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Filed Pursuant To Rule 424(b)(3)
File No. 333-33407
File No. 333-33407-01
File No. 333-33407-02
File No. 333-33407-03
File No. 333-33407-04
PROSPECTUS
BELDEN & BLAKE CORPORATION [LOGO]
OFFER TO EXCHANGE $1,000 PRINCIPAL AMOUNT OF 9 7/8% SERIES B
SENIOR SUBORDINATED NOTES DUE 2007 FOR EACH $1,000 PRINCIPAL AMOUNT OF
OUTSTANDING 9 7/8% SERIES A SENIOR SUBORDINATED NOTES DUE 2007
Belden & Blake Corporation, an Ohio corporation (the "Company"), hereby
offers to exchange (the "Exchange Offer") up to $225,000,000 in aggregate
principal amount of its 9 7/8% Series B Senior Subordinated Notes due 2007 (the
"Exchange Notes") for up to $225,000,000 in aggregate principal amount of its
outstanding 9 7/8% Series A Senior Subordinated Notes due 2007 that were issued
and sold in reliance upon an exemption from registration under the Securities
Act of 1933, as amended (the "Senior Subordinated Notes" and, together with the
Exchange Notes, the "Notes").
The terms of the Exchange Notes will be the same in all respects (including
principal amount, interest rate, maturity and ranking) as the terms of the
Senior Subordinated Notes for which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes have been registered under the
Securities Act of 1933, as amended (the "Securities Act"), and therefore will
not be subject to certain restrictions on transfer applicable to the Senior
Subordinated Notes. The Exchange Notes will be issued under the Indenture (as
defined) governing the Senior Subordinated Notes, and the Exchange Notes will
not be entitled to registration rights except under certain limited
circumstances. The Senior Subordinated Notes are, and the Exchange Notes will
be, unsecured and will be subordinated to all existing and future Senior
Indebtedness (as defined) of the Company. The Notes will rank pari passu with
any future senior subordinated indebtedness of the Company and will rank senior
to all other Subordinated Indebtedness (as defined) of the Company. The Senior
Subordinated Notes are, and the Exchange Notes will be, guaranteed, jointly and
severally and fully and unconditionally, on a senior subordinated basis, by each
of the Company's direct and indirect subsidiaries on the issue date of the
Senior Subordinated Notes, namely, The Canton Oil & Gas Company, Peake Energy,
Inc., Ward Lake Drilling, Inc. and Target Oilfield Pipe & Supply Company, and by
each direct and indirect subsidiary of the Company (excluding Unrestricted
Subsidiaries (as defined)) formed or acquired thereafter (collectively, the
"Guarantors"). The Indenture permits the Company to incur additional
indebtedness, including Senior Indebtedness, subject to certain limitations. See
"Description of the Notes." As of June 30, 1997 the Company had outstanding in
the aggregate $329.5 million of indebtedness, of which $104.0 million was Senior
Indebtedness. As of July 31, 1997, the Company had outstanding aggregate
indebtedness of $329.5 million, of which $104.0 million was Senior Indebtedness.
For a description of the terms of the Exchange Notes, see "Description of the
Notes." There will be no cash proceeds to the Company from the Exchange Offer.
The Senior Subordinated Notes were originally issued and sold on June 27,
1997 in a transaction not registered under the Securities Act, in reliance upon
the exemption provided in Section 4(2) of the Securities Act and Rule 144A of
the Securities Act (the "Initial Offering"). Accordingly, the Senior
Subordinated Notes may not be reoffered, resold or otherwise pledged,
hypothecated or transferred in the United States unless so registered or unless
an applicable exemption from the registration requirements of the Securities Act
is available. Based upon interpretations provided to third parties by the Staff
(the "Staff") of the Securities and Exchange Commission (the "Commission"), the
Company believes that the Exchange Notes issued pursuant to the Exchange Offer
in exchange for the Senior Subordinated Notes may be offered for resale, resold
and otherwise transferred by holders thereof (other than any holder which is (i)
an "affiliate" of the Company
(continued on next page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 14 FOR A DISCUSSION OF CERTAIN FACTORS
THAT SHOULD BE CONSIDERED BY PARTICIPANTS IN 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 OR ANY STATE SECURITIES 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 SEPTEMBER 18, 1997.
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within the meaning of the Securities Act (an "Affiliate"), (ii) a broker-dealer
who acquired Senior Subordinated Notes directly from the Company or (iii) a
broker-dealer who acquired Senior Subordinated Notes as a result of
market-making or other trading activities) without compliance with the
registration and prospectus delivery provisions of the Securities Act, provided
that such Exchange Notes are acquired in the ordinary course of such holders'
business and such holders have no arrangement with any person to participate in
a distribution of such 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 in connection with any resale of such Exchange
Notes. The Letter of Transmittal that is filed as an exhibit to the Registration
Statement of which this Prospectus is a part (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, as it may be amended or supplemented from
time to time, may be used by a broker-dealer in connection with resales of
Exchange Notes received in exchange for Senior Subordinated Notes where such
Senior Subordinated Notes were acquired by such broker-dealer as a result of
market-making or other trading activities. The Company has agreed that, for a
period of 180 days after the Expiration Date (as defined), it will make this
Prospectus available to any broker-dealer for use in connection with any such
resale. Any holder that cannot rely upon such interpretations must comply with
the registration and prospectus delivery requirements of the Securities Act in
connection with a secondary resale transaction. See "Plan of Distribution."
The Senior Subordinated Notes and the Exchange Notes constitute new issues
of securities with no established public trading market. The Company does not
intend to apply for listing of the Exchange Notes on any national securities
exchange or for their quotation through the National Association of Securities
Dealers Automated Quotation System. Therefore, there can be no assurance as to
the development or liquidity of any trading market for the Exchange Notes. Any
Senior Subordinated Notes not tendered and accepted in the Exchange Offer will
remain outstanding. To the extent that Senior Subordinated Notes are tendered
and accepted in the Exchange Offer, a holder's ability to sell untendered, and
tendered but unaccepted, Senior Subordinated Notes could be adversely affected.
Following consummation of the Exchange Offer, the holders of Senior Subordinated
Notes will continue to be subject to the existing restrictions on transfer
thereof and the Company will have no further obligation to register such Senior
Subordinated Notes under the Securities Act except under certain limited
circumstances. See "Description of the Notes--Senior Subordinated Notes
Registration Rights."
The Exchange Offer is not conditioned upon any minimum aggregate principal
amount of Senior Subordinated Notes being tendered or accepted for exchange. The
Exchange Offer will expire at 5:00 p.m., New York City time, on October 31,
1997, unless extended (the "Expiration Date"). The first date of acceptance for
exchange of the Senior Subordinated Notes (the "Exchange Date") will be the
Expiration Date. Senior Subordinated Notes tendered pursuant to the Exchange
Offer may be withdrawn at any time prior to the Expiration Date. Otherwise such
tenders are irrevocable.
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE NOTES, INCLUDING
OVERALLOTMENT, STABILIZING TRANSACTIONS, SHORT COVERING TRANSACTIONS AND PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "PLAN OF DISTRIBUTION."
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AVAILABLE INFORMATION
The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement," which term shall include all amendments,
exhibits, annexes and schedules thereto) pursuant to the Securities Act, and the
rules and regulations promulgated thereunder, covering the Exchange Notes being
offered hereby. 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. Statements made in this
Prospectus as to the contents of any contract, agreement or other document
referred to in the Registration Statement are not necessarily complete. With
respect to each such contract, agreement or other document filed as an exhibit
to the Registration Statement, reference is made to the exhibit for a more
complete description of the matter involved, and each such statement shall be
deemed qualified in this entirety by such reference.
Upon consummation of the Exchange Offer, the Company will become subject to
the periodic reporting and to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"). Periodic reports, proxy
statements and other information filed by the Company with the Commission may be
inspected at the public reference facilities maintained by the Commission at
Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549, or at its regional
offices located at Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661 and Seven World Trade Center, Suite 1300, New York, New
York 10048. Copies can be obtained by mail at prescribed rates. Requests for
copies should be directed to the Commission's Public Reference Section,
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549. The Commission
also maintains a Web site (http://www.sec.gov) that contains reports, proxy and
information statements regarding registrants that file electronically with the
Commission. Copies of such material can be obtained from the Company upon
request.
The Company is required by the terms of the indenture dated as of June 27,
1997 between the Company, the Guarantors and LaSalle National Bank, as trustee
(the "Trustee"), under which the Senior Subordinated Notes were issued and under
which the Exchange Notes are to be issued (the "Indenture"), to furnish the
Trustee and the holders of the Notes with annual reports containing consolidated
financial statements audited by its independent certified public accountants,
with quarterly reports containing unaudited condensed consolidated financial
statements for each of the first three quarters of each fiscal year and with
current reports on Form 8-K.
NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS IN
CONNECTION WITH THE EXCHANGE OFFER COVERED BY THIS PROSPECTUS. 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 TO SELL,
OR A SOLICITATION OF ANY OFFER TO BUY, THE EXCHANGE NOTES IN ANY JURISDICTION
WHERE, 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
NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS PROSPECTUS OR IN THE AFFAIRS
OF THE COMPANY SINCE THE DATE HEREOF.
MARKET AND INDUSTRY DATA
MARKET DATA USED THROUGHOUT THIS PROSPECTUS WAS OBTAINED THROUGH COMPANY
RESEARCH, SURVEYS OR STUDIES PURCHASED BY THE COMPANY AND CONDUCTED BY THIRD
PARTIES AND FROM INDUSTRY OR GENERAL PUBLICATIONS. THE COMPANY HAS NOT
INDEPENDENTLY VERIFIED MARKET DATA PROVIDED BY THIRD PARTIES OR INDUSTRY OR
GENERAL PUBLICATIONS. SIMILARLY, INTERNAL COMPANY SURVEYS, WHILE BELIEVED BY THE
COMPANY TO BE RELIABLE, HAVE NOT BEEN VERIFIED BY ANY INDEPENDENT SOURCES.
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SUMMARY
The following summary is qualified in its entirety by, and should be read
in conjunction with, the more detailed information and financial statements,
including the notes thereto, appearing elsewhere in this Prospectus. Unless the
context otherwise requires, all references to "Belden & Blake" or the "Company"
include Belden & Blake Corporation and its consolidated subsidiaries. Certain
industry terms are defined in the Glossary. Pro forma information gives effect
to the Transaction, as described in the notes to the Unaudited Pro Forma
Consolidated Financial Statements.
THE COMPANY
Belden & Blake, an independent energy company, is primarily engaged in
producing natural gas and oil, acquiring and enhancing the economic performance
of producing gas and oil properties, exploring for and developing natural gas
and oil reserves and gathering and marketing natural gas. Until 1995, the
Company conducted business exclusively in the Appalachian Basin where it has
operated since 1942 through several predecessor entities. It is now one of the
largest exploration and production companies operating in the Appalachian Basin
in terms of reserves, acreage held and wells operated. In early 1995, the
Company commenced operations in the Michigan Basin and in September 1996, the
Company commenced operations in the Illinois Basin. The Michigan and Illinois
Basins have geologic and operational similarities to the Appalachian Basin and
are in proximity to the Company's core operations. The operating environment in
each of the basins in which the Company operates is highly fragmented, providing
substantial acquisition opportunities.
The Company currently operates approximately 7,900 wells with total net
production of approximately 71 Mmcf per day of gas and 1,900 Bbls per day of
oil. At December 31, 1996, the Company had proved reserves of 332.9 Bcfe with a
Present Value of $356 million. On an Mcfe basis, the reserves were 79% proved
developed and 87% natural gas, with a reserve life index of approximately 11
years. The Company holds leases on more than one million net acres. Since 1992,
the Company has grown principally through the acquisition of producing
properties and related gas gathering facilities and the exploration and
development of its own acreage.
The Company has built a significant gas gathering and marketing operation
and owns and operates approximately 2,800 miles of gas gathering systems in the
basins in which the Company operates. As of June 30, 1997, the Company marketed
131 Mmcf per day, approximately 50% of which was purchased from third parties.
The Company also operates a major regional oilfield service and supply business.
BUSINESS STRENGTHS
The Company believes it has certain strengths that provide it with
significant competitive advantages, including the following:
- Proven Growth Record. The Company has generated consistent growth through
a balanced program of acquisitions and development and exploratory
drilling. Over the last four years, on a compound annual basis, the
Company has increased proved reserves by 34%, production by 50% and
EBITDA by 56%.
- Geographic Focus. The Company's operations are exclusively focused on the
Appalachian, Michigan and Illinois Basins. The Company believes that its
54-year operating history has resulted in a specialized technical
expertise that provides a competitive advantage in sourcing and
evaluating acquisitions and drilling opportunities within these areas.
Furthermore, the Company enjoys economies of scale in operating and
developing its properties not experienced by many smaller competitors.
- Leading Regional Consolidator. There are currently over 10,000 operators
in the Appalachian and Michigan Basins. While Belden & Blake is one of
the largest producers in these basins, it
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will account for less than 6% of the projected gas production in these
basins in 1997. The Company's significant technical and regional
expertise, as well as its low cost structure, provides a distinct
advantage in pursuing its acquisition strategy. The Company has a proven
and highly disciplined approach to making acquisitions at attractive
prices. Over the last five years, the Company has been a leading
consolidator in these basins, acquiring 192.9 Bcfe of proved developed
reserves in 33 transactions for a total of $129.4 million at an average
cost of $0.67 per Mcfe.
- Successful Drilling Record. The Company has achieved a very successful
drilling record during the last five years. In highly developed or
blanket formations the Company's success rate is 97%, while in less
developed or deeper formations, the Company's success rate is 59%, for an
overall success rate of 85%. During this period, the Company drilled 547
gross (409.9 net) wells, which added 82.2 Bcfe of proved developed
reserves at an average cost of $1.03 per Mcfe.
- Substantial Development Drilling Inventory. The Company has a substantial
current acreage position of approximately 1,019,000 net acres, of which
approximately 504,800 are classified as undeveloped. The Company believes
that its current acreage holdings would support six years of drilling
activities at current oil and gas prices without additions to its current
acreage base.
- Low Risk Nature of Reserves. The Company's producing reserves are
characterized by low volume, low risk production that is subject to
gradual decline rates over an expected 15 to 25 year economic life. As a
result of the long-lived nature of its properties, Belden & Blake has
lower reinvestment requirements to maintain reserve quantities,
production levels and values than many of its competitors.
- Premium Pricing. Due to the Company's proximity to the large commercial
and industrial markets in the Northeast and its strong gas marketing
capability, Belden & Blake has enjoyed relatively stable gas prices at
premiums well above national spot market prices. Over the last five
years, the Company has realized an average premium of $0.52 per Mcf over
national average wellhead prices. For the second quarter of 1997, the
Company received a $0.44 per Mcf premium over estimated national average
wellhead prices.
- Attractive Full Cycle Economics. The Company serves as the operator on
substantially all of its properties, which provides the Company
significant control over the amount and timing of capital and operating
expenditures. Over the last five years the Company has reduced operating
costs per Mcfe (defined as the sum of production expense, production
taxes and general and administrative expense) from $1.53 per Mcfe in 1992
to $0.87 per Mcfe in 1996. The combination of low operating costs with
the premium pricing received by the Company for its production has
enabled the Company to achieve an average operating margin over the last
three years (defined as revenue per Mcfe less the sum of production
expenses and production taxes per Mcfe) of $1.81 Mcfe, which is
significantly greater than the industry average operating margin for this
period. The Company's full cycle economics of 2.75x, calculated by
dividing its average operating margin for the last three years by its
average replacement cost of $0.66 per Mcfe over this period, is among the
highest in the industry.
- Extensive Gathering and Marketing Operations. The Company owns and
operates approximately 2,800 miles of gas gathering systems which
interconnect with, and deliver gas to, the interstate pipelines in its
six-state area of operations. The Company also markets approximately 60
Mmcf per day of gas purchased from third parties. The Company's gathering
and marketing activities (i) increase the return on the Company's
development activities, (ii) provide exposure to and increase the returns
on acquisitions, (iii) strengthen the Company's relationships with
higher-margin end users and (iv) provide markets for incremental
production. The Company's gathering and marketing activities generated
EBITDA of $7.0 million in 1996.
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- Experienced Management. Eight senior officers have an average of 23 years
of oil and gas industry experience, the vast majority of which was
obtained in the core basins in which the Company currently operates.
Additionally, the Company's technical staff, which includes 19 petroleum
engineers, 11 geologists and two geophysicists, have an average of over
15 years experience in the oil and gas industry.
BUSINESS STRATEGY
The Company seeks to increase reserves, production and cash flow through a
balanced program of exploration and development drilling and strategic
acquisitions. The key elements of the Company's strategy are as follows:
- Maintain a Balanced Drilling Program. It is the Company's intention to
expand production and reserves through a balanced program of
developmental and exploratory drilling. The Company believes that there
are significant exploration and development opportunities in the less
developed or deeper formations in the Appalachian Basin for those
operators with the capital, technical expertise and ability to assemble
the large acreage positions needed to justify the use of advanced
exploration and production technologies. The Company has identified
numerous development and exploratory drilling locations in the deeper
formations of the Appalachian and Michigan Basins. More than 750,000
wells have been drilled in the Appalachian Basin, but fewer than 2,000
wells have been drilled to a depth greater than 7,500 feet, and fewer
than 100 wells have been drilled to a depth greater than 12,500 feet. The
Company's drilling budget in 1997 is approximately $38.7 million, which
will fund the drilling of approximately 250 wells.
- Utilize Advanced Technology. The combination of long-lived production and
high drilling success rates at the shallow depths has resulted in a
highly fragmented, extensively drilled, low technology operating
environment in the Appalachian Basin. The Company has been applying more
advanced technology, including 3-D seismic, horizontal drilling, advanced
fracturing techniques and enhanced oil recovery methods. The Company is
implementing these techniques to improve drilling success rates, the size
of its average discovery, production rates, reserve recovery rates and
total economics in its operating areas.
- Pursue Consolidation Opportunities. There is a continuing trend toward
consolidation in the energy industry in general. The basins in which the
Company operates are highly fragmented. The Company believes this
provides the basis for significant acquisition opportunities as capital
constrained operators, the majority of which are privately held, seek
liquidity or operating capital. The Company intends to capitalize on its
geographic knowledge, technical expertise, low cost structure and
decentralized organization to pursue additional strategic acquisitions in
its area of operations. The Company's acquisition strategy focuses on
acquiring producing properties that: (i) are properties in which the
Company already owns an interest and operates or that are strategically
located in relation to its existing operations, (ii) can be enhanced
through operating cost reductions, advanced production technologies,
mechanical improvements, recompleting or reworking wells and/or the use
of enhanced and secondary recovery techniques, (iii) provide development
and exploratory drilling opportunities or opportunities to improve the
Company's acreage position, (iv) have the potential for increased
revenues resulting from the Company's gas marketing capabilities, or (v)
are of sufficient size to allow the Company to operate efficiently in new
areas.
- Expand Gas Gathering and Marketing. The Company's extensive gas gathering
systems and regional natural gas marketing operation are integral to the
Company's low cost structure and high revenues per unit of gas
production. It is the Company's intention to expand its gas gathering
systems to further improve the rate of return on the Company's drilling
and development activities. The Company has excellent relationships with
a large number of utilities and industrial end users located within the
Company's operating areas. The Com-
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pany's gas marketing operation provides a ready market for increased
production, allowing the Company to shift sales from third-party gas to
its own production.
The Company maintains its corporate headquarters at 5200 Stoneham Road,
North Canton, Ohio 44720, and its telephone number is (330) 499-1660.
THE ACQUISITION
Pursuant to an Agreement and Plan of Merger dated as of March 27, 1997 (the
"Acquisition Agreement"), BB Merger Corp. ("BB Merger"), a newly organized
company owned by TPG II, TPG Investors II, L.P., TPG Parallel II, L.P. and
Johnson Rice & Company, L.L.C. (collectively, the "TPG Investors"), merged with
and into the Company, with the Company being the surviving corporation (the
"Acquisition"). As a result of the Acquisition, all of the stock of the Company
is owned by the TPG Investors. Aggregate consideration of approximately $318.5
million was paid to shareholders and stock option holders of the Company in
connection with the merger of the Company and BB Merger, with shareholders of
the Company receiving $27.00 per share for each share of common stock of the
Company owned by them and stock option holders receiving the net value of their
options based on $27.00 per share for all options surrendered. The net proceeds
of the sale of the Senior Subordinated Notes (the "Initial Offering"), together
with borrowings of $104.0 million under the New Credit Agreement and an equity
investment (the "Equity Investment") of $108.2 million by the TPG Investors,
were used to fund this consideration, repay certain indebtedness of the Company
in the amount of $94.0 million and pay certain related fees and expenses.
The Acquisition, the Initial Offering, the Equity Investment, the execution
of the New Credit Agreement and the application of the net proceeds therefrom to
consummate the transactions contemplated by the Acquisition, the repayment of
certain existing indebtedness and the payment of related fees and expenses are
collectively referred to as the "Transaction."
TEXAS PACIFIC GROUP
Texas Pacific Group ("Texas Pacific") was founded by David Bonderman, James
G. Coulter and William S. Price, III in 1993 to pursue private and public
investment opportunities through a variety of methods, including leveraged
buyouts, joint ventures, restructurings, bankruptcies and strategic public
securities investments. The principals of Texas Pacific operate TPG Partners,
L.P. and TPG II, both Delaware limited partnerships with aggregate committed
capital of over $3.2 billion. Texas Pacific currently has twelve investments in
its portfolio, including America West Airlines, Beringer Wine Estates, Del Monte
Foods, Ducati Motor, Favorite Brands International, Paradyne and Virgin Cinemas.
In addition, the principals of Texas Pacific led the $9 billion reorganization
of Continental Airlines in 1993. The acquisition of the Company was TPG's second
major investment in the oil and gas industry in the last two years. In December,
1995, Texas Pacific acquired approximately 42% of the voting equity of Denbury
Resources, an oil and gas company operating in Mississippi and Louisiana.
THE EXCHANGE OFFER
THE EXCHANGE OFFER............ The Company is offering to exchange up to
$225,000,000 aggregate principal amount of
9 7/8% Series B Senior Subordinated Notes due
2007 for up to $225,000,000 aggregate principal
amount of its outstanding 9 7/8% Series A
Senior Subordinated Notes due 2007 that were
issued and sold on June 27, 1997 in reliance
upon an exemption from registration under the
Securities Act. The terms of the Exchange Notes
will be substantially identical in all respects
(including principal amount, interest rate,
maturity and ranking) to the
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terms of the Senior Subordinated Notes for
which they may be exchanged pursuant to the
Exchange Offer, except that the Exchange Notes
have been registered under the Securities Act
and therefore will not be subject to certain
restrictions on transfer except as provided
herein (see "The Exchange Offer -- Terms of the
Exchange Offer") and will not be entitled to
registration rights except under certain
limited circumstances.
Exchange Notes issued pursuant to the Exchange
Offer in exchange for the Senior Subordinated
Notes may be offered for resale, resold and
otherwise transferred by holders thereof (other
than any holder which is (i) an Affiliate, (ii)
a broker-dealer who acquired Senior
Subordinated Notes directly from the Company or
(iii) a broker-dealer who acquired Senior
Subordinated Notes as a result of market making
or other trading activities) without compliance
with the registration and prospectus delivery
provisions of the Securities Act except as
provided herein and provided that such Exchange
Notes are acquired in the ordinary course of
such holders' business and such holders have no
arrangement with any person to participate in a
distribution of such Exchange Notes.
MINIMUM CONDITION............. The Exchange Offer is not conditioned upon any
minimum aggregate principal amount of Senior
Subordinated Notes being tendered for exchange.
EXPIRATION DATE............... The Exchange Offer will expire at 5:00 p.m.,
New York City time, on October 31, 1997 unless
extended (the "Expiration Date").
EXCHANGE DATE................. The first date of acceptance for exchange of
the Senior Subordinated Notes will be the
Expiration Date.
CONDITIONS TO THE EXCHANGE
OFFER......................... The obligation of the Company to consummate the
Exchange Offer is subject to certain
conditions. See "The Exchange Offer -- Certain
Conditions to the Exchange Offer." The Company
reserves the right to terminate or amend the
Exchange Offer at any time prior to the
Expiration Date upon the occurrence of any such
condition.
WITHDRAWAL RIGHTS............. Tenders may be withdrawn at any time prior to
the Expiration Date. Any Senior Subordinated
Notes not accepted for any reason will be
returned without expense to the tendering
holders thereof as promptly as practicable
after the expiration or termination of the
Exchange Offer.
PROCEDURES FOR TENDERING
SENIOR SUBORDINATED NOTES..... See "The Exchange Offer -- How to Tender."
FEDERAL INCOME TAX
CONSEQUENCES.................. The exchange of Senior Subordinated Notes for
Exchange Notes by holders should not constitute
an exchange for federal income tax purposes,
and U.S. holders should not realize any gain or
loss upon receipt of Exchange Notes. See
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"The Exchange Offer -- Certain Federal Income
Tax Considerations."
EFFECT ON HOLDERS OF SENIOR
SUBORDINATED NOTES............ As a result of the making of this Exchange
Offer, and upon acceptance for exchange of all
validly tendered Senior Subordinated Notes
pursuant to the terms of this Exchange Offer,
the Company will have fulfilled covenants
contained in the terms of the Senior
Subordinated Notes and the Exchange and
Registration Rights Agreement (the
"Registration Rights Agreement") dated June 27,
1997 between the Company, the Guarantors and
Chase Securities Inc., BT Securities
Corporation and NationsBanc Capital Markets,
Inc., as initial purchasers (collectively, the
"Initial Purchasers") and, accordingly, the
holders of the Senior Subordinated Notes will
have no further registration or other rights
under the Registration Rights Agreement, except
under certain limited circumstances. See
"Description of the Notes -- Senior
Subordinated Notes Registration Rights."
Holders of the Senior Subordinated Notes who do
not tender their Senior Subordinated Notes in
the Exchange Offer will continue to hold such
Senior Subordinated Notes and will be entitled
to all the rights and limitations applicable
thereto under the Indenture. All untendered,
and tendered but unaccepted, Senior
Subordinated Notes will continue to be subject
to the restrictions on transfer provided for in
the Senior Subordinated Notes and the
Indenture. To the extent that Senior
Subordinated Notes are tendered and accepted in
the Exchange Offer, the trading market, if any,
for the Senior Subordinated Notes could be
adversely affected. See "Risk
Factors -- Consequences of Exchange and Failure
to Exchange."
TERMS OF THE NOTES
The Exchange Offer applies to $225,000,000 aggregate principal amount of
the Senior Subordinated Notes. The form and terms of the Exchange Notes are the
same as the form and terms of the Senior Subordinated Notes except that the
Exchange Notes have been registered under the Securities Act and, therefore,
will not bear legends restricting the transfer thereof. The Exchange Notes will
evidence the same debt as the Senior Subordinated Notes and will be entitled to
the benefit of the Indenture. See "Description of the Notes."
ISSUER........................ Belden & Blake Corporation.
SECURITIES OFFERED............ $225 million aggregate principal amount of
9 7/8% Series B Senior Subordinated Notes due
2007.
MATURITY...................... June 15, 2007.
INTEREST PAYMENT DATES........ June 15 and December 15 of each year,
commencing on December 15, 1997.
MANDATORY REDEMPTION.......... None.
OPTIONAL REDEMPTION........... Except as otherwise described below, the Notes
will not be redeemable at the Company's option
prior to June 15, 2002.
9
<PAGE> 10
Thereafter, the Notes will be subject to
redemption at the option of the Company, in
whole or in part, at the redemption prices set
forth herein, plus accrued and unpaid interest
thereon to the applicable redemption date. In
addition, prior to June 15, 2000, the Company
may, at its option, on any one or more
occasions, redeem up to 40% of the original
principal amount of the Notes at a redemption
price equal to 109.875% of the principal amount
thereof, plus accrued and unpaid interest, if
any, to the redemption date with all or a
portion of the net proceeds of public sales of
common stock of the Company; provided that at
least 60% of the original aggregate principal
amount of the Notes remains outstanding
immediately after the occurrence of such
redemption. See "Description of the
Notes -- Optional Redemption."
CHANGE OF CONTROL............. Upon the occurrence of a Change of Control, (i)
the Company will have the option, at any time,
on or prior to June 15, 2002 (but in no event
more than 90 days after the occurrence of such
Change of Control), to redeem the Notes, in
whole but not in part, at a redemption price
equal to 100% of the principal amount thereof
plus the Applicable Premium as of, and accrued
and unpaid interest, if any, to, the date of
redemption, and (ii) if the Company does not so
redeem the Notes, the Company will be required
to offer to repurchase all or a portion of each
Holder's Notes, at an offer price in cash equal
to 101% of the aggregate principal amount of
such Notes plus accrued and unpaid interest, if
any, to the date of repurchase, and to
repurchase all Notes tendered pursuant to such
offer. The New Credit Agreement prohibits the
Company from repurchasing any Notes pursuant to
a Change of Control offer prior to the
repayment in full of the Senior Debt under the
New Credit Agreement. If a Change of Control
were to occur, the Company may not have
sufficient available funds to purchase all
Notes tendered pursuant to the Change of
Control offer after first satisfying its
obligations under the New Credit Agreement or
other Senior Debt that may then be outstanding,
if accelerated. The failure by the Company to
purchase all Notes tendered pursuant to the
Change of Control offer would constitute an
Event of Default (as defined). If any Event of
Default occurs, the Trustee (as defined) or
holders of at least 25% in principal amount of
the Notes then outstanding may declare the
principal of and the accrued and unpaid
interest on such Notes to be due and payable
immediately. However, such repayment would be
subject to certain subordination provisions in
the Indenture (as defined). See "Risk
Factors -- Risks Relating to a Change of
Control" and "Description of the
Notes -- Ranking and Subordination" and
" -- Repurchase at the Option of
Holders -- Change of Control," and " -- Events
of Default and Remedies."
RANKING....................... The Notes will be general unsecured obligations
of the Company and will be subordinated in
right of payment to all existing and future
Senior Debt of the Company, which
10
<PAGE> 11
includes borrowings under the New Credit
Agreement. The Notes will rank pari passu in
right of payment with all other senior
subordinated debt of the Company and any other
indebtedness which does not expressly provide
that it is subordinated in right of payment to
the Notes. As of June 30, 1997 the aggregate
principal amount of Senior Debt outstanding was
approximately $104.0 million, all of which was
borrowed under the New Credit Agreement, and
there was no senior subordinated debt
outstanding (exclusive of the Notes). The Notes
will also be effectively subordinated to all
secured indebtedness of the Company. In
addition, the Notes may be structurally
subordinated to all existing and future
liabilities of the Company's subsidiaries. See
"Capitalization," "Description of the
Notes -- Ranking and Subordination" and
"Description of Other Indebtedness."
SUBSIDIARY GUARANTEES......... The Company's payment obligations under the
Notes will be jointly, severally and
unconditionally guaranteed on a senior
subordinated basis by each Restricted
Subsidiary of the Company and any future
Restricted Subsidiary of the Company. The
Guarantees will be subordinated to Senior Debt
of the Subsidiary Guarantors substantially to
the same extent and manner as the Notes are
subordinated to Senior Debt. Each Guarantee
will be effectively subordinated to all secured
indebtedness of the relevant Subsidiary
Guarantor. See "Description of the
Notes -- Guarantees" and "Description of Other
Indebtedness."
CERTAIN COVENANTS............. The Indenture contains certain covenants that
limit the ability of the Company and its
Restricted Subsidiaries to incur additional
indebtedness and issue Disqualified Capital
Stock (as defined), pay dividends, make
distributions, make investments, make certain
other Restricted Payments (as defined), enter
into certain transactions with Affiliates (as
defined), dispose of certain assets, incur
liens securing Indebtedness (as defined) of any
kind other than Permitted Liens, (as defined)
and engage in mergers and consolidations. See
"Description of the Notes -- Certain
Covenants."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the Notes offered hereby,
including information regarding the Company's highly leveraged capital
structure, the uncertainty of oil and gas prices and certain risks associated
with an investment in the Notes offered hereby.
11
<PAGE> 12
SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The following tables set forth certain (i) historical and pro forma
financial data and (ii) reserve and operating data. The pro forma financial and
operating information gives effect to the Transaction (principally the effects
of purchase accounting and additional interest expense) as described in the
notes to the Unaudited Pro Forma Consolidated Financial Statements. The
historical data should be read in conjunction with the historical Consolidated
Financial Statements and Notes thereto included herein. See also "Selected
Consolidated Financial Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations." The pro forma information should
be read in conjunction with the Unaudited Pro Forma Consolidated Financial
Statements included herein. Neither the historical nor the pro forma results are
necessarily indicative of future results.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------------- -----------------------------------------
PRO FORMA PRO FORMA
----------- -----------
1994 1995 1996 1996 1996 1997 1997
-------- -------- -------- ----------- ----------- ----------- -----------
(UNAUDITED) (UNAUDITED) (UNAUDITED) (UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
PREDECESSOR PREDECESSOR
------------------------------ --------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Oil and gas sales................ $ 32,574 $ 46,853 $ 79,491 $ 79,491 $ 38,190 $ 41,591 $ 41,591
Gas marketing and gathering...... 33,072 40,436 44,527 44,527 21,789 21,657 21,657
Oilfield sales and service....... 13,157 20,066 25,517 25,517 10,922 14,665 14,665
Interest and other............... 562 2,712 3,700 3,700 1,741 1,484 1,484
-------- -------- -------- --------- --------- --------- ---------
79,365 110,067 153,235 153,235 72,642 79,397 79,397
Expenses
Production expense............... 7,827 11,756 18,098 17,792 8,378 10,158 10,036
Production taxes................. 1,357 2,060 3,168 3,168 1,511 1,647 1,647
Cost of gas and gathering
expense........................ 28,878 33,831 37,556 37,556 17,990 18,340 18,340
Oilfield sales and service
expense........................ 12,180 18,266 23,142 23,142 10,026 13,936 13,936
Exploration expense.............. 2,803 4,924 6,064 6,064 2,859 4,380 4,380
General and administrative
expense........................ 3,567 3,802 4,573 4,095 2,115 2,445 2,293
Interest expense................. 3,503 6,073 7,383 30,060 3,824 3,715 15,030
Depreciation, depletion and
amortization................... 11,886 19,717 29,752 53,200 14,701 15,366 26,600
Franchise, property and other
taxes.......................... 854 1,228 1,739 1,489 882 908 783
Transaction related expenses..... -- 16,758
-------- -------- -------- --------- --------- --------- ---------
72,855 101,657 131,475 176,566 62,286 87,653 93,045
-------- -------- -------- --------- --------- --------- ---------
Income (loss) before income
taxes............................ 6,510 8,410 21,760 (23,331) 10,356 (8,256) (13,648)
Net income (loss) (a).............. $ 3,843 $ 5,121 $ 14,755 $ (15,140) $ 6,827 $ (9,873) $ (8,598)
======== ======== ======== ========= ========= ========= =========
OTHER FINANCIAL DATA:
EBITDA (b)......................... $ 24,702 $ 39,124 $ 64,959 $ 65,993 $ 31,740 $ 31,963 $ 32,362
Net cash provided by operations.... 15,709 21,949 46,531 N/A 22,064 32,782 N/A
Net cash used in investing......... (37,286) (123,970) (40,095) N/A (10,064) (36,474) N/A
Net cash provided by (used in)
financing........................ 2,982 110,694 (10,152) N/A (11,753) 12,408 N/A
Capital expenditures (c)........... 37,812 123,692 41,617 N/A 11,622 27,682 N/A
RATIOS:
EBITDA to interest expense......... 7.1x 6.4x 8.8x 2.2x 8.3x 8.6x 2.2x
Earnings to fixed charges (d)...... 2.7x 2.3x 3.7x N/A 3.5x 3.0x N/A
Total debt to EBITDA............... 1.9x 2.8x 1.5x N/A N/A N/A N/A
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR PREDECESSOR(f) SUCCESSOR(f)
------------------------------ ----------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END OF PERIOD) (e):
Cash and cash equivalents.......... $ 3,649 $ 12,322 $ 8,606 N/A $ 12,569 | $ 17,322 N/A
Total assets....................... 148,173 297,298 303,763 N/A 293,533 | 599,762 N/A
Long-term debt, including current |
portion.......................... 46,696 110,671 99,796 N/A 99,220 | 329,469 N/A
Shareholders' equity............... 81,142 142,291 158,918 N/A 149,613 | 108,230 N/A
</TABLE>
- ---------------
(a) Includes loss from discontinued operations of $337,000, $1,139,000, $439,000
and $439,000 in the years 1994, 1995, 1996 and 1996 pro forma, respectively.
No losses from discontinued operations were recorded in the six months ended
June 30, 1996 and 1997.
(b) EBITDA represents income from continuing operations plus income taxes,
exploration expense, interest expense and depletion, depreciation and
amortization expense. EBITDA is not presented as an indicator of the
Company's operating performance, an indicator of cash available for
discretionary spending or as a measure of liquidity. EBITDA may not be
comparable to other similarly titled measures of other companies. On a
historical basis, EBITDA data has been substantially similar to
"Consolidated Cash Flow" as used in the Indenture. See "Description of the
Notes" for the detailed definition of "Consolidated Cash Flow."
(c) Including acquisitions of properties and businesses, net of acquired cash,
of $17,968,000, $99,837,000, and $4,543,000 in the years 1994, 1995 and
1996, respectively and $254,000 and $9,263,000 in the first six months of
1996 and 1997, respectively.
(d) For the purpose of determining the ratio of earnings to fixed charges,
earnings are defined as income from continuing operations before income
taxes plus fixed charges. Fixed charges consist of interest expense,
interest portion of rent expense and amortization of debt issuance costs.
Earnings for the pro forma periods in 1996 and 1997 are inadequate to cover
fixed charges. The pro forma amount of the deficiency is $23,331,000 in 1996
and $13,648,000 in the first six months of 1997.
(e) The balance sheet data as of June 30, 1997 reflects the preliminary
allocation of the purchase price to the assets acquired and liabilities
assumed by the successor company.
(f) See footnote (2) on page F-27 regarding the accounting for the merger of the
Company with TPG on June 27, 1997.
12
<PAGE> 13
SUMMARY RESERVE AND OPERATING DATA
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994 1995 1996
-------- -------- --------
<S> <C> <C> <C>
ESTIMATED PROVED RESERVES (a):
Natural gas (Bcf).................................... 123.0 239.4 288.6
Oil (Mbbls).......................................... 4,113 6,283 7,389
Total (Bcfe)......................................... 147.7 277.1 332.9
Percent natural gas.................................. 83% 86% 87%
Percent proved developed............................. 84% 87% 79%
RESERVE LIFE INDEX (YEARS) (b):........................ 12 14 11
PRODUCT PRICES (AT DECEMBER 31) (a):
Natural gas (per Mcf)................................ $ 2.55 $ 2.30 $ 3.02
Oil (per Bbl)........................................ 15.97 16.95 22.97
FUTURE NET CASH FLOWS ($000) (a):
Undiscounted......................................... $229,844 $385,685 $668,493
Present Value........................................ 116,471 214,250 355,959
RESERVE ADDITIONS (MMCFE):
Acquisitions......................................... 28,214 124,545 10,200
Extensions, discoveries and revisions................ 17,624 25,628 75,657
-------- -------- --------
Net additions........................................ 45,838 150,173 85,857
======== ======== ========
COSTS INCURRED ($000):
Acquisitions......................................... $ 22,018 $ 84,169 $ 6,595
Development and exploration.......................... 11,272 24,874 36,881
-------- -------- --------
Total costs incurred................................. $ 33,290 $109,043 $ 43,476
======== ======== ========
RESERVE REPLACEMENT COST PER MCFE (c).................. $ 0.73 $ 0.73 $ 0.51
RESERVE REPLACEMENT (d)................................ 366% 740% 289%
GAS MARKETING:
Gross gas gathering and marketing margin ($000)...... $ 4,194 $ 6,605 $ 6,971
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------- --------------------------
1994 1995 1996 1996 1997
-------- -------- -------- ----------- -----------
(UNAUDITED) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
PRODUCTION:
Natural gas (Mmcf)................................... 9,563 16,961 25,410 12,347 12,747
Oil (Mbbls).......................................... 496 556 719 357 381
Natural Gas Equivalents (Mmcfe)...................... 12,539 20,297 29,722 14,490 15,032
AVERAGE SALES PRICE:
Natural gas (per Mcf)................................ $ 2.58 $ 2.21 $ 2.56 $ 2.54 $ 2.69
Oil (per Bbl)........................................ 15.98 16.78 20.24 19.09 19.11
Natural Gas Equivalents (per Mcfe)................... 2.60 2.31 2.67 2.64 2.77
PER MCFE DATA:
Average production costs including production
taxes.............................................. $ 0.74 $ 0.69 $ 0.72 $ 0.68 $ 0.79
Average operating margin (e)......................... 1.86 1.62 1.95 1.96 1.98
WELLS DRILLED:
Productive
Gross.............................................. 80 129 187 53 71
Net................................................ 58.3 104.0 148.5 42.4 55.3
Dry
Gross.............................................. 12 26 20 5 12
Net................................................ 5.2 13.9 12.2 3.3 6.7
Success rate (net)................................... 92% 88% 92% 93% 89%
</TABLE>
- ---------------
(a) Proved reserves and future net cash flows (before taxes) were estimated in
accordance with Commission guidelines. Prices and costs at December 31 for
each of the years 1994 through 1996 were used in the calculation of proved
reserves and future net cash flows and were held constant through the
periods of estimated production, except as otherwise provided by contract,
in accordance with the Commission's guidelines.
(b) The reserve life index is calculated by dividing proved reserves by annual
production, both on an Mcfe basis.
(c) Reserve replacement costs are calculated by dividing costs incurred by net
reserve additions.
(d) Reserve replacement is calculated as net reserve additions divided by the
Company's actual production for the period, both on an Mcfe basis.
(e) Average sales price per Mcfe less average production costs including
production taxes per Mcfe.
13
<PAGE> 14
RISK FACTORS
Prior to tendering their Senior Subordinated Notes for the Exchange Notes
offered hereby, holders of Senior Subordinated Notes should carefully consider,
together with the other information included in this Prospectus, the following
risk factors which are generally applicable to the Senior Subordinated Notes as
well as the Exchange Notes.
EFFECTS OF LEVERAGE
As a result of the Transaction, including the Initial Offering and the
application of the proceeds therefrom, the Company is highly leveraged with
outstanding indebtedness of $329.5 million as of July 31, 1997, consisting of
$104.0 million of Senior Indebtedness, $225.0 million of Senior Subordinated
Indebtedness and $0.5 million of other Indebtedness. Annual interest costs in
1996 on a pro forma basis would have totaled $30.1 million. The Company's level
of indebtedness will have several important effects on its future operations,
including: (i) a substantial portion of the Company's cash flow from operations
must be dedicated to the payment of interest on its indebtedness and will not be
available for other purposes; (ii) covenants contained in the Company's debt
obligations will require the Company to meet certain financial tests, and other
restrictions will limit its ability to borrow additional funds or to dispose of
assets and may affect the Company's flexibility in planning for, and reacting
to, changes in its business, including possible acquisition activities; and
(iii) the Company's ability to obtain additional financing in the future for
working capital, capital expenditures, acquisitions, general corporate purposes
or other purposes may be impaired. The Company's ability to meet its debt
service obligations and to reduce its total indebtedness will be dependent upon
the Company's future performance, which will be subject to oil and gas prices,
the Company's level of production, general economic conditions and to financial,
business and other factors affecting the operations of the Company, many of
which are beyond its control. See "Forward-Looking Information."
In addition, all amounts owing under the New Credit Agreement will become
due before any principal payments on the Notes are scheduled to become due and
such amounts will need to be refinanced. Furthermore, to the extent that the
Company is unable to repay the principal amount of the Notes at maturity out of
cash on hand, it will need to refinance the Notes, or repay the Notes with the
proceeds of an equity offering, at or prior to their maturity. There can be no
assurance that the Company will be able to generate sufficient cash flow to
service its interest payment obligations under its indebtedness or that future
borrowings or equity financing will be available for the payment or refinancing
of the Company's indebtedness. To the extent that the Company is not successful
in negotiating renewals of its borrowings or in arranging new financing, it may
have to sell significant assets, which would have a material adverse effect on
the Company's business and results of operations. Among the factors that will
affect the Company's ability to effect an offering of its capital stock or
refinance the Notes are financial market conditions and the value and
performance of the Company at the time of such offering or refinancing. There
can be no assurance that any such offering or refinancing can be successfully
completed. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources" and "Description of
Other Indebtedness."
VOLATILITY OF OIL AND GAS PRICES
The Company's financial condition, operating results and future growth and
the carrying value of its oil and gas properties are substantially dependent on
prevailing prices of, and demand for, oil and gas. The Company's ability to
maintain or increase its borrowing capacity and to obtain additional capital on
attractive terms is also substantially dependent upon oil and gas prices.
Historically the markets for oil and gas have been volatile and are likely to
continue to be volatile in the future. Prices for oil and gas are subject to
large fluctuations in response to relatively minor changes in the supply of, and
demand for, oil and gas, market uncertainty and a variety of additional factors
beyond the control of the Company. These factors include weather conditions in
the United
14
<PAGE> 15
States and elsewhere, economic conditions in the United States and elsewhere,
actions of the Organization of Petroleum Exporting Countries ("OPEC"),
governmental regulation, political stability in the Middle East and elsewhere,
the supply of, and demand for, oil and gas, and the availability and prices of
foreign imports and alternate fuel sources. Any substantial and extended decline
in the price of oil or gas would have an adverse effect on the Company's
carrying value of its proved reserves, borrowing capacity, the Company's ability
to obtain additional capital, and its financial condition, revenues,
profitability and cash flows from operations.
Volatile oil and gas prices make it difficult to estimate the value of
producing properties for acquisition and often cause disruption in the market
for oil and gas producing properties, as buyers and sellers have difficulty
agreeing on such value. Price volatility also makes it difficult to budget for
and project the return on acquisitions and development and exploration projects.
UNCERTAINTY OF ESTIMATES OF RESERVES AND FUTURE NET REVENUES
This Prospectus contains estimates of the Company's oil and gas reserves
and the future net revenues from those reserves which have been prepared by the
Company and certain independent petroleum engineers. Reserve engineering is a
subjective process of estimating the recovery from underground accumulations of
oil and gas that cannot be measured in an exact manner, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. Estimates of
economically recoverable oil and gas reserves and of future net cash flows
necessarily depend upon a number of variable factors and assumptions, such as
historical production from the area compared with production from other
producing areas, the assumed effects of regulations by governmental agencies and
assumptions concerning future oil and gas prices, future operating costs,
severance and excise taxes, development costs and workover and remedial costs,
all of which may in fact vary considerably from actual results. Because all
reserve estimates are to some degree speculative, the quantities of oil and gas
that are ultimately recovered, production and operation costs, the amount or
timing of future development expenditures and future oil and gas sales prices
may all vary from those assumed in these estimates and such variances may be
material. In addition, different reserve engineers may make different estimates
of reserve quantities and cash flows based upon the same available data.
The present value of estimated future net cash flows referred to in this
Prospectus should not be construed as the current market value of the estimated
proved oil and gas reserves attributable to the Company's properties. The
calculation of the present value of the future net revenues 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
gas, prevailing oil and gas prices and other factors. See "Business and
Properties -- Reserves." 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 Present Value of the Company's oil and gas reserves as of
December 31, 1996, was based on prices in effect on that date. Average product
prices at December 31, 1996 were $3.02 per Mcf of gas and $22.97 per Bbl of oil,
which prices were substantially higher than historical prices used by the
Company to calculate Present Value in recent years. For example, at December 31,
1995, the average prices for natural gas and oil were $2.30 per Mcf and $16.95
per Bbl, respectively. The closing price on the New York Mercantile Exchange
("NYMEX") for the prompt month natural gas contract delivered at Henry Hub on
December 31, 1996 and July 31, 1997 was $2.757 per Mcf and $2.177 per Mcf,
respectively, assuming one Mmbtu per Mcf. The closing price on NYMEX for the
prompt month oil contract delivered at Cushing, Oklahoma on December 31, 1996
and July 31, 1997 was $25.92 per Bbl and $20.14 per Bbl, respectively. The
proximity of the Appalachian and Michigan Basins to large commercial and
industrial natural gas markets has
15
<PAGE> 16
generally resulted in premium wellhead gas prices that since 1986 have ranged
from $0.31 to $1.30 per Mcf above national wellhead prices. The Company's
average wellhead gas price in the second quarter of 1997 was $0.44 per Mcf above
the estimated average national wellhead price.
FINDING AND ACQUIRING ADDITIONAL RESERVES
The Company's future success depends upon its ability to find or acquire
additional oil and 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. There can be no assurance
that the Company's planned exploration and development projects and acquisition
activities will result in significant additional reserves or that the Company
will have success drilling productive wells at economic returns. If prevailing
oil and gas prices were to increase significantly, the Company's finding costs
to add new reserves could increase as a result of rising costs of goods and
services associated with its drilling activity. The drilling of oil and gas
wells involves a high degree of risk, especially the risk of dry holes or of
wells that are not sufficiently productive to provide an economic return on the
capital expended to drill the wells. The cost of drilling, completing and
operating wells is uncertain, and drilling or production may be curtailed or
delayed as a result of many factors.
Exploration drilling and, to a lesser extent, development drilling involve
a high degree of risk that no commercial production will be obtained or that the
production will be insufficient to recover drilling and completion costs. The
costs of drilling, completing and operating wells is 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 -- Drilling Results."
The Company's business is capital intensive. To maintain its base of proved
oil and gas reserves, a significant amount of cash flow from operations must be
reinvested in property acquisitions, development or exploration activities. To
the extent cash flow from operations is reduced and external sources of capital
become limited or unavailable, the Company's ability to make the necessary
capital investments to maintain or expand its asset base will be impaired.
Without such investment, the Company's oil and gas reserves would decline.
PROPERTY ACQUISITION RISKS
The Company intends to continue acquiring oil and gas properties.
Successful acquisition of producing properties generally requires accurate
assessments of (i) recoverable reserves, (ii) future oil and gas prices and
operating costs, (iii) potential environmental and other liabilities and (iv)
other factors. Such assessments are necessarily inexact and their accuracy
inherently uncertain. 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. Nevertheless, 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 environmental problems, such as groundwater
contamination, are not necessarily observable even when an inspection is
undertaken. See "Business and Properties -- Acquisition of Producing
Properties."
CAPITAL AVAILABILITY
The development and acquisition of oil and gas properties is dependent upon
the Company's ability to finance such projects. The Company utilizes the New
Credit Agreement among the Company and several banks (the "Banks") to borrow, as
needed, the funds required for any given
16
<PAGE> 17
transaction or project. If funds under the New Credit Agreement are not
available to fund development projects and acquisitions, the Company would have
to obtain such financing from other debt financing or other sources. There can
be no assurance that any such other financing would 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 Agreement limits the amounts the Company may borrow to
amounts determined by the Banks, in their sole discretion, based upon a variety
of factors including the discounted Present Value of the Company's estimated
future net cash flow from oil and gas production (the "Borrowing Base").
Currently, the Borrowing Base is $180 million, and the Company had borrowings of
$104.0 million outstanding as of July 31, 1997. The Borrowing Base will be
determined semi-annually if 75% or more of the Borrowing Base is utilized, or
annually in the event that less than 75% of the Borrowing Base is utilized. In
addition, the Company and certain Banks may request one additional
re-determination per year. If oil and gas prices decline below their current
levels, the availability of funds and the ability to pay outstanding amounts
under the New Credit Agreement could be materially adversely affected. The
Indenture also contains restrictions on the Company's ability to incur
additional indebtedness. Other contractual arrangements to which the Company may
become subject in the future could contain similar restrictions. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
OPERATING HAZARDS AND UNINSURED RISKS; PRODUCTION CURTAILMENTS
The oil and 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, cratering, fires, explosions, pipeline ruptures or
spills, pollution and other risks, any of which could result in personal
injuries, loss of life, damage to properties, environmental pollution,
suspension of operations and substantial losses. Although the Company carries
insurance that it believes is 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 results of 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
may be subject to production curtailments. The curtailments may vary from a few
days to several months. In most cases the Company will be provided only limited
notice as to when production will be curtailed and the duration of such
curtailments. The Company is currently not curtailed on any of its production.
HEDGING RISKS
From time to time, the Company may hedge a portion of its physical oil and
natural gas production by entering short positions through fixed price swaps or
options. The Company may also sell futures contracts on the NYMEX. As of July
31, 1997, the Company had no hedge positions.
The Company's Pricing Committee, composed of certain senior managers, has
the responsibility for defining and implementing hedge strategies. The hedge
program provides for oversight and reporting requirements, hedge goals and how
strategies will be developed.
In the past, hedges have involved only the sale of futures contracts on the
NYMEX to fix the price on a portion of the Company's gas production. The Company
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 gas, are subject to a number
of risks including instances in which: (i) production is less than expected;
(ii) there is a widening of price differentials between delivery points required
by fixed price delivery contracts to the extent they differ from those of the
Company's production; or (iii) the Company's customers or the counterparties to
its futures contracts fail to purchase or deliver the contracted quantities of
oil
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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.
GAS CONTRACT RISK
A significant portion of the Company's production is subject to fixed price
contracts. Approximately 47% of average gas production for June 1997 was sold
subject to fixed price sales contracts. These fixed price contracts are at
prices ranging from $1.91 to $3.69 per Mcf. The fixed price contracts with
remaining terms of less than one year, between one and three years and greater
than three years constitute approximately 76%, 21% and 3%, respectively, of the
volume sold under fixed price contracts. At June 30, 1997, the weighted average
price in each category of these contracts was $2.70, $3.61 and $2.46 per Mcf,
respectively. The fixed price sales contracts limit the benefits the Company
will realize if current market prices rise above the contract prices.
GAS GATHERING AND MARKETING
The Company's gas gathering and marketing operations depend in large part
on the ability of the Company to contract with third party producers to purchase
their gas, to obtain sufficient volumes of committed natural gas reserves, to
replace production from declining wells, to assess and respond to changing
market conditions in negotiating gas purchase and sale agreements and to obtain
satisfactory margins between the purchase price of its natural gas supply and
the sales price for such natural gas. In addition, the Company's operations are
subject to changes in regulations relating to gathering and marketing of oil and
gas. The inability of the Company to attract new sources of third party natural
gas or to promptly respond to changing market conditions or regulations in
connection with its gathering and marketing operations could have a material
adverse effect on the Company's financial condition and results of operations.
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, marketing,
transportation and storage of oil and gas. The Company's operations are subject
to numerous laws and regulations governing plugging and abandonment, the
discharge of materials into the environment or otherwise relating to
environmental protection. These laws and regulations require the acquisition of
a permit before drilling commences, restrict the types, quantities and
concentration of various substances that can be released into the environment in
connection with drilling and production activities, limit or prohibit drilling
activities on certain lands lying within wilderness, wetlands and other
protected areas, and impose substantial liabilities for pollution which might
result from the Company's operations. The Company may also be subject to
substantial clean-up costs for any toxic or hazardous substance that may exist
under any of its properties. Moreover, the recent trend toward stricter
standards in environmental legislation and regulation is likely to continue. For
instance, legislation has been proposed in Congress from time to time that would
reclassify certain crude oil and natural gas exploration and production wastes
as "hazardous wastes" which would make the reclassified wastes subject to much
more stringent handling, disposal and clean-up requirements. If such legislation
were to be enacted, it could have a significant impact on the operating costs of
the Company, as well as the oil and gas industry in general. The Company could
incur substantial costs to comply with environmental laws and regulations.
COMPETITION
The Company encounters substantial competition in acquiring properties,
marketing oil and gas, purchasing gas to meet delivery requirements, securing
equipment, hiring and retaining personnel and operating its properties. The
Company's competitors in acquisitions, development, exploration and production
include major oil companies, numerous independent oil and gas
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companies, individual proprietors and others. Many of these competitors have
financial and other resources which substantially exceed those of the Company
and have been engaged in the energy business for a much longer time than the
Company. 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.
DEPENDENCE ON KEY PERSONNEL
The Company depends, and will continue to depend in the foreseeable future,
on the services of its officers and key employees with extensive experience and
expertise in evaluating and analyzing producing oil and gas properties and
drilling prospects, maximizing production from oil and gas properties and
marketing oil and gas production. The ability of the Company to retain its
officers and key employees is important to the continued success and growth of
the Company. The loss of key personnel could have a material adverse effect on
the Company. Although the Company has entered into employment agreements with
Ronald L. Clements and Ronald E. Huff, it has not entered into employment
agreements with the other officers and key employees of the Company. The Company
does not maintain key man life insurance on any of its officers or key
employees. See "Management."
SUBORDINATION OF NOTES AND GUARANTEES
The Notes are subordinated in right of payment to all existing and future
Senior Debt of the Company, including borrowings under the New Credit Agreement.
In the event of bankruptcy, liquidation or reorganization of the Company, the
assets of the Company will be available to pay obligations on the Notes only
after all Senior Debt has been paid in full, and there may not be sufficient
assets remaining to pay amounts due on any or all of the Notes outstanding. The
aggregate principal amount of Senior Debt of the Company, as of July 31, 1997,
was $104.0 million. The Guarantees are subordinated to Indebtedness of the
Subsidiary Guarantors to the same extent and in the same manner as the Notes are
subordinated to Senior Debt. Additional Senior Debt may be incurred by the
Company from time to time, subject to certain restrictions. The maximum amount
of Senior Debt the Company is permitted to incur under the Indenture is $300
million, including borrowings under the New Credit Agreement. In addition to
being subordinated to all existing and future Senior Debt of the Company, the
Notes are not secured by any of the Company's assets, unlike the borrowings
under the New Credit Agreement. As a consequence, the Notes are effectively
subordinated to all of the Company's secured debt. In addition, the Notes may be
structurally subordinated to indebtedness of the Company's Subsidiaries. See
"Description of the Notes -- Ranking and Subordination."
ABSENCE OF PUBLIC MARKET; RESTRICTIONS ON TRANSFERABILITY
The Exchange Notes are new securities for which there is no market.
Although the Initial Purchasers have informed the Company that they currently
intend to make a market in the Exchange Notes, the Initial Purchasers are not
obligated to do so and any such market making may be discontinued at any time
without notice. In addition, such market making activity may be limited during
the pendency of the Exchange Offer. Accordingly, there can be no assurance as to
the development or liquidity of any market for the Exchange Notes. If a trading
market does not develop or is not maintained, holders of the Exchange Notes may
experience difficulty in reselling the Exchange Notes or may be unable to sell
them at all. If a market for the Exchange Notes develops, any such market may be
discontinued at any time. The Company does not intend to apply for listing of
the Exchange Notes on any securities exchange or for quotation of the Exchange
Notes through the National Association of Securities Dealers Automated Quotation
System.
The Exchange Notes generally will be permitted to be resold or otherwise
transferred by each holder without the requirement of further registration. The
Exchange Offer will not be conditioned upon any minimum or maximum aggregate
principal amount of Senior Subordinated Notes being
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tendered for exchange. In the case of non-exchanging holders of Senior
Subordinated Notes, no assurance can be given as to the liquidity of the trading
market for the Senior Subordinated Notes following the Exchange Offer. See "Plan
of Distribution."
The liquidity of, and trading market for, the Senior Subordinated Notes or
the Exchange Notes also may be adversely affected by general declines in the
market or by declines in the market for similar securities. Such declines may
adversely affect such liquidity and trading markets independent of the financial
performance of, and prospects for, the Company.
CONSEQUENCES OF EXCHANGE AND FAILURE TO EXCHANGE
Holders of Senior Subordinated Notes who do not exchange their Senior
Subordinated Notes for Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the restrictions on transfer of such Senior
Subordinated Notes as set forth in the legend thereon as a consequence of the
issuance of the Senior Subordinated Notes pursuant to exemption from, or in
transactions not subject to, the registration requirements of the Securities Act
and applicable state securities laws. In general, the Senior Subordinated Notes
may not be offered or sold unless registered under the Securities Act and
applicable state securities laws or pursuant to an exemption therefrom. Except
under certain limited circumstances, the Company does not intend to register the
Senior Subordinated Notes under the Securities Act. In addition, any holder of
Senior Subordinated Notes who tenders in the Exchange Offer for the purpose of
participating in a distribution of the Exchange Notes may be deemed to have
received restricted securities and, if so, will be required to comply with the
registration and prospectus delivery requirements of the Securities Act in
connection with any resale transaction. To the extent Senior Subordinated Notes
are tendered and accepted in the Exchange Offer, the trading market, if any, for
the Senior Subordinated Notes not tendered could be adversely affected. See "The
Exchange Offer" and "Senior Subordinated Notes Registration Rights."
RISKS RELATING TO A CHANGE OF CONTROL
Upon a Change of Control, holders of the Notes will have the right to
require the Company to repurchase all or any part of such holders' Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of repurchase. The events that constitute a Change
of Control under the Notes would constitute a default under the New Credit
Agreement, which prohibits the purchase of the Notes by the Company in the event
of certain Change of Control events unless and until such time as the Company's
indebtedness under the New Credit Agreement is repaid in full. There can be no
assurance that the Company and the Subsidiary Guarantors would have sufficient
financial resources available to satisfy all of its or their obligations under
the New Credit Agreement and the Notes in the event of a Change of Control. The
Company's failure to purchase the Notes would result in a default under the
Indenture and under the New Credit Agreement, each of which could have adverse
consequences for the Company and the holders of the Notes. See "Description of
Other Indebtedness" and "Description of the Notes -- Repurchase at the Option of
Holders -- Change of Control." The definition of "Change of Control" in the
Indenture includes a sale, lease, conveyance or other disposition of "all or
substantially all" of the assets of the Company and its Subsidiaries, taken as a
whole, to a person or group of persons. There is little case law interpreting
the phrase "all or substantially all" in the context of an indenture. Because
there is no precise established definition of this phrase, the ability of a
holder of the Notes to require the Company to repurchase such Notes as a result
of a sale, lease, conveyance or transfer of all or substantially all of the
Company's assets to a person or group of persons may be uncertain.
CONTROLLING SHAREHOLDERS
All of the common stock of the Company is owned by the TPG Investors. As a
result of this ownership, the TPG Investors are able to direct the election of
the members of the Board of
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Directors of the Company and, therefore, direct the management and policies of
the Company and are able to unilaterally approve mergers and other fundamental
corporate changes involving the Company which require shareholder approval. The
interests of the TPG Investors as shareholders may differ from the interests of
holders of the Notes. See "Principal Shareholders" and "Certain Relationships
and Related Transactions."
FRAUDULENT CONVEYANCE CONSIDERATIONS
The incurrence by the Company of indebtedness such as the Notes to finance
the Acquisition and the incurrence by the Guarantors of indebtedness such as the
Guarantees may be subject to review under Federal bankruptcy law or relevant
state fraudulent conveyance laws if a bankruptcy case or lawsuit is commenced by
or on behalf of unpaid creditors of the Company or any of the Guarantors, as the
case may be. Under these laws, if a court were to find that, after giving effect
to the sale of the Notes and the application of the net proceeds therefrom and
the issuance of the Guarantees by the Guarantors, either (a) the Company or any
such Guarantor, as the case may be, incurred such indebtedness with the intent
of hindering, delaying or defrauding creditors or (b) the Company or such
Guarantor, as the case may be, received less than reasonably equivalent value or
consideration for incurring such indebtedness and (i) was insolvent or was
rendered insolvent by reason of such transactions, (ii) was engaged in a
business or transaction for which the assets remaining with the Company or such
Guarantor, as the case may be, constituted unreasonably small capital, or (iii)
intended to incur, or believed that it would incur, debts beyond its ability to
pay as they matured, such court might subordinate such indebtedness to presently
existing and future indebtedness of the Company or such Guarantor, as the case
may be, or void the issuance of such indebtedness and direct the repayment of
any amounts paid thereunder to the creditors of the Company or such Guarantor,
as the case may be, or take other action detrimental to the holders of such
indebtedness.
The measure of insolvency for purposes of determining whether a transfer is
avoidable as a fraudulent transfer varies depending upon the law of the
jurisdiction that is being applied. Generally, however, a debtor would be
considered insolvent if the sum of all its debts, including contingent
liabilities, was greater than the value of all its assets at a fair valuation or
if the present fair saleable value of the debtor's assets was less than the
amount required to repay its probable liability on its debts, including
contingent liabilities, as they become absolute and mature.
To the extent that proceeds from the Initial Offering were used to
refinance the indebtedness of the Company, a court might find that the Company
did not receive fair consideration or reasonably equivalent value for the
incurrence of the indebtedness represented by the Notes. In addition, if a court
were to find that any of the components of the Acquisition constituted a
fraudulent transfer, to the extent that proceeds from the Initial Offering were
used to finance or refinance such components, a court might find that the
Company did not receive fair consideration or reasonably equivalent value for
the incurrence of the indebtedness represented by the Notes.
To the extent that a Guarantee of any Guarantor is avoided as a fraudulent
conveyance or found unenforceable for any other reason, holders of the Notes
would cease to have any claim in respect of such Guarantor. In such event, the
claims of the holders of the Notes against such Guarantor would be subject to
the prior payment of all liabilities and preferred stock claims of such
Guarantor. There can be no assurance that, after providing for all prior claims
and preferred stock interests, if any, there would be sufficient assets to
satisfy the claims of the holders of the Notes relating to any voided portion of
the Guarantee of such Guarantor.
The Company believes that the Notes and the Guarantees were issued for
proper purposes and in good faith. In addition, after giving effect to the
consummation of the Acquisition and the Initial Offering and the application of
the proceeds therefrom, the Company does not: (i) believe that it or any
Guarantor was or is insolvent or rendered insolvent; (ii) believe that it or any
Guarantor was or is engaged in a business or transaction for which its remaining
assets constitute unreasonably small
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capital; or (iii) intend for it or any Guarantor to incur, or believe that it or
any Guarantor will incur, debts beyond its ability to pay as they mature. These
beliefs are based on the Company's analysis of internal cash flow projections
and estimated values of assets and liabilities of the Company and the Guarantors
at the time of the Acquisition and the Initial Offering. There can be no
assurance, however, that a court passing on these issues would make the same
determination.
FORWARD-LOOKING INFORMATION
Information included in this Prospectus contains forward-looking statements
within the meaning of Section 27A of the Securities Act and Section 21E of the
Exchange Act, including projections, estimates and expectations. Those
statements by their nature are subject to certain risks, uncertainties and
assumptions and will be influenced by various factors. Should one or more of
these statements or their underlying assumptions prove to be incorrect, actual
results could vary materially. Although the Company believes that such
projections, estimates and expectations are based on reasonable assumptions, it
can give no assurance that such projections, estimates and expectations will be
achieved. Important factors that could cause actual results to differ materially
from those in the forward-looking statements herein include political and
economic developments in the United States and foreign countries, federal and
state regulatory developments, the timing and extent of changes in commodity
prices, the extent of success in acquiring oil and gas properties and in
discovering, developing and producing reserves, the Company's future production
and costs of operation, the market demand for, and prices of, oil and natural
gas, the uncertainties of reserve estimates, environmental risks and conditions
of the capital markets and equity markets during the periods covered by the
forward-looking statements. See "Risk Factors" for further information with
respect to certain of such factors. In addition, certain of such projections and
expectations are based on historical results, which may not be indicative of
future performance. See "Unaudited Pro Forma Consolidated Financial Statements."
USE OF PROCEEDS
There will be no net proceeds to the Company from the exchange pursuant to
the Exchange Offer. The Company used the net proceeds from the sale of the
Senior Subordinated Notes of $218.3 million, together with the $104.0 million
borrowed from the Banks under the New Credit Agreement, to (i) pay a portion of
the consideration for the Acquisition; (ii) repay all outstanding indebtedness
under the Company's then existing credit facility in the amount of $94.0
million; and (iii) pay certain related fees and expenses.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
The sole purpose of the Exchange Offer is to fulfill the obligations of the
Company with respect to the Registration Rights Agreement.
The Senior Subordinated Notes were originally issued and sold on June 27,
1997 (the "Issue Date"). Such sales were not registered under the Securities Act
in reliance upon the exemption provided by Section 4(2) of the Securities Act
and Rule 144A under the Securities Act. In connection with the sale of the
Senior Subordinated Notes, the Company agreed to file with the Commission a
registration statement relating to an exchange offer (the "Exchange Offer
Registration Statement") pursuant to which Exchange Notes covered by such
registration statement and containing the same terms as the Senior Subordinated
Notes, except as set forth in this Prospectus, would be offered in exchange for
Senior Subordinated Notes tendered at the option of the holders thereof. Each
broker-dealer that receives Exchange Notes for its own account in exchange for
Senior Subordinated Notes, where such Senior Subordinated Notes were acquired by
such broker-
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dealer as a result of market-making activities or other trading activities, must
acknowledge that it will deliver a prospectus in connection with any resale of
such Exchange Notes. See "Senior Subordinated Notes Registration Rights."
TERMS OF THE EXCHANGE OFFER; PERIOD FOR TENDERING SENIOR SUBORDINATED NOTES
Upon the terms and subject to the conditions set forth in this Prospectus
and in the accompanying Letter of Transmittal (which together constitute the
Exchange Offer), the Company will accept for exchange Senior Subordinated Notes
that are properly tendered on or prior to the Expiration Date and not withdrawn
as permitted below. As used herein, the term "Expiration Date" means 5:00 p.m.,
New York City time, on October 31, 1997; provided, however, that if the Company,
in its sole discretion, has extended the period of time for which the Exchange
Offer is open, the term "Expiration Date" means the latest time and date to
which the Exchange Offer has been extended.
As of the date of this Prospectus, $225 million aggregate principal amount
of Senior Subordinated Notes is outstanding. This Prospectus, together with the
Letter of Transmittal, is first being sent on or about the date of this
Prospectus, to all Holders of Senior Subordinated Notes known to the Company.
The Company's obligation to accept Senior Subordinated Notes for exchange
pursuant to the Exchange Offer is subject to certain conditions as set forth
under "--Certain Conditions to the Exchange Offer" below.
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 Senior Subordinated Notes, by
giving oral or written notice of such extension to the Holders thereof as
described below. During any such extension, all Senior Subordinated Notes
previously tendered will remain subject to the Exchange Offer and may be
accepted for exchange by the Company. Any Senior Subordinated 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.
Senior Subordinated Notes tendered in the Exchange Offer must be in
denominations of principal amount of $1,000 or any integral multiple thereof.
The Company expressly reserves the right to amend or terminate the Exchange
Offer, and not to accept for exchange any Senior Subordinated Notes not
theretofore accepted for exchange, upon the occurrence of any of the conditions
of the Exchange Offer specified below under "--Certain Conditions to the
Exchange Offer." The Company will give oral or written notice of any extension,
amendment, non-acceptance or termination to the Holders of the Senior
Subordinated Notes as promptly as practicable, such notice in the case of any
extension to be issued by means of a press release or other public announcement
no later than 9:00 a.m., New York City time, on the next business day following
the previously scheduled Expiration Date.
HOW TO TENDER
The tender to the Company of Senior Subordinated Notes by a Holder thereof
as set forth below and the acceptance thereof by the Company will constitute a
binding agreement between the tendering Holder and the Company upon the terms
and subject to the conditions set forth in this Prospectus and in the
accompanying Letter of Transmittal. Except as set forth below, a Holder who
wishes to tender Senior Subordinated Notes for exchange pursuant to the Exchange
Offer must transmit a properly completed and duly executed Letter of
Transmittal, including all other documents required by such Letter of
Transmittal, to LaSalle National Bank (the "Exchange Agent") at the address set
forth below under "Exchange Agent" on or prior to the Expiration Date. In
addition, either (i) certificates for such Senior Subordinated Notes must be
received by the Exchange Agent along with the Letter of Transmittal, or (ii) a
timely confirmation of a book-entry transfer (a "Book-Entry Confirmation") of
such Senior Subordinated Notes, if such procedure is available, into the
Exchange Agent's account at The Depository Trust Company (the "Book-Entry
Transfer Facility")
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pursuant to the procedure for book-entry transfer described below, must be
received by the Exchange Agent prior to the Expiration Date, or (iii) the Holder
must comply with the guaranteed delivery procedures described below. THE METHOD
OF DELIVERY OF SENIOR SUBORDINATED NOTES, LETTERS OF TRANSMITTAL AND ALL OTHER
REQUIRED DOCUMENTS IS AT THE ELECTION AND RISK OF THE HOLDER. IF SUCH DELIVERY
IS BY MAIL, IT IS RECOMMENDED THAT REGISTERED MAIL, PROPERLY INSURED, WITH
RETURN RECEIPT REQUESTED, BE USED. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE TIMELY DELIVERY. NO LETTERS OF TRANSMITTAL OR SENIOR
SUBORDINATED NOTES SHOULD BE SENT TO THE COMPANY.
Any beneficial owner whose Senior Subordinated Notes are registered in the
name of a broker, dealer, commercial bank, trust company or other nominee and
who wishes to tender should contact the registered Holder promptly and instruct
such registered Holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on his own behalf, such beneficial owner must,
prior to completing and executing the Letter of Transmittal and delivering
Senior Subordinated Notes, either make appropriate arrangements to register
ownership of the Senior Subordinated Notes in such beneficial owner's name or
obtain a properly completed bond power from the registered Holder. The transfer
of registered ownership may take considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, must be guaranteed unless the Senior Subordinated Notes surrendered
for exchange are tendered (i) by a registered Holder of the Senior Subordinated
Notes who has not completed the box entitled "Special Issuance Instructions" or
"Special Delivery Instructions" on the Letter of Transmittal or (ii) for the
account of an Eligible Institution (as defined below). In the event that
signatures on a Letter of Transmittal or a notice of withdrawal, as the case may
be, are required to be guaranteed, such guarantees must be by a member of the
Securities Agents Medallion Program, The New York Stock Exchanges Medallion
Signature Program or The Stock Exchanges Medallion Program (collectively,
"Eligible Institutions"). If Senior Subordinated Notes are registered in the
name of a person other than a signer of the Letter of Transmittal, the Senior
Subordinated Notes surrendered for exchange must be endorsed by, or be
accompanied by a written instrument or instruments of transfer or exchange, in
satisfactory form as determined by the Company in its sole discretion, duly
executed by the registered Holder with the signature thereon guaranteed by an
Eligible Institution.
All questions as to the validity, form, eligibility (including time of
receipt) and acceptance of Senior Subordinated Notes tendered for exchange will
be determined by the Company in its sole discretion, which determination shall
be final and binding. The Company reserves the absolute right to reject any and
all tenders of any particular Senior Subordinated Notes not properly tendered or
to not accept any particular Senior Subordinated Notes which acceptance might,
in the judgment of the Company or its counsel, be unlawful. The Company also
reserves the right to waive any defects or irregularities or conditions of the
Exchange Offer as to any particular Senior Subordinated Notes either before or
after the Expiration Date (including the right to waive the ineligibility of any
Holder who seeks to tender Senior Subordinated Notes in the Exchange Offer). The
interpretation of the terms and conditions of the Exchange Offer as to any
particular Senior Subordinated Notes either before or after the Expiration Date
(including the Letter of Transmittal and the instructions thereto) by the
Company shall be final and binding on all parties. Unless waived, any defects or
irregularities in connection with tenders of Senior Subordinated Notes for
exchange must be cured within such reasonable period of time as the Company
shall determine. Neither the Company, the Exchange Agent nor any other person
shall be under any duty to give notification of any defect or irregularity with
respect to any tender of Senior Subordinated Notes for exchange, nor shall any
of them incur any liability for failure to give such notification.
If the Letter of Transmittal is signed by a person or persons other than
the registered Holder or Holders of Senior Subordinated Notes, such Senior
Subordinated Notes must be endorsed or accompanied by appropriate powers of
attorney, in either case signed exactly as the name or names of the registered
Holder or Holders appear on the Senior Subordinated Notes.
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If the Letter of Transmittal or any Senior Subordinated Notes or powers of
attorney are signed by trustees, executors, administrators, guardians,
attorneys-in-fact, officers of corporations or others acting in a fiduciary or
representative capacity, such persons should so indicate when signing, and,
unless waived by the Company, proper evidence satisfactory to the Company of
their authority to so act must be submitted.
By tendering, each Holder will represent to the Company that, among other
things, the Exchange Notes acquired pursuant to the Exchange Offer are being
obtained in the ordinary course of business of the person receiving such
Exchange Notes, whether or not such person is the Holder, and that neither the
Holder nor such other person has any arrangement or understanding with any
person to participate in the distribution of the Exchange Notes. In the case of
a Holder that is not a broker-dealer, each such Holder, by tendering, will also
represent to the Company that such Holder is not engaged in and does not intend
to engage in, a distribution of the Exchange Notes. If any Holder or any such
other person is an "affiliate," as defined in Rule 405 under the Securities Act,
of the Company, or is engaged in or intends to engage in or has an arrangement
or understanding with any person to participate in a distribution of such
Exchange Notes to be acquired pursuant to the Exchange Offer, such Holder or any
such other person (i) cannot rely on the applicable interpretations of the Staff
of the Commission and (ii) must comply with the registration and prospectus
delivery requirements of the Securities Act in connection with any resale
transaction. Each broker-dealer that receives Exchange Notes for its own account
in exchange for Senior Subordinated Notes, where such Senior Subordinated 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. See "Plan of Distribution." The Letter of Transmittal
states that by so acknowledging and by delivering such a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
ACCEPTANCE OF SENIOR SUBORDINATED NOTES FOR EXCHANGE; DELIVERY OF EXCHANGE NOTES
Upon satisfaction or waiver of all conditions to the Exchange Offer, the
Company will accept, promptly after the Expiration Date, all Senior Subordinated
Notes properly tendered and will issue the Exchange Notes promptly after
acceptance of the Senior Subordinated Notes. See "--Certain Conditions to the
Exchange Offer" below. For purposes of the Exchange Offer, the Company shall be
deemed to have accepted properly tendered Senior Subordinated Notes for exchange
when, as and if the Company has given oral or written notice thereof to the
Exchange Agent, with written confirmation of any oral notice to be given
promptly thereafter.
For each Senior Subordinated Note accepted for exchange, the Holder will
receive an Exchange Note having a principal amount equal to that of the
surrendered Senior Subordinated Note. The Exchange Notes will bear interest from
the most recent date to which interest has been paid on the Senior Subordinated
Notes or, if no interest has been paid on the Senior Subordinated Notes, from
June 27, 1997. Accordingly, registered Holders of Exchange Notes on the relevant
record date for the first interest payment date following the consummation of
the Exchange Offer will receive interest accruing from the most recent date to
which interest has been paid or, if no interest has been paid, from June 27,
1997. Senior Subordinated Notes accepted for exchange will cease to accrue
interest from and after the date of consummation of the Exchange Offer. Holders
of Senior Subordinated Notes whose Senior Subordinated Notes are accepted for
exchange will not receive any payment in respect of accrued interest on such
Senior Subordinated Notes otherwise payable on any interest payment date the
record date for which occurs on or after the date of consummation of the
Exchange Offer.
In all cases, issuance of Exchange Notes for Senior Subordinated Notes that
are accepted for exchange pursuant to the Exchange Offer will be made only after
timely receipt by the Exchange Agent of certificates for such Senior
Subordinated Notes (or a timely Book-Entry Confirmation of such Senior
Subordinated Notes into the Exchange Agent's account at the Book-Entry Transfer
25
<PAGE> 26
Facility), a properly completed and duly executed Letter of Transmittal and all
other required documents. If any tendered Senior Subordinated Notes are not
accepted for any reason set forth in the terms and conditions of the Exchange
Offer or if Senior Subordinated Notes are submitted for a greater principal
amount than the Holder desires to exchange, such unaccepted or non-exchanged
Senior Subordinated Notes will be returned without expense to the tendering
Holder (or, in the case of Senior Subordinated Notes tendered by book-entry
transfer into the Exchange Agent's account at the Book-Entry Transfer Facility
pursuant to the book-entry procedures described below, such non-exchanged Senior
Subordinated Notes will be credited to an account maintained with such Book-
Entry Transfer Facility) as promptly as practicable after the expiration or
termination of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with respect
to the Senior Subordinated Notes at the Book-Entry Transfer Facility for
purposes of the Exchange Offer within two business days after the date of this
Prospectus, and any financial institution that is a participant in the
Book-Entry Transfer Facility's systems may make book-entry delivery of Senior
Subordinated Notes by causing the Book-Entry Transfer Facility to transfer such
Senior Subordinated Notes into the Exchange Agent's account at the Book-Entry
Transfer Facility in accordance with such Book-Entry Transfer Facility's
procedures for transfer. However, although delivery of Senior Subordinated Notes
may be effected through book-entry transfer at the Book-Entry Transfer Facility,
the Letter of Transmittal or facsimile thereof, with any required signature
guarantees and any other required documents, must, in any case, be transmitted
to and received by the Exchange Agent at the address set forth below under
"--Exchange Agent" on or prior to the Expiration Date or the guaranteed delivery
procedures described below must have been complied with.
GUARANTEED DELIVERY PROCEDURES
If a registered Holder of the Senior Subordinated Notes desires to tender
such Senior Subordinated Notes and the Senior Subordinated Notes are not
immediately available, or time will not permit such Holder's Senior Subordinated
Notes or other required documents to reach the Exchange Agent before the
Expiration Date, or the procedure for book-entry transfer cannot be completed on
a timely basis, a tender may be effected if (i) the tender is made through an
Eligible Institution, (ii) prior to the Expiration Date, the Exchange Agent
receives from such Eligible Institution a properly completed and duly executed
Letter of Transmittal (or a facsimile thereof) and Notice of Guaranteed
Delivery, substantially in the form provided by the Company (by facsimile
transmission, mail or hand delivery), setting forth the name and address of the
Holder of Senior Subordinated Notes and the amount of Senior Subordinated Notes
tendered, stating that the tender is being made thereby and guaranteeing that
within three New York Stock Exchange ("NYSE") trading days after the Expiration
Date, the certificates for all physically tendered Senior Subordinated Notes, in
proper form for transfer, or a Book-Entry Confirmation, as the case may be, and
any other documents required by the Letter of Transmittal will be deposited by
the Eligible Institution with the Exchange Agent, and (iii) the certificates for
all physically tendered Senior Subordinated Notes, in proper form for transfer,
or a Book-Entry Confirmation, as the case may be, and all other documents
required by the Letter of Transmittal, are received by the Exchange Agent within
three NYSE trading days after the Expiration Date.
WITHDRAWAL RIGHTS
Tenders of Senior Subordinated Notes may be withdrawn at any time prior to
5:00 p.m., New York City time, on the Expiration Date.
For a withdrawal to be effective, a written notice of withdrawal must be
received by the Exchange Agent at the address or, in the case of Eligible
Institutions, at the facsimile number, set forth below under "--Exchange Agent"
prior to 5:00 p.m., New York City time, on the Expiration
26
<PAGE> 27
Date. Any such notice of withdrawal must (i) specify the name of the person
having tendered the Senior Subordinated Notes to be withdrawn (the "Depositor"),
(ii) identify the Senior Subordinated Notes to be withdrawn (including the
certificate number or numbers and principal amount of such Senior Subordinated
Notes), (iii) contain a statement that such person is withdrawing his election
to have such Senior Subordinated Notes exchanged, (iv) be signed by the person
in the same manner as the original signature on the Letter of Transmittal by
which such Senior Subordinated Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer to have the
Trustee with respect to the Senior Subordinated Notes register the transfer of
such Senior Subordinated Notes in the name of the person withdrawing the tender
and (v) specify the name in which such Senior Subordinated Notes are registered,
if different from that of the Depositor. If Senior Subordinated Notes have been
tendered pursuant to the procedure for book-entry transfer described above, any
notice of withdrawal must specify the name and number of the account at the
Book-Entry Transfer Facility to be credited with the withdrawn Senior
Subordinated Notes and otherwise comply with the procedures of such facility.
All questions as to the validity, form and eligibility (including time of
receipt) of such notices will be determined by the Company, whose determination
shall be final and binding on all parties. Any Senior Subordinated Notes so
withdrawn will be deemed not to have been validly tendered for exchange for
purposes of the Exchange Offer and no Exchange Notes will be issued with respect
thereto unless the Senior Subordinated Notes so withdrawn are validly
re-tendered. Any Senior Subordinated Notes that have been tendered for exchange
but that are not exchanged for any reason will be returned to the tendering
Holder without cost to such Holder (or, in the case of Senior Subordinated Notes
tendered by book-entry transfer into the Exchange Agent's account at the
Book-Entry Transfer Facility pursuant to the book-entry transfer procedures
described above, such Senior Subordinated Notes will be credited to an account
maintained with the Book-Entry Transfer Facility for the Senior Subordinated
Notes) as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Senior Subordinated Notes
may be re-tendered by following the procedures described under "--How to Tender"
above at any time on or prior to 5:00 p.m., New York City time, on the
Expiration Date.
CERTAIN CONDITIONS TO THE EXCHANGE OFFER
Notwithstanding any other provision of the Exchange Offer, the Company
shall not be required to accept for exchange, or to issue Exchange Notes in
exchange for, any Senior Subordinated Notes and may terminate or amend the
Exchange Offer, if at any time before the acceptance of such Senior Subordinated
Notes for exchange or the exchange of the Exchange Notes for such Senior
Subordinated Notes, any of the following events shall occur:
(a) there shall be threatened, instituted or pending any action or
proceeding before, or any injunction, order or decree shall have been
issued by, any court or governmental agency or other governmental
regulatory or administrative agency or commission, (i) seeking to restrain
or prohibit the making or consummation of the Exchange Offer or any other
transaction contemplated by the Exchange Offer, or assessing or seeking any
damages as a result thereof, or (ii) resulting in a material delay in the
ability of the Company to accept for exchange or exchange some or all of
the Senior Subordinated Notes pursuant to the Exchange Offer; or any
statute, rule, regulation, order or injunction shall be sought, proposed,
introduced, enacted, promulgated or deemed applicable to the Exchange Offer
or any of the transactions contemplated by the Exchange Offer by any
government or governmental authority, domestic or foreign, or any action
shall have been taken, proposed or threatened, by any government,
governmental authority, agency or court, domestic or foreign, that in the
reasonable judgment of the Company might directly or indirectly result in
any of the consequences referred to in clauses (i) or (ii) above or, in the
reasonable judgment of the Company, might result in the holders of Exchange
Notes having obligations with respect to resales and transfers of Exchange
Notes that are greater than those described in the interpretation of the
Commission referred to on the
27
<PAGE> 28
cover page of this Prospectus, or would otherwise make it inadvisable to
proceed with the Exchange Offer; or
(b) there shall have occurred (i) any general suspension of or general
limitation on prices for, or trading in, securities on any national
securities exchange or in the over-the-counter market, (ii) any limitation
by a governmental agency or authority that may adversely affect the ability
of the Company to complete the transactions contemplated by the Exchange
Offer, (iii) a declaration of a banking moratorium or any suspension of
payments in respect of banks in the United States or any limitation by any
governmental agency or authority that adversely affects the extension of
credit or (iv) a commencement of a war, armed hostilities or other similar
international calamity directly or indirectly involving the United States,
or, in the case of any of the foregoing existing at the time of the
commencement of the Exchange Offer, a material acceleration or worsening
thereof; or
(c) any change (or any development involving a prospective change)
shall have occurred or be threatened in the business, properties, assets,
liabilities, financial condition, operations, results of operations or
prospects of the Company and its subsidiaries taken as a whole that, in the
reasonable judgment of the Company, is or may be adverse to the Company, or
the Company shall have become aware of facts that, in the reasonable
judgment of the Company, have or may have adverse significance with respect
to the value of the Senior Subordinated Notes or the Exchange Notes; that
in the reasonable judgment of the Company in any case, and regardless of
the circumstances (including any action by the Company) giving rise to any
such condition, makes it inadvisable to proceed with the Exchange Offer
and/or with such acceptance for exchange or with such exchange.
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 Company's failure 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 that may be asserted
at any time and from time to time.
In addition, the Company will not accept for exchange any Senior
Subordinated Notes tendered, and no Exchange Notes will be issued in exchange
for any such Senior Subordinated 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.
EXCHANGE AGENT
LaSalle National Bank has been appointed as the Exchange Agent for the
Exchange Offer. All executed Letters of Transmittal should be directed to the
Exchange Agent at the address set forth below. Questions and requests for
assistance, requests for additional copies of this Prospectus or of the Letter
of Transmittal and requests for Notices of Guaranteed Delivery should be
directed to the Exchange Agent addressed as follows:
LASALLE NATIONAL BANK, EXCHANGE AGENT
<TABLE>
<S> <C>
By Mail or Hand Delivery: By Facsimile Transmission:
LaSalle National Bank (for Eligible Institutions only):
135 South LaSalle Street (312) 904-2236
Suite 1860 Confirm by Telephone:
Chicago, Illinois 60603 (312) 904-2970
</TABLE>
28
<PAGE> 29
DELIVERY OF THE LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET FORTH
ABOVE OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE OTHER THAN AS SET FORTH
ABOVE DOES NOT CONSTITUTE A VALID DELIVERY OF SUCH LETTER OF TRANSMITTAL.
FEES AND EXPENSES
The Company will not make any payment to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The estimated cash expenses to be
incurred in connection with the Exchange Offer will be paid by the Company and
are estimated in the aggregate to be $240,000.
TRANSFER TAXES
Holders who tender their Senior Subordinated Notes for exchange will not be
obligated to pay any transfer taxes in connection therewith, except that Holders
who instruct the Company to register Exchange Notes in the name of, or request
that Senior Subordinated Notes not tendered or not accepted in the Exchange
Offer be returned to, a person other than the registered tendering Holder will
be responsible for the payment of any applicable transfer tax.
CONSEQUENCES OF EXCHANGING SENIOR SUBORDINATED NOTES
Holders of Senior Subordinated Notes who do not exchange their Senior
Subordinated Notes for Exchange Notes pursuant to the Exchange Offer will
continue to be subject to the provisions in the Indenture regarding transfer and
exchange of the Senior Subordinated Notes and the restrictions on transfer of
such Senior Subordinated Notes as set forth in the legend thereon as a
consequence of the issuance of the Senior Subordinated Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Senior Subordinated Notes may not be offered or sold unless
registered under, pursuant to an exemption from or in a transaction not subject
to, the Securities Act and applicable state securities laws. The Company does
not currently anticipate that it will register Senior Subordinated Notes under
the Securities Act. Based on interpretations by the Staff of the Commission, as
set forth in no-action letters issued to third parties, the Company believes
that Exchange Notes issued pursuant to the Exchange Offer in exchange for Senior
Subordinated Notes may be offered for resale, resold or otherwise transferred by
Holders thereof (other than any such Holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act) without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such Exchange Notes were acquired in the ordinary
course of such Holders' business and such Holders have no arrangement or
understanding with any person to participate in the distribution of such
Exchange Notes. However, the Staff of the Commission has not rendered a no-
action letter with respect to the Exchange Offer, and there can be no assurance
that the Staff would make a similar determination for the Exchange Offer as in
such other circumstances. Each Holder, other than a broker-dealer, must
acknowledge that it is not engaged in, and does not intend to engage in, a
distribution of Exchange Notes and has no arrangement or understanding to
participate in a distribution of Exchange Notes. If any Holder is an affiliate
of the Company, is engaged in or intends to engage in or has any arrangement or
understanding with respect to the distribution of the Exchange Notes to be
acquired pursuant to the Exchange Offer, such Holder (i) cannot rely on the
applicable interpretations of the staff of the Commission and (ii) must comply
with the registration and prospectus delivery requirements of the Securities Act
in connection with any resale transaction. Each broker-dealer that receives
Exchange Notes for its own account in exchange for Senior Subordinated Notes
must acknowledge that such Senior Subordinated Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities and that it will deliver a prospectus in connection with any resale
of such Exchange Notes. See "Plan of Distribution."
29
<PAGE> 30
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS
The following is a summary of certain United States federal income tax
consequences associated with the exchange of Senior Subordinated Notes for
Exchange Notes and the ownership and disposition of the Exchange Notes by
holders who acquired the Exchange Notes pursuant to the Exchange Offer. The
summary is based upon current laws, regulations, rulings and judicial decisions,
all of which are subject to change. The discussion below does not address all
aspects of United States federal income taxation that may be relevant to
particular holders in the context of their specific investment circumstances or
certain types of holders subject to special treatment under such laws (for
example, financial institutions, banks, tax-exempt organizations and insurance
companies). In addition, the discussion does not address any aspect of state,
local or foreign taxation and assumes that a holder of the Exchange Notes (i)
will hold them as "capital assets" (generally, property held for investment)
within the meaning of Section 1221 of the Internal Revenue Code of 1986, as
amended (the "Code"), and (ii) will not own, directly or indirectly, 10% or more
of the total combined voting power of all classes of stock of the Company
entitled to vote.
For purposes of the discussion, a "United States holder" is an individual
who is a citizen or resident of the United States, a corporation, partnership or
other entity created under the laws of the United States or any political
subdivision thereof, or an estate or trust that is subject to United States
federal income taxation without regard to the source of income and a "Non-United
States holder" is any holder who is not a United States holder.
PROSPECTIVE PURCHASERS OF THE EXCHANGE NOTES ARE URGED TO CONSULT THEIR TAX
ADVISORS CONCERNING THE UNITED STATES FEDERAL INCOME TAX CONSEQUENCES OF
ACQUIRING, OWNING AND DISPOSING OF THE EXCHANGE NOTES AS WELL AS THE APPLICATION
OF STATE, LOCAL AND FOREIGN INCOME AND OTHER TAX LAWS.
Exchange Offer. The exchange of Senior Subordinated Notes for Exchange
Notes pursuant to the Exchange Offer should not be treated as an exchange or
other taxable event for U.S. federal income tax purposes because under Treasury
regulations, the Exchange Notes should not be considered to differ materially in
kind or extent from the Senior Subordinated Notes. Rather, the Exchange Notes
received by a holder should be treated as a continuation of the Senior
Subordinated Notes in the hands of such holder. As a result, there should be no
U.S. federal income tax consequences to holders who exchange Senior Subordinated
Notes for Exchange Notes pursuant to the Exchange Offer and any such holder
should have the same tax basis and holding period in the Exchange Notes as it
had in the Senior Subordinated Notes immediately before the exchange.
United States Holders. Interest payable on the Exchange Notes will be
includible in the income of a United States holder in accordance with such
holder's regular method of accounting. If an Exchange Note is redeemed, sold or
otherwise disposed of, a United States holder generally will recognize gain or
loss equal to the difference between the amount realized on the sale or other
disposition of such Exchange Note (to the extent such amount does not represent
accrued but unpaid interest) and such holder's tax basis in the Exchange Note.
Subject to the market discount rules discussed below, such gain or loss will be
capital gain or loss, assuming that the holder has held the Exchange Note as a
capital asset, and will be long-term if the holder has held the Exchange Note
for more than one year at the time of disposition (including the holding period
of the Senior Subordinated Notes).
Under the market discount rules of the Code, a holder (other than a holder
who made the election described below) who purchased a Senior Subordinated Note
with "market discount" (generally defined as the amount by which the stated
redemption price at maturity exceeds the holder's purchase price) will be
required to treat any gain recognized on the redemption, sale or other
disposition of the Exchange Note received in the disposition as ordinary income
to the extent of the market discount that accrued during the holding period of
such Exchange Note (which would include the holding period of the Senior
Subordinated Note). A holder who has elected under
30
<PAGE> 31
applicable Code provisions to include market discount in income annually as such
discount accrues will not, however, be required to treat any gain recognized as
ordinary income under these rules. Holders should consult their tax advisors as
to the portion of any gain that would be taxable as ordinary income under these
provisions.
Non-United States Holders. An investment in the Exchange Notes by a
Non-United States holder generally will not give rise to any United States
federal income tax consequences if the interest received or any gain recognized
on the sale, redemption or other disposition of the Exchange Notes by such
holder is not treated as effectively connected with the conduct by such holder
of a trade or business in the United States, and in the case of gains derived by
an individual, such individual is not present in the United States for 183 days
or more and certain other requirements are met. Under current Treasury
regulations, in order to avoid back-up withholding of 31% on payments of
interest (i) a Non-United States holder of the Exchange Notes generally must
certify to the issuer or its agent, under penalties of perjury, that it is not a
United States person and complete and provide the payor with a U.S. Treasury
Form W-8 (or a suitable substitute form), which includes its name and address,
or (ii) a securities clearing organization, bank or other financial organization
that holds customers' securities in the ordinary course of business (a
"financial institution") and holds the Exchange Notes, must certify under
penalties of perjury that such a Form W-8 (or suitable substitute form) has been
received from the beneficial owner of the Exchange Notes by it or by a financial
institution between it and the beneficial owner, and must furnish the payor with
a copy thereof.
On April 22, 1996, the Internal Revenue Service proposed regulations (the
"Proposed Regulations") that, if enacted in their current form, could affect the
procedures to be followed by a Non-United States holder in establishing such
holder's status as a Non-United States holder for purposes of the backup
withholding rules discussed above. The Proposed Regulations, if adopted in their
current form, generally would be effective for payments made after December 31,
1997. Prospective investors should consult their tax advisors concerning the
potential adoption of the Proposed Regulations and the potential effect of such
regulations on an investment in the Exchange Notes.
CAPITALIZATION
The following table sets forth as of June 30, 1997, the cash and
capitalization of the successor Company. The information was derived from, and
is qualified by reference to, the unaudited consolidated financial statements of
the Company, including the notes thereto, included elsewhere in this Prospectus.
This information should be read in conjunction with such financial statements,
including the notes thereto and "Management's Discussion and Analysis of
Financial Condition and Results of Operations" included elsewhere in this
Prospectus.
<TABLE>
<CAPTION>
AS OF
JUNE 30, 1997
--------------
HISTORICAL
--------------
(IN THOUSANDS)
<S> <C>
Cash and cash equivalents..................................... $ 17,322
========
Long-term debt (including current portion)
New Credit Agreement........................................ $104,000
Senior Subordinated Notes due 2007.......................... 225,000
Other....................................................... 469
--------
Total long-term debt........................................ 329,469
Total shareholders' equity.................................... 108,230
--------
Total capitalization.......................................... $437,699
========
</TABLE>
31
<PAGE> 32
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying Unaudited Pro Forma Consolidated Statements Of Operations
give effect to, among other things: (i) the offering of the Senior Subordinated
Notes and initial borrowings of $104.0 million under the New Credit Agreement;
(ii) the Acquisition of the Company by the TPG Investors and related purchase
accounting; and (iii) the surrender for cash of certain outstanding stock
options. The unaudited pro forma consolidated statements of operations for the
year ended December 31, 1996 and the six months ended June 30, 1997 were
prepared as if the items above had occurred on January 1, 1996 and January 1,
1997, respectively. The unaudited consolidated balance sheet as of June 30, 1997
appearing elsewhere herein reflects the preliminary allocation of the purchase
price to the assets acquired and liabilities assumed by the successor company.
The unaudited pro forma consolidated statements of operations exclude $16.8
million of non-recurring transaction related expenses, which were recorded as an
expense at the time of the consummation of the merger.
This information is not necessarily indicative of future results of
operations and it should be read in conjunction with the separate historical
financial statements and related notes of the Company included in this
Prospectus.
32
<PAGE> 33
BELDEN & BLAKE CORPORATION
PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- ----------------------------------------
HISTORICAL PRO FORMA PRO FORMA HISTORICAL PRO FORMA PRO FORMA
1996 ADJUSTMENTS 1996 1997 ADJUSTMENTS 1997
---------- ------------ --------- ---------- ------------ ---------
<S> <C> <C> <C> <C> <C> <C>
REVENUES
Oil and gas sales........... $ 79,491 $ 79,491 $ 41,591 $41,591
Gas marketing and
gathering................. 44,527 44,527 21,657 21,657
Oilfield sales and
service................... 25,517 25,517 14,665 14,665
Interest and other.......... 3,700 3,700 1,484 1,484
-------- ------- -------- --------
153,235 153,235 79,397 79,397
EXPENSES
Production expense.......... 18,098 $ (306)(a) 17,792 10,158 $ (122)(a) 10,036
Production taxes............ 3,168 3,168 1,647 1,647
Cost of gas and gathering
expense................... 37,556 37,556 18,340 18,340
Oilfield sales and service
expense................... 23,142 23,142 13,936 13,936
Exploration expense......... 6,064 6,064 4,380 4,380
General and administrative
expense................... 4,573 (478)(a) 4,095 2,445 (152)(a) 2,293
Interest expense............ 7,383 22,677(c) 30,060 3,715 11,315(c) 15,030
Depreciation, depletion and
amortization.............. 29,752 23,448(d) 53,200 15,366 11,234(d) 26,600
Franchise and other taxes... 1,739 (250)(e) 1,489 908 (125)(e) 783
Transaction related
expenses.................. 16,758 (16,758)(b) --
-------- --------- ------- -------- -------- --------
131,475 45,091 176,566 87,653 5,392 93,045
-------- --------- ------- -------- -------- --------
Income (loss) from continuing
operations before income
taxes....................... 21,760 (45,091) (23,331) (8,256) (5,392) (13,648)
Provision (benefit) for income
taxes:
Current..................... 2,228 (2,228)(f) -- (1,508) 1,508(f) --
Deferred.................... 4,338 (12,968)(f) (8,630) 3,125 (8,175)(f) (5,050)
-------- --------- ------- -------- -------- --------
6,566 (15,196) (8,630) 1,617 (6,667) (5,050)
-------- --------- ------- -------- -------- --------
Income (loss) from continuing
operations.................. 15,194 (29,895) (14,701) (9,873) 1,275 (8,598)
Loss from discontinued
operations.................. (439) (439)
-------- --------- ------- -------- -------- --------
NET INCOME (LOSS)............. $ 14,755 $(29,895) $(15,140) $ (9,873) $ 1,275 $(8,598)
======== ========= ======= ======== ======== ========
</TABLE>
See notes to pro forma consolidated financial statements.
33
<PAGE> 34
BELDEN & BLAKE CORPORATION
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
The accompanying Unaudited Pro Forma Consolidated Statements Of Operations
reflect the following adjustments:
a) To adjust compensation expense and fringe benefit expense due to the
retirement of Henry S. Belden, IV ("Belden") and Max L. Mardick ("Mardick") and
the Employment Agreements signed by Messrs. Clements and Huff. One officer was
included in the historical information in "Production expense" and one officer
was included in "General and administrative expense."
b) To eliminate the effect of non recurring transaction related expenses.
c) To adjust interest expense associated with the additional debt borrowed under
the Initial Offering and the New Credit Agreement.
d) To adjust depreciation, depletion and amortization as a result of purchase
accounting.
e) To adjust franchise taxes based on the reduction in equity.
f) To adjust the provision for income taxes as a result of the other pro forma
adjustments.
34
<PAGE> 35
SELECTED CONSOLIDATED FINANCIAL DATA
The following tables present selected consolidated financial data covering
the five years ended December 31, 1996 and the six months ended June 30, 1996
and 1997. Such data has been derived from, and should be read in conjunction
with, the Consolidated Financial Statements and Notes thereto, and "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
included herein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
------------------------------------------------------------ -----------------------------------
1992 1993 1994 1995 1996 1996 1997
-------- -------- -------- -------- -------- --------------- ---------------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS
DATA:
Revenues
Oil and gas sales..... $ 15,046 $ 26,631 $ 32,574 $ 46,853 $ 79,491 $ 38,190 $ 41,591
Gas marketing and
gathering........... 26,494 34,709 33,072 40,436 44,527 21,789 21,657
Oilfield sales and
service............. 9,496 10,887 13,157 20,066 25,517 10,922 14,665
Interest and other.... 1,517 651 562 2,712 3,700 1,741 1,484
-------- -------- -------- -------- -------- --------- ---------
52,553 72,878 79,365 110,067 153,235 72,642 79,397
Expenses
Production expense.... 5,140 5,875 7,827 11,756 18,098 8,378 10,158
Production taxes...... 222 1,244 1,357 2,060 3,168 1,511 1,647
Cost of gas and
gathering expense... 24,922 30,646 28,878 33,831 37,556 17,990 18,340
Oilfield sales and
service expense..... 7,508 10,319 12,180 18,266 23,142 10,026 13,936
Exploration expense... 2,381 2,538 2,803 4,924 6,064 2,859 4,380
General and
administrative
expense............. 3,637 3,459 3,567 3,802 4,573 2,115 2,445
Interest expense...... 2,200 3,187 3,503 6,073 7,383 3,824 3,715
Depreciation,
depletion and
amortization........ 4,853 9,693 11,886 19,717 29,752 14,701 15,366
Franchise, property
and other taxes..... 105 655 854 1,228 1,739 882 908
Transaction related
expenses............ -- 16,758
-------- -------- -------- -------- -------- --------- ---------
50,968 67,616 72,855 101,657 131,475 62,286 87,653
-------- -------- -------- -------- -------- --------- ---------
Income (loss) from
continuing operations
before income taxes... 1,585 5,262 6,510 8,410 21,760 10,356 (8,256)
Provision (benefit)
for income taxes --
Current............. 618 435 644 1,214 2,228 1,384 (1,508)
Provision (benefit)
for income taxes --
Deferred............ (172) 1,562 1,686 936 4,338 2,145 3,125
-------- -------- -------- -------- -------- --------- ---------
446 1,997 2,330 2,150 6,566 3,529 1,617
-------- -------- -------- -------- -------- --------- ---------
Income (loss) from
continuing
operations............ 1,139 3,265 4,180 6,260 15,194 6,827 (9,873)
Loss from discontinued
operations............ -- (45) (337) (1,139) (439) -- --
-------- -------- -------- -------- -------- --------- ---------
Net income (loss)....... $ 1,139 $ 3,220 $ 3,843 $ 5,121 $ 14,755 $ 6,827 $ (9,873)
======== ======== ======== ======== ======== ========= =========
OTHER FINANCIAL DATA:
EBITDA (a).............. $ 11,019 $ 20,680 $ 24,702 $ 39,124 $ 64,959 $ 31,740 $ 31,963
Net cash provided by
operations............ 6,663 9,386 15,709 21,949 46,531 22,064 32,782
Net cash used in
investing............. (10,077) (13,608) (37,286) (123,970) (40,095) (10,064) (36,474)
Net cash provided by
(used in) financing... 6,210 23,156 2,982 110,694 (10,152) (11,753) 12,408
Capital
expenditures(b)....... 10,060 14,025 37,812 123,692 41,617 11,622 27,682
RATIOS:
EBITDA to interest
expense............... 5.0x 6.5x 7.1x 6.4x 8.8x 8.3x 8.6x
Earnings to fixed
charges (c)........... 1.6x 2.5x 2.7x 2.3x 3.7x 3.5x 3.0x
Total debt to EBITDA.... 5.6x 2.1x 1.9x 2.8x 1.5x N/A N/A
</TABLE>
<TABLE>
<CAPTION>
PREDECESSOR(e) SUCCESSOR(e)
--------------- ---------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA (END
OF PERIOD)(D):
Cash and cash
equivalents........... $ 3,311 $ 22,244 $ 3,649 $ 12,322 $ 8,606 $ 12,569 | $ 17,322
Total assets............ 102,253 135,174 148,173 297,298 303,763 293,533 | 599,762
Long-term debt, |
including current |
portion............... 61,936 42,844 46,696 110,671 99,220 99,220 | 329,469
Shareholders' equity.... 29,023 76,857 81,142 142,291 158,918 149,613 | 108,230
</TABLE>
- ---------------
(a) EBITDA represents income from continuing operations plus income taxes,
exploration expense, interest expense and depletion, depreciation and
amortization expense. EBITDA is not presented as an indicator of the
Company's operating performance, an indicator of cash available for
discretionary spending or as a measure of liquidity. EBITDA may not be
comparable to other similarly titled measures of other companies. On a
historical basis, EBITDA data has been substantially similar to
"Consolidated Cash Flow" as used in the Indenture. See "Description of the
Notes" for the detailed definition of "Consolidated Cash Flow."
(b) Including acquisitions of properties and businesses, net of acquired cash,
of $4,994,000, $560,000, $17,968,000, $99,837,000, and $4,543,000 in the
years 1992, 1993, 1994, 1995 and 1996, respectively and $254,000 and
$9,263,000 in the first six months of 1996 and 1997, respectively.
(c) For the purpose of determining the ratio of earnings to fixed charges,
earnings are defined as income from continuing operations before income
taxes plus fixed charges. Fixed charges consist of interest expense,
interest portion of rent expense and amortization of debt issuance costs.
(d) The balance sheet data as of June 30, 1997 reflects the preliminary
allocation of the purchase price to the assets acquired and liabilities
assumed by the successor company.
(e) See footnote (2) on page F-27 regarding the accounting for the merger of the
Company with TPG on June 27, 1997.
35
<PAGE> 36
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 and Notes thereto and the Selected
Consolidated Financial Data included elsewhere herein.
GENERAL
The Company is an independent oil and gas producer operating in the
Appalachian, Michigan and Illinois Basins. At June 30, 1997, the Company's net
production was approximately 72 Mmcf of natural gas and 2,000 Bbl per day. The
Company owns and operates approximately 2800 miles of gas gathering systems with
access to the commercial and industrial gas markets of the northeastern United
States. At June 30, 1997 the Company was marketing approximately 131 Mmcf of gas
per day, approximately one-half of which consisted of its own production, with
the balance purchased from third parties.
The Company has sustained its substantial growth rate through a balanced
program of development and exploratory drilling and strategic acquisitions. From
March 1992 through December 1996 the Company drilled 547 gross wells (409.9 net)
adding 82.2 Bcfe in net proved developed reserves. During the same period, the
Company acquired 192.9 Bcfe of proved developed reserves in 33 separate
transactions. In the five years ended December 31, 1996, the Company has added
3.5 Mcfe through drilling and acquisitions for every Mcfe it has produced.
The Company generates revenues from the sale of gas and oil, from gas
gathering and marketing operations and from oilfield sales and service.
Gas production is sold pursuant to a combination of fixed price and market
sensitive contracts and on the spot market. During 1996, approximately 47% of
the Company's gas sales were made pursuant to fixed price contracts, and 46%
pursuant to market sensitive contracts, with the balance sold on the spot
market. The Company's fixed price gas contracts had a weighed average price of
$2.88 per Mcf. The fixed price contracts with remaining terms of less than one
year, between one and three years and greater than three years constitute
approximately 76%, 21% and 3%, respectively, of the volumes sold under fixed
price contracts. The Company's oil production is sold to refineries at
prevailing market prices.
The Company's gas gathering and marketing operations consist of purchasing
gas at the wellhead and from interstate pipelines and selling gas to industrial
customers and local gas distribution companies. The cost of gas purchased from
the Company is the wellhead price stipulated by the well operating agreements
and is included in "Cost of Gas and Gathering Expense" below.
The Company provides oilfield sales and services to its own operations and
to third parties. Oilfield sales and service provided to the Company's own
operations are provided at cost and all intercompany revenues and expenses are
eliminated in consolidation.
The Company utilizes the "successful efforts" method of accounting for its
oil and gas properties. Under this method, property acquisition and development
costs and productive exploration costs are capitalized while non-productive
exploration costs, which include dry holes, expired leases and delay rentals,
are expensed as incurred. Capitalized costs related to proved properties are
depleted using the unit-of-production method. No gains or losses are recognized
upon the disposition of oil and gas properties except in extraordinary
transactions. Sales proceeds are credited to the carrying value of the
properties. Maintenance and repairs are expensed, and expenditures which enhance
the value of properties are capitalized.
36
<PAGE> 37
RESULTS OF OPERATIONS
The following table sets forth certain selected financial and operating
information for the Predecessor Company for the periods indicated:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
------------------------------------- -----------------------
1994 1995 1996 1996 1997
--------- --------- --------- --------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PRICE DATA)
<S> <C> <C> <C> <C> <C>
Revenues......................... $ 79,365 $ 110,067 $ 153,235 $ 72,642 $ 79,397
Expenses (1)..................... 72,855 101,657 131,475 62,286 87,653
Net Income (Loss)................ 3,843 5,121 14,755 6,827 (9,873)
EBITDA(2)........................ 24,702 39,124 64,959 31,740 31,963
Production Volumes:
Natural Gas (Bcf).............. 9.6 17.0 25.4 12.3 12.7
Oil (Mbbl)..................... 496 556 719 357 381
Natural Gas Equivalents
(Bcfe)...................... 12.5 20.3 29.7 14.5 15.0
Average Prices:
Natural Gas (per Mcf).......... $ 2.58 $ 2.21 $ 2.56 $ 2.54 $ 2.69
Oil (per Bbl).................. 15.98 16.78 20.24 19.09 19.11
Natural Gas Equivalents
(Mcfe)...................... 2.60 2.31 2.67 2.64 2.77
</TABLE>
<TABLE>
<CAPTION>
PERCENTAGE CHANGE
FROM PRIOR PERIOD
----------------------------------
YEAR ENDED
DECEMBER 31, SIX MONTHS
-------------- ENDED
1995 1996 JUNE 30, 1997
---- ---- --------------
<S> <C> <C> <C>
Revenues...................................................... 39% 39% 9%
Expenses (1).................................................. 40 29 41
Net Income.................................................... 33 188 N/A
EBITDA(2)..................................................... 58 66 1
Production Volumes:
Natural Gas................................................. 77 50 3
Oil......................................................... 12 29 7
Natural Gas Equivalents..................................... 62 46 4
Average Prices:
Natural Gas................................................. (14) 16 6
Oil......................................................... 5 21 --
Natural Gas Equivalents..................................... (11) 16 5
</TABLE>
- ---------------
(1) Including transaction related expenses of $16.8 million in the six month
period ended June 30, 1997.
(2) EBITDA represents income from continuing operations plus income taxes,
exploration expense, interest expense and depletion, depreciation and
amortization expense (as defined in the Indenture). See "Description of the
Notes -- Certain Covenants--Incurrence of Indebtedness and Issuance of
Disqualified Stock." EBITDA is not presented as an indicator of the
Company's operating performance, an indicator of cash availability for
discretionary spending or as a measure of liquidity. EBITDA may not be
comparable to other similarly titled measures of other companies. On a
historical basis, EBITDA data has been substantially similar to
"Consolidated Cash Flow" as used in the Indenture. See "Description of the
Notes" for the detailed definition of "Consolidated Cash Flow."
As disclosed in notes to consolidated financial statements for the period
ended June 30, 1997, on March 27, 1997 the Company entered into a merger
agreement with TPG Partners II, L.P. ("TPG") which resulted in all of the
Company's common stock being acquired by TPG on June 27, 1997 in a transaction
accounted for as a purchase. For financial reporting purposes, the merger is
considered effective June 30, 1997 and the operations of the company prior to
July 1, 1997 are
37
<PAGE> 38
classified as predecessor company operations. The consolidated balance sheet at
June 30, 1997 reflects the application of purchase accounting to measure the
Company's assets and liabilities at fair value and is not comparable to the
historical balance sheet as of December 31, 1996. Also, debt incurred to finance
the acquisition and related transaction costs are reflected in the June 30, 1997
financial statements. A vertical black line is shown in the financial statements
to separate the financial position and results of operations of the predecessor
and successor companies.
The merger with TPG resulted in the Company becoming highly leveraged and
incurring costs associated with the merger of $16.8 million which have been
expensed in 1997 second quarter results. The allocation of the purchase price to
the June 30, 1997 consolidated balance sheet resulted in a significant increase
to assets and liabilities which will result in materially higher future charges
for depreciation, depletion and amortization and interest.
RESULTS OF OPERATIONS -- SIX MONTHS OF 1997 AND 1996 COMPARED
OIL AND GAS SALES. Oil and gas sales increased $3.4 million (9%) in the
first six months of 1997 compared to the same period of 1996 due to an increase
in oil and gas volumes sold and a higher average price paid for the Company's
oil and gas.
Oil volumes increased 24,000 Bbls (7%) from 357,000 Bbls in the first six
months of 1996 to 381,000 Bbls in the first six months of 1997 resulting in an
increase in oil sales of approximately $450,000. Gas volumes increased 0.4 Bcf
(3%) from 12.3 Bcf in the first six months of 1996 to 12.7 Bcf in the first six
months of 1997 resulting in an increase in gas sales of approximately $1.0
million. These volume increases were primarily due to production from properties
acquired and wells drilled in 1996 and 1997.
The average price paid for the Company's oil increased from $19.09 per
barrel in the first six months of 1996 to $19.11 per barrel in the first six
months of 1997. The average price paid for the Company's natural gas increased
$.15 per Mcf to $2.69 per Mcf in the first six months of 1997 compared to the
first six months of 1996 which increased gas sales in the first six months of
1997 by approximately $1.9 million.
GAS MARKETING AND GATHERING REVENUE. Gas marketing and gathering revenue
in the first six months of 1997 was consistent compared to the same period in
1996.
OILFIELD SALES AND SERVICE REVENUE. Oilfield sales and service revenue
increased $3.8 million (34%) from $10.9 million in the first six months of 1996
to $14.7 million in the first six months of 1997. This increase was primarily
due to increased third party oilfield sales revenue.
INTEREST AND OTHER REVENUE. Interest and other revenue decreased $257,000
(15%) from $1.7 million in the first six months of 1996 to $1.5 million in the
first six months of 1997. The net change resulted from a decrease in various
miscellaneous income items.
PRODUCTION EXPENSE. Production expense increased $1.8 million (21%) from
$8.4 million in the first six months of 1996 to $10.2 million in the first six
months of 1997. The average production cost increased from $.58 per Mcfe
(equivalent Mcf of natural gas) in the first six months of 1996 to $.68 per Mcfe
in the first six months of 1997. These increases were due to an anticipated
steep decline in production volumes from certain high volume wells with low
production costs coupled with a reduction in operating fees received from third
parties primarily due to the purchase of certain third party working interests
by the Company. Such fees are recorded as a reduction of production expense.
PRODUCTION TAXES. Production taxes increased $136,000 (9%) from $1.5
million in the first six months of 1996 to $1.6 million in the first six months
of 1997. This increase was primarily due to the increased production volumes
discussed above.
38
<PAGE> 39
COST OF GAS AND GATHERING EXPENSE. Cost of gas and gathering expense in
the first six months of 1997 was consistent compared to the same period in 1996.
OILFIELD SALES AND SERVICE EXPENSE. Oilfield sales and service expense
increased $3.9 million (39%) from $10.0 million in the first six months of 1996
to $13.9 million in the first six months of 1997 primarily as a result of the
increased cost of goods sold associated with the increased sales described
above.
EXPLORATION EXPENSE. Exploration expense increased $1.5 million (53%) from
$2.9 million in the first six months of 1996 to $4.4 million in the first six
months of 1997 primarily due to $920,000 in dry hole expense in the first six
months of 1997, higher levels of geological, geophysical and leasing activity
and increases in the size of the technical staff in conjunction with increased
drilling activity.
GENERAL AND ADMINISTRATIVE EXPENSE. General and administrative expense
increased $330,000 (16%) from $2.1 million in the first six months of 1996 to
$2.4 million in the first six months of 1997 primarily due to an increase in
employee health insurance costs.
DEPRECIATION, DEPLETION AND AMORTIZATION. Depreciation, depletion and
amortization increased by $665,000 (5%) from $14.7 million in the first six
months of 1996 to $15.4 million in the first six months of 1997. Depletion
expense increased $492,000 (4%) from $11.4 million in the first six months of
1996 to $11.9 million in the first six months of 1997. This increase was
primarily due to the increased production volumes described above. Depletion per
Mcfe increased from $.78 per Mcfe in the first six months of 1996 to $.79 per
Mcfe in the first six months of 1997.
OPERATING INCOME. Operating income decreased $2.0 million (14%) from $14.2
million in the first six months of 1996 to $12.2 million in the first six months
of 1997. The operating income from the oil and gas operations segment decreased
$1.4 million (12%) from $12.2 million in the first six months of 1996 to $10.8
million in the first six months of 1997. The decrease was attributable to the
items discussed above. The operating loss from the oilfield sales and service
segment increased $230,000 from operating income of $194,000 in the first six
months of 1996 to an operating loss of $36,000 in the first six months of 1997.
INTEREST EXPENSE. Interest expense in the first six months of 1997 was
consistent compared to the same period in 1996.
TRANSACTION RELATED EXPENSES. Transaction related expenses were $16.8
million in the first six months of 1997 reflecting costs paid by the predecessor
company.
NET (LOSS) INCOME. Net income decreased $16.7 million from net income of
$6.8 million in the first six months of 1996 to a net loss of $9.9 million in
the first six months of 1997. This decrease was primarily the result of
transaction related expenses and the other items discussed above. The provision
for income taxes decreased from $3.5 million in the first six months of 1996 to
$1.6 million in the first six months of 1997. This decrease is due to the
decrease in income or loss before income taxes combined with a change in the
effective tax rate due to the nondeductibility of certain transaction related
expenses in the first six months of 1997.
1996 Compared to 1995
Oil and Gas Sales. Oil and gas sales increased $32.6 million (70%) in 1996
compared to 1995 due to an increase in oil and gas volumes sold and a higher
average price paid for the Company's oil and gas.
Oil volumes increased 163,000 Bbls (29%) from 556,000 Bbls in 1995 to
719,000 Bbls in 1996 resulting in an increase in oil sales of approximately $2.7
million. Gas volumes increased 8.4 Bcf (50%) from 17.0 Bcf in 1995 to 25.4 Bcf
in 1996 resulting in an increase in gas sales of
39
<PAGE> 40
approximately $18.7 million. These volume increases were primarily due to
production from properties acquired in 1995 and wells drilled in 1995 and 1996.
The average price paid for the Company's oil increased from $16.78 per
barrel in 1995 to $20.24 per barrel in 1996 which increased oil sales by
approximately $2.5 million. The average price paid for the Company's natural gas
increased $.35 per Mcf to $2.56 per Mcf in 1996 compared to 1995 resulting in
increased gas sales of approximately $8.9 million.
Gas Marketing and Gathering Revenue. Gas marketing and gathering revenue
increased $4.1 million (10%) from $40.4 million in 1995 to $44.5 million in 1996
primarily due to an increase in the volume of gas purchased from third parties
and resold and an increase in the average selling price of gas.
Oilfield Sales and Service Revenue. Oilfield sales and service revenue
increased $5.4 million (27%) from $20.1 million in 1995 to $25.5 million in
1996. This increase was primarily due to the sales generated by the three
oilfield sales and service companies acquired by the Company in 1995 and
increased third party oilfield sales and service revenue.
Interest and Other Revenue. Interest and other revenue increased $1.0
million (36%) from $2.7 million in 1995 to $3.7 million in 1996 primarily due to
the recognition of income in 1996 from incentive production payments associated
with certain properties operated by Ward Lake, partially offset by the
recognition in 1995 of anticipated proceeds from contract rejection claims that
were filed in the bankruptcy proceedings of Columbia Gas Transmission
Corporation. Amounts included in income related to the Columbia claims were $1.3
million in 1995 and $276,000 in 1996. Payment of these claims was received by
the Company in January 1997.
Production Expense. Production expense increased $6.3 million (54%) from
$11.8 million in 1995 to $18.1 million in 1996. This increase was primarily due
to the increased production volumes discussed above and a reduction in operating
fees charged to third parties. Such fees are recorded as a reduction of
production expense. The average production cost per equivalent Mcf of natural
gas excluding taxes increased from $.58 per Mcfe in 1995 to $.61 per Mcfe in
1996.
Production Taxes. Production taxes increased $1.1 million (54%) from $2.1
million in 1995 to $3.2 million in 1996. This increase was primarily due to the
increased production volumes discussed above.
Cost of Gas and Gathering Expense. Cost of gas and gathering expense
increased $3.8 million (11%) from $33.8 million in 1995 to $37.6 million in 1996
due to an increase in volumes of gas purchased and an increase in the cost of
gas.
Oilfield Sales and Service Expense. Oilfield sales and service expense
increased $4.8 million (27%) from $18.3 million in 1995 to $23.1 million in 1996
primarily as a result of the increased cost of goods sold associated with the
increased sales described above.
Exploration Expense. Exploration expense increased $1.2 million (23%) from
$4.9 million in 1995 to $6.1 million in 1996 primarily due to higher levels of
geological, geophysical and leasing activity and increases in the size of the
technical staff in conjunction with increased drilling activity.
General and Administrative Expense. General and administrative expense
increased $771,000 (20%) from $3.8 million in 1995 to $4.6 million in 1996 due
to increases in employee compensation and benefits, an increase in profit
sharing and bonuses and investment banking and other professional fees.
Interest Expense. Interest expense increased $1.3 million (22%) from $6.1
million in 1995 to $7.4 million in 1996. This increase was primarily due to
higher average debt balances incurred to
40
<PAGE> 41
finance the 1995 acquisitions. See "Notes to Audited Consolidated Financial
Statements -- Note 3 -- Acquisitions."
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization increased by $10.1 million (51%) from $19.7 million in 1995 to
$29.8 million in 1996. Depletion expense increased $7.9 million (53%) from $15.1
million in 1995 to $23.0 million in 1996. This increase was primarily due to
additional depletion expense associated with the increased production volumes
described above. Depletion per Mcfe increased from $.74 per Mcfe in 1995 to $.77
per Mcfe in 1996. This increase was primarily the result of proved reserves
added through acquisitions and drilling at a higher cost per Mcfe.
Franchise, Property and Other Taxes. Franchise, property and other taxes
increased by $511,000 (42%) from $1.2 million in 1995 to $1.7 million in 1996.
Franchise taxes increased approximately $350,000 due to the increase in
shareholders' equity as a result of the common stock issued in 1995 and the
increase in net income retained in the business.
Income From Continuing Operations Before Income Taxes. Income from
continuing operations before income taxes increased $13.4 million (159%) from
$8.4 million in 1995 to $21.8 million in 1996. The oil and gas operations
segment increased operating income $12.4 million (99%) from $12.4 million in
1995 to $24.8 million in 1996. The increase was attributable to the items
discussed above. The oilfield sales and service segment operating income
increased $290,000 (43%) from $673,000 in 1995 to $963,000 in 1996.
Income From Continuing Operations. Income from continuing operations
increased $8.9 million (143%) from $6.3 million in 1995 to $15.2 million in
1996. This increase in income from continuing operations was primarily the
result of the items discussed above. Provision for income taxes from continuing
operations increased $4.4 million (205%) from $2.2 million in 1995 to $6.6
million in 1996. This increase was attributable to the increase in income from
continuing operations before income taxes and an increase in the effective tax
rate. The increase in the effective tax rate was primarily due to the decrease
of nonconventional fuel source tax credits as a percentage of income from
continuing operations. Earnings from continuing operations on a per common share
basis increased from $.69 per share in 1995 to $1.34 per share in 1996. This
increase was primarily the result of the factors discussed above.
Loss From Discontinued Operations. Loss from discontinued operations was
$675,000 ($439,000 net of tax benefit or $.04 per share) in 1996 compared to
$1,761,000 ($1,139,000 net of tax benefit or $.13 per share) in 1995. The losses
in 1996 and 1995 include losses on assets sold, the write-down of various assets
and inventories to estimated realizable value and a provision for estimated
costs of asset disposals and future losses.
1995 Compared to 1994
Oil and Gas Sales. Oil and gas sales increased $14.3 million (44%) in 1995
compared to 1994 due primarily to an increase in oil and gas volumes sold and a
higher average price paid for the Company's oil. These increases more than
offset a lower average price paid for the Company's natural gas.
Oil volumes increased 60,000 Bbls (12%) from 496,000 Bbls in 1994 to
556,000 Bbls in 1995 resulting in an increase in oil sales of approximately $1.0
million. Gas volumes increased 7.4 Bcf (77%) from 9.6 Bcf in 1994 to 17.0 Bcf in
1995 resulting in an increase in gas sales of approximately $19.1 million. These
volume increases were primarily due to production from the Company's 1995
acquisitions and from wells drilled in 1994 and 1995. Gas volumes produced in
1995 were less than the Company's full production potential as a result of the
Company's decision to curtail gas production due to low spot market gas prices.
Interstate pipeline repairs and construction in Michigan and West Virginia also
reduced potential production volumes.
41
<PAGE> 42
The average price paid for the Company's oil increased from $15.98 per
barrel in 1994 to $16.78 per barrel in 1995 which increased oil sales by
approximately $450,000. The average price paid for the Company's natural gas
decreased $.37 per Mcf to $2.21 per Mcf in 1995 compared to 1994 resulting in
decreased gas sales of approximately $6.3 million.
Gas Marketing and Gathering Revenue. Gas marketing and gathering revenue
increased $7.3 million (22%) from $33.1 million in 1994 to $40.4 million in 1995
primarily due to the Company's 1995 acquisitions. Increased volumes of gas
purchased from third parties and resold were offset by a lower average selling
price.
Oilfield Sales and Service Revenue. Oilfield sales and service revenue
increased $6.9 million (53%) from $13.2 million in 1994 to $20.1 million in
1995. This increase was primarily due to the sales generated by the three
oilfield service companies acquired by the Company in September and October of
1994 and three oilfield sales and service companies acquired in 1995.
Interest and Other Revenue. Interest and other revenue increased $2.1
million (383%) from $562,000 in 1994 to $2.7 million in 1995 primarily due to
the recognition of $1.3 million in anticipated proceeds from contract rejection
claims that have been filed in the bankruptcy proceedings of Columbia Gas
Transmission Corporation and the recognition of income in 1995 from an incentive
production payment associated with certain properties operated by Ward Lake.
Production Expense. Production expense increased $4.0 million (50%) from
$7.8 million in 1994 to $11.8 million in 1995. This increase was primarily due
to the increased production volumes discussed above. The average production cost
per equivalent Mcf of natural gas excluding taxes decreased from $.62 per Mcfe
in 1994 to $.58 per Mcfe in 1995.
Production Taxes. Production taxes increased $703,000 (52%) from $1.4
million in 1994 to $2.1 million in 1995. This increase was primarily due to the
increased production volumes discussed above.
Cost of Gas and Gathering Expense. Cost of gas and gathering expense
increased $4.9 million (17%) from $28.9 million in 1994 to $33.8 million in 1995
primarily due to the Company's 1995 acquisitions. Increased volumes of gas
purchased from third parties and resold were offset by a lower average purchase
price.
Oilfield Sales and Service Expense. Oilfield sales and service expense
increased $6.1 million (50%) from $12.2 million in 1994 to $18.3 million in 1995
primarily as a result of the increased cost of goods sold associated with
increased sales resulting from the acquisitions described above.
Exploration Expense. Exploration expense increased $2.1 million (76%) from
$2.8 million in 1994 to $4.9 million in 1995 primarily due to higher levels of
geological and geophysical activity and increases in the size of the technical
staff.
General and Administrative Expense. General and administrative expense
increased $235,000 (7%) from $3.6 million in 1994 to $3.8 million in 1995
primarily due to increases in employee compensation and benefits.
Interest Expense. Interest expense increased $2.6 million (73%) from $3.5
million in 1994 to $6.1 million in 1995. This increase was primarily due to
higher average debt balances incurred to finance the 1995 acquisitions. See
"Notes to Audited Consolidated Financial Statements -- Note 3 -- Acquisitions."
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization increased by $7.8 million (66%) from $11.9 million in 1994 to $19.7
million in 1995. Depletion expense increased $6.0 million (66%) from $9.1
million in 1994 to $15.1 million in 1995. This increase was primarily due
42
<PAGE> 43
to additional depletion expense associated with the increased production volumes
described above. Depletion per Mcfe increased from $.72 per Mcfe in 1994 to $.74
per Mcfe in 1995.
Franchise, Property and Other Taxes. Franchise, property and other taxes
increased by $374,000 (44%) from $854,000 in 1994 to $1.2 million in 1995
primarily due to the acquisitions made in 1995 and the increase in shareholders'
equity as a result of the common stock issued in 1995.
Income From Continuing Operations Before Income Taxes. Income from
continuing operations before income taxes increased $1.9 million (29%) from $6.5
million in 1994 to $8.4 million in 1995. The operating income from the oil and
gas operations segment increased $3.3 million (37%) from $9.1 million in 1994 to
$12.4 million in 1995. The increase was attributable to the items discussed
above. The operating income from the oilfield sales and service segment
increased $323,000 (92%) from $350,000 in 1994 to $673,000 in 1995.
Income From Continuing Operations. Income from continuing operations
increased $2.1 million (50%) from $4.2 million in 1994 to $6.3 million in 1995.
This increase in income from continuing operations was primarily the result of
the items discussed above. Provision for income taxes from continuing operations
decreased $180,000 (8%) from $2.3 million in 1994 to $2.2 million in 1995. This
decrease was attributable to a decrease in the effective tax rate partially
offset by an increase in income from continuing operations before income taxes.
The effective tax rate decreased primarily due to the utilization of
nonconventional fuel source tax credits. Earnings from continuing operations on
a per common share basis increased from $.57 per share in 1994 to $.69 per share
in 1995. This increase was primarily the result of the factors discussed above.
Loss From Discontinued Operations. Loss from discontinued operations was
$1,761,000 ($1,139,000 net of tax benefit or $.13 per share) in 1995 compared to
$509,000 ($337,000 net of tax benefit or $.05 per share) in 1994. The loss in
1995 includes the write-down of various assets and inventories to estimated
realizable value and a provision for estimated costs of asset disposals and
future losses.
LIQUIDITY AND CAPITAL RESOURCES
General. The Company's liquidity and capital resources are closely related
to and dependent on the current prices paid for its oil and gas. The net
proceeds of the Initial Offering, together with borrowings under the New Credit
Agreement, were used in part to repay certain existing outstanding indebtedness
of the Company, including all amounts outstanding under the Existing Credit
Facility and the 7% Senior Notes. See "Use of Proceeds."
Management believes that cash flow from operations, the net proceeds of the
Initial Offering, and borrowing capacity under the New Credit Agreement will be
adequate to meet future liquidity needs through 1998, including satisfying the
Company's financial obligations and funding its capital program, excluding
significant acquisitions. Nevertheless, should revenues decrease as a result of
lower oil or gas prices or operating difficulties, reevaluation of the Company's
capital spending plans would be required (currently estimated at $40 million,
not including acquisitions, for 1997).
Cash Flows. The Company's current ratio at June 30, 1997 was 1.48 to 1.00.
The Company's net cash provided by operations for the years ended December 31,
1995 and 1996 was $21.9 million and $46.5 million, respectively. During the
first six months of 1997, working capital decreased $1.3 million from $22.1
million to $20.8 million. The decrease was primarily due to an increase in
accounts payable and accrued expense ($11.2 million) reflecting the accrual of
$9.1 million of costs related to the merger with TPG. The Company's operating
activities provided cash flow of $32.8 million during the first six months of
1997. The level of the Company's cash flow in the future will depend on a number
of factors including the demand and price levels for oil and gas, its ability to
acquire additional producing properties and the scope and success of its
drilling activities. The
43
<PAGE> 44
Company intends to finance such activities principally through its available
cash flow and through additional borrowings.
Capital Expenditures. The Company currently expects to make capital
expenditures of approximately $33 million during 1997 for its drilling
activities and spend approximately $7 million for other capital expenditures.
The Company's acquisition program is expected to be financed with available cash
flow and with borrowings under the New Credit Agreement.
New Credit Agreement. The New Credit Agreement provides the Company with a
$200 million revolving credit loan facility subject to availability under the
Borrowing Base. Currently, the borrowing base is set at $180 million. See
"Description of Other Indebtedness." The Company believes that its existing
sources of working capital are sufficient to satisfy all currently anticipated
working capital requirements.
Effects of Inflation. Although certain of the Company's costs and expenses
may be affected by inflation, inflationary costs have not had a significant
impact on the Company's results of operations.
44
<PAGE> 45
BUSINESS AND PROPERTIES
GENERAL
Belden & Blake, an independent energy company, is primarily engaged in
producing natural gas and oil, acquiring and enhancing the economic performance
of producing gas and oil properties, exploring for and developing natural gas
and oil reserves and gathering and marketing natural gas. Until 1995, the
Company conducted business exclusively in the Appalachian Basin where it has
operated since 1942 through several predecessor entities. It is now one of the
largest exploration and production companies operating in the Appalachian Basin
in terms of reserves, acreage held and wells operated. In early 1995, the
Company commenced operations in the Michigan Basin and in September 1996, the
Company commenced operations in the Illinois Basin. The Michigan and Illinois
Basins have geologic and operational similarities to the Appalachian Basin and
are in proximity to the Company's core operations. The operating environment in
each of the basins in which the Company operates is highly fragmented, providing
substantial acquisition opportunities.
The Company currently operates approximately 7,900 wells with total net
production of approximately 71 Mmcf per day of gas and 1,900 Bbls per day of
oil. At December 31, 1996, the Company had proved reserves of 332.9 Bcfe with a
Present Value of $356 million. On an Mcfe basis, the reserves were 79% proved
developed and 87% natural gas, with a reserve life index of approximately 11
years. The Company holds leases on more than one million net acres. Since 1992,
the Company has grown principally through the acquisition of producing
properties and related gas gathering facilities and the exploration and
development of its own acreage.
The Company has built a significant gas gathering and marketing operation
and owns and operates 2,800 miles of gas gathering systems in the basins in
which the Company operates. As of June 30, 1997, the Company marketed 131 Mmcf
per day, approximately 50% of which was purchased from third parties. The
Company also operates a major regional oilfield service and supply business.
BUSINESS STRENGTHS
The Company believes it has certain strengths that provide it with
significant competitive advantages, including the following:
- Proven Growth Record. The Company has generated consistent growth through
a balanced program of acquisitions and development and exploratory
drilling. Over the last four years on a compound annual basis, the
Company has increased proved reserves by 34%, production by 50% and
EBITDA by 56%.
- Geographic Focus. The Company's operations are exclusively focused on the
Appalachian, Michigan and Illinois Basins. The Company believes that its
54-year operating history has resulted in a specialized technical
expertise that provides a competitive advantage in sourcing and
evaluating acquisitions and drilling opportunities within these areas.
Furthermore, the Company enjoys economies of scale in operating and
developing its properties not experienced by many smaller, regional
competitors.
- Leading Regional Consolidator. There are currently over 10,000 operators
in the Appalachian and Michigan Basins. While Belden & Blake is one of
the largest producers in these basins, it will account for less than 6%
of the projected gas production in these basins in 1997. The Company's
significant technical and regional expertise, as well as its low cost
structure, provides a distinct advantage in pursuing its acquisition
strategy. The Company has a proven and highly disciplined approach to
making acquisitions at attractive prices. Over the last five years, the
Company has been a leading consolidator in these basins, acquiring 192.9
Bcfe of proved developed reserves in 33 transactions for a total of
$129.4 million at an average cost of $0.67 per Mcfe.
45
<PAGE> 46
- Successful Drilling Record. The Company has achieved a very successful
drilling record during the last five years. In highly developed or
blanket formations the Company's success rate is 97%, while in less
developed or deeper formations, the Company's success rate is 59%, for an
overall success rate of 85%. During this period, the Company drilled 547
gross (409.9 net) wells, which added 82.2 Bcfe of proved developed
reserves at an average cost of $1.03 per Mcfe.
- Substantial Development Drilling Inventory. The Company has a substantial
current acreage position of approximately 1,019,000 net acres, of which
approximately 504,800 are classified as undeveloped. The Company believes
that its current acreage holdings would support six years of drilling
activities at current oil and gas prices without additions to its current
acreage base.
- Low Risk Nature of Reserves. The Company's producing reserves are
characterized by low volume, low risk production that is subject to
gradual decline rates over an expected 15 to 25 year economic life. As a
result of the long-lived nature of its properties, Belden & Blake has
lower reinvestment requirements to maintain reserve quantities,
production levels and reserve values than many of its competitors.
- Premium Pricing. Due to the Company's proximity to the large commercial
and industrial markets in the Northeast and its strong gas marketing
capability, Belden & Blake has enjoyed relatively stable gas prices at
premiums well above national spot market prices. Over the last five
years, the Company has realized an average premium of $0.52 per Mcf over
national average wellhead prices. For the second quarter of 1997, the
Company received a $0.44 per Mcf premium over estimated national average
wellhead prices.
- Attractive Full Cycle Economics. The Company serves as the operator on
substantially all of its properties, which provides the Company
significant control over the amount and timing of capital and operating
expenditures. Over the last five years the Company has reduced operating
costs per Mcfe (defined as the sum of production expense, production
taxes and general and administrative expense) from $1.53 per Mcfe in 1992
to $0.87 per Mcfe in 1996. The combination of low operating costs with
the premium pricing received by the Company for its production has
enabled the Company to achieve an average operating margin over the last
three years (defined as revenue per Mcfe less the sum of production
expenses and production taxes per Mcfe) of $1.81 Mcfe, which is
significantly greater than the industry average operating margin for this
period. The Company's full cycle economics of 2.75x, calculated by
dividing its average operating margin for the last three years by its
average replacement cost of $0.66 per Mcfe over this period, is among the
highest in the industry.
- Extensive Gathering and Marketing Operations. The Company owns and
operates approximately 2,760 miles of gas gathering systems which
interconnect with, and deliver gas to, the interstate pipelines in its
six-state area of operations. The Company also markets approximately 63
Mmcf per day of gas purchased from third parties. The Company's gathering
and marketing activities (i) increase the return on the Company's
development activities, (ii) provide exposure to and increase the returns
on acquisitions, (iii) strengthen the Company's relationships with
higher-margin end users and (iv) provide markets for incremental
production. The Company's gathering and marketing activities generated
EBITDA of $7.0 million in 1996.
- Experienced Management. Eight senior officers have an average of 23 years
of oil and gas industry experience, the vast majority of which was
obtained in the core basins in which the Company currently operates.
Additionally, the Company's technical staff, which includes 19 petroleum
engineers, 11 geologists and two geophysicists, have an average of over
15 years experience in the oil and gas industry.
46
<PAGE> 47
BUSINESS STRATEGY
The Company seeks to increase reserves, production and cash flow through a
balanced program of exploration and development drilling and strategic
acquisitions. The key elements of the Company's strategy are as follows:
- Maintain a Balanced Drilling Program. It is the Company's intention to
expand production and reserves through a balanced program of
developmental and exploratory drilling. The Company believes that there
are significant exploration and development opportunities in the less
developed or deeper formations in the Appalachian Basin for those
operators with the capital, technical expertise and ability to assemble
the large acreage positions needed to justify the use of advanced
exploration and production technologies. The Company has identified
numerous development and exploratory drilling locations in the deeper
formations of the Appalachian and Michigan Basins. More than 750,000
wells have been drilled in the Appalachian Basin, but fewer than 2,000
wells have been drilled to a depth greater than 7,500 feet, and fewer
than 100 wells have been drilled to a depth greater than 12,500 feet. The
Company's drilling budget in 1997 is approximately $38.7 million, which
will fund the drilling of approximately 250 wells.
- Utilize Advanced Technology. The combination of long-lived production and
high drilling success rates at the shallow depths has resulted in a
highly fragmented, extensively drilled, low technology operating
environment in the Appalachian Basin. The Company has been applying more
advanced technology, including 3-D seismic, horizontal drilling, advanced
fracturing techniques and enhanced oil recovery methods. The Company is
implementing these techniques to improve drilling success rates, the size
of average discovery, production rates, reserve recovery rates and total
economics in its operating areas.
- Pursue Consolidation Opportunities.There is a continuing trend toward
consolidation in the energy industry in general. The basins in which the
Company operates are highly fragmented. The Company believes this
provides the basis for significant acquisition opportunities as capital
constrained operators, the majority of which are privately held, seek
liquidity or operating capital. The Company intends to capitalize on its
geographic knowledge, technical expertise, low cost structure and
decentralized organization to pursue additional strategic acquisitions in
its area of operations. The Company's acquisition strategy focuses on
acquiring producing properties that: (i) are properties in which the
Company already owns an interest and operates or that are strategically
located in relation to its existing operations, (ii) can be enhanced
through operating cost reductions, advanced production technologies,
mechanical improvements, recompleting or reworking wells and/or the use
of enhanced and secondary recovery techniques, (iii) provide development
and exploratory drilling opportunities or opportunities to improve the
Company's acreage position, (iv) have the potential for increased
revenues resulting from the Company's gas marketing capabilities, or (v)
are of sufficient size to allow the Company to operate efficiently in new
areas.
- Expand Gas Gathering and Marketing. The Company's extensive gas gathering
systems and regional natural gas marketing operation are integral to the
Company's low cost structure and high revenues per unit of gas
production. It is the Company's intention to expand its gas gathering
systems to further improve the rate of return on the Company's drilling
and development activities. The Company has excellent relationships with
a large number of utilities and industrial end users located within the
Company's operating areas. The Company's gas marketing operation provides
a ready market for increased production, allowing the Company to shift
sales from third-party gas to its own production.
SIGNIFICANT PROPERTIES
At December 31, 1996, the Company's properties included working interests
in 7,721 gross (6,462 net) productive oil and gas wells. The Company also held
interests in 565,900 gross
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<PAGE> 48
(504,800 net) undeveloped acres. At June 30, 1997, 99% of the Company's reserves
were located in the Appalachian and Michigan Basins.
Appalachian Basin. The Appalachian Basin is the oldest and geographically
one of the largest oil and gas producing regions in the United States. Fewer
than 2,000 wells have been drilled to a depth greater than 7,500 feet and less
than 100 wells have been drilled to a depth greater than 12,500 feet in the
entire Appalachian Basin. The Company's reserves in this basin represent 72% of
total Present Value. Appalachian Basin proved reserves total 241 Bcfe, of which
approximately 87% are developed. On an Mcfe basis, 83% of the reserves are
natural gas. Combined net daily production from these properties currently
averages 2,000 Bbls and 55 Mmcf of natural gas. Gross wells total 7,037 (6,158
net), of which 6,958 are Company operated. Although the Appalachian Basin has
sedimentary formations indicating the potential for oil and gas reserves to
depths of 30,000 feet or more, oil and gas is currently produced primarily from
shallow highly developed blanket formations at depths of 1,000 to 5,500 feet. It
is estimated that 40% to 50% of recoverable reserves are produced in the first
three years, with gradual declines in subsequent years. Average well lives range
from 15 years to 25 years or more, and drilling success rates of the Company and
other drillers in these formations historically have exceeded 90%. Gas
production generally is transported through Company owned gas gathering systems
and is sold primarily to commercial and industrial customers.
Michigan Basin. Geologically, the Michigan Basin resembles the Appalachian
Basin with shallow blanket formations and deeper formations with greater reserve
potential. The Michigan Basin represents 27% of the total Present Value of the
Company's reserves. Michigan Basin proved reserves total 89 Bcfe, of which
approximately 59% are developed. On an Mcfe basis, 97% of the reserves are
natural gas. Combined net daily production from these properties currently
averages 100 Bbls and 16 Mmcf of natural gas. Gross wells total 583 (205 net),
of which 561 are Company operated. Most of the Company's production in the
Michigan Basin is derived from the shallow blanket Antrim Shale formation at
depths of 700 to 1,700 feet. This formation is characterized by high formation
water production in the early years of a well's productive life, with water
production decreasing over time. Antrim Shale wells typically produce at rates
of 100 Mcf to 125 Mcf per day for several years, with modest declines
thereafter. Gas production often increases in the early years as the producing
formation becomes less water saturated. The operating environment in the Antrim
Shale formation is more capital intensive because of the low natural reservoir
pressures and the high initial water content of the formation. Average well
lives are 20 years of more, and drilling success rates of the Company and other
drillers in these formations historically have exceeded 90%.
Illinois Basin. Geologically, the Illinois Basin is similar to the
Appalachian and Michigan Basins in that it has shallow blanket formations and
deeper formations with greater reserve potential. The Illinois Basin represents
1% of the Company's total Present Value of its reserves. Illinois Basin proved
reserves total 3 Bcfe, of which 75% are developed. All of the reserves are
natural gas. Net daily production from the Company's properties currently
averages one Mmcf per day. The Company holds interests in 97 gross (83.9 net)
wells, all of which are operated by the Company.
The Company's production in the Illinois Basin is primarily from the New
Albany Shale formation, which is the stratigraphic equivalent of the Antrim
Shale formation. The New Albany Shale has similar operating characteristics to
shale formations in the adjacent Appalachian and Michigan Basins from which the
Company is currently producing. Production characteristics of the New Albany
Shale are very similar to the Devonian Shale from which the Company produces in
West Virginia.
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<PAGE> 49
RESERVES
The following table sets forth the Company's proved oil and gas reserves as
of December 31, 1994, 1995 and 1996 determined in accordance with the rules and
regulations of the Commission.
<TABLE>
<CAPTION>
DECEMBER 31,
-----------------------------
1994 1995 1996
----- ----- -----
<S> <C> <C> <C>
Estimated proved reserves
Natural gas (Bcf)................................ 123.0 239.4 288.6
Oil (Mbbl)....................................... 4,113 6,283 7,389
Natural Gas Equivalents (Bcfe)................... 147.7 277.1 332.9
</TABLE>
John G. Redic, Inc. ("Redic"), an independent petroleum engineering firm,
prepared estimates of the Company's proved developed reserves and the future net
cash flow (and Present Value thereof) attributable to such proved developed
reserves. The estimates of the Company's proved undeveloped reserves and the
future net cash flow (and Present Value thereof) attributable to such proved
undeveloped reserves were prepared by the Company's petroleum engineers.
Estimates of proved developed reserves and future net revenues attributable to
such proved developed reserves shown in Redic's report for Antrim Shale wells
and projects in Manistee County, Michigan were taken directly from a special
report prepared by Ryder Scott Company ("Ryder Scott"), an independent petroleum
engineering firm. Because of time constraints, Redic did not review either the
basic data or methodology used by Ryder Scott. As part of its due diligence
analysis of the Company's assets, TPG II retained Ryder Scott to review Redic's
and the Company's reserve estimates. Ryder Scott reviewed estimates which
constituted approximately 50% of the Company's total proved producing reserves
and approximately 89% of the Company's proved undeveloped reserves. Ryder Scott
found that the estimates by Redic and the Company were prepared using accepted
industry principles of engineering and evaluation. Ryder Scott's review
indicated that differences between its estimates and those of Redic and the
Company were greater in proved undeveloped reserves than in proved producing
reserves. Although in substantial agreement with Redic's and the Company's
reserve estimates, based on its initial review, Ryder Scott recommended downward
adjustments of approximately 7% of total Present Value of proved reserves.
The Company filed reserve estimates with the Energy Information
Administration for the year ended December 31, 1996. The difference between the
reserve estimates in such report and the reserve estimates in this Prospectus
does not exceed five percent.
The following table sets forth the estimated future net cash flows from and
the Present Value of the proved reserves of the Company as of December 31, 1996.
Future net cash flow represents future gross cash flow from the production and
sale of proved reserves, net of production costs (including production taxes, ad
valorem taxes and operating expenses) and future development costs. Such
calculations, which are prepared in accordance with the Statement of Financial
Accounting Standards No. 69 "Disclosure about Oil and Gas Producing Activities"
are based on constant cost and price factors. Prices for natural gas and oil at
December 31, 1996 were $3.02 per Mcf and $22.97 per Bbl, respectively. These
prices were substantially higher than historical prices used by the Company to
calculate Present Value in recent years. For example, at December 31, 1995,
natural gas and oil prices were $2.30 per Mcf and $16.95 per Bbl, respectively.
A decline in prices relative to year-end 1996 would cause a substantial decline
in Present Value. For example, a $0.10 decline in gas prices, holding all other
variables constant, would decrease Present Value by 4.0% or $14.2 million, and a
$1.00 decline in oil prices would decrease Present Value by 1.0% or $3.8
million. Furthermore, there can be no assurance that the proved undeveloped
reserves will be developed within the periods indicated and it is likely that
actual prices received in the future will vary from those used in determining
this information. All estimates of oil and gas reserves are subject to
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<PAGE> 50
significant uncertainty. See "Risk Factors -- Uncertainty of Estimates of
Reserves and Future Net Revenues."
<TABLE>
<S> <C>
Estimated future net cash flows (before income taxes) attributable
to estimated production........................................... $ 668,492,000
Present value before income taxes (discounted at 10% per annum)..... $ 355,959,000
</TABLE>
PRODUCTION
The following table sets forth certain information regarding oil and gas
production from the Company's properties:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1992 1993 1994 1995 1996
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
Production
Gas (Bcf).................... 3.7 7.4 9.6 17.0 25.4
Oil (Mbbl)................... 351 453 496 556 719
Average sales price
Gas (per Mcf)................ $ 2.22 $ 2.55 $ 2.58 $ 2.21 $ 2.56
Oil (per Bbl)................ 19.27 17.15 15.98 16.78 20.24
Average production costs per Mcfe
(including production taxes).... $ 0.92 $ 0.71 $ 0.74 $ 0.69 $ 0.72
Total oil and gas revenues (in
thousands)...................... $ 15,046 $ 26,631 $ 32,574 $ 46,853 $ 79,491
Total production expenses (in
thousands)...................... $ 5,362 $ 7,190 $ 9,292 $ 13,979 $ 21,469
</TABLE>
DRILLING RESULTS
The following tables set forth drilling results with respect to wells
drilled during the past five years:
<TABLE>
<CAPTION>
HIGHLY DEVELOPED OR BLANKET FORMATIONS(1)
--------------------------------------------------------
1992 1993 1994 1995 1996
------ ------- ------- -------- --------
<S> <C> <C> <C> <C> <C>
Productive
Gross............................. 4 42 58 106 153
Net............................... 4.0 31.4 45.6 92.5 126.3
Dry
Gross............................. 0 2 2 4 2
Net............................... 0.0 0.7 0.4 3.2 2.0
Success Rate
Gross............................. 100% 95% 97% 96% 99%
Net............................... 100% 98% 99% 97% 98%
Reserves discovered--net (Mmcfe).... 97 3,019 4,813 18,474 32,664
Approximate cost (in thousands)..... $ 170 $ 4,847 $ 5,762 $ 15,079 $ 22,198
Cost per Mcfe....................... $ 1.75 $ 1.61 $ 1.20 $ 0.82 $ 0.68
</TABLE>
- ---------------
(1) Consists of wells drilled to the Berea and Clinton Sandstone formations in
Ohio, the Berea Sandstone, Devonian Brown Shale, Ravencliff Sandstone and
Big Lime Limestone formations in West Virginia, the Clarendon, Coalbed
Methane and Medina formations in Pennsylvania, the Medina Sandstone
formation in New York and the New Albany Shale formation in Kentucky.
50
<PAGE> 51
<TABLE>
<CAPTION>
LESS DEVELOPED OR DEEPER FORMATIONS(1)
-------------------------------------------------------
1992 1993 1994 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Productive
Gross.............................. 8(3) 16(2) 22(3) 23(4) 34
Net................................ 6.4 8.8 12.7 11.5 22.2
Dry
Gross.............................. 7 14 10 22 18
Net................................ 5.1 11.4 4.8 10.7 10.2
Success Rate
Gross.............................. 53% 53% 69% 51% 65%
Net................................ 56% 44% 73% 52% 69%
Reserves discovered--net (Mmcfe)..... 1,821 3,173 5,196 5,194 7,740
Approximate cost (in thousands)...... $ 3,343 $ 3,413 $ 5,509 $ 5,284 $ 9,029
Cost per Mcfe........................ $ 1.84 $ 1.08 $ 1.06 $ 1.02 $ 1.17
</TABLE>
- ---------------
(1) Consists of wells drilled to the Trenton Limestone and Knox formations in
Ohio, the Niagaran and Dundee Carbonates in Michigan and the Oriskany
Sandstone and Onondaga Limestone formations in Pennsylvania and the Oriskany
Sandstone, Onondaga Limestone and Knox formations in New York.
(2) Two additional wells which were dry in the Knox formations were subsequently
completed in the shallower Clinton formation.
(3) One additional well which was dry in the Knox formations was subsequently
completed in the shallower Clinton formation.
(4) Two additional wells which were dry in the Knox formations were subsequently
completed in the shallower Clinton formation. One additional well which was
dry in the Oriskany formation was subsequently completed in the shallower
Berea/Shale formations.
PRODUCING WELLS
The following table summarizes by state the Company's productive wells at
December 31, 1996:
<TABLE>
<CAPTION>
STATE GROSS NET
------------------------------------------------------ ------ ------
<S> <C> <C>
Ohio.................................................. 3,908 3,513
West Virginia......................................... 1,254 1,010
Pennsylvania.......................................... 817 630
New York.............................................. 1,058 1,005
Michigan.............................................. 583 205
Kentucky.............................................. 101 99
----- -----
7,721 6,462
===== =====
</TABLE>
ACQUISITION OF PRODUCING PROPERTIES
The Company's acquisition strategy focuses on producing properties that:
(i) the Company already owns an interest in and operates or that are
strategically located in relation to its existing operations; (ii) can be
increased in value through operating cost reductions, advanced production
technology, mechanical improvements, recompleting or reworking wells and/or the
use of enhanced and secondary recovery techniques; (iii) provide development
drilling opportunities or enhance the Company's acreage position; (iv) have the
potential for increased revenues from gas production through the Company's gas
marketing capabilities; or (v) are of sufficient size to allow the Company to
operate efficiently in new areas. Using these criteria, the Company employs a
disciplined approach to acquisition analysis that requires input and approval
from all key areas of
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<PAGE> 52
the Company. These areas include field operations, exploration and production,
finance, gas marketing, land management and environmental compliance. Although
the Company often reviews in excess of 50 acquisition opportunities per year,
this disciplined approach can result in uneven annual spending on acquisitions.
The following table sets forth information pertaining to acquisitions completed
during the period 1992 through 1996.
<TABLE>
<CAPTION>
PROVED DEVELOPED RESERVES ACQUIRED
--------------------------------------------
NATURAL GAS
NUMBER OF PURCHASE NATURAL GAS OIL EQUIVALENTS
PERIOD TRANSACTIONS PRICE(1) (MMCF) (MBBL) (MMCFE)
-------------- ------------ -------------- ----------- ------ -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
1992.......... 5 $ 23,733 41,477 466 44,241
1993.......... 8 3,883 4,121 119 4,835
1994.......... 11 20,274 26,877 223 28,215
1995.......... 6 77,388 97,314 1,850 108,416
1996.......... 3 4,103 6,000 205 7,230
--
-------- ------- ----- -------
Total......... 33 $129,381 175,789 2,863 192,937
== ======== ======= ===== =======
</TABLE>
- ---------------
(1) Represents the portion of the purchase price allocated to proved developed
reserves.
During 1996, the Company acquired for approximately $4.1 million working
interests in 323 oil and gas wells in Ohio and Kentucky. Estimated proved
developed reserves associated with the wells total 6.0 Bcf of natural gas and
205,000 Bbls of oil net to the Company's interest at July 1, 1996.
Ward Lake Acquisition. In January 1995, the Company made its initial entry
into the Michigan Basin by acquiring Ward Lake, a privately-held exploration and
production company, for $15.1 million. Ward Lake operated and held production
payments and working interests averaging 13.6% in approximately 500 Antrim Shale
gas wells in Michigan's lower peninsula and approximately 5,500 undeveloped
leasehold acres in the proximity of the wells. The acquired wells had estimated
proved developed gas reserves of 98 Bcf (14 Bcf net to the Company's interest)
at December 31, 1994. Through March 31, 1997, the Company had purchased
additional working interests averaging 24% in the wells operated by Ward Lake
for approximately $12 million. The interests acquired had estimated proved
developed reserves of 16 Bcf at December 31, 1994. The interests acquired also
qualify for nonconventional fuel source tax credits through 2002, which the
Company sold in early 1996.
Quaker State Properties Acquisition. In July 1995, the Company purchased
from Quaker State Corporation most of its oil and gas properties and related
assets in the Appalachian Basin for approximately $50 million. These properties
included approximately 1,460 gross (1,100 net) wells with estimated proved
reserves of 46.8 Bcf of gas and 2.2 Mmbbl of oil at December 31, 1994, including
proved undeveloped reserves of approximately 5.6 Bcf of gas and 0.4 Mmbbl of oil
at December 31, 1994, approximately 250 miles of gas gathering systems in
Pennsylvania, New York, Ohio and West Virginia, undeveloped oil and gas leases
and fee mineral interests covering approximately 250,000 acres, an extensive
geologic and geophysical database and other assets.
52
<PAGE> 53
ACREAGE DATA
The following table summarizes by state the Company's gross and net
developed and undeveloped leasehold acreage at December 31, 1996:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------------------------------------------------
DEVELOPED ACREAGE UNDEVELOPED ACREAGE TOTAL ACREAGE
----------------------- ----------------------- -----------------------
STATE GROSS NET GROSS NET GROSS NET
- ------------------- --------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C> <C>
Ohio............... 317,300 285,400 255,800 214,400 573,100 499,800
West Virginia...... 55,800 39,300 23,400 19,400 79,200 58,700
Pennsylvania....... 41,900 31,300 209,700 199,500 251,600 230,800
New York........... 130,800 118,100 28,900 26,200 159,700 144,300
Michigan........... 31,000 29,400 47,300 44,500 78,300 73,900
Kentucky........... 11,100 10,800 800 800 11,900 11,600
------- ------- ------- ------- --------- ----------
587,900 514,300 565,900 504,800 1,153,800 1,019,100
======= ======= ======= ======= ========= ==========
</TABLE>
PRESENT ACTIVITIES
In the first six months of 1997, the Company drilled 83 gross (62.0 net)
wells at a cost of approximately $11.4 million. Net reserves discovered as a
result of this drilling activity are estimated at 14.8 Bcfe, or approximately
99% of the Company's production during the period. The Company plans to drill
approximately 250 gross (206 net) wells in 1997 at an estimated cost of $33
million.
In April 1997, the Company acquired interests in 290 gross (166.5 net)
wells in West Virginia for $3.7 million. The Company operates 287 of these
wells. Net proved developed reserves associated with these wells are estimated
to total 5.8 Bcf. The Company is currently purchasing additional working
interest in these wells from other working interest owners.
GAS GATHERING
The Company operates approximately 2,800 miles of natural gas gathering
systems in Ohio, West Virginia, Pennsylvania, New York, Michigan and Kentucky
which are tied directly to various interstate natural gas transmission systems.
The interconnections with these interstate pipelines afford the Company
potential marketing access to numerous major gas markets. The Company earned
gathering revenues of $6.3 million in 1996. Direct costs associated with gas
gathering in 1996 totaled approximately $1.7 million.
GAS MARKETING
The major industrial centers of Akron, Buffalo, Canton, Chicago, Cleveland,
Detroit and Pittsburgh are all located in close proximity to the Company's
operations and provide a large potential market for direct natural gas sales.
The Company focuses its gas marketing efforts on small to mid-sized industrial
customers that require more service and have the potential to generate higher
margins per Mcf than large industrial users. The Company earned gas marketing
revenues of $38.2 million in 1996. Direct costs associated with gas marketing in
1996 totaled approximately $35.9 million.
The Company sells the gas it produces to its commercial and industrial
customers, local distribution companies and on the spot market. In addition to
its own production, the Company buys substantial amounts of gas from other
producers and third parties and resells it. At June 30, 1997, the Company
marketed approximately 131 Mmcf of gas per day of which approximately 50%
consisted of its own production and 50% consisted of gas purchased from third
parties. Approximately 82% of this third party gas was produced from Company
operated wells. Gas sold by the Company to end users and local distribution
companies is usually sold pursuant to contracts which extend for periods of one
or more years at either fixed prices or market sensitive prices. Gas sold on the
spot market is generally priced on the basis of a regional index.
53
<PAGE> 54
Since late 1995, the Company has attempted to maintain a balance between
gas volumes sold under fixed price contracts and volumes sold under market
sensitive contracts. These market sensitive contracts allow the Company to
select the price at which future months' deliveries will be sold, based on a
regional index or a negotiated positive basis above the relevant NYMEX price.
These "triggering" contracts allow the Company to effectively hedge contract
prices without selling futures contracts and take advantage of periodic price
spikes on the NYMEX. This contract strategy is intended to reduce price
volatility and place a partial floor under the price received while still
maintaining the potential for gains from upward movement in market sensitive
prices. Additionally, the Company has a policy which governs its trading in the
financial futures markets. The Company may, from time to time, partially hedge
its contract prices by selling futures contracts on the NYMEX. At July 31, 1997,
the Company did not have any open futures contracts. See "Risk Factors--Hedging
Risks." The following table shows the type of contract and category of buyer for
gas marketed by the Company at June 30, 1997:
<TABLE>
<CAPTION>
NO. OF CONTRACTS MMCF PER DAY
---------------- ------------
<S> <C> <C>
Fixed Price Contracts
End Users...................................... 185 40
Local Distribution Companies................... 12 17
Spot Markets................................... 2 5
--- ---
Total..................................... 199 62
=== ===
Market Sensitive Contracts
End Users...................................... 9 4
Local Distribution Companies................... 2 32
Spot Markets................................... 9 33
--- ---
Total..................................... 20 69
=== ===
</TABLE>
OILFIELD SALES AND SERVICE
The Company has provided its own oilfield services for more than 30 years
in order to ensure quality control and operational and administrative support to
its exploration and production operations. In 1992, Arrow Oilfield Service
Company ("Arrow"), a separate service division, was organized as a profit
center. Arrow provides the Company and third party customers with necessary
oilfield services such as well workovers, well completions, brine hauling and
disposal and oil trucking. Arrow currently has approximately 400 third party
customers in its five-state service area. In 1996, approximately 55% of Arrow's
revenues were generated by sales to third parties.
Target Oilfield Pipe & Supply Company ("TOPS"), a wholly-owned subsidiary
of the Company, operates retail sales outlets in the Appalachian and Michigan
Basins from which it sells a broad range of equipment, including pipe, tanks,
fittings, valves and pumping units. The Company originally entered the oilfield
supply business to ensure the quality and availability of supplies for its own
operations. TOPS currently has approximately 1,000 third party customers in its
five-state market area. In 1996, approximately 67% of TOPS' revenues were
generated by sales to third parties.
CUSTOMERS
During the year ended December 31, 1996 there was no customer which
accounted for 10% or more of the Company's consolidated revenues. The only
customer which accounted for 10% or more of the Company's consolidated revenues
during the year ended December 31, 1995 was The East Ohio Gas Company with
purchases of $11.1 million. The only customer which accounted for 10% or more of
the Company's consolidated revenues during the year ended December 31, 1994 was
Ravenswood Aluminum Company ("RAC"), sales to which totaled $9.6 million.
The Company's contract with RAC, its principal gas purchaser in West
Virginia, requires it to deliver 10 billion Btus (approximately 8.9 Mmcf) of gas
per day through 1998. At present, the
54
<PAGE> 55
Company is supplying this contract requirement by delivering approximately 6.1
billion Btus of its own gas production, 3.1 billion Btus of production from
royalty and joint working interest owners in wells in which the Company holds an
interest and 0.8 billion Btus of gas purchased from third parties.
COMPETITION
The oil and gas industry is highly competitive. Competition is particularly
intense with respect to the acquisition of producing properties and the sale of
oil and gas production. There is competition among oil and gas producers as well
as with other industries in supplying energy and fuel to users.
The competitors of the Company in oil and gas exploration, development,
production and marketing include major integrated oil and gas companies as well
as numerous independent oil and gas companies, individual proprietors, natural
gas pipelines and their affiliates and natural gas marketers and brokers. Many
of these competitors possess and employ financial and personnel resources
substantially in excess of those available to the Company. Such competitors may
be able to pay more for desirable prospects or producing properties 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. The ability of
the Company to add to its reserves in the future will be dependent on its
ability to exploit its current developed and undeveloped lease holdings and its
ability to select and acquire suitable producing properties and prospects for
future exploration and development.
TITLE TO PROPERTIES
The Company believes that the title to its oil and gas properties is good
and defensible in accordance with standards generally accepted in the oil and
gas industry, subject to exceptions that, in the opinion of the Company, are not
so material as to detract substantially from the use or value of such
properties. The Company's properties are typically subject, in one degree or
another, to one or more of the following: (i) royalties and other burdens and
obligations, express or implied, under oil and gas leases; (ii) overriding
royalties, production payments and other burdens created by the Company or its
predecessors in title; (iii) a variety of contractual obligations (including, in
some cases, development obligations) arising under operating agreements, farmout
agreements, production sales contracts and other agreements that may affect the
properties or their titles; (iv) liens that arise in the normal course of
operations, such as those for unpaid taxes, statutory liens securing obligations
to unpaid suppliers and contractors and contractual liens under operating
agreements; (v) pooling, unitization and communitization agreements,
declarations and orders; and (vi) easements, restrictions, rights-of-way and
other matters that commonly affect property. To the extent that such burdens and
obligations affect the Company's rights to production revenues, they have been
taken into account in calculating the Company's net revenue interests and in
estimating the quantity and value of the Company's reserves. The Company
believes that the burdens and obligations affecting its properties are
conventional in the industry for properties of the kind owned by the Company.
EMPLOYEES
As of June 30, 1997, the Company had 606 full-time employees, including 232
oilfield sales and service employees, 300 oil and gas production employees, 20
petroleum engineers, 11 geologists and two geophysicists. None of the Company's
employees is represented by a union. The Company considers its relations with
its employees to be good.
REGULATORY MATTERS
The Company's operations are affected by extensive regulation pursuant to
various federal, state and local laws and regulations. These laws and
regulations, among other things, may affect the rate of oil and gas production.
The Company's operations are subject to numerous laws and regulations governing
plugging and abandonment, the discharge of materials into the environment
55
<PAGE> 56
or otherwise relating to environmental protection. These laws and regulations
require the acquisition of a permit before drilling commences, restrict the
types, quantities and concentration of various substances that can be released
into the environment in connection with drilling and production activities,
limit or prohibit drilling activities on certain lands lying within wilderness,
wetlands and other protected areas, and impose substantial liabilities for
pollution which might result from the Company's operations. See "Risk
Factors -- Laws and Regulations."
ENVIRONMENTAL REGULATION
Activities on the Company's oil and gas producing properties are subject to
existing federal, state and local laws and regulations governing health, safety,
environmental quality and pollution control. Failure to comply with
environmental laws can result in substantial civil or criminal penalties, as
well as the revocation of necessary environmental permits. Pursuant to these
laws and regulations, the Company may be subject to substantial clean-up costs
for any toxic or hazardous substance that may exist on or under any of its
properties. The Company cannot predict what effect additional regulation or
legislation, enforcement policies thereunder, and claims for damages to
property, employees, other persons and the environment resulting from operations
on its properties could have on its financial condition or results of
operations. The Company could incur substantial costs to comply with
environmental laws and regulations.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "superfund" law, imposes liability, regardless of
fault or the legality of the original conduct, on certain classes of persons
that contributed to the release of a "hazardous substance" into the environment.
These persons include the current or previous owner and operator of a site and
companies that disposed or arranged for the disposal of, the hazardous substance
found at a site. CERCLA also authorizes the Environmental Protection Agency
("EPA") and, in some cases, private parties to take actions in response to
threats to the public health or the environment and to seek recovery from such
responsible classes of persons of the costs of such action. In the course of
their operations, the operators of the Company's properties have generated and
will generate wastes that may fall within CERCLA's definition of "hazardous
substances." The Company or the operator of the properties may be responsible
under CERCLA for all or part of the costs to clean up sites at which such
substances have been disposed.
The operations of the Company's properties are subject to the requirements
of the Federal Occupational Safety and Health Act ("OSHA") and comparable state
statutes. The OSHA hazard communication standard, the EPA community
right-to-know regulations under Title III of the Federal Superfund Amendment and
Reauthorization Act and similar state statutes require that information be
organized and maintained about hazardous materials used or produced in the
operations. Certain of this information must be provided to employees, state and
local government authorities and citizens.
LEGAL PROCEEDINGS
On January 2, 1996, Karen J. Volgstadt, individually and as administrator
of the Estate of George A. Volgstadt, filed a complaint in the Supreme Court of
Chautauqua County, New York against the Company and a subsidiary of the Company
seeking the recovery of $6,000,000 in compensatory damages for the death of
George A. Volgstadt in an accident which occurred during the course of his
employment with the subsidiary. Stipulations of Discontinuance with prejudice
have been entered by Mrs. Volgstadt with respect to claims against the Company
and the subsidiary. Accordingly, neither the Company nor the subsidiary has any
liability with respect to this matter.
The Company is involved in several other lawsuits arising in the ordinary
course of business. The Company believes that the result of such proceedings,
individually or in the aggregate, will not have a material adverse effect on the
Company's financial position or the results of operations.
56
<PAGE> 57
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The executive officers and directors of the Company are listed below,
together with a description of their experience and certain other information.
The TPG Investors anticipate that they will cause to be elected additional
individuals, including individuals unaffiliated with either the TPG Investors or
the Company, to serve as directors of the Company.
<TABLE>
<CAPTION>
NAME AGE POSITION
- ------------------------------- -------------------------------------------------------------
<S> <C> <C>
Ronald L. Clements 54 Chief Executive Officer and Director
Ronald E. Huff 42 President, Chief Financial Officer and Director
Joseph M. Vitale 56 Senior Vice President Legal, General Counsel, Secretary and
Director
Leo A. Schrider 58 Senior Vice President Technical Development
Dennis D. Belden 51 Vice President Supply and Service
Charles P. Faber 55 Vice President Corporate Development
Tommy L. Knowles 46 Vice President Production
Dean A. Swift 45 Vice President, Assistant General Counsel and Assistant
Secretary
Henry S. Belden, IV 57 Director
Max L. Mardick 62 Director
William S. Price, III 41 Director
David M. Stanton 34 Director
</TABLE>
All executive officers of the Company serve at the pleasure of its Board of
Directors.
Ronald L. Clements, who became Chief Executive Officer and a Director of
the Company upon consummation of the Acquisition, had been Senior Vice President
of Exploration and Production of the Company since 1993 and managed the
Company's Exploration and Production Division. He joined Belden & Blake in 1990
and served as Vice President of Producing Operations until 1993. He has more
than 30 years of petroleum engineering and production experience. Prior to
joining Belden & Blake he served as Vice President and District Manager of TXO
Production Corporation in Corpus Christi, Texas. From 1967 to 1982, Mr. Clements
held various operational management positions with Shell Oil Company. Mr.
Clements received a BS degree in Electrical Engineering from the University of
North Dakota and a MS degree in Petroleum Engineering from the University of
Tulsa. He is a member of the Society of Petroleum Engineers and the Ohio Oil and
Gas Association.
Ronald E. Huff, who became President, Chief Financial Officer and a
Director of the Company upon consummation of the Acquisition, had been Senior
Vice President and Chief Financial Officer of the Company since 1989, having
previously served as its Senior Controller from 1986 to 1989. Mr. Huff was a
director of Belden & Blake from 1991 to 1997. He is a Certified Public
Accountant with nearly 20 years of experience in oil and gas finance and
accounting. From 1983 to 1986, Mr. Huff served as Vice President and Chief
Accounting Officer of Towner Petroleum Company. From 1980 to 1983 he worked for
Sonat Exploration Company as Manager of Financial Accounting; and from 1977 to
1980 he served as Corporate Accounting Supervisor for Transco Companies,
Incorporated. Mr. Huff received a BS degree in Accounting from the University of
Wyoming. He is a member of the Ohio Petroleum Accountants Society and the
Financial Executives Institute -- Northeast Ohio Chapter.
Joseph M. Vitale has been Senior Vice President Legal of the Company since
1989 and has served as its General Counsel since 1974. He was a director of the
Company from 1991 to 1997, and
57
<PAGE> 58
was appointed to serve on the Board of Directors as of the consummation of the
Acquisition. Prior to joining Belden & Blake, Mr. Vitale served for four years
in the Army Judge Advocate General's Corps. He holds a BS degree from John
Carroll University and a JD degree from Case Western Reserve Law School. He is a
member of the Ohio Oil and Gas Association, the Stark County, Ohio State and
American Bar Associations, and the Interstate Oil Compact Commission. Mr. Vitale
is a past Chairman of the Natural Resources Law Committee of the Ohio State Bar
Association.
Leo A. Schrider has been Senior Vice President of Technical Development
since 1993. He previously served as Senior Vice President of Exploration,
Drilling and Engineering for the Company since 1986. Mr. Schrider is a Petroleum
Engineer with 35 years of experience in oil and gas production, principally in
the Appalachian Basin. Prior to joining Belden & Blake in 1981, he served as
Assistant and Deputy Director of Morgantown Energy Technology Center from 1976
to 1980. From 1973 to 1976, Mr. Schrider served as Project Manager of the
Laramie Energy Research Center. He has also held various research positions with
the U.S. Department of Energy in Wyoming and West Virginia. Mr. Schrider
received his BS degree from the University of Pittsburgh in 1961 and did
graduate work at West Virginia University. He has published more than 35
technical papers on oil and gas production. He was an Adjunct Professor at West
Virginia University and also served as a member of the International Board of
Directors of the Society of Petroleum Engineers. In 1994, Mr. Schrider was
elected to the Board of Directors of the Petroleum Technology Transfer Council
and is chairman of the producer advisory group representing the Appalachian
region.
Dennis D. Belden has served as Vice President of Supply and Service for the
Company since 1989 and has managed the Oilfield Supply and Service Division
since 1992. He joined Belden & Blake in 1980 and served as the Company's land
manager from 1980 to 1989. From 1976 to 1980 he was employed by Wilmot Mining
Company as Special Projects Manager. Mr. Belden attended Kent State University.
He is a member of the Ohio Oil and Gas Association.
Charles P. Faber has been Vice President of Corporate Development for the
Company since 1993. He previously served as Senior Vice President of Capital
Markets from 1988 to 1993. Prior to joining Belden & Blake, Mr. Faber was
employed as Senior Vice President of Marketing for Heritage Asset Management
from 1986 to 1988. From 1983 to 1986 he served as President and Chief Executive
Officer of Samson Properties, Incorporated. Mr. Faber holds a BA degree in
Marketing and an MBA in Finance from the University of Wisconsin. He is a member
of the Independent Petroleum Association of America, the National Investor
Relations Institute and the Petroleum Investor Relations Association.
Tommy L. Knowles has been Vice President of Production of the Company since
January of 1996. He has 24 years of petroleum engineering and production
experience. Prior to joining Belden & Blake, Mr. Knowles served as President of
FWA Drilling Company, a subsidiary of Texas Oil & Gas Corporation. From 1982 to
1988 he worked for TXO Production Corporation in Sacramento, California, serving
in various management positions including Vice President. From 1979 to 1982 he
held the position of Drilling and Production Manager for Texas Oil & Gas
Corporation, and from 1973 to 1979 he held various engineering, supervisory and
management positions with Exxon Corporation. Mr. Knowles holds a BS degree in
Mechanical Engineering from the University of Texas at Austin. He is a member of
the Society of Petroleum Engineers, the American Petroleum Institute, and the
Independent Association of Drilling Contractors.
Dean A. Swift has served as Vice President, Assistant General Counsel and
Assistant Secretary of the Company since 1989. He served as Assistant General
Counsel of the Company from 1981 to 1989. From 1978 to 1981 he was associated
with the law firm of Hahn, Loeser and Parks in Cleveland, Ohio. Mr. Swift
received a BA degree from The University of the South and a JD degree from the
University of Virginia. He is a member of the Stark County, Ohio State and
American Bar Associations.
58
<PAGE> 59
Henry S. Belden, IV served as Chairman and Chief Executive Officer of the
Company since 1982. He resigned as Chairman and Chief Executive Officer upon the
consummation of the Acquisition, and was appointed to serve on the Board of
Directors upon consummation of the Acquisition. Mr. Belden has been involved in
oil and gas production since 1955 and associated with Belden & Blake since 1967.
Prior to joining Belden & Blake, he was employed by Ashland Oil & Refining
Company and Halliburton Services, Incorporated. Mr. Belden attended Florida
State University and the University of Akron and is a member of the 25-Year Club
of the Petroleum Industry and the Board of Trustees of the Ohio Oil and Gas
Association. He is also a member of the Regional Advisory Board of the
Independent Petroleum Association of America and a director and a member of the
Executive Committee of the Pennsylvania Grade Crude Oil Association. He is a
member of the Interstate Oil Compact Commission. Other professional memberships
include the World Business Council and the Association of Ohio Commodores. He is
a director of KeyBank-Canton District and Phoenix Packaging Corporation.
Max L. Mardick was President and Chief Operating Officer of the Company
from 1990 to 1997, a director from 1992 to 1997 and a director of predecessor
companies from 1988 to 1992. He resigned as President and Chief Operating
Officer upon consummation of the Acquisition and was appointed to serve on the
Board of Directors upon consummation of the Acquisition. He previously served as
Executive Vice President and Chief Operating Officer from 1988 to 1990. Mr.
Mardick is a Petroleum Engineer with more than 35 years of experience in
domestic and international production, engineering, drilling operations and
property evaluation. Prior to joining Belden & Blake, he was employed for more
than 30 years by Shell Oil Company in various engineering, supervisory and
senior management positions, including: Manager, Property Acquisitions and
Business Development (1986-1988); Production Manager for Shell's Onshore and
Eastern Divisions (1981-1986); Production Manager of Shell's Rocky Mountain
Division (1980-1981); Operations Manager (1977-1980); and Engineering Manager
(1975-1977). Mr. Mardick holds a BS degree in Petroleum Engineering from the
University of Kansas. He is a member of the Society of Petroleum Engineers and
the Ohio Oil and Gas Association. He has served as Vice Chairman of the
Alabama--Mississippi section of the Mid-Continent Oil and Gas Association.
William S. Price, III, who became a director upon consummation of the
Acquisition, was a founding partner of Texas Pacific in 1993. Prior to forming
Texas Pacific, Mr. Price was Vice President of Strategic Planning and Business
Development for G.E. Capital, and from 1985 to 1991 he was employed by the
management consulting firm of Bain & Company, attaining partnership status and
acting as co-head of the Financial Services Practice. Mr. Price is a 1978
graduate of Stanford University and received a JD degree from the Boalt Hall
School of Law at the University of California, Berkeley. Mr. Price is Chairman
of the Board of Favorite Brands International, Inc. and Co-Chairman of the Board
of Beringer Wine Estates. He also serves on the Boards of Directors of
Continental Airlines, Inc., Continental Micronesia, Inc., Denbury Resources,
Inc. and Vivra Specialty Partners, Inc.
David M. Stanton, who became a director upon consummation of the
Acquisition, is a partner of Texas Pacific. From 1991 until he joined Texas
Pacific in 1994, Mr. Stanton was a venture capitalist with Trinity Ventures,
where he specialized in information technology, software and telecommunications
investing. Mr. Stanton earned a BS degree in Chemical Engineering from Stanford
University and received an MBA from the Stanford Graduate School of Business.
Mr. Stanton serves on the Boards of Directors of Denbury Resources, Inc., TPG
Communications, Inc. and Paradyne Partners, L.P.
59
<PAGE> 60
SUMMARY COMPENSATION TABLE
The following table shows the annual and long-term compensation for
services in all capacities to the Company during the fiscal years ended December
31, 1996, 1995 and 1994 of the Company's Chief Executive Officer and its other
four most highly compensated executive officers.
<TABLE>
<CAPTION>
LONG-TERM
COMPENSATION ALL OTHER
ANNUAL COMPENSATION AWARDS COMPENSATION(1)
----------------------------------------------- ------------ ---------------
NO. OF
SHARES
NAME AND OTHER ANNUAL UNDERLYING
PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION OPTIONS/SARS
- -------------------------------- ---- -------- -------- ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Henry S. Belden, IV 1996 $322,038 $161,962 $ 0 40,000 $25,869(2)
Chairman of the Board 1995 310,994 145,765 0 40,000 18,720(2)
and Chief Executive Officer 1994 299,038 39,720 0 33,000 15,165(2)
Max L. Mardick 1996 236,731 83,793 0 25,000 13,439
President and Chief 1995 229,808 72,445 0 25,000 7,042
Operating Officer 1994 206,438 28,421 0 20,000 9,419
Ronald E. Huff 1996 166,462 66,175 0 20,000 11,550
Senior Vice President 1995 168,466 32,706 0 20,000 8,016
and Chief Financial Officer 1994 157,354 17,608 0 15,000 8,125
Joseph M. Vitale 1996 162,069 66,020 0 20,000 10,078
Senior Vice President 1995 156,066 52,810 0 20,000 8,768
Legal, General Counsel 1994 150,577 17,495 0 15,000 7,615
and Secretary
Ronald L. Clements 1996 171,173 66,303 4,000 20,000 11,342
Senior Vice President of 1995 161,373 62,568 5,000 20,000 7,629
Exploration and Production 1994 151,731 22,514 5,000 15,000 7,892
</TABLE>
- ---------------
(1) Represents contributions of cash and Company common stock to the Company's
401(k) Profit Sharing Plan for the account of the named executive officers.
(2) Includes $8,316, $7,641 and $5,422 as the portion of the total premium paid
by the Company in 1996, 1995 and 1994, respectively, under a split-dollar
insurance plan that is attributable to term life insurance coverage for Mr.
Belden.
OPTION/SAR GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS
------------------------------------------------------------------------------------
% OF TOTAL
OPTIONS/SARS
OPTIONS/ GRANTED TO
SARS EMPLOYEES IN EXERCISE OR EXPIRATION GRANT DATE
NAME GRANTED(1) FISCAL YEAR BASE PRICE DATE PRESENT VALUE(2)
- ------------------------------ ---------- ------------- ----------- ---------- ----------------
<S> <C> <C> <C> <C> <C>
Henry S. Belden, IV 40,000 14.3% $ 21.00 8/26/06 $428,800
Max L. Mardick 25,000 8.9 21.00 8/26/06 268,000
Ronald E. Huff 20,000 7.1 21.00 8/26/06 214,400
Joseph M. Vitale 20,000 7.1 21.00 8/26/06 214,400
Ronald L. Clements 20,000 7.1 21.00 8/26/06 214,400
</TABLE>
- ---------------
(1) Options granted are exercisable starting 12 months after the date of grant,
with 25% of the shares covered thereby becoming exercisable at that time and
an additional 25% becoming exercisable on each successive anniversary date.
The options were granted for a term of ten years, subject to earlier
termination on cessation of employment.
(2) This is a hypothetical valuation using the Black-Scholes valuation method.
The Company's use of this model should not be considered as an endorsement
of its accuracy at valuing options. All stock option valuation methods,
including the Black-Scholes model, require a prediction about the future
movement of a company's stock price. Since all options are granted at an
exercise price equal to the market value of the Company's common stock on
the date of grant, no value will be realized if there is no appreciation in
the market price of the stock.
60
<PAGE> 61
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END
OPTION/SAR VALUE
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED
NUMBER OF UNEXERCISED IN-THE MONEY
SHARES OPTIONS/SARS AT FY-END OPTIONS/SARS AT FY-END (1)
ACQUIRED VALUE ---------------------------- ----------------------------
NAME ON EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- ------------------------ ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Henry S. Belden, IV -0- -0- 52,750 95,250 $ 714,688 $ 805,938
Max L. Mardick -0- -0- 31,250 58,750 420,781 492,344
Ronald E. Huff -0- -0- 23,750 46,250 318,438 383,438
Joseph M. Vitale -0- -0- 23,750 46,250 318,438 383,438
Ronald L. Clements -0- -0- 12,500 42,500 144,065 325,312
</TABLE>
- ---------------
(1) Values are calculated as the difference between the exercise price of the
options and the market value of the Company's common stock of $25.50 as of
December 31, 1996.
COMPENSATION OF DIRECTORS
Directors of the Company will not be compensated for their services as such
nor for their participation on any committees of the Board of Directors.
EMPLOYMENT AND SEVERANCE AGREEMENTS
The Company has severance agreements with Messrs. Clements, Huff and Vitale
which entitle each of them to receive a lump sum severance payment equal to 300%
of the sum of (i) his respective annual base salary at the highest rate in
effect for any period prior to his employment termination plus (ii) his highest
annual bonus and incentive compensation during the three-year period preceding a
change in control, in the event of the termination of his employment by the
Company other than for "cause" (as defined therein) or his resignation in
response to a substantial reduction in responsibilities, authority, position,
compensation or location of his place of work within three years following a
change in control. In addition, each of them would be entitled to receive an
additional payment sufficient to cover any excise tax imposed by Section 4999 of
the Code on the severance payments or other payment considered "contingent on a
change in ownership or control" of the Company within the meaning of Section
280G of the Code.
Messrs. Clements and Huff each entered into employment agreements dated as
of June 27, 1997 (the "Employment Agreements") providing for their employment as
Chief Executive Officer and President, respectively, of the Company. The
Employment Agreements provide for an annual base salary of not less than
$300,000 payable to Mr. Clements and $250,000 payable to Mr. Huff. Messrs.
Clements and Huff will each be entitled to earn an annual bonus of up to 50% of
his annual base salary based on the attainment of certain goals to be set by the
Company's Board of Directors. Each of Messrs. Clements and Huff agreed to
continue to hold, and not surrender, certain stock options previously granted to
him under the Company's Stock Option Plan, thereby foregoing the right to
receive $334,220 each in cash upon the surrender of such options. The Employment
Agreements provide for the granting to each of Messrs. Clements and Huff of
additional options to purchase shares of common stock of the Company
constituting 1.25% of the outstanding common stock (on a fully-diluted basis) at
an option price equivalent to the price paid by the TPG Investors in connection
with the Equity Contribution. The options will vest over a four year period,
with one-fourth (1/4) vesting one year after the date of grant and the balance
at the rate of one-twelfth (1/12) at the end of each quarter thereafter during
the continuation of employment with the Company. The Employment Agreements
provide for certain call options and rights of first refusal in connection with
the shares of common stock obtainable upon the exercise of stock options.
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The Employment Agreements provide that Messrs. Clements and Huff will be
entitled to employee welfare and retirement benefits substantially comparable to
those presently provided by the Company and to any other employee benefits later
made available to senior executive management of the Company.
The Employment Agreements further provide that the existing severance
agreements that Messrs. Clements and Huff have with the Company will remain in
force and upon the expiration thereof will be replaced by new severance
agreements providing substantially the same benefits.
COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION
During 1996, the Compensation Committee of the Board of Directors consisted
of George M. Smart, Raymond D. Saunders and Gary R. Petersen, all of whom are
outside directors.
Henry S. Belden, IV, a director of the Company, is a director of Phoenix
Packaging Corporation of which Mr. Smart is President and Chief Executive
Officer.
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PRINCIPAL SHAREHOLDERS
The following table sets forth certain information as of July 31, 1997
regarding the beneficial ownership of the Company's common stock by each person
who beneficially owns more than five percent of the Company's outstanding common
stock. Each director, the chief executive officer and the four other most highly
compensated executive officers and by all directors and executive officers of
the Company, as a group:
<TABLE>
<CAPTION>
FIVE PERCENT SHAREHOLDERS NUMBER OF SHARES PERCENTAGE OF SHARES
----------------------------------------- ---------------- --------------------
<S> <C> <C>
TPG Advisors II, Inc. 9,907,414(1) 98.3%
201 Main Street, Suite 2420
Fort Worth, Texas 76102
OFFICERS AND DIRECTORS
William S. Price, III 9,907,414(1) 98.3%
Henry S. Belden IV 26,757(2) *
Ronald L. Clements 12,877(2) *
Ronald E. Huff 12,877(2) *
Max L. Mardick 16,509(2) *
David M. Stanton -0- -0-
Joseph M. Vitale -0- -0-
All directors and executive 9,976,434 99.1%
officers as a group
</TABLE>
- ---------------
*Less than 1%
(1) Neither TPG Advisors II, Inc. nor Mr. Price is the record owner of any
shares of the Company's common stock. Mr. Price is, however, a director,
executive officer and shareholder of TPG Advisors II, Inc., which is the
general partner of TPG GenPar II, L.P., which in turn is the general partner
of each of TPG II, TPG Investors II, L.P. and TPG Parallel II, L.P. which
are the direct beneficial owners of 8,449,439, 576,611 and 881,364 shares of
common stock, respectively.
(2) Consists of shares subject to stock options exercisable within 60 days.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
In connection with the Transaction, the Company entered into a Transaction
Advisory Agreement with TPG II pursuant to which TPG II received a cash
financial advisory fee of $5.0 million upon the closing of the Acquisition as
compensation for its services as financial advisor in connection with the
Transaction. TPG II also will be entitled to receive (but, at its discretion,
may waive) fees of up to 1.5% of the "transaction value" for each subsequent
transaction (a tender offer, acquisition, sale, merger, exchange offer,
recapitalization, restructuring or other similar transaction) in which the
Company is involved. The term "transaction value" means the total value of any
subsequent transaction, including, without limitation, the aggregate amount of
the funds required to complete the subsequent transaction (excluding any fees
payable pursuant to the Transaction Advisory Agreement and fees, if any, paid to
any other person or entity for financial advisory, investment banking, brokerage
or any other similar services rendered in connection with such transaction)
including the amount of any indebtedness, preferred stock or similar items
assumed (or remaining outstanding). The Transaction Advisory Agreement shall
continue until the earlier of (i) 10 years from the execution date or (ii) the
date on which TPG II and its affiliates cease to own, beneficially, directly or
indirectly, at least 25% of the voting power of the securities of the Company.
In management's opinion, the fees provided for under the Transaction Advisory
Agreement reasonably reflect the benefits received and to be received by the
Company.
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Messrs. Belden and Mardick have each entered into non-competition
agreements with the Company dated March 27, 1997 (the "Non-Competition
Agreements"), which became effective contemporaneously with consummation of the
Acquisition. Pursuant to the terms of the Non-Competition Agreements, Messrs.
Belden and Mardick have each agreed, for a period of three (3) years from June
27, 1997 that he will not, in any county in the United States in which the
Company does business, directly or indirectly, either for himself or as a member
of a partnership or as a shareholder, investor, agent, associate or consultant
engage in any business in which the Company is engaged immediately prior to June
27, 1997. Messrs. Belden and Mardick have each further agreed that he will not,
directly or indirectly, make any misleading or untrue statement that disparages
or would have the effect of disparaging the Company or any of its affiliates or
employees or of adversely affecting the reputation, business or credit rating of
the Company or any of its affiliates or employees, and that, for a period of
three years from the Effective Time, he will not, directly or indirectly,
interfere with, or take any action that would have the effect of interfering
with, the contractual and other relationships between the Company or any of its
affiliates and any of its or their employees, customers or suppliers. In
consideration of such agreements, Mr. Belden will receive $2,400,616.44 and Mr.
Mardick will receive $983,711.16 in each case payable in 36 monthly
installments.
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<PAGE> 65
DESCRIPTION OF THE NOTES
GENERAL
The Exchange Notes will be issued, and the Senior Subordinated Notes were
issued, pursuant to an Indenture (the "Indenture") among the Company, the
Subsidiary Guarantors and LaSalle National Bank, as trustee (the "Trustee").
Copies of the Indenture will be made available to holders of the Notes upon
request to the Company. Upon issuance of the Exchange Notes, if any, or the
effectiveness of the Shelf Registration Statement the Indenture will be subject
to the Trust Indenture Act of 1939, as amended (the "Trust Indenture Act"). The
terms of the Notes include those stated in the Indenture and those made part of
the Indenture by reference to the Trust Indenture Act. The Notes are subject to
all such terms, and Holders of the Notes are referred to the Indenture and the
Trust Indenture Act for a statement thereof. The following summary of certain
provisions of the Indenture does not purport to be complete and is qualified in
its entirety by reference to the Indenture, including the definitions therein of
certain terms used below. The definitions of certain terms used in the following
summary are set forth below under "-- Certain Definitions."
The Notes are general unsecured obligations of the Company and are
subordinated in right of payment to Senior Debt. The Notes are guaranteed on a
senior subordinated basis by each Restricted Subsidiary of the Company and any
future Restricted Subsidiary of the Company. The obligations of the Subsidiary
Guarantors under the Guarantees are general unsecured obligations of each of the
Subsidiary Guarantors and are subordinated in right of payment to all
obligations of the Subsidiary Guarantors in respect of Senior Debt. See "--
Guarantees" and "Risk Factors -- Subordination of Notes and Guarantees."
For purposes of this section, the term "Company" means Belden & Blake
Corporation. As of the date of the Indenture, all of the Company's Significant
Subsidiaries will be Restricted Subsidiaries. Under certain circumstances,
however, the Company will be able to designate current and future Subsidiaries
as Unrestricted Subsidiaries. Unrestricted Subsidiaries will not be subject to
many of the restrictive covenants set forth in the Indenture. See "-- Certain
Covenants."
TERMS OF THE NOTES
The Notes are limited in aggregate principal amount to $225 million and
will mature on June 15, 2007. Interest on the Notes accrues at the rate of
9 7/8% per annum and is payable semi-annually in arrears on June 15 and December
15 of each year, commencing December 15, 1997, to Holders of the Notes of record
on the immediately preceding June 1 and December 1. Interest on the Notes
accrues from the most recent date on which interest has been paid or, if no
interest has been paid, from the date of original issuance.
Interest is computed on the basis of a 360-day year comprised of twelve
30-day months. Principal, premium, if any, and interest on the Notes is payable
at the office or agency of the Company maintained for such purpose within the
City and State of New York or, at the option of the Company, payment of interest
may be made by check mailed to the Holders of the Notes at their respective
addresses set forth in the applicable register of Holders of the Notes. Until
otherwise designated by the Company, the Company's office or agency in New York
will be the office of the Trustee maintained for such purpose. The Notes will be
fully registered as to principal and interest in minimum denominations of $1,000
and integral multiples of $1,000 in excess thereof.
OPTIONAL REDEMPTION
Except as otherwise described below, the Notes are not redeemable at the
Company's option prior to June 15, 2002. Thereafter, the Notes are subject to
redemption at the option of the Company, in whole or in part, upon not less than
30 nor more than 60 days' notice, at the redemption prices (expressed as
percentages of principal amount) set forth below plus accrued
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<PAGE> 66
and unpaid interest thereon to the applicable redemption date, if redeemed
during the twelve-month period beginning on June 15 of the years indicated
below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
-------------------------------------------------------------- ----------
<S> <C>
2002.......................................................... 104.938%
2003.......................................................... 103.292%
2004.......................................................... 101.646%
2005 and thereafter........................................... 100.000%
</TABLE>
Prior to June 15, 2000, the Company may, at its option, on any one or more
occasions, redeem up to 40% of the original aggregate principal amount of the
Notes at a redemption price equal to 109.875% of the principal amount thereof,
plus accrued and unpaid interest, if any, thereon to the redemption date, with
all or a portion of the net proceeds of public sales of common stock of the
Company; provided that at least 60% of the original aggregate principal amount
of the Notes remains outstanding immediately after the occurrence of such
redemption; and provided, further, that such redemption shall occur within 60
days of the date of the closing of the related sale of common stock of the
Company.
At any time on or prior to June 15, 2002, the Notes may also be redeemed as
a whole at the option of the Company upon the occurrence of a Change of Control
(but in no event more than 90 days after the occurrence of such Change of
Control) at a redemption price equal to 100% of the principal amount thereof,
plus the Applicable Premium as of, and accrued but unpaid interest, if any, to,
the date of redemption (subject to the right of Holders of record on the
relevant record date to receive interest due on the relevant interest payment
date).
SELECTION AND NOTICE
In the case of any partial redemption, selection of the Notes 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 such other Notes are not so listed, on a pro rata basis, by lot
or by such method as such Trustee shall deem fair and appropriate; provided that
no Note of $1,000 or less shall be redeemed in part. Notices of redemption shall
be mailed by first class mail at least 30 but not more than 60 days before the
redemption date to each Holder of the Notes to be redeemed at its registered
address. If any Note is to be redeemed in part only, the notice of redemption
that relates to such Note shall state the portion of the principal amount
thereof to be redeemed. A new Note in principal amount equal to the unredeemed
portion thereof will be issued in the name of the Holder thereof upon
cancellation of the original Note. On and after the redemption date, interest
will cease to accrue on the Notes or portions of them called for redemption.
RANKING AND SUBORDINATION
The payment of principal of, premium, if any, and interest on, the Notes
and any other payment obligations of the Company in respect of the Notes
(including any obligation to repurchase the Notes) are subordinated in certain
circumstances in right of payment, as set forth in the Indenture, to the prior
payment in full in cash of all Senior Debt, whether outstanding on the date of
the Indenture or thereafter incurred.
Upon any payment or distribution of property or securities to creditors of
the Company in a liquidation or dissolution of the Company or in a bankruptcy,
reorganization, insolvency, receivership or similar proceeding relating to the
Company or its property, or in an assignment for the benefit of creditors or any
marshalling of the Company's assets and liabilities, the holders of Senior Debt
will be entitled to receive payment in full of all Obligations due in respect of
such Senior Debt (including interest after the commencement of any such
proceeding at the rate specified in the applicable Senior Debt, whether or not a
claim for such interest would be allowed in a proceeding) before the Holders of
the Notes will be entitled to receive any payment with respect to the Notes,
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<PAGE> 67
and until all Obligations with respect to Senior Debt are paid in full, any
distribution to which the Holders of the Notes would be entitled shall be made
to the holders of Senior Debt (except that Holders of the Notes may receive
payments made from the trust described under "-- Legal Defeasance and Covenant
Defeasance").
The Company also may not make any payment (whether by redemption, purchase,
retirement, defeasance or otherwise) upon or in respect of the Notes (except
from the trust described under "-- Legal Defeasance and Covenant Defeasance") if
(i) a default in the payment of the principal of, premium, if any, or interest
on Designated Senior Debt occurs ("payment default") or (ii) any other default
occurs and is continuing with respect to Designated Senior Debt that permits, or
with the giving of notice or passage of time or both (unless cured or waived)
will permit, holders of the Designated Senior Debt as to which such default
relates to accelerate its maturity ("non-payment default") and (solely with
respect to this clause (ii)) the Trustee receives a notice of such default (a
"Payment Blockage Notice") from the Company or the holders of any Designated
Senior Debt. Cash payments on the Notes shall be resumed (a) in the case of a
payment default, upon the date on which such default is cured or waived and (b)
in case of a nonpayment default, the earlier of the date on which such
nonpayment default is cured or waived or 179 days after the date on which the
applicable Payment Blockage Notice is received, unless the maturity of any
Designated Senior Debt has been accelerated or a default of the type described
in clause (ix) under the caption "Events of Default and Remedies" has occurred
and is continuing. No new period of payment blockage may be commenced unless and
until 360 days have elapsed since the date of commencement of the payment
blockage period resulting from the immediately prior Payment Blockage Notice. No
nonpayment default in respect of Designated Senior Debt that existed or was
continuing on the date of delivery of any Payment Blockage Notice to the Trustee
shall be, or be made, the basis for a subsequent Payment Blockage Notice unless
such default shall have been cured or waived for a period of no less than 90
days.
The Indenture further requires that the Company promptly notify holders of
Senior Debt if payment of the Notes is accelerated because of an Event of
Default.
As a result of the subordination provisions described above, in the event
of a liquidation or insolvency of the Company, Holders of the Notes may recover
less ratably than creditors of the Company who are holders of Senior Debt. The
principal amount of Senior Debt outstanding at July 31, 1997 was $104.0 million,
all of which represented borrowings under the New Credit Agreement, and there
was no senior subordinated debt outstanding (exclusive of the Notes). See
"Description of Other Indebtedness." The Indenture limits, subject to certain
financial tests, the amount of additional Indebtedness, including Senior Debt,
that the Company and its Subsidiaries can incur. See "-- Certain
Covenants -- Incurrence of Indebtedness and Issuance of Disqualified Stock."
GUARANTEES
The Company's payment obligations under the Notes are jointly, severally
and unconditionally guaranteed (the "Guarantees") by each Subsidiary Guarantor
and any future Restricted Subsidiary of the Company. The Guarantees are
subordinated to Indebtedness of the Subsidiary Guarantors to the same extent and
in the same manner as the Notes are subordinated to the Senior Debt. Each
Guarantee by a Subsidiary Guarantor is limited to an amount not to exceed the
maximum amount that can be guaranteed by the applicable Subsidiary Guarantor
without rendering such Guarantee, as it relates to such Subsidiary Guarantor,
voidable under applicable law relating to fraudulent conveyance or fraudulent
transfer or similar laws affecting rights of creditors generally.
The Indenture provides that no Subsidiary Guarantor may consolidate with,
or merge with or into (whether or not such Subsidiary Guarantor is the surviving
Person), another Person other than the Company or another Subsidiary Guarantor
whether or not affiliated with such Subsidiary Guarantor, unless (i) subject to
the provisions of the following paragraph, the Person formed by or
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<PAGE> 68
surviving any such consolidation or merger (if other than such Subsidiary
Guarantor) assumes all the obligations of such Subsidiary Guarantor pursuant to
a supplemental indenture in form and substance reasonably satisfactory to the
Trustee in respect of the Notes, the Indenture and the Guarantees; and (ii)
immediately after giving effect to such transaction, no Default or Event of
Default exists.
The Indenture provides that in the event of a sale or other disposition of
all or substantially all of the assets of a Subsidiary Guarantor to a third
party, by way of merger, consolidation or otherwise, or a sale or other
disposition of all of the capital stock of a Subsidiary Guarantor, then such
Subsidiary Guarantor (in the event of a sale or other disposition, by way of
such a merger, consolidation or otherwise, of all of the capital stock of such
Subsidiary Guarantor) or the Person acquiring the property (in the event of a
sale or other disposition of all or substantially all of the assets of such
Subsidiary Guarantor) will be released from and relieved of any obligations
under its Guarantee; provided that the Net Proceeds of such sale or other
disposition are applied in accordance with the covenant described under the
caption "-- Repurchase at the Option of Holders -- Asset Sales."
Any Subsidiary Guarantor that is designated an Unrestricted Subsidiary in
accordance with the terms of the Indenture shall, upon such designation, be
released and relieved of its obligations under its Guarantee and any
Unrestricted Subsidiary whose designation as such is revoked and any newly
formed or newly acquired Subsidiary that becomes a Restricted Subsidiary will be
required to execute a Guarantee in accordance with the terms of the Indenture.
MANDATORY REDEMPTION
Except as set forth below under "-- Repurchase at the Option of Holders,"
the Company is not required to make mandatory redemption or sinking fund
payments with respect to the Notes.
REPURCHASE AT THE OPTION OF HOLDERS
Change of Control
Upon the occurrence of a Change of Control, each Holder of the Notes will,
unless the Company shall have elected to redeem the Notes prior to June 15, 2002
upon a Change of Control as permitted by the third paragraph of "-- Optional
Redemption," have the right to require the Company to repurchase all or any part
(equal to $1,000 or an integral multiple thereof) of such Holder's Notes
pursuant to the offer described below (the "Change of Control Offer") at an
offer price in cash equal to 101% of the aggregate principal amount of the Notes
plus accrued and unpaid interest, if any, thereon to the date of purchase (the
"Change of Control Payment"). Within 30 days following any Change of Control,
the Company will mail a notice to each Holder describing the transaction or
transactions that constitute the Change of Control and offer to repurchase the
Notes pursuant to the procedures required by the Indenture and described in such
notice on a date no earlier than 30 days nor later than 60 days from the date
such notice is mailed (the "Change of Control Payment Date"). The Company will
comply with the requirements of Rule 14e-1 under the Exchange Act and any other
securities laws and regulations thereunder to the extent such laws and
regulations are applicable in connection with the repurchase of the Notes as a
result of a Change of Control.
On the Change of Control Payment Date, the Company will, to the extent
lawful, (i) accept for payment all Notes or portions thereof properly tendered
pursuant to the Change of Control Offer, (ii) deposit with the Paying Agent an
amount equal to the Change of Control Payment in respect of all the Notes or
portions thereof so tendered and (iii) deliver or cause to be delivered to the
Trustee the relevant Notes so accepted together with an Officers' Certificate
stating the aggregate principal amount of such Notes or portions thereof being
purchased by the Company. The Paying Agent will promptly mail to each Holder of
the Notes so tendered the Change of Control Payment for such Notes, and the
Trustee will promptly authenticate and mail (or cause to be transferred by book
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<PAGE> 69
entry) to each tendering Holder a new Note equal in principal amount to any
unpurchased portion of the Notes surrendered, if any; provided that each such
new Note will be in a principal amount of $1,000 or an integral multiple
thereof. The Indenture will provide that, prior to complying with the provisions
of this covenant, but in any event within 30 days following a Change of Control,
the Company will either repay all outstanding Senior Debt or obtain the
requisite consents, if any, under all agreements governing outstanding Senior
Debt to permit the repurchase of the Notes required by this covenant. The
Company will publicly announce the results of the Change of Control Offer on or
as soon as practicable after the Change of Control Payment Date.
Except as described above with respect to a Change of Control, the
Indenture does not contain provisions that permit the Holders of the Notes to
require that the Company repurchase or redeem the Notes in the event of a
takeover, recapitalization or similar transaction.
The Company will not be required to make a Change of Control Offer if a
third party makes the Change of Control Offer in the manner, at the times and
otherwise in compliance with the requirements set forth in the Indenture
applicable to a Change of Control Offer made by the Company and purchases all
Notes validly tendered and not withdrawn under such Change of Control Offer.
The change of control that occurred upon completion of the Transaction did
not constitute a Change of Control under the Indenture and the Holders of the
Notes have no right to require the Company to make a Change of Control Offer or
a Change of Control Payment in respect thereof.
The definition of Change of Control includes a phrase relating to the sale,
lease, transfer, conveyance or other disposition of "all or substantially all"
of the assets of the Company and its Subsidiaries taken as a whole. Although
there is a developing body of case law interpreting the phrase "substantially
all," there is no precise established definition of the phrase under applicable
law. Accordingly, the ability of a Holder of the Notes to require the Company to
repurchase such Notes as a result of a sale, lease, transfer, conveyance or
other disposition of less than all of the assets of the Company and its
Subsidiaries taken as a whole to another Person or group may be uncertain.
Asset Sales
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, engage in an Asset Sale unless (i) the
Company or the Restricted Subsidiary, as the case may be, receives consideration
at the time of such Asset Sale at least equal to the fair market value (as
determined in good faith by a resolution of the Board of Directors set forth in
an Officers' Certificate delivered to the Trustee, which determination shall be
conclusive evidence of compliance with this provision) of the assets or Equity
Interests issued or sold or otherwise disposed of and (ii) at least 85% of the
consideration therefor received by the Company or such Restricted Subsidiary
from such Asset Sale, plus all other Asset Sales since the date of the
Indenture, on a cumulative basis, is in the form of cash, Cash Equivalents,
properties and capital assets to be used by the Company or any Restricted
Subsidiary in the Oil and Gas Business or oil and gas properties owned or held
by another Person which are to be used in the Oil and Gas Business of the
Company or its Restricted Subsidiaries, or any combination thereof (collectively
the "Cash Consideration"); provided that the amount of (x) any liabilities (as
shown on the Company's or such Restricted Subsidiary's most recent balance
sheet) of the Company or any Restricted Subsidiary (other than contingent
liabilities and liabilities that are by their terms subordinated to the Notes or
any guarantee thereof) that are assumed by the transferee of any such assets
pursuant to a customary novation agreement that releases the Company or such
Restricted Subsidiary from further liability and (y) any non-cash consideration
received by the Company or any such Restricted Subsidiary from such transferee
that are converted by the Company or such Restricted Subsidiary into cash within
180 days of closing such Asset Sale, shall be deemed to be cash for purposes of
this provision (to the extent of the cash received); provided, however, that the
Company and its
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Restricted Subsidiaries may make Asset Sales with a fair market value not
exceeding $5 million in the aggregate in each year of twelve calendar months
(beginning the first full month following the date of the Indenture) free from
any of the restrictions, requirements or other provisions under this "Asset
Sales" section.
Within 360 days after the receipt of any Net Proceeds from an Asset Sale,
the Company may apply such Net Proceeds, at its option, in any order or
combination, (a) to reduce Senior Debt, (b) to make Permitted Investments, (c)
to make investments in interests in other Oil and Gas Businesses or (d) to make
capital expenditures in respect of the Company's or its Restricted Subsidiaries'
Oil and Gas Business or to purchase long-term assets that are used or useful in
the Oil and Gas Business. Pending the final application of any such Net
Proceeds, the Company may temporarily reduce Senior Debt that is revolving debt
or otherwise invest such Net Proceeds in any manner that is not prohibited by
the Indenture. Any Net Proceeds from Asset Sales that are not applied as
provided in the first sentence of this paragraph will (after the expiration of
the periods specified in this paragraph) be deemed to constitute "Excess
Proceeds."
When the aggregate amount of Excess Proceeds exceeds $15 million, the
Company will be required to make an offer to all Holders of the Notes and, to
the extent required by the terms thereof, to all holders or lenders of Pari
Passu Indebtedness (an "Asset Sale Offer") to purchase the maximum principal
amount of the Notes and any such Pari Passu Indebtedness to which the Asset Sale
Offer applies that may be purchased out of the Excess Proceeds, at an offer
price in cash equal to 100% of the principal amount thereof plus accrued and
unpaid interest thereon to the date of purchase, in accordance with the
procedures set forth in the Indenture or the agreements governing the Pari Passu
Indebtedness, as applicable. To the extent that the aggregate principal amount
of the Notes and Pari Passu Indebtedness tendered pursuant to an Asset Sale
Offer is less than the Excess Proceeds, the Company may use any remaining Excess
Proceeds for general corporate purposes. If the aggregate principal amount of
the Notes surrendered by Holders thereof and other Pari Passu Indebtedness
surrendered by holders or lenders thereof, collectively, exceeds the amount of
Excess Proceeds, the Trustee shall select the Notes and Pari Passu Indebtedness
to be purchased on a pro rata basis, based on the aggregate principal amount
thereof surrendered in such Asset Sale Offer. Upon completion of such Asset Sale
Offer, the amount of Excess Proceeds shall be reset at zero.
The New Credit Agreement may prohibit the Company from purchasing any Notes
and also provides that certain change of control events with respect to the
Company would constitute a default thereunder. Any future credit agreements or
other agreements relating to Senior Debt to which the Company becomes a party
may contain similar restrictions and provisions. In the event a Change of
Control or Asset Sale Offer occurs at a time when the Company is prohibited from
purchasing the Notes by the terms of the New Credit Agreement or other
agreements relating to other Senior Debt, the Company could seek the consent of
its lenders to the purchase or could attempt to refinance the borrowings that
contain such prohibition. If the Company does not obtain such a consent or repay
such borrowings, the Company may remain prohibited from purchasing the Notes. In
such case, the Company's failure to purchase tendered Notes would constitute an
Event of Default under the Indenture which would, in turn, constitute a default
under the New Credit Agreement. In such circumstances, the subordination
provisions in the Indenture would likely restrict payments to the Holders of the
Notes.
CERTAIN COVENANTS
Restricted Payments
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly: (i) declare or pay
any dividend or make any other payment or distribution on account of the
Company's Equity Interests (including, without limitation, any payment to
holders of the Company's Equity Interests in connection with any merger or
consolidation
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involving the Company) to holders of the Company's Equity Interests (other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of the Company); (ii) purchase, redeem or otherwise acquire or retire for
value any Equity Interests of the Company or any Subsidiary of the Company that
is not a Wholly Owned Restricted Subsidiary of the Company (other than any such
purchase, redemption or other acquisition or retirement made in connection with
the Transaction); (iii) make any principal payment on, or purchase, redeem,
defease or otherwise acquire or retire for value any Indebtedness that is
subordinated to the Notes, except at final maturity or as a mandatory or sinking
fund repayment; or (iv) make any Restricted Investment (all such payments and
other actions set forth in clauses (i) through (iv) above being collectively
referred to as "Restricted Payments"), unless, at the time of and after giving
effect to such Restricted Payment:
(a) no Default or Event of Default shall have occurred and be
continuing or would occur as a consequence thereof; and
(b) the Company would, at the time of such Restricted Payment and
after giving pro forma effect thereto as if such Restricted Payment had
been made at the beginning of the applicable four-quarter period, have been
permitted to incur at least $1.00 of additional Indebtedness pursuant to
the Fixed Charge Coverage Ratio test set forth in the first paragraph of
the covenant described below under the caption "-- Incurrence of
Indebtedness and Issuance of Disqualified Stock"; and
(c) such Restricted Payment, together with the aggregate of all other
Restricted Payments made by the Company and its Restricted Subsidiaries
after the date of the Indenture (excluding Restricted Payments permitted by
clauses (1), (3), (4) and (7) of the next succeeding paragraph), is less
than the sum of (i) 50% of the Consolidated Net Income of the Company for
the period (taken as one accounting period) from the beginning of the first
fiscal quarter commencing after the date of the Indenture to the end of the
Company's most recently ended fiscal quarter for which internal financial
statements are available at the time of such Restricted Payment (or, if
such Consolidated Net Income for such period is a deficit, less 100% of
such deficit), plus (ii) 100% of the aggregate net cash proceeds received
by the Company from the issue or sale since the date of the Indenture of
Equity Interests of the Company or of debt securities of the Company that
have been converted into or exchanged for such Equity Interests (other than
Equity Interests (or convertible debt securities) sold to a Subsidiary of
the Company and other than Disqualified Stock or debt securities that have
been converted into Disqualified Stock), plus (iii) to the extent that any
Restricted Investment that was made after the date of the Indenture is sold
for cash or otherwise liquidated or repaid for cash or the receipt of
properties used in the Oil and Gas Business, the lesser of (A) the net cash
proceeds of such sale, liquidation or repayment or the fair market value of
property received in exchange therefor and (B) the amount of such
Restricted Investment, provided, however, that the foregoing provisions of
this paragraph (c) will not prohibit Restricted Payments in an aggregate
amount not to exceed $15 million.
The foregoing provisions will not prohibit (1) the purchase, redemption,
retirement or other acquisition for value of any Equity Interests of the Company
contemplated by the Transaction; (2) the payment of any dividend within 60 days
after the date of declaration thereof, if at said date of declaration such
payment would have complied with the provisions of the Indenture; (3) the
redemption, repurchase, retirement or other acquisition of any Equity Interests
of the Company in exchange for, or out of the proceeds of, the substantially
concurrent sale (other than to a Subsidiary of the Company) of other Equity
Interests of the Company (other than any Disqualified Stock); provided that the
amount of any such net cash proceeds that are utilized for any such redemption,
repurchase, retirement or other acquisition shall be excluded from clause
(c)(ii) of the preceding paragraph; (4) the defeasance, redemption or repurchase
of subordinated Indebtedness with the net cash proceeds from an incurrence of
subordinated Permitted Refinancing Debt or the substantially concurrent sale
(other than to a Subsidiary of the Company) of Equity Interests of the
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Company (other than Disqualified Stock); provided that the amount of any such
net cash proceeds that are utilized for any such redemption, repurchase,
retirement or other acquisition shall be excluded from clause (c)(ii) of the
preceding paragraph; (5) the repurchase, redemption or other acquisition or
retirement for value of any Equity Interests of the Company or any Subsidiary of
the Company held by any of the Company's (or any of its Subsidiaries') employees
pursuant to any management equity subscription agreement or stock option
agreement in effect as of the date of the Indenture; provided that the aggregate
price paid for all such repurchased, redeemed, acquired or retired Equity
Interests shall not exceed $2 million in any twelve-month period; and provided
further that no Default or Event of Default shall have occurred and be
continuing immediately after such transaction; (6) the purchase, redemption or
other acquisition or retirement for value of any Equity Interests of the Company
(initially represented by stock options to acquire 204,500 shares of the
Company's common stock, which number will be adjusted in connection with the
Transaction) granted prior to the Acquisition and held by Messrs. Belden,
Mardick, Clements and Huff, which individuals elected not to dispose of such
Equity Interests in connection with the Acquisition; and (7) repurchases of
Equity Interests deemed to occur upon exercise of stock options if such Equity
Interests represent a portion of the exercise price of such options.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (as determined in good faith by a resolution of the Board of
Directors set forth in an Officers' Certificate delivered to the Trustee, which
determination shall be conclusive evidence of compliance with this provision) on
the date of the Restricted Payment of the asset(s) proposed to be transferred by
the Company or the applicable Restricted Subsidiary, as the case may be,
pursuant to the Restricted Payment. Not later than five days after the date of
making any Restricted Payment, the Company shall deliver to the Trustee an
Officers' Certificate stating that such Restricted Payment is permitted and
setting forth the basis upon which the calculations required by the covenant
"Restricted Payments" were computed.
Designation of Unrestricted Subsidiaries
The Board of Directors of the Company may designate any Restricted
Subsidiary to be an Unrestricted Subsidiary if such designation would not cause
a Default. For purposes of making such determination, all outstanding
Investments by the Company and its Restricted Subsidiaries (except to the extent
repaid in cash) in the Subsidiary so designated will be deemed to be Restricted
Payments at the time of such designation and will reduce the amount available
for Restricted Payments under clause (c) of the first paragraph of the covenant
"Restricted Payments." All such outstanding Investments will be deemed to
constitute Investments in an amount equal to the greater of the fair market
value or the book value of such Investments at the time of such designation.
Such designation will only be permitted if such Restricted Payment would be
permitted at such time and if such Restricted Subsidiary otherwise meets the
definition of an Unrestricted Subsidiary.
Incurrence of Indebtedness and Issuance of Disqualified Stock
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create, incur, issue,
assume, guarantee or otherwise become directly or indirectly liable,
contingently or otherwise, with respect to (collectively, "incur") any
Indebtedness and that the Company will not issue any Disqualified Stock and will
not permit any of its Restricted Subsidiaries to issue any shares of preferred
stock to any Person other than the Company or a Wholly Owned Restricted
Subsidiary of the Company; provided, however, that the Company and the
Subsidiary Guarantors may incur Indebtedness or issue shares of Disqualified
Stock if:
(i) the Fixed Charge Coverage Ratio for the Company's most recently
ended four full fiscal quarters for which internal financial statements are
available immediately preceding the date on which such additional
Indebtedness is incurred or such Disqualified Stock is issued would have
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been at least 2.5 to 1, determined on a pro forma basis as set forth in the
definition of Fixed Charge Coverage Ratio; and
(ii) no Default or Event of Default shall have occurred and be
continuing at the time such additional Indebtedness is incurred or such
Disqualified Stock is issued or would occur as a consequence of the
incurrence of the additional Indebtedness or the issuance of the
Disqualified Stock.
Notwithstanding the foregoing, the Indenture does not prohibit any of the
following (collectively, "Permitted Indebtedness"): (a) the Indebtedness
evidenced by the Notes; (b) the incurrence by the Company or any of its
Restricted Subsidiaries of Indebtedness pursuant to Credit Facilities, so long
as the aggregate principal amount of all Indebtedness outstanding under all
Credit Facilities does not, at any one time, exceed the greater of (i) $300
million and (ii) the Borrowing Base, provided that the Company may incur more
than $300 million of Indebtedness pursuant to Credit Facilities only if the
Fixed Charge Coverage Ratio for the Company's most recently ended four full
fiscal quarters for which internal financial statements are available would have
been at least 2.0 to 1, determined on a pro forma basis as set forth in the
definition of Fixed Charge Coverage Ratio; (c) the guarantee by any Subsidiary
Guarantor of any Indebtedness that is permitted by the Indenture to be incurred
by the Company; (d) all Indebtedness of the Company and its Restricted
Subsidiaries in existence as of the date of the Indenture; (e) intercompany
Indebtedness between or among the Company and any of its Wholly Owned Restricted
Subsidiaries; provided, however, that if the Company is the obligor on such
Indebtedness, (i) such Indebtedness is expressly subordinate to the payment in
full of all Obligations with respect to the Notes and (ii)(A) any subsequent
issuance or transfer of Equity Interests that results in any such Indebtedness
being held by a Person other than the Company or a Wholly Owned Restricted
Subsidiary and (B) any sale or other transfer of any such Indebtedness to a
Person that is not either the Company or a Wholly Owned Restricted Subsidiary
shall be deemed, in each case, to constitute an incurrence of such Indebtedness
by the Company or such Restricted Subsidiary, as the case may be; (f)
Indebtedness in connection with one or more standby letters of credit,
guarantees, performance bonds or other reimbursement obligations, in each case,
issued in the ordinary course of business and not in connection with the
borrowing of money or the obtaining of advances or credit (other than advances
or credit on open account, includible in current liabilities, for goods and
services in the ordinary course of business and on terms and conditions which
are customary in the Oil and Gas Business, and other than the extension of
credit represented by such letter of credit, guarantee or performance bond
itself), not to exceed in the aggregate at any given time 5% of Total Assets;
(g) Indebtedness under Interest Rate Hedging Agreements entered into for the
purpose of limiting interest rate risks, provided that the obligations under
such agreements are related to payment obligations on Indebtedness otherwise
permitted by the terms of this covenant and that the aggregate notional
principal amount of such agreements does not exceed 105% of the principal amount
of the Indebtedness to which such agreements relate; (h) Indebtedness under Oil
and Gas Hedging Contracts, provided that such contracts were entered into in the
ordinary course of business for the purpose of limiting risks that arise in the
ordinary course of business of the Company and its Restricted Subsidiaries; (i)
the incurrence by the Company of Indebtedness not otherwise permitted to be
incurred pursuant to this paragraph, provided that the aggregate principal
amount of all Indebtedness incurred pursuant to this clause (i), together with
all Permitted Refinancing Debt incurred pursuant to clause (j) of this paragraph
in respect of Indebtedness previously incurred pursuant to this clause (i), does
not exceed $15 million at any one time outstanding; (j) Permitted Refinancing
Debt incurred in exchange for, or the net proceeds of which are used to
refinance, extend, renew, replace, defease or refund, Indebtedness that was
permitted by the Indenture to be incurred (including Indebtedness previously
incurred pursuant to this clause (j), but excluding Indebtedness under clauses
(b), (c), (e), (f), (g), (h), (k), (l) and (m)); (k) accounts payable or other
obligations of the Company or any Restricted Subsidiary to trade creditors
created or assumed by the Company or such Restricted Subsidiary in the ordinary
course of business in connection with the obtaining of goods or services; (l)
Indebtedness consisting of
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obligations in respect of purchase price adjustments, guarantees or indemnities
in connection with the acquisition or disposition of assets; and (m) production
imbalances that do not, at any one time outstanding, exceed 2% of the Total
Assets of the Company.
The Indenture provides that the Company will not permit any Unrestricted
Subsidiary to incur any Indebtedness other than Non-Recourse Debt; provided,
however, if any such Indebtedness ceases to be Non-Recourse Debt, such event
shall be deemed to constitute an incurrence of Indebtedness by the Company.
No Layering
The Indenture provides that (i) the Company will not incur, create, issue,
assume, guarantee or otherwise become liable for any Indebtedness that is
subordinate or junior in right of payment to any Senior Debt and senior in any
respect in right of payment to the Notes and (ii) the Subsidiary Guarantors will
not directly or indirectly incur, create, issue, assume, guarantee or otherwise
become liable for any Indebtedness that is subordinate or junior in right of
payment to Senior Debt and senior in any respect in right of payment to the
Guarantees, provided, however, that the foregoing limitations will not apply to
distinctions between categories of Indebtedness that exist by reason of any
Liens arising or created in accordance with the provisions of the Indenture in
respect of some but not all such Indebtedness.
Liens
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, create, incur, assume or otherwise cause or
suffer to exist or become effective any Lien securing Indebtedness of any kind
(other than Permitted Liens) upon any of its property or assets, now owned or
hereafter acquired, unless all payments under the Notes are secured by such Lien
prior to, or on an equal and ratable basis with, the Indebtedness so secured for
so long as such Indebtedness is secured by such Lien.
Dividend and Other Payment Restrictions Affecting Restricted Subsidiaries
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, directly or indirectly, create or otherwise
cause or suffer to exist or become effective any encumbrance or restriction on
the ability of any Restricted Subsidiary to (i)(x) pay dividends or make any
other distributions to the Company or any of the Restricted Subsidiaries of the
Company (1) on its Capital Stock or (2) with respect to any other interest or
participation in, or measured by, its profits, or (y) pay any indebtedness owed
to the Company or any Restricted Subsidiaries of the Company, (ii) make loans or
advances to the Company or any Restricted Subsidiaries of the Company or (iii)
transfer any of its properties or assets to the Company or any Restricted
Subsidiaries of the Company, except for such encumbrances or restrictions
existing under or by reason of (a) the New Credit Agreement as in effect as of
the date of the Indenture, and any amendments, modifications, restatements,
renewals, increases, supplements, refundings, replacements or refinancings
thereof or any other Credit Facility, provided that such amendments,
modifications, restatements, renewals, increases, supplements, refundings,
replacements, refinancings or other Credit Facilities are no more restrictive
with respect to such dividend and other payment restrictions than those
contained in the New Credit Agreement as in effect on the date of the Indenture,
(b) the Indenture and the Notes, (c) applicable law, (d) any instrument
governing Indebtedness or Capital Stock of a Person acquired by the Company or
any of its Restricted Subsidiaries as in effect at the time of such acquisition
(except, in the case of Indebtedness, to the extent such Indebtedness was
incurred in connection with or in contemplation of such acquisition), which
encumbrance or restriction is not applicable to any Person, or the properties or
assets of any Person, other than the Person and its Subsidiaries, or the
property or assets of the Person and its Subsidiaries, so acquired, provided
that, such Indebtedness or Capital Stock was permitted by the terms of the
Indenture to be incurred, (e) by reason of customary non-assignment provisions
in
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leases entered into in the ordinary course of business, (f) purchase money
obligations for property acquired in the ordinary course of business that impose
restrictions of the nature described in clause (iii) above on the property so
acquired, (g) Permitted Refinancing Debt, provided that the restrictions
contained in the agreements governing such Permitted Refinancing Debt are no
more restrictive than those contained in the agreements governing the
Indebtedness being refinanced, (h) any other security agreement, instrument or
document relating to Senior Debt hereafter in effect, provided that such
encumbrances or restrictions are customary in connection with such documents and
that the terms and conditions of such encumbrances or restrictions are no more
restrictive than those encumbrances or restrictions imposed in connection with
the New Credit Agreement, (i) Permitted Liens or (j) customary provisions in
joint venture agreements and other similar agreements relating to the
distribution of revenues from such joint venture or other business venture.
Merger, Consolidation, or Sale of Assets
The Indenture provides that, except for the Transaction, the Company may
not consolidate or merge with or into (whether or not the Company is the
surviving corporation), or sell, assign, transfer, lease, convey or otherwise
dispose of all or substantially all of its properties or assets, in one or more
related transactions, to another Person, and the Company may not permit any of
its Restricted Subsidiaries to enter into any such transaction or series of
transactions if such transaction or series of transactions would, in the
aggregate, result in a sale, assignment, transfer, lease, conveyance, or other
disposition of all or substantially all of the properties or assets of the
Company to another Person unless (i) the Company is the surviving corporation or
the Person formed by or surviving any such consolidation or merger (if other
than the Company) or to which such sale, assignment, transfer, lease, conveyance
or other disposition shall have been made (the "Surviving Entity") is a
corporation organized or existing under the laws of the United States, any state
thereof or the District of Columbia; (ii) the Surviving Entity (if the Company
is not the continuing obligor under the Indenture) assumes all the obligations
of the Company under the Notes and the Indenture pursuant to a supplemental
indenture in a form reasonably satisfactory to the Trustee; (iii) immediately
before and after giving effect to such transaction or series of transactions no
Default or Event of Default exists; (iv) immediately after giving effect to such
transaction or series of transactions on a pro forma basis (and treating any
Indebtedness not previously an obligation of the Company and its Subsidiaries
which becomes the obligation of the Company or any of its Subsidiaries as a
result of such transaction as having been incurred at the time of such
transaction or series of transactions), the Consolidated Net Worth of the
Company and its Subsidiaries or the Surviving Entity (if the Company is not the
continuing obligor under the Indenture) is equal to or greater than the
Consolidated Net Worth of the Company and its Subsidiaries immediately prior to
such transaction or series of transactions; and (v) the Company or the Surviving
Entity (if the Company is not the continuing obligor under the Indenture) will,
at the time of such transaction or series of transactions and after giving pro
forma effect thereto as if such transaction or series of transactions had
occurred at the beginning of the applicable four-quarter period, be permitted to
incur at least $1.00 of additional Indebtedness pursuant to the test set forth
in the first paragraph of the covenant described above under the caption "--
Incurrence of Indebtedness and Issuance of Disqualified Stock." Each Subsidiary
Guarantor, if any, unless it is the other party to the transactions described
above, shall have confirmed by supplemental indenture that its Guarantee shall
apply to such Person's obligations under the Indenture and the Notes.
Notwithstanding the restrictions described in the foregoing clauses (iv) and
(v), any Restricted Subsidiary may consolidate with, merge into or transfer all
or part of its properties and assets to the Company, and any Wholly Owned
Restricted Subsidiary may consolidate with, merge into or transfer all or part
of its properties and assets to another Wholly Owned Restricted Subsidiary.
Further, notwithstanding the foregoing, the merger of the Company with an
Affiliate incorporated solely for the purpose of reincorporating the Company in
another jurisdiction shall be permitted. The foregoing provisions shall not
apply if the Company shall have elected to redeem the Notes prior to
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June 15, 2002, upon a Change of Control as permitted by the third paragraph of
"-- Optional Redemption" and such redemption takes place prior to or
simultaneously with the Company's consolidation or merger with or into another
Person.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Subsidiaries to, make any payment to, or sell, lease, transfer or
otherwise dispose of any of its properties or assets to, or purchase any
property or assets from, or enter into or make or amend any contract, agreement,
understanding, loan, advance or guarantee with, or for the benefit of, any of
its Affiliates (each of the foregoing, an "Affiliate Transaction"), unless (i)
such Affiliate Transaction is on terms that are no less favorable to the Company
or the relevant Subsidiary than those that would have been obtained in a
comparable transaction by the Company or such Subsidiary with an unrelated
Person and (ii) the Company delivers to the Trustee (a) with respect to any
Affiliate Transaction or series of related Affiliate Transactions involving
aggregate consideration in excess of $5 million, an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above, (b)
with respect to any Affiliate Transaction or series of related Affiliate
Transactions involving aggregate consideration in excess of $7.5 million, a
resolution of the Board of Directors set forth in an Officers' Certificate
certifying that such Affiliate Transaction complies with clause (i) above and
that such Affiliate Transaction has been approved in good faith by a majority of
the members of the Board of Directors who are disinterested with respect to such
Affiliate Transaction, which resolution shall be conclusive evidence of
compliance with this provision, and (c) with respect to any Affiliate
Transaction or series of related Affiliate Transactions involving aggregate
consideration in excess of $10 million, an Officer's Certificate as described in
clause (b) above and an opinion as to the fairness to the Company or such
Subsidiary of such Affiliate Transaction from a financial point of view issued
by an accounting, appraisal, engineering or investment banking firm of national
standing (for purposes of this clause (c) such opinion and the resolution
described in clause (b) above shall be conclusive evidence of compliance with
this provision); provided that the following shall not be deemed Affiliate
Transactions: (1) reasonable fees and compensation paid to (including issuances
and grant of securities and stock options), and employment agreements and stock
option and ownership plans for the benefit of, officers, directors, employees or
consultants of the Company or any Restricted Subsidiary of the Company as
determined in good faith by the Company's Board of Directors or senior
management; (2) payments made in connection with the Transaction, including fees
to TPG II, (3) the repurchase of shares of the Company's common stock obtainable
by Messrs. Belden, Mardick, Clements and Huff, pursuant to the exercise of stock
options to acquire 204,500 shares of the Company's common stock granted to such
individuals prior to the Acquisition, and which options such individuals elected
not to exercise or surrender in connection with the Acquisition, (4)
transactions between or among the Company and/or its Restricted Subsidiaries,
(5) Restricted Payments and Permitted Investments that are permitted by the
provisions of the Indenture described above under the caption "-- Restricted
Payments" and the definition of Permitted Investments, (6) indemnification
payments made to officers, directors and employees of the Company or its
Subsidiaries pursuant to charter, by-law, statutory or contractual provisions
and (7) any contracts, agreements or understandings (i) existing as of the date
of the Indenture or (ii) entered into pursuant to the terms of the Merger
Agreement and described in this Prospectus including, without limitation, the
Transaction Advisory Agreement, or any amendment thereto or any transaction
contemplated thereby (including pursuant to any amendment thereto or any
replacement agreement thereto so long as any such amendment or replacement
agreement is not more disadvantageous to the holders of the Notes in any
material respect than the original agreement as in effect on the date of the
Indenture).
Additional Subsidiary Guarantees
The Indenture provides that if the Company or any of its Restricted
Subsidiaries shall acquire or create another Restricted Subsidiary after the
date of the Indenture, then such newly acquired or
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created Restricted Subsidiary will be required to execute a Guarantee and
deliver an opinion of counsel, in accordance with the terms of the Indenture.
Business Activities
The Company will not, and will not permit any Restricted Subsidiary to,
engage in any material respect in any business other than the Oil and Gas
Business.
Commission Reports
Notwithstanding that the Company may not be required to remain subject to
the reporting requirements of Section 13 or 15(d) of the Exchange Act, to the
extent permitted by the Exchange Act the Company will file with the Commission
and provide, within 15 days after such filing, the Trustee and Holders and
prospective Holders (upon request) with the annual reports and the information,
documents and other reports which are specified in Sections 13 and 15(d) of the
Exchange Act. In the event that the Company is not permitted to file such
reports, documents and information with the Commission, the Company will provide
substantially similar information to the Trustee, the Holders, and prospective
Holders (upon request) as if the Company were subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act within 15 days of the
date the Company would have been obligated to file such reports with the
Commission, were the Company permitted to file such reports with the Commission.
The Company also will comply with the other provisions of Section 314(a) of the
Trust Indenture Act.
EVENTS OF DEFAULT AND REMEDIES
The Indenture provides that each of the following constitutes an Event of
Default: (i) a default for 30 days in the payment when due of interest on the
Notes (whether or not prohibited by the subordination provisions of the
Indenture); (ii) a default in payment when due of the principal of or premium,
if any, on the Notes (whether or not prohibited by the subordination provisions
of the Indenture); (iii) the failure by the Company to comply with its
obligations under "Certain Covenants -- Merger, Consolidation, or Sale of
Assets" above; (iv) the failure by the Company for 30 days after notice from the
Trustee or the Holders of at least 25% in aggregate principal amount of the
Notes then outstanding to comply with the provisions described under the
captions "Repurchase at the Option of Holders" and "Certain Covenants" other
than the provisions described under "-- Merger, Consolidation or Sale of
Assets"; (v) failure by the Company for 60 days after notice from the Trustee or
the Holders of at least 25% in aggregate principal amount of the Notes then
outstanding to comply with any of its other agreements in the Indenture or the
Notes; (vi) except as permitted by the Indenture, any Guarantee shall be held in
any judicial proceeding to be unenforceable or invalid or shall cease for any
reason to be in full force and effect or a Significant Subsidiary, or any Person
acting on behalf of such Significant Subsidiary, shall deny or disaffirm its
obligations under its Guarantee; (vii) 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 for money borrowed by the Company or any of its
Significant Subsidiaries (or the payment of which is guaranteed by the Company
or any of its Significant Subsidiaries) whether such Indebtedness or guarantee
now exists, or is created after the date of the Indenture, which default (a) is
caused by a failure to pay principal of such Indebtedness prior to the
expiration of the grace period provided in such Indebtedness on the date of such
default (a "Payment Default") or (b) 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 is then existing a Payment Default or the
maturity of which has been so accelerated, aggregates $10 million or more;
(viii) the failure by the Company or any of its Subsidiaries to pay final,
non-appealable judgments aggregating in excess of $10 million, which judgments
remain unpaid or discharged for a period of 60 days; and (ix) certain events of
bankruptcy or insolvency with respect to the Company or any of its Significant
Subsidiaries.
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If any Event of Default occurs and is continuing, the Trustee or the
Holders of at least 25% in principal amount of the Notes then outstanding may
declare the principal of and accrued but unpaid interest on such Notes to be due
and payable immediately. Notwithstanding the foregoing, in the case of an Event
of Default arising from certain events of bankruptcy or insolvency, with respect
to the Company or any Significant Subsidiary, all outstanding Notes will become
due and payable without further action or notice. Holders of the Notes may not
enforce the Indenture or the Notes except as provided in the Indenture. Subject
to certain limitations, Holders of a majority in principal amount of the Notes
then outstanding may direct the Trustee in its exercise of any trust or power.
The Trustee may withhold from Holders of the Notes notice of any continuing
Default or Event of Default (except a Default or Event of Default relating to
the payment of principal or interest) if it determines that withholding notice
is in their interest.
The Holders of a majority in aggregate principal amount of the Notes then
outstanding by notice to the Trustee may on behalf of the Holders of all of the
Notes waive any existing Default or Event of Default and its consequences under
the Indenture except a continuing Default or Event of Default in the payment of
interest or premium on, or the principal of, the Notes.
The Company is required to deliver to the Trustee annually a statement
regarding compliance with the Indenture, and the Company is required, within
five business days of becoming aware of any Default or Event of Default, to
deliver to the Trustee a statement specifying such Default or Event of Default.
LEGAL DEFEASANCE AND COVENANT DEFEASANCE
The Company may, at its option and at any time, elect to have all of its
and the Subsidiary Guarantors' obligations discharged with respect to the
outstanding Notes ("Legal Defeasance") except for (i) the rights of Holders of
such outstanding Notes to receive payments in respect of the principal of,
premium, if any, or interest on such Notes when such payments are due from the
trust referred to below, (ii) the Company's obligations with respect to such
Notes concerning issuing temporary Notes, registration of such Notes, mutilated,
destroyed, lost or stolen Notes and the maintenance of an office or agency for
payments, (iii) the rights, powers, trusts, duties and immunities of the
Trustee, and the Company's obligations in connection therewith and (iv) the
Legal Defeasance provisions of the Indenture. In addition, the Company may, at
its option and at any time, elect to have the obligations of the Company
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. In the event
Covenant Defeasance occurs, certain events (not including non-payment,
bankruptcy, receivership, rehabilitation and insolvency events) described under
"Events of Default and Remedies" will no longer constitute an Event of Default.
In order to exercise either Legal Defeasance or Covenant Defeasance, (i)
the Company must irrevocably deposit with the Trustee, in trust, for the benefit
of the Holders of the Notes, cash in U.S. dollars, non-callable Government
Securities, 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 outstanding Notes
on the stated maturity or on the applicable redemption date, as the case may be,
and the Company must specify whether the Notes are being defeased to maturity or
to a particular redemption date; (ii) 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 such Trustee confirming that (A) the Company has
received from, or there has been published by, the Internal Revenue Service a
ruling or (B) 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 of the
outstanding Notes 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
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not occurred; (iii) 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 such Trustee confirming that the Holders of the outstanding Notes
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; (iv) no Default or Event
of Default shall have occurred and be continuing on the date of such deposit
(other than a Default or Event of Default resulting from the borrowing of funds
to be applied to 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; (v) such Legal Defeasance or Covenant Defeasance
will not result in a breach or violation of, or constitute a default under, any
material agreement or instrument (other than the Indenture) to which the Company
or any of its Subsidiaries is a party or by which the Company or any of its
Subsidiaries is bound; (vi) the Company must 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; (vii) the Company must deliver to the Trustee an Officers'
Certificate stating that the deposit was not made by the Company with the intent
of preferring the Holders of the Notes over the other creditors of the Company,
or with the intent of defeating, hindering, delaying or defrauding creditors of
the Company or others; and (viii) the Company must deliver to the Trustee an
Officers' Certificate and an opinion of counsel, each stating that all
conditions precedent provided for relating to the Legal Defeasance or the
Covenant Defeasance have been complied with.
TRANSFER AND EXCHANGE
A Holder may transfer or exchange the Exchange Notes in accordance with the
Indenture. The Registrar and the Trustee may require a Holder, among other
things, to furnish appropriate endorsements and transfer documents and the
Company may require a Holder to pay any taxes and fees required by law or
permitted by the Indenture. The Company is not required to transfer or exchange
any Exchange Note selected for redemption. Also, the Company is not required to
transfer or exchange any Exchange Note for a period of 15 days before a
selection of the Notes to be redeemed.
The registered Holder of an Exchange Note will be treated as the owner of
it for all purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as described in the next two succeeding paragraphs, the Indenture,
the Notes or the Guarantees may be amended or supplemented with the consent of
the Holders of at least a majority in principal amount of the Notes then
outstanding (including, without limitation, consents obtained in connection with
a purchase of, or tender offer or exchange offer for, the Notes), and any
existing default or compliance with any provision of the Indenture or the Notes
or the Guarantees may be waived with the consent of the Holders of a majority in
principal amount of the then outstanding Notes (including consents obtained in
connection with a tender offer or exchange offer for the Notes).
Without the consent of each Holder affected, an amendment or waiver may not
(with respect to any Notes held by a nonconsenting Holder): (i) reduce the
principal amount of the Notes whose Holders must consent to an amendment,
supplement or waiver, (ii) reduce the principal of or change the fixed maturity
of any Note or alter the provisions with respect to the redemption of the Notes
as described above under "Optional Redemption" or "Repurchase at the Option of
Holders", (iii) reduce the rate of or change the time for payment of interest on
any Note, (iv) waive a Default or Event of Default in the payment of principal
of the Notes (except a rescission of acceleration of the Notes by the Holders of
at least a majority in principal amount of such Notes and a waiver of the
payment default that resulted from such acceleration), (v) make any Note payable
in money other
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than that stated in the Notes, (vi) make any change in the provisions of the
Indenture relating to waivers of past Defaults or the rights of Holders of the
Notes to receive payments of principal of or premium, if any, or interest on the
Notes or (vii) make any change in the foregoing amendment and waiver provisions.
In addition, any amendment to the provisions of Article 10 of the Indenture
(which relate to subordination) will require the consent of the Holders of at
least 66 2/3% in principal amount of the Notes then outstanding if such
amendment would adversely affect the rights of Holders of such Notes. However,
no amendment may be made to the subordination provisions of the Indenture that
adversely affects the rights of any holder of Senior Debt then outstanding
unless the holders of such Senior Debt (or any group or representative thereof
authorized to give a consent) consent to such change.
Notwithstanding the foregoing, without the consent of any Holder of the
Notes the Company and the Trustee may amend or supplement the Indenture or the
Notes to cure any ambiguity, defect or inconsistency, to provide for
uncertificated Notes in addition to or in place of certificated Notes (provided,
however, that the uncertificated Notes are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to
provide for the assumption of the Company's obligations to Holders of the Notes
in the case of a merger or consolidation, to make any change that would provide
any additional rights or benefits to the Holders of the Notes or that does not
adversely affect the legal rights under the Indenture of any such Holder, or to
comply with requirements of the Commission in order to effect or maintain the
qualification of the Indenture under the Trust Indenture Act.
CONCERNING THE TRUSTEE
The Indenture contains certain limitations on the rights of the Trustee,
should it become a creditor of the Company, to obtain payment of claims in
certain cases, or to realize on certain property received in respect of any such
claim as security or otherwise. The Trustee will be permitted to engage in other
transactions; however, if it acquires any conflicting interest, it must
eliminate such conflict within 90 days, apply to the Commission for permission
to continue or resign.
The Holders of a majority in principal amount of the then outstanding Notes
will have the right to direct the time, method and place of conducting any
proceeding for exercising any remedy available to the Trustee, subject to
certain exceptions. The Indenture provides that in case an Event of Default
shall occur (which shall not be cured), the Trustee will be required, in the
exercise of its power, to use the degree of care of a prudent man in the conduct
of his own affairs. Subject to such provisions, the Trustee will be under no
obligation to exercise any of its rights or powers under the Indenture at the
request of any Holder of the Notes, unless such Holder shall have offered to
such Trustee security and indemnity satisfactory to it against any loss,
liability or expense.
GOVERNING LAW
The Indenture, the Notes and the Guarantees provide that they will be
governed by the laws of the State of New York.
BOOK-ENTRY, DELIVERY AND FORM
Except as set forth below, the Exchange Notes will be issued in the form of
one or more fully registered Global Notes (each, a "Global Note"). Each Global
Note will be deposited with, or on behalf of, The Depository Trust Company, New
York, New York (the "Depositary") and registered in the name of Cede & Co., as
nominee of the Depositary or will remain in the custody of the Trustee pursuant
to the FAST Balance Certificate Agreement between DTC and the Trustee.
The Depository has advised the Company that it is (i) a limited purpose
trust company organized under the laws of the State of New York, (ii) a member
of the Federal Reserve System, (iii) a "clearing corporation" within the meaning
of the Uniform Commercial Code, as amended, and
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(iv) a "Clearing Agency" registered pursuant to Section 17A of the Exchange Act.
The Depository was created to hold securities for its participants
(collectively, the "Participants") and facilitates the clearance and settlement
of securities transactions between Participants through electronic book entry
changes to the accounts of its Participants, thereby eliminating the need for
physical transfer and delivery of certificates. The Depository's Participants
include securities brokers and dealers (including the Initial Purchaser), banks
and trust companies, clearing corporations and certain other organizations.
Access to the Depository's system is also available to other entities such as
banks, brokers, dealers and trust companies (collectively, the "Indirect
Participants") that clear through or maintain a custodial relationship with a
Participant, either directly or indirectly.
So long as the Depository or its nominee is the registered owner of the
Global Note, the Depository or such nominee, as the case may be, will be
considered the sole owner or Holder of the Exchange Notes represented by the
Global Note for all purposes under the Indenture. Except as provided below,
owners of beneficial interests in a Global Note will not be entitled to have
Exchange Notes represented by such Global Note registered in their names, will
not receive or be entitled to receive physical delivery of Certificated
Securities, and will not be considered the owners or holders thereof under the
Indenture for any purpose, including with respect to giving of any directions,
instruction or approval to the Trustee thereunder. As a result, the ability of a
person having a beneficial interest in Exchange Notes represented by a Global
Note to pledge such interest to persons or entities that do not participate in
the Depository's system or to otherwise take action with respect to such
interest, may be affected by the lack of a physical certificate evidencing such
interest.
Accordingly, each owner of a beneficial interest in a Global Note must rely
on the procedures of the Depository and, if such owner is not a Participant or
an Indirect Participant, on the procedures of the Participant through which such
owner owns its interest, to exercise any rights of a Holder under the Indenture
or such Global Note. The Company understands that under existing industry
practice, in the event the Company requests any action of holders or an owner of
a beneficial interest in a Global Note desires to take any action that the
Depository, as the Holder of such Global Note, is entitled to take, the
Depository would authorize the Participants to take such action and the
Participant would authorize such owner owning through such Participants to take
such action or would otherwise act upon the instruction of such owner. Neither
the Company nor the Trustee will have any responsibility or liability for any
aspect of the records relating to or payments made on account of Notes by the
Depository, or for maintaining, supervising or reviewing any records of the
Depository relating to such Notes.
Payments with respect to the principal of, premium, if any, and interest on
any Exchange Notes represented by a Global Note registered in the name of the
Depository or its nominee on the applicable record date will be payable by the
Trustee to or at the direction of the Depository or its nominee in its capacity
as the registered Holder of the Global Note representing such Notes under the
Indenture. Under the terms of the Indenture, the Company and the Trustee may
treat the persons in whose names the Exchange Notes, including the Global Notes,
are registered as the owners thereof for the purpose of receiving such payment
and for any and all other purposes whatsoever. Consequently, neither the Company
nor the Trustee has or will have any responsibility or liability for the payment
of such amounts to beneficial owners of Exchange Notes (including principal,
premium, if any, and interest), or to immediately credit the accounts of the
relevant Participants with such payment, in amounts proportionate to their
respective holdings in the principal amount of the beneficial interest in the
Global Note as shown on the records of the Depository. Payments by the
Participants and the Indirect Participants to the beneficial owners of Exchange
Notes will be governed by standing instructions and customary practice and will
be the responsibility of the Participants or the Indirect Participants.
The Company expects that pursuant to procedures established by the
Depository (i) upon deposit of the Global Notes, the Depository will credit the
accounts of Participants designated by the Initial Purchaser with an interest in
the Global Note and (ii) ownership of the Exchange Notes will be
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shown on, and the transfer of ownership thereof will be effected only through,
records maintained by the Depository (with respect to the interest of
Participants), the Participants and the Indirect Participants. The laws of some
states require that certain persons take physical delivery in definitive form of
securities that they own and that security interests in negotiable instruments
can only be perfected by delivery of certificates representing the instruments.
Consequently, the ability to transfer Exchange Notes or to pledge the Exchange
Notes as collateral will be limited to such extent.
CERTIFICATED SECURITIES
If (i) the Company notifies the Trustee in writing that the Depository is
no longer willing or able to act as a depository and the Company is unable to
locate a qualified successor within 90 days, (ii) the Company, at its option,
notifies the Trustee in writing that it elects to cause the issuance of Exchange
Notes in definitive form under the Indenture, or (iii) upon the occurrence of
certain other events, then, upon surrender by the Depository of its Global
Notes, Certificated Securities will be issued to each person that the Depository
identifies as the beneficial owner of the Exchange Notes represented by the
Global Note. In addition, subject to certain conditions, any person having a
beneficial interest in a Global Note may, upon request to the Trustee, exchange
such beneficial interest for Certificated Securities. Upon any such issuance,
the Trustee is required to register such Certificated Securities in the name of
such person or persons (or the nominee of any thereof), and cause the same to be
delivered thereto.
Neither the Company nor the Trustee shall be liable for any delay by the
Depository or any Participant or Indirect Participant in identifying the
beneficial owners of the related Exchange Notes and each such person may
conclusively rely on, and shall be protected in relying on, instructions from
the Depository for all purposes (including with respect to the registration and
delivery, and the respective principal amounts, of the Notes to be issued).
SAME-DAY SETTLEMENT AND PAYMENT
Settlement for the Exchange Notes will be made in immediately available
funds. So long as the Exchange Notes are represented by a permanent Global Note
or Notes, all payments of principal, premium, if any, and interest will be made
by the Company in immediately available funds.
Secondary trading in long-term notes and debentures of corporate issuers is
generally settled in clearing-house or next-day funds. So long as the Exchange
Notes are represented by a permanent Global Note or Notes registered in the name
of the Depositary or its nominee, the Notes will trade in the Depositary's
Same-Day Funds Settlement System, and secondary market trading activity in the
Notes will therefore be required by the Depositary to settle in immediately
available funds. No assurance can be given as to the effect, if any, of
settlement in immediately available funds on the trading activity in the Notes.
CERTAIN DEFINITIONS
Set forth below are certain defined terms used in the Indenture. Reference
is made to the Indenture for a full definition of all such terms, as well as any
other capitalized terms used herein for which no definition is provided.
"Acquired Debt" means, with respect to any specified Person, (i)
Indebtedness of any other Person existing at the time such other Person is
merged with or into or becomes a Subsidiary of such specified Person, including,
without limitation, Indebtedness incurred in connection with, or in
contemplation of, such other Person merging with or into or becoming a
Subsidiary of such specified Person, and (ii) Indebtedness secured by a Lien
encumbering any asset acquired by such specified Person.
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"Affiliate" of any specified Person means any other Person directly or
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person. For purposes of this definition, "control"
(including, with correlative meanings, the terms "controlling," "controlled by"
and "under common control with"), as used with respect to any Person, shall mean
the possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise.
"Applicable Premium" means, with respect to a Note at the redemption date,
the greater of (i) 1% of the principal amount of such Note and (ii) the excess
of (A) the present value at such time of (1) the redemption price of such Note
at June 15, 2002 (such redemption price being described under "-- Optional
Redemption"), plus (2) all required interest payments (excluding accrued but
unpaid interest) due on such Note through June 15, 2002, computed using a
discount rate equal to the Treasury Rate plus 75 basis points, over (B) the
then-outstanding principal amount of such Note.
"Asset Sale" means (i) the sale, lease, conveyance or other disposition by
the Company or any of its Restricted Subsidiaries (but excluding the creation of
a Lien) of any assets including, without limitation, by way of a sale and
leaseback (provided that the sale, lease, conveyance or other disposition of all
or substantially all of the assets of the Company and its Subsidiaries taken as
a whole will be governed by the provisions of the Indenture described above
under the caption "-- Repurchase at the Option of Holders -- Change of Control"
and/or the provisions described above under the caption "-- Certain
Covenants -- Merger, Consolidation, or Sale of Assets" and not by the provisions
described above under "-- Repurchase at the Option of Holders -- Asset Sales"),
and (ii) the issue or sale by the Company or any of its Restricted Subsidiaries
of Equity Interests of any of the Company's Subsidiaries (including the sale by
the Company or a Restricted Subsidiary of Equity Interests in an Unrestricted
Subsidiary), in the case of either clause (i) or (ii), whether in a single
transaction or a series of related transactions (a) that have a fair market
value in excess of $5 million or (b) for net proceeds in excess of $5 million.
Notwithstanding the foregoing, the following shall not be deemed to be Asset
Sales: (i) a transfer of assets by the Company to a Wholly Owned Restricted
Subsidiary of the Company or by a Wholly Owned Restricted Subsidiary of the
Company to the Company or to another Wholly Owned Restricted Subsidiary of the
Company, (ii) an issuance of Equity Interests by a Wholly Owned Restricted
Subsidiary of the Company to the Company or to another Wholly Owned Restricted
Subsidiary of the Company, (iii) the making of a Restricted Payment or Permitted
Investment that is permitted by the covenant described above under the caption
"-- Certain Covenants -- Restricted Payments," (iv) the abandonment, farm-out,
lease or sublease of undeveloped oil and gas properties in the ordinary course
of business, (v) the trade or exchange by the Company or any Restricted
Subsidiary of the Company of any oil and gas property or interest therein owned
or held by the Company or such Restricted Subsidiary for any oil and gas
property or interest therein owned or held by another Person, including any cash
or Cash Equivalents necessary in order to achieve an exchange of equivalent
value; provided that any such cash or Cash Equivalents received by the Company
or such Restricted Subsidiary will be subject to the provisions described in the
second and third paragraphs under "-- Asset Sales," which the Board of Directors
of the Company determine in good faith to be of approximately equivalent value,
(vi) the sale or transfer of hydrocarbons or other mineral products or surplus
or obsolete equipment in the ordinary course of business or (vii) the sale of
oil and gas properties in connection with tax credit transactions complying with
sec. 29 of the Code.
"Attributable Debt" in respect of a sale and leaseback transaction means,
at the time of determination, the present value (discounted at the rate of
interest implicit in such transaction, determined in accordance with GAAP) of
the obligation of the lessee for net rental payments during the remaining term
of the lease included in such sale and leaseback transaction (including any
period for which such lease has been extended or may, at the option of the
lessor, be extended to
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the extent the lease payments during such extension period are required to be
capitalized on a balance sheet in accordance with GAAP).
"Borrowing Base" means, as of any date, the lesser of (i) $600 million or
(ii) the aggregate amount of borrowing availability as of such date under all
Credit Facilities that determine availability on the basis of a borrowing base
or other asset-based calculation.
"Capital Lease Obligation" means, at the time any determination thereof is
to be made, the amount of the liability in respect of a capital lease that would
at such time be required to be capitalized on a balance sheet in accordance with
GAAP.
"Capital Stock" means (i) in the case of a corporation, corporate stock,
(ii) in the case of an association or business entity, any and all shares,
interests, participations, rights or other equivalents (however designated) of
corporate stock, (iii) in the case of a partnership, partnership interests
(whether general or limited), (iv) in the case of a limited liability company or
similar entity, any membership or similar interests therein and (v) any other
interest or participation that confers on a Person the right to receive a share
of the profits and losses of, or distributions of assets of, the issuing Person.
"Cash Equivalents" means (i) United States dollars, (ii) securities issued
or directly and fully guaranteed or insured by the United States government or
any agency or instrumentality thereof having maturities of not more than one
year from the date of acquisition, (iii) certificates of deposit and eurodollar
time deposits with maturities of one year or less from the date of acquisition,
bankers' acceptances with maturities not exceeding one year and overnight bank
deposits, in each case with any lender party to the New Credit Agreement or with
any domestic commercial bank having capital and surplus in excess of $500
million, (iv) repurchase obligations with a term of not more than seven days for
underlying securities of the types described in clauses (ii) and (iii) above
entered into with any financial institution meeting the qualifications specified
in clause (iii) above, (v) commercial paper having a rating of at least P1 from
Moody's Investors Service, Inc. (or its successor) or a rating of at least A1
from Standard & Poor's Ratings Services (or its successor) and (vi) investments
in money market or other mutual funds substantially all of whose assets comprise
securities of types described in clauses (ii) through (v) above.
"Change of Control" means the occurrence of any of the following:
(i) prior to the first public offering of Voting Stock of the Company,
either (x) Permitted Holders cease to be the "beneficial owner(s)" (as
defined in Rules 13d-3 and 13d-5 under the Exchange Act), directly or
indirectly, of more than 35% of the total voting power of the Voting Stock
of the Company, or (y) Permitted Holders cease to be entitled by voting
power, contract or otherwise to elect or cause the election of directors of
the Company having a majority of the total voting power of the Board or
Directors, in each case, whether as a result of issuance of securities of
the Company, any merger, consolidation, liquidation or dissolution of the
Company, any direct or indirect transfer of securities by any Permitted
Holder or otherwise (for purposes of this clause (i) and clause (ii) below,
Permitted Holders shall be deemed to beneficially own any Voting Stock of
an entity (the "specified entity") held by any other entity (the "parent
entity") so long as the Permitted Holders beneficially own, directly or
indirectly, a majority of the Voting Stock of the parent entity;
(ii) following the first public offering of Voting Stock of the
Company, any "Person"(as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than one or more Permitted Holders, is or becomes
the beneficial owner (as defined in clause (i) above, except that a Person
shall be deemed to have "beneficial ownership" of all shares that any such
Person has the right to acquire within one year), directly or indirectly,
of more than 50% of the Voting Stock of the Company; provided that the
Permitted Holders beneficially own (as defined in clause (i) above),
directly or indirectly, in the aggregate a lesser percentage of the Voting
Stock of the Company than such other Person and do not have the right or
ability by voting
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power, contract or otherwise to elect or designate for election a majority
of the Board of Directors;
(iii) the sale, lease, transfer, conveyance or other disposition
(other than by way of merger or consolidation), in one or a series of
related transactions, of all or substantially all of the assets of the
Company and its Subsidiaries taken as a whole to any "Person" or group of
related Persons (a "Group") (as such term is used in Sections 13(d) and
14(d) of the Exchange Act) other than a Permitted Holder;
(iv) the adoption of a plan relating to the liquidation or dissolution
of the Company; and
(v) during any period of two consecutive years, individuals who at the
beginning of such period constituted the Board of Directors (together with
any new directors whose election by such Board of Directors or whose
nomination for election by the shareholders of the Company was approved by
a vote of a majority of the directors of the Company then still in office
who were either directors at the beginning of such period or whose election
or nomination for election was previously so approved) cease for any reason
to constitute a majority of the Board of Directors then in office.
"Commission" means the Securities and Exchange Commission.
"Consolidated Cash Flow" means, with respect to any Person for any period,
the Consolidated Net Income of such Person and its Restricted Subsidiaries for
such period plus (i) an amount equal to any extraordinary or non-recurring loss,
and any net loss realized in connection with (a) an Asset Sale (together with
any related provision for taxes) and (b) the disposition of any securities by
such Person or any of its Restricted Subsidiaries or the extinguishment of any
Indebtedness of such Person or any of its Restricted Subsidiaries, to the extent
such losses were included in computing such Consolidated Net Income, plus (ii)
provision for taxes based on income or profits of such Person and its Restricted
Subsidiaries for such period, to the extent that such provision for taxes was
included in computing such Consolidated Net Income, plus (iii) consolidated
interest expense of such Person and its Restricted Subsidiaries for such period,
whether paid or accrued (including, without limitation, amortization of original
issue discount, non-cash interest payments, the interest component of any
deferred payment obligations, the interest component of all payments associated
with Capital Lease Obligations, imputed interest with respect to Attributable
Debt, commissions, discounts and other fees and charges incurred in respect of
letters of credit or bankers' acceptance financings, and net payments (if any)
pursuant to Interest Rate Hedging Agreements), to the extent that any such
expense was included in computing such Consolidated Net Income, plus (iv)
depreciation, depletion and amortization expenses (including amortization of
goodwill and other intangibles) for such Person and its Restricted Subsidiaries
for such period to the extent that such depreciation, depletion and amortization
expenses were included in computing such Consolidated Net Income, plus (v)
exploration expenses for such Person and its Restricted Subsidiaries for such
period to the extent such exploration expenses were included in computing such
Consolidated Net Income, plus (vi) costs incurred in connection with
acquisitions that would be eligible for capitalization treatment under GAAP, but
have been expensed at the time of incurrence, plus (vii) other non-cash charges
(excluding any such non-cash charge to the extent that it represents an accrual
of or reserve for cash charges in any future period or amortization of a prepaid
cash expense that was paid in a prior period) of such Person and its Restricted
Subsidiaries for such period to the extent that such other non-cash charges were
included in computing such Consolidated Net Income, in each case, on a
consolidated basis and determined in accordance with GAAP. Notwithstanding the
foregoing, the provision for taxes on the income or profits of, and the
depreciation, depletion and amortization and other non-cash charges and expenses
of, a Restricted Subsidiary of the relevant Person shall be added to
Consolidated Net Income to compute Consolidated Cash Flow only to the extent
(and in the same proportion) that the Net Income of such Restricted Subsidiary
was included in calculating the Consolidated Net Income of such Person and only
if a corresponding amount would be permitted at the date of determination to be
dividended to
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such Person by such Restricted Subsidiary without prior governmental approval
(that has not been obtained), and without direct or indirect restriction
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to that
Restricted Subsidiary or its stockholders.
"Consolidated Net Income" means, with respect to any Person for any period,
the aggregate of the Net Income of such Person and its Restricted Subsidiaries
for such period, on a consolidated basis, determined in accordance with GAAP;
provided that (i) the Net Income (but not loss) of any Person that is not a
Restricted Subsidiary or that is accounted for by the equity method of
accounting shall be included only to the extent of the amount of dividends or
distributions paid in cash to the referent Person or a Wholly Owned Restricted
Subsidiary thereof, (ii) the Net Income of any Restricted Subsidiary shall be
excluded to the extent that the declaration or payment of dividends or similar
distributions by that Restricted Subsidiary of that Net Income is not at the
date of determination permitted without any prior governmental approval (that
has not been obtained) or, directly or indirectly, by operation of the terms of
its charter or any agreement, instrument, judgment, decree, order, statute, rule
or governmental regulation applicable to that Restricted Subsidiary or its
stockholders, (iii) the Net Income of any Person acquired in a pooling of
interests transaction for any period prior to the date of such acquisition shall
be excluded and (iv) the cumulative effect of a change in accounting principles
shall be excluded.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Restricted Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of the
most recent fiscal quarter of the Company ending prior to the taking of any
action for the purpose of which the determination is being made and for which
financial statements are available (but in no event ending more than 135 days
prior to the taking of such action), as (i) the par or stated value of all
outstanding Capital Stock of the Company, plus (ii) paid-in capital or capital
surplus relating to such Capital Stock plus (iii) any retained earnings or
earned surplus less (A) any accumulated deficit (in each case excluding any
minority interest) and (B) any amounts attributable to Disqualified Stock.
"Credit Facilities" means, with respect to the Company, one or more debt
facilities (including, without limitation, the New Credit Agreement) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, production payments, receivables
financing (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
Indebtedness under Credit Facilities outstanding on the date on which the Notes
are first issued and authenticated under the Indenture (after giving effect to
the use of proceeds thereof) shall be deemed to have been incurred on such date
in reliance on the exception provided by clause (b) of the definition of
Permitted Indebtedness.
"Default" means any event that is or with the passage of time or the giving
of notice or both would be an Event of Default.
"Designated Senior Debt" means (i) the New Credit Agreement and (ii) any
other Senior Debt permitted under the Indenture which, at the date of
determination, has an aggregate principal amount outstanding of, or under which,
at the date of determination, the holders thereof are committed to lend up to,
at least $25 million and is specifically designated by the Company in the
instrument evidencing or governing such Senior Debt as "Designated Senior Debt"
for purposes of the Indenture.
"Disqualified Stock" means any Capital Stock that, 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 for any consideration other than Capital Stock, pursuant to a sinking
fund obligation or otherwise, is convertible or is exchangeable for Indebtedness
or Disqualified Stock or redeemable for any consideration other than Capital
Stock at the option of the
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holder thereof, in whole or in part, in each case on or prior to the date that
is 91 days after (x) the date on which the Notes mature or (y) on which there
are no Notes outstanding.
"Dollar-Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Equity Interests" means Capital Stock and all warrants, options or other
rights to acquire Capital Stock (but excluding any debt security that is
convertible into, or exchangeable for, Capital Stock).
"Fixed Charges" means, with respect to any Person for any period, the sum,
without duplication, of (i) the consolidated interest expense of such Person and
its Restricted Subsidiaries for such period, whether paid or accrued (including,
without limitation, amortization of original issue discount, non-cash interest
payments, the interest component of any deferred payment obligations, the
interest component of all payments associated with Capital Lease Obligations,
imputed interest with respect to Attributable Debt, commissions, discounts and
other fees and charges incurred in respect of letter of credit or bankers'
acceptance financings, and net payments (if any) pursuant to Interest Rate
Hedging Agreements), (ii) the consolidated interest expense of such Person and
its Restricted Subsidiaries that was capitalized during such period, (iii) any
interest expense on Indebtedness of another Person that is guaranteed by such
Person or any of its Restricted Subsidiaries or secured by a Lien on assets of
such Person or any of its Restricted Subsidiaries (whether or not such guarantee
or Lien is called upon) and (iv) the product of (a) all cash dividend payments
(and non-cash dividend payments in the case of a Person that is a Restricted
Subsidiary, unless paid in Equity Interests that are not Disqualified Stock) on
any series of preferred stock of such Person or any of its Restricted
Subsidiaries, times (b) a fraction, the numerator of which is one and the
denominator of which is one minus the then current combined federal, state and
local statutory tax rate of such Person, expressed as a decimal, in each case,
on a consolidated basis and in accordance with GAAP. Notwithstanding the
foregoing, when calculating the amount of Fixed Charges, any interest expense
attributable to any Person shall be included in such calculation to the same
extent the Net Income of such Person was included in the calculation of
Consolidated Net Income in connection with calculating the Fixed Charge Coverage
Ratio.
"Fixed Charge Coverage Ratio" means with respect to any Person for any
period, the ratio of the Consolidated Cash Flow of such Person for such period
to the Fixed Charges of such Person for such period. In the event that the
Company or any of its Restricted Subsidiaries incurs, assumes, guarantees or
redeems any Indebtedness (other than revolving credit borrowings) or issues or
redeems preferred stock subsequent to the commencement of the period for which
the Fixed Charge Coverage Ratio is being calculated but prior to the date on
which the calculation of the Fixed Charge Coverage Ratio is made (the
"Calculation Date"), then the Fixed Charge Coverage Ratio shall be calculated
giving pro forma effect to such incurrence, assumption, guarantee or redemption
of Indebtedness, or such issuance or redemption of preferred stock, as if the
same had occurred at the beginning of the applicable four-quarter reference
period. In addition, for purposes of making the computation referred to above,
(i) acquisitions that have been made by the referent Person or any of its
Restricted Subsidiaries, including through mergers or consolidations and
including any related financing transactions, during the four-quarter reference
period or subsequent to such reference period and on or prior to the Calculation
Date (including, without limitation, any acquisition to occur on the Calculation
Date) shall be deemed to have occurred on the first day of the four-quarter
reference period and any cost savings or expense reductions attributable at the
time of such computation or to be attributable in the future to such
acquisition, shall be included in such computation, to the extent that such
adjustments would be permitted under Article 11 of Regulation S-X and
Consolidated Cash Flow for such reference period shall be calculated without
giving effect to clause (iii) of the proviso set forth in the definition of
Consolidated Net Income, (ii) the net proceeds of Indebtedness incurred or
Disqualified Stock issued by the referent Person pursuant to the first paragraph
of the covenant described under the caption "-- Certain Covenants -- Incur-
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rence of Indebtedness and Issuance of Disqualified Stock" during the
four-quarter reference period or subsequent to such reference period and on or
prior to the Calculation Date shall be deemed to have been received by the
referent Person or any of its Restricted Subsidiaries on the first day of the
four-quarter reference period and applied to its intended use on such date,
(iii) the Consolidated Cash Flow attributable to discontinued operations, as
determined in accordance with GAAP, and operations or businesses disposed of
prior to the Calculation Date, shall be excluded, and (iv) the Fixed Charges
attributable to discontinued operations, as determined in accordance with GAAP,
and operations or businesses disposed of prior to the Calculation Date, shall be
excluded, but only to the extent that the obligations giving rise to such Fixed
Charges will not be obligations of the referent Person or any of its Restricted
Subsidiaries following the Calculation Date.
"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 or in such other statements by such
other entity as have been approved by a significant segment of the accounting
profession, which are in effect on the Issuance Date.
"Guarantee" means a guarantee (other than by endorsement of negotiable
instruments for collection in the ordinary course of business), direct or
indirect, in any manner (including, without limitation, letters of credit and
reimbursement agreements in respect thereof), of all or any part of any
Indebtedness.
"Indebtedness" means, with respect to any Person, without duplication, (a)
any indebtedness of such Person, whether or not contingent, (i) in respect of
borrowed money, (ii) evidenced by bonds, notes, debentures or similar
instruments, (iii) evidenced by letters of credit (or reimbursement agreements
in respect thereof) or banker's acceptances, (iv) representing Capital Lease
Obligations, (v) representing the balance deferred and unpaid of the purchase
price of any property, except any such balance that constitutes an accrued
expense or trade payable, (vi) representing any obligations in respect of
Interest Rate Hedging Agreements or Oil and Gas Hedging Contracts, and (vii) in
respect of any Production Payment, (b) all Indebtedness of others secured by a
Lien on any asset of such Person (whether or not such indebtedness is assumed by
such Person), (c) obligations of such Person in respect of production
imbalances, (d) Acquired Debt of such Person, (e) Attributable Debt of such
Person, and (f) to the extent not otherwise included in the foregoing, the
guarantee by such Person of any Indebtedness of any other Person.
"Interest Rate Hedging Agreements" means, with respect to any Person, the
obligations of such Person under (i) interest rate swap agreements, interest
rate cap agreements and interest rate collar agreements and (ii) other
agreements or arrangements designed to protect such Person against fluctuations
in interest rates.
"Investors" means TPG Partners II, L.P., TPG Parallel II, L.P., and TPG
Investors II, L.P.
"Investments" means, with respect to any Person, all investments by such
Person in other Persons (including Affiliates) in the forms of direct or
indirect loans (including guarantees of Indebtedness or other obligations, but
excluding trade credit) or capital contributions, purchases or other
acquisitions for consideration of Indebtedness, Equity Interests or other
securities, together with all items that are or would be classified as
investments on a balance sheet prepared in accordance with GAAP; provided that
the following shall not constitute Investments: (i) an acquisition of assets,
Equity Interests or other securities by the Company for consideration consisting
of common equity securities of the Company, (ii) Interest Rate Hedging
Agreements entered into in accordance with the limitations set forth in clause
(g) of the second paragraph of the covenant described under the caption "--
Certain Covenants -- Incurrence of Indebtedness and Issuance of Disqualified
Stock," (iii) Oil and Gas Hedging Agreements entered into in accordance with the
limitations set forth in clause (h) of the second paragraph of the covenant
described under the caption "-- Certain Covenants -- Incurrence of Indebtedness
and Issuance of Disqualified Stock" and (iv) endorsements of negotiable
instruments and documents in the ordinary course of
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business. If the Company or any Restricted Subsidiary of the Company sells or
otherwise disposes of any Equity Interests of any direct or indirect Restricted
Subsidiary of the Company such that, after giving effect to any such sale or
disposition, such entity is no longer 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 Equity Interests of such
Subsidiary not sold or disposed of.
"Lien" means, with respect to any asset, any mortgage, lien, pledge,
charge, security interest or encumbrance of any kind in respect of such asset,
whether or not filed, recorded or otherwise perfected under applicable law
(including any conditional sale or other title retention agreement, any lease in
the nature thereof, any option or other agreement to sell or give a security
interest in and any filing of or agreement to give any financing statement under
the Uniform Commercial Code (or equivalent statutes) of any jurisdiction).
"Net Income" means, with respect to any Person, the net income (loss) of
such Person, determined in accordance with GAAP and before any reduction in
respect of preferred stock dividends, excluding, however, (i) any gain or loss,
together with any related provision for taxes on such gain or loss, realized in
connection with (a) any Asset Sale (including, without limitation, dispositions
pursuant to sale and leaseback transactions) or (b) the disposition of any
securities by such Person or any of its Restricted Subsidiaries or the
extinguishment of any Indebtedness of such Person or any of its Restricted
Subsidiaries and (ii) any extraordinary or nonrecurring gain or loss, together
with any related provision for taxes on such extraordinary or nonrecurring gain
or loss.
"Net Proceeds" means the aggregate cash proceeds received by the Company or
any of its Restricted Subsidiaries in respect of any Asset Sale (including,
without limitation, any cash received upon the sale or other disposition of any
non-cash consideration received in any Asset Sale, but excluding cash amounts
placed in escrow, until such amounts are released to the Company), net of the
direct costs relating to such Asset Sale (including, without limitation, legal,
accounting, investment banking and other professional fees and expenses, and
sales commissions) and any relocation expenses incurred as a result thereof,
taxes paid or payable as a result thereof (after taking into account any
available tax credits or deductions and any tax sharing arrangements), amounts
required to be applied to the repayment of Indebtedness (other than Indebtedness
under any Senior Debt) secured by a Lien on the asset or assets that were the
subject of such Asset Sale and any reserve for adjustment in respect of the sale
price of such asset or assets established in accordance with GAAP and any
reserve established for future liabilities.
"New Credit Agreement" means that certain Credit Agreement, dated as of
June 27, 1997, among the Company, The Chase Manhattan Bank, N.A., as Agent and
lender and the other parties thereto, providing for up to $200 million of
Indebtedness, including any related notes, guarantees, security or pledge
agreements, collateral documents, instruments and agreements executed in
connection therewith, and in each case as amended, restated, modified, renewed,
refunded, replaced or refinanced, in whole or in part, from time to time,
whether or not with the same lenders or agents; provided that no such
amendments, restatements, modifications, renewals, refundings, replacements or
refinancings shall result in provisions for Indebtedness or outstanding
Indebtedness in excess of $200 million, and provided further, that the total
amount of Indebtedness outstanding under the New Credit Agreement and all
documents executed in connection therewith and referred to in this definition
shall be no greater than $200 million in the aggregate.
"Non-Recourse Debt" means Indebtedness (i) as to which neither the Company
nor any of its Restricted Subsidiaries (a) provides any guarantee or credit
support of any kind (including any undertaking, guarantee, indemnity, agreement
or instrument that would constitute Indebtedness), or (b) is directly or
indirectly liable (as guarantor or otherwise); and (ii) no default with respect
to which (including any rights that the holders thereof may have to take
enforcement action against an Unrestricted Subsidiary) would permit (upon
notice, lapse of time, or both) any holder of any other Indebtedness of the
Company or any of its Restricted Subsidiaries to declare a default on such other
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Indebtedness or cause the payment thereof to be accelerated or payable prior to
its stated maturity; and (iii) the explicit terms of which provide that there is
no recourse against any of the assets of the Company or its Restricted
Subsidiaries.
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
"Oil and Gas Business" means (i) the acquisition, exploration, development,
operation and disposition of interests in oil, gas and other hydrocarbon
properties, (ii) the gathering, marketing, distribution, treating, processing,
storage, selling and transporting of any production from such interests or
properties and the marketing of oil and gas obtained from unrelated Persons,
(iii) any business relating to exploration for or development, production,
treatment, processing, storage, transportation, gathering or marketing of oil,
gas and other minerals and products produced in association therewith, (iv) any
business relating to oilfield sales and service and (v) any activity that is
ancillary to or necessary or appropriate for the activities described in clauses
(i) through (iv) of this definition.
"Oil and Gas Hedging Contracts" means any oil and gas purchase or hedging
agreement, and other agreement or arrangement, in each case, that is designed to
provide protection against oil and gas price fluctuations.
"Pari Passu Indebtedness" means Indebtedness that ranks pari passu in right
of payment to the Notes.
"Permitted Holders" means the Investors, any investment partnership or fund
managed by the principals of TPG II, any partners of the Investors, members of
their immediate family and trusts for the benefit of members of their immediate
family, their respective Affiliates and any Person acting in the capacity of an
underwriter in connection with a public or private offering of the Company's
Capital Stock.
"Permitted Indebtedness" has the meaning given in the covenant described
under the caption "-- Certain Covenants -- Incurrence of Indebtedness and
Issuance of Disqualified Stock."
"Permitted Investments" means (a) any Investment in the Company or in a
Restricted Subsidiary of the Company; (b) any Investment in Cash Equivalents;
(c) any Investment by the Company or any Restricted Subsidiary of the Company in
a Person if, as a result of such Investment and any related transactions that at
the time of such Investment are contractually mandated to occur, (i) such Person
becomes a Restricted Subsidiary of the Company or (ii) such Person is merged,
consolidated or amalgamated with or into, or transfers or conveys all or
substantially all of its assets to, or is liquidated into, the Company or a
Restricted Subsidiary of the Company; (d) any Investment made as a result of the
receipt of non-cash consideration from an Asset Sale that was made pursuant to
and in compliance with the covenant described above under the caption "--
Repurchase at the Option of Holders -- Asset Sales" or not constituting an Asset
Sale by reason of the $5 million threshold contained in the definition thereof;
(e) other Investments in any Person or Persons having an aggregate fair market
value (measured on the date each such Investment was made and without giving
effect to subsequent changes in value), when taken together with all other
Investments made pursuant to this clause (e) that are at the time outstanding,
not to exceed the greater of (i) $75 million or (ii) 15% of the Company's Total
Assets at the time such Investment is made; (f) any Investment acquired by the
Company in exchange for Equity Interests in the Company (other than Disqualified
Stock), (g) shares of Capital Stock received in connection with any good faith
settlement of a bankruptcy proceeding involving a trade creditor; (h) Interest
Rate Hedging Agreements; (i) loans and advances to employees in the ordinary
course of business for bona fide business purposes and (j) entry into operating
agreements, joint ventures, partnership agreements, working interests, royalty
interests, mineral leases, processing agreements, farm-out agreements, contracts
for the sale, transportation or exchange of oil and natural gas, unitization
agreements, pooling arrangements, area of mutual interest agree-
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ments, production sharing agreements 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 Gas Business, excluding
however, Investments in corporations other than any Investment received pursuant
to the Asset Sale provision.
"Permitted Liens" means (i) Liens securing Indebtedness of a Subsidiary or
Liens securing Senior Debt that is outstanding on the date of issuance of the
Notes (after giving effect to the Transaction) and Liens securing Senior Debt
that is permitted by the terms of the Indenture to be incurred; (ii) Liens in
favor of the Company or any Restricted Subsidiary; (iii) Liens on property
existing at the time of acquisition thereof by the Company or any Subsidiary of
the Company and Liens on property or assets of a Subsidiary existing at the time
it became a Subsidiary, provided that such Liens were in existence prior to the
contemplation of the acquisition and do not extend to any assets other than the
acquired property or the property of the acquired subsidiary; (iv) Liens
incurred or deposits made in the ordinary course of business in connection with
workers' compensation, unemployment insurance or other kinds of social security,
or to secure the payment or performance of tenders, statutory or regulatory
obligations, surety or appeal bonds, performance bonds or other obligations of a
like nature incurred in the ordinary course of business (including lessee or
operator obligations under statutes, governmental regulations or instruments
related to the ownership, exploration and production of oil, gas and minerals on
state or federal lands or waters); (v) Liens existing on the date of the
Indenture (after giving effect to the Transaction); (vi) Liens for taxes,
assessments or governmental charges or claims that are not yet delinquent or
that are being contested in good faith by appropriate proceedings promptly
instituted and diligently concluded, provided that any reserve or other
appropriate provision as shall be required in conformity with GAAP shall have
been made therefor; (vii) statutory liens of landlords, mechanics, suppliers,
vendors, warehousemen, carriers or other like Liens arising in the ordinary
course of business; (viii) pre-judgment liens and judgment Liens not giving rise
to an Event of Default so long as any appropriate legal proceeding that may have
been duly initiated for the review of such judgment shall not have been finally
terminated or the period within which such proceeding may be initiated shall not
have expired; (ix) Liens on, or related to, properties or assets to secure all
or part of the costs incurred in the ordinary course of the Oil and Gas Business
for the exploration, drilling, development, production, processing,
transportation, marketing, storage or operation thereof; (x) Liens on pipeline
or pipeline facilities that arise under operation of law; (xi) Liens arising
under operating agreements, joint venture agreements, partnership agreements,
oil and gas leases, farm-out agreements, division orders, contracts for the
sale, transportation or exchange of oil or natural gas, unitization and pooling
declarations and agreements, area of mutual interest agreements and other
agreements that are customary in the Oil and Gas Business; (xii) Liens reserved
in oil and gas mineral leases for bonus or rental payments and for compliance
with the terms of such leases, (xiii) Liens securing the Notes; (xiv) Liens
constituting survey exceptions, encumbrances, easements, and reservations of,
and rights to others for, rights-of-way, zoning and other restrictions as to the
use of real properties, and minor defects of title which, in the case of any of
the foregoing, do not secure the payment of borrowed money, and in the aggregate
do not materially adversely affect the value of the assets of the Company and
its Restricted Subsidiaries, taken as a whole, or materially impair the use of
such properties for the purposes for which such properties are held by the
Company or such subsidiaries; and (xv) Liens not otherwise permitted by clauses
(i) through (xiv) that are incurred in the ordinary course of business of the
Company or any Subsidiary with respect to obligations that do not exceed $5
million at any one time outstanding.
"Permitted Refinancing Debt" means any Indebtedness of the Company or any
of its Restricted Subsidiaries issued in exchange for, or the net proceeds of
which are used to extend, refinance, renew, replace, defease or refund other
Indebtedness (other than Indebtedness incurred under a Credit Facility) of the
Company or any of its Restricted Subsidiaries; provided that: (i) the principal
amount of such Permitted Refinancing Indebtedness does not exceed the principal
amount of the Indebtedness so extended, refinanced, renewed, replaced, defeased
or refunded (plus the amount
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of reasonable expenses incurred in connection therewith); (ii) such Permitted
Refinancing Indebtedness has a final maturity date on or later than the final
maturity date of, and has a Weighted Average Life to Maturity equal to or
greater than the Weighted Average Life to Maturity of, the Indebtedness being
extended, refinanced, renewed, replaced, defeased or refunded; (iii) if the
Indebtedness being extended, refinanced, renewed, replaced, defeased or refunded
is subordinated in right of payment to the Notes, such Permitted Refinancing
Indebtedness has a final maturity date later than the final maturity date of,
and is subordinated in right of payment to, the Notes on terms at least as
favorable taken as a whole to the Holders of the Notes as those contained in the
documentation governing the Indebtedness being extended, refinanced, renewed,
replaced, defeased or refunded; and (iv) such Indebtedness is incurred either by
the Company or by the Restricted Subsidiary who is the obligor on the
Indebtedness being extended, refinanced, renewed, replaced, defeased or
refunded.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Production Payments" means Dollar-Denominated Production Payments and
Volumetric Production Payments, collectively.
"Restricted Investment" means an Investment other than a Permitted
Investment.
"Restricted Subsidiary" means any direct or indirect Subsidiary of the
Company that is not an Unrestricted Subsidiary.
"Senior Debt" means (i) Indebtedness of the Company or any Subsidiary of
the Company under or in respect of any Credit Facility, whether for principal,
interest (including interest accruing after the filing of a petition initiating
any proceeding pursuant to any bankruptcy law, whether or not the claim for such
interest is allowed as a claim in such proceeding), reimbursement obligations,
fees, commissions, expenses, indemnities or other amounts, and (ii) any other
Indebtedness permitted under the terms of the Indenture, unless the instrument
under which such Indebtedness is incurred expressly provides that it is on a
parity with or subordinated in right of payment to the Notes. Notwithstanding
anything to the contrary in the foregoing sentence, Senior Debt will not include
(w) any liability for federal, state, local or other taxes owed or owing by the
Company, (x) any Indebtedness of the Company to any of its Subsidiaries or other
Affiliates, (y) any trade payables or (z) any Indebtedness that is incurred in
violation of the Indenture (other than Indebtedness under (i) the New Credit
Agreement or (ii) any other Credit Facility that is incurred on the basis of a
representation by the Company to the applicable lenders that it is permitted to
incur such Indebtedness under the Indenture).
"Significant Subsidiary" means (i) each Subsidiary that for the most recent
fiscal year of such Subsidiary had consolidated revenues greater than $10
million or as at the end of such fiscal year had assets or liabilities greater
than $10 million and (ii) any group of Subsidiaries that, taken together, would
constitute a Significant Subsidiary.
"Subsidiary" means, with respect to any Person, (i) any corporation,
association or other business entity of which more than 50% of the total voting
power of shares of Capital Stock, entitled (without regard to the occurrence of
any contingency) to vote in the election of directors, managers or trustees
thereof is at the time owned or controlled, directly or indirectly, by such
Person or one or more of the other Subsidiaries of that Person (or a combination
thereof) and (ii) any partnership (a) the sole general partner or the managing
general partner of which is such Person or a Subsidiary of such Person or (b)
the only general partners of which are such Person or one or more Subsidiaries
of such Person (or any combination thereof).
"Subsidiary Guarantors" means each Restricted Subsidiary of the Company
existing on the date of the Indenture (such Subsidiaries being The Canton Oil &
Gas Company, Peake Energy, Inc., Ward Lake Drilling, Inc. and Target Oilfield
Pipe & Supply Company), and any future Restricted
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Subsidiary of the Company that executes a Guarantee in accordance with the
provisions of the Indenture, and, in each case, their respective successors and
assigns.
"Total Assets" means, with respect to any Person, the total consolidated
assets of such Person and its Restricted Subsidiaries, as shown on the most
recent balance sheet of such Person.
"Treasury Rate" means the yield to maturity at the time of computation of
United States Treasury securities with a constant maturity (as compiled and
published in the most recent Federal Reserve Statistical Release H.15(519) which
has become publicly available at least two Business Days prior to the redemption
date (or, if such Statistical Release is no longer published, any publicly
available source or similar market data)) most nearly equal to the period from
the redemption date to June 15, 2002; provided that if the period from the
redemption date to June 15, 2002 is not equal to the constant maturity of a
United States Treasury security for which a weekly average yield is given, the
Treasury Rate shall be obtained by linear interpolation (calculated to the
nearest one-twelfth of a year) from the weekly average yields of United States
Treasury securities for which such yields are given, except that if the period
from the redemption date to June 15, 2002 is less than one year, the weekly
average yield on actually traded United States Treasury securities adjusted to a
constant maturity of one year shall be used.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company which at
the time of determination shall be an Unrestricted Subsidiary (as designated by
the Board of Directors of the Company, as provided below) and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors of the Company
may designate any Subsidiary of the Company (including any newly acquired or
newly formed Subsidiary or a Person becoming a Subsidiary through merger or
consolidation or Investment therein) to be an Unrestricted Subsidiary only if
(a) such Subsidiary does not own any Capital Stock of, or own or hold any Lien
on any property of, any other Subsidiary of the Company which is not a
Subsidiary of the Subsidiary to be so designated or otherwise an Unrestricted
Subsidiary; (b) all the Indebtedness of such Subsidiary shall, at the date of
designation, and will at all times thereafter, consist of Non-Recourse Debt; (c)
the Company certifies that such designation complies with the limitations of the
"Restricted Payments" covenant; (d) such Subsidiary, either alone or in the
aggregate with all other Unrestricted Subsidiaries, does not operate, directly
or indirectly, all or substantially all of the business of the Company and its
Subsidiaries; (e) such Subsidiary does not, directly or indirectly, own any
Indebtedness of or Equity Interest in, and has no investments in, the Company or
any Restricted Subsidiary; (f) such Subsidiary is a Person with respect to which
neither the Company nor any of its Restricted Subsidiaries has any direct or
indirect obligation (1) to subscribe for additional Equity Interests of such
Person or (2) to maintain or preserve such Person's financial condition or to
cause such Person to achieve any specified levels of operating results; and (g)
on the date such Subsidiary is designated an Unrestricted Subsidiary, such
Subsidiary is not a party to any agreement, contract, arrangement or
understanding with the Company or any Restricted Subsidiary with terms
substantially less favorable to the Company or such Restricted Subsidiary than
those that might have been obtained from Persons who are not Affiliates of the
Company. Any such designation by the Board of Directors of the Company shall be
evidenced to the Trustee by filing with the Trustee a resolution of the Board of
Directors of the Company giving effect to such designation and an Officers'
certificate certifying that such designation complied with the foregoing
conditions. If, at any time, any Unrestricted Subsidiary would fail to meet the
foregoing requirements as an Unrestricted Subsidiary, if shall thereafter cease
to be an Unrestricted Subsidiary for purposes of the Indenture and any
Indebtedness of such Subsidiary shall be deemed to be incurred as of such date.
The Board of Directors of the Company may designate any Unrestricted Subsidiary
to be a Restricted Subsidiary; provided, that (i) immediately after giving
effect to such designation, no Default or Event of Default shall have occurred
and be continuing or would occur as a consequence thereof and the Company could
incur at least $1.00 of additional Indebtedness (excluding Permitted
Indebtedness) pursuant to the first paragraph of the "Incurrence of Indebtedness
and Issuance of Disqualified Stock"
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<PAGE> 94
covenant on a pro forma basis taking into account such designation and (ii) such
Subsidiary executes a Guarantee pursuant to the terms of the Indenture.
"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" of an entity means all classes of Capital Stock of such
entity then outstanding and normally entitled to vote in the election of
directors or all interests in such entity with the ability to control the
management or actions of such entity.
"Weighted Average Life to Maturity" means, when applied to any Indebtedness
at any date, the number of years obtained by dividing (i) the sum of the
products obtained by multiplying (a) the amount of each then remaining
installment, sinking fund, serial maturity or other required payments of
principal, including payment at final maturity, in respect thereof, by (b) the
number of years (calculated to the nearest one-twelfth) that will elapse between
such date and the making of such payment, by (ii) the then outstanding principal
amount of such Indebtedness.
"Wholly Owned Restricted Subsidiary" of any Person means a Restricted
Subsidiary of such Person all of the outstanding Capital Stock or other
ownership interests of which (other than directors' qualifying shares) shall at
the time be owned, directly or indirectly, by such Person or by one or more
Wholly Owned Restricted Subsidiaries of such Person.
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<PAGE> 95
DESCRIPTION OF OTHER INDEBTEDNESS
The Company entered into a credit agreement dated as of June 27, 1997 (the
"New Credit Agreement") among the Company, the several lenders from time to time
parties thereto (collectively, the "Banks"), and The Chase Manhattan Bank, as
administrative agent (the "Administrative Agent"), Bankers Trust Company, as
syndication agent and NationsBanc of Texas, as documentation agent
(collectively, the "Agents"). Chase Securities Inc., acted as advisor and
arranger for the New Credit Agreement. The following is a summary description of
the principal terms of the New Credit Agreement and the other loan documents.
The description set forth below does not purport to be complete and is qualified
in its entirety by reference to certain agreements setting forth the principal
terms and conditions of the Company's New Credit Agreement, which are available
upon request from the Company.
Structure. The Banks have committed, subject to compliance with the
Borrowing Base and customary conditions, to provide the Company with revolving
credit loans of up to $200 million, of which $25 million will be available for
the issuance of letters of credit.
The Company initially borrowed $104.0 million on June 27, 1997 under the
New Credit Agreement (i) to partially finance the acquisition of the Company by
the TPG Investors; (ii) to repay certain existing outstanding indebtedness of
the Company and (iii) to pay certain fees and expenses related to the
Transaction. The New Credit Agreement may be utilized to fund the Company's
working capital requirements, including issuance of stand-by and trade letters
of credit, to fund acquisitions and for other general corporate purposes. At
July 31, 1997, the Company's outstanding borrowings under the New Credit
Agreement totaled $104.0 million.
The New Credit Agreement is a senior secured revolving credit facility
providing for revolving loans to the Company and the issuance of U.S.
dollar-denominated letters of credit for the account of the Company in an
aggregate principal amount (such amount includes the aggregate stated amount of
all letters of credit and the aggregate reimbursement and other obligations in
respect thereof) at any time not to exceed the Company's Borrowing Base, which
will be the sum of the Company's proved developed producing reserves, proved
developed non-producing reserves, proved undeveloped reserves and related
processing and gathering assets and other assets of the Company as The Chase
Manhattan Bank, Bankers Trust Company and NationsBanc of Texas (the "Engineering
Committee") deem appropriate, adjusted by the Engineering Committee in
accordance with their standard oil and gas lending practices and approved by the
Banks holding at least 75% of the commitments under the New Credit Agreement.
Initially, the Borrowing Base has been set at $180 million. In the event that
75% or more of the Borrowing Base is utilized, the Borrowing Base will be
re-determined semi-annually. If less than 75% of the Borrowing Base is utilized,
the Borrowing Base will be re-determined annually. The Borrower and the Required
Lenders (each as defined therein) may request one additional re-determination
per year.
The availability of borrowings under the New Credit Agreement will be
subject to certain conditions. Loans and letters of credit under the New Credit
Agreement will be available at any time during the five-year term of the New
Credit Agreement subject to the fulfillment of customary conditions precedent
including the absence of a material adverse change in the condition of the
Company, the absence of a default under the New Credit Agreement and compliance
with the Borrowing Base.
Security; Guaranty. The Company's obligations under the New Credit
Agreement are guaranteed by each of the Company's direct and indirect domestic
material subsidiaries. The New Credit Agreement and the guarantees thereof are
secured by a perfected first priority security interest in the following
properties of the Company and its direct and indirect subsidiaries: (i) oil and
gas properties representing at least 75% of the Present Value of the oil and gas
properties included in the most recently delivered reserve report; (ii) all of
the gas gathering assets; (iii) all accounts
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<PAGE> 96
receivable, inventory and intangibles; and (iv) all of the capital stock of the
Company and the Company's direct and indirect subsidiaries.
Interest; Maturity. Borrowings under the New Credit Agreement bear interest
at a rate per annum equal (at the Company's option) to: (i) the Administrative
Agent's Eurodollar rate plus an applicable margin or (ii) an alternate base rate
(equal to the highest of the Administrative Agent's prime rate, a certificate of
deposit rate plus 1%, or the Federal Funds effective rate plus 1/2 of 1%) plus
an applicable margin. Initially, the applicable margin is 1.5% per annum for
Eurodollar rate loans and 0.5% per annum for alternate base rate loans. The New
Credit Agreement will mature on June 27, 2002.
Fees. The Company will be required to pay the Banks, on a quarterly basis,
a commitment fee on the undrawn portion of the New Credit Agreement at a rate
equal to: (i) 1/2 of 1% per annum in the event that loans under the New Credit
Agreement are equal to or exceed 50% of the Borrowing Base; or (ii) 0.375% per
annum in the event that loans under the New Credit Agreement are less than 50%
of the Borrowing Base. The Company is also obligated to pay (i) a per annum
letter of credit fee on the aggregate amount of outstanding letters of credit at
a rate equal to the greater of (a) the applicable margin for Eurodollar rate
loans minus 1/8 of 1% and (b) $500; (ii) a fronting bank fee for the letter of
credit issuing bank equal to 1/8 of 1% per annum; and (iii) agent, arrangement
and other similar fees.
Covenants. The New Credit Agreement contains a number of covenants that,
among other things, restrict the ability of the Company and its subsidiaries to
dispose of assets, incur additional indebtedness, prepay other indebtedness
(including the Notes) or amend certain debt instruments (including the
Indenture), pay dividends, create liens on assets, enter into sale and leaseback
transactions, make investments, loans or advances, make acquisitions, engage in
mergers or consolidations, change the business conducted by the Company or its
subsidiaries, make capital expenditures or engage in certain transactions with
affiliates and otherwise restrict certain corporate activities. In addition,
under the New Credit Agreement, the Company is required to maintain specified
financial ratios and tests, including minimum interest coverage ratios and
maximum leverage ratios.
Events of Default. The New Credit Agreement contains customary events of
default, including nonpayment of principal, interest or fees, material
inaccuracy of representations and warranties, violation of covenants,
cross-default and cross-acceleration to certain other indebtedness, certain
events of bankruptcy and insolvency, material judgments against the Company,
invalidity of any guarantee or security interest and a change of control of the
Company in certain circumstances as set forth therein.
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<PAGE> 97
EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The Company, each of the Guarantors and the Initial Purchasers entered into
an exchange and registration rights agreement (the "Exchange and Registration
Rights Agreement") pursuant to which the Company agreed to (i) file with the
Commission on or prior to August 26, 1997 the Exchange Offer Registration
Statement relating to a registered exchange offer (the "Exchange Offer") for the
Senior Subordinated Notes under the Securities Act and (ii) use its best efforts
to cause the Exchange Offer Registration Statement to be declared effective
under the Securities Act by November 9, 1997. As soon as practicable after the
effectiveness of the Exchange Offer Registration Statement, the Company will
offer to the holders of the Senior Subordinated Notes who are not prohibited by
any law or policy of the Commission from participating in the Exchange Offer the
opportunity to exchange their Senior Subordinated Notes for the Exchange Notes.
The Company will keep the Exchange Offer open for not less than 30 days (or
longer, if required by law) after the date notice of the Exchange Offer is
mailed to the holders of the Notes. If (i) applicable interpretations of the
staff of the Commission do not permit the Company to effect the Exchange Offer
as contemplated thereby or (ii) for any other reason the Exchange Offer is not
consummated by December 9, 1997 (iii) any holder either (A) is not eligible to
participate in the Exchange Offer or (B) participates in the Exchange Offer and
does not receive freely transferable Exchange Notes in exchange for tendered
Senior Subordinated Notes, the Company will file with the Commission a shelf
registration statement (the "Shelf Registration Statement") to cover resales of
Transfer Restricted Securities (as defined below) by such holders who satisfy
certain conditions relating to, among other things, the provision of information
in connection with the Shelf Registration Statement. For purposes of the
foregoing, "Transfer Restricted Securities" means each Senior Subordinated Note
until (i) the date on which such Note has been exchanged for a freely
transferable Exchange Note in the Exchange Offer, (ii) the date on which such
Note has been effectively registered under the Securities Act and disposed of in
accordance with the Shelf Registration Statement or (iii) the date on which such
Note is distributed to the public pursuant to Rule 144 under the Securities Act
or is saleable pursuant to Rule 144(k) under the Securities Act.
The Company will use its best efforts to have the Exchange Offer
Registration Statement and, if applicable, the Shelf Registration Statement
(each a "Registration Statement") declared effective by the Commission as
promptly as practicable after the filing thereof. Unless the Exchange Offer
would not be permitted by a policy of the Commission, the Company will commence
the Exchange Offer and will use its best efforts to consummate the Exchange
Offer as promptly as practicable, but in any event prior to 165 days after the
Issue Date. If applicable, the Company will use its best efforts to keep the
Shelf Registration Statement effective for a period of two years after the Issue
Date, subject to certain exceptions, including suspending the effectiveness
thereof for certain valid business reasons. If (i) the applicable Registration
Statement is not filed with the Commission on or prior to August 26, 1997, (ii)
the Exchange Offer Registration Statement or the Shelf Registration Statement,
as the case may be, is not declared effective by November 9, 1997 (or in the
case of a Shelf Registration Statement required to be filed in response to a
change in law or the applicable interpretations of Commission's staff, if later,
within 45 days after publication of the change in law or interpretation), (iii)
the Exchange Offer is not consummated on or prior to December 9, 1997 or (iv)
the Shelf Registration Statement is filed and declared effective by November 9,
1997 (or in the case of a Shelf Registration Statement required to be filed in
response to a change in law or the applicable interpretations of Commission's
staff, if later, within 45 days after publication of the change in law or
interpretation), but shall thereafter cease to be effective (at any time that
the Company is obligated to maintain the effectiveness thereof) without being
succeeded within 60 days by an additional Registration Statement filed and
declared effective (each such event referred to in clauses (i) through (iv), a
"Registration Default"), the Company will generally be obligated to pay
liquidated damages to each holder of Transfer Restricted Securities, during the
period of such Registration Default in an amount equal to $0.192 per week per
$1,000 principal amount of the Notes constituting Transfer Restricted Securities
held by such holder until the applicable Registration Statement is filed or
declared effective, the Exchange Offer is consummated or the Shelf Registration
Statement again becomes effective, as the case may be; provided, however, no
liquidated damages shall be payable for a Registration Default under clause
(iii) above if a Shelf
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<PAGE> 98
Registration Statement covering resales of the Transfer Restricted Securities
for which the Exchange Offer was intended shall have been declared effective.
All accrued liquidated damages shall be paid to holders in the same manner as
interest payments on the Notes on semi-annual payment dates which correspond to
interest payment dates for the Notes. Following the cure of all Registration
Defaults, the accrual of liquidated damages will cease.
The Exchange and Registration Rights Agreement also provides that the
Company (i) shall make available for a period of 90 days after the consummation
of the Exchange Offer a prospectus meeting the requirements of the Securities
Act to any broker-dealer for use in connection with any resale of any such
Exchange Notes and (ii) shall pay all expenses incident to the Exchange Offer
(including the expenses of one counsel to the holders of the Senior Subordinated
Notes) and will indemnify certain holders of the Notes (including any
broker-dealer) against certain liabilities, including liabilities under the
Securities Act. A broker-dealer that delivers such a prospectus to purchasers in
connection with such resales will be subject to certain of the civil liability
provisions under the Securities Act, and will be bound by the provisions of the
Exchange and Registration Rights Agreement (including certain indemnification
rights and obligations).
Each holder of the Senior Subordinated Notes that wishes to exchange such
Notes for Exchange Notes in the Exchange Offer will be required to make certain
representations, including representations that (i) any Exchange Notes to be
received by it will be acquired in the ordinary course of its business, (ii) it
has no arrangement with any person to participate in the distribution of the
Exchange Notes and (iii) it is not an "affiliate," as defined in Rule 405 of the
Securities Act, of the Company or if it is an affiliate, it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
If a holder is not a broker-dealer, it will be required to represent that
it is not engaged in, and does not intend to engage in, the distribution of the
Exchange Notes. If a holder is a broker-dealer that will receive Exchange Notes
for its own account in exchange for Senior Subordinated Notes that were acquired
as a result of market making activities or other trading activities, it will be
required to acknowledge that it will deliver a prospectus in connection with any
resale of such Exchange Notes.
Holders of the Senior Subordinated Notes will be required to make certain
representations to the Company (as described above) in order to participate in
the Exchange Offer and will be required to deliver information to be used in
connection with the Shelf Registration Statement in order to have their Notes
included in the Shelf Registration Statement and benefit from the provisions
regarding liquidated damages set forth in the preceding paragraphs. A holder who
sells Senior Subordinated 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 under the Securities Act in connection
with such sales and will be bound by the provisions of the Exchange and
Registration Rights Agreement which are applicable to such a holder (including
certain indemnification obligations).
For so long as the Senior Subordinated Notes are outstanding, the Company
will continue to provide to holders of such Notes and to prospective purchasers
of the Notes the information required by paragraph (d)(4) of Rule 144A under the
Securities Act ("Rule 144A"). The Company will provide a copy of the Exchange
and Registration Rights Agreement to prospective purchasers of Notes identified
to the Company by the Initial Purchasers upon request.
The foregoing description of the Exchange and Registration Rights Agreement
is a summary only, does not purport to be complete and is qualified in its
entirety by reference to all provisions of the Exchange and Registration Rights
Agreement.
PLAN OF DISTRIBUTION
Based on interpretations by the Staff set forth in no-action letters issued
to third parties, the Company believes that Exchange Notes issued pursuant to
the Exchange Offer in exchange for
98
<PAGE> 99
Senior Subordinated Notes may be offered for resale, resold and otherwise
transferred by holders thereof (other than any holder which is (i) an
"Affiliate," (ii) a broker-dealer who acquired Senior Subordinated Notes
directly from the Company or (iii) broker-dealers who acquired Senior
Subordinated Notes as a result of market-making or other trading activities)
without compliance with the registration and prospectus delivery provisions of
the Securities Act, provided that such Exchange Notes are acquired in the
ordinary course of such holders' business and such holders have no arrangement
with any person to participate in a distribution of such Exchange Notes and that
broker-dealers receiving Exchange Notes in the Exchange Offer will be subject to
a prospectus delivery requirement with respect to resales of such 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 in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Senior Subordinated Notes where Senior Subordinated Notes were
acquired as a result of market-making activities or other trading activities.
The Company has agreed that, for a period of 180 days after the Expiration Date,
it will make this Prospectus, as amended or supplemented, available to any
broker-dealer for use in connection with any such resale. In addition, until
October 13, 1997, all dealers effecting transactions in the Exchange Notes may
be required to deliver a prospectus.
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 at 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 on 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.
For a period of 180 days after the Expiration Date, the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the expenses of one counsel for the
holders of the Notes) other than commissions or concessions of any brokers or
dealers and will indemnify such holders (including any broker-dealers) against
certain liabilities, including liabilities under the Securities Act.
The Initial Purchasers may engage in stabilizing transactions in accordance
with Rule 104 under the Exchange Act. Stabilizing transactions permit bids to
purchase the underlying security so long as the stabilizing bids do not exceed a
specified maximum. Such stabilization transactions may cause the price of the
Notes to be higher than it would otherwise be in the absence of such
transactions.
LEGAL MATTERS
The validity of the Exchange Notes offered hereby will be passed upon for
the Company by Black, McCuskey, Souers & Arbaugh, 220 Market Avenue South,
Canton, Ohio 44702-2116.
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<PAGE> 100
EXPERTS
Certain information with respect to the gas and oil reserves of the Company
are derived from the reports of John G. Redic, Inc. and Ryder Scott Company,
independent petroleum engineers. Such information has been included herein in
reliance upon the authority of said firms as experts with respect to such
matters.
The consolidated financial statements of the Company at December 31, 1996
and 1995 and for each of the three years in the period ended December 31, 1996,
appearing in this Prospectus and Registration Statement have been audited by
Ernst & Young LLP, independent auditors, as set forth in their report thereon
appearing elsewhere herein and in the Registration Statement, and are included
in reliance upon such report given upon the authority of such firm as experts in
accounting and auditing.
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GLOSSARY OF SELECTED OIL AND GAS TERMS
The terms defined in this glossary are used throughout this Offering
Memorandum.
Bbl. One stock tank barrel, or 42 US gallons liquid volume, used herein in
reference to crude oil or other liquid hydrocarbons.
Bcf. One billion cubic feet.
Bcfe. One billion cubic feet of natural gas equivalent.
Btu. British thermal unit, which is the quantity of heat required to raise the
temperature of one pound of water from 58.5 to 59.5 degrees Fahrenheit.
Developed acreage. Acres which are allocated or assignable to producing wells or
wells capable of production.
Gross acres or gross wells. The total acres or wells, as the case may be, in
which a working interest is owned.
Mbbl. One thousand Bbl.
Mcf. One thousand cubic feet, used herein in reference to natural gas.
Mmbbl. One million Bbl.
Mcfe. One thousand cubic feet of natural gas equivalent, using the ratio of one
Bbl of crude oil to six Mcf of natural gas.
Mmbtu. One million Btus.
Mmcf. One million cubic feet.
Mmcfe. One million cubic feet of natural gas equivalent.
Net acres or net wells. The sum of the fractional working interests owned in
gross acres or gross wells.
Present Value. The pre-tax present value, discounted at 10%, of future net cash
flows from estimated proved reserves, calculated holding prices and costs
constant at amounts in effect on the date of the report (unless such prices or
costs are subject to change pursuant to contractual provisions) and otherwise in
accordance with the Commission's rules for inclusion of oil and gas reserve
information in financial statements filed with the Commission.
Productive well. A well that is producing oil or natural gas or that is capable
of production.
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 crude oil, natural gas and natural
gas liquids which geological and engineering data demonstrate with reasonable
certainty to be recoverable in future years from known reservoirs under existing
economic and operating conditions.
Proved undeveloped reserves. Reserves that are expected to be recovered from new
wells on undrilled acreage or from existing wells where a relatively major
expenditures is required for completion.
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 costs of production.
Working interest. The operating interest which 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.
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BELDEN & BLAKE CORPORATION
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
FINANCIAL STATEMENTS FOR THE YEAR ENDED DECEMBER 31, 1996
Report of Independent Auditors..................................................... F-2
Consolidated Balance Sheets as of December 31, 1996 and 1995....................... F-3
Consolidated Statements of Operations for the years ended December 31, 1996, 1995
and 1994........................................................................ F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31,
1996, 1995 and 1994............................................................. F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1996, 1995
and 1994........................................................................ F-6
Notes to Consolidated Financial Statements......................................... F-7
FINANCIAL STATEMENTS FOR THE PERIOD ENDED JUNE 30, 1997 (UNAUDITED)
Consolidated Balance Sheets as of June 30, 1997 and December 31, 1996.............. F-23
Consolidated Statements of Operations for the six months ended June 30, 1997 and
1996............................................................................ F-24
Consolidated Statements of Shareholders' Equity for the six months ended June 30,
1997 and the years ended December 31, 1996 and 1995............................. F-25
Consolidated Statements of Cash Flows for the six months ended June 30, 1997 and
1996............................................................................ F-26
Notes to Consolidated Financial Statements......................................... F-27
</TABLE>
F-1
<PAGE> 103
REPORT OF INDEPENDENT AUDITORS
To the Shareholders and Board of Directors
Belden & Blake Corporation
We have audited the accompanying consolidated balance sheets of Belden &
Blake Corporation as of December 31, 1996 and 1995, and the related consolidated
statements of operations, shareholders' equity and cash flows for each of the
three years in the period ended December 31, 1996. These financial statements
are the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Belden & Blake
Corporation at December 31, 1996 and 1995, and the consolidated results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996, in conformity with generally accepted accounting principles.
ERNST & YOUNG LLP
Cleveland, Ohio
February 21, 1997
F-2
<PAGE> 104
BELDEN & BLAKE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
DECEMBER 31
------------------------
1996 1995
--------- ---------
<S> <C> <C>
ASSETS
CURRENT ASSETS
Cash and cash equivalents......................................... $ 8,606 $ 12,322
Accounts receivable, net.......................................... 33,523 28,123
Inventories....................................................... 9,397 9,253
Deferred income taxes............................................. 2,918 2,254
Other current assets.............................................. 2,280 2,198
--------- ---------
TOTAL CURRENT ASSETS...................................... 56,724 54,150
PROPERTY AND EQUIPMENT, AT COST
Oil and gas properties (successful efforts method)................ 266,521 235,344
Gas gathering systems............................................. 26,045 25,416
Land, buildings, machinery and equipment.......................... 31,578 29,977
--------- ---------
324,144 290,737
Less accumulated depreciation, depletion and amortization......... 86,808 59,209
--------- ---------
PROPERTY AND EQUIPMENT, NET............................... 237,336 231,528
OTHER ASSETS........................................................ 9,703 11,620
--------- ---------
$ 303,763 $ 297,298
========= =========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable.................................................. $ 9,421 $ 11,004
Accrued expenses.................................................. 20,990 23,811
Current portion of long-term liabilities.......................... 4,203 1,976
--------- ---------
TOTAL CURRENT LIABILITIES................................. 34,614 36,791
LONG-TERM LIABILITIES
Bank and other long-term debt..................................... 59,216 67,223
Senior notes...................................................... 31,111 35,000
Convertible subordinated debentures............................... 5,550 6,800
Other............................................................. 1,765 1,500
--------- ---------
97,642 110,523
DEFERRED INCOME TAXES............................................... 12,589 7,693
SHAREHOLDERS' EQUITY
Common stock without par value; $.10 stated value per share;
authorized 50,000,000 shares; issued and outstanding 11,231,865
and 11,136,496 shares.......................................... 1,123 1,114
Preferred stock without par value; $100 stated value per share;
authorized 8,000,000 shares; issued and outstanding 24,000
shares......................................................... 2,400 2,400
Paid in capital................................................... 128,035 126,063
Retained earnings................................................. 27,395 12,820
Unearned portion of restricted stock.............................. (35) (106)
--------- ---------
TOTAL SHAREHOLDERS' EQUITY................................ 158,918 142,291
--------- ---------
$ 303,763 $ 297,298
========= =========
</TABLE>
See accompanying notes.
F-3
<PAGE> 105
BELDEN & BLAKE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------------
1996 1995 1994
--------- --------- --------
<S> <C> <C> <C>
REVENUES
Oil and gas sales..................................... $ 79,491 $ 46,853 $ 32,574
Gas marketing and gathering........................... 44,527 40,436 33,072
Oilfield sales and service............................ 25,517 20,066 13,157
Interest and other.................................... 3,700 2,712 562
--------- --------- --------
153,235 110,067 79,365
EXPENSES
Production expense.................................... 18,098 11,756 7,827
Production taxes...................................... 3,168 2,060 1,357
Cost of gas and gathering expense..................... 37,556 33,831 28,878
Oilfield sales and service............................ 23,142 18,266 12,180
Exploration expense................................... 6,064 4,924 2,803
General and administrative expense.................... 4,573 3,802 3,567
Interest expense...................................... 7,383 6,073 3,503
Depreciation, depletion and amortization.............. 29,752 19,717 11,886
Franchise, property and other taxes................... 1,739 1,228 854
--------- --------- --------
131,475 101,657 72,855
--------- --------- --------
INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES... 21,760 8,410 6,510
Provision for income taxes............................ 6,566 2,150 2,330
--------- --------- --------
INCOME FROM CONTINUING OPERATIONS....................... 15,194 6,260 4,180
LOSS FROM DISCONTINUED OPERATIONS....................... (439) (1,139) (337)
--------- --------- --------
NET INCOME.............................................. $ 14,755 $ 5,121 $ 3,843
========= ========= ========
EARNINGS (LOSS) PER COMMON SHARE:
CONTINUING OPERATIONS................................. $ 1.34 $ 0.69 $ 0.57
DISCONTINUED OPERATIONS............................... (0.04) (0.13) (0.05)
--------- --------- --------
NET INCOME............................................ $ 1.30 $ 0.56 $ 0.52
========= ========= ========
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING.............. 11,176 8,785 7,080
========= ========= ========
</TABLE>
See accompanying notes.
F-4
<PAGE> 106
BELDEN & BLAKE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNEARNED
COMMON COMMON PREFERRED PAID IN RETAINED RESTRICTED
SHARES STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
------ ------ --------- -------- -------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
JANUARY 1, 1994....................... 7,053 $ 706 $ 2,400 $ 69,865 $ 4,216 $ (330) $ 76,857
Stock issued.......................... 32 3 385 388
Net income............................ 3,843 3,843
Preferred stock dividend.............. (180) (180)
Restricted stock vested............... 129 105 234
------ ------ ------- -------- ------- ------ --------
DECEMBER 31, 1994..................... 7,085 709 2,400 70,379 7,879 (225) 81,142
Stock issued.......................... 4,028 403 55,264 55,667
Net income............................ 5,121 5,121
Preferred stock dividend.............. (180) (180)
Stock options exercised............... 2 -- 25 25
Employee stock bonus.................. 22 2 251 253
Restricted stock vested............... 144 119 263
------ ------ ------- -------- ------- ------ --------
DECEMBER 31, 1995..................... 11,137 1,114 2,400 126,063 12,820 (106) 142,291
Net income............................ 14,755 14,755
Preferred stock dividend.............. (180) (180)
Stock options exercised and related
tax benefit......................... 3 -- 47 47
Employee stock bonus.................. 26 3 418 421
Restricted stock activity............. 4 -- 263 71 334
Conversion of debentures.............. 62 6 1,244 1,250
------ ------ ------- -------- ------- ------ --------
DECEMBER 31, 1996..................... 11,232 $1,123 $ 2,400 $128,035 $27,395 $ (35) $158,918
====== ====== ======= ======== ======= ====== ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 107
BELDEN & BLAKE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
----------------------------------------
1996 1995 1994
--------- ---------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income.......................................... $ 14,755 $ 5,121 $ 3,843
Adjustments to reconcile net income to net cash
provided by operating activities:
Depreciation, depletion and amortization......... 29,752 20,154 12,021
Loss on disposal of property and equipment....... 534 177 91
Deferred income taxes............................ 4,232 488 1,570
Deferred compensation and stock grants........... 1,311 1,067 359
Change in operating assets and liabilities, net
of effects of acquisition of businesses:
Accounts receivable and other operating
assets...................................... (4,385) (14,485) (1,622)
Inventories.................................... (144) 469 (2,328)
Accounts payable and accrued expenses.......... 476 8,958 1,775
--------- ---------- ---------
NET CASH PROVIDED BY OPERATING ACTIVITIES... 46,531 21,949 15,709
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired..... (4,543) (99,837) (17,968)
Proceeds from property and equipment disposals...... 2,227 589 438
Additions to property and equipment................. (37,074) (23,855) (19,844)
(Increase) decrease in other assets................. (705) (867) 88
--------- ---------- ---------
NET CASH USED IN INVESTING ACTIVITIES....... (40,095) (123,970) (37,286)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit and long-term
debt............................................. 16,105 73,000 6,100
Repayment of long-term debt and other obligations... (26,117) (17,818) (2,938)
Preferred stock dividends........................... (180) (180) (180)
Proceeds from sale of common stock and stock
options.......................................... 40 59,438 --
Common stock placement cost......................... -- (3,746) --
--------- ---------- ---------
NET CASH (USED IN) PROVIDED BY FINANCING
ACTIVITIES................................ (10,152) 110,694 2,982
--------- ---------- ---------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS.. (3,716) 8,673 (18,595)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR........ 12,322 3,649 22,244
--------- ---------- ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR.............. $ 8,606 $ 12,322 $ 3,649
========= ========== =========
</TABLE>
See accompanying notes.
F-6
<PAGE> 108
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) BUSINESS AND SIGNIFICANT ACCOUNTING POLICIES
BUSINESS
The Company operates primarily in the oil and gas industry. The Company's
principal business is the acquisition, exploration, development and production
of oil and gas reserves, and the gathering and marketing of natural gas. Sales
of oil are ultimately made to refineries. Sales of gas are ultimately made to
gas utilities and industrial consumers in Ohio, Michigan, West Virginia,
Pennsylvania, New York and Kentucky. The Company also provides oilfield services
and is a distributor of a broad range of oilfield equipment and supplies. Its
customers include other independent oil and gas companies, dealers and operators
throughout Ohio, Michigan, West Virginia, Pennsylvania and New York. The price
of oil and gas has a significant impact on the Company's working capital and
results of operations.
PRINCIPLES OF CONSOLIDATION AND FINANCIAL PRESENTATION
The accompanying consolidated financial statements include the financial
statements of the Company and its subsidiaries. All significant intercompany
accounts and transactions have been eliminated in consolidation.
USE OF ESTIMATES IN THE FINANCIAL STATEMENTS
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts. Significant estimates used in the
preparation of the Company's financial statements which could be subject to
significant revision in the near term include estimated oil and gas reserves and
the estimated net realizable value of the assets of discontinued operations.
Although actual results could differ from these estimates, significant
adjustments to these estimates historically have not been required.
CASH EQUIVALENTS
For purposes of the statements of cash flows, cash equivalents are defined
as all highly liquid debt instruments purchased with an initial maturity of
three months or less.
CONCENTRATIONS OF CREDIT RISK
Credit limits, ongoing credit evaluation and account monitoring procedures
are utilized to minimize the risk of loss. Collateral is generally not required.
Expected losses are provided for currently and actual losses have been within
management's expectations.
INVENTORIES
Inventories of material, pipe and supplies are valued at average cost.
Crude oil and natural gas inventories are stated at average cost.
PROPERTY AND EQUIPMENT
The Company utilizes the "successful efforts" method of accounting for its
oil and gas properties. Under this method, property acquisition and development
costs and certain productive exploration costs are capitalized while
non-productive exploration costs, which include certain geological and
geophysical costs, dry holes, expired leases and delay rentals, are expensed as
incurred. Capitalized costs related to proved properties are depleted using the
unit-of-production method. Depreciation, depletion and amortization of proved
oil and gas properties is calculated on
F-7
<PAGE> 109
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the basis of estimated recoverable reserve quantities. These estimates can
change based on economic or other factors. No gains or losses are recognized
upon the disposition of oil and gas properties except in extraordinary
transactions. Sales proceeds are credited to the carrying value of the
properties. Maintenance and repairs are expensed, and expenditures which enhance
the value of properties are capitalized.
Unproved oil and gas properties are stated at cost and consist of
undeveloped leases. These costs are assessed periodically to determine whether
their value has been impaired, and if impairment is indicated, the costs are
charged to expense.
Gas gathering systems are stated at cost. Depreciation expense is computed
using the straight-line method over 15 years.
Property and equipment are stated at cost. Depreciation of non-oil and gas
properties is computed using the straight-line method over the useful lives of
the assets ranging from 3 to 15 years for machinery and equipment and 30 to 40
years for buildings. When assets other than oil and gas properties are retired
or otherwise disposed of, the cost and related accumulated depreciation are
removed from the accounts, and any resulting gain or loss is reflected in income
for the period. The cost of maintenance and repairs is charged to income as
incurred, and significant renewals and betterments are capitalized.
NET INCOME PER COMMON SHARE
Net income per common share is computed by subtracting preferred dividends
from net income and dividing the difference by the weighted average number of
common and common equivalent shares outstanding. Outstanding options,
convertible securities and warrants are included in the computation of net
income per common share when their effect is dilutive.
REVENUE RECOGNITION
Oil and gas production revenue is recognized as production and delivery
take place. Oil and gas marketing revenues are recognized when title passes.
Oilfield sales and service revenues are recognized when the goods or services
have been provided.
INCOME TAXES
The Company uses the liability method of accounting for income taxes.
Deferred income taxes are provided for temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
the amounts used for income tax purposes. Deferred income taxes also are
recognized for operating losses that are available to offset future taxable
income and tax credits that are available to offset future federal income taxes.
RECLASSIFICATIONS
Certain reclassifications have been made in 1995 and 1994 to conform to the
presentation in 1996.
(2) ACCOUNTING CHANGES
During 1996, the Company adopted Statement of Financial Accounting
Standards (SFAS) 123, "Accounting for Stock-Based Compensation." Under SFAS 123,
companies may elect to adopt the fair value method of accounting for stock-based
compensation or continue to use Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees" (APB 25) to
F-8
<PAGE> 110
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
measure expense associated with stock-based compensation. The Company has
elected to continue to follow APB 25. See Note 8.
During 1996, the Company adopted SFAS 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to be Disposed Of." This
statement requires impairment losses to be recognized for long-lived assets
(other than unproved properties) used in continuing operations when indicators
of impairment are present and the assets' carrying value is not anticipated to
be recovered through future operations or sale. No impairment was required as a
result of adopting SFAS 121.
(3) ACQUISITIONS
The following acquisitions were accounted for as purchase business
combinations. Accordingly, the results of operations of the acquired businesses
are included in the Company's consolidated statements of operations from the
date of the respective acquisitions.
During 1996, the Company acquired for approximately $4.1 million working
interests in 323 oil and gas wells in Ohio and Kentucky. Estimated proved
developed reserves associated with the wells totaled 6.0 Bcf of natural gas and
205,000 Bbls of oil net to the Company's interest at July 1, 1996.
Effective in July 1995, the Company purchased from Quaker State Corporation
most of its oil and gas properties and related assets in the Appalachian Basin
(the "Quaker State Properties") for approximately $50 million. The Quaker State
Properties included approximately 1,460 gross (1,100 net) wells with estimated
proved reserves of 2.2 Mmbbl of oil and 46.8 Bcf of gas at December 31, 1994,
approximately 250 miles of gas gathering systems, undeveloped oil and gas leases
and fee mineral interests covering approximately 250,000 acres, an extensive
geologic and geophysical database and other assets.
In January 1995, the Company purchased Ward Lake Drilling, Inc. ("Ward
Lake"), a privately-held exploration and production company headquartered in
Gaylord, Michigan, for $15.1 million. Ward Lake operates and holds a production
payment interest and working interests averaging 13.6% in approximately 500
Antrim Shale gas wells located in Michigan's lower peninsula. The purchase also
included approximately 5,500 undeveloped leasehold acres that Ward Lake owns in
Michigan. At December 31, 1994, the wells had estimated proved developed natural
gas reserves totaling 98 Bcf (14 Bcf net to the Company's interest).
Approximately one half of the purchase price represented payment for the proved
reserves, with the balance associated with other oil and gas and corporate
assets. Through the end of 1996, the Company purchased additional working
interests averaging 24% in the wells operated by Ward Lake for approximately $12
million. The interests acquired had estimated proved developed reserves of 16
Bcf at December 31, 1994. The production from certain interests qualify for
nonconventional fuel source tax credits.
In addition, during 1995 the Company, in four separate transactions,
acquired for approximately $29.2 million working interests in oil and gas wells
in Michigan, Ohio, Pennsylvania and New York and drilling rights on more than
250,000 acres in Ohio. Estimated proved developed reserves associated with the
wells totaled 35 Bcfe of natural gas net to the Company's interest at December
31, 1994.
In January 1994, the Company purchased substantially all of TGX
Corporation's Appalachian Basin assets for $15.5 million. The assets acquired
included 1,034 gross (910 net) gas and oil wells on approximately 121,000 acres
located in northeastern Ohio and southwestern New York and 15,000 undeveloped
acres and related inventory, real estate and oilfield equipment. At December 31,
1993, the properties acquired had estimated proved reserves of 22.0 Bcf of
natural gas and 28,700 Bbls of oil.
F-9
<PAGE> 111
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The unaudited pro forma results of operations for the year ended December
31, 1995 as if the acquisitions above occurred at the beginning of the period
were revenues of $124.9 million, net income of $8.5 million and net income per
common share of $.75. The pro forma effects of the 1996 acquisitions were not
material.
(4) DETAILS OF BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ACCOUNTS RECEIVABLE
Accounts receivable.................................... $ 16,675 $ 16,096
Allowance for doubtful accounts........................ (556) (269)
Oil and gas production receivable...................... 16,729 11,610
Current portion of notes receivable.................... 675 686
-------- --------
$ 33,523 $ 28,123
======== ========
INVENTORIES
Oil.................................................... $ 1,578 $ 1,574
Natural gas............................................ 375 170
Material, pipe and supplies............................ 7,444 7,509
-------- --------
$ 9,397 $ 9,253
======== ========
PROPERTY AND EQUIPMENT, GROSS
OIL AND GAS PROPERTIES
Producing properties................................... $247,651 $214,984
Non-producing properties............................... 10,277 11,286
Other.................................................. 8,593 9,074
-------- --------
$266,521 $235,344
======== ========
LAND, BUILDINGS, MACHINERY AND EQUIPMENT
Land, buildings and improvements....................... $ 8,537 $ 8,748
Machinery and equipment................................ 23,041 21,229
-------- --------
$ 31,578 $ 29,977
======== ========
ACCRUED EXPENSES
Accrued expenses....................................... $ 8,617 $ 9,924
Accrued drilling and completion costs.................. 658 4,902
Accrued income taxes................................... 612 15
Ad valorem and other taxes............................. 3,114 2,162
Compensation and related benefits...................... 2,994 2,147
Undistributed production revenue....................... 4,995 4,661
-------- --------
$ 20,990 $ 23,811
======== ========
</TABLE>
F-10
<PAGE> 112
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(5) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
DECEMBER 31
-------------------
1996 1995
------- --------
(IN THOUSANDS)
<S> <C> <C>
Revolving line of credit................................ $59,000 $ 67,000
Senior notes............................................ 35,000 35,000
Convertible subordinated debentures..................... 5,550 6,800
Other................................................... 246 1,871
------- --------
99,796 110,671
Less current portion.................................... 3,918 1,648
------- --------
Long-term debt.......................................... $95,878 $109,023
======= ========
</TABLE>
The Company has a $200 million unsecured revolving credit facility with a
group of banks that matures on March 31, 2001. Outstanding balances under the
facility incurred interest at the Company's choice of either: (1) the one, two,
or three-month LIBOR plus 1.25% (6.81% for the three-month LIBOR interest rate
option at December 31, 1996) or (2) the bank's prime rate (8.25% at December 31,
1996). At December 31, 1996, amounts payable under this facility were at the
three-month LIBOR option with rates ranging from 6.78% to 6.84%. Borrowings
under the credit agreement are limited to the borrowing base as established
semi-annually by the bank group. The borrowing base at December 31, 1996 was $70
million. The Company believes that its oil and gas reserves at December 31, 1996
could provide a borrowing base in excess of $115 million.
When market conditions are favorable, the Company may enter into interest
rate swap arrangements, whereby a portion of the Company's floating rate
exposure is exchanged for a fixed interest rate. The Company had no such
derivative financial instruments at December 31, 1996 or 1995.
The Company has $35 million of 7% fixed-rate senior notes outstanding with
five insurance companies. These notes, which are interest-only through 1996,
mature on September 30, 2005. Equal principal payments of $3,888,888 will be
required on each September 30 commencing in 1997.
The convertible subordinated debentures have a fixed interest rate of 9.25%
and mature on June 30, 2000. The debentures are currently convertible by the
debenture holders at the rate of one share of the Company's common stock for
each $20.15 of principal. During 1996, $1,250,000 of the debentures were
converted by the holders into 62,034 shares of common stock.
The debt agreements contain various covenants restricting payment of
dividends on common stock to $5 million plus 50% of cumulative net income,
restricting sales of assets to 15% of shareholders' equity in any one year and
requiring the maintenance of certain levels of net worth, working capital and
other financial ratios.
At December 31, 1996, the aggregate long-term debt maturing in the next
five years is as follows: $3,918,000 (1997); $3,907,000 (1998); $3,907,000
(1999); $9,457,000 (2000); $62,907,000 (2001); and $15,700,000 (2002 and
thereafter).
(6) LEASES
The Company leases certain computer equipment, vehicles and office space
under noncancelable agreements with lease periods of one to five years. Rent
expense amounted to approximately $1.6 million, $1.4 million and $742,000 for
the years ended December 31, 1996, 1995, and 1994,
F-11
<PAGE> 113
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
respectively. Future commitments under leasing arrangements were not significant
at December 31, 1996.
(7) SHAREHOLDERS' EQUITY
In December 1996 and 1995, the Company awarded 36,077 and 26,085 shares of
common stock, respectively, to employees as profit sharing and bonuses. These
shares were issued in each subsequent year.
In November 1996, $1,250,000 of convertible subordinated debentures were
converted by the debenture holders at the rate of one share of the Company's
common stock for each $20.15 of principal into 62,034 shares of common stock.
In August 1995, the Company sold 4,025,000 shares of common stock. Net
proceeds, after deducting underwriting discounts and expenses, totaled
approximately $55.6 million. Approximately $50 million of the net proceeds were
used to purchase the Quaker State Properties, and the remaining proceeds were
used to reduce the outstanding balance under the Company's revolving credit
agreement.
Outstanding warrants for the purchase of 13,801 shares of the Company's
common stock at a price of $21.74 per share were exercisable by the holder in
whole or part any time prior to February 15, 1997. These warrants expired
unexercised on February 15, 1997.
On December 31, 1992, the Company issued 24,000 shares of Class II Serial
Preferred Stock with a stated value of $100 per share. In preference to shares
of common stock, each share is entitled to cumulative cash dividends of $7.50
per year, payable quarterly. The Preferred Stock is subject to redemption at
$100 per share at any time by the Company and is convertible into common stock,
at the holder's election, at any time after five years from the date of issuance
at a conversion price of $15.00 per common share. Holders of the Preferred Stock
are entitled to one vote per preferred share. In February 1997, the Company
notified the preferred stockholder that it intended to redeem 100% of the
preferred stock for aggregate consideration of $2.4 million in March, 1997.
At December 31, 1996, the Company had reserved a total of 449,075 shares of
common stock for the conversion of the convertible subordinated debentures and
the Class II Serial Preferred Stock and the exercise of the outstanding warrants
referred to above.
The Company's Articles of Incorporation include certain anti-takeover
provisions. The provisions grant the Board of Directors the authority to issue
and fix the terms of preferred stock as well as the ability to take certain
other actions that could have the effect of discouraging unsolicited takeover
attempts. In addition, the Company has entered into contracts with its officers
and other employees that provide for severance payments, in certain
circumstances, in the event that their employment is terminated following a
change in control. The senior notes may, at the noteholder's discretion, be
accelerated and become due and payable upon a change in control of the Company.
(8) STOCK OPTION PLANS
The Company has an employee stock option plan which is authorized to issue
up to 1,070,000 shares of common stock to officers and employees. The exercise
price of options may not be less than the fair market value of a share of common
stock on the date of grant. Options expire on the tenth anniversary of the grant
date unless cessation of employment causes earlier termination. The options
become exercisable in 25% increments over a four-year period beginning one year
from date of grant. As of December 31, 1996, there were 301,000 shares available
for grant under the Plan.
F-12
<PAGE> 114
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
On May 27, 1994, the shareholders approved the Non-Employee Directors Stock
Option Plan authorizing the issuance of up to 120,000 shares of common stock.
Options for 2,000 shares will be granted each year to each non-employee
director. The exercise price of options under the Plan is equal to the fair
market value on the date of grant. Options expire on the tenth anniversary of
the grant date. The options become exercisable on the anniversary of the grant
date at a rate of one third of the shares each year. As of December 31, 1996,
there were 80,000 shares available for grant under the Plan.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under SFAS
123, "Accounting for Stock-Based Compensation" requires use of option valuation
models that were not developed for use in valuing employee stock options. Under
APB 25, no compensation expense is recognized because the exercise price of the
Company's employee stock options equals the market price of the underlying stock
on the date of the grant.
Pro forma information regarding net income and earnings per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of that
Statement. The fair value for these stock options was estimated at the date of
grant using a Black-Scholes option pricing model with the following
weighted-average assumptions for 1995 and 1996, respectively: risk-free interest
rates of 6.4% and 6.5%; volatility factors of the expected market price of the
Company's common stock of .36 and .36; dividend yield of zero; and a
weighted-average expected life of the option of seven years.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information for grants made after January 1, 1995, follows:
<TABLE>
<CAPTION>
1996 1995
------- ------
<S> <C> <C>
Pro forma net income (in thousands)............................. $14,286 $5,016
Pro forma earnings per share.................................... $ 1.25 $ .55
</TABLE>
The effects of applying Statement 123 for providing pro forma disclosures
are not indicative of future amounts until the new rules are applied to all
outstanding, nonvested awards.
F-13
<PAGE> 115
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock option activity under the two plans consisted of the following:
<TABLE>
<CAPTION>
WEIGHTED
NUMBER AVERAGE
OF EXERCISE
SHARES PRICE
------- --------
<S> <C> <C>
BALANCE DECEMBER 31, 1993.................................... 95,000 $10.00
Granted.................................................... 193,000 12.38
-------
BALANCE DECEMBER 31, 1994.................................... 288,000 11.59
Granted.................................................... 260,000 16.37
Exercised.................................................. (2,250) 11.32
Forfeited.................................................. (1,000) 10.00
-------
BALANCE DECEMBER 31, 1995.................................... 544,750 13.88
Granted.................................................... 292,000 20.74
Exercised.................................................. (3,250) 12.38
Forfeited.................................................. (30,000) 15.75
-------
BALANCE DECEMBER 31, 1996.................................... 803,500 $16.31
======= ======
OPTIONS EXERCISABLE AT DECEMBER 31, 1996..................... 225,525 $12.73
======= ======
</TABLE>
The weighted average fair value of options granted during the years 1996
and 1995 were $10.59 and $8.27 per share, respectively. The exercise price for
the options outstanding as of December 31, 1996 ranged from $10.00 to $16.38 per
share. At December 31, 1996 the weighted average remaining contractual life of
the outstanding options is 8.4 years.
(9) TAXES
The provision for income taxes on income from continuing operations before
income taxes in the Consolidated Statements of Operations includes the
following:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT
Federal.................................... $2,011 $1,103 $ 454
State...................................... 217 111 190
------ ------ ------
2,228 1,214 644
DEFERRED
Federal.................................... 4,257 826 1,539
State...................................... 81 110 147
------ ------ ------
4,338 936 1,686
------ ------ ------
TOTAL $6,566 $2,150 $2,330
====== ====== ======
</TABLE>
F-14
<PAGE> 116
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The effective tax rate for continuing operations differs from the U.S.
federal statutory tax rate, as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
-------------------------
1996 1995 1994
---- ----- ----
<S> <C> <C> <C>
Statutory federal income tax rate......................... 35.0% 34.0% 34.0%
Increases (reductions) in taxes resulting from:
State income taxes, net of federal tax benefit.......... 1.9 1.7 3.4
Nonconventional fuel source tax credits................. (5.9) (10.0) --
Statutory depletion..................................... (.6) (.3) (2.3)
Other, net.............................................. (.2) .2 .7
----- ----- -----
Effective income tax rate for the year.................... 30.2% 25.6% 35.8%
===== ===== =====
</TABLE>
The effect of the federal rate change, which was not material, is included
in "Other".
Significant components of deferred income tax liabilities and assets are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31
--------------------
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred income tax liabilities:
Property and equipment, net...................... $16,195 $10,891
Other, net....................................... 762 155
------- -------
Total deferred income tax liabilities......... 16,957 11,046
Deferred income tax assets:
Accrued expenses................................. 2,293 1,984
Inventories...................................... 360 212
Net operating loss carryforwards................. 667 966
Tax credit carryforwards......................... 3,562 2,263
Other, net....................................... 404 182
------- -------
Total deferred income tax assets.............. 7,286 5,607
------- -------
Net deferred income tax liability............. $ 9,671 $ 5,439
======= =======
Long-term liability.............................. $12,589 $ 7,693
Current asset.................................... (2,918) (2,254)
------- -------
Net deferred income tax liability............. $ 9,671 $ 5,439
======= =======
</TABLE>
At December 31, 1996, the Company had approximately $1,800,000 of net
operating loss carryforwards available for federal income tax reporting
purposes. Substantially all of the net operating loss carryforwards are limited
as to their annual utilization as a result of prior ownership changes. The net
operating loss carryforwards, if unused, will expire from 2002 to 2009. The
Company has alternative minimum tax credit carryforwards of approximately
$3,562,000 which have no expiration date.
Included in "Franchise, property and other taxes" are property taxes
associated with production activities of $203,000, $163,000 and $108,000 for the
years 1996, 1995 and 1994, respectively.
(10) PROFIT SHARING AND RETIREMENT PLANS
The Company has a non-qualified profit sharing arrangement under which the
Company contributes discretionary amounts determined by the compensation
committee of its Board of
F-15
<PAGE> 117
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Directors. Amounts are allocated to substantially all employees based on
relative compensation. The Company contributed $1,256,600, $458,000 and $340,000
for the years 1996, 1995 and 1994, respectively, to the profit sharing plan of
which one half was paid in cash and one half was paid in shares of the Company's
common stock contributed into each eligible employee's 401(k) plan account.
Additional discretionary bonuses are also made.
The Company has a qualified defined contribution plan (a 401(k) plan)
covering substantially all of the employees of the Company. Under the plan, an
amount equal to 2% of participants' compensation is contributed by the Company
to the plan each year. Eligible employees may also make voluntary contributions
which the Company matches $.25 for every $1.00 contributed up to 6% of an
employee's annual compensation. Retirement plan expense for 1996, 1995 and 1994
was $457,332, $372,213 and $286,446, respectively.
The Company has non-qualified deferred compensation plans which permit
certain key employees and directors to elect to defer a portion of their
compensation.
(11) COMMITMENTS AND CONTINGENCIES
The Company is involved in various legal actions arising in the normal
course of business. In the opinion of management, the ultimate disposition of
these matters will not have a material adverse effect on the financial position
of the Company.
(12) SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------
1996 1995 1994
------ ------ ------
(IN THOUSANDS)
<S> <C> <C> <C>
CASH PAID DURING THE YEAR FOR:
Interest............................................... $7,830 $5,592 $3,146
Income taxes........................................... 1,222 1,296 90
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Acquisition of assets in exchange for long-term
liabilities......................................... $ -- $8,460 $ 527
Debentures converted to common stock................... 1,250 -- --
Acquisition of assets in exchange for common stock..... -- -- 388
Sale of assets in exchange for note receivable......... -- -- 689
</TABLE>
(13) FAIR VALUE OF FINANCIAL INSTRUMENTS
The fair value of the financial instruments disclosed herein is not
representative of the amount that could be realized or settled, nor does the
fair value amount consider the tax consequences, if any, of realization or
settlement. The amounts in the financial statements for cash equivalents,
accounts receivable and notes receivable approximate fair value due to the short
maturities of these instruments. The recorded amounts of outstanding bank and
other long term debt approximate fair value because interest rates are based on
LIBOR or the prime rate or due to the short maturities. The preferred stock is
redeemable at $100 per share plus unpaid dividends. The following table
F-16
<PAGE> 118
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reflects the financial instruments for which the fair value differs from the
carrying amount of such financial instrument in the Company's December 31, 1996
and 1995 balance sheets:
<TABLE>
<CAPTION>
1996 1995
--------------------- ---------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Assets
Amounts receivable................. $ 5,659 $ 6,976 $ 6,764 $ 8,440
Liabilities
Senior notes....................... 35,000 34,500 35,000 35,200
Convertible subordinated
debentures...................... 5,550 7,024 6,800 7,117
</TABLE>
The fair value of the amounts receivable is based on the discounted
expected future cash flows. The fair value of the senior notes is based on rates
available at year-end for similar instruments. The fair value of the convertible
subordinated debentures at December 31, 1996 is based on the conversion rate of
$20.15 and valuing the common shares at the December 31, 1996 closing stock
price of $25.50. The fair value of the convertible subordinated debentures at
December 31, 1995 is based on rates available for similar instruments.
(14) SUPPLEMENTARY INFORMATION ON OIL AND GAS ACTIVITIES
The following disclosures of costs incurred related to oil and gas
activities are presented in accordance with SFAS No. 69.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
---------------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Acquisition costs
Proved properties.............................. $ 4,275 $79,464 $20,274
Unproved properties............................ 2,320 4,705 1,744
Developmental costs.............................. 30,750 19,906 9,142
Exploratory costs................................ 6,131 4,968 2,130
</TABLE>
PROVED OIL AND GAS RESERVES (UNAUDITED)
The Company's proved developed and proved undeveloped reserves are all
located within the United States. The Company cautions that there are many
uncertainties inherent in estimating proved reserve quantities and in projecting
future production rates and the timing of development expenditures. In addition,
estimates of new discoveries are more imprecise than those of properties with a
production history. Accordingly, these estimates are expected to change as
future information becomes available. Material revisions of reserve estimates
may occur in the future, development and production of the oil and gas reserves
may not occur in the periods assumed, and actual prices realized and actual
costs incurred may vary significantly from those used. Proved reserves represent
estimated quantities of natural gas, crude oil and condensate that geological
and engineering data demonstrate, with reasonable certainty, to be recoverable
in future years from known reservoirs under economic and operating conditions
existing at the time the estimates were made. Proved developed reserves are
proved reserves expected to be recovered through wells and equipment in place
and under operating methods being utilized at the time the estimates were made.
F-17
<PAGE> 119
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The estimates of proved developed reserves have been reviewed by
independent petroleum engineers. The estimates of proved undeveloped reserves
were prepared by the Company's petroleum engineers.
The following table sets forth changes in estimated proved and proved
developed reserves for the three years ended December 31, 1996:
<TABLE>
<CAPTION>
OIL GAS
(BBL) (MCF)
--------- -----------
<S> <C> <C>
DECEMBER 31, 1993...................................... 3,532,879 94,264,949
Extensions and discoveries............................. 242,365 8,554,382
Purchase of reserves in place.......................... 222,981 26,876,534
Sales of reserves in place............................. (11,178) (1,022,027)
Revisions of previous estimates........................ 622,462 3,880,633
Production............................................. (496,039) (9,562,862)
--------- -----------
DECEMBER 31, 1994...................................... 4,113,470 122,991,609
Extensions and discoveries............................. 229,957 22,287,564
Purchase of reserves in place.......................... 2,197,414 111,360,991
Sale of reserves in place.............................. (28,693) (278,013)
Revisions of previous estimates........................ 326,771 (419)
Production............................................. (555,913) (16,961,424)
--------- -----------
DECEMBER 31, 1995...................................... 6,283,006 239,400,308
Extensions and discoveries............................. 387,414 38,079,620
Purchase of reserves in place.......................... 336,279 8,182,402
Sale of reserves in place.............................. (7,664) (250,021)
Revisions of previous estimates........................ 1,108,538 28,601,277
Production............................................. (718,667) (25,410,233)
--------- -----------
DECEMBER 31, 1996...................................... 7,388,906 288,603,353
========= ===========
PROVED DEVELOPED RESERVES
December 31, 1994...................................... 3,714,671 101,355,451
========= ===========
December 31, 1995...................................... 5,592,579 206,998,924
========= ===========
December 31, 1996...................................... 6,410,344 225,693,651
========= ===========
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS RELATING TO PROVED OIL
AND GAS RESERVES (UNAUDITED)
The following tables, which present a standardized measure of discounted
future net cash flows and changes therein relating to proved oil and gas
reserves, are presented pursuant to SFAS No. 69. In computing this data,
assumptions other than those required by the FASB could produce different
results. Accordingly, the data should not be construed as representative of the
fair market value of the Company's proved oil and gas reserves. The following
assumptions have been made:
- Future revenues were based on year-end oil and gas prices. Future price
changes were included only to the extent provided by existing contractual
agreements.
- Production and development costs were computed using year-end costs
assuming no change in present economic conditions.
- Future net cash flows were discounted at an annual rate of 10%.
F-18
<PAGE> 120
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
- Future income taxes were computed using the approximate statutory tax
rate and giving effect to available net operating losses, tax credits and
statutory depletion.
The standardized measure of discounted future net cash flows relating to
proved oil and gas reserves is presented below:
<TABLE>
<CAPTION>
DECEMBER 31
----------------------------------------
1996 1995 1994
---------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C>
Estimated future cash inflows (outflows)
Revenues from the sale of oil and gas... $1,087,997 $ 679,286 $ 395,610
Production and development costs........ (419,504) (293,601) (165,766)
---------- --------- ---------
Future net cash flows before income
taxes................................... 668,493 385,685 229,844
Future income taxes....................... (185,768) (80,715) (54,762)
---------- --------- ---------
Future net cash flows..................... 482,725 304,970 175,082
10% timing discount....................... (223,496) (134,053) (85,228)
---------- --------- ---------
Standardized measure of discounted future
net cash flows.......................... $ 259,229 $ 170,917 $ 89,854
========== ========= =========
</TABLE>
The principal sources of changes in the standardized measure of future net
cash flows are as follows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
------------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Beginning of year............................. $170,917 $ 89,854 $ 71,086
Sale of oil and gas, net of production
costs....................................... (58,023) (32,874) (23,287)
Extensions and discoveries, less related
estimated future development and production
costs....................................... 60,738 24,441 14,317
Purchase of reserves in place less estimated
future production costs..................... 10,694 104,270 20,715
Sale of reserves in place less estimated
future production costs..................... (191) (329) (635)
Revisions of previous quantity estimates...... 38,204 1,129 4,972
Net changes in prices and production costs.... 83,530 (4,723) 94
Change in income taxes........................ (55,494) (17,756) (8,852)
Accretion of 10% timing discount.............. 21,425 11,647 8,944
Changes in production rates (timing) and
other....................................... (12,571) (4,742) 2,500
-------- -------- --------
End of year................................... $259,229 $170,917 $ 89,854
======== ======== ========
</TABLE>
F-19
<PAGE> 121
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(15) INDUSTRY SEGMENT FINANCIAL INFORMATION
The table below presents certain financial information regarding the
Company's industry segments of its continuing operations. Intersegment sales are
billed on an intercompany basis at prices for comparable third party goods and
services.
<TABLE>
<CAPTION>
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
REVENUES
Oil and gas operations........................ $124,294 $ 88,632 $ 65,646
Oilfield sales and service.................... 32,827 25,178 17,360
Intersegment sales............................ (7,310) (5,112) (4,203)
-------- -------- --------
$149,811 $108,698 $ 78,803
======== ======== ========
OPERATING INCOME
Oil and gas operations........................ $ 24,756 $ 12,444 $ 9,104
Oilfield sales and service.................... 963 673 350
-------- -------- --------
$ 25,719 $ 13,117 $ 9,454
======== ======== ========
IDENTIFIABLE ASSETS
Oil and gas operations........................ $281,761 $274,021 $132,538
Oilfield sales and service.................... 20,492 20,348 12,408
-------- -------- --------
$302,253 $294,369 $144,946
======== ======== ========
DEPRECIATION, DEPLETION AND AMORTIZATION
EXPENSE
Oil and gas operations........................ $ 28,598 $ 18,729 $ 11,343
Oilfield sales and service.................... 1,154 988 543
-------- -------- --------
$ 29,752 $ 19,717 $ 11,886
======== ======== ========
CAPITAL EXPENDITURES
Oil and gas operations........................ $ 35,486 $129,219 $ 33,956
Oilfield sales and service.................... 1,240 4,735 3,391
-------- -------- --------
$ 36,726 $133,954 $ 37,347
======== ======== ========
</TABLE>
No customer exceeded 10% of consolidated revenue during the year ended
December 31, 1996. One customer exceeded 10% of consolidated revenue during each
of the years ended December 31, 1995 and 1994 which amounted to $11.1 million
and $9.6 million, respectively.
F-20
<PAGE> 122
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(16) QUARTERLY RESULTS OF OPERATIONS (UNAUDITED)
The results of operations for the four quarters of 1996 and 1995 are shown
below.
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
1996
Sales and other operating revenues... $38,359 $32,542 $36,571 $42,339
Gross profit......................... 7,965 7,087 7,270 8,966
Net income........................... 3,425 3,402 3,186 4,742
Net income per common share.......... .30 .30 .28 .42
1995
Sales and other operating revenues... $20,872 $22,063 $30,566 $35,197
Gross profit......................... 3,250 3,865 5,178 5,288
Net income........................... 739 916 1,155 2,311
Net income per common share.......... .10 .12 .11 .20
</TABLE>
Income tax expense in the fourth quarter of 1995 was reduced by
approximately $600,000 to record the reduction of the effective tax rate for the
first nine months of 1995 as a result of the recognition of nonconventional fuel
source tax credits.
(17) DISCONTINUED OPERATIONS
In September 1995, the Company announced plans to sell Engine Power
Systems, Inc. ("EPS"), its wholly-owned subsidiary engaged in engine, parts and
service sales. The Company was unable to identify an acceptable buyer for EPS.
Since September 1995, a substantial portion of the workforce was eliminated and
substantial assets were sold. The Company recognized an additional charge in
1996 to reduce the remaining assets to net realizable value. Net revenues
generated by EPS were approximately $3.9 million in 1996, $4.2 million in 1995
and $3.7 million in 1994. The results of operations of EPS are presented as
discontinued operations in the accompanying financial statements for all periods
presented.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31
--------------------------------
1996 1995 1994
------ -------- ------
(IN THOUSANDS)
<S> <C> <C> <C>
Loss from operations of discontinued business.... $ (180) $ (760) $ (509)
Income tax benefit............................... 63 268 172
------ -------- ------
(117) (492) (337)
Estimated loss on disposal....................... (495) (1,001) --
Income tax benefit............................... 173 354 --
------ -------- ------
(322) (647) --
------ -------- ------
LOSS FROM DISCONTINUED OPERATIONS................ $ (439) $ (1,139) $ (337)
====== ======== ======
</TABLE>
(18) SALE OF TAX CREDIT PROPERTIES
In February and March 1996, the Company sold certain interests that qualify
for the nonconventional fuel source tax credit. The interests were sold in two
separate transactions for approximately $750,000 and $100,000, respectively, in
cash and a volumetric production payment under which 100% of the cash flow from
the properties will go to the Company until approximately 11.7 Bcf and 3.4 Bcf,
respectively, of gas has been produced and sold. In addition to receiving 100%
of the cash
F-21
<PAGE> 123
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
flow from the properties, the Company will receive quarterly incentive payments
based on production from the interests. The Company has the option to repurchase
the interests at a future date.
(19) HEDGING ACTIVITIES
As a result of certain 1995 acquisitions, the Company has several contracts
to sell gas at indexed prices. In early 1996, the Company's Board of Directors
approved a formal policy covering hedging with financial instruments.
Significant provisions of this policy are that targets are pre-defined and
transactions are pre-authorized by senior management; all transactions must meet
the accounting definition of a hedge; basis risk must be hedged; leveraged
transactions are prohibited and quarterly reports must be made to the Board of
Directors on all open positions.
The Company may, from time to time, partially hedge indexed contract price
exposure by selling futures contracts on the NYMEX. During 1996, the Company
incurred a net $258,000 pretax loss on its hedging activities due to rapidly
rising gas prices during the year. At December 31, 1996, the Company did not
have any open futures contracts.
When market conditions are favorable, the Company may enter into interest
rate swap arrangements, whereby a portion of the Company's floating rate
exposure is exchanged for a fixed interest rate. The Company had no such
derivative financial instruments at December 31, 1996 or 1995.
F-22
<PAGE> 124
BELDEN & BLAKE CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)
<TABLE>
<CAPTION>
SUCCESSOR | PREDECESSOR
COMPANY | COMPANY
----------- | ------------
JUNE 30, | DECEMBER 31,
1997 | 1996
----------- | ------------
(UNAUDITED) |
<S> <C> | <C>
ASSETS |
CURRENT ASSETS |
Cash and cash equivalents...................................... $ 17,322 | $ 8,606
Accounts receivable, net....................................... 28,846 | 33,523
Inventories.................................................... 9,286 | 9,397
Deferred income taxes.......................................... 2,739 | 2,918
Other current assets........................................... 5,643 | 2,280
--------- | --------
TOTAL CURRENT ASSETS................................... 63,836 | 56,724
PROPERTY AND EQUIPMENT, AT COST |
Oil and gas properties (successful efforts method)............. 462,115 | 266,521
Gas gathering systems.......................................... 18,813 | 26,045
Land, buildings, machinery and equipment....................... 25,255 | 31,578
--------- | --------
506,183 | 324,144
Less accumulated depreciation, depletion and amortization...... -- | 86,808
--------- | --------
PROPERTY AND EQUIPMENT, NET............................ 506,183 | 237,336
OTHER ASSETS..................................................... 29,743 | 9,703
--------- | --------
$ 599,762 | $303,763
========= | ========
LIABILITIES AND SHAREHOLDERS' EQUITY |
CURRENT LIABILITIES |
Accounts payable............................................... $ 9,690 | $ 9,421
Accrued expenses............................................... 31,894 | 20,990
Current portion of long-term liabilities....................... 1,413 | 4,203
--------- | --------
TOTAL CURRENT LIABILITIES.............................. 42,997 | 34,614
LONG-TERM LIABILITIES |
Bank and other long-term debt.................................. 104,335 | 59,216
Senior notes................................................... -- | 31,111
Senior subordinated notes...................................... 225,000 | --
Convertible subordinated debentures............................ -- | 5,550
Other.......................................................... 4,788 | 1,765
--------- | --------
334,123 | 97,642
DEFERRED INCOME TAXES............................................ 114,412 | 12,589
SHAREHOLDERS' EQUITY |
Common stock without par value; $.10 stated value per share; |
authorized 58,000,000 and 50,000,000 shares; issued and |
outstanding 10,000,000 and 11,231,865 shares................ 1,000 | 1,123
Preferred stock without par value; $100 stated value per share; |
authorized -0- and 8,000,000 shares; issued and outstanding |
-0-and 24,000 shares........................................ -- | 2,400
Paid in capital................................................ 107,230 | 128,035
Retained earnings.............................................. -- | 27,395
Unearned portion of restricted stock........................... -- | (35)
--------- | --------
TOTAL SHAREHOLDERS' EQUITY............................. 108,230 | 158,918
--------- | --------
$ 599,762 | $303,763
========= | ========
</TABLE>
- ---------------
The balance sheet at December 31, 1996 has been derived from the audited
financial statements at that date but does not include all of the information
and footnotes required by generally accepted accounting principles for complete
financial statements.
See accompanying notes.
F-23
<PAGE> 125
BELDEN & BLAKE CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
--------------------
SIX MONTHS
ENDED JUNE 30,
1997 1996
------- -------
<S> <C> <C>
REVENUES
Oil and gas sales................................................... $41,591 $38,190
Gas marketing and gathering......................................... 21,657 21,789
Oilfield sales and service.......................................... 14,665 10,922
Interest and other.................................................. 1,484 1,741
-------- -------
79,397 72,642
EXPENSES
Production expense.................................................. 10,158 8,378
Production taxes.................................................... 1,647 1,511
Cost of gas and gathering expense................................... 18,340 17,990
Oilfield sales and service.......................................... 13,936 10,026
Exploration expense................................................. 4,380 2,859
General and administrative expense.................................. 2,445 2,115
Depreciation, depletion and amortization............................ 15,366 14,701
Franchise, property and other taxes................................. 908 882
-------- -------
67,180 58,462
-------- -------
OPERATING INCOME...................................................... 12,217 14,180
Interest expense.................................................... 3,715 3,824
Transaction related expenses........................................ 16,758
-------- -------
20,473 3,824
-------- -------
(LOSS) INCOME BEFORE INCOME TAXES..................................... (8,256) 10,356
Provision for income taxes.......................................... 1,617 3,529
-------- -------
NET (LOSS) INCOME..................................................... $(9,873) $ 6,827
======== =======
</TABLE>
See accompanying notes.
F-24
<PAGE> 126
BELDEN & BLAKE CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
UNEARNED
COMMON COMMON PREFERRED PAID IN RETAINED RESTRICTED
SHARES STOCK STOCK CAPITAL EARNINGS STOCK TOTAL
-------- ------- --------- --------- -------- ---------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
PREDECESSOR COMPANY:
JANUARY 1, 1995.................... 7,085 $ 709 $ 2,400 $ 70,379 $ 7,879 $ (225) $ 81,142
Stock issued....................... 4,028 403 55,264 55,667
Net income......................... 5,121 5,121
Preferred stock dividend........... (180) (180)
Stock options exercised............ 2 -- 25 25
Employee stock bonus............... 22 2 251 253
Restricted stock................... 144 119 263
------- ------ ------- --------- -------- ------ ---------
DECEMBER 31, 1995.................. 11,137 1,114 2,400 126,063 12,820 (106) 142,291
Net income......................... 14,755 14,755
Preferred stock dividend........... (180) (180)
Stock options exercised and related
tax benefit...................... 3 -- 47 47
Employee stock bonus............... 26 3 418 421
Restricted stock activity.......... 4 -- 263 71 334
Conversion of debentures........... 62 6 1,244 1,250
------- ------ ------- --------- -------- ------ ---------
DECEMBER 31, 1996.................. 11,232 1,123 2,400 128,035 27,395 (35) 158,918
Net loss........................... (9,873) (9,873)
Preferred stock redeemed........... (2,400) (2,400)
Preferred stock dividend........... (45) (45)
Subordinated debentures converted
to common stock.................. 275 27 5,523 5,550
Stock options exercised and
surrendered and related tax
benefit.......................... 1 -- 1,596 1,596
Employee stock bonus............... 36 4 926 930
Restricted stock activity.......... 17 35 52
------- ------ ------- --------- -------- ------ ---------
JUNE 30, 1997 (UNAUDITED).......... 11,544 $1,154 $ -- $ 136,097 $ 17,477 $ -- $ 154,728
------- ------ ------- --------- -------- ------ ---------
SUCCESSOR COMPANY:
Redemption of common stock......... (11,544) (1,154) (136,097) (17,477) (154,728)
Sale of common stock to TPG........ 10,000 1,000 107,230 108,230
------- ------ ------- --------- -------- ------ ---------
JUNE 30, 1997 (UNAUDITED).......... 10,000 $1,000 $ -- $ 107,230 $ -- $ -- $ 108,230
======= ====== ======= ========= ======== ====== =========
</TABLE>
See accompanying notes.
F-25
<PAGE> 127
BELDEN & BLAKE CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(IN THOUSANDS)
<TABLE>
<CAPTION>
PREDECESSOR COMPANY
-----------------------
SIX MONTHS ENDED JUNE 30
-----------------------
1997 1996
--------- --------
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.................................................. $ (9,873) $ 6,827
Adjustments to reconcile net (loss) income to net cash provided by
operating activities:
Depreciation, depletion and amortization........................... 15,366 14,701
Transaction related expenses....................................... 15,903 --
Loss (gain) on disposal of property and equipment.................. 356 (8)
Deferred income taxes.............................................. 3,125 2,145
Deferred compensation and stock grants............................. 1,756 682
Change in operating assets and liabilities, net of effects of
purchases of businesses:
Accounts receivable and other operating assets..................... 1,237 (1,092)
Inventories........................................................ 112 (225)
Accounts payable and accrued expenses.............................. 4,800 (966)
--------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES....................... 32,782 22,064
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisition of businesses, net of cash acquired.................... (9,263) (254)
Proceeds from property and equipment disposals..................... 704 2,059
Additions to property and equipment................................ (18,419) (11,368)
Increase in other assets........................................... (9,496) (501)
--------- --------
NET CASH USED IN INVESTING ACTIVITIES........................... (36,474) (10,064)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from revolving line of credit and long-term debt.......... 46,000 7,105
Proceeds from new credit agreement................................. 104,000 --
Proceeds from senior subordinated notes............................ 225,000 --
Repayment of long-term debt and other obligations.................. (140,325) (18,768)
Payment to shareholders & optionholders............................ (203,934) --
Transaction related expenses....................................... (15,903) --
Preferred stock redeemed........................................... (2,400) --
Preferred stock dividends.......................................... (45) (90)
Proceeds from sale of common stock and stock options............... 15 --
--------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES............. 12,408 (11,753)
--------- --------
NET INCREASE IN CASH AND CASH EQUIVALENTS............................ 8,716 247
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD..................... 8,606 12,322
--------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD........................... $ 17,322 $ 12,569
========= ========
CASH PAID DURING THE PERIOD FOR:
Interest........................................................... $ 4,153 $ 4,241
Income taxes....................................................... 288 951
NON-CASH INVESTING AND FINANCING ACTIVITIES:
Debentures converted to stock...................................... 5,550 --
Acquisition of assets in exchange for long-term obligations........ 792 --
</TABLE>
See accompanying notes.
F-26
<PAGE> 128
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
JUNE 30, 1997
(1) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Belden &
Blake Corporation (the "Company") have been prepared in accordance with
generally accepted accounting principles for interim financial information and
with the instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, they do not include all of the information and footnotes required
by generally accepted accounting principles for complete financial statements.
In the opinion of management, all adjustments (consisting of normal recurring
accruals) considered necessary for a fair presentation have been included.
Operating results for the six-month period ended June 30, 1997 are not
necessarily indicative of the results that may be expected for the year ended
December 31, 1997. For further information, refer to the consolidated financial
statements and footnotes included in the Company's annual report on Form 10-K
for the year ended December 31, 1996.
(2) MERGER
On March 27, 1997, the Company signed a definitive merger agreement with
TPG Partners II, L.P. ("TPG"), a private investment partnership, in which TPG
and certain other investors acquired the Company in an all-cash transaction
valued at $485 million. Under the terms of the agreement, TPG and such investors
paid $27 per share for all common shares outstanding plus an additional amount
to redeem certain options held by directors and employees. The transaction was
completed on June 27, 1997 and for financial reporting purposes has been
accounted for as a purchase effective June 30, 1997. The results of operations
for the periods ended June 30, 1997 reflect the historical results of the
predecessor company including the recognition of transaction related expenses
which were paid by the predecessor company. The June 30, 1997 balance sheet
reflects the preliminary allocation of the purchase price to the assets acquired
and liabilities assumed by the successor company and is not comparable to the
balance sheet as of December 31, 1996. A vertical black line is shown to
separate the financial statements of the predecessor and successor companies.
Following are unaudited pro forma results of operations as if the
transaction occurred at the beginning of 1996:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30
--------------------
1997 1996
------- -------
<S> <C> <C>
Total revenues........................................ $79,397 $72,642
Net loss from continuing operations................... (8,598) (22,696)
</TABLE>
The unaudited pro forma information presented above does not purport to be
indicative of the results that actually would have been obtained if the merger
had been consummated at the beginning of 1996 and is not intended to be a
projection of future results or trends.
In connection with the merger, the Company entered into a Transaction
Advisory Agreement with TPG pursuant to which TPG received a cash financial
advisory fee of $5.0 million for services as financial advisor in connection
with the merger. These fees are included in the $16.8 million of transaction
related expenses. TPG also will be entitled to receive fees of up to 1.5% of the
transaction value for each subsequent transaction entered into by the successor
company.
F-27
<PAGE> 129
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
Certain former officers have entered into non-competition agreements with
the Company dated March 27, 1997, which became effective contemporaneously with
consummation of the merger. These agreements have a term of 36 months and a
total present value of $3 million. The obligation for these agreements is in the
June 30, 1997 balance sheet.
Certain executives of the predecessor company have agreed that they would
not exercise or surrender certain stock options having an aggregate value of
$1.8 million, based on the intrinsic value of the options (the difference
between the exercise price of the options and a purchase price of $27 per
share). Effective as of the closing, the exercise price and number of shares
obtainable upon exercise of these options were changed to reflect the intrinsic
value of the predecessor company's options. The $1.8 million aggregate value has
been recorded as additional purchase price.
(3) LONG-TERM DEBT
Long-term debt consists of the following:
<TABLE>
<CAPTION>
SUCCESSOR | PREDECESSOR
COMPANY | COMPANY
--------- | ------------
JUNE 30, | DECEMBER 31,
1997 | 1996
--------- | ------------
<S> <C> | <C>
New credit agreement.............................. $ 104,000 | $ --
Revolving line of credit.......................... -- | 59,000
Senior Notes...................................... -- | 35,000
Senior subordinated notes......................... 225,000 | --
Convertible subordinated debentures............... -- | 5,550
Other............................................. 469 | 246
--------- | --------
329,469 | 99,796
Less current portion.............................. 134 | 3,918
--------- | --------
Long-term debt.................................... $ 329,335 | $ 95,878
========= | ========
</TABLE>
On June 27, 1997, the Company completed a private placement (pursuant to
Rule 144A) of $225 million of 9 7/8% Senior Subordinated Notes, Series A, which
mature on June 15, 2007. The notes were issued under an indenture which provides
that interest will be payable semiannually on June 15 and December 15 of each
year, commencing December 15, 1997. The notes are subordinate to the new credit
facility.
The notes are redeemable in whole or in part at the option of the Company,
at any time on or after June 15, 2002, at the redemption prices set forth below
plus, in each case, accrued and unpaid interest, if any, thereon.
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---------------------------------------------------------------- ----------
<S> <C>
2002............................................................ 104.938%
2003............................................................ 103.292%
2004............................................................ 101.646%
2005 and thereafter............................................. 100.000%
</TABLE>
Prior to June 15, 2000, the Company may, at its option, on any one or more
occasions, redeem up to 40% of the original aggregate principal amount of the
notes at a redemption price equal to 109.875% of the principal amount, plus
accrued and unpaid interest, if any, on the redemption date,
F-28
<PAGE> 130
BELDEN & BLAKE CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- CONTINUED
with all or a portion of net proceeds of public sales of common stock of the
Company; provided that at least 60% of the original aggregate principal amount
of the notes remains outstanding immediately after the occurrence of such
redemption; and provided, further, that such redemption shall occur within 60
days of the date of the closing of the related sale of common stock of the
Company.
Upon a "change in control" in the Company, as defined in the 9 7/8% Notes
Indenture, the note holders may require, at their election, that the Company
repurchase all or a portion of the notes at an offer price in cash equal to 101%
of the aggregate principal amount thereof plus accrued and unpaid interest, if
any, thereon.
The indenture under which the subordinated notes were issued contains
certain covenants that limit the ability of the Company and its subsidiaries to
incur additional indebtedness and issue stock, pay dividends, make
distributions, make investments, make certain other restricted payments, enter
into certain transactions with affiliates, dispose of certain assets, incur
liens securing indebtedness of any kind other than permitted liens, and engage
in mergers and consolidations.
On June 27, 1997, the Company entered into a revolving credit agreement
with several lenders. These lenders have committed, subject to compliance with
the borrowing base to provide the Company with revolving credit loans of up to
$200 million, of which $25 million will be available for the issuance of letters
of credit. The new credit agreement is a senior revolving credit facility. The
initial borrowing base has been set at $180 million. The borrowing base is the
sum of the Company's proved developed reserves, proved developed non-producing
reserves, proved undeveloped reserves and related processing and gathering
assets and other assets of the Company, adjusted by the Engineering Committee of
the Bank in accordance with their standard oil and gas lending practices. If
less than 75% of the borrowing base is utilized, the borrowing base will be re-
determined annually. If more than 75% of the borrowing base is utilized, the
borrowing base will be re-determined semi-annually. The Company borrowed $104
million under the new credit agreement to partially finance the acquisition of
the Company by TPG and certain other investors; to repay certain existing
outstanding indebtedness of the Company and to pay certain fees and expenses
related to the transaction. The new credit agreement will mature on June 27,
2002. Outstanding balances under the agreement incur interest at the Company's
choice of several indexed rates, the most favorable being 7.1875% at June 30,
1997.
The new credit agreement contains a number of covenants that , among other
things, restrict the ability of the Company and its subsidiaries to dispose of
assets, incur additional indebtedness, prepay other indebtedness or amend
certain debt instruments, pay dividends, create liens on assets, enter into sale
and leaseback transactions, make investments, loans or advances, make
acquisitions, engage in mergers or consolidations, change the business conducted
by the Company or its subsidiaries, make capital expenditures or engage in
certain transactions with affiliates and otherwise restrict certain corporate
activities. In addition, under the new credit agreement, the Company is required
to maintain specified financial ratios and tests, including minimum interest
coverage ratios and maximum leverage ratios.
F-29
<PAGE> 131
NO DEALER, SALES PERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN
THIS PROSPECTUS IN CONNECTION WITH THE OFFER CONTAINED HEREIN, AND, IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON
AS HAVING BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT
CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY, ANY
SECURITIES OTHER THAN THE SECURITIES TO WHICH IT RELATES OR AN OFFER TO
SELL, OR THE SOLICITATION OF AN OFFER TO BUY, SUCH SECURITIES IN ANY
CIRCUMSTANCES IN WHICH SUCH OFFER OR SOLICITATION IS UNLAWFUL. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY SALE MADE HEREUNDER WILL, UNDER ANY
CIRCUMSTANCES, CREATE AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE
AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF OR THAT THE INFORMATION
CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO ITS DATE.
------------------------------------------------------------
TABLE OF CONTENTS
<TABLE>
<S> <C>
Available Information................. 3
Summary............................... 4
Risk Factors.......................... 14
Forward-Looking Information........... 22
Use of Proceeds....................... 22
The Exchange Offer.................... 22
Capitalization........................ 31
Unaudited Pro Forma Consolidated
Financial Statements................ 32
Selected Consolidated Financial
Data................................ 35
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 36
Business and Properties............... 45
Management............................ 57
Principal Shareholders................ 63
Certain Relationships and Related
Transactions........................ 63
Description of the Notes.............. 65
Description of Other Indebtedness..... 95
Exchange and Registration Rights
Agreement........................... 97
Plan of Distribution.................. 98
Legal Matters......................... 99
Experts............................... 100
Glossary of Selected Oil and Gas
Terms............................... 101
Index to Consolidated Financial
Statements.......................... F-1
</TABLE>
UNTIL OCTOBER 13, 1997, ALL DEALERS EFFECTING TRANSACTIONS IN THE
NOTES OFFERED HEREBY, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION,
MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE
OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS.
PROSPECTUS
$225,000,000
BELDEN & BLAKE CORPORATION
9 7/8% SENIOR SUBORDINATED
NOTES DUE 2007
LOGO
SEPTEMBER 18, 1997
