<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON OCTOBER 22, 1996
REGISTRATION NO. 333-12005
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
---------------------
PRE-EFFECTIVE AMENDMENT NO. 2
to
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------------
DENBURY RESOURCES INC.
(Exact name of Registrant as specified in its charter)
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<S> <C> <C>
CANADA 1311 NOT APPLICABLE
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer
incorporation or organization) classification code number) identification number)
17304 PRESTON ROAD, SUITE 200 PHIL RYKHOEK, C.F.O.
DALLAS, TEXAS 75252 DENBURY RESOURCES INC.
(972) 380-1923 17304 PRESTON RD., SUITE 200
(Address and telephone number of Registrant's DALLAS, TEXAS 75252
principal executive offices) (972) 380-1923; FACSIMILE: (972) 713-3051
(Name, address and telephone number of
Agent for Service)
</TABLE>
---------------------
Copies to:
DONALD W. BRODSKY CARLOS A. FIERRO
DEIDRE L. TREADWELL BAKER & BOTTS, L.L.P.
JENKENS & GILCHRIST, 2001 ROSS AVENUE
A PROFESSIONAL CORPORATION DALLAS, TX 75201
1100 LOUISIANA, SUITE 1800 (214) 953-6500; FACSIMILE: (214) 953-6503
HOUSTON, TX 77002
(713) 951-3300; FACSIMILE: (713) 951-3314
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
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 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 of 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 THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
================================================================================
<PAGE> 2
DENBURY RESOURCES INC.
CROSS-REFERENCE SHEET
BETWEEN ITEMS OF FORM S-1 AND THE PROSPECTUS
PURSUANT TO ITEM 501(B) OF REGULATION S-K
<TABLE>
<CAPTION>
ITEM PROSPECTUS
NO. CAPTION
- ---- -----------
<C> <S> <C>
1 Forepart of the Registration Statement and
Outside Front Cover Page of Prospectus......... Facing Page; Cross-Reference Sheet;
Outside Front Cover Page
2 Inside Front and Outside Back Cover Pages of
Prospectus..................................... Inside Front and Outside Back Cover
Pages
3 Summary Information and Risk Factors........... Prospectus Summary; Risk Factors
4 Use of Proceeds................................ Use of Proceeds
5 Determination of Offering Price................ *
6 Dilution....................................... *
7 Selling Security Holders....................... *
8 Plan of Distribution........................... Underwriting
9 Description of Securities to be Registered..... Description of Capital Stock
10 Interests of Named Experts and Counsel......... *
11 Information with Respect to the Registrant
(a) Description of Business.................... Business and Properties
(b) Description of Property.................... Business and Properties
(c) Legal Proceedings.......................... Legal Proceedings
(d) Market for Common Stock.................... Price Range of Common Shares and
Dividend
(e) Financial Statements....................... Policy Index to Financial Statements and
Schedules
(f) Selected Financial Data.................... Selected Consolidated Financial Data
(g) Supplementary Financial Information........ Notes to Financial Statements
(h) Management's Discussion and Analysis of
Financial Condition and Results of
Operations..................................... Management's Discussion and Analysis of
Financial Condition and Results of
Operations
(i) Disagreements with Accountants............. *
(j) Directors and Officers of Registrant....... Management
(k) Compensation of Directors and Officers..... Management
(l) Security Ownership......................... Security Ownership of Certain Beneficial
Owners and Management
(m) Interests of Management in Certain Transactions.. Interests of Management in Certain
Transactions
12 Disclosure of Commission Position on
Indemnification for Securities Act
Liabilities.................................... *
</TABLE>
- ---------------
* Not Applicable
<PAGE> 3
***************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY *
* NOR SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH *
* SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO *
* REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH *
* STATE. *
* *
***************************************************************************
SUBJECT TO COMPLETION, DATED OCTOBER 22, 1996
PROSPECTUS
, 1996
4,400,000 SHARES
[DRI LOGO]
COMMON SHARES
All of the Common Shares offered hereby are being sold by Denbury Resources
Inc. Of the 4,400,000 shares offered hereby, 3,600,000 shares are being offered
in an underwritten public offering (the "Public Offering") and 800,000 shares
are being offered in a concurrent offering (the "TPG Offering") directly to an
existing stockholder at a price equal to the price to the public per share set
forth below less underwriting discounts and commissions. The Public Offering and
the TPG Offering are each conditioned on the consummation of the other. The
Public Offering and the TPG Offering are collectively referred to as the
"Offerings."
The Common Shares are listed on the Nasdaq National Market under the symbol
"DENRF" and on The Toronto Stock Exchange under the symbol "DNR." On October 21,
1996, the closing price of the Common Shares on the Nasdaq National Market and
The Toronto Stock Exchange as reported by each such exchange was U.S. $13.75 and
Cdn. $18.75, respectively. See "Price Range of Common Shares and Dividend
Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN MATTERS
THAT SHOULD BE CONSIDERED BY PROSPECTIVE INVESTORS.
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>
- ------------------------------------------------------------------------------------------------------------------------------------
PRICE UNDERWRITING PROCEEDS
TO THE DISCOUNTS AND TO THE
PUBLIC COMMISSIONS(1) COMPANY(2)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Per Share
Public Offering................ $ $ $
TPG Offering................... $ $ $
Total(3)......................... $ $ $
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."
(2) Before deducting estimated expenses of $500,000 payable by the Company.
(3) The Company has granted to the Underwriters an option, exercisable within 30
days of the date hereof, to purchase up to 540,000 additional Common Shares
at the Price to the Public less Underwriting Discounts and Commissions,
solely to cover over-allotments, if any. If such option is exercised in
full, the total Price to the Public, Underwriting Discounts and Commissions
and Proceeds to the Company will be $ , $ and $ ,
respectively. See "Underwriting."
The Common Shares are being offered in the Public Offering by the several
Underwriters when, as and if delivered to and accepted by the Underwriters and
subject to various prior conditions, including their right to reject orders in
whole or in part. It is expected that delivery of such share certificates will
be made in New York, New York on or about , 1996.
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
JOHNSON RICE & COMPANY L.L.C.
<PAGE> 4
This page will contain a map of the Gulf Coast Region depicting the geographical
location of the Company's twelve largest fields.
IN CONNECTION WITH THE PUBLIC OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR
EFFECT TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE
SECURITIES AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH STABILIZING, IF COMMENCED, MAY BE DISCONTINUED AT ANY TIME.
IN CONNECTION WITH THE PUBLIC OFFERING, CERTAIN UNDERWRITERS AND SELLING
GROUP MEMBERS (IF ANY) MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE
COMMON SHARES ON THE NASDAQ NATIONAL MARKET IN ACCORDANCE WITH RULE 10B-6A UNDER
THE SECURITIES EXCHANGE ACT OF 1934. SEE "UNDERWRITING."
2
<PAGE> 5
PROSPECTUS SUMMARY
The following summary is qualified in its entirety and should be read in
conjunction with the more detailed information and Consolidated Financial
Statements and notes thereto included in this Prospectus. Investors should
carefully consider the information set forth under "Risk Factors." All dollar
amounts in this Prospectus, unless otherwise indicated, are expressed in United
States dollars and all financial data is presented in accordance with Canadian
generally accepted accounting principles ("GAAP"). All share information
contained in this Prospectus has been adjusted to reflect a one-for-two reverse
split of the Common Shares, effective on October 10, 1996. The July 1, 1996
estimated proved reserve data included throughout this Prospectus have been
prepared by Netherland, Sewell & Associates, Inc. ("Netherland & Sewell"),
independent petroleum engineers. Unless otherwise indicated herein, the
information contained in this Prospectus assumes that the Underwriters'
over-allotment option will not be exercised. The terms "Denbury" and the
"Company" refer to Denbury Resources Inc., a Canadian corporation, and all
references to the operations and assets of the Company include those of its
wholly-owned subsidiaries. Certain terms used herein are defined in the Glossary
included elsewhere in this Prospectus.
THE COMPANY
Denbury is an independent energy company engaged in acquisition,
development and exploration activities in the U.S. Gulf Coast region. Since
1993, after having disposed of its Canadian oil and natural gas properties, the
Company has focused its operations primarily onshore in Louisiana and
Mississippi. Over the last three years, the Company has achieved rapid growth in
proved reserves, production and cash flow by concentrating on the acquisition of
properties which it believes have significant upside potential and through the
efficient development, enhancement and operation of those properties.
For the three-year period ended December 31, 1995, the Company increased
its proved reserves by 57% per annum, from 5.8 MMBOE at December 31, 1993 to
14.3 MMBOE. As of July 1, 1996, including the Hess and Ottawa Acquisitions (as
herein defined), the Company had increased its proved reserves to 22.7 MMBOE,
representing a 59% increase over December 31, 1995 reserves. Over the same
three-year period, the Company also increased its average daily production by
88% per annum, from 1,194 BOE/d to 4,207 BOE/d. Pro forma for the Hess and
Ottawa Acquisitions, production for the first six months of 1996 was 9,323
BOE/d. For the three-year period ended December 31, 1995, Adjusted EBITDA grew
at an annual rate of 94%, from $3.0 million to $11.3 million. Pro forma Adjusted
EBITDA for the first six months of 1996 was $18.7 million.
As of July 1, 1996, the Company had proved reserves of 11.7 MMBbls and 65.8
Bcf. At such date, the PV10 Value was $175.3 million, of which $157.8 million
was attributable to proved developed reserves. Denbury operates wells comprising
approximately 68% of its PV10 Value. The twelve largest fields owned by the
Company constitute approximately 80% of its estimated proved reserves and within
these twelve fields, Denbury owns an average working interest of 84%.
BUSINESS STRATEGY
The Company believes that its growth to date in proved reserves, production
and cash flow is a direct result of its adherence to several fundamental
principles. The Company seeks to achieve attractive returns on capital through
prudent acquisitions, development and exploratory drilling and efficient
operations; maintain a conservative balance sheet to preserve maximum financial
and operational flexibility; and create strong employee incentives through
equity ownership. These fundamental principles are at the core of the Company's
long-term growth strategy.
REGIONAL FOCUS. By focusing its efforts in the Gulf Coast region, primarily
Louisiana and Mississippi, the Company has been able to accumulate substantial
geological, reservoir and operating data which it believes provides it with a
significant competitive advantage. Given its experience in the Gulf Coast
region, the Company believes it is better able to proactively identify and
evaluate potential acquisitions, negotiate and
3
<PAGE> 6
close selected acquisitions on favorable terms, and develop and operate the
properties in an efficient and low-cost manner once acquired. The Company
believes the Gulf Coast represents one of the most attractive regions in North
America given the region's prolific production history and the new opportunities
that have been created by advanced technologies such as 3-D seismic and various
drilling, completion and recovery techniques. Moreover, because of the region's
proximity to major pipeline networks serving attractive northeastern U.S.
markets, the Company typically realizes natural gas prices in excess of those
realized in many other producing regions.
DISCIPLINED ACQUISITION STRATEGY. The Company acquires properties where it
believes significant additional value can be created. Such properties are
typically characterized by: (i) long production histories, (ii) complex
geological formations which have multiple producing zones and substantial
exploitation potential, (iii) a history of limited operational attention and
capital investment, often due to their relatively small size and limited
strategic importance to the previous owner and (iv) the potential for the
Company to gain control of operations. By maintaining conservative levels of
debt, the Company is able to respond quickly to acquisitions that fit within its
criteria. The Company believes that due to continuing rationalization of
properties, primarily by major integrated and independent energy companies, a
strong backlog of acquisition opportunities should continue. In addition, the
Company seeks to maintain a well-balanced portfolio of oil and natural gas
development, exploitation and exploration projects in order to minimize the
overall risk profile of its investment opportunities while still providing
significant upside potential. The Company's recent Hess and Ottawa Acquisitions
are illustrative of the type of opportunities the Company seeks.
OPERATION OF HIGH WORKING INTEREST PROPERTIES. The Company typically seeks
to acquire working interest positions that give the Company operational control
or which the Company believes may lead to operational control. As the operator
of properties comprising approximately 68% of its total PV10 Value, the Company
is better able to manage and monitor production and more effectively control
expenses, the allocation of capital and the timing of field development. Once a
property is acquired, the Company employs its technical and operational
expertise in fully evaluating a field for future potential and, if favorable,
consolidates working interest positions primarily through negotiated
transactions which tend to be attractively priced compared to acquisitions
available in competitive situations. The consolidation of ownership allows the
Company to: (i) enhance the effectiveness of its technical staff by
concentrating on relatively few wells; (ii) increase production while adding
virtually no additional personnel; and (iii) increase ownership in a property to
the point where the potential benefits of value enhancement activities justify
the allocation of Company resources.
EXPLOITATION OF PROPERTIES. The Company seeks to maximize the value of its
properties by either increasing production, increasing recoverable reserves or
reducing operating costs, and often through a combination of all three. The
Company utilizes a variety of techniques to achieve this goal, including: (i)
undertaking surface improvements such as rationalizing, upgrading or redesigning
production facilities; (ii) making downhole improvements such as resizing
downhole pumps or reperforating existing production zones; (iii) reworking
existing wells into new production zones with additional potential; (iv)
conducting developmental drilling to access undrained portions of the field
which can only be produced from a new wellbore; and (v) utilizing exploratory
drilling, which is frequently based on various advanced technologies such as 3-D
seismic. The Company believes that by employing a full range of value
enhancement techniques it is better able to extract the maximum value from its
properties.
PERSONNEL. The Company believes it has assembled a highly competitive team
of experienced and technically proficient employees who are motivated through a
positive work environment and by ownership in the Company, which is encouraged
through the Company's stock option and stock purchase plans. The Company's
geological and engineering professionals have an average of over 15 years of
experience in the Gulf Coast region. The Company believes that employee
ownership is essential for attracting, retaining and motivating quality
personnel. Approximately 92% of Denbury's eligible employees were participating
in the Company's stock purchase plan as of July 1, 1996.
4
<PAGE> 7
RECENT DEVELOPMENTS
TPG INVESTMENTS
In December 1995, the Company completed a $40.0 million private placement
of securities with the Texas Pacific Group ("TPG") consisting of Common Shares,
$10 Convertible First Preferred Shares, Series A ("Convertible Preferred") and
warrants to purchase Common Shares (collectively, the "TPG Placement"). The TPG
Placement enabled the Company to repay its then outstanding bank debt and
facilitated its ability to pursue its long-term growth strategy. See "Interests
of Management in Certain Transactions."
Concurrent with the Public Offering, the Company will sell an additional
800,000 Common Shares directly to TPG at a price equal to the price to the
public less underwriting discounts and commissions. The Public Offering and the
TPG Offering are each conditioned on the consummation of the other.
CAPITALIZATION ADJUSTMENTS
On October 10, 1996, the Company effected a one-for-two reverse split of
its outstanding Common Shares. Effective October 15, 1996, all of the Company's
outstanding 9 1/2% Convertible Debentures ("Debentures") were converted by their
holders in accordance with their terms into 308,642 Common Shares. The holders
of the Debentures also received an additional 7,948 Common Shares in lieu of
interest which would have been due the holders absent an early conversion of the
Debentures. Subsequent to June 30, 1996, the Company issued 187,500 Common
Shares for the conversion of the remaining 6 3/4% Convertible Debentures of the
Company and 75,000 Common Shares for the exercise of half of the Cdn. $8.40
Warrants ("Warrants"). The Company intends to convert all of the 1,500,000
shares of Convertible Preferred simultaneously with the closing of the Offerings
into 2,816,372 Common Shares. Giving effect to the issuance of Common Shares for
the Warrants, the Debentures and the 6 3/4% Convertible Debentures, and the
subsequent conversion of the Convertible Preferred upon approval by the Board of
Directors (collectively, the "Capitalization Adjustments"), as of June 30, 1996
an additional 3,395,462 Common Shares would have been outstanding.
ACQUISITION OF HESS PROPERTIES
The Company completed several property acquisitions during the first half
of 1996, the largest of which was the acquisition of producing oil and natural
gas properties in Mississippi, Louisiana and Alabama, plus certain overriding
royalty interests in Ohio, from Amerada Hess Corporation ("Amerada Hess") for
$37.2 million (the "Hess Acquisition"), effective May 1, 1996. Average daily
production during the first half of 1996 from these properties, including the
periods when they were not owned by the Company, was approximately 6.6 MMcf/d
and 2,230 Bbls/d, or 3,335 BOE/d, net to the interest acquired by Denbury. As of
July 1, 1996, the Hess Acquisition properties had estimated net proved reserves
of approximately 5.9 MMBOE, consisting of approximately 5.0 MMBbls and 5.6 Bcf,
with a PV10 Value of $43.1 million. Approximately 90% of the PV10 Value of the
Hess Acquisition was for wells on which Denbury assumed operations with an
average working interest of approximately 80%.
OTHER ACQUISITIONS
In addition to the Hess Acquisition, during the first half of 1996 the
Company completed other acquisitions totaling $10.8 million. The largest of
these was the acquisition of additional working interests in five Mississippi
oil and natural gas properties in which the Company already owned an interest,
and certain overriding royalty interests in other areas, which were acquired
during April 1996 for approximately $7.5 million from Ottawa Energy, Inc.
("Ottawa"), a subsidiary of Highridge Exploration Ltd. (the "Ottawa
Acquisition"). In addition to the Ottawa Acquisition, the Company completed four
other acquisitions, primarily in Louisiana, totaling $3.3 million. Average daily
production during the first half of 1996 from these acquisitions, including the
Ottawa Acquisition and the periods when they were not owned by the Company, was
approximately 3.7 MMcf/d and 434 Bbls/d, or 1,048 BOE/d, net to the interest
acquired by the
5
<PAGE> 8
Company. As of July 1, 1996, the Company's estimated net proved reserves for
these acquisitions totaled approximately 1.1 MMBbls and 13.1 Bcf or 3.3 MMBOE,
with a PV10 Value of $24.1 million.
NEW CREDIT FACILITY
In order to fund these acquisitions, improve the terms and increase the
size of the previous credit facility, the Company has entered into a new $150.0
million dollar credit facility (the "Credit Facility") with NationsBank of Texas
("NationsBank"). This refinancing closed during the second quarter of 1996, and
has a borrowing base as of October 15, 1996 of $60.0 million. The Credit
Facility is a two-year revolving credit facility that converts to a three-year
term loan in May 1998, unless renewed or extended. See "Management's Discussion
and Analysis of Financial Condition and Results of Operations -- New Credit
Facility."
THE OFFERINGS
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<S> <C>
Common Shares offered by the Company:
Public Offering........................................ 3,600,000 shares
TPG Offering........................................... 800,000 shares
Total.......................................... 4,400,000 shares
Common Shares to be outstanding after the Offerings...... 19,498,269 shares(1)
Use of Proceeds.......................................... To repay outstanding indebtedness
under the Credit Facility incurred
primarily in connection with the
recent acquisitions. The remainder
of the proceeds, if any, will be
used to fund future capital
expenditures related to
exploration, development and
acquisition activities, to
increase working capital and for
general corporate purposes. See
"Use of Proceeds."
Nasdaq National Market trading symbol.................... DENRF
The Toronto Stock Exchange trading symbol................ DNR
</TABLE>
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(1) Represents Common Shares outstanding as of October 15, 1996 after giving
effect to the Capitalization Adjustments and the Offerings. This total does
not include 1,758,750 shares issuable pursuant to outstanding warrants and
stock options, of which 1,179,187 were exercisable as of October 15, 1996.
6
<PAGE> 9
SUMMARY OIL AND NATURAL GAS RESERVE DATA
The net proved oil and natural gas reserve estimates as of December 31,
1995 and July 1, 1996 have been prepared by Netherland & Sewell, and the net
proved oil and natural gas reserve estimates as of December 31, 1993 and 1994
have been prepared by the Scotia Group, Inc., both independent petroleum
engineers. For additional information relating to the Company's oil and natural
gas reserves, see "Risk Factors -- Uncertainty of Estimates of Oil and Natural
Gas Reserves," "Business and Properties -- Oil and Natural Gas Operations," and
Note 10 to the Consolidated Financial Statements of the Company. Attached hereto
as Appendix A is a letter from Netherland & Sewell relating to their July 1,
1996 reserve report.
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------- JULY 1,
1993 1994 1995 1996
------- ------- ------- --------
<S> <C> <C> <C> <C>
ESTIMATED PROVED RESERVES:
Oil (MBbls).......................................... 3,583 4,230 6,292 11,725
Natural gas (MMcf)................................... 13,029 42,047 48,116 65,807
Oil equivalent (MBOE)................................ 5,755 11,238 14,311 22,693
Discounted estimated future net cash flow before
income taxes (PV10 Value) (thousands)(1).......... $28,638 $52,691 $96,965 $175,255
Standardized measure of discounted estimated future
net cash flow after net income taxes
(thousands)(1).................................... $28,465 $46,928 $81,164 $150,160
</TABLE>
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(1) Determined based on period-end unescalated prices and costs in accordance
with the guidelines of the Securities and Exchange Commission (the "SEC"),
discounted at 10% per annum. The oil prices as of December 31, 1995 and July
1, 1996, respectively, were West Texas Intermediate $18.00 and $20.00 per
barrel adjusted by field, and the NYMEX Henry Hub natural gas prices for the
same two periods were $2.24 and $2.65 per MMBtu, also adjusted by field.
SUMMARY OPERATING DATA
The following table sets forth summary data with respect to the production
and sales of oil and natural gas by the Company for the periods indicated.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
--------------------------------------- -----------------------------
PRO PRO
FORMA FORMA
1993(1) 1994 1995 1995(2) 1995 1996 1996(2)
------- ------ ------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET AVERAGE DAILY PRODUCTION VOLUMES:
Oil (Bbls).......................... 858 1,340 1,995 4,966 1,830 2,894 4,651
Natural gas (Mcf)................... 2,013 9,113 13,271 21,918 12,075 22,518 28,031
Oil equivalent (BOE)................ 1,194 2,859 4,207 8,619 3,843 6,647 9,323
WEIGHTED AVERAGE SALES PRICES:
Oil (per Bbl)....................... $13.91 $13.84 $ 14.90 $ 14.64 $ 14.92 $ 17.39 $ 17.33
Natural gas (per Mcf)............... 2.06 1.78 1.90 1.83 1.85 2.80 2.72
UNIT DATA ($ PER BOE):
Revenue............................. $13.47 $12.17 $ 13.05 $ 13.09 $ 12.94 $ 17.07 $ 16.84
Production expenses................. (4.75) (4.13) (4.42) (4.87) (4.50) (4.42) (4.64)
------ ------ ------- ------- ------- ------- -------
Production netback.................. 8.72 8.04 8.63 8.22 8.44 12.65 12.20
General and administrative.......... (1.80) (1.12) (1.25) (0.77) (1.40) (1.46) (1.18)
Interest, net....................... 0.04 (0.99) (1.26) (0.50) (1.25) (0.19) (0.07)
------ ------ ------- ------- ------- ------- -------
Operating cash flow (3)............. $ 6.96 $ 5.93 $ 6.12 $ 6.95 $ 5.79 $ 11.00 $ 10.95
====== ====== ======= ======= ======= ======= =======
</TABLE>
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(1) Includes production from Canadian properties sold during 1993.
(2) Gives effect to the (i) Capitalization Adjustments, (ii) Hess Acquisition,
(iii) Ottawa Acquisition, and (iv) the application of estimated net proceeds
of $50.9 million from the Offerings as if such transactions had been
consummated as of January 1 of the period presented. See "Use of Proceeds."
(3) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
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SUMMARY HISTORICAL AND PRO FORMA FINANCIAL DATA
The summary historical financial data set forth below as of and for the
years ended December 31, 1993, 1994 and 1995 have been derived from the
Company's audited financial statements and notes thereto contained elsewhere in
this Prospectus. The financial data for the six-month periods ended June 30,
1995 and 1996 were derived from the unaudited financial statements of the
Company, and include in management's opinion, all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the results for
such periods. The operating results for such periods are not necessarily
indicative of the operating results to be expected for a full fiscal year and
none of the data presented below are necessarily indicative of future results.
The summary historical and unaudited pro forma financial data for the Company
are qualified in their entirety and should be read in conjunction with "Pro
Forma Operating Results," "Management's Discussion and Analysis of Financial
Condition and Results of Operations" and the Company's Consolidated Financial
Statements and Notes.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
---------------------------------------- -----------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1995(1) 1995 1996 1996(1)
------- ------- ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Revenue:
Oil, natural gas and related
product
sales............................ $ 5,868 $12,692 $20,032 $41,196 $ 8,997 $20,650 $28,574
Interest income.................... 76 23 77 77 21 124 124
------- ------- ------- ------- ------- ------- -------
Total revenues.............. 5,944 12,715 20,109 41,273 9,018 20,774 28,698
------- ------- ------- ------- ------- ------- -------
Expenses:
Production......................... 2,067 4,309 6,789 15,336 3,128 5,350 7,870
General and administrative......... 782 1,105 1,832 2,332 935 1,656 1,906
Interest........................... 83 1,146 2,085 1,716 927 681 233
Imputed preferred dividends........ -- -- -- -- -- 759 --
Loss on early extinguishment of
debt............................. -- -- 200 200 200 440 440
Depletion and depreciation......... 1,898 4,209 8,022 16,521 3,075 7,382 10,099
Franchise taxes.................... -- 65 100 100 42 107 107
------- ------- ------- ------- ------- ------- -------
Total expenses.............. 4,830 10,834 19,028 36,205 8,307 16,375 20,655
------- ------- ------- ------- ------- ------- -------
Income before the following: 1,114 1,881 1,081 5,068 711 4,399 8,043
Gain on sale of Canadian
properties....................... 966 -- -- -- -- -- --
------- ------- ------- ------- ------- ------- -------
Income before income taxes........... 2,080 1,881 1,081 5,068 711 4,399 8,043
Provision for federal income taxes... (345) (718) (367) (1,722) (242) (1,804) (2,785)
------- ------- ------- ------- ------- ------- -------
Net income........................... $ 1,735 $ 1,163 $ 714 $ 3,346 $ 469 $ 2,595 $ 5,258
======== ======== ======== ======== ======== ======== ========
Net income per common share.......... $ 0.35 $ 0.19 $ 0.10 $ 0.28 $ 0.07 $ 0.23 $ 0.27
======== ======== ======== ======== ======== ======== ========
Weighted average common shares
outstanding........................ 4,990 6,240 6,870 11,921 6,536 11,512 19,321
======== ======== ======== ======== ======== ======== ========
OTHER DATA:
Operating cash flow(2)............. $ 3,030 $ 6,185 $ 9,394 $21,880 $ 4,025 $13,303 $18,582
Capital expenditures............... 29,855 16,903 28,524 -- 10,506 60,733 --
Adjusted EBITDA(3)................. 3,019 7,213 11,311 23,428 4,892 13,537 18,691
</TABLE>
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
AS OF DECEMBER 31, ---------------------
------------------------------- PRO
1993 1994 1995 ACTUAL FORMA(4)
------- ------- ------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.................................... $35,978 $48,964 $77,641 $132,900 $144,285
Working capital (deficiency).................... (1,410) (1,620) 6,862 (1,184) 10,201
Long-term debt, net of current maturities....... 6,177 16,536 3,474 42,964 34
Convertible preferred stock..................... -- -- 15,000 15,759 --
Shareholders' equity............................ 24,431 25,962 53,501 57,258 127,332
</TABLE>
8
<PAGE> 11
- ---------------
(1) Gives effect to the (i) Capitalization Adjustments, (ii) Hess Acquisition,
(iii) Ottawa Acquisition, and (iv) the application of estimated net proceeds
of $50.9 million from the Offerings as if such transactions had been
consummated as of January 1 of the period presented. See "Use of Proceeds."
(2) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
(3) Adjusted EBITDA represents earnings before interest income, interest
expense, income taxes, depletion and depreciation, gain on sale of oil and
natural gas properties, imputed preferred dividends and losses on early
extinguishment of debt. Adjusted EBITDA is not intended to represent cash
flows for the period, nor has it been presented as an alternative to
operating income nor as an indicator of operating performance. It should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with GAAP. See the Company's Consolidated Statements
of Cash Flows in the Consolidated Financial Statements included elsewhere in
this Prospectus. Adjusted EBITDA is included in this Prospectus because it
is a basis upon which the Company assesses its financial performance.
(4) Gives effect to the Capitalization Adjustments and the application of
estimated net proceeds of $50.9 million from the Offerings.
9
<PAGE> 12
RISK FACTORS
In addition to other information set forth elsewhere in this Prospectus,
the following factors relating to the Company and the Offerings should be
considered when evaluating an investment in the Common Shares offered hereby.
PRICE FLUCTUATIONS AND MARKETS
The Company's revenue, profitability and future rate of growth are
substantially dependent upon the price of, and demand for, oil, natural gas and
natural gas liquids. Historically the markets for oil and natural gas have been
volatile and are likely to continue to be volatile in the future. The prices for
oil and natural gas are subject to wide fluctuations in response to relatively
minor changes in the supply of and demand for oil and natural gas, market
uncertainty and a variety of additional factors that are beyond the control of
the Company. These factors include the level of consumer product demand, weather
conditions, domestic and foreign governmental relations and taxes, the price and
availability of alternative fuels, political conditions in the Middle East and
other petroleum producing areas, the foreign supply of oil and natural gas, the
price of foreign imports and overall economic conditions. It is impossible to
predict future oil and natural gas price movements with any certainty. Declines
in oil and natural gas prices would not only reduce revenue, but could reduce
the amount of the Company's oil and natural gas that can be produced
economically and could, therefore, have a material adverse effect on the
Company's financial condition, results of operations and reserves. In an effort
to minimize the effect of price volatility, the Company has in the past entered
into hedging arrangements from time to time. The Company did not have any
financial hedging contracts in place as of the date of this Prospectus, although
it may have such contracts in the future.
The availability of a ready market for the Company's oil and natural gas
production also depends on a number of factors, including the demand for and
supply of oil and natural gas and the proximity of reserves to, and the capacity
of, oil and natural gas gathering systems, pipelines or trucking and terminal
facilities. Wells may be temporarily shutin for lack of a market or due to
inadequacy or unavailability of pipeline or gathering system capacity.
NEED TO REPLACE RESERVES
The Company's future success depends on its ability to find, develop or
acquire additional oil and natural gas reserves that are recoverable on an
attractive economic basis. Unless the Company successfully replaces the reserves
that it produces (through development, exploration or acquisitions), the
Company's proved reserves will decline. Furthermore, approximately 55% of the
Company's proved developed reserves at July 1, 1996 are located in the lower
Gulf Coast geosyncline in southern Louisiana which is characterized by
relatively rapid decline rates. Approximately 59% of the Company's total proved
reserves at July 1, 1996 were either proved undeveloped or proved developed
non-producing. Recovery of such reserves will require significant capital
expenditures and successful drilling operations. There can be no assurance that
the Company will continue to be successful in its effort to develop or replace
its proved reserves.
DRILLING AND OPERATING RISKS
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be encountered. There can be no
assurance that new wells drilled by the Company will be productive or that the
Company will recover all or any portion of its investment. Drilling for oil and
natural gas may involve unprofitable efforts, not only from dry wells but from
wells that are productive but do not produce sufficient net revenues to return a
profit after drilling, operating and other costs. The cost of drilling,
completing and operating wells is often uncertain. The Company's drilling
operations may be curtailed, delayed or canceled as a result of numerous
factors, many of which are beyond the Company's control, including title
problems, weather conditions, compliance with governmental requirements and
shortages or delays in the delivery of equipment and services.
The Company's operations are subject to all of the risks normally incident
to the operation and development of oil and natural gas properties and the
drilling of oil and natural gas wells, including encountering unexpected
formations or pressures, blow-outs, the release of contaminants into the
environment, cratering and fires, all of which could result in personal
injuries, loss of life, damage to property of the
10
<PAGE> 13
Company and others, and the imposition of fines and penalties pursuant to
environmental legislation. See "-- Governmental and Environmental Regulation."
The Company is not fully insured against all of these risks, nor are all such
risks insurable. Although the Company maintains liability insurance in an amount
which it considers adequate, the nature of these risks is such that liabilities
could exceed policy limits, or as in the case of environmental fines and
penalties, be uninsurable, in which event the Company could incur significant
costs that could have a material adverse effect upon its financial condition.
The Company believes that it has proper procedures in place and that its
operating staff carries out their work in a manner designed to mitigate these
risks.
The Company has focused its oil and natural gas operations in certain key
areas and currently receives approximately 80% of its production from 14 fields.
Any interruption to these key areas could materially adversely affect the
operations of the Company. In the majority of the Company's Mississippi fields,
significant amounts of saltwater are produced which require disposal. Currently,
the Company is able to dispose of such saltwater economically, but should it be
unable to do so in the future, production from these fields would become
uneconomical.
UNCERTAINTY OF ESTIMATES OF OIL AND NATURAL GAS RESERVES
Estimates of the Company's proved developed oil and natural gas reserves
and future net revenues therefrom appearing elsewhere herein are based on
reserve reports prepared by independent petroleum engineers. The estimation of
reserves requires substantial judgment on the part of the petroleum engineers,
resulting in imprecise determinations, particularly with respect to new
discoveries. Different reserve engineers may make different estimates of reserve
quantities and revenues attributable thereto based on the same data. The
accuracy of any reserve estimate depends on the quality of available data as
well as engineering and geological interpretation and judgment. The Company's
reserves are primarily water-drive reservoirs which can increase the uncertainty
of the estimates that have been prepared. Results of drilling, testing and
production or price changes subsequent to the date of the estimate may result in
revisions to such estimates. The estimates of future net revenues reflect oil
and natural gas prices as of the date of estimation, without escalation. There
can be no assurance, however, that such prices will be realized or that the
estimated production volumes will be produced during the periods indicated.
Future performance that deviates significantly from the reserve reports could
have a material adverse effect on the Company.
ACQUISITION RISKS
The Company's rapid growth in recent years has been attributable in
significant part to acquisitions of producing properties. After the Offerings,
the Company expects to continue to evaluate and, where appropriate, pursue
acquisition opportunities on terms management considers favorable to the
Company. There can be no assurance that suitable acquisition candidates will be
identified in the future, nor that they will be integrated successfully into the
Company's operations or successful in achieving desired profitability
objectives. In addition, the Company competes against other companies for
acquisitions, and there can be no assurance that the Company will be successful
in the acquisition of any material property interests.
The successful acquisition of producing properties requires an assessment
of recoverable reserves, exploration potential, future oil and natural gas
prices, operating costs, potential environmental and other liabilities and other
factors beyond the Company's control. In connection with such an assessment, the
Company performs a review of the subject properties that it believes to be
generally consistent with industry practices. Nonetheless, the resulting
assessments are necessarily inexact and their accuracy inherently uncertain, and
such a review may not reveal all existing or potential problems, nor will it
necessarily permit a buyer to become sufficiently familiar with the properties
to fully assess their merits and deficiencies. Inspections may not always be
performed on every platform or well, and structural and environmental problems
are not necessarily observable even when an inspection is undertaken.
Additionally, significant acquisitions can change the nature of the
operations and business of the Company depending upon the character of the
acquired properties, which may be substantially different in operating and
geologic characteristics or geographic location than existing properties. While
it is the Company's current intent to concentrate on acquiring producing
properties with development and exploration
11
<PAGE> 14
potential located in the Gulf Coast region, there is no assurance that the
Company will not pursue acquisitions or properties located in other geographic
regions.
SUBSTANTIAL CAPITAL REQUIREMENTS
In the future, the Company will require additional funds to develop,
maintain and acquire additional interests in existing or newly-acquired
properties. During the last three years, the Company's capital expenditures have
averaged four times more than its cash flow from operations (exclusive of the
changes in non-cash working capital balances) and it has continued this trend
into 1996 by spending approximately 4.6 times its cash flow during the first
half of 1996. Historically, the Company has funded these expenditures
principally through debt and equity. As of October 15, 1996, the Company had a
$60.0 million borrowing base on its Credit Facility, $12.0 million of which was
available. The Company intends to use the net proceeds from the Offerings to
substantially reduce its outstanding bank debt. See "Use of Proceeds." The
borrowing base on this facility will be redetermined semi-annually by the lender
in its sole discretion and there can be no assurance the borrowing base will be
maintained at its present level. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- New Credit Facility."
Although the Company carefully monitors its capital requirements and plans
its expenditures accordingly, and believes that it will be able to meet all of
its obligations in the future, there can be no assurance that additional capital
will always be available to the Company in the future or that it will be
available on terms that are acceptable to the Company. Should outside capital
resources be limited, the rate of Company growth would substantially decline,
and there can also be no assurance that the Company would be able to continue to
increase its oil and natural gas production or oil and natural gas reserves.
Numerous factors affect the cost and availability of capital, including market
conditions, the Company's results of operations and the rate of the Company's
drilling successes.
CONTROLLING SHAREHOLDER
In December 1995, the Company completed a $40.0 million private placement
of securities to TPG consisting of the Convertible Preferred, Common Shares and
warrants. The Convertible Preferred will be converted into approximately 2.8
million Common Shares concurrently with the closing of the Offerings. TPG will
buy 800,000 Common Shares in the TPG Offering directly from the Company at the
price to the public less underwriting discounts and commissions. After adjusting
for the conversion of the Convertible Preferred, the Offerings and the other
Capitalization Adjustments, TPG will own approximately 40% of the Common Shares
outstanding on a fully-diluted basis. TPG is entitled to nominate a minimum of
three of seven representatives to the Company's Board of Directors as long as
TPG maintains certain ownership levels. The current Board of Directors has six
members of which three members were nominated by TPG. In addition, certain
transactions, including changes to the number of board members, amendments to
the Company's Articles of Continuance, certain issuances of debt, certain
acquisitions and dispositions, and most issuances of equity, require the
two-thirds majority of the Board of Directors, which cannot be obtained without
the approval of at least one TPG representative. Additionally, TPG has the right
(which has been waived for the Public Offering), but not the obligation to
maintain its pro rata ownership interest in the equity securities of the Company
in the event the Company issues any additional equity securities or securities
convertible into Common Shares of the Company by purchasing additional shares on
the same terms and conditions. However, this right expires should TPG's
ownership interest fall below 20%. See "Interests of Management in Certain
Transactions."
SHARES ELIGIBLE FOR FUTURE SALE
After giving pro forma effect to the Offerings and the Capitalization
Adjustments, the Company would have had 19,498,269 Common Shares outstanding as
of October 15, 1996 (20,038,269 shares assuming exercise of the Underwriters'
over-allotment option in full). The Common Shares sold in the Public Offering
will be freely tradable without restrictions or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). 7,608,038 of the
8,408,038 Common Shares beneficially owned by TPG as of the close of the
Offerings will be "restricted" securities within the meaning of the Securities
Act as a result of the issuance thereof in a private transaction. The Company
believes that such "restricted" Common Shares will
12
<PAGE> 15
become eligible for sale on the open market under Rule 144 from time to time
after December 21, 1997. In connection with the Public Offering, the Company,
all of its directors and executive officers and TPG have agreed not to sell or
otherwise dispose of any Common Shares, including any securities exercisable for
or convertible into Common Shares, for a period of 120 days from the date of
this Prospectus, without the prior written consent of Donaldson, Lufkin &
Jenrette Securities Corporation. See "Underwriting."
In addition, the Company has granted certain registration rights to TPG.
After December 21, 1997 and until December 21, 2000, TPG has the right, subject
to certain conditions, to demand that its stock be registered under the
Securities Act on one occasion. TPG also has "piggyback" registration rights
and, subject to certain conditions, may participate in a future registration by
the Company of Common Shares (or securities convertible into or exchangeable
for, or options, warrants or other rights to acquire, Common Shares) under the
Securities Act. TPG has waived its "piggyback" registration rights with regard
to the Public Offering. See "Interests of Management in Certain Transactions"
and "Shares Eligible for Future Sale."
The sale of a substantial number of Common Shares or the availability of a
substantial number of shares for sale may adversely affect the market price of
the Common Shares and could impair the Company's ability to raise additional
capital through the sale of its equity securities.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its continued success will depend to a
significant extent upon the abilities and continued efforts of its board of
directors and its senior management, particularly Gareth Roberts, its Chief
Executive Officer and President. The Company does not have any employment
agreements and does not maintain any key man life insurance. The loss of the
services from any of its key personnel could have a material adverse effect on
the Company's results of operations. The success of the Company will also
depend, in part, upon the Company's ability to find, hire and retain additional
key management personnel who are also being sought by other businesses. The
inability to find, hire and retain such personnel could have a material adverse
effect upon the Company's results of operations. See "Management -- Directors
and Executive Officers."
COMPETITION
The Company operates in a highly competitive environment. The Company
competes with major integrated and independent energy companies for the
acquisition of desirable oil and natural gas properties, as well as for the
equipment and labor required to develop and operate such properties. Many of
these competitors have financial and other resources substantially greater than
those of the Company. See "Business and Properties -- Competition."
GOVERNMENTAL AND ENVIRONMENTAL REGULATION
The production of oil and natural gas is subject to regulation under a wide
range of United States federal and state statutes, rules, orders and
regulations. State and federal statutes and regulations require permits for
drilling, reworking and recompletion operations, drilling bonds and reports
concerning operations. Most states in which the Company owns and operates
properties have regulations governing conservation matters, including provisions
for the unitization or pooling of oil and natural gas properties, the
establishment of maximum rates of production from oil and natural gas wells and
the regulation of the spacing, plugging and abandonment of wells. Many states
also restrict production to the market demand for oil and natural gas and
several states have indicated interest in revising applicable regulations in
light of the persistent oversupply and low prices for oil and natural gas
production. These regulations may limit the rate at which oil and natural gas
could otherwise be produced from the Company's properties. Some states have also
enacted statutes prescribing ceiling prices for natural gas sold within the
state. See "Business and Properties -- Regulations."
Various federal, state and local laws and regulations relating to the
protection of the environment may affect the Company's operations and costs. In
particular, the Company's production operations, its salt water disposal
operations and its use of facilities for treating, processing or otherwise
handling hydrocarbons and wastes therefrom are subject to stringent
environmental regulation. The majority of the Company's Louisiana activity is
conducted in a marsh environment where environmental regulations are somewhat
greater. Although compliance with these regulations increases the cost of
Company operations, such compliance has
13
<PAGE> 16
not had a material effect on the Company's capital expenditures, earnings or
competitive position. Environmental regulations have historically been subject
to frequent change by regulatory authorities and the Company is unable to
predict the ongoing cost of complying with these laws and regulations or the
future impact of such regulations on its operations. A significant discharge of
hydrocarbons into the environment could, to the extent such event is not
insured, subject the Company to substantial expense. See "Business and
Properties -- Regulations -- Environmental Regulations."
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED SHARES; ANTI-TAKEOVER
PROVISIONS
The Company's Articles of Continuance authorize the future issuance of an
unlimited number of First Preferred Shares and Second Preferred Shares
(collectively, the "Preferred Shares"), with such designations, rights,
privileges, restrictions and conditions as may be determined from time to time
by the Board of Directors. Accordingly, the Board of Directors is empowered,
without shareholder approval, to issue Preferred Shares with dividend,
liquidation, conversion, voting or other rights that could adversely affect the
voting power or other rights of holders of the Company's Common Shares. In the
event of issuance, the Preferred Shares could be utilized, under certain
circumstances, as a method of discouraging, delaying or preventing a change in
control of the Company. Such actions could have the effect of discouraging bids
for the Company, thereby preventing shareholders from receiving the maximum
value for their shares. Although the Company has no present intention to issue
any additional Preferred Shares, there can be no assurance that the Company will
not do so in the future. As of the close of the Offerings, no Preferred Shares
will be outstanding. See "Interests of Management in Certain Transactions."
The Investment Canada Act includes provisions that are intended to
encourage persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with the Company's Board of Directors rather
than pursue non-negotiated takeover attempts. These existing anti-takeover
provisions may have a significant effect on the ability of a shareholder to
benefit from certain kinds of transactions that may be opposed by the incumbent
Board of Directors. See "Canadian Taxation and the Investment Canada Act" and
"Description of Capital Stock."
NO DIVIDENDS
During the last five fiscal years, the Company has not paid any dividends
on its outstanding Common Shares, nor does the Company intend to do so. In
addition, the Company is restricted from doing so under its Credit Facility. The
Company currently intends to retain its cash for the continued expansion of its
business, including exploration, development and acquisition activities.
FORWARD-LOOKING INFORMATION
All statements other than statements of historical fact contained in this
Prospectus, including statements in "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and "Business and Properties,"
are forward-looking statements. Forward-looking statements in this Prospectus
generally are accompanied by words such as "anticipate," "believe," "estimate,"
"project" or "expect" or similar statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, no
assurance can be given that such expectations will prove correct. Factors that
could cause the Company's results to differ materially from the results
discussed in such forward-looking statements include the aforementioned risks
described under "Risk Factors," such as the fluctuations of the prices received
or demand for the Company's oil and natural gas, the uncertainty of drilling
results and reserve estimates, operating hazards, acquisition risks,
requirements for capital, general economic conditions, the competition from
other exploration, development and production companies and the effects of
governmental and environmental regulation. All forward-looking statements in
this Prospectus are expressly qualified in their entirety by the cautionary
statements in this paragraph.
14
<PAGE> 17
CONCURRENT OFFERINGS
Concurrent with the Public Offering, the Company will sell an additional
800,000 Common Shares to TPG at a price equal to the price to the public per
share set forth on the cover of this Prospectus less underwriting discounts and
commissions. The Public Offering and the TPG Offering are each conditioned on
the consummation of the other.
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Shares in the
Offerings are estimated to be approximately $50.9 million ($57.2 million if the
Underwriters' over allotment option is exercised in full), based on an assumed
public offering price of $12.50 per share. From these proceeds, the Company
intends to repay its borrowings under the Credit Facility to better position the
Company for future acquisition and development activities. As of October 15,
1996, the Credit Facility had an outstanding balance of $48.0 million and an
average interest rate of 6.8% per annum. The Credit Facility is currently a
revolving credit facility that will convert to a three-year term loan in May
1998, unless renewed or extended. The Company borrowed $39.9 million against
this Credit Facility during the second quarter of 1996, primarily to fund the
Hess Acquisition, the Ottawa Acquisition and other acquisitions. See "Business
and Properties -- Acquisitions of Oil and Natural Gas Properties." Since June
30, 1996, an additional $8.0 million has been borrowed to fund the Company's
development program. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- New Credit Facility." The remainder of
the proceeds from the Offerings, if any, will be used to fund future capital
expenditures related to acquisition, development, and exploration activities,
increase working capital and for general corporate purposes. To the extent that
the net proceeds of the Offerings are not immediately used, they will be
invested in investment grade short-term interest-bearing obligations.
15
<PAGE> 18
PRICE RANGE OF COMMON SHARES AND DIVIDEND POLICY
The Company's Common Shares have been listed on the Nasdaq National Market
("NASDAQ") since August 25, 1995 and on The Toronto Stock Exchange ("TSE") in
Toronto, Ontario, Canada, since February 14, 1984 and currently trade under the
symbols "DENRF" and "DNR," respectively. Due to the one-for-two reverse stock
split, the Common Shares will trade on NASDAQ under the symbol "DENFD" through
November 13, 1996. The following table summarizes the high and low last reported
sales prices on days in which there were trades of the Common Shares on NASDAQ
and on the TSE (as reported by such exchanges) for each quarterly period during
the last two fiscal years and to date during 1996. The following prices have
been adjusted for the one-for-two reverse stock split effective on October 10,
1996.
<TABLE>
<CAPTION>
NASDAQ TSE
-------------- --------------
HIGH LOW HIGH LOW
----- ----- ----- -----
(U.S. $) (CDN. $)
<S> <C> <C> <C> <C>
1994
First Quarter.......................................... -- -- 8.00 6.30
Second Quarter......................................... -- -- 8.80 7.00
Third Quarter.......................................... -- -- 9.00 7.20
Fourth Quarter......................................... -- -- 8.80 7.10
1995
First Quarter.......................................... -- -- 7.80 6.60
Second Quarter......................................... -- -- 8.70 7.00
Third Quarter.......................................... 6.74 5.32 8.70 7.00
Fourth Quarter......................................... 6.26 5.50 8.70 7.10
1996
First Quarter.......................................... 7.88 6.26 10.80 8.30
Second Quarter......................................... 10.62 8.50 14.50 12.00
Third Quarter.......................................... 13.50 10.00 18.60 13.70
Fourth Quarter (through October 21, 1996............... 13.75 12.50 18.75 17.00
</TABLE>
The last reported sales prices of the Common Shares on NASDAQ and the TSE
on October 21, 1996, as reported by such exchanges, were U.S. $13.75 per share
and Cdn. $18.75 per share, respectively.
During the last five fiscal years, the Company has not paid any dividends
on its outstanding Common Shares, nor does the Company intend to do so in the
foreseeable future. In addition, the Company is prohibited from doing so under
its Credit Facility. See "Management's Discussions and Analysis of Financial
Condition and Results of Operations -- New Credit Facility."
As of October 15, 1996, to the best of the Company's knowledge, the Common
Shares were held of record by approximately 1,200 holders.
16
<PAGE> 19
CAPITALIZATION
The following table sets forth the capitalization of the Company as of June
30, 1996 and as adjusted to give effect to the Capitalization Adjustments and
the application of the $50.9 million estimated net proceeds from the Offerings,
as if each had been consummated as of June 30, 1996. See "Use of Proceeds." This
table should be read in conjunction with the Company's Consolidated Financial
Statements and related notes thereto, "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and other financial information
included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
AS OF JUNE 30, 1996
------------------------
ACTUAL AS ADJUSTED
-------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents.............................................. $ 3,085 $ 14,470
======== =========
Long-term debt:
Revolving bank loan.................................................. $ 40,000 $ --
Convertible debentures............................................... 2,930 --
Other notes payable.................................................. 34 34
-------- ---------
Total long-term debt......................................... 42,964 34
-------- ---------
Convertible First Preferred Shares, Series A
1,500,000 authorized; $10 par value; 1,500,000 and -0- shares
outstanding, respectively......................................... 15,759 --
-------- ---------
Shareholders' equity(1):
Common Shares, no par value; unlimited shares authorized; 11,632,215
and 19,427,677 outstanding, respectively(2)....................... 51,226 121,436
Retained earnings(3).............................................. 6,032 5,915
-------- ---------
Total shareholders' equity................................... 57,258 127,351
-------- ---------
Total capitalization....................................... $115,981 $ 127,385
======== =========
</TABLE>
- ---------------
(1) Excludes 1,043,425 outstanding stock options as of June 30, 1996,
exercisable at various prices ranging from $2.50 to $11.36 per share with a
weighted average price of $7.36 (of which 503,800 were currently
exercisable), and 700,000 Common Shares reserved for issuance upon exercise
of the two series of Common Share purchase warrants.
(2) Includes the issuance of: (i) 4,400,000 Common Shares upon the closing of
the Offerings, (ii) 2,816,372 Common Shares in exchange for the Convertible
Preferred, (iii) 308,642 Common Shares for the principal and 7,948 Common
Shares for the interest from October 15, 1996 (the date of conversion) to
April 13, 1997 on the 9 1/2% Convertible Debentures, (iv) 187,500 Common
Shares for the 6 3/4% Convertible Debentures converted on July 31, 1996 and
(v) 75,000 Common Shares for the Cdn. $8.40 warrants exercised on August 27,
1996. See "Interests of Management in Certain Transactions."
(3) Includes a $117,000 charge to earnings for the imputed interest from October
15, 1996 to April 13, 1997 for the pro forma early conversion of the 9 1/2%
Convertible Debentures. This interest was paid in Common Shares at a price
of Cdn. $14.72 per Common Share.
17
<PAGE> 20
PRO FORMA OPERATING RESULTS
The following unaudited pro forma consolidated statements of income for the
year ended December 31, 1995 and the six months ended June 30, 1996 reflect the
historical information of the Company as adjusted to give effect to: (i) revenue
and direct operating expenses of the Ottawa Acquisition, (ii) revenue and direct
operating expenses of the Hess Acquisition, (iii) the pro forma adjustments
related to the Ottawa and Hess Acquisitions ("Acquisition Adjustments") and (iv)
the Capitalization Adjustments, the Offerings and application of the estimated
net proceeds therefrom, in each case as if such transactions had been
consummated as of the beginning of each respective period. A pro forma balance
sheet is not presented as both the Ottawa and Hess Acquisitions had been
consummated before June 30, 1996. Additional property acquisitions were made in
1996 that have not been included in the pro forma adjustments since they are
immaterial individually and in the aggregate. See "Capitalization."
The unaudited pro forma consolidated statements of income are provided for
comparative purposes only and should be read in conjunction with the historical
consolidated financial statements of the Company and the historical statements
of revenues and direct operating expenses of the properties acquired in the
Ottawa Acquisition and the Hess Acquisition. The pro forma information presented
is not necessarily indicative of the results that actually would have been
obtained if such transactions had occurred at the beginning of the indicated
periods or of future results.
18
<PAGE> 21
UNAUDITED PRO FORMA STATEMENT OF INCOME
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1996
--------------------------------------------------------------------------------------
CAPITALIZATION
DENBURY OTTAWA HESS ACQUISITION AND OFFERING PRO FORMA
HISTORICAL ACQUISITION ACQUISITION ADJUSTMENTS ADJUSTMENTS COMBINED
---------- ----------- ----------- ----------- -------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil, natural gas and
related product
sales................. $ 20,650 $ 854 $ 7,070 $ -- $ -- $28,574
Interest and other....... 124 -- -- -- -- 124
-------- ----- ------- ------- -------- -------
Total revenues... 20,774 854 7,070 -- -- 28,698
-------- ----- ------- ------- -------- -------
Expenses:
Production............... 5,350 168 2,352 -- -- 7,870
General and
administrative........ 1,656 -- -- 250(1) -- 1,906
Interest................. 681 -- -- 1,041(2) (1,489)(3) 233
Imputed preferred
dividend.............. 759 -- -- -- (759)(6) --
Loss on early
extinguishment of
debt.................. 440 -- -- -- -- 440
Depletion and
depreciation.......... 7,382 -- -- 2,717(4) -- 10,099
Franchise taxes.......... 107 -- -- -- -- 107
-------- ----- ------- ------- -------- -------
Total expenses... 16,375 168 2,352 4,008 (2,248) 20,655
-------- ----- ------- ------- -------- -------
Income before tax.......... 4,399 686 4,718 (4,008) 2,248 8,043
Provision for federal
income tax............... (1,804) (233)(5) (1,604)(5) 1,362(5) (506)(5) (2,785)
-------- ----- ------- ------- -------- -------
Net income................. $ 2,595 $ 453 $ 3,114 $(2,646) $ 1,742 $ 5,258
======== ===== ======= ======= ======== =======
Net income per common
share.................... $ 0.23 $ 0.27
======== =======
Average common shares
outstanding.............. 11,512 19,321
======== =======
</TABLE>
See notes on the following page.
19
<PAGE> 22
UNAUDITED PRO FORMA STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
--------------------------------------------------------------------------------------
CAPITALIZATION
DENBURY OTTAWA HESS ACQUISITION AND OFFERING PRO FORMA
HISTORICAL ACQUISITION ACQUISITION ADJUSTMENTS ADJUSTMENTS COMBINED
---------- ----------- ----------- ----------- -------------- ---------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C>
Revenues:
Oil, natural gas and
related product
sales................. $ 20,032 $ 2,954 $18,210 $ -- $ -- $41,196
Interest and other....... 77 -- -- -- -- 77
-------- ------- ------- --------- ------ -------
Total revenues... 20,109 2,954 18,210 -- -- 41,273
-------- ------- ------- --------- ------ -------
Expenses:
Production............... 6,789 659 7,888 -- 15,336
General and
administrative........ 1,832 -- -- 500(1) -- 2,332
Interest................. 2,085 -- -- 3,338(2) (3,707)(3) 1,716
Loss on early
extinguishment of
debt.................. 200 -- -- -- -- 200
Depletion and
depreciation.......... 8,022 -- -- 8,499(4) -- 16,521
Franchise taxes.......... 100 -- -- -- -- 100
-------- ------- ------- --------- ------ -------
Total expenses... 19,028 659 7,888 12,337 (3,707) 36,205
-------- ------- ------- --------- ------ -------
Income before tax.......... 1,081 2,295 10,322 (12,337) 3,707 5,068
Provision for federal
income tax(5)............ (367) (780) (3,509) 4,194 (1,260) (1,722)
-------- ------- ------- --------- ------ -------
Net income................. $ 714 $ 1,515 $ 6,813 $ (8,143) $2,447 $ 3,346
======== ======= ======= ========= ====== =======
Net income per common
share.................... $ 0.10 $ 0.28
======== =======
Average common shares
outstanding.............. 6,870 11,921
======== =======
</TABLE>
- ---------------
(1) Reflects an increase of $500,000 in annual general and administrative
expense for additional personnel and associated costs relating to the
acquired properties, net of anticipated allocations to operations and
capitalization of exploration costs.
(2) Reflects an increase in interest expense for the period to reflect the $44.5
million of bank debt that would have been required to fund the Hess and
Ottawa Acquisitions had they occurred as of the beginning of each
respective period. The applicable interest rate was reduced from the
Company's historical bank interest rate by 1 3/8% for such periods to
reflect the reduction in the margin over LIBOR as a result of the new
Credit Facility.
(3) Interest expense was: (i) reduced to reflect receipt of $50.9 million in
estimated net proceeds from the Offering and the $460,000 from the exercise
on August 27, 1996 of 75,000 of the Cdn. $8.40 Warrants and the application
thereof to reduce debt, in each case as if the funds were received and
applied at the beginning of each period ($3.8 million and $1.6 million for
1995 and 1996, respectively), (ii) increased to reflect the imputed
interest on the Debentures from the end of each respective period through
April 13, 1997, in addition to the interest actually charged on the
Debentures during the period presented ($167,000 and $87,000 for 1995 and
1996, respectively), and (iii) reduced to reflect the conversion as of the
beginning of each period of the 6 3/4% Convertible Debentures that were
converted into 187,500 Common Shares on July 31, 1996 ($74,000 and $35,000
for 1995 and 1996, respectively).
(4) Depreciation, depletion and amortization ("DD&A") expense has been computed
using the unit of production method and reflects the Company's increased
investment in oil and natural gas properties. The July 1, 1996 estimated
net proved reserves prepared by Netherland & Sewell were used in the DD&A
computation for the Hess and Ottawa Acquisitions.
(5) Income taxes were computed on a pro forma basis using the federal statutory
rate of 34%.
(6) Reflects the elimination of the imputed preferred dividend on the
Convertible Preferred that will be converted into Common Shares concurrent
with the completion of the Offering.
20
<PAGE> 23
SELECTED CONSOLIDATED FINANCIAL DATA
The following selected consolidated financial data of the Company for each
year for the five-year period ended December 31, 1995 are derived from the
Company's audited Consolidated Financial Statements. The selected consolidated
financial data for the six-month periods ended June 30, 1995 and 1996 are
unaudited and include, in management's opinion, all adjustments (consisting of
only normal recurring adjustments) necessary to present fairly the results for
such interim periods. Results for the interim periods are not necessarily
indicative of results to be expected for the entire year. The selected
consolidated financial data should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's Consolidated Financial Statements and the Notes thereto included
elsewhere herein. See Note 8 of the Notes to Consolidated Financial Statements
for a reconciliation between Canadian and U.S. GAAP.
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
-------------------------------------------------- ------------------
1991 1992 1993 1994 1995 1995 1996
------- ------ ------- ------- ------- ------- -------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
SELECTED INCOME STATEMENT DATA:
Revenue:
Oil, natural gas and related product sales.... $ 1,962 $1,912 $ 5,868 $12,692 $20,032 $ 8,997 $20,650
Interest income............................... 5 40 76 23 77 21 124
------- ------ ------- ------- ------- ------- -------
Total revenues............................ 1,967 1,952 5,944 12,715 20,109 9,018 20,774
Expenses:
Production.................................... 669 634 2,067 4,309 6,789 3,128 5,350
General and administrative.................... 437 955 782 1,105 1,832 935 1,656
Interest...................................... 16 8 83 1,146 2,085 927 681
Imputed preferred dividends................... -- -- -- -- -- -- 759
Loss on early extinguishment of debt.......... -- -- -- -- 200 200 440
Depletion and depreciation.................... 1,973 690 1,898 4,209 8,022 3,075 7,382
Franchise taxes............................... -- -- -- 65 100 42 107
------- ------ ------- ------- ------- ------- -------
Total expenses............................ 3,095 2,287 4,830 10,834 19,028 8,307 16,375
------- ------ ------- ------- ------- ------- -------
Income (loss) before the following:............. (1,128) (335) 1,114 1,881 1,081 711 4,399
Gain on sale of Canadian properties........... -- -- 966 -- -- -- --
------- ------ ------- ------- ------- ------- -------
Income (loss) before income taxes............... (1,128) (335) 2,080 1,881 1,081 711 4,399
Provision for federal income taxes.............. -- -- (345) (718) (367) (242) (1,804)
------- ------ ------- ------- ------- ------- -------
Net income (loss)............................... $(1,128) $ (335) $ 1,735 $ 1,163 $ 714 $ 469 $ 2,595
======= ====== ======= ======= ======= ======= =======
Net income (loss) per common share.............. $ (0.58) $(0.11) $ 0.35 $ 0.19 $ 0.10 $ 0.07 $ 0.23
======= ====== ======= ======= ======= ======= =======
Weighted average common shares outstanding...... 1,952 2,949 4,990 6,240 6,870 6,536 11,512
======= ====== ======= ======= ======= ======= =======
OTHER DATA:
Operating cash flow(1).......................... $ 846 $ 354 $ 3,030 $ 6,185 $ 9,394 $ 4,025 $13,303
Capital expenditures............................ 1,068 6,189 29,855 16,903 28,524 10,506 60,733
Adjusted EBITDA(2).............................. 856 323 3,019 7,213 11,311 4,892 13,537
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30,
------------------------------------------------- -------------------
1991 1992 1993 1994 1995 1995 1996
------ ------ ------- ------- ------- ------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Total assets.................................... $3,466 $8,225 $35,978 $48,964 $77,641 $56,917 $132,900
Working capital (deficiency).................... (125) 1,369 (1,410) (1,620) 6,862 (2,262) (1,184)
Long-term debt, net of current maturities....... -- -- 6,177 16,536 3,474 20,491 42,964
Convertible preferred stock..................... -- -- -- -- 15,000 -- 15,759
Shareholders' equity............................ 2,882 7,548 24,431 25,962 53,501 28,891 57,258
</TABLE>
- ---------------
(1) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
(2) Adjusted EBITDA represents earnings before interest income, interest
expense, income taxes, depletion and depreciation, gain on sale of oil and
gas properties, imputed preferred dividends and losses on early
extinguishment of debt. Adjusted EBITDA is not intended to represent cash
flows for the period, nor has it been presented as an alternative to
operating income nor as an indicator of operating performance. It should not
be considered in isolation or as a substitute for measures of performance
prepared in accordance with GAAP. See the Company's Consolidated Statements
of Cash Flows in the Consolidated Financial Statements included elsewhere in
this Prospectus. Adjusted EBITDA is included in this Prospectus because it
is a basis upon which the Company assesses its financial performance.
21
<PAGE> 24
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Denbury is an independent energy company engaged in acquisition,
development and exploration activities in the U.S. Gulf Coast region. Since
1993, after having disposed of its Canadian oil and natural gas properties, the
Company has focused its operations primarily onshore in Louisiana and
Mississippi. Over the last three years, the Company has achieved rapid growth in
proved reserves, production and cash flow by concentrating on the acquisition of
properties which it believes have significant upside potential and through the
efficient development, enhancement and operation of those properties.
ACQUISITION OF HESS PROPERTIES
The Company completed several property acquisitions during the first half
of 1996, the largest of which was the acquisition of producing oil and natural
gas properties in Mississippi, Louisiana, and Alabama, plus certain overriding
royalty interests in Ohio, for approximately $37.2 million from Amerada Hess,
effective May 1, 1996. The average daily production from the properties included
in the Hess Acquisition during May and June 1996 was approximately 5.9 MMcf/d
and 1,962 Bbls/d, which increased the Company's average daily production during
the first half of 1996 by approximately 2.0 MMcf/d and 650 Bbls/d, or 1,000
BOE/d. As of July 1, 1996, the properties in this acquisition had estimated net
proved reserves of approximately 5.9 MMBOE which consisted of approximately 5.0
MMBbls and approximately 5.6 Bcf, with a PV10 Value of $43.1 million.
Approximately 90% of the PV10 Value was for wells on which Denbury assumed
operations with an average working interest of approximately 80%. See "Business
and Properties -- Acquisitions of Oil and Natural Gas Properties."
OTHER ACQUISITIONS
In addition to the Hess Acquisition, during the first half of 1996 the
Company completed other acquisitions totaling $10.8 million. The largest of
these was the Ottawa Acquisition, an acquisition of additional working interests
in five Mississippi oil and natural gas properties in which the Company already
owned an interest, plus certain overriding royalty interests in other areas,
which were acquired during April 1996 for approximately $7.5 million. The
average daily production from the Ottawa Acquisition during April, May and June
1996 was approximately 1.5 MMcf/d and 354 Bbls/d, which increased the Company's
average daily production during the first half of 1996 by approximately 760
Mcf/d and 175 Bbls/d, or 300 BOE/d.
In addition to the Ottawa Acquisition, the Company spent an additional $3.3
million on four other acquisitions, primarily in Louisiana. These properties
contributed approximately 1.5 MMcf/d and 50 Bbls/d, or 300 BOE/d, to the
Company's average daily production during the first half of 1996. See "Business
and Properties -- Acquisitions of Oil and Natural Gas Properties." As of July 1,
1996, the Company's estimated net proved reserves for all of these other
acquisitions, including the Ottawa Acquisition, totaled approximately 1.1 MMBbls
and 13.1 Bcf or 3.3 MMBOE, with a PV10 Value of $24.1 million.
NEW CREDIT FACILITY
In order to fund these acquisitions, improve the terms and increase the
size of its previous credit facility, the Company entered into the new $150.0
million Credit Facility. This refinancing closed during the second quarter of
1996 and has a borrowing base as of October 15, 1996 of $60.0 million. The
Credit Facility is a two-year revolving credit facility that converts to a
three-year term loan in May 1998, unless renewed or extended. The Credit
Facility is secured by virtually all the Company's oil and natural gas
properties and interest is payable at either the bank's prime rate or, depending
on the percentage of the borrowing base that is outstanding, at rates ranging
from LIBOR plus 7/8% to LIBOR plus 1 3/8%. The Credit Facility has several
restrictions including, among others: (i) a prohibition on the payment of
dividends, (ii) a requirement for a minimum equity balance, (iii) a requirement
to maintain positive working capital as defined and (iv) a prohibition of most
debt and corporate guarantees.
22
<PAGE> 25
CAPITAL RESOURCES AND LIQUIDITY
As outlined in the following table, in each of the last three years and
during the first half of 1996, the Company made capital expenditures which
required additional debt and equity capital to supplement cash flow from
operations.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
------------------------------ JUNE 30,
1993 1994 1995 1996
-------- -------- -------- ----------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Acquisitions of oil and natural gas
properties.................................... $ 20,076 $ 6,606 $ 16,763 $ 47,974
Oil and natural gas expenditures................ 9,779 10,297 11,761 12,759
-------- -------- -------- --------
Total................................. $ 29,855 $ 16,903 $ 28,524 $ 60,733
======== ======== ======== ========
</TABLE>
Since January 1, 1993, the Company has made total capital expenditures of
$136.0 million, which were primarily financed with equity ($58.1 million,
including the Convertible Preferred), debt ($43.2 million) and cash from
operations ($31.9 million). During 1995, the Company's sources of capital, other
than cash flow from operations, were a $1.8 million issue of subordinated debt,
a $2.4 million private placement of Common Shares and the $39.5 million, net of
expenses, TPG Placement in December 1995. During the first half of 1996, the
Company's funds were provided by operating cash flow and bank debt, beginning
the year with $100,000 of outstanding bank debt and ending the six month period
with $40.0 million of bank debt outstanding.
As of June 30, 1996, the Company had a working capital deficit of $1.2
million and total bank debt of $40.0 million. The Company has budgeted
development expenditures for the remainder of 1996 that exceed its projected
cash flow. As of October 15, 1996, the Company had a borrowing base of $60.0
million with a total of $48.0 million drawn against the Credit Facility. With
the increased cash flow from the acquired properties and the undrawn portion of
the Credit Facility, the Company anticipates that it can fund its development
budget for the second half of 1996 of approximately $16.0 million and meet its
obligations in the foreseeable future. If external capital resources are limited
or reduced in the future, the Company can adjust its development expenditure
program accordingly. However, such adjustments could limit, or even eliminate,
the Company's future growth. In addition to its development program, the Company
has historically required capital for the acquisition of producing properties,
which have been a major factor in the Company's rapid growth during recent
years. There can be no assurance that suitable acquisitions will be identified
in the future or that any such acquisitions will be successful in achieving
desired profitability objectives. Without suitable acquisitions or the capital
to fund such acquisitions, the Company's future growth could be limited or even
eliminated. As such, the Company is seeking additional equity financing from the
Offerings in order to reduce its debt levels and better position the Company for
future opportunities.
Sources and Uses of Funds
During the first half of 1996, the Company spent approximately $10.7
million on oil and natural gas development expenditures, $48.0 million on the
previously discussed oil and natural gas acquisitions, and approximately $2.0
million on geological, geophysical and acreage expenditures. The development
expenditures included $3.9 million spent on drilling and the balance of $6.8
million spent on workover costs. These expenditures were funded by bank debt,
available cash and cash flow from operations.
During 1995, the Company made $28.5 million in capital expenditures, with
the single largest component being a $10.0 million acquisition of seven
producing wells in the Gibson and Humphreys fields located near the Company's
other properties in Southern Louisiana (the "Gibson Acquisition").
The balance of 1995 acquisition expenditures were for additional interests
in the Company's Lirette field in Louisiana ($2.9 million), interests in the
Bully Camp field, also in Louisiana ($2.1 million), and a few smaller
acquisitions in both Mississippi and Louisiana. During 1995, the Company also
spent $1.9 million drilling four wells in Mississippi, $1.1 million for acreage,
geological and geophysical and delay rentals, and the balance of $8.1 million
for workovers of existing properties. The 1995 expenditures were funded on an
interim basis with cash flow from operations ($9.4 million) and bank debt ($19.4
million), which was repaid in
23
<PAGE> 26
December 1995 with a portion of the $39.5 million of net proceeds from the TPG
Placement. See "Interests of Management in Certain Transactions."
Capital expenditures for 1994 were $16.9 million and included $10.3 million
of development costs primarily expended on natural gas properties in Louisiana,
with the balance of $6.6 million expended on acquisitions of properties
primarily in Louisiana, of which $5.5 million was spent on acquiring additional
working interests in existing Company-operated properties. Expenditures in 1994
were principally funded by $6.2 million of cash provided by operations and net
incremental debt of $8.8 million, of which $1.5 million came from the issuance
of unsecured convertible debentures and the balance from bank debt.
During 1993, the Company made capital expenditures of approximately $29.9
million, of which $20.1 million was for acquisitions. The remaining $9.8 million
was expended on drilling, completions and equipment. Included in the 1993
capital expenditures was approximately $8.7 million for the acquisition of the
several properties from a major oil company in Mississippi (the "Mississippi
Acquisition"), approximately $1.8 million for the acquisition and $4.7 million
for the exploitation of the Puckett field in Mississippi and approximately $9.0
million for the acquisition of properties in Southern Louisiana (the "Louisiana
Acquisition").
The Company's largest source of funds in 1993 was net proceeds of $15.1
million from the issuance of equity in Canada, principally comprised of three
offerings totaling 2,142,500 Common Shares at an average price of Cdn. $9.16 per
share. In each of these offerings, the Company issued special warrants that were
subsequently converted into Common Shares. In addition to cash provided by
equity during 1993, the Company also received $7.6 million of cash from
long-term debt, $3.0 million of cash flow provided by operations and $3.1
million of cash from the disposal of the Company's remaining Canadian
properties.
RESULTS OF OPERATIONS
Comparison of Six Months Ended June 30, 1996 and June 30, 1995
Denbury continued to increase its daily production with an average of 5,453
BOE/d during the first quarter of 1996 and 7,841 BOE/d during the second
quarter, for an overall average of 6,647 BOE/d during the first half of 1996 as
compared to 3,843 BOE/d for the comparable six month period of 1995 (73%
increase). The combination of the Hess and Ottawa Acquisitions contributed
approximately 1,300 BOE/d to the Company's average daily production during the
first half of 1996. The production from these two acquisitions for the first six
months of 1996, including the periods when they were not owned by the Company,
was approximately 3,964 BOE/d. In addition, the Gibson Acquisition contributed
approximately 1,039 BOE/d to the Company's average daily production during the
first half of 1996, with the balance of the increase, 465 BOE/d, primarily
attributable to the Company's development and exploitation program.
In addition, oil and natural gas prices improved substantially over 1995
levels during the first half of 1996. Average oil prices were $17.39 per Bbl as
compared to $14.92 per Bbl for the comparable period in 1995 (17% increase) and
natural gas prices increased to an average price of $2.80 per Mcf during the
first half of 1996 as compared to $1.85 for the comparable period in 1995 (51%
increase). The Company averaged a sales price of $17.07 per BOE during the first
half of 1996 as compared to $12.94 per BOE during the first half of 1995 (32%
increase).
As a result of the aforementioned production and price increases and
property acquisitions, oil and natural gas revenue increased 130% to $20.7
million during the first half of 1996 from $9.0 million for the first half of
1995. Approximately $3.7 million of the increase was related to the Hess and
Ottawa Acquisitions, approximately $3.3 million to the Gibson Acquisition,
approximately $3.4 million to the increase in product prices, and the balance
due to an increase in production as a result of development and other
acquisition activities. Production expenses also increased 71% to $5.4 million
during the first half of 1996 as compared to $3.1 million for the comparable
period in 1995. Production expenses on a BOE basis were $4.42 and $4.50 for the
first half of 1996 and 1995 respectively, a decline of 2% from first half 1995
levels. The first quarter of 1996 operating expenses were slightly less on a BOE
basis because a larger percentage of the first quarter's production was natural
gas (62% on a BOE basis), which typically has a lower operating cost per BOE
than
24
<PAGE> 27
oil. However, the second quarter included two months of operating expenses
relating to the Hess Acquisition which had an average production cost of $6.27
per BOE. In July 1996, the Company assumed operations of these Hess Acquisition
properties and will focus on lowering the production costs during the last half
of 1996 to levels more consistent with the Company's average.
General and administrative expenses increased by 77% to $1.7 million for
the first half of 1996 from $935,000 for the comparable period in 1995. On a per
BOE basis, however, general and administrative costs remained relatively
consistent at $1.46 per BOE for the first half of 1996 as compared to $1.40 per
BOE for the comparable period in 1995. During the first half of 1996, the
Company conducted a review of salaries and awarded raises and bonuses to its
employees. Bonuses, including related payroll taxes, amounted to approximately
$225,000. In addition, the Company began to increase its staff levels during the
second quarter of 1996 to handle the Hess Acquisition, but was not entitled to
any operator's overhead recovery on these properties until July 15, 1996 as
Amerada Hess remained the operator of record until that date. During the first
half of 1995, the Company had non-recurring expenses of approximately $190,000
relating to personnel changes. The Company's objective is to lower general and
administrative costs for the last half of 1996 on a BOE basis to a level close
to the overall average for 1995 of $1.25 per BOE.
As a result of the $39.5 million TPG Placement and the corresponding
retirement of bank debt, the only interest-bearing debt outstanding during the
first quarter of 1996 was approximately $3.3 million of subordinated debt and
minor trade notes payable. During the second quarter, however, the Company
borrowed $39.9 million on its Credit Facility in order to close the Hess and
Ottawa Acquisitions. The net effect was an overall 27% reduction in interest
expense to $681,000 for the first half of 1996, from $927,000 for the comparable
period of 1995.
During the first half of 1996, the Company expensed $759,000 relating to an
imputed dividend on the Convertible Preferred. Under Canadian GAAP this is
reported as an operating expense, while under U.S. GAAP this would be deducted
from net income to arrive at net income applicable to the common shareholders.
This charge to earnings reflects the increase in the mandatory redemption value
of the Convertible Preferred during the period. The Company has not, nor does it
intend to, pay any dividends on the Convertible Preferred.
Also during the first half of 1996, the Company had a $440,000 charge
relating to a loss on early extinguishment of debt. These costs relate to the
remaining unamortized debt issue costs of the Company's prior credit facility
with ING Capital Corporation, which was replaced in May 1996, as previously
discussed. The Company also had a charge of $200,000 during the first half of
1995 for the same item relating to another bank refinancing. Under U.S. GAAP, a
loss on early extinguishment of debt would be an extraordinary item rather than
a normal operating expense as required by Canadian GAAP.
DD&A increased by 140% to $7.4 million for the first half of 1996 as
compared to $3.1 million for the first half of 1995. DD&A per BOE increased 17%
to $6.10 per BOE for the first half of 1996 from $5.22 per BOE for the year
ended December 31, 1995 due to a large percentage of the 1995 and 1996 capital
expenditures relating to acquisitions, which have had a higher per unit cost for
the Company than those reserves added by development expenditures.
The deferred tax provision for the first half of 1996 was approximately
41%, which is higher than the U.S. statutory rate due to certain non-deductible
Canadian expenses and the non-deductible imputed preferred dividend expense of
$759,000. The Company did not have a current tax provision as it generated a
loss for federal income tax purposes.
Primarily as a result of increased production and improved product prices,
net income increased 453% to $2.6 million ($0.11 per common share) for the first
half of 1996 from $469,000 ($0.04 per common share) during the first half of
1995. Cash flow from operations (before the change in non-cash working capital
balances) also increased 231% over first half 1995 levels to $13.3 million
during the first half of 1996 from $4.0 million during the first half of 1995,
also primarily due to strong oil and natural gas prices as well as increased
production.
25
<PAGE> 28
Comparison of Years Ended December 31, 1995 and December 31, 1994
During 1995, production for the year averaged 4,207 BOE/d, which compares
to 2,859 BOE/d in 1994 (a 47% increase), with a higher percentage increase in
revenue of $7.3 million (a 58% increase) between the two years. Oil production
for 1995 increased by 49% from 1,340 Bbls/d in 1994 to 1,995 Bbls/d in 1995 and
natural gas production increased by 46% from 9,113 Mcf/d in 1994 to 13,271 Mcf/d
in 1995. Approximately 240 BOE/d was attributable to the Gibson Acquisition with
the balance primarily attributable to the Company's development and exploitation
program. In addition, the average oil price increased 8% from $13.84 per Bbl in
1994 to $14.90 per Bbl in 1995 and the natural gas price also increased 7%, from
an average price of $1.78 per Mcf in 1994 to $1.90 per Mcf during 1995. The
Company realized a $800,000 gas hedging gain during 1995 which added $0.17 per
Mcf to its average net natural gas price. The Company does not have any oil or
natural gas hedges in place for 1996 due to the relatively strong commodity
prices to date in 1996 and the reduced debt levels and resultant reduced risk of
price changes on cash flow.
The combination of production and price increases caused oil and natural
gas revenue to increase 57%, from $12.7 million in 1994 to $20.0 million in
1995. Approximately $700,000 of the increase is attributable to the Gibson
Acquisition, approximately $1.3 million to product price increases with the
balance due to the increases in production resulting from development and other
acquisition activities.
Production expenses were $6.8 million in 1995 compared to $4.3 million in
1994 as a result of increased production, although on a BOE basis, production
expense had a slight increase of seven percent to $4.42 per BOE in 1995 from
$4.13 in 1994.
General and administrative expenses increased by 65% from $1.1 million in
1994 to $1.8 million in 1995 as a result of the Company's continuing growth. On
a per BOE basis, these costs also increased by 12% from $1.12 per BOE in 1994 to
$1.25 per BOE in 1995 primarily due to $190,000 of expenses during 1995 ($0.12
per BOE) for costs relating to non-recurring personnel changes.
Interest expense increased significantly to $2.1 million in 1995 from $1.1
million in 1994. Approximately $19.4 million of bank debt was borrowed during
1995 primarily for acquisitions, increasing bank debt levels to a peak of $32.2
million just before year end when the bank debt was reduced to $100,000 with the
proceeds from the TPG Placement. Interest expense on a BOE basis was $1.26 in
1995 versus $0.99 per BOE in 1994 due to the net borrowing during the first
eleven months of 1995.
Cash flow from operations in 1995 (before the changes in non-cash working
capital balances) increased over 1994 by 52%, to $9.4 million in 1995 from $6.2
million in 1994. On a per BOE basis, cash flow from operations in 1995 also
increased over 1994 by 3%, to $6.12 in 1995 from $5.93 in 1994. Higher product
prices more than offset the higher interest costs, operating expenses and
general and administrative costs.
DD&A increased by 91% to $8.0 million in 1995 from $4.2 million in 1994.
DD&A per BOE also increased 30% from $4.03 in 1994 to $5.22 in 1995 due to a
large percentage of the 1995 capital expenditures (60%) relating to
acquisitions, which have had a higher per unit cost for the Company than those
reserves added by development expenditures.
During 1995, the Company recognized $200,000 of expenses relating to the
loss on early extinguishment of debt. These costs relate to the unamortized debt
issue costs which were written off when the Company changed its primary bank
lender in April 1995. Under U.S. GAAP, these costs would be an extraordinary
item, rather than a normal operating expense as required under Canadian GAAP.
The deferred tax provision for 1995 was approximately 34%, slightly less
than 1994's provision of approximately 38%. The 1994 provision was slightly
higher than the U.S. statutory rate due to the mix of Canadian versus U.S.
expenses. The Company did not have a current tax provision as it generated a
loss for federal income tax purposes.
Net income decreased by 39% to $714,000 in 1995 from $1.2 million in 1994.
Although every category of revenue and expense increased substantially between
the two years, the reduced net income was primarily a result of certain
nonrecurring charges and a disproportionate increase in depreciation and
depletion expense as compared to the increase in revenue.
26
<PAGE> 29
Comparison of Years Ended December 31, 1994 and December 31, 1993
During 1994, production for the year averaged 2,859 BOE/d, which compares
to 1,194 BOE/d in 1993. Oil production for 1994 increased by 56% from 858 Bbls/d
in 1993 to 1,340 Bbls/d in 1994 and natural gas production increased by 353%
from 2.0 MMcf/d in 1993 to 9.1 MMcf/d in 1994. However, natural gas prices
decreased 14%, from 1993 average prices of $2.06 per Mcf to the $1.78 per Mcf in
1994 with oil prices remaining almost constant at $13.91 per Bbl in 1993 and
$13.84 per Bbl in 1994. The net effect of the production increase and natural
gas price decrease was an increase in revenue for 1994 of 116% over 1993
revenue, with 1994 oil and natural gas revenue of $12.7 million as compared to
1993 levels of $5.9 million. Approximately $7.8 million of the increase was
attributable to production increases, partially offset by the drop in revenue of
approximately $931,000 attributable to the decline in natural gas prices.
Production expenses were $4.3 million in 1994 compared to $2.1 million in
1993 as a result of increased production. On a BOE basis, production expense
declined by 13% to $4.13 per BOE in 1994 from $4.75 per BOE in 1993 as a result
of cost saving measures by the Company and the gas properties acquired in the
Louisiana Acquisition late in 1993 which generally have a lower operating cost
per BOE than oil properties.
General and administrative expenses increased by 41% from $782,000 in 1993
to $1.1 million in 1994. This reflects the Company's increased activity and the
establishment of the second major operating area in Southern Louisiana in late
1993. On a per BOE basis, however, these costs decreased by 38% from $1.80 per
BOE in 1993 to $1.12 per BOE in 1994.
Interest expense increased significantly to $1.1 million in 1994 from
$83,000 in 1993. Approximately $7.6 million of interest-bearing debt was added
in late 1993 primarily to complete the Louisiana Acquisition, and further
acquisitions during 1994 increased debt to $16.4 million by year end.
Additionally, the weighted average interest rate increased by 0.9 percentage
points during 1994 from 8.0% in 1993 to 8.9% in 1994. Interest expense was $0.99
per BOE in 1994 versus a net interest income of $0.04 per BOE in 1993.
Cash flow from operations in 1994 (before the changes in non-cash working
capital balances) increased over 1993 by 104%, from $3.0 million in 1993 to $6.2
million in 1994. On a per BOE basis, however, cash flow from operations in 1994
decreased from 1993 levels by 15%, from $6.96 per BOE in 1993 to $5.93 per BOE
in 1994. Higher interest costs and lower product prices more than offset the
positive effects of lower per unit operating and general and administrative
costs.
DD&A increased by 122% to $4.2 million in 1994 from $1.9 million in 1993 as
a result of the 140% increase in production. The percentage increase in DD&A was
lower than the percentage increase in production due to the addition of
significant reserves at a lower cost per BOE. DD&A per BOE decreased 8% from
$4.36 in 1993 to $4.03 in 1994.
Deferred taxes represent approximately 38% of income before income taxes in
1994, an increase from the 17% in 1993. The 1993 tax provision was reduced by
the application of Canadian tax loss carry forwards against the one-time gain
from the sale of Canadian assets. The Company did not have a current tax
provision as it generated a loss for federal income tax purposes.
Net income, before the one-time gain in 1993 from the sale of Canadian
properties, increased by 51% to $1.2 million in 1994 from $769,000 in 1993,
primarily as a result of the increased production and associated revenue with a
less than proportionate increase in most expenses.
27
<PAGE> 30
BUSINESS AND PROPERTIES
THE COMPANY
Denbury is an independent energy company engaged in acquisition,
development and exploration activities in the U.S. Gulf Coast region. Since
1993, after having disposed of its Canadian oil and natural gas properties, the
Company has focused its operations primarily onshore in Louisiana and
Mississippi. Over the last three years, the Company has achieved rapid growth in
proved reserves, production and cash flow by concentrating on the acquisition of
properties which it believes have significant upside potential and through the
efficient development, enhancement and operation of those properties.
For the three-year period ended December 31, 1995, the Company increased
its proved reserves by 57% per annum, from 5.8 MMBOE at December 31, 1993 to
14.3 MMBOE. As of July 1, 1996, including the Hess and Ottawa Acquisitions (as
herein defined), the Company had increased its proved reserves to 22.7 MMBOE,
representing a 59% increase over December 31, 1995 reserves. Over the same
three-year period, the Company also increased its average daily production by
88% per annum, from 1,194 BOE/d to 4,207 BOE/d. Pro forma for the Hess and
Ottawa Acquisitions, production for the first six months of 1996 was 9,323
BOE/d. For the three-year period ended December 31, 1995, Adjusted EBITDA grew
at an annual rate of 94%, from $3.0 million to $11.3 million. Pro forma Adjusted
EBITDA for the first six months of 1996 was $18.7 million.
As of July 1, 1996, the Company had proved reserves of 11.7 MMBbls and 65.8
Bcf. At such date, the PV10 Value was $175.3 million, of which $157.8 million
was attributable to proved developed reserves. Denbury operates wells comprising
approximately 68% of its PV10 Value. The twelve largest fields owned by the
Company constitute approximately 80% of its estimated proved reserves and within
these twelve fields, Denbury owns an average working interest of 84%.
The Company's address is 17304 Preston Road, Suite 200, Dallas, TX 75252
and the telephone number is (972) 380-1923.
BUSINESS STRATEGY
The Company believes that its growth to date in proved reserves, production
and cash flow is a direct result of its adherence to several fundamental
principles. The Company seeks to achieve attractive returns on capital through
prudent acquisitions, development and exploratory drilling and efficient
operations; maintain a conservative balance sheet to preserve maximum financial
and operational flexibility; and create strong employee incentives through
equity ownership. These fundamental principles are at the core of the Company's
long-term growth strategy.
REGIONAL FOCUS. By focusing its efforts in the Gulf Coast region, primarily
Louisiana and Mississippi, the Company has been able to accumulate substantial
geological, reservoir and operating data which it believes provides it with a
significant competitive advantage. Given its experience in the Gulf Coast
region, the Company believes it is better able to proactively identify and
evaluate potential acquisitions, negotiate and close selected acquisitions on
favorable terms, and develop and operate the properties in an efficient and low-
cost manner once acquired. The Company believes the Gulf Coast represents one of
the most attractive regions in North America given the region's prolific
production history and the new opportunities that have been created by advanced
technologies such as 3-D seismic and various drilling, completion and recovery
techniques. Moreover, because of the region's proximity to major pipeline
networks serving attractive northeastern U.S. markets, the Company typically
realizes natural gas prices in excess of those realized in many other producing
regions.
DISCIPLINED ACQUISITION STRATEGY. The Company acquires properties where it
believes significant additional value can be created. Such properties are
typically characterized by: (i) long production histories; (ii) complex
geological formations which have multiple producing zones and substantial
exploitation potential; (iii) a history of limited operational attention and
capital investment, often due to their relatively small size and limited
strategic importance to the previous owner; and (iv) the potential for the
Company to gain control of operations. By maintaining conservative levels of
debt, the Company is able to respond quickly
28
<PAGE> 31
to acquisitions that fit within its criteria. The Company believes that due to
continuing rationalization of properties, primarily by major integrated and
independent energy companies, a strong backlog of acquisition opportunities
should continue. In addition, the Company seeks to maintain a well-balanced
portfolio of oil and natural gas development, exploitation and exploration
projects in order to minimize the overall risk profile of its investment
opportunities while still providing significant upside potential. The Company's
recent Hess and Ottawa Acquisitions are illustrative of the type of
opportunities the Company seeks.
OPERATION OF HIGH WORKING INTEREST PROPERTIES. The Company typically seeks
to acquire working interest positions that give the Company operational control
or which the Company believes may lead to operational control. As the operator
of properties comprising approximately 68% of its total PV10 Value, the Company
is better able to manage and monitor production and more effectively control
expenses, the allocation of capital and the timing of field development. Once a
property is acquired, the Company employs its technical and operational
expertise in fully evaluating a field for future potential and, if favorable,
consolidates working interest positions primarily through negotiated
transactions which tend to be attractively priced compared to acquisitions
available in competitive situations. The consolidation of ownership allows the
Company to: (i) enhance the effectiveness of its technical staff by
concentrating on relatively few wells; (ii) increase production while adding
virtually no additional personnel; and (iii) increase ownership in a property to
the point where the potential benefits of value enhancement activities justify
the allocation of Company resources.
EXPLOITATION OF PROPERTIES. The Company seeks to maximize the value of its
properties by either increasing production, increasing recoverable reserves or
reducing operating costs, and often through a combination of all three. The
Company utilizes a variety of techniques to achieve this goal, including: (i)
undertaking surface improvements such as rationalizing, upgrading or redesigning
production facilities; (ii) making downhole improvements such as resizing
downhole pumps or reperforating existing production zones; (iii) reworking
existing wells into new production zones with additional potential; (iv)
conducting developmental drilling to access undrained portions of the field
which can only be produced from a new wellbore; and (v) utilizing exploratory
drilling, which is frequently based on various advanced technologies such as 3-D
seismic. The Company believes that by employing a full range of value
enhancement techniques it is better able to extract the maximum value from its
properties.
PERSONNEL. The Company believes it has assembled a highly competitive team
of experienced and technically proficient employees who are motivated through a
positive work environment and by ownership in the Company, which is encouraged
through the Company's stock option and stock purchase plans. The Company's
geological and engineering professionals have an average of over 15 years of
experience in the Gulf Coast region. The Company believes that employee
ownership is essential for attracting, retaining and motivating quality
personnel. Approximately 92% of Denbury's eligible employees were participating
in the Company's stock purchase plan as of July 1, 1996.
OIL AND NATURAL GAS OPERATIONS
Denbury operates in two core areas, Louisiana and Mississippi. The Company
operates 54 wells in Louisiana from an office in Houma and 107 wells in
Mississippi from an office in Laurel. The 12 largest oil and natural gas fields
owned by the Company constitute approximately 80% of its total reserves on both
a BOE and PV10 Value basis Within these 12 fields, Denbury owns an average 84%
working interest and operates 77% of the wells, which comprise 54% of the
Company's PV10 Value. This concentration of value in a relatively small number
of fields allows the Company to benefit substantially from any operating cost
reductions or production enhancements and allows the Company to effectively
manage the properties from its two field offices.
These two core areas are similar in that the major trapping mechanisms for
oil and natural gas accumulations are structural features usually related to
deep-seated salt or shale movement. Both areas typically feature mostly multiple
sandstone reservoirs with strong water-drive characteristics. However, the two
areas differ significantly in drilling costs, risks and the size of potential
reserves. In Mississippi, the producing zones are generally shallower than in
Louisiana and therefore drilling and workover costs are lower. However, the
geological complexity of southern Louisiana, which is more expensive to exploit,
creates the
29
<PAGE> 32
potential for larger discoveries, particularly of natural gas. The Company's
production in Louisiana is predominately natural gas, while Mississippi is
predominately oil.
The following tables set forth information with respect to Denbury's
properties, reserves and drilling and production activities. The information
included in this table about the Company's proved oil and natural gas reserve
estimates as of July 1, 1996 were prepared by Netherland & Sewell. See "Risk
Factors -- Uncertainty of Estimates of Oil and Natural Gas Reserves."
<TABLE>
<CAPTION>
1996 AVERAGE
PROVED RESERVES AS OF JULY 1, 1996 PRODUCTION(1)
----------------------------------------------- ---------------------- GROSS AVERAGE NET
OIL NATURAL GAS PV10 VALUE PV10 VALUE OIL NATURAL GAS PRODUCTIVE REVENUE
(MBBLS) (MMCF) (000'S)(2) % OF TOTAL (BBLS/D) (MCF/D) WELLS(3) INTEREST(3)
------- ----------- ---------- ---------- -------- ----------- ---------- -----------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOUISIANA
Lirette................ 290 28,566 $ 45,661 26.1% 157 7,897 11 60.1%
Gibson................. 309 6,732 14,879 8.5% 184 4,330 2 54.5%
South Chauvin.......... 144 7,362 8,857 5.0% 25 283 2 76.0%
Bayou Rambio........... 38 4,591 6,454 3.7% 30 2,200 1 72.2%
Lapeyrouse............. 127 2,578 6,025 3.4% 3 66 3 61.8%
Other Louisiana........ 1,484 10,863 29,425 16.8% 433 5,541 83 41.0%
------ ------ -------- ------ ----- ------ ---
Total Louisiana...... 2,392 60,692 111,301 63.5% 832 20,317 102 44.4%
------ ------ -------- ------ ----- ------ ---
MISSISSIPPI
Eucutta................ 2,999 -- 20,751 11.8% 350 -- 36 71.9%
Davis.................. 2,375 -- 12,420 7.1% 622 -- 24 70.6%
South Thompson Creek... 516 -- 5,930 3.4% 116 -- 4 80.0%
West Yellow Creek...... 869 -- 4,657 2.7% 266 -- 7 78.2%
Quitman................ 854 -- 4,137 2.4% 61 -- 7 67.5%
Dexter................. -- 3,699 4,070 2.3% 1 1,643 8 48.3%
Puckett................ 750 40 3,845 2.2% 185 9 7 75.4%
Other Mississippi...... 818 699 5,103 2.9% 406 202 79 28.9%
------ ------ -------- ------ ----- ------ ---
Total Mississippi.... 9,181 4,438 60,913 34.8% 2,007 1,854 172 51.3%
------ ------ -------- ------ ----- ------ ---
OTHER.................... 152 677 3,041 1.7% 55 347 14 35.9%
------ ------ -------- ------ ----- ------ ---
COMPANY TOTAL............ 11,725 65,807 $175,255 100.0% 2,894 22,518 288 48.1%
====== ====== ======== ====== ===== ====== ===
</TABLE>
- ---------------
(1) Average production during the period from January 1, 1996 through June 30,
1996. Certain properties, including those purchased in the Hess and Ottawa
Acquisitions, were acquired during 1996. This table only includes production
during the periods when such properties were owned by the Company. See
"-- Production Volumes, Sales Prices and Production Costs" for pro forma
production data.
(2) The reserves were prepared using constant prices and costs in accordance
with the guidelines of the SEC, based on the prices received on a field by
field basis as of July 1, 1996. The oil price at that date was West Texas
Intermediate $20.00 per Bbl adjusted by field and a NYMEX Henry Hub natural
gas price average of $2.65 per MMBtu, also adjusted by field.
(3) Includes only productive wells in which the Company had a working interest
as of July 1, 1996.
LOUISIANA OPERATING AREA
The Company's southern Louisiana producing fields are typically large
structural features containing multiple sandstone reservoirs. Current production
depths range from 7,000 feet to 16,000 feet with potential throughout the areas
for even deeper production. The region produces predominantly natural gas, with
most reservoirs producing with a water-drive mechanism.
The majority of the Company's southern Louisiana fields lie in the Houma
embayment area of Terrebonne and LaFourche Parishes. The area is characterized
by complex geological structures which have produced prolific reserves, typical
of the lower Gulf Coast geosyncline. Given the swampy conditions of southern
Louisiana, 3-D seismic has only recently become feasible for this area as
improvements in field recording techniques have made the process more
economical. 3-D seismic has become a valuable tool in exploration and
development throughout the onshore Gulf Coast and has been pivotal in
discovering
30
<PAGE> 33
significant reserves. The Company believes that the first generation of 3-D data
acquired in these swampy areas has the potential to identify significant
exploration prospects, particularly in the deeper geopressured sections below
12,000 feet.
Lirette
The Lirette structure is a large salt-cored anticline located about 10
miles south of Houma, Louisiana, which has produced over one Tcf of natural gas
from multiple reservoirs. The field is located in six to ten feet of inland
water and produces from depths of 8,000 feet to 16,000 feet. The field was
discovered in 1937, but in 1993, when the Company first acquired a 23% working
interest in the field, gross production had declined to less than 3 MMcf/d. An
initial geological review indicated significant potential and in early 1994,
Denbury increased its interest in the field to an average 60% working interest
by acquiring additional interests from working interest partners in four
separate transactions. By January 1995, following a series of workovers of
existing wells, gross production had grown to approximately 13.2 MMcf/d and 360
Bbls/d (6.5 MMcf/d and 150 Bbls/d net). Additional interests were acquired in
early 1995 to increase the Company's ownership to its current average 78%
working interest.
As a result of two workovers and two wells drilled during 1996, net
production had increased to an average during September 1996 of 12.0 MMcf/d and
174 Bbls/d from 13 wells. During the latter half of 1996 and into 1997, the
Lirette Field will be covered by a 3-D survey currently in process. It is
anticipated that drilling projects created out of this seismic work will
probably be drilled in late 1997 or 1998. See "-- Southern Louisiana 3-D
Acquisitions."
Gibson/Humphreys
In late 1994, Denbury acquired minor working interests in five wells in the
Gibson and Humphreys Fields located in Terrebonne Parish, 20 miles northwest of
the Lirette Field, in the northern part of the Houma embayment. The Gibson
Field, discovered in 1937, has produced over 813 Bcf and 14 MMBbls while the
Humphreys Field, discovered in 1956, has produced 527 Bcf and 6 MMBbls. During
1995, the Company acquired and processed 38 square miles of 3-D seismic data
covering these fields and in November 1995 acquired a majority working interest
in these fields. By December 1995, Denbury's acreage position had grown to 3,165
net acres with interests in six active wells and eight inactive wells. During
September 1996, net production in these two fields averaged approximately 4.6
MMcf/d and 82 Bbls/d. Two additional wells are currently planned in this area
during 1997, one of which is an offset to the Kuntz A-10 well, Gibson Field's
largest current producer, to attempt to accelerate the production of the field's
behind pipe zones. The second well will be drilled to a new horizon within the
same field.
South Chauvin
In February 1996, Denbury purchased interests in two producing wells and
four non-producing wells in South Chauvin Field located in the Houma embayment
area, about 4 miles south of Houma and six miles northwest of Lirette Field.
Chauvin Field, discovered by Shell Oil, is a faulted anticline which has
produced approximately 180 Bcf and 8,500 MBbls since 1960 at depths between
6,000 feet and 14,500 feet. The Company believes considerable potential exists
in the deeper sections below 13,000 feet. Some production has already been
established at Chauvin from this deeper section but appears not to have been
drilled at the optimum location. Denbury intends to either shoot a new 3-D
survey or purchase one recently shot by another company within the next 12
months to confirm the structure.
Of the three currently producing wells at Chauvin, Denbury owns an average
95% working interest. During September 1996, these three wells produced at an
average net rate of .3 MMcf/d and 20 Bbls/d. The Company plans a series of
workovers in the latter half of 1996 and has to date identified 16 potential
behind pipe zones in four wells and two undeveloped drilling locations. This
drilling activity is planned for 1997.
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<PAGE> 34
Bayou Rambio
Production at the Bayou Rambio Field was established in 1955 and has
exceeded 150 Bcf and 920 MBbls to date. Denbury operates one producing well in
the field, the Kelly #2 which is located in Terrebonne Parish about 15 miles
west of Lirette Field. During October 1995, the Company successfully recompleted
this well and during the first part of 1996, acquired additional interests in
this well, bringing its working interest to 88%. During September 1996, the
Kelly #2 produced at an average net rate of approximately 1 MMcf/d and 10
Bbls/d. The Company is currently evaluating 15 square miles of 3-D seismic data
covering this area. Based upon this evaluation, a development location is
tentatively scheduled to be drilled during 1997. This field has historically
produced from twenty-five different pay zones.
Lapeyrouse
The Lapeyrouse Field is a large structural feature which has produced over
.6 Tcf and 10 MMBbls since its discovery in 1941. Denbury currently operates one
producing well and one shut-in well and has a small interest in one other
producing well in the Lapeyrouse field. Net production from this area was
relatively minor during September 1996, averaging 0.1 MMcf/d and 2 Bbls/d.
However, this area is part of the Lirette 3-D joint venture and also will be
covered by the 147 square mile 3-D survey to be conducted in late 1996. The
Company believes considerable potential exists in the section below 15,000 feet
which has produced 8 Bcf from one well in the field. The Company is planning a
workover of the shut-in well during 1997, pending a review of the 3-D seismic,
and anticipates that other drilling opportunities may arise as 3-D data is
evaluated across this large feature. See "-- Southern Louisiana 3-D
Acquisitions."
Other Louisiana
The Company has a 50% working interest in 17 operated producing wells in
the Bayou Des Allemands Field, located in the LaFourche and St. Charles
Parishes. This field was acquired as part of the Hess Acquisition. During
September 1996, net production from this field averaged 0.1 MMcf/d and 173
Bbl/d. Production in this field is from discrete sand intervals located from
3,700 feet to 11,500 feet in depth. Over 30 behind pipe sands have been
identified for future completion as the present zones deplete. Additional
potential may exist in updip locations in producing fault blocks, in untested
fault blocks and in deeper horizons. A 3-D seismic survey is planned during 1997
to help identify any upside potential.
The Company also acquired Lake Chicot Field in St. Martin Parish, Louisiana
as part of the Hess Acquisition and has a 50% working interest in 12 wells. Only
three wells are currently producing, although the Company is in the process of
returning another 9 wells to production as the field was temporarily shut-in
when the Company took over as operator after the acquisition.
Denbury owns a non-operated 19% working interest in three active wells in
North Deep Lake Field in Cameron Parish. During 1995, one of these wells was
successfully recompleted into a shallower sand. During September 1996, net
production from this field averaged 1.6 MMcf/d.
Denbury owns a 100% working interest in 473 acres covering Breton Sound
Blocks 12 and 13 located in Louisiana State water approximately 70 miles
southeast of New Orleans. Breton Sound Block 13 is an abandoned oil and natural
gas field in 14 feet of water. Production was established in the 1960s from a
mid-Miocene sand at 7,500 feet, but water and natural gas coning from an
associated natural gas cap prevented significant economic production. The field
was abandoned in the 1970s after having produced less than 150 MBbls. During the
second quarter of 1996, Denbury drilled a horizontal well to redevelop this
field. The well tested at a gross production rate of 5.5 MMcf/d and commenced
production on September 2, 1996. During the first 23 days of production, the
well's gross production averaged 1.9 MMcf/d and 55 Bbls/d. Although the well is
on production, the Company is still in process of completing its oil storage
facilities that should be completed by early October. Because of the limited oil
storage facilities, the Company is not currently able to produce the well at its
optimum rates and until the facilities are completed, an accurate assessment of
future production rates is not possible.
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<PAGE> 35
Southern Louisiana 3-D Acquisitions
During 1995, the Company acquired approximately 46 square miles of 3-D
seismic data over five of its existing fields in southern Louisiana consisting
of Bayou Rambio, DeLarge, North Deep Lake, Gibson and Humphreys. During the
second quarter of 1996, the Company entered into a joint venture agreement with
two industry partners to acquire approximately 147 square miles of 3-D seismic
data in the Terrebonne Parish area, which includes three of the Company's
existing fields, Lirette, Lapeyrouse and North Lapeyrouse. The Company's
existing productive zones are excluded from the joint venture. Denbury will own
a one-third interest in any new prospects discovered through this joint venture,
which currently owns rights to over 35,000 acres within the survey area. The
Company will be responsible for one-third of the cost of both the 3-D seismic
survey and any wells drilled. The Company anticipates that the 3-D seismic
survey should be completed and the data analyzed by the fall of 1997. In
addition, five of the fields acquired during the first half of 1996 have 3-D
seismic coverage which should be available to the Company in the future and two
additional fields are presently being surveyed. The acquisition and processing
of this data will occur during the second half of 1996 and continue into 1997.
MISSISSIPPI OPERATING AREA
In Mississippi, most of the Company's production is oil, produced largely
from depths of less than 10,000 feet. Fields in this region are characterized by
relatively small geographic areas which generate prolific production from
multiple pay sands. The Company's Mississippi production is usually associated
with large amounts of saltwater, which must be disposed of in saltwater disposal
wells, and almost all wells require pumping. These factors increase the
operating costs on a per barrel basis as compared to Louisiana. The Company
places considerable emphasis on reducing these costs in order to maximize the
cash flow from this area.
Eucutta
The Eucutta Field is located about 18 miles east of Laurel, Mississippi.
Since its discovery in 1943, this field has produced 63 MMBbls and 4.7 Bcf.
Denbury acquired the majority of its interests in this field as part of the
recent Hess Acquisition and currently operates 31 producing oil wells and 16
saltwater injection wells. The field is divided into a shallow Eutaw sand unit
in which the Company has a 76% working interest and the deeper Tuscaloosa sand
zones in which the Company has a 100% working interest. The Eucutta Field traps
oil in multiple sandstones in a highly faulted anticline. At present, seven
different sands are productive at depths between 5,000 feet and 11,000 feet.
Most of the wells produce oil with large amounts of saltwater, which requires
pumping. During September 1996, net production from this field averaged 1,063
Bbls/d.
The Company plans a capital expenditure program at Eucutta Field which will
include upgrading producing facilities, drilling wells and a 3-D seismic
evaluation. The Company believes that through a combination of these
investments, production can be increased and operating costs reduced. Two wells
are planned to be drilled in late 1996, with perhaps four more in 1997 and 1998.
Consideration is being given to acquiring a 3-D seismic survey over the field
and, if pursued, most likely would occur in 1997.
Davis/Frances Creek
The Davis Field and nearby Frances Creek Field are located 42 miles
northeast of Laurel in the northern part of the Mississippi salt basin. Denbury
operates 19 producing wells within the area and owns minor non-operated
interests in eight other wells. The net average production from these wells
during September 1996 was approximately 929 Bbls/d. Davis is a compact anticline
that has produced over 21 MMBbls since its discovery by Conoco in 1969. Over 30
sands have produced oil between the intervals of 5,000 feet and 8,000 feet.
Both the Davis and Frances Creek Fields are relatively mature fields and
produce large amounts of saltwater. During August 1996, these fields produced an
average of approximately 55,000 barrels of saltwater per day, all of which were
re-injected into the ground. The Company places considerable emphasis on
controlling operating costs in these fields to minimize the cost of saltwater
disposal and pumping equipment.
33
<PAGE> 36
Since acquiring the majority of the field in 1993, Denbury has undertaken
an active redevelopment program including numerous workovers and two development
wells. As a result of this work and continued reductions in operating costs, the
Company has been able to steadily increase the proven reserves every year.
During the remainder of 1996, the Company plans to drill a horizontal well to
improve withdrawal efficiency, with another horizontal well planned for 1997.
The Company has identified 11 zones behind pipe for future development.
South Thompson Creek
The South Thompson Creek Field is located in Wayne County, Mississippi,
about 23 miles southeast of Laurel. Denbury operates 3 wells in the field with
an average working interest of 100%. In September 1996, net production from the
field averaged 356 Bbls/d. The South Thompson Creek Field is an anticline which
has produced a total of 3.9 MMBbls since its discovery in 1960 from sandstone
reservoirs in the Hosston, Rodessa and Tuscaloosa formations.
Denbury first acquired an interest in the field in 1993 and increased its
ownership in 1995 by acquiring the apex of the field. Subsequently, in 1995, the
Company drilled its first horizontal well and in April 1996, Denbury acquired
the remaining interest in the field as part of the Ottawa Acquisition. A second
horizontal well was drilled in May 1996, which during September 1996 produced an
average of 252 Bbls/d and 763 barrels of saltwater per day.
In 1997, the Company may drill a third horizontal well in the field pending
continued evaluation of the first two horizontal wells. In addition, there are
two shut in wells which have recompletion potential.
West Yellow Creek
The West Yellow Creek Field is located 28 miles west of Laurel in Wayne
County, Mississippi. Denbury operates seven producing oil wells and two
saltwater disposal wells, with an average working interest of 97%. During
September 1996, net production from the field averaged 266 Bbls/d.
The Company's production is located in the central part of West Yellow
Creek Field which has produced over 34 MMBbls since 1947, with most of the
production being from the Eutaw formation at 5,000 feet. Production also occurs
from multiple sands in the Tuscaloosa and Washita-Fredericksburg formations.
This Tuscaloosa and Washita-Fredericksburg production, discovered in 1966, was
essentially abandoned prior to 1993, when the Company acquired its first
interests in the field. The Company began a drilling program in 1993 which
continued through 1994. By a combination of successful drilling and additional
production acquisitions, the Company was able to increase its net production
from 40 Bbls/d in 1993 to 250 Bbls/d in 1995. In 1996, the Company acquired an
additional 50% working interest in the operated wells through the Ottawa
Acquisition.
Quitman
The Quitman Field is located in Clarke County, Mississippi, 31 miles
northeast of Laurel and near the Davis and Frances Creek Fields. The Company
acquired the field as part of the Hess Acquisition and now operates seven
producing wells and 13 shut in wells. The Company owns an average working
interest of 82%. In September 1996, net production from these wells averaged 180
Bbls/d.
The Quitman Field was discovered in 1966 and has produced approximately 21
MMBbls from 18 separate reservoirs between 4,000 feet and 12,000 feet. The
principal producing zones at Quitman are the Smackover formation and several
sands in the Cotton Valley formation.
Denbury has identified 24 prospective zones behind pipe in existing shut-in
wells. Testing of these zones will begin during the second half of 1996. The
Company also plans to upgrade production and saltwater disposal facilities in an
attempt to lower operating costs.
34
<PAGE> 37
In 1997, the Company plans to evaluate the Quitman Field and the immediate
vicinity, including Davis and Frances Creek fields, with a 3-D seismic survey.
The Company believes that this survey will aid in the accurate evaluation of the
existing reservoir and could lead to the discovery of new producing horizons.
Dexter
The Dexter Field is located in southern Mississippi, about 60 miles
northeast of New Orleans, Louisiana. This field has produced 240 Bcf and 10.8
MMBbls since its discovery in 1957 from a series of natural gas and oil bearing
reservoirs between 8,000 feet and 16,000 feet. The Company currently owns
interests in eight outside operated wells, with an average 56% working interest.
These interests were acquired in several transactions between 1992 and 1996.
During September 1996, average net production from these wells was 2.4 MMcf/d.
The Company has identified four additional zones for recompletion potential and
may drill a development well in this field in 1997.
Puckett
The Puckett Field, which was discovered in 1960, is located about 40 miles
northwest of Laurel in Southern Mississippi. Since its discovery Puckett has
produced 7.3 Bcf and 6 MMBbls. Denbury operates seven wells in the field with an
average working interest of 94%. In August 1996, average net production from
these wells was 143 Bbls/d. Denbury acquired its interest in January 1993 and
immediately began a workover program in the field. Gross production was
increased from 40 BOE/d at acquisition to its current level of 147 BOE/d during
September 1996. Current plans are to produce the current zones and then
recomplete these wells into uphole horizons. There are presently 13 zones
identified behind pipe for future development.
Other Mississippi
The Sandersville Field is located about 12 miles northeast of Laurel,
Mississippi. The field produces heavy oil from shallow sands of the Eutaw
formation along with large amounts of saltwater. The Sandersville Field was
first purchased in late 1994 when Denbury acquired a 97% working interest in 15
active and inactive wells. During 1996, the Company completed a rework of six
producing wells and two saltwater disposal wells, and net production in
September 1996 averaged 246 Bbls/d. Sandersville Field is a four-mile long
structure with oil trapped in multiple sands at around 4,000 feet. Historically,
the recovery of oil has been low and may be enhanced by horizontal drilling. A
study is underway to determine the best location to test this concept with a
well planned for mid-1997.
ACQUISITIONS OF OIL AND NATURAL GAS PROPERTIES
The Company regularly seeks to acquire properties that complement its
operations, that provide exploitation, exploration and development opportunities
and that have cost reduction potential. The Company has purchased the majority
of its current producing wells and has increased production by a variety of
techniques, including development drilling, increasing fluid withdrawal and
reworking existing wells. These acquisitions have also balanced the Company's
reserve mix between oil and natural gas, increased the scale of its operations
in the onshore Gulf Coast area and provided the Company with a significant base
of operations within its area of geographic focus. Since 1993, aggregate
expenditures to acquire producing properties were approximately $93.7 million.
The properties included in the Company's five largest acquisitions make up
approximately 80% of its total proved reserves on a BOE basis. These five
acquisitions are discussed below in the order of their acquisition by the
Company.
Mississippi Acquisition
Effective May 1, 1993, the Company acquired interests in the Davis, Frances
Creek and Lake Utopia Fields in the Mississippi Salt Basin for approximately
$9.0 million. At the date of acquisition, the estimated net proved reserves
included 2,170 MBbls and 217 MMcf, aggregating 2,206 MBOE. From the date of
acquisition through June 30, 1996, the Company produced 789 MBOE from the
acquired properties and has successfully increased its ownership in the Davis
Field through approximately $600,000 of incremental
35
<PAGE> 38
acquisitions. As of July 1, 1996, the estimated net proved reserves of the
properties totaled 2.4 MMBOE, with a PV10 Value of $12.5 million.
Louisiana Acquisition
Effective October 1, 1993, Denbury acquired interests in the Lirette, Bayou
Rambio, Delarge, Lapeyrouse, Lake Boeuf, North Deep Lake and Bay Baptiste Fields
in southern Louisiana for approximately $9.8 million. Six of the seven fields
are situated in the prolific Houma Embayment, which is located south of Houma
and located approximately 40 miles south of New Orleans, Louisiana. This basin
contains fields which have produced more than 2 Tcf of gas since 1930. These
fields have established productive sand intervals as shallow as 1,000 feet to
depths in excess of 17,000 feet, with individual well production rates exceeding
10 MMcf/d.
At the date of acquisition, the net proved reserves included 155 MBbls and
9,137 MMcf, aggregating 1,677 MBOE. From the date of acquisition through June
30, 1996, the Company produced 1,669 MBOE from the acquired properties.
Subsequent to the acquisition, Denbury has successfully completed approximately
$9.6 million in acquisitions of incremental interests in the Lirette and Bayou
Rambio Fields. As of July 1, 1996, the estimated net proved reserves of the
properties was 7.1 MMBOE, with a PV10 Value of $65.0 million.
Gibson Acquisition
In October 1995, Denbury acquired additional interests in the Gibson and
Humphreys Fields in southern Louisiana for approximately $10.2 million. At the
date of acquisition, the net proved reserves included approximately 412 MBbls
and 9,435 MMcf, aggregating 1,985 MBOE. From the date of acquisition through
June 30, 1996, the Company produced 256 MBOE from the acquired properties. As of
July 1, 1996, the estimated net proved reserves of the properties was 1.6 MMBOE,
with a PV10 Value of $16.5 million.
Ottawa Acquisition
In April 1996, the Company acquired additional working interests in five of
its existing oil and natural gas properties in Mississippi, plus certain
overriding royalty interests in other areas, from Ottawa for approximately $7.5
million. This acquisition included 29 producing gross wells (8.8 net working
interest wells), plus overriding royalty interests in an additional 65 wells.
These properties contributed approximately 760 Mcf/d and 175 Bbls/d, or 300
BOE/d, to the Company's average net daily production during the first half of
1996. Average daily production during the first half of 1996 from these
properties, including the periods when they were not owned by the Company, was
approximately 1,615 Mcf/d and 360 Bbls/d, or 629 BOE/d, net to the interest
acquired by Denbury. As of July 1, 1996, the estimated net proved reserves of
these properties was 1.3 MMBOE, with a PV10 Value of $10.4 million.
Hess Acquisition
The largest acquisition by the Company to date, which occurred during the
first half of 1996, was the acquisition of producing oil and natural gas
properties in Mississippi, Louisiana, and Alabama, plus certain overriding
royalty interests in Ohio, for approximately $37.2 million from Amerada Hess. In
May and June 1996, these properties contributed approximately 2.0 MMcf/d and 650
Bbls/d, or 1,000 BOE/d, to the Company's average daily production during the
first half of 1996. Average daily production during the first half of 1996 from
these properties, including the periods when they were not owned by the Company,
was approximately 6.6 MMcf/d and 2,230 Bbls/d, or 3,335 BOE/d, net to the
interest acquired by Denbury. The properties in this acquisition had estimated
net proved reserves of approximately 5.9 MMBOE which consisted of 5.0 MMBbls and
5.6 Bcf, with a PV10 Value of $43.1 million.
Approximately 90% of the PV10 Value of the Hess Acquisition was for wells
on which Denbury assumed operations with an average working interest of
approximately 80%. Four fields out of a total of 60 fields, comprise
approximately 73% of the total Hess Acquisition PV10 Value. The two largest
fields in Mississippi, Eucutta and Quitman Fields, make up approximately 57% of
the total acquisition PV10 Value. Both fields are
36
<PAGE> 39
in the same vicinity as the Company's existing Mississippi core properties, with
the Eucutta Field located in Wayne County, Mississippi between the Company's
Sandersville and West Yellow Creek existing production. The Quitman Field is
located in Clarke County, Mississippi, adjacent to the Company's Davis and
Frances Creek existing production. The two largest fields in Louisiana are the
Atchafalaya Bay and Bayou Des Allemands Fields, which comprise approximately 16%
of the total acquisition PV10 Value. These two fields are in adjacent parishes
to Terrebonne Parish where the majority of the Company's existing Louisiana
production is located. Atchafalaya Bay Field is just west of Terrebonne Parish
in St. Mary Parish and Bayou Des Allemands Field is located Northeast of
Terrebonne Parish in St. Charles and LaFourche Parishes.
PRODUCTION VOLUMES, SALES PRICES AND PRODUCTION COSTS
The following table summarizes the Company's net oil and natural gas
production volumes, average sales prices and production costs for each year of
the three-year period ended December 31, 1995 and the six month periods ended
June 30, 1995 and 1996.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED JUNE 30,
-------------------------------------- -----------------------------
PRO PRO
FORMA FORMA
1993 1994 1995 1995(1) 1995 1996 1996(1)
------ ------ ------ ------- ------ ------ -------
<S> <C> <C> <C> <C> <C> <C> <C>
NET PRODUCTION VOLUME:
Crude oil (MBbls)......... 313 489 728 1,813 331 527 847
Natural gas (MMcf) ....... 735 3,326 4,844 8,000 2,186 4,098 5,102
Oil equivalent (MBOE)..... 435 1,043 1,535 3,146 696 1,210 1,697
AVERAGE SALE PRICES:
Crude oil ($/Bbl)......... $13.91 $13.84 $14.90 $14.64 $14.92 $17.39 $17.33
Natural gas ($/Mcf) ...... 2.06 1.78 1.90 1.83 1.85 2.80 2.72
Oil equivalent ($/BOE).... 13.47 12.17 13.05 13.09 12.94 17.07 16.84
AVERAGE PRODUCTION COSTS:
Per equivalent BOE........ $ 4.75 $ 4.13 $ 4.42 $ 4.87 $ 4.50 $ 4.42 $ 4.64
</TABLE>
- ---------------
(1) During 1996, the Company made two significant property acquisitions. See
"Acquisitions of Oil and Natural Gas Properties." The summary pro forma
results assume that these transactions were completed as of the beginning of
each respective period. See also "Pro Forma Operating Results."
OIL AND NATURAL GAS ACREAGE
The following table sets forth the Company's acreage position as of
December 31, 1995:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
----------------- -----------------
GROSS NET GROSS NET
------ ------ ------ ------
<S> <C> <C> <C> <C>
Louisiana............................................. 13,704 10,333 3,990 3,902
Mississippi........................................... 5,940 3,079 3,826 1,963
Oklahoma.............................................. -- -- 550 340
Texas................................................. 840 660 1,385 417
------ ------ ------ ------
Total....................................... 20,484 14,072 9,751 6,622
====== ====== ====== ======
</TABLE>
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<PAGE> 40
The following table sets forth the Company's acreage position as of June
30, 1996:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
----------------- -----------------
GROSS NET GROSS NET
------ ------ ------ ------
<S> <C> <C> <C> <C>
Alabama............................................... 870 600 1,089 361
Louisiana............................................. 29,802 20,487 7,565 6,765
Mississippi........................................... 18,087 11,903 13,181 6,336
Oklahoma.............................................. -- -- 550 340
Texas................................................. 840 660 1,385 417
------ ------ ------ ------
Total....................................... 49,599 33,650 23,770 14,219
====== ====== ====== ======
</TABLE>
PRODUCTIVE WELLS
The following table sets forth the Company's gross and net productive wells
as of December 31, 1995:
<TABLE>
<CAPTION>
NATURAL GAS
OIL WELLS WELLS TOTAL
-------------- -------------- ---------------
GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Louisiana.................................. 9 5.7 32 20.5 41 26.2
Mississippi................................ 64 45.9 11 2.2 75 48.1
Texas...................................... -- -- 4 2.9 4 2.9
----
- --
--- ---- --- -----
Total ........................... 73 51.6 47 25.6 120 77.2
=== ===== == ==== === =====
</TABLE>
The following table sets forth the Company's gross and net productive wells
as of June 30, 1996:
<TABLE>
<CAPTION>
NATURAL GAS
OIL WELLS WELLS TOTAL
--------------- -------------- ---------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Alabama................................... 2 0.2 5 1.0 7 1.2
Louisiana................................. 54 27.9 48 27.2 102 55.1
Mississippi............................... 158 102.8 14 5.3 172 108.1
Texas..................................... 2 1.8 5 3.3 7 5.1
--
--- ----- ---- --- -----
Total........................... 216 132.7 72 36.8 288 169.5
=== ===== == ==== === =====
</TABLE>
DRILLING ACTIVITY
The following table sets forth the results of drilling activities during
each of the three years in the period ended December 31, 1995 and the six months
ended June 30, 1996. Two wells were in the process of drilling at June 30, 1996.
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
JUNE 30,
YEAR ENDED DECEMBER 31, 1996
------------------------------------------- -----------
GROSS NET GROSS NET GROSS NET GROSS NET
----- --- ----- --- ----- --- ----- ---
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EXPLORATORY WELLS:
Productive................................ -- -- -- -- -- -- -- --
Nonproductive............................. 1 0.5 3 0.8 2 1.0 1 1.0
DEVELOPMENT WELLS:
Productive................................ 5 2.2 4 2.9 2 1.5 4 3.5
Nonproductive............................. 1 0.9 1 1.0 -- -- -- --
-- --- -- --- -- --- -- ---
Total.................................. 7 3.6 8 4.7 4 2.5 5 4.5
== === == === == === == ===
</TABLE>
PRODUCT MARKETING
Denbury's production is primarily from developed fields close to major
pipelines or refineries and established infrastructure. As a result, Denbury has
not experienced any difficulty in finding a market for all of its product as it
becomes available or in transporting its product to these markets.
38
<PAGE> 41
Oil Marketing
Denbury markets its oil to a variety of purchasers, most of which are
large, established companies. The oil is generally sold under a one-year
contract with the sales price based on an applicable posted price, plus a
negotiated premium. This price is determined on a well-by-well basis and the
purchaser generally takes delivery at the wellhead. Mississippi oil, which
accounted for approximately 80% of the Company's oil production in 1995, is
primarily light sour crude and sells at a discount to the published West Texas
Intermediate posting. The balance of the oil production, Louisiana oil, is
primarily light sweet crude, which typically sells at a slight premium to the
West Texas Intermediate posting.
Natural Gas Marketing
Virtually all of Denbury's natural gas production is close to existing
pipelines and consequently, the Company generally has a variety of options to
market its natural gas. The Company sells the majority of its natural gas on one
year contracts with prices fluctuating month-to-month based on published
pipeline indices with slight premiums or discounts to the index.
Production Price Hedging
For 1995, the Company entered into financial contracts to hedge 75% of the
Company's net natural gas production and 43% of the Company's net oil
production. The net effect of these hedges was to increase oil and natural gas
revenues by approximately $750,000 during 1995. The Company did not have any
hedge contracts in place as of September 30, 1996 although it may have such
contracts in the future.
SIGNIFICANT OIL AND NATURAL GAS PURCHASERS
Oil and natural gas sales are made on a day-to-day basis under short-term
contracts at the current area market price. The loss of any purchaser would not
be expected to have a material adverse effect upon operations. For the period
ended December 31, 1995, the Company sold 10% or more of its net production of
oil and natural gas to the following purchasers: Natural Gas Clearinghouse
(21%), Amerada Hess (20%), Conoco, Inc. (12%), and Brymore Energy Corp. (12%),
which as of May 1, 1996 is wholly-owned by the Company.
TITLE TO PROPERTIES
Customarily in the oil and natural gas industry, only a perfunctory title
examination is conducted at the time properties believed to be suitable for
drilling operations are first acquired. Prior to commencement of drilling
operations, a thorough drill site title examination is normally conducted and
curative work is performed with respect to significant defects. During
acquisitions, title reviews are performed on all properties; however, formal
title opinions are obtained on only the higher value properties.
COMPETITION
The oil and natural gas industry is highly competitive in all its phases.
The Company encounters strong competition from many other energy companies in
acquiring economically desirable producing properties and drilling prospects and
in obtaining equipment and labor to operate and maintain its properties. In
addition, many energy companies possess greater resources than the Company.
GEOGRAPHIC SEGMENTS
During 1993, the Company had $618,000 of oil and natural gas sales in
Canada and generated $1.1 million of net income in Canada, including the gain on
sale of Canadian properties of $966,000. All Canadian oil and natural gas
properties were disposed of in 1993 and thus all of the Company's operations are
now in the United States.
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<PAGE> 42
REGULATIONS
The availability of a ready market for oil and gas production depends upon
numerous factors beyond the Company's control. These factors include regulation
of natural gas and oil production, federal and state regulations governing
environmental quality and pollution control, state limits on allowable rates of
production by well or proration unit, the amount of natural gas and oil
available for sale, the availability of adequate pipeline and other
transportation and processing facilities and the marketing of competitive fuels.
State and federal regulations generally are intended to prevent waste of natural
gas and oil, protect rights to produce natural gas and oil between owners in a
common reservoir, control the amount of natural gas and oil produced by
assigning allowable rates of production and control contamination of the
environment. Pipelines are subject to the jurisdiction of various federal, state
and local agencies. The following discussion summarizes the regulation of the
United States oil and gas industry and is not intended to constitute a complete
discussion of the various statutes, rules, regulations and governmental orders
to which the Company's operations may be subject.
Regulation of Natural Gas and Oil Exploration and Production
The Company's operations are subject to various types of regulation at the
federal, state and local levels. Such regulation includes requiring permits for
the drilling wells, maintaining bonding requirements in order to drill or
operate wells and regulating the location of wells, the method of drilling and
casing wells, the surface use and restoration of properties upon which wells are
drilled in, the plugging and abandoning of wells and the disposal of fluids used
in connection with operations. The Company's operations are also subject to
various conservation laws and regulations. These include the regulation of the
size of drilling and spacing units or proration units and the density of wells
which may be drilled in and the unitization or pooling of oil and gas
properties. In addition, state conservation laws establish maximum rates of
production from oil and gas wells, generally prohibit the venting or flaring of
gas and impose certain requirements regarding the ratability of production. The
effect of these regulations may limit the amount of oil and gas the Company can
produce from its wells and may limit the number of wells or the locations at
which the Company can drill. The regulatory burden on the oil and gas industry
increases the Company's costs of doing business and, consequently, affects its
profitability. Inasmuch as such laws and regulations are frequently expanded,
amended and reinterpreted, the Company is unable to predict the future cost or
impact of complying with such regulations.
Federal Regulation of Sales and Transportation of Natural Gas
Federal legislation and regulatory controls in the U.S. have historically
affected the price of the natural gas produced by the Company and the manner in
which such production is marketed. The Federal Energy Regulatory Commission (the
"FERC") regulates the interstate transportation and sale for resale of natural
gas by interstate and intrastate pipelines. The FERC previously regulated the
maximum selling prices of certain categories of gas sold in "first sales" in
interstate and intrastate commerce under the Natural Gas Policy Act. Effective
January 1, 1993, however, the Natural Gas Wellhead Decontrol Act (the "Decontrol
Act") deregulated natural gas prices for all "first sales" of natural gas, which
includes all sales by the Company of its own production. As a result, all sales
of the Company's domestically produced natural gas may be sold at market prices,
unless otherwise committed by contract. The FERC's jurisdiction over natural gas
transportation and gas sales other than first sales was unaffected by the
Decontrol Act.
The Company's natural gas sales are affected by the regulation of
intrastate and interstate gas transportation. In an attempt to restructure the
interstate pipeline industry with the goal of providing enhanced access to, and
competition among, alternative natural gas supplies, the FERC, commencing in
April 1992, issued Order Nos. 636, 636-A and 636-B ("Order No. 636") which have
altered significantly the interstate transportation and sale of natural gas.
Among other things, Order No. 636 required interstate pipelines to unbundle the
various services that they had provided in the past, such as sales, transmission
and storage, and to offer these services individually to their customers. By
requiring interstate pipelines to "unbundle" their services and to provide their
customers with direct access to pipeline capacity held by them, Order No. 636
has enabled pipeline customers to choose the levels of transportation and
storage service they require, as well
40
<PAGE> 43
as to purchase natural gas directly from third-party merchants other than the
pipelines and obtain transportation of such gas on a non-discriminatory basis.
The effect of Order No. 636 has been to enable the Company to market its natural
gas production to a wider variety of potential purchasers. The Company believes
that these changes generally have improved the Company's access to
transportation and have enhanced the marketability of its natural gas
production. To date, Order No. 636 has not had any material adverse effect on
the Company's ability to market and transport its natural gas production.
However, the Company cannot predict what new regulations may be adopted by the
FERC and other regulatory authorities, or what effect subsequent regulations may
have on the Company's activities. In addition, Order No. 636 and a number of
related orders were appealed. Recently, the United States Court of Appeals for
the District of Columbia Circuit issued an opinion largely upholding the basic
features and provisions of Order No. 636. However, even though Order No. 636
itself has been judicially approved, several related FERC orders remain subject
to pending appellate review and further changes could occur as a result of court
orders or at the FERC's own initiative.
In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural
gas. Some of the more notable of these regulatory initiatives include (i) a
series of orders in individual pipeline proceedings articulating a policy of
generally approving the voluntary divestiture of interstate natural gas
pipeline-owned gathering facilities to pipeline affiliates, (ii) the completion
of a rulemaking involving the regulation of interstate natural gas pipelines
with marketing affiliates under Order No. 497, (iii) FERC's on-going efforts to
promulgate standards for pipeline electronic bulletin boards and electronic data
exchange, (iv) a generic inquiry into the pricing of interstate pipeline
capacity, (v) efforts to refine FERC's regulations controlling the operation of
the secondary market for released interstate natural gas pipeline capacity, and
(vi) a policy statement regarding market-based rates and other non-cost-based
rates for interstate pipeline transmission and storage capacity. Several of
these initiatives are intended to enhance competition in natural gas markets.
While any resulting FERC action would affect the Company only indirectly, the
ongoing, or, in some instances, preliminary evolving nature of these regulatory
initiatives makes it impossible at this time to predict their ultimate impact
upon the Company's activities.
Oil Price Controls and Transportation Rates
Sales of crude oil, condensate and gas liquids by the Company are not
currently regulated and are made at market prices. Commencing in October 1993,
the FERC has modified its regulation of oil pipeline rates and services in order
to comply with the Energy Policy Act of 1992. That Act mandated the FERC to
streamline oil pipeline ratemaking by abandoning its old, cumbersome procedures
and issue new procedures to be effective January 1, 1995. In response, the FERC
issued a series of rules (Order Nos. 561 and 561-A) establishing an indexing
system under which oil pipelines will be able to change their transportation
rates, subject to prescribed ceiling levels. The FERC's new oil pipeline
ratemaking methodology was recently affirmed by the Court. The Company is not
able at this time to predict the effects of Order Nos. 561 and 561-A, if any, on
the transportation costs associated with oil production from the Company's oil
producing operations.
Environmental Regulations
The Company's operations are subject to numerous laws and regulations
governing the discharge of materials into the environment or otherwise relating
to environmental protection. Public interest in the protection of the
environment has increased dramatically in recent years. The trend of more
expansive and stricter environmental legislation and regulations could continue.
To the extent laws are enacted or other governmental action is taken that
restricts drilling or imposes environmental protection requirements that result
in increased costs to the oil and gas industry in general, the business and
prospects of the Company could be adversely affected.
The EPA and various state agencies have limited the approved methods of
disposal for certain hazardous and nonhazardous wastes. Certain wastes generated
by the Company's oil and natural gas operations that are currently exempt from
treatment as "hazardous wastes" may in the future be designated as "hazardous
wastes," and therefore be subject to more rigorous and costly operating and
disposal requirements.
41
<PAGE> 44
The Company currently owns or leases numerous properties that for many
years have been used for the exploration and production of oil and gas. Most of
these properties have been operated by prior owners, operators and third parties
whose treatment and disposal or release of hydrocarbons or other wastes was not
under the Company's control. These properties and the wastes disposed thereon
may be subject to Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"), Federal Resource Conservation and Recovery Act and
analogous state laws. Under such laws, the Company could be required to remove
or remediate previously disposed wastes (including wastes disposed of or
released by prior owners or operators) or property contamination (including
groundwater contamination) or to perform remedial plugging operations to prevent
future contamination.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Certain provisions of CAA may result in
the gradual imposition of certain pollution control requirements with respect to
air emissions from the operations of the Company. The EPA and states have been
developing regulations to implement these requirements. The Company may be
required to incur certain capital expenditures in the next several years for air
pollution control equipment in connection with maintaining or obtaining
operating permits and approvals addressing other air emission-related issues.
However, the Company does not believe its operations will be materially
adversely affected by any such requirements.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as the Company, to prepare and implement
spill prevention, control, countermeasure and response plans relating to the
possible discharge of oil into surface waters. The Oil Pollution Act of 1990
("OPA") contains numerous requirements relating to the prevention of and
response to oil spills into waters of the United States. The OPA subjects owners
of facilities to strict joint and several liability for all containment and
cleanup costs and certain other damages arising from a spill, including but not
limited to, the costs of responding to a release of oil to surface waters.
Regulations are currently being developed under the OPA and state laws
concerning oil pollution prevention and other matters that may impose additional
regulatory burdens on the Company.
The Company also is subject to a variety of federal, state, and local
permitting and registration requirements relating to protection of the
environment. Management believes that the Company 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.
TAXATION
Since all of the Company's oil and natural gas operations are located in
the United States, the Company's primary tax concerns relate to U.S. tax laws,
rather than Canadian laws. Certain provisions of the United States Internal
Revenue Code of 1986, as amended, are applicable to the petroleum industry.
Current law permits the Company to deduct currently, rather than capitalize,
intangible drilling and development costs ("IDC") incurred or borne by it. The
Company, as an independent producer, is also entitled to a deduction for
percentage depletion with respect to the first 1,000 barrels per day of domestic
crude oil (and/or equivalent units of domestic natural gas) produced by it (if
such percentage of depletion exceeds cost depletion). Generally, this deduction
is 15% of gross income from an oil and natural gas property, without reference
to the taxpayer's basis in the property. Percentage depletion can not exceed the
taxable income from any property (computed without allowance for depletion), and
is limited in the aggregate to 65% of the Company's taxable income. Any
depletion disallowed under the 65% limitation, however, may be carried over
indefinitely. See Note 4 "Income Taxes" of the Consolidated Financial Statements
for additional tax disclosures.
LEGAL PROCEEDINGS
There are no material pending legal proceedings to which the Company or any
of its subsidiaries is a party or of which any of their property is the subject.
However, due to the nature of its business, certain legal or administrative
proceedings arise from time to time in the ordinary course of its business.
42
<PAGE> 45
MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The names of the directors and officers of the Company, the offices held by
them with the Company and the periods during which such offices have been held
are set forth below. Each executive officer and director holds office for one
year or until his death, resignation or removal or until his successor is duly
elected and qualified. The Company currently has a vacancy on its Board of
Directors caused by the resignation of Mr. Martin Fortier on August 30, 1996. If
replaced, this vacancy will be filled by a non-TPG nominee.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
- ----------------------------------------- ------ -----------------------------------------
<S> <C> <C>
Ronald G. Greene(1)(2)(3)(4)............. 47 Chairman of the Board
William S. Price, III(2)(3)(4)........... 40 Director
David M. Stanton(1)...................... 34 Director
Wieland F. Wettstein(1).................. 46 Director
David Bonderman.......................... 53 Director
President, Chief Executive Officer and
Gareth Roberts........................... 43 Director
Phil Rykhoek............................. 40 Chief Financial Officer and Secretary
Mark A. Worthey.......................... 38 Vice President, Operations
Matthew Deso............................. 43 Vice President, Exploration
</TABLE>
- ---------------
(1) Member of the Audit Committee.
(2) Member of the Compensation Committee.
(3) Member of the Stock Option Plan Committee.
(4) Member of the Stock Purchase Plan Committee.
Directors
Ronald G. Greene - Chairman of the Board, has been a director of the
Company since 1995. Mr. Greene is the Founder and Chairman of the Board of
Renaissance Energy Ltd. and was CEO of Renaissance from its inception in 1974
until May 1990. He is also the sole shareholder, officer and director of Tortuga
Investment Corp., a private investment company. Mr. Greene also serves on the
board of directors of a private Western Canadian airline.
William S. Price, III has been a director of the Company since 1995. Mr.
Price is a co-founder and principal of the Texas Pacific Group, a private
investment firm that specializes in corporate acquisitions in a wide range of
industries. Prior to forming the Texas Pacific Group in 1992, Mr. Price was
vice-president of strategic planning and business development for G.E. Capital
and from 1985 to 1991, was employed by the management consulting firm of Bain &
Company, attaining officer status and acting as co-head of the Financial
Services Practice. Mr. Price also serves on the Board of Directors of
Continental Airlines, Inc., Continental Micronesia, Inc., PPOM, LP., and Vivra
Heart Services.
David M. Stanton has been a director of the Company since 1995. Mr. Stanton
is a managing director of the Texas Pacific Group, a private investment firm
that specializes in corporate acquisitions in a wide range of industries. From
1991 until he joined the Texas Pacific Group in 1994, Mr. Stanton was a venture
capitalist with Trinity Ventures where he specialized in information technology,
software and telecommunications investments.
Wieland F. Wettstein has been a director of the Company since 1990. Mr.
Wettstein is the Executive Vice-President and indirectly controls 50% of Finex
Financial Corporation Ltd., a merchant banking company in Calgary, Alberta, a
position he has held for more than five years. Mr. Wettstein serves on the board
of directors of two public oil and natural gas companies, BXL Energy and Attock
Energy Corporation, and on the boards of a private technology firm and a private
gas marketing company.
David Bonderman became a director of the Company in May, 1996. Mr.
Bonderman is a co-founder and principal of the Texas Pacific Group, a private
investment firm that specializes in corporate acquisitions in a
43
<PAGE> 46
wide range of industries. Prior to forming the Texas Pacific Group in 1992, Mr.
Bonderman was the Chief Operating Officer of the Robert M. Bass Group, Inc. (now
doing business as Keystone, Inc.), joining them in 1983. Keystone, Inc. is the
personal investment vehicle of Fort Worth, Texas-based investor, Robert M. Bass.
Mr. Bonderman is an honor graduate from Harvard Law School and serves on the
boards of Continental Airlines, Inc., PPOM, L.P., American Savings Bank, Bell &
Howell Company, National Reinsurance and Virgin Cinemas Limited. Mr. Bonderman
also serves in general partner advisory board roles for Acadia Partners, Colony
Investors and Newbridge Investment Partners.
Executive Officers
Gareth Roberts - President, Chief Executive Officer and Director, is the
founder and President of Denbury Management, Inc. which was founded in April
1990. Mr. Roberts has more than 20 years of experience in the exploration and
development of oil and natural gas properties with Texaco, Inc., Murphy Oil
Corporation and Coho Resources, Inc. His expertise is particularly focused in
the Gulf Coast Region where he specializes in the acquisition and development of
old fields with low productivity. Mr. Roberts holds honors and masters degrees
in Geology and Geophysics from St. Edmund Hall, Oxford University.
Phil Rykhoek - Chief Financial Officer, a Certified Public Accountant,
joined the Company and was appointed to the position of Chief Financial Officer
and Secretary in June 1995. Prior to joining the Company, Mr. Rykhoek was
Executive Vice President and co-founder of Petroleum Financial, Inc., a company
formed in May 1991 to provide oil and natural gas accounting services on a
contract basis to other entities. From 1982 to 1991 (except for 1986), Mr.
Rykhoek was employed by Amerac Energy Corporation (formerly Wolverine
Exploration Company), most recently as Vice President and Chief Accounting
Officer. He retained his officer status during his tenure at Petroleum
Financial, Inc.
Matthew Deso - Vice President, Exploration, has been with Denbury
Management, Inc. since October 1990, first as a consultant then, when he moved
to Dallas in January 1994, as Vice President of Exploration. Mr. Deso has twenty
years of petroleum geology experience, and received a Bachelor of Science in
Geosciences from the University of Texas in 1976. Mr. Deso also worked for
Enserch Exploration (three years), Terra Resources (three years) and TXO
Production Corp. (eight years) in positions of varying responsibility.
Mark A. Worthey - Vice President, Operations, is a geologist and is
responsible for all aspects of operations in the field. He joined Denbury
Management, Inc. in September 1992. Previously he was with Coho Resources, Inc.
as an exploitation manager, beginning his employment there in 1985. Mr. Worthey
graduated from Mississippi State University with a Bachelor of Science degree in
petroleum geology in 1984.
As part of the Securities Purchase Agreement that governed the TPG
Placement, TPG has the right to designate three of seven nominees to serve on
the Board of Directors of the Company. It was also intended by the parties to
the agreement that Mr. Ronald G. Greene would be nominated to serve as one of
the seven directors and that the remaining three directors would be nominated by
the Company. TPG will forfeit its right to designate one of the directors that
it would otherwise be entitled to designate if at any time TPG owns securities
of the Company representing less than 30% of the outstanding Common Shares,
calculated on a fully-diluted basis. TPG shall forfeit its right to designate
any director if at any time TPG's share holdings, on a fully-diluted basis,
represent less than 20% of the outstanding Common Shares. Currently, Mr. David
M. Stanton, Mr. David Bonderman and Mr. William S. Price, III are directors of
the Company nominated by TPG. The Company currently has a vacancy on its Board
of Directors caused by the resignation of Mr. Martin Fortier on August 30, 1996.
If replaced, this vacancy will be filled by a non-TPG nominee.
COMPENSATION OF DIRECTORS AND OFFICERS
The following table sets forth certain summary information regarding
compensation paid or accrued by the Company to or on behalf of the Company's
Chief Executive Officer and each of the other three most highly compensated
executive officers ("Named Executive Officers") of the Company (determined as of
December 31, 1995) for the fiscal years ended December 31, 1993, 1994 and 1995.
44
<PAGE> 47
The Company reimburses the directors of the Company for out-of-pocket
traveling expenses in connection with each board meeting attended. There are no
other arrangements in respect of which directors of the Company receive monetary
compensation for acting in that capacity.
<TABLE>
<CAPTION> ANNUAL
COMPENSATION(1) LONG-TERM
-------------------- --------------------
COMMON SHARES
UNDERLYING
NAME AND PRINCIPAL POSITION YEAR SALARY BONUSES OPTION/SARS GRANTED
- ----------------------------------------------- ---- -------- -------- --------------------
<S> <C> <C> <C> <C>
Gareth Roberts................................. 1995 $150,000 $ 3,410 --
President and Chief Executive Officer 1994 150,000 -- --
1993 150,000 6,000 55,500
Phil Rykhoek................................... 1995 $ 55,682 $ 1,923 50,000
Chief Financial Officer and Secretary(2) 1994 -- -- --
1993 -- -- --
Mark A. Worthey................................ 1995 $100,000 $ 1,923 --
Vice President, Operations 1994 89,000 4,000 5,000
Denbury Management, Inc. 1993 89,000 4,000 89,250
Matthew Deso................................... 1995 $100,000 $ 1,923 5,000
Vice President, Exploration 1994 89,000 4,000 12,500
Denbury Management, Inc.(3) 1993 55,000 4,000 55,000
</TABLE>
- ---------------
(1) The aggregate amount of all other annual compensation as defined by
applicable securities regulations was not greater than the lesser of
$50,000 or 10% of the total annual salary and bonus of each Named Executive
Officer for each financial year.
(2) Mr. Rykhoek joined Denbury in June 1995.
(3) Mr. Deso joined Denbury in April 1993.
STOCK OPTIONS
The Company has an employee stock option plan (the "Plan") pursuant to
which stock options may be granted to full and part-time employees, officers and
directors of the Company and its subsidiaries, from time to time, as the board
of directors of the Company may determine. The Plan allows the granting of
either non-qualified or incentive stock options. Under the terms of the Plan,
the number of Common Shares reserved for issuance may not exceed 1,050,000
Common Shares. The term of options granted under the Plan are determined by the
board of directors provided that no option may be granted for a period that
exceeds 10 years from the date of the grant, or such lesser period of time as
permitted, from time to time, by the applicable rules of the TSE. The purchase
price of any shares subject to options under the Plan is fixed by the board of
directors, but may not be less than the greater of the two average closing
trading prices for the ten trading days preceding the date of grant as reported
on the TSE and NASDAQ. All option agreements granted under the Plan must be in
accordance with the policies and procedures of the TSE and NASDAQ.
At a meeting of the Board of Directors of the Company on May 16, 1996, the
Plan was amended to increase the number of options authorized to be issued under
the Plan to 1,250,000. This amendment is subject to shareholder and regulatory
approval.
As of September 30, 1996, options outstanding pursuant to the Plan were
comprised of incentive stock options covering 634,000 Common Shares held by one
officer/director, three officers and 33 employees and non-qualified stock
options covering 424,750 Common Shares held by two directors, one
officer/director, three officers, 14 employees and one former employee. These
options are exercisable at prices ranging from $3.66 to $11.36, with a weighted
average price of $7.56. Of the total outstanding options, 479,187 were currently
exercisable as of September 30, 1996. From January 1, 1996 through September 30,
1996, the Company granted 516,500 options.
45
<PAGE> 48
OPTION GRANTS IN LAST FISCAL YEAR
The following table represents the options granted to the Named Executive
Officers during 1995 and the value of such options:
<TABLE>
<CAPTION>
POTENTIAL
REALIZABLE
VALUE AT ASSUMED
ANNUAL
INDIVIDUAL GRANTS RATES OF
------------------------------------------------------ STOCK PRICE
NUMBER OF % OF APPRECIATION FOR
SECURITIES TOTAL OPTIONS EXERCISE OPTION
UNDERLYING GRANTED TO OR BASE TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------
NAME GRANTED(#) FISCAL YEAR ($/SH)(1) DATE 5%($) 10%($)
- --------------------------- ---------- ------------- --------- ---------- ------- --------
<S> <C> <C> <C> <C> <C> <C>
Gareth Roberts............. -- -- -- -- -- --
Phil Rykhoek............... 25,000(3) 9% $6.08 6/22/00 $41,954 $ 92,707
25,000(4) 9% 6.02 8/18/05 94,800 240,242
Mark A. Worthey............ -- -- -- -- -- --
Matthew Deso............... 5,000(3) 2% 5.92 1/3/00 8,186 18,089
</TABLE>
- ---------------
(1) These options are denominated in Canadian dollars and are converted to U.S.
dollars for this table using an exchange rate of Cdn. $1.35 = U.S. $1.00.
(2) Calculated based on the fair market value of the Common Shares on the date
of grant. The amounts represent only certain assumed compounded annual
rates of appreciation. Actual gains, if any, on stock option exercises and
Common Share holdings cannot be predicted, and there can be no assurance
that the gains set forth in the table will be achieved. A conversion
exchange rate of Cdn. $1.35 = U.S. $1.00 was assumed in the calculation.
(3) The options vest in installments of 50% on the date of grant and 50% one
year from the date of grant.
(4) The options vest in installments of 25% six months from the date of grant,
25% one year from the date of grant, 25% two years from the date of grant,
and 25% three years from the date of grant.
OPTION EXERCISES AND HOLDINGS
The following table sets forth information with respect to the Named
Executive Officers concerning unexercised options held as of December 31, 1995.
None of the Named Executive Officers exercised any options during 1995. During
the first three quarters of 1996, the Named Executive Officers exercised a total
of 28,750 options.
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE
NUMBER OF UNEXERCISED MONEY
OPTIONS AT OPTIONS AT FISCAL
FISCAL YEAR-END YEAR-END(1)
---------------------------- ----------------------------
EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Gareth Roberts................................ 27,750 -- $21,326 $ --
Phil Rykhoek.................................. 12,500 37,500 2,199 7,708
Mark A. Worthey............................... 73,250 -- 1,620 --
Matthew Deso.................................. 60,000 2,500 4,861 810
</TABLE>
- ---------------
(1) Based on the closing sale price of the Common Shares on December 21, 1995,
the last day prior to December 31, 1995 in which there was trading
activity, of $6.25 per share as reported by NASDAQ. A conversion exchange
rate of Cdn. $1.35 = U.S. $1.00 was assumed in the calculation as the
options are denominated in Canadian dollars.
46
<PAGE> 49
INTERESTS OF MANAGEMENT IN CERTAIN TRANSACTIONS
Other than as described in the paragraphs that follow, there are no
material interests, direct or indirect, of any director, officer or any
shareholder of the Company who beneficially owns, directly or indirectly, or
exercises control or direction over more than 5% of the outstanding Common
Shares, or any known family member, associate or affiliate of such persons, in
any transaction within the last three years or in any proposed transaction that
has materially affected or would materially affect the Company, or any of its
subsidiaries. The Company believes that the terms of the transactions described
below were as favorable to the Company as terms that reasonably could have been
obtained from non-affiliated third parties.
FINANCIAL ADVISORY FEE
In October 1993, the Company paid a management fee of $75,000 to Finex
Financial Corporation Ltd. a Company indirectly controlled by Mr. Martin G.
Fortier, a then director of the Company, and Mr. Wieland F. Wettstein, a
director of the Company, for services rendered and assistance provided in
raising equity and in the sale of its Canadian operations.
TPG PLACEMENT
In December 1995, the Company closed a $40.0 million private placement of
securities with partnerships that are affiliated with TPG. The TPG Placement was
comprised of: (i) 4.2 million Common Shares issued at $5.85 per share; (ii)
625,000 warrants at a price of $1.00 per warrant, entitling the holder to
purchase 625,000 Common Shares at $7.40 per share; and (iii) 1.5 million shares
of $10 stated value Convertible Preferred. The Convertible Preferred shares are
initially convertible at $7.40 of stated value per Common Share with such
conversion rate declining 2.5% per quarter. The Convertible Preferred do not
have any cash or other stated dividend requirement. The Convertible Preferred
have a mandatory redemption at a 63.86% premium at December 21, 2000, but also
originally provided that the Company can cause a mandatory conversion after
January 1, 1999 if the price of the Common Stock exceeds $10.00 per share for a
period of 40 consecutive trading days. The terms of the Convertible Preferred
were amended at a Special Meeting on October 9, 1996 to allow the Company to
require a conversion of the Convertible Preferred at any time. See
"-- Conversion of Convertible Preferred and Debentures." The Company intends to
convert the Convertible Preferred simultaneously with the closing of the
Offerings. The Company may also force conversion of the warrants after December
21, 1997, if the price of the Common Stock exceeds $10.00 per share for a period
of 40 consecutive trading days. As of September 30, 1996, TPG is the beneficial
owner of 7,608,038 Common Shares, which represents 48.4% of the outstanding
Common Shares prior to the Offerings. See "Security Ownership of Certain
Beneficial Owners and Management."
In connection with the TPG Placement, TPG received the right to nominate
three of the seven directors of the Company. See "Management -- Executive
Officers and Directors." In addition, for a period of two years TPG has certain
"piggyback" registration rights which allow TPG to include all or part of the
Common Shares acquired by TPG in any registration statement of the Company
during that period. Beginning December 21, 1997 and until December 21, 2000, TPG
may request and receive one demand registration whereby TPG may make a written
request to the Company for registration under the Securities Act of the Common
Shares acquired by TPG. Finally, the agreement provides that TPG shall have the
right, but not the obligation, to maintain its pro rata ownership interest
(after the assumed exercise of its warrants and Convertible Preferred) in the
equity securities of the Company, in the event that the Company issues any
additional equity securities or securities convertible into Common Shares of the
Company, by purchasing additional shares of the Company on the same terms and
conditions. This right, however, expires should TPG's share holdings represent
less than 20% of the outstanding Common Shares. TPG has waived its registration
rights and its right to maintain its pro rata ownership with regard to the
Public Offering.
The Company issued 333,333 Common Shares to Tortuga Investment Corp. as a
financial advisory fee for its services in connection with the TPG Placement.
Tortuga Investment Corp. is a corporation wholly-owned by Mr. Ronald Greene,
currently Chairman of the Board of Directors. Mr. Greene was not a director of
47
<PAGE> 50
the Company, nor had he held any director or officer position with the Company
prior to the time of the issuance of such Common Shares.
TPG OFFERING
Concurrent with the Public Offering, the Company will sell an additional
800,000 Common Shares to TPG at the price to the public per share less the
underwriting discounts and commissions. See "Concurrent Offerings." In
connection with the TPG Offering, the Company will grant the same registration
rights to TPG with respect to the Common Shares purchased as described above
under "-- TPG Placement."
CONVERSION OF CONVERTIBLE PREFERRED AND DEBENTURES
In order to position the Company for the Public Offering, the Board of
Directors and its financial advisors determined that it was in the best
interests of the Company to: (i) increase the market price per Common Share to
levels significantly above U.S. $5.00, the level below which certain stocks are
subject to the penny stock rules; (ii) simplify the capital structure of the
Company; and (iii) reduce the overhang that exists as a result of existing
convertible securities. The Board of Directors believed that these goals would
be best achieved by taking the following actions: (i) consolidating the number
of Common Shares through a one-for-two reverse split of the Common Shares; (ii)
modifying the terms of the Convertible Preferred such that the Convertible
Preferred may be converted to Common Shares at the election of the Company prior
to January 1, 1999; and (iii) issuing Common Shares in lieu of interest to the
holders of the Debentures in order to induce such holders to convert their
Debentures to Common Shares prior to the mandatory redemption date. Accordingly,
the Company held a Special Meeting of the shareholders on October 9, 1996, at
which resolutions effecting the foregoing were approved.
Subject to, and simultaneously with, the completion of the Offerings, the
Company intends to require a conversion of the Convertible Preferred, thereby
increasing the number of Common Shares of the Company by 2,816,373 and
eliminating the outstanding Convertible Preferred. TPG, which currently owns 35%
of the outstanding Common Shares, is the sole holder of the Convertible
Preferred.
Effective October 15, 1996, the Company issued a total of 7,948 Common
Shares in lieu of interest on the Debentures, plus an additional 308,642 Common
Shares for the principal amount in accordance with the existing terms of the
Debentures. Mr. Ronald G. Greene, Chairman of the Board of Directors, owned 80%
of the Debentures which were purchased by him at market value prior to his
election to the Board of Directors. Mr. Greene also purchased Cdn. $1,500,000 of
the 6 3/4% Convertible Debentures at market value prior to his election to the
Board of Directors, which were converted into 187,500 Common Shares on July 31,
1996 in accordance with the terms of the 6 3/4% Convertible Debentures.
PURCHASE OF WORKING INTERESTS
In May 1996, the Company purchased oil and natural gas working interests
from four employees for an aggregate consideration of $387,000, which included
$158,000 paid to Mr. Matthew Deso, Vice President of Exploration of the Company,
$133,000 paid to Mr. Mark Worthey, Vice President of Operations of the Company
and $26,000 paid to the spouse of Mr. Gareth Roberts, President of the Company.
The purchase prices were determined by the Company based on the present value of
the estimated future net revenue to be generated from the estimated proved
reserves of the properties using a 15% discount rate. The acquisition was for
additional working interests in properties in which the Company also holds an
interest. To the best of the Company's knowledge, none of the Company's officers
or directors have any remaining interests in properties owned by the Company.
48
<PAGE> 51
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of October 15, 1996,
concerning beneficial ownership of the Common Shares by: (i) any shareholders
known to the Company to beneficially own more than 5% of the issued and
outstanding Common Shares and (ii) all executive officers and directors
individually and as a group. Except as otherwise indicated and except for those
shares that are listed as being beneficially owned by more than one shareholder,
each shareholder identified in the table has sole voting and investment power
with respect to their shares.
<TABLE>
<CAPTION>
BENEFICIAL BENEFICIAL
OWNERSHIP PRIOR OWNERSHIP AFTER
TO OFFERINGS OFFERINGS(1)
NAME AND ADDRESS OF ----------------------- ---------------
BENEFICIAL OWNER SHARES PERCENT PERCENT
- ----------------------------------------------------- --------- ------- ---------------
<S> <C> <C> <C>
Ronald G. Greene..................................... 866,130(2) 5.7%(2) 4.4%(2)
Suite 700, 407 -- 2nd Street
Calgary, Alberta T2P 2Y3
David Bonderman...................................... 7,608,038(3) 48.4%(3) 41.8%(3)
201 Main Street, Suite 2420
Ft. Worth, TX 76102
William S. Price, III................................ 7,608,038(3) 48.4%(3) 41.8%(3)
600 California Street, Suite 1850
San Francisco, CA 94108
David M. Stanton..................................... --(4) * *
Wieland F. Wettstein................................. 161,414(5) 1.1%(5) *
Gareth Roberts....................................... 514,239(6) 3.4%(6) 2.6%
Phil Rykhoek......................................... 13,818(7) * *
Mark A. Worthey...................................... 76,369(7) * *
Matthew Deso......................................... 66,569(7) * *
All of the executive officers and directors as a
group (9 persons).................................. 9,306,577(8) 58.5%(8) 49.7%(8)
TPG Advisors, Inc.................................... 7,608,038(3) 48.4%(3) 41.8%(3)
201 Main Street, Suite 2420
Ft. Worth, TX 76102
</TABLE>
- ---------------
* Less than 1%.
(1) After giving effect to the issuance of an aggregate of 4,400,000 Common
Shares in the Offerings.
(2) After giving effect to the conversion of Cdn. $2,000,000 of the 9 1/2%
Convertible Debentures into an aggregate of 253,272 Common Shares. Includes
30,150 Common Shares held by Mr. Greene's spouse in her retirement plan and
520,833 Common Shares held by Tortuga Investment Corp., which is solely
owned by Mr. Greene.
(3) After giving effect to: (i) the pro forma conversion of the 1,500,000
Convertible Preferred into 2,816,372 Common Shares, and (ii) the pro forma
exercise of the 625,000 Common Share purchase warrants. Neither Mr.
Bonderman, Mr. Price nor TPG Advisors, Inc. are the owner of record of any
securities of the Company. However, Mr. Bonderman and Mr. Price are
directors, executive officers and shareholders of TPG Advisors, Inc., which
is the general partner of TPG GenPar, L.P., which in turn is the general
partner of both TPG Partners, L.P., and TPG Parallel I, L.P., which are the
direct beneficial owners of these securities. The "Beneficial Ownership
after Offerings," includes 800,000 Common Shares which the Company will sell
to TPG as part of the TPG Offering.
(4) Although Mr. Stanton is not considered to be a "beneficial owner" as that
term is defined by the Securities and Exchange Commission, Mr. Stanton is a
managing director of TPG Partners, L.P.
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<PAGE> 52
(5) After giving effect to the pro forma exercise of the 18,000 Common Shares
which Mr. Wettstein has the right to acquire pursuant to vested stock
options. Also includes 110,489 Common Shares held by S.P. Hunt Holdings
Ltd., which is solely owned by a trust of which Mr. Wettstein is a trustee,
and 19,600 Common Shares owned by his spouse.
(6) After giving effect to the pro forma exercise of the 27,750 Common Shares
which Mr. Roberts has the right to acquire pursuant to vested stock options.
Also includes 138,330 Common Shares held by Ashley Petroleum, Inc., which is
solely owned by Mr. Roberts, and 1,426 Common Shares held by his wife.
(7) After giving effect to the pro forma exercise, as applicable, of the 13,438,
73,250 and 62,500 Common Shares which Mr. Rykhoek, Mr. Worthey and Mr. Deso,
respectively, have the right to acquire pursuant to stock options which are
currently vested or which vest within the next sixty days.
(8) After giving effect to: (i) the conversion of Cdn. $2,000,000 of the 9 1/2%
Convertible Debentures into an aggregate of 253,272 Common Shares, (ii) the
pro forma conversion of the 1,500,000 Convertible Preferred into 2,816,372
Common Shares, (iii) the pro forma exercise of the 625,000 Common Share
purchase warrants, and (iv) the pro forma exercise of the 194,938 Common
Shares which the officers and directors as a group have the right to acquire
pursuant to stock options which are currently vested or which vest within
the next sixty days. Ownership does include the shares held by TPG, although
Mr. Price and Mr. Bonderman, who are directors of the Company, are not the
owners of record of these securities. Mr. Price and Mr. Bonderman are
directors, executive officers and shareholders of TPG Advisors, Inc., which
is the general partner of TPG GenPar, L.P., which in turn is the general
partner of both TPG Partners, L.P. and TPG Parallel I, L.P., which are the
direct beneficial owners of these same securities. The "Beneficial Ownership
after Offerings," includes 800,000 Common Shares which the Company will sell
to TPG as part of the TPG Offering.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized share capital of Denbury consists of an unlimited number of
Common Shares, of which 12,281,897 were issued and outstanding as of October 15,
1996, and two classes of preferred shares, unlimited in number and issuable in
series, none of which will be outstanding after the completion of the Offerings.
In addition to the issued and outstanding Common Shares, options to purchase
Common Shares and other forms of convertible securities for Common Shares are
outstanding.
There are no limitations imposed by Canadian legislation or regulations or
by the Articles of Continuance or Bylaws of the Company on the right of holders
of either the Common Shares or the Common Share Purchase Warrants who are not
residents of Canada to hold or vote the Common Shares or to hold the Common
Share Purchase Warrants.
COMMON SHARES
The holders of the Common Shares are entitled to one vote for each Common
Share held at all meetings of shareholders of the Company, other than meetings
of the holders of any other class of shares meeting as a class or the holders of
one or more series of any class of shares meeting as a series; are entitled to
any dividends that may be declared by the board of directors thereon; and in the
event of liquidation, dissolution or winding-up of the Company, are entitled,
subject to the rights of the holders of shares ranking prior to the Common
Shares, to share rateably in such assets of the Company as are available for
distribution. The holders of Common Shares have no pre-emptive rights under
Canadian law or the Articles of Continuance.
At October 15, 1995, 75,000 warrants were outstanding at an exercise price
of Cdn. $8.40 expiring on May 5, 2000 and 625,000 warrants were outstanding at
an exercise price of U.S. $7.40 expiring on December 21, 1999. Each warrant
entitles the holder thereof to purchase one Common Share at any time prior to
the expiration date. The Company has the option after December 21, 1997 to
require exercise of the
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<PAGE> 53
625,000 warrants if the weighted average trading price of the Common Stock
exceeds $10.00 per share for a period of 40 consecutive trading days.
The Company is also required to maintain a continuously effective
registration statement for a two-year period relating to the resale of 705,643
Common Shares, including 150,000 Common Shares issuable upon the exercise of
warrants, which were issued in two private placements in April and May 1995. An
effective registration statement relating to this requirement is currently on
file.
The Company has granted TPG certain demand and "piggyback" registration
rights and preemptive rights in connection with the TPG Placement. For a
description of these rights, see "Interests of Management in Certain
Transactions." TPG has waived its "piggyback" registration rights and preemptive
rights in connection with the Public Offering. Concurrent with the Public
Offering, the Company will sell an additional 800,000 Common Shares to TPG at
the price to the public per share less underwriting discounts and commissions.
See "Concurrent Offerings." TPG will also have demand and "piggyback"
registration rights with respect to the Common Shares purchased in the TPG
Offering.
PREFERRED SHARES
The Company's Articles of Continuance authorize the future issuance of
First Preferred Shares and Second Preferred Shares (collectively, the "Preferred
Shares"), with such designations, rights, privileges, restrictions and
conditions as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without shareholder approval,
to issue Preferred Shares with dividend, liquidation, conversion, voting or
other rights that could adversely affect the voting power or other rights of
holders of the Company's Common Shares. In the event of issuance, the Preferred
Shares could be utilized, under certain circumstances, as a method of
discouraging, delaying or preventing a change in control of the Company. Such
actions could have the effect of discouraging bids for the Company and, thereby,
preventing shareholders from receiving the maximum value for their shares.
Although the Company has no present intention to issue any additional Preferred
Shares, there can be no assurance that the Company will not do so in the future.
As of the close of the Offerings, no Preferred Shares will be outstanding. For a
description of the currently outstanding Convertible Preferred, see "Interests
of Management in Certain Transactions."
CANADIAN TAXATION AND THE INVESTMENT CANADA ACT
The following is a summary of the principal Canadian income tax
considerations generally applicable to nonresidents of Canada who hold the
Common Shares as capital property, deal at arm's length with the Company and do
not use or hold and are deemed not to use or hold their Common Shares in the
course of carrying on a business in Canada and do not carry on insurance
business in Canada. This summary has been prepared by reference to the existing
provisions of the Income Tax Act (Canada) (the "Act"), the Income Tax
Regulations (the "Regulations"), all published proposals for the amendment of
the Act and the Regulations to the date hereof and the published administrative
practices of Revenue Canada, the agency that administers the Act. Although this
summary does not specifically address the provincial income tax consequences of
an investment in Common Shares, generally speaking, provincial taxation does not
apply to persons who are not resident in Canada and who do not own or hold
property in the course of carrying on a business in Canada. Apart from changes
to the Act and the Regulations which have been publicly announced to the date
hereof, this summary does not consider the potential for any future alterations
to Canadian income tax legislation.
DISPOSITIONS OF COMMON SHARES
A nonresident of Canada will only be subject to taxation in Canada under
the Act in respect of a disposition of Common Shares if such shares constitute
"taxable Canadian property" to such nonresident. Provided that the Common Shares
are listed on a recognized stock exchange in Canada at the time of a
disposition, they will only constitute "taxable Canadian property" to a holder
if the holder, either alone or together with persons with whom the holder does
not deal at arm's length, owns or at any time in the five years prior to the
date of dispositions, has owned in excess of 25% of the issued and outstanding
shares of a class or
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<PAGE> 54
series of the capital of the Company. Persons who are related by blood or
marriage, or are subject to common control are deemed to deal otherwise than at
arm's length; other persons may also be considered to be dealing otherwise than
at arm's length in certain circumstances. For the purposes of determining the
25% threshold, rights or options to acquire Common Shares will be treated as
ownership thereof. Subject to the comments set out below in respect of the
application of the U.S. -- Canada Income Tax Convention to U.S. resident
holders, nonresidents whose shares constitute "taxable Canadian property" will
be subject to taxation thereon on the same basis as Canadian residents.
Generally speaking, three-quarters of the excess of the holder's proceeds of
disposition, over the adjusted cost base of the Common Shares, must be included
in income as a taxable capital gain, to be taxed at prevailing federal Canadian
rates, which range from approximately 26% to 39%.
Nonresidents whose shares are repurchased by the Company, except in respect
of certain purchases made by the Company in the open market, will give rise to
the deemed payment of a dividend by the Company to the former holder of Common
Shares in an amount equal to the excess paid over the paid-up capital of the
Common Shares so repurchased. Such deemed dividend will be excluded from the
former holders' proceeds of disposition of his Common Shares for the purposes of
computing any capital gain but will be subject to Canadian nonresident
withholding tax in the manner described below under "Dividends." In certain
limited circumstances, a sale by a holder of the Common Shares to a corporation
resident in Canada with which the holder does not deal at arm's length may give
rise to the deemed payment of a dividend, to the extent the amount received in
consideration therefor exceeds the paid-up capital of the Common Shares disposed
of.
Pursuant to the U.S. -- Canada Income Tax Convention (the "Convention"),
shareholders of the Company who are resident in the U.S. for the purposes of the
Convention and whose shares might otherwise be "taxable Canadian property" may
be exempt from Canadian taxation in respect of any gains on the Common Shares
provided the principal value of the Company is not derived from real property
located in Canada at the time of the disposition.
The Company owns no Canadian real property and the Company has no present
intention to acquire Canadian real property.
DIVIDENDS
Under the Act, withholding tax is imposed at the rate of 25% on the amount
of any dividends paid or credited on the Common Shares to a person not resident
in Canada. Pursuant to the Canada U.S. -- Canada Income Tax Convention, the rate
of tax on such dividends is reduced to 6% for dividends received in 1996 and 5%
thereafter by any U.S. resident corporation who owns in excess of 10% of the
voting shares of the corporation, and to 15% in all other instances.
INVESTMENT CANADA ACT
The Investment Canada Act (the "ICA") prohibits the acquisition of control
of a Canadian business by non-Canadians without review and approval of the
Investment Review Division of Industry Canada, the agency that administers the
ICA, unless such acquisition is exempt from review under the provisions of the
ICA. Investment Review Division of Industry Canada must be notified of such
exempt acquisitions. The ICA covers acquisitions of control of corporate
enterprises, whether by purchase of assets, shares or "voting interests" of an
entity that controls, directly or indirectly, another entity carrying on a
Canadian business. The ICA will have no effect on the acquisition of shares
covered by this Prospectus.
Apart from the ICA, there are no other limitations on the right of
nonresident or foreign owners to hold or vote securities imposed by Canadian law
or the Certificate of Continuance of the Company. There are no other decrees or
regulations in Canada which restrict the export or import of capital, including
foreign exchange controls, or that affect the remittance of dividends, interest
or other payments to nonresident holders of the Company's Common Shares except
as discussed above.
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<PAGE> 55
SHARES ELIGIBLE FOR FUTURE SALE
After giving effect to the Offerings and the Capitalization Adjustments,
the Company would have had 19,498,269 Common Shares outstanding as of October
15, 1996 (20,038,269 shares assuming exercise of the Underwriters'
over-allotment option in full). The Common Shares sold in the Public Offering
will be freely tradable without restrictions or further registration under the
Securities Act. 7,608,038 of the 8,408,038 Common Shares beneficially held by
TPG as of the close of the Offerings will be "restricted" securities within the
meaning of the Securities Act as a result of the issuance thereof in a private
transaction. These "restricted" Common Shares may be publicly sold only if
registered under the Securities Act or sold in accordance with an applicable
exemption from registration, such as those provided by Rule 144 promulgated
under the Securities Act.
In general, under Rule 144 as currently in effect, a person (or persons
whose shares are aggregated) who has beneficially owned shares for at least two
years, including persons who may be deemed "affiliates" of the Company, would be
entitled to sell within any three-month period a number of shares that does not
exceed the greater of the average weekly trading volume during the four calendar
weeks preceding such sale or 1% of the then outstanding Common Shares
(approximately 194,983 shares immediately after the Offerings). A person who is
deemed not to have been an "affiliate" of the Company at any time during the 90
days preceding a sale, and who has beneficially owned such shares for at least
three years, would be entitled to sell such shares under Rule 144 without regard
to the volume limitations described above. The Company believes that 7,608,038
shares owned by TPG will be eligible for sale in the public market pursuant to
Rule 144 after December 21, 1997, and the remaining shares beneficially held by
TPG will be eligible for sale in the public market pursuant to Rule 144
immediately upon close of the TPG Offering. The Company is unable to estimate
the number of shares, if any, that TPG may sell from time to time under Rule
144, since such number will depend on the future market price and trading volume
for the Common Shares, as well as other factors beyond the Company's control.
In connection with the Public Offering, the Company, each of its directors
and executive officers and TPG have agreed not to sell or otherwise dispose of
any Common Shares, including any shares exercisable for or convertible into
Common Shares, for a period of 120 days from the date of this Prospectus,
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation. See "Underwriting."
The Company has granted TPG certain demand and "piggyback" registration
rights with respect to its Common Shares. See "Interests of Management in
Certain Transactions." TPG has waived its "piggyback" registration rights and
preemptive rights in connection with the Public Offering.
An increase in the number of Common Shares that may become available for
sale in the public market may adversely affect the market price prevailing from
time to time of the Common Shares and could impair the Company's ability to
raise additional capital through the sale of its equity securities.
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<PAGE> 56
UNDERWRITING
Subject to the terms and conditions contained in an underwriting agreement
(the "Underwriting Agreement"), a syndicate of underwriters named below (the
"Underwriters"), for whom Donaldson, Lufkin & Jenrette Securities Corporation,
Prudential Securities Incorporated and Johnson Rice & Company L.L.C., are acting
as representatives (the "Representatives"), have severally agreed to purchase
3,600,000 Common Shares from the Company. The number of Common Shares that each
Underwriter have severally agreed to purchase is set forth opposite its name
below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ -----------
<S> <C>
Donaldson, Lufkin & Jenrette Securities Corporation..............................
Prudential Securities Incorporated...............................................
Johnson Rice & Company L.L.C.....................................................
----------
Total.................................................................. 3,600,000
==========
</TABLE>
The Underwriting Agreement provides that the obligation of the several
Underwriters to pay for and accept delivery of the Common Shares are subject to
certain conditions. If any of the Common Shares are purchased by the
Underwriters pursuant to the Underwriting Agreement, all such Common Shares
(other than the Common Shares covered by the over-allotment option described
below) must be so purchased.
The Company has been advised by the Representatives that the Underwriters
propose to offer the Common Shares to the public initially at the price to the
public set forth on the cover page of this Prospectus and to certain dealers
(who may include the Underwriters) at such price less a concession not to exceed
$ per share. The Underwriters may allow, and such dealers may re-allow,
a discount not in excess of $ per share to any other Underwriter and
certain other dealers.
The Company has granted to the Underwriters an option to purchase up to
540,000 additional Common Shares at the public offering price set forth on the
cover page hereof less underwriting discounts and commissions, solely to cover
over-allotments. Such option may be exercised at any time until 30 days after
the date of this Prospectus. To the extent that the Underwriters exercise such
option, each of the Underwriters will be committed, subject to certain
conditions, to purchase a number of option shares proportionate to such
Underwriter's initial commitment as indicated in the preceding table.
The Company, each of its directors and executive officers and TPG, subject
to certain exceptions, have agreed not to offer, sell or otherwise dispose of
any Common Shares, or any shares exercisable for or convertible into Common
Shares, prior to the expiration of 120 days from the date of this Prospectus,
without the prior written consent of Donaldson, Lufkin & Jenrette Securities
Corporation on behalf of the Underwriters.
The Company has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act or to contribute to
payments that the Underwriters may be required to make in respect thereof.
In connection with the Public Offering, certain Underwriters may engage in
passive market making transactions in the Common Shares on the Nasdaq National
Market immediately prior to the commencement of sales in the offering made
hereby, in accordance with Rule 10b-6A under the Securities Exchange Act of
1934, as amended. Passive market making consists of displaying bids on the
Nasdaq National Market limited
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<PAGE> 57
by the bid prices of independent market makers and purchases limited by such
prices and effected in response to order flow. Net purchases by a passive market
maker on each day are limited to a specified percentage of the passive market
maker's average daily trading volume in the Common Shares during a specified
prior period and must be discontinued when such limit is reached. Passive market
making may stabilize the market price of the Common Shares at a level above that
which might otherwise prevail and, if commenced, may be discontinued at any
time.
PLAN OF DISTRIBUTION FOR THE TPG OFFERING
Pursuant to a Stock Purchase Agreement (the "Stock Purchase Agreement")
entered into by TPG and the Company, TPG has irrevocably agreed to purchase
800,000 Common Shares at a price equal to the price to the public per share in
the Public Offering less the underwriting discounts and commissions. Pursuant to
the Stock Purchase Agreement, TPG has represented and warranted that the
execution, delivery and performance of the Stock Purchase Agreement by it has
been duly and validly authorized by all necessary actions and that the Stock
Purchase Agreement is the legal, valid and binding obligation of TPG. The
Company has represented that the execution, delivery and performance of the
Stock Purchase Agreement by it has been duly and validly authorized by all
necessary corporate actions and that the Stock Purchase Agreement is the legal,
valid and binding obligation of the Company.
The TPG Offering is being made directly by the Company to TPG. The TPG
Offering is not being made on an underwritten basis, and the Underwriters of the
Public Offering are not acting on behalf of the Company, as agents or in any
other capacity, in connection therewith. TPG has agreed to provide, at the
closing of the TPG Offering, an undertaking to the TSE not to sell any of the
Common Shares acquired pursuant to the TPG Offering for a period of six months
following the acquisition of such Common Shares without prior written consent of
the TSE.
The closing of the purchase of Common Shares pursuant to the Stock Purchase
Agreement is conditioned upon, and will occur concurrently with, the closing of
the Public Offering.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
The Company is incorporated under the laws of Canada. Some of the
directors, controlling persons and officers of the Company, as well as the
experts named herein, are residents of Canada and all or substantially all of
such persons' assets are located outside of the United States. As a result, it
may be difficult for holders of the Common Shares to effect service within the
United States upon the directors, controlling persons, officers and experts who
are not residents of the United States or to realize in the United States upon
judgments of courts of the United States against such persons and the Company
predicated upon civil liability under the United States federal securities laws.
The Company has been advised by its counsel, Burnet, Duckworth & Palmer,
Calgary, Alberta, that there is doubt as to the enforceability in Canada against
the Company or against any of its directors, controlling persons, officers or
experts who are not residents of the United States, in original actions for
enforcement of judgments of United States courts, of liabilities predicated
solely upon United States federal securities laws.
LEGAL MATTERS
The legality of the Common Shares offered hereby have been passed upon for
the Company by Burnet, Duckworth & Palmer, Calgary, Alberta. Certain matters in
connection with the Public Offering will be passed upon for the Company by
Jenkens & Gilchrist, a Professional Corporation and for the Underwriters by
Baker & Botts, L.L.P., Dallas, Texas.
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<PAGE> 58
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company for each of the three years ended December 31, 1995 and the
statements of revenues and direct operating expenses attributable to certain oil
and natural gas properties (Ottawa Properties) acquired by the Company for the
year ended December 31, 1995 included in this Prospectus and elsewhere in the
Registration Statement have been audited by Deloitte & Touche, Chartered
Accountants, Calgary, Alberta, Canada, as stated in their reports appearing in
this Prospectus and elsewhere in the Registration Statement and have been so
included in reliance upon the reports of such firm given upon their authority as
experts in accounting and auditing.
The statements of revenues and direct operating expenses attributable to
certain oil and natural gas properties (Amerada Hess Properties) acquired by the
Company for the years ended December 31, 1995, 1994 and 1993 included in this
Prospectus and Registration Statement have been audited by Deloitte & Touche
LLP, independent auditors, as stated in their report appearing herein and have
been so included in reliance upon the report of such firm given upon their
authority as experts in accounting and auditing.
The reference to the reports of Netherland, Sewell & Associates, Inc. and
The Scotia Group, Inc., both independent petroleum engineers located in Dallas,
Texas, contained herein with respect to the proved reserves, the estimated
future net revenue from such proved reserves, and the discounted present values
of such estimated future net revenue, is made in reliance upon the authority of
such firms as experts with the respect to such matters.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Securities
Exchange Act of 1934, as amended, and in accordance therewith files reports,
proxy statements and other information with the Securities and Exchange
Commission (the "SEC"). Such reports, proxy statements and other information can
be inspected and copied at the public reference facilities maintained by the SEC
at 450 5th Street, N.W., Room 1024, Washington, D.C. 20549, and at the following
regional offices of the SEC: 7 World Trade Center, 13th Floor, New York, New
York 10048 and Northwestern Atrium Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661, at prescribed rates. In addition, such materials filed
electronically by the Company with the Commission are available at the
Commission's World Wide Web site at http://www.sec.gov. The Company's Common
Stock is traded on the Nasdaq National Market and such reports, proxy statements
and other information may be inspected at the Nasdaq Stock Market, 1735 K
Street, N.W., Washington, D.C. 20006.
The Company has filed with the SEC a Registration Statement on Form S-1
under the Securities Act, with respect to the securities offered hereby. This
Prospectus does not contain exhibits and schedules and certain other information
which is part of the Registration Statement and which have been omitted from
this Prospectus as permitted by the rules and regulations of the SEC. Statements
contained herein concerning the contents of any contract, agreement or other
document filed as an exhibit to the Registration Statement are necessarily
summaries of such contracts, agreements or documents and are qualified in their
entirety by reference to each such exhibit. The Registration Statement and the
exhibits and schedules forming a part thereof can be obtained from the SEC.
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<PAGE> 59
GLOSSARY
The terms defined in this section are used throughout this Prospectus.
ADJUSTED EBITDA. Adjusted EBITDA represents earnings before interest
income, interest expense, income taxes, depletion and depreciation, gain on sale
of oil and gas properties, imputed preferred dividends and losses on early
extinguishment of debt.
ANTICLINE. Geologically positive structure favorable for trapping
hydrocarbons.
BBL. One stock tank barrel, of 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
BBLS/D. Barrels of oil produced per day.
BCF. One billion cubic feet of natural gas.
BOE. One barrel of oil equivalent using the ratio of one barrel of crude
oil, condensate or natural gas liquids to 6 Mcf of natural gas.
BOE/D. BOEs produced per day.
BTU. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees Fahrenheit.
CDN. Canadian.
COMMERCIAL WELL; COMMERCIALLY PRODUCTIVE WELL. An oil and gas well which
produces oil and natural gas in sufficient quantities such that proceeds from
the sale of such production exceed production expenses and taxes.
DEVELOPED ACREAGE. The number of acres which are allocated or assignable to
producing wells or wells capable of production.
DEVELOPMENT WELL. A developmental well is a well drilled within the
presently proved productive area of an oil or natural gas reservoir, as
indicated by reasonable interpretation of available data, with the objective of
completing in that reservoir.
DRY HOLE; DRY WELL; NON-PRODUCTIVE WELL. A well found to be incapable of
producing either oil or natural gas in sufficient quantities to justify
completion as an oil or natural gas well.
EXPLORATORY WELL. An exploratory well is a well drilled either in search of
a new, as-yet undiscovered oil or natural gas reservoir or to greatly extend the
known limits of a previously discovered reservoir.
FARMOUT. An assignment of an interest in a drilling location and related
acreage conditional upon the drilling of a well on that location.
FORMATION. A succession of sedimentary beds that were deposited under the
same general geologic conditions.
GEOPRESSURED. Pressures in excess of the normal increase in pressure with
depth.
GEOSYNCLINE. A regional area of subsidence in which sediments are
accumulated.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may be,
in which a working interest is owned.
HORIZONTAL WELLS. Wells which are drilled at angles greater than 70 degrees
from vertical.
MBBL. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand BOEs.
MBOE/D. One thousand BOE/d.
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<PAGE> 60
MBTU. One thousand Btus.
MCF. One thousand cubic feet of natural gas.
MCF/D. One thousand cubic of natural gas produced per day.
MMBBL. One million barrels of crude oil or other liquid hydrocarbons.
MMBOE. One million BOEs.
MMBTU. One million Btus.
MMCF. One million cubic feet of natural gas.
MMCF/D. One million cubic feet of natural gas produced per day.
NET; NET REVENUE INTEREST. Production or revenue that is owned by the
Company and produced for its interest after deducting royalties and other
similar interests.
NET ACRES OR NET WELLS. The sum of the fractional working interests owned
in gross acres or gross wells.
PV10 VALUE. When used with respect to oil and natural gas reserves, PV10
Value means the estimated future gross revenue to be generated from the
production of proved reserves, net of estimated production and future
development costs, using prices and costs in effect at the determination date,
without giving effect to non-property related expenses such as general and
administrative expenses, debt service and future income tax expense or to
depreciation, depletion and amortization, discounted using an annual discount
rate of 10% in accordance with the guidelines of the SEC.
PRODUCTIVE WELL. A well that is producing oil or natural gas or that is
capable of production.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be recovered
from new wells on undrilled acreage or from existing wells where a relatively
major expenditure is required for recompletion.
ROYALTY INTEREST. An interest in an oil and natural gas property entitling
the owner to a share of oil or natural gas production free of costs of
production.
TCF. One trillion cubic feet of natural gas.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been
participated in or completed to a point that would permit the production of
commercial quantities of oil and natural gas regardless of whether such acreage
contains proved reserves.
WORKING INTEREST. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property as well as to a
share of production.
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<PAGE> 61
INDEX TO FINANCIAL STATEMENTS AND SCHEDULES
YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993
SIX MONTHS ENDED JUNE 30, 1996 AND 1995 (UNAUDITED)
<TABLE>
<CAPTION>
PAGE
----------------
<S> <C>
Independent Auditors' Report................................................ F-2
Consolidated Balance Sheets................................................. F-3
Consolidated Statements of Income........................................... F-4
Consolidated Statements of Cash Flows....................................... F-5
Consolidated Statement of Changes in Shareholders' Equity................... F-6
Notes to the Consolidated Financial Statements.............................. F-7 thru F-23
Statement of Revenues and Direct Operating Expenses of Ottawa Properties
Independent Auditors' Report.............................................. F-24
Statement of Revenues and Direct Operating Expenses....................... F-25
Notes to Statement of Revenues and Direct Operating Expenses.............. F-26 thru F-27
Statements of Revenues and Direct Operating Expenses of Amerada Hess
Properties
Independent Auditors' Report.............................................. F-28
Statements of Revenues and Direct Operating Expenses...................... F-29
Notes to Statements of Revenues and Direct Operating Expenses............. F-30 thru F-32
</TABLE>
F-1
<PAGE> 62
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Denbury Resources Inc.
(formerly Newscope Resources Ltd.)
We have audited the consolidated balance sheets of Denbury Resources Inc.
(formerly Newscope Resources Ltd.) as at December 31, 1995 and 1994 and the
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the years in the three year period ended December 31, 1995.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally
accepted in Canada and the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance 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.
In our opinion, these consolidated financial statements present fairly in
all material respects, the financial position of the Company as at December 31,
1995 and 1994 and the results of its operations and the changes in shareholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1995, in accordance with accounting principles generally accepted
in Canada.
DELOITTE & TOUCHE
Chartered Accountants
Calgary, Alberta
February 23, 1996 (October 15, 1996 as to Note 11)
F-2
<PAGE> 63
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------- JUNE 30,
1994 1995 1996
-------- -------- -----------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents.................................. $ 712 $ 6,553 $ 3,085
Accrued production receivable.............................. 1,909 3,212 6,307
Trade and other receivables................................ 993 1,160 2,837
-------- -------- ----------
Total current assets............................... 3,614 10,925 12,229
-------- -------- ----------
PROPERTY AND EQUIPMENT (USING FULL COST ACCOUNTING)
Oil and natural gas properties............................. 44,820 72,510 133,442
Unevaluated oil and natural gas properties................. 6,251 7,085 6,571
Less accumulated depreciation and depletion................ (6,149) (13,982) (21,140)
-------- -------- ----------
Net property and equipment......................... 44,922 65,613 118,873
-------- -------- ----------
OTHER ASSETS................................................. 428 1,103 1,798
-------- -------- ----------
TOTAL ASSETS....................................... $ 48,964 $ 77,641 $ 132,900
======== ======== ==========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities................... $ 5,056 $ 3,886 $ 13,288
Current portion of long-term debt.......................... 178 177 125
-------- -------- ----------
Total current liabilities.......................... 5,234 4,063 13,413
-------- -------- ----------
LONG-TERM LIABILITIES
Senior bank debt........................................... 14,950 75 40,000
Subordinated debt and other notes payable.................. 1,586 3,399 2,964
Provision for site reclamation costs....................... 138 242 340
Deferred income taxes and other............................ 1,094 1,361 3,166
-------- -------- ----------
Total long-term liabilities........................ 17,768 5,077 46,470
-------- -------- ----------
CONVERTIBLE FIRST PREFERRED SHARES, SERIES A
1,500,000 shares authorized, issued and outstanding
at December 31, 1995.................................... -- 15,000 15,759
-------- -------- ----------
SHAREHOLDERS' EQUITY
Common shares, no par value unlimited shares authorized;
outstanding -- 6,304,667, 11,428,809 and 11,632,215
shares at December 31, 1994, December 31, 1995 and June
30, 1996, respectively.................................. 23,239 50,064 51,226
Retained earnings.......................................... 2,723 3,437 6,032
-------- -------- ----------
Total shareholders' equity.............................. 25,962 53,501 57,258
-------- -------- ----------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY......... $ 48,964 $ 77,641 $ 132,900
======== ======== ==========
</TABLE>
See Notes to Consolidated Financial Statements.
<TABLE>
<S> <C>
Approved by the Board:
/s/ Gareth /s/ Wieland F. Wettstein
Roberts Wieland F. Wettstein
Gareth Director
Roberts
Director
</TABLE>
F-3
<PAGE> 64
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ------------------
1993 1994 1995 1995 1996
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
(UNAUDITED)
REVENUES
Oil, natural gas and related product
sales.................................... $ 5,868 $12,692 $20,032 $ 8,997 $20,650
Interest income............................. 76 23 77 21 124
------- ------- ------- ------- -------
Total revenues........................... 5,944 12,715 20,109 9,018 20,774
------- ------- ------- ------- -------
EXPENSES
Production.................................. 2,067 4,309 6,789 3,128 5,350
General and administrative.................. 782 1,105 1,832 935 1,656
Interest.................................... 83 1,146 2,085 927 681
Imputed preferred dividends................. -- -- -- -- 759
Loss on early extinguishment of debt........ -- -- 200 200 440
Depletion and depreciation.................. 1,898 4,209 8,022 3,075 7,382
Franchise taxes............................. -- 65 100 42 107
------- ------- ------- ------- -------
Total expenses...................... 4,830 10,834 19,028 8,307 16,375
------- ------- ------- ------- -------
Income before the following: 1,114 1,881 1,081 711 4,399
Gain on sale of Canadian properties......... 966 -- -- -- --
------- ------- ------- ------- -------
Income before income taxes.................... 2,080 1,881 1,081 711 4,399
Provision for federal income taxes............ (345) (718) (367) (242) (1,804)
------- ------- ------- ------- -------
NET INCOME.................................... $ 1,735 $ 1,163 $ 714 $ 469 $ 2,595
======= ======= ======= ======= =======
NET INCOME PER COMMON SHARE................... $ .35 $ .19 $ .10 $ .07 $ .23
======= ======= ======= ======= =======
Average number of common shares outstanding... 4,990 6,240 6,870 6,536 11,512
======= ======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 65
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED JUNE 30,
-------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income............................ $ 1,735 $ 1,163 $ 714 $ 469 $ 2,595
Adjustments needed to reconcile to net
cash flow provided by operations:
Depreciation, depletion and
amortization..................... 1,916 4,304 8,113 3,075 7,382
Deferred income taxes.............. 345 718 367 242 1,804
Gain on sale of Canadian
properties....................... (966) -- -- -- --
Imputed preferred dividend......... -- -- -- -- 759
Loss on early extinguishment of
debt............................. -- -- 200 200 440
Other.............................. -- -- -- 39 323
-------- -------- -------- -------- --------
3,030 6,185 9,394 4,025 13,303
Changes in working capital items
relating to operations:
Accrued production receivable...... (586) (986) (1,303) (481) (3,096)
Trade and other receivables........ (260) (124) (168) (261) (702)
Accounts payable and accrued
liabilities...................... 2,742 1,842 (1,170) (664) 8,082
-------- -------- -------- -------- --------
NET CASH FLOW PROVIDED BY OPERATIONS.... 4,926 6,917 6,753 2,619 17,587
-------- -------- -------- -------- --------
CASH FLOW USED FOR INVESTING ACTIVITIES:
Oil and natural gas expenditures... (9,779) (10,297) (11,761) (4,001) (12,759)
Acquisition of oil and natural gas
properties....................... (20,076) (6,606) (16,763) (6,505) (47,974)
Proceeds on disposal of Canadian
properties....................... 3,129 -- -- -- --
Net purchases of other assets...... (157) (122) (560) (227) (754)
Acquisition of subsidiary, net of
cash acquired.................... -- -- -- -- 209
-------- -------- -------- -------- --------
NET CASH USED FOR INVESTING
ACTIVITIES............................ (26,883) (17,025) (29,084) (10,733) (61,278)
-------- -------- -------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Bank borrowings.................... 7,600 9,835 19,350 5,750 39,900
Bank repayments.................... -- (2,485) (34,200) (2,100) --
Issuance of subordinated debt...... -- 1,451 1,772 1,772 --
Issuance of common stock........... 15,148 367 26,825 2,460 796
Issuance of preferred stock........ -- -- 15,000 -- --
Costs of debt financing............ (251) (122) (493) (269) (378)
Other.............................. 277 62 (82) (36) (95)
-------- -------- -------- -------- --------
NET CASH PROVIDED BY FINANCING
ACTIVITIES............................ 22,774 9,108 28,172 7,577 40,223
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 817 (1,000) 5,841 (537) (3,468)
Cash and cash equivalents at beginning
of year............................... 895 1,712 712 712 6,553
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF
PERIOD................................ $ 1,712 $ 712 $ 6,553 $ 175 $ 3,085
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Cash paid during the period for
interest......................... $ 64 $ 1,027 $ 2,127 $ 1,009 $ 271
SUPPLEMENTAL DISCLOSURE OF FINANCING
ACTIVITIES:
Conversion of subordinated debt to
common stock..................... -- -- -- -- $ 366
Assumption of liabilities in
acquisition...................... -- -- -- -- 1,321
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 66
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY
(DOLLAR AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
COMMON SHARES
(NO PAR VALUE)
--------------------- RETAINED
SHARES AMOUNT EARNINGS TOTAL
---------- ------- -------- -------
<S> <C> <C> <C> <C>
BALANCE -- JANUARY 1, 1993........................... 3,789,730 $ 7,724 $ (175) $ 7,549
Issued pursuant to employee stock option plan........ 276,187 1,033 -- 1,033
Private placement of Special Warrants exchanged...... 942,500 5,866 -- 5,866
Private placement of Special Warrants exchanged...... 500,000 4,356 -- 4,356
Private placement of Special Warrants exchanged...... 700,000 3,893 -- 3,893
Net income........................................... -- -- 1,735 1,735
---------- ------- ------ -------
BALANCE -- DECEMBER 31, 1993......................... 6,208,417 22,872 1,560 24,432
---------- ------- ------ -------
Issued pursuant to employee stock option plan........ 96,250 367 -- 367
Net income........................................... -- -- 1,163 1,163
---------- ------- ------ -------
BALANCE -- DECEMBER 31, 1994......................... 6,304,667 23,239 2,723 25,962
---------- ------- ------ -------
Issued pursuant to employee stock option plan........ 10,000 54 -- 54
Private placement of Special Warrants exchanged...... 614,143 2,314 -- 2,314
Private placement of common shares................... 4,499,999 24,457 -- 24,457
Net income........................................... -- -- 714 714
---------- ------- ------ -------
BALANCE -- DECEMBER 31, 1995......................... 11,428,809 50,064 3,437 53,501
---------- ------- ------ -------
(Unaudited)
Issued pursuant to employee stock option plan........ 125,750 656 -- 656
Issued pursuant to employee stock purchase plan...... 15,156 140 -- 140
Conversion of subordinated debt...................... 62,500 366 -- 366
Net income........................................... -- -- 2,595 2,595
---------- ------- ------ -------
BALANCE -- JUNE 30, 1996 (UNAUDITED)................. 11,632,215 $51,226 $6,032 $57,258
========== ======= ====== =======
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 67
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Company's operating activities are related to exploration, development
and production of oil and natural gas in the United States. All of the Canadian
operations were sold effective September 1, 1993.
The Company's name was changed on June 7, 1994, from Canadian Newscope
Resources Inc. to Newscope Resources Ltd. and again on December 21, 1995 to
Denbury Resources Inc.
On October 9, 1996 the shareholders of the Company approved an amendment to
the Articles of Continuance to consolidate the number of issued and outstanding
Common Shares on the basis of one Common Share for each two Common Shares
outstanding. All applicable shares and per share data have been adjusted for the
reverse stock split.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles and include the accounts of
the Company and its wholly owned subsidiaries, Denbury Holdings Ltd., Denbury
Management, Inc. and Denbury Marine L.L.C. and the Company's equity in the
operation of its 50% owned subsidiary, Brymore Energy Corporation ("Brymore").
The Company acquired the remaining 50% of Brymore effective May 1, 1996 and
began consolidating all of Brymore as of that date.
OIL AND NATURAL GAS OPERATIONS
a) Capitalized costs
The Company follows the full-cost method of accounting for oil and natural
gas properties. Under this method, all costs related to the exploration for and
development of oil and natural gas reserves are capitalized and accumulated in a
single cost center representing the Company's activities undertaken exclusively
in the United States. Such costs include lease acquisition costs, geological and
geophysical expenditures, lease rentals on undeveloped properties, costs of
drilling both productive and non-productive wells and general and administrative
expenses directly related to exploration and development activities. Proceeds
received from disposals are credited against accumulated costs except when the
sale represents a significant disposal of reserves in which case a gain or loss
is recognized.
b) Depletion and depreciation
The costs capitalized, including production equipment, are depleted or
depreciated on the unit-of-production method, based on proved oil and natural
gas reserves as determined by independent petroleum engineers. Oil and natural
gas reserves are converted to equivalent units based upon the relative energy
content which is six thousand cubic feet of natural gas to one barrel of crude
oil.
c) Site reclamation
Estimated future costs of well abandonment and site reclamation, including
the removal of production facilities at the end of their useful life, are
provided for on a unit-of-production basis. Costs are based on engineering
estimates of the anticipated method and extent of site restoration, valued at
year-end prices and in accordance with the current legislation and industry
practice. The annual provision for future site reclamation costs is included in
depletion and depreciation expense.
d) Ceiling test
The capitalized costs less accumulated depletion, depreciation and deferred
taxes are limited to an amount which is not greater than the estimated future
net revenue from proved reserves using period-end prices less estimated future
site restoration and abandonment costs, future production-related general and
F-7
<PAGE> 68
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
administrative expenses, financing costs and income taxes, plus the cost (net of
impairments) of undeveloped properties.
e) Joint interest operations
Substantially all of the Company's oil and natural gas exploration and
production activities are conducted jointly with others. These financial
statements reflect only the Company's proportionate interest in such activities.
FOREIGN CURRENCY TRANSLATION
Since 1993 when the Company sold its Canadian oil and natural gas
properties, virtually all of the Company's assets are located in the United
States. These assets and the United States operations are accounted for and
reported in U.S. dollars and no translation is necessary. The minor amount of
Canadian assets and liabilities is translated to U.S. dollars using year-end
exchange rates and any Canadian operations, which are principally minor
administrative and interest expenses, are translated using the historical
exchange rate.
EARNINGS PER SHARE
Net income per common share is computed by dividing the net income
attributable to common shareholders by the weighted average number of shares of
common stock outstanding. The stock options, warrants, convertible debt and the
conversion of the Convertible First Preferred Shares, Series A ("Convertible
Preferred") were anti-dilutive or immaterial and were not included in the
calculation of earnings per share.
STATEMENT OF CASH FLOWS
For purposes of the Statement of Cash Flows, cash equivalents include time
deposits, certificates of deposit and all liquid debt instruments with original
maturities of three months or less.
REVENUE RECOGNITION
The Company follows the "sales method" of accounting for its oil and
natural gas revenue whereby the Company recognizes sales revenue on all oil or
natural gas sold to its purchasers, regardless of whether the sales are
proportionate to the Company's ownership in the property. A receivable or
liability is recognized only to the extent that the Company has an imbalance on
a specific property greater than the expected remaining proved reserves. As of
December 31, 1994 and 1995 and June 30, 1996, the Company's aggregate oil and
natural gas imbalances were not material to its financial statements.
The Company recognizes revenue and expenses of purchased producing
properties commencing from the closing or agreement date, at which time the
Company also assumes control.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT
RISK
The Company's product price hedging activities are described in Note 6 to
the consolidated financial statements. Credit risk relating to these hedges is
minimal because of the credit risk standards required for counter-parties and
monthly settlements. The Company has entered into hedging contracts with only
large and financially strong companies.
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents, short-term investments and
trade and accrued production receivables. The Company's cash equivalents and
short-term investments represent high-quality securities placed with various
investment grade institutions. This investment practice limits the Company's
exposure to concentrations of credit risk. The
F-8
<PAGE> 69
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Company's trade and accrued production receivables are dispersed among various
customers and purchasers; therefore, concentrations of credit risk are limited.
Also, the Company's more significant purchasers are large companies with
excellent credit ratings. If customers are considered a credit risk, letters of
credit are the primary security obtained to support lines of credit.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of certain assets, liabilities,
revenues and expenses as of and for the reporting period. Estimates and
assumptions are also required in the disclosure of contingent assets and
liabilities as of the date of the financial statements. Actual results may
differ from such estimates.
INTERIM FINANCIAL DATA
In the opinion of management, the accompanying unaudited consolidated
financial statements contain all the adjustments (consisting of only normal
recurring accruals) necessary to present fairly the financial position as of
June 30, 1996, and the results of operations and changes in financial position
for the six months ended June 30, 1995 and 1996.
2. PROPERTY AND EQUIPMENT
UNEVALUATED OIL AND NATURAL GAS PROPERTIES EXCLUDED FROM DEPLETION
Under full cost accounting, the Company may exclude certain unevaluated
costs from the amortization base pending determination of whether proved
reserves have been discovered or impairment has occurred. A summary of the
unevaluated properties excluded from oil and natural gas properties being
amortized at December 31, 1994 and 1995 and June 30, 1996 and the year in which
they were incurred follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1994 DECEMBER 31, 1995
---------------------------------- ------------------------------------
INCURRED IN INCURRED IN
------------------------ --------------------------
1992 1993 1994 TOTAL 1993 1994 1995 TOTAL
---- ------ ------ ------ ------ ------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Property acquisition
cost..................... $11 $3,696 $1,230 $4,937 $1,151 $1,230 $2,909 $5,290
Exploration costs.......... 128 1,186 1,314 -- 1,146 649 1,795
--- ------ ------ ------ ------ ------ ------ ------
Total............ $11 $3,824 $2,416 $6,251 $1,151 $2,376 $3,558 $7,085
=== ====== ====== ====== ====== ====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996
----------------------------
(UNAUDITED)
INCURRED IN
----------------------------
1994 1995 1996 TOTAL
------ ------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Property acquisition cost............................... $ 606 $ 590 $2,379 $3,575
Exploration costs....................................... 1,101 581 1,314 2,996
------ ------ ------ ------
Total......................................... $1,707 $1,171 $3,693 $6,571
====== ====== ====== ======
</TABLE>
Costs are transferred into the amortization base on an ongoing basis as the
projects are evaluated and proved reserves established or impairment determined.
Pending determination of proved reserves attributable to the above costs, the
Company cannot assess the future impact on the amortization rate.
F-9
<PAGE> 70
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
General and administrative costs that directly relate to exploration and
development activities that were capitalized during the period totaled $480,000,
$480,000 and $630,000 for the years ended December 31, 1993, 1994 and 1995 and
$260,000 and $516,000 for the six months ended June 30, 1995 and 1996,
respectively.
Amortization per BOE was $4.36, $4.03, $5.22 and $6.10 for the years ended
December 31, 1993, 1994 and 1995 and six months ended June 30, 1996,
respectively.
3. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------ JUNE 30,
1994 1995 1996
------- ------ -----------
<S> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C>
Senior bank loan..................................... $14,950 $ 100 $40,000
Convertible debentures............................... 1,426 3,296 2,930
Other notes payable.................................. 338 255 159
------- ------ -------
16,714 3,651 43,089
Less portion due within one year..................... 178 177 125
------- ------ -------
Total long-term debt....................... $16,536 $3,474 $42,964
======= ====== =======
</TABLE>
BANKS
On May 5, 1995, the Company refinanced and on November 14, 1995 amended its
revolving credit facility with a new lender, ING Capital Corporation, expanding
its credit line to $25,000,000 from $15,000,000. The new credit facility,
denominated in U.S. dollars, is a senior secured one-year revolving facility
converting to a four year term loan in April 1996, unless renewed or extended.
The total outstanding principal balance may at no time exceed a borrowing base
as determined semi-annually by the lender and is secured by all of the Company's
current and future oil and natural gas properties. Interest is payable at the
Company's option at the bank prime base rate plus 1% or the LIBOR rate plus
2.75%. The credit facility also has certain other restrictions, including: (i) a
requirement to maintain positive working capital, (ii) a minimum equity balance
of $25 million after certain adjustments, (iii) a prohibition on the payment of
dividends, (iv) a maximum of $2 million per year on general and administrative
expenses and (v) a prohibition of most other debt and corporate guarantees. As
of December 31, 1995, the Company had $100,000 outstanding on the line of
credit, with an available borrowing base of $25 million.
On May 30, 1996, the Company refinanced its revolving credit facility with
NationsBank of Texas as agent. See Note 11 for additional disclosures.
SUBORDINATED DEBT
On March 23, 1994, Denbury issued Cdn. $2,000,000 principal amount of
unsecured convertible debentures. The debentures are due in five years, have an
interest rate of 6 3/4% per annum, and are convertible at any time by the
holders into Common Shares at a conversion price of Cdn. $8.00 per Common Share.
Under certain conditions after July 15, 1996, the Company has the right to
require an early redemption.
On January 17, 1995, Denbury issued Cdn. $2,500,000 principal amount of
unsecured convertible debentures. The debentures are due in five years, have an
interest rate of 9 1/2% per annum, and are convertible at any time by the
holders into Common Shares at a conversion price of Cdn. $8.10 per Common Share.
Under certain conditions after April 13, 1997, the Company has the right to
require an early redemption.
F-10
<PAGE> 71
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
INDEBTEDNESS REPAYMENT SCHEDULE
The Company's indebtedness is repayable as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-------------------------------------------------
CONVERTIBLE OTHER NOTES
YEAR BANK LOAN DEBENTURES PAYABLE TOTAL
------------------------------------------- --------- ----------- ----------- ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
1996....................................... $ 25 $ -- $152 $ 177
1997....................................... 33 -- 79 112
1998....................................... 33 -- 22 55
1999....................................... 9 1,465 2 1,476
2000....................................... -- 1,831 -- 1,831
---- ------ ---- ------
$100 $3,296 $255 $3,651
==== ====== ==== ======
</TABLE>
<TABLE>
<CAPTION>
JUNE 30, 1996 (UNAUDITED)
--------------------------------------------------
CONVERTIBLE OTHER NOTES
YEAR BANK LOAN DEBENTURES PAYABLE TOTAL
------------------------------------------ --------- ----------- ----------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
1996...................................... $ -- $ -- $ 56 $ 56
1997...................................... -- -- 79 79
1998...................................... 6,667 -- 22 6,689
1999...................................... 13,333 1,099 2 14,434
2000...................................... 13,333 1,831 -- 15,164
2001...................................... 6,667 -- -- 6,667
------- ------ ---- -------
$40,000 $2,930 $159 $43,089
======= ====== ==== =======
</TABLE>
4. INCOME TAXES
The Company's tax provision is as follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED ENDED
DECEMBER 31, JUNE 30,
-------------------- --------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Deferred
Federal....................................... $345 $718 $367 $242 $1,804
State......................................... -- -- -- -- --
---- ---- ---- ---- ------
Total................................. $345 $718 $367 $242 $1,804
==== ==== ==== ==== ======
</TABLE>
F-11
<PAGE> 72
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Income tax expense for the year varies from the amount that would result
from applying Canadian federal and provincial tax rates to income before income
taxes as follows:
<TABLE>
<CAPTION>
SIX MONTHS
ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------- --------------
1993 1994 1995 1995 1996
----- ----- ----- ---- ------
(AMOUNTS IN THOUSANDS) (UNAUDITED)
<S> <C> <C> <C> <C> <C>
Deferred income tax provision calculated
using the Canadian federal and provincial
statutory combined tax rate of 44.34%...... $ 922 $ 834 $ 479 $315 $2,287
Decrease resulting from:
Effect of lower income tax rates on United
States income.............................. (105) (116) (112) (73) (483)
Utilization of prior years' losses........... (472) -- -- -- --
----- ----- ----- ---- ------
$ 345 $ 718 $ 367 $242 $1,804
===== ===== ===== ==== ======
</TABLE>
The Company at December 31, 1995 had net operating loss carryforwards for
U.S. tax purposes of approximately $12,366,000 and approximately $10,875,000 for
alternative minimum tax purposes. The net operating losses are scheduled to
expire as follows:
<TABLE>
<CAPTION>
INCOME ALTERNATIVE
YEAR TAX MINIMUM TAX
-------------------------------------- ------ -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
2005.................................. $ 39 $ --
2006.................................. 11 --
2007.................................. 1,358 599
2008.................................. 5,016 4,889
2009.................................. 3,377 2,868
2010.................................. 2,565 2,519
</TABLE>
5. SHAREHOLDERS' EQUITY
AUTHORIZED
The Company is authorized to issue an unlimited number of Common Shares
with no par value, First Preferred Shares and Second Preferred Shares. The
preferred shares may be issued in one or more series with rights and conditions
as determined by the Directors.
COMMON STOCK
Each Common Share entitles the holder thereof to one vote on all matters on
which holders are permitted to vote. The Texas Pacific Group ("TPG") was granted
a right of first refusal in the private placement (see below), to maintain
proportionate ownership. No stockholder has any right to convert common stock
into other securities. The holders of shares of common stock are entitled to
dividends when and if declared by the Board of Directors from funds legally
available therefore and, upon liquidation, to a pro rata share in any
distribution to stockholders, subject to prior rights of the holders of the
preferred stock. The Company is restricted from declaring or paying any cash
dividend on the Common Stock by its bank loan agreements.
F-12
<PAGE> 73
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
CONVERTIBLE DEBENTURES
The Company has reserved 558,642 Common Shares for issuance upon the
conversion of Convertible Debentures which have been issued (See Note 3).
PRIVATE PLACEMENT OF SECURITIES
In December 1995, the Company closed a $40 million private placement of
securities with partnerships that are affiliated with the Texas Pacific Group
("TPG Placement"). The TPG Placement was comprised of: (i) 4.166 million common
shares issued at $5.85 per share, (ii) 625,000 warrants at a price of $1.00 per
warrant entitling the holder to purchase 625,000 common shares at $7.40 per
share and (iii) 1.5 million shares of $10 stated value Convertible First
Preferred Shares, Series A ("Convertible Preferred"). The Convertible Preferred
shares are initially convertible at $7.40 of stated value per common share with
such conversion rate declining 2.5% per quarter. The shares also have a
mandatory redemption at a 63.86% premium at December 21, 2000, but also provide
that the Company can cause a mandatory conversion after January 1, 1999 if the
price of the Common Stock exceeds $10.00 per share for a period of 40
consecutive trading days. The Convertible Preferred do not have any cash or
other stated dividend requirements although the Company is making an accrual
each year to account for the mandatory redemption premium quarterly accretion.
This accrual correspondingly reduces the net income available to the common
shareholders and is considered in the Company's primary earnings per share
calculation. The Company may also force conversion of the warrants after
December 21, 1997, if the price of the Common Stock exceeds $10.00 per share for
a period of 40 consecutive trading days. See Note 11 "Subsequent Events"
concerning a special meeting of shareholders at which the terms of the
Convertible Preferred were modified.
In addition, for a period of two years TPG has certain "piggyback"
registration rights which allow TPG to include all or part of the Common Shares
acquired by TPG in any registration statement of the Company during that period.
Furthermore, after the initial two years and until December 21, 2000, TPG may
request and receive one demand registration whereby TPG may make a written
request to the Company for registration, under the Securities Act of 1933, as
amended, for the Common Shares acquired by TPG.
The TPG agreement provides that TPG shall have the right, but not the
obligation, to maintain its pro rata ownership interest (after the assumed
exercise of their warrants and Convertible Preferred) in the equity securities
of the Company, in the event that the Company issues any additional equity
securities or securities convertible into Common Shares of the Company, by
purchasing additional shares of the Company on the same terms and conditions.
However, this right expires should TPG's share holdings represent less than 20%
of the outstanding Common Shares. TPG has waived its registration rights and
right to maintain its pro rata ownership with regard to the Public Offering.
As part of the TPG Placement, Tortuga Investment Corp. was paid a financial
advisor fee of 333,333 Common Shares of the Company. The sole shareholder of
Tortuga Investment Corp. was appointed to the Board of Directors of the Company
and elected Chairman upon the closing of the TPG Placement.
WARRANTS
At December 31, 1995, 150,000 warrants were outstanding at an exercise
price of Cdn. $8.40 expiring on May 5, 2000 and 625,000 warrants were
outstanding at an exercise price of U.S. $7.40 expiring on December 21, 1999.
Each warrant entitles the holder thereof to purchase one Common Share at any
time prior to the expiration date. The Company has the option after December 21,
1997, to require exercise of the 625,000 warrants if the weighted average
trading price of the Common Stock exceeds $10.00 per share for a period of 40
consecutive trading days.
F-13
<PAGE> 74
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SPECIAL WARRANT ISSUES
On April 25, 1995, the Company issued 614,143 Special Warrants at a price
of $4.70 (Cdn. $6.50) per Special Warrant for gross proceeds of $2,750,000
(29,036 Common Share Purchase Warrants were issued to Southcoast Capital
Corporation, as placement agent, in partial payment of their fee). Costs of the
issue were $436,000, resulting in net proceeds to the Company of approximately
$2,314,000. Each Special Warrant was exchanged, at no additional cost, for one
Common Share of Denbury on August 11, 1995.
On April 6, 1993, Denbury issued 942,500 Special Warrants at a price of
Cdn. $8.50 per Special Warrant for gross and net proceeds of $6,348,000 and
$5,866,000 respectively. On June 22, 1993, Denbury issued 500,000 Special
Warrants at a price of Cdn. $12.00 per Special Warrant for gross and net
proceeds of $4,693,000 and $4,356,000 respectively. On December 10, 1993,
Denbury issued an additional 700,000 Special Warrants at a price of Cdn. $8.00
per Special Warrant for gross and net proceeds of $4,208,000 and $3,893,000
respectively. Each of these Special Warrants was exchanged, at no additional
cost, for one Common Share resulting in the issue of 2,142,500 Common Shares.
STOCK OPTIONS AND STOCK PURCHASE PLAN
The Company maintains a Stock Option Plan which authorizes the grant of
options of up to 1,050,000 of Common Shares. Under the plan, incentive and
non-qualified options may be issued to officers, key employees and consultants.
The plan is administered by the Stock Option Committee of the Board. At December
31, 1995, a total of 731,925 options had been granted under the plan, of which
539,625 shares were exercisable as of that date. In February 1996, the Company
also implemented a Stock Purchase Plan which authorizes the sale of up to
250,000 Common Shares to all full time employees with at least six months of
service. Under the plan, the employees may contribute up to 10% of their base
salary and the Company matches 75% of the employee contribution. The combined
funds are used to purchase previously unissued Common Shares of the Company
based on its current market value at the end of the each quarter. This plan is
administered by the Stock Purchase Plan Committee of the Board.
Following is a summary of stock option activity during the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------- JUNE 30,
SHARES UNDER OPTION 1993 1994 1995 1996
---------------------------------------- --------- --------- --------- -----------
(UNAUDITED)
<S> <C> <C> <C> <C>
Outstanding at beginning of year........ 329,500 541,312 557,312 731,925
Granted................................. 500,500 138,750 274,500 444,000
Terminated.............................. (12,500) (26,500) (89,887) (6,750)
Exercised............................... (276,188) (96,250) (10,000) (125,750)
Expired................................. -- -- -- --
--------- --------- --------- ---------
Outstanding at end of period
(exercisable at $1.25 to $5.68 per
share)................................ 541,312 557,312 731,925 1,043,425
========= ========= ========= =========
</TABLE>
6. PRODUCT PRICE HEDGING CONTRACTS
In October 1994, the Company entered into two financial contracts
("collars") to hedge 10,000 Mcf/d of natural gas production for calendar year
1995. The first natural gas contract for 8,000 Mcf/d of natural gas had a floor
of $1.845 per MMBTU and a ceiling of $2.095 per MMBTU. The second natural gas
contract was for 2,000 Mcf/d and had a floor of $1.775 per MMBTU and a ceiling
of $1.885 per MMBTU. These contracts covered 75% of the Company's net revenue
interest production in 1995 and increased oil and natural gas revenues by
approximately $800,000 during such period.
F-14
<PAGE> 75
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In addition, in 1995 the Company entered into two swap contracts for oil.
The first oil contract was for 500 Bbls/d of oil at a price of $17.79 per barrel
of oil commencing on February 1, 1995, and ending on January 31, 1996. The
second oil contract was also for 500 Bbls/d of oil at a price of $18.83, for the
period commencing on April 12, 1995, and ending on December 30, 1995. These
contracts covered 43% of the Company's net revenue interest production for 1995
and decreased oil and natural gas revenues by approximately $47,000 during such
period.
The Company does not have any hedge contracts in place as of September 30,
1996.
7. COMMITMENTS AND CONTINGENCIES
The Company has operating leases for the rental of office space, office
equipment, and vehicles. At June 30, 1996 and December 31, 1995, long-term
commitments for these items require the following future minimum rental
payments:
<TABLE>
<CAPTION>
DECEMBER 31, JUNE 30,
1995 1996
------------ -----------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
(UNAUDITED)
1996........................................ $304 $ 320
1997........................................ 251 428
1998........................................ 239 409
1999........................................ 86 166
2000........................................ -- --
---- -------
$880 $ 1,323
==== =======
</TABLE>
The Company is subject to various possible contingencies which arise
primarily from interpretation of federal and state laws and regulations
affecting the oil and natural gas industry. Such contingencies include differing
interpretations as to the prices at which oil and natural gas sales may be made,
the prices at which royalty owners may be paid for production from their leases
and other matters. Although management believes it has complied with the various
laws and regulations, administrative rulings and interpretations thereof,
adjustments could be required as new interpretations and regulations are issued.
In addition, production rates, marketing and environmental matters are subject
to regulation by various federal and state agencies.
The Company is not currently a party to any litigation which would have a
material impact on its financial statements. However, due to the nature of its
business, certain legal or administrative proceedings may arise in the ordinary
course of its business.
8. DIFFERENCES IN GENERALLY ACCEPTED ACCOUNTING PRINCIPLES BETWEEN
CANADA AND THE UNITED STATES
The consolidated financial statements have been prepared in accordance with
GAAP in Canada. The primary difference between Canadian and U.S. GAAP affecting
the Company's 1995 financial statements results from the fact that under U.S.
GAAP the loss on early extinguishment of debt during 1995 would be an
extraordinary item while under Canadian GAAP, it is not extraordinary.
Net income, net income per share and all balance sheet amounts for the year
ended December 31, 1995 are not effected by the difference in GAAP; however, the
net income before extraordinary items would be $846,000 ($.12 per common share)
as compared to the $714,000 ($.10 per common share) as reported under Canadian
GAAP.
The primary differences between Canadian and U.S. GAAP affecting the
Company's 1996 consolidated financial statements relate to the presentation of
the early extinguishment of debt and the imputed dividend on
F-15
<PAGE> 76
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
the Convertible Preferred. During the first six months of 1996, the Company
expensed $759,000 relating to the imputed preferred dividend, as required under
Canadian GAAP. Under U.S. GAAP, this dividend would be deducted after net income
to compute the net income attributable to the common shareholders. The Company
also expensed its debt issue cost relating to the Company's prior bank credit
agreement with ING Capital Corporation totaling $440,000. Under Canadian GAAP
this is an operating expense while under U.S. GAAP a loss on early
extinguishment of debt is an extraordinary item. While net income per common
share and all balance sheet accounts are not affected by these differences in
GAAP, the net income for the first six months of 1996 under U.S. GAAP would be
$3,354,000, while under Canadian GAAP the amount reported was $2,595,000.
In addition, the methodology for computing earnings per common share is not
consistent between the two countries. However, for the first six months of 1996
the stock options, warrants, convertible debt, and the conversion of the
Convertible Preferred were either anti-dilutive or immaterial and were not
included in the earnings per share under either GAAP calculation. Therefore the
difference in methodology had no effect on the earnings per common share
reported in the Consolidated Financial Statements.
In 1995, the United States Financial Accounting Standards Board issued
Statement of Financial Accounting Standard ("SFAS") No. 123, "Accounting for
Stock-Based Compensation." SFAS No. 123 is effective for fiscal years beginning
after December 31, 1995 and requires companies to use recognized option pricing
models to estimate the fair value of stock based compensation, including stock
options. The Statement requires additional disclosures based on this fair value
based method of accounting for an employee stock option and encourages, but does
not require, companies to recognize the value of these stock option grants as
additional compensation using the methodology of SFAS No. 123. The Company does
not intend to recognize compensation expense as calculated under SFAS No. 123 in
the future and intends to continue recognizing expense as prescribed by APB
Opinion No. 25, "Accounting for Stock Issued to Employees," as allowed under
SFAS No. 123. As such, the adoption of SFAS No. 123 during 1996 will not have
any effect on the Company's consolidated financial statements.
As of June 30, 1996, the Company has two stock-based compensation plans. In
the stock purchase plan which was implemented on February 1, 1996, an employee
can elect to contribute up to 10% of their base earnings. The Company matches
75% of these contributions and the combined funds are used to purchase
previously unissued Common Shares based upon the current market price. The
Company recognizes compensation expense for the 75% Company matching portion,
which during the six months ended June 30, 1996 totaled $60,000.
F-16
<PAGE> 77
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company also has a stock option plan as more fully described in Note 5.
The Company applies APB Opinion No. 25 in accounting for this plan and
accordingly no compensation cost has been recognized. Had compensation expense
been determined based on the fair value at the grant dates for the stock option
grants consistent with the method of SFAS No. 123, the Company's net income and
net income per common share would have been reduced to the pro forma amounts
indicated below:
<TABLE>
<CAPTION>
YEAR ENDED SIX MONTHS
DECEMBER 31, ENDED JUNE 30,
1995 1996
------------ --------------
<S> <C> (UNAUDITED)
Net income:
As reported (thousands)................................. $ 714 $2,595
Pro forma (thousands)................................... 503 2,435
Net income per common share:
As reported............................................. $ .10 $ .23
Pro forma............................................... .07 .21
Stock options issued during period (thousands)............ 275 444
Weighted average exercise price........................... $ 5.90 $ 8.64
Average per option compensation value of options
granted(1).............................................. 2.34 2.88
Compensation cost (thousands)............................. 320 243
</TABLE>
- ---------------
(1) Calculated in accordance with the Black-Scholes option pricing model, using
the following assumptions; expected volatility computed using, as of the
date of grant, the prior three year monthly average of the Common Shares as
listed on the TSE, which ranged from 37% to 67%; expected dividend
yield -- 0%; expected option term -- 3 years, and risk-free rate of return
as of the date of grant which ranged from 5.3% to 7.8%, based on the yield
of five year U.S. treasury securities.
Deferred income taxes relate to temporary differences based on tax laws and
statutory rates in effect at the December 31, 1994 and 1995 and June 30, 1996
balance sheet dates. At December 31, 1994, and 1995 and June 30, 1996, all
deferred tax assets and liabilities were computed based on Canadian GAAP amounts
and were noncurrent as follows:
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- JUNE 30,
1994 1995 1996
------- ------- -----------
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Loss carryforwards.......................................... $(3,332) $(4,205) $(5,380)
Deferred tax liabilities:
Exploration and intangible development costs................ 4,396 5,636 8,615
------- ------- -------
Net deferred tax liability.................................... $ 1,064 $ 1,431 $ 3,235
======= ======= =======
</TABLE>
9. SUPPLEMENTAL INFORMATION
GEOGRAPHIC SEGMENTS
During 1993, the Company had $618,000 of oil and natural gas sales in
Canada and generated $1,065,000 of net income in Canada, including the gain on
sale of Canadian properties of $966,000. All Canadian oil and natural gas
properties were disposed of in 1993 and thus, all of the Company's operations
are now in the United States.
F-17
<PAGE> 78
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
SIGNIFICANT OIL AND NATURAL GAS PURCHASERS
Oil and natural gas sales are made on a day-to-day basis or under
short-term contracts at the current area market price. The loss of any purchaser
would not be expected to have a material adverse effect upon operations. For the
period ended December 31, 1995, the Company sold 10% or more of its net
production of oil and natural gas to the following purchasers: Natural Gas
Clearinghouse (21%), Amerada Hess (20%), Conoco, Inc. (12%), and Brymore Energy
Corp. (12%).
COSTS INCURRED
The following table summarizes costs incurred in oil and natural gas
property acquisition, exploration and development activities. Property
acquisition costs are those costs incurred to purchase, lease, or otherwise
acquire property, including both undeveloped leasehold and the purchase of
revenues in place. Exploration costs include costs of identifying areas that may
warrant examination and in examining specific areas that are considered to have
prospects containing oil and natural gas reserves, including costs of drilling
exploratory wells, geological and geophysical costs and carrying costs on
undeveloped properties. Development costs are incurred to obtain access to
proved reserves, including the cost of drilling development wells, and to
provide facilities for extracting, treating, gathering, and storing the oil and
natural gas.
Costs incurred in oil and natural gas activities for the years ended
December 31, 1993, 1994 and 1995 and the six months ended June 30, 1996 are as
follows:
<TABLE>
<CAPTION>
SIX MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------- JUNE 30,
1993 1994 1995 1996
------- ------- ------- -----------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
Property acquisition................... $21,604 $ 6,736 $17,198 $48,179
Exploration............................ 608 1,796 1,687 1,841
Development............................ 7,643 8,371 9,639 10,713
------- ------- ------- -------
$29,855 $16,903 $28,524 $60,733
======= ======= ======= =======
</TABLE>
PROPERTY ACQUISITIONS
In November 1995, the Company closed on an acquisition of seven producing
wells and certain non-producing leases in the Gibson/Humphreys fields of
Terrebonne Parish, Louisiana for approximately $10.2 million.
The 1995 acquisition was accounted for under purchase accounting and the
results of operations were consolidated beginning October 1, 1995. Unaudited pro
forma results of operations of the Company as if the acquisition had occurred at
the beginning of each respective period are as follows:
<TABLE>
<CAPTION>
PRO FORMA
YEAR ENDED DECEMBER
31,
---------------------
1994 1995
------- -------
(IN THOUSANDS
EXCEPT PER SHARE
AMOUNTS)
(UNAUDITED)
<S> <C> <C>
Revenues....................................................... $14,587 $22,235
Net income..................................................... 767 587
Net income per common share.................................... .12 .09
</TABLE>
F-18
<PAGE> 79
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In computing the pro forma results, depreciation, depletion and
amortization expense was computed using the units of production method, and an
adjustment was made to interest expense reflecting that bank debt that was
required to fund the acquisition.
No additional general and administrative expense was expected as the
Company could absorb these operations without additional personnel.
The following represents the revenues and direct operating expenses
attributable to the net interest acquired in the Gibson/Humphreys field by the
Company and are presented on the full cost accrual basis of accounting.
Depreciation, depletion, and amortization, allocated general and administrative
expenses, interest expense and income, and income taxes have been excluded
because the property interests acquired represent only a portion of a business
and these expenses are not necessarily indicative of the expenses to be incurred
by the Company.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
-------------------
1994 1995
------ ------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C>
Revenues:
Oil, natural gas and related product sales..................... $1,872 $2,849
------ ------
Direct operating expenses:
Lease operating expense........................................ 495 420
Severance and property taxes................................... 87 154
------ ------
582 574
------ ------
Excess of revenues over direct operating expenses................ $1,290 $2,275
====== ======
</TABLE>
See Note 11 for additional property acquisition disclosures.
10. SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
Net proved oil and natural gas reserve estimates as of July 1, 1996 and
December 31, 1995 were prepared by Netherland & Sewell and the net oil and
natural gas reserve estimates as of December 31, 1994 and 1993 were prepared by
The Scotia Group, Inc., both independent petroleum engineers located in Dallas,
Texas. The reserves were prepared in accordance with guidelines established by
the Securities and Exchange Commission and accordingly, were based on existing
economic and operating conditions. Oil and natural gas prices in effect as of
the reserve report date were used without any escalation except in those
instances where the sale is covered by contract, in which case the applicable
contract prices including fixed and determinable escalations were used for the
duration of the contract, and thereafter the last contract price was used.
Operating costs, production and ad valorem taxes and future development costs
were based on current costs with no escalation.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. Moreover, the present values should
not be construed as the current market value of the Company's oil and natural
gas reserves or the costs that would be incurred to obtain equivalent reserves.
All of the reserves are located in the United States.
F-19
<PAGE> 80
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESTIMATED QUANTITIES OF RESERVES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS
--------------------------------------------------- ENDED
JUNE 30,
1993 1994 1995 1996
--------------- --------------- --------------- ---------------
OIL GAS OIL GAS OIL GAS OIL GAS
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
------ ------ ------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE BEGINNING OF YEAR..... 565 2,383 3,583 13,029 4,230 42,047 6,292 48,116
Revisions of previous
estimates................ (254) 234 (48) 2,827 830 (1,620) (259) (238)
Extensions, discoveries and
other additions.......... 299 -- 640 14,978 732 -- 10 3,134
Production.................. (272) (673) (489) (3,326) (728) (4,844) (527) (4,098)
Acquisition of minerals in
place.................... 3,245 11,084 544 14,539 1,228 12,533 6,209 18,893
----- ------ ----- ------ ----- ------ ------ ------
BALANCE AT END OF PERIOD...... 3,583 13,029 4,230 42,047 6,292 48,116 11,725 65,807
===== ====== ===== ====== ===== ====== ====== ======
PROVED DEVELOPED RESERVES:
Balance at beginning of
year..................... 425 1,755 3,418 12,303 3,755 35,578 5,290 34,894
Balance at end of period.... 3,418 12,303 3,755 35,578 5,290 34,894 10,439 58,052
</TABLE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND
CHANGES THEREIN RELATING TO PROVED OIL AND NATURAL GAS RESERVES
The Standardized Measure of Discounted Future Net Cash Flows and Changes
Therein Relating to Proved Oil and Natural Gas Reserves ("Standardized Measure")
does not purport to present the fair market value of the Company's oil and
natural gas properties. An estimate of such value should consider, among other
factors, anticipated future prices of oil and natural gas, the probability of
recoveries in excess of existing proved reserves, the value of probable reserves
and acreage prospects, and perhaps different discount rates. It should be noted
that estimates of reserve quantities, especially from new discoveries, are
inherently imprecise and subject to substantial revision.
Under the Standardized Measure, future cash inflows were estimated by
applying year-end prices, adjusted for fixed and determinable escalations, to
the estimated future production of year-end proved reserves. Future cash inflows
were reduced by estimated future production and development costs based on
year-end costs to determine pre-tax cash inflows. Future income taxes were
computed by applying the statutory tax rate to the excess of pre-tax cash
inflows over the Company's tax basis in the associated proved oil and natural
gas properties. Tax credits and net operating loss carry forwards were also
considered in the future income tax calculation. Future net cash inflows after
income taxes were discounted using a 10% annual discount rate to arrive at the
Standardized Measure.
F-20
<PAGE> 81
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------ JULY 1,
1993 1994 1995 1996
-------- -------- -------- ---------
(AMOUNTS IN
THOUSANDS)
<S> <C> <C> <C> <C>
Future cash inflows................................... $ 67,279 $126,129 $214,932 $ 392,385
Future production costs............................... (20,587) (35,069) (56,323) (105,280)
Future development costs.............................. (3,408) (7,369) (16,154) (24,117)
-------- -------- -------- ---------
Future net cash flows before taxes.................... 43,284 83,691 142,455 262,988
10% annual discount for estimated timing of cash
flows............................................ (14,646) (31,000) (45,490) (87,733)
-------- -------- -------- ---------
Discounted future net cash flows before taxes......... 28,638 52,691 96,965 175,255
Discounted future income taxes........................ (173) (5,763) (15,801) (25,095)
-------- -------- -------- ---------
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS............................................... $ 28,465 $ 46,928 $ 81,164 $ 150,160
======== ======== ======== =========
</TABLE>
The following table sets forth an analysis of changes in the Standardized
Measure of Discounted Future Net Cash Flows from proved oil and natural gas
reserves:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, SIX MONTHS ENDED
---------------------------- JUNE 30,
1993 1994 1995 1996
------- ------- -------- ----------------
<S> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
Beginning of year.................................. $ 4,584 $28,465 $ 46,928 $ 81,164
Sales of oil and natural gas produced, net of
production costs................................. (3,801) (8,383) (13,243) (15,300)
Net changes in sales prices........................ (937) 863 23,037 20,556
Extensions and discoveries, less applicable future
development costs................................ 579 13,416 1,926 2,239
Previously estimated development costs incurred.... 709 2,492 2,193 3,331
Revisions of previous estimates, including revised
estimates of development costs, reserves and
rates of production.............................. (996) (2,914) 3,958 (3,975)
Accretion of discount.............................. 458 2,847 4,693 4,058
Purchase of minerals in place...................... 27,304 15,732 21,710 67,381
Net change in income taxes......................... 565 (5,590) (10,038) (9,294)
------- ------- -------- --------
End of period...................................... $28,465 $46,928 $ 81,164 $150,160
======= ======= ======== ========
</TABLE>
11. SUBSEQUENT EVENTS
During April 1996, the Company closed an acquisition of additional working
interests in five Mississippi oil and natural gas properties in which the
Company already owns an interest, plus certain overriding royalty interests in
other areas for approximately $7.5 million. The properties were acquired from
Ottawa Energy, Inc., a subsidiary of Highridge Exploration Ltd.
On April 17, 1996, Denbury entered into a purchase and sale agreement with
Amerada Hess Corporation to purchase producing oil and natural gas properties in
Mississippi, Louisiana and Alabama, plus certain overriding royalty interests in
Ohio, for approximately $37.2 million. The acquisition included 439 wells (110
net working interest wells), of which 129 wells are Company operated with the
balance consisting of 124 non-operated working interest wells and 186 royalty
interests wells. Of the 439 total acquired wells, 37 operated, 37 non-operated
and 21 royalty interest wells are currently non-producing. The Company funded
this acquisition with bank financing from a new credit facility and closed this
transaction during June 1996.
F-21
<PAGE> 82
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
These two acquisitions were accounted for under purchase accounting and the
results of operations were consolidated during the second quarter of 1996. Pro
forma results of operations of the Company as if the acquisitions had occurred
at the beginning of each respective period are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -------------------
1995 1995 1996
------------ ------- -------
(IN THOUSANDS, EXCEPT PER SHARE
AMOUNTS)
<S> <C> <C> <C>
Revenues............................................ $ 41,273 $18,913 $28,698
Net income.......................................... 899 878 3,516
Net income per common share......................... .13 .13 .31
</TABLE>
In order to fund these two acquisitions and also to generally improve the
terms and increase the size of its existing credit facility, the Company has
entered into a new $150 million credit facility with NationsBank of Texas
("NationsBank"). This refinancing closed on May 31, 1996 and has a borrowing
base as of October 15, 1996 of $60 million. NationsBank is the agent bank and
the facility includes two other banks. The credit facility is a two year
revolving credit facility that converts to a three year term loan in May 1998,
unless renewed or extended. The credit facility is secured by virtually all the
Company's oil and natural gas properties and interest is payable at either the
bank's prime rate or, depending on the percentage of the borrowing base that is
outstanding, ranging from LIBOR plus 7/8% to LIBOR plus 1 3/8%. This credit
facility also has several restrictions including, among others: (i) a
prohibition on the payment of dividends, (ii) a requirement for a minimum equity
balance, (iii) a requirement to maintain positive working capital as defined,
and (iv) a prohibition of most debt and corporate guarantees.
At a meeting of the Board of Directors of the Company on May 16, 1996, the
Company's Stock Option Plan was amended to increase the number of option shares
authorized to be issued under the Plan from 1,050,000 to 1,250,000. This
amendment is subject to shareholder and regulatory approval.
On July 31, 1996, the Company issued 187,500 Common Shares for the
conversion of the remaining 6 3/4% Convertible Debentures of the Company and on
August 27, 1996, issued 75,000 Common Shares for the exercise of 75,000 Cdn.
$8.40 warrants.
The Company held a Special Meeting of its shareholders on October 9, 1996
and passed three resolutions. The first resolution ratified and approved an
amendment to the Articles of Continuance to consolidate the number of issued and
outstanding Common Shares on the basis of one (1) Common Share for each two (2)
Common Shares outstanding. All applicable shares and per share data have been
adjusted for the stock split. The second resolution ratified and approved an
amendment to the Articles of Continuance which governs the conversion provision
attaching to the Convertible Preferred Shares which gave the Company the right
to require the holders of the Preferred Shares to convert their Preferred Shares
into Common Shares at any time, provided that the conversion rate in effect as
of January 1, 1999 would be used for any required conversion prior to that date.
Prior to this Preferred Amendment, the Company could not require a conversion of
these Preferred Shares prior to January 1, 1999. Subject to, and simultaneously
with, the completion of the Offerings, the Company plans to require a
conversion, thereby increasing the number of Common Shares of the Company by
2,816,372 and eliminating the outstanding Preferred Shares.
The third resolution passed provides for the Company to issue Common Shares
at an issue price of Cdn. $14.72 per share in payment of the interest that would
be due on the 9 1/2% Convertible Debentures from the conversion date through and
including April 13, 1997, if the holders of the debentures convert their
debentures into Common Shares prior to April 13, 1997. On October 15, 1996,
these debentures were converted by the holders in accordance with their terms
into 308,642 Common Shares along with an additional 7,948 Common Shares for the
interim interest.
F-22
<PAGE> 83
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
UNAUDITED QUARTERLY INFORMATION
The following table presents unaudited summary financial information on a
quarterly basis for 1994 and 1995 and the first two quarters of 1996 (in
thousands except per share amounts).
<TABLE>
<CAPTION>
MARCH 31 JUNE 30 SEPT. 30 DEC. 31
-------- ------- -------- -------
<S> <C> <C> <C> <C>
1994
Revenues................................................ $2,574 $ 2,951 $3,400 $ 3,790
Expenses................................................ 2,011 2,351 2,829 3,643
Net income.............................................. 365 369 350 79
Net income per share.................................... .06 .06 .06 .01
Cash flow from operations(a)............................ 1,361 1,514 1,665 1,645
1995
Revenues................................................ $4,381 $ 4,636 $4,841 $ 6,251
Expenses................................................ 3,723 4,583 4,554 6,168
Net income.............................................. 435 35 190 54
Net income per share.................................... .08 0.00 .02 0.00
Cash flow from operations(a)............................ 2,112 1,913 2,234 3,135
1996
Revenues................................................ $9,092 $11,682
Expenses................................................ 6,767 9,608
Net income.............................................. 1,380 1,215
Net income per share.................................... .12 .11
Cash flow from operations(a)............................ 6,065 7,238
</TABLE>
- ---------------
(a) Exclusive of the net change in non-cash working capital balances.
F-23
<PAGE> 84
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Denbury Resources Inc.
We have audited the accompanying statement of revenues and direct operating
expenses attributable to certain oil and natural gas properties ("Ottawa
Properties") (see Note 1) acquired by Denbury Resources Inc. for the year ended
December 31, 1995. This statement is the responsibility of the management of
Ottawa Energy, Inc., as operator of the properties. Our responsibility is to
express an opinion on this statement based on our audit.
We conducted our audit in accordance with auditing standards generally
accepted in Canada and the United States of America. Those standards require
that we plan and perform the audit to obtain reasonable assurance whether the
statement is free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the statement. An
audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation.
The accompanying statement of revenues and direct operating expenses
reflect the revenues and direct operating expenses attributable to the Ottawa
Properties as described in Note 1 to the statement and is not intended to be a
complete presentation of the revenues and expenses of the Ottawa Properties.
In our opinion, the accompanying statement presents fairly, in all material
respects, the revenues and direct operating expenses described in Note 1 of the
Ottawa Properties for the year ended December 31, 1995, in accordance with
generally accepted accounting principles.
DELOITTE & TOUCHE
Chartered Accountants
Calgary, Alberta
April 9, 1996 (April 15, 1996 as to Note 1)
F-24
<PAGE> 85
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
OF OTTAWA PROPERTIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED JUNE 30,
DECEMBER 31, -----------------
1995 1995 1996
------------ ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
(UNAUDITED)
Revenues:
Oil, natural gas and related product sales................... $2,954 $ 1,492 $ 1,766
Direct operating expenses:
Lease operating expense...................................... 659 297 320
------ ------- -------
Excess of revenue over direct operating expenses............... $2,295 $ 1,195 $ 1,446
====== ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-25
<PAGE> 86
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
OF OTTAWA PROPERTIES
1. THE PROPERTIES
The accompanying statements represent the revenues and direct operating
expenses attributable to the net interest in producing wells and certain
non-producing leases sold to Denbury Resources Inc. ("Denbury"), by Ottawa
Energy, Inc. ("Ottawa") for approximately $8.0 million, before adjustments.
Denbury closed on $5.6 million of the acquisition on April 15, 1996 and closed
on the remainder at the end of April. The properties are located in the states
of Texas, Louisiana, and Mississippi. These acquired properties and related
operations were included in the Company's consolidated financial statements
effective April 1, 1996.
2. BASIS OF PRESENTATION
Historical financial statements reflecting financial position, results of
operations and cash flows required by generally accepted accounting principles
are not presented, as such information is neither readily available on an
individual property basis nor meaningful for the properties acquired because the
entire acquisition cost is being assigned to oil and natural gas properties.
Accordingly, these statements of revenue and direct operating expenses are
presented in lieu of the financial statements required under Rule 3-05 of
Securities and Exchange Commission Regulation S-X. All of the statements and
disclosures are stated in U.S. dollars.
The accompanying statements of revenues and direct operating expenses
represent Ottawa's net ownership interest in the properties acquired by Denbury
and are presented on the full cost accrual basis of accounting. Depreciation,
depletion, and amortization, allocated general and administrative expenses,
interest expense and income, and income taxes have been excluded because the
property interests acquired represent only a portion of a business and these
expenses are not necessarily indicative of the expenses to be incurred by
Denbury.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of certain revenues and expenses as
of and for the reporting period. Estimates and assumptions are also required in
the disclosure of contingent assets and liabilities as of the date of the
financial statements. Actual results may differ from such estimates.
3. CONTINGENT LIABILITIES
Given the nature of the properties acquired and as stipulated in the
purchase agreement, Denbury is subject to loss contingencies pursuant to
existing or expected environmental laws, regulations, and leases covering the
acquired properties.
4. OIL AND NATURAL GAS RESERVES INFORMATION (UNAUDITED)
Unaudited reserve information as of December 31, 1994 and December 31, 1995
related to the properties being acquired is presented in the table below.
<TABLE>
<CAPTION>
OIL GAS
OIL AND NATURAL GAS RESERVE QUANTITIES (MBBL) (MMCF)
----------------------------------------------------------------- ------- -------
<S> <C> <C>
Proved Developed and Undeveloped Reserves:
December 31, 1994.............................................. 1,049.2 3,228.0
Production.................................................. (144.8) (615.5 )
------- -------
December 31, 1995.............................................. 904.4 2,612.5
======= =======
Proved Developed Reserves:
As of December 31, 1994........................................ 514.5 3,228.0
As of December 31, 1995........................................ 743.3 2,612.5
</TABLE>
F-26
<PAGE> 87
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
OF OTTAWA PROPERTIES -- (CONTINUED)
The standardized measure of discounted future net cash flows ("Standardized
Measure") relating to oil and natural gas reserves being acquired is calculated
in accordance with Statement of Financial Accounting Standards No. 69. The
Standardized Measure has been prepared assuming year-end selling prices adjusted
for future fixed and determinable contractual price changes, year-end
development and production costs and a 10% annual discount rate. The reserves
and the related Standardized Measure at December 31, 1995, derived from the July
1, 1996 oil and natural gas reserve report prepared by Netherland & Sewell, were
adjusted for production during 1995 and, in addition, the Standardized Measure
was also adjusted for price changes to derive reserves and the Standardized
Measure as of December 31, 1994. The Standardized Measure is not a fair market
value of the mineral interests purchased and the Standardized Measure presented
for the proved oil and natural gas reserves does not purport to present the fair
market value of oil and natural gas properties.
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
(AMOUNTS IN
THOUSANDS)
-----------------
<S> <C>
Future cash inflows.................................................. $21,593.7
Future production and development costs.............................. (5,381.4)
---------
Future net cash flows undiscounted................................... 16,212.3
10% Annual discount for estimated timing of cash flows............... (5,149.8)
---------
Discounted future net cash flows before taxes........................ 11,062.5
Discounted future income taxes....................................... (1,211.0)
---------
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS............. $ 9,851.5
=========
</TABLE>
The following are principal sources of change in the standardized measure
of discounted future net cash flows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995
-----------------
(AMOUNTS IN
THOUSANDS)
-----------------
<S> <C>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AT BEGINNING
OF PERIOD.......................................................... $ 9,035.6
Changes resulting from:
Net change in prices............................................... 2,548.6
Sales of oil and natural gas produced.............................. (2,295.2)
Net change in income taxes......................................... (420.0)
Accretion of discount.............................................. 982.6
---------
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AT END OF
PERIOD............................................................. $ 9,851.6
=========
</TABLE>
F-27
<PAGE> 88
INDEPENDENT AUDITORS' REPORT
To the Board of Directors of
Denbury Resources Inc.
We have audited the accompanying statements of revenues and direct
operating expenses attributable to certain oil and natural gas properties
("Amerada Hess Properties") (see Note 1) acquired by Denbury Resources Inc. for
the years ended December 31, 1995, 1994 and 1993. These statements are the
responsibility of the management of Amerada Hess Corporation, as owner of the
properties. Our responsibility is to express an opinion on these statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the 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.
The accompanying statements of revenues and direct operating expenses
reflect the revenues and direct operating expenses attributable to the Amerada
Hess Properties as described in Note 1 to the statements and is not intended to
be a complete presentation of the revenues and expenses of the Amerada Hess
Properties.
In our opinion, the accompanying statements present fairly, in all material
respects, the revenues and direct operating expenses of the Amerada Hess
Properties described in Note 1 for the years ended December 31, 1995, 1994 and
1993 in accordance with generally accepted accounting principles.
DELOITTE & TOUCHE, LLP
Dallas, Texas
May 22, 1996 (June 21, 1996 as to Note 1)
F-28
<PAGE> 89
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES OF
AMERADA HESS PROPERTIES
<TABLE>
<CAPTION>
SIX MONTHS ENDED
YEAR ENDED DECEMBER 31, JUNE 30,
----------------------------- ----------------
1993 1994 1995 1995 1996
------- ------- ------- ------ ------
<S> <C> <C> <C> <C> <C>
(AMOUNTS IN THOUSANDS)
<CAPTION>
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil, natural gas and related product sales... $26,087 $17,787 $18,210 $8,403 $9,893
Direct operating expenses:
Lease operating expense...................... 7,908 6,598 7,888 3,497 3,476
------- ------- ------- ------ ------
Excess of revenues over direct operating
expense...................................... $18,179 $11,189 $10,322 $4,906 $6,417
======= ======= ======= ====== ======
</TABLE>
The accompanying notes are an integral part of these statements.
F-29
<PAGE> 90
NOTES TO STATEMENT OF REVENUES
AND DIRECT OPERATING
EXPENSES OF AMERADA HESS PROPERTIES
1. THE PROPERTIES
The accompanying statements represent the revenues and direct operating
expenses attributable to the net interest in producing wells and certain
non-producing leases sold to Denbury Resources Inc. ("Denbury"), by Amerada Hess
Corporation ("Amerada Hess") for approximately $42.0 million, before adjustments
totaling approximately $5 million which included a purchase price reduction for
interim net cash flow from January 1, 1996, the effective date. The properties
are located in the states of Louisiana, Mississippi, Alabama, and Ohio. The
acquisition closed in June 1996. These acquired properties and related
operations were included in the Company's consolidated financial statements
effective May 1, 1996.
2. BASIS OF PRESENTATION
Historical financial statements reflecting financial position, results of
operations and cash flows required by generally accepted accounting principles
are not presented, as such information is neither readily available on an
individual property basis nor meaningful for the properties acquired because the
entire acquisition cost is being assigned to oil and natural gas properties.
Accordingly, these statements of revenues and direct operating expenses are
presented in lieu of the financial statements required under Rule 3-05 of
Securities and Exchange Commission Regulation S-X. All of the statements and
disclosures are stated in U.S. dollars.
The accompanying statements of revenues and direct operating expenses
represent Amerada Hess's net ownership interest in the properties acquired by
Denbury and are presented on the full cost accrual basis of accounting.
Depreciation, depletion, and amortization, allocated general and administrative
expenses, interest expense and income, and income taxes have been excluded
because the property interests acquired represent only a portion of a business
and these expenses are not necessarily indicative of the expenses to be incurred
by Denbury.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of certain revenues and expenses as
of and for the reporting period. Estimates and assumptions are also required in
the disclosure of contingent assets and liabilities as of the date of the
financial statements. Actual results may differ from such estimates.
3. CONTINGENT LIABILITIES
Given the nature of the properties acquired and as stipulated in the
purchase agreement, Denbury is subject to loss contingencies, if any, pursuant
to existing or expected environmental laws, regulations, and leases covering the
acquired properties.
F-30
<PAGE> 91
NOTES TO STATEMENT OF REVENUES
AND DIRECT OPERATING
EXPENSES OF AMERADA HESS PROPERTIES -- (CONTINUED)
4. OIL AND NATURAL GAS RESERVES INFORMATION (UNAUDITED)
Unaudited reserve information related to the properties being acquired is
presented in the table below and is derived from the July 1, 1996 oil and
natural gas reserve report prepared by Netherland & Sewell, and calculated as of
December 31, 1995, 1994 and 1993 and January 1, 1993 by adding production for
1996, 1995, 1994 and 1993 to the July 1, 1996 amount.
<TABLE>
<CAPTION>
OIL GAS
ESTIMATED QUANTITIES OF PROVED RESERVES (MBBL) (MMCF)
---------------------------------------------------------------- -------- --------
<S> <C> <C>
January 1, 1993............................................... 8,528.7 15,060.5
Production................................................. (1,219.0) (3,391.4)
-------- --------
December 31, 1993............................................. 7,309.7 11,669.1
Production................................................. (965.9) (2,303.6)
-------- --------
December 31, 1994............................................. 6,343.8 9,365.5
Production................................................. (939.7) (2,540.7)
-------- --------
December 31, 1995............................................. 5,404.1 6,824.8
======== ========
Proved Developed Reserves:
As of January 1, 1993......................................... 7,948.7 14,994.9
As of December 31, 1993....................................... 6,729.7 11,603.5
As of December 31, 1994....................................... 5,763.8 9,299.9
As of December 31, 1995....................................... 4,824.1 6,759.2
</TABLE>
F-31
<PAGE> 92
NOTES TO STATEMENT OF REVENUES
AND DIRECT OPERATING
EXPENSES OF AMERADA HESS PROPERTIES -- (CONTINUED)
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
RELATED TO OIL AND NATURAL GAS RESERVES
The standardized measure of discounted future net cash flows ("Standardized
Measure") relating to oil and natural gas reserves being acquired is calculated
in accordance with Statement of Financial Accounting Standards No. 69. The
Standardized Measure has been prepared assuming year-end selling prices adjusted
for future fixed and determinable contractual price changes, year-end
development and production costs and a 10% annual discount rate. The reserves
and the related Standardized Measure at December 31, 1995, derived from the July
1, 1996 oil and natural gas reserve report prepared by Netherland & Sewell, were
adjusted for production during 1996, 1995, 1994, and 1993 and, in addition, the
Standardized Measure was also adjusted for price changes to derive reserves and
the Standardized Measure as of December 31, 1995, 1994 and 1993. The
Standardized Measure is not a fair market value of the mineral interests
purchased and the Standardized Measure presented for the proved oil and natural
gas reserves does not purport to present the fair market value of the oil and
natural gas properties. An estimate of such value should consider among other
factors, anticipated future prices of oil and natural gas, the probability of
recoveries of existing proved reserves, the value of probable reserves and
acreage prospects, and perhaps different discount rates. It should be noted that
estimates of reserve quantities are inherently imprecise and subject to
substantial revision. Since the purchase price is approximately equal to the
Standardized Measure of discounted future net cash flows, a tax provision has
not been included.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows.................................. $147,473 $129,686 $111,476
Future production and development costs.............. (61,493) (54,895) (47,007)
-------- -------- --------
Future net cash flows undiscounted................... 85,980 74,791 64,469
10% annual discount for estimated timing of cash
flows.............................................. (34,497) (27,683) (14,978)
-------- -------- --------
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS.............................................. $ 51,483 $ 47,108 $ 49,491
======== ======== ========
</TABLE>
The following are principal sources of changes in the standardized measure
of discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
--------------------------------
1993 1994 1995
-------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS AT BEGINNING OF PERIOD....................... $ 81,869 $ 51,483 $ 47,108
Changes resulting from:
Net change in prices............................... (20,393) 1,666 7,993
Sales of oil and natural gas produced.............. (18,179) (11,189) (10,321)
Accretion of discount.............................. 8,186 5,148 4,711
-------- -------- --------
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH
FLOWS AT END OF PERIOD............................. $ 51,483 $ 47,108 $ 49,491
======== ======== ========
</TABLE>
F-32
<PAGE> 93
August 10, 1996
Mr. Matthew W. Deso
Denbury Management, Inc.
Suite 200
17304 Preston Road
Dallas, Texas 75252
Dear Mr. Deso:
In accordance with your request, we have estimated the proved reserves and
future revenue, as of July 1, 1996, to the Denbury Management, Inc. (DMI)
interest in certain oil and gas properties located in Alabama, Louisiana,
Mississippi, Ohio, and Texas as listed in the accompanying tabulations. These
properties include those acquired from Amerada Hess Corporation (AHC) effective
January 1, 1996, as well as those acquired in other transactions during the
first half of 1996. For the purposes of this report, all DMI properties except
those acquired from AHC are referred to as the Corporate Properties. This report
has been prepared using constant prices and costs and conforms to the guidelines
of the Securities and Exchange Commission (SEC).
As presented in the accompanying summary projections, Tables I through IV,
we estimate the net reserves and future net revenue to the DMI interest, as of
July 1, 1996, to be:
<TABLE>
<CAPTION>
Net Reserves Future Net Revenue
------------------------ -----------------------------
Oil Gas Present Worth
Category (Barrels) (MCF) Total at 10%
--------------------------------- ---------- ---------- ------------ -------------
<S> <C> <C> <C> <C>
Proved Developed
Producing...................... 5,787,264 21,115,993 $104,619,100 $ 83,585,700
Non-Producing.................. 4,651,331 36,935,535 131,825,700 74,257,900
Proved Undeveloped............... 1,285,964 7,755,584 26,543,100 17,411,800
---------- ---------- ------------ ------------
Total Proved........... 11,724,559 65,807,112 $262,987,900 $ 175,255,400
</TABLE>
The oil reserves shown include crude oil, condensate, and gas plant
liquids. Oil volumes are expressed in barrels which are equivalent to 42 United
States gallons. Gas volumes are expressed in thousands of standard cubic feet
(MCF) at the contract temperature and pressure bases.
This report includes summary projections of reserves and revenue for each
reserve category. For the purposes of this report, the term "lease" refers to a
single economic projection.
A-1
<PAGE> 94
The estimated reserves and future revenue shown in this report are for
proved developed producing, proved developed non-producing, and proved
undeveloped reserves. In accordance with SEC guidelines, our estimates do not
include any value for probable or possible reserves which may exist for these
properties. This report does not include any value which could be attributed to
interests in undeveloped acreage beyond those tracts for which undeveloped
reserves have been estimated.
Future gross revenue to the DMI interest is prior to deducting state
production taxes and ad valorem taxes. Future net revenue is after deducting
these taxes, future capital costs, and operating expenses, but before
consideration of federal income taxes. In accordance with SEC guidelines, the
future net revenue has been discounted at an annual rate of 10 percent to
determine its "present worth." The present worth is shown to indicate the effect
of time on the value of money and should not be construed as being the fair
market value of the properties.
For the purposes of this report, a field inspection of the properties has
not been performed nor has the mechanical operation or condition of the wells
and their related facilities been examined. We have not investigated possible
environmental liability related to the properties; therefore, our estimates do
not include any costs which may be incurred due to such possible liability.
Also, our estimates do not include any salvage value for the lease and well
equipment nor the cost of abandoning the properties.
As requested, oil prices used in this report are based on a July 1, 1996
NYMEX Cushing West Texas Intermediate posted price of $20.00 per barrel,
adjusted by lease for gravity, transportation fees, and regional posted price
differentials. The sulfur and natural gas liquids prices used for the Lambeth
7-14 located in Big Escambia Creek Field, Alabama, are $43.30 per long ton and
$14.60 per barrel, respectively. The natural gas liquids price for Gibson Field,
Louisiana, is $14.97 barrel. Gas prices used in this report are based on a July
1, 1996 NYMEX Henry Hub price of $2.65 per MMBTU, adjusted by lease for
transportation fees and regional spot market price differentials. Oil, sulfur,
natural gas liquids, and gas prices are held constant in accordance with SEC
guidelines.
Lease and well operating costs are based on operating expense records of
DMI and AHC. For non-operated properties, these costs include the per-well
overhead expenses allowed under joint operating agreements along with costs
estimated to be incurred at and below the district and field levels. As
requested, lease and well operating costs for the operated properties include
only direct lease and field level costs. Headquarters general and administrative
overhead expenses of DMI are not included. Lease and well operating costs are
held constant in accordance with SEC guidelines. Capital costs are included as
required for workovers, new development wells, and production equipment.
We have made no investigation of potential gas volume and value imbalances
which may have resulted from overdelivery or underdelivery to the DMI interest.
Therefore, our estimates of reserves and future revenue do not include
adjustments for the settlement of any such imbalances;
A-2
<PAGE> 95
our projections are based on DMI receiving its net revenue interest share of
estimated future gross gas production.
The reserves included in this report are estimates only and should not be
construed as exact quantities. They may or may not be recovered; if recovered,
the revenues therefrom and the costs related thereto could be more or less than
the estimated amounts. The sales rates, prices received for the reserves, and
costs incurred in recovering such reserves may vary from assumptions included in
this report due to governmental policies and uncertainties of supply and demand.
Also, estimates of reserves may increase or decrease as a result of future
operations.
In evaluating the information at our disposal concerning this report, we
have excluded from our consideration all matters as to which legal or
accounting, rather than engineering and geological, interpretation may be
controlling. As in all aspects of oil and gas evaluation, there are
uncertainties inherent in the interpretation of engineering and geological data;
therefore, our conclusions necessarily represent only informed professional
judgments.
The titles to the properties have not been examined by Netherland, Sewell &
Associates, Inc., nor has the actual degree or type of interest owned been
independently confirmed. The data used in our estimates were obtained from
Denbury Management, Inc.; other interest owners; various operators of the
properties; and the nonconfidential files of Netherland, Sewell & Associates,
Inc. and were accepted as accurate. We are independent petroleum engineers,
geologists, and geophysicists; we do not own an interest in these properties and
are not employed on a contingent basis. Basic geologic and field performance
data together with our engineering work sheets are maintained on file in our
office.
Very truly yours,
/s/ Frederic D. Sewell
Frederic D. Sewell
A-3
DMA:MMD
<PAGE> 96
================================================================================
NO DEALER, SALESMAN, OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT
BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY OR THE SELLING
SHAREHOLDER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY SECURITIES OTHER THAN THE SECURITIES TO
WHICH IT RELATES NOR DOES IT CONSTITUTE AN OFFER OR SOLICITATION BY ANYONE IN
ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION WOULD BE UNLAWFUL OR TO ANY
PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE
DELIVERY OF THIS PROSPECTUS NOR ANY OFFER OR SALE MADE HEREUNDER AT ANY TIME
SHALL IMPLY THAT INFORMATION HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Prospectus Summary.................... 3
Risk Factors.......................... 10
Concurrent Offerings.................. 15
Use of Proceeds....................... 15
Price Range of Common Shares and
Dividend Policy..................... 16
Capitalization........................ 17
Pro Forma Operating Results........... 18
Selected Consolidated Financial
Data................................ 21
Management's Discussion and Analysis
of Financial Condition and Results
of Operations....................... 22
Business and Properties............... 28
Management............................ 43
Interests of Management in Certain
Transactions........................ 47
Security Ownership of Certain
Beneficial Owners and Management.... 49
Description of Capital Stock.......... 50
Canadian Taxation and the Investment
Canada Act.......................... 51
Shares Eligible for Future Sale....... 53
Underwriting.......................... 54
Plan of Distribution for the TPG
Offering............................ 55
Service and Enforcement of Legal
Process............................. 55
Legal Matters......................... 55
Experts............................... 56
Available Information................. 56
Glossary.............................. 57
Index to Consolidated Financial
Statements.......................... F-1
Letter of Netherland, Sewell &
Associates, Inc..................... A-1
</TABLE>
================================================================================
================================================================================
4,400,000 SHARES
[DRI LOGO]
COMMON STOCK
-----------------------
PROSPECTUS
-----------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
JOHNSON RICE & COMPANY L.L.C.
REPRESENTATIVES OF THE UNDERWRITERS
================================================================================
<PAGE> 97
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The estimated expenses in connection with the issuance and distribution of
the securities being registered (other than underwriting discounts and
commissions) are set forth in the following itemized table:
<TABLE>
<S> <C>
SEC Registration Fee...................................................... $ 21,115
NASD Filing Fee........................................................... 6,250
Nasdaq National Market.................................................... 17,500
Toronto Stock Exchange Listing Fee........................................ 10,000
Transfer Agent's Fees..................................................... 10,000
Accounting Fees........................................................... 100,000
Legal Fees................................................................ 125,000
Engineering Fees.......................................................... 50,000
Printing.................................................................. 100,000
Miscellaneous............................................................. 60,135
--------
Total........................................................... $500,000
========
</TABLE>
- ---------------
* To be completed by amendment
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Section 124(1) of the Canada Business Corporations Act ("CBCA") provides
that, except in respect of an action by or on behalf of a corporation or body
corporate to procure a judgment in its favor, a corporation may indemnify a
director or officer of the corporation, a former director or officer of the
corporation or a person who acts or acted at the corporation's request as a
director or officer of a body corporate of which the corporation is or was a
shareholder or creditor, and his heirs and legal representatives, against all
costs, charges, and expenses, including an amount paid to settle an action or
satisfy a judgment, reasonably incurred by him in respect of any civil, criminal
or administrative action or proceeding to which he is made a party by reason of
being or having been a director or officer of such corporation or body
corporate, if:
(a) he acted honestly and in good faith with a view to the best
interests of the corporation; and
(b) in a case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, he had reasonable grounds for
believing that his conduct was lawful.
Section 124(2) of the CBCA provides that even if such a person is named in
an action by or on behalf of the corporation or body corporate to procure a
judgment in its favor, a corporation may indemnify such a person with court
approval if such person meets the standards set forth in Section 124(1).
Additionally, a person named in Section 124(1) is entitled to indemnity from the
corporation if the person seeking indemnity:
(a) was substantially successful on the merits in his defense of the
action or proceeding; and
(b) fulfills the conditions set forth above.
Section 5.02 of the Company's Bylaws contains the same standards set forth
in Section 124(1), but makes indemnification in such circumstances mandatory by
the Company.
In addition to the above provisions, the Company has also entered into an
indemnity agreement with its officers and directors, which, subject to the CBCA,
sets forth the procedures by which a person may seek indemnity and clarifies the
situations in which a person may be entitled to indemnity by the Company.
II-1
<PAGE> 98
Effective in September 1996, the Corporation modified the directors and
officers insurance covering each of its officers and directors. The insurance
provides up to $10 million of coverage for the officers and directors with
deductibles ranging from zero to $350,000, depending on the type of claim, and
$10 million coverage for the Corporation with a 25% co-insurance provision. The
Corporation has paid for 100% of the cost of this insurance.
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
During the last three years, the Company issued a total of 1,422,643
warrants to purchase Common Shares. All of these warrants were issued to
residents of the United States, except for 142,433 of the 614,143 Special
Warrants issued on April 24, 1995, which were sold to Canadian residents, as
indicated in the chart below. Of those warrants issued, 700,000 warrants are
still outstanding and 722,643 were converted to Common Shares, which are
currently outstanding. The following table sets forth certain details with
respect to the issuance of such securities. The information in this Item 15 has
been adjusted to reflect the one-for-two reverse split of the Common Shares
effective on October 10, 1996.
<TABLE>
<CAPTION>
AGGREGATE
AMOUNT AND TITLE OF OFFERING
SECURITY ISSUED DATE ISSUED PURCHASER(S) PRICE EXEMPTION
- ----------------------- ----------------- -------------------- ------------- ---------------
<C> <C> <C> <S> <C> <C>
33,500 Special December 17, 1993 Bodel, Inc. Cdn. $268,000 sec.4(2)-Rule
Warrant(1) 144A
58,500 Special April 24, 1995 State Street $274,950 sec.4
Warrant(2) Research(3)
79,788 Special April 24, 1995 Virginia Retirement $375,003 sec.4
Warrant(2) System
26,596 Special April 24, 1995 Monsanto Master $124,998 sec.4(2)-Rule
Warrant(2) Trust #22-85716 506
26,596 Special April 24, 1995 City of Detroit $124,988 sec.4(2)-Rule
Warrant(2) Policeman & Fireman 506
#97301
26,596 Special April 24, 1995 Montgomery County $124,988 sec.4(2)-Rule
Warrant(2) Employee Ret. 506
36,050 Special April 24, 1995 Mackenzie Financial $169,435 sec.4(2)-Rule
Warrant(2) Corporation(4) 506
106,383 Special April 24, 1995 Roytor & Co.(4) $500,000 sec.4(2)-Rule
Warrant(2) 506
85,106 Special April 24, 1995 Drakes Landing $400,000 sec.4(2)-Rule
Warrant(2) Associates, L.P. 506
85,106 Special April 24, 1995 JDN Partners $400,000 sec.4(2)-Rule
Warrant(2) 506
50,000 Special April 24, 1995 Mr. Michael A. $235,000 sec.4(2)-Rule
Warrant(2) Nicolais 506
33,422 Special April 24, 1995 Southcoast Capital $20,614 sec.4(2)-Rule
Warrant(2) Corp. 506
150,000 Common Share May 5, 1995 Internationale (5) sec.4(2)
Purchase Nederlanden (U.S.)
Warrant Capital Corporation
625,000 Common Share December 21, 1995 T.P.G. Advisors, $625,000 sec.4(2)-Rule
Purchase Inc. and 506
Warrant affiliates(6)
</TABLE>
- ---------------
(1) Underlying Common Shares were issued for no additional consideration in
March 1994.
(2) Underlying Common Shares were issued for no additional consideration in
August 1995.
(3) State Street Research has declined to exercise its contractual registration
rights with respect to the 58,500 Common Shares underlying these 58,500
Special Warrants.
II-2
<PAGE> 99
(4) Canadian resident.
(5) Issued pursuant to the refinancing of the Company's Credit Facility with
Internationale Nederlanden (U.S.) Capital Corporation in April 1995. As of
the date hereof, 75,000 of these common share purchase warrants have been
exercised.
(6) T.P.G. Advisors, Inc. is not the owner of record of these securities.
However, T.P.G. Advisors, Inc. is the general partner of TPG GenPar, L.P.,
which in turn is the general partner of TPG Partners, L.P. and TPG
Parallel, L.P., which are the direct beneficial owner of these securities.
On December 21, 1995, in the same transaction described in the table above
in which the Company issued 625,000 Common Share Purchase Warrants to TPG
Advisors, Inc. and certain of its affiliates, the Company issued 4,166,666
Common Shares and 1,500,000 Convertible Preferred Shares to TPG Advisors, Inc.
and certain of its affiliates for aggregate consideration of $24,375,000 and
$15,000,000, respectively. Additionally, the Company issued 333,333 Common
Shares to Tortuga Investment Corp. as a financial advisory fee in connection
with the same transaction.
The Company also issued a total of 6,642,499 Common Shares in Canada in
private transactions between the Company and Canadian citizens or corporations
during the period January 1, 1993, through December 31, 1995. In July 1993, the
Company issued 942,500 Common Shares upon the conversion of the same number of
Special Warrants sold to 27 institutional and eight individual investors in a
private placement at the price of Cdn. $8.50 per Special Warrant. In October
1993, the Company issued 500,000 Common Shares upon the exercise of the same
number of Special Warrants sold to 24 institutional investors in a private
placement at the price of Cdn. $12.00 per Special Warrant. In March 1994, the
Company issued 700,000 Common Shares upon the exercise of the same number of
Special Warrants sold to various private places at the price of Cdn. $8.00 per
Special Warrant.
The Company also issued convertible debentures to three Canadian residents
in 1994 and 1995. In April of 1994, the Company issued Cdn. $1,500,000 and Cdn.
$500,000 principal amount of 6.75% Unsecured, Convertible, Redeemable Debentures
to Tortuga Investment Corp. and Lintex Holdings Ltd., respectively, in private
placements. Additionally, in January 1995, the Company issued Cdn. $2,000,000,
$250,000 and $250,000 principal amount of 9.5% Unsecured, Convertible,
Redeemable Debentures, to Ronald G. Greene, Royal Trust of Canada and Mackenzie
Financial Corporation, respectively, in a private placement. As of the closing
of this Offering none of the debentures described in this paragraph will be
outstanding.
In addition, the Company issued 500,500 options to purchase Common Shares
during 1993, at prices ranging from Cdn. $7.40 to $15.50 per share, 138,750
options during 1994 at prices ranging from Cdn. $6.80 to $8.30 per share and
274,500 options during 1995 at prices ranging from Cdn. $7.60 to $8.50 per share
to certain employees, officers and directors under the Company's Employee Stock
Option Plan.
The Company issued 276,188, 96,250 and 10,000 Common Shares to certain
employees, officers and directors upon the exercise of stock options granted
pursuant to the Company's Employee Stock Option Plan in 1993, 1994 and 1995,
respectively.
All of the above transactions with U.S. residents were exempt from
registration under the Securities Act of 1933 (the "Act") in reliance on either
Section 4(2) of the Act or Regulation D promulgated thereunder as transactions
by an issuer not involving any public offering, or Rule 701 promulgated under
Section 3(b) of the Act as transactions pursuant to compensatory benefit plans
and contracts relating to compensation as provided under such Rule 701. The
recipients of securities in each such transaction represented their intentions
to acquire the securities for investment only and not with a view to or for sale
in connection with any distribution thereof and appropriate legends were affixed
to the same share certificates issued in such transactions.
All of the above transactions with Canadian residents were exempt from
registration under the Act, pursuant to Regulation S, promulgated under such
Act.
II-3
<PAGE> 100
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<S> <C>
1** -- Form of Underwriting Agreement.
3(a)** -- Certificate of Amendment of the Company dated October 10, 1996 and
related Articles of Amendment.
3(b) -- Articles of Continuance of the Company, as amended (incorporated by
reference as Exhibits 3(a), 3(b), 3(c), 3(d) of the Registrant's
Registration Statement on Form F-1 dated August 25, 1995) and Exhibit
4(e) of the Registrant's Registration Statement on Form S-8 dated
February 2, 1996).
3(c) -- General By-Law No. 1: A By-Law Relating Generally to the Conduct of
the Affairs of the Company, as amended (incorporated by reference as
Exhibit 3(e) of the Registrant's Registration Statement on Form F-1
dated August 25, 1995 and Exhibit 4(d) of the Registrant's
Registration Statement on Form S-8 dated February 2, 1996).
4(a) -- "Common Shares" section of Schedule "A" to Articles of Amendment of
Newscope Resources Limited dated December 13, 1990, exhibited in full
at 3(a) (incorporated by reference as Exhibit 4(a) of the
Registrant's Registration Statement on Form F-1 dated August 25,
1995).
4(b) -- Section 1.05 of General By-Law No. 1, exhibited in full at 3(b)
(incorporated by reference as Exhibit 4(b) of the Registrant's
Registration Statement on Form F-1 dated August 25, 1995).
4(c) -- Pages 8-14 of General By-Law No. 1, exhibited in full at 3(b)
(incorporated by reference as Exhibit 4(c) of the Registrant's
Registration Statement on Form F-1 dated August 25, 1995).
4(d) -- Newscope Resources Ltd. Unsecured 6.75% Convertible Debenture due
April 15, 1999 (incorporated by reference as Exhibit 4(d) of the
Registrant's Registration Statement on Form F-1 dated August 25,
1995).
4(e) -- Newscope Resources Ltd. Unsecured 9.5% Convertible Debenture due
January 13, 2000 (incorporated by reference as Exhibit 4(e) of the
Registrant's Registration Statement on Form F-1 dated August 25,
1995).
4(f) -- "Series Provisions Attaching to the Convertible Preferred Shares,
Series A" section of Schedule "A" to the Articles of Amendment of the
Company dated December 21, 1995, exhibited in full at 3(a)
(incorporated by reference as Exhibit 4(e) of the Registrant's
Registration Statement on Form S-8 dated February 2, 1996).
5** -- Opinion of Burnet, Duckworth & Palmer.
10(a) -- Shelf Registration Agreement dated April 24, 1995, by and among
Newscope Resources Ltd. and holders of Special Warrants (incorporated
by reference as Exhibit 10(a) of the Registrant's Registration
Statement on Form F-1 dated August 25, 1995).
10(b) -- Credit Agreement between Denbury Management Inc., (Borrower), Denbury
Resources Inc., (Guarantor), Denbury Holdings, Ltd., (Guarantor), and
NationsBank of Texas N.A. as agent, dated May 31, 1996 (incorporated
by reference as Exhibit 10(b) of the Registrant's Post-effective
Amendment No. 2 to Form F-1 on Form S-1 dated June 25, 1996).
10(c)* -- Common Share Purchase Warrant representing right of Internationale
Nederlanden (U.S.) Capital Corporation to purchase 150,000 Common
Shares of Newscope Resources Ltd.
</TABLE>
II-4
<PAGE> 101
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<S> <C>
10(d) -- Registration Rights Agreement dated May 5, 1995, between
Internationale Nederlanden (U.S.) Capital Corporation and Newscope
Resources Ltd. (incorporated by reference as Exhibit 10(d) of the
Registrant's Registration Statement on Form F-1 dated August 25,
1995).
10(e) -- Special Warrant Indenture between Newscope Resources Ltd. and the R-M
Trust Company dated as of April 24, 1995 (incorporated by reference
as Exhibit 10(e) of the Registrant's Registration Statement on Form
F-1 dated August 25, 1995).
10(f) -- Denbury Resources Inc. Stock Option Plan (incorporated by reference
as Exhibit 4(f) of the Registrant's Registration Statement on Form
S-8 dated February 2, 1996).
10(g) -- Denbury Resources Inc. Stock Purchase Plan (incorporated by reference
as Exhibit 4(g) of the Registrant's Registration Statement on Form
S-8 dated February 2, 1996).
10(h) -- Form of indemnification agreement between Newscope Resources Ltd. and
its officers and directors (incorporated by reference as Exhibit
10(h) of the Registrant's Form 10-K for the year ended December 31,
1995).
10(i) -- Securities Purchase Agreement and exhibits between Newscope Resources
Ltd. and TPG Partners, L.P. as of November 13, 1995 (incorporated by
reference as Exhibit 10(i) of the Registrant's Form 10-K for the year
ended December 31, 1995).
10(j) -- First Amendment to the November 13, 1995 Securities Purchase
Agreement between Newscope Resources Ltd. and TPG Partners, L.P. as
of December 21, 1995 (incorporated by reference on Exhibit 10(j) of
the Registrant's Form 10-K for the year ended December 31, 1995).
10(k)** -- Stock Purchase Agreement between TPG Partners, L.P. and Denbury
Resources Inc., dated as of October 2, 1996.
21 -- List of Subsidiaries of Denbury Resources Inc. (incorporated by
reference on Exhibit 21 of the Registrant's Form 10-K for the year
ended December 31, 1995).
23(a)** -- Consent of Deloitte & Touche.
23(b)** -- Consent of Deloitte & Touche LLP.
23(c)* -- Consent of The Scotia Group.
23(d)* -- Consent of Netherland, Sewell and Associates.
23(e)** -- Consent of Burnet, Duckworth & Palmer (contained in their opinion
filed as Exhibit 5 hereto).
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
(b) FINANCIAL STATEMENTS AND SCHEDULES. Financial statements filed as a
part of this report are listed in the Index to Financial Statements appearing
herein on page F-1.
ITEM 17. UNDERTAKINGS
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
registrant pursuant to the provisions described in Item 14 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 Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
II-5
<PAGE> 102
in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question whether
such indemnification by it is against public policy as expressed in the Act and
will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes:
(1) For purposes of determining any liability under the Securities Act
of 1933, the information omitted from the form of prospectus filed as part
of this registration statement in reliance upon Rule 430A and contained in
a 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 the purpose of determining any liability under the Securities
Act of 1933, each post-effective amendment that contains a form of
prospectus shall be deemed to be a new registration statement relating to
the securities offered therein, and the offering of such securities at that
time shall be deemed to be the initial bona fide offer thereof.
II-6
<PAGE> 103
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended,
Denbury Resources Inc., the Registrant, has duly caused this Pre-effective
Amendment No. 2 to Registration Statement No. 333-12005 to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of Dallas,
Texas, on the 22nd day of October, 1996.
DENBURY RESOURCES INC.
By: /s/ PHIL RYKHOEK
-----------------------
Phil Rykhoek
Chief Financial Officer
Pursuant to the requirements of the Securities Act of 1933, as amended,
this Registration Statement has been signed by the following persons in the
capacities and on the dates indicated, in multiple counterparts with the effect
of one original. Each person whose signature appears below as a signatory to
this Registration Statement constitutes and appoints Gareth Roberts and Phil
Rykhoek, or either one of them, his true and lawful attorney-in-fact and agent
with full power of substitution and resubstitution, for him and in his name,
place and stead, in any and all capacities, to sign any and all amendments to
this Registration Statement, and to file the same, with all exhibits thereto,
and all other documents in connection therewith, with the Securities and
Exchange Commission, granting unto said attorney-in-fact and agent, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done in and about the premises, as fully to all intents and
purposes as he might or could do in person, hereby ratifying and confirming all
that said attorney-in-fact and agent or his substitute may lawfully do or cause
to be done by virtue hereof.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
- --------------------------------------------- ---------------------------- -----------------
<C> <S> <C>
GARETH ROBERTS* President and Chief October 22, 1996
- --------------------------------------------- Executive Officer and
Gareth Roberts Director (Principal
Executive Officer)
/s/ PHIL RYKHOEK Chief Financial Officer and October 22, 1996
- --------------------------------------------- Secretary and Authorized
Phil Rykhoek Representative (Principal
Financial and Accounting
Officer)
RONALD G. GREENE* Chairman of the Board and October 22, 1996
- --------------------------------------------- Director
Ronald G. Greene
WIELAND WETTSTEIN* Director October 22, 1996
- ---------------------------------------------
Wieland Wettstein
DAVID M. STANTON* Director October 22, 1996
- ---------------------------------------------
David M. Stanton
*By: /s/ PHIL RYKHOEK
--------------------------------------
Phil Rykhoek
Attorney-in-Fact pursuant to
power of attorney contained in
original filing of this Registration
Statement
</TABLE>
II-7
<PAGE> 104
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Denbury Resources Inc.
(Formerly Newscope Resources Ltd.)
We have audited the consolidated financial statements of Denbury Resources
Inc. (Formerly Newscope Resources Ltd.) as at December 31, 1995 and 1994 and for
each of the three years in the period ended December 31, 1995 and have issued
our report thereon dated February 23, 1996, such consolidated financial
statements and report are included elsewhere in this registration statement on
Form S-1. Our audits also included the Schedule I -- Condensed Financial
Information of Denbury Resources Inc. listed in Item 16. This financial
statement schedule is the responsibility of the Company's management. Our
responsibility is to express an opinion based on our audits.
We conducted our audits in accordance with the auditing standards generally
accepted in Canada the United States of America. Those standards require that we
plan and perform the audit to obtain reasonable assurance whether the financial
statements are free of material misstatements. An audit also 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 used by management, as well as evaluating the
overall financial statement presentation.
In our opinion, such financial statement schedule, when considered in
relation to the basic consolidated financial statements taken as a whole,
present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE
Chartered Accountants
Calgary, Alberta
February 23, 1996 (October 15, 1996 as to Note 5)
S-1
<PAGE> 105
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DENBURY RESOURCES INC.
(FORMERLY NEWSCOPE RESOURCES LTD.)
UNCONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
------- -------
<S> <C> <C>
Current assets
Cash and cash equivalents............................................ $ 7 $ 8
Trade and other receivables.......................................... 2 7
------- -------
Total current assets................................................. 9 15
------- -------
Investment in subsidiaries (equity method)............................. 25,890 70,130
Loan receivable from subsidiary........................................ 1,521 1,563
Other assets........................................................... 19 28
------- -------
Total assets................................................. $27,439 $71,736
======= =======
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities............................. $ 20 $ 9
Long-term debt......................................................... 1,457 3,226
------- -------
1,477 3,235
------- -------
Convertible First Preferred Shares, Series A
1,500,000 shares authorized; issued and outstanding at December 31,
1995.............................................................. -- 15,000
------- -------
Shareholders' equity
Common shares, no par value unlimited shares authorized;
outstanding -- 11,428,809 shares at December 31, 1995 and
6,304,667 shares at December 31, 1994............................. 23,239 50,064
Retained earnings.................................................... 2,723 3,437
------- -------
Total shareholders' equity........................................ 25,962 53,501
------- -------
Total liabilities and shareholders' equity................... $27,439 $71,736
======= =======
</TABLE>
See Notes to Financial Statements.
S-2
<PAGE> 106
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DENBURY RESOURCES INC.
UNCONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
------ ------- -------
<S> <C> <C> <C>
Revenues
Oil, natural gas and related product sales............... $ 618 $ -- $ --
Interest income.......................................... 44 1 460
------ ------- -------
Total revenues........................................ 662 1 460
------ ------- -------
Expenses
Production............................................... 161 -- --
General and administrative............................... 214 149 178
Interest................................................. 9 76 282
Depletion and depreciation............................... 179 2 --
------ ------- -------
Total expenses................................... 563 227 460
------ ------- -------
Income before the following................................ 99 (226) --
Equity in net earnings of subsidiaries................... 670 1,389 714
Gain on sale of Canadian properties...................... 966 -- --
------ ------- -------
Income before income taxes................................. 1,735 1,163 714
Provision for federal income taxes......................... -- -- --
------ ------- -------
Net income................................................. $1,735 $ 1,163 $ 714
====== ======= =======
Net income per common share................................ $ .35 $ .19 $ .10
====== ======= =======
Average number of common shares outstanding................ 4,990 6,240 6,870
====== ======= =======
</TABLE>
See Notes to Financial Statements.
S-3
<PAGE> 107
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DENBURY RESOURCES INC.
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1993 1994 1995
-------- ------- --------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income.................................................. $ 1,735 $ 1,163 $ 714
Adjustments needed to reconcile to net cash flow provided by
operations:
Depreciation, depletion and amortization................. 179 11 17
Gain on sale of Canadian properties...................... (966) -- --
Equity on net earnings of subsidiaries................... (670) (1,389) (714)
-------- ------- --------
278 (215) 17
Changes in working capital items relating to operations:
Trade and other receivables.............................. 212 8 (4)
Accounts payable and accrued liabilities................. (203) (77) (12)
-------- ------- --------
Net cash flow provided by operations.......................... 287 (284) 1
-------- ------- --------
Cash flow from investing activities:
Investments in subsidiaries.............................. (19,381) (1,518) (43,569)
Proceeds on disposal of Canadian properties.............. 3,129 -- --
Net purchases of other assets............................ (41) (15) 7
-------- ------- --------
Net cash used for investing activities........................ (16,293) (1,533) (43,562)
-------- ------- --------
Cash flow from financing activities:
Issuance of subordinated debt............................ -- 1,451 1,772
Issuance of common stock................................. 15,148 367 26,825
Issuance of preferred stock.............................. -- -- 15,000
Costs of debt financing.................................. -- -- (35)
-------- ------- --------
Net cash provided by financing activities..................... 15,148 1,818 43,562
-------- ------- --------
Net increase (decrease) in cash and cash equivalents.......... (858) 1 1
Cash and cash equivalents at beginning of year................ 864 6 7
-------- ------- --------
Cash and cash equivalents at end of year...................... $ 6 $ 7 $ 8
======== ======= ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................... $ 9 $ 76 $ 282
</TABLE>
See Notes to Financial Statements.
S-4
<PAGE> 108
DENBURY RESOURCES INC.
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRATION
NOTES TO FINANCIAL STATEMENTS
NOTE 1. ACCOUNTING POLICIES
Consolidation -- The financial statements of Denbury Resources Inc. reflect
the investment in subsidiaries using the equity method.
Income Taxes -- No provision for income taxes has been made in the
Statement of Income because the Company has losses for Canadian tax purposes.
NOTE 2. CONSOLIDATED FINANCIAL STATEMENTS
Reference is made to the Consolidated Financial Statements and related
notes of Denbury Resources Inc. and Subsidiaries for additional information.
NOTE 3. DEBT AND GUARANTEES
Information on the long-term debt of Denbury Resources Inc. is disclosed in
Note 3 to the Consolidated Financial Statements. Denbury Resources Inc. has
guaranteed the subsidiaries' bank credit line.
NOTE 4. DIVIDENDS RECEIVED
Subsidiaries' of Denbury Resources Inc. do not make formal cash dividend
declarations and distributions to the parent and are currently restricted from
doing so under the subsidiaries bank loan agreement.
NOTE 5. SUBSEQUENT EVENTS
The Company held a Special Meeting of its shareholders on October 9, 1996
and passed three resolutions. The first resolution ratified and approved an
amendment to the Articles of Continuance to consolidate the number of issued and
outstanding Common Shares on the basis of one (1) Common Share for each two (2)
Common Shares outstanding. All applicable shares and per share data have been
adjusted for the stock split. The second resolution ratified and approved an
amendment to the Articles of Continuance which governs the conversion provision
attaching to the Convertible Preferred Shares which gave the Company the right
to require the holders of the Preferred Shares to convert their Preferred Shares
into Common Shares at any time, provided that the conversion rate in effect as
of January 1, 1999 would be used for required conversion prior to that date.
Prior to this Preferred Amendment, the Company could not require a conversion of
these Preferred Shares prior to January 1, 1999. Subject to, and simultaneously
with, the completion of this Offering, the Company plans to require a
conversion, thereby increasing the number of Common Shares of the Company by
2,816,372 and eliminating the outstanding Preferred Shares. The third resolution
passed provides for the Company to issue Common Shares at an issue price of Cdn.
$14.72 per share in payment of the interest that would be due on the 9 1/2%
Convertible Debentures from the conversion date through and including April 13,
1997, if the holders of the debentures convert their debentures into Common
Shares prior to April 13, 1997. On October 15, 1996, these debentures were
converted by the holders in accordance with their terms into 308,642 Common
Shares along with an additional 7,948 Common Shares for the interim interest.
S-5
<PAGE> 109
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<S> <C>
1** -- Form of Underwriting Agreement.
3(a)** -- Certificate of Amendment of the Company dated October 10, 1996 and
related Articles of Amendment.
3(b) -- Articles of Continuance of the Company, as amended (incorporated by
reference as Exhibits 3(a), 3(b), 3(c), 3(d) of the Registrant's
Registration Statement on Form F-1 dated August 25, 1995) and Exhibit
4(e) of the Registrant's Registration Statement on Form S-8 dated
February 2, 1996).
3(c) -- General By-Law No. 1: A By-Law Relating Generally to the Conduct of
the Affairs of the Company, as amended (incorporated by reference as
Exhibit 3(e) of the Registrant's Registration Statement on Form F-1
dated August 25, 1995 and Exhibit 4(d) of the Registrant's
Registration Statement on Form S-8 dated February 2, 1996).
4(a) -- "Common Shares" section of Schedule "A" to Articles of Amendment of
Newscope Resources Limited dated December 13, 1990, exhibited in full
at 3(a) (incorporated by reference as Exhibit 4(a) of the
Registrant's Registration Statement on Form F-1 dated August 25,
1995).
4(b) -- Section 1.05 of General By-Law No. 1, exhibited in full at 3(b)
(incorporated by reference as Exhibit 4(b) of the Registrant's
Registration Statement on Form F-1 dated August 25, 1995).
4(c) -- Pages 8-14 of General By-Law No. 1, exhibited in full at 3(b)
(incorporated by reference as Exhibit 4(c) of the Registrant's
Registration Statement on Form F-1 dated August 25, 1995).
4(d) -- Newscope Resources Ltd. Unsecured 6.75% Convertible Debenture due
April 15, 1999 (incorporated by reference as Exhibit 4(d) of the
Registrant's Registration Statement on Form F-1 dated August 25,
1995).
4(e) -- Newscope Resources Ltd. Unsecured 9.5% Convertible Debenture due
January 13, 2000 (incorporated by reference as Exhibit 4(e) of the
Registrant's Registration Statement on Form F-1 dated August 25,
1995).
4(f) -- "Series Provisions Attaching to the Convertible Preferred Shares,
Series A" section of Schedule "A" to the Articles of Amendment of the
Company dated December 21, 1995, exhibited in full at 3(a)
(incorporated by reference as Exhibit 4(e) of the Registrant's
Registration Statement on Form S-8 dated February 2, 1996).
5** -- Opinion of Burnet, Duckworth & Palmer.
10(a) -- Shelf Registration Agreement dated April 24, 1995, by and among
Newscope Resources Ltd. and holders of Special Warrants (incorporated
by reference as Exhibit 10(a) of the Registrant's Registration
Statement on Form F-1 dated August 25, 1995).
10(b) -- Credit Agreement between Denbury Management Inc., (Borrower), Denbury
Resources Inc., (Guarantor), Denbury Holdings, Ltd., (Guarantor), and
NationsBank of Texas N.A. as agent, dated May 31, 1996 (incorporated
by reference as Exhibit 10(b) of the Registrant's Post-effective
Amendment No. 2 to Form F-1 on Form S-1 dated June 25, 1996).
10(c)* -- Common Share Purchase Warrant representing right of Internationale
Nederlanden (U.S.) Capital Corporation to purchase 150,000 Common
Shares of Newscope Resources Ltd.
</TABLE>
<PAGE> 110
<TABLE>
<CAPTION>
EXHIBIT
NUMBER EXHIBIT
- -------------------- ------------------------------------------------------------------------
<S> <C>
10(d) -- Registration Rights Agreement dated May 5, 1995, between
Internationale Nederlanden (U.S.) Capital Corporation and Newscope
Resources Ltd. (incorporated by reference as Exhibit 10(d) of the
Registrant's Registration Statement on Form F-1 dated August 25,
1995).
10(e) -- Special Warrant Indenture between Newscope Resources Ltd. and the R-M
Trust Company dated as of April 24, 1995 (incorporated by reference
as Exhibit 10(e) of the Registrant's Registration Statement on Form
F-1 dated August 25, 1995).
10(f) -- Denbury Resources Inc. Stock Option Plan (incorporated by reference
as Exhibit 4(f) of the Registrant's Registration Statement on Form
S-8 dated February 2, 1996).
10(g) -- Denbury Resources Inc. Stock Purchase Plan (incorporated by reference
as Exhibit 4(g) of the Registrant's Registration Statement on Form
S-8 dated February 2, 1996).
10(h) -- Form of indemnification agreement between Newscope Resources Ltd. and
its officers and directors (incorporated by reference as Exhibit
10(h) of the Registrant's Form 10-K for the year ended December 31,
1995).
10(i) -- Securities Purchase Agreement and exhibits between Newscope Resources
Ltd. and TPG Partners, L.P. as of November 13, 1995 (incorporated by
reference as Exhibit 10(i) of the Registrant's Form 10-K for the year
ended December 31, 1995).
10(j) -- First Amendment to the November 13, 1995 Securities Purchase
Agreement between Newscope Resources Ltd. and TPG Partners, L.P. as
of December 21, 1995 (incorporated by reference on Exhibit 10(j) of
the Registrant's Form 10-K for the year ended December 31, 1995).
10(k)** -- Stock Purchase Agreement between TPG Partners, L.P. and Denbury
Resources Inc., dated as of October 2, 1996.
21 -- List of Subsidiaries of Denbury Resources Inc. (incorporated by
reference on Exhibit 21 of the Registrant's Form 10-K for the year
ended December 31, 1995).
23(a)** -- Consent of Deloitte & Touche.
23(b)** -- Consent of Deloitte & Touche LLP.
23(c)* -- Consent of The Scotia Group.
23(d)* -- Consent of Netherland, Sewell and Associates.
23(e)** -- Consent of Burnet, Duckworth & Palmer (contained in their opinion
filed as Exhibit 5 hereto).
</TABLE>
- ---------------
* Previously filed.
** Filed herewith.
<PAGE> 1
EXHIBIT 1
Draft of October 22, 1996
3,600,000 Shares
DENBURY RESOURCES, INC.
Common Stock
UNDERWRITING AGREEMENT
__________, 1996
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
JOHNSON RICE & COMPANY L.L.C.
As representatives of the
several underwriters
named in Schedule I hereto
277 Park Avenue
New York, New York 10172
Dear Sirs:
Denbury Resources, Inc., a corporation organized under the
Canada Business Corporations Act (the "Company"), proposes to issue and sell
3,600,000 shares of its Common Shares (the "Firm Shares") to the several
underwriters named in Schedule I hereto (the "Underwriters"). The Company also
proposes to issue and sell to the several Underwriters not more than 540,000
additional shares of its Common Shares (the "Additional Shares") if requested
by the Underwriters as provided in Section 2 hereof. The Firm Shares and the
Additional Shares are herein collectively called the Shares. The common shares
of the Company to be outstanding after giving effect to the sales contemplated
hereby are hereinafter referred to as the Common Shares.
1. Registration Statement and Prospectus. The Company
has prepared and filed with the Securities and Exchange Commission (the
"Commission") in accordance with the provisions of the Securities Act of 1933,
as amended, and the rules and regulations of the Commission thereunder
(collectively called the "1933 Act"), a registration statement on Form S-1
(File No. 333-12005) including a prospectus relating to the Shares, which may
be amended. The registration statement as amended at the time when it becomes
effective, including a registration statement (if any) filed pursuant to Rule
462(b) under the 1933 Act increasing the size of the offering
<PAGE> 2
registered under the 1933 Act and information (if any) deemed to be part of the
registration statement at the time of effectiveness pursuant to Rule 430A or
Rule 434 under the 1933 Act, is hereinafter referred to as the Registration
Statement; and the prospectus (including any prospectus subject to completion
taken together with any term sheet meeting the requirements of Rule 434(b) or
Rule 434(c) under the 1933 Act) in the form first used to confirm sales of
Shares is hereinafter referred as the Prospectus. The Company has also
prepared and filed a short form preliminary prospectus (the "Canadian
Preliminary Prospectus") relating to the Shares with the securities commissions
(the "Canadian Securities Commissions" and, together with the Commission, the
"Securities Commissions") of the provinces of British Columbia, Alberta and
Ontario (the "Offering Provinces") in accordance with the provisions of the
securities legislation, rules and regulations applicable therein, including
National Policy No. 47 (collectively, the "Canadian Securities Legislation"),
and shall prepare and file a final short form prospectus (the "Canadian Final
Prospectus") as soon as possible and in any event not later than 5:00 p.m.
(local time) on __________, 1996, or such other time and date as the Company
and the Underwriters may agree in writing with the Canadian Securities
Commissions and the Company shall have obtained either (a) a final expedited
review receipt (the "Expedited Review Receipt") that evidences a final receipt
has been issued for the Canadian Final Prospectus by each of the Canadian
Securities Commissions under the expedited review system and procedures
provided for in the Memorandum of Understanding for Expedited Review of Short
Form Prospectus and Renewal Annual Information Forms dated November 15, 1994
(the "Expedited Review Process") or (b) a receipt from each of the Canadian
Securities Commissions, dated the date of filing, and shall have taken all
other steps and proceedings as may be necessary to enable the Shares to be
offered and sold to the public in all of the Offering Provinces through First
Energy Capital Corp. (the "Canadian Underwriter") or any other registrants who
comply with the relevant provisions of the applicable Canadian Securities
Legislation, not later than the close of business on the date of filing (or
such other time and date as the Company and the Underwriters may agree to in
writing) and, if an Expedited Review Receipt is issued, the Company shall file
within three (3) business days the material required in accordance with the
Expedited Review Process in the "Participating Jurisdictions" other than the
"Designated Jurisdiction" (as those terms are defined in the Expedited Review
Process). Any amendment to the Canadian Final Prospectus, any amended
prospectus or auxiliary material, information, evidence, return, report,
application, statement or document that may be filed by or on behalf of the
Company under the Canadian Securities Legislation prior to the Closing Time or
prior to the expiry of the period of distribution of the Shares in the Offering
Provinces, is referred to herein collectively as the "Supplementary Material."
2. Agreements to Sell and Purchase. On the basis of the
representations and warranties contained in this Agreement, and subject to its
terms and conditions, the Company agrees to issue and sell, and each
Underwriter agrees, severally and not jointly, to purchase from the Company at
a price per share of U.S. $______ (the "Purchase Price") the number of Firm
Shares set forth opposite the name of such Underwriter in Schedule I hereto.
On the basis of the representations and warranties contained
in this Agreement, and subject to its terms and conditions, the Company agrees
to issue and sell the Additional Shares and
2
<PAGE> 3
the Underwriters shall have the right to purchase, severally and not jointly,
up to 540,000 Additional Shares from the Company at the Purchase Price.
Additional Shares may be purchased solely for the purpose of covering
over-allotments made in connection with the offering of the Firm Shares. The
Underwriters may exercise their right to purchase Additional Shares in whole or
in part from time to time by giving written notice thereof to the Company
within 30 days after the date of this Agreement. You shall give any such
notice on behalf of the Underwriters and such notice shall specify the
aggregate number of Additional Shares to be purchased pursuant to such exercise
and the date for payment and delivery thereof. The date specified in any such
notice shall be a business day (i) no earlier than the Closing Date (as
hereinafter defined), (ii) no later than ten business days after such notice
has been given and (iii) no earlier than two business days after such notice
has been given. If any Additional Shares are to be purchased, each
Underwriter, severally and not jointly, agrees to purchase from the Company the
number of Additional Shares (subject to such adjustments to eliminate
fractional shares as you may determine) which bears the same proportion to the
total number of Additional Shares to be purchased from the Company as the
number of Firm Shares set forth opposite the name of such Underwriter in
Schedule I bears to the total number of Firm Shares.
The Company hereby agrees and the Company shall, concurrently
with the execution of this Agreement, deliver an agreement executed by (i) each
of the directors and officers of the Company, and (ii) the Texas Pacific Group,
pursuant to which each such person agrees, not to offer, sell, contract to
sell, grant any option to purchase, or otherwise dispose of any Common Shares
of the Company or any securities convertible into or exercisable or
exchangeable for such Common Shares or in any other manner transfer all or a
portion of the economic consequences associated with the ownership of any such
Common Shares, except to the Underwriters pursuant to this Agreement, for a
period of 120 days after the date of the Prospectus without the prior written
consent of Donaldson, Lufkin & Jenrette Securities Corporation.
Notwithstanding the foregoing, during such period (i) the Company may grant
stock options pursuant to the Company's existing stock option plan and (ii) the
Company may issue Common Shares upon the exercise of an option or warrant or
the conversion of a security outstanding on the date hereof or pursuant to the
Company's Employee Stock Purchase Plan.
3. Terms of Public Offering. The Company is advised by
you that (i) the Underwriters, other than the Canadian Underwriter, propose to
make a public offering of their respective portions of the Shares in the United
States as soon as you deem advisable after the Registration Statement has been
declared effective and initially to offer such Shares upon the terms set forth
in the Prospectus and (ii) the Canadian Underwriter proposes to make a public
offering of its portion of the Shares in the Offering Provinces as soon as you
deem advisable after an Expedited Review Receipt has been obtained from the
Alberta Securities Commission or a receipt for the Canadian Final Prospectus
has been issued by each of the Canadian Securities Commissions and to offer
such Shares upon the terms set forth in the Canadian Final Prospectus.
The Company understands that the Shares allotted to the
Canadian Underwriter will be offered and sold only in the Offering Provinces
pursuant to the Canadian Final Prospectus and that the Firm Shares allocated to
the other Underwriters will not be offered and sold in the Offering
3
<PAGE> 4
Provinces unless such Firm Shares are reallotted by the other Underwriters to
the Canadian Underwriter.
4. Delivery and Payment. Delivery to the Underwriters
of and payment for the Firm Shares shall be made at 10:00 A.M., New York City
time, on the third or fourth business day unless otherwise permitted by the
Commission pursuant to Rule 15c6-1 of the Securities Exchange Act of 1934, as
amended (the "Exchange Act")(the "Closing Date") following the date of the
initial public offering, and in any event not later than _________, 1996, at
such place as you shall designate. The Closing Date and the location of
delivery of and the form of payment for the Firm Shares may be varied by
agreement between you and the Company.
Delivery to the Underwriters of and payment for any Additional
Shares to be purchased by the Underwriters shall be made at such place as you
shall designate at 10:00 A.M., New York City time, on the date specified in the
applicable exercise notice given by you pursuant to Section 2 (an "Option
Closing Date"). Subject to Section 2 hereof, any such Option Closing Date and
the location of delivery of and the form of payment for such Additional Shares
may be varied by agreement between you and the Company.
Certificates for the Shares shall be registered in such names
and issued in such denominations as you shall request in writing not later than
two full business days prior to the Closing Date or an Option Closing Date, as
the case may be. Such certificates shall be made available to you for
inspection not later than 9:30 A.M., New York City time, on the business day
next preceding the Closing Date or the applicable Option Closing Date, as the
case may be. Certificates in definitive form evidencing the Shares shall be
delivered to you on the Closing Date or the applicable Option Closing Date, as
the case may be, with any transfer taxes thereon duly paid by the Company, for
the respective accounts of the several Underwriters, against payment of the
Purchase Price therefor by wire or certified or official bank checks payable in
Federal funds to the order of the Company.
5. Agreements of the Company. The Company agrees with
you:
(a) To use its best efforts to cause the
Registration Statement to become effective at the earliest possible
time and to obtain an Expedited Review Receipt from the Alberta
Securities Commission or receipts from the Canadian Securities
Commissions for the Canadian Final Prospectus at the earliest possible
time.
(b) To advise you promptly and, if requested by
you, to confirm such advice in writing, (i) when the Registration
Statement has become effective and when any post-effective amendment
to it becomes effective, (ii) of any request by the Commission for
amendments to the Registration Statement or amendments or supplements
to the Prospectus or for additional information, (iii) when the
Expedited Review Receipt has been obtained from the Alberta Securities
Commission or receipts have been obtained from each of the Canadian
Securities Commissions for the Canadian Final Prospectus or any
Supplementary
4
<PAGE> 5
Material has been filed with the Canadian Securities Commissions, (iv)
any request from the Canadian Securities Commissions for amendments or
supplements to the Canadian Final Prospectus; (v) of the issuance by
the Commission of any stop order suspending the effectiveness of the
Registration Statement or of the suspension of qualification of the
Shares for offering or sale in any jurisdiction, or the initiation of
any proceeding for such purposes, (vi) of the issuance by any Canadian
Securities Commission of any order having the effect of ceasing or
suspending the distribution of the Shares or ceasing or suspending the
trading of the common shares of the Company in any of the Offering
Provinces or preventing or suspending the use in any of the Offering
Provinces of the Canadian Preliminary Prospectus or the Canadian Final
Prospectus, or of the institution or, to the knowledge of the Company,
threatening of any proceedings for any such purpose, and (vii) of the
happening of any event during the period referred to in paragraph (f)
below which makes any statement of a material fact made in the
Registration Statement, the Prospectus or the Canadian Final
Prospectus untrue or which requires the making of any additions to or
changes in the Registration Statement, the Prospectus or the Canadian
Final Prospectus in order to make the statements therein not
misleading. The Company will use every reasonable effort to prevent
the issuance of any such stop order or of any such order ceasing or
suspending the distribution of the Shares, ceasing or suspending the
trading of the common shares of the Company in any of the Offering
Provinces or preventing or suspending such use in any of the Offering
Provinces of the Canadian Preliminary Prospectus or the Canadian Final
Prospectus and, if any such order is issued, to obtain the lifting
thereof at the earliest possible time.
(c) To furnish to you, without charge, four
signed copies of the Registration Statement as first filed with the
Commission and of each amendment to it, including all exhibits, and to
furnish to you and each Underwriter designated by you such number of
conformed copies of the Registration Statement as so filed and of each
amendment to it, without exhibits, as you may reasonably request.
(d) To furnish Donaldson, Lufkin & Jenrette
Securities Corporation and the Canadian Underwriter contemporaneously
with the filing thereof with the Alberta Securities Commission, a copy
of the Canadian Final Prospectus and any Supplementary Material,
approved, signed and certified as required by the securities laws of
the Offering Provinces, and shall cause commercial copies of the
Canadian Final Prospectus and any Supplementary Material to be
delivered to the Canadian Underwriter without charge in such cities in
the Offering Provinces and in such numbers as the Canadian Underwriter
may reasonably request as soon as possible and in any event within 24
hours of the time such material shall have been filed with the Alberta
Securities Commission.
(e) Not to file any amendment or supplement to
the Registration Statement, whether before or after the time when it
becomes effective, or to make any amendment or supplement to the
Prospectus or the Canadian Final Prospectus (including the issuance or
filing of any term sheet within the meaning of Rule 434) or to file
any other Supplementary Material of which you shall not previously
have been advised or to which
5
<PAGE> 6
you shall reasonably object; and to prepare and file with the
Securities Commissions, promptly upon your reasonable request, any
amendment to the Registration Statement or Canadian Final Prospectus
or supplement to the Prospectus (including the issuance or filings of
any term sheet within the meaning of Rule 434) which may be necessary
or advisable in connection with the distribution of the Shares by you,
and to use its best efforts to cause the same to become promptly
effective.
(f) Promptly after the Registration Statement
becomes effective and an Expedited Review Receipt or receipts for the
Canadian Final Prospectus have been obtained from the Canadian
Securities Commissions, and from time to time thereafter for such
period as in the opinion of counsel for the Underwriters a prospectus
is required by law to be delivered in connection with sales by an
Underwriter or a dealer, to furnish to each Underwriter and dealer as
many copies of the Prospectus or the Canadian Final Prospectus (and of
any amendment or supplement to the Prospectus or the Canadian Final
Prospectus) as such Underwriter or dealer may reasonably request.
(g) If during the period specified in paragraph
(f) any event shall occur as a result of which, in the opinion of
counsel for the Underwriters it becomes necessary to amend or
supplement the Prospectus and/or the Canadian Final Prospectus in
order to make the statements therein, in the light of the
circumstances when the Prospectus or the Canadian Final Prospectus is
delivered to a purchaser, not misleading, or if it is necessary to
amend or supplement the Prospectus and/or the Canadian Final
Prospectus to comply with any law, forthwith to prepare and file with
the appropriate Securities Commission an appropriate amendment or
supplement to the Prospectus and/or the Canadian Final Prospectus so
that the statements in the Prospectus and/or the Canadian Final
Prospectus, as so amended or supplemented, will not in the light of
the circumstances when it is so delivered, be misleading, or so that
the Prospectus and/or the Canadian Final Prospectus will comply with
law, and to furnish to each Underwriter and to such dealers as you
shall specify, such number of copies thereof as such Underwriter or
dealers may reasonably request.
(h) Prior to any public offering of the Shares,
to cooperate with you and counsel for the Underwriters in connection
with the registration or qualification of the Shares for offer and
sale by the several Underwriters and by dealers under the state
securities or Blue Sky laws of such jurisdictions as you may request,
to continue such qualification in effect so long as required for
distribution of the Shares and to file such consents to service of
process or other documents as may be necessary in order to effect such
registration or qualification.
(i) To mail and make generally available to its
stockholders as soon as reasonably practicable an earnings statement
covering a period of at least twelve months after the effective date
of the Registration Statement (but in no event commencing later than
90 days after such date) which shall satisfy the provisions of Section
11(a) of the 1933 Act, and to advise you in writing when such
statement has been so made available.
6
<PAGE> 7
(j) During the period of five years after the
date of this Agreement, (i) to mail as soon as reasonably practicable
after the end of each fiscal year to the registered holders of its
Common Shares a financial report of the Company and its subsidiaries
on a consolidated basis (and a similar financial report of all
unconsolidated subsidiaries, if any), all such financial reports to
include a consolidated balance sheet, a consolidated statement of
operations, a consolidated statement of cash flows and a consolidated
statement of shareholders' equity as of the end of and for such fiscal
year, together with comparable information as of the end of and for
the preceding year, certified by independent certified public
accountants, and (ii) to make generally available as soon as
practicable after the end of each quarterly period (except for the
last quarterly period of each fiscal year) to such holders, a
consolidated balance sheet, a consolidated statement of operations and
a consolidated statement of cash flows (and similar financial reports
of all unconsolidated subsidiaries, if any) as of the end of and for
such period, and for the period from the beginning of such year to the
close of such quarterly period, together with comparable information
for the corresponding periods of the preceding year.
(k) During the period referred to in paragraph
(j), to furnish to you as soon as available a copy of each report or
other publicly available information of the Company mailed to the
registered holders of Common Shares or filed with the Securities
Commissions or any of them and such other publicly available
information concerning the Company and its subsidiaries as you may
reasonably request.
(l) To pay all costs, expenses, fees and taxes
incident to (i) the preparation, printing, filing and distribution
under the 1933 Act of the Registration Statement (including financial
statements and exhibits), each preliminary prospectus and all
amendments and supplements to any of them prior to or during the
period specified in paragraph (f), (ii) the printing and delivery of
the Prospectus, the Canadian Preliminary Prospectus and the Canadian
Final Prospectus and all amendments or supplements to any of them
during the period specified in paragraph (f), (iii) the printing and
delivery of this Agreement, the Preliminary and Supplemental Blue Sky
Memoranda and all other agreements, memoranda, correspondence and
other documents printed and delivered in connection with the offering
of the Shares (including in each case any disbursements of counsel for
the Underwriters relating to such printing and delivery), (iv) the
registration or qualification of the Shares for offer and sale under
the securities or Blue Sky laws of the several states (including in
each case the reasonable fees and disbursements of counsel for the
Underwriters relating to such registration or qualification and
memoranda relating thereto), (v) the registration or qualification of
the Shares for offer and sale in the Offering Provinces (including in
each case the reasonable fees and disbursements of Canadian counsel
for the Underwriters relating to such registration of qualification
and opinions relating thereto), (vi) filings and clearance with the
National Association of Securities Dealers, Inc. ("NASD") in
connection with the offering, (vii) the listing of the Shares on the
National Association of Securities Dealers Automated Quotation system
("Nasdaq") National Market and The Toronto Stock Exchange and (viii)
furnishing such copies of the Registration
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<PAGE> 8
Statement, the Prospectus, the Canadian Preliminary Prospectus, the
Canadian Final Prospectus and all amendments and supplements thereto
as may be requested for use in connection with the offering or sale of
the Shares by the Underwriters or by dealers to whom Shares may be
sold. Except as otherwise provided in this Section 5(l), the
Underwriters shall pay their own costs and expenses, including the
costs and expenses of their counsel, any transfer taxes on the Shares
which they may sell and the expenses of advertising any offering of
the Shares made by the Underwriters.
(m) To use its best efforts to maintain the
inclusion of such Common Shares in the Nasdaq National Market (or on a
national securities exchange) for a period of three years after the
effective date of the Registration Statement.
(n) The Company will use the net proceeds
received by them from the sale of the Shares in the manner specified
in the Prospectus under "Use of Proceeds."
(o) Prior to the time at which the distribution
of the Shares is completed, the Company shall not, directly or
indirectly, (i) take any action designed to cause or result in, or
that constitutes or might reasonably be expected to constitute,
stabilization or manipulation of the price of any security of the
Company to facilitate the sale or resale of the Shares or (ii) bid
for, purchase or pay anyone any compensation for soliciting purchases
of, the Shares.
(p) To use its best efforts to do and perform all
things required or necessary to be done and performed under this
Agreement by the Company prior to the Closing Date or any Option
Closing Date, as the case may be.
6. Representations and Warranties of the Company. The
Company represents and warrants to each Underwriter that:
(a) The Registration Statement has become
effective; no stop order suspending the effectiveness of the
Registration Statement is in effect, and no proceedings for such
purpose are pending before or threatened by the Commission; and no
Canadian Securities Commission has issued any order having the effect
of ceasing or suspending the distribution of the Shares or ceasing or
suspending the trading of the common shares of the Company in any of
the Offering Provinces or preventing or suspending the use in any of
the Offering Provinces of the Canadian Preliminary Prospectus or the
Canadian Final Prospectus and, to the knowledge of the Company, no
proceedings for any such purpose have been instituted or threatened.
(b) (i) Each part of the Registration Statement,
when such part became effective, did not contain and each such part,
as amended or supplemented, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading, (ii) the
8
<PAGE> 9
Registration Statement and the Prospectus comply and, as amended or
supplemented, if applicable, will comply in all material respects with
the 1933 Act and (iii) the Prospectus does not contain and, as amended
or supplemented, if applicable, will not contain any untrue statement
of a material fact or omit to state a material fact necessary to make
the statements therein, in the light of the circumstances under which
they were made, not misleading, except that the representations and
warranties set forth in this paragraph (b) do not apply to statements
or omissions in the Registration Statement or the Prospectus based
upon information furnished to the Company in writing by such
Underwriter through you expressly for use therein.
(c) (i) At the time that the Canadian Securities
Commissions issue an Expedited Review Receipt or receipts for the
Canadian Final Prospectus, the Canadian Final Prospectus, as
subsequently amended, if applicable, will not contain any untrue
statement of a material fact or omit to state a material fact required
to be stated therein or necessary to make the statements therein not
misleading in the light of the circumstances under which they were
made and (ii) the Canadian Final Prospectus complies and, as amended,
if applicable, will comply in all material respects with the Canadian
Securities Legislation as interpreted and applied by the Canadian
Securities Commissions.
(d) Each preliminary prospectus filed as part of
the registration statement as originally filed or as part of any
amendment thereto, or filed pursuant to Rule 424 under the 1933 Act,
and each Registration Statement filed pursuant to Rule 462(b) under
the 1933 Act, if any, complied when so filed in all material respects
with the 1933 Act; and did not contain an untrue statement of a
material fact or omit to state a material fact required to be stated
therein or necessary to make the statements therein, in the light of
the circumstances under which they were made, not misleading.
(e) The Company does not own or control, directly
or indirectly, any corporation, association, trust or other entity
other than those entities listed on Schedule II hereto. Such Schedule
II lists under the caption "U.S. SUBSIDIARIES" those subsidiaries that
are organized in the United States (the "U.S. Subsidiaries") and under
the caption "CANADIAN SUBSIDIARIES" those subsidiaries that are
organized in Canada (the "Canadian Subsidiaries," and together with
the U.S. Subsidiaries, the "Subsidiaries"). The Company and each of
the Subsidiaries has been duly organized, is validly existing as a
corporation or limited liability company in good standing under the
laws of its jurisdiction of incorporation and has full power and
authority to carry on its business as it is currently being conducted
and to own, lease and operate its properties, and each is duly
qualified and is in good standing as an extraprovincial or foreign
corporation or limited liability company authorized to do business in
each jurisdiction in which the nature of its business or its ownership
or leasing of property requires such qualification, except where the
failure to be so qualified would not have a material adverse effect on
the Company and the Subsidiaries, taken as a whole.
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<PAGE> 10
(f) All of the outstanding shares of capital
stock of, or other ownership interests in, each of the Subsidiaries
have been duly authorized and validly issued and are fully paid and
non-assessable, and are owned by the Company, free and clear of any
security interest, claim, lien, encumbrance or adverse interest of any
nature, except for the lien of Nationsbank of Texas, N.A., with
respect to the Company's $150 million credit facility described in the
Prospectus.
(g) All the outstanding shares of capital stock
of the Company have been duly authorized and validly issued and are
fully paid, non-assessable and not subject to any preemptive or
similar rights (except for preemptive rights granted to the TPG
Partners, L.P. and TPG Parallel, L.P. (collectively, "TPG") pursuant
to the Securities Purchase Agreement, dated as of November 13, 1995
(the "Securities Purchase Agreement"), between the Company and TPG,
which rights have been duly and effectively waived); and the Shares
have been duly authorized and, when issued and delivered to the
Underwriters against payment therefor as provided by this Agreement,
will be validly issued, fully paid and non-assessable, and the
issuance of such Shares will not be subject to any preemptive or
similar rights.
(h) The authorized capital stock of the Company,
including the Common Shares, conforms as to legal matters to the
description thereof contained in the Prospectus and the Canadian Final
Prospectus.
(i) Neither the Company nor any of the
Subsidiaries is in violation of its respective charter or by-laws or
other organizational documents or in default in the performance of any
obligation, agreement or condition contained in any bond, debenture,
note or any other evidence of indebtedness or in any other agreement,
indenture or instrument material to the conduct of the business of the
Company and the Subsidiaries, taken as a whole, to which the Company
or any of the Subsidiaries is a party or by which it or any of its
subsidiaries or their respective property is bound.
(j) The execution, delivery and performance of
this Agreement, compliance by the Company with all the provisions
hereof and the consummation of the transactions contemplated hereby
will not require any consent, approval, authorization or other order
of any court, regulatory body, administrative agency or other
governmental body (except as such may be required under the securities
or Blue Sky laws of the various states, the NASD and the Canadian
Securities Legislation) and will not conflict with or constitute a
breach of any of the terms or provisions of, or a default under, the
charter or by-laws or other organizational documents of the Company or
any of the Subsidiaries or any agreement, indenture or other
instrument material to the conduct of the business of the Company or
the Subsidiaries to which it or any of the Subsidiaries is a party or
by which it or any of the Subsidiaries or their respective property is
bound, or violate or conflict with any laws, administrative
regulations or rulings or court decrees applicable to the Company, any
of the Subsidiaries or their respective property.
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<PAGE> 11
(k) Except as otherwise set forth in the
Prospectus and the Canadian Final Prospectus, there are no material
legal or governmental proceedings pending to which the Company or any
of the Subsidiaries is a party or of which any of their respective
property is the subject, and, to the best of the Company's knowledge,
no such proceedings are threatened or contemplated; the aggregate of
all pending legal or governmental proceedings that are not described
in the Prospectus and the Canadian Final Prospectus to which the
Company or any Subsidiary is a party or which affect any of their
respective properties, including ordinary routine litigation
incidental to the business of the Company or any Subsidiary, would not
have a material adverse change in the business, prospects, financial
condition or results of operation of the Company and the Subsidiaries,
taken as a whole. No contract or document of a character required to
be described in the Registration Statement, the Prospectus or the
Canadian Final Prospectus or to be filed as an exhibit to the
Registration Statement is not so described or filed as required.
(l) Neither the Company nor any of the
Subsidiaries has violated in any material respect any foreign,
federal, state or local law or regulation relating to the protection
of human health and safety, the environment or hazardous or toxic
substances or wastes, pollutants or contaminants ("Environmental
Laws"), nor any federal or state law relating to discrimination in the
hiring, promotion or pay of employees nor any applicable federal or
state wages and hours laws, nor any provisions of the Employee
Retirement Income Security Act or the rules and regulations
promulgated thereunder, which in each case might result in any
material adverse change in the business, prospects, financial
condition or results of operation of the Company and the Subsidiaries,
taken as a whole.
(m) The Company and each of the Subsidiaries has
such permits, licenses, franchises and authorizations of governmental
or regulatory authorities ("permits"), including, without limitation,
under any applicable Environmental Laws, as are necessary to own,
lease and operate its respective properties and to conduct its
business; the Company and each of the Subsidiaries has fulfilled and
performed all of its material obligations with respect to such permits
and no event has occurred which allows, or after notice or lapse of
time would allow, revocation or termination thereof or results in any
other material impairment of the rights of the holder of any such
permit; and, except as described in the Prospectus, such permits
contain no restrictions that are materially burdensome to the Company
or any of the Subsidiaries.
(n) Based on the prior experience of the Company
and the Subsidiaries with respect to compliance with Environmental
Laws, the Company reasonably has concluded that the costs and
liabilities associated with compliance by the Company and the
Subsidiaries with Environmental Laws are not likely to have, singly or
in the aggregate, a material adverse effect on the Company and the
Subsidiaries, taken as a whole.
(o) The Company and each of the Subsidiaries has
(i) generally satisfactory title to all its interests in its oil and
gas properties material to the conduct of its
11
<PAGE> 12
business, title investigations having been carried out by the Company
and each of the Subsidiaries in accordance with the general practice
in the oil and gas industry, (ii) good and indefeasible title in fee
simple to all other real property owned by it and (iii) good and
indefeasible title to all personal property owned by it, in each case
free and clear of all liens, encumbrances, claims, security interests,
subleases and defects except such as are described in the Prospectus
or such as do not materially affect the value of such property and do
not interfere with the use made and proposed to be made of such
property by the Company and the Subsidiaries; and any real property
and buildings held under lease by the Company and the Subsidiaries are
held by them under valid, subsisting and enforceable leases with such
exceptions as are not material and do not interfere with the use made
and proposed to be made of such property and buildings of the Company
and the Subsidiaries;
(p) The Company and each of the Subsidiaries
maintains commercially reasonable amounts of adequate insurance for
the protection of its assets material to the conduct of its business.
(q) Deloitte & Touche are independent public
accountants with respect to the Company as required by the 1933 Act.
(r) The financial statements, together with
related schedules and notes forming part of the Registration
Statement, the Prospectus and the Canadian Final Prospectus (and any
amendment or supplement thereto), present fairly the consolidated
financial position, results of operations and changes in financial
position of the Company and the Subsidiaries on the basis stated in
the Registration Statement and the Canadian Final Prospectus at the
respective dates or for the respective periods to which they apply;
such statements and related schedules and notes have been prepared in
accordance with Canadian generally accepted accounting principles
consistently applied throughout the periods involved, except as
disclosed therein; and the other financial and statistical information
and data set forth in the Registration Statement, the Prospectus and
the Canadian Final Prospectus (and any amendment or supplement
thereto) is, in all material respects, accurately presented and
prepared on a basis consistent with such financial statements and the
books and records of the Company.
(s) The Company is not an "investment company" or
a company "controlled" by an "investment company" within the meaning
of the Investment Company Act of 1940, as amended.
(t) Except as described in the Prospectus, no
holder of any security of the Company has any right to require
registration of Common Shares or any other security of the Company.
(u) The Company has complied with all provisions
of Section 517.075, Florida Statutes (Chapter 92-198, Laws of
Florida).
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<PAGE> 13
(v) There are no outstanding subscriptions,
rights, warrants, options, calls, convertible securities, commitments
of sale or liens related to or entitling any person to purchase or
otherwise to acquire any shares of the capital stock of, or other
ownership interest in, the Company or any Subsidiary except as
otherwise disclosed in the Registration Statement and the Canadian
Final Prospectus.
(w) Except as disclosed in the Prospectus, there
are no business relationships or related party transactions required
to be disclosed therein by Item 404 of Regulation S-K of the
Commission.
(x) The Company and each of the Subsidiaries
maintains a system of internal accounting controls sufficient to
provide reasonable assurance that (i) transactions are executed in
accordance with management's general or specific authorizations; (ii)
transactions are recorded as necessary to permit preparation of
financial statements in conformity with generally accepted accounting
principles and to maintain asset accountability; (iii) access to
assets is permitted only in accordance with management's general or
specific authorization; and (iv) the recorded accountability for
assets is compared with the existing assets at reasonable intervals
and appropriate action is taken with respect to any differences.
(y) All material tax returns required to be filed
by the Company and each of the Subsidiaries in any jurisdiction have
been filed, other than those filings being contested in good faith,
and all material taxes, including withholding taxes, penalties and
interest, assessments, fees and other charges due pursuant to such
returns or pursuant to any assessment received by the Company or any
of the Subsidiaries have been paid, other than those being contested
in good faith and for which adequate reserves have been provided.
(z) No stamp or other issuance, goods or services
or transfer taxes or duties and no capital gains, income, withholding
or other taxes are payable by or on behalf of the Underwriters to the
Government of Canada or any political subdivision or taxing authority
thereof or therein in connection with (i) the sale and delivery by the
Company of the Shares to or for the respective accounts of the
Underwriters or (ii) the sale and delivery outside of Canada by the
Underwriters of the Shares to the initial purchasers thereof.
(aa) The Company has filed a registration
statement pursuant to Section 12(g) of the Exchange Act, to register
the Common Shares and has filed applications to list the Shares on the
Nasdaq National Market and The Toronto Stock Exchange, and has
received notification that the listings have been approved, subject to
notice of issuance of the Shares and subject to the Company fulfilling
all of the requirements of the Toronto Stock Exchange as set forth in
the letter of The Toronto Stock Exchange dated October 16, 1996.
7. Indemnification.
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<PAGE> 14
(a) The Company agrees to indemnify and hold
harmless each Underwriter, each person, if any, who controls any
Underwriter within the meaning of Section 15 of the 1933 Act or
Section 20 of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), and the officers, directors, employees, agents and
partners of each Underwriter from and against any and all losses,
claims, damages, liabilities and judgments (including, but not limited
to, losses, claims, damages, liabilities and judgments under the 1933
Act, the Exchange Act or under the Canadian Securities Legislation)
caused by any untrue statement or alleged untrue statement of a
material fact contained in the Registration Statement, the Prospectus,
the Canadian Preliminary Prospectus and the Canadian Final Prospectus
(as amended or supplemented if the Company shall have furnished any
amendments or supplements thereto) or any preliminary prospectus, or
caused by any omission or alleged omission to state therein a material
fact required to be stated therein or necessary to make the statements
therein not misleading, except insofar as such losses, claims,
damages, liabilities or judgments are caused by any such untrue
statement or omission or alleged untrue statement or omission based
upon information furnished in writing to the Company by or on behalf
of any Underwriter through you expressly for use therein; provided,
however, that the foregoing indemnity agreement with respect to any
preliminary prospectus shall not inure to the benefit of any
Underwriter from whom the person asserting any such losses, claims,
damages, liabilities or judgments purchased Shares, or any person
controlling such Underwriter, if a copy of the Prospectus or the
Canadian Final Prospectus (as then amended or supplemented if the
Company shall have furnished any amendments or supplements thereto)
was not sent or given by or on behalf of such Underwriter to such
person, if required by law so to have been delivered, at or prior to
the written confirmation of the sale of the Shares to such person, and
if the Prospectus (as so amended and supplemented) or the Canadian
Final Prospectus would have cured the defect giving rise to such loss,
claim, damage, liability or judgment.
(b) In case any action shall be brought against
any Underwriter or any person controlling such Underwriter, based upon
any preliminary prospectus, the Canadian Preliminary Prospectus, the
Registration Statement, the Prospectus, the Canadian Final Prospectus
or any amendment or supplement thereto and with respect to which
indemnity may be sought against the Company, such Underwriter shall
promptly notify the Company in writing and the Company shall assume
the defense thereof, including the employment of counsel reasonably
satisfactory to such indemnified party and payment of all fees and
expenses. Any Underwriter or any such controlling person shall have
the right to employ separate counsel in any such action and
participate in the defense thereof, but the fees and expenses of such
counsel shall be at the expense of such Underwriter or such
controlling person unless (i) the employment of such counsel shall
have been specifically authorized in writing by the Company, (ii) the
Company shall have failed to assume the defense and employ counsel or
(iii) the named parties to any such action (including any impleaded
parties) include both such Underwriter or such controlling person and
the Company and such Underwriter or such controlling person shall have
been advised in writing by such counsel that there may be one or more
legal defenses available to it which are different from or
14
<PAGE> 15
additional to those available to the Company (in which case the
Company shall not have the right to assume the defense of such action
on behalf of such Underwriter or such controlling person, it being
understood, however, that the Company shall not, in connection with
any one such action or separate but substantially similar or related
actions in the same jurisdiction arising out of the same general
allegations or circumstances, be liable for the fees and expenses of
more than one separate firm of attorneys (in addition to any local
counsel) for all such Underwriters and controlling persons, which firm
shall be designated in writing by Donaldson, Lufkin & Jenrette
Securities Corporation and that all such fees and expenses shall be
reimbursed as they are incurred). The Company shall not be liable for
any settlement of any such action effected without its written consent
but if settled with the written consent of the Company, the Company
agrees to indemnify and hold harmless any Underwriter and any such
controlling person from and against any loss or liability by reason of
such settlement. Notwithstanding the immediately preceding sentence,
if in any case where the fees and expenses of counsel are at the
expense of the indemnifying party and an indemnified party shall have
requested the indemnifying party to reimburse the indemnified party
for such fees and expenses of counsel as incurred, such indemnifying
party agrees that it shall be liable for any settlement of any action
effected without its written consent if (i) such settlement is entered
into more than ten business days after the receipt by such
indemnifying party of the aforesaid request and (ii) such indemnifying
party shall have failed to reimburse the indemnified party in
accordance with such request for reimbursement prior to the date of
such settlement. No indemnifying party shall, without the prior
written consent of the indemnified party, effect any settlement of any
pending or threatened proceeding in respect of which any indemnified
party is or could have been a party and indemnity could have been
sought hereunder by such indemnified party, unless such settlement
includes an unconditional release of such indemnified party from all
liability on claims that are the subject matter of such proceeding.
(c) Each Underwriter agrees, severally and not
jointly, to indemnify and hold harmless the Company, its directors,
its officers who sign the Registration Statement and any person
controlling the Company within the meaning of Section 15 of the 1933
Act or Section 20 of the Exchange Act, to the same extent as the
foregoing indemnity from the Company to each Underwriter but only with
reference to information furnished in writing by or on behalf of such
Underwriter through you expressly for use in the Registration
Statement, the Prospectus, the Canadian Preliminary Prospectus, the
Canadian Final Prospectus or any preliminary prospectus. In case any
action shall be brought against the Company, any of its directors, any
such officer or any person controlling the Company based on the
Registration Statement, the Prospectus, the Canadian Preliminary
Prospectus, the Canadian Final Prospectus or any preliminary
prospectus and in respect of which indemnity may be sought against any
Underwriter, the Underwriter shall have the rights and duties given to
the Company (except that if the Company shall have assumed the defense
thereof, such Underwriter shall not be required to do so, but may
employ separate counsel therein and participate in the defense thereof
but the fees and expenses of such counsel shall be at the expense of
such Underwriter), and the Company, its directors, any such officers
and any
15
<PAGE> 16
person controlling the Company shall have the rights and duties given
to the Underwriter, by Section 7(b) hereof.
(d) If the indemnification provided for in this
Section 7 is unavailable to an indemnified party in respect of any
losses, claims, damages, liabilities or judgments referred to therein,
then each indemnifying party, in lieu of indemnifying such indemnified
party, shall contribute to the amount paid or payable by such
indemnified party as a result of such losses, claims, damages,
liabilities and judgments (i) in such proportion as is appropriate to
reflect the relative benefits received by the Company on the one hand
and the Underwriters on the other hand from the offering of the Shares
or (ii) if the allocation provided by clause (i) above is not
permitted by applicable law, in such proportion as is appropriate to
reflect not only the relative benefits referred to in clause (i) above
but also the relative fault of the Company and the Underwriters in
connection with the statements or omissions which resulted in such
losses, claims, damages, liabilities or judgments, as well as any
other relevant equitable considerations. The relative benefits
received by the Company and the Underwriters shall be deemed to be in
the same proportion as the total net proceeds from the offering
(before deducting expenses) received by the Company, and the total
underwriting discounts and commissions received by the Underwriters,
bear to the total price to the public of the Shares, in each case as
set forth in the table on the cover page of the Prospectus. The
relative fault of the Company and the Underwriters shall be determined
by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission to state a
material fact relates to information supplied by the Company or the
Underwriters and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
The Company and the Underwriters agree that it would not be
just and equitable if contribution pursuant to this Section 7(d) were
determined by pro rata allocation (even if the Underwriters were treated as one
entity for such purpose) or by any other method of allocation which does not
take account of the equitable considerations referred to in the immediately
preceding paragraph. The amount paid or payable by an indemnified party as a
result of the losses, claims, damages, liabilities or judgments referred to in
the immediately preceding paragraph shall be deemed to include, subject to the
limitations set forth above, any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any such
action or claim. Notwithstanding the provisions of this Section 7, no
Underwriter shall be required to contribute any amount in excess of the amount
by which the total price at which the Shares underwritten by it and distributed
to the public were offered to the public exceeds the amount of any damages
which such Underwriter has otherwise been required to pay by reason of such
untrue or alleged untrue statement or omission or alleged omission. No person
guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of
the 1933 Act) shall be entitled to contribution from any person who was not
guilty of such fraudulent misrepresentation. The Underwriters' obligations to
contribute pursuant to this Section 7(d) are several in proportion to the
respective number of Shares purchased by each of the Underwriters hereunder and
not joint.
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<PAGE> 17
8. Conditions of Underwriters' Obligations. The several
obligations of the Underwriters to purchase the Firm Shares under this
Agreement are subject to the satisfaction of each of the following conditions:
(a) All the representations and warranties of the
Company contained in this Agreement shall be true and correct on the
Closing Date with the same force and effect as if made on and as of
the Closing Date.
(b) The Registration Statement shall have become
effective not later than 5:00 p.m. (and in the case of a Registration
Statement filed under Rule 462 (b) of the 1933 Act, not later than
10:00 p.m.), New York City time, on the date of this Agreement and an
Expedited Review Receipt shall be obtained from the Alberta Securities
Commission or receipts shall be obtained from each of the Canadian
Securities Commissions for the Canadian Final Prospectus not later
than 5:00 p.m. on the business day immediately following the date of
this Agreement or at such later date and time as you may approve in
writing, and at the Closing Date no stop order suspending the
effectiveness of the Registration Statement shall have been issued and
no proceedings for that purpose shall have been commenced or shall be
pending before or contemplated by the Commission and no Canadian
Securities Commission shall have issued any order having the effect of
ceasing or suspending the distribution of the Shares or ceasing or
suspending the trading of the common shares of the Company in any of
the Offering Provinces or preventing or suspending the use in any of
the Offering Provinces of the Canadian Final Prospectus and, to the
knowledge of the Company, no proceedings for such purpose shall have
been instituted or threatened.
(c) (i) Since the date of the latest balance
sheet included in the Registration Statement, the Prospectus and the
Canadian Final Prospectus there shall not have been any material
adverse change, or any development involving a prospective material
adverse change, in the condition, financial or otherwise, or in the
earnings, affairs or business prospects, whether or not arising in the
ordinary course of business, of the Company and the Subsidiaries,
taken as a whole, (ii) since the date of the latest balance sheet
included in the Registration Statement, the Prospectus and the
Canadian Final Prospectus there shall not have been any change, or any
development involving a prospective material adverse change, in the
capital stock or in the long-term debt of the Company from that set
forth in the Registration Statement, the Prospectus and the Canadian
Final Prospectus, (iii) the Company and its Subsidiaries shall have no
liability or obligation, direct or contingent, which is material to
the Company and its Subsidiaries, taken as a whole, other than those
reflected in the Registration Statement, the Prospectus and the
Canadian Final Prospectus and (iv) on the Closing Date you shall have
received a certificate dated the Closing Date, signed by Gareth
Roberts and Phil Rykhoek, in their capacities as the President, Chief
Executive Officer and Director and the Chief Financial Officer and
Secretary of the Company, confirming the matters set forth in
paragraphs (a), (b), and (c) of this Section 8.
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<PAGE> 18
(d) You shall have received on the Closing Date
an opinion (satisfactory to you), dated the Closing Date, of Burnet,
Duckworth & Palmer, Canadian counsel for the Company, to the effect
that:
(i) the Company and each of the Canadian
Subsidiaries has been incorporated, is validly existing as a
corporation under the laws of its jurisdiction of
incorporation and has the corporate power and authority
required to carry on its business as it is currently being
conducted and to own, lease and operate its properties;
(ii) the Company and each of the Canadian
Subsidiaries is duly qualified and is registered as an extra
provincial or foreign corporation authorized to do business in
each jurisdiction in which the nature of its business or its
ownership or leasing of property requires such qualification,
except where the failure to be so qualified would not have a
material adverse effect on the Company and the Canadian
Subsidiaries, taken as a whole;
(iii) all of the outstanding shares of
capital stock of each of the Canadian Subsidiaries have been
duly and validly authorized and issued and are fully paid and
non-assessable, and are owned by the Company, free and clear
to the knowledge of such counsel of any security interest,
claim, lien, encumbrance or adverse interest of any nature;
(iv) The authorized share capital of the
Company consists of an unlimited number of common shares,
_________ of which are issued and outstanding, and two classes
of preferred shares, unlimited in number and issuable in
series, _________ of which are issued and outstanding, and all
outstanding Common Shares have been duly authorized and
validly issued and are fully-paid and non- assessable;
(v) the form of definitive share
certificate representing the Common Shares has been duly
approved and adopted by the Company, and complies with all
legal requirements including the legal requirements of The
Toronto Stock Exchange;
(vi) the Shares have been duly
authorized, and when issued and delivered to the Underwriters
against payment therefor as provided by this Agreement, will
have been validly issued and will be fully paid and
non-assessable, and the issuance of such Shares is not subject
to any preemptive or similar rights arising by operation of
law, under the charter or by-laws of the Company or, to the
best of such counsel's knowledge, after due inquiry, otherwise
(except for pre-emptive rights granted to TPG pursuant to the
Security Purchase Agreement, which rights have been waived by
TPG in connection with the offering of the Shares);
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<PAGE> 19
(vii) the Common Shares are listed and
posted for trading on The Toronto Stock Exchange and the
Shares have been conditionally approved for listing subject to
the Company fulfilling all of the requirements of The Toronto
Stock Exchange as set forth in the letter of The Toronto Stock
Exchange dated October 16, 1996;
(viii) this Agreement has been duly
authorized, executed and, to the extent delivery is a matter
governed by the laws of the province of Alberta, delivered by
the Company and is a valid and binding agreement of the
Company enforceable in accordance with its terms (except as
rights to indemnity and contribution hereunder may be limited
by applicable law);
(ix) the authorized capital stock of the
Company, including the Common Shares, conforms as to legal
matters to the description thereof contained in the Prospectus
and the Canadian Final Prospectus;
(x) the statements under the captions
"Description of Capital Stock," "Canadian Taxation and the
Investment Canada Act" and "Service and Enforcement of Legal
Process" of Securities" in the Prospectus and the Canadian
Final Prospectus and Items 14 and 15 of Part II of the
Registration Statement insofar as such statements constitute a
summary of legal matters documents or proceedings referred to
therein, fairly present the information called for with
respect to such legal matters, documents and proceedings;
(xi) neither the Company nor any of the
Canadian Subsidiaries is in violation of its respective
charter or by-laws;
(xii) the execution, delivery and
performance of this Agreement by the Company, compliance by
the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not
require any consent, approval, authorization or other order of
any court, regulatory body, administrative agency or other
governmental body (other than the Canadian Securities
Commissions and the Toronto Stock Exchange) and will not
conflict with or constitute a breach of any of the terms or
provisions of, or a default under, the charter or by-laws of
the Company or any of the Canadian Subsidiaries, or violate or
conflict with any laws, administrative regulations or, to the
best of such counsel's knowledge, after due inquiry, rulings
or court decrees applicable to the Company or any of the
Subsidiaries or their respective properties;
(xiii) all approvals, permits, consents and
authorizations of the Canadian Securities Commissions have
been obtained to qualify the issuance and sale of the Shares
to the public in the Offering Provinces through registrants
19
<PAGE> 20
registered under the applicable laws of the Offering Provinces
who have complied with the relevant provisions of such
applicable laws;
(xiv) to the best of such counsel's
knowledge, after due inquiry, other than as described in the
Registration Statement and the Prospectus, no holder of any
security of the Company has any right to require registration
of Common Shares or any other security of the Company;
(xv) to the best of such counsel's
knowledge, no action, suit or proceeding is pending or
threatened against or affecting the Company or any of the
Subsidiaries or any of their respective properties before or
by any court, governmental official, commission, board or
other administrative agency wherein an unfavorable decision,
order, ruling or finding would have a material adverse effect
on the business, prospects, financial condition or results of
operation of the Company and the Subsidiaries, taken as a
whole;
(xvi) no stamp or other issuance, goods or
services or transfer taxes or duties and no capital gains,
income, withholding or other taxes are payable by or on behalf
of the Underwriters to the Government of Canada or any
political subdivision or taxing authority thereof or therein
in connection with (i) the sale and delivery by the Company of
the Shares to or for the respective accounts of the
Underwriters or (ii) the sale and delivery outside of Canada
by the Underwriters of the Shares to the initial purchasers
thereof;
(xvii) insofar as matters of federal
Canadian and Alberta law are concerned, (A) the Registration
Statement and the filing of the Registration Statement with
the Commission have been duly authorized by and on behalf of
the Company and the Registration Statement has been duly
executed pursuant to such authorization by and on behalf of
the Company and (B) the Canadian Final Prospectus and the
filing of the Canadian Final Prospectus has been duly
authorized by and on behalf of the Company, and the Canadian
Final Prospectus has been duly executed pursuant to such
authorization by and on behalf of the Company;
(xviii) the Shares are eligible for
investment as set forth under the heading "Eligibility for
Investment" in the Canadian Final Prospectus;
(xix) such counsel is of the opinion that
the Canadian Final Prospectus and any amendments thereto
(excluding the financial statements and other financial and
statistical data included or incorporated by reference therein
or omitted therefrom, as to which such counsel need express no
opinion) appears on its face to have been appropriately
responsive in all material respects as to the requirements of
the securities laws, rules and regulations of the Offering
Provinces as interpreted and applied by the relevant Canadian
Securities Commission;
20
<PAGE> 21
(xx) nothing has come the to attention of
such counsel which would lead such counsel to believe that
(except for the financial statements and other financial,
accounting or statistical data included or incorporated in the
Canadian Final Prospectus or omitted therefrom, and other than
with respect to information which is related solely to the
Underwriters) the Canadian Final Prospectus contains any
untrue statement of a material fact or omits 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; and
(xxi) the consent to jurisdiction in New
York of the Company contained herein will be valid and binding
on the Company; in an action on a final judgment in personam
against the Company of a New York court that is not
impeachable as void or voidable under New York law, a court in
any of the Offering Provinces (a "Canadian Court") would give
effect to the appointment by the Company of
___________________ as its agent for service and to the
service of process in the manner set forth in the relevant
section of such agreements, whereby the Company has submitted
to the jurisdiction in any New York court and to the terms of
the relevant section, assuming its validity under New York
law; should enforcement of this Agreement be sought in any of
the Offering Provinces (each a "Relevant Province") in
accordance with the laws of New York, a Canadian Court would
recognize the choice of New York law (other than for matters
of procedure, in respect of which the laws of the Relevant
Province would be applied), and, upon appropriate evidence as
to such law being adduced, apply such law, provided that none
of the provisions of this Agreement or of applicable New York
law is contrary to public policy as that term is understood
under the laws of the Relevant Province and the federal laws
of Canada applicable therein; provided, however, that a
Canadian Court would retain discretion to decline to hear such
action if it is contrary to public policy, as that term is
understood under the laws of the Relevant Province and the
federal laws of Canada applicable therein, or if it is not the
proper forum to hear such an action or if concurrent
proceedings are being brought elsewhere, and they are not
aware of any reason why, in the circumstances, contemplated by
this Agreement a Canadian Court would decline to apply New
York law or to hear such an action based on public policy; the
laws of Canada and the laws of the Relevant Province would
permit an action to be brought in a Canadian Court on a final
and conclusive judgment in personam of a New York court
respecting the enforcement of this Agreement for a sum certain
if: (a) the court rendering such judgment properly exercised
jurisdiction over the judgment debtor as recognized by the
courts of the Relevant Province (and submission to the
non-exclusive jurisdiction of the New York court by the
Company pursuant to this Agreement will be sufficient for the
purpose); (b) such judgment was not obtained by fraud or in a
manner contrary to natural justice and the enforcement thereof
would not be inconsistent with public policy, as that term is
understood under the laws of the Relevant Province and the
federal laws of Canada considered applicable therein or
contrary to an order made by
21
<PAGE> 22
the Attorney General of Canada under the Foreign
Extraterritorial Measures Act (Canada); (c) the enforcement of
such judgment does not constitute, directly or indirectly, the
enforcement of foreign revenue, expropriatory or penal laws;
(d) no new admissible evidence relevant to the action is
discovered prior to the rendering of the judgment by the
Canadian Court; (e) the action to enforce such judgment is
commenced within six years of the date of such judgment; and
(f) in the case of judgment obtained by default, there has
been no manifest error in the granting of such judgment, and
that they are not aware of any reason why, in the
circumstances contemplated by this Agreement, such an action
could not be brought in the Relevant Province based on public
policy (provided that the opinion given in this clause may be
qualified to the extent that a court may decline to enforce
rights of indemnity and contribution and that judgments are
subject to the Currency Act (Canada)).
In rendering such opinion, such counsel may state
that they express no opinion as to matters governed by laws other than
the federal laws of Canada and the laws of the Offering Provinces.
The opinion of Burnet, Duckworth & Palmer described
in paragraph (d) above shall be rendered to you at the request of the
Company and shall so state therein.
(e) You shall have received on the Closing Date
an opinion (satisfactory to you), dated the Closing Date, of Jenkens &
Gilchrist, a Professional Corporation, counsel for the Company, to the
effect that:
(i) the Company has been duly
incorporated, is validly existing as a corporation under the
laws of its jurisdiction of organization and has full power
and authority required to carry on its business as it is
currently being conducted and to own, lease and operate its
properties;
(ii) Denbury Management, Inc. has been
duly incorporated, is validly existing as a corporation in
good standing under the laws of its jurisdiction of
organization and has full power and authority required to
carry on its business as it is currently being conducted and
to own, lease and operate its properties; each of the other
U.S. Subsidiaries is validly existing as a corporation or
limited liability company in good standing under the laws of
its jurisdiction of organization;
(iii) Denbury Management, Inc. is duly
qualified and is in good standing as a foreign corporation
authorized to do business in each jurisdiction in which the
nature of its business or its ownership or leasing of property
requires such qualification, except where the failure to be so
qualified would not have a material adverse effect on the
Company and its Subsidiaries, taken as a whole;
22
<PAGE> 23
(iv) all of the outstanding shares of
capital stock of, or other ownership interests in, Denbury
Management, Inc. have been duly and validly authorized and
issued and are fully paid and non-assessable, and, to such
counsel's knowledge, are owned by the Company, free and clear
of any security interest, claim, lien, encumbrance or adverse
interest of any nature (except for the lien of Nationsbank of
Texas, N.A., with respect to the Company's $150 million credit
facility described in the Prospectus);
(v) to the knowledge of such counsel,
the issuance of the Shares is not subject to any preemptive or
similar rights (except for preemptive rights granted to TPG
pursuant to the Securities Purchase Agreement, which rights
have been duly and effectively waived by TPG in connection
with the offering of the Shares);
(vi) assuming due authorization,
execution and delivery of this Agreement under Canadian
federal and Alberta law, this Agreement has been duly executed
and delivered by the Company;
(vii) the Registration Statement has
become effective under the 1933 Act, no stop order suspending
its effectiveness has been issued and no proceedings for that
purpose are, to the knowledge of such counsel, pending before
or contemplated by the Commission;
(viii) the statements under the captions
"Risk Factors -- Governmental and Environmental Regulation",
"Business and Properties -- Regulations", and "Shares Eligible
for Future Sale" in the Prospectus and Items 14 and 15 of Part
II of the Registration Statement insofar as such statements
constitute a summary of legal matters, documents or
proceedings referred to therein, fairly present in all
material respects, the information called for with respect to
such legal matters, documents and proceedings;
(ix) to the knowledge of such counsel,
Denbury Management, Inc. is not in violation of its charter or
by-laws;
(x) the execution, delivery and
performance of this Agreement by the Company, compliance by
the Company with all the provisions hereof and the
consummation of the transactions contemplated hereby will not
require any consent, approval, authorization or other order of
any U.S. court, regulatory body, administrative agency or
other governmental body (except as such may be required under
the 1933 Act or other securities or Blue Sky laws) and will
not conflict with or constitute a breach of any of the terms
or provisions of, or a default under, the charter or by-laws
of Denbury Management, Inc. or any agreement, indenture or
other instrument which is an exhibit to the Registration
Statement or a document
23
<PAGE> 24
incorporated by reference therein, or violate or conflict with
any laws, administrative regulations or rulings or, to the
knowledge of such counsel, court decrees applicable to the
Company or any of the Subsidiaries or their respective
properties;
(xi) to the knowledge of such counsel,
there are not any legal or governmental proceedings pending or
threatened to which the Company or any of the Subsidiaries is
a party or to which any of their respective property is
subject which is required to be described in the Registration
Statement or the Prospectus and is not so described, or of any
contract or other document which is required to be described
in the Registration Statement or the Prospectus or is required
to be filed as an exhibit to the Registration Statement which
is not described or filed as required;
(xii) the Company is not an "investment
company" or a company "controlled" by an "investment company"
within the meaning of the Investment Company Act of 1940, as
amended;
(xiii) to the knowledge of such counsel,
except as described in the Prospectus, no holder of any
security of the Company has any right to require registration
of Common Shares or any other security of the Company;
(xiv) the Registration Statement
(including any Registration Statement filed under 462 (b) of
the 1933 Act, if any) and the Prospectus and any supplement or
amendment thereto (except for financial statements and reserve
information as to which no opinion need be expressed) comply
as to form in all material respects with the 1933 Act;
(xv) such counsel shall state that such
counsel has participated in conferences with officers and
representatives of the Company, representatives of the
independent public accountants for the Company and the
Underwriters at which the contents of the Registration
Statement and the Prospectus and related matters were
discussed, and, although such counsel is not passing upon and
does not assume any responsibility for and have not verified
the accuracy, completeness or fairness of the statements
contained in the Registration Statement and the Prospectus,
and have not made any independent check or verification
thereof, on the basis of the foregoing no facts have come to
the attention of such counsel that lead such counsel to
believe that either the Registration Statement at the time it
became effective (including the information deemed to be part
of the Registration Statement at the time of effectiveness
pursuant to Rule 430A(b), if applicable), or any amendment
thereof made prior to the Closing Date as of the date of such
amendment, contained an 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 as of its date (or any
amendment thereof or supplement thereto made prior to the
Closing Date as of the date of such amendment or supplement)
and as of the
24
<PAGE> 25
Closing Date contained or contains an untrue statement of a
material fact or omitted or omits to state any material fact
required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which
they were made, not misleading (it being understood that such
counsel need express no belief or opinion with respect to the
exhibits and the financial statements and other financial and
statistical data included therein).
In rendering such opinion, such counsel may rely (A)
as to matters involving the application of laws other than the laws of
the United States and jurisdictions in which they are admitted, to the
extent such counsel deems proper and to the extent specified in such
opinion, if at all, upon an opinion or opinions (in form and substance
reasonably satisfactory to Underwriters' Counsel) of other counsel
reasonably acceptable to Underwriters' Counsel, familiar with the
applicable laws; (B) as to matters of fact, to the extent they deem
proper, on certificates of responsible officers of the Company and
certificates or other written statements of officers of departments of
various jurisdictions having custody of documents respecting the
corporate existence or good standing of the Company and its
subsidiaries, provided that copies of any such statements or
certificates shall be delivered to Underwriters' Counsel. The opinion
of such counsel for the Company shall state that the opinion of any
such other counsel is in form satisfactory to such counsel and, in
their opinion, you and they are justified in relying thereon.
The opinion of Jenkens & Gilchrist, a Professional
Corporation described in paragraph (d) above shall be rendered to you
at the request of the Company and shall so state therein.
(f) You shall have received on the Closing Date
an opinion, dated the Closing Date, of Baker & Botts, L.L.P., counsel
for the Underwriters, as to the matters referred to in clauses (i),
(v) (solely as to preemptive rights arising by operation of law or
under the charter or by-laws of the Company), (vi), (viii), (ix) (but
only with respect to the statements under the caption "Underwriting")
and (xvii) of the foregoing paragraph (e). In giving such opinion
with respect to the matters covered by clause (xvii) such counsel may
state that their opinion and belief are based upon their participation
in the preparation of the Registration Statement and Prospectus and
any amendments or supplements thereto and review and discussion of the
contents thereof, but are without independent check or verification
except as specified.
(g) You shall have received on the Closing Date
an opinion, dated the Closing Date, of McMillan Binch, Canadian
counsel for the Underwriters, as to the matters referred to in clauses
(i) (solely as to the Company), (vi) (solely as to preemptive rights
arising by operation of law or under the charter or by-laws of the
Company), (viii) (solely as to due authorization, execution, and
delivery), (ix) and (xiii) of the foregoing paragraph (d). In
rendering such opinion, such counsel may state that they express no
opinion as to matters governed by laws other than the federal laws of
Canada and the laws of the Offering
25
<PAGE> 26
Provinces. In rendering their opinion with respect to the matters
referred to in clauses (viii) and (xiii) of the foregoing paragraph
(d), such counsel may rely on the opinion of Burnet, Duckworth &
Palmer, Canadian counsel to the Company, to the extent that the
matters referred to therein are governed by the laws of the Provinces
of Alberta or British Columbia.
(h) You shall have received a letter on and as of
the Closing Date, in form and substance satisfactory to you, from
Deloitte & Touche, independent public accountants, with respect to the
financial statements and certain financial information contained in
the Registration Statement and the Prospectus and substantially in the
form and substance of the letter delivered to you by Deloitte & Touche
on the date of this Agreement.
(i) The Company shall have delivered to you the
agreements specified in Section 2 hereof.
(j) The sale by the Company of 800,000 of its
Common Shares to TPG pursuant to the Stock Purchase Agreement, dated
as of October 2, 1996, between the Company and TPG shall have been
consummated prior to or concurrently with the sale by the Company of
the Firm Shares pursuant to this Agreement.
(k) The Company shall not have failed at or prior
to the Closing Date to perform or comply with any of the agreements
herein contained and required to be performed or complied with by the
Company at or prior to the Closing Date.
The several obligations of the Underwriters to purchase any Additional Shares
hereunder are subject to the delivery to you on the applicable Option Closing
Date of such documents as you may reasonably request with respect to the good
standing of the Company, the due authorization and issuance of such Additional
Shares and other matters related to the issuance of such Additional Shares.
9. Effective Date of Agreement and Termination. This
Agreement shall become effective upon the later of (i) execution of this
Agreement and (ii) when notification of the effectiveness of the Registration
Statement has been released by the Commission and an Expedited Review Receipt
or receipts for the Canadian Final Prospectus has been obtained from the
Canadian Securities Commissions.
This Agreement may be terminated at any time prior to the
Closing Date by you by written notice to the Company if any of the following
has occurred or come into effect: (i) since the respective dates as of which
information is given in the Registration Statement, the Prospectus, Canadian
Final Prospectus, any material adverse change or development involving a
prospective material adverse change in the condition, financial or otherwise,
of the Company and its subsidiaries, taken as a whole, or the earnings,
affairs, or business prospects of the Company or any of its subsidiaries, taken
as a whole, whether or not arising in the ordinary course of business, which
would, in your judgment, make it impracticable to market the Shares on the
terms and in the manner
26
<PAGE> 27
contemplated in the Prospectus or the Canadian Final Prospectus, (ii) any
outbreak or escalation of hostilities or other national or international
calamity or crisis or change in economic conditions or in the financial markets
of the United States, Canada or elsewhere that, in your judgment, is material
and adverse and would, in your judgment, make it impracticable to market the
Shares on the terms and in the manner contemplated in the Prospectus or the
Canadian Final Prospectus, (iii) the suspension or material limitation of
trading in securities on the New York Stock Exchange, the American Stock
Exchange, The Toronto Stock Exchange or the Nasdaq National Market or
limitation on prices for securities on any such exchange or the Nasdaq National
Market, (iv) the enactment, publication, decree or other promulgation of any
United States or Canadian federal, state or provincial statute, regulation,
rule or order of any United States or Canadian court or other governmental
authority which in your opinion materially and adversely affects, or will
materially and adversely affect, the business or operations of the Company or
any Subsidiary, (v) the declaration of a banking moratorium by either United
States or Canadian federal or New York State authorities or (vi) the taking of
any action by any United States or Canadian federal, state, provincial or local
government or agency in respect of its monetary or fiscal affairs which in your
opinion has a material adverse effect on the financial markets in the United
States and/or Canada.
If on the Closing Date or on an Option Closing Date, as the
case may be, any one or more of the Underwriters shall fail or refuse to
purchase the Firm Shares or Additional Shares, as the case may be, which it or
they have agreed to purchase hereunder on such date and the aggregate number of
Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused
to purchase is not more than one-tenth of the total number of Shares to be
purchased on such date by all Underwriters, each non-defaulting Underwriter
shall be obligated severally, in the proportion which the number of Firm Shares
set forth opposite its name in Schedule I bears to the total number of Firm
Shares which all the non-defaulting Underwriters, as the case may be, have
agreed to purchase, or in such other proportion as you may specify, to purchase
the Firm Shares or Additional Shares, as the case may be, which such defaulting
Underwriter or Underwriters, as the case may be, agreed but failed or refused
to purchase on such date; provided that in no event shall the number of Firm
Shares or Additional Shares, as the case may be, which any Underwriter has
agreed to purchase pursuant to Section 2 hereof be increased pursuant to this
Section 9 by an amount in excess of one-ninth of such number of Firm Shares or
Additional Shares, as the case may be, without the written consent of such
Underwriter. If on the Closing Date or on an Option Closing Date, as the case
may be, any Underwriter or Underwriters shall fail or refuse to purchase Firm
Shares, or Additional Shares, as the case may be, and the aggregate number of
Firm Shares or Additional Shares, as the case may be, with respect to which
such default occurs is more than one-tenth of the aggregate number of Shares to
be purchased on such date by all Underwriters and arrangements satisfactory to
you and the Company for purchase of such Shares are not made within 48 hours
after such default, this Agreement will terminate without liability on the part
of any non-defaulting Underwriter and the Company. In any such case which does
not result in termination of this Agreement, either you or the Company shall
have the right to postpone the Closing Date or the applicable Option Closing
Date, as the case may be, but in no event for longer than seven days, in order
that the required changes, if any, in the Registration Statement, the
Prospectus, the Canadian Final Prospectus or any
27
<PAGE> 28
other documents or arrangements may be effected. Any action taken under this
paragraph shall not relieve any defaulting Underwriter from liability in
respect of any default of any such Underwriter under this Agreement.
10. Agent for Service; Submission to Jurisdiction. Each
of the parties hereto irrevocably (i) agrees that any legal suit, action or
proceeding against the Company brought by any Underwriter or by any person who
controls any Underwriter arising out of or based upon this Agreement or the
transactions contemplated hereby may be instituted in any New York court, (ii)
waives to the fullest extent it may effectively do so, any objection which it
may now or hereafter have to the laying of venue of any such proceeding and
(iii) submits to the exclusive jurisdiction (except for proceedings instituted
in regard to the enforcement of a judgement of any such court, as to which such
jurisdiction is non-exclusive) of such courts in any such suit, action or
proceeding. The Company has appointed CT Corporation System, 1633 Broadway,
New York, New York, 10019, as its authorized agent (the "Authorized Agent")
upon whom process may be served in any such action arising out of or based on
this Agreement or the transactions contemplated hereby which may be instituted
in any New York Court by any Underwriter or any person who controls any
Underwriter, expressly consents to the jurisdiction of any such court in
respect of any such action, and waives any other requirements of or objections
to personal jurisdiction with respect thereto. Such appointment shall be
irrevocable. The Company represents and warrants that the Authorized Agent has
agreed to act as such agent for service of process and agrees to take any and
all action, including the filing of any and all documents and instruments, that
may be necessary to continue such appointment in full force and effect as
aforesaid. Service of process upon the Authorized Agent and written notice of
such service to the Company shall be deemed, in every respect, effective
service of process upon the Company.
11. Miscellaneous. Notices given pursuant to any
provision of this Agreement shall be addressed as follows: (a) if to the
Company, to Denbury Resources, Inc., 17304 Preston Road, Suite 200, Dallas,
Texas 75252, and (b) if to any Underwriter or to you, to you c/o Donaldson,
Lufkin & Jenrette Securities Corporation, 277 Park Avenue, New York, New York
10172, Attention: Syndicate Department, or in any case to such other address
as the person to be notified may have requested in writing.
The respective indemnities, contribution agreements,
representations, warranties and other statements of the Company, its officers
and directors and of the several Underwriters set forth in or made pursuant to
this Agreement shall remain operative and in full force and effect, and will
survive delivery of and payment for the Shares, regardless of (i) any
investigation, or statement as to the results thereof, made by or on behalf of
any Underwriter or by or on behalf of the Company, the officers or directors of
the Company or any controlling person of the Company, (ii) acceptance of the
Shares and payment for them hereunder and (iii) termination of this Agreement.
If this Agreement shall be terminated by the Underwriters
because of any failure or refusal on the part of the Company to comply with the
terms or to fulfill any of the conditions of this
28
<PAGE> 29
Agreement, the Company agrees to reimburse the several Underwriters for all
out-of-pocket expenses (including the fees and disbursements of counsel)
reasonably incurred by them.
Except as otherwise provided, this Agreement has been and is
made solely for the benefit of and shall be binding upon the Company, the
Underwriters, any controlling persons referred to herein and their respective
successors and assigns, all as and to the extent provided in this Agreement,
and no other person shall acquire or have any right under or by virtue of this
Agreement. The term "successors and assigns" shall not include a purchaser of
any of the Shares from any of the several Underwriters merely because of such
purchase.
THIS AGREEMENT SHALL BE GOVERNED AND CONSTRUED IN ACCORDANCE
WITH THE LAWS OF THE STATE OF NEW YORK.
This Agreement may be signed in various counterparts which
together shall constitute one and the same instrument.
29
<PAGE> 30
Please confirm that the foregoing correctly sets forth the
agreement between the Company and the several Underwriters.
Very truly yours,
DENBURY RESOURCES, INC.
By:
------------------------------------
Name:
------------------------------
Title:
-----------------------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
JOHNSON RICE & COMPANY L.L.C.
Acting severally on behalf of
themselves and the several
Underwriters named in
Schedule I hereto
By: DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
By:
-------------------------------
Name:
--------------------------
Title:
-------------------------
30
<PAGE> 31
SCHEDULE I
<TABLE>
<CAPTION>
Number of Firm Shares
Underwriters to be Purchased
------------ ---------------------
<S> <C>
Donaldson, Lufkin & Jenrette, Securities Corporation . . . . . . . . . .
Prudential Securities Incorporated . . . . . . . . . . . . . . . . . . .
Johnson Rice & Company L.L.C. . . . . . . . . . . . . . . . . . . . . . .
---------
Total 3,600,000
=========
</TABLE>
31
<PAGE> 32
SCHEDULE II
U.S. SUBSIDIARIES
Denbury Management, Inc.
Denbury Marine L.L.C.
Brymore Energy Corp.
CANADIAN SUBSIDIARIES
Denbury Holdings, Inc.
32
<PAGE> 1
EXHIBIT 3(A)
[INDUSTRY CANADA LETTERHEAD]
<TABLE>
<S> <C>
CERTIFICATE CERTIFICAT
OF AMENDMENT DE MODIFICATION
CANADA BUSINESS LOI CANADIENNE SUR
CORPORATIONS ACT LES SOCIETES PAR ACTIONS
DENBURY RESOURCES INC. 175695-8
- ------------------------------------------- -------------------------------------------
Name of corporation -- Denomination de la Corporation number -- Numero de la societe societe
I hereby certify that the articles of the Je certifie que les statuts de la societe
above-named corporation were amended susmentionnee ont ete modifies ;
(a) under section 13 of the Canada Business / / a) en vertu de l'article 13 de la Loi
Corporations Act in accordance with the canadienne sur les societes par actions,
attached notice; conformement a l'avis ci-joint;
(b) under section 27 of the Canada Business / / b) en vertu de l'article 27 de la Loi
Corporations Act as set out in the attached canadienne sur les societes par actions,
articles of amendment designating a series tel qu'il est indique dans les clauses
of shares; modificatrices ci-jointes designant une
serie d'actions;
(c) under section 179 of the Canada /X/ c) en vertu de l'article 179 de la Loi
Business Corporations Act as set out in the canadienne sur les societes par actions,
attached articles of amendment; tel qu'il est indique dans les clauses
modificatrices ci-jointes;
(d) under section 191 of the Canada / / d) en vertu de l'article 191 de la Loi
Business Corporations Act as set out in the canadienne sur les societes par actions,
attached articles of reorganization. tel qu'il est indique dans les clauses de
reorganisation ci-jointes.
/s/ [ILLEGIBLE] October 10, 1996/le 10 octobre 1996
Director -- Directeur Date of Amendment -- Date de modification
</TABLE>
<PAGE> 2
CANADA BUSINESS CORPORATIONS ACT FORM 4
ARTICLES OF AMENDMENT
(SECTION 27 OR 177)
- --------------------------------------------------------------------------------
1. NAME OF CORPORATION: 2. CORPORATION NO.
DENBURY RESOURCES INC. 175695-8
- --------------------------------------------------------------------------------
3. THE ARTICLES OF THE ABOVE-NAMED CORPORATION ARE AMENDED AS FOLLOWS:
i. Pursuant to Section 173(1)(h) of the Canada Business Corporations Act, the
issued and outstanding common shares of the Corporation be and the same
are hereby changed by the consolidation of the issued and outstanding
common shares on the basis of one (1) common share ("New Share") for each
two (2) issued and outstanding common shares ("Old Shares");
ii. Pursuant to Section 173(1)(g) of the Canada Business Corporations Act, the
rights, privileges, restrictions and conditions (the "Preferred Share
Terms") attaching to the outstanding Convertible First Preferred Shares,
Series A of the Corporation be and the same are hereby modified and
amended by the deletion of the first sentence of Section 3.3 of the
Preferred Share Terms and the substitution therefore of the following:
"Notwithstanding the foregoing, the Corporation shall have the right to
require the holders of the First Preferred Shares, Series A to exercise
their conversion rights set forth in Section 3.1 in respect of all, but not
less than all, the First Preferred Shares, Series A held by such holders
provided that if such right is exercised by the Corporation at any time
prior to January 1, 1999, the First Preferred Shares, Series A shall be
convertible into fully paid and non-assessable Common Shares on the Current
Conversion Basis in effect as at January 1, 1999."
- --------------------------------------------------------------------------------
DATE SIGNATURE TITLE
October 9, 1996 /s/ PHIL RYKHOEK Chief Financial Officer and
Corporate Secretary
- --------------------------------------------------------------------------------
--------------------------------------
FOR DEPARTMENTAL USE ONLY
FILED -- OCTOBER 10, 1996
--------------------------------------
<PAGE> 1
EXHIBIT 5
[BURNET, DUCKWORTH & PALMER LETTERHEAD]
October 22, 1996
Denbury Resources, Inc.
17304 Preston Road, Suite 510
Dallas, Texas 75252
Dear Sirs:
RE: OFFERING OF COMMON SHARES OF DENBURY RESOURCES INC.
We have acted as counsel to Denbury Resources Inc., a Canadian corporation
(the "Corporation"), in connection with the registration under the Securities
Act of 1933, as amended (the "Act"), of an aggregate 4,940,000 Common Shares of
the Corporation, without nominal or par value (the "Common Shares"), 3,600,000
of such Common Shares being offered in an underwritten public offering (the
"Public Offering"), 800,000 of such Common Shares being offered in a concurrent
offering directly to an existing stock holder (the "TPG Offering") and 540,000
of such Common Shares being subject to an over-allotment option granted to the
Underwriters, all pursuant to a Registration Statement on Form S-1
(Registration No. 333-12005) as amended, filed with the Securities and Exchange
Commission (the "Registration Statement"). We have also acted as Canadian
counsel to the Corporation in connection with
i. the related Underwriting Agreement in connection with the offering
of the Common Shares (the "Underwriting Agreement") among the
Corporation and Donaldson, Lufkin & Jenrette Securities
Corporation, acting separately on behalf of itself and the other
underwriters named in the Underwriting Agreement and Schedule 1
thereto; and
ii. the Stock Purchase Agreement, as amended, between the Corporation
and TPG Partners, L.P. in connection with the TPG Offering (the
"Stock Purchase Agreement").
In connection therewith, we have examined:
i. the Articles of Continuance and the by-laws of the Corporation, in
each case, as amended to date;
ii. copies of resolutions of the Board of Directors of the Corporation
authorizing the issuance of the Common Shares and related matters;
iii. the Registration Statement, and all exhibits thereto;
iv. the Stock Purchase Agreement; and
<PAGE> 2
v. such other documents and instruments as we have deemed necessary
for the expression of opinions herein contained.
In conducting the foregoing examinations, we have assumed the
genuineness of all signatures and the authenticity of all documents submitted to
us as originals, and the conformity to original documents of all documents
submitted to us as certified of photostatic copies. As to various questions of
fact material to this opinion, we have relied upon documents, records and
instruments furnished to us by the Corporation, without independent verification
of their accuracy.
We are qualified to practice law in the Province of Alberta and our
opinion herein is restricted to the laws of the Province of Alberta and the
federal laws of Canada applicable therein.
Based, in reliance upon, and subject to the foregoing, we are of the
optnion that the Common Shares, when issued and delivered by the Corporation in
accordance with the terms and conditions of the Underwriting Agreement and the
Stock Purchase Agreement and the Stock Purchase Agreement, respectively, and the
Corporation has received payment in full of the purchase price therefor as
specified in the Prospectus of the Corporation attached to and forming part of
the Registration Statement as being the consideration for the Common Shares,
will be validly issued as fully paid and non-assessable Common Shares of the
Corporation.
We hereby consent to the filing of this opinion as an exhibit to the
Registration Statement and to the use of our name under the caption "Legal
Matters" in the Prospectus forming a part of the Registration Statement.
This opinion is being furnished for the sole benefit of the addressee
hereof and may not be relied upon or distributed to any other person or entity
or for any other purpose without our express prior written consent. This
opinion is given as at the date hereof and we disclaim any obligation or
undertaking to advise any person of any change in law or fact which may come to
our attention after the date hereof.
Yours truly,
/s/ [ILLEGIBLE]
<PAGE> 1
EXHIBIT 10(k)
STOCK PURCHASE AGREEMENT
THIS STOCK PURCHASE AGREEMENT ("Agreement") is entered into as of the
2nd day of October, 1996 by and between Denbury Resources, Inc. ("Company") and
TPG Partners, L.P. ("Buyer").
W I T N E S S E T H
WHEREAS, the Company is offering 3,600,000 of its Common Shares
("Common Shares"), no par value, to the public in an offering ("Public
Offering") through a syndicate of underwriters ("Underwriters"); and
WHEREAS, concurrent with and conditioned upon the closing of the
Public Offering, the Company desires to sell to Buyer, and Buyer desires to
purchase from Company, 800,000 of the Company's Common Shares (the "Shares")
pursuant to a registered offering on the terms and conditions set forth herein;
NOW THEREFORE, in consideration of the mutual covenants and agreements
contained herein, and other good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto agree as
follows:
ARTICLE 1
PURCHASE AND SALE OF SHARES
1.1 PURCHASE AND SALE OF SHARES. Subject to the conditions set
forth in Section 1.3 hereof, the Company agrees to sell the Shares to Buyer and
Buyer agrees to purchase the Shares from the Company, on the terms and
conditions set forth in this Agreement.
1.2 PURCHASE PRICE. The purchase price per Share for the Shares
shall be 93.5% of the price per share of the Common Shares to the public in the
Public Offering, as set forth in the final prospectus relating to the Public
Offering; provided, however, that such purchase price shall be subject to
approval by the Toronto Stock Exchange ("TSE"). In the event that the TSE does
not approve the purchase price of 93.5% of the Public Offering price, the
purchase price of the Shares shall be 100% of the price per share to the public
in the Public Offering.
1.3 CONDITIONS PRECEDENT. The Company's obligation to sell and
Buyer's obligation to buy the Shares is subject to and conditioned upon (i) the
closing of the Public Offering, (ii) the effectiveness of a Registration
Statement relating to the TPG Offering, and (iii) the delivery to Buyer of a
final prospectus relating to the TPG Offering.
1
<PAGE> 2
1.4 CLOSING. The purchase and sale of the Shares shall be
consummated at a closing to be held simultaneously with the closing of the
Public Offering, or at such other date as the parties shall agree. At the
closing, the following documents shall be exchanged:
A. In payment of the purchase price for the Shares,
Buyer shall deliver immediately available funds to the Company by wire
transfer to NationsBank of Texas, N.A., ABA #______, Account No.______,
Memo: For the Account of Denbury Resources Inc.
B. The Company shall deliver the certificate(s)
representing the Shares to Buyer.
C. Buyer and the Company shall execute and deliver each
to the other at the closing a cross receipt for the certificate(s)
representing the Shares and the funds representing the purchase price
of the Shares, respectively.
1.5 ASSIGNMENT TO AFFILIATES. Buyer may assign all or any portion
of its rights to purchase the Shares under this Agreement to any one of its
affiliates having TPG GenPar, L.P., as its general partner, including TPG
Parallel I, L.P.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF BUYER
2.1 INFORMED INVESTOR. Buyer holds the position of an affiliate
of the Company for the purpose of Rule 144 promulgated pursuant to the
Securities Act of 1933 (the "Act"), and by reason of such position has access
to substantial information regarding the Company's finances, properties, assets
and liabilities, and business prospects. Such information is sufficient to
permit Buyer to make an informed investment in the Shares.
2.2 SOPHISTICATED INVESTOR. By reason of Buyer's business and
financial experience (and the business and financial experience of any persons
retained by Buyer to advise him with respect to his investment in the Shares),
Buyer (together with such advisers, if any) has such knowledge, sophistication
and experience in business and financial matters as to be capable of evaluating
the merits and risks of the investment in the Shares.
2.3 NO DISTRIBUTION INTENT. Buyer represents to the Company that
it is not acquiring the Shares with a view to, nor does it have any current
intent to engage in, a distribution of the Shares. Buyer acknowledges that as
an affiliate under Rule 144, Buyer may only resell the Shares in accordance
with the applicable terms and conditions of Rule 144 (other than Rule 144(d)),
including restrictions on the volume of Shares that may be resold and the
manner of sale.
2
<PAGE> 3
2.4 AUTHORITY; NO CONSENT. Upon execution and delivery by Buyer,
this Agreement will constitute the legal, valid, and binding obligation of
Buyer, enforceable against Buyer in accordance with its terms. Buyer has the
absolute and unrestricted right, power, and authority to execute and deliver
this Agreement and to perform its obligations under this Agreement. Buyer is
not and will not be required to obtain any consent from any person in
connection with the execution and delivery of this Agreement or the
consummation or performance of any of the transactions contemplated hereby.
2.5 NO VIOLATION. Buyer represents and warrants that neither the
execution and performance of this Agreement nor the consummation of the
transactions contemplated hereby will (i) conflict with, or result in a breach
of the terms, conditions and provisions of, or constitute a default under, its
organizational documents, any agreement, indenture or other instrument under
which it is bound, or (ii) violate or conflict with any judgment, decree,
order, statute, rule, regulation or administrative proceedings or lawsuits,
pending or threatened, of any court or any public, governmental or regulatory
agency or body having jurisdiction over him or his properties or assets.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF THE COMPANY
3.1 SHARES. The Shares will be duly authorized and when issued in
accordance with this Agreement and upon the payment of the purchase price set
forth in Section 1.2 hereof, will be duly and validly issued, fully paid and
nonassessable and the Company will deliver an opinion of Jenkens & Gilchrist, a
Professional Corporation, to that effect at the closing.
3.2 AUTHORITY; NO CONSENT. Upon the execution and delivery by the
Company of this Agreement, this Agreement will constitute the legal, valid, and
binding obligation of the Company, enforceable against it in accordance with
its terms. The Company has the absolute and unrestricted right, power, and
authority to execute and deliver this Agreement and to perform its obligations
under this Agreement. The Company is not and will not be required to obtain
any consent from any person in connection with the execution and delivery of
this Agreement or the consummation or performance of any of the transactions
contemplated hereby.
ARTICLE 4
MISCELLANEOUS
4.1 ENTIRE AGREEMENT. This Agreement sets forth the entire
agreement and understanding of the parties with respect to the transactions
contemplated hereby, and supersedes all prior agreements, arrangements, and
understandings relating to the subject matter hereof.
4.2 NOTICES. All notices, payments and other required
communications ("Notices") to the parties shall be in writing, and shall be
addressed, respectively, as follows:
3
<PAGE> 4
IF TO COMPANY: Denbury Resources Inc.
17304 Preston Road, Suite 200
Dallas, Texas 75252
Attn: Phil Rykhoek
IF TO BUYER: TPG Partners, L.P.
201 Main Street
Suite 2420
Fort Worth, Texas 76102
Attn: James J. O'Brien
All Notices shall be given (i) by personal delivery, or (ii) by electronic
communication, with a confirmation sent by registered or certified mail, return
receipt requested, or (iii) by registered or certified mail, return receipt
requested. All Notices shall be deemed delivered (i) if by personal delivery,
on the date of delivery if delivered during normal business hours, and, if not
delivered during normal business hours, on the next business day following
delivery, (ii) if by electronic communication, on the date of receipt of the
electronic communication, and (iii) if solely by mail, on the date of deposit
of the mailing in an official U.S. post office mail depository. A party may
change its address by Notice to the other party.
4.3 APPLICABLE LAW AND VENUE. All questions concerning the
construction, validity and interpretation of this Agreement shall be governed
by the internal laws, and not the law of conflicts, of the State of Texas. Any
legal action relating to this Agreement shall be brought only in a court of
competent jurisdiction in Dallas County, Texas or in the United States District
Court for the Northern District of Texas, Dallas Division.
4.4 ATTORNEY'S FEES. If any legal action is brought by any party
hereto, it is expressly agreed that the prevailing party in such legal action
shall be entitled to recover from the other party reasonable attorneys' fees in
addition to any other relief that may be awarded. For the purposes of this
Section, the "prevailing party" shall be the party in whose favor final
judgment is entered. In the event that declaratory or injunctive relief alone
is granted, the court may determine which, if either, of the parties is the
prevailing party. The amount of reasonable attorneys' fees shall be determined
by the court.
4.5 WAIVER. The failure of a party to insist on the strict
performance of any provision of this Agreement or to exercise any right, power
or remedy upon a breach hereof shall not constitute a waiver of any provision
of this Agreement or limit the party's right thereafter to enforce any
provision or exercise any right.
4.6 SEVERABILITY. If any term, provision, covenant, or
restriction of this Agreement is held by the final, nonappealable order of a
court of competent jurisdiction to be invalid, void, or unenforceable, the
remainder of the terms, provisions, covenants, and restrictions hereof shall
remain in full force and effect and shall in no way be affected, impaired, or
invalidated.
4
<PAGE> 5
4.7 AMENDMENTS. This Agreement may be amended, modified, or
superseded only by written instrument executed by all parties hereto.
4.8 HEADINGS. The Article and Section headings appearing in this
Agreement are for convenience of reference only and are not intended, to any
extent or for any purpose, to limit or define the text of any Article or
Section.
4.9 GENDER AND NUMBER. Whenever required by the context, as used
in this Agreement, the singular number shall include the plural and the neuter
shall include the masculine or feminine gender, and vice versa.
4.10 COUNTERPARTS. This Agreement may be executed in several
counterparts, each of which shall be an original and all of which together
shall constitute one agreement binding on all parties hereto, notwithstanding
that all the parties have not signed the same counterpart.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
effective as of the date first above written.
Company: DENBURY RESOURCES INC.
By: /s/ PHIL RYKHOEK
----------------------------
Phil Rykhoek
Chief Financial Officer
Buyer: TPG PARTNERS, INC.
By: TPG GenPar, L.P.
its General Partner
By: TPG Advisors, Inc.
its General Partner
By: /s/ JAMES J. O'BRIEN
--------------------
James J. O'Brien
Vice-President
5
<PAGE> 1
EXHIBIT 23(A)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Denbury Resources
Inc. on Form S-1 of our report dated May 22, 1996 (June 21, 1996 as to Note 1)
on the statements of revenues and direct operating expenses attributable to
certain oil and gas properties (Amerada Hess Properties) acquired by Denbury
Resources Inc. for the years ended December 31, 1995, 1994 and 1993, appearing
in the Prospectus.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE LLP
Dallas, Texas
October 22, 1996
<PAGE> 1
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Denbury Resources
Inc. on Form S-1 of our report dated February 23, 1996 (October 15, 1996 as to
Note 11), on the consolidated financial statements of Denbury Resources Inc.
(formerly Newscope Resources Ltd.), appearing in the Prospectus, which is part
of this Registration Statement, of our report dated February 23, 1996 (October
15, 1996 as to Note 5), relating to the financial statement schedule appearing
elsewhere in the Registration Statement and of our report dated April 9, 1996
(April 15, 1996 as to Note 1), relating to the statements of revenues and direct
operating expenses attributable to certain oil and gas properties (Ottawa
Properties) acquired by Denbury Resources Inc. for the year ended December 31,
1995 appearing in the Prospectus, which is a part of this Registration
Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE
Chartered Accountants
Calgary, Alberta
October 22, 1996
