As filed with the Securities and Exchange Commission on January 19, 1999
Registration No. 333-69577
- ------------------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
---------------
Amendment No. 1
to
Form S-4
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
---------------
DENBURY RESOURCES INC.
(Exact name of Registrant as specified in its charter)
Canada 1311 Not Applicable
(State or other jurisdiction (Primary standard (I.R.S. employer
of incorporation or industrial identification no.)
organization) classification
code number)
PHIL RYKHOEK, C.F.O.
17304 Preston Road, Suite 200 Denbury Resources Inc.
Dallas, Texas 75252 17304 Preston Road, Suite 200
(972) 673-2000 Dallas, Texas 75252
(Address and telephone number (972) 673-2000; Facsimile:
of Registrant's (972) 673-2051
principal executive offices) (Name, address and telephone
number of Agent for Service)
Copies to:
DONALD W. BRODSKY
KAREN BRYANT
Jenkens & Gilchrist,
A Professional Corporation
1100 Louisiana, Suite 1800
Houston, TX 77002
(713) 951-3300; Facsimile: (713) 951-3314
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after (a) the effectiveness of this Registration Statement and (b)
the effective date of the continuance of Denbury Resources Inc., a Canadian
corporation, as a domestic corporation under Delaware law which, as continued
under Delaware law, is the "Registrant".
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
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, as amended, or until the registration statement
shall become effective on such date as the Commission, acting pursuant to such
Section 8(a), may determine.
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
Proposed Proposed
Title of Each Class Amount Maximum Maximum Amount of
of Securities to be to be Offering Price Aggregate Registration
Registered Registered Per Share Offering Price Fee
<S> <C> <C> <C> <C>
Common Stock 31,976,538 (1) $ 4.00 (2) $ 127,906,000(2) $35,558(2)(3)
<FN>
(1) Consists of (i) 26,801,680 shares of Denbury Delaware common stock issuable
upon the conversion pursuant to the continuance of the Company to the
United States as a Delaware corporation from Canada under Delaware law, of
currently issued and outstanding common shares of the Company, and (ii) up
to 5,174,858 shares of Denbury Delaware common stock reserved for issuance
and which will be reserved by Denbury Delaware upon conversion of shares of
the Company reserved for issuance under the Company's Stock Option Plan and
Employee Stock Purchase Plan and the outstanding warrants, assuming that
the proposed resolutions are approved by the shareholders.
(2) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(f)(1) and Rule 457(c), based on the average of the
high and low prices of Common Shares, no par value, of the Company on
December 22, 1998 on the New York Stock Exchange.
(3) The Registrant has previously paid a filing fee of $35,558.
</FN>
</TABLE>
<PAGE>
The information in this prospectus is not complete and may be changed. We may
not sell these securities until the registration statement filed with the
Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these
securities in any state where the offer or sale is not permitted.
Preliminary Proxy Statement/Prospectus
Subject to Completion, dated February __, 1999
[Logo]
DENBURY RESOURCES INC.
We are calling a special meeting of stockholders of Denbury Resources Inc.
("Denbury Canada" or the "Company") to vote on:
o the move of the Company's domicile from Canada to the United States as a
Delaware corporation ("Denbury Delaware");
o the sale of 18,552,876 of the Company's common shares to an affiliate of
the Texas Pacific Group ("TPG"), the Company's largest shareholder, for
U.S. $100 million, or $5.39 per share; and
o the increase in the number of common shares available for issuance under
our employee stock purchase and stock option plans.
MOVE OF DOMICILE. The proposed move to the United States will not change
the business or operations of our Company or our personnel and directors,
and we will own all of the same assets and liabilities. The board of
directors believes the Company will benefit from the move to the United
States through greater flexibility in the ways it raises money and makes
acquisitions. The Company's common shares will continue to trade on the New
York Stock Exchange (the "NYSE") and Toronto Stock Exchange (the "TSE")
under the symbol "DNR."
SALE OF SHARES TO TPG. The sale of common shares to TPG will provide
funds we can use to buy oil and gas properties at a time when it is
difficult for oil and gas companies to raise money. We believe that current
low oil and gas prices make this an excellent time to pursue oil and gas
acquisitions.
MORE SHARES FOR EMPLOYEE PLANS. Our employee stock purchase and stock
option plans provide rewards and incentives to our key employees and help
us retain these key employees. Additional common shares are needed for
these plans.
CONSIDER CAREFULLY THE RISK FACTORS BEGINNING ON PAGE 14 OF THIS DOCUMENT.
You should read this entire document carefully. It explains the proposals,
particularly the move of the Company's domicile from Canada to the United States
and the sale of common shares to TPG.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE FOR ALL OF THE PROPOSALS.
The special meeting will be held on March __, 1999 in Calgary, Alberta. Whether
or not you plan to attend the meeting, please vote and mail in your proxy card
by following the instructions on page 27 under "The Meeting" and on the proxy
card.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED THESE SECURITIES OR DETERMINED IF THIS PROXY
STATEMENT/PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
This Proxy Statement/Prospectus was first mailed to stockholders on February __,
1999.
<PAGE>
DENBURY RESOURCES INC.
17304 PRESTON ROAD, SUITE 200
DALLAS, TX 75252
NOTICE OF SPECIAL MEETING OF SHAREHOLDERS
Date: February __, 1999 Place: Petroleum Club
Viking Room
319 Fifth Avenue S.W.
Calgary, Alberta
Time: 10:00 a.m. (Calgary time)
At the special meeting, the shareholders of Denbury Resources Inc. will be
asked to vote on:
1. moving the Company's corporate domicile from Canada to the United
States as a Delaware corporation;
2. granting the board of directors the authority to postpone or abandon
the move, even if approved by the shareholders, if it determines
such move or its timing are not be in the Company's best interest;
3. selling 18,552,876 common shares to an affiliate of TPG for $100
million or $5.39 per share;
4. increasing the number of common shares that may be issued under the
Company's Employee Stock Purchase Plan;
5. increasing the number of common shares that may be issued under the
Company's Stock Option Plan; and
6. any other business that may properly come before the special
meeting.
A quorum is required to hold the meeting. The move of corporate domicile
requires approval by 2/3 of the votes cast by the Company's shareholders. The
sale of common shares to TPG requires a simple majority of the shareholders
voting for approval, excluding any vote by TPG or its affiliates. The increase
in the number of shares under the stock purchase and stock option plans also
requires a simple majority. If you disagree with moving the Company's domicile,
you may be paid the fair value of your stock in exchange for your shares. To be
paid, you must follow the steps outlined in this document. DO NOT SEND STOCK
CERTIFICATES WITH YOUR PROXY CARD.
Only shareholders who owned stock at the close of business on January __,
1999 can vote at this meeting or any adjournments that may take place.
By Order of the Board of Directors,
Phil Rykhoek
Chief Financial Officer and Secretary
As of February __, 1999
IF YOU ARE UNABLE TO ATTEND THE MEETING IN PERSON, IT IS IMPORTANT THAT THE
ENCLOSED PROXY CARD BE SIGNED, DATED AND PROMPTLY RETURNED IN THE ENCLOSED
ENVELOPE. THIS PROXY CARD MUST BE RECEIVED AT LEAST TWO BUSINESS DAYS BEFORE THE
MEETING TO BE INCLUDED IN THE VOTE. YOU MAY VOTE BY RETURNING THE PROXY CARD
EVEN IF YOU PLAN TO ATTEND THE MEETING.
<PAGE>
TABLE OF CONTENTS
Page
QUESTIONS AND ANSWERS ABOUT
VOTING......................................................................1
SUMMARY........................................................................3
Moving the Corporate Domicile...............................................3
Right to Dissent.........................................................3
Background to and Principal Reasons for
the Move of Corporate Domicile..........................................4
Difference in Shareholder Rights in Canada
and Delaware............................................................5
Certain Income Tax Considerations of the
Move of Corporate Domicile..............................................6
Directors and Officers Afer the Move.....................................7
Stock Exchange Listings After the Move;
Recent Prices...........................................................7
Intent of Management and TPG to Vote in
Favor of the Move.......................................................7
Granting the Board of Directors Authority to
Abandon or Postpone the Move of Domicile..................................7
Sale of Shares to TPG.......................................................8
Increase of Authorized Shares Under Employee
Stock Purchase Plan......................................................10
Increase of Authorized Shares Under Stock
Option Plan..............................................................11
Summary Historical And Pro Forma
Consolidated Financial Data..............................................12
RISK FACTORS..................................................................14
Risks Arising Out of the Proposed Move of
Domicile.................................................................14
Canadian Federal Income Tax Considerations...............................14
United States Federal Income Tax
Considerations.........................................................14
Effects of the Move of Domicile on
Shareholder Rights.....................................................15
Risks of Selling Common Shares to TPG......................................17
Controlling Stockholder..................................................17
Dilution.................................................................17
Risks Inherent in an Investment in DRI.....................................17
Volatility of Oil and Natural Gas Prices;
Full Cost pool Writedowns..............................................18
Substantial Capital Requirements and Need
To Replace Reserves....................................................18
Uncertainty of Oil and Natural Gas Reserve
Estimates..............................................................18
Acquisition Risks........................................................18
Drilling and Operating Risks.............................................18
Effects of Leverage and Restrictive Debt
Covenants..............................................................19
Dependence on Key Personnel..............................................19
Governmental and Environmental Regulation................................19
Competition..............................................................19
Shares Eligible for Future Sale..........................................19
THE COMPANY...................................................................20
Corporate Overview.........................................................20
Corporate Strategy.........................................................20
Acquisitions...............................................................20
Impact of Recent Oil and Gas Price Decreases...............................21
Summary Historical and Pro Forma
Consolidated Financial Data..............................................23
Summary Reserve Data.......................................................25
Summary Operating Data.....................................................26
THE MEETING...................................................................27
General....................................................................27
Voting Rights..............................................................27
Vote Required to Approve the Proposals.....................................28
Solicitation and Revocation of Proxies.....................................28
MOVING THE CORPORATE DOMICILE.................................................29
The Move...................................................................29
The Merger.................................................................30
Effects of the Move of Corporate Domicile and
Merger...................................................................31
Background to and Principal Reasons for the
Move of Corporate Domicile and Merger....................................32
Material Canadian Federal Income Tax
Consequences of the Move of Corporate
Domicile and Merger......................................................34
Material United States Federal Income Tax
Consequences to Shareholders of the Move of
Corporate Domicile and Merger............................................37
Material United States Federal Income Tax
Consequences to the Company of the Move of
Corporate Domicile and Merger............................................44
Comparison of Shareholders' Rights.........................................46
Dissenting Shareholders' Rights............................................55
GRANTING THE BOARD OF DIRECTORS
AUTHORITY TO ABANDON OR POSTPONE
THE MOVE OF DOMICILE.......................................................57
ii
<PAGE>
SALE OF SHARES TO TPG.........................................................57
Opinion of CSFB............................................................63
Use of Proceeds............................................................66
Capitalization.............................................................67
INCREASE OF AUTHORIZED SHARES UNDER
EMPLOYEE STOCK PURCHASE PLAN...............................................67
INCREASE OF AUTHORIZED SHARES UNDER
STOCK OPTION PLAN..........................................................68
MANAGEMENT....................................................................69
Compensation of Directors and Officers.....................................71
DESCRIPTION OF CAPITAL STOCK..................................................72
Denbury Canada and Denbury Delaware Common
Stock....................................................................72
Denbury Delaware Preferred Stock...........................................72
NATURE OF THE TRADING MARKET..................................................72
LEGAL MATTERS.................................................................73
EXPERTS.......................................................................73
WHERE YOU CAN FIND MORE
INFORMATION.............................................................73
Available Information......................................................73
Incorporation of Certain Documents by
Reference................................................................74
Certain Forward-Looking Statements.........................................74
OTHER MATTERS.................................................................74
SERVICE AND ENFORCEMENT OF LEGAL
PROCESS....................................................................74
GLOSSARY......................................................................75
EXHIBIT A - OPINION OF CREDIT SUISSE
FIRST BOSTON CORPORATION..................................................A-1
EXHIBIT B - SECTION 190 OF THE CBCA..........................................B-1
EXHIBIT C - CERTIFICATE OF
DOMESTICATION.............................................................C-1
EXHIBIT D - CERTIFICATE OF
INCORPORATION.............................................................D-1
EXHIBIT E - BYLAWS...........................................................E-1
EXHIBIT F - LIQUIDITY OPINION................................................F-1
EXHIBIT G - FULL TEXT OF RESOLUTIONS.........................................G-1
iii
<PAGE>
QUESTIONS AND ANSWERS ABOUT THE VOTING
Q: Should I send in my stock certificates?
A: No, unless you are exercising your dissenter's rights. In that case, you
should carefully read pages 55 through 57 and follow those instructions.
Otherwise, you should keep your stock certificates as the move will not
require surrender of stock certificates at any time.
Q: Who is entitled to vote?
A: Shareholders as of the close of business on the record date, January __,
1999.
Q: How do I vote? What do I need to do now?
A: After carefully reading and considering the information contained in this
document, please fill out and sign your proxy card. Then mail your signed
proxy card in the enclosed prepaid return envelope as soon as possible so
that your shares will be represented at the special meeting. Your proxy
card will instruct the persons named on the card to vote your shares at the
special meeting as you direct on the card. If you do not vote or you
abstain on any proposal, the effect will be a vote against that proposal.
THE BOARD OF DIRECTORS RECOMMENDS THAT YOU VOTE IN FAVOR OF ALL OF THE
PROPOSALS.
Q. May I change my vote after I have mailed my signed proxy card?
A. You may change your vote at any time before your proxy is voted at the
special meeting. You may do this in one of three ways:
o notifying the Corporate Secretary in writing;
o voting in person at the meeting; or
o returning a later-dated proxy card.
If you choose either of the first two methods, you must submit your notice
of revocation or your new proxy card to the attention of the Corporate
Secretary at Denbury Resources Inc., 17304 Preston Road, Suite 200, Dallas,
Texas 75252.
Q: If my shares are held in "street name" by my broker, will my broker vote my
shares for me?
A: Your broker will vote your shares only if you provide instructions to them
on how to vote. However, brokers who hold shares as nominees will have
discretionary authority to vote on the increase in common shares authorized
for issuance under our employee stock purchase plan and stock option plan.
If you fail to provide instructions, your shares will not be voted. Shares
that are not voted will not be counted in the vote totals.
Q: What vote is required for the proposals to pass?
A: The vote required for approval varies for the proposals:
o The proposal to move the corporate domicile must receive 2/3 of all
votes cast.
o The proposed sale of stock to TPG must be voted on by at least 50% of
the outstanding shares. TPG's shares will be included to determine
whether 50% have voted, but a majority of the voting shareholders
excluding TPG must approve the proposed sale.
o The other proposals must be approved by a simple majority of the shares
voting.
1
<PAGE>
Q: How will voting on any other business be conducted?
A: If business other than the proposals described in this document is
presented at the meeting, your signed proxy card gives authority to Ronald
G. Greene, Chairman of the Board, or Phil Rykhoek, Chief Financial Officer
and Secretary, to vote on such matters at their discretion.
Q: Who can answer my questions?
A: If you have more questions about the proposals, you should contact:
Denbury Resources Inc.
Attn: Investor Relations
17304 Preston Road., Suite 200
Dallas, Texas 75252
(972) 673-2000
2
<PAGE>
SUMMARY
This summary highlights selected information from this document and may not
contain all the information that is important to you. To better understand the
proposals, you should read this entire document carefully, as well as the
additional documents we refer you to. See "Where You Can Find More Information"
(pages 73 through 74). We have also included a glossary on page 75 of certain
oil and gas related abbreviations and definitions that are used in this
document. All of the dollar amounts used in this document are expressed in U.S.
dollars unless otherwise noted.
MOVING THE CORPORATE DOMICILE
Move Followed by Merger
We will move the corporate domicile of the Company from Canada to the
United States if shareholders approve this proposal. Specifically, the Company
will become a Delaware corporation. After the move of corporate domicile, the
Company and it's wholly owned subsidiary, Denbury Management, Inc., known as
DMI, will merge, leaving one company in existence, Denbury Resources Inc. To
keep the Canadian and the Delaware corporations separate in this document, we
will refer to the proposed new Delaware corporation as Denbury Delaware and to
the existing Canadian corporation as Denbury Canada.
The move and merger will happen on the same day shortly after the
shareholder meeting. Each common share of Denbury Canada will automatically
become one share of common stock of Denbury Delaware. The move itself will not
change your ownership percentage in the Company, although there could be a
slight change resulting from shareholders that exercise their dissenters'
rights. However, dilution will result if the sale of stock to TPG is approved.
For example:
o If you currently own 100 common shares, then after the move you will
own 100 shares of common stock in Denbury Delaware.
o If you currently own 10% of the Company's common stock, then after
the move and sale of stock to TPG, you will own approximately 5.9%
of Denbury Delaware's common stock. Such percentage may be slightly
higher if shareholders exercise their dissenter rights and sell
their shares to the Company.
If you hold stock options or warrants to purchase our common shares, the
options will continue in existence on essentially the same terms and apply to
shares of Denbury Delaware. These changes in legal structure will not change our
business or operations. Under Delaware law, approval by shareholders is not
required for a merger of a wholly owned subsidiary into its parent.
Right to Dissent
Under Canadian law, you may dissent with respect to the proposal to move
the domicile of the Company and be paid the fair value of your shares. TO
DISSENT AND BE PAID, YOU MUST FOLLOW THE
3
<PAGE>
PROPER PROCEDURES SET OUT ON PAGES 55 THROUGH 57. IF YOU DO NOT FOLLOW THE
PROPER PROCEDURES, YOU WILL LOSE YOUR RIGHT TO DISSENT. You can lose your right
to dissent, for example, by:
o voting in favor of the resolution on moving the Company's domicile; or
o failing to send in a dissent notice prior to the Special Meeting; or
o failing to make a payment demand within a twenty-day period after the
meeting.
To dissent, please refer to Exhibit "B" to this document and read the section
"Moving the Corporate Domicile--Comparison of Shareholders' Rights" for more
details. The board of directors may postpone or abandon the proposal to move the
Company's domicile if the owners of a large number of shares dissent and request
payment for the fair value of their shares and the board determines that the
aggregate cost to repurchase these shares is too high.
Background to and Principal Reasons for the Move of Corporate Domicile
Our board of directors believes it is advantageous for us to move our
corporate domicile from Canada to the United States for the following reasons:
o Incremental Canadian tax costs reduce flexibility in our capital
structure. For example, there is a Canadian withholding tax on interest
and dividend payments transferred between the United States and Canada.
This withholding tax discourages the Company's issuance of convertible
debt or convertible preferred stock.
o We believe that being a United States corporation will give us more
opportunities to make acquisitions. For example, United States companies
are more likely to accept common stock from the Company as a United
States corporation in exchange for their oil and gas assets or stock
than from a foreign corporation. We also anticipate that being a United
States corporation will give us better access to the United States
capital markets.
o Certain United States laws and regulations permit more flexibility on
corporate matters. For example, Canadian law requires that at least 1/3
of our board members be Canadian residents. No similar requirement
exists in the United States. Additionally, we are unable to take
advantage of certain benefits of the North American Free Trade Act
because we are a Canadian corporation that is more than 50% owned by
United States residents. We expect the move to save us administrative
time and money in the future.
o Our financial results are prepared following the Canadian accounting
rules. As a United States company, we would report using United States
accounting principles. Although the United States and Canadian
accounting rules are similar, they are not quite the same. Since we are
normally compared to United States peer companies, it may eliminate some
confusion if we reported our results based on the United States
accounting principles. We also believe that the United States accounting
rules are currently more favorable in the case of mergers, which may be
beneficial in certain circumstances.
o All of our operations are now in the United States and over 75% of our
shareholders are United States residents.
4
<PAGE>
Differences in Shareholder Rights in Canada and Delaware.
While many rights and privileges of stockholders of a Delaware corporation
are comparable to those of shareholders of a Canadian corporation, there are
certain material differences. These differences between the current charter and
bylaws of the Company and the proposed Certificate of Incorporation and by-laws
for Denbury Delaware, are discussed under "Moving the Corporate
Domicile-Comparison of Shareholders' Rights" and "Risk Factors--Effects of the
Move of Domicile on Shareholder Rights." They include:
o Votes required for extraordinary transactions
o Amendment to governing documents
o Dissenters' rights
o Oppression remedies
o Derivative actions
o Shareholder consent in lieu of a meeting
o Shareholder quorum
o Director qualifications
o Fiduciary duties of directors
o Indemnification of officers and directors
o Director liability
o Anti-takeover provisions and interested shareholder transactions
o Access to corporate records
You should read this section carefully regarding these differences.
Certain Income Tax Considerations of the Move of Corporate Domicile
We expect the move to be tax-free to the shareholders and the Company for
both United States and Canadian federal income tax purposes. To discuss this in
greater detail and other federal income tax considerations, we have prepared the
following summary. As summary information is by its nature less precise and
detailed, you are encouraged to carefully read the discussions under the tax
section "Moving the Corporate Domicile." You are also encouraged to consult with
your own tax advisor.
This transaction may also have tax consequences to shareholders who are
neither Canadian nor United States taxpayers. If you are one of these
shareholders, you are urged to consult your own tax advisor.
TAX TREATMENT OF SHAREHOLDERS AS A RESULT OF THE MOVE OF CORPORATE
DOMICILE. We have structured the continuance and merger to be tax free for
shareholders in the United States and Canada who receive only shares of common
stock in Denbury Delaware in the deemed exchange for their common shares in
Denbury Canada. Under our proposed structure, the tax basis and holding period
of these shareholders in their new Delaware common stock will be the same as
their tax basis and holding period of their current Denbury Canada common
shares.
TAX TREATMENT OF THE COMPANY AS RESULT OF THE MOVE OF CORPORATE DOMICILE.
Under certain circumstances, moving our legal domicile from Canada to the United
States could result in taxation of the Company under either Canadian or United
States tax law.
5
<PAGE>
Under Canadian income tax laws, the Company will be treated as if it had
sold all of its property in exchange for the fair market value of Denbury
Delaware common stock received in the move. The Company will be subject to
Canadian tax on any income and net taxable capital gains from this deemed
disposition. Additionally, the Company will be subject to a Canadian corporate
emigration tax at a rate of five percent of the amount by which the fair market
value of the Company's assets net of liabilities exceeds the paid-up capital of
the Company's issued and outstanding shares. Given the current value of the
Company's assets, however, no Canadian federal taxes should be owed by the
Company under the Canadian Tax Act from the move. There can be no assurance,
however, that Revenue Canada will agree with the valuation of the Company's
assets which supports the conclusion that no tax will be owed. A disagreement
with Revenue Canada could result in the Company owing Canadian income taxes.
Under United States federal income tax laws, the Company will also have to
pay United States federal income tax if the fair market value of Denbury
Delaware common stock that is distributed to shareholders of the Company is
greater than the Company's tax basis in Denbury Delaware common stock at the
time of the move. Our calculation indicates that the Company's tax basis in
Denbury Delaware common stock should substantially exceed the fair market value
of Denbury Delaware common stock at the time of the move. Assuming that our tax
basis and fair market value determinations are correct, the Company will not
realize a gain on the move. There can be no assurance, however, that the
Internal Revenue Service will agree with the Company's calculation of such tax
basis or that the fair market value of such stock will not change before the
date of the move. Any disagreement could result in the Company owing United
States federal income taxes as a result of the move.
TAX TREATMENT OF THE MERGER. We have structured the merger to qualify as
the liquidation of a wholly owned subsidiary into its parent corporation. The
Company should not recognize any gain or loss on the merger and have a tax basis
and holding period in the assets of its subsidiary equal to the subsidiary's tax
basis and holding period in those assets before the merger. You should not
recognize any gain or loss for United States income tax purposes on your Denbury
Delaware common stock as a result of the merger.
TAX TREATMENT OF DIVIDENDS TO CANADIAN SHAREHOLDERS AFTER THE MOVE OF
CORPORATE DOMICILE. We have not paid dividends in the past on our stock and do
not expect to pay dividends in the foreseeable future. If you reside in Canada,
after the continuance and merger any dividends received by you from us will be
includible in your taxable income. A portion of any dividends will be reduced by
U.S. withholding taxes on dividends. If you are a corporation, any dividends
will probably not be deductible. If you are an individual you will not be
entitled to receive the gross-up and dividend tax credit treatment that you get
when you receive dividends from Canadian corporations.
TAX TREATMENT OF DEFERRED INCOME PLANS AFTER THE MOVE OF CORPORATE
DOMICILE. After the continuance, our shares will still be a qualified investment
for trusts governed by registered savings plans, deferred profit sharing plans
and registered retirement income funds, as long as the shares remain listed on
the TSE, the NYSE or another prescribed stock exchange. However, following the
move, if you are a Canadian deferred income plan or similar tax-exempt entity,
our shares will be treated as foreign property. Therefore, if you hold our
shares you may be subject to certain penalty taxes. If you are a current holder
of our shares, you will have a two year grace period before these penalty taxes
will take effect.
POTENTIAL ADVERSE TAX CONSEQUENCES OF THE MOVE. We believe that the
proposed move and merger will not cause any material adverse consequences to us
or to you as a shareholder. We reviewed our assets, liabilities and paid-up
capital and obtained legal opinions from our tax advisors that no Canadian or
United States federal taxes will be due as a result of the move. You should
understand that
6
<PAGE>
it is possible that the authorities could reject our positions and claim that we
or you owe taxes as a result of this transaction.
Directors and Officers after the Move.
The directors and officers of Denbury Delaware will be identical to the
current directors of Denbury Canada. It is anticipated that officers of the
Company's operating subsidiary that are not currently officers of the Company
will be elected to a similar position with the Company following the merger. See
"Moving the Corporate Domicile - Effects of the Move of Corporate Domicile" and
"Management of the Company."
Stock Exchange Listings after the Move; Recent Prices.
Our common shares are listed on the NYSE and the TSE and trade under the
symbol "DNR." We plan to maintain both listings following the continuance and
merger. It is possible that trading symbols may change. The closing sales price
of the our common shares on January 15,1999, was $5.75 on the NYSE and Cdn.
$9.00 on the TSE. Please also see the section "Nature of Trading Market."
Intent of Management and TPG to Vote in Favor of the Move
As of December 31, 1998, directors and executive officers, excluding those
affiliated with TPG, controlled approximately 7% of our outstanding shares.
These directors and executive officers intend to vote in favor of all proposals.
The TPG affiliates own 32% of the outstanding common shares and have agreed to
vote in favor of the move and the proposed changes to the benefit plans. The
proposal to sell stock to TPG will require approval by a simple majority of the
shareholders voting, excluding any vote by TPG or its affiliates.
THE BOARD RECOMMENDS THAT YOU VOTE IN FAVOR OF THE MOVE OF DOMICILE.
GRANTING THE BOARD OF DIRECTORS AUTHORITY TO
ABANDON OR POSTPONE THE MOVE OF DOMICILE
You are being asked to approve a separate proposal which grants authority
to the board of directors to postpone or abandon the move of the corporate
domicile, even if approved by the shareholders, if the board determines such a
move or the timing of it would not be in the Company's best interest. There are
two likely reasons the board would postpone or abandon the move:
o if it appeared that there would be adverse tax consequences to the
Company because of a significant increase in the market value of the
Company between the date of this document and the date of the move; or
o if a significant number of shareholders exercise their dissenters'
rights and request payment for the fair value of their shares. If the
board determines that the cost to repurchase these shares exceeds the
perceived value of the continuance, then the board may use its
discretion to abandon the move.
THE BOARD RECOMMENDS THAT YOU VOTE IN FAVOR OF THIS PROPOSAL.
7
<PAGE>
SALE OF SHARES TO TPG
The third proposal asks you to approve the sale of common shares to TPG,
our largest shareholder, for $100 million, or $5.39 per share. If you approve
this sale, it will take place whether or not the move does.
REQUIRED SHAREHOLDER APPROVAL. The NYSE and TSE require shareholders to
approve a substantial sale of shares to a significant shareholder. The NYSE
requires that holders of at least 50% of the outstanding shares vote on the
proposed sale. TPG's shares will be included to determine whether 50% have
voted, but a majority of the votes cast by shareholders other than TPG and its
affiliates must approve this proposal.
PURPOSE OF THE SALE OF SHARES TO TPG. The sale of shares to TPG will raise
funds for acquisitions. Because of the downturn in the United States oil and gas
industry during 1998 as a result of decreases in oil and gas prices, we believe
this is an excellent time to make attractive acquisitions. This additional
equity will give us greater flexibility to pursue such opportunities. It is
doubtful that we could make any meaningful acquisitions without this additional
equity, especially with our current debt levels. Additionally, this stock sale
improves our debt ratios.
We will initially use the estimated $98.5 million of net proceeds from the
sale to reduce our outstanding debt, although we ultimately plan to use these
funds primarily for acquisitions. Because of the low oil and gas prices and the
reduced cash flows we have scaled back our capital expenditures. Accordingly, we
do not plan to use any significant portion of these funds for development or
exploration activities.
CONFLICTS OF INTEREST AND CREATION OF THE SPECIAL TRANSACTIONS COMMITTEE.
The sale of shares to TPG is subject to a number of conflicts of interest:
o TPG is our largest shareholder.
o Three of the officers and directors of TPG's controlling entity are
members of our board.
o TPG can maintain its pro rata interest in our common shares. If any
additional equity is issued by the Company, TPG may purchase additional
shares on the same terms and conditions.
Therefore, our board created a Special Transactions Committee. None of the
members of this Committee are members of our management or affiliated in any way
with TPG. Mr. Greene, the Chairman of the Board and the Chairman of the
Committee, and Messrs. Wettstein and Matthews, are the members of this
Committee.
NEGOTIATION OF TPG PURCHASE PRICE. The Committee negotiated the price with
TPG taking into account discussions with management and certain financial
information prepared by Credit Suisse First Boston Corporation ("CSFB"), the
Company's financial advisor. Negotiations were concluded on December 1, 1998.
FACTORS CONSIDERED BY THE SPECIAL TRANSACTIONS COMMITTEE. The factors
considered by the Committee in negotiating the sale of shares to TPG are:
8
<PAGE>
o The $5.39 per share price represents a 41% premium over the closing
market price for our common shares on December 1, 1998 and was the
midpoint of a November 24, 1998 preliminary financial analysis of our
per share value prepared by CSFB. As of the date of this document, this
price was _____% [higher/lower] than the closing market price for the
common shares on the NYSE.
o The $100 million provides us with substantial funds to make acquisitions
at a time when attractive opportunities may be available to us if we
have sufficient capital. If we make successful acquisitions, we can
continue to grow.
o CSFB has provided our board of directors with its opinion regarding the
fairness, from a financial point of view, to the Company of the
consideration to be received by the Company for the common shares to be
sold to TPG. The full text of CSFB's opinion dated December 16, 1998 is
attached to this document as Exhibit A and should be reviewed carefully.
CSFB's opinion does not constitute a recommendation to any shareholder
as to how to vote on the stock purchase by TPG.
o The Committee considered other alternatives discussed below. Because of
TPG's current interest in the Company, it is unlikely that another
entity would be willing to pay a premium over market price substantially
higher than the price TPG is willing to pay.
ALTERNATIVES CONSIDERED. During the course of negotiations with TPG, the
Committee considered several other alternatives:
o The first was the sale of non-voting common stock to TPG. TPG responded
that it would expect to purchase such non-voting shares at a discount
from the price paid for voting shares. The Committee determined that it
would not benefit us to forego any premium in order to sell TPG
non-voting stock since TPG already nominates three of seven board
members and is our largest shareholder.
o The Committee also considered seeking out other private investors with
the goal of obtaining a higher price. However, the Committee was not
confident that a better price could be obtained from another party. TPG
is already paying a 41% premium over the market price at the time of
pricing. The attractiveness to another investor of making a substantial
purchase would be substantially reduced by TPG's existing significant
ownership interest in the Company. The search for an interested third
party would only result in delays. Since we already are receiving a
premium over market price from TPG, a third party offer might not be as
attractive.
o The Committee also considered the alternative of a rights offering to
existing shareholders. However, rights offerings are typically sold at a
discount to current market. If stock were to be offered at a premium in
a rights offering, few if any shareholders other than TPG, would be
likely to acquire additional shares. Thus, in a rights offering TPG
might be able to acquire control with a smaller premium than being paid
in this private placement.
9
<PAGE>
BENEFITS TO TPG FROM THE SALE. The main benefit TPG gains from the
transaction is control of the Company. The sale will increase TPG's ownership of
the Company's issued and outstanding common shares from approximately 32% to
approximately 60% . Currently, we do not expect this transaction to result in
any changes to our board of directors, management or operations. After the
consummation/sale, TPG will have adequate voting power to sell the Company if it
wishes to do so on terms, and at a time, which it determines.
FAIRNESS OF THE TRANSACTION. The Committee believes that TPG is paying a
fair price for the shares given the substantial premium being paid over the
market price at the time of pricing and given the large number of common shares
being purchased. The transaction must also be approved by a majority of
disinterested shareholders. In addition, CSFB has issued an opinion to the board
regarding the fairness, from a financial point of view, to the Company of the
consideration to be received by the Company for the common shares to be sold to
TPG.
TPG PURCHASE AGREEMENT. We entered into a stock purchase agreement with TPG
on December 16, 1998. The consummation of the sale is conditioned upon:
o the approval of the sale by a majority of the non-TPG shareholders;
o the approval of the purchase price by the Toronto Stock Exchange;
o an amendment of our existing bank credit agreement that is acceptable to
both us and TPG;
o the execution of a registration rights agreement covering all of TPG's
shares;
o the absence of a material adverse change, as that is defined, prior to
closing; and
o satisfaction of the other conditions.
See "Sale of Shares to TPG-The TPG Purchase Agreement".
DISSENTERS' RIGHTS. You will have no dissenters' rights in connection with
the proposed sale of shares to TPG. However, you will have dissenters' rights in
connection with the proposal to change our domicile from Canada to the United
States.
THE BOARD RECOMMENDS THAT YOU VOTE IN FAVOR OF THE PROPOSED SALE OF SHARES
TO TPG. This sale will provide needed funds at a time when other capital sources
are unavailable. This will enable us to grow if it can make favorable
acquisitions.
INCREASE OF AUTHORIZED SHARES UNDER
EMPLOYEE STOCK PURCHASE PLAN
Approval of the fourth proposal will amend the Company's employee stock
purchase plan by increasing the maximum number of common shares available for
sale under the plan from 250,000 shares to 750,000 shares. As of December 30,
1998, only 64,858 common shares were available for purchase under the plan. The
shares to be issued on December 31, 1998 exceeded the shares available on the
plan
10
<PAGE>
by 22,524. As such, the shares purchased by the employees as of December 31 will
not be issued until after shareholder approval.
THE BOARD BELIEVES THIS PLAN IS AN INTEGRAL PART OF THE COMPANY'S OVERALL
COMPENSATION STRATEGY AND RECOMMENDS THAT YOU VOTE FOR THE AMENDMENT.
INCREASE OF AUTHORIZED SHARES UNDER
STOCK OPTION PLAN
Approval of the fifth proposal will amend our stock option plan to increase
the maximum number of common shares reserved for issuance under the option plan
by 2,015,756 shares. On December 1, 1998, the board approved the issuance of
1,627,988 additional stock options, subject to shareholder approval, as of
January 4, 1999, as part of their annual compensation review. As of January 15,
1999, the Company has approximately 3,518,519 options outstanding but only
2,519,244 common shares approved by the shareholders and reserved for issuance.
In order to complete the issuance of stock options on January 4, 1999, you must
ratify the board approved increase of 2,015,756 shares.
If you approve this increase and if you approve the proposed sale of common
shares to TPG, the maximum number of common shares reserved for future issuance
under the option plan will be 4,535,000 shares, or approximately 10% of the then
issued and outstanding common shares.
THE BOARD BELIEVES THE OPTION PLAN IS AN INTEGRAL PART OF OUR OVERALL
COMPENSATION STRATEGY AND RECOMMENDS THAT YOU VOTE FOR THE AMENDMENT.
11
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONDENSED CONSOLIDATED FINANCIAL DATA
We are providing the following financial information to aid you in your
analysis of the items to be voted upon. This information is only a summary and
you should read it in connection with our historical financial statements and
the related notes contained in the annual, quarterly and other reports and
information that we have filed with the Securities and Exchange Commission. See
"Where You Can Find More Information". We have also provided additional detail
in the section "The Company - Summary Historical and Pro Forma Consolidated
Financial Data".
CHANGE TO U.S. GAAP. Our move of the corporate domicile to the United
States will require that we convert our financial statements to the United
States accounting rules. While the United States and Canadian rules are similar,
there are differences that have historically affected our financial statements.
During the periods shown, these differences related to the way that losses on
early extinguishment of debt, preferred dividends and computation of earnings or
losses per common share are presented. To further illustrate these changes, we
have prepared the following condensed information following both the Canadian
and United States accounting rules.
PRO FORMA EFFECT OF STOCK SALE TO TPG. The unaudited pro forma financial
data set forth below illustrates the effect of the proposed sale of common
shares to TPG and the use of these funds to repay bank debt. This pro forma data
assumes that the funds are received as of the beginning of the periods
presented. This information is provided for illustrative purposes only and does
not show what the results of operations would have been had the funds actually
been received on the dates assumed.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------- ---------------------------
Pro Pro
Forma Forma
1995 1996 1997 1997 1997 1998 1998
------- ------- ------- ------- ------- -------- --------
Canadian GAAP: (in thousands, except per share amounts and ratios)
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues...........$ 20,109 $53,649 $86,456 $86,456 $61,069 $ 68,037 $ 68,037
Total expenses........... 19,028 39,593 62,658 61,855 44,191 243,697 239,857
Net income (loss)........ 714 8,744 14,903 15,499 10,633 (125,042) (121,202)
Net income (loss) per
common share
Basic...................$ 0.10 $ 0.67 $ 0.74 $ 0.40 $ 0.53 $ (4.88) $ (2.74)
Fully diluted........... 0.10 0.62 0.70 0.40 0.50 (4.88) (2.74)
Weighted average common
shares outstanding 6,870 13,104 20,224 38,777 20,175 25,631 44,184
Selected Ratios:
Ratio of earnings to
fixed charges (a)....... 1.5x 4.4x 19.9x 54.6 x 34.9x (c)x (c)x
Ratio of EBITDA (b) to
interest expense........ 5.4 17.5 50.9 183.5 102.1 3.0 4.3
Ratio of long-term debt
to EBITDA............... 0.3 0.1 4.2 2.5 0.4(d) 4.2(d) 2.4(d)
<FN>
(a) 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.
(b) EBITDA represents earnings before interest income, interest expense, income
taxes, depletion and depreciation, imputed preferred dividends and losses
on early extinguishment of debt. We have included information concerning
EBITDA because we believe that EBITDA is used by certain investors as one
measure of a company'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) As a result of actual and pro-forma pre-tax losses of $175,660,000 and
$171,820,000 incurred for the nine months ended September 30, 1998,
respectively, we were unable to cover our fixed charges of $12,954,000 and
$9,114,000, respectively.
(d) EBITDA used to calculate the ratio of long-term debt to EBITDA for these
periods has been annualized.
</FN>
</TABLE>
12
<PAGE>
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
---------------------------------- ---------------------------
Pro Pro
Forma Forma
1995 1996 1997 1997 1997 1998 1998
------- ------- ------- ------- ------- -------- --------
United States GAAP: (in thousands, except per share amounts and ratios)
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Total revenues...........$ 20,109 $53,649 $86,456 $86,456 $61,069 $ 68,037 $ 68,037
Total expenses........... 18,828 37,872 62,658 61,855 44,191 243,697 239,857
Extraordinary item....... 132 290 - - - - -
Net income (loss)........ 714 10,025 14,903 15,499 10,633 (125,042) (121,202)
Net income (loss)
attributable to common
shareholders........... 714 8,744 14,903 15,499 10,633 (125,042) (121,202)
Net income (loss) per
common share
Basic:
Income (loss) before
extraordinary item..$ 0.12 $ 0.69 $ 0.74 $ 0.40 $ 0.53 (4.88) (2.74)
Extraordinary item... (0.02) (0.02) - - - - -
-------- ------- ------- ------- ------- -------- -------
Net income (loss)....$ 0.10 $ 0.67 $ 0.74 $ 0.40 $ 0.53 $ (4.88) (2.74)
======== ======= ======= ======= ======= ======== =======
Diluted:
Income (loss) before
extraordinary item..$ 0.12 $ 0.65 $ 0.70 $ 0.40 $ 0.49 $ (4.88) (2.74)
Extraordinary item... (0.02) (0.02) - - - - -
-------- ------- ------- ------- ------- -------- -------
Net income (loss)....$ 0.10 $ 0.63 $ 0.70 $ 0.40 $ 0.49 $ (4.88) (2.74)
======== ======= ======= ======= ======= ======== =======
Weighted average common
shares outstanding 6,870 13,104 20,224 38,777 20,175 25,631 44,184
======== ======= ======= ======= ======= ======== =======
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of September 30, 1998
----------------------------- -------------------------
Pro
1995 1996 1997 Actual Forma
-------- ------- -------- --------- ---------
Canadian and U.S. GAAP (in thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital.................$ 6,862 $12,482 $ 2,692 $ 1,679 $ 10,179
Total assets.................... 77,641 166,505 447,548 369,352 377,852
Long-term debt, net of current
maturities.................... 3,474 125 240,000 215,000 125,000
Shareholders' equity............ 53,501 142,504 160,223 129,838 228,338
</TABLE>
13
<PAGE>
RISK FACTORS
You should carefully consider all information in this Proxy
Statement/Prospectus, especially the risk factors below in determining how to
vote on all the proposals.
RISKS ARISING OUT OF THE PROPOSED MOVE OF DOMICILE
The following risks address the first proposal of moving the Company from
Canada to the United States and becoming a Delaware corporation.
Canadian Federal Income Tax Considerations
On the date of continuance, we will be treated as if we sold all our
property and received the fair market value for those properties. If we realize
income or a gain, we will be taxed on that amount. We could be subject to an
additional tax if the fair market value of our assets, net of liabilities,
exceeds the paid-up capital of our issued and outstanding shares.
We reviewed our assets, liabilities and paid-up capital and obtained a
legal opinion from our tax advisors. We believe we will not owe any Canadian
federal income taxes as a result of the move. It is possible that the facts on
which we based our assumptions and conclusions could change before this
transaction is consummated. We have not applied to the federal tax authorities
for a ruling on this matter and do not intend to do so as it is highly unlikely
that the tax authorities would issue any ruling on this type of transaction. We
have also made certain favorable assumptions regarding the tax treatment of this
transaction. You should understand that federal tax authorities could reject our
valuations or positions and claim that we owe taxes as a result of this
transaction.
United States Federal Income Tax Considerations
We believe the continuance and merger will qualify as a tax-free
reorganization for us and our shareholders. For United States residents and
taxpayers, your tax basis and holding period will not change as a result of the
reorganization. We have not asked, nor do we intend to ask, for a ruling from
the IRS that the continuance and merger will qualify as a tax-free
reorganization. There is always the risk that the IRS's interpretation of the
reorganization could be unfavorable.
There is also a tax on United States shareholders if we were determined to
be a Passive Foreign Investment Corporation ("PFIC"). This would cause certain
United States shareholders to recognize ordinary income or loss on the
reorganization. We do not believe that this tax applies, although this also
requires certain interpretations of the law.
We have not paid dividends on our common shares in the past and do not
expect to pay them in the foreseeable future. If we were to pay dividends to
non-United States shareholders, they would be subject to United States
withholding taxes. If a dividend was paid to a United States trade or business,
it would be subject to the regular United States federal income tax. You may
also be subject to "backup withholding" at rates of up to 31% on dividends or
the sale or exchange of our stock unless you are a corporation with certain
exemptions or an individual who provides a taxpayer identification number and
certifies that you are not subject to backup withholding. If any amount is
withheld in this manner, it does serve as a credit against your United States
federal income tax liability.
14
<PAGE>
IF YOU ARE A CANADIAN OR UNITED STATES SHAREHOLDER, YOU SHOULD CAREFULLY
READ THE MORE DETAILED DISCUSSIONS UNDER THE APPLICABLE TAX SECTIONS OF "MOVING
THE CORPORATE DOMICILE" AND SHOULD ALSO CONSULT WITH YOUR OWN TAX ADVISORS.
Effects of the Move of Domicile on Shareholder Rights
After the move, you will become a shareholder of Denbury Delaware.
Currently we are incorporated in Canada and governed by Canadian law. After the
move we will be incorporated in the State of Delaware and governed by Delaware
law. We will have new articles of incorporation and by-laws. Your rights as a
Delaware shareholder will be different than your current rights as a shareholder
of a Canadian company. These differences are summarized below, but you should
also read the section "Moving the Corporate Domicile-Comparison of Shareholders'
Rights" for a more complete description of these differences.
VOTES REQUIRED FOR EXTRAORDINARY TRANSACTIONS. In Canada, certain corporate
transactions (such as certain amalgamations, continuances, sales, leases or
exchanges of all or substantially all the assets of a corporation, liquidations,
and dissolutions) usually require approval by 2/3 of the voting shareholders.
In Delaware, these transactions require approval by shareholders who own a
majority of the outstanding stock. Delaware law does not require that
shareholders approve a merger of a wholly owned subsidiary into its parent
corporation when the parent corporation is the surviving entity. Our proposed
articles of incorporation do not require such a vote.
AMENDMENT TO GOVERNING DOCUMENTS. In Canada, amendments to articles of
incorporation usually require approval by 2/3 of the voting shareholders.
Changes to the by-laws may be made by the board of directors, subject to
approval by a majority of voting shareholders.
In Delaware, amendments to the articles of incorporation require a vote of
the board of directors followed by the affirmative vote of the holders of a
majority of the outstanding stock. If an amendment to the articles of
incorporation alters the powers, preferences or special rights of a particular
class or series of stock and may affect them adversely, that class may also vote
on the amendment, regardless of any other normal voting rights of that class.
Changes to the by-laws may be made by the shareholders or the board of
directors.
DISSENTERS' RIGHTS AND OPPRESSION REMEDIES. As a shareholder of Denbury
Canada, Canadian law allows you to exercise dissent rights with regard to the
move and demand a cash payment for your common shares equal to their fair value.
In addition, you may apply to the board for an oppression remedy for any act or
omission which is oppressive or unfairly prejudicial to your interest.
Under Delaware law, you may also exercise dissent rights to a merger or
consolidation and demand a cash payment for your shares equal to the fair value
as determined by the corporation or an independent appraiser. There are no
appraisal rights if the common shares are listed on a national securities
exchange (including the NASDAQ National Market ("NASDAQ")) or held of record by
more than 2,000 stockholders, except in certain circumstances. These dissent
rights do not apply if you own shares in the surviving corporation and the
merger did not require the vote of the stockholders of the surviving
corporation. Delaware law does not provide for an oppression remedy similar to
that of Canadian law, although there are a variety of legal and equitable
remedies to a corporation's stockholders for improper acts or omissions of a
corporation, its officers and directors.
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<PAGE>
SHAREHOLDER CONSENT IN LIEU OF A MEETING. Under Canadian law, you may take
shareholder action without a meeting only if you have a written resolution
signed by all the shareholders entitled to vote.
Under Delaware law, you may take shareholder action without a meeting if
you have a written consent signed by a sufficient number of shareholders so that
you have the minimum number of votes necessary to approve such action.
SHAREHOLDER QUORUM. Under Canadian law, unless a corporation's by-laws
provide otherwise, a quorum is present at a meeting of the shareholders,
irrespective of the number of shareholders actually present at the meeting, if
the holders of a majority of the shares entitled to vote at the meeting are
present in person or represented by proxy. Currently, Denbury Canada's by-laws
only require 2 people representing at least 5% of the outstanding shares be
present or represented by proxy to have a quorum.
Under Delaware law, a corporation's articles of incorporation or by-laws
may specify the number of shares or the voting power which shall be present, or
represented by proxy, to constitute a quorum for the transaction of any business
at any meeting of the shareholders. However, in no event shall a quorum consist
of less than one-third of the shares entitled to vote at the meeting.
DIRECTOR QUALIFICATIONS. Under Canadian law, at least one-third of your
directors must be residents of Canada. There are certain other restrictions if
the corporation is publicly traded or has only one or two total directors.
Delaware law has no such requirements.
INDEMNIFICATION OF DIRECTORS AND OFFICERS. You are allowed to indemnify
directors and officers in both Canada and Delaware. However, Delaware law allows
for the advance payment of an indemnitee's expenses before the final disposition
of an action. To do so, the indemnitee must agree to repay the amount advanced
if it is later determined that the indemnitee was not entitled to
indemnification with regard to such action.
LIABILITY OF DIRECTORS. Under Delaware law, a corporation's articles of
incorporation may include a provision to limit or eliminate the liability of
directors for breach of fiduciary duty as a director under certain
circumstances. To qualify, this liability must not arise from certain proscribed
conduct, including acts or omissions not in good faith or from conduct which:
o involves intentional misconduct or a knowing violation of law;
o breaches the duty of loyalty;
o involves the payment of unlawful dividends;
o expends funds for unlawful stock purchases; or
o benefits a director personally from redemption or transactions.
Denbury Delaware's articles of incorporation will provide for this type of
limitation of liability. There are no similar provisions under Canadian law.
16
<PAGE>
ACCESS TO CORPORATE RECORDS. Under Canadian law, you, other shareholders
and the creditors of a corporation, their agents or legal representatives as
well as their directors may examine free of charge during normal business hours
the following:
o the articles of incorporation, by-laws and unanimous shareholder
agreements of the Company;
o the minutes and resolutions of shareholders;
o all notices pertaining to the term of office, election of, or change of
directors of the Company; and
o the securities register of the Company.
Since the Company is public, any person may examine the records mentioned
above for a reasonable fee. All shareholders of the Company may request a copy
of the articles of incorporation, by-laws, unanimous shareholder agreements of
the Company free of charge.
Under Delaware law, any shareholder of a corporation, their agents or legal
representatives may demand in writing to examine the records of that
corporation. This demand must have a proper purpose, be sworn under oath, and
directed to that corporation at its principal place of business or its
registered office in Delaware. A proper purpose must be related to that
shareholder's interest in the corporation as a shareholder. The articles of
incorporation of a Delaware corporation may also provide these examination
powers to holders of the corporation's debt securities. The proposed articles of
incorporation of Denbury Delaware will have this provision.
RISKS OF SELLING COMMON SHARES TO TPG
The following risks address the third proposal asking approval of the sale
of common shares to TPG for $100 million.
Controlling Stockholder
TPG currently owns 32% of the Company. If you approve this sale, TPG's
holdings will significantly increase to approximately 60% of the Company.
Accordingly, TPG will be able to determine virtually all matters submitted for
shareholder approval. TPG will be able to control the election of directors and
to determine the corporate and management policies of the Company.
Dilution
If the stock sale to TPG is approved, your percentage ownership in the
Company will be diluted. For example, if you own 10% of the Company's common
shares before the sale, you will own approximately 5.9% of the Company's common
shares immediately after the sale.
RISKS INHERENT IN AN INVESTMENT IN THE COMPANY
This last group of risks highlight risks inherent in investing in the
Company and particularly in a company which is engaged in the oil and gas
business. Because you are already a shareholder of the Company, the risks of
continuing an investment in a company in the oil and gas business will not
change because of the proposals you are being asked to vote on.
17
<PAGE>
Following is a summary of these risks. You should keep in mind that summary
information is less precise and detailed. You are encouraged to review our other
documents incorporated by reference for a better understanding of the business
risks inherent in an investment in our Company.
Volatility of Oil and Natural Gas Prices; Full Cost Pool Writedowns.
Our business is highly dependent on the prices that we receive for oil and
natural gas. Between the first nine months of 1997 and 1998, our net oil prices
declined 39% and our net natural gas prices declined 7%. Our cash flow and
results of operations have been significantly reduced. We had a non-cash $165
million full cost pool writedown as of June 30, 1998 and expect that we will
have an additional writedown at December 31, 1998 based on the current oil price
levels. This could significantly reduce our shareholders' equity and may cause
us to default on one of our bank covenants that pertains to our net worth, the
waiver of which cannot be assured.
Substantial Capital Requirements and Need to Replace Reserves.
Our assets are a depleting resource. We have a constant need for additional
funds to develop, maintain and acquire additional properties. Our future success
depends on finding additional oil and natural gas reserves that are profitable.
Our growth could be limited or eliminated and there could even be a reduction of
our assets if we are unsuccessful or if we do not have the necessary funds to
carry out our development activities.
Uncertainty of Oil and Natural Gas Reserve Estimates.
Our proved oil and natural gas reserves disclosed in this document are
estimated by independent petroleum engineers. There are numerous uncertainties
inherent in estimating these reserves and the estimates are based on several
assumptions, which are speculative. The actual future production and cash flow
from these reserves could vary substantially from these estimates. Our reserve
quantities and values are also significantly affected by oil prices. By December
31, 1998, oil prices had dropped approximately $6.25 per Bbl and natural gas
prices had dropped approximately $0.50 per Mcf from the prior year-end levels.
When reserves are reviewed at year-end 1998, these drops in price will have an
effect on the reserve quantities and PV10 Value, although it is not possible to
quantify this decrease until the December 31, 1998 reserve report, expected in
February 1999, is completed.
Acquisition Risks.
Much of our growth is due to acquisitions of producing properties. If the
sale of shares to TPG is approved, we will pursue acquisitions with the proceeds
from that sale. Successful acquisitions are influenced by many factors, such as
an assessment of the recoverable reserves, exploration potential, future product
prices, operating costs, potential environment and other liabilities and other
factors beyond our control. Although we attempt to analyze and evaluate these
factors, we cannot be sure that our acquisitions will perform as anticipated and
will be profitable for us.
Drilling and Operating Risks.
Drilling activities have many risks, including the potential that no
commercially productive reserves will be discovered. There are also risks
associated with the drilling and other day-to-day operations of the Company,
including the possibility of unexpected formations or pressures, blow-outs,
environmental contamination, fires, personal injuries, pollution, fines and
penalties and other items.
18
<PAGE>
Effects of Leverage and Restrictive Debt Covenants.
Our debt is at one of the highest levels in our history. As of December 31,
1998, we had total debt of $225 million plus an additional $30 million available
for future borrowings under our bank credit facility. These high debt levels can
have an impact on our future ability to obtain funds and may require a
substantial portion of our cash flow to be used just for debt service. If we
were to default on our debt covenants, it could have material adverse effect on
us. Our ability to meet our obligations in the future depends on our future
performance and prevailing economic conditions and other factors, some of which
are beyond our control.
Dependence on Key Personnel.
We are dependent upon the services of our Chief Executive Officer and
President, Gareth Roberts, other senior management and our board of directors.
The loss of the services of any of these key personnel could have a material
adverse effect on us. The Company has no employment agreements with any of these
individuals and no key man life insurance policies.
Governmental and Environmental Regulation.
Our operations are affected by extensive federal, state and local laws and
environmental regulations. We cannot assure you that material indemnity claims
will not arise against us with respect to properties we have acquired or may
acquire in the future.
Competition.
The natural gas and oil industry is highly competitive. We compete against
major oil companies, other independent oil and natural gas concerns, and
individual producers and operators. Many of these competitors have substantially
greater financial and other resources than we have.
Shares Eligible for Future Sale.
We have granted registration rights to TPG in the past and will modify
these rights if the sale of stock to TPG is approved and consummated. It is
possible that the public sale of a substantial number of common shares by TPG
could adversely affect the market price of our common shares and could impair
our ability to raise additional capital in the future.
19
<PAGE>
THE COMPANY
Corporate Overview
We are an independent exploration, development and production company
headquartered in Dallas, Texas. We acquire oil and gas properties and develop
and explore for oil and natural gas on our own properties. Our activities have
been focused in the United States Gulf Coast region, primarily onshore in
Louisiana and Mississippi.
As of December 31, 1997, we had proved reserves of 52.0 million barrels of
oil and 77.2 billion cubic feet of natural gas or 64.9 million barrels of oil
equivalent. These oil and natural gas reserves had a discounted present value
using a 10% discount factor and constant oil and natural gas prices ("PV10
Value") of $361.3 million, of which $276.5 million was attributable to proved
developed reserves. This PV10 Value was computed based on oil and natural gas
prices in effect at December 31, 1997. By December 31, 1998, oil prices had
dropped approximately $6.25 per Bbl and natural gas prices had dropped
approximately $0.50 per Mcf from the prior year-end levels. When reserves are
reviewed at year-end 1998 these drops in price will have an effect on the
reserve quantities and PV10 Value, although it is not possible to quantify this
decrease until the December 31, 1998 reserve report, expected in February 1999,
is completed.
As of December 31, 1997, we operated approximately 83% of the wells
comprising our PV10 Value. Our nine largest fields constituted approximately 82%
of our estimated proved reserves. Within these nine fields, we had an average
working interest of 91%.
Corporate Strategy
As part of our corporate strategy, we believe in the following fundamental
principles:
o Remain focused in specific regions;
o Acquire properties where we believe additional value can be created
through a combination of exploitation, development, exploration and
marketing;
o Acquire properties that give us a majority working interest and
operational control or where we believe we can ultimately obtain it;
o Maximize the value of our properties by increasing production and
reserves while reducing costs; and
o Maintain a highly competitive team of experienced and incentivized
personnel.
Acquisitions
Since the current management team became involved in the Company in 1993,
we have focused our attention exclusively in the United States. Since that time,
acquisitions have been an important part of our strategy. From 1993 through
December 31, 1995, we spent a total of $43.4 million on acquisitions. Since
1995, we have made two key acquisitions, the first in May 1996. At that time, we
acquired properties in our core areas of Mississippi and Louisiana from Amerada
Hess Corporation for
20
<PAGE>
approximately $37.2 million. In December 1997, we acquired oil properties in the
Heidelberg Field from Chevron U.S.A., Inc. for approximately $202 million.
HESS ACQUISITION. As of June 30, 1996, the effective date of the Hess
acquisition, they were producing approximately 2,945 BOE per day and had proved
reserves of approximately 5.9 MMBOE. After acquiring the properties, we did
extensive development and exploitation on these properties and as a result,
increased the production 185% to a peak of 8,393 BOE per day during the second
quarter of 1998 and increased the reserves 141% to 14.2 MMBOE as of December 31,
1997. This acquisition has been very profitable for us even though production
has peaked and oil prices have dropped during 1998 to one of the lowest levels
in recent history. Production for the third quarter of 1998 averaged
approximately 7,600 BOE per day with further declines expected during the fourth
quarter. These production declines primarily occurred because of production
decreases on the horizontal oil wells drilled late in 1997 and early 1998 and
the lack of drilling and other development activity on these properties during
the latter half of 1998 due to the low oil prices. There are additional
development projects to do on these properties, plus some exploration potential,
when oil prices recover to a more normalized level.
CHEVRON ACQUISITION. The Heidelberg Field acquired in the Chevron
acquisition is located approximately nine miles from the Eucutta Field, our
property with the highest PV10 Value acquired in the Hess acquisition. The
estimated proved reserves as of January 1, 1998 for the Chevron Acquisition
properties were approximately 27.6 MMBOE, with average net daily production of
approximately 2,900 BOE per day for the fourth quarter of 1997. Due to the low
oil price throughout 1998, we have not developed this field as quickly as we
originally planned. In spite of the scaled back development plan, production at
this field averaged approximately 4,200 BOE per day during the third quarter of
1998, which is a 45% increase from the fourth quarter of 1997.
Impact of Recent Oil and Gas Price Decreases
At June 30, 1998 we had a $165 million non-cash writedown of the full cost
pool primarily as a result of the low oil prices; $134 million of this amount
was attributable to the inclusion of the Heidelberg properties in the full cost
pool. This writedown was computed based on a NYMEX oil price of $14.00 per
barrel. As of September 30, 1998, we did not have any additional writedowns as
oil prices had recovered slightly and were higher than they were at June 30,
1998. However since September 30, oil prices have continued to drop and as of
the end of 1998 were approximately $2.75 per Bbl below the June 30, 1998 levels.
At these prices, another writedown of the full cost pool appears certain at
December 31, 1998, although the exact magnitude is difficult to determine at
this time. These values will depend on several factors and the reserve
quantities and values as determined by our independent petroleum engineers.
Between the first nine months of 1997 and 1998, our net oil product prices
decreased 39% ($6.89 per Bbl) and our natural gas product prices declined by 7%
($0.19 per Mcf). This drop in oil and natural gas prices has caused our cash
flow and results of operations to drop substantially during 1998 and has
contributed to an increase in our debt levels during the year. Furthermore, at
these oil price levels, most of our oil development and exploration projects are
uneconomical. Thus, we have significantly curtailed our development expenditures
and are shifting our focus to potential acquisition opportunities. However, if
oil prices do recover to a more normalized level, we have built a significant
inventory of oil
21
<PAGE>
development projects that will then be economic, subject to the availability of
capital. A majority of these inventoried projects are on the Chevron acquisition
properties.
We believe the low price environment makes this a good time to pursue
acquisitions. Without additional capital our high debt levels make it difficult
for us to make any meaningful acquisitions. This is why we are seeking
additional funds and are asking you, as a shareholder, to approve the sale of
common shares to TPG for $100 million.
22
<PAGE>
SUMMARY HISTORICAL AND PRO FORMA CONSOLIDATED FINANCIAL DATA
The following table of summary historical consolidated financial data of
the Company as of and for the years ended December 31, 1995, 1996 and 1997 is
derived from the audited consolidated financial statements of the Company. The
summary historical consolidated financial data for the nine month periods ended
September 30, 1997 and 1998, and as of September 30, 1998, is derived from
unaudited consolidated financial statements of the Company that we believe
include all the adjustments (consisting of only normal recurring adjustments)
necessary to fairly report the results for these periods. Please keep in mind
that the operating results for the nine month periods do not necessarily
represent results to be expected for a full fiscal year. The summary unaudited
pro forma consolidated financial data for the Company set forth below assumes
that the proposed sale of shares to TPG was made as of the beginning of the two
respective periods and that the funds were used to reduce bank debt.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ----------------------------
Pro Pro
Forma Forma
1995 1996 1997 1997 1997 1998 1998
-------- -------- -------- -------- -------- -------- --------
Canadian GAAP: (in thousands, except per share amounts and ratios)
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Oil, natural gas and
related product sales...$ 20,032 $ 52,880 $ 85,333 $ 85,333 $ 60,083 $ 66,959 $ 66,959
Interest income......... 77 769 1,123 1,123 986 1,078 1,078
-------- -------- -------- -------- -------- -------- --------
Total revenues...... 20,109 53,649 86,456 86,456 61,069 68,037 68,037
-------- -------- -------- -------- -------- -------- --------
Expenses:
Production.............. 6,789 13,495 22,218 22,218 15,737 22,782 22,782
General and
administrative........ 1,832 4,267 6,182 6,182 4,535 4,996 4,996
Interest................ 2,085 1,993 1,111 308 387 12,788 8,948
Imputed preferred
dividends............. - 1,281 - - - - -
Loss on early
extinguishment of debt 200 440 - - - - -
Depletion and
depreciation.......... 8,022 17,904 32,719 32,719 23,224 37,528 37,528
Writedown of oil and
natural gas properties - - - - - 165,000 165,000
Franchise taxes......... 100 213 428 428 308 603 603
-------- -------- -------- -------- -------- -------- --------
Total expenses...... 19,028 39,593 62,658 61,855 44,191 243,697 239,857
-------- -------- -------- -------- -------- -------- --------
Income (loss) before
income taxes.......... 1,081 14,056 23,798 24,601 16,878 (175,660) (171,820)
Federal income tax
benefit (provision)... (367) (5,312) (8,895) (9,102) (6,245) 50,618 50,618
-------- -------- -------- -------- -------- -------- --------
Net income (loss)........$ 714 $ 8,744 $ 14,903 $ 15,499 $ 10,633 $(125,042)$(121,202)
======== ======== ======== ======== ======== ========= =========
Net income (loss) per
common share
Basic...................$ 0.10 $ 0.67 $ 0.74 $ 0.40 $ 0.53 $ (4.88) (2.74)
Fully diluted........... 0.10 0.62 0.70 0.40 0.50 (4.88) (2.74)
Weighted average common
shares outstanding...... 6,870 13,104 20,224 38,777 20,175 25,631 44,184
Other Financial Data:
Operating cash flow (a)..$ 9,394 $ 34,140 $ 56,607 $ 57,410 $ 40,166 $ 27,324 $ 31,164
Capital expenditures..... 28,524 86,857 305,427 305,427 70,773 93,682 93,682
EBITDA (b)............... 11,311 34,905 56,505 56,505 39,503 38,578 38,578
Selected Ratios:
Ratio of earnings to
fixed charges (c)....... 1.5x 4.4x 19.9x 54.6x 34.9x (d)x (d)x
Ratio of EBITDA to
interest expense........ 5.4 17.5 50.9 183.5 102.1 3.0 4.3
Ratio of long-term debt
to EBITDA............... 0.3 0.1 4.2 2.5 0.4(e) 4.2(e) 2.4(e)
<FN>
(a) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances. We have included information concerning
cash flow before the changes in working capital items because we believe
that certain investors use this as one measure of a company's performance.
This 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.
(b) EBITDA represents earnings before interest income, interest expense, income
taxes, depletion and depreciation, imputed preferred dividends and losses
on early extinguishment of debt. We have included information concerning
EBITDA because we believe that EBITDA is used by certain investors as one
measure of a company'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) As a result of actual and pro-forma pre-tax losses of $175,660,000 and
$171,820,000 incurred for the nine months ended September 30, 1998,
respectively, we were unable to cover our fixed charges of $12,954,000 and
$9,114,000, respectively.
(e) EBITDA used to calculate the ratio of long-term debt to EBITDA for these
periods has been annualized.
</FN>
</TABLE>
23
<PAGE>
Change to United States GAAP:
As part of the move of our domicile to the United States, we will convert our
consolidated financial statements to United States generally accepted accounting
principles ("GAAP"). The primary differences between the Canadian and United
States GAAP relate to the (1) loss on early extinguishment of debt, (2)
preferred dividends, and (3) computation of earnings or loss per share. For the
years ended December 31, 1995 and 1996, the loss on early extinguishment of debt
was reported as an operating expense under Canadian GAAP, while it would have
been reported as an extraordinary item under United States GAAP. In addition,
for the year ended December 31, 1996, the imputed preferred dividend was also
reported as an operating expense under Canadian GAAP while under United States
GAAP it would have been a reduction to the net income attributable to common
shareholders. The only other reporting difference relates to how fully diluted
earnings or loss per common share are computed. This causes a slight difference
in fully diluted earnings per share for the year ended December 31, 1996 and for
the nine months ended September 30, 1997. To further illustrate the differences,
the following is the same income statement data prepared in accordance with
United States GAAP:
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------------------- ----------------------------
Pro Pro
Forma Forma
1995 1996 1997 1997 1997 1998 1998
-------- -------- -------- -------- -------- ---------- ----------
United States GAAP: (in thousands, except per share amounts and ratios)
Income Statement Data:
<S> <C> <C> <C> <C> <C> <C> <C>
Revenue:
Oil, natural gas and
related product sales.$ 20,032 $ 52,880 $ 85,333 $ 85,333 $ 60,083 $ 66,959 $ 66,959
Interest income......... 77 769 1,123 1,123 986 1,078 1,078
-------- -------- -------- -------- -------- ---------- ----------
Total revenues...... 20,109 53,649 86,456 86,456 61,069 68,037 68,037
-------- -------- -------- -------- -------- ---------- ----------
Expenses:
Production.............. 6,789 13,495 22,218 22,218 15,737 22,782 22,782
General and
administrative........ 1,832 4,267 6,182 6,182 4,535 4,996 4,996
Interest................ 2,085 1,993 1,111 308 387 12,788 8,948
Depletion and
depreciation.......... 8,022 17,904 32,719 32,719 23,224 37,528 37,528
Franchise taxes......... 100 213 428 428 308 603 603
Writedown of oil and
natural gas properties - - - - - 165,000 165,000
-------- -------- -------- -------- -------- ---------- ----------
Total expenses...... 18,828 37,872 62,658 61,855 44,191 243,697 239,857
-------- -------- -------- -------- -------- ---------- ----------
Income (loss) before
income taxes........... 1,281 15,777 23,798 24,601 16,878 (175,660) (171,820)
Federal income tax
benefit (provision).... (435) (5,462) (8,895) (9,102) (6,245) 50,618 50,618
-------- -------- -------- -------- -------- ---------- ----------
Income (loss) before
extraordinary item..... 846 10,315 14,903 15,499 10,633 (125,042) (121,202)
Extraordinary item:
Loss on early
extinguishment of debt,
net of applicable
income taxes.......... 132 290 - - - - -
-------- -------- -------- -------- -------- ---------- ----------
Net income (loss) $ 714 $ 10,025 $ 14,903 $ 15,499 $ 10,633 $ (125,042) $ (121,202)
======== ======== ======== ======== ======== ========== ==========
Net income (loss)
attributable to common
shareholders..........$ 714 $ 8,744 $ 14,903 $ 15,499 $ 10,633 $ (125,042) $ (121,202)
======== ======== ======== ======== ======== ========== ==========
Net income (loss) per
common share
Basic:
Income (loss) before
extraordinary item $ 0.12 $ 0.69 $ 0.74 $ 0.40 $ 0.53 $ (4.88) $ (2.74)
Extraordinary item... (0.02) (0.02) - - - - -
-------- -------- -------- -------- -------- ---------- ----------
Net income (loss)....$ 0.10 $ 0.67 $ 0.74 $ 0.40 $ 0.53 $ (4.88) (2.74)
======== ======== ======== ======== ======== ========== ==========
Diluted:
Income (loss) before
extraordinary item $ 0.12 $ 0.65 $ 0.70 $ 0.40 $ 0.49 $ (4.88) (2.74)
Extraordinary item... (0.02) (0.02) - - - - -
-------- -------- -------- -------- -------- ---------- ----------
Net income (loss)....$ 0.10 $ 0.63 $ 0.70 $ 0.40 $ 0.49 $ (4.88) $ (2.74)
======== ======== ======== ======== ======== ========== ==========
Weighted average common
shares outstanding 6,870 13,104 20,224 38,777 20,175 25,631 44,184
======== ======== ======== ======== ======== ========== ==========
</TABLE>
<TABLE>
<CAPTION>
As of December 31, As of September 30, 1998
----------------------------- -------------------------
Pro
1995 1996 1997 Actual Forma
-------- ------- -------- -------- ---------
Canadian and U.S. GAAP (in thousands)
Balance Sheet Data:
<S> <C> <C> <C> <C> <C>
Working capital................$ 6,862 $12,482 $ 2,692 $ 1,679 $ 10,179
Total assets.................... 77,641 166,505 447,548 369,352 377,852
Long-term debt, net of current
maturities.................... 3,474 125 240,000 215,000 125,000
Convertible preferred stock..... 15,000 - - - -
Shareholders' equity............ 53,501 142,504 160,223 129,838 228,338
</TABLE>
24
<PAGE>
SUMMARY RESERVE DATA
The following table summarizes the estimates of our net proved oil and
natural gas reserves and the present value of these reserves as of the dates
indicated. This reserve information was prepared by Netherland & Sewell,
independent petroleum engineers.
<TABLE>
<CAPTION>
As of December 31,
-------------------------------
1995 1996 1997
--------- -------- --------
<S> <C> <C> <C>
Proved Reserves:
Oil (MBbls)................................ 6,292 15,052 52,018
Natural Gas (MMcf)......................... 48,116 74,102 77,191
Oil Equivalent (MBOE)...................... 14,311 27,403 64,883
Proved developed reserves as a percent of
total proved reserves................... 78% 84% 66%
Present Values:
PV10 Value (before income taxes, in
thousands).................................$ 96,965 $316,098(d) $361,329(e)
Standardized measure of discounted
estimated future net cash flow after
net income taxes (in thousands).......... 81,164 241,872 $335,308
Representative Oil and Gas Prices: (a)
West Texas Intermediate (per Bbl)..........$ 18.00 $ 23.39(d) $ 16.18(e)
NYMEX Henry Hub (per MMBtu)................ 2.24 3.90(d) 2.58(e)
Other Reserve Data:
Reserve replacement percent (b)............ 300% 500% 867%
Reserve to production ratio (years) (c).... 9.3 9.2 12.7
- ---------------
<FN>
(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 our 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, we 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.
(e) For comparative purposes, we also prepared a reserve report as of December
31, 1997 using the prices used in the December 31, 1996 reserve report. The
PV10 Value in this report was $633.4 million with 67.8 MMBOE of proved
reserves. Of this PV10 Value, $206.7 million was attributable to the
Chevron Acquisition, as opposed to its PV 10 Value of $109.4 million using
December 31, 1997 prices.
By December 31, 1998, oil prices had dropped approximately $6.25 per Bbl
and natural gas prices had dropped approximately $0.50 per Mcf from the
prior year-end levels. When reserves are reviewed at year-end 1998 these
drops in price will have an effect on the reserve quantities and the PV10
Value, although it is not possible to quantify this decrease until the
December 31, 1998 reserve report, expected in February 1999, is completed.
</FN>
</TABLE>
25
<PAGE>
SUMMARY OPERATING DATA
The following table shows summary operating data for the production and
sales of oil and natural gas by us for the periods indicated.
<TABLE>
<CAPTION>
Nine Months Ended
Year Ended December 31, September 30,
------------------------ -----------------
1995 1996 1997 1997 1998
------- ------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Average Net Daily Production
Volumes:
Oil (Bbls).......... 1,995 4,099 7,902 7,615 14,373
Natural gas (Mcf)... 13,271 24,406 36,319 34,061 39,255
Oil equivalent (BOE) 4,207 8,167 13,955 13,292 20,916
Weighted Average Sales
Prices:
Oil (per Bbl)....... $ 14.90 $ 18.98 $ 17.25 $ 17.53 $ 10.64
Natural gas (per
Mcf).............. 1.90 2.73 2.68 2.54 2.35
Per BOE Data:
Revenue............. $ 13.05 $ 7.69 $ 16.75 $ 16.56 $ 11.73
Production expenses. (4.42) (4.51) (4.36) (4.34) (3.99)
------- ------- ------- ------- -------
Production netback.. 8.63 13.18 12.39 12.22 7.74
General and
administrative.... (1.25) (1.50) (1.30) (1.33) (0.98)
Interest, net....... (1.26) (0.26) 0.02 0.18 (1.97)
------- ------- ------- ------- -------
Operating cash flow (a) $ 6.12 $ 11.42 $ 11.11 $ 11.07 $ 4.79
======= ======= ======= ======= =======
- ----------
<FN>
(a) Represents cash flow provided by operations, exclusive of the net change in
non-cash working capital balances.
</FN>
</TABLE>
26
<PAGE>
THE MEETING
General
This Proxy Statement/Prospectus is furnished in connection with the
solicitation by our board of directors and management of proxies for use at a
special meeting of shareholders to be held on _________, February __, 1999 at
The Petroleum Club, Viking Room, 319 Fifth Avenue S.W., Calgary, Alberta at
10:00 a.m. (Calgary time), or any adjournments thereof. Proxies will be
solicited primarily by mail and may also be solicited by the directors or
officers of the Company. The Company will bear the costs of such solicitation.
THE BOARD HAS UNANIMOUSLY APPROVED:
O THE MOVE OF THE CORPORATE DOMICILE TO DELAWARE;
O A RESOLUTION GRANTING IT AUTHORITY TO POSTPONE OR ABANDON THE MOVE IF IT
IS NOT IN OUR BEST INTERESTS;
O THE SALE OF 18,552,876 COMMON SHARES TO OUR LARGEST SHAREHOLDER, TPG,
FOR $100 MILLION;
O THE INCREASE IN THE NUMBER OF COMMON SHARES THAT MAY BE ISSUED UNDER OUR
EMPLOYEE STOCK PURCHASE PLAN; AND
O THE INCREASE IN THE NUMBER OF COMMON SHARES RESERVED FOR ISSUANCE UNDER
OUR STOCK OPTION PLAN.
THE BOARD RECOMMENDS THAT YOU VOTE FOR ALL PROPOSALS. THE FULL TEXT OF
THESE RESOLUTIONS ARE ATTACHED TO THIS DOCUMENT AS EXHIBIT G.
Voting Rights
The board has set January __, 1999 as the record date for the special
meeting. At December 31, 1998, the Company had 26,801,680 common shares
outstanding, which carry one vote per share. Only holders of such common shares
of record as of January __, 1999 or transferees of such shares who produce,
before February __, 1999, proper evidence of ownership of such shares will be
entitled to vote at the meeting.
So far as our directors and officers are aware, as of December 31, 1998 the
only persons or companies beneficially owning, directly or indirectly, or
exercising control or direction over shares carrying more than 10% of the voting
rights attached to all outstanding shares are TPG, which beneficially owns
approximately 32% of the shares outstanding, and Royce and Associates, Inc.,
Royce Management Company and Charles M. Royce, which collectively own
approximately 11% of the shares outstanding.
Each shareholder may vote in person or by proxy. A person acting as a proxy
need not be a shareholder of the Company.
27
<PAGE>
Vote Required to Approve the Proposals
MOVE OF DOMICILE. The move of the corporate domicile must be approved by at
least 2/3 of the votes cast by shareholders present in person or represented by
proxy at the meeting. If our shareholders do not approve the move, we will
continue to be a corporation governed by Canadian law. The board has not
considered any alternative action if the move is not approved.
SALE OF SHARES TO TPG. The proposal to sell common shares to TPG requires
the affirmative vote of more than 50% of the votes cast by shareholders present
in person or represented by proxy at the meeting. The total vote cast on this
proposal must represent over 50% of all common shares entitled to vote on this
proposal. TPG's shares may be included in order to reach a 50% participation
level, but a majority of the voting shareholders excluding TPG and its
affiliates must approve the proposed sale of stock.
INCREASE UNDER EMPLOYEE PLANS AND AUTHORITY TO ABANDON MOVE. The proposals
to authorize additional common shares for issuance under our Employee Stock
Purchase Plan, reserve additional shares for issuance under our Stock Option
Plan and authorizing the board the authority to abandon the move require the
affirmative vote of 50% of the votes cast by common shareholders present in
person or represented by proxy at the meeting.
Solicitation and Revocation of Proxies
Proxies will be solicited primarily by mail and may also be solicited by
our directors or officers at nominal cost. The cost of such solicitation will be
borne by the Company.
All shares represented at the meeting by properly executed proxies will be
voted in accordance with the instructions specified on the proxy card. If no
such specification is made, and if the proxy card names the management
designees, they will vote in favor of all proposals. The management designees
are directors and officers of the Company and have indicated their willingness
to represent as proxy the shareholder who appoints them.
The enclosed proxy card, when properly signed, confers discretionary
authority to the persons named with respect to amendments or variations of
matters identified in the Notice of Meeting and any other matters which may
properly be brought before the meeting. As of the date hereof, management of the
Company is not aware that any such amendments or other matters are to be
presented at the meeting. However, if any other matters which are not now known
to management should properly come before the meeting, then the proxies named on
the proxy card intend to vote in accordance with the judgment of management of
the Company.
To be valid, a proxy card must be signed by the shareholder or by the
shareholder's attorney duly authorized in writing.
In addition to revocation in any manner permitted by law, a proxy may be
revoked by an instrument in writing signed by the shareholder or by his attorney
duly authorized in writing, and received by the Secretary of Denbury Resources
Inc., c/o CIBC Mellon Trust Company, Corporate Trust Department, 600 Dome Tower,
333 - 7th Avenue S.W., Calgary, Alberta T2P 2Z1, not less than forty-eight (48)
hours (excluding Saturdays, Sundays and holidays) before the time set for the
meeting or any adjournment thereof.
A SHAREHOLDER HAS THE RIGHT TO APPOINT A PERSON (WHO NEED NOT BE A
SHAREHOLDER) TO ATTEND THE MEETING AND ACT ON HIS BEHALF AT THE MEETING OTHER
THAN THE PERSONS DESIGNATED IN THE ENCLOSED
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FORM OF PROXY, WHO ARE OFFICERS OR DIRECTORS OF THE COMPANY. Such right may be
exercised by striking out the names of the persons designated on the enclosed
proxy card and by inserting in the blank space provided for that purpose the
name of the desired person or by completing another proper form of proxy. The
completed and executed proxy must be delivered to the Company on or before
January __, 1999. A shareholder who has given a proxy may revoke it at any time
before its use by either (i) notifying the Corporate Secretary, (ii) voting in
person at the meeting, or (iii) returning a later-dated proxy on or before
January __, 1999.
PROPERLY EXECUTED PROXIES WITHOUT INSTRUCTIONS ON HOW TO VOTE ON ANY OF THE
PROPOSALS WILL BE VOTED "FOR" THE APPROVAL OF SUCH PROPOSALS.
MOVING THE CORPORATE DOMICILE
The Move
Through a continuance, the Company intends to change its domicile from
Canada to the United States by means of a process which is called a
domestication in the State of Delaware. Domestication is a process available to
non-United States corporations under Section 388 of Delaware General Corporation
Law. Simultaneously with the domestication, Denbury Canada will apply for a
certificate of discontinuance under Section 188(7) of the Canada Business
Corporations Act. After the special meeting, we will file the appropriate
documents with both Delaware and Canada and then the Company will be
reincorporated as a Delaware corporation.
The first proposal to be voted on at the meeting relating to the
continuance actually authorizes us to:
o continue the Company as Denbury Delaware under the Delaware law and
simultaneously discontinue the Company's existence in Canada under
Canadian law;
o approve the certificate of incorporation, which will be filed with the
Secretary of State of the State of Delaware along with a certificate of
domestication, which is attached as Exhibit D and C to this document;
o authorize Denbury Canada to apply to the Director of its jurisdiction of
incorporation for the Authorization, file the Authorization and the
Delaware filings with the Secretary of State of the State of Delaware
and a notice of the Delaware filings with such Director; and
o approve the merger of Denbury Delaware and its wholly owned subsidiary
immediately following the continuance.
PROCEDURES UNDER DELAWARE LAW. Unlike in the case of a move of domicile by
corporations between states within the United States, the continuance does not
involve the merger of two separate corporations. Typically a shell corporation
is created in the state of intended domicile prior to the merger; and the
migrating corporation is merged into the shell corporation, with only the shell
corporation surviving. In the case of a continuance and domestication, no
corporate entity will exist under Delaware law prior to the effective date of
the continuance. Consequently, there is no "surviving corporation" and "target
corporation" as in a typical merger. Rather, Denbury Canada consents to the
jurisdiction of Delaware by filing a certificate of incorporation that complies
with the provisions of Delaware law applicable to domestic Delaware corporations
and an additional document, a certificate of domestication. Upon filing the new
certificate of incorporation and the certificate of domestication, the Company
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becomes subject to the jurisdiction of Delaware law, but retains its original
incorporation date in Canada as the incorporation date for purposes of Delaware
law. In addition, Delaware law provides explicitly that the domestication shall
not be deemed to affect any obligations or liabilities of the corporation
incurred prior to its domestication.
PROCEDURES UNDER CANADIAN LAW. Simultaneously with the domestication in
Delaware, Denbury Canada must terminate its existence under Canadian law. Under
Canadian law, a corporation may apply to another jurisdiction requesting to be
continued as if it had been incorporated under the laws of that other
jurisdiction. An application for continuance requires approval by 2/3 of
shareholders and satisfaction of the Director of its jurisdiction of
incorporation that the proposed continuance will not adversely affect creditors
or shareholders of the corporation. Furthermore, a corporation shall not be
continued under the laws of another jurisdiction unless the laws of the
jurisdiction where continuance is sought provide that following the continuance:
o the property of the corporation continues to be its property;
o the corporation continues to be liable for its obligations;
o an existing cause of action, claim or liability is unaffected;
o a civil, criminal or administrative action or proceeding pending may be
continued to be prosecuted by or against the corporation; and
o a conviction against the corporation may be enforced against the new
corporation or a ruling, order or judgment may be enforced by or
against the corporation.
The directors of the corporation may postpone or abandon the continuance,
following approval by the shareholders without seeking shareholder consent to
such a postponement or abandonment.
CONTINUATION BY THE COMPANY AS DENBURY DELAWARE. If the proposed move is
approved by our shareholders and the board decides not to postpone or abandon
the move of domicile and the Director of Denbury Canada's jurisdiction of
incorporation has issued a letter of satisfaction for submission to the Delaware
authorities under Delaware law, Denbury Delaware will file a certificate of
incorporation and a certificate of domestication in Delaware. Once the Delaware
filings have been filed in Delaware and Denbury Canada has continued in
Delaware, the Director of the jurisdiction in which Denbury Canada is
incorporated will issue a Certificate of Discontinuance and Canadian law will
cease to apply.
The Merger
Essentially at the same time as the Company's move into Delaware, at which
point the Company becomes Denbury Delaware, its wholly owned subsidiary, DMI,
will be merged into Denbury Delaware. Denbury Delaware will be the surviving
entity. Shareholder approval of the merger is not required under Delaware law
because DMI will be the wholly owned subsidiary of Denbury Delaware. The merger
will not take place if the move is not consummated. No additional stock issuance
will take place as a result of the merger.
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Effects of the Move of Corporate Domicile and Merger
ASSETS, LIABILITIES, OBLIGATIONS. By operation of Delaware law, as of the
effective date of the move, all of the assets, property, rights, liabilities and
obligations of the Company immediately prior to the continuance will continue to
be the assets, property, rights, liabilities and obligations of Denbury
Delaware. Canadian law ceases to apply to the Company on the date shown on the
Certificate of Discontinuance to be issued by the Director. On the effective
date of the move:
o the property of the Company will continue to be the property of Denbury
Delaware;
o Denbury Delaware will continue to be liable for the obligations of the
Company;
o an existing cause of action, claim or liability to prosecution against
the Company will be unaffected;
o a civil, criminal or administrative action or proceeding pending by or
against the Company may be continued to be prosecuted by or against
Denbury Delaware;
o a conviction against the Company may be enforced against Denbury
Delaware; or
o a ruling, order or judgment in favor of or against the Company may be
enforced by or against Denbury Delaware.
By operation of Delaware law, as of the effective date of the merger:
o all of the assets, property, rights, liabilities and obligations of DMI
immediately prior to the merger will become the assets, property,
rights, liabilities and obligations of Denbury Delaware;
o Denbury Delaware will be liable for the obligations of DMI;
o an existing cause of action, claim or liability to prosecution against
Denbury Delaware will be unaffected;
o a civil, criminal or administrative action or proceeding pending by or
against DMI may be continued to be prosecuted by or against Denbury
Delaware;
o a conviction against DMI may be enforced against Denbury Delaware; or
o a ruling, order or judgment in favor of or against DMI may be enforced
by or against Denbury Delaware.
After the merger, Denbury Delaware will also be directly liable for the DMI
9% Senior Subordinated Notes due 2008 and will assume all the obligations
relating to these notes. In summary, as a result of the merger Denbury Delaware
will expressly assume all rights and obligations of DMI.
CAPITAL STOCK. Once the move is completed, holders of Denbury Canada common
shares will receive one share of Denbury Delaware common stock for each common
share held before the merger.
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The existing certificates representing the Company's common shares will not be
canceled. Holders of options to purchase the Company's common shares on the date
of the move will continue to hold options to purchase an identical number of
shares of Denbury Delaware common stock on substantially the same terms.
Similarly, holders of warrants to purchase the Company's common shares will
continue to hold warrants to purchase an identical number of shares of Denbury
Delaware common stock on substantially the same terms. The common stock of DMI
will be canceled in the merger.
Many attributes of the Company's common shares and Denbury Delaware common
stock will be the same, although there are differences in shareholders' rights
under Canadian and Delaware laws. See "Moving the Corporate Domicile of the
Company-Comparison of Shareholders' Rights" and "Description of Capital Stock."
BUSINESS AND OPERATIONS. The move, if approved, will change our legal
domicile but our business or operations will not change. The merger will combine
the present holding company and its operating subsidiary, but will have no
effect on the business or operations of either entity.
DIRECTORS AND OFFICERS. The directors and officers of the Company
immediately before the move will serve in the same capacities after the move.
See "Management of the Company." Once the move occurs, the election, duties,
resignation and removal of the Company directors and officers shall be governed
by Delaware law, the Certificate of Incorporation and the By-laws of Denbury
Delaware. As part of the merger, we anticipate that officers of DMI that are not
presently officers of the Company will be elected as officers of Denbury
Delaware in the same capacity.
STOCK EXCHANGE LISTINGS. The Company's common shares are currently listed
and traded on the NYSE and the TSE under the symbol "DNR." We anticipate that we
will maintain both listings as Denbury Delaware following the move and merger.
SECURITIES REGULATION. We also anticipate that we will continue to be a
"reporting issuer" in each Province of Canada immediately following the
continuance.
Background to and Principal Reasons for the Move of Corporate Domicile and
Merger
The board believes that it is advantageous for the Company to move its
domicile to Delaware for the following reasons:
REDUCING TAX COSTS OF CERTAIN TRANSACTIONS. If the Company issues certain
types of securities such as convertible debt and preferred stock, there is an
incremental cost because of a withholding tax on any interest and dividend
payments that pass between the United States and Canada. Since all of the assets
and operations of the Company are conducted through its wholly owned subsidiary,
any funding of dividend or interest payments for convertibles or preferred stock
results in the regular transfer of funds between its wholly owned subsidiary and
the Company. For the same reason, even though the Company does not currently
intend to do so, there would be a withholding tax on any dividends declared and
paid on its common shares. This incremental tax cost reduces our flexibility
with regards to our capital structure. These costs would be eliminated after the
move to Delaware.
IMPROVING MARKET ACCESS. We would like to be able to issue its common
shares or other securities in exchange for oil and natural gas properties or for
ownership in another company. Since we are a Canadian company, some United
States companies are hesitant about doing this type of transaction
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due to the potential tax complications both currently and prospectively.
Furthermore, the United States has been our primary source of capital in recent
years. We believe that more opportunities and capital may be available to us if
we are a United States corporation.
LESS RESTRICTIVE GOVERNING LAW. Canadian law requires that at least 1/3 of
our directors be Canadian residents. We have been able to attract qualified
Canadian residents to serve on our board, but this requirement does reduce our
flexibility in choosing directors. Delaware law does not impose any such
requirement, and thus the continuance will provide us with greater flexibility
in the future as to the composition of our board.
Furthermore, over 50% of our stock is held by United States residents and
we are listed on the NYSE. Thus we must abide by most United States securities
and stock exchange requirements as though we were a United States company. The
high percentage of United States ownership also prevents us from receiving the
benefits of the North American Free Trade Act ("NAFTA") which reduces certain
administrative burdens of Canadian companies doing business in the United
States. We must also abide by the respective Canadian and stock exchange
requirements as a Canadian corporation. Occasionally, the combination of these
rules and the inability to utilize the reduced requirements of NAFTA are
unusually restrictive on our business. We also expect to realize some minor
savings in administrative time and expense by a move of our corporate domicile
to the United States.
BETTER COMPARISON WITH PEERS. Since all of our business is conducted in the
United States, the market generally compares us to similar-sized United States
companies. Although the United States and Canadian accounting rules are similar,
they are not quite the same. Occasionally, this results in different accounting
treatment for the Company, making it confusing for investors. This confusion
would be eliminated once we become a Delaware corporation because then we would
report using United States GAAP. In addition, there are certain benefits under
United States GAAP with regard to the current accounting rules relating to
mergers. These rules may be beneficial in certain circumstances.
INCREASINGLY LIMITED CONTACT WITH CANADA. While our operations at one time
were located in, or closely associated with Alberta, since 1993 when we focused
entirely upon the oil and gas business in the United States, our connections
with Canada have continually been reduced. Currently, we have no business
operations in Canada. All our employees are located in the United States, and,
as of December 31, 1998, more than 75% of our outstanding common shares were
held by non-Canadian shareholders. Prior to 1995, our common shares were only
traded on the TSE. At the start of 1995, we were admitted to trading on the
NASDAQ and moved to the NYSE in May 1997. A majority of our recent equity and
debt offerings have been funded by non-Canadian entities or individuals.
SELECTION OF STATE OF DELAWARE. For many years, Delaware has followed a
policy of encouraging incorporation in that state and has adopted comprehensive,
modern and flexible corporate laws which are periodically updated and revised to
meet changing business needs. As a result of this deliberate policy to provide a
hospitable climate for corporate development, many major corporations have
initially chosen Delaware for their domicile, or have subsequently
reincorporated in, continued into or domesticated in Delaware. In addition, the
Delaware courts have developed considerable expertise in dealing with corporate
issues, and a substantial body of case law has developed construing Delaware
corporations law and establishing specific legal principles and policies
regarding Delaware corporations. Not only has this served to provide greater
legal predictability with respect to the corporate legal affairs of Delaware
corporations, but it has also given Delaware an important role in respect of the
corporate laws of the United States generally, as many of its principles and
policies have been adopted by, and
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become important precedents for the laws of, other states. It is anticipated
that Delaware corporate law will continue its leadership position in the
development of corporate law in the United States, and that the Delaware
legislature will continue to ensure that Delaware corporate law itself remains
as up to date and as flexible as possible.
THE BOARD OF DIRECTORS HAS UNANIMOUSLY APPROVED THE CONTINUANCE OUT OF
CANADA AND DOMESTICATION OF THE COMPANY UNDER THE PROVISIONS OF CANADIAN AND
DELAWARE LAWS, AND RECOMMEND THAT SHAREHOLDERS VOTE FOR THIS PROPOSAL.
Material Canadian Federal Income Tax Consequences of the Move of Corporate
Domicile and Merger
In the opinion of Burnet, Duckworth & Palmer, Canadian counsel to the
Company, the following are the principal Canadian federal income tax
considerations under the Income Tax Act (Canada) (the "Canadian Tax Act") with
respect to the move generally applicable to the Company and to shareholders of
the Company who, for purposes of the Canadian Tax Act, hold their shares of
Denbury Canada's common shares and will hold their Denbury Delaware common stock
as capital property and who deal at arm's length with the Company. This opinion
does not apply to a shareholder who is or will be a foreign affiliate of any
person resident in Canada, or to whom the Company will be a foreign affiliate
following continuation within the meaning of the Canadian Tax Act. Lastly this
summary is not applicable to a corporation which is a "specified financial
institution" or to whom the mark-to-market provisions of the Canadian Tax Act
otherwise apply.
Shares will generally be considered to be capital property to a shareholder
unless such shares are held in the course of carrying on a business or are
acquired in a transaction considered to be an adventure in the nature of trade.
Shareholders should consult their own tax advisors regarding whether they hold
their shares of Denbury Canada's common shares as capital property and will hold
their Denbury Delaware common stock as capital property for the purposes of the
Canadian Tax Act. Shareholders who are resident in Canada and whose shares of
Denbury Canada's common shares or Denbury Delaware common stock might not
otherwise qualify as capital property may be entitled to obtain this
qualification by making an irrevocable election provided by Subsection 39(4) of
the Canadian Tax Act prior to the continuance. Shareholders who do not hold
their shares as capital property should consult their own tax advisors regarding
their particular circumstances.
This summary is based on the current provisions of the Canadian Tax Act,
the regulations thereunder, the Canada-United States Income Tax Convention,
1980, as amended (the "Tax Treaty"), and counsel's understanding of the current
administrative practices published by Revenue Canada, Customs, Excise and
Taxation ("Revenue Canada"). This summary takes into account specific proposals
to amend the Canadian Tax Act and regulations publicly announced by the Minister
of Finance prior to the date hereof (the "Tax Proposals"), and assumes that all
Tax Proposals will be enacted in their present form. However, no assurances can
be given that the Tax Proposals will be enacted in the form presented, or at
all. Except for the foregoing, this summary does not take into account or
anticipate any changes in the law, whether by judicial, administrative or
legislative action or decision, nor does it take into account provincial,
territorial or foreign income tax legislation or considerations, which may
differ from the Canadian federal income tax considerations described herein. No
advance income tax ruling has been obtained from Revenue Canada to confirm the
tax consequences of any of the transactions described herein.
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These opinions expressed herein are based on the assumptions that shares of
the Company continue to be listed on a stock exchange which is prescribed for
the purposes of the Tax Act and Denbury Canada common shares and the Denbury
Delaware commo n stock may not reasonably be considered to derive their value,
directly or indirectly, primarily from portfolio investment in shares, debt,
commodities or any other similar properties.
This summary does not discuss all aspects of Canadian federal income
taxation that may be relevant to a particular shareholder. Shareholders should
consult their own tax advisors with respect to the tax consequences of the
transactions described herein in their particular circumstances.
TAXATION OF THE COMPANY. Upon the continuance, the Company will be deemed
to have disposed of all of its property for proceeds of disposition equal to the
fair market value thereof immediately prior to the continuance. The Company will
be subject to tax under the Canadian Tax Act on any income and net taxable
capital gains arising thereby. The Company will also be subject to an additional
tax at the rate of five percent on the amount by which the fair market value of
the Company's assets, net of liabilities, exceeds the paid-up capital of the
Company's issued and outstanding shares, except that if one of the main reasons
for the Company changing its residence to the United States was to reduce the
amount of such additional tax or Canadian withholding tax, the rate of such tax
would be 25 percent. The Company will not be resident in Canada after the
continuance for the purposes of the Canadian Tax Act. The management of the
Company, in consultation with certain of its advisors, has reviewed the
Company's assets, liabilities and paid-up capital and has advised counsel that
no Canadian federal taxes should be due and payable by the Company under the
Canadian Tax Act as a result of the continuance. Based upon certain
representations of fact which have been made by the Company (which
representations are set forth below), counsel is of the opinion that no Canadian
tax liability will arise as a result of the continuance. The representations of
the Company upon which this opinion is based are that (i) the fair market value
of the Company's assets is less than the aggregate value of the paid-up capital
of all of the Company's issued and outstanding shares and all of the liabilities
of the Company, and (ii) the deemed disposition of all of the Company's assets
at fair market value upon the continuance will not create income in excess of
the Canadian tax deductions which are available to the Company.
The Company's representations are based on the trading value of the
Company's securities and the price at which securities are to be issued to TPG
and certain other factual matters, and counsel can express no opinion on such
matters of factual determination, and facts underlying the Company's assumptions
and conclusions may also change prior to the effective date of the continuance.
The Company has not applied to Canadian federal tax authorities for a ruling as
to the amount of federal taxes payable by the Company under the Canadian Tax Act
as a result of the continuance and does not intend to apply for such a ruling
given the factual nature of the determinations involved. There can be no
assurance that the Canadian federal tax authorities will accept the valuations
or the positions that the Company has adopted with respect to the Canadian
federal tax treatment of such amounts. Accordingly, there can be no assurance
that the Canadian federal tax authorities will conclude after the effective date
of the continuance that no Canadian federal taxes are due under the Canadian Tax
Act as a result of the continuance or that the amount of Canadian federal taxes
claimed or found to be due will not be significant.
TAXATION OF SHAREHOLDERS RESIDENT IN CANADA. The following portion of the
opinion applies to shareholders of the Company who are resident in Canada for
the purposes of the Canadian Tax Act.
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Shareholders of the Company will not be considered to have disposed of
their shares of the Company's common shares or to have realized a taxable
capital gain or loss by reason only of the continuance. The continuance will
also have no effect on the adjusted cost base to shareholders of their shares of
the Company's common shares.
Following the continuance, dividends received by a shareholder on shares of
Denbury Delaware common stock will be included in computing income and will
generally not be deductible in computing taxable income of a shareholder that is
a corporation, and, in the case of a shareholder who is an individual, such
dividends will not receive the gross-up and dividend tax credit treatment
generally applicable to dividends on shares of taxable Canadian corporations.
Also, following the continuance, shares of Denbury Delaware common stock
will be a qualified investment for trusts governed by deferred profit sharing
plans, registered retirement saving plans and registered income funds
(collectively, "Deferred Income Plans"), provided such shares remain listed on a
prescribed stock exchange. SUCH SHARES WILL BE FOREIGN PROPERTY AFTER THE
EFFECTIVE DATE OF THE CONTINUANCE, AND ACCORDINGLY, THE HOLDING OF SUCH SHARES
BY DEFERRED INCOME PLANS OR BY CERTAIN OTHER TAX-EXEMPT ENTITIES INCLUDING
REGISTERED INVESTMENTS AND REGISTERED PENSION PLANS MAY SUBJECT SUCH HOLDERS TO
PENALTY TAXES UNDER THE CANADIAN TAX ACT. HOWEVER, PERSONS HOLDING SHARES OF THE
COMPANY AT THE TIME OF THE CONTINUANCE MAY BE ENTITLED TO AVAIL THEMSELVES OF A
PROVISION OF THE CANADIAN TAX ACT TO ELIMINATE SUCH PENALTY TAX FOR UP TO 24
MONTHS FOLLOWING THE CONTINUANCE. THIS IS INTENDED TO PERMIT DEFERRED INCOME
PLANS AND OTHER TAX EXEMPT PERSONS TO EITHER DISPOSE OF THEIR SHARES ON A
ORDERLY BASIS, OR TO RE-BALANCE THEIR PORTFOLIOS TO FALL WITHIN THE LIMITS
PLACED IN OWNERSHIP OF "FOREIGN PROPERTY". SUCH HOLDERS ARE URGED TO CONTACT
THEIR OWN TAX ADVISORS TO DETERMINE THE POTENTIAL APPLICABILITY OF SUCH PENALTY
TAXES TO THEM.
TAXATION OF DISSENTING SHAREHOLDERS. Pursuant to the administrative
practices of Revenue Canada, the amount paid to a dissenting shareholder should
be treated as proceeds of his or her common shares. Accordingly, the dissenting
shareholder would recognize a capital gain (or a capital loss) to the extent
that the amount received, net of any reasonable costs of disposition, exceeds
(or is less than) the adjusted cost base of such holder's common shares. If a
holder is a corporation, any capital loss arising on the disposition of common
shares may in certain circumstances be reduced by the amount of any dividends
which have been received on such share. Analogous rules apply to a partnership
or trust of which a corporation is a member or beneficiary. A shareholder will
be required to include three-quarters of any capital gain (a "taxable capital
gain") in computing his or her income for purposes of the Canadian Tax Act and
will be entitled to deduct three-quarters of any capital loss only against
taxable capital gains in accordance with the detailed provisions of the Canadian
Tax Act in that regard.
TAXATION OF SHAREHOLDERS NOT RESIDENT IN CANADA. The following portion of
this summary applies to shareholders who, for purposes of the Canadian Tax Act:
o are not resident or deemed to be resident in Canada at any time when
they held or hold Denbury Canada common shares;
o do not use or hold and are not deemed to use or hold their Denbury
Canada common shares in the course of carrying on a business in Canada;
or
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o in the case of shareholders who carry on an insurance business in Canada
and elsewhere, establish that Denbury Canada common shares are
"designated insurance property".
Shareholders will not be considered to have disposed of their Denbury
Canada common shares or to have realized a taxable capital gain or loss by
reason only of the continuance. The continuance will also have no effect on the
adjusted cost base to shareholders of their Denbury Canada common shares. After
the effective date of the continuance, dividends received by a shareholder on
Denbury Delaware Common stock will not be subject to Canadian withholding tax.
Provided that a Denbury Canada common share is not "taxable Canadian
property" to a shareholder at the time of disposition of such share, such
shareholder will not be subject to Canadian tax on any capital gain arising by
reason of the disposition of such Denbury Canada common share. After the
effective date of the continuance, based on the present activities of Denbury
Delaware, Denbury Delaware Common stock will not generally be taxable Canadian
property to a shareholder at any particular time.
Pursuant to the administrative practices of Revenue Canada, the amount paid
to a dissenting shareholder should be treated as proceeds of disposition of his
or her Denbury Canada common shares. Provided that such shares are not taxable
Canadian property for the purposes of the Canadian Tax Act, such proceeds of
disposition will not be subject to Canadian tax. Such shareholder should consult
his or her own tax advisors in this regard.
Material United States Federal Income Tax Consequences to Shareholders of the
Move of Corporate Domicile And Merger
In the opinion of Jenkens & Gilchrist, a Professional Corporation, special
United States federal income tax counsel to the Company ("U.S. Special Tax
Counsel"), the following are the material United States federal income tax
considerations arising from and relating to the continuance that are generally
applicable to shareholders of the Company that are United States citizens or
residents, domestic corporations, domestic partnerships, estates subject to
United States federal income tax on their income regardless of source, and
trusts, but only if a court within the United States is able to exercise primary
supervision over the administration of such trust and one or more United States
fiduciaries have the authority to control all the substantial decisions of the
trust ("U.S. Shareholders") and to certain shareholders of the Company that are
not U.S. Shareholders ("non-U.S. Shareholders"). This discussion does not
address all aspects of United States federal income taxation that may be
relevant to a particular U.S. Shareholder (including, without limitation, U.S.
Shareholders who directly or constructively own ten percent or more, by vote or
value, of the stock of the Company, and the potential application of the
alternative minimum tax), to a particular non-U.S. Shareholder, or to certain
types of investors subject to special treatment under the United States federal
income tax laws (for example, banks, life insurance companies, tax-exempt
organizations, broker-dealers or holders who received the Company's common stock
as compensation). This discussion does not address any aspect of state, local or
foreign laws.
This discussion is based on the United States Internal Revenue Code of
1986, as amended (the "Code"), existing and proposed regulations thereunder, IRS
rulings and pronouncements, reports of congressional committees, judicial
decisions and current administrative rulings and practice, all as in effect on
the date hereof and which are subject to change. Any such change could be
retroactive and, accordingly, could modify the tax consequences discussed
herein. No advance ruling from the IRS
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with respect to the matters discussed herein has been requested. Accordingly, it
is possible that the United States federal income tax consequences of the
continuance may differ from those described below.
The following does not address all aspects of federal income taxation that
may be relevant to a particular shareholder in light of such holder's particular
circumstances and income tax situation. Shareholders are urged to consult their
own tax advisors as to the particular tax consequences to them of the
transactions described herein including the application of state, local and
foreign tax laws; possible future changes in federal tax laws; and any pending
or proposed legislation.
TAXATION OF U.S. SHAREHOLDERS. The following discussion is limited to U.S.
Shareholders:
o who hold Denbury Canada common shares and/or will hold Denbury Delaware
common stock (as defined below) as "capital assets" within the meaning
of Section 1221 of the Code;
o whose ownership, receipt or disposition of Denbury Canada common shares
and/or Denbury Delaware common stock is not attributable to a permanent
establishment in a country other than the United States for purposes of
an income tax treaty to which the United States is a party; and
o who are not residents of a country other than the United States for
purposes of an income tax treaty to which the United States is a party.
U.S. Shareholders who do not meet one or more of the foregoing criteria are
urged to consult their tax advisors regarding their particular United States
federal income tax consequences.
The Continuance. For United States federal income tax purposes, the
continuance should result in a constructive exchange by Denbury Canada
shareholders of their Denbury Canada common shares for stock in a new United
States corporation, Denbury Delaware common stock, and should qualify as a
"reorganization within the meaning of Section 368(a) of the Code. This
conclusion is based on certain factual assumptions and reliance on
representations from the Company.
With respect to a U.S. Shareholder, other than a Section 1248 Shareholder
(as defined below), based on the foregoing conclusion that the continuance
should qualify as a reorganization, the following will be the material United
States federal income tax consequences:
o The U.S. Shareholder will not recognize gain or loss on the constructive
exchange of Denbury Canada common shares solely for Denbury Delaware
common stock;
o The tax basis of Denbury Delaware common stock constructively received
will be the same as the basis of Denbury Canada common shares
constructively surrendered in exchange therefore;
o The holding period for the shares of Denbury Delaware common stock will
include the holding period of Denbury Canada common shares
constructively surrendered in exchange therefor; and
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o Any U.S. Shareholder who exercises his rights under Canadian law to
dissent from the continuance should be treated as if his Denbury Canada
common shares was redeemed for cash and should in general recognize
capital gain or loss in an amount equal to the difference between the
amount of cash received and the U.S. Shareholder's basis in Denbury
Canada common shares surrendered therefor. Special rules may apply to
dissenting shareholders of the Company that actually or constructively
(pursuant to Section 318 of the Code) own shares of the Company as to
which dissenter's rights are not being exercised.
A Section 1248 Shareholder is defined as a U.S. Shareholder of the Company
who actually or constructively owns (or has actually or constructively owned at
any time in the five year period immediately preceding the continuance) 10
percent or more of the voting stock of the Company.
Notice Requirement. Any U.S. Shareholder who receives Denbury Delaware
common stock in exchange for Denbury Canada common shares and takes the position
that such exchange is eligible for nonrecognition treatment IS REQUIRED TO FILE
A NOTICE WITH THE IRS on or before the last day for filing a United States
federal income tax return (taking into account any extensions of time therefor)
for the U.S. Shareholder's taxable year in which the continuance occurs. The
notice must contain certain information specifically enumerated in Section
7.367(b)-1 of the United States treasury regulations, and U.S. Shareholders are
advised to consult their tax advisors for assistance in preparing such notice.
If a U.S. Shareholder required to give notice as described above fails to give
such notice, and if the U.S. Shareholder further fails to establish reasonable
cause for the failure, then the IRS will be required to determine, based on all
the facts and circumstances, whether the conversion of Denbury Canada common
shares into Denbury Delaware common stock is eligible for nonrecognition
treatment. In making the determination, the IRS may conclude:
o that the conversion is eligible for nonrecognition treatment, despite
such noncompliance;
o that the conversion is eligible for nonrecognition treatment, provided
that certain other conditions imposed by the United States treasury
regulations are satisfied; or
o that the conversion is not eligible for nonrecognition treatment and
that any gain recognized will be taken into account for purposes of
increasing the tax basis of Denbury Delaware common stock received
pursuant to the continuance.
Nevertheless, the failure of any one U.S. Shareholder to satisfy the
foregoing notice requirements should not bar other U.S. Shareholders that do
satisfy such requirements from receiving nonrecognition treatment with respect
to the conversion of their Denbury Canada common shares into Denbury Delaware
common stock pursuant to the continuance.
Passive Foreign Investment Company Considerations. For United States
federal income tax purposes, the Company generally will be classified as a PFIC
for any taxable year during which either:
o 75 percent or more of its gross income is passive income (as defined for
United States federal income tax purposes); or
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o on average for such taxable year, 50 percent or more of its assets (by
value) produce or are held for the production of passive income.
For purposes of applying the foregoing tests, all or some of the assets and
gross income of the Company's subsidiaries will be attributed to the Company.
While there can be no assurance with respect to the classification of the
Company as a PFIC, the Company believes that it did not constitute a PFIC during
any taxable year ending at or prior to consummation of the continuance. In
connection with the transactions contemplated herein, U.S. Special Tax Counsel
will not be rendering an opinion with regard to the Company's status as a PFIC.
Although the matter is not free from doubt, if the Company is a PFIC prior
to the consummation of the continuance and the U.S. Shareholder does not make a
qualified electing fund election (a "QEF Election"), then:
o the U.S. Shareholder would be required to allocate gain recognized upon
the exchange of Denbury Canada common shares for Denbury Delaware common
stock ratably over the U.S. Shareholder's holding period for such
Denbury Canada common shares;
o the amount allocated to each year (other than the year of the
disposition of Denbury Canada common shares or any year prior to the
beginning of the first taxable year of the Company for which it was a
PFIC), would be subject to tax at the highest rate applicable to
individuals or corporations, as the case may be, for the taxable year to
which such income is allocated, and an interest charge would be imposed
upon the resulting tax attributable to each such year (which charge
would accrue from the due date of the return for the taxable year to
which such tax was allocated); and
o gain recognized upon the disposition of Denbury Canada common shares
(including upon the exchange of Denbury Canada common shares for Denbury
Delaware common stock in the continuance) would be taxable as ordinary
income.
If a U.S. Shareholder made a QEF Election, then the U.S. Shareholder
generally is currently taxable on such U.S. Shareholder's pro rata share of the
Company's ordinary earnings and net capital gains (at ordinary income and
capital gains rates, respectively) for each taxable year of the Company in which
the Company is classified as a PFIC, even if no dividend distributions are
received by such U.S. Shareholder unless such U.S. Shareholder made an election
to defer such taxes.
The foregoing summary of the possible application of the PFIC rules to the
Company and the U.S. Shareholders of Denbury Canada common shares is only a
summary of certain material aspects of those rules. Because the United States
federal income tax consequences to a U.S. Shareholder under the PFIC provisions
may be significant, U.S. Shareholders of Denbury Canada common shares are urged
to discuss those consequences with their tax advisors.
TAXATION OF NON-U.S. SHAREHOLDERS. The following discussion is applicable
to non-U.S. Shareholders:
o who hold Denbury Canada common shares or will hold Denbury Delaware
common stock as capital assets within the meaning of Section 1221 of the
Code;
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o who do not actually or constructively own (and have not at any time in
the preceding five-year period actually or constructively owned) five
percent or more (by vote or value) of the stock of the Company;
o whose ownership, receipt or disposition of Denbury Canada common shares
and/or Denbury Delaware common stock is not attributable either to the
conduct of a trade or business in the United States or to a permanent
establishment in the United States; and
o who are not residents of the United States for purposes of United States
federal income tax law or an income tax treaty to which the United
States is a party.
Non-U.S. Shareholders who do not meet one or more of the foregoing criteria
are urged to consult their own tax advisors regarding their particular United
States federal income tax consequences.
The Continuance. If, as expected, the continuance qualifies as a
reorganization, then a non-U.S. Shareholder generally should have the same
United States federal income tax consequences as those described above for a
U.S. Shareholder regarding nonrecognition of gain or loss, tax basis and holding
period. Except as set forth in the following paragraph, a non-U.S. Shareholder
generally will not be required to file a notice with the IRS with respect to the
continuance.
A non-U.S. Shareholder generally will not be subject to United States
federal income tax on gain recognized, if any, upon the exchange of the shares
of Denbury Canada common shares for the shares of Denbury Delaware common stock
unless:
o the gain is effectively connected with the conduct of a trade or
business within the United States by the non-U.S. Shareholder;
o the gain is attributable to a permanent establishment in the United
States,
o in the case of a non-U.S. Shareholder who is a nonresident alien
individual and holds Denbury Canada common shares as a capital asset,
such non-U.S. Shareholder is present in the United States for 183 or
more days in the taxable year and certain other circumstances are
present; or
o the non-U.S. Shareholder is subject to tax pursuant to the provisions of
the Code applicable to certain United States expatriates. A non-U.S.
Shareholder that would be subject to United States federal income tax on
such gains and takes the position that the exchange of Denbury Canada
common shares for Delaware common stock is eligible for nonrecognition
treatment will be required to file a notice with the IRS. See
"--Taxation of U.S. Shareholders--The Continuance," above.
Dividends on Denbury Delaware Common Stock. Generally, dividends received
by a non-U.S. Shareholder with respect to Denbury Delaware common stock will be
subject to United States withholding tax at a rate of 30 percent, which rate may
be subject to reduction by an applicable income tax treaty (generally 15 percent
on dividends paid to residents of Canada who qualify for the benefits of the
income tax treaty between the United States and Canada). If the dividends are
effectively connected with the conduct of a United States trade or business or
are attributable to a permanent establishment in
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the United States, they would be taxed at the graduated rates that are
applicable to United States citizens, resident aliens and domestic corporations
and would not be subject to United States withholding tax if the non-U.S.
Shareholder gives an appropriate statement to the withholding agent in advance
of the dividend payment. A non-U.S. Shareholder that is a corporation may be
subject to an additional branch profits tax on effectively connected dividends.
Sale of Denbury Delaware Common Stock. A non-U.S. Shareholder generally
will not be subject to United States federal income tax on gain recognized, if
any, upon the sale of shares of Denbury Delaware Common stock unless:
o the gain is effectively connected with the conduct of a trade or
business within the United States by the non-U.S. Shareholder;
o in the case of a non-U.S. Shareholder who is a nonresident alien
individual and holds the Denbury Delaware Common stock as a capital
asset, such non-U.S. Shareholder is present in the United States for 183
or more days in the taxable year and certain other circumstances are
present;
o the non-U.S. Shareholder is subject to tax pursuant to the provisions of
the Code applicable to certain United States expatriates; or
o Denbury Delaware is or has been a "United States real property holding
corporation" ("USRPHC") for federal income tax purposes, as such term is
defined by Section 897(c) of the Code, and the non-U.S. Shareholder
owned directly or pursuant to certain attribution rules at any time
during the five year period ending on the date of disposition more than
5% of Denbury Delaware common stock (assuming that Denbury Delaware
common stock is regularly traded on an established securities market,
within the meaning of Section 897(c)(3) of the Code).
The Company believes that the as of the date of the continuance, Denbury
Delaware will be a USRPHC and that Denbury Delaware common stock will be treated
as being traded on an established exchange.
Estate Tax. Denbury Delaware common stock owned (or treated as owned) by an
individual may be includible in his or her gross estate for United States
federal estate tax purposes and thus may be subject to United States federal
estate tax, unless an applicable estate tax treaty provides otherwise.
TAXATION OF THE MERGER. The merger of DMI into Denbury Delaware should
qualify as a tax-free liquidation of a wholly owned subsidiary into its parent
corporation. As such, shareholders of Denbury Delaware will recognize no gain or
loss on the merger for United States federal income tax purposes.
INFORMATION REPORTING AND BACKUP WITHHOLDING. The Company must report
annually to the IRS and to each U.S. and non-U.S. Shareholder the amount of
dividends paid to such Non-U.S. Shareholder and the tax withheld with respect to
such dividends. These information reporting requirements apply regardless of
whether withholding tax was reduced by an applicable income tax treaty. Copies
of these information returns reporting such dividends and withholding may also
be made
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available to the tax authorities in the country in which the non-U.S.
Shareholder resides under the provisions of an applicable income tax treaty or
other agreement with the tax authorities in that country.
In general, information reporting requirements may apply to dividend
distributions on Denbury Delaware common stock, or the proceeds of a sale,
exchange, retraction or redemption of Denbury Delaware common stock. A 31
percent backup withholding tax may apply to such payments unless the holder is a
corporation, non-U.S. Shareholder or comes within certain exempt categories and,
when required, demonstrates its exemption or provides a correct taxpayer
identification number, certifies as to no loss of exemption from backup
withholding and otherwise complies with applicable requirements of the backup
withholding rules. A holder of Denbury Delaware common stock who is required to
provide its correct taxpayer identification number and fails to do so may be
subject to penalties imposed by the IRS.
United States backup withholding tax generally will not apply to dividends
paid on Denbury Delaware common stock that are subject to the 30% or reduced
treaty rate of withholding previously discussed if the beneficial owner
certifies its non-U.S. status under penalties of perjury (or, with respect to
payments made after December 31, 1999, satisfies certain documentary evidence
requirements for establishing that it is a non-U.S. holder) or otherwise
establishes an exemption. Furthermore, under current law, dividends paid on
Denbury Delaware common stock to a non-U.S. Shareholder at an address outside
the United States are generally exempt from backup withholding tax (but not from
30% withholding tax, as discussed above).
On October 14, 1997 the IRS issued final regulations ("1997 Final
Regulations") which affect the United States taxation of non-U.S. shareholders.
Under the 1997 Final Regulations, for dividends paid after December 31, 1999, a
non-United States person must generally provide proper documentation indicating
non-United States status to a withholding agent in order to avoid backup
withholding tax. However, dividends paid to certain exempt recipients (not
including individuals) will not be subject to backup withholding even if such
documentation is not provided if the withholding agent is allowed to rely on
certain presumptions concerning the recipient's non-United States status
(including payment to an address outside the United States).
Payments of proceeds from the sale of Denbury Canada common shares by a
non-U.S. Shareholder made to or through a non-United States office of a broker
generally will not be subject to information reporting or backup withholding.
However, payments made to or through a non-United States office of a United
States broker or a non-United States office of a non-United States broker that
has certain specified connections with the United States, are generally subject
to information reporting (but not backup withholding) unless the shareholder
certifies its non-United States status under penalties of perjury or otherwise
establishes its entitlement to an exemption. Payments of proceeds from the sale
of Denbury Delaware common stock by a non-U.S. Shareholder made to or through a
United States office of a broker are generally subject to both information
reporting and backup withholding at a rate of 31% unless the shareholder
certifies its non-United States status under penalties of perjury or otherwise
establishes its entitlement to an exemption.
Any amounts withheld under the backup withholding rules from a payment to a
holder will be allowed as a credit against such holder's United States federal
income tax, provided that the required information is furnished to the IRS.
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Material United States Federal Income Tax Consequences to the Company of the
Move of Corporate Domicile and Merger
In the opinion of U.S. Special Tax Counsel, the following are the material
United States federal income tax considerations arising from and relating to the
continuance and the merger that are applicable to the Company. As described in
more detail in the preceding section, the continuance should qualify as a
"reorganization" within the meaning of Section 368(a) of the Code. This
conclusion is based on certain factual assumptions and reliance on
representations from the Company and certain principal shareholders of the
Company.
This discussion is based upon United States laws, regulations, rulings and
decisions currently in effect, all of which are subject to change, possibly with
retroactive effect. No advance income tax ruling has been sought or obtained
from the IRS regarding the tax consequences of any of the transactions described
herein. Accordingly, it is possible that the United States federal income tax
consequences to the Company of the continuance may differ from those described
below.
CONTINUANCE. A domestication transaction, such as the continuance, is
generally treated for federal income tax purposes as a transfer by the Company
of all of its assets and liabilities to a new domestic corporation, Denbury
Delaware, in exchange for all of the stock of Denbury Delaware followed by a
liquidating distribution by the Company to its shareholders of Denbury Delaware
common stock received in exchange for the Company's assets and liabilities.
Generally, the Code provides non-recognition treatment to the acquired
corporation in such a transaction if it otherwise meets the requirements of a
reorganization. In certain circumstances occurring in an international
reorganization, however, the operation of certain rules overrides the
non-recognition treatment normally obtained in a reorganization. Such rules may
cause the Company to recognize gain on the deemed transfer and/or distribution,
as described below.
The deemed transfer by the Company of all of its assets and liabilities to
Denbury Delaware should be treated as a nontaxable event if Denbury Delaware
common stock received by the Company is a "United States real property interest"
("USRPI"). If Denbury Delaware common stock is not a USRPI, then the Company may
be subject to United States federal income tax on the gain or loss resulting
from the disposition of its assets that are USRPIs. Denbury Delaware common
stock will be a USRPI, however, if Denbury Delaware is a USRPHC. As discussed
above, under "Material United States Federal Income Tax Consequences to
Shareholders--Taxation of Non-U.S. Shareholders," the Company has represented
that it believes that Denbury Delaware will be a USRPHC. Based on this
representation, U.S. Special Tax Counsel has concluded that Denbury Delaware
common stock will be a USRPI and, therefore, the deemed transfer should not
result in United States federal income taxation.
Even though the Company's deemed transfer to Denbury Delaware should be a
non recognition event for United States federal income tax purposes, the deemed
liquidating distribution by the Company of Denbury Delaware common stock to its
shareholders may be a taxable event if Denbury Delaware common stock is a USRPI.
As discussed above, U.S. Special Tax Counsel has concluded that Denbury Delaware
common stock will be a USRPI.
In general, notwithstanding any non recognition provision of the Code, a
foreign corporation (such as the Company) recognizes gain on the distribution
(including a deemed distribution in liquidation or redemption) of a USRPI (such
as Denbury Delaware common stock) in an amount equal to the excess
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of the fair market value of such USRPI (as of the time of the distribution) over
such corporation's adjusted basis in the USRPI, and the Code requires such
corporations to deduct and withhold a tax equal to 35 percent of the gain
recognized on such distribution. The Company has represented that the adjusted
basis of Denbury Delaware common stock will be substantially in excess of its
fair market value at the time of the continuance. Therefore, based on this
representation, no gain will be recognized on the Company's distribution of
Denbury Delaware common stock to its shareholders. The Company will apply for a
withholding certificate from the IRS to confirm that the Company has no
withholding tax payment obligation. There can be no assurance, however, that the
IRS will agree with the Company's calculation of its tax basis in Denbury
Delaware common stock or with the Company's calculation of the fair market value
of such stock. Any such disagreement or change could result in the Company owing
United States federal income tax as a result of the continuance.
MERGER. The merger should qualify as tax-free to Denbury Delaware and DMI
with the following United States federal income tax consequences:
o Denbury Delaware will recognize no gain or loss on the receipt of DMI's
assets;
o DMI will recognize no gain or loss on the distribution of its assets to
Denbury Delaware;
o Denbury Delaware will take a tax basis in the assets of DMI equal to
DMI's tax basis immediately prior to the merger; and
o Denbury Delaware's holding period in the DMI assets received will
include DMI's holding period in such assets.
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COMPARISON OF SHAREHOLDERS' RIGHTS
All shareholders of Denbury Canada will become stockholders of Denbury
Delaware after the move. Denbury Canada is a corporation organized under
Canadian law. Denbury Delaware will be a corporation organized under and
governed by Delaware law. The principal attributes of Denbury Delaware common
stock and Denbury Canada's common shares are similar, although there are
significant differences in shareholder rights. The following is a summary of
these material differences which arise from differences between United States
and Canadian securities laws, between the Canada Business Corporations Act (the
"CBCA"), the Delaware General Corporation Law (the "DGCL"), and between Denbury
Canada's present charter and by-laws and the proposed certificate of
incorporation and by-laws of Denbury Delaware. The proposed Delaware governing
documents are attached to this document as Exhibits D and E, respectively.
THIS SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE TERMS OF THE ARTICLES OF
INCORPORATION AND BY-LAWS OF DENBURY CANADA AND THE CERTIFICATE OF INCORPORATION
AND BY-LAWS OF DENBURY DELAWARE ATTACHED TO THIS DOCUMENT.
CANADA DELAWARE
- ----------------------------------- ----------------------------------------
Vote Required for Extraordinary Transactions
Under the CBCA, shareholders The DGCL requires the
holding not less than 2/3 of the affirmative vote of a majority of
votes cast by the shareholders the outstanding stock entitled to
entitled to vote on certain vote thereon to authorize any
extraordinary corporate actions merger, consolidation, dissolution
must approve those special or sale of substantially all of the
actions. These include certain assets of a corporation. However,
amalgamations, continuances, an authorizing stockholder vote is
liquidations, dissolutions and not required of a corporation
sales, leases or exchanges of all surviving a merger if:
or substantially all the assets of
a corporation (other than in the o such corporation's certificate
ordinary course of business). In of incorporation is not
certain cases, a special amended in any respect by
resolution to approve an the merger;
extraordinary corporate action is o each share of stock
also required to be approved outstanding immediately prior
separately by the holders of a to the merger will be an
class or series of shares. identical share of the
corporation after the merger;
and
o no shares of common stock or
those convertible into common
stock will be issued in the
merger, or the common stock to
be issued in the merger does
not exceed 20% of
such corporation's outstanding
common stock immediately prior
to the merger.
No stockholder approval is required
under the DGCL for mergers of a parent
and a subsidiary, of which it owns 90%
or more.
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CANADA DELAWARE
- ----------------------------------- ----------------------------------------
Denbury Canada currently does
not have a shareholders' rights plan.
Shareholders' rights plans are common
to many corporations incorporated in
the United States. They give a
corporation's board of directors the
opportunity to withstand an
unsolicited takeover attempt while
taking sufficient time to evaluate an
offer and to consider alternative
measures or transactions that may be
appropriate in responding to the
offer. The DGCL permits shareholders'
rights plans in general and permits
the adoption of shareholders' rights
plans by a board of directors without
shareholder approval.
Amendment to Governing Documents
Under the CBCA, amendments to The DGCL requires that any
the articles of incorporation amendment to the corporation's
generally require approval by certificate of incorporation must be
holders of not less than 2/3 of approved by the holders of a
the votes cast by shareholders majority of the outstanding stock of
entitled to vote. The directors each class entitled to vote. The
may amend or repeal any by-law certificate of incorporation can
unless the articles of require a greater level of approval.
incorporation or by-laws otherwise The proposed certificate of
provide . When the directors amend incorporation for Denbury Delaware
or repeal a by-law, they are will not require a greater level of
required under the CBCA to submit approval.
the change to the shareholders at
the next meeting of shareholders. If an amendment adversely
Shareholders may confirm, reject, alters the rights or preferences of
amend or repeal the by-law a particular class or series of
amendment by the vote of holders stock, that class or series must
of a majority of the votes cast by approve the amendment as a class
shareholders present and entitled even if the certificate of
to vote. incorporation does not provide this
right. The DGCL also reserves the
power to amend or repeal the by-laws
to stockholders unless the certificate
of incorporation confers such power on
the board of directors in addition to
the stockholders. The proposed
certificate of incorporation of
Denbury Delaware expressly authorizes
the board of directors to adopt, amend
or repeal Denbury Delaware's by-laws.
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CANADA DELAWARE
- ----------------------------------- ----------------------------------------
Dissenters' Rights
The CBCA provides that Under the DGCL, shareholders have
shareholders entitled to vote on the right to dissent from a merger
certain matters may exercise or consolidation by demanding
dissent rights and demand payment payment in cash for their shares
for the fair value of their equal to the fair value of such
shares. For this purpose the CBCA shares. Fair value is to be
does not distinguish between determined by agreement with the
listed and unlisted shares. corporation or by an independent
Dissenters' rights exist when appraiser appointed by a court in an
there is a vote upon matters such action timely brought by the
as: corporation or the dissenters and
o any amalgamation with excludes any appreciation or
another corporation (other depreciation as a consequence, or in
than with certain affiliated expectation, of the transaction. The
corporations); DGCL grants dissenters' appraisal
o an amendment to the rights only in the case of mergers
corporation's articles of or consolidations and not in the
incorporation; case of a sale or transfer of assets
o adding, changing or removing or a purchase of assets for stock,
any provisions which regardless of the number of shares
restrict the issue, transfer being issued. No appraisal rights
or ownership of shares; are available for shares listed on a
o a continuance under the laws national securities exchange or
of another jurisdiction; and designated for trading on the NASDAQ
o a sale, lease or exchange of or held of record by more than 2,000
all or substantially all the stockholders. However, dissenters'
property of the corporation rights are available if the
other than in the ordinary agreement of merger or consolidation
course of business. does not convert such shares into:
However, a shareholder is not o stock of the surviving
entitled to dissent if an corporation;
amendment to the articles of o stock of another corporation
incorporation is effected by a which is listed on a national
court order approving a securities exchange or
reorganization or by a court order designated for trading on the
made in connection with an action NASDAQ or held of record by
for an oppression remedy. Under more than 2,000 stockholders;
the CBCA, a shareholder may seek and
an oppression remedy for any o cash in lieu of fractional
corporate act or omission which is shares or some combination of
oppressive or unfairly prejudicial the three.
to or that unfairly disregards a
shareholder's interest. In addition, dissenter's rights are
unavailable if the stockholders of
the surviving corporation are not
required to vote upon the merger.
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CANADA DELAWARE
- ----------------------------------- ----------------------------------------
Oppression Remedy
Section 241 of the CBCA The DGCL does not provide for a
provides an oppression remedy. A similar remedy. However, the DGCL
court may make any order, both provides a variety of legal and
interim and final, to rectify the equitable remedies to a
matters complained of, if corporation's stockholders for
satisfied that: improper acts or omissions of a
corporation, its officers and
o any act or omission of the directors. Under the DGCL, only
corporation or any of its stockholders can bring an action
affiliates; alleging a breach of fiduciary duty
o the conduct of its business by the directors of a corporation.
or the acts of its In order to be successful, the
directors or affiliates have stockholder must show that the act
been oppressive or unfairly or omission is not protected by the
prejudicial to, or that business judgment rule. This rule
unfairly disregards the presumes that disinterested
interests of, any security directors' decisions are made in
holder, creditor, director good faith and in the best interests
or officer of the of the corporation, absent a showing
corporation. of intentional misconduct, gross
negligence or a conflict of interest.
A complainant includes a present or
former shareholder, officer or
director of the corporation or any
of its affiliates, or the Director
of the CBCA.
Because of the breadth of the
conduct covered by the oppression
remedy and the wide scope of the
court's remedial powers, the
oppression remedy is very flexible.
It is frequently relied upon to
safeguard the interest of shareholders
and others with a substantial interest
in the corporation. Under the CBCA, it
is not necessary to prove that the
directors of a corporation acted in bad
faith in order to seek an oppression
remedy. It is sufficient to prove that
their actions were oppressive, unfairly
prejudiced to, or unfairly disregarded
the interests of, any security holder,
director, officer or creditor. Although
the court may order the corporation
to pay the interim expenses such as
legal fees of a complainant, ultimately
the complainant may be held accountable
for such interim costs.
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CANADA DELAWARE
- ----------------------------------- ----------------------------------------
Derivative Action
Under the CBCA, a complainant A derivative action may be
may apply to the court for leave brought in Delaware by a stockholder
to bring an action in the name of on behalf of, and for the benefit
and on behalf of a corporation or of, the corporation. The DGCL
any of its subsidiaries, or to provides that the person must allege
intervene in an existing action to that he was a stockholder at the
which they are a party. Under the time when the transaction
CBCA, in order to bring an action, took place. A stockholder may not
a complainant must first give sue derivatively without first
reasonable notice to the directors demanding that the corporation bring
of the corporation of the suit, which demand has been refused,
intention to apply to the court. unless it is shown that such demand
The court must be satisfied that: would have been futile.
o the directors of the
corporation will not bring,
diligently prosecute or
defend the action;
o the complainant is acting in
good faith; and
o it appears that the action
is in the interest of the
corporation.
Under the CBCA, the court in a
derivative action may make any
order it thinks fit, including orders
pertaining to conduct of the lawsuit
or the making of payments to former
and present shareholders and payment
of reasonable legal fees incurred by
the complainant.
Shareholder Consent in Lieu of Meeting
Under the CBCA, shareholders Under the DGCL and under
can take an action by written Denbury Delaware's certificate
resolution and without a meeting of incorporation, any action to be
only if all shareholders sign the taken at a meeting of stockholders
written resolution may be taken without a meeting if a
consent in writing is signed by the
required number of shareholders. The
vote required is the same vote
required at a stockholder's meeting.
The corporation is required to give
prompt notice of the taking of
corporate action to stockholders who
have not consented in writing.
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CANADA DELAWARE
- ----------------------------------- ----------------------------------------
Shareholder Quorum
Under the CBCA and Denbury Under the DGCL and under
Canada's charter, a quorum is Denbury Delaware's proposed by-laws,
present at a meeting if two a quorum for any meeting of the
shareholders are represented in shareholders consists of 1/3 of the
person or by proxy and hold at shares entitled to vote at a
least 5% of Denbury Canada's meeting, in person or by proxy.
outstanding shares.
Director Qualifications
Under the CBCA, 1/3 of the Delaware does not have comparable
directors must be Canadian requirements.
residents. In addition, because
the securities of Denbury Canada
are publicly traded, it must have
at least three directors. At
least two of the directors must
not be officers or employees of
Denbury Canada or its affiliates.
Fiduciary Duties of Directors
Directors of corporations incorporated or organized under the CBCA and the
DGCL have fiduciary obligations to the corporation and its shareholders. Under
these fiduciary obligations, the directors must act in accordance with the legal
principle of "duty of care."
Section 122 of the CBCA Under the DGCL, the duty of
requires directors of a Canadian care requires that directors act in
corporation to act honestly and in an informed and deliberative manner
good faith with a view to the best and prior to making a business
interests of the corporation. decision, inform themselves of all
The duty of care requires that material information reasonably
the directors exercise the care, available to them. The duty of
diligence and akill that a loyalty requires directors to act in
reasonably prudent person would good faith, not out of
exercise in comparable self-interest, and in a manner which
circumstances. the directors reasonably believe to
be in the best interest of the
stockholders pursuant to the
"business judgment rule."
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CANADA DELAWARE
- ----------------------------------- ----------------------------------------
Indemnification of Officers and Directors
Under the CBCA and pursuant to The DGCL permits a corporation to
Denbury Canada's by-laws, it may indemnify its present or former
indemnify present or former directors or officers made a party
directors or officers against all to any third party proceeding
expenses and settlement amounts or because of their service as director
judgments arising out of actions or officer of the corporation.
against such individuals because Indemnification can cover expenses,
of their service as directors or judgments, fines and settlement
officers. In order to qualify for amounts. In order to qualify for
indemnification such director or indemnification such director or
officer must: officer must:
o have acted honestly and in o have acted in good faith and
good faith with a view to in a manner such person
the best interest of the reasonably believed to be in
Company; and or not opposed to the best
o in the case of a criminal or interests of the corporation;
administrative action and
enforced by a monetary o with respect to any criminal
penalty, have had reasonable action or proceeding, had no
grounds for believing that reason to believe that such
his or her conduct was lawful. conduct was unlawful.
Indemnification will be In a derivative action, or an
provided to an eligible director action in the right of the
or officer who meets both these corporation, the corporation is
tests or was entitled to such permitted to indemnify directors and
indemnity or was substantially officers against expenses if they
successful on the merits in the acted in good faith and in a manner
action. that they reasonably believed to be
in or not opposed to the best
A corporation may, if the interests of the corporation.
person meets the conditions above However, in such a case, no
and it is approved by a court, indemnification shall be made if
also indemnify an eligible such person is adjudged liable to
director or officer in an action the corporation. Even if an
by or on behalf of the adjudication of liability occurs,
corporation. such person may be indemnified for
expenses to the extent that the
The officers and directors of court in the action determines that
Denbury Canada currently have such directors or officers are
indemnification contracts which fairly and reasonably entitled to
survive the termination of their indemnity.
service as officers or directors.
These contracts will continue The DGCL allows the corporation
after the move of domicile to to advance expenses before the
Delaware. resolution of an action if such
person agrees to repay advances if
they are not entitled to
indemnification. The CBCA does not
expressly provide for such advance
payment.
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CANADA DELAWARE
- ----------------------------------- ----------------------------------------
Director Liability
The CBCA limits or eliminates The DGCL provides that a
the liability of directors to the corporation's certificate of
corporation or its stockholders incorporation may limit or eliminate
for certain malfeasance or the liability of directors to the
nonfeasance by them. In some corporation or its stockholders for
circumstances, if a director monetary damages for breach of
proves that he did not know and fiduciary duty as a director. Such
could not have known of the liability cannot arise from ce
rtain
unlawful act, he will not be proscribed conduct, including:
liable. Also, certain actions to
enforce a liability imposed by the o acts or omissions not in good
CBCA must be brought within two faith;
years of the date of the act. o acts involving intentional
Further, a director will not be misconduct;
liable under certain sections of o acts which violate the law;
the CBCA if he relied in good o breach of the duty of loyalty;
faith on: o payment of unlawful dividends;
o expenditure of funds for
o financial statements fairly unlawful stock purchases; or
represented to him by an o redemptions or transactions
officer or in a written from which such director
report of the auditor to derived an improper personal
reflect the corporation's benefit.
financial condition; or
o a report of a lawyer, The proposed certificate of
accountant, engineer, incorporation of Denbury Delaware
appraiser or other person limits director liability to the
whose profession lends corporation or its stockholders,
credibility to a statement except for liability for:
made by him. o any breach of the director's
duty of loyalty to the
corporation or its
stockholders;
o acts or omissions not in good
faith or which involve
intentional misconduct or a
knowing violation of law;
o certain unlawful distributions
by the corporation; or
o any transaction from which the
director derived an improper
personal benefit.
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CANADA DELAWARE
- ----------------------------------- ----------------------------------------
Anti-takeover Provisions and Interested Stockholder Transactions
Policies of certain Canadian Section 203 of the DGCL
securities regulatory authorities, prohibits a "business combination"
including Policy 9.1 of the between the corporation and an
Ontario Securities Commission "interested stockholder" within
("Policy 9.1"), contain three years of the stockholder
requirements for related party becoming an "interested
transactions. A related party stockholder"unless certain
transaction is any transaction in conditions are met. Denbury Delaware
which a corporation acquires or will expressly opt out of this
transfers an asset or securities provision. An "interested
or liability from or to directors, stockholder" is a person who
senior officers and holders of at controls 15% or more of the
least 10% of the voting securities outstanding voting stock at any time
of the corporation. Policy 9.1 within the prior three-year period.
requires: A "business combination" includes a
merger or consolidation, a sale of
o more detailed disclosures in 10% or more of the corporation's
the proxy material assets or aggregate market value and
pertaining to a related certain transactions that would
party transaction; increase the interested
o preparation of a formal stockholder's proportionate
valuation of the ownership in the corporation.
transaction; and
o a summary of the valuation This provision does not apply where:
in the proxy material. o either the business combination
or the transaction making the
Policy 9.1 also requires minority person an interested stockholder
shareholders to approve the is approved by the
transaction, by either a simple corporation's previous board of
majority or two-thirds of the directors;
votes cast, depending upon the o after the transaction making the
circumstances. person an interested stockholder,
that person owned at least 85% of
the outstanding voting stock of
the corporation;
o the business combination is
approved by a majority of the board
of directors and the disinterested
shareholders owning two-thirds of
the outstanding shares entitled to
be cast;
o the corporation is not a public
company by virtue of certain stock
exchange listings or inter-dealer
quotations and has less than 2,000
stockholders
o the corporation has opted out of
Section 203.
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CANADA DELAWARE
- ----------------------------------- ----------------------------------------
Access to Corporate Records
Under the CBCA, you, other Under the DGCL, any
shareholders and the creditors of shareholder of a corporation, their
a corporation, their agents or agents or legal representatives may
legal representatives as well as make a written demand to examine the
the Director under the CBCA may records of that corporation. Such a
examine: demand to examine the corporation's
records must have a proper purpose,
o the articles of be sworn under oath, and directed to
incorporation, by-laws, that corporation at its principal
unanimous shareholder place of business or its registered
agreements of Denbury Canada; office in Delaware. A proper
o the minutes and resolutions purpose is one that is reasonably
of shareholders; related to that shareholder's
o all notices pertaining interest in the corporation as a
to the term of office, shareholder. The certificate of
election of, or change of incorporation of a Delaware
directors of Denbury corporation may also provide these
Canada; and examination powers to holders of the
o the securities register of corporation's debt securities. The
Denbury Canada free of charge proposed certificate of
during normal business hours. incorporation of Denbury Delaware
Denbury Canada free of charge will contain such a provision.
Since Denbury Canada is public,
any person may examine the
aforementioned records for a
reasonable fee. All shareholders
of Denbury Canada may request a
copy of the articles of incorporation,
by-laws, unanimous shareholder
agreements of that corporation free
of charge.
Dissenting Shareholders' Rights
Section 190 of the CBCA is reprinted in its entirety as Exhibit B to this
document. Shareholders may dissent from the proposal to move the Company's
corporate domicile. THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE
PROVISIONS OF SECTION 190 OF THE CBCA.
If you wish to dissent and do so in compliance with Section 190, you will
be entitled to be paid the fair value of the shares you hold. Fair value is
determined as of the day before the move is approved by shareholders and
excludes the investment of $100 million by TPG.
If you wish to dissent, you must send the Company written objection to the
move before the Special Meeting. If you vote in favor of the move, you lose your
rights to dissent. If you abstain or vote against the move, you preserve your
dissent rights. If is not sufficient to vote against the move or abstain. You
must also provide a separate dissent notice. If you grant a proxy and intend to
dissent, the proxy must instruct the proxy holder to vote against the move in
order to prevent the proxy holder from voting such shares in favor of the move
and thereby voiding your right to dissent. Under the CBCA, you have no right of
partial dissent. Accordingly, you may only dissent as to all your shares.
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We are required to notify each shareholder who has filed a Dissent Notice
that the move has been approved. This must be sent within 10 days after
shareholders approve the move. The Company will not send a notice to any
shareholder who voted to approve the move or who has withdrawn their notice.
Within 20 days after receiving the above notice from the Company (or, if
you do not receive such notice within 20 days after learning that the move has
been approved), you must send to the Company a payment demand containing:
o your name and address;
o the number of shares you own; and
o a demand for payment of the fair value of such shares.
Within 30 days after sending a payment demand, you must send to the
Company's transfer agent (Secretary of Denbury Resources Inc., c/o CIBC Mellon
Trust Company, Corporate Trust Department, 600 Dome Tower, 333 7th Avenue S.W.,
Calgary, Alberta T2P 2Z1) the certificates representing your shares. If you fail
to send to the Company a dissent notice, a payment demand and the share
certificates within the appropriate time frame, you forfeit your right to
dissent and to be paid the fair value of your shares. The Company's transfer
agent will endorse on your share certificates a notice that you are a dissenting
shareholder and will return the share certificates to you.
Once you send a payment demand to the Company, you cease to have any rights
as a shareholder. Your only remaining right is the right to be paid the fair
value of your shares. If you withdraw your payment demand before the Company
makes an offer to you, if the Company fails to make an offer to you, you
withdraw your payment demand, or if the continuance does not proceed, then your
rights as a shareholder are reinstated.
Within seven days of the closing of the move or the date the Company
receives your payment demand, it must send you a written offer to pay for your
shares. This offer must include a written offer to pay you an amount considered
by the board of directors to be the fair value of your shares. The offer must
include a statement showing the manner used to calculate the fair value. Every
offer to pay must be on the same terms. The Company must pay you for your shares
within 10 days after you accept its offer. Any such offer lapses if the Company
does not receive your acceptance within 30 days after the offer to pay has been
made.
If the Company fails to make an offer to pay for your shares, or if you
fail to accept the offer within 50 days after the date of the move, the Company
may apply to a court to fix a fair value for your shares. If the Company fails
to apply to a court, you may apply to a court for the same purpose within a
further period of 20 days. You are not required to give security for costs in
such a case.
All dissenting shareholders whose shares have not been purchased will be
joined as parties and bound by the decision of the court. The Company is
required to notify each affected dissenting shareholder of the date, place and
consequences of the application and of their right to appear and be heard in
person or by counsel. The court may determine whether any person who is a
dissenting shareholder should be joined as a party. The court will then fix a
fair value for the shares of all dissenting shareholders who have not accepted a
payment offer from the Company. The final order of a court will be rendered
against the Company for the amount of the fair value of the shares of all
dissenting
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<PAGE>
shareholders. The court may, in its discretion, allow a reasonable rate of
interest on the amount payable to each dissenting shareholder.
THIS IS ONLY A SUMMARY OF THE DISSENTING SHAREHOLDER PROVISIONS OF THE
CBCA. THEY ARE TECHNICAL AND COMPLEX. IT IS SUGGESTED THAT IF YOU WANT TO AVAIL
YOURSELF OF YOUR RIGHTS THAT YOU SEEK YOUR OWN LEGAL ADVICE. FAILURE TO COMPLY
STRICTLY WITH THE PROVISIONS OF THE CBCA MAY PREJUDICE YOUR RIGHT OF DISSENT.
For a general summary of certain income tax implications to a dissenting
shareholder, see "Move the Corporate Domicile-Material Canadian Federal Income
Tax Consequences of the Move of Corporate Domicile and Merger--Taxation of
Dissenting Shareholders" and "-Shareholders Not Resident in Canada-Dissenting
Shareholders" and "Moving the Corporate Domicile of the Company--Material United
States Federal Income Tax Consequences to Shareholders of the Move of Corporate
Domicile and Merger".
GRANTING THE BOARD OF DIRECTORS AUTHORITY TO
ABANDON OR POSTPONE THE MOVE OF DOMICILE
The second proposal asks shareholders to grant authority to the board of
directors to postpone or abandon the move, even if approved by the shareholders,
if the board later determines such a move or the timing of it would not be in
the Company's best interests. Although it is difficult to foresee all
possibilities or reasons to postpone or abandon the move, the following
situations are the two most likely reasons why the board could possibly take
such action:
o if it appeared that there would be adverse tax consequences to the
Company because of a significant increase in the market value of the
Company between the date of this document and the date of the move; or
o if a significant number of shareholders exercise their dissenters'
rights and request payment for the fair value of their shares. If the
board determines that the cost to repurchase these shares exceeds the
perceived value of the continuance, then the board may use its
discretion to abandon the move.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF THIS
PROPOSAL.
SALE OF SHARES TO TPG
The third proposal asks you to approve the sale of 18,552,876 common shares
to TPG, the Company's largest shareholder, for $100 million, or $5.39 per share.
If shareholders approve the sale to TPG, it will take place whether or not the
move does.
REASONS FOR SEEKING SHAREHOLDER APPROVAL. The NYSE and the TSE require
shareholders to approve substantial sales of shares to a significant
shareholder. The NYSE also requires that holders of at least 50% of the
outstanding shares vote on the proposed sale. TPG's shares will be included to
determine whether 50% have voted, but a majority of the votes cast by
shareholders, other than TPG and its affiliates, must approve this proposal.
BACKGROUND OF THE TRANSACTION AND TPG'S INTEREST IN THE COMPANY. David
Bonderman, James G. Coulter and William S. Price, III founded the Texas Pacific
Group in 1992 to pursue public
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and private investment opportunities. The principals of TPG manage TPG Partners,
L.P., TPG Parallel I, L.P, and TPG Partners II, L.P., the buyer of the shares
discussed here, plus other investment funds. TPG Partners, L.P. and TPG Parallel
I, L.P. currently own 7,931,048 and 790,390 common shares of the Company,
respectively. TPG's other investments include such branded consumer product
companies such as Beringer Wine Estates Holdings, Inc., Ducati Motors, S.p.A.,
Favorite Brands International, Inc. and J. Crew Group, Inc.
TPG first invested $40.0 million in the Company in December 1995 to
purchase common shares, Convertible First Preferred Shares and warrants. In
October 1996 at the time of our public offering of 4,940,000 common shares, TPG
purchased 800,000 shares for approximately $9.6 million directly from the
Company at the same price that shares were offered to the public less
underwriting discounts ($12.035 per share). In February 1998, TPG purchased
313,400 shares for $5.0 million ($15.955 per share) at the time of the Company's
public offering of 4,240,780 common shares, again at the public offering price
less underwriting discounts. As of December 31, 1998, TPG owned approximately
32% of the Company's issued and outstanding common shares.
EXISTING AGREEMENT WITH TPG. Under a December 1995 agreement signed when
TPG made their first investment in the Company, TPG is entitled to nominate
three of the seven board members, who have been Messrs. Stanton, Price and
Bonderman since late 1995. As part of the same agreement, the Company is
entitled to nominate three board members and Mr. Greene, Chairman of the board,
is nominated by both parties. Both TPG and the Company agreed to use their best
efforts to elect these seven nominees. Additionally, as part of TPG's original
purchase in 1995, the Company amended its charter so that the following actions
require approval by 2/3 of the directors:
o an acquisition with a purchase price in excess of 20% of our assets;
o a change in the number of directors of the Company;
o amendment to the certificate of incorporation or by-laws;
o any issuance of equity securities or securities convertible into equity
securities other than under our stock option or employee benefit plans;
o creation of any series of preferred stock;
o issuance of debt securities in excess of 10% of our assets; and
o borrowings other than under existing credit lines or certain increases
in those credit lines.
Because three of our seven directors are affiliates of TPG, at least one of the
TPG affiliated directors must approve the actions listed above. This approval
requirement will continue to exist after the move.
TPG'S INTENTIONS AFTER THE SALE. TPG intends to review continuously the
equity positions of its affiliates in the Company. Depending upon future
evaluations of the business prospects of the Company and upon other
developments, including general economic and business conditions and money
market and stock market conditions, TPG or its affiliates may determine to
increase or decrease the equity interest in the Company by acquiring additional
common shares or other securities convertible into common shares or by disposing
of all or a portion of their holdings, subject to any applicable legal and
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contractual restrictions on its ability to do so. TPG has no current intention
to cause any of its affiliates to increase their ownership of the Company's
outstanding common shares other than through the current TPG purchase.
PURPOSE OF THE SALE OF SHARES. The primary purpose of the TPG stock sale is
to raise funds for acquisitions. At this time traditional financing for the oil
and gas industry is generally unavailable because of the downturn in the U.S.
equity and debt markets during the summer of 1998, along with decreases in the
oil and gas prices. The purchase prices for oil and gas properties have
decreased because of these factors. This increases the likelihood of making
attractive acquisitions. We perceive it to be an attractive time to make
acquisitions, especially if we have additional equity to buy properties. With
our current debt levels, it is doubtful that we could make any meaningful
acquisitions without this additional equity. This stock sale also improves our
debt ratios.
We will initially use the estimated $98.5 million net proceeds of the sale
to reduce our outstanding debt, although we ultimately plan to use these funds
primarily for acquisitions. Because of the low oil and gas prices and the
reduced cash flows, we have scaled back our capital expenditures. Accordingly,
we do not plan to use any significant portion of these funds for development or
exploration activities. See also "Use of Proceeds."
ALTERNATIVES CONSIDERED. A private sale of equity to TPG was the initial
alternative considered due to TPG's familiarity with the Company, TPG's
substantial current ownership in the Company, their interest in increasing their
investment in the Company and the difficulty of finding another party that could
make such a substantial single investment on a timely basis. Because of TPG's
affiliation with the Company, the board of directors created a Special
Transactions Committee (see "Conflicts of Interest and Creation of the Special
Transactions Committee" below) to negotiate with TPG. During the course of
negotiations with TPG, the Committee considered several other alternatives:
o The first was the sale of non-voting common stock to TPG. TPG responded
that it would expect to purchase such non-voting shares at a discount
from the price paid for voting shares. The Committee determined that it
would not benefit us to forego any premium in order to sell TPG
non-voting stock since TPG already nominates three of seven board
members and is our largest shareholder.
o The Committee also considered seeking out other private investors with
the goal of obtaining a higher price. However, the Committee was not
confident that a better price could be obtained from another party. TPG
was already paying a 41% premium over market price at the time of
pricing. The attractiveness to another investor of making a substantial
purchase would be substantially reduced by TPG's existing significant
ownership interest in the Company. The search for an interested third
party would only result in delays. Since we already are receiving a
premium over market price from TPG, a third party offer might not be as
attractive.
o The Committee also considered the alternative of a rights offering to
existing shareholders. However, rights offerings are typically sold at a
discount to current market. If stock were to be offered at a premium in
a rights offering, few if any shareholders other than TPG, would be
likely to acquire additional shares. Thus, in a rights offering TPG
might be able to acquire control with a smaller premium than being paid
in this private placement.
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BENEFITS TO TPG OF THE SALE. The effect of selling the shares to TPG and
its main benefit to TPG will be to give TPG control of the Company. The sale
will increase TPG's ownership of the Company's issued and outstanding common
shares from approximately 32% to approximately 60% . Currently, we do not expect
this transaction to result in any changes to our board, management or
operations. After the consummation/sale, TPG will have adequate voting power to
sell the Company if it wishes to do so on terms, and at a time, which it
determines.
As part of the terms of the stock purchase, the Certificate of
Incorporation of the Company (if its legal domicile is moved to Delaware), will
opt out of the provisions of Section 203 of the Delaware General Corporation
Law. Section 203 prohibits an interested shareholder, such as TPG, from engaging
in a "business combination" with a company for three years unless approved by
the holders of 2/3 of the Company's issued and outstanding common shares. A
"business combination" includes a merger, sale of substantially all of a
company's assets or sale of its shares to an interested shareholder such as TPG.
CONFLICTS OF INTEREST AND CREATION OF THE SPECIAL TRANSACTIONS COMMITTEE.
The sale of shares to TPG is subject to a number of conflicts of interest:
o TPG is our largest shareholder;
o Three of the officers and directors of TPG's controlling entity are
members of our board;
o TPG has the right to maintain its pro rata interest in our outstanding
common shares. If any additional equity is issued by the Company, TPG
may purchase enough additional shares on the same terms to maintain its
percentage ownership of common shares of the Company. This right has
been waived by TPG in each sale of equity securities since 1995.
Therefore, the Board of Directors of the Company created a Special
Transactions Committee. None of the members of the Special Transactions
Committee were members of management or were affiliated in any way with TPG. Mr.
Greene, the Chairman of the board and the Chairman of the Committee, and Messrs.
Wettstein and Matthews are members of the Committee.
NEGOTIATION OF TPG PURCHASE PRICE. The Committee negotiated the price with
TPG taking into account discussions with management and certain financial
information prepared by CSFB, our financial advisor. Negotiations were concluded
on December 1, 1998.
FACTORS CONSIDERED BY THE SPECIAL TRANSACTIONS COMMITTEE. The factors
considered by the Committee in negotiating the sale of shares to TPG and in
recommending that shareholders approve the transaction are:
o The $5.39 per share price represents a 41% premium over the closing
market price for our common shares on December 1, 1998 and was the
midpoint of a November 24, 1998 preliminary financial analysis of our
per share value prepared by CSFB (the estimated equity reference ranges
in the financial analyses prepared in connection with CSFB's December
16, 1998 opinion were approximately $0.39 per share lower than those in
CSFB's preliminary financial analyses, primarily due to decreases in oil
prices in the interim period). As of the date of this document, the
$5.39 per share price was _____% [higher/lower] than the closing market
price for the common shares on the NYSE.
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o The $100 million provides us with substantial funds to make acquisitions
at a time when attractive opportunities may be available to us if we
have sufficient capital. If we make successful acquisitions, we can
continue to grow.
o CSFB has provided the board with an opinion (attached to this document
as Exhibit A) regarding the fairness, from a financial point of view, to
the Company of the consideration to be received by the Company for the
common shares to be sold to TPG.
o The Committee considered other alternatives discussed below. Because of
TPG's current interest in the Company, it is unlikely that another
entity would be willing to pay a premium over market price substantially
higher than the price TPG is willing to pay.
FAIRNESS OF THE TRANSACTION. The Committee believes that TPG is paying a
fair price for the shares given the substantial premium being paid over the
market price at the time of pricing and given the large number of common shares
being purchased. The transaction must also be approved by a majority of
disinterested shareholders. In addition, CSFB has provided the board of
directors a written opinion dated December 16, 1998 as to the fairness, from a
financial point of view to the Company of the consideration to be received from
TPG.
THE STOCK PURCHASE AGREEMENT. On December 16, 1998 the Company and an
affiliate of TPG entered into a Stock Purchase Agreement specifying the terms of
TPG's $100 million purchase of 18,552,876 newly-issued common shares, which is a
purchase price of $5.39 per common share. If the move of corporate domicile is
approved by our shareholders, the shares will be purchased from Denbury Delaware
rather than Denbury Canada. Several conditions must be met before the sale can
be closed:
o a majority of the non-TPG shareholders voting must approve the sale;
o the TSE must approve the purchase price;
o the Company must amend its existing bank credit agreement on terms
acceptable to the Company, TPG and the bank;
o the Company and TPG must sign the registration rights agreement covering
all of TPG's shares, the terms of which have already been negotiated by
the Company and TPG;
o no "material adverse effect" (as defined below) shall have occurred
prior to the closing; and
o certain other conditions in the agreement must be satisfied.
As used in the agreement, a "material adverse effect" means a material
adverse effect on the financial condition, results of operations, business or
assets of the Company. However this does not include:
o an adverse effect on the Company's financial statements;
o non-cash writedowns in the book value of the Company's oil and gas
properties;
o a decline in the Company's reserve quantities or value;
o a decline in the Company's production volumes; or
o a decrease in the borrowing base under the Company's bank credit
facility,
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IF THESE THINGS RESULT PRIMARILY AND DIRECTLY FROM:
o prevailing oil prices or prevailing natural gas prices provided that the
weighted average price realized by the Company over any 28 consecutive
day period between December 16, 1998 and the closing does not fall below
80% of the per barrel or per Mcf price realized by the Company for the
week commencing December 6, 1998, or
o a decrease in the Company's production, provided that the average daily
production on a BOE basis during any 28 consecutive day period between
December 16, 1998 and the closing does not fall to a level below 13,000
BOE per day.
Under the agreement, the Company has agreed not to pursue any acquisitions,
mergers or consolidations with any third parties and to pay TPG a break-up fee
of $3.0 million if any such transaction is agreed upon. TPG may terminate the
agreement if the stock sale is not approved at the shareholders meeting, if the
transaction is not consummated before the earlier of June 16, 1999 or the
expiration of the approval of the purchase price by the TSE. TPG is entitled to
a $1.0 million fee if any such termination takes place. This fee will be
included in the $3.0 million described above if that is also payable.
The Company has agreed to indemnify TPG and its affiliates for any losses
incurred by them as a result of the Company's breach of any representation,
warranty, agreement or covenant made by it in the Stock Purchase Agreement or
the TPG Registration Rights Agreement or in any certificate delivered by the
Company pursuant thereto or any claim by a third party relating to the TPG
purchase transaction, except for losses resulting from such a claim that is
finally judicially determined to have resulted primarily from the conduct of TPG
and its affiliates. TPG has agreed to indemnify the Company and its
representatives for any losses incurred by them as a result of TPG's breach of
any representation, warranty, agreement or covenant made by TPG in the Stock
Purchase Agreement or the TPG Registration Rights Agreement or in any
certificate delivered by TPG pursuant thereto.
THE REGISTRATION RIGHTS AGREEMENT. The new registration rights agreement
covers the shares proposed to be sold to TPG, plus the shares currently owned by
TPG (a total of 27,274,314 shares). The agreement will provide TPG
certain"piggyback" registration rights and also gives TPG the right to cause the
Company to file up to four demand registrations, including one shelf
registration. These demand rights expire on the sixth anniversary of the closing
and are subject to customary exceptions and black-out periods. The Company will
bear the expenses of each "piggyback" registration and the expenses of three of
the four demand registrations. Under this agreement, the Company cannot grant
any registration rights more favorable than those granted to TPG to any other
person. The Company also will indemnify TPG for certain items with regard to the
registration statements. Although TPG has had demand and "piggyback"
registration rights since December 1995, those rights have not been exercised to
date.
LIQUIDITY OPINION. In addition, the Company will receive an opinion (the
"Liquidity Opinion") from Griffiths McBurney & Partners, Calgary, Alberta,
Canada, an independent registered dealer, that the market for our common shares
is liquid and will not be materially less liquid following the purchase by TPG.
The TSE has delivered a letter to the Ontario and Quebec Securities Commissions
indicating the concurrence of the TSE with the Liquidity Opinion. A copy of the
Liquidity Opinion is attached to this document as Exhibit F.
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NO DISSENTERS' RIGHTS IN TPG TRANSACTION. Shareholders will have no
dissenters' rights as to the proposed sale of shares to TPG. However,
dissenters' rights are available to shareholders in connection with the proposal
to move the domicile from Canada to the United States as a Delaware corporation.
EXPENSES OF THE TRANSACTION. The expenses of the TPG purchase transaction,
estimated to be $1.5 million, are to be paid by the Company, and include the fee
due to CSFB and legal, accounting, filing fee, printing and proxy solicitation
expenses. Proxy solicitation expenses and the related legal, accounting, filing
fees and printing costs are related not only to shareholder approval of the sale
of shares to TPG, but also to the other matters submitted to shareholders for
approval. A substantial portion of those expenses relate to the proposed move
from Canada to Delaware.
THE BOARD OF DIRECTORS RECOMMENDS THAT SHAREHOLDERS VOTE IN FAVOR OF THE
PROPOSED SALE OF SHARES TO TPG. This sale will provide needed equity capital at
a time when other capital sources are unavailable, which will enable us to grow
if we can find favorable acquisitions.
OPINION OF CSFB
CSFB was retained by the Company to render an opinion as to the fairness
from a financial point of view to the Company of the consideration to be
received by the Company in the TPG purchase transaction. CSFB was selected by
the Company based on CSFB's experience and expertise. CSFB is an internationally
recognized investment banking firm and is regularly engaged in the valuation of
businesses and securities in connection with mergers and acquisitions, leveraged
buyouts, negotiated underwritings, competitive biddings, secondary distributions
of listed and unlisted securities, private placements and valuations for
corporate and other purposes. CSFB rendered to the board a written opinion dated
December 16, 1998 to the effect that, as of such date and based upon and subject
to certain matters stated in such opinion, the consideration to be received by
the Company pursuant to the TPG purchase transaction was fair to the Company
from a financial point of view.
THE FULL TEXT OF CSFB'S WRITTEN OPINION TO THE BOARD, WHICH SETS FORTH THE
PROCEDURES FOLLOWED, ASSUMPTIONS MADE, MATTERS CONSIDERED AND LIMITATIONS ON THE
REVIEW UNDERTAKEN, IS ATTACHED AS EXHIBIT A TO THIS DOCUMENT AND IS INCORPORATED
HEREIN BY REFERENCE. YOU ARE URGED TO READ THIS OPINION CAREFULLY IN ITS
ENTIRETY. CSFB'S OPINION IS ADDRESSED TO THE BOARD AND RELATES ONLY TO THE
FAIRNESS OF THE CONSIDERATION TO BE RECEIVED IN THE TPG PURCHASE TRANSACTION
FROM A FINANCIAL POINT OF VIEW TO THE COMPANY, DOES NOT ADDRESS ANY OTHER ASPECT
OF THE PROPOSED TPG PURCHASE TRANSACTION OR ANY RELATED TRANSACTION AND DOES NOT
CONSTITUTE A RECOMMENDATION TO ANY SHAREHOLDER WITH RESPECT TO MATTERS RELATING
TO THE TPG PURCHASE TRANSACTION. THE SUMMARY OF THE OPINION OF CSFB SET FORTH IN
THIS DOCUMENT IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
In arriving at its opinion, CSFB reviewed the Stock Purchase Agreement
dated December 16, 1998 between the Company and an affiliate of TPG and certain
publicly available business and financial information relating to the Company.
CSFB also reviewed certain other information relating to the Company, including
financial forecasts and reserve reports, provided to or discussed with CSFB by
the Company, and met with the management of the Company to discuss the business
and prospects of the Company. CSFB also considered certain financial and stock
market data of the Company, and compared those data with similar data for other
publicly held companies in businesses similar to the Company and considered, to
the extent publicly available, the financial terms of certain other transactions
recently effected. CSFB also considered such other information, financial
studies, analyses and investigations and financial, economic and market criteria
which CSFB deemed relevant. CSFB's opinion was rendered during
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<PAGE>
a period of volatility in the financial and commodity markets and was
necessarily subject to the absence of further material developments in
financial, economic and market conditions from those prevailing on the date of
such opinion.
In connection with its review, CSFB did not assume any responsibility for
independent verification of any of the information provided to or otherwise
reviewed by CSFB and relied on such information being complete and accurate in
all material respects. With respect to financial forecasts, CSFB was advised,
and assumed, that such forecasts were reasonably prepared on bases reflecting
the best currently available estimates and judgments of the Company's management
as to its future financial performance. CSFB also assumed, with the Company's
consent, that the reserve reports reviewed by CSFB were reasonably prepared on
bases reflecting the best currently available estimates and judgments of the
preparers of such reports as to the oil and gas reserves of the Company. In
addition, CSFB was not requested to make and did not make an independent
evaluation or appraisal of the Company's assets or liabilities (contingent or
otherwise), nor was CSFB furnished with any such evaluations or appraisals.
CSFB's opinion was necessarily based upon information available to, and
financial, economic, market and other conditions as they existed and could be
evaluated by, CSFB on the date of its opinion. CSFB did not express any opinion
as to the actual value of the Company's common shares when issued pursuant to
the TPG purchase transaction or the prices at which the Company's common shares
will trade subsequent to the TPG purchase transaction. In connection with its
engagement, CSFB was not requested to, and did not, participate in the
negotiation and structuring of the TPG purchase transaction, nor was CSFB
requested to, and CSFB did not, solicit third party indications of interest in
acquiring all or any part of the Company. Although CSFB evaluated the
consideration to be received by the Company in the TPG purchase transaction from
a financial point of view, CSFB was not requested to, and did not, recommend the
specific consideration payable in the TPG purchase transaction, which
consideration was determined through negotiations between the Company and TPG.
No other limitations were imposed on CSFB with respect to the investigations
made or procedures followed by CSFB in rendering its opinion.
In preparing its opinion to the board, CSFB performed a variety of
financial and comparative analyses, including those described below. The summary
of CSFB's analyses set forth below does not purport to be a complete description
of the analyses underlying CSFB's opinion. The preparation of a fairness opinion
is a complex analytic process involving various determinations as to the most
appropriate and relevant methods of financial analyses and the application of
those methods to the particular circumstances and, therefore, such an opinion is
not readily susceptible to summary description. In arriving at its opinion, CSFB
made qualitative judgments as to the significance and relevance of each analysis
and factor considered by it. Accordingly, CSFB believes that its analyses must
be considered as a whole and that selecting portions of its analyses and
factors, without considering all analyses and factors, could create a misleading
or incomplete view of the processes underlying such analyses and its opinion. In
its analyses, CSFB made numerous assumptions with respect to the Company,
industry performance, regulatory, general business, economic, market and
financial conditions and other matters, many of which are beyond the control of
the Company. No company, transaction or business used in such analyses as a
comparison is identical to the Company or the proposed TPG purchase transaction,
nor is an evaluation of the results of such analyses entirely mathematical;
rather, such analyses involve complex considerations and judgments concerning
financial and operating characteristics and other factors that could affect the
acquisition, public trading or other values of the companies, business segments
or transactions being analyzed. The estimates contained in such analyses and the
ranges of valuations resulting from any particular analysis are not necessarily
indicative of actual values or predictive of future results or values, which may
be significantly more or less favorable than those suggested by such analyses.
In addition, analyses relating to the value of businesses or securities do not
purport to be appraisals or to reflect the prices at which businesses or
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<PAGE>
securities actually may be sold. Accordingly, such analyses and estimates are
inherently subject to substantial uncertainty. CSFB's opinion and financial
analyses were only one of many factors considered by the board in its evaluation
of the proposed TPG purchase transaction and should not be viewed as
determinative of the views of the Company's board or management with respect to
the TPG purchase transaction or the consideration payable in the TPG purchase
transaction.
The following is a summary of the material analyses performed by CSFB in
connection with its opinion dated December 16, 1998:
DISCOUNTED CASH FLOW ANALYSIS. Based on certain financial forecasts
provided by Company management and certain sensitivities to such forecasts, CSFB
estimated the present value of the Company's forecasted streams of unlevered
free cash flows using discount rates ranging from 10.0% to 12.0%. These
unlevered free cash flows were developed based on certain operating and
financial assumptions, estimates and other information and certain sensitivities
to such estimates regarding the Company's business, including estimated
commodity prices, production, operating costs and related capital expenditures
which were discussed with Company management. This analysis indicated an implied
enterprise reference range for the Company of approximately $310 million to $380
million.
SELECTED COMPANIES ANALYSIS. CSFB compared certain publicly available
financial, operating and stock market data of the Company to corresponding data
of selected publicly traded companies in the oil and gas exploration and
production industry. Such companies included Belco Oil & Gas Corporation, Coho
Energy, Inc., Comstock Resources, Inc., Cross Timbers Oil Company, Forest Oil
Corporation, HS Resources, Inc., Patina Oil & Gas Corporation, Stone Energy
Corporation, Vintage Petroleum, Inc., and The Wiser Oil Company (collectively,
the "Selected Companies"). All multiples were based on closing stock prices as
of December 15, 1998. Applying a range of selected multiples for the Selected
Companies of (i) enterprise value (equity value plus debt minus cash) to
estimated 1998 and 1999 earnings before interest, taxes, depreciation,
amortization and exploration expense ("EBITDAX") of 6.5x to 7.5x and 5.0x to
6.0x, respectively, (ii) enterprise value to 1997 proved reserves of oil and gas
equivalent barrels ("BOE") of $4.50 to $5.50 per BOE, and (iii) enterprise value
to 1997 after-tax Standardized Measure of Discounted Future Net Cash Flows (as
defined by the SEC) of 0.9x to 1.1x to corresponding financial data of the
Company indicated an implied enterprise reference range for the Company of
approximately $280 million to $340 million.
SELECTED TRANSACTIONS ANALYSIS. Using publicly available and other
information, CSFB analyzed the purchase prices and implied transaction multiples
paid in selected recent transactions in the oil and gas exploration and
production industry. All multiples were based on financial information available
at the time of the transaction. Included in the transactions reviewed by CSFB
with respect to the Company's Mississippi properties were the investment in Coho
Energy, Inc. by Hicks, Muse, Tate & Furst Inc., the Company's acquisition of
certain properties of Chevron Corporation, the acquisition by an undisclosed
acquirer of certain properties from Murphy Oil Corporation, the Company's
acquisition of certain properties of Amerada Hess Corporation, and the
acquisition by Howell Corporation of certain properties of Norcen Energy
Resources Ltd. (the "Mississippi Selected Transactions"). Included in the
transactions reviewed by CSFB with respect to the Company's Louisiana properties
were the acquisition by Swift Energy Company of certain properties of Sonat
Inc., the merger of McMoRan Oil & Gas Company and Freeport-McMoRan Sulphur Inc.,
the acquisition by The Meridian Resource Corporation of certain properties of
Shell Oil Company, the acquisition by Cross Timbers Oil Company of certain
properties of EEX Corporation, the acquisition by Forest Oil Corporation of
certain properties of LLOG Exploration Company, the merger of Texoil, Inc. and
Cliffwood Oil & Gas Corporation, the acquisition by Comstock Resources, Inc. of
certain
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<PAGE>
properties of Bois d'Arc Resources, the acquisition by Equitable Resources, Inc.
of certain properties of Chevron Corporation, the acquisition by Rio Grande,
Inc. of certain properties of Bechtel Energy, the acquisition by Norcen Energy
Resources Ltd. of certain properties of Flores & Rucks, Inc., the acquisition by
Canadian Occidental Petroleum Ltd. of certain properties of Shell Oil Company,
the acquisition by American Exploration Company of certain properties of Zilkha
Energy Company, the acquisition by Flores & Rucks, Inc. of certain properties of
Mobil Corporation, and the acquisition by Newscope Resources Ltd. (now the
Company) of certain properties of an undisclosed seller (the "Louisiana Selected
Transactions" and, together with the Mississippi Selected Transactions, the
"Selected Transactions"). Applying a range of selected multiples for the
Selected Transactions of (i) enterprise value to proved reserves of $5.00 to
$6.00 per BOE for the Company's total proved reserves, (ii) enterprise value to
proved reserves of $4.75 to $5.75 per BOE for the Company's Mississippi proved
reserves, and (iii) enterprise value to proved reserves of $6.00 to $7.00 per
BOE for the Company's Louisiana proved reserves to the corresponding reserve
data of the Company indicated an implied enterprise reference range for the
Company of approximately $325 million to $390 million.
AGGREGATE REFERENCE RANGES. On the basis of the valuation methodologies
employed in the analyses described above, CSFB derived aggregate enterprise and
equity reference ranges for the Company of approximately $310 million to $380
million and $99 million to $169 million, respectively, or approximately $3.70 to
$6.31 per diluted common share.
OTHER FACTORS. In preparing its opinion, CSFB performed certain other
analyses and considered certain other information and data, including, among
other things, (i) the potential pro forma effect of the TPG purchase transaction
on the Company's estimated 1999 net income and cash flow; (ii) certain latest 12
months pro forma credit statistics for the Company resulting from the TPG
purchase transaction, including EBITDAX to interest expense, earnings before
interest and taxes to interest expense, cash flow from operations to net debt
and net debt to net book capitalization; (iii) the trading characteristics of
the Company's common shares; (iv) the share price premiums paid in certain oil
and gas exploration and production transactions; and (v) the comparative trading
characteristics for the Company and certain other oil and gas exploration and
production companies relative to certain estimates of net asset value.
MISCELLANEOUS. Under the terms of CSFB's engagement, CSFB will receive a
fee for its services in connection with the delivery of its opinion. We also
have agreed to reimburse CSFB for out-of-pocket expenses incurred by CSFB in
performing its services, including fees and expenses of legal counsel and any
other advisor retained by CSFB, and to indemnify CSFB and certain related
persons and entities against certain liabilities under the federal securities
laws, arising out of CSFB's engagement.
In the past, CSFB has provided financial services to TPG and certain of its
affiliates unrelated to the proposed TPG purchase transaction, and for those
services has received compensation. In the ordinary course of business, CSFB and
its affiliates may actively trade the debt and equity securities of the Company
for their own accounts and for the accounts of customers and, thus, may at any
time hold long or short positions in such securities.
USE OF PROCEEDS
The net proceeds to the Company from the TPG purchase transaction are
estimated to be approximately $98.5 million. We intend to use the net proceeds
to reduce outstanding borrowings under our bank credit facility. The undrawn
balance under the credit facility will then be available for capital
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<PAGE>
expenditures and general corporate purposes, although our primary use of these
funds will be for acquisitions of additional oil and natural gas properties. As
of December 31, 1998, the credit facility had an outstanding balance of $100
million and an average interest rate of 6.8% per annum.
CAPITALIZATION
The following table sets forth as of September 30, 1998 (i) the actual
capitalization of the Company, and (ii) the capitalization of the Company as
adjusted to give effect to the TPG purchase transaction and the use of the net
proceeds from that sale to reduce bank debt and increase the cash balance. See
also "Use of Proceeds."
<TABLE>
<CAPTION>
As of September 30, 1998
-----------------------
As
Adjusted
for the
Company TPG
Historical Purchase
---------- ---------
(in thousands)
<S> <C> <C>
Cash and cash equivalents............................. $ 4,250 $ 12,750
========== =========
Short-term debt:
Credit Facility................................. $ - $ -
---------- ---------
Long-term debt:
Credit Facility................................. 90,000 -
9% Senior Subordinated Notes Due 2008........... 125,000 125,000
---------- ---------
Total long-term debt......................... 215,000 125,000
---------- ---------
Shareholders' equity (a):
Common shares, no par value; unlimited shares
authorized; 26,801,680 outstanding;
45,354,556 outstanding as adjusted for
the TPG Purchase................................ 227,796 326,296
Accumulated deficit................................ (97,958) (97,958)
---------- ----------
Total shareholders' equity...................... 129,838 228,338
---------- ----------
Total capitalization........................ $ 344,838 $ 353,338
========== ==========
- ---------------
<FN>
(a) Excludes 1,890,689 outstanding stock options as of September 30, 1998
exercisable at various prices ranging from $5.55 to $22.24 per share with a
weighted average price of approximately $13.00 (of which 387,063 were
currently exercisable), and 75,000 common shares reserved for issuance upon
exercise of common share purchase warrants.
</FN>
</TABLE>
INCREASE OF AUTHORIZED SHARES UNDER
EMPLOYEE STOCK PURCHASE PLAN
The fourth proposal to be voted on is amending our Employee Stock Purchase
Plan. If approved, the stock purchase plan will be amended by increasing the
maximum number of common shares under the plan from 250,000 shares to 750,000
shares. As of December 30, 1998, only 64,858 common shares were available for
purchase under the plan. The number of shares issued each quarter has steadily
increased due to the addition of several employees since the stock purchase plan
was adopted in 1996 and the recent decline in our stock price. The shares to be
issued on December 31, 1998 exceeded the shares available in the plan by 22,524.
As such, the shares purchased by the employees as of December 31 will not be
issued until after shareholder approval.
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THE BOARD BELIEVES THAT THE STOCK PURCHASE PLAN IS AN INTEGRAL PART OF OUR
OVERALL COMPENSATION PLAN AND RECOMMENDS THAT YOU VOTE FOR THE AMENDMENT.
INCREASE OF AUTHORIZED SHARES UNDER
STOCK OPTION PLAN
The fifth proposal to be voted upon is amending our Stock Option Plan. This
was increased to 2,000,000 shares in 1997 and further increased to 2,648,000
shares in May, 1998. The board further amended the stock option plan on December
1, 1998 to increase the total number of shares reserved for future issuance to
4,535,000, subject to shareholder and regulatory approval. Since the disclosures
made in the 1998 Information Circular - Proxy Statement as of February 28, 1998,
the following activity in the stock option plan has taken place:
<TABLE>
<CAPTION>
Actual Stock Stock Options Reserved for
Options Available for Future
Outstanding Future Grants Issuance
-------------- ------------- --------------
<S> <C> <C> <C>
Balance February 28, 1998 1,976,378 671,622 2,648,000
Granted (1) 1,682,925 (1,682,925) -
Exercised (128,756) - (128,756)
Canceled (12,028) 12,028 -
Authorized increases - 2,015,756 2,015,756
-------------- ------------- --------------
Balance January 15, 1999 (2) 3,518,519 1,016,481 4,535,000
============== ============= ==============
Percent of common shares
outstanding
January 15, 1999 (2) 7.8% 2.2% 10.0%
============== ============= ==============
</TABLE>
Since August 9, 1995, the effective date of the Plan, the following
activity has taken place:
<TABLE>
<CAPTION>
Actual Stock Stock Options Reserved for
Options Available for Future
Outstanding Future Grants Issuance
-------------- ------------- --------------
<S> <C> <C> <C>
Balance August 9, 1995 614,425 435,575 1,050,000
Granted (1) 3,566,709 (3,566,709) -
Exercised (610,587) - (610,587)
Canceled (52,028) 52,028 -
Authorized increases - 4,095,587 4,095,587
-------------- ------------- --------------
Balance January 15, 1999 (2) 3,518,519 1,016,481 4,535,000
============== ============= ==============
Percent of common shares
outstanding
January 15, 1999 (2) 7.8% 2.2% 10.0%
============== ============= ==============
- ---------------
<FN>
(1) Includes 1,627,988 grants made on January 4, 1999, subject to shareholder
approval.
(2) Balance outstanding January 15, 1999 as adjusted for the proposed sale of
common stock to TPG.
</FN>
</TABLE>
Since the last annual meeting held in May 1998, the board of directors
authorized a 2,015,756 share increase subject to shareholder and regulatory
approval. The board of directors also authorized a grant of
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<PAGE>
1,627,988 stock options made to all Company employees on January 4, 1999, in
accordance with the terms of the plan. These board authorized grants were meant
to provide a similar level of compensation to the employees as the employees
received in prior years and are an integral part of our overall compensation
plan. These options will be subject to shareholder and regulatory approval. If
this amendment to the stock option plan is approved, the stock options available
for future grants under the plan will be 1,016,481 common shares, and the
maximum number of common shares reserved for future issuance under the plan will
be 4,535,000 common shares, or approximately 2.2% and 10%, respectively, of the
issued and outstanding common shares as at January 15, 1999, as adjusted for the
proposed sale of 18,552,876 common shares to TPG. The board of directors
approved this increase to ensure that there will be sufficient stock options
available for option grants made on January 4, 1999 and for additional option
grants which may be approved during fiscal 1999 or beyond. Pursuant to TSE
regulations, this increase in the common shares reserved for issuance under the
plan must be approved by the shareholders. Accordingly, at the special meeting
an Ordinary Resolution to approve the amendment to our Stock Option Plan will be
presented which increases the Common Share Maximum, as defined in the plan, by
2,015,756 common shares.
This resolution must be approved by a simple majority of votes cast by
shareholders who vote in person or by proxy at the meeting in respect of the
above resolution.
WE BELIEVE THAT THE STOCK OPTION PLAN IS AN INTEGRAL PART OF OUR OVERALL
COMPENSATION STRATEGY. THE BOARD RECOMMENDS THAT YOU VOTE FOR THIS AMENDMENT.
MANAGEMENT
The names of our directors and officers, their ages and the offices held by
them 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 the
Company and DMI, unless otherwise noted.
<TABLE>
<CAPTION>
Name Age Position(s)
- ----------------------------- ------ -------------------------------------
<S> <C> <C>
Ronald G. Greene (a)(b)(c)(d) 50 Chairman of the Board of the Company
David Bonderman.............. 56 Director of the Company
Wilmot L. Matthews (a)....... 62 Director of the Company
William S. Price, III
(b)(c)(d).................... 42 Director of the Company
David M. Stanton............. 36 Director of the Company
Wieland F. Wettstein (a)..... 49 Director of the Company
Gareth Roberts............... 46 President, Chief Executive Officer
and Director
Phil Rykhoek................. 42 Chief Financial Officer and
Secretary and Director of DMI
Mark A. Worthey.............. 40 Vice President, Operations and
Director of DMI
Bobby J. Bishop.............. 38 Controller and Chief Accounting
Officer
Ron Gramling................. 53 President of DMI marketing subsidiary
Lynda Perrard................ 55 Vice President, Land of DMI
<FN>
(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.
</FN>
</TABLE>
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<PAGE>
Ronald G. Greene is the Chairman of the board and a director of the Company,
positions he has held 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.
David Bonderman has been a director of the Company since 1996. Mr. Bonderman is
a co-founder and partner of TPG. Before 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 AerFi Group plc; Bell & Howell Company,
Carr Realty Corporation; Continental Airlines; Inc.; Ducati Motors S.P.A.;
National Education Corporation; Ryanair, Limited; Virgin Cinemas, Limited; and
Washington Mutual, Inc.
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 founding partner of TPG. Before 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 serves on the Boards of Directors of AerFi Group
plc, Belden & Blake Corporation, Beringer Wine Estates Holdings, Inc.,
Continental Airlines, Inc., Del Monte Foods Company, Favorite Brands
International, Inc., Vivra Specialty Partners, Inc. and Zilog, Inc.
David M. Stanton has been a director of the Company since 1995. Mr. Stanton is a
partner 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 Belden & Blake Corporation, Paradyne Partners, L.P., TPG
Communications, Inc. and Zilog, Inc.
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.
Gareth Roberts is President, Chief Executive Officer, a director and 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.
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<PAGE>
Phil Rykhoek is Chief Financial Officer and a Certified Public Accountant. He
joined the Company and was appointed to the position of Chief Financial Officer
and Secretary in June 1995. Before 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 as 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 is Controller and Chief Accounting Officer. He is a Certified
Public Accountant and joined the Company as Controller in August 1993 and was
appointed to the position of Chief Accounting Officer in December, 1997. Before
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 is President of our marketing subsidiary. He joined the Company in
May 1996 when the Company purchased the subsidiary's assets. Before becoming
affiliated with the Company, he was employed 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 is Vice President, Land of DMI, a position she has held since
April 1994. Ms. Perrard has over 30 years of experience in the oil and gas
industry as a petroleum landman. Before 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.
Mr. Matthew Deso resigned from his position as Vice President of Exploration on
January 6, 1999 to pursue other interests.
COMPENSATION OF DIRECTORS AND OFFICERS
Information concerning compensation received by our executive officers and
directors was presented under the caption "Statement of Executive Compensation"
in the Proxy Statement for the 1998 Annual Meeting and is incorporated by
reference.
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<PAGE>
DESCRIPTION OF CAPITAL STOCK
The authorized capital of the Company consists of an unlimited number of
common shares without nominal or par value. The authorized capital of Denbury
Delaware under the proposed certificate of incorporation will be 100,000,000
shares of common stock, $____ par value per share. As of December 31, 1998,
there were 26,801,680 common shares of the Company outstanding.
DENBURY CANADA AND DENBURY DELAWARE COMMON STOCK
The principal attributes of Denbury Canada's common shares and Denbury
Delaware's common stock will be identical, other than differences in
shareholders' rights under Canadian and Delaware law described under "Moving the
Corporate Domicile of the Company--Comparison of Shareholders' Rights" and
"Description of Capital Stock." The holders of Denbury Delaware common stock
will be entitled to vote at all meetings of shareholders, except meetings at
which only holders of a specified class of shares are entitled to vote, to
receive any dividend declared thereon, and, subject to the rights, privileges,
restrictions and conditions attaching to any other class of shares of Denbury
Delaware, to receive the remaining property of Denbury Delaware upon
dissolution.
DENBURY DELAWARE PREFERRED STOCK
The certificate of incorporation for Denbury Delaware authorizes the future
issuance of preferred shares, with such designations, rights, privileges,
restrictions and conditions as may be determined from time to time by the board
of directors. 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 Denbury Delaware's common stock. 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 Denbury Delaware.
Such actions could have the effect of discouraging bids for Denbury Delaware
and, thereby, preventing shareholders from receiving the maximum value for their
shares. Although Denbury Delaware has no present intention to issue any
additional preferred shares, there can be no assurance that Denbury Delaware
will not do so in the future. No preferred shares will be outstanding upon
consummation of the proposed move of domicile or sale of shares to TPG.
NATURE OF THE TRADING MARKET
Our common shares have been listed on the NYSE since May 8, 1997 and were
listed on the NASDAQ from August 25, 1995 through May 8, 1997. Our common shares
have also been listed on the TSE in Toronto, Canada, since February 14, 1984.
Our 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 1999.
72
<PAGE>
<TABLE>
<CAPTION>
NYSE / NASDAQ TSE
---------------- ---------------
High Low High Low
------- ------- ------ ------
(US $) (C $)
<S> <C> <C> <C> <C>
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................... 24.63 17.88 33.50 25.50
1998
First Quarter.................... 20.63 16.13 29.00 23.00
Second Quarter................... 17.75 12.75 25.00 18.50
Third Quarter.................... 13.50 6.00 19.90 8.75
Fourth Quarter................... 8.50 3.50 13.10 5.40
1999
First Quarter (through January
15, 1999)...................... 6.19 5.19 9.05 7.15
</TABLE>
LEGAL MATTERS
Certain matters of Canadian law in connection with the continuance will be
passed upon by Burnet, Duckworth & Palmer. Certain legal matters in connection
with the shares of Denbury Delaware capital stock to be issued in connection
with the continuance will be passed upon by Jenkens & Gilchrist, a Professional
Corporation, Houston, Texas on behalf of Denbury Delaware.
EXPERTS
The consolidated financial statements and the related financial statement
schedule incorporated in this document by reference from the Company's Annual
Report on Form 10-K for the year ended December 31, 1997 have been audited by
Deloitte & Touche LLP, chartered accountants, as stated in their reports, which
are incorporated herein by reference, and have been so incorporated in reliance
upon the reports of such firm given upon their authority as experts in
accounting and auditing.
WHERE YOU CAN FIND MORE INFORMATION
AVAILABLE INFORMATION
Our SEC filings are available to the public over the Internet at the SEC's
web site at http//www.sec.gov. You may also read and copy any document we file
at the SEC's public reference rooms in Washington, D.C., New York, New York, and
Chicago, Illinois. Our filings can also be inspected at the New York Stock
Exchange, 20 Broad St., New York, New York 10005.
The Company has filed a Registration Statement with the SEC on Form S-4 to
register the common shares that will be deemed to be issued to stockholders in
the move of our corporate domicile. This Proxy Statement/Prospectus is part of
such Registration Statement and constitutes a prospectus in addition to being a
proxy statement of the Company for the special meeting. As allowed by SEC rules,
this Proxy
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<PAGE>
Statement/Prospectus does not contain all the information contained in the
Registration Statement or in the exhibits to the Registration Statement.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The SEC allows us to include certain information in this document by
"incorporating by reference," which means that we can disclose important
information to you by referring to those documents. The following documents were
filed by us with the SEC by the Company and are incorporated by reference in
this Proxy Statement/Prospectus and any future filings made with the SEC under
Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act:
1. Annual Report on Form 10-K for the year ended December 31, 1997;
2. Quarterly Reports on Form 10-Q for the quarters ended March 31, 1998,
June 30, 1998 and September 30, 1998; and
3. Current Reports on Form 8-K dated December 2, 1998 and December 17,
1998.
YOU MAY REQUEST A COPY OF THESE FILINGS AT NO COST BY WRITING OR
TELEPHONING US AT DENBURY RESOURCES INC., 17304 PRESTON ROAD, SUITE 200, DALLAS,
TEXAS 75252 (TELEPHONE NUMBER (972) 673- 2000, ATTENTION: SECRETARY. TO ENSURE
TIMELY DELIVERY OF THE DOCUMENTS, ANY REQUEST SHOULD BE MADE BY JANUARY __,
1999.
CERTAIN FORWARD-LOOKING STATEMENTS
CERTAIN STATEMENTS IN THIS PROXY STATEMENT/PROSPECTUS CONSTITUTE
"FORWARD-LOOKING STATEMENTS" WITHIN THE MEANING OF THE PRIVATE SECURITIES
LITIGATION REFORM ACT OF 1995, AND CAN BE IDENTIFIED BY THE USE OF
FORWARD-LOOKING TERMINOLOGY SUCH AS "MAY," "WILL," "EXPECT," "ANTICIPATE,"
"ESTIMATE" OR "CONTINUE" OR THE NEGATIVE THEREOF OR OTHER VARIATIONS THEREON OR
COMPARABLE TERMINOLOGY. THE STATEMENTS UNDER THE CAPTION "RISK FACTORS" IN THIS
PROXY STATEMENT/PROSPECTUS CONSTITUTE CAUTIONARY STATEMENTS IDENTIFYING
IMPORTANT FACTORS, INCLUDING MATERIAL RISKS AND UNCERTAINTIES, WITH RESPECT TO
SUCH FORWARD-LOOKING STATEMENTS THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM THOSE REFLECTED IN SUCH FORWARD-LOOKING STATEMENTS.
OTHER MATTERS
Our board does not intend to bring any matters before the special meeting
other than those proposals contained in this Proxy Statement/Prospectus. We do
not know of any matters to be brought before the meeting by others. If any other
matters properly come before the special meeting, it is the intention of the
persons named in accompanying proxies to vote such proxies in accordance with
the judgment of the board.
SERVICE AND ENFORCEMENT OF LEGAL PROCESS
The Company is incorporated in Canada. Some of the directors and experts
are residents of Canada and most, if not all, of these person's assets are
located outside of the United States. It may be difficult for a shareholder in
the United States to effect service or realize anything from a judgment against
these Canadian residents or the Company as a result of any possible civil
liability resulting from a violation of the United States federal securities
laws. This has been confirmed by our Canadian legal counsel, Burnet, Duckworth &
Palmer in Calgary, Alberta.
74
<PAGE>
GLOSSARY
The terms defined in this section are used throughout this Proxy
Statement/Prospectus.
Bbl. One stock tank barrel, of 42 U.S. gallons liquid volume, used herein
in reference to crude oil or other liquid hydrocarbons.
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.
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.
MBbl. One thousand barrels of crude oil or other liquid hydrocarbons.
MBOE. One thousand BOEs.
MBtu. One thousand Btus.
Mcf. One thousand cubic feet of natural gas.
MMBbl. One million barrels of crude oil or other liquid hydrocarbons.
MMBOE. One million BOEs.
MMBtu. One million Btus.
MMcf. One million cubic feet of natural gas.
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.
Proved Developed Reserves. Reserves that can be expected to be recovered
through existing wells with existing equipment and operating methods.
Proved Reserves. The estimated quantities of crude oil, natural gas and
natural gas liquids which geological and engineering data demonstrate with
reasonable certainty to be recoverable in future years from known reservoirs
under existing economic and operating conditions.
Proved Undeveloped Reserves. Reserves that are expected to be recovered
from new wells on undrilled acreage or from existing wells where a relatively
major expenditure is required for recompletion.
Tcf. One trillion cubic feet of natural gas.
Working Interest. The operating interest which gives the owner the right to
drill, produce and conduct operating activities on the property as well as to a
share of production.
75
<PAGE>
EXHIBIT A
[Letterhead of Credit Suisse First Boston Corporation]
December 16, 1998
Board of Directors
Denbury Resources Inc.
17304 Preston Road, Suite 200
Dallas, Texas 75252
Members of the Board:
You have asked us to advise you with respect to the fairness to Denbury
Resources Inc. ("Denbury") from a financial point of view of the consideration
to be received by Denbury pursuant to the terms of the Stock Purchase Agreement,
dated as of December 16, 1998 (the "Stock Purchase Agreement"), between Denbury
and TPG Partners II, L.P. ("TPG"). The Stock Purchase Agreement provides for,
among other things, a U.S.$100 million equity investment in Denbury by TPG (the
"TPG Investment") pursuant to which TPG will purchase an aggregate of 18,552,876
newly issued common shares of Denbury (the "Denbury Common Shares") for a
purchase price of U.S.$5.39 per share in cash (the "Consideration").
In arriving at our opinion, we have reviewed the Stock Purchase Agreement and
certain publicly available business and financial information relating to
Denbury. We have also reviewed certain other information relating to Denbury,
including financial forecasts and reserve reports, provided to or discussed with
us by Denbury, and have met with Denbury's management to discuss the business
and prospects of Denbury. We have also considered certain financial and stock
market data of Denbury, and we have compared those data with similar data for
other publicly held companies in businesses similar to Denbury, and we have
considered, to the extent publicly available, the financial terms of certain
other transactions which have recently been effected. We also considered such
other information, financial studies, analyses and investigations and financial,
economic and market criteria which we deemed relevant. The opinion expressed
herein is being rendered during a period of volatility in the financial and
commodity markets and is necessarily subject to the absence of further material
developments in financial, economic and market conditions from those prevailing
on the date hereof.
In connection with our review, we have not assumed any responsibility for
independent verification of any of the foregoing information and have relied on
its being complete and accurate in all material respects. With respect to the
financial forecasts, we have been advised, and have assumed, that such forecasts
have been reasonably prepared on bases reflecting the best currently available
estimates and judgments of Denbury's management as to the future financial
performance of Denbury. We also have assumed, with your consent, that the
reserve reports reviewed by us have been reasonably prepared on bases reflecting
the best currently available estimates and judgments of the preparers of such
reports as to the oil and gas reserves of Denbury. In addition, we have not been
requested to make, and have not made, an independent evaluation or appraisal of
the assets or liabilities (contingent or otherwise) of Denbury, nor have we been
furnished with any such evaluations or
A-1
<PAGE>
Board of Directors
Denbury Resources Inc.
December 16, 1998
Page 2
appraisals. Our opinion is necessarily based upon information available to us,
and financial, economic, market and other conditions as they exist and can be
evaluated, on the date hereof. We are not expressing any opinion as to what the
value of Denbury Common Shares actually will be when issued pursuant to the TPG
Investment or the prices at which the Denbury Common Shares will trade
subsequent to the TPG Investment. In connection with our engagement, we were not
requested to, and we did not, participate in the negotiation or structuring of
the TPG Investment, nor were we requested to, and we did not, solicit third
party indications of interest in acquiring all or any part of Denbury.
We have acted as financial advisor to Denbury in connection with this opinion
and will receive a fee for such services, a significant portion of which will be
payable upon the delivery of this opinion. In the past, we have provided
financial services to TPG and certain of its affiliates unrelated to the
proposed TPG Investment, for which services we have received compensation. In
the ordinary course of business, Credit Suisse First Boston and its affiliates
may actively trade the debt and equity securities of Denbury for their own
accounts and for the accounts of customers and, accordingly, may at any time
hold a long or short position in such securities.
It is understood that this letter is for the information of the Board of
Directors of Denbury in connection with its evaluation of the TPG Investment,
does not constitute a recommendation to any shareholder as to how such
shareholder should vote on any matter relating to the proposed TPG Investment,
and is not to be quoted or referred to, in whole or in part, in any registration
statement, prospectus or proxy statement, or in any other document used in
connection with the offering or sale of securities, nor shall this letter be
used for any other purposes, without our prior written consent.
Based upon and subject to the foregoing, it is our opinion that, as of the date
hereof, the Consideration to be received by Denbury pursuant to the TPG
Investment is fair to Denbury from a financial point of view.
Very truly yours,
CREDIT SUISSE FIRST BOSTON CORPORATION
A-2
<PAGE>
EXHIBIT B
SHAREHOLDERS HAVE THE RIGHT TO DISSENT TO THE MOVE OF THE CORPORATE
DOMICILE OF THE COMPANY. SUCH RIGHT OF DISSENT IS DESCRIBED IN THE INFORMATION
CIRCULAR. SEE "MOVING THE CORPORATE DOMICILE OF THE COMPANY--DISSENTING
SHAREHOLDERS' RIGHTS" FOR FULL DETAILS OF THE RIGHT TO DISSENT AND THE PROCEDURE
FOR COMPLIANCE WITH THE RIGHT OF DISSENT. THE FULL TEXT OF SECTION 190 OF THE
CBCA IS SET FORTH BELOW.
SECTION 190 OF THE CANADA BUSINESS CORPORATIONS ACT
190. (28) RIGHT TO DISSENT -- Subject to sections 191 and 241, a holder of
shares of any class of a corporation may dissent if the corporation is subject
to an order under paragraph 192(4)(d) that affects the holder or if the
corporation resolves to
a. amend its articles under section 173 or 174 to add, change or remove any
provisions restricting or constraining the issue, transfer or ownership
of shares of that class;
b. amend its articles under section 173 to add, change or remove any
restriction on the business or businesses that the corporation may carry
on;
c. amalgamate otherwise than under section 184;
d. be continued under section 188; or
e. sell, lease or exchange all or substantially all of its property under
subsection 189(3).
(29) FURTHER RIGHT. -- A holder of shares of any class or series of shares
entitled to vote under section 176 may dissent if the corporation resolves to
amend its articles in a manner described in that section.
(30) PAYMENT FOR SHARES. -- In addition to any other right he may have, but
subject to subsection (26), a shareholder who complies with this section is
entitled, when the action approved by the resolution from which he dissents or
an order made under subsection 192(4) becomes effective, to be paid by the
corporation the fair value of the shares held by him in respect of which he
dissents, determined as of the close of business on the day before the
resolution was adopted or the order was made.
(31) NO PARTIAL DISSENT. -- A dissenting shareholder may only claim under this
section with respect to all the shares of a class held by him on behalf of any
one beneficial owner and registered in the name of the dissenting shareholder.
(32) OBJECTION. -- A dissenting shareholder shall send to the corporation, at or
before any meeting of shareholders at which a resolution referred to in
subsection (1) or (2) is to be voted on, a written objection to the resolution,
unless the corporation did not give notice to the shareholder of the purpose of
the meeting and of his right to dissent.
B-1
<PAGE>
(33) NOTICE OF RESOLUTION. -- The corporation shall, within ten days after the
shareholders adopt the resolution, send to each shareholder who has filed the
objection referred to in subsection (5) notice that the resolution has been
adopted, but such notice is not required to be sent to any shareholder who voted
for the resolution or who has withdrawn his objection.
(34) DEMAND FOR PAYMENT -- A dissenting shareholder shall, within twenty days
after he receives a notice under subsection (6) or, if he does not receive such
notice, within twenty days after he learns that the resolution has been adopted,
send to the corporation a written notice containing
a. his name and address;
b. the number and class of shares in respect of which he dissents; and
c. a demand for payment of the fair value of such shares.
(35) SHARE CERTIFICATE. -- A dissenting shareholder shall, within thirty days
after sending a notice under subsection (7), send the certificates representing
the shares in respect of which he dissents to the corporation or its transfer
agent.
(36) FORFEITURE. -- A dissenting shareholder who fails to comply with subsection
(8) has no right to make a claim under this section.
(37) ENDORSING CERTIFICATE. -- A corporation or its transfer agent shall endorse
on any share certificate received under subsection (8) a notice that the holder
is a dissenting shareholder under this section and shall forthwith return the
share certificates to the dissenting shareholder.
(38) SUSPENSION OF RIGHTS. -- On sending a notice under subsection (7), a
dissenting shareholder cases to have any rights as a shareholder other than the
right to be paid the fair value of his shares as determined under this section
except where
a. a dissenting shareholder withdraws his notice before the corporation
makes an offer under subsection (12),
b. the corporation fails to make an offer in accordance with subsection
(12) and the dissenting shareholder withdraws his notice, or
c. the directors revoke a resolution to amend the articles under subsection
173(2) or 174(5), terminate an amalgamation agreement under subsection
183(6) or an application for continuance under subsection 188(6), or
abandon a sale, lease or exchange under subsection 189(9),
in which case his rights as a shareholder are reinstated as of the date he sent
the notice referred to in subsection (7).
(39) OFFER TO PAY. -- A corporation shall, not later than seven days after the
later of the day on which the action approved by the resolution is effective or
the day the corporation received the
B-2
<PAGE>
noticed referred to in subsection (7), send to each dissenting shareholder who
has sent such notice
a. a written offer to pay for his shares in an amount considered by the
directors of the corporation to be the fair value thereof, accompanied
by a statement showing how the fair value was determined; or
b. if subsection (26) applies, a notification that it is unable lawfully to
pay dissenting shareholders for their shares.
(40) SAME TERMS. -- Every offer made under subsection (12) for shares of the
same class or series shall be on the same terms.
(41) PAYMENT. -- Subject to subsection (26), a corporation shall pay for the
shares of a dissenting shareholder within ten days after an offer made under
subsection (12) has been accepted, but any such offer lapses if the corporation
does not receive an acceptance thereof within thirty days after the offer has
been made.
(42) CORPORATION MAY APPLY TO COURT. -- Where a corporation fails to make an
offer under subsection (12), or if a dissenting shareholder fails to accept an
offer, the corporation may, within fifty days after the action approved by the
resolution is effective or within such further period as a court may allow,
apply to a court to fix a fair value for the shares of any dissenting
shareholder.
(43) SHAREHOLDER APPLICATION TO COURT. -- If a corporation fails to apply to a
court under subsection (15), a dissenting shareholder may apply to a court for
the same purpose within a further period of twenty days or within such further
period as a court may allow.
(44) VENUE. -- An application under subsection (15) or (16) shall be made to a
court having jurisdiction in the place where the corporation has its registered
office or in the province where the dissenting shareholder resides if the
corporation carries on business in that province.
(45) NO SECURITY FOR COSTS. -- A dissenting shareholder is not required to give
security for costs in an application made under subsection (15) or (16).
(46) PARTIES. -- On an application to a court under subsection (15) or (16),
a. all dissenting shareholders whose shares have not been purchased by the
corporation shall be joined as parties and are bound by the decision of
the court; and
b. the corporation shall notify each affected dissenting shareholder of the
date, place and consequences of the application and of his right to
appear and be head in person or by counsel.
(47) POWERS OF COURT. -- On an application to a court under subsection (15) or
(16), the court may determine whether any other person is a dissenting
shareholder who should be joined as a party, and the court shall then fix a fair
value for the shares of all dissenting shareholders.
B-3
<PAGE>
(48) APPRAISERS. -- A court may in its discretion appoint one or more appraisers
to assist the court to fix a fair value for the shares of the dissenting
shareholders.
(49) FINAL ORDER. -- The final order of a court shall be rendered against the
corporation in favour of each dissenting shareholder and for the amount of his
shares as fixed by the court.
(50) INTEREST. -- A court may in its discretion allow a reasonable rate of
interest on the amount payable to each dissenting shareholder from the date the
action approved by the resolution is effective until the date of payment.
(51) NOTICE THAT SUBSECTION (26) APPLIES. -- If subsection (26) applies, the
corporation shall, within ten days after the pronouncement of an order under
subsection (22), notify each dissenting shareholder that it is unable lawfully
to pay dissenting shareholders for their shares.
(52) EFFECT WHERE SUBSECTION (26) APPLIES. -- If subsection (26) applies, a
dissenting shareholder, by written notice delivered to the corporation within
thirty days after receiving a notice under subsection (24), may
a. withdraw his notice of dissent, in which case the corporation is deemed
to consent to the withdrawal and the shareholder is reinstated to his
full rights as a shareholder; or
b. retain a status as a claimant against the corporation, to be paid as
soon as the corporation is lawfully able to do so or, in a liquidation,
to be ranked subordinate to the rights of creditors of the corporation
but in priority to its shareholders.
(53) LIMITATION. -- A corporation shall not make a payment to a dissenting
shareholder under this section if there are reasonable grounds for believing
that
a. the corporation is or would after the payment be unable to pay its
liabilities as they become due, or
b. the realizable value of the corporation's assets would thereby be less
than the aggregate of its liabilities. 1994, c.24, s.23.
<PAGE>
EXHIBIT C
CERTIFICATE OF DOMESTICATION
To be filed by Amendment
C-1
<PAGE>
EXHIBIT D
CERTIFICATE OF INCORPORATION
To be filed by Amendment
D-1
<PAGE>
EXHIBIT E
BYLAWS
To be filed by Amendment
E-1
<PAGE>
EXHIBIT F
LIQUIDITY OPINION
To be filed by Amendment
F-1
<PAGE>
Exhibit G
Special Resolution Approving
the Change of Corporate Domicile from Canada to the United States
BE IT RESOLVED as a special resolution of the shareholders of Denbury
Resources Inc. (the "Company") that:
1. the change of domicile of the Company from Canada to the United States
whereby the Company will be domesticated under the laws of the State of
Delaware pursuant to section 388 of the Delaware General Corporation Law
(the "DGCL")and discontinued under the provisions of section 188(7) of the
Canada Business Corporations Act (the "CBCA") be and the same is hereby
approved and authorized and the Company be and it is hereby authorized to
apply to the Secretary of State of the State of Delaware for the purposes
of domesticating the Company under the laws of the State of Delaware
pursuant to section 388 of the DGCL and thereafter apply to the Director
under the CBCA for a Certificate of Discontinuance pursuant to section
188(7) of the CBCA;
2. the Certificate of Incorporation and the Certificate of Domestication,
which are attached as Exhibits "C" and "D", respectively, to the
Information Circular - Proxy Statement of the Company mailed to the
shareholders of the Company for the purposes of the Special Meeting,
subject to changes as the Secretary of State of the State of Delaware may
require or as the Board of Directors of the Company may approve, be and the
same are hereby adopted, approved and authorized;
3. any one director or officer of the Company be and is hereby authorized for
and on behalf of the Company to do all such acts and things and to execute,
deliver and file all such deeds, documents and other instruments as may be
necessary or desirable to carry out the provisions of this resolution
which, without limiting the generality of the foregoing, shall include the
execution and filing with the Secretary of State of the State of Delaware
of the Certificate of Domestication and the Certificate of Incorporation,
the application to the Director under the CBCA to authorize and approve the
Continuance, the application to the Director under the CBCA for a
Certificate of Discontinuance pursuant to section 188(7) of the CBCA and
all other requisite notices and filings in respect of the domestication
required pursuant to applicable laws; and
4. conditional upon the domestication of the Company under the laws of the
State of Delaware in accordance with all legal requirements relating
thereto being made effective, the merger of the Company with its
wholly-owned subsidiary, Denbury Management Inc., whereby the Company will
be the surviving entity, be and the same is hereby approved and authorized.
G-1
<PAGE>
Ordinary Resolution Authorizing
the Board the Authority to Postpone or Abandon the Move
BE IT RESOLVED as a special resolution of the shareholders of Denbury
Resources Inc. (the "Company") that:
1. the directors of the Company may, in their sole discretion and
notwithstanding that this resolution has been duly passed by the
shareholders of the Company, postpone or abandon the move of the corporate
domicile of the Company without further action or approval of the
shareholders if the Board of Directors determines that such a move or
timing of the domestication would not be in the Company's best interests.
G-2
<PAGE>
Ordinary Resolution Approving the Sale of Shares to the Texas Pacific
Group
WHEREAS Denbury Resources Inc. (the "Company") has entered into a stock
purchase agreement (the "TPG Purchase Agreement") dated December 16, 1998 with
an affiliate of the Texas Pacific Group ("TPG"), pursuant to which TPG has
agreed to purchase 18,552,876 newly-issued Common Shares of Denbury Resources
Inc. for a total purchase price of U.S. $100 million, representing a
subscription price of U.S. $5.39 per Common Share, which agreement provides,
among other things, that the consummation of the sale of the shares to TPG is
conditional upon the approval by holders of the majority of the Common Shares of
the Company voting that are disinterested shareholders;
NOW THEREFORE BE IT RESOLVED, as an ordinary resolution of the shareholders
of the Company, that:
1. the private placement by the Company to TPG of an aggregate 18,552,876
Common Shares at a subscription price of U.S. $5.39 per share for an
aggregate purchase price of U.S. $100 million pursuant to the terms and
conditions of the TPG Purchase Agreement be and the same is hereby
authorized and approved and the TPG Purchase Agreement and all
transactions contemplated thereby be and the same are hereby ratified,
approved and confirmed including any and all other agreements, documents
and instruments and the performance of such further and other actions as
may be necessary or desirable in order to give full effect to the TPG
Purchase Agreement and the obligations of the Company with respect
thereto including the actions, documents, agreements and instruments
contemplated thereby or hereby;
2. any one director or officer of the Company be and is hereby authorized
for and on behalf of the Company to do all such acts and things and to
execute, deliver and file all such deeds, documents and other
instruments as may be necessary or desirable to carry out the provisions
of this resolution; and
3. the directors of the Company may, in their sole discretion and
notwithstanding that this resolution has been duly passed by the
shareholders of the Company, revoke this resolution before it is acted
upon without further action or approval of the shareholders.
G-3
<PAGE>
Ordinary Resolution Approving
Increase of Authorized Shares under the Company's Employee Stock
Purchase Plan
BE IT RESOLVED as an ordinary resolution of the shareholders of Denbury
Resources Inc. (the "Company") that:
1. the amendment to the employee stock purchase plan of the Company made
effective February 1, 1996 (the "Employee Stock Purchase Plan"), by
increasing the maximum number of Common Shares of the Company which shall
be available for sale under the Employee Stock Purchase Plan from 250,000
Common Shares to 750,000 Common Shares be and the same is hereby ratified,
approved and authorized; and
2. any one director or officer of the Company be and is hereby authorized for
and on behalf of the Company to do all such acts and things and to execute,
deliver and file all such deeds, documents and other instruments as may be
necessary or desirable to carry out the provisions of this resolution
including, without liming the generality of the foregoing, all necessary
notices, filings and applications to the Toronto and New York stock
exchanges in respect of the amendment to the Employee Stock Purchase Plan
and the additional listing of Common Shares issued under the Employee Stock
Purchase Plan.
G-4
<PAGE>
Ordinary Resolution Approving
Increase of Authorized Shares under the Company's Stock Option Plan
BE IT RESOLVED that an ordinary resolution of the shareholders of Denbury
Resources Inc. (the "Company") that:
1. the amendment to the stock option plan of the Company made effective August
9, 1995 (the "Stock Option Plan"), as amended, by the increase of an
additional 2,015,756 Common Shares issuable under the Stock Option Plan
such that the maximum number of Common Shares reserved for future issuance
under the Stock Option Plan will be 4,535,000 Common Shares representing
approximately 10% of the outstanding Common Shares after giving effect to
the proposed sale of 18,552,876 Common Shares to Texas Pacific Group, and
pursuant to which the "Common Share Maximum" as defined in section 4(a) of
the Stock Option Plan is increased to 5,145,587 Common Shares be and the
same is hereby ratified, approved and authorized; and
2. any one director or officer of the Company be and is hereby authorized for
and on behalf of the Company to do all such acts and things and to execute,
deliver and file all such deeds, documents and other instruments as may be
necessary or desirable to carry out the provisions of this resolution
including, without liming the generality of the foregoing, all necessary
notices, filings and applications to the Toronto and New York stock
exchanges in respect of the amendment to the Stock Option Plan and the
additional listing of Common Shares issuable upon exercise of options
granted under the Stock Option Plan.
G-5
<PAGE>
PART II INFORMATION NOT REQUIRED IN PROSPECTUS
Item 22. 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 the Company's Bylaws contains the same standards set forth
in Section 124(1), but makes indemnification in such circumstances mandatory by
the Company.
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
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<PAGE>
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 the Company 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 the Company 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 21. Exhibits and Financial Statement Schedules
(a) Exhibits.
Exhibit Description of Exhibit
- ------- ----------------------
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 the
Company's Registration Statement on Form F-1 dated August 25, 1995,
Exhibit 4(e) of the Company's Registration Statement on Form S-8 dated
February 2, 1996 and Exhibit 3(a) of the Pre-effective Amendment No. 2
of the Company'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 the Company'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.
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<PAGE>
Exhibit Description of Exhibit
- ------- ----------------------
3(c) Restated Articles of Incorporation of Denbury Management, Inc.
(incorporated by reference as Exhibit 3(c) of the Registrant's
Registration Statement on Form S-3 dated February 19, 1998).
3(d) Bylaws of Denbury Management, Inc. (incorporated by reference as
Exhibit 3(c) of the Registrant's Registration Statement on Form S-3
dated February 19, 1998).
3(e)** Certificate of Domestication of Denbury Resources Inc. (attached as
Exhibit C to the Prospectus of this Registration Statement).
3(f)** Form of Articles of Incorporation of Denbury Resources Inc., a Delaware
corporation (attached as Exhibit D to the Prospectus of this
Registration Statement).
3(g)** Form of By-laws of Denbury Resources Inc., a Delaware corporation
(attached as Exhibit E to the Prospectus of this Registration
Statement).
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 the Company defining the
rights of the holders of Common Shares.
4(b) Form of Indenture between DMI and Chase Bank of Texas National
Association, as trustee (incorporated by reference as Exhibit 4(b) of
Registrant's Registration Statement on Form S-3 dated February 19,
1998).
4(c)* Section 190 of the Canada Business Corporation Act (attached as Exhibit
B to the Prospectus of this Registration Statement).
5(a)** Opinion of Burnet, Duckworth & Palmer.
5(b)** Opinion of Jenkens & Gilchrist, a Professional Corporation.
8(a)** Form of opinion of Burnet, Duckworth & Palmer as to Canadian tax
matters.
8(b)** Form of opinion of Jenkens & Gilchrist, a Professional Corporation as
to United States tax matters.
10(a) Stock Purchase Agreement dated December 16, 1998 between the Company
and TPG Partners II, L.L.C. (incorporated by reference as Exhibit 99.1
of the Registrant's Form 8- K dated December 17, 1998).
10(b)* Consent letter and form of Fourth Amendment to First Restated Credit
Agreement, by and among Denbury Management, as borrower, Denbury
Resources Inc., as guarantor, NationsBank of Texas, N.A. as
administrative agent and NationsBank of Texas, N.A. as bank, dated
November 30, 1998.
12* Statement of Ratio of Earnings to Fixed Charges.
23(a)* Consent of Deloitte & Touche LLP.
23(b)** Consent of Burnet, Duckworth & Palmer (contained in its opinion filed
as Exhibit 5 (a).
23(c)** 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).
99* Consent of Credit Suisse First Boston Corporation.
- ---------------------------
II-3
<PAGE>
* Previously filed.
** To be filed by amendment.
Item 22. Undertakings
The undersigned registrant hereby undertakes to respond to requests for
information that is incorporated by reference into the prospectus pursuant to
Item 4, 10(b), 11, or 13 of this form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
The undersigned registrant hereby undertakes to supply by means of a
post-effective amendment all information concerning a transaction, and the
Company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-4
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act the registrant has duly
caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Dallas, State of Texas,
on January 19, 1999.
DENBURY RESOURCES 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.
Signatures Title Date
President, Chief Executive January 19, 1999
/s/ Gareth Roberts * Officer and Director
- ----------------------------- of the Company
Gareth Roberts (Principal Executive Officer)
Chief Financial Officer, January 19, 1999
Secretary and Authorized
/s/ Phil Rykhoek * Representative of the Company
- ----------------------------- (Principal Financial Officer)
Phil Rykhoek
Controller and Chief Accounting January 19, 1999
/s/ Bobby J. Bishop * Officer of the Company
- ----------------------------- (Principal Accounting Officer)
Bobby J. Bishop
/s/ Ronald G. Greene * Chairman of the Board and January 19, 1999
- ----------------------------- Director of the Company
Ronald G. Greene
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<PAGE>
Signatures Title Date
/s/ Wieland Wettstein * Director of the Company January 19, 1999
- ----------------------------
Wieland Wettstein
/s/ Wilmot Matthews * Director of the Company January 19, 1999
- ----------------------------
Wilmot Matthews
By: * /s/ Phil Rykhoek
----------------------------
Phil Rykhoek
Attorney-in-Fact pursuant to
Power of Attorney contained
in original filing of the
Registration Statement.
EXHIBIT INDEX
Exhibit Description of Exhibit
- ------- ----------------------
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 the
Company's Registration Statement on Form F-1 dated August 25, 1995,
Exhibit 4(e) of the Company's Registration Statement on Form S-8 dated
February 2, 1996 and Exhibit 3(a) of the Pre-effective Amendment No. 2
of the Company'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 the Company'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.
(incorporated by reference as Exhibit 3(c) of the Registrant's
Registration Statement on Form S-3 dated February 19, 1998).
3(d) Bylaws of Denbury Management, Inc. (incorporated by reference as
Exhibit 3(c) of the Registrant's Registration Statement on Form S-3
dated February 19, 1998).
3(e)** Certificate of Domestication of Denbury Resources Inc. (attached as
Exhibit C to the Prospectus of this Registration Statement).
3(f)** Form of Articles of Incorporation of Denbury Resources Inc., a Delaware
corporation (attached as Exhibit D to the Prospectus of this
Registration Statement).
3(g)** Form of By-laws of Denbury Resources Inc., a Delaware corporation
(attached as Exhibit E to the Prospectus of this Registration
Statement).
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 the Company defining the
rights of the holders of Common Shares.
4(b) Form of Indenture between DMI and Chase Bank of Texas National
Association, as trustee (incorporated by reference as Exhibit 4(b) of
Registrant's Registration Statement on Form S-3 dated February 19,
1998).
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<PAGE>
Exhibit Description of Exhibit
- ------- ----------------------
4(c)* Section 190 of the Canada Business Corporation Act (attached as Exhibit
B to the Prospectus of this Registration Statement).
5(a)** Opinion of Burnet, Duckworth & Palmer.
5(b)** Opinion of Jenkens & Gilchrist, a Professional Corporation.
8(a)** Form of opinion of Burnet, Duckworth & Palmer as to Canadian tax
matters.
8(b)** Form of opinion of Jenkens & Gilchrist, a Professional Corporation as
to United States tax matters.
10(a) Stock Purchase Agreement dated December 16, 1998 between the Company
and TPG Partners II, L.L.C. (incorporated by reference as Exhibit 99.1
of the Registrant's Form 8- K dated December 17, 1998).
10(b)* Consent letter and form of Fourth Amendment to First Restated Credit
Agreement, by and among Denbury Management, as borrower, Denbury
Resources Inc., as guarantor, NationsBank of Texas, N.A. as
administrative agent and NationsBank of Texas, N.A. as bank, dated
November 30, 1998.
12* Statement of Ratio of Earnings to Fixed Charges.
23(a)* Consent of Deloitte & Touche LLP.
23(b)** Consent of Burnet, Duckworth & Palmer (contained in its opinion filed
as Exhibit 5 (a).
23(c)** 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).
99* Consent of Credit Suisse First Boston Corporation.
- -------------------
* Previously filed.
** To be filed by amendment.
II-7
