0% on each of three
specified dates with a maximum interest rate of 15.5%. The Company may also be
obligated to issue equity securities up to a maximum of 5.0% of the fully
diluted common equity of the Company.
In April 1997, the terms of the Company's 1996 Series A Convertible
Preferred Stock were amended to require the Company to raise $15 million of
additional equity by December 31, 1997 rather than March 31, 1998 as described
in Note 9.
NOTE 17-EMPLOYMENT CONTRACTS AND TERMINATION OF EMPLOYMENT AND
CHANGE-IN-CONTROL ARRANGEMENTS
Mr. Gary C. Evans and Mr. Matthew C. Lutz have employment agreements with
Magnum Hunter Resources, Inc. Mr. Evans' agreement terminates December 31, 1997
and continues thereafter on a year to year basis
F-25
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and provides for a base salary of $200,000 per annum. Mr. Lutz's agreement
terminates September 30, 1997 and continues thereafter on a year to year basis
and provides for a base salary of $100,000 per annum. Both agreements provide
that the same benefits supplied to other Company employees shall be available to
the employee. The employment agreements also contain, among other things,
covenants by the employee that in the event of termination, he will not
associate with a business that competes with the Company for a period of one
year after cessation of employment. The Company also has key man life insurance
on Mr. Evans in the amount of $1,000,000.
F-26
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
Proved oil and gas reserves consist of those estimated quantities of
crude oil, natural gas, and natural gas liquids that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Estimates of petroleum reserves have been made by independent engineers
and Company employees. These estimates include reserves in which the Company
holds an economic interest under production-sharing and other types of operating
agreements. These estimates do not include probable or possible reserves. The
estimated net interests in proved reserves are based upon subjective engineering
judgments and may be affected by the limitations inherent in such estimation.
The process of estimating reserves is subject to continual revision as
additional information becomes available as a result of drilling, testing,
reservoir studies and production history. There can be no assurance that such
estimates will not be materially revised in subsequent periods.
Estimated quantities of proved oil and gas reserves of the Company were
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Natural Gas
(Thousand
Oil (Barrels) Cubic Feet)
--------------- --------------
December 31, 1996
Proved reserves........................................................... 5,338,255 90,565,997
Proved developed reserves................................................. 1,962,184 71,275,141
December 31, 1995
Proved reserves........................................................... 3,767,739 14,071,916
Proved developed reserves................................................. 1,681,841 8,796,748
December 31, 1994
Proved reserves........................................................... 1,260,520 4,914,207
Proved developed reserves................................................. 239,795 394,872
The changes in proved reserves for the years ended December 31, 1996
and 1995 were as follows:
Natural Gas
(Thousand
Oil (Barrels) Cubic Feet)
--------------- ----------------
Reserves at December 31, 1994.................................................. 1,260,520 4,914,207
Purchase of minerals-in-place.................................................. 3,122,382 10,973,298
Extensions and discoveries..................................................... 38,498 564,247
Production..................................................................... (29,972) (102,056)
Revisions of estimates......................................................... (623,689) (2,277,780)
--------------- ----------------
Reserves at December 31, 1995.................................................. 3,767,739 14,071,916
Purchase of minerals-in-place.................................................. 2,678,579 81,943,557
Sale of minerals-in-place...................................................... (214,381) (1,318,164)
Extensions and discoveries..................................................... 151,606
Production..................................................................... (191,203) (2,674,793)
Revisions of estimates......................................................... (702,479) (1,608,125)
--------------- ----------------
Reserves at December 31, 1996.................................................. 5,338,255 90,565,997
=============== ================
</TABLE>
F-27
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The aggregate amounts of capitalized costs relating to oil and gas producing
activities and the related accumulated depreciation, depletion and impairment as
of December 31, 1996, 1995, and 1994 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Unproved oil and gas properties....................... $ 459,254 $842,889 $700,344
Proved properties..................................... 70,574,890 36,256,428 7,932,496
---------------- ---------------- ------------------
Gross Capitalized Costs............................... 71,034,144 37,099,317 8,632,840
Accumulated depreciation, depletion and
impairment......................................... (4,513,541) (1,914,602) (1,499,095)
---------------- ---------------- ------------------
Net Capitalized Costs................................. $66,520,603 $35,184,715 $7,133,745
================ ================ ==================
</TABLE>
Costs incurred in oil and gas producing activities, both capitalized
and expensed, during the years ended December 31, 1996, 1995, and 1994 were as
follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Property acquisition costs
Proved properties..................................... $31,982,821 $27,983,521 $1,737,543
Unproved properties................................... - 142,545 -
Exploration costs........................................ 1,114,733 340,411 -
Development costs........................................ 837,273 - 791,144
--------------- ------------- ---------------
Total Costs Incurred..................................... $33,934,827 $28,466,477 $2,528,687
=============== ============= ===============
</TABLE>
Results of operations from oil and gas producing activities for the
years ended December 31, 1996, 1995, and 1994 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Oil and gas production revenue............................ $10,247,688 $616,596 $729,478
Disposal services revenue................................. 20,487 31,978 15,704
Production costs.......................................... (4,389,465) (267,647) (324,392)
Depreciation and depletion................................ (2,598,939) (421,101) (243,180)
---------------- --------------- ---------------
Results of Operations for Producing
Activities................................................ $3,279,771 $ (40,174) $177,610
================ =============== ===============
</TABLE>
The standardized measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31, 1996, 1995, and 1994 were
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Future cash inflows........................... $492,157,062 $95,068,694 $25,900,669
Future development and production costs....... (138,614,804) (37,746,877) (10,011,434)
--------------------- ------------------- -------------------
Future net cash flows, before income tax...... 353,542,258 57,321,817 15,889,235
Future income taxes........................... (102,341,098) (11,381,779) (3,679,963)
--------------------- ------------------- -------------------
Future Net Cash Flows......................... 251,201,160 45,940,038 12,209,272
10% annual discount........................... (134,116,299) (16,120,359) (5,974,156)
--------------------- ------------------- -------------------
Standardized Measure of Discounted Future
Net Cash Flows............................. $117,084,861 $29,819,679 $6,235,116
===================== ================== ====================
</TABLE>
F-28
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
SUPPLEMENTAL INFORMATION ON OIL AND GAS PRODUCING ACTIVITIES
(UNAUDITED)
The primary changes in the standardized measure of discounted estimated
future net cash flows for the years ended December 31, 1996, 1995, and 1994 were
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Purchases of minerals-in-place....................... $129,544,769 $30,507,745 $2,736,310
Sales of minerals-in-place........................... (2,195,780) - -
Extensions, discoveries and improved recovery,
less related costs................................ 302,785 582,001 162,944
Sales of oil and gas produced, net of production
costs............................................. (5,858,223) (350,083) (300,517)
Development costs incurred during the period......... - - 467,192
Revision of prior estimates:
Net change in prices and costs.................... 14,993,539 4,864,688 (1,074,222)
Change in quantity estimates...................... (10,107,737) (7,637,000) (2,981,078)
Accretion of discount................................ 2,981,968 623,512 1,289,466
Net change in income taxes........................... (42,396,139) (5,006,300) (594,905)
------------------ ---------------- ------------------
Net Change........................................... $87,265,182 $23,584,563 $(294,810)
=================== ================= ==================
</TABLE>
Estimated future cash inflows are computed by applying year-end prices
of oil and gas to year-end quantities of proved reserves. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves at
the end of the year, based on year-end costs and assuming continuation of
existing economic conditions. Estimated future income tax expense is calculated
by applying year-end statutory tax rates to estimated future pre-tax net cash
flows related to proved oil and gas reserves, less the tax basis of the
properties involved.
The assumption used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and as such, do not
necessarily reflect the Company's expectations of actual revenues to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process are equally applicable to the standardized
measure computations since these estimates are the basis for the valuation
process.
F-29
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEET
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
<S> <C>
June 30,
1997
----------------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 1,571
Securities available for sale 360
Accounts receivable
Trade, net of allowance of $134,158 10,541
Due from affiliates 101
Notes receivable from affiliate 382
Current portion of long-term note receivable 129
Prepaid and other 384
----------------------
TOTAL CURRENT ASSETS 13,468
----------------------
PROPERTY, PLANT AND EQUIPMENT
Oil and gas properties, full cost method
Unproved 460
Proved 208,871
Pipelines 9,824
Other property 571
---------------------
TOTAL PROPERTY, PLANT AND EQUIPMENT 219,726
Accumulated depreciation, depletion and impairment (9,329)
---------------------
NET PROPERTY, PLANT AND EQUIPMENT 210,397
---------------------
OTHER ASSETS
Deposits and other assets 6,140
Long-term notes receivable, net of imputed interest 1,665
---------------------
TOTAL ASSETS $ 231,670
=====================
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Trade payables and accrued liabilities $ 5,524
Dividends payable 219
Suspended revenue payable 834
Current maturities of long-term debt 22
Notes payable 2,699
---------------------
TOTAL CURRENT LIABILITIES 9,298
---------------------
LONG-TERM LIABILITIES
Long-term debt, less current maturities 187,033
Production payment liability 831
Deferred income taxes 2,215
Minority interest 40
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY
Preferred stock - $.001 par value; 10,000,000 shares authorized,
216,000 designated as Series A; 80,000 shares issued and outstanding,
liquidation amount $0 -
1,000,000 shares designated as 1996 Series A Convertible;
1,000,000 issued and outstanding, liquidation amount $10,000,000 1
Common stock - $.002 par value; 50,000,000 shares authorized,
14,263,037 shares issued and outstanding 29
Additional paid-in capital 39,782
Accumulated deficit (7,688)
Unrealized gain (loss) on investments 130
--------------------
32,254
Treasury stock (654,939 shares of common stock) (1)
--------------------
TOTAL STOCKHOLDERS' EQUITY 32,253
--------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 231,670
====================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-30
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
(in thousands of dollars, except for per share amounts)
<TABLE>
<CAPTION>
<S> <C> <C>
<S> <C> <C> <C> <C>
Three Months Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------------
1997 1996 1997 1996
--------------------------------------------------------------
Operating Revenues:
Oil and gas sales $ 8,528 $ 1,441 $ 11,791 $ 2,821
Gas gathering, marketing and processing 1,391 771 5,283 1,528
Oil field services and international sales 135 99 3,606 201
--------------------------------------------------------------
Total Operating Revenues 10,054 2,311 20,680 4,550
--------------------------------------------------------------
Operating Costs and Expenses
Oil and gas production 3,143 561 4,740 1,126
Gas gathering, marketing and processing 978 670 3,938 1,314
Oil field services and international sales 86 160 3,424 327
Depreciation and depletion 3,379 578 4,460 1,084
General and administrative 429 221 651 443
--------------------------------------------------------------
Total Operating Costs and Expenses 8,015 2,190 17,213 4,294
--------------------------------------------------------------
Operating Profit (Loss) 2,039 121 3,467 256
Other income 83 160 155 186
Interest expense (3,690) (245) (4,758) (499)
--------------------------------------------------------------
Net Income (Loss) before income tax and minority interest (1,568) 36 (1,136) (57)
Benefit (Provision) for deferred income tax 596 - 432 -
--------------------------------------------------------------
Net Income (Loss) before minority interest (972) 36 (704) (57)
Minority interest in subsidiary earnings (2) - (20) -
--------------------------------------------------------------
Net Income (Loss) Before Extraordinary Loss (974) 36 (724) (57)
Extraordinary Loss From Early Extinguishment of Debt (1,384) - (1,384) -
--------------------------------------------------------------
Net Income (Loss) (2,358) 36 (2,108) (57)
Dividends Applicable to Preferred Stock (219) (168) (438) (340)
--------------------------------------------------------------
Loss Applicable to Common Shares $ (2,577) $ (132) $ (2,546) $ (397)
==============================================================
Loss Before Extraordinary Loss per Common Share $ (0.09) $ (0.01) $ (0.09) $ (0.03)
Extraordinary Loss per Common Share $ (0.10) $ - $ (0.10) $ -
--------------------------------------------------------------
Loss per Common Share $ (0.19) $ (0.01) $ (0.19) $ (0.03)
==============================================================
Common Shares Used In Per Share Calculation 13,602,940 11,710,065 13,644,884 11,658,958
==============================================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-31
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
<S> <C> <C>
Six Months Ended
June 30,
----------------------------------
1997 1996
----------------------------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss) $ (2,108) $ (57)
Adjustments to reconcile net income (loss) to cash provided by
(used for) operating activities:
Extraordinary loss 1,384 -
Depreciation and depletion 4,460 1,084
Amortization of financing fees 153 -
Deferred income taxes (432) -
Minority interest 20 -
(Gain) Loss on sale of assets - (143)
Other 51 -
Change in certain assets and liabilities
Accounts and notes receivables (6,029) (479)
Other current assets (332) (82)
Deposits and other assets - (401)
Accounts payable and accrued liabilities 1,634 351
----------------------------------
NET CASH PROVIDED BY (USED BY) OPERATING ACTIVITIES $ (1,198) $ 273
----------------------------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from the sale of assets 463 188
Additions to property and equipment (141,667) (37,301)
Loan made for promissory note receivable (145) -
Payments received on promissory note receivable 164 -
----------------------------------
NET CASH USED BY INVESTING ACTIVITIES (141,185) (37,113)
----------------------------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of long-term debt and production payment 335,000 54,313
Fees paid related to financing activities (7,881) -
Proceeds from short-term notes payable 2,699 -
Payments of principal on long-term debt and production payment (186,817) (15,890)
Payment of fees on issuance of preferred stock (505) -
Proceeds from issuance of common and preferred stock,
net of offering costs 12 -
Dividends paid (241) (349)
----------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 142,267 38,074
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (116) 1,234
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 1,687 1,544
---------------------------------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 1,571 $ 2,778
=================================
The accompanying notes are an integral part of these consolidated financial statements.
</TABLE>
F-32
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
June 30, 1997
(Unaudited)
NOTE 1 - MANAGEMENT'S REPRESENTATION
The consolidated balance sheet as of June 30, 1997, the consolidated
statements of operations for the six months ended June 30, 1997 and 1996, and
the consolidated statements of cash flows for the six month periods then ended
are unaudited. In the opinion of management, all necessary adjustments (which
include only normal recurring adjustments) have been made to present fairly the
financial position, results of operations and changes in cash flows.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted. It is suggested that these condensed financial
statements be read in conjunction with the financial statements and notes
thereto included in the December 31, 1996 annual report on Form 10-KSB for the
Company. The results of operations for the six month period ended June 30, 1997,
are not necessarily indicative of the operating results for the full year.
The accompanying consolidated financial statements include the accounts of
the Company and its wholly-owned subsidiaries. All significant intercompany
transactions and balances have been eliminated in consolidation. Certain items
have been reclassified to conform with the current presentation.
NOTE 2 - RECENT EVENTS
In February, 1997, the Company entered into a definitive agreement with
Burlington Resources, Inc. to acquire for $143.5 million, subject to certain
purchase price adjustments, effective January 1, 1997, the Permian Basin
Properties consisting of 25 field areas in West Texas and 22 field areas in
Southeast New Mexico containing 1,852 producing oil and natural gas wells. In
accordance with the definitive acquisition agreement, the Company made a
performance deposit of $10 million against the purchase price.
On April 30, 1997, the Company closed on the purchase of the Permian Basin
Properties for a net purchase price of approximately $133 million, including,
but not limited to, certain adjustments for a January 1, 1997 effective date.
The Company financed the acquisition of the Permian Basin Properties with a
new $130.0 million credit facility (the "New Credit Facility") and a senior
subordinated credit facility of $60.0 million (the "Bridge Loan Facility").
Borrowings of $119.5 million under the New Credit Facility and $60.0 million
under the Bridge Loan Facility were used to pay the $123.0 million balance of
the $133.0 million net purchase price for the Permian Basin Properties, to repay
the $53.7 million in outstanding indebtedness as of April 30, 1997 under the
Company's previous $100.0 million credit facility and to pay the costs
associated with the Permian Basin acquisition and the
F-33
<PAGE>
related financings.
On May 28, 1997, the Company completed an offering of $140,000,000
aggregate principal amount of its 10% Senior Notes due 2007 (the "Notes").
Interest on the Notes will accrue from their date of original issuance and will
be payable semi-annually in arrears on June 1 and December 1 of each year,
commencing on December 1, 1997, at the rate of 10% per annum. The Notes will be
redeemable, in whole or in part, at the option of the Company on or after June
1, 2002, at the redemption prices set forth herein, plus accrued interest to the
date of redemption. The Notes will be general unsecured obligations of the
Company and will rank pari passu with any unsubordinated indebtedness of the
Company and will rank senior in right of payment to all subordinated obligations
of the Company. The net proceeds from the offering were approximately $135.5
million after deducting estimated fees and expenses of $4.5 million payable by
the Company. The Company utilized the net proceeds to repay the $60.0 million of
outstanding indebtedness under the Bridge Loan Facility and to reduce
indebtedness under the New Credit Facility by approximately $75.5 million. As of
June 30, 1997, the Company had approximately $47 million of secured indebtedness
outstanding (excluding unused commitments of $13 million under the New Credit
Facility).
F-34
<PAGE>
INDEPENDENT AUDITORS' REPORT
Board of Directors
Magnum Hunter Resources, Inc.
Irving, Texas
We have audited the accompanying historical summaries of revenue and
direct operating expenses of properties to be acquired April 30, 1997 (the
"Permian Basin Properties"), for the years ended December 31, 1996, 1995 and
1994. The historical summaries are the responsibility of the Company's
management. Our responsibility is to express an opinion on the historical
summaries based on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the historical summaries are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the historical summary. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall historical summary presentation.
We believe that our audit provides a reasonable basis for our opinion.
The accompanying historical summaries were prepared for the purpose of
complying with the rules and regulations of the Securities and Exchange
Commission (for inclusion in the Form S-4 of Magnum Hunter Resources, Inc.) as
described in Note 1 and are not intended to be a complete presentation of the
properties' revenues and expenses.
In our opinion, the historical summaries referred to above present
fairly, in all material respects, the revenue and direct operating expenses of
the properties to be acquired April 30, 1997, in conformity with generally
accepted accounting principles.
HEIN + ASSOCIATES LLP
April 23, 1997
Dallas, Texas
F-35
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
PERMIAN BASIN PROPERTIES
HISTORICAL SUMMARIES OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND FOR THE FOUR MONTH PERIODS ENDED APRIL 30, 1997 AND 1996
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Year Ended 1996 Year Ended 1995 Year Ended 1994
--------------- --------------- ---------------
OIL AND GAS SALES....................................... $39,433,000 $30,098,000 $33,605,000
DIRECT OPERATING EXPENSES............................... (11,646,000) (11,711,000) (12,314,000)
------------------ ------------------ -------------------
NET REVENUE............................................. $27,787,000 $18,387,000 $21,291,000
================== ================== ===================
</TABLE>
<TABLE>
<CAPTION>
<S> <C> <C>
Four Months ended Four Months Ended
April 30, 1997 April 30, 1996
(Unaudited) (Unaudited)
------------------ ------------------
OIL AND GAS SALES................................... $12,627,000 $12,323,000
DIRECT OPERATING EXPENSES (3,039,000) (3,891,000)
------------------ ------------------
NET REVENUE $ 9,588,000 $ 8,432,000
================== ==================
</TABLE>
See Notes to Historical Summaries of Revenues and Direct Operating Expenses for
the Years Ended December 31, 1996, 1995 and 1994 and for the Four Month Periods
Ended April 30, 1997 and 1996.
F-36
<PAGE>
MAGNUM HUNTER RESOURCES, INC. AND SUBSIDIARIES
PERMIAN BASIN PROPERTIES
NOTES TO HISTORICAL SUMMARIES OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED DECEMBER 31, 1996, 1995 AND 1994
AND FOR THE FOUR MONTH PERIODS ENDED APRIL 30, 1997 AND 1996
NOTE 1-BASIS OF PREPARATION
The accompanying historical summaries of revenues and direct operating
expenses relate to the operations of the oil and gas properties to be acquired
by Magnum Hunter Resources, Inc. (the "Company") on April 30, 1997 from
Burlington Resources Oil and Gas Company (Burlington). The properties are to be
acquired for approximately $133,000,000, net of purchase adjustments.
Revenues are recorded when the Company's share of oil or natural gas
and related liquids are sold. Direct operating expenses are recorded when the
related liability is incurred. Direct operating expenses include lease operating
expenses, ad valorem taxes and production taxes. Depreciation and amortization
of oil and gas properties, general and administrative expenses and income taxes
have been excluded from operating expenses in the accompanying historical
summaries because the amounts would not be comparable to those resulting from
proposed future operations. Sales of natural gas and oil (until August 1996)
have generally been made to an affiliated entity of Burlington.
The historical summaries presented herein were prepared for the purposes of
complying with the financial statement requirements of a business acquisition to
be filed on Form S-4 as promulgated by Regulation S-B Item 3-10 of the
Securities Exchange Act of 1934.
Unaudited Information
The historical summaries for the four month periods ended April 30, 1997
and 1996 were taken from Burlington's books and records without audit. However,
in the opinion of management, such information includes all adjustments
(consisting only of normal recurring accruals) which are necessary to properly
reflect the historical summaries of the Permian Basin Properties for the four
month periods ended April 30, 1997 and 1996.
NOTE 2-CONTINGENCIES
The properties to be acquired are subject to several lawsuits against
Burlington that have arisen from the ordinary course of operations. Burlington
has indemnified the Company in the Purchase and Sale Agreement against any
liability from those claims.
In the Purchase and Sale Agreement, Burlington agreed to indemnify the
Company against environmental claims relating to the acquired properties and
arising prior to January 1, 1997 provided that the Company notifies Burlington
of such claims by December 31, 1997. Burlington will provide indemnification
against such claims up to $10,762,500 and share the next $21,525,000 of claims
with the Company on an equal basis. Burlington represented in the Purchase and
Sale Agreement that no material environmental claims have been asserted; however
certain of these properties require remediation which, in the Company's opinion,
will not result in material costs.
NOTE 3-SUPPLEMENTAL INFORMATION ON OIL AND GAS RESERVES (UNAUDITED)
Proved oil and gas reserves consist of those estimated quantities of
crude oil, natural gas, and natural gas liquids that geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions. Proved
developed oil and gas reserves are reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
The following estimates of proved reserves have been made by
independent engineers. The estimated net interests in proved reserves are based
upon subjective engineering judgments and may be affected by the limitations
inherent in such estimation. The process of estimating reserves is subject to
continual revision as additional information becomes available as a result of
drilling, testing, reservoir studies and production history. There can be no
assurance that such estimates will not be materially revised in subsequent
periods.
F-37
<PAGE>
Estimated quantities of proved oil and gas reserves of the properties
to be acquired April 30, 1997 are as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Natural Gas (Thousand
Oil (Barrels) Cubic Feet)
December 31, 1996
Proved reserves............................................... 15,291,000 99,876,000
============= =============
Proved developed reserves..................................... 8,968,000 77,373,000
============= =============
December 31, 1995
Proved reserves............................................... 16,176,000 108,476,000
============= ==============
Proved developed reserves..................................... 9,853,000 85,973,000
============= ==============
December 31, 1994
Proved reserves............................................... 17,121,000 118,076,000
============= ==============
Proved developed reserves..................................... 10,798,000 95,573,000
============= ==============
</TABLE>
The changes in proved reserves for the years ended December 31, 1996,
1995 and 1994 were as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
Natural Gas (Thousand
Oil (Barrels) Cubic Feet)
Reserves at January 1, 1994...................................... 18,120,000 128,066,000
Revisions and other.............................................. 55,000 1,417,000
Production....................................................... (1,054,000) (11,407,000)
--------------------- ---------------------
Reserves at December 31, 1994.................................... 17,121,000 118,076,000
Revisions and other.............................................. 73,000 730,000
Production....................................................... (1,018,000) (10,330,000)
--------------------- ---------------------
Reserves at December 31, 1995.................................... 16,176,000 108,476,000
Revisions and other.............................................. 29,000 808,000
Production....................................................... (914,000) (9,408,000)
--------------------- ---------------------
Reserves at December 31, 1996.................................... 15,291,000 99,876,000
====================== =====================
</TABLE>
F-38
<PAGE>
The standardized measure of discounted estimated future net cash flows
related to proved oil and gas reserves at December 31, 1996, 1995 and 1994 were
as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
1996 1995 1994
---- ---- ----
Future cash inflows........................ $769,681,000 $410,721,000 $423,775,000
Future development and production costs.... (300,868,000) (275,252,000) (285,124,000)
--------------------- --------------------- ---------------------
Future net cash flows, before income tax... 468,813,000 135,469,000 138,651,000
Future income taxes........................ (116,660,000) - (1,103,000)
--------------------- --------------------- ---------------------
Future Net Cash Flows...................... 352,153,000 135,469,000 137,548,000
10% annual discount........................ (169,385,000) (60,181,000) (59,395,000)
--------------------- --------------------- ---------------------
Standardized Measure of Discounted
Future
Net Cash Flows............................. $182,768,000 $75,288,000 $78,153,000
====================== ====================== ====================
</TABLE>
The primary changes in the standardized measure of discounted estimated
future net cash flows for the years ended December 31, 1996, 1995 and 1994 were
as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C>
1996 1995 1994
---- ---- ----
Beginning of year............................... $75,288,000 $78,153,000 $95,678,000
Sales of oil and gas produced, net of
production costs............................. (27,787,000) (18,387,000) (21,291,000)
Net change in price and costs................... 182,919,000 6,800,000 (13,600,000)
Change in quantity estimates and other.......... 933,000 432,000 611,000
Accretion of discount........................... 7,528,000 7,800,000 9,568,000
Net change in income taxes...................... (56,113,000) 490,000 7,187,000
----------------- ------------------- ------------------
End of year..................................... $182,768,000 $75,288,000 $78,153,000
================= =================== ==================
</TABLE>
Estimated future cash inflows are computed by applying year-end prices
of oil and gas to year-end quantities of proved reserves. Estimated future
development and production costs are determined by estimating the expenditures
to be incurred in developing and producing the proved oil and gas reserves at
the end of the year, based on year-end costs and assuming continuation of
existing economic conditions. Estimated future income tax expense is calculated
by applying year-end statutory tax rates to estimated future pre-tax net cash
flow related to proved oil and gas reserves, less the tax basis of the
properties involved.
The assumptions used to compute the standardized measure are those
prescribed by the Financial Accounting Standards Board and as such, do not
necessarily reflect the Company's expectations of actual revenues to be derived
from those reserves nor their present worth. The limitations inherent in the
reserve quantity estimation process are equally applicable to the standardized
measure computations since these estimates are the basis for the valuation
process.
F-39
<PAGE>
No dealer, salesperson, or other person has been authorized to give any
information or to make any representations in connection with the offer
contained herein other than those contained in this Prospectus, and, if given or
made, such information or representations must not be relied upon as having been
authorized by the Company or the Initial Purchasers. This Prospectus does not
constitute an offer to sell or the solicitation of any offer to buy any security
other than those to which it relates, nor does it constitute an offer to sell,
or the solicitation of an offer to buy, to any person in any jurisdiction in
which such offer or solicitation is not authorized, or in which the person
making such offer or solicitation is not qualified to do so, or to any person to
whom it is unlawful to make such offer or solicitation. Neither the delivery of
this Prospectus nor any sale made hereunder shall, under any circumstances,
create any implication that there has been no change in the affairs of the
Company since the date hereof nor that the information contained herein is
correct as of any time subsequent to the date hereof.
---------
TABLE OF CONTENTS
Page
Prospectus Summary.......................................................... 7
Risk Factors................................................................ 20
Use of Proceeds............................................................. 29
The Exchange Offer.......................................................... 30
Capitalization.............................................................. 41
Unaudited Pro Forma Combined
Financial Data............................................................ 42
Selected Consolidated Financial Data........................................ 48
Management's Discussion and Analysis of
Financial Condition and Results
of Operations............................................................. 50
Business and Properties..................................................... 61
Management.................................................................. 80
Principal Stockholders and Share
Ownership of Management................................................... 83
Certain Transactions........................................................ 83
Description of New Credit Facility.......................................... 84
Description of the Exchange Notes........................................... 85
Description of the Outstanding Notes........................................115
Certain Federal Income Tax Considerations...................................115
Book-Entry; Delivery and Form...............................................119
Plan of Distribution........................................................121
Legal Matters...............................................................123
Experts.....................................................................123
Available Information.......................................................124
Incorporation of Certain Documents
by Reference.............................................................125
Glossary....................................................................126
Index to Consolidated Financial Statements..................................F-1
<PAGE>
-------------------------------
PROSPECTUS
-------------------------------
$140,000,000
[LOGO]
MAGNUM HUNTER RESOURCES,
INC.
10% Senior Notes due 2007
October 24, 1997
<PAGE>
P A R T II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 20. Indemnification of Directors and Officers.
The General Corporation Law of Nevada permits provisions in the
articles, by-laws or resolutions approved by shareholders which limit liability
of directors for breach of fiduciary duty in certain specified circumstances.
The Articles of Incorporation, with certain exceptions, eliminate any personal
liability of a director to the Company or its shareholders for monetary damages
for the breach of a director's fiduciary duty, and therefore a director cannot
be held liable for damages to the Company or its shareholders for gross
negligence or lack of due care in carrying out his fiduciary duties as a
director. Nevada law permits indemnification if a director or officer acts in
good faith in a manner reasonably believed to be in, or not opposed to, the best
interests of the corporation. A director or officer must be indemnified as to
any matter in which he successfully defends himself. Indemnification is
prohibited as to any matter in which the director or officer is adjudged liable
to the corporation.
Item 21(a). Exhibits.
The information required by this Item 21(a) is set forth in the Index
to Exhibits accompanying this Registration Statement and is incorporated herein
by reference.
Item 22. Undertakings.
Insofar as indemnification for liabilities arising under the Securities
Act may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described under Item 20 above, or
otherwise, the registrant has been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable.
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 the documents
filed subsequent to the effective date of the Registration Statement through the
date of responding to the request.
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.
II-1
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, each of the
registrants has duly caused this Amendment No. 1 to the Registration Statement
to be signed on its behalf by the undersigned, thereunto duly authorized, in
Irving, Texas, on the 23th day of October, 1997.
MAGNUM HUNTER RESOURCES, INC.
/s/ Gary C. Evans
By:-----------------------------------
Gary C. Evans
President and Chief Executive Officer
MAGNUM HUNTER PRODUCTION, INC.
/s/ Gary C. Evans
By:-----------------------------------
Gary C. Evans
Chief Executive Officer
HUNTER GAS GATHERING, INC.
/s/ Gary C. Evans
By:-----------------------------------
Gary C. Evans
Chief Executive Officer
GRUY PETROLEUM MANAGEMENT CO.
/s/ Gary C. Evans
By:---------------------------------
Gary C. Evans
Chief Executive Officer
CONMAG ENERGY CORPORATION
/s/ Gary C. Evans
By:--------------------------------
Gary C. Evans
Chief Executive Officer
RAMPART PETROLEUM, INC.
/s/ Gary C. Evans
By:--------------------------------
Gary C. Evans
Chief Executive Officer
II-2
<PAGE>
MAGNUM HUNTER RESOURCES, INC.
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ Gary C. Evans
- ------------------------- Director, President and Chief October 23, 1997
Gary C. Evans Executive Officer
Matthew C. Lutz *
- -------------------------- Director, Chairman of the Board October 23, 1997
Matthew C. Lutz and Executive Vice President of
Exploration and Business
Development
/s/ Chris Tong
- -------------------------- Senior Vice President and October 23 1997
Chris Tong Chief Financial Officer
David S. Krueger *
- -------------------------- Vice President and Chief
David S. Krueger Accounting Officer (principal October 23, 1997
accounting officer)
Gerald W. Bolfing *
- -------------------------- Director October 23, 1997
Gerald W. Bolfing
Oscar C. Lindemann *
- ------------------------- Director October 23, 1997
Oscar C. Lindemann
John H. Trescot, Jr. *
- ------------------------- Director October 23, 1997
John H. Trescot, Jr.
James E. Upfield *
- -------------------------- Director October 23, 1997
James E. Upfield
*By: /s/ Gary C. Evans
- --------------------------
Attorney-in-fact
II-3
<PAGE>
MAGNUM HUNTER PRODUCTION, INC.
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
Richard R. Frazier *
- - ------------------------- Director, President and Chief October 23, 1997
Richard R. Frazier Operating Officer
/s/ Gary C. Evans
- - ------------------------- Director and Chief Executive October 23, 1997
Gary C. Evans Officer(principal
executive officer)
/s/ Chris Tong
- -------------------------- Senior Vice President and October 23, 1997
Chris Tong Chief Financial Officer
David S. Krueger *
- - ------------------------- Vice President and Chief October 23, 1997
David S. Krueger Accounting Officer
Matthew C. Lutz *
- - ------------------------- Director October 23, 1997
Matthew C. Lutz
*By: /s/ Gary C. Evans
- --------------------------
Attorney-in-fact
II-4
<PAGE>
HUNTER GAS GATHERING, INC.
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
R. Renn Rothrock, Jr. *
- --------------------------- Director and President October 23, 1997
R. Renn Rothrock, Jr.
/s/ Gary C. Evans
- --------------------------- Director and Chief Executive October 23, 1997
Gary C. Evans Officer (principal executive
officer)
/s/ Chris Tong
- -------------------------- Senior Vice President and October 23, 1997
Chris Tong Chief Financial Officer
David S. Krueger *
- --------------------------- Vice President and Chief October 23, 1997
David S. Krueger Accounting Officer
Matthew C. Lutz *
- --------------------------- Director October 23, 1997
Matthew C. Lutz
*By: /s/ Gary C. Evans
- --------------------------
Attorney-in-fact
II-5
<PAGE>
GRUY PETROLEUM MANAGEMENT CO.
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
Richard R. Frazier *
- ------------------------ Director and Chief Operating October 23, 1997
Richard R. Frazier Officer
/s/ Gary C. Evans
- ------------------------- Director and Chief Executive October 23, 1997
Gary C. Evans Officer (principal executive
officer)
R. Renn Rothrock, Jr. *
- ------------------------- Director and President October 23, 1997
R. Renn Rothrock, Jr.
/s/ Chris Tong
- -------------------------- Senior Vice President and October 23, 1997
Chris Tong Chief Financial Officer
David S. Krueger *
- ------------------------- Vice President and Chief October 23, 1997
David S. Krueger Accounting Officer
Matthew C. Lutz *
- ------------------------- Director October 23, 1997
Matthew C. Lutz
*By: /s/ Gary C. Evans
- --------------------------
Attorney-in-fact
II-6
<PAGE>
CONMAG ENERGY, INC.
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ Richard R. Frazier
- --------------------------- Director, President and Chief October 23, 1997
Richard R. Frazier Operating Officer
Gary C. Evans *
- --------------------------- Director and Chief Executive October 23, 1997
Gary C. Evans Officer (principal executive
officer)
David S. Krueger *
- -------------------------- Vice President and Chief October 23, 1997
David S. Krueger Accounting Officer
/s/ Chris Tong
- -------------------------- Senior Vice President and October 23, 1997
Chris Tong Chief Financial Officer
Matthew C. Lutz *
- -------------------------- Director October 23, 1997
Matthew C. Lutz
*By: /s/ Gary C. Evans
- --------------------------
Attorney-in-fact
II-7
<PAGE>
RAMPART PETROLEUM, INC.
POWER OF ATTORNEY
Pursuant to the requirements of the Securities Act of 1933, this Amendment
No. 1 to the Registration Statement has been signed by the following persons in
the capacities and on the dates indicated.
Signature Title Date
/s/ Richard R. Frazier
- ------------------------ Director, President and Chief October 23, 1997
Richard R. Frazier Operating Officer
Gary C. Evans *
- ------------------------- Director and Chief Executive October 23, 1997
Gary C. Evans Officer (principal executive
officer)
/s/ Chris Tong
- ------------------------- Senior Vice President and October 23, 1997
Chris Tong Chief Financial Officer
David S. Krueger *
- ------------------------ Vice President and Chief October 23, 1997
David S. Krueger Accounting Officer
Matthew C. Lutz *
- ------------------------ Director October 23, 1997
Matthew C. Lutz
*By: /s/ Gary C. Evans
- --------------------------
Attorney-in-fact
II-8
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Description of Exhibit
3.1 & 4.1 Articles of Incorporation (Incorporated by reference
to Registration Statement on Form S-18, File No.
33-30298-D)
3.2 & 4.2 Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Form 10-K for the year
ended December 31, 1990)
3.3 & 4.3 Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Registration Statement
on Form SB-2, File No. 33-66190)
3.4 & 4.4 Articles of Amendment to Articles of Incorporation
(Incorporated by reference to Registration Statement
on Form S-3, File No. 333-30453)
3.5 & 4.5 By-Laws, as Amended (Incorporated by reference to
Registration Statement on Form SB-2File No. 33-66190)
3.6 & 4.6 Certificate of Designation of 1996 Series A Preferred
Stock (Incorporated by reference to Form 8-K dated
December 26, 1996, filed January 3, 1997)
3.7 & 4.7 Amendment to Certificate of Designations for 1996
Series A Convertible Preferred Stock (Incorporated by
reference to Registration Statement on Form S-3, File
No. 333-30453)
4.8 Indenture dated May 29, 1997 between Magnum Hunter
Resources, the subsidiary guarantors named therein
and First Union National Bank of North Carolina, as
Trustee (Incorporated by Reference to Registration
Statement on Form S-4 File No. 333- 31149)
4.9 Form of 10% Senior Note due 2007 (Incorporated by
Reference to Registration Statement on Form S-4 File
No. 333- 31149)
5 Opinion of Thompson & Knight, a Professional
Corporation(Incorporated by Reference to Registration
Statement on Form S-4 File No. 333- 31149)
10.1 Amended and Restated Credit Agreement,dated April 30,
1997, between Magnum Hunter Resources, Inc. and
Bankers Trust Company, et al. (Incorporated by
Reference to Registration Statement on Form S-4 File
No. 333- 31149)
10.2 First Amendment to Amended and Restated Credit
Agreement, dated April 30, 1997,between Magnum Hunter
Resources, Inc. and Bankers Trust Company, et al.
(Incorporated by Reference to Registration Statement
on Form S-4 File No. 333- 31149)
10.3 Employment Agreement for Gary C. Evans (Incorporated
by reference to Registration
Statement on Form S-4, File No. 333-2290)
10.4 Employment Agreement for Matthew C. Lutz Incorporated
by reference to Registration Statement on Form S-4,
File No. 333-2290)
10.5 Stock Purchase Agreement among Magnum Hunter
Resources, Inc. and Trust Company of the West and TCW
Asset Management Company, in the capacities described
herein,TCW Debt and Royalty Fund IVB and TCW Debt and
Royalty Fund IVC, dated as of December 6, 1996
(Incorporated by reference to Form 8-K dated December
26, 1996, filed January 3, 1997)
10.6 Registration Rights Agreement, dated May 29, 1997,
between Magnum Hunter Resources, Inc. and Bankers
Trust Company, et al. (Incorporated by Reference to
Registration Statement on Form S-4 File No.333-31149)
10.7 Purchase and Sale Agreement, dated May 17, 1996
between Meridian Oil, Inc. and ConMag Energy
Corporation (Incorporated by reference to Form 8-K,
dated June 28, 1996, filed July 12, 1996)
10.8 Purchase and Sale Agreement, dated February 27, 1997
among Burlington Resources Oil and Gas Company,
Glacier Park Company and Magnum Hunter Production,Inc
(Incorporated by reference to Form 8-K, dated April
30, 1997, filed May 12, 1997)
21 Subsidiaries of the Registrant (Incorporated by
Reference to Registration Statement on Form S-4
File No. 333- 31149)
23.1 Consent of Thompson & Knight, a Professional
Corporation (contained in its opinion filed as
Exhibit 5)
23.2** Consent of Deloitte & Touche LLP
23.3** Consent of Hein + Associates LLP
23.4 Consent of Ryder Scott Co. (Incorporated by Reference
to Registration Statement on Form S-4 File No. 333-
31149)
<PAGE>
23.5 Consent of Gaffney, Cline & Associates Inc.
(Incorporated by Reference to Registration Statement
on Form S-4 File No. 333- 31149)
23.6 Consent of Glenn Harrison Petroleum Consultants, Inc.
(Incorporated by Reference to Registration Statement
on Form S-4 File No. 333- 31149)
23.7 Consent of James J. Weisman, Jr.
(Incorporated by Reference to Registration Statement
on Form S-4 File No. 333- 31149)
23.8 Consent of Hensley Consultants, Inc.
(Incorporated by Reference to Registration Statement
on Form S-4 File No. 333- 31149)
25 Statement of Eligibility of First Union National Bank
of North Carolina, as Trustee (Incorporated by
Reference to Registration Statement
on Form S-4 File No. 333- 31149)
** Filed herewith.
Exhibit 23.2
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Magnum Hunter Resources,
Inc. on Form S-4 of our report dated March 14, 1997 (April 30, 1997 as to Note
16), appearing in the Prospectus, which is part of this Registration Statement,
and to the reference to us under the heading "Experts" in such Prospectus.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 23, 1997
EXHIBIT 23.3
INDEPENDENT AUDITOR'S CONSENT
We consent to the use in the Pre Effective Amendment No. 1 on Form S-4
Registration Statement of Magnum Hunter Resources, Inc. ("The Company") of our
reports dated April 23, 1997 and April 3, 1996, respectively, accompanying the
historical summaries of revenues and direct operating expenses of the Properties
to be Acquired April 30, 1997, and the consolidated financial statements of The
Company contained in such Registration Statement; and our report dated August 2,
1996 accompanying the historical summaries of revenues and direct operating
expenses of the Properties Acquired June 28, 1996 incorporated by reference into
such Registration Statement, and to the use of our name and the statements with
respect to us, as appearing under the heading "Experts" in the Registration
Statement.
/s/ HEIN + ASSOCIATES LLP
- - ----------------------------
HEIN + ASSOICATES LLP
Certified Public Accountants
October 23, 1997
Dallas, Texas
