<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON MARCH 5, 1997
REGISTRATION STATEMENT NO. 333-22189
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------------
AMENDMENT NO. 1
TO
FORM S-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
HUGOTON ENERGY CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
KANSAS 48-1036256
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
</TABLE>
301 NORTH MAIN, SUITE 1900
WICHITA, KANSAS 67202
(316) 262-1522
(Address, including zip code, and telephone number, including
area code, of registrant's principal executive offices)
---------------------
FLOYD C. WILSON
CHAIRMAN OF THE BOARD, PRESIDENT
AND CHIEF EXECUTIVE OFFICER
HUGOTON ENERGY CORPORATION
301 NORTH MAIN, SUITE 1900
WICHITA, KANSAS 67202
(316) 262-1522
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
Copies to:
<TABLE>
<S> <C>
ROBERT H. WHILDEN, JR. R. JOEL SWANSON
VINSON & ELKINS L.L.P. BAKER & BOTTS, L.L.P.
2300 FIRST CITY TOWER ONE SHELL PLAZA
1001 FANNIN 910 LOUISIANA STREET
HOUSTON, TEXAS 77002 HOUSTON, TEXAS 77002
(713) 758-2222 (713) 229-1234
</TABLE>
---------------------
Approximate date of commencement of proposed sale to the public: AS SOON AS
PRACTICABLE AFTER THE EFFECTIVE DATE OF THIS REGISTRATION STATEMENT.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]
If the registrant elects to deliver its latest annual report to security
holders, or a complete and legible facsimile thereof, pursuant to Item 11(a)(1)
of this Form, check the following box: [ ]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
---------------------
THE REGISTRANT HEREBY AMENDS THE 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 SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
================================================================================
<PAGE> 2
INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
OF ANY SUCH STATE.
SUBJECT TO COMPLETION
MARCH 5, 1997
PROSPECTUS
6,000,000 SHARES
[HUGOTON LOGO] HUGOTON ENERGY CORPORATION
COMMON STOCK
(NO PAR VALUE)
Of the shares of Common Stock, no par value (the "Common Stock"), being offered
(the "Shares"), 1,500,000 Shares are being sold by Hugoton Energy Corporation
("Hugoton" or the "Company") and 4,500,000 Shares are being sold by the Selling
Stockholders. See "Principal and Selling Stockholders." The Company will not
receive any of the proceeds from the sale of shares by the Selling Stockholders.
The Common Stock is quoted on the Nasdaq National Market ("Nasdaq/NMS") under
the symbol "HUGO." On March 4, 1997, the last reported sale price of the Common
Stock on the Nasdaq/NMS was $11.00 per share. See "Price Range of Common Stock."
PROSPECTIVE PURCHASERS OF THE SHARES OF COMMON STOCK SHOULD CAREFULLY CONSIDER
THE MATTERS SET FORTH BEGINNING ON PAGE 8 UNDER THE CAPTION "RISK FACTORS."
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
PROCEEDS TO
PRICE TO UNDERWRITING PROCEEDS TO SELLING
PUBLIC DISCOUNT COMPANY(1) STOCKHOLDERS
<S> <C> <C> <C> <C>
Per Share......................... $ $ $ $
Total(2).......................... $ $ $ $
</TABLE>
- --------------------------------------------------------------------------------
(1) Before deducting estimated expenses payable by the Company, estimated at
$ .
(2) The Company and a Selling Stockholder have granted the Underwriters 30-day
options to purchase up to 900,000 additional shares of Common Stock on the
same terms per share solely to cover over-allotments, if any. If such
options are exercised in full, the total Price to Public, Underwriting
Discount, Proceeds to Company and Proceeds to Selling Stockholders will be
$ , $ , $ and $ , respectively. See
"Underwriting."
The Shares are offered subject to receipt and acceptance by the Underwriters, to
prior sale and to the Underwriters' right to reject any order in whole or in
part and to withdraw, cancel or modify the offer without notice. It is expected
that delivery of the Shares will be made at the office of Salomon Brothers Inc,
Seven World Trade Center, New York, New York, or through the facilities of The
Depository Trust Company, on or about , 1997.
SALOMON BROTHERS INC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
JEFFERIES & COMPANY, INC.
The date of this Prospectus is , 1997.
<PAGE> 3
[MAPS TO COME]
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN, OR OTHERWISE AFFECT THE PRICE OF THE COMMON STOCK,
INCLUDING PURCHASES OF THE COMMON STOCK TO COVER SOME OR ALL OF A SHORT POSITION
IN THE COMMON STOCK MAINTAINED BY THE UNDERWRITERS AND THE IMPOSITION OF PENALTY
BIDS. FOR A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."
IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS (IF ANY) OR THEIR RESPECTIVE AFFILIATES MAY ENGAGE IN PASSIVE MARKET
MAKING TRANSACTIONS IN THE COMMON STOCK ON THE NASDAQ/NMS IN ACCORDANCE WITH
RULE 103 OF REGULATION M. SEE "UNDERWRITING."
2
<PAGE> 4
PROSPECTUS SUMMARY
This summary is qualified in its entirety by the more detailed information
and consolidated financial statements (including the notes thereto) appearing
elsewhere in this Prospectus and in the documents incorporated herein by
reference. As used herein, the "Company" or "Hugoton" means Hugoton Energy
Corporation and its consolidated subsidiaries unless the context requires
otherwise. Unless otherwise indicated, the information in this Prospectus
assumes that the Underwriters' over-allotment options will not be exercised. See
"Certain Definitions" for definitions of certain oil and gas industry terms used
in this Prospectus.
THE COMPANY
Hugoton Energy Corporation is a rapidly growing independent oil and natural
gas company engaged in the exploration for and the development, exploitation,
production and acquisition of oil and natural gas reserves and properties. The
Company has historically been one of the most active independent operators in
the Hugoton Field and has expanded its operations throughout the Mid-Continent
area in Kansas, Oklahoma and Texas, and into the Permian Basin in West Texas and
New Mexico, the Austin Chalk Trend of Texas and Louisiana and the Williston
Basin in Montana and North Dakota. The Company intends to expand its reserve
base by continuing its drilling and acquisition activities primarily in its four
core areas. The Company focuses on exploring and developing properties that it
believes possess significant upside potential, which can be realized through the
application of 3-D seismic technology and traditional geologic studies, as well
as advanced drilling and completion techniques.
The Company has increased its proved reserves from 22 Bcfe at December 31,
1991 to 322 Bcfe at December 31, 1996. The proved reserves are 70% natural gas
and are 77% proved developed producing, with a reserve-to-production ratio of 11
years, based on 1996 production. The Company operates 1,625 wells, representing
87% of its reserves. During the five years ended December 31, 1996, the Company
added proved reserves equal to 500% of production at an average cost of $.66 per
Mcfe. The Company's average net daily production has increased from 2.6 MMcfe
during 1991 to 79.8 MMcfe during 1996. In addition, the Company increased its
EBITDAX from $1.7 million in 1992 to $38.7 million in 1996.
The Company's rapid growth is a result of its aggressive drilling and
acquisition programs. During the last five years, the Company has drilled a
total of 242 wells and completed 176 of them for a success ratio of 73%. This
drilling program has added approximately 106 Bcfe of proved reserves, or 141% of
production, at an average cost of $.37 per Mcfe.
During the five year period ended December 31, 1996, the Company's
acquisitions added over 270 Bcfe to proved reserves, or 359% of production, at
an average cost of $.78 per Mcfe. The Company focuses on potential acquisitions
within its core areas, but also considers selected opportunities in new areas.
The Company's strategy is to acquire producing properties with operational
control in oil and natural gas basins that offer significant exploitation,
development and exploratory prospects. The Company's most significant
acquisitions have been the purchase of two oil and natural gas partnerships
owned by The Prudential Insurance Company of America ("Prudential") in 1993 and
the purchase of Consolidated Oil & Gas, Inc. ("COG") in 1995.
The Company has accumulated an acreage position of approximately 567,000
net acres, including 165,000 net acres that were added during 1996. These
acreage holdings are located in the Company's four core areas and have
exploration and development opportunities with multiple pay horizons. The
Company believes that it has sufficient drilling prospects in its current
acreage inventory to allow it to continue its drilling program through 1999, and
it intends to continue to add acreage to its holdings. The Company's 1997
capital budget is $75 million, an increase of 70% over 1996 capital
expenditures, and includes $50 million for the drilling of approximately 200
wells, $10 million for 3-D seismic and land costs and $15 million for small
strategic acquisitions. In its 1997 drilling budget, the Company has assembled
prospects with a wide range of risk profiles, with approximately 60% of the
budget to be spent for
3
<PAGE> 5
relatively lower risk development drilling, and approximately 40% for
exploratory drilling. The drilling budget will be expended 30% in the Hugoton
Producing Area and other fields in the Mid-Continent area, 30% in the Permian
Basin, 20% in the Austin Chalk Trend, and 20% in the Williston Basin.
BUSINESS STRATEGY AND CORE AREAS OF OPERATIONS
The Company plans to continue to increase its reserves, production, cash
flow and earnings through: (a) the aggressive development and exploration of its
existing properties, (b) the utilization of advanced exploration and development
techniques, including 3-D seismic and horizontal drilling, to maximize drilling
success and minimize costs, (c) control of operations through the ownership of
majority working interests in a significant number of its properties to minimize
the cost of production and to direct the development of its extensive acreage
position, (d) the acquisition of producing properties and undeveloped acreage in
its core areas which are believed to have significant development and
exploration potential and (e) the preservation of a strong financial position
that affords the Company financing flexibility in the execution of its strategy.
Set forth below is a description of the Company's four core operating
areas:
Hugoton Producing Area and Other Mid-Continent Properties
The Company has assembled a substantial acreage position of over 330,000
net acres in these areas that offers a significant number of drilling
opportunities. The producing properties located in this region contribute
approximately 70% of the Company's current production. The Company has budgeted
$15 million for the drilling of up to 114 wells in these areas in 1997.
The Company currently has over 170 square miles of 3-D seismic data in the
Hugoton Producing Area, and plans to shoot an additional 100 square miles during
1997. The Company plans to drill approximately 50 new wells during each of the
next three years based on this data. Hugoton is participating in a joint
exploration and development agreement with Oxy U.S.A. covering deep rights on a
180,500 acre block underlying the Hugoton Field. Since June 1996, the Company
has drilled 22 wells in this exploration play, 20 of which were successful. Of
these 20 wells, 13 are currently on production at a cumulative gross rate of
approximately 2,200 Bbls of oil and 10 MMcf of natural gas per day, exceeding
expectations based on the historical performance of other wells in the area. The
Company's drilling success and production rates have been significantly improved
as a result of the application of 3-D seismic technology.
In Northwest Oklahoma, the Company is currently downspacing from 640 acres
to 160 acres per well to fully develop selected leases and the Company plans to
drill over 120 infill wells during the next three years, which will also explore
additional formations. In the Dalhart Basin of West Texas, the Company is
evaluating 3-D seismic data and intends to obtain additional seismic data in
1997 to identify drilling locations.
Permian Basin
The Company owns an interest in 39,000 net acres in the Permian Basin,
which is located in the southwestern portion of Texas extending into
southeastern New Mexico. The Company acquired its initial Permian Basin reserves
and leases through its acquisition of COG in 1995. These properties are
currently developed on 160-acre spacing, however, adjacent leases have shown
development potential for increased production rates and additional reserves on
80-acre spacing. The Company is currently downspacing these properties to
80-acre spacing in the Spraberry Trend formation. Hugoton has identified over
100 development locations to be drilled over the next three years, and expects
to drill deeper to evaluate untested horizons, including structural features in
the Silurian Fusselman formation. The Company has budgeted $15 million for the
drilling of up to 63 wells during 1997 in this Basin.
4
<PAGE> 6
Austin Chalk Trend
During 1996, the Company acquired a 25% interest in eight producing gas
wells in the downdip portion of the Austin Chalk Trend in Texas and a 50%
interest in approximately 42,000 undeveloped acres in this Trend. These
acquisitions targeted specific tracts where geological and geophysical studies
indicated the existence of the Austin Chalk formation. Additionally, the Company
acquired a 50% interest in 100,000 acres in three distinct prospect areas in the
Louisiana portion of the Trend. During 1996, the Company drilled and completed
its first five horizontal Austin Chalk wells in Texas, all of which were
commercially productive. The Company has budgeted $10 million to drill eight
horizontal Austin Chalk wells during 1997, including six in Texas and two in
Louisiana.
Williston Basin
The Company acquired producing properties in the Williston Basin of Montana
and North Dakota with the acquisition of COG in September 1995. These properties
are predominantly oil producing and account for approximately 20% of the
Company's current production. During 1996, the Company began aggressive 3-D
seismic and acreage acquisition programs targeting multi-pay structures. The
Company added 95,000 net undeveloped acres in areas with previously identified
Red River formation closures, which were known to contain reservoir quality
rocks with hydrocarbons present. The Company has identified 28 specific drilling
prospects along the northwestern flank of the Basin and has initiated 3-D
seismic work that covers approximately 90 square miles for the first 10 wells.
The initial well is scheduled to be drilled during the second quarter of 1997
with an additional nine wells to be drilled during the rest of the year. The
Company has budgeted $10 million for drilling in this area during 1997.
THE OFFERING
<TABLE>
<S> <C>
Common Stock offered by:
The Company................................ 1,500,000 shares
Selling Stockholders....................... 4,500,000 shares
Common Stock to be outstanding after the
Offering................................... 21,202,036 shares*
Use of Proceeds by the Company............... To repay a portion of bank indebtedness incurred in
connection with acquisitions. See "Use of Proceeds."
Nasdaq/NMS Symbol............................ HUGO
</TABLE>
- ---------------
* Based on the number of shares of Common Stock outstanding at December 31,
1996. Does not include a total of 1,222,687 shares issuable upon exercise of
outstanding stock options. See "Description of Capital Stock."
---------------------
The Company is incorporated in the State of Kansas, its principal executive
offices are located at 301 North Main, Suite 1900, Wichita, Kansas 67202 and its
telephone number is (316) 262-1522.
5
<PAGE> 7
SUMMARY FINANCIAL DATA
The following table presents summary financial information of the Company
for the periods indicated and should be read in conjunction with the Company's
consolidated financial statements and the notes thereto included elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Significant acquisitions of producing oil and gas
properties affect the comparability of the financial data for the periods
presented below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and gas.......................... $ 66,292 $ 35,906 $ 23,696 $17,349 $ 6,731
Gas plant............................ 1,914 1,638 1,945 1,172 2,177
Other(1)............................. 10 (3,315) (11) 16 547
-------- -------- -------- ------- -------
Total revenues............... 68,216 34,229 25,630 18,537 9,455
-------- -------- -------- ------- -------
Expenses:
Production........................... 21,667 11,570 7,528 7,178 4,671
Gas plant............................ 1,420 978 1,189 934 1,320
Exploration.......................... 1,711 2,239 3,036 587 137
General and administrative........... 6,872 4,346 3,117 1,883 1,761
Compensatory stock option
expense(2)........................ -- -- -- 3,289 --
Depreciation, depletion and
amortization...................... 23,423 15,234 8,677 5,582 1,452
-------- -------- -------- ------- -------
Total expenses............... 55,093 34,367 23,547 19,453 9,341
-------- -------- -------- ------- -------
Operating income (loss)................ 13,123 (138) 2,083 (916) 114
Other income (expenses):
Interest............................. (6,070) (5,108) (3,077) (2,371) (502)
Other................................ 466 319 252 199 44
-------- -------- -------- ------- -------
Total other income
(expense).................. (5,604) (4,789) (2,825) (2,172) (458)
-------- -------- -------- ------- -------
Income (loss) before income taxes and
extraordinary item................... 7,519 (4,927) (742) (3,088) (344)
(Provision) benefit for income taxes... (3,316) 1,394 66 582 (86)
-------- -------- -------- ------- -------
Income (loss) before extraordinary
item................................. 4,203 (3,533) (676) (2,506) (430)
Extraordinary item-loss from early
extinguishment of debt, net of tax... -- (136) -- -- --
-------- -------- -------- ------- -------
Net income (loss)............ $ 4,203 $ (3,669) $ (676) $(2,506) $ (430)
======== ======== ======== ======= =======
Net income (loss) per common
share...................... $ 0.21 $ (0.27) $ (0.07) $ (0.41) $ (0.09)
======== ======== ======== ======= =======
Weighted average number of common
shares outstanding................... 19,698 13,460 10,310 6,071 5,000
OTHER DATA:
Net cash provided by operating
activities........................... $ 29,484 $ 11,367 $ 10,431 $ 5,931 $ 1,928
Net cash (used) in investing
activities........................... (36,706) (36,869) (39,116) (78,765) (3,685)
Net cash provided by financing
activities........................... 7,040 27,750 28,683 73,755 1,865
EBITDAX(3)............................. 38,723 17,654 14,048 5,452 1,747
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit).............. $ 8,545 $ 6,083 $ 11,551 $ 1,732 $(2,234)
Property and equipment, net............ 232,778 217,635 96,436 78,842 12,342
Total assets........................... 251,929 234,655 116,634 88,329 16,309
Long-term debt......................... 95,000 88,000 60,000 62,500 9,062
Shareholders' equity................... 131,527 127,324 50,225 19,995 1,184
</TABLE>
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(1) The year ended December 31, 1995 includes a charge of $2.7 million relating
to the Company's natural gas hedging activities resulting from a loss of
basis correlation for certain contracts (see Note 11 of Company's Notes to
the Consolidated Financial Statements).
(2) Reflects a non-cash charge for compensatory stock options granted to certain
employees that have been or will be satisfied by the Company's Chairman of
the Board, President and Chief Executive Officer.
(3) EBITDAX represents income before depreciation, depletion, amortization,
exploration expense, interest expense, income taxes and extraordinary item.
EBITDAX is a financial measure commonly used in the Company's industry and
should not be considered in isolation or as a substitute for net income,
cash flow provided by operating activities or other income or cash flow data
prepared in accordance with generally accepted accounting principles or as a
measure of a company's profitability or liquidity.
6
<PAGE> 8
SUMMARY OPERATING AND RESERVE DATA(1)
The following table sets forth summary operating data and estimates of
proved oil and gas reserves for the periods indicated. For additional
information relating to reserves, see "Risk Factors -- Uncertainty of Estimates
of Oil and Gas Reserves" and "Business and Properties -- Oil and Natural Gas
Reserves" and Supplemental Oil and Gas Information in the Company's Notes to
Consolidated Financial Statements.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
----------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C>
NET PRODUCTION:
Natural Gas (MMcf)................... 19,026 14,651 12,491 7,717 1,711
Oil (MBbls).......................... 1,700 1,018 369 154 38
Natural Gas Equivalents (MMcfe)(2)... 29,226 20,759 14,705 8,641 1,939
AVERAGE NET DAILY PRODUCTION:
Natural Gas (Mcf).................... 51,983 40,139 34,223 21,142 4,688
Oil (Bbls)........................... 4,644 2,789 1,012 423 104
Natural Gas Equivalents (Mcfe)(2).... 79,847 56,873 40,295 23,680 5,312
AVERAGE SALES PRICES(3):
Natural Gas ($/Mcf).................. $ 1.87 $ 1.30 $ 1.44 $ 1.53 $ 1.62
Oil ($/Bbl).......................... 18.03 16.37 15.31 15.62 19.82
Natural Gas Equivalents
($/Mcfe)(2)....................... 2.27 1.72 1.61 1.64 1.82
Production Costs ($/Mcfe)(4)........... 0.74 0.56 0.51 0.49 0.50
PROVED RESERVES (end of period):
Natural Gas (MMcf)................... 225,181 192,962 139,694 138,512 29,940
Oil (MBbls).......................... 16,178 13,884 4,982 3,035 991
Total Proved Reserves (MMcfe)(2)..... 322,249 276,266 169,586 156,722 35,886
Annual Reserve Replacement Ratio(5).... 264% 605% 137% 1,566% 948%
Estimated Reserve Life (in years)(6)... 11.0 13.3 11.5 18.1 18.5
Present Value of estimated future net
revenues before income taxes
(discounted at 10%)($000s)(7)........ $464,440 $191,506 $ 80,929 $ 88,604 $ 19,160
Standardized measure of discounted
future net cash flows ($000s)(7)..... $335,436 $173,250 $ 80,082 $ 84,116 $ 15,241
</TABLE>
- ---------------
(1) Significant acquisitions of producing oil and gas properties affect the
comparability of the operating data for the periods presented.
(2) Calculated based on a ratio of one barrel of oil equal to six thousand
cubic feet of natural gas.
(3) Includes the effect of hedging transactions.
(4) Includes lease operating costs and production and severance taxes and
gathering, transportation and other production expense.
(5) The annual reserve replacement ratio is a percentage determined by dividing
the estimated proved reserves added during a year from exploitation,
development and exploration activities, and acquisitions of proved reserves
by the oil and gas volumes produced during that year.
(6) Estimated reserve life is calculated on an Mcfe basis by dividing the total
estimated proved reserves at year-end by the total net production during
the year.
(7) The present value of estimated future net revenues before income taxes
(discounted at 10%) as of December 31, 1996 and the standardized measure of
discounted future net cash flows were determined using the weighted average
sales prices of $3.79 per Mcf of natural gas and $24.53 per Bbl of oil.
7
<PAGE> 9
FORWARD-LOOKING INFORMATION
Certain of the statements set forth under "Prospectus -- Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources," "Business and Properties" and
elsewhere in this Prospectus, such as the statements regarding planned capital
expenditures, the availability of capital resources to fund capital expenditures
and the number of anticipated wells to be drilled in 1997 and thereafter, are
forward-looking and are based upon the Company's current belief as to the
outcome and timing of such future events. There are numerous risks and
uncertainties that can affect the outcome and timing of such events, including
many factors beyond the control of the Company. These factors include, but are
not limited to, the matters described in "Risk Factors." Should one or more of
these risks or uncertainties occur, or should underlying assumptions prove
incorrect, the Company's actual results and plans for 1997 and beyond could
differ materially from those expressed in the forward-looking statements.
RISK FACTORS
Prospective purchasers of Common Stock should carefully consider the risk
factors set forth below, as well as the other information contained in this
Prospectus in evaluating an investment in the Common Stock.
VOLATILITY OF OIL AND GAS PRICES
The Company's future revenue, profitability and rate of growth are
substantially dependent upon the prevailing prices of, and the demand for, oil
and natural gas. Prices for oil and natural gas are subject to wide fluctuation
due to 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, such as various economic, political and regulatory developments,
and competition from other sources of energy.
UNCERTAINTY OF ESTIMATES OF OIL AND GAS RESERVES
Estimating quantities of reserves and future net cash flows is not an exact
science. There are numerous uncertainties inherent in estimating quantities of
proved oil and gas reserves, including many factors beyond the control of the
Company. This Prospectus contains estimates of the proved oil and gas reserves
of the Company and the estimated future net cash flows therefrom. Such estimates
rely upon various assumptions, including those prescribed by the Commission,
such as future oil and gas prices, drilling and operating expenses, capital
expenditures, taxes, and availability of funds. The present value of future net
cash flows 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. The process of estimating oil and gas reserves is complex, requiring
significant decisions and assumptions in the evaluation of available geological,
engineering and economic data for each reservoir. As a result, any such estimate
is inherently an imprecise estimation of reserve quantities and estimated future
net revenue therefrom. Actual future production, revenue, taxes, development
expenditures, operating expenses and quantities of recoverable oil and gas
reserves will vary from those assumed in the estimate.
Any significant variance from the assumptions could materially affect the
quantity and value of the Company's reserves as compared to the estimates set
forth in this Prospectus. The Company's production operations may be curtailed
or suspended as a result of governmental requirements or price controls,
mechanical difficulties or other circumstances beyond the control of the
Company. The Company's properties may also be susceptible to hydrocarbon
drainage from production by other operators on adjacent properties. In addition,
these 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.
8
<PAGE> 10
NEED FOR DEVELOPMENT AND ACQUISITION OF ADDITIONAL RESERVES
The Company's future success, as is generally the case in the industry,
depends upon its ability to find, develop or acquire additional oil and gas
reserves that are economically recoverable. Unless the Company conducts
successful exploration, development and exploitation activities on properties it
currently owns or acquires additional properties containing proved reserves, the
Company's proved reserves will decline. The successful acquisition of producing
properties requires an assessment of recoverable reserves, future oil and gas
prices and operating costs, potential environmental and other liabilities, title
issues and other factors. Such assessments are necessarily inexact and their
accuracy is inherently uncertain.
There can be no assurance that the Company's exploration and development
projects will result in significant additional reserves or that the Company will
have success drilling productive wells at economically viable costs.
Furthermore, while the Company's revenues may increase if prevailing oil and gas
prices increase, the Company's finding costs for additional reserves could also
increase.
The Company intends to make substantial capital expenditures for the
acquisition, exploration, development and production of its oil and natural gas
reserves. While the Company believes that the net proceeds from the Offering,
cash flow from operations and borrowings under the Company's existing bank
credit facility should provide the Company sufficient funds for its planned
activities through the end of 1997, additional debt or equity financing may be
required prior to such time or thereafter to fund further exploration,
exploitation and development activities or future property acquisitions. No
assurances can be given as to the availability or terms of any such additional
financing that may be required or that financing will continue to be available
to the Company. If such financing is not available, the Company's exploration,
exploitation and development activities and future property acquisitions may be
curtailed.
RISKS OF HEDGING 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 hedging 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 substantially over the price
established by the hedge. 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 hedging arrangement, (iii) the counterparties to
the Company's future contracts fail to perform 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 -- Hedging Activities."
CONCENTRATION OF OWNERSHIP
The Company, Odyssey Partners, L.P. ("Odyssey"), Cramer, Rosenthal,
McGlynn, Inc. ("CRM"), each of American Gas & Oil Investors, Limited
Partnership, AmGO II, Limited Partnership, First Reserve Secured Energy Assets
Fund, Limited Partnership, and First Reserve Fund V, Limited Partnership
(collectively, the "First Reserve Group"), COMDISCO, Inc. ("Comdisco") and Floyd
C. Wilson ("Wilson") are parties to a certain Agreement of Shareholders (the
"Shareholders Agreement"). The Shareholders Agreement provides that the parties
agree, so long as they own certain percentages of common stock of the Company,
to vote their shares of Company Common Stock to elect the members of the Board
of Directors. See "Principal and Selling Stockholders -- Shareholders
Agreement." Prior to the Offering, the parties to the Shareholders Agreement
beneficially own approximately 83% of the outstanding shares of Common Stock,
and following the Offering they will beneficially own approximately
9
<PAGE> 11
56%. Accordingly, these shareholders, if they voted together, would have the
ability to elect all of the Company's directors and to approve all other
stockholder actions.
DEPENDENCE ON KEY PERSONNEL
The Company depends to a large extent on the services of Floyd C. Wilson
and W. Mark Womble. Mr. Wilson and Mr. Womble devote their full time to the
Company. The Company currently has an employment contract with Mr. Wilson that
expires in August 2000 and with Mr. Womble that expires in September 1999. The
unavailability of Mr. Wilson or Mr. Womble could have a material adverse effect
on the Company. The Company believes that its success is also dependent upon its
ability to continue to employ and retain skilled technical personnel. See
"Management."
MARKETABILITY OF PRODUCTION
The marketability of the Company's production depends upon the availability
and capacity of gas gathering systems, pipelines and processing facilities, and
the unavailability or lack of capacity thereof could result in the shut-in of
producing wells or the delay or discontinuance of development plans for
properties. In addition, Federal and state regulation of oil and gas production
and transportation, general economic conditions and changes in supply and demand
could adversely affect the Company's ability to produce and market its oil and
natural gas on a profitable basis.
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 the equipment and labor required to
develop and operate such properties. The Company also competes with major and
independent oil and gas companies in the marketing and sale of oil and natural
gas to marketers and end-users. Many of these competitors have financial and
other resources substantially greater than those of the Company. See "Business
and Properties -- Competition."
DRILLING RISKS
Drilling involves numerous risks, including the risk that no commercially
productive oil or gas reservoirs will be encountered. The cost of drilling and
completing wells is often uncertain, and drilling operations may be curtailed,
delayed or canceled as a result of a variety of factors, including unexpected
drilling conditions, pressure or irregularities in formations, equipment
failures or accidents, weather conditions, and shortages or delays in the
delivery of equipment. There can be no assurance as to the success of the
Company's future drilling activities.
OPERATING HAZARDS
The oil and gas business involves a variety of operating risks, including
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. 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 obtained
by the Company will be adequate to cover any losses or liabilities. The Company
cannot predict the continued availability of insurance or the availability of
insurance at premium levels that justify its purchase.
COMPLIANCE WITH GOVERNMENTAL REGULATIONS
Oil and gas operations are subject to various federal, state and local
governmental regulations which may be changed from time to time in response to
economic or political conditions. Matters subject to
10
<PAGE> 12
regulation include discharge permits for drilling operations, drilling and
abandonment bonds or other financial responsibility requirements, reports
concerning operations, the spacing of wells, unitization and pooling of
properties and taxation. From time to time, regulatory agencies have imposed
price controls and limitations on production by restricting the rate of flow of
oil and 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. These laws and
regulations have continually imposed increasingly strict requirements for water
and air pollution control and solid waste management.
SHARES ELIGIBLE FOR FUTURE SALE
Immediately upon completion of the Offering, the Company will have
approximately 21,200,000 shares of Common Stock outstanding. The shares sold in
the Offering will be freely tradeable without restriction or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"), except for any shares purchased by an "affiliate" (as that term is
defined under the Securities Act) of the Company, which may be subject to the
resale limitations of Rule 144 promulgated under the Securities Act. All of the
currently outstanding shares of Common Stock held by an "affiliate" of the
Company within the meaning of Rule 144 may be publicly sold only if registered
under the Securities Act or sold in accordance with an applicable exemption from
registration, such as Rule 144.
As of December 31, 1996, options for a total of 1,222,687 shares of Common
Stock were outstanding under the Company's stock option plans and various option
agreements with officers and directors, 595,850 of which are currently
exercisable. The Company has filed or plans to file registration statements
covering the shares issuable upon exercise of such stock options and,
accordingly, all shares issued upon exercise of such options are or will be
freely tradeable under the Securities Act. In addition, the holders of
approximately 6,495,541 shares of Common Stock have registered the sale of such
Common Stock under the Securities Act of 1933 and the holders of 5,093,128
additional shares of Common Stock have certain registration rights with respect
to such shares that may be exercised beginning 90 days after the date of this
Prospectus. Future sales of shares of Common Stock by existing stockholders
could adversely affect the market price of the Common Stock.
The Selling Stockholders, certain other stockholders and each of the
Company's existing executive officers and directors have agreed with the
Underwriters not to offer, sell, contract to sell, grant any option for the
purchase of or otherwise dispose of any shares of Common Stock beneficially
owned by them as of the date of this Prospectus, other than as gifts to family
members, for a period of 90 days after such date without the prior written
consent of Salomon Brothers Inc on behalf of the Underwriters. See
"Underwriting."
NO DIVIDENDS
The Company has never paid cash dividends on its Common Stock and does not
intend to pay cash dividends on its Common Stock in the foreseeable future. The
Company currently intends to retain its cash for the continued development of
its business, including development, exploration and acquisition activities. In
addition, the Company's bank credit facility currently restricts the ability of
the Company to pay dividends.
11
<PAGE> 13
USE OF PROCEEDS
The net proceeds to the Company from this Offering are estimated to be
$15.3 million ($20.0 million if the Underwriters' over-allotment options are
exercised in full), assuming a public offering price of $11.00 per share and
after deducting underwriting discounts and estimated offering expenses payable
by the Company. Substantially all of such proceeds will be used to repay a
portion of bank indebtedness incurred in connection with acquisitions and any
remainder will be used for general corporate purposes, including working
capital. At December 31, 1996, the average interest rate under the Company's
revolving credit bank agreement expiring September 1999 was 6.54%. The Company
will not receive any proceeds from the sale of shares of Common Stock by the
Selling Stockholders.
CAPITALIZATION
The following table sets forth the capitalization of the Company at
December 31, 1996 and as adjusted to reflect the sale of the shares of Common
Stock offered hereby and the application of the net proceeds therefrom
(estimated to be approximately $15.3 million). This table should be read in
conjunction with "Use of Proceeds," "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and the Consolidated Financial
Statements of the Company and in each case the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AT DECEMBER 31, 1996
----------------------------------
AS
HISTORICAL ADJUSTED
--------------- ---------------
(IN THOUSANDS)
<S> <C> <C>
Long-term debt (1).......................................... $ 95,000 $ 80,000
-------- --------
Shareholders' equity:
Preferred Stock, no par value, 10,000,000 shares
authorized; no shares issued and outstanding........... -- --
Common Stock, no par value, 100,000,000 shares authorized;
19,702,036 shares issued and outstanding; 21,202,036
shares issued and outstanding, as adjusted (2)......... 197 212
Additional paid-in capital.................................. 134,541 149,816
Retained deficit............................................ (3,211) (3,211)
-------- --------
Total shareholders' equity............................. 131,527 146,817
-------- --------
Total capitalization................................... $226,527 $226,817
======== ========
</TABLE>
- ---------------
(1) For a description of the Credit Facility, see "Use of Proceeds" and
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources."
(2) Does not include 1,222,687 shares of Common Stock issuable upon exercise of
options outstanding. See Note 7 of the Company's Notes to the Consolidated
Financial Statements.
12
<PAGE> 14
PRICE RANGE OF COMMON STOCK
The Common Stock is traded on the Nasdaq/NMS under the symbol "HUGO". The
following table sets forth for the periods indicated, the high and low sales
prices as reported by the Nasdaq/NMS. On March 4, 1997, the last reported sale
price of the Common Stock as reported by the Nasdaq/NMS was $11.00 per share.
<TABLE>
<CAPTION>
HIGH LOW
---- ---
<S> <C> <C>
1995
First Quarter............................................... $ 8 9/16 $ 6
Second Quarter.............................................. 9 1/4 7 1/2
Third Quarter............................................... 10 1/2 8
Fourth Quarter.............................................. 9 3/4 8 1/4
1996
First Quarter............................................... $ 9 1/4 $ 7 1/4
Second Quarter.............................................. 8 3/4 7
Third Quarter............................................... 9 3/8 7 3/8
Fourth Quarter.............................................. 11 5/8 8 1/4
1997
First Quarter (through March 4)............................. $12 1/2 $ 9 1/4
</TABLE>
The Company had approximately 1,100 shareholders, including 1,000
beneficial owners and 100 holders of record as of February 15, 1997.
DIVIDEND POLICY
Holders of Common Stock are entitled to cash dividends, when, as and if
declared by the Board of Directors. The Company currently intends to reinvest
its earnings in the business and does not intend to pay dividends on the Common
Stock for the foreseeable future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" for a description of certain limitations on the payment of dividends
on the Common Stock.
13
<PAGE> 15
SELECTED CONSOLIDATED FINANCIAL DATA
The following table presents selected financial information of the Company
for the periods indicated and should be read in conjunction with the Company's
Consolidated Financial Statements and the Notes thereto included elsewhere in
this Prospectus and "Management's Discussion and Analysis of Financial Condition
and Results of Operations." Significant acquisitions of producing oil and gas
properties affect the comparability of the financial data for the periods
presented below.
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
--------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues:
Oil and gas.............................. $ 66,292 $ 35,906 $ 23,696 $17,349 $ 6,731
Gas plant................................ 1,914 1,638 1,945 1,172 2,177
Other(1)................................. 10 (3,315) (11) 16 547
-------- -------- -------- ------- -------
Total revenues................... 68,216 34,229 25,630 18,537 9,455
-------- -------- -------- ------- -------
Expenses:
Production............................... 21,667 11,570 7,528 7,178 4,671
Gas plant................................ 1,420 978 1,189 934 1,320
Exploration.............................. 1,711 2,239 3,036 587 137
General and administrative............... 6,872 4,346 3,117 1,883 1,761
Compensatory stock option expense(2)..... -- -- -- 3,289 --
Depreciation, depletion and
amortization.......................... 23,423 15,234 8,677 5,582 1,452
-------- -------- -------- ------- -------
Total expenses................... 55,093 34,367 23,547 19,453 9,341
-------- -------- -------- ------- -------
Operating income (loss).................... 13,123 (138) 2,083 (916) 114
Other income (expenses):
Interest................................. (6,070) (5,108) (3,077) (2,371) (502)
Other.................................... 466 319 252 199 44
-------- -------- -------- ------- -------
Total other income (expense)..... (5,604) (4,789) (2,825) (2,172) (458)
-------- -------- -------- ------- -------
Income (loss) before income taxes and
extraordinary item....................... 7,519 (4,927) (742) (3,088) (344)
(Provision) benefit for income taxes....... (3,316) 1,394 66 582 (86)
-------- -------- -------- ------- -------
Income (loss) before extraordinary item.... 4,203 (3,533) (676) (2,506) (430)
Extraordinary item-loss from early
extinguishment of debt, net of tax....... -- (136) -- -- --
-------- -------- -------- ------- -------
Net income (loss)................ $ 4,203 $ (3,669) $ (676) $(2,506) $ (430)
======== ======== ======== ======= =======
Net income (loss) per common
share.......................... $ 0.21 $ (0.27) $ (0.07) $ (0.41) $ (0.09)
======== ======== ======== ======= =======
Weighted average number of common shares
outstanding.............................. 19,698 13,460 10,310 6,071 5,000
OTHER DATA:
Net cash provided by operating
activities............................... $ 29,484 $ 11,367 $ 10,431 $ 5,931 $ 1,928
Net cash (used) in investing activities.... (36,706) (36,869) (39,116) (78,765) (3,685)
Net cash provided by financing
activities............................... 7,040 27,750 28,683 73,755 1,865
BALANCE SHEET DATA (AT END OF PERIOD):
Working capital (deficit).................. $ 8,545 $ 6,083 $ 11,551 $ 1,732 $(2,234)
Property and equipment, net................ 232,778 217,635 96,436 78,842 12,342
Total assets............................... 251,929 234,655 116,634 88,329 16,309
Long-term debt............................. 95,000 88,000 60,000 62,500 9,062
Shareholders' equity....................... 131,527 127,324 50,225 19,995 1,184
</TABLE>
- ---------------
(1) The year ended December 31, 1995 includes a charge of $2.7 million relating
to the Company's natural gas hedging activities resulting from a loss of
basis correlation for certain contracts (see Note 11 of Company's Notes to
the Consolidated Financial Statements).
(2) Reflects a non-cash charge for compensatory stock options granted to certain
employees that have been or will be satisfied by the Company's Chairman of
the Board, President and Chief Executive Officer.
14
<PAGE> 16
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
GENERAL
Hugoton Energy Corporation was formed in 1987 and until 1993 grew primarily
through acquisitions in the Hugoton Producing Area. Since 1993, the Company has
grown through producing property and leasehold acquisitions and development and
exploratory drilling, primarily in three additional core areas: the Williston
Basin, the Permian Basin and, most recently, the Austin Chalk Trend. Expansion
into these areas marked a shift in the Company's asset base from the lower risk,
limited upside of the Hugoton Producing Area to areas with much greater
exploration and development potential. On February 1, 1994, the Company
completed its initial public offering of 3.45 million shares of Common Stock.
The Company's 1997 capital budget is $75 million, an increase of 70% over
1996 capital expenditures, and 70% of the drilling budget is planned for
expenditures outside of the Hugoton Producing Area. The Company continues to
aggressively pursue acquisitions, but the timing and impact of such acquisitions
cannot be predicted.
1996 Acquisitions and Property Sales. During 1996, the Company spent $17.4
million to acquire 165,000 additional net undeveloped acres, including 95,000
net acres in the Williston Basin. These acreage additions were equal to 70% of
the Company's net undeveloped acres at December 31, 1995.
On June 20, 1996, the Company purchased a 50% working interest for $12.9
million in approximately 95,000 gross acres in the Austin Chalk Trend in
Louisiana. This acreage acquisition, coupled with the January 1, 1996 acreage
acquisition mentioned below and several smaller acreage acquisitions in the
third quarter, presents the Company with a total of 148,000 gross acres in the
Austin Chalk Trend to explore.
During 1996, the Company sold its interest in a group of non-strategic
producing gas properties and a gas gathering and salt water disposal system
located in Southern Colorado and Northern New Mexico to a major oil company for
$4.5 million. The Company also sold its interest in approximately 450
non-strategic producing oil properties located in Northeast Oklahoma for $1.5
million.
On January 1, 1996, the Company purchased an undivided interest in a group
of producing oil and gas properties and undeveloped acreage for $9.7 million
from a privately-held company that owns an undivided interest in and operates
the properties. The producing properties and acreage are located in Southeast
Texas and established a presence for the Company in the Austin Chalk Trend. The
acquisition included eight producing wells and 35,000 gross acres, in which the
Company's working interests are 25% and 50%, respectively.
Prior Major Property Acquisitions. The Company's current property position
has been shaped by two large acquisitions consummated in 1995 and 1993 and
several smaller acquisitions.
In September 1995, the Company acquired COG, a privately owned oil and gas
company for $35 million in cash and 9.1 million shares of Common Stock. The
acquisition extended the Company's operations into several basins outside the
Hugoton Producing Area, primarily into the Williston Basin and Permian Basin.
In July 1993, the Company significantly strengthened its position as a
major operator in the Hugoton Field with the $73.5 million purchase from
Prudential of interests in two limited partnerships formed to acquire and
develop properties in the Hugoton Producing Area for which the Company had acted
as general partner.
These two acquisitions were supplemented by a $13.6 million acquisition of
56 producing wells in the Hugoton Producing Area from Mobil Corporation in 1995,
as well as the purchase in 1994 of a 50% interest in 186,000 mineral acres
covering deep rights underlying shallow production located in the Hugoton Field
which is being developed jointly with Oxy U.S.A.
15
<PAGE> 17
The future results of the Company may depend on its ability to locate and
develop additional oil and natural gas properties, to attract and employ new
sources of capital, to develop these properties and to successfully market the
resulting production of crude oil and natural gas products. Historically, the
markets for oil and natural gas have been volatile and are likely to continue to
be volatile in the future but it is impossible to predict these future price
movements. Declines in oil and natural gas prices may adversely affect the
Company's cash flow, liquidity and profitability. Due to the nature of the oil
and natural gas industry and the general risks relating to the exploration for
and production of oil and natural gas, including the volatility of prices for
crude oil and natural gas products, there can be no assurance that these efforts
will be successful.
RESULTS OF OPERATIONS
The following table sets forth the Company's oil and natural gas production
during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- ------- -------
<S> <C> <C> <C>
Net Production:
Natural gas (MMcf)................................... 19,026 14,651 12,491
Oil (MBbls).......................................... 1,700 1,018 369
Natural gas equivalents (MMcfe)...................... 29,226 20,759 14,705
Average Sales Price(1):
Natural gas ($/Mcf)(2)............................... $ 1.87 $ 1.30 $ 1.44
Oil ($/Bbl).......................................... 18.03 16.37 15.31
Natural gas equivalents ($/Mcfe)..................... 2.27 1.72 1.61
Other Data:
Production costs ($/Mcfe)(3)......................... $ 0.74 $ 0.56 $ 0.51
Depreciation, depletion and
amortization($/Mcfe)(4)........................... 0.76 0.68 0.54
</TABLE>
- ---------------
(1) Includes the effect of hedging transactions. See Note 11 of the Company's
Notes to the Consolidated Financial Statements.
(2) Average prices received from sales of natural gas include revenues
attributable to NGLs as the Company has not historically accounted
separately for production or revenues attributable to NGLs.
(3) Consists of lease operating expenses, production and severance taxes and
gathering, transportation and other production expense.
(4) Excludes depreciation, depletion and amortization not related to oil and gas
properties.
YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995
Net Income or Loss and Cash Flow from Operating Activities. For the year
ended December 31, 1996, the Company reported net income of $4.2 million, or
$.21 per share, on total revenue of $68.2 million. This compares to a net loss
of $3.7 million, or $.27 per share, on total revenue of $34.2 million for the
year ended December 31, 1995. Cash flows from operating activities for 1996
increased by 159% to $29.4 million from $11.4 million in 1995. The increase in
net income for 1996 is largely attributable to a full year impact of the
addition of the properties acquired in the COG acquisition completed in
September of 1995, higher average sales prices per Mcfe ($2.27 in 1996 versus
$1.72 in 1995) and the continued success of the Company's drilling program. The
Company's net income, cash flows and average sales prices for 1996 were all
significantly impacted by the Company's oil and natural gas swap contracts,
resulting in pre-tax income and the average sales price per Mcfe being reduced
by $8.7 million and $.30, respectively, for the year ended December 31, 1996.
Oil and Gas Revenues. Revenues from oil and gas operations increased by 85%
to $66.3 million in 1996, compared to $35.9 million during 1995. The increase
from 1995 to 1996 is largely attributed to the inclusion of the COG and other
acquisition properties for the full year in 1996, higher average sales prices
16
<PAGE> 18
and the continued success of the Company's drilling activities. The Company's
1996 gas production increased by 30% and oil production increased by 67% over
1995 production.
Production Expense. Production expense for 1996 increased to $21.7 million
compared to $11.6 million in 1995. The overall increase reflects the addition of
a substantial number of wells (through the COG and other acquisitions and the
Company's drilling program), and the per unit increase in production expenses
reflects an increase in the oil component of the Company's production, which is
relatively higher cost than gas production.
Exploration Expense. Exploration expense decreased by $.5 million from $2.2
million in 1995 to $1.7 million in 1996. The decrease was due largely to the
higher success rate achieved by the Company from its drilling program (87% in
1996 versus 72% in 1995).
General and Administrative Expense. General and administrative expense
increased to $6.9 million in 1996 compared to $4.3 million in 1995. This
increase reflected the impact of a full year of expenses subsequent to the
acquisition of COG and the continued expansion of the Company's operations.
Depreciation, Depletion and Amortization Expense. Depreciation, depletion
and amortization ("DD&A") for 1996 was $23.4 million compared to $15.2 million
for 1995. The Company's DD&A expense per Mcfe increased from $.68 in 1995 to
$.76 in 1996. These increases are mainly due to higher production levels in 1996
compared to 1995 and the result of increased DD&A rates resulting from the
adjustment of such rates to incorporate the book allocated basis to proved oil
and gas properties acquired from COG, which bear a higher unit of production
DD&A rate than the Company's other producing properties.
Interest Expense. Interest expense was $6.1 million for 1996 compared to
$5.1 million for 1995. This increase is attributable to a higher average
long-term debt balance outstanding during 1996, principally as a result of
funding the COG and other acquisitions.
Income Taxes. For 1996, the Company recorded a tax provision of $3.3
million compared to a $1.4 million benefit recorded in 1995. The effective tax
rate for 1996 was 44.1% as compared to 28.3% in 1995. The provision recorded in
1996 exceeds a normal tax rate primarily as a result of the amortization of
certain non-deductible property costs arising from the purchase allocation
related to the COG acquisition.
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Net Loss and Cash Flow from Operating Activities. For the year ended
December 31, 1995, the Company reported a net loss of $3.7 million, or $.27 per
share, on total revenue of $34.2 million. This compares to a net loss of $0.7
million, or $.07 per share, on total revenue of $25.6 million for the year ended
December 31, 1994. Cash flows from operating activities for 1995 increased by 9%
to $11.4 million from $10.4 million in 1994. The increase in the net loss for
1995 was largely due to the charge to earnings of $2.7 million related to the
decoupling of the Company's natural gas swap contracts during the fourth quarter
of 1995 (see Note 11 of the Company's Notes to the Consolidated Financial
Statements), losses incurred on the sale of oil and gas properties of $0.6
million during 1995 and an increase in the charge for expired leases of $0.9
million. The increase in revenues for 1995 is attributable to an increase in the
price per Mcfe received by the Company ($1.72 in 1995 versus $1.61 in 1994) and
the impact of the addition of the properties acquired in the COG acquisition
completed in September 1995.
Oil and Gas Revenues. Revenues from oil and gas operations increased by 52%
to $35.9 million in 1995, compared to $23.7 million during 1994. The increase
from 1994 to 1995 was largely attributable to the inclusion of the COG and other
acquisition properties for four and six months, respectively, and the continued
success of the Company's drilling activities. The Company's 1995 gas production
increased by 17% and oil production increased by 176% over 1994 production.
Production Expense. Production expense for 1995 increased by 54% to $11.6
million compared to $7.5 million in 1994. The increase reflects the addition of
a substantial number of wells (through the COG and Mobil acquisitions and the
Company's drilling program), and the increase in the oil component of the
Company's production.
17
<PAGE> 19
Exploration Expense. Exploration expense decreased from $3.0 million in
1994 to $2.2 million in 1995. The decrease was due largely to the higher success
rate achieved by the Company from its drilling program (72% in 1995 versus 62%
in 1994) and a fewer number of wells drilled by the Company (39 gross wells in
1995 compared to 78 gross wells in 1994).
General and Administrative Expense. General and administrative expense
increased to $4.3 million in 1995 compared to $3.1 million in 1994. This
increase reflected the continued expansion of the Company's operation and the
associated costs of additional personnel; however; these expenses declined when
expressed as a percentage of revenues reflecting the Company's efforts to
acquire properties that can be incorporated into its existing property base with
minimal incremental general and administrative expense.
Depreciation, Depletion and Amortization Expense. DD&A for 1995 was $15.2
million compared to $8.7 million for 1994. The Company's DD&A expense per Mcfe
increased from $.54 in 1994 to $.68 in 1995. These increases were mainly due to
higher production levels in 1995 compared to 1994 and the result of increased
DD&A rates resulting from the application of such rates to the book allocated
basis to proved oil and gas properties acquired from COG in September 1995,
which bear a higher unit of production DD&A rate than the Company's other
producing properties.
Interest Expense. Interest expense was $5.1 million for 1995 compared to
$3.1 million for 1994. This increase was attributable to a higher average
long-term debt balance outstanding during 1995, principally as a result of
funding the COG and other acquisitions.
Income Taxes. For 1995, the Company recorded a tax benefit of $1.4 million
compared to a $.07 million benefit recorded in 1994. The benefit recorded in
1995 recognized the effect of the COG acquisition, whereby the Company accounted
for the acquisition under the purchase method of accounting, and as required by
FAS 109, the basis differences between the allocated fair value for book
purposes and the assumed historical tax bases required the Company to establish
the necessary deferred tax liabilities for these temporary differences. As such,
the Company's deferred net tax liability position allowed the Company to
recognize a tax benefit for the pre-tax operating losses generated in the period
subsequent to the acquisition date of COG. During 1995, the pre-tax losses
incurred by the Company prior to the acquisition of COG were not tax benefited
because the Company was in a net deferred tax asset position which required such
benefits to be reduced by valuation allowances.
LIQUIDITY AND CAPITAL RESOURCES
The Company's working capital position increased by $2.5 million from
year-end 1995 to $8.5 million at December 31, 1996. Cash decreased by $0.2
million and accounts receivable increased by $4.1 million. The Company's ratio
of current assets to current liabilities was 2.0 to 1.0 at December 31, 1996 and
1.8 to 1.0 at December 31, 1995.
Capital Expenditures. The Company's primary needs for cash are for
exploration, development and acquisitions of oil and gas properties, payment of
interest on outstanding indebtedness and working capital obligations. The
Company's 1997 capital expenditure budget has been set at $75 million of which
approximately $50 million is committed to drilling, $10 million for 3-D seismic
and land costs and $15 million for small strategic acquisitions. Funding for the
Company's exploration and development activities and its working capital
obligations is provided primarily by internally-generated cash flow. The Company
budgets its capital expenditures based on projected cash flows and routinely
adjusts the level of its capital expenditures in response to anticipated changes
in cash flows.
Capital Resources. The Company's capital resources consist of cash flow
from operating activities and funds available under the credit facility. On
September 7, 1995, the Company arranged a new bank credit facility,
simultaneously with the closing of the COG acquisition. The new facility is an
unsecured $250 million revolving credit agreement that is due September 7, 1999.
The facility is provided by seven banks, led by Bank One, Texas as agent and
Texas Commerce Bank National Association as co-agent. The Borrowing Base, as
defined in the loan agreement, is currently set at $135 million, and is subject
to
18
<PAGE> 20
semi-annual redetermination based upon an evaluation of the Company's oil and
gas reserves. Outstanding borrowings were $95 million at December 31, 1996.
The credit facility provides the option of borrowing at floating interest
rates based on Bank One's base rate or at a Eurodollar option based on the
London Interbank Offered Rate ("LIBOR") plus 3/4 of 1% to 1.25% per annum,
depending on the outstanding loan balance. Interest is paid quarterly or at the
end of each interest period. The Company also incurs a commitment fee of 1/4 of
1% on the unused portion of the Borrowing Base. In addition, the credit facility
also contains customary restrictive covenants, including restrictions on the
payment of dividends in excess of 50% of the Company's annual net income, and
requires the Company to maintain certain financial ratios.
At December 31, 1996, the Company was a party to one interest rate swap
agreement that was entered into on December 11, 1995 for $25 million in notional
principal amount. The effect of this agreement is to provide the Company with an
interest rate on $25 million in notional principal amount for the three-year
term of the agreement of 5.445% plus a margin of 3/4 of 1% to 1.25%. Under
market conditions at December 31, 1996, the aggregate effective annual interest
rate after giving effect to the swap agreement was 6.542%.
The Company has historically funded its operations and capital spending
programs with cash flow from operations and borrowings under bank credit
facilities. The Company believes that cash flow from operations and the
borrowing availability under the credit facility will be sufficient to meet its
anticipated capital requirements for 1997. However, because future cash flows
and the availability of financing are subject to a number of variables, such as
the level of production and the prices received for oil and natural gas, there
can be no assurance that the Company's capital resources will be sufficient to
maintain currently planned levels of capital expenditures.
Hedging Transactions. With the 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 hedging transactions of various
kinds with respect to both oil and natural gas. 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.
At December 31, 1996, the Company had entered into swap agreements fixing
the price of 70,000 barrels per month, for the first three months of its oil
production for 1997 at a weighted average price of $24.25 per Bbl. In addition,
the Company has entered into a forward sale of 20 MMcf of natural gas per day
for the first three months of 1997 at a net price to the Company of $3.68 per
Mcf. The Company continues to evaluate whether to enter into additional hedging
transactions for 1997 and future years. In addition, the Company may determine
from time to time to terminate its then existing hedging positions. (See Note 11
of the Company's Notes to the Consolidated Financial Statements).
The Company's net income, cash flows and average sales prices for 1996 were
all significantly impacted by the Company's oil and natural gas swap contracts,
resulting in pre-tax income and the average sales price per Mcfe being reduced
by $8.7 million and $.30, respectively, for the year ended December 31, 1996.
The reduction was caused in part by an unusually high volatility of natural gas
prices and the widening of the differential or correlation between the cash
prices for the Company's production and the NYMEX contract settlement prices.
INFLATION AND CHANGES IN PRICES
The Company's revenues and the value of its oil and natural gas properties
have and will continue to be affected by changes in oil and natural gas prices.
The Company's ability to maintain current borrowing capacity and to obtain
additional capital on attractive terms is also substantially dependent on oil
and natural gas prices. Oil and natural gas prices are subject to significant
seasonal and other fluctuations that are beyond the Company's ability to control
or predict. Although certain of the Company's costs and expenses are affected by
the level of inflation, inflation did not have a significant effect on the
Company's operations during 1996 or 1995.
19
<PAGE> 21
BUSINESS AND PROPERTIES
THE COMPANY
Hugoton Energy Corporation is a rapidly growing independent oil and natural
gas company engaged in the exploration for and the development, exploitation,
production and acquisition of oil and natural gas reserves and properties. The
Company has historically been one of the most active independent operators in
the Hugoton Field and has expanded its operations throughout the Mid-Continent
area in Kansas, Oklahoma and Texas, and into the Permian Basin in West Texas and
New Mexico, the Austin Chalk Trend of Texas and Louisiana and the Williston
Basin in Montana and North Dakota. The Company intends to expand its reserve
base by continuing its drilling and acquisition activities primarily in its four
core areas. The Company focuses on exploring and developing properties that it
believes possess significant upside potential, which can be realized through the
application of 3-D seismic technology and traditional geologic studies, as well
as advanced drilling and completion techniques.
The Company has increased its proved reserves from 22 Bcfe at December 31,
1991 to 322 Bcfe at December 31, 1996. The proved reserves are 70% natural gas
and are 77% proved developed producing, with a reserve-to-production ratio of 11
years, based on 1996 production. The Company operates 1,625 wells, representing
87% of its reserves. During the five years ended December 31, 1996, the Company
added proved reserves equal to 500% of production at an average cost of $.66 per
Mcfe. The Company's average net daily production has increased from 2.6 MMcfe
during 1991 to 79.8 MMcfe during 1996. In addition, the Company increased its
EBITDAX from $1.7 million in 1992 to $38.7 million in 1996.
The Company's rapid growth is a result of its aggressive drilling and
acquisition programs. During the last five years, the Company has drilled a
total of 242 wells and completed 176 of them for a success ratio of 73%. This
drilling program has added approximately 106 Bcfe of proved reserves, or 141% of
production, at an average cost of $.37 per Mcfe.
During the five year period ended December 31, 1996, the Company's
acquisitions added over 270 Bcfe to proved reserves, or 359% of production, at
an average cost of $.78 per Mcfe. The Company focuses on potential acquisitions
within its core areas, but also considers selected opportunities in new areas.
The Company's strategy is to acquire producing properties with operational
control in oil and natural gas basins that offer significant exploitation,
development and exploratory prospects. The Company's most significant
acquisitions have been the purchase of two oil and natural gas partnerships
owned by Prudential in 1993 and the purchase of COG in 1995.
The Company has accumulated an acreage position of approximately 567,000
net acres, including 165,000 net acres that were added during 1996. These
acreage holdings are located in the Company's four core areas and have
exploration and development opportunities with multiple pay horizons. The
Company believes that it has sufficient drilling prospects in its current
acreage inventory to allow it to continue its drilling program through 1999, and
it intends to continue to add acreage to its holdings. The Company's 1997
capital budget is $75 million, an increase of 70% over 1996 capital
expenditures, and includes $50 million for the drilling of approximately 200
wells, $10 million for 3-D seismic and land costs and $15 million for small
strategic acquisitions. In its 1997 drilling budget, the Company has assembled
prospects with a wide range of risk profiles, with approximately 60% of the
budget to be spent for relatively lower risk development drilling, and
approximately 40% for exploratory drilling. The drilling budget will be expended
30% in the Hugoton Producing Area and other basins in the Mid-Continent, 30% in
the Permian Basin, 20% in the Austin Chalk Trend, and 20% in the Williston
Basin.
PRINCIPAL OPERATING AREAS
The Company operates primarily in four core areas, and is the operator of
1,625 wells representing 87% of proved reserves. The following table sets forth
data as of December 31, 1996 with respect to the estimated quantities of proved
oil and gas reserves and the present value of estimated future net revenues
before taxes, determined in accordance with Commission regulations (discounted
at 10%)
20
<PAGE> 22
("PV-10") attributable to the Company's properties in each region. The PV-10 as
of December 31, 1996 was determined using the weighted average sales prices of
$3.79 per Mcf of natural gas and $24.53 per Bbl of oil.
<TABLE>
<CAPTION>
NATURAL %
OIL GAS TOTAL OF PV-10
PROPERTY/AREA (MBBLS) (MMCF) (MMCFE) TOTAL ($000)
- ------------- ------- -------- -------- -------- ---------
<S> <C> <C> <C> <C> <C>
Hugoton/Mid-Continent...................... 7,757 170,951 217,493 67% $296,596
Permian Basin.............................. 4,758 38,332 66,880 21 95,259
Austin Chalk............................... 136 8,771 9,587 3 20,084
Williston Basin............................ 3,527 7,127 28,289 9 52,501
----- ------ ------ --- -------
Total............................. 16,178 225,181 322,249 100% $464,440
===== ====== ====== === =======
</TABLE>
Hugoton Producing Area and Other Mid-Continent Properties
The Hugoton Producing Area consists of both the Hugoton Field, located
primarily in Kansas and in the Oklahoma and Texas panhandles, and the fields and
pay zones underlying the Hugoton Field. The Company began its activities in the
Hugoton Producing Area in 1987 with a mineral and working interest acquisition
program. The Company's strategy has been to acquire shallow gas wells, lease
unleased minerals, and obtain farmouts from major oil companies to obtain proven
reserves, and more significantly, exploration rights to the deeper formations
within the Hugoton Producing Area.
Primary producing horizons in the region are the Permian Chase group,
Pennsylvanian carbonates of the Lansing and Kansas City groups, Pennsylvanian
Morrow sands, and Mississippian Chester sands. Depths of these formations range
from 2,900 feet for the Chase group to 6,000 feet for the Chester sands. The
Company's acreage position in this region comprises over 330,000 net acres, and
includes a significant inventory of drilling opportunities developed using both
traditional geological studies and 3-D seismic technology.
The Company currently has over 170 square miles of 3-D seismic data in the
Hugoton Producing Area, and plans to shoot an additional 100 square miles during
1997. The Company plans to drill approximately 50 new wells during each of the
next three years based on this data. Hugoton is participating in a joint
exploration and development agreement with Oxy U.S.A. covering deep rights on a
180,500 acre block underlying the Hugoton Field. Since June 1996, the Company
has drilled 22 wells in this exploration play, 20 of which were successful. Of
these 20 wells, 13 are currently on production at a cumulative gross rate of
approximately 2,200 barrels of oil and 10 million cubic feet of natural gas per
day, exceeding expectations based on the historical performance of other wells
in the area. The Company's drilling success and production rates have been
significantly improved as a result of the application of 3-D seismic technology.
In 1994, Hugoton acquired interests in existing multi-pay gas producing
wells in Woods and Woodward counties of Northwest Oklahoma. The area has been
developed on 640-acre spacing, but the Company is currently downspacing to
160-acre spacing to fully develop selected leases. The development will require
over 120 infill wells, which the Company intends to drill over the next three
years, and which will also explore the Redfork sands located above the Chester
sands.
The Company's properties in the Texas Panhandle are located in the Barnett
Ranch area of Carson and Hutchison counties, the Panhandle West and East fields,
and the Sherman county area of the Texas Hugoton field. Hugoton is evaluating
several prospects in Texas, including the Proctor/Fulton ranch area of Oldham
and Hartley counties in the Dalhart Basin. The Company is evaluating existing
3-D seismic data in this area and intends to obtain additional seismic data in
1997 to identify drilling locations.
Permian Basin
The Company owns an interest in 39,000 net acres in the Permian Basin,
covering an area of over 60 square miles, located in the southwestern portion of
Texas and extending into southeastern New Mexico. The Company acquired its
initial Permian Basin reserves and leases through its acquisition of COG in
September 1995. Primary producing horizons include Spraberry sands, which
produce from depths of 5,500 to 7,000 feet, and the Wolfcamp and Canyon sands
which produce from depths of 7,000 to 8,000 feet.
21
<PAGE> 23
The Company is drilling downspacing wells in the Spraberry formation which
is currently developed on 160-acre spacing, but which has shown excellent
development potential on an 80-acre spacing. The Company has identified over 100
development locations to be drilled over the next three years, and expects to
test additional horizons based on 3-D seismic including deeper Silurian
Fusselman structural features.
Since September 1996, the Company has drilled ten of these locations, all
of which were successful. Seven of the wells are currently on production at a
cumulative gross rate of 245 barrels of oil and 675 thousand cubic feet of gas
per day. Based on these results, the Company intends to accelerate this
development program during 1997.
Austin Chalk Trend
During 1996, the Company acquired a 25% interest in eight producing gas
wells in the Austin Chalk Trend in Texas and a 50% interest in approximately
42,000 undeveloped acres in the downdip portion of this Trend. All of the
Company's interests in this Trend are operated by a privately owned oil and gas
company with experience and additional properties in the area. These
acquisitions targeted specific tracts where geological and geophysical studies
indicated the existence of the Austin Chalk formation of sufficient thickness
and containing significant seismic events which generally indicate economic
production. During 1996, the Company drilled and completed its first five
horizontal Austin Chalk wells in Texas, all of which were commercially
productive. Three additional wells are currently being drilled in the
deepest-yet drilled portion of the Trend. Other operators have completed
approximately eight wells in this area that are producing at rates ranging from
10 million cubic feet per day to, in one instance, over 80 million cubic feet
per day.
Additionally, the Company acquired a 50% interest in 100,000 acres in three
distinct prospect areas in the Louisiana portion of the Trend. These acreage
positions were chosen based on the presence of hydrocarbon-bearing Austin Chalk
as evidenced by well logs and electric logs drilled to deeper depths, seismic
features common to superior Austin Chalk production and the proximity to
competitor activity in these areas. The Company plans to drill its initial well
in this area during the third quarter of 1997.
The Company intends to keep two rigs drilling on its Austin Chalk acreage
holdings throughout 1997 and 1998. The Company has budgeted $10 million to drill
eight horizontal Austin Chalk wells during 1997, including six in Texas and two
in Louisiana.
Williston Basin
The Company acquired producing properties in the Williston Basin of Montana
and North Dakota with the acquisition of COG in September 1995. These properties
are predominantly oil producing and account for approximately 20% of the
Company's current production. Included are eight fields producing both oil and
gas from multiple pay zones. During 1996, the Company began aggressive 3-D
seismic and acreage acquisition programs targeting multi-pay structures ranging
in depth from 9,000 to 12,000 feet.
The Company acquired over 95,000 net undeveloped acres in the Basin with
previously identified Red River formation closures, which are known to contain
reservoir quality rocks with hydrocarbons present. These structures have the
potential for multiple pay zones. Reserves attributable to productive wells in
the Red River area range from 100,000 barrels of oil per well to over 500,000
barrels of oil per well with producing rates ranging from 200 to 600 barrels of
oil per day.
The Company has identified 28 specific drilling prospects along the
northwestern flank of the Basin and has initiated 3-D seismic work that covers
approximately 90 square miles for the first 10 wells. The initial well is
scheduled to be drilled during the second quarter of 1997 with an additional
nine wells to be drilled during the rest of the year. The Company has budgeted
$10 million for drilling in this area during 1997.
DRILLING
The Company continues to aggressively develop and explore its extensive
leasehold position and plans to drill approximately 200 wells during 1997.
22
<PAGE> 24
Infill and Development Drilling. The Company has drilled 93 infill and
development wells during the last five years and achieved a success rate of 88%.
The Company seeks to acquire properties that contain additional infill and
development potential. These properties generally contain producing wells with
multiple pay horizons that have not been fully developed.
Field Extension and Exploratory Drilling. The Company has drilled 149 field
extension and exploratory wells during the last five years and achieved a
success rate of 63%. The Company continues to extend the limits of its producing
fields as well as those owned by or acquired from others. In addition, the
Company is involved in numerous exploration projects, including various 3-D
seismic and horizontal drilling projects.
The following table sets forth the wells drilled by the Company during the
periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
-----------------------------------------------
1996 1995 1994
------------- ------------- -------------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Infill and Development:
Productive........................ 30.0 23.9 5.0 2.3 22.0 21.0
Non-Productive.................... 1.0 0.1 4.0 3.0 2.0 1.3
---- ---- ---- ---- ---- ----
Total..................... 31.0 24.0 9.0 5.3 24.0 22.3
==== ==== ==== ==== ==== ====
Field Extension and Exploratory:
Productive........................ 28.0 12.2 23.0 14.4 26.0 20.0
Non-Productive.................... 8.0 5.8 7.0 5.8 28.0 21.0
---- ---- ---- ---- ---- ----
Total..................... 36.0 18.0 30.0 20.2 54.0 41.0
==== ==== ==== ==== ==== ====
Total:
Productive........................ 58.0 36.1 28.0 16.7 48.0 41.0
Non-Productive.................... 9.0 5.9 11.0 8.8 30.0 22.3
---- ---- ---- ---- ---- ----
Total..................... 67.0 42.0 39.0 25.5 78.0 63.3
==== ==== ==== ==== ==== ====
</TABLE>
As of December 31, 1996, the Company had a working interest in 939 gross
(446 net) natural gas wells and 1,320 gross (1,064 net) oil wells. At February
28, 1997, the Company was participating in the drilling of seven wells.
GAS GATHERING AND PROCESSING
The Company owns and operates the Kinsler gas gathering system and
processing plant in Morton County, Kansas. The gathering system consists of more
than 30 miles of pipelines and currently serves 28 wells, of which 24 are
operated by the Company. The gathering system has a throughput capacity of
approximately 10 MMcf per day of natural gas. During the year ended December 31,
1996, the system gathered an average of 4.1 MMcf per day of natural gas.
The processing plant is currently processing 2.3 MMcf per day of natural
gas and during the year ended December 31, 1996, the plant recovered an average
of 9,000 gallons of NGLs per day. All gas delivered to the system is purchased
by the Company at the wellhead at prices related to the Panhandle Eastern Pipe
Line monthly index. All NGLs are trucked to the Jayhawk NGL pipeline and
delivered to a Warren NGL, Inc. fractionation plant where they are sold at
monthly average spot market prices. In August 1996, the Company modified its
downstream transportation arrangements and now all residue gas available after
processing is delivered to PanEnergy Field Services and is marketed on the
Panhandle Eastern Pipe Line system at spot market prices.
23
<PAGE> 25
ACREAGE
The table below describes the Company's developed and undeveloped leasehold
acreage as of December 31, 1996. A substantial portion of the developed
leasehold acreage is developed above 3,500 feet, but is undeveloped below 3,500
feet.
<TABLE>
<CAPTION>
UNDEVELOPED ACREAGE DEVELOPED ACREAGE TOTAL ACREAGE
------------------- ----------------- -------------------
GROSS NET GROSS NET GROSS NET
-------- -------- ------- ------- --------- -------
<S> <C> <C> <C> <C> <C> <C>
Hugoton/Mid-
Continent.......... 221,754 112,984 311,070 219,792 532,824 332,776
Permian Basin........ 19,616 4,208 44,074 34,712 63,690 38,920
Austin Chalk......... 149,583 68,136 12,147 3,339 161,730 71,475
Williston Basin...... 265,810 111,240 49,778 13,009 315,588 124,249
------- ------- ------- ------- --------- -------
Total...... 656,763 296,568 417,069 270,852 1,073,832 567,420
======= ======= ======= ======= ========= =======
</TABLE>
No possible or probable reserves have been assigned to the Company's
undeveloped acreage. As is customary in the oil and gas industry, the Company
can retain its interests in undeveloped acreage by drilling activity which
establishes commercial production sufficient to maintain the leases, or by
payment of delay rentals during the remaining primary term of such a lease. The
Company paid $0.2 million in delay rentals for 1996 and projects an expense of
approximately $1.7 million for 1997. The oil and natural gas leases in which the
Company has an interest are for varying primary terms.
In addition to the developed and undeveloped acreage indicated, the Company
is engaged in numerous farmout agreements with other owners of oil and natural
gas leases and is actively leasing additional acreage. A farmout agreement is a
customary industry agreement which provides that the assignee drill an
exploratory well or wells on the farmout properties, and if the well is
completed as a commercial producer of oil and/or natural gas, the assignee earns
an assignment of some or all of the assignor's oil and natural gas lease
interests.
As of December 31, 1996, the Company is an assignee in various farmout
agreements. Rights to earn the interest in the farmout acreage can be
surrendered by the Company at any time by giving notice to an assignor, or they
can be lost through nonperformance by the Company.
OIL AND NATURAL GAS RESERVES
The following table summarizes the estimates of the Company's proved
producing, proved non-producing and proved undeveloped reserves as of December
31, 1996, and the discounted present value attributable to the Company's
estimated proved reserves at such date, as estimated by independent petroleum
engineers, Ryder Scott Company.
<TABLE>
<CAPTION>
PROVED RESERVES
--------------------------------------------------
PRODUCING NON-PRODUCING UNDEVELOPED TOTAL
--------- ------------- ----------- --------
<S> <C> <C> <C> <C>
Natural gas (MMcf)................. 180,610 9,217 35,354 225,181
Oil and NGLs (MBbls)............... 11,200 868 4,110 16,178
Natural gas equivalents (MMcfe).... 247,810 14,425 60,014 322,249
Present value of estimated future
net revenues before income taxes
(discounted at 10%) ($000)(1).... $345,544 $25,124 $93,772 $464,440
</TABLE>
- ---------------
(1) The present value of estimated future net revenues before income taxes
(discounted at 10%) as of December 31, 1996 was determined using the
weighted average sales prices of $3.79 per Mcf of natural gas and $24.53 per
Bbl of oil.
24
<PAGE> 26
These estimates of the Company's proved reserves have not been filed with
or included in reports to any federal agency.
In accordance with applicable requirements of the Securities and Exchange
Commission (the "Commission"), estimates of the Company's proved reserves and
future net revenues are made using oil and natural gas sales prices estimated to
be in effect as of the date of such reserve estimates and are held constant
throughout the life of the properties (except to the extent a contract
specifically provides for escalation). Estimated quantities of proved reserves
and future net revenues therefrom are affected by oil and natural gas prices,
which have fluctuated widely in recent years. There are numerous uncertainties
inherent in estimating oil and natural gas reserves and their estimated values,
including many factors beyond the control of the producer. The reserve data set
forth in this document represents only estimates. Reserve engineering is a
subjective process of estimating underground accumulations of oil and natural
gas that cannot be measured in an exact manner. The accuracy of any reserve
estimate is a function of the quality of available data and engineering and
geological interpretation and judgment. As a result, estimates of different
engineers may vary. In addition, estimates of reserves are subject to revision
based upon actual production, results of future development and exploration
activities, prevailing oil and natural gas prices, operating costs and other
factors, of which revisions may be material. Accordingly, reserve estimates are
often different from the quantities of oil and natural gas that are ultimately
recovered. The meaningfulness of such estimates is highly dependent upon the
accuracy of the assumptions upon which they are based.
The volume of production from oil and natural gas properties declines as
reserves are depleted. Except to the extent the Company acquires properties
containing proved reserves or conducts successful exploration and development
activities, or both the proved reserves of the Company will decline as reserves
are produced. The Company's future oil and natural gas production is therefore
highly dependent upon its level of success in finding or acquiring additional
reserves.
PRODUCTION
The following table sets forth the Company's oil and natural gas production
data during the periods indicated:
<TABLE>
<CAPTION>
YEARS ENDED DECEMBER 31,
------------------------
1996 1995 1994
------ ------ ------
<S> <C> <C> <C>
Net Production(1):
Natural gas (MMcf)..................................... 19,026 14,651 12,491
Oil (MBbls)............................................ 1,700 1,018 369
Natural gas equivalents (MMcfe)........................ 29,226 20,759 14,705
Average Net Daily Production(1):
Natural gas (Mcf)...................................... 51,983 40,139 34,223
Oil (Bbls)............................................. 4,644 2,789 1,012
Natural gas equivalents (Mcfe)......................... 79,847 56,873 40,295
Average Sales Price(2):
Natural Gas ($/Mcf).................................... $ 1.87 $ 1.30 $ 1.44
Oil ($/Bbl)............................................ 18.03 16.37 15.31
Natural gas equivalents ($/Mcfe)....................... 2.27 1.72 1.61
Other Data:
Production costs ($/Mcfe)(3)........................... $ 0.74 $ 0.56 $ 0.51
Depreciation, depletion and amortization ($/Mcfe)(4)... 0.76 0.68 0.54
</TABLE>
- ---------------
(1) Net production and average net daily production excludes NGLs and natural
gas purchased by AmGas Corporation and resold to third parties.
25
<PAGE> 27
(2) Includes the effect of hedging transactions. Average prices received from
sales of natural gas include revenues attributable to NGLs as the Company
has not historically accounted separately for production or revenues
attributable to NGLs.
(3) Consists of lease operating expenses, production and severance taxes and
gathering, transportation and other production expenses.
(4) Excludes depreciation, depletion and amortization not related to oil and gas
properties.
MARKETING
Approximately 90% of the Company's natural gas production is sold at index
related, spot-market prices. The balance of the Company's gas is sold under
longer term contracts at percentage-of-proceeds or fixed prices.
Most of the Company's spot market gas is sold to Cibola Energy Services
Corporation ("Cibola"), a wholly-owned subsidiary of TransCanada Pipelines, Ltd.
Under a marketing agreement, Cibola has marketing rights to all of the Company's
undedicated gas production. The agreement mitigates the Company's exposure to
pipeline imbalance penalties and enables the Company to take advantage of the
size, diverse markets and trading expertise of Cibola, while still maintaining
market control. This arrangement increases the Company's access to premium gas
markets and enhances its pricing options. In addition, Cibola assists the
Company in such areas as nominations, scheduling and solicitation of gathering
and transportation discounts. This symbiotic relationship provides the benefits
of an in-house marketing company, without the overhead expense. The agreement
may be canceled by either party upon sixty days notice.
Natural Gas Liquids. The Company's natural gas liquids produced from its
processing plant are sold at market prices (see "Gas Gathering and Processing").
The Company's natural gas liquids extracted by third party processors are
generally sold under percentage of proceeds contracts.
Hedging Activities. The Company utilizes commodity swap agreements in an
attempt to reduce its exposure to commodity price movements. At December 31,
1996, the Company had entered into swap agreements fixing the price of 70,000
Bbls per month, for the first three months of its oil production for 1997 at a
weighted average price of $24.25 per Bbl. In addition, the Company had entered
into forward sales contracts for 20 MMcf per day of natural gas for the first
three months of 1997 at a net price of $3.68 per Mcf.
Customers. During 1996, Cibola and GPM Gas Corporation each purchased in
excess of 10% of the oil and natural gas sold by the Company (29% in the
aggregate). The Company entered into an exclusive marketing agreement with
Cibola during 1995. The agreement allows either party to terminate the agreement
upon 60 days notice if they are dissatisfied with the results. The Company
benefits from a long-standing business relationship with the above purchasers;
however, based on the current demand for oil and natural gas, the Company does
not believe the loss of any of these purchasers would have a material adverse
effect on the Company (see Note 10 of the Company's Notes to the Consolidated
Financial Statements).
Oil and Natural Gas Condensate. All of the Company's crude oil and
condensate is sold at current market prices, under various short and
intermediate term contracts. The Company aggregates the majority of its
production into regional packages and periodically solicits offers from
qualified buyers.
Trading. In December 1995, the Company formed HEC Trading Company ("HTC"),
a wholly-owned subsidiary, to buy, sell and trade various oil and natural gas
products, including financial instruments, in order to add value to the
Company's production.
TITLE TO PROPERTIES
As is customary in the oil and natural gas industry, the Company makes only
a cursory review of title to farmout acreage and to undeveloped oil and natural
gas leases upon execution of any contracts. Prior
26
<PAGE> 28
to the commencement of drilling operations, a thorough title examination is
conducted and curative work is performed with respect to significant defects. 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 any 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. The Company has obtained
title opinions on substantially all of its producing properties and believes
that it has satisfactory title to such properties in accordance with standards
generally accepted in the oil and gas industry. Prior to completing an
acquisition of producing oil and natural gas leases, the Company obtains title
opinions on all leases valued at $25,000 or greater. The Company's oil and
natural gas properties are subject to customary royalty interests, liens for
current taxes and other burdens which the Company believes do not materially
interfere with the use of or affect the value of such properties.
COMPETITION
The oil and gas industry is highly competitive. The Company competes for
the acquisition of oil and natural gas properties, primarily on the basis of the
price to be paid for such properties, with numerous entities, including major
oil companies, other independent oil and gas concerns and individual producers
and operators. Many competitors have financial and other resources substantially
greater than those of the Company. The Company believes that it enjoys a
competitive advantage over most other companies active in the Hugoton Producing
Area because of its extensive database of information and its technical and
geological experience in the area.
REGULATION
General
Various aspects of the Company's oil and natural gas operations are
regulated by administrative agencies under statutory provisions of the states
where such operations are subject to various types of regulation, including
regulation by state and federal agencies. Legislation affecting the oil and gas
industry is under constant review for amendment or expansion. Numerous
departments and agencies, both federal and state, are authorized by statute to
issue, and have issued, rules and regulations binding upon the oil and gas
industry and its individual members. The Federal Energy Regulatory Commission
("FERC") regulates the transportation and sale for resale of natural gas in
interstate commerce pursuant to the Natural Gas Act of 1938 ("NGA") and the
Natural Gas Policy Act of 1978 ("NGPA"). In the past, the Federal government has
regulated the prices at which oil and gas could be sold. 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. Deregulation of wellhead sales in the
natural gas industry began with the enactment of the NGPA in 1978. In 1989,
Congress enacted the Natural Gas Wellhead Decontrol Act ("the Decontrol Act").
The Decontrol Act removed all NGA and NGPA price and nonprice controls affecting
wellhead sales of natural gas effective January 1, 1993.
Regulation of Oil and Natural Gas Exploration and Production
Exploration and production operations of the Company are subject to various
types of regulation at the federal, state and local levels. Such regulations
include requiring permits and drilling bonds for the drilling of wells,
regulating the location of wells, the method of drilling and casing wells, and
the surface use and restoration of properties upon which wells are drilled. Many
states also have statutes or regulations addressing conservation matters,
including provisions for the utilization or pooling of oil and gas properties,
the establishment of maximum rates of production from oil and gas wells and the
regulation of spacing, plugging and abandonment of such wells. Some state
statutes limit the rate at which oil and gas can be produced from the Company's
properties. See "Risk Factors -- Compliance with Governmental Regulations."
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<PAGE> 29
Natural Gas Marketing, Gathering, Processing and Transportation
Federal legislation and regulatory controls in the United States have
historically affected the price of natural gas and the manner in which such
production is marketed.
Commencing in April 1992, the FERC issued Order Nos. 636,636-A, and 636-B
("Order No. 636"), which require interstate pipelines 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. Although Order No. 636 does not directly regulate
the Company's activities, the FERC has stated that it intends for Order No. 636
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's activities. Although
Order No. 636 could provide the Company with additional market access and more
fairly applied transportation service rates, Order No. 636 could also subject
the Company to more restrictive pipeline imbalance tolerances and greater
penalties for violation of those tolerances.
In many instances, the result of Order No. 636 and related initiatives have
been to substantially reduce or eliminate the interstate pipelines' traditional
role as wholesalers of natural gas in favor of providing only storage and
transportation services.
Order No. 636 has been implemented on all interstate pipelines. In July
1996, the United States Court of Appeals for the District of Columbia Circuit
largely upheld Order No. 636. A number of parties have appealed this ruling to
the Supreme Court and proceedings on remanded issues are currently ongoing at
FERC. In addition, numerous parties have filed petitions for review of Order No.
636, as well as orders in individual pipeline restructuring proceedings. Upon
such judicial review, these orders may be remanded or reversed in whole or in
part. With Order No. 636 subject to court review, and pending ongoing court
reviews of individual pipeline restructurings, it is difficult to predict with
precision its ultimate effects.
In December 1992, the FERC issued Order No. 547, governing the issuance of
blanket marketer sales certificates to all natural gas sellers other than
interstate pipelines. The order eliminates the need for natural gas producers
and marketers to seek specific authorization under Section 7 of the NGA from the
FERC to make sales of natural gas for resale. The FERC intends Order No. 547, in
tandem with Order No. 636, to foster a competitive market for natural gas by
giving natural gas purchasers access to multiple supply sources at market-driven
prices. Order No. 547 may increase competition in markets in which the Company's
natural gas is sold.
The FERC has recently announced its intention to re-examine certain of its
transportation-related policies, including the appropriate manner in which
interstate pipelines release transportation capacity under Order No. 636, and
the use of market-based rates for interstate gas transmission. While any
resulting FERC action would affect the Company only indirectly, these inquires
are intended to further enhance competition in natural gas markets.
Regulation of onshore natural gas gathering activities is primarily a
matter of state oversight. Regulation of gas gathering and transportation
activities, depending upon the state involved, may include various
transportation, safety, rate, environmental and non-discriminatory purchase and
transport requirements.
Oil Sales and Transportation Rates
Sales prices of crude oil and gas liquids by the Company are not regulated.
The price the Company receives from the sale of these products may be affected
by the cost of transporting the products to market. Effective January 1995, the
FERC implemented regulations establishing an indexing system under which oil
pipelines will be able to change their transportation rates, subject to
prescribed ceiling levels. The indexing system would generally index such rates
to inflation, subject to certain conditions and limitations. The Company is not
able at this time to predict the effects of these regulations if any, on the
transportation costs associated with oil production from the Company's oil
producing operations.
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<PAGE> 30
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.
Pipeline Safety Regulation
The Company's gathering operations are subject to safety and operational
regulations relating to the design, installation, testing, construction,
operation, replacement and management of facilities. Pipeline safety issues have
recently been the subject of increasing focus in various political and
administrative arenas at both the state and federal levels. Additional pending
legislation would, among other things, increase the frequency with which certain
pipelines must be inspected, as well as increase potential civil and criminal
penalties for violations of pipeline safety.
Operating Hazards and Environmental Matters
The oil and gas business involves a variety of operating risks, including
the risk of fire, explosions, blow-outs, pipe failure, casing collapse,
abnormally pressured formations and environmental hazards such as oil spills,
gas leaks, ruptures and 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. Such
hazards may hinder or delay drilling, development and on-line operations.
Extensive federal, state and local laws govern oil and natural gas
operations regulating the discharge of materials into the environment or
otherwise relating to the protection of the environment. Numerous governmental
departments issue rules and regulations to implement and enforce such laws which
are often difficult and costly to comply with and which carry substantial
penalties for failure to comply. Some laws, rules and regulations relating to
protection of the environment may, in certain circumstances, impose "strict
liability" for environmental contamination, rendering a person liable for
environmental damages and cleanup costs without regard to negligence of fault on
the part of such person. Other laws, rules and regulations may restrict the rate
of oil and natural gas production below the rate that would otherwise exist. The
regulatory burden on the oil and natural gas industry increases its cost of
doing business and consequently affects its profitability. These laws, rules and
regulations affect the operations of the Company. Compliance with environmental
requirements generally could have a material adverse effect upon the capital
expenditures, earnings or competitive position of Hugoton and its subsidiaries.
The Company believes that it is in substantial compliance with current
applicable environmental laws and regulations and that continued compliance with
existing requirements will not have a material adverse impact on the Company.
Nevertheless, changes in environmental law have the potential to adversely
affect the Company's operations. For instance, at least two separate courts have
recently ruled that certain wastes associated with the production of crude oil
may be classified as hazardous substances under the Comprehensive Environmental
Response, Compensation, and Liability Act (commonly called "Superfund") and thus
the Company could become subject to the burdensome cleanup and liability
standards established under the federal Superfund program if significant
concentrations of such wastes were determined to be present at the Company's
properties or to have been produced as a result of the Company's operations.
Alternately, pending amendments to Superfund presently under consideration by
the U.S. Congress could relax many of the burdensome cleanup and liability
standards established under the statute.
The Company has established guidelines to be followed to comply with
environmental laws, rules and regulations. The Company has designated a
compliance officer whose responsibility is to monitor regulatory requirements
and their impacts on the Company and to implement appropriate compliance
procedures. The Company also employs an environmental manager whose
responsibilities include causing the Company's operations to be carried out in
accordance with applicable environmental guidelines and implementing adequate
safety precautions.
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<PAGE> 31
Although the Company maintains insurance against some, but not all, of the
risks described above, including insuring the cost of clean-up operations,
public liability and physical damage, there is no assurance that such insurance
will be adequate to cover all such costs or that such insurance will continue to
be available in the future or that such insurance will be available at premium
levels that justify its purchase. The occurrence of a significant event not
fully insured or indemnified against could have a material adverse effect on the
Company's financial condition and operations.
The Company has established guidelines to be followed to comply with
environmental laws, rules and regulations. The Company has designated a
compliance officer whose responsibility is to monitor regulatory requirements
and their impacts on the Company and to implement appropriate compliance
procedures. Although the company maintains pollution insurance against the costs
of clean-up operations, public liability and physical damage, there is no
assurance that such insurance will be adequate to cover all such costs or that
such insurance will continue to be available in the future.
EMPLOYEES
On February 28, 1997, the Company employed 116 people, including 55 that
work in the Company's various field offices. The Company believes its
relationship with its employees is satisfactory.
OFFICES AND EQUIPMENT
The Company leases its Wichita, Kansas headquarters under a lease covering
approximately 40,000 square feet, expiring in 2006. The monthly rent is
approximately $30,000. The Company also leases office space in Denver, Colorado
and owns six field operating offices in Kansas, Oklahoma, Texas, and North
Dakota. The Company also maintains an inventory of field equipment and materials
including tubular goods, compressors, pumping units and field vehicles.
LEGAL PROCEEDINGS
The Company is a named defendant in lawsuits and is a party in governmental
proceedings from time to time arising in the ordinary course of business. While
the outcome of such lawsuits and other proceedings against the Company cannot be
predicted with certainty, management does not believe that these matters will
have a material adverse effect on the financial condition or results of
operations of the Company.
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<PAGE> 32
MANAGEMENT
The Company's Board of Directors currently has nine members. The following
table sets forth the names, ages and titles of the current directors and
executive officers of the Company and, in the case of the directors, the
expiration of their respective terms.
<TABLE>
<CAPTION>
EXPIRATION OF
NAME AGE POSITION TERM AS DIRECTOR
---- --- -------- ----------------
<S> <C> <C> <C>
Floyd C. Wilson....................................................... 50 Chairman of the Board, President 1999
and Chief Executive Officer
W. Mark Womble........................................................ 46 Executive Vice President and Chief 1999
Financial Officer
J. W. Decker.......................................................... 45 Executive Vice President and 1999
Director
Jimmy W. Gowens....................................................... 48 Vice President of Exploration --
Earl W. Ringeisen..................................................... 62 Vice President of Operations --
Dallas W. Dobbs....................................................... 39 Vice President of Marketing --
Randall K. Click...................................................... 43 Vice President of Land --
Shane M. Bayless...................................................... 30 Controller --
David S. Elkouri...................................................... 43 Director 1998
John T. McNabb, II.................................................... 52 Director 1998
Alan J. Andreini...................................................... 50 Director 1998
Stephen Berger........................................................ 57 Director 1997
Jonathan S. Linker.................................................... 47 Director 1997
William E. Macaulay................................................... 51 Director 1997
</TABLE>
Floyd C. Wilson has been Chairman of the Board, President and Chief
Executive Officer of the Company since he formed the Company in 1987. Mr. Wilson
started in the energy business in Houston in 1970 as a completion engineer. He
moved to Wichita in 1976 to start an oil and gas operating company, one of
several successful energy ventures which preceded the 1987 formation of the
Company. Mr. Wilson has served as a member of the Board of Directors of the
Kansas Independent Oil and Gas Association.
W. Mark Womble has been Chief Financial Officer and Vice President of the
Company since October 1, 1993 and a Director since 1995. Mr. Womble has been
Executive Vice President of the Company since May 18, 1995. Mr. Womble worked as
a Financial Consultant in the Dallas office of Merrill Lynch & Co. from October
1991 to October 1993. Prior to October 1991, Mr. Womble was employed by a large
independent oil and gas company for 10 years, the last three of which he served
as Vice President and Treasurer.
J. W. Decker has been Executive Vice President and Director of the Company
since September 1995. Prior to joining the Company, Mr. Decker served as
President and Chief Executive Officer of Consolidated Oil & Gas, Inc. from 1991
until it was merged into the Company in September 1995.
Jimmy W. Gowens has been Vice President of Exploration of the Company since
August 1993. From April 1987 to August 1993 Mr. Gowens was Manager of
Exploration of the Company.
Earl W. Ringeisen has been Vice President of Operations of the Company
since August 1993, and from April 1987 to August 1993 Mr. Ringeisen was
Production Superintendent and Completion Engineer of the Company.
Dallas W. Dobbs has been Vice President of Marketing of the Company since
May 1996. Mr. Dobbs was Controller from June 1993 to May 1996 and Manager of
Information Systems from October 1991 to June 1993.
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<PAGE> 33
Randall K. Click has been Vice President of Land of the Company since
August 1996 and was Manager of Land from June 1994 to August 1996. Prior to
joining the Company, Mr. Click was acting Director of Acquisitions and
Divestitures for Atlantic Richfield Company from September 1993 until June 1994
and served as Senior Landman from April 1991 until September 1993.
Shane M. Bayless has been Controller of the Company since May 1996 and
Manager of Accounting from August 1993 to May 1996. Prior to joining the
Company, Mr. Bayless was a Senior Auditor with Ernst & Young LLP from January
1990 to August 1993.
David S. Elkouri has been a Director since July 1993. Mr. Elkouri has been
a member in the law firm of Hinkle, Eberhart & Elkouri, L.L.C., Wichita, Kansas,
since 1986.
John T. McNabb, II has been a Director since July 1993. Mr. McNabb has been
Chief Executive Officer and director of Growth Capital Partners, Inc., a
merchant banking firm, since April 1992. Prior to such time, Mr. McNabb was a
Managing Director and a board member of BT Southwest, Inc., a wholly-owned
subsidiary of Bankers Trust New York Corporation, a merchant banking firm,
beginning in July 1990. Mr. McNabb is also a director of Vintage Petroleum, Inc.
Alan J. Andreini has been a Director since September 1995. Mr. Andreini has
been Executive Vice President of Comdisco, Inc., a corporation which provides
high technology asset management and continuity services, since 1994. From 1980
until 1994, Mr. Andreini was a Senior Vice President of Comdisco, Inc. Mr.
Andreini is also a director of Comdisco, Inc.
Stephen Berger has been a Director since July 1993. Mr. Berger has been a
General Partner in Odyssey Partners, L.P., an investment partnership, since July
1993. From July 1990 to July 1993, Mr. Berger was employed by GE Capital
Corporation, a corporate finance corporation, most recently as Executive Vice
President. Mr. Berger is also a director of Forstmann & Company, Inc., Monarch
Marking Systems, Inc., Scotsman Holdings, Inc. and The Scotsman Group, Inc.
Jonathan S. Linker has been a Director since July 1996. Mr. Linker has
served as Managing Director of First Reserve Corporation, an investment company,
since November 1996. Mr. Linker has been President and director of IDC Energy,
an oil and gas production and investment company, since January 1987. Mr. Linker
is also Vice President and director of Sunset Production Corporation, an oil and
gas company, since January 1992.
William E. Macaulay has been a Director since September 1995. Mr. Macaulay
has been President and Chief Executive Officer of First Reserve Corporation, an
investment management firm, since 1983. Mr. Macaulay is also a director of
Maverick Tube Corporation, Weatherford Enterra, Inc., National-Oilwell, Inc. and
TransMontaigne Oil Company.
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<PAGE> 34
PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth certain information regarding the beneficial
ownership of the Company's Common Stock as of February 1, 1997 by (i) each
person who is known by the Company to be the beneficial owner (as determined in
accordance with Rule 13d-3 under the Securities and Exchange Act of 1934, as
amended) of more than 5% of the outstanding Common Stock; (ii) each Selling
Stockholder; (iii) each director and (iv) all executive officers and directors
of the Company as a group.
<TABLE>
<CAPTION>
NUMBER OF
SHARES SHARES OWNED
BENEFICIALLY PERCENT NUMBER AFTER
OWNED AT BENE- OF OFFERING
FEBRUARY 1, FICIALLY SHARES ---------------------
NAME 1997 OWNED OFFERED NUMBER PERCENT
---- ------------ -------- --------- ---------- -------
<S> <C> <C> <C> <C> <C>
Floyd C. Wilson 4,257,541(a) 21.4% -- 4,257,541 19.9%
Odyssey Partners, L.P. 2,142,800(b) 10.8% 2,142,800 -- --
Cramer Rosenthal McGlynn, Inc. 1,423,934(c) 7.2% -- 1,423,934 6.7%
First Reserve Corporation 4,768,441(d) 24.1% 2,357,200 2,411,241 11.4%
Comdisco, Inc. 3,859,820 19.5% -- 3,859,820 18.2%
John T. McNabb, II 71,000(e) * -- 71,000 *
Stephen Berger 2,163,800(b)(f) 10.9% -- -- --
David S. Elkouri 51,000(g) * -- 51,700 *
W. Mark Womble 54,631(h) * -- 54,631 *
J. W. Decker 318,230(i) 1.6% -- 318,230 1.5%
Alan J. Andreini 3,924,820(j) 19.9% -- 3,924,820 18.5%
William E. Macaulay 4,768,441(k) 24.1% -- 2,411,241(d) 11.4%
Jonathan S. Linker 4,791,941(k) 24.3% -- 2,434,741(d) 11.5%
Directors and executive officers 15,837,284(l) 77.7% -- 11,316,284 51.8%
as a group (15 persons)
</TABLE>
- ---------------
* Represents less than 1%
(a) Does not include 141,750 shares currently owned by Mr. Wilson but which are
subject to an agreement with the Company pursuant to which Mr. Wilson is
required to contribute to the Company the number of shares necessary to
satisfy the exercise of certain of the options previously granted by the
Company in exchange for receipt of the exercise price therefor. Includes
100,000 shares held by Mr. Wilson's wife and 100,000 shares held by a family
limited partnership, of which Mr. Wilson's wife is the general partner and
his children are limited partners. Also includes 204,626 shares held by The
Wilson Foundation, 5,991 shares allocated to Mr. Wilson pursuant to the
Company's 401(k) Profit Sharing Plan (based on a plan statement dated as of
September 30, 1996), and 125,000 shares issuable pursuant to presently
exercisable options granted to Mr. Wilson pursuant to stock option
agreements with the Company.
(b) Leon Levy, Jack Nash, Joshua Nash, Stephen Berger (a director of the
Company) and Brian Wruble, by virtue of being general partners of Odyssey,
share voting and investment power with respect to the Company's Common Stock
owned by Odyssey and, accordingly, may each be deemed to own beneficially
the Company's Common Stock owned by Odyssey. Each of the aforesaid persons
has expressly disclaimed any such beneficial ownership which exceeds the
proportionate interest in the Common Stock which he may be deemed to own as
a general partner of Odyssey. Odyssey is a private investment firm with
substantial equity capital invested in marketable securities and closely
held businesses. The address of each of the general partners of Odyssey is
the address of Odyssey.
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<PAGE> 35
(c) As disclosed on the latest Schedule 13G, dated as of May 1, 1996, filed with
the Securities and Exchange Commission.
(d) As disclosed on Amendment No. 1 to Schedule 13D, dated as of January 28,
1997, filed with the Commission. First Reserve Corporation owns no shares of
the Company's Common Stock directly but, as the managing general partner of
the entities named below, it shares voting and investment power over such
shares with such entities. First Reserve Corporation is the managing general
partner of First Reserve Secured Energy Asset Fund, Limited Partnership
("FRSEA"), First Reserve Fund V, Limited Partnership ("Fund V"), American
Gas & Oil Investors Limited Partnership ("AmGO") and AmGO II, Limited
Partnership ("AmGO II"). The following table sets forth certain information
regarding the beneficial ownership of the Company's Common Stock as of
February 1, 1997:
<TABLE>
<CAPTION>
SHARES OWNED AFTER THE
NUMBER OF SHARES PERCENT NUMBER OF OFFERING
BENEFICIALLY OWNED AT BENEFICIALLY SHARES -----------------------
NAME FEBRUARY 1, 1997 OWNED OFFERED NUMBER PERCENT
------------------------ --------------------- ------------ --------- ----------- ---------
<S> <C> <C> <C> <C> <C>
FRSEA................... 1,833,956 9.3% 1,233,956 600,000 2.8%
Fund V.................. 2,138,802 10.7% 619,764 1,519,038 7.2%
AmGO.................... 584,407 3.0% 292,204 292,203 1.4%
AmGO II................. 211,276 1.1% 211,276 -- --
</TABLE>
(e) Represents 71,000 shares issuable upon exercise of options granted to Mr.
McNabb pursuant to stock option agreements with the Company.
(f) Includes 21,000 shares issuable upon exercise of options granted to Mr.
Berger pursuant to stock option agreements with the Company.
(g) Includes 46,000 shares issuable upon exercise of options granted to Mr.
EIkouri pursuant to stock option agreements with the Company. Includes 4,000
shares owned by The David S. and Debbi C. Elkouri Foundation and 1,000
shares owned by The David S. Elkouri Rollover IRA.
(h) Includes 50,000 shares issuable upon exercise of options granted to Mr.
Womble pursuant to stock option agreements with the Company. Includes 3,251
shares acquired pursuant to the Company's 401(k) Profit Sharing Plan (based
on a plan statement dated as of September 30, 1996).
(i) Includes 93,750 shares issuable upon exercise of options granted to Mr.
Decker pursuant to a stock option agreement with the Company, 31,250 shares
of which are pursuant to a stock option agreement which has not yet been
approved by the stockholders of the Company.
(j) Includes 15,000 shares issuable upon exercise of options granted to Mr.
Andreini pursuant to a stock option agreement with the Company. Also
includes 3,859,820 shares beneficially owned by Comdisco, for which Mr.
Andreini shares voting and investment power as an executive officer of
Comdisco. Mr. Andreini disclaims beneficial ownership of the Company's
Common Stock owned by Comdisco.
(k) Messrs. Macaulay and Linker are each managing directors and Mr. Macaulay is
a stockholder of First Reserve Corporation. First Reserve Corporation is the
managing general partner of FRSEA, Fund V, AmGO and AmGO II which
collectively own, 4,768,441 shares of the Company's Common Stock. Messrs.
Macaulay and Linker each disclaim beneficial ownership of the Company's
Common Stock owned by the partnerships, but through their positions at First
Reserve Corporation share voting and investment power over such shares.
(l) Includes 538,875 shares issuable upon exercise of options under the 1993
Option Plan, the 1995 Option Plan and the Additional Option Agreements,
including 135,750 of the 141,750 shares referenced in (a) above. Includes
78,000 shares issuable upon exercise of options under the Amended and
Restated 1993 Nonemployee Directors' Stock Option Plan. Also includes shares
held by Odyssey, Comdisco, and partnerships and entities for whom First
Reserve Corporation is the managing general partner.
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<PAGE> 36
SHAREHOLDERS AGREEMENT
On September 7, 1995, as a condition to the merger between the Company and
COG, the Company, Odyssey, CRM, the First Reserve Group, Comdisco and Wilson
entered into the Shareholders Agreement. The Shareholders Agreement provides
that, so long as the parties own their shares or until the Shareholders
Agreement is terminated, such parties agree to use their best efforts (including
voting the shares owned by them and their affiliates, calling special meetings
of the stockholders of the Company and executing and delivering written
consents) to elect nine members of the Board, consisting of the following: three
members designated by the First Reserve Group, one member designated by
Comdisco, two members designated by Wilson, one member designated by Odyssey and
two members designated by a vote of a majority of the stockholders of the
Company.
Each party's right to designate a director or directors shall terminate if
such party's ownership of the Company's Common Stock is below 5% of the
outstanding Common Stock of the Company. After the Offering, Odyssey will no
longer own any Common Stock of the Company; therefore, its right to designate a
director will terminate.
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<PAGE> 37
DESCRIPTION OF CAPITAL STOCK
The Company's authorized capital stock consists of 100,000,000 shares of
Common Stock, without par value, and 10,000,000 shares of Preferred Stock,
without par value.
COMMON STOCK
Upon completion of the Offering, the Company will have 21,202,036 shares of
Common Stock outstanding. Holders of Common Stock are entitled to one vote for
each share held in the election of directors and on all other matters submitted
to a vote of shareholders and do not have cumulative voting rights. Holders of a
majority of the shares of Common Stock entitled to vote in any election of
directors may elect all of the directors standing for election.
Holders of Common Stock are entitled to receive ratably such dividends, if
any, as may be declared by the Board of Directors out of funds legally available
therefor, subject to any preferential dividend rights of any outstanding
Preferred Stock. See "Dividend Policy." Upon the liquidation, dissolution or
winding up of the Company, the holders of Common Stock are entitled to receive
ratably the net assets of the Company available after payment of all debts and
other liabilities, subject to the prior rights of any outstanding Preferred
Stock. Holders of Common Stock have no preemptive, subscription, redemption or
conversion rights. The outstanding shares of Common Stock are, and the shares
offered by the Company in the Offering will be, when issued and paid for, fully
paid and nonassessable.
PREFERRED STOCK
The Company has an authorized class of undesignated Preferred Stock
consisting of 10,000,000 shares, none of which are issued and outstanding. The
Board of Directors is authorized, subject to any limitations prescribed by law,
without further shareholder approval, to issue up to 10,000,000 shares of
Preferred Stock from time to time, in one or more series. Each such series of
Preferred Stock shall have such number of shares, designations, preferences,
voting powers, qualifications and special or relative rights or privileges as
shall be determined by the Board of Directors, which may include, among others,
dividend rights, voting rights, redemption and sinking fund provisions,
liquidation preferences and conversion rights.
The Board of Directors has the authority to issue shares of Preferred Stock
and to determine its rights and preferences to eliminate delays associated with
a shareholder vote on specific issuances. The issuance of Preferred Stock, while
providing desirable flexibility in connection with possible acquisitions and
other corporate purposes, could adversely affect the voting power of holders of
Common Stock and the likelihood that such holders will receive dividend payments
and payments upon liquidation and could have the effect of delaying, deferring
or preventing a change in control of the Company. The Company has no present
plans to issue any shares of Preferred Stock, but may do so in the future. Under
certain circumstances, the issuance of such Preferred Stock may render more
difficult or tend to discourage a merger, tender offer or proxy contest for the
Company, the assumption of control of the Company by a holder of a large block
of the Company's securities or the removal of incumbent directors.
CLASSES OF DIRECTORS
The Company's Bylaws provide that the Board of Directors shall consist of
three classes of directors, each serving for a three-year term ending in a
successive year. This provision may make it more difficult to effect a takeover
of the Company because it would generally take two annual meetings of
shareholders for an acquiring party to elect a majority of the Board of
Directors. As a result, a classified Board of Directors may discourage proxy
contests for the election of directors or purchases of a substantial block of
stock because it could operate to prevent obtaining control of the Board of
Directors in a relatively short period of time. For information relating to a
shareholders agreement among the principal stockholders of the Company, see
"Shareholders Agreement."
36
<PAGE> 38
Indemnification Provisions
The Company's Bylaws provide that the Company shall indemnify all directors
and officers of the Company to the full extent permitted by the Kansas General
Corporation Code. Under such provisions, any director or officer, who in his
capacity as such, is made or threatened to be made, a party to any suit or
proceeding, may be indemnified if the Board of Directors determines such
director or officer acted in good faith and in a manner he reasonably believed
to be in or not opposed to the best interest of the Company.
TRANSFER AGENT AND REGISTRAR
The transfer agent and registrar for the Common Stock is American Stock
Transfer and Trust Company, New York, New York.
37
<PAGE> 39
UNDERWRITING
Subject to the terms and conditions set forth in the Underwriting Agreement
among the Company, the Selling Stockholders and Salomon Brothers Inc, Donaldson,
Lufkin & Jenrette Securities Corporation, Smith Barney Inc. and Jefferies &
Company, Inc., as representatives of the several underwriters (the
"Representatives"), the Company and the Selling Stockholders have agreed to sell
to the entities named below (the "Underwriters"), and each of the Underwriters
has severally agreed to purchase from the Company and the Selling Stockholders,
the aggregate number of shares of Common Stock set forth opposite its name
below.
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Salomon Brothers Inc ...................
Donaldson, Lufkin & Jenrette Securities
Corporation...........................
Smith Barney Inc. ......................
Jefferies & Company, Inc. ..............
---------
Total......................... 6,000,000
=========
</TABLE>
The Underwriting Agreement provides that the several Underwriters will be
obligated to purchase all the shares of Common Stock being offered (other than
the shares covered by the over-allotment option described below), if any are
purchased.
The Representatives have advised the Company that they propose initially to
offer the Common Stock directly to the public at the public offering price set
forth on the cover page of this Prospectus and to certain dealers at such price
less a concession not in excess of $ per share. The Underwriters may allow,
and such dealers may reallow, a concession not in excess of $ per share on
sales to certain other dealers. After the initial offering, the price to public
and concessions to dealers may be changed.
First Reserve Secured Energy Asset Fund, Limited Partnership; First Reserve
Fund V, Limited Partnership; American Gas & Oil Investors, Limited Partnership
and AmGO II, Limited Partnership have granted to the Underwriters an option,
exercisable for 30 days from the date of this Prospectus, to purchase up to
450,000 additional shares of Common Stock at the price to public less the
underwriting discount set forth on the cover page of this Prospectus and,
subject to the prior exercise in full of the option granted by such Selling
Stockholders, the Company has granted the Underwriters a similar option for an
additional 450,000 shares. The Underwriters may exercise these options solely
for the purpose of covering over-allotments, if any, incurred in the sale of
shares of Common Stock being offered hereby. To the extent the Underwriters
exercise such options, each of the Underwriters will be obligated, subject to
certain conditions, to purchase the same proportion of such additional shares as
the number of shares set forth opposite such Underwriter's name in the preceding
table bears to the total number of shares of Common Stock offered by the
Underwriters hereby.
For a period of 90 days after the date of this Prospectus, the Company,
certain stockholders including the Selling Stockholders, and each director and
executive officer of the Company have agreed not to offer, sell, contract to
sell or otherwise dispose of any shares of Common Stock, any other capital stock
of the Company or any security convertible into or exercisable or exchangeable
for Common Stock or any such other capital stock without the prior written
consent of Salomon Brothers Inc, except (i) the Company may issue securities
pursuant to the Company's stock option or other benefit or incentive plans
maintained for its officers, directors or employees and (ii) the Company may
issue shares in connection with an acquisition, provided that the recipient of
the shares agrees to the foregoing restrictions.
38
<PAGE> 40
No action has been taken or will be taken in any jurisdiction by the
Company or the Underwriters that would permit a public offering of the shares
offered hereby in any jurisdiction where action for that purpose is required,
other than the United States. Persons who come into possession of this
Prospectus are required by the Company and the Underwriters to inform themselves
about and to observe any restrictions as to the offering of the shares offered
hereby and the distribution of this Prospectus.
The Company and the Selling Stockholders have agreed to indemnify the
Underwriters against certain civil liabilities, including certain liabilities
under the Securities Act or contribute to payments the Underwriters may be
required to make in respect thereof.
In connection with this Offering, certain Underwriters and selling group
members and their respective affiliates may engage in transactions that
stabilize, maintain or otherwise affect the market price of the Common Stock.
Such transactions may include stabilization transactions effected in accordance
with Rule 104 of Regulation M, pursuant to which such persons may bid for or
purchase Common Stock for the purpose of stabilizing its market price. The
Underwriters also may create a short position for the account of the
Underwriters by selling more Common Stock in connection with the Offering than
they are committed to purchase from the Company and the Selling Stockholders,
and in such case may purchase Common Stock in the open market following
completion of the Offering to cover all or a portion of such short position. The
Underwriters may also cover all or a portion of such short position, up to
900,000 shares of Common Stock, by exercising the Underwriters' over-allotment
options referred to above. In addition, Salomon Brothers Inc, on behalf of the
Underwriters, may impose "penalty bids" under contractual arrangements with the
Underwriters whereby it may reclaim from an Underwriter (or dealer participating
in the Offering) for the account of the other Underwriters, the selling
concession with respect to Common Stock that is distributed in the Offering but
subsequently purchased for the account of the Underwriters in the open market.
Any of the transactions described in this paragraph may result in the
maintenance of the price of the Common Stock at a level above that which might
otherwise prevail in the open market. None of the transactions described in this
paragraph are required, and, if they are undertaken, they may be discontinued at
any time.
LEGAL OPINIONS
The legality of the Common Stock offered hereby will be passed upon for the
Company by Vinson & Elkins L.L.P., Houston, Texas, and certain legal matters
will be passed upon for the Underwriters by Baker & Botts, L.L.P., Houston,
Texas.
EXPERTS
The consolidated financial statements of Hugoton Energy Corporation as of
December 31, 1995 and 1996 and for each of the years in the three-year period
ended December 31, 1996 appearing in this Prospectus and Registration Statement
have been audited by Ernst & Young LLP, independent auditors, as set forth in
their report thereon appearing elsewhere herein, and are included in reliance
upon such report given upon the authority of such firm as experts in accounting
and auditing.
The estimates of oil and gas reserves appearing herein at December 31,
1994, 1995 and 1996 were based upon engineering studies prepared by the
independent petroleum engineering firm of Ryder Scott Company Petroleum
Engineers. Such estimates are included herein in reliance upon the authority of
such firm as an expert in such matters.
39
<PAGE> 41
CERTAIN DEFINITIONS
As used in this Prospectus, the following terms have the following specific
meanings: "Mcf" means thousand cubic feet, "MMcf" means million cubic feet,
"Bcf" means billion cubic feet, "Bbl" means barrel, "Bbls" means barrels,
"MBbls" means thousand barrels and "MMBbls" means million barrels, "Mcfe" means
thousand cubic feet equivalent, "MMcfe" means million cubic feet equivalent,
"Bcfe" means billion cubic feet equivalent, "MMbtu" means million British
thermal units and "Tcf" means trillion cubic feet.
Unless otherwise indicated in this Prospectus, natural gas volumes are
stated at the legal pressure base of the state or area in which the reserves are
located at 60 degrees Fahrenheit. Natural gas equivalents are determined using
the ratio of six Mcf of natural gas to one barrel of crude oil, condensate or
natural gas liquids so that one barrel of oil is referred to as six Mcf of
natural gas equivalent or "Mcfe".
The term "spot market" as used herein refers to natural gas sold under
contracts with a term of six months or less or contracts which call for a
redetermination of sales prices every six months or earlier.
With respect to information concerning the Company's working interests in
wells or drilling locations, "gross" oil and gas wells or "gross" acres is the
number of wells or acres in which the Company has an interest, and "net" oil and
gas wells or "net" acres are determined by multiplying "gross" wells or acres by
the Company's working interest in those wells or acres. A working interest in an
oil and gas lease is an interest that gives the owner the right to drill,
produce, and conduct operating activities on the property and to receive a share
of production of any hydrocarbons covered by the lease. A working interest in an
oil and gas lease also entitles its owner to a proportionate interest in any
well located on the lands covered by the lease, subject to all royalties,
overriding royalties and other burdens, to all costs and expenses of
exploration, development and operation of any well located on the lease, and to
all risks in connection therewith.
"Acreage held by production" means acreage covered by an oil and gas lease
which has a producing well on it, or which is pooled with a lease or leases
having one or more producing wells on them, so the lease is maintained in effect
for the duration of such production.
"Capital expenditures" means costs associated with exploratory and
development drilling (including exploratory dry holes); leasehold acquisitions;
seismic data acquisitions; geological, geophysical and land related overhead
expenditures; delay rentals; producing property acquisitions; and other
miscellaneous capital expenditures.
A "development well" is a well drilled as an additional well to the same
horizon or horizons as other producing wells on a prospect, or a well drilled on
a spacing unit adjacent to a spacing unit with an existing well capable of
commercial production and which is intended to extend the proven limits of a
prospect. An "exploratory well" is a well drilled to find commercially
productive hydrocarbons in a unproved area, or to extend significantly a known
prospect.
"EBITDAX" means income before depletion, depreciation, amortization,
exploration expense, interest expense, income taxes and extraordinary items.
A "farmin" or "farmout" means an agreement whereunder the owner of a
working interest in an oil and gas lease assigns the working interest or a
portion thereof to another party who desires to drill on the leased acreage.
Generally, the assignee is required to drill one or more wells in order to earn
its interest in the acreage. The assignor usually retains a royalty or
reversionary interest in the lease. The interest received by an assignee is a
"farmin" while the interest transferred by the assignor is a "farmout."
"Hugoton Field" means the Chase formation of the Kansas Hugoton field in
southwest Kansas and the Guymon Hugoton field in the Oklahoma panhandle and the
Brown Dolomite formation of the Texas Hugoton field in the Texas panhandle, the
Bradshaw gas area of southwest Kansas (which is also in the Chase formation) and
the Panhandle fields of Texas (which are also in the Brown Dolomite formation).
40
<PAGE> 42
"Hugoton Producing Area" means the Hugoton Field and the fields and pay
zones underlying the Hugoton Field.
"Infill drilling" means drilling for the development and production of
proved undeveloped reserves or to economically accelerate production of reserves
classified as proved developed.
"Mineral interests" means an interest in the minerals in the ground,
sometimes subject to a mineral lease, which entitles the owner to a specified
portion of the production or the proceeds from the sale of the production
thereof unburdened by operating and development costs.
"Multiple pay horizons" refers to the existence of numerous distinct
potential or proved producing formations oriented such that a vertical well bore
may encounter one or more of the formations which in turn increases the
likelihood of such well bore resulting in a productive well.
"Natural gas equivalents" means a volume, expressed in Mcf's of natural
gas, which includes not only natural gas but also oil, condensate or natural gas
liquids converted to an equivalent quantity of natural gas on an energy
equivalent basis. Equivalent gas reserves are based on a conversion factor of
six Mcf of gas per barrel of liquids.
"Overriding royalty interests" means an interest in an oil and gas property
entitling the owner to a share of natural gas and oil production free of costs
of production.
"Present value of future net revenues" means estimated future net revenues
discounted at a rate of ten percent per annum.
"Productive well" means a well that is producing oil or gas or that is
capable of production.
"Reserves" means natural gas and crude oil, condensate and natural gas
liquids on a net revenue interest basis, found to be commercially recoverable.
"Proved developed reserves" includes proved developed producing reserves and
includes only those reserves expected to be recovered from existing completion
intervals in existing wells. "Proved reserves" means the estimated quantities of
oil, natural gas, natural gas liquids and oil which geological and engineering
data demonstrate with reasonable certainty to be recoverable in future years
from known reservoirs under existing economic and operating conditions. "Proved
undeveloped location" means a site on which a development well can be drilled
consistent with local spacing rules for the purpose of recovering proved
reserves. "Proved undeveloped reserves" includes those reserves expected to be
recovered from new wells on proved undrilled acreage or from existing wells
where a relatively major expenditure is required for recompletion. "Reserve
life" means the proved reserves divided by the annualized production volumes.
"Undeveloped acreage" means 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 gas regardless of whether such acreage contains proved
reserves.
"Recompletion" means the completion for production of an existing wellbore
in another formation in which the well has previously been completed.
AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form
S-2 (the "Registration Statement", which term encompasses all amendments,
exhibits, annexes and schedules thereto) under the Securities Act, with respect
to the Common Stock offered hereby. This Prospectus, which constitutes a part of
the Registration Statement, does not contain all the information set forth in
the Registration Statement, to which reference is hereby made. Statements made
in this Prospectus as to the contents of any contract, agreement or other
document referred to are not necessarily complete. With respect to each such
contract, agreement or other document filed as an exhibit to the Registration
Statement and the exhibits thereto, reference is hereby made to the exhibit for
a more complete description of the matter involved, and each statement made
herein shall be deemed qualified in its entirety by such reference.
41
<PAGE> 43
The Company is subject to the informational and reporting requirements of
the Exchange Act, and in accordance therewith files periodic reports, proxy and
information statements and other information with the Commission. The
Registration Statement filed by the Company with the Commission, as well as such
reports, proxy and information statements and other information filed by the
Company with the Commission, are available at the web site that the Commission
maintains at http://www.sec.gov and can be inspected and copied at the public
reference facilities maintained by the Commission at Room 1024, Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of
the Commission located at 7 World Trade Center, New York, New York 10048, and
the Chicago Regional Office, Northwestern Atrium Center, 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such material, when
filed, may also be obtained from the Public Reference Section of the Commission
at 450 Fifth Street, N.W., Washington, D.C. 20549 at prescribed rates. The
Common Stock is quoted on the Nasdaq/NMS and such reports, proxy and information
statements and other information concerning the Company are available at the
offices of the Nasdaq National Market located at 1735 K Street, N.W.,
Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
Incorporated by reference in this Prospectus is the Company's Annual Report
on Form 10-K for the fiscal year ended December 31, 1996, filed previously with
the SEC pursuant to Section 13 of the Exchange Act. Any statement contained in a
document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein modifies or supersedes such statement. Any statement so
modified or superseded shall not be deemed, except as so modified or superseded,
to constitute a part of this Prospectus.
The Company will provide without charge to each person, including any
beneficial owner of Common Stock, to whom a copy of this Prospectus has been
delivered, on the written or oral request of such person, a copy of any or all
of the foregoing documents incorporated by reference in this Prospectus, other
than exhibits to such documents unless such exhibits are specifically
incorporated by reference into the information that this Prospectus
incorporates. Written or oral requests for such copies should be directed to W.
Mark Womble, Executive Vice President, Hugoton Energy Corporation, 301 North
Main, Suite 1900, Wichita, Kansas 67202 (telephone: (316) 262-1522).
42
<PAGE> 44
HUGOTON ENERGY CORPORATION
INDEX TO FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Consolidated Financial Statements:
Report of Independent Auditors.............................. F-2
Consolidated Balance Sheets as of December 31, 1996 and
1995...................................................... F-3
Consolidated Statements of Operations for the years ended
December 31, 1996, 1995, and 1994......................... F-4
Consolidated Statements of Shareholders' Equity for the
years ended December 31, 1996, 1995 and 1994.............. F-5
Consolidated Statements of Cash Flows for the years ended
December 31, 1996, 1995 and 1994.......................... F-6
Notes to Consolidated Financial Statements.................. F-7
Unaudited Supplemental Oil and Gas Information.............. F-21
</TABLE>
F-1
<PAGE> 45
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Shareholders
Hugoton Energy Corporation
We have audited the accompanying consolidated balance sheets of Hugoton
Energy Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of operations, shareholders' equity and cash flows for
each of the three years in the period ended December 31, 1996. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements and the
schedule 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 consolidated financial position of
Hugoton Energy Corporation at December 31, 1996 and 1995, and the consolidated
results of its operations and its cash flows for each of the three years in the
period ended December 31, 1996 in conformity with generally accepted accounting
principles.
ERNST & YOUNG LLP
Wichita, Kansas
February 7, 1997
F-2
<PAGE> 46
HUGOTON ENERGY CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------
1996 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
ASSETS
Current assets:
Cash...................................................... $ 3,732 $ 3,914
Accounts receivable, less allowance for doubtful accounts
of $146 ($155 in 1995)................................. 12,985 8,859
Other..................................................... 568 1,096
-------- --------
Total current assets.............................. 17,285 13,869
-------- --------
Properties and equipment, at cost (successful efforts
method)
Proved properties......................................... 253,419 232,173
Unproved properties....................................... 24,696 7,314
Gas plant and gathering system............................ 1,478 2,976
Other..................................................... 6,303 5,612
-------- --------
285,896 248,075
Less accumulated depreciation, depletion and
amortization.................................... (53,118) (30,440)
-------- --------
232,778 217,635
-------- --------
Other assets, net........................................... 1,866 3,151
-------- --------
Total Assets...................................... $251,929 $234,655
======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities:
Accounts payable.......................................... $ 6,534 $ 4,439
Other accrued liabilities................................. 1,104 831
Accrued swap contract liability........................... -- 1,646
Accrued property taxes payable............................ 505 529
Accrued interest payable.................................. 597 341
-------- --------
Total current liabilities......................... 8,740 7,786
-------- --------
Long-term debt.............................................. 95,000 88,000
Deferred income taxes....................................... 16,142 10,795
Other deferred liabilities.................................. 520 750
Commitments and contingencies
Shareholders' equity:
Preferred stock, no par value, 10,000 shares authorized,
none issued and outstanding............................ -- --
Common Stock, no par value, 100,000 shares authorized,
19,702 shares issued and outstanding (19,697 in
1995).................................................. 197 197
Paid-in capital........................................... 134,541 134,541
Retained deficit.......................................... (3,211) (7,414)
-------- --------
Total shareholders' equity........................ 131,527 127,324
-------- --------
Total Liabilities and Shareholders' Equity........ $251,929 $234,655
======== ========
</TABLE>
See accompanying notes.
F-3
<PAGE> 47
HUGOTON ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS,
EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Revenues:
Oil and gas............................................... $66,292 $35,906 $23,696
Gas plant................................................. 1,914 1,638 1,945
Loss on certain gas swap contracts........................ 10 (2,712) --
Gain (loss) on sale of properties......................... -- (603) (11)
------- ------- -------
Total revenues.................................... 68,216 34,229 25,630
------- ------- -------
Expenses:
Production
Lease operations....................................... 16,460 9,214 5,664
Production and severance tax........................... 3,639 1,974 1,367
Gathering, transportation and other.................... 1,568 382 497
Gas plant................................................. 1,420 978 1,189
Exploration............................................... 1,711 2,239 3,036
General and administrative................................ 6,872 4,346 3,117
Depreciation, depletion and amortization.................. 23,423 15,234 8,677
------- ------- -------
Total expenses.................................... 55,093 34,367 23,547
------- ------- -------
Operating income (loss)..................................... 13,123 (138) 2,083
------- ------- -------
Other income (expenses):
Interest.................................................. (6,070) (5,108) (3,077)
Other..................................................... 466 319 252
------- ------- -------
Total other income (expenses)..................... (5,604) (4,789) (2,825)
------- ------- -------
Income (loss) before income taxes and extraordinary item.... 7,519 (4,927) (742)
(Provision) benefit for income taxes........................ (3,316) 1,394 66
------- ------- -------
Income (loss) before extraordinary item..................... 4,203 (3,533) (676)
Extraordinary item -- loss from early extinguishment of
debt, net of income tax................................... -- (136) --
------- ------- -------
Net income (loss)........................................... $ 4,203 $(3,669) $ (676)
======= ======= =======
Income (loss) per common share:
Income (loss) before extraordinary item..................... $ 0.21 $ (0.26) $ (0.07)
======= ======= =======
Extraordinary item.......................................... $ -- $ (0.01) $ --
======= ======= =======
Net income (loss) per common share.......................... $ 0.21 $ (0.27) $ (0.07)
======= ======= =======
Weighted average number of common shares outstanding........ 19,698 13,460 10,310
======= ======= =======
</TABLE>
See accompanying notes.
F-4
<PAGE> 48
HUGOTON ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
<TABLE>
<CAPTION>
COMMON STOCK
PREFERRED ---------------- PAID-IN RETAINED
STOCK NUMBER AMOUNT CAPITAL DEFICIT TOTAL
--------- ------ ------ ------- -------- -----
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
YEARS ENDED DECEMBER 31,
1996, 1995 AND 1994:
BALANCE, DECEMBER 31, 1993.. -- 7,143 $ 71 $ 22,994 $(3,070) $ 19,995
Proceeds from issuance of
common stock.............. -- 3,450 35 30,736 -- 30,771
Stock options exercised..... -- 13 -- 135 -- 135
Net loss.................... -- -- -- -- (675) (675)
--- ------ ---- -------- ------- --------
BALANCE, DECEMBER 31, 1994.. -- 10,606 106 53,865 (3,745) 50,226
Issuance of common stock in
connection with the
acquisition of
Consolidated Oil & Gas,
Inc....................... -- 9,091 91 80,695 -- 80,786
Tax effect of stock options
exercised................. -- -- -- (19) -- (19)
Net loss.................... -- -- -- -- (3,669) (3,669)
--- ------ ---- -------- ------- --------
BALANCE, DECEMBER 31, 1995.. -- 19,697 197 134,541 (7,414) 127,324
Stock options exercised..... -- 5 -- 40 -- 40
Tax effect of stock options
exercised................. -- -- -- (40) -- (40)
Net income.................. -- -- -- -- 4,203 4,203
--- ------ ---- -------- ------- --------
BALANCE, DECEMBER 31, 1996.. -- 19,702 $197 $134,541 $(3,211) $131,527
=== ====== ==== ======== ======= ========
</TABLE>
See accompanying notes.
F-5
<PAGE> 49
HUGOTON ENERGY CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
------------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss)......................................... $ 4,203 $ (3,669) $ (676)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
Extraordinary loss........................................ -- 136 --
Depreciation, depletion, and amortization................. 23,423 15,234 8,677
Leasehold abandonments.................................... 225 886 --
Deferred income taxes..................................... 3,316 (1,504) --
(Gain) loss on sale of proved properties and other
assets................................................. (85) 582 (80)
Gain on sale of marketable securities..................... -- (73) --
Other non-cash charges.................................... 230 462 --
Changes in operating assets and liabilities net of effects
from acquisitions:
Accounts receivable....................................... (4,126) (1,577) 1,138
Other current assets...................................... 528 530 (114)
Other..................................................... 1,046 99 (15)
Accounts payable.......................................... 2,095 567 967
Accrued liabilities....................................... 505 (2,452) 284
Accrued swap contract liability........................... (1,646) 1646 --
Deferred liabilities...................................... (230) 500 250
-------- -------- --------
Net cash provided by operating activities................. 29,484 11,367 10,431
Cash flows from investing activities:
Payment for business acquisition, net of cash acquired.... -- (28,799) --
Proceeds from sale of proved properties and other
assets................................................. 7,407... 3,357 --
Additions to properties and equipment..................... (44,091) (22,578) (25,964)
Purchase of marketable securities available for sale...... -- -- (11,085)
Proceeds from sale of marketable securities............... -- 11,158 --
Purchase of rights relating to operating agreements....... -- -- (2,000)
Net change in note receivable............................. (22) (7) (67)
-------- -------- --------
Net cash used in investing activities..................... (36,706) (36,869) (39,116)
Cash flows from financing activities:
Increase in debt issue costs.............................. -- (250) --
Proceeds from long-term debt.............................. 25,000 113,000 29,500
Repayment of long-term debt............................... (18,000) (85,000) (32,000)
Net proceeds from issuance of common stock................ -- -- 32,085
Initial public offering costs paid........................ -- -- (1,037)
Proceeds from exercised stock options..................... 40 -- 135
-------- -------- --------
Net cash provided by financing activities................. 7,040 27,750 28,683
-------- -------- --------
Net increase (decrease) in cash............................. (182) 2,248 (2)
Cash at beginning of year................................... 3,914 1,666 1,668
-------- -------- --------
Cash at end of year......................................... $ 3,732 $ 3,914 $ 1,666
======== ======== ========
Supplemental disclosure of cash flow information:
Interest paid............................................. $ 6,140 $ 5,714 $ 2,860
Income taxes paid......................................... -- 38 15
Common stock issued in connection with the acquisition of
COG.................................................... -- 80,786 --
</TABLE>
During 1996 the Company determined that it was necessary to adjust the
deferred tax liability related oil and gas properties acquired in connection
with the acquisition of COG. The effect of the adjustment was to increase
deferred income tax liability and properties and equipment by $1,991.
See accompanying notes.
F-6
<PAGE> 50
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN THOUSANDS FOR DOLLAR AMOUNTS)
1. ORGANIZATION AND ACCOUNTING POLICIES
BASIS OF PRESENTATION
The accompanying statements include the accounts of Hugoton Energy
Corporation and its wholly owned subsidiaries, AmGas, Corporation. (AmGas),
which was formed on December 19, 1991, Hugoton Exploration Corporation (HEX),
which was formed on November 9, 1993, Tiffany Gathering, Inc. (TGI), which was
acquired as a result of the acquisition of Consolidated Oil & Gas, Inc. on
September 7, 1995 and HEC Trading Company (HTC), which was formed December 14,
1995. All significant intercompany accounts and transactions have been
eliminated in consolidation.
ORGANIZATION, LINE OF BUSINESS, AND CREDIT CONCENTRATION
Hugoton Energy Corporation (HEC), incorporated April 23, 1987, and its
wholly owned subsidiaries, Amgas, HEX, TGI and HTC, (hereinafter referred to as
the "Company") are engaged in the acquisition of, exploration for and the
development and production of, natural gas and oil. In addition, the Company
owns and operates a gas gathering system and a gas processing plant. The
principal markets for the Company's natural gas and oil production are
Mid-Continent-based oil and gas marketing and crude oil refining companies. The
Company grants credit to certain first purchasers of oil and gas. The Company
also grants credit to certain oil and gas property owners related to lease
operating expenses paid on their behalf by the Company. Such first purchasers
and property owners are principally located in the United States.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles, requires management to make certain estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
HEDGING ACTIVITIES
Commodity Hedges. The Company manages the risk associated with the
fluctuations in the prices of oil and natural gas primarily through short-term
fixed-priced energy swap contracts. Each energy swap contract is designated to
existing natural gas or oil production of the Company and involves the exchange
of amounts based on a fixed commodity price for amounts based on an average of
quoted index prices of the commodity.
Gains and losses from hedging transactions are recognized in income and
reflected in the accompanying statements of cash flows as operating activities
in the periods for which the underlying commodity was hedged (the accrual
accounting method). The fair value of the swap agreements are not recognized in
the financial statements. Gains and losses on terminations of energy swap
contracts are deferred and amortized as an adjustment to income over the
remaining term of the original contract life of the terminated swap agreement.
If the necessary correlation to the commodity being hedged ceases during the
contract period, the basis differential attributable to such contracts is
recognized as a gain or loss and is no longer deferred, but recognized in
current operating results in the period the loss of correlation was identified
(see Note 11).
Interest-Rate Swap Agreement. The Company has also entered into an interest
rate swap agreement to effectively convert a portion of its floating-rate
borrowings into fixed-rate obligations and manage its exposure to interest rate
fluctuations. The accrual accounting method is used and the interest rate
differential to be received or paid is being accrued and recognized as an
adjustment to interest expense related to the debt.
F-7
<PAGE> 51
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
OIL AND GAS PROPERTIES
The Company accounts for its oil and gas activities using the successful
efforts method. Under the successful efforts method, all costs incurred to
purchase, lease, or otherwise acquire a property are capitalized when incurred.
Costs to drill and equip all development wells and successful exploratory wells
are capitalized. All other exploration costs including geological and
geophysical costs, lease rentals, impaired acreage costs and the cost of
unsuccessful exploratory wells are charged to expense.
In March 1995, the FASB issued Statement No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which requires impairment losses to be recognized for long-lived assets used in
operations when indicators of impairment are present and the undiscounted cash
flows are not sufficient to recover the assets' carrying amount. The impairment
loss is measured by comparing the fair value of the asset to its carrying
amount. The Company elected early adoption of Statement No. 121 in 1995 and,
based on available estimates and current circumstances, has determined that no
impairment loss has occurred during the years ended December 31, 1996 and 1995.
Impairment is recognized for undeveloped properties by providing a
valuation allowance based on such factors as lease term, prior experience and
anticipated plans of the Company to develop the properties.
Depreciation, depletion and amortization of proved properties, wells, and
related equipment is provided on a unit-of-production method based upon
estimated recoverable proved oil and gas reserves.
With respect to normal dispositions, the cost of properties retired or
otherwise disposed of, and the applicable accumulated depreciation, depletion
and amortization are removed from the accounts, and the resulting profit or
loss, if any, is reflected in current operations.
OTHER PROPERTY AND EQUIPMENT
Other property and equipment are depreciated by the straight-line method
over the following estimated useful lives:
<TABLE>
<S> <C>
Building.................................................... 31 1/2 years
Gas plant................................................... 10 years
Vehicles.................................................... 3 years
Office furniture and equipment.............................. 3 years
</TABLE>
DEBT ISSUE COSTS
The debt issue costs which are included in other assets are being amortized
by the straight-line method over the four-year term of the bank revolving note
agreement.
RIGHTS RELATED TO OPERATING AGREEMENT
Costs to acquire rights related to operating agreements for which the
Company is the operator of producing properties for unrelated third parties are
included in other assets and are being amortized on a straight-line basis over
the estimated life of the managed properties, which approximates 10 years.
OIL AND GAS SALES AND GAS IMBALANCES
Oil and gas revenues are recognized as production and sales take place. The
Company uses the sales method of accounting for gas imbalances in those
circumstances where the Company has underproduced or overproduced its ownership
percentage in a property. Under this method, a liability is
F-8
<PAGE> 52
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
recorded to the extent that the Company's overproduced position in a reservoir
cannot be recouped through the production of remaining reserves. The Company's
net overproduced position at December 31, 1996 and 1995 was not significant.
EARNINGS PER COMMON SHARE
Earnings per common share are based upon the weighted average number of
common shares outstanding during each period. The weighted average number of
common shares does not include any common stock equivalents because (1) shares
issuable pursuant to options that will be satisfied with shares held by the
principal shareholder are already included in shares outstanding and (2) the
remaining stock options outstanding are not materially dilutive.
INCOME TAXES
Deferred tax assets and liabilities are recognized for the future tax
consequences attributable to differences between the financial statement
carrying amounts of existing assets and liabilities and their respective tax
bases. Valuation allowances are established when necessary to reduce deferred
tax assets to the amounts expected to be realized. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable
income in the years in which those temporary differences are expected to be
recovered or settled.
STOCK BASED COMPENSATION
In October 1995, the FASB issued Statement No. 123, Accounting for
Stock-Based Compensation, which prescribed accounting and reporting standards
for all stock-based compensation plans, including employee stock options,
restricted stock, and stock appreciation rights. Statement No. 123 did not
require companies to change their existing accounting for employee stock options
under APB Opinion No. 25, Accounting for Stock Issued to Employees, but instead
encouraged companies to recognize expense for stock-based awards on their
estimated fair value on the date of grant. Companies electing to continue to
follow present account rules under APB 25 are required to provide pro forma
disclosures of what net income and earnings per share would have been had the
new fair value method been used. The Company has elected to continue to apply
the existing accounting rules contained in APB 25 and the required pro forma
disclosures under the new method have been presented (see Note 7).
RECLASSIFICATION
Certain prior year amounts have been classified to conform with the 1996
presentation.
2. ACQUISITIONS
1996 ACQUISITIONS
On June 20, 1996, the Company purchased a 50% working interest for $12.9
million in approximately 95,000 gross acres in the Austin Chalk Trend in
Louisiana. This acreage acquisition, coupled with the January 1, 1996 acreage
acquisition mentioned below and various acreage acquired in the third quarter,
presents the Company with a total of 148,000 gross acres in the Austin Chalk
Trend to explore.
On January 1, 1996, the Company purchased an undivided interest in a group
of producing oil and gas properties and undeveloped acreage for $9.7 million
from a privately-held company that owns an undivided interest in and operates
the properties. The producing properties and acreage are located in Southeast
Texas and established a presence for the Company in the Austin Chalk trend. The
acquisition
F-9
<PAGE> 53
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
included eight producing wells and 35,000 gross acres, of which the Company's
working interest is 25% and 50% respectively.
ACQUISITION OF CONSOLIDATED OIL & GAS, INC.
On September 7, 1995, the Company closed its acquisition (effective
September 1, 1995) of Consolidated Oil & Gas, Inc. ("COG"). The acquisition was
financed by cash on hand, bank borrowings under the Company's credit facility
(see Note 4) and by the issuance of 9,090,736 shares of the Company's common
stock.
The acquisition has been accounted for as a purchase and, accordingly, the
acquired underlying assets and liabilities have been recorded at their estimated
fair values at the date of acquisition. The purchase price was allocated to the
assets and liabilities acquired as follows:
<TABLE>
<CAPTION>
(IN THOUSANDS)
<S> <C>
Cash........................................................ $ 9,062
Accounts receivable......................................... 3,595
Other current assets........................................ 353
Properties and equipment.................................... 118,419
Other assets................................................ 1,383
Deferred income tax liabilities............................. (12,299)
Accrued liabilities......................................... (1,866)
--------
Net allocated fair value of assets.......................... $118,647
Less:
Value of common stock issued net of offering costs
incurred of $2,167..................................... (80,786)
Cash acquired............................................... (9,062)
--------
Cash paid................................................... $ 28,799
========
</TABLE>
The operations of COG are included in the Company's consolidated financial
statements from the effective date of the acquisition.
OTHER 1995 ACQUISITIONS
On June 30, 1995, the Company purchased a group of producing oil and
natural gas properties from Mobil Corporation for $13.6 million of cash. These
properties, which produce predominately natural gas, are located in southwestern
Kansas and the Oklahoma panhandle. The effective date of the acquisition was
July 1, 1995.
The operations of the Mobil acquisition is included in the Company's
consolidated financial statements from the effective date of the acquisition.
1994 ACQUISITIONS
During 1994, the Company acquired producing properties, undeveloped acreage
and the rights to operate a group of properties for a total purchase price of
approximately $14 million in three separate acquisitions. The undeveloped
acreage acquired gives the Company a 50% interest in approximately 186,000
undeveloped mineral acres (below the depth of 3,500 feet) in the Kansas Hugoton
Producing Area. One of the acquisitions was a stock purchase with underlying
assets consisting of producing properties and undeveloped acreage. In connection
with a portion of the interests acquired in undeveloped acreage, the Company
entered into a joint exploration agreement for the exploration of this acreage
F-10
<PAGE> 54
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
block with Oxy USA, whereby Oxy was granted a carried interest in certain costs
in the drilling of an agreed upon number of wells (see Note 11). The operations
of the acquisitions are included in the Company's consolidated financial
statements from the effective date of the acquisitions.
PRO FORMA RESULTS OF OPERATIONS
The accompanying unaudited pro forma results of operations gives effect to
the COG and Mobil Acquisitions as if the transactions had occurred on January 1,
1994 under the purchase method of accounting. The unaudited pro forma results of
operations data is presented for illustrative purposes and is not necessarily
indicative of the actual results that would have occurred had the acquisitions
been consummated as of January 1, 1994 or of future results of operations. The
data reflects adjustments for (a) the mark to market of open hedging contracts
held by COG at the time of acquisition, (b) the estimated change in general and
administrative expenses giving effect to integration of the administrative
functions of the combined companies, (c) the estimated increase in depreciation,
depletion and amortization relating to the acquisitions, (d) the estimated
increase in interest expense resulting from the increased borrowings relating to
the acquisitions and (e) the estimated provision for income taxes for the change
in income taxes resulting from the inclusion of the historical results of
operations of the acquisitions and the adjustments in (a) through (d) above. The
pro forma effects of the property acquisitions for 1996 are not presented as
such amounts are not significant.
<TABLE>
<CAPTION>
YEARS ENDED
DECEMBER 31,
----------------------
1995 1994
--------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
<S> <C> <C>
Unaudited pro forma information:
Revenues.................................................. $58,307 $73,002
Net income (loss) before extraordinary item............... $(4,239) $ 4,899
Net income (loss)......................................... $(4,375) $ 3,426
Net income (loss) per share............................... $ (.22) $ .17
</TABLE>
3. TRANSACTIONS WITH AFFILIATES
The Company accounts for transactions with the Company's Chairman and CEO
for his pro rata share of revenues and expenses in association with his
interests in certain oil and gas prospects he personally has participated in,
since the formation of the Company. The Company believes that the terms of the
principal shareholder's participation are comparable to those by other
non-affiliated working interest owners.
4. LONG-TERM DEBT
Long-term debt at December 31, 1996 and 1995, consists of the following:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Bank credit facility with a group of seven banks, principal
payable at September 7, 1999, interest payable at Bank
One's base rate and LIBOR rates at various Eurodollar
maturity dates (6.45% to 8.25% at December 31, 1996)...... $95,000 $88,000
------- -------
Less current maturities..................................... -- --
------- -------
$95,000 $88,000
======= =======
</TABLE>
F-11
<PAGE> 55
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
On September 7, 1995, the Company arranged a new bank credit facility,
simultaneously with the closing of the COG acquisition. The new facility is an
unsecured $250 million revolving credit agreement that is due September 7, 1999.
The facility is provided by seven banks, led by Bank One, Texas, N.A. ("Bank
One") as agent and Texas Commerce Bank National Association as Co-agent. The
Borrowing Base, as defined in the loan agreement, is currently set at $135
million, and is subject to semi-annual redetermination. In connection with the
arrangement of the new bank credit facility, during 1995 the Company recorded an
extraordinary loss of $220 ($136 after income taxes) which represented the
write-off of the related unamortized loan costs.
At December 31, 1996, the Company was a party to one interest rate swap
agreement that was entered into on December 11, 1995 for $25 million in notional
principal amount. The effect of this agreement is to provide the Company with an
interest rate on $25 million in notional principal amount for the three-year
term of the agreement of 5.445% plus a margin of 3/4 of 1 % to 1.25%. Under
market conditions at December 31, 1996, the aggregate effective annual interest
rate after giving effect to the swap agreement was 6.542%.
The credit facility provides the option of borrowing at floating interest
rates based on Bank One's base rate or at a Eurodollar option based on the
London Interbank Offered Rate ("LIBOR") plus 3/4 of 1% to 1.25% per annum,
depending on the outstanding loan balance. Interest is payable quarterly or at
the end of each interest period. The Company also incurs a commitment fee of
1/4 of 1% on the unused portion of the Borrowing Base.
In addition, the bank credit facility contains restrictive covenants
requiring, among other things, the maintenance of a specified current ratio,
tangible net worth and a limitation of the declaration or payment of dividends
on the Company's stock to 50% of net income for any fiscal year. The Company is
in compliance with these covenants at December 31, 1996.
Principal maturities of long-term debt over the next five years are as
follows (in thousands):
<TABLE>
<S> <C>
1997.................................................... $ --
1998.................................................... --
1999.................................................... 95,000
2000.................................................... --
2001.................................................... --
-------
$95,000
=======
</TABLE>
F-12
<PAGE> 56
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
5. INCOME TAXES
Significant components of the provision (benefit) for income taxes are as
follows:
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------
1996 1995 1994
------ ------- ----
(IN THOUSANDS)
<S> <C> <C> <C>
Current:
Federal............................................... $ -- $ -- $(66)
State................................................. -- -- --
------ ------- ----
Total......................................... -- -- (66)
Deferred:
Federal............................................... 2,967 (1,247) --
State................................................. 349 (147) --
------ ------- ----
Total......................................... 3,316 (1,394) --
------ ------- ----
Total income tax expense (benefit)............ $3,316 $(1,394) $(66)
====== ======= ====
</TABLE>
Deferred income taxes reflect the net tax effects of temporary differences
between the carrying amounts of assets and liabilities for financial reporting
purposes and the amounts used for income tax purposes. During 1995 and 1994, in
connection with transactions involving the purchase price allocations relating
to acquisitions of businesses, the Company recorded deferred tax liabilities net
of valuation allowance of approximately $12,300 and $650, respectively for the
financial statement/tax bases difference in the underlying assets. Such taxable
differences enabled the Company to reduce its valuation allowance by
approximately $999 and $650 in 1995 and 1994, respectively. The benefit of
reducing the valuation allowance was recorded as a reduction to the property and
equipment or intangibles recorded in the acquisitions in accordance with SFAS
No. 109.
Significant components of the Company's deferred tax assets and liabilities
as of December 31, 1996 and 1995 are as follows:
<TABLE>
<CAPTION>
1996 1995
------- -------
(IN THOUSANDS)
<S> <C> <C>
Deferred tax assets:
Compensatory stock option expense......................... $ 309 $ 698
Allowance for doubtful accounts........................... 56 59
Accrued liabilities....................................... -- 23
Net operating loss carryforward........................... 7,091 6,002
Swap contract loss........................................ -- 626
AMT credit carryforward................................... 550 550
------- -------
Net deferred tax assets........................... 8,006 7,958
------- -------
Deferred tax liabilities:
Book basis of oil and gas properties in excess of tax
basis.................................................. 24,148 18,400
Other..................................................... -- 353
------- -------
Total deferred tax liabilities.................... 24,148 18,753
------- -------
Net deferred tax liabilities...................... $16,142 $10,795
======= =======
</TABLE>
F-13
<PAGE> 57
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
The reconciliation of income tax expense (benefit) computed at the U.S.
federal statutory tax rates to the actual income tax expense (benefit) is:
<TABLE>
<CAPTION>
DECEMBER 31,
----------------------------
1996 1995 1994
-------- ------- -----
(IN THOUSANDS)
<S> <C> <C> <C>
Income tax expense (benefit) at federal statutory
rate.............................................. $ 2,557 $(1,675) $(252)
State income taxes, net of federal benefit.......... 301 (197) (45)
Utilization of loss carryback....................... -- -- (66)
Nondeductible amortization.......................... 443 -- --
Various accruals and expenses not deductible for
tax............................................... 14 102 --
Valuation allowance................................. -- 376 310
Other............................................... 1 -- (13)
-------- ------- -----
Actual income tax expense (benefit)................. $ 3,316 $(1,394) $ (66)
======== ======= =====
</TABLE>
At December 31, 1996, the Company had net operating loss carryforwards of
approximately $18,600, which can be carried forward to reduce future federal
income taxes payable. Net operating loss carryforwards expire beginning in 2009
if not utilized.
6. PREFERRED STOCK
The Company has authorized a class of undesignated preferred stock
consisting of 10,000,000 shares, none of which are issued and outstanding. The
Board of Directors has not determined the rights and privileges of holders of
such preferred stock and the Company has no present plans to issue any shares of
preferred stock.
7. STOCK OPTIONS
The Company has various stock plans (the "Plans") whereby options to
purchase shares of common stock have been or may be granted to officers,
employees, and non-employee directors. The vesting periods and expiration of
options are determined on a plan by plan, or grant by grant basis. Expiration
dates of the options outstanding at December 31, 1996, range from July 25, 1997
to October 24, 2002.
In 1993 the Company adopted an employee stock option plan and a Nonemployee
Directors stock option plan which was amended during 1996 that provide for the
issuance of incentive and non-qualified options to purchase common stock. The
employee stock option plan provides for the issuance of up to 600,000 shares and
the Nonemployee Director plan provides for the issuance of up to 150,000 shares.
In 1995 the Company and its shareholders approved the 1995 Stock Option
Plan for employees whereby 500,000 shares were reserved for issuance.
The Company has elected to follow Accounting Principles Board Opinion No.
25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under FASB
Statement No. 123, "Accounting For Stock-Based Compensation," requires use of
option valuation models that were not developed for use in valuing employee
stock options. Under APB 25, because the exercise price of the Company's
employee stock options equals the market price of the underlying stock on the
date of grant, no compensation expense is recognized.
F-14
<PAGE> 58
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
The following is a summary of stock option activity, and related
information for the years ended December 31, 1996, 1995, and 1994:
<TABLE>
<CAPTION>
EMPLOYEE NON-EMPLOYEE
------------------------- ------------------------
NUMBER OF PRICE RANGE NUMBER OF PRICE RANGE
SHARES PER SHARE SHARES PER SHARE
--------- ------------- --------- ------------
<S> <C> <C> <C> <C>
Outstanding, December 31, 1993.. 579,852 $.10- 10.00 75,000 $10.00
Stock options granted......... 10,000 11.50 20,000 12.25
Stock options exercised....... (39,085) .10- 10.00 --
Stock options expired or
canceled................... -- --
--------- -------
Outstanding, December 31, 1994.. 550,767 .10- 11.50 95,000 10.00-12.25
Stock options granted......... 582,500 8.00-9.0938 4,000 8.41
Stock options exercised....... (101,190) .10 -- --
Stock options expired or
canceled................... (53,000) 8.00- 10.00 (6,000) 8.41-12.25
--------- -------
Outstanding, December 31, 1995.. 979,077 .10- 11.50 93,000 8.41-12.25
Stock options granted......... 339,000 7.125- 8.50 40,000 8.75
Stock options exercised....... (115,890) .10- 8.00 -- --
Stock options expired or
canceled................... (112,500) 7.125- 11.50 -- --
--------- -------
Outstanding, December 31, 1996.. 1,089,687 $.10- 11.50 133,000 $8.41-12.25
========= =======
Exercisable at December 31,
1994........................... 59,500 $.10-11.50 27,500 $10.00-12.25
1995........................... 316,900 $.10-11.50 55,500 8.41-12.25
1996........................... 470,350 .10-11.50 125,500 8.41-12.25
</TABLE>
Stock options granted during 1996 include 125,000 shares at a price of
$8.34 to an officer which have been approved by the Board of Directors, but are
subject to approval by the Company's shareholders.
At December 31, 1996, 1995 and 1994, there were 96,148, 162,648, and 65,148
shares, respectively, reserved for future grants under existing plans.
Pursuant to the 1993 Stock Option Plan, a principal shareholder entered
into an agreement with the Company whereby, upon any exercise of an outstanding
option with a $.10 exercise price, he will deliver to the Company the number of
shares to which the optionee is entitled to such exercise and the Company will
pay to the principal shareholder the exercise price paid for such shares by the
optionee. This agreement does not pertain to any future options granted under
the Plan.
Additionally, the principal shareholder entered into an agreement with the
Company, whereby, upon the exercise of certain of the non-employee stock options
at $10 per share (which were not granted under the 1993 Stock Option Plan), he
will deliver to the Company the number of shares to which the optionee is
entitled pursuant to such exercise and the Company will pay to the principal
shareholder the exercise price paid for such shares by the optionee.
F-15
<PAGE> 59
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
At December 31, 1996 the number of shares subject to options which will be
delivered to the Company by the Company's Chairman and CEO are as follows:
<TABLE>
<CAPTION>
OPTION NUMBER OF
PRICE SHARES
- ------ ---------
<C> <C>
$ .10 88,185
10.00 75,000
</TABLE>
FAS 123 PRO FORMA INFORMATION
Pro forma information regarding net income and earnings per share is
required by Statement 123 which also requires that the information be
determined, as if the Company had accounted for its employee stock option
granted subsequent to December 31, 1994 under the fair value method of that
Statement. The fair value for these options was estimated at the date of grant
using a Black-Scholes option pricing model with the following range of
assumptions for 1996 and 1995:
<TABLE>
<CAPTION>
1996 1995
---------- ----------
<S> <C> <C>
Expected life of options (years)......................... 2-4 2-4
Expected stock price volatility.......................... .316% .316%
Risk-free interest rate.................................. 5.13-5.30% 5.68-6.11%
</TABLE>
The range of assumptions for the expected life and the interest rate is
caused by the separation of the grants into portions based on their vesting
terms.
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting restrictions
and are fully transferable. In addition, option valuation models require the
input of highly subjective assumptions including the expected stock price
volatility. Because the Company's employee stock options have characteristics
significantly different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimated, in
management's opinion, the existing models do not necessarily provide a reliable
single measure of the fair value of its employee stock options.
For purposes of pro forma disclosures, the estimated fair value of the
options is amortized to expense over the options' vesting period. The Company's
pro forma information follows:
<TABLE>
<CAPTION>
1996 1995
------ -------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
<S> <C> <C>
Net income (loss) -- as reported............................ $4,203 $(3,669)
Net income (loss) -- pro forma.............................. $3,505 $(4,195)
Earnings (loss) per share -- as reported.................... $ .21 $ (.27)
Earnings (loss) per share -- pro forma...................... $ .18 $ (.31)
</TABLE>
F-16
<PAGE> 60
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
Because Statement 123 is applicable only to options granted subsequent to
December 31, 1994, its pro forma effect will not be fully reflected until 1997.
The weighted-average remaining contractual life of options outstanding as
of December 31, 1996, 1995, and 1994 were 3.0 years, 3.3 years, and 3.3 years
respectively. The weighted-average option exercise price information for the
years 1996, 1995, and 1994 follows:
<TABLE>
<CAPTION>
1996 1995 1994
---- ---- ----
<S> <C> <C> <C>
Outstanding January 1.................................... $7.35 $5.49 $5.07
Stock options granted.................................... $8.15 $8.39 $12.00
Stock options exercised.................................. $.44 $.10 $3.52
Stock options expired or canceled........................ $9.94 $9.74 $ --
Outstanding, December 31................................. $8.00 $7.35 $5.49
Exercisable at December 31............................... $8.03 $8.38 $9.76
Weighted-average fair value of options granted during the
year................................................... $2.23 $2.20
</TABLE>
8. EMPLOYEE BENEFIT PLANS
During 1994, the Company adopted a qualified 401(k) Profit Sharing Plan
which permits eligible employees to defer up to 10% of their compensation. The
Company may make matching contributions related to an employee's deferral on a
discretionary basis.
Prior to the adoption of the qualified 401(k) Profit Sharing Plan, the
Company had a discretionary profit sharing plan. During the years ended December
31, 1996, 1995 and 1994, the Company incurred expenses of $215,786, $138,277 and
$25,345, respectively, related to these plans.
9. OIL AND GAS PROPERTY COSTS
Capitalized costs relating to the Company's oil and gas producing
activities and the related amounts of accumulated depreciation, depletion and
amortization are shown below (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1996 1995 1994
-------- -------- --------
<S> <C> <C> <C>
Proved properties............................... $253,419 $232,173 $ 97,382
Unproved properties............................. 24,696 7,314 9,104
-------- -------- --------
Total property costs.................. 278,115 239,487 106,486
Accumulated depreciation, depletion and
amortization.................................. (49,921) (28,377) (15,038)
-------- -------- --------
Net property costs.................... $228,194 $211,110 $ 91,448
======== ======== ========
</TABLE>
Costs incurred (all of which were incurred in the United States) in the
Company's oil and gas activities were as follows (in thousands):
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1996 1995 1994
------- -------- -------
<S> <C> <C> <C>
Acquisition of Properties:
Proved........................................... $ 5,355 $129,962 $ 5,092
Unproved......................................... 17,382 1,526 8,795
Exploration........................................ 9,168 5,530 7,644
Development........................................ 7,756 2,313 3,589
------- -------- -------
$39,661 $139,331 $25,120
======= ======== =======
</TABLE>
F-17
<PAGE> 61
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
10. MAJOR CUSTOMERS
The Company markets its oil and gas production to numerous purchasers under
a combination of short-and long-term contracts. During 1996, 1995 and 1994, the
Company's largest three purchasers accounted for 38%, 55% and 60%, respectively,
of oil and gas revenues of the Company. The Company had no other purchasers that
accounted for greater than 10% of its oil and gas revenues. The Company believes
that the loss of any single customer would not have a material adverse effect on
the results of operations of the Company.
11. COMMITMENTS AND CONTINGENCIES
LEGAL CONTINGENCIES
The Company is not a defendant in any significant pending legal proceedings
other than 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.
LEASE AGREEMENTS
The Company leases office facilities under noncancellable operating leases.
Future minimum rental commitments as of December 31, 1996 are as follows:
<TABLE>
<CAPTION>
YEAR AMOUNT
---- ------
(IN
THOUSANDS)
<S> <C>
1997........................................................ $ 459
1998........................................................ 459
1999........................................................ 459
2000........................................................ 459
2001........................................................ 459
Thereafter.................................................. 1,864
------
Total............................................. $4,159
======
</TABLE>
Approximately $520 of such rental commitments is included in Other Deferred
Liabilities as of December 31, 1996.
DRILLING OBLIGATION
During 1994, the Company entered into an agreement with Oxy USA whereby a
carried interest for certain costs of drilling a specified number of wells would
be borne by the Company. The carried interest arose in connection with the
acquisition of rights to certain undeveloped acreage acquired from OXY USA (see
Note 2). In order to maintain its acquired rights in the undeveloped acreage,
the Company was obligated to drill 20 wells by September 1, 1995 and 20
additional wells by January 1, 1997. The Company satisfactorily complied with
both the September 1, 1995 and January 1, 1997 drilling obligation.
HEDGING TRANSACTIONS
With the objective of achieving more predictable revenues and cash flows
and reducing the exposure to fluctuation 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
F-18
<PAGE> 62
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
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 portion of its estimated production for
1997. 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. Generally, either the
Company or the counter party to the agreements is required to make a settlement
payment to the other equal to the difference between the specified contract
amount and the settlement amount. The following is a summary of the Company's
hedging transactions in effect as of December 31, 1996 and 1995:
Natural Gas -- at December 31, 1996, the Company had entered into a
forward sale contract for 20 MMcf of natural gas per day for the first
three months of 1997 at a net price to the Company of $3.68 per Mcf.
At December 31, 1995, the Company was a party to natural gas swap
agreements which ran from November 1995 through October 1996 NYMEX natural
gas futures contract month for a quantity of 39,000 MMBTU per day at an
average price of $1.80 per MMBTU.
Oil -- at December 31, 1996, the Company was a party to swap
agreements fixing the price of 70,000 barrels per month, for the first
three months of its oil production for 1997 at a weighted average price of
$24.25/barrel.
At December 31, 1995, the Company was a party to oil swap agreements
which ran from the January 1996 through December 1996 NYMEX WTI crude oil
futures contract month for a quantity of 40,000 barrels per month at an
average price of $17.28 per BBL.
During 1995, though its acquisition of COG, the Company assumed certain
hedge contract obligations for crude oil futures. The crude oil futures
obligation was comprised of several swap agreements with fixed prices ranging
from $18.00 to $20.80 per BBL on an aggregate volume of 40,000 to 100,000 BBLS
per month. Of the assumed contracts, only two remained in effect at December 31,
1995, representing a total of 40,000 BBLS at a price range of $18.00 to $20.80
per BBL. Differences between the monthly amortization and the contract
settlement amount was reflected in the Company's oil and gas revenues.
The Company is required to post margin in the form of cash when projected
commodity prices exceed the scheduled fixed prices in the contract less any
amount of agreed upon open credit. The amount of margin cash posted at December
31, 1996 and 1995 was $-0- and $325 respectively.
In 1995, a realized hedging loss of $250 was included in oil and gas sales.
The Company had net deferred losses of $1,283 for settled derivative contracts
at December 31, 1995, relative to future production periods. During 1995, the
Company recorded a charge to earnings of $2.7 million related to the
"decoupling" of the basis correlation between the Company's cash price and NYMEX
contract settlement price.
In 1996, a realized hedging loss of $8,698 was included in oil and gas
sales. The Company had no deferred gain or losses at December 31, 1996.
F-19
<PAGE> 63
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(IN THOUSANDS FOR DOLLAR AMOUNTS)
12. FINANCIAL INSTRUMENTS
The following information is provided regarding the estimated fair value of
certain on and off-balance sheet financial instruments employed by the Company
as of December 31, 1996 and the methods and assumptions used to estimate the
fair value of such financial instruments:
<TABLE>
<CAPTION>
DECEMBER 31, 1996 DECEMBER 31, 1995
------------------- -------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ------- -------- -------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Fixed-price natural gas energy swaps.... $ -- $ -- $ (1,646) $(1,349)
Fixed-price crude oil swaps............. -- (251) -- 301
Long-term debt (1)...................... 95,000 95,000 88,000 88,000
Interest rate swaps..................... -- 59 -- 158
</TABLE>
- ---------------
(1) Carrying amount does not include capitalized debt issue costs (see Note 1).
Cash, accounts receivable, other current assets, accounts payable and
accrued liabilities are each estimated to have a fair value approximating
carrying amount due to the short maturity of those instruments, or to the
criteria used to determine carrying value in the financial instruments.
The "fair value" of the Company's fixed-price natural gas and crude oil
swaps as of December 31, 1995 were estimated based on quoted market prices of
natural gas and crude oil for the periods covered by the contracts. The net
differential between the fixed prices in each contract and the quoted market
prices for future periods, as adjusted for estimated basis, has been applied to
the volumes covered by each contract to arrive at an estimated future value.
The fair value of the Company's long-term debt is estimated to approximate
the carrying amount at December 31, 1996.
The fair value of the Company's interest rate swap at December 31, 1996 is
based on quoted market prices as of such dates.
13. ADDITIONAL CASH FLOW INFORMATION
For purposes of cash flows, the Company considers cash to include currency
on hand and demand deposits with banks or other financial institutions.
14. INITIAL PUBLIC OFFERING
On January 25, 1994, the Company sold 3,450,000 shares of common stock in
an initial public offering for proceeds of approximately $32 million, exclusive
of offering costs. The Company used the proceeds to pay down borrowings on its
bank credit facility. Supplemental loss per share would be $0.05 giving affect
to the public offering as if it had occurred January 1, 1994 with the proceeds
of the offering used to retire debt. For the computation, shares issued in the
public offering were included in the weighted average shares outstanding from
the beginning of the year end and, accordingly, the net loss was reduced by the
interest expense on the debt retired.
15. YEAR-END ADJUSTMENTS
The aggregate effect of adjustments recorded in the fourth quarter of 1995
and 1994, had the effect of increasing the net loss and decreasing the net loss
by approximately $783 and $534, respectively. The principal adjustment was
related to revisions of previous estimates of depreciation, depletion and
amortization of proved properties as a result of revisions to the underlying oil
and gas reserves.
F-20
<PAGE> 64
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUPPLEMENTAL OIL AND GAS INFORMATION
(UNAUDITED)
OIL AND GAS RESERVES
The following information summarizes the Company's net proved reserves of
oil and natural gas and the present values thereof for each of the three years
ended December 31, 1996. The December 31, 1994, 1995 and 1996 reserve estimates
were based on the reports by the independent engineering firm of Ryder Scott
Company. All studies have been prepared in accordance with regulations
prescribed by the Securities and Exchange Commission. Future net revenue is
estimated by such engineers using oil and gas prices in effect as the end of
each respective year with price escalations permitted only for those properties
which have contracts allowing specific increases. Future operating costs are
based on the level of operating expenses incurred during each such year. The
reliability of any reserve estimate is a function of the quality of available
information and of engineering interpretation and judgment. Such estimates are
susceptible to revision in light of subsequent drilling and production history
or as a result of economic conditions.
Estimated Quantities of Oil and Gas Reserves (unaudited). The following
table sets forth the Company's estimated proved reserves for each of the three
years ended December 31, 1995. All of the Company's reserves are located within
the United States:
<TABLE>
<CAPTION>
1996 1995 1994
----------------- ----------------- -----------------
OIL GAS OIL GAS OIL GAS
(MBBLS) (MMCF) (MBBLS) (MMCF) (MBBLS) (MMCF)
------- ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C>
PROVED RESERVES
Beginning of year................ 13,884 192,962 4,982 139,694 3,035 138,512
Acquisition of proved reserves... 49 4,829 9,923 60,564 222 8,669
Extensions and discoveries....... 4,489 45,199 401 3,093 803 5,278
Revisions of previous
estimates...................... (106) 4,293 (391) 8,733 1,291 (274)
Sales of reserves in place....... (438) (3,076) (13) (4,471) -- --
Production....................... (1,700) (19,026) (1,018) (14,651) (369) (12,491)
------ ------- ------ ------- ------- -------
End of year...................... 16,178 225,181 13,884 192,962 4,982 139,694
====== ======= ====== ======= ======= =======
PROVED DEVELOPED PRODUCING
RESERVES
Beginning of year................ 12,746 189,434 4,745 132,230 2,844 117,064
====== ======= ====== ======= ======= =======
End of year...................... 11,200 180,610 12,746 189,434 4,745 132,230
====== ======= ====== ======= ======= =======
</TABLE>
F-21
<PAGE> 65
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL OIL AND GAS INFORMATION
(UNAUDITED)
Standardized Measure of Discounted Future Net Cash Flows (unaudited). The
following table reflects the standardized measure of discounted future net cash
flows relating to the Company's interests in proved oil and gas reserves. The
future net cash inflows were developed as follows:
(1) Estimates were made of quantities of proved reserves and the future
period during which they are expected to be produced based on year-end
economic conditions.
(2) The estimated cash flows from future production of proved reserves were
prepared on the basis of prices received at December 31, 1996, 1995,
1994, as follows: 1996-$24.53 per BBL, $3.79 per MCF; 1995-$18.01 per
BBL, $1.76 per MCF; and 1994-$15.56 per BBL, $1.25 per MCF.
(3) The resulting future gross revenue streams were reduced by estimated
future costs to develop and to produce the proved reserves, based on
year-end cost estimates.
(4) Future income taxes were computed by applying the appropriate statutory
tax rates to the future pre-tax net cash flows less the current tax
basis of the properties involved and related carryforwards, giving
effect to permanent differences and tax credits.
(5) The resulting future net revenue streams were reduced to present value
amounts by applying a 10% discount factor.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------
1996 1995 1994
---------- --------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows............................ $1,267,988 $ 583,236 $250,584
Future costs:
Production................................... 354,996 233,098 103,471
Development.................................. 44,120 3,779 2,015
---------- --------- --------
Future net cash flows before income taxes...... 868,872 346,359 145,098
Discount at 10% per annum...................... (404,432) (154,853) (64,169)
Discounted future income taxes................. (129,004) (18,256) (847)
---------- --------- --------
Standardized measure of discounted future net
cash flows................................... $ 335,436 $ 173,250 $ 80,082
========== ========= ========
</TABLE>
F-22
<PAGE> 66
HUGOTON ENERGY CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SUPPLEMENTAL OIL AND GAS INFORMATION
(UNAUDITED)
The following are the principal sources of change in the standardized
measure of discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1996 1995 1994
--------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure of discounted future net
cash flows, beginning of period................ $ 173,250 $ 80,082 $ 84,116
Net changes in prices and production costs....... 169,025 27,837 (18,820)
Revisions in quantity estimates.................. 10,507 (6,057) 2,905
Accretion in discount............................ 19,151 8,093 8,860
New field discoveries and extensions, net of
future production and development costs........ 120,561 7,173 11,105
Purchases of reserves in-place................... 9,648 101,430 5,199
Sales of reserves in-place....................... (2,634) (2,904) --
Sales of oil and gas produced, net of production
costs.......................................... (53,323) (24,995) (16,924)
Net change in income taxes....................... (110,749) (17,409) 3,641
--------- -------- --------
Standardized measure of discounted future net
cash flows, end of period...................... $ 335,436 $173,250 $ 80,082
========= ======== ========
</TABLE>
F-23
<PAGE> 67
NO DEALER, SALESPERSON OR ANY OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN OR
INCORPORATED BY REFERENCE IN THIS PROSPECTUS IN CONNECTION WITH THE OFFER MADE
BY THIS PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS
MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, THE SELLING
STOCKHOLDERS OR ANY OF THE UNDERWRITERS. NEITHER THE DELIVERY OF THIS PROSPECTUS
NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY
IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATES AS OF WHICH INFORMATION IS GIVEN IN THIS PROSPECTUS. THIS PROSPECTUS
DOES NOT CONSTITUTE AN OFFER OR SOLICITATION 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 SOLICITATION.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary..................... 3
Forward Looking Information............ 8
Risk Factors........................... 8
Use of Proceeds........................ 12
Capitalization......................... 12
Price Range of Common Stock............ 13
Dividend Policy........................ 13
Selected Consolidated Financial Data... 14
Management's Discussion and Analysis of
Financial Condition and Results of
Operations........................... 15
Business and Properties................ 20
Management............................. 31
Principal and Selling Stockholders..... 33
Description of Capital Stock........... 36
Underwriting........................... 38
Legal Opinions......................... 39
Experts................................ 39
Certain Definitions.................... 40
Available Information.................. 41
Incorporation of Certain Documents by
Reference............................ 42
Index to Financial Statements and
Supplemental Data.................... F-1
</TABLE>
6,000,000 SHARES
[HUGOTON LOGO]
HUGOTON ENERGY CORPORATION
COMMON STOCK
(NO PAR VALUE)
SALOMON BROTHERS INC
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
SMITH BARNEY INC.
JEFFERIES & COMPANY, INC.
PROSPECTUS
DATED , 1997
<PAGE> 68
PART II
INFORMATION NOT REQUIRED IN THE PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
All expenses incurred in connection with the Offering described in this
Registration Statement will be paid by the Company. The estimated expenses are
as follows:
<TABLE>
<S> <C>
SEC registration fee........................................ $ 23,784
NASD fee.................................................... 8,348
Printing expenses........................................... 100,000
Accounting fees............................................. 70,000
Legal fees.................................................. 150,000
Blue Sky fees and expenses.................................. 5,000
Transfer Agent and Registrar fee............................ 2,500
Miscellaneous............................................... 25,368
--------
TOTAL............................................. $385,000
========
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
The Registrant has authority under Section 17-6305 of the Kansas General
Corporation Code (the "KGCC") to indemnify its officers, directors, employees
and agents to the extent provided in such statute. Article V, Section 2, of the
Registrant's Bylaws, referenced as Exhibit 3.2 hereto, provides for
indemnification of the Registrant's officers, directors, employees and agents.
Article V, Section 2, 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
Bylaws.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933, as amended (the "Securities Act"), may be permitted to directors,
officers or persons controlling the Registrant pursuant to the foregoing
provisions, the Registrant has been informed that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy
as expressed in the Securities Act and is therefore unenforceable.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits:
<TABLE>
<S> <C>
1.1* -- Form of Underwriting Agreement
2.1 -- Agreement and Plan of Merger, dated May 26, 1995, by and
among Hugoton Energy Corporation, Oil & Gas, Inc. and
Hugoton Exploration Corporation (Incorporated by
reference to Exhibit 4.4 of the Registration Statement on
Form S-3, Registration No. 33-97366)
2.2 -- Amendment to Agreement and Plan of Merger, dated August
3, 1995 by and among Hugoton Energy Corporation,
Consolidated Oil & Gas, Inc. and Hugoton Exploration
Corporation (Incorporated by reference to Exhibit 4.4 of
the Registration Statement on Form S-3, Registration No.
33-97366)
3.1 -- Restated Articles of Incorporation of the Company, as
amended (Incorporated by reference to Exhibit 3.1 of the
Registration Statement on Form S-1, Registration No.
33-70924)
3.2 -- Bylaws of the Company, as amended (Incorporated by
reference to Exhibit 3.2 of the Registration Statement on
Form S-1, Registration No. 33-70924)
</TABLE>
II-1
<PAGE> 69
<TABLE>
<S> <C>
4.1 -- Specimen Common Stock certificate (Incorporated by
reference to Exhibit 4.1 of the Registration Statement on
Form S-1, Registration No. 33-70924)
5.1* -- Opinion and Consent of Vinsons & Elkins L.L.P.
10.1 -- Employment Agreement, dated September 1, 1995 between the
Company and Floyd C. Wilson (Incorporated by reference to
Exhibit 10.1 of the Company's 1995 Annual Report on Form
10-K)
10.2 -- Employment Agreement, dated September 7, 1995 between the
Company and Jay W. Decker (Incorporated by reference to
Exhibit 10.2 of the Company's 1996 Annual Report on Form
10-K)
10.3 -- Employment Agreement, dated December 16, 1996 between the
Company and W. Mark Womble (Incorporated by reference to
Exhibit 10.3 of the Company's 1996 Annual Report on Form
10-K)
10.4 -- 1993 Stock Option Plan (Incorporated by reference to
Exhibit 10.12 of the Registration Statement on Form S-1,
Registration No. 33-70924)
10.5 -- 401(k) Employee Benefit Plan (Incorporated by reference
to Exhibit 10.13 of the Registration Statement on Form
S-1, Registration No. 33-70924)
10.6 -- Nonemployee Directors' Stock Option Plan (Incorporated by
reference to Exhibit 10.14 of the Registration Statement
on Form S-1, Registration No. 33-70924)
10.7 -- 1995 Stock Option Plan (Incorporated by reference to
Exhibit 4.1 of the Registration Statement on Form S-8,
Registration No. 33-97092)
10.8 -- Loan Agreement, dated September 7, 1995, by and among the
Company, Amgas Corporation, Hugoton Exploration
Corporation, Tiffany Gathering Inc., Bank One, Texas
N.A., Texas Commerce Bank National Association, Bank of
Montreal, Wells Fargo Bank, National Association,
Meespierson N.V., Credit Lyonnais Cayman Island Branch
and Bank of Scotland, and Bank One, Texas N.A. as Agent,
and Texas Commerce Bank National Association as Co-agent
(Incorporated by reference to Exhibit 10.8 of the
Company's 1995 Annual Report on Form 10-K)
10.9 -- First Amendment to Loan Agreement dated January 22, 1996,
by and among the Company, Amgas Corporation, Hugoton
Exploration Corporation, HEC Trading Company, Tiffany
Gathering, Inc., Bank One, Texas N.A., Texas Commerce
Bank National Association, Bank of Montreal, Wells Fargo
Bank, National Association, Meespierson N.V., Credit
Lyonnais Cayman Island Branch and Bank of Scotland, and
Bank One, Texas N.A. as Agent, and Texas Commerce Bank
National Association as Co-agent (Incorporated by
reference to Exhibit 10.9 of the Company's 1995 Annual
Report on Form 10-K)
10.10 -- Second Amendment to Loan Agreement dated June 11, 1996,
by and among the Company, Amgas Corporation, Hugoton
Exploration Corporation, HEC Trading Company, Tiffany
Gathering, Inc., Bank One, Texas N.A., Texas Commerce
Bank National Association, Bank of Montreal, Wells Fargo
Bank, National Association, Meespierson N.V., Credit
Lyonnais Cayman Island Branch and Bank of Scotland, and
Bank One, Texas N.A. as Agent, and Texas Commerce Bank
National Association as Co-Agent (Incorporated by
reference to Exhibit 10.10 of the Company's 1996 Annual
Report on Form 10-K)
10.11 -- Purchase and sale agreement dated June 1, 1995 by and
between Mobil Oil Corporation and the Company
(Incorporated by reference to Exhibit 10.10 of the
Company's 1995 Annual Report on Form 10-K)
10.12 -- Shareholder Agreement dated May 26, 1995, by and among
the Company, Consolidated Oil & Gas, Inc. and Odyssey
Partners, L.P. (Incorporated by reference to Exhibit
10.11 of the Company's 1995 Annual Report on Form 10-K)
</TABLE>
II-2
<PAGE> 70
<TABLE>
<S> <C>
10.13 -- Agreement of Shareholders dated September 7, 1995, by and
among the Company, First Reserve Fund V, Limited
Partnership, First Reserve Secured Energy Assets Fund,
Limited Partnership, American Gas & Oil Investors,
Limited Partnerships, AmGO II, Limited Partnership, AmGO
III, Limited Partnership, J. W. Decker, COMDISCO, Inc.,
Odyssey Partners, L. P. and Floyd C. Wilson (Incorporated
by reference to Exhibit 10.12 of the Company's 1995
Annual Report on Form 10-K)
10.14 -- Registration Rights Agreement dated September 7, 1995, by
and among the Company Hugoton Energy Corporation, Odyssey
Partners, L.P., Cramer, Rosenthal, McGlynn, Inc.,
American Gas & Oil Investors, AmGO II, AmGO III, First
Reserve Secured Energy Assets Fund, First Reserve Fund V,
COMDISCO, Inc. and Floyd C. Wilson (Incorporated by
reference to Exhibit 10.13 of the Company's 1995 Annual
Report on Form 10-K)
10.15 -- Purchase and Sale Agreement dated December 28, 1995 by
and between Shield Petroleum Incorporated, P&M Properties
and the Company (Incorporated by reference to Exhibit
10.15 of the Company's 1996 Annual Report on Form 10-K)
10.16 -- Purchase and Sale Agreement dated June 18, 1996 by and
between Shield Petroleum Incorporated and the Company
(Incorporated by reference to Exhibit 10.16 of the
Company's 1996 Annual Report on Form 10-K)
21.1 -- List of subsidiaries of the Company (Incorporated by
reference to Exhibit 21.1 of the Company's 1995 Annual
Report on Form 10-K)
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Ryder Scott Company
23.3* -- Consent of Vinson & Elkins L.L.P. [included in Exhibit
5.1]
24.1 -- Power of Attorney (included on the signature page to this
Registration Statement) (Incorporated by reference to
Exhibit 24.1 of the Registrant's Registration Statement
on Form S-1, Registration No. 33-70924)
</TABLE>
- ---------------
* Filed herewith.
(b) Consolidated Financial Statement Schedules, Years ended December 31,
1994, 1995 and 1996.
The following Financial Statement Schedules are included in Part II of this
Registration Statement:
Hugoton Energy Corporation:
Report of Independent Auditors
Schedule II -- Valuation and Qualifying Accounts
All other schedules are omitted because the required information is
inapplicable or the information is presented in the Financial Statements or
related notes.
ITEM 17. UNDERTAKINGS
The undersigned Registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in the
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.
(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement
II-3
<PAGE> 71
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.
Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the provisions described in Item 15, above, 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 Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment by
the Registrant 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 Securities Act and will be governed by
the final adjudication of such issue.
II-4
<PAGE> 72
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-2 and has duly caused this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Wichita, State of Kansas, on March 4, 1997.
HUGOTON ENERGY CORPORATION
By: /s/ W. MARK WOMBLE
----------------------------------
W. Mark Womble
Executive Vice President and
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, this
registration statement has been signed by the following persons in the
capacities indicated and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
* Chairman of the Board, President March 4, 1997
- ----------------------------------------------------- and Chief Executive Officer
Floyd C. Wilson
/s/ W. MARK WOMBLE Executive Vice President, Chief March 4, 1997
- ----------------------------------------------------- Financial Officer (Principal
W. Mark Womble Financial Officer) and
Director
* Executive Vice President and March 4, 1997
- ----------------------------------------------------- Director
J. W. Decker
* Controller (Principal Accounting March 4, 1997
- ----------------------------------------------------- Officer)
Shane M. Bayless
* Director March 4, 1997
- -----------------------------------------------------
Stephen Berger
* Director March 4, 1997
- -----------------------------------------------------
David S. Elkouri
* Director March 4, 1997
- -----------------------------------------------------
John T. McNabb, II
* Director March 4, 1997
- -----------------------------------------------------
Alan J. Andreini
</TABLE>
II-5
<PAGE> 73
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<C> <S> <C>
Director March 4, 1997
- -----------------------------------------------------
William E. Macaulay
* Director March 4, 1997
- -----------------------------------------------------
Jonathan Linker
*By: /s/ W. MARK WOMBLE
------------------------------------------------
W. Mark Womble, Attorney in Fact
</TABLE>
II-6
<PAGE> 74
REPORT OF INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Hugoton Energy Corporation
We have audited the consolidated financial statements of Hugoton Energy
Corporation as of December 31, 1996 and 1995, and for each of the three years in
the period ended December 31, 1996, and have issued our report thereon dated
February 7, 1997 (included elsewhere in this Registration Statement). Our audits
also included the financial statement schedule listed in Item 16(b) of this
Registration Statement. This schedule is the responsibility of the Company's
management. Our responsibility is to express an opinion based on our audits.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly in all material respects the information set forth therein.
ERNST & YOUNG LLP
Wichita, Kansas
February 7, 1997
S-1
<PAGE> 75
SCHEDULE II
HUGOTON ENERGY CORPORATION
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------
BALANCE AT BALANCE AT
BEGINNING END OF
DESCRIPTION OF PERIOD ADDITIONS DEDUCTIONS PERIOD
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Year ended December 31, 1996:
Allowance for doubtful accounts............. $155 $ -- $ (9) $146
Year ended December 31, 1995:
Allowance for doubtful accounts............. 159 --(B) (4) 155
Valuation allowance for deferred tax
assets................................... 623 376 (999) --
Year ended December 31, 1994:
Allowance for doubtful accounts............. 326 -- (167) 159
Valuation allowance for deferred tax
assets................................... 963 310(A) (650) 623
</TABLE>
- ---------------
(A) During 1994, in connection with a stock acquisition, the Company recorded a
deferred tax liability of $650,000 for the financial statement/tax bases
difference in the underlying assets. Such taxable differences enabled the
Company to reduce its valuation allowance by the same amount. The benefit of
reducing the valuation allowance was recorded as a reduction to the
intangibles recorded in the acquisition in accordance with SFAS 109.
(B) At December 31, 1995, the Company decreased its valuation allowance to zero
as a result of the Company's acquisition of COG, whereby the allocated value
of the acquired assets exceeded the historical tax basis by an amount which
will enable the Company to realize the deferred assets recorded.
S-2
<PAGE> 76
INDEX TO EXHIBITS
<TABLE>
<S> <C>
1.1* -- Form of Underwriting Agreement
2.1 -- Agreement and Plan of Merger, dated May 26, 1995, by and
among Hugoton Energy Corporation, Oil & Gas, Inc. and
Hugoton Exploration Corporation (Incorporated by
reference to Exhibit 4.4 of the Registration Statement on
Form S-3, Registration No. 33-97366)
2.2 -- Amendment to Agreement and Plan of Merger, dated August
3, 1995 by and among Hugoton Energy Corporation,
Consolidated Oil & Gas, Inc. and Hugoton Exploration
Corporation (Incorporated by reference to Exhibit 4.4 of
the Registration Statement on Form S-3, Registration No.
33-97366)
3.1 -- Restated Articles of Incorporation of the Company, as
amended (Incorporated by reference to Exhibit 3.1 of the
Registration Statement on Form S-1, Registration No.
33-70924)
3.2 -- Bylaws of the Company, as amended (Incorporated by
reference to Exhibit 3.2 of the Registration Statement on
Form S-1, Registration No. 33-70924)
4.1 -- Specimen Common Stock certificate (Incorporated by
reference to Exhibit 4.1 of the Registration Statement on
Form S-1, Registration No. 33-70924)
5.1* -- Opinion and Consent of Vinsons & Elkins L.L.P.
10.1 -- Employment Agreement, dated September 1, 1995 between the
Company and Floyd C. Wilson (Incorporated by reference to
Exhibit 10.1 of the Company's 1995 Annual Report on Form
10-K)
10.2 -- Employment Agreement, dated September 7, 1995 between the
Company and Jay W. Decker (Incorporated by reference to
Exhibit 10.2 of the Company's 1996 Annual Report on Form
10-K)
10.3 -- Employment Agreement, dated December 16, 1996 between the
Company and W. Mark Womble (Incorporated by reference to
Exhibit 10.3 of the Company's 1996 Annual Report on Form
10-K)
10.4 -- 1993 Stock Option Plan (Incorporated by reference to
Exhibit 10.12 of the Registration Statement on Form S-1,
Registration No. 33-70924)
10.5 -- 401(k) Employee Benefit Plan (Incorporated by reference
to Exhibit 10.13 of the Registration Statement on Form
S-1, Registration No. 33-70924)
10.6 -- Nonemployee Directors' Stock Option Plan (Incorporated by
reference to Exhibit 10.14 of the Registration Statement
on Form S-1, Registration No. 33-70924)
10.7 -- 1995 Stock Option Plan (Incorporated by reference to
Exhibit 4.1 of the Registration Statement on Form S-8,
Registration No. 33-97092)
10.8 -- Loan Agreement, dated September 7, 1995, by and among the
Company, Amgas Corporation, Hugoton Exploration
Corporation, Tiffany Gathering Inc., Bank One, Texas
N.A., Texas Commerce Bank National Association, Bank of
Montreal, Wells Fargo Bank, National Association,
Meespierson N.V., Credit Lyonnais Cayman Island Branch
and Bank of Scotland, and Bank One, Texas N.A. as Agent,
and Texas Commerce Bank National Association as Co-agent
(Incorporated by reference to Exhibit 10.8 of the
Company's 1995 Annual Report on Form 10-K)
10.9 -- First Amendment to Loan Agreement dated January 22, 1996,
by and among the Company, Amgas Corporation, Hugoton
Exploration Corporation, HEC Trading Company, Tiffany
Gathering, Inc., Bank One, Texas N.A., Texas Commerce
Bank National Association, Bank of Montreal, Wells Fargo
Bank, National Association, Meespierson N.V., Credit
Lyonnais Cayman Island Branch and Bank of Scotland, and
Bank One, Texas N.A. as Agent, and Texas Commerce Bank
National Association as Co-agent (Incorporated by
reference to Exhibit 10.9 of the Company's 1995 Annual
Report on Form 10-K)
</TABLE>
<PAGE> 77
<TABLE>
<S> <C>
10.10 -- Second Amendment to Loan Agreement dated June 11, 1996,
by and among the Company, Amgas Corporation, Hugoton
Exploration Corporation, HEC Trading Company, Tiffany
Gathering, Inc., Bank One, Texas N.A., Texas Commerce
Bank National Association, Bank of Montreal, Wells Fargo
Bank, National Association, Meespierson N.V., Credit
Lyonnais Cayman Island Branch and Bank of Scotland, and
Bank One, Texas N.A. as Agent, and Texas Commerce Bank
National Association as Co-Agent (Incorporated by
reference to Exhibit 10.10 of the Company's 1996 Annual
Report on Form 10-K)
10.11 -- Purchase and sale agreement dated June 1, 1995 by and
between Mobil Oil Corporation and the Company
(Incorporated by reference to Exhibit 10.10 of the
Company's 1995 Annual Report on Form 10-K)
10.12 -- Shareholder Agreement dated May 26, 1995, by and among
the Company, Consolidated Oil & Gas, Inc. and Odyssey
Partners, L.P. (Incorporated by reference to Exhibit
10.11 of the Company's 1995 Annual Report on Form 10-K)
10.13 -- Agreement of Shareholders dated September 7, 1995, by and
among the Company, First Reserve Fund V, Limited
Partnership, First Reserve Secured Energy Assets Fund,
Limited Partnership, American Gas & Oil Investors,
Limited Partnerships, AmGO II, Limited Partnership, AmGO
III, Limited Partnership, J. W. Decker, COMDISCO, Inc.,
Odyssey Partners, L. P. and Floyd C. Wilson (Incorporated
by reference to Exhibit 10.12 of the Company's 1995
Annual Report on Form 10-K)
10.14 -- Registration Rights Agreement dated September 7, 1995, by
and among the Company Hugoton Energy Corporation, Odyssey
Partners, L.P., Cramer, Rosenthal, McGlynn, Inc.,
American Gas & Oil Investors, AmGO II, AmGO III, First
Reserve Secured Energy Assets Fund, First Reserve Fund V,
COMDISCO, Inc. and Floyd C. Wilson (Incorporated by
reference to Exhibit 10.13 of the Company's 1995 Annual
Report on Form 10-K)
10.15 -- Purchase and Sale Agreement dated December 28, 1995 by
and between Shield Petroleum Incorporated, P&M Properties
and the Company (Incorporated by reference to Exhibit
10.15 of the Company's 1996 Annual Report on Form 10-K)
10.16 -- Purchase and Sale Agreement dated June 18, 1996 by and
between Shield Petroleum Incorporated and the Company
(Incorporated by reference to Exhibit 10.16 of the
Company's 1996 Annual Report on Form 10-K)
21.1 -- List of subsidiaries of the Company (Incorporated by
reference to Exhibit 21.1 of the Company's 1995 Annual
Report on Form 10-K)
23.1 -- Consent of Ernst & Young LLP
23.2 -- Consent of Ryder Scott Company
23.3* -- Consent of Vinson & Elkins L.L.P. [included in Exhibit
5.1]
24.1 -- Power of Attorney (included on the signature page to this
Registration Statement) (Incorporated by reference to
Exhibit 24.1 of the Registrant's Registration Statement
on Form S-1, Registration No. 33-70924)
</TABLE>
- ---------------
* Filed herewith.
<PAGE> 1
EXHIBIT 1.1
Hugoton Energy Corporation
6,000,000 Shares (1)
Common Stock
(no par value)
Underwriting Agreement
_____________, 1997
Salomon Brothers Inc,
Donaldson, Lufkin & Jenrette
Securities Corporation,
Smith Barney Inc. and
Jefferies & Company, Inc.
As Representatives of the several Underwriters,
c/o Salomon Brothers Inc
Seven World Trade Center
New York, New York 10048
Dear Sirs:
Hugoton Energy Corporation, a Kansas corporation (the
"Company"), proposes to sell to the underwriters named in Schedule I hereto
(the "Underwriters"), for whom you (the "Representatives") are acting as
representatives, 1,500,000 shares of Common Stock, no par value ("Common
Stock"), of the Company, and the persons named in Schedule II hereto (the
"Selling Stockholders") propose to sell to the Underwriters 4,500,000 shares of
Common Stock (said shares to be issued and sold by the Company and shares to be
sold by the Selling Stockholders collectively being hereinafter called the
"Underwritten Securities"). The Company and a Selling Stockholder named in
Schedule III hereto also propose to grant to the Underwriters an option to
purchase up to 900,000 additional shares of Common Stock (the "Option
Securities"; the Option Securities, together with the Underwritten Securities,
being hereinafter called the "Securities").
- ---------------------
(1) Plus an option to purchase from the Company and the person named
in Schedule III hereto up to 900,000 additional shares to cover
over-allotments.
<PAGE> 2
1. Representations and Warranties.
(a) The Company represents and warrants to, and agrees
with, each Underwriter as set forth below in this Section 1. Certain terms
used in this Section 1 are defined in paragraph (iii) hereof.
(i) The Company has filed with the Securities and
Exchange Commission (the "Commission") a registration statement (file
number 333-22189) on Form S-2, including a related preliminary
prospectus, for the registration under the Securities Act of 1933 (the
"Act") of the offering and sale of the Securities. The Company may
have filed one or more amendments thereto, including the related
preliminary prospectus, each of which has previously been furnished to
you. The Company will next file with the Commission either (A) prior
to effectiveness of such registration statement, a further amendment
to such registration statement (including the form of final
prospectus) or (B) after effectiveness of such registration statement,
a final prospectus in accordance with Rules 430A and 424(b)(1) or (4).
In the case of clause (B), the Company has included in such
registration statement, as amended at the Effective Date, all
information (other than Rule 430A Information) required by the Act and
the rules thereunder to be included in the Prospectus with respect to
the Securities and the offering thereof. As filed, such amendment and
form of final prospectus, or such final prospectus, shall contain all
Rule 430A Information, together with all other such required
information, with respect to the Securities and the offering thereof
and, except to the extent the Representatives shall agree in writing
to a modification, shall be in all substantive respects in the form
furnished to you prior to the Execution Time or, to the extent not
completed at the Execution Time, shall contain only such specific
additional information and other changes (beyond that contained in the
latest Preliminary Prospectus) as the Company has advised you, prior
to the Execution Time, will be included or made therein.
(ii) On the Effective Date, the Registration Statement did
or will, and when the Prospectus is first filed (if required) in
accordance with Rule 424(b) and on the Closing Date, the Prospectus
(and any supplements thereto) will, comply in all material respects
with the applicable requirements of the Act and the rules thereunder;
on the Effective Date, the Registration Statement did not or will not
contain any untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary in order to
make the statements therein not misleading; and, on the Effective
Date, the Prospectus, if not filed pursuant to Rule 424(b), did not or
will not, and on the date of any filing pursuant to Rule 424(b) and on
the Closing Date, the Prospectus ( together with any supplement
thereto) will not, include any untrue statement of a material fact or
omit to state a material fact necessary in order to make the
statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that the Company makes
no representations or warranties as to the information contained in or
omitted from the Registration Statement, or the Prospectus (or any
supplement thereto) in reliance upon and in conformity with
information furnished in writing to the Company by or on behalf of any
Underwriter through the Representatives specifically for inclusion in
the Registration Statement or the Prospectus (or any supplement
thereto).
-2-
<PAGE> 3
(iii) The terms which follow, when used in this Agreement,
shall have the meanings indicated. The term "the Effective Date"
shall mean each date that the Registration Statement and any
post-effective amendment or amendments thereto became or become
effective. "Execution Time" shall mean the date and time that this
Agreement is executed and delivered by the parties hereto.
"Preliminary Prospectus" shall mean any preliminary prospectus
referred to in paragraph (i) above and any preliminary prospectus
included in the Registration Statement at the Effective Date that
omits Rule 430A Information. "Prospectus" shall mean the prospectus
(including all documents incorporated by reference therein) relating
to the Securities that is first filed pursuant to Rule 424(b) after
the Execution Time or, if no filing pursuant to Rule 424(b) is
required, shall mean the form of final prospectus relating to the
Securities included in the Registration Statement at the Effective
Date. "Registration Statement" shall mean the registration statement
referred to in paragraph (i) above (including all documents
incorporated by reference therein), exhibits and financial statements,
as amended at the Execution Time (or, if not effective at the
Execution Time, in the form in which it shall become effective) and,
in the event any post-effective amendment thereto becomes effective
prior to the Closing Date (as hereinafter defined), shall also mean
such registration statement as so amended. Such term shall include
Rule 430A Information deemed to be included therein at the Effective
Date as provided by Rule 430A. "Rule 424" and "Rule 430A" refer to
such rules under the Act. "Rule 430A Information" means information
with respect to the Securities and the offering thereof permitted to
be omitted from the Registration Statement when it becomes effective
pursuant to Rule 430A.
(iv) The financial statements, including the notes
thereto, and supporting schedules included in the Registration
Statement or incorporated by reference therein present fairly the
financial position of the Company and its consolidated subsidiaries as
at the dates indicated and the results of their operations for the
periods specified; except as otherwise stated in the Registration
Statement, such financial statements have been prepared in conformity
with generally accepted accounting principles applied on a consistent
basis; and the supporting schedules included in the Registration
Statement or incorporated by reference therein present fairly the
information required to be stated therein.
(v) The information on the basis of which the reserve
estimates and related information included in the Registration
Statement or incorporated by reference therein were prepared by the
Company, its subsidiaries, Ryder Scott Company Petroleum Engineers or
any other person is true and correct in all material respects.
(vi) Since the respective dates as of which information is
given in the Registration Statement and the Prospectus, except as
otherwise stated therein, (A) there has been no material adverse
change in the condition, financial or otherwise, or the earnings,
affairs or business prospects of the Company and its subsidiaries
considered as one enterprise, whether or not arising in the ordinary
course of business, (B) there have been no transactions entered into
by the Company or any of its subsidiaries other than those in the
ordinary course of business, which are material with respect to the
Company and its subsidiaries considered as one enterprise, and (C)
there has been no dividend or
-3-
<PAGE> 4
distribution of any kind declared, paid or made by the Company on any
class of its capital stock.
(vii) The Company has been duly incorporated and is validly
existing as a corporation in good standing under the laws of the State
of Kansas with corporate power and authority to own, lease and operate
its properties and conduct its business as described in the
Prospectus.
(viii) The authorized, issued and outstanding capital stock
of the Company is as set forth in the Prospectus under
"Capitalization" (except for issuances, if any, subsequent to the date
of the Prospectus pursuant to employee benefit plans); the shares of
issued and outstanding Common Stock have been duly authorized and
validly issued and are fully paid and nonassessable; the Securities to
be purchased by the Underwriters from the Company have been duly
authorized for issuance and sale to pursuant to this Agreement and,
when issued and delivered by the Company pursuant to this Agreement
against payment therefor, will be validly issued and fully paid and
non-assessable; the issuance of the Securities is not subject to
preemptive or other similar rights; and the Common Stock conforms to
all statements relating thereto contained in the Prospectus.
(ix) This Agreement has been duly and validly authorized
by the Company.
(x) The execution, delivery and performance of this
Agreement and the consummation of the transactions herein contemplated
have been duly and validly authorized by all necessary corporate
action and will not conflict with or constitute a breach or violation
of, or default under, or result in the creation or imposition of any
lien, charge or encumbrance upon any property or assets of the Company
or any of its subsidiaries pursuant to, any contract, indenture,
mortgage, loan agreement, note, lease or other instrument to which the
Company or any of its subsidiaries is a party or by which it or any of
them may be bound, or to which any of the property or assets of the
Company or any of its subsidiaries is subject, nor will such action
result in any breach or violation of, or default under, the provisions
of the charter or by-laws of the Company or of any applicable law,
administrative regulation or administrative or court decree.
(b) Each Selling Stockholder represents and warrants to,
and agrees with, each Underwriter that:
(i) Such Selling Stockholder is the lawful owner of the
Securities to be sold by such Selling Stockholder hereunder and upon
sale and delivery of, and payment for, such Securities, as provided
herein, such Selling Stockholder will convey good and marketable title
to such Securities, free and clear of all liens, encumbrances,
equities and claims whatsoever.
(ii) Such Selling Stockholder has not taken and will not
take, directly or indirectly, any action designed to or which has
constituted or which might reasonably be expected to cause or result,
under the Exchange Act or otherwise, in stabilization or
-4-
<PAGE> 5
manipulation of the price of any security of the Company to facilitate
the sale or resale of the Securities and has not effected any sales of
shares of Common Stock which, if effected by the issuer, would be
required to be disclosed in response to Item 701 of Regulation S-K.
[(iii) Certificates in negotiable form for such Selling
Stockholder's Securities have been placed in custody, for delivery
pursuant to the terms of this Agreement, under a Custody Agreement
duly authorized, executed and delivered by such Selling Stockholders,
in the form heretofore furnished to you (the "Custody Agreement") with
_______________ of _______________, as Custodian (the "Custodian");
the Securities represented by the certificates so held in custody for
each Selling Stockholder are subject to the interests hereunder of the
Underwriters, the Company and the other Selling Stockholders; and the
arrangements for custody and delivery of such certificates, made by
such Selling Stockholder hereunder and under the Custody Agreement,
are not subject to termination by any acts of such Selling
Stockholder, or by operation of law, incapacity of such Selling
Stockholder or the occurrence of any other event.]
(iv) No consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation
by such Selling Stockholder of the transactions contemplated herein,
except such as may have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection
with the purchase and distribution of the Securities by the
Underwriters and such other approvals as have been obtained.
(v) Neither the sale of the Securities being sold by
such Selling Stockholder nor the consummation of any other of the
transactions herein contemplated by such Selling Stockholder or the
fulfillment of the terms hereof by such Selling Stockholder will
conflict with, result in a breach or violation of, or constitute a
default under any law or the charter or by-laws of such Selling
Stockholder or the terms of any indenture or other agreement or
instrument to which such Selling Stockholder or any of its
subsidiaries is a party or bound, or any judgement, order or decree
applicable to such Selling Stockholder or any of its subsidiaries of
any court, regulatory body, administrative agency, governmental body
or arbitrator having jurisdiction over such Selling Stockholder or any
of its subsidiaries.
2. Purchase and Sale. (a) Subject to the terms and
conditions and in reliance upon the representations and warranties herein set
forth, the Company and the Selling Stockholders agree, severally and not
jointly, to sell to each Underwriter, and each Underwriter agrees, severally
and not jointly, to purchase from the Company and the Selling Stockholders, at
a purchase price of $_____ per share, the amount of the Underwritten Securities
set forth opposite such Underwriter's name in Schedule I hereto.
(b) Subject to the terms and conditions and in reliance
upon the representations and warranties herein set forth, the Company and the
Selling Stockholder named in Schedule III hereto hereby grants an option to the
several Underwriters to purchase, severally and not jointly, up to 900,000
shares of the Option Securities at the same purchase price per share as the
Underwriters
-5-
<PAGE> 6
shall pay for the Underwritten Securities. Said option may be exercised only
to cover over-allotments in the sale of the Underwritten Securities by the
Underwriters. Said option may be exercised in whole or in part at any time
(but not more than once) on or before the 30th day after the date of the
Prospectus upon written or telegraphic notice by the Representatives to the
Company and such Selling Stockholder setting forth the number of shares of the
Option Securities as to which the several Underwriters are exercising the
option and the settlement date. Delivery of certificates for the shares of
Option Securities by the such Selling Stockholder, and payment therefor to such
Selling Stockholder, shall be made as provided in Section 3 hereof. The
maximum number of shares of the Option Securities to be sold by the Company and
the Selling Stockholder is set forth in Schedule III hereto. In the event the
Underwriters exercise less than their full over-allotment option, the number of
shares of the Option Securities to be sold by each party listed on Schedule III
shall be, as nearly as practicable, in the same proportion to each other as are
the number of shares of the Option Securities listed opposite their respective
names on said Schedule III. The number of shares of the Option Securities to
be purchased by each Underwriter shall be the same percentage of the total
number of shares of the Option Securities to be purchased by the several
Underwriters as such Underwriter is purchasing of the Underwritten Securities,
subject to such adjustments as you in your absolute discretion shall make to
eliminate any fractional shares.
3. Delivery and Payment. Delivery of and payment for
the Underwritten Securities and the Option Securities (if the option provided
for in Section 2(b) hereof shall have been exercised on or before the third
business day prior to the Closing Date) shall be made at 10:00 AM, New York
City time, on _______________, 1997, or such later date (not later than
______________, 1997) as the Representatives shall designate, which date and
time may be postponed by agreement among the Representatives, the Company and
the Selling Stockholders or as provided in Section 9 hereof (such date and time
of delivery and payment for the Securities being herein called the "Closing
Date"). Delivery of the Securities shall be made to the Representatives for
the respective accounts of the several Underwriters against payment by the
several Underwriters through the Representatives of the respective aggregate
purchase prices of the Securities being sold by the Company and each of the
Selling Stockholders to or upon the order of the Company and the Selling
Stockholders by wire transfer of same day funds to accounts designated by each
of them. Delivery of the Underwritten Securities and the Option Securities
shall be made at such location as the Representatives shall reasonably
designate at least one business day in advance of the Closing Date and payment
for such Securities shall be made at the office of ________________.
Certificates for the Securities shall be registered in such names and in such
denominations as the Representatives may request not less than three full
business days in advance of the Closing Date.
The Company and the Selling Stockholders agree to have the
Securities available for inspection, checking and packaging by the
Representatives in New York, New York, not later than 1:00 PM on the business
day prior to the Closing Date.
Each Selling Stockholder will pay all applicable state
transfer taxes, if any, involved in the transfer to the several Underwriters of
the Securities to be purchased by them from such Selling Stockholder and the
respective Underwriters will pay any additional stock transfer taxes involved
in further transfers.
-6-
<PAGE> 7
If the option provided for in Section 2(b) hereof is exercised
after the third business day prior to the Closing Date, the Company will
deliver (at the expense of the Company) to the Representatives, at One New York
Plaza, New York, New York, on the date specified by the Representatives (which
shall be within three business days after exercise of said option),
certificates for the Option Securities in such names and denominations as the
Representatives shall have requested against payment of the purchase price
thereof to or upon the order of the Selling Stockholder identified in Schedule
III by wire transfer of same day funds to an account designated by each of
them. If settlement for the Option Securities occurs after the Closing Date,
the Company and the Selling Stockholder will deliver to the Representatives on
the settlement date for the Option Securities, and the obligation of the
Underwriters to purchase the Option Securities shall be conditioned upon
receipt of, supplemental opinions, certificates and letters confirming as of
such date the opinions, certificates and letters delivered on the Closing Date
pursuant to Section 6 hereof.
4. Offering by Underwriters. It is understood that the
several Underwriters propose to offer the Securities for sale to the public as
set forth in the Prospectus.
5. Agreements.
(a) The Company agrees with the several Underwriters that:
(i) The Company will use its best efforts to cause the
Registration Statement, if not effective at the Execution Time, and
any amendment thereof, to become effective. Prior to the termination
of the offering of the Securities, the Company will not file any
amendment of the Registration Statement or supplement to the
Prospectus without your prior consent. Subject to the foregoing
sentence, if the Registration Statement has become or becomes
effective pursuant to Rule 430A, or filing of the Prospectus is
otherwise required under Rule 424(b), the Company will cause the
Prospectus, properly completed, and any supplement thereto to be filed
with the Commission pursuant to the applicable paragraph of Rule
424(b) within the time period prescribed and will provide evidence
satisfactory to the Representatives of such timely filing. The
Company will promptly advise the Representatives (A) when the
Registration Statement, if not effective at the Execution Time, and
any amendment thereto, shall have become effective, (B) when the
Prospectus, and any supplement thereto, shall have been filed (if
required) with the Commission pursuant to Rule 424(b), (C) when, prior
to termination of the offering of the Securities, any amendment to the
Registration Statement shall have been filed or become effective, (D)
of any request by the Commission for any amendment of the Registration
Statement or supplement to the Prospectus or for any additional
information, (E) of the issuance by the Commission of any stop order
suspending the effectiveness of the Registration Statement or the
institution or threatening of any proceeding for that purpose and (F)
of the receipt by the Company of any notification with respect to the
suspension of the qualification of the Securities for sale in any
jurisdiction or the initiation or threatening of any proceeding for
such purpose. The Company will use its best efforts to prevent the
issuance of any such stop order and, if issued, to obtain as soon as
possible the withdrawal thereof.
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<PAGE> 8
(ii) If, at any time when a prospectus relating to the
Securities is required to be delivered under the Act, any event occurs
as a result of which the Prospectus as then supplemented would include
any untrue statement of a material fact or omit to state any material
fact necessary to make the statements therein in the light of the
circumstances under which they were made not misleading, or if it
shall be necessary to amend the Registration Statement or supplement
the Prospectus to comply with the Act or the rules thereunder, the
Company promptly will (i) prepare and file with the Commission,
subject to the second sentence of paragraph (a) of this Section 5, an
amendment or supplement which will correct such statement or omission
or effect such compliance and (ii) supply any supplemented Prospectus
to you in such quantities as you may reasonably request.
(iii) As soon as practicable, the Company will make
generally available to its security holders and to the Representatives
an earnings statement or statements of the Company and its
subsidiaries which will satisfy the provisions of Section 11(a) of the
Act and Rule 158 under the Act.
(iv) The Company will furnish to the Representatives and
counsel for the Underwriters, without charge, signed copies of the
Registration Statement (including exhibits thereto) and to each other
Underwriter a copy of the Registration Statement (without exhibits
thereto) and, so long as delivery of a prospectus by an Underwriter or
dealer may be required by the Act, as many copies of each Preliminary
Prospectus and the Prospectus and any supplement thereto as the
Representatives may reasonably request. The Company will pay the
expenses of printing or other production of all documents relating to
the offering.
(v) The Company will arrange for the qualification of the
Securities for sale under the laws of such jurisdictions as the
Representatives may designate, and will maintain such qualifications
in effect so long as required for the distribution of the Securities
and will pay the fee of the National Association of Securities
Dealers, Inc., in connection with its review of the offering.
(vi) The Company will not, for a period of 90 days
following the Execution Time, without the prior written consent of
Salomon Brothers Inc, offer, sell or contract to sell, or otherwise
dispose of, directly or indirectly, or announce the offering of, any
other shares of Common Stock or any securities convertible into, or
exchangeable for, shares of Common Stock; provided, however, that the
Company may issue and sell Common Stock pursuant to any employee stock
option plan, stock ownership plan or dividend reinvestment plan of the
Company in effect at the Execution Time; and, provided, further, that
the Company may issue Common Stock in connection with an acquisition
provided that the recipient of such Common Stock agrees to the
foregoing restriction.
(b) Each Selling Stockholder agrees with the several Underwriters
that it will not during the period of 90 days following the Execution Time,
without the prior written consent of Salomon Brothers Inc, offer, sell or
contract to sell, or otherwise dispose of, directly or indirectly,
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<PAGE> 9
or announce the offering of, any other shares of Common Stock beneficially
owned by such person, or any securities convertible into, or exchangeable for,
shares of Common Stock.
6. Conditions to the Obligations of the Underwriters.
The obligations of the Underwriters to purchase the Underwritten Securities and
the Option Securities, as the case may be, shall be subject to the accuracy of
the representations and warranties on the part of the Company and the Selling
Stockholders contained herein as of the Execution Time, the Closing Date and
any settlement date pursuant to Section 3 hereof, to the accuracy of the
statements of the Company and the Selling Stockholders made in any certificates
pursuant to the provisions hereof, to the performance by the Company and the
Selling Stockholders of their respective obligations hereunder and to the
following additional conditions:
(a) If the Registration Statement has not become
effective prior to the Execution Time, unless the Representatives
agree in writing to a later time, the Registration Statement will
become effective not later than (i) 6:00 PM New York City time on the
date of determination of the public offering price, if such
determination occurred at or prior to 3:00 PM New York City time on
such date or (ii) 12:00 Noon on the business day following the day on
which the public offering price was determined, if such determination
occurred after 3:00 PM New York City time on such date; if filing of
the Prospectus, or any supplement thereto, is required pursuant to
Rule 424(b), the Prospectus, and any such supplement, will be filed in
the manner and within the time period required by Rule 424(b); and no
stop order suspending the effectiveness of the Registration Statement
shall have been issued and no proceedings for that purpose shall have
been instituted or threatened.
(b) The Company shall have furnished to the
Representatives the opinion of Vinson & Elkins L.L.P., counsel for the Company,
dated the Closing Date, to the effect that:
(i) each of the Company and Hugoton Exploration Company
and [HEC Trading Company] and __________________ (individually a
"Subsidiary" and collectively the "Subsidiaries") has been duly
incorporated and is validly existing as a corporation in good standing
under the laws of the jurisdiction in which it is chartered or
organized, with full corporate power and authority to own its
properties and conduct its business as described in the Prospectus;
(ii) all the outstanding shares of capital stock of each
Subsidiary have been duly and validly authorized and issued and are
fully paid and nonassessable, and, except as otherwise set forth in
the Prospectus, all outstanding shares of capital stock of the
Subsidiaries are owned of record by the Company either directly or
through wholly owned subsidiaries free and clear of any perfected
security interest and, to the knowledge of such counsel, after due
inquiry, any other security interests, claims, liens or encumbrances;
(iii) the Company's authorized equity capitalization is as
set forth in the Prospectus; the capital stock of the Company conforms
to the description thereof contained in the Prospectus; the
outstanding shares of Common Stock (including the Securities being
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<PAGE> 10
sold hereunder by the Selling Stockholders) have been duly and validly
authorized and issued and are fully paid and nonassessable; the
Securities being sold hereunder by the Company have been duly and
validly authorized, and, when issued and delivered to and paid for by
the Underwriters pursuant to this Agreement, will be fully paid and
nonassessable; the certificates for the Securities are in valid and
sufficient form; and the holders of outstanding shares of capital
stock of the Company are not entitled to preemptive or other rights to
subscribe for the Securities;
(iv) to the best knowledge of such counsel, there is no
pending or threatened action, suit or proceeding before any court or
governmental agency, authority or body or any arbitrator involving the
Company or any of its subsidiaries of a character required to be
disclosed in the Registration Statement which is not adequately
disclosed in the Prospectus, and there is no franchise, contract or
other document of a character required to be described in the
Registration Statement or Prospectus, or to be filed as an exhibit,
which is not described or filed as required;
(v) the Registration Statement has become effective under
the Act; any required filing of the Prospectus, and any supplements
thereto, pursuant to Rule 424(b) has been made in the manner and
within the time period required by Rule 424(b); to the best knowledge
of such counsel, no stop order suspending the effectiveness of the
Registration Statement has been issued, no proceedings for that
purpose have been instituted or threatened and the Registration
Statement and the Prospectus (other than the financial statements and
other financial and statistical information contained therein as to
which such counsel need express no opinion) comply as to form in all
material respects with the applicable requirements of the Act and the
rules thereunder; and such counsel has no reason to believe that at
the Effective Date and as of the Closing Date the Registration
Statement contained any untrue statement of a material fact or omitted
to state any material fact required to be stated therein or necessary
to make the statements therein not misleading or that the Prospectus
includes any untrue statement of a material fact or omits to state a
material fact necessary to make the statements therein, in the light
of the circumstances under which they were made, not misleading;
(vi) this Agreement has been duly authorized, executed and
delivered by the Company;
(vii) no consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation
of the transactions contemplated herein, except such as have been
obtained under the Act and such as may be required under the blue sky
laws of any jurisdiction in connection with the purchase and
distribution of the Securities by the Underwriters and such other
approvals (specified in such opinion) as have been obtained;
(viii) neither the issue and sale of the Securities, nor the
consummation of any other of the transactions herein contemplated nor
the fulfillment of the terms hereof will conflict
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<PAGE> 11
with, result in a breach or violation of, or constitute a default
under any law or the charter or by-laws of the Company or the terms of
any indenture or other agreement or instrument known to such counsel
and to which the Company or any of its subsidiaries is a party or
bound or any judgment, order or decree known to such counsel to be
applicable to the Company or any of its subsidiaries of any court,
regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over the Company or any of its
subsidiaries; and
(ix) no holders of securities of the Company have rights
to the registration of such securities under the Registration
Statement except such holders who have not elected to participate in
the offering contemplated thereby.
In rendering such opinion, such counsel may rely (A) as to matters involving
the application of laws of any jurisdiction other than the State of Delaware or
Texas or the United States, to the extent they deem proper and specified in
such opinion, upon the opinion of other counsel of good standing whom they
believe to be reliable and who are satisfactory to counsel for the Underwriters
and (B) as to matters of fact, to the extent they deem proper, on certificates
of responsible officers of the Company and public officials. Reference to the
Prospectus in this paragraph (b) include any supplements thereto at the Closing
Date.
(c) The Selling Stockholders shall have furnished to the
Representatives the opinion of ______________________________, counsel for the
Selling Stockholders, dated the Closing Date, to the effect that:
(i) this Agreement [, the Custody Agreement and the
Power-of-Attorney] has [have] been duly authorized, executed and
delivered by the Selling Stockholders [, the Custody Agreement is
valid and binding on the Selling Stockholders] and each Selling
Stockholder has full legal right and authority to sell, transfer and
deliver in the manner provided in this Agreement [and the Custody
Agreement] the Securities being sold by such Selling Stockholder
hereunder;
(ii) the delivery by each Selling Stockholder to the
several Underwriters of certificates for the Securities being sold
hereunder by such Selling Stockholder against payment therefor as
provided herein, will pass good and marketable title to such
Securities to the several Underwriters, free and clear of all liens,
encumbrances, equities and claims whatsoever;
(iii) no consent, approval, authorization or order of any
court or governmental agency or body is required for the consummation
by any Selling Stockholder of the transactions contemplated herein,
except such as may have been obtained under the Act and such as may be
required under the blue sky laws of any jurisdiction in connection
with the purchase and distribution of the Securities by the
Underwriters and such other approvals (specified in such opinion) as
have been obtained; and
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<PAGE> 12
(iv) neither the sale of the Securities being sold by any
Selling Stockholder nor the consummation of any other of the
transactions herein contemplated by any Selling Stockholder or the
fulfillment of the terms hereof by any Selling Stockholder will
conflict with, result in a breach or violation of, or constitute a
default under any law or the charter or By-laws of the Selling
Stockholder or the terms of any indenture or other agreement or
instrument known to such counsel and to which any Selling Stockholder
is a party or bound, or any judgment, order or decree known to such
counsel to be applicable to any Selling Stockholder of any court,
regulatory body, administrative agency, governmental body or
arbitrator having jurisdiction over any Selling Stockholder.
In rendering such opinion, such counsel may rely (A) as to matters involving
the application of laws of any jurisdiction other than the State of
______________ or the United States, to the extent they deem proper and
specified in such opinion, upon the opinion of other counsel of good standing
whom they believe to be reliable and who are satisfactory to counsel for the
Underwriters, and (B) as to matters of fact, to the extent they deem proper, on
certificates of the Selling Stockholders and public officials.
(d) The Representatives shall have received from Baker &
Botts, L.L.P., counsel for the Underwriters, such opinion or opinions, dated
the Closing Date, with respect to the issuance and sale of the Securities, the
Registration Statement, the Prospectus (together with any supplement thereto)
and other related matters as the Representatives may reasonably require, and
the Company and each Selling Stockholder shall have furnished to such counsel
such documents as they request for the purpose of enabling them to pass upon
such matters.
(e) The Company shall have furnished to the
Representatives a certificate of the Company, signed by the Chairman of the
Board or the President and the principal financial or accounting officer of the
Company, dated the Closing Date, to the effect that the signers of such
certificate have carefully examined the Registration Statement, the Prospectus,
any supplement to the Prospectus and this Agreement and that:
(i) the representations and warranties of the Company in
this Agreement are true and correct in all material respects on and as
of the Closing Date with the same effect as if made on the Closing
Date and the Company has complied with all the agreements and
satisfied all the conditions on its part to be performed or satisfied
at or prior to the Closing Date;
(ii) no stop order suspending the effectiveness of the
Registration Statement has been issued and no proceedings for that
purpose have been instituted or, to the Company's knowledge,
threatened; and
(iii) since the date of the most recent financial statements
included in the Prospectus (exclusive of any supplement thereto),
there has been no material adverse change in the condition (financial
or other), earnings, business or properties of the Company and its
subsidiaries, whether or not arising from transactions in the ordinary
course of business,
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<PAGE> 13
except as set forth in or contemplated in the Prospectus (exclusive of
any supplement thereto).
(f) Each Selling Stockholder shall have furnished to the
Representatives a certificate, signed by the Chairman of the Board or the
President or the principal financial or accounting officer of such Selling
Stockholder, dated the Closing Date, to the effect that the signer of such
certificate has carefully examined the Registration Statement, the Prospectus,
any supplement to the Prospectus and this Agreement and that the
representations and warranties of such Selling Stockholder in this Agreement
are true and correct in all material respects on and as of the Closing Date to
the same effect as if made on the Closing Date.
(g) At the Execution Time and at the Closing Date, Ernst
& Young shall have furnished to the Representatives a letter or letters, dated
respectively as of the Execution Time and as of the Closing Date, in form and
substance satisfactory to the Representatives, confirming that they are
independent accountants within the meaning of the Act and the applicable
published rules and regulations thereunder and stating in effect that:
(i) in their opinion the audited financial statements and
financial statement schedules included in the Registration Statement
and the Prospectus and reported on by them comply in form in all
material respects with the applicable accounting requirements of the
Act and the related published rules and regulations;
(ii) on the basis of a reading of the latest unaudited
financial statements made available by the Company and its
subsidiaries; carrying out certain specified procedures (but not an
examination in accordance with generally accepted auditing standards)
which would not necessarily reveal matters of significance with
respect to the comments set forth in such letter; a reading of the
minutes of the meetings of the stockholders, directors and committees
of the Company and the Subsidiaries; and inquiries of certain
officials of the Company who have responsibility for financial and
accounting matters of the Company and its subsidiaries as to
transactions and events subsequent to December 31, 1996, nothing came
to their attention which caused them to believe that:
(1) any unaudited financial statements included
in the Registration Statement and the Prospectus do not comply
in form in all material respects with applicable accounting
requirements of the Act and with the published rules and
regulations of the Commission with respect to registration
statements on Form S-2; and said unaudited financial
statements are not in conformity with generally accepted
accounting principles applied on a basis substantially
consistent with that of the audited financial statements
included in the Registration Statement and the Prospectus; or
(2) with respect to the period subsequent to
December 31, 1996, there were any changes, at a specified date
not more than five business days prior to the date of the
letter, in the long-term debt of the Company and its
subsidiaries or capital
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<PAGE> 14
stock of the Company or decreases in the stockholders' equity
of the Company as compared with the amounts shown on the
December 31, 1996 consolidated balance sheet included in the
Registration Statement and the Prospectus, or for the period
from December 31, 1996 to such specified date there were any
decreases, as compared with the corresponding period in the
preceding year; in net revenues or income before income taxes
or in total or per share amounts of net income of the Company
and its subsidiaries, except in all instances for changes or
decreases set forth in such letter, in which case the letter
shall be accompanied by an explanation by the Company as to
the significance thereof unless said explanation is not deemed
necessary by the Representatives.
(iii) they have performed certain other specified
procedures as a result of which they determined that certain
information of an accounting, financial or statistical nature (which
is limited to accounting, financial or statistical information derived
from the general accounting records of the Company and its
subsidiaries) set forth in the Registration Statement and the
Prospectus, agrees with the accounting records of the Company and its
subsidiaries, excluding any questions of legal interpretation.
References to the Prospectus in this paragraph (g) include any
supplement thereto at the date of the letter.
(h) Subsequent to the Execution Time or, if earlier, the
dates as of which information is given in the Registration Statement (exclusive
of any amendment thereof) and the Prospectus (exclusive of any supplement
thereto), there shall not have been (i) any change or decrease specified in the
letter or letters referred to in paragraph (g) of this Section 6 or (ii) any
change, or any development involving a prospective change, in or affecting the
business or properties of the Company and its subsidiaries the effect of which,
in any case referred to in clause (i) or (ii) above, is, in the judgment of the
Representatives, so material and adverse as to make it impractical or
inadvisable to proceed with the offering or delivery of the Securities as
contemplated by the Registration Statement (exclusive of any amendment thereof)
and the Prospectus (exclusive of any supplement thereto).
(i) At the Execution Time, the Company shall have
furnished to the Representatives a letter substantially in the form of Exhibit
A hereto from each officer and director of the Company and Comdisco, Inc.
addressed to the Representatives, in which each such person agrees not to
offer, sell or contract to sell, or otherwise dispose of, directly or
indirectly, or announce an offering of, any shares of Common Stock beneficially
owned by such person or any securities convertible into, or exchangeable for,
shares of Common Stock for a period of 90 days following the Execution Time
without the prior written consent of the Representatives.
(j) At the Execution Time, Ryder Scott Company Petroleum
Engineers shall have furnished to the Representatives a letter dated as of the
Execution Time substantially in the form heretofore approved by you.
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<PAGE> 15
(k) Prior to the Closing Date, the Company shall have
furnished to the Representatives such further information, certificates and
documents as the Representatives may reasonably request.
If any of the conditions specified in this Section 6 shall not
have been fulfilled in all material respects when and as provided in this
Agreement, or if any of the opinions and certificates mentioned above or
elsewhere in this Agreement shall not be in all material respects reasonably
satisfactory in form and substance to the Representatives and counsel for the
Underwriters, this Agreement and all obligations of the Underwriters hereunder
may be canceled at, or at any time prior to, the Closing Date by the
Representatives. Notice of such cancellation shall be given to the Company and
each Selling Stockholder in writing or by telephone or telegraph confirmed in
writing.
The documents required to be delivered by this Section 6 shall
be delivered on the Closing Date.
7. Reimbursement of Underwriters' Expenses. If the sale
of the Securities provided for herein is not consummated because any condition
to the obligations of the Underwriters set forth in Section 6 hereof is not
satisfied, because of any termination pursuant to Section 10 hereof or because
of any refusal, inability or failure on the part of the Company or any Selling
Stockholder to perform any agreement herein or comply with any provision hereof
other than by reason of a default by any of the Underwriters, the Company will
reimburse the Underwriters severally upon demand for all out-of-pocket expenses
(including reasonable fees and disbursements of counsel) that shall have been
incurred by them in connection with the proposed purchase and sale of the
Securities. If the Company is required to make any payments to the
Underwriters under this Section 7 because of any Selling Stockholder's refusal,
inability or failure to satisfy any condition to the obligations of the
Underwriters set forth in Section 6, the Selling Stockholders pro rata in
proportion to the percentage of Securities to be sold by each shall reimburse
the Company on demand for all amounts so paid.
8. Indemnification and Contribution. (a) The Company
jointly and severally and each Selling Stockholder, severally in proportion to
the percentage of Securities to be sold by it, agree to indemnify and hold
harmless each Underwriter, the directors, officers, employees and agents of
each Underwriter and each person who controls any Underwriter within the
meaning of either the Act or the Securities Exchange Act of 1934 (the "Exchange
Act") against any and all losses, claims, damages or liabilities, joint or
several, to which they or any of them may become subject under the Act, the
Exchange Act or other Federal or state statutory law or regulation, at common
law or otherwise, insofar as such losses, claims, damages or liabilities (or
actions in respect thereof) arise out of or are based upon any untrue statement
or alleged untrue statement of a material fact contained in the registration
statement for the registration of the Securities as originally filed or in any
amendment thereof, or in any Preliminary Prospectus or the Prospectus, or in
any amendment thereof or supplement thereto, or arise out of or are based upon
the omission or alleged omission to state therein a material fact required to
be stated therein or necessary to make the statements therein not misleading,
and agrees to reimburse each such indemnified party, as incurred, for any legal
or other expenses reasonably incurred by them in connection with investigating
or defending any such
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<PAGE> 16
loss, claim, damage, liability or action; provided, however, that the Company
and the Selling Stockholders will not be liable in any such case to the extent
that any such loss, claim, damage or liability arises out of or is based upon
any such untrue statement or alleged untrue statement or omission or alleged
omission made therein in reliance upon and in conformity with written
information furnished to the Company by or on behalf of any Underwriter through
the Representatives specifically for inclusion therein. This indemnity
agreement will be in addition to any liability which the Company or the Selling
Stockholders may otherwise have.
(b) Each Underwriter severally agrees to indemnify and
hold harmless the Company, each of its directors, each of its officers who
signs the Registration Statement, and each person who controls the Company
within the meaning of either the Act or the Exchange Act and each Selling
Stockholder, to the same extent as the foregoing indemnity to each Underwriter,
but only with reference to written information relating to such Underwriter
furnished to the Company by or on behalf of such Underwriter through the
Representatives specifically for inclusion in the documents referred to in the
foregoing indemnity. This indemnity agreement will be in addition to any
liability which any Underwriter may otherwise have. The Company and the
Selling Stockholders acknowledge that the statements set forth in the last
paragraph of the cover page and under the heading "Underwriting" in any
Preliminary Prospectus and the Prospectus constitute the only information
furnished in writing by or on behalf of the several Underwriters for inclusion
in any Preliminary Prospectus or the Prospectus, and you, as the
Representatives, confirm that such statements are correct.
(c) Promptly after receipt by an indemnified party under
this Section 8 of notice of the commencement of any action, such indemnified
party will, if a claim in respect thereof is to be made against the
indemnifying party under this Section 8, notify the indemnifying party in
writing of the commencement thereof; but the failure so to notify the
indemnifying party (i) will not relieve it from liability under paragraph (a)
or (b) above unless and to the extent it did not otherwise learn of such action
and such failure results in the forfeiture by the indemnifying party of
substantial rights and defenses and (ii) will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraph (a) or (b) above. The
indemnifying party shall be entitled to appoint counsel of the indemnifying
party's choice at the indemnifying party's expense to represent the indemnified
party in any action for which indemnification is sought (in which case the
indemnifying party shall not thereafter be responsible for the fees and
expenses of any separate counsel retained by the indemnified party or parties
except as set forth below); provided, however, that such counsel shall be
satisfactory to the indemnified party. Notwithstanding the indemnifying
party's election to appoint counsel to represent the indemnified party in an
action, the indemnified party shall have the right to employ separate counsel
(including local counsel), and the indemnifying party shall bear the reasonable
fees, costs and expenses of such separate counsel if (i) the use of counsel
chosen by the indemnifying party to represent the indemnified party would
present such counsel with a conflict of interest, (ii) the actual or potential
defendants in, or targets of, any such action include both the indemnified
party and the indemnifying party and the indemnified party shall have
reasonably concluded that there may be legal defenses available to it and/or
other indemnified parties which are different from or additional to those
available to the indemnifying party, (iii) the indemnifying party shall not
have employed
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<PAGE> 17
counsel satisfactory to the indemnified party to represent the indemnified
party within a reasonable time after notice of the institution of such action
or (iv) the indemnifying party shall authorize the indemnified party to employ
separate counsel at the expense of the indemnifying party. An indemnifying
party will not, without the prior written consent of the indemnified parties,
settle or compromise or consent to the entry of any judgment with respect to
any pending or threatened claim, action, suit or proceeding in respect of which
indemnification or contribution may be sought hereunder (whether or not the
indemnified parties are actual or potential parties to such claim or action)
unless such settlement, compromise or consent includes an unconditional release
of each indemnified party from all liability arising out of such claim, action,
suit or proceeding.
(d) In the event that the indemnity provided in paragraph
(a) or (b) of this Section 8 is unavailable to or insufficient to hold harmless
an indemnified party for any reason, the Company, jointly and severally, the
Selling Stockholders, severally, and the Underwriters agree to contribute to
the aggregate losses, claims, damages and liabilities (including legal or other
expenses reasonably incurred in connection with investigating or defending
same) (collectively "Losses") to which the Company, one or more of the Selling
Stockholders and one or more of the Underwriters may be subject in such
proportion as is appropriate to reflect the relative benefits received by the
Company and the Selling Stockholders on the one hand and by the Underwriters on
the other from the offering of the Securities; provided, however, that in no
case shall any Underwriter (except as may be provided in any agreement among
underwriters relating to the offering of the Securities) be responsible for any
amount in excess of the underwriting discount or commission applicable to the
Securities purchased by such Underwriter hereunder. If the allocation provided
by the immediately preceding sentence is unavailable for any reason, the
Company, jointly and severally, the Selling Stockholders, severally, and the
Underwriters shall contribute in such proportion as is appropriate to reflect
not only such relative benefits but also the relative fault of the Company and
the Selling Stockholders on the one hand and of the Underwriters on the other
in connection with the statements or omissions which resulted in such Losses as
well as any other relevant equitable considerations. Benefits received by the
Company and the Selling Stockholders shall be deemed to be equal to the total
net proceeds from the offering (before deducting expenses), and benefits
received by the Underwriters shall be deemed to be equal to the total
underwriting discounts and commissions, in each case as set forth on the cover
page of the Prospectus. Relative fault shall be determined by reference to
whether any alleged untrue statement or omission relates to information
provided by the Company, the Selling Stockholders or the Underwriters. The
Company, the Selling Stockholders and the Underwriters agree that it would not
be just and equitable if contribution were determined by pro rata allocation or
any other method of allocation which does not take account of the equitable
considerations referred to above. Notwithstanding the provisions of this
paragraph (d), no person guilty of fraudulent misrepresentation (within the
meaning of Section 11(f) of the Act) shall be entitled to contribution from any
person who was not guilty of such fraudulent misrepresentation. For purposes
of this Section 8, each person who controls an Underwriter within the meaning
of either the Act or the Exchange Act and each director, officer, employee and
agent of an Underwriter shall have the same rights to contribution as such
Underwriter, and each person who controls the Company within the meaning of
either the Act or the Exchange Act, each officer of the Company who shall have
signed the Registration Statement and each director of the Company shall have
the
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<PAGE> 18
same rights to contribution as the Company, subject in each case to the
applicable terms and conditions of this paragraph (d).
(e) The liability of each Selling Stockholder under such
Selling Stockholder's representations and warranties contained in Section 1
hereof and under the indemnity and contribution agreements contained in this
Section 8 shall be limited to an amount equal to the initial public offering
price of the Securities sold by such Selling Stockholder to the Underwriters.
9. Default by an Underwriter. If any one or more
Underwriters shall fail to purchase and pay for any of the Securities agreed to
be purchased by such Underwriter or Underwriters hereunder and such failure to
purchase shall constitute a default in the performance of its or their
obligations under this Agreement, the remaining Underwriters shall be obligated
severally to take up and pay for (in the respective proportions which the
amount of Securities set forth opposite their names in Schedule I hereto bears
to the aggregate amount of Securities set forth opposite the names of all the
remaining Underwriters) the Securities which the defaulting Underwriter or
Underwriters agreed but failed to purchase; provided, however, that in the
event that the aggregate amount of Securities which the defaulting Underwriter
or Underwriters agreed but failed to purchase shall exceed 10% of the aggregate
amount of Securities set forth in Schedule I hereto, the remaining Underwriters
shall have the right to purchase all, but shall not be under any obligation to
purchase any, of the Securities, and if such nondefaulting Underwriters do not
purchase all the Securities, this Agreement will terminate without liability to
any nondefaulting Underwriter, the Selling Stockholders or the Company. In the
event of a default by any Underwriter as set forth in this Section 9, the
Closing Date shall be postponed for such period, not exceeding seven days, as
the Representatives shall determine in order that the required changes in the
Registration Statement and the Prospectus or in any other documents or
arrangements may be effected. Nothing contained in this Agreement shall
relieve any defaulting Underwriter of its liability, if any, to the Company,
the Selling Stockholders and any nondefaulting Underwriter for damages
occasioned by its default hereunder.
10. Termination. This Agreement shall be subject to
termination in the absolute discretion of the Representatives, by notice given
to the Company prior to delivery of and payment for the Securities, if prior to
such time (i) trading in the Company's Common Stock shall have been suspended
by the Commission or the National Association of Securities Dealers National
Market System or trading in securities generally on the New York Stock Exchange
or the National Association of Securities Dealers National Market System shall
have been suspended or limited or minimum prices shall have been established on
either of such Exchange or Market System, (ii) a banking moratorium shall have
been declared either by Federal or New York State authorities or (iii) there
shall have occurred any outbreak or escalation of hostilities, declaration by
the United States of a national emergency or war or other calamity or crisis
the effect of which on financial markets is such as to make it, in the judgment
of the Representatives, impracticable or inadvisable to proceed with the
offering or delivery of the Securities as contemplated by the Prospectus
(exclusive of any supplement thereto).
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<PAGE> 19
11. Representations and Indemnities to Survive. The
respective agreements, representations, warranties, indemnities and other
statements of the Company or its officers, of each Selling Stockholder and of
the Underwriters set forth in or made pursuant to this Agreement will remain in
full force and effect, regardless of any investigation made by or on behalf of
any Underwriter, any Selling Stockholder or the Company or any of the officers,
directors or controlling persons referred to in Section 8 hereof, and will
survive delivery of and payment for the Securities. The provisions of Sections
7 and 8 hereof shall survive the termination or cancellation of this Agreement.
12. Notices. All communications hereunder will be in
writing and effective only on receipt, and, if sent to the Representatives,
will be mailed, delivered or telegraphed and confirmed to them, care of Salomon
Brothers Inc, at Seven World Trade Center, New York, New York, 10048; or, if
sent to the Company, will be mailed, delivered or telegraphed and confirmed to
it at 301 North Main, Suite 1900, Wichita, Kansas 67202, attention of the legal
department; or if sent to the Selling Stockholders, will be mailed, delivered
or telegraphed and confirmed to them at the addresses set forth in Schedule II
hereto.
13. Successors. This Agreement will inure to the benefit
of and be binding upon the parties hereto and their respective successors and
the officers and directors and controlling persons referred to in Section 8
hereof, and no other person will have any right or obligation hereunder.
14. Applicable Law. This Agreement will be governed by
and construed in accordance with the laws of the State of New York.
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<PAGE> 20
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to us the enclosed duplicate hereof,
whereupon this letter and your acceptance shall represent a binding agreement
among the Company and the several Underwriters.
Very truly yours,
HUGOTON ENERGY CORPORATION
By:_____________________________________
Name:___________________________________
Title:__________________________________
ODYSSEY PARTNERS, L.P.
By:_____________________________________
Name:___________________________________
Title:__________________________________
FIRST RESERVE SECURED ENERGY ASSET FUND,
LIMITED PARTNERSHIP
FIRST RESERVE FUND V, LIMITED PARTNERSHIP
AMERICAN GAS & OIL INVESTORS LIMITED
PARTNERSHIP
AMERICAN GAS & OIL INVESTORS II LIMITED
PARTNERSHIP
By: FIRST RESERVE CORPORATION,
GENERAL PARTNER
By:_______________________________
Name:_____________________________
Title:____________________________
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<PAGE> 21
The foregoing Agreement is hereby
confirmed and accepted as of the
date first above written.
Salomon Brothers Inc,
Donaldson, Lufkin & Jenrette
Securities Corporation,
Smith Barney Inc. and
Jefferies & Company, Inc.
By: Salomon Brothers Inc
By:_______________________________
Vice President
For themselves and the other
several Underwriters named in
Schedule I to the foregoing
Agreement.
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<PAGE> 1
EXHIBIT 5.1
[VINSON & ELKINS LETTERHEAD]
February 28, 1997
Hugoton Energy Corporation
301 North Main Street
Suite 1900
Wichita, Kansas 67202
Re: Sale of up to 6,900,000 shares of Common Stock
Gentlemen:
We have acted as counsel to Hugoton Energy Corporation, a Kansas
corporation (the "Company"), in connection with the proposed issuance and sale
by the Company (or up to 1,950,000 shares if the underwriters exercise their
over-allotment option in full) of 1,500,000 shares of Common Stock, $.10 par
value ("Common Stock"), of the Company and by certain selling stockholders
(the "Selling Stockholders") of 4,500,000 shares (or up to 4,950,000 shares
if the underwriters exercise their over-allotment option in full) of Common
Stock pursuant to a Registration Statement on Form S-2 filed by the Company
with the Securities and Exchange Commission (herein referred to as the
"Registration Statement").
We have made such inquiries and examined such documents as we have
considered necessary or appropriate for the purpose of giving the opinions
hereinafter set forth. We have assumed the genuineness and authenticity of all
signatures on all original documents, the authenticity of all documents
submitted to us as originals, the conformity to originals of all documents
submitted to us as copies and the due authorizations, execution, delivery or
recordation of all documents where due authorization, execution or recordation
are prerequisites to the effectiveness thereof.
Based upon the foregoing, and having regard for such legal
considerations as we deem relevant, we are of the opinion that:
(i) the Company is a corporation duly organized, validly existing
and in good standing under the laws of the State of Kansas;
(ii) the authorized capital stock of the Company consists of
10,000,000 shares of Preferred Stock, no par value, none of
which are issued and outstanding, and 100,000,000 shares of
Common Stock, no par value,
<PAGE> 2
of which, as of December 31, 1996, 19,702,036 shares were
issued and outstanding; and
(iii) the 6,000,000 shares of Common Stock, and up to an aggregate
of 900,000 additional shares of Common Stock to cover
over-allotments (if any), proposed to be issued and sold by
the Company and the Selling Stockholders pursuant to the
Registration Statement and the Underwriting Agreement with the
underwriters will, upon issuance and delivery against payment
therefor, be duly authorized and legally issued, fully paid
and nonassessable.
We hereby consent to the filing of this opinion with the Securities and
Exchange Commission as an exhibit to the Registration Statement and to the
statements made regarding our Firm and to the use of our name under the heading
""Legal Options'' in the prospectus constituting a part of the Registration
Statement.
Very truly yours,
VINSON & ELKINS, L.L.P.
