<PAGE> 1
As filed with the Securities and Exchange Commission on September 13, 1996
Registration No. 333
================================================================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
FORM S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
DENBURY RESOURCES INC.
(Exact name of Registrant as specified in its charter)
CANADA 1311 NOT APPLICABLE
(State or other jurisdiction (Primary standard industrial (I.R.S. employer
of incorporation or classification code identification no.)
organization) number)
PHIL RYKHOEK, C.F.O.
17304 PRESTON ROAD, SUITE 200 DENBURY RESOURCES INC.
DALLAS, TEXAS 75252 17304 PRESTON RD., SUITE 200
(972) 380-1923 DALLAS, TEXAS 75252
(Address and telephone number of (972) 380-1923; FACSIMILE: (972) 713-3051
Registrant's (Name, address and telephone number
principal executive offices) of Agent for Service)
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;
HOUSTON, TX 77002 FACSIMILE: (214) 953-6503
(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: [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
=========================================================================================================
Proposed
maximum Proposed maximum
Title of each class Amount offering aggregate Amount of
of securities to be to be price per offering price Registration
registered registered* share (1)(2) (2) Fee
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares . . . . . . . . . . . . . . . 4,600,000 $12.50 $57,500,000 $19,827.59
=========================================================================================================
</TABLE>
* Includes an aggregate of 600,000 Shares subject to an Underwriters' over
allotment option.
(1) Calculated by averaging the high $12.75 and low $12.25 price of Common
Shares of the Registrant on September 12, 1996 on the Nasdaq National
Market pursuant to Rule 457(c).
(2) Such figures give effect to the proposed one-for-two reverse stock split.
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
----- -------
<S> <C> <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
Policy
(e) Financial Statements . . . . . . . . . . . . . . . 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 Management's Discussion and Analysis of
Financial Condition and Results of Operations . . . 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 Interests of Management in Certain
Transactions . . . . . . . . . . . . . . . . . . . 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 SEPTEMBER 13, 1996
PROSPECTUS 4,000,000 SHARES
________, 1996 [DRI LOGO]
Common Shares
All of the Common Shares offered hereby (the "Offering") are being
sold by Denbury Resources Inc. 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 September 12, 1996, the closing price of the Common
Shares on the Nasdaq National Market and The Toronto Stock Exchange as reported
by each such exchange (adjusted for the one-for-two reverse split of Common
Shares) was U.S. $12.25 and Cdn. $16.90, respectively. See "Price Range of
Common Shares and Dividend Policy."
SEE "RISK FACTORS" BEGINNING ON PAGE 9 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>
- ----------------------------------------------------------------------------------------------
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO THE
THE PUBLIC COMMISSIONS (1) COMPANY (2)
<S> <C> <C> <C>
- ----------------------------------------------------------------------------------------------
Per share . . . . . . . . . . $ $ $
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 the Offering 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 600,000 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 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 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 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 THIS 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."
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<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, other than as appearing in the Consolidated
Financial Statements, has been adjusted to reflect a one-for-two reverse split
of the Common Shares, which will be submitted to the shareholders for approval
on October 9, 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. 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 the 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
3
<PAGE> 6
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 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
PRIVATE PLACEMENT OF SECURITIES
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."
CAPITALIZATION ADJUSTMENTS
The Company has called a Special Meeting of its shareholders to be
held on October 9, 1996 (the "Meeting") to approve an amendment to the Articles
of Continuance governing the terms of the Convertible Preferred that would give
the Company the right to convert the Convertible Preferred to Common Shares at
any time, at the election of the Company (the "Preferred Amendment"). The
Company intends to convert the Convertible Preferred simultaneously with the
closing of the Offering. In addition to the Preferred Amendment, the
shareholders will be asked to approve at the Meeting: (i) a one-for-two
reverse split of Common Shares and (ii) the issuance of Common Shares at an
issue price of Cdn. $14.72 per share in lieu of interest that would be due on
the Company's 9 1/2% Convertible Debentures ("Debentures") from the conversion
date to and including April 13, 1997, if the holders of such Debentures convert
the Debentures into Common Shares prior to April 13, 1997.
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"). Giving effect to the issuance of Common Shares for the
Warrants and the 6 3/4% Convertible Debentures, and the approval of the three
shareholder resolutions and subsequent conversions of the Convertible Preferred
and Debentures upon approval by the Board of Directors (collectively, the
"Capitalization Adjustments"), as of June 30, 1996 an additional 3,400,200
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
5
<PAGE> 8
to the interest acquired by the 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 September 12, 1996 of $53.0 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 OFFERING
COMMON SHARES OFFERED BY THE COMPANY. . . . 4,000,000 shares
COMMON SHARES TO BE OUTSTANDING
AFTER THE OFFERING . . . . . . . . . . 19,079,090 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
(1) Represents Common Shares outstanding as of August 31, 1996 after
giving effect to the Capitalization Adjustments and the Offering.
This total does not include 1,769,250 shares issuable pursuant to
outstanding warrants and stock options, of which 1,185,000 were
exercisable as of August 31, 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 Reserve Estimates,"
"Business and Properties - Oil and 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
Estimated discounted future net revenues before
income taxes (PV10 Value) (thousands)
(1) (2) . . . . . . . . . . . . . . . . $28,638 $52,691 $96,965 $175,255
Standardized measure of discounted estimated
future net cash flow after net income
taxes (thousands) (2). . . . . . . . . . $28,465 $46,928 $81,164 $150,160
</TABLE>
(1) 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.
(2) Determined based on period-end unescalated prices and costs in
accordance with the guidelines of the Securities and Exchange
Commission ("SEC"), discounted at 10% per annum.
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 (2) 1994 1995 1995 (1) 1995 1996 1996 (1)
--------- ------ ------ ----------- ------- --------- ----------
<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) (0.61) (1.25) (0.19) (0.07)
------ ------ ------ ------ ------ ------ -------
Operating cash flow (3) $ 6.96 $ 5.93 $ 6.12 $ 6.84 $ 5.79 $11.00 $ 10.95
====== ====== ====== ====== ====== ====== =======
</TABLE>
(1) Adjusted to give effect to the Hess Acquisition and Ottawa
Acquisition as if such acquisitions had been completed as of the
beginning of the periods presented.
(2) Includes production from Canadian properties sold during 1993.
(3) Represents cash flow provided by operations, exclusive of the net
change in non-cash working capital balances.
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<PAGE> 10
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)
------- -------- -------- -------- ------- -------- --------
SELECTED INCOME STATEMENT DATA: (Dollars in thousands, except per share amounts)
<S> <C> <C> <C> <C> <C> <C> <C>
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 2,066 927 681 233
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 36,555 8,307 16,375 20,655
------- -------- -------- -------- ------- -------- --------
Income before the following: 1,114 1,881 1,081 4,718 711 4,399 8,043
Gain on sale of Canadian
properties . . . . . . . . 966 - - - - - -
------- -------- -------- -------- ------- -------- --------
Income before income taxes . . . . 2,080 1,881 1,081 4,718 711 4,399 8,043
Provision for federal income taxes (345) (718) (367) (1,603) (242) (1,804) (2,785)
------- -------- -------- -------- ------- -------- --------
Net income . . . . . . . . . . . . $1 ,735 $ 1,163 $ 714 $ 3,115 $ 469 $ 2,595 $ 5,258
======= ======== ======== ======== ======= ======== ========
Net income per common share (2) . . $ 0.35 $ 0.19 $ 0.10 $ 0.27 $ 0.07 $ 0.23 $ 0.28
======= ======== ======== ======== ======= ======== ========
Weighted average common
shares outstanding (2) . . . 4,990 6,240 6,870 11,521 6,536 11,512 18,921
======= ======== ======== ======== ======= ======== ========
OTHER DATA:
Operating cash flow (3) . . . . . . $ 3,030 $ 6,185 $ 9,394 $ 21,530 $ 4,025 $ 13,303 $ 18,582
Capital expenditures . . . . . . . 29,855 16,903 28,524 - 10,506 60,733 -
Adjusted EBITDA (4) . . . . . . . . 3,019 7,213 11,311 23,428 4,892 13,537 18,691
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF JUNE 30, 1996
---------------------------------- -----------------------
PRO
1993 1994 1995 ACTUAL FORMA (5)
-------- --------- -------- ---------- ----------
BALANCE SHEET DATA: (Dollars in thousands)
<S> <C> <C> <C>
Total assets . . . . . . . . . . . . . . . . . $ 35,978 $ 48,964 $ 77,641 $ 132,900 $ 139,610
Working capital (deficiency) . . . . . . . . . (1,410) (1,620) 6,862 (1,184) 5,526
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 57,258 122,657
</TABLE>
(1) Gives effect to the (i) Capitalization Adjustments, (ii) Hess Acquisition,
(iii) Ottawa Acquisition, and (iv) the application of estimated net
proceeds of $46.3 million from the Offering as if such transactions had
been consummated as of January 1 of the period presented. See "Use of
Proceeds."
(2) Adjusted for a proposed one-for-two reverse split of Common Shares to be
effective in October 1996, subject to shareholder and regulatory approval.
(3) Represents cash flow provided by operations, exclusive of the net change
in non-cash working capital balances.
(4) 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.
(5) Gives effect to the Capitalization Adjustments and the application of
estimated net proceeds of $46.3 million from the Offering.
8
<PAGE> 11
RISK FACTORS
In addition to other information set forth elsewhere in this
Prospectus, the following factors relating to the Company and the Offering
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 and results of operations. 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 has not
entered into any financial hedging contracts as of September 12, 1996.
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 shut-in 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 a
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.
9
<PAGE> 12
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 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 revenue 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 revenue
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 Offering,
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.
10
<PAGE> 13
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 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 spent on average 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 September 12, 1996, the Company had a $53.0 million
borrowing base on its Credit Facility, $8.0 million of which was available.
The Company intends to use the net proceeds from this Offering 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. Assuming approval by the shareholders of the Company, the
Convertible Preferred will be converted into approximately 2.8 million Common
Shares concurrently with the closing of this Offering. After adjusting for
this conversion, the Offering and the other Capitalization Adjustments, TPG
will own approximately 39% 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. See "Interests of Management in Certain Transactions."
SHARES ELIGIBLE FOR FUTURE SALE
After giving effect to the Offering and the Capitalization
Adjustments, the Company would have had 19,079,090 Common Shares outstanding as
of August 31, 1996 (19,679,090 shares assuming exercise of the Underwriters'
over-allotment option in full). The Common Shares sold in the Offering will be
freely tradable without restrictions or further registration under the
Securities Act of 1933, as amended (the "Securities Act"). All 7,608,038 of
the Common Shares beneficially owned by TPG as of the close of the Offering
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 become eligible for sale on the open
market under Rule 144 from time to
11
<PAGE> 14
time after December 21, 1997. In connection with the Offering, the Company,
all of it's 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."
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. Additionally, TPG has the right, 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%. TPG has waived its
"piggyback" registration rights and its pre-emptive rights with regard to the
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 - Executive
Officers and Directors."
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
12
<PAGE> 15
states have also enacted statutes prescribing ceiling prices for natural gas
sold within the state. See "Business and Properties - Governmental
Regulations."
Various United States federal, state and local laws and regulations
governing the discharge of materials into the environment, or otherwise
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 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 - Environmental
Matters."
AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED SHARES; ANTI-TAKEOVER
PROVISIONS
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, 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 this Offering, 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
13
<PAGE> 16
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, the 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
USE OF PROCEEDS
The net proceeds to the Company from the sale of Common Shares in the
Offering are estimated to be approximately $46.3 million ($53.3 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 September
12, 1996, the Credit Facility had an outstanding balance of $45.0 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 $5.0 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 Offering, 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 Offering 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. 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 proposed
one-for-two reverse stock split to be effective in October 1996, subject to
shareholder and regulatory approval.
<TABLE>
<CAPTION>
NASDAQ TSE
--------------------- --------------------
High Low High Low
-------- -------- ------- -------
1994 (U.S. $) (Cdn. $)
<S> <C> <C> <C> <C>
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 through September 12, 1996 13.50 10.00 18.60 13.70
</TABLE>
The last reported sales prices of the Common Shares on NASDAQ and the
TSE on September 12, 1996, as reported by such exchanges, were U.S. $12.25 per
share and Cdn. $16.90 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 September 1, 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 $46.3 million estimated net proceeds from the
Offering, 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, "Managements'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 $ 9,795
========= =========
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 19,032,415 outstanding,
respectively (2) . . . . . . . . . . . . . . . . . . . . 51,226 116,761
Retained earnings (3) . . . . . . . . . . . . . . . . . . . 6,032 5,896
--------- ---------
Total shareholders' equity . . . . . . . . . . . 57,258 122,657
--------- ---------
Total capitalization . . . . . . . . . $ 115,981 $ 122,691
========= =========
</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) 4,000,000 Common Shares upon the closing
of the Offering, (ii) 2,816,372 Common Shares in exchange for the
Convertible Preferred, (iii) 308,642 Common Shares for the principal
and 12,686 Common Shares for the interest from June 30, 1996 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 $136,000 charge to earnings for the imputed interest from
June 30, 1996 to April 13, 1997 for the pro forma early conversion of
the 9 1/2% Convertible Debentures. This interest would be 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 Offering 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 $ 0.28
========= ========
Average common shares outstanding 11,512 18,921
========= ========
</TABLE>
See notes on 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>
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) (3,357)(3) 2,066
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 (3,357) 36,555
-------- -------- -------- -------- -------- --------
Income before tax . . . . . . . . . 1,081 2,295 10,322 (12,337) 3,357 4,718
Provision for federal income tax (367) (780) (3,509) 4,194 (1,141) (1,603)
-------- -------- -------- -------- -------- --------
Net income . . . . . . . . . . . . $ 714 $ 1,515 $ 6,813 $ (8,143) $ 2,216 $ 3,115
======== ======== ======== ======== ======== ========
Net income per common share . . . . $ 0.10 $ 0.27
======== ========
Average common shares outstanding . 6,870 11,521
======== ========
</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 $46.3 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 ($1.6
million and $3.5 million for 1996 and 1995, 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 ($87,000 and $167,000 for 1996 and 1995, 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 ($35,000 and $74,000 for 1996
and 1995, 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 . . . . . . . . . . - - (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(1) . . . . . . $ (0.58) $ (0.11) $ 0.35 $ 0.19 $ 0.10 $ 0.07 $ 0.23
======= ======= ======= ======== ======== ======= ========
Weighted average common shares outstanding(1) . . 1,952 2,949 4,990 6,240 6,870 6,536 11,512
======= ======= ======= ======== ======== ======= ========
Other Data:
Operating cash flow(2) . . . . . . . . . . . . . $ 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(3) . . . . . . . . . . . . . . . 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) Adjusted for a proposed one-for-two reverse split to be effective in
October 1996, subject to shareholder and regulatory approval.
(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 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 the 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 September 12, 1996 of $53.0
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
22
<PAGE> 25
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.
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 made total capital expenditures of
$136.0 million, which were 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 September 12, 1996, the Company had a borrowing base of $53.0
million with a total of $45.0 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 Offering 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, $48.2 million on the
previously discussed oil and natural gas acquisitions, and approximately $1.8
million on geological and geophysical expenditures. The development
expenditures included $3.9 million on drilling and the balance of $6.8 million
on workover costs. These expenditures were funded by bank debt, available cash
and cash flow from operations.
23
<PAGE> 26
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 Humphrey's fields located near the Company's
other properties in Southern Louisiana (the "Gibson Acquisition").
The balance of the 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 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 $21.6 million was for acquisitions. The remaining $8.3
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
24
<PAGE> 27
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 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 cost 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
25
<PAGE> 28
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.
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% in 1995 to 13,271
Mcf/d from 9,113 Mcf/d in 1994. 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, oil prices increased 8%
from $13.84 per Bbl in 1994 to $14.90 per Bbl in 1995 and natural gas prices
also increased 7%, with 1995 average prices of $1.90 per Mcf versus the $1.78
per Mcf average received in 1994. The Company realized a $800,000 gas hedging
gain during 1995 which added $0.17 per Mcf to the 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 the 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
26
<PAGE> 29
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% percent 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
non- recurring charges and a disproportionate increase in depreciation and
depletion expense as compared to the increase in revenue.
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.
27
<PAGE> 30
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 over 1993 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 the 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.
28
<PAGE> 31
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. 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 the 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
29
<PAGE> 32
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.
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 the 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.
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<PAGE> 33
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 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 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 "Risks
Factors-Uncertainty of Reserve Estimates."
<TABLE>
<CAPTION>
1996 AVERAGE
PROVED RESERVES AS OF JULY 1, 1996 PRODUCTION (1)
----------------------------------------- ------------------- AVERAGE
PV10 PV10 GROSS NET
NATURAL VALUE VALUE NATURAL PRODUCTIVE REVENUE
OIL GAS (000'S) % OF OIL GAS WELLS INTEREST
(MBBLS) (MMCF) (2) TOTAL (BBLS/D) (MCF/D) (3) (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%
S. 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%
S. 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 and Sales Prices" 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 has 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 on the Company's
existing production with potential throughout the areas for even deeper
production. The region produces predominantly natural gas, with most
reservoirs producing with a water-drive mechanism.
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<PAGE> 34
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 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% 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 level of 78%
working interest.
As a result of two workovers and two wells drilled during 1996, net
production had increased during August 1996 to 11.6 MMcf/d and 181 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 Humphrey 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 Humphrey's 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 August 1996, net production in these two fields
averaged approximately 3.8 MMcf/d and 66 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, the 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 August 1996, these three wells produced
at an average net rate of 0.4 MMcf/d. The Company plans a series of
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<PAGE> 35
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.
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 August
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 Field
The Lapeyrouse Field is a large structural feature which has produced
over 2 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 August 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 in 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
August 1996, net production from this field averaged 0.1 MMcf/d and 162 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 August 1996, net
production from this field averaged 1.6 MMcf/d.
Denbury owns a 100% working interest in 551 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
33
<PAGE> 36
and commenced production on September 2, 1996. During the first eight days of
production, the well averaged 3.1 MMcf/d and 41 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.
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 August 1996, the net production from
this field averaged 1,169 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
34
<PAGE> 37
interests in eight other wells. The net average production from these wells
during August 1996 was approximately 805 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.
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 August 1996, net
production from the field averaged 506 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 produced on average
during August 1996, 378 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
August 1996, net production from the field averaged 271 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
35
<PAGE> 38
producing wells and 13 shut in wells. The Company owns an average working
interest of 82%. In August 1996, net production from these wells averaged 173
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.
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 August 1996, the average net production from these wells was
2.3 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, the 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 to its current level of 186 BOE/d during
August 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 August
1996 averaged 254 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
36
<PAGE> 39
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. The following paragraphs outline
information regarding these five acquisitions.
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 until 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 acquisitions. As
of July 1, 1996, the estimated net proved reserves of the properties totaled
2,368 MBOE, 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 until
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 MBOE, 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 412 MBbls and 9,435
MMcf, aggregating 1,985 MBOE. From the date of acquisition until 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 1,570 MBOE,
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
approximately 175 Bbls/d, or approximately 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
approximately 360 Bbls/d, or approximately 629 BOE/d, net to the interest
acquired by Denbury. As of July 1, 1996, the estimated net proved reserves of
the properties was 1.3 MMBOE, with a PV10 Value of $10.4 million.
37
<PAGE> 40
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 Amerada 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 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 following
summary pro forma results assume that these transactions were
completed as of the beginning of each respective period. See also
"Pro Forma Operating Results."
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<PAGE> 41
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>
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>
Oil Wells Natural Gas 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>
Oil Wells Natural Gas 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>
39
<PAGE> 42
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. There were two wells in the process of
drilling at June 30, 1996.
<TABLE>
<CAPTION>
Six Months
Ended June 30,
Year Ended December 31, June 30,
---------------------------------------------------------- ----------------
1993 1994 1995 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 nor in transporting its product to these markets.
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 does not have any
hedge contracts in place as of September 12, 1996.
40
<PAGE> 43
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.
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
41
<PAGE> 44
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
Historically, the transportation and sale for resale of natural gas in
interstate commerce have been regulated pursuant to the Natural Gas Act of 1938
(the "NGA"), the Natural Gas Policy Act of 1978 (the "NGPA") and the
regulations promulgated thereunder by the Federal Energy Regulatory Commission
(the "FERC"). Maximum selling prices of certain categories of natural gas sold
in "first sales," whether sold in interstate or intrastate commerce, were
regulated pursuant to the NGPA. On July 26, 1989, the Natural Gas Wellhead
Decontrol Act (the "Decontrol Act") was enacted, which removed, as of not later
than January 1, 1993, all remaining federal price controls from natural gas
sold in "first sales". The FERC's jurisdiction over natural gas transportation
was unaffected by the Decontrol Act.
Historically, producers typically sold their production to intrastate
and interstate pipelines, which then functioned as the wholesalers selling to
the local distributors and other end-use customers. However, in April 1992,
the FERC issued Order No. 636, a rule designed to restructure the interstate
natural gas transportation and marketing system and remove various barriers and
practices that have historically limited non-pipeline natural gas sellers,
including producers, from effectively competing with interstate pipelines for
sales to local distribution companies and large industrial and commercial
customers. Order No. 636 requires that interstate pipelines provide
transportation services to all shippers an open and non-discriminatory basis
and separate from their sales service. Because the purpose of Order No. 636 is
to give all customers a chance to purchase their gas supplies from non-pipeline
merchants, the regulations require that pipelines provide firm and
interruptible transportation service and access to gas storage facilities on a
basis that is equal in quality for all natural gas supplies, whether purchased
from the pipeline or elsewhere, and access to gas storage facilities. The
restructuring process has been implemented on a pipeline-by- pipeline basis
through negotiations in individual pipeline proceedings, followed by FERC
orders approving the plans, sometimes imposing significant conditions.
Numerous parties filed for judicial review of Order No. 636 as well as for
judicial review of the FERC's orders approving restructuring plans for various
individual pipelines. The United States Court of Appeals for the District of
Columbia Circuit (the "Court") recently issued its decision in the appeal of
Order No. 636 and largely upheld the basic tenets of the order. The Court's
decision is still subject to rehearing and parties could potentially petition
for writ of certiorari to the United States Supreme Court. It is not possible
to predict what effect, if any, the ultimate outcome of this judicial review
process or the other appeals still pending in individual pipeline restructuring
proceedings will have on the FERC's open-access regulations or on the Company.
The FERC is currently considering several other rules intended to
streamline its regulation of the industry and promote competition. One deals
with pipeline rates. For decades, the principal methodology used to set
interstate pipeline rates has been based on the actual cost to provide that
service. In recent years, regulators have concluded that sufficient
competition may exist in certain markets to allow a relaxation of this historic
approach. In January 1996, the FERC issued a statement of policy and request
for comments concerning alternatives to its traditional cost-of- service
ratemaking methodology and set forth the criteria that the FERC will use to
evaluate proposals to charge market- based rates for the transportation of
natural gas. The FERC also requested comments on whether it should allow gas
pipelines the flexibility to negotiate the terms and conditions of
transportation service with prospective shippers. In another rulemaking, the
FERC is considering how to alter its regulations to promote the fair and
effective release and recontracting of pipeline capacity from one shipper to
another, and to what extent such transactions should be regulated where the
market is demonstrably competitive. In this regard, an experimental pilot
program implementing certain new procedures will be implemented in the
1996-1997 winter heating season. Lastly, the FERC
42
<PAGE> 45
has issued a policy statement on how interstate pipelines can recover in rates
the costs of new facilities. While the policy may affect the Company and other
producer-shippers only indirectly, the policy should enhance competition in new
markets and encourage the construction of gas supply laterals. As to all of
these matters, the Company cannot predict what further action the FERC will
take; however, the Company does not believe that it will be affected by any
action taken materially differently than other natural gas producers, gatherers
and marketers with which it competes.
Commencing in May 1994, the FERC began to delineate a new gathering
policy in light of Order No. 636. As a general matter, gathering, which is the
transportation of gas in or near the field where produced to points of
interconnect with large diameter, high pressure transportation pipelines, is
exempt from the FERC's jurisdiction; however, where the gathering is performed
by the interstate pipelines in association with the pipeline's jurisdictional
transportation activities, the FERC retains regulatory control over the
associated gathering services to prevent abuses. Except in situations in which
the gatherer acts in concert with an interstate pipeline affiliate to frustrate
the FERC's transportation policies, the FERC does not generally have
jurisdiction. In addition, the FERC has approved several transfers proposed by
interstate pipelines of gathering facilities to unregulated independent or
affiliated gathering companies. The FERC's policy of approving the interstate
pipeline's proposed "spindown" of its gathering facilities to an unregulated
affiliate company has recently been upheld on judicial review, but the court
reversed and remanded that portion of the FERC's orders by which the
unregulated affiliate was obligated to continue existing gathering services to
producers under "default contracts" for up to two years after spindown. It
remains unclear whether the FERC will attempt to reimpose such conditions or
will otherwise act in response to producer requests for additional protection
against perceived monopolistic action by pipeline-related gatherers. While
changes to the FERC's gathering policy affect the Company only indirectly, such
changes could affect the price and availability of capacity on certain
gathering facilities, and thus access to certain interstate pipelines, which,
in turn, could affect the price of gas at the wellhead and in markets in which
the Company competes. However, the Company does not believe that it will be
affected by these changes to the FERC's gathering policy materially
differently than other natural gas producers with which it competes.
In October 1992, the Energy Policy Act of 1992 was enacted. This Act
streamlined the permitting process necessary to import Canadian natural gas and
altered the treatment of such gas under the NGPA, eliminating the FERC's
jurisdiction over the price of non-pipeline sales of natural gas imported from
Canada. Canadian natural gas imports still require import authorizations from
the Department of Energy's Office of Fossil Energy under Section 3 of the NGA
and construction and siting authorizations, where applicable, from the FERC.
These changes could enhance the ability of Canadian producers to export natural
gas to the United States and increase competition in the domestic natural gas
market.
Additional proposals and proceedings that might affect the natural gas
industry are pending before Congress, the FERC and the courts. The natural gas
industry historically has been very heavily regulated; therefore, there is no
assurance that the less stringent regulatory approach recently pursued by the
FERC and Congress will continue.
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.
43
<PAGE> 46
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 Company generates wastes, including hazardous wastes, that are
subject to the Federal Resource Conservation and Recovery Act ("RCRA") and
comparable state statutes. The EPA and various state agencies have limited the
approved methods of disposal for certain hazardous and nonhazardous wastes.
Furthermore, 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.
The Company currently owns or leases numerous properties that for many
years have been used for the exploration and production of oil and gas.
Although the Company believes that it has utilized good operating and waste
disposal practices, prior owners and operators of these properties may not have
utilized similar practices, and, hydrocarbons or other wastes may have been
disposed of or released on or under the properties owned or leased by the
Company or on or under locations where such wastes have been taken for
disposal. In addition, many of these properties have been operated by third
parties whose treatment and disposal or release of hydrocarbons or other wastes
was not under the Company's control. These properties and the wastes disposed
thereon may be subject to Comprehensive Environmental Response, Compensation,
and Liability Act ("CERCLA"), RCRA and analogous state laws. Under such laws,
the Company could be required to remove or remediate previously disposed wastes
(including wastes disposed of or released by prior owners or operators) or
property contamination (including groundwater contamination) 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. Amendments to the CAA were
adopted in 1990 and contain provisions that 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. The OPA also requires owners and operators of facilities that could be
the source of an oil spill into waters of the United States, including
wetlands, to post a bond, letter of credit, or other form of financial
assurance in the amount of $150 million to cover costs that could be incurred
by governmental authorities in responding to an oil spill. This financial
assurance requirement has not yet been enforced by the federal government, and
legislation is currently pending before Congress that would limit the financial
assurance requirement to offshore facilities and reduce the amount to $35
million. If the financial assurance requirements is enforced without change,
the Company and other similarly situated onshore oil and gas producers could
suffer increased operating costs. In addition to OPA, other federal and state
laws for the control of water pollution also provide varying civil and criminal
penalties and liabilities in the case of releases of petroleum or its
derivatives into surface waters or into the ground. Regulations are currently
44
<PAGE> 47
being developed under the OPA and state laws concerning oil pollution
prevention and other matters that may impose additional regulatory burdens on
the Company. In addition, the CAA and analogous state laws require permits to
be obtained to authorize discharge into surface waters or to construct
facilities in wetland areas. With respect to certain of its operations, the
Company is required to maintain such permits or meet general permit
requirements. The EPA recently adopted regulations concerning discharges of
storm water runoff. This program requires covered facilities to obtain
individual permits, participate in a group permit or seek coverage under an EPA
general permit. The Company believes that it will be able to obtain, or be
included under, such permits, where necessary, and minor modifications to
existing facilities and operations that would not have a material affect on the
Company.
CERCLA, also known as the "Superfund" law, and similar state laws
impose liability, without regard to fault or the legality of the original
conduct, on certain classes of persons that are considered to have contributed
to the release of a "hazardous substance" into the environment. These persons
include the owner or operator of the disposal site or sites where the release
occurred and companies that disposed or arranged for the disposal of the
hazardous substances found at the site. Persons who are or were responsible
for releases of hazardous substances under CERCLA may be subject to joint and
several liability for the costs of cleaning up the hazardous substances that
have been released into the environment and for damages to natural resources,
and it is not uncommon for neighboring landowners and other third parties to
file claims for personal injury and property damage allegedly caused by the
hazardous substances released into the environment.
The Company 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.
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<PAGE> 48
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 holds office until his
death, resignation or removal or until his successor is duly elected and
qualified. Each 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. This vacancy will be
filled by a non-TPG nominee at or before the Company's next annual meeting.
<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
Gareth Roberts . . . . . . . . . . 43 President, Chief Executive Officer and 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.
46
<PAGE> 49
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 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, Dallas,
Texas, 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, Dallas, Texas, 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, Dallas, Texas, 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, Dallas, Texas, 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. This vacancy will be filled by a non- TPG nominee at or
before the Company's next annual meeting.
47
<PAGE> 50
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.
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 COMPENSATION
------------------------ ----------------------
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 1994 - - -
Secretary(2) 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 such other stock exchanges on which the Common Shares are listed and
posted for trading from time to time.
48
<PAGE> 51
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 August 31, 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 435,250 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 $7.56. Of the total outstanding options, 485,000 were
currently exercisable as of August 31, 1996. From January 1, 1996 through
August 31, 1996, the Company granted 516,500 options.
OPTION GRANTS IN LAST FISCAL YEAR
The following table represents the options granted to the Named
Executive Officers during 1995 and the value of such options:
<TABLE>
<CAPTION>
INDIVIDUAL GRANTS POTENTIAL REALIZABLE
---------------------------------------------------- VALUE AT ASSUMED ANNUAL
NUMBER OF % OF RATES OF
SECURITIES TOTAL OPTIONS EXERCISE STOCK PRICE
UNDERLYING GRANTED TO OR BASE APPRECIATION FOR OPTION TERM(2)
OPTIONS EMPLOYEES IN PRICE EXPIRATION -------------------------------
NAME GRANTED (#) FISCAL YEAR ($/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 and directors concerning unexercised options held as of
December 31, 1995. None of the Named Executive Officers or directors exercised
any options during 1995.
49
<PAGE> 52
AGGREGATED OPTION EXERCISES IN LAST FISCAL YEAR
AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
VALUE OF UNEXERCISED IN-THE MONEY
NUMBER OF UNEXERCISED 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.
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 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 former 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
Company will present to the shareholders for approval at a Special Meeting on
October 9, 1996 a resolution to amend the terms of the Convertible Preferred to
allow the Company to require a conversion of the Convertible Preferred at any
time. See "-Modification of Convertible Preferred and Debentures." 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 June 30, 1996, TPG is the holder of 7,608,038
Common Shares, on a fully-diluted basis, which represents 48.5% of the
outstanding Common Shares prior to the Offering.
50
<PAGE> 53
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 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 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.
Modification of Convertible Preferred and Debentures
In order to position the Company for the 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 believe 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 to
Common Shares prior to the mandatory redemption date. Accordingly, the Company
has called a Special Meeting of the shareholders of the Company to be held on
October 9, 1996 to consider resolutions to effect the foregoing.
If the resolution regarding the Convertible Preferred is approved by
the shareholders and subject to, and simultaneously with, the completion of the
Offering, the Company plans to require a conversion, 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.
If the resolution regarding the Debentures is approved, the Company
would issue a total of 7,958 Common Shares in lieu of interest, assuming an
approval date and conversion as of October 15, 1996, 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, owns
80% of the 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
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<PAGE> 54
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 directors have any remaining
interests in properties owned by the Company.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth information, as of August 31, 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 OFFERING OFFERING (1)
NAME AND ADDRESS OF ------------------------------- ---------------
BENEFICIAL OWNER SHARES PERCENT PERCENT
- --------------------------------------- ------------- --------- ---------
<S> <C> <C> <C>
Ronald G. Greene . . . . . . . . . . . 869,917 (2) 5.8% (2) 4.6% (2)
Suite 700, 407 - 2nd Street
Calgary, Alberta T2P 2Y3
David Bonderman . . . . . . . . . . . . 7,608,038 (3) 48.5% (3) 38.6% (3)
201 Main Street, Suite 2420
Ft. Worth, TX 76102
William S. Price, III . . . . . . . . . 7,608,038 (3) 48.5% (3) 38.6% (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) 2.7% (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) . . . 9,310,364 (8) 58.6% (8) 46.8% (8)
TPG Advisors, Inc. . . . . . . . . . . 7,608,038 (3) 48.5% (3) 38.6% (3)
201 Main Street, Suite 2420
Ft. Worth, TX 76102
</TABLE>
* Less than 1%.
(1) After giving effect to the issuance of 4,000,000 Common Shares offered
hereby.
(2) After giving effect to the pro forma conversion of Cdn. $2,000,000 of
the 9 1/2% Convertible Debentures into 257,059 Common Shares assuming
a conversion date of June 30, 1996. 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, L.P., which are the direct beneficial owners of these
securities.
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<PAGE> 55
(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.
(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 pro forma conversion of Cdn.
$2,000,000 of the 9 1/2% Convertible Debentures into 257,059 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, L.P.,
which are the direct beneficial owners of these same securities.
DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized share capital of Denbury consists of an unlimited
number of Common Shares, of which 11,941,390 were issued and outstanding as of
August 31, 1996, and two classes of preferred shares, unlimited in number and
issuable in series, none of which will be outstanding after the completion of
this Offering. 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 By-laws 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 August 31, 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 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.
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<PAGE> 56
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 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 this Offering, 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 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
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<PAGE> 57
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.
SHARES ELIGIBLE FOR FUTURE SALE
After giving effect to the Offering and the Capitalization
Adjustments, the Company would have had 19,079,090 Common Shares outstanding as
of August 31, 1996 (19,679,090 shares assuming exercise of the Underwriters'
over-allotment option in full). The Common Shares sold in the Offering will be
freely tradable without
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<PAGE> 58
restrictions or further registration under the Securities Act. All 7,608,038
of the Common Shares beneficially held by TPG as of the close of the Offering
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 190,790 shares immediately after the
Offering). 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 the shares owned by TPG will be
eligible for sale in the public market pursuant to Rule 144 after December 21,
1997. 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 Offering, the Company, each of the it's
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 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> 59
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 4,000,000 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,000,000
=========
</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 600,000 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.
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<PAGE> 60
In connection with the 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 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.
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 and Jenkens &
Gilchrist, Houston, Texas. Certain matters in connection with the Offering
will be passed upon for the Underwriters by Baker & Botts, L.L.P., Dallas,
Texas.
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 firm as experts with the respect to such matters.
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<PAGE> 61
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 Commision'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> 62
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. BOE's 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.
60
<PAGE> 63
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.
MBTU. One thousand Btus.
MCF. One thousand cubic feet of natural gas.
MCF/D. Mcf 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 thousand Mcf/d.
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.
61
<PAGE> 64
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.
62
<PAGE> 65
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-24
Statement of Revenues and Direct Operating Expenses of Ottawa Properties
Independent Auditors' Report F-25
Statement of Revenues and Direct Operating Expenses F-26
Notes to Statement of Revenues and Direct Operating Expenses F-27 thru F-28
Statements of Revenues and Direct Operating Expenses of Amerada Hess Properties
Independent Auditors' Report F-29
Statements of Revenues and Direct Operating Expenses F-30
Notes to Statements of Revenues and Direct Operating Expenses F-31 thru F-33
</TABLE>
F-1
<PAGE> 66
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
F-2
<PAGE> 67
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
----------------------- June 30,
1994 1995 1996
------- ------- --------
(Unaudited)
<S> <C> <C> <C>
ASSETS
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 - 12,609,335, 22,857,619 and 23,264,430
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.
Approved by the Board:
- ----------------------
/s/ Gareth Roberts /s/ Wieland F. Wettstein
- ------------------------------ ------------------------------
Gareth Roberts Wieland F. Wettstein
Director Director
F-3
<PAGE> 68
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
------ ------- ------- ------ -------
(Unaudited)
<S> <C> <C> <C> <C> <C>
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 . . . . . . . . $ 0.17 $ 0.09 $ 0.05 $ 0.04 $ 0.11
====== ======= ======= ====== =======
Average number of common shares
outstanding . . . . . . . . . . . . . . . . 9,980 12,480 13,739 13,071 23,024
====== ======= ======= ====== =======
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE> 69
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> 70
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 7,579,460 $7,724 $(175) $7,549
Issued pursuant to employee stock option plan . . . . 552,375 1,033 - 1,033
Private placement of Special Warrants exchanged . . . 1,885,000 5,866 - 5,866
Private placement of Special Warrants exchanged . . . 1,000,000 4,356 - 4,356
Private placement of Special Warrants exchanged . . . 1,400,000 3,893 - 3,893
Net income . . . . . . . . . . . . . . . . . . . . . - - 1,735 1,735
---------- ------- ------ -------
BALANCE - DECEMBER 31, 1993 12,416,835 22,872 1,560 24,432
---------- ------- ------ -------
Issued pursuant to employee stock option plan . . . . 192,500 367 - 367
Net income . . . . . . . . . . . . . . . . . . . . . - - 1,163 1,163
---------- ------- ------ -------
BALANCE - DECEMBER 31, 1994 12,609,335 23,239 2,723 25,962
---------- ------- ------ -------
Issued pursuant to employee stock option plan . . . . 20,000 54 - 54
Private placement of Special Warrants exchanged . . . 1,228,285 2,314 - 2,314
Private placement of common shares . . . . . . . . . 8,999,999 24,457 - 24,457
Net income . . . . . . . . . . . . . . . . . . . . . - - 714 714
---------- ------- ------ -------
BALANCE - DECEMBER 31, 1995 22,857,619 50,064 3,437 53,501
---------- ------- ------ -------
(UNAUDITED)
Issued pursuant to employee stock option plan . . . . 251,500 656 - 656
Issued pursuant to employee stock purchase plan . . . 30,311 140 - 140
Conversion of subordinated debt . . . . . . . . . . . 125,000 366 - 366
Net income . . . . . . . . . . . . . . . . . . . . . - - 2,595 2,595
---------- ------- ------ -------
BALANCE - JUNE 30, 1996 (UNAUDITED) 23,264,430 $51,226 $6,032 $57,258
========== ======= ====== =======
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 71
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.
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
administrative expenses, financing costs and income taxes, plus the cost (net
of impairments) of undeveloped properties.
F-7
<PAGE> 72
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
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, 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.
F-8
<PAGE> 73
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
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 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, 1996 and 1995.
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 June
30, 1996, December 31, 1995 and 1994 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>
F-9
<PAGE> 74
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
<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.
General and administrative costs that directly relate to exploration and
development activities that were capitalized during the period totaled $516,000
and $260,000 for the six months ended June 30, 1996 and 1995, respectively, and
$630,000, $480,000 and $480,000 for the years ended December 31, 1995, 1994 and
1993, respectively.
Amortization per BOE was $6.10, $5.22, $4.03 and $4.36 for the six months ended
June 30, 1996 and the years ended December 31, 1995, 1994 and 1993,
respectively.
3. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
<TABLE>
<CAPTION>
December 31,
----------------------- June 30,
1994 1995 1996
-------- ------ --------
(Amounts in thousands)
(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
F-10
<PAGE> 75
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
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. $4.00 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. $4.05 per Common
Share. Under certain conditions after April 13, 1997, the Company has the
right to require an early redemption.
Indebtedness Repayment Schedule
The Company's indebtedness is repayable as follows:
<TABLE>
<CAPTION>
As of 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>
F-11
<PAGE> 76
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
As of 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 Ended
Year 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>
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:
F-12
<PAGE> 77
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
<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.
CONVERTIBLE DEBENTURES
The Company has reserved 1,117,284 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) 8.333 million
common shares issued at $2.925 per share, (ii) 1.25 million warrants at a price
of $0.50 per warrant entitling the holder to purchase 1.25 million common
shares at $3.70 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 $3.70 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 $5.00 per share for a
period of 40 consecutive trading days. The Convertible Preferred do not have
any cash or other stated
F-13
<PAGE> 78
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
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 $5.00 per share for a period of 40
consecutive trading days. See Note 11 "Subsequent Events" concerning a
special meeting of shareholders to modify the terms of the Convertible
Preferred.
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 Offering.
As part of the TPG Placement, Tortuga Investment Corp. was paid a financial
advisor fee of 666,666 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, 300,000 warrants were outstanding at an exercise price of
Cdn. $4.20 expiring on May 5, 2000 and 1,250,000 warrants were outstanding at
an exercise price of U.S. $3.70 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 1,250,000 warrants if the weighted average trading
price of the Common Stock exceeds $5.00 per share for a period of 40
consecutive trading days.
SPECIAL WARRANT ISSUES
On April 25, 1995, the Company issued 1,228,285 Special Warrants at a price of
$2.35 (Cdn. $3.25) per Special Warrant for gross proceeds of $2,750,000 (58,072
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 1,885,000 Special Warrants at a price of Cdn.
$4.25 per Special Warrant for gross and net proceeds of $6,348,000 and
$5,866,000 respectively. On June 22, 1993, Denbury issued 1,000,000 Special
Warrants at a price of Cdn. $6.00 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 1,400,000 Special Warrants at a price of Cdn.
F-14
<PAGE> 79
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
$4.00 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 4,285,000
Common Shares.
STOCK OPTIONS AND STOCK PURCHASE PLAN
The Company maintains a Stock Option Plan which authorizes the grant of options
of up to 2,100,000 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 1,463,850 options had been granted under the
plan, of which 1,079,350 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 500,000 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 . . . . . . 659,000 1,082,625 1,114,625 1,463,850
Granted . . . . . . . . . . . . . . . . . . . 1,001,000 277,500 549,000 888,000
Terminated . . . . . . . . . . . . . . . . . (25,000) (53,000) (179,775) (13,500)
Exercised . . . . . . . . . . . . . . . . . . (552,375) (192,500) (20,000) (251,500)
Expired . . . . . . . . . . . . . . . . . . . - - - -
--------- --------- --------- ---------
OUTSTANDING AT END OF PERIOD (EXERCISABLE AT
$1.25 TO $5.68 PER SHARE) . . . . . . . . 1,082,625 1,114,625 1,463,850 2,086,850
========= ========= ========= =========
</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.
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.
F-15
<PAGE> 80
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
The Company does not have any hedge contracts in place as of September 12,
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)
(Unaudited)
<S> <C> <C>
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 ($0.06 per common
share) as compared to the $714,000 ($0.05 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 the Convertible
F-16
<PAGE> 81
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
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.
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:
F-17
<PAGE> 82
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Year Ended Six Months
December 31, Ended June 30,
1995 1996
-------------- --------------
(Unaudited)
<S> <C> <C>
NET INCOME:
As reported (thousands). . . . . . . . . . . . . . . . $ 714 $ 2,595
Pro forma (thousands) . . . . . . . . . . . . . . . . 503 2,435
NET INCOME PER COMMON SHARE:
As reported . . . . . . . . . . . . . . . . . . . . . $ 0.05 $ 0.11
Pro forma . . . . . . . . . . . . . . . . . . . . . . 0.04 0.11
Stock options issued during period (thousands). . . . . . . . . 549 888
Weighted average exercise price . . . . . . . . . . . . . . . . $ 2.95 $ 4.32
Average per option compensation value of options granted (1). . 1.17 1.44
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
---------- ----------- -----------
(Amounts in thousands)
(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-18
<PAGE> 83
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
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
------- -------- --------- ------------
(Amounts in thousands) (Unaudited)
<S> <C> <C> <C> <C>
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:
F-19
<PAGE> 84
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Pro Forma
Year Ended December 31,
-----------------------
(Unaudited)
1994 1995
-------- -------
(in thousands except per share amounts)
<S> <C> <C>
Revenues . . . . . . . . . $14,587 $22,235
Net income . . . . . . . . 767 587
Net income per
common share . . . . . . 0.06 0.04
</TABLE>
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>
For the Years 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,
F-20
<PAGE> 85
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
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.
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-21
<PAGE> 86
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
<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>
For the Six
For the Year Ended December 31, Months
------------------------------------- Ended June 30,
1993 1994 1995 1996
------- -------- --------- ---------------
(Amounts in thousands)
<S> <C> <C> <C> <C>
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 and production 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 (UNAUDITED)
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-22
<PAGE> 87
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
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 . . . 0.07 0.07 0.15
</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 September 12, 1996 of $53 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 2,000,000 to 2,500,000. This
amendment is subject to shareholder and regulatory approval.
On July 31, 1996, the Company issued 375,000 Common Shares for the conversion
of the remaining 6 3/4% Convertible Debentures of the Company and on August 27,
1996, issued 150,000 Common Shares for the exercise of 150,000 Cdn. $4.20
warrants.
In September 1996, the Company called a Special Meeting of the shareholders of
the Company to be held on October 9, 1996 to consider and, if thought fit, pass
three resolutions. The first resolution is to ratify and approve 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. The second resolution is to ratify and approve an
amendment to the Articles of Continuance which governs the conversion provision
attaching to the Convertible Preferred Shares which will give 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 will 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. If approved by
the shareholders and 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 5,632,745 and eliminating the
outstanding Preferred Shares.
F-23
<PAGE> 88
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - (CONTINUED)
YEARS ENDED DECEMBER 31, 1993, 1994 AND 1995 AND FOR THE SIX MONTHS
ENDED JUNE 30, 1995 AND 1996 (UNAUDITED)
The third resolution is to provide for the Company to issue Common Shares at an
issue price of Cdn. $7.36 per share in payment of the interest that would be
due on the 9 1/2% Convertible Debentures from the conversion date (following
shareholders approval of the resolution) through and including April 13, 1997,
if the holders of the debentures convert their debentures into Common Shares
prior to April 13, 1997. If approved, the Company would issue a total of
15,915 Common Shares for the interim interest, assuming an approval date and
conversion as of October 15, 1996, plus an additional 617,284 Common Shares
which would be issued for the principal amount in accordance with the existing
terms of the debentures.
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>
- ------------------------------------------------------------------------------------------------------
1994 March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
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 0.03 0.03 0.03 0.00
Cash flow from operations (a) 1,361 1,514 1,665 1,645
- ------------------------------------------------------------------------------------------------------
1995 March 31 June 30 Sept. 30 Dec. 31
- ------------------------------------------------------------------------------------------------------
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 0.04 0.00 0.01 0.00
Cash flow from operations (a) 2,112 1,913 2,234 3,135
- ------------------------------------------------------------------
1996 March 31 June 30
- ------------------------------------------------------------------
Revenues $ 9,092 $ 11,682
Expenses 6,767 9,608
Net income 1,380 1,215
Net income per share 0.06 0.05
Cash flow from operations (a) 6,065 13,303
</TABLE>
(a) Exclusive of the net change in non-cash working capital balances.
F-24
<PAGE> 89
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-25
<PAGE> 90
STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES OF
OTTAWA PROPERTIES
<TABLE>
<CAPTION>
For the Year
Ended
December 31,
1995
------------
(amounts in
thousands)
<S> <C>
Revenues:
Oil, natural gas and related product sales. . . . . $2,954
Direct operating expenses:
Lease operating expense . . . . . . . . . . . . . . 659
------
Excess of revenue over direct operating expenses. . . . . $2,295
======
</TABLE>
The accompanying notes are an integral part of these statements.
F-26
<PAGE> 91
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. A portion of the
acquisition is subject to a preferential purchase right held by third parties.
If the rights are exercised, approximately $65,000 will be deducted from the
purchase price and the revenues during 1995 would be reduced by approximately
$8,000.
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.
F-27
<PAGE> 92
NOTES TO STATEMENT OF REVENUES
AND DIRECT OPERATING
EXPENSES OF OTTAWA PROPERTIES
<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>
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 . . . . . . . . . . . . . . . . . . . . . 16,212.4
10% Annual discount for estimated timing of cash flows . . . . . . . . . . . (5,149.8)
---------
Discounted future net cash flows before taxes . . . . . . . . . . . . . . . . 11,062.6
Discounted future income taxes . . . . . . . . . . . . . . . . . . . . . . . (1,211.0)
---------
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS . . . . . . . . . . $ 9,851.6
=========
</TABLE>
The following are principal sources of change in the standardized
measure of
discounted future net cash flows:
<TABLE>
<CAPTION>
Year ended 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 $ 9,851.6
AT END OF PERIOD . . . . . . . . . . . . . . . . . . . . =========
</TABLE>
F-28
<PAGE> 93
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-29
<PAGE> 94
STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES OF
AMERADA HESS PROPERTIES
<TABLE>
<CAPTION>
For the Year Ended December 31,
-------------------------------
1993 1994 1995
--------- ------- --------
(Amounts in thousands)
<S> <C> <C> <C>
Revenues:
Oil, natural gas and related
product sales. . . . . . $26,087 $17,787 $18,210
Direct operating expenses:
Lease operating expense. . . . . 7,908 6,598 7,888
-------- ------- -------
Excess of revenues over direct
operating expense. . . . $18,179 $11,189 $10,322
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-30
<PAGE> 95
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.
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.
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.
F-31
<PAGE> 96
STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES OF
AMERADA HESS PROPERTIES
<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>
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.
F-32
<PAGE> 97
STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES OF
AMERADA HESS PROPERTIES
<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-33
<PAGE> 98
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> 99
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> 100
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
DMA:MMD
A-3
<PAGE> 101
================================================================================
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 . . . . . . . . . . . . . . . . . . . . . 9
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 . . . . . . . . . . . . . . . 29
Management . . . . . . . . . . . . . . . . . . . . . 46
Interests of Management in Certain Transactions . . . 50
Security Ownership of Certain Beneficial Owners
and Management . . . . . . . . . . . . . . . 52
Description of Capital Stock . . . . . . . . . . . . 53
Canadian Taxation and the Investment Canada Act . . . 54
Shares Eligible for Future Sale . . . . . . . . . . . 55
Underwriting . . . . . . . . . . . . . . . . . . . . 57
Service and Enforcement of Legal Process . . . . . . 58
Legal Matters . . . . . . . . . . . . . . . . . . . . 58
Experts . . . . . . . . . . . . . . . . . . . . . . . 58
Available Information . . . . . . . . . . . . . . . . 59
Glossary . . . . . . . . . . . . . . . . . . . . . . 60
Index to Consolidated Financial Statements . . . . . F-1
Letter of Netherland, Sewell & Associates, Inc. . . . A-1
</TABLE>
================================================================================
================================================================================
4,000,000 SHARES
[LOGO]
DENBURY RESOURCES INC.
COMMON SHARES
------------
PROSPECTUS
------------
DONALDSON, LUFKIN & JENRETTE
SECURITIES CORPORATION
PRUDENTIAL SECURITIES INCORPORATED
JOHNSON RICE & COMPANY L.L.C.
REPRESENTATIVES OF THE UNDERWRITERS
================================================================================
<PAGE> 102
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 . . . . . . . . . $ *
NASD Filing Fee . . . . . . . . . . . . *
Nasdaq National Market . . . . . . . . *
Toronto Stock Exchange Listing Fee . . *
Transfer Agent's Fees . . . . . . . . . *
Blue Sky Fees and Expenses . . . . . . *
Accounting Fees . . . . . . . . . . . . *
Legal Fees . . . . . . . . . . . . . . *
Engineering Fees . . . . . . . . . . . *
Printing . . . . . . . . . . . . . . . *
Miscellaneous . . . . . . . . . . . . . *
----------
Total . . . . . . . . . . . . $ *
==========
</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)
II-1
<PAGE> 103
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.
Effective in September 1995, the Corporation purchased directors and
officers insurance covering each of its officers and directors. The insurance
provides up to $5 million of coverage for the officers and directors with
deductibles ranging from zero to $350,000, depending on the type of claim, and
$5 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 2,845,285
warrants to purchase Common Shares. All of these warrants were issued to
residents of the United States, except for 284,866 of the 1,228,285 Special
Warrants issued on April 24, 1995, which were sold to Canadian residents, as
indicated in the chart below. Of those warrants issued, 1,400,000 warrants are
still outstanding and 1,445,285 were converted to Common Shares, which are
currently outstanding. The following table sets forth certain details with
respect to the issuance of such securities. None of the information in this
Item 15 has been adjusted to reflect the one-for-two reverse split of the
Common Shares to be submitted to the shareholders of the Company for approval
on October 9, 1996.
<TABLE>
<CAPTION>
Amount and Title of Aggregate
Security Issued Date Issued Purchaser(s) Offering Price Exemption
--------------- ----------- ------------ -------------- ---------
<S> <C> <C> <C> <C>
67,000 Special December 17, 1993 Bodel, Inc. Cdn. $268,000 Section 4(2)-Rule 144A
Warrant(1)
117,000 Special April 24, 1995 State Street $274,950 Section 4(2)-Rule 506
Warrant(2) Research(3)
159,576 Special April 24, 1995 Virginia Retirement $375,003 Section 4(2)-Rule 506
Warrant(2) System
53,191 Special April 24, 1995 Monsanto Master Trust $124,998 Section 4(2)-Rule 506
Warrant(2) #22-85716
53,191 Special April 24, 1995 City of Detroit $124,988 Section 4(2)-Rule 506
Warrant(2) Policeman & Fireman
#97301
53,191 Special April 24, 1995 Montgomery County $124,988 Section 4(2)-Rule 506
Warrant(2) Employee Ret.
72,100 Special April 24, 1995 Mackenzie Financial $169,435 Section 4(2)-Rule 506
Warrant(2) Corporation(4)
212,766 Special April 24, 1995 Roytor & Co.(4) $500,000 Section 4(2)-Rule 506
Warrant(2)
</TABLE>
II-2
<PAGE> 104
<TABLE>
<CAPTION>
Aggregate
Amount and Title of Offering
Security Issued Date Issued Purchaser(s) Price Exemption
--------------- ----------- ------------ ----- ---------
<S> <C> <C> <C> <C> <C>
170,213 Special April 24, 1995 Drakes Landing $400,000 Section 4(2)-Rule 506
Warrant(2) Associates, L.P.
170,213 Special April 24, 1995 JDN Partners $400,000 Section 4(2)-Rule 506
Warrant(2)
100,000 Special April 24, 1995 Mr. Michael A. Nicolais $235,000 Section 4(2)-Rule 506
Warrant(2)
66,844 Special April 24, 1995 Southcoast Capital $20,614 Section 4(2)-Rule 506
Warrant(2) Corp.
300,000 Common Share May 5, 1995 Internationale (5) Section 4(2)
Purchase Nederlanden (U.S.)
Warrant Capital Corporation
1,250,000 Common Share December 21, 1995 T.P.G. Advisors, Inc. $625,000 Section 4(2)-Rule 506
Purchase and affiliates (6)
Warrant
</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 117,000 Common Shares
underlying these 117,000 Special Warrants.
(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, 150,000 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 1,250,000 Common Share Purchase Warrants to TPG
Advisors, Inc. and certain of its affiliates, the Company issued 8,333,333
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 666,666 Common
Shares to Tortuga Investment Corp. as a financial advisory fee in connection
with the same transaction.
The Company also issued a total of 13,284,999 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 1,885,000 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. $4.25 per Special
Warrant. In October 1993, the Company issued 1,000,000 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. $6.00 per Special
Warrant. In March 1994, the Company issued 1,400,000 Common Shares upon the
exercise of the same number of Special Warrants sold to various private places
at the price of Cdn. $4.00 per Special Warrant.
II-3
<PAGE> 105
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 1,001,000 options to purchase Common Shares
during 1993, at prices ranging from Cdn. $3.70 to $7.75 per share, 277,500
options during 1994 at prices ranging from Cdn. $3.40 to $4.15 per share and
549,000 options during 1995 at prices ranging from Cdn. $3.80 to $4.25 per
share to certain employees, officers and directors under the Company's Employee
Stock Option Plan.
The Company issued 552,375, 192,500 and 20,000 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.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(A) EXHIBITS.
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
---------- -------
<S> <C>
1(a)** Form of Underwriting Agreement.
3(a)* Form of Articles of Amendment to be filed prior to the closing of the offering made under this
Registration Statement.
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).
</TABLE>
II-4
<PAGE> 106
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
---------- -------
<S> <C>
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(a)** Opinion of Burnet, Duckworth & Palmer.
5(b)** Opinion of Jenkens & Gilchrist, a Professional Corporation.
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.
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).
</TABLE>
II-5
<PAGE> 107
<TABLE>
<CAPTION>
EXHIBIT NO. EXHIBIT
----------- -------
<S> <C>
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).
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.
23(f)** Consent of Jenkens & Gilchrist, a Professional Corporation (contained in its opinion filed as Exhibit
5(b)).
</TABLE>
- ----------------
* Filed herewith.
** To be filed by amendment.
(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.
II-6
<PAGE> 108
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
II-7
<PAGE> 109
SCHEDULE I - CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DENBURY RESOURCES INC.
(FORMERLY NEWSCOPE RESOURCES LTD.)
UNCONSOLIDATED BALANCE SHEETS
(Amounts in thousands of U.S. dollars)
<TABLE>
<CAPTION>
December 31,
------------------------
1994 1995
------ ------
ASSETS
<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 - 22,857,619 shares at
December 31, 1995 and 12,609,335 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.
II-8
<PAGE> 110
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 . . . . . . . . . . . . . . $ 0.17 $ 0.09 $0.05
====== ====== ======
Average number of common shares outstanding . . . . . . 9,980 12,480 13,739
====== ====== ======
</TABLE>
See Notes to Financial Statements.
II-9
<PAGE> 111
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.
II-10
<PAGE> 112
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.
II-11
<PAGE> 113
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 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-12
<PAGE> 114
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, Denbury
Resources Inc., the Registrant, has duly caused this Registration Statement No.
__________ to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Dallas, Texas, on the 13th day of September, 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
---------- ----- ----
<S> <C> <C>
/s/ Gareth Roberts President and Chief Executive September 13, 1996
- ------------------------- Officer and Director
Gareth Roberts (Principal Executive Officer)
/s/ Phil Rykhoek Chief Financial Officer and September 13, 1996
- ------------------------- Secretary and Authorized
Phil Rykhoek Representative
(Principal Financial and
Accounting Officer)
/s/ Ronald G. Greene Chairman of the Board and September 13, 1996
- ------------------------- Director
Ronald G. Greene
/s/ Wieland Wettstein Director September 13, 1996
- -------------------------
Wieland Wettstein
/s/ David M. Stanton Director September 13, 1996
- -------------------------
David M. Stanton
</TABLE>
II-13
<PAGE> 115
EXHIBIT INDEX
<TABLE>
<CAPTION>
Exhibit No. Exhibit
- ----------- ---------------------------------------------------------------
<S> <C>
1(a)* Form of Underwriting Agreement.
3(a) Form of Articles of Amendment to be filed prior to the
closing of the offering made under this Registration Statement.
5(a)* Opinion of Burnet, Duckworth & Palmer.
5(b)* Opinion of Jenkens & Gilchrist, a Professional Corporation.
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.
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
23(f)* Consent of Jenkens & Gilchrist, a Professional Corporation
(contained in its opinion filed as Exhibit 5(b)).
</TABLE>
* To be filed by amendment.
<PAGE> 1
EXHIBIT 3 (A)
FORM OF ARTICLES
OF AMENDMENT
<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. 75695-8
- --------------------------------------------------------------------------------
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
, 1996 Chief Financial Officer and
Corporate Secretary
- --------------------------------------------------------------------------------
==========================================
FOR DEPARTMENTAL USE ONLY
FILED --
==========================================
<PAGE> 1
EXHIBIT 10 (C)
COMMON SHARE
PURCHASE WARRANT
<PAGE> 2
THIS WARRANT AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "U.S.
SECURITIES ACT") OR UNDER ANY STATE SECURITIES OR BLUE-SKY LAWS. THIS WARRANT
AND ANY SHARES ACQUIRED UPON THE EXERCISE OF THIS WARRANT MAY BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF ONLY (A) OUTSIDE THE UNITED
STATES IN ACCORDANCE WITH REGULATION S UNDER THE U.S. SECURITIES ACT, IF
APPLICABLE, OR (B) TO A QUALIFIED INSTITUTIONAL BUYER IN ACCORDANCE WITH RULE
144A UNDER THE U.S. SECURITIES ACT, OR (C) PURSUANT TO ANOTHER EXEMPTION FROM
REGISTRATION UNDER THE U.S. SECURITIES ACT AND ANY APPLICABLE STATE SECURITIES
LAWS AFTER PROVIDING EVIDENCE REASONABLY SATISFACTORY TO THE COMPANY TO THE
EFFECT THAT SUCH OFFER AND SALE IS IN COMPLIANCE WITH AN APPLICABLE EXEMPTION
FROM REGISTRATION, OR (D) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER
THE U.S. SECURITIES ACT AND APPLICABLE STATE SECURITIES LAWS. THIS WARRANT
MAY NOT BE SOLD, ASSIGNED, TRANSFERRED OR OTHERWISE DISPOSED OF EXCEPT UPON THE
CONDITIONS SPECIFIED IN THIS WARRANT AND NO SALE, ASSIGNMENT, TRANSFER OR OTHER
DISPOSITION OF THIS WARRANT SHALL BE VALID OR EFFECTIVE UNLESS AND UNTIL SUCH
CONDITIONS HAVE BEEN COMPLIED WITH.
COMMON SHARE PURCHASE WARRANT
DENBURY RESOURCES INC.
(Incorporated under the Canada Business Corporations Act)
THIS WARRANT WILL BE VOID AND OF NO VALUE OR EFFECT UNLESS EXERCISED
PRIOR TO 4:30 P.M. (CALGARY TIME) ON MAY 5, 2000
No. 2-N
Right to Purchase
150,000 Common Shares
THIS IS TO CERTIFY that, subject to the terms and conditions
attached as Schedule "A" hereto which are incorporated herein by reference and
made a part hereof, ING (U.S.) INVESTMENT CORPORATION is entitled to purchase
at any time and from time to time up to 4:30 p.m. (Calgary time) on May 5, 2000
(the "Expiry Date") at the Dallas offices of Denbury Resources Inc.
("Corporation") at 17304 Preston Road, Suite 200, Dallas, TX, 75252 or such
other office of the Corporation as the Corporation may provide notice of
hereunder (or at such offices of a duly appointed transfer agent of the
Corporation (the "Transfer Agent"), notice of which shall have been provided
hereunder) the above-stated number of fully paid and non-assessable common
shares ("Common Shares") without nominal or par value in the capital of the
Corporation, as such shares were constituted on May 5, 1995 upon and subject to
the terms and conditions hereinafter referred to, at a price per Common Share
of $4.20 (Canadian funds), subject to adjustment as provided in this Warrant
and Schedule "A" hereto.
Such right to purchase Common Shares in the capital of the
Corporation may only be exercised by the holder hereof within the time
hereinbefore set out by:
a. duly completing, in the manner indicated, and executing the
subscription form attached hereto,
b. surrendering this Warrant to the Corporation at the aforesaid
office together with a bank draft, certified check or cash
payable to the order of the Corporation in the amount of the
aggregate exercise price for the Common Shares subscribed for,
and
c. providing to the Corporation such additional documentation as
it may reasonably require as evidence of compliance with all
applicable securities laws.
This Warrant and such certified check or cash shall be deemed
to be surrendered only upon
<PAGE> 3
personal delivery thereof or, if sent by post or other means of transmission,
upon actual receipt thereof by the Corporation at the office referred to above
(or to the Transfer Agent).
Upon such surrender, the person or persons in whose name or
names the Common Shares so subscribed for are to be issued shall, subject to
the provisions of Subsection 3(f), be deemed for all purposes to be the holder
or holders of record of such Common Shares and the Corporation covenants that
it will, subject to the provisions of this Warrant, cause a certificate or
certificates representing such Common Shares to be delivered or mailed to such
person or persons forthwith at the address or addresses specified in such
subscription form.
The holder of this Warrant may subscribe for and purchase any
lesser number of whole Common Shares than the number of Common Shares
purchasable under this Warrant and, in such event, shall be entitled to receive
a new warrant in respect of the balance of the Common Shares purchasable under
this Warrant not then subscribed for and purchased.
To the extent that this Warrant confers the right to purchase
a fraction of a Common Share, such right may be exercised in respect of such
fraction only in combination with another Warrant or other Warrants which in
the aggregate entitle the holder to purchase a whole number of Common Shares.
No fractional Common Shares will be issued nor consideration given in lieu
thereof.
This Warrant and Schedule "A" hereto provides for the delivery
of additional or fewer shares upon the exercise of the right of purchase hereby
granted and the adjustment of the exercise price therefor in certain events
therein set forth and also provides for the giving of notice by the Corporation
prior to taking certain actions specified therein.
The holder of this Warrant may, at any time prior to the
Expiry Date of the Warrants, upon surrender hereof to the Company or the
Transfer Agent as referred to above and payment of such applicable transfer
charges as may be required by the Corporation or Transfer Agent from time to
time, exchange this Warrant for other Warrants entitling the holder to
subscribe in the aggregate for the same number of Common Shares as is
purchasable under this Warrant.
The holding of this Warrant shall not constitute the holder
hereof a shareholder of the Corporation or entitle such holder to any right or
interest in respect thereof except as herein expressly provided.
This Warrant and all rights hereunder or evidenced hereby may
be transferred, in whole or in part, only upon compliance with the conditions
attaching to this Warrant on the register kept at the offices of the
Corporation, or of the Transfer Agent by the holder or his legal
representatives or his attorney duly appointed by an instrument in writing in
the form attached hereto and execution satisfactory to the Corporation and such
transfer shall be duly noted thereon by the Corporation.
The Corporation and the Transfer Agent may deem and treat the
holder of any Warrant as the absolute owner thereof for all purposes and the
Corporation shall not be affected by any notice to the contrary.
The Corporation may at any time purchase in the open market,
by private contract or otherwise, all or any portion of this Warrant on such
terms and conditions as the Corporation and the holder of the Warrant to be
purchased may mutually agree.
The Corporation covenants that so long as any Warrants remain
outstanding:
a. It will send to the Warrantholder copies of all financial statements
and other material furnished
<PAGE> 4
to the shareholders of the Corporation after the date of this
certificate;
b. It will reserve and there will remain unissued out of its authorized
capital a sufficient number of Common Shares to satisfy the rights of
acquisition upon the exercise of the Warrants as provided for herein;
c. It will cause the Common Shares from time to time subscribed for
pursuant to the exercise of this Warrant in the manner herein provided
to be duly issued and delivered in accordance with this Warrant and
the terms hereof;
d. All of the Common Shares which shall be issued upon the exercise of
this Warrant shall be issued as fully-paid and non-assessable;
e. It will use its reasonable best efforts to maintain the listing of the
Common Shares which are outstanding on The Toronto Stock Exchange, or
such other stock exchange in Canada or the United States on which the
Common Shares of the Corporation may become listed;
f. It will use its reasonable best efforts to maintain its status as
"reporting issuer" in good standing in the Province of Alberta and
Ontario;
g. It will maintain a register at the offices of the Corporation or the
Transfer Agent in which shall be entered the names and addresses of
the holders of Warrants and particulars of Warrants held by them
respectively, which register shall at all reasonable times be open for
inspection by the holders of Warrants; and
h. Subject to the provisions hereof, the Corporation will carry on and
conduct and will cause to be carried on and conducted its business in
a proper and efficient manner and will cause to be kept proper books
of account in accordance with generally accepted accounting practice,
provided that the Corporation or any subsidiary of the Corporation may
cease to operate or may dispose of any business, premises, property or
operation if in the opinion of the directors or officers of the
Corporation it would be advisable and in the best interests of the
Corporation to do so. Subject to the provisions hereof, the
Corporation will do or cause to be done, all things necessary to
preserve and keep in full force and effect its corporate existence,
provided that nothing herein contained shall prevent the amalgamation,
consolidation, merger, sale, winding-up or liquidation of the
Corporation or any subsidiary of the Corporation or the abandonment of
any rights and franchises of the Corporation or any subsidiary of the
Corporation if in the opinion of the directors or officers of the
Corporation, it would be advisable and in the best interest of the
Corporation or of such subsidiary of the Corporation to do so.
In case the Warrant certificate shall become mutilated or be lost,
destroyed or stolen, the Corporation, subject to applicable law, shall issue,
certify and deliver a new Warrant certificate of like tenor as the one
mutilated, lost, destroyed or stolen in exchange for and in place of and upon
cancellation of such mutilated certificate, or in lieu of and in substitution
for such lost, destroyed or stolen certificate, and the substituted certificate
shall be in a form approved by the Corporation and shall be entitled to the
benefits hereof and shall rank equally in accordance with its terms with all
other Warrant certificates issued or to be issued hereunder.
The applicant for the issue of a new certificate shall bear the cost
of the issue thereof and in the case of loss, destruction or theft shall, as a
condition precedent to the issue thereof, furnish to the Corporation such
evidence of ownership and of the loss, destruction or theft of the certificate
so lost, destroyed or stolen as shall be satisfactory to the Corporation in its
sole
<PAGE> 5
and reasonable discretion, and such applicant may also be required to furnish
an indemnity or security in amount and form satisfactory to the Corporation in
its sole and reasonable discretion and shall pay the reasonable charges of the
Corporation in connection therewith.
The holding of this warrant certificate or the warrants represented
hereby shall not constitute the Warrantholder a shareholder of the Corporation.
On the date of exercise of the Warrant, the Warrantholder shall be deemed to be
a shareholder of the Corporation.
Time shall be of the essence hereof.
This share purchase warrant shall be governed by and construed in
accordance with the laws of the Province of Alberta and the laws of Canada
applicable therein.
IN WITNESS WHEREOF the Corporation has caused this warrant certificate
to be issued by its duly authorized signatory this 27th day of August, 1996.
DENBURY RESOURCES INC.
Per:
-----------------------------------
Authorized Signatory
Per:
-----------------------------------
Authorized Signatory
<PAGE> 6
TRANSFER OF WARRANTS
FOR VALUE RECEIVED, the undersigned hereby sells, assigns and
transfers to the transferee described below, all of the rights of the
undersigned under the within Warrant with respect to ____________ Warrants of
Denbury Resources Inc. registered in the name of the undersigned on the records
of the Corporation represented by the within certificate,
Name:__________________________________________________________________________
(print clearly)
Address in full:_______________________________________________________________
_______________________________________________________________________________
and hereby irrevocably constitutes and appoints _______________________________
as agent and attorney in fact to transfer said Warrant(s) on the books of
Denbury Resources Inc. with full power of substitution in the premises.
DATED the ___day of __________, ______.
-----------------------------------
(Name)
-----------------------------------
(Signature of Warrantholder)
-----------------------------------
(Title of Signing Officer or Agent,
if any)
-----------------------------------
(Address in full)
-----------------------------------
-----------------------------------
(Tax Identification No.)
NOTE: THE ABOVE SIGNATURE MUST CORRESPOND EXACTLY WITH THE NAME ON THE FACE OF
THE WITHIN WARRANT.
<PAGE> 7
SUBSCRIPTION FORM
TO: Denbury Resources Inc.
17304 Preston Road, Suite 200
Dallas, TX 75252
Dear Sirs:
The undersigned holder of the within Warrant hereby exercises the
right to purchase and hereby subscribes for __________ Common Shares without
nominal or par value in the capital of DENBURY RESOURCES INC. at the
subscription price per share and according to the terms of the within Warrant
surrendered herewith according to the conditions thereof and herewith makes
payment of the subscription price in full for the said number of Common Shares,
by way of cash, bank draft or certified check.
Please issue and deliver a certificate for the shares being purchased
as follows:
Name:_________________________________________________________________
(print clearly)
Address in full:______________________________________________________
______________________________________________________________________
Number of Common Shares:______________________________________________
Total Subscription Price: $_____________________
Further Warrant required for balance of Common Shares purchaseable:
______________________________________________________________________
DATED this ____ day of __________, ______.
-----------------------------------
Name
-----------------------------------
Signature (Signature of Warrantholder
to be the same as appears on the face
of the Warrant Certificate or with the
name of the transferee appearing in the
Transfer Form)
-----------------------------------
Title of Signing Officer or Agent
(if any)
------------------------------------
Print full address
------------------------------------
-----------------------------------
Tax Identification Number
<PAGE> 8
INSTRUCTIONS TO COMMON SHARE PURCHASE WARRANTHOLDERS
TO SUBSCRIBE: The holder hereof may exercise his right to purchase Common
Shares of the Corporation by completing the above form and surrendering this
Warrant certificate to the Corporation together with a certified check payable
to the order of the Corporation for the subscription price of the Common Shares
subscribed for, at its office at 17304 Preston Road, Suite 200, Dallas, TX
75252 or such other office of the Corporation that the Corporation may provide
notice of hereunder, or at such offices of a duly appointed Transfer Agent of
the Corporation, notice of which shall have been given to the Warrantholder.
The rights of the holder hereof cease if this Warrant is not exercised prior to
the Expiry Date.
COMMON SHARES RECEIVED ON THE EXERCISE OF THE WARRANTS MAY BE SUBJECT
TO A "HOLD PERIOD" UNDER APPLICABLE SECURITIES LAWS IF THE WARRANTS ARE
EXERCISED PRIOR TO THE EXPIRATION OF THE STATUTORY "HOLD PERIOD" IMPOSED BY
SUCH APPLICABLE SECURITIES LAWS AND CERTIFICATES, REPRESENTING SUCH COMMON
SHARES MAY, IN SUCH CIRCUMSTANCES, BE ISSUED WITH A LEGEND TO REFLECT SUCH HOLD
PERIOD.
COMMON SHARES ISSUABLE UPON THE EXERCISE OF THE WARRANTS ARE
"RESTRICTED SECURITIES" AS DEFINED IN RULE 144 UNDER THE UNITED STATES
SECURITIES ACT OF 1933, AS AMENDED, (THE "U.S. SECURITIES ACT") AND IF THE
HOLDER DETERMINES TO OFFER, SELL OR OTHERWISE TRANSFER THE COMMON SHARES
ISSUABLE UPON EXERCISE OF THE WARRANT, SUCH SECURITIES MAY BE OFFERED, SOLD OR
OTHERWISE TRANSFERRED, ONLY PURSUANT TO REGISTRATION UNDER THE U.S. SECURITIES
ACT OR (A) OUTSIDE THE UNITED STATES IN ACCORDANCE WITH RULE 904 OF REGULATION
S UNDER THE U.S. SECURITIES ACT (IF AVAILABLE), OR (B) IN COMPLIANCE WITH AN
EXEMPTION FROM REGISTRATION UNDER THE U.S. SECURITIES ACT AND THE APPLICABLE
STATE SECURITIES LAWS.
For your own protection it would be wise to register if forwarding by mail.
The maximum number of Common Shares without nominal or par value for
which you may subscribe is 150,000 Common Shares, subject to adjustment in
accordance with the terms hereof.
THE RIGHTS OF THE HOLDER HEREOF CEASE IF THIS WARRANT IS NOT EXERCISED
ON OR PRIOR TO THE EXPIRY DATE. TO EXERCISE THIS WARRANT, THE HOLDER MUST
DELIVER TO THE CORPORATION (OR TRANSFER AGENT) THE WARRANT, THE SUBSCRIPTION
FORM AND SUCH CASH OR CERTIFIED CHECK OR BANK DRAFT AT THE OFFICE OF THE
CORPORATION (OR TRANSFER AGENT), REFERRED TO ABOVE, ON OR PRIOR TO THE EXPIRY
DATE.
TRANSFER: This Warrant is transferable on the books of the Corporation
upon completion of the required form of transfer and in accordance with the
terms of the Warrants.
<PAGE> 9
THIS IS SCHEDULE "A" REFERRED TO IN
THE ANNEXED COMMON SHARE PURCHASE WARRANTS
ISSUED BY DENBURY RESOURCES INC. ON AUGUST 27, 1996
1. Definitions
In this Warrant,
a. "Common Shares" means fully paid and non-assessable common
shares of the Corporation as constituted on May 5, 1995 and,
i. except where the context hereof otherwise requires,
includes Common Shares issued or to be issued in
accordance with the exercise of Warrants hereunder;
and
ii. includes for purposes of the adjustments required
under Section 3, shares of any other class of stock
now or hereafter issued by the Corporation if the
holders of such shares participate pari passu with
the holders of Common Shares as to dividends and
distributions made by the Corporation;
b. "Current Market Price" per share at any date means the
weighted average price per share at which Common Shares have
traded for the 20 consecutive trading days ended not less than
5 days immediately preceding the date in question on The
Toronto Stock Exchange, or, if the Common Shares are listed on
another stock exchange, on such stock exchange on which the
Common Shares are listed as may be selected for such purpose
by the directors or, if the Common Shares are not listed on
any stock exchange, then on the over-the-counter market. The
weighted average price shall be determined by dividing the
aggregate sale price of all Common Shares sold on such
exchange or market, as the case may be, during the said 20
days by the total number of Common Shares so sold. If such
Common Shares are not listed or any stock exchange or traded
on an over the counter market, the Current Market Price shall
be determined in good faith by the directors of the
Corporation;
c. "Exercise Price" means $4.20 (Canadian funds), as may be
adjusted from time to time in accordance with Section 3
hereof,, for each Common Share which may be issued from time
to time upon the exercise of the rights contained in the
Warrants to purchase Common Shares in accordance with the
provisions hereof;
d. "Expiry Date" means May 5, 2000;
e. "Expiry Time" means 4:30 p.m. (Calgary time) on the Expiry
Date;
f. "Warrants" means the common share purchase warrants of the
Corporation issued hereunder and for the time being
outstanding; and
g. "Warrantholder" or "holder" means the holder of a warrant
hereunder.
2. Weekends and Holidays
If the date for the taking of any action under this Warrant
expires on a Saturday, Sunday or a legal holiday, in the Province of Alberta,
such action may be taken on the next succeeding business day with the same
force and effect as if taken within the period for the taking of such action.
3. Adjustment of Exercise Price, etc.
The purchase rights in effect at any date attaching to the Warrants
shall be subject to
<PAGE> 10
adjustment from time to time as follows:
a. if and whenever at any time from the date hereof and prior to
the Expiry Time, the Corporation shall:
i. subdivide, redivide or change its outstanding Common
Shares into a greater number of shares;
ii. reduce, combine or consolidate its outstanding Common
Shares into a smaller number of shares; or
iii. issue Common Shares or securities convertible or
exchangeable into Common Shares to the holders of all
or substantially all of the outstanding Common Shares
by way of a stock dividend;
the Exercise Price in effect on the effective date of such
subdivision, redivision, change, reduction, combination or
consolidation or on the record date for such issue of Common
Shares or securities convertible or exchangeable into Common
Shares by way of a stock dividend, as the case may be, shall
be adjusted immediately after such effective date or record
date, as the case may be, so that it shall equal the price
determined by multiplying the Exercise Price in effect on such
date by a fraction of which the numerator shall be the total
number of Common Shares outstanding immediately prior to such
date and the denominator shall be the total number of Common
Shares outstanding immediately after such date (including, in
the case where securities convertible into or exchangeable for
Common Shares are issued, the number of Common Shares that
would have been outstanding had such securities been converted
into or exchanged for Common Shares on such record date).
Such adjustment shall be made successively whenever any event
referred to in this Subsection shall occur and any such issue
of Common Shares by way of a stock dividend shall be deemed to
have been made on the record date for the stock dividend for
the purpose of calculating the number of outstanding Common
Shares, or securities convertible into Common Shares, under
Subsections a, c and d of this Section 3. To the extent that
any such securities convertible into or exchangeable for
Common Shares are not converted into or exchanged for Common
Shares prior to the expiration of the conversion or exchange
right, the Exercise Price shall be readjusted effective as at
the date of such expiration to the Exercise Price which would
then be in effect based upon the number of Common Shares
actually issued on the exercise of such conversion or exchange
right;
b. upon any adjustment of the Exercise Price pursuant to
Subsection 3(a) and 3(c), the number of Common Shares
purchasable under each Warrant shall contemporaneously be
adjusted by multiplying the number of Common Shares
theretofore purchasable on the exercise thereof by a fraction
of which the numerator shall be the Exercise Price in effect
immediately prior to such adjustment and the denominator shall
be the Exercise Price resulting from such adjustment;
c. if and whenever at any time from the date hereof and prior to
the Expiry Time the Corporation shall fix a record date for
the issuance of rights, options or warrants (other than the
Warrants) to all or substantially all the holders of its
outstanding Common Shares entitling them, for a period
expiring not more than forty-five (45) days after such record
date, to subscribe for or purchase Common Shares (or
securities convertible into or
<PAGE> 11
exchangeable for Common Shares) at a price per share (or
having a conversion or exchange price per share) less than
92.5% of the Current Market Price on such record date, the
Exercise Price in effect on such record date shall be adjusted
immediately after such record date so that it shall equal the
price determined by multiplying the Exercise Price in effect
on such record date by a fraction, of which the numerator
shall be the total number of Common Shares outstanding on such
record date plus a number arrived at by dividing the aggregate
price of the total number of additional Common Shares offered
for subscription or purchase (or the aggregate conversion or
exchange price of the convertible securities so offered) by
such Current Market Price, and of which the denominator shall
be the total number of Common Shares outstanding on such
record date plus the total number of additional Common Shares
offered for subscription or purchase (or into which the
convertible securities so offered are convertible or
exchangeable). Common Shares owned by or held for the account
of the Corporation shall be deemed not to be outstanding for
the purpose of any such computation. Such adjustment shall be
made successively whenever such a record date is fixed. To
the extent that any such rights, options or warrants are not
so issued or any such rights, options or warrants are not
exercised prior to the expiration thereof, the Exercise Price
shall be readjusted to the Exercise Price which would then be
in effect if such record date had not been fixed or to the
Exercise Price which would then be in effect based upon the
number and aggregate price of Common Shares (or securities
convertible into or exchangeable for Common Shares) actually
issued upon the exercise of such rights, options or warrants,
as the case may be;
d. if and whenever at any time from the date hereof and prior to
the Expiry Time the Corporation shall fix a record date for
the making of a distribution to all or substantially all the
holders of its outstanding Common Shares of:
i. shares of any class other than Common Shares (or
other securities convertible into or exchangeable for
Common Shares); or
ii. rights, options or warrants (other than the Warrants)
excluding (i) those referred to in Subsection c of
this Section 3, and (ii) those referred to in
Subsection c of this Section 3 but exercisable at a
price per share (or having a conversion or exchange
price per share) not less than 92.5% of the Current
Market Price; or
iii. evidences of its indebtedness; or
iv. assets (including shares of other corporations);
then, in each such case, the Exercise Price in effect on such
record date shall be adjusted immediately after such record
date so that it shall equal the price determined by
multiplying the Exercise Price in effect on such record date
by a fraction, of which the numerator shall be the total
number of Common Shares outstanding on such record date
multiplied by the Current Market Price per Common Share on
such record date, less the aggregate fair market value (as
determined by the directors of the Corporation acting
reasonably and in good faith, which determination shall be
conclusive) of such shares or rights, options or warrants or
evidences of indebtedness or assets so distributed, and of
which the denominator shall be the total number of Common
Shares outstanding on such record date multiplied by the
Current Market Price per Common Share. Common Shares owned by
or held for the account of the Corporation shall be deemed not
to be outstanding for the purpose of any such computation.
Such adjustment shall be made successively
<PAGE> 12
whenever such a record date is fixed. To the extent that such
distribution is not so made, the Exercise Price shall be
readjusted to the Exercise Price which would then be in effect
based upon such shares or rights, options or warrants or
evidences of indebtedness or assets actually distributed, as
the case may be;
e. if and whenever at any time from the date hereof and prior to
the Expiry Time, there is a reclassification of the Common
Shares or a capital reorganization of the Corporation other
than as described in Subsection a of this Section 3 or a
consolidation, amalgamation or merger of the Corporation with
or into any other body corporate, trust, partnership or other
entity, or a sale or conveyance of the property and assets of
the Corporation as an entirety or substantially as an entirety
to any other body corporate, trust, partnership or other
entity, any Warrantholder who has not exercised his right of
purchase prior to the effective date of such reclassification,
reorganization, consolidation, amalgamation, merger, sale or
conveyance, upon the exercise of such right thereafter, shall
be entitled to receive and shall accept in lieu of the number
of Common Shares then subscribed for by him but for the same
aggregate consideration payable therefor, the number of shares
or other securities or property of the Corporation or of the
body corporate, trust, partnership or other entity resulting
from such merger, amalgamation or consolidation, or to which
such sale or conveyance may be made, as the case may be, that
such Warrantholder would have been entitled to receive on such
reclassification, capital reorganization, consolidation,
amalgamation, merger, sale or conveyance, if, on the record
date or the effective date thereof, as the case may be, the
Warrantholder had been the registered holder of the number of
Common Shares so subscribed for. To give effect to or to
evidence the provisions of this subsection, the Corporation
shall or shall impose upon its successor or such purchasing
body corporate, partnership, trust or other entity, as the
case may be, prior to or contemporaneously with any such
reclassification, reorganization, consolidation, amalgamation,
merger, sale or conveyance, an agreement or undertaking which
shall provide, to the extent possible, for the application of
the provisions set forth in this Warrant with respect to the
rights and interests thereafter of the Warrantholders to the
end that the provisions set forth in this Warrant shall
thereafter correspondingly be made applicable, as nearly as
may reasonably be, with respect to any shares, other
securities or property to which a Warrantholder is entitled on
the exercise of his purchase rights thereafter. Any agreement
or undertaking entered into between the Corporation, any
successor to the Corporation or such purchasing body
corporate, partnership, trust or other entity shall provide
for adjustments which shall be as nearly equivalent as may be
practicable to the adjustments provided in this Section 3 and
which shall apply to successive reclassifications,
reorganizations, amalgamations, consolidations, mergers, sales
or conveyances;
f. in any case in which this Section 3 shall require that an
adjustment shall become effective immediately after a record
date or closing date, as the case may be, for an event
referred to herein, the Corporation may defer, until the
occurrence of such event, issuing to the holder of any Warrant
exercising his purchase rights after such record date and
before the occurrence of such event the additional Common
Shares issuable upon such exercise by reason of the adjustment
required by such event before giving effect to such
adjustment; provided, however, that the Corporation shall
deliver to such holder an appropriate instrument evidencing
such holder's right to receive such additional Common Shares
upon the occurrence of the event requiring such adjustment and
the right to receive any distributions made on such additional
Common Shares declared in favour of holders of record of
Common Shares on and after the date of exercise or such later
date as such
<PAGE> 13
holder would, but for the provisions of this Subsection f,
have become the holder of record of such additional Common
Shares pursuant to the Warrants;
g. the adjustments provided for in this Section in the Exercise
Price and in the number and classes of shares which are to be
received on the exercise of Warrants, are cumulative. After
any adjustment pursuant to this Section, the term "Common
Shares" where used in this Warrant shall be interpreted to
mean shares of any class or classes which, as a result of all
prior adjustments pursuant to this Section, the Warrantholder
is entitled to receive upon the exercise of his Warrant, and
the number of Common Shares indicated in any subscription made
pursuant to a Warrant shall be interpreted to mean the number
of shares of all classes which, as a result of all prior
adjustments pursuant to this Section, a Warrantholder is
entitled to receive upon the full exercise of a Warrant
entitling the holder thereof to purchase the number of Common
Shares so indicated;
h. all shares of any class which a Warrantholder is at the time
in question entitled to receive on the full exercise of his
Warrant, whether or not as a result of adjustments made
pursuant to this Section, shall, for the purposes of the
interpretation of this Warrant, be deemed to be shares which
such Warrantholder is entitled to purchase pursuant to such
Warrant;
i. in the event of any question arising with respect to the
adjustments provided for in this Section 3, such question
shall be conclusively determined by a national accounting firm
mutually acceptable to the Corporation and the Warrantholder,
which may be the Corporation's auditors, which accounting firm
shall have access to all necessary records of the Corporation,
and such determination shall be binding upon the Corporation,
all Warrantholders and all other persons in interest;
j. anything in this Section 3 to the contrary notwithstanding, no
adjustment shall be made in the Exercise Price unless such
adjustment would require an increase or decrease of at least
1% in the Exercise Price then in effect, but in such case any
adjustment that would otherwise have been required then to be
made shall be carried forward and taken into account in any
subsequent adjustment in the Exercise Price. In case the
Common Shares at any time outstanding shall, prior to the
Expiry Time, be subdivided or redivided into a greater number
of Common Shares or reduced, combined or consolidated into a
lesser number of Common Shares, the minimum adjustment
aforesaid and any adjustment carried forward as aforesaid
shall thereupon be itself adjusted to such amount which shall
bear the same relation to the minimum adjustment established
immediately prior to such event as the total number of Common
Shares outstanding immediately prior thereto shall bear to the
total number of Common Shares outstanding immediately after
such event. Any such minimum adjustment so established shall
continue in effect until the same shall again be changed as
herein provided;
k. notwithstanding anything contained in this Section 3, no
adjustment shall be made in the Exercise Price or in the
number and classes of shares which are to be received on
exercise of Warrants if the issue of Common Shares is being
made pursuant to this Warrant or pursuant to any stock option
or stock purchase plan in force from time to time for
directors, officers or employees of the Corporation;
l. no adjustment in the Exercise Price or the number of Common
Shares purchaseable upon the exercise of this Warrant need
made under Subsection 3(c) if, subject to the prior
<PAGE> 14
written consent of The Toronto Stock Exchange, the Corporation
issues or distributes to the Warrantholder the rights,
options, or warrants referred to in such Subsection 3(c) which
the Warrantholder would have been entitled to receive had this
Warrant been exercised prior to the happening of such event or
the record date with respect thereto;
m. in case the Corporation shall take any action affecting the
Common Shares other than action described in this Section 3,
which in the opinion of the directors of the Corporation would
materially affect the rights of the Warrantholder, the
Exercise Price and/or the number of Common Shares which may be
acquired upon exercise of a Warrant shall be adjusted by
action of the directors in such manner and at such time, in
their sole discretion, as they may determine to be equitable
in the circumstances, provided that no such adjustment will be
made unless prior approval of all stock exchanges on which the
Common Shares are listed (including The Toronto Stock Exchange
if the Common Shares have been listed thereon within the 12
month period prior to the date of the action requiring
adjustment) for trading has been obtained. Failure of the
directors to make such an adjustment shall be conclusive
evidence that the directors have determined that it is
equitable to make no adjustment in the circumstances.
4. Proceedings Prior to any Action Requiring Adjustment
As a condition precedent to the taking of any action which
would require an adjustment in any of the subscription rights pursuant to any
of the Warrants, including the Exercise Price and the number and classes of
shares which are to be received upon the exercise thereof, the Corporation
shall take any corporate action which may, in the opinion of counsel, be
necessary in order that the Corporation has unissued and reserved in its
authorized capital and may validly and legally issue as fully paid and
non-assessable all the shares which the holders of such Warrants are entitled
to receive on the full exercise thereof in accordance with the provisions
hereof.
5. Certificate of Adjustment
The Corporation shall from time to time immediately after the
occurrence of any event which requires an adjustment or readjustment as
provided in Section 3, deliver a certificate of the Corporation to a
Warrantholder specifying the nature of the event requiring the same and the
amount of the adjustment necessitated thereby and setting forth in reasonable
detail the method of calculation and the facts upon which such calculation is
based. Notwithstanding the foregoing, if the Corporation has given notice
under Section 6 covering all the relevant facts in respect of such event, no
such notice need be given under this Section 5.
6. Notice of Special Matters
The Corporation covenants that so long as any Warrant remains
outstanding, it will give notice to the Warrantholder of its intention to fix a
record date or closing date, as the case may be, for any event referred to in
Subsections a, c or d of Section 3 (other than the subdivision, redivision,
change in number, reduction, combination or consolidation of its Common Shares)
which may give rise to an adjustment in the Exercise Price, or its intention to
take any action described in Subsection (e) of Section 3 and, in each case,
such notice shall specify the particulars of such event and the record date
and/or the effective date for such event; provided that the Corporation shall
only be required to specify in such notice such particulars of such event as
shall have been fixed and determined on the date on which such notice is given.
Such notice shall be given in each case not less than fourteen (14) days prior
to such applicable record date, closing date or effective date.
<PAGE> 15
7. No Action after Notice
The Corporation covenants with the Warrantholder that it will
not close its transfer books or take any other corporate action which might
deprive the holder of a Warrant of the opportunity of exercising his right of
purchase pursuant thereto during the period of fourteen (14) days after the
giving of the notices set forth in Sections 5 and 6.
8. Notices
a. Notice to Corporation
Any notice to the Corporation under the provisions of this
Warrant shall be valid and effective if delivered to or if
given by registered letter, postage prepaid, addressed to the
Corporation at 17304 Preston Road, Suite 200, Dallas, TX 75252
Attention: President, and shall be deemed to have been
effectively given on the date of delivery or, if mailed, 5
days after actual posting of the notice. The Corporation may
from time to time notify the Warrantholders in writing of a
change of address which thereafter, until changed by like
notice, shall be the address of the Corporation for all
purposes of this Indenture.
b. Notice to Warrantholders
Any notice to Warrantholders under the provisions of this
Warrant shall be valid and effective if sent by telecopier
through electronic means, or letter or circular through the
ordinary post addressed to such holders at their post office
addresses appearing on the register of Warrantholders and
shall be deemed to have been effectively given on the date of
delivery or, if mailed, five days following actual posting of
notice.
<PAGE> 1
EXHIBIT 23 (A)
CONSENT OF DELOITTE & TOUCHE
<PAGE> 2
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, 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, 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
September 12, 1996
<PAGE> 1
EXHIBIT 23 (B)
CONSENT OF DELOITTE & TOUCHE LLP
<PAGE> 2
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
September 12, 1996
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EXHIBIT 23 (C)
CONSENT OF THE SCOTIA GROUP
<PAGE> 2
September 13, 1996
CONSENT OF INDEPENDENT PETROLEUM ENGINEER
The Scotia Group, Inc., (Scotia) hereby consents to all references
appearing in the Registration Statement on Form S-1, and any amendments
thereto, pertaining to 4,000,000 Common Shares of Denbury Resources Inc.
(Denbury), a Canadian corporation, to be filed with the Securities and Exchange
Commission on or about September 13, 1996, to the reports of Scotia dated 14
February 1995 and 11 February 1994 relating to Scotia's audits of Denbury's
estimates of Denbury's proved oil and gas reserves as of December 31, 1994 and
December 31, 1993. We also consent to the reference of our firm under the
heading "Experts" in such Registration Statement.
Very truly yours,
THE SCOTIA GROUP
BY: /s/ Robert H. Caldwell
---------------------------
Robert H. Caldwell, PhD
Partner
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EXHIBIT 23 (D)
CONSENT OF NETHERLAND, SEWELL & ASSOCIATES
<PAGE> 2
CONSENT OF INDEPENDENT PETROLEUM ENGINEERS AND GEOLOGISTS
We hereby consent to the references to our firm and to our reports
effective December 31, 1995 and July 1, 1996, in the Registration Statement on
Form S-1 of Denbury Resources, Inc., a Canadian corporation, to be filed with
the Securities and Exchange Commission on or about September 13, 1996. We also
consent to the reference of our firm under the heading "Experts" in such
Registration Statement.
NETHERLAND, SEWELL & ASSOCIATES, INC.
By: /s/ Frederic D. Sewell
---------------------------------
Frederic D. Sewell
President
Dallas, Texas
September 13, 1996