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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 9, 1997
REGISTRATION NO. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
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BELCO OIL & GAS CORP.
(Exact name of Registrant as specified in its charter)
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NEVADA 1311 13-3869719
(State or other jurisdiction of (Primary Standard Industrial (I.R.S. Employer
incorporation or organization) Classification Code Number) Identification No.)
ROBERT A. BELFER
CHAIRMAN OF THE BOARD AND
CHIEF EXECUTIVE OFFICER
767 FIFTH AVENUE, 46TH FLOOR 767 FIFTH AVENUE, 46TH FLOOR
NEW YORK, NEW YORK 10153 NEW YORK, NEW YORK 10153
(212) 644-2200 (212) 644-2200
(Address, including zip code, and telephone (Name, Address, including zip code,
number, including area code, of and telephone number,
registrant's principal executive offices) including area code, of agent for service)
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Copy to:
ALAN P. BADEN
VINSON & ELKINS L.L.P.
2300 FIRST CITY TOWER
HOUSTON, TEXAS 77002-6760
(713) 758-2430
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO THE
PUBLIC: As soon as practicable following the effectiveness of this Registration
Statement.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION, DATED OCTOBER 9, 1997
PROSPECTUS
BELCO OIL & GAS CORP.
OFFER TO EXCHANGE
8 7/8% SERIES B SENIOR SUBORDINATED NOTES DUE 2007
FOR ALL OUTSTANDING 8 7/8% SERIES A
SENIOR SUBORDINATED NOTES DUE 2007
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M. NEW YORK CITY TIME,
ON NOVEMBER 10, 1997, UNLESS EXTENDED
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Belco Oil & Gas Corp., a Nevada corporation (the "Company"), hereby offers, upon
the terms and subject to the conditions set forth in this Prospectus and the
accompanying letter of transmittal (the "Letter of Transmittal," and together
with this Prospectus, the "Exchange Offer"), to exchange $1,000 principal amount
of its 8 7/8% Series B Senior Subordinated Notes due 2007 (the "Exchange
Notes"), which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement (as defined herein)
of which this Prospectus constitutes a part, for each $1,000 principal amount of
its outstanding 8 7/8% Series A Senior Subordinated Notes due 2007 (the "Old
Notes"), of which $150,000,000 principal amount is outstanding. The form and
terms of the Exchange Notes are identical in all material respects to the form
and terms of the Old Notes except for certain transfer restrictions and
registration rights relating to the Old Notes. The Exchange Notes will evidence
the same debt as the Old Notes and will be issued under and be entitled to the
benefits of the Indenture (as defined herein). The Exchange Notes and the Old
Notes are collectively referred to herein as the "Notes."
The Notes are senior subordinated obligations of the Company and are
subordinated in right of payment to all existing and future Senior Debt (as
defined herein) of the Company, including indebtedness under the New Credit
Facility (as defined herein), pari passu in right of payment with all existing
or future senior subordinated indebtedness of the Company and senior in right of
payment to all other subordinated indebtedness of the Company.
The Company will accept for exchange any and all Old Notes that are validly
tendered on or prior to 5:00 p.m., New York City time, on the date the Exchange
Offer expires, which will be November 10, 1997, unless the Exchange Offer is
extended. See "The Exchange Offer -- Expiration Date; Extensions; Amendments."
Tenders of Old Notes may be withdrawn at any time prior to 5:00 p.m., New York
City time, on the business day prior to the Expiration Date (as defined herein),
unless previously accepted for exchange. The Exchange Offer is not conditioned
upon any minimum principal amount of Old Notes being tendered for exchange.
However, the Exchange Offer is subject to certain conditions which may be waived
by the Company and to the terms and provisions of the Registration Rights
Agreement (as defined herein). Old Notes may be tendered only in denominations
of $1,000 principal amount and integral multiples thereof. The Company has
agreed to pay the expenses of the Exchange Offer. See "The Exchange Offer."
The Exchange Notes will bear interest at the rate of 8 7/8% per annum, payable
semi-annually on March 15 and September 15 of each year, commencing March 15,
1998, to holders of record on the March 1 and September 1 immediately preceding
such interest payment date. Holders of Exchange Notes of record on March 1, 1998
will receive interest on March 15, 1998 from the date of issuance of the
Exchange Notes, plus an amount equal to the accrued interest on the Old Notes
from the date of issuance of the Old Notes, September 23, 1997, to the date of
exchange thereof. Interest on the Old Notes accepted for exchange will cease to
accrue upon issuance of the Exchange Notes.
(Cover continued on next page)
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SEE "RISK FACTORS" BEGINNING ON PAGE 15 OF THIS PROSPECTUS FOR A DISCUSSION OF
CERTAIN FACTORS THAT SHOULD BE CONSIDERED IN EVALUATING AN INVESTMENT IN THE
NOTES.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
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The date of this Prospectus is , 1997
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The Old Notes were sold by the Company on September 23, 1997 to the Initial
Purchasers (as defined herein) in a transaction not registered under the
Securities Act in reliance upon Section 4(2) of the Securities Act. The Old
Notes were thereupon offered and sold by the Initial Purchasers only to
"qualified institutional buyers" (as defined in Rule 144A under the Securities
Act), each of whom agreed to comply with certain transfer restrictions and other
conditions. Accordingly, the Old Notes may not be offered, resold or otherwise
transferred unless registered under the Securities Act or unless an applicable
exemption from the registration requirements of the Securities Act is available.
The Exchange Notes are being offered hereunder in order to satisfy the
obligations of the Company under the Registration Rights Agreement entered into
with the Initial Purchasers in connection with the offering of the Old Notes.
See "The Exchange Offer" and "Exchange and Registration Rights Agreement."
Based on no-action letters issued by the staff of the Securities and Exchange
Commission (the "Commission" or "SEC") to third parties, including Exxon Capital
Holdings Corporation, SEC No-Action Letter (available April 13, 1989), Morgan
Stanley & Co. Inc., SEC No-Action Letter (available June 5, 1991) (the "Morgan
Stanley Letter") and Mary Kay Cosmetics, Inc., SEC No-Action Letter (available
June 5, 1991), the Company believes that the Exchange Notes issued pursuant to
the Exchange Offer may be offered for resale, resold and otherwise transferred
by the respective holders thereof (other than a "Restricted Holder," being (i) a
broker-dealer who purchased Old Notes exchanged for such Exchange Notes directly
from the Company to resell pursuant to Rule 144A or any other available
exemption under the Securities Act or (ii) a person 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 are acquired in the ordinary
course of such holder's business and such holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of such Exchange Notes. Eligible holders
wishing to accept the Exchange Offer must represent to the Company that such
conditions have been met. Holders who tender Old Notes in the Exchange Offer
with the intention to participate in a distribution of the Exchange Notes may
not rely upon the Morgan Stanley Letter or similar no-action letters. See "The
Exchange Offer -- General." Each broker-dealer that receives Exchange Notes for
its own account pursuant to the Exchange Offer must acknowledge that it will
deliver a prospectus in connection with any resale of such Exchange Notes. The
Letter of Transmittal states that by so acknowledging and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act. This Prospectus, 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 Old Notes
where such Old Notes were acquired by such broker-dealer 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 available to any broker-dealer for use in connection with any such
resale. See "Plan of Distribution."
The Company will not receive any proceeds from the Exchange Offer.
The Exchange Notes will constitute a new issue of securities with no established
trading market, and there can be no assurance as to the liquidity of any markets
that may develop for the Exchange Notes or as to the ability of or price at
which the holders of Exchange Notes would be able to sell their Exchange Notes.
Future trading prices of the Exchange Notes will depend on many factors,
including, among others, prevailing interest rates, the Company's operating
results and the market for similar securities. The Company does not intend to
apply for listing of the Exchange Notes on any securities exchange. Chase
Securities Inc., Goldman, Sachs & Co. and Smith Barney Inc. (together, the
"Initial Purchasers") have informed the Company that they currently intend to
make a market for the Exchange Notes. However, they are not so obligated, and
any such market making may be discontinued at any time without notice.
Accordingly, no assurance can be given that an active public or other market
will develop for the Exchange Notes or as to the liquidity of or the trading
market for the Exchange Notes.
THE EXCHANGE OFFER IS NOT BEING MADE TO, NOR WILL THE COMPANY ACCEPT SURRENDERS
FOR EXCHANGE FROM, HOLDERS OF OLD NOTES IN ANY JURISDICTION IN WHICH THE
EXCHANGE OFFER OR THE ACCEPTANCE THEREOF WOULD NOT BE IN COMPLIANCE WITH THE
SECURITIES OR BLUE SKY LAWS OF SUCH JURISDICTION.
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TABLE OF CONTENTS
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PAGE NO.
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Available Information....................................... 3
Incorporation of Certain Documents by Reference............. 4
Prospectus Summary.......................................... 5
Forward-Looking Statements.................................. 15
Risk Factors................................................ 15
Private Placement........................................... 24
Use of Proceeds............................................. 24
Capitalization.............................................. 24
Selected Historical Financial Data.......................... 25
Management's Discussion and Analysis of Financial Condition
and Results of Operations................................. 26
Business and Properties..................................... 34
Management.................................................. 53
Certain Affiliate Transactions.............................. 56
Security Ownership of Management and Certain Beneficial
Owners.................................................... 58
The Exchange Offer.......................................... 59
Description of the Notes.................................... 66
Exchange and Registration Rights Agreement.................. 98
Transfer Restrictions on Old Notes.......................... 100
Plan of Distribution........................................ 102
Legal Matters............................................... 102
Experts..................................................... 103
Glossary of Oil and Gas Terms............................... 104
Index to Financial Statements............................... F-1
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements and other information
with the Commission. Such reports and other information can be inspected and
copied at the public reference facilities maintained by the Commission at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the
following regional offices of the Commission: Seven World Trade Center, Suite
1300, New York, New York 10048 and Citicorp Center, 500 West Madison Street,
Suite 1400, Chicago, Illinois 60661-2511. Copies of such materials can be
obtained by mail from the Public Reference Section of the Commission, at
Judiciary Plaza, 450 Fifth Street, N.W., Washington, D.C. 20549, at prescribed
rates. In addition, the Commission maintains a site on the World Wide Web that
contains reports, proxy and information statements and other information filed
electronically by the Company with the Commission which can be accessed over the
Internet at http://www.sec.gov. While any Old Notes remain outstanding, the
Company will make available, upon request, to any holder and any prospective
purchaser of Old Notes, the information required pursuant to Rule 144A(d)(4)
under the Securities Act during any period in which the Company is not subject
to Section 13 or 15(d) of the Exchange Act. Any such request should be directed
to the Secretary of the Company, 767 Fifth Avenue, 46th Floor, New York, New
York 10153.
This Prospectus constitutes part of a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") filed by the Company with the Commission under the
Securities Act. This Prospectus omits certain of the information set forth in
the Registration Statement. Reference is hereby made to the Registration
Statement and to the exhibits relating thereto for further information with
respect to the Company and the securities offered hereby.
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Statements contained herein concerning the provisions of contracts or other
documents are not necessarily complete, and each such statement is qualified in
its entirety by reference to the copy of the applicable contract or other
document filed with the Commission. Copies of the Registration Statement and the
exhibits thereto are on file at the offices of the Commission and may be
obtained upon payment of the fee prescribed by the Commission, or may be
examined without charge at the public reference facilities of the Commission
described above.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents have been filed by the Company with the Commission
pursuant to the Exchange Act (File No. 1-12634) and are incorporated herein by
reference:
(1) the Company's Annual Report on Form 10-K for the fiscal year ended
December 31, 1996; and
(2) the Company's Quarterly Reports on Form 10-Q for the quarters
ended March 31, 1997 and June 30, 1997; and
(3) the Company's Proxy Statement for the Annual Meeting of
Stockholders held May 13, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or
15(d) of the Exchange Act subsequent to the date of this Prospectus and prior to
the termination of the offering made by this Prospectus shall be deemed to be
incorporated by reference herein and to be a part hereof from the date of filing
thereof. Any statement contained in a document incorporated or deemed to be
incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
or in any other subsequently filed document that also is or is deemed to be
incorporated by reference herein, modifies or supersedes such statement. Any
such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus.
The Company hereby undertakes to provide without charge to each person,
including any beneficial owner, to whom a copy of this Prospectus has been
delivered, upon the written or oral request of such person, a copy of any or all
of the information that has been incorporated by reference in this Prospectus
(not including exhibits to the information that is incorporated by reference
herein unless such exhibits are specifically incorporated by reference in such
information). Requests for such copies should be directed to the Secretary of
the Company at 767 Fifth Avenue, 46th Floor, New York, New York, 10153. In order
to ensure timely delivery of such documents prior to the Expiration Date, any
request should be made by October 31, 1997.
NO PERSON HAS BEEN AUTHORIZED TO GIVE ANY INFORMATION OR MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROSPECTUS AND THE
ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION OR
REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY
OR THE EXCHANGE AGENT. NEITHER THE DELIVERY OF THIS PROSPECTUS OR THE
ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER, NOR ANY SALE MADE
HEREUNDER SHALL UNDER ANY CIRCUMSTANCES CREATE AN IMPLICATION THAT THERE HAS
BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF. NEITHER THIS
PROSPECTUS NOR THE ACCOMPANYING LETTER OF TRANSMITTAL, OR BOTH TOGETHER,
CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE
SECURITIES OFFERED HEREBY BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR
SOLICITATION IS NOT AUTHORIZED OR IN WHICH THE PERSON MAKING SUCH OFFER OR
SOLICITATION IS NOT QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL
TO MAKE SUCH OFFER OR SOLICITATION.
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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 requires otherwise, all references in this Prospectus to "Belco" or the
"Company" refer to Belco Oil & Gas Corp. and its consolidated subsidiaries.
Certain terms relating to the oil and gas business are defined in "Glossary of
Oil and Gas Terms."
THE COMPANY
Belco Oil & Gas Corp. ("Belco" or the "Company") is an independent energy
company engaged in the exploration for and exploitation, development and
production of natural gas and oil primarily in the Rocky Mountains, Texas,
Louisiana and Michigan. Since its inception in April 1992, the Company has grown
and diversified its reserve base largely through a balanced program of
exploration and development drilling. The Company concentrates its activities in
core areas in which it has accumulated detailed geologic knowledge and has
developed significant management and technical expertise. Additionally, the
Company structures its participation in natural gas and oil exploration and
development activities to minimize initial costs and risks, while permitting
substantial follow on investment. For the twelve months ended June 30, 1997, the
Company generated natural gas and oil revenues of $125.6 million and EBITDA of
$105.5 million.
The Company has achieved substantial growth in reserves, production,
revenues and EBITDA since 1992. Belco's estimated proved reserves have increased
at a compound annual growth rate of 46.1%, from 67 Bcfe as of December 31, 1992
to 305 Bcfe as of December 31, 1996. Over this period, average daily production
has increased from 4 MMcfe per day in 1992 to over 153 MMcfe per day in 1996.
Similarly, the growth in the Company's natural gas and oil revenues and EBITDA
has been substantial, increasing from $3.5 million and $2.9 million,
respectively, for the year ended December 31, 1992, to $119.7 million and $105.5
million, respectively, for the year ended December 31, 1996. The Company's low
cost structure is evidenced by its general and administrative expenses of $0.06
per Mcfe and lease operating expenses of $0.14 per Mcfe in 1996. For the three
years ended December 31, 1996, the Company's operating cash inflows per Mcfe
averaged $1.65 and its finding costs averaged approximately $0.80 per Mcfe.
The Company's operations are currently focused on the Green River Basin
(which includes the Moxa Arch Trend), the Wind River and Big Horn Basins, all of
which are in Wyoming, the Giddings Field in east central Texas, the Austin Chalk
Trend in Louisiana and the Central Basin in Michigan. At December 31, 1996, the
Company had estimated proved reserves of 305 Bcfe with a pre-tax Present Value
of $416 million after adjusting for oil and gas commodity hedges. On an Mcfe
basis, the Company's estimated proved reserves were 65% proved developed and 93%
natural gas. As of June 30, 1997, Belco held or controlled interests in
approximately 2.8 million gross (1.3 million net) undeveloped acres and the
Company had an interest in 533 gross (170 net) wells.
BUSINESS STRENGTHS
The Company believes that 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 exploration and development program. Over the last four
years, on a compound annual basis, the Company has increased proved
reserves by 46.1%, production by 148.7% and EBITDA by 146.0%.
Substantial Drilling Inventory. The Company has identified over 750
potential drilling locations based on geological and geophysical
evaluations. Additionally, the Company has spent $82.8 million since
January 1, 1996 to increase its acreage position from approximately 330,000
gross (146,000
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net) undeveloped acres to approximately 2.8 million gross (1.3 million net)
undeveloped acres at June 30, 1997.
Strategic Alliances. The Company has formed key strategic alliances
with experienced industry partners such as Amoco Production Company, Union
Pacific Resources Group and OXY USA. In cases where the Company is not the
operator, the alliance has been structured to enable the Company to become
integrally involved with the drilling and production decision making
process. These strategic alliances also provide the Company with the
benefits of shared technological expertise, while affording the Company the
opportunity to diversify risk.
Successful Drilling Record. Since inception through December 31, 1996,
the Company has drilled 438 gross (122.2 net) development wells of which
408 gross (114.1 net) are currently producing. Additionally, the Company
has drilled 36 gross (16.3 net) exploratory wells of which 20 gross (13
net) are currently producing. During this period, the Company's drilling
efforts resulted in over 436 Bcfe of proved reserves (including revisions)
at a finding cost of approximately $0.72 per Mcfe.
High Operating Margins. The Company's drilling success, its high
impact wells and low cost structure have enabled the Company to generate
high gross cash margins (unhedged oil and gas sales less general and
administrative and operating expenses) of $2.09 per Mcfe pre tax ($1.99 per
Mcfe net of tax) for the twelve months ended June 30, 1997. This margin
compares favorably to an average of $1.71 per Mcfe experienced by public
companies which the Company believes are peer companies (and based on
publicly filed industry data) for the same period.
Experienced and Committed Management. Belco's senior management team
has extensive experience in the oil and gas industry. In particular, the
Company's Chief Executive Officer, Robert A. Belfer, began his career in
the oil and gas industry in 1958 with Belco Petroleum Corporation ("BPC"),
which grew to become a Fortune 500 company with operations primarily in the
Rocky Mountains and offshore Peru. In 1983, BPC merged with InterNorth, a
predecessor of Enron Corp. Mr. Belfer and his family own an approximate
77.3% equity interest in the Company.
BUSINESS STRATEGY
The key elements of the Company's strategy are as follows:
Pursue a Balanced Drilling Program. Belco believes that there are
significant exploratory and development opportunities in the Rocky
Mountain, Texas, Louisiana and Michigan acreage positions that the Company
has assembled. The Company has identified potentially more than three years
of drilling inventory based on its existing holdings. Through June 30,
1997, the Company has made capital expenditures of approximately $72
million and plans to spend approximately $78 million through the remainder
of 1997.
Utilize Advanced Technology. The Company extensively uses advanced
technology, including equipment designed specifically for drilling deep
horizontal wells, the application of innovative hydraulic fracturing
techniques and 3-D seismic. Additionally, the Company has acquired
approximately 144 square miles of 3-D seismic data and 54 thousand miles of
2-D seismic data in its core geographic areas and plans to acquire an
additional 130 square miles of 3-D seismic data. The Company's experienced
technical staff includes six petroleum engineers, nine geologists and one
geophysicist, who have, on average, over 17 years of experience in the oil
and gas industry.
Maintain Low Cost Structure. The Company's management team is focused
on maintaining a low cost structure to maximize cash flow and earnings. As
part of this strategy, the Company focuses on core operating areas where it
can achieve economies of scale. The Company believes that maintaining its
low cost structure permits the Company to be consistently profitable in
various pricing environments.
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Reduce Commodity Price Volatility. The Company engages in a wide
variety of commodity price risk management transactions with the objective
of achieving more predictable revenues and cash flows and reducing its
exposure to fluctuations in natural gas and oil prices.
Maintain Financial Flexibility. The Company is committed to
maintaining financial flexibility in order to pursue exploration and
development activities and to take advantage of other opportunities that
may arise. Historically, the Company has funded its growth through
internally generated cash flow, bank credit facilities and proceeds from
its initial public offering in March 1996. The issuance of the Notes
offered hereby in conjunction with the Company's New Credit Facility will
increase liquidity and diversify the Company's capital structure.
Pursue Selective Acquisitions. To augment its growth through the
drillbit, the Company continually reviews potential acquisitions of oil and
gas properties or businesses that complement its existing operations and
that provide long term growth opportunities. The Company focuses its
attention on potential acquisitions principally within its core operating
areas or in areas that may establish a new core area and generally have (i)
high working interests; (ii) long lived reserves; (iii) operational control
or the ability to exercise significant influence over operations; and, (iv)
significant development potential.
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The Company's executive offices are located at 767 Fifth Avenue, 46th
Floor, New York, New York 10153, and its telephone number is (212) 644-2200.
THE PRIVATE PLACEMENT AND USE OF PROCEEDS
The Old Notes were sold by the Company on September 23, 1997 to the Initial
Purchasers and were thereupon offered and sold by the Initial Purchasers only to
certain qualified buyers. A portion of the $145 million net proceeds received by
the Company in connection with the sale of the Old Notes was used to repay all
borrowings outstanding under the Old Credit Facility (as defined herein). It is
anticipated that the remainder of the net proceeds from the sale of the Old
Notes will be used to provide working capital to the Company to fund further
exploration and development of the Company's oil and gas properties, the
acquisition of additional oil and gas properties or businesses, and other
general corporate purposes. See "Private Placement" and "Capitalization."
THE EXCHANGE OFFER
The Exchange Offer relates to the exchange of up to $150,000,000 principal
amount of Exchange Notes for up to $150,000,000 principal amount of Old Notes.
The form and terms of the Exchange Notes are identical in all material respects
to the form and terms of the Old Notes except that the Exchange Notes have been
registered under the Securities Act and will not contain certain transfer
restrictions and hence are not entitled to the benefits of the Registration
Rights Agreement relating to the contingent increases in the interest rate
provided for pursuant thereto. The Exchange Notes will evidence the same debt as
the Old Notes and will be issued under and be entitled to the benefits of the
Indenture governing the Old Notes. See "Description of the Notes."
The Exchange Offer......... Each $1,000 principal amount of Exchange Notes will
be issued in exchange for each $1,000 principal
amount of outstanding Old Notes. As of the date
hereof, $150,000,000 principal amount of Old Notes
are issued and outstanding. The Company will issue
the Exchange Notes to tendering holders of Old
Notes on or as promptly as practicable after the
Expiration Date.
Resale..................... The Company believes that the Exchange Notes issued
pursuant to the Exchange Offer generally will be
freely transferable by the holders thereof without
registration or any prospectus delivery requirement
under the Securities Act, except for certain
Restricted Holders who
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may be required to deliver copies of this
Prospectus in connection with any resale of the
Exchange Notes issued in exchange for such Old
Notes. See "The Exchange Offer -- General" and
"Plan of Distribution."
Expiration Date............ 5:00 p.m., New York City time, on November 10,
1997, unless the Exchange Offer is extended, in
which case the term "Expiration Date" means the
latest date to which the Exchange Offer is
extended. See "The Exchange Offer -- Expiration
Date; Extensions; Amendments."
Interest on the Notes...... The Exchange Notes will bear interest payable
semi-annually on March 15 and September 15 of each
year, commencing March 15, 1998. Holders of
Exchange Notes of record on March 1, 1998 will
receive interest on March 15, 1998 from the date of
issuance of the Exchange Notes, plus an amount
equal to the accrued interest on the Old Notes from
the date of issuance of the Old Notes, September
23, 1997, to the date of exchange thereof.
Consequently, assuming the Exchange Offer is
consummated prior to the record date in respect of
the March 15, 1998 interest payment for the Old
Notes, holders who exchange their Old Notes for
Exchange Notes will receive the same interest
payment on March 15, 1998 that they would have
received had they not accepted the Exchange Offer.
Interest on the Old Notes accepted for exchange
will cease to accrue upon issuance of the Exchange
Notes. See "The Exchange Offer -- Interest on the
Exchange Notes."
Procedures for Tendering
Old Notes.................. Each holder of Old Notes wishing to accept the
Exchange Offer must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, in
accordance with the instructions contained herein
and therein, and mail or otherwise deliver such
Letter of Transmittal, or such facsimile, or an
Agent's Message (as defined herein) together with
the Old Notes to be exchanged and any other
required documentation to the Exchange Agent at the
address set forth herein and therein or effect a
tender of Old Notes pursuant to the procedures for
book-entry transfer as provided for herein. See
"The Exchange Offer -- Procedures for Tendering."
Special Procedures for
Beneficial Holders....... Any beneficial holder whose Old Notes are
registered in the name of a broker, dealer,
commercial bank, trust company or other nominee and
who wishes to tender in the Exchange Offer should
contact such registered holder promptly and
instruct such registered holder to tender on the
beneficial holder's behalf. If such beneficial
holder wishes to tender directly, such beneficial
holder must, prior to completing and executing the
Letter of Transmittal and delivering the Old Notes,
either make appropriate arrangements to register
ownership of the Old Notes in such holder's name or
obtain a properly completed bond power from the
registered holder. The transfer of record ownership
may take considerable time. See "The Exchange
Offer -- Procedures for Tendering."
8
<PAGE> 10
Guaranteed Delivery
Procedures............... Holders of Old Notes who wish to tender their Old
Notes and whose Old Notes are not immediately
available or who cannot deliver their Old Notes and
a properly completed Letter of Transmittal or any
other documents required by the Letter of
Transmittal to the Exchange Agent prior to the
Expiration Date, or who cannot complete the
procedure for book-entry transfer on a timely basis
and deliver an Agent's Message, may tender their
Old Notes according to the guaranteed delivery
procedures set forth in "The Exchange Offer --
Guaranteed Delivery Procedures."
Withdrawal Rights.......... Tenders of Old Notes may be withdrawn at any time
prior to 5:00 p.m., New York City time, on the
business day prior to the Expiration Date, unless
previously accepted for exchange. See "The Exchange
Offer -- Withdrawal of Tenders."
Termination of the Exchange
Offer.................... The Company may terminate the Exchange Offer if it
determines that the Exchange Offer violates any
applicable law or interpretation of the staff of
the Commission. Holders of Old Notes will have
certain rights against the Company under the
Registration Rights Agreement should the Company
fail to consummate the Exchange Offer. See "The
Exchange Offer -- Termination" and "Exchange and
Registration Rights Agreement."
Acceptance of Old Notes and
Delivery of Exchange
Notes.................... Subject to certain conditions (as summarized above
in "Termination of the Exchange Offer" and
described more fully in "The Exchange
Offer -- Termination"), the Company will accept for
exchange any and all Old Notes which are properly
tendered in the Exchange Offer prior to 5:00 p.m.,
New York City time, on the Expiration Date. The
Exchange Notes issued pursuant to the Exchange
Offer will be delivered as promptly as practicable
following the Expiration Date. See "The Exchange
Offer -- General."
Exchange Agent............. The Bank of New York is serving as exchange agent
(the "Exchange Agent") in connection with the
Exchange Offer. The mailing address of the Exchange
Agent is: The Bank of New York, 101 Barclay Street,
7th Floor, Reorganization Section, New York, New
York 10286, Attention: Odell Romeo. Hand deliveries
and deliveries by overnight courier should be sent
to: The Bank of New York, 101 Barclay Street, New
York, NY 10286, Corporate Trust Services Window,
Ground Level, Attention: Reorganization Section,
Mr. Odell Romeo. For information with respect to
the Exchange Offer, the telephone number for the
Exchange Agent is (212) 815-6337 and the facsimile
number for the Exchange Agent is (212) 815-6339.
See "The Exchange Offer -- Exchange Agent."
Use of Proceeds............ There will be no cash proceeds payable to the
Company from the issuance of the Exchange Notes
pursuant to the Exchange Offer. See "Use of
Proceeds." For a discussion of the use of the net
proceeds received by the Company from the sale of
the Old Notes, see "Private Placement."
9
<PAGE> 11
TERMS OF THE NOTES
Notes Outstanding.......... $150 million aggregate principal amount of 8 7/8%
Senior
Subordinated Notes due 2007.
Maturity................... September 15, 2007.
Interest Payment Dates..... March 15 and September 15 of each year, commencing
on March 15, 1998.
Mandatory Redemption....... None.
Optional Redemption........ Except as otherwise described below, the Notes will
not be redeemable at the Company's option prior to
September 15, 2002. 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 September 15, 2000, the Company
may, at its option, on any one or more occasions,
redeem up to 33 1/3% of the original aggregate
principal amount of the Notes at a redemption price
equal to 108.875% 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 66 2/3% 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 September 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, thereon 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 aggregate principal
amount of such Notes plus accrued and unpaid
interest, if any, thereof to the date of
repurchase, and to repurchase all Notes tendered
pursuant to such offer. The Company's New Credit
Facility (the "New Credit Facility") will prohibit
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
Facility. 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 Facility 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 -- Payment Upon a
10
<PAGE> 12
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 will include borrowings under
the New Credit Facility. 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. The Notes will be effectively subordinated
in right of payment to the liabilities of the
Subsidiaries of the Company. As of June 30, 1997,
on a pro forma basis, after giving effect to the
application of the net proceeds from the Offering,
the Company would have had no Senior Debt
outstanding (including no outstanding borrowings
under the New Credit Facility), and there would be
no senior subordinated debt outstanding (exclusive
of the Notes). The Notes will also be effectively
subordinated to all secured debt 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."
Certain Covenants.......... The Notes will be issued pursuant to an indenture
(the "Indenture") containing certain covenants that
will, among other things, 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, 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."
Transfer Restrictions...... The Old Notes were not registered under the
Securities Act and unless so registered may not be
offered or sold except pursuant to an exemption
from, or in a transaction not subject to, the
registration requirements of the Securities Act.
See "Transfer Restrictions on Old Notes".
Exchange Offer............. Pursuant to a registration rights agreement (the
"Registration Rights Agreement") by and among the
Company and the Initial Purchasers, the Company
agreed to (i) file a registration statement with
the Commission (the "Exchange Offer Registration
Statement") with respect to an offer to exchange
the Old Notes (the "Exchange Offer") for senior
subordinated debt securities of the Company with
terms substantially identical to the Notes (the
"New Notes") (except that the New Notes generally
will not contain terms with respect to transfer
restrictions) within 60 days after the date of
original issuance of the Old Notes, September 23,
1997, and (ii) use its best efforts to cause such
registration statement to become effective under
the Securities Act within 120 days after such issue
date. The Registration Statement of which this
Prospectus is a part constitutes such Exchange
Offer Registration Statement. In the event that
appli-
11
<PAGE> 13
cable law or interpretations of the staff of the
Commission do not permit the Company to effect the
Exchange Offer, or if certain holders of the Notes
notify the Company that they are not permitted to
participate in, or would not receive freely
tradeable Notes pursuant to, the Exchange Offer,
the Company will use its best efforts to cause to
become effective a registration statement (the
"Shelf Registration Statement") with respect to the
resale of the Old Notes and to keep the Shelf
Registration Statement effective until two years
after the date of original issuance of the Old
Notes. The interest rate on the Old Notes is
subject to increase under certain circumstances if
the Company is not in compliance with its
obligations under the Registration Rights
Agreement. See "Exchange and Registration Rights
Agreement."
RISK FACTORS
See "Risk Factors" for a discussion of certain factors that should be
considered in connection with an investment in the Exchange Notes, the
uncertainty of oil and gas prices and certain risks associated with an
investment in the Exchange Notes.
12
<PAGE> 14
SUMMARY FINANCIAL DATA
The following table sets forth summary historical financial data for the
Company as of and for each of the periods indicated. The following information
should be read in conjunction with "Selected Historical Financial Data,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and the financial statements of the Company and the related notes
thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
------------------------------ ------------------
1994 1995 1996 1996 1997
-------- -------- -------- ------- --------
(DOLLARS IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Oil and gas sales...................... $ 40,362 $ 68,767 $119,710 $56,646 $ 62,578
Commodity price risk management
activities.......................... 550 9,480 (5,967) 2,633 (3,098)
Interest............................... 195 353 2,653 886 1,268
-------- -------- -------- ------- --------
Total revenues........................... 41,107 78,600 116,396 60,165 60,748
-------- -------- -------- ------- --------
Costs and expenses
Oil and gas operating expenses......... 5,510 5,824 7,847 3,879 4,504
Depreciation, depletion and
amortization........................ 14,072 27,590 40,904 19,320 21,698
General and administrative............. 2,269 2,597 3,059 1,756 1,670
-------- -------- -------- ------- --------
Total costs and expenses................. 21,851 36,011 51,810 24,955 27,872
-------- -------- -------- ------- --------
Income before taxes...................... 19,256 42,589 64,586 35,210 32,876
Pro forma provision for income
taxes(1)............................... 5,030 13,852 21,953 11,790 11,260
-------- -------- -------- ------- --------
Pro forma net income(1).................. $ 14,226 $ 28,737 $ 42,633 $23,420 $ 21,616
======== ======== ======== ======= ========
OPERATING AND OTHER DATA:
EBITDA(2)................................ $ 33,328 $ 70,179 $105,490 $54,530 $ 54,574
Capital expenditures..................... 52,230 71,387 142,712 59,778 71,693
Net cash provided by operating
activities............................. 28,126 62,037 108,059 48,643 53,215
PRO FORMA FINANCIAL DATA:
EBITDA to pro forma interest(3).......... N/A N/A 7.7x N/A 7.9x
Pro forma debt to EBITDA(3).............. N/A N/A 1.4x N/A N/A
Pro forma interest(3).................... N/A N/A $ 13,773 N/A $ 6,886
BALANCE SHEET DATA (END OF PERIOD):
Working capital.......................... $ 14,357 $ 446 $ 48,667 $ 9,673
Total assets............................. 101,625 145,550 303,918 328,082
Long term debt, including current
maturities............................. 6,930 22,000 -- 10,000
Total stockholders' equity............... 89,890 105,015 233,203 254,972
</TABLE>
- ---------------
(1) Gives pro forma effect to the application of federal and state income taxes
to the Company as if it were a taxable corporation for the periods
presented. 1996 excludes a one-time non-cash deferred tax charge of $30.1
million recognized as a result of the Combination (as defined) consummated
on March 29, 1996 in connection with the Company's initial public offering.
(2) EBITDA represents income from continuing operations plus income taxes,
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 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."
(3) Gives effect to the Offering and the application of the net proceeds
therefrom as described under "Use of Proceeds" as if such transaction had
occurred at the beginning of the periods on January 1, 1996 and January 1,
1997.
13
<PAGE> 15
SUMMARY RESERVE AND OPERATING DATA
The following tables set forth summary information with respect to the
Company's estimated net proved oil and gas reserves as of December 31, 1994,
1995 and 1996 and the Company's operating data for the periods indicated.
Information in this Prospectus as of December 31, 1995 and 1996 relating to
estimated net proved oil and gas reserves and the estimated future net revenues
attributable thereto is based upon the reserve reports ("Miller and Lents
Reports") prepared by Miller and Lents, Ltd. ("Miller and Lents"), independent
petroleum engineers. All calculations of estimated net proved reserves have been
made in accordance with the rules and regulations of the Commission and, except
as otherwise indicated, give no effect to federal or state income taxes
otherwise attributable to estimated future net revenues from the sale of oil and
gas. The present value of estimated future net revenues has been calculated
using a discount factor of 10%. See "Risk Factors -- Oil and Gas Reserves" and
"Reserve Engineers."
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1994(1) 1995(2) 1996
-------- -------- --------
<S> <C> <C> <C>
ESTIMATED PROVED RESERVES (AT DECEMBER 31)(2):
Oil and condensate (MBbls)................................ 1,929 2,452 3,327
Natural gas (MMcf)........................................ 114,655 204,170 284,992
Natural gas equivalents (MMcfe)........................... 126,229 218,882 304,954
Percent natural gas....................................... 91% 93% 93%
Percentage proved developed............................... 88% 69% 65%
PRODUCT PRICES (AT DECEMBER 31)(3):
Oil (per Bbl)............................................. $ 16.57 $ 18.38 $ 25.13
Natural gas (per Mcf)..................................... 1.73 1.96 3.68
FUTURE NET CASH FLOWS BEFORE TAXES ($000)(2)(4):
Undiscounted.............................................. $180,763 $294,567 $747,330
Discounted................................................ 109,785 206,509 415,530
RESERVE ADDITIONS (MMCFE):
Acquisition............................................... -- -- 22,965
Extensions, discoveries and revisions..................... 55,225 135,466 119,160
-------- -------- --------
Total additions........................................... 55,225 135,466 142,125
======== ======== ========
COSTS INCURRED ($000):
Property acquisitions..................................... $ 10,916 $ 13,643 $ 74,401
Exploration and development............................... 41,314 57,744 68,311
-------- -------- --------
Total costs incurred...................................... $ 52,230 $ 71,387 $142,712
======== ======== ========
RESERVE REPLACEMENT COST (PER MCFE)(5)...................... $ 0.95 $ 0.53 $ 1.00
RESERVE REPLACEMENT RATIO(6)................................ 255% 316% 254%
PRODUCTION DATA:
Oil and condensate (MBbls)................................ 691 961 794
Natural gas (MMcf)........................................ 17,482 37,047 51,289
Natural gas equivalent (MMcfe)............................ 21,628 42,813 56,053
UNIT ECONOMICS:
Data per Mcfe:
Oil and gas sales revenues (unhedged)..................... $ 1.86 $ 1.61 $ 2.14
Commodity price risk management activities -- Cash........ .03 .22 .06
-- Non-Cash........ -- -- (.17)
Oil and gas operating expenses............................ (.25) (.14) (.14)
General and administrative................................ (.10) (.06) (.06)
Depreciation, depletion and amortization.................. (.65) (.64) (.73)
Interest income........................................... -- -- .05
-------- -------- --------
Pre-tax operating profit.................................. $ 0.89 $ 0.99 $ 1.15
======== ======== ========
Gross cash margin(7)...................................... $ 1.54 $ 1.63 $ 2.05
======== ======== ========
</TABLE>
- ---------------
(1) The December 31, 1994 information relating to estimated net proved oil and
gas reserves and the estimated future net revenue attributable thereto is
based upon the data compiled by Company engineers in accordance with the
rules and regulations of the Commission and, except as otherwise indicated,
gives no effect to federal or state income taxes otherwise attributable to
estimated future net revenues from the sale of oil and gas.
(2) Excludes 228 MBbls of oil, 15,926 MMcf of gas and 17,294 MMcfe of proved
undeveloped reserves (the "Incremental Reserves") which were included in the
Miller and Lents Report as of December 31, 1995. Consequently, also excludes
$18,089,000 and $11,838,000 of Future Net Cash Flows Before Taxes,
Undiscounted and Discounted, respectively, for the year ended December 31,
1995, attributable to such Incremental Reserves. The Incremental Reserves
related to the Company's contractual option right at December 31, 1995 to
participate in certain undeveloped wells in addition to its leasehold
position. No such option rights are reflected in the Miller and Lents Report
as of December 31, 1996.
(3) Prices shown were used in the calculation of proved reserves and future net
cash flows before taxes.
(4) Oil and gas commodity hedges included in future cash inflows totaled $14.0
million, $7.6 million and ($60.8) million at December 31, 1994, 1995 and
1996, respectively, and such hedges included in discounted future net cash
flows before income taxes totaled $12.4 million, $7.2 million and ($55.2)
million at December 31, 1994, 1995 and 1996, respectively.
(5) Reserve replacement costs are calculated by dividing costs incurred by total
reserve additions.
(6) Reserve replacement is calculated as total reserve additions divided by the
Company's actual production for the period, both on an Mcfe basis.
(7) Includes cash gains (losses) on price risk management activities and
interest income.
14
<PAGE> 16
FORWARD-LOOKING STATEMENTS
This Prospectus includes "forward-looking statements" within the meaning of
Section 27A of the Securities Act and Section 21E of the Securities Exchange Act
of 1934, as amended (the "Exchange Act"). All statements other than statements
of historical facts included in this Prospectus, including without limitation
statements under "Summary," "Risk Factors," "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and "Business and
Properties" regarding planned capital expenditures, the availability of capital
resources to fund capital expenditures, estimates of proved reserves, the number
of anticipated wells to be drilled in 1997 and thereafter, the Company's
financial position, business strategy and other plans and objectives for future
operations, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to have been correct.
There are numerous uncertainties inherent in estimating quantities of proved oil
and natural gas reserves and in projecting future rates of production and timing
of development expenditures, including many factors beyond the control of the
Company. Reserve engineering is a subjective process of estimating underground
accumulations of oil and natural gas that cannot be measured in an exact way,
and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates made by different engineers often vary from one another. In
addition, results of drilling, testing and production subsequent to the date of
an estimate may justify revisions of such estimate and such revisions, if
significant, would change the schedule of any further production and development
drilling. Accordingly, reserve estimates are generally different from the
quantities of oil and natural gas that are ultimately recovered. Additional
important factors that could cause actual results to differ materially from the
Company's expectations are disclosed under "Risk Factors" and elsewhere in this
Prospectus. All subsequent written and oral forward-looking statements
attributable to the Company or persons acting on its behalf are expressly
qualified in their entirety by such factors.
RISK FACTORS
In addition to the other information set forth elsewhere in this
Prospectus, the following factors relating to the Company should be carefully
considered when evaluating an investment in the Exchange Notes.
VOLATILITY OF OIL AND GAS PRICES; MARKETABILITY OF PRODUCTION
The Company's revenue, profitability and future rate of growth are
substantially dependent upon the prevailing prices of, and demand for, oil and
natural gas. The Company's ability to maintain or increase its borrowing
capacity and to obtain additional capital on attractive terms is also
substantially dependent upon oil and gas prices. Prices for oil and natural gas
are subject to wide fluctuation in response to relatively minor changes in the
supply of and demand for oil and natural gas, market uncertainty and a variety
of additional factors that are beyond the control of the Company. These factors
include the level of consumer product demand, weather conditions, domestic and
foreign governmental regulations, the price and availability of alternative
fuels, political conditions in the Middle East, the foreign supply of oil and
natural gas, the price of oil and gas imports and overall economic conditions.
From time to time, oil and gas prices have been depressed by excess domestic and
imported supplies. There can be no assurance that current price levels will be
sustained. It is impossible to predict future oil and natural gas price
movements with any certainty. Declines in oil and natural gas prices may
adversely affect the Company's financial condition, liquidity and results of
operations and may reduce the amount of the Company's oil and natural gas that
can be produced economically. Additionally, substantially all of the Company's
sales of oil and natural gas are made in the spot market or pursuant to
contracts based on spot market prices and not pursuant to long-term fixed price
contracts. With the objective of reducing price risk, the Company enters into
hedging transactions with respect to a portion of its expected future
production. There can be no assurance, however, that such hedging transactions
will reduce risk or mitigate the effect of any substantial or extended decline
in oil or natural gas prices. Any substantial or
15
<PAGE> 17
extended decline in the prices of oil or natural gas would have a material
adverse effect on the Company's financial condition and results of operations.
In addition, the marketability of the Company's production depends upon the
availability and capacity of gas gathering systems, pipelines and processing
facilities. Federal and state regulation of oil and gas production and
transportation, general economic conditions and changes in supply and demand all
could adversely affect the Company's ability to produce and market its oil and
natural gas. If market factors were to change dramatically, the financial impact
on the Company could be substantial. The availability of markets and the
volatility of product prices are beyond the control of the Company and represent
a significant risk. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Overview" and "Business and
Properties -- Marketing."
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 OIL AND GAS RESERVES
This Prospectus contains estimates of the Company's proved oil and gas
reserves and the estimated future net revenues therefrom based upon the
Company's estimates and the Miller and Lents Report that rely upon various
assumptions, including assumptions required by the Commission as to oil and gas
prices, drilling and operating expenses, capital expenditures, taxes and
availability of funds. The process of estimating oil and gas reserves is
complex, requiring significant decisions and assumptions in the evaluation of
available geological, geophysical, engineering and economic data for each
reservoir. As a result, such estimates are inherently imprecise. Actual future
production, oil and gas prices, revenues, taxes, development expenditures,
operating expenses and quantities of recoverable oil and gas reserves may vary
substantially from those estimated in the Company's estimates and the Miller and
Lents Report. Any significant variance in these assumptions could materially
affect the estimated quantity and value of reserves set forth in this Offering
Memorandum. In addition, the Company's proved reserves may be subject to
downward or upward revision based upon production history, results of future
exploration and development, prevailing oil and gas prices and other factors,
many of which are beyond the Company's control. Actual production, revenues,
taxes, development expenditures and operating expenses with respect to the
Company's reserves will likely vary from the estimates used, and such variances
may be material.
Approximately 35% of the Company's total proved reserves at December 31,
1996 were undeveloped, which are by their nature less certain. Recovery of such
reserves will require significant capital expenditures and successful drilling
operations. The reserve data set forth in the Company's estimates and the Miller
and Lents Report assumes that substantial capital expenditures by the Company
will be required to develop such reserves. Although cost and reserve estimates
attributable to the Company's oil and gas reserves have been prepared in
accordance with industry standards, no assurance can be given that the estimated
costs are accurate, that development will occur as scheduled or that the results
will be as estimated. See "Business and Properties -- Oil and Gas Reserves."
The present value of future net revenues referred to in this Prospectus
should not be construed as the current market value of the estimated oil and gas
reserves attributable to the Company's properties. In accordance with applicable
requirements of the Commission, the estimated discounted future net cash flows
from proved reserves are generally based on prices and costs as of the date of
the estimate, whereas actual future prices and costs may be materially higher or
lower. Actual future net cash flows also will be affected by increases in
consumption by gas purchasers and changes in governmental regulations or
taxation. The timing of actual future net cash flows from proved reserves, and
thus their actual present value, will be affected by the timing of both the
production and the incurrence of expenses in connection with development and
production of oil and gas properties. In addition, the 10% discount factor,
which is required by the Commission to be used in calculating discounted future
net cash flows for
16
<PAGE> 18
reporting purposes, is not necessarily the most appropriate discount factor
based on interest rates in effect from time to time and risks associated with
the Company or the oil and gas industry in general.
RESERVE REPLACEMENT
As is customary in the oil and gas exploration and production industry, the
Company's future success depends upon its ability to find, develop or acquire
additional oil and gas reserves that are economically recoverable. Unless the
Company replaces its estimated proved reserves (through development, exploration
or acquisition), the Company's proved reserves will generally decline as they
are produced.
Exploratory 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 are 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 -- Costs Incurred and Drilling Results."
The Company's current strategy includes increasing its reserve base through
acquisitions of leaseholds with drilling potential and by continuing to exploit
its existing properties. There can be no assurance, however, that the Company's
exploration and development projects will result in significant additional
reserves or that the Company will have continuing success drilling productive
wells at economically viable costs. Furthermore, while the Company's revenues
may increase if prevailing oil and gas prices increase significantly, the
Company's finding costs for additional reserves could also increase. For a
discussion of the Company's reserves, see "Business and Properties -- Oil and
Gas Reserves."
SUBSTANTIAL CAPITAL REQUIREMENTS
The Company makes, and will continue to make, substantial expenditures for
the development, exploration, acquisition and production of oil and natural gas
reserves. The Company incurred capital expenditures of $71.4 million during 1995
and $142.7 million during 1996. The Company plans to make capital expenditures,
excluding expenditures for acquisitions, of approximately $150 million in 1997.
Management believes that the Company will have sufficient cash provided by
operating activities, borrowings under the New Credit Facility and the proceeds
from the Offering to fund planned capital expenditures in 1997. However, if
revenues or cash flows from operations decrease as a result of lower oil and
natural gas prices or operating difficulties, the Company may be limited in its
ability to expend the capital necessary to undertake or complete its planned
drilling program, or it may be forced to raise additional debt or equity
proceeds to fund such expenditures. The New Credit Facility will limit the
amounts the Company may borrow to an initial availability of $50 million subject
to increase or decrease based upon borrowing base adjustments. There can be no
assurance that additional debt or equity financing or cash generated by
operations will be available to meet these requirements. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
ACQUISITION RISKS
The Company continues to pursue the acquisition of oil and gas properties
and businesses. Although no definitive agreements have been reached regarding
any such acquisitions, if consummated such acquisitions may have a material
impact on the Company's business. Any acquisition by the Company must satisfy
the applicable covenants set forth in the Indenture.
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
17
<PAGE> 19
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.
HOLDING COMPANY STRUCTURE
The Company conducts all of its operations through subsidiaries.
Accordingly, the Company relies on dividends and cash advances from its
subsidiaries to provide funds necessary to meet its obligations, including the
payment of principal and interest on the Notes. The ability of any such
subsidiary to pay dividends or make cash advances is subject to applicable laws
and contractual restrictions, including restrictions under credit agreements
between such subsidiary and third party lenders, as well as the financial
condition and operating requirements of such subsidiary.
OPERATING HAZARDS AND UNINSURED RISKS; PRODUCTION CURTAILMENTS
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or natural gas reservoirs will be
encountered, that operations may be curtailed, delayed or canceled and that
title problems, weather conditions, compliance with governmental requirements,
mechanical difficulties or shortages or delays in the delivery of drilling rigs,
work boats and other equipment may limit the Company's ability to market its
production. There can be no assurance that new wells drilled by the Company will
be productive or that the Company will recover all or any portion of its
investment. Drilling for oil and natural gas may involve unprofitable efforts,
not only from dry wells but also from wells that are productive but do not
produce sufficient net revenues to return a profit after drilling, operating and
other costs. In addition, the Company's properties may be susceptible to
hydrocarbon drainage from production by other operators on adjacent properties.
Industry operating risks include the risk of fire, explosions, blow-outs,
pipe failure, abnormally pressured formations and environmental hazards such as
oil spills, gas leaks, ruptures or discharges of toxic gases, the occurrence of
any of which could result in substantial losses to the Company due to injury or
loss of life, severe damage to or destruction of property, natural resources and
equipment, pollution or other environmental damage, clean-up responsibilities,
regulatory investigation and penalties and suspension of operations.
Additionally, many of the Company's oil and gas operations are located in an
area that is subject to tropical weather disturbances, some of which can be
severe enough to cause substantial damage to facilities and possibly interrupt
production. In accordance with customary industry practice, the Company
maintains insurance against some, but not all, of the risks described above.
There can be no assurance that any insurance will be adequate to cover losses or
liabilities. The Company cannot predict the continued availability of insurance
at premium levels that justify its purchase. 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.
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with major and independent oil and gas companies for the acquisition of
desirable oil and gas properties, as well as for the equipment and labor
required to develop and operate such properties. Many of these competitors
18
<PAGE> 20
have financial and other resources substantially greater than those of the
Company. See "Business and Properties -- Competition."
RISKS OF PRICE RISK MANAGEMENT TRANSACTIONS
In order to manage its exposure to price risks in the marketing of its oil
and natural gas, the Company has in the past and expects to continue to enter
into oil and natural gas price risk management arrangements with respect to a
portion of its expected production. These arrangements may include futures
contracts on the New York Mercantile Exchange ("NYMEX"), fixed price delivery
contracts and financial swaps. While intended to reduce the effects of
volatility of the price of oil and natural gas, such transactions may limit
potential gains by the Company if oil and natural gas prices were to rise or
fall substantially over the price established by the arrangement. In addition,
such transactions may expose the Company to the risk of financial loss in
certain circumstances, including instances in which (i) production is less than
expected; (ii) if there is a widening of price differentials between delivery
points for the Company's production and the delivery point assumed in the
arrangement; (iii) the counterparties to the Company's future contracts fail to
perform under the contract; or (iv) a sudden, unexpected event materially
impacts oil or natural gas prices. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Business and Properties -- Price Risk Management Transactions."
GOVERNMENTAL REGULATION
Oil and gas operations are subject to various United States federal, state
and local governmental regulations that change from time to time in response to
economic or political conditions. Matters subject to regulation include
discharge permits for drilling operations, drilling and abandonment bonds,
reports concerning operations, the spacing of wells, and unitization and pooling
of properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and gas wells below actual production capacity in order to conserve supplies
of oil and gas. In addition, the production, handling, storage, transportation
and disposal of oil and gas, by-products thereof and other substances and
materials produced or used in connection with oil and gas operations are subject
to regulation under federal, state and local laws and regulations primarily
relating to protection of human health and the environment. 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. To date, expenditures related to
complying with these laws and for remediation of existing environmental
contamination have not been significant in relation to the results of operations
of the Company.
Although the Company believes it is in substantial compliance with all
applicable laws and regulations, the requirements imposed by such laws and
regulations are frequently changed and subject to interpretation. In addition,
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, and the Company is unable to predict
the ultimate cost of compliance with these requirements or their effect on its
production. See "Business and Properties -- Regulation."
EFFECTS OF LEVERAGE
As of June 30, 1997, as adjusted for the issuance of the Old Notes and the
application of the proceeds therefrom, the Company's long-term debt would have
been $150 million. See "Capitalization." In addition, the Indenture allows the
Company to incur additional indebtedness on a secured basis. As of June 30,
1997, after giving effect to the sale of the Old Notes and the application of
the net proceeds
19
<PAGE> 21
therefrom, the Company estimates that it would have had $150 million committed
but undrawn under the New Credit Facility, subject to the borrowing base formula
at the time of draw.
The Company's level of indebtedness will have several important effects on
its operations, including (i) a substantial portion of the Company's cash flow
from operations will be dedicated to the payment of interest on its indebtedness
and will not be available for other purposes; (ii) the covenants contained in
the Indenture 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 business conditions; 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.
Moreover, future acquisition or development activities may require the Company
to alter its capitalization significantly. These changes in capitalization may
significantly alter the leverage of the Company. The Company's ability to meet
its debt service obligations and to reduce its total indebtedness will be
dependent upon the Company's future performance, which will be subject to
general economic conditions and to financial, business and other factors
affecting the operations of the Company, many of which are beyond its control.
There can be no assurance that the Company's future performance will not be
adversely affected by such economic conditions and financial, business and other
factors. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources."
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."
PAYMENT UPON A CHANGE OF CONTROL
Upon the occurrence of a Change of Control, each holder of the Notes may,
if the Company has not under certain circumstances previously redeemed the
Notes, require the Company to purchase all or a portion of such Holder's Notes
at 101% of the principal amount of the Notes, together with accrued and unpaid
interest, if any, to the date of purchase. Prior to any such repurchase of the
Notes, the Company may be required to (i) repay all or a portion of indebtedness
under the New Credit Facility or (ii) obtain any requisite consent to permit the
repurchase. If the Company is unable to repay all of such indebtedness or is
unable to obtain the necessary consents, the Company would be unable to offer to
repurchase the Notes, which would constitute an Event of Default under the
Indenture. There can be no assurance that the Company will have sufficient funds
available at the time of any Change of Control to make any debt payment
(including repurchases of Notes) as described above. 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. See "Description of the Notes -- Repurchase at the Option of
Holders -- Change of Control."
The events that constitute a Change of Control under the Indenture may also
be events of default under the New Credit Facility or other Senior Debt of the
Company. Such events may permit the lenders under such debt instruments to
reduce the borrowing base thereunder or accelerate the debt and, if the
20
<PAGE> 22
debt is not paid, to enforce security interests on, or commence litigation that
could ultimately result in a sale of, substantially all the assets of the
Company, thereby limiting the Company's ability to raise cash to repurchase the
Notes and receive the special benefit of the offer-to-purchase provisions to the
Holders of the Notes.
SUBORDINATION OF NOTES
The Indenture governing the Notes limits, but does not prohibit, the
incurrence by the Company of additional indebtedness that is senior in right of
payment to the Notes. In the event of bankruptcy, liquidation, reorganization or
other winding up of the Company, the assets of the Company will be available to
pay the Company's obligations on the Notes only after all Senior Debt has been
paid in full, and there may not be sufficient assets remaining to pay amounts
due on the Notes. In addition, under certain circumstances, no payments may be
made with respect to principal of, premium, if any, or interest on the Notes if
a default exists with respect to any Senior Debt. See "Description of the
Notes -- Ranking and Subordination."
In addition, the Notes will be effectively subordinated to any indebtedness
and liabilities (including trade payables) of the Company's future Subsidiaries
that are not Subsidiary Guarantors (as defined herein).
The Indenture imposes limits on the ability of the Company and its future
Restricted Subsidiaries (as defined herein) to incur additional indebtedness and
liens and to enter into agreements that would restrict the ability of such
future Restricted Subsidiaries to make distributions, loans or other payments to
the Company. These limitations are subject to various qualifications. Subject to
certain limitations, the Company and its Subsidiaries may incur additional
secured indebtedness. For additional details of these provisions and the
applicable qualifications, see "Description of the Notes -- Ranking and
Subordination" and "-- Certain Covenants."
FRAUDULENT CONVEYANCE CONSIDERATIONS RELATING TO FUTURE SUBSIDIARY GUARANTEES
Although the Company currently has no subsidiaries that will be Subsidiary
Guarantors, the Company's obligations under the Notes may under certain
circumstances be guaranteed on an unsecured senior subordinated basis by
Restricted Subsidiaries. Various fraudulent conveyance laws have been enacted
for the protection of creditors and may be utilized by a court of competent
jurisdiction to subordinate or avoid any Subsidiary Guarantee issued by a
Subsidiary Guarantor. It is also possible that under certain circumstances a
court could hold that the direct obligations of a Subsidiary Guarantor could be
superior to the obligations under the Subsidiary Guarantee.
To the extent that a court were to find that at the time a Subsidiary
Guarantor entered into a Subsidiary Guarantee either (x) the Subsidiary
Guarantee was incurred by a Subsidiary Guarantor with the intent to hinder,
delay or defraud any present or future creditor or that a Subsidiary Guarantor
contemplated insolvency with a design to favor one or more creditors to the
exclusion in whole or in part of others or (y) the Subsidiary Guarantor did not
receive fair consideration or reasonably equivalent value for issuing the
Subsidiary Guarantee and, at the time it issued the Subsidiary Guarantee, the
Subsidiary Guarantor (i) was insolvent or rendered insolvent by reason of the
issuance of the Subsidiary Guarantee; (ii) was engaged or about to engage in a
business or transaction for which the remaining assets of the Subsidiary
Guarantor constituted unreasonably small capital; or (iii) intended to incur, or
believed that it would incur, debts beyond its ability to pay such debts as they
matured, the court could avoid or subordinate the Subsidiary Guarantee in favor
of the Subsidiary Guarantor's other credits. Among other things, a legal
challenge of a Subsidiary Guarantee issued by a Subsidiary Guarantor on
fraudulent conveyance grounds may focus on the benefits, if any, realized by the
Subsidiary Guarantor as a result of the issuance by the Company of the Notes. To
the extent a Subsidiary Guarantee is avoided as a fraudulent conveyance or held
unenforceable for any other reason, the Holders of the Notes would cease to have
any claim in respect of such Subsidiary Guarantor and would be creditors solely
of the Company.
21
<PAGE> 23
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 Offering are 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.
To the extent that a Subsidiary Guarantee of any Subsidiary 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 Subsidiary
Guarantor. In such event, the claims of the Holders of the Notes against such
Subsidiary Guarantor would be subject to the prior payment of all liabilities
and preferred stock claims of such Subsidiary 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 Subsidiary Guarantee
of such Subsidiary Guarantor.
RELIANCE ON KEY PERSONNEL
The Company depends, and will continue to depend in the foreseeable future,
on the services of the 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 Company is dependent upon Robert A. Belfer, the Company's Chairman and
Chief Executive Officer, and Laurence D. Belfer, the Company's President and
Chief Operating Officer, in addition to certain of its other executive officers.
The unexpected loss of the services of one or more of these individuals could
have a detrimental effect on the Company. The Company does not maintain key man
life insurance on any of its officers or key employees. See "Management."
CONTROL BY CERTAIN STOCKHOLDERS
Robert A. Belfer, his spouse, his children, his sisters, their spouses,
their children and trusts for their children and grandchildren own approximately
77.3% of the outstanding shares of the Company's common stock, par value $0.01
per share (the "Common Stock"). As a result, such stockholders will be able to
effectively control the outcome of certain matters requiring a stockholder vote,
including the election of directors. Such ownership of Common Stock may have the
effect of delaying, deferring or preventing a change of control of the Company
and may adversely affect the voting and other rights of other stockholders.
CERTAIN POTENTIAL CONFLICTS OF INTERESTS
Robert A. Belfer is a director of Enron Corp. ("Enron"). Enron, primarily
through its majority owned subsidiary, Enron Oil & Gas Company ("EOG"), is
involved in the exploration, development and production of oil and gas. Mr.
Belfer is not a director of EOG. While the Company's activities have not
historically overlapped with the activities of Enron or EOG, the Company may in
the future compete for certain opportunities with Enron or EOG. To the extent
any conflict from such future competition may arise, Mr. Belfer intends to
excuse himself from participating in any decisions of the Board of Directors of
Enron related to such opportunities.
22
<PAGE> 24
ABSENCE OF PUBLIC MARKET FOR THE NOTES; RESTRICTIONS ON TRANSFER
The Notes will be new securities for which currently there is no trading
market. The Company does not intend to apply for listing of the Notes on any
securities exchange or stock market. The Notes are expected to be eligible for
trading the Private Offerings, Resale and Trading through Automated Linkages
("PORTAL") market. Although the Initial Purchases have informed the Company that
they currently intend to make a market in the Notes, the Initial Purchasers are
not obligated to do so, and any such market making may be discontinued at any
time without notice. The liquidity of any market for the Notes will depend upon
the number of Holders of the Notes, the interest of securities dealers in making
a market in the Notes and other factors. Accordingly, there can be no assurance
as to the development or liquidity of any market for the Notes, and even if a
market does develop, the price at which the holders of Exchange Notes will be
able to sell such Notes is not assured and the Exchange Notes could trade at a
price above or below either their purchase price or face value.
Historically, the market for noninvestment grade debt has been subject to
disruptions that have caused substantial volatility in the prices of securities
similar to the Notes. There can be no assurance that the market, if any, for the
Notes will not be subject to similar disruptions. Any such disruptions may have
an adverse effect on the Holders of the Notes.
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<PAGE> 25
PRIVATE PLACEMENT
On September 23, 1997, the Company completed the private sale to the
Initial Purchasers of $150,000,000 principal amount of the Old Notes at a price
of 100.00% of the principal amount thereof in a transaction not registered under
the Securities Act in reliance upon Section 4(2) of the Securities Act. The
Initial Purchasers thereupon offered and resold the Old Notes only to qualified
institutional buyers at an initial price to such purchasers of 100.00% of the
principal amount thereof. A portion of the $145 million net proceeds received by
the Company in connection with the sale of the Old Notes was used to repay all
borrowings outstanding under the Old Credit Facility. It is anticipated that the
remainder of the net proceed will be used to provide working capital to the
Company to fund further exploration and development of the Company's oil and gas
properties, the acquisition of additional oil and gas properties or businesses
and other general corporate purposes.
USE OF PROCEEDS
The Company will not receive any cash proceeds from the issuance of the
Exchange Notes offered hereby. In consideration for issuing the Exchange Notes
as contemplated in this Prospectus, the Company will receive in exchange a like
principal amount of Old Notes, the terms of which are identical in all material
respects to the Exchange Notes. The Old Notes surrendered in exchange for the
Exchange Notes will be retired and canceled and cannot be reissued. Accordingly,
issuance of the Exchange Notes will not result in any change in capitalization
of the Company.
CAPITALIZATION
The following table sets forth as of June 30, 1997, (i) the actual
capitalization of the Company and (ii) the as adjusted capitalization of the
Company giving effect to the sale of the Old Notes, the New Credit Facility and
the application of the net proceeds therefrom. The table 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 elsewhere in this Prospectus.
<TABLE>
<CAPTION>
JUNE 30, 1997
----------------------
ACTUAL AS ADJUSTED
-------- -----------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (including current maturities):
Old Credit Facility....................................... $ 10,000 $ --
New Credit Facility....................................... -- --
8 7/8% Senior Subordinated Notes due 2007................. -- 150,000
-------- --------
Total long-term debt, including current maturities..... 10,000 150,000
Total stockholders' equity.................................. 254,972 254,972
-------- --------
Total capitalization........................................ $264,972 $404,972
======== ========
</TABLE>
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<PAGE> 26
SELECTED HISTORICAL FINANCIAL DATA
The following table sets forth selected financial data regarding the
Company as of and for each of the periods indicated. The historical financial
data, exclusive of the various ratio data, as of and for the three years ended
December 31, 1996, are derived from the financial statements of the Company
audited by Arthur Andersen LLP, independent public accountants. The financial
data as of June 30, 1997 and for the six months ended June 30, 1997 and 1996,
are derived from the Company's unaudited financial statements, which, in the
opinion of management, include all adjustments (which consist only of normal
recurring adjustments) necessary for a fair presentation of the financial
position and results of operations of the Company for such interim periods. The
following data should be read in conjunction with "Management's Discussion and
Analysis of Financial Condition and Results of Operations" and the Company's
financial statements and notes thereto.
<TABLE>
<CAPTION>
PERIOD FROM
INCEPTION
(APRIL 30, SIX MONTHS ENDED
1992) TO YEAR ENDED DECEMBER 31, JUNE 30,
DECEMBER 31, ----------------------------------------- --------------------
1992 1993 1994 1995 1996 1996 1997
------------ -------- -------- -------- -------- --------- --------
(IN THOUSANDS, EXCEPT RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
STATEMENT OF OPERATIONS DATA:
Revenues
Oil and gas sales........... $ 3,536 $ 19,255 $ 40,362 $ 68,767 $119,710 $ 56,646 $ 62,578
Commodity price risk
management activities..... -- -- 550 9,480 (5,967) 2,633 (3,098)
Interest.................... 80 57 195 353 2,653 886 1,268
-------- -------- -------- -------- -------- --------- --------
Total revenues.............. 3,616 19,312 41,107 78,600 116,396 60,165 60,748
-------- -------- -------- -------- -------- --------- --------
Costs and expenses
Oil and gas operating
expenses.................. 289 2,495 5,510 5,824 7,847 3,879 4,504
Depreciation, depletion and
amortization.............. 401 4,098 14,072 27,590 40,904 19,320 21,698
General and
administrative............ 424 856 2,269 2,597 3,059 1,756 1,670
-------- -------- -------- -------- -------- --------- --------
Total costs and expenses...... 1,114 7,449 21,851 36,011 51,810 24,955 27,872
-------- -------- -------- -------- -------- --------- --------
Income before taxes........... 2,502 11,863 19,256 42,589 64,586 35,210 32,876
Pro forma provision for income
taxes (1)................... 637 1,504 5,030 13,852 21,953 11,790 11,260
-------- -------- -------- -------- -------- --------- --------
Pro forma net income (1)...... $ 1,865 $ 10,359 $ 14,226 $ 28,737 $ 42,633 $ 23,420 $ 21,616
======== ======== ======== ======== ======== ========= ========
Pro forma earnings per share
(1)(2)...................... $ .07 $ .41 $ .57 $ 1.15 $ 1.42 $ .82 $ .69
======== ======== ======== ======== ======== ========= ========
Weighted Average Common Shares
Outstanding (2)............. 25,000 25,000 25,000 25,000 29,986 28,447 31,500
STATEMENT OF CASH FLOWS DATA:
EBITDA(3)..................... $ 2,903 $ 15,961 $ 33,328 $ 70,179 $105,490 $ 54,530 $ 54,574
Capital expenditures.......... 15,744 32,647 52,230 71,387 142,712 59,778 71,693
Cash flow from operating
activities.................. 729 14,351 28,126 62,037 108,059 48,643 53,215
Cash flow from investing
activities.................. (13,086) (33,698) (52,670) (65,133) (143,826) (55,223) (94,810)
Cash flow from financing
activities.................. 14,115 18,708 30,376 (2,299) 77,684 77,339 --
BALANCE SHEET DATA:
Working capital............... $ 1,184 $ 3,108 $ 14,357 $ 446 $ 48,667 $ 9,673
Total assets.................. 19,671 50,248 101,625 145,550 303,918 328,082
Long-term debt, including
current maturities.......... -- -- 6,930 22,000 -- 10,000
Total stockholders' equity.... 16,617 47,188 89,890 105,015 233,203 254,972
</TABLE>
- ---------------
(1) Gives pro forma effect to the application of federal and state income taxes
to the Company as if it were a taxable corporation for the periods
presented. 1996 excludes a one-time non-cash deferred tax charge of $30.1
million recognized as a result of the Combination consummated on March 29,
1996 in connection with the Company's initial public offering.
(2) Pro forma earnings per share has been computed as if the 25,000,000 shares
of Common Stock that were issued in connection with Combination (as defined
herein) had been outstanding for all years prior to 1996.
(3) EBITDA represents income from continuing operations plus income taxes,
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 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."
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<PAGE> 27
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion is intended to assist in the understanding of the
Company's historical financial position and results of operations for each year
in the two year period ended December 31, 1996 and for the six months ended June
30, 1997 and 1996. Financial Statements and notes thereto included elsewhere in
this Prospectus should be referred to in conjunction with the following
discussion.
OVERVIEW
Since its inception in April 1992, the Company has grown rapidly, with
substantially all of its growth coming "through the drillbit."
The Company's participation in exploration and development activities in
the Moxa Arch Area of Wyoming and in the Austin Chalk Trend in the Giddings
Field of Texas are principally responsible for the substantial expansion of
production, revenues and reserves since the Company's inception.
The Company was organized as a Nevada corporation in January 1996 in
connection with the Combination (the "Combination") of ownership interests (the
"Combined Assets") in certain entities (the "Predecessors") and direct interests
in oil and gas properties and certain hedge transactions owned by members of the
Robert A. Belfer family and by employees of the Predecessors and entities
related thereto ("Direct Interests"). The Company and the owners of the Combined
Assets entered into an Exchange and Subscription Agreement and Plan of
Reorganization, dated as of January 1, 1996 (the "Exchange Agreement"), that
provided for the issuance by the Company of an aggregate of 25,000,000 shares of
Common Stock to such owners in exchange for the Combined Assets on March 29,
1996, the date the Company's initial public offering closed. The owners of the
Combined Assets received shares of Common Stock proportionate to the value of
the Combined Assets underlying their ownership interests in the Predecessors and
the Direct Interests.
Pursuant to the Exchange Agreement, the owners of the Combined Assets
received all revenues attributable to production and are responsible for all
incurred expenses related to the Combined Assets for all periods prior to
January 1, 1996. Effective with the Combination (which was contemporaneous with
the closing of the Company's initial public offering), the Company is entitled
to receive all revenues and is responsible for all expenses related to the
Combined Assets on and after January 1, 1996.
From inception through the date of the Combination, March 29, 1996, the
Predecessors were not required to pay federal income taxes due to their status
as either a partnership, individual owner, Subchapter S corporation, limited
liability corporation or joint venture, which are "pass-through" entities that
are not subject to federal income taxation; instead, taxes relating to the
Combined Assets for such periods were required to be paid by the owners of the
Predecessors and the Direct Interests.
Although the effective date of the Exchange Agreement is January 1, 1996,
each owner of the Combined Assets was required to include in its taxable income,
for all periods ending on the date of or prior to the completion of the
Combination, such owner's allocable portion of the taxable income attributable
to the Combined Assets and was entitled to all tax benefits attributable to the
Combined Assets through completion of the Combination.
The Company's revenue, profitability and future rate of growth are
substantially dependent upon prevailing prices for natural gas, oil and
condensate. These prices are dependent upon numerous factors beyond the
Company's control, such as economic, political and regulatory developments and
competition from other sources of energy. The energy markets have historically
been very volatile, and there can be no assurance that oil and natural gas
prices will not be subject to wide fluctuations in the future. A substantial or
extended decline in oil and natural gas prices could have a material adverse
effect on the Company's financial position, results of operations and access to
capital, as well as the quantities of natural gas and oil reserves that the
Company may economically produce. Natural gas produced is sold under contracts
that primarily reflect spot market conditions for their particular area. The
Company markets its oil with other working interest owners on spot price
contracts and typically receives a
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<PAGE> 28
premium compared to the price posted for such oil. As of June 30, 1997,
approximately 90% of the Company's production volumes relate to the sale of
natural gas.
The Company utilizes commodity swaps and options and other commodity price
risk management transactions for a portion of its oil and natural gas production
to achieve a more predictable cash flow and to reduce its exposure to price
fluctuations. The Company accounts for these transactions as hedging activities
or uses mark-to-market accounting for those contracts that do not qualify for
hedge accounting. As of December 31, 1996, the Company had various natural gas
and oil price risk management contracts in place with respect to portions of its
estimated production for 1997 and with respect to lesser portions of its
estimated production for 1998 and 1999. The Company expects from time to time to
either add or reduce the amount of price risk management contracts that it has
in place in keeping with its hedging strategy.
The following table sets forth certain operations data of the Company for
the periods presented:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Oil and Gas Sales (in thousands) (1)...... $40,362 $68,767 $119,710 $56,646 $62,578
Weighted Average Sales Prices (Unhedged):
Oil (per Bbl)........................... $ 16.48 $ 17.35 $ 21.30 $ 19.93 $ 20.49
Gas (per Mcf)........................... $ 1.67 $ 1.42 $ 2.00 $ 1.81 $ 2.12
Net Production Data:
Oil (MBbl).............................. 691 961 794 414 453
Gas (MMcf).............................. 17,482 37,047 51,289 26,787 25,100
Gas equivalent (MMcfe).................. 21,628 42,813 56,053 29,271 27,818
Data per Mcfe:
Oil and gas sales revenues (unhedged)... $ 1.86 $ 1.61 $ 2.14 $ 1.94 $ 2.25
Commodity price risk management
activities
-- Cash............................ .03 .22 .06 .09 (.21)
-- Non-Cash........................ -- -- (.17) -- .10
Oil and gas operating expenses.......... (.25) (.14) (.14) (.13) (.16)
General and administrative.............. (.10) (.06) (.06) (.06) (.06)
Depreciation, depletion and
amortization......................... (.65) (.64) (.73) (.66) (.78)
Interest income......................... -- -- .05 .02 .04
------- ------- -------- ------- -------
Pre-tax operating profit................ $ 0.89 $ 0.99 $ 1.15 $ 1.20 $ 1.18
------- ------- -------- ------- -------
Number of wells drilled or drilling:
Gross................................... 87 118 80 40 59
Net..................................... 22 34 34 17 31
</TABLE>
- ---------------
(1) Oil and gas sales exclude results related to commodity price risk management
activities reported separately.
RESULTS OF OPERATIONS -- JUNE 30, 1997 COMPARED TO JUNE 30, 1996
Revenues
For the first six months of 1997, oil and gas sales revenues (unhedged)
increased $5.9 million, or 10%, to $62.6 million over the prior year comparable
period. The revenue increase is the result of higher average price realizations
for both oil and natural gas. Production volume during the first six months of
1997 on an Mcfe basis declined by 5% to 27,818 MMcfe when compared to the prior
year comparable period but increased 4% when compared to the last half of
calendar year 1996 production. Natural gas production represented approximately
90% of the Company's total production on an Mcfe basis.
As a result of the substantial oil and gas price increases which occurred
in the first quarter of 1997 (which had a positive overall impact on oil and gas
sales revenues), commodity price risk management activities during the first
half of 1997 resulted in a net pre-tax loss of $3.1 million, consisting of
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<PAGE> 29
$5.9 million in realized losses which were partially offset by a $2.8 million
unrealized mark-to-market gain. The impact of such activities on an Mcfe basis
amounted to a net loss of $0.11 ($0.21 cash loss and non-cash gain of $0.10) and
a gain of $0.09 (all cash) per Mcfe for the first half of 1997 and 1996,
respectively.
Costs and Expenses
Production and Operating Expenses. Production and operating expenses
increased 16% from $3.9 million in the first half of 1996 to $4.5 million for
the comparable period in 1997 due mainly to the increased number of wells on
line and higher costs associated with new oil wells and a growing population of
older wells. Operating costs were $0.16 per Mcfe for the first six months of
1997 when compared to $0.13 per Mcfe in the first six months of 1996.
Depreciation, Depletion and Amortization. Depreciation, depletion and
amortization ("DD&A"), for the first half of 1997 increased 12% over the prior
year comparable period, from $19.3 million to $21.7 million, primarily due to
the drilling of deeper and higher costs wells.
General and Administrative Expenses. General and administrative expense
("G&A") declined 5% in the first half of 1997 to $1.7 million when compared to
the $1.8 million incurred in the first half of 1996. The rate per Mcfe for G&A
costs is unchanged at $0.06.
Income Before Income Taxes
The Company's income before income taxes for the first half of 1997
decreased by approximately $2.3 million, or 7%, to $32.9 million from $35.2
million in the prior year period. The decrease over the prior year comparable
period is due to commodity price risk management activities and lower production
offset in part by higher weighted average prices realized for both oil and
natural gas.
Income Taxes
Income tax expenses for the first half of 1997 were $11.3 million utilizing
an estimated effective income tax rate of 34.25%. In connection with the
Combination and Exchange Agreement, the Company became a taxable corporation
and, as a result, was required to record a one-time, non-cash charge in the
amount of $29.9 million during the first half of 1996 to establish a deferred
tax liability related to prior years on its balance sheet due to the change in
the tax status of the Company. At year end 1996, this estimated amount was
increased to $30.1 million following the completion of related income tax
returns.
RESULTS OF OPERATIONS -- 1996 COMPARED TO 1995
Revenues
Oil and natural gas sales revenues for the year 1996 (unhedged) increased
74% to $119.7 million when compared to the $68.8 million realized in 1995. The
substantial increase is principally identified with the addition of new Giddings
Field wells, in both the Navasota and Independence areas of the Company's
operations, and higher average prices realized for both oil and natural gas.
Weighted average oil and natural gas prices (unhedged) increased 23% and 41%,
respectively, when compared to 1995 price realizations. Production volume in
1996 on an Mcfe basis (using 6 Mcf of gas for 1 barrel of oil) increased 31%
over the prior year to 56,053 MMcfe. Daily production increased to 153,150 Mcfe
for 1996 compared to 117,300 Mcfe for 1995.
Commodity price risk management activities resulted in a pre-tax loss of
$6.0 million for 1996 which included (1) a realized hedging loss of $83,000, (2)
net realized losses on settlements of non-hedging transactions totaling $3.9
million, (3) net premiums received totaling $7.4 million and (4) a non-cash
unrealized loss for mark-to-market accounting of $9.4 million. As a result of
the substantial oil and natural gas price increases which occurred in the fourth
quarter of 1996 (which had a positive impact on oil and gas sales revenue), the
Company recorded a fourth quarter pre-tax loss of $8.4 million from commodity
price risk management activities which included a $4.2 million non-cash charge
for unrealized losses
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<PAGE> 30
related to required mark-to-market accounting. The 1995 results of operations
included pre-tax income of $9.5 million related to realized hedging gains. The
impact of such activities on an Mcfe basis amounted to a loss of $0.11 ($0.06
cash gain and a non-cash loss of $0.17) and a gain of $0.22 (all cash) per Mcfe
for 1996 and 1995, respectively.
Interest income realized during 1996 was $2.7 million compared to $0.4
million for 1995 due to higher average cash balances principally attributable to
the proceeds of the Company's initial public offering.
Costs and Expenses
Production and Operating Expenses. Production and operating expenses
including associated taxes in 1996 amounted to $7.9 million, an increase of 35%
over the $5.8 million incurred in the prior year. Operating costs on a Mcfe
basis were flat at $0.14 per Mcfe for both 1996 and 1995. A substantial portion
of the Company's natural gas production from wells drilled prior to September
1996 in the downdip Giddings Field qualifies for exemption from Texas state
production taxes. This exemption will continue for production through August 31,
2001.
Depreciation, Depletion and Amortization. DD&A costs related to oil and gas
properties totaled $40.9 million for 1996, a 48% increase over the $27.6 million
incurred in the 1995 comparable period. The Company's average DD&A rate per Mcfe
for 1996 was $0.73 compared to a rate of $0.64 per Mcfe in 1995. The increased
rate primarily reflects the higher average cost of drilling deeper wells and
costs associated with the unsuccessful East Texas Cotton Valley Reef Trend
exploration activities.
General and Administrative Expenses. G&A totaled $3.1 million for 1996, net
of capitalized G&A costs directly related to the Company's oil and natural gas
exploration and development efforts, an 18% increase over the prior year. The
increase reflects the addition of new employees hired to assist with the
Company's expanding activities and additional costs incurred in connection with
becoming a publicly traded entity. On an Mcfe basis, G&A costs were flat at
$0.06 for both 1996 and 1995. Operations G&A expenses for 1996 in the amount of
$3.1 million have been capitalized to oil and gas property accounts. The
increase of $1.8 million over the 1995 comparable amount reflects the Company's
rapidly expanding exploration and development efforts.
Income Before Income Taxes
The Company's income before income taxes for 1996 was $64.6 million, a 52%
increase over the $42.6 million realized in the prior year comparable period.
The increase is directly related to increased production from new well additions
in the Giddings Field and substantially higher average prices realized for both
oil and natural gas.
Income Taxes
Income tax expenses for 1996 amounted to $46.4 million. The provision for
taxes includes a one-time, non-cash charge in the amount of $30.1 million that
was required as a result of the Combination and the Exchange Agreement which
changed the tax status of the Company.
RESULTS OF OPERATIONS -- 1995 COMPARED TO 1994
Revenues
During 1995, oil and natural gas sales revenues (unhedged) increased $28.4
million, or 70%, to $68.8 million as compared to 1994. The revenue increase is
principally the result of new Giddings Field well additions in the Navasota
River and Independence areas of the Company's operations. Production volume on
an Mcfe basis increased to 42.8 MMcfe, representing an increase of 98% over the
prior year. Natural gas production represented approximately 87% of the
Company's total production on an Mcf equivalent basis. This significant
improvement in revenues was achieved despite a decline in the Company's average
wellhead natural gas prices in 1995. Weighted average wellhead natural gas
prices
29
<PAGE> 31
(unhedged) were down approximately 15% from 1994 prices and weighted average
wellhead oil prices were up approximately 5% from 1994 prices.
Commencing in late 1993, marketing activities associated with sales of
natural gas and crude oil also included natural gas, crude oil price swap and
option transactions, along with other commodity price hedging of natural gas and
crude oil and condensate prices. These transactions added approximately $9.5
million to net operating revenues for 1995. The average Mcfe price realized for
these transactions amounted to $0.22 per Mcfe for 1995. During 1995, revenues
per Mcfe, including revenue from hedges, per Mcfe totaled $1.83.
Costs and Expenses
Production and Operating Expenses. Production and operating expenses
increased 6% from $5.5 million in 1994 to $5.8 million in 1995. On an Mcfe
basis, operating costs decreased 44% to $0.14 for 1995, compared to $0.25 for
1994. The decrease is due mainly to an increase in the number of highly
productive wells in the Giddings Field.
Depreciation, Depletion and Amortization. DD&A for 1995 increased 96%, from
$14.1 million to $27.6 million, due to increased production. Lower well costs
due to efficiencies achieved related to the Company's experience in its existing
operating areas coupled with the Company's ability to achieve a higher level of
reserve additions for its 1995 wells resulted in a DD&A rate of $0.64 per Mcfe
for 1995, compared to $0.65 per Mcfe in 1994, a 2% reduction.
General and Administrative Expenses. G&A for 1995 increased 14%, from $2.3
million for 1994 to $2.6 million for 1995. The higher G&A expenses for 1995
primarily relate to increases in the number of employees due to a higher level
of overall activity for the Company as well as increases in employee salaries
and benefits. G&A expense totaling $1.2 million and $0.1 million have been
capitalized to oil and gas property accounts for 1995 and 1994, respectively.
Income Before Income Taxes. The Company's income before income taxes for
1995 increased by approximately $23.3 million, or 121% to $42.6 million from
$19.3 million in the prior year period. Increases in revenues were generated
primarily by increases in production from new well additions in the Giddings
Field and were partially offset by increases in operating costs and expenses
related to the new additions and lower natural gas and oil prices. Additionally,
the Company realized approximately $9.5 million related to its commodity price
risk management activities for 1995.
LIQUIDITY AND CAPITAL RESOURCES
General
On March 29, 1996, the Company successfully completed an initial public
offering of 6,500,000 shares of Common Stock. The initial public offering
provided the Company with approximately $113 million net of offering expenses.
Proceeds from the offering were used to repay approximately $35 million of
indebtedness under the Company's Old Credit Facility, fund capital expenditures
and for other general corporate purposes. The remaining proceeds from the
offering, together with cash flows from operations, are currently being used to
fund planned capital expenditures, including lease acquisitions, commitments,
other working capital requirements and general corporate purposes.
Cash Flow
Net operating cash flow (pre-tax), a measure of performance for exploration
and production companies, is generally derived by adjusting net income to
eliminate the effects of the non-cash depreciation, depletion and amortization
expense, provision for deferred income taxes and non-cash effects of commodity
price risk management activities. Net operating cash flow (pre-tax) before
changes in working capital was approximately $49.6 million and $53.9 million for
the first six months of 1997 and 1996, respectively. The Company had working
capital amounting to $9.7 million as of June 30, 1997, a decrease from the $48.7
million available as of December 31, 1996.
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<PAGE> 32
Capital Expenditures
For 1997, the Company has budgeted approximately $150 million for capital
expenditures which may be increased or decreased depending on oil and gas
prices, drilling results and other investment opportunities. The Company is
currently allocating approximately 77% of its budget to development and
exploration projects and approximately 23% to leasehold and seismic acquisition
activities, compared to the 45% for development and exploration and 55% for
leasehold and seismic in 1996. During the eighteen month period ending June 30,
1997, the Company has expended approximately $82.8 million on new leases for
potential development over the next several years.
In June 1997, the Company purchased 2,940,000 shares of common stock of
Hugoton Energy Corporation at $10.50 per share for a total investment of $30.9
million as of June 30, 1997.
Credit Facilities
In December of 1994, the Company entered into a three-year $25 million
Credit Agreement with The Chase Manhattan Bank (the "Old Credit Facility").
Principal outstanding is due and payable upon maturity in December 1997 with
interest due quarterly. In order to finance future capital requirements during
the first quarter of 1996, the Company increased the Old Credit Facility and the
borrowing base thereunder to $40 million. The borrowing base represents the
maximum available amount that may be borrowed under the Old Credit Facility at
any given time. Since all indebtedness under the Old Credit Facility was repaid
with proceeds from the initial public offering, the Company elected to reduce
its Old Credit Facility to $30 million and the borrowing base under the Old
Credit Facility to $15 million on May 1, 1996. The reduction in the borrowing
base permits the Company to pay a lower commitment fee, which is currently
calculated at an annual rate of 0.25 of 1% of the unused portion of the
available borrowing base. As of June 30, 1997, a total of $10 million in
advances were made to the Company and outstanding under the Old Credit Facility.
On September 23, 1997, the Company entered into a five-year $150 million credit
agreement with The Chase Manhattan Bank, as administrative agent, and other
lending institutions with an initial borrowing base of $50 million (the "New
Credit Facility").
The Company intends to fund its planned capital expenditures, commitments
and working capital requirements through cash flows from operations, from the
proceeds of the sale of the Old Notes and to the extent necessary, borrowings
under the New Credit Facility or other potential financings. If there are
changes in oil and natural gas prices, however, that correspondingly affect cash
flows and the borrowing base under the New Credit Facility, the Company has the
discretion and ability to adjust its capital budget. The Company believes it
will have sufficient capital resources and liquidity to fund its capital
expenditures and meet its financial obligations as they come due.
The following is a description of the New Credit Facility:
General. The New Credit Facility is among the Company, The Chase Manhattan
Bank, as administrative agent (the "Agent"), and other lending institutions (the
"Banks"). The New Credit Facility provides for an aggregate principal amount of
revolving loans of up to the lesser of $150 million or the borrowing base as in
effect from time to time, which includes a subfacility from the Agent for
letters of credit of up to $25 million. Initially, the borrowing base will be
$50 million. The borrowing base will be redetermined by the Agent and the Banks
semi-annually based upon their usual and customary oil and gas lending criteria
as such exist from time to time. In addition, the Company may request two
additional redeterminations and the Banks may request one additional
redetermination per year. Capitalized terms used in this description that are
not defined herein have the meaning given to such terms in the New Credit
Facility.
Collateral. Indebtedness of the Company under the New Credit Facility will
be secured by a pledge of the capital stock of each of the Company's material
subsidiaries.
Interest. Indebtedness under the New Credit Facility bears interest at a
floating rate based (at the Company's option) upon (i) the ABR with respect to
ABR Loans or (ii) the Eurodollar Rate for one, two, three or six months (or nine
or twelve months if available to the Banks), plus the Applicable Margin. The ABR
will be the greater of (i) the Prime Rate, (ii) the Base CD Rate plus 1% or
(iii) the Federal Funds
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<PAGE> 33
Effective Rate plus 1/2 of 1%. The Applicable Margin for Eurodollar Loans will
vary from 0.50% to 0.875% depending on the borrowing base usage. Borrowing base
usage will be a ratio of (i) outstanding Loans and letters of credit to (ii) the
then effective borrowing base. Interest on ABR Loans will be payable quarterly
in arrears and interest on Eurodollar Loans will be payable on the last day of
the interest period therefor and, if longer than three months, at three month
intervals.
Maturity. The New Credit Facility will terminate in September 2002. The New
Credit Facility provides that loans may be borrowed, repaid and reborrowed from
time to time until such termination date, subject to the satisfaction of certain
conditions on the date of any such borrowing and, in the case of repayment of
Eurodollar Loans, compliance with certain yield protection provisions.
Scheduled Payments and Prepayments. The New Credit Facility does not
require any scheduled payments of principal. The New Credit Facility provides
for mandatory repayments of loans if the aggregate principal amount of the loans
and the letters of credit exceed the borrowing base then in effect. The first
such prepayment must be in an amount of not less than 50% of the deficiency and
will be due within 90 days of the date such deficiency is determined to exist.
The balance will be due within the next 90 day period.
Amounts under the New Credit Facility may be voluntarily prepaid without
premium or penalty, subject to certain notice requirements, certain required
minimum prepayment amounts and in the case of Eurodollar Loans, certain yield
protection provisions.
Commitment and Letter of Credit Fees. The Company is required to pay to the
Banks a commitment fee based on the committed undrawn amount of the lesser of
the aggregate commitments or the then effective borrowing base during a
quarterly period equal to a percent which varies from 0.20% to 0.30% depending
on the borrowing base usage. Such commitment fees will be payable in arrears on
a quarterly basis. The Company also is required to pay letter of credit fees as
follows: (i) to the Banks, an amount equal to the Applicable Margin for the
daily aggregate amount available to be drawn under each letter of credit
outstanding; and (ii) to the Agent, an issuance fee equal to 0.125% per annum of
the stated amount of each letter of credit. Fees payable under clause (i) and
(ii) are payable quarterly in arrears and fees payable under clause (ii) are
also payable on each anniversary of the date of issuance of such letter of
credit if the letter of credit is outstanding for a period in excess of one
year. The Company will also pay other usual and customary costs and expenses
associated with issuing, effecting payment, amending, negotiating or
administering the letters of credit.
Conditions to Extensions of Credit. The obligation of the Banks to make
subsequent loans or extend letters of credit is subject to the satisfaction of
certain customary conditions including, but not limited to, the absence of a
default or event of default under the New Credit Facility, all representations
and warranties under the New Credit Facility and the other related Loan
Documents (including, without limitation, a material adverse change
representation) being true and correct.
Covenants. The New Credit Facility requires the Company to meet certain
financial tests, including meeting a minimum interest coverage ratio and current
ratio and a maximum leverage ratio. The New Credit Facility also contains
covenants which, among other things, limit the incurrence of additional
indebtedness, the nature of the business of the Company and its subsidiaries,
investments, leases of assets, ownership of subsidiaries, dividends,
transactions with affiliates, asset sales, acquisitions, mergers and
consolidations, liens and encumbrances and other matters customarily restricted
in such agreements. The New Credit Facility also contains additional covenants
which require the Company to maintain its properties and those of its
subsidiaries, together with insurance thereon, to provide certain information to
the Agent and the Banks, including financial statements, notices and reports and
to permit inspections of the books and records of the Company and its
subsidiaries, to comply with applicable laws, including environmental laws and
ERISA, to pay taxes and contractual obligations and to use the proceeds of the
loans for working capital and for other general corporate purposes.
Events of Default. The New Credit Facility contains customary events of
default, including payment defaults, breach of representations, warranties and
covenants (subject to certain cure periods), cross-
32
<PAGE> 34
defaults to certain other indebtedness, certain events of bankruptcy and
insolvency, judgment defaults in excess of $1 million and the failure of any of
the pledges to be in full force and effect.
Indemnification. Under the New Credit Facility, the Company has agreed to
indemnify the Agent and the Banks and related persons from and against any and
all losses, liabilities, claims, damages or expenses (including, without
limitation, fees and disbursements of counsel) that may be incurred by or
asserted against any such indemnified party in connection with any
investigation, litigation or other proceeding relating to the entering into
and/or performance of the New Credit Facility or related Loan Documents,
provided that the Company is not liable for any such losses, liabilities,
claims, damages or expenses resulting from such indemnified party's own gross
negligence or willful misconduct.
Eurodollar Yield Protection; Etc. The New Credit Facility contains
customary provisions protecting the Banks in the event of unavailability of
funding, illegality, capital adequacy requirements, increased costs, withholding
taxes and funding losses.
Commodity Price Risk Management Transactions
Certain of the Company's commodity price risk management arrangements
require the Company to deliver cash collateral or other assurances of
performance to the counterparties in the event that the Company's payment
obligations with respect to its commodity price risk management transactions
exceed certain levels.
With the primary objective of achieving more predictable revenues and cash
flows and reducing the exposure to fluctuations in oil and natural gas prices,
the Company has entered into price risk management transactions of various kinds
with respect to both oil and natural gas. While the use of certain of these
price risk management arrangements limits the downside risk of adverse price
movements, it may also limit future revenues from favorable price movements. The
Company engages in transactions such as selling covered calls or straddles which
are marked-to-market at the end of the relevant accounting period. Since the
futures market historically has been highly volatile, these fluctuations may
cause significant impact on the results of any given accounting period. The
Company has entered into price risk management transactions with respect to a
substantial portion of its estimated production for the remainder of 1997 and
with respect to lesser portions of its estimated production for 1998 and 1999.
The Company continues to evaluate whether to enter into additional price risk
management transactions for 1997 and future years. In addition, the Company may
determine from time to time to unwind its then existing price risk management
positions as part of its price risk management strategy.
Environmental Matters
The Company's operations are subject to various federal, state and local
laws and regulations relating to the protection of the environment, which have
become increasingly stringent. The Company believes its current operations are
in material compliance with current environmental laws and regulations. There
are no environmental claims pending or, to the Company's knowledge, threatened
against the Company. There can be no assurance, however, that current regulatory
requirements will not change, currently unforeseen environmental incidents will
not occur or past noncompliance with environmental laws will not be discovered
on the Company's properties.
Recent Accounting Pronouncements
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128 -- "Earnings per
Share" effective for interim and annual periods after December 15, 1997. This
statement replaces primary earnings per share ("EPS") with a newly defined basis
EPS and modifies the computation of diluted EPS. The Company's basic and diluted
EPS computed using the requirements of SFAS 128 are the same as the Company's
current disclosed pro forma net income per common share.
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<PAGE> 35
BUSINESS AND PROPERTIES
GENERAL
Belco is an independent energy company engaged in the exploration for and
exploitation, development and production of natural gas and oil primarily in the
Rocky Mountains, Texas, Louisiana and Michigan. Since its inception in April
1992, the Company has grown and diversified its reserve base largely through a
balanced program of exploration and development drilling. The Company
concentrates its activities in core areas in which it has accumulated detailed
geologic knowledge and has developed significant management and technical
expertise. Additionally, the Company structures its participation in natural gas
and oil exploration and development activities to minimize initial costs and
risks, while permitting substantial follow on investment. For the twelve months
ended June 30, 1997, the Company generated natural gas and oil revenues of
$125.6 million and EBITDA of $105.5 million.
The Company has achieved substantial growth in reserves, production,
revenues and EBITDA since 1992. Belco's estimated proved reserves have increased
at a compound annual growth rate of 46.1%, from 67 Bcfe as of December 31, 1992
to 305 Bcfe as of December 31, 1996. Over this period, average daily production
has increased from 4 MMcfe per day in 1992 to over 153 MMcfe per day in 1996.
Similarly, the growth in the Company's natural gas and oil revenues and EBITDA
has been substantial, increasing from $3.5 million and $2.9 million,
respectively, for the year ended December 31, 1992, to $119.7 million and $105.5
million, respectively, for the year ended December 31, 1996. The Company's low
cost structure is evidenced by its general and administrative expenses of $0.06
per Mcfe and lease operating expenses of $0.14 per Mcfe in 1996. For the three
years ended December 31, 1996, the Company's operating cash inflows per Mcfe
averaged $1.65 and its finding costs averaged approximately $0.80 per Mcfe.
The Company's operations are currently focused on the Green River Basin
(which includes the Moxa Arch Trend), the Wind River and Big Horn Basins, all of
which are in Wyoming, the Giddings Field in east central Texas, the Austin Chalk
Trend in Louisiana and the Central Basin in Michigan. At December 31, 1996, the
Company had estimated proved reserves of 305 Bcfe with a pre-tax Present Value
of $416 million after adjusting for oil and gas commodity hedges. On an Mcfe
basis, the Company's estimated proved reserves were 65% proved developed and 93%
natural gas. As of June 30, 1997, Belco held or controlled interests in
approximately 2.8 million gross (1.3 million net) undeveloped acres and the
Company had an interest in 533 gross (170 net) wells.
BUSINESS STRENGTHS
The Company believes that 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 exploration and development program. Over the last four
years, on a compound annual basis, the Company has increased proved
reserves by 46.1%, production by 148.7% and EBITDA by 146.0%.
Substantial Drilling Inventory. The Company has identified over 750
potential drilling locations based on geological and geophysical
evaluations. Additionally, the Company has spent $82.8 million since
January 1, 1996 to increase its acreage position from approximately 330,000
gross (146,000 net) undeveloped acres to approximately 2.8 million gross
(1.3 million net) undeveloped acres at June 30, 1997.
Strategic Alliances. The Company has formed key strategic alliances
with experienced industry partners such as Amoco Production Company
("Amoco"), Union Pacific Resources Group ("UPR") and OXY USA ("OXY"). In
cases where the Company is not the operator, the alliance has been
structured to enable the Company to become integrally involved with the
drilling and production decision making process. These strategic alliances
also provide the Company with the
34
<PAGE> 36
benefits of shared technological expertise, while affording the Company the
opportunity to diversify risk.
Successful Drilling Record. Since inception through December 31, 1996,
the Company has drilled 438 gross (122.2 net) development wells of which
408 gross (114.1 net) are currently producing. Additionally, the Company
has drilled 36 gross (16.3 net) exploratory wells of which 20 gross (13
net) are currently producing. During this period, the Company's drilling
efforts resulted in over 436 Bcfe of proved reserves (including revisions)
at a finding cost of approximately $0.72 per Mcfe.
High Operating Margins. The Company's drilling success, its high
impact wells and low cost structure have enabled the Company to generate
high gross cash margins of $2.09 per Mcfe pre tax ($1.99 per Mcfe net of
tax) for the twelve months ended June 30, 1997. This margin compares
favorably to an average of $1.71 per Mcfe experienced by public companies
which the Company believes are peer companies (and based on publicly filed
industry data) for the same period. This peer group consists of the
following companies: Barrett Resources Corp., Forcenergy Inc., Nuevo Energy
Co., HS Resources, Inc., Seagull Energy Corp., United Meridian Corp., Cross
Timbers Oil Co., Vintage Petroleum, Inc. and Lomak Petroleum, Inc.
Experienced and Committed Management. Belco's senior management team
has extensive experience in the oil and gas industry. In particular, the
Company's Chief Executive Officer, Robert A. Belfer, began his career in
the oil and gas industry in 1958 with Belco Petroleum Corporation, which
grew to become a Fortune 500 company with operations primarily in the Rocky
Mountains and offshore Peru. In 1983, BPC merged with InterNorth, a
predecessor of Enron Corp. Mr. Belfer and his family own an approximate
77.3% equity interest in the Company.
BUSINESS STRATEGY
The key elements of the Company's strategy are as follows:
Pursue a Balanced Drilling Program. Belco believes that there are
significant exploratory and development opportunities in the Rocky
Mountain, Texas, Louisiana and Michigan acreage positions that the Company
has assembled. The Company has identified potentially more than three years
of drilling inventory based on its existing holdings. Through June 30,
1997, the Company has made capital expenditures of approximately $72
million and plans to spend approximately $78 million through the remainder
of 1997.
Utilize Advanced Technology. The Company extensively uses advanced
technology, including equipment designed specifically for drilling deep
horizontal wells, the application of innovative hydraulic fracturing
techniques and 3-D seismic. Additionally, the Company has acquired
approximately 144 square miles of 3-D seismic data and 54 thousand miles of
2-D seismic data in its core geographic areas and plans to acquire an
additional 130 square miles of 3-D seismic data. The Company's experienced
technical staff includes six petroleum engineers, nine geologists and one
geophysicist, who have, on average, over 17 years of experience in the oil
and gas industry.
Maintain Low Cost Structure. The Company's management team is focused
on maintaining a low cost structure to maximize cash flow and earnings. As
part of this strategy, the Company focuses on core operating areas where it
can achieve economies of scale. The Company believes that maintaining its
low cost structure permits the Company to be consistently profitable in
various pricing environments.
Reduce Commodity Price Volatility. The Company engages in a wide
variety of commodity price risk management transactions with the objective
of achieving more predictable revenues and cash flows and reducing its
exposure to fluctuations in natural gas and oil prices.
Maintain Financial Flexibility. The Company is committed to
maintaining financial flexibility in order to pursue exploration and
development activities and take advantage of other opportunities that may
arise. Historically, the Company has funded its growth through internally
generated cash flow, bank credit facilities and proceeds from its initial
public offering in March 1996. The issuance of
35
<PAGE> 37
the Notes offered hereby in conjunction with the Company's New Credit
Facility will increase liquidity and diversify the Company's capital
structure.
Pursue Selective Acquisitions. To augment its growth through the
drillbit, the Company continually reviews potential acquisitions of oil and
gas properties or businesses that complement its existing operations and
that provide long term growth opportunities. The Company focuses its
attention on potential acquisitions principally within its core operating
areas or in areas that may establish a new core area and generally have (i)
high working interests; (ii) long lived reserves; (iii) operational control
or the ability to exercise significant influence over operations; and, (iv)
significant development potential.
PRIMARY OPERATING AREAS
The Company's operations are currently focused in four primary operating
areas: (i) the Rocky Mountains, principally in Wyoming, which include the Green
River Basin (inclusive of the Moxa Arch Trend), the Wind River and the Big Horn
Basins; (ii) Texas, principally in the Giddings Field in east central Texas,
which includes the Navasota, Independence and River Bend prospect areas; (iii)
Louisiana, in the Austin Chalk Trend; and, (iv) Michigan's Central Basin.
Rocky Mountains -- Wyoming
The Company maintains a significant acreage position in the Rocky Mountains
of Wyoming on which it conducts an ongoing exploration and development program.
In June 1992, the Company commenced a development drilling program in the Moxa
Arch Trend pursuant to a farmout from Amoco. In 1996, the Company significantly
expanded its acreage and exploration activities by acquiring the rights to up to
approximately 750,000 gross (250,000 net) acres in the Green River, Wind River
and Big Horn Basins in Wyoming, which lie north and east of the Moxa Arch Trend.
The Company has added approximately 225,565 gross (68,441 net) acres thus far in
1997 in these basins.
Moxa Arch Trend. One of the Company's primary operating areas is the Moxa
Arch Trend located in the Greater Green River Basin in southwestern Wyoming,
principally in Lincoln, Sweetwater and Uinta Counties. Approximately 48% of the
Company's estimated proved reserves at December 31, 1996 were located in this
field. The Company participates in vertical gas wells in this area which target
the Frontier and/or Dakota formations at depths that range from approximately
10,000 to 12,500 feet. The Frontier formation is a relatively blanket "tight gas
sand" formation, while the Dakota formation, beneath the Frontier, tends to be a
more prolific, but less predictable channel sand. Production from Moxa Arch
wells, particularly from the Frontier formation, tends to be long-lived, with 25
to 30 year reserve lives not uncommon.
Through 1996, the Company had participated in 186 gross (55 net) wells in
this field with 118 Frontier wells, 14 Dakota wells and 44 dual completions
(both Frontier and Dakota completed). Average net production for the first half
of 1997 was approximately 24.4 MMcfe per day. Forty-seven of the Company's wells
drilled in 1992 qualified for the Section 29 Tax Credit of approximately $0.59
per Mcf, which is attributable to all qualified production from these wells
through 2002.
Beginning in the middle of 1994, the Company substantially reduced the rate
at which it participated in new Moxa Arch wells. This reduction was primarily
due to: (i) Rocky Mountain gas prices which, on both an absolute and relative
basis, experienced a substantial decline in 1994 through late 1996, but which
recovered in late 1996 and early 1997, and (ii) the Bureau of Land Management
("BLM") which required all operators to perform an environmental impact study
("EIS") along a portion of the Moxa Arch. In March 1997, the BLM issued its
record of decision. In concluding its review of the EIS, the BLM has authorized
the drilling of approximately 700 natural gas wells in the Moxa Arch, subject to
review of certain air quality components. In May 1997, the Company re-commenced
drilling operations in the Moxa Arch Trend and plans to utilize 2-3 rigs to
drill 30+ locations in 1997. See "-- Regulation -- Environmental Regulation."
36
<PAGE> 38
Green River, Wind River and Big Horn Basins. Effective November 1, 1996,
the Company entered into a joint development agreement with Andex Partners and
Andover Partners to conduct exploratory operations in the Green River and Wind
River Basins of Wyoming. Under the agreement, the Company will spend a minimum
of $20 million on seismic, leasing and exploratory activities through December
31, 2001 and will initially earn rights to a 50% interest in approximately
300,000 net acres. At July 31, 1997, four exploratory wells on the acreage were
drilling and two exploratory wells were in the completion phase. Three of the
wells are operated by UPR and three are operated by Yates Petroleum Corporation
("Yates").
Effective December 31, 1996, the Company entered into two joint development
agreements with Snyder Oil Company ("SOCO") pursuant to which the Company
acquired or has the right to acquire a 50% interest in 87,321 net acres in the
Wind River Basin of Wyoming and 110,859 net acres in the Big Horn Basin of
Wyoming. Under such agreements, SOCO will be the operator. In June 1997, the
initial well in the Big Horn Basin tested at the rate of 400 Mcfe per day and is
currently being evaluated. The Tribal #46, the initial well on the Company's
Wind River acreage, was completed in August 1997 and initially produced in
excess of 3.5 MMcf per day.
In June 1997, the Company entered into a participation agreement with Tom
Brown Inc. ("Tom Brown") and Andover Partners covering an approximate one
million acre AMI in the Big Horn Basin and acquired an interest in an initial
100,000 gross (25,000 net) acres.
The Company expects to participate in a series of exploratory wells in
these Basins with UPR, SOCO, Tom Brown and Yates serving as primary operators.
These wells will target multiple formations, the most prevalent of which is the
Frontier formation. If initial results are successful, these projects hold the
potential for multi-well developmental drilling programs for the Company over
the next several years.
Texas
Giddings Field. Approximately 45% of the Company's estimated proved
reserves at December 31, 1996 were located in the Giddings Field of east central
Texas, principally in Grimes, Washington and Fayette Counties. The Giddings
Field is one of the most actively drilled oil and gas fields in the United
States. The primary producing zone in the Giddings Field is the Austin Chalk, a
fractured carbonate formation that has been highly conducive to the application
of horizontal drilling technology. The Austin Chalk formation is encountered in
this field at depths believed by the Company to range between approximately
7,000 and 17,000 feet.
The Company first acquired interests in the Giddings Field in September
1992. During the first half of 1997, average net production from this field was
approximately 108 MMcfe per day. Through June 30, 1997, the Company had drilled
248 gross (85.3 net) wells in this field and continues to control approximately
315,000 gross undeveloped acres in this area. The Company currently divides the
Giddings Field into three prospect areas: (i) Navasota River, primarily in
Grimes County; (ii) Independence, primarily in Washington County; and, (iii)
River Bend, primarily in Fayette County. The Company expects to be drilling new
wells in the Giddings Field for the foreseeable future in addition to
re-entering older wells to drill additional laterals. Currently, a majority of
the Company's interests in this field are held pursuant to agreements with and
operated by Chesapeake Energy Corporation ("Chesapeake") and, to a lesser
extent, UPR. The Company serves as operator in the River Bend prospect area.
The Company believes that its success in the Giddings Field is attributable
to three principal factors: (i) continued technological advances in horizontal
drilling have significantly lowered finding and development costs in the field;
(ii) the geological setting of the deeper downdip areas of the field has created
more extensive fracturing than in other areas of the Texas Austin Chalk Trend;
and, (iii) the Company's acquisition program in cooperation with other operators
has permitted the creation of larger spacing units, thus reducing possible
competition for reserves from offsetting wells. As a result of these factors,
the Company's deeper downdip wells have, on average, produced greater reserves
per well than average wells in other areas of the Texas Austin Chalk Trend.
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<PAGE> 39
The majority of the Company's acreage in the Giddings Field was classified
as a tight sands reservoir by the Texas Railroad Commission. Wells spud between
June 1989 and September 1996 are exempt from the 7.5% state severance tax on
natural gas through August 2001. See "--Texas Severance Tax Abatement."
Gulf Coast. In March 1996, the Company entered into an exploration
agreement with Edge Petroleum Corporation ("Edge") pursuant to which the parties
expect to jointly conduct a series of 3-D seismic programs covering potentially
up to 750 square miles onshore in the Gulf Coast region of Texas. Under the
program, Edge and the Company initiated the first 50+ square mile 3-D seismic
shoots targeting the shallower Frio formation and potentially larger reserves in
the deeper Wilcox and Yegua formations. Edge will be operator of any shallow
zone wells drilled under the program and under certain circumstances the Company
will operate prospects targeting deeper zones. At June 30, 1997, Belco and Edge
had acquired seismic options on approximately 35,000 gross acres. As of July 31,
1997, three Frio wells have been drilled based on the evaluations of the initial
3-D seismic shoot, with two successful tests. The Company plans to participate
in additional Frio wells and Wilcox and Yegua prospects later this year.
Louisiana -- Austin Chalk Trend
The Louisiana Austin Chalk Trend is an extension of the 200-mile long
Austin Chalk Trend of Texas and represents a continuation of the Company's
exploration and development activities using deep-well horizontal drilling
technology. In December 1994, OXY announced the completion of a single lateral
horizontal Austin Chalk discovery in the Masters Creek area of central
Louisiana, approximately 200 miles east of the Company's activities in the
Giddings Field.
Since 1994, more than two and one-half million acres have been leased in
the Louisiana Austin Chalk Trend by industry participants including the Company,
UPR, Chesapeake, OXY and Sonat, Inc. Currently, approximately 30 rigs are
drilling in the Louisiana Austin Chalk Trend, including two rigs operated by the
Company. Recent drilling results for the Company include the Turner 22#1 well, a
dual lateral horizontal well, which was placed on production in late May and as
of August 1, 1997 has produced in excess of 200,000 barrels of oil and 310 MMcf
of gas. At June 30, 1997, the Company owned or had the right to acquire
approximately 345,000 net acres in this trend, representing a net investment of
approximately $38 million.
In order to further develop its large acreage position, in December 1996
the Company entered into two AMIs with UPR covering approximately 93,000
combined net acres in Avoyelles, Evangeline, Rapides and St. Landry Parishes,
and one AMI with OXY covering approximately 24,000 combined net acres in St.
Landry Parish. These AMIs, which provide for a sharing of costs and benefits as
well as operations in each such area, allow the Company to expedite the
exploration and development of its acreage position and gain the benefits of
shared expertise with two leading industry partners and experienced horizontal
players. Wells are now drilling in each of the UPR AMIs with operations
scheduled to commence in the OXY AMI in September 1997. In May 1997, the Company
created an additional AMI with OXY by selling additional fractional interests in
approximately 29,500 net acres to OXY for $11.8 million, realizing a substantial
gain on this transaction, which gain is applied to reduce the Company's property
pooled. The Company also retained a small royalty interest on such acreage.
Michigan -- Central Basin
In June 1996, the Company entered into an exploration program with two
private oil and gas companies pursuant to which the Company acquired a 35%
interest in approximately 220,000 net acres in the Central Basin of Michigan and
obtained the option to acquire an additional undivided 15% of such acreage
following the completion of a multi-well test program. By June 30, 1997, the
Company had accumulated interests, including the foregoing, in a total of
approximately 422,100 gross and 159,396 net acres in this Basin.
38
<PAGE> 40
The initial objectives of this play are thin gas-bearing sands at depths
ranging from approximately 8,000 to 10,000 feet. In addition, shallower oil
zones are expected to be tested in the Company's 1997 drilling program.
In late 1996, the Company began operations on an initial test program
covering different portions of this large acreage position. Each of these
vertical wells target one or more formations with long-lived reserves
anticipated. At June 30, 1997, the Company had participated in eight wells with
three successful wells, three wells waiting on completion or further evaluation
and two unsuccessful wells. While per well recoveries are expected to be modest,
lower drilling costs and premium pricing to NYMEX create the potential for
overall attractive economics.
ACREAGE
The following table sets forth, as of December 31, 1996, the gross and net
acres that the Company owns, controls or has the right to acquire interests in
both developed and undeveloped acreage. Developed acreage refers to acreage
within producing units and undeveloped acreage refers to acreage that has not
been placed in producing units. "Gross" acres refers to the total number of
acres in which the Company owns a working interest. "Net" acres refers to gross
acres multiplied by the Company's fractional working interest. As of June 30,
1997, the Company had increased its developed acreage to 191,246 gross (68,017
net) acres and its undeveloped acreage to 2,792,625 gross (1,264,941 net) acres.
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED(1)
---------------- ---------------------
GROSS NET GROSS NET
------- ------ --------- ---------
<S> <C> <C> <C> <C>
Rocky Mountains:
Green River Basin.............................. -- -- 553,001 150,435
Moxa Arch Trend................................ 25,737 14,290 33,822 19,755
Wind River Basin............................... -- -- 57,923 28,459
Big Horn Basin................................. -- -- 119,034 55,431
Denver-Julesburg Basin......................... -- -- 217,811 131,032
Texas:
Giddings Field................................. 129,422 40,812 313,500 152,538
Gulf Coast..................................... 428 214 35,172 17,720
Louisiana:
Austin Chalk Trend............................. 960 960 459,427 364,605
Michigan:
Central Basin.................................. -- -- 395,023 144,847
Oklahoma:
Golden Trend................................... 11,680 1,686 3,278 983
------- ------ --------- ---------
Totals......................................... 168,227 57,962 2,187,991 1,065,805
======= ====== ========= =========
</TABLE>
- ---------------
(1) Leases covering approximately half of the undeveloped acreage will expire
within the next five years. However, the Company expects to evaluate this
acreage prior to its expiration. The Company's leases generally provide that
the leases will continue past their primary terms if oil or gas in
commercial quantities is being produced from a well on such leases.
39
<PAGE> 41
POTENTIAL DRILLING LOCATIONS
The following table sets forth as of June 30, 1997, the number of potential
drilling locations identified by the Company.
<TABLE>
<S> <C>
Rocky Mountains............................................. 390
Texas....................................................... 125
Louisiana................................................... 120
Michigan.................................................... 120
Oklahoma.................................................... 8
---
Totals............................................ 763
===
</TABLE>
DRILLING ACTIVITY
The following table sets forth the wells participated in by the Company
during the periods indicated. In the table, "gross" refers to the total wells in
which the Company has a working interest, and "net" refers to gross wells
multiplied by the Company's working interest therein.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
--------------------------------------------- ENDED JUNE 30,
1994 1995 1996(1) 1997(2)
------------- ------------- ------------- ---------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ------ -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Development:
Productive...................... 82.0 21.0 84.0 24.0 64.0(3) 23.0 25.0 9.9
Non-productive.................. 0.0 0.0 6.0 1.2 2.0 0.8 5.0 2.8
---- ---- ---- ---- ---- ---- ---- ----
Total................... 82.0 21.0 90.0 25.2 66.0 23.8 30.0 12.7
==== ==== ==== ==== ==== ==== ==== ====
Exploratory:
Productive...................... 5.0 1.2 5.0 1.9 10.0 7.9 8.0 7.3
Non-productive.................. 0.0 0.0 2.0 0.3 3.0 2.4 8.0 4.5
---- ---- ---- ---- ---- ---- ---- ----
Total................... 5.0 1.2 7.0 2.2 13.0 10.3 16.0 11.8
==== ==== ==== ==== ==== ==== ==== ====
</TABLE>
- ---------------
(1) Does not include 16.0 gross (8.9 net) wells being drilled at December 31,
1996.
(2) Does not include 13.0 gross (6.9 net) wells being drilled at June 30, 1997.
(3) Includes three gross oil and gas wells with multiple completions. Wells with
multiple completions are counted only once for purposes of the above table.
40
<PAGE> 42
VOLUMES, REVENUE, PRICES AND PRODUCTION COSTS
The following table sets forth certain information regarding the production
volumes, revenue, average prices received and average production costs
associated with the Company's sale of oil and natural gas for the periods
indicated.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
---------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
<S> <C> <C> <C> <C> <C>
Net Production Data:
Oil (MBbl)........................ 691 961 794 414 453
Gas (MMcf)........................ 17,482 37,047 51,289 26,787 25,100
Gas equivalent (MMcfe)............ 21,628 42,813 56,053 29,271 27,818
Oil and Gas Sales ($ in 000's)(1)... $40,362 $68,767 $119,710 $56,646 $62,578
Average Sales Price (Unhedged):
Oil ($ per Bbl)................... $ 16.48 $ 17.35 $ 21.30 $ 19.93 $ 20.49
Gas ($ per Mcf)................... $ 1.67 $ 1.42 $ 2.00 $ 1.81 $ 2.12
Costs ($ per Mcfe):
Oil and gas operating expenses.... $ 0.25 $ 0.14 $ 0.14 $ 0.13 $ 0.16
General and administrative........ $ 0.10 $ 0.06 $ 0.06 $ 0.06 $ 0.06
Depreciation, depletion and
amortization of oil and gas
properties..................... $ 0.65 $ 0.64 $ 0.73 $ 0.66 $ 0.78
</TABLE>
- ---------------
(1) Oil and gas sales exclude results related to commodity price risk management
activities reported separately.
DEVELOPMENT, EXPLORATION AND ACQUISITION EXPENDITURES
The following table sets forth certain information regarding the costs
incurred by the Company in its development, exploration and acquisition
activities during the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
------------------------------ ENDED
1994 1995 1996 JUNE 30, 1997
------- ------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Development Costs........................... $39,587 $54,451 $ 50,433 $29,442
Exploration Costs........................... 1,727 2,382 17,444 22,148
Acquisition Costs:
Unproved properties....................... 10,916 13,643 64,530 18,227
Proved properties......................... -- -- 9,871 1,876
Capitalized Interest........................ -- 911 434 --
------- ------- -------- -------
Total............................. $52,230 $71,387 $142,712 $71,693
======= ======= ======== =======
</TABLE>
OIL AND GAS RESERVES
The Company engaged Miller and Lents to estimate the Company's net proved
reserves, projected future production, estimated future net revenue attributable
to its proved reserves, and the present value of such estimated future net
revenue as of December 31, 1996. Miller and Lents' estimates were based upon a
review of production histories and other geologic, economic, ownership and
engineering data provided by the Company. In estimating the reserve quantities
that are economically recoverable, Miller and Lents used selling prices and
estimated development and production costs that were in effect during December
1996 without giving effect to hedging activities. In accordance with
requirements of the Commission, no price or cost escalation or de-escalation was
considered by Miller and Lents. Based upon the Miller and Lents Report, the
Company has calculated estimated future net revenues to give effect to the
impact of oil and gas commodity hedges, which are set forth in footnote (5) to
the following table.
41
<PAGE> 43
Horizontal completions are relatively new and, therefore, reserve estimates
for such wells are inherently less certain than estimates of reserves from wells
completed utilizing traditional methods having longer production histories. This
lack of operating history also prevents reservoir engineers from estimating
reserves based on production and pressure performance methods. Reserves assigned
to these properties were necessarily based on analogy with older wells producing
from the same horizons. Reserve estimates based on analogy are less precise than
estimates based on volumetric calculations or analysis of production and
pressure performance.
The table below sets forth information as of December 31, 1996, with
respect to the Company's estimated net proved reserves as estimated by Miller
and Lents. The present value of estimated future net revenue shown is not
intended to represent the current market value of the estimated oil and gas
reserves owned by the Company.
<TABLE>
<CAPTION>
PROVED PROVED
DEVELOPED(1) UNDEVELOPED(2)(3) TOTAL(3)
------------ ----------------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C>
Estimated Proved Reserves:
Oil and condensate (MMBbls)...................... 2.1 1.2 3.3
Gas (Bcf)(4)..................................... 184.9 100.1 285.0
Gas equivalents (Bcfe)........................... 197.3 107.7 305.0
Estimated Future Net Revenue Before
Income Taxes(5).................................. $559,131 $248,958 $808,089
Present Value of Estimated Future Net Revenue
Before Income Taxes (Discounted at 10% Per
Annum)(5)........................................ $336,247 $134,332 $470,579
</TABLE>
- ---------------
(1) Proved developed reserves are proved reserves which are expected to be
recovered from existing wells with existing equipment and operating methods.
(2) Proved undeveloped reserves are proved reserves which are expected to be
recovered from new wells drilled to known reservoirs on undrilled acreage
for which the existence and recoverability of such reserves can be estimated
with reasonable certainty or from existing wells where a relatively major
expenditure is required to establish production.
(3) Includes approximately 11 Bcfe of proved undeveloped reserves subject to a
participation right owned by third party investors in the Company's Moxa
Arch Drilling Programs.
(4) Includes natural gas liquids.
(5) Estimated future net revenue before income taxes represents estimated future
gross revenue to be generated from the production of proved reserves, net of
estimated production and future development costs, using prices at year-end
1996, which were $3.68 per Mcf of gas and $25.13 per barrel of oil without
giving effect to commodities price risk management related activities. At
December 31, 1996, the estimated future net revenue before income taxes and
the present value of such estimated future net revenue before income taxes
related to such activities were ($60,760) and ($55,151), respectively (based
on oil and gas prices in effect at December 31, 1996), which amounts have
not been deducted from estimated future net revenue before income taxes and
its present value as shown above. If such amounts were deducted, estimated
future net revenue before income taxes would equal $498,372 (Proved
Developed) and $747,330 (Total) and present values of such estimated future
net revenues before income taxes would equal $281,198 (Proved Developed) and
$415,530 (Total). The amounts shown are in thousands and do not give effect
to non-property related expenses, such as general and administrative
expenses, debt service and future income tax expense or to depreciation,
depletion and amortization. See Note 13 to Notes to Consolidated Financial
Statements.
The prices used in calculating the estimated future net revenue
attributable to proved reserves do not necessarily reflect market prices for oil
and gas production subsequent to December 31, 1996. There can be no assurance
that all of the proved reserves will be produced and sold within the periods
indicated, that the assumed prices will actually be realized for such production
or that existing contracts will be honored or judicially enforced.
With respect to the interests described in Note (3) above, the Company's
actual interests may differ from such assumed interests as a result of Moxa Arch
Program investor's determination to participate in offset wells under applicable
participation agreements.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors
42
<PAGE> 44
beyond the control of the Company. The reserve data set forth herein represents
only estimates. Reserve engineering is a subjective process of estimating
underground accumulations of oil and gas that cannot be measured in an exact
way, and the accuracy of any reserve estimate is a function of the quality of
available data and of engineering and geological interpretation and judgment. As
a result, estimates made by different engineers often vary. In addition, results
of drilling, testing and production subsequent to the date of an estimate may
justify revision of such estimates, and such revisions may be material.
Accordingly, reserve estimates are often different from the quantities of oil
and gas that are ultimately recovered. Furthermore, the estimated future net
revenue from proved reserves and the present value thereof are based upon
certain assumptions, including prices, future production levels and costs, that
may not prove correct over time. Predictions about prices and future production
levels are subject to great uncertainty, and this is particularly true as to
proved undeveloped reserves, which are inherently less certain than proved
developed reserves and which comprise a significant portion of the Company's
proved reserves. See "Risk Factors."
PRODUCTIVE WELL SUMMARY
The following table sets forth the Company's ownership in productive wells
at December 31, 1996. Gross oil and gas wells include three with multiple
completions. Wells with multiple completions are counted only once for purposes
of the following table. Production from various formations in wells without
multiple completions is commingled.
<TABLE>
<CAPTION>
PRODUCTIVE WELLS
----------------
GROSS NET
----- -----
<S> <C> <C>
Gas......................................................... 386.0 105.9
Oil......................................................... 31.0 14.0
----- -----
Total............................................. 417.0 119.9
===== =====
</TABLE>
MARKETING
There are a variety of factors which affect the market for oil and natural
gas, including the extent of domestic production and imports of oil and gas, the
proximity and capacity of natural gas pipelines and other transportation
facilities, demand for oil and gas, the marketing of competitive fuels and the
effects of state and federal regulations of oil and gas production and sales.
The Company has not experienced any difficulties in marketing its oil or gas.
The oil and gas industry also competes with other industries in supplying the
energy and fuel requirements of industrial, commercial and individual customers.
Although the Company seeks to moderate the impact of price volatility
through its commodity price risk management activities, the Company remains
subject to price fluctuations for natural gas sold in the spot market due
primarily to seasonality of demand and other factors beyond the Company's
control. Domestic oil prices generally follow worldwide oil prices, which are
subject to price fluctuations resulting from changes in world supply and demand.
PRODUCTION SALES CONTRACTS
In Wyoming, the Company sells all of its natural gas, natural gas liquids
and condensate from its Moxa Arch Wells under a market sensitive long term sales
contract with Amoco Energy Trading Corporation (the "Amoco Gas Contract"). The
price payable to the Company under the Amoco Gas Contract for the gas is the
Northwest Pipeline Rocky Mountain Index, plus $0.03 per MMBtu, less fuel charges
and gathering fees and adjusted for Btu content. The Amoco Gas Contract expires
on January 1, 1999. The Amoco Gas Contract can be extended by the Company for an
additional three year term.
All of the Company's current Wyoming oil and condensate production is sold
at market related prices pursuant to an option held by Amoco.
The Company's Moxa Arch wells are subject to various gathering agreements
with third parties including, as to wells drilled under the Amoco Farmout
Agreement in the Wilson Ranch, Seven Mile Gulch
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<PAGE> 45
and Bruff areas, a Gas Gathering and Processing Agreement dated March 20, 1992
with Northwest Pipeline. Gathering fees under this agreement are presently
$0.065 per MMBtu, subject to indexed escalation, and fuel charges of 0.5%.
Gathering fees and fuel charges in the Cow Hollow/Shute Creek areas are similar
to those under the Amoco Gas Contract.
In Texas, Louisiana and Oklahoma, the Company sells its gas to purchasers
under percentage of proceeds or index-based contracts. Under the percentage of
proceeds contract, the Company receives a fixed percentage of the resale price
received by the purchaser for sales of residue gas and natural gas liquids
recovered after gathering and processing the Company's gas. The Company receives
between 85% and 92% of the proceeds from residue gas sales and from 85% to 90%
of the proceeds from natural gas liquids sales received by the Company's
purchasers when the products are resold. The residue gas and natural gas liquids
sold by these purchasers are sold primarily based on spot market prices. The
revenue received by the Company from the sale of natural gas liquids is included
in natural gas sales. Under indexed-based contracts, the Company receives for
its gas at the wellhead a price per MMBtu tied to indexes published in Inside
FERC or Gas Daily, subject in most cases to a discount to the relevant index in
lieu of a gathering fee.
All of the Company's Texas, Louisiana and Oklahoma oil production is sold
under market sensitive or spot price contracts to various purchasers.
Sales to individual customers constituting 10% or more of total oil and gas
sales in 1996 were made to Aquila Southwest Pipeline (37%), GPM Gas Corporation
(31%) and Amoco Gas Trading Corp. (10%).
Management believes that the loss of any of the above customers would not
have a material adverse effect on the Company's results of operations or its
financial position.
PRICE RISK MANAGEMENT TRANSACTIONS
Commodity Price Risk Management
With the objective of achieving more predictable revenues and cash flows
and reducing the exposure to fluctuations in gas and oil prices, the Company has
entered into price risk management transactions of various types with respect to
both natural gas and oil, as described below. While the use of these
arrangements limits the downside risk of adverse price movements, it may also
limit future revenues from favorable price movements. The Company had entered
into price risk management transactions with respect to a substantial portion of
its production for 1996 and 1997 and with respect to lesser portions of its
estimated production for 1998 and significantly less for 1999. The Company
continues to evaluate whether to enter into additional such transactions for
1997 and future years. In addition, the Company may determine from time to time
to terminate its then existing hedging and other risk management positions.
All of the Company's price risk management transactions are carried out in
the over-the-counter market and not on the NYMEX, with financial counterparties
having at least an investment grade credit rating. All of these transactions
provide solely for financial settlements relating to closing prices on the
NYMEX.
The following is a summary of the types of price risk management
transactions in effect as of December 31, 1996.
Swaps. Since all of the Company's natural gas and oil is sold on "floating"
or market related prices, the Company has entered into financial swap
transactions which convert a floating price into a fixed price for a future
month. For any particular swap transaction, the counterparty is required to make
a payment to the Company in the event that the NYMEX Reference Price for any
settlement period is less than the swap price for such hedge, and the Company is
required to make a payment to the counterparty in the event that the NYMEX
Reference Price for any settlement period is greater than the swap price for
such hedge.
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<PAGE> 46
Reverse Swaps. When the Company determines it desires to reduce the amount
of swaps because of an assumed favorable outlook for prices it enters into a
reverse swap. Under such a transaction the role of the Company and the role of
the counterparty are reversed.
Collars. A collar provides for an average floor price and an average
ceiling price. For any particular collar transaction, the counterparty is
required to make a payment to the Company if the average NYMEX Reference Price
for the reference period is below the floor price for such transaction, and the
Company is required to make payment to the counterparty if the average NYMEX
Reference Price is above the ceiling price for such transaction.
Options, Puts and Straddles. When the Company believes that it receives a
sufficiently high cash premium (or other consideration) for granting the
counterparty a call or put option, it may enter into such a transaction. If the
Company sold a $23.00 call on oil for $0.40 a barrel in a given month and prices
averaged $22.00 a barrel for such month, the Company would receive a net
realization per barrel of $22.40 ($22.00 plus the $0.40 premium). However, if
for that month the price of oil averaged $25.00 per barrel, the Company would
receive a net realization of $23.40 (the call price, $23.00, plus $0.40). The
Company regards this as a prudent transaction under certain circumstances
provided that the Company always has more physical production for the periods
involved than its related aggregate risk management transactions. The
transactions described in this paragraph are required to be marked to market as
to the value of these transactions on the last day of the accounting period to
which such statement relates.
Basis Swaps. Since a substantial portion of the Company's natural gas is
sold under spot contracts with reference to Houston Ship Channel prices and the
Company's price risk management transactions are based on the NYMEX Reference
Price relating to gas delivered to Henry Hub, Louisiana, the Company has entered
into basis swaps that require the counterparty to make a payment to the Company
in the event that the average NYMEX Reference Price per MMBtu for gas delivered
to Henry Hub, Louisiana for a reference period exceeds the average price for
MMBtu for gas delivered at the Houston Ship Channel for such reference period by
more than a stated differential, and requires the Company to make a payment to
the counterparty in the event that the NYMEX Reference Price for Henry Hub
exceeds the price for Houston Ship Channel gas by less than the stated
differential (or in the event that the Houston Ship Channel price exceeds the
Henry Hub price). The Company also sells Wyoming gas at prices based on the
Northwest Pipeline Rocky Mountain Index (an index of prices for gas delivered at
various delivery points on the Northwest Pipeline in the Northern Rocky Mountain
area) and has entered into basis swaps that requires the counterparty to make a
payment to the Company in the event that the average NYMEX Reference Price per
MMBtu for gas delivered at Henry Hub, Louisiana for a reference period exceeds
the stated differential or to have the Company pay to the counterparty if it is
less than the stated differential (or if the Northwest Pipeline Rocky Mountain
index price is greater than the NYMEX reference price).
The result of all of these transactions with respect to 1996 and the open
positions for both natural gas and oil with respect to future years (primarily
1997 and 1998) are set forth in detail in Footnote 6 to the Consolidated
Financial Statements.
Certain of the Company's price risk management transactions were previously
covered by guarantees of, and certain other collateral from Robert A. Belfer.
Subsequent to the Company's initial public offering, all such guarantees have
been terminated and all such collateral has been returned.
TEXAS SEVERANCE TAX ABATEMENT
Production from natural gas wells that have been certified as tight
formations or deep wells by the Texas Railroad Commission ("high cost gas
wells") and that were spudded or completed during the period from June 16, 1989
to September 1, 1996 qualify for an exemption from the 7.5% severance tax in
Texas on natural gas and natural gas liquids produced by such wells prior to
August 31, 2001. The natural gas production from wells drilled on certain of the
Company's properties in the Austin Chalk area qualify for this tax exemption. In
addition, high cost gas wells that are spudded or completed during the period
from September 1, 1996 to August 31, 2002 are entitled to receive a severance
tax reduction upon obtaining a high cost gas certification from the Texas
Railroad Commission within 180 days after
45
<PAGE> 47
first production. The tax reduction is based on a formula composed of the
statewide "median" (as determined by the State of Texas from producer reports)
and the producer's actual drilling and completion costs. More expensive wells
will receive a greater amount of tax credit. This tax rate reduction remains in
effect for 10 years or until the aggregate tax credits received equal 50% of the
total drilling and completion costs.
LOUISIANA SEVERANCE TAX ABATEMENTS
A five-year exemption from severance tax applies to production from oil and
gas wells that are returned to service after having been inactive for two or
more years or having 30 days or less of production during the past two years. An
application must be made to the Louisiana Department of Natural Resources before
commencement of production during the period beginning July 31, 1994, and ending
June 30, 1998. Upon certification, the five-year exemption period begins from
the date of the application.
All severance tax is suspended for 24 months or until payout of the well
cost is achieved, whichever occurs first, on any horizontally drilled well or
recompletion well from which production commences after July 31, 1994. The term
"horizontal drilling" means high angle drilling of bore holes with 50 to 3,000
plus feet of lateral penetration through productive reservoirs, and "horizontal
recompletion" means horizontal drilling in an existing well bore.
Production of natural gas, gas condensate and oil from any well drilled to
a true vertical depth of more than 15,000 feet and where production starts after
July 31, 1994, is exempt from severance tax for 24 months or until payout of the
well cost, whichever occurs first. The exemption applies to production from any
depth in the wellbore.
Currently, the Louisiana severance tax rate on oil is 12.5% of gross value
and the severance tax on gas is 7.7 cents per Mcf. Only one of the severance tax
exemptions discussed above may be taken on a particular well. The Company
anticipates that a substantial portion of its current and future Louisiana wells
will qualify for one of the two exemptions discussed above.
SECTION 29 TAX CREDIT
The natural gas production from wells drilled on certain of the Company's
properties in the Moxa Arch Trend and Golden Trend Field qualifies for the
Section 29 Tax Credit. The Section 29 Tax Credit is an income tax credit against
regular federal income tax liability with respect to sales of the Company's
production of natural gas produced from tight gas sand formations, subject to a
number of limitations. Fuels qualifying for the Section 29 Tax Credit must be
produced from a well drilled or a facility placed in service after November 5,
1990 and before January 1, 1993, and be sold before January 1, 2003.
The basic credit, which is currently approximately $0.52 per MMbtu of
natural gas produced from tight sand reservoirs and approximately $1.03 per
MMbtu of natural gas produced from Devonian Shale, is computed by reference to
the price of crude oil and is phased out as the price of oil exceeds $23.50 in
1979 dollars (as adjusted for inflation) with complete phaseout if such price
exceeds $29.50 in 1979 dollars (as adjusted for inflation). Under this formula,
the commencement of phaseout would be triggered if the average price for crude
oil rose above approximately $45 per Bbl in current dollars. The Company
generated approximately $0.9 million of Section 29 Tax Credits in 1996. The
Section 29 Tax Credit may not be credited against the alternative minimum tax,
but under certain circumstances may be carried over and applied against regular
tax liability in future years. Therefore, no assurances can be given that the
Company's Section 29 Tax Credits will reduce its federal income tax liability in
any particular year.
REGULATION
The oil and gas industry is extensively regulated by federal, state and
local authorities. In particular, oil and gas production operations and
economics are affected by price controls, environmental protection
46
<PAGE> 48
statutes and regulations, tax statutes and other laws relating to the petroleum
industry, as well as changes in such laws, changing administrative regulations
and the interpretations and application of such laws, rules and regulations. In
October 1992, comprehensive national energy legislation was enacted which
focuses on electric power, renewable energy sources and conservation. This
legislation, among other things, guarantees equal treatment of domestic and
imported natural gas supplies, mandates expanded use of natural gas and other
alternative fuel vehicles, funds natural gas research and development, permits
continued offshore drilling and use of natural gas for electric generation and
adopts various conservation measures designed to reduce consumption of imported
oil. The legislation may be viewed as generally intended to encourage the
development and use of natural gas. Oil and gas industry legislation and agency
regulation are under constant review for amendment and expansion for a variety
of political, economic and other reasons.
Regulation of Natural Gas and Oil Exploration and Production. The Company's
operations are subject to various types of regulation at the federal, state and
local levels. Such regulation includes requiring permits for the drilling of
wells, maintaining bonding requirements in order to drill or operate wells and
regulating the location of wells, the method of drilling and casing wells, the
surface use and restoration of properties upon which wells are drilled, the
plugging and abandoning of wells and the disposal of fluids used in connection
with operations. The Company's operations are also subject to various
conservation laws and regulations. These include the regulation of the size of
drilling and spacing units or proration units and the density of wells which may
be drilled in and the unitization or pooling of oil and gas properties. In this
regard, some states (such as Oklahoma) allow the forced pooling or integration
of tracts to facilitate exploration while other states (such as Texas) rely on
voluntary pooling of lands and leases. In areas where pooling is voluntary, it
may be more difficult to form units and, therefore, more difficult to develop a
project if the operator owns less than 100% of the leasehold. In addition, state
conservation laws establish maximum rates of production from oil and gas wells,
generally prohibit the venting or flaring of gas and impose certain requirements
regarding the ratability of production. The effect of these regulations may
limit the amount of oil and gas the Company can produce from its wells and may
limit the number of wells or the locations at which the Company can drill. The
regulatory burden on the oil and gas industry increases the Company's costs of
doing business and, consequently, affects its profitability. Inasmuch as such
laws and regulations are frequently expanded, amended or reinterpreted, the
Company is unable to predict the future cost or impact of complying with such
regulations.
The Company has operations located on federal oil and gas leases, which are
administered by the MMS. Such leases are issued through competitive bidding,
contain relatively standardized terms and require compliance with detailed MMS
regulations and orders pursuant to the Outer Continental Shelf Lands Act
("OCSLA") (which are subject to change by the MMS). For offshore operations,
lessees must obtain MMS approval for exploration plans and development and
production plans prior to the commencement of such operations. In addition to
permits required from other agencies (such as the Coast Guard, the Army Corps of
Engineers and the Environmental Protection Agency (the "EPA")), lessees must
obtain a permit from the MMS prior to the commencement of drilling. The MMS has
promulgated regulations requiring offshore production facilities located on the
OCS to meet stringent engineering and construction specifications. The MMS
proposed additional safety-related regulations concerning the design and
operating procedures for OCS production platforms and pipelines. These proposed
regulations were withdrawn pending further discussions among interested federal
agencies. The MMS also has regulations restricting the flaring or venting of
natural gas, liquid hydrocarbons and oil without prior authorization. Similarly,
the MMS has promulgated other regulations governing the plugging and abandonment
of wells located offshore and the removal of all production facilities. To cover
the various obligations of lessees on the OCS, the MMS generally requires that
lessees post substantial bonds or other acceptable assurances that such
obligations will be met. The cost of such bonds or other surety can be
substantial and there is no assurance that bonds or other surety can be obtained
in all cases. Under certain circumstances, the MMS may require Company
operations on federal leases to be suspended or terminated. Any such suspension
or termination could materially and adversely affect the Company's financial
condition and operations.
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<PAGE> 49
The MMS issued a notice of proposed rulemaking in which it proposed to
amend its regulations governing the calculation of royalties and the valuation
of crude oil produced from federal leases. The proposed rule would modify the
valuation procedures for both arm's length and non-arm's length crude oil
transactions to decrease reliance on posted prices and assign a value to crude
oil that better reflects market value, establish a new MMS form for collecting
value differential data and amend the valuation procedure for the sale of
federal royalty oil. The Company cannot predict at this stage of the rulemaking
proceeding how it might be affected by this amendment to the MMS regulations.
In April 1997, after two years of study, the MMS withdrew proposed changes
to the way it values natural gas for royalty payments. These proposed changes
would have established an alternative market-based method to calculate royalties
on certain natural gas sold to affiliates or pursuant to non-arm's length sales
contracts.
Natural Gas and Oil Marketing and Transportation. Historically, the
transportation and sale for resale of natural gas in interstate commerce have
been regulated pursuant to the Natural Gas Act of 1938, the Natural Gas Policy
Act of 1978 (the "NGPA") and the regulations promulgated thereunder by the
Federal Energy Regulatory Commission (the "FERC"). In the past, the federal
government has regulated the prices at which oil and gas could be sold.
Deregulation of wellhead sales in the natural gas industry began with the
enactment of the NGPA. In 1989, the Natural Gas Wellhead Decontrol Act was
enacted. This act amended the NGPA to remove both price and non-price controls
from natural gas sold in "first sales" as of January 1, 1993. While sales by
producers of natural gas and all sales of crude oil, condensate and natural gas
liquids can currently be made at uncontrolled market prices, Congress could
reenact price controls in the future.
Several major regulatory changes have been implemented by the FERC from
1985 to the present that affect the economics of natural gas production,
transportation and sales. In addition, the FERC continues to promulgate
revisions to various aspects of the rules and regulations affecting those
segments of the natural gas industry, most notably interstate natural gas
transmission companies, which remain subject to the FERC's jurisdiction. These
initiatives may also affect the intrastate transportation of gas under certain
circumstances. The stated purposes of many of these regulatory changes is to
promote competition among the various sectors of the gas industry. The ultimate
impact of these complex and overlapping rules and regulations, many of which are
repeatedly subjected to judicial challenge and interpretation, cannot be
predicted.
Commencing in April 1992, the FERC issued Order Nos. 636, 636-A, 636-B and
636-C (collectively, "Order No. 636"), which, among other things, require
interstate pipelines to "restructure" to provide transportation separate, or
"unbundled," from the pipelines' sales of gas. Also, Order No. 636 requires
pipelines to provide open-access transportation on a basis that is equal for all
gas supplies. Order No. 636 has been implemented as a result of FERC orders in
individual pipeline service restructuring proceedings. In many instances, the
result of the Order No. 636 and related initiatives have been to substantially
reduce or bring to an end the interstate pipelines' traditional roles as
wholesalers of natural gas in favor of providing only storage and transportation
services. The FERC has issued final orders in virtually all pipeline
restructuring proceedings, and has completed a series of one year reviews to
determine whether refinements are required regarding individual pipeline
implementations of Order No. 636.
Although Order No. 636 does not directly regulate natural gas producers
such as the Company, the FERC has stated that Order No. 636 is intended to
foster increased competition within all phases of the natural gas industry. It
is unclear what impact, if any, increased competition within the natural gas
industry under Order No. 636 will have on the Company and its natural gas
marketing efforts. The United States Court of Appeals for the District of
Columbia Circuit (the "Court") recently issued its decision in the appeals of
Order No. 636. The Court largely upheld the basic tenets of Order No. 636,
including the requirements that interstate pipelines "unbundle" their sales of
gas from transportation and that pipelines provide open-access transportation on
a basis that is equal for all gas suppliers. The Court remanded several
relatively narrow issues for further explanation by the FERC. In doing so, the
Court
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<PAGE> 50
made it clear that the FERC's existing rules on the remanded issues would remain
in effect pending further consideration. The Company believes that the issues
remanded for further action do not appear to materially affect it. The United
States Supreme Court has decided not to review the Court's decision regarding
Order No. 636. In February 1997, the FERC issued Order No. 636-C, its order on
remand from the Court. Order 636-C is currently pending on rehearing before the
FERC. Although Order No. 636 could provide the Company with additional market
access and more fairly applied transportation service rates, terms and
conditions, it could also subject the Company to more restrictive pipeline
imbalance tolerances and greater penalties for violations of those tolerances.
The Company does not believe, however, that it will be affected by any action
taken with respect to Order No. 636 materially differently than other natural
gas producers and marketers with which it competes.
The FERC has issued a statement of policy and a request for comments
concerning alternatives to its traditional cost-of-service rate making
methodology. This policy statement articulates the criteria that the FERC will
use to evaluate proposals to charge market-based rates for the transportation of
natural gas. The policy statement also provides that the FERC will consider
proposals for negotiated rates for individual shippers of natural gas, so long
as a cost-of-service-based rate is available as a recourse rate. A number of
pipelines have obtained FERC authorization to charge negotiated rates. The FERC
also has requested comments on whether it should allow gas pipelines the
flexibility to negotiate the terms and conditions of transportation service with
prospective shippers. The Company cannot predict what further action the FERC
will take on these matters, however, the Company does not believe that it will
be affected by any action taken materially differently than other natural gas
producers and marketers with which it competes.
The FERC has announced its intention to reexamine certain of its
transportation-related policies, including the manner in which interstate
pipeline shippers may release interstate pipeline capacity under Order No. 636
for resale in the secondary market. While any resulting FERC action would affect
the Company only indirectly, the FERC's current rules and policies may have the
effect of enhancing competition in natural gas markets by, among other things,
encouraging non-producer natural gas marketers to engage in certain purchase and
sale transactions. The Company cannot predict what action the FERC will take on
these matters, nor can it accurately predict whether the FERC's actions will
achieve the goal of increasing competition in markets in which the Company's
natural gas is sold. However, the Company does not believe that it will be
affected by any action taken materially differently than other natural gas
producers and marketers with which it competes.
The FERC has issued a policy statement on how interstate natural gas
pipelines can recover the costs of new pipeline facilities. While the FERC's
policy statement on new construction cost recovery affects the Company only
indirectly, in its present form, the new policy should enhance competition in
natural gas markets and facilitate construction of gas supply laterals. The FERC
has denied requests for rehearing of this policy statement. The FERC has issued
numerous orders approving the spin-down or spin-off by interstate pipelines of
their gathering facilities. A "spin-off" is a FERC-approved sale of gathering
facilities to a non-affiliate. A "spin-down" is a transfer of gathering
facilities to an affiliate. These approvals were given despite the strong
protests of a number of producers concerned that any diminution in FERC's
oversight of interstate pipeline-related gathering services might result in a
denial of open access or otherwise enhance the pipeline's monopoly power. The
FERC's lead decision in this area has been largely affirmed by an appellate
court. While the FERC has stated that it will retain limited jurisdiction over
such gathering facilities and will hear complaints concerning any denial of
access, it is unclear what effect the FERC's gathering policy will have on
producers such as the Company and the Company cannot predict what further action
the FERC will take on these matters. One possible result of the FERC's actions
may be increased state regulatory oversight of gathering.
Commencing in October 1993, the FERC issued a series of rules (Order Nos.
561 and 561-A) establishing an indexing system under which oil pipelines will be
able to change their transportation rates, subject to prescribed ceiling levels.
The indexing system, which allows or may require pipelines to make rate changes
to track changes in the Producer Price Index for Finished Goods, minus one
percent, became effective January 1, 1995. The FERC's decision in this matter
was recently affirmed by the Court.
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<PAGE> 51
The Company is not able at this time to predict the effects of Order Nos. 561
and 561-A, if any, on the transportation costs associated with oil production
from the Company's oil producing operations.
Additional proposals and proceedings that might affect the oil and gas
industry are pending before the FERC and the courts. The Company cannot predict
when or whether any such proposals may become effective. In the past, the
natural gas industry has been heavily regulated. There is no assurance that the
regulatory approach currently pursued by the FERC will continue indefinitely.
Notwithstanding the foregoing, the Company does not anticipate that compliance
with existing federal, state and local laws, rules and regulations will have a
material or significantly adverse effect upon the capital expenditures, earnings
or competitive position of the Company.
Environmental Regulation. Activities of the Company with respect to the
exploration, development and production of oil and natural gas are subject to
stringent environmental regulation by state and federal authorities including
the EPA. Such regulation has increased the cost of planning, designing,
drilling, operating and in some instances, abandoning wells. In most instances,
the regulatory requirements relate to the handling and disposal of drilling and
production waste products and waste created by water and air pollution control
procedures. Although the Company believes that compliance with existing
environmental regulations will not have a material adverse effect on operations
or earnings, the risks of substantial costs and liabilities are inherent in oil
and gas operations, and there can be no assurance that significant costs and
liabilities, including civil and criminal penalties, will not be incurred.
Moreover, it is possible that other developments, such as stricter environmental
laws and regulations, and claims for damages to property or persons resulting
from the Company's operations could result in substantial costs and liabilities
to the Company.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, imposes liability, without regard
to fault or the legality of the original conduct, on certain classes of persons
with respect to the release of a "hazardous substance" into the environment.
These persons include the owner and operator of the disposal site or sites where
the release occurred and companies that disposed or arranged for the disposal of
the hazardous substances released at such site. Persons who are or were
responsible for releases of hazardous substances under CERCLA may be subject to
joint and several liability for the costs of cleaning up the hazardous
substances that have been released into the environment and for damages to
natural resources, and it is not uncommon for neighboring landowners and other
third parties to file claims for personal injury and property damage allegedly
caused by the hazardous substances released into the environment.
The Company generates wastes, including hazardous wastes, that are subject
to the federal Resource Conservation and Recovery Act ("RCRA") and comparable
state statutes. The EPA and various state agencies have limited the approved
methods of disposal for certain hazardous and nonhazardous wastes. Furthermore,
it is possible that certain wastes generated by the Company's oil and natural
gas operations that are currently exempt from treatment as "hazardous wastes"
may in the future be designated as "hazardous wastes" under RCRA or other
applicable statutes and therefore be subject to more rigorous and costly
operating and disposal requirements.
The Company currently owns or leases, and has in the past owned or leased,
numerous properties that for many years have been used for the exploration and
production of oil and gas. Although the Company has utilized operating and
disposal practices that were standard in the industry at the time, hydrocarbons
or other wastes may have been disposed of or released on or under the properties
owned or leased by the Company or on or under other locations where such wastes
have been taken for disposal. In addition, many of these properties have been
owned or operated by third parties whose treatment and disposal or release of
hydrocarbons or other wastes was not under the Company's control. These
properties and the wastes disposed thereon may be subject to CERCLA, RCRA and
analogous state laws. Under such laws, the Company could be required to remove
or remediate previously disposed wastes (including wastes disposed of or
released by prior owners or operators) or property contamination (including
groundwater contamination by prior owners or operators) or to perform remedial
plugging operations to prevent future contamination.
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The Oil Pollution Act of 1990 (the "OPA") amends certain provisions of the
Federal Water Pollution Control Act of 1972, commonly referred to as the Clean
Water Act ("CWA") and other statutes as they pertain to the prevention of and
response to oil spills into navigable waters. The OPA subjects owners and
operators of facilities to strict joint and several liability for all
containment and cleanup costs and certain other public and private damages
arising from a spill, including, but not limited to, the costs of responding to
a release of oil to surface waters. OPA establishes a liability limit for
onshore facilities of $350 million and for offshore facilities, all removal
costs plus $75 million, however, a party cannot take advantage of liability
limits if the spill is caused by gross negligence or willful misconduct or
resulted from a violation of a federal safety, construction or operating
regulation. If a party fails to report a spill or cooperate in the cleanup,
liability limits likewise do not apply. The CWA provides penalties for any
discharges of petroleum product in reportable quantities and imposes substantial
liability for the costs of removing a spill. State laws for the control of water
pollution also provide varying civil and criminal penalties and liabilities in
the case of releases of petroleum or its derivatives into surface waters or into
the ground. Federal regulations under the CWA and OPA require certain owners or
operators of facilities that store or otherwise handle oil, such as the Company,
to prepare and implement spill prevention, control and countermeasure plans and
facility response plans relating to the possible discharge of oil into surface
waters. In addition, the CWA and analogous state laws require permits to be
obtained to authorize discharges into surface waters or to construct facilities
in wetland areas. With respect to certain of its operations, the Company is
required to maintain such permits or meet general permit requirements. In 1992,
the EPA adopted regulations concerning discharges of storm water runoff. This
program requires covered facilities to obtain individual permits, participate in
a group permit or seek coverage under an EPA general permit. The Company
believes that it is in substantial compliance with the requirements of the CWA
and OPA and that any non-compliance would not have a material adverse effect on
the Company.
In April of 1994, the Bureau of Land Management directed that an EIS be
performed along a portion of the Moxa Arch area of Wyoming. The final EIS was
completed in June of 1996. In March of 1997, the BLM issued its record of
decision relating to this EIS. During the pendency of the EIS and record of
decision, regulatory approval to drill wells in the affected area was difficult
to obtain. The BLM's record of decision authorized the drilling of approximately
700 natural gas wells in the Moxa Arch, subject to review of certain air quality
components. The Company believes that drilling activity will now resume, albeit
subject to the record of decision.
OPERATING HAZARDS AND INSURANCE
Oil and gas drilling and production activities are subject to numerous
risks, many of which are beyond the Company's control. These risks include the
risk that no commercially productive oil or natural gas reservoirs will be
encountered, that operations may be curtailed, delayed or canceled as a result
of title problems, weather conditions, compliance with governmental
requirements, mechanical difficulties or shortages or delays in the delivery of
equipment and that the availability or capacity of gathering systems, pipelines
or processing facilities may limit the Company's ability to market its
production. There can be no assurance that new wells drilled by the Company will
be productive or that the Company will recover all or any portion of its
investment. Drilling for oil and natural gas may involve unprofitable efforts,
not only from dry wells, but from wells that are productive but do not produce
sufficient net revenues to return a profit after drilling, operating and other
costs.
In addition, the Company's properties may be susceptible to hydrocarbon
drainage from production by other operators on adjacent properties. Industry
operating risks include the risk of fire, explosions, blow-outs, pipe failure,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures or discharges of toxic gases, the occurrence of any of which
could result in substantial losses to the Company due to injury or loss of life,
severe damage to or destruction of property, natural resources and equipment,
pollution or other environmental damage, clean-up responsibilities, regulatory
investigation and penalties and suspension of operations. Additionally, the
Company's oil and gas
51
<PAGE> 53
operations are located in an area that is subject to tropical weather
disturbances, some of which can be severe enough to cause substantial damage to
facilities and possibly interrupt production.
The MMS requires lessees of OCS properties to post performance bonds in
connection with the plugging and abandonment of wells located offshore and the
removal of all production facilities. The Company has posted an area wide bond
meeting MMS requirements and has obtained additional supplemental bonding on its
offshore leases as required by the MMS.
The Company maintains customary oil and gas related third party liability
coverage, which it must renew annually, that insures the Company against certain
sudden and accidental risks associated with drilling, completing and operating
its wells. There can be no assurance that this insurance will be adequate to
cover any losses or exposure to liability or that the Company will be able to
renew its coverage annually. The Company and its subsidiaries carry workers'
compensation insurance in all states in which they operate. While the Company
believes this coverage is customary in the industry, it does not provide
complete coverage against all operating risks.
TITLE TO PROPERTIES
Title to properties is subject to royalty, overriding royalty, carried, net
profits, working and other similar interests and contractual arrangements
customary in the oil and gas industry, to liens for current taxes not yet due
and to other encumbrances. As is customary in the industry in the case of
undeveloped properties, little investigation of record title is made at the time
of acquisition (other than a preliminary review of local records).
Investigations, including a title opinion of local counsel, are generally made
before commencement of drilling operations. To the extent title opinions or
other investigations reflect title defects, the Company, rather than the seller
of the undeveloped property, is typically responsible to cure any such title
defects at its expense. If the Company were unable to remedy or cure title
defect of a nature such that it would not be prudent to commence drilling
operations on the property, the Company could suffer a loss of its entire
investment in the property. From time to time the Company's title to oil and gas
properties is challenged through legal proceedings. Under the terms of certain
of the Company's joint development, participation and farmout agreements, the
Company's interest (other than interests acquired through holding of leasehold
interests prior to spudding of the well) in each well is conveyed to the Company
upon the successful completion of the well or satisfaction of other conditions.
EMPLOYEES
As of June 30, 1997, the Company had 73 full time employees, none of whom
is represented by organized labor unions. The Company considers its employee
relations to be good.
LEGAL PROCEEDINGS
The Company is not a party to any material pending legal proceedings, other
than ordinary routine litigation incidental to its business that management
believes would not have a material adverse effect on its financial condition or
results of operations.
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<PAGE> 54
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the name, age and position of each of the
Company's executive officers and directors:
<TABLE>
<CAPTION>
NAME AGE POSITION
---- --- --------
<S> <C> <C>
Robert A. Belfer............... 62 Chairman of the Board and Chief Executive Officer
Laurence D. Belfer............. 31 Director, President and Chief Operating Officer
Philip A. Epstein.............. 41 Senior Financial and Legal Advisor and General Counsel
Dominick J. Golio.............. 51 Vice President -- Financial, Chief Financial Officer
and Treasurer
Shiv K. Sharma................. 55 Senior Vice President -- Engineering
Mel Fife....................... 46 Vice President -- Business Development
Gary Hampton................... 41 Vice President -- Exploration -- Eastern Region
Steven L. Mueller.............. 44 Vice President -- Exploration -- Western Region
M. Bradford Moody.............. 38 Vice President -- Legal and Land
George A. Sheffer.............. 45 Vice President -- Operations
Graham Allison................. 57 Director
Daniel C. Arnold............... 67 Director
Alan D. Berlin................. 57 Director
Jack Saltz..................... 66 Director
Georgiana Sheldon-Sharp........ 73 Director
</TABLE>
Robert A. Belfer, Chairman of the Board and Chief Executive Officer of the
Company. Mr. Belfer began his career at Belco Petroleum Corporation in 1958 and
became Executive Vice President in 1964, President in 1965 and Chairman of the
Board in 1984. BPC was an independent oil and gas producer in the United States
and abroad, which went public in 1959. It was one of the largest independent oil
and gas companies in the United States and was included in Fortune's listing of
the 500 largest industrial companies in the United States prior to merging with
InterNorth, Inc. (now Enron Corp.) in 1983. Following the merger, Mr. Belfer
became Chief Operating Officer of BelNorth Petroleum Corp., a combination of oil
and gas producing operations of BPC and InterNorth. He resigned from his
position with InterNorth in 1986 and pursued personal investments in oil and gas
and other industries. In April 1992, Mr. Belfer founded the Company. In addition
to his position at the Company, Mr. Belfer serves on the boards of Enron, EOTT
Energy Corp., and NAC Re Corporation. Mr. Belfer received his undergraduate
degree from Columbia College (A.B. 1955) and a law degree from the Harvard Law
School (J.D. 1958).
Laurence D. Belfer, Director, President and Chief Operating Officer of the
Company. Mr. Belfer joined the Company as Vice President in September 1992. He
was promoted to Executive Vice President in May 1995 and Chief Operating Officer
in December 1995. He is a founder and Chairman of Harvest Management, Inc., a
money management firm. Mr. Belfer graduated from Harvard University (B.A. 1988)
and from Columbia Law School (J.D. 1992).
Philip A. Epstein, Senior Financial and Legal Advisor and General Counsel
of the Company. Mr. Epstein began his career as a corporate associate with the
New York City law firms of Kaye, Scholer, Fierman, Hays & Handler (1984-1987)
and Fried, Frank, Harris, Shriver & Jacobson (1988-1991), specializing in
mergers and acquisitions and corporate finance. Mr. Epstein joined the Belfer
family in 1991 as Investment Counsel, assuming the founding positions of
Executive Vice President, General Counsel and Secretary of the Company in April
1992. Mr. Epstein resigned from these positions in December 1992 but continues
to serve as Senior Financial and Legal Advisor and General Counsel to the
Company and to the Belfer family. Mr. Epstein received an undergraduate degree
from the University of
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<PAGE> 55
Chicago (B.A. 1978), graduate degree in Politics and Economics from Oxford
University (M.A. Oxon 1981) and his law degree from Northwestern University of
Law (J.D. 1984).
Dominick J. Golio, Vice President -- Finance, Chief Financial Officer and
Treasurer of the Company. Mr. Golio began his career at the New York City office
of Arthur Andersen & Co. in 1972. In 1975, he joined Case, Pomeroy & Company and
Felmont Oil Corporation, its publicly traded affiliate, where he rose to the
position of Vice President Finance. Mr. Golio left Felmont in 1987 following a
merger between Felmont and Homestake Mining Company. He served as Vice President
Finance and Administration at both AEG Corporation, the U.S. electronics
subsidiary of Daimler-Benz North America, until 1991 and at Millmaster Onyx
Group, Inc. until September 1993 at which time he joined the Company. Mr. Golio
is a Certified Public Accountant (NY). He holds undergraduate and graduate
degrees from Pace University (B.B.A. Accounting, 1972, M.B.A. -- Taxation,
1978).
Shiv K. Sharma, Senior Vice President -- Engineering of the Company. Mr.
Sharma began his career in 1967 as a Reservoir Engineer with Shell Oil Company.
In 1970, he joined BPC as a reservoir engineer and was subsequently elected to
Vice President and Senior Vice President of Engineering, a position he held
until his departure from that company in 1988. From 1988 to 1992, Mr. Sharma
worked as a petroleum consultant for several New York companies. He served as a
director and consultant to the Company commencing April 1992 and was elected to
his present position in April 1994. Mr. Sharma received his degrees in petroleum
technology from the Indian School of Mines (B.S. 1963) and petroleum engineering
from Stanford University (M.S. 1966).
Mel Fife, Vice President -- Business Developments of the Company. Mr. Fife
began his career in 1979 as an Independent Landman working for various
companies. Mr. Fife joined Union Pacific Resources Company in 1988 and served as
a Landman until 1994. He joined the Company in November 1995 as Land Manager and
was promoted to Vice President -- Land in January 1997. Mr. Fife has 18 years of
extensive experience in all phases of land in the oil and gas industry. Mr. Fife
is a graduate of Dallas Christian College (1979) from which he received a
Bachelor of Science Degree and attended Emory University's Divinity Program
(1978-1979).
Gary Hampton, Vice President -- Exploration -- Eastern Region of the
Company. Mr. Hampton began his career in 1978 as a Reservoir Geologist for Texas
Eastern (now PanEnergy). Mr. Hampton joined Champlin (currently UPR) in 1980 as
a geologist and remained there until 1984. Mr. Hampton spent the next two years
with Clayton Williams Energy generating prospects and developing acreage plays.
In 1986, he became an independent consultant geologist providing geological
assessments to the energy and environmental industry. Mr. Hampton rejoined
Clayton Williams Energy in 1989 as the geologist responsible for, among other
programs, geological planning associated with the company's Austin Chalk
development program resulting in over 100 horizontal wells drilled in the Austin
Chalk, Buda and Georgetown formations. Mr. Hampton was named Exploration Manager
at Clayton Williams where he remained until February 1995, at which time he
joined the Company as Manager -- Geology. Mr. Hampton was promoted to Vice
President -- Exploration in January 1996 and renamed Vice
President -- Exploration -- Eastern Division in October 1996. He received a B.S.
in Geology from the University of Southern Mississippi in 1978.
M. Bradford Moody, Vice President -- Legal and Land. Mr. Moody began his
career in 1983 as an Associate with Akin, Gump, Strauss, Hauer & Feld in
Washington D.C., specializing in energy law. In 1988, he joined Pennzoil Company
as an Attorney, and later Senior Attorney, specializing in oil and gas law. He
remained at Pennzoil Company until 1996, at which time he joined Belco as Senior
Attorney. In August 1997, Mr. Moody was named Vice President -- Legal and Land
of the Company. Mr. Moody received his undergraduate degree from Rice University
(B.A. Economics 1980) and also attended Richmond College in London, England
(1978-79). He received his law degree from the University of Texas School of Law
(J.D. 1983).
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<PAGE> 56
Steven L. Mueller, Vice President -- Exploration -- Western Region of the
Company. Mr. Mueller began his career in 1975 as a Geological Engineer at
Tenneco Oil, Lafayette. He advanced at Tenneco Oil, Lafayette to Senior
Geological Engineer in 1979, Project Geological Engineer in 1980 and Division
Geological Engineer in the later part of 1980. Mr. Mueller relocated to San
Antonio, Texas in 1985 where he maintained the title of Division Geological
Engineer at Tenneco Oil but had the responsibility of reorganizing and then
supervising an 18 member geological engineering group. Mr. Mueller was then
promoted to Division Exploration Manager in 1987. In 1988 Mr. Mueller joined
Fina Oil in Houston, Texas as Exploration Manager of South Louisiana and in 1992
he joined American Exploration in Houston, Texas as Exploitation Vice President.
He was with American Exploration until October of 1996 when he joined the
Company. Mr. Mueller has over 21 years experience in exploring for and
exploiting oil and gas fields both onshore and offshore and an expertise in 3-D
Seismic, mapping, log analysis and risk management. He holds a BS in Geological
Engineering from the Colorado School of Mines (1975).
George A. Sheffer, Vice President -- Operations of the Company. Mr. Sheffer
began his career in 1974 at Chevron USA where he served in the capacities of
Reservoir Engineer, Drilling Representative and Production Engineer. Mr. Sheffer
went on to serve in various engineering management positions with Meridian Oil
and its predecessor Southland Royalty Company from 1979 to 1992. He joined the
Company as Senior Petroleum Engineer in May 1994 after spending two years at
Mearsk Energy, Inc. as Drilling Manager. He was promoted to Vice
President -- Operations at the Company in November 1994. Mr. Sheffer has more
than 20 years of diverse experience in all phases of petroleum engineering and
operations management in the domestic oil and gas industry. Mr. Sheffer has
specialized in horizontal drilling since 1987 in Oklahoma and Texas. He has
extensive experience in the entire Austin Chalk Trend from South Texas to the
Louisiana Border. Mr. Sheffer is a graduate of Pennsylvania State University
(1974) from which he received a degree in Petroleum and Natural Gas Engineering.
Graham Allison, Director of the Company. Dr. Allison is the Douglas Dillon
Professor of Government and the Director of the Center for Science and
International Affairs at Harvard University. Until March 1994, he served as
Assistant Secretary of Defense for Policy and Plans and continues to serve as
Special Advisor to the Secretary of Defense. From 1977 to 1989, Dr. Allison was
Dean of Harvard's John F. Kennedy School of Government. He was a founding member
of the Trilateral Commission and a Director of the Council on Foreign Relations.
He also formerly served as a Director of the Getty Oil Company, New England
Securities and the Taubman Companies.
Daniel C. Arnold, Director of the Company. Mr. Arnold practiced law with
the firm of Vinson & Elkins L.L.P. in Houston, Texas from 1953 until 1983. From
January 1983 through April 1988, Mr. Arnold served as a Director, and as
President and later Chairman of First City Bancorporation of Texas, Inc. Mr.
Arnold held a number of positions, including serving as Chairman of the Board
and Chief Executive Officer of Farm & Home Financial Corporation and its wholly
owned subsidiary, Farm and Home Savings Association from February 1989 to April
1991. Currently, Mr. Arnold serves as Director of the Parkway Company and U.S.
Physical Therapy, Inc. and is engaged primarily in managing personal
investments.
Alan D. Berlin, Director of the Company. Mr. Berlin is a partner in the law
firm of Aitken Irvin Lewin Berlin Vrooman & Cohn, LLP where he specializes in
international energy matters, taxation and corporate law. For over five years
prior to joining the firm in 1995, he was engaged in the private practice of
law. Mr. Berlin was a special consultant to the United Nations Department of
Technical Cooperation for Development and the Center for Transnational
Corporations (1989-1994). Mr. Berlin has been appointed an Honorary Associate of
the Centre for Petroleum and Mineral Law and Policy at the University of Dundee,
Scotland, and is a member of the Association of International Petroleum
Negotiators. Mr. Berlin was employed in various positions with BPC from 1977 to
1985 with his last position being President of BPC Peru.
Jack Saltz, Director of the Company. Mr. Saltz is a private investor in oil
and gas, real estate development and other industries. He is President of OTS
Corp., a real estate development company and Chairman of Crown Funding Corp., a
mortgage brokerage firm. He is also President of Highpro Corp., a
55
<PAGE> 57
firm that invests in oil and gas exploration projects. Mr. Saltz was a major
stockholder of BPC and served BPC in many capacities including Director and
Senior Vice President.
Georgiana Sheldon-Sharp, Director of the Company. Ms. Sheldon-Sharp has
over 30 years of experience in the executive and legislative branches of the
federal government, as well as politics and private business. Her areas of
expertise include defense, foreign affairs and fossil and nuclear energy. She
served as Acting Chairman and Commissioner of the FERC from 1977 to 1985 and
served on the Board of Directors of Enron from 1985 to 1993. Ms. Sheldon-Sharp
currently serves on the Board of Trustees of Keuka College and the Federal
Woman's Award, Inc. and is a member of the Executive Committee of the United
States Energy Association World Energy Conference.
CERTAIN AFFILIATE TRANSACTIONS
Set forth below is a description of certain transactions entered into
between the Company and certain of its officers, directors and shareholders.
The Company has entered into a substantial portion of its natural gas and
crude oil commodity swap agreements and option agreements with Enron Capital &
Trade Resources Corp. ("ECT"), a subsidiary of Enron. Mr. Robert A. Belfer is a
member of the Board of Directors of Enron. These agreements were entered into in
the ordinary course of business of the Company and are on terms that the Company
believes are no less favorable than the terms of similar arrangements with third
parties. Pursuant to the terms of these agreements ECT paid to the Company a net
amount of approximately $5.243 million with respect to 1996. The amount of
future payments (as well as whether payments will be made by the Company to ECT
or vice versa) is affected by fluctuations in energy commodity prices. The
Company believes that it and ECT will continue to enter into similar
arrangements throughout 1997.
The Company sells, from time to time, liquid products to ECT on a
competitive basis. In addition, the Company entered into a six-month crude
contract with EOTT Energy Corp. ("EOTT"), of which Mr. Robert A. Belfer is a
director, pursuant to which the Company is paid a designated posted price plus a
premium.
In 1995 the Company engaged Midway Partners LLC ("Midway") to serve as
advisor to the Company regarding certain financial matters including the initial
public offering of the Company's Common Stock (the "IPO"). Philip A. Epstein,
the Senior Financial and Legal Advisor and General Counsel of the Company, is
one of two managing partners and principals of Midway. In connection with such
engagement, the Company paid Midway an advisory fee of $50,000. Following
consummation of the IPO, in April 1996 the Company paid Midway an additional
amount of $200,000. The total fees payable to Midway were calculated as the
lesser of $250,000 or 0.25% of the transaction value. The Company believes that
the terms of the Midway fee arrangement compare favorably to the terms which
might have been available from a non-affiliated party.
In December 1995 the Company acquired an interest in the East Texas Cotton
Valley Reef Play. During 1996, the Company drilled one dry hole, conducted a 3-D
seismic survey and subsequently relinquished its interest in the prospect. The
Company expended approximately $7.9 million on the East Texas Cotton Valley Reef
Play. Daniel C. Arnold, a Director of the Company, is the managing partner of
partnerships that are investors in the entity which sold the Company its
interest in the East Texas Cotton Valley Reef Play.
The Company's executive offices are leased from its Chairman and $250,000
was paid under such lease in 1996. Lease expense for the Company's executive
offices for the period from inception through 1995 was paid by the Chairman,
with no reimbursement. The Company has recorded an office space and service
expense and a corresponding capital contribution of approximately $250,000 and
$200,000 for the periods ended December 31, 1995 and 1994, respectively, based
on an estimated allocation of space occupied. The Company's remaining commitment
related to the office space and service charge is $250,000 per year through
1999. Management believes the fee compares favorably to the terms which might
have been available from a non-affiliated party.
56
<PAGE> 58
Additionally, from inception through March 31, 1996, the Company's Chairman
did not draw any compensation from the Company. The Company has recorded salary
and benefits expense and a corresponding capital contribution of $150,000 for
each of the periods ended December 31, 1995 and 1994, based on estimates of time
devoted to the Company and using expected 1996 compensation. In 1996, the
Chairman commenced receiving compensation.
Certain officers and employees of the Company have loans outstanding to the
Company. These loans were made to enable such persons to finance their purchase
of interests in oil and gas properties prior to the IPO. As part of the IPO such
persons were issued shares of Common Stock in exchange for their interests
pursuant to the Combination. The loans remain outstanding and are secured by
certain of such shares of Common Stock. The loans have been modified to provide
for final maturity after three years from the date of the Combination, which
occurred on March 29, 1996, and all outstanding principal will be due at such
date. The loans may be prepaid at any time at the option of the borrower. Each
borrower will have the option of repaying such loan in cash or with shares of
Common Stock. If a borrower chooses to repay with Common Stock, the shares to be
used for such purpose will be valued based on the then fair market value of the
Common Stock. The interest rate on each of the loans is at the prime rate, as
announced from time to time, of The Chase Manhattan Bank. Interest will accrue
during the first two years of such loans but the payment of interest will not be
required during such period. After such two year period, cash payments of
interest will be required quarterly until the loan is repaid. The officers of
the Company who have received such loans, and the principal amounts of their
loans plus accrued interest as applicable as of December 31, 1996 are as
follows: Dominick J. Golio -- $256,923.00, Shiv K. Sharma -- $411,028.00, and
George Sheffer -- $106,775.00.
The officers of the Company have other business positions that they will
continue to pursue independent of the Company; however, none of these interests
are related to the oil and gas business of the Company.
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<PAGE> 59
SECURITY OWNERSHIP OF MANAGEMENT AND CERTAIN BENEFICIAL OWNERS
The table below sets forth as of August 1, 1997 (i) the name of each person
known by management to own beneficially more than 5% of the Company's
outstanding Common Stock, the number of shares beneficially owned by each such
shareholder and the percentage of outstanding shares owned and (ii) the number
and percentage of outstanding shares of Common Stock beneficially owned by each
of the Company's directors and executive officers and by all directors and
executive officers of the Company as a group. Unless otherwise noted, the
persons named below have sole voting and investment power with respect to such
shares.
The Company knows of no one who beneficially owns in excess of five percent
of a class of the Company's Common Stock except as set forth in the table below.
<TABLE>
<CAPTION>
NUMBER OF PERCENT OF
NAME OF BENEFICIAL OWNER SHARES(1) CLASS
------------------------ ----------- ----------
<S> <C> <C>
Robert A. Belfer(2)......................................... 12,267,165 38.85%
Renee E. Belfer(3).......................................... 5,882,179 18.62%
Laurence D. Belfer(4)....................................... 2,674,296 8.46%
Jack Saltz(5)(6)(9)......................................... 2,042,828 6.47%
Saltz Investment Group...................................... 1,924,248 6.09%
Robert A. Belfer 1983 Grantor Trust......................... 1,642,040 5.20%
Shiv K. Sharma(7)........................................... 284,054 *
Philip A. Epstein(7)........................................ 219,419 *
Dominick J. Golio(7)(8)..................................... 108,212 *
Graham Allison(9)........................................... 21,000 *
Daniel C. Arnold(9)(10)..................................... 22,000 *
Alan D. Berlin(9)........................................... 2,500 *
Georgiana Sheldon-Sharp(9).................................. 2,000 *
All directors and executive officers as a group(11)......... 17,742,317 56.08%
</TABLE>
- ---------------
* Less than 1%
(1) Under the regulations of the Commission, shares are deemed to be
"beneficially owned" by a person if he or she directly or indirectly has or
shares the power to vote or dispose of such shares, whether or not he or
she has any pecuniary interest in such shares, or if he or she has the
right to acquire the power to vote or dispose of such shares within 60
days, including any right to acquire such power through the exercise of any
option, warrant or right.
(2) Does not include shares owned by Robert A. Belfer's spouse, children or
trusts of which his children or grandchildren are beneficiaries, totaling
10,091,079 shares, of which he disclaims beneficial ownership. Includes
200,000 shares held by Robert A. Belfer as Trustee of the Robert A. and
Renee E. Belfer Family Foundation of which he disclaims beneficial
ownership.
(3) Renee E. Belfer is the spouse of Robert A. Belfer and mother of Laurence D.
Belfer. Includes 1,510,338 shares held by trusts of which Renee E. Belfer
is sole trustee and the beneficiaries of which are her children. Includes
1,642,040 shares held by the Robert A. Belfer 1983 Grantor Trust of which
Renee E. Belfer is co-trustee and has shared voting and investment power.
(4) Includes (i) 557,674 shares held by a trust of which Laurence D. Belfer is
sole trustee and the beneficiaries of which are Laurence D. Belfer and his
two sisters and (ii) options to purchase 12,000 shares of Common Stock.
(5) Includes 1,924,248 shares held by Saltz Investment Group, LLC, a limited
liability company of which Mr. Saltz is sole managing director.
(6) Does not include 259,644 shares held by trusts of which Mr. Saltz's wife is
trustee and the beneficiaries of which are his children, and of which he
disclaims beneficial ownership.
(7) Includes options to purchase 6,000 shares of Common Stock.
(8) Does not include 6,150 shares owned by Dominick J. Golio's spouse and
children, of which he disclaims beneficial ownership.
(9) Includes options to purchase 1,000 shares of Common Stock.
(10) Does not include 5,000 shares owned by Mr. Arnold's spouse, of which he
disclaims beneficial ownership. Includes 20,000 shares owned by two limited
partnerships of which Mr. Arnold is the Managing General Partner and has
shared voting and investment power.
(11) Does not include 6,152,853 shares owned by the spouses of the directors and
officers as a group. If included, the total number of shares owned by the
directors and officers as a group would be 23,881,170 which would
constitute 75.61% of the class of stock.
58
<PAGE> 60
THE EXCHANGE OFFER
GENERAL
In connection with the sale of the Old Notes, the purchasers thereof became
entitled to the benefits of certain registration rights under the Registration
Rights Agreement. The Exchange Notes are being offered hereunder in order to
satisfy the obligations of the Company under the Registration Rights Agreement.
See "Exchange and Registration Rights Agreement."
For each $1,000 principal amount of Old Notes surrendered to the Company
pursuant to the Exchange Offer, the holder of such Old Notes will receive $1,000
principal amount of Exchange Notes. Upon the terms and subject to the conditions
set forth in this Prospectus and in the accompanying Letter of Transmittal, the
Company will accept all Old Notes properly tendered prior to 5:00 p.m., New York
City time, on the Expiration Date. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer in integral multiples of $1,000 principal
amount.
Under existing interpretations of the staff of the SEC, including Exxon
Capital Holdings Corporation, SEC No-Action Letter (available April 13, 1989),
the Morgan Stanley Letter and Mary Kay Cosmetics, Inc., SEC No-Action Letter
(available June 5, 1991), the Company believes that the Exchange Notes would in
general be freely transferable after the Exchange Offer without further
registration under the Securities Act by the respective holders thereof (other
than a "Restricted Holder," being (i) a broker-dealer who purchased Old Notes
exchanged for such Exchange Notes directly from the Company to resell pursuant
to Rule 144A or any other available exemption under the Securities Act or (ii) a
person 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 are
acquired in the ordinary course of such holder's business and such holder is not
participating in, and has no arrangement with any person to participate in, the
distribution (within the meaning of the Securities Act) of such Exchange Notes.
Eligible holders wishing to accept the Exchange Offer must represent to the
Company that such conditions have been met. Any holder of Old Notes who tenders
in the Exchange Offer for the purpose of participating in a distribution of the
Exchange Notes could not rely on the interpretation by the staff of the SEC
enunciated in the Morgan Stanley Letter and similar no-action letters, and must
comply with the registration and prospectus delivery requirements of the
Securities Act in connection with any resale transaction.
Each holder of Old Notes who wishes to exchange Old Notes for Exchange
Notes in the Exchange Offer will be required to make certain representations,
including that (i) it is neither an affiliate of the Company nor a broker-dealer
tendering Old Notes acquired directly from the Company for its own account, (ii)
any Exchange Notes to be received by it are being acquired in the ordinary
course of its business and (iii) it is not participating in, and it has no
arrangement with any person to participate in, the distribution (within the
meaning of the Securities Act) of the Exchange Notes. In addition, in connection
with any resales of Exchange Notes, any broker-dealer (a "Participating
Broker-Dealer") who acquired Old Notes for its own account 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. The staff of the SEC has
taken the position in no-action letters issued to third parties including
Shearman & Sterling, SEC No-Action Letter (available July 2, 1993), that
Participating Broker-Dealers may fulfill their prospectus delivery requirements
with respect to the Exchange Notes (other than a resale of an unsold allotment
from the original sale of Old Notes) with this Prospectus, as it may be amended
or supplemented from time to time. Under the Registration Rights Agreement, the
Company is required to allow Participating Broker-Dealers to use this
Prospectus, as it may be amended or supplemented from time to time, in
connection with the resale of such Exchange Notes. See "Plan of Distribution."
The Exchange Offer shall be deemed to have been consummated upon the
earlier to occur of (i) the Company having exchanged Exchange Notes for all
outstanding Old Notes (other than Old Notes held by a Restricted Holder)
pursuant to the Exchange Offer and (ii) the Company having exchanged, pursuant
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<PAGE> 61
to the Exchange Offer, Exchange Notes for all Old Notes that have been tendered
and not withdrawn on the date that is 30 days following the commencement of the
Exchange Offer. In such event, holders of Old Notes seeking liquidity in their
investment would have to rely on exemptions to registration requirements under
the securities laws, including the Securities Act.
As of the date of this Prospectus, $150,000,000 aggregate principal amount
of Old Notes are issued and outstanding. In connection with the issuance of the
Old Notes, the Company arranged for the Old Notes to be eligible for trading in
the Private Offering, Resale and Trading through Automated Linkages (PORTAL)
Market, the National Association of Securities Dealers' screen based, automated
market trading of securities eligible for resale under Rule 144A.
The Company shall be deemed to have accepted for exchange validly tendered
Old Notes when, as and if the Company has given oral or written notice thereof
to the Exchange Agent. See "-- Exchange Agent." The Exchange Agent will act as
agent for the tendering holders of Old Notes for the purpose of receiving
Exchange Notes from the Company and delivering Exchange Notes to such holders.
If any tendered Old Notes are not accepted for exchange because of an invalid
tender or the occurrence of certain other events set forth herein, certificates
for any such unaccepted Old Notes will be returned, without expense, to the
tendering holder thereof as promptly as practicable after the Expiration Date.
Holders of Old Notes who tender in the Exchange Offer will not be required to
pay brokerage commissions or fees or, subject to the instructions in the Letter
of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes, in connection with the Exchange Offer. See
"-- Fees and Expenses."
This Prospectus, together with the accompanying Letter of Transmittal, is
being sent to all registered holders as of the date of this Prospectus.
EXPIRATION DATE; EXTENSIONS; AMENDMENTS
The term "Expiration Date" shall mean November 10, 1997 unless the Company,
in its sole discretion, extends the Exchange Offer, in which case the term
"Expiration Date" shall mean the latest date to which the Exchange Offer is
extended. In order to extend the Expiration Date, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
record holders of Old Notes an announcement thereof, each prior to 9:00 a.m.,
New York City time, on the next business day after the previously scheduled
Expiration Date. Such announcement may state that the Company is extending the
Exchange Offer for a specified period of time. The Company reserves the right
(i) to delay acceptance of any Old Notes, to extend the Exchange Offer or to
terminate the Exchange Offer and to refuse to accept Old Notes not previously
accepted, if any of the conditions set forth herein under "-- Termination" shall
have occurred and shall not have been waived by the Company (if permitted to be
waived by the Company), by giving oral or written notice of such delay,
extension or termination to the Exchange Agent, and (ii) to amend the terms of
the Exchange Offer in any manner deemed by it to be advantageous to the holders
of the Old Notes. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof. If the Exchange Offer is amended in a manner determined by the Company
to constitute a material change, the Company will promptly disclose such
amendment in a manner reasonably calculated to inform the holders of the Old
Notes of such amendment. Without limiting the manner in which the Company may
choose to make public announcements of any delay in acceptance, extension,
termination or amendment of the Exchange Offer, the Company shall have no
obligation to publish, advertise, or otherwise communicate any such public
announcement, other than by making a timely release to the Dow Jones News
Service.
INTEREST ON THE EXCHANGE NOTES
The Exchange Notes will bear interest payable semi-annually on March 15 and
September 15 of each year, commencing March 15, 1998. Holders of Exchange Notes
of record on March 1, 1998 will receive interest on March 15, 1998 from the date
of issuance of the Exchange Notes, plus an amount equal to the
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<PAGE> 62
accrued interest on the Old Notes from the date of issuance of the Old Notes,
September 23, 1997, to the date of exchange thereof. Consequently, assuming the
Exchange Offer is consummated prior to the record date in respect of the March
15, 1998 interest payment for the Old Notes, holders who exchange their Old
Notes for Exchange Notes will receive the same interest payment on March 15,
1998 that they would have received had they not accepted the Exchange Offer.
Interest on the Old Notes accepted for exchange will cease to accrue upon
issuance of the Exchange Notes.
PROCEDURES FOR TENDERING
To tender in the Exchange Offer, a holder must complete, sign and date the
Letter of Transmittal, or a facsimile thereof, have the signatures thereon
guaranteed if required by the Letter of Transmittal, and mail or otherwise
deliver such Letter of Transmittal or such facsimile, or an Agent's Message,
together with the Old Notes and any other required documents, to the Exchange
Agent prior to 5:00 p.m., New York City time, on the Expiration Date. In
addition, either (i) the certificates for such Old 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 Old
Notes, if such procedure is available, into the Exchange Agent's account at The
Depository Trust Company (the "Book-Entry Transfer Facility") pursuant to the
procedure for book-entry transfer described below, must be received by the
Exchange Agent along with an Agent's Message prior to the Expiration Date or
(iii) the Holder must comply with the guaranteed delivery procedures described
below. The tender by a holder of Old Notes will constitute an agreement between
such holder and the Company in accordance with the terms and subject to the
conditions set forth herein and in the Letter of Transmittal. Delivery of all
documents must be made to the Exchange Agent at its address set forth herein.
Holders may also request that their respective brokers, dealers, commercial
banks, trust companies or nominees effect such tender for such holders.
The term "Agent's Message" means a message, transmitted by the Book-Entry
Transfer Facility to, and received by, the Exchange Agent and forming a part of
a Book-Entry Confirmation, which states that such Book-Entry Transfer Facility
has received an express acknowledgment from the participant in such Book-Entry
Transfer Facility tendering Old Notes which are the subject of such Book-Entry
Confirmation that such participant has received and agrees to be bound by the
terms of the Letter of Transmittal, and that the Company may enforce such
agreement against such participant.
The method of delivery of Old Notes and the Letter of Transmittal and all
other required documents to the Exchange Agent is at the election and risk of
the holders. Instead of delivery by mail, it is recommended that holders use an
overnight or hand delivery service. In all cases, sufficient time should be
allowed to assure timely delivery. No Letter of Transmittal or Old Notes should
be sent to the Company. Only a holder of Old Notes may tender such Old Notes in
the Exchange Offer. The term "holder" with respect to the Exchange Offer means
any person in whose name Old Notes are registered on the books of the Company or
any other person who has obtained a properly completed stock power from the
registered holder.
Any beneficial holder whose Old Notes are registered in the name of such
holder's broker, dealer, commercial bank, trust company or other nominee and who
wishes to tender should contact such registered holder promptly and instruct
such registered holder to tender on behalf of the registered holder. If such
beneficial holder wishes to tender directly, such beneficial holder must, prior
to completing and executing the Letter of Transmittal and delivering his Old
Notes, either make appropriate arrangements to register ownership of the Old
Notes in such holder's name or obtain a properly completed bond power from the
registered holder. The transfer of record ownership may take considerable time.
If the Letter of Transmittal is signed by the record holder(s) of the Old Notes
tendered thereby, the signature must correspond with the name(s) written on the
face of the Old Notes without alteration, enlargement or any change whatsoever.
If the Letter of Transmittal is signed by a participant in Depositary Trust
Company ("DTC"), the signature must correspond with the name as it appears on
the security position listing as the holder of the Old Notes. Signatures on a
Letter of Transmittal or a notice of withdrawal, as the case may be, must be
guaranteed by a member firm of a registered national securities exchange or of
the National Association of Securities Dealers, Inc., a commercial bank or trust
company having an office
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or correspondent in the United States or an "eligible guarantor institution"
within the meaning of Rule 17Ad-15 under the Exchange Act (an "Eligible
Institution") unless the Old Notes tendered pursuant thereto are tendered (i) by
a registered holder (or by a participant in DTC whose name appears on a security
position listing as the owner) who has not completed the box entitled "Special
Issuance Instructions" or "Special Delivery Instructions" on the Letter of
Transmittal and the Exchange Notes are being issued directly to such registered
holder (or deposited into the participant's account at DTC) or (ii) for the
account of an Eligible Institution. If the Letter of Transmittal is signed by a
person other than the registered holder of any Old Notes listed therein, such
Old Notes must be endorsed or accompanied by appropriate bond powers which
authorize such person to tender the Old Notes on behalf of the registered
holder, in either case signed as the name of the registered holder or holders
appears on the Old Notes. If the Letter of Transmittal or any Old Notes or bond
powers 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, evidence satisfactory to the Company of their
authority to so act must be submitted with the Letter of Transmittal.
A tender will be deemed to have been received as of the date when the
tendering holder's duly signed Letter of Transmittal accompanied by Old Notes
(or a timely confirmation received of a book-entry transfer of Old Notes into
the Exchange Agent's account at DTC with an Agent's Message) or a Notice of
Guaranteed Delivery from an Eligible Institution is received by the Exchange
Agent. Issuances of Exchange Notes in exchange for Old Notes tendered pursuant
to a Notice of Guaranteed Delivery by an Eligible Institution will be made only
against delivery of the Letter of Transmittal (and any other required documents)
and the tendered Old Notes (or a timely confirmation received of a book-entry
transfer of Old Notes into the Exchange Agent's account at DTC with an Agent's
Message) with the Exchange Agent.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance and withdrawal of the tendered Old Notes will be determined
by the Company in its sole discretion, which determination will be final and
binding. The Company reserves the absolute right to reject any and all Old Notes
not properly tendered or any Old Notes the Company's acceptance of which would,
in the opinion of the Company or its counsel, be unlawful. The Company also
reserves the absolute right to waive any conditions of the Exchange Offer or
defects or irregularities in tender as to particular Old Notes. The Company's
interpretation of the terms and conditions of the Exchange Offer (including the
instructions in the Letter of Transmittal) shall be final and binding on all
parties. Unless waived, any defects or irregularities in connection with tenders
of Old Notes must be cured within such 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 defects or irregularities with respect to tenders
of Old Notes nor shall any of them incur any liability for failure to give such
notification. Tenders of Old Notes will not be deemed to have been made until
such irregularities have been cured or waived. Any Old Notes received by the
Exchange Agent that are not properly tendered and as to which the defects or
irregularities have not been cured or waived will be returned without cost by
the Exchange Agent to the tendering holder of such Old Notes unless otherwise
provided in the Letter of Transmittal, as soon as practicable following the
Expiration Date. In addition, the Company reserves the right in its sole
discretion to (i) purchase or make offers for any Old Notes that remain
outstanding subsequent to the Expiration Date, or, as set forth under
"-- Termination," to terminate the Exchange Offer and (ii) to the extent
permitted by applicable law, purchase Old Notes in the open market, in privately
negotiated transactions or otherwise. The terms of any such purchases or offers
may differ from the terms of the Exchange Offer.
BOOK-ENTRY TRANSFER
The Exchange Agent will establish an account with respect to the Old Notes
at DTC within two business days after the date of this Prospectus, and any
financial institution which is a participant in DTC may make book-entry delivery
of the Old Notes by causing DTC to transfer such Old Notes into the Exchange
Agent's account in accordance with DTC's procedure for such transfer. Although
delivery of
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Old Notes may be effected through book-entry transfer into the Exchange Agent's
account at DTC, an Agent's Message must be transmitted to and received by the
Exchange Agent on or prior to the Expiration Date at one of its addresses set
forth below under "-- Exchange Agent", or the guaranteed delivery procedure
described below must be complied with. DELIVERY OF DOCUMENTS TO DTC DOES NOT
CONSTITUTE DELIVERY TO THE EXCHANGE AGENT. All references in this Prospectus to
deposit or delivery of Old Notes shall be deemed to include DTC's book-entry
delivery method.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and whose Old Notes are not
immediately available or who cannot deliver their Old Notes, the Letter of
Transmittal or any other required documents to the Exchange Agent prior to the
Expiration Date, or who cannot complete the procedure for book-entry transfer on
a timely basis and deliver an Agent's Message, may effect a tender if: (i) the
tender is made by or through an Eligible Institution; (ii) prior to the
Expiration Date, the Exchange Agent receives from such Eligible Institution a
properly completed and duly executed Notice of Guaranteed Delivery (by facsimile
transmission, mail or hand delivery) setting forth the name and address of the
holder of the Old Notes, the registration number or numbers of such Old Notes
(if applicable), and the total principal amount of Old Notes tendered, stating
that the tender is being made thereby and guaranteeing that, within five
business days after the Expiration Date, the Letter of Transmittal, together
with the Old Notes in proper form for transfer (or a confirmation of a
book-entry transfer into the Exchange Agent's account at DTC with an Agent's
Message) and any other documents required by the Letter of Transmittal, will be
deposited by the Eligible Institution with the Exchange Agent; and (iii) such
properly completed and executed Letter of Transmittal, together with the
certificate(s) representing all tendered Old Notes in proper form for transfer
(or a confirmation of such a book-entry transfer) and all other documents
required by the Letter of Transmittal are received by the Exchange Agent within
five business days after the Expiration Date.
TERMS AND CONDITIONS OF THE LETTER OF TRANSMITTAL
The Letter of Transmittal contains, among other things, certain terms and
conditions which are summarized below and are part of the Exchange Offer.
Each holder who participates in the Exchange Offer will be required to
represent that any Exchange Notes received by it will be acquired in the
ordinary course of its business, that such holder is not participating in, and
has no arrangement with any person to participate in, the distribution (within
the meaning of the Securities Act) of the Exchange Notes, and that such holder
is not a Restricted Holder.
Old Notes tendered in exchange for Exchange Notes (or a timely confirmation
of a book-entry transfer of such Old Notes into the Exchange Agent's account at
DTC) must be received by the Exchange Agent, with the Letter of Transmittal or
an Agent's Message and any other required documents, by the Expiration Date or
within the time periods set forth above pursuant to a Notice of Guaranteed
Delivery from an Eligible Institution. Each holder tendering the Old Notes for
exchange sells, assigns and transfers the Old Notes to the Exchange Agent, as
agent of the Company, and irrevocably constitutes and appoints the Exchange
Agent as the holder's agent and attorney-in-fact to cause the Old Notes to be
transferred and exchanged. The holder warrants that it has full power and
authority to tender, exchange, sell, assign and transfer the Old Notes and to
acquire the Exchange Notes issuable upon the exchange of such tendered Old
Notes, that the Exchange Agent, as agent of the Company, will acquire good and
unencumbered title to the tendered Old Notes, free and clear of all liens,
restrictions, charges and encumbrances, and that the Old Notes tendered for
exchange are not subject to any adverse claims when accepted by the Exchange
Agent, as agent of the Company. The holder also warrants and agrees that it
will, upon request, execute and deliver any additional documents deemed by the
Company or the Exchange Agent to be necessary or desirable to complete the
exchange, sale, assignment and transfer of the Old Notes. All authority
conferred or agreed to be conferred in the Letter of Transmittal by the holder
will survive the death, incapacity or dissolution of the holder and any
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obligation of the holder shall be binding upon the heirs, personal
representatives, successors and assigns of such holder.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be withdrawn
at any time prior to 5:00 p.m., New York City time, on the business day prior to
the Expiration Date, unless previously accepted for exchange. To withdraw a
tender of Old Notes in the Exchange Offer, a written or facsimile transmission
notice of withdrawal must be received by the Exchange Agent at its address set
forth herein prior to 5:00 p.m., New York City time, on the business day prior
to the Expiration Date and prior to acceptance for exchange thereof by the
Company. Any such notice of withdrawal must (i) specify the name of the person
having deposited the Old Notes to be withdrawn (the "Depositor"), (ii) identify
the Old Notes to be withdrawn (including, if applicable, the registration number
or numbers and total principal amount of such Old Notes), (iii) be signed by the
Depositor in the same manner as the original signature on the Letter of
Transmittal by which such Old Notes were tendered (including any required
signature guarantees) or be accompanied by documents of transfer sufficient to
permit the Trustee with respect to the Old Notes to register the transfer of
such Old Notes into the name of the Depositor withdrawing the tender, (iv)
specify the name in which any such Old Notes are to be registered, if different
from that of the Depositor and (v) if applicable because the Old Notes have been
tendered pursuant to the book-entry procedures, specify the name and number of
the participant's account at DTC to be credited, if different than that of the
Depositor. All questions as to the validity, form and eligibility (including
time of receipt) of such withdrawal notices will be determined by the Company,
whose determination shall be final and binding on all parties. Any Old Notes so
withdrawn will be deemed not to have been validly tendered for purposes of the
Exchange Offer and no Exchange Notes will be issued with respect thereto unless
the Old Notes so withdrawn are validly retendered. Any Old Notes which have been
tendered but which are not accepted for exchange will be returned to the holder
thereof without cost to such holder as soon as practicable after withdrawal,
rejection of tender or termination of the Exchange Offer. Properly withdrawn Old
Notes may be retendered by following one of the procedures described above under
"-- Procedures for Tendering" at any time prior to the Expiration Date.
TERMINATION
Notwithstanding any other term of the Exchange Offer, the Company will not
be required to accept for exchange any Old Notes not theretofore accepted for
exchange, and may terminate the Exchange Offer if it determines that the
Exchange Offer violates any applicable law or interpretation of the staff of the
SEC.
If the Company determines that it may terminate the Exchange Offer, as set
forth above, the Company may (i) refuse to accept any Old Notes and return any
Old Notes that have been tendered to the holders thereof, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the Expiration of the
Exchange Offer, subject to the rights of such holders of tendered Old Notes to
withdraw their tendered Old Notes or (iii) waive such termination event with
respect to the Exchange Offer and accept all properly tendered Old Notes that
have not been withdrawn. If such waiver constitutes a material change in the
Exchange Offer, the Company will disclose such change by means of a supplement
to this Prospectus that will be distributed to each registered holder of Old
Notes, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders of the Old Notes, if the Exchange Offer
would otherwise expire during such period. Holders of Old Notes will have
certain rights against the Company under the Registration Rights Agreement
should the Company fail to consummate the Exchange Offer.
EXCHANGE AGENT
The Bank of New York, the trustee under the Indenture, has been appointed
as Exchange Agent for the Exchange Offer. Questions and requests for assistance
and requests for additional copies of this
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Prospectus or of the Letter of Transmittal should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
By Mail: By Hand or Overnight Courier:
The Bank of New York The Bank of New York
101 Barclay Street, 7th Floor 101 Barclay Street, 7th Floor
Reorganization Section New York, New York 10286
New York, New York 10286 Corporate Trust Services Window
Attention: Mr. Odell Romeo Ground Level
Attention: Reorganization Section,
Facsimile Transmission: (212) 815-6339 Mr. Odell Romeo
Confirm by Telephone: (212) 815-6337
</TABLE>
FEES AND EXPENSES
The expenses of soliciting tenders pursuant to the Exchange Offer will be
borne by the Company. The principal solicitation for tenders pursuant to the
Exchange Offer is being made by mail. Additional solicitations may be made by
officers and regular employees of the Company and its affiliates in person, by
telegraph or telephone. The Company will not make any payments to brokers,
dealers or other persons soliciting acceptances of the Exchange Offer. The
Company, however, will pay the Exchange Agent reasonable and customary fees for
its services and will reimburse the Exchange Agent for its reasonable
out-of-pocket expenses in connection therewith. The Company may also pay
brokerage houses and other custodians, nominees and fiduciaries the reasonable
out-of-pocket expenses incurred by them in forwarding copies of this Prospectus,
Letters of Transmittal and related documents to the beneficial owners of the Old
Notes and in handling or forwarding tenders for exchange.
The other expenses incurred in connection with the Exchange Offer,
including fees and expenses of the Exchange Agent and Trustee and accounting and
legal fees, will be paid by the Company. The Company will pay all transfer
taxes, if any, applicable to the exchange of Old Notes pursuant to the Exchange
Offer. If, however, Exchange Notes or Old Notes not tendered or accepted for
exchange are to be delivered to, or are to be registered or issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other persons) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
ACCOUNTING TREATMENT
No gain or loss for accounting purposes will be recognized by the Company
upon the consummation of the Exchange Offer. The expenses of the Exchange Offer
will be amortized by the Company over the term of the Exchange Notes under
generally accepted accounting principles.
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DESCRIPTION OF THE NOTES
The Exchange Notes will be issued and the Old Notes were issued under an
indenture dated as of September 23, 1997 (the "Indenture") between the Company,
as issuer, and The Bank of New York, as trustee (the "Trustee"). A copy of the
Indenture is available upon request. The following summary of the material
provisions of the Indenture does not purport to be complete and is subject to,
and qualified in its entirety by reference to, all of the provisions of the
Indenture, including the definitions of certain terms contained therein. The
definitions of certain capitalized terms used in the following summary are set
forth below under "Certain Definitions."
The Notes and the Exchange Notes will constitute a single series of debt
securities under the Indenture. If the Exchange Offer is consummated, Holders of
Notes who do not exchange their Notes for Exchange Notes will vote together with
Holders of the Exchange Notes for all relevant purposes under the Indenture. In
that regard, the Indenture requires that certain actions by the Holders
thereunder (including acceleration following an Event of Default) must be taken,
and certain rights must be exercised, by specified minimum percentages of the
aggregate principal amount of the outstanding securities issued under the
Indenture. In determining whether Holders of the requisite percentage in
principal amount have given any notice, consent or waiver or taken any other
action permitted under the Indenture, any Notes that remain outstanding after
the Exchange Offer will be aggregated with the Exchange Notes, and the Holders
of such Notes and the Exchange Notes will vote together as a single series for
all such purposes. Accordingly, all references herein to specified percentages
in aggregate principal amount of the outstanding Notes shall be deemed to mean,
at any time after the Exchange Offer is consummated, such percentages in
aggregate principal amount of the Notes and the Exchange Notes then outstanding.
GENERAL
The Notes will be general unsecured obligations of the Company and will be
subordinated in right of payment to Senior Debt. See "-- Ranking and
Subordination." For purposes of this section, the term "Company" means Belco Oil
& Gas Corp. 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 will be limited in aggregate principal amount to $150 million and
will mature on September 15, 2007. Interest on the Notes will accrue at the rate
of 8 7/8% per annum and will be payable semi-annually in arrears on March 15 and
September 15 of each year, commencing March 15, 1998, to Holders of the Notes of
record on the immediately preceding March 1 and September 1. Interest on the
Notes will accrue 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 will be computed on the basis of a 360-day year comprised of
twelve 30-day months. Principal, premium, if any, and interest on the Notes will
be payable 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.
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OPTIONAL REDEMPTION
Except as otherwise described below, the Notes will not be redeemable at
the Company's option prior to September 15, 2002. Thereafter, the Notes will be
subject to redemption at the option of the Company, in whole or in part, upon
not less than 30 nor more than 60 days' notice, at the redemption prices
(expressed as percentages of principal amount) set forth below plus accrued and
unpaid interest thereon to the applicable redemption date, if redeemed during
the twelve-month period beginning on September 15 of the years indicated below:
<TABLE>
<CAPTION>
YEAR PERCENTAGE
---- ----------
<S> <C>
2002........................................................ 104.438%
2003........................................................ 102.958%
2004........................................................ 101.479%
2005 and thereafter......................................... 100.000%
</TABLE>
Prior to September 15, 2000, the Company may, at its option, on any one or
more occasions, redeem up to 33 1/3% of the original aggregate principal amount
of the Notes at a redemption price equal to 108.875% 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 66 2/3% of the original aggregate
principal amount of the Notes remains outstanding immediately after the
occurrence of such redemption.
At any time on or prior to September 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) will be 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.
Certain Subsidiaries of the Company may, from time to time, guarantee the
Company's obligations under the Notes. See "Limitation on Guarantees of
Indebtedness by Restricted Subsidiaries." Payment by a Subsidiary Guarantor
pursuant to its Subsidiary Guarantee will be subordinated, as set forth in the
Indenture, to the prior payment in full of such Subsidiary's Guarantor Senior
Indebtedness.
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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; 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 of the Company occurs ("payment default") or (ii) any
other default occurs and is continuing with respect to Designated Senior Debt of
the Company 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 (or their representative) of any Designated Senior Debt. A Subsidiary
Guarantor will be prohibited from making any payment upon its Subsidiary
Guarantee if (i) a default in the payment of the principal of, premium, if any,
or interest on Designated Senior Debt of such Subsidiary Guarantor occurs (a
"payment default") or (ii) any other default occurs and is continuing with
respect to Designated Senior Debt of such Subsidiary Guarantor 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
related to accelerate its maturity (a "non-payment default") and, with respect
to this clause (ii), the Trustee receives a Payment Blockage Notice from the
Company, the Subsidiary Guarantor or the holders (or their representative) of
any Senior Designated Debt. Cash payments on the Notes or payment under a
Subsidiary Guarantee, as the case may be, 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. As of
June 30, 1997, on a pro forma basis, after giving effect to the application of
the net proceeds from the Offering, the Company would have had no Senior Debt
outstanding (including no outstanding borrowings under the New Credit Facility),
and there would be no senior subordinated debt outstanding (exclusive of the
Notes). See "Description of Other Indebtedness." The Indenture will limit,
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."
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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 September 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").
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
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 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.
In the event that the Company makes an offer to purchase the Notes pursuant
to the provisions of this "-- Change of Control" covenant, the Company intends
to comply with any applicable securities
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laws and regulations, including any applicable requirements of Section 14(e) of,
and Rule 14e-1 under, the Exchange Act.
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 the Board of Directors or an officer of the Company
or such Restricted Subsidiary with responsibility for such transaction, which
determination shall be conclusive evidence of compliance with this provision) of
the assets or Equity Interests issued or sold or otherwise disposed of; (ii)
such Asset Sale complies, to the extent applicable, with the covenants described
herein under "Merger, Consolidation, or Sale of Assets" or "Limitation on the
Sale or Issuance of Capital Stock of Restricted Subsidiaries," as applicable and
(iii) at least 75% of the consideration therefor received by the Company or such
Restricted Subsidiary from such Asset Sale 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 is 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 Restricted Subsidiaries may make Asset Sales
with a fair market value not exceeding $15 million in the aggregate in any
period of twelve calendar months, 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, Guarantor Senior Indebtedness or Pari
Passu Indebtedness (provided that, in connection with a reduction of Pari Passu
Indebtedness, the Company or such Restricted Subsidiary redeems a pro rata
portion of the Notes), (b) to make Permitted Investments, (c) to make
investments in interests in other Oil and Gas Businesses, (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 or (e) to repurchase any Notes, as provided below. 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 is 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
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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.
In the event that the Company makes an offer to purchase the Notes pursuant
to the provisions of this "-- Asset Sales" covenant, the Company intends to
comply with any applicable securities laws and regulations, including any
applicable requirements of Section 14(e) of, and Rule 14e-1 under, the Exchange
Act.
The New Credit Facility 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 Facility 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 Facility. 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 Equity
Interests of the Company or any Restricted Subsidiary (including, without
limitation, any payment in connection with any merger or consolidation involving
the Company) to the direct or indirect holders of Equity Interests of the
Company or any Restricted Subsidiary in their capacity as such (other than
dividends or distributions payable in Equity Interests (other than Disqualified
Stock) of the Company or a Restricted Subsidiary and other than dividends or
distributions payable to the Company or a Restricted Subsidiary so long as, in
the case of any dividend or distribution payable on or in respect of any class
or series of securities issued by a Subsidiary other than a Wholly Owned
Restricted Subsidiary, the Company or a Restricted Subsidiary receives at least
its pro rata share of such dividend or distribution in accordance with its
Equity Interests in such class or series of securities); (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; (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;
(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
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(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 (2), (3), (4), (5), (6) 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) 100% of the value of any issue or sale of Equity Interests (other
than Disqualified Stock) since the date of the Indenture used to acquire
any Person engaged in the Oil and Gas Business or assets used in the Oil
and Gas Business, plus (iv) 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, plus
(v) the amount received in cash as a return on investment or interest on a
loan constituting a Restricted Investment, provided, however, that the
foregoing provisions of this paragraph (c) will not prohibit Restricted
Payments in an aggregate amount not to exceed $25 million.
The foregoing provisions will not prohibit (1) 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; (2) the redemption, repurchase, retirement or other acquisition of
any Equity Interests of the Company or any Restricted Subsidiary, respectively
in exchange for, or out of the proceeds of, the substantially concurrent sale
(other than to the Company or a Subsidiary of the Company) of other Equity
Interests of the Company or such Restricted Subsidiary, respectively (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;
(3) the defeasance, redemption or repurchase of any Disqualified Stock of the
Company or any Restricted Subsidiary in exchange for, or out of the
substantially concurrent sale (other than to the Company or a Subsidiary of the
Company) of Disqualified Stock of the Company or such Restricted Subsidiary,
respectively; provided that (i) the Disqualified Stock sold matures, is
mandatorily redeemable, is convertible or exchangeable into Indebtedness or
Disqualified Stock of the Company or a Restricted Subsidiary on a date that is
no earlier than the corresponding date with respect to the Disqualified Stock
that has been so defeased, redeemed or repurchased and (ii) the amount of any
such net cash proceeds that are utilized for any such defeasance, redemption or
repurchase 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 Company; 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) repurchases of Equity Interests deemed to occur upon
exercise of stock options if such Equity Interests represent a portion of
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the exercise price of such options; and (7) the making of loans by the Company
or any of its Restricted Subsidiaries to officers or directors of the Company;
provided that the aggregate outstanding amount of such loans shall not exceed,
at any time, $2.5 million plus any such loans outstanding on the date of the
Indenture.
The amount of all Restricted Payments (other than cash) shall be the fair
market value (as determined in good faith by the Board of Directors or a
responsible officer of the Company, 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.
In computing Consolidated Net Income of the Company under paragraph (c)
above, (1) the Company shall use audited financial statements for the portions
of the relevant period for which audited financial statements are available on
the date of determination and unaudited financial statements and other current
financial data based on the books and records of the Company for the remaining
portion of such period and (2) the Company shall be permitted to rely in good
faith on the financial statements and other financial data derived from the
books and records of the Company that are available on the date of
determination. If the Company makes a Restricted Payment which, at the time of
the making of such Restricted Payment, would in the good faith determination of
the Company be permitted under the requirements of the Indenture, such
Restricted Payment shall be deemed to have been made in compliance with the
Indenture notwithstanding any subsequent adjustments made in good faith to the
Company's financial statements affecting Consolidated Net Income of the Company
for any period.
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 and any Subsidiary Guarantors will not issue
any Disqualified Stock and will not permit any of its Restricted Subsidiaries
(other than a Subsidiary Guarantor) 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 any Subsidiary Guarantor 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
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
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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) $250
million and (ii) the Borrowing Base, provided that the Company may incur more
than $250 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 Restricted
Subsidiary of any Indebtedness that is permitted by the Indenture to be incurred
by the Company, provided that the covenant under the caption entitled
"-- Certain Covenants -- Guarantees of Indebtedness by Restricted Subsidiaries"
is satisfied in connection with the issuance of such guarantee; (d) all
Indebtedness of the Company and its Restricted Subsidiaries in existence as of
the date of the Indenture; (e) Indebtedness of any Restricted Subsidiary,
provided that and for so long as such Restricted Subsidiary is a Subsidiary
Guarantor (and if on any date such Subsidiary shall cease to be a Subsidiary
Guarantor, such Indebtedness shall be deemed incurred on such date); (f)
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; (g) 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); (h) Indebtedness under Interest Rate Hedging Agreements, 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 amount of such agreements does not exceed 105% of the
principal amount of the Indebtedness to which such agreements relate; (i)
Indebtedness under Oil and Gas Commodity Price Risk Management Contracts, (j)
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 (j), together with
all Permitted Refinancing Debt incurred pursuant to clause (k) of this paragraph
in respect of Indebtedness previously incurred pursuant to this clause (j), does
not exceed $20 million at any one time outstanding; (k) 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 (k)); (l) 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; (m) Purchase
Money Debt; (n) Indebtedness consisting of obligations in respect of purchase
price adjustments, guarantees or indemnities in connection with the acquisition
or disposition of assets; (o) production imbalances incurred in the ordinary
course of business; (p) Indebtedness of a Subsidiary Guarantor, if any, in
respect of the Subsidiary Guarantee of such Subsidiary Guarantor; and (q)
incurrence by a Restricted Subsidiary of Indebtedness, provided that the
aggregate principal amount of all Indebtedness for all Restricted Subsidiaries
incurred pursuant to this clause (q) does not exceed $5 million at any one time
outstanding.
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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 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, 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.
The Indenture provides that no Subsidiary Guarantor will directly or
indirectly create, incur, assume or suffer to exist any Lien (other than
Permitted Liens) that secures obligations under any Pari Passu Indebtedness or
under any subordinated Indebtedness of such Subsidiary Guarantor on any asset or
property of such Subsidiary Guarantor or any income or profits therefrom, or
assign or convey any right to receive income therefrom, unless the Subsidiary
Guarantee of such Subsidiary Guarantor is equally and ratably secured with the
obligations so secured or until such time as such obligations are no longer
secured by a Lien.
Sale and Leaseback Transactions
The Indenture provides that the Company will not, and will not permit any
of its Restricted Subsidiaries to, enter into any sale and leaseback
transaction; provided that the Company or its Restricted Subsidiaries may enter
into a sale and leaseback transaction if (i) the Company could have incurred
Indebtedness in an amount equal to the Attributable Debt relating to such sale
and leaseback transaction 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" or (ii) the gross cash proceeds of such sale
and leaseback transaction are at least equal to the fair market value (as
determined in good faith by a resolution 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 property that is
the subject of such sale and leaseback transaction and the transfer of assets in
such sale and leaseback transaction is permitted by, and the Company applies the
net proceeds of such transaction in compliance with, the covenant described
above under the caption "Repurchase at the Option of Holders -- Asset Sales."
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
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Company, except for such encumbrances or restrictions existing under or by
reason of (a) the New Credit Facility, 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 Facility,
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 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 Facility, (i) Permitted Liens, (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, or (k) any agreement
relating to a sale and leaseback transaction or capital lease, but only on the
property subject to such transaction or lease and only to the extent that such
restrictions or encumbrances are customary with respect to a sale and leaseback
transaction or capital lease.
Guarantees of Indebtedness by Restricted Subsidiaries
(a) The Indenture provides that the Company will not permit any Restricted
Subsidiary to guarantee the payment of any Indebtedness of the Company or any
Indebtedness of any other Restricted Subsidiary (in each case, the "Guaranteed
Debt") unless (i) if such Restricted Subsidiary is not a Subsidiary Guarantor,
such Restricted Subsidiary simultaneously executes and delivers a supplemental
indenture to the Indenture providing for a Subsidiary Guarantee of payment of
the Notes by such Restricted Subsidiary, (ii) if the Notes or the Subsidiary
Guarantee (if any) of such Restricted Subsidiary are subordinated in right of
payment to the Guaranteed Debt, the Subsidiary Guarantee under the supplemental
indenture shall be subordinated to such Restricted Subsidiary's guarantee with
respect to the Guaranteed Debt substantially to the same extent as the Notes or
the Subsidiary Guarantee are subordinated to the Guaranteed Debt under the
Indenture, (iii) if the Guaranteed Debt is by its express terms subordinated in
right of payment to the Notes or the Subsidiary Guarantee (if any) of such
Restricted Subsidiary, any such guarantee of such Restricted Subsidiary with
respect to the Guaranteed Debt shall be subordinated in right of payment to such
Restricted Subsidiary's Subsidiary Guarantee with respect to the Notes
substantially to the same extent as the Guaranteed Debt is subordinated to the
Notes or the Subsidiary Guarantee (if any) of such Restricted Subsidiary, (iv)
until the Notes have been repaid in full or defeased in accordance with the
provisions under the heading "Legal Defeasance and Covenant Defeasance," such
Restricted Subsidiary waives and will not in any manner whatsoever claim or take
the benefit or advantage of, any rights of reimbursement, indemnity or
subrogation or any other rights against the Company or any other Restricted
Subsidiary as a result of any payment by such Restricted Subsidiary under its
Subsidiary Guarantee; and (v) if such Restricted Subsidiary is required under
clause (i) to execute and deliver a supplemental indenture, at the time of such
delivery such Restricted Subsidiary shall deliver to the Trustee an opinion of
counsel to the effect that (A) such Subsidiary Guarantee of the Notes has been
duly executed and authorized and (B) such Subsidiary
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Guarantee of the Notes constitutes a valid, binding and enforceable obligation
of such Restricted Subsidiary, except insofar as enforcement thereof may be
limited by bankruptcy, insolvency or similar laws (including, without
limitation, all laws relating to fraudulent transfers) and except insofar as
enforcement thereof is subject to general principles of equity; provided that
this paragraph (a) shall not be applicable to any guarantee of any Restricted
Subsidiary that (A) existed at the time such Person became a Restricted
Subsidiary of the Company and (B) was not incurred in connection with, or in
contemplation of, such Person becoming a Restricted Subsidiary of the Company.
(b) Notwithstanding the foregoing and the other provisions of the
Indenture, any Subsidiary Guarantee by a Restricted Subsidiary of the Notes
shall provide by its terms that it shall be automatically and unconditionally
released and discharged upon (i) any sale, exchange or transfer, to any Person
not an Affiliate of the Company, of all of the Company's Capital Stock in, or
all or substantially all the assets of, such Restricted Subsidiary (which sale,
exchange or transfer is not prohibited by the Indenture) or (ii) in the case of
a guarantee incurred pursuant to paragraph (a) of this covenant, the release or
discharge of the guarantee which resulted in the creation of such Subsidiary
Guarantee, except a discharge or release by or as a result of payment under such
guarantee.
Limitation on the Sale or Issuance of Capital Stock of Restricted Subsidiaries
The Indenture provides that the Company will not sell or otherwise dispose
of any shares of Capital Stock of a Restricted Subsidiary, and shall not permit
any Restricted Subsidiary (other than a Subsidiary Guarantor), directly or
indirectly, to issue or sell or otherwise dispose of any shares of its Capital
Stock except (i) to the Company or a Wholly Owned Restricted Subsidiary, (ii)
if, immediately after giving effect to such issuance, sale or other disposition,
such Restricted Subsidiary remains a Restricted Subsidiary, (iii) shares of
nonvoting Capital Stock of Restricted Subsidiaries may be issued or sold to
employees or directors of the Company or any Subsidiary, or (iv) if all shares
of Capital Stock of such Restricted Subsidiary are sold or otherwise disposed.
In connection with any sale or disposition of Capital Stock (including a sale or
disposition of Capital Stock of a Subsidiary Guarantor), the Company will be
required to comply with the covenant described under the caption "-- Asset
Sales" above.
Merger, Consolidation or Sale of Assets
The Indenture provides that 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 Restricted Subsidiaries which becomes the
obligation of the Company or any of its Restricted 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 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
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
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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 Subsidiary Guarantee shall
apply to such Person's obligations under the Indenture and the Notes.
Notwithstanding the restrictions described in the foregoing clauses (i), (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.
Transactions with Affiliates
The Indenture provides that the Company will not, and will not permit any
of its Restricted 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 $10 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 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
$15 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 grants 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) transactions between or
among the Company and/or its Restricted Subsidiaries, (3) 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, (4) indemnification payments made to officers, directors
and employees of the Company or its Subsidiaries pursuant to charter, by-law,
statutory or contractual provisions, (5) any contracts, agreements or
understandings existing as of the date of the Indenture, and (6) any contracts,
agreements or understandings between the Company and any of its Affiliates with
respect to the lease by the Company from such Affiliate of office space for the
Company in New York City, including any collateral agreements entered into with
respect to such lease.
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.
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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 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 and the Holders, 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 Subsidiary 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 Subsidiary Guarantor, or any
Person acting on behalf of such Subsidiary Guarantor, shall deny or disaffirm
its obligations under its Subsidiary 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 Restricted Subsidiaries (or the payment of which is
guaranteed by the Company or any of its Restricted 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 Restricted
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 Restricted Subsidiaries.
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
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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 ten
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
obligations discharged with respect to the outstanding Notes and have each
Subsidiary Guarantor's, if any, obligation discharged with respect to its
Subsidiary Guarantee ("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 and
have each Subsidiary Guarantor's, if any, obligation 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 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
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(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, 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 (subject to certain restrictions, see "Restrictions on
Transfer") transfer or 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 Note selected for
redemption. Also, the Company is not required to transfer or exchange any Note
for a period of 15 days before a selection of the Notes to be redeemed.
The registered Holder of a Note will be treated as the owner of it for all
purposes.
AMENDMENT, SUPPLEMENT AND WAIVER
Except as provided in the next two succeeding paragraphs, the Indenture or
the Notes and the Subsidiary Guarantees, if any, 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 Subsidiary 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 or premium, if any, or interest on 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 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, (vii)
make any change in the foregoing amendment and waiver provisions or (viii)
except as provided under paragraph (b) of "Certain Covenants -- Guarantees of
Indebtedness by Restricted Subsidiaries" or "Legal Defeasance and Covenant
Defeasance," release a Subsidiary Guarantor, if any, from its obligations under
its Subsidiary Guarantee, if any, or make any change in a Subsidiary Guaranty,
if any that would adversely affect the Holders. 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.
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Notwithstanding the foregoing, without the consent of any Holder of the
Notes, the Company, a Subsidiary Guarantor, if any (with respect to a Subsidiary
Guarantee, if any, or the Indenture to which it is a party) 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 or any
Subsidiary Guarantor'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 Subsidiary Guarantees, if any, will
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 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 on the date of the closing of the sale of the Notes offered
hereby (the "Closing Date") 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.
Notes that were issued as described under "Certificated Securities," will
be issued in registered definitive form without coupons (the "Certificated
Securities"). Upon the transfer to a QIB or Institutional Accredited Investor of
Certificated Securities, such Certificated Securities may, unless the Global
Note has previously been exchanged for Certificated Securities, be exchanged for
an interest in the relevant Global Note representing the principal amount of
Notes being transferred. For a description of the restrictions on the transfer
of Certificated Securities, see "Transfer Restrictions."
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 (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 settle-
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ment 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. QIBs and Institutional
Accredited Investors may elect to hold Notes purchased by them through the
Depository. QIBs who are not Participants may beneficially own securities held
by or on behalf of the Depository only through Participants or Indirect
Participants. Institutional Accredited Investors may beneficially own securities
held by or on behalf of the Depository only through Participants or Indirect
Participants.
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 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 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 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 QIB and Institutional Accredited Investors owning a
beneficial interest in a Global Note must rely on the procedures of the
Depository and, if such QIB or Institutional Accredited Investor is not a
Participant or an Indirect Participant, on the procedures of the Participant
through which such QIB or Institutional Accredited Investor 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 a QIB or Institutional Accredited
Investor that is 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 QIBs and Institutional Accredited
Investors owning through such Participants to take such action or would
otherwise act upon the instruction of such QIBs and Institutional Accredited
Investors. 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 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 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 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 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
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Purchaser with an interest in the Global Note and (ii) ownership of the Notes
will be 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 Notes or to pledge the Notes as collateral
will be limited to such extent. For certain other restrictions on the
transferability of the Notes, see "Transfer Restrictions."
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 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 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 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 Notes will be made in immediately available funds. So
long as the 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 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.
"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
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"under common control with"), as used with respect to any Person, shall mean the
possession, directly or indirectly, of the power to direct or cause the
direction of the management or policies of such Person, whether through the
ownership of voting securities, by agreement or otherwise; provided that a
Director or Officer of a Person shall not, for purposes of this definition, be
deemed to control such Person solely by reason of their holding such position or
office. No Person shall be deemed an Affiliate of an oil and gas royalty trust
solely by virtue of ownership of units of beneficial interest in such trust.
"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 September 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 September 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 $10 million or (b) for net proceeds in excess of $10 million.
Notwithstanding the foregoing, the following shall not be deemed to be Asset
Sales: (i) a transfer of assets by the Company to a Restricted Subsidiary of the
Company or by a Restricted Subsidiary of the Company to the Company or to
another 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 an Investment that is, in either case,
permitted by the covenant described above under the caption "-- Certain
Covenants -- Restricted Payments"; provided that the sale, lease, conveyance or
other disposition by the Company or any of its Restricted Subsidiaries of an
Investment shall be deemed an Asset Sale, (iv) the abandonment, farmout, 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 determines in good faith by resolution to be of approximately equivalent
value, (vi) the sale or transfer of hydrocarbons or other mineral products 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 or any successor
or analogous provisions of the Code, or (viii) the sale or transfer of surplus
or obsolete equipment in the ordinary course of business.
"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 the extent the lease payments during such extension
period are required to be capitalized on a balance sheet in accordance with
GAAP).
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"Borrowing Base" means, as of any date, 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 twelve
months from the date of acquisition, (iii) certificates of deposit and
eurodollar time deposits with maturities of twelve months or less from the date
of acquisition, bankers' acceptances with maturities not exceeding twelve months
and overnight bank deposits, in each case with any lender party to the New
Credit Facility 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) 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).
(ii) the consummation of any transaction (including, without
limitation, any purchase, sale, acquisition, disposition, merger or
consolidation) the result of which is that any "person" (as defined above)
or Group, other than one or more Permitted Holders, becomes the "beneficial
owner" (as such term is defined in Rule 13d-3 and Rule 13d-5 under the
Exchange Act) of more than 50% of the aggregate voting power of all classes
of Capital Stock of the Company having the right to elect directors under
ordinary circumstances.
(iii) the adoption of a plan relating to the liquidation or
dissolution of the Company; and
(iv) 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
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(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, including, without limitation, any ceiling limitation write downs and
non-cash losses or charges to net income resulting from the net change in value
of such Person's mark-to-market portfolio of Oil and Gas Commodity Price Risk
Management Contracts, 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 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
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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 or any Restricted
Subsidiary, one or more debt facilities including, without limitation, the New
Credit Facility 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 Facility 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 $10 million and is specifically designated by the Company or a
Subsidiary Guarantor, as applicable, 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 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) .
"Existing Investments" means any Investments held by the Company or any of
its Restricted Subsidiaries as of the date of the Indenture.
"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
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(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 -- Incurrence
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 of the United States of America, 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.
"Guarantor Senior Indebtedness" means any Indebtedness of a Subsidiary
Guarantor permitted to be incurred under the terms of the Indenture, unless the
instrument under which such Indebtedness is
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incurred expressly provides that it is on a parity with or subordinated in right
of payment to the Subsidiary Guarantee of such Subsidiary Guarantor, including
interest accruing subsequent to the filing of, or which would have accrued but
for the filing of, a petition of bankruptcy, whether or not such interest is an
allowable claim in such bankruptcy proceeding. Notwithstanding anything to the
contrary in the foregoing sentence, Guarantor Senior Indebtedness will not
include (1) any liability for federal, state, local or other taxes owed or owing
by any Subsidiary Guarantor, (2) any obligation of a Subsidiary Guarantor to the
Company or to any other Restricted Subsidiary of the Company, (3) any accounts
payable or trade liabilities of a Subsidiary Guarantor arising in the ordinary
course of business (including instruments evidencing such liabilities), (4) any
Indebtedness of Subsidiary Guarantor that is incurred in violation of the
Indenture, (5) Indebtedness of a Subsidiary Guarantor which, when incurred and
without respect to any election under Section 1111(b) of Title 11, United States
Code, is without recourse to such Subsidiary Guarantor, (6) any Indebtedness,
guarantee or obligation of a Subsidiary Guarantor which is subordinate or junior
to any other Indebtedness, guarantee or obligation of such Subsidiary Guarantor,
(7) Indebtedness evidenced by a Subsidiary Guarantee and (8) Capital Stock of a
Subsidiary Guarantor.
"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 Commodity Price Risk Management
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.
"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
(h) 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 Commodity Price Risk Management Contracts entered into
in accordance with the limitations set forth in clause (i) of the second
paragraph of the covenant described under the caption "--Certain
Covenants--Incurrence of Indebtedness and Issuance of Disqualified Stock", (iv)
endorsements of negotiable instruments and documents in the ordinary course of
business, (v) extensions of trade credit on commercially reasonable terms in
accordance with normal trade practices, and (vi) bonds, notes, debentures or
other securities received in compliance with covenants described under the
caption "--Certain Covenants--Asset Sales." 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
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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 within 90 days of any Asset Sale, 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 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 Facility" means that certain credit agreement, dated as of
September 23, 1997, among the Company, The Chase Manhattan Bank, as Agent and
lender and the other parties thereto, providing for up to $150 million of
Indebtedness, including any related notes, guarantees, security or pledge
agreements, collateral documents, instruments and agreements executed by the
Company or any Subsidiary of the Company 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 $250 million, and provided
further, that the total amount of Indebtedness outstanding under the New Credit
Facility and all documents executed in connection therewith and referred to in
this definition shall be no greater than $250 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
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 (other than the Capital Stock of an Unrestricted Subsidiary).
"Obligations" means any principal, interest, penalties, fees,
indemnifications, reimbursements, damages and other liabilities payable under
the documentation governing any Indebtedness.
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"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 oil field 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 Commodity Price Risk Management Contracts" means any oil and
gas purchase or commodity price risk management agreement, and other agreement
or arrangement, entered into in the ordinary course of business, in each case,
that is utilized in connection with the Company's policy of achieving a more
predictable cash flow, and reducing the Company's exposure to fluctuations in
gas and oil prices.
"Pari Passu Indebtedness" means (a) with respect to the Notes, Indebtedness
that ranks pari passu in right of payment to the Notes and (b) with respect to
any Subsidiary Guarantee, Indebtedness which ranks pari passu in right of
payment to such Subsidiary Guarantee.
"Permitted Holders" means (1) Robert A. Belfer, Renee E. Belfer, Laurence
D. Belfer and Jack Saltz, (2) the spouses and descendants of such individuals,
(3) the estates or legal representatives of the individuals named in clauses (1)
and (2) and (4) trusts created for the benefit of Persons named in clauses (1)
and (2).
"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) any Investment acquired by the Company in exchange for Equity
Interests in the Company (other than Disqualified Stock), (f) shares of Capital
Stock received in connection with any good faith settlement of a bankruptcy
proceeding involving a trade creditor; (g) Interest Rate Hedging Agreements or
Oil and Gas Commodity Price Risk Management Contracts; (h) loans and advances to
employees in the ordinary course of business for bona fide business purposes;
(i) entry into operating agreements, joint ventures, partnership agreements,
working interests, royalty interests, mineral leases, processing agreements,
farm-out or farm-in agreements, contracts for the sale, transportation or
exchange of oil and natural gas, unitization agreements, pooling arrangements,
area of mutual interest agreements, 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 and (j) any
other Investments in any Person or Persons not otherwise permitted to be made
pursuant to clauses (a)-(i) above, when taken together with all other
Investments made pursuant to this clause (j) that are at the time outstanding,
having an aggregate amount (such amount to be calculated on a cost basis) not to
exceed the greater of (i) the sum of (x) Existing Investments and any
Investments made with the proceeds of any sales thereof therefrom plus (y) $15
million and (ii) 15% of Total Assets, as calculated at the time of such
Investment. For purposes of clause (i) of the preceding sentence, the
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amount of any Existing Investment (including any Investment made with the
proceeds therefrom) is to be calculated on a cost basis.
"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 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 Lien was not created in contemplation of the acquisition
of the property, and provided further that no such Lien shall 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;
(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 or farm-in
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
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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;
(xv) any interest or title of a lessor under any Capital Lease
Obligation or operating lease;
(xvi) Liens resulting from the deposit of funds or evidences of
Indebtedness in trust for the purpose of defeasing Indebtedness of the
Company or any of the Restricted Subsidiaries;
(xvii) Liens securing obligations under Interest Rate Hedging
Agreements or Oil and Gas Commodity Price Risk Management Contracts;
(xviii) Liens upon specific items of inventory or other goods and
proceeds of the Company or any Restricted Subsidiary securing the Company's
or such Restricted Subsidiary's, as the case may be, obligations in respect
of bankers' acceptances issued or created for the account of the Company or
such Restricted Subsidiary, as the case may be, to facilitate the purchase,
shipment or storage of such inventory or other goods;
(xix) Liens securing reimbursement obligations with respect to
commercial letters of credit which encumber documents and other property
relating to such letters of credit and products and proceeds thereof;
(xx) Liens encumbering property or assets under construction arising
from progress or partial payments by a customer of the Company or its
Restricted Subsidiaries relating to such property or assets;
(xxi) Liens encumbering deposits made to secure Obligations arising
from statutory, regulatory, contractual or warranty requirements of the
Company or any of its Restricted Subsidiaries, including rights of offset
and set-off;
(xxii) Liens securing Purchase Money Debt; provided however that the
related Purchase Money Debt shall not be secured by any property or assets
of the Company or any Restricted Subsidiary other than the property and
assets acquired by the Company with the proceeds of such Purchase Money
Debt;
(xxiii) Liens on the Capital Stock of Unrestricted Subsidiaries;
(xxiv) Liens to secure any Permitted Refinancing Debt, provided that
the Indebtedness so exchanged, extended, refinanced, renewed, replaced,
defeased or refunded was secured by Liens permitted pursuant to clause
(iii) or (v) of this definition, provided however, that (a) such new Liens
shall be limited to all or part of the same property that secured the
original Lien, plus improvements on the property and (b) the Permitted
Refinancing Debt secured by such Lien at such time is not increased to any
amount greater than the sum of (x) the outstanding principal amount or, if
greater, the committed amount of the Indebtedness secured by Liens
described under clause (iii) or (v) of this definition at the time the
original Lien became a Lien permitted in accordance with the Indenture and
(y) an amount necessary to pay any fees and expenses, including premiums,
related to such exchange, extension, refinancing, renewal, replacement,
defeasement or refunding;
(xxv) Liens securing Attributable Indebtedness under any sale and
leaseback transaction permitted by the terms of the Indenture, but only on
the property subject to such sale and leaseback transaction.
(xxvi) Liens not otherwise permitted by clauses (i) through (xv) that
are incurred in the ordinary course of business of the Company or any
Subsidiary with respect to obligations that do not exceed $10 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,
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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
of reasonable expenses incurred in connection therewith (other than increases
resulting from the capitalization of interest or fees)); (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 or the Subsidiary Guarantees,
as the case may be, 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 or the Subsidiary Guarantees, as the case may be, on terms
at least as favorable taken as a whole to the Holders of the Notes, or the
Subsidiary Guarantees, as the case may be, 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.
"Purchase Money Debt" means Indebtedness incurred in connection with the
purchase by the Company or any of its Subsidiaries of any equipment, real or
personal property, or any other asset, other than Equity Interests of any Person
(i) as to which the obligee expressly waives the provisions of Section 1111(b)
of Title 11, United States Code; (ii) 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) other than the pledge of the equipment, real or personal
property or other assets acquired with the proceeds of such Indebtedness; (iii)
no default with respect to which (including any rights that the holders thereof
may have to take enforcement actions 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 indebtedness or cause the payment thereof to be
accelerated or payable prior to its stated maturity; and (iv) the explicit terms
of which provide that there is no recourse against any of the assets of the
Company or its Restricted Subsidiaries, other than recourse against the
equipment, real or personal property or other assets acquired with the proceeds
of such Indebtedness.
"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
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violation of the Indenture (other than Indebtedness under (i) the New Credit
Facility 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 Guarantee" mean any guarantee of the obligations of the Company
under the Indenture and Notes by any Person in accordance with the provisions of
the Indenture.
"Subsidiary Guarantor" means any Person that incurs a Subsidiary Guarantee;
provided that upon the release and discharge of such Person from its subsidiary
Guarantee in accordance with the Indenture, such Person shall cease to be a
Subsidiary Guarantor.
"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 September 15, 2002; provided that if the period from the
redemption date to September 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 September 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
Restricted 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
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Subsidiaries has any direct or indirect obligation 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, it 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" covenant
on a pro forma basis taking into account such designation and (ii) such
Subsidiary executes a Guarantee if required by 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.
"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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EXCHANGE AND REGISTRATION RIGHTS AGREEMENT
The Company 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 use its reasonable best efforts (i) to
file with the Commission on or prior to 60 days after September 23, 1997, the
date of original issuance of the Notes (the "Issue Date") the Exchange Offer
Registration Statement relating to a registered exchange offer (the "Exchange
Offer") for Exchange Notes under the Securities Act and (ii) to cause the
Exchange Offer Registration Statement to be declared effective under the
Securities Act within 120 days after the Issue Date. As soon as practicable
after the effectiveness of the Exchange Offer Registration Statement, the
Company will offer to the Holders of Old Notes who are not prohibited by any law
or policy of the Commission from participating in the Exchange Offer the
opportunity to exchange their Old Notes for Exchange Notes, identical in all
material respects to Old Notes (except that the Exchange Notes will not contain
terms with respect to transfer restrictions) that would be registered under the
Securities Act. 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 Old 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 within 150 days after the Issue Date or (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 Old 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 Old Note until (i)
the date on which such Old Note has been exchanged for a freely transferable
Exchange Note in the Exchange Offer, (ii) the date on which such Old 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
Old 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 reasonable 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 150 days after the
Issue Date. If applicable, the Company will use its reasonable 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 60 days
after the Issue Date, (ii) the Exchange Offer Registration Statement or the
Shelf Registration Statement, as the case may be, is not declared effective
within 120 days after the Issue Date (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 60 days after
publication of the change in law or interpretation), (iii) the Exchange Offer is
not consummated on or prior to 150 days after the Issue Date or (iv) the Shelf
Registration Statement is filed and declared effective within 120 days after the
Issue Date (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 60 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,
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<PAGE> 100
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
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 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 Old Notes that wishes to exchange Old 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 Old 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 Old 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 Old 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 Old
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 Old Notes are outstanding, the Company will continue to
provide to Holders of Old Notes and to prospective purchasers of Old Notes the
information required by paragraph (d)(4) of Rule 144A under the Securities Act
("Rule 144A").
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.
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TRANSFER RESTRICTIONS ON OLD NOTES
OFFERS AND SALES BY THE INITIAL PURCHASERS
The Old Notes were not registered under the Securities Act and may not be
offered or sold in the United States or to, or for the account or benefit of,
U.S. persons except in accordance with an applicable exemption from the
registration requirements thereof. Accordingly, the Old Notes were offered and
sold only in the United States to QIBs under Rule 144A under the Securities Act
who, prior to their purchase of Old Notes, delivered to the Initial Purchasers a
letter containing certain representations and agreements, in a private sale
exempt from the registration requirements of the Securities Act.
INVESTOR REPRESENTATIONS AND RESTRICTIONS ON RESALE
Each purchaser of Old Notes was deemed to have acknowledged, represented to
and agreed with the Company and the Initial Purchasers as follows:
1. It understands and acknowledges that the Old Notes have not been
registered under the Securities Act or any other applicable securities
laws, and that the Old Notes are being offered for resale in transactions
not requiring registration under the Securities Act or any other securities
laws, including sales pursuant to Rule 144A and, unless so registered, may
not be offered, sold or otherwise transferred except in compliance with the
registration requirements of the Securities Act or any other applicable
securities laws, pursuant to any exemption therefrom or in a transaction
not subject thereto and in each case in compliance with the conditions for
transfer set forth in paragraph (4) below.
2. It is not an "affiliate" (as defined in Rule 144 under the
Securities Act) of the Company or acting on behalf of the Company and is a
QIB and is aware that any sale of Old Notes to it will be made in reliance
on Rule 144A and such acquisition will be for its own account or for the
account of another QIB.
3. It acknowledges that none of the Company, the Initial Purchasers or
any person representing the Company or the Initial Purchasers has made any
representation to it with respect to the Company, or the Offering, other
than the information contained in the Offering Memorandum, which has been
delivered to it and upon which it is relying in making its investment
decision with respect to the Old Notes. It has had access to such financial
and other information concerning the Company and the Old Notes as it has
deemed necessary in connection with its decision to purchase the Old Notes,
including an opportunity to ask questions of and request information from
the Company and the Initial Purchasers.
4. It is purchasing the Old Notes for its own account or for one or
more investor accounts for which it is acting as a fiduciary or agent, in
each case not with a view to, or for offer or sale in connection with, any
distribution thereof in violation of the Securities Act, subject to any
requirement of law that the disposition of its property or the property of
such investor account or accounts be at all times within its or their
control and subject to its or their ability to resell such Old Notes
pursuant to Rule 144A or any exemption from registration available under
the Securities Act. It agrees on its own behalf and on behalf of any
investor account for which it is purchasing the Old Notes, and each
subsequent Holder of the Old Notes by its acceptance thereof will agree, to
offer, sell or otherwise transfer such Old Notes prior to the date which is
two years after the later of the date of original issue and the last date
that the Company or any affiliate of the Company was the owner of such Old
Notes or any predecessor thereto) (the "Resale Restriction Termination
Date") only (a) to the Company, (b) pursuant to a registration statement
that has been declared effective under the Securities Act, (c) for so long
as the Old Notes are eligible for resale pursuant to Rule 144A, to a person
it reasonably believes is a QIB that purchases for its own account or for
the account of a QIB to whom notice is given that the transfer is being
made in reliance on Rule 144A, (d) pursuant to offers and sales that occur
outside the United States within the meaning of Regulation S under the
Securities
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<PAGE> 102
Act, (e) to an Institutional Accredited Investor that is purchasing for its
own account or for the account of such Institutional Accredited Investor,
in each case in a minimum principal amount of the Old Notes of $250,000 or
(f) pursuant to any other available exemption from the registration
requirements of the Securities Act, subject in each of the foregoing cases
to any requirement of law that the disposition of its property or the
property of such investor account or accounts be at all times within its or
their control. The foregoing restrictions on resale will not apply
subsequent to the Resale Restriction Termination Date. If any resale or
other transfer of the Old Notes is proposed to be made pursuant to clause
(e) above prior to the Resale Restriction Termination Date, the transferor
shall deliver a letter from the transferee substantially in the form of
Annex A hereto to the Company and the Trustee, which shall provide, among
other things, that the transferee is an Institutional Accredited Investor
that is acquiring such Notes not for distribution in violation of the
Securities Act. Each purchaser acknowledges that the Company and the
Trustee reserve the right prior to any offer, sale or other transfer prior
to the Resale Restriction Termination Date of the Old Notes pursuant to
clauses (d), (e) and (f) above to require the delivery of an opinion of
counsel, certifications and/or other information satisfactory to the
Company and the Trustee. Each purchaser acknowledges that each Old Note
will contain a legend substantially to the following effect.
THIS SECURITY HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF
1933, AS AMENDED (THE "SECURITIES ACT"), OR ANY STATE SECURITIES LAWS.
NEITHER THIS SECURITY NOR ANY INTEREST OR PARTICIPATION HEREIN MAY BE
REOFFERED, SOLD, ASSIGNED, TRANSFERRED, PLEDGED, ENCUMBERED OR OTHERWISE
DISPOSED OF IN THE ABSENCE OF SUCH REGISTRATION UNLESS SUCH TRANSACTION IS
EXEMPT FROM, OR NOT SUBJECT TO, REGISTRATION.
THE HOLDER OF THIS SECURITY BY ITS ACCEPTANCE HEREOF AGREES TO OFFER,
SELL OR OTHERWISE TRANSFER SUCH SECURITY, PRIOR TO THE DATE (THE "RESALE
RESTRICTION TERMINATION DATE") WHICH IS TWO YEARS AFTER THE LATER OF THE
ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE ON WHICH THE ISSUER OR ANY
AFFILIATE OF THE COMPANY WAS THE OWNER OF THIS SECURITY (OR ANY PREDECESSOR
OF SUCH SECURITY), ONLY (A) TO THE COMPANY, (B) PURSUANT TO A REGISTRATION
STATEMENT THAT HAS BEEN DECLARED EFFECTIVE UNDER THE SECURITIES ACT, (C)
FOR SO LONG AS THE SECURITIES ARE ELIGIBLE FOR RESALE PURSUANT TO RULE
144A, TO A PERSON IT REASONABLY BELIEVES IS A "QUALIFIED INSTITUTIONAL
BUYER" AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT THAT PURCHASES FOR
ITS OWN ACCOUNT OR FOR THE ACCOUNT OF A QUALIFIED INSTITUTIONAL BUYER TO
WHOM NOTICE IS GIVEN THAT THE TRANSFER IS BEING MADE IN RELIANCE ON RULE
144A, (D) PURSUANT TO OFFERS AND SALES THAT OCCUR OUTSIDE THE UNITED STATES
WITHIN THE MEANING OF REGULATION S UNDER THE SECURITIES ACT, (E) TO AN
INSTITUTIONAL ACCREDITED INVESTOR WITHIN THE MEANING OF RULE 501 (a)(1),
(2), (3) OR (7) UNDER THE SECURITIES ACT THAT IS ACQUIRING THE SECURITY FOR
ITS OWN ACCOUNT, OR FOR THE ACCOUNT OF SUCH AN INSTITUTIONAL ACCREDITED
INVESTOR, IN EACH CASE IN A MINIMUM PRINCIPAL AMOUNT OF THE SECURITIES OF
$250,000, FOR INVESTMENT PURPOSES AND NOT WITH A VIEW TO OR FOR OFFER OR
SALE IN CONNECTION WITH ANY DISTRIBUTION IN VIOLATION OF THE SECURITIES
ACT, OR (F) PURSUANT TO ANOTHER AVAILABLE EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT, SUBJECT TO THE ISSUER'S AND THE
TRUSTEE'S RIGHT PRIOR TO ANY SUCH OFFER, SALE OR TRANSFER PURSUANT TO
CLAUSES (D), (E) AND (F) TO REQUIRE THE DELIVERY OF AN OPINION OF COUNSEL,
CERTIFICATION AND/OR OTHER INFORMATION SATISFACTORY TO EACH OF THEM, AND IN
THE CASE OF THE FOREGOING CLAUSES (A)-(F), A CERTIFICATE OF TRANSFER IN THE
FORM APPEARING ON THE OTHER SIDE OF THIS SECURITY IS COMPLETED AND
DELIVERED BY THE TRANSFEROR TO THE COMPANY AND THE TRUSTEE. THIS LEGEND
WILL BE REMOVED UPON THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION
TERMINATION DATE.
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5. It acknowledges that the Company, the Initial Purchasers and others
will rely upon the truth and accuracy of the foregoing acknowledgments,
representations and agreements and agrees that, if any of the
acknowledgments, representations or warranties deemed to have been made by
it by its purchase of Old Notes are no longer accurate, it shall promptly
notify the Company and the Initial Purchasers. If it is acquiring any Old
Notes as a fiduciary or agent for one or more investor accounts, it
represents that it has sole investment discretion with respect to each such
account and that it has full power to make the foregoing acknowledgments,
representations and agreements on behalf of each such account.
PLAN OF DISTRIBUTION
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 Old Notes where such Old 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.
The Company will not receive any proceeds from any sale of Exchange Notes
by broker-dealers. Exchange Notes received by broker-dealers for their own
account pursuant to the Exchange Offer may be sold from time to time in one or
more transactions in the over-the-counter market, in negotiated transactions,
through the writing of options on the Exchange Notes or a combination of such
methods of resale, at market prices prevailing at the time of resale, at prices
related to such prevailing market prices or negotiated prices. Any such resale
may be made directly to purchasers or to or through brokers or dealers who may
receive compensation in the form of commissions or concessions from any such
broker-dealer 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
broker-dealers and will indemnify the Holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
LEGAL MATTERS
The validity of the issuance of the Exchange Notes offered hereby is being
passed upon for the Company by Vinson & Elkins L.L.P., Houston, Texas.
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EXPERTS
The audited consolidated financial statements included in this Prospectus,
to the extent and for the periods indicated in their report, have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
report with respect thereto, and are included herein in reliance upon the
authority of said firm as experts in accounting and auditing in giving said
reports.
Information relating to the estimated proved reserves of oil and natural
gas and the related estimates of future net revenues and present values thereof
as of December 31, 1996 and 1995, as included in this Prospectus and in the
notes to the financial statements of the Company, have been prepared by Miller
and Lents, Ltd., independent petroleum engineers and, to such extent, are
included herein in reliance upon the authority of such firm as experts with
respect to such reports and audits.
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GLOSSARY OF OIL AND GAS TERMS
The definitions set forth below shall apply to the indicated terms as used
in this Prospectus. All volumes of natural gas referred to herein are stated at
the legal pressure base of the state or area where the reserves exist and at 60
degrees Fahrenheit and in most instances are rounded to the nearest major
multiple.
AMI. Area of Mutual Interest.
Bbl. One stock tank barrel, or 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
Bcf. Billion cubic feet.
Bcfe. Billion cubic feet equivalent, determined using the ratio of six Mcf
of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
Completion. The installation of permanent equipment for the production of
oil or natural gas, or in the case of a dry hole, the reporting of abandonment
to the appropriate agency.
Developed acreage. The number of acres that are allocated or assignable to
producing wells or wells capable of production.
Development well. A well drilled within the proved area of an oil or
natural gas reservoir to the depth of a stratigraphic horizon known to be
productive.
Dry hole or well. A well found to be incapable of producing hydrocarbons in
sufficient quantities such that proceeds from the sale of such production exceed
production expenses and taxes.
Exploratory well. A well drilled to find and produce oil or natural gas
reserves not classified as proved, to find a new reservoir in a field previously
found to be productive of oil or natural gas in another reservoir or to extend a
known reservoir.
Field. An area consisting of a single reservoir or multiple reservoirs all
grouped on or related to the same individual geological structural feature
and/or stratigraphic condition.
Finding costs. Total costs incurred in oil and gas acquisition, exploration
and development activities and capitalized interest divided by total reserve
additions, including purchases of minerals in place, extensions, discoveries,
revisions and other additions.
Gross acres or gross wells. The total acres or wells, as the case may be,
in which a working interest is owned.
Liquids. Crude oil, condensate and natural gas liquids.
MBbls. One thousand barrels of crude oil or other liquid hydrocarbons.
Mcf. One thousand cubic feet.
Mcf/d. One thousand cubic feet per day.
Mcfe. One thousand cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
MMS. Mineral Management Service of the United States Department of the
Interior.
MMbtu. One million Btus.
MMcf. One million cubic feet.
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MMcfe. One million cubic feet equivalent, determined using the ratio of six
Mcf of natural gas to one Bbl of crude oil, condensate or natural gas liquids.
Net acres or net wells. The sum of the fractional working interests owned
in gross acres or gross wells, as the case may be.
Oil. Crude oil and condensate.
Operating cash inflows per Mcfe. Net operating cash inflows as listed in
the Consolidated Statements of Cash Flows in the Consolidated Financial
Statements divided by net gas equivalent production for the applicable periods.
Present value or PV10. When used with respect to oil and natural gas
reserves, the estimated future gross revenue to be generated from the production
of proved reserves, net of estimated production and future development costs,
using prices and costs in effect as of the date indicated, without giving effect
to non-property related expenses such as general and administrative expenses,
debt service and future income tax expenses or to depreciation, depletion and
amortization, discounted using an annual discount rate of 10%.
Productive well. A well that is found to be capable of producing
hydrocarbons in sufficient quantities such that proceeds from the sale of such
production exceed production expenses and taxes.
Proved developed nonproducing reserves. Proved developed reserves expected
to be recovered from zones behind casing in existing wells.
Proved developed producing reserves. Proved developed reserves that are
expected to be recovered from completion intervals currently open in existing
wells and capable of production to market.
Proved reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids that geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved undeveloped location. A site on which a development well can be
drilled consistent with spacing rules for purposes of recovering proved
undeveloped reserves.
Proved undeveloped reserves. Proved reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where a
relatively major expenditure is required for recompletion.
Recompletion. The completion for production of an existing well bore in
another formation from that in which the well has been previously completed.
Reservoir. A porous and permeable underground formation containing a
natural accumulation of producible oil and/or natural gas that is confined by
impermeable rock or water barriers and is individual and separate from other
reservoirs.
Royalty interest. An interest in an oil and natural gas property entitling
the owner to a share of oil or natural gas production free of costs of
production.
Undeveloped acreage. Lease acreage on which wells have not been drilled or
completed to a point that would permit the production of commercial quantities
of oil and natural gas regardless of whether such acreage contains proved
reserves.
Updip. A higher point in the reservoir.
Working interest. The operating interest that gives the owner the right to
drill, produce and conduct operating activities on the property and a share of
production.
Workover. Operations on a producing well to restore or increase production.
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BELCO OIL & GAS CORP. AND SUBSIDIARIES
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants.................... F-2
Consolidated Balance Sheets as of December 31, 1995 and 1996
(Audited) and June 30, 1997 (Unaudited)................... F-3
Consolidated Statements of Operations for the Years Ended
December 31, 1994, 1995 and 1996 (Audited) and for the Six
Months Ended June 30, 1996 and 1997 (Unaudited)........... F-4
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1994, 1995 and 1996 (Audited) and
for the Six Months Ended June 30, 1997 (Unaudited)........ F-5
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1994, 1995 and 1996 (Audited) and for the Six
Months Ended June 30, 1996 and 1997 (Unaudited)........... F-6
Notes to Consolidated Financial Statements.................. F-7
</TABLE>
CONSOLIDATED FINANCIAL STATEMENT SCHEDULES
None
All schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are not required under the
related instructions or are inapplicable and therefore have been omitted.
F-1
<PAGE> 108
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Belco Oil & Gas Corp.:
We have audited the accompanying consolidated balance sheets of Belco Oil &
Gas Corp. (a Nevada Corporation) and subsidiaries as of December 31, 1996 and
1995, and the related consolidated statements of operations, stockholders'
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 consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Belco Oil &
Gas Corp. and subsidiaries as of December 31, 1996 and 1995, and the 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.
ARTHUR ANDERSEN LLP
Houston, Texas
February 28, 1997
F-2
<PAGE> 109
BELCO OIL & GAS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SIX MONTHS ENDED
1995 1996 JUNE 30, 1997
-------- -------- ----------------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents............................ $ 1,556 $ 43,473 $ 1,878
Accounts receivable, oil and gas..................... 16,979 28,934 22,571
Assets from commodity price risk management
activities........................................ -- 2,249 2,876
Advances to oil and gas operators.................... 45 69 674
Other current assets................................. 401 456 2,196
-------- -------- ---------
Total Current Assets......................... 18,981 75,181 30,195
-------- -------- ---------
PROPERTY AND EQUIPMENT:
Oil and gas properties at cost based on full-cost
accounting --
Proved oil and gas properties..................... 152,081 237,150 294,936
Unproved oil and gas properties................... 19,927 77,570 79,677
Less -- Accumulated depreciation, depletion and
amortization.................................... (45,771) (86,490) (108,188)
-------- -------- ---------
Net property and equipment................... 126,237 228,230 266,425
-------- -------- ---------
OTHER ASSETS........................................... 332 507 31,462
-------- -------- ---------
Total Assets................................. $145,550 $303,918 $ 328,082
======== ======== =========
LIABILITIES AND EQUITY
CURRENT LIABILITIES:
Current maturities of long-term debt................. $ -- $ -- $ 10,000
Accounts payable and accrued liabilities............. 8,440 16,886 4,931
Distribution payable................................. 10,095 -- --
Liabilities from commodity price risk management
activities........................................ -- 7,220 5,578
Income taxes payable................................. -- 2,408 13
-------- -------- ---------
Total Current Liabilities.................... 18,535 26,514 20,522
-------- -------- ---------
LONG-TERM DEBT......................................... 22,000 -- --
DEFERRED INCOME TAXES.................................. -- 39,967 48,871
LIABILITIES FROM COMMODITY PRICE RISK MANAGEMENT
ACTIVITIES........................................... -- 4,234 3,717
STOCKHOLDERS' EQUITY:
Preferred stock, $0.01 par value; 10,000,000 shares
authorized; none issued or outstanding............ -- -- --
Common Stock, $0.01 par value; 120,000,000 shares
authorized; 31,577,300 shares issued and
outstanding at December 31, 1996 and June 30,
1997, respectively................................ -- 316 316
Additional paid-in capital........................... -- 186,703 186,798
Retained earnings.................................... -- 48,244 69,861
Combined equity of predecessor entities.............. 105,849 -- --
Unearned compensation................................ -- (1,285) (1,228)
Notes receivable for equity interest................. (834) (775) (775)
-------- -------- ---------
Total Stockholders' Equity................... 105,015 233,203 254,972
-------- -------- ---------
Total Liabilities and Stockholders' Equity... $145,550 $303,918 $ 328,082
======== ======== =========
</TABLE>
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-3
<PAGE> 110
BELCO OIL & GAS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
---------------------------- --------------------
1994 1995 1996 1996 1997
------- ------- -------- ------- -------
(UNAUDITED)
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
REVENUES:
Oil and gas sales............... $40,362 $68,767 $119,710 $56,646 $62,578
Commodity price risk management
activities................... 550 9,480 (5,967) 2,633 (3,098)
Interest........................ 195 353 2,653 886 1,268
------- ------- -------- ------- -------
Total revenues.......... 41,107 78,600 116,396 60,165 60,748
------- ------- -------- ------- -------
COSTS AND EXPENSES:
Oil and gas operating
expenses..................... 5,510 5,824 7,847 3,879 4,504
Depreciation, depletion and
amortization................. 14,072 27,590 40,904 19,320 21,698
General and administrative...... 2,269 2,597 3,059 1,756 1,670
------- ------- -------- ------- -------
Total costs and
expenses.............. 21,851 36,011 51,810 24,955 27,872
------- ------- -------- ------- -------
INCOME BEFORE INCOME TAXES........ 19,256 42,589 64,586 35,210 32,876
------- ------- -------- ------- -------
PROVISION FOR INCOME TAXES........ -- -- 46,404(a) 36,264(a) 11,260
------- ------- -------- ------- -------
NET INCOME (LOSS)................. $19,256 $42,589 $ 18,182(a) $(1,054)(a) $21,616
======= ======= ======== ======= =======
PRO FORMA NET INCOME:
Income before income taxes...... $19,256 $42,589 $ 64,586 $35,210 $32,876
Pro forma provision for income
taxes........................ 5,030 13,852 21,953 11,790 11,260
------- ------- -------- ------- -------
Pro forma net income.... $14,226 $28,737 $ 42,633 $23,420 $21,616
======= ======= ======== ======= =======
PRO FORMA NET INCOME PER COMMON
SHARE........................... $ 0.57 $ 1.15 $ 1.42 $ 0.82 $ 0.69
======= ======= ======== ======= =======
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING..................... 25,000 25,000 29,986 28,447 31,500
======= ======= ======== ======= =======
</TABLE>
- ---------------
(a) Includes a one-time non-cash deferred tax charge of $30.1 million recognized
as a result of the Combination consummated on March 29, 1996. See Note 1.
Historical net income per share, including the deferred tax charge, was
$0.61 for the year ended December 31, 1996 and ($0.04) for the six months
ended June 30, 1996. The pro forma amounts present the Company as if a
taxable corporation for all periods and are based on the average number of
shares outstanding during the period assuming the shares issued in
connection with the Combination were outstanding for all periods.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-4
<PAGE> 111
BELCO OIL & GAS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
NOTES
COMMON STOCK ADDITIONAL COMBINED RECEIVABLE
--------------- PAID-IN UNEARNED RETAINED PREDECESSOR FOR EQUITY
SHARES AMOUNT CAPITAL COMPENSATION EARNINGS EQUITY INTEREST TOTAL
------ ------ ---------- ------------ -------- ----------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, December 31, 1993... -- $ -- $ -- $ -- $ -- $ 47,188 $ -- $ 47,188
------ ---- -------- ------- ------- -------- ----- --------
Contributions................ -- -- -- -- -- 50,040 -- 50,040
Distributions................ -- -- -- -- -- (26,468) -- (26,468)
Issuance of employee notes
receivable................. -- -- -- -- -- -- (126) (126)
Income before income taxes... -- -- -- -- -- 19,256 -- 19,256
------ ---- -------- ------- ------- -------- ----- --------
BALANCE, December 31, 1994... -- $ -- $ -- $ -- $ -- $ 90,016 $(126) $ 89,890
------ ---- -------- ------- ------- -------- ----- --------
Contributions................ -- -- -- -- -- 4,512 -- 4,512
Distributions................ -- -- -- -- -- (31,268) -- (31,268)
Issuance of employee notes
receivable................. -- -- -- -- -- -- (868) (868)
Repayment of employee notes
receivable................. -- -- -- -- -- -- 160 160
Income before income taxes... -- -- -- -- -- 42,589 -- 42,589
------ ---- -------- ------- ------- -------- ----- --------
BALANCE, December 31, 1995... -- $ -- $ -- $ -- $ -- $105,849 $(834) $105,015
------ ---- -------- ------- ------- -------- ----- --------
Exchange combination......... 25,000 250 72,142 -- -- (72,392) -- --
Public stock offering, net of
costs of $10.4 million..... 6,500 65 113,050 -- -- -- -- 113,115
Restricted stock issued...... 77 1 1,511 (1,285) -- -- -- 227
Repayment of employee notes
receivable................. -- -- -- -- -- -- 59 59
Distributions to predecessor
owners..................... -- -- -- -- -- (3,395) -- (3,395)
Net Income (a)............... -- -- -- -- 48,244 (30,062) -- 18,182
------ ---- -------- ------- ------- -------- ----- --------
BALANCE, December 31, 1996... 31,577 $316 $186,703 $(1,285) $48,244 $ -- $(775) $233,203
------ ---- -------- ------- ------- -------- ----- --------
Restricted stock issued
(Unaudited)................ 4 -- 95 57 -- -- -- 152
Net income (Unaudited)....... -- -- -- -- 21,617 -- -- 21,617
------ ---- -------- ------- ------- -------- ----- --------
BALANCE, June 30, 1997
(Unaudited)................ 31,581 $316 $186,798 $(1,228) $69,861 $ -- $(775) $254,972
------ ---- -------- ------- ------- -------- ----- --------
</TABLE>
- ---------------
(a) Includes a one-time non-cash deferred tax charge of $30.1 million recognized
as a result of the Combination consummated on March 29, 1996. See Note 1.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-5
<PAGE> 112
BELCO OIL & GAS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
FOR THE YEAR ENDED FOR THE SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
------------------------------- -------------------
1994 1995 1996 1996 1997
-------- -------- --------- -------- --------
(UNAUDITED)
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income(a).............................. $ 19,256 $ 42,589 $ 18,182 $ (1,054) $ 21,616
Adjustments to reconcile net income to net
operating cash inflows --
Depreciation, depletion and
amortization........................... 14,072 27,590 40,904 19,320 21,698
Deferred tax provision(a)................ -- -- 39,967 35,644 8,904
Amortization of restricted stock
compensation........................... -- -- 227 -- 152
Commodity price risk management
activities............................. 277 (570) 9,436 -- (2,786)
Changes in operating assets and
liabilities --
Accounts receivable, oil and gas....... (6,084) (6,445) (11,955) (8,207) 6,363
Other current assets................... -- -- (286) 401 53
Accounts payable and accrued
liabilities......................... 605 (1,127) 11,584 2,539 (2,785)
-------- -------- --------- -------- --------
Net operating cash inflows.......... 28,126 62,037 108,059 48,643 53,215
-------- -------- --------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Exploration and development expenditures... (52,230) (71,387) (142,712) (59,778) (71,693)
Investment in Hugoton Energy Corporation... -- -- -- -- (30,870)
Changes in accounts payable and accrued
liabilities for oil and gas
expenditures............................. 721 5,243 (730) 4,616 (1,564)
Proceeds from sale of oil and gas
properties............................... -- -- -- -- 11,800
Change in advances to oil and gas
operators................................ (1,012) 1,566 (24) 45 (605)
Changes in other assets.................... (149) (555) (360) (106) (1,878)
-------- -------- --------- -------- --------
Net investing cash outflows......... (52,670) (65,133) (143,826) (55,223) (94,810)
-------- -------- --------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from initial public offering...... -- -- 113,115 113,115 --
Long-term borrowings....................... 6,930 17,170 13,300 13,300 --
Long-term debt repayments.................. -- (2,100) (35,300) (35,300) --
Equity contributions....................... 50,040 4,512 -- -- --
Equity distributions....................... (26,468) (21,173) (13,490) (13,865) --
Employee loans, net........................ (126) (708) 59 89 --
-------- -------- --------- -------- --------
Net financing cash inflows
(outflows)........................ 30,376 (2,299) 77,684 77,339 --
-------- -------- --------- -------- --------
INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS................................ 5,832 (5,395) 41,917 70,759 (41,595)
CASH AND CASH EQUIVALENTS AT BEGINNING OF
PERIOD..................................... 1,119 6,951 1,556 1,556 43,473
-------- -------- --------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD... $ 6,951 $ 1,556 $ 43,473 $ 72,315 $ 1,878
======== ======== ========= ======== ========
</TABLE>
- ---------------
(a) Prior to March 29, 1996, the earnings of the Company were not subject to
corporate income taxes as the Company, prior to the Combination, was a group
of non-taxpaying entities. See Note 1.
The accompanying notes to consolidated financial statements
are an integral part of these statements.
F-6
<PAGE> 113
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(INFORMATION FOR THE SIX MONTHS ENDED JUNE 30, 1996 AND 1997 IS UNAUDITED)
NOTE 1 -- ORGANIZATION AND NATURE OF OPERATIONS
Organization
Belco Oil & Gas Corp. was organized as a Nevada corporation in January 1996
in connection with the combination of assets (the "Combination") consisting of
ownership interests (the "Combined Assets") in certain entities and direct
interests in oil and gas properties and certain hedge transactions owned by the
predecessors and entities related thereto. On March 29, 1996, Belco Oil & Gas
Corp. completed its initial public offering (the "Offering") issuing 6,500,000
shares of Common Stock at $19 per share. Belco Oil & Gas Corp. and the owners of
the Combined Assets entered into an Exchange and Subscription Agreement and Plan
of Reorganization dated as of January 1, 1996 (the "Exchange Agreement") that
provided for the issuance by the Company of an aggregate of 25,000,000 shares of
Common Stock to such owners in exchange for the Combined Assets on March 29,
1996, the date the Offering closed. The owners of the Combined Assets received
shares of Common Stock proportionate to the value of the Combined Assets
underlying their ownership interests in the predecessors and the direct
interests.
The Combination was accounted for as a reorganization of entities under
common control because of the common control of the stockholders of Belco Oil &
Gas Corp. and by virtue of their direct ownership of the entities and interests
exchanged. Accordingly, the net assets acquired in the Combination have been
recorded at the historical cost basis of the affiliated predecessor owners.
Belco Oil & Gas Corp. and its subsidiaries and prior to March 29, 1996, the
combined predecessor entities, are referred to herein as "Belco" or the
"Company".
Nature of Operations
The Company is an independent energy company engaged in the exploration,
development and production of natural gas and oil. The Company operates in this
single industry segment, and all operations are conducted in the United States.
The Company's operations are presently focused in the Giddings Field (east
central Texas), the Moxa Arch Trend (southwest Wyoming) and to a lesser extent
the Golden Trend Field (southern Oklahoma) and Louisiana.
Substantially all of the Company's production is sold under
market-sensitive contracts. The Company's revenue, profitability and future rate
of growth are substantially dependent upon the price of, and demand for, oil,
natural gas and natural gas liquids. Prices for oil and natural gas are subject
to wide fluctuation in response to relatively minor changes in the supply of and
demand for oil and natural gas, market uncertainty and a variety of additional
factors that are beyond the control of the Company. These factors include the
level of consumer product demand, weather conditions, domestic and foreign
governmental regulations, the price and availability of alternative fuels,
political conditions in the Middle East, the foreign supply of oil and natural
gas, the price of foreign imports and overall economic conditions. The Company
is affected more by fluctuations in natural gas prices than oil prices, because
a majority of its production (92 percent during 1996 on a volumetric equivalent
basis) was natural gas. With the objective of reducing price risk, the Company
has entered into hedging and related price risk management transactions with
respect to a significant amount of its expected future production (see Note 6).
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements for the year ended December 31, 1996
include the accounts of the Company and its wholly-owned subsidiaries. The
Company's interests in the Moxa Arch investment
F-7
<PAGE> 114
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
programs (the 1992 Moxa Arch Drilling Program, the 1993 Moxa Arch Drilling
Program and the Moxa Arch 1992 Offset Drilling Program) are accounted for using
the proportionate consolidation method of accounting for investments in oil and
gas property interests, whereby the Company's share of each program's assets,
liabilities, revenues and expenses is included in the appropriate accounts of
the consolidated financial statements. All material intercompany balances and
transactions have been eliminated.
For the years ended December 31, 1995 and 1994, the combined accounts are
prepared using the historical costs and results of operations of the combined
predecessor entities as if such entities had always been combined.
Property and Equipment
The Company follows the full-cost method of accounting for oil and gas
properties. Accordingly, all costs associated with acquisition, exploration and
development of oil and gas reserves, including directly related internal costs,
are capitalized. The Company capitalized $3,065,000, $1,181,000 and $127,000 of
internal costs during 1996, 1995 and 1994, respectively.
Oil and gas properties are amortized on the unit-of-production method using
estimates of proved reserve quantities. Investments in unproved properties are
not amortized until proved reserves associated with the projects can be
determined or until impairment occurs. The amortizable base includes estimated
future development costs and, where significant, dismantlement, restoration and
abandonment costs, net of estimated salvage values.
In addition, the capitalization costs of proved oil and gas properties are
subject to a "ceiling test," which limits such costs to the estimated present
value net of related tax effects, discounted at a 10 percent interest rate, of
future net cash flows from proved reserves, based on current economic and
operating conditions. If capitalized costs exceed this limit, the excess is
charged to depreciation, depletion and amortization.
Sales and other dispositions of proved and unproved properties are
accounted for as adjustments of capitalized costs with no gain or loss
recognized, unless significant reserves are involved. Abandonments of properties
are accounted for as adjustments of capitalized costs with no loss recognized.
Management Fees
The Company manages three investment Programs which were formed during
1992-1994 to acquire and develop interests in certain drilling prospects. The
Company offered, to certain qualified investors, the opportunity to invest in
the prospects through participation in the Programs. In return for its
management activities on behalf of the Programs, the Company earns an annual
management fee of one percent of committed capital. After elimination of
management fees received from affiliated entities, including predecessor owners,
the Company earned management fees totaling $583,000, $602,000 and $763,000
during 1996, 1995 and 1994, respectively. Such management fees have been
credited to oil and gas property costs.
Capitalization of Interest
Interest costs related to the acquisition and development of unproved
properties are capitalized to oil and gas properties. Interest costs capitalized
for the years ended December 31, 1996 and 1995, totaled $434,000 and $911,000,
respectively. Interest costs for the year ended December 31, 1994, were not
significant.
F-8
<PAGE> 115
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accounting for Commodity Price Risk Management Activities
The Company periodically engages in price risk management activities in
order to manage its exposure to oil and gas price volatility. Gains and losses,
including terminated hedges, related to qualifying hedges of the Company's oil
and gas production are deferred and are recognized as revenues as the associated
production occurs.
Estimates of future cash flows applicable to oil and gas commodity hedges
are reflected in future cash flows from proved reserves in the supplemental oil
and gas disclosures, with such estimates based on prices in effect as of the
date of the reserve report (See Note 13).
Transactions that do not qualify for hedge accounting are accounted for
using the mark-to-market method. Under such method, the financial instruments
are reflected at market value at the end of the period with resulting unrealized
gains and losses recorded as assets and liabilities in the consolidated
financial statements. Changes in the market value of outstanding financial
instruments are recognized as gains or losses in the period of change.
Revenue Recognition
Revenue from oil and gas sales is recorded on an accrual basis as title is
transferred with deliveries at the wellhead.
Gas Balancing
The Company uses the sales method to account for natural gas imbalances.
Under the sales method, the Company recognizes revenues based on the amount of
gas sold to purchasers, which may differ from the amounts to which the Company
is entitled based on its interests in the properties. However, revenue is
deferred and a liability is recorded for those properties where production sold
by the Company exceeds its entitled share of remaining natural gas reserves. Gas
balancing obligations as of December 31, 1996 and 1995 were not significant.
Additionally, gas imbalances are generally reflected as adjustments to reported
gas reserves and future cash flows in the supplemental oil and gas disclosures.
Income Taxes
The Company accounts for income taxes under the provisions of Statement of
Financial Accounting Standards (SFAS) No. 109 -- "Accounting for Income Taxes,"
which provides for an asset and liability approach for accounting for income
taxes. Under this approach, deferred tax assets and liabilities are recognized
based on anticipated future tax consequences, using currently enacted tax laws,
attributable to differences between financial statement carrying amounts of
assets and liabilities and their respective tax bases. Deferred tax assets are
reduced by a valuation allowance when, based upon management's estimate, it is
more likely than not that a portion of the deferred tax assets will not be
realized in a future period.
The earnings for the years ended December 31, 1995 and 1994 were not
subject to corporate income taxes as the Company was a combination of
nontaxpaying entities, including Subchapter S, limited liability corporations,
partnership and joint venture entities and individual interest. Accordingly,
earnings were directly taxable to the individual owners. The pro forma provision
for income tax is an estimate of the Company's income taxes that would have been
provided in accordance with SFAS No. 109, if the Company were a taxable entity
during the periods presented (See Note 5).
F-9
<PAGE> 116
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Stock-Based Compensation
The Company accounts for employee stock-based compensation using the
intrinsic value method prescribed by Accounting Principles Board (APB) Opinion
No. 25, "Accounting for Stock Issued to Employees." Accordingly, the adoption of
SFAS No. 123, "Accounting for Stock-Based Compensation" in 1996 had no effect on
the Company's results of operations.
Equity Distribution Payable
Undistributed production revenues for 1995, net of costs and expenses
through December 31, 1995 were estimated at $10.1 million for distribution to
the predecessor owners in 1996. This amount was accrued as an equity
distribution payable at December 31, 1995. Actual required distributions totaled
$13.5 million and were distributed in 1996.
Cash Equivalents
The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.
Pro Forma Net Income Per Share
Pro forma net income per share is based on the weighted average number of
shares of Common Stock outstanding. The computation assumes that the Company was
incorporated during the periods presented and presents the shares issued in
connection with the Combination as outstanding for all periods. The effects of
Common Stock equivalent shares (stock options) and restricted stock were not
material for the year ended 1996.
In February 1997, the Financial Accounting Standards Board issued SFAS No.
128 -- "Earnings per Share" effective for interim and annual periods after
December 15, 1997. This statement replaces primary earnings per share ("EPS")
with a newly defined basic EPS and modifies the computation of diluted EPS. The
Company's basic and diluted EPS computed using the requirements of SFAS 128 are
substantially the same as the Company's currently disclosed pro forma net income
per common share.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates. Significant
estimates with regard to these financial statements include the estimated fair
value of oil and gas commodity price risk management contracts and the estimate
of proved oil and gas reserve volumes and the related discounted future net cash
flows therefrom (See Notes 6 and 13).
Unaudited Interim Information
The unaudited interim combined financing statements as of June 30, 1997 and
for each of the six month periods ended June 30, 1997 and 1996, included herein,
have been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. 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 the Company's management, the unaudited
interim combined financial statements contain all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation. The
interim financial results are not necessarily indicative of operating results
for an entire year.
F-10
<PAGE> 117
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 3 -- DEBT
In December 1994, Belco Energy L.P. entered into a three-year revolving
credit facility with The Chase Manhattan Bank (the "Bank"). Semiannually, the
Bank will make a determination of the Company's borrowing base, determined
solely at the discretion of the Bank. The Company may request two additional
borrowing base redeterminations per annum. At December 31, 1996 the Credit
Facility was $30 million with a borrowing base of $15 million.
Principal outstanding, if any, is due and payable upon maturity in December
1997 with interest due quarterly. The terms of the agreement provide for
interest at rates ranging from the prime rate plus .25 percent to .375 percent,
or the Eurodollar Rate (ER) plus 1.75 percent to 1.875 percent. The applicable
margin over the prime rate or ER varies depending on the aggregate advances
outstanding as a percentage of the borrowing base. The unused portions of the
borrowing base are subject to a .25 percent commitment fee.
Covenants contained in the revolving credit agreement limit Belco Energy
L.P.'s ability to incur additional indebtedness, create liens on its assets and
prohibit speculative transactions in any commodities or futures market. Belco
Energy L.P. is also limited in its ability to make loans, investments or
guarantees and distributions of retained earnings. At December 31, 1996
restricted retained earnings totaled approximately $30 million. Additionally,
Belco Energy L.P. is required to maintain a minimum tangible net worth ($30
million) and certain ratios of leverage (not greater than 1.5:1) and interest
coverage (earnings before interest, taxes and depreciation, depletion and
amortization to interest expense of not less than 2.75:1). The Bank has the
ability in the event of default to perfect a security interest in certain of the
Company's properties.
The Company repaid all of its outstanding bank debt in March 1996 and as of
December 31, 1996, there was no outstanding balance. As of June 30, 1997, $10
million was outstanding under the facility. The credit facility remains in
effect to finance future obligations of the Company.
NOTE 4 -- RELATED-PARTY TRANSACTIONS
The Company enters into a substantial portion of its Commodity Price Risk
Management Activities with Enron Capital & Trade Resources (ECT), a subsidiary
of Enron Corp. The Company's Chairman serves on the board of directors of Enron
Corp. These agreements were entered into in the ordinary course of business of
the Company and are on terms that the Company believes are no less favorable
than the terms of similar arrangements with third parties. Pursuant to the terms
of these agreements, (i) ECT has paid to the Company a net amount of
approximately $5,243,000 with respect to 1996, (ii) ECT has paid to the Company
a net amount of approximately $5,370,000 with respect to 1995 and (iii) the
Company paid to ECT a net amount of approximately $22,000 with respect to 1994.
The Company's executive offices are leased from its Chairman and $250,000
was paid under such lease in 1996. Lease expense for the Company's executive
offices for the period from inception through 1995 was paid by the Chairman,
with no reimbursement. The Company has recorded an office space and service
expense and a corresponding capital contribution of approximately $250,000 and
$200,000 for the periods ended December 31, 1995 and 1994, respectively, based
on an estimated allocation of space occupied. The Company's remaining commitment
related to the office space and service charge is $250,000 per year through
1999. Management believes the fee compares favorably to the terms which might
have been available from a non-affiliated party.
Additionally, from inception through March 31, 1996, the Company's Chairman
did not draw any compensation from the Company. The Company has recorded salary
and benefits expense and a corresponding capital contribution of $150,000 for
each of the periods ended December 31, 1995 and
F-11
<PAGE> 118
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
1994, based on estimates of time devoted to the Company and using expected 1996
compensation. In 1996, the Chairman commenced receiving compensation.
Certain employees of the Company had an ownership interest in certain oil
and gas properties held by the Company as of December 31, 1995, and 1994. The
Company had receivables of $775,000, $834,000 and $126,000 as of December 31,
1996, 1995 and 1994, respectively, related to amounts loaned to employees in
connection with employee purchases of oil and gas interests. Such receivables
have been recorded as a reduction of equity in the consolidated balance sheets,
as such interests were exchanged for Common Stock in the Combination (see Note
1). The Company also had payables of $102,000 and $81,000 to the employees at
December 31, 1995 and 1994, respectively, related to revenues generated by the
properties in which the employees had such ownership interest.
In 1995, the Company engaged Midway Partners LLC (Midway) to serve as
advisor in connection with certain financial matters of the Company, including
the Combination and the potential initial public offering of the Company's
Common Stock. The Company's Senior Financial and Legal Advisor and General
Counsel is one of two managing partners and principals of Midway. In connection
with such engagement, the Company has paid Midway an advisory fee of $50,000. In
1996, upon consummation of the offering, the Company paid Midway an additional
$200,000.
NOTE 5 -- INCOME TAXES
Prior to March 29, 1996, the earnings of the Company were not subject to
corporate income taxes as the Company, prior to the Combination, was a
combination of non-taxpaying entities, including Subchapter S, limited liability
corporations, partnership and joint venture entities and individual interests.
Accordingly, taxable earnings were directly taxable to the individual owners
through the date of the Combination. As a result of the Combination consummated
on March 29, 1996, the Company became a taxpaying entity and recorded, in the
first quarter of 1996, a $30.1 million one-time, non-cash charge to earnings to
establish a deferred tax liability. The historical provision for income taxes
for the year ended December 31, 1996 includes the one-time charge. The pro forma
provision for income taxes reflected in the Consolidated Statements of
Operations for the years ended December 31, 1996, 1995 and 1994 has been
presented to reflect the Company's income taxes under the assumption that the
Company was a taxpaying entity since its inception.
Although the effective date of the Exchange Agreement is January 1, 1996,
each owner of the Combined Assets will be required under existing federal income
tax rules and regulations to include in its taxable income, for all periods
ending on the date of or prior to the completion of the Combination (March 29,
1996), its allocable portion of the taxable income attributable to the Combined
Assets and will be entitled to all tax benefits related to the Combined Assets
through the completion of the Combination on March 29, 1996.
Total provision for income taxes consists of the following:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, 1996
-----------------
(IN THOUSANDS)
<S> <C>
Payable currently:
Federal................................................... $ 6,345
State..................................................... 92
-------
6,437
-------
Deferred: 39,967
-------
Total provision for income taxes.................. $46,404
=======
</TABLE>
F-12
<PAGE> 119
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The differences between the statutory federal income taxes and the
Company's pro forma effective taxes is summarized as follows:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- ------- -------
(IN THOUSANDS)
<S> <C> <C> <C>
Statutory federal income taxes...................... $ 6,740 $14,906 $22,605
State income tax, net of federal benefit............ 50 115 80
Section 29 tax credits.............................. (1,530) (909) (947)
Other............................................... (230) (260) 215
------- ------- -------
Pro forma provision for income taxes................ $ 5,030 $13,852 $21,953
======= ======= =======
</TABLE>
The principal components of the Company's net deferred income tax liability
at December 31, 1996 are as follows:
<TABLE>
<CAPTION>
1996
--------------
(IN THOUSANDS)
<S> <C>
Deferred income tax assets
Commodity price risk management activities................ $(1,494)
Other..................................................... (245)
-------
(1,739)
-------
Deferred income tax liabilities
Depreciation, depletion and amortization.................. 41,159
Other..................................................... 547
-------
41,706
-------
Net deferred income tax liability................. $39,967
=======
</TABLE>
Section 29 Tax Credit
The natural gas production from wells drilled on certain of the Company's
properties in the Moxa Arch Trend and Golden Trend Field qualifies for the
Section 29 Tax Credit. The Section 29 Tax Credit is an income tax credit against
regular federal income tax liability with respect to sales of the Company's
production of natural gas produced from tight gas sand formations, subject to a
number of limitations. Fuels qualifying for the Section 29 Tax Credit must be
produced from a well drilled or a facility placed in service after November 5,
1990 and before January 1, 1993, and be sold before January 1, 2003.
The basic credit, which is currently approximately $0.52 per MMBtu of
natural gas produced from tight sand reservoirs and approximately $1.03 per
MMBtu of natural gas produced from Devonian Shale, is computed by reference to
the price of crude oil and is phased out as the price of oil exceeds $23.50 in
1979 dollars (as adjusted for inflation) with complete phaseout if such price
exceeds $29.50 in 1979 dollars (as adjusted for inflation). Under this formula,
the commencement of phaseout would be triggered if the average price for crude
oil rose above approximately $45 per Bbl in current dollars. The Company
estimates that it generated approximately $0.9 million of Section 29 Tax Credits
in 1996. The Section 29 Tax Credit may not be credited against the alternative
minimum tax, but under certain circumstances may be carried over and applied
against regular tax liability in future years. Therefore, no assurances can be
given that the Company's Section 29 Tax Credits will reduce its federal income
tax liability in any particular year. As production from qualified wells
decline, the production based tax credit will also decline.
F-13
<PAGE> 120
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Texas Severance Tax Abatement
Production from natural gas wells that have been certified as tight
formations or deep wells by the Texas Railroad Commission ("high cost gas
wells") and that are spudded or completed during the period from June 16, 1989
to September 1, 1996 qualify for an exemption from the 7.5% severance tax in
Texas on natural gas and natural gas liquids produced by such wells prior to
August 31, 2001. The natural gas production from wells drilled on certain of the
Company's properties in the Austin Chalk area qualify for this tax reduction. In
addition, high cost gas wells that are spudded or completed during the period
from September 1, 1996 to August 31, 2002 are entitled to receive a severance
tax reduction upon obtaining a high cost gas certification from the Texas
Railroad Commission within 180 days after first production. The tax reduction is
based on a formula composed of the statewide "median" (as determined by the
State of Texas from producer reports) and the producer's actual drilling and
completion costs. More expensive wells will receive a greater amount of tax
credit. This tax rate reduction remains in effect for 10 years or until the
aggregate tax credits received equal 50% of the total drilling and completion
costs. The reduction in severance taxes for such wells is reflected as a
reduction in oil and gas operating expenses and an increase in the standardized
measure of discounted future net cash flows relating to proved oil and gas
reserves (See Note 13).
NOTE 6 -- COMMODITY PRICE RISK MANAGEMENT ACTIVITIES AND FAIR VALUE OF
FINANCIAL INSTRUMENTS
Hedging Transactions
With the objective of achieving more predictable revenues and cash flows
and reducing the exposure to fluctuations in gas and oil prices, the Company has
entered into hedging transactions of various kinds with respect to both gas and
oil. While the use of these hedging arrangements limits the downside risk of
adverse price movements, it may also limit future revenues from favorable price
movements. As of December 31, 1996, the Company had entered into hedging
transactions with respect to a significant portion of its estimated production
for 1997 and to a lesser extent its estimated production for 1998 and 1999. The
Company continues to evaluate whether to enter into additional hedging
transactions for future years. In addition, the Company may determine from time
to time to terminate its then existing hedging positions if market conditions
warrant.
F-14
<PAGE> 121
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table and notes thereto cover the Company's pricing and
notional volumes on open natural gas and oil commodity hedges as of December 31,
1996:
<TABLE>
<CAPTION>
PRODUCTION PERIODS
--------------------------------------
1997 1998 1999 TOTAL
------- ------- ------ -------
<S> <C> <C> <C> <C>
Gas --
Price swaps -- receive fixed price
(thousand MMBtu)(1)(6)................. 14,305 3,665 -- 17,970
Average price, per MMBtu............... $ 2.10 $ 2.01 -- $ 2.08
Collars and options (thousand MMBtu)(2)... 8,350 9,885 -- 18,235
Average floor price, per MMBtu......... $ 2.05 $ 1.92 -- $ 1.98
Average ceiling price, per MMBtu....... $ 2.44 $ 2.16 -- $ 2.29
Price swaps -- pay fixed price (thousand
MMBtu)(3).............................. 8,777 1,070 -- 9,847
Average price, per MMBtu............... $ 2.20 $ 2.30 -- $ 2.21
Basis swaps (thousand MMBtu)(4)(5)........ 35,158 10,950 -- 46,108
Average basis differential, per
MMBtu................................ $ .20 $ .39 -- $ .25
Oil --
Price swaps -- receive fixed price
(MBbls)(1)............................. 301 35 -- 336
Average price, per Bbl................. $ 18.49 $ 18.49 -- $ 18.49
Collars and options (MBbls)(2)............ 353 242 25 620
Average floor price, per Bbl........... $ 18.22 $ 17.21 $17.00 $ 17.78
Average ceiling price, per Bbl......... $ 21.16 $ 18.92 $18.50 $ 20.18
Price swaps -- pay fixed price
(MBbls)(3)............................. 60 -- -- 60
Average price, per Bbl................. $ 21.70 -- -- $ 21.70
</TABLE>
- ---------------
(1) For any particular swap transaction, the counterparty is required to make a
payment to the Company in the event that the NYMEX Reference Price for any
settlement period is less than the swap price for such hedge, and the
Company is required to make a payment to the counterparty in the event that
the NYMEX Reference Price for any settlement period is greater than the swap
price for such hedge.
(2) For any particular collar transaction, the counterparty is required to make
a payment to the Company if the average NYMEX Reference Price for the
reference period is below the floor price for such transaction, and the
Company is required to make payment to the counterparty if the average NYMEX
Reference Price is above the ceiling price for such transaction.
(3) In order to close certain commodity price hedge positions, the Company
entered into various swap positions where the Company is the fixed-price
payor on the swap. In these transactions, the counterparty is required to
make a payment to the Company in the event that the NYMEX Reference Price
for any settlement period is greater than the swap price, and the Company is
required to make a payment to the counterparty in the event that the NYMEX
Reference Price for any settlement period is less than the swap price.
(4) Since most of the Company's gas is sold under spot contracts with reference
to Houston Ship Channel prices and substantially all of the Company's hedge
transactions are based on the NYMEX Reference Price, the Company has entered
into basis swaps that require the counterparty to make a payment to the
Company in the event that the average NYMEX Reference Price per MMBtu for a
reference period exceeds the average price per MMBtu for gas delivered at
the Houston Ship Channel for such reference period by a stated differential,
and requires the Company to make a payment to the counterparty in the event
that the NYMEX Reference Price exceeds the Houston Ship Channel price by
less than a stated differential (or in the event that the Houston Ship
Channel price exceeds the NYMEX Reference Price). The Company also sells its
Wyoming gas at prices based on the Northwest Pipeline Rocky Mountain Index
and has entered into basis swaps that require the counterparty to make a
payment to the Company in the event that the NYMEX Reference Price per MMBtu
for a reference period exceeds the Northwest Pipeline Rocky Mountain Index
Price by more than a stated differential and requires the Company to make a
payment to the counterparty in the event that the NYMEX Reference Price
exceeds the Northwest Pipeline Rocky Mountain Index Price by less than a
stated differential (or in the event that the Northwest Pipeline Rocky
Mountain Index Price is greater than the NYMEX Reference Price).
(5) Does not include 3,650 thousand MMBtu of basis swaps in 1997 that are
extendable at the election of the counterparty.
(6) Does not include 1,825 and 8,205 thousand MMBtu of swaps in 1997 and 1998,
respectively, that are extendable at the election of the counterparty.
F-15
<PAGE> 122
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
All of the above transactions were carried out in the over-the-counter
market, and not on the NYMEX, with financial counterparties having at least an
investment grade credit rating. All of these transactions provide solely for
financial settlements related to closing prices on the NYMEX.
In 1995 and 1994, a realized hedging gain of $9.5 million and $550,000,
respectively, was included in Commodity Price Risk Management Revenues. At
December 31, 1995, the Company had net deferred losses of $145,000 for settled
derivative contracts and net deferred premium costs of $86,000, relative to
future production periods. The current portion of these amounts are included in
other current assets and the long-term portion in other assets.
In 1996, a realized hedging loss of $83,000 was included in Commodity Price
Risk Management Revenues. At December 31, 1996, the Company had accrued
liabilities of $307,000 for settled derivative contracts and net deferred
premium costs of $465,000, relative to future production periods. These amounts
are included in Price Risk Management Activities as a current liability and
current asset, respectively.
Non-Hedging Transactions
As described in Note 2, the Company uses the mark-to-market method of
accounting for instruments that do not qualify for hedge accounting. The 1996
results of operations included an aggregate pre-tax loss of $5.9 million related
to these activities which included (1) net realized losses on settlements
totaling $3.9 million, (2) net premiums received totaling $7.4 million and (3)
the unrealized loss resulting from net change in the value of the Company's
mark-to-market portfolio of price risk management activities for the year ended
December 31, 1996 of $9.4 million, all included in Commodity Price Risk
Management Revenues. As a result of the increase in oil and natural gas prices
which occurred in the fourth quarter, the Company recorded a fourth quarter
pre-tax loss of $8.4 million from Commodity Price Risk Management Activities
which included a $4.2 million ($2.77 million net of tax) non-cash charge for
unrealized losses related to mark-to-market accounting requirements. At December
31, 1996, the Company's consolidated balance sheet reflects $1.8 million and
$11.2 million of price risk management assets and liabilities, respectively,
which includes primarily the mark-to-market reserve. The Company had not entered
into any financial instruments that did not qualify for hedge accounting prior
to 1996.
F-16
<PAGE> 123
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table and notes thereto cover the Company's pricing and
notional volumes on open natural gas and oil financial instruments at December
31, 1996, that do not qualify for hedge accounting:
<TABLE>
<CAPTION>
PRODUCTION PERIODS
----------------------------------------
1997 1998 1999 TOTAL
------- ------- ------- -------
<S> <C> <C> <C> <C>
Gas --
Straddles (thousand MMBtu)(1).......... 1,825 -- -- 1,825
Average price, per MMBtu............ $ 2.24 -- -- $ 2.24
Calls Sold (thousand MMBtu)(2)......... 11,260 10,950 -- 22,210
Average price, per MMBtu............ $ 2.04 $ 2.27 -- $ 2.15
Puts Sold (thousand MMBtu)(2).......... 5,360 1,093 -- 6,453
Average price, per MMBtu............ $ 1.98 $ 2.00 -- $ 1.98
Price swaps -- pay fixed price
(thousand MMBtu).................... 5,430 -- -- 5,430
Average price, per MMBtu............ $ 1.99 -- -- $ 1.99
Oil --
Calls Sold (MBbls)(2).................. 301 68 6 375
Average price, per Bbl.............. $ 22.41 $ 22.21 $ 22.00 $ 22.37
Puts Sold (MBbls)(2)................... -- 60 -- 60
Average price, per Bbl.............. -- $ 19.75 -- $ 19.75
</TABLE>
- ---------------
(1) A straddle is a combination of a put sold and a call sold. The Company is
required to make a payment to the counterparty in the event that the NYMEX
Reference Price for any settlement period is greater than the ceiling price
or less than the floor price. The Company receives a significant premium
upon entering into such contract.
(2) Calls sold or puts sold under written option contracts, in return for a
significant premium received by the Company upon initiation of the contract,
the Company is required to make a payment to the counterparty in the event
that the NYMEX Reference Price for any settlement period is greater than the
price of the call sold, or less than the price of the put sold.
Fair Value of Financial Instruments
The following table presents the carrying amounts and estimated fair values
of the Company's financial instruments at December 31, 1996 and 1995. SFAS No.
107 defines the fair value of a financial instrument as the amount at which the
instrument could be exchanged in a current transaction between willing parties.
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
------------------ ------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents................... $ 1,556 $ 1,556 $43,473 $43,473
Long-term bank debt......................... 22,000 22,000 -- --
Oil and gas commodity -- Hedges............. 231 9,200 158 (8,555)
-- Non-hedges..... -- -- (9,363) (9,363)
</TABLE>
The following methods and assumptions were used to estimate the fair value
of the financial instruments summarized in the above table. The carrying values
of trade receivables and trade payables included in the accompanying
consolidated balance sheets approximated market value at December 31, 1996 and
1995.
Cash and Cash Equivalents
The carrying amounts approximate fair value because of the short maturity
of those instruments.
F-17
<PAGE> 124
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Long-Term Debt
The fair value of the Company's debt is assumed to be the same as the
carrying value because the interest rate is variable and is reflective of market
rates.
Oil and Gas Commodity Financial Instruments
The estimated fair value of oil and gas commodity financial instruments has
been determined by using available market data and applying certain valuation
methodologies. In some cases, quotes of termination values were available.
Judgment is necessarily required in interpreting market data, and the use of
different market assumptions or estimation methodologies could result in
different estimates of fair value.
NOTE 7 -- COMMITMENTS AND CONTINGENCIES
Future Contingencies Related to the Moxa Arch Programs
From 1992 to 1994, the Company established three Moxa Arch investment
programs: the 1992 Moxa Arch Drilling Program, the 1993 Moxa Arch Drilling
Program, and the Moxa Arch 1992 Offset Drilling Program. The Programs were
established to develop certain drilling prospects acquired as a result of a
farmout agreement with Amoco Production Company and others. The Company offered
certain qualified investors (the Investors) the opportunity to invest in the
prospects through participation in the Programs. The Programs have invested
$116.6 million in connection with the development of the Moxa Arch Trend of
Southwest Wyoming. Through October 30, 1996, the Company owned approximately
55.20 percent of the 1992 Moxa Arch Drilling Program, 32.45 percent of the 1993
Moxa Arch Drilling Program, and 58.21 percent of the Moxa Arch 1992 Offset
Drilling Program. On October 31, 1996 the Company purchased from certain
third-party investors interests (the "Acquired Interests") in the Belco Oil &
Gas Corp. 1992, 1993 and 1992 Offset Moxa Arch Drilling Programs. The effective
date of the purchase was October 31, 1996 for financial reporting purposes. The
Acquired Interests represent incremental working interests in the Company's
natural gas wells in the Moxa Arch trend located in Lincoln, Sweetwater and
Uinta Counties, Wyoming. The Company paid aggregate cash consideration of $9.9
million plus an 80% participation in potential natural gas price increases (net
of incremental production costs) associated with production from the wells
through July 31, 1999 (the "Price Participation Right"). After the purchase, the
Company's interest in these programs was increased to 81.5% of the 1992 Moxa
Arch Drilling Program, 74.0% of the 1993 Moxa Arch Drilling Program, and 80.5%
of the Moxa Arch 1992 Offset Drilling Program. The transaction was accounted for
using the purchase method of accounting.
The remaining third-party investors in the Programs may "put" their
interest to Belco annually through 2003, based upon a valuation by a nationally
recognized independent petroleum engineering firm of the discounted net present
value of the future net revenues from production of proved reserves attributable
to the interests. The put amount is to be calculated based upon certain
specified parameters including prices, discount factors and reserve life. No
investor under the Programs exercised the put right in 1996. The Company is not
obligated to repurchase in any one calendar year more than 30% of the interests
originally acquired by the program investors (including, for purposes of this
calculation, the Company's interest). The Company's purchase price under the put
right has not been calculated given that no investors have exercised such right.
However, using reserve values presented in Note 13, Standardized Measure of
Discounted Future Net Cash Flows Relating to Proved Oil and Gas Reserves (SEC
basis using year-end prices and a 10% discount rate), the maximum purchase price
if all remaining investors exercised the put option would not be material to the
Company as of December 31, 1996.
F-18
<PAGE> 125
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Lease Commitments
At December 31, 1996, the Company had operating leases covering office
space. Minimum rental commitments under such operating leases are as follows (in
thousands):
<TABLE>
<CAPTION>
YEAR ENDING DECEMBER 31,
------------------------
<S> <C>
1997................................................. $354
1998................................................. 365
1999................................................. 250
----
Total........................................... $969
====
</TABLE>
For the years ended December 31, 1996, 1995 and 1994, total rental expense
was approximately $329,000, $317,000 and $200,000, respectively.
Legal Proceedings
The Company is a named defendant in routine litigation incidental to its
business. While the ultimate results of these proceedings cannot be predicted
with certainty, the Company does not believe that the outcome of these matters
will have a material adverse effect on the Company.
Environmental Matters
The Company's operations are subject to various federal, state and local
laws and regulations relating to the protection of the environment, which have
become increasingly stringent. The Company believes its current operations are
in material compliance with current environmental laws and regulations. There
are no environmental claims pending or, to the Company's knowledge, threatened
against the Company. There can be no assurance, however, that current regulatory
requirements will not change, currently unforeseen environmental incidents will
not occur or past noncompliance with environmental laws will not be discovered
on the Company's properties.
NOTE 8 -- CASH FLOW INFORMATION
The Company paid $4.0 million in income taxes during the 1996 period with
the remaining 1996 liability for such taxes due in the first quarter of 1997.
The Company paid $4.7 and $0.6 million in income taxes during the six-month
periods ended June 30, 1997 and June 30, 1996, respectively. No income taxes
were paid by the Company in 1995 and 1994 because the applicable taxes were paid
by the individual owners of the affiliated entities and properties now included
in the Company (See Note 5).
NOTE 9 -- CUSTOMER INFORMATION
Concentrations of Credit Risk
The Company's revenues are derived from uncollateralized sales to customers
in the oil and gas industry. The concentration of credit risk in a single
industry affects the Company's overall exposure. The Company has not experienced
significant credit losses on such sales.
Major Customers
Oil and gas sales for 1996 include $44.6 million, $37.7 million and $11.7
million in revenues received from three customers. Also, 1996 revenues included
net losses in the amount of $5.9 million related to Commodity Price Risk
Management Activities. Oil and gas sales for 1995 include $7.9 million, $21.1
million, $17.2 million and $14.0 million in revenues received from four
customers. Also, 1995 revenues
F-19
<PAGE> 126
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
include commodity price risk management gains totaling $9.5 million. Oil and gas
sales for 1994 include $15.1 million, $7.6 million, $4.9 million and $9.7
million in revenues received from four customers. No other customers
individually accounted for 10 percent or more of revenues.
NOTE 10 -- EMPLOYEE BENEFIT PLAN
Retirement Plan
The Company adopted a 401(k) and savings plan for its employees on January
1, 1995. The plan qualifies under Section 401(k) of the Internal Revenue Code as
a salary reduction plan. Under the plan, but subject to certain limitations
imposed under the Internal Revenue Code, eligible employees are permitted to (a)
defer receipt of up to 15 percent of their compensation on a pre-tax basis
(salary deferral contributions) or (b) contribute up to 10 percent of their
compensation to the plan on an after-tax basis. The plan provides for a Company
matching contribution in an amount equal to 50 percent of a participant's salary
deferral contributions that are not in excess of 6 percent of such participant's
compensation. The plan also permits the Company, in its sole discretion, to make
a contribution that is allocated on the last day of each calendar year to
certain eligible participants. Company matching and discretionary contributions
are vested over a period of five years at the rate of 20 percent per year.
During 1996 and 1995, the Company incurred $62,443 and $37,293,
respectively, in connection with this plan.
Performance Unit Plan
In 1996, Belco adopted a performance unit plan which is a long-term
incentive compensation plan to be administered by the Stock Option Committee of
the Board of Directors. All employees of the Company are eligible to receive an
award of performance units under the plan. A performance unit has a performance
period that is four consecutive calendar years beginning with and including the
calendar year in which the performance unit is granted. The value of a
performance unit will be determined based on the ranking of the Company's return
on Common Stock during an applicable performance period compared to the return
on the shares of Common Stock of certain companies with which the Company
competes; however, the maximum value is $2.00 per unit. While payments with
respect to performance units will normally be made at the end of the four-year
performance period, pro-rated payments may also be made at an earlier time in
the event a participant's employment with the Company is involuntarily
terminated without cause or is terminated by reason of retirement, death or
disability. Payments with respect to performance units will be made in a single
sum and may be made in cash, Common Stock or a combination thereof as the Stock
Option Committee in its sole discretion may determine. During 1996, the Company
granted 250,000 performance units. As of December 31, 1996 the Company has made
no cash payments in connection with this plan.
NOTE 11 -- CAPITAL STOCK
Exchange Agreement and Public Equity Offering
On March 29, 1996, the Exchange Agreement was consummated resulting in the
issuance of 25,000,000 shares to the Predecessor Owners (See Note 1). In
addition, on March 29, 1996, the Company completed its initial public offering
issuing 6,500,000 shares at $19 per share. Net proceeds totaled $113.1 million
after offering costs of $10.4 million.
Stock Incentive Plans
On March 25, 1996, the Company adopted a Stock Incentive Plan (the Plan)
under which options for shares of Belco's Common Stock may be granted to
officers and employees for up to
F-20
<PAGE> 127
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
2,250,000 shares of Common Stock. Under the Plan, options granted may either be
incentive stock options or non-qualified stock options with a maximum term of 10
years and are granted at no less than the fair market of the stock at the date
of grant. Options vest 20% per year until fully vested five years from the date
of grant.
A separate plan has been established under which options for shares of
Belco's Common Stock may be granted to nonemployee directors for up to
approximately 158,000 shares of Common Stock. The plan provides that each
non-employee director be granted stock options for 3,000 shares annually as of
the date of the Annual Meeting. The option price of shares issued is equal to
the fair market value of the stock on the date of grant. All options vest
33 1/3% per year, beginning one year from date of grant, until fully vested and
expire ten years after the date of grant.
A summary of the status of the Company's plans (the Plans) as of December
31, 1996 and the changes during the year then ended is presented below:
<TABLE>
<CAPTION>
NUMBER OF WEIGHTED AVERAGE
OPTIONS EXERCISE PRICE
---------- ----------------
<S> <C> <C>
Outstanding at beginning of year........................ -- $ --
Granted............................................... 409,000 20.91
Exercised............................................. -- --
Forfeited............................................. (8,000) 20.09
Expired............................................... -- --
---------- --------
Outstanding at end of year.............................. 401,000 $20.91
Exercisable at end of year.............................. -- $ --
========== ========
Available for grant at end of year...................... 1,929,700
----------
Weighted average fair value of options granted during
the year.............................................. $ 12.73
----------
</TABLE>
The following table summarizes information about stock options outstanding
at December 31, 1996:
<TABLE>
<CAPTION>
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
-------------------------------------------------- -------------------------------
NUMBER WEIGHTED NUMBER
OUTSTANDING AT AVERAGE WEIGHTED EXERCISABLE AT WEIGHTED
DECEMBER 31, REMAINING AVERAGE DECEMBER 31, AVERAGE
RANGE OF PRICES 1996 CONTRACTUAL LIFE EXERCISE PRICE 1996 EXERCISE PRICE
--------------- -------------- ---------------- -------------- -------------- --------------
<S> <C> <C> <C> <C> <C>
$19.00............... 310,000 9.25 $19.00 -- $ --
$24.06-32.68......... 91,000 9.56 27.40 -- --
------- ------
401,000 9.31 $20.91 -- $ --
======= ======
</TABLE>
As permitted by SFAS No. 123, the Company applies APB Opinion No. 25 and
related Interpretations in accounting for its stock option plans. Accordingly,
no compensation expense has been recognized for the Plans. Had compensation
costs been determined based on the fair value at the grant dates consistent with
the method of SFAS No. 123, the Company's pro forma net income and pro forma
earnings per share would have been reduced to the pro forma amounts indicated
below (in thousands, except for per share amounts):
<TABLE>
<S> <C> <C>
Pro Forma Net Income....................................... As Reported $42,633
Pro Forma $42,117
Pro Forma Earnings Per Share............................... As Reported $ 1.42
Pro Forma $ 1.40
</TABLE>
F-21
<PAGE> 128
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The fair value of grants was estimated on the date of grant using the
Black-Scholes options pricing model with the following weighted average
assumptions used: risk-free interest rate of 6.74 percent, expected volatility
of 31.0 percent, expected lives of 7.5 years and no dividend yield. The pro
forma amounts shown above may not be representative of future results since 1996
was the first year for the Plans.
Under the Stock Incentive Plan, participants may be granted stock without
cost (restricted stock). During 1996, 77,300 shares of restricted stock were
issued under the Plan. The restrictions on disposition lapse 20% each year and
non-vested shares must be forfeited in the event employment ceases. Unearned
compensation was charged for the market value of the restricted shares at the
date the shares were issued. The unearned compensation is shown as a reduction
of stockholders' equity in the accompanying consolidated balance sheet and is
being amortized ratably as the restrictions lapse. During 1996, $227,000 was
charged to expense relating to the Plan.
NOTE 12 -- SUPPLEMENTAL QUARTERLY FINANCIAL DATA (IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS):
<TABLE>
<CAPTION>
QUARTERS
----------------------------------------
FIRST SECOND THIRD FOURTH
------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C>
1995
Revenues......................................... $15,701 $19,456 $20,728 $22,715
======= ======= ======= =======
Costs and Expenses............................... $ 7,070 $ 8,910 $ 9,015 $11,016
======= ======= ======= =======
Pro Forma Net Income............................. $ 5,783 $ 7,066 $ 7,848 $ 8,040
======= ======= ======= =======
Pro Forma Net Income Per Share................... $ 0.23 $ 0.28 $ 0.31 $ 0.33
======= ======= ======= =======
1996
Revenues......................................... $28,610 $31,555 $28,027 $28,204
======= ======= ======= =======
Costs and Expenses............................... $12,118 $12,837 $13,206 $13,649
======= ======= ======= =======
Pro Forma Net Income............................. $11,066 $12,354 $ 9,782 $ 9,431
======= ======= ======= =======
Pro Forma Net Income Per Share................... $ 0.44 $ 0.39 $ 0.31 $ 0.30
======= ======= ======= =======
</TABLE>
The sum of the individual quarterly pro forma net income per share amounts
may not agree with year-to-date pro forma net income per share as each period's
computation is based on the weighted average number of common shares outstanding
during that period.
F-22
<PAGE> 129
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 13 -- SUPPLEMENTAL INFORMATION ON OIL AND GAS EXPLORATION AND PRODUCING
ACTIVITIES (UNAUDITED):
Capitalized Costs
The following table sets forth the capitalized costs and related
accumulated depreciation, depletion and amortization relating to the Company's
oil and gas production, exploration and development activities as of December
31, 1996 and 1995 (in thousands):
<TABLE>
<CAPTION>
1995 1996
-------- --------
<S> <C> <C>
Proved properties........................................... $152,081 $237,150
Unproved properties......................................... 19,927 77,570
-------- --------
Total capitalized costs..................................... 172,008 314,720
Less -- Accumulated depreciation, depletion and
amortization.............................................. (45,771) (86,490)
-------- --------
Net capitalized costs....................................... $126,237 $228,230
======== ========
</TABLE>
Costs Not Being Amortized
The following table sets forth a summary of unproved oil and gas property
costs not being amortized at December 31, 1996, by the year in which such costs
were incurred (in thousands):
<TABLE>
<CAPTION>
1993 1994 1995 1996 TOTAL
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Leasehold and seismic............... $1,426 $8,085 $10,491 $57,568 $77,570
------ ------ ------- ------- -------
</TABLE>
Costs Incurred
The following table sets forth the costs incurred in oil and gas
acquisition, exploration and development activities as of December 31, 1996,
1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Property acquisitions costs --
Proved........................................... $ -- $ -- $ 9,871
Unproved......................................... 10,916 13,643 64,530
Exploration costs.................................. 1,727 2,382 17,444
Development costs.................................. 39,587 54,451 50,433
Capitalized interest............................... -- 911 434
------- ------- --------
Total costs incurred............................. $52,230 $71,387 $142,712
======= ======= ========
</TABLE>
F-23
<PAGE> 130
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Results of Operations for Oil and Gas Producing Activities
The following table sets forth revenue and direct cost information relating
to the Company's oil and gas exploration and production activities as of
December 31, 1996, 1995 and 1994 (in thousands):
<TABLE>
<CAPTION>
1994 1995 1996
------- ------- --------
<S> <C> <C> <C>
Oil and gas revenues (including commodity price
risk management activities)...................... $40,912 $78,247 $113,743
Costs and expenses --
Lease operating expenses......................... 3,431 4,136 7,024
Production taxes................................. 2,079 1,688 823
Depreciation, depletion and amortization......... 14,072 27,590 40,904
------- ------- --------
Results of operations from producing activities
before income taxes.............................. 21,330 44,833 64,992
Pro forma provision for income taxes............... 5,756 14,638 22,095
Pro forma results of operations from producing
activities....................................... $15,574 $30,195 $ 42,897
======= ======= ========
Amortization rate per Mcf equivalent, recurring.... $ .65 $ .64 $ .73
======= ======= ========
</TABLE>
Oil and Gas Reserve Information
The following summarizes the policies used by the Company in preparing the
accompanying oil and gas reserves and the changes in such standardized measure
of discounted future net cash flows relating to proved oil and gas reserves and
the changes in such standardized measure from period to period.
Proved reserves are estimated quantities of crude oil and natural gas 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 developed reserves are proved reserves that can
reasonably be expected to be recovered through existing wells with existing
equipment and operating methods.
Proved oil and gas reserve quantities and the related discounted future net
cash flows (without giving effect to hedging activities) as of December 31, 1996
and 1995 are based on estimates prepared by Miller & Lents, independent
petroleum engineers. Such estimates have been prepared in accordance with
guidelines established by the Securities and Exchange Commission (SEC). Reserve
estimates for periods prior to December 31, 1995 were not prepared by an
independent petroleum engineer. While reserve reports for years ended prior to
December 31, 1995 were not prepared contemporaneously, they have been prepared
by an in-house engineer on a basis generally consistent with the Miller & Lents
report. The Company used the December 31, 1995 Miller & Lents estimates as an
initial basis and adjusted such data for actual production and extensions,
discoveries and other additions in 1994 to determine the relevant data for each
of these periods. The Company also calculated the reserve economics at the end
of 1994 using oil and gas prices in effect as of the end of the year.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting future rates of production and timing of
development expenditures, including many factors beyond the control of the
Company. The reserve data set forth herein represent only estimates. Reserve
engineering is a subjective process of estimating underground accumulations of
oil and gas that cannot be measured in an exact way, and the accuracy of any
reserve estimate is a function of the quality of available data and of
engineering and geological interpretation and judgment. As a result, estimates
made by different engineers often vary. In addition, results of drilling,
testing and production subsequent to the date of an estimate may justify
revision of such estimates, and such revisions may be material.
F-24
<PAGE> 131
BELCO OIL & GAS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Accordingly, reserve estimates are often different from the quantities of oil
and gas that are ultimately recovered.
The standardized measure of discounted future net cash flows from
production of proved reserves was developed by first estimating the quantities
of proved reserves and the future periods during which they are expected to be
produced based on year-end economic conditions. The estimated future cash flows
from proved reserves were then determined based on year-end prices, except in
those instances where fixed contracts provide for a higher or lower amount.
Estimates of future cash flows applicable to oil and gas commodity hedges have
been prepared by the Company and are reflected in future cash flows from proved
reserves with such estimates based on prices in effect as of the date of the
reserve report. Additionally, future cash flows were reduced by estimated
production costs, costs to develop and produce the proved reserves, and when
significant, certain abandonment costs, all based on year-end economic
conditions. Future net cash flows have been discounted by 10 percent in
accordance with SEC guidelines.
The standardized measure of discounted future net cash flows does not
purport, nor should it be interpreted, to present the fair value of the
Company's oil and gas reserves. An estimate of fair value would also take into
account, among other things, the recovery of reserves not presently classified
as proved, anticipated future changes in prices and costs and a discount factor
more representative of the time value of money and the risks inherent in reserve
estimates.
Under SEC rules, companies that follow full-cost accounting methods are
required to make quarterly "ceiling test" calculations. Under this test, proved
oil and gas property costs may not exceed the present value of estimated future
net revenues from proved reserves, discounted at 10 percent, as adjusted for
related tax effects and deferred tax reserves. Application of these rules during
periods of relatively low oil and gas prices, even if of short-term duration,
may result in write-downs.
F-25
<PAGE> 132
BELCO OIL & GAS CORP.
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
RELATING TO PROVED OIL AND GAS RESERVES
(IN THOUSANDS)
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------------
1994 1995 1996
-------- -------- ----------
<S> <C> <C> <C>
Future cash inflows(2)................................. $244,782 $427,213 $1,071,550
Future production costs................................ (55,364) (96,643) (253,159)
Future development costs............................... (8,655) (36,003) (71,061)
Future net inflows before income taxes(2).............. 180,763 294,567 747,330
Discount at 10% annual rate............................ (70,978) (88,058) (331,800)
-------- -------- ----------
Discounted future net cash flows before income
taxes............................................. 109,785 206,509 415,530
Pro forma discounted future income taxes(1)............ (29,000) (58,000) (134,957)
-------- -------- ----------
Standardized measure of discounted future net cash
flows................................................ $ 80,785 $148,509 $ 280,573
======== ======== ==========
</TABLE>
- ---------------
(1) The earnings of the Company were not subject to corporate income taxes prior
to March 29, 1996 as the Company was a combination of nontaxpaying entities.
Concurrent with the Exchange Agreement (see Note 1), the Company became a
taxable corporation. The estimated pro forma income taxes as of December 31,
1995 and 1994, discounted at 10%, have been presented assuming the Company
was a taxable entity for all periods.
(2) Oil and gas commodity hedges included in future cash inflows totaled ($60.8)
million, $7.6 million and $14.0 million at December 31, 1996, 1995 and 1994,
respectively, and such hedges included in discounted future net cash flows
before income taxes totaled ($55.2) million, $7.2 million and $12.4 million
at December 31, 1996, 1995 and 1994, respectively.
F-26
<PAGE> 133
BELCO OIL & GAS CORP.
CHANGES IN STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
1994 1995 1996
-------- -------- ---------
<S> <C> <C> <C>
Balance, Beginning of year............................. $ 61,108 $ 80,785 $ 148,509
Sales and transfers of oil and gas produced, net of
production costs..................................... (35,402) (72,423) (111,780)
Net change in sales price and production costs......... (11,205) 11,390 145,133
Extensions and discoveries............................. 38,812 104,549 153,920
Purchases of minerals in place......................... -- -- 7,843
Changes in estimated future development costs.......... 835 8,655 24,618
Revisions in quantities................................ -- -- 50,309
Accretion of discount.................................. 8,511 10,979 20,651
Other, principally revisions in estimates of timing of
production........................................... 23,126 33,574 (81,673)
Change in income taxes................................. (5,000) (29,000) (76,957)
-------- -------- ---------
Balance, End of year................................... $ 80,785 $148,509 $ 280,573
======== ======== =========
</TABLE>
F-27
<PAGE> 134
BELCO OIL & GAS CORP.
RESERVE QUANTITY INFORMATION
PROVED RESERVES
<TABLE>
<CAPTION>
(MBBLS) (MMCF)
------- -------
OIL GAS
<S> <C> <C>
Balance at December 31, 1993................................ 963 86,854
Purchases of minerals in place............................ -- --
Extensions, discoveries and other additions............... 1,657 45,283
Revisions of previous estimates........................... -- --
Sales of minerals in place................................ -- --
Production................................................ (691) (17,482)
Balance at December 31, 1994................................ 1,929 114,655
Purchases of minerals in place............................ -- --
Extensions, discoveries and other additions............... 1,484 126,562
Revisions of previous estimates........................... -- --
Sales of minerals in place................................ -- --
Production................................................ (961) (37,047)
Balance at December 31, 1995................................ 2,452 204,170
Purchases of minerals in place............................ 162 21,993
Extensions, discoveries and other additions............... 1,411 87,319
Revisions of previous estimates........................... 96 22,799
Sales of minerals in place................................ -- --
Production................................................ (794) (51,289)
Balance at December 31, 1996................................ 3,327 284,992
PROVED DEVELOPED RESERVES
December 31, 1993........................................... 938 86,223
December 31, 1994........................................... 1,793 100,113
December 31, 1995........................................... 1,838 140,725
December 31, 1996........................................... 2,070 184,904
----- -------
</TABLE>
NOTE 14 -- EVENTS (UNAUDITED) SUBSEQUENT TO DATE OF AUDITORS' REPORT
The Company is currently offering $150,000,00 of senior subordinated notes
due 2007. 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.
In June 1997 the Company purchased 2,940,000 shares of common stock of
Hugoton Energy Corporation (Hugoton) at $10.50 per share or a total investment
of $30.9 million. The Company's offer to purchase the remaining shares of
Hugoton was subsequently withdrawn. This investment is presently carried at cost
on the Company's Balance Sheet.
F-28
<PAGE> 135
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Nevada Private Corporation Law ("NPCL") provides that a corporation may
indemnify any person who was or is a party or is threatened to be made a party,
by reason of the fact that such person was an officer of director of such
corporation, or is or was serving at the request of such corporation as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise, to (x) any action or suit by or in the right
of the corporation against expenses, including amounts paid in settlement and
attorneys' fees, actually and reasonably incurred, in connection with the
defense or settlement believed to be in, or not opposed to, the best interests
of the corporation, except that indemnification may not be made for any claim,
issue or matter as to which such a person has been adjudged by a court of
competent jurisdiction to be liable to the corporation or for amounts paid in
settlement to the corporation and (y) any other action or suit or proceeding
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement, actually and reasonably incurred, if he or she acted in good
faith and in a manner which he or she reasonably believed to be in, or not
opposed to, reasonable cause to believe his or her conduct was unlawful. To the
extent that a director, officer, employee or agent has been "successful on the
merits or otherwise" the corporation must indemnify such person. The articles of
incorporation or bylaws may provide that the expenses of officers and directors
incurred in defending any such action must be paid as incurred and in advance of
the final disposition of such action. The NPCL also permits the Registrant to
purchase and maintain insurance on behalf of the Registrant's directors and
officers against any liability arising out of their status as such, whether or
not Registrant would have the power to indemnify him or her against such
liability. These provisions may be sufficiently broad to indemnify such persons
for liabilities arising under the Securities Act.
The Company's Articles and Bylaws provide that the Company shall, to the
fullest extent not prohibited by applicable law, indemnify any director or
officer of the Company in connection with certain actions, suits or proceedings,
against expenses, including attorneys' fees, judgments, fines and amounts paid
in settlement actually and reasonably incurred. The Company is also required to
pay any expenses incurred by a director or officer in defending such an action,
in advance of the final disposition of such action. The Company's Articles and
Bylaws further provide that, by resolution of the Board of Directors, such
benefits may be extended to employees, agents or other representatives of the
Company. In addition, the Company's Articles and Bylaws provide that all rights
to indemnification and advancement of expenses are deemed to arise out of a
contract between the Company and each person to be indemnified which may be
evidenced by a separate contract between the Company and each such person.
The Company has entered into indemnity agreements with each of its
directors and executive officers. Under each indemnity agreement, the Company
will pay on behalf of the Indemnitee, and his executors, administrators and
heirs, any amount which he is or becomes legally obligated to pay because of (i)
any claim or claims from time to time threatened or made against him by any
person because of any act or omission or neglect or breach of duty, including
any actual or alleged error or misstatement or misleading statement, which he
commits or suffers while acting in his capacity as a director and/or officer of
the Company or an affiliate or (ii) being a party, or being threatened to be
made a party, to any threatened, pending or contemplated action, suit or
proceeding, whether civil, criminal, administrative or investigative, by reason
of the fact the he is or was an officer, director, employee or agent of the
Company or an affiliate or is or was serving at the request of the Company as a
director, officer, employee or agent of another corporation, partnership, joint
venture, trust or other enterprise. The payment which the Company will be
obligated to make hereunder shall include, inter alia, damages, charges,
judgments, fines, penalties, settlements and costs, cost of investigation and
cost of defense of legal, equitable or criminal actions, claims or proceedings
and appeals therefrom, and costs of attachment, supersedes,
II-1
<PAGE> 136
bail, surety or other bonds. The Company also provides liability insurance for
each of its directors and executive officers.
The Registrant has authority under the NPCL to indemnify its officers,
directors, employees and agents to the extent provided in such statute. Sections
4.16 and 4.17 of the Registrant's Bylaws, referenced as Exhibit 3.2 hereto,
provide for indemnification of the Registrant's officers, directors, employees
and agents.
The NPCL provides that a corporation's articles of incorporation may
contain a provision which eliminates or limits the personal liability of a
director or officer to the corporation or its stockholders for damages for
breach of fiduciary duty as a director or officer, provided that such a
provision must not eliminate or limit the liability of a director or officer
for: (a) acts or omissions which involve intentional misconduct, fraud or a
knowing violation of law; or (b) the payment of illegal distributions. The
Company's Articles include a provision eliminating the personal liability of
directors for breach of fiduciary duty except that such provision will not
eliminate or limit any liability which may not be so eliminated or limited under
applicable law.
Section 4.18 of the Registrant's Bylaws provides that the Registrant may
maintain insurance, at its expense, to protect itself and any of its directors,
officers, employees or agents or any person serving at the request of the
Registrant as a director, officer, employee or agent of another corporation,
partnership, joint venture, trust or other enterprise, against any expense,
liability or loss, whether or not the Registrant would have the power to
indemnify such person against such expense, liability or loss under the NPCL.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers of persons controlling the Registrant
pursuant to the foregoing provisions, the Registrant has been informed that in
the opinion of the Securities and Exchange Commission such indemnification is
against public policy as expressed in the Securities Act and is therefore
unenforceable.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
The following instruments and documents have been previously filed as
Exhibits to this Registration Statement. Exhibits incorporated by reference are
so indicated by parenthetical information.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<C> <S>
3.1 -- Articles of Incorporation of the Company (Incorporated by
reference to Exhibit 3.1 to the Company's Registration
Statement on Form S-1 (File No. 333-1034))
3.2 -- By-Laws of the Company (Incorporated by reference to
Exhibit 3.2 to the Company's Registration Statement on
Form S-1 (File No. 333-1034))
4.1 -- Indenture dated as of September 23, 1997 among the
Company, as issuer, and The Bank of New York, as trustee
4.2 -- Exchange and Registration Rights Agreement dated
September 23, 1997 by and among the Company and Chase
Securities Inc., Goldman, Sachs & Co. and Smith Barney
Inc.
5.1 -- Opinion of Vinson & Elkins L.L.P.
10.1 -- Credit Agreement dated as of September 23, 1997 by and
among Belco Oil & Gas Corp. and The Chase Manhattan Bank,
as administrative agent, and certain financial
institutions named therein as Lenders.
11.1 -- Computation of earnings per share.
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Miller and Lents Ltd.
23.3 -- Consent of Vinson & Elkins L.L.P. (included in Exhibit
5.1)
24.1 -- Power of Attorney (included on the signature pages of
this Registration Statement)
25.1 -- Statement of Eligibility of The Bank of New York
99.1 -- Form of Letter of Transmittal
</TABLE>
II-2
<PAGE> 137
(b) Consolidated Financial Statement Schedules.
All schedules are omitted because they are not applicable or the required
information has been provided in the consolidated financial statements or the
notes thereto.
ITEM 22. UNDERTAKINGS.
The Company hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of
1933, each filing of the registrant's annual report pursuant to Section 13(a) or
Section 15(d) of the Securities Exchange Act of 1934 (and, where applicable,
each filing of an employee benefit plan's annual report pursuant to Section
15(d) of the Securities Exchange Act of 1934) that is incorporated by reference
in the registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(2) Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers and controlling persons of
the registrant pursuant to the foregoing provisions, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission, such indemnification is against public policy as expressed in the
Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(3) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
registration statement through the date of responding to the request.
(4) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the registration statement when it became
effective.
II-3
<PAGE> 138
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Amendment No. 1 to the Registration Statement to be signed
on its behalf by the undersigned, thereunto duly authorized, in the City of New
York, the State of New York on October 9, 1997.
BELCO OIL & GAS CORP.
By: /s/ ROBERT A. BELFER
------------------------------------
Robert A. Belfer
Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Amendment No. 1 to the Registration Statement has been signed below by the
following persons in the capacities and on the dates indicated.
<TABLE>
<CAPTION>
NAME TITLE DATE
---- ----- ----
<C> <S> <C>
/s/ ROBERT A. BELFER Chairman of the Board and Chief October 9, 1997
- ----------------------------------------------------- Executive Officer (Principal
Robert A. Belfer Executive Officer)
/s/ LAURENCE D. BELFER Director, President and Chief October 9, 1997
- ----------------------------------------------------- Operating Officer
Laurence D. Belfer
/s/ DOMINICK J. GOLIO Vice President -- Finance and Chief October 9, 1997
- ----------------------------------------------------- Financial Officer (Principal
Dominick J. Golio Financial and Accounting Officer)
* Director October 9, 1997
- -----------------------------------------------------
Graham Allison
* Director October 9, 1997
- -----------------------------------------------------
Daniel C. Arnold
* Director October 9, 1997
- -----------------------------------------------------
Alan D. Berlin
* Director October 9, 1997
- -----------------------------------------------------
Jack Saltz
* Director October 9, 1997
- -----------------------------------------------------
Georgiana Sheldon-Sharp
*By: /s/ ROBERT A. BELFER
------------------------------------------------
Robert A. Belfer, as attorney-in-fact
</TABLE>
II-4
