<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 23, 1997
REGISTRATION NO. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
------------------
FORM S-3
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
------------------
DENBURY RESOURCES INC.
DENBURY MANAGEMENT, INC.
(Exact name of Registrant as specified in its charter)
<TABLE>
<C> <C> <C>
CANADA NOT APPLICABLE
TEXAS 1311 75-2294373
(State or other jurisdiction of (Primary standard industrial (I.R.S. employer identification
incorporation or organization) classification code number) no.)
PHIL RYKHOEK, C.F.O.
DENBURY RESOURCES INC.
17304 PRESTON ROAD, SUITE 200 17304 PRESTON ROAD, SUITE 200
DALLAS, TEXAS 75252 DALLAS, TEXAS 75252
(972) 713-3000 (972) 713-3000; FACSIMILE: (972) 713-3051
(Address and telephone number of Registrants' (Name, address and telephone
principal executive offices) number of Agent for Service)
</TABLE>
Copies to:
<TABLE>
<C> <C>
DONALD W. BRODSKY STEPHEN L. BURNS
JENKENS & GILCHRIST, CRAVATH, SWAINE & MOORE
A PROFESSIONAL CORPORATION WORLDWIDE PLAZA
1100 LOUISIANA, SUITE 1800 825 EIGHTH AVENUE
HOUSTON, TX 77002 NEW YORK, NY 10019
(713) 951-3300; FACSIMILE: (713) 951-3314 (212) 474-1000; FACSIMILE: (212) 474-3700
</TABLE>
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.
If the only securities being registered on this form are being offered
pursuant to dividend or interest reinvestment plans, please check the following
box: [ ]
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 other than securities offered only in connection with dividend or
reinvestment plans, 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
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<CAPTION>
=================================================================================================================================
PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT OFFERING AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED TO BE REGISTERED PRICE PER SECURITY OFFERING PRICE(A) REGISTRATION FEE
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Common Shares........................... 5,565,140(b) $17.969(c) $100,000,000 $29,500
% Senior Subordinated Notes Due
2008.................................. $100,000,000 100% $100,000,000 $29,500
Guarantee(d)............................ (e) (e) (e) (d)(e)
- ------------------------------------------------------------------------------------------------------------------------------
Total......................... -- -- $200,000,000 $59,000
==============================================================================================================================
</TABLE>
(a) Estimated solely for purposes of calculating the registration fee.
(b) Includes an aggregate of 725,888 Common Shares subject to an Underwriters'
over-allotment option, and Common Shares to be sold directly by Denbury
Resources Inc. to its majority shareholder.
(c) Calculated by averaging the high ($18.0625) and low ($17.875) price of the
Common Shares of Denbury Resources Inc. on December 23, 1997 on the New York
Stock Exchange pursuant to Rule 457(c) under the Securities Act of 1933, as
amended.
(d) The Guarantee of the Senior Subordinated Notes by Denbury Resources Inc. is
also being registered hereby. Pursuant to Rule 457(n) under the Securities
Act of 1933, as amended, no registration fee is required with respect to the
Guarantee.
(e) No separate consideration will be received for the Guarantee from the
purchasers of the Notes.
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
EXPLANATORY NOTE
This Registration Statement contains alternate pages, sections, paragraphs,
sentences or phrases which will be contained in two forms of Prospectus covered
by this Registration Statement, one to be used in connection with the offering
(the "Equity Offering") of Common Shares by Denbury Resources Inc. (the "Equity
Prospectus") and the other to be used in connection with the concurrent offering
(the "Debt Offering") of % Senior Subordinated Notes Due 2008 by Denbury
Management, Inc., the wholly owned subsidiary of Denbury Resources Inc. (the
"Debt Prospectus"). Those sections, paragraphs, sentences or phrases that will
appear only in the Equity Prospectus are marked at the beginning of such
section, paragraph, sentence or phrase by the symbol [E] and those appearing
only in the Debt Prospectus are designated by the symbol [D]. Unless so
indicated with a [D] or [E], the language therein will appear in both forms of
Prospectus. The closing of the Debt Offering is conditioned upon the closing of
the Equity Offering; however, the closing of the Equity Offering is not
conditioned upon the closing of the Debt Offering. Denbury Management Inc. is a
Registrant with respect to the debt securities only. Denbury Resources Inc. is a
Registrant with respect to both the equity and debt securities.
<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.
[D] PROSPECTUS (Subject to Completion)
Issued December 23, 1997
$100,000,000
DMI LOGO
Denbury Management, Inc.
% SENIOR SUBORDINATED NOTES DUE 2008
Fully and Unconditionally Guaranteed on a Senior Subordinated Basis by
Denbury Resources Inc.
------------------------
Interest payable and
------------------------
Interest on the % Senior Subordinated Notes Due 2008 (the "Notes") of Denbury
Management Inc. ("DMI") will be payable semi-annually on and of
each year, commencing , 1998. The Notes are redeemable at the option
of DMI, in whole or in part, on or after , 2003, at the redemption
prices set forth herein, together with accrued and unpaid interest, if any, to
the date of redemption. In addition, at any time prior to , 2001, DMI
may redeem in the aggregate up to 35% of the original principal amount of the
Notes with the proceeds of one or more Stock Offerings (as defined herein), at
% of their principal amount, plus accrued interest. Upon a Change of Control
(as defined herein), each holder of the Notes may require DMI to purchase all or
a portion of such holder's Notes at 101% of the aggregate principal amount
thereof, together with accrued and unpaid interest, if any, to the date of
purchase. See "Description of the Notes."
Concurrently with the offering made hereby (the "Debt Offering"), Denbury
Resources Inc., DMI's parent company ("DRI"), is offering of its Common
Shares (the "Equity Offering" and, together with the Debt Offering, the
"Offerings") pursuant to a simultaneous underwritten public offering. In
addition, in connection with the Equity Offering, entities affiliated with the
Texas Pacific Group, DRI's largest shareholder, will purchase from DRI
Common Shares (the "TPG Purchase"). The closing of the Debt Offering is
conditioned upon the consummation of the Equity Offering and the TPG Purchase.
The Notes will be general unsecured obligations of DMI, subordinated in right of
payment to all existing and future Senior Indebtedness (as defined) of DMI, but
senior in right of payment to all existing and future subordinated indebtedness
of DMI. As of September 30, 1997, after giving pro forma effect to the
Transactions (as defined herein), DMI and its subsidiaries would have had $
million of Senior Indebtedness outstanding under the Credit Facility (as defined
herein) and $ million available under the Credit Facility which, when
borrowed, will constitute Senior Indebtedness. The Notes will be fully and
unconditionally guaranteed on a senior subordinated basis by DRI.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE FOR A DISCUSSION OF INFORMATION 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.
------------------------
PRICE % AND ACCRUED INTEREST
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) COMMISSIONS(2) COMPANY(1)(3)
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<S> <C> <C> <C>
Per Note..................................... % % %
Total........................................ $ $ $
</TABLE>
- ------------
(1) Plus accrued interest from , 1998, if any.
(2) DMI has agreed to indemnify the Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriters."
(3) Before deducting expenses of the Debt Offering, estimated at $ .
------------------------
The Notes are offered, subject to prior sale, when, as and if accepted by
the Underwriters named herein and subject to approval of certain legal matters
by Cravath, Swaine & Moore, counsel for the Underwriters. It is expected that
delivery of the Notes will be made on or about , 1998 at the office of
Morgan Stanley & Co. Incorporated, New York, N.Y., against payment therefor in
immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER NATIONSBANC MONTGOMERY
January , 1998
<PAGE> 4
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.
[E] PROSPECTUS (Subject to Completion)
Issued December 23, 1997
Shares
DRI LOGO
Denbury Resources Inc.
COMMON SHARES
------------------------
All of the Common Shares offered hereby are being sold by Denbury Resources Inc.
The Common Shares are listed on the New York Stock Exchange and on The Toronto
Stock Exchange under the symbol "DNR." On , 1997, the reported last
sale price of the Common Shares on the New York Stock Exchange and The Toronto
Stock Exchange was US$ per share and C$ per share,
respectively.
Concurrently with the closing of this offering of Common Shares (the "Equity
Offering"), entities affiliated with the Texas Pacific Group ("TPG"), the
Company's largest shareholder, will purchase from the Company Common
Shares (the "TPG Purchase") at $ per share (equal to the price to
public per share set forth below less underwriting discounts and commissions).
The closing of the Equity Offering is conditioned upon the closing of the TPG
Purchase.
Concurrently with the Equity Offering, Denbury Management, Inc.("DMI"), a wholly
owned subsidiary of the Company, is offering $100 million in aggregate principal
amount of % Senior Subordinated Notes Due 2008 (the "Debt Offering" and,
together with the Equity Offering, the "Offerings"). The closing of the Equity
Offering is not conditioned upon the closing of the Debt Offering. The Common
Shares offered hereby are also being offered for sale in Canada.
------------------------
SEE "RISK FACTORS" BEGINNING ON PAGE FOR INFORMATION 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.
------------------------
PRICE $ A SHARE
------------------------
<TABLE>
<CAPTION>
UNDERWRITING
PRICE TO DISCOUNTS AND PROCEEDS TO
PUBLIC(1) 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 "Underwriters."
(2) Before deducting expenses of the Equity Offering, estimated at
$ .
(3) The Company has granted to the Underwriters an option, exercisable
within 30 days of the date hereof, to purchase up to an aggregate of
additional Common Shares at the price to public less underwriting
discounts and commissions, for the purpose of covering over-allotments,
if any. If the Underwriters exercise such option in full, the total
price to public, underwriting discounts and commissions and proceeds to
the Company will be $ , $ and $ , respectively. See
"Underwriters."
------------------------
The Common Shares are offered, subject to prior sale, when, as and if
accepted by the Underwriters named herein and subject to approval of certain
legal matters by Cravath, Swaine & Moore, counsel for the Underwriters. It is
expected that delivery of the Common Shares will be made on or about
, 1998 at the office of Morgan Stanley & Co. Incorporated, New York, N.Y.,
against payment therefor in immediately available funds.
------------------------
MORGAN STANLEY DEAN WITTER
GORDON CAPITAL, INC.
JOHNSON RICE & COMPANY L.L.C.
LOEWEN, ONDAATJE, MCCUTCHEON USA LIMITED
January , 1998
<PAGE> 5
This page will contain a map of the Gulf Coast Region depicting the
geographical location of the Company's nine largest fields.
---------------------
CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE [[D] OF THE NOTES] [[E]
OF THE COMMON SHARES]. SPECIFICALLY, THE UNDERWRITERS MAY OVER-ALLOT IN
CONNECTION WITH THIS OFFERING AND MAY BID FOR AND PURCHASE [[D] THE NOTES] [[E]
THE COMMON SHARES] IN THE OPEN MARKET. FOR A DESCRIPTION OF THESE ACTIVITIES,
SEE "UNDERWRITERS."
[E] IN CONNECTION WITH THIS OFFERING, CERTAIN UNDERWRITERS AND SELLING GROUP
MEMBERS MAY ENGAGE IN PASSIVE MARKET MAKING TRANSACTIONS IN THE COMMON SHARES ON
THE NEW YORK STOCK EXCHANGE AND THE TORONTO STOCK EXCHANGE IN ACCORDANCE WITH
REGULATION M OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. SEE
"UNDERWRITERS."
2
<PAGE> 6
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 ANY OF THE
UNDERWRITERS. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO SELL OR A
SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED BY THIS PROSPECTUS
BY ANYONE IN ANY JURISDICTION IN WHICH SUCH OFFER OR SOLICITATION IS NOT
AUTHORIZED, OR IN WHICH THE PERSON MAKING THE OFFER OR SOLICITATION IS NOT
QUALIFIED TO DO SO OR TO ANY PERSON TO WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER OR
SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY DISTRIBUTION OF
SECURITIES MADE HEREUNDER OR THEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE
AN IMPLICATION THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
THE DATE HEREOF OR THEREOF OR THAT THE INFORMATION CONTAINED IN THIS PROSPECTUS
IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE DATE HEREOF.
---------------------
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Information Incorporated by
Reference...........................
Prospectus Summary....................
Risk Factors..........................
Forward-Looking Statements............
[D] Equity Offering...................
[E] Debt Offering.....................
Use of Proceeds.......................
[E] Price Range of Common Shares......
[E] Dividend Policy...................
Capitalization........................
Unaudited Pro Forma Consolidated
Financial Information...............
Selected Consolidated Financial
Data................................
Management's Discussion and Analysis
of Financial Condition and Results
of Operations.......................
Business and Properties...............
Management............................
Principal Shareholders................
</TABLE>
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Interests of Management in Certain
Transactions........................
[E] Description of Capital Stock......
Description of Certain Indebtedness...
[D] Description of the Notes..........
[D] Certain U.S. Federal Income Tax
Considerations......................
[E] Canadian Taxation and the
Investment Canada Act...............
Service and Enforcement of Legal
Process.............................
[E] Shares Eligible for Future Sale...
Underwriters..........................
Legal Matters.........................
Experts...............................
Available Information.................
Glossary..............................
Index to Consolidated Financial F-1
Statements..........................
Summary Reserve Report................ A-1
</TABLE>
INFORMATION INCORPORATED BY REFERENCE
The following documents which have been previously filed with the
Securities and Exchange Commission (the "Commission") are incorporated in this
Prospectus: (i) the Company's Annual Report on Form 10-K for the year ended
December 31, 1996; (ii) the Company's Quarterly Reports on Form 10-Q for the
quarters ended March 31, 1997, June 30, 1997 and September 30, 1997; (iii) the
Company's proxy statement dated May 21,1997; (iv) the Company's report on Form
8-K dated September 12, 1997; (v) the Company's report on Form 8-K dated
December 8, 1997; and (vi) the Company's report on Form 8-K dated December 16,
1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 and
15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
subsequent to the date of this Prospectus and prior to the termination of the
offering of securities to be made hereunder shall be deemed to be incorporated
herein by reference and made a part hereof from the date of filing of such
documents.
Any statement contained herein or in a document incorporated or deemed to
be incorporated by reference herein shall be deemed to be modified or superseded
for purposes of this Prospectus to the extent that a statement contained herein,
therein or in any other subsequently filed document that also is or is deemed to
be
3
<PAGE> 7
incorporated by reference herein modifies or supersedes such statement. Any
statement so modified or superseded shall not be deemed, except as so modified
or superseded, to constitute a part of this Prospectus.
Any person receiving a copy of this Prospectus may obtain from the Company
without charge a copy of any and all documents or part thereof incorporated
herein by reference (other than exhibits and schedules to such documents unless
such exhibits or schedules are specifically incorporated by reference into the
information the Prospectus incorporates), upon written or oral request. Requests
should be directed to Phil Rykhoek, Chief Financial Officer and Corporate
Secretary, Denbury Resources Inc., 17304 Preston Road, Suite 200, Dallas, Texas,
75252, telephone: (972) 713-3000.
4
<PAGE> 8
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by reference to, and
should be read in conjunction with, the more detailed information and
Consolidated Financial Statements included elsewhere in this Prospectus. 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. The December 31, 1997
estimated proved reserve data included throughout this Prospectus have been
prepared by Netherland, Sewell & Associates, Inc. ("Netherland & Sewell"),
independent petroleum engineers. Unless the context otherwise requires, the
terms "Denbury" and the "Company" refer to Denbury Resources Inc., a Canadian
corporation, and its wholly owned subsidiaries, the term "DRI" refers to Denbury
Resources Inc. only, and the term "DMI" refers to the wholly owned subsidiary of
DRI, Denbury Management, Inc., a Texas corporation. Certain information
contained in this summary and elsewhere in this Prospectus, including
information with respect to the Company's plans and strategy for its business,
are forward-looking statements. Prospective investors should carefully consider
the information set forth under "Risk Factors" for a discussion of important
factors that could cause actual results to differ materially from the
forward-looking statements contained in this Prospectus. Certain oil and gas
industry terms used herein are defined in the Glossary included elsewhere in
this Prospectus. [E] Unless otherwise indicated herein, the information
contained in this Prospectus assumes that the Underwriters' over-allotment
option will not be exercised.
THE COMPANY
OVERVIEW
Denbury is an independent energy company engaged in acquisition,
development and exploration activities in the U.S. Gulf Coast region, primarily
onshore in Louisiana and Mississippi. The Company believes the Gulf Coast
represents one of the most attractive regions in North America given the
region's prolific production history, complex geology (with multiple producing
horizons) and the opportunities that have been created by advanced technologies
such as 3-D seismic and various drilling, completion and recovery techniques. As
of December 31, 1997, the Company had proved reserves of MMBbls and
Bcf or MMBOE. At such date, the PV10 Value of these reserves was $
million, of which $ million was attributable to proved developed reserves.
Denbury operates wells comprising approximately % of its PV10 Value. The
nine largest fields in which the Company has an interest constitute
approximately % of its estimated proved reserves and, within these nine
fields, Denbury owns an average working interest of %.
Over the last four 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 its properties. For the
three-year period ended December 31, 1996, the Company increased its proved
reserves at a compound annual growth rate of 68%, from 5.8 MMBOE to 27.4 MMBOE.
Over the four-year period ended December 31, 1996, the Company also increased
its average net daily production at a compound annual growth rate of 90%, from
1,193 BOE/d to 8,167 BOE/d, with a further increase to 14,195 BOE/d for the
third quarter of 1997. For the same four-year period, EBITDA increased at a
compound annual growth rate of 126%, from $3.0 million to $34.9 million. EBITDA
for the twelve months ended September 30, 1997 was $51.9 million.
Since 1993, when the Company began to focus its operations exclusively in
the United States, through December 31, 1995, the Company spent a total of $43.4
million on acquisitions. In May 1996, the Company acquired properties in its
core areas of Mississippi and Louisiana from Amerada Hess Corporation ("Amerada
Hess") for approximately $37.2 million (the "Hess Acquisition"). As of June 30,
1996, these acquired properties were producing approximately 2,945 BOE/d and had
proved reserves of approximately 5.9 MMBOE. Since that date, the Company's
extensive development and exploitation on these properties has resulted in an
82% increase in production to 5,373 BOE/d for the third quarter of 1997 and a
% increase in proved reserves to MMBOE as of December 31, 1997.
5
<PAGE> 9
On November 25, 1997, the Company announced that it had entered into an
agreement to purchase properties in the Heidelberg Field, which is adjacent to
the Company's other primary oil properties in Mississippi, from Chevron U.S.A.
Inc. ("Chevron") for approximately $202 million (the "Chevron Acquisition").
These properties are located approximately nine miles from the Eucutta Field,
the property with the highest PV10 Value acquired by the Company in the Hess
Acquisition. The estimated proved reserves as of December 31, 1997 for the
Chevron Acquisition properties are approximately 28.1 MMBOE ( % of the
Company's total proved reserves at December 31,1997), with average net daily
production of approximately 2,940 BOE/d for the third quarter of 1997. As a
result of the significant amount of future development and exploitation to be
performed on these properties and the increase in future reserves and production
that the Company expects to result from such development and exploitation, the
Company has attributed approximately $75 million of the purchase price to
unevaluated properties. The Company believes that the properties acquired in the
Chevron Acquisition provide exploitation opportunities similar to those of the
Mississippi properties acquired in the Hess Acquisition and the Company intends
to apply the same technologies to the Heidelberg Field. The Company's estimated
1998 development budget for the Heidelberg Field is approximately $28 million.
See "-- Acquisition of Chevron Properties."
BUSINESS STRATEGY
The Company seeks to: (i) achieve attractive returns on capital through
prudent acquisitions, development and exploratory drilling and efficient
operations; (ii) maintain a conservative balance sheet to preserve maximum
financial and operational flexibility; and (iii) create strong employee
incentives through equity ownership. 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 which are at the core of the
Company's long-term growth strategy. The Company's long-term growth strategy
includes the following fundamental principles:
REGIONAL FOCUS. The Company intends to continue the regional focus of its
operations. By focusing its efforts in the Gulf Coast region, primarily
Louisiana and Mississippi, the Company has been able to accumulate substantial
geological and reservoir data and operating experience which it believes
provides it with significant competitive advantages. For example, the Company
believes it is better able to identify, evaluate and negotiate potential
acquisitions, and develop and operate its properties in an efficient and low-
cost manner. The Company believes the Gulf Coast represents one of the most
attractive regions in North America given the region's prolific production
history, complex geology (with multiple producing horizons) and the
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 important
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 intends to continue to
acquire properties where it believes significant additional value can be
created. Such properties are typically characterized by: (i) long production
histories; (ii) complex geological formations with multiple producing horizons
and substantial exploitation potential; (iii) a history of limited operational
focus 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. The Company believes that due to
continuing rationalization of properties, primarily by major integrated and
independent energy companies, future acquisition opportunities should continue
to be available. 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 recent
Hess and Chevron Acquisitions are examples of the types of opportunities the
Company seeks.
OPERATION OF HIGH WORKING INTEREST PROPERTIES. The Company intends to
continue to acquire working interest positions that give it operational control
or that the Company believes may lead to operational control. As the operator of
properties comprising approximately % of its total PV10 Value, the Company
believes it 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
6
<PAGE> 10
and operational expertise to fully evaluate a field's future potential. If
favorable, it will consolidate its 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 so
that the potential benefits of value enhancement activities justify the
allocation of Company resources.
EXPLOITATION OF PROPERTIES. The Company intends to maximize the value of
its properties through a combination of increasing production, increasing
recoverable reserves or reducing operating costs. During 1997, the Company's
primary methodology for achieving these objectives was the use of horizontal
drilling, which it also intends to emphasize in 1998. Horizontal drilling has
historically produced oil at faster rates and with lower operating costs on a
BOE basis than traditional vertical drilling. The Company also utilizes a
variety of other techniques to maximize property values, 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; and (iv)
utilizing exploratory drilling, which is frequently based on various advanced
technologies such as 3-D seismic.
EXPERIENCED AND INCENTIVIZED PERSONNEL. The Company intends to maintain a
highly competitive team of experienced and technically proficient employees and
motivate them through a positive work environment and stock ownership in the
Company. The Company's 29 geological and engineering professionals have an
average of over 15 years of experience in the Gulf Coast region. The Company
believes that employee ownership, which is encouraged through the Company's
stock option and stock purchase plans, is essential for attracting, retaining
and motivating quality personnel. As of September 30, 1997, approximately 91% of
the Company's eligible employees were participating in the Company's stock
purchase plan. The Company believes that all employees are important to the
success of the Company and as such grants bonuses and stock options to both
management and employees on a basis roughly proportional to salaries.
ACQUISITION OF CHEVRON PROPERTIES
On November 25, 1997, the Company announced that it had entered into an
agreement to purchase oil properties in the Heidelberg Field, Jasper County,
Mississippi, from Chevron for approximately $202 million. The Chevron
Acquisition represents the largest acquisition by the Company to date. The
Heidelberg Field is adjacent to the Company's other primary oil properties in
Mississippi and includes 122 producing wells, 96 of which the Company will
operate. The Company is purchasing an average working interest of 94% and an
average net revenue interest of 81% in these 96 wells, which wells account for
approximately 99% of the field's average net daily production. The average net
daily production from these properties during the third quarter of 1997 was
approximately 2,840 Bbls/d and 600 Mcf/d.
The Chevron Acquisition added proved reserves as of December 31, 1997 of
approximately 27.7 MMBbls and 2.5 Bcf, or approximately 28.1 MMBOE. As a result
of the significant amount of future development and exploitation to be performed
on these properties and the increase in future reserves and production that the
Company expects to result from such development and exploitation, the Company
has attributed approximately $75 million of the purchase price to unevaluated
properties.
The Company has identified several potential development projects during
its initial evaluation of the Heidelberg Field. These include initiating a
waterflood project, upgrading lift capacity in over 15 wells and recompleting 30
wells in new zones. In addition, the Company has identified over 40 potential
drilling locations in addition to other potential secondary and tertiary
recovery projects. Horizontal wells drilled by the Company in 1997 at nearby
Davis, Quitman and Eucutta Fields improved daily production rates significantly
as compared to vertical wells drilled in the same fields. Consequently, the
Company anticipates that 25 of the 40 proposed future wells in the Heidelberg
Field will be horizontal wells. The Company's total 1998 development budget for
the Heidelberg Field is approximately $28 million.
7
<PAGE> 11
TPG PURCHASE
In December 1995, the Texas Pacific Group initially invested in the Company
through a $40 million private placement of securities and currently owns
approximately 40% of the outstanding Common Shares (after giving effect to the
pro forma exercise of TPG's warrants to purchase 625,000 Common Shares). In
connection with the Offerings, TPG is purchasing an additional Common
Shares (the "TPG Purchase"). See "Interests of Management in Certain
Transactions." After giving effect to the Equity Offering and the TPG Purchase,
TPG will own approximately % of the outstanding Common Shares.
TPG was founded by David Bonderman, James G. Coulter and William S. Price
III in 1993 to pursue private and public investment opportunities. The
principals of TPG operate limited partnerships with committed capital of over
$3.2 billion. TPG has several investments in its portfolio, including America
West Airlines, Beringer Wine Estates, Belden and Blake Corporation, Continental
Airlines, Del Monte Foods, Ducati Motor, Favorite Brands International, J. Crew
Group Inc., Paradyne, St. Joe Communications and Virgin Cinemas.
[D] THE DEBT OFFERING
Issuer..................... Denbury Management, Inc.
Guarantor.................. Denbury Resources Inc. (the "Guarantor").
Securities Offered......... $100,000,000 aggregate principal amount of %
Senior Subordinated Notes Due 2008.
Maturity Date.............. , 2008.
Interest Rate and Payment
Dates...................... The Notes will bear interest at a rate of % per
annum. Interest on the Notes will accrue from the
date of issuance thereof and will be payable
semi-annually on and of each
year, commencing , 1998.
Optional Redemption........ Except as set forth below, the Notes will not be
redeemable at the option of DMI prior to
, 2003. Thereafter, the Notes will be redeemable
at the option of DMI, in whole or in part, at the
redemption prices set forth herein, together with
accrued and unpaid interest, if any, to the date of
redemption. If at any time or from time to time
before , 2001, DRI consummates a Stock
Offering, DMI may, at its option, use all or a
portion of the proceeds therefrom to redeem up to
35% of the original principal amount of the Notes
at a redemption price equal to % of the
aggregate principal amount thereof, together with
accrued and unpaid interest, if any, to the date of
redemption; provided, however, that (i) at least
$ million in aggregate principal amount of
Notes remains outstanding immediately after each
such redemption or such redemption retires the
Notes in their entirety and (ii) such redemption
occurs within 60 days following the closing of such
Stock Offering. See "Description of the
Notes -- Optional Redemption."
Repurchase Obligation upon
Change of Control........ Upon the occurrence of a Change of Control, each
holder of Notes will have the right to require DMI
to purchase all or a portion of such holder's Notes
at a price equal to 101% of the aggregate principal
amount thereof, together with accrued and unpaid
interest to the date of purchase. See "Risk
Factors -- Risks Relating to a Change of Control"
8
<PAGE> 12
and "Description of the Notes -- Certain
Covenants -- Change of Control."
Ranking.................... The Notes will be unsecured, general obligations of
DMI subordinated in right of payment to all
existing and future Senior Indebtedness of DMI. The
Notes will rank pari passu in right of payment with
any future senior subordinated indebtedness of DMI
and will be senior in right of payment to all
existing and future subordinated indebtedness of
DMI. As of September 30, 1997, after giving pro
forma effect to the Transactions, DMI would have
had approximately $ of outstanding Senior
Indebtedness and no outstanding subordinated
indebtedness. The Company may incur additional
indebtedness under the Credit Facility after the
Offerings, and such indebtedness will constitute
Senior Indebtedness. See "Risk
Factors -- Subordination of the Notes and Guaranty"
and "Description of the Notes -- Ranking."
Guaranty................... The Notes will be fully and unconditionally
guaranteed (the "Guaranty") on a senior
subordinated basis by the Guarantor, of which DMI
is a direct wholly owned subsidiary. The Guaranty
will be a general, unsecured obligation of the
Guarantor, subordinated in right of payment to all
existing and future Senior Indebtedness of the
Guarantor. As of September 30, 1997, after giving
pro forma effect to the Transactions, the Guarantor
would have had $ million of Senior Indebtedness
outstanding, all of which would have represented
its guarantee of Senior Indebtedness of DMI under
the Credit Facility. See "Risk Factors --
Subordination of the Notes and Guaranty" and
"Description of the Notes -- Ranking."
Certain Covenants.......... The indenture pursuant to which the Notes will be
issued (the "Indenture") will contain certain
covenants for the benefit of the holders,
including, among others, covenants limiting the
incurrence of additional indebtedness, the payment
of dividends, the redemption of capital stock, the
making of certain investments, the incurrence of
dividend and other payment restrictions affecting
subsidiaries, the issuance of capital stock of
subsidiaries, asset sales, the creation of liens,
certain sale and leaseback transactions,
transactions with affiliates and certain mergers
and consolidations. However, these limitations will
be subject to a number of important qualifications
and exceptions. See "Description of the
Notes -- Certain Covenants."
Use of Proceeds............ The net proceeds from the Debt Offering, together
with the net proceeds from the Equity Offering and
the TPG Purchase, will be used to reduce the
Company's outstanding indebtedness under the Credit
Facility, incurred primarily in connection with the
Chevron Acquisition. Following such repayment, the
Company will continue to have borrowing
availability under the Credit Facility to fund
future acquisitions, development activities and
working capital. See "Use of Proceeds."
Concurrent Equity
Offering................... Concurrently with the Debt Offering, DRI is
offering ( if the underwriters'
over-allotment option is exercised in full) of its
Common Shares, no par value (the "Common Shares"),
by a separate prospectus. The closing of the Debt
Offering is conditioned on the concurrent closing
of the Equity Offering and the TPG Purchase;
however, the closing of the Equity Offering is not
conditioned on the closing of the Debt Offering.
9
<PAGE> 13
[E] THE EQUITY OFFERING
Common Shares offered
by DRI................... shares(a)
Common Shares to be
outstanding after the
Equity Offering.......... shares(b)
Concurrent Debt Offering... Concurrently with the Equity Offering, DMI is
offering $100 million aggregate principal amount of
its % Senior Subordinated Notes Due 2008 by a
separate prospectus. The closing of the Equity
Offering is not conditioned on the closing of the
Debt Offering.
Use of Proceeds............ The net proceeds from the Equity Offering, together
with the net proceeds from the Debt Offering and
the TPG Purchase, will be used to reduce the
Company's outstanding indebtedness under the Credit
Facility incurred primarily in connection with the
Chevron Acquisition. Following such repayment, the
Company will continue to have borrowing
availability under the Credit Facility to fund
future acquisitions, development activities and
working capital. See "Use of Proceeds."
New York Stock Exchange and
The Toronto Stock
Exchange symbol.......... DNR
- ---------------
(a) Excludes Common Shares to be purchased by TPG in the TPG Purchase.
(b) Includes 20,370,699 Common Shares outstanding as of December 15, 1997 and
Common Shares to be purchased by TPG in the TPG Purchase. This total
does not include 2,247,556 shares issuable pursuant to outstanding warrants
and stock options, of which 1,096,572 were exercisable as of December 15,
1997.
RISK FACTORS
Prior to making an investment decision, prospective investors should
consider carefully, together with other information contained in this
Prospectus, the risk factors discussed under the caption "Risk Factors" herein.
10
<PAGE> 14
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The summary historical consolidated financial data of the Company set forth
below as of and for the years ended December 31, 1994, 1995 and 1996 have been
derived from the audited consolidated financial statements of the Company. The
summary historical consolidated financial data for the nine-month periods ended
September 30, 1996 and 1997, and as of September 30, 1997, have been derived
from unaudited consolidated financial statements of the Company which, in
management's opinion include 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. The summary unaudited
pro forma consolidated financial data for the Company set forth below have been
derived from the Pro Forma Financial Statements (as defined) included elsewhere
in this Prospectus. The summary historical and pro forma consolidated financial
data are qualified in their entirety by, and should be read in conjunction with,
"Unaudited Pro Forma Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Company's consolidated financial statements included elsewhere in this
Prospectus (the "Consolidated Financial Statements").
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- ----------------------------
PRO PRO
FORMA FORMA
1994 1995 1996 1996(A) 1996 1997 1997(A)
------- ------- ------- -------- ------- ------- --------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS AND RATIOS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Oil, natural gas and related
product sales............... $12,692 $20,032 $52,880 $ 76,542 $34,709 $60,083 $ 74,117
Interest income............... 23 77 769 769 425 986 986
------- ------- ------- -------- ------- ------- --------
Total revenues........... 12,715 20,109 53,649 77,311 35,134 61,069 75,103
------- ------- ------- -------- ------- ------- --------
Expenses:
Production.................... 4,309 6,789 13,495 20,145 9,197 15,737 20,974
General and administrative.... 1,105 1,832 4,267 4,954 2,825 4,535 5,049
Interest...................... 1,146 2,085 1,993 12,227 1,530 387 7,894
Imputed preferred dividends... -- -- 1,281 1,281 1,153 -- --
Loss on early extinguishment
of debt..................... -- 200 440 440 440 -- --
Depletion and depreciation.... 4,209 8,022 17,904 24,491 12,557 23,224 27,049
Franchise taxes............... 65 100 213 213 160 308 308
------- ------- ------- -------- ------- ------- --------
Total expenses........... 10,834 19,028 39,593 63,751 27,862 44,191 61,274
------- ------- ------- -------- ------- ------- --------
Income before income taxes...... 1,881 1,081 14,056 13,560 7,272 16,878 13,829
Provision for federal income
taxes......................... (718) (367) (5,312) (5,128) (2,932) (6,245) (5,117)
------- ------- ------- -------- ------- ------- --------
Net income...................... $ 1,163 $ 714 $ 8,744 $ 8,432 $ 4,340 $10,633 $ 8,712
======= ======= ======= ======== ======= ======= ========
Net income per common share
Primary....................... $ 0.19 $ 0.10 $ 0.67 $ 0.47 $ 0.37 $ 0.53 $ 0.35
Fully diluted................. 0.19 0.10 0.62 0.45 0.36 0.50 0.34
Weighted average common shares
outstanding................... 6,240 6,870 13,104 18,002 11,616 20,175 25,073
OTHER FINANCIAL DATA:
Operating cash flow(b).......... $ 6,185 $ 9,394 $34,140 $ 40,231 $21,767 $40,166 $ 40,942
Capital expenditures............ 16,903 28,524 86,857 288,857 73,320 70,773 272,773
EBITDA(c)....................... 7,213 11,311 34,905 51,230 22,527 39,503 47,786
SELECTED RATIOS:
Ratio of earnings to fixed
charges(d).................... 2.6x 1.5x 4.4x 1.9x 3.1x 34.9x 2.7x
Ratio of EBITDA to interest
expense....................... 6.3 5.4 17.5 4.2 14.7 102.1 6.1
Ratio of long-term debt to
EBITDA........................ 2.3 0.3 0.1 2.3 1.6(e) 0.4(e) p2.2(e)
</TABLE>
11
<PAGE> 15
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
1997
AS OF DECEMBER 31, -------------------
---------------------------- PRO
1994 1995 1996 ACTUAL FORMA(A)
------- ------- -------- -------- --------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)......................... $(1,620) $ 6,862 $ 12,482 $ 2,899 $ 2,899
Total assets...................................... 48,964 77,641 166,505 210,424 414,924
Long-term debt, net of current maturities......... 16,536 3,474 125 20,005 139,030
Convertible preferred stock....................... -- 15,000 -- -- --
Shareholders' equity.............................. 25,962 53,501 142,504 155,558 241,033
</TABLE>
- ---------------
(a) Gives effect to the Transactions (as defined under "Unaudited Pro Forma
Consolidated Financial Information") as if the Transactions had been
consummated as of the beginning of the period presented. See "Unaudited Pro
Forma Consolidated Financial Information."
(b) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
(c) EBITDA represents earnings before interest income, interest expense, income
taxes, depletion and depreciation, imputed preferred dividends and losses on
early extinguishment of debt. The Company has included information
concerning EBITDA because it believes that EBITDA is used by certain
investors as one measure of an issuer's historical ability to service its
debt. EBITDA is not a measurement determined in accordance with generally
accepted accounting principles and should not be considered in isolation or
as a substitute for measures of performance prepared in accordance with
generally accepted accounting principles.
(d) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings from continuing operations before income taxes, plus
fixed charges. Fixed charges consist of interest expense, amortization of
debt expense, and imputed preferred stock dividends.
(e) EBITDA used to calculate the ratio of long-term debt to EBITDA for these
periods has been annualized.
12
<PAGE> 16
SUMMARY OIL AND NATURAL GAS RESERVE DATA
The following table summarizes the estimates of the Company's net proved
oil and natural gas reserves as of the dates indicated and the present value
attributable to the reserves at such dates. The proved reserve and present value
data as of December 31, 1995, 1996 and 1997 have been prepared by Netherland &
Sewell, independent petroleum engineers. A summary of the Netherland & Sewell
report as of December 31, 1997 is included as Annex A to this Prospectus. See
"Risk Factors -- Uncertainty of Estimates of Oil and Natural Gas Reserves,"
"Business and Properties -- Oil and Natural Gas Operations," and Note 11 to the
Consolidated Financial Statements.
<TABLE>
<CAPTION>
AS OF DECEMBER 31,
-----------------------------
1995 1996 1997
------- -------- --------
<S> <C> <C> <C>
PROVED RESERVES:
Oil (MBbls)............................................... 6,292 15,052
Natural Gas (MMcf)........................................ 48,116 74,102
Oil Equivalent (MBOE)..................................... 14,311 27,403
Proved developed as a percent of total proved reserves.... 78% 84%
PRESENT VALUES:
PV10 Value (before income taxes, in thousands)............ $96,965 $316,098(d)
Standardized measure of discounted estimated future net
cash flow after net income taxes (in thousands)......... 81,164 241,872
REPRESENTATIVE OIL AND GAS PRICES:(a)
West Texas Intermediate (per Bbl)......................... $ 18.00 $ 23.39
NYMEX Henry Hub (per MMBtu)............................... 2.24 3.90
OTHER RESERVE DATA:
Reserve replacement percent(b)............................ 300% 500%
Reserve to production ratio (years)(c).................... 9.3 9.2
</TABLE>
- ---------------
(a) The oil prices as of each respective year-end were based on West Texas
Intermediate ("WTI") posted prices per barrel and NYMEX Henry Hub ("NYMEX")
prices per MMBtu, with these representative prices adjusted by field to
arrive at the appropriate corporate net price.
(b) Equals current period reserve additions through acquisition of reserves,
extensions and discoveries, and revisions of prior estimates divided by the
production for such period.
(c) Calculated by dividing year-end proved reserves by such year's annual
production.
(d) For comparative purposes, the Company also prepared a reserve report as of
December 31, 1996 using a 1996 WTI price of $21.00 per Bbl and a NYMEX price
of $2.40 per MMBtu, with these prices also adjusted by field. The PV10 Value
in this report was $213.7 million with 27.0 MMBOE of proved reserves. For
the nine months ended September 30, 1997, the average WTI price was
approximately $18.90 per Bbl and the average NYMEX price was approximately
$2.39 per MMBtu.
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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------- -----------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996(A) 1996 1997 1997(A)
------ ------- ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C>
AVERAGE NET DAILY PRODUCTION VOLUMES:
Oil (Bbls)................................ 1,340 1,995 4,099 7,520 3,529 7,615 10,522
Natural gas (Mcf)......................... 9,113 13,271 24,406 25,076 23,867 34,061 34,648
Oil equivalent (BOE) ..................... 2,859 4,207 8,167 11,699 7,507 13,292 16,297
WEIGHTED AVERAGE SALES PRICES:
Oil (per Bbl)............................. $13.84 $ 14.90 $ 18.98 $ 18.75 $ 18.05 $ 17.53 $ 17.45
Natural gas (per Mcf)..................... 1.78 1.90 2.73 2.72 2.64 2.54 2.54
PER BOE DATA:
Revenue................................... $12.17 $ 13.05 $ 17.69 $ 17.88 $ 16.87 $ 16.56 $ 16.65
Production expenses....................... (4.13) (4.42) (4.51) (4.70) (4.47) (4.34) (4.71)
------ ------- ------- ------- ------- ------- -------
Production netback........................ 8.04 8.63 13.18 13.18 12.40 12.22 11.94
General and administrative................ (1.12) (1.25) (1.50) (1.21) (1.45) (1.33) (1.20)
Interest, net............................. (0.99) (1.26) (0.26) (2.57) (0.37) 0.18 (1.54)
------ ------- ------- ------- ------- ------- -------
Operating cash flow(b).................... $ 5.93 $ 6.12 $ 11.42 $ 9.40 $ 10.58 $ 11.07 $ 9.20
====== ======= ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Adjusted to give effect to the Transactions as if the Transactions had been
completed as of the beginning of the periods presented.
(b) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
13
<PAGE> 17
RISK FACTORS
Prospective purchasers of the securities offered hereby should carefully
consider the following factors in addition to the other information in this
Prospectus. See "Forward-Looking Statements."
SUBSTANTIAL CAPITAL REQUIREMENTS
In the future, the Company will require additional funds to develop,
maintain and acquire additional interests in existing or newly acquired
properties. During the last three years, the Company's total capital
expenditures, including acquisitions, have averaged significantly more than its
cash flow from operations. The Company made capital expenditures of $28.5
million, $86.9 million and $272.8 million, respectively, in the years ended
December 31, 1995 and 1996, and the nine-month period ended September 30, 1997
(including the pro forma effect of the Chevron Acquisition). Historically, the
Company has funded these expenditures principally through internally generated
cash flows, bank debt and the issuance of equity. The Company intends to use the
net proceeds from the Offerings and the TPG Purchase to substantially reduce its
outstanding bank debt. As of December 31, 1997, after giving pro forma effect to
the Transactions the Company would have had $ million available under its
Credit Facility. See "Use of Proceeds." The borrowing base on the Credit
Facility will be redetermined semi-annually by the lenders thereunder in their
sole discretion and there can be no assurance that the borrowing base will be
maintained at its present level. If the Company's borrowing base under the
Credit Facility is decreased, the Company's ability to obtain the funds
necessary to carry out its business strategy may be limited. See "Management's
Discussion and Analysis of Financial Condition and Results of
Operations -- Restated Credit Facility" and "Description of Certain
Indebtedness."
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. 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. Should
outside capital resources be limited, the rate of the Company's 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 reserves.
PRICE FLUCTUATIONS AND MARKETS
The Company's revenue, profitability and future rate of growth are
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, governmental regulations 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. These
factors and the volatility of the energy markets make it extremely difficult 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 oil and natural gas that can be produced economically by the
Company and, as a result, could have a material adverse effect on the Company's
financial condition, results of operations and reserves. In an effort to
minimize the effect of price volatility, the Company has from time to time in
the past entered into hedging arrangements. The Company currently does not have
any financial hedging contracts in place, although it may have such contracts in
the future.
The availability of a ready market for the Company's oil and natural gas
production also depends on a number of factors, including the demand for and
supply of oil and natural gas and the proximity of reserves to, and the capacity
of, oil and natural gas gathering systems, pipelines or trucking and terminal
facilities. Wells
14
<PAGE> 18
may be temporarily shut-in for lack of a market, or due to the inadequacy or
unavailability of pipeline or gathering system capacity. If any of these market
factors were to dramatically change, the impact on the Company's financial
condition would be substantial.
ACQUISITION RISKS
The Company's rapid growth in recent years has been attributable in
significant part to acquisitions of producing properties. After the consummation
of the Offerings, the Company expects to continue to evaluate and, where
appropriate, pursue acquisition opportunities. There can be no assurance that
suitable acquisition opportunities will be identified in the future, or that
they will be integrated successfully into the Company's operations or be
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 accurately assess a property's value or reveal all
existing or potential problems, nor will it necessarily permit a buyer to become
sufficiently familiar with the property to fully assess its merits and
deficiencies. Inspections may not always be performed on every platform or well,
and structural and environmental problems are not necessarily observable even
when an inspection is undertaken.
Additionally, significant acquisitions can change the nature of the
operations and business of the Company depending upon the character of the
acquired properties, which may have substantially different operating and
geological characteristics or geographic location than existing properties.
While it is the Company's current intention to continue to concentrate on
acquiring producing properties with development and exploration potential
located in the Gulf Coast region, there can be no assurance that the Company
will not pursue acquisitions or properties located in other geographic regions.
To the extent that such acquired properties are substantially different than the
Company's Gulf Coast properties, the Company's ability to efficiently realize
the economic benefits of such transactions may be limited.
DRILLING AND OPERATING RISKS
Drilling activities are subject to many risks, including the risk that no
commercially productive reservoirs will be discovered. 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 in such wells. Drilling for
oil and natural gas may involve unprofitable efforts, not only from dry wells
but also from wells that are productive but do not produce sufficient net
revenues to return a profit after deducting drilling, operating and other costs.
The cost of drilling, completing and operating wells is often uncertain. The
Company's drilling operations may be curtailed, delayed or canceled as a result
of numerous factors, many of which are beyond the Company's control, including
title problems, weather conditions, compliance with governmental requirements
and shortages or delays in the delivery of equipment and services.
The Company's operations are subject to all of the risks normally incident
to the operation and development of oil and natural gas properties and the
drilling of oil and natural gas wells, including encountering unexpected
formations or pressures, blow-outs, the release of contaminants into the
environment, cratering and fires, all of which could result in personal
injuries, loss of life, pollution damage, damage to property of the Company and
others, including the inability to control such risk when wells are being
drilled by third party contractors and the imposition of fines and penalties
pursuant to environmental legislation. See "-- Governmental and Environmental
Regulation" and "Business and Properties -- Legal Proceedings." 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
15
<PAGE> 19
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. There can be no assurance,
however, that such procedures will be effective in deterring these costs.
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 of operations in these key areas could materially adversely
affect the profitability 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.
NEED TO REPLACE RESERVES
The Company's future success depends on its ability to find, develop or
acquire additional oil and natural gas reserves that are recoverable on an
attractive economic basis. Unless the Company successfully replaces the reserves
that it produces (through development, exploration or acquisitions), the
Company's proved reserves will decline. Furthermore, approximately % of the
Company's proved developed reserves at December 31, 1997 are located in the
lower Gulf Coast geosyncline in southern Louisiana, which is characterized by
relatively rapid decline rates. Approximately % of the Company's total
proved reserves at December 31, 1997 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 on terms economically beneficial to the
Company, if at all.
UNCERTAINTY OF ESTIMATES OF OIL AND NATURAL GAS RESERVES
Estimates of the Company's proved developed oil and natural gas reserves
and future net revenues therefrom appearing elsewhere herein are based on
reserve reports prepared by independent petroleum engineers. There are numerous
uncertainties inherent in estimating the quantity of proved reserves, including
many factors which are beyond the Company's control. The estimates contained in
this Prospectus are based on several assumptions, all of which are speculative
to a certain degree. Actual future production, revenues, taxes, operating
expenses, development expenditures and quantities of recoverable oil and natural
gas reserves could vary substantially from those assumed in the estimates and
any significant variance in these assumptions could materially affect the
estimated quantity of reserves. The estimation of reserves requires substantial
judgment on the part of the petroleum engineers, resulting in imprecise
determinations, particularly with respect to new discoveries. Different reserve
engineers may make different estimates of reserve quantities and revenues
attributable thereto based on the same data. The accuracy of any reserve
estimate depends on the quality of available data, as well as engineering and
geological interpretation and judgment. The Company's reserves are primarily
water-drive reservoirs which can increase the uncertainty of the estimates that
have been prepared. Results of drilling, testing and production or price changes
subsequent to the date of the estimate may result in revisions to such
estimates. The estimates of future net revenues reflect oil and natural gas
prices as of the date of estimation, without escalation. There can be no
assurance, however, that such prices will be realized or that the estimated
production volumes will be produced during the periods indicated. Future
performance that deviates significantly from that found in the reserve reports
could have a material adverse effect on the Company.
EFFECTS OF LEVERAGE AND RESTRICTIVE DEBT COVENANTS
As of September 30, 1997, after giving pro forma effect to the
Transactions, the Company would have had total consolidated indebtedness of
approximately $ million and a debt-to-capitalization ratio of %. In
addition, the Company may incur additional indebtedness in the future under the
Credit Facility in connection with its acquisition, development, exploitation
and exploration of oil and natural gas producing properties. As of December 31,
1997, after giving pro forma effect to the Transactions, the Company would have
had $ million of availability under the Credit Facility.
16
<PAGE> 20
The degree to which the Company will be leveraged following the
Transactions could have important consequences to holders of the [D] Notes [E]
Common Shares, including but not limited to, the following: (i) a substantial
portion of the Company's cash flow from operations will be dedicated to debt
service and will not be available for other purposes; (ii) the Company's ability
to obtain additional financing in the future could be limited; (iii) certain of
the Company's borrowings are at variable rates of interest, which could result
in higher interest expense in the event of increases in interest rates; (iv) the
Company may be more vulnerable to downturns in its business or in the general
economy and may be restricted from making acquisitions, introducing new
technologies or exploiting business opportunities; and (v) the Indenture and the
Credit Agreement (as defined herein) contain financial and restrictive covenants
that limit the ability of the Company to, among other things, borrow additional
funds, dispose of assets or pay cash dividends. Failure by the Company to comply
with such covenants could result in an event of default under such debt
instruments which, if not cured or waived, could have a material adverse effect
on the Company. [D] In addition, the degree to which the Company is leveraged
could prevent it from purchasing all Notes tendered to it upon the occurrence of
a Change of Control, which would constitute an event of default under the
Indenture. See "Management's Discussion and Analysis of Financial Condition and
Result of Operations -- Restated Credit Facility", "Description of Certain
Indebtedness" and "Description of the Notes."
If the Company is unable to generate sufficient cash flow or otherwise
obtain funds necessary to make required payments on its indebtedness or, if the
Company otherwise fails to comply with the various covenants in such
indebtedness (including covenants in the Credit Facility), it would be in
default under the terms thereof, which would permit the holders of such
indebtedness to accelerate the maturity of such indebtedness and could cause
defaults under other indebtedness of the Company, including the Notes, or result
in its bankruptcy. [D] Such defaults or any bankruptcy of the Company resulting
therefrom could result in a default on the Notes and could delay or preclude
payment of principal of, or interest on, the Notes. See "-- Subordination of the
Notes and Guaranty." The ability of the Company to meet its obligations will be
dependent upon the future performance of the Company, which will be subject to
prevailing economic conditions and to financial, business and other factors,
including factors beyond the control of the Company.
[D] SUBORDINATION OF THE NOTES AND GUARANTY
The indebtedness evidenced by the Notes and the Guaranty will be senior
subordinated obligations of DMI and the Guarantor, as the case may be. The
payment of the principal of, premium (if any), and interest on the Notes and the
payment of the Guaranty is each subordinate in right of payment, as set forth in
the Indenture, to the prior payment in full of all Senior Indebtedness of DMI or
the Guarantor, as the case may be, including the obligations of DMI under, and
the Guarantor's guarantee of DMI's obligations with respect to, the Credit
Facility.
As of September 30, 1997, after giving pro forma effect to the
transactions, (i) the Senior Indebtedness of DMI would have been approximately
$ million, $ of which would have been secured and (ii) the Senior
Indebtedness of the Guarantor would have been approximately $ million,
$ million of which would have represented guarantees of Senior Indebtedness
of DMI under the Credit Facility. Although the Indenture contains limitations on
the amount of additional Indebtedness that DMI may incur, under certain
circumstances the amount of such Indebtedness could be substantial and, in any
case, such Indebtedness may be Senior Indebtedness. See "Description of the
Notes -- Certain Covenants -- Limitation on Indebtedness." After the
consummation of the Transactions, including the anticipated repayment of
borrowings under the Credit Facility, approximately $ million of additional
borrowings will be available under the Credit Facility for general corporate
purposes, which amounts will constitute Senior Indebtedness of DMI and the
Guarantor if and when incurred.
In the event of the bankruptcy, liquidation or reorganization of DMI or the
Guarantor, the assets of DMI or the Guarantor, as the case may be, will be
available to pay the Notes or the Guaranty only after all Senior Indebtedness of
DMI or the Guarantor, as the case may be, has been paid in full. Sufficient
funds may not exist to pay amounts due on the Notes in such event. In addition,
the subordination provisions of the Indenture provide that no cash payment may
be made with respect to the Notes during the continuance of a payment default
under any Senior Indebtedness of DMI. Furthermore, if certain non-payment
defaults exist with
17
<PAGE> 21
respect to certain Senior Indebtedness of DMI, the holders of such Senior
Indebtedness will be able to prevent payments on the Notes for certain periods
of time. See "Description of the Notes -- Ranking."
CONTROLLING SHAREHOLDER
In December 1995, the Company completed a $40.0 million private placement
of securities to TPG consisting of Convertible Preferred (as defined herein),
Common Shares and warrants to purchase Common Shares. After giving pro forma
effect to the Equity Offering and the TPG Purchase, TPG will own approximately
% of the Common Shares outstanding on a fully-diluted basis. TPG is
entitled to nominate a minimum of three of the seven members of the Company's
Board of Directors so long as TPG maintains certain ownership levels. 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 nominee. Additionally, so long
as TPG's equity interest is 20% or greater, it has the right (which has been
partially waived for the Equity Offering), but not the obligation, to maintain
its pro rata ownership interest in the equity securities of the Company in the
event the Company issues any additional equity securities or securities
convertible into Common Shares by purchasing additional shares on the same terms
and conditions. At the request of the New York Stock Exchange, the Company has
agreed to make the extension of this right subject to shareholder ratification
every five years with the first vote on the matter expected to be at the
Company's annual meeting in the year 2000. See "Interests of Management in
Certain Transactions."
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 policies. The loss
of the services of 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."
[D] RISKS RELATING TO A CHANGE OF CONTROL
Upon a Change of Control, holders of the Notes will have the right to
require the Company to purchase all or any part of such holders' Notes at a
price equal to 101% of the principal amount thereof, plus accrued and unpaid
interest, if any, to the date of purchase. The events that constitute a Change
of Control under the Indenture would constitute a default under the Credit
Agreement, which prohibits the purchase of the Notes by the Company in the event
of certain Change of Control events unless and until such time as the Company's
indebtedness under the Credit Facility is repaid in full. There can be no
assurance that the Company and the Guarantor would have sufficient financial
resources available to satisfy all of its or their obligations under the Credit
Facility and the Notes in the event of a Change of Control. The Company's
failure to purchase the Notes would result in a default under the Indenture and
under the Credit Agreement, each of which could have material adverse
consequences for the Company and the holders of the Notes. See "Description of
Certain Indebtedness" and "Description of the Notes -- Change of Control."
[E] SHARES ELIGIBLE FOR FUTURE SALE
As of December 31, 1997, after giving pro forma effect to the Equity
Offering and the TPG Purchase, the Company would have had Common
Shares outstanding ( Common Shares assuming exercise of the
Underwriters' over-allotment option in full). The Common Shares sold in the
Equity Offering will be freely tradable without restrictions or further
registration under the Securities Act of 1933, as amended (the "Securities
Act"). Of the Common Shares beneficially owned by TPG as of the close of
the Equity Offering and the TPG Purchase 6,983,038 will be "restricted"
securities within the meaning of the Securities
18
<PAGE> 22
Act as a result of the issuance thereof in a private transaction. The Company
believes that such "restricted" Common Shares are eligible for sale on the open
market pursuant to Rule 144 under the Securities Act from time to time. In
connection with the Equity Offering and the TPG Purchase, the Company, all of
its directors and executive officers and TPG have agreed not to sell or
otherwise dispose of any Common Shares, including any securities exercisable for
or convertible into Common Shares, for a period of 120 days from the date of
this Prospectus, without the prior written consent of Morgan Stanley & Co.
Incorporated. See "Underwriters."
In addition, the Company has granted certain registration rights to TPG.
Until December 21, 2000, TPG has the right, subject to certain conditions, to
demand that its Common Shares be registered under the Securities Act on one
occasion. 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.
COMPETITION
The Company operates in a highly competitive industry. The Company competes
with a large number of 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."
The principal resources necessary for the exploration for, and the
acquisition, exploitation, production and sale of, oil and natural gas are
leaseholds under which oil and natural gas reserves may be discovered, drilling
rigs and related equipment to explore for and develop such reserves, capital
assets required for the exploitation and production of the reserves and
knowledgeable personnel to conduct all phases of oil and natural gas operations.
The Company must compete for such resources with major oil companies and
independent operators and also with other industries for certain personnel and
materials. Although the Company believes its current resources are adequate to
preclude any significant disruption of operations in the immediate future, the
continued availability of such materials and resources to the Company cannot be
assured.
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. Federal and state statutes and regulations require permits for
drilling, reworking and recompletion operations, drilling bonds and reports
concerning operations, and these permits are subject to modification, renewal
and revocation by the issuing governmental authority. Most states in which the
Company owns and operates properties have regulations governing conservation
matters, including provisions for the unitization or pooling of oil and natural
gas properties, the establishment of maximum rates of production from oil and
natural gas wells and the regulation of the spacing, plugging and abandonment of
wells. Many states also restrict production to the market demand for oil and
natural gas, and several states have indicated interest in revising applicable
regulations in light of the persistent oversupply and low prices for oil and
natural gas production. These regulations may limit the rate at which oil and
natural gas could otherwise be produced from the Company's properties. Some
states have also enacted statutes prescribing ceiling prices for natural gas
sold within the state. See "Business and Properties -- Regulations."
Various federal, state and local laws and regulations relating to the
protection of the environment may affect the Company's operations and costs. In
particular, the Company's production operations, its salt water disposal
operations and its use of facilities for treating, processing or otherwise
handling hydrocarbons and wastes therefrom are subject to stringent
environmental regulation. The majority of the Company's Louisiana activity is
conducted in a marsh environment where environmental regulations are somewhat
greater. Although compliance with these regulations increases the cost of
Company operations, such compliance has not had a material effect on the
Company's capital expenditures, earnings or competitive position. There can be
no assurance, however, that future compliance with these regulations will not
have such a material adverse
19
<PAGE> 23
effect. 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. There can be no assurance that present or
future regulation will not adversely affect the Company's exploration,
development and production of its oil and natural gas producing properties. A
significant discharge of hydrocarbons into the environment could, to the extent
such event is not insured, subject the Company to substantial expense. See
"Business and Properties -- Regulations."
[E] AUTHORIZATION AND DISCRETIONARY ISSUANCE OF PREFERRED SHARES; ANTI-TAKEOVER
PROVISIONS
DRI's Articles of Continuance authorize the future issuance of an unlimited
number of First Preferred Shares and Second Preferred Shares (collectively, the
"Preferred Shares"), with such designations, rights, privileges, restrictions
and conditions as may be determined from time to time by the Board of Directors.
Accordingly, the Board of Directors is empowered, without shareholder approval,
to issue Preferred Shares with dividend, liquidation, conversion, voting or
other rights that could adversely affect the voting power or other rights of
holders of the Common Shares. The issuance of 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. After giving effect to
the Offerings, no Preferred Shares will be outstanding. See "Interests of
Management in Certain Transactions."
The Investment Canada Act includes provisions that are intended to
encourage persons considering unsolicited tender offers or other unilateral
takeover proposals to negotiate with DRI's Board of Directors rather than pursue
non-negotiated takeover attempts. These provisions apply to DRI and 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
"Description of Capital Stock" and "Canadian Taxation and the Investment Canada
Act."
[E] ABSENCE OF DIVIDENDS
During the last five fiscal years, the Company has not paid any dividends
on its outstanding Common Shares, and the Company does not intend to pay any
dividends in the foreseeable future. DRI is a holding company with no
independent operations. Accordingly, any amounts available for dividends will be
dependent on the prior declaration of dividends by DMI to DRI. In addition, the
terms of the Credit Facility restrict, and the terms of the Notes will restrict,
the payment of dividends by DMI. The Company currently intends to retain its
cash for the continued expansion of its business, including exploration,
development and acquisition activities.
[D] ABSENCE OF A PUBLIC MARKET FOR THE NOTES
The Notes are a new issue of securities for which there is currently no
trading market. The Company intends to apply for a listing of the Notes on the
Luxembourg Stock Exchange after consummation of the Debt Offering. The
Underwriters have advised the Company that they currently intend to make a
market in the Notes, although the Underwriters are not obligated to do so and
may discontinue such market making at any time. The Company does not intend to
apply for listing of the Notes on a securities exchange or to seek approval for
quotation through an automated quotation system. Accordingly, there can be no
assurance that an active market will develop upon completion of the Debt
Offering or, if developed, that such market will be sustained or as to the
liquidity of any market. Factors such as quarterly or cyclical variations in the
Company's financial results, variations in interest rates, future announcements
concerning the Company or its competitors, government regulation, general
economic and other conditions and developments affecting the oil and gas
industry could cause the market price of the Notes to fluctuate substantially.
20
<PAGE> 24
CONCENTRATION OF CUSTOMERS
During 1996, the Company sold 10% or more of its net production of oil and
natural gas to the following purchasers: Natural Gas Clearinghouse (20%); Penn
Union Energy Services (19%); Enron Trading & Transportation (13%); and Hunt
Refining (15%). In addition, the Company is currently selling a majority of its
oil to Hunt Refining under a two-year contract which expires in April 1998 and
is currently receiving a premium to the posted price in this contract. The
Company may not be able to renew this contract in the future or may not be able
to obtain terms as favorable as those in the existing contract. While the
Company believes that its relationships with these purchasers are good, any loss
of revenue from these purchasers could have a material adverse effect on the
Company's results of operations.
FORWARD-LOOKING STATEMENTS
The statements contained in this Prospectus that are not historical facts,
including, but not limited to, statements found in the "Prospectus Summary,"
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and "Business and Properties," are "forward-looking statements," as
that term is defined in Section 21E of the Exchange Act, that involve a number
of risks and uncertainties. Such forward-looking statements may be or may
concern, among other things, capital expenditures, drilling activity,
acquisition plans and proposals, dispositions, development activities, cost
savings, production efforts and volumes, hydrocarbon reserves, hydrocarbon
prices, liquidity, regulatory matters and competition. Such forward-looking
statements generally are accompanied by words such as "plan," "estimate,"
"expect," "predict," "anticipate," "projected," "should," "assume," "believe" or
other words that convey the uncertainty of future events or outcomes. Such
forward-looking statements are based upon management's current plans,
expectations, estimates and assumptions and are subject to a number of risks and
uncertainties that could significantly affect current plans, anticipated
actions, the timing of such actions and the Company's financial condition and
results of operations. As a consequence, actual results may differ materially
from expectations, estimates or assumptions expressed in or implied by any
forward-looking statements made by or on behalf of the Company. Among the
factors that could cause actual results to differ materially are: fluctuations
of the prices received or demand for the Company's oil and natural gas, the
uncertainty of drilling results and reserve estimates, operating hazards,
acquisition risks, requirements for capital, general economic conditions,
competition and government regulations, as well as the risks and uncertainties
discussed in this Prospectus, including, without limitation, the portions
referenced above, and the uncertainties set forth from time to time in the
Company's other public reports, filings and public statements.
[D] EQUITY OFFERING
Concurrently with the Debt Offering, the Company is offering Common
Shares to the public in the Equity Offering and TPG is purchasing Common
Shares in the TPG Purchase. In addition, as part of the Equity Offering the
Company has granted the underwriters an option to purchase up to additional
Common Shares to cover over-allotments, if any. The closing of the Debt Offering
is conditioned upon the closing of the Equity Offering and the TPG Purchase;
however, the closing of the Equity Offering is not conditioned upon the closing
of the Debt Offering.
[E] DEBT OFFERING
Concurrently with the Equity Offering, the Company is offering $100 million
of % Senior Subordinated Notes Due 2008 to the public. The Indenture to be
executed in conjunction with the Debt Offering will contain certain covenants,
including covenants that limit (i) indebtedness, (ii) restricted payments, (iii)
issuances and sale of capital stock of restricted subsidiaries, (iv)
sale/leaseback transaction, (v) transactions with affiliates, (vi) liens, (vii)
asset sales, (viii) dividend and other payment restrictions affecting restricted
subsidiaries and (ix) mergers and consolidations. The closing of the Equity
Offering is not conditioned upon the closing of the Debt Offering; however, the
closing of the Debt Offering is conditioned
21
<PAGE> 25
upon the closing of the Equity Offering. See "Description of Certain
Indebtedness -- Senior Subordinated Notes."
USE OF PROCEEDS
[D] The net proceeds to the Company from the Debt Offering are estimated to
be approximately $ million. Concurrently with the Debt Offering, the Company
is offering Common Shares in the Equity Offering and TPG is purchasing
Common Shares in the TPG Purchase. The closing of the Debt Offering is
conditioned upon the closing of the Equity Offering and the TPG Purchase;
however, the closing of the Equity Offering is not conditioned upon the closing
of the Debt Offering.
[E] The net proceeds to the Company from the Equity Offering are estimated
to be approximately $ million ($ million if the Underwriters'
over-allotment option is exercised in full), based on an assumed public offering
price of $ per share. Concurrently with the Equity Offering, the Company is
offering $100 million of % Senior Subordinated Notes Due 2008 in the Debt
Offering. The closing of the Equity Offering is not conditioned upon the closing
of the Debt Offering; however, the closing of the Debt Offering is conditioned
upon the closing of the Equity Offering.
The Company intends to use the total net proceeds of the Offerings and the
TPG Purchase (estimated to be $ million) to reduce outstanding borrowings
under the Credit Facility. The undrawn balance under the Credit Facility will
then be available for capital expenditures and general corporate purposes,
including the acquisition of additional producing oil and natural gas
properties. As of December 31, 1997, the Credit Facility had an outstanding
balance of $ million and an average interest rate of % per annum. After
the application of the proceeds from the Offerings and the TPG Purchase to
reduce amounts outstanding under the Credit Facility, the Credit Facility will
consist of a five-year revolving credit facility with a borrowing base of $175
million. The Company borrowed $ million under the Credit Facility during the
fourth quarter of 1997, primarily to fund the Chevron Acquisition. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Restated Credit Facility," "Business and
Properties -- Acquisitions of Oil and Natural Gas Properties" and "Description
of Certain Indebtedness -- Credit Facility."
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<PAGE> 26
[E] PRICE RANGE OF COMMON SHARES
The Common Shares have been listed on the New York Stock Exchange ("NYSE")
since May 8, 1997 and were listed on the Nasdaq National Market ("NASDAQ") from
August 25, 1995 through May 8, 1997. The Common Shares have also been listed on
The Toronto Stock Exchange ("TSE") in Toronto, Canada, since February 14, 1984.
The Common Shares currently trade under the symbol "DNR" on both the NYSE and
TSE. The following table summarizes the high and low last reported sale prices
(adjusted for the one-for-two reverse stock split in October 1996) as reported
by each exchange for each quarterly period during the last two fiscal years and
to date during 1998.
<TABLE>
<CAPTION>
NYSE/NASDAQ TSE
--------------- ---------------
HIGH LOW HIGH LOW
------ ------ ------ ------
(US $) (C $)
<S> <C> <C> <C> <C>
1996
First Quarter................................... $ 7.88 $ 6.26 $10.80 $ 8.30
Second Quarter.................................. 10.62 8.50 14.50 12.00
Third Quarter................................... 13.50 10.00 18.60 12.70
Fourth Quarter.................................. 15.25 12.50 20.95 17.00
1997
First Quarter................................... 16.00 12.00 21.75 16.40
Second Quarter.................................. 17.63 13.13 24.50 18.00
Third Quarter................................... 23.75 16.13 33.00 22.20
Fourth Quarter.................................. -- -- -- --
1998
First Quarter (through , 1998)......
</TABLE>
A recent reported last sale price per share for the Common Shares on the
NYSE and the TSE is set forth on the cover page of this Prospectus. As of
December 31, 1997, to the best of the Company's knowledge, there were
approximately 1,200 holders of record of Common Shares.
[E] DIVIDEND POLICY
The Company has not paid any dividends in the last five fiscal years on its
Common Shares and does not intend to pay any dividends on its Common Shares in
the foreseeable future. In the past, the Company has used its available cash
flow to conduct exploration and development activities or to make acquisitions,
and expects to continue to do so in the future. DRI is a holding company with no
independent operations. Accordingly, any amounts available for dividends will be
dependent on the prior declaration of dividends by DMI to DRI. In addition, the
terms of the Credit Facility restrict, and the terms of the Notes will restrict,
the payment of dividends by DMI.
23
<PAGE> 27
CAPITALIZATION
The following table sets forth as of September 30, 1997 (i) the actual
capitalization of the Company, (ii) the capitalization of the Company as
adjusted for the Chevron Acquisition, (iii) the capitalization of the Company as
further adjusted to give effect to the Equity Offering and the TPG Purchase and
(iv) the capitalization of the Company as further adjusted to give effect to the
Debt Offering. See "Use of Proceeds." This table should be read in conjunction
with "Unaudited Pro Forma Consolidated Financial Information," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements.
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
------------------------------------------------------
AS FURTHER
ADJUSTED FOR
AS ADJUSTED THE EQUITY
FOR THE OFFERING AS ADJUSTED
COMPANY CHEVRON AND TPG FOR THE
HISTORICAL ACQUISITION PURCHASE TRANSACTIONS
---------- ----------- ------------ ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Cash and cash equivalents....................... $ 2,236 $ 2,236 $ 2,236 $ 2,236
======== ======== ======== ========
Short-term debt:
Credit Facility (a)........................... $ -- $ 47,000 $ -- $ --
-------- -------- -------- --------
Long-term debt:
Credit Facility (a)........................... 20,000 175,000 136,525 39,025
% Senior Subordinated Notes Due 2008....... -- -- -- 100,000
Other notes payable........................... 5 5 5 5
-------- -------- -------- --------
Total long-term debt.................. 20,005 175,005 136,530 139,030
-------- -------- -------- --------
Shareholders' equity (b):
Common Shares, no par value; unlimited shares
authorized; 20,364,799 outstanding;
outstanding as adjusted for the
Transactions............................... 132,744 132,744 218,219 218,219
Retained earnings............................. 22,814 22,814 22,814 22,814
-------- -------- -------- --------
Total shareholders' equity................. 155,558 155,558 241,033 241,033
-------- -------- -------- --------
Total capitalization.................. $175,563 $377,563 $377,563 $380,063
======== ======== ======== ========
</TABLE>
- ---------------
(a) The Credit Facility was revised and restated in December 1997 in order to
fund the Chevron Acquisition. After repayment of the acquisition tranche and
other borrowings thereunder with the proceeds from the Offerings, the Credit
Facility will consist of a five year revolving credit facility with a
borrowing base of $175 million.
(b) Excludes 1,512,206 outstanding stock options as of September 30, 1997
exercisable at various prices ranging from $5.55 to $17.29 per share with a
weighted average price of $10.69 (of which 395,222 were currently
exercisable), and 700,000 Common Shares reserved for issuance upon exercise
of the two series of Common Share purchase warrants.
24
<PAGE> 28
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
The following unaudited pro forma consolidated statements of income for the
year ended December 31, 1996 and the nine months ended September 30, 1997 and
the unaudited pro forma consolidated balance sheet as of September 30, 1997
(collectively, the "Pro Forma Financial Statements") are based on the historical
consolidated financial statements of the Company and the historical financial
statements of the properties acquired by the Company ("Chevron Properties") in
the Chevron Acquisition, adjusted to give effect to the following transactions
(collectively, the "Transactions"): (i) the Chevron Acquisition; and (ii) the
Offerings and the TPG Purchase and application of the estimated net proceeds
therefrom. Additional property acquisitions were made in 1997 that have not been
included in the pro forma adjustments since they are immaterial individually and
in the aggregate. These acquisitions are included in the Company's historical
statements from the date of their respective acquisition.
The Unaudited Pro Forma Consolidated Statement of Income for the year ended
December 31, 1996 gives effect to the Transactions as if they had occurred as of
January 1, 1996, and the Unaudited Pro Forma Consolidated Statement of Income
for the nine months ended September 30, 1997 gives effect to the Transactions as
if they had occurred as of January 1, 1997. The Unaudited Pro Forma Consolidated
Balance Sheet gives effect to the Transactions as if they had occurred as of
September 30, 1997. The pro forma adjustments are described in the accompanying
notes and are based upon available information and certain assumptions that
management believes are reasonable.
The Pro Forma Financial Statements do not purport to represent what the
Company's results of operations or financial condition would actually have been
had the Transactions in fact occurred on such dates or to project the Company's
results of operations or financial condition for any future date or period. The
Pro Forma Financial Statements should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements.
25
<PAGE> 29
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
-----------------------------------------------------------------
HISTORICAL ADJUSTMENTS
------------------------ ------------------------
OFFERINGS
COMPANY CHEVRON CHEVRON AND TPG
HISTORICAL PROPERTIES ACQUISITION PURCHASE PRO FORMA
---------- ---------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil, natural gas and related
product........................ $52,880 $23,662 $ -- $ -- $76,542
Interest and other................ 769 -- -- -- 769
------- ------- -------- ------- -------
Total revenues............ 53,649 23,662 -- -- 77,311
------- ------- -------- ------- -------
Expenses:
Production........................ 13,495 6,650 -- -- 20,145
General and administrative........ 4,267 -- 687(b) -- 4,954
Interest.......................... 1,993 -- 15,716(c) (5,482)(e) 12,227
Imputed preferred dividend........ 1,281 -- -- -- 1,281
Loss on early extinguishment of
debt........................... 440 -- -- -- 440
Depletion and depreciation........ 17,904 -- 6,587(d) -- 24,491
Franchise taxes................... 213 -- -- -- 213
------- ------- -------- ------- -------
Total expenses............ 39,593 6,650 22,990 (5,482) 63,751
------- ------- -------- ------- -------
Income before income taxes.......... 14,056 17,012 (22,990) 5,482 13,560
Provision for income taxes.......... (5,312) (6,294)(a) 8,506(a) (2,028)(a) (5,128)
------- ------- -------- ------- -------
Net income.......................... $ 8,744 $10,718 $(14,484) $ 3,454 $ 8,432
======= ======= ======== ======= =======
Net income per common share
Primary........................... $ 0.67 $ 0.47
Fully diluted..................... 0.62 0.45
Average common shares outstanding... 13,104 18,002
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Information
26
<PAGE> 30
UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997
----------------------------------------------------------------
HISTORICAL ADJUSTMENTS
----------------------- ------------------------
OFFERINGS
COMPANY CHEVRON CHEVRON AND TPG
HISTORICAL PROPERTIES ACQUISITION PURCHASE PRO FORMA
---------- ---------- ----------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
Revenues:
Oil, natural gas and related
product........................... $60,083 $14,034 $ -- $ -- $74,117
Interest and other................... 986 -- -- -- 986
------- ------- ------- ------- -------
Total revenues............... 61,069 14,034 -- -- 75,103
------- ------- ------- ------- -------
Expenses:
Production........................... 15,737 5,237 -- -- 20,974
General and administrative........... 4,535 -- 514(b) -- 5,049
Interest............................. 387 -- 10,289(c) (2,782)(e) 7,894
Depletion and depreciation........... 23,224 -- 3,825(d) -- 27,049
Franchise taxes...................... 308 -- -- -- 308
------- ------- ------- ------- -------
Total expenses............... 44,191 5,237 14,628 (2,782) 61,274
------- ------- ------- ------- -------
Income before income taxes............. 16,878 8,797 (14,628) 2,782 13,829
Provision for income taxes............. (6,245) (3,255)(a) 5,412(a) (1,029)(a) (5,117)
------- ------- ------- ------- -------
Net income............................. $10,633 $ 5,542 $(9,216) $ 1,753 $ 8,712
======= ======= ======= ======= =======
Net income per common share
Primary.............................. $ 0.53 $ 0.35
Fully diluted........................ 0.50 0.34
Average common shares outstanding...... 20,175 25,073
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Information
27
<PAGE> 31
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30, 1997
----------------------------------------------------------------
ADJUSTMENTS
------------------------------------
EQUITY
OFFERING
COMPANY CHEVRON AND TPG DEBT
HISTORICAL ACQUISITION PURCHASE OFFERING PRO FORMA
---------- ----------- -------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C>
ASSETS:
Current assets
Cash and cash equivalents........ $ 2,236 $ -- $ -- $ -- $ 2,236
Accrued production receivable.... 7,097 -- -- -- 7,097
Trade and other receivables...... 14,507 -- -- -- 14,507
-------- -------- -------- -------- --------
Total current assets..... 23,840 -- -- -- 23,840
-------- -------- -------- -------- --------
Property and equipment (using full
cost accounting)
Oil and gas properties........... 230,521 127,000(f) -- -- 357,521
Unevaluated oil and gas
properties.................... 6,389 75,000(f) -- -- 81,389
Less accumulated depreciation and
depletion..................... (53,527) -- -- -- (53,527)
-------- -------- -------- -------- --------
Net property and equipment.... 183,383 202,000 -- -- 385,383
-------- -------- -------- -------- --------
Other assets....................... 3,201 -- -- 2,500(k) 5,701
-------- -------- -------- -------- --------
Total assets............. $210,424 $202,000 $ -- $ 2,500 $414,924
======== ======== ======== ======== ========
LIABILITIES AND SHAREHOLDERS'
EQUITY:
Current liabilities
Accounts payable and accrued
liabilities................... $ 16,858 $ -- $ -- $ -- $ 16,858
Oil and gas production payable... 4,060 -- -- -- 4,060
Current portion of long-term
debt.......................... 23 47,000(g) (47,000)(i) -- 23
-------- -------- -------- -------- --------
Total current
liabilities............ 20,941 47,000 (47,000) -- 20,941
-------- -------- -------- -------- --------
Long-term liabilities
Long-term debt................... 20,005 155,000(h) (38,475)(i) (97,500)(l) 39,030
Senior subordinated debt......... -- -- -- 100,000(m) 100,000
Provision for site reclamation
costs......................... 938 -- -- -- 938
Deferred income taxes and
other......................... 12,982 -- -- -- 12,982
-------- -------- -------- -------- --------
Total long-term
liabilities............ 33,925 155,000 (38,475) 2,500 152,950
-------- -------- -------- -------- --------
Shareholders' equity
Common shares, no par value;
unlimited shares authorized;
20,364,799 outstanding;
outstanding pro forma......... 132,744 -- 85,475(j) -- 218,219
Retained earnings................ 22,814 -- -- -- 22,814
-------- -------- -------- -------- --------
Total shareholders'
equity................. 155,558 -- 85,475 -- 241,033
-------- -------- -------- -------- --------
Total liabilities and
shareholders' equity... $210,424 $202,000 $ -- $ 2,500 $414,924
======== ======== ======== ======== ========
</TABLE>
See Notes to Unaudited Pro Forma Consolidated Financial Information
28
<PAGE> 32
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION
(a) Income taxes were computed using the federal statutory rate of 35% plus a 2%
provision for state income taxes.
(b) Reflects an increase of $687,000 and $514,000 for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively, in
general and administrative expense for additional personnel and associated
costs relating to the properties acquired in the Chevron Acquisition, net of
anticipated allocations to operations and capitalization of exploration
costs.
(c) Reflects an increase in interest expense for the period presented to reflect
the $202 million of borrowing under the Credit Facility (at an assumed
annual interest rate of 7.8% and 6.8% for the year ended December 31, 1996
and the nine months ended September 30, 1997, respectively) that would have
been required to fund the Chevron Acquisition had it occurred as of the
beginning of such period.
(d) Depreciation, depletion and amortization ("DD&A") and site reclamation
expenses have been computed using the unit of production method and reflects
the Company's increased investment in oil and natural gas properties, which
investment excludes $75 million of the Chevron Acquisition purchase price as
the Company intends to classify this amount as unevaluated properties at
December 31, 1997. The December 31, 1997 estimated proved reserves prepared
by Netherland & Sewell were used in the DD&A computation for the Chevron
Acquisition.
(e) Reflects a decrease in interest expense for the period presented resulting
from (i) the receipt of $85.5 million in estimated net proceeds from the
Equity Offering and the TPG Purchase and the application of such net
proceeds to reduce borrowings under the Credit Facility and (ii) the receipt
of $97.5 million in estimated net proceeds from the Debt Offering and the
application of such net proceeds to reduce borrowings under the Credit
Facility (assuming the Notes are issued at an annual interest rate of 8.5%).
Interest expense also includes the amortization of deferred debt issuance
costs. A change in the interest rate on the Notes of 0.25% would result in a
$250,000 and $187,000 change in interest expense for the year ended December
31, 1996 and the nine months ended September 30, 1997, respectively. In the
event the Debt Offering is not consummated, pro forma interest expense would
be $11,061,000 and $6,319,000 for the year ended December 31, 1996 and the
nine months ended September 30, 1997, respectively.
(f) Reflects the purchase price paid in the Chevron Acquisition, of which the
Company intends to classify $75 million as unevaluated properties.
(g) Reflects the incurrence of indebtedness under the acquisition tranche of the
Credit Facility to finance a portion of the Chevron Acquisition.
(h) Reflects the incurrence of indebtedness under the revolving portion of the
Credit Facility to finance a portion of the Chevron Acquisition.
(i) Reflects the repayment of indebtedness outstanding under the Credit Facility
with the net proceeds of the Equity Offering and the TPG Purchase.
(j) Reflects the issuance and sale of Common Shares in the Equity Offering and
the TPG Purchase, net of underwriting discounts and commissions and
estimated expenses.
(k) Reflects deferred financing costs incurred in connection with the Debt
Offering.
(l) Reflects the repayment of indebtedness outstanding under the Credit Facility
with the net proceeds of the Debt Offering.
(m) Reflects the issuance of the Notes in the Debt Offering.
29
<PAGE> 33
SELECTED CONSOLIDATED FINANCIAL DATA
The selected historical consolidated financial data for the Company set
forth below as of and for the years ended December 31, 1992, 1993, 1994, 1995
and 1996, have been derived from the audited consolidated financial statements
of the Company. The selected historical consolidated financial data for the
nine-month periods ended September 30, 1996 and 1997, and as of September 30,
1997, have been derived from unaudited consolidated financial statements of the
Company which, in management's opinion, include 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. The
information set forth below should be read in conjunction with "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------------------------- -----------------
1992 1993 1994 1995 1996 1996 1997
------ ------- ------- ------- ------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenue:
Oil, natural gas and related product.................... $1,912 $ 5,868 $12,692 $20,032 $52,880 $34,709 $60,083
Interest income......................................... 40 76 23 77 769 425 986
------ ------- ------- ------- ------- ------- -------
Total revenues...................................... 1,952 5,944 12,715 20,109 53,649 35,134 61,069
------ ------- ------- ------- ------- ------- -------
Expenses:
Production.............................................. 634 2,067 4,309 6,789 13,495 9,197 15,737
General and administrative.............................. 955 782 1,105 1,832 4,267 2,825 4,535
Interest................................................ 8 83 1,146 2,085 1,993 1,530 387
Imputed preferred dividends............................. -- -- -- -- 1,281 1,153 --
Loss on early extinguishment of debt.................... -- -- -- 200 440 440 --
Depletion and depreciation.............................. 690 1,898 4,209 8,022 17,904 12,557 23,224
Franchise taxes......................................... -- -- 65 100 213 160 308
------ ------- ------- ------- ------- ------- -------
Total expenses...................................... 2,287 4,830 10,834 19,028 39,593 27,862 44,191
------ ------- ------- ------- ------- ------- -------
Income (loss) before the following:....................... (335) 1,114 1,881 1,081 14,056 7,272 16,878
Gain on sale of Canadian properties..................... -- 966 -- -- -- -- --
------ ------- ------- ------- ------- ------- -------
Income (loss) before income taxes......................... (335) 2,080 1,881 1,081 14,056 7,272 16,878
Provision for federal income taxes........................ -- (345) (718) (367) (5,312) (2,932) (6,245)
------ ------- ------- ------- ------- ------- -------
Net income (loss)......................................... $ (335) $ 1,735 $ 1,163 $ 714 $ 8,744 $ 4,340 $10,633
====== ======= ======= ======= ======= ======= =======
Net income (loss) per common share:
Primary................................................. $(0.11) $ 0.35 $ 0.19 $ 0.10 $ 0.67 $ 0.37 $ 0.53
Fully diluted........................................... (0.11) 0.35 0.19 0.10 0.62 0.36 0.50
Weighted average common shares outstanding................ 2,949 4,990 6,240 6,870 13,104 11,616 20,175
OTHER FINANCIAL DATA:
Operating cash flow(a).................................... $ 354 $ 3,030 $ 6,185 $ 9,394 $34,140 $21,767 $40,166
Capital expenditures...................................... 6,189 29,855 16,903 28,524 86,857 73,320 70,773
EBITDA(b)................................................. 323 3,019 7,213 11,311 34,905 22,527 39,503
SELECTED RATIOS:
Ratio of earnings to fixed charges(c)..................... (d) 12.3x 2.6x 1.5x 4.4x 3.1x 34.9x
Ratio of EBITDA to interest expense....................... 40.4 36.4 6.3 5.4 17.5 14.7 102.1
Ratio of long-term debt to EBITDA......................... -- 2.0 2.3 0.3 0.1 1.6(e) 0.4(e)
</TABLE>
<TABLE>
<CAPTION>
AS OF DECEMBER 31, AS OF
----------------------------------------------- SEPTEMBER 30,
1992 1993 1994 1995 1996 1997
------ ------- ------- ------- -------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
BALANCE SHEET DATA:
Working capital (deficit)................................. $1,369 $(1,410) $(1,620) $ 6,862 $ 12,482 $ 2,899
Total assets.............................................. 8,225 35,978 48,964 77,641 166,505 210,424
Long-term debt, net of current maturities................. -- 6,177 16,536 3,474 125 20,005
Convertible preferred stock............................... -- -- -- 15,000 -- --
Shareholders' equity...................................... 7,548 24,431 25,962 53,501 142,504 155,558
</TABLE>
- ---------------
(a) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
(b) 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. The
Company has included information concerning EBITDA because it believes that
EBITDA is used by certain investors as one measure of an issuer's historical
ability to service its debt. EBITDA is not a measurement determined in
accordance with generally accepted accounting principles and should not be
considered in isolation or as a substitute for measures of performance
prepared in accordance with generally accepted accounting principles.
(c) For purposes of determining the ratio of earnings to fixed charges, earnings
are defined as earnings from continuing operations before income taxes, plus
fixed charges. Fixed charges consist of interest expense, amortization of
debt expense, and imputed preferred stock dividends.
(d) Earnings were inadequate to cover fixed charges as there was a $317,000
deficiency.
(e) EBITDA for these periods has been annualized.
30
<PAGE> 34
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, primarily
onshore in Louisiana and Mississippi. Over the last four 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 its properties.
ACQUISITION OF CHEVRON PROPERTIES
On November 25, 1997, the Company announced that it had entered into an
agreement to purchase oil properties in the Heidelberg Field, Jasper County,
Mississippi, from Chevron for approximately $202 million. The Chevron
Acquisition represents the largest acquisition by the Company to date. The
Heidelberg Field is adjacent to the Company's other primary oil properties in
Mississippi and includes 122 producing wells, 96 of which the Company will
operate. The Company is purchasing an average working interest of 94% and an
average net revenue interest of 81% in these 96 wells, which wells account for
approximately 99% of the field's average net daily production. The average net
daily production from these properties during the third quarter of 1997 was
approximately 2,840 Bbls/d and 600 Mcf/d.
The Chevron Acquisition added proved reserves as of December 31, 1997 of
approximately 27.7 MMBbls and 2.5 Bcf, or approximately 28.1 MMBOE. As a result
of the significant amount of future development and exploitation to be performed
on these properties and the increase in future reserves and production that the
Company expects to result from such development and exploitation, the Company
has attributed approximately $75 million of the purchase price to unevaluated
properties.
The Company has identified several potential development projects during
its initial evaluation of the Heidelberg Field. These include initiating a
waterflood project, upgrading lift capacity in over 15 wells and recompleting 30
wells in new zones. In addition, the Company has identified over 40 potential
drilling locations in addition to other potential secondary and tertiary
recovery projects. Horizontal wells drilled by the Company in 1997 at nearby
Davis, Quitman and Eucutta Fields improved daily production rates significantly
as compared to vertical wells drilled in the same fields. Consequently, the
Company anticipates that 25 of the 40 proposed future wells in the Heidelberg
Field will be horizontal wells. The Company's total 1998 development budget for
the Heidelberg Field is approximately $28 million.
ACQUISITION OF HESS PROPERTIES
The Company completed several property acquisitions during 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, the first two months of ownership, was
approximately 2,945 BOE/d. The average daily production on these properties had
increased to 5,373 BOE/d by the third quarter of 1997. As of December 31, 1997,
in the Company's independent reserve report (the "December Report"), the
properties in the Hess Acquisition had estimated net proved reserves of
approximately MMBOE with a PV10 Value of $ million. This
compares to approximately 5.9 MMBOE of net proved reserves and a $43.1 million
PV10 Value on these same properties as reported in the Company's independent
reserve report dated July 1, 1996 (the "July Report"). The December Report was
calculated using year-end prices which were based on a WTI price of $
per Bbl and a NYMEX price of $ per MMBtu, with these representative
prices adjusted by field to arrive at the appropriate corporate net price, as
compared to oil and gas prices of $20.00 and $2.65, respectively, in the July
Report. In addition to the increase in proved reserves, the Company produced
approximately 1.9 MMBOE from July 1, 1996 through September 30, 1997 with total
net operating income of $23.8 million.
31
<PAGE> 35
RESTATED CREDIT FACILITY
The Company has a credit facility (the "Credit Facility") with NationsBank
of Texas, N.A., as agent for a group of banks. The Credit Facility was increased
in size from $150 million to $300 million in December 1997 in order to fund the
Chevron Acquisition. After application of the net proceeds from the Offerings
and the TPG Purchase to reduce amounts outstanding under the Credit Facility,
the Credit Facility will consist of a five-year revolving credit facility with a
borrowing base of $175 million with $ available on a pro forma basis as
of December 31, 1997. The borrowing base is subject to review every six months.
The Credit Facility is secured by substantially all of the Company's oil and
natural gas properties, except for those acquired in the Chevron Acquisition.
Interest is payable on the revolving credit facility at either the 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%. Interest is payable at
LIBOR plus 1 5/8% as long as the acquisition tranche is outstanding and
escalates 0.25% each quarter, beginning on March 1, 1998, unless the acquisition
tranche is repaid. The Credit Facility has several restrictions, including,
among others: (i) a prohibition on the payment of dividends; (ii) a requirement
for a minimum equity balance; (iii) a requirement to maintain positive working
capital as defined; (iv) a minimum interest coverage test; and (v) a prohibition
on most debt and corporate guarantees.
THE NOTES
The Notes to be issued by DMI are to be fully and unconditionally
guaranteed by DMI's parent company, DRI, pursuant to the terms and conditions of
the Indenture. The Indenture will contain certain covenants for the benefit of
the holders of the Notes, including, among others, covenants limiting the
payment of dividends, including dividends payable from DMI to the Guarantor.
CAPITAL RESOURCES AND LIQUIDITY
As discussed below, in each of the last three years, the Company's capital
expenditures required additional debt and equity capital to supplement cash flow
from operations.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------- SEPTEMBER 30
1994 1995 1996 1997
------- ------- ------- ------------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Acquisitions of oil and natural gas
properties............................. $ 6,606 $16,763 $48,407 $16,073
Oil and natural gas expenditures......... 10,297 11,761 38,450 54,700
------- ------- ------- -------
Total.......................... $16,903 $28,524 $86,857 $70,773
======= ======= ======= =======
</TABLE>
From January 1, 1994, through September 30, 1997, including the pro forma
adjustments for the Chevron Acquisition, the Company has made total capital
expenditures of $405.1 million. These capital expenditures were funded by the
issuance of equity ($105.3 million), bank debt ($209.9 million) and cash
generated by operations ($89.9 million). During 1996, the Company's funds were
provided by operating cash flow and equity, although the Company did use bank
debt during the year. The Company began 1996 with $100,000 of outstanding bank
debt, borrowed $47.9 million during the year, paid off the debt with the
proceeds from a public offering of Common Shares in October 1996 and ended the
year with $100,000 of bank debt outstanding. For the nine months ended September
30, 1997, the Company's average debt outstanding was $3.6 million.
As of December 31, 1997, the Company had minimal working capital and
approximately $ million of debt outstanding. A portion of this debt also
relates to an acquisition tranche on which the interest rate increases 0.25%
each quarter beginning on March 1, 1998. Although the Company is still reviewing
its budget, particularly in light of the recent Chevron Acquisition, the Company
is currently budgeting capital expenditures for 1998 of approximately $90
million, of which approximately $28 million is allocated for the properties
included in the Chevron Acquisition. Although the Company's projected cash flow
is highly variable and difficult to predict as it is dependent on product
prices, drilling success and other factors, these
32
<PAGE> 36
projected expenditures are expected to exceed the Company's cash flow during
1998. As of December 31, 1997, after giving pro forma effect to the
Transactions, the Company would have had an unused borrowing base of $
million under the Credit Facility to fund any potential cash flow deficits. If
external capital resources are limited or reduced in the future, the Company can
also adjust its capital expenditure program accordingly. However, such
adjustments could limit, or even eliminate, the Company's future growth.
In addition to its internal capital expenditure 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 financing from the
Offerings and the TPG Purchase in order to reduce amounts outstanding under the
Credit Facility and to better position the Company for future opportunities.
SOURCES AND USES OF FUNDS. During the first nine months of 1997, the
Company spent approximately $54.7 million on exploration and development
expenditures and approximately $16.1 million on acquisitions. The exploration
and development expenditures included approximately $38.2 million spent on
drilling, $6.7 million on geological, geophysical and acreage expenditures and
$9.8 million on workover costs. These expenditures were funded by available
cash, bank debt and cash flow from operations. The Company anticipates that a
total of approximately $10 million will be spent during 1997 on exploration
expenditures $65 million on development expenditures, and $225 million on
acquisitions.
During 1996, the Company spent approximately $33.4 million on oil and
natural gas development expenditures, $37.2 million on the Hess Acquisition,
$7.5 million on properties acquired in April 1996 (the "Ottawa Acquisition"),
$3.7 million on other minor oil and natural gas acquisitions, and approximately
$5.1 million on geological, geophysical and acreage expenditures. The
development expenditures included $15.5 million spent on drilling and $17.9
million spent on workover costs. These expenditures were funded during the year
by bank debt, available cash and cash flow from operations, although the bank
debt was retired with the proceeds from a public offering of Common Shares in
October 1996.
During 1995, the Company made $28.5 million in capital expenditures, with
the single largest component being a $10.0 million acquisition of seven
producing wells in the Gibson and Humphreys Fields located near the Company's
other properties in southern Louisiana (the "Gibson Acquisition"). The balance
of 1995 acquisition expenditures were for additional interests in the Company's
Lirette Field in Louisiana ($2.9 million), interests in the Bully Camp Field,
also in Louisiana ($2.1 million), and a few smaller acquisitions in both
Mississippi and Louisiana. During 1995, the Company also spent $1.9 million
drilling four wells in Mississippi, $1.1 million for acreage, geological and
geophysical and delay rentals, and $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 a
private placement of equity with TPG.
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.
33
<PAGE> 37
RESULTS OF OPERATIONS
OPERATING INCOME
During the last three years, operating income has increased significantly
as outlined in the following chart. Oil and gas revenue increased as a result of
the increased oil and gas production and increases in oil and gas product
prices.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
---------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- -------- ------- --------
<S> <C> <C> <C> <C> <C>
Operating income (in thousands)
Oil sales............................ $ 6,767 $10,852 $ 28,475 $17,455 $ 36,436
Natural gas sales.................... 5,925 9,180 24,405 17,254 23,647
Less production expenses............. (4,309) (6,789) (13,495) (9,197) (15,737)
------- ------- -------- ------- --------
Operating income.................. $ 8,383 $13,243 $ 39,385 $25,512 $ 44,346
======= ======= ======== ======= ========
Unit prices
Oil price per Bbl.................... $ 13.84 $ 14.90 $ 18.98 $ 18.05 $ 17.53
Gas price per Mcf.................... 1.78 1.90 2.73 2.64 2.54
Netback per BOE
Sales price.......................... $ 12.17 $ 13.05 $ 17.69 $ 16.87 $ 16.56
Production expenses.................. (4.13) (4.42) (4.51) (4.47) (4.34)
------- ------- -------- ------- --------
$ 8.04 $ 8.63 $ 13.18 $ 12.40 $ 12.22
======= ======= ======== ======= ========
Average net daily production volume
Bbls................................. 1,340 1,995 4,099 3,529 7,615
Mcf.................................. 9,113 13,271 24,406 23,867 34,061
BOE.................................. 2,858 4,207 8,167 7,507 13,292
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996. Production
increases have been fueled by both internal growth from the Company's
development and exploration programs and from the acquisition of producing
properties. Production on a BOE/d basis increased 47% between 1994 and 1995 with
approximately 240 BOE/d attributable to the Gibson Acquisition and the balance
of approximately 1,109 BOE/d primarily attributable to internal growth. Between
1995 and 1996, production increased 94% with approximately 2,550 BOE/d
attributable to the properties included in the Hess and Ottawa Acquisitions and
750 BOE/d attributable to properties included in the Gibson Acquisition. The
balance of approximately 660 BOE/d was attributable to internal growth on other
properties.
Oil and gas revenue has increased not only because of the large increase in
production, but also due to improved product prices for these periods. Between
1994 and 1995, product price increases were relatively modest with an 8%
increase in oil prices and a 7% increase in natural gas prices. The Company also
realized an $800,000 gas hedging gain during 1995 which added $.17 per Mcf to
its average natural gas price. The Company did not have any oil or natural gas
hedges in place during 1996, nor does it have any currently in place due to the
relatively strong commodity prices and the reduced debt levels of the Company.
During 1996, product prices increased substantially with a 27% increase in the
average oil price and a 44% increase in the average natural gas price. Coupled
with the production increases, the Company's oil and natural gas revenue
increased 164%, or $32.8 million, from 1995 to 1996. Approximately $16.5 million
of the increase was related to properties acquired in the Hess and Ottawa
Acquisitions, approximately $5.4 million to properties acquired in the Gibson
Acquisition, approximately $7.7 million due to the increase in product prices
and the balance of approximately $3.2 million due to increased production from
internal growth on other properties.
Production expenses increased each year along with the increases in
production. On a BOE basis, production expenses increased 7% from 1994 to 1995
and increased 2% from 1995 to 1996. The increases were largely attributable to
the changes in the mix of properties as the Mississippi oil properties tend to
have a higher operating cost per BOE than the Louisiana gas properties. During
the first two months of ownership
34
<PAGE> 38
(May and June 1996), the production expenses averaged $6.27 per BOE on the Hess
Acquisition properties which were more heavily weighted toward Mississippi oil
than Louisiana gas. After assuming operations, these averages were brought more
in line with the Company averages through cost savings and increased production
levels. For the remainder of the year (May through December 1996) production
expenses on these properties averaged $5.35 per BOE.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996. Production
increases have been fueled by both internal growth from the Company's
development and exploration programs and from the acquisition of producing
properties during 1996, particularly the Hess Acquisition. During May and June
of 1996, the first two months of ownership, the properties acquired in the Hess
Acquisition averaged approximately 2,945 BOE/d. During the first, second and
third quarters of 1997, the production from these same properties averaged
approximately 4,385 BOE/d, 4,613 BOE/d and 5,373 BOE/d, respectively, a 49%, 57%
and 82% increase, respectively, from initial production levels. Total corporate
production on a BOE/d basis increased 21% from the fourth quarter of 1996
average of 10,132 BOE/d to the first quarter of 1997 average of 12,256 BOE/d,
increased an additional 9% to 13,405 BOE/d for the second quarter of 1997 and an
additional increase of 6% to 14,195 BOE/d for the third quarter of 1997. Since
the Company has had only limited acquisitions since the Hess Acquisition, the
production increases since June 30, 1996 were almost solely as a result of
internal development. On a quarter to quarter comparison, production on a BOE
basis increased 54% between the respective third quarters. When comparing the
nine month periods, production on a BOE basis has increased 77%, reflecting the
effect of the Hess Acquisition effective in May 1996.
Oil and gas revenue has increased primarily because of the large increase
in production. Oil product prices decreased by 3% and natural gas product prices
declined 4% or an overall decline of 2% when measured on a BOE basis when
comparing the nine months ended September 30, 1997 to the comparable period in
1996. During the first nine months of 1996, approximately 47% of the Company's
production on a BOE basis was oil while during the first nine months of 1997,
approximately 57% of the Company's production on a BOE basis was oil.
Production expenses on an absolute basis increased between the relative
periods of 1996 and 1997 along with the increases in production. On a BOE basis,
production expenses decreased 3% when comparing the first nine months of 1996 to
the first nine months of 1997. This improvement was a result of efficiencies
achieved from higher production volumes (on both an absolute basis and per well
basis) despite the Company having a higher percentage of oil production in 1997
as compared to 1996, which typically has a higher operating cost per BOE.
GENERAL AND ADMINISTRATIVE EXPENSES
As outlined below, general and administrative ("G&A") expenses have
increased along with the Company's growth.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------- -----------------
1994 1995 1996 1996 1997
------ ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Net G&A expenses (in thousands)
Gross expenses.......................... $2,475 $ 3,900 $ 8,407 $ 5,583 $ 9,999
State franchise taxes................... 65 100 213 159 308
Operator overhead charges............... (890) (1,438) (2,916) (1,906) (3,789)
Capitalized exploration expenses........ (480) (630) (1,224) (851) (1,675)
------ ------- ------- ------- -------
Net expenses............................ $1,170 $ 1,932 $ 4,480 $ 2,985 $ 4,843
====== ======= ======= ======= =======
Average G&A cost per BOE.................. $ 1.12 $ 1.25 $ 1.50 $ 1.45 $ 1.33
Employees as of end of period............. 27 51 122 109 141
</TABLE>
COMPARISON OF YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996. On a BOE basis,
these costs increased 12% from 1994 to 1995 and increased 20% from 1995 to 1996.
Part of the increase in 1995 was attributable to $190,000 of costs ($0.12 per
BOE) related to non-recurring personnel changes. As a result of improved
35
<PAGE> 39
financial results during the first quarter of 1996 and other factors, the
Company conducted a review of salaries and awarded increases and bonuses in
February 1996 to its employees. Bonuses, including related payroll taxes,
amounted to approximately $225,000 ($0.08 per BOE). During 1996, the Company
also accrued $545,000 ($0.18 per BOE) for bonuses which were awarded in February
1997. 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,
resulting in a further increase in general and administrative cost per BOE, as
Amerada Hess remained the operator of record until that date.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996. On a BOE
basis, G&A expenses declined 8% when comparing the first nine months of 1996 to
the comparable period in 1997. The decrease is partially attributable to the
increased production on both an absolute and per well basis. Furthermore, the
respective well operating agreements allow the Company, when it is the operator,
to charge a well with a specified overhead rate during the drilling phase. As a
result of the increased drilling activity in 1997, the percentage of gross G&A
recovered through these types of allocations (listed in the above table as
"Operator overhead charges") increased when compared to the corresponding
periods of 1996. During the first nine months of 1996, approximately 34% was
recovered by operator overhead charges, while during the comparable period of
1997 this increased to 38%. This trend is even more pronounced in the third
quarter of 1997 with 42% of the gross G&A recovered as compared to 35% for the
third quarter of 1996.
INTEREST AND FINANCING EXPENSES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- ------------------
1994 1995 1996 1996 1997
------- ------- ------- -------- -------
(IN THOUSANDS EXCEPT PER UNIT AMOUNTS)
<S> <C> <C> <C> <C> <C>
Interest expense....................... $ 1,146 $ 2,085 $ 1,993 $ 1,530 $ 387
Non-cash interest expense.............. (86) (90) (459) (345) (64)
------- ------- ------- ------- ------
Cash interest expense.................. 1,060 1,995 1,534 1,185 323
Interest and other income.............. (23) (77) (769) (425) (986)
------- ------- ------- ------- ------
Net interest expense................. $ 1,037 $ 1,918 $ 765 $ 760 $ (663)
======= ======= ======= ======= ======
Average interest cost per BOE.......... $ 0.99 $ 1.26 $ 0.26 $ 0.37 $(0.18)
Average debt outstanding............... 12,200 21,400 19,500 20,673 3,610
Ratio of earnings to fixed charges..... 2.6x 1.5x 4.4x 3.1x 34.9x
Imputed preferred dividend............. $ -- $ -- $ 1,281 $ 1,153 $ --
Loss on early extinguishment of debt... -- 200 440 440 --
</TABLE>
During the first half of 1996 and 1997, the Company had minimal debt
outstanding as virtually all of the bank debt had been retired during the
previous fourth quarter. In 1995, the bank debt was repaid with proceeds from
the December 1995 private placement of equity with TPG and in 1996, the debt was
repaid with proceeds from a public offering of Common Shares completed in
October 1996. However, in 1996, the Company did incur debt late in the second
quarter in order to fund property acquisitions and, during the third quarter of
1997, the Company borrowed approximately $20 million to fund $12.5 million of
property acquisitions and $7.5 million of development expenditures.
The private placement of equity in December 1995 with TPG included 1.5
million shares of Convertible Preferred. During 1996, the Company recognized
$1.3 million of charges representing the imputed preferred dividend until
October 30, 1996 when the Convertible Preferred were converted into 2.8 million
Common Shares. Under Canadian generally accepted accounting principles, this
dividend was reported as an operating expense, while under U.S. generally
accepted accounting principles this would not be an expense but it would be
deducted from net income to arrive at net income attributable to the common
shareholders. In addition to paying off its bank debt and converting the
Convertible Preferred into common equity during 1996, the Company also converted
its remaining subordinated debt into common equity, leaving the Company
essentially debt-free as of December 31, 1996.
36
<PAGE> 40
During 1996, the Company had a $440,000 charge relating to a loss on early
extinguishment of debt. These costs related to the remaining unamortized debt
issue costs of the Company's prior credit facility 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 type of expense relating to a previous bank
debt refinancing. Under U.S. generally accepted accounting principles, a loss on
early extinguishment of debt would be an extraordinary item rather than a normal
operating expense as required by Canadian generally accepted accounting
principles.
DEPLETION, DEPRECIATION AND SITE RESTORATION
COMPARISON OF YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996. DD&A has
increased along with the additional capitalized cost and increased production.
DD&A per BOE has increased 30% from 1994 to 1995 and 15% from 1995 to 1996
primarily due to 59% of the 1995 capital expenditures and 56% of the 1996
expenditures relating to property acquisitions, which had a higher per unit cost
for the Company than those reserves added by development expenditures.
COMPARISON OF NINE MONTHS ENDED SEPTEMBER 30, 1997 AND 1996. The Company's
DD&A rate per BOE for the first half of 1997 increased to $6.50 per BOE to
provide for the estimated effect of reduced oil prices on reserve quantities,
the estimated effect of rising drilling costs on certain proved undeveloped
locations, and higher than anticipated costs on wells drilled in Louisiana that
were proved undeveloped locations at December 31, 1996. In comparison, the
Company's DD&A rate was $5.99 per BOE for the year ended December 31, 1996. The
oil prices used in the December 31, 1996 reserve report were based on a WTI
posting price of $23.39 per Bbl in accordance with the rules of the Commission
while the comparable WTI price at June 30, 1997 was $17.15 per Bbl. This
reduction in oil prices reduced the June 30, 1997 estimated reserves by
approximately 1.3 MMBbls.
As a result of two oil and natural gas discoveries announced in September,
1997, the Company's third quarter DD&A rate decreased to $6.22 per BOE ($6.40
per BOE for the nine months ended September 30, 1997). During the third quarter
of 1997, the Company also transferred approximately $4.6 million from the
unevaluated properties to the full cost pool reflecting activity on these
properties, leaving a balance of approximately $6.4 million in unevaluated
properties as of September 30, 1997. The DD&A effect of this transfer was
approximately $440,000 for the quarter.
The Company also provides for the estimated future costs of well
abandonment and site reclamation, net of any anticipated salvage, on a
unit-of-production basis. This provision is included in the DD&A expense and has
increased each year along with an increase in the number of properties owned by
the Company.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER UNIT)
Depletion and depreciation............... $4,177 $7,918 $17,533 $12,430 $22,899
Site restoration provision............... 32 104 371 127 325
------ ------ ------- ------- -------
Total amortization....................... $4,209 $8,022 $17,904 $12,557 $23,224
====== ====== ======= ======= =======
Average DD&A cost per BOE................ $ 4.03 $ 5.22 $ 5.99 $ 6.10 $ 6.40
</TABLE>
37
<PAGE> 41
INCOME TAXES
Due to net operating losses by its U.S. subsidiary each year for tax
purposes, the Company does not have any current tax provision. The deferred tax
provision as a percentage of net income has varied depending on the mix of
Canadian and U.S. expenses. The rate declined from 1994 to 1995 as there were
less Canadian expenses, but increased again slightly in 1996 due to the
non-deductible imputed preferred dividend and interest on the subordinated debt.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
Deferred income taxes (thousands)........ $ 718 $ 367 $ 5,312 $ 2,932 $ 6,245
Average income tax costs per BOE......... 0.69 0.24 1.78 1.43 1.72
Effective tax rate....................... 38% 34% 38% 40% 37%
</TABLE>
NET INCOME
Primarily as a result of increased production and improved product prices,
net income and cash flow from operations increased substantially between 1995
and 1996 as outlined below. Between 1994 and 1995, net income decreased 39% as a
result of certain nonrecurring charges and a disproportionate increase in DD&A
as compared to the increase in revenue. Net income and cash flow from operations
increased substantially on both a gross and per share basis between the first
nine months of 1996 and the first nine months of 1997 as outlined below.
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------- -----------------
1994 1995 1996 1996 1997
------ ------ ------- ------- -------
<S> <C> <C> <C> <C> <C>
(IN THOUSANDS EXCEPT PER SHARE)
Net income............................... $1,163 $ 714 $ 8,744 $ 4,340 $10,633
Net income per common share:
Primary................................ 0.19 0.10 0.67 0.37 0.53
Fully diluted.......................... 0.19 0.10 0.62 0.36 0.50
Cash flow from operations(a)............. 6,185 9,394 34,140 21,767 40,166
</TABLE>
- ---------------
(a) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
38
<PAGE> 42
The following table summarizes the cash flow, DD&A and net income on a BOE
basis for the comparative periods. Each of the individual components are
discussed above.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------ ---------------
1994 1995 1996 1996 1997
------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C>
Per BOE Data
Revenue................................... $12.17 $13.05 $17.69 $16.87 $16.56
Production expenses....................... (4.13) (4.42) (4.51) (4.47) (4.34)
------ ------ ------ ------ ------
Production netback........................ 8.04 8.63 13.18 12.40 12.22
General and administrative................ (1.12) (1.25) (1.50) (1.45) (1.33)
Interest.................................. (0.99) (1.26) (0.26) (0.37) 0.18
------ ------ ------ ------ ------
Cash flow from operations(a)........... 5.93 6.12 11.42 10.58 11.07
DD&A...................................... (4.03) (5.22) (5.99) (6.10) (6.40)
Deferred income taxes..................... (0.69) (0.24) (1.78) (1.43) (1.72)
Other non-cash items...................... (0.10) (0.19) (0.72) (0.94) (0.02)
------ ------ ------ ------ ------
Net income............................. $ 1.11 $ 0.47 $ 2.93 $ 2.11 $ 2.93
====== ====== ====== ====== ======
</TABLE>
- ---------------
(a) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
YEAR 2000 MODIFICATIONS
The Company is currently reviewing its computer systems in order to
evaluate necessary modifications for the year 2000. The Company does not
currently anticipate that it will incur material expenditures to complete any
such modifications.
RECENTLY ISSUED ACCOUNTING STANDARDS
See discussion of Recently Issued Accounting Standards in Note 7 of the
Consolidated Financial Statements.
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, primarily
onshore in Louisiana and Mississippi. The Company believes the Gulf Coast
represents one of the most attractive regions in North America given the
region's prolific production history, complex geology (with multiple producing
horizons) and the opportunities that have been created by advanced technologies
such as 3-D seismic and various drilling, completion and recovery techniques. As
of December 31, 1997, the Company had proved reserves of MMBbls and
Bcf or MMBOE. At such date, the PV10 Value of these reserves was $
million, of which $ million was attributable to proved developed reserves.
Denbury operates wells comprising approximately % of its PV10 Value. The
nine largest fields in which the Company has an interest constitute
approximately % of its estimated proved reserves and, within these nine
fields, Denbury owns an average working interest of %.
Over the last four 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 its properties. For the
three-year period ended December 31, 1996, the Company increased its proved
reserves at a compound annual growth rate of 68%, from 5.8 MMBOE to 27.4 MMBOE.
Over the four-year period ended December 31, 1996, the Company
39
<PAGE> 43
also increased its average net daily production at a compound annual growth rate
of 90%, from 1,193 BOE/d to 8,167 BOE/d, with a further increase to 14,195 BOE/d
for the third quarter of 1997. For the same four-year period, EBITDA increased
at a compound annual growth rate of 126%, from $3.0 million to $34.9 million.
EBITDA for the twelve months ended September 30, 1997 was $51.9 million.
Since 1993, when the Company began to focus its operations exclusively in
the United States, through December 31, 1995, the Company spent a total of $43.4
million on acquisitions. In May 1996, the Company acquired properties in its
core areas of Mississippi and Louisiana from Amerada Hess Corporation ("Amerada
Hess") for approximately $37.2 million (the "Hess Acquisition"). As of June 30,
1996, these acquired properties were producing approximately 2,945 BOE/d and had
proved reserves of approximately 5.9 MMBOE. Since that date, the Company's
extensive development and exploitation on these properties has resulted in an
82% increase in production to 5,373 BOE/d for the third quarter of 1997 and a
% increased in proved reserves to MMBOE as of December 31, 1997.
On November 25, 1997, the Company announced that it had entered into an
agreement to purchase properties in the Heidelberg Field, which is adjacent to
the Company's other primary oil properties in Mississippi, from Chevron U.S.A.
Inc. ("Chevron") for approximately $202 million (the "Chevron Acquisition").
These properties are located approximately nine miles from the Eucutta Field,
the property with the highest PV10 Value acquired by the Company in the Hess
Acquisition. The estimated proved reserves as of January 1, 1998 for the Chevron
Acquisition properties are approximately 28.1 MMBOE, with average net daily
production of approximately 2,940 BOE/d for the third quarter of 1997. As a
result of the significant amount of future development and exploitation to be
performed on these properties and the increase in future reserves and production
that the Company expects to result from such development and exploitation, the
Company has attributed approximately $75 million of the purchase price to
unevaluated properties. The Company believes that the properties acquired in the
Chevron Acquisition provide exploitation opportunities similar to those of the
Mississippi properties acquired in the Hess Acquisition and the Company intends
to apply the same technologies to the Heidelberg Field. The Company's estimated
1998 development budget for the Heidelberg Field is approximately $28 million.
See "-- Acquisition of Chevron Properties."
BUSINESS STRATEGY
The Company seeks to: (i) achieve attractive returns on capital through
prudent acquisitions, development and exploratory drilling and efficient
operations; (ii) maintain a conservative balance sheet to preserve maximum
financial and operational flexibility; and (iii) create strong employee
incentives through equity ownership. 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 which are at the core of the
Company's long-term growth strategy. The Company's long-term growth strategy
includes the following fundamental principles:
REGIONAL FOCUS. The Company intends to continue the regional focus of its
operations. By focusing its efforts in the Gulf Coast region, primarily
Louisiana and Mississippi, the Company has been able to accumulate substantial
geological and reservoir data and operating experience which it believes
provides it with significant competitive advantages. For example, the Company
believes it is better able to identify, evaluate and negotiate potential
acquisitions, and develop and operate its properties in an efficient and low-
cost manner. The Company believes the Gulf Coast represents one of the most
attractive regions in North America given the region's prolific production
history, complex geology (with multiple producing horizons) and the
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 important
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 intends to continue to
acquire properties where it believes significant additional value can be
created. Such properties are typically characterized by: (i) long production
histories; (ii) complex geological formations with multiple producing horizons
and substantial exploitation potential; (iii) a history of limited operational
focus and capital investment, often due to their
40
<PAGE> 44
relatively small size and limited strategic importance to the previous owner;
and (iv) the potential for the Company to gain control of operations. The
Company believes that due to continuing rationalization of properties, primarily
by major integrated and independent energy companies, future acquisition
opportunities should continue to be available. 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 recent Hess and Chevron Acquisitions are examples of the types of
opportunities the Company seeks.
OPERATION OF HIGH WORKING INTEREST PROPERTIES. The Company intends to
continue to acquire working interest positions that give it operational control
or that the Company believes may lead to operational control. As the operator of
properties comprising approximately % of its total PV10 Value, the Company
believes it 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 to fully evaluate a field's future potential. If favorable, it will
consolidate its 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 so
that the potential benefits of value enhancement activities justify the
allocation of Company resources.
EXPLOITATION OF PROPERTIES. The Company intends to maximize the value of
its properties through a combination of increasing production, increasing
recoverable reserves or reducing operating costs. During 1997, the Company's
primary methodology for achieving these objectives was the use of horizontal
drilling, which it also intends to emphasize in 1998. Horizontal drilling has
historically produced oil at faster rates and with lower operating costs on a
BOE basis than traditional vertical drilling. The Company also utilizes a
variety of other techniques to maximize property values, 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; and (iv)
utilizing exploratory drilling, which is frequently based on various advanced
technologies such as 3-D seismic.
EXPERIENCED AND INCENTIVIZED PERSONNEL. The Company intends to maintain a
highly competitive team of experienced and technically proficient employees and
motivate them through a positive work environment and stock ownership in the
Company. The Company's 29 geological and engineering professionals have an
average of over 15 years of experience in the Gulf Coast region. The Company
believes that employee ownership, which is encouraged through the Company's
stock option and stock purchase plans, is essential for attracting, retaining
and motivating quality personnel. As of September 30, 1997, approximately 91% of
the Company's eligible employees were participating in the Company's stock
purchase plan as of September 30, 1997. The Company believes that all employees
are important to the success of the Company and as such grants bonuses and stock
options to both management and employees on a basis roughly proportional to
salaries.
OIL AND NATURAL GAS OPERATIONS
Denbury operates in two core areas, Louisiana and Mississippi. The Company
operates 67 wells in Louisiana from an office in Houma and 161 wells in
Mississippi from an office in Laurel. The largest oil and natural gas
fields owned by the Company constitute approximately % and %,
respectively, of its total proved reserves on a BOE and PV10 Value basis. Within
these fields, Denbury owns an average % working interest and operates
% of the wells, which comprise % of the Company's PV10 Value.
Approximately % of the Company's PV10 Value is located in three adjacent
counties in Mississippi and one parish in Louisiana. This concentration of value
in a relatively small number of fields allows the Company to benefit
substantially from any operating cost reductions or production enhancements and
allows the Company to effectively manage the properties from its two field
offices.
These two core areas are similar in that the major trapping mechanisms for
oil and natural gas accumulations are structural features usually related to
deep-seated salt or shale movement. Both areas
41
<PAGE> 45
typically feature fields with mostly multiple sandstone reservoirs supported by
strong waterdrives. 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 table sets forth information with respect to Denbury's
properties, reserves and drilling and production activities. The information
included in this table about the Company's proved oil and natural gas reserve
estimates as of December 31, 1997 were prepared by Netherland & Sewell. See
"Risks Factors -- Uncertainty of Estimates of Oil and Natural Gas Reserves."
<TABLE>
<CAPTION>
AVERAGE NET PRODUCTION AS OF
PROVED RESERVES THIRD QUARTER OF SEPTEMBER 30,
AS OF DECEMBER 31, 1997 1997(A) 1997
--------------------------------------- ----------------------- ---------------------
PV10 AVERAGE
NATURAL PV10 VALUE NATURAL GROSS NET
OIL GAS VALUE % OF OIL GAS PRODUCTIVE REVENUE
(MBBLS) (MMCF) (000'S)(B) TOTAL (BBLS/D) (MCF/D) WELLS(C) INTEREST
-------- ------- ---------- ----- ---------- --------- ---------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LOUISIANA
Lirette..................... 171 10,828 18 63.0%
Gibson...................... 256 4,954 3 57.8%
Lake Chicot................. 53 39 10 38.3%
South Chauvin............... 49 2,367 4 73.4%
Bayou Rambio................ 25 1,981 3 59.1%
Other Louisiana............. 1,240 11,003 72 48.7%
--- --- --- --- ----- ------ ---
Total Louisiana........... 1,794 31,172 110 51.5%
--- --- --- --- ----- ------ ---
MISSISSIPPI
Heidelberg(d)............... -- -- -- --
Eucutta..................... 1,751 -- 45 75.3%
Davis....................... 1,235 -- 25 90.5%
Quitman..................... 1,392 -- 18 60.7%
Other Mississippi........... 1,366 2,504 87 53.1%
--- --- --- --- ----- ------ ---
Total Mississippi........... 5,744 2,504 175 66.5%
--- --- --- --- ----- ------ ---
Other......................... 77 385 -- --
--- --- --- --- ----- ------ ---
Company Total................. 7,615 34,061 285 60.7%
=== === === === ===== ====== ===
</TABLE>
- ---------------
(a) This table does not include production on the properties acquired in the
Chevron Acquisition. See "-- Production Volumes, Sales Prices and Production
Costs" for pro forma production data.
(b) The reserves were prepared using constant prices and costs in accordance
with the guidelines of the Commission, based on the prices received on a
field by field basis as of December 31, 1997. The oil price at that date was
WTI $ per Bbl adjusted by field and a NYMEX natural gas price
average of $ per MMBtu, also adjusted by field.
(c) Includes only productive wells in which the Company has a working interest
as of September 30, 1997.
(d) Property acquired in the Chevron Acquisition. The average net production on
these properties from July 1, 1997 through September 30, 1997 was 2,840
Bbls/d and 600 Mcf/d from 122 gross productive wells with an average net
revenue interest of 81%.
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
42
<PAGE> 46
Company places considerable emphasis on reducing these costs in order to
maximize the cash flow from this area. The Company has increased its emphasis in
horizontal drilling based on its apparent success during the past year. These
horizontal wells have contributed to the reduction of operating costs on a BOE
basis during the last twelve months, as these wells typically produce oil more
efficiently, resulting in higher production rates and better recovery
efficiency.
The Company drilled its first horizontal well in 1995 at the South Thompson
Creek Field in Mississippi and drilled a subsequent horizontal well in this
field during 1996. Both of these wells were completed as producers. During the
last quarter of 1996 and 1997, the Company drilled ten horizontal wells at an
average cost of $780,000. These wells produced at an average production rate of
330 Bbls/d in their initial month of production. Although horizontal wells
typically decline rapidly from their initial production rates, these ten wells
had an average production rate of 190 Bbls/d for the month of November 1997 and
have been producing for an average of six months. These horizontal wells
typically have a higher internal rate of return than a comparable vertical well,
reduce operating costs per BOE and reduce the number of wells required to drain
the reservoir. The Company plans to drill approximately 50 horizontal wells in
1998 in Mississippi.
HEIDELBERG FIELD. Heidelberg field was discovered in 1944 and has produced
an estimated 191 MMBbls and 36 Bcf since its discovery. This Field is a large
salt-cored anticline which is divided by faulting into a western and eastern
half. Production is from a series of normally pressured Cretaceous and Jurassic
sandstone horizons situated between 4,500 feet and 11,500 feet. There are 11
producing formations in the Heidelberg Field containing 44 individual reservoir
intervals, with the majority of the current production coming from the Eutaw and
Christmas sands at depths of approximately 5,000 feet.
The West Heidelberg Eutaw sands have been unitized and water injection
began late in 1996 in order to increase the bottom hole pressure and improve
recoveries from the formation. A production response to the injection is
expected during 1998. The Eutaw East One Fault Block Oil Pool Unit (Eutaw
formation in East Heidelberg) was unitized in October 1997 and injection is
projected to commence in March 1998. These waterflood projects, particularly the
East Unit, comprise a significant portion of the potential reserves at
Heidelberg. The Company has a 78% working interest in the East Unit, 59% of
which was acquired in the Chevron Acquisition and the remaining 19% of which was
acquired over a three-month period from three other entities. The Company
operates a similar Eutaw unit at its East Eucutta Field, located approximately
nine miles to the southeast, with production from sands with similar porosity,
permeability, thickness and drive mechanisms.
The Company has identified several potential development projects during
its initial evaluation of the Heidelberg Field. These include initiating a
waterflood project, upgrading lift capacity in over 15 wells and recompleting 30
wells in new zones. In addition, the Company has identified over 40 potential
drilling locations in addition to other potential secondary and tertiary
recovery projects. Horizontal wells drilled by the Company in 1997 at nearby
Davis, Quitman and Eucutta Fields improved daily production rates significantly
as compared to vertical wells drilled in the same fields. Consequently, the
Company anticipates that 25 of the 40 proposed future wells will be horizontal
wells. The Company's total 1998 development budget for the Heidelberg Field is
approximately $28 million.
Based on its experience in other fields in the same area, the Company
believes that significant additional reserve potential may exist beyond the
identified proven reserves. The development budget in 1998 and ensuing years is
expected, in part, to be used to evaluate this potential which is summarized
below:
Higher oil recovery in the Eutaw sand waterfloods. Since discovery of the
Heidelberg Field, total cumulative production in the Eutaw formation through
November 1997 has been 80 MMBbls, which, based upon geological and engineering
analysis, the Company estimates has recovered 22% of the original oil in place.
Based upon a similar analysis, the Company estimates that historical cumulative
production from the Eutaw formation under waterflood at nearby East Eucutta
Field has recovered an estimated 34% of the oil in place. The Company believes
that similar recovery factors may be achievable at Heidelberg Field based on the
geological conditions that appear to be analogous. The Company will also attempt
to improve the recovery factors through the use of horizontal drilling and may
also employ tertiary recovery methods such as carbon dioxide injection. The
Company currently is evaluating the feasibility of such methods.
43
<PAGE> 47
Higher oil recovery in the Christmas sands. Because of the success of the
Company's horizontal drilling program in other fields in the area, the Company
intends to develop the Christmas sands primarily through horizontal drilling.
Since its discovery, the Christmas sands have produced approximately 67 MMBbls
through November 1997. The Company believes these sands are ideal for horizontal
development due to the strong natural water drive of these reservoirs. Recent
horizontal drilling by the Company has produced oil at faster rates and reduced
operating costs on a BOE basis as compared to vertical drilling. Although
Denbury believes that horizontal drilling should ultimately increase the amount
of oil recovered from the Christmas sands, to date the Company does not have
enough production history to determine if, and to the extent, oil recoveries
will increase.
Further drilling in deeper zones. The zones below the Christmas formation
including the Tuscaloosa, Paluxy, Rodessa, Hosston, Cotton Valley and Smackover
formations, have produced on a cumulative basis a combined 44 MMBbls and 14 Bcf
through November 1997. The Company believes that additional reserve potential
may exist for extensions of existing reservoirs and potential new reservoirs in
these zones within the Heidelberg Field area. A 36-square mile 3-D seismic
program over the field was shot by Chevron in 1993 and will be acquired under
license by Denbury. The Company intends to reprocess the 3-D seismic data to
evaluate this potential.
EUCUTTA FIELD. 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 Hess Acquisition and currently operates 45 producing oil wells and 3
saltwater injection wells. Most of the wells produce oil with large amounts of
saltwater, which requires pumping and disposal.
The Eucutta Field is divided into a shallow Eutaw sand unit in which the
Company has a 78% working interest and the deeper Tuscaloosa, Wash-Fred, Paluxy,
Rodessa, Sligo and Hosston sand zones in which the Company has a 100% working
interest. The Eucutta Field traps oil in multiple sandstone reservoirs from the
Eutaw to the Hosston Formations in this highly faulted anticline from depths of
5,000 to 11,000 feet. Denbury recently established new production in the Paluxy
interval in a series of six stacked sands. Two additional delineation wells have
been drilled and completed for this interval and the Company currently plans to
drill six horizontal wells to fully develop this new area. The deeper intervals
of the Cotton Valley and Smackover formations have yet to be tested in crestal
positions on this structure although these two horizons have proved to be highly
productive throughout the Mississippi Salt Basin.
Since its acquisition in May 1996, the Company has implemented a capital
expenditure program at Eucutta Field which included upgrading production
facilities, recompletions and drilling wells. At the time of acquisition,
production from this field was approximately 1,100 Bbls/d. All six wells drilled
in 1997 were successful, one of which was a horizontal well. As a result of
these wells and other development work, during November 1997 the net production
increased to an average of 2,079 Bbls/d. The Company plans to shoot a 3-D
seismic survey over the field and have it processed by late 1998. During 1998,
the Company also plans to drill 15 wells, of which eight will be horizontal
wells.
DAVIS FIELD. The Davis Field is located 42 miles northeast of Laurel in the
northern part of the Mississippi salt basin. Denbury operates 36 producing wells
within the area. 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. At the time of acquisition in 1993,
the gross production from this field was approximately 700 Bbls/d. During the
month of November 1997, the gross production was approximately 1,000 Bbls/d with
net production of 928 Bbls/d.
The Davis Field is a relatively mature field and produces large amounts of
saltwater. During November 1997, the field produced an average of approximately
71,000 barrels of saltwater per day, all of which were re-injected into the
ground. The Company places considerable emphasis on controlling operating costs
in this field by minimizing the cost of saltwater disposal and pumping
equipment.
Since acquiring the majority of the Davis Field in 1993, Denbury has
undertaken an active redevelopment program including numerous workovers and five
development wells. As a result of this work and continued
44
<PAGE> 48
reductions in operating costs, the Company has been able to steadily increase
the proven reserves every year. During 1996, the Company drilled two successful
horizontal wells to improve withdrawal efficiency and drilled an additional
three horizontal wells in 1997, with one additional well in progress as of
December 31, 1997. The Company plans to drill six horizontal wells in this field
in 1998.
QUITMAN FIELD. The Quitman Field is located in Clarke County, Mississippi,
31 miles northeast of Laurel and near the Davis Field. The Company acquired the
field as part of the Hess Acquisition and now operates 18 producing wells. The
Company owns an average working interest of 93%. The Quitman Field was
discovered in 1966 and has since produced approximately 21 MMBbls from 18
separate reservoirs between 7,500 feet and 12,000 feet. The principal producing
zones at Quitman Field are the Smackover formation and several sands in the
Cotton Valley formation.
Since its acquisition in May, 1996, the Company has implemented a capital
expenditure program at Quitman Field which has included upgrading production
facilities and drilling wells. At the time of acquisition, the net production
from this field was approximately 200 Bbls/d. During November 1997, the net
production averaged 1,747 Bbls/d. All five wells drilled in 1997 were
successful, of which two were horizontal wells. During 1998, the Company plans
to drill five wells, of which four will be horizontal wells.
OTHER MISSISSIPPI FIELDS. In addition to the above fields, Denbury owns an
interest in wells in 35 other fields in Mississippi, which in the aggregate
averaged approximately 1,920 Bbls/d and 2.5 MMcf/d of net production during
November 1997.
LOUISIANA OPERATING AREA
The Company's southern Louisiana producing fields are typically large
structural features containing multiple sandstone reservoirs. Current production
depths range from 7,000 feet to 16,000 feet with potential throughout the area
for even deeper production. The region produces predominantly natural gas, with
most reservoirs producing with a water-drive mechanism.
The majority of the Company's southern Louisiana fields lie in the Houma
embayment area of Terrebonne and LaFourche Parishes. The area is characterized
by complex geological structures which have produced prolific reserves, typical
of the lower Gulf Coast geosyncline. Given the swampy conditions of southern
Louisiana, 3-D seismic has only recently become feasible for this area as
improvements in field recording techniques have made the process more
economical. 3-D seismic has become a valuable tool in exploration and
development throughout the onshore Gulf Coast and has been pivotal in
discovering significant reserves. The Company currently owns or has license to
work on over 300 square miles of 3-D seismic data and plans to continue to
expand its data ownership. The Company believes that this 3-D seismic data, some
of which is the first 3-D shot in these swampy areas, has the potential to
identify significant exploration prospects, particularly in the deeper
geopressured sections below 12,000 feet.
During 1995, the Company acquired approximately 46 square miles of 3-D
seismic data over five of its existing fields in Southern Louisiana, namely
Bayou Rambio, De Large, North Deep Lake, Gibson and Humphreys. During 1996, the
Company entered into a joint venture agreement with two industry partners and
shot approximately 158 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 owns a one-third interest in any new prospects
discovered through this joint venture that currently owns rights to over 35,000
acres within the survey area. The 3-D seismic survey is complete and two wells
have been drilled to date based on the results of the survey. One was a dry hole
and the other a successful well in the Lirette Field area. There are currently
10 identified prospect areas which have been generated as a result of the
survey, of which three should be drilled during the first half of 1998. The 3-D
seismic survey is still being reviewed for additional drilling opportunities.
LIRETTE FIELD. The Lirette structure is a large salt-cored anticline
located about 10 miles south of Houma, Louisiana, which has produced over one
Tcf of natural gas from multiple reservoirs. The field is located in six to ten
feet of inland water and produces from depths of 8,000 feet to 16,000 feet. The
field was discovered in 1937, but in 1993, when the Company first acquired a 23%
working interest in the field, gross production had
45
<PAGE> 49
declined to less than 3 MMcf/d. 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 1995 and 1997 to increase the Company's ownership to its current average 82%
working interest. During November 1997 the net production from this field
averaged approximately 9.8 MMcf/d and 172 Bbls/d from 18 wells.
During the latter half of 1996, the Lirette Field was covered by a 3-D
seismic survey which is currently being evaluated. One well was drilled in the
Lirette area in 1997, the Scana No. 1 Laterre, as a result of this 3-D seismic
survey. This well established two pay sands in the prolific Tex W interval a
southern untested fault block. Two additional untested fault blocks have been
identified on the Lirette structure and are scheduled for drilling during 1998.
GIBSON AND HUMPHREYS FIELDS. In late 1994, Denbury acquired minor working
interests in five wells in the Gibson and Humphreys Fields located in Terrebonne
Parish, 20 miles northwest of the Lirette Field, in the northern part of the
Houma embayment. The Gibson Field, since its discovery in 1937, has produced
over 813 Bcf and 14 MMBbls, while the Humphreys Field, since its discovery 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 additional 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 November 1997,
the net production in these two fields averaged approximately 6.1 MMcf/d and 110
Bbls/d. Denbury drilled two wells in this area in 1997, one of which was
successful. This well, the Pelican A-12, found two productive intervals and was
completed in the lower most formation. This well produced at an average rate of
620 Mcf/d, net to the Company, during the month of November 1997. No wells are
currently planned in this field for 1998.
LAKE CHICOT FIELD. The Company acquired Lake Chicot Field in St. Martin
Parish, Louisiana as part of the Hess Acquisition and has an average of 45%
working interest in 10 producing wells. Two wells were drilled in this area in
1997 based upon a review of 3-D seismic data, one of which is temporarily
abandoned and one of which was successful. This well, the SL 411 #19, produced
at an average rate of 2.6 MMcf/d and 32 Bbls/d, net to the Company, during the
month of November 1997. During November 1997, the net production from this field
averaged 2.8 MMcf/d and 82 Bbls/d. Drilling in this field is seasonal and
limited to late December through April because of the water depths. During the
1997-1998 drilling season, the Company plans to drill a horizontal well in the K
sand oil reservoir, plus three other wells which will test the attic positions
of seismic defined fault blocks. One of these wells will test a deeper Cib Haz
formation, an excellent producer in the area, but one that has yet to be tested
in the highest structural position.
SOUTH CHAUVIN FIELD. In February 1996, the Company purchased interests in
two producing wells and four non-producing wells in South Chauvin Field located
in the Houma embayment area, about four miles south of Houma and six miles
northwest of Lirette Field. Of the four currently producing wells at Chauvin,
the Company owns an average 94% working interest. During November 1997, the net
production from this field averaged 4.2 MMcf/d and 73 Bbls/d. In late 1996, the
Company acquired 13.7 square miles of 3-D seismic data covering the field and is
currently evaluating the data. The Company drilled one well in this area in 1997
which produced at an average rate of 3.1 MMcf/d and 60 Bbls/d, net to the
Company, during the month of November 1997. One well, a sidetrack of an existing
well, is currently planned in this field for 1998.
BAYOU RAMBIO FIELD. Production at the Bayou Rambio Field was established in
1955 and has exceeded 150 Bcf and 920 MBbls to date. The Company operates three
producing wells in the field, which is located in Terrebonne Parish about 15
miles west of Lirette Field. During November 1997, the net production from this
field averaged 8.5 MMcf/d and 109 Bbls/d. Two of these producing wells were
drilled in 1997 based on a review of 3-D seismic data. The Company has one
additional well planned for the first half of 1998 which will attempt to
accelerate the production of the established reserves increasing the field's
PV10 Value, while drilling a deeper sand interval which may establish additional
pay sands.
OTHER LOUISIANA FIELDS. In addition to the above fields, the Company owns
an interest in wells at 39 other fields in Louisiana, which in the aggregate
averaged approximately 8.7 MMcf/d and 860 Bbls/d of net production during
November 1997.
46
<PAGE> 50
ACQUISITIONS OF OIL AND NATURAL GAS PROPERTIES
The Company regularly seeks to acquire properties that complement its
operations, provide exploitation, exploration and development opportunities and
have cost reduction potential. The Company has purchased the majority of its
current producing wells and has increased production by a variety of techniques,
including development drilling, increasing fluid withdrawal and reworking
existing wells. These acquisitions have also balanced the Company's reserve mix
between oil and natural gas, increased the scale of its operations in the
onshore Gulf Coast area and provided the Company with a significant base of
operations within its area of geographic focus. Since 1993, aggregate
expenditures to acquire producing properties are approximately $310 million
through September 30, 1997 adjusted for the Chevron Acquisition. The properties
included in the Company's five largest acquisitions make up approximately %
of its total proved reserves on a BOE basis as of December 31, 1997. These five
acquisitions are discussed below in the order of their acquisition by the
Company.
MISSISSIPPI ACQUISITION IN 1993. 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 2.2 MMBOE. From the date of acquisition through September 30,
1997, the Company produced 1,377 MBOE from the acquired properties and has
successfully increased its ownership in the Davis Field through approximately
$4.3 million of incremental acquisitions. As of December 31, 1997, the estimated
net proved reserves of the properties totaled MMBOE, with a PV10 Value of
$ million.
LOUISIANA ACQUISITION IN 1993. 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 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 1.7 MMBOE. From the date of acquisition through
September 30, 1997, the Company produced 2,898 MBOE from the acquired
properties. Subsequent to the acquisition, Denbury has successfully completed
approximately $12.7 million in acquisitions of incremental interests in the
Lirette and Bayou Rambio Fields. As of December 31, 1997, the estimated net
proved reserves of the properties was MMBOE, with a PV10 Value of $
million.
GIBSON ACQUISITION IN 1995. In October 1995, Denbury acquired additional
interests in the Gibson and Humphreys Fields in Southern Louisiana for
approximately $10.2 million. At the date of acquisition, the net proved reserves
included approximately 412 MBbls and 9,435 MMcf, aggregating 2.0 MMBOE. From the
date of acquisition through September 30, 1997, the Company produced 1,285 MBOE
from the acquired properties. As of December 31, 1997, the estimated net proved
reserves of the properties was MMBOE, with a PV10 Value of $ million.
HESS ACQUISITION IN 1996. The Company completed several property
acquisitions during 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, the first
two months of ownership, was approximately 2,945 BOE/d. The average daily
production on these properties had increased to 5,373 BOE/d by the third quarter
of 1997. As of December 31, 1997, in the Company's independent reserve report
(the "December Report"), the properties in the Hess Acquisition had estimated
net proved reserves of approximately MMBOE with a PV10 Value of $
million. This compares to approximately 5.9 MMBOE of net proved reserves and a
$43.1 million PV10 Value on these same properties as reported in the July
Report. The December Report was calculated using year-end prices which were
based on a WTI price of $ per Bbl and a NYMEX price of $ per
Mcf, with these representative prices adjusted by field to arrive at the
appropriate corporate
47
<PAGE> 51
net price, as compared to oil and gas prices of $20.00 and $2.65, respectively,
in the July Report. In addition to the increase in proved reserves, the Company
produced approximately 1.9 MMBOE from July 1, 1996 through September 30, 1997
with total net operating income of $23.8 million.
Three, out of a total of 60 fields, comprise over % of the total Hess
Acquisition PV10 Value as of December 31, 1997. The two largest fields in
Mississippi, Eucutta and Quitman Fields, make up approximately % of the
total PV10 Value. Both fields are in the same vicinity as the Company's
previously existing Mississippi core properties. The largest field in Louisiana
is the Lake Chicot Field, which comprises approximately % of the total PV10
Value.
CHEVRON ACQUISITION IN 1997. On November 25, 1997, the Company announced
that it had entered into an agreement to purchase oil properties in the
Heidelberg Field, Jasper County, Mississippi, from Chevron for approximately
$202 million. The Chevron Acquisition represents the largest acquisition by the
Company to date. The Heidelberg Field is adjacent to the Company's other primary
oil properties in Mississippi and includes 122 producing wells, 96 of which the
Company will operate. The Company is purchasing an average working interest of
94% and an average net revenue interest of 81% in these 96 wells, which wells
account for approximately 99% of the field's average net daily production. The
average net daily production from these properties during the third quarter of
1997 was approximately 2,840 Bbls/d and 600 Mcf/d.
The Chevron Acquisition added proved reserves as of December 31, 1997 of
approximately 27.7 MMBbls and 2.5 Bcf, or approximately 28.1 MMBOE. As a result
of the significant amount of future development and exploitation to be performed
on these properties and the increase in future reserves and production that the
Company expects to result from such development and exploitation, the Company
has attributed approximately $75 million of the purchase price to unevaluated
properties.
The Company has identified several potential development projects during
its initial evaluation of the Heidelberg Field. These include initiating a
waterflood project, upgrading lift capacity in over 15 wells and recompleting 30
wells in new zones. In addition, the Company has identified over 40 potential
drilling locations in addition to other potential secondary and tertiary
recovery projects. Horizontal wells drilled by the Company in 1997 at nearby
Davis, Quitman and Eucutta Fields improved daily production rates significantly
as compared to vertical wells drilled in the same fields. Consequently, the
Company anticipates that 25 of the 40 proposed future wells in the Heidelberg
Field will be horizontal wells. The Company's total 1998 development budget for
the Heidelberg Field is approximately $28 million.
PRODUCTION VOLUMES, SALES PRICES AND PRODUCTION COSTS
The following table summarizes the Company's net oil and natural gas
production volumes, average sales prices and production costs for each of the
years in the three-year period ended December 31, 1996 and for the nine month
periods ended September 30, 1996 and 1997.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED SEPTEMBER 30,
------------------------------------ ---------------------------------
PRO FORMA PRO FORMA
1994 1995 1996 1996(A) 1996 1997 1997(A)
------ ------ ------ --------- -------- -------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
NET PRODUCTION VOLUME:
Oil (MBbls)............ 489 728 1,500 2,752 967 2,079 2,873
Natural gas (MMcf)..... 3,326 4,844 8,933 9,178 6,540 9,299 9,459
Oil equivalent (MBOE).. 1,043 1,535 2,989 4,282 2,057 3,629 4,449
AVERAGE SALE PRICES:
Oil ($/Bbl)............ $13.84 $14.90 $18.98 $18.75 $18.05 $17.53 $17.45
Natural gas ($/Mcf).... 1.78 1.90 2.73 2.72 2.64 2.54 2.54
Oil equivalent
($/BOE)............. 12.17 13.05 17.69 17.88 16.87 16.56 16.65
AVERAGE PRODUCTION COSTS:
Per BOE................ $ 4.13 $ 4.42 $ 4.51 $ 4.70 $ 4.47 $ 4.34 $ 4.71
</TABLE>
- ---------------
(a) Pro forma for the Chevron Acquisition. See "-- Acquisitions of Oil and
Natural Gas Properties" and "Unaudited Pro Forma Consolidated Financial
Information."
48
<PAGE> 52
OIL AND NATURAL GAS ACREAGE
The following table sets forth the Company's acreage position as of
December 31, 1996:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------------- ---------------
GROSS NET GROSS NET
------ ------ ------ ------
<S> <C> <C> <C> <C>
Louisiana........................................... 29,328 20,374 10,137 7,812
Mississippi......................................... 17,511 11,138 19,180 8,002
Other............................................... 1,710 1,260 1,709 722
------ ------ ------ ------
Total..................................... 48,549 32,772 31,026 16,536
====== ====== ====== ======
</TABLE>
The following table sets forth the Company's acreage position as of
September 30, 1997:
<TABLE>
<CAPTION>
DEVELOPED UNDEVELOPED
--------------- ---------------
GROSS NET GROSS NET
------ ------ ------ ------
<S> <C> <C> <C> <C>
Louisiana........................................... 28,519 19,870 20,542 10,668
Mississippi......................................... 17,102 12,655 27,185 10,970
------ ------ ------ ------
Total..................................... 45,621 32,525 47,727 21,638
====== ====== ====== ======
</TABLE>
PRODUCTIVE WELLS
The following table sets forth the Company's gross and net productive wells
as of December 31, 1996:
<TABLE>
<CAPTION>
NATURAL GAS
OIL WELLS WELLS TOTAL
------------- ------------ -------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Louisiana................................... 44 24.8 66 38.1 110 62.9
Mississippi................................. 142 106.0 28 14.8 170 120.8
Other....................................... 4 2.0 12 5.3 16 7.3
--- ----- --- ---- --- -----
Total............................. 190 132.8 106 58.2 296 191.0
=== ===== === ==== === =====
</TABLE>
The following table sets forth the Company's gross and net productive wells
as of September 30, 1997:
<TABLE>
<CAPTION>
NATURAL GAS
OIL WELLS WELLS TOTAL
------------- ------------ -------------
GROSS NET GROSS NET GROSS NET
----- ----- ----- ---- ----- -----
<S> <C> <C> <C> <C> <C> <C>
Louisiana................................... 40 25.7 70 43.2 110 68.9
Mississippi................................. 154 132.5 21 7.2 175 139.7
--- ----- --- ---- --- -----
Total............................. 194 158.2 91 50.4 285 208.6
=== ===== === ==== === =====
</TABLE>
49
<PAGE> 53
DRILLING ACTIVITY
The following table sets forth the results of drilling activities during
each of the three years in the period ended December 31, 1996 and the nine
months ended September 30, 1997. No wells were in the process of drilling at
September 30, 1997.
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
----------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------------- ------------- ------------- -------------
GROSS NET GROSS NET GROSS NET GROSS NET
----- ---- ----- ---- ----- ---- ----- ----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
EXPLORATORY WELLS:
Productive..................... -- -- -- -- -- -- 2 0.8
Nonproductive.................. 3 0.8 2 1.0 1 1.0 5 2.4
DEVELOPMENT WELLS:
Productive..................... 4 2.9 2 1.5 9 7.9 26 22.7
Nonproductive.................. 1 1.0 -- -- -- -- 2 1.1
---- ---- ---- ---- ---- ---- ---- ----
Total.................. 8 4.7 4 2.5 10 8.9 35 27.0
==== ==== ==== ==== ==== ==== ==== ====
</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 its product as it becomes
available or 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
short-term 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 73% of the Company's oil production in 1996, is
primarily light sour crude and sells at a discount to the published WTI posting.
The balance of the oil production, Louisiana oil, is primarily light sweet
crude, which typically sells at a slight premium to the WTI posting.
The Company is currently selling a majority of its oil under a two-year
contract to Hunt Refining which expires on April 1998 and is currently receiving
a premium to the posted price in this contract. The Company may not be able to
renew this contract in the future or may not be able to obtain terms as
favorable as those in the existing contract.
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 currently have any hedging contracts in place, although it may enter
into such contracts in the future.
SIGNIFICANT OIL AND NATURAL GAS PURCHASERS
Oil and natural gas sales are made on a day-to-day basis under short-term
contracts at the current area market price. The loss of any purchaser would not
be expected to have a material adverse effect upon the Company's operations. For
the period ended December 31, 1996, the Company sold 10% or more of its net
production of oil and natural gas to the following purchasers: Natural Gas
Clearinghouse (20%), Penn Union Energy Services (19%), Enron Trading &
Transportation (13%) and Hunt Refining (15%).
50
<PAGE> 54
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. The Company
believes that it has good title to its oil and natural gas properties, some of
which are subject to minor encumbrances, easements and restrictions.
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. See
"Risk Factors -- Competition."
GEOGRAPHIC SEGMENTS
All of the Company's operations are in the United States.
OFFICE AND FIELD FACILITIES
The Company leases its executive and administrative offices in Dallas,
Texas, consisting of approximately 25,000 square feet, under a lease that
continues through May 1999. On August 6, 1997, the Company entered into a ten
year office lease for approximately 50,000 square feet to replace its current
corporate headquarters. This new lease is expected to commence late in 1998.
EMPLOYEES
At December 15, 1997, the Company had 156 employees associated with its
operations, including 45 field personnel in Mississippi and 35 field personnel
in Louisiana. None of the Company's employees is represented by a union. The
Company considers its employee relations to be satisfactory.
LEGAL PROCEEDINGS
From time to time, the Company is a party to legal proceedings in the
ordinary course of its business, including actions for personal injury and
property damage occurring as a result of the operation of wells, and claims for
environmental damage. In June of 1997, a well blow-out occurred at the Lake
Chicot Field, for which the Company is operator, in St. Martin Parish, Louisiana
in which four individuals that were employees of other third party entities were
killed, none of whom were employees or contractors of the Company. In connection
with this blow-out, a lawsuit was filed on July 2, 1997, Barbara Trahan, et al
.v. Mallard Bay Drilling L.L.C., Parker Drilling Company and Denbury Management,
Inc., Case No. 58226-G in the 16th Judicial District Court in St. Martin Parish,
Louisiana alleging various defective and dangerous conditions violation of
certain rules and regulations and acts of negligence. The Company believes that
all litigation to which it is a party is covered by insurance and none of such
legal proceedings can be reasonably expected to have a material adverse effect
on the Company's financial condition or results of operations. See "Risk
Factors -- Drilling and Operating Risks."
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
51
<PAGE> 55
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 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, the
plugging and abandoning of wells and the disposal of fluids used in connection
with operations. The Company's operations are also subject to various
conservation laws and regulations. These include the regulation of the size of
drilling and spacing units or proration units and the density of wells which may
be drilled in and the unitization or pooling of oil and gas properties. In
addition, state conservation laws establish maximum rates of production from oil
and gas wells, generally prohibit the venting or flaring of gas and impose
certain requirements regarding the ratability of production. The effect of these
regulations may limit the amount of oil and gas the Company can produce from its
wells and may limit the number of wells or the locations at which the Company
can drill. Each state generally imposes a production or severance tax with
respect to production and sale of crude oil, natural gas and natural gas liquids
within their respective jurisdictions. The regulatory burden on the oil and gas
industry increases the Company's costs of doing business and, consequently,
affects its profitability. Inasmuch as such laws and regulations are frequently
expanded, amended and reinterpreted, the Company is unable to predict the future
cost or impact of complying with such regulations.
FEDERAL REGULATION OF SALES AND TRANSPORTATION OF NATURAL GAS. Federal
legislation and regulatory controls in the U.S. have historically affected the
price of the natural gas produced by the Company and the manner in which such
production is marketed. The Federal Energy Regulatory Commission (the "FERC")
regulates the interstate transportation and sale for resale of natural gas by
interstate and intrastate pipelines. The FERC previously regulated the maximum
selling prices of certain categories of gas sold in "first sales" in interstate
and intrastate commerce under the Natural Gas Policy Act. Effective January 1,
1993, however, the Natural Gas Wellhead Decontrol Act (the "Decontrol Act")
deregulated natural gas prices for all "first sales" of natural gas, which
includes all sales by the Company of its own production. As a result, all sales
of the Company's domestically produced natural gas may be sold at market prices,
unless otherwise committed by contract. The FERC's jurisdiction over natural gas
transportation and gas sales other than first sales was unaffected by the
Decontrol Act.
The Company's natural gas sales are affected by the regulation of
intrastate and interstate gas transportation. In an attempt to restructure the
interstate pipeline industry with the goal of providing enhanced access to, and
competition among, alternative natural gas supplies, the FERC, commencing in
April 1992, issued Order Nos. 636, 636-A and 636-B ("Order No. 636") which have
altered significantly the interstate transportation and sale of natural gas.
Among other things, Order No. 636 required interstate pipelines to unbundle the
various services that they had provided in the past, such as sales, transmission
and storage, and to offer these services individually to their customers. By
requiring interstate pipelines to "unbundle" their services and to provide their
customers with direct access to pipeline capacity held by them, Order No. 636
has enabled pipeline customers to choose the levels of transportation and
storage service they require, as well as to purchase natural gas directly from
third-party merchants other than the pipelines and obtain transportation of such
gas on a non-discriminatory basis. The effect of Order No. 636 has been to
enable the Company to market its natural gas production to a wider variety of
potential purchasers. The Company believes that these changes generally have
improved the Company's access to transportation and have enhanced the
marketability of its natural gas production. To date, Order No. 636 has not had
any material adverse effect on the Company's ability to market and transport its
natural gas production. However, the Company cannot predict what new regulations
may be adopted by the FERC and other regulatory authorities,
52
<PAGE> 56
or what effect subsequent regulations may have on the Company's activities. In
addition, Order No. 636 and a number of related orders were appealed. Recently,
the United States Court of Appeals for the District of Columbia Circuit issued
an opinion largely upholding the basic features and provision of Order No. 636.
However, even though Order No. 636 itself has been judicially approved, several
related FERC orders remain subject to pending appellate review and further
changes could occur as a result of court order or at the FERC's own initiative.
In recent years the FERC also has pursued a number of other important
policy initiatives which could significantly affect the marketing of natural
gas. Some of the more notable of these regulatory initiatives include (i) a
series of orders in individual pipeline proceedings articulating a policy of
generally approving the voluntary divestiture of interstate natural gas
pipeline-owned gathering facilities to pipeline affiliates, (ii) the completion
of a rulemaking involving the regulation of interstate natural gas pipelines
with marketing affiliates under Order No. 497, (iii) FERC's on-going efforts to
promulgate standards for pipeline electronic bulletin boards and electronic data
exchange, (iv) a generic inquiry into the pricing of interstate pipeline
capacity, (v) efforts to refine FERC's regulations controlling the operation of
the secondary market for released interstate natural gas pipeline capacity, and
(vi) a policy statement regarding market-based rates and other non-cost-based
rates for interstate pipeline transmission and storage capacity. Several of
these initiatives are intended to enhance competition in natural gas markets.
While any resulting FERC action would affect the Company only indirectly, the
ongoing, or, in some instances, preliminary evolving nature of these regulatory
initiatives makes it impossible at this time to predict their ultimate impact
upon the Company's activities.
OIL PRICE CONTROLS AND TRANSPORTATION RATES. Sales of crude oil, condensate
and gas liquids by the Company are not currently regulated and are made at
market prices. Commencing in October 1993, the FERC has modified its regulation
of oil pipeline rates and services in order to comply with the Energy Policy Act
of 1992. That Act mandated that FERC 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.
GATHERING REGULATIONS. Under the Natural Gas Act (the "NGA"), facilities
used for and operations involving the production and gathering of natural gas
are exempt from FERC jurisdiction, while facilities used for and operations
involving interstate transmission are not. Under current law even facilities
which otherwise would have been classified as gathering may be subject to the
FERC's rate and service jurisdiction when owned by an interstate pipeline
company and when such regulation is necessary in order to effectuate FERC's
Order No. 636 open-access initiatives. FERC has reaffirmed that it does not have
jurisdiction over natural gas gathering facilities and services and that such
facilities and services are properly regulated by state authorities. As a
result, natural gas gathering may receive greater regulatory scrutiny by state
agencies. In addition, the FERC has approved several transfers by interstate
pipelines of gathering facilities to unregulated gathering companies, including
affiliates. This could allow such companies to compete more effectively with
independent gatherers.
State regulation of gathering facilities generally includes various safety,
environmental and, in some circumstances, nondiscriminatory take requirements.
While some states provide for the rate regulation of pipelines engaged in the
intrastate transportation of natural gas, such regulation has not generally been
applied against gatherers of natural gas. Natural gas gathering may receive
greater regulatory scrutiny following the pipeline industry restructuring under
Order No. 636. Thus the Company's gathering operations could be adversely
affected should they be subject in the future to the application of state or
federal regulation of rates and services. See "Risk Factors -- Governmental and
Environmental Regulation."
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
53
<PAGE> 57
more expansive and stricter environmental legislation and regulations could
continue. To the extent laws are enacted or other governmental action is taken
that restricts drilling or imposes environmental protection requirements that
result in increased costs to the oil and gas industry in general, the business
and prospects of the Company could be adversely affected.
The EPA and various state agencies have limited the approved methods of
disposal for certain hazardous and nonhazardous wastes. Certain wastes generated
by the Company's oil and natural gas operations that are currently exempt from
treatment as "hazardous wastes" may in the future be designated as "hazardous
wastes," and therefore be subject to more rigorous and costly operating and
disposal requirements.
The Company currently owns or leases numerous properties that for many
years have been used for the exploration and production of oil and gas. Most of
these properties have been operated by prior owners, operators and third parties
whose treatment and disposal or release of hydrocarbons or other wastes was not
under the Company's control. These properties and the wastes disposed thereon
may be subject to Comprehensive Environmental Response, Compensation, and
Liability Act ("CERCLA"), Federal Resource Conservation and Recovery Act and
analogous state laws. Under such laws, the Company could be required to remove
or remediate previously disposed wastes (including wastes disposed of or
released by prior owners or operators) or property contamination (including
groundwater contamination) or to perform remedial plugging operations to prevent
future contamination.
The Company's operations may be subject to the Clean Air Act ("CAA") and
comparable state and local requirements. Certain provisions of CAA may result in
the gradual imposition of certain pollution control requirements with respect to
air emissions from the operations of the Company. The EPA and states have been
developing regulations to implement these requirements. The Company may be
required to incur certain capital expenditures in the next several years for air
pollution control equipment in connection with maintaining or obtaining
operating permits and approvals addressing other air emission-related issues.
However, the Company does not believe its operations will be materially
adversely affected by any such requirements.
Federal regulations require certain owners or operators of facilities that
store or otherwise handle oil, such as the Company, to prepare and implement
spill prevention, control, countermeasure and response plans relating to the
possible discharge of oil into surface waters. The Oil Pollution Act of 1990
("OPA") contains numerous requirements relating to the prevention of and
response to oil spills into waters of the United States. The OPA subjects owners
of facilities to strict joint and several liability for all containment and
cleanup costs and certain other damages arising from a spill, including but not
limited to, the costs of responding to a release of oil to surface waters.
Regulations are currently being developed under the OPA and state laws
concerning oil pollution prevention and other matters that may impose additional
regulatory burdens on the Company.
The Resource Conservation and Recovery Act ("RCRA") is the principal
federal statute governing the treatment, storage and disposal of hazardous
wastes. RCRA imposes stringent operating requirements (and liability for failure
to meet such requirements) on a person who is either a "generator" or
"transporter" of hazardous waste or an "owner" or "operator" of a hazardous
waste treatment, storage or disposal facility. At present, RCRA includes a
statutory exemption that allows most crude oil and natural gas exploration and
production wastes to be classified as nonhazardous waste. A similar exemption is
contained in many of the state counterparts to RCRA. At various times in the
past, proposals have been made to amend RCRA and various state statutes to
rescind the exemption that excludes crude oil and natural gas exploration and
production wastes from regulation as hazardous waste under such statutes. Repeal
or modification of this exemption by administrative, legislative or judicial
process, or through changes in applicable state statutes, would increase the
volume of hazardous waste to be managed and disposed of by the Company.
Hazardous wastes are subject to more rigorous and costly disposal requirements
than are non-hazardous wastes. Any such change in the applicable statues may
require the Company to make additional capital expenditures or incur increased
operating expenses.
Some states have enacted statutes governing the handling, treatment,
storage and disposal of naturally occurring radioactive material ("NORM"). NORM
is present in varying concentrations in subsurface and hydrocarbon reservoirs
around the world and may be concentrated in scale, film and sludge in equipment
that
54
<PAGE> 58
comes in contact with crude oil and natural gas production and processing
streams. Mississippi legislation prohibits the transfer of property for
residential or other unrestricted use if the property contains NORM above
prescribed levels.
The Company also is subject to a variety of federal, state and local
permitting and registration requirements relating to the 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. See "Risk Factors -- Governmental and Environmental Regulation."
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 tax 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 the
Company (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. For additional tax disclosures, see Note 4 of the
Consolidated Financial Statements.
55
<PAGE> 59
MANAGEMENT
The names of the directors and officers of the Company, their ages, the
offices held by them with the Company and the periods during which such offices
have been held are set forth below. Each officer and director holds office for
one year or until his death, resignation or removal or until his successor is
duly elected and qualified. The officers set forth below hold the same position
in both DRI and DMI unless otherwise noted.
<TABLE>
<CAPTION>
NAME AGE POSITION(S)
---- --- -----------
<S> <C> <C>
Ronald G. Greene(a)(b)(c)(d)................ 48 Chairman of the Board of DRI
Wilmot L. Matthews(a)....................... 61 Director of DRI
William S. Price, III(b)(c)(d).............. 40 Director of DRI
David M. Stanton............................ 34 Director of DRI
Wieland F. Wettstein(a)..................... 47 Director of DRI
David Bonderman............................. 54 Director of DRI
Gareth Roberts.............................. 44 President, Chief Executive Officer and
Director of DRI and DMI
Matthew Deso................................ 43 Vice President, Exploration and Director
of DMI
Phil Rykhoek................................ 41 Chief Financial Officer and Secretary and
Director of DMI
Mark A. Worthey............................. 40 Vice President, Operations and Director of
DMI
Bobby J. Bishop............................. 37 Controller and Chief Accounting Officer
Ron Gramling................................ 52 President of DMI marketing subsidiary
Lynda Perrard............................... 54 Vice President, Land of DMI
</TABLE>
- ---------------
(a) Member of the Audit Committee.
(b) Member of the Compensation Committee.
(c) Member of the Stock Option Plan Committee.
(d) Member of the Stock Purchase Plan Committee.
Ronald G. Greene is the Chairman of the Board, and 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 Chief Executive Officer 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.
Wilmot L. Matthews was first elected as director of the Company on December
9, 1997. Mr. Matthews, a Chartered Accountant, has been involved in all aspects
of investment banking by serving in various positions with Nesbitt Burns Inc.
and its predecessor companies from 1964 until his retirement in September 1996,
most recently as Vice Chairman and Director. Mr. Matthews is currently President
of Marjad Inc., a personal investment company, and also serves on the Board of
Directors of Renaissance Energy Ltd. and several private companies.
William S. Price, III has been a director of the Company since 1995. Mr.
Price is a co-founder and principal of TPG. Prior to forming TPG 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 is Chairman of the Board of Favorite Brands
International, Inc. and Co-Chairman of the Board of Beringer Wine Estates. Mr.
Price also serves on the Board of Directors of Continental Airlines, Inc.,
Continental Micronesia, Inc., Vivra Specialty Partners Inc. and Belden & Blake
Corporation.
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<PAGE> 60
David M. Stanton has been a director of the Company since 1995. Mr. Stanton
is a managing director of TPG. From 1991 until he joined TPG in 1994, Mr.
Stanton was a venture capitalist with Trinity Ventures where he specialized in
information technology, software and telecommunications investments. Mr. Stanton
also serves on the Board of Directors of TPG Communications, Inc., Paradyne
Partners, L.P. and Belden & Blake Corporation.
Wieland F. Wettstein has been a director of the Company since 1990. Mr.
Wettstein is the Executive Vice President of, 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 a public oil and natural gas company, BXL Energy,
and on the Board of Directors of a private technology firm.
David Bonderman has been a director of the Company since 1996. Mr.
Bonderman is a co-founder and principal of TPG. Prior to forming TPG 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 serves on the boards of Continental Airlines; Inc.; National
Education Corporation; Carr Realty Corporation; Bell & Howell Company; Ryanair,
Limited; Virgin Cinemas, Limited; Ducati Motors S.P.A.; and Washington Mutual,
Inc.
Gareth Roberts -- President, Chief Executive Officer and a Director, is the
founder of DMI, 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. Mr. Roberts also serves on
the Board of Directors of Belden & Blake Corporation.
Matthew Deso -- Vice President, Exploration, has been with the Company
since October 1990, first as a consultant then, when he moved to Dallas in
January 1994, as Vice President of Exploration, his current position. 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.
Phil Rykhoek -- Chief Financial Officer, a Certified Public Accountant,
joined the Company and was appointed to the position of Chief Financial Officer
and Secretary in June 1995. Prior to joining the Company, Mr. Rykhoek was
Executive Vice President and co-founder of Petroleum Financial, Inc., a private
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.
Mark A. Worthey -- Vice President, Operations, is a geologist and is
responsible for all aspects of operations in the field. He joined the Company 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.
Bobby J. Bishop -- Controller and Chief Accounting Officer, a Certified
Public Accountant, joined the Company as Controller in August 1993 and was
appointed to the position of Chief Accounting Officer in December, 1997. Prior
to joining the Company, Mr. Bishop was the Chief Financial Officer for Arcadia
Exploration and Production Company, a private company. He also worked for Lake
Ronel Oil Company and TXO Production Corp. Mr. Bishop graduated from the
University of Oklahoma with a Bachelor of Business Administration in Accounting
in 1983.
Ron Gramling -- President of DRI's marketing subsidiary, joined the Company
in May 1996 when the Company purchased the subsidiary's assets. Prior to
becoming affiliated with the Company, he was employed
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<PAGE> 61
by Hadson Gas Systems as Vice President of term supply. Mr. Gramling has 27
years of marketing, transportation and supply experience in the natural gas and
crude oil industry. He received his Bachelor of Business Administration degree
from Central State University, Edmond, Oklahoma in 1970.
Lynda Perrard -- Vice President, Land of DMI, joined the Company in April
1994. Ms. Perrard has over 30 years of experience in the oil and gas industry as
a petroleum landman. Prior to joining the Company, Ms. Perrard was the President
and Chief Executive Officer of Perrard Snyder, Inc., a corporation performing
contract land services. Ms. Perrard also served as Vice President, Land for
Snyder Exploration Company from 1986 to 1991.
As part of the Securities Purchase Agreement that governed the TPG's
initial investment in the Company, 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 represent less
than 20% of the outstanding Common Shares, calculated on a fully-diluted basis.
Currently, Messrs. Stanton, Bonderman and Price are the directors of the Company
nominated by TPG.
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<PAGE> 62
PRINCIPAL SHAREHOLDERS
The following table sets forth information, as of December 15, 1997,
concerning beneficial ownership of the Common Shares before and after giving
effect to the Transactions for: (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 Common 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 Common
Shares.
<TABLE>
<CAPTION>
BENEFICIAL
OWNERSHIP
BENEFICIAL OWNERSHIP AS OF AFTER THE
DECEMBER 15, 1997 TRANSACTIONS
-------------------------- ------------
NAME AND ADDRESS OF BENEFICIAL OWNER SHARES PERCENT PERCENT
------------------------------------ ------------ --------- ------------
<S> <C> <C> <C>
Ronald G. Greene................................. 900,900(a) 4.4%(a)
Suite 700, 407 -- 2nd Street
Calgary, Alberta T2P 2Y3
David Bonderman.................................. 8,658,038(b) 41.2%(b)
201 Main Street, Suite 2420
Ft. Worth, TX 76102
Wilmot L. Matthews............................... 156,450(c) *
1 First Canadian Place, Suite 5101
Toronto, ON M5X 1E3
William S. Price, III............................ 8,411,038(d) 40.0%(d)
600 California Street, Suite 1850
San Francisco, CA 94108
David M. Stanton................................. 2,000(e) *
Wieland F. Wettstein............................. 83,389(f) *
Gareth Roberts................................... 497,706(g) 2.4%(g)
Phil Rykhoek..................................... 4,087(h) *
Mark A. Worthey.................................. 78,666(h) *
Matthew Deso..................................... 25,466(h) *
Bobby J. Bishop.................................. 2,212 *
All of the executive officers and directors as a
group (11 persons)............................. 10,411,914(i) 49.4%(i)
TPG Advisors, Inc................................ 8,408,038(j) 40.0%(j)
201 Main Street, Suite 2420
Ft. Worth, TX 76102
</TABLE>
- ---------------
* Less than 1%.
(a) Includes 30,150 Common Shares held by Mr. Greene's spouse in her retirement
plan, 900 shares held in trust for Mr. Greene's minor children and 520,833
Common Shares held by Tortuga Investment Corp., which is solely owned by
Mr. Greene.
(b) Includes 250,000 Common Shares in a family partnership 100% controlled by
Mr. Bonderman and 625,000 Common Share purchase warrants held by TPG which,
for purposes of this disclosure, are assumed to be exercised. Mr. Bonderman
is a director, executive officer and shareholder of TPG Advisors, Inc.,
which is the general partner of TPG GenPar, L.P., which in turn is the
general partner of both TPG Partners, L.P., and TPG Parallel I, L.P., which
are the direct beneficial owners of the remaining securities attributed to
Mr. Bonderman. Mr. Bonderman's beneficial ownership after the Transactions
includes the Common Shares purchased by TPG in the TPG Purchase.
(c) Includes 52,500 Common Shares held by a subsidiary of Marjad Inc., which is
wholly owned by Mr. Matthews, 2,450 Common Shares held in various trusts of
which Mr. Matthews is a trustee and an
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<PAGE> 63
income beneficiary and 1,500 Common Shares as to which Mr. Matthews holds a
power of attorney but no beneficial interest.
(d) Includes 1,000 Common Shares held by Mr. Price and 2,000 Common Shares held
by Mr. Price's spouse and 625,000 Common Share purchase warrants held by
TPG which, for purposes of this disclosure, are assumed to be exercised.
Mr. Price is a director, executive officer and shareholder of TPG Advisors,
Inc., which is the general partner of TPG GenPar, L.P., which in turn is
the general partner of both TPG Partners, L.P., and TPG Parallel I, L.P.,
which are the direct beneficial owners of the remaining securities
attributed to Mr. Price. Mr. Price's beneficial ownership after the
Transactions includes the Common Shares purchased by TPG in the TPG
Purchase.
(e) Although Mr. Stanton is not considered to be a "beneficial owner" as that
term is defined by the Commission, Mr. Stanton is a managing director of
TPG.
(f) Includes 76,439 Common Shares held by S.P. Hunt Holdings Ltd., which is
solely owned by a trust of which Mr. Wettstein is a trustee.
(g) Includes 138,330 Common Shares held by Ashley Petroleum, Inc., which is
solely owned by Mr. Roberts, and 2,110 Common Shares held by his wife.
(h) Includes 1,875, 73,250 and 17,500 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 60 days of
December 22, 1997.
(i) Includes 92,625 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 60 days of December 22, 1997 and 625,000
Common Share purchase warrants held by TPG which, for purposes of this
disclosure, are assumed to be exercised. Beneficial ownership does include
the Common Shares held by affiliates of TPG, although Mr. Price and Mr.
Bonderman, who are directors of the Company, are not the owners of record
of these securities. Mr. Price and Mr. Bonderman are directors, executive
officers and shareholders of TPG Advisors, Inc., which is the general
partner of TPG GenPar, L.P., which in turn is the general partner of both
TPG Partners, L.P. and TPG Parallel I, L.P., which are the direct
beneficial owners of these securities. The beneficial ownership after the
Transactions of the directors and executive officers as a group includes
the Common Shares purchased by TPG in the TPG Purchase.
(j) Includes 625,000 Common Share purchase warrants held by TPG which, for
purposes of this disclosure, are assumed to be exercised.
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<PAGE> 64
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,
participating in any transaction within the last three years or in any proposed
transaction that has materially affected or would materially affect the Company,
or any of its subsidiaries. The Company believes that the terms of the
transactions described below were as favorable to the Company as terms that
reasonably could have been obtained from non-affiliated third parties.
TPG INVESTMENTS
In December 1995, the Company closed a $40.0 million private placement of
securities with partnerships that are affiliated with TPG (the "TPG Placement").
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 holders thereof to purchase 625,000 Common Shares at $7.40 per
share; and (iii) 1.5 million shares of $10 stated value Convertible First
Preferred Shares, Series A ("Convertible Preferred"). The shareholders of the
Company at a Special Meeting on October 9, 1996 approved 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. All of the Convertible
Preferred shares were converted into 2,816,372 Common Shares on October 30,
1996. As per the terms of the warrants, the Company is allowed to force
conversion of the warrants after December 21, 1997 if the price of the Common
Shares exceeds $10.00 per share for a period of 40 consecutive trading days. As
of December 15, 1997, TPG is the beneficial owner of 7,783,038 Common Shares,
which represents 38% of the outstanding Common Shares (40% after the pro forma
exercise of the warrants).
In connection with the TPG Placement, TPG received the right to nominate
three of the directors of the Company out of a maximum of seven. Of the current
directors, Messrs. Bonderman, Price and Stanton were nominated by TPG. See
"Management." In addition, until December 21, 1997, TPG had certain "piggyback"
registration rights which allowed TPG to include all or part of the Common
Shares acquired by TPG in any registration statement of the Company during that
period. Commencing 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 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 calculated on a fully-diluted
basis. At the request of the NYSE, the Company has agreed to make the extension
of this right subject to shareholder ratification every five years with the
first vote on the matter expected to be at the annual meeting in the year 2000.
TPG waived its right to maintain its pro rata ownership with regard to the
public offering by the Company in October 1996, but did purchase 800,000 Common
Shares included in the offering directly from the Company. These Common Shares
were sold for 93.5% of the public offering price, or the same net price that the
remainder of the shares included in the offering were being sold to the
underwriters. TPG has waived its right to maintain its pro rata ownership with
regard to the Equity Offering but is planning on purchasing shares in the
TPG Purchase at % of the public offering price, or the same net price that
the remainder of the shares included in the Equity Offering are being sold to
the Underwriters. As of December 31, 1997, after giving pro forma effect to the
Transactions, TPG will be the beneficial owner of Common Shares, which
represents % of the outstanding Common Shares.
In 1995, 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 of the Company. 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.
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<PAGE> 65
MODIFICATION OF DEBENTURES
In addition to modifying the terms of the Convertible Preferred at the
special meeting of the shareholders on October 9, 1996, the shareholders
approved the issuance of 7,948 Common Shares in lieu of interest, plus an
additional 308,642 Common Shares to redeem the principal amount the outstanding
9.5% Convertible Debentures (the "Debentures") in accordance with their existing
terms. Mr. Ronald G. Greene, Chairman of the Board of Directors, owned 80% of
the Debentures, which were purchased by him at market value prior to his
election to the Board of Directors. These Debentures were redeemed on October
15, 1996. Mr. Greene also purchased C $1,500,000 of 6 3/4% Convertible
Debentures at market value prior to his election to the Board of Directors that
were converted into 187,500 Common Shares on July 31, 1996 in accordance with
the terms of the 6 3/4% Convertible Debentures.
PURCHASE OF WORKING INTERESTS
In May 1996, the Company purchased oil and natural gas working interests
from four employees for an aggregate consideration of $387,000, which included
$158,000 paid to Mr. Matthew Deso, Vice President of Exploration of the Company,
$133,000 paid to Mr. Mark Worthey, Vice President of Operations of the Company
and $26,000 paid to the spouse of Mr. Gareth Roberts, President and Chief
Executive Officer of the Company. The purchase prices were determined by the
Company based on the present value of the estimated future net revenue to be
generated from the estimated proved reserves of the properties (based on the
prior year's report thereon from Netherland & Sewell) using a 15% discount rate.
The acquisitions were for additional working interests in properties in which
the Company also holds an interest. To the best of the Company's knowledge, none
of the Company's officers or directors have any remaining interests in
properties owned by the Company.
[E] DESCRIPTION OF CAPITAL STOCK
GENERAL
The authorized share capital of DRI consists of an unlimited number of
Common Shares, of which were issued and outstanding as of December
31, 1997, and two classes of preferred shares, unlimited in number and issuable
in series, none of which is outstanding. In addition to the issued and
outstanding Common Shares, options to purchase Common Shares and
75,000 warrants are outstanding.
There are no limitations imposed by Canadian legislation or regulations or
by the Articles of Continuance or Bylaws of DRI 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: (i) to one vote for each
Common Share held at all meetings of shareholders of DRI, 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; (ii) to any
dividends that may be declared by the Board of Directors thereon; and (iii) in
the event of liquidation, dissolution or winding-up of DRI, are entitled,
subject to the rights of the holders of shares ranking prior to the Common
Shares, to share rateably in such assets of DRI as are available for
distribution. The holders of Common Shares have no pre-emptive rights under
Canadian law or the Articles of Continuance.
At December 31, 1997, 75,000 warrants were outstanding at an exercise price
of C $8.40 expiring on May 5, 2000. Each warrant entitles the holder thereof to
purchase one Common Share at any time prior to the expiration date.
DRI 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
62
<PAGE> 66
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 with the Commission.
DRI has granted TPG certain demand 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 rights
to maintain its pro rata ownership in connection with the Equity Offering
although they intend to buy Common Shares concurrently with the
Equity Offering directly from the Company. These Common Shares will be sold to
TPG for 95.25% of the public offering price, the same net price at which the
remainder of the Common Shares included in the Equity Offering are being sold to
the Underwriters.
PREFERRED SHARES
DRI 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 DRI'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 DRI 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. There are no
Preferred Shares currently outstanding.
DESCRIPTION OF CERTAIN INDEBTEDNESS
CREDIT FACILITY
The Company is currently in the process of revising and restating its
Credit Facility pursuant to an agreement (the "Credit Agreement") under which
DMI is the borrower from NationsBank of Texas, N.A., as administrative agent for
a syndicate of lenders. The following is a summary of certain terms of the
Credit Facility and is qualified in its entirety by reference to the Credit
Agreement and the various related documents to be entered into in connection
with the Credit Facility.
The total commitment under the Credit Facility will be $300 million,
subject to borrowing base availability. The initial borrowing base under the
Credit Facility will be $260 million, $85 million of which consists of an
interim acquisition financing commitment (the "Acquisition Tranche"). The
initial borrowing base of $260 million will be reduced simultaneously with the
issuance by the Company of any debt or equity securities by an amount equal to
the net proceeds from the issuance of such securities, until such time as the
borrowing base is reduced to the conforming borrowing base of $175 million.
Borrowings under the Acquisition Tranche in excess of this borrowing base are
subject to review semi-annually and the interest rate on the Credit Facility
will escalate 0.25% each quarter, commencing March 31, 1998, until such excess
is repaid. In addition, the conforming borrowing base is subject to
redetermination semi-annually, at the sole discretion of the lenders, based upon
engineering and other due diligence conducted by the lenders, and in accordance
with customary practices and standards in effect from time to time for oil and
natural gas loans similar to the Credit Facility. The borrowing base may be
affected from time to time by the performance of the Company's oil and natural
gas properties and changes in oil and natural gas prices. The Company incurs a
commitment fee of up to 0.45% per year on the unused portion of the borrowing
base.
Borrowings under the Credit Facility are payable in full on ,
2002 and bear interest at the option of the Company at 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% (LIBOR plus 1 5/8% as long as
the Acquisition Tranche is outstanding). As of December 31, 1997, after giving
effect to the Transactions, the Company would have had a borrowing base of
$ million, of which $ million was available.
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<PAGE> 67
The obligations of DMI as borrower under the Credit Facility will be fully
and unconditionally guaranteed by DRI, DMI's direct corporate parent. In
addition, the Credit Facility will be secured by first priority security
interests in certain oil and natural gas properties which secured the Company's
prior credit facility entered into on May 31, 1996 (excluding the properties
acquired in the Chevron Acquisition) and a pledge of all of the stock of DMI;
provided, however, that if the borrowings outstanding under the Credit Facility
exceed the borrowing base after redetermination on , 1998, the
Credit Facility will be secured by substantially all of the Company's oil and
natural gas properties (including those acquired in the Chevron Acquisition).
The Credit Facility contains certain covenants which, among other things,
restrict the Company's ability to pay dividends and other restricted payments,
incur additional indebtedness, create liens, enter into leases and investments
(including hedging investments), engage in mergers and consolidations or engage
in certain transactions with affiliates. In addition, the Company will be
required to comply with certain financial ratios and tests, including a minimum
tangible net worth test, a current ratio coverage test and an EBITDA to interest
ratio test.
[E] SENIOR SUBORDINATED NOTES
Concurrently with the Equity Offering DMI is offering up to $100 million
aggregate principal amount of its % Senior Subordinated Notes Due 2008
pursuant to the Debt Offering. The following is a summary of certain terms of
the Notes and is qualified in its entirely by reference to the "Description of
the Notes" herein and to the Indenture (the "Indenture") relating to the Notes.
A copy of the proposed form of Indenture has been filed with the Registration
Statement of which this Prospectus forms a part.
The Notes will be unsecured senior subordinated obligations of DMI, and
will rank pari passu in right of payment with all existing and future senior
subordinated indebtedness of DMI and will be subordinated to future senior
indebtedness of the Company. The Notes mature on , 2008. The Notes
will bear interest at the rate of % per annum and will be payable
semi-annually, commencing on . The Notes will be fully and
unconditionally guaranteed on a senior subordinated basis by DRI. The
indebtedness represented by the Guaranty will be unsecured senior subordinated
obligations of DRI, and will rank pari passu in right of payment with all
existing and future senior subordinated indebtedness of DRI.
Except as stated below, the Notes will not be redeemable prior to
, 2003. Thereafter, the Notes will be redeemable at the option of
DMI, in whole or in part, at any time or from time to time, at a premium which
will be at a fixed percentage that declines to par on or after ,
2005, in each case together with accrued and unpaid interest, if any, to the
date of redemption. In the event DRI consummates a Stock Offering prior to
, 2001, DMI may, at its option, use all or a portion of the proceeds
from such offering to redeem up to 35% of the original aggregate principal
amount of the Notes at a redemption price equal to % of the aggregate
principal amount of the Notes to be redeemed, plus accrued and unpaid interest,
if any, thereon to the redemption date, provided at least $ million
aggregate principal amount of the Notes remains outstanding after such
redemption.
Upon the occurrence of a Change of Control (as defined in the Indenture),
each holder of Notes will have the right to require the Company to purchase all
or a portion of such holder's Notes at a price equal to 101% of the aggregate
principal amount thereof, together with accrued and unpaid interest to the date
of purchase.
The Indenture will contain certain covenants, including covenants that
limit (i) indebtedness, (ii) restricted payments, (iii) distributions from
restricted subsidiaries, (iv) transactions with affiliates, (v) sales of assets
and subsidiary stock (including sale and leaseback transactions), (vi) dividend
and other payment restrictions affecting restricted subsidiaries and (vii)
mergers or consolidations.
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<PAGE> 68
[D] DESCRIPTION OF THE NOTES
As used in this section, the term "Company" shall mean DMI, the issuer of
the Notes.
GENERAL
The Notes are to be issued under an Indenture, to be dated as of
, 1998 (the "Indenture"), between the Company and , as Trustee
(the "Trustee"). A copy of the form of Indenture will be filed as an exhibit to
the Registration Statement of which this Prospectus is a part. The following
summary of certain provisions of the Indenture does not purport to be complete
and is subject to, and is qualified in its entirety by reference to, the
Indenture and the Notes, including the definitions of certain terms therein and
those terms made a part of the Indenture by the Trust Indenture Act of 1939, as
amended.
TERMS OF THE NOTES
The Notes will be unsecured senior subordinated obligations of the Company,
initially limited to $100 million aggregate principal amount, and will mature on
, 2008. The Notes will bear interest at the rate per annum shown on
the cover page hereof from , 1998, or from the most recent date to
which interest has been paid or provided for, payable semiannually to Holders of
record at the close of business on the or immediately preceding the
interest payment date on and of each year, commencing , 1998.
Interest on overdue principal and (to the extent permitted by law) on overdue
installments of interest will accrue at 1% per annum in excess of such rate.
Interest on the Notes will be computed on the basis of a 360-day year of twelve
30-day months.
Principal of and interest on the Notes will be payable, and the Notes may
be exchanged or transferred, at the office or agency of the Company in the
Borough of Manhattan, The City of New York (which initially shall be the
corporate trust office of the Trustee, at New York, New York ,
except that, at the option of the Company, payment of interest may be made by
check mailed to the address of the Holders as such address appears in the Note
Register.
The Notes will be issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
Subject to the covenants described below under "-- Certain Covenants" and
applicable law, the Company may issue additional Notes under the Indenture in an
unlimited principal amount. The Notes offered hereby and any additional Notes
subsequently issued would be treated as a single class for all purposes under
the Indenture.
OPTIONAL REDEMPTION
Except as set forth in the following paragraph, the Notes will not be
redeemable at the option of the Company prior to , 2003. Thereafter,
the Notes will be redeemable, at the Company's option, in whole or in part, at
any time or from time to time, upon not less than 30 nor more than 60 days'
prior notice mailed by first-class mail to each Holder's registered address, at
the following redemption prices (expressed in percentages of principal amount),
plus accrued interest to the redemption date (subject to the right of Holders of
record on the relevant record date to receive interest due on the relevant
interest payment date), if redeemed during the 12-month period commencing on
of the years set forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
- ------ ----------
<S> <C> <C>
2003.............................................................. %
2004..............................................................
2005 and thereafter............................................... 100
</TABLE>
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<PAGE> 69
In addition, at any time and from time to time prior to , 2001,
the Company may redeem in the aggregate up to 35% of the original principal
amount of the Notes with the proceeds of one or more Stock Offerings to the
extent the net cash proceeds thereof are contributed to the equity capital of
the Company and so long as there is a Public Market at the time of such
redemption, at a redemption price (expressed as a percentage of principal
amount) of % plus accrued interest to the redemption date (subject to the
right of Holders of record on the relevant record date to receive interest due
on the relevant interest payment date); provided, however, that (i) either at
least $ aggregate principal amount of the Notes must remain outstanding
after each such redemption or such redemption must retire the Notes in their
entirety and (ii) such redemption occurs within 60 days following the closing of
such Stock Offering.
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in original principal amount or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount thereof to be redeemed. A new Note in principal amount equal to
the unredeemed portion thereof will be issued in the name of the Holder thereof
upon cancellation of the original Note.
SINKING FUND
There will be no sinking fund payments for the Notes.
GUARANTY
DRI, as primary obligor and not merely as surety, will irrevocably, fully
and unconditionally guarantee (the "Guaranty") on a senior subordinated basis
the performance and the punctual payment when due, whether at Stated Maturity,
by acceleration or otherwise, of all the obligations of the Company under the
Indenture and the Notes (all such obligations guaranteed by DRI being herein
called the "Guaranteed Obligations." The Guarantor is a holding company that
will derive all of its operating income and cash flow from its subsidiaries,
including primarily the Company, the common stock of which will be pledged to
secure the Guarantor's guarantee of indebtedness of the Company outstanding
under the Credit Facility. The Guarantor will agree to pay, in addition to the
amount stated above, any and all expenses (including reasonable counsel fees and
expenses) incurred by the Trustee and the Holders in enforcing any rights under
the Guaranty with respect to the Guarantor. The Guarantor has no material assets
other than the common stock of the Company.
The Guaranty is a continuing guarantee and shall (a) remain in full force
and effect until payment in full of all the Guaranteed Obligations, (b) be
binding upon the Guarantor and (c) enure to the benefit of and be enforceable by
the Trustee, the Holders and their successors, transferees and assigns.
Pursuant to the Indenture, the Guarantor may consolidate with, merge with
or into, or transfer all or substantially all its assets to any other Person to
the extent described below under "-- Certain Covenants -- Merger and
Consolidation"; provided, however, that if such Person is not the Company, the
Guarantor's obligations under the Indenture and the Guaranty must be expressly
assumed by such other Person. See "-- Certain Covenants -- Merger and
Consolidation".
RANKING
The indebtedness evidenced by the Notes and the Guaranty will be senior
unsecured, general obligations of the Company and the Guarantor, as the case may
be, subordinated in right of payment, as set forth in the Indenture, to the
prior payment of all Senior Indebtedness of the Company or the Guarantor, as the
case may be, whether outstanding on the Issue Date or thereafter incurred,
including the obligations of the Company under, and the Guarantor's guarantee of
the Company's obligations with respect to, the Credit Facility.
As of September 30, 1997, after giving pro forma effect to the
Transactions, (i) the Senior Indebtedness of the Company would have been
approximately $ million, of which $ would have been secured
indebtedness and (ii) the Senior Indebtedness of the Guarantor would have been
approximately $ mil-
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lion, all of which would have represented its guarantee of Senior Indebtedness
of the Company under the Credit Facility. Although the Indenture contains
limitations on the amount of additional Indebtedness that the Company may incur,
under certain circumstances the amount of such Indebtedness could be substantial
and, in any case, such Indebtedness may be Senior Indebtedness. See "-- Certain
Covenants -- Limitation on Indebtedness."
Only Indebtedness of the Company or the Guarantor that is Senior
Indebtedness will rank senior to the Notes and the Guaranty in accordance with
the provisions of the Indenture. The Notes and the Guaranty will in all respects
rank pari passu with all other Senior Subordinated Indebtedness of the Company
and the Guarantor, respectively. The Company and the Guarantor each has agreed
in the Indenture that it will not Incur, directly or indirectly, any
Indebtedness that is subordinate or junior in ranking in right of payment to its
Senior Indebtedness unless such Indebtedness is Senior Subordinated Indebtedness
or is expressly subordinated in right of payment to Senior Subordinated
Indebtedness. Unsecured Indebtedness is not deemed to be subordinated or junior
to Secured Indebtedness merely because it is unsecured.
A portion of the operations of the Company are currently conducted through
its subsidiaries. Claims of creditors of any such subsidiaries, including trade
creditors, secured creditors and creditors holding guarantees issued by such
subsidiaries, and claims of preferred stockholders (if any) of such subsidiaries
generally will have priority with respect to the assets and earnings of such
subsidiaries over the claims of creditors of the Company, including holders of
the Notes, even though such obligations would not constitute Senior Indebtedness
of the Company. The Notes, therefore, will be effectively subordinated to
creditors (including trade creditors) and preferred stockholders (if any) of
subsidiaries of the Company. Although the Indenture limits the incurrence of
Indebtedness and the issuance of preferred stock of certain of the Company's
subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Indenture does not impose any limitation on the
incurrence by such subsidiaries of liabilities that are not considered
Indebtedness under the Indenture. See "-- Certain Covenants -- Limitation on
Indebtedness".
The Company may not pay principal of, premium (if any) or interest on, the
Notes make or any deposit pursuant to the provisions described under
"Defeasance" below or may not repurchase, redeem or otherwise retire any Notes
(collectively, "pay the Notes") if (i) any Designated Senior Indebtedness of the
Company is not paid when due or (ii) any other default on Designated Senior
Indebtedness of the Company occurs and the maturity of such Designated Senior
Indebtedness is accelerated in accordance with its terms unless, in either case,
the default has been cured or waived and any such acceleration has been
rescinded or such Designated Senior Indebtedness has been paid in full. However,
the Company may pay the Notes without regard to the foregoing if the Company and
the Trustee receive written notice approving such payment from the
Representative of the Designated Senior Indebtedness with respect to which
either of the events set forth in clause (i) or (ii) of the immediately
preceding sentence has occurred and is continuing. During the continuance of any
default (other than a default described in clause (i) or (ii) of the second
preceding sentence) with respect to any Designated Senior Indebtedness of the
Company pursuant to which the maturity thereof may be accelerated immediately
without further notice (except such notice as may be required to effect such
acceleration) or the expiration of any applicable grace periods, the Company may
not pay the Notes for a period (a "Payment Blockage Period") commencing upon the
receipt by the Trustee (with a copy to the Company) of written notice (a
"Blockage Notice") of such default from the Representative of the holders of
such Designated Senior Indebtedness specifying an election to effect a Payment
Blockage Period and ending 179 days thereafter (or earlier if such Payment
Blockage Period is terminated (i) by written notice to the Trustee and the
Company from the Person or Persons who gave such Blockage Notice, (ii) because
the default giving rise to such Blockage Notice is no longer continuing or (iii)
because such Designated Senior Indebtedness has been repaid in full).
Notwithstanding the provisions described in the immediately preceding sentence,
unless the holders of such Designated Senior Indebtedness or the Representative
of such holders have accelerated the maturity of such Designated Senior
Indebtedness, the Company must resume payments on the Notes after the end of
such Payment Blockage Period. The Notes shall not be subject to more than one
Payment Blockage Period in any consecutive 360-day period, irrespective of the
number of defaults with respect to Designated Senior Indebtedness of the Company
during such period.
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Upon any payment or distribution of the assets of the Company upon a total
or partial liquidation or dissolution or reorganization of or similar proceeding
relating to the Company or its property, the holders of Senior Indebtedness of
the Company will be entitled to receive payment in full of such Senior
Indebtedness before the Noteholders are entitled to receive any payment in
respect of the Notes, and until such the Senior Indebtedness is paid in full,
any payment or distribution to which Noteholders would be entitled from the
Company but for the subordination provisions of the Indenture will be made to
holders of such Senior Indebtedness the Company as their interests may appear.
If a distribution is made to Noteholders that, due to the subordination
provisions, should not have been made to them, such Noteholders are required to
hold it in trust for the holders of Senior Indebtedness of the Company and pay
it over to them as their interests may appear.
If payment of the Notes is accelerated because of an Event of Default, the
Company or the Trustee shall promptly notify the holders of Designated Senior
Indebtedness of the Company or the Representative of such holders of the
acceleration.
The obligations of the Guarantor under its Guaranty are unsecured senior
subordinated obligations. As such, the rights of Noteholders to receive payment
by the Guarantor pursuant to the Guaranty will be subordinated in right of
payment to the rights of holders of Senior Indebtedness of the Guarantor. The
terms of the subordination provisions described above with respect to the
Company's obligations under the Notes apply equally to the Guarantor and the
obligations of the Guarantor under the Guaranty.
By reason of the subordination provisions contained in the Indenture, in
the event of insolvency, creditors of the Company or the Guarantor who are
holders of Senior Indebtedness of the Company or the Guarantor, as the case may
be, may recover more, ratably, than the Noteholders, and creditors of the
Company or the Guarantor who are not holders of Senior Indebtedness of the
Company or the Guarantor may recover less, ratably, than holders of Senior
Indebtedness of the Company, or the Guarantor, as the case may be, and may
recover more, ratably, than the Noteholders.
Notwithstanding the foregoing, payment from the money or the proceeds of
U.S. Government Obligations held in any defeasance trust described under
"-- Defeasance" below will not be contractually subordinated in right of payment
to any Senior Indebtedness of the Company or subject to the restrictions
described herein.
CERTAIN DEFINITIONS
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in the Oil and Gas Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary; or (iii) Capital Stock constituting a minority interest in any
Person that at such time is a Restricted Subsidiary; provided, however, that any
such Restricted Subsidiary described in clauses (ii) or (iii) above is primarily
engaged in the Oil and Gas Business.
"Adjusted Consolidated Assets" means at any time the total amount of assets
of the Company and its Restricted Subsidiaries (less applicable depreciation,
amortization and other valuation reserves), after deducting therefrom all
current liabilities of the Company and its Restricted Subsidiaries (excluding
intercompany items), all as set forth on the consolidated balance sheet of the
Company and its Restricted Subsidiaries as of the end of the most recent fiscal
quarter ended at least 45 days prior to the date of determination.
"Adjusted Consolidated Net Tangible Assets" or "ACNTA" means (without
duplication), as of the date of determination, (a) the sum of (i) discounted
future net revenue from proved crude oil and natural gas reserves of the Company
and its Restricted Subsidiaries calculated in accordance with SEC guidelines
before any state or federal income taxes, as estimated in a reserve report
prepared as of the end of the Company's most recently completed fiscal year,
which reserve report is prepared or reviewed by independent petroleum engineers,
as increased by, as of the date of determination, the discounted future net
revenue of (A) estimated proved crude oil and natural gas reserves of the
Company and its Restricted Subsidiaries attributable to
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acquisitions consummated since the date of such year-end reserve report, and (B)
estimated crude oil and natural gas reserves of the Company and its Restricted
Subsidiaries attributable to extensions, discoveries and other additions and
upward determinations of estimates of proved crude oil and natural gas reserves
due to exploration, development or exploitation, production or other activities
which reserves were not reflected in such year-end reserve report which would,
in the case of determinations made pursuant to clauses (A) and (B), in
accordance with standard industry practice, result in such determinations, in
each case calculated in accordance with SEC guidelines (utilizing the prices
utilized in such year-end reserve report), and decreased by, as of the date of
determination, the discounted future net revenue attributable to (C) estimated
proved crude oil and natural gas reserves of the Company and its Restricted
Subsidiaries reflected in such year-end reserve report produced or disposed of
since the date of such year-end reserve report and (D) reductions in the
estimated oil and gas reserves of the Company and its Restricted Subsidiaries
reflected in such year-end reserve report since the date of such year-end
reserve report attributable to downward determinations of estimates of proved
crude oil and natural gas reserves due to exploration, development or
exploitation, production or other activities conducted or otherwise occurring
since the date of such yearend reserve report which would, in the case of
determinations made pursuant to clauses (C) and (D), in accordance with standard
industry practice, result in such determinations, in each case calculated in
accordance with SEC guidelines (utilizing the prices utilized in such year-end
reserve report); provided, however, that, in the case of each of the
determinations made pursuant to clauses (A) through (D), such increases and
decreases shall be as estimated by the Company's engineers, except that if as a
result of such acquisitions, dispositions, discoveries, extensions or revisions,
there is a Material Change which is an increase, then such increases and
decreases in the discounted future net revenue shall be confirmed in writing by
an independent petroleum engineer, (ii) the capitalized costs that are
attributable to crude oil and natural gas properties of the Company and its
Restricted Subsidiaries to which no proved crude oil and natural gas reserves
are attributed, based on the Company's books and records as of a date no earlier
than the date of the Company's latest annual or quarterly financial statements,
(iii) the Net Working Capital on a date no earlier than the date of the
Company's latest annual or quarterly financial statements and (iv) the greater
of (I) the net book value on a date no earlier than the date of the Company's
latest annual or quarterly financial statements and (II) the appraised value, as
estimated by independent appraisers, of other tangible assets of the Company and
its Restricted Subsidiaries as of a date no earlier than the date of the
Company's latest audited financial statements (provided that the Company shall
not be required to obtain such an appraisal of such assets if no such appraisal
has been performed), minus (b) to the extent not otherwise taken into account in
the immediately preceding clause (a), the sum of (i) minority interests, (ii)
any natural gas balancing liabilities of the Company and its Restricted
Subsidiaries reflected in the Company's latest audited financial statements,
(iii) the discounted future net revenue, calculated in accordance with SEC
guidelines (utilizing the same prices utilized in the Company's year-end reserve
report), attributable to reserves subject to participation interests, overriding
royalty interests or other interests of third parties, pursuant to
participation, partnership, vendor financing or other agreements then in effect,
or which otherwise are required to be delivered to third parties, (iv) the
discounted future net revenues, calculated in accordance with SEC guidelines
(utilizing the same prices utilized in the Company's year-end reserve report),
attributable to reserves that are required to be delivered to third parties to
fully satisfy the obligations of the Company and its Restricted Subsidiaries
with respect to Volumetric Production Payments on the schedules specified with
respect thereto and (v) the discounted future net revenues, calculated in
accordance with SEC guidelines, attributable to reserves subject to
Dollar-Denominated Production Payments that, based on the estimates of
production included in determining the discounted future net revenues specified
in the immediately preceding clause (a) (i) (utilizing the same prices utilized
in the Company's year-end reserve report), would be necessary to satisfy fully
the obligations of the Company and its Restricted Subsidiaries with respect to
Dollar-Denominated Production Payments on the schedules specified with respect
thereto.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and controlled" have meanings correlative to the foregoing. For
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purposes of the provisions described under "-- Certain Covenants -- Limitation
on Restricted Payments", "-- Certain Covenants -- Limitation on Affiliate
Transactions" and "-- Certain Covenants -- Limitations on Sales of Assets and
Subsidiary Stock" only, "Affiliate" shall also mean any beneficial owner of
Capital Stock representing 10% or more of the total voting power of the Voting
Stock (on a fully diluted basis) of the Company or of rights or warrants to
purchase such Capital Stock (whether or not currently exercisable) and any
Person who would be an Affiliate of any such beneficial owner pursuant to the
first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other disposition
(or series of related sales, leases, transfers or dispositions) by the Company
or any Restricted Subsidiary, including any disposition by means of a merger,
consolidation or similar transaction (each referred to for the purposes of this
definition as a "disposition"), of (i) any shares of Capital Stock of a
Restricted Subsidiary (other than directors' qualifying shares or shares
required by applicable law to be held by a Person other than the Company or a
Restricted Subsidiary), (ii) all or substantially all the assets of any division
or line of business of the Company or any Restricted Subsidiary or (iii) any
other assets of the Company or any Restricted Subsidiary outside of the ordinary
course of business of the Company or such Restricted Subsidiary. Notwithstanding
the foregoing, none of the following shall be deemed to be an Asset Disposition:
(1) a disposition by a Restricted Subsidiary to the Company or by the Company or
a Restricted Subsidiary to a Wholly Owned Subsidiary, (2) for purposes of the
covenant described under "-- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock" only, a disposition that constitutes a Restricted Payment
permitted by the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments", a disposition of all or substantially all the assets of
the Company in compliance with "-- Certain Covenants -- Merger and
Consolidation" or a disposition that constitutes a Change of Control pursuant to
clause (iii) of the definition thereof, (3) the sale or transfer (whether or not
in the ordinary course of business) of crude oil and natural gas properties or
direct or indirect interests in real property; provided, however, that at the
time of such sale or transfer such properties do not have associated with them
any proved reserves, (4) the abandonment, farm-out, lease or sublease of
developed or undeveloped crude oil and natural gas properties in the ordinary
course of business, (5) the trade or exchange by the Company or any Restricted
Subsidiary of any crude oil and natural gas property owned or held by the
Company or such Restricted Subsidiary for any crude oil and natural gas property
owned or held by another Person or (6) the sale or transfer of hydrocarbons or
other mineral products or surplus or obsolete equipment, in each case in the
ordinary course of business.
"Attributable Debt" in respect of a Sale/Leaseback Transaction means, as at
the time of determination, the present value (discounted at the interest rate
implicit in the Sale/Leaseback Transaction, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with respect to any
Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the sum
of the products of numbers of years from the date of determination to the dates
of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Banks" has the meaning specified in the Credit Agreement.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday (as defined in
the Indenture).
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
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"Capital Stock" of any Person means any and all shares, interests, rights
to purchase, warrants, options, participation or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"Change of Control" means the occurrence of any of the following events:
(i) any "person" (as such term is used in Sections 13(d) and 14(d) of
the Exchange Act), other than a Permitted Holder, is or becomes the
beneficial owner (as defined in Rules 13d-3 and 13d-5 under the Exchange
Act, except that for purposes of this clause (i) such person shall be
deemed to have "beneficial ownership" of all shares that such person has
the right to acquire, whether such right is exercisable immediately or only
after the passage of time), directly or indirectly, of more than 35% of the
total voting power of the Voting Stock of the Company (for the purposes of
this clause (i), such person shall be deemed to beneficially own any Voting
Stock of a specified corporation held by a parent corporation, if such
person is the beneficial owner (as defined in this clause (i)), directly or
indirectly, of more than 35% of the voting power of the Voting Stock of
such parent corporation);
(ii) during any period of two consecutive years from and after the
Issue Date, individuals who at the beginning of such period constituted the
Board of Directors of DRI (together with any new directors whose election
by such Board of Directors or whose nomination for election by the
shareholders of DRI was approved by a vote of a majority of the directors
of DRI then still in office who were either directors at the beginning of
such period or whose election or nomination for election was previously so
approved) cease for any reason to constitute a majority of the Board of
Directors then in office; or
(iii) the merger or consolidation of the Company with or into another
Person or the merger of another Person with or into the Company, or the
sale of all or substantially all the assets of the Company to another
Person (other than a Person that is controlled (as defined in the
definition of "Affiliate") by the Permitted Holders), and, in the case of
any such merger or consolidation, the securities of the Company that are
outstanding immediately prior to such transaction and which represent 100%
of the aggregate voting power of the Voting Stock of the Company are
changed into or exchanged for cash, securities or property, unless pursuant
to such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving
corporation that represent immediately after such transaction, at least a
majority of the aggregate voting power of the Voting Stock of the surviving
corporation.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Coverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of EBITDA for the period of the most recent
four consecutive fiscal quarters ending at least 45 days prior to the date of
such determination to (ii) Consolidated Interest Expense for such four fiscal
quarters; provided, however, that (1) if the Company or any Restricted
Subsidiary has Incurred any Indebtedness since the beginning of such period that
remains outstanding or if the transaction giving rise to the need to calculate
the Consolidated Coverage Ratio is an Incurrence of Indebtedness, or both,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving effect on a pro forma basis to such Indebtedness as if such
Indebtedness had been Incurred on the first day of such period and the discharge
of any other Indebtedness repaid, repurchased, defeased or otherwise discharged
with the proceeds of such new Indebtedness as if such discharge had occurred on
the first day of such period, (2) if the Company or any Restricted Subsidiary
has repaid, repurchased, defeased or otherwise discharged any Indebtedness since
the beginning of such period or if any indebtedness is to be repaid,
repurchased, defeased or otherwise discharged on the date of the transaction
giving rise to the need to calculate the Consolidated Coverage Ratio, EBITDA and
Consolidated Interest Expense for such period shall be calculated on a pro forma
basis as if such discharge had occurred on the first day of such period and as
if the Company or such Restricted Subsidiary has not earned the interest income
actually earned during such period in respect of cash or Temporary Cash
Investments used to repay, repurchase, defease or otherwise discharge such
Indebtedness, (3) if since the beginning of such period the Company or any
Restricted Subsidiary shall have made any Asset Disposition (other than an Asset
Disposition involving assets having a fair market value of less than the greater
of one
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percent (1%) of Adjusted Consolidated Net Tangible Assets as of the end of the
Company's then most recently completed fiscal year and $2.0 million), then
EBITDA for such period shall be reduced by an amount equal to EBITDA (if
positive) directly attributable to the assets which are the subject of such
Asset Disposition for such period, or increased by an amount equal to EBITDA (if
negative), directly attributable thereto for such period and Consolidated
Interest Expense for such period shall be reduced by an amount equal to the
Consolidated Interest Expense directly attributable to any Indebtedness of the
Company or any Restricted Subsidiary repaid, repurchased, defeased or otherwise
discharged with respect to the Company and its continuing Restricted
Subsidiaries in connection with such Asset Disposition for such period (or, if
the Capital Stock of any Restricted Subsidiary is sold, the Consolidated
Interest Expense for such period directly attributable to the Indebtedness of
such Restricted Subsidiary to the extent the Company and its continuing
Restricted Subsidiaries are no longer liable for such Indebtedness after such
sale), (4) if since the beginning of such period the Company or any Restricted
Subsidiary (by merger or otherwise) shall have made an Investment in any
Restricted Subsidiary (or any person which becomes a Restricted Subsidiary) or
an acquisition (including by way of lease) of assets, including any acquisition
of assets occurring in connection with a transaction requiring a calculation to
be made hereunder, EBITDA and Consolidated Interest Expense for such period
shall be calculated after giving pro forma effect thereto (including the
Incurrence of any Indebtedness) as if such Investment or acquisition occurred on
the first day of such period and (5) if since the beginning of such period any
Person (that subsequently became a Restricted Subsidiary or was merged with or
into the Company or any Restricted Subsidiary since the beginning of such
period) shall have made any Asset Disposition, any Investment or acquisition of
assets that would have required an adjustment pursuant to clause (3) or (4)
above if made by the Company or a Restricted Subsidiary during such period,
EBITDA and Consolidated Interest Expense for such period shall be calculated
after giving pro forma effect thereto as if such Asset Disposition, Investment
or acquisition occurred on the first day of such period. For purposes of this
definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting Officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest of such Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in excess of
12 months).
"Consolidated Current Liabilities" as of the date of determination means
the aggregate amount of liabilities of the Company and its consolidated
Restricted Subsidiaries which would properly be classified as current
liabilities (including taxes accrued as estimated), on a consolidated balance
sheet of the Company and its Restricted subsidiaries at such date, after
eliminating (i) all intercompany items between the Company and any Restricted
Subsidiary and (ii) all current maturities of long-term Indebtedness, all as
determined in accordance with GAAP consistently applied.
"Consolidated Indebtedness" at any date of determination means the amount
of Indebtedness of the Company and its Restricted Subsidiaries outstanding on
such date determined on a consolidated basis in accordance with GAAP.
"Consolidated Interest Expense" means, for any period, the total interest
expense of the Company and its Restricted Subsidiaries for such period,
determined on a consolidated basis in accordance with GAAP, plus, to the extent
not included in such total interest expense, and to the extent incurred by the
Company or its Restricted Subsidiaries, without duplication, (i) interest
expense attributable to Capital Lease Obligations and imputed interest with
respect to Attributable Debt, (ii) capitalized interest, (iii) non-cash interest
expense, (iv) commissions, discounts and other fees and charges owed with
respect to letters of credit and bankers' acceptance financing, (v) net costs
(including amortization of fees and up-front payments) associated with interest
rate caps and other interest rate and currency options that, at the time entered
into, resulted in the Company and its Restricted Subsidiaries being net payees
as to future payouts under such caps or options, and interest rate and currency
swaps and forwards for which the Company or any of its Restricted Subsidiaries
has paid a premium, (vi) dividends (excluding dividends paid in shares of
Capital Stock which is not Disqualified
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Stock) in respect of all Disqualified Stock held by Persons other than the
Company or a Wholly Owned Subsidiary, (vii) interest accruing on any
Indebtedness of any other Person to the extent such Indebtedness is Guaranteed
by the Company or any Restricted Subsidiary or secured by a Lien on assets of
the Company or any Restricted Subsidiary to the extent such Indebtedness
constitutes Indebtedness of the Company or any Restricted Subsidiary (whether or
not such Guarantee or Lien is called upon); provided, however, "Consolidated
Interest Expense" shall not include any (x) amortization of costs relating to
original debt issuances other than the amortization of debt discount related to
the issuance of zero coupon securities or other securities with an original
issue price of not more than 90% of the principal thereof, (y) Consolidated
Interest Expense with respect to any Indebtedness Incurred pursuant to clause
(b)(8) of the covenant described under "-- Certain Covenants -- Limitation on
Indebtedness" and (z) noncash interest expense Incurred in connection with
interest rate caps and other interest rate and currency options that, at the
time entered into, resulted in the Company and its Restricted Subsidiaries being
either neutral or net payors as to future payouts under such caps or options.
"Consolidated Net Income" means, for any period, the net income of the
Company and its Subsidiaries determined on a consolidated basis in accordance
with GAAP; provided, however, that there shall not be included in such
Consolidated Net Income: (i) any net income of any Person (other than the
Company) if such Person is not a Restricted Subsidiary, except that (A) subject
to the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Person for such period shall be included in such Consolidated
Net Income up to the aggregate amount of cash actually distributed by such
Person during such period to the Company or a Restricted Subsidiary as a
dividend or other distribution (subject, in the case of a dividend or other
distribution paid to a Restricted Subsidiary, to the limitations contained in
clause (iii) below) and (B) the Company's equity in a net loss of any such
Person for such period shall be included in determining such Consolidated Net
Income; (ii) any net income (or loss) of any Person acquired by the Company or a
Subsidiary in a pooling of interests transaction for any period prior to the
date of such acquisition; (iii) any net income of any Restricted Subsidiary if
such Restricted Subsidiary is subject to restrictions, directly or indirectly,
on the payment of dividends or the making of distributions by such Restricted
Subsidiary, directly or indirectly, to the Company, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in the net
income of any such Restricted Subsidiary for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash actually
distributed by such Restricted Subsidiary during such period to the Company or
another Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution paid to another Restricted
Subsidiary, to the limitation contained in this clause) and (B) the Company's
equity in a net loss of any such Restricted Subsidiary for such period shall be
included in determining such Consolidated Net Income; (iv) any gain or loss
realized upon the sale or other disposition of any assets of the Company or its
consolidated Subsidiaries (including pursuant to any sale-and-leaseback
arrangement) which is not sold or otherwise disposed of in the ordinary course
of business and any gain or loss realized upon the sale or other disposition of
any Capital Stock of any Person; (v) extraordinary gains or losses; and (vi) the
cumulative effect of a change in accounting principles. Notwithstanding the
foregoing, for the purposes of the covenant described under "Certain
Covenants -- Limitation on Restricted Payments" only, there shall be excluded
from Consolidated Net Income any dividends, repayments of loans or advances or
other transfers of assets from Unrestricted Subsidiaries to the Company or a
Restricted Subsidiary to the extent such dividends, repayments or transfers
increase the amount of Restricted Payments permitted under such covenant
pursuant to clause (a)(3)(E) thereof.
"Consolidated Net Tangible Assets", as of any date of determination, means
the total amount of assets (less accumulated depreciation and amortization,
allowances for doubtful receivables, other applicable reserves and other
properly deductible items) which would appear on a balance sheet of the Company
and its Restricted Subsidiaries, determined on a consolidated basis in
accordance with GAAP, and after giving effect to purchase accounting and after
deducting therefrom Consolidated Current Liabilities and, to the extent
otherwise included, the amounts of: (i) minority interests in Restricted
Subsidiaries held by Persons other than the Company or a Restricted Subsidiary;
(ii) excess of cost over fair value of assets of businesses acquired, as
determined in good faith by the Board of Directors; (iii) any revaluation or
other write-up in book value of assets subsequent to the Issue Date as a result
of a change in the method of valuation in accordance
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with GAAP consistently applied; (iv) unamortized debt discount and expenses and
other unamortized deferred charges, goodwill, patents, trademarks, service
marks, trade names, copyrights, licenses, organization or developmental expenses
and other intangible items; (v) treasury stock; (vi) cash set apart and held in
a sinking or other analogous fund established for the purpose of redemption or
other retirement of Capital Stock to the extent such obligation is not reflected
in Consolidated Current Liabilities; and (vii) Investments in and assets of
Unrestricted Subsidiaries.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its Subsidiaries, determined on a consolidated
basis in accordance with GAAP, as of the end of the most recent fiscal quarter
of the Company ending at least 45 days prior to the taking of any action for the
purpose of which the determination is being made, as (i) the par or stated value
of all outstanding Capital Stock of the Company plus (ii) paid-in capital or
capital surplus relating to such Capital Stock plus (iii) any retained earnings
or earned surplus less (A) any accumulated deficit and (B) any amounts
attributable to Disqualified Stock.
"Credit Agreement" means that certain Credit Agreement, dated as of
, as amended, by and among the Company and Nations Bank, N.A. (or any
successor thereto or replacement thereof), as agent and as a lender, and certain
other institutions, as lenders, providing for up to $ million of
Indebtedness, including any related notes, guarantees, collateral documents,
instruments and agreements executed in connection therewith, and in each case as
amended, restated, modified, renewed, refunded, replaced or refinanced, in whole
or in part, from time to time.
"Credit Facilities" means, with respect to the Company or any Restricted
Subsidiary, one or more debt facilities (including the Credit Agreement) or
commercial paper facilities with banks or other institutional lenders providing
for revolving credit loans, term loans, production payments, receivables
financing (including through the sale of receivables to such lenders or to
special purpose entities formed to borrow from such lenders against such
receivables) or letters of credit, in each case, as amended, restated, modified,
renewed, refunded, replaced or refinanced in whole or in part from time to time.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary.
"Default" means any event which is, or after notice or passage of time or
both would be, an Event of Default.
"Designated Senior Indebtedness" in respect of a Person means (i) all the
obligations of such Person under any Credit Facility (including the Credit
Agreement) and (ii) any other Senior Indebtedness of such Person which, at the
date of determination, has an aggregate principal amount outstanding of, or
under which, at the date of determination, the holders thereof are committed to
lend up to, at least $ million and is specifically designated by such Person
in the instrument evidencing or governing such Senior Indebtedness as
"Designated Senior Indebtedness" for purposes of the Indenture.
"Disqualified Stock" means, with respect to any Person, any Capital Stock
to the extent that by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event, it (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable, whole or in part, at the option of
the holder thereof, in each case described in the immediately preceding clauses
(i) , (ii) or (iii), on or prior to the Stated Maturity of the Notes; provided,
however, that any Capital Stock that would not constitute Disqualified Stock but
for provisions thereof giving holders thereof the right to require such Person
to repurchase or redeem such Capital Stock upon the occurrence of an "asset
sale" or "change of control" occurring prior to the Stated Maturity of the Notes
shall not constitute Disqualified Stock if (x) the "asset sale" or "change of
control" provisions applicable to such Capital Stock are not more favorable to
the holders of such Capital Stock than the provisions described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
"-- Certain Covenants -- Change of Control" and (y) any such requirement only
becomes operative after compliance with such corresponding terms applicable to
the Notes, including the purchase of any Notes tendered pursuant thereto.
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"Dollar -- Denominated Production Payments" means production payment
obligations recorded as liabilities in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"DRI" means Denbury Resources Inc., a Canadian corporation, and any
successor corporation.
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) provision for taxes based on
income or profits, (b) depletion and depreciation expense, (c) amortization
expense (d) exploration costs and (e) all other non-cash charges (excluding any
such non-cash charge to the extent that it represents an accrual of or reserve
for cash charges in any future period or amortization of a prepaid cash expense
that was paid in a prior period except such amounts as the Company determines in
good faith are nonrecurring), and less, to the extent included in calculating
such Consolidated Net Income and in excess of any costs or expenses attributable
thereto and deducted in calculating such Consolidated Net Income, the sum of (x)
the amount of deferred revenues that are amortized during such period and are
attributable to reserves that are subject to Volumetric Production Payments and
(y) amounts recorded in accordance with GAAP as repayments of principal and
interest pursuant to Dollar-Denominated Production Payments. Notwithstanding the
foregoing, the provision for taxes based on the income or profits of, and the
depletion, depreciation, amortization and exploration and other non-cash charges
of, a Restricted Subsidiary shall be added to Consolidated Net Income to compute
EBITDA only to the extent (and in the same proportion) that the net income of
such Restricted Subsidiary was included in calculating Consolidated Net Income
and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Exempt Foreign Subsidiary" means (i) any Subsidiary engaged in the Oil and
Gas Business exclusively outside the United States of America, irrespective of
its jurisdiction of incorporation and (ii) any other Subsidiary whose assets
(excluding any cash and Temporary Cash Investments) consist exclusively of
Capital Stock or Indebtedness of one or more Subsidiaries described in clause
(i) of this definition, that, in any case, is so designated by the Company in an
Officers' Certificate delivered to the Trustee and (a) is not a Guarantor of,
and has not granted any Lien to secure, any Indebtedness of the Company or any
Subsidiary other than another Exempt Foreign Subsidiary and (b) does not have
total assets that, when aggregated with the total assets of any other Exempt
Foreign Subsidiary, exceed % of the Company's consolidated total assets, as
determined in accordance with GAAP, as reflected on the Company's most recent
quarterly or annual balance sheet. The Company may revoke the designation of any
Exempt Foreign Subsidiary by notice to the Trustee.
"GAAP" means generally accepted accounting principles in the United States
of America as in effect on the Issue Date, including those set forth in (i) the
opinions and pronouncements of the Accounting Principles Board of the American
Institute of Certified Public Accountants, (ii) statements and pronouncements of
the Financial Accounting Standards Board, (iii) such other statements by such
other entity as approved by a significant segment of the accounting profession,
and (iv) the rules and regulations of the SEC governing the inclusion of
financial statements (including pro forma financial statements) in periodic
reports required to be filed pursuant to Section 13 of the Exchange Act,
including opinions and pronouncements in staff accounting bulletins and similar
written statements from the accounting staff of the SEC.
"Guarantee" means, without duplication, any obligation, contingent or
otherwise, of any Person directly or indirectly guaranteeing any Indebtedness of
any Person and any obligation, direct or indirect, contingent or otherwise, of
such Person (i) to purchase or pay (or advance or supply funds for the purchase
or payment of) such Indebtedness of such Person (whether arising by virtue of
partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or
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deposit in the ordinary course of business. The term "Guarantee" used as a verb
has a corresponding meaning. The term "Guarantor" shall mean any Person
Guaranteeing any obligation.
"Guarantor" means Denbury Resources Inc. or any successor thereto.
"Guaranty" means the Guarantee of the Notes by the Guarantor pursuant to
the Guaranty.
"Hedging Obligations" of any Person means the obligations of such Person
pursuant to any Oil and Gas Hedging Contract, Interest Rate Agreement or
Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become liable
for; provided, however, that any Indebtedness or Capital Stock of a Person
existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication), (i) the principal of and premium (if any)
in respect of (A) indebtedness of such Person for money borrowed and (B)
indebtedness evidenced by notes, debentures, bonds or other similar instruments
for the payment of which such Person is responsible or liable; (ii) all Capital
Lease Obligations of such Person and all Attributable Debt in respect of
Sale/Leaseback Transactions entered into by such Person; (iii) all obligations
of such Person issued or assumed as the deferred purchase price of property
(which purchase price is due more than six months after the date of taking
delivery of title to such property), including all obligations of such Person
for the deferred purchase price of property under any title retention agreement
(but excluding trade accounts payable arising in the ordinary course of
business); (iv) all obligations of such Person for the reimbursement of any
obligor on any letter of credit, banker's acceptance or similar credit
transaction (other than obligations with respect to letters of credit securing
obligations (other than obligations described in (i) through (iii) above)
entered into in the ordinary course of business of such Person to the extent
such letters of credit are not drawn upon or, if and to the extent drawn upon,
such drawing is reimbursed no later than the tenth Business Day following
receipt by such Person of a demand for reimbursement following payment on the
letter of credit); (v) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified Stock or,
with respect to any Subsidiary of such Person the liquidation preference with
respect to any Preferred Stock (but excluding, in each case, any accrued
dividends); (vi) all obligations of such Person relating to any Production
Payment or in respect of production imbalances (but excluding production
imbalances arising in the ordinary course of business); (vii) all obligations of
the type referred to in clauses (i) through (vi) of other Persons and all
dividends of other Persons for the payment of which, in either case, such Person
is responsible or liable, directly or indirectly, as obligor, guarantor or
otherwise, including by means of any Guarantee (including, with respect to any
Production Payment, any warranties or guarantees of production or payment by
such Person with respect to such Production Payment but excluding other
contractual obligations of such Person with respect to such Production Payment);
(viii) all obligations of the type referred to in clauses (i) through (vii) of
other Persons secured by any Lien on any property or asset of such
first-mentioned Person (whether or not such obligation is assumed by such
first-mentioned Person), the amount of such obligation being deemed to be the
lesser of the value of such property or assets or the amount of the obligation
so secured and (ix) to the extent not otherwise included in this definition,
Hedging Obligations of such Person. The amount of Indebtedness of any Person at
any date shall be the outstanding balance at such date of all unconditional
obligations as described above and the maximum liability, assuming the
contingency giving rise to the obligation were to have occurred on such date, of
any Guarantees outstanding at such date.
None of the following shall constitute Indebtedness: (i) indebtedness
arising from agreements providing for indemnification or adjustment of purchase
price or from guarantees securing any obligations of the Company or any of its
Subsidiaries pursuant to such agreements, incurred or assumed in connection with
the disposition of any business, assets or Subsidiary of the Company, other than
guarantees or similar credit
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support by the Company or any of its Subsidiaries of Indebtedness incurred by
any Person acquiring all or any portion of such business, assets or Subsidiary
for the purpose of financing such acquisition; (ii) any trade payables and other
accrued currently liabilities incurred in the ordinary course of business as the
deferred purchase price of property; (iii) obligations arising from guarantees
to suppliers, lessors, licensees, contractors, franchisees or customers incurred
in the ordinary course of business; (iv) obligations (other than express
Guarantees of indebtedness for borrowed money) in respect of Indebtedness of
other Persons arising in connection with (A) the sale or discount of accounts
receivable, (B) trade acceptances and (C) endorsements of instruments for
deposit in the ordinary course of business; (v) obligations in respect of
performance bonds provided by the Company or its Subsidiaries in the ordinary
course of business and refinancing thereof; (vi) obligations arising from the
honoring by a bank or other financial institution of a check, draft or similar
instrument drawn against insufficient funds in the ordinary course of business,
provided, however that such obligation is extinguished within two Business Days
of its incurrence; and (vii) obligations in respect of any obligations under
workers' compensation laws and similar legislation.
"Interest Rate Agreement" means any interest rate swap agreement, interest
rate cap agreement or other financial agreement or arrangement designed to
protect the Company or any Restricted Subsidiary against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers or joint interest partners or drilling
partnerships sponsored by the Company or any Restricted Subsidiary in the
ordinary course of business that are recorded as accounts receivable on the
balance sheet of the lender) or other extensions of credit (including by way of
Guarantee or similar arrangement) or capital contribution to (by means of any
transfer of cash or other property to others or any payment for property or
services for the account or use of others), or any purchase or acquisition of
Capital Stock, Indebtedness or other similar instruments issued by such Person.
For purposes of the definition of "Unrestricted Subsidiary", the definition of
"Restricted Payment" and the covenant described under "-- Certain
Covenants -- Limitation on Restricted Payments", (i) "Investment" shall include
the portion (proportionate to the Company's equity interest in such Subsidiary)
of the fair market value of the net assets of any Subsidiary of the Company at
the time that such Subsidiary is designated an Unrestricted Subsidiary;
provided, however, that upon a redesignation of such Subsidiary as a Restricted
Subsidiary, the Company shall be deemed to continue to have a permanent
"Investment" in an Unrestricted Subsidiary equal to an amount (if positive)
equal to (x) the Company's "Investment" in such Subsidiary at the time of such
redesignation less (y) the portion (proportionate to the Company's equity
interest in such Subsidiary) of the fair market value of the net assets of such
Subsidiary at the time of such redesignation; and (ii) any property transferred
to or from an Unrestricted Subsidiary shall be valued at its fair market value
at the time of such transfer, in each case as determined in good faith by the
Board of Directors.
"Issue Date" means the date on which the Notes are originally issued.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien or
charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Limited Recourse Indebtedness" means, with respect to any Production
Payments, Indebtedness, the terms of which limit the liability of the Company
and its Restricted Subsidiaries solely to the hydrocarbons covered by such
Production Payments; provided, however, that no default with respect to such
Indebtedness would permit any holder of any other Indebtedness of the Company or
any Restricted Subsidiary to declare a default on such other Indebtedness or
cause the payment thereof to be accelerated or payable prior to its stated
maturity.
"Material Change" means an increase or decrease (excluding changes that
result solely from changes in prices) of more than 15% during a fiscal quarter
in the discounted future net revenues from proved crude oil and natural gas
reserves of the Company and its Restricted Subsidiaries, calculated in
accordance with clause (a)(i) of the definition of Adjusted Consolidated Net
Tangible Assets; provided, however, that the following will be excluded from the
calculation of Material Change: (i) any acquisitions during the fiscal quarter
of oil and gas reserves that have been estimated by independent petroleum
engineers and with respect to which a report or reports of such engineers exist
and (ii) any disposition of properties existing at the beginning of such
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fiscal quarter that have been disposed of in compliance with the covenant
described under "-- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock".
"Moody's" means Moody's Investor's Service, Inc. and its successors.
"Net Available Cash" from an Asset Disposition means cash payments received
therefrom (including any cash payments received by way of deferred payment of
principal pursuant to a note or installment receivable or otherwise, but only as
and when received, but excluding any other consideration received in the form of
assumption by the acquiring Person of Indebtedness or other obligations relating
to such properties or assets or received in any other noncash form) in each case
net of (i) all legal, title and recording tax expenses, commissions and other
fees (including financial and other advisory fees) and expenses incurred, and
all Federal, state, provincial, foreign and local taxes required to be accrued
as a liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to such
Asset Disposition, in accordance with the terms of any Lien upon or other
security agreement of any kind with respect to such assets, or which must by its
terms, or in order to obtain a necessary consent to such Asset Disposition, or
by applicable law, be repaid out of the proceeds from such Asset Disposition,
(iii) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition and (iv) the deduction of appropriate amounts provided by the seller
as a reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and retained by
the Company or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital Stock,
means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
"Net Present Value" means, with respect to any proved hydrocarbon reserves,
the discounted future net cash flows associated with such reserves, determined
in accordance with the rules and regulations (including interpretations thereof)
of the SEC in effect on the Issue Date.
"Net Working Capital" means (a) all current assets of the Company and its
Restricted Subsidiaries minus (b) all current liabilities of the Company and its
Restricted Subsidiaries, except current liabilities included in Indebtedness,
determined in accordance with GAAP.
"Oil and Gas Business" means the business of the exploration for, and
exploitation, development, acquisition, production, processing (but not
refining), marketing, storage and transportation of, hydrocarbons, and other
related energy and natural resource businesses (including oil and gas services
businesses related to the foregoing).
"Oil and Gas Hedging Contract" means any oil and gas purchase or hedging
agreement, and other agreement or arrangement, in each case, that is designed to
provide protection against oil and gas price fluctuations.
"Permitted Business Investment" means any investment made in the ordinary
course of, and of a nature that is or shall have become customary in, the Oil
and Gas Business including investments or expenditures for actively exploiting,
exploring for, acquiring, developing, producing, processing, gathering,
marketing or transporting oil and gas through agreements, transactions,
interests or arrangements which permit one to share risks or costs, comply with
regulatory requirements regarding local ownership or satisfy other objectives
customarily achieved through the conduct of Oil and Gas Business jointly with
third parties, including (i) ownership interests in oil and gas properties,
processing facilities, gathering systems or ancillary real property interests
and (ii) Investments in the form of or pursuant to operating agreements,
processing agreements, farm-in agreements, farm-out agreements, development
agreements, area of mutual interest agreements, unitization agreements, pooling
agreements, joint bidding agreements, service contracts, joint venture
agreements, partnership agreements (whether general or limited), subscription
agreements, stock purchase agreements and other similar agreements with third
parties.
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"Permitted Holders" means The Texas Pacific Group.
"Permitted Investment" means an Investment by the Company or any Restricted
Subsidiary in (i) a Restricted Subsidiary or a Person that will, upon the making
of such Investment, become a Restricted Subsidiary; provided, however,that the
primary business of such Restricted Subsidiary is an Oil and Gas Business; (ii)
another Person if as a result of such Investment such other Person is merged or
consolidated with or into, or transfers or conveys all or substantially all its
assets to, the Company or a Restricted Subsidiary; provided, however, that such
Person's primary business is an Oil and Gas Business; (iii) Temporary Cash
Investments; (iv) receivables owing to the Company or any Restricted Subsidiary
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as the Company or
any such Restricted Subsidiary deems reasonable under the circumstances; (v)
payroll, travel and similar advances to cover matters that are expected at the
time of such advances ultimately to be treated as expenses for accounting
purposes and that are made in the ordinary course of business; (vi) loans or
advances to employees made in the ordinary course of business; (vii) stock,
obligations or securities received in settlement of debts created in the
ordinary course of business and owing to the Company or any Restricted
Subsidiary or in satisfaction of judgments; (viii) any Person to the extent such
Investment represents the non-cash portion of the consideration received for an
Asset Disposition as permitted pursuant to the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
(ix) Permitted Business Investments.
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, minor encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially impair their use in
the operation of the business of such Person; (f) Liens securing Indebtedness
Incurred to finance the construction, purchase or lease of, or repairs,
improvements or additions to, property of such Person (including Liens securing
Indebtedness of the pollution control or revenue bond type); provided, however,
that the Lien may not extend to any other property owned by such Person or any
of its Subsidiaries at the time the Lien is Incurred, and the Indebtedness
secured by the Lien may not be Incurred more than 180 days after the later of
the acquisition, completion of construction, repair, improvement, addition or
commencement of full operation of the property subject to the Lien; (g) Liens to
secure Indebtedness permitted under the provisions described in clause (b)(1) or
(b)(8) under "-- Certain Covenants -- Limitation on Indebtedness"; provided,
however, that any such Lien securing Indebtedness described in such clause
(b)(8) shall be limited to the hydrocarbons related thereto and any gathering
systems utilized in gathering and transporting such hydrocarbons; (h) Liens
existing on the Issue Date; (i) Liens on property or shares of Capital Stock of
another Person at the time such other Person becomes a Subsidiary of such
Person; provided, however, that such Liens are not created, incurred or assumed
in connection with, or in contemplation of, such other Person becoming such a
Subsidiary; provided further, however, that such Lien may not extend to any
other property owned by such Person or any of its Subsidiaries; (j) Liens on
property at the time such Person or any of its Subsidiaries acquires the
property, including any
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acquisition by means of a merger or consolidation with or into such Person or a
Subsidiary of such Person; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that the Liens may not extend to any
other property owned by such Person or any of its Subsidiaries; (k) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a wholly owned Subsidiary of such Person (or, in the case of
the Company, to a Wholly Owned Subsidiary); (l) Liens securing Hedging
Obligations so long as such Hedging Obligations relate to Indebtedness that is,
and is permitted to be under the Indenture, secured by a Lien on the same
property securing such Hedging Obligations; (m) Liens arising in the ordinary
course of business in favor of the United States, any state thereof, any foreign
country or any department, agency, instrumentality or political subdivision of
any such jurisdiction, to secure partial, progress, advance or other payments
pursuant to any contract or statute; (n) Liens to secure any Refinancing (or
successive Refinancing) as a whole, or in part, of any Indebtedness secured by
any Lien referred to in the foregoing clause (f), (h), (i) and (j); provided,
however, that (x) such new Lien shall be limited to all or part of the same
property that secured the original Lien (plus improvements to or on such
property) and (y) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (A) the outstanding principal
amount or, if greater, committed amount of the Indebtedness described under
clause (f), (h), (i) or (j) at the time the original Lien became a Permitted
Lien and (B) an amount necessary to pay any fees and expenses, including
premiums, related to such refinancing, refunding, extension, renewal or
replacement; (o) Liens on, or related to, properties to secure all or part of
the costs incurred in the ordinary course of business of exploration, drilling,
development, production, processing, transportation, marketing or storage or
operation thereof; (p) Liens on pipeline or pipeline facilities, hydrocarbons or
other properties which arise out of operation of law; (q) Liens reserved in oil
and gas mineral leases for bonus or rental payments and for compliance with the
terms of such leases; (r) Liens arising under partnership agreements, oil and
gas leases, farm-out agreements, division orders, contracts for the sale,
purchase, exchange, transportation or processing (but not the refining) of oil,
gas or other hydrocarbons, unitization and pooling declarations and agreements,
development agreements, operating agreements, area of mutual interest
agreements, and other similar agreements which are customary in the Oil and Gas
Business; (s) judgment and attachment Liens not giving rise to an Event of
Default or Liens created by or existing from any litigation or legal proceeding
that are currently being contested in good faith by appropriate proceedings and
for which adequate reserves have been made; (t) Liens in favor of collecting or
payor banks having a right of setoff, revocation, refund or chargeback with
respect to money or instruments of the Company or any Subsidiary on deposit with
or in possession of such bank; and (u) royalties, overriding royalties, revenue
interests, net revenue interests, net profit interests, reversionary interests,
production payments, production sales contracts, operating agreements, and other
similar interests, properties, arrangements, and agreements, all as ordinarily
exist with respect to the Company's properties. Notwithstanding the foregoing,
"Permitted Liens" will not include any Lien described in clause (f), (i) or (j)
above to the extent (A) such Lien applies to any Additional Assets or Permitted
Business Investment acquired directly or indirectly from Net Available Cash
pursuant to clause (a)(i)(B) or paragraph (c) of the covenant described under
"-- Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and
(B) the fair value of such Additional Assets or Permitted Business Investment is
less than the sum of (x) the amount of Indebtedness secured by such Lien plus
(y) the amount of Net Available Cash so invested in such Additional Assets or
Permitted Business Investment.
"Permitted Marketing Obligations" means Indebtedness of the Company or any
Restricted Subsidiary under letter of credit or borrowed money obligations, or
in lieu of or in addition to such letters of credit or borrowed money,
guarantees of such Indebtedness or other obligations of the Company or any
Restricted Subsidiary by any other Restricted Subsidiary, as applicable, related
to the purchase by the Company or any Restricted Subsidiary of hydrocarbons for
which the Company or such Restricted Subsidiary has contracts to sell; provided,
however, that in the event that such Indebtedness or obligations are guaranteed
by the Company or any Restricted Subsidiary, then either (i) the Person with
which the Company or such Restricted Subsidiary has contracts to sell has an
investment grade credit rating from S&P or Moody's, or in lieu thereof, a Person
guaranteeing the payment of such obligated Person has an investment grade credit
rating from S & P or Moody's, or (ii) such Person posts, or has posted for it, a
letter of credit in favor of the Company or such
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Restricted Subsidiary with respect to all such Person's obligations to the
Company or such Restricted Subsidiary under such contracts.
"Person" means any individual, corporation, partnership, joint venture,
association, joint-stock company, trust, unincorporated organization, government
or any agency or political subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any corporation,
means Capital Stock of any class or classes (however designated) which is
preferred as to the payment of dividends, or as to the distribution of assets
upon any voluntary or involuntary liquidation or dissolution of such
corporation, over shares of Capital Stock of any other class of such
corporation.
The term "principal" of a Note means the principal of the Note plus the
premium, if any, payable on the Note which is due or overdue or is to become due
at the relevant time.
"Production Payments" means, collectively, Dollar-Denominated Production
Payments and Volumetric Production Payments.
"Public Market" means any time when at least 15% of the total issued and
outstanding common stock of DRI has been distributed by means of an effective
registration statement under the Securities Act or sales pursuant to Rule 144
under the Securities Act.
"Refinance" means, in respect of any Indebtedness, to refinance, extend,
renew, refund, repay, prepay, redeem, decease or retire, or to issue other
Indebtedness in exchange or replacement for, such Indebtedness. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of
the Company or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.
"Representative" means any trustee, agent or representative (if any) for an
issue of Senior Indebtedness of the Company or of a Guarantor.
"Restricted Payment" with respect to any Person means (i) the declaration
or payment of any dividends or any other distributions of any sort in respect of
its Capital Stock (including any payment in connection with any merger or
consolidation involving such Person) or similar payment to the direct or
indirect holders of its Capital Stock (other than (x) dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock), (y)
dividends or distributions payable solely to the Company or a Restricted
Subsidiary, and (z) pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Company held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock), (iii) the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations of such Person (other than the purchase, repurchase or
other acquisition of Subordinated Obligations
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purchased in anticipation of satisfying a sinking fund obligation, principal
installment or final maturity, in each case due within one year of the date of
acquisition) or (iv) the making of any Investment (other than a Permitted
Investment) in any Person.
"Restricted Subsidiary" means any Subsidiary of the Company that is not an
Unrestricted Subsidiary.
"S&P" means Standard & Poor's Rating Services, a division of The
McGraw-Hill Company, Inc., and its successors.
"Sale/Leaseback Transaction" means an arrangement relating to property now
owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person, provided that the fair market value of such property
(as reasonably determined by the Board of Directors acting in good faith) is $10
million or more.
"SEC" means the Securities and Exchange Commission.
"Secured Indebtedness" means any Indebtedness of the Company secured by a
Lien.
"Senior Indebtedness" means with respect to any Person (i) Indebtedness of
such Person, and all obligations of such Person under any Credit Facility,
whether outstanding on the Issue Date or thereafter Incurred and (ii) accrued
and unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating such Person to the extent
post-filing interest is allowed in such proceeding) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
such Person is responsible or liable unless, with respect to obligations
described in the immediately preceding clause (i) or (ii), in the instrument
creating or evidencing the same or pursuant to which the same is outstanding, it
is provided that such obligations are not superior in right of payment to the
Notes or the Guaranty; provided, however, that Senior Indebtedness shall not
include (1) any obligation of such Person to any Subsidiary of such Person, (2)
any liability for Federal, state, local or other taxes owed or owing by such
Person, (3) any accounts payable or other liability to trade creditors arising
in the ordinary course of business (including guarantees thereof or instruments
evidencing such liabilities), (4) any Indebtedness of such Person (and any
accrued and unpaid interest in respect thereof) which is subordinate or junior
in any respect to any other Indebtedness or other obligation of such Person or
(5) that portion of any Indebtedness which at the time of Incurrence is Incurred
in violation of the Indenture (other than, in the case of the Company or the
Guarantor, Indebtedness under any Credit Facility that is Incurred on the basis
of a representation by the Company or the Guarantor to the applicable lenders
that such Person is permitted to Incur such Indebtedness under the Indenture).
"Senior Subordinated Indebtedness" means (i) with respect to the Company,
the Notes and any other Indebtedness of the Company that specifically provides
that such Indebtedness is to rank pari passu with the Notes in right of payment
and is not subordinated by its terms in right of payment to any Indebtedness or
other obligation of the Company which is not Senior Indebtedness of the Company
and (ii) with respect to the Guarantor, its Guaranty of the Notes and any other
indebtedness of such Person that specifically provides that such Indebtedness
rank pari passu with the Guaranty in respect of payment and is not subordinated
by its terms in respect of payment to any Indebtedness or other obligation of
such Person which is not Senior Indebtedness of such Person.
"Significant Subsidiary" means any Restricted Subsidiary that would be a
"Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the date specified
in such security as the fixed date on which the final payment of principal of
such security is due and payable, including pursuant to any mandatory redemption
provision (but excluding any provision providing for the repurchase of such
security at the option of the holder thereof upon the happening of any
contingency unless such contingency has occurred).
"Stock Offering" means a primary offering, whether public or private, of
shares of common stock of DRI.
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"Subordinated Obligation" means any Indebtedness of the Company or the
Guarantor (whether outstanding on the Issue Date or thereafter Incurred) which
is subordinate or junior in right of payment to, in the case of the Company, the
Notes or, in the case of the Guarantor, the Guaranty pursuant to a written
agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation, association,
partnership or other business entity of which more than 50% of the total voting
power of shares of Capital Stock or other interests (including partnership
interests) entitled (without regard to the occurrence of any contingency) to
vote in the election of directors, managers or trustees thereof is at the time
owned or controlled, directly or indirectly, by (i) such Person, (ii) such
Person and one or more Subsidiaries of such Person or (iii) one or more
Subsidiaries of such Person.
"Temporary Cash Investments" means any of the following: (i) any investment
in direct obligations of the United States of America or any agency thereof or
obligations guaranteed by the United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of deposit and money
market deposits maturing within 180 days of the date of acquisition thereof
issued by a bank or trust company which is organized under the laws of the
United States of America, any state thereof or any foreign country recognized by
the United States, and which bank or trust company has capital, surplus and
undivided profits aggregating in excess of $50.0 million (or the foreign
currency equivalent thereof) and has outstanding debt which is rated "A" (or
such similar equivalent rating) or higher by at least one nationally recognized
statistical rating organization (as defined in Rule 436 under the Securities
Act) or any money-market fund sponsored by a registered broker dealer or mutual
fund distributor, (iii) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (i) above
entered into with a bank meeting the qualifications described in clause (ii)
above, (iv) investments in commercial paper, maturing not more than 180 days
after the date of acquisition, issued by a Person (other than an Affiliate of
the Company) organized and in existence under the laws of the United States of
America or any foreign country recognized by the United States of America with a
rating at the time as of which any investment therein is made of "P-2" (or
higher) according to Moody's or "A-2" (or higher) according to S&P, and (v)
investments in securities with maturities of six months or less from the date of
acquisition issued or fully guaranteed by any state, commonwealth or territory
of the United States of America, or by any political subdivision or taxing
authority thereof, and rated at least "A" by S&P or "A" by Moody's.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that at
the time of determination shall be designated an Unrestricted Subsidiary by the
Board of Directors in the manner provided below and (ii) any Subsidiary of an
Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary of
the Company (including any newly acquired or newly formed Subsidiary) to be an
Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries owns
any Capital Stock or Indebtedness of, or holds any Lien on any property of, the
Company or any other Subsidiary of the Company that is not a Subsidiary of the
Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under "-- Certain Covenants -- Limitation on
Restricted Payments". The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under
"-- Certain Covenants -- Limitation on Indebtedness" and (y) no Default shall
have occurred and be continuing. Any such designation by the Board of Directors
shall be evidenced by the Company to the Trustee by promptly filing with the
Trustee a copy of the board resolution giving effect to such designation and an
Officers' Certificate certifying that such designation complied with the
foregoing provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable at the issuer's option.
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"Volumetric Production Payments" means production payment obligations
recorded as deferred revenue in accordance with GAAP, together with all
undertakings and obligations in connection therewith.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares and shares held by other
Persons to the extent such shares are required by applicable law to be held by a
Person other than the Company or a Restricted Subsidiary) is owned by the
Company or one or more Wholly Owned Subsidiaries.
CERTAIN COVENANTS
The Indenture contains covenants including, among others, the following:
LIMITATION ON INDEBTEDNESS. (a) The Company shall not, and shall not permit
any Restricted Subsidiary to, Incur, directly or indirectly, any Indebtedness;
provided, however, that the Company or Restrictive Subsidiary may Incur
Indebtedness if, on the date of such Incurrence and after giving effect thereto,
either (i) the Consolidated Coverage Ratio equals or exceeds to 1.0, or
(ii) the Adjusted Consolidated Net Tangible Assets would be equal to or greater
than % of Consolidated Indebtedness.
(b) Notwithstanding the foregoing paragraph (a), the Company and any
Restricted Subsidiary may Incur the following Indebtedness:
(1) Indebtedness Incurred pursuant to any Credit Facility, so long as
the aggregate amount of all Indebtedness outstanding under all Credit
Facilities does not, at any one time, exceed the aggregate amount of
borrowing availability as of such date under all Credit Facilities that
determine availability on the basis of a borrowing base or other
asset-based calculation; provided, however, that in no event shall such
amount exceed the greater of (x) $ million and (y) % of ACNTA as of
the date of such Incurrence;
(2) Indebtedness owed to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of
any Capital Stock which results in any such Wholly Owned Subsidiary ceasing
to be a Wholly Owned Subsidiary or any subsequent transfer of such
Indebtedness (other than to the Company or another Wholly Owned Subsidiary)
shall be deemed, in each case, to constitute the Incurrence of such
Indebtedness by the issuer thereof;
(3) The Notes (other than additional Notes) and the Guaranty;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this covenant);
(5) Indebtedness or Preferred Stock of a Restricted Subsidiary
Incurred and outstanding on or prior to the date on which such Restricted
Subsidiary was acquired by the Company (other than Indebtedness or
Preferred Stock Incurred in connection with, or to provide all or any
portion of the funds or credit support utilized to consummate, the
transaction or series of related transactions pursuant to which such
Restricted Subsidiary became a Restricted Subsidiary or was acquired by the
Company);
(6) Refinancing Indebtedness in respect of Indebtedness Incurred
pursuant to paragraph (a) or pursuant to clause (3), (4), (5) above, or
this clause (6); provided, however, that to the extent such Refinancing
Indebtedness directly or indirectly Refinances Indebtedness or Preferred
Stock of a Restricted Subsidiary described in clause (5), such Refinancing
Indebtedness shall be Incurred only by such Restricted Subsidiary or the
Company;
(7) Indebtedness of the Company or a Restricted Subsidiary represented
by Capital Lease Obligations, mortgage financings or purchase money
obligations, in each case Incurred for the purpose of financing all or any
part of the purchase price or cost of construction or improvement of
property used in an Oil and Gas Business or Incurred to Refinance any such
purchase price or cost of construction or
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improvement, in each case (other than a Refinancing) Incurred no later than
365 days after the date of such acquisition or the date of completion of
such construction or improvement; provided, however, that the principal
amount of any Indebtedness Incurred pursuant to this clause (7) (other than
a Refinancing) in any single calendar year shall not exceed $ million;
(8) Indebtedness with respect to Production Payments; provided,
however, that any such Indebtedness shall be Limited Recourse Indebtedness;
provided further, however, that the Net Present Value of the reserves
related to such Production Payments shall not exceed % of ACNTA at the
time of Incurrence;
(9) Indebtedness consisting of Interest Rate Agreements directly
related to Indebtedness permitted to be Incurred by the Company and its
Restricted Subsidiaries pursuant to the Indenture;
(10) Indebtedness under Oil and Gas Hedging Contracts and Currency
Agreements entered into in the ordinary course of business for the purpose
of limiting risks that arise in the ordinary course of business of the
Company and its Restricted Subsidiaries;
(11) Indebtedness in respect of letters of credit issued for the
benefit of the Company or any of its Restricted Subsidiaries to the extent
they are issued in connection with the ordinary course of business of the
Company and its Restricted Subsidiaries, Incurred in an aggregate amount
which, when taken together with the amount of all other Indebtedness
Incurred pursuant to this clause (11) and then outstanding, does not exceed
the greater of (x) $ million and (y) % of the maximum Indebtedness
that would at such time be permitted to be outstanding pursuant to clause
(b)(1) above;
(12) Indebtedness of the Company or a Restricted Subsidiary Incurred
to finance capital expenditures and Refinancing Indebtedness Incurred in
respect thereof in an aggregate amount which, when taken together with the
amount of all other Indebtedness Incurred pursuant to this clause (12) and
then outstanding, does not exceed $ million;
(13) Permitted Marketing Obligations; and
(14) Indebtedness in an aggregate amount which, together with the
amount of all other Indebtedness of the Company and its Restricted
Subsidiaries outstanding on the date of such Incurrence (other than
Indebtedness permitted by clauses (1) through (13) above or paragraph (a))
does not exceed $ million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations of the
Company unless such Indebtedness shall be subordinated to the Notes to at least
the same extent as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant, (i)
in the event that an item of Indebtedness meets the criteria of more than one of
the types of Indebtedness described above, the Company, in its sole discretion,
will classify such item of Indebtedness and only be required to include the
amount and type of such Indebtedness in one of the above clauses and (ii) an
item of Indebtedness may be divided and classified in more than one of the types
of Indebtedness described above.
(e) Notwithstanding paragraphs (a) and (b) above, neither the Company nor
the Guarantor shall Incur any Indebtedness if such Indebtedness is subordinate
or junior in ranking in any respect to any Senior Indebtedness of the Company or
the Guarantor, unless such Indebtedness is Senior Subordinated Indebtedness of
the Company or the Guarantor.
LIMITATION ON RESTRICTED PAYMENTS. (a) The Company shall not, and shall not
permit any Restricted Subsidiary, directly or indirectly, to make a Restricted
Payment if at the time the Company or such Restricted Subsidiary makes such
Restricted Payment: (1) a Default shall have occurred and be continuing (or
would result therefrom); (2) the Company is not able to Incur an additional
$1.00 of Indebtedness pursuant to paragraph (a) of the covenant described under
"-- Limitation on Indebtedness"; or (3) the aggregate amount of such Restricted
Payment and all other Restricted Payments since the Issue Date would exceed the
sum of:
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(A) 50% of the Consolidated Net Income accrued during the period (treated as one
accounting period) from the beginning of the fiscal quarter immediately
following the fiscal quarter during which the Notes are originally issued to the
end of the most recent fiscal quarter ending at least 45 days prior to the date
of such Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit); (B) the aggregate Net Cash Proceeds
received by the Company from the issuance or sale of its Capital Stock (other
than Disqualified Stock) subsequent to the Issue Date (other than an issuance or
sale to a Subsidiary of the Company and other than an issuance or sale to an
employee stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees); (C) the aggregate Net Cash
Proceeds received by the Company from the issue or sale subsequent to the Issue
Date of its Capital Stock (other than Disqualified Stock) to an employee stock
ownership plan; provided, however, that if such employee stock ownership plan
incurs any Indebtedness with respect thereto, such aggregate amount shall be
limited to an amount equal to any increase in the Consolidated Net Worth of the
Company resulting from principal repayments made by such employee stock
ownership plan with respect to such Indebtedness; (D) the amount by which
Indebtedness of the Company is reduced on the Company's balance sheet upon the
conversion or exchange (other than by a Subsidiary of the Company) subsequent to
the Issue Date, of any Indebtedness of the Company convertible or exchangeable
for Capital Stock (other than Disqualified Stock) of the Company (less the
amount of any cash, or the fair value of any other property, distributed by the
Company upon such conversion or exchange); and (E) an amount equal to the sum of
(i) the net reduction in Investments in Unrestricted Subsidiaries resulting from
dividends, repayments of loans or advances or other transfers of assets, in each
case to the Company or any Restricted Subsidiary from Unrestricted Subsidiaries,
and (ii) the portion (proportionate to the Company's equity interest in such
Subsidiary) of the fair market value of the net assets of an Unrestricted
Subsidiary at the time such Unrestricted Subsidiary is designated a Restricted
Subsidiary; provided, however, that the foregoing sum shall not exceed, in the
case of any Unrestricted Subsidiary, the amount of Investments previously made
(and treated as a Restricted Payment) by the Company or any Restricted
Subsidiary in such Unrestricted Subsidiary.
(b) The provisions of the foregoing paragraph (a) shall not prohibit: (i)
any purchase or redemption of Capital Stock or Subordinated Obligations of the
Company made by exchange for, or out of the proceeds of the substantially
concurrent sale of, Capital Stock of the Company (other than Disqualified Stock
and other than Capital Stock issued or sold to a Subsidiary of the Company or an
employee stock ownership plan or to a trust established by the Company or any of
its Subsidiaries for the benefit of their employees); provided, however, that
(A) such purchase or redemption shall be excluded in the calculation of the
amount of Restricted Payments and (B) the Net Cash Proceeds from such sale shall
be excluded from the calculation of amounts under clause (3)(B) of paragraph (a)
above (but only to the extent that such Net Cash Proceeds were used to purchase
or redeem such Capital Stock as provided in this clause (i)); (ii) any purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value
of Subordinated Obligations of the Company made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Indebtedness of the Company
which is permitted to be Incurred pursuant to the covenant described under
"-- Limitation on Indebtedness"; provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement for value
shall be excluded in the calculation of the amount of Restricted Payments; (iii)
dividends paid within 60 days after the date of declaration thereof if at such
date of declaration such dividend would have complied with this covenant;
provided, however, that at the time of payment of such dividend, no other
Default shall have occurred and be continuing (or result therefrom); provided
further, however, that such dividend shall be included in the calculation of the
amount of Restricted Payments; (iv) the repurchase of shares of, or options to
purchase shares of, common stock of the Company or any of its Subsidiaries from
employees, former employees, directors or former directors of the Company or any
of its Subsidiaries (or permitted transferees of such employees, former
employees, directors or former directors), pursuant to the terms of the
agreements (including employment agreements) or plans (or amendments thereto)
approved by the Board of Directors under which such individuals purchase or sell
or are granted the option to purchase or sell, shares of such common stock;
provided, however, that the aggregate amount of such repurchases shall not
exceed $ million in any calendar year and $ million in the aggregate;
provided further, however, that such repurchases shall be excluded in the
calculation of the amount of Restricted Payments; or (v) other Restricted
Payments in an aggregate amount not to exceed $ million; provided
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however, that such Restricted Payments shall be excluded in the calculation of
the amount of Restricted Payments.
LIMITATION ON RESTRICTIONS ON DISTRIBUTIONS FROM RESTRICTED SUBSIDIARIES.
The Company shall not, and shall not permit any Restricted Subsidiary to, create
or otherwise cause or permit to exist or become effective any consensual
encumbrance or restriction on the ability of any Restricted Subsidiary (a) to
pay dividends or make any other distributions on its Capital Stock or pay any
Indebtedness owed to the Company or a Restricted Subsidiary, (b) to make any
loans or advances to the Company or a Restricted Subsidiary or (c) to transfer
any of its property or assets to the Company or a Restricted Subsidiary, except:
(i) any encumbrance or restriction pursuant to an agreement in effect at or
entered into on the Issue Date; (ii) any encumbrance or restriction with respect
to a Restricted Subsidiary pursuant to an agreement relating to any Indebtedness
Incurred by such Restricted Subsidiary on or prior to the date on which such
Restricted Subsidiary was acquired by the Company (other than Indebtedness
Incurred as consideration in, or to provide all or any portion of the funds or
credit support utilized to consummate, the transaction or series of related
transactions pursuant to which such Restricted Subsidiary became a Restricted
Subsidiary or was acquired by the Company) and outstanding on such date; (iii)
any encumbrance or restriction pursuant to an agreement effecting a Refinancing
of Indebtedness Incurred pursuant to an agreement referred to in clause (i) or
(ii) of this covenant or this clause (iii) or contained in any amendment to an
agreement referred to in clause (i) or (ii) of this covenant or this clause
(iii); provided, however, that the encumbrances and restrictions with respect to
such Restricted Subsidiary contained in any such refinancing agreement or
amendment are no less favorable to the Noteholders than encumbrances and
restrictions with respect to such Restricted Subsidiary contained in such
agreements; (iv) any such encumbrance or restriction consisting of customary
nonassignment provisions in leases governing leasehold interests to the extent
such provisions restrict the transfer of the lease or the property leased
thereunder; (v) in the case of clause (c) above, restrictions contained in
security agreements or mortgages securing Indebtedness of a Restricted
Subsidiary to the extent such restrictions restrict the transfer of the property
subject to such security agreements or mortgages; and (vi) any restriction with
respect to a Restricted Subsidiary imposed pursuant to an agreement entered into
for the sale or disposition of all or substantially all the Capital Stock or
assets of such Restricted Subsidiary pending the closing of such sale or
disposition.
LIMITATION ON SALES OF ASSETS AND SUBSIDIARY STOCK. (a) In the event and to
the extent that the Net Available Cash received by the Company or any Restricted
Subsidiary from one or more Asset Dispositions occurring on or after the Issue
Date in any period of 12 consecutive months exceeds 15% of Adjusted Consolidated
Net Tangible Assets as of the beginning of such 12-month period, then the
Company shall (i) within 180 days (in the case of (A) below) or 18 months (in
the case of (B) below) after date such Net Available Cash so received exceeds
such 15% of Adjusted Consolidated Net Tangible Assets (A) apply an amount equal
to such excess Net Available Cash to repay Senior Indebtedness or Indebtedness
of a Restricted Subsidiary, in each case owing to a Person other than the
Company or any Affiliate of the Company or (B) invest an equal amount, or the
amount not so applied pursuant to clause (A), in Additional Assets or a
Permitted Business Investment or (ii) apply such excess Net Available Cash (to
the extent not applied pursuant to clause (i)) as provided in the following
paragraphs of this covenant. The amount of such excess Net Available Cash
required to be applied during the applicable period and not applied as so
required by the end of such period shall constitute "Excess Proceeds."
If, as of the first day of any calendar month, the aggregate amount of
Excess Proceeds not theretofore subject to an Excess Proceeds Offer (as defined
below) totals at least $ million, the Company must, not later than the
fifteenth Business Day of such month, make an offer (an "Excess Proceeds Offer")
to purchase from the Holders on a pro rata basis an aggregate principal amount
of Notes equal to the Excess Proceeds (rounded down to the nearest multiple of
$1,000) on such date, at a purchase price equal to 100% of the principal amount
of such Notes, plus, in each case, accrued interest (if any) to the date of
purchase (the "Excess Proceeds Payment").
The Company will comply, to the extent applicable, with the requirements of
Section 14(e) of the Exchange Act and any other securities laws or regulations
thereunder in the event that such Excess Proceeds are received by the Company
under this covenant and the Company is required to repurchase Notes as
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described above. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this covenant, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this covenant by virtue thereof.
(c) In the event of an Asset Disposition by the Company or any Restricted
Subsidiary that consists of a sale of hydrocarbons and results in Production
Payments, the Company or such Restricted Subsidiary shall apply an amount equal
to the Net Available Cash received by the Company or such Restricted Subsidiary
to (i) reduce Senior Indebtedness of the Company or Indebtedness of a Restricted
Subsidiary, in each case owing to a Person other than the Company or any
Affiliate of the Company, within 180 days after the date such Net Available Cash
is so received, or (ii) invest in Additional Assets or a Permitted Business
Investment within 18 months after the date such Net Available Cash is so
received.
LIMITATION ON AFFILIATE TRANSACTIONS. (a) The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person who is not such an Affiliate, (2) if such Affiliate
Transaction involves an amount in excess of $ million, is set forth in
writing and has been approved by a majority of the members of the Board of
Directors having no personal stake in such Affiliate Transaction or (3) if such
Affiliate Transaction involves an amount in excess of $ million, has been
determined by a nationally recognized investment banking firm or other qualified
independent appraiser to be fair, from a financial standpoint, to the Company
and its Restricted Subsidiaries.
(b) The provisions of the foregoing paragraph (a) shall not prohibit (i)
any sale of hydrocarbons or other mineral products to an Affiliate of the
Company or the entering into or performance of Oil and Gas Hedging Contracts,
gas gathering, transportation or processing contracts or oil or natural gas
marketing or exchange contracts with an Affiliate of the Company, in each case,
in the ordinary course of business, so long as the terms of any such transaction
are approved by a majority of the members of the Board of Directors who are
disinterested with respect to such transaction, (ii) the sale to an Affiliate of
the Company of Capital Stock of the Company that does not constitute
Disqualified Stock, (iii) transactions contemplated by any employment agreement
or other compensation plan or arrangement existing on the Issue Date or
thereafter entered into by the Company or any of its Restricted Subsidiaries in
the ordinary course of business, (iv) transactions between or among the Company
and its Restricted Subsidiaries, (v) transactions between the Company or any of
its Restricted Subsidiaries and Persons that are controlled (as defined in the
definition of "Affiliate") by the Company (an "Unrestricted Affiliate); provided
that no other Person that controls (as so defined) or is under common control
with the Company holds any Investments in such Unrestricted Affiliate; (vi)
Restricted Payments and Permitted Investments that are permitted by the
provisions of the Indenture described above under the caption "-- Limitation on
Restricted Payments", and (vii) loans or advances to employees in the ordinary
course of business and approved by the Company's Board of Directors in an
aggregate principal amount not to exceed $ million outstanding at any one
time.
CHANGE OF CONTROL. (a) Upon the occurrence of a Change of Control, each
Holder shall have the right to require that the Company repurchase such Holder's
Notes at a purchase price in cash equal to 101% of the principal amount thereof
plus accrued and unpaid interest, if any, to the date of purchase (subject to
the right of Holders of record on the relevant record date to receive interest
on the relevant interest payment date), in accordance with the terms
contemplated in paragraph (b) below.
In the event that at the time of such Change of Control the terms of the
Indebtedness under the Credit Agreement restrict or prohibit the repurchase of
Notes pursuant to this covenant, then prior to the mailing of the notice to
Holders provided for in paragraph (b) below, but in any event within 30 days
following any Change of Control, the Company shall (i) repay in full all
Indebtedness and repay such Indebtedness of each lender which has accepted such
offer or (ii) obtain the requisite consent under the agreements governing the
Indebtedness under the Credit Agreement to permit the repurchase of the Notes as
provided for in paragraph (b) below.
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(b) Within 30 days following a Change of Control, the Company shall mail a
notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
principal amount thereof plus accrued and unpaid interest, if any, to the date
of purchase (subject to the right of Holders of record on the relevant record
date to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (3) the
repurchase date (which shall be no earlier than 30 days nor later than 60 days
from the date such notice is mailed); and (4) the instructions determined by the
Company, consistent with this covenant, that a Holder must follow in order to
have its Notes purchased.
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the repurchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with the provisions of this covenant, the Company shall
comply with the applicable securities laws and regulations and shall not be
deemed to have breached its obligations under this covenant by virtue thereof.
The Change of Control purchase feature is a result of negotiations between
the Company and the Underwriters. Management has no present intention to engage
in a transaction involving a Change of Control, although it is possible that the
Company would decide to do so in the future. Subject to the limitations
discussed below, the Company could, in the future, enter into certain
transactions, including acquisitions, refinancing or other recapitalizations,
that would not constitute a Change of Control under the Indenture, but that
could increase the amount of indebtedness outstanding at such time or otherwise
affect the Company's capital structure or credit ratings. Restrictions on the
ability of the Company to incur additional Indebtedness are contained in the
covenants described under "-- Limitation on Indebtedness", "-- Limitation on
Liens" and "-- Limitation on Sale/Leaseback Transactions". Such restrictions can
only be waived with the consent of the holders of a majority in principal amount
of the Notes then outstanding. Except for the limitations contained in such
covenants, however, the Indenture will not contain any covenants or provisions
that may afford holders of the Notes protection in the event of a highly
leveraged transaction.
The Credit Agreement prohibits the Company from purchasing any Notes and
also provides that the occurrence of certain change of control events with
respect to the Company would constitute a default thereunder. In the event a
Change of Control occurs at a time when the Company is prohibited from
purchasing Notes, the Company could seek the consent of its lenders to the
purchase of Notes or could attempt to refinance the borrowings that contain such
prohibition. If the Company does not obtain such a consent or repay such
borrowings, the Company will remain prohibited from purchasing Notes. In such
case, the Company's failure to purchase tendered Notes would constitute an Event
of Default under the Indenture which would, in turn, constitute a default under
the Credit Agreement. In such circumstances, the subordination provisions in the
Indenture would likely restrict payment to the Holders of Notes.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be repurchased upon a Change of Control. Moreover,
the exercise by the Holders of their right to require the Company to repurchase
the Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such repurchase on the
Company. Finally, the Company's ability to pay cash to the holders of Notes
following the occurrence of a Change of Control may be limited by the Company's
then existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required repurchases.
The provisions under the Indenture relating to the Company's obligation to
make an offer to repurchase the Notes as a result of a Change of Control may be
waived or modified with the written consent of the holders of a majority in
principal amount of the Notes.
The Company will not be required to make an offer to purchase the Notes as
a result of a Change of Control if a third party (i) makes such offer in the
manner, at the times and otherwise in compliance with the
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requirements set forth in the Indenture relating to the Company's obligations to
make such an offer and (ii) purchases all Notes validly tendered and not
withdrawn under such an offer.
LIMITATION ON THE SALE OR ISSUANCE OF CAPITAL STOCK OF RESTRICTED
SUBSIDIARIES. The Company shall not sell or otherwise dispose of any shares of
Capital Stock of a Restricted Subsidiary, and shall not permit any Restricted
Subsidiary, directly or indirectly, to issue or sell or otherwise dispose of any
shares of its Capital Stock except (i) to the Company or a Wholly Owned
Subsidiary, (ii) if, immediately after giving effect to such issuance, sale or
other disposition, the Company and its Restricted Subsidiaries would own less
than 20% of the Voting Stock of such Restricted Subsidiary and have no greater
economic interest in such Restricted Subsidiary, (iii) if, immediately after
giving effect to such issuance, sale or other disposition, the Company and its
Restricted Subsidiaries would own greater than 80% of the Voting Stock of such
Restricted Subsidiary and have no lesser economic interest in such Restricted
Subsidiary or (iv) to the extent such shares represent directors' qualifying
shares or shares required by applicable law to be held by a Person other than
the Company or Restricted Subsidiary.
LIMITATION ON LIENS. The Company shall not, directly or indirectly, Incur
or permit to exist any Lien (other than Permitted Liens) of any nature
whatsoever on any of its properties (including Capital Stock of a Restricted
Subsidiary), whether owned at the Issue Date or thereafter acquired, to secure
any Indebtedness of the Company that is not Senior Indebtedness of the Company,
without effectively providing that the Notes shall be secured equally and
ratably with (or prior to) the obligations so secured for so long as such
obligations are so secured.
LIMITATION ON SALE/LEASEBACK TRANSACTIONS. The Company shall not, and shall
not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Restricted Subsidiary would be entitled to (A) Incur Indebtedness in an amount
equal to the Attributable Debt with respect to such Sale/Leaseback Transaction
pursuant to the covenant described under "-- Limitation on Indebtedness" and (B)
create a Lien on such property securing such Attributable Debt without equally
and ratably securing the Notes pursuant to the covenant described under
"-- Limitation on Liens," (ii) the net proceeds received by the Company or any
Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the fair value (as determined by the Board of Directors) of such
property and (iii) the Company applies the proceeds of such transaction in
compliance with the covenant described under "-- Limitation on Sales of Assets
and Subsidiary Stock."
MERGER AND CONSOLIDATION. The Company shall not consolidate with or merge
with or into, or convey, transfer or lease , in one transaction or a series of
transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a Person organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company (if not
the Company) shall expressly assume, by an indenture supplemental thereto,
executed and delivered to the Trustee, in form satisfactory to the Trustee, all
the obligations of the Company under the Notes and the Indenture; (ii)
immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing, (iii) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) or, if applicable,
paragraph (b)(15), of the covenant described under "-- Limitation on
Indebtedness", (iv) immediately after giving effect to such transaction, the
Successor Company shall have Adjusted Consolidated Net Tangible Assets that are
not less than the Adjusted Consolidated Net Tangible Assets prior to such
transaction; and (v) the Company shall have complied with certain additional
conditions set forth in the Indenture; provided, however, that clauses (iii) and
(iv) shall not be applicable to any such transaction solely between the Company
and any Restricted Subsidiary.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor
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Company in the case of a lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
Pursuant to the Indenture, the Guarantor will covenant not to merge with or
into, or convey, transfer or lease, in one transaction or a series of
transactions, all or substantially all of its assets to any Person unless; (i)
the resulting, surviving or transferee Person (if not the Guarantor) shall be a
Person organized and existing under the laws of the jurisdiction under which the
Guarantor was organized or under the laws of the United States of America, or
any State thereof or the District of Columbia, and such Person shall expressly
assume, by executing a Guaranty Agreement, all the obligations of the Guarantor,
if any, under its Guaranty, (ii) immediately after giving effect to such
transaction or transactions on a pro forma basis (and treating any Indebtedness
which becomes an obligation of the resulting, surviving or transferee Person as
a result of such transaction as having been issued by such Person at the time of
such transaction), no Default shall have occurred and be continuing; and (iii)
the Company shall have complied with certain additional conditions contained in
the Indenture.
SEC Reports. Notwithstanding that the Company may not at any time be
subject to the reporting requirements of Section 13 or 15(d) of the Exchange
Act, the Company shall file with the SEC and provide the Trustee and Noteholders
with such annual reports and such information, documents and other reports as
are specified in Sections 13 and 15(d) of the Exchange Act and applicable to a
U.S. corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by the Company to comply with its obligations under
"-- Certain Covenants -- Merger and Consolidation" above, (iv) the failure by
the Company to comply for 30 days after notice with any of its obligations in
the covenants described above under "-- Certain Covenants", "-- Limitation on
Indebtedness", "-- Limitation on Restricted Payments", "-- Limitation on
Restrictions on Distributions from Restricted Subsidiaries", "-- Limitation on
Sales of Assets and Subsidiary Stock" (other than a failure to purchase Notes),
"-- Limitation on Affiliate Transactions", "-- Limitation on the Sale or
Issuance of Capital Stock of Restricted Subsidiaries", "-- Change of Control"
(other than a failure to purchase Notes), "-- Limitation on Liens",
"-- Limitation on Sale/Leaseback Transactions", or "-- SEC Reports", (v) the
failure by the Company to comply for 60 days after notice with its other
agreements contained in the Indenture, (vi) Indebtedness of the Company or the
Guarantor (other than Limited Recourse Indebtedness) is not paid within any
applicable grace period after final maturity or the maturity of such
Indebtedness is accelerated by the holders thereof because of a default (and
such acceleration is not rescinded or annulled) and the total amount of such
Indebtedness unpaid or accelerated exceeds $ million (the "cross
acceleration provision"), (vii) certain events of bankruptcy, insolvency or
reorganization of the Company or a Significant Subsidiary (the "bankruptcy
provisions"), (viii) any judgment or decree for the payment of money in excess
of $ million or its foreign currency equivalent at the time is rendered
against the Company or a Significant Subsidiary, remains outstanding for a
period of 60 days following such judgment and is not discharged, waived or
stayed within 10 days after notice (the "judgment default provision") or (ix)
the Guaranty ceases to be in full force and effect (other than in accordance
with the terms thereof) or the Guarantor denies or disaffirms its obligations
under the Guaranty if such default continues for a period of ten days after
notice thereof to the Company (the "guaranty default provision"). However, a
default under clauses (iv), (v), (viii) and (ix) will not constitute an Event of
Default until the Trustee or the holders of 25% in principal amount of the
outstanding Notes notify the Company of the default and the Company does not
cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the holders
of at least 25% in principal amount of the outstanding Notes may declare the
principal of and accrued but unpaid interest on all the Notes to be due and
payable. Upon such a declaration, such principal and interest shall be due and
payable
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immediately. If an Event of Default relating to certain events of bankruptcy,
insolvency or reorganization of the Company occurs and is continuing, the
principal of and interest on all the Notes will ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any holders of the Notes. Under certain circumstances, the
holders of a majority in principal amount of the outstanding Notes may rescind
any such acceleration with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of the
Trustee, in case an Event of Default occurs and is continuing, the Trustee will
be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless (i) such
holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount of the outstanding
Notes have requested the Trustee to pursue the remedy, (iii) such holders have
offered the Trustee reasonable security or indemnity against any loss, liability
or expense, (iv) the Trustee has not complied with such request within 60 days
after the receipt thereof and the offer of security or indemnity and (v) the
holders of a majority in principal amount of the outstanding Notes have not
given the Trustee a direction inconsistent with such request within such 60-day
period. Subject to certain restrictions, the holders of a majority in principal
amount of the outstanding Notes are given the right to direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. The Trustee,
however, may refuse to follow any direction that conflicts with law or the
Indenture or that the Trustee determines is unduly prejudicial to the rights of
any other holder of a Note or that would involve the Trustee in personal
liability.
The Indenture provides that if a Default occurs and is continuing and is
known to the Trustee, the Trustee must mail to each holder of the Notes notice
of the Default within 90 days after it occurs. Except in the case of a Default
in the payment of principal of or interest on any Note, the Trustee may withhold
notice if and so long as a committee of its trust officers determines that
withholding notice is not opposed to the interest of the holders of the Notes.
In addition, the Company is required to deliver to the Trustee, within 120 days
after the end of each fiscal year, a certificate indicating whether the signers
thereof know of any Default that occurred during the previous year. The Company
also is required to deliver to the Trustee, within 30 days after the occurrence
thereof, written notice of any event which would constitute certain Defaults,
their status and what action the Company is taking or proposes to take in
respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount of the Notes then
outstanding (including consents obtained in connection with a tender offer or
exchange for the Notes) and any past default or compliance with any provisions
may also be waived with the consent of the holders of a majority in principal
amount of the Notes then outstanding. However, without the consent of each
holder of an outstanding Note affected thereby, no amendment may, among other
things, (i) reduce the amount of Notes whose holders must consent to an
amendment, (ii) reduce the rate of or extend the time for payment of interest on
any Note, (iii) reduce the principal of or extend the Stated Maturity of any
Note, (iv) reduce the premium payable upon the redemption of any Note or change
the time at which any Note may be redeemed as described under "-- Optional
Redemption", (v) make any Note payable in money other than that stated in the
Note, (vi) impair the right of any holder of the Notes to receive payment of
principal of and interest on such holder's Notes on or after the due dates
therefor or to institute suit for the enforcement of any payment on or with
respect to such holder's Notes, (vii) make any change in the amendment
provisions which require each holder's consent or in the waiver provisions,
(viii) make any change to the subordination provisions of the Indenture that
would adversely affect the Noteholders or (ix) make any change in the Guaranty
that could adversely affect such holder.
Without the consent of any holder of the Notes, the Company, the Guarantor
and the Trustee may amend the Indenture to cure any ambiguity, omission, defect
or inconsistency, to provide for the assumption by a successor corporation of
the obligations of the Company or the Guarantor under the Indenture, to provide
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for uncertificated Notes in addition to or in place of certificated Notes
(provided that the uncertificated Notes are issued in registered form for
purposes of Section 163(f) of the Code, or in a manner such that the
uncertificated Notes are described in Section 163(f)(2)(B) of the Code), to make
any change in the subordination provisions of the Indenture that would limit or
terminate the benefits available to any holder of Senior Indebtedness of the
Company or the Guarantor thereunder, to add guarantees with respect to the
Notes, to secure the Notes, to add to the covenants of the Company for the
benefit of the holders of the Notes or to surrender any right or power conferred
upon the Company or the Guarantor, to make any change that does not adversely
affect the rights of any holder of the Notes or to comply with any requirement
of the SEC in connection with the qualification of the Indenture under the Trust
Indenture Act. However, no amendment may be made to the subordination provisions
of the Indenture that adversely affects the rights of any holder of Senior
Indebtedness of the Company or the Guarantor then outstanding unless the holders
of such Senior Indebtedness (or their Representative) consents to such change.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company is
required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
TRANSFER
The Notes will be issued in registered form and will be transferable only
upon the surrender of the Notes being transferred for registration of transfer.
The Company may require payment of a sum sufficient to cover any tax, assessment
or other governmental charge payable in connection with certain transfers and
exchanges.
DEFEASANCE
The Company at any time may terminate all its obligations under the Notes
and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to register the
transfer or exchange of the Notes, to replace mutilated, destroyed, lost or
stolen Notes and to maintain a registrar and paying agent in respect of the
Notes. The Company at any time may terminate its obligations under the covenants
described under "-- Certain Covenants" (other than the covenant described under
"-- Merger and Consolidation"), the operation of the cross acceleration
provision, the bankruptcy provisions with respect to Significant Subsidiaries,
the judgment default provision and the guaranty default provision described
under "-- Defaults" above and the limitations contained in clauses (iii) and
(iv) under the first paragraph of, and in the third paragraph of, "-- Certain
Covenants -- Merger and Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding its
prior exercise of its covenant defeasance option. If the Company exercises its
legal defeasance option, payment of the Notes may not be accelerated because of
an Event of Default with respect thereto. If the Company exercises its covenant
defeasance option, payment of the Notes may not be accelerated because of an
Event of Default specified in clause (iv), (vi), (vii) (with respect only to
Significant Subsidiaries) or (viii) under "-- Defaults" above or because of the
failure of the Company to comply with clause (iii) or (iv) under the first of
paragraph of, or with the third paragraph of, "-- Certain Covenants -- Merger
and Consolidation" above. If the Company exercises its legal defeasance option
or its covenant defeasance option, the Guarantor will be released from all its
obligations with respect to the Guaranty.
In order to exercise either defeasance option, the Company must irrevocably
deposit in trust (the "defeasance trust") with the Trustee money or U.S.
Government Obligations for the payment of principal and interest on the Notes to
redemption or maturity, as the case may be, and must comply with certain other
conditions, including delivery to the Trustee of an Opinion of Counsel to the
effect that holders of the Notes will not recognize income, gain or loss for
Federal income tax purposes as a result of such deposit and defeasance and will
be subject to Federal income tax on the same amount and in the same manner and
at the
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same times as would have been the case if such deposit and defeasance had not
occurred (and, in the case of legal defeasance only, such Opinion of Counsel
must be based on a ruling of the Internal Revenue Service or other change in
applicable Federal income tax law).
CONCERNING THE TRUSTEE
is to be the Trustee under the Indenture and has
been appointed by the Company as Registrar and Paying Agent with regard to the
Notes.
The Holders of a majority in principal amount of the outstanding Notes will
have the right to direct the time, method and place of conducting any proceeding
for exercising any remedy available to the Trustee, subject to certain
exceptions. The Indenture provides that if an Event of Default occurs (and is
not cured), the Trustee will be required, in the exercise of its power, to use
the degree of care of a prudent man in the conduct of his own affairs. Subject
to such provisions, the Trustee will be under no obligation to exercise any of
its rights or powers under the Indenture at the request of any Holder of Notes,
unless such Holder shall have offered to the Trustee security and indemnity
satisfactory to it against any loss, liability or expense and then only to the
extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it (including the Guaranty) and the Notes will
be governed by, and construed in accordance with, the laws of the State of New
York without giving effect to applicable principles of conflicts of law to the
extent that the application of the law of another jurisdiction would be required
thereby.
[D] CERTAIN U.S. FEDERAL INCOME TAX CONSIDERATIONS
The following is a general discussion of the principal United States
federal income tax consequences of the purchase, ownership and disposition of
the Notes to initial purchasers thereof who are United States Holders (as
defined below) and the principal United States federal income and estate tax
consequences of the purchase, ownership and disposition of the Notes to initial
purchasers who are foreign Holders (as described below). This discussion is
based on currently existing provisions of the Code, existing, temporary and
proposed Treasury regulations promulgated thereunder, and administrative and
judicial interpretations thereof, all as in effect or proposed on the date
hereof and all of which are subject to change, possible with retroactive effect,
or different interpretations. This discussion does not address the tax
consequences to subsequent purchasers of Notes and is limited to purchasers who
hold the Notes as capital assets, within the meaning of section 1221 of the
Code. This discussion also does not address the tax consequences to Foreign
Holders that are subject to United States federal income tax on a net basis on
income realized with respect to a Note because such income is effectively
connected with the conduct of a United States trade or business. Such Foreign
holders are generally taxed in a similar manner to United States Holders, but
certain special rules do apply. Moreover, this discussion is for general
information only and does not address all of the tax consequences that may be
relevant to particular initial purchasers in light of their personal
circumstances or to certain types of initial purchasers (such as certain
financial institutions, insurance companies, tax-exempt entities, dealers in
securities or persons who have hedged the risk of owning a Note).
PROSPECTIVE PURCHASERS ARE URGED TO CONSULT THEIR OWN TAX ADVISORS AS TO
THE PARTICULAR TAX CONSEQUENCES TO THEM OF THE PURCHASE, OWNERSHIP AND
DISPOSITION OF THE NOTES, INCLUDING THE APPLICABILITY OF ANY FEDERAL TAX LAWS OR
ANY STATE, LOCAL OR FOREIGN TAX LAWS, AND ANY CHANGES (OR PROPOSED CHANGES IN
APPLICABLE TAX LAWS OR INTERPRETATIONS THEREOF.
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UNITED STATES FEDERAL INCOME TAXATION OF UNITED STATES HOLDERS
As used herein, the term "United States Holder" means a holder of a Note
that is, for United States federal income tax purposes, (a) a citizen or
resident of the Untied States, (b) a corporation, partnership or other entity
created or organized in or under the laws of the United States or any political
subdivision thereof, (c) an estate the income of which is subject to United
States federal income taxation regardless of source, or (iv) a trust subject to
the primary supervision of a court within the United States and the control of a
United States fiduciary as described in Section 7701 (a)(30) of the Code.
PAYMENT OF INTEREST ON NOTES. Interest paid or payable on a Note will be
taxable to a United States Holder a ordinary interest income, generally at the
time it is received or accrued, in accordance with such holder's regular method
of accounting for United States federal income tax purposes.
SALE, EXCHANGE OR RETIREMENT OF NOTES. Upon the sale, redemption,
retirement at maturity or other disposition of a Note, a United States Holder
generally will recognize taxable gain or loss equal to the difference between
the sum of cash plus the fair market value of all other property received on
such disposition (except to the extent such cash or property is attributable to
accrued by unpaid interest, which will be taxable as ordinary income) and such
United States Holder's adjusted tax basis in the Note. A United States Holder's
adjusted tax basis in a Note generally will equal the cost of the Note to such
United States Holder, less and principal payments received by such United States
Holder.
Gain or loss recognized on the disposition of a Note generally will be
capital gain or loss and will be long-term capital gain or loss if, at the time
of such disposition, the United States Holder's holding period for the Note is
more than one year. Under the Taxpayer Relief Act of 1997, lower tax rates apply
to the sale or exchange of capital assets by individuals who have held such
assets for more than 18 months.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Backup withholding and
information reporting requirements may apply to certain payments of principal,
premium, if any, and interest on a Note, and to proceeds of the sale or
redemption of a Note before maturity. The Company, its agent, a broker, the
Trustee or any paying agent, as the case may be, will be required to withhold
from any payment that is subject to backup withholding a tax equal to 31% of
such payment if a United States Holder fails to furnish his, her or its taxpayer
identification number (social security or employer identification number),
certify that such number is correct, certify that such holder is not subject to
backup withholding or otherwise comply with the applicable requirements of the
backup withholding rules. Certain United States Holders, including all
corporations, are not subject to backup withholding and information reporting
requirements. Any amounts withheld under the backup withholding rules from a
payment to a United States Holder will be allowed as a credit against such
United States Holder's United States federal income tax liability and may
entitle the holder to a refund, provided that the required information is
furnished to the Internal Revenue Service ("IRS").
UNITED STATES FEDERAL INCOME TAXATION OF FOREIGN HOLDERS
As used herein, the term "Foreign Holder" means a holder of a Note that is,
for United States federal income tax purposes, (a) a nonresident alien
individual, (b) a foreign corporation, (c) a nonresident alien fiduciary of a
foreign estate or trust or (d) a foreign partnership.
PAYMENT OF INTEREST ON NOTES. In general, payments of interred received by
a Foreign Holder will not be subject to a United States federal withholding tax,
provided that (i) (a) the Foreign holder does not actually or constructively own
10% or more of the total combined voting power of all classes of stock of DMI
entitled to vote, (b) the foreign Holder is not a controlled foreign corporation
that is related to DMI actually or constructively through stock ownership, and
(c) either (I) the beneficial owner of the Note, under penalties of perjury,
provides DMI or its agent with such beneficial owner's name and address and
certifies on IRS Form W-8 (or a suitable substitute form) that it is not a
United States Holder or (II) a securities clearing organization, bank or other
financial institution that holds customers' securities in the ordinary course of
its trade or business (a "financial institution") holds the Notes and provides a
statement to DMI or its agent under penalties of perjury in which it certifies
that such an IRS Form W-8 (or a suitable substitute) has been received by it
from the beneficial owner of the Notes or qualifying intermediary and furnishes
DMI or its
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agent a copy thereof or (ii) the Foreign Holder is entitled to the benefits of
an income tax treaty under which interest on the Notes is exempt from United
States withholding tax and the Foreign Holder or such foreign older's agent
provides a properly executed IRS Form 1001 claiming the exemption. Payments of
interest not exempt from United States federal withholding tax as described
above will be subject to such withholding tax at the rate of 30% (subject to
reduction under an applicable income tax treaty).
SALE, EXCHANGE OR RETIREMENT OF THE NOTES. A Foreign Holder generally will
not be subject to United States federal income tax (and generally no tax will be
withheld) with respect to gain realized on the sale, exchange, redemption,
retirement at maturity or other disposition of a Notes unless the Foreign Holder
is an individual who is present in the United States for a period or periods
aggregating 183 or more days in the taxable year of the disposition and,
generally, either has a "tax home" or an "office or other fixed place of
business" in the United States.
BACKUP WITHHOLDING AND INFORMATION REPORTING. Backup withholding and
information reporting requirements do not apply to payments of interest made by
DMI or paying agent to Foreign Holders if the certification described above
under "-- United States Federal Income Taxation of Foreign Holders" payment of
interest on Notes' is received, provided that the payor does not have actual
knowledge that the holder is a United States Holder. If any payments of
principal and interest are made to the beneficial owner of a Notes by or through
the foreign office of a foreign custodian, foreign nominee or the foreign agent
of such beneficial owner, or if the foreign office of a foreign "broker" (as
defined in applicable Treasury regulations) pays the proceeds of the sale of a
Notes to the seller thereof, backup withholding information reporting will not
apply. Information reporting requirements (but not backup withholding) will
apply, however, to a payment by a foreign office of a broker that is a United
States person, that derives 50% or more of its gross income for certain periods
from the conduct of a trade or business in the United States, or that is a
"controlled foreign corporation" (generally, a foreign corporation controlled by
certain United States shareholders) with respect to the United States unless the
broker has documentary evidence in its records that the holder is a Foreign
Holder a certain other conditions are met or the holder otherwise establishes an
exemption. Payment by a United States office of a broker is subject to both
backup withholding at a rate of 31% and information reporting unless the holder
certifies under penalties of perjury that it is a Foreign Holder or otherwise
establishes an exemption.
The procedures described above for withholding tax on interest payments,
and some of the associated backup withholding and information reporting rules,
are currently the subject of regulations issued in final form October 7, 1997.
The final regulations are effective for payments made after December 31, 1998,
subject to certain transition rules (the "1997 Final Regulations"). The 1997
Final Regulations will modify the procedures for establishing an exemption from
withholding tax described above.
FEDERAL ESTATE TAX
Subject to applicable estate tax treaty provisions, Notes held at the time
of death (or Notes transferred before death but subject to certain retained
rights or powers) by an individual who at the time of death is a Foreign Holder
will not be included in such Foreign Holder's gross estate for United States
federal estate tax purposes provided that the individual does not actually or
constructively own 10% or more of the total combined voting power of all classes
of stock of DMI entitled to vote or hold the Notes in connection with a United
States trade or business.
[E] 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
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<PAGE> 100
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 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 basis 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
thereof.
Pursuant to the U.S.-Canada Income Tax Convention (the "Convention"),
shareholders of the Company who are residents of 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, a 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 5% for dividends received 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
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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.
THE FOREGOING DISCUSSION IS A SUMMARY OF THE PRINCIPAL CANADIAN FEDERAL
INCOME AND ESTATE TAX CONSEQUENCES OF THE OWNERSHIP, SALE OR OTHER DISPOSITION
OF THE COMMON SHARES. ACCORDINGLY, INVESTORS ARE URGES TO CONSULT THEIR TAX
ADVISORS WITH RESPECT TO THE CANADIAN INCOME AND ESTATE TAX CONSEQUENCES OF THE
OWNERSHIP AND DISPOSITION OF THE COMMON SHARES, INCLUDING THE APPLICATION AND
EFFECT OF THE LAWS OF ANY STATE, LOCAL, FOREIGN OR OTHER TAXING JURISDICTION.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
DRI is incorporated under the laws of Canada. Some of the directors,
controlling persons and officers of DRI, 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 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 DRI predicated upon civil liability
under the United States federal securities laws. DRI has been advised by its
counsel, Burnet, Duckworth & Palmer, Calgary, Alberta, that there is doubt as to
the enforceability in Canada against DRI 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.
[E] SHARES ELIGIBLE FOR FUTURE SALE
After giving effect to the Equity Offering, the Company would have had
Common Shares outstanding as of December 31, 1997 ( Common Shares
assuming exercise of the Underwriters' over-allotment option in full). The
Common Shares sold in the Equity Offering will be freely tradable without
restrictions or further registration under the Securities Act. As of the close
of the Equity Offering, 7,393,090 of the Common Shares beneficially held
by TPG 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
that provided by Rule 144.
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 one
year, 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 shares immediately after the Equity Offering and the TPG
Purchase). 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 two years, would be entitled to sell such Common Shares
under Rule 144 without regard to the volume limitations described above. The
Company is unable to estimate the number of Common Shares, if any, that TPG may
sell from
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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 Equity Offering, the Company, each of its directors
and executive officers and TPG have agreed not to sell or otherwise dispose of
any Common Shares, including any securities exercisable for or convertible into
Common Shares, for a period of 120 days from the date of this Prospectus,
without the prior written consent of Morgan Stanley & Co. Incorporated. See
"Underwriters."
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 right to maintain its pro rata
ownership in connection with the Equity 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.
[E] UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement (the "Underwriting Agreement"), DRI has agreed to sell Common
Shares to a syndicate of underwriters (the "Underwriters"), for whom Morgan
Stanley & Co. Incorporated, Gordon Capital Inc., Johnson Rice & Company L.L.C.
and Loewen, Ondaatje, McCutcheon USA Limited are acting as representatives (the
"Representatives"), and the Underwriters have severally agreed to purchase the
number of Common Shares set forth opposite their respective names below:
<TABLE>
<CAPTION>
NUMBER
UNDERWRITERS OF SHARES
------------ ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
Gordon Capital, Inc. .......................................
Johnson Rice & Company L.L.C. ..............................
Loewen, Ondaatje, McCutcheon USA Limited....................
-------
Total.............................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the several
Underwriters to pay for and accept delivery of the Common Shares offered hereby
are subject to the approval of certain legal matters by their counsel and to
certain other 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
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 reallow,
a concession not in excess of $ per share to any other Underwriter or
certain other dealers. After the initial offering of the Common Shares the
offering price and other selling terms may from time to time be varied by the
Underwriters.
The Company has granted to the Underwriters an option to purchase up to
additional Common Shares at the price to public 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 Common Shares proportionate to such
Underwriter's initial commitment as indicated in the preceding table.
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Each of the Underwriters has represented and, during the period of six
months after the date hereof, agreed that (a) it has not offered or sold and
will not offer or sell any Common Shares in the United Kingdom except to persons
whose ordinary activities involve them in acquiring, holding, managing or
disposing of investments (as principal or agent) for the purpose of their
business or otherwise in circumstances which have not resulted and will not
result in an offer to the public in the United Kingdom within the meaning of the
Public Offers of Securities Regulations (1995) (the "Regulations"); (b) it has
complied and will comply with all applicable provisions of the Financial
Services Act 1986 and the Regulations with respect to anything done by it in
relation to the Common Shares offered hereby in, from or otherwise involving the
United Kingdom; and (c) it has only issued or passed on and will only issue or
pass on to any person in the United Kingdom any document received by it in
connection with the issue of the Common Shares if that person is a kind
described in Article 11(3) of the Financial Services Act 1986 (Investment
Advertisements) (Exemptions) Order 1996, or is a person to whom such document
may otherwise lawfully be issued or passed on.
The Company has agreed to indemnify the Underwriters against certain
liabilities that may be incurred in connection with the offering of the Common
Shares, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
In order to facilitate the Equity Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Common Shares. Specifically, the Underwriters may over-allot in connection with
the Equity Offering, creating a short position in the Common Shares for their
own account. In addition, to cover overallotments or to stabilize the price of
the Common Shares, the Underwriters may bid for, and purchase, Common Shares in
the open market. Finally, the underwriting syndicate may reclaim selling
concessions allowed to an underwriter or a dealer for distributing the Common
Shares in the Equity Offering, if the syndicate repurchases previously
distributed Common Shares in transactions to cover syndicate short positions, in
stabilization transactions or otherwise. Any of these activities may stabilize
or maintain the market price of the Common Shares above independent market
levels. The Underwriters are not required to engage in these activities, and may
end any of these activities at any time.
The Common Shares being sold in the TPG Purchase are being sold directly to
TPG by the Company. The TPG Purchase is not being made on an underwritten basis,
and the Underwriters of the Equity Offering are not acting on behalf of the
Company, as agents or in any other capacity, in connection therewith. TPG has
agreed to provide, at the closing of the TPG Purchase, an undertaking to the TSE
not to sell any of the Common Shares acquired pursuant to the TPG Purchase for a
period of six months following the acquisition of such Common Shares without the
prior written consent of the TSE. The closing of the TPG Purchase is conditioned
upon, and will occur concurrently with, the closing of the Equity Offering.
[D] UNDERWRITERS
Under the terms and subject to the conditions contained in an underwriting
agreement (the "Underwriting Agreement"), the Underwriters named below have
severally agreed to purchase, and DMI has agreed to sell them, the principal
amount of Notes set forth opposite their respective names below:
<TABLE>
<CAPTION>
PRINCIPAL
AMOUNT
UNDERWRITERS OF NOTES
------------ ---------
<S> <C>
Morgan Stanley & Co. Incorporated...........................
-------
NationsBanc Montgomery Securities, Inc. ....................
Total.............................................
=======
</TABLE>
The Underwriting Agreement provides that the obligations of the
Underwriters to pay for and accept delivery of the Notes offered hereby are
subject to the approval of certain legal matters by their counsel and to certain
other conditions. If the Notes are purchased by the Underwriters pursuant to the
Underwriting Agreement, all such Notes must be so purchased.
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The Underwriters initially propose to offer the Notes directly to the
public at the public offering price set forth on the cover page of this
Prospectus and to certain dealers at a price that represents a concession not in
excess of % of the principal amount of the Notes. Each Underwriter may
allow, and such dealers may reallow, a concession to certain other dealers not
in excess of % of the principal amount of the Notes. After the initial
offering of the Notes the offering price and other selling terms may from time
to time be varied by the Underwriters.
DMI and the Guarantor have agreed to indemnify the Underwriters against
certain liabilities that may be incurred in connection with the offering of the
Notes, including liabilities under the Securities Act, or to contribute to
payments that the Underwriters may be required to make in respect thereof.
In order to facilitate the Debt Offering, the Underwriters may engage in
transactions that stabilize, maintain or otherwise affect the price of the
Notes. Specifically, the Underwriters may over-allot in connection with Debt
Offering, creating a short position in the Notes for their own account. In
addition, to cover over-allotments or to stabilize the price of the Notes, the
Underwriters may bid for, and purchase, Notes in the open market. Finally, the
underwriting syndicate may reclaim selling concessions allowed to an underwriter
or a dealer for distributing the Notes in the Debt Offering, if the syndicate
repurchases previously distributed Notes in transactions to cover syndicate
short positions, in stabilization transactions or otherwise. Any of these
activities may stabilize or maintain the market price of the Notes above
independent market levels. The Underwriters are not required to engage in these
activities, and may end any of these activities at any time.
NationsBank of Texas, N.A., an affiliate of NationsBanc Montgomery
Securities, Inc., is agent and a lender under the Credit Facility. Net proceeds
of the Debt Offering will be applied to repay indebtedness under the Credit
Facility. NationsBanc of Texas, N.A., and its affiliates may perform financial
and banking services for the Company in the ordinary course of business.
[E] LEGAL MATTERS
The legality of the securities offered hereby have been passed upon for the
Company by Burnet, Duckworth & Palmer, Calgary, Alberta and Jenkens & Gilchrist,
a Professional Corporation, Houston, Texas. Certain legal matters in connection
with the Offerings will be passed upon for the Underwriters by Cravath, Swaine &
Moore, New York, New York.
[D] LEGAL MATTERS
The legality of the Notes offered hereby will be passed upon for DMI by
Jenkens & Gilchrist, a Professional Corporation. Certain legal matters in
connection with the Offerings will be passed upon for the Company by Burnet,
Duckworth & Palmer, Calgary, Alberta and for the Underwriters by Cravath, Swaine
& Moore, New York, New York.
EXPERTS
The consolidated financial statements and financial statement schedule of
the Company as at December 31, 1995 and 1996 and for each of the three years in
the period ended December 31, 1996 included and incorporated by reference 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 and incorporated by reference 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 of Chevron's
working interest in the Heidelberg Fields acquired by the Company for each of
the two years in the period December 31, 1996 and for the nine months ended
September 30, 1997 included in this Prospectus has been so included in reliance
on the report of Price Waterhouse LLP, independent accountants, given on the
authority of said firm as experts in auditing and accounting.
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The reference to the reports of Netherland, Sewell & Associates, Inc.,
independent petroleum engineers located in Dallas, Texas, contained herein with
respect to the proved reserves, the estimated future net revenue from such
proved reserves, and the discounted present values of such estimated future net
revenue, is made in reliance upon the authority of such firms as experts with
the respect to such matters.
AVAILABLE INFORMATION
The Company is subject to the information requirements of the Exchange Act,
and in accordance therewith files reports, proxy statements and other
information with the Commission. Such reports, proxy statements and other
information can be inspected and copied at the public reference facilities
maintained by the Commission at 450 5th Street, N.W., Room 1024, Washington,
D.C. 20549, and at the following regional offices of the Commission: Seven World
Trade Center, 13th Floor, New York, New York 10048 and Citicorp Center, 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661, at prescribed rates. In
addition, such materials filed electronically by the Company with the Commission
are available at the Commission's World Wide Web site at http://www.sec.gov. The
Common Shares are traded on the NYSE and such reports, proxy statements and
other information may be inspected at 20 Broad Street, New York, New York 10005.
The Common Shares are also traded on the TSE and any filings with the TSE may be
inspected at The Exchange Tower, 2 First Canada Plaza, Toronto, Ontario, Canada
M5X 1J2.
The Company has filed with the Commission a Registration Statement on Form
S-3 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
Commission. 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 Commission.
[D] LISTING AND GENERAL INFORMATION
Application will be made to list the Notes on the Luxembourg Stock
Exchange. Prior to the listing, a legal notice relating to the issuance of the
Notes and the governing documents of each of the Company will be deposited with
the Chief Registrar of the District Court of Luxembourg (Greffier en Chef du
Tribuanl d'Arrondissement de et a Luxembourg), where such documents may be
examined or copies obtained.
So long as the Notes are listed on the Luxembourg Stock Exchange and the
rules of such Stock Exchange shall so require, copies of the governing documents
of each of the Company and the Guarantor and the Indenture (including the terms
of the Guarantee) will be available for inspection at the office of the
Company's special agent to be chosen in Luxembourg. So long as the Notes are
listed on the Luxembourg Stock Exchange and the rules of such Stock Exchange
shall so require, copies of any and all required statutory accounts of the
Company and the Guarantor and any and all required annual and quarterly reports
of the Company and the Guarantor will be available during normal business hours
on any weekday at the office of the Company's special agent to be chosen in
Luxembourg.
The creation and issuance of the Notes were authorized on behalf of DMI by
resolutions adopted by the Board of Directors of the Company on ,
1997. The creation and issuance of the Guaranty was authorized on behalf of the
Guarantor by resolutions adopted by the Board of Directors of DRI on
, 1997.
The Company accepts responsibility for the information contained in this
Prospectus. To the best knowledge of the Company, the information contained in
this Prospectus is in accordance with the facts and does not omit anything
likely to affect the import of the Prospectus.
There has been no material adverse change in the financial position of the
Company or the Guarantor since December 31, 1996, except as disclosed herein.
Neither the Company not any of its subsidiaries is a
102
<PAGE> 106
party to any litigation that, in the judgment of the Company, is material in the
context of the issuance of the Notes, except as disclosed herein.
The Company will appoint a special agent in Luxembourg until such time as
the Company is required to appoint a transfer and paying agent located in
Luxembourg. The Company reserves the right to vary such appointment.
103
<PAGE> 107
GLOSSARY
The terms defined in this section are used throughout this Prospectus.
ANTICLINE. Geologically positive structure favorable for trapping
hydrocarbons.
Bbl. One stock tank barrel, of 42 U.S. gallons liquid volume, used
herein in reference to crude oil or other liquid hydrocarbons.
Bbls/d. Barrels of oil produced per day.
Bcf. One billion cubic feet of natural gas.
BOE. One barrel of oil equivalent using the ratio of one barrel of
crude oil, condensate or natural gas liquids to 6 Mcf of natural gas.
BOE/d. BOEs produced per day.
Btu. British thermal unit, which is the heat required to raise the
temperature of a one-pound mass of water from 58.5 to 59.5 degrees
Fahrenheit.
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.
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 that reservoir.
DRY HOLE; DRY WELL; NON-PRODUCTIVE WELL. A well found to be incapable
of producing either oil or natural gas in sufficient quantities to justify
completion as an oil or natural gas well.
EXPLORATORY WELL. An exploratory well is a well drilled either in
search of a new, as-yet undiscovered oil or natural gas reservoir or to
greatly extend the known limits of a previously discovered reservoir.
FARMOUT. An assignment of an interest in a drilling location and
related acreage conditional upon the drilling of a well on that location.
FORMATION. A succession of sedimentary beds that were deposited under
the same general geologic conditions.
GEOPRESSURED. Pressures in excess of the normal increase in pressure
with depth.
GEOSYNCLINE. A regional area of subsidence in which sediments are
accumulated.
GROSS ACRES OR GROSS WELLS. The total acres or wells, as the case may
be, in which a working interest is owned.
HORIZONTAL WELLS. Wells which are drilled at angles greater than 70
degrees from vertical.
Mbbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand BOEs.
MBOE/d. One thousand BOE/d.
MBtu. One thousand Btus.
Mcf. One thousand cubic feet of natural gas.
Mcf/d. One thousand cubic of natural gas produced per day.
MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
MMBOE. One million BOEs.
104
<PAGE> 108
MMBtu. One million Btus.
MMdf. One million cubic feet of natural gas.
MMcf/d. One million cubic feet of natural gas produced per day.
NET; NET REVENUE INTEREST. Production or revenue that is owned by the
Company and produced for its interest after deducting royalties and other
similar interests.
NET ACRES OR NET WELLS. The sum of the fractional working interests
owned in gross acres or gross wells.
PV10 VALUE. When used with respect to oil and natural gas reserves,
PV10 Value means the estimated future gross revenue to be generated from
the production of proved reserves, net of estimated production and future
development costs, using prices and costs in effect at the determination
date, without giving effect to non-property related expenses such as
general and administrative expenses, debt service and future income tax
expense or to depreciation, depletion and amortization, discounted to
present value using an annual discount rate of 10% in accordance with the
guidelines of the Commission.
PRODUCTIVE WELL. A well that is producing oil or natural gas or that
is capable of production.
PROVED DEVELOPED RESERVES. Reserves that can be expected to be
recovered from existing wells with existing equipment and operating
methods.
PROVED RESERVES. The estimated quantities of crude oil, natural gas
and natural gas liquids which geological and engineering data demonstrate
with reasonable certainty to be recoverable in future years from known
reservoirs under existing economic and operating conditions.
PROVED UNDEVELOPED RESERVES. Reserves that are expected to be
recovered from new wells on undrilled acreage or from existing wells where
a relatively major expenditure is required for recompletion.
ROYALTY INTEREST. An interest in an oil and natural gas property
entitling the owner to a share of oil or natural gas production free of
costs of production.
Tcf. One trillion cubic feet of natural gas.
UNDEVELOPED ACREAGE. Lease acreage on which wells have not been
participated in or completed to a point that would permit the production of
commercial quantities of oil and natural gas regardless of whether such
acreage contains proved reserves.
WORKING INTEREST. The cost-bearing interest in a well or property
which gives the owner the right to drill, produce and conduct operating
activities on the property as well as to a share of production.
105
<PAGE> 109
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
DENBURY RESOURCES INC. AND SUBSIDIARIES
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 Consolidated Financial Statements................ F-7 thru F-29
STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES OF
CHEVRON PROPERTIES
Report of Independent Accountants......................... F-30
Statements of Revenues and Direct Operating Expenses of
Properties............................................. F-31
Notes to Statement of Revenues and Direct Operating
Expenses of Properties................................. F-32 thru F-34
</TABLE>
F-1
<PAGE> 110
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Denbury Resources Inc.
We have audited the consolidated balance sheets of Denbury Resources Inc.
as at December 31, 1995 and 1996 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, 1996. 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 1996 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, 1996, in accordance with accounting principles generally accepted
in Canada.
Deloitte & Touche
Chartered Accountants
Calgary, Alberta
February 21, 1997
F-2
<PAGE> 111
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(UNAUDITED)
<S> <C> <C> <C>
CURRENT ASSETS
Cash and cash equivalents................................ $ 6,553 $ 13,453 $ 2,236
Accrued production receivable............................ 3,212 11,906 7,097
Trade and other receivables.............................. 1,160 3,643 14,507
-------- -------- --------
Total current assets............................. 10,925 29,002 23,840
-------- -------- --------
PROPERTY AND EQUIPMENT (USING FULL COST ACCOUNTING)
Oil and natural gas properties........................... 72,510 159,724 230,521
Unevaluated oil and natural gas properties............... 7,085 6,413 6,389
Less accumulated depreciation and depletion.............. (13,982) (31,141) (53,527)
-------- -------- --------
Net property and equipment....................... 65,613 134,996 183,383
-------- -------- --------
OTHER ASSETS............................................... 1,103 2,507 3,201
-------- -------- --------
TOTAL ASSETS..................................... $ 77,641 $166,505 $210,424
======== ======== ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES
Accounts payable and accrued liabilities................. $ 2,872 $ 10,903 $ 16,858
Oil and gas production payable........................... 1,014 5,550 4,060
Current portion of long-term debt........................ 177 67 23
-------- -------- --------
Total current liabilities........................ 4,063 16,520 20,941
-------- -------- --------
LONG-TERM LIABILITIES
Senior bank debt......................................... 75 125 20,005
Subordinated debt and other notes payable................ 3,399 -- --
Provision for site reclamation costs..................... 242 613 938
Deferred income taxes and other.......................... 1,361 6,743 12,982
-------- -------- --------
Total long-term liabilities...................... 5,077 7,481 33,925
-------- -------- --------
CONVERTIBLE FIRST PREFERRED SHARES, SERIES A
1,500,000 shares authorized, issued and outstanding at
December 31, 1995..................................... 15,000 -- --
-------- -------- --------
SHAREHOLDERS' EQUITY
Common shares, no par value unlimited shares authorized;
outstanding -- 11,428,809, 20,055,757 and 20,364,799
shares at December 31, 1995, December 31, 1996 and
September 30, 1997, respectively...................... 50,064 130,323 132,744
Retained earnings........................................ 3,437 12,181 22,814
-------- -------- --------
Total shareholders' equity....................... 53,501 142,504 155,558
-------- -------- --------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY....... $ 77,641 $166,505 $210,424
======== ======== ========
</TABLE>
See Notes to Consolidated Financial Statements.
Approved by the Board:
<TABLE>
<C> <C>
/s/ GARETH ROBERTS /s/ WIELAND F. WETTSTEIN
- ----------------------------------------------------- -----------------------------------------------------
Gareth Roberts Wieland F. Wettstein
Director Director
</TABLE>
F-3
<PAGE> 112
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(AMOUNTS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
(U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
--------------------------- -----------------
1994 1995 1996 1996 1997
------- ------- ------- ------- -------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
REVENUES
Oil, natural gas and related product
sales................................... $12,692 $20,032 $52,880 $34,709 $60,083
Interest income and other.................. 23 77 769 425 986
------- ------- ------- ------- -------
Total revenues..................... 12,715 20,109 53,649 35,134 61,069
------- ------- ------- ------- -------
EXPENSES
Production................................. 4,309 6,789 13,495 9,197 15,737
General and administrative................. 1,105 1,832 4,267 2,825 4,535
Interest................................... 1,146 2,085 1,993 1,530 387
Imputed preferred dividends................ -- -- 1,281 1,153 --
Loss on early extinguishment of debt....... -- 200 440 440 --
Depletion and depreciation................. 4,209 8,022 17,904 12,557 23,224
Franchise taxes............................ 65 100 213 160 308
------- ------- ------- ------- -------
Total expenses..................... 10,834 19,028 39,593 27,862 44,191
------- ------- ------- ------- -------
Income before income taxes................... 1,881 1,081 14,056 7,272 16,878
Provision for federal income taxes........... (718) (367) (5,312) (2,932) (6,245)
------- ------- ------- ------- -------
NET INCOME................................... $ 1,163 $ 714 $ 8,744 $ 4,340 $10,633
======= ======= ======= ======= =======
NET INCOME PER COMMON SHARE
Primary.................................... $ 0.19 $ 0.10 $ 0.67 $ 0.37 $ 0.53
Fully diluted.............................. 0.19 0.10 0.62 0.36 0.50
======= ======= ======= ======= =======
Average number of common shares
outstanding................................ 6,240 6,870 13,104 11,616 20,175
======= ======= ======= ======= =======
</TABLE>
See Notes to Consolidated Financial Statements
F-4
<PAGE> 113
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------ -------------------
1994 1995 1996 1996 1997
-------- -------- -------- -------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOW FROM OPERATING ACTIVITIES:
Net income..................................... $ 1,163 $ 714 $ 8,744 $ 4,340 $ 10,633
Adjustments needed to reconcile to net cash
flow provided by operations:
Depreciation, depletion and amortization..... 4,304 8,113 17,904 12,557 23,224
Deferred income taxes........................ 718 367 5,312 2,932 6,245
Imputed preferred dividend................... -- -- 1,281 1,153 --
Loss on early extinguishment of debt......... -- 200 440 440 --
Other........................................ -- -- 459 345 64
-------- -------- -------- -------- --------
6,185 9,394 34,140 21,767 40,166
Changes in working capital items relating to
operations:
Accrued production receivable................ (986) (1,303) (8,694) (4,388) 4,809
Trade and other receivables.................. (124) (168) (1,508) (659) (10,864)
Accounts payable and accrued liabilities..... 1,581 (1,660) 6,711 9,688 5,955
Oil and gas production payable............... 261 490 4,536 2,004 (1,490)
-------- -------- -------- -------- --------
NET CASH FLOW PROVIDED BY OPERATIONS............. 6,917 6,753 35,185 28,412 38,576
-------- -------- -------- -------- --------
CASH FLOW USED FOR INVESTING ACTIVITIES:
Oil and natural gas expenditures............. (10,297) (11,761) (38,450) (25,704) (54,700)
Acquisition of oil and natural gas
properties................................. (6,606) (16,763) (48,407) (47,616) (16,073)
Net purchases of other assets................ (122) (560) (1,726) (1,290) (1,238)
Acquisition of subsidiary, net of cash
acquired................................... -- -- 209 209 --
-------- -------- -------- -------- --------
NET CASH USED FOR INVESTING ACTIVITIES........... (17,025) (29,084) (88,374) (74,401) (72,011)
-------- -------- -------- -------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Bank borrowings.............................. 9,835 19,350 47,900 44,900 19,900
Bank repayments.............................. (2,485) (34,200) (47,900) -- --
Issuance of subordinated debt................ 1,451 1,772 -- -- --
Issuance of common stock..................... 367 26,825 60,664 1,690 2,421
Issuance of preferred stock.................. -- 15,000 -- -- --
Costs of debt financing...................... (122) (493) (411) (408) (33)
Other........................................ 62 (82) (164) (135) (70)
-------- -------- -------- -------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES........ 9,108 28,172 60,089 46,047 22,218
-------- -------- -------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS.................................... (1,000) 5,841 6,900 58 (11,217)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR... 1,712 712 6,553 6,553 13,453
-------- -------- -------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD....... $ 712 $ 6,553 $ 13,453 $ 6,611 $ 2,236
======== ======== ======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for interest..... $ 1,027 $ 2,127 $ 1,621 $ 1,080 $ 150
SUPPLEMENTAL DISCLOSURE OF FINANCING ACTIVITIES:
Conversion of subordinated debt to common
stock...................................... -- -- $ 3,314 $ 1,465 --
Conversion of preferred stock to common
stock...................................... -- -- 16,281 -- --
Assumption of liabilities in acquisition..... -- -- 1,321 1,321 --
</TABLE>
See Notes to Consolidated Financial Statements
F-5
<PAGE> 114
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, 1994........................ 6,208,417 $ 22,872 $ 1,560 $ 24,432
Issued pursuant to employee stock option plan... 96,250 367 -- 367
Net income...................................... -- -- 1,163 1,163
---------- -------- ------- --------
BALANCE -- DECEMBER 31, 1994...................... 6,304,667 23,239 2,723 25,962
---------- -------- ------- --------
Issued pursuant to employee stock option plan... 10,000 54 -- 54
Private placement of Special Warrants
exchanged.................................... 614,143 2,314 -- 2,314
Private placement of common shares.............. 4,499,999 24,457 -- 24,457
Net income...................................... -- -- 714 714
---------- -------- ------- --------
BALANCE -- DECEMBER 31, 1995...................... 11,428,809 50,064 3,437 53,501
---------- -------- ------- --------
Issued pursuant to employee stock option plan... 197,675 1,070 -- 1,070
Issued pursuant to employee stock purchase
plan......................................... 31,311 358 -- 358
Public placement of common shares............... 4,940,000 58,776 -- 58,776
Conversion of preferred stock................... 2,816,372 16,281 -- 16,281
Conversion of warrants.......................... 75,000 460 -- 460
Conversion of subordinated debt................. 566,590 3,314 -- 3,314
Net income...................................... -- -- 8,744 8,744
---------- -------- ------- --------
BALANCE -- DECEMBER 31, 1996...................... 20,055,757 130,323 12,181 142,504
---------- -------- ------- --------
Issued pursuant to employee stock option plan... 270,056 1,764 -- 1,764
Issued pursuant to employee stock purchase
plan......................................... 38,986 657 -- 657
Net income...................................... -- -- 10,633 10,633
---------- -------- ------- --------
BALANCE -- SEPTEMBER 30, 1997 (UNAUDITED)......... 20,364,799 $132,744 $22,814 $155,558
========== ======== ======= ========
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE> 115
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996 AND FOR THE NINE MONTHS
ENDED SEPTEMBER 30, 1996 AND 1997 (UNAUDITED)
1. SIGNIFICANT ACCOUNTING POLICIES
The Company's operating activities are related to exploration, development
and production of oil and natural gas in the United States. All of the Canadian
operations were sold effective September 1, 1993.
The Company's name was changed on June 7, 1994, from Canadian Newscope
Resources Inc. to Newscope Resources Ltd. and again on December 21, 1995 to
Denbury Resources Inc.
On October 9, 1996 the shareholders of the Company approved an amendment to
the Articles of Continuance to consolidate the number of issued and outstanding
Common Shares on the basis of one Common Share for each two Common Shares
outstanding. All applicable shares and per share data have been adjusted for the
reverse stock split.
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements have been prepared in accordance with
Canadian generally accepted accounting principles and include the accounts of
the Company and its wholly owned subsidiaries, Denbury Holdings Ltd., Denbury
Management, Inc. and Denbury Marine L.L.C. and the Company's equity in the
operation of its 50% owned subsidiary, Denbury Energy Services ("Services"). The
Company acquired the remaining 50% of Services effective May 1, 1996 and began
consolidating all of Services as of that date. All material intercompany
balances and transactions have been eliminated.
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, net of estimated salvage value, 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.
F-7
<PAGE> 116
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
d) Ceiling test
The capitalized costs less accumulated depletion, depreciation, related
deferred taxes and site reclamation costs 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.
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 are 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. In accordance with Canadian generally accepted
accounting principles ("GAAP"), the imputed dividend during 1996 on the
Convertible First Preferred Shares, Series A has been recorded as an operating
expense in the accompanying financial statements and this is deducted from net
income in computing earnings per share. The conversion of the Convertible First
Preferred Shares, Series A ("Convertible Preferred") was anti-dilutive and was
not included in the calculation of earnings per share. In computing fully
diluted earnings per share, the stock options, warrants and convertible debt
instruments were dilutive for the year ended December 31, 1996 and for the nine
months ended September 30, 1997 and were assumed to be converted or exercised as
of the beginning of the respective period with the proceeds used to reduce
interest expense. For the prior years, these instruments were either
anti-dilutive or immaterial. All of the Convertible Preferred and the
convertible debt were converted into common shares during 1996 and thus were not
relevant to the calculation of earnings per share during 1997.
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
maturities at the date of purchase 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 1996 and September 30, 1997, the Company's aggregate oil
and natural gas imbalances were not material to its financial statements.
F-8
<PAGE> 117
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company recognizes revenue and expenses of purchased producing
properties commencing from the closing or agreement date, at which time the
Company also assumes control.
FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK AND CONCENTRATIONS OF CREDIT
RISK
The Company's product price hedging activities are described in Note 6 to
the consolidated financial statements. Credit risk relating to these hedges is
minimal because of the credit risk standards required for counter-parties and
monthly settlements. The Company has entered into hedging contracts with only
large and financially strong companies.
The Company's financial instruments that are exposed to concentrations of
credit risk consist primarily of cash equivalents, short-term investments and
trade and accrued production receivables. The Company's cash equivalents and
short-term investments represent high-quality securities placed with various
investment grade institutions. This investment practice limits the Company's
exposure to concentrations of credit risk. The 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.
FAIR VALUE OF FINANCIAL INSTRUMENTS
As of December 31, 1995, December 31, 1996 and September 30, 1997, the
carrying value of the Company's debt and other financial instruments
approximates its fair market value. The Company's bank debt is based on a
floating interest rate and thus adjusts to market as interest rates change. The
Company's other financial instruments are primarily cash, cash equivalents,
short-term receivables and payables which approximate fair value due to the
nature of the instrument and the relatively short maturities.
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 consolidated financial
position as of September 30, 1997, and the results of its operations and its
cash flow for the nine months ended September 30, 1996 and 1997.
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
F-9
<PAGE> 118
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
summary of the unevaluated properties excluded from oil and natural gas
properties being amortized at December 31, 1995 and 1996 and September 30, 1997
and the year in which they were incurred follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1995 DECEMBER 31, 1996
--------------------------------- ----------------------
INCURRED IN INCURRED IN
------------------------ ----------------------
1993 1994 1995 TOTAL 1995 1996 TOTAL
------ ------ ------ ------ ---- ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Property acquisition cost..... $1,151 $1,230 $2,909 $5,290 $252 $2,614 $2,866
Exploration costs............. -- 1,146 649 1,795 87 3,460 3,547
------ ------ ------ ------ ---- ------ ------
Total............... $1,151 $2,376 $3,558 $7,085 $339 $6,074 $6,413
====== ====== ====== ====== ==== ====== ======
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997
(UNAUDITED)
----------------------
INCURRED IN
----------------------
1995 1996 1997 TOTAL
---- ------ ------ ------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C> <C>
Property acquisition cost.............................. $-- $ 286 $ 930 $1,216
Exploration costs...................................... 53 1,457 3,663 5,173
--- ------ ------ ------
Total........................................ $53 $1,743 $4,593 $6,389
=== ====== ====== ======
</TABLE>
The Company anticipates that approximately $75 million of the costs
relating to the Chevron Acquisition which closed in December, 1997 will be
classified as unevaluated as of December 31, 1997.
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 $480,000,
$630,000 and $1,224,000 for the years ended December 31, 1994, 1995 and 1996 and
$851,000 and $1,675,000 for the nine months ended September 30, 1996 and 1997,
respectively.
Amortization per BOE was $4.03, $5.22, $5.99 and $6.40 for the years ended
December 31, 1994, 1995 and 1996 and nine months ended September 30, 1997,
respectively.
3. NOTES PAYABLE AND LONG-TERM INDEBTEDNESS
<TABLE>
<CAPTION>
DECEMBER 31,
------------- SEPTEMBER 30,
1995 1996 1997
------ ---- -------------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Senior bank loan......................................... $ 100 $100 $ 20,000
Convertible debentures................................... 3,296 -- --
Other notes payable...................................... 255 92 28
------ ---- -------------
3,651 192 20,028
Less portion due within one year......................... (177) (67) (23)
------ ---- -------------
Total long-term debt................................... $3,474 $125 $ 20,005
====== ==== =============
</TABLE>
F-10
<PAGE> 119
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
BANKS
During 1996 the Company 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 December 31, 1996 of $60 million.
NationsBank is the agent bank and the facility includes two other banks.
The credit facility is a two-year revolving credit facility that converts to a
three year term loan in May 1998, unless renewed or extended. This revolver
conversion date was extended to May 1999 on April 1, 1997. 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. As of December 31, 1996, the Company had $100,000
outstanding on this line of credit and $645,000 of letters of credit
outstanding.
The Company made two amendments to its bank credit facility during 1997 and
revised and restated its facility in December, 1997. See Note 12 for additional
disclosures.
SUBORDINATED DEBT
On March 23, 1994, Denbury issued Cdn. $2,000,000 principal amount of
6 3/4% unsecured convertible debentures and on January 17, 1995, Denbury issued
Cdn. $2,500,000 principal amount of 9 1/2% unsecured convertible debentures.
These debentures were converted into 566,590 Common Shares during 1996.
INDEBTEDNESS REPAYMENT SCHEDULE
The Company's indebtedness is repayable as follows:
<TABLE>
<CAPTION>
DECEMBER 31, 1996
-------------------------------------
OTHER NOTES
YEAR BANK LOAN PAYABLE TOTAL
---- --------- ----------- -----
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
1997.............................................. $ -- $67 $ 67
1998.............................................. 17 23 40
1999.............................................. 33 2 35
2000.............................................. 33 -- 33
2001.............................................. 17 -- 17
---- --- ----
$100 $92 $192
==== === ====
</TABLE>
F-11
<PAGE> 120
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 (UNAUDITED)
---------------------------------------
OTHER NOTES
YEAR BANK LOAN PAYABLE TOTAL
---- --------- ----------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
1997........................................... $ -- $ 3 $ 3
1998........................................... -- 23 23
1999........................................... 3,333 2 3,335
2000........................................... 6,667 -- 6,667
2001........................................... 6,667 -- 6,667
2002........................................... 3,333 -- 3,333
------- --- -------
$20,000 $28 $20,028
======= === =======
</TABLE>
4. INCOME TAXES
The Company's tax provision is as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- ------------------
1994 1995 1996 1996 1997
----- ----- ------- ------- -------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Deferred
Federal.................................... $718 $367 $5,312 $2,932 $5,907
State...................................... -- -- -- -- 338
---- ---- ------ ------ ------
Total.............................. $718 $367 $5,312 $2,932 $6,245
==== ==== ====== ====== ======
</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>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
----------------------- ------------------
1994 1995 1996 1996 1997
----- ----- ------- ------- --------
(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%............................... $ 834 $ 479 $ 6,233 $3,224 $ 7,484
Increase resulting from:
Imputed preferred dividend.............. -- -- 568 511 --
Non-deductible Canadian expenses........ -- -- 97 64 --
Decrease resulting from:
Effect of lower income tax rates on
United States income................. (116) (112) (1,586) (867) (1,239)
----- ----- ------- ------ -------
$ 718 $ 367 $ 5,312 $2,932 $ 6,245
===== ===== ======= ====== =======
</TABLE>
F-12
<PAGE> 121
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company at December 31, 1996 had net operating loss carryforwards for
U.S. tax purposes of approximately $18,329,000 and approximately $12,485,000 for
alternative minimum tax purposes. The net operating losses are scheduled to
expire as follows:
<TABLE>
<CAPTION>
INCOME ALTERNATIVE
YEAR TAX MINIMUM TAX
---- ------- ------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C>
2004.................................................. $ 39 $ --
2005.................................................. 11 --
2006.................................................. 644 500
2007.................................................. 714 99
2008.................................................. 5,016 4,889
2009.................................................. 3,377 2,868
2010.................................................. 3,467 3,420
2011.................................................. 5,061 710
</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 SHARES
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 Shares by its bank loan agreement.
1996 CAPITAL ADJUSTMENTS
During 1996, the Company issued 250,000 Common Shares for the conversion of
the 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"). On October 10,
1996, the Company effected a one-for-two reverse split of its outstanding common
Shares. Effective October 15, 1996, all of the Company's outstanding 9 1/2%
Convertible Debentures ("Debentures") were converted by their holders in
accordance with their terms into 308,642 Common Shares. The holders of the
Debentures also received an additional 7,948 Common Shares in lieu of interest
which would have been due the holders absent an early conversion of the
Debentures. At a special meeting held on October 9, 1996, the shareholders of
the Company approved an amendment to the terms of the First Preferred Shares,
Series A ("Convertible Preferred") to allow the Company to require the
conversion of the Convertible Preferred at any time, provided that the
conversion rate in effect as of January 1, 1999 would apply to any required
conversion prior to that date. The Company converted all of the 1,500,000 shares
of Convertible Preferred on October 30, 1996 into 2,816,372 Common Shares. The
Company also issued an aggregate of 4,940,000 Common Shares on October 30, 1996
and November 1, 1996 at a net price of $12.035 per share as part of a public
offering for net proceeds to the Company of approximately $58.8 million (the
"Public Offering"). TPG purchased 800,000 of these shares at $12.035 per share.
F-13
<PAGE> 122
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
PRIVATE PLACEMENT OF SECURITIES
In December 1995, the Company closed a $40 million private placement of
securities with partnerships that are affiliated with the Texas Pacific Group
("TPG Placement"). The TPG Placement was comprised of: (i) 4.166 million common
shares issued at $5.85 per share, (ii) 625,000 warrants at a price of $1.00 per
warrant entitling the holder to purchase 625,000 common shares at $7.40 per
share through December 21, 1999 and (iii) 1.5 million shares of $10 stated value
Convertible Preferred. The Convertible Preferred shares were initially
convertible at $7.40 of stated value per common share with such conversion rate
declining 2.5% per quarter. The shares also had a mandatory redemption at a
63.86% premium at December 21, 2000. The Convertible Preferred were converted
into 2,816,372 Common Shares on October 30, 1996. During the period that the
Convertible Preferred were outstanding, the Company made a charge to net income
to accrue the increase during the period in the mandatory redemption premium.
The Company may force conversion of the $7.40 warrants issued in the TPG
Placement after December 21, 1997, if the price of the Common Shares exceeds
$10.00 per share for a period of 40 consecutive days.
As part of the TPG Placement, TPG was granted 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 the first
two years. After the initial two years and until December 21, 2000, TPG may
request and receive one demand registration statement to register 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) 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 waived its right to maintain its pro rata ownership with regard to
the Equity Offering.
As part of the TPG Placement, Tortuga Investment Corp. was paid a financial
advisor fee of 333,333 Common Shares of the Company. The sole shareholder of
Tortuga Investment Corp. was appointed to the Board of Directors of the Company
and elected Chairman upon the closing of the TPG Placement.
WARRANTS
At December 31, 1996, 75,000 warrants were outstanding at an exercise price
of Cdn. $8.40 expiring on May 5, 2000. TPG holds 625,000 warrants at an exercise
price of $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.
SPECIAL WARRANT ISSUES
On April 25, 1995, the Company issued 614,143 Special Warrants at a price
of $4.70 (Cdn. $6.50) per Special Warrant for gross proceeds of $2,750,000
(29,036 Common Share Purchase Warrants were issued to Southcoast Capital
Corporation, as placement agent, in partial payment of their fee). Costs of the
issue were $436,000, resulting in net proceeds to the Company of approximately
$2,314,000. Each Special Warrant was exchanged, at no additional cost, for one
Common Share of Denbury on August 11, 1995.
F-14
<PAGE> 123
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
STOCK OPTIONS AND STOCK PURCHASE PLAN
The Company maintains a Stock Option Plan which authorizes the grant of
options of up to 2,243,525 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.
Following is a summary of stock option activity during the years ended
December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1997:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, NINE MONTHS ENDED
------------------------------------------------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------------------- ------------------- --------------------- ---------------------
WEIGHTED WEIGHTED WEIGHTED WEIGHTED
AVERAGE AVERAGE AVERAGE AVERAGE
NUMBER PRICE NUMBER PRICE NUMBER PRICE NUMBER PRICE
------- -------- ------- -------- --------- -------- --------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OUTSTANDING AT
BEGINNING OF
PERIOD.............. 541,312 $6.68 557,312 $6.30 731,925 $6.11 1,053,000 $ 7.63
Granted............... 138,750 5.64 274,500 5.89 525,500 8.96 750,512 13.64
Terminated............ (26,500) 9.35 (89,887) 7.79 (6,750) 6.28 (21,250) 12.02
Exercised............. (96,250) 3.74 (10,000) 5.42 (197,675) 5.42 (270,056) 6.93
Expired............... -- -- -- -- -- -- -- --
------- ----- ------- ----- --------- ----- --------- ------
OUTSTANDING AT END OF
PERIOD.............. 557,312 $6.30 731,925 $6.11 1,053,000 $7.63 1,512,206 $10.69
======= ===== ======= ===== ========= ===== ========= ======
Options exercisable at
end of period....... 487,937 $6.39 539,675 $6.19 532,375 $6.82 395,222 $ 7.56
======= ===== ======= ===== ========= ===== ========= ======
</TABLE>
<TABLE>
<CAPTION>
WEIGHTED WEIGHTED
OPTIONS OUTSTANDING AS OF OPTIONS AVERAGE WEIGHTED AVERAGE EXERCISABLE AVERAGE
DECEMBER 31, 1996: OUTSTANDING PRICE REMAINING LIFE (YRS.) OPTIONS PRICE
- ------------------------- ----------- -------- --------------------- ----------- --------
<S> <C> <C> <C> <C> <C>
Exercise price of:
$3.65 to $6.99 372,000 $ 5.79 4.3 305,250 $ 5.77
$7.00 to $9.99 444,625 7.78 6.5 175,906 7.70
$10.00 to $14.87 236,375 10.23 9.4 51,219 10.09
</TABLE>
In February 1996, the Company also implemented a Stock Purchase Plan which
authorizes the sale of up to 250,000 Common Shares to all full-time employees
with at least six months of service. Under the plan, the employees may
contribute up to 10% of their base salary and the Company matches 75% of the
employee contribution. The combined funds are used to purchase previously
unissued Common Shares of the Company based on its current market value at the
end of the each quarter. The Company recognizes compensation expense for the 75%
Company matching portion, which for 1996 totaled $147,000 and for the nine
months ended September 30, 1997 totaled $282,000. This plan is administered by
the Stock Purchase Plan Committee of the Board.
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> 124
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company did not have any hedge contracts in place as of December 31,
1996 or September 30, 1997.
7. COMMITMENTS AND CONTINGENCIES
The Company has operating leases for the rental of office space, office
equipment, and vehicles. At December 31, 1996, and September 30, 1997 long-term
commitments for these items require the following future minimum rental
payments:
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
1996 1997
------------ -------------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C>
1997............................................. $ 442 $ 123
1998............................................. 441 474
1999............................................. 166 988
2000............................................. -- 1,196
2001............................................. -- 1,192
2002............................................. -- 1,178
------ ------
$1,049 $5,151
====== ======
</TABLE>
On August 6, 1997, the Company entered into a ten year office lease. See
Note 12.
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 differences between Canadian and U.S. GAAP affecting
the Company's consolidated financial statements are as discussed below.
LOSS ON EXTINGUISHMENT OF DEBT AND IMPUTED PREFERRED DIVIDENDS
The most significant GAAP difference relates to the presentation of the
early extinguishment of debt and the imputed dividend on the Convertible
Preferred. During 1996, the Company expensed $1,281,000 relating to the imputed
preferred dividend, as required under Canadian GAAP. Under U.S. GAAP, this
dividend would be deducted from 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 agreements totaling
$200,000 and $440,000 for 1995 and 1996, respectively. 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
F-16
<PAGE> 125
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
for 1995 and 1996 under U.S. GAAP would be $714,000 and $10,025,000,
respectively, while under Canadian GAAP the amounts reported were $714,000 and
$8,744,000, respectively.
EARNINGS PER SHARE
In addition, the methodology for computing earnings per common share is not
consistent between the two countries. For Canadian purposes, dilutive securities
are only considered in the fully diluted presentation of earnings per share and
the proceeds from such dilutive securities are used to reduce debt in the
calculation. Under U.S. GAAP, the proceeds from such instruments are used to
repurchase Common Shares, using a slightly different methodology for the primary
and fully diluted calculations. For the years ended December 31, 1994 and 1995,
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. For the year
ended December 31, 1996, the Convertible Preferred was still anti-dilutive, but
the stock options, convertible debt and warrants were dilutive and included in
the earnings per share calculations, but with different results under the two
respective GAAP's. Under U.S. GAAP for the year ended December 31, 1996, the
primary earnings per share would be $.64 and the fully-diluted earnings per
share would be $.63 as compared to the $.67 and $.62 as reported under Canadian
GAAP.
For the first nine months of 1996, under U.S. GAAP, the primary and
fully-diluted earnings per common share would be $0.36 and $0.35, compared to
the $0.37 and $0.36, respectively, as reported under Canadian GAAP. Under U.S.
GAAP for the first nine months of 1997, the primary and fully-diluted earnings
per common share would be $0.50 and $0.49, as compared to the $0.53 and $0.50,
respectively, as reported under Canadian GAAP.
During 1996, the Company issued 4,940,000 Common Shares in a public
offering and used a portion of the proceeds to retire bank debt. On a pro forma
basis using U.S. GAAP and assuming that the Common Shares had been issued as of
January 1, 1996 and the interest expense for 1996 relating to the bank debt was
reversed, the primary earnings per share would be $.57 per share. No interest
income was assumed in the pro forma calculation even though the proceeds from
the equity issuance exceeded the bank debt that was retired.
STOCK-BASED COMPENSATION
In 1995, the United States Financial Accounting Standards Board issued
Statement of Financial Accounting Standards ("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 has
elected to continue recognizing expense as prescribed by APB Opinion No. 25,
"Accounting for Stock Issued to Employees", as allowed under SFAS No. 123 rather
than recognizing compensation expense as calculated under SFAS No. 123. As such,
the adoption of SFAS No. 123 during 1996 did not have any effect on the
Company's consolidated financial statements.
F-17
<PAGE> 126
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The Company has two stock-based compensation plans as more fully described
in Note 5. With regard to its stock option plan, the Company applies APB Opinion
No. 25 in accounting for this plan and accordingly no compensation cost has been
recognized. Had compensation expense been determined based on the fair value at
the grant dates for the stock option grants consistent with the method of SFAS
No. 123, the Company's net income and net income per common share would have
been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------
1995 1996
------- --------
<S> <C> <C>
Net income:
As reported (thousands)................................... $ 714 $8,744
Pro forma (thousands)..................................... 503 8,215
Net income per common share:
As reported............................................... $0.10 $ 0.67
Pro forma................................................. 0.07 0.63
Stock options issued during period (thousands).............. 275 526
Weighted average exercise price............................. $5.90 $ 8.96
Average per option compensation value of options
granted(a)................................................ 2.34 2.95
Compensation cost (thousands)............................... 320 801
</TABLE>
- ---------------
(a) 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 32% 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
Deferred income taxes relate to temporary differences based on tax laws and
statutory rates in effect at the December 31, 1995 and 1996 balance sheet dates.
At December 31, 1995, and 1996, all deferred tax assets and liabilities were
computed based on Canadian GAAP amounts and were noncurrent as follows:
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
DECEMBER 31, SEPTEMBER 30,
------------------ -------------
1995 1996 1997
------- ------- -------------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C>
Deferred tax assets:
Loss carryforwards............................... $(4,511) $(4,902) $(10,100)
Deferred tax liabilities:
Exploration and intangible development costs..... 5,942 11,645 23,088
------- ------- --------
Net deferred tax liability......................... $ 1,431 $ 6,743 $ 12,988
======= ======= ========
</TABLE>
RECENTLY ISSUED ACCOUNTING STANDARDS
The Accounting Standards Executive Committee of the American Institute of
Certified Public Accountants has adopted Statement of Position 96-1,
"Environmental Remediation Liabilities," which provides guidance on the
recognition, measurement, display and disclosure of environmental remediation
liabilities. The Statement is effective for the Company's 1997 fiscal year.
Management evaluated such Statement and believes that it will not have a
material effect on the financial position or results of operations of the
Company.
F-18
<PAGE> 127
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
In February 1997 the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 128 Earnings Per Share, ("SFAS 128")
simplifies the standards for computing earnings per share ("EPS") and makes them
more comparable to international EPS standards. SFAS 128 replaces the
presentation of primary EPS with a presentation of basic EPS. Basic EPS excludes
dilution and is computed by dividing income available to common shareholders by
the weighted average number of common shares outstanding for the period. Diluted
EPS reflects the potential dilution that could occur if securities or other
contracts to issue common stock were exercised, converted into common stock or
resulted in the issuance of common shares that then shared in the earnings of
the entity. Diluted EPS is computed similarly to fully diluted EPS pursuant to
Accounting Principles Board Opinion No. 15. SFAS 128 is effective for financial
statements issued for periods ending after December 15, 1997, including interim
periods. Earlier application is not permitted. Basic EPS for the year ended
December 31, 1994, 1995 and 1996 and the nine months ended September 30, 1996
and 1997 under SFAS 128 would $0.19, $0.10, $0.67, $0.37, and $0.53 per common
share respectively. This compares to $0.19, $0.10, $0.64, $0.36, and $0.50
respective periods as computed under current U.S. GAAP.
In June 1997, the FASB issued SFAS No. 130, "Reporting Comprehensive
Income" and SFAS No. 131, "Disclosures About Segments of an Enterprise and
Related Information." SFAS No. 130 establishes standards for reporting and
display of comprehensive income in the financial statements. Comprehensive
income is the total of net income and all other non-owner changes in equity.
SFAS No. 131 requires that companies disclose segment data based on how
management makes decisions about allocating resources to segments and measuring
their performance. SFAS Nos. 130 and 131 are effective for 1998. Adoption of
these standards is not expected to have an effect on the Company's financial
statements, financial position or results of operations.
9. SUPPLEMENTAL INFORMATION
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, 1996, the Company sold 10% or more of its net
production of oil and natural gas to the following purchasers: Natural Gas
Clearinghouse (20%), Penn Union Energy Services (19%), Enron Oil Trading &
Transportation (13%), and Hunt Refining (15%).
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.
F-19
<PAGE> 128
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Costs incurred in oil and natural gas activities for the years ended
December 31, 1994, 1995 and 1996 and the nine months ended September 1997 are as
follows:
<TABLE>
<CAPTION>
NINE MONTHS
YEAR ENDED DECEMBER 31, ENDED
--------------------------- SEPTEMBER 30,
1994 1995 1996 1997
------- ------- ------- -------------
(AMOUNTS IN THOUSANDS)
(UNAUDITED)
<S> <C> <C> <C> <C>
Property acquisition......................... $ 6,736 $17,198 $48,856 $17,592
Exploration.................................. 1,796 1,687 4,592 14,058
Development.................................. 8,371 9,639 33,409 39,123
------- ------- ------- -------
$16,903 $28,524 $86,857 $70,773
======= ======= ======= =======
</TABLE>
PROPERTY ACQUISITIONS
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 owned an interest, plus certain overriding royalty interests in
other areas for approximately $7.5 million (the "Ottawa Acquisition"). 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 "Hess Acquisition"). The Company
funded this acquisition with bank financing from its NationsBank credit facility
and closed this transaction during June 1996.
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>
YEAR ENDED
DECEMBER 31,
-----------------
1995 1996
------- -------
<S> <C> <C>
Revenues (thousands)........................................ $41,273 $61,573
Net income (thousands)...................................... 899 9,820
Net income per common share................................. 0.13 0.75
</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 the bank debt that was
required to fund the acquisitions. The pro forma results reflect an increase of
$250,000 and $500,000 for 1996 and 1995, respectively, in 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.
F-20
<PAGE> 129
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents the revenues and direct operating expenses
attributable to the net interest acquired in the Hess Acquisition by the Company
and are presented on the full cost accrual basis of accounting. Depreciation,
depletion, and amortization, allocated general and administrative expenses,
interest expense and income, and income taxes have been excluded because the
property interests acquired represent only a portion of a business and these
expenses are not necessarily indicative of the expenses to be incurred by the
Company.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------
1994 1995 1996
------- ------- -------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Oil, natural gas and related product sales............. $17,787 $18,210 $20,165
Direct operating expenses:
Lease operating expense................................ 6,598 7,888 6,302
------- ------- -------
Excess of revenues over direct operating expenses........ $11,189 $10,322 $13,863
======= ======= =======
</TABLE>
The following represents the revenues and direct operating expenses
attributable to the net interest acquired in the Ottawa Acquisition by the
Company and are presented on the full cost accrual basis of accounting.
Depreciation, depletion, and amortization, allocated general and administrative
expenses, interest expense and income, and income taxes have been excluded
because the property interests acquired represent only a portion of a business
and these expenses are not necessarily indicative of the expenses to be incurred
by the Company.
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31,
1996
------------
(AMOUNTS IN
THOUSANDS)
<S> <C>
Revenues:
Oil, natural gas and related product sales................ $4,215
Direct operating expenses:
Lease operating expense................................... 760
------
Excess of revenues over direct operating expenses........... $3,455
======
</TABLE>
In November 1995, the Company acquired seven producing wells and certain
non-producing leases in the Gibson/Humphreys Fields of Terrebonne Parish,
Louisiana for approximately $10.2 million.
See also Note 12 for disclosures regarding the Chevron Acquisition made in
December, 1997.
F-21
<PAGE> 130
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
10. CONDENSED CONSOLIDATING FINANCIAL INFORMATION
Denbury Management, Inc. will be issuing debt securities during early 1998
which will be fully and unconditionally guaranteed by Denbury Resources Inc.
Denbury Holdings Ltd. was merged into Denbury Resources Inc. in December 1997
and is not a guarantor of the debt. Condensed consolidating financial
information for Denbury Resources Inc. and Subsidiaries as of December 31, 1995
and 1996 and September 30, 1997 and for the years ended December 31, 1994, 1995
and 1996 and for the nine months ended September 30, 1996 and 1997 is as
follows:
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1995
------------------------------------------------------------------------------
DENBURY DENBURY DENBURY
MANAGEMENT DENBURY RESOURCES INC. RESOURCES INC.
INC. (ISSUER) HOLDINGS LTD. (GUARANTOR) ELIMINATIONS CONSOLIDATED
------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets.......................... $10,910 $ -- $ 15 $ -- $10,925
Property and equipment (using full cost
accounting)........................... 65,613 -- -- -- 65,613
Investment in subsidiaries (equity
method)............................... -- 71,693 70,130 (141,823) --
Other assets............................ 1,075 -- 1,591 (1,563) 1,103
------- ------- ------- --------- -------
Total assets................... $77,598 $71,693 $71,736 $(143,386) $77,641
======= ======= ======= ========= =======
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities..................... $ 4,054 $ -- $ 9 $ -- $ 4,063
Long-term liabilities................... 1,851 1,563 3,226 (1,563) 5,077
Convertible First Preferred Shares...... -- -- 15,000 -- 15,000
Shareholders' equity.................... 71,693 70,130 53,501 (141,823) 53,501
------- ------- ------- --------- -------
Total liabilities and
shareholders' equity......... $77,598 $71,693 $71,736 $(143,386) $77,641
======= ======= ======= ========= =======
</TABLE>
F-22
<PAGE> 131
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
DECEMBER 31, 1996
------------------------------------------------------------------------------
DENBURY DENBURY DENBURY
MANAGEMENT DENBURY RESOURCES INC. RESOURCES INC.
INC. (ISSUER) HOLDINGS LTD. (GUARANTOR) ELIMINATIONS CONSOLIDATED
------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets............................. $ 28,722 $ -- $ 280 $ -- $ 29,002
Property and equipment (using full cost
accounting).............................. 134,996 -- -- -- 134,996
Investment in subsidiaries (equity
method).................................. -- 142,321 140,763 (283,084) --
Other assets............................... 2,505 -- 1,560 (1,558) 2,507
-------- -------- -------- --------- --------
Total assets....................... $166,223 $142,321 $142,603 $(284,642) $166,505
======== ======== ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities........................ $ 16,421 $ -- $ 99 $ -- $ 16,520
Long-term liabilities...................... 7,481 1,558 -- (1,558) 7,481
Shareholders' equity....................... 142,321 140,763 142,504 (283,084) 142,504
-------- -------- -------- --------- --------
Total liabilities and shareholders'
equity........................... $166,223 $142,321 $142,603 $(284,642) $166,505
======== ======== ======== ========= ========
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1997 (UNAUDITED)
------------------------------------------------------------------------------
DENBURY DENBURY DENBURY
MANAGEMENT DENBURY RESOURCES INC. RESOURCES INC.
INC. (ISSUER) HOLDINGS LTD. (GUARANTOR) ELIMINATIONS CONSOLIDATED
------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
ASSETS
Current assets............................. $ 23,453 $ -- $ 387 $ -- $ 23,840
Property and equipment (using full cost
accounting).............................. 183,383 -- -- -- 183,383
Investment in subsidiaries (equity
method).................................. -- 155,174 153,630 (308,804) --
Other assets............................... 3,200 -- 1,545 (1,544) 3,201
-------- -------- -------- --------- --------
Total assets....................... $210,036 $155,174 $155,562 $(310,348) $210,424
======== ======== ======== ========= ========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Current liabilities........................ $ 20,937 $ -- $ 4 $ -- $ 20,941
Long-term liabilities...................... 33,925 1,544 -- (1,544) 33,925
Shareholders' equity....................... 155,174 153,630 155,558 (308,804) 155,558
-------- -------- -------- --------- --------
Total liabilities and shareholders'
equity........................... $210,036 $155,174 $155,562 $(310,348) $210,424
======== ======== ======== ========= ========
</TABLE>
F-23
<PAGE> 132
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1994
------------------------------------------------------------------------------
DENBURY DENBURY DENBURY
MANAGEMENT DENBURY RESOURCES INC. RESOURCES INC.
INC. (ISSUER) HOLDINGS LTD. (GUARANTOR) ELIMINATIONS CONSOLIDATED
------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $12,714 $ -- $ 1 $ -- $12,715
Expenses................................... 10,607 -- 227 -- 10,834
------- ------- ------- -------- -------
Income (loss) before the following: 2,107 -- (226) -- 1,881
Equity in net earnings of subsidiaries... -- 1,389 1,389 (2,778) --
------- ------- ------- -------- -------
Income before income taxes................. 2,107 1,389 1,163 (2,778) 1,881
Provision for federal income taxes......... (718) -- -- -- (718)
------- ------- ------- -------- -------
Net income................................. $ 1,389 $ 1,389 $ 1,163 $ (2,778) $ 1,163
======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1995
------------------------------------------------------------------------------
DENBURY DENBURY DENBURY
MANAGEMENT DENBURY RESOURCES INC. RESOURCES INC.
INC. (ISSUER) HOLDINGS LTD. (GUARANTOR) ELIMINATIONS CONSOLIDATED
------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $20,107 $ -- $ 460 $ (458) $20,109
Expenses................................... 19,026 -- 460 (458) 19,028
------- ------- ------ --------- -------
Income (loss) before the following: 1,081 -- -- -- 1,081
Equity in net earnings of subsidiaries... -- 714 714 (1,428) --
------- ------- ------ --------- -------
Income before income taxes................. 1,081 714 714 (1,428) 1,081
Provision for federal income taxes......... (367) -- -- -- (367)
------- ------- ------ --------- -------
Net income................................. $ 714 $ 714 $ 714 $ (1,428) $ 714
======= ======= ====== ========= =======
</TABLE>
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31, 1996
------------------------------------------------------------------------------
DENBURY DENBURY DENBURY
MANAGEMENT DENBURY RESOURCES INC. RESOURCES INC.
INC. (ISSUER) HOLDINGS LTD. (GUARANTOR) ELIMINATIONS CONSOLIDATED
------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $53,631 $ -- $ 179 $ (161) $53,649
Expenses................................... 38,008 -- 1,746 (161) 39,593
------- ------- ------- -------- -------
Income (loss) before the following: 15,623 -- (1,567) -- 14,056
Equity in net earnings of subsidiaries... -- 10,311 10,311 (20,622) --
------- ------- ------- -------- -------
Income before income taxes................. 15,623 10,311 8,744 (20,622) 14,056
Provision for federal income taxes......... (5,312) -- -- -- (5,312)
------- ------- ------- -------- -------
Net income................................. $10,311 $10,311 $ 8,744 $(20,622) $ 8,744
======= ======= ======= ======== =======
</TABLE>
F-24
<PAGE> 133
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
DENBURY RESOURCES INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATING STATEMENTS OF INCOME
(IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1996 (UNAUDITED)
------------------------------------------------------------------------------
DENBURY DENBURY DENBURY
MANAGEMENT DENBURY RESOURCES INC. RESOURCES INC.
INC. (ISSUER) HOLDINGS LTD. (GUARANTOR) ELIMINATIONS CONSOLIDATED
------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $35,130 $ -- $ 117 $ (113) $35,134
Expenses................................... 26,507 -- 1,468 (113) 27,862
------- ------- ------- --------- -------
Income (loss) before the following: 8,623 -- (1,351) -- 7,272
Equity in net earnings of subsidiaries... -- 5,691 5,691 (11,382) --
------- ------- ------- --------- -------
Income before income taxes................. 8,623 5,691 4,340 (11,382) 7,272
Provision for federal income taxes......... (2,932) -- -- -- (2,932)
------- ------- ------- --------- -------
Net income................................. $ 5,691 $ 5,691 $ 4,340 $ (11,382) $ 4,340
======= ======= ======= ========= =======
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS ENDED SEPTEMBER 30, 1997 (UNAUDITED)
------------------------------------------------------------------------------
DENBURY DENBURY DENBURY
MANAGEMENT DENBURY RESOURCES INC. RESOURCES INC.
INC. (ISSUER) HOLDINGS LTD. (GUARANTOR) ELIMINATIONS CONSOLIDATED
------------- ------------- -------------- ------------ --------------
<S> <C> <C> <C> <C> <C>
Revenues................................... $61,066 $ -- $ 105 $ (102) $61,069
Expenses................................... 44,191 -- 102 (102) 44,191
------- ------- ------- --------- -------
Income (loss) before the following: 16,875 -- 3 -- 16,878
Equity in net earnings of subsidiaries... -- 10,630 10,630 (21,260) --
------- ------- ------- --------- -------
Income before income taxes................. 16,875 10,630 10,633 (21,260) 16,878
Provision for federal income taxes......... (6,245) -- -- -- (6,245)
------- ------- ------- --------- -------
Net income................................. $10,630 $10,630 $10,633 $ (21,260) $10,633
======= ======= ======= ========= =======
</TABLE>
11. SUPPLEMENTAL RESERVE INFORMATION (UNAUDITED)
Net proved oil and natural gas reserve estimates as of December 31, 1995
and 1996 were prepared by Netherland & Sewell and the net oil and natural gas
reserve estimates as of December 31, 1994 were prepared by The Scotia Group,
Inc., both independent petroleum engineers located in Dallas, Texas. The
reserves were prepared in accordance with guidelines established by the
Securities and Exchange Commission and accordingly, were based on existing
economic and operating conditions. Oil and natural gas prices in effect as of
the reserve report date were used without any escalation except in those
instances where the sale is covered by contract, in which case the applicable
contract prices including fixed and determinable escalations were used for the
duration of the contract, and thereafter the last contract price was used.
Operating costs, production and ad valorem taxes and future development costs
were based on current costs with no escalation.
There are numerous uncertainties inherent in estimating quantities of
proved reserves and in projecting the future rates of production and timing of
development expenditures. The following reserve data represents estimates only
and should not be construed as being exact. Moreover, the present values should
not be construed as the current market value of the Company's oil and natural
gas reserves or the costs that would be incurred to obtain equivalent reserves.
All of the reserves are located in the United States.
F-25
<PAGE> 134
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
ESTIMATED QUANTITIES OF RESERVES
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
---------------------------------------------------
1994 1995 1996
--------------- --------------- ---------------
OIL GAS OIL GAS OIL GAS
(MBBL) (MMCF) (MBBL) (MMCF) (MBBL) (MMCF)
------ ------ ------ ------ ------ ------
<S> <C> <C> <C> <C> <C> <C>
Balance beginning of year............... 3,583 13,029 4,230 42,047 6,292 48,116
Revisions of previous estimates....... (48) 2,827 830 (1,620) (490) 3,737
Revisions due to price changes........ -- -- -- -- 1,053 402
Extensions, discoveries and other
additions.......................... 640 14,978 732 -- 3,492 5,480
Production............................ (489) (3,326) (728) (4,844) (1,500) (8,933)
Acquisition of minerals in place...... 544 14,539 1,228 12,533 6,205 25,300
----- ------ ----- ------ ------ ------
Balance at end of period................ 4,230 42,047 6,292 48,116 15,052 74,102
===== ====== ===== ====== ====== ======
Proved developed reserves:
Balance at beginning of year.......... 3,418 12,303 3,755 35,578 5,290 34,894
Balance at end of period.............. 3,755 35,578 5,290 34,894 13,371 58,634
</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.
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------------------
1994 1995 1996
-------- -------- ---------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows................................. $126,129 $214,932 $ 627,476
Future production costs............................. (35,069) (56,323) (134,986)
Future development costs............................ (7,369) (16,154) (28,722)
-------- -------- ---------
Future net cash flows before taxes.................. 83,691 142,455 463,768
10% annual discount for estimated timing of cash
flows.......................................... (31,000) (45,490) (147,670)
-------- -------- ---------
Discounted future net cash flows before taxes....... 52,691 96,965 316,098
Discounted future income taxes...................... (5,763) (15,801) (74,226)
-------- -------- ---------
Standardized measure of discounted future net
cash.............................................. $ 46,928 $ 81,164 $ 241,872
======== ======== =========
</TABLE>
F-26
<PAGE> 135
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following table sets forth an analysis of changes in the Standardized
Measure of Discounted Future Net Cash Flows from proved oil and natural gas
reserves:
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-----------------------------
1994 1995 1996
------- -------- --------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Beginning of year..................................... $28,465 $ 46,928 $ 81,164
Sales of oil and natural gas produced, net of
production costs.................................... (8,383) (13,243) (39,385)
Net changes in sales prices........................... 863 23,037 116,587
Extensions and discoveries, less applicable future
development and production costs.................... 13,416 1,926 34,113
Previously estimated development costs incurred....... 2,492 2,193 5,278
Revisions of previous estimates, including revised
estimates of development costs, reserves and rates
of production....................................... (2,914) 3,958 7,747
Accretion of discount................................. 2,847 4,693 8,116
Purchase of minerals in place......................... 15,732 21,710 86,677
Net change in income taxes............................ (5,590) (10,038) (58,425)
------- -------- --------
End of period......................................... $46,928 $ 81,164 $241,872
======= ======== ========
</TABLE>
12. SUBSEQUENT EVENTS (UNAUDITED)
On November 25, 1997, Denbury entered into a purchase and sale agreement
with Chevron to purchase producing oil and natural gas properties in
Mississippi, for approximately $202 million (the "Chevron Acquisition"). The
acquisition included 122 wells, of which 96 wells will be Company operated. The
Company funded this acquisition with bank financing from a revised and restated
credit facility and closed this transaction during December, 1997.
This acquisition was accounted for under purchase accounting and the
results of operations will be consolidated effective December 31, 1997. Pro
forma results of operations of the Company as if the Chevron Acquisition had
occurred at the beginning of each respective period are as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED SEPTEMBER 30,
DECEMBER 31, ----------------------
1996 1996 1997
-------------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S> <C> <C> <C>
Revenues........................................... $77,311 $52,534 $75,103
Net income......................................... 4,978 1,236 6,959
Net income per common share........................ 0.38 0.11 0.34
</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 the bank debt that was
required to fund the acquisitions. The pro forma results reflect an increase of
$687,000, $514,000 and $514,000 for 1996 and the nine months ended September 30,
1996 and 1997, respectively, in 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.
F-27
<PAGE> 136
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
The following represents the revenues and direct operating expenses
attributable to the net interest acquired in the Chevron Acquisition by the
Company and are presented on the full cost accrual basis of accounting.
Depreciation, depletion, and amortization, allocated general and administrative
expenses, interest expense and income, and income taxes have been excluded
because the property interests acquired represent only a portion of a business
and these expenses are not necessarily indicative of the expenses to be incurred
by the Company.
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
----------------- SEPTEMBER 30,
1995 1996 1997
------- ------- -------------
<S> <C> <C> <C>
Revenues:
Oil, natural gas and related product............... $17,460 $23,662 $14,034
Direct operating expenses:
Lease operating expense............................ 5,825 6,650 5,237
------- ------- -------
Excess of revenues over direct operating expenses.... $11,635 $17,012 $ 8,797
======= ======= =======
</TABLE>
The Company made two amendments to its credit facility during 1997. In
April, 1997, the Company amended its bank credit facility (i) to extend the
revolver by one year to May 31, 1999, (ii) to extend the termination date by one
year to May 31, 2002, and (iii) to reduce the commitment fee percentages.
In October, 1997, the Company further amended its bank credit facility to
(i) modify the security requirement of the facility such that mortgages will
only be required by the banks to the extent that they were in place as of the
date of the amendment and (ii) to modify certain other definitions and minor
provisions of the agreement.
In order to fund the Chevron Acquisition, the Company has revised and
restated its credit facility (the "Credit Facility") with NationsBank of Texas,
as agent, ("NationsBank") a group of banks and increased the size of the
facility from $150 million to $300 million. This restatement was made during the
fourth quarter of 1997, with an adjusted borrowing base as of December 31, 1997
of $260 million of which $ million was available. The Credit Facility
includes a five year revolving credit facility of $175 million, unless renewed
or extended, plus an acquisition tranche of $85 million that is subject to
review every six months and on which the interest rate escalates 0.25% each
quarter beginning March 1, 1998.
On August 6, 1997, the Company entered into a ten year office lease for its
corporate headquarters which is expected to commence late in 1998. The estimated
minimum annual rental payments for the first five years of the lease are
projected to be $1.15 million per year (commencing on occupancy) and the minimum
annual rental payments during the remaining five years of the lease are
projected to be $1.25 million per year.
UNAUDITED QUARTERLY INFORMATION
The following table presents unaudited summary financial information on a
quarterly basis for 1995 and 1996 and the first three quarters of 1997 (in
thousands except per share amounts).
<TABLE>
<CAPTION>
1995
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
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 (primary)............ 0.08 0.00 0.02 0.00
Cash flow from operations(a).............. 2,112 1,913 2,234 3,135
</TABLE>
F-28
<PAGE> 137
DENBURY RESOURCES INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
<TABLE>
<CAPTION>
1996
-----------------------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30 DECEMBER 31
-------- ------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues.................................. $ 9,092 $11,682 $14,359 $18,516
Expenses.................................. 6,767 9,608 11,486 11,732
Net income................................ 1,380 1,215 1,745 4,404
Net income per share (primary)(b)......... 0.12 0.11 0.14 0.25
Cash flow from operations(a).............. 6,065 7,238 8,464 12,373
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------------
MARCH 31 JUNE 30 SEPTEMBER 30
-------- ------- ------------
<S> <C> <C> <C> <C>
Revenues.................................. $21,653 $19,015 $20,401
Expenses.................................. 13,375 15,512 15,304
Net income................................ 5,215 2,207 3,211
Net income per share (primary)............ 0.26 0.11 0.16
Cash flow from operations(a).............. 14,922 12,001 13,243
</TABLE>
- ---------------
(a) Exclusive of the net change in non-cash working capital balances.
(b) Due to the significant variances between quarters in net income and average
shares outstanding, the combined quarterly income per share does not equal
the reported earnings per share for 1996.
F-29
<PAGE> 138
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
of Denbury Resources Inc.
We have audited the accompanying statement of revenues and direct operating
expenses of Chevron U.S.A. Inc.'s working interest in the Heidelberg Fields (the
"Properties") acquired by Denbury Resources Inc. (the "Company") for each of the
two years in the period ended December 31, 1996 and for the nine months ended
September 30, 1997. This statement is the responsibility of the Company's
management. Our responsibility is to express an opinion on this statement based
on our audit.
We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the statement of revenues and direct
operating expenses is free of material misstatement. An audit includes
examining, on a test basis, evidence supporting the amounts and disclosures in
the statement of revenues and direct operating expenses. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the statement of
revenues and direct operating expenses. We believe that our audit provides a
reasonable basis for our opinion.
The accompanying statement of revenues and direct operating expenses was
prepared for the purpose of complying with the rules and regulations of the
Securities and Exchange Commission (for inclusion in the registration statement
on Form S-3 of Denbury Resources Inc.) as described in Note 1 and is not
intended to be a complete presentation of the Properties' revenues and expenses.
In our opinion, the statement of revenues and direct operating expenses
referred to above presents fairly, in all material respects, the revenues and
direct operating expenses of the Properties described in Note 1 for each of the
two years in the period ended December 31, 1996 and for the nine months ended
September 30, 1997, in conformity with generally accepted accounting principles.
Price Waterhouse LLP
San Francisco, California
December 19, 1997
F-30
<PAGE> 139
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES OF PROPERTIES
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, NINE MONTHS ENDED
------------------ SEPTEMBER 30,
1995 1996 1997
------- ------- -----------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Revenues:
Oil, natural gas and related product sales......... $17,460 $23,662 $14,034
Direct operating expenses:
Lease operating expense............................ 5,825 6,650 5,237
------- ------- -------
Excess of revenues over direct operating expense..... $11,635 $17,012 $ 8,797
======= ======= =======
</TABLE>
The accompanying notes are an integral part of these statements.
F-31
<PAGE> 140
NOTES TO STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES OF PROPERTIES
1. BASIS OF PRESENTATION
Denbury Resources Inc. (the "Company") agreed on November 25, 1997 to
acquire Chevron U.S.A. Inc.'s working interest in the Heidelberg Fields for
approximately $202 million. The Properties are located in the state of
Mississippi. The acquisition is expected to close in December 1997. These
acquired Properties will be consolidated in the Company's financial statements
effective January 1, 1998. Other owners of working interests in the Properties
covered by the acquisition agreement have the preferential right to acquire the
Properties, which if exercised could reduce the interest acquired by the
Company.
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, the statement of revenues and direct operating expenses is
presented in lieu of the financial statements required under Rule 3-05 of
Securities and Exchange Commission Regulation S-X.
The accompanying statement of revenues and direct operating expenses (the
"Statement") relates only to the working interest in the Properties acquired and
may not be representative of future operations. The Statement includes revenues
from natural gas sales and direct operating expenses for each of the periods
presented. The Statement does not include federal and state income taxes,
interest, depletion, depreciation and amortization or general and administrative
expenses because such amounts would not be indicative of those expenses which
would be incurred by the Company.
Revenues in the Statement are recognized on the entitlement method.
The accompanying Statement has been prepared on the accrual basis in
accordance with generally accepted accounting principles. Preparation of the
Statement in conformity with generally accepted accounting principles requires
management to make estimates and assumptions that affect the amounts reported in
the Statement and accompanying notes. Actual results could differ from those
estimates.
2. COMMITMENTS AND CONTINGENCIES
Chevron U.S.A. Inc. is a defendant in numerous lawsuits, including, along
with other oil companies, actions challenging oil royalty and severance tax
payments based on posted prices. Plaintiffs may seek to recover large and
sometimes unspecified amounts, and some matters may remain unresolved for
several years. The amount of such future cost is indeterminable. Such liability
for events occurring prior to the effective date of the acquisition shall be
retained by Chevron U.S.A. Inc. and Chevron U.S.A. Inc. has indemnified the
Company for any costs incurred by it in conjunction with these suits.
Given the nature of the Properties acquired and as stipulated in the
purchase agreement, the Company is subject to loss contingencies, if any,
pursuant to existing or expected environmental laws, regulations, and leases
covering the acquired Properties. Management does not believe such matters will
have a material impact on the Statement.
3. CONCENTRATION OF CUSTOMERS
During the year ended December 31, 1996 and the nine months ended September
30, 1997, approximately 67% and 31% of the Properties' production was sold to
Hunt Refining Company and Southland Oil Company, respectively. During the year
ended December 31, 1995, approximately 88% and 10% of the Properties' production
was sold to Amerada Hess Corporation and Hunt Refining Company, respectively.
While management believes that its relationships with these purchasers is good,
any loss of revenue from these purchasers due to nonpayment or late payment by
the purchaser would have an adverse effect on the Statement.
F-32
<PAGE> 141
NOTES TO STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES OF PROPERTIES -- (CONTINUED)
4. OIL AND NATURAL GAS RESERVES INFORMATION (UNAUDITED)
The Properties' proved oil and natural gas reserves at September 30, 1997
and December 31, 1996 and 1995 have been estimated by the Company's petroleum
consultants, Netherland & Sewell, in accordance with guidelines established by
the Securities and Exchange Commission ("SEC").
<TABLE>
<CAPTION>
OIL GAS
ESTIMATED QUANTITIES OF PROVED RESERVES (MBBL) (MMCF)
--------------------------------------- -------- -------
<S> <C> <C>
January 1, 1995............................................. 31,331.1 3,303.7
Production................................................ 1,321.5 290.6
-------- -------
December 31, 1995........................................... 30,009.6 3,013.1
Production................................................ 1,252.0 245.1
-------- -------
December 31, 1996........................................... 28,757.6 2,768.0
Production................................................ 793.6 160.1
-------- -------
September 30, 1997.......................................... 27,964.0 2,607.9
======== =======
Proved Developed Reserves:
As of January 1, 1995..................................... 17,230.8 3,303.7
As of December 31, 1995................................... 15,909.3 3,013.1
As of December 31, 1996................................... 14,657.3 2,768.0
As of September 30, 1997.................................. 13,863.7 2,607.9
</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 acquired is calculated in
accordance with regulations prescribed by the SEC. The Standardized Measure has
been prepared assuming year-end selling prices adjusted for future fixed and
determinable price changes, year-end development and production costs and a 10%
annual discount rate. The reserves and the related Standardized Measure at
September 30, 1997 were adjusted for production during the nine-months ended
September 30, 1997 and the years ended December 31, 1996 and 1995, and in
addition, Standardized Measure was also adjusted for price changes to derive
reserves and the Standardized Measure as of September 30, 1997, December 31,
1996 and December 31, 1995. 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.
<TABLE>
<CAPTION>
DECEMBER 31,
--------------------- SEPTEMBER 30,
1995 1996 1997
--------- --------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Future cash inflows............................. $ 470,689 $ 613,780 $ 426,489
Future production and development costs......... (201,520) (204,876) (189,243)
--------- --------- ---------
Future net cash flows undiscounted.............. 269,169 408,904 237,246
10% annual discount for estimated timing of cash
flows......................................... (142,503) (203,206) (113,931)
--------- --------- ---------
Standardized measure of discounted future net
cash flows.................................... $ 126,666 $ 205,698 $ 123,315
========= ========= =========
</TABLE>
F-33
<PAGE> 142
NOTES TO STATEMENT OF REVENUES AND
DIRECT OPERATING EXPENSES OF PROPERTIES -- (CONTINUED)
The following are principal sources of changes in the standardized measure
of discounted future net cash flows:
<TABLE>
<CAPTION>
YEAR ENDED NINE MONTHS
DECEMBER 31, ENDED
-------------------- SEPTEMBER 30,
1995 1996 1997
-------- -------- -------------
(AMOUNTS IN THOUSANDS)
<S> <C> <C> <C>
Standardized measure of discounted future net
cash flows at beginning of period.............. $ 97,753 $126,666 $205,698
Changes resulting from:
Net change in prices........................... 30,772 83,377 (89,014)
Sales of oil and natural gas produced.......... (11,635) (17,012) (8,797)
Accretion of discount.......................... 9,776 12,667 15,428
-------- -------- --------
Standardized measure of discounted future net
cash flows at end of period.................... $126,666 $205,698 $123,315
======== ======== ========
</TABLE>
F-34
<PAGE> 143
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. 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........................................ $ *
NYSE Filing Fee............................................. *
NASD Fee.................................................... *
The Toronto Stock Exchange Listing Fee...................... *
Luxembourg Stock Exchange Listing Fee....................... *
Transfer Agent's Fees....................................... *
Blue Sky Fees and Expenses.................................. *
Accounting Fees............................................. *
Legal Fees and Expenses..................................... *
Engineering Fees............................................ *
Printing and Engraving Fees and Expenses.................... *
Trustee Fees................................................ *
Rating Agency Fee........................................... *
Miscellaneous............................................... *
------
Total............................................. $ *
======
</TABLE>
- ---------------
* To be completed by amendment
ITEM 15. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Canada
Section 124(1) of the Canada Business Corporations Act ("CBCA") provides
that, except in respect of an action by or on behalf of a corporation or body
corporate to procure a judgment in its favor, a corporation may indemnify a
director or officer of the corporation, a former director or officer of the
corporation or a person who acts or acted at the corporation's request as a
director or officer of a body corporate of which the corporation is or was a
shareholder or creditor, and his heirs and legal representatives, against all
costs, charges, and expenses, including an amount paid to settle an action or
satisfy a judgment, reasonably incurred by him in respect of any civil, criminal
or administrative action or proceeding to which he is made a party by reason of
being or having been a director or officer of such corporation or body
corporate, if:
(a) he acted honestly and in good faith with a view to the best
interests of the corporation; and
(b) in a case of a criminal or administrative action or proceeding
that is enforced by a monetary penalty, he had reasonable grounds for
believing that his conduct was lawful.
Section 124(2) of the CBCA provides that even if such a person is named in
an action by or on behalf of the corporation or body corporate to procure a
judgment in its favor, a corporation may indemnify such a person with court
approval if such person meets the standards set forth in Section 124(1).
Additionally, a person named in Section 124(1) is entitled to indemnity from the
corporation if the person seeking indemnity:
(a) was substantially successful on the merits in his defense of the
action or proceeding; and
(b) fulfills the conditions set forth above.
Section 5.02 of DRI's Bylaws contains the same standards set forth in
Section 124(1), but makes indemnification in such circumstances mandatory by
DRI.
II-1
<PAGE> 144
Texas
DMI has authority under Articles 2.02(A)(16) and 2.02-1 of the Texas
Business Corporation Act (the "TBCA") to indemnify its directors and officers to
the extent provided for in such statute. Section 3.06 of DMI's Bylaws provides
that the board of directors of DMI may authorize DMI to pay expenses incurred
by, so as to satisfy a judgment or fine rendered or levied against, present or
former directors, officers or employees of DMI as provided by Article
2.02(A)(16) of the TBCA.
The TBCA provides in part that a corporation may indemnify a director or
officer or other person who was, is, or is threatened to be made a named
defendant or respondent in a proceeding because the person is or was a director,
officer, employee or agent of the corporation, if it is determined that (i) such
person conducted himself in good faith; (ii) reasonably believed, in the case of
conduct in his official capacity as a director or officer of the corporation,
that his conduct was in the corporation's best interest, and, in all other
cases, that his conduct was not opposed to the corporation's best interests; and
(iii) in the case of any criminal proceeding, had no reasonable cause to believe
that his conduct was unlawful.
A corporation may indemnify a person under the TBCA against judgments,
penalties (including excise and similar taxes), fines, settlements, and
reasonable expenses actually incurred by the person in connection with the
proceeding. If the person is found liable to the corporation or is found liable
on the basis that personal benefit was improperly received by the person, the
indemnification is limited to reasonable expenses actually incurred by the
person in connection with the proceeding, and shall not be made in respect of
any proceeding in which the person shall have been found liable for willful or
intentional misconduct in the performance of his duty to the corporation.
A corporation may also pay or reimburse expenses incurred by a person in
connection with his appearance as a witness or other participation in a
proceeding at a time when he is not a named defendant or respondent in the
proceeding.
In addition to the above provisions, both DRI and DMI have also entered
into an indemnity agreement with their officers and directors, which, subject to
the CBCA and TBCA, respectively, 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 DRI or DMI, both.
Effective in August 1997, the Company modified the directors and officers
insurance covering each of its officers and directors. The insurance provides up
to $15 million of coverage for the officers and directors with deductibles
ranging from zero to $350,000, depending on the type of claim, and $15 million
of coverage for the Company. The Company has paid for 100% of the cost of this
insurance.
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Exhibits.
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1(a)** -- Form of Underwriting Agreement relating to Equity
Offering.
1(b)** -- Form of Underwriting Agreement relating to Debt Offering.
3(a) -- Articles of Continuance of Denbury Resources Inc., as
amended (incorporated by reference as Exhibits 3(a),
3(b), 3(c), 3(d) of DRI's Registration Statement on Form
F-1 dated August 25, 1995, Exhibit 4(e) of DRI's
Registration Statement on Form S-8 dated February 2, 1996
and Exhibit 3(a) of the Pre-effective Amendment No. 2 of
DRI's Registration Statement on Form S-1 dated October
22, 1996).
</TABLE>
II-2
<PAGE> 145
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
3(b) -- General By-Law No. 1: A By-Law Relating Generally to the
Conduct of the Affairs of Denbury Resources Inc., as
amended (incorporated by reference as Exhibit 3(e) of
DRI's Registration Statement on Form F-1 dated August 25,
1995, Exhibit 4(d) of the Registrant's Registration
Statement on Form S-8 dated February 2, 1996.
3(c)** -- Restated Articles of Incorporation of Denbury Management,
Inc.
3(d)** -- Bylaws of Denbury Management, Inc.
4(a) -- See Exhibits 3(a), 3(b), 3(c) and 3(d) for provisions of
the Articles of Continuance and General By-Law No. 1 of
DRI defining the rights of the holders of Common Shares.
4(b)** -- Indenture dated as of , 1998, between DMI and
, as trustee.
5(a)** -- Opinion of Burnet, Duckworth & Palmer.
5(b)** -- Opinion of Jenkens & Gilchrist, a Professional
Corporation.
10(a)** -- Form of First Restated Credit Agreement, by and among
DMI, as borrower, DRI as guarantor, NationsBank of Texas,
N.A., as administrative agent, Nationsbanc Montgomery
Securities, Inc., as syndication agent and arranger and
the financial institutions listed on Schedule I thereto,
as banks, to be executed on December 29, 1997.
12* -- Statement of Ratio of Earnings to Fixed Charges.
23(a)* -- Consent of Deloitte & Touche
23(b)* -- Consent of Price Waterhouse LLP
23(c)** -- Consent of Netherland, Sewell and Associates.
23(d)** -- Consent of Burnet, Duckworth & Palmer (contained in its
opinion filed as Exhibit 5.a).
23(e)** -- Consent of Jenkens & Gilchrist, a Professional
Corporation (contained in its opinion filed as Exhibit
5(b)).
24(a)* -- Power of Attorney (contained on the signature page of
this Registration Statement).
25.1** -- Statement of Eligibility of , as Trustee.
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
(b) Financial Statements and Schedules.
<TABLE>
<CAPTION>
PAGE
------------
<S> <C>
Independent Auditors' Report................................ II-7
Schedule I -- Condensed Financial Information of
Registrant................................................ II-8 thru 11
</TABLE>
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
Registrants pursuant to the provisions described in Item 15 above, or otherwise,
the Registrants 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
Registrants of expenses incurred or paid by a director, officer or controlling
person of the Registrants in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person
II-3
<PAGE> 146
in connection with the securities being registered, the Registrants will, unless
in the opinion of their 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 Registrants hereby undertake:
(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-4
<PAGE> 147
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, as amended, the
Registrants certified that they have reasonable grounds to believe that they
meet all of the requirements for filing on Form S-3 and have duly caused this
Registration Statement No. to be signed on their behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on December 23, 1997.
DENBURY RESOURCES INC.
By: /s/ PHIL RYKHOEK
----------------------------------
Phil Rykhoek
Chief Financial Officer
DENBURY MANAGEMENT, INC.
By: /s/ PHIL RYKHOEK
----------------------------------
Phil Rykhoek
Chief Financial Officer
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.
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.
<TABLE>
<CAPTION>
SIGNATURES TITLE DATE
---------- ----- ----
<C> <S> <C>
/s/ GARETH ROBERTS President, Chief Executive December 23, 1997
- ----------------------------------------------------- Officer and Director of
Gareth Roberts DRI (Principal Executive
Officer)
/s/ PHIL RYKHOEK Chief Financial Officer, December 23, 1997
- ----------------------------------------------------- Secretary and
Phil Rykhoek Authorized Representative
of DRI (Principal
Financial Officer)
/s/ BOBBY J. BISHOP Controller and Chief December 23, 1997
- ----------------------------------------------------- Accounting Officer of DRI
Bobby J. Bishop (Principal Accounting
Officer)
/s/ RONALD G. GREENE Chairman of the Board and December 23, 1997
- ----------------------------------------------------- Director of DRI
Ronald G. Greene
/s/ WIELAND WETTSTEIN Director of DRI December 23, 1997
- -----------------------------------------------------
Wieland Wettstein
</TABLE>
II-5
<PAGE> 148
<TABLE>
<C> <S> <C>
/s/ WILMOT MATTHEWS Director of DRI December 23, 1997
- ------------------------------------------------------
Wilmot Matthews
/s/ GARETH ROBERTS President, Chief Executive Officer December 23, 1997
- ------------------------------------------------------ and Director of DMI (Principal
Gareth Roberts Executive Officer)
/s/ PHIL RYKHOEK Chief Financial Officer and December 23, 1997
- ------------------------------------------------------ Secretary and
Phil Rykhoek Director of DMI (Principal
Financial Officer)
/s/ BOBBY J. BISHOP Controller and Chief Accounting December 23, 1997
- ------------------------------------------------------ Officer of DMI (Principal
Bobby J. Bishop Accounting Officer)
/s/ MATTHEW DESO Vice President, Exploration and December 23, 1997
- ------------------------------------------------------ Director of DMI
Matthew Deso
/s/ MARK WORTHEY Vice President, Operations and December 23, 1997
- ------------------------------------------------------ Director of DMI
Mark Worthey
</TABLE>
II-6
<PAGE> 149
INDEPENDENT AUDITORS' REPORT
To the Shareholders of Denbury Resources Inc.
We have audited the consolidated financial statements of Denbury Resources
Inc. as at December 31, 1995 and 1996 and for each of the three years in the
period ended December 31, 1996 and have issued our report thereon dated February
21, 1997, such consolidated financial statements and report are included
elsewhere in this registration statement on Form S-3. 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 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 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 made 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 21, 1997
II-7
<PAGE> 150
SCHEDULE I -- CONDENSED FINANCIAL INFORMATION OF REGISTRANT
DENBURY RESOURCES INC.
UNCONSOLIDATED BALANCE SHEETS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
ASSETS
<TABLE>
<CAPTION>
DECEMBER 31,
-------------------
1995 1996
------- --------
<S> <C> <C>
Current assets
Cash and cash equivalents................................. $ 8 $ 274
Trade and other receivables............................... 7 6
------- --------
Total current assets.............................. 15 280
------- --------
Investment in subsidiaries (equity method).................. 70,130 140,763
Loan receivable from subsidiary............................. 1,563 1,558
Other assets................................................ 28 2
------- --------
Total assets...................................... $71,736 $142,603
======= ========
LIABILITIES AND SHAREHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued liabilities.................. $ 9 $ 99
Long-term debt.............................................. 3,226 --
------- --------
3,235 99
------- --------
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 -- 20,055,757 shares at December 31, 1996
and 11,428,809 shares at December 31, 1995............. 50,064 130,323
Retained earnings......................................... 3,437 12,181
------- --------
Total shareholders' equity........................ 53,501 142,504
------- --------
Total liabilities and shareholders' equity........ $71,736 $142,603
======= ========
</TABLE>
See Notes to Financial Statements.
II-8
<PAGE> 151
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,
-------------------------
1994 1995 1996
------ ------ -------
<S> <C> <C> <C>
Revenues
Oil, natural gas and related product sales................ $ -- $ -- $ --
Interest income........................................... 1 460 179
------ ------ -------
Total revenues.................................... 1 460 179
------ ------ -------
Expenses
General and administrative................................ 149 178 161
Interest.................................................. 76 282 304
Imputed preferred dividends............................... -- -- 1,281
Depletion and depreciation................................ 2 -- --
------ ------ -------
Total expenses.................................... 227 460 1,746
------ ------ -------
Income before the following................................. (226) -- (1,567)
Equity in net earnings of subsidiaries.................... 1,389 714 10,311
------ ------ -------
Income before income taxes.................................. 1,163 714 8,744
Provision for federal income taxes.......................... -- -- --
------ ------ -------
Net income........................................ $1,163 $ 714 $ 8,744
====== ====== =======
Net income per common share
Primary................................................... $ 0.19 $ 0.10 $ 0.67
Fully diluted............................................. 0.19 0.10 0.62
====== ====== =======
Average number of common shares outstanding................. 6,240 6,870 13,104
====== ====== =======
</TABLE>
See Notes to Financial Statements
II-9
<PAGE> 152
DENBURY RESOURCES INC.
UNCONSOLIDATED STATEMENTS OF CASH FLOWS
(AMOUNTS IN THOUSANDS OF U.S. DOLLARS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
-------------------------------
1994 1995 1996
------- -------- --------
<S> <C> <C> <C>
Cash flow from operating activities:
Net income................................................ $ 1,163 $ 714 $ 8,744
Adjustments needed to reconcile to net cash flow provided
by operations:
Depreciation, depletion and amortization............... 2 -- --
Imputed preferred dividend............................. -- -- 1,281
Other.................................................. 9 17 114
Equity on net earnings of subsidiaries................. (1,389) (714) (10,311)
------- -------- --------
(215) 17 (172)
Changes in working capital items relating to operations:
Trade and other receivables............................ 8 (4) --
Accounts payable and accrued liabilities............... (77) (12) 90
------- -------- --------
Net cash flow provided by operations........................ (284) 1 (82)
------- -------- --------
Cash flow from investing activities:
Investments in subsidiaries............................ (1,518) (43,569) (60,316)
Net purchases of other assets.......................... (15) 7 --
------- -------- --------
Net cash used for investing activities...................... (1,533) (43,562) (60,316)
------- -------- --------
Cash flow from financing activities:
Issuance of subordinated debt.......................... 1,451 1,772 --
Issuance of common stock............................... 367 26,825 60,664
Issuance of preferred stock............................ -- 15,000 --
Costs of debt financing................................ -- (35) --
------- -------- --------
Net cash provided by financing activities................... 1,818 43,562 60,664
------- -------- --------
Net increase (decrease) in cash and cash equivalents........ 1 1 266
Cash and cash equivalents at beginning of year.............. 6 7 8
------- -------- --------
Cash and cash equivalents at end of year.................... $ 7 $ 8 $ 274
======= ======== ========
Supplemental disclosure of cash flow information:
Cash paid during the year for interest................. $ 76 $ 282 $ 277
</TABLE>
II-10
<PAGE> 153
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. have
been prepared in accordance with Canadian generally accepted accounting
principles and 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> 154
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
<C> <S>
1(a)** -- Form of Underwriting Agreement relating to Equity
Offering.
1(b)** -- Form of Underwriting Agreement relating to Debt Offering.
3(a) -- Articles of Continuance of Denbury Resources Inc., as
amended (incorporated by reference as Exhibits 3(a),
3(b), 3(c), 3(d) of DRI's Registration Statement on Form
F-1 dated August 25, 1995, Exhibit 4(e) of DRI's
Registration Statement on Form S-8 dated February 2, 1996
and Exhibit 3(a) of the Pre-effective Amendment No. 2 of
DRI's Registration Statement on Form S-1 dated October
22, 1996).
3(b) -- General By-Law No. 1: A By-Law Relating Generally to the
Conduct of the Affairs of Denbury Resources Inc., as
amended (incorporated by reference as Exhibit 3(e) of
DRI's Registration Statement on Form F-1 dated August 25,
1995, Exhibit 4(d) of the Registrant's Registration
Statement on Form S-8 dated February 2, 1996.
3(c)** -- Restated Articles of Incorporation of Denbury Management,
Inc.
3(d)** -- Bylaws of Denbury Management, Inc.
4(a) -- See Exhibits 3(a), 3(b), 3(c) and 3(d) for provisions of
the Articles of Continuance and General By-Law No. 1 of
DRI defining the rights of the holders of Common Shares.
4(b)** -- Indenture dated as of , 1998, between DMI and
, as trustee.
5(a)** -- Opinion of Burnet, Duckworth & Palmer.
5(b)** -- Opinion of Jenkens & Gilchrist, a Professional
Corporation.
10(a)** -- Form of First Restated Credit Agreement, by and among
DMI, as borrower, DRI as guarantor, NationsBank of Texas,
N.A., as administrative agent, Nationsbanc Montgomery
Securities, Inc., as syndication agent and arranger and
the financial institutions listed on Schedule I thereto,
as banks, to be executed on December 29, 1997.
12* -- Statement of Ratio of Earnings to Fixed Charges.
23(a)* -- Consent of Deloitte & Touche
23(b)* -- Consent of Price Waterhouse LLP
23(c)** -- Consent of Netherland, Sewell and Associates.
23(d)** -- Consent of Burnet, Duckworth & Palmer (contained in its
opinion filed as Exhibit 5.a).
23(e)** -- Consent of Jenkens & Gilchrist, a Professional
Corporation (contained in its opinion filed as Exhibit
5(b)).
24(a)* -- Power of Attorney (contained on the signature page of
this Registration Statement).
25.1** -- Statement of Eligibility of , as Trustee.
</TABLE>
- ---------------
* Filed herewith.
** To be filed by amendment.
<PAGE> 1
EXHIBIT 12
DENBURY RESOURCES INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEARS ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------ -----------------------------
PRO FORMA PRO FORMA
1992 1993 1994 1995 1996 1996 1996 1997 1997
----- ------ ------ ------ ------- --------- ------- ------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Earnings:
Pretax income from continuing
operations........................... $(335) $1,114 $1,881 $1,081 $14,056 $13,560 $ 7,272 $16,878 $13,829
Fixed charges............................ 18 99 1,180 2,161 4,080 14,314 3,385 498 8,005
----- ------ ------ ------ ------- ------- ------- ------- -------
Earnings............................. (317) 1,213 3,061 3,242 18,136 27,874 10,657 17,376 21,834
----- ------ ------ ------ ------- ------- ------- ------- -------
Fixed Charges:
Interest expense....................... 8 83 1,146 2,085 1,993 12,227 1,530 387 7,894
Interest component of rent expense..... 10 16 34 76 116 116 81 111 111
Imputed preferred divided.............. -- -- -- -- 1,281 1,281 1,153 -- --
Preferred dividend tax effect.......... -- -- -- -- 690 690 621 -- --
----- ------ ------ ------ ------- ------- ------- ------- -------
Fixed charges........................ $ 18 $ 99 $1,180 $2,161 $ 4,080 $14,314 $ 3,385 $ 498 $ 8,005
----- ------ ------ ------ ------- ------- ------- ------- -------
Ratio of earnings to fixed............... (a) 12.3 2.6 1.5 4.4 1.9 3.1 34.9 2.7
===== ====== ====== ====== ======= ======= ======= ======= =======
</TABLE>
- ---------------
(a) Earnings were inadequate to cover fixed charges as there was a $317,000
deficiency.
<PAGE> 1
EXHIBIT 23(A)
INDEPENDENT AUDITORS' CONSENT
We consent to the use in this Registration Statement of Denbury Resources
Inc. on Form S-3 of our report dated February 21, 1997, on the consolidated
financial statements of Denbury Resources Inc., appearing and incorporated by
reference in the prospectus, which is part of this Registration Statement and of
our report dated February 21, 1997, relating to the financial statement schedule
appearing elsewhere and incorporated by reference in the Registration Statement.
We also consent to the reference to us under the heading "Experts" in such
Prospectus.
DELOITTE & TOUCHE
Chartered Accountants
Calgary, Alberta
December 22, 1997
<PAGE> 1
EXHIBIT 23(B)
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-3 of Denbury Resources Inc. of our report dated
December 19, 1997 relating to the statement of revenues and direct operating
expenses of Chevron U.S.A. Inc's working interest in the Heidelberg Fields
acquired by Denbury Resources Inc., which appears in such Prospectus. We also
consent to the reference to us under the heading "Experts" in such Prospectus.
PRICE WATERHOUSE LLP
San Francisco, California
December 19, 1997
