Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
(Final)
Filed by the Registrant [X]
Filed by a Party other than the Registrant [_]
Check the appropriate box:
[X] Definitive Proxy Statement
[_] Confidential, for Use of the Commission Only (as permitted by
Rule 14a-6(e)(2))
[_] Definitive Proxy Statement
[_] Definitive Additional Materials
[_] Soliciting Material Pursuant to Section 240.14a-11(c) or Section 240.14a-12
Filing By:
Beta Oil & Gas, Inc. (File No 000-25717)
(Name of Registrant as Specified in Its Charter)
Payment of Filing Fee (Check the appropriate box):
[_] No fee required
[X] Fee computed on table below per Exchange Act Rules 14a-6(i)(1) and 0-11
1) Title of each class of securities to which transaction applies:
Beta Company common stock, par value $.001 per share.
2) Aggregate number of securities to which transaction applies:
2,250,000 shares
3) Per Unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which the
filing fee is calculated and state how it was determined):
/1/ $6.74
4) Proposed maximum aggregate value of transaction: $15,165,000
5) Total fee paid: $ 0
[X] Fee paid previously with preliminary materials
[_]Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid: $ 3,033
2) Form, Schedule or Registration Statement No.:
3) Filing Party:
4) Date Filed:
---------------------------------------------------------/1/ Estimated pursuant to Rule 0-11(c)(1) and 0-11(a)(4) under the Exchange Act solely for the purpose of calculating the filing fee, based on the average of the high and low sale prices for shares of Beta Common Stock on the Nasdaq Small Cap Market on January 11, 2000 ($6.74 per share) multiplied by the 2,250,000 shares of Beta common stock to be issued in connection with the merger.
------------------------------------------------------------------------The board of directors of Beta Oil & Gas, Inc. has unanimously approved a merger with Red River Energy, Inc. designed to strengthen Beta’s position in the oil and gas industry and recommends that you approve the merger. The board of directors also unanimously approved the Beta Amended and Restated 1999 Incentive and Non-statutory Stock Option Plan and recommends that you vote to approve the stock option plan.
Upon completion of the merger, Red River shareholders will receive a total of 2,250,000 shares of Beta common stock in exchange for their shares of Red River common stock. Beta shareholders will continue to own their existing shares of Beta common stock. After the merger, the Red River shareholders will hold approximately 18‰ of Beta’s outstanding common stock.
We are requesting the shareholders of Beta to consent to the merger agreement and the stock issuance in the merger. In addition, we are asking you to approve the adoption of the Beta Amended and Restated 1999 Incentive and Non-statutory Stock Option Plan. We plan on obtaining such stockholder approval by the written consent of our shareholders owning a majority of Beta common stock on or before September 11, 2000 as permitted under Nevada law. This date may be extended by Beta’s management until no later than September 25, 2000. As such, we do not plan on holding a meeting of our shareholders to vote on these matters.
Please take the time to indicate your approval of the merger and the stock option plan by completing and mailing the enclosed consent forms to Beta Oil & Gas, Inc., 6120 S. Yale St., Suite 813, Tulsa, OK 74136. The consent forms are the printed cards which accompany this proxy statement. Instructions relating to the completion of the consent forms are inside.
Steve A. Antry, President and Chairman
Beta Oil & Gas, Inc.
For a discussion of risks which you should consider in evaluating the merger see Risk Factors beginning on page 20.
Neither the Securities and Exchange Commission nor any state securities regulators have approved or disapproved the Beta Oil & Gas, Inc. common stock to be issued under this proxy statement or determined if this proxy statement is accurate or adequate. Any representation to the contrary is a criminal offense.
This proxy statement dated August 9, 2000 was first mailed to shareholders on or about August 11, 2000.
We are requesting that you sign and complete the separate consent forms enclosed with this document on or before September 11, 2000. You are requested to complete, sign on the printed card both on the front and reverse side containing the consent forms and return the printed card in the self addressed postage prepaid envelope to Beta Oil & Gas, Inc., 6120 S. Yale St., Suite 813, Tulsa, OK 74136. By completing and signing the enclosed consent forms, you will be approving:
| 1. The Agreement and Plan of Merger dated November 19, 1999 in which a wholly owned subsidiary of Beta will merge into Red River Energy, Inc., an Oklahoma corporation, and each outstanding share of Red River, will be converted into 2,250 shares of Beta common stock or a total of 2.25 million shares of Beta common stock, and Red River will become a wholly-owned subsidiary of Beta; and |
| 2. the Beta Amended and Restated 1999 Incentive and Nonstatutory Stock Option Plan. |
Approval of the merger proposal is not conditioned on adoption of the stock option proposal. Adoption of the stock option proposal is not conditioned on approval of the merger proposal.
Your board of directors believes that the merger is in the best interest of Beta and its shareholders. Your board has unanimously approved the merger and recommends that you vote for approval of the merger agreement. The board of directors also recommends that you vote to approve the Beta Amended and Restated 1999 Incentive and Nonstatutory Stock Option Plan. The accompanying proxy statement provides detailed information concerning the merger and the stock option plan.
Your consent is important. The approval of the merger agreement and the stock option plan by a majority of Beta shareholders is required under Beta's bylaws and The Nasdaq Stock Market. Please complete, date and sign on the front and reverse side the accompanying printed card containing the consent forms and return them promptly in the enclosed envelope. If you do not complete and return your consent forms, you will, in effect, be voting against such proposals. If you sign and return the enclosed printed card but fail to designate whether you are consenting to or withholding consent to either of the proposals, you will be considered to have consented to and voted for that proposal. If you wish to consent to one but not the other proposal, you must return the consent form and indicate to which proposal you are consenting. Once we receive your consent, you may not revoke it. If your shares are held in street name, the broker will not have discretionary authority to consent to the proposals unless instructed to do so in writing signed by you.
| By Order of the Board of Directors, /s/ Steve A. Antry Steve A. Antry President and Chairman |
August 9, 2000
Table of Contents
Page
----
QUESTIONS AND ANSWERS ABOUT THE BETA/RED RIVER MERGER
AND THE STOCK OPTION PLAN..........................................................1
SUMMARY........................................................................................11
The Companies.............................................................................11
Beta......................................................................................11
Red River.................................................................................11
The Merger................................................................................12
Shareholders' Consent.....................................................................13
Terms of the Merger Agreement.............................................................14
Comparative Per Share Market Price Information............................................14
Risk Factors..............................................................................15
Listing of Beta Commons Stock.............................................................15
The Stock Option Plan.....................................................................15
Summary Financial Data for Beta...........................................................16
Summary Financial Data of Red River.......................................................17
Selected Unaudited Pro Forma Combined Financial Data of Beta and Red River................18
RISK FACTORS...................................................................................20
WHERE YOU CAN FIND MORE INFORMATION............................................................27
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS...........................................28
REQUEST FOR CONSENT OF BETA SHAREHOLDERS.......................................................28
Purpose...................................................................................28
Recommendation of Beta Board..............................................................28
Record Date; Voting Rights................................................................28
Exercise of Consent.......................................................................29
Cost of Requesting Consents...............................................................29
Required Consents.........................................................................29
Share Ownership of Management.............................................................29
PROPOSAL FOR CONSENT TO THE AGREEMENT AND
PLAN OF MERGER DATED NOVEMBER 19, 1999
THE MERGER.....................................................................30
General...................................................................................30
Background of the Merger..................................................................30
Beta's Reasons for The Merger; Recommendation of its Board of Directors...................36
Red River's Reasons for The Merger; Recommendation of its Board of Directors..............37
Material Federal Income Tax Consequences..................................................37
Interest of Red River Management in the Merger............................................37
Percentage Ownership Interest of Red River Shareholders After the Merger..................39
Appraisal Rights..........................................................................39
Resales of Beta Common Stock..............................................................39
THE MERGER AGREEMENT...........................................................................40
General...................................................................................40
Conditions to the Merger..................................................................40
Representations and Warranties............................................................41
Survival..................................................................................41
Conduct of Business Prior to Closing Date.................................................42
Pre-Closing Mutual Covenants..............................................................43
No Solicitation of Other Proposals........................................................43
Arbitration...............................................................................44
Termination...............................................................................44
Consequences of Termination...............................................................44
Amendments................................................................................45
Post Closing Covenants....................................................................45
Registration of Shares of Beta Common Stock...............................................45
PRINCIPAL SHAREHOLDERS OF BETA.................................................................47
DESCRIPTION OF BETA'S CAPITAL STOCK............................................................49
Common Stock..............................................................................49
Stockholder Action........................................................................49
Possible Anti-Takeover Effects of Authorized but Unissued Stock...........................50
Other Anti-Takeover Provisions............................................................50
Certain Charter and Bylaws Provisions.....................................................50
Stockholder Meetings and Other Provisions.................................................51
Transfer Agent and Registrar..............................................................51
Certain Provisions of the Beta Bylaws.....................................................51
MARKET PRICES..................................................................................53
Beta Common Stock.........................................................................53
UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS....................................54
Beta Oil & Gas, Inc. Unaudited Pro Forma Combined Condensed Balance Sheet as
of March 31, 2000......................................................................55
Beta Oil & Gas, Inc. Unaudited Pro Forma Combined Condensed Statement of
Operations For the Year Ended December 31, 1999................................................57
Beta Oil & Gas, Inc. Unaudited Pro Forma Combined Condensed Statement of
Earnings For the Three Months Ended March 31, 2000.....................................58
BETA OIL & GAS, INC. NOTES TO UNAUDITED PRO FORMA
CONDENSED COMBINED FINANCIAL STATEMENTS................................................59
GLOSSARY.......................................................................................60
BUSINESS OF BETA...............................................................................63
General...................................................................................63
Technology................................................................................63
Summary of Oil and Gas Operations.........................................................64
PROPERTIES OF BETA.............................................................................66
Yegua/Frio/Wilcox Trend 3-D Seismic Joint Venture, Jackson County, Texas..................66
Transition Zone Project...................................................................68
Norcal Project, Onshore San Joaquin and Sacramento Basins.................................70
International.............................................................................70
Additional Projects Under Review..........................................................72
General...................................................................................72
Company Reserves..........................................................................72
Well Statistics...........................................................................72
Acreage Statistics........................................................................73
Drilling Activity.........................................................................74
Competition...............................................................................74
Employees.................................................................................74
Premises..................................................................................75
Litigation................................................................................75
Beta's Management Discussion and Analysis of Financial Condition
And Results of Operations.......................................................76
INFORMATION ABOUT RED RIVER....................................................................87
Business of Red River.....................................................................87
Oil and Gas Properties....................................................................88
Legal Proceedings.........................................................................93
Management of Red River...................................................................93
Principal Shareholders of Red River.......................................................94
Red River's Management Discussion and Analysis of Financial Condition
And Results of Operations ......................................................95
ADDITIONAL PROPOSAL FOR THE BETA SHAREHOLDERS
CONSENT TO THE ADOPTION OF THE AMENDED AND RESTATED
1999 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN.............................102
STOCKHOLDER PROPOSALS..........................................................................104
INDEPENDENT ACCOUNTANTS........................................................................104
EXPERTS........................................................................................104
LEGAL OPINIONS.................................................................................104
ANNEX A AGREEMENT AND PLAN OF MERGER.........................................................A-1
ANNEX B RED RIVER ENERGY, INC. AND SUBSIDIARIES CONSOLIDATED
FINANCIAL STATEMENTS...................................................................B-1
ANNEX C BETA OIL & GAS, INC. AND SUBSIDIARIES CONSOLIDATED
FINANCIAL STATEMENTS...................................................................C-1
ANNEX D ONEOK RESOURCES COMPANY STATEMENTS OF REVENUES AND
DIRECT OPERATING EXPENSES OF CERTAIN PROPERTIES SOLD TO
RED RIVER ENERGY, INC..................................................................D-1
ANNEX F BETA OIL & GAS, INC. BETA AMENDED AND RESTATED
1999 INCENTIVE AND NONSTATUTORY STOCK OPTION PLAN......................................F-1
QUESTIONS AND ANSWERS ABOUT THE BETA/RED RIVER MERGER
AND THE STOCK OPTION PLAN
Q: Why are the companies proposing the business combination? Q: What is required to approve the merger and the stock
option plan?
A: We believe that the combined strengths of the two
companies will provide enhanced value to our shareholders A: The written consent by the shareholders owning a
through the addition of proved developed reserves in majority of the issued and outstanding shares of Beta
diverse locations and formations where we are not to the merger and the stock option plan is required
currently located, greater management experience and under applicable law. Such approval is a condition
control in the operation of exploratory and for closing the merger and approving the stock option
underdeveloped prospects as well as developed properties, plan.
a more predictable income stream and diversification of
risks. We believe that our combined strengths will Q: What do I need to do now?
enable us to compete more effectively in the domestic
markets where our interests in properties are currently A: After reviewing this proxy statement, just sign
located. each of the enclosed consent forms and mail them in
the enclosed return envelope as soon as possible .
Q: Please explain the exchange ratio. You may indicate your vote by placing a check mark
inside either the box for "Consents" or the box for
A: Red River shareholders will receive a total of 2.25 "Withholds Consent" on the enclosed consent forms. If
million shares of Beta common stock in exchange for their you sign and return the enclosed consent forms to the
shares of Red River common stock. After the merger, the Company without checking either of these boxes, such
Red River shareholders will own approximately 18.4‰ consent forms will be treated as though you consented
of the total outstanding shares of Beta common stock. to both the proposed merger and the adoption of the
stock option plan. Once we receive your consent, it
Q: Will I be able to sell my shares of Beta common stock? may not be revoked. The board of directors of Beta
unanimously recommend voting in favor of the proposed
A: Beta common stock, is listed on the Nasdaq Small Cap merger and the stock option plan.
Market and unless you are subject to special restrictions
your stock is freely tradable. Approval of the merger proposal is not conditioned on
adoption of the stock option proposal. Adoption of
Q: Who can consent to the merger and the stock option plan? the stock option proposal is not conditioned on
approval of the merger proposal. A separate consent
A: Only holders of record of the Beta common stock and the form is provided for approval of each of the merger
Red River common stock as of the close of business agreement and the stock option plan.
on July 17, 2000 will be entitled to consent to the
merger and approve the merger agreement and the stock If you are opposed to either the merger or the stock
option plan. option plan, you do not need to return the consent
form for that proposal.
The shares of Beta common stock have been issued in the
names of the Red River shareholders but are being held in
escrow by a third party escrow agent. The 2,250,000
escrowed shares will not be voted by the escrow agent for
either of the proposals.
QUESTIONS AND ANSWERS ABOUT THE BETA/RED RIVER MERGER
AND THE STOCK OPTION PLAN
(Continued)
Q: If my shares are held in “street name” by my Q: When do you expect the merger to be completed?
broker, will my broker be entitled to consent on
my behalf? A: We expect to complete the merger as soon as
possible after receiving written consent from
A: Your broker will be entitled to complete and sign the shareholders owning a majority of the
the Consent Form with respect to the number of issued and outstanding shares of Beta, but not
shares beneficially owned by you only if you earlier than September 11, 2000. We are requesting
provide your broker with instructions regarding such consents be returned by no later than
your preference to consent to, or withhold September 11, 2000.
consent as to, the merger, the merger agreement
and the stock option plan. Q: Whom should I call if I have any questions?
Q: Should I send in my stock certificate now? A: Beta shareholders who have questions about
the merger may call and speak to any Beta
A: No. Beta shareholders will keep their current corporate officer at (800) 866-8055.
certificates. Red River shareholders will receive
stock certificates for the Beta shares at closing.
This summary highlights selected information from this proxy statement and may not contain all of the information that is important to you. To understand the merger more fully and for a more complete description of the legal terms of the merger, you should read carefully this entire document. The merger agreement is attached as Annex A. We encourage you to read the merger agreement. It is the legal document that governs the merger. The stock option plan is also attached as Annex D and we encourage you to read it.
The terms "Beta", "we", "us" and "our" as used throughout this proxy statement refer to Beta Oil and Gas, Inc. References to "Red River" mean Red River Energy, Inc. and its wholly owned subsidiary, Red River Energy, LLC.
The Companies in the L.L.C. for shares of stock in Red River
Energy, Inc. As a result, Red River Energy,
Beta (see pages 63) L.L.C. became a single member limited
liability company which is wholly owned by Red
Beta is an oil and gas company organized in June River Energy, Inc. Most of the Red River
1997 to participate in the exploration and assets are held by and the operations
production of natural gas and crude oil. Our conducted by Red River Energy, L.L.C. Red
operations are currently focused in proven oil and River's operations to date have consisted
gas producing trends primarily in South Texas, primarily of the acquisition and operations of
Louisiana and Central California. Our wholly producing oil and gas properties in central
owned subsidiary, BETAustralia, LLC, participates Oklahoma and drilling and development
in the exploration for oil and gas in Australia. operations involving coal bed methane reserves
in eastern Oklahoma. Red River also owns a
To date, we have relied almost exclusively on natural gas gathering system, which is a
joint ventures with qualified operating oil and system of pipelines which carry natural gas
gas companies to operate our projects through the from producing gas wells in a particular area
exploratory and production phases. This has to a connection point on a main pipeline.
reduced general and administrative costs necessary
to conduct operations. As of the date of this Its principal focus is on the acquisition of
document, we were operating only one of our desirable producing oil and gas properties,
projects. with the intent of enhancing the production
and revenues from the properties through
We believe that 3-D seismic surveys have reduced efficient operations, aggressive marketing
the risk of oil and gas exploration in certain efforts, drilling on available development
areas. Recognizing this change, we have locations and conducting workover and enhanced
participated in the acquisition of prospective recovery operations.
acreage blocks for targeted, proprietary, 3-D
seismic surveys. From the data generated by the On June 15, 2000, Red River completed an acquisition
initial proprietary seismic surveys, covering 313 of producing oil and gas properties from ONEOK
square miles, we have identified in excess of Resources for an adjusted purchase price of
200 potential drillsites. approximately $5.6 million.
Red River has a management team with substantial experience
in the evaluation, acquisition, operation and
Red River (see pages 87) marketing of oil and gas reserves. At June 5, 2000,
Red River had 14 full-time employees, including
7 professionals with a combined total of 120
years of experience in the oil
Red River Energy, L.L.C. was formed in 1997 and gas business. It is expected that after
and commenced operations in early 1998. the merger, these persons will all continue to
In November 1999, the members of Red be employed by Red River, which will be
River Energy, L.L.C. exchanged their interests renamed Beta Operating Company, and will act
primarily as the producing property
acquisition and operating team of Beta.
The Merger (see pages 30) Material Federal Income Tax Consequences. The
merger is intended qualify as a
General. In the merger, Beta Acquisition Company, “reorganization” within the meaning of Section
our wholly owned subsidiary, will merge into Red 368(a) of the Internal Revenue Code of 1986,
River, with Red River being the surviving as amended. As such a reorganization,
company. Following the completion of the merger, generally no gain or loss will be recognized
Red River will be a wholly-owned subsidiary of for United States federal income tax purposes
Beta, and each of the 1,000 shares of Red River by the shareholders of Red River upon the
common stock will be converted into 2,250 shares exchange of their Red River common stock for
of Beta common stock. Beta will issue a total of shares of Beta common stock in the merger.
2,250,000 shares of Beta stock to the Red River Shareholders of Red River are urged to consult
shareholders. their own tax advisors regarding the specific
Recommendation of the Beta Board. The Beta board tax consequences to them of the merger,
of directors believes that the proposed merger and including the application of state, local and
the share issuance are fair to and in the best foreign tax laws, as well as federal tax laws.
interests of Beta and its shareholders and has
unanimously approved the merger agreement. The Accounting Treatment. The merger is intended
Beta board unanimously recommends that the to be accounted for as a purchase
shareholders of Beta vote in favor of the adoption under applicable accounting rules.
of the merger agreement and the merger.
Exchange of Stock Certificates. At the closing of Record Date. You may vote for approval of the
the merger, each Red River stockholder will merger by written consent if you owned Beta
receive a certificate representing the number of common stock on June 5, 2000, the
shares of Beta common stock into which the Red record date. You may cast one vote for each
River stockholder's shares have been converted. share you own.
Appraisal Rights. Beta shareholders are not Directors and Officers of Beta After Merger.
entitled to appraisal rights under Nevada Law. The board of directors after the merger will
Since the Red River shareholders have signed the consist of six directors, including Rolf N.
merger agreement and have therefore committed to Hufnagel, who as President of Red River is
approve the merger agreement, they will not be required under the merger agreement to be
entitled to exercise appraisal rights they would appointed as an additional director of Beta.
otherwise have. Mr. Hufnagel was elected as a director
at our annual meeting of shareholders held
June 24,2000. Mr. J. Chris Steinhauser,
a former director and Chief Financial Officer of
Beta, has resigned as an officer and did not stand for re-election to
the Beta board of directors. The other officers of Beta after
the merger will continue to be the same
persons serving in the same positions as of
the date of this document, except that
Joseph L. Burnett has been elected as
Chief Financial Officer for Beta.
Shareholders' Consent (see page Annex E) Conditions to the Merger. The completion of
the merger depends upon the satisfaction of
Approval of the merger agreement and the merger various conditions unless otherwise waived,
which upon completion will result in the issuance which include :
of shares of Beta common stock to the Red River
shareholders will require the written consent of |X| requisite approval of the merger
the holders of a majority of the issued and agreement and the merger by our
outstanding shares of Beta common stock. Our shareholders
management and employees own 25 % of the issued ;
and outstanding Beta common stock and will consent
to the adoption of the merger agreement and the
merger. All of the Red River shareholders signed
the merger agreement and agreed to vote their
shares in favor of the merger.
Once we receive your consent, it is not revokable. |X| no party has intentionally and
fraudulently misrepresented or willfully
breached any material representation or
warranty made to the other party as set
Terms of Merger Agreement forth in the merger agreement; and
(see pages 30) |X| absence of any litigation, action or
proceeding whether pending or threatened
The Agreement and Plan of Merger is attached to before any consent or governmental agency
this document as Appendix A. You are encouraged seeking to restrain or prohibit the
----------
to read the merger agreement in its entirety as it
is the legal document which will govern the merger.
General. The merger agreement provides that our ;
wholly owned subsidiary, Beta Acquisition Company,
Inc., an Oklahoma corporation will be merged with
and into Red River. The name of the surviving
corporation will be changed to Beta Operating
Company. As a result of the merger, the Red River
shareholders will receive 2,250 shares of Beta
common stock for each share of Red River common
stock owned by them or a total of 2,250,000 shares
of Beta common stock.
In addition, we will execute a guaranty of Red
River's indebtedness to the Bank of Oklahoma in
substitution of the personal guarantees of the Red
River shareholders. The Red River shareholders
have personally guaranteed approximately
$3,000,000 of the total $13,300,000 of
indebtedness to the Bank of Oklahoma. Solicitation. Until completion or termination
of the merger, the Red River shareholders and
Red River are not permitted to enter into,
request, solicit or engage in any discussions,
negotiations, understandings or agreements
with anyone other than Beta or its subsidiary
relating to the merger consolidation or sale
of Red River or its stock, properties and
assets other than in the ordinary course of
business.
Terms of Merger Agreement Termination. The merger agreement may be
(Continued) terminated by written notice under certain
circumstances as follows:
Registration of Shares. We are obligated under the
Merger Agreement to register the 2.25 million |X| the mutual consent of the parties;
shares of Beta common stock which will be issued to
the Red River shareholders upon completion of the |X| a party if the other party shall have
merger. Such registration shall permit the resale fraudulently and intentionally
in the market from time to time of such shares by misrepresentated
the Red River Shareholders or certain of their any representation of a
assignees. We are required to prepare and file material nature or willfully breached any
such registration statement by no later than material warranty made in the merger
June 30, 2000 and we expect that it will be filed agreement and the misrepresentation or
very shortly after this proxy statement is first breach
mailed to our shareholders. We are further
required to use our best efforts to have the
registration statement declared effective promptly has not been cured within the earlier of
after such filing, although we have no control over 30 days after notice of the
the timing of the effectiveness of such misstatementmisrepresentation or breach
registration statement. or the date of closing of the merger
agreement; or
The Red River
Shareholders have agreed to suspend any sales of |X| either party if the merger is not
their shares under completed on or prior to December
the registration statement 31, 2000 so long as such party is not the
if there exist certain cause for such failure of completion;
conditions which we consider would be significantly
disadvantageous to us due to, among other
conditions, the existence of a material financing
or other matured transaction not publicly disclosed
or the unavailability of required financial
statements beyond our control. Any such suspension
shall continue until such disadvantageous condition
is removed or 60 consecutive days or 180 days in
any 12 month period.
The Red River Shareholders are also given piggyback
registration rights which obligates Beta to include
their shares in any subsequent registration
statement filed by Beta with the Securities Comparative Per Share Market Price Information
Exchange Commission. (see page 53)
Fees and Expenses. Each party to the merger
agreement is required to pay its own expenses, Beta common stock is listed on the Nasdaq
including attorneys' fees and costs if the merger National Market under the symbol "BETA". On
is completed or the merger agreement is terminated
by mutual consent or the merger is not completed by November 18, 1999, the last full trading day
December 31, 2000. on the Nasdaq Small Cap Market prior to the
public announcement of the proposed merger,
Beta common stock closed at $8 1/8 per share.
On June 5, 2000, Beta common stock
closed at $8 7/8 per share.
Risk Factors (see pages 20) Listing of Beta Common Stock
(see pages 39)
In evaluating the proposed merger under the merger
agreement, the shareholders of Beta and the Red As a condition of the merger agreement, we
River Shareholders should consider in their will list the shares of Beta common stock to
entirety the various risk factors discussed on be issued in the merger on the Nasdaq
pages 20 through 26 of this document, including National Market System if we
among other factors: are then qualified for listing on that stock
exchange.
• the possible inability of
integrating the independent operations of Beta
and Red River and realizing the benefits of
the merger; The Stock Option Plan
(see pages 84)
In addition to approving the merger agreement
• the dilution which will be experienced by and the merger, each holder of Beta common
our shareholders following the merger; stock is being asked to consent to the
adoption of Beta's Amended and Restated 1999
Incentive and Nonstatutory Stock Option Plan.
The stock option plan was adopted by our board
of directors on August 27, 1999 for the
benefit of our employees. A total of 700,000
shares of Beta common stock representing
7.4% of the issued and outstanding Beta
common stock on the date of this document have
been reserved for issuance upon exercise of
the options to be granted under the stock
option plan to our employees, officers and
directors as incentive compensation to
encourage them to contribute to our future
success through their collective efforts.
• the need by the combined company for
additional financing in the immediate future The terms of the stock option plan are
to fund its growth and the uncertainty of its discussed on the pages listed above. Stock
ability to raise such financing. options which may be exercised immediately
upon shareholder consent for a total of 97,500
• the exposure of the properties of the shares of Beta common stock have been granted
combined company to wider price fluctuations to a total of 6 employees. Of this amount,
in production than has been experienced by stock options for a total of 95,000 shares of
Beta during the past few years as a result of Beta common stock have been granted to our
Red River's larger emphasis on oil production; officers and directors.
• the higher ratio of operating expenses to The exercise price of the stock options will
revenues which the combined company will be no less than the fair market of Beta common
experience due to the more mature nature of stock as quoted on the over-the-counter market
Red River's oil and gas properties; and at the close of market on the date each such
stock options are granted to the optionees.
• the uncertainty of the commercial
viability and profitability of Red River's
coal bed methane interests.
• the fact that we are acquiring Red
River for a consideration equal to $10.75
per barrel equivalent which is a price
significantly higher than the market value
of Red River's proved reserves.
• the fact that we did not engage a separate
engineering firm to evalue the proved and
unproved reserves of Red River and there has
been no third party engineering firm assessment
of the unproved reserves of Red River.
The following table presents selected historical financial data for Beta derived from Beta's Financial Statements. The following data is only a summary and should be read with Beta historical financial statements and related notes contained in this document. These financial statements provide further information about significant events that impacted Beta's financial condition.
For the
period
from The year The year
inception ended ended The three The three
(June 6, December December months ended months
1997) to 31, 1998 31, 1999 March 31, ended March
December 1999 31, 2000
31, 1997
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(Unaudited) (Unaudited)
Revenues
Oil and gas sales $ - $ - $ 1,199,480$ 29,664 $ 940,250
------------- ------------ ---------------------------- -------------
Costs and expenses:
Lease operating - - 81,538 9,035 33,888
expense
General and 245,452 746,769 1,418,240 258,245 489,633
administrative
Impairment expense - 1,670,691 1,224,962 - -
Depreciation and 1,530 11,883 914,233 12,415 561,072
depletion expense
------------- ------------ ---------------------------- -------------
Total costs 246,982 2,429,343 3,638,973 279,695 1,084,593
and expenses
------------- ------------ ---------------------------- -------------
Loss from operations (246,982) (2,429,343) (2,439,493) (250,031) (144,343)
Other income and (expense):
Interest expense - - (2,966,651) (466,348) (1,096)
Interest income 45,409 44,843 21,741 2,275 20,013
------------- ------------ ---------------------------- -------------
Net loss $ (201,573) $(2,384,500) $ (5,384,403)$ (714,104) $ (125,426)
============= ============ ============================ =============
Basic and diluted loss per $ (.05) $ ($.37) $ ($.66)$ ($0.10) $ ($0.01)
common share
============= ============ ============================ =============
Dividends per common share $ - $ - $ - $ - $ -
============= ============ ============================ =============
Book value per common share $ 1.63 $ 1.89 $ 2.19$ 2.03 $ 2.24
============= ============ ============================ =============
December December December March 31,
31, 31, 31, 2000
1997 1998 1999
------------ ----------- ------------ ------------
(Unaudited)
Working capital.................. $ 3,117,351 $ (96,457) $ 2,034,268 $ 2,847,116
Oil and gas properties, net...... $ 5,900,794 $ 13,183,304 $ 18,104,598 $ 18,047,061
Total assets..................... $ 9,921,057 $ 13,618,471 $ 20,881,475 $ 21,818,227
Total long term debt............. $ - $ - $ 27,939 $ 21,139
Total liabilities................ $ 870,847 $ 319,129 $ 293,238 $ 238,952
Shareholder's equity............. $ 9,050,210 $ 13,299,342 $ 20,588,237 $ 21,579,275
The following table presents selected historical financial data for Red River derived from Red River's Financial Statements. The following data is only a summary and should be read with Red River historical financial statements and related notes contained in this document. These financial statements provide further information about significant events that impacted Red River's financial condition.
The year The year
ended ended The three The three
December December months ended months ended
31, 1998 31, 1999 March 31, March 31,
1999 2000
------------- ------------- -------------- --------------
(Unaudited) (Unaudited)
Revenues: $ 865,356 $ 3,188,758 $ 499,635 $ 1,109,347
------------- ------------- -------------- --------------
Costs and expenses:
Operating costs 316,533 1,296,775 315,624 379,201
General and administrative 685,573 980,627 261,074 329,281
Depreciation and depletion 182,747 586,095 97,892 176,321
expense
------------- ------------- -------------- --------------
Total costs and 1,184,853 2,863,497 674,590 884,803
expenses
------------- ------------- -------------- --------------
Income (loss) from operations (319,497) 325,261 (174,955) 224,544
Other income and (expense):
Gain (loss) on sale of fixed (20,000) 2,438 2,438 -
assets
Interest expense (168,851) (512,264) (104,757) (151,761)
Other, net (1,318) - 214 -
------------- ------------- -------------- --------------
Net Income (loss) $ (509,666) $ (184,565) $ (277,060) $ 72,783
============= ============= ============== ==============
Basic and diluted loss per common $ (509.66) $ (184.57) $ (277.06) $ 7.15
share
============= ============= ============== ==============
Dividends per common share $ - $ - $ - $ -
============= ============= ============== ==============
Book value per common share $ 730.25 $ 562.27 $ 514.79 $ 635.05
============= ============= ============== ==============
December December March 31,
31, 31, 2000
1998 1999
----------- ------------ ------------
(Unaudited)
Working capital $ (92,758) $ (1,963,547) $ (1,964,424)
Oil and gas properties, net $ 6,230,565 $ 8,057,930 $ 8,147,447
Total assets $ 7,658,080 $ 10,969,027 $ 11,172,945
Long-term debt $ 6,421,095 $ 7,767,386 $ 7,742,804
Total liabilities $ 6,927,835 $ 10,406,758 $ 10,537,893
Stockholder's equity $ 730,245 $ 562,269 $ 635,052
The merger is intended to be accounted for using the purchase method of accounting, which means that for future accounting and financial reporting purposes, we will treat our companies as a combined company commencing on the date the merger is effective.
The following unaudited pro forma combined summary financial data is presented to reflect the merger under the Agreement and Plan of Merger and the acquisition of the ONEOK properties under the purchase and sale agreement between Red River and ONEOK Resources Company on (1) the unaudited historical balance sheet data as of March 31, 2000, and (2) the unaudited historical statements of operations data for the year ended December 31, 1999 and the three months ended March 31, 2000 of Beta and Red River.
The selected pro forma balance sheet data gives effect to this transaction as if it had taken place on March 31, 2000. The selected pro forma combined statements of operations data reflects this transaction as if it had taken place at the beginning of the period presented.
For financial accounting purposes, it is expected that the merger will be accounted for using the purchase method of accounting. Therefore, Beta's cost to acquire Red River, calculated to be $14.455 million assuming an average Beta common stock price of $6.38 per share with 2,250,000 shares issued to the stockholders of Red River, will be allocated to the assets acquired and liabilities assumed according to their fair values.
The ONEOK properties were acquired on June 15, 2000 for total consideration of $5,608,809, subject to additional post-closing adjustment for the final accounting of net revenues and operating expenses from the effective date to the closing. Such adjustment will be determined within 90 days after closing. The acquisition of the ONEOK properties was funded through additional borrowings under the Red River line of credit. In connection with the merger, Beta and Red River will incur approximately $100,000 (pre tax) in nonrecurring merger costs related to legal, accounting, consulting and other costs. These costs are included in the total purchase price noted above.
The pro forma information also does not reflect any additional expenses or any cost savings and other synergies anticipated by Beta's management as a result of the merger. The companies may have performed differently if they had actually been combined. You should not rely on the pro forma information as being indicative of the actual historical results that we would have had or the future results that we will experience after the merger.
December 31, March 31,
1999 2000
------------- -----------
Selected unaudited pro forma combined
financial data
Revenues.......................... $ 6,475,622 $ 2,707,207
Net income (loss)................. $ (8,027,996) (2,513,317)
Total assets...................... $ - $49,627,000
Long term debt.................... $ $13,372,752
Comparative per share data
Beta historical
Earnings per share-basic and diluted..$ (.66) $ (0.01)
Dividends per common share........... $ - $ -
Book value per share......... $ $ 2.24
Red River historical
Earnings per share-basic and diluted. $ (184.57) $ 72.78
Dividends per common share........... $ - $ -
Book value per share.............. $ $ 635.05
Beta pro forma combined
Earnings per share-basic and diluted. $ (.77) $ (0.21)
Dividends per common share........... $ - $ -
Book value per share................. $ $ $ 2.79
Red River pro forma equivalent
Earnings per share-basic and diluted. $ (1,746.03) $ (1,130.20)
Dividends per common share........... $ - $ -
Book value per share................. $ $ 6,279.71
In deciding whether to approve the merger, there are a number of risks, some of which are inherent in the oil and gas industry, which you should consider in connection with the merger and the acquisition of shares of Beta common stock following the merger. You should carefully consider these risks along with the other information contained in this document. The risks discussed below should not be considered as exhaustive of all of the risks which may be involved in the merger and the acquisition of such shares. You should also refer to the cautionary note regarding "Forward Looking Statements" on page 28.
We may not succeed in integrating the separate and independent operations of Beta and Red River and realize the benefits we are seeking in the merger.
Realization of the benefits sought from the merger will depend upon the ability of Beta and Red River as a combined company to integrate successfully the separate management, properties, activities and operations as currently in place. We may not be able to integrate our operations with those of Red River without the loss of key employees, customers or suppliers; loss of revenues; increases in operating or other costs; or other difficulties which may arise as a result of the merger. If we are unable to better utilize the revenues of the two companies on a combined basis as compared to the separate revenues of each company on a stand alone basis and achieve integration in a timely and coordinated manner, the financial condition, operating results and cash flow of either or both companies to the merger could be adversely affected. We may not be able to realize the operating efficiencies and other benefits sought from the merger.
Red River's properties have tended to be more susceptible to wider variations in the pricing of production from its properties than experienced by Beta during the past few years.
Historically, Red River has derived over 20% of its revenues from the production of oil. This percentage will increase to approximately 40% as a result of Red River's acquisition of the ONEOK Properties described under Information About Red River - Oil and Gas Properties and Red River's Management Discussion and Analysis of Financial Condition and Results of Operations - Plan of Operation for 2000. Beta only derives 4% of its revenues from oil. While the prices for both oil and gas have been very volatile during the past several years, the prices of oil have tended to fluctuate within a wider range than the prices of natural gas during the past 12 months. For example, the quoted price for a near month contract barrel of "West Texas Intermediate" crude oil on the New York Mercantile Exchange on March 14, 1999 was $32.02 and had ranged between a high of $34.37 per barrel to a low of $13.03 per barrel during the preceding 12 months. This represents a price variation of approximately 163% during the 12 month period. The Henry-Hub natural gas price as quoted on the New York Mercantile Exchange during the same period has fluctuated from a high of approximately $2.88 per Mcf. to a low of approximately $2.02 per Mcf, or a price variation of 43% during such period.
As a result of the merger, Beta will be more susceptible to the larger variations in oil prices as compared to the relatively smaller price swings experienced with natural gas.
Because Red River's oil and gas properties are more mature than Beta's oil and gas properties, the costs of operating Red River's properties as a percentage of revenues generated from its properties is higher than the expense/revenue ratio as regards Beta's oil and gas properties.
Substantially all of Red River's oil and gas properties have been on production for more than 40 years. All Beta's producing oil and gas properties have been on production for a year or less. Since the production from oil and gas wells declines over time and since many of the costs of operating these wells are fixed costs, the operating costs for older wells tend to be a much higher percentage of the revenues from those wells. Red River's properties also produce substantially higher volumes of saltwater than the Beta properties. This higher water production will not be able to be lowered significantly and will probably increase significantly in the future when recompletions are performed on the wells, This will increase the operating costs of the Red River properties even further. Red River's operating expenses were 40% of oil and gas revenues for 1999. By contrast, Beta's operating expenses were 7% of oil and gas revenues during the same period. Following the merger, Beta's profit margins will be more vulnerable to any reduction in the prices of oil and gas which may occur in the future. Lower oil and gas prices in the future could negatively impact the continued viability of certain properties to be acquired from Red River. In addition, this condition could adversely affect the overall profitability of the combined company's operations.
The market price of shares of Beta common stock could decrease, due to the issuance of shares to the Red River shareholders.
The number of shares of Beta common stock issued and outstanding following the merger will increase by 2.25 million shares which represents the number of shares which the Red River shareholders will receive in the merger subject only to a limited adjustment required to be made for a breach or misstatement by either Red River or the Red River shareholders, or Beta as provided in the merger agreement. It is currently anticipated under the merger agreement, as amended, that the shares to be issued by the Company to the Red River shareholders will be registered for resale pursuant to a shelf acquisition registration statement which could be declared effective at the time of the closing of the merger. The market price of the shares of Beta common stock could be depressed if such shareholders were to sell a large block of such shares on The Nasdaq Stock Market at any one time. As a consequence, existing Beta shareholders wishing to sell their shares in the future may either be unable to sell their shares at a particular time due to insufficient demand to absorb the large block of shares which may be sold by one or more Red River shareholders at that time, or be forced to sell their shares at depressed market prices.
Existing shareholders of Beta common stock will experience dilution in their stock ownership as a result of the merger.
The merger agreement provides that the Red River shareholders will receive 2.25 million shares of Beta common stock which will be released from escrow by the escrow agent upon the closing of the merger. Such number of shares represents approximately 18% of the total issued and outstanding shares of Beta common stock as of the date of this document. The escrowed shares will be treated as issued and outstanding but will not be voted by the escrow agent as to the two proposals relating to the merger agreement and the stock option plan. These shares will be returned to Beta by the escrow agent for cancellation if the Beta shareholders do not approve the merger.
In addition to reducing the percentage ownership of each existing shareholder of Beta common stock, the issuance of the shares of Beta common stock in connection with the merger may have the effect of reducing our net income per share from current levels or levels which may otherwise be expected. This could reduce the market price of the shares of our common stock following the merger unless revenue growth or cost savings and other business synergies sufficient to offset the effect of such issuance can be achieved, which is uncertain.
Further dilution in the percentage ownership of each existing shareholder would occur if we were to terminate the services of our President and Chairman of the Board of Directors, Mr. Steve A. Antry. Under his employment contract, dated June 23, 1997, if Mr. Antry's employment is terminated by us without cause, we are required, among other items, to grant Mr. Antry over a 5 year term an option to purchase shares of Beta common stock equal to 10% of the then issued and outstanding shares of Beta common stock at an exercise price equal to the lesser of 60% of the fair market value of the shares during the 60 day period preceding the termination notice or $3.00 per share.
Due to amendments to the merger agreement, Beta will be obligated to close the merger transaction even though certain conditions have not been satisfied prior to the closing date as originally contemplated under the merger agreement.
The parties to the merger agreement entered into the first amendment and second amendment to such agreement effective as of January 19, 2000 and February 14, 2000, respectively. Under the first amendment, as a good faith condition of the merger, Beta issued in the name of each Red River shareholder their proportionate share of the 2.25 million shares of its common stock and deposited the stock certificates with a third party escrow agent to be held in escrow until the closing of the merger. Under the second amendment, the parties agreed to reduce from 15 to 3 the number of conditions required to be satisfied by Red River as a condition of Beta's obligation to close under the merger agreement. The three conditions which will excuse Red River from performing under the merger agreement are limited to
Beta, as a consequence of such amendment, will be required to close the merger transaction, even though certain conditions as set forth in the merger agreement have not been performed or satisfied by Red River or the Red River shareholders as originally contemplated under such agreement and such failure of performance would adversely affect the value or the advantages of the merger for Beta.
The combined company will need additional financing in the next six months to fund its aggressive growth strategy and failure to obtain such financing would not only hamper its ability to expand its oil and gas operations but could result in a contraction of its business and activities.
We expect that we will be required to invest substantial funds for purposes of developing the oil and gas properties which will be acquired by the combined company as a result of the merger. In addition, we will continue our aggressive program to identify, acquire and develop exploratory projects that meet certain criteria in the year 2000 and the future years after such year. Furthermore, as a result of the Merger, we will be assuming existing Bank of Oklahoma debt owed by Red River which is currently in the amount of approximately $13.3 million. Such anticipated expenditures will require large amounts of capital in excess of the anticipated working capital from the operations of the combined companies. Our ability to raise additional capital through public or private debt or equity financing to meet our financial requirements is uncertain. We may not be able to raise such funds. Failure to raise such additional funds could materially adversely affect
If additional financing is obtained by us, such financing
We depend substantially on the continued presence of key personnel for critical management decisions and industry contacts.
Our future performance following the merger will be substantially dependent on the performance of our executive officers and key employees. The loss of the services of any of the executive officers or other key employees of Beta or Red River for any reason could have a material adverse effect on our business, operating results, financial condition and cash flows after the merger.
Among our reasons for the merger is to obtain the experience and expertise in oil and gas property acquisitions, operations and financings that the management of Red River possesses and their particular knowledge with respect to the oil and gas properties owned and operated by Red River. Should one or more members of the Red River management team leave the company, we could lose a substantial portion of this anticipated benefit of the merger.
The Beta Board has not engaged an investment banking firm to provide a fairness opinion about the merger.
In evaluating the terms of the merger and whether it is in the best interests of Beta and its shareholders, the Beta Board relied upon the experience and analytical skills of its members. It has not engaged an investment banking firm to render an opinion on the fairness of the merger to the Beta shareholders from a financial point of view. The Beta Board believes that the merger is fair to the Beta shareholders and is in their best interests but there is no assurance that the same conclusion would be reached by an investment banking firm if one had been hired to provide a fairness opinion.
The Beta Board did not obtain a separate reserve engineering report in evaluating the proved oil and gas reserves for Red River.
In estimating the value of the Red River proved oil and gas reserves, we relied primarily on the Ryder Scott Company report of September 1, 1999 which is described under THE MERGER - Background of the Merger. This report was commissioned by Red River after preliminary discussions regarding a possible merger had begun. The future pricing and cost and certain assumptions used by Ryder Scott were those provided by Red River, we were aware of the assumptions being provided and agreed that they were appropriate for the purposes of the report and our evaluation of the Red River reserves. Nevertheless, if we had engaged a different engineering firm to provide a separate report for us, it very well could have reflected a more conservative value for the Red River proved reserves and may have resulted in a lower price for Red River than the 2,250,000 shares we have committed to pay which equates to $10.75/BOE equivalent of the Red River proved reserves using the assumptions and figures discussed on page 33.
The Beta Board did not obtain a third party reserve engineering report in evaluating the unproved oil and gas reserves for Red River.
The purchase price for Red River is substantially higher than we or any other party would typically pay to purchase only the proved reserves of Red River. We have committed to pay this higher value because of the experienced management and acquisition team that we will be acquiring, as well as the unproved reserve potential of the Red River properties, particularly the West Edmond Hunton Lime Unit properties. In analyzing these unproved reserves, we and the Red River personnel reviewed the drilling and production history of the WEHLU properties and the experiences of owners of those properties over the 50 to 60 years since that field was first developed. We also looked at results of new production techniques utilized in the same or similar geological zones in other regions. The $10.75/BOE value of proved reserves attributable to the WEHLU roperties of Red River, based on the assumptions and figures discussed on page 33 is substantially more than the approximately $2.11/BOE of proved reserves price that Red River paid for those properties in 1998. The ultimate value that we may realize from the unproved reserves attributable to the WEHLU properties is very speculative and the actual reserves discovered and produced could be substantially less than we have estimated. Neither we nor Red River engaged a third party engineering firm to assess these unproved reserves. Estimates of probable and possible oil and gas reserves, even when made by independent engineering firms, are highly speculative and subject to numerous risks and uncertainties. We did not believe that a third party engineering report would have materially improved our assessment of the potential and the risk of these unproved reserves. Based upon our experience in the oil and gas industry, our knowledge of the Red River personnel and the history and status of the Red River properties, we believe that the price being paid for Red River is fair and the acquisition of Red River is in the best interests of our shareholders. Nevertheless, you should be aware of the substantial risks involved in acquiring probable and possible reserves in amounts of this magnitude and realize that this acquisition could result in substantial losses and possibly liquidity problems to us in the future if the expected reserves are not developed, if the costs of developing these reserves significantly exceed our present estimates or if oil and gas prices fall significantly below the projections we have made for the future. The coal bed methane operations of Red River have not yet been proven to be a commercially viable venture.
Red River has committed approximately $2.2 million to the exploration, development, production and marketing of coal bed methane. At December 31, 1999, it had drilled a total of 47 wells for this purpose. However, the commercial viability of these wells cannot be determined until they have produced gas and water for a period of 12 to 24 months. No assurances can be given that these operations will prove to be profitable to Beta.
Red River's hedging activities could result in losses to Beta.
Red River has used, and expects to continue using, energy swap arrangements and financial futures to reduce the volatility of natural gas prices. Beginning July 1, 2000, Red River has one-year commitments to sell 2,700 Mmbtu of natural gas per day at a price of $3.085 per Mmbtu, representing approximately 50% of its current daily gas production. If the market price of natural gas were to increase substantially over the period of the hedging arrangements, Beta could lose significant revenues compared to what it would receive without the hedging commitments. Red River expects to continue to use hedging arrangements as part of its future gas marketing strategy.
Red River has substantial long-term indebtedness.
At December 31, 1999, Red River's consolidated long-term indebtedness was approximately $10,000,000, of which approximately $7,700,000 is payable to the Bank of Oklahoma. Beta has agreed to guaranty $3,000,000 of the approximately $7,700,000 indebtedness with the Bank of Oklahoma. In addition, as a result of its acquisition of properties from ONEOK Resources, which closed June 15, 2000, Red River has increased its indebtedness with the Bank of Oklahoma by approximately $5,600,000 for a total indebtedness with that bank of approximately $13,300,000. With the completion of the purchase of the ONEOK Properties, Red Rivers consolidated long-term indebtedness, including the current portion, has increased to approximately $15,600,000. This amount is substantially higher than Beta's current long-term debt of $28,000. To the extent of the Bank of Oklahoma indebtedness, which will be assumed by Beta upon completion of the merger, Beta's investment in Red River will be exposed to the risk of loss associated with properties acquired which are significantly leveraged. Although financing a substantial portion of the acquisition or development costs of properties acquired or developed permits a company like Red River to acquire and develop larger or more valuable properties and drill more exploratory wells than would be the case if such acquisition or development was financed solely by Red River's capital, such financing has also increased its exposure to losses and therefore Beta's exposure to losses following the completion of the merger. The loan is secured by Red River's interests in the oil and gas properties which are being acquired and will be owned by the combined company. Except to the extent the terms of the loan permit the deferral of a portion of the interest payments to the lender, principal and interest payments will be required to be made by Beta regardless of whether the interests in the properties being acquired by the combined company from Red River are producing income sufficient to make such payments. If such loan is not paid when due, Beta could sustain a loss on its investment as a result of the foreclosure by the lender on the interests in the properties being acquired by the combined company.
Title to the properties in which we have an interest may be impaired by title defects.
We have and will continue to depend on Red River to obtain title opinions on properties which it is currently drilling as well as properties to be drilled or acquired in which the combined company will have an interest following the merger. We have independently conducted title examinations of the Red River properties. However, there is no assurance that we will not suffer a monetary loss from title defects or failure arising from the Red River properties. Under the terms of the operating agreements affecting those properties, any monetary loss arising from title failure or defects with respect to the oil and gas properties being acquired from Red River as a result of the merger is to be borne by all parties to any such agreement in proportion to their interest in such property. If there are any title defects or defects in assignment of leasehold rights in properties in which Red River holds an interest, we will suffer a financial loss.
We cannot be certain that the insurance coverage maintained by us or Red River will be adequate to cover all losses which may be sustained in connection with the oil and gas activities with respect to the Red River properties.
Red River has purchased and currently maintains workers compensation and general liability insurance with respect to its ownership and operating activities on the oil and gas properties in which it owns an interest and/or acts as the operator. In addition, we have purchased and are maintaining a general liability policy with a total limits on claims of $2,000,000 and a workers compensation policy to provide added insurance if the coverage provided by an operators policy is inadequate to cover our losses. The Red River policy, our policy, and the policies maintained by our third party operators, which have limits ranging from $10,000 to $20,000,000 depending on the type of occurrence generally cover:
A loss in connection with the oil and gas properties in which Red River has an interest and which are being transferred to the combined company as a result of the merger could have a materially adverse effect on our financial position and results of operation to the extent that the insurance coverage provided under our policy and the policy maintained by Red River cover only a portion of any such loss.
Because the value of our shares of common stock which will be delivered to the Red River shareholders upon completion of the merger will be significantly higher than the market value of Red River's proved reserves, our future financial condition may be adversely affected if we are not successful in increasing the production rate and ultimate recovery from the West Edmund Hunton Lime Unit.
We will be acquiring Red River and its properties as the result of the merger by delivering shares of our common stock having a total value of $18,300,000 based on the $8.13 market value of our stock at November 19, 1999, the date the merger agreement was signed by the parties to such agreement. We are in effect paying a price of $10.75 per barrel of oil equivalent based on the December 31, 1999 reserve estimates for Red River. The price we are paying is significantly higher than the market value of Red River's proved reserves. We are paying the higher purchase price based on, among other things, our expectation that we will be able to increase significantly the production rate and ultimate recovery from the West Edmund Hunton Lime Unit, which is Red River's primary asset. If we are unable to increase substantially the production rate an ultimate recovery from the West Edmund Hunton Lime Unit as we currently expect, or if the price of oil or gas drops significantly below the escalated oil and gas price forecast we used to evaluate the Red River purchase, our future financial results could be negatively affected and we may report substantial losses as a result.
Beta has filed an annual report, quarterly reports, special reports, and other information with the Securities and Exchange Commission. You may read and copy reports, statements or other information at the SEC's public reference rooms in Washington, D.C. (at Room 1024, 450 Fifth Street, N.W., Washington, D.C. 20549), New York, New York (at 7 World Trade Center, Suite 1300, New York, New York 10048) or Chicago, Illinois (at Suite 1400, 500 West Madison, Chicago, Illinois 60661). Please call the SEC at 1-800-SEC-0330 for further information on the public reference rooms. Beta's SEC filings are also available to the public from commercial document retrieval services and at the web site maintained by the SEC at "www.sec.gov". Information about Beta can also be found at its web site at “www.betaoil.com”. All statements, trend analyses and other information contained in this document relating to production of oil and gas properties in which Beta or Red River have an interest, estimated reserves of the companies, markets for any such production and trends in Beta's or Red River's results of operations or financial conditions, as well as other forward-looking statements including those containing words such as "will", "should", "could", "anticipate", "believe", "plan", "estimate", "expect", "intend", "project", "forecast", and other similar expressions, constitute forward-looking statements under the Private Securities Litigation Reform Act of 1995. These forward- looking statements involve known and unknown risks and uncertainties that may cause results and conditions to differ materially from the forward-looking statements. The risks and uncertainties include the following: Purpose of Request for Consents We are requesting the consent of our shareholders who owned shares of Beta common stock as of the record date for: General Beta did not reach a final purchase agreement with any of the ten prior acquisition candidates for the following reasons: Of the potential acquisition candidates reviewed, only in one case did Beta discuss a purchase price with the prospective seller, a company out of Oklahoma City. This candidate’s properties were located exclusively in central California and contained an estimated 5.66 million barrels of oil equivalent. Beta offered a purchase price of $40 million comprised of the assumption of debt and Beta common and preferred stock. This equated to a purchase price of $7.05 per barrel of oil equivalent. Beta was at a very early stage and a privately held company at the time. The offer was declined by the seller and Beta made the decision not to increase its offer primarily due to the geographic location of the properties. Beta felt that mature oil properties located in this area posed far too many environment risks and potential liabilities to justify a higher price. On October 8, 1999, Mr. Antry, Mr. J. Chris Steinhauser, director and Chief Financial Officer of Beta, Mr. Fetters, Mr. Hufnagel and Mr. Robert E. Davis, Jr., Chief Financial Officer, director and Executive Vice President of Red River, met and discussed the possibility of merging Red River and Beta. Beta management presented an initial price based upon their evaluation of Red River. In addition, Beta agreed to assume Red River's debt to the Bank of Oklahoma which was approximately $7.6 million as of September 30, 1999 and subsequently increased to approximately $7.7 million as of December 31, 1999. Beta did not assume a $.1 million loan secured by certain of Red River's equipment nor the approximately $2.2 million indebtedness secured by the coal methane properties. As mentioned below, no value was assigned to such properties in negotiating the amount of the purchase price. By deducting the approximately $7.6 million bank debt out of the $23.4 million as shown in the table above, Beta determined the purchase price to be $15.8 million or $7.02 per share based on the 2,250,000 shares to be issued in the merger. Beta emphasizes that the escalated price parameters used to determine the value of Red River’s proved reserves at September 1, 1999 are not in accordance with SEC proved oil and gas reserve disclosure rules. Beta does not ordinarily use escalated prices and costs to present reserve values in its SEC filings. However, the values presented here using escalated prices and costs reflect what we believe result in a more realistic forecast of future revenues and expenses we expect to experience from these proved reserves and from exploiting the development potential of many of the Red River properties. The reserve estimate presented here using the escalated price and expense parameters are to inform you of one of the primary factors in determining the purchase price. SEC parameters prescribe the use of unescalated price and cost assumptions to determine standardized reserve values. Had those same parameters been used to value Red River’s proved reserves, the purchase price might have been less. It is difficult to allocate with any certainty how much of the purchase price is attributable to the future development potential of the Red River properties and how much is attributable to the perceived value in the management team of Red River. Red River’s future net cash flows, net of income tax and discounted to present value, as of December 31, 1999 is $10,844,030 based on the standardized measure prescribed in Financial Accounting Standard No. 69 and according to SEC parameters. Beta utilized a third party engineering report, dated September 1, 1999, as the basis of determining the $23.4 million net present value of the Red River proved oil and gas reserves using a 10% discount factor. The report was prepared by Ryder Scott Company and utilized escalated oil and gas prices supplied by Red River to determine the net present value. The price assumption for natural gas started at $3.25 per mcf, escalated at 3% per year to $5.22 per mcf, and averaged $4.49 per mcf. The price assumption for oil started at $23.25 per barrel, escalated at 3% per year to $37.31 per barrel, and averaged $31.19 per barrel. Operating costs were escalated at a rate of 3% per year as well. Red River's estimated proved reserves at December 31, 1999 using SEC parameters were 2,416,584 barrels of oil equivalent. This is based on a Ryder Scott report dated December 31, 1999 which used unescalated prices in effect as of that date in accordance with SEC disclosure rules. Using the 2,416,584 barrels of oil equivalent at December 31, 1999, the $8.13 closing stock price for Beta common stock, the assumption of approximately $7.7 million of bank debt and the 2,250,000 shares to be issued in the merger, Beta is paying approximately $10.75 per barrel of oil equivalent for Red River's proved reserves assuming no value is attributable to the probable and possible reserves of Red River or to the management team which will continue with Red River. The discounted net present value at December 31, 1999 using SEC parameters and a 15% discount factor, is $11.8 million. By deducting the $7.7 million in bank debt, this would result in an assumed purchase price of $1.82 per Beta share. The assumed purchase price did not assign value to the coal bed methane properties which are considered unevaluated at this time, nor the approximately $2.2 million indebtedness secured by those properties. As noted above, the purchase price does assume that we will realize significant value from the development of the probable reserves that are expected to be extracted through enhanced recovery from the acreage holdings in the West Edmond Hunton Lime Unit (“WEHLU”). Beta believes that the additional reserves that could be extracted from the WEHLU property are probable since their recoverability is at least 50% likely. The expected value was a principal reason for using a 10% discount factor instead of a 15% discount factor to value the discounted future net cash flows from the proved reserves of Red River. This results in a $6.4 million higher present discounted value being attributed to revenues expected to be produced from Red River’s reserves than would be the case if the 15% discount factor were used. This increased present discounted value could be viewed as the premium value assigned to the enhanced recovery potential of the WEHLU properties, although we must emphasize that because they are categorized as only “probable” reserves, it is not possible to predict with any certainty the economic results that we will realize through the WEHLU development activities. These probable reserves were not assessed by a third party engineering firm such as Ryder Scott Company. However, we believe that this is a good development opportunity for the reasons summarized below. As discussed further in the Business of Red River section of this document, Red River is the operator of the WEHLU field which is comprised of 30,160 surface acres in central Oklahoma. There are 22 gross (21 net) producing wells in the field, 16 (15 net) of which produce natural gas and six (six net) of which produce crude oil. Most of the wells have pumps or other forms of artificial lift to aid production of the reserves. There are 33 additional shut-in wells that are being evaluated for a possible return to production. We believe that there are a number of potential locations to drill additional development wells on the properties. During 2000, we will drill additional wells in this unit, but the extent of this activity will be not be decided until Red River has reviewed the results of a pilot project scheduled to commence in the second quarter of 2000. Red River has entered into an agreement with Avalon Exploration, Inc. of Tulsa to jointly test and develop additional production on its acreage in the WEHLU area. The WEHLU field, originally discovered in 1942, is the largest Hunton Lime field in the state, representing nearly 40% of the state's Hunton production. Avalon, with substantial Hunton Lime trend experience, will use advanced fracing technology that has been successful in the Hunton Lime in other parts of the state along with a "dewatering" process to increase the oil cut to very economic levels. Red River recently tested this process in one WEHLU well and early results show a ten-fold increase in oil production as well as additional gas production. With Avalon as the technical lead and Red River remaining as operator, this potential will be tested this year through a ten-well pilot program. Red River has retained (a) a 12.5% interest after Avalon achieves payout of the amounts it expends, plus (b) an option to repurchase 25% of its original working interest in these same properties after each five-well pilot project drilled by Avalon has been completed, whereby Red River can elect to reimburse Avalon for 25% of the actual costs incurred depending on the success of these pilot projects. If the pilot program is successful, the ongoing development of the field will commence with approximately 200 to 300 potential locations on the 30,000 acres. Once in this developmental stage, Red River will retain 40% of its interest in these wells by paying for 36.3% of the development costs. Additionally, Red River will retain 100% of its working interest in approximately 50 existing well bores. If the pilot program and the resulting WEHLU field development is successful, recoverable oil volumes between 75 million and 150 million barrels, or between 24 million and 48 million barrels net to Red River, may be possible but the certainty of recovering these volumes is much lower than that which is required for them to be classified as proved reserves. Therefore, you should understand that these estimated volumes are not proved reserves since reserves are not defined as proved unless they are supported by actual production or a conclusive formation test and have a reasonable certainty of being recovered. It is possible that these development efforts could produce substantially fewer additional reserves and could be an unprofitable venture. Neither Beta nor Red River engaged a third party engineering firm to assess the validity of our estimates of probable reserves from WEHLU. On October 13, 1999, the Red River board and the Beta board approved the execution of a letter of intent. During October and November 1999, the parties and their representatives continued their due diligence and negotiated the definitive merger agreement. Under this amendment to the merger agreement, the parties agreed that all other conditions required to be performed by a party to the merger agreement as a condition of the other party's obligation to close the merger transaction are no longer conditions of closing. The parties agreed that a party's remedy for the breach of any of these conditions is the right to seek specific performance in a court having jurisdiction over the breaching party. At closing, Beta Acquisition Company will be merged with Red River which shall continue as the surviving corporation. After closing, Red River will change its name to Beta Operating Company, "Beta Operating," and shall continue as Beta's wholly-owned operating and acquisition subsidiary. Beta's Reasons for The Merger; In August 1999, management of Beta and Red River initiated discussions on the feasibility of pursuing an acquisition by Beta of Red River. Following these discussions, the board of directors of Beta directed management to investigate the acquisition of Red River and to commence due diligence investigations of Red River's properties and prospects for future growth. As a result of these due diligence investigations, the Beta directors concluded that an acquisition of Red River would be beneficial to Beta and decided to approve the merger agreement and to recommend shareholders approve the share issuance for the following reasons: The Beta board has unanimously approved and adopted the merger agreement and the share issuance and the transactions contemplated thereby and the Beta board unanimously recommends that shareholders of Beta consent to the merger agreement and merger. Red River's Reasons for The Merger Material Federal Income Tax Consequences Interest of Red River Management in the Merger Messrs. Rolf N. Hufnagel, President and a Director of Red River, and Robert E. Davis, Jr., Chief Financial Officer and a Director of Red River, who together own 80% of the issued and outstanding shares of the Red River common stock, will enter into three-year employment agreements with Beta. The other Red River shareholders are expected to continue in the employment of Red River after the merger but none of them will have a written employment agreement. The employment agreements with Messrs. Hufnagel and Davis will be terminable early only on the death or disability of the employee or after written notice for cause. As a result, the position and salary of each of Messrs. Hufnagel and Davis are protected following the merger until the end of the term of his agreement. In addition, Beta has agreed to appoint Rolf Hufnagel to the Beta board of directors. Mr. Hufnagel was elected to the Beta board of directors at the annual meeting of shareholders held June 24, 2000. Messrs. Hufnagel and Davis negotiated the terms of the merger agreement and participated in the discussion, deliberation and voting of the Red River board to adopt the merger agreement. Percentage Ownership Interest of Red River Shareholders After the Merger Under the terms of the first amendment to the merger agreement, dated as of January 19, 2000, stock certificates representing the number of shares of Beta common stock to be transferred to the Red River shareholders upon the closing of the merger as stated in the foregoing table have been issued and are currently being held in escrow by an escrow agent. If the merger is not completed, the escrow agent will release the shares of Beta common stock from escrow and return these shares to Beta for cancellation. Appraisal Rights Resales of Beta Common Stock The following summarizes the material provisions of the merger agreement, a copy of which is attached as Annex A to this proxy statement. This summary is qualified in its entirety by reference to the merger agreement. You are urged to read the merger agreement in its entirety for a complete description of the merger. Other Conditions. The merger agreement, as amended by the second amendment thereto, contemplates the satisfaction of various conditions but, unlike the provisions of the merger agreement prior to such amendment, the failure to satisfy one or more of such conditions shall not interfere with the completion of the merger if such conditions are not performed prior to the closing date. Breach of any of these conditions is subject to specific performance or to the return of a portion of the shares as discussed below under "Remedies for Misrepresentation or Breach." Among such conditions to be satisfied by Red River or by its shareholders include the following : Representations and Warranties. The merger agreement contains numerous representations and warranties by Red River and the Red River shareholders to Beta as to various matters, such as: Survival. The representations, warranties and covenants under the merger agreement will survive the closing of the merger for a period which ends on the earlier of one year after the closing date or the date Beta's first consolidated audit report is issued after the closing date which includes audited financial information concerning Red River. Pre-Closing Mutual Covenants. The merger agreement contains mutual covenants of the parties regarding each party's obligation to: No Solicitation of Other Proposals. The merger agreement provides that unless it is terminated prior to the closing date as permitted under the merger agreement, neither Red River nor the Red River shareholders will solicit or engage in any discussions, negotiations, understandings or agreements with any person or entity other than Beta relating to the merger, consolidation or sale of Red River's stock or properties other than in the ordinary course of business. Remedies for Misrepresentation or Breach. In the event of any breach by Red River or the Red River shareholders of their representations, warranties or covenants under the merger agreement, the merger agreement provides that the Red River shareholders will be required to return to Beta the number of shares of Beta common stock determined by dividing the dollar amount of loss incurred by Beta on account of the breach by the closing price of a share of Beta common stock as quoted on the Nasdaq Stock Market as of the closing date of the merger agreement, even though the nonbreaching party's claim against the other party is not discovered until after such date. The Red River shareholders will not be required to return any shares until such time as the amount of losses incurred by Beta on account of breaches exceeds $100,000 and will not in any event be required to return more than 225,000 shares. Arbitration. The merger agreement provides for the settlement of all disputes arising pursuant to or in any way related to the merger agreement by arbitration conducted in accordance with the rules of the American Arbitration Association by three arbitrators. Termination. The merger agreement may be terminated and the merger abandoned at any time prior to the closing date by: Consequences of Termination. If the merger agreement is validly terminated, no party will be relieved from any liability resulting from a breach of its representations, warranties and covenants under the merger agreement occurring prior to the termination. In addition, provisions of the merger agreement related to the following will survive: Termination Expenses and Costs. Each party to the merger agreement will pay its own costs and expenses, including its attorneys' fees and costs, if the merger as contemplated under the merger agreement Otherwise, if the merger agreement is terminated prior to the closing date by a party not making any misstatement or not in breach of any covenant or warranty under the merger agreement, the party making the misstatement or breach will be obligated to pay in addition to its costs and expenses the other party's costs and expenses, including actual attorney's fees. Specific Performance. Any failure to perform or breach of any provision of the merger agreement or any misrepresentation under the merger agreement which does not involve a fraudulent or intentional misrepresentation of a material fact or a willful breach of a material warranty will not result in the termination of the merger agreement. Instead, the nonbreaching party's only recourse, in addition to its right to obtain additional shares of Beta common stock if Beta is the breaching party or recover shares of common stock if Red River and its shareholders are in breach of the merger agreement, is its right to seek specific performance of such provision in a court proceeding. Amendments. The merger agreement may be amended or modified, and any provision of the merger agreement may be waived, only by a writing executed and delivered by the parties. Post Closing Covenants. The merger agreement provides that following the consummation of the merger: Registration of Shares of Beta Common Stock. In the event the merger is consummated, under the merger agreement, we are obligated by no later than June 30, 2000 to prepare and file with the SEC, a shelf registration statement. We expect to file this registration statement shortly after this proxy statement is first mailed to our shareholders. The purpose of the shelf registration statement will be to register the resale of the shares of Beta common stock to be received by the Red River shareholders upon consummation of the merger. We are required to use our best efforts to have the shelf registration statement promptly declared effective by the SEC on or after its filing. We are also required to maintain the information contained in the shelf registration statement current at all times as required under the applicable provisions of the Securities Act of 1933 until the termination of the shelf registration statement. The shelf registration statement is required to be maintained until two years after the date that the SEC first declares the shelf registration statement effective. Security Ownership Of Certain Beneficial Owners And Management Certain of the shareholders in this table have agreed that they will not sell their shares representing 2,670,000 of the 3,053,500 of the total beneficial shares held until July 9, 2000. The statements set forth under this heading generally describe Nevada General Corporation Law, Beta's certificate of incorporation and Beta's by-laws ; the statements are subject to the detailed provisions of the Nevada General Corporation Law, the Beta certificate of incorporation and the Beta by- laws. Common Stock Stockholder Action Possible Anti-Takeover Effects of Authorized but Unissued Stock Other Anti-Takeover Provisions The termination provisions of this employment contract were designed, in part, to impede and discourage a hostile takeover attempt and to protect the continuity of management./p> Certain Charter and Bylaws Provisions Stockholder Meetings and Other Provisions Transfer Agent and Registrar Certain Provisions of the Beta Bylaws Beta common stock began trading July 9, 1999 on the Nasdaq Small Cap Market under the symbol "BETA". The following table sets forth for the fiscal period indicated the range of the high and low sale prices of Beta common stock as reported on the Nasdaq Small Cap Market. Beta has not paid any cash or other dividends since its inception. For the foreseeable future, Beta intends to retain any funds otherwise available for dividends for use in the expansion of its business. Set forth below is the last reported sale price of Beta common stock on November 19, 1999, the last trading day prior to the public announcement of the execution of the merger agreement, and on August 8, 2000, the last trading day prior to the date of this proxy statement, both as reported on the Nasdaq Small Cap Market and National Market, respectively. Beta Oil & Gas, Inc. The following unaudited pro forma combining, condensed financial information is presented to reflect the merger under the Agreement and Plan of Merger of Beta Oil & Gas, Inc. and subsidiaries (“Beta”) and Red River Energy, Inc. and subsidiaries (“Red River”) and the acquisition of the ONEOK properties under the purchase and sale agreement between Red River and ONEOK Resources Company (“ONEOK properties”) on (1) the unaudited historical condensed balance sheet as of March 31, 2000, and (2) the unaudited historical condensed statements of operations for the year ended December 31, 1999 and the three months ended March 31, 2000. The Pro Forma Combined Condensed Balance Sheet gives effect to these transactions as if they had taken place on March 31, 2000. The Pro Forma Combined Condensed Statements of Operations reflects these transactions as if they had taken place at the beginning of the periods presented. For financial accounting purposes, it is expected that the merger will be accounted for using the purchase method of accounting. Therefore, Beta’s cost to acquire Red River, calculated to be $14.455 million assuming an average Beta common stock price of $6.38 per share with 2,250,000 shares issued to the stockholders of Red River, will be allocated to the assets acquired and liabilities assumed according to their fair values. The assumptions used in preparing the pro forma adjustments are described in the footnotes to the pro forma combining, condensed financial statements. However, due to the uncertainties inherent in the assumption process, it is at least reasonably possible that the assumptions might require further revision and that such revision could be material. The ONEOK properties were acquired on June 15, 2000 for total consideration of $5,608,809, subject to additional post-closing adjustment for the final accounting of net revenues and operating expenses from the effective date to the closing. Such adjustment will be determined within 90 days after closing. The acquisition of the ONEOK properties was funded through additional borrowings under the Red River line of credit. Beta Oil & Gas, Inc. Beta Oil & Gas, Inc. Beta Oil & Gas, Inc. Beta Oil & Gas, Inc. Beta Oil & Gas, Inc. As used in this proxy statement: General Unevaluated oil and gas properties - United States Unevaluated oil and gas properties - Foreign Impairment of Oil and Gas Properties - United States Evaluated Properties - United States Impairment of Oil and Gas Properties - United States Evaluated Properties - Foreign Beta's current oil and gas exploration activities are focused in four distinct project areas as follows: WELL STATISTICS ACREAGE STATISTICS DRILLING ACTIVITYWHERE YOU CAN FIND MORE INFORMATION
You should rely only on the information contained in this document to consent or withhold consent on the merger or the stock option plan. We have not authorized anyone to give any information or make any representation about the merger, the stock option plan or our companies that is different from or in addition to, that contained in this document. Therefore, if anyone gives you information of this sort, you should not rely on it. The information contained in this document speaks only as of the date of this document, unless the information specifically indicates that another date applies.CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
€ Beta's and Red River's ability to generate additional capital to complete its planned drilling and exploration activities;
€ risks inherent in oil and gas acquisitions, exploration, drilling, development and production; price volatility of oil and gas;
€ inherent imprecision of estimating recoverable reserves;
€ competition from other oil and gas companies;
€ shortages of equipment, services and supplies;
€ government regulation;
€ environmental matters;
€ financial condition and operating performance of the other companies participating in the exploration, development and production of oil and gas ventures in which Beta is involved;
€ ability to attract and retain highly qualified personnel; and
€ the availability and terms of future acquisitions.
In addition to the above, the forward-looking statements are subject to uncertainties relating to the synergies, charges and expenses associated with the merger. These are discussed under “Risk Factors” above. Beta expressly disclaims any duty to update any forward-looking statements.REQUEST FOR CONSENT OF BETA SHAREHOLDERS
• the approval of the merger agreement and the merger contemplated under such agreement; and
• the approval of the Amended and Restated 1999 Incentive and Nonstatutory Stock Option Plan.
Recommendation of the Beta Board
The Beta board of directors believes that the terms and provisions of the merger agreement and the merger are fair to and in the best interests of Beta and its shareholders and has unanimously approved the merger agreement and the issuance of the 2.25 million shares of Beta common stock to the Red River shareholders upon completion of the merger. The Beta board of directors also unanimously approved the adoption of the Amended and Restated 1999 Incentive and Nonstatutory Stock Option Plan. The Beta board of directors unanimously recommends that the Beta shareholders consent to the adoption of the merger agreement, the merger and the stock option plan.
Record Date; Voting Rights
Only holders of record of Beta common stock at the close of business on July 17, 2000, are entitled to consent to the merger agreement, merger and stock option plan by completing, signing and returning their consent form to us as instructed in such form. At the record date, July 17, 2000, there were 12,225,159 shares of Beta common stock outstanding, held by approximately 381 record holders including those holders owning shares held in street name for the benefit of persons. Each holder of Beta common stock is entitled to consent on the matters requested for shareholder approval on the basis of one vote for each share of Beta common stock he or she owns of record in the record date.
Exercise of Consent
The enclosed printed card contains separate forms for consent to the approval of the merger agreement and merger and the approval of the stock option plan. Record holders wishing to consent to either or both of these matters must place a check mark in the appropriate box or boxes and sign their names in the space provided on each of the consent forms on the front and reverse side of the enclosed card. The consent forms on the printed card must be returned in the self-addressed, first class postage prepaid envelope by no later than September 11, 2000. The votes of the shareholders on the consent forms will not be counted if not received by us on or before such date.
If you do not complete and return your consent forms, you will, in effect, be voting against such proposals. If you sign and return your consent form but fail to check any of the boxes provided for either or both of the proposals, Beta will treat the consent form as a vote for each proposal. If you wish to consent to one but not the other proposal, you must return the consent form and indicate to which proposal you are consenting. If your shares are held in street name, the broker will not have discretionary authority to consent to the proposals unless instructed to do so in writing signed by you.
Approval of the merger proposal is not conditioned on adoption of the stock option proposal. Adoption of the stock option proposal is not conditioned on approval of the merger proposal.
Consents May Not be Revoked
If you return the separate written consent forms signed by you approving either or both of the proposals, such consents, once received by us, may not be revoked and will be counted as an affirmative vote for the matter or matters for which consent has been given.
Cost of Requesting Consents
Our board of directors is soliciting the consents on behalf of Beta. We will bear the entire cost of requesting the consents, including all printing expenses, and filing fees in connection with the filing of this document with the SEC. Directors, officers and regular employees of Beta may solicit consents by telephone or otherwise, as well as through the mail. The directors, officers and regular employees will not receive any additional compensation for any solicitation, but may be reimbursed for out-of-pocket expenses. Beta expects its internal expenses of solicitation to be nominal.
Required Consents
The holders of a majority of the outstanding shares of Beta common stock on the record date must consent to the proposals to approve them.
Share Ownership of Management
At the close of business twenty days before the date of this proxy statement, July 19, 2000, directors and executive officers of Beta had the right to vote an aggregate of 2,688,500 shares of the outstanding shares of Beta common stock, or approximately 22% of the shares of Beta common stock then outstanding. The 2,688,500 shares does not include 365,000 shares underlying presently exercisable warrants which are beneficially owned by officer and directors. It is expected that all of these persons will consent to both the approval of the merger agreement and merger and the adoption of the stock option plan.PROPOSAL FOR CONSENT OF THE BETA SHAREHOLDERS'
TO THE AGREEMENT AND PLAN OF MERGER DATED NOVEMBER 19, 1999
THE MERGER
At the effective time of the merger, Beta Acquisition Company, Inc. a wholly owned subsidiary of Beta, will merge with and into Red River. Red River will thereby become a wholly-owned subsidiary of Beta and each share of Red River common stock outstanding will be converted into 2,250 shares of Beta common stock. Upon completion of the merger, Red River will change its name to Beta Operating Company, Inc.
Background of the Merger
Beta continually evaluates corporate development opportunities to strengthen its competitive position in the oil and gas industry, increase its proved reserves, strengthen its management expertise, and diversify its prospects and producing wells. It seeks out companies, prospects, and producing property acquisitions that are accretive to Beta shareholders and that will enhance its growth potential.
Management of Red River has sought to expand its operations, diversify its prospects as well as allow its shareholders to increase the liquidity of their investment. Management of Red River is also aware that its ability to raise additional capital may be enhanced as a public entity.
Red River management viewed Beta as a suitable candidate for a business combination. Red River management based this determination on publicly available financial information, and on familiarity with Beta management, resulting, in part, from preliminary discussions held during August 1999 concerning the possible acquisition by Beta of Red River and the acquaintance of Mr. Steve A. Antry, Chairman and President of Beta, and Mr. Rolf N. Hufnagel, President of Red River.
Mr. Antry has known Mr. Hufnagel for approximately 15 years and they get together from time to time to update each other on their respective activities and progress both personally and professionally. Mr. Antry worked for Mr. Hufnagel in the mid-eighties as his Land Manager for Nerco Oil and Gas in Oklahoma City ( a subsidiary of Pacific Power and Light). Mr. Antry and Mr. Hufnagel have not worked together since working at Nerco and have had no other affiliations or business activities since that time. While visiting family in Tulsa in August 1999, Mr. Antry had dinner with Mr. Hufnagel and Bob Davis, the cofounders and principal owners of Red River. A discussion ensued about the subject of merging the two companies. It was decided at that dinner to exchange information on the respective companies in contemplation of a merger.
In August and September 1999 , operating and financial personnel of each of Red River and Beta, and their legal and accounting advisors, also commenced due diligence investigations as to the other company. On August 31, 1999, Mr. Antry and R. Thomas Fetters, Managing Director of Exploration and a director of Beta, visited the offices of Red River, executed confidentiality agreements and discussed in detail the properties of Red River. On September 7, 1999, Mr. Antry received the approval of the Beta board to pursue merger discussions and continue a due diligence review of Red River.
Red River management has many years of experience in the oil and gas industry and was familiar with the valuation of similar companies in the industry. After several meetings and discussions and after research into the business and prospects of Red River, Beta management performed its own analysis of the value of Red River.
Beta management has many years of experience in the oil and gas industry and it has actively reviewed several acquisition opportunities since Beta's inception in June of 1997 involving the analysis of companies with proven producing properties. Since its founding in 1997, Beta management has reviewed approximately ten potential acquisition candidates prior to entering into a merger agreement with Red River. These candidates were oil and gas companies with oil and gas reserves located in several geographic areas of the United States.1) In several instances other public companies and/or their significant shareholders approached Beta as a potential acquiror. After reviewing many of these candidates, management and the Board felt that the negative impact on the balance sheet would have been too great for a company our size at the time of the offers. Also, in most of these instances a substantial amount of value was in their prospect inventories in the form of possible reserves. 2) One California based candidate had 80+ employees. Also, the properties were all in an area of California that our Exploration Manager felt had too much risk of environmental problems into the future. 3) Beta reviewed an acquisition involving a Mississippi based operating company but decided that the candidate's administrative overhead was excessive relative to Beta's. Beta has recently resumed discussions with this company. However, the discussions are in the early stages and no terms have been discussed. 4) We reviewed a potential acquisition of a producing property in Oklahoma. Based on a review by our Exploration Manager, we concluded that the property contained limited upside potential beyond the proved producing reserves and did not merit further review. 5) We reviewed an acquisition of a company with reserves in Louisiana. Due to the fact that a large percentage of the transaction value was concentrated in proved undeveloped, probable and possible reserves, we concluded that such an acquisition was too speculative. This was due to the fact that a very small percentage of the reserve value was in the proved developed producing category. 6) We reviewed the acquisition of a property located in offshore Louisiana consisting primarily of proved developed producing reserves. However, since the wells had less than six months production history, we concluded that there was not sufficient production history to make a reliable estimate of recoverable reserves.
Beta initially proposed a purchase price of approximately $9.4 million after deducting Red River's outstanding bank debt, assuming a Beta stock price of $5.50 per share, resulting in a proposed issuance in the merger of approximately 1.7 million shares of Beta common stock. This purchase price was determined using Beta's estimate of Red River's proven producing reserves at September 1, 1999 and discounting the future net cash flows therefrom using a 15% discount factor. This estimate was determined using the independent engineering report prepared by Ryder Scott Company dated September 1, 1999. The price and operating cost assumptions used in the report are discussed below. Beta's initial proposal excluded Red River's coal bed methane properties and did not assign any probable reserve values to the enhanced or secondary recovery potential of Red River's conventional oil and gas properties.
Red River's management responded to Beta's initial offer by stating that it did not wish to exclude the coal bed methane properties and that the offer did not give adequate value to Red River's proved producing reserves. Red River management stated that a total issuance of 2.4 million Beta shares would constitute a fair price for Red River.
Between October 8 and 11, 1999, Mr. Antry and Mr. Hufnagel had several meetings and telephone conversations to discuss the price to be paid in the transaction. As a result of these discussions, Beta management made its own conclusion as to the valuation of Red River, which was based on its assessment of the value of the Red River proved producing reserves and the economic potential associated with Red River's probable reserves. Due to the length of time involved in concluding the negotiation of the merger agreement and the significant price fluctuations for Beta common stock and in the United States securities markets generally, both Red River and Beta determined that it would be desirable to agree upon an exchange ratio to fix the maximum number of shares of Beta stock that would be issuable in the merger at 2,250,000. By establishing a fixed price of 2,250,000 shares, both Beta and Red River decided to treat the investment in the other as having been made when the letter of intent was signed by the two parties. Beta and Red River thereby decided to bear the resultant market risks and rewards of any future swings in the price of Beta stock.
The 2,250,000 share issuance was determined as follows:
Approximate
-----------
million
-------
Present value of Red River's proved producing reserves at September
1, 1999 using a 10% discount and using escalated price and cost parameters.... $23.4
Bank of Oklahoma Revolving line of credit as of
September 30, 1999............................................... (7.6)
----------------
Net purchase price paid............................................................ $15.8
================
Beta shares to be issued to Red River shareholders............................ 2.25
Assumed purchase price per Beta share......................................... $7.02
================
This September 1, 1999 Ryder Scott report was commissioned by Red River after we began preliminary discussions with Red River regarding a possible merger. The future pricing and cost and certain other assumptions used by Ryder Scott were those provided by Red River, although we were aware of the assumptions being provided and agreed that they would be appropriate for the purposes of the report and our evaluation of the Red River reserves. It is commonplace in reviewing a purchase of producing oil and gas properties for the purchaser to engage its own independent engineering firm to assess the reserves of the offered properties. We did not engage such a firm because the engagement of Ryder Scott Company was a mutual decision and because we are acquiring all of Red River and it personnel, not just its proved reserves. Nevertheless, if we had engaged a different engineering firm to provide a separate report for us, such a report very well could have reflected a more conservative value for the Red River proved reserves and might have resulted in a lower price for Red River. Our estimates of the unproved reserves of Red River are based on our own analyses and those provided by Red River personnel. No third party engineering firm was engaged to assess those unproved reserves.
After the letter of intent was signed, Beta contracted with a land consulting firm in Tulsa to review Red River's land and well records and contracts for any title encumbrances or other matters which could materially affect the value of Red River. None were noted as a result of the consultant's review. In addition, both Beta and Red River engaged Hein + Associates, LLP, Beta's independent auditors, to perform an audit of Red River's financial position as of December 31, 1998 and results of operations for the fiscal year ending December 31, 1998. Hein + Associates, LLP also performed a review of Red River's interim results of operations for the nine months ended September 30, 1999, as well as its financial position as of September 30, 1999. In addition, Joe C. Richardson, Jr., a director of Beta, and Steve Antry conducted a physical inspection of the Red River field equipment and facilities during the week of November 1, 1999. Messrs. John Tatum, a Beta director, and Tom Fetters conducted a geologic review of the Red River properties.
At a meeting held on November 17, 1999, the Beta board unanimously determined that the merger was fair to and in the best interests of Beta and its shareholders and approved the merger agreement, the merger and the other transactions contemplated thereby and resolved to recommend that the shareholders of Beta vote in favor of the issuance of shares of Beta common stock to the Red River shareholders.
On November 19, 1999, Beta and Red River entered into a definitive Agreement and Plan of Merger. For purposes of effecting this transaction, Beta has formed a wholly owned subsidiary called Beta Acquisition Company, Inc. This agreement was subsequently amended by the first amendment dated January 19, 2000 and the second amendment dated February 14, 2000.
The purpose of the first amendment was to establish an escrow account for the shares to be delivered to Red River Shareholders at the closing date. Under the terms of this amendment to the merger agreement, Beta agreed to issue the 2.25 million shares of its common stock and deposit such shares in escrow to provide good faith assurances to the Red River shareholders that the shares will be issued on the closing date.
The purpose of the second amendment was to extend the deadline for the closing date specified in the merger agreement from March 31, 2000 to December 31, 2000 and to enable the two companies to proceed with certain business activities as though they were a combined company.
Under the terms of this amendment, the obligations of either party to close under the merger agreement were limited to 3 conditions:
The parties also agreed to change the date when the merger agreement, as amended, will terminate, if the merger has not been completed, from March 31, 2000 to December 31, 2000. Otherwise, the parties agreed that the merger agreement may only be terminated by mutual consent of the parties or the intentional and fraudulent misrepresentations of a material nature or willful breach of any material warranty contained in the merger agreement which is not cured by the closing date or if earlier within 30 days after notice of the breach or misrepresentation is given to the breaching party.
In addition, the parties agreed to prepare and file a shelf registration statement to register the shares of Beta common stock issued to the Red River shareholders for resale as soon as reasonably possible after filing the definitive proxy statement but no later than June 30, 2000.
Beta has agreed to these amendments for the following reasons:
Recommendation of its Board of Directors
€ Red River management was receptive to receiving Beta stock as the sole consideration in an acquisition of Red River. This would not require Beta to utilize its cash resources to acquire Red River and would result in minimal transaction costs;
€ Red River had pursued a business strategy that focused on the acquisition of producing oil and gas properties which complemented Beta's aggressive exploration strategy.
€ Red River's significant proved producing reserves which have a net present value of $15.8 million before income tax considerations, at December 31, 1999 and its existing $25 million line of credit with the Bank of Oklahoma will allow Beta to more easily access bank financing which will lower Beta's cost of capital.
€ The majority of Red River's current reserve value and cash flow is concentrated in one producing unit in Central Oklahoma. The wells in this unit have extensive production histories with highly predictable decline rates which makes evaluating their future recoverable reserves more certain than other acquisitions.
€ Red River's proved producing reserves in Oklahoma offer Beta a predictable and stable future revenue base when contrasted with Beta's gulf coast properties, which tend to decline more quickly and can result in significant year to year fluctuations in revenues.
€ Red River's proved producing reserves in Oklahoma offer Beta substantial upside from enhanced recovery projects currently planned by Red River.
€ Red River's management consists of individuals with extensive experience and expertise in the evaluation, negotiation of producing property purchases as well as the operation of producing wells. The management of Red River will continue as the management of Beta's wholly owned subsidiary, Beta Operating Company, and will help facilitate the growth of Beta through the acquisition of additional properties in the future.
€ The Red River/Beta Operating management will also enable Beta to operate more of its exploratory prospects, thus allowing it to have more control over the operations and reduce Beta's dependence on third party operators.
In view of the variety of factors considered in connection with its evaluation of the merger, the Beta board did not find it practicable to and did not quantify or otherwise assign relative weights to the specific factors considered in reaching its determination. In addition, individual members of the Beta board may have given different weights to different factors. The Beta board did consider the Red River acquisition in comparison to other acquisition candidates previously reviewed by Beta and determined that the Red River acquisition would be more beneficial to Beta than the other candidates because of the reasons cited above.
The Beta board also relied on the independent engineering report prepared by Ryder Scott as of September 1, 1999 in determining that the purchase price being paid is fair and reasonable and in the best interests of Beta and its shareholders. The board did not compare this purchase price to prices paid for other acquisitions by other oil and gas companies at the time because of its assessment that Beta is acquiring substantial value besides the Red River proved reserves in the transaction. Based on its own internal assessment of the properties and the economic potential for additional reserves beyond the existing proved reserves, the additional value being added by the Red River management and the other factors listed above, the board believes the merger consideration to be a fair price for all the Red River stock. The board did not engage an independent engineering firm to assess any of the additional reserves beyond the existing proved reserves.
The Red River Shareholders believe that the merger is desirable and in their best interests for several reasons, including:
€ The exploration prospects and experience of Beta's management complement the producing property acquisition and operation activities of Red River, making the combined company more diversified and flexible.
€ As a public company with substantial management experience and expertise in equity financing, Beta should have greater access to the capital markets, thus increasing the financing opportunities for Red River's operations after the merger.
€ As a larger company, Beta and Red River should be a more competitive participant in the oil and gas industry.
€ The exploration prospects of Beta provide substantial upside potential, albeit at a somewhat greater risk than Red River is currently experiencing.
€ As a public company, ownership of shares of Beta common stock will provide the Red River shareholders with greater investment liquidity and flexibility.
The following outlines the anticipated material United States federal income tax consequences of the merger and is not a complete analysis of all tax effects of the merger. The discussion does not address the effect of state or local tax laws, or the effect of any U.S. federal tax laws other than those pertaining to United States federal income tax.
The merger is intended to qualify as a reorganization under Section 368(a) of the Code. The following are the intended material United States federal income tax consequences of the merger:
€ No gain or loss will be recognized by Red River, Beta or Beta's merger subsidiary as a result of the merger.
€ No gain or loss will be recognized by Red River shareholders upon the conversion of Red River common stock into shares of Beta common stock pursuant to the merger.
€ The aggregate tax basis of the shares of Beta common stock received in exchange for shares of Red River common stock pursuant to the merger, will be the same as the aggregate tax basis of the shares of Red River common stock.
These consequences are based on current federal tax law. Future legislative, administrative or judicial changes or interpretations, which can apply retroactively, could affect the accuracy of those conclusions. No rulings have or will be sought from the Internal Revenue Service concerning the tax consequences of the merger and the merger is not conditioned upon receipt of a legal opinion regarding the tax consequences of the merger.
Shareholders should be aware that certain directors and executive officers of Red River have interests that are in addition to or may be different from the interests of Red River shareholders generally. The officers and directors having these interests negotiated the terms of the merger agreement and participated in the discussion, deliberation and voting of the Red River board to adopt the merger agreement.
The following table reflects the ownership interest of Red River shareholders in Beta following the merger. The numbers are based on the number of shares actually outstanding as of the record date, July 17, 2000.
Percentage Beneficial
Ownership of Beta
After the Merger
----------------
Beta shares pre-merger, excluding 2,250,000 shares held
in escrow pending merger.................................... 9,975,159
Red River shares outstanding pre-merger...................... 1,000
Total Beta shares post-merger................................ 12,225,159 100%
Rolf N. Hufnagel 1,440,000 11.78%
Robert E. Davis, Jr. 360,000 2.94%
Stephen J. Vogel 90,000 0.74%
Janet L. McGehee 90,000 0.74%
Billy L. Baysinger, Jr. 90,000 0.74%
Brent A. Biggs 90,000 0.74%
Mark A. Biggs 90,000 0.74%
Beta shares issued to Red River shareholders......... 2,250,000 18.42%
Percentage beneficial ownership of pre-merger Red
River shareholders ....................... 18.42%
Under Nevada law, Beta shareholders are not entitled to appraisal rights with respect to approval of the share issuance. The Red River shareholders are all parties to the merger agreement and have committed to approve the merger. Consequently, they will not have any dissenters' appraisal rights.
The shares of Beta common stock issued in connection with the merger have not been registered under the Securities Act of 1933. Subject to the registration rights granted to the Red River shareholders, the Red River shareholders may not offer, sell, assign or otherwise dispose of the 2,250,000 shares of Beta common stock received in the merger unless the shares are subsequently registered under the Securities Act or unless an exemption from registration is available. The stock certificates representing the shares of Beta common stock which will be transferred to the Red River Shareholders at closing and which are being held in escrow as provided under the merger agreement, as amended, will contain a legend restricting the transferability of the shares of Beta common stock as provided therein and stop order instructions may be imposed by Beta's transfer agent restricting the transferability of such shares.
Beta has granted the Red River shareholders certain registration rights in connection with the 2,250,000 shares received in the merger. Under the second amendment to the merger agreement, dated as of February 14, 2000, Beta is required, after the filing of this proxy statement with the SEC and by no later than June 30, 2000, to prepare and file with the Commission a shelf registration statement for the purpose of registering the 2,250,000 shares for resale in the market from time to time.
Once the registration statement is declared effective, and so long as it remains effective and current, these shares may be traded freely and without restriction by those shareholders following the effective time of the merger.THE MERGER AGREEMENT
General. The merger agreement provides for the merger of a wholly owned subsidiary of Beta into Red River. As a result of the merger, Red River will become a wholly owned subsidiary of Beta. The merger will be consummated and effective under Oklahoma law upon the filing of a certificate of merger with the Oklahoma Secretary of State, which is expected to occur as soon as practicable after the last condition precedent to the merger set forth in the merger agreement has been satisfied or waived, but not later than December 31, 2000. Following the merger, the certificate of incorporation of Red River will be amended to change Red River's to Beta Operating Company.
Manner and Basis of Converting Shares. As a result of the merger, each share of Red River common stock will be converted into the right to receive 2,250 shares of Beta common stock. A total of 2,250,000 shares of Beta common stock will be issued pursuant to the merger.
Conditions to the Merger. As amended by the second amendment to merger agreement, the obligation of Beta to consummate the merger is subject only to the following 3 conditions:
The conditions to be satisfied by Beta and Merger Sub include the following :
• Red River's due organization and good standing;
• binding effect of the merger agreement upon Red River and the Red River shareholders;
• absence of any conflict with any of Red River's organizational documents and agreements as a result of the merger;
• Red River's corporate authorization with respect to the merger;
• Red River's capitalization;
• title to the outstanding shares of Red River common stock;
• Red River's financial statements;
• absence of undisclosed material liabilities of Red River;
• absence of material changes with respect to Red River since September 30, 1999;
• tax matters with respect to Red River;
• condition of Red River's tangible assets;
• title to and status and operation of Red River's oil and gas properties;
• Red River's insurance coverage;
• Red River's intellectual property rights;
• litigation involving Red River;
• Red River's compliance with laws and orders;
• consents and approvals required in connection with the merger;,
• contracts binding upon Red River;
• Red River employee matters;
• investment intent of the Red River shareholders with respect to the Beta common stock to be issued pursuant to the merger;
• Red River's licenses, facilities and permits; and
• Red River's accounts receivable and accounts payable.
The merger agreement contains numerous representations and warranties by Beta to Red River and the Red River shareholders as to various matters, such as:
• Beta's due organization and good standing;
• the binding effect of the merger agreement upon Beta;
• the absence of any conflict with any of Beta's organizational documents and agreements as a result of the merger;
• Beta's corporate authorization with respect to the merger;
• Beta's capitalization;
• the currency and timeliness of Beta's SEC filings;
• the absence of material litigation involving Beta;
• Beta's compliance with laws and orders; and
• shareholder votes required in connection with the merger;
Conduct of Business Prior to Closing Date. Except as otherwise contemplated by the merger agreement, Red River and the Red River shareholders have agreed in the merger agreement that from the date of the merger agreement until the closing date of the merger that Red River will conduct its business in the ordinary course, consistent with past practices, and in particular, Red River will not, among other things:
In the event of any breach by Beta of its representations, warranties or covenants under the merger agreement, the merger agreement provides that Beta will be required to issue to the Red River shareholders the number of shares of Beta common stock determined by dividing the dollar amount of loss incurred by the Red River shareholders on account of the breach by the closing price of a share of Beta common stock as of the closing date of the merger agreement, even though the nonbreaching party's claim against the other party is not discovered until after such date. Beta will not be required to issue any additional shares until such time as the amount of losses incurred by the Red River shareholders on account of breaches exceeds $100,000 and will not in any event be required to issue more than 225,000 additional shares.
For purposes of determining the number of shares to be returned by the Red River shareholders or to be issued by Beta, the dollar amount of the loss sustained by the nonbreaching party as a result of a breach of, or misrepresentation made under, the merger agreement will be the amount of losses, damages, costs, expenses, pre- and post-judgment interest, penalties, court costs, investigation costs and attorneys' fees determined by any court in a judicial proceeding or an arbitrator or arbitration panel in any arbitration proceeding as reflected in a judgment or award, or by the parties pursuant to a settlement of any such proceeding or any demand of claim made against the breaching party or by any governmental agency as a result of an assessment against the nonbreaching party.
• cannot be consummated for reasons beyond the control of the parties and they have used their best efforts to obtain requisite approvals and consents,
• is terminated by mutual consent of the parties, or
• is not closed prior to December 31, 2000.
• The directors, officers and shareholders of Red River will reasonably cooperate in effecting the merger, the orderly transfer of assets and control of Red River to Beta, obtaining any governmental or third party approvals or consents necessary to effect such transfer and keeping existing contracts of Red River intact.
• The officers, directors and shareholders of Red River will treat as confidential and refrain from using or disclosing all information of a confidential nature and notify Beta promptly of any request, subpoena or demand to disclose such confidential information .
• The officers, directors and shareholders of Red River will refrain from any action having the effect of discouraging any lessor, licensor, customer, supplier or other person having a business relationship with Red River from continuing its business relationship with Red River.
• Beta will provide to Red River employees, who are employed by Beta or any of its subsidiaries at the effective time of the merger, so long as they remain so employed, the same employee benefits (other than salary or incentive compensation) and coverage under employee benefit plans which in the aggregate are generally comparable to those provided to Beta employees in comparable positions.
• Each party, including the officers, directors and shareholders of Red River, will take such further action as another party may reasonably request to accomplish the merger.
• The combined company will continue Red River's business or use a significant portion of itsRed River's assets in a business.
• Beta will use its best efforts to obtain the release of the Red River shareholders' personal guarantees securing Red River's approximately $3,000,000 of the indebtedness to the Bank of Oklahoma, N.A. to the extent the bank is willing to release the personal guarantees. As an inducement to the bank, Beta will give its guarantee in substitution of the personal guarantees. Beta will also indemnify the Red River shareholders as to any funds they may be required to pay with respect to their personal guarantees.
• Beta will not take or fail to take any action which would reasonably be likely to prevent the merger from qualifying as a reorganization under Section 368 of the Code.
If we determine that a condition exists which would make it significantly disadvantageous for the shares of Beta common stock to be offered and sold under the shelf registration statement, the Red River Shareholders have agreed to suspend any sales of their shares under the shelf registration statement for up to 60 consecutive days or an aggregate of 180 days within any 12 month period. Disadvantageous conditions include the unavailability of our required financial statements for reasons beyond our control, the existence or anticipation of a material financing, merger, acquisition or material transaction involving us or other similar events or conditions involving us or our subsidiaries that have not been publicly disclosed.
Under the terms of the merger agreement, the Red River shareholders are also entitled to piggy-back registration rights relating to their shares of Beta common stock to be received in the merger. If we propose to file a registration statement in connection with an offering (with the exception of certain offerings such as the registration of stock options or debt or preferred stock financing) for our own account or the account of any other person, we are required in each such instance to notify the Red River shareholders at least 20 days prior to such filing and give them the opportunity to register the number of their shares of Beta common stock which they request us to include in such registration statement The piggy-back registration is subject to the permission of the managing underwriter or underwriters of the offering. If the underwriter(s) determine(s) that the amount of shares of Beta common stock is so large as to materially and adversely affect the success of the offering, the total amount of the securities included in the offering will be reduced. As a result of such reduction, the shares of Beta common stock requested by the Red River shareholders to be included in such registration statement will be proportionately reduced with all securities of holders having rights to include their securities in such registration statement. We may withdraw any such registration statement and abandon any proposed offering which we initiated without the consent of the Red River shareholders or any other person, if we determine in our sole discretion that such action is in our best interest and the best interest of our shareholders.
The merger agreement contains cross indemnification provisions relating to the indemnification of the other party by a party violating any rules or regulations under federal securities laws or making a misrepresentation of or omitting to state a material fact necessary to make the statements in any such registration statement not misleading.
We will be responsible for paying all of the expenses, fees and costs, including legal and accounting fees and expenses incurred in connection with each registration (whether a shelf registration or a piggy-back registration) involving the shares of Beta common stock to be received upon consummation of the merger.PRINCIPAL SHAREHOLDERS OF BETA
The following table will inform you, as of June 5, 2000, about the beneficial ownership of shares of Beta's common stock held by each person who beneficially owns more than 5% of the outstanding shares of the common stock, each person who is a director or officer of Beta and all persons as a group who are officers and directors of Beta, and as to the percentage of outstanding shares held.
Approximate Percent Approximate
Shares of Class Before the Percent of Class
Name of Beneficial Owner Beneficially Owned Merger(2) After the Merger(3)
(1)
- - --------------------------------------------- -------------------- ---------------------- --------------------
Mr. Steve Antry
Mrs. Lisa Antry, Jointly
6120 S. Yale, Suite 813
Tulsa, OK 74136 1,565,000(4) 15.59% 12.73%
Mr. R. Thomas Fetters
6120 S. Yale, Suite 813
Tulsa, OK 74136 375,000(5) 3.75% 3.06%
Mr. Lawrence W. Horwitz
2 Venture Plaza,
Suite 350
Irvine, CA 92618 90,000(6) 0.90% 0.73%
Mr. Joe C. Richardson Jr.
6120 S. Yale, Suite 813
Tulsa, OK 74136 400,000(7) 4.01% 3.27%
Mr. Stephen L. Fischer
6120 S. Yale, Suite 813
Tulsa, OK 74136 390,000(8) 3.89% 3.18%
Mr. J. Chris Steinhauser
901 Dove Street, #230
Newport Beach, CA 92660 115,000(9) 1.14% .93%
Mr. John P. Tatum
6120 S. Yale, Suite 813
Tulsa, OK 74136 68,500(10) 0.68% 0.56%
Mr. Rolf Hufnagel
6120 S. Yale, Suite 813
Tulsa, OK 74136 0(11) 0.00% 11.78%
Mr. Joseph L. Burnett
6120 S. Yale, Suite 813
Tulsa, Oklahoma, 74136 50,000(12) 0.50% 0.41%
-------------------- ---------------------- --------------------
All officers, key persons and directors as
a group (8 persons) 3,053,500(13) 30.46% 36.66%
==================== ====================== ====================
(1) Unless otherwise indicated, all shares of common stock are held directly with sole voting and investment powers. Securities not outstanding, but included in the beneficial ownership of each such person are deemed to be outstanding for the purpose of computing the percentage of outstanding securities of the class owned by such person, but are not deemed to be outstanding for the purpose of computing percentage of the class owned by any other person. (2) This column represents the approximate percentage of beneficial ownership prior to the issuance of the 2,250,000 shares to the Red River shareholders. Such shares are currently held in an escrow account pending the completion of the merger at which time the shares will be transferred to the Red River shareholders according to their interest in the shares. (3) Assumes the issuance of the 2,250,000 shares in the merger. (4) Mr. Steve Antry and Mrs. Lisa Antry, husband and wife, own 1,500,000 shares as community property. This also includes 25,000 shares of common stock underlying presently exercisable stock warrants. The warrants are exercisable at $5.00 per share and expire on March 12, 2003. In addition, this includes 40,000 shares of common stock underlying stock options which are expected to become exercisable within 60 days. The options are exercisable at $6.00 per share and expire on December 31, 2004. (5) Mr. Fetters owns directly 350,000 shares of Beta's common stock. In addition, this includes 25,000 shares of common stock underlying stock options which are expected to become exercisable within 60 days. The options are exercisable at $6.00 per share and expire on December 31, 2004. (6) Mr. Horwitz owns directly 50,000 shares. In addition, Horwitz & Beam with whom the director is a shareholder, owns 20,000 shares. In addition, this includes 20,000 shares of common stock underlying presently exercisable stock warrants. The warrants are exercisable at $6.00 per share and expire on September 1, 2004. (7) Mr. Richardson owns directly 400,000 shares. (8) Mr. Fischer owns directly 350,000 shares. This also includes 25,000 shares of common stock underlying presently exercisable stock warrants. The warrants are exercisable at $5.00 per share and expire on March 12, 2003. In addition, this includes 15,000 shares of common stock underlying stock options which are expected to become exercisable within 60 days. The options are exercisable at $6.00 per share and expire on December 31, 2004. (9) This represents 100,000 shares of common stock underlying stock warrants which shall expire on January 27, 2003. On January 27, 1998, Beta issued 100,000 common stock purchase warrants exercisable at a price of $3.75 per share of which 75,000 are currently exercisable by J. Chris Steinhauser, the former chief financial officer of Beta. This also includes 25,000 shares underlying presently exercisable stock warrants which were granted to Mr. Steinhauser. The warrants are exercisable at $5.00 per share and expire on March 12, 2003. In addition, this includes 15,000 shares of common stock underlying stock options which are expected to become exercisable within 60 days. The options are exercisable at $6.00 per share and expire on December 31, 2004. Mr. Steinhauser resigned as a director and as the chief financial officer of Beta effective on June 6, 2000. (10) Mr. Tatum owns 18,500 shares of common stock and 50,000 shares underlying common stock warrants which are exercisable at a price of $5.00 and which expire April 1, 2004. (11) Mr. Hufnagel was appointed to the Beta board of directors on June 6, 2000. Upon closing of the merger, Mr. Hufnagel will receive 1,440,000 shares of Beta common stock. (12) Mr. Burnett became the chief financial officer of Beta on June 6, 2000. This represents 100,000 shares of common stock underlying warrants which shall expire on May 31, 2005. On May 31, 2000, Beta issued 100,000 common stock purchase warrants exercisable at a price of $8.38 per share, of which 50,000 are currently exercisable by Mr. Burnett. (13) Includes 365,000 shares of common stock underlying stock warrants and options. DESCRIPTION OF BETA'S CAPITAL STOCK
Beta is authorized to issue 50,000,000 shares of common stock, $0.001 par value. As of June 5, 2000, Beta had 9,975,159 shares of common stock outstanding and an additional 2,250,000 shares of common stock being held in escrow.
Each holder of common stock is entitled to one vote per share on all matters to be voted upon by Beta's shareholders. Shareholders are entitled to as many votes as equal to the number of shares multiplied by the number of directors to be elected and may cast all votes for a single director or may distribute them among the number to be voted for any two or more of them in the election of directors. These are called cumulative voting rights. The holders of common stock are entitled to receive ratably such dividends, if any, as may be declared from time to time by the Board of Directors out of funds legally available therefor. Beta has not paid, and does not presently intend to pay, dividends on its common stock. In the event of a liquidation, dissolution or winding up of Beta, the holders of common stock are entitled to share ratably in all assets remaining after payment of liabilities, subject to prior distribution rights of holders of preferred stock, if any, then outstanding. The common stock has no preemptive or conversion rights or other subscription rights. There are no redemption or sinking fund provisions available to the common stock. All outstanding shares of common stock are validly authorized and issued and are fully paid and non-assessable, and the shares of common stock to be issued upon exercise of warrants as described in this proxy statement will be validly authorized and issued, fully paid and non-assessable. As of June 5, 2000 there were approximately 381 record holders of Beta's common stock.
During the period from inception, June 6, 1997, through December 31, 1997, Beta issued 797,245 callable and 730,977 non-callable common stock purchase warrants entitling the holders to purchase 1,528,222 shares of Beta common stock at prices ranging from $2.00 to $5.00 per share. During the year ended December 31, 1998, Beta issued 415,958 callable and 553,483 non-callable common stock purchase warrants entitling the holders to purchase 969,441 shares of Beta common stock at prices ranging from $3.75 to $7.50 per share.
Because its common stock has traded at a market price exceeding $7.00 per share for 10 consecutive days, Beta is entitled to call 442,000 of the 797,245 callable $5 warrants at any time. Beta has issued a call for these warrants and approximately 796,000 of the warrants were exercised prior to their expiration.
In addition, Beta will be entitled to call 415,958 warrants at any time on and after the date that its common stock is traded on any exchange, including the the Nasdaq Stock Market or the Over-the-Counter Bulletin Board, at a market price equal or exceeding $10.00 per share for 10 consecutive trading days. All common stock Purchase warrants expire 5 years from their date of issuance.
According to Beta's bylaws, concerning any act or action required of or by the holders of the common stock, the affirmative vote of the holders of a majority of the issued and outstanding common stock entitled to vote thereon is sufficient to authorize, affirm, ratify or consent to such act or action, except as otherwise provided by law. Officers, directors and holders of 5% or more of outstanding shares of Beta common stock do not constitute a majority and thus do not control the voting upon all actions required or permitted to be taken by shareholders of Beta, including the election of directors.
As of the date of this proxy statement, Beta's authorized but unissued capital stock consists of 37,774,841 shares of common stock. One of the effects of the existence of authorized but unissued capital stock may be to enable the board of directors to render more difficult or to discourage an attempt to obtain control of Beta by means of a merger, tender offer, proxy contest or otherwise, and to protect the continuity of Beta's management. If in the due exercise of its fiduciary obligations, for example, the board of directors were to determine that a takeover proposal was not in Beta's best interests, such shares could be issued by the board of directors without stockholder approval in one or more private placements or other transactions that might prevent or render more difficult or costly the completion of the takeover transaction by diluting the voting or other rights of the proposed acquiring or insurgent stockholder or stockholder group, by creating a substantial voting block in institutional or other hands that might undertake to support the position of the incumbent board of directors, by effecting an acquisition that might complicate or preclude the takeover, or otherwise.
Beta executed a contract of employment with the president and chairman of the board of directors, Steve A. Antry, dated June 23, 1997. The contract provides for an indefinite term of employment at an annual salary of $150,000, commencing in October 1997, and an annual car allowance of up to $12,000. The contract may be terminated by Beta without cause upon the payment of the following:(a) Options to acquire the common stock of Beta in an amount equal to 10% of the then issued and outstanding shares containing a five year term, piggyback registration rights and an exercise price equal to 60% of the fair market value of the shares during the sixty day period of time preceding the termination notice, such amount not to exceed $3.00 per share. (b) A cash payment equal to two times the aggregate annual compensation. (c) In the event of termination without cause, all unvested securities issued by Beta to the Employee shall immediately vest and Beta shall not have the right to terminate or otherwise cancel any securities issued by Beta to Mr. Antry.
Limitation of Liability and Indemnification
Beta's Articles of Incorporation and its Bylaws limit the liability of directors and officers to the extent permitted by Nevada law. Specifically, the Articles of Incorporation provide that the directors and officers of Beta will not be personally liable to Beta or its shareholders for monetary damages for breach of their fiduciary duties as directors, including gross negligence, except liability for acts or omissions “which involve intentional misconduct, fraud or a knowing violation of law not in good faith, or the payment of dividends in violation of Section 78.300 of the Nevada Revised Statutes.”
Beta has obtained a directors and officers liability insurance policy for the purposes of indemnification which shall cover all elected and appointed directors and officers of Beta up to $1,000,000 for each claim and $3,000,000 in the aggregate. Beta believes that the limitation of liability provision in its Articles of Incorporation, and the directors and officers liability insurance will facilitate Beta's ability to continue to attract and retain qualified individuals to serve as directors and officers of Beta.
Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers, and controlling persons of Beta, Beta has been advised that in the opinion of the Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore unenforceable. Except for the payment by Beta of expenses incurred or paid by a director, officer, or controlling person of Beta in the successful defense of any action, suitor proceeding, if a claim for indemnification against such liabilities is asserted by such director, officer or controlling person of Beta in connection with the securities being registered, Beta will, unless in the opinion of its counsel the matter has been settled by a controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issues.
At present, there is no pending litigation or proceeding involving any director, officer, employee or agent for which indemnification will be required or permitted under Beta's Articles of Incorporation. Beta is not aware of any threatened litigation or proceeding which may result in a claim for such indemnification.
Under the Bylaws, special meetings of the shareholders of Beta may be called only by a majority of the members of the board of directors, the chairman of the board, the president, or by one or more shareholders holding shares in the aggregate entitled to cast not less than 10% of the votes at any such meeting. The annual meeting shall be held each year on May 15 at 10:00 A.M., or at such other date that is convenient as determined by the Directors, at a place to be designated by the board of directors.
The transfer agent and registrar for the common stock is Oxford Transfer & Registrar, 317 S.W. Alder, Portland, OR 97204.
Beta needs to obtain shareholder approval of a plan or arrangement under paragraph 1 below, or prior to the issuance of common stock under paragraph 2, 3, or 4 below:
1. when a stock option or purchase plan is to be established or other arrangement made pursuant to which stock may be acquired by officers or directors, except for warrants or rights issued generally to security holders of Beta or broadly based plans or arrangements including other employees (e.g., ESOPs). In the case where shares are issued to a person not previously employed by Beta, as an inducement essential to the individual's entering into an employment contract with Beta, shareholder approval will generally not be required. The establishment of a plan or arrangement under which the amount of securities which may be issued does not exceed the lesser of 1 percent of the number of shares of common stock, 1 percent of the voting power outstanding, or 25,000 shares will not generally require shareholder approval;
2. when the issuance will result in a change of control of Beta;
3. in connection with the acquisition of the stock or assets of another company if:
a. any director, officer, or substantial shareholder of Beta has a 5 percent or greater interest (or such persons collectively have a 10 percent or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction or series of related transactions and the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, could result in an increase in outstanding common shares or voting power of 5 percent or more; or
b. where, due to the present or potential issuance of common stock, or securities convertible into or exercisable for common stock, other than a public offering for cash:
€ the common stock has or will have upon issuance voting power equal to or in excess of 20 percent of the voting power outstanding before the issuance of stock or securities convertible into or exercisable for common stock; or
€ the number of shares of common stock to be issued is or will be equal to or in excess of 20 percent of the number of shares or common stock outstanding before the issuance of the stock or securities; or
4. in connection with a transaction other than a public offering involving:
a. the sale or issuance by Beta of common stock (or securities convertible into or exercisable for common stock) at a price less than the greater of book or market value which together with sales by officers, directors, or substantial shareholders of the company equals 20 percent or more of common stock or 20 percent or more of the voting power outstanding before the issuance; or
b. the sale or issuance by Beta of common stock (or securities convertible into or exercisable common stock) equal to 20 percent or more of the common stock or 20 percent or more of the voting power outstanding before the issuance for less than the greater of book or market value of the stock.
Exceptions to those conditions requiring shareholder approval may be made upon application to Nasdaq when:
€ the delay in securing stockholder approval would seriously jeopardize the financial viability of Beta; and
€ reliance by Beta on this exception is expressly approved by the audit committee or a comparable body of the board of directors.
If Beta is relying on this exception it must mail to all shareholders not later than 10 days before issuance of the securities a letter alerting them to its omission to seek the shareholder approval that would otherwise be required and indicating that the audit committee or a comparable body of the board of directors has expressly approved the exception.
The issuance of the shares of Beta common stock in the names of the Red River shareholders, which shares are being held in escrow by a third party escrow agent, is subject to shareholder approval of the merger agreement and merger. If the Beta shareholders do not approve the merger, the escrow agent is required to release all of these shares from escrow and return them to Beta for cancellation. As such, these shares will not be transferred and therefore will not be issued to the Red River shareholders if the Beta shareholders do not approve the merger agreement.
Only shares actually issued and outstanding, excluding treasury shares or shares held by a subsidiary, are to be used in making any calculation provided for in determining whether shareholder approval is required. Unissued shares reserved for issuance upon conversion of securities or upon exercise of options or warrants will not be regarded as outstanding.
Where shareholder approval is required, the minimum vote which will constitute shareholder approval shall be a majority of the total votes cast on the proposal in person or by proxy.MARKET PRICES OF BETA COMMON STOCK
Beta Common Stock
Nasdaq Small Cap Market
Fiscal Year Ending December 31, 1999: High Low
------------------------------------- ---- ---
1st Quarter.......................... N/A N/A
2nd Quarter.......................... N/A N/A
3rd Quarter.......................... 6-11/16 4-1/4
4th Quarter.......................... 8-5/8 5-15/16
Fiscal Year Ending December 31, 2000: High Low
------------------------------------- ---- ---
1st Quarter.......................... 10-13/16 6-1/2
2nd Quarter.......................... 9-7/8 7-1/4
November 19, 1999.......... $ 8 1/8
August 8, 2000............. $ 9 3/4
Pro Forma Combining, Condensed Financial Statements
The unaudited pro forma combining, condensed financial statements are based on the assumptions set forth in the notes to such statements and should be read in conjunction with the historical financial statements and related notes of Beta and Red River and the ONEOK Properties’ statement of revenues and direct operating expenses contained herein, which were used to prepare the pro forma combining, condensed financial statements.
Combining, Condensed Balance Sheet
March 31, 2000
(Unaudited)
ONEOK
Acquisition Combined Pro Forma Combined pro-forma
Beta Historical Adjustment Pro Forma Adjustments
----------------- ------------------ ------------ ---------- ------------- --------------------
ASSETS
Current Assets:
Cash and cash equivalents $ 2,296,899 $ 470,063 $ - $ 470,063 $ - $ 2,766,962
Accounts receivable 672,945 336,654 - 336,654 - 1,009,599
Prepaid expenses 95,085 23,948 - 23,948 - 119,033
---------------- ---------------- ------------ ----------- ------------- ---------------
Total current assets 3,064,929 830,665 - 830,665 - 3,895,594
Oil and Gas Properties, at cost
(full cost method):
Evaluated properties 10,294,405 6,000,615 5,608,809 (2)11,609,424 13,819,948 (1) 35,723,777
Unevaluated properties 12,107,762 2,803,122 - 2,803,122 - (1) 14,910,884
Less-accumulated amortization
And impairments of full cost pool (4,355,106) (656,290) - (656,290) (2,792,929) (5) (7,804,325)
----------- ---------- ----------- ----------- ------------ -----------
Net oil and gas properties 18,047,061 8,147,447 5,608,809 13,756,256 11,027,019 42,830,336
Other Operating Property and Equipment:
Gas gathering system - 1,306,173 - 1,306,173 - 1,306,173
Support equipment - 1,116,615 - 1,116,615 - 1,116,615
Less-accumulated depreciation - (266,657) - (266,657) - (266,657)
----------- --------------- ----------- ------------ ------------ -----------
Net other operating property
and equipment - 2,156,131 - 2,156,131 - 2,156,131
Furniture, Fixtures and Equipment, net 9,039 29,884 - 29,884 - 38,923
Other Assets 697,198 8,818 - 8,818 - 706,016
---------------- ---------------- ------------ ------------- ------------ -----------
Total Assets $ 21,818,227 $ 11,172,945 $ 5,608,809 $16,781,754 $11,027,019 $ 49,627,000
================ ================ ============ ============= ============ ===========
Continued
See accompanying notes to combining, condensed financial information.
Combining, Condensed Balance Sheet
March 31, 2000
(Unaudited)
Continued
ONEOK
Acquisition Combined Pro Forma Combined
Beta Historical Adjustment Pro Forma Adjustments Pro Form
----------------- ------------------ ------------ ---------- ------------- --------------------
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Premiums payable – current portion
of long-term debt $ 26,220 $ - $ - $ - $ - $ 26,220
Current portion of long-term debt - 2,246,317 - 2,246,317 - 2,246,317
Accounts payable, trade 180,948 280,389 - 280,389 100,000 561,337
Accounts payable, related party - 63,818 - 63,818 - 63,818
Accrued interest - 156,488 - 156,488 - 156,488
Accrued liabilities 10,645 48,077 - 48,077 - 58,722
---------------- ---------------- ------------ ----------- ----------- ---------------
Total current liabilities 217,813 2,795,089 - 2,795,089 100,000 3,112,902
Long-Term Debt, less current
portion 21,139 7,742,804 5,608,809 (2)13,351,613 - 13,372,752
----------------- ---------------- ------------ ----------- ---------- ---------------
Total liabilities 238,952 10,537,893 5,608,809 16,146,702 100,000 16,485,654
Stockholders’ Equity 21,579,275 635,052 - 635,052 10,927,019 33,141,346
----------------- ---------------- ------------ ----------- ---------- ---------------
Total Liabilities and Stockholders’ Equity $ 21,818,227 $ 11,172,945 $ 5,608,809 $ 16,781,754 $ 11,027,019 $49,627,000
================ ================ ============ ============= ========== ================
See accompanying notes to combining, condensed financial information.
Pro Forma Combining, Condensed Statement of Operations
For the Three Months Ended March 31, 2000
(Unaudited)
ONEOK
ONEOK ACQUISITION COMBINED PRO FORMA COMBINED
BETA RED RIVER PROPERTIES ADJUSTMENT PRO-FORMA ADJUSTMENTS PRO FORMA
--------------- ---------------- ----------------- ------------------- ------------------ -------------- ------------
REVENUES $ 940,250 $ 1,109,347 $ 657,610 $ - $ 1,766,957 $ - $ 2,707,207
COSTS AND EXPENSES 1,084,593 884,803 221,718 124,526 (3) 2,524,737 (5)
6,000 (6) 1,237,047 134,121 (4) 4,980,498
-------------- --------------- --------------- ---------------- ------------------- ---------------- -------------
INCOME (LOSS) FROM OPERATIONS (144,343) 224,544 435,892 (130,526) 529,910 (2,658,858) (2,273,291)
OTHER INCOME (EXPENSE), net 18,917 (151,761) - (107,182) (7) (258,943) - (240,026)
-------------- --------------- --------------- ---------------- ------------------- ---------------- --------------
NET INCOME (LOSS) $ (125,426) $ 72,783 $ 435,892 $ (237,708) $ 270,967 $ (2,658,858) $ (2,513,317)
============== =============== =============== ================= =================== ================ ===============
BASIC AND DILUTED INCOME (LOSS)
PER SHARE $ (0.01) $ 0.21
============== ===============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (BASIC)
9,486,113 2,250,000 (8) 11,736,113
============== ================ ================
See accompanying notes to combining, condensed financial information.
Pro Forma Combining, Condensed Statement of Operations
For the Year Ended December 31, 1999
(Unaudited)
ONEOK
ONEOK ACQUISITION COMBINED PRO FORMA COMBINED
BETA RED RIVER PROPERTIES ADJUSTMENTS PRO FORMA ADJUSTMENTS PRO-FORMA
---------------- ----------------- ---------------- ------------------- ------------------ ----------- ------------
Revenues $ 1,199,480 $ 3,188,758 $ 2,087,384 $ - $ 5,276,142 $ - $ 6,475,622
COSTS AND EXPENSES 3,638,973 2,863,497 940,267 528,219 (3) 912,418 (4)
24,000 (6) 4,355,983 1,720,847 (5) 10,628,221
--------------- --------------- --------------- ---------------- ---------------- ------------ -------------
INCOME (LOSS) FROM OPERATIONS (2,439,493) 325,261 1,147,117 (552,219) 920,159 (2,633,265) (4,152,599)
OTHER INCOME (EXPENSE), net (2,944,910) (509,826) - (420,661) (7) (930,487) - (3,875,397)
--------------- --------------- --------------- ---------------- ---------------- ------------ -------------
NET INCOME (LOSS) $ (5,384,403) $ (184,565) $ 1,147,117 $ (972,880) $ (10,328) $ (2,633,265) $(8,027,996)
=============== =============== =============== ================= ================= ============ =============
BASIC AND DILUTED INCOME (LOSS)
PER SHARE $ (0.66) $ (0.77)
============== ==============
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING (BASIC)
8,160,000 2,250,000 (8) 10,410,000
=============== =========== ===============
See accompanying notes to combining, condensed financial information.
Notes to the Pro Forma Combining, Condensed Statement of Operations
(Unaudited)(1) To reflect the acquisition of Red River in a purchase transaction where Beta acquired 100% of the net assets of Red River for 2,250,000 shares of Beta common stock. The acquisition was valued at $14,455,000 including $100,000 of estimated acquisition costs. Based on an analysis performed by Beta management, the assets and liabilities of Red River are adjusted to their fair values, which approximate book values, except for the evaluated oil and gas properties which were increased by $13,805,427 to their estimated fair value based on the September 1, 1999 Ryder Scott Reserve Report. This amount will be included in the full cost amortization base of the Company. The adjustment also includes the removal of Red River's stockholders' equity accounts. (2) To reflect the acquisition of the ONEOK properties under the purchase and sale agreement between Red River and ONEOK for total consideration of $5,608,809. (3) To reflect additional amortization costs giving effect to the increase in the amortization base of the evaluated properties due to the acquisition of the ONEOK properties by Red River. (4) To reflect additional amortization costs giving effect to the increase in the amortization base of the evaluated properties acquired through the merger of Beta and Red River. The amortization base of Red River includes the amortization base of the ONEOK properties as if they had been acquired by Red River from the beginning of the periods presented. (5) To reflect the impairment charge, on a consolidated basis, under full cost method of accounting for oil and properties due to the book basis of the properties being greater than the calculated ceiling assuming prices and costs in effect as of December 31, 1999 and March 31, 2000. (6) Reflects estimated incremental general and administrative expenses due to the acquisition of the ONEOK properties. (7) Reflects increased interest expense, based upon the current rate for each of the period presented, from borrowings under the Red River line of credit to finance the acquisition of the ONEOK properties as if the borrowings had been outstanding as of the beginning of the periods presented. (8) The pro forma combined weighted average common shares reflect the adjustment for the issuance of 2.25 million shares of Beta common stock to Red River stockholders, per the Agreement and Plan of Merger. GLOSSARY
"Acquisition of properties" are the costs incurred to obtain rights to production of oil and gas. These costs include the costs of acquiring oil and gas leases and other interests. These costs include lease costs, finder's fees, brokerage fees, title costs, legal costs, recording costs, options to purchase or lease interests and any other costs associated with the acquisitions of an interest in current or possible production.
"Area of mutual interest" means, generally, an agreed upon area of land, varying in size, included and described in an oil and gas exploration agreement which participants agree will be subject to rights of first refusal as among themselves, such that any participant acquiring any minerals, royalty, overriding royalty, oil and gas leasehold estates or similar interests in the designated area, is obligated to offer the other participants the opportunity to purchase their agreed upon percentage share of the interest so acquired on the same basis and cost as purchased by the acquiring participant. If the other participants, after a specific time period, elect not to acquire their pro-rata share, the acquiring participant is typically then free to retain or sell such interests.
"Back-in interests" also referred to as a carried interest, involve the transfer of interest in a property, with provision to the transferor to receive a reversionary interest in the property after the occurrence of certain events.
"Bbl" means barrel, 42 U.S. gallons liquid volume, used in this proxy statement in reference to crude oil or other liquid hydrocarbons.
"Bcf" means billion cubic feet, used in this proxy statement in reference to gaseous hydrocarbons.
"BCFEQ" means billions of cubic feet of gas equivalent, determined using the ratio of six thousand cubic feet of gas to one barrel of oil, condensate or gas liquids.
"Casing Point" means the point in time at which an election is made by participants in a well whether to proceed with an attempt to complete the well as a producer or to plug and abandon the well as a non-commercial dry hole. The election is generally made after a well has been drilled to its objective depth and an evaluation has been made from drill cutting samples, well logs, cores, drill stem tests and other methods. If an affirmative election is made to complete the well for production, production casing is then generally cemented in the hole and completion operations are then commenced.
"Development costs" are costs incurred to drill, equip, or obtain access to proved reserves. They include costs of drilling and equipment necessary to get products to the point of sale and may entail on-site processing.
"Exploration costs" are costs incurred, either before or after the acquisition of a property, to identify areas that may have potential reserves, to examine specific areas considered to have potential reserves, to drill test wells, and drill exploratory wells. Exploratory wells are wells drilled in unproven areas. The identification of properties and examination of specific areas will typically include geological and geophysical costs, also referred to as G&G, which include topological studies, geographical and geophysical studies, and costs to obtain access to properties under study. Depreciation of support equipment, and the costs of carrying unproved acreage, delay rentals, ad valorem property taxes, title defense costs, and lease or land record maintenance are also classified as exploratory costs.
"Farmout" involves an entity's assignment of all or a part of its interest in a property in exchange for the assignee's obligation to expend all or part of the funds to drill and equip the property.
"Future net revenues, before income taxes" means an estimate of future net revenues from a property at a specified date, after deducting production and ad valorem taxes, future capital costs and operating expenses, before deducting income taxes. Future net revenues, before income taxes, should not be construed as being the fair market value of the property.
"Future net revenues, net of income taxes" means an estimate of future net revenues from a property at a specified date, after deducting production and ad valorem taxes, future capital costs and operating expenses, net of income taxes. Future net revenues, net of income taxes, should not be construed as being the fair market value of the property.
"Mcf" means thousand cubic feet, used in this proxy statement to refer to gaseous hydrocarbons.
"MMcf" means million cubic feet, used in this proxy statement to refer to gaseous hydrocarbons.
"MBbl" means thousand barrels, used in this proxy statement to refer to crude oil or other liquid hydrocarbons.
"Gross" oil and gas wells or "gross" acres is the total number of wells or acres in which Beta has an interest.
"Net" oil and gas wells or "net" acres are determined by multiplying "gross" wells or acres by Beta's interest in such wells or acres.
"Oil and gas lease" or "Lease" means an agreement between a mineral owner, the lessor, and a lessee which conveys the right to the lessee to explore for and produce oil and gas from the leased lands. Oil and gas leases usually have a primary term during which the lessee must establish production of oil and or gas. If production is established within the primary term, the term of the lease generally continues in effect so long as production occurs on the lease. Leases generally provide for a royalty to be paid to the lessor from the gross proceeds from the sale of production.
"Overpressured reservoir" are reservoirs subject to abnormally high pressure as a result of certain types of subsurface conditions.
"Present value of future net revenues, before income taxes" means future net revenues, before income taxes, discounted at an annual rate of 10% to determine their "present value." The present value is shown to indicate the effect of time on the value of the revenue stream and should not be construed as being the fair market value of the properties.
"Present value of future net revenues, net of income taxes" means future net revenues, net of income taxes discounted at an annual rate of 10% to determine their "present value." The present value is shown to indicate the effect of time on the value of the revenue stream and should not be construed as being the fair market value of the properties.
"Production costs" means operating expenses and severance and ad valorem taxes on oil and gas production.
"Prospect" means a geologic anomaly which may contain hydrocarbons that has been identified through the use of 3-D and/or 2-D seismic surveys and/or other methods.
"Proved oil and gas reserves" are 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, i.e. prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Reservoirs are considered proved if economic producibility is supported by either actual production or conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any, and (B) the immediately adjoining portions not yet drilled, but which can reasonably be judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.
"Proved developed oil and gas reserves" are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas reserves expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
"Proved undeveloped oil and gas reserves" are 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. Reserves on undrilled acreage shall be limited to those drilling units offsetting productive units that are reasonably certain of production when drilled. Proved reserves for other undrilled units can be claimed only where it can be demonstrated with certainty that there is continuity of production from the existing productive formation. Under no circumstances should estimates for proved undeveloped reserves be attributable to any acreage for which an application of fluid injection or other improved recovery technique is contemplated, unless such techniques have been proved effective by actual tests in the area and in the same reservoir.
"Reserve target" means a geologic anomaly which may contain hydrocarbons that has been identified through the use of 3-D and 2-D seismic surveys and other methods.
"Royalty interest" is a right to oil, gas, or other minerals that is not burdened by the costs to develop or operate the related property. The basic royalty interest is retained by the owner of mineral rights when his property is leased for purposes of development.
"Trend" means a geographical area where similar geological, geophysical, or oil and gas reservoir and production characteristics may exist.
"Seismic Option" generally means an agreement in which the mineral owner grants the right to acquire seismic data on the subject lands and grants an option to acquire an oil and gas lease on the lands at a predetermined price.
"Working interest" is an interest in an oil and gas property that is burdened with the costs of development and operation of the property.BUSINESS OF BETA
Beta Oil & Gas, Inc. is an oil and gas company organized in June 1997 to engage in the exploration, development, exploitation and production of natural gas and crude oil. Beta's operations are currently focused in proven oil and gas producing trends primarily in South Texas, Louisiana and Central California.
Beta believes that the availability of economic 3-D seismic surveys has fundamentally changed the risk profile of oil and gas exploration in certain regions, specifically South Texas and Louisiana.
Recognizing this change in risk profile, Beta has aggressively sought to acquire significant prospective acreage blocks for targeted, proprietary, 3-D seismic surveys. As of December 31, 1999, Beta had assembled approximately 38,000 gross acres under lease or option.
Approximately 94% of Beta's current acreage position is evaluated by proprietary 3-D seismic data that Beta has acquired through joint participation with operating oil and gas companies. From the data generated by its initial proprietary seismic surveys, covering over 300 square miles, in excess of 200 potential drillsites have been identified.
Approximately $11,000,000 has been utilized to acquire working interests in lands and seismic data in the onshore Texas Gulf Coast region. Beta's interests in the onshore Texas properties are operated by Parallel Petroleum Corporation, Allegro Investments, Inc. and Sue Ann Production, Inc. Drilling commenced on these projects during 1999 and has resulted in eight discoveries of oil and gas to date. Representatives of Parallel, Allegro and Sue Ann have informed Beta that drilling will continue in these projects throughout the year 2000. Beta anticipates that participation in exploratory and drilling projects in South Texas will constitute its primary activity during 2000.
Approximately $ 7,000,000 has been invested in leases, seismic and drilling in Louisiana. Drilling commenced on these prospects in 1998 and has resulted in five oil and gas discoveries so far. It is expected that Beta will participate in the drilling of a minimum of six wells in Louisiana during 2000.
The balance of funds raised to date have been utilized primarily to fund various domestic and international exploratory activities. Beta's exploratory activities in areas outside of Texas have resulted in two natural gas discoveries located in Central California. It is anticipated that Beta will expend additional funds to explore these areas during 2000 and future periods.
Beta has to rely on joint ventures with qualified operating oil and gas companies to operate its projects through the exploratory and production phases. This has reduced general and administrative costs necessary to conduct operations. As of the date of this proxy statement, Beta is operating only one of the oil and gas wells or prospects in which it owns an interest. The balance of Beta's wells or prospects are being operated by third parties.
Technology
Beta participates in projects utilizing economically feasible advanced technology in their exploration and development activities to reduce risks, lower costs, and more efficiently produce oil and gas. Beta believes that the availability of cost effective 3-D seismic surveys makes its use in exploration and development activities attractive from a risk management perspective in certain areas such as South Texas and Louisiana. In certain instances, 3-D seismic surveys more accurately inform Beta in evaluating drilling prospects than do conventional 2-D seismic and traditional evaluation methods. During 1999, Beta participated in the drilling of ten South Texas exploratory wells utilizing 3-D seismic. Seven of the Texas wells have been completed for production. During the same period, Beta participated in the drilling of seven Louisiana exploratory wells identified from 3-D seismic, of which four have been completed for production. None of the Texas or Louisiana prospects had been identified prior to the use of 3-D seismic. Beta management believes that the use of 3-D seismic resulted in higher number of completions of producing wells than would otherwise be the case without the use of the 3-D seismic. 3-D seismic allows Beta and its partners to better image the potential size of an exploratory target and distinguish between larger more profitable targets and smaller less attractive targets.
Briefly, a seismic survey sends pulses of sound from the surface, down into the earth, and records the echoes reflected back to the surface. By calculating the speed at which sound travels through the various layers of rock, it is possible to estimate the depth to the reflecting surface. It then becomes possible to infer the structure of rock deep below the earth's surface. Beta has focused its exploration activity in the Gulf of Mexico region due to affordable and available seismic data, and the affordability of the software and computer hardware necessary to peer through the layers of rock and salt to locate heretofore undiscovered hydrocarbons. Beta evaluates substantially all of its exploratory prospects using 3-D or enhanced 2-D seismic surveys.
In evaluating certain of its exploratory prospects, Beta also uses amplitude versus offset "AVO" technology. AVO analysis can show the high contrast between the sand and shales and provides for better interpretation of the reservoir sands to determine the presence of gas.
Beta retains experienced third-party consultants and participates with experienced joint working interest owners to acquire, process and interpret 3-D seismic surveys. Beta attempts to ensure the integrity of the 3-D seismic analysis in each of its projects by emphasizing quality control throughout the data acquisition, processing and interpretation. Whenever possible, Beta also attempts to correlate or "model" the interpretations of 3-D seismic surveys with wells previously drilled on or near the prospect being evaluated.
Beta may supplement its exploration efforts with acquisitions of producing oil and gas properties. Beta would seek to acquire producing properties that either are underperforming relative to their potential or are candidates for 3-D seismic analysis.
Summary of Oil and Gas Operations
Capitalized costs at December 31 1998, and 1999 relating to Beta's oil and gas activities are summarized as follows:
December 31, 1998 December 31, 1999
----------------- -----------------
United States Foreign United States Foreign
------- ------- ------- -------
Capitalized costs-
Evaluated properties $ 1,763,082 $ 1,624,218 $ 8,128,928 $ 1,681,270
Unevaluated properties 11,426,732 39,963 11,973,532 118,095
Less- Accumulated
depreciation,depletion,
amortization and impairment (46,473) (1,624,218) (2,115,957) (1,681,270)
------------ ----------- ------------ -----------
$ 13,143,341 $ 39,963 $17,986,503 $ 118,095
============ =========== ============ ===========
As Beta's properties are evaluated through exploration, they will be included in the amortization base. Costs of unevaluated properties in the United States at December 31, 1998 and 1999 represent property acquisition and exploration costs in connection with Beta's Louisiana, Texas and California prospects. The prospects and their related costs in unevaluated properties have been assessed individually and no impairment charges were considered necessary for the United States properties for any of the periods presented. The current status of these prospects is that seismic has been acquired, processed and is currently being interpreted on the subject lands within the prospects. Drilling commenced on the prospects in the first quarter of 1999 and will continue in future periods. As the prospects are evaluated through drilling in future periods, the property acquisition and exploration costs associated with the wells drilled will be transferred to evaluated properties where they will be subject to amortization.
Unevaluated costs as of December 31, 1999, outside the United States represent costs in connection with the evaluation and proposed acquisition of one or more exploration blocks in Australia.
As a result of a ceiling test calculation, which limits capitalized costs, net of related deferred tax liability to the aggregate of the estimated present value, discounted at 10 percent of future net revenues from proved reserved plus lower of cost or fir market value of unproved properties. Beta recognized an impairment of approximately $1,168,000 related to its oil and gas properties during the fourth quarter of 1999. Beta recognized an impairment of approximately $46,000 related to its oil and gas properties during the fourth quarter of 1998.
During the year ended December 31, 1998 Beta participated in the drilling of 6 wells within the United States. The property acquisition and exploration costs associated with the wells totaling $1,763,082 were transferred to evaluated properties and were evaluated for impairment. Since all of the proved reserves associated with the wells were non-producing or behind pipe and no production had occurred as of December 31, 1998, no depletion expense was recorded during the year ended December 31, 1998.
During the year ended December 31, 1999, Beta participated in the drilling of 19 wells within the United States. The property acquisition and exploration costs associated with the wells were transferred to evaluated properties. Production commenced during the period and depletion expense of $901,573 was recorded.
As a result of a ceiling test calculation, which limits capitalized costs, net of related deferred tax liability, to the aggregate of the estimated present value, discounted at 10 percent of future net revenues from proved reserves plus lower of cost or fair market value of unproved properties. Beta recognized an impairment of approximately $1,168,000 related to its oil and gas properties during the fourth quarter of 1998.
During 1998, Beta, through its wholly owned subsidiary, BETAustralia, LLC secured an option to participate for a 5% working interest in two petroleum licenses covering 2,798,000 acres (approximately 4,372 square miles). Per the terms of the option agreement, Beta exercised its option to earn a 5% working interest by participating in the drilling of two offshore test wells in the license areas. The wells were completed as dry holes. The property acquisition and exploration costs associated therewith totaling $1,624,218 were transferred to evaluated properties and charged to impairment expense during the year ended December 31, 1998. The exploration licenses expired in December 1998. Property acquisition and exploration costs associated with a Brazilian prospect totaling $ 57,052 were transferred to evaluated properties and charged to impairment expense during the year ended December 31, 1999.PROPERTIES OF BETA
1. Yegua and Frio Trend 3-D Seismic Joint Venture - Onshore Gulf Coast Region, Jackson County, Texas;
2. Transition Zone Project - Offshore and Onshore Gulf Coast Region, Texas and Louisiana;
3. Norcal Project - Onshore San Joaquin and Sacramento Basins, California; and
4. International - Onshore Australia and Brazil.
In substantially all of its project areas, Beta has entered into joint ventures with operators who have extensive experience and expertise in those areas. This has allowed Beta to obtain working interests in a number of prospects with minimal associated overhead.
The following discussion contains forward looking statements. The projects discussed in this section may never yield any additional commercial discoveries of hydrocarbons and, even if they do, they could result in a loss to Beta. See "Risk Factors" for a discussion of the risk factors associated with the projects.
YEGUA/FRIO/WILCOX TREND 3-D SEISMIC JOINT VENTURE, JACKSON COUNTY, TEXAS
Beta presently owns working interests in four Onshore Gulf Coast exploration projects located in Jackson County, Texas. The projects are operated by Parallel Petroleum Corporation, Allegro Investments, Inc. and Sue-Ann Production Company. Approximately 15,000 gross acres, approximately 3,900 acres net to Beta's working interest, of oil and gas leases have been acquired in these four projects as of December 31, 1998. As of December 31, 1999 , the operators had completed 3-D seismic surveys over an area totaling 286 square miles within which these projects are located and were evaluating seismic data to select drilling locations. Drilling commenced on Beta's project areas in the first quarter of 1999.
The following projects in which Beta is participating will use the same seismic techniques that Parallel has previously used to identify potential drill sites. The status of the projects is as follows:
1) Texana Project. Approximately 25,000 gross acres under seismic coverage; 294 gross acres under lease; 74 acres under lease net to Beta's 25% working interest as of December 31, 1999 :
Approximately 40 square miles of 3-D seismic data has been acquired and processed. "Amplitude Versus Offset" analysis and data interpretation has been completed. Approximately 10 potential locations have been identified for drilling in 2000 and future periods. Drilling of exploratory wells is expected to commence in the third quarter of the year 2000.
2) Formosa Grande Project. Approximately 92,000 gross acres under seismic coverage; 6,471 gross acres under lease; 1,618 acres under lease net to Beta's 25% working interest at December 31, 1999 :
Approximately 140 square miles of 3-D seismic data has been acquired. The seismic data has been interpreted and prospects identified. Drilling of exploratory wells commenced in the fourth quarter of 1999 and has resulted in one dry hole to date. Approximately 46 additional potential locations have been identified for drilling in 2000 and future periods. Two wells were drilled in the second quarter. One gas/condensate well has been completed, the second well is currently being drilled.
3) Ganado Project. Approximately 25,000 gross acres under seismic coverage, 4,965 gross acres under lease; 993 acres under lease net to Beta's 20% working interest at December 31, 1999 :
Approximately 40 square miles of 3-D seismic data has been acquired and is in the interpretive stages. Three exploratory wells have been drilled in this project this year. Two wells were dry holes and the third well was completed for production. Approximately 91 additional locations have been identified for drilling during 2000 and future periods, three well s are planned for the third quarter alone.
4) BWC Project. Approximately 42,440 gross acres under seismic coverage, 3,561 gross acres under lease; 1,175 acres under lease net to Beta's 12.5% working interest at December 31, 1999 :
Approximately 66 square miles of 3-D seismic data has been acquired and is in the interpretive stages. Drilling of exploratory wells commenced in the first quarter of 1999 and has resulted in seven oil and gas discoveries out of eight wells drilled to date. Approximately 100 additional potential locations have been identified for drilling in 2000 and future periods. Additional drilling is scheduled for the third quarter of 2000.
Terms of Participation
All of the lands covered by the exploration agreements are subject to "area of mutual interest" provisions described in the glossary preceding the "Business" section. The exploration agreements generally provide, among other things, for participation by Beta and other participants on the following terms and conditions:
€ Participants were required to pay 133% of actual cost of initial land costs, consisting mainly of seismic options, and the costs of acquiring, processing and interpreting seismic data. The 33% premium was paid to unrelated parties as compensation for assembling the leases and conducting the seismic operations. All costs incurred after the interpretation phase are billed to the participants at actual cost. The post interpretation costs include the cost of drilling, completing and equipping wells and the costs of acquiring leases. All of the projects are now in the post-interpretive stage.
€ Once the seismic data has been acquired and interpreted, prospects will be designated within the seismic survey areas. The parties to the agreement then have the option to participate in the prospect according to their pro-rata working interest. Those parties who elect not to participate forfeit their rights of participation in the specific prospect but retain the right to participate in other prospects proposed in the seismic survey area which are outside of the specific prospect.
€ Those parties who elect to participate in a specific prospect then proceed to acquire oil and gas leases within the prospect by exercising seismic options. The seismic options were acquired in advance of seismic acquisition and convey the right to conduct seismic operations as well as the option to enter into an oil and gas lease on the subject lands at a pre-determined price per acre. The seismic option allows Beta and its partners to acquire and evaluate seismic data before actually acquiring leases. After the seismic data has been evaluated, Beta and its partners can then selectively acquire leases by exercising on acreage which is determined to be prospective from seismic evaluation. Seismic options covering lands which are determined not to have oil and gas potential are allowed to expire at no further cost to the participants. The cost of a seismic option is usually much lower than the cost of acquiring a lease and it also prevents the mineral owner lessor from leasing the oil and gas rights to another party during the term of the option.
Geological and Economic Overview of the Yegua/Frio/Wilcox Trend 3-D Joint Venture
The subject lands lie in close proximity to productive oil and gas fields which produce from the Yegua/Frio/Wilcox intervals. Beta wishes to emphasize that the historical production results in the area are not necessarily indicative of the results that Beta may obtain from its oil and gas prospects.
Within Beta's project areas, there are high potential exploration opportunities that are being defined with the use of 3-D seismic. The Jackson County, Texas area has proven to be suitable for 3-D seismic as faulting and structures are easily identified and many stratigraphic reservoirs exhibit hydrocarbon indicators from the shallowest Miocene sands, throughout the Frio, and into the Vicksburg, Yegua, and Wilcox intervals. The Formosa Grande Prospect Area has numerous regional down-to-the-coast faults that are easily identified at the top of the Frio, but also has deep seated faulting that does not exhibit displacement at the shallower horizons. Very often, these deep faults do create hydrocarbon traps. Most fields in this trend area exhibit multiple stacked reservoirs.
A Frio level structure map exhibits numerous large four-way closures, primarily down-thrown to regional growth faulting. These large structures have, for the most part, been exploited, some as early as the 1930s and 1940s. Although it is not readily apparent in regional mapping, much of the Frio production is stratigraphic in nature, that is, trapped in channel sands that traverse structures, or in sands that "pinch out" up onto the flanks of these large structures. Significant reserves may remain in similar traps which have not been developed to date. Such traps should be readily defined with 3-D seismic data.
Beta's project areas appear to be located in a suitable "trend" area to apply 3-D seismic technology to identify reserves that have been passed over in existing fields as well as to discover new reserves in deeper pools and undrained fault segments in compartmentalized fields.
TRANSITION ZONE PROJECT
Beta has entered into several joint exploration agreements in southern Louisiana and Texas in an area which is generally described as the Transition Zone.
The Transition Zone
The Transition Zone of Southern Louisiana and Texas covers the shoreline and near shore environments in the Gulf of Mexico region. This region has been under-explored because acquisition of seismic data in the area was very expensive and has historically been of less than ideal quality due to the problems inherent in gathering data in the wide variety of environments encountered between land and deeper water offshore. Innovative techniques have been utilized to acquire and process 3-D seismic data and quality data that provides the opportunity to accurately interpret the structural and stratigraphic framework of the area.
All of the reserve targets will lie in the shallow waters or onshore. Depths of the reserve targets will typically range from 3,000 to 15,000 feet. The average dry hole costs for these wells are expected to be $1,500,000 for a straight hole and $2,000,000 for a directional hole to the 100% working interest. The completion cost per well is estimated at $1,000,000 to $1,500,000 to the 100% working interest. Beta's prospects in the Transition Zone are located within or adjacent to existing pipeline infrastructure. This will enable wells drilled in the prospects to be connected to existing pipelines to transport oil and gas to markets.
The Cheniere Exploration Agreements
During 1999, Beta entered into joint exploration agreements with Cheniere Energy, Inc. on five natural gas prospects located in Louisiana.
The following prospects in which Beta is participating have been identified from a proprietary 3-D seismic survey acquired by Cheniere. The status of the prospects is as follows:
1) Cobra Prospect. All of the leases associated with this prospect were allowed to expire :,br>
This prospect is located onshore in Cameron Parish, Louisiana. A well commenced drilling on this prospect to a total depth of 12,500 feet in February 1999 and was determined to be non-commercial.
2) Shark Prospect. Approximately 752 gross acres under lease; 113 acres net to Beta's 15% working interest:
This prospect is located offshore in West Cameron Block 49, Louisiana. A 9,900 foot test well commenced drilling on this prospect in April 1999 and encountered pay. Noncommercial shows were encountered and the well was completed as a dry hole. A separate deeper 11,000 foot test is planned for this prospect in the third quarter of 2000. In addition to the deep objectives, the teest will evaluate the previously encountered show zones in an updip position.
3) Redfish Prospect. Approximately 732 gross acres under lease; 110 acres net to Beta's 15% working interest:
This prospect is located offshore in West Cameron Block 49, Louisiana. A 10,000 foot test well was drilled on this prospect in March 1999 and completed for production at an initial stabilized production rate in excess of 15,000 mcf and 100 barrels of condensate per day. The well is currently producing at a rate in excess of 14,000 mcf and 50 barrels of condensate per day.
4) Stingray Prospect. Approximately 691 gross acres under lease; 104 acres net to Beta's 15% working interest:
This prospect is located offshore in West Cameron Block 49, Louisiana. A test well was drilled on this prospect in May of 1999. The well was completed for production in September at a stabilized rate in excess of 8,000 mcf and 60 barrels of condensate per day. The initial producing zone has been depleted and the well has been re-completed in another producing zone in a shallower interval. The well is currently producing approximately 6,000 mcf of natural gas and 40 barrels of condensate per day.
5) Heron Prospect. Approximately 1,139 gross acres under lease; 142 acres net to Beta's 12.5% working interest
This prospect is located onshore in Cameron Parish, Louisiana. An 11,700 foot Planulina test was commenced in September 1999 and completed as a dry hole.
The Rozel Exploration Agreement
Beta entered into a joint exploration agreement with Rozel Energy in 1998 to explore for oil and gas in the Transition Zone of South Louisiana. Under this agreement, which expired on February 23, 1999, Rozel identified prospects on the basis of a 3-D seismic survey completed by Fairfield Industries, one of the leading providers of 3-D seismic data for the Gulf of Mexico. Although the agreement with Rozel has expired, Beta continues to have participation rights in acreage acquired and wells drilled before the expiration of the agreement.
Under the terms of the Rozel agreement, Beta provided a total of $480,000 of lease acquisition funding for prospects before expiration of the agreement. Rozel identified the prospects utilizing the 3-D seismic data from the Fairfield survey. In consideration for providing the lease acquisition funds, Beta is entitled, but not obligated, to participate on a prospect by prospect basis in leases that were acquired by Rozel Energy during the term of the agreement.
There are currently three remaining undrilled prospects in which Beta has rights of participation. Beta's terms of participation shall require it to pay approximately 12.5% of the costs of drilling and completing the first well in each prospect to earn approximately a 9.375% working interest in the initial well and prospect acreage, a "third for a quarter" basis. Beta's 9.375% working interest shall be further reduced to 8.8% after the costs of the prospect have been recouped. Beta is obligated to pay a $50,000 fee on those prospects in which it elects to participate. Beta shall be entitled to reimbursement of lease funds advanced for prospects in which it elects not to participate. Beta shall be entitled to such reimbursement if and when Rozel either sells or otherwise conveys, i.e. farmouts, its interest in, or drills, the prospect.
In addition to the three undrilled prospects, Beta owns a 9.375% working interest in three producing wells and 5,000 acres surrounding it. The OCS-G-13825 Minkfish #1, West Cameron Blk. 39, was drilled to a depth of approximately 10,500 feet. The well commenced production in January 1999 and is currently producing at a rate in excess of 4,000 mcf and 30 barrels of condensate per day. A second well, the Minkfish #2, was drilled and completed in 1999 and the well is currently producing at rate in excess of 6,000 mcf and 100 barrels of condensate per day. A third well has been drilled and completed and is currently shut in due to the need for well compression. The compression will not be installed until such time that the second well requires compression. At this time no specific date has been set for the compression installation.
The Lapeyrouse 3-D Prospect
This prospect is in Terrebone Parish, South Louisiana, an area specifically targeted by Beta for its high reserve potential based on historical production results that have been published for this area. Although the main objective, the Duval, will be reached with a 14,800' test well, a total of twenty-one objectives will be tested with one well bore. These consist of fourteen smaller objectives from 10,000' to 14,000' to pressure point and seven larger objectives in abnormal pressure, over-pressured reservoir, through 16,000'.
Beta's working interest was purchased after detailed 3-D seismic was completed and interpreted. A total of 7,000 mineral acres have been leased to drill the multiple objectives stated above. Beta's working interest varies between 2.5% and 6.25% in the project leases. Beta has acquired additional working interests from participants who have declined to participate, which has increased Beta's working interest in the initial exploratory well to 19%. Estimated drilling costs to casing point for a proposed 14,800 foot test are $3,304,302 of which Beta shall pay $627,817 for its proportionate 19% working interest. Estimated completion costs are $1,051,683 of which Beta shall pay $199,819 for its proportionate 19% working interest, provided Beta elects to participate in the completion. A well is expected to be drilled in the third quarter of 2000.
The Greens Lake Prospect
This prospect is in Galveston County, Texas on trend with the Eagel Point Vicksburg Sand discovery. The 2900 acre prospect lies within a proprietary 24 square mile S-D survey. Prospective sands include the Miocene, Lower Frio and Vicksburg which are upthrown to a major regional fault. . Two wells, both to be drilled to a depth of approximately 14,000 feet, are planned in this prospect, the first well to be drilled in the third quarter of 2000. Beta has a 25% working interest in this prospect.
The Estherwood Prospect
The Estherwood Prospect is located onshore Acadia Parish, Louisiana within the Field Limits of the Lawson Field. The operation involved the re-entry of the Sandefer #1 Pelto originally drilled in 1989. In December 1999 Beta re-entered the well. The Marg tex sand at 11,720' was tested and determined to non-commercial. Beta has a 50% working interest in this prospect and is the operator.
NORCAL PROJECT, ONSHORE SAN JOAQUIN AND SACRAMENTO BASINS
Beta had entered into an exclusive eighteen month contract, which expired in April of 1999, to utilize 3-D and 2-D seismic technology in a 500 square mile area of mutual interest with Source Energy LLC. Beta has maintained a between a 30 to 75% working interest in certain prospects generated by FrimodigSource Energy LLC in the San Joaquin and Sacramento Basins in Central and Northern California. As of December 31, 1999, Beta has participated in the drilling of five wells in the Norcal Project. Two of the wells have been completed for production:
1) The N.W. Buttonwillow #1 was completed in July 1998 flowing at a rate of 415 mcf per day and is currently shut in due to high water production. The well is being evaluated by the operator for abandonment. No decision has been reached at this time. Beta has a 75% working interest in this well.
2) The S.E. Garrison City #1 was completed and tested at a rate of 2,400 mcf per day. The well is awaiting a pipeline hookup. Beta has a 30% working interest in this well.
In addition, Beta participated in the drilling of the S. Shafter #1, the Bowerbank #1 and the Buttonwillow #1, all three of which were completed as dry holes. The Buttonwillow #1 is a different well than the N.W. Buttonwillow #1.
INTERNATIONAL
Although the majority of Beta's exploration efforts are focused in the United States, management believes that international exposure can reduce the business risks commonly associated with having operational activities confined to one country.
Australian Projects
Beta has reviewed a number of exploration projects in the Asia Pacific Region and elected to participate in two exploration areas covering four separate exploration permits in Eastern Australia. A description of the areas is as follows:
1) Toko Syncline Project
Beta's wholly owned subsidiary BETAustralia LLC has signed an agreement with Dyad Australia, Inc. of Midland, Texas to participate for a 20% working interest, 16.4% net revenue interest, in Dyad's rights to the Toko Syncline Project. Dyad is the holder of exploration permits covering approximately 918,000 contiguous acres, 1,434 square miles, in the Georgina and Eromanga Basins of Western Queensland. Since the acquisition of the permits, Dyad has acquired, analyzed, and reprocessed 400 miles of existing 2-D seismic data and identified four potentially significant geological structures encompassing approximately 55,000 acres or 86 square miles. During the period from 1964 to 1980, there were six wells drilled in the Toko Syncline that went deep enough to provide meaningful subsurface control. Four were exploratory and two were full core tests by the Geological Survey of Queensland. Of these six, only one well failed to identify oil or gas shows. At the time the wells were drilled, there were no gas pipelines in the prospect areas available to transport natural gas, if commercial amounts of gas could be discovered. The lack of pipelines in the area discouraged further exploration in the area until now.
One of the structures is of particular interest due to a well, the Ethabuka #1 drilled on the structure in 1973 by Alliance Oil Development. The well encountered a persistent gas flow of 200 MCF of gas per day while drilling. The well was abandoned 3,500 feet short of the initial target depth after twisting off the drill pipe and making several unsuccessful efforts to reclaim the hole. This very significant show of gas was documented by the Queensland Department of Minerals and Energy. At the time, there was no gas pipeline in the area.
The market for natural gas has increased significantly since then in the area. Western Queensland has a large mining industry centered in the city of Mt. Isa. This area holds some of the world's largest deposits of copper, lead, zinc, and phosphate. Previously, the mines and the associated processing and smelting plants were fueled entirely by coal, which was shipped approximately 750 miles by rail. The Queensland government is encouraging the introduction of natural gas as an energy source. Construction of a 14 inch gas transmission line from southwest Queensland to Mt. Isa is now complete and transporting gas. The pipeline crosses the Toko Syncline project area, exposing the project to a viable market for natural gas.
Dyad has entered into an agreement with a major U.S. concern for the funding of additional seismic data acquisition and the drilling of an exploration well. Under the terms of the agreement, Dyad will have the opportunity to buy into the exploratory well by reimbursing its proportionate share of actual costs after the well has been drilled and evaluated. Dyad also has the option of postponing its buy-in until later stages in the development program. Per the terms of the Beta-Dyad agreement, Beta has paid $100,000 to acquire 20% of Dyad's working interest buy-in rights in the project area. If Dyad buys into the program after the initial exploratory well has been drilled and evaluated, Beta will at that point, have the option of acquiring a net 10% working interest at cost. If Dyad postpones its buy-in option until the later stages of the project, then its option to purchase an interest will be incrementally reduced. Beta's working and net revenue interest in the Toko Syncline project area will depend on if and when Dyad and its partners elect to buy-in to the project and will be reduced in the later stages of the project if the buy-in option is not exercised and additional expenditures are incurred by the funding partner. The funding partner will have exclusive marketing rights to hydrocarbons in the project area, subject to an agreed minimum floor price to be received for hydrocarbons produced and sold.
Beta anticipates that the initial exploratory well could be drilled in the second quarter of 2000.
2) Stansbury Basin Project
In March 1998, Beta formed a wholly owned subsidiary called BETAustralia, LLC, a limited liability company organized under the laws of California, for the purposes of participating in the Stansbury Basin Project and other Australian projects. Beta made an initial cash advance of $320,000 to secure an option to participate for a 5% working interest in two petroleum licenses covering 2,798,000 acres or approximately 4,372 square miles. Per the terms of the option agreement, Beta exercised its option to earn a 5% working interest by participating in the drilling of two offshore test wells in the license areas. Beta incurred costs of $1,305,445 in the drilling of the two wells. The wells were completed as dry holes. The costs associated therewith totaling $1,625,000 have been transferred to evaluated properties and charged to impairment expense during the year ended December 31, 1998. Beta has no current plans to conduct additional exploration activities in the Australian, Stansbury Basin, license areas. The exploration licenses expired in December of 1998.
Additional Projects Under Review
Although Beta's initial international focus is Australia, management is currently reviewing several other opportunities. However, there is no guarantee that any of these projects will ever reach fruition.
These are forward looking statements. The projects discussed in this section may never materialize and, even if they do materialize, they could result in a loss to Beta. No formal agreements have been reached and there can be no assurance that such a purchase will ever be completed and this potential acquisition should not be relied upon in making an investment decision.
GENERAL
Beta holds interests in producing properties and undeveloped acreage in three states within the United States.
COMPANY RESERVES
Beta had no proved reserves as of December 31, 1997. Beta's total net ownership in oil and gas reserves as of December 31, 1998 and 1999 are based on independent engineering reports. The reserve quantities and valuations for fiscal 1998 are based upon estimates by Veazey & Associates, Inc. The reserve quantities and valuations for fiscal 1999 are based upon estimates by Ryder Scott Company.
Proved developed reserves are those that can be recovered through existing wells with existing equipment and existing operating or tested recovery techniques. All of Beta's reserves are classified as proved developed reserves. These reserves are located entirely within the United States.
Beta Oil & Gas, Inc.
Historical Reserve Information
as of December 31, 1998 and 1999
---------------------------------------------- ---------------- ----------------
DESCRIPTION 1998 1999
---------------------------------------------- ---------------- ----------------
Proved Developed Reserves
Oil (bbls) 1,461 13,201
Gas (mcf) 1,596,740 4,170,000
---------------------------------------------- ---------------- ----------------
Proved Reserves
Oil (bbls) 1,461 13,201
Gas (mcf) 1,596,740 4,170,000
---------------------------------------------- ---------------- ----------------
Future Net Cash Flows
Before Income Tax $2,553,762 $7,534,646
---------------------------------------------- ---------------- ----------------
Standardized Measure of
Discounted Future Net Cash Flows $1,716,608 $6,012,972
---------------------------------------------- ---------------- ----------------
As of December 31, 1997, Beta did not own working interest in any productive wells. As of December 31, 1998 Beta owned working interests in two, .84 net, wells which have been completed for production but which have not yet commenced production. As of December 31, 1999 Beta owned working interests in thirteen, 1.84 net, wells which have been completed and commenced production.
The following tables set forth the undeveloped and developed acreage of Beta as of December 31, 1998 and 1999:
Beta Oil & Gas, Inc. Acreage Holdings
As of December 31, 1998 and 1999
1998 1999
----------------------- ----------------------
UNDEVELOPED ACREAGE GROSS NET GROSS NET
ACRES ACRES ACRES ACRES
------------------------------------- ----------- -- --------- ----------- ----------
California 200 150 520 156
Louisiana 7,502 485 11,680 1,460
Texas 59,038 10,955 18,167 4,435
------------------------------------- ----------- ----------- ----------- ----------
UNDEVELOPED ACREAGE 66,740 11,590 30,367 6,051
===================================== =========== =========== =========== ==========
1998 1999
------------------------------------- ----------- ----------- ----------- ----------
DEVELOPED ACREAGE GROSS NET GROSS NET
ACRES ACRES ACRES ACRES
------------------------------------- ----------- ----------- ----------- ----------
California 600 450 580 300
Louisiana 5,000 470 6,423 682
Texas 0 00 1,058 141
------------------------------------- ----------- ----------- ----------- ----------
DEVELOPED ACREAGE 5,600 920 8,061 1,123
===================================== =========== =========== =========== ==========
The following table sets forth the results of Beta's drilling activities in the fiscal years ended December 31, 1997, 1998 and 1999:
Beta Oil & Gas, Inc.
Summary of Drilling Activity
For Fiscal Years Ending December 31, 1997, 1998 and 1999
--------------------------------------- ------------- ------------- ------------
EXPLORATORY WELLS 1997 1998 1999
--------------------------------------- ------------- ------------- ------------
GROSS
Productive 0 2 12
Dry 0 6 9
--------------------------------------- ------------- ------------- ------------
TOTAL 0 8 21
======================================= ============= ============= ============
NET
Productive 0 .84 1.75
Dry 0 1.13 2.42
--------------------------------------- ------------- ------------- ------------
TOTAL 0 1.97 4.17
======================================= ============= ============= ============
--------------------------------------- ------------- ------------- ------------
DEVELOPMENT WELLS 1997 1998 1999
--------------------------------------- ------------- ------------- ------------
GROSS
Productive 0 0 0
Dry 0 0 0
--------------------------------------- ------------- ------------- ------------
TOTAL 0 0 0
======================================= ============= ============= ============
NET
Productive 0 0 0
Dry 0 0 0
--------------------------------------- ------------- ------------- ------------
TOTAL 0 0 0
======================================= ============= ============= ============
Competition
The oil and gas industry is highly competitive. Beta competes with a number of other companies, including large oil and gas companies and other independent operators with greater financial resources and, in some cases, with more experience. Companies that are active in the same geographic areas as Beta include, but are not limited to, Basin Exploration Inc., Unocal Corp., Fina Inc., Kerr-McGee Corp., St. Mary Land & Exploration, Esenjay Exploration and Cheniere Energy Inc.
Employees
As of the date of this proxy statement, Beta employs 7 full-time employees. Beta hires independent contractors on an "as needed" basis only. Beta has no collective bargaining agreements with its employees. Beta believes that its employee relationships are satisfactory. Due to its current level of growth, Beta anticipates increasing its number of full-time employees to eight by the June of 2000.
Premises
Effective July 2000, Beta's operations will be conducted from their new office location in Tulsa, OK. The re-location is in conjunction with the Red River merger. Beta will share office space at Red River's existing office location. Beta terminated its existing office lease effective July 1, 2000.
Litigation
There is no litigation currently pending or threatened against Beta.
The following discussion is to inform you about the financial position, liquidity and capital resources of Beta as of December 31, 1999 and 1998 and March 31, 2000, and the results of operations for the period from inception (June 6, 1997) through December 31, 1997, the years ended December 31, 1998 and 1999 and the three months ended March 31,1999 and 2000.
Disclosure Regarding Forward-Looking Statements
Included in this report are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Although the company believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations reflected in such forward-looking statements will prove to have been correct.
All forward looking statements contained in this section are based on assumptions believed to be reasonable.
These forward looking statements include statements regarding:
Beta's financial position
Proved or possible reserve quantities and net present values of those reserves
Business strategy
Plans and objectives of management of Beta for future operations and capital expenditures
Beta can give no assurance that such expectations and assumptions will prove to be correct. Reserve estimates of oil and gas properties are generally different from the quantities of oil and natural gas that are ultimately recovered or found. This is particularly true for estimates applied to exploratory prospects. Additionally, any statements contained in this report regarding forward-looking statements are subject to various known and unknown risks, uncertainties and contingencies, many of which are beyond the control of Beta. Such things may cause actual results, performance, achievements or expectations to differ materially from the anticipated results, performance, achievements or expectations.
Factors that may affect such forward-looking statements include, but are not limited to:
Beta's ability to generate additional capital to complete its planned drilling and exploration activities
Risks inherent in oil and gas acquisitions, exploration, drilling, development and production; price volatility of oil and gas
Competition from other oil and gas companies
Shortages of equipment, services and supplies
Government regulation
Environmental matters
Financial condition and operating performance of the other companies participating in the exploration, development and production of oil and gas ventures that Beta is involved in
In addition, since substantially all of Beta's prospects are currently operated by third parties, Beta may not be in a position to control costs, safety and timeliness of work as well as other critical factors affecting a producing well or exploration and development activities.
Financial Condition, Liquidity and Capital Resources
Beta's working capital was a surplus of $2,847,116 at March 31, 2000 compared to a surplus of $A2,034,268 at December 31, 1999 and a deficit of ($96,457) at December 31, 1998. Beta's working capital increased between December 31, 1998 and March 31, 2000, primarily due to Beta's completion of its initial public offering and the exercise of Beta common stock warrants. In order to fund capital expenditures in early 1999, Beta obtained short term debt financing in the form of $3,000,000 in bridge note financing which is discussed below under "Bridge Note" and completed an initial public offering in July 1999 which is discussed below under "Initial Public Offering." In order to fund capital expenditures during 2000, Beta issued a warrant call which is discussed below under “Exercise of Warrants”
Historical Cash Used In and Provided by Operating, Investing and Financing Activities
Beta financed all of its business activities through December 31, 1998 through issuances of its common stock in private placements. Beta raised net proceeds of $9,221,783 during 1997 and $6,548,632 during 1998 in these private placements. During the year ended December 31, 1999 Beta realized net proceeds of $2,835,000 from a bridge note financing, net proceeds of $7,733,553 from an initial public offering and net proceeds of $2,052,620 from exercise of Beta common stock warrants. The $3,000,000 face amount of the bridge notes was repaid in full on July 7, 1999 from the proceeds of the initial public offering. In addition, Beta received net proceeds of $1,116,465 from the exercise of warrants during the three months ended March 31,2000.
The net proceeds of the private placements, the bridge note financing, the initial public offering and the exercise of warrants have been primarily invested in oil and gas properties totaling $6,945,695, $8,928,201, and $5,900,794 for the years ended December 31, 1999, 1998 and 1997, respectively and $500,343 during the three months ended March 31, 2000.
Beta's cash balance at March 31,2000 was $2,296,899 compared to $1,448,655 at December 31, 1999 and $198,043 at December 31, 1998. The change in Beta's cash balance is summarized as follows:
| The Year ended December 31, 1999 | The three months ended March 31, 2000 |
| Beginning Cash balance | $ 198,043 | $ 1,448,655 |
| Sources of cash: | ||
| Cash provided by operating activities | (1,262,655) | 473,045 |
| Cash provided by financing activities | 9,759,960 | 1,107,661 |
| Total sources of cash | 8,497,305 | 1,580,706 |
| Uses of cash: | ||
| Oil and gas property expenditures | (6,945,695) | (500,343) |
| Other assets (increase in advances to industry partners) | (299,051) | (232,119) |
| Furniture, fixtures and equipment | (1,947) | - |
| (7,246,693) | (732,462) | |
| Ending Cash balance | 1,448,655 ================= | 2,296,899 ================= |
Long Term Liquidity and Capital Resources
The timing of most of Beta's capital expenditures is discretionary. Beta has no material long-term commitments associated with its capital expenditure plans or operating agreements. Consequently, Beta has a significant degree of flexibility to adjust the level of such expenditures as circumstances warrant. The level of capital expenditures will vary in future periods depending on the success it experiences on planned exploratory drilling activities in future periods, gas and oil price conditions and other related economic factors. Accordingly, Beta has not yet prepared an estimate of capital expenditures for future periods beyond 2000.
Upon completion of the proposed merger with Red River, Beta will guarantee approximately $3,000,000 of Red River's total $7,700,000 indebtedness at December 31, 1999 with the Bank of Oklahoma. In addition, at June 15, 2000, Red River increased its indebtedness with the Bank of Oklahoma by approximately $5.6 million in connection with the ONEOK property acquisition increasing the total indebtedness with such bank to approximately $13,700,000. In the opinion of Beta management, the estimated future net cash flow from the Red River oil and gas properties and the ONEOK property will be sufficient to repay the principal and interest associated with the Bank of Oklahoma debt. This assessment is based on current oil and gas prices in effect and current reserve estimates, all of which are subject to change. In the event of substantial reductions in the prices received for oil and gas and/or downward revisions of oil and gas reserve estimates, the cash flow from the Red River properties may not be sufficient to service the Bank of Oklahoma debt. In this event, Beta may be required to dedicate significant amounts of cash to service debt requirements. The funds will have to come from one of the sources discussed below under "Plan of Operation 2000." In the event that such funds are not available, Beta will be compelled to sell oil and gas properties to repay the debt.
Red River's 80% owned subsidiary, TCM, L.L.C., also has $2,165,000 of debt associated with its coal bed methane properties as of December 31, 1999. The debt is not guaranteed by Red River and TCM has no material amount of assets or properties other than the coal bed methane properties. These are currently classified as unevaluated since they are still in the testing phase. The lender's recourse for repayment of the debt is limited to its mortgage on the coal bed methane properties and the proceeds of production from those properties. At present, Beta does not intend to dedicate any of its cash resources to the repayment of this debt since the lender's recourse is limited.
Red River also has no material long-term commitments associated with its capital expenditure plans or operating agreements other than its planned activities in the "WEHLU" unit in Central Oklahoma. The level of Red River's capital expenditures will vary in future periods depending on the results it experiences in the "WEHLU" unit. Effective February 18, 2000 Red River entered into an agreement with Avalon Exploration, Inc. of Tulsa to jointly test and develop additional production in the Company's 30,000 acre producing WEHLU Unit in Central Oklahoma.
The terms of the agreement call for Avalon to drill wells and expend an estimated $4.4 million and will thereby be entitled to an assignment of all of Red River’s leasehold interest in the wells drilled by Avalon and in production from the 160 acres surrounding each well. Red River has retained (a) a 12.5% interest after Avalon achieves payout of the amounts it expends, plus (b) an option to repurchase 25% of its original working interest in these same properties after each five-well pilot project drilled by Avalon has been completed, whereby Red River can elect to reimburse Avalon for 25% of the actual costs incurred depending on the success of these pilot projects. The option to purchase must be exercised within 120 days of the completion of the drilling activities on each pilot project. Red River benefits from this option in that it is able to review the initial success of the pilot project before deciding whether to commit funds for the project. It is currently estimated that the option to purchase will need to be exercised sometime in the first half of 2001 should Red River elect to participate. If Red River exercises its option to purchase the pilot program interest, it will be required to advance its 25% share of the estimated $4.4 million capital costs associated with the pilot program, or $1.1 million. In the event funds are unavailable, Red River will have to forfeit the 25% look back interest. If Red River is unable to utilize its existing line of credit with the Bank of Oklahoma, then Beta may be required to advance funds on Red River’s behalf to allow Red River to exercise its option. In this event, Beta will have to secure funds from one of the sources discussed below under “Plan of Operation 2000.” There is no assurance that these funds will be available.
If the WEHLU pilot program is successful, the ongoing development of the field will commence in the year 2001 with approximately 200 to 300 potential locations to be drilled on the 30,000 acres. Red River will retain a 40% working interest by paying for 36.3% of the development costs. It is estimated that this development could take place over a three to five year period commencing in the second half of 2001. Preliminary estimates are that Red River's net share of development cost will range between $36,000,000 and $54,000,000 over the 3 to 5 year period. Red River will seek to fund these capital expenditures utilizing bank financing. Beta may also seek to provide additional funding through the issuance of its common stock in a public offering. If funds are unavailable to Red River, either through a bank line of credit or cash advances provided by Beta, Red River will be compelled to reduce its interest in the development of the 200 to 300 potential locations.
Bridge Note
During 1999 Beta completed the private placement of a $3,000,000 bridge note financing to three institutional investors referred to as the "1999 bridge financing." Beta issued promissory notes having a maturity date of one year and bearing an interest rate of 10%. In addition, a total of 459,000 shares of Beta common stock were issued in connection with the 1999 bridge financing. The $3,000,000 in bridge notes was repaid in full with accrued interest on July 7, 1999 from the proceeds of Beta's initial public offering.
Beta received net cash proceeds of $2,835,000 from the bridge notes. The estimated fair market value of 429,000 shares of common stock issued in connection with the bridge note of $2,574,000 was treated as a discount and was amortized over the term of the promissory notes using the interest method. The estimated fair market value of 30,000 additional shares of common stock issued per the terms of the bridge note of $180,000 was immediately expensed as interest during 1999. Accordingly, Beta incurred additional interest expense of $2,754,000 because of the shares of Beta common stock issued in connection with the bridge notes. The debt issuance costs of the 1999 bridge financing of $89,100 were amortized as additional interest expense during the year ended December 31, 1999.
Plan of Operation for 2000
In the opinion of Beta's management, the existing working capital of Beta, net cash flow from operations and the exercise of common stock purchase warrants subsequent to December 31, 1999 will be sufficient to fund the operations and projected capital requirements of Beta throughout 2000. Beta is allocating its cash resources from all sources, including the net proceeds of the initial public offering, to the following categories of expenditures:
| 1 | With the completion of the Red River merger, Beta estimates revenue will be approximately $10 to $12 million for 2000, and EBITDA will be approximately $4 million for 2000. | 2) | Drilling and completion costs for wells on Beta's prospects which are estimated to be approximately $4,100,000 for 2000. While it is difficult to predict the exact timing of when these wells will be proposed for drilling, Beta's operating agreements generally provide a 30 day period in which to elect participation in a proposed well. Generally funds must be advanced within 30 days or less after the 30 day election period; |
| 3) | Costs of $750,000 estimated during 2000 to drill new wells, convert certain producing wells to saltwater disposal wells, reactivate certain wells and fracture treat certain wells associated with the Red River properties; | ||
| 4) | Leasehold acquisition costs which are estimated to be $665,000; | ||
| 5) | 3-D seismic acquisition costs only if funds are available; and | ||
| 6) | General and administrative overhead. |
Other than item 2) above, Beta does not anticipate the Red River merger will impact its year 2000 capital budget or financing plans. As discussed above under "Long Term Liquidity and Capital Resources," Beta may have to advance additional funds to Red River in future periods to facilitate development of the Red River properties and this may impact Beta's planned capital expenditures and financing plans.
Beta's planned capital expenditures and administrative expenses could exceed those amounts budgeted and could exceed Beta's cash from all sources. If this happens, it may be necessary for Beta to raise additional funds. It is anticipated that additional funds will be raised from one or more of the following sources:
| 1) | During 1997, Beta issued approximately 797,000 callable common stock purchase warrants which are exercisable at a price of $5.00 per share. Beta issued a call for these warrants since its common stock has traded on Nasdaq at a market price equal to or exceeding $7.00 per share for 10 consecutive days. Beta received proceeds of approximately $4.0 million from the exercise of 796,000 warrants prior to their expiration on May 25, 2000. equal to the exercise price times the number of shares which are issued from the exercise of warrants. |
| 2) | Beta has approximately 388,000 callable common stock purchase warrants outstanding exercisable at a price of $7.50 per share. Beta is able to call these warrants at any time after its common stock has traded on Nasdaq at a market price equal to or exceeding $10.00 per share for 10 consecutive days. It is Beta's intent to call all of these warrants at such time, if and when, the $10.00 trading price is achieved and cash is needed to fund capital requirements. Beta will receive proceeds equal to the exercise price times the number of shares which are issued from the exercise of warrants net of commission to the broker of record, if any. Beta could realize net proceeds of approximately $2,900,000 from the exercise of these warrants. There is no assurance that Beta will ever realize any proceeds from the $7.50 warrant calls. |
| 3) | Beta may seek bank or other debt financing at such time that cash flow from operations is established. Beta is not able to predict when, if ever, such financing will be available. Beta is currently seeking bank financing in the range of $1,000,000 to $5,000,000. |
| 4) | Beta may seek mezzanine financing, if available, on terms acceptable to Beta. Mezzanine financing usually involves debt with a higher cost of capital as compared to conventional bank financing. Beta would seek mezzanine financing in the range of $1,000,000 to $5,000,000. Beta would seek to use this means of financing in the event that a particular acquisition did not have sufficient proved producing reserve collateral to support a conventional bank loan. |
| 5) | Beta may realize additional cash flow from oil and gas wells to be drilled, if found to be productive. Beta owns a working interest in wells that are currently producing and in additional wells which are presently being completed and equipped for production. Beta currently estimates that during 2000 it will generate approximately $3,400,000 of net cash flow after deducting lease operating expenses. |
If the above additional sources of cash are insufficient or are unavailable on terms acceptable to Beta, Beta will be compelled to reduce the scope of its business activities. If Beta is unable to fund planned expenditures within a thirty to sixty day period after a well is proposed for drilling, it may be necessary to:
| 1) | Forfeit its interest in wells that are proposed to be drilled; |
| 2) | Farm-out its interest in proposed wells; |
| 3) | Sell a portion of its interest in proposed wells and use the sale proceeds to fund its participation for a lesser interest; and |
| 4) | Reduce general and administrative expenses. |
As stated above, Beta believes it has sufficient working capital to fund its capital expenditure requirements throughout 2000. In the event that Beta cannot raise additional capital, it may be necessary for Beta to curtail its business activities until other financing is available.
Beta's long term goal is to continue the pattern of growing the Company by accumulating oil and gas reserves through acquisition and drilling the next three to five year period,and then selling the Company. In the event Beta cannot raise additional capital, or the industry market is unfavorable, Beta may have to slow or alter its long term goal accordingly.
These are forward looking statements that are based on assumptions which in the future may not prove to be accurate. Although Beta's management believes that the expectations reflected in such forward looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved.
Comparison of Results of Operations for the Period from Inception, June 6, 1997, through December 31, 1997 and the year ended December 31, 1998
During the period from inception, June 6, 1997, through December 31, 1997 and the year ended December 31, 1998 Beta generated no revenues.
General and administrative expenses for the period from inception, June 6, 1997, through December 31, 1997 were $245,452 compared to $746,769 for the year ended December 31, 1998. This represents a $501,317 or a 204% increase. The primary reasons for the increase were due to:
(1) A full year of operations in 1998 as compared to a partial year in 1997 .
(2) An increase in the number of employees from three in 1997 to five in 1998.
(3) Costs related to Beta's initial public offering.
Loss from operations totaled $(246,982) for the period from inception, June 6, 1997, through December 31, 1997 compared to $(2,429,343) for the year ended 1998. The primary reason for the increase in the loss was due to an impairment expense of $1,670,691 recorded in 1998. During 1998 Beta participated in the drilling of two offshore test wells in Australia. The drilling resulted in two dry holes. All of the property acquisition and exploration costs associated with the Australian full cost pool totaling $1,624,218 have been transferred to evaluated properties and charged to impairment expense during 1998. In addition, it was determined that the capitalized costs associated with the U.S. full cost pool exceeded their cost ceiling by $46,473. Accordingly, an impairment write-down of $46,473 was recorded as of December 31, 1998.
Other income for the period from inception, June 6, 1997, through December 31, 1997 consisted of interest income in the amount of $45,409. Beta realized $44,843 of interest income for 1998.
Net loss for the period from inception, June 6, 1997, through December 31, 1997 was $(201,573) compared to $(2,384,500) for the year ended December 31, 1998. The increase in net loss was primarily due to the impairment writedown of oil and gas properties.
Comparison of Results of Operations for the Years Ended December 31, 1998 and 1999
During the year ended December 31, 1999 Beta had oil and gas revenues of $1,199,480. Beta's net production was 475,065 mcf at an average price of $2.44 per mcf and 1,822 barrels of oil at an average price of $23.03 per barrel. During the year ended December 31, 1998 Beta generated no revenues.
During the year ended December 31, 1999 Beta incurred lease operating expenses of $81,538. Beta's average lifting cost for this period was $.17 per mcf equivalent. During the year ended December 31, 1998 Beta incurred no lease operating expense.
General and administrative expenses for the year ended December 31, 1999 were $1,418,240 compared to $746,769 for the year ended December 31, 1998. This represents a $671,471 or a 90% increase over the prior year period. The primary reasons for the increase were due to:
(1) An increase in operational activities in 1999 versus 1998;
(2) An increase in the number of employees from 5 in 1998 to 6 in 1999; and
(3) General and administrative Costs related to Beta's initial public offering and filing the S-1 registration statement which are not readily identifiable as offering costs.
Impairment expense for the year ended 1999 was $1,224,962 compared to $1,670,691 for the 1998 year. The impairments for both years are as follows:
1998 1999 Total
---- ---- -----
Foreign cost pool $ 1,624,218 $ 57,052 $ 1,681,270
U.S. cost pool 46,473 1,167,910 1,214,383
------------- ------------ -------------
$ 1,670,691 $ 1,224,962 $ 2,895,653
============= ============ =============
As a result of a ceiling test calculation, an impairment write-down of $1,224,962 was recorded for the year ended December 31, 1999. The impairment was due mainly to downward revisions of reserve estimates associated with two wells drilled in 1998. The downward revisions were due to disappointing production results from the wells experienced in the fourth quarter of 1999 when the producing zones in the wells began producing large amounts of water in place of gas and oil.
Depreciation and depletion expense for the year ended December 31, 1999 was $914,233 compared to $11,883 for the year ended December 31, 1998. This represents a $902,350 increase over the prior year period. The primary reason for the increase is due to the fact Beta had no oil or gas production in the prior year period that would give rise to depletion expense.
Loss from operations totaled $(2,439,493) for the year ended December 31, 1999 compared to $(2,429,343) for the year ended December 31, 1998.
Other income for the year ended December 31, 1999 consisted of interest income in the amount of $21,741. Beta realized $44,843 of interest income for the year 1998. The reason for the decrease was lower average cash and cash equivalents balances for the 1999 period as compared to the 1998 period.
During the year ended December 31, 1999, Beta incurred interest expense of $2,966,651, substantially all of which related to the bridge notes. Interest expense related to the bridge notes for the 1999 period consists of the following:
| Cash interest expense | $ 120,555 |
| Amortization of note discount and fair market value of 459,000 shares | 2,754,000 |
| Amortization of deferred loan costs | 89,100 |
| Bridge note interest expense for the year ended December 31, 1999 | $ 2,963,655============= |
_ During the year ended December 31, 1998, Beta incurred no interest expense.
Net loss for the year ended December 31, 1999 was $(5,384,403) compared to $(2,384,500) for the year ended December 31, 1998. The increase in net loss was primarily due to the interest expense related to the bridge note.
Comparison of Results of Operations for the Three months Ended March 31, 2000 and 1999 (unaudited)
During the three months ended March 31, 2000 Beta had oil and gas revenues of $940,250 as compared to $29,664 for the prior year period. Beta's net production and average prices received were as follows:
Three Months Ended
March 31
Increase
2000 1999 (Decrease)
Oil and gas sales $940,250 $29,664 3,070%
Net gas production (mcf) 331,833 18,455 1,698%
Net Oil production (barrels of oil) 1,125 - N/A
Average gas price $2.74 $1.61 70%
Average oil price $27.89 N/A N/A
During the three months ended March 31, 2000 Beta incurred lease operating expenses of $33,888 as compared to $9,035 for the prior year period. Beta's lease operating costs per equivalent unit of production were as follows:
Three Months Ended
March 31
Increase
2000 1999 (Decrease)
Lease operating expense $33,888 $9,035 275%
Average lifting cost per equivalent mcf $.10 $.49 (80%)
General and administrative expenses for the three months ended March 31, 2000 were $489,633 compared to $258,245 for the three months ended March 31, 1999. This represents a $231,388 or a 90% increase over the prior year period. The primary reasons for the increase were due to:
| (1) | An increase in operational activities in 2000 versus 1999 (approximately $69,000); |
| (2) | An increase in the number of employees from six in 1999 to seven in 1999 (approximately $16,000); |
| (3) | Costs related to Beta's merger with Red River (approximately $87,000); and |
| (4) | Costs related to being a publicily traded company(approximately $50,000). |
Depreciation and depletion expense for the three months ended March 31, 2000 was $561,072 compared to $12,415 for the three months ended March 31, 1999. This represents a $548,657 increase over the prior year period. The primary reason for the increase is due to the fact Beta had significantly higher oil and gas production in the current period versus the prior year that would give rise to higher depletion expense.
Loss from operations totaled $(144,343) for the three months ended March 31, 2000 compared to $(250,031) for the three months ended March 31, 1999. The primary reason for the decrease in the loss was due to the significant increase in revenues in the current period versus the prior year period.
Other income for the three months ended March 31, 2000 consisted of interest income in the amount of $20,013. Beta realized $2,275 of interest income for the three month period in 1999. The reason for the increase was higher average cash and cash equivalents balances for the 2000 period as compared to the 1999 period.
During the three months ended March 31, 2000, Beta incurred interest expense of $1,096 as compared to $466,348 for the three months ended March 31, 1999. Substantially all of the 1999 interest expense related to the bridge notes. Interest expense related to the bridge notes for the 1999 period consists of the following:
Cash interest expense $ 36,843
Amortization of note discount and fair market value of 30,000 shares 405,354
Amortization of deferred loan costs 24,151
--------------
Bridge note interest expense for the three months ended March 31, 1999 $ 466,348
==============
Net loss for the three months ended March 31, 2000 was $(125,426) compared to $(714,104) for the three months ended March 31, 1999. The decrease in net loss was primarily due to the reduction in interest expense and the significant increase in revenues.
Income Taxes
As of December 31, 1999, Beta had available, to reduce future taxable income, tax net operating loss carryforwards of approximately $9,500,000 which expire in the years 2012 through 2019. As of December 31, 1999, Beta has a deferred tax asset of $3,293,830 which is fully reserved for with a valuation allowance. Utilization of the tax net operating loss carryforward may be limited in the event a 50% or more change of ownership occurs within a three year period. The tax net operating loss carryforward may be limited by other factors as well.
Cancellation of Warrants
On June 21, 1999, certain warrant holders agreed to cancel 87,296 warrants to purchase common stock consisting of 20,000 warrants exercisable at $5.00 per share and 67,296 warrants exercisable at $7.00 per share. All of the cancelled warrants were non-callable with expiration dates on March 12, 2003. The warrants were cancelled for no consideration pursuant to a request by the National Association of Securities Dealers, the "NASD". The warrant holders were certain NASD member firms and their employees who participated in Beta's 1998 private placement, as well as Beta's legal counsel. The cancellation request was made and complied with because the NASD determined that these warrants could be deemed "underwriter's compensation" and the continued existence of these warrants could result in the compensation for the initial public offering exceeding the NASD guidelines. Therefore, all such warrants which could be deemed "underwriter's compensation" in excess of NASD guidelines have been cancelled for no consideration.
Initial Public Offering
On July 30, 1999, Beta completed its initial public offering of common stock. Beta sold 1,465,490 shares of common stock at $6.00 per share out of the 1,500,000 maximum number of shares offered pursuant to its S-1 Registration Statement which was declared effective July 1, 1999. Beta withdrew from registration the 34,510 unsold shares, the 150,000 shares registered to satisfy an "Over-Allotment Option," and a total of 31,878 shares issuable upon exercise of Selected Dealer Warrants in connection with the unsold portion of the offering, including the Over-allotment Option.
Beta realized gross proceeds of $8,792,948 from the sale of its common stock in the initial public offering, before deducting commissions and offering expenses. On July 7, 1999, Beta applied $3,070,000 of the proceeds from the offering towards the full repayment of the bridge notes and accrued interest.
During 1997 Beta issued 797,245 callable common stock purchase warrants entitling the holders to purchase 797,245 shares of Beta’s common stock at an exercise price of $5.00 per share. Beta was entitled to call these warrants at any time on and after the date that its common stock is traded on any exchange, including the NASD Over-the-Counter Bulletin Board, at a market price equal to or exceeding $7.00 per share for 10 consecutive trading days.
Because its common stock has traded at a market price exceeding $7.00 per share for 10 consecutive days, Beta became entitled to call the callable $5 warrants at any time. Beta issued a call for these warrants as of February 23, 2000, the record date. Of the 797,245 callable $5 warrants originally issued, approximately 381,000 had already been exercised prior to the issuance of the call and the remaining outstanding warrants were exercised at the call. The gross amount realized from the exercised warrants was approximately $3.97 million. The closing price for Beta common stock on February 23, 2000 on the Nasdaq Stock Market was $9.00 per share.
Stock Option Plan
On August 27, 1999, the board of directors approved an incentive and non-statutory stock option plan which authorizes the Compensation Committee to grant stock option awards to officers, directors and employees. The plan provides, among other things, the following:
€ The maximum number of shares which may be optioned and sold under the plan is 700,000 shares.
€ The per share exercise price for common shares to be issued pursuant to the exercise of an option shall be no less than the fair market value of Beta's common stock as of the date of grant.
€ The per share exercise price for common shares to be issued to persons owning more than 10% of the voting stock of Beta at the date of grant, shall be no less than 110% of the fair market value of Beta's common stock as of the date of grant.
€ The maximum term of the options shall be a maximum of 10 years or such lesser time period as the board of directors determines. The maximum time period for options to be issued to persons owning more than 10% of the voting stock of Beta at the date of grant shall be 5 years from the date of grant.
The Compensation Committee of the board of directors granted 97,500 options to officers, directors and employees as of August 27, 1999 at an exercise price of $6.00 per share. All of the 97,500 options will expire on or before December 31, 2004. None of the 97,500 options, or any additional options issued under the plan shall become exercisable until such time as the shareholders of Beta have approved the plan as provided in Beta's bylaws.
Beta Acquisition of Red River Energy, Inc.
Beta has entered into an agreement to purchase Red River Energy, Inc. of Tulsa, Oklahoma, a private oil and natural gas company. The purchase price will be paid by the assumption of approximately $7.7 million existing debt and the issuance of approximately 2.25 million shares of Beta common stock. The purchase is subject to approval by Beta shareholders.
The assets of Red River Energy, Inc. consist of four components: 1) a 97.4% working interest (80% net revenue interest) in a 30,160 acre unit which is currently producing approximately 2.8 MMBTU/d and 96 net Bopd from 22 active wells in the Hunton Limestone formation in Central Oklahoma; 2) an 85% working interest (68% net revenue interest) in 8,100 acres which are currently producing approximately 630 net MMBTU/d from 45 wells in the Atoka and Gilcrease formations in Eastern Oklahoma; 3) a gas gathering system consisting of 40 miles of pipeline which is currently transporting approximately 1950 MMBTU/d in Eastern Oklahoma; and 4) a 46 well coal bed methane project also located in Eastern Oklahoma which is currently under development and producing approximately 600 MMBTU/d. Red River Energy, Inc. is the operator of all its properties.
Unevaluated Properties
Substantially all of Beta’s unevaluated costs at December 31, 1999 and March 31, 2000 relate to seismic, geological and leasehold costs incurred in Beta’s Jackson County prospects. Beta and its partners have recently reprocessed selected portions of the approximately 300 square miles of its 3-D data. In addition, recent drilling activity by other oil and gas companies in the vicinity of Beta’s prospects have yielded oil and gas discoveries in the deeper Lower Yegua and Wilcox formations. As a result of the seismic reprocessing and drilling activity, Beta and its partners have now identified in excess of 200 prospects and leads within the areas that have been evaluated by the 3-D seismic. This is approximately twice the number of locations previously identified by the 3-D seismic. The large number of additional prospects and leads recently identified will delay somewhat the evaluation of the costs associated with Beta’s unevaluated properties. Accordingly, Beta has revised its previous estimates of when the unevaluated costs will be considered evaluated and now believes that much of the evaluation will be delayed to future periods. This delay in the evaluation of unevaluated costs is not expected to adversely impact Beta’s financial condition, results of operations and liquidity in future periods.
Impact of Recently Issued Standards
Beta intends to adopt SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," issued in June 1998 effective with its fiscal year beginning January 1, 2000 as required by the Statement. Due to Beta's current and anticipated limited use of derivative instruments, management anticipates that adoption of SFAS 133 will not have any significant impact on Beta's financial position or results of operations. SFAS 132, "Employees' Disclosures about Pensions and other Postretirement Benefits," and SFAS 134, "Accounting for Mortgage-Backed Securities Retained after the Securitization of Mortgage Loans Held for Sale by a Mortgage Banking Enterprise" were issued in 1998 and are not expected to impact Beta regarding future financial statement disclosures, results of operations and financial position.
Year 2000“Y2K” Problem
Beta has experienced no disruption in its operations that management can attribute to Year 2000 issues. In addition, Beta has seen no Year 2000 related problems or received any reports of such problems from entities with which Beta transacts business.
This section of the proxy statement provides you with certain information regarding Red River and its business. You should read this information in connection with the other information provided to you in this proxy statement.
Red River was formed in 1997 and commenced operations in early 1998. It was originally formed as a limited liability company under Oklahoma law and named Red River Energy, L.L.C. Subsequent to September 30, 1999, the members of the limited liability company exchanged their member interests for shares of Red River Energy, Inc., which is an Oklahoma corporation formed in 1999 but which had no activities, assets or shareholders prior to its acquisition of the Red River Energy L.L.C. member interests from the Red River Shareholders. Red River Energy, Inc. has elected to be taxed under subchapter S of the Internal Revenue Code. This restructuring was undertaken due to the desire of the Red River Shareholders to have an S corporation as the parent company of their related business activities.. Red River Energy, L.L.C. continues to hold title to the assets and operations of Red River as a wholly owned subsidiary. The coal bed methane exploration, development and production operations of Red River are conducted through TCM, L.L.C., an Oklahoma limited liability company which is 80% owned by Red River.
BUSINESS OF RED RIVER
Red River engages in the oil and gas business in the continental United States. It acquires, develops, operates and sells oil and gas property interests of all types. Red River also focuses on the acquisition of gas gathering systems associated with the producing fields in which it has an interest. It owns and operates the West Edmond Hunton Lime Field Unit in central Oklahoma, the Hitchita Field in Okmulgee and McIntosh Counties, and through its 80% owned subsidiary, TCM, L.L.C., coal bed methane gas wells in Tulsa and Okmulgee Counties in Oklahoma. Red River also owns and operates a gas gathering system located primarily in McIntosh County, Oklahoma.
Red River's headquarters are located in Tulsa, Oklahoma. At March 31, 2000 Red River employed 14 persons on a full time basis.
Red River's principal line of business is oil and gas acquisition, exploration, development and production. Red River evaluates producing oil and gas prospects from several perspectives. It reviews the opportunities to produce and market the oil and gas production from the properties, to participate in drilling activities on development locations and to rework the wells to improve production and further develop the area.
Red River faces strong competition from many other companies and individuals engaged in the oil and gas business, many of which are very large, well-capitalized energy companies with substantial capabilities. Red River may be at a competitive disadvantage in acquiring oil and gas prospects since it must compete with these individuals and companies, many of which have greater financial resources and larger technical staffs.
Red River's business is not dependent on a single customer and its management does not believe that it will be in the foreseeable future since oil and gas purchasers are readily available in today's markets.
Red River's search for oil and gas is concentrated in the continental United States, primarily in Oklahoma and Texas. However, the acquisition, exploration, development, production and sale of oil and gas are subject to many factors that are outside Red River's control. These factors include worldwide and domestic economic conditions; oil import quotas; availability of drilling rigs, casing and other supplies; proximity to pipelines; the supply and price of other fuels and the regulation of prices, production, transportation and marketing by federal and state government authorities. The oil and gas industry has at times been faced with shortages in tubular steel, increased prices in used steel casing and a shortage of drilling rigs which have in the past delayed drilling activities by oil and gas operators. Pumping units and other wellhead equipment have also been in short supply from time to time.
Red River is subject to various federal, state and local laws and regulations regarding environmental and ecological matters. Environmental laws may necessitate significant capital outlays, which may materially affect Red River's earnings potential and could cause material changes in Red River's business. At the present time, however, environmental laws have not materially hindered nor adversely affected Red River's business.
Working capital is needed in the oil and gas industry to finance the drilling and completion of wells, to finance major workovers to enhance existing production, and to acquire undeveloped leasehold interests and proved producing properties. At present, Red River is generating sufficient revenue from operations and has sufficient credit lines to supply current working capital requirements.
OIL AND GAS PROPERTIES
West Edmond Hunton Lime Unit. The principal properties of Red River are the oil and gas leases comprising the West Edmond Hunton Lime Unit which covers parts of Canadian, Logan, Kingfisher and Oklahoma Counties in central Oklahoma. The production from this 30,160 acre field is from the Hunton Limestone formation (located at depths of 6,600 to 7,100 feet) and was first discovered in 1943. Approximately 80% of the production from this field is natural gas. Red River is the operator of these properties.
The field was unitized in 1947 and was operated by Sohio Petroleum Company. At one time there were over 750 wells producing oil and gas from the field. Sohio continued to operate the field until it sold its interest to Phillips Petroleum Company in 1988. Phillips operated the field from 1988 until 1992, at which time it was acquired by a privately held company, WEHLU Producers Inc. Red River purchased the properties from WEHLU Producers, Inc. in mid 1998 and took over operations of the field during August 1998.
Since its acquisition of the properties, Red River has conducted a number of field enhancement operations, including six acid stimulation jobs, reactivation of two wells and installing larger downhole pumps on three wells. A fracture stimulation treatment was performed on one well and it was placed on electrical submersible pump. The acid stimulation jobs increased production from those wells by an aggregate of 16 barrels of oil per day and 110 Mcf of natural gas today, and resulted in an increase in water production of 104 barrels per day. The two well reactivations increase production by a total of 7 barrels of oil per day with an additional 60 barrels of water per day. Resizing the three downhole pumps resulted in production increases of 12 barrels of oil per day, and five Mcf of natural gas per day with an increase in water production of 110 barrels per day. The well that was fracture stimulated and placed on submersible pump had a production increase of 35 barrels of oil per day and 70 Mcf of natural gas per day, with an increase in water production of 300 barrels per day.
There are 22 gross (21 net) producing wells in the field, 16 (15 net) of which produce natural gas and six (six net) of which produce crude oil. Most of the wells have pumps or other forms of artificial lift to aid production of the reserves. There are 33 additional shut in wells that are being evaluated to be returned to production.
The following chart reflects the average monthly oil production from the WEHLU properties on a yearly basis from 1970 through 1999, the monthly gas production from 1980 through 1999(the only years this information is currently available) and water production for 1998 and 1999 (the only years this information is available):
[graphic omitted]The following chart reflects actual monthly oil,gas and water production on a monthly basis since January of 1998:
[graphic omitted]
The monthly production from these properties for the first four months of 2000 has been as follows:
Bbls Oil Mcf Gas Bbls Water
Jan 3,994 81,785 30,624
Feb 3,653 72,163 33,682
Mar 3,732 79,183 30,982
Apr 4,526 79,349 38,694
May 4,413 83,022 39,966
Jun 4,051 78,878 35,892
Approximately 80% of Red River's sales of natural gas from the West Edmond Hunton Lime Unit are made to GPM Gas Corporation under a contract that expires on March 31, 2001 but which will be extended on a year to year basis unless one of the parties elects to terminate it at the end of a term. The price paid for the gas sold under this contract is based on a formula tied to several monthly published index prices. Sales of all of Red River's production of crude oil from the field are made to Sunoco Inc. under a contract that runs month to month and provides for a price based on a $1.25 per barrel bonus over Sunoco's posted price for "Oklahoma Sweet" crude oil. Red River believes that other purchasers of production from this field are readily available if the arrangements with the current purchasers were to terminate for any reason.
Red River believes that there are a number of potential locations to drill additional development wells on the properties. It is anticipated that during 2000 Red River will drill additional wells in this unit, but the extent of this activity will be not be decided until Red River has reviewed the results of a pilot project scheduled to commence third quarter of 2000. As described under Red River Management's Discussion and Analysis of Financial Condition and Results of Operations - Plan of Operation 2000, Red River has entered into an agreement with Avalon Exploration, Inc. of Tulsa, Oklahoma to jointly test for and develop additional production on these properties.
Hitchita Field. Red River owns approximately 8,100 acres (6,080 net acres) of oil and gas leases in the Hitchita Field which is located in Okmulgee and McIntosh Counties in Oklahoma. It has interests in 45 wells (34 net) and operates 39 of those wells. These wells produce dry gas from various formations with depths ranging from 1700 to 2600'. Gas is sold into Red River Field Services low pressure gathering system. Red River anticipates drilling one additional prospect in late 2000 and developing one of the prospects recently drilled. Subsequent development operations in the area will depend in largely on the results achieved from this additional drilling.
Gas Gathering System. Through its wholly owned subsidiary, Red River Field Services, L.L.C., Red River owns a low pressure gathering system in the Hitchita Field which comprises approximately 40 miles of pipeline and is connected to 47 wells. The system currently gathers approximately 1,950 Mcf of natural gas per day. Red River is actively seeking new well connections.
These properties secure a mortgage loan which had an outstanding principal balance at December 1, 1999 of $7,694,229 and which bears interest at the variable annual rate based on the prime rate of the lender or LIBOR, whichever Red River elects from time to time, currently 8.25%. This mortgage loan is a revolving credit facility.
Red River also has field equipment securing an installment loan with an outstanding balance at December 1, 1999 of $152,723 and which bears interest at the annual rate of 8.25%. The loan matures on October 31, 2001.
Hedging Transactions. From time to time, Red River engages in hedging transactions in order to increase to some extent the stability and reliability of the prices that it receives for its natural gas production. Effective July 1,2000, Red River has committed for one year to sell 2,700 Mmbtu per day of natural gas at a price of $3.085 per Mmbtu, representing approximately 60% of Red River's average daily gas production. Red River expects to continue to engage in hedging transactions at times it believes are opportune as part of its overall natural gas marketing strategy. While hedging arrangements may protect Red River to some extent during the period of the hedging contract from the detrimental effects of declining market prices in natural gas, they will also limit the benefit that Red River would otherwise realize as a result of increases in market prices during the period.
Leasehold and Well Data. The following tables set forth information with respect to Red River's oil and gas interests. This information is as of December 31, 1999, unless otherwise indicated. Red River's interests are all located in the State of Oklahoma:
Gross Acres Net Acres
----------- ---------
Total Developed leasehold acreage 37,960 35,389
Total Undeveloped leasehold acreage 0 0
Total Oil Gas
----- --- ---
Gross productive wells................... 99 39 60
Net productive wells..................... 88 38 50
Wells drilled: Total Oil Gas Dry
----- --- --- ---
1999 (through December 31)............... 1 0 1 0
1998..................................... 0 0 0 0
Year Ended Year Ended
---------- ----------
1998 1999
------ ----
Type of Wells Drilled:
Net productive exploratory...... 0 0
Net productive development...... 0 0.165
Net dry development............. 0 0
Price and Production Data. Red River's average sales price, oil and natural gas production volumes and average production cost for each Mcf equivalent of production for the periods indicated were as follows:
Year Ended Year Ended
----------- ----------
December 31, December
------------- --------
1998 31, 1999
---- --------
Oil production (Bbl)..................... 13,470 33,584
Gas production (Mcf)..................... 336,537 911,036
Average sales price:
Oil (per Bbl)........................ $12.38 $17.86
Gas (per Mcf)........................ $ 2.08 $2.20
Average production cost per
Mcfe.................................. $ 0.76 $ .91
Reserves. The following table sets forth certain information regarding Red River's proved oil and gas reserves at the end of the period indicated. The reports were prepared by Ryder Scott Company Petroleum Engineers in accordance with the guidelines established by the Securities and Exchange Commission and the Financial Accounting Standards Board, using prices received as of the effective date of each report. The reserve information for the December 31, 1998 report was calculated using a gas price of $2.06/mmbtu and oil price of $10.50/bbl and the reserve information for the December 31, 1999 report was calculated using a gas price of $2.26/mmbtu and an oil price of $24.00 per barrel. Prices and operating costs are unescalated. The estimated cash flows are reduced to present value amounts by applying a 10% per year discount factor. The standardized measure of future discounted net cash flows reflects estimated future income taxes using current statutory income tax rates including consideration for estimated future statutory depletion and tax credits.
There are numerous uncertainties inherent in estimating quantities of proved reserves, including many factors beyond the control of Red River. Reservoir engineering is a subjective process of estimating subsurface accumulations of oil and gas that cannot be measured in an exact manner, and the accuracy of any reserve estimate is a function of the quality of available data and the interpretation of that data. As a result, estimates by different engineers often vary, sometimes significantly. In addition, physical factors, such as changes in product price, may justify revision of these estimates. Accordingly, oil and gas quantities ultimately recovered will vary from reserve estimates.
December 31, 1998 December 31, 1999
----------------- -----------------
Proved reserves:
Oil (Bbls)............................... 434,070 349,584
Gas (Mcf)................................ 15,542,000 12,402,000
Estimated future net revenues from oil
and gas reserves before income taxes:.... $ 26,427,079 $ 25,844,599
Standardized Measure of Discounted
Future Net Cash Flows:................... $ 8,365,009 $ 10,844,030
Recent Developments.On June 15, 2000, Red River purchased from ONEOK Resources Company 124 properties and prospects in 26 fields located in Kansas, Oklahoma and Texas. These properties had at December 31, 1999 estimated proved reserves of 792,935 barrels of oil and 5,587,104 Mcf of natural gas. The purchase price was $5,608,809, subject to possible post-closing adjustments or approximately $3.51 per barrel of oil equivalent before closing adjustments. The properties are geographically distributed into three areas: Mid-Continent (17 fields), West Texas (4 fields) and onshore Gulf Coast (5 fields). The package includes 34 (30 net) operated oil wells, 3 (2 net) operated gas wells, 30 (4 net) non-operated oil wells and 44 (7 net) non-operated gas wells. In total there are 74 non-operated wells or 67% of the total wells acquired. The majority of the value is associated with the operated leases in the Mid-Continent region. Red River funded the purchase through Red River’s credit facility with the Bank of Oklahoma.
Coal Bed Methane. Red River, through TCM, is in the process of testing wells drilled during late 1998 and early 1999 in Tulsa and Okmulgee Counties to develop the coal bed methane reserves believed to be there. At December 31, 1999, TCM had drilled a total of 47 wells covering approximately 2800 acres to test the commercial viability of the coal bed methane reserves. Some wells began producing in early 1999 and the last few wells began selling gas in July 1999. The project is still in the testing phase and Red River estimates that it takes approximately 12 to 24 months of production of water and gas from each well to determine if it will produce methane in commercial quantities. The proved reserves attributable to this project have not been fully determined. At this time, this project is classified as unevaluated.
The coal bed methane development operations have been financed primarily under a non-recourse credit facility with Duke Energy Financial Services, Inc. The total amount of the principal due under that facility at December 31, 1999 was $2,165,234 and the indebtedness bears interest at prime plus one percentage point, which currently is 10%. Under the terms of the credit facility, Duke Financial Services is entitled to receive overriding royalty interests in these properties.
Legal Proceedings
Red River has no pending legal proceedings and, to the knowledge of its management, no legal proceedings are threatened.
Management of Red River
Mr. Rolf N. Hufnagel, age 52, is the Chairman, President and Chief Executive Officer of Red River Energy, Inc., which he cofounded in 1997. His function at Red River is to set the course for Red River's activities, while providing significant interaction within the oil and gas industry so as to maintain sizeable deal flow for acquisition purposes. Mr. Hufnagel is also directly involved with finding, evaluating, negotiating and closing acquisition opportunities and Red River's capital needs. Prior to forming Red River, Mr. Hufnagel founded and served as Chairman, President and Chief Executive Officer of Carlton Resources Corporation, an oil and gas acquisition company, from 1994 to 1998. From 1986 to 1992, Mr. Hufnagel served as Senior Vice President of RAMCO Oil & Gas, Inc., a privately held property acquisition company. Mr. Hufnagel's experience encompasses over 25 years. Mr. Hufnagel received his Bachelor of Science from Cameron University and his Master of Business Administration from the University of Oklahoma in 1974.
Mr. Robert E. Davis Jr. , age 48, is Executive Vice President and Chief Financial Officer of Red River. He is responsible for the Company's financing and accounting activities as well as assisting in economic evaluations of potential acquisition targets. Prior to cofounding Red River, Mr. Davis served as Executive Vice President and Chief Financial Officer of Carlton Resources Corporation, an oil and gas acquisition company, from 1996 to 1998. From 1994 to 1996, Mr. Davis served as Executive Vice President and Chief Financial Officer of American Central Gas Company in Tulsa, a natural gas gathering and processing company. In 1983, Mr. Davis co-founded and served as Executive Vice President and Chief Financial Officer of Vesta Energy Company, a nationally recognized natural gas marketing company. From 1986 through 1992, he also served as President and Chief Executive Officer of Esco Energy, Inc., the holding company of Vesta Energy Co., Omega Pipeline Co. and Esco Exploration Company. During his 25 years in the oil and gas industry, Mr. Davis also served as CPA with Arthur Young & Company (now Ernst & Young LLP) in Tulsa, specializing in oil and gas taxation and accounting, a commercial loan officer at United Oklahoma Bank in Oklahoma City and manager of drilling program sales and administration with Andover Oil Company of Tulsa. Mr. Davis has a B.S. degree in finance and accounting from the University of Oklahoma. He is a licensed certified public accountant in the state of Oklahoma.
Mr. Billy L. Baysinger, Jr., age 36, is Senior Vice President of Acquisitions for Red River. He is responsible for identifying strategic acquisition candidates and coordinating the evaluation process of each property set. In addition, Mr. Baysinger oversees the office administration and production land functions. From 1997 until 1998, Mr. Baysinger was employed by Carlton Resources Corporation and, its wholly owned subsidiary, Magic Circle Energy Corporation as Vice President, Business Development. Prior to his employment with Carlton Resources, Mr. Baysinger spent five years in the midstream sector of the oil and gas industry working for Associated Natural Gas (PanEnergy Field Services and now Duke Energy). He has been active in the oil and gas industry for nearly 15 years starting in 1985 as a geologist with Lynan Energy, Inc., a small private oil and gas company. He managed gas marketing, contract administration and volume control functions during another five year span. Mr. Baysinger received a Bachelor of Science degree in Geology from Oklahoma State University in 1985 and his Master of Business Administration from Central State University in 1989. He is a member of the American Association of Petroleum Geologists, Gas Processors Association and the Natural Gas Association of Oklahoma.
Mr. Brent A. Biggs, age 33, is the Vice President of Marketing for Red River. He is responsible for managing Red River's product marketing efforts including the sale of natural gas, crude oil and liquids. He is also a member of the acquisitions team. Prior to joining Red River in 1998, he was the Manager of Product Marketing and Gas Supply for Carlton Resources Corporation from 1997 to 1998. Prior to joining Carlton Resources, Mr. Biggs was Product-Marketing Manager for RAMCO Operating Company and RB Operating Company from 92 to 97. He has more than nine years experience in the oil and gas business and is a member of the Natural Gas Association of Oklahoma. Mr. Biggs attended the University of Central Oklahoma and majored in Business Management.
Ms. Janet L. McGehee, age 39, is Vice President of Engineering and is responsible for all the engineering functions of Red River. She evaluates properties for acquisition opportunities and once a property base is established she will be responsible for operations, development and enhancement of the properties. Prior to the formation of Red River, she served as Engineering Manager for Carlton Resources from 1997 to 1998, providing property evaluations to the bank and coordinating evaluations with third party engineering groups. She also provided property enhancement with workover and recompletion proposals on the Magic Circle properties. Prior to joining Carlton in 1997, she was a district engineer for Samson Resources from 1993 to 1996. In addition, Ms. McGehee served as a petroleum engineer for Hawkins Oil & Gas, Inc. from 1983 to 1989, and a senior engineer for Geodyne Resources, Inc. from 1990 to 1992, both in Tulsa. Ms. McGehee received a Bachelor of Science in Petroleum Engineering from Texas A&M University. She is a Licensed Professional Engineer and a member and director of the MidContinent Section of the Society of Petroleum Engineers.
Mr. Stephen J. Vogel, age 53, is the minority owner and President of TCM. L.L.C., an 80%-owned subsidiary of Red River, which was created to operate Red River's coal bed methane projects. Mr. Vogel brings 25 years of oil and gas experience to Red River Energy. Prior to the formation of Red River, Mr. Vogel served as Vice President of Operations for Carlton Resources from 1996 to 1998. Before joining Carlton Resources, Mr. Vogel owned Star Production Corporation and worked as Senior Vice President of Operations and Chief Operating Officer of RAMCO Oil & Gas, Inc. in Tulsa from 1987 to 1992. Mr. Vogel has worked in oil and gas engineering and operations in the United States, the Pacific Rim, South America, and the Middle East. Mr. Vogel has served as a senior engineer for Phillips Petroleum from 1974 to 1978, the Executive Vice President and Chief Operating Officer of Texas International Petroleum from 1978 to 1981, President and Chief Operating Officer of Graceland Petroleum in Oklahoma City from 1981 to 1982, Vice President of production for Eason Oil from 1983 to 1984, and Vice President of Engineering and Acquisitions for Samson Resources in Tulsa in 1984. Mr. Vogel received both a Bachelor of Science and Masters of Science in Mechanical Engineering from Oklahoma State University in 1968 and 1973, respectively. Mr. Vogel is a member of the Society of Petroleum Engineers and the American Society of Mechanical Engineers. From 1968 to 1971, Mr. Vogel served in the United States Army in Germany and Vietnam.
Principal Shareholders Of Red River
The following table sets forth certain information concerning the number of shares of Red River common stock owned beneficially, as of December 1, 1999 by each of the Red River shareholders. No shares of any other class of equity securities are outstanding. All of the shares are beneficially owned by the named owners directly.
Beneficial Ownership
--------------------
Percent
Shares Of Total
------ --------
Name Of Beneficial Owner
Rolf N. Hufnagel 640 64%
Robert E. Davis, Jr. 160 16%
Billy L. Baysinger, Jr. 40 4%
Brent A. Biggs 40 4%
Janet L. McGehee 40 4%
Stephen J. Vogel 40 4%
Mark A. Biggs 40 4%
----------- ------------
All directors and officers as a group (7 persons)..... 1,000 100.0%
=========== ============
The following discussion should be read in conjunction with Red River’s consolidated financial statements and related notes to the financial statements appearing elsewhere in this proxy statement. The following discussion is to inform you about the financial position, liquidity and capital resources of Red River as of December 31, 1999 and March 31, 2000 as well as for the results of operations for the years ended December 31, 1998 and December 31, 1999 and the three-month periods ended March 31, 1999 and March 31, 2000.
FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES
Red River's working capital was a deficit of ($1,963,547) at December 31, 1999 compared to a deficit of ($1,964,424) at March 31, 2000.
Red River has no material long-term commitments associated with its capital expenditure plans or operating agreements other than its planned activity on its properties in the West Edmond Hunton Lime Unit ("WEHLU") in Central Oklahoma and its June 15, 2000 purchase of oil and gas properties from ONEOK Resources Company as discussed below under PLAN OF OPERATION FOR 2000. Red River intends to fund its $1.1 million capital cost of its 25% option to purchase an interest in the pilot program with bank borrowing and recently did fund its purchase of the ONEOK properties with bank borrowing. Red River's bank has indicated a willingness to fund the purchase of an interest in the pilot program, but there is no guarantee that it will. Red River could look to Beta for this funding. Red River's bank has funded Red River's acquisition of the ONEOK properties. Additionally, Red River has budgeted $1.5 million for workovers on existing wells in WEHLU to enhance production. Red River currently intends to use borrowed funds from its bank and capital contributions from Beta to fund this development work.
Red River has certain debt service requirements over the next six years which are triggered if certain oil and gas reserve values are not maintained in excess of Red River’s borrowing base. If, in the future, the reserve values are insufficient to support the borrowing base, the scheduled principal payments would average approximately $2.23 million per year for the next six years, beginning as early as January of 2000, plus interest on the outstanding principal at LIBOR + 1.8%, currently approximately 7.6%. Red River anticipates that it will have sufficient cash flow from its existing oil and gas properties to make these debt payments.
Included in Red River’s consolidated current liabilities of March 31, 2000 is the current portion of long-term debt owned by its subsidiary TCM to its lender under a revolving line of credit. This debt, which was used to fund TCM’s drilling of coal bed wells, is recourse only to the assets of TCM. At March 31, 2000, 10% of the outstanding principal of the approximate $2.2 million of total indebtedness of TCM, or $220,000, was due. TCM did not have available funds to make this principal payment and Red River has no plans to make any advances to TCM for this purpose. Red River is in negotiations with the lender to purchase the note and the other interests the lender has in these properties for a cash payment of $525,000, 10,000 shares of Beta stock and warrants to purchase an additional 100,000 shares of Beta common stock at a price equal to 125% of the market price on the date of the closing, subject to the closing of the Merger. Should the lender choose not to sell its interests to Red River or to renegotiate the loan repayment terms, TCM would be forced to assign the existing coal bed properties to the lender in lieu of foreclosure as payment on the note.
HISTORICAL CASH USED IN AND PROVIDED BY OPERATING, INVESTING AND FINANCING ACTIVITIES
Red River financed its business activities through a combination of contributions of equity by its stockholders, bank debt, and cash flow from operations. Red River received cash contributions from members of $380,000 during the year ended December 31, 1998. In addition, Red River borrowed $6,274,734 of long and short term debt during the year ended December 31, 1998 and, $ 3,584,729 during the year ended December 31, 1999. It had no borrowings during the three months ended March 31, 2000. Red River generated net revenues of $499,635 for the three months ended March 31, 1999 and $1,109,347 for the three months ended March 31, 2000.
The net proceeds of equity contributions, borrowings and net revenues have been primarily invested in oil and gas properties, drilling activities and gas gathering systems totaling $6,672,845 in 1998 and $3,623,943 in 1999 and $2,785,966 and $225,399, respectively, during the three month periods ended March 31, 1999 and March 31, 2000.
The general and administrative expense of $685,573 and $980,627, respectively, for the years ended December 31, 1998 and December 31, 1999, and $261,074 and $329,281, respectively, for the three months ended March 31, 1999 and March 31, 2000 include non-cash expenses of $217,800 and $151,200, respectively for the years ended December 31, 1998 and December 31, 1999 and $69,300 and $0, respectively, for the three month periods ended March 31, 1999 and March 31, 2000, all representing salary contributed to Red River in lieu of cash compensation.
LONG TERM LIQUIDITY AND CAPITAL RESOURCES
The timing of most of Red River's capital expenditures is discretionary. Red River has no material long-term commitments associated with its capital expenditure plans or operating agreements other than with the WEHLU properties and the purchase of the ONEOK properties discussed below under PLAN OF OPERATION FOR 2000. Generally, Red River has a significant degree of flexibility to adjust the level of such expenditures as circumstances warrant. The level of capital expenditures will vary in future periods depending on the success it experiences on planned development drilling activities, oil and gas price conditions and other related economic factors.
Red River expects significant opportunities to invest significant capital in development drilling, recompletions of existing wells, investments in coal bed methane drilling and oil and gas property acquisitions. Red River expects to finance these opportunities through internally generated cash flow, bank borrowings, equity contributions and funds generated from partners participating in these projects.
PLAN OF OPERATION FOR 2000
Red River will rely on the same strategy for the rest of 2000 that it employed in 1998 and 1999. Red River was able to fund its operations and acquisitions out of stockholder contributions, debt and internally generated cash flow. The opportunities for growth and increased cash flow will come primarily from four areas of focus.
Further Enhancement of the WEHLU Properties. Red River currently owns and operates approximately 30,000 acres of leasehold which it purchased as a producing property in September of 1998. These properties currently account for approximately 85% of Red River's total daily oil and gas production.
A newly designed recompletion technique has resulted in a significant Hunton formation recompletion program in the State of Oklahoma. This program has resulted in significantly higher production rates on old Hunton formation wells and the drilling of successful new wells once thought to be wet and incapable of economic production. In this procedure, the Hunton formation is fracture stimulated with an acid based fluid and the well is placed on electrical submersible pump. This method will also cause greater volumes of water to be produced which will increase the operating costs of the WEHLU property. Red River believes its 30,000 acres of leasehold held by production is a major candidate for this procedure. However, there are no assurances that this procedure will materially increase oil production in the future and that no independent engineering study has been performed on the WEHLU property to validate this technique as a means to significantly increase oil production.
Effective February 18, 2000 Red River entered into an agreement with Avalon Exploration, Inc. of Tulsa to jointly test and develop additional production in the Company's 30,000 acre producing WEHLU Unit in Central Oklahoma. The terms of the agreement call for Avalon to drill wells and expend an estimated $4.4 million. Red River has retained an option to purchase a 25% "look back" working interest in these same wells, whereby Red River can elect to reimburse Avalon for 25% of actual costs incurred depending on the success of these pilot wells. The option to purchase must be exercised within 120 days of the completion of the drilling activities. It is currently estimated that the option to purchase will need to be exercised sometime in the first half of 2001 should Red River elect to participate. If Red River exercises its option to purchase the pilot program interest, it will be required to advance its 25% share of the estimated $4.4 million capital costs associated with the pilot program, or $1.1 million. In the event funds are unavailable, Red River will have to forfeit the 25% look back interest. If Red River is unable to utilize its existing line of credit with the Bank of Oklahoma, then it must obtain other obtain financing from another source in order to fund this obligation. If the merger is consummated, Red River may seek the financing from Beta, but there is no assurance that the financing will be available.
If the WEHLU pilot program is successful, the ongoing development of the field will commence in the year 2001 with approximately 200 to 300 potential locations to be drilled on the 30,000 acres. Red River will retain a 40% working interest by paying for 36% of the development costs. It is estimated that this development could take place over a three to five year period commencing in the second half of 2001. Preliminary estimates are that Red River's net share of development cost will range between $36,000,000 and $54,000,000 over the three to five year period. Red River will seek to fund these capital expenditures utilizing bank financing. If the merger is consummated, Beta may also seek to provide additional funding through the issuance of its common stock in a public offering. If funds are unavailable to Red River, either through a bank line of credit or cash advances provided by Beta, Red River will be compelled to reduce its interest in the development of the 200 to 300 potential locations.
In addition to the joint venture with Avalon, Red River Energy has budgeted $1.5 million for workovers on existing wellbores which are in the WEHLU area but which are excluded from the joint venture with Avalon. These expenditures to enhance production are expected to be expended in 2000 and 2001.
Further Enhancement and Development Drilling within the Mcintosh Prospect and Expansion of the Existing Gas Gathering System. Two new developmental wells in the McIntosh prospect were drilled for the first half of 2000 at an estimated cost to Red River of approximately $125,000. One well was a dry hole and the other well began commercial production in mid-June and is currently producing 700 Mcfd. Two additional wells are planned for the fourth quarter.
Continuation of the Coal Bed Methane Drilling Program by TCM. The coal bed methane drilling program of Red River's 80% owned subsidiary, TCM, L.L.C. has been underway since February of 1998, financed from internal cash flow and a loan from a major gas and electric utility company which is nonrecourse to any of the assets of Red River other than its interest in TCM. This project has involved the drilling of 47 wells to date, including a saltwater disposal well, and also included the installation of a gas and a saltwater gathering system. The wells are currently in a state of de-watering and the economic results of the project are considered unevaluated. Red River is currently negotiating a purchase of the mortgage note and other interests held by the public utility.
Red River's Program of Acquiring Additional Producing Oil and Gas Properties. It is the intent of Red River to pursue oil and gas producing property acquisitions in the $20 million to $50 million dollar range during 2000. Red River continues to evaluate oil and gas acquisition targets and submit bids when merited. On May 1, 2000, Red River entered into an agreement with ONEOK Resources Company to purchase 124 properties and prospects in 26 fields located in Kansas, Oklahoma and Texas. At December 31, 1999, these properties had estimated proved reserves of 792,935 barrels of oil and 5,587,104 Mcf of natural gas. The purchase price was $5,600,000 per barrel of oil equivalent before closing adjustment or approximately $3.51 after adjustment for production revenues and operational expenses after the effective date of January 1, 2000, and in connection with any exercise by third parties of existing preferential purchase rights and certain matters discovered during Red River's due diligence. The properties are geographically distributed into three areas: Mid-Continent (17 fields), West Texas (4 fields) and onshore Gulf Coast (5 fields). The package includes 34 (30 net) operated oil wells, 3 (2 net) operated gas wells, 30 (4 net) non-operational oil wells and 44 (7 net) non-operated gas wells. The majority of the value is associated with the operated leases in the Mid-Continent region. On June 15, 2000, Red River consummated the purchase from ONEOK and funded the purchase through Red River's credit facility with the Bank of Oklahoma.
Red River's planned capital expenditures and administrative expenses could exceed those amounts budgeted and could exceed Red River's cash from all sources. If this happens, it may be necessary for Red River to raise additional funds. Since Red River has funded the acquisition of the ONEOK Properties under its revolving line of credit with the Bank of Oklahoma, substantially all of the Red River's current borrowing capacity under its credit facility has been consumed. It is anticipated that additional funds will be raised from one or more of the following sources:
Since Red River has funded the acquisition of the ONEOK Properties under its revolving line of credit with the Bank of Oklahoma, substantially all of Red River's current borrowing capacity under its credit facility has been consumed.
| 1) | Red River currently estimates that during 2000 it will generate approximately $2,500,000 of net cash flow from its producing wells after deducting lease operating expenses. |
| 2) | In the event the merger with Beta is consummated, Beta will advance funds to Red River to cover certain capital expenditures. Beta has already budgeted $900,000 for the current year to advance to Red River in connection with Red River's planned activities in the WEHLU and McIntosh properties. |
If the above additional sources of cash are insufficient or are unavailable on terms acceptable to Red River, Red River will be compelled to reduce the scope of its business activities. If Red River is unable to fund planned expenditures, it may be necessary to:
| 1) | Defer or cancel planned exploitation and development activities; |
| 2) | Farm-out its interest in proposed activities; |
| 3) | Sell a portion of its interest in proposed wells and use the sale proceeds to fund its participation for a lesser interest; and |
| 4) | Reduce general and administrative expenses. |
Red River believes it will have sufficient working capital to fund its capital expenditure requirements throughout 2000.
These are forward looking statements that are based on assumptions which in the future may not prove to be accurate. Although Red River’s management believes that the expectations reflected in such forward looking statements are based on reasonable assumptions, it can give no assurance that its expectations will be achieved.
Results of Operations
Red River Energy, L.L.C. was formed as a limited liability company which elected to be taxed as a partnership for federal income tax purposes. As a consequence, prior to the acquisition of Red River Energy, L.L.C. by Red River Energy, Inc. on November 8, 1999, the taxable income of Red River was taxed to its members in proportion to their individual ownership interests, and the payment of federal income taxes on such proportionate share of Red River's taxable income is the personal obligation of each member. Red River Energy, Inc., which acquired all of the membership interests of the Red River management, is an S Corporation for federal income tax purposes. Like a limited liability company, an S corporation is not a taxpayer as its income is included in the taxable income of its shareholders. As a consequence of the merger, Red River's status as an S Corporation will automatically terminate. The taxable year of Red River will end on the day of the merger and a tax return will be due for the short taxable year ending then. Thereafter Red River will be treated as a C Corporation for income tax purposes and its income will be reported on a consolidated tax return filed by Beta, its parent corporation.
Three Months Ended March 31, 2000 compared to Three Months Ended March 31, 1999
Oil and gas sales increased from $499,635 for the three months ended March 31, 1999 to $972,127 for the three months ended March 31, 2000, an increase of 95%, primarily due to acquisition of the McIntosh producing properties in July of 1999 and increased oil and gas prices in 2000. Field services revenue was $137,220 for the three months ended March 31, 2000 compared to $-0- for the prior year period, due to addition of the McIntosh gathering system in July of 1999.
Price and Production Data. Red River's average sales price, oil and natural gas production volumes and average production cost for each Mcf equivalent of production for the three months ended March 31, 1999 and March 31, 2000.
| Quarter Ended March 31, 1999 | Quarter Ended March 31, 2000 | |
| Oil production (Bbl)......................... | 8,079 | 8,982 |
| Gas production (Mcf)..................... | 216,596 | 277,607 |
| Average sales price: | ||
| Oil (per Bbl)........................ | $10.80 | $27.62 |
| Gas (per Mcf)........................ | $1.90 | $2.61 |
| Average production cost per Mcfe.......... | $1.19 | $.96 |
The price received by Red River for its gas sales during the three months ended March 31, 2000 were positively affected by its hedging arrangements. Without those arrangements, Red River would have realized average natural gas prices of $2.32 per mcf.
Operating expenses for the three months ended March 31, 1999 were $315,624, compared to $318,652, for the comparable period in 2000, and depreciation and depletion expense increased from $97,892 for the first three months of 1999 compared to $176,321 for the same period of 2000, principally because of the producing property acquisitions in March 1999. Interest expense was higher for the three months ended March 31, 2000, $151,761 compared to $104,757 for the same period in 1999, an increase of 45%, because bank borrowings totaling approximately $2,100,000 were incurred in March 1999 to finance the acquisition of the McIntosh properties. General and administrative expenses increased 26%, from $261,074 for the three months ended March 31, 1999 to $329,281 for the same period in 2000, due primarily to addition of three employees.
Year Ended December 31, 1999 compared to Year Ended December 31, 1998
Oil and gas sales increased from $865,356 for the year ended December 31, 1998 to $2,852,121 for the year ended December 31, 1999, an increase of 230%, primarily due to acquisition of the WEHLU producing oil and gas properties in September of 1998. Additionally, the McIntosh producing oil and gas properties and gathering system were purchased in July of 1999, resulting in six months of revenues from these properties in 1999 compared to no revenues in 1998. Also contributing to the increase were the higher oil and gas prices in 1999. Revenues from field services were $336,637 compared to $-0- for the prior year, due to addition of the McIntosh gathering system in 1999.
Price and Production Data. Red River's average sales price, oil and natural gas production volumes and average production cost for each Mcf equivalent of production for the years 1998 and 1999 were as follows:
Year Ended Year Ended
December 31, December 31,
1998 1999
Oil production (Bbl)......................... 13,470 33,584
Gas production (Mcf)..................... 336,537 911,036
Average sales price:
Oil (per Bbl)........................ $12.38 $17.86
Gas (per Mcf)........................ $ 2.08 $2.20
Average production cost per
Mcfe.................................. $ 0.76 $.91
The price received by Red River for its gas sales in 1999 were negatively affected by its hedging arrangements. Without those arrangements, Red River would have realized average natural gas prices of $2.31 per mcf.
Operating expenses for the year ended December 31, 1999 were $1,148,421, or $.91 per mcf equivalent compared to $316,533, or $.76 per mcf equivalent for the comparable period in 1998, for an increase of 263%, and depreciation and depletion expense increased to $586,095 in 1999 compared to $182,747 for the same period of 1998, principally because of the producing property acquisitions in September 1998 and March 1999. Interest expense was significantly higher for the year ended December 31, 1999, $512,264, compared to $168,851 for the same period in 1998, an increase of 203%, because bank borrowings totaling approximately $5,383,000 in September 1998 and $2,100,000 in March 1999 were incurred to finance the acquisition of the WEHLU and McIntosh properties. General and administrative expenses increased 43%, from $685,573 for the year ended December 31, 1998 to $980,627 for the same period in 1999, due primarily to addition of three employees.
Effective as of August 27, 1999, our board of directors adopted the 1999 Incentive and Nonstatutory Stock Option Plan, a copy of which is appended to this proxy statement on Appendix D. The Plan was subsequently amended and restated by our board of directors effective as of January 6, 2000.
The Plan as amended and restated is referred to as the "stock option plan." The stock option plan is subject to approval by the written consent of the holders of a majority of the Beta common stock. We are presenting the stock option plan for approval by the written consent of the holders of a majority of the issued and outstanding shares of the Beta common stock. Our management currently owns 22.45% of the issued and outstanding shares of Beta common stock. ALL SUCH SHARES OVER WHICH OUR MANAGEMENT EXERCISES VOTING POWER WILL CONSENT TO THE APPROVAL OF THE STOCK OPTION PLAN. It will be necessary to secure the written consent of the holders of a majority of the issued and outstanding shares of Beta common stock to obtain the required approval of the stock option plan.
The stock option plan provides for the granting to employees of incentive stock options within the meaning of Section 422 of the Internal Revenue Code of 1986, as amended, and for the granting of nonstatutory stock options to directors who are not employees and consultants. In the case of employees who receive incentive stock options which are first exercisable in a particular calendar year whose aggregate fair market value exceeds $100,000, the excess of the $100,000 limitation shall be treated as a nonstatutory stock option under the stock option plan.
The stock option plan is being administered by the Compensation Committee appointed by our board of directors. This committee consists of two directors, Joe C. Richardson, Jr. and John Tatum, neither of whom is an employee of Beta. As such, under Rule 16b-3, the grant of such stock options under the stock option plan to officers and directors who are our employees is exempt from the short swing profits provisions under Section 16(b) of the Securities Exchange Act of 1934 ("1934 Act").
This committee has the power, subject to the approval of our board of directors, to determine the terms of the options granted, including the number of shares subject to each option, the exercisability and vesting requirements of each option, and the form of consideration payable upon the exercise of such option (i.e., whether cash or exchange of existing shares of Beta common stock in a cashless transaction or a combination thereof).
A maximum of 700,000 shares of Beta common stock (which amount is subject to adjustment for stock splits, stock dividends, combinations or reclassification of the Beta common stock) are reserved for issuance under the stock option plan. As of the date of this proxy statement, stock options exercisable for a total of 97,500 shares of Beta common stock have been granted to a total of six employees as incentive stock options. Of this amount, stock options for a total of 95,000 shares of Beta common stock have been granted to officers and directors who are employees. The average exercise price of such stock options is $6.00 per share, which represented an amount in excess of 110% of the fair market value of the average of the last reported highest bid and lowest asked prices quoted on the Nasdaq Small Cap Market on August 27, 1999, which was the date such stock options were granted. In the event that the stock option plan is not approved by a majority of the Beta shareholders, the 97,500 stock options will be cancelled.
The stock option plan requires that the exercise price of the stock options granted under such plan shall not be less than, but may be higher than, 100% of the fair market value per share as determined on the date of grant. However, if an employee who is granted a Stock Option owns, at the time of grant, stock representing move than 10% of the voting power of all classes of Beta Stock, the exercise price for options which are incentive stock options may not be less than 110% of the fair market value per share on the date of grant.
So long as our stock is reported on The Nasdaq Stock Market, the fair market value per share on the date of grant of a stock option under the stock option plan shall be the average of the last reported highest bid and the lowest asked prices quoted on the Nasdaq Small Cap Market System or the Nasdaq National Market System on such date as is appropriate. The Company's shares qualified on May 4, 2000 for designation on the Nasdaq National Market System, so for future grants the fair market value per share shall be the closing price of the Beta common stock as reported on such system on the date of grant, or if our price is not quoted on such date, then the closing price as of the last immediately preceding day on which the closing price is so reported.
The stock option plan will continue in effect for 10 years from August 20, 1999 (i.e., the date first adopted by our board of directors), unless sooner terminated by our board of directors. Unless otherwise provided by our board of directors, the stock options granted under the stock option plan will terminate immediately prior to the consummation of a proposed dissolution or liquidation of Beta.
The options granted under the stock option plan are for a period of not more than 10 years after the date of grant. However, in the case of an optionee who owns, at the time of grant, stock representing more than 10% of the combined voting power of all classes of Beta stock, the term of the options shall not be for more than five (5) years.
Upon the termination of an optionee as our employee, he/she must exercise his/her option within three (3) months (as set forth in such stock option) after he/she ceases to be our employee. If an optionee becomes disabled and due to such disability ceases to be our employee, he/she must exercise his/her option within the period of time not exceeding 12 months (as set forth in such stock option). Upon the death of an optionee whose employment by us was not terminated prior to such event, the optionee's estate or person acquiring the right to exercise such option by bequest or inheritance may exercise such option at any time within 12 months following the date of such optionee's death but only to the extent that the optionee could have exercised such option (under its terms) if his/her employment had continued uninterrupted for such 12 month period.
The options granted under the stock option plan may only be exercised by the optionee during his/her lifetime and are not transferable except by will or by the laws of descent and distribution. The shares of Beta common stock transferred to an optionee as a result of the exercise of a stock option are "restricted securities" under Rule 144 as promulgated under the 1933 Act and may only be resold or transferred in compliance with such rule and the registration requirements or an exemption from such requirements under the 1933 Act.
Shareholders of Beta may submit proposals to be considered for stockholder action at the 2000 Annual Meeting of Shareholders of Beta if they do so in accordance with applicable regulations of the SEC and with the requirements of the Beta by-laws. Any stockholder proposal must be submitted to the secretary of Beta no later than January 30, 2000 in order to be considered for inclusion in Beta's 2000 proxy materials. The proxies named in the proxy solicitation for the 2000 Annual Meeting of shareholders will have discretionary authority to vote on any matters proposed at the meeting by any shareholders if Beta was not given written notice of the matter no later than March 15, 2000.
The consolidated financial statements of Beta as of December 31, 1999 and for each of the three years in the period ended December 31, 1999, included in this proxy statement have been included in reliance on the report of Hein + Associates, LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing.
The consolidated financial statements of Red River as of December 31, 1998 and 1999, and for the two years ended December 31, 1999, included in this proxy statement, have been included in reliance on the report of Hein + Associates LLP, independent accountants, given on the authority of said firm as experts in accounting and auditing.
The unaudited supplementary oil and gas reserve information of Beta included in this proxy statement has been included in reliance of the report of Veazey & Associates, Inc. The unaudited supplementary oil and gas reserve information appears elsewhere in this proxy statement on the authority of Veazey & Associates, Inc.
The unaudited supplementary oil and gas reserve information of Red River included in this proxy statement has been included in reliance of the report of Ryder Scott Company, L.P. The unaudited supplementary oil and gas reserve information appears elsewhere in this proxy statement on the authority of Ryder Scott Company, L.P.
The validity of the shares of Beta common stock being offered hereby is being passed upon for Beta by Clanahan, Tanner, Downing and Knowlton, P.C. Shareholders of this law firm do not own shares of Beta common stock.
AGREEMENT AND PLAN OF MERGER
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THIS AGREEMENT AND PLAN OF MERGER ("Agreement") is made this 19th day of November, 1999, by and among Beta Oil& Gas, Inc.,
a Nevada corporation ("Purchaser"), Beta Acquisition Company, Inc., an Oklahoma corporation ("Merger Sub"), and Red River Energy,
Inc., an Oklahoma corporation ("Company") and the shareholders listed in Schedule A attached to this Agreement, individually
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(collectively, "Red River Shareholders".
RECITALS
A. The Company is engaged in the ownership, leasing, acquisition, exploration, drilling and development of oil and gas
property, located in Oklahoma and the production and sale of oil and gas; B. The Purchaser owns 100% of the issued and outstanding
capital stock of Merger Sub;
B. The Purchaser owns 100% of the issued and outstanding capital stock of Merger Sub:;and
C. Purchaser desires to acquire the Company's business by merging the Merger Sub with and into the Company in accordance
with the terms and conditions of this Agreement in a transaction designed and intended to meet the requirements of Section ("ss.")
368(a)(l)(A) andss.368(a)(2)(E) of the Internal Revenue Code of 1986, as amended ("Code") and as a result of such transaction the
Company, following the merger of Merger Sub with and into the Company which shall be the Surviving Corporation and, as such, shall
become a subsidiary of the Purchaser.
NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein and other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby agree as follows:
1. Certain Definitions. The definitions set forth below shall apply to the meaning of the terms as used throughout this
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Agreement. All other capitalized terms shall have the meaning as defined in other sections of this Agreement.
1.1 "Affiliate" shall mean with reference to a particular Person (i) any Person, directly or indirectly, owning, controlling or
holding with power to vote 10% or more of the outstanding voting securities of such particular Person; (ii) any Person 10% or more of
whose outstanding voting securities are directly or indirectly owned, controlled or held with power to vote by such particular
Person; or (iii) any Person, directly or indirectly, controlled by, controlling or under common control with such particular Person
1.1 "Agreement" shall mean this Agreement and Plan of Merger.
1.1 "Beta Common Stock" shall mean the $.001 par value voting common stock of the Purchaser.
1.1 "Closing" shall mean the consummation of the transactions contemplated by this Agreement.
1.1 "Closing Date" shall mean the date on which the Closing occurs pursuant to Section 2.4 hereof.
1.1 "Commission" shall mean the United States Securities and Exchange Commission.
1.1 "Company" shall mean Red River Energy, Inc., an Oklahoma corporation, and its predecessor, Red River Energy, L.L.C. which
became a wholly owned subsidiary of Red River Energy, Inc. in a reorganization underss.351 of the Code.
1.1 "Effective Time" shall mean the time when the Certificate of Merger is filed as provided in Section 2.5 hereof and the
Merger of Merger Sub with and into the Company becomes effective under applicable law.
1.1 "Red River Shareholders" shall mean the shareholders set forth in Schedule A attached to this Agreement, who collectively,
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as of the date of this Agreement, own all of the issued and outstanding Red River Stock.
1.1 "Red River Stock" shall mean the $1.00 par value voting common stock of the Company, which is the only authorized capital
stock of the Company.
1.1 "Employment Agreements" shall mean those Employment Agreements attached hereto as Exhibit 7.1.9.
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1.1 "Merger" shall have the same meaning as set forth in Section 2.2 hereof.
1.1 "Person" shall mean an individual, partnership, corporation, trust, limited liability company, unincorporated organization,
association or joint venture or a government, or an agency, political subdivision or instrumentality thereof.
1.1 "Purchaser" shall mean Beta Oil & Gas, Inc., a Nevada corporation.
1.1 "Securities Act" shall mean the Securities Act of 1933, as amended, and the rules and regulations thereunder.
1.1 "Surviving Corporation" shall have the same meaning as set forth in Section 2.2 of this Agreement.
1.1 "Year 2000 Compliance" shall mean that (a) no value for current date will cause any interruption in operation; (b)
date-based functionality will behave consistently for dates prior to, during and after Year 2000; (c) in all interfaces and data
storage, the first two digits in the year of any date are specified either explicitly or by unambiguous algorithms; (d) year 2000
will be recognized as a leap year; and (e) the year "00" will be read and correctly interpreted as the year "2000."
All other capitalized terms shall have the meanings as specified elsewhere in this Agreement.
1. The Merger and Consideration
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1.1 Red River Consideration. On the Closing Date, the shares of Red River Stock owned by the Red River Shareholders, consisting
of 1,000 shares of Red River Stock which constitutes all of the issued and outstanding shares of the Company's capital stock, shall
be converted into and become, and there shall be paid and issued, in exchange for such shares, Two Million Two Hundred Fifty Thousand
(2,250,000) shares of Beta Common Stock which shall be issued by the Purchaser to the Red River Shareholders. Such shares of Beta
Common Stock shall be divided and issued to each Red River Shareholder in proportion to their respective ownership interests in the
Red River Stock as set forth in Schedule A attached hereto.
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1.1 Merger. At the Effective Time and subject to and upon the terms and conditions of this Agreement and in accordance with
Oklahoma law, Merger Sub shall be merged with and into the Company (the "Merger") and as a result of such Merger the separate
corporate existence of the Merger Sub shall cease and the Company shall continue as the surviving corporation. The Company as the
surviving corporation after the Merger is hereafter sometimes referred to as the "Surviving Corporation".
The Merger will have the effect set forth in the Oklahoma General Corporation Act. The Surviving Corporation may, at any
time after the Effective Time, take any action, including executing and delivering any certificates, instruments and documents as
shall be determined by the Board of Directors of the Surviving Corporation to be necessary and appropriate, in the name and on
behalf of either the Company or Merger Sub in order to carry out and effectuate the transactions contemplated by this Agreement.
1.1 Shareholder Approvals. Subsequent to the date of this Agreement and prior to the Effective Time, the parties hereto shall
obtain the requisite shareholder approval as required under their respective Articles or Certificate of Incorporation and Bylaws and
under Nevada and Oklahoma law as follows:
a Purchaser Approval. Pursuant to Section 1.4b of Article XII of the Purchaser's Bylaws, the Purchaser, through its Board of
Directors, shall duly call, give notice of, convene shareholders for the approval of this Agreement and the issuance of the shares of
Beta Common Stock for the number of shares as contemplated under Section 2.1 hereof, all in accordance with Nevada law, its Articles
of Incorporation and Bylaws. In addition, the Purchaser as the holder of 100% of Merger Sub's issued and outstanding Common Stock
shall approve, by written consent of its Board of Directors, this Agreement and the Merger contemplated hereby in accordance with
Oklahoma law and the Certificate of Incorporation of Merger Sub; and
a Company Approval. The Company, acting through its Board of Directors shall duly call, give notice of, convene and hold a
special meeting of its shareholders (the "Special Meeting") to consider and vote upon the approval and adoption of this Agreement and
the Merger contemplated hereby, or shall seek the requisite written consent of its shareholders, all in accordance with Oklahoma law
and its Certificate of Incorporation and Bylaws. The Company shall hold the Special Meeting or obtain such written consent as soon
as practicable after the date hereof.
1.1 Closing. The Closing Date shall occur on that date which is on or before three (3) days after the satisfaction and receipt
of any and all required conditions and approvals, including any required approval of the shareholders of Purchaser; but in no event
later than March 31, 2000. The Purchaser and the Company will use best efforts to close as soon as possible upon execution of this
Agreement. In the event that the Closing Date falls on a Saturday, Sunday or Federal holiday, then the next succeeding date which is
not a Saturday, Sunday or Federal holiday shall be the Closing Date. The Closing shall take place at the offices of the Company,
6120 S. Yale, Suite 813, Tulsa, Oklahoma, 10:00 a.m. Central Standard Time on the Closing Date, or at such other time or place as
mutually agreed by the parties hereto. Such Closing may be accomplished by facsimile transmission of Closing Documents and facsimile
signatures, provided that the original of such signed documents are transmitted to the party or parties entitled to receive such
documents within three (3) business days following the Closing Date. The Closing shall be effective as of the close of business of
the Closing Date. At the Closing, (a) the Company and the Red River Shareholders will deliver to Merger Sub and the Purchaser the
various certificates and instruments and documents referred to in Section 7.1 hereof, (b) Purchaser and Merger Sub will deliver to
the Company and the Red River Shareholders the various certificates, instruments and documents referred to in Section 7.2 hereof, and
(c) Purchaser and Merger Sub will deliver to the Red River Shareholders in the manner provided below in Section 7.2.1 the Stock
Certificates evidencing the consideration issued in the Merger.
1.1 Consummation of the Transaction at the Closing. Purchaser, Merger Sub and the Company will each carry out the procedures
specified under the applicable provisions of Oklahoma law as shall be necessary and appropriate to assure the effectiveness of the
Merger. The Merger shall be consummated by filing the Certificate of Merger with the Secretary of State of Oklahoma in such form as
required by, and executed in accordance with the relevant provisions of Oklahoma law to the extent required. Such Certificate of
Merger shall provide for an amendment to the Company's Certificate of Incorporation to change its name to "Beta Operating Company."
1.1 Effect of Merger. At the Effective Time:
1.1.1 Surviving Corporation. Merger Sub shall be merged with and into the Company, with the Company as the Surviving Corporation,
and the separate existence of Merger Sub shall cease. As a result of the Merger, the Red River Shareholders who held stock
certificates representing the Red River Stock prior to the Merger shall cease to have any rights with respect to such stock and all
rights, privileges, powers, franchises and interests of the Company and all of its properties, whether real, personal or mixed, all
debts due on whatever account, and every other interest of the Company, whether tangible or intangible shall be deemed to vest in the
Surviving Corporation without further act or deed, and all claims, demands, property and every other interest shall be as of the
Effective Time the property of the Surviving Corporation to the same extent as previously owned or held by the Company.
1.1.1 Certificate of Incorporation. Except as contemplated by Section 2.5, the Certificate of Incorporation of the Company in
effect at and as of the Effective Time shall remain the Certificate of Incorporation of the Surviving Corporation until thereafter
amended as provided by law.
1.1.1 Bylaws. The Bylaws of the Company, as in effect immediately prior to the Effective Time, shall be the bylaws of the
Surviving Corporation until thereafter amended as provided by law and provisions of such Bylaws.
1.1.1 Directors and Officers. Immediately prior to the Effective Time of the Merger, the directors and officers of the Company as
constituted immediately prior to the Effective Time shall tender their resignations to the Company as agreed upon in Exhibit 2.6.4.
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The number of directors of the Surviving Corporation and the persons serving as Directors of the Surviving Corporation shall be a
minimum of three (3) directors and a maximum of six (6) directors (the exact number of which shall be determined by resolution of the
directors of the Surviving Corporation). The number of directors and the individuals who shall serve as directors of the Surviving
Corporation shall be determined by the Purchaser, as the sole shareholder of the Surviving Corporation immediately following the
Effective Time and such persons as so appointed shall continue to hold office until their successors have been duly nominated,
elected or appointed as provided under the Surviving Corporation's Bylaws as may subsequently be amended in accordance with the
provisions thereof. The officers of the Surviving Corporation shall be appointed, immediately following the Effective Time and the
election by the Purchaser of the directors of its Board of Directors, by the directors of the Surviving Corporation and such officers
as so appointed shall hold such offices in the Surviving Corporation following the Effective Time, until such time as their
successors have been duly appointed and qualified.
1.1.2 The Merger. From and after the Effective Time, the Merger shall have all the effects provided for a merger under Oklahoma
law, , which law shall govern the Surviving Corporation.
1.2 Effect on Capital Stock.
1.2.1 Conversion of Red River Stock. At the Effective Time, as a result of the Merger and without any action on the part of
Purchaser, Merger Sub, the Company or the holders of any of their securities, all of the issued and outstanding shares of Red River
Stock immediately prior to the Effective Time, held by the Red River Shareholders shall be delivered for surrender to the Purchaser
on the Closing Date and at the Effective Time converted into the right to receive all of the shares of Beta Common Stock payable
under this Agreement.
The certificate or certificates representing Red River Stock shall after the Effective Time cease to
have any rights with respect to such shares of Red River Stock except the right to the issuance of the number of shares of Beta
Common Stock as provided in Schedule A attached hereto for such Red River Stock upon the surrender of such certificate or
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certificates in accordance with this Section 2.7 hereof. Upon the filing of the Certificate of Merger with the Secretary of State
of Oklahoma, as a consequence of the Merger and without any other action on the part of the parties to this Agreement, each of the
issued and outstanding shares of Red River Stock shall be cancelled and retired by the Surviving Corporation in exchange for the
shares of Beta Common Stock as provided in Section 2.1 hereof and as set forth in Schedule A attached hereto and all other shares of
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the Company's capital stock shall automatically be cancelled and retired and no payment by the Purchaser or Merger Sub shall be made
with respect to any such other capital stock, if any, of the Company. At the Closing, the Company shall issue to the Purchaser a
stock certificate, registered on the Company's stock transfer records, in the Purchaser's name representing 1,000 shares of the
Surviving Corporation's Common Stock, which shall have been duly authorized by the Board of Directors of the Company as constituted
immediately prior to the Closing Date and such shares as so issued shall constitute the only issued and outstanding shares of the
Surviving Corporation.
1.2.2 Subsequent Transfer: Loss, Stolen or Destroyed Certificates. After the Effective Time, there shall be no transfer on the
stock transfer books of the Surviving Corporation of shares of Red River Stock that were registered as outstanding immediately prior
to the Effective Time other than the shares issued in the name of the Purchaser as required in Section 2.7.1 hereof. If any
registered certificate for the Company shall have been lost, stolen or destroyed, the Surviving Corporation, upon making of an
Affidavit signed by the person claiming such certificate to have been lost, stolen or destroyed and setting forth the facts and other
information relating to such loss or destruction shall, subject to the provisions of this Section 2.7.2, deliver a stock certificate
for the appropriate shares of Beta Common Stock for the Red River Stock represented by such certificate in accordance with Section
2.1.1 hereof to the Person(s) legally entitled thereto. The Surviving Corporation, in the sole discretion of its Board of Directors
and as a condition precedent to the delivery of the shares of Beta Common Stock in exchange for the shares of Red River Stock
represented by such certificate, may require the owner of such lost, stolen or destroyed certificate to provide a bond or other
security in such sum as it reasonably may direct as indemnity against any claim that may be made against the Surviving Corporation
with respect to the certificate alleged to have been so lost, stolen or destroyed.
1.2.3 Merger Sub Stock. Each share of the $.001 par value common stock of Merger Sub issued and outstanding immediately prior to
the Effective Time shall be cancelled and converted into the 1,000 shares of the Surviving Corporation's Common Stock as provided in
Section 2.7.1 hereof, all of which shares shall be owned and held of record in the name of the Purchaser.
1.2.4 Dissenting Shares. As provided in Section 3.1.4 hereof, the Red River Shareholders shall take whatever action is necessary
and appropriate effectively to waive under the applicable provision of the Oklahoma General Corporation Act their rights to an
appraisal of the shares of Red River Stock held by each of them, which represent all the authorized, issued and outstanding shares of
the Red River Stock on and prior to the Closing Date.
2. Conditions Precedent to Obligations
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2.1 Conditions Precedent to the Purchaser's and Merger Sub's Obligations. The obligations of Purchaser and Merger Sub to be
performed under this Agreement on or before the Closing Date are subject to each and all of the following conditions, any one or more
of which may, however, be waived in whole or in part by Purchaser.
2.1.1 Representations and Warranties. The representations and warranties of the Company herein contained shall be true on and as
of the date hereof and as of the Closing Date in all material respects with the same force and effect as though made on and as of
said date.
2.1.2 Performance of Obligations. The Company shall have performed in all material respects all of the Company's covenants,
undertakings, obligations, conditions and agreements required to be performed by it under this Agreement.
2.1.3 Performance at Closing. The Company shall have performed each of the acts it is required to perform and delivered each of
the certificates and other documents it is required to deliver, or appeared at Closing ready, willing and able to perform each of the
acts it is required to perform and deliver each of the certificates and other documents it is required to deliver.
2.1.4 Waiver of Dissenter's Rights. The Red River Shareholders shall have provided the Company prior to Closing a legally binding
instrument executed by such Shareholders waiving all of their rights for an appraisal of the Red River Stock owned by them in
accordance with the Oklahoma General Corporation Act and any other applicable provisions under Oklahoma law and to the extent
applicable under Nevada law.
2.1.5 Absence of Restraining Action. No suit, action or other proceeding shall be pending, or threatened, before any court or
governmental agency in which it will be, or it is, sought to restrain or prohibit or to obtain damages or other relief in connection
with this Agreement or the consummation of the transactions contemplated hereunder.
2.1.6 Absence of Litigation. The Company shall have disclosed to Purchaser in Exhibit 4.1.20 all suits, actions or other
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proceedings pending before any court or governmental agency, or threatened against or affecting the Company and Purchaser shall be
satisfied that no such suit, action or other proceeding, if adversely determined, would have a material adverse effect on the value
of the business, assets, or properties of the Company, or the value of the Red River Stock.
2.1.7 No Attachment. None of the Company's assets or properties shall have been attached or levied upon or passed into the hands
of a receiver or assignee for the benefit of creditors. No petition or similar instrument shall have been filed with respect to the
Company under any bankruptcy or insolvency law, and no injunction or restraining order shall have been instituted against the Company
that would have a material adverse effect on the Company.
2.1.8 No Liens, Indebtedness. Except as set forth in Exhibit 3.1.8, the Company shall not be subject to indebtedness nor its
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properties or assets subject to liens or encumbrances of any kind, other than (i) indebtedness and liens for current taxes, wages and
operating expenses in the normal course of business, payment of which at the time of Closing shall not yet be due; (ii) indebtedness
identified in the Company's Financial Statements as set forth in Exhibit 4.1.7 attached hereto; (iii) any accounts payable or loans
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advanced to the Company subsequent to the Financial Statement Date which were incurred in the ordinary course of its business; (iv)
any other indebtedness approved by the Purchaser; or (v) Permitted Encumbrances (as hereinafter defined).
2.1.9 Resignations. Purchaser and Merger Sub shall have received the resignation dated as of the Closing Date of each director of
the Company and the officers of the Company as agreed upon in Exhibit 2.6.4 that Purchaser requests so resign prior to the Closing.
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2.1.10 Corporate Records. Purchaser and Merger Sub shall have received the stock books, minute books, and corporate seal (if any)
of the Company and its subsidiaries, if any.
2.1.11 Consents and Waivers. All consents from third parties, including without limitation the Notification and Report Form only
to the extent required to be filed under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations
thereunder ("HSR Act"), as well as any other consent or waiver required under any other Licenses, Leases, Permits, Approvals or
Contracts set forth in Exhibits 4.1.17, 4.1.22, 4.1.24 and 4.1.28 attached hereto and as provided in Section 4.1.31 hereof and any
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other person or governmental bodies, necessary for the consummation of the transactions contemplated hereby shall have been obtained.
2.1.12 Absence of Adverse Changes. The Company shall not have suffered any material adverse change in its financial condition,
business, property or assets since the date of the Company's Financial Statements as set forth in Exhibit 4.1.7 attached hereto
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2.1.13 Opinion of Counsel. Purchaser and Merger Sub shall have received an opinion of counsel for the Company dated as of the
Closing Date in form or substance as may reasonably requested by Purchaser.
2.1.14 Certificates. Purchaser and Merger Sub shall have received the certificates and other closing documents required to be
received under Section 7.1.6 and otherwise under Section 7.1 hereof on or prior to the Closing Date.
2.1.15 Shareholder Approval. The shareholders of the Company shall have approved the Merger and the other transactions
contemplated by this Agreement in accordance with the Oklahoma General Corporation Act.
2.2 Conditions Precedent to the Company's and Red River Shareholders' Obligations. The obligations of the Company and the Red
River Shareholders to be performed under this Agreement at Closing are subject to each and all of the following conditions, any one
or more of which may, however, be waived in whole or in part by the Company or the Red River Shareholders.
2.2.1 Representations and Warranties. The representations and warranties of Purchaser and Merger Sub set forth in this Agreement
shall be true and correct in all material respects on and as of the date hereof and as of the Closing Date with the same effect as if
made on and as of the said date.
2.2.2
Performance of Obligations. Purchaser and Merger Sub shall have performed or complied with all of
Purchaser's and Merger Sub's covenants, undertakings, obligations, conditions and agreements herein to be performed on or before
Closing as contained in this Agreement, including, but not limited to, Purchaser's obligation to undertake the filing of the Shelf
Registration pursuant to the requirements of and by no later than the date set forth in Section 9.15 and execution by the Surviving
Corporation and Purchaser of the Employment Agreements.
2.2.3 Performance at Closing. Each of Purchaser and Merger Sub shall have performed each of the acts it is required to perform
and delivered each of the certificates and other documents it is required to deliver, or appeared at Closing ready, willing and able
to perform each of the acts it is required to perform and deliver each of the certificates and other documents it is required to
deliver.
2.2.4 Absence of Restraining Action. No suit, action or other proceeding shall be pending, or threatened, before any court or
governmental agency in which it will be, or it is, sought to restrain or prohibit or to obtain damages or other relief in connection
with this Agreement or the consummation of the transactions contemplated hereunder.
2.2.5 Absence of Litigation. Purchaser shall have disclosed to the Company and the Red River Shareholders all suits, actions or
other proceedings pending before any court or governmental agency, or threatened against or affecting Purchaser or Merger Sub and the
Company and the Red River Shareholders shall be satisfied that no such suit, action or other proceeding which, if adversely
determined, would have a material adverse effect on the value of the business, assets, or properties of the Purchaser or Merger Sub
or the value of the Beta Common Stock.
2.2.6 Certificates. The Company shall have received such certificates as are required by Section 7.2.3 hereof on or prior to the
Closing Date.
2.2.7 Opinion of Counsel. An opinion of counsel for Purchaser and Merger Sub shall have been delivered to the Company and the Red
River Shareholders dated as of the Closing Date, substantially in the form or substance as may reasonably requested by the Company
and the Red River Shareholders.
2.2.8 Purchaser Shareholder Approval. The shareholders of the Purchaser shall have approved the Merger and the other transactions
contemplated by this Agreement in accordance with the General Corporation Law of Nevada.
2.2.9 Employment Agreements. Purchaser shall have caused the Company to execute and deliver the Employment Agreements.
2.2.10 Absence of Adverse Changes. Neither Purchaser nor Merger Sub shall have suffered any material adverse change in its
financial condition, business, property or assets since the date of this Agreement.
2.2.11 Consents and Waivers. All consents from third parties, including without limitation the Notification and Report Form only
to the extent required to be filed under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, and the regulations
thereunder ("HSR Act"), as well as any other consent or waiver required under any other Licenses, Leases, Permits, Approvals or
Contracts set forth in Exhibits 4.1.17, 4.1.22, 4.1.24 and 4.1.28 attached hereto and as provided in Section 4.1.31 hereof and any
---------------- ------ ------- ------
other person or governmental bodies, necessary for the consummation of the transactions contemplated hereby shall have been obtained.
2.2.12 Filing of Shelf Registration. Purchaser shall undertake to file a Shelf Registration Statement with the Commission to the
extent and within the time period required by Section 9.15 relating to the future resale of the shares of Beta Common Stock to be
received by the Red River Shareholders.
2.2.13 Nasdaq Listing of Shares. Purchaser shall undertake to file the necessary documents requesting that the shares of Beta
Common Stock to be issued to the Red River Shareholders be listed on and available for trading on The Nasdaq Stock Market.
2.2.14 Director Appointment. Rolf N. Hufnagel shall have been appointed as a director of the Purchaser, effective immediately
after the Effective Time.
3. Representations and Warranties
3.1 Representations and Warranties of Seller. The Company and the Red River Shareholders, represent and warrant to Purchaser
and Merger Sub as of the date hereof and as of the Closing Date, as follows:
3.1.1 Good Standing. The Company is a corporation duly organized, validly existing and in good standing under the laws of the
State of Oklahoma, with full corporate power and authority to own, operate and lease its properties and its interests in properties
(including its interests in oil and gas properties) and to carry on its business as now being conducted. The Company is qualified to
do business and is in good standing in all jurisdictions where its properties, assets and/or activities and operations so require,
which states are listed in Exhibit 4.1.1 attached hereto, except where the failure to qualify would not have a material adverse
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effect on the Company. True and correct copies of the Company's Certificate of Incorporation and all amendments thereto and
restatements thereof, and the Company's Bylaws and all amendments thereof and restatements thereto are set forth in Exhibit 4.1.1
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attached hereto.
3.1.2 Binding Agreement. This Agreement has been executed and delivered by the Company and each of the Red River Shareholders as
set forth above, constitutes the valid and binding obligation of the Company and the Red River Shareholders enforceable in accordance
with its terms, except as such enforcement may be limited by applicable bankruptcy, insolvency, moratorium, general principles of
equity, or similar laws affecting the rights of creditors generally, and will not conflict with, cause a breach, violate or be in
contravention of or result in a default under the Company's Certificate of Incorporation, Bylaws or any other organizational or
governing instrument of the Company, or of any Contract, Lease, indenture, promissory notes, agreement, mortgage or other instrument
to which the Company is a party or by which any of its assets or property is bound or affected or, to the best of the Company's
knowledge, any law, rule, License, regulation, judgment, decree or order of any court, agency or other authority to which
jurisdiction the Company is subject. All corporate action necessary for the approval and/or ratification of this Agreement has been
taken or will have been taken on or before the Closing.
3.1.3 Authorized Stock The only authorized capital stock of the Company is 50,000 shares of its $1.00 par value common stock, of
which, as of the date hereof, 1,000 shares of Red River Stock are issued and outstanding. The Red River Shareholders own such
portions of the issued and outstanding shares of Red River Stock as set forth in Schedule A attached hereto. No other person has any
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legal ownership interest in and to any shares of the Red River Stock.
3.1.4 Stock Fully Paid and Ownership of Securities. All issued and outstanding shares of the Red River Stock have been duly
authorized and validly issued and are fully paid and non-assessable. As of the date hereof, there are not, and as of the Closing
Date there will not be, any (i) options, warrants, purchase rights, subscription rights or other contract rights or commitments,
stock appreciation rights, phantom stock or other any rights to purchase any shares of the Red River Stock or any debt or securities
convertible into such shares or (ii) obligations of the Company, contractual or contingent, to issue any such options, warrants,
rights or shares. As of the date hereof, record ownership of the Red River Stock is held 100% by the Red River Shareholders, and
each such Shareholder owns of record and beneficially the number of shares set forth opposite such Shareholder's name in Schedule A
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attached to this Agreement. The Red River Shareholders represent and warrant that as of the Closing Date such Red River Stock will
be free and clear of all pledges, liens, security interests, encumbrances or other restrictions (excluding restrictions imposed on
the transfer of the Red River Stock under the Securities Act) and of all voting trusts, voting agreements, proxies and other voting
restrictions.
3.1.5 Indefeasible. The Red River Shareholders have good and indefeasible title to the shares of the Red River Stock to be
transferred pursuant to the terms hereof and such shares at the Closing will be presented to the Surviving Corporation, free and
clear of all pledges, liens, security interests, encumbrances, equities, claims or other restrictions (other than restrictions
imposed under the Securities Act), and such Shareholders have full power and authority to consummate the transactions described
herein.
3.1.6 No Agreements. There are no agreements with any person with respect to (i) the sale, lease, exchange or other disposition
of any of the Company's properties or assets, except in the ordinary course of its business; or (ii) the sale, pledge, hypothecation,
transfer, assignment or other disposition of the ownership, direct or indirect, of any of the shares of the Red River Stock, the
operation of which may in the future result in a change in control of the Company.
3.1.7 Financial Representations. To be attached hereto within 15 days from the date hereof as Exhibit 4.1.7 are a Balance Sheet,
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Statement of Income (Loss and Deficit) and Statement of Changes in Financial Position (including notes to such financial statements)
as of September 30, 1999, and for the Nine (9) month period then ended (collectively the "Financial Statements"). The Financial
Statements will have been prepared in accordance with generally accepted accounting principles applied on a consistent basis, except
as disclosed therein, and will present fairly the financial position of the Company as of September 30, 1999, ("Financial Statement
Date") and the results of operations for the Nine (9) month period then ended.
3.1.8
No Liabilities. As of the Financial Statement Date, the Company had no material liabilities or
obligations of any nature (whether accrued, absolute, contingent, and due or to become due) except as disclosed or reflected in the
Financial Statements, or as set forth in Exhibit 4.1.8 attached hereto.
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3.1.9 No Change In Financial Condition. Except as set forth in Exhibit 4.1.9 attached hereto, since the Financial Statement Date,
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there has not been, and neither the Red River Shareholders nor the Company know of (i) any event, condition or state of facts that
has resulted or may reasonably be expected to result in any material adverse change in the financial condition, business, sales,
income, properties, assets or liabilities of the Company from that shown on the Financial Statements; or (ii) any material adverse
change with respect to any contracts to which the Company is a party or any event, circumstance, fact or other occurrence which may
result in any material adverse change to the financial condition, business, sales, income, properties or assets of the Company; or
(iii) any material damage, destruction or loss to the properties, assets or business of the Company, whether or not covered by
insurance, as the result of any fire, explosion, accident, casualty, labor disturbance or interruption, requisition or taking of
property by any governmental body or agency, flood, embargo, or act of God or the public enemy, or cessation, interruption or
diminution of operations, which has materially and adversely affected or impaired or which may be reasonably expected to materially
or adversely affect or impair the conduct of the Company's operations or business; or (iv) any labor trouble other than routine
grievances (including without limitation any negotiation, or request for negotiation, for any representation or any labor contract)
or to the Red River Shareholders' and the Company's knowledge any event or condition of any character which has materially and
adversely affected or which may be reasonably expected to materially and adversely affect or impair the conduct of the Company's
operations or business; or (v) any declaration, setting aside or payment of any dividend, or any distribution, in respect of the Red
River Stock; or (vi) any redemption, purchase or other acquisition by the Company of any shares of the Red River Stock; or (vii) any
significant loss of customers of the Company.
3.1.10 Certain Tax Matters. The Company has, or shall have, prepared and duly filed (and to the best of its knowledge has done so
accurately and correctly) all federal, state, county and local income, franchise, sales, use, real property personal property, ad
valorem, production and severance tax returns and reports required to be filed as of the date hereof, and which shall be required to
be filed on or before the Closing Date, with respect to the Company and has, or shall have duly paid, withheld or reserved for all
taxes, penalties and other governmental charges required to be paid as of the date hereof that have been assessed or levied against
or upon it or its properties, assets, income, franchises, licenses or sales, including, without limitations, federal, state, county
and local income taxes, gross receipt property taxes franchise, sales, use, real property, personal property, ad valorem, production,
severance and similar taxes and assessments (based on production of hydrocarbons or receipt of proceeds therefrom on the oil and gas
properties or other assets and the business owned and operated by the Company, or to the extent that they relate to periods on or
prior to the Financial Statement Date are reflected as a liability on the Financial Statements, or if not paid, is contesting such
amounts in good faith by the appropriate proceedings. All such taxes and assessment, which have become due prior to the Effective
Time have been or will have been timely and properly paid. In the event the Company is contesting such amounts in good faith, the
Company has established a reserve for financial accounting purposes in connection with the business currently conducted by the
Company, neither the Red River Shareholders nor the Company know of any proposal by any taxing authority for additional taxes or
assessments against or upon the Company. To the best of the knowledge of the Red River Shareholders and the Company, all monies
required to be withheld by the Company from employees for income taxes, social security and unemployment insurance taxes have, as of
the date hereof, been collected or withheld, and as of the Closing Date shall have been collected and withheld, and either paid to
the appropriate governmental agencies or set aside in cash for such purpose. The Company has not entered into any agreement for the
extension of time or the assessment of any tax or tax delinquency, nor has the Company received any outstanding or unresolved notices
from the Internal Revenue Service or any taxing body of any proposed examination or of any proposed deficiency or assessment or of
any tax returns or tax liabilities due and payable. The Company has or will within ten (10) days of the date hereof, deliver to
Purchaser an accurate, correct and complete copy of each return or statement filed by, on behalf of or including the Company for
federal income tax purposes or state and local income or franchise tax purposes for the last three (3) tax years of the Company or
for such period as the Company has been in existence. All material elections with respect to the taxes affecting the Company as of
the date hereof are set forth in Exhibit 4.1.10. After the date hereof, no written election permitted under federal, state or local
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income, property, franchise or other tax laws, ordinances, codes, rules or regulations will be made by the Company without
Purchaser's and Merger Sub's express written consent. The provisions of this Section 4.1.10 shall not apply to any federal or state
income tax returns that may be due for a short period as a result of the Merger but rather shall be subject to filing by the existing
officers of the Company within the time period normally required for any such filings following the Effective Date.
3.1.11 Financial Disclosure. The Company has made available to Purchaser and Merger Sub, all information known to the Red River
Shareholders or the Company with respect to (i) accounts, borrowing resolutions and deposit boxes maintained by the Company at any
bank or other financial institution and the account numbers and the names and addresses of all of the persons authorized to effect
transactions in such accounts and pursuant to such resolutions and with access to such boxes; and (ii) the names of all persons,
firms, associations, corporations or business organizations holding general or special powers of attorney from the Company and a
summary of the terms thereof.
3.1.12 Condition of Tangible Assets. To the best of the knowledge of the Company and the Red River Shareholders, all material
tangible portions of the assets, and properties owned by the Company or in which the Company has a leasehold interest or a working
interest, royalty interest, farmout or farmin interest or any other leasehold or mineral interest of any kind whatsoever in oil and
gas or mineral properties, including the well equipment, pipe and other structures located thereon, including all real properties or
leasehold interests in real property and structures thereon, are in good operating condition and repair, subject only to ordinary
wear and tear in light of their respective ages and the respective uses for which they are currently used, and that the use of such
tangible properties and assets conform and comply in all material respects with all rules, regulations and standards applicable to
the Company or its assets or property, imposed by applicable federal, state or local laws, ordinances, codes, orders, rules or
regulations.
3.1.13 All Assets. The properties and assets of the Company as of the date hereof include (i) all properties and assets, whether
or not reflected on the balance sheet included in the Financial Statements, including Licenses, Permits, Leases, Contracts, customer
lists, goodwill and any other tangible or intangible assets disclosed in the Exhibits attached to this Agreement, and (ii) assets and
properties acquired by the Company after the Financial Statement Date and on or before the date hereof in the ordinary course of
business or as disclosed in the Exhibits attached to this Agreement, other than such properties and assets as shall have been
transferred or otherwise disposed of by the Company in the ordinary course of business.
3.1.14 Stock Transfer Records and Minute Books. The stock transfer records and corporate minutes books of the Company and its
subsidiaries will be furnished to the Purchaser and Merger Sub at least ten (10) days prior to the Closing Date and will be complete
and correct in all respects. The minutes books will accurately reflect all meetings, consents and other actions of the shareholders
and Board of Directors of the Company since its incorporation.
3.1.15 Defensible Title. Except for Permitted Encumbrances (as defined herein), the Company has good and defensible title to all
of its assets and properties, including fee interests in real property and title to all its other properties and assets owned as of
the date hereof, free and clear of all mortgages, liens, pledges, charges, claims (real or asserted) or encumbrances of any nature
whatsoever. Title to the oil and gas interests included in the Company's assets and properties is not subject to being reduced by
virtue of any reversionary or back-in interests or reassignments or payments required of the Company; the oil and gas interests are
not subject to any joint venture agreements, farmout agreements, operating agreements, oil and or gas sales or processing contracts,
preferential rights of purchase, consents to assignment, drilling and or development obligations or other burden, restriction or
limitation with respect to the ownership interest of the Company therein, the operation thereof, or the disposition and processing of
production attributable thereto which are not ordinary and customary in the oil and gas industry, or which contain any terms,
provisions, conditions or agreements which are not ordinary and customary in the oil and gas industry or which decrease the Company's
net revenue interest or increase the Company's working interest from the working interest and net revenue interests set forth in
Exhibit 4.1.28. The Company owns the Working interest and net revenue interest shown in Exhibit 4.1.28 in the oil and gas properties
- - -------------- --------------
in which it has an interest. (b) Except as set forth in Exhibit 4.1.15 with respect to the oil, gas and other mineral leases, unit
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agreements, pooling agreements, communization agreements, and other documents creating oil, gas and mineral interest included in the
oil and gas interests, (a) the Company has fulfilled all requirements for filings, certificates, disclosures of parties in interest,
and other similar matters contained in (or otherwise applicable thereto by law, rule or regulation) the Leases or other documents
applicable to it and is fully qualified to own and hold all such Leases or other interests; (b) there are no obligations (excluding
implied covenants, if any) to engage in continuous development operations in order to maintain any such Lease or other interest in
force and effect for the areas and depths covered thereby; (c) there are no provisions applicable to such Leases or other documents
which increase the royalty share of the lessor thereunder, except where such increase would not decrease the Company's net revenue
interest below those shown on Exhibit 4.1.28; and (d) subject to any express or implied covenants, upon the establishment of
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production in commercial quantities, the Leases and other interests are to be in full force and effect over the economic life of the
property involved and do not have terms fixed by a certain number of years. With respect to tangible personal property held by the
Company under lease, all such agreements are valid, binding and in full force and effect and the Company is not in default under any
such Lease. As used in this Agreement with respect to an oil and gas property, the term "good and defensible title" shall mean title
to such oil and gas property which is free and clear of liens and encumbrances (other than Permitted Encumbrances) and which entitles
the Company to a net revenue interest in such oil and gas property that is no less than the net revenue interest that is set forth in
Exhibit 4.1.28 and to a working interest in such oil and gas property that is no greater than the working interest shown in Exhibit
- - --------------- -------
4.1.28 without a corresponding increase in net revenue interest.
- - ------
3.1.16 Permitted Encumbrances. The following liens, charges and other encumbrances of a similar nature are collectively referred to
herein as the "Permitted Encumbrances" with respect to the properties and assets of the Company:
(i) liens for current state or local property taxes not yet due and payable or subject to
penalties; zoning ordinances, building laws, restrictions and regulations imposed by governmental authorities, if any, none of which
is materially violated by existing buildings and uses by the Company;
(ii) any assessment for local benefits levied by any governmental authority and not now a lien
upon all or any portion of such real property; provided, however, neither the Red River Shareholders nor the Company know or have
reason to know of any such assessment;
(iii) liens of carriers, warehousemen, mechanics, laborers, materialmen, landlords, vendors,
workmen, and operators arising by operation of law in the ordinary course of business or by a written agreement existing as of the
date hereof and necessary or incident to the exploration, development, operation, and maintenance of oil and natural gas properties
and related facilities and assets for sums not yet due or being contested in good faith by appropriate proceedings, which proceedings
are disclosed in Exhibit 4.1.16 attached hereto and which liens Purchaser has approved as Permitted Encumbrances;
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(iv) any mortgage, deeds of trust or other encumbrances on leasehold properties which the Company
is leasing from a third party and which is from the owner of the property. and does not adversely affect the Company's working
interest or net revenue interest in the oil and gas properties;
(v) Liens incurred in the ordinary course of business in connection with worker's compensation,
unemployment insurance, and other social security legislation (other than ERISA) to the extent such liens are for amounts not yet due;
(vi) liens, easements, rights-of-way, restrictions, servitude, permits, conditions, covenants,
exceptions, reservations, and other similar encumbrances incurred in the ordinary course of business or existing on property and not
materially impairing the value of the assets of the Company or interfering with the ordinary conduct of the Company's business or
rights to their assets,
(vii) all rights to consent by, required notices to, filings with, or other actions by
governmental authorities to the extent customarily obtained subsequent to closing,
(viii) farmout, carried working interest, joint operating, unitization, royalty, overriding
royalty, sales, and similar agreements relating to the exploration or development of, or production from, oil and natural gas
properties entered into in the ordinary course of business, unless such agreements decrease the Company's net revenue interest or
increase the Company's working interest from the interests set forth in Exhibit 4.1.28 attached hereto,
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(ix) any defects, irregularities, or deficiencies in title to easements, rights-of-way, or other
surface use agreements that do not adversely affect the value of any asset of the Company,
(x) preferential rights to purchase and third-party consents that would not be activated or
triggered by the Merger and the other transactions contemplated by this Agreement, except that any such rights which affect the West
Hunton Lime Unit shall be Permitted Encumbrances if they are listed in Exhibit 4.1.16 attached hereto and approved by Purchaser as
Permitted Encumbrances;
(xi) liens approved in writing by or on behalf of Purchaser,
(xii) any liens, mortgages or security interests disclosed in the Financial Statements or on
Exhibit 4.1. 16,
- - ----------------
(xiii) such imprefections of title, liens, easements or encumbrances, if any, as are not material
in character, amount or extent and do not, severally or in the aggregate, materially detract from the value or materially and
adversely interfere with the present use of the property subject thereto or affected thereby or otherwise materially impair the
business and operations of the Company (for purposes of this subsection only, "material" shall mean the foregoing title defects with
a cumulative value which in the aggregate exceeds $100,000).
3.1.17 Leases and Licenses. Exhibit 4.1.17 attached hereto sets forth, as of the date hereof and which shall set forth as of the
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Closing Date, an accurate and complete list of all leases and purchases of real property or leases, including without limitation oil
and gas leases or mineral interests and agreement relating thereto, license agreements and purchases of personal property (covering
property with a purchase price as of the date hereof greater than $25,000) to which the Company is a party (whether as purchaser,
lessor, lessee, licenser or licensee) (collectively, the "Leases and Licenses"). The Company, as purchaser, lessee or licensee, has
entered into all such Leases and Licenses which the Company reasonably believes may be necessary for the conduct of the business and
operation as now conducted. The Company has furnished to Purchaser accurate and complete copies of all such Leases and Licenses.
The Company has good and defensible title to each of the leasehold and other interests created by the Leases and Licenses, free and
clear of all security interests, claims, liens and encumbrances of any nature, other than Permitted Encumbrances. Each such Lease
and License is in full force and effect. Each such Lease and License constitutes the legal, valid and binding obligation of the
Company and, to the best of the knowledge of the Company and the Red River Shareholders, the other party or parties thereto,
enforceable against the Company in accordance with its respective terms of each such lease or license except as may be limited by
bankruptcy, insolvency, reorganization, readjustment of debt, moratorium, general principles of equity or other laws of general
application related to or affecting the enforcement of creditor's rights generally. Neither the Company nor the Red River
Shareholders have received notice or have any reason to know, of any claimed material default under any such Leases and Licenses
except as set forth in Exhibit 4.1.17.
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3.1.18 Insurance. Exhibit 4.1.18 attached hereto sets forth, as of the date hereof, an accurate and complete list and brief
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description of the terms of all policies of insurance carried by the Company and designating the Company as the insured thereunder.
The description of each policy consists of a description of the subject property, the insurance coverage, the deductibles and the
additional insureds. The Company has furnished to the Purchaser and Merger Sub an accurate and complete copy of all such insurance
policies. Except as set forth in Exhibit 4.1.18, to the best of the knowledge of the Red River Shareholders and the Company, no
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insurance carrier has refused any application for insurance by the Company or any other person on behalf of the Company with respect
to any of its properties or assets or any of its Leases and Licenses.
3.1.19 Intellectual Property Rights. Exhibit 4.1.19 attached hereto sets forth, as of the date hereof, an accurate and complete
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list of all letters patent, patent applications, trademarks, service marks, trade names, brands, logos, copyrights and licenses both
domestic and foreign, and rights with respect to the foregoing, whether or not registered or registrable with any governmental
authority, now owned or used by the Company. Neither the Red River Shareholders nor the Company have received notice, or otherwise
have any reason to know, of any claimed or threatened infringement of the rights of others with respect to any patents, trademarks,
service marks, trade names, brands, logos, copyrights and licenses used or owned by the Company, the loss of which would have a
material adverse effect upon the business, operations, assets or financial condition of the Company.
3.1.20 No Litigation. Except as set forth in Exhibit 4.1.20 attached hereto, there are no existing or pending or, to the best of
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the knowledge of the Company and the Red River Shareholders, threatened suits, actions, claims, or litigation, administrative,
arbitration or other proceedings or governmental investigations or inquiries to which the Company or the Red River Shareholders are a
party or to which any of the properties or assets thereof is subject.
3.1.21 No Violation of Laws or Regulations. To the best knowledge of the Company and Red River Shareholders, the Company has
materially complied with, and is not in any material respect in default under or in violation of, any laws, ordinances, requirements,
regulations or orders applicable to its businesses and properties, nor is the Company in violation of or in default of any order,
writ, injunction, judgment or decree of any court, arbitrator, or federal, state or local department official, commission, authority,
board, bureau, agency or other instrumentality issued or pending against the Company which might adversely affect the Company's or
the Red River Shareholders' ability to execute, deliver and perform their obligations under this Agreement or to consummate the
transactions contemplated hereby or which challenges or seeks to prevent, enjoin, alter or materially delay any such transactions.
Neither the Red River Shareholders nor the Company have received notice, or otherwise have any reason to know, of any claimed default
or violation with respect to any of the foregoing. There have been no illegal payments, kickbacks, bribes or political contributions
made by the Company to any person, entity or governmental or regulatory body in the United States or any foreign country or political
subdivision.
3.1.22 Approvals. All consents necessary or required to be obtained by the Company for the consummation of the transactions
contemplated hereby are set forth in Exhibit 4.1.22 attached hereto. The Company will have obtained, on or before the Closing Date,
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all such consents, approvals and authorizations of all designations, declarations and notices required to be obtained or given, as
the case may be, pursuant to the Certificate of Incorporation or the Bylaws of the Company or under or in accordance with any Lease,
License, Permit, Contract, agreement, indenture or other instrument to which the Company is a party or by which the Company or any of
its properties or assets are bound in connection with the execution, delivery and performance of this Agreement and the consummation
of each transaction referred to in this Agreement. Subject to obtaining the approvals set forth in Exhibit 4.1.22, attached hereto,
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neither the execution, delivery or performance of this Agreement nor the conclusion of any transaction contemplated by this Agreement
will result in any violation of, be in conflict with or constitute a default under any term or provision of the Certificate of
Incorporation or the Bylaws of the Company or any such Lease, License, Permit, Contract, indenture or other agreement or instrument
or the rules and regulations of any regulatory body.
3.1.23 Labor Agreements. There are (i) no collective bargaining agreements between the Company and any labor union or other
representative of employees, including local agreements. amendments, supplements, letters and memoranda of understanding of all kinds
and (ii) no employment or consulting contracts which are not terminable at will without penalty to which the Company is a party.
3.1.24 Contracts. Exhibit 4.1.24 attached hereto sets forth, as of the date hereof and as of the Closing Date, accurate and
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complete lists of the following:
(i) except for the Leases and Licenses, all agreements, contracts, arrangements, commitments, understandings or obligations,
oral or written, of the Company which are to be performed in whole or in part on or after the date hereof and which require or may
require the payment by the Company in an amount, or under which the Company is required or may be required to provide goods or
services of a value, greater than twenty-five thousand dollars ($25,000) during any period of twelve (12) consecutive months;
(ii) any agreement to which the Company is a party or by which its properties or assets are bound that limits the freedom of such
corporation to compete in any line of business or with any person; and
(iii) all other agreements, contracts, arrangements, commitments, understandings or obligations, oral or written (other than oral
contracts of employment), between the Company on the one part and one or more or all of the Red River Shareholders or any other
officer or director of the Company on the other part, or in which any of such persons or entities has any financial interest, direct
or indirect (including without limitation any agreements affecting the Company's properties or assets and agreements to make loans).
The Red River Shareholders have furnished to the extent requested by Purchaser or Merger Sub or have made available for
inspection by Purchaser and Merger Sub a copy of each agreement, contract, arrangement, commitment or obligation set forth on
Exhibit 4.1.24, attached hereto. Collectively the contracts, agreements, arrangements, commitments or obligations set forth in this
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Section and listed in Exhibit 4.1.24, attached hereto, are referred to throughout this Agreement as the "Contracts." Except as set
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forth in Exhibit 4.1.24, each such Contract is in full force and effect and to the best of the Company's and the Red River
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Shareholders' knowledge the Company has performed in all material respects all of the obligations under each Contract required to be
performed by it as of the date hereof and as of the Closing Date and no such Contract is in default, nor has any event occurred,
which with the passage of time or giving of notice or both, will result in the occurrence of a default under any such Contract.
3.1.25 Employees. The Company is not a party to any agreement, contract, arrangement, plan, commitment or understanding which has
resulted or would result, upon the consummation of the transactions contemplated under this Agreement or otherwise, separately or in
the aggregate, in the payment of any "excess parachute payment" within the meaning of Codess.280G nor is the Company obligated to pay
any severance arrangements with any current or former employees of the Company or any of its subsidiaries. Attached hereto as
Exhibit 4.1.25 is a true and complete list of all employees of the Company compensated by the Company. There are no employees of the
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Company who have employment contracts or employee benefit rights which cannot be terminated upon reasonable notice, except to the
extent employment benefit rights must be continued as required by state and federal law.
3.1.26 Environmental Matters. To the best knowledge of the Company and the Red River Shareholders, the Company has duly complied
with, and the operation of its business, equipment and other assets in the facilities owned or leased by the Company and its
subsidiaries, if any, are in compliance with the provisions of all applicable federal, state and local environmental, health and
safety laws, statutes, ordinances, rules and regulations of any governmental or quasi governmental authority relating to (i)
omissions, (ii) discharges, release or seepage to surface water or ground water, (iii) solid or liquid waste disposal, (iv) the use,
storage, generation, handling, transport, discharge, release or disposal of toxic or hazardous substances or waste, or (vi) other
environmental, health or safety matters, including, without limitation, the Comprehensive Environmental Response Compensation and
Liability Act of 1980, as amended by the Superfund Amendments and Authorization Act of 1986; the Occupational Safety and Health Act,
as amended; the Resource Conservation and Recovery Act of 1976; the Federal Water Pollution Control Act of 1970, as amended; the Safe
Drinking Water Act of 1974; the Toxic Substances Control Act of 1976; the Emergency Planning and Community Right to Know Act of 1986,
as amended; and the Clean Air Act, as amended; the Federal Water Pollution Control Act, as amended; the Oil Pollution Act of 1990, as
amended; the Rivers and Harbors Act of 1899; the Hazardous and Solid Waste Amendments Act of 1984, as amended; and the Hazardous
Materials Transportation Act, as amended (collectively "Environmental and Health Laws"). To the best knowledge of the Company and
the Red River Shareholders, there are no investigations, administrative proceedings, judicial actions, orders, claims or notices
which are pending, anticipated or threatened against the Company, relating to violations of the Environmental and Health Laws. The
Company has not received a notice of, and does not know or have any reason to suspect, any facts which might constitute a violation
of any Environmental or Health Laws which relate to the use, ownership or occupancy of any property or facilities used by the Company
in connection with the operation of its business or any activity of the Company's business which would result in a violation or
threatened violation of any Environmental or Health Laws.
3.1.27 Stock Representations. Subject to the rights of the Red River Shareholders under Section 9.15, the Red River Shareholders
(i) intend to acquire the shares of the Beta Common Stock pursuant to Section 2.1 hereof solely for the purpose of investment and not
for the resale and distribution thereof, and has no present intention to offer, sell, assign or otherwise dispose of the same; (ii)
are either accredited investors within the meaning of Rule 501(a) of Regulation D as promulgated under the Securities Act of 1933, as
amended ("Securities Act") or sophisticated investors within the meaning of the judicial and regulatory rulings and interpretations
of Section 4(2) of the Securities Act and Rule 506(b)(2)(ii) of Regulation D as promulgated under the Securities Act; (iii) will be
required in connection with any reoffer or resale of the Beta Common Stock to (a) comply with Rule 144 and, in the case of those Red
River Shareholders who are Affiliates of the Company, with Rule 145(d), as shall be applicable, (b) comply with any other exemption
from registration under the Securities Act, or (c) offer and sell their shares of Beta Common Stock pursuant to an effective
registration statement under the Securities Act; (iv) agree that they will not offer, sell., transfer, assign or otherwise dispose of
("disposition") any such shares of Beta Common Stock unless any such disposition shall comply with either Rule 145 or Rule 144, as
the case may be, of the Securities Act or be registered or be exempt from registration under the Securities Act and shall comply with
Rule 144, all applicable federal and state securities laws, and (v) agree and acknowledge that the stock certificates representing
the shares of Beta Common Stock which will be acquired by the Red River Shareholders under this Agreement will contain a legend
restricting the transferability of the shares of Beta Common Stock as provided herein and that stop order instructions may be imposed
by the Purchaser's transfer agent restricting the transferability of such shares.
3.1.28 Licenses, Facilities.
(i) All licenses and authorizations material to the operation of the Company's oil and gas wells and other facilities owned,
operated or leased by the Company, such oil and gas wells and other facilities being identified at Exhibit 4.1.28, attached hereto,
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and/or to the conduct of the Company's business are listed at Exhibit 4.1.28 attached hereto. The Company is operating the oil and
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gas wells and other facilities identified in full compliance with the authorizations identified; neither the Red River Shareholders
nor the Company have any knowledge of any matters which might result in the supervision or revocation of such authorizations, or the
issuance of any citation or forfeiture to the Company. To the best of the knowledge of the Company and the Red River Shareholders,
there are no unsatisfied citations or notices of apparent liability issued or investigations ongoing, by any federal or state
government agency, commission or other authority with respect to the oil and as wells and other facilities owned, operated or leased
by the Company or their operation.
(ii) The Company owns all of the equipment necessary or useful in the operation of the oil and gas wells and other facilities in
accordance with their licenses and with the Company obligations under any agreements now in effect (the "Equipment"). All of the
Equipment is in good repair and operable condition, ordinary wear and tear excepted, and have been, and will be, prior to Closing,
operated in accordance with the authorizations for the oil and gas wells and other facilities and the rules and regulations of the
federal and state regulatory agency, commission or other authority having jurisdiction over such oil and gas wells and other
facilities.
(iii) Purchaser, Merger Sub, the Red River Shareholders and the Company will cooperate in seeking authorizations or consents to
the transfer of control to the Surviving Corporation, and each party will bear its expenses incurred in requesting such
authorizations or consents required to be obtained under the provisions of this Agreement by such party. Purchaser, Merger Sub, the
Red River Shareholders and the Company shall cooperate fully in responding promptly to any inquiries or objections related to such
requests for authorizations or consents.
3.1.29 Accounts Receivable. All of the accounts receivable of the Company as disclosed in the Financial Statements constitute
valid receivables deemed collectible, have been incurred in the ordinary course of business consistent with past practices and, to
the Company's and the Red River Shareholders' knowledge are collectible in the ordinary course of the Company's business, except to
the extent of the reserve for bad debts or doubtful accounts as set forth in the Financial Statements attached hereto as Exhibit
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4.1.7, and are not subject to any setoffs or counterclaims. To the knowledge of the Company and the Red River Shareholders, no part
of such accounts receivable is contingent upon the performance by the Company of any obligation, and no agreements for deduction or
discounts have been made with respect to any part of such receivables.
3.1.30 Payables. The list of itemized accounts payable of the Company as shown on Exhibit 4.1.30 as of the Financial Statement
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Date attached hereto represent a complete list of all of the Company's accounts payable to its creditors as of such date, are true
and correct and are not currently in default as of the date hereof and as of the Closing Date. The Company shall not incur any
additional accounts payable between the date hereof and the Closing Date other than in the ordinary course of business without
Purchaser's express written consent.
3.1.31 Permits. To the best knowledge of the Company and the Red River Shareholders, the Company has obtained all permits,
licenses and any other approvals or authorizations (collectively "Permits") in connection with the ownership, operation, or leasing
of the oil and gas wells and facilities in which the Company has an interest and the drilling and completion, or proposed drilling
and completion, of oil and gas wells and the extraction, removal, transportation and gathering of oil and gas under any existing oil
and gas leases or other Leases, Licenses or Contracts relating to the operation of its oil and gas properties or leasehold interests
which are presently being operated or which are currently in effect. All such Permits are presently valid and in full force and
effect and no revocation, cancellation, or withdrawal thereof has been effective or to the best of the knowledge of the Company and
the Red River Shareholders, threatened. Except as disclosed herein, the execution, delivery and performance of this Agreement and
the consummation of the transactions contemplated hereby will not result in the termination of, or change in, any such Permits.
3.1.32
Employee Benefit Matters.
(i) Employee Salaries and Benefits. Exhibit 4.1.32 consists of a true and complete list of all of the salaries of all employees
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of the Company and a true and complete list of the plans, programs and arrangements providing profit sharing, retirement, pension,
savings, thrift, deferred compensation, stock options, stock purchases, group insurance, accident, sickness, medical, dental and
disability benefits, and all vacation pay, severance pay, incentive compensation, consulting agreements, bonuses and other employee
benefits or fringe benefits maintained currently or at any time in the past three (3) years by the Company or with respect to which
contributions are made or have been made at any time in the past six (6) years by the Company (including health insurance, life
insurance and other benefit plans maintained for retirees) whether or not such plans, programs and arrangements consist "employee
benefit plans" within the meaning of Section 3(3) of the Employees Retirement Income Security Act of 1974, as amended ("ERISA"),
whether or not such plans, programs and arrangements are in the nature of formal or informal understandings, and whether or not such
plans, programs and arrangements are pursuant to any collective bargaining arrangements. Such plans, programs and arrangements are
collectively referred to herein as "Benefit Plans".
(ii) Compliance with ERISA. To the best knowledge of the Company and the Red River Shareholders, each Benefit Plan of the
Company which is covered by ERISA complies in all material respects and has been administered in all material respects in accordance
with the applicable provisions of ERISA and the Code, including, without limitations, the satisfaction of all applicable recording,
disclosure, fiduciary and tax qualification requirements under ERISA and the Code. The Company has filed or caused to be filed with
the Internal Revenue Service annual reports on form 5500 or 5500C or 5500R, as applicable, for each Benefit Plan for all years and
periods for which such reports were required. To the best knowledge of the Company and the Red River Shareholders, all statements
and disclosures made on the documents or forms filed or distributed pursuant to the applicable reporting and disclosure requirements
under ERISA and the Code have been true and complete in all material respects and have been filed or distributed timely. No Benefit
Plan has incurred any excise tax liability.
(iii) Funding. The Company has made all payments and contributions to all Benefit Plans on a timely basis as required by the
terms of each such Plan, ERISA and the Code. All such payments and contributions have been deducted fully by the Company for
federal income tax purposes. Such deductions have not been challenged or disallowed by any governmental authority and the Company
has no reason to believe that such deductions are not properly allowable. The Company has funded or will fund each Benefit Plan in
accordance with the terms of each Benefit Plan and, with respect to the current plan year for benefits accrued through the Closing
Date, including the payment of applicable premiums on any insurance contract funding a Benefit Plan for coverage provided through
the date hereof.
(iv) Prohibited Transactions. To the best knowledge of the Company and the Red River Shareholders, no "prohibited transaction"
as defined inss.406 of ERISA orss.4975 of the Code, has occurred with respect to any Benefit Plan other than any such transaction
which is exempt underss.408 of ERISA orss.4975(d) of the Code. No fiduciary violations, as defined inss.404 of ERISA, have occurred
with respect to which the Company could have any present or future liability or obligations. Each Benefit Plan is, and has been,
operated and administered in accordance with the appropriate written plan documents.
(v) Determination Letters. The Internal Revenue Service has issued to the Company letters determining that any Benefit Plan
operated by the Company is qualified underss.401(a) and related sections of the Code to the extent applicable and the related trust
of such Benefit Plans operated as qualified plans are exempt from federal income tax underss.501(a) of the Code. To the best
knowledge of the Company and the Red River Shareholders, there have been no occurrences since the date of any such determination
letter which have adversely affected or which could adversely affect such qualification.
(vi) Medical Plans. Each Benefit Plan that provides medical and related benefits has been operated in compliance with all
requirements ofss.ss.601 through 608 of ERISA and either (i)ss.ss.162(i)(2) and (k) of the Code and the regulations promulgated thereunder
(prior to 1989) or (ii)ss.4980(B) of the Code and the regulations promulgated thereunder (after 1988) relating to the continuation of
coverage under certain circumstances in which coverage could otherwise cease. Exhibit 4.1. 32(vi) attached hereto is a true and
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complete list of all former employees of the Company and their respective beneficiaries who, as of the date hereof, are receiving or
who are eligible to elect to receive benefits pursuant to such plans and the provisions of ERISA and the Code.
(vii) Post Retirement Benefits. No Plan, program or arrangement maintained by the Company provides for post-retirement medical
benefits, post-retirement death benefits or other post-retirement welfare benefits, except to the extent of the continuation
coverage rules as provided under the provisions ofss.4980B of the Code andss.ss.601 through 608 of ERISA.
(viii) Communications. All communications with respect to each Benefit Plan by any person having the requisite authority to make
such communications reflect and always have reflected accurately the plan documents and operations of each such Benefit Plan. There
have been no written statements or communications, and to the best knowledge of the Company and the Red River Shareholders, no oral
statements or communications made to any employee or former employee of the Company in any form by any person (including, without
limitation, any officer, director or any other employee of the Company having the requisite power to do so) which provide for or
could be construed as a contract or promise by the Company to provide for any pension, welfare or other insurance type benefits to
any such employee or former employee, whether before or after retirement, other than benefits under the Benefit Plans listed in
Exhibit 4.1.32 attached hereto.
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(ix) Severance. The Company has no severance arrangements with any current or former employee of the Company and neither
Purchaser nor Merger Sub shall have any liability for severance payments to employees of the Company who voluntarily incur a
separation from service prior to and including the Closing Date or as a result of the consummation of the transactions contemplated
by this Agreement.
3.1.33 Directors and Officers. Exhibit 4.1.33 attached hereto is a correct and complete list as of the date hereof showing the
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names of each of the Officers and Directors of the Company, each of whom has been duly elected or appointed.
3.1.34 No Subsidiary. Except as set forth in Exhibit 4.1.34, the Company does not have any subsidiaries and does not own shares of
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common stock or capital stock in any other corporation or a participating interest or other interest in any limited liability
company, partnership, joint venture, strategic alliance or any other entity, association or business arrangement.
3.1.35 Sale of Production. Except as set forth in Exhibit 4.1.35, no hydrocarbons produced from the Company's oil and gas
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properties are subject to a sales contract (other than a contract or division order terminable upon no more than 30 days notice), and
no person has any call upon, option to purchase or similar rights with respect to production from the Company's oil and gas
properties. The Company is receiving proceeds from the sale of production from the properties in a timely manner, and the proceeds
payable to Company are not being held in suspense by any production purchaser or operator and are not subject to refund.
3.1.36 Prepayments and Imbalances. The Company is not obligated by virtue of a production payment, prepayment arrangement under
any contract containing a "take or pay", advance payment or similar provision, gas balancing agreement or other arrangement to
deliver hydrocarbons at some time after the Effective Time, without then or thereafter receiving full payment therefor.
3.1.37 Demands for Release. The Company has not received any currently pending demands for release regarding any portion of any
oil and gas leases or demands for reconveyance of any interest in any of the oil and gas properties.
3.1.38 Operating Agreements. With respect to any and all operating agreements affecting any of the Company's oil and gas
properties: (1) there are no outstanding calls or payments in excess of $25,000 under authorities for expenditures for payment which
are due from Company and have not been paid; (2) there are no operations with respect to which either Company is a non-consenting
party or is subject to a prior non-consent election the effect of which is not reflected in the working interest and net revenue
interest of the Company reflected in Exhibit 4.1.28.
3.1.39 Plugging Operations. There are no pending governmental or other requests or demands to plug, replug or abandon any well
which have not been satisfied.
3.1.40 Surface Rights. The Company has obtained the surface leases and rights-of-way necessary to conduct its operations on the
Company's oil and gas properties in the manner in which they have been conducted prior to the Effective Time.
3.1.41 Suspense Accounts. Suspense accounts for production proceeds payable to third parties that are maintained by Company are
adequate for the purposes for which they were created, and will contain sufficient monies at the Closing Date to satisfy obligations
to such third parties for the payment of their proceeds of production as of the Closing Date.
3.1.42 ""Full Disclosure". None of the written information provided by the Company and the Red River Shareholders to Purchaser and
Merger Sub in connection with the negotiation of this Agreement contains any intentionally misleading statement of a material fact.
No representation or warranty of the Red River Shareholders set forth in this Agreement contains any untrue statement of a material
fact or omits to state a material fact necessary in order to make the statements contained herein not misleading.
3.2 Representations and Warranties of Purchaser and Merger Sub. Purchaser and Merger Sub, jointly and severally, represent to
the Company and the Red River Shareholders as follows:
3.2.1 Good Standing. Purchaser and Merger Sub are both corporations duly organized, validly existing and in good standing under
the laws of Nevada and Oklahoma, respectively, with full corporate power and authority to own, operate and lease their properties and
to carry on their respective businesses as now being conducted. Purchaser and Merger Sub are both qualified to do business and in
good standing in all jurisdictions where their properties, assets and operations so require. Purchaser and Merger Sub have all
requisite power and authority to enter into this Agreement and perform their obligations under this Agreement. A true and correct
copy of Merger Sub's Articles of Incorporation and all amendments thereto and restatements thereof, certified by the Oklahoma
Secretary of State and Merger Sub's Bylaws and all amendments thereof and restatements thereto, certified as true, complete and
accurate by the Secretary of Merger Sub are set forth in Exhibit 4.2.1 attached hereto.
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3.2.2 Binding Agreement. This Agreement has been executed and delivered by each of Purchaser and Merger Sub, and constitutes the
valid and binding obligation of Purchaser and Merger Sub enforceable in accordance with its terms, except as such enforcement may be
limited by applicable bankruptcy, insolvency, moratorium, general principles of equity or similar laws affecting the rights of
creditors generally. This Agreement and the performance of this Agreement by Purchaser and Merger Sub will not conflict with,
breach, violate or be in contravention of or result in a default under Purchaser's or Merger Sub's Articles or Certificate of
Incorporation, By-laws or any other organizational or governing instrument of Purchaser or Merger Sub, or of any agreement, mortgage
or other instrument to which either Purchaser or Merger Sub is a party or by which any of its assets or property is bound or affected
or, to the best of Purchaser's knowledge, any law, rule, license, regulation, judgment, decree or order of any court, agency or other
authority which has jurisdiction over the business, properties, assets and activities of Purchaser or Merger Sub. All corporate
action necessary for the approval and/or ratification of this Agreement has been taken, or in the case of the submission of this
Agreement for approval by Purchaser's shareholders in accordance with Purchaser's Bylaws will have been taken on or before Closing
Date.
3.2.3 Litigation. There are no pending or to the best of Purchaser's and Merger Sub's knowledge, threatened suits, actions,
inquiries, claims, arbitrations, administrative or legal or other proceedings or governmental investigations or to which either
Purchaser or Merger Sub is a party or to which any of its properties or assets thereof is subject.
3.2.4 No Violation of Laws or Regulations. To the best knowledge of the Purchaser, Purchaser has materially complied with, and is
not in any material respect in default under or in violation of, any laws, ordinances. requirements, regulations or orders applicable
to its businesses and properties, nor is Purchaser in violation of or in default of any order, writ, injunction, judgment or decree
of any court, arbitrator, or federal, state or local department official, commission, authority, board, bureau, agency or other
instrumentality issued or pending against the Purchaser which might adversely affect the Purchaser's ability to execute, deliver and
perform its obligations under this Agreement or to consummate the transactions contemplated hereby or which challenges or seeks to
prevent, enjoin, alter or materially delay any such transactions. Purchaser has not received notice, or otherwise has any reason to
know, of any claimed default or violation with respect to any of the foregoing. There have been no illegal payments, kickbacks,
bribes or political contributions made by the Purchaser to any person, entity or governmental or regulatory body in the United States
or any foreign country or political subdivision.
3.2.5 Current Filings With SEC. Purchaser has filed all Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and other
applications and reports required to be filed by Purchaser with the Commission under the Securities Exchange Act of 1934, as amended
("Exchange Act"). The Company and the Red River Shareholders have access under the EDGAR system and have reviewed (i) each
registration statement, report on Form 8-K, proxy statement or information statement prepared by it since December 1, 1998, and (ii)
Purchaser's Quarterly Reports on Form 10-Q for the quarterly periods ended June 30, and September 30, each in the form (including
exhibits) filed with the Commission (collectively, the "Purchaser SEC Reports"). As of their respective dates, the Purchaser SEC
Reports did not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or
necessary to make the statements made therein, in light of the circumstances in which they were made, not misleading. Each of the
consolidated balance sheets included in the Purchaser SEC Reports (including the related notes and schedules) fairly presents the
consolidated financial position of Purchaser and its Subsidiaries as of its date and each of the consolidated statements of income,
of stockholders' equity and of cash flows included in or incorporated by reference into the Purchaser SEC Reports (including any
related notes and schedules) fairly presents the results of operations, stockholders' equity and cash flows, of Purchaser and its
Subsidiaries for the periods set forth therein (subject, in the case of unaudited statements, to normal year-end audit adjustments
which will not be material to Purchaser and its subsidiaries taken as a whole in amount or effect), in each case in accordance with
generally accepted accounting principles consistently applied during the periods involved, except as may be noted therein. Other
than the Purchaser SEC Reports, Purchaser has not filed any other definitive reports or statements with the Commission since
January 1, 1999.
3.2.6 Purchaser's Stock. The only authorized capital stock of Purchaser is fifty million (50,000,000) shares of its $.001 par
value voting common stock, which is the Beta Common Stock. The number of shares of Beta Common Stock which are issued and
outstanding as of the date hereof is as set forth in Exhibit 4.2.6 attached hereto. All outstanding shares of capital stock of the
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Purchaser have been duly authorized and validly issued and are fully paid and nonassessable. Except as specifically stated in the
SEC Reports and Exhibit 4.2.6 attached hereto, as of the date of this Agreement, there are outstanding (a) no shares of capital stock
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or other voting securities of Purchaser, (b) no securities of Purchaser convertible into or exchangeable for shares of capital stock
or voting securities of Purchaser, and (c) no options, warrants or other rights to acquire from Purchaser, and no preemptive or
similar rights, subscription or other rights, convertible securities, agreements, arrangements or commitments of any character,
relating to the capital stock of Purchaser, obligating Purchaser to issue, transfer or sell, any capital stock, voting securities or
securities convertible into or exchangeable for capital stock or voting securities of Purchaser or obligating Purchaser to grant,
extend or enter into any such option, warrant, subscription or other right, convertible security, agreement, arrangement or
commitment (the items in clauses 4.2.6(a), 4.2.6(b) and 4.2.6(c) being referred to collectively as the "Purchaser Securities").
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There are no outstanding obligations of Purchaser to repurchase, redeem or otherwise acquire any Purchaser Securities. Upon issuance
of the 2,250,000 shares of Beta Common Stock to the Red River Shareholders, such shares of Beta Common Stock will be validly issued,
fully paid and nonassessable. The Beta Common Stock is currently listed on the Nasdaq Small Cap Market.
3.2.7 Year 2000 Compliance.The Purchaser will not suffer a material adverse effect attributable to a lack of Year 2000 Compliance
in any system, process or equipment owned or utilized by the Purchaser, or any other aspect of its business and operations, or any
system, process or equipment of any of its material customers, suppliers or vendors.
3.2.8 Vote Required.The affirmative vote of the holders of a majority of the outstanding shares of Beta Common Stock is the only
vote of the holders of any class or series of Purchaser Securities or other voting securities necessary to approve this Agreement,
the Merger and the transactions contemplated hereby.
4. Activities Prior to the Closing Date
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4.1 Operation of Company's Business. The Red River Shareholders and the Company (for purposes of this Section 5, all references
to the "Company" shall include each of the Company's subsidiaries, if any) hereby agree that from and after the date hereof to the
Closing Date, except as otherwise contemplated by this Agreement, the Company shall conduct its business solely in the ordinary
course consistent with past practices, and the Company shall, and the Red River Shareholders shall cause the Company to:
4.1.1 Organizational Documents. Not amend its Certificate of Incorporation or Charter or Bylaws, except as may be necessary to
carry out this Agreement or as required by law;
4.1.2 Corporate Name. Not change its corporate name or permit the use thereof by any other corporation, person or entity;
4.1.3 Compensation. Not pay or agree to pay any employee, officer, or director, without the consent of Purchaser and Merger Sub,
compensation which is in excess of the current compensation level of each employee, officer or director, except for standard periodic
increases to non-management employees consistent with past practices in terms of timing and amount;
4.1.4 Management. Not make any changes in management without the prior written consent of Purchaser and Merger Sub;
4.1.5 Reorganizations or Other Related Transactions. Not merge or consolidate with any other corporation, or acquire, agree to
acquire or be acquired by any corporation, association, partnership, joint venture or other entity without the prior written consent
of Purchaser and Merger Sub;
4.1.6 Disposition or Abandonment of Assets. Not sell, transfer or otherwise dispose of any of its properties or assets or its
interests in oil and gas properties or other mineral properties nor abandon any of its oil and gas wells, Equipment or other
facilities without the prior written consent of Purchaser and Merger Sub, except in the ordinary course of business;
4.1.7 Indebtedness. Not create, incur, assume or guarantee any indebtedness for money borrowed except for trade and other
indebtedness incurred in the ordinary course of business, unless the Company first advises Purchaser and receives its consent
thereto.
4.1.8 Encumbrances. Not create or suffer to exist any Encumbrance on any of its properties or assets, including without
limitation its interests in oil and gas properties or other mineral properties, equipment or other facilities, except for Permitted
Encumbrances and those in existence on the date hereof;
4.1.9 Increase of Indebtedness. Not increase the amount of any indebtedness outstanding under any loan agreement, mortgage or
borrowing arrangement in existence on the date hereof, unless the Company first advises Purchaser and Merger Sub and receives their
consent thereto except for additional borrowings required to fund the working capital needs of the Company in the ordinary course of
business under any line of credit loan identified in the Company's Financial Statements to the extent permitted thereunder by the
documentation relating thereto in effect as of the date hereof and then only to the extent that the Company has first notified
Purchaser of any such borrowings under the line of credit subsequent to the date hereof and both Purchaser and Merger Sub approve
such borrowings;
4.1.10 Payables. Pay when due, in accordance with past practices, all of its accounts payables and trade obligations;
4.1.11 Maintenance of Assets. Maintain its facilities, assets and properties, including without limitation the Equipment in good
operating repair, order and condition, reasonable wear and tear excepted, and notify Purchaser and Merger Sub promptly upon any loss
of, damage to or destruction of any of its facilities, properties or assets;
4.1.12 Insurance. Not allow to lapse and maintain in full force and effect all insurance coverage of the types and in the amounts
set forth in the Exhibits attached hereto and apply the proceeds received under any insurance policy or as a result of any loss of,
damage to, or destruction of any of its facilities, properties or assets, including the Equipment, to the repair or replacement of
such facilities, properties or assets, including the Equipment;
4.1.13 Contracts and Permits. Maintain in full force and effect all Leases, Licenses, Contracts and Permits for or related to the
operation of its business in all respects and in all places as its business is now conducted;
4.1.14 Goodwill. Use its best efforts to preserve its business organization in tact, to keep available the services of its present
employees and to preserve the goodwill of its customers and others having business relations with it;
4.1.15 Issuance of Securities. Not issue any additional capital stock, options, warrants, or other rights to purchase capital
stock or securities convertible into or exchangeable for capital stock of the Company; not declare, set aside or pay any dividend or
make any other distributions in respect of any of the Company's shares of capital stock;
4.1.16 Repurchase of Securities and Repayment of Indebtedness. Except as approved by Purchaser after first being notified of any
such event, not make any direct or indirect redemption, purchase or other acquisition of shares of the Company's capital stock or
make any direct or indirect repurchase, repayment or retirement of any principal of, or interest on, any indebtedness other than
regularly scheduled payments of principal and interest as provided in the promissory note evidencing any of the Company's
indebtedness;
4.1.17 Litigation. Promptly advise Purchaser and Merger Sub in writing of the commencement of, and of any known threat to
commence, any suit, claim, action, arbitration, legal or administrative proceedings, governmental investigation or tax audit against
the Company;
4.1.18 Monthly Financial Statements. Deliver to Purchaser and Merger Sub as soon as available monthly financial statements
("Monthly Financial Statements") of the Company commencing with the month of October, 1999, and for each calendar month thereafter
prior to the Closing Date;
4.1.19 Elections to Participate and Nonconsents. Not to elect to not participate in operations for the drilling of any new well or
the fracturing or recompletion of any existing well, without the prior written consent of Purchaser. Purchaser shall respond timely
to any requests for such consent.
4.1.20 Miscellaneous. Not enter into any agreement or otherwise agree to take any action in violation of the negative covenants
set forth in this Section 5 or take, agree to take or omit to take any action that would make any representation or warranty
inaccurate.
4.2 Access to Information. (a) The Company and Red River Shareholders will cooperate fully with Purchaser and Merger Sub, and
the Company shall provide, and the Red River Shareholders shall cause the Company to provide, to Purchaser and its accountants,
counsel and other representatives (collectively "Advisors") during normal business hours, (i) full access to the books, records,
Equipment, oil and gas leases, title opinions and other information concerning the oil and gas properties and other real estate owned
or leased by the Company or in which the Company has an interest, and all other Contracts, Leases, Licenses and Permits relating to
the assets and operations of the Company's oil and gas business and properties and all work papers relating to the Company of the
Company's independent accountants and (ii) full opportunity to discuss the Company's business affairs and assets with its officers,
employees, agents and independent accountants ("Company's Advisors") and furnish to Purchaser, Merger Sub and their Advisors copies
of such documents, records and information with respect to the affairs of the Company as Purchaser, Merger Sub or its Advisors may
reasonably request.
(b) The Purchaser will cooperate fully with the Company and the Red River Shareholders, and the Purchaser shall provide to
the Company and its Advisors during normal business hours, (i) full access to the books, records, Equipment, oil and gas leases,
title opinions and other information concerning the oil and gas properties and other real estate owned or leased by the Purchaser or
in which the Purchaser has an interest, and all other Contracts, Leases, Licenses and Permits relating to the assets and operations
of the Purchaser's oil and gas business and properties and all work papers relating to the Purchaser of the Purchaser's independent
accountants and (ii) full opportunity to discuss the Purchaser's business affairs and assets with its officers, employees, agents and
independent accounts ("Purchaser's Advisors") and furnish to the Company, the Red River Shareholders and their Advisors copies of
such documents, records and information with respect to the affairs of the Purchaser as the Company, the Red River Shareholders or
their Advisors may reasonably request.
4.3 Confidentiality. Purchaser, Merger Sub, their respective officers, directors and employees shall retain in confidence and
shall cause their Advisors to retain in confidence, all information obtained by them pursuant to the investigations made by Purchaser
or its Advisors pursuant to Section 5.2 (the "Confidential Information"). The Red River Shareholders, the Company, its officers,
directors and employees and the Company's Advisors shall retain in confidence, all information obtained by them in connection with
any investigation undertaken by such persons as a result of Purchaser or Merger Sub providing such Persons such access to information
of the Purchaser or Merger Sub as provided in this Agreement. The parties agree that Confidential Information shall not include
information which (i) was or becomes generally available to the public other than as a result of a Red River disclosure by Purchaser,
Merger Sub, the Red River Shareholders, the Company or any of their officers, directors or employees or any of their Advisors, (ii)
was or becomes available to Purchaser, Merger Sub, the Red River Shareholders, the Company, any of their officers, directors or
employees or their Advisors on a non-confidential basis from a source other than Purchaser, Merger Sub, the Red River Shareholders,
the Company or the Company's Advisors, provided that such source is not bound by a confidential agreement or (iii) was, or in the
future is, developed independently by Purchaser, Merger Sub or their Advisors or by the Red River Shareholders, the Company or their
Advisors without reference to the information furnished by the Purchaser, Merger Sub, the Red River Shareholders or the Company or
the Company's Advisors, as the case may be. The parties understand and agree that all of the Confidential Information supplied to
Purchaser, Merger Sub or their Advisor or to the Red River Shareholders or the Company or their Advisors is provided on the
understanding that such Confidential Information shall remain the property of Purchaser, Merger Sub or the Company, as the case may
be, and that all copies and originals of any Confidential Information furnished pursuant to this Agreement from one party to another
will be returned to the party furnishing such Confidential Information or, at the option of the party to whom the Confidential
Information belongs, destroyed promptly upon such party's request after termination of this Agreement as provided under Section 8
hereof. Pending the Closing of the transactions contemplated hereby or if this Agreement is terminated as provided in Section 8
hereof, a party receiving the Confidential Information of another party shall not use such information to its economic or financial
advantage or benefit.
4.4 Benefit Plans. Between the date hereof and the Closing Date the Company will not establish or implement a new Benefit Plan
of any kind whatsoever.
4.5 Best Efforts and Standstill. Subject to the other provisions of this Agreement, the Red River Shareholders and the Company
will use their best efforts to cause the conditions listed in Section 3.1 hereof to be satisfied on or before the Closing Date.
Subject to the other conditions of this Agreement, Purchaser and Merger Sub will use their best efforts to cause the conditions
listed in Section 3.2 hereof to be satisfied on or before the Closing Date. The Red River Shareholders and the Company further agree
that they will not enter into, request, solicit or engage in any Red River discussions, negotiations, understandings or agreements
with any person or entity other than Purchaser and Merger Sub relating to the merger, consolidation or sale of the Company or Red
River Stock or the properties and assets of the Company (other than in the ordinary course of business) unless this Agreement is
terminated pursuant to Section 8 hereof.
4.6 Listing of Purchaser Common Stock. Purchaser shall notify The Nasdaq Stock Market of the issuance of the shares of Beta
Common Stock in connection with the consummation of the Merger and to use its reasonable best efforts to list and cause such shares
of Beta Common Stock to be eligible for trading on the Nasdaq Small Cap Market or the Nasdaq National Market System if the Beta
Common Stock is then eligible for listing thereon.
4.7 Meeting of Stockholders of Purchaser. If Purchaser does not obtain the written consent required for the Merger by the
holders of a majority of the outstanding shares of Beta Common Stock ("Purchaser Stockholder Consent"), Purchaser shall cause a
meeting of its stockholders (the "Purchaser Stockholder Meeting") to be duly called and held as soon as reasonably practicable, for
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the purpose of voting on the approval and adoption of this Agreement and the Merger (the "Purchaser Stockholder Approval"). The board
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of directors of Purchaser shall recommend approval and adoption of this Agreement by Purchaser's stockholders. In connection with the
Purchaser Stockholder Consent or the Purchaser Stockholder Meeting, as the case may be, Purchaser (x) will promptly prepare and file
with the Commission, will use its reasonable best efforts to have cleared by the Commission and will thereafter mail to its
stockholders as promptly as practicable the Purchaser Information Statement or Purchaser Proxy Statement and all other proxy
materials for the Purchaser Stockholder Meeting, as applicable, (y) will use its best efforts, subject to the immediately preceding
sentence, to obtain the Purchaser Stockholder Consent or the Purchaser Stockholder Approval and (z) will otherwise comply with all
legal requirements applicable to the Purchaser Stockholder Consent or the Purchaser Stockholder Meeting.
5. Post-Closing Covenants. The Red River Shareholders, the Company and Purchaser and Merger Sub agree as follows with respect
to the period following the Closing.
5.1 Cooperation of The Red River Shareholders and Former Officers of Company. The Red River Shareholders and the current
officers and directors of the Company, will reasonably cooperate upon and after the Closing Date in effecting the Merger and the
orderly transfer of the assets and properties as well as the control of the Company to Purchaser by using their reasonable efforts to
cause any federal, state or local governmental body, and every agency and department and instrumentality thereof, to have contracts
between such government, agency, department and instrumentality and the Company, to the extent required under any existing Contracts
between the Company and such governmental body, as a result of the change of control of the Company, to be approved and transferred
into the name of the Company under the control of the Purchaser following the Closing. To the extent that any other contract between
the Company and any other third parties require approval as a result of the Merger, the Red River Shareholders and the current
officers and directors of the Company will reasonably cooperate in effecting any such approval such that the Contracts will remain
intact and enforceable in accordance with the terms thereof. To the extent required to effect any such approval and transfer of
control, the Red River Shareholders and the current officers and directors of the Company will execute any appropriate and reasonable
documents or instruments required to accomplish such result.
5.2 Litigation Support. If and to the extent that the Company is actively contesting or defending against any charge,
complaint, action, suit, proceeding, hearing, investigation, claim, or demand (collectively "Proceedings") in connection with (i) any
transaction contemplated under this Agreement, or (ii) any fact, situation, circumstance, status, condition, activity, practice,
planning, occurrence, event, incident, action, failure to act, or transaction on or prior to the Closing Date involving the Company,
the Company, the Red River Shareholders and the current officers and directors of the Company will reasonably cooperate with
Purchaser, Merger Sub and their counsel in contesting or defending against any such Proceedings, making available any personnel of
the Company, and providing such testimony in access to their books and records as shall be reasonably necessary in connection with
contesting or defending against such Proceedings. Except to the extent that Purchaser and Merger Sub are entitled to indemnification
with respect to contesting or defending any such Proceedings, Purchaser and Merger Sub shall bear the cost and expense of contesting
or defending against any such Proceedings.
5.3 Disposition of Confidential Information. After the Closing, the Red River Shareholders and the current officers and
directors of the current Company will treat and hold as such all of the Confidential Information, refrain from using any of the
Confidential Information except in connection with this Agreement, and deliver promptly to the Purchaser and Merger Sub or destroy,
at the request and option of Purchaser and Merger Sub, all tangible correspondence, documents, instruments, memorandums and all other
writings (and all copies thereof) which embody the Confidential Information which are in such persons' possession. Afer the Closing,
if the Red River Shareholders or current officers or directors of the Company are requested or required (by oral question or request
for information or document in any legal proceeding, interrogatory, subpoena, civil investigative demand, or similar process) to Red
River, disclose any Confidential Information, the Red River Shareholders and the current officers or directors of the Company will
notify Purchaser and Merger Sub promptly of any such request or requirement to enable Purchaser and Merger Sub to seek an appropriate
remedy to enjoin the Red River disclosure of such Confidential Information or waive compliance with the provisions of this Section.
The foregoing provision shall not apply to any Confidential Information which is generally available to the public immediately prior
to the time of Red River disclosure.
5.4 Other Transitional Matters. The Red River Shareholders and the current officers and directors of the Company will not take
any action which primarily is designed or intended to have the effect of Red River discouraging lessor, licenser, customer, supplier,
or other business associate of the Company or any of its subsidiaries from maintaining the same business relationships with the
Company and its subsidiaries after the Closing as it maintained with the Company and its subsidiaries prior to the Closing. The Red
River Shareholders and the current officers and directors of the Company will refer all lessor, licensor, customer and supplier
inquiries relating to the business of the Company and any of its subsidiaries to Purchaser from and after the Closing Date.
5.5 Employee Benefits. (a) Following the consummation of the Merger, Purchaser shall continue to provide to individuals who
are employed by the Company as of the effective time of the Merger (the "Effective time") and who, if any, remain employed with
Purchaser or any Subsidiary of Purchaser ("Affected Employees"), for so long as such Affected Employees remain employed by Purchaser
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or any Subsidiary of Purchaser, employee benefits (other than salary or incentive compensation) pursuant to employee benefit plans,
programs, policies or arrangements maintained by Purchaser or any Subsidiary of Purchaser providing coverage and benefits which, in
the aggregate, are generally comparable to those provided to employees of Purchaser in positions comparable to positions held by
Affected Employees with Purchaser or its Subsidiaries from time to time after the Effective Time.
(b) Purchaser will, or will cause the Surviving Corporation to, (i) waive all limitations as to preexisting
conditions, exclusions and waiting periods with respect to participation and coverage requirements applicable to the Affected
Employees under any welfare benefit plans that such employees may be eligible to participate in after the Effective Time, other than
limitations or waiting periods that are already in effect with respect to such employees and that have not been satisfied as of the
Effective Time under any welfare plan maintained for the Affected Employees immediately prior to the Effective Time, and (ii) provide
each Affected Employee with credit for any co-payments and deductibles paid prior to the Effective Time in satisfying any applicable
deductible or out-of-pocket requirements under any welfare plans that such employees are eligible to participate in after the
Effective Time.
5.6 Cooperation After Closing. In case at any time after the Closing Date any further action is necessary or desirable to carry
out and accomplish the purposes of this Agreement and the transactions contemplated hereunder, the Red River Shareholders and the
current officers and directors of the Company, in the case of the Company's and the Red River Shareholder's performance under this
Agreement, and Purchaser, in the case of Purchaser's and Merger Sub's performance under this Agreement, will take such further action
as the party seeking or requesting such performance ("Requesting Party") may reasonably request, including executing and delivering
such further instruments and documents as shall be necessary or appropriate to accomplish and effectuate such transaction. Except as
to costs and damages associated with the indemnification of Purchaser and Merger Sub, as provided below, all costs and expenses
relating to any such matters after the Closing Date will be borne by Purchaser and Merger Sub.
5.7 Continuity of Business. Following the Merger, the Surviving Corporation will continue the historic business of the Company
or use a significant portion of the Company's business assets in a business.
5.8 Bank Guarantees. Following the Closing, Purchaser shall use its best efforts to cause the release of the personal
guarantees executed by the Red River Shareholders which secure the Company's indebtedness to the Bank of Oklahoma, National
Association ("Bank") as described in Exhibit 6.8 attached hereto to the extent that the Bank is willing to consent to such a
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release. As an inducement for the Bank to release the Red River Shareholders from their personal guarantees of the indebtedness
described in Exhibit 6.8, Purchaser will execute a guaranty required by the Bank to guarantee such indebtedness in substitution of
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the personal guarantees of the Red River Shareholders only to the extent of their current guarantees with the Bank. After the
Closing, Purchaser shall indemnify and hold the Red River Shareholders harmless from and against any and all amounts which any or all
of the Red River Shareholders are required to pay on account of the guaranties set forth in Exhibit 6.8 attached hereto prior to
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their release from such guaranties only, however, to the extent of their personal guarantee obligations as currently in effec
5.9
Tax Treatment. Purchaser shall not take any action and shall not fail to take any action which action or failure to act would
prevent, or would be reasonably likely to prevent, the Merger from qualifying as a reorganization under Section 368 of the Code.
6. Delivery of Closing Documents.
6.1 Delivery of Closing Documents to Purchaser and Merger Sub. Subject to the fulfillment of all of the conditions set forth in
Section 3.1 hereof, at the Closing, the following documents, agreements, and instruments shall be duly delivered by the Company and
the Red River Shareholders:
Certificates representing the shares of Red River Stock which shall be duly executed in blank or with a duly executed stock
power attached thereto, endorsed in blank, in order to effect the transfer of the shares of Red River Stock from the Red River
Shareholders to Purchaser, with all stock transfer, tax stamps, if any, affixed and cancelled and if required by Purchaser's transfer
agent shall be guaranteed by a United States Commercial Bank or by a broker who is a member of the New York Stock Exchange or is
otherwise approved by the transfer agent of Purchaser to guarantee signatures in connection with such transfer;
6.1.1 The Resignations of the Officers and Directors of the Company as agreed upon in Exhibit 2.6.4 and as requested by Purchaser
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prior to the Closing;
6.1.2 The books and records referred to in Section 3.1.10 hereof;
6.1.3 The opinion of Conner & Winters, A Professional Corporation, counsel for the Company in the form and substance reasonably
requested by Purchaser;
6.1.4
A certificate of good standing from the State of Oklahoma certified by the appropriate official of such
state, dated as of the date not more than five (5) days prior to the Closing Date evidencing that the Company is duly qualified and
in good standing and in effect indicating that the Company has filed all franchise tax returns due to the date of such certificate,
that all taxes shown on such returns to be due have been paid in full, and that there are no outstanding franchise tax claims or
assessments against the Company as of the date of such certificate;
6.1.5 All consents and approvals referred to in section 3.1.11 hereof;
6.1.6 The Company's closing certificate in the form of Exhibit 7.1.6 attached hereto;
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6.1.7 Certificate of Merger as contemplated by Section 2.5 hereof;
6.1.8 To the extent appropriate and only if any secured loan, for which the Company is currently obligated is paid in whole or in
part on or prior to the Closing Date (which is not contemplated as of the date hereof), documentation (including without limitation,
duly executed UCC-3 termination statements) satisfactory in form and substance to Purchaser and Merger Sub as requested by Purchaser
and Merger Sub to release all or a portion of such Encumbrances to the extent of such loan repayment, if any, in favor of any of the
holders of any such indebtedness on the property and assets of the Company;
6.1.9 Employment Agreement between the Surviving Corporation and Rolf N. Hufnagel and Robert E. Davis, Jr., executed by them and
the Purchaser in the form attached hereto as Exhibit 7.1.9; and
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6.1.10 Such other documents or instruments of further assurance or conveyance as shall be deemed necessary and appropriate by the
Purchaser and Merger Sub.
6.2 Delivery of Documents to the Company and the Red River Shareholders. Subject to the fulfillment of all conditions set forth
in Section 3.2 hereof, at the Closing, the following documents, agreements and instruments shall be duly delivered by the Purchaser
and Merger Sub to the Company and Red River Shareholders:
6.2.1 Stock Certificates representing shares of Beta Common Stock to be issued to each of the Red River Shareholders in the
amounts set forth in Schedule A attached hereto;
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6.2.2 Certificates of good standing from the Nevada and Oklahoma Secretary of State (as appropriate), dated not more than five (5)
days prior to the Closing Date evidencing that Purchaser and Merger Sub are duly qualified and in good standing and in effect
indicating that Merger Sub has filed all franchise taxes on the date of such certificate, that all taxes shown on such returns to be
due have been paid in full, and that there are no outstanding franchise tax claims or assessments against Merger Sub as of the date
of such certificate;
6.2.3 Purchaser's and Merger Sub's closing certificate in the form of Exhibit 7.2.3 attached hereto;
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6.2.4 The opinion of Clanahan, Tanner, Downing & Knowlton, P.C. to be in form and substance reasonably requested by the Company
and the Red River Shareholders; and
6.2.5 Employment Agreements between the Surviving Corporation, Rolf N. Hufnagel and Robert E. Davis, Jr., executed by Surviving
Corporation and the Purchaser, in the form attached hereto as Exhibit 7.1.9.
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6.2.6 Certificate of Merger as contemplated by Section 2.5 hereof; and
6.2.7 Such other documents and instruments of further assurance and conveyance as shall be deemed necessary and appropriate to the
Closing of the transactions contemplated hereby.
7. Termination
7.1 Events of Termination. Anything contained elsewhere in this Agreement to the contrary notwithstanding, prior to the Closing
Date, this Agreement may be terminated by written notice of termination as follows:
7.1.1 Mutual Consent. Any time by mutual consent of the Company and Purchaser or Merger Sub;
7.1.2 Prior to Closing Date. By the Company or Purchaser or Merger Sub if the other party shall have (i) misstated to any
material extent any representation or been in breach of any warranty contained herein, or (ii) breached any covenant, undertaking or
restriction contained herein, and such misstatement or breach has not been cured by the earlier of (a) thirty (30) days after the
giving of notice of such party of such misstatement or breach or (b) the Closing Date
7.1.3 Delay. By either party by written notice to the other party if the Closing shall not have occurred on or prior to March
31, 2000; provided, however, that the right to terminate this Agreement under this Section 8.1.3 shall not be available to any party
whose failure to fulfill or perform any obligation under this Agreement has been a substantial cause of, or has substantially
resulted in, the failure of the Closing to occur on or before such date.
7.1.4 Amendment of Exhibits. By the party ("Receiving Party") receiving Exhibits, Schedules or Attachments or amendments
thereto from the other party to this Agreement which disclose information which such Receiving Party determines to materially
adversely affect the economic, financial or business considerations previously determined by the Receiving Party in entering into
this Agreement setting forth its or his objection to such Exhibit, Schedule or Attachment and to which such Receiving Party gives ten
(10) days written notice to the party furnishing such Exhibits, Schedules or Attachments.
7.1.5 Consequences of Termination. In the event of a termination and abandonment hereof pursuant to the provisions of this
Section 8, this Agreement shall become void and have no effect, without any liability on any of the parties or their directors or
officers or stockholder in respect of this Agreement, except that (a) the agreements contained in this Section 8.1.5, in Section 5.3
and in Section 9.2 shall survive the termination hereof and (b) no such termination shall relieve any party of any liability or
damages resulting from a breach by that party of its representations, warranties, covenants, agreements or other obligations under
this Agreement prior to such termination. In addition, if this Agreement is terminated as provided under Section 8.1.2 hereof, the
party, misstating or breaching this Agreement shall be obligated to pay the other party's costs and expenses incurred in connection
with this Agreement, including actual attorney's fees. Otherwise, if the transactions contemplated hereunder cannot be consummated
for reasons beyond the control of the parties hereto, provided they have used their best efforts to acquire the approvals and
consents hereunder, or this Agreement is terminated under the provisions of Sections 8.1.1 or 8.1.3 hereof , then each party hereto
will pay its own expenses, including without limitation its attorneys' fees and costs.
8. Miscellaneous
8.1 Notices. Any notices under this Agreement shall be in writing, signed by the party giving the same and transmitted by
registered or certified United States Mail or by a generally accepted national courier service providing confirmation of delivery,
and addressed to the party to receive the notice at the address set forth below or such other address as any party may specify by
notice to the other party, and shall be deemed properly given and received when actually given and received:
If to Purchaser: Beta Acquisition Company, Inc.
901 Dove Street, Suite 230
Newport Beach, California 92660
Attn: Steve Antry
With a copy to: J. Chris Steinhauser
If to the Company
and Red River Shareholders: Red River Energy, Inc.
6120 South Yale Avenue, Suite 813
Tulsa, Oklahoma 74136
With a copy to: Conner & Winters, A Professional Corporation 3700
First National Tower
15 East 5th Street
Tulsa, Oklahoma 74103
Attention: Lynnwood R. Moore, Jr.
8.2
Brokerage Commissions.
8.2.1 The Company hereby represents and warrants to Purchaser that the Company has not engaged or utilized the services of any
broker or finder in connection with this transaction and that no commissions are payable with respect to this transaction. The
Company hereby agrees to indemnify and hold Purchaser and the Company harmless from and against any liability for any claims of any
broker or finder claiming by, through or under the Company or the Red River Shareholders.
8.2.2 Purchaser and Merger Sub hereby represent and warrant to the Company and the Red River Shareholders that neither the
Purchaser nor Merger Sub have engaged or utilized the services of any broker or finder in connection with this transaction and that
no commissions are payable with respect to this transaction. Purchaser and Merger Sub hereby agree to indemnify and hold the Red
River Shareholders and the Company harmless from and against any liability for any claims of any other broker or finder claiming by,
through or under Purchaser and Merger Sub.
8.3 Successors and Assigns. This Agreement is personal to the parties hereto and may not be assigned, transferred, delegated or
nullified without the prior written consent of all of the parties hereto. This Agreement shall be binding upon and inure to the
benefit of the parties hereto and their respective heirs, personal representatives, successors and permitted assigns.
8.4 Arbitration. Any dispute arising pursuant to or in any way related to this Agreement or the transactions contemplated
hereby shall be settled by arbitration at a mutually agreed upon location in Newport Beach, California; provided, however, that
nothing in this Section shall restrict the right of either party to apply to a court of competent jurisdiction for emergency relief
pending final determination of a claim by arbitration in accordance with this Section. All arbitration shall be conducted in
accordance with the rules and regulations of the American Arbitration Association, in force at the time of any such dispute, by a
panel of three (3) single arbitrators selected in accordance with the procedures of the American Arbitration Association. Each party
shall pay its own expenses associated with such arbitration, including 50% of the expenses of the arbitrator, provided that the
prevailing party in any arbitration shall be entitled to reimbursement of reasonable attorney's fees and expenses (including, without
limitation, arbitration expenses) relating to such arbitration. The award of the arbitrator, based upon written findings of fact and
conclusions of law, shall be binding upon the parties; and judgment in accordance with that decision may be entered in any court
having jurisdiction thereof.
8.5 No Oral Modifications. No amendments or modifications to this Agreement shall be made or deemed to have been made unless in
writing executed and delivered by the party to be bound thereby. Any provision of this Agreement may be waived, amended,
supplemented or modified only by agreement in writing of the parties hereto.
8.6
Waiver. The failure of any party to this Agreement to insist upon strict performance of any of the terms of this
Agreement will not constitute a waiver of any of its rights under this Agreement or its right subsequently to assert, rely upon, or
enforce any provision of this Agreement.
8.7
Governing Law. This Agreement shall be interpreted, governed by and enforced according to the laws of the State of Oklahoma.
8.8 Severability. If any provision of this Agreement shall be held invalid, illegal or unenforceable, the validity, legality
and enforceability of the remaining provisions of this Agreement will not in any way be affected or impaired thereby.
8.9 Headings and Captions for Convenience. The headings and captions contained in this Agreement are for convenience only and
shall not be considered in interpreting the provisions hereof.
8.10 Counterparts. This agreement may be executed simultaneously in two or more counterparts, each of which shall be deemed an
original, all of which together shall constitute one and the same instrument.
8.11 Representations, Warranties and Covenants. Notwithstanding any investigation made by or on behalf of the Company, the Red
River Shareholders or Purchaser prior to or after the Closing Date, all representations, warranties and covenants of the parties
hereto contained herein shall survive and remain in full force and effect for a period equal to the earlier of (i) the date that the
first independent consolidated audit report of Purchaser and the Surviving Corporation is issued after the Closing Date, or (ii) one
year after the Closing Date.
8.12 Remedies for Misrepresentation or Breach by Red River Shareholders. In the event of:
(a) any inaccuracy in any representation or the breach of any warranty made by the Red River Shareholders
and the Company in or pursuant to this Agreement or any Exhibit, Schedule or other attachment to this Agreement,
(b) any failure by the Red River Shareholders and the Company duly to perform or observe any term,
provision, covenant, or agreement in this Agreement to be performed or observed on the part of the Red River Shareholders and the
Company, or
(c) action, suit, investigation, proceeding, demand, assessment, audit, judgment and claim, including any
employment-related claim arising out of the foregoing (collectively "Claims"), against the Company or any of its subsidiaries, even
though such Claims may not be filed or come to light until after the Closing Date, Purchaser shall have the right to demand an
adjustment to the number of shares of the Beta Common Stock issued to the Red River Shareholders as provided in Section 2.1 hereof
and a return of a portion of the shares of the Beta Common Stock to recompense Purchaser for the amount of the loss resulting from
such misrepresentation or breach , the number of shares to be determined by dividing the amount of the loss by the closing price per
share of Beta Common Stock as quoted at the Nasdaq Small Cap Market or the Nasdaq National Market System (as applicable) on the
Closing Date. Notwithstanding anything contained in the foregoing to the contrary, any and all such adjustments in the number of
shares of Beta Common Stock shall not exceed in the aggregate 225,000 shares of Beta Common Stock over the period provided in
Section 9.11 hereof.
Purchaser and Merger Sub hereby covenant and agree to immediately provide to the Red River Shareholders any and all
notifications or other correspondence it receives related to matters which may affect this indemnity.
The Red River Shareholders' obligation to return shares of Beta Common Stock to Purchaser as provided hereunder shall not
exceed in the aggregate ten percent (10%) of the total shares issued to them as determined on the Closing Date. The Red River
Shareholders shall have no obligation to return shares of Beta Common Stock until the aggregate losses as provided under this
Section 9.12 exceed One Hundred Thousand Dollars ($100,000) and shall be liable to return a portion of the shares of Beta Common
Stock received by them on the Closing Date only for the losses in excess of such amount. The amount of any losses for which an
adjustment is required to be made under this Section 9.12 bythe Red River Shareholders shall be computed net of any insurance
proceeds received by the Surviving Corporation or Purchaser with respect to the matter out of which such liability arose. Each
party agrees to use commercially reasonable efforts to mitigate any damage or expense resulting from any matter giving rise to the
losses covered under this Section. It is agreed that the obligations of the Red River Shareholders under this Section 9.12 shall be
solely for the benefit of Purchaser, Merger Sub and the Surviving Corporation and may not be enforced by any insurer under any
subrogation or similar agreement or arrangement or by any governmental authority except as a receiver for Purchaser or Surviving
Corporation. The liability of the Red River Shareholders hereunder shall be joint and several. No claims for losses under this
Section 9.12 may be asserted by Purchaser or Surviving Corporation under this section from and after the period set forth in Section
9.11 of this Agreement. If one or more of the Red River Shareholders who are required to return shares of Beta Common Stock under
the provisions of this Section 9.12 have sold all or a portion of their shares of Beta Common Stock such that such shareholder(s)
are unable to return shares of Beta Common Stock as provided herein, such shareholder(s) obligation hereunder shall be paid in cash
in an amount equal to the closing market price of the shares of Beta Common Stock, as determined on the Closing Date, for which
delivery thereof to Purchaser cannot be made.
Any dividends accruing or paid on the shares of Beta Common Stock required to be returned under this Section 9.12 shall be
returned to Purchaser upon determination of the loss in the manner provided in this Section 9.12.
As used in this Section 9.12 and Section 9.13, the term "loss" shall mean and include (y) all losses, damages, costs and
expenses, including without limitation pre- and post-judgment interest, penalties, court costs and attorneys' fees and expenses, and
(z) all demands, claims, actions, costs of investigation, causes of action, proceedings, arbitrations, judgments, settlements and
assessments.
After the Closing, the remedies provided in this Section 9.12 to Purchaser, Merger Sub and the Surviving Corporation shall
be exclusive of any other rights or remedies available to Purchaser, Merger Sub or the Surviving Corporation, either at law or in
equity, for breach of this Agreement or any certificates delivered pursuant hereto; provided that none of Purchaser, Merger Sub or
the Surviving Corporation waives the right to seek specific performance or injunctive relief.
8.13 Purchaser's Indemnification. In the event of:
(a) any inaccuracy in any representation or the breach of any warranty made by Purchaser or Merger Sub in
or pursuant to this Agreement or any Exhibit, Schedule or other attachment to this Agreement of Purchaser or Merger Sub; or
(b) any failure by Purchaser or Merger Sub of their duty to perform or observe any item, provision,
covenant or agreement in this Agreement to be performed or observed on the part of Purchaser or Merger Sub,
Purchaser shall be obligated to issue additional shares of Beta Common Stock to each of the Red River Shareholders
in proportion to the number of shares issued to them by Purchaser on the Closing Date to cover any losses resulting from any such
misrepresentation or breach provided in (a) and (b) above. The obligation to issue additional shares of Beta Common Stock to the
Red River Shareholders under this Section 9.13 shall not exceed 225,000 shares of Beta Common Stock and shall be determined based on
the closing price of the shares of the Beta Common Stock as determined on the Closing Date. The provisions of Section 9.12 regarding
the determination of the loss, , the limitation concerning the aggregate amount of losses (i.e., $100,000) which must be incurred
before the adjustment in the number of shares is required, and the offset of such losses by any insurance proceeds received are
hereby incorporated by reference as part of this Section 9.13 and shall apply with equal force and effect to Purchaser with respect
to its obligations under this Section 9.13 as it applies to the Red River Shareholders under Section 9.12 and in furtherance thereof
for purposes of this Section 9.13 all references to the Red River Shareholders under Section 9.12 shall be to Purchaser where
applicable.
8.14 No Benefit To Others. The representations, warranties, covenants and agreements contained in this Agreement are for the
sole benefit of the parties hereto and their respective heirs, successors, assigns, and such representations, warranties, covenants
and agreements shall not be construed as conferring, and are not intended to confer, any rights on any other persons.
8.15
Registration of Securities.(a) As used in this Section 9.15, the following terms have the meanings set forth below:
"Disadvantageous Condition" has the meaning set forth in Section 9.15(b)(iv).
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"Holders" means the Red River Shareholders or any person who becomes a holder of Subject Securities after the Closing Date
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as a result of a No-Sale Transaction.
"No-Sale Transaction" means a transfer from a Holder of Subject Securities that does not constitute a "sale" (as such term
--------------------
is understood and defined under the Securities Act), including without limitation a distribution from a Holder that is a corporation,
partnership, joint venture, limited liability company, association or trust to the owner of a beneficial interest in such Holder.
"Registration Expenses" has the meaning set forth in Section 9.15(e).
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"Registration Termination Date" means the second anniversary of the date when the Commission first declares the Shelf
-------------------------------
Registration Statement effective.
"Shelf Registration Statement" means a registration statement on Form S-1 or S-3 filed with the Commission under the
------------------------------
Securities Act.
"Subject Securities" means the shares of Beta Common Stock issued to the Red River Shareholders pursuant to the Merger and
-------------------
any common stock or other security issued or issuable as a dividend or other distribution with respect to, or in exchange for, or
upon conversion or in replacement of, any of such Beta Common Stock.
"Suspension Notice" has the meaning set forth in Section 9.15(b)(iv).
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(b) (i) By no later than March 31, 2000, Purchaser shall prepare and file with the Commission a Shelf
Registration Statement for the purpose of registering the resale in the market from time to time of the Subject Securities by Holders
or by potential assignees of such Holders to which all or a portion of such Holders' Subject Securities may be transferred in a
No-Sale Transaction.
(ii) Purchaser will use its best efforts to have the Shelf Registration Statement promptly
declared effective by the Commission on or after the filing of such Shelf Registration Statement and thereafter to maintain the
effectiveness of the Shelf Registration Statement and to maintain such Shelf Registration Statement "current" (as below defined) at
all times until the Registration Termination Date. Purchaser shall promptly give written notice to the Holders when the Registration
Statement has been declared effective by the Commission and is available for use by Holders for the resale of Subject Securities.
(iii) The Shelf Registration Statement shall not be considered to be "current" at any time when,
by reason of occurrence of any event or by reason of the passage of time, the Shelf Registration Statement does not meet the
requirements of Section 10, Section 12(2) or Section 17 of the Securities Act, or the Shelf Registration Statement contains an untrue
statement of a material fact or omits to state any material fact required to be stated therein or necessary to make the statements
therein not misleading. The Shelf Registration Statement shall disclose that Holders may elect to resell Subject Securities without
registration of such sales under the Shelf Registration Statement, by making such sales under and as permitted by Rules 144 or 145,
as applicable, of the Commission under the Securities Act.
(iv) If at any time or times after the Shelf Registration Statement is declared effective by the
Commission, Purchaser determines that the offering of Beta Common Stock under the Shelf Registration Statement would be significantly
disadvantageous to Purchaser because of, or improper in view of (or improper without disclosure in the prospectus included in the
Shelf Registration Statement of), the existence or anticipation of a material financing, merger, acquisition or other material
transaction or event involving Purchaser or its subsidiaries that has not been publicly disclosed, the unavailability of any required
financial statements for reasons substantially beyond the control of the Purchaser, or other similar events or conditions involving
Purchaser or its subsidiaries that have not been publicly disclosed (a "Disadvantageous Condition"), Purchaser shall be entitled to
--------------------------
either suspend the effectiveness of the Shelf Registration Statement with the Commission or suspend the availability of the Shelf
Registration for resales of Subject Securities by Holders, or may take both such actions, and shall promptly notify all Holders
thereof by delivery of written notice (a "Suspension Notice"); provided, however, that Purchaser's obligation to maintain the Shelf
-----------------
Registration Statement current under this Section 9.15(b) shall not be suspended by reason of Purchaser's failure to disclose
information at a time when public disclosure of such information is required by law. Upon receipt of a Suspension Notice, Holders
shall immediately discontinue the use of the Shelf Registration Statement for any purpose until notified by Purchaser that the Shelf
Registration Statement is current and available for use by Holders for sales of Subject Securities. Purchaser shall not be entitled
to suspend the effectiveness of the Shelf Registration Statement until the later of (X) the removal of the Disadvantageous Conditions
or (Y) for a period of not more than 60 consecutive days, or (B) 180 days within any twelve-month period. As promptly as practicable
after the public disclosure of such Disadvantageous Condition or the Purchaser determines that the Disadvantageous Condition no
longer exists, Purchaser shall amend or supplement the Shelf Registration Statement to the extent necessary to make the Shelf
Registration Statement current, and shall give prompt written notice to all Holders when the Shelf Registration Statement is again
available for resales of Subject Securities.
(v) Purchaser shall promptly notify all Holders of Subject Securities of, and confirm in writing,
the issuance by the Commission of any stop order suspending the effectiveness of the Shelf Registration Statement or the initiation
of any proceedings for that purpose. Purchaser shall use its best efforts to obtain the withdrawal of any order suspending the
effectiveness of the Shelf Registration Statement at the earliest possible time.
(vi) Purchaser will cause all of the Subject Securities to be listed on each securities exchange
or market, as the case may be, on which similar securities issued by Purchaser are then listed no later than the effective date of
the Shelf Registration Statement.
(c) If at any time the Purchaser proposes to file a registration statement under the 1933 Act with respect to
an offering by the Purchaser for its own account or for the account of any other Person of any class of equity security, including
any warrants, options or other security convertible into or exchangeable for any equity security (other than a registration statement
on Forms S-4 or S-8 (or their successor forms) or filed in connection with an exchange offer or an offering of securities solely to
the Purchaser's existing stockholders, and other than as set forth in subsection (c)(i) below), then the Purchaser shall in each case
give written notice of such proposed filing to the Holders at least twenty (20) days before the anticipated filing date, and such
notice shall offer such Holders the opportunity to register such number of Subject Securities as each such Holder may request (a
"Piggy-back Registration"). The Purchaser shall use reasonable efforts to cause the managing underwriter or underwriters of a
proposed underwritten offering to permit the Holders requested to be included in the registration for such offering to include such
securities in such offering on the same terms and conditions as any similar securities of the Purchaser included therein. Similarly,
Purchaser may include the shares of any other Person in the Shelf Registration Statement as contemplated in subsection (b) above.
Notwithstanding the foregoing, if the managing underwriter or underwriters of such offering delivers an opinion to the Holders that
the total amount of securities which they and any other Persons (other than the Purchaser) intend to include in such offering is
sufficiently large to materially and adversely affect the success of such offering, then the amount of Subject Securities to be
offered for the accounts of Holders of Subject Securities shall be reduced pro rata with all securities held by holders of securities
having rights for inclusion therein to the extent necessary, in the opinion of such managing underwriter, to reduce the total amount
of securities to be included in such offering to the amount recommended by such managing underwriter. In connection with the rights
set forth in this subsection 9.15(c), it is agreed that:
(i) Notwithstanding anything to the contrary contained in this Agreement, the Purchaser shall
not be required to include Subject Securities in any registration statement if the proposed registration is (1) a registration of a
stock option or other employee incentive compensation or employee benefit plan or of securities issued or issuable pursuant to any
such plan, or a registration statement relating to warrants, options or shares of capital stock granted or to be granted or sold
primarily to employees, directors or officers of the Purchaser, (2) a registration of securities issued or issuable pursuant to a
stockholder reinvestment plan or other similar plan, (3) a registration of securities issued in exchange for any securities or any
assets of, or in connection with a merger or consolidation with, an unaffiliated Purchaser, (4) a registration of securities pursuant
to a "rights" or other similar plan designed to protect the Purchaser's stockholders from a coercive or other attempt to cause a
change in control of the Purchaser, (5) a registration of securities filed pursuant to Rule 145 under the 1933 Act or any successor
rule, or (6) a registration of preferred stock or securities issued in connection with any debt or preferred stock financing of the
Purchaser.
(ii) The Purchaser may withdraw any registration statement and abandon any proposed offering
initiated by the Purchaser without the consent of any Person, including the Holders, notwithstanding the request of any such Holder
to participate therein in accordance with this provision, if the Purchaser determines in its sole discretion that such action is in
the best interests of the Purchaser and its stockholders (for this purpose, the interest of the Holders shall not be considered).
(d) Purchaser will indemnify and hold harmless each Holder, each of such Holder's officers, directors,
partners, or members, as the case may be, and each Person controlling such Holder, with respect to which registration or
qualification of Subject Securities has been effected pursuant to this Section 9.15 against all claims, losses, damages, and
liabilities, joint or several (or actions in respect thereof), arising out of or based upon any untrue statement (or alleged untrue
statement) of a material fact contained in the Shelf Registration Statement, prospectus, or offering circular, or in any document
incorporated by reference in any of the foregoing, or arising out of or based upon any omission (or alleged omission) to state
therein a material fact required to be stated therein or necessary to make the statements therein not misleading, or any violation by
Purchaser of any rule or regulation promulgated under the Securities Act applicable to Purchaser and relating to action or inaction
required of Purchaser in connection with the Shelf Registration, each of such Holder's officers, directors, partners, or members, as
the case may be, and each Person controlling such Holder, for any legal and any other expenses reasonably incurred in connection with
investigating or defending any such claims, loss, damage, liability or action; PROVIDED, however, that Purchaser will not be liable
in any such case to the extent that any such claim, loss, damage, liability or expense arises out of or is based upon any untrue
statement or omission based upon written information furnished to Purchaser by such Holder specifically for inclusion in any such
registration statement, prospectus or offering circular. The obligations of Purchaser under the foregoing indemnity agreement shall
survive the completion of the offering of Subject Securities under the Shelf Registration Statement .
(e) Each Holder with respect to which registration or qualification of Subject Securities has been
effected pursuant to this Section 9.15 will indemnify and hold harmless Purchaser, each of Purchaser's officers, directors, and each
Person controlling Purchaser, against all claims, losses, damages, and liabilities, joint or several (or actions in respect thereof),
arising out of or based upon any untrue statement (or alleged untrue statement) of a material fact contained in any registration
statement, prospectus, or offering circular, or in any document incorporated by reference in any of the foregoing, or arising out of
or based upon any omission (or alleged omission) to state therein a material fact required to be stated therein or necessary to make
the statements therein not misleading, or any violation by such Holder of any rule or regulation promulgated under the Securities Act
or Exchange Act applicable to such Holder and relating to action or inaction required of such Holder in connection with any such
registration or qualification, and will promptly reimburse Purchaser, each of Purchaser's officers, directors, and each Person
controlling Purchaser, for any legal and any other expenses reasonably incurred in connection with investigating or defending any
such claims, loss, damage, liability or action; PROVIDED, however, that such Holder will not be liable in any such case to the extent
that any such claim, loss, damage, liability or expense does not arise out of or is not based upon any untrue statement or omission
based upon written information furnished by such Holder specifically for inclusion in any such registration statement, prospectus or
offering circular. The obligations of Holders under the foregoing indemnity agreement shall survive the completion of the offering of
Subject Securities under any registration statement provided for in this Section 9.15.
(f) All expenses incident to Purchaser's performance of or compliance with this Section 9.15, including,
without limitation, all registration and filing fees, fees and expenses of compliance with securities or blue sky laws (including
fees and disbursements of counsel in connection with blue sky qualifications of the Subject Securities), rating agency fees, printing
expenses, messenger and delivery expenses, internal expenses (including, without limitation, all salaries and expenses of its
officers and employees performing legal or accounting duties), the fees and expenses incurred in connection with the listing of the
securities to be registered on The Nasdaq Stock Market and all securities exchanges on which similar securities issued by Purchaser
are then quoted or listed, the fees and disbursements of counsel for Purchaser and its independent certified public accountants
(including the expense of any special audit or comfort letters required by or incident to such performance), securities act liability
insurance (if Purchaser elects to obtain such insurance), the fees and expenses of any special experts retained by Purchaser in
connection with such registration, and fees and expenses of other Persons retained by Purchaser, in connection with each registration
hereunder (but not including discounts, commissions, fees or expenses payable to underwriters that are attributable to the Subject
Securities offered on behalf of the Selling Holder or the fees and expenses of counsel for any selling Holder) (collectively, the
"Registration Expenses") will be borne by Purchaser.
- - ----------------------
(g) Purchaser will also take such action as may be required to be taken under applicable blue sky laws in
connection with the issuance of Beta Common Stock pursuant to this Agreement and in connection with resale of Subject Securities by
Holders pursuant to the Shelf Registration Statement; PROVIDED that Purchaser will not be required to become qualified as a foreign
corporation in any jurisdiction.
8.16 Publicity. Prior to the Closing Date, all notices to third parties and all other publicity relating to the transactions
contemplated by this Agreement shall be jointly planned, coordinated and approved by the Company, and Purchaser or Merger Sub;
provided, however, that such approval shall not be unreasonably withheld.
8.17 Exhibits. The Exhibits, Schedules and Attachments referred to herein are incorporated into this Agreement by reference.
Such Exhibits, Schedules and Attachments may be amended or modified by a party provided that the other party ("Receiving Party") has
been furnished with a copy of the Amendment or modification to such Exhibit, Schedule or Attachment; provided, however, that if any
such amendment shall materially adversely affect the economics, financial or business considerations of the transactions contemplated
under this Agreement as determined by the Receiving Party, such Receiving Party may terminate this Agreement in accordance with
Section 8.1.4.
8.18 Entire Agreement. This Agreement, together with Exhibits, Schedules and Attachments hereto, represents the entire agreement
between the parties hereto with respect to the subject matter hereof and all prior agreements, understandings or negotiations shall
be deemed merged herein. No representations, warranties, promises or agreements, express or implied, shall exist between the
parties, except as stated herein.
8.19
Currency Amounts. All references to dollar amounts in this Agreement shall refer to, and be interpreted solely as
referring to, the dollar amount under the United States monetary system.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.
BETA OIL & GAS, INC.
a Nevada corporation
By: /s/ J. Chris Steinhauser
Its: Chief Financial Officer
BETA ACQUISITION COMPANY, INC.
an Oklahoma corporation
By: /s/ J. Chris Steinhauser
Its: President
RED RIVER ENERGY, INC.
an Oklahoma corporation
By: /s/Rolf Hufnagel
Its: President
THE RED RIVER SHAREHOLDERS
/s/Rolf N. Hufnagel
/s/Robert E. Davis, Jr.
/s/Stephen J. Vogel
/s/Janet L. McGeehee
/s/Billy L. Baysinger, Jr.
/s/Brent A. Biggs
/s/Mark A. Biggs
THIS FIRST AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER (“First Amendment”) is made as of this 19th day of January, 2000, by and among Beta Oil & Gas, Inc., a Nevada corporation (“Purchaser”), Beta Acquisition Company, Inc., an Oklahoma corporation (“Merger Sub”), and Red River Energy, Inc., an Oklahoma corporation (“Company”), and the shareholders executing this Agreement, individually (collectively, “Red River Shareholders”). Unless otherwise defined in this First Amendment, all capitalized terms in this document shall have the same meaning as defined in the Merger Agreement.
A. The parties hereto have proposed that prior to the Closing Date, Purchaser issue in the respective names of the Red River Shareholders and deposit in escrow the total number of shares of Beta Common Stock to be issued to the Red River Shareholders at Closing as a condition of the obligations of the Company and the Red River Shareholders to consummate the Merger as contemplated under the Merger Agreement and to provide assurances to the Red River Shareholders that such shares will be received by them in connection with the consummation of the Merger;
B. Purchaser is willing to issue and make a deposit in good faith of all of the shares of Beta Common Stock to be issued to the Red River Shareholders which will constitute the stock consideration (“Share Consideration”) to be paid by Purchaser under the Merger Agreement; and
C. The parties to the Agreement and Plan of Merger, dated November 19, 1999 (“Merger Agreement”), wish to amend the Merger Agreement to provide for the issuance and deposit of such portion of the Share Consideration with an escrow agent mutually agreeable to the parties hereto.
NOW THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby amend the Merger Agreement and agree as follows:
1. Issuance and Deposit of Portion of Share Consideration. The Merger Agreement is hereby amended to add a new Section 3.2.15 which shall read in its entirety as follows:
“3.2.15 Escrow of Portion of Share Consideration. As of the Effective Date of the First Amendment to the Merger Agreement, Purchaser shall issue seven (7) stock certificates representing 2,250,000 shares of Beta Common Stock for the number of shares in the names of current Red River Shareholders as follows:
| Name | Number of Shares |
| Rolf N. Hufnagel | 1,440,000 |
| Robert E. Davis, Jr. | 360,000 |
| Stephen J. Vogel | 90,000 |
| Janet L. McGehee | 90,000 |
| Billy L. Basinger, Jr | 90,000 |
| Brent A. Biggs | 90,000 |
| Mark A. Biggs | 90,000 |
The shares represented by such stock certificates shall constitute "restricted securities" within the meaning of Rule 144(a)(3) of the Securities Act of 1933, as amended ("the Act"). Such stock certificates shall contain a restrictive legend as to the restrictions on the transferability of such shares. Such certificates shall be deposited with, and held by H.T.C. Escrow Company,("Escrow Agent"), 730 Seventeenth Street, Suite 500, Denver, Colorado 80202, pursuant to the terms and provisions of the Escrow Agreement and Instructions ("Escrow Agreement") which is attached to this First Amendment in the form ofAppendix A.
The stock certificates shall be delivered by the Escrow Agent on the Closing Date to Rolf N. Hufnagel as the agent for the Red River Shareholders. If the Merger Agreement is terminated in accordance with the terms thereof prior to the consummation of the Merger, the stock certificates shall be redelivered by the Escrow Agent to Purchaser. Each of the parties hereto agrees to provide written instructions to the Escrow Agent to such effect.“
During the period that the shares represented by the Stock Certificate as set forth above are held in escrow pending the consummation of the Merger, neither the Escrow Agent nor any of the Red River Shareholders shall have the right to vote such shares or dispose of such shares, except to the extent of the Escrow Agent's obligation to deliver or redeliver the shares as provided in the Escrow Agreement.
2. Effective Date. This First Amendment to the Merger Agreement shall be effective for all purposes as of January 14, 2000 ("Effective Date").
3. Amendment to Schedule A. Schedule A to the Merger Agreement is hereby amended as set forth on the Amended Schedule A attached hereto.
4. Authorization of Agent to Sign. By signing this First Amendment, the undersigned Red River Shareholders hereby authorize and empower Rolf N. Hufnagel as their agent to execute the Escrow Agreement on their behalf, to execute any instructions to the Escrow Agent that may be necessary or appropriate under the terms of this agreement or the Escrow Agreement and to act on their behalf by taking any and all action which may be required of them under the terms and provisions of the Escrow Agreement.
5. No Other Modifications. Except as modified by this First Amendment, there are no other changes or modifications to the Merger Agreement. The Merger Agreement, as of the date hereof, remains in full force and effect and is enforceable in accordance with the terms thereof, including the terms of this First Amendment.
6. Counterparts. This Agreement may be signed in one or more counterparts, each of which shall be deemed an original but all of which shall constitute one and the same instrument.
Even though this First Amendment is executed by the parties on a later date, it shall be effective for all purposes as of the Effective Date.
IN WITNESS WHEREOF, the parties hereto have executed this Agreement the day and year first above written.
BETA OIL & GAS, INC.
a Nevada Columbia corporation
By: /s/ J. Chris Steinhauser
Its:Chief Financial Officer
BETA ACQUISITION COMPANY, INC.
an Oklahoma corporation
By: /s/ J. Chris Steinhauser
Its: President
RED RIVER ENERGY, INC.
an Oklahoma corporation
By: /s/ Rolf Hufnagel
Its: President
THE RED RIVER SHAREHOLDERS
/s/Rolf N. Hufnagel
/s/Robert E. Davis, Jr.
/s/Stephen J. Vogel
/s/Janet L. McGehee
/s/Billy L. Baysinger, Jr.
/s/Brent A. Biggs
/s/Mark A. Biggs
| RED RIVER | BETA | |
| Rolf N. Hufnagel | 640 Shares | 1,440,000 Shares |
| Robert E. Davis, Jr. | 160 Shares | 360,000 Shares |
| Billy L. Baysinger, Jr. | 40 Shares | 90,000 Shares |
| Brent A. Biggs | 40 Shares | 90,000 Shares |
| Mark A. Biggs | 40 Shares | 90,000 Shares |
| Janet L. McGehee | 40 Shares | 90,000 Shares |
| Stephen J. Vogel | 40 Shares | 90,000Shares |
| Total | 1,000 Shares | 2,250,000 Shares |
ESCROW AGREEMENT AND INSTRUCTIONS
TO: H.T.C. ESCROW COMPANY
Beta Oil & Gas, Inc., a Nevada corporation ("Company"), hereby delivers to you a stock certificates ("Stock Certificates") for 2,250,000 shares of its Common Stock $.001 par value ("the Shares") which have been issued for the number of Shares in the name of the current shareholders of Red River Energy, Inc. as follows:
| Name | Number of Shares | Stock Certificate No. |
| Rolf N. Hufnagel | 1,440,000 | |
| Robert E. Davis, Jr. | 360,000 | |
| Stephen J. Vogel | 90,000 | |
| Janet L. McGehee | 90,000 | |
| Billy L. Basinger, Jr. | 90,000 | |
| Brent A. Biggs | 90,000 | |
| Mark A. Biggs | 90,000 |
The Shares represented by the Certificates are being deposited in an escrow account with you, as escrow agent, as a deposit made in good faith of the total stock consideration to be transferred to the shareholders of Red River Energy, Inc. in connection with the performance of the Company's obligations under the Plan of Merger and Agreement, dated November 19, 1999 as amended by the First Amendment to Agreement and Plan of Merger, dated January 19, 2000 ("Merger Agreement") prior to the closing of the merger transaction as contemplated under the Merger Agreement. The Certificates representing the Shares are to be held and delivered by you in accordance with the directions contained inSchedule A attached hereto and made a part hereof by this reference and on the terms and conditions as otherwise set forth in this Agreement.
The Shares represented by the Stock Certificates are "restricted securities" within the meaning of Rule 144(a)(3) as promulgated under the Securities Act of 1933, as amended (the "Act"). The Stock Certificates contain a restrictive legend as to the restrictions on the transferability of the Shares.
During the period that the Shares represented by the Stock Certificate, as set forth above, are held in escrow as provided in this Agreement, neither the Agent (as defined below) nor any of the shareholders of Red River Energy, Inc. named in the foregoing table shall have the right to vote the Shares or dispose of the Shares, except to the limited extent as directed in accordance with the instructions to the Agent in Schedule A attached hereto.
The persons signing this Agreement are parties to the Merger Agreement and hereby represent that they have been duly authorized to sign this Agreement in the capacity as set forth in the signature page to this Agreement.
SECTION ONE
POSITION OF AGENT
H.T.C. Escrow Company (hereafter "Agent") acts hereunder as a depositary only and is not a party to, or bound by, any of the terms of provisions of the Merger Agreement or any other agreement or undertaking which may be evidenced by, or arise out of, or which may relate to, the Shares deposited with it under the terms of this Agreement. Agent is not responsible or liable in any manner for the sufficiency, correctness, genuineness, or validity of the Shares represented by the Stock Certificates or the issuance thereof and undertakes no responsibility or liability for the form of execution of such Stock Certificates or the identity, authority, title or rights of any person executing or depositing the Stock Certificates as described in this Agreement.
SECTION TWO
LIABILITY OF AGENT
Agent shall not be liable for any error of judgment or for any act done or omitted by it in good faith, or for anything which it may in good faith do or refrain from doing in connection herewith. No liability will be incurred by Agent if, in the event of any dispute or question as to the construction of the directions in Schedule A, it acts in accordance with the opinion of its legal counsel. The Company hereby agrees to indemnify Agent and to hold Agent harmless against any claims whatsoever in the event of any dispute between the Company and Red River Energy, Inc. or any of the Shareholders of Red River Energy, Inc., or with any third person with respect to this agreement and the Merger Agreement.
SECTION THREE
NOTICES OF DEFAULT
All notices of default of any persons shall be given in writing to an officer of Agent. Unless written notice shall be so given, Agent shall not be required to take or be bound by notice of any default or to take action concerning such default. If written notice of default is properly given and Agent is required on receipt thereof to take any action with respect to such default, and such action involves any expense or liability, Agent shall not be required to take any such action, unless it is indemnified against such expense or liability in a manner satisfactory to it.
SECTION FOUR
DOCUMENTS
Agent is authorized to act on any document believed by it to be genuine and to be signed by the proper party or parties, and will incur no liability in so acting.
SECTION FIVE
ADVERSE CLAIMS
In the event of any disagreement or the presentation of adverse claims or demands in connection with, or for the Shares represented by, the Stock Certificates or any matter related to or affected thereby, Agent shall, at its option, be entitled to refuse to comply with any such claims or demands during the continuance of such disagreement and may refrain from delivering the Stock Certificates, and in so doing Agent shall not become liable to the Company or any party to the Merger Agreement or to any persons named in the attached schedules, or to any other person, due to its failure to comply with any such adverse claim or demand. Agent shall be entitled to continue, without liability, to refrain and refuse to act:
(a) Until all the rights of the adverse claimants have been finally adjudicated by a court having jurisdiction of the parties and the Shares represented by the Stock Certificates and any matter related to this Agreement or the Merger Agreement, after which time Agent shall be entitled to act in conformity with such adjudication; or
(b) Until all differences shall have been adjusted by agreement and Agent shall have been notified thereof and shall have been directed in writing signed jointly or in counterpart by the Company and by all persons making adverse claims or demands, at which time Agent shall be protected in acting in compliance therewith.
Agent may, at its option, in the absence of a final adjudication or agreement between the parties, interplead the Stock Certificates representing the Shares held by Agent into the District Court for the City and County of Denver, State of Colorado, and shall be entitled to reimbursement for its reasonable attorney's fees in so doing.
SECTION SIX
COMPENSATION LIEN
Agent agrees to serve without compensation under this Agreement. However, Agent shall have a first lien on the Shares represented by the Stock Certificates held by it under this Agreement for any costs, liability, expenses or fees it may reasonably incur as the consequence of its acting as Agent under this Agreement.
Dated this 19th day of January, 2000.
THE COMPANY:
Beta Oil and Gas, Inc.,
a Nevada corporation
by:/s/J. Chris Steinhauser
Chief Financial Officer
Red River Energy, Inc.,
an Oklahoma corporation
by:/s/Rolf N. Hufnagel
Rolf N. Hufnagel, President
/s/Rolf N. Hufnagel
Rolf N. Hufnagel, individually and
as Agent for the Red River Shareholders
signatory to the Merger Agreement as
authorized by the First Amendment to
the Merger Agreement, dated
January 19, 2000
H.T.C. Escrow Company acknowledges receipt of your escrow letter of instructions of which the foregoing is a copy, and of the Stock Certificate representing the Shares as provided in the foregoing Escrow Agreement, and agrees to hold and deliver the Stock Certificate in accordance with the terms and conditions in the escrow letter of instructions and the directions contained inSchedule A attached to such Agreement.
Dated this 19th day of January, 2000.
H.T.C. ESCROW COMPANY
by:/s/Denis B. Clanahan
H.T.C. Escrow Company ("Agent") is hereby instructed to take possession of and hold Stock Certificate Numbers _____ through _____, inclusively, as identified in the Escrow Agreement and Instructions, dated January ____, 2000 ("Agreement") to which thisSchedule A is attached.
Agent shall hold such Stock Certificates until such time as Agent has received written instructions from the Company, Red River Energy, Inc. and Rolf N. Hufnagel, on his behalf and on behalf of all of the Red River Shareholders signatory to the Merger Agreement, as amended, which instructions shall have been signed by all such persons directing Agent as to the person to whom the items set forth in thisSchedule A should be delivered by the Agent.
Upon delivery of the Stock Certificates, the parties to the Agreement as well as their respective attorneys shall sign such releases and indemnities as required by Agent and at such time Agent shall be discharged of any and all duties obligations required by it to be performed and any and all liabilities relating to or arising out of its duties and responsibilities under this Agreement and the discharge thereof.
Dated this 19th day of January, 2000.
THE COMPANY:
Beta Oil and Gas, Inc.,
a Nevada corporation
by:/s/ J. Chris Steinhauser
J. Chris Steinhauser
Chief Financial Officer
Red River Energy, Inc.,
an Oklahoma corporation
by:/s/ Rolf N. Hufnagel
Rolf N. Hufnagel, President
/s/ Rolf N. Hufnagel
Rolf N. Hufnagel, individually and
as Agent for the Red River
Shareholders signatory to the Merger
Agreement as authorized by the
First Amendment to the Merger Agreement,
dated January 19, 2000
THIS SECOND AMENDMENT TO THE AGREEMENT AND PLAN OF MERGER (“Second Amendment”) is made as of this 14th day of February, 2000, by and among Beta Oil & Gas, Inc., a Nevada corporation (“Purchaser”), Beta Acquisition Company, Inc., an Oklahoma corporation (“Merger Sub”), and Red River Energy, Inc., an Oklahoma corporation (“Company”), and the shareholders executing this Agreement, individually (collectively, “Red River Shareholders”). Unless otherwise defined in this Second Amendment, all capitalized terms in this document shall have the same meaning as defined in the Merger Agreement, dated November 19, 1999.
A. Since the date that the parties hereto entered into the Merger Agreement, certain developments have occurred which the parties hereto have determined necessitate that the Merger contemplated under such agreement be consummated in any event with only limited exceptions and the parties hereto intend that the terms and provisions of the Merger Agreement shall be binding on the parties hereto and subject to limited exceptions shall be specifically enforceable by any party to the Merger Agreement notwithstanding any provisions presently contained in the Merger Agreement to the contrary;
B. Such developments include without limiting the generality thereof (i) the payment by the Purchaser of auditor’s fees with respect the audit of the consolidated financial statements of Red River Energy, LLC and its subsidiaries for the year ended December 31, 1998 and the unaudited consolidated financial statements for Red River Energy, LLC and its subsidiaries for the nine month period ended September 30, 1998 and 1999, and (ii) the indication by the United States Securities and Exchange Commission (“Commission”) that the Preliminary Proxy Statement filed with the Commission on January 12, 2000 will be fully reviewed and the resulting delay to the Closing of the Merger Agreement that could result from such regulatory review;
C. The desire of the parties hereto to have certainty that, subject to certain exceptions as set forth in this Second Amendment, the transaction contemplated under the Agreement will be Closed and the Merger will be effectuated and as such enable the parties to proceed with the planned expenditures and development of the properties, implement and carry out the business plans and strategies for, and proceed with the conduct of the combined business operations and activities of the Purchaser and the Company on a going forward basis as though Merger Sub had merged with and into the Company and the Company was a wholly owned subsidiary of the Purchaser;
D. The parties hereto wish is to amend the Merger Agreement, as amended by the First Amendment to the Agreement and Plan of Merger, dated January 19, 2000, to extend date when the Merger Agreement will automatically be terminated if the Closing of the Merger has not been completed by a fixed date as provided in this Second Amendment; and
E. The parties in addition wish to amend Sections 3.1 and 3.2 of the Merger Agreement to provide that the Closing as contemplated under the Merger Agreement, as amended, will occur, and the Merger will be consummated, in any event on the Closing Date and at the Effective Time notwithstanding the satisfaction of the conditions set forth in Sections 3.1.1 through 3.1.15 and Sections 3.2.1 through 3.2.14 of the Merger Agreement to the contrary, except as otherwise provided in this Second Amendment.
NOW THEREFORE, in consideration of the foregoing premises and for other good and valuable consideration, the receipt and sufficiency of which are hereby acknowledged, the parties hereby amend the Merger Agreement, as previously amended, and agree as follows:
1.Amendments to Conditions of Closing. Sections 3.1 and 3.2 are hereby amended to provide that the obligations of the respective parties to Close as set forth under such Sections shall be subject only to the conditions that (i) no party has intentionally and fraudulently misrepresented or willfully breached any material representation or warranty made by such party to the other party as set forth in the Merger Agreement; (ii) no suit, action or other proceeding shall be pending or threatened as set forth in Sections 3.1.5 and 3.2.5 of the Merger Agreement; and (iii) the shareholders of the Purchaser shall have approved the Merger Agreement in accordance with the Purchaser’s Articles of Incorporation, its Bylaws and the General Corporation Law of Nevada. Otherwise, the conditions set forth in Sections 3.1.1 through 3.1.15 of the Merger Agreement shall be performed by the Company and the Red River Shareholder on or before the Closing Date but except as expressly provided in this Section 1 shall not be a condition of the Purchaser’s and Merger Sub’s obligation to close the transactions contemplated under the Merger Agreement on the Closing Date. Similarly, the conditions set forth in Sections 3.2.1 through 3.2.14 of the Merger Agreement shall be required to be performed by the Purchaser and Merger Sub on or before the Closing Date but except as expressly provided in this Section 1 shall not be a condition of the Company’s and the Red River Shareholders’ obligation to close the transactions contemplated under the Merger Agreement on the Closing Date.
2.Closing. The first sentence of Section 2.4 of the Merger Agreement shall be deleted and the following shall be in substitution therefor:
| “The Closing Date shall occur on that date which is on or before three (3) days after the satisfaction and receipt of any and all required conditions and approvals as set forth in Section 1 of the Second Amendment to the Merger Agreement, but in no event shall the Closing occur later than December 31, 2000; provided, however, that notwithstanding anything contained in the foregoing to the contrary, the Closing Date shall occur no sooner than three (3) days after the date that Purchaser in using its reasonable best efforts has satisfied the requirements of Sections 3.2.12 and 3.2.13 or if the Closing has not occurred by June 30, 2000, the Closing shall not occur until three (3) days after such registration statement has been declared effective by the Commission; and provided further that so long as Purchaser has used its best efforts to file the registration statement as provided herein, and any delays in filing or having the registration statement declared effective are for any reason beyond Purchaser’s control and relate to delays by Red River, the Closing shall occur within three (3) days after the necessary conditions and approvals under Section 1 of the Second Amendment have occurred. At the Closing, the shares of Beta Common Stock as contemplated under Section 7.2.1 shall be delivered by the escrow agent consistent with the provisions of the First Amendment to the Merger Agreement and the Escrow Agreement and Instructions attached thereto. |
Except as so amended, the remainder of Section 2.4 shall remain unmodified.
3.Amendment to Registration of Securities Section 9.15(b)(I) of the Merger Agreement is hereby amended to read in its entirety as follows:
| “As soon as reasonably possible after filing the Definitive Proxy Statement, and no later than June 30, 2000, the Purchaser shall prepare and file with the Commission a Shelf Registration Statement for the purpose of registering the resale in the market from time to time of the Subject Securities by Holders or by potential assignees of such Holders to which all or part of such Holders' Subject Securities may be transferred in a No-Sale Transaction. |
4.Amendment to Termination for Breach or Misrepresentation. Section 8.1.2 of the Merger Agreement is hereby amended to read in its entirety as follows:
| “8.1.2Prior to Closing Date. By the Company or Purchaser or Merger Sub if the other party shall have fraudulently and intentionally misrepresented any representation of a material nature or willfully breached any material warranty contained herein, and such misrepresentation or breach shall not have been cured by the earlier of (i) thirty (30) days after the giving of notice of such party of such misrepresentation or breach or (ii) the Closing Date.” |
5.Amendment to Termination Date. Section 8.1.3 of the Merger Agreement is hereby amended to change the date of March 31, 2000, as referenced therein, to December 31, 2000, which shall be the date when either party by written notice to the other may terminate the Merger Agreement if the Closing shall not have occurred by such date. Except as amended by this Section 2, the provisions of Section 8.1.3 shall remain unmodified.
6.Deletion of Provision Relating to Termination. Section 8.1.4 of the Merger Agreement is hereby deleted in its entirety. As a consequence of such deletion, Section 8.1.5 of the Merger Agreement is hereby renumbered as Section 8.2 and any reference therein to Section 8.1.5 shall be deemed to refer to Section 8.2.
7.Specific Performance. A new Section 9.20 shall be added to the Merger Agreement which shall read in its entirety as follows:
| “9.20 Specific Performance. In the event either party breaches any provision of this Agreement, fails to perform or is in breach of any covenant contained in this Agreement, or makes a misrepresentation of any representation or breaches any warranty contained in this Agreement which does not involve a fraudulent or intentional misrepresentation of a material fact or a willful breach of a material warranty, the nonbreaching party’s sole recourse shall be the right to seek specific performance of the Merger Agreement in a court of competent jurisdiction having jurisdiction over the breaching party; provided, however, that the nonbreaching party shall be entitled to the remedies set forth in Sections 9.12 or 9.13, whichever section is applicable to the party which is not in breach of this Agreement. If the misstatement or breach of a representation or warranty involves a fraudulent or intentional misrepresentation of a material fact or a willful breach of a material warranty, the nonbreaching party shall have the right to terminate this Agreement in accordance with Section 8.1.2 or shall be entitled to seek specific performance of this Agreement as provided in this Section 9.20.” |
8.Effective Date. This Second Amendment to the Merger Agreement shall be effective for all purposes as of February 14, 2000 ("Effective Date").
9.No Other Modifications. Except as modified by this Second Amendment, there are no other changes or modifications to the Merger Agreement, as previously amended. The Merger Agreement, as previously amended, remains in full force and effect and is enforceable in accordance with the terms thereof, including the terms of this Second Amendment,
10.Counterparts. This Second Amendment may be signed in one or more counterparts, each of which shall be deemed an original but all of which together shall constitute one and the same instrument.
Even though this Second Amendment is executed by the parties on a later date, it shall be effective for all purposes as of the Effective Date.
IN WITNESS WHEREOF,the parties hereto have executed this Agreement the day and year first above written.
| BETA OIL & GAS, INC. | |
| a Nevada corporation | |
| By: /s/Steve Antry Steve Antry | |
| Its: President | |
| BETA ACQUISITION COMPANY, INC. | |
| an Oklahoma corporation | |
| By: J. Chris Steinhauser | |
| Its: President | |
| RED RIVER ENERGY, INC. | |
| an Oklahoma corporation | |
| By: /s/Rolf Hufnagel | |
| Its: Rolf Hufnagel | |
| THE RED RIVER SHAREHOLDERS | |
| /s/Rolf N. Hufnagel | |
| Rolf N. Hufnagel | |
| /s/Robert E. Davis, Jr. | |
| Robert E. Davis, Jr. | |
| /s/Stephen J. Vogel | |
| Stephen J. Vogel | |
| /s/Janet L. McGeehee | |
| Janet L. McGeehee | |
| /s/Billy L. Baysinger, Jr. | |
| Billy L. Baysinger, Jr. | |
| /s/Brent A. Biggs | |
| Brent A. Biggs | |
| /s/Mark A. Biggs | |
| Mark A. Biggs |
| Page | |
| Independent Auditor's Report............................................. | B-2 |
| Consolidated Balance Sheets - December 31, 1998, 1999 and March 31, 2000 (unaudited)................. | B-3 |
| Consolidated Statements of Operations - For the Years Ended December 31, 1998 and 1999 and For the Three Months Ended March 31, 1999 and 2000 (unaudited) ........ | B-4 |
| Consolidated Statement of Stockholders' Equity - For the Years Ended December 31, 1998 and 1999 and For the Three Months Ended March 31, 2000 (unaudited)........................................................ | B-5 |
| Consolidated Statements of Cash Flows - For the Years Ended December 31, 1998 and 1999 and For the Three Months Ended March 31, 1999 and 2000 (unaudited)............. | B-6 |
| Notes to Consolidated Financial Statements.......................................................... | B-7 |
The Stockholders and Board of Directors
Red River Energy, Inc.
Tulsa, Oklahoma
We have audited the consolidated balance sheets of Red River Energy, Inc. and subsidiaries as of December 31, 1998 and 1999, and the related consolidated statements of operations, stockholders' equity, and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Red River Energy, Inc. and subsidiaries as of December 31, 1998 and 1999 and the results of their operations and their cash flows for the years then ended in conformity with generally accepted accounting principles.
/S/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
February 16, 2000
December 31, December 31, March 31,
1998 1999 2000
------------------ ------------------- ------------------
(unaudited)
ASSETS
Current Assets:
Cash $ 48,980 $ 366,653 $ 470,063
Accounts receivable 335,002 308,572 336,654
Advance on drilling contract 30,000 - -
Prepaid expenses - 600 23,948
---------------- --------------- ----------------
Total current assets 413,982 675,825 830,665
Oil and Gas Properties, at cost (full cost method)
Evaluated properties 5,224,845 5,897,603 6,000,615
Unevaluated properties 1,143,656 2,708,661 2,803,122
Less – accumulated amortization of full cost pool (137,936) (548,334) (656,290)
---------------- --------------- ----------------
Net oil and gas properties 6,230,565 8,057,930 8,147,447
Other Operating Property and Equipment, at cost
Gas gathering system - 1,303,160 1,306,173
Support equipment 1,012,335 1,096,415 1,116,615
Less – accumulated depreciation (38,118) (201,315) (266,657)
---------------- --------------- ----------------
Net other operating property and equipment 974,217 2,198,260 2,156,131
Furniture, Fixtures and Equipment, net 39,316 28,194 29,884
Other assets - 8,818 8,818
---------------- --------------- ----------------
Total Assets $ 7,658,080 $ 10,969,027 $ 11,172,945
================= ================ ================
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities:
Current portion of long-term debt $ 68,424 $ 2,233,176 $ 2,246,317
Accounts payable, trade 303,931 161,329 280,389
Accounts payable, related party 95,931 57,023 63,818
Accrued interest 36,154 126,989 156,488
Other accrued liabilities 2,300 60,855 48,077
---------------- --------------- ----------------
Total current liabilities 506,740 2,639,372 2,795,089
Long-Term Debt, less current portion 6,421,095 7,767,386 7,742,804
---------------- --------------- ----------------
Total liabilities 6,927,835 10,406,758 10,537,893
Commitments (Note 8) - - -
Stockholders’ Equity
Common stock, $1.00 par value, 50,000 shares authorized,
1,000 shares issued and outstanding 1,000 1,000 1,000
Additional paid-in capital 1,238,911 1,255,500 1,255,500
Accumulated deficit (509,666) (694,231) (621,448)
---------------- --------------- ----------------
Total stockholders’ equity 730,245 562,269 635,052
---------------- --------------- ----------------
Total Liabilities and Stockholders’ Equity $ 7,658,080 $ 10,969,027 $ 11,172,945
================ ================ ================
For the years ended For the three months ended
December 31, March 31,
1998 1999 1999 2000
------------------- ------------------- ------------------ -------------------
(unaudited) (unaudited)
Revenues:
Oil and gas sales $ 865,356 $ 2,852,121 $ 499,635 $ 972,127
Field services - 336,637 - 137,220
------------------- ------------------- ------------------ -------------------
Total revenue 865,356 3,188,758 499,635 1,109,347
Costs and Expenses:
Oil and gas production costs 316,533 1,148,421 315,624 318,652
Field services - 148,354 - 60,549
General and administrative 685,573 980,627 261,074 329,281
Depreciation, depletion and amortization
expense 182,747 586,095 97,892 176,321
Total costs and expenses 1,184,853 2,863,497 674,590 884,803
Income (Loss) From Operations (319,497) 325,261 (174,955) 224,544
Other Income (Expense):
Gain (loss) on sale of fixed assets (20,000) 2,438 2,438 -
Interest expense, net (168,851) (512,264) (104,757) (151,761)
Other, net (1,318) - 214 -
Total other income (expense) (190,169) (509,826) (102,105) (151,761)
Net Income (Loss) $ (509,666) $ (184,565) $ (277,060) $ 72,783
Additional Total
Common Stock Paid-in Accumulated Stockholders’
Shares Amount Capital Deficit Equity
---------------- ---------------- ------------------- -------------------- ---------------------
Common stock issued to form the company 1,000 $ 1,000 $ 379,000 $ - $ 380,000
Contribution of equipment by officers - - 774,000 - 774,000
Contribution of salaries by stockholders - - 217,800 - 217,800
Additional cash contributions by officers - - 38,565 - 38,565
Distributions to stockholders - - (170,454) - (170,454)
Net loss - - - (509,666) (509,666)
---------------- ---------------- ------------------- --------------------
Balances, December 31, 1998 1,000 1,000 1,238,911 (509,666) 730,245
Contribution of salaries by stockholders - - 151,200 - 151,200
Distributions to stockholders - - (134,611) - (134,611)
Net loss - - - (184,565) (184,565)
---------------- ---------------- ------------------- --------------------
Balances, December 31, 1999 1,000 1,000 1,255,500 (694,231) 562,269
Net income (unaudited) - - - 72,783 72,783
---------------- ---------------- ------------------- --------------------
Balances, March 31, 2000 (unaudited) 1,000 $ 1,000 $ 1,255,500 $ (621,448) $ 635,052
================ ================ =================== ====================
for the years ended for the three months ended
December 31, March 31,
1998 1999 1999 2000
------------------- ------------------ ------------------ ------------------
Cash Flows From Operating Activities: (unaudited) (unaudited)
Net income (loss) $ (509,666) $ (184,565) $ (277,060) $ 72,783
Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:
Depreciation, depletion, and amortization
182,747 586,095 97,892 176,321
Contribution of salaries by stockholders
217,800 151,200 69,300 -
(Gain) loss on sale of equipment 20,000 (2,438) (2,438) -
(Increase) decrease in:
Accounts receivable (335,002) 26,430 96,273 (28,082)
Advance in drilling contract (30,000) 30,000 30,000 -
Prepaid expenses - (600) (320) (23,348)
Other assets - (8,818) - -
Increase (decrease) in:
Accounts payable, trade 303,931 (142,602) (32,660) 119,060
Accounts payable, related party 95,931 1 (38,908) - 6,795
Accrued interest 36,154 90,835 (29,009) 29,499
Other accrued liabilities 2,300 58,555 18,511 (12,778)
------------ ----------- ------------ -----------
Net cash provided by (used in) operating activities (15,805) 565,184 (29,511) 340,250
------------ ----------- ------------ -----------
Cash Flows From Investing Activities:
Capital expenditures for:
Evaluated oil and gas property (5,224,845) (672,758) (643,156) (103,012)
Unevaluated oil and gas property (1,127,656) (1,565,005) (818,385) (94,461)
Gas gathering system - (1,303,160) (1,254,399) (3,013)
Support equipment (284,335) (106,623) (95,007) (20,199)
Furniture, fixtures and equipment (46,009) (1,378) (4,714)
Proceeds from sale of property and equipment
10,000 24,981 24,981 -
------------- ------------- ------------- ----------
Net cash (used in) investing activities (6,672,845) (3,623,943) (2,785,966) (225,399)
------------- ------------- ------------- ----------
For the years ended For the three months ended
December 31, March 31,
1998 1999 1999 2000
------------------- ------------------ ------------------ ------------------
Cash Flows From Financing Activities: (Unaudited) (unaudited)
Cash borrowings from line of credit 6,274,734 3,584,729 2,852,175 -
Issuance of notes payable 345,000 - - -
Principal payments on borrowings (130,215) (73,686) (38,322) (11,441)
Proceeds from sale of stock 380,000 - - -
Capital contributions 38,565 - - -
Distributions to stockholders (170,454) (134,611) (7,695) -
------------------- ----------------- ------------------ ------------------
Net cash provided (used) by financing
activities 6,737,630 3,376,432 2,806,158 (11,441)
------------------- ----------------- ------------------ -----------------
Increase in Cash and Cash Equivalents 48,980 317,673 (9,319) 103,410
Cash and Cash Equivalents, at beginning of period - 48,980 48,980 366,653
Cash and Cash Equivalents, at end of period $ 48,980 $ 366,653 39,661 $ 470,063
=================== ================= ================== =================
Supplemental Disclosure of Cash Flow Information
Cash paid for:
Interest $ 152,342 $ 499,380 $ 140,911 $ 149,199
Non-cash investing and financing transactions:
Assets contributed by stockholders $ 774,000 $ - $ - $ -
RED RIVER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Information subsequent to December 31, 1999 is unaudited)
1. Nature of Operations:
Red River Energy, LLC ("Red River Energy") was incorporated in the State of Oklahoma in November 1997, with operations commencing
in February 1998, to engage in the business of oil and gas exploration, acquisition, production, development, marketing, and
transportation in the United States.
The Company also conducts business through its subsidiaries TCM, LLC ("TCM") and Red River Field Services, LLC ("Red River
Field"). TCM was formed by Red River Energy and was incorporated in the State of Oklahoma in November 1997, with operations
commencing in August 1998, to explore, produce, market, and transport coal bed methane gas from leases located in Eastern
Oklahoma. Red River Field was incorporated in the State of Oklahoma in March 1999 to market and transport gas produced by Red
River Energy and others from leasehold interests located in Eastern Oklahoma.
In November 1999, the members of Red River Energy exchanged their units of ownership interest for stock in Red River Energy, Inc.
(Red River) an Oklahoma corporation that has elected to be taxed as an S corporation. As a result of this transaction, Red River
is now the parent of Red River Energy and the former members of Red River Energy now own all of the issued and outstanding stock
of Red River.
Also in November 1999, Red River entered into a binding Agreement and Plan of Merger with Beta Oil & Gas Inc. (Beta). The merger
consideration consists of Beta common stock. Under the agreement, Beta has also agreed to guarantee certain of the Company's bank
indebtedness. Upon closing of the agreement, the shareholders of Red River will convert all issued and outstanding common stock
into 2.25 million shares of Beta common stock. Completion of the agreement is contingent upon approval by Beta shareholders.
2. Summary of Significant Accounting Policies:
Principles of Consolidation - The consolidated financial statements include the accounts of Red River and subsidiaries ("the
Company"). All significant intercompany accounts and transactions have been eliminated in consolidation.
TCM has 1,000 member units outstanding at December 31, 1999 with 800 units owned by the Company and 200 units owned individually
by a stockholder of the Company as a minority interest. Upon formation of TCM, the Company committed to contribute cash and
assets to be used on establishing and developing TCM. The minority member contributed cash of $20. For the additional cash and
assets contributed, the Company received no additional ownership units. Under the operating agreement, the Company is to receive
all income and losses of TCM until such time as the total amount of income allocated to the Company equals the amount of cash,
service, and equipment contributions made to TCM. Thereafter, profits and losses of TCM will be allocated to the two owners in
proportion to their respective ownership interests. Distributions are limited to available cash as defined in the operating
agreement.
Use of Estimates - The preparation of the Company's consolidated financial statements in conformity with generally accepted
accounting principles requires the Company's management to make estimates and assumptions that affect the amounts reported in
these financial statements and accompanying notes. Actual results could differ from those estimates.
The Company's financial statements are based on significant estimates including the selection of useful lives for property,
plant and equipment, and oil and gas reserve quantities which form the basis for the calculation of amortization and impairment
of oil and gas properties. Management emphasizes that reserve estimates are inherently imprecise and that estimates of more
recent discoveries are more imprecise than those for properties with long production histories.
Oil and Gas Properties - The Company follows the full cost method of accounting for oil and gas producing activities and,
accordingly, capitalizes all costs incurred in the acquisition, exploration, and development of proved oil and gas properties,
including the costs of abandoned properties, dry holes, geophysical costs, and annual lease rentals. All general corporate
costs are expensed as incurred. In general, sales or other dispositions of oil and gas properties are accounted for as
adjustments to capitalized costs, with no gain or loss recorded. Amortization of evaluated oil and gas properties is computed
on the units of production method based on all proved reserves on a country by country basis. Unevaluated oil and gas
properties are assessed for impairment either individually or on an aggregate basis. The net capitalized costs of evaluated
oil and gas properties (full cost ceiling limitation) are not to exceed their related estimated future net revenues discounted
at 10%, and the lower of cost or estimated fair value of unproved properties, net of tax considerations.
Joint Ventures - All exploration and production activities are conducted jointly with others and, accordingly, the accounts
reflect only the Company's proportionate interest in such activities.
Revenue Recognition - The Company recognizes oil and gas sales upon delivery to the purchaser.
Furniture, Fixtures and Equipment - Furniture, fixtures, and equipment are stated at cost. Provision for depreciation and
amortization on property and equipment is calculated using the straight-line and accelerated methods over the estimated useful
lives (ranging from 3 to 5 years) of the respective assets. The cost of normal maintenance and repairs is charged to operating
expense as incurred. Material expenditures, which increase the life of an asset, are capitalized and depreciated over the
estimated remaining useful life of the asset. The cost of properties sold, or otherwise disposed of, and the related
accumulated depreciation or amortization are removed from the accounts, and any gain or losses are reflected in current
operations.
Impairment of Long-Lived Assets - In the event that facts and circumstances indicate that the costs of long-lived assets, other
than oil and gas properties, may be impaired, an evaluation of recoverability would be performed. If an evaluation is
required, the estimated future undiscounted cash flows associated with the asset would be compared to the asset's carrying
amount to determine if a write-down to market value or discounted cash flow value is required. Impairment of oil and gas
properties is evaluated subject to the full cost ceiling as described under oil and gas properties.
Income Taxes - No provision has been made for income taxes since the Company has elected to be taxed as an "S Corporation" as
defined in the Internal Revenue Code. The Company's shareholders will report the Company's taxable income or loss on their
individual tax returns.
Concentrations of Credit Risk - Credit risk represents the accounting loss that would be recognized at the reporting date if
counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that
arise from financial instruments exist for groups of customers or counter parties when they have similar economic characteristics
that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions
described below. In accordance with FASB Statement No. 105, Disclosure of Information about Financial Instruments with
Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, the credit risk amounts shown in cash and
accounts receivable do not take into account the value of any collateral or security.
The Company operates primarily in the oil and gas industry within the United States. Oil and gas sales are based solely on
short-term purchase contracts from three customers with related accounts receivable subject to credit risk.
Fair Value of Financial Instruments - The estimated fair values for financial instruments under FASB Statement No. 107,
Disclosures about Fair Value of Financial Instruments, are determined at discrete points in time based on relevant market
information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair values of the
Company's financial instruments, which includes all cash, accounts receivable, accounts payable, and long term debt approximates
the carrying values in the financial statements at December 31, 1998 and 1999.
Hedging Activities - The Company uses derivative commodity instruments to manage commodity price risk associated with future
natural gas and crude oil production, but does not use them for speculative purposes. The Company's commodity price hedging
program utilizes swap contracts. To qualify as a hedge, these contracts must correlate to anticipated future production such that
the Company's exposure to the effects of commodity price changes is reduced. The gains and losses related to these hedging
transactions are recognized as adjustments to revenue recorded for the related production. No such contracts were outstanding as
of December 31, 1998. As of December 31, 1999, the Company had contracts expiring on March 31, 2000 on the sale of 315,000 Mmbtu
of gas at an average price of $2.62 per Mmbtu. Effective April 1, 2000, the Company has committed to sell 225,000 Mmbtu of natural
gas at a price of $2.46 per Mmbtu and 108,000 Mmbtus at a price of $2.49 per Mmbtu through June 30,2000. Effective July 1, 2000,
the Company has committed for one year to sell 985,500 Mmbtu of natural gas at a price of $3.085 per Mmbtu, representing
approximately 60% of Red River's average daily gas production.
Statement of Cash Flows - For purposes of the statement of cash flows, the Company considers all highly liquid debt instruments
purchased with an original maturity of three months or less to be cash equivalents.
Impact of Recently Issued Standards - In June 1998, the Financial Accounting Standards Board issued Statement of Financial
Accounting Standards No. 133 (FASB133), "Accounting for Derivative Instruments and Hedging Activities." This statement was
effective for fiscal years beginning after June 15, 1999. However, in July 1999, FASB137 was issued delaying the effective date
of FASB133 for one year, to fiscal years beginning after June 15, 2000. FASB133 requires that an entity recognize all derivatives
as assets or liabilities in the statement of financial position and measure their instruments at fair value. The Company has not
yet determined the impact of FASB133 on its financial statements.
Segment Information - The Company has adopted SFAS 131, "Disclosure about
Segments of an Enterprise and Related Information." As defined in that Standard,
the Company operates in only one segment, oil and gas exploration.
Interim Financial Information - The March 31, 1999 and 2000 financial statements
have been prepared by the Company without audit. In the opinion of management,
the accompanying financial statements contain all adjustments (consisting of
only normal recurring accruals) necessary for a fair presentation of the
Company's financial position as of March 31, 2000 and the results of operations
and cash flows for the three months ended March 31,1999 and 2000. The results of
operations for the three month periods ended March 31, 1999 and 2000 are not
necessarily indicative of those that will be obtained for the entire fiscal
year.
3. Basis of Presentation:
As reflected in the accompanying financial statements, the Company has incurred net losses of $509,666 and $184,565 for the
years ending December 31, 1998 and 1999, respectively and has negative working capital of $1,963,547 as of December 31, 1999.
Net losses of $376,634 and $483,826 for the years ended December 31, 1998 and 1999, respectively, and negative working capital
of $2,255,980 as of December 31, 1999 are attributable to TCM. As discussed in Note 7, the Company is in the process of
renegotiating the payment terms of TCM's loan with an energy financial services company. If the Company is unsuccessful and
becomes in default under the loan, the lender's recourse is solely to certain assets of TCM. The remainder of the Company's
operations are profitable and are generating sufficient cash flows to pay the Company's obligations as they come due and, in
management's opinion, will continue to do so for at least the next year.
4. Summary of Oil and Gas Operations:
Property Acquisitions - In July 1998, the Company acquired a 97.4% working interest (80.0% net revenue interest) in a producing
oil and gas prospect in Central Oklahoma for a cash payment of $5,258,000. The property includes a 30,160-acre unit producing
from 22 active wells. In March 1999, the Company acquired an 85.0% working interest (68.0% net revenue interest) in 7,500
acres that are currently producing from 45 active wells in Eastern Oklahoma for a cash payment of $1,950,000. The property
also includes a gas gathering system consisting of 40 miles of pipeline transporting gas produced to Eastern Oklahoma.
Full Cost Amortization Expense - Amortization expense amounted to $137,936, $410,398, and 107,955 for the years ended December
31, 1998 and 1999 and the three month period ended March 31, 2000, respectively. Amortization expense per equivalent units of
oil and gas produced amounted to $1.58, $2.21 and $2.26 per barrel for the years ended December 31, 1998, 1999 and for the
three month period ended March 31, 2000, respectively. Natural gas is converted to equivalent units of oil on the basis of six
MCF of gas to one equivalent barrel of oil.
Unevaluated Oil and Gas Properties - The Company is currently developing a 76 well coal bed methane project located in Eastern
Oklahoma. As of March 31, 2000, the evaluation of the property had not been completed through exploration, and therefore is
not included in the depletion base. The completed wells are currently producing gas and water and have generated revenue of
$168,518 and $42,256 during the year ended December 31, 1999 and the three months ended March 31, 2000, respectively, but it
has not yet been determined whether the wells will produce gas in commercial quantities.
The Company is in the process of testing various completion techniques in an effort to effectively de-water the coal beds and
optimize gas production. It is estimated that six to nine months of additional operational data will be required to
effectively evaluate the properties. Drilling is expected to continue on the prospects through the year ended December 31,
2000 and in future periods. As the prospect is evaluated through future drilling and testing operations, the property
development and exploration costs associated with the wells drilled will be transferred to evaluated properties and included in
the depletion base.
Capitalization of Interest - For the years ended December 31, 1998 and 1999 and the three month period ended March 31, 2000,
the Company capitalized interest costs of $18,896, $176,498 and $54,131, respectively, related to the unevaluated oil and gas
properties' exploration activities.
Costs Included in Oil and Gas Producing Activities - Costs incurred in oil and gas producing activities, all of which have been
in the United States, are as follows:
December 31, March 31,
1998 1999 2000
--------------------------------- ------------------
(unaudited)
---------------------------------
Property acquisition $ 5,224,845 $ 672,758 $ -
---------------------------------
---------------------------------
Exploration $ 1,143,656 $ 1,565,005 $ 197,473
---------------------------------
---------------------------------
Development $ - $ - -
---------------------------------
---------------------------------
5. Other Operating Property and Equipment:
Other operating property and equipment are the 40 miles of pipeline acquired during 1999 in Eastern Oklahoma and specific
equipment and vehicles related to the oil and gas activities purchased in 1998 and 1999. During the years ended December 31, 1998
and 1999 and the three month period ended March 31, 2000, the Company recorded depreciation expense of $38,118, $163,197 and
13,078, respectively.
At March 31, 2000, support equipment with a net book value of $705,000 was classified as idle. In management's opinion, the net
book value of the idle equipment is not in excess of net realizable value.
6. Furniture, Fixtures and Equipment:
Property and equipment consisted of the following:
December 31, March 31,
-------------------------------- -------------------
1998 1999 2000
------------------ ------------------- -------------------- --------------------
(unaudited)
Office equipment $ 40,000 $ 40,000 40,000
Computer equipment 6,009 7,387 12,102
Less- Accumulated depreciation (6,693) (19,193) (22,218)
------------------ -------------------- ---------------------
$ 39,316 $ 28,194 $ 29,884
================== =================== =====================
During the years ended December 31, 1998 and 1999 and the three months ended March 31, 2000, the Company recorded depreciation
expense of $6,693, $12,500 and $3,025, respectively.
7. Long-Term Debt:
Long-term debt consisted of the following:
December 31, March 31,
1998 1999 2000
------------------ ------------------- ------------------
(unaudited)
Note payable under a revolving credit
agreement, due July 31, 2001, bearing
interest at the prime rate minus .25% (7.627%
at December 31, 1999), accrued interest
payable monthly, collateralized by
substantially all oil and gas properties
owned by Red River Energy and Red River Field.
$ 5,413,000 $ 7,694,676 $ 7,694,676
---------------- ---------------- ----------------
-----------------------------------------------
Note payable under a revolving credit
agreement, monthly payments of principal and
accrued interest equal to 100% of the net
production proceeds of specific coal bed
methane wells, final payment on outstanding
principal and interest due July 31, 2002,
bearing interest at the prime rate plus 1.50%
(8.50% at December 31, 1999), collateralized
by certain assets of TCM.
861,734 2,165,234 2,165,234
--------------- ---------------- ----------------
December 31, March 31,
1998 1999 2000
----------------------------------------------- ------------------
(unaudited)
Note payable, due in monthly installments of
$6,845 including interest of 7.50% maturing
on October 31, 2001, unsecured.
214,785 140,652 129,211
------------ --------------- --------------
$ 6,489,519 10,000,562 9,989,121
------------ --------------- --------------
Less current portion 68,424 2,233,176 2,246,317
$ 6,421,095 $ 7,767,386 7,742,804
================ ================ ==============
The $7,694,676 note at March 31, 2000 arises from a credit agreement with a
commercial bank for Red River Energy that provides for maximum outstanding
borrowings aggregating $25 million and maturing on July 31, 2001. The aggregate
amount of advances under the revolving credit agreement is limited to a
collateral borrowing base of $5.8 million at December 31, 1998 and $9.2 at
December 31, 1999 and March 31, 2000. The shareholders have committed to a
limited personal guarantee of the repayment of the credit agreement up to
$800,000. Under the terms of the agreement, the Company is required to maintain
certain ratios and be in compliance with other covenants. At March 31, 2000, the
Company was not in compliance with certain covenants. The Company has obtained a
waiver that waives compliance with such covenant through April 1, 2001.
The $2,165,234 note at March 31, 2000 arises from a credit agreement between an
energy financial services company and TCM which provides for maximum outstanding
borrowings aggregating $2.5 million and maturing on July 31, 2002. Under the
terms of the agreement, TCM may make periodic draws to fund specific costs
incurred in developing certain coal bed methane wells. Also, TCM is required to
make monthly repayments of principal and accrued interest equal to 100% of the
net production proceeds of specific coal bed methane gas wells. The agreement
allows for the deferral of the required monthly repayments if the purchase of
the production from those wells does not meet specific percentages of
production. However, if outstanding borrowings on the agreement are greater than
90%, 50%, and 25% of the total borrowings made under the agreement at March 31,
2000 and July 31, 2000, 2001, and 2002, respectively, then TCM is required to
make additional payments equal to the difference between the outstanding
borrowings at the date and the specific percentage of total borrowings made
under the agreement.
TCM has also granted to the lender an undivided 2% overriding royalty interest
in the coal bed methane gas wells. The overriding royalty interest is reduced
(to a minimum of 1-7/12%) if the borrowings are repaid prior to specified dates
and, may be increased (to a maximum of 3%) if borrowings are not repaid by
specific dates. No value has been assigned to the overriding royalty interest
because the properties are still being evaluated. At the time that the
properties are evaluated and overriding royalties are due, TCM will treat the
payments as additional interest expense to the extent paid. For the years ended
December 31, 1998 and 1999 and the three months ended March 31, 2000, there have
been no overriding royalty payments made to the lender.
The Company did not make the March 31 payment and does not currently believe
that they will be able to make the July 31, 2000 payment. The Company is in the
process of renegotiating the payment terms of the loan and, while the Company
believes they will be successful, there are no assurances of their success.
Therefore, the entire balance of the line of credit is classified as current at
December 31, 1999 and March 31, 2000.
Scheduled maturities of notes payable and long-term debt are as follows:
Years Ending December 31, Amount
---------------------
2000 2,233,176
2001 7,767,386
------------
Total 10,000,562
============
8. Commitments:
Lease Commitments - The Company leases office space in Oklahoma and certain vehicles under long-term operating leases. The Company's
leases include the cost of real property taxes. Insurance, utilities, and routine maintenance are the Company's responsibility.
Future minimum lease payments for all non-cancelable operating leases are as follows:
Years ending December 31, Amount
---------------------
2000 $ 116,169
2001 105,815
2002 105,815
2003 105,815
2004 8,818
-----------
Total 442,432
===========
Rent expense was $51,827, $97,564 and $27,293 for the years ended December 31, 1998, 1999 and for the three month period ended
March 31, 2000, respectively.
9. Stockholders' Equity:
The Company was originally formed as Red River Energy, LLC with 100 membership units authorized and issued to the members. In
November 1999, the members formed Red River Energy, Inc. and exchanged each membership unit of Red River Energy, LLC for ten
shares of common stock of Red River Energy, Inc. The accompanying financials statements have been retroactively restated to
reflect this transaction.
Two majority stockholders also made additional contributions of assets to the Company totaling $812,565. The assets consist of
office furniture with a historical cost of $19,000 and equipment with a historical cost of $755,000, $705,000 of which is idle at
March 31, 2000, and is expected to be used in the exploration and production of the coal bed methane gas properties.
RED RIVER ENERGY, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Company has assigned overriding royalty interests to certain employees
who are also stockholders of the Company to reward such employees with
incentive compensation based on the results of the Company's oil and gas
drilling activities. The interests assigned were determined at the
discretion of management prior to the commencement of certain drilling
programs by the Company. For the year ended December 31, 1999, the Company
had paid $15,547 to these employees for their overriding royalty interests
and an additional $6,344 was accrued as other accrued liabilities as of
December 31, 1999.
10. Subsequent Events (unaudited):
In February 2000, the Company entered into an agreement with an operator to jointly test and develop additional production
during 2000 in the Company's West Edmond Hunton Lime Unit (Wehlu) in cENTRAL Oklahoma.
On June 15, 2000, Red River purchased from ONEOK Resources Company 124
properties and prospects in 26 fields located in Kansas, Oklahoma and
Texas. These properties had at December 31, 1999 estimated proved reserves
of 896,800 barrels of oil and 6,018,000 Mcf of natural gas. The purchase
price was $5,608,809, subject to possible post-closing adjustments. The
properties are geographically distributed into three areas: Mid-Continent
(17 fields), West Texas (4 fields) and onshore Gulf Coast (5 fields). The
package includes 34 (30 net) operated oil wells, 3 (2 net) operated gas
wells, 30 (4 net) non-operational oil wells and 44 (7 net) non-operated gas
wells. The majority of the value is associated with the operated leases in
the Mid-Continent region. Red River funded the purchase through Red
River’s credit facility with the Bank of Oklahoma.
11. Unaudited Supplementary Oil and Gas Reserve Information:
The following supplementary information is presented in compliance with United States Securities and Exchange Commission
("SEC") regulations and is not covered by the report of the Company's independent auditors.
The information required to be disclosed for the year ended 1998 and after in accordance with FASB Statement No. 69,
"Disclosures About Oil and Gas Producing Activities," is discussed below and is further detailed in the following tables.
Proved oil and gas reserves are 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 developed oil and gas reserves are those reserves expected to be recovered
through existing wells with existing equipment and operating methods. The Company's reserves are substantially all proved
developed. The reserve data is based on studies prepared by the Company's independent consulting petroleum engineers. Reserve
estimates require substantial judgement on the part of petroleum engineers resulting in imprecise determinations, particularly
with respect to new discoveries. Accordingly, it is expected that the estimates of reserves will change as future production
and development information become available. At December 31, 1998 and 1999, all of the Company's proved oil and gas reserve
quantities are located in Oklahoma. The following table presents estimates of the Company's net proved oil and gas reserves
and changes therein for the years ended December 31, 1998 and 1999:
Changes in Quantities of Proved Petroleum and Natural Gas Reserves (unaudited)
Proved Reserves
----------------------------------------
Oil Gas
(Bbls) (Mcf)
------------------- --------------------
Proved reserves, beginning of year - -
Purchase of minerals in place 447,470 15,878,536
Production (13,470) (336,536)
-------------------- --------------------
Proved reserves, December 31, 1998 434,000 15,542,000
Purchase of minerals in place 1,852,138
Production (33,584) (911,036)
Revisions of previous estimates (50,832) (4,081,102)
-------------------- --------------------
Proved reserves, December 31, 1999 349,584 12,402,000
==================== ====================
Standardized Measure of Discounted Future Net Cash Flows (unaudited) - Statement of Financial Accounting Standards No. 69
prescribes guidelines for computing a standardized measure of future cash flows and changes therein relating to estimated
proved reserves. The Company has followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are determined by applying year-end prices and costs to the
estimated quantities of oil and gas to be produced. Estimates of future income taxes are computed using current statutory
income tax rates including consideration for estimated future statutory depletion and tax credits. The resulting net cash
flows are reduced to present value amounts by applying a 10% discount factor.
The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and,
as such, do not necessarily reflect the Company's expectations for actual revenues to be derived from those reserves nor their
present worth. The limitations inherent in the reserve quantity estimation process, as discussed previously are equally
applicable to the standardized measure computations since those estimates are the basis for the valuation process.
The following summary sets forth the Company's future net cash flows relating to proved oil and gas reserves as of December 31,
1998 and 1999 based on the standardized measure prescribed in Statement of Financial Accounting Standard No. 69:
Year ended December 31,
1998 1999
-------------------------- -----------------------
Future cash inflows $ 39,090,229 $ 36,330,303
Future costs-
Production (12,614,429) (10,485,704)
Development (48,721) -
----------------- ------------------
Future net cash inflows before income tax 26,427,079 25,844,599
Future income tax (5,505,574) (4,975,498)
----------------- ------------------
Future net cash flows 20,921,505 20,869,101
10% discount factor (12,556,496) (10,025,071)
----------------- ------------------
Future net cash flows $ 8,365,009 $ 10,844,030
================= ==================
Changes in the Standardized Measure (unaudited) - The following are the principal sources of changes in the standardized
measure of discounted future net cash flows for the years ended December 31, 1998 and 1999:
Year ended December 31,
1998 1999
-------------------------- -----------------------
Standardized measure, beginning of year $ - $ 8,365,009
Purchase of minerals in place 11,295,703 $ 995,917
Sale of oil and gas produced, net of production
costs (548,823) (1,993,551)
Changes in income taxes, net (2,381,871) (530,567)
Changes in prices and costs - 5,150,637
Changes in development costs - 38,805
Accretion of discount - 836,501
Revisions of estimates and other - (2,018,721)
----------------- ----------------
Standardized measure, end of year $ 8,365,009 $ 10,844,030
================= ================
The Shareholders and Board of Directors
Beta Oil & Gas, Inc.
Newport Beach, California
We have audited the accompanying consolidated balance sheets of Beta Oil & Gas, Inc. and subsidiaries as of December 31, 1998 and 1999, and the related statements of operations, shareholders' equity, and cash flows for the period from inception (June 6, 1997) to December 31, 1997, and the years ended December 31, 1998 and 1999. These consolidated financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Beta Oil & Gas, Inc. and subsidiaries as of December 31, 1998 and 1999, and the results of their operations and their cash flows for the period from inception (June 6, 1997) to December 31, 1997 and for the years ended December 31, 1998 and 1999 in conformity with generally accepted accounting principles.
/s/ HEIN + ASSOCIATES LLP
HEIN + ASSOCIATES LLP
Certified Public Accountants
Orange, California
February 22, 2000
BETA OIL & GAS, INC.
CONSOLIDATED BALANCE SHEETS
December 31, 1998 December 31, March 31,
1999 2000
------------------ ------------------ ----------------
(Unaudited)
Current Assets:
Cash and cash equivalents $ 198,043 $ $
1,448,655 2,296,899
Accounts receivable -
Oil and gas sales - 745,493
671,767
Other 9,678
1,178 1,178
Prepaid expenses 14,951
104,241 95,085
------------------ ------------------ ----------------
Total current assets 222,672
2,299,567 3,064,929
------------------ ------------------ ----------------
Oil and Gas properties, at cost (full cost method):
Evaluated properties 3,387,300
9,810,198 10,294,405
Unevaluated properties 11,466,695 12,091,627
12,107,762
Less--accumulated depletion and impairments (1,670,691) (3,797,227)
(4,355,106)
------------------ ------------------ ----------------
Net oil and gas properties 13,183,304 18,104,598
18,047,061
------------------ ------------------ ----------------
Furniture, Fixtures and Equipment, at cost,
Less - accumulated depreciation of $13,413 , $26,072 and
$29,264 at December 31, 1998, and 1999, and March 31, 22,943 12,231 9,039
2000 (unaudited)respectively
Other Assets 166,028 465,079
697,198
Deferred Offering Costs 23,524 - -
------------------ ------------------ ----------------
$ 13,618,471 $ 20,881,475 $ 21,818,227
================== ================== ================
(Continued)
BETA OIL & GAS, INC.
CONSOLIDATED BALANCE SHEETS
(Continued)
LIABILITIES AND SHAREHOLDERS' EQUITY
December 31, 1998 December 31, March 31,
1999 2000
------------------ ------------------ -----------------
(Unaudited)
Current Liabilities:
Premiums payable - current portion $ - $ 28,224 $ 26,220
Accounts payable, trade 310,770 225,174 180,948
Payroll and payroll taxes payable 7,559 10,631 -
Accrued taxes - - 9,375
Other accrued expenses 800 1,270 1,270
------------------ ------------------ -----------------
Total current liabilities 319,129 265,299 217,813
Premiums payable - 27,939 21,139
------------------ ------------------ -----------------
Total liabilities 319,129 293,238 238,952
------------------ ------------------ -----------------
Commitments and Contingencies (Notes 1 and 7)
Shareholders' Equity:
Common stock, $.001 par value 50,000,000 shares authorized
7,029,492, 9,400,124 and 9,624,448 shares issued and
outstanding
at December 31, 1998, and 1999, and March 31, 2000 7,029
(Unaudited) respectively 9,400 9,624
Additional paid-in capital 15,878,386 28,549,313 29,665,553
Accumulated deficit (2,586,073) (7,970,476) (8,095,902)
------------------ ------------------ -----------------
Total shareholders' equity 13,299,342 20,588,237 21,579,275
------------------ ------------------ -----------------
------------------ ------------------ -----------------
Total Liabilities and Shareholders' Equity $ 13,618,471 $ 20,881,475 $ 21,818,227
================== ================== =================
The accompanying notes are an integral part of these consolidated financial statements
BETA OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
For the
period from The year The year
inception ended ended The three The three
(June 6, December 31, December 31, months ended months ended
1997) to 1998 1999 March 31, March 31, 2000
December 31, 1999
1997
--------------- --------------- ---------------
----------------- --------------
(Unaudited) (Unaudited)
Revenues
Oil and gas sales $ - $ - $ 1,199,480 $ 29,664 $ 940,250
----------------- -------------- --------------- --------------- ---------------
Costs and Expenses:
Lease operating expense - - 81,538 9,035
33,888
General and administrative 245,452 746,769 1,418,240 258,245
489,633
Impairment expense - 1,670,691 1,224,962 - -
Depreciation and 1,530 11,883 914,233 12,415 561,072
depletion expense
----------------- -------------- --------------- --------------- ---------------
Total costs and 246,982 2,429,343 3,638,973 279,695 1,084,593
expenses
----------------- -------------- --------------- --------------- ---------------
Loss from Operations (246,982) (2,429,343) (2,439,493) (144,343)
(250,031)
Other Income and (Expense):
Interest expense - - (2,966,651) (466,348)
(1,096)
Interest income 45,409 44,843 21,741 2,275
20,013
----------------- -------------- --------------- --------------- ---------------
Net Loss $ (201,573) $ (2,384,500) $ (5,384,403) $ $
(714,104) (125,426)
================= ============== =============== =============== ===============
Basic and Diluted Loss
per Common Share ($.05) ($.37) ($.66) ($0.10) ($0.01)
================= ============== =============== =============== ===============
Weighted Average Number of
Common Shares Outstanding 4,172,662 6,366,923 8,160,000 7,303,481 9,486,113
================= ============== =============== =============== ===============
The accompanying notes are an integral part of these consolidated financial statements
BETA OIL & GAS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
Common Stock Additional Total
--------------------------------------
Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
----------------- ----------------- ---------------- ---------------- ------------------
BALANCES, June 6, 1997 - $ - $ - $ - $ -
Issuance of common stock, net of offering 5,565,648 5,566 9,216,217 - 9,221,783
costs
Salary contributed to Beta - - 30,000 - 30,000
Net loss - - - (201,573) (201,573)
----------------- ----------------- ---------------- ---------------- ------------------
BALANCES, December 31, 1997 5,565,648 5,566 9,246,217 (201,573) 9,050,210
Issuance of common stock, net of offering 1,463,844 1,463 6,572,169 - 6,573,632
costs
Salary contributed to Beta - - 60,000 - 60,000
Net loss - - - (2,384,500) (2,384,500)
----------------- ----------------- ---------------- ---------------- ------------------
BALANCES, December 31, 1998 7,029,492 7,029 15,878,386 (2, 586,073) 13,299,342
----------------- ----------------- ---------------- ---------------- ------------------
The accompanying notes are an integral part of these consolidated financial statements
(Continued)
BETA OIL & GAS, INC.
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(Continued)
Common Stock Additional Total
-------------------------------------
Paid-in Accumulated Shareholders'
Shares Amount Capital Deficit Equity
---------------- ---------------- ---------------- ----------------- ------------------
BALANCES, December 31, 1998 7,029,492 7,029 15,878,386 (2,586,073) 13,299,342
Issuance of shares for bridge note financing 459,000 459 2,647,641 - 2,648,100
Salary contributed to Beta - - 10,000 - 10,000
Issuance of warrants to consultants - - 126,890 - 126,890
Warrants issued for properties - - 102,135 - 102,135
Issuance of shares for warrant exercises 446,142 446 2,052,174 - 2,052,620
Issuance of shares in initial public offering, 1,465,490 1,466 7,732,087 - 7,733,553
net
Net loss - - - (5,384,403) (5,384,403)
---------------- ---------------- ---------------- ----------------- ------------------
BALANCES, December 31, 1999 9,400,124 $ 9,400 $ 28,549,313 $ (7,970,476) $ 20,588,237
Issuance of shares for warrant exercises 224,324 224 1,116,241 - 1,116,465
(unaudited)
Net loss (unaudited) - - - (125,426) (125,426)
---------------- ---------------- ---------------- ----------------- ------------------
BALANCES, March 31, 2000 (unaudited) 9,624,448 $ 9,624 $ 29,665,554 $ (8,095,902) $ 21,579,276
================ ================ ================ ================= ==================
The accompanying notes are an integral part of these consolidated financial statements
BETA OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the
period from For the For the The three The three
inception year ended year ended months months
(June 6, December December ended March ended
1997) to 31, 1998 31, 31, 1999 March 31,
December 31, 1999 2000
1997
------------------ ---------------- --------------- ---------------- ---------------
(Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss $ (201,573) $ (2,384,500) $ (5,384,403) $ (714,104) $ (125,426)
Adjustments to reconcile net loss to
net cash provided by (used in)
operating activities:
Depreciation and depletion 1,530 11,883 914,233 12,415 561,072
Amortization of notes payable
discount and debt issuance costs - - 2,754,000 429,505 -
Impairment expense - 1,670,691 1,224,962 - -
Warrants issued to consultants - - 126,890 - -
Salary contributed to Beta 30,000 60,000 10,000 -
10,000
Changes in operating assets and
liabilities:
Accounts receivable - (9,678) (19,687) 73,726
(736,993)
Prepaid expenses (2,599) (12,352) 8,159 9,155
(89,290)
Accounts payable, trade 807,474 (496,703) 35,167 (44,226)
(85,596)
Commissions payable 25,329 (25,329) - - -
Accrued payroll 24,044 (16,485) 3,072 5,680 (10,631)
Other accrued expenses 14,000 (13,200) 470 2,762 9,375
Net cash provided by (used
in)
------------------ ---------------- --------------- ---------------- ---------------
operating 698,205 (1,215,673) (1,262,655) (230,103) 473,045
activities
------------------ ---------------- --------------- ---------------- ---------------
CASH FLOWS FROM
INVESTING ACTIVITIES:
Oil and gas property expenditures (5,900,794) (8,928,201) (6,945,695) (2,193,467) (500,343)
Change in other assets - (166,028) (299,051) 30,820
(232,119)
Acquisition of furniture & equipment (33,595) (2,762) (1,947) (1,948) -
------------------ ---------------- --------------- ---------------- ---------------
Net cash used in investing (5,934,389) (9,096,991) (7,246,693) (2,164,595) (732,462)
activities
------------------ ---------------- --------------- ---------------- ---------------
(Continued)
BETA OIL & GAS, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Continued)
For the
period from For the For the For the For the
inception year ended year ended three three
(June 6, December December months months
1997) to 31, 1998 31, 1999 ended ended
December March 31, March 31,
31, 1997 1999 2000
---------------- --------------- ---------------- --------------- --------------
CASH FLOWS FROM
FINANCING ACTIVITIES:
Proceeds from sale of common stock net $ 9,221,783 $ 6,548,632 $ 7,733,553 $ - $ 1,116,465
Proceeds from exercise of warrants - - 2,052,620 - -
Offering costs of previous private placements - - - (27,680) -
Proceeds from premiums payable - - 71,527 - -
Repayment of premiums payable - - (15,364) - (8,804)
Proceeds from bridge notes payable - - 2,894,100 2,835,000 -
Repayment of bridge notes - - (3,000,000) - -
(Increase) decrease in deferred offering costs - (23,524) 23,524 (41,334) -
---------------- --------------- ---------------- --------------- -------------
Net cash provided by financing activities 9,221,783 6,525,108 9,759,960 2,765,986 1,107,661
---------------- --------------- ---------------- --------------- --------------
NET INCREASE (DECREASE) IN
CASH AND CASH EQUIVALENTS: 3,985,599 (3,787,556) 1,250,612 371,288 848,244
CASH AND CASH EQUIVALENTS:
Beginning of period - 3,985,599 198,043 198,043 1,448,655
---------------- --------------- ---------------- --------------- --------------
End of period $ 3,985,599 $ 198,043 $ 1,448,655 $ 569,331 $ 2,296,899
================ =============== ================ =============== ==============
SUPPLEMENTAL DISCLOSURE OF
CASH FLOW INFORMATION:
Cash paid for interest $ - $ - $ 123,552 $ 33,281 $ 1,096
================ =============== ================ =============== ==============
Cash paid for income taxes $ - $ - $ 5,475 $ - $ -
================ =============== ================ =============== ==============
SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES:
For the
period from For the For the For the For the
inception year ended year ended three three months
(June 6, December December 31, months ended March
1997) to 31, 1998 1999 ended March 31, 2000
December 31, 31, 1999
1997
----------------- ---------------- ----------------- ---------------- -----------------
Fair value of common stock issued for:
Oil and gas properties $ - $ 25,000 $ - $ - $ -
Fair value of warrants issued for:
Oil and gas properties $ - $ - $ 102,135 $ - $ -
The accompanying notes are an integral part to these consolidated financial statements
(Information subsequent to December 31, 1999 is unaudited)
(1) ORGANIZATION AND OPERATIONS
The Company
Beta Oil & Gas, Inc. was incorporated under the laws of the State of Nevada on June 6, 1997 to participate in the oil and gas acquisition, exploration, development and production business in the United States and internationally. Beta's wholly owned subsidiary, BETAustralia, LLC, was formed on February 20, 1998 as a limited liability company under the laws of the State of California for the purposes of participating in the acquisition, evaluation and development of exploration blocks in Australia.
In November 1999, the Company formed the wholly owned subsidiary Beta Acquisition Company, Inc. under the laws of the State of Oklahoma to participate in oil and gas acquisitions in the United States.
Operations
Since its inception, Beta has participated as a non-operating working interest owner in the acquisition of undeveloped leases, seismic options, lease options and foreign concessions and has participated in extensive seismic surveys and the drilling of test wells on its undeveloped properties. Further leasehold acquisitions and seismic operations are planned for 2000 and future periods. In addition, exploratory drilling is scheduled during 2000 and future periods on Beta's undeveloped properties. It is anticipated that these exploration activities together with others that may be entered into will impose financial requirements which will exceed the existing working capital of Beta. Management plans to raise additional equity and/or debt capital to finance its continued participation in planned activities. In the opinion of Beta management, current cash flow projections indicate that Beta can continue as a going concern even if additional financing is unavailable. However, if additional financing is not available, Beta will be compelled to reduce the scope of its business activities. If Beta is unable to fund planned expenditures, it may be necessary to:
1. Forfeit its interest in wells that are proposed to be drilled;
2. Farm-out its interest in proposed wells;
3. Sell a portion of its interest in prospects and use the sale proceeds to fund its participation for a lesser interest; and
4. Reduce general and administrative expenses.
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation
The consolidated financial statements include the accounts of Beta and its wholly-owned subsidiaries. All significant inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
Beta's financial statements are based upon a number of significant estimates, including oil and gas reserve quantities which form the basis for the calculation of amortization and impairment of oil and gas properties
(Information subsequent to December 31, 1999 is unaudited)
and the estimated useful lives selected for furniture, fixtures and equipment.Management emphasizes that reserve estimates are inherently imprecise and that estimates of more recent discoveries are more imprecise that those for properties with long production histories.
Oil and Gas Properties
Beta follows the full cost method of accounting for oil and gas producing activities and, accordingly, capitalizes all costs incurred in the acquisition, exploration, and development of proved oil and gas properties, including the costs of abandoned properties, dry holes, geophysical costs, and annual lease rentals. All general corporate costs are expensed as incurred. In general, sales or other dispositions of oil and gas properties are accounted for as adjustments to capitalized costs, with no gain or loss recorded. Amortization of evaluated oil and gas properties is computed on the units of production method based on all proved reserves on a country by country basis. Unevaluated oil and gas properties are assessed for impairment either individually or on an aggregate basis. The net capitalized costs of evaluated oil and gas properties (full cost ceiling limitation) are not to exceed their related estimated future net revenues discounted at 10%, and the lower of cost or estimated fair value of unproved properties, net of tax considerations.
Joint Ventures
All exploration and production activities are conducted jointly with others and, accordingly, the accounts reflect only Beta's proportionate interest in such activities. Beta is a non-operator in all of its oil and gas producing activities to date.
Revenue Recognition
Revenue is recognized upon delivery of oil and gas production.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment is stated at cost. Depreciation is provided on furniture, fixtures and equipment using the straight-line method over an estimated service life of three years.
Income Taxes
Beta accounts for income taxes using the asset and liability method wherein deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which the temporary differences are expected to be recovered or settled.
Concentrations of Credit Risk
Credit risk represents the accounting loss that would be recognized at the reporting date if counterparties failed completely to perform as contracted. Concentrations of credit risk (whether on or off balance sheet) that arise from financial instruments exist for groups of customers or counterparties when they have similar
(Information subsequent to December 31, 1999 is unaudited)
economic characteristics that would cause their ability to meet contractual obligations to be similarly affected by changes in economic or other conditions described below. In accordance with FASB Statement No. 105, Disclosure of Information about Financial Instruments with Off-Balance-Sheet Risk and Financial Instruments with Concentrations of Credit Risk, the credit risk amounts shown in cash and accounts receivable do not take into account the value of any collateral or security. As of December 31, 1998 and 1999, Beta maintained cash in a bank that was approximately $98,000 and $1,352,085, respectively, in excess of the federally insured limit.
Fair Value of Financial Instruments
The estimated fair values for financial instruments under FAS No. 107, Disclosures about Fair Value of Financial Instruments, are determined at discrete points in time based on relevant market information. These estimates involve uncertainties and cannot be determined with precision. The estimated fair values of Beta's financial instruments, which includes all cash, accounts receivable and accounts payable, approximate the carrying values in the financial statements at December 31, 1998 and 1999.
Stock Based Compensation
Beta has elected to follow Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to Employees (APB25) and related interpretations in accounting for its employee stock options. In accordance with FASB Statement No. 123 Accounting for Stock-Based Compensation (FASB123), Beta will disclose the impact of adopting the fair value accounting of employee stock options. Transactions in equity instruments with non-employees for goods or services have been accounted for using the fair value method as prescribed by FASB123.
Loss Per Common Share
Basic earnings per share excludes dilution and is calculated by dividing net loss by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity. Potential common shares for all periods presented were anti-dilutive and excluded in the earnings per share computation.
Cash Equivalents
For purposes of the Statements of Cash Flows, cash and cash equivalents include cash on hand, amounts held in banks and highly liquid investments purchased with an original maturity of three months or less.
Impact of Recently Issued Standards
Beta intends to adopt SFAS 133, "Accounting for Derivative Instruments and Hedging Activities," issued in June 1998 effective with its fiscal year beginning January 1, 2000 as required by the Statement. Due to Beta's current and anticipated limited use of derivative instruments, management anticipates that adoption of SFAS 133 will not have any significant impact on Beta's financial position or results of operations.
Segment Information
(Information subsequent to December 31, 1999 is unaudited)
Beta has adopted SFAS 131, "Disclosure about Segments of an Enterprise and Related Information." As defined in that Standard, Beta operates in only one segment, oil and gas exploration.
Interim Financial Information - The March 31, 1999 and 2000 financial statements have been prepared by the Company without audit. In the opinion of management, the accompanying financial statements contain all adjustments (consisting of only normal recurring accruals) necessary for a fair presentation of the Company's financial position as of March 31, 2000 and the results of operations and cash flows for the three months ended March 31,1999 and 2000. The results of operations for the three month periods ended March 31, 1999 and 2000 are not necessarily indicative of those that will be obtained for the entire fiscal year.
(3) SUMMARY OF OIL AND GAS OPERATIONS
Capitalized costs at December 31,1998 and 1999 and March 31, 1999 relating to Beta's oil and gas
activities are summarized as follows:
Year ended Year ended Three months ended
December 31, 1998 December 31, 1999 March 31, 2000
United States Foreign United States Foreign United States Foreign
-------------- ------- ------------- ------- ------------- -------
Capitalized costs-
Evaluated properties $ 1,763,082 $ 1,624,218 $ 8,128,928 $ 1,681,270 $ 8,613,135 $ 1,681,270
Unevaluated properties 11,426,732 39,963 11,973,532 118,095 11,988,882 118,880
Less- Accumulated depreciation,
depletion, amortization
and impairment (46,473) (1,624,218) (2,115,957) (1,681,270) (2,673,836) (1,681,270)
------------- ----------- ----------- ---------- ----------- ----------
$ 13,143,341 $ 39,963 $ 17,986,503 $ 118,095 $ 17,928,181 $ 118,880
============= =========== ============ =========== ============ ===========
Costs incurred in oil and gas producing activities are as follows:
Inception (June 6, 1997) Year ended Year ended
through December 31, 1997 December 31, 1998 December 31, 1999
------------------------------ ------------------------------- -------------------------------
United States United States United States
Foreign Foreign Foreign
------------- ------------- ------------- ------------- ------------- --- -------------
Property acquisition $ 3,835,540 $ - $ 2,808,123 $ 323,463 $ 1,810,331 $ 114,632
=============== ============== ============== ============== ============== ==============
Exploration $ 2,035,254 $ 30,000 $ 4,510,897 $ 1,310,718 $ 5,122,866 $ -
============== ============== ============== ============== ============== ==============
Development $ - $ - $ - $ - $ - $ -
============== ============== ============== ============== ============== ==============
The three months ended
March 31, 2000
---------------------------- ------------------------------
United States
Foreign
------------------------ ------------- -------------
------------------------
Property acquisition $ 15,350$ 786
------------------------ ============== ==============
------------------------
Exploration $ 484,207$ -
------------------------ ============== ==============
------------------------
Development $ - $ -
------------------------ ============== ==============
Unevaluated oil and gas properties - United States
As Beta's properties are evaluated through exploration, they will be included in the amortization base. Costs of unevaluated properties in the United States at December 31,1998 and 1999 represent property acquisition and exploration costs in connection with Beta's Louisiana, Texas and California prospects. The prospects and their related costs in unevaluated properties have been assessed individually and no impairment charges were considered necessary for the United States properties for any of the periods presented. The current status of these prospects is that seismic has been acquired, processed and is being interpreted on an ongoing basis on the subject lands within the prospects. Drilling commenced on the prospects in the first quarter of 1999 and will continue in future periods. As the prospects are evaluated through drilling in future periods, the property acquisition and exploration costs associated with the wells drilled will be transferred to evaluated properties where they will be subject to amortization.
(Information subsequent to December 31, 1999 is unaudited)
Unevaluated oil and gas properties - Foreign
Unevaluated costs incurred outside the United States represent costs in connection with the acquisition of properties in Australia.
At December 31, 1998 and 1999, and march 31, 2000, capitalized unevaluated properties consist of the following:
December 31, 1998 December 31, 1999 March 31, 2000
---------------------- ---------------------- ---------------
Unproved property acquisition cost $ 6,476,043 $ 7,056,414 7,072,549
Exploration costs 4,990,652 5,035,213 5,035,213
---------------------- ---------------------- ---------------
$ 11,466,695 $ 12,091,627 12,107,762
====================== ====================== ===============
Management expects that planned activities for the year 2000 will enable the evaluation for approximately 20% of the costs as of March 31, 2000. Evaluation of 30% of the remaining costs is expected to occur in 2001 with the remaining 50% in future periods.
Impairment of Oil and Gas Properties – United States
As a result of a ceiling test calculation, which limits capitalized costs, net of related deferred tax liability, to the aggregate of the estimated present value, discounted at 10 percent of future net revenues from proved reserves plus lower of cost or fair market value of unproved properties, Beta recognized an impairment of approximately $1,168,000 related to its oil and gas properties during the fourth quarter of 1999. Beta recognized an impairment of approximately $46,000 related to its oil and gas properties during the fourth quarter of 1998.
Evaluated Properties - United States
During the year ended December 31, 1998 Beta participated in the drilling of 6 wells within the United States. The property acquisition and exploration costs associated with the wells were transferred to evaluated properties and were evaluated for impairment. Since all of the proved reserves associated with the wells were non-producing or behind pipe and no production had occurred as of December 31, 1998, no depletion expense was recorded during the year ended December 31, 1998.
During the year ended December 31, 1999, Beta participated in the drilling of 19 wells within the United States. The property acquisition and exploration costs associated with the wells were transferred to evaluated properties. Production commenced during the year and depletion expense of $901,573 was recorded. Additional depletion expense of $557,80 was recorded for the three months ended March 31, 2000.
Evaluated Properties - Foreign
During 1998, Beta, through its wholly owned subsidiary, BETAustralia, LLC secured an option to participate for a 5% working interest in two petroleum licenses covering 2,798,000 acres (approximately 4,372 square miles). Per the terms of the option agreement, Beta exercised its option to earn a 5% working interest by participating in the drilling of two offshore test wells in the license areas. The wells were completed as dry holes. The property acquisition and exploration costs associated therewith totaling $1,624,218 were transferred to evaluated properties and charged to impairment expense during the year ended December 31, 1998. The exploration licenses expired in December 1998. Additional costs of $57,052 were transferred to and charged to impairment expense during 1999.
(Information subsequent to December 31, 1999 is unaudited)
(4) BRIDGE NOTES - NOTES PAYABLE
During the year ended December 31, 1999 Beta completed the private placement of a $3,000,000 bridge promissory note financing to three institutional investors (the "1999 bridge financing"). In connection with the 1999 bridge financing, Beta granted the investors a security interest in all of Beta's assets. In addition, a total of 459,000 shares of Beta common stock were issued in connection with the 1999 bridge financing. The $3,000,000 in bridge notes was repaid in full with accrued interest on July 7, 1999 from the proceeds of Beta's initial public offering.
Beta received net cash proceeds of $2,835,000 from the bridge notes. The estimated fair market value of 429,000 shares of common stock issued in connection with the bridge note of $2,574,000 was treated as a discount and was amortized over the term of the promissory notes using the interest method. The estimated fair market value of 30,000 additional shares of common stock issued per the terms of the bridge note of $180,000 was immediately expensed as interest during the year ended December 31, 1999. Accordingly, Beta incurred additional interest expense of $2,754,000 because of the common stock issued in connection with the bridge notes. The debt issuance costs of the 1999 bridge financing of $89,100 were amortized as additional interest expense during the year ended December 31, 1999.
During the year ended December 31, 1999, Beta incurred interest expense of $2,966,651, substantially all of which related to the bridge notes. Interest expense related to the bridge notes for the 1999 period consists of the following:
| Cash interest expense | $ 120,555 |
| Amortization of note discount and fair market value of 459,000 shares | 2,754,000 |
| Amortization of deferred loan costs | 89,100 |
| Bridge note interest expense for the year ended December 31, 1999 | $ 2,963,655 |
The remaining $2,997 represents cash interest expense incurred in connection with financing insurance premiums.
(Information subsequent to December 31, 1999 is unaudited)
(5) COMMON STOCK WARRANTS
The following table summarizes the number of shares reserved for the exercise of common stock purchase warrants as of December 31, 1998 and 1999:
12/31/1998 Warrants Warrants Warrants 12/31/1999 Callable/Non-
Expiration Date Exercise Price Exercised Cancelled Granted Shares Callable
--------------- --------------- --------- - ------- ------ --------
Shares
-------
06/23/2002 $2.00 230,000 (50,000) - - 180,000 Non-Callable
09/05/2002 $5.00 266,667 (15,270) - - 251,397 Non-Callable
10/01/2002 $4.50 10,000 - - - 10,000 Non-Callable
12/30/2002 $4.50 224,310 (56,180) - - 168,130 Non-Callable
09/05/2002 $5.00 797,245 (324,692) - - 472,553 Callable (a)
01/27/2003 $3.75 100,000 - - - 100,000 Non-Callable (c)
02/04/2003 $5.00 2,000 - - - 2,000 Non-Callable
03/12/2003 $5.00 230,100 - (20,000) - 210,100 Non-Callable
03/12/2003 $7.50 100,000 - - - 100,000 Non-Callable
03/13/2003 $7.50 50,000 - - - 50,000 Callable (b)
03/12/2003 $7.00 121,383 - (67,296) - 54,087 Non-Callable
03/12/2003 $7.50 365,958 - - - 365,958 Callable (b)
04/08/2004 $5.00 - - - 50,000 50,000 Non-Callable (e)
08/03/2004 $6.00 - - - 25,000 25,000 Callable (d)
08/16/2004 $6.00 - - - 30,000 30,000 Non-Callable
09/01/2004 $6.00 - - - 20,000 20,000 Non-Callable
09/08/2004 $7.50 - - - 133,122 133,122 Non-Callable
09/10/2004 $6.38 - - - 1,000 1,000 Non-Callable(f)
09/14/2004 $6.00 - - - 50,000 50,000 Callable (d)
11/02/2004 $6.38 - - - 10,000 10,000 Non-Callable
----------------------------------------------------
2,497,663 (446,142) (87,296) 319,122 2,283,347
====================================================
| (a) | Beta will be entitled to call these warrants at any time on and after the date that its common stock is traded on any exchange, including the NASD Over-the-Counter Bulletin Board, at a market price equal to or exceeding $7.00 per share for 10 consecutive trading days. |
| (b) | Beta will be entitled to call these warrants at any time on and after the date that its common stock is traded on any exchange, including the NASD Over-the-Counter Bulletin Board, at a market price equal to or exceeding $10.00 per share for 10 consecutive trading days. |
| (c) | On January 27, 1998, Beta issued 100,000 common stock purchase warrants exercisable at a price of $3.75 per share to an officer of Beta. The exercise price was equal to the market value of the common stock on the date of grant. The warrants vest as follows: (a) 25,000 warrants vested immediately; (b) 25,000 shall vest upon the first anniversary of the employee's employment (January 27,1998) with Beta; (c) 25,000 shall vest upon the second anniversary of employment; and (d) 25,000 shall vest upon the third anniversary of employment. If the officer ceases employment during the vesting period, all nonvested warrants shall be forfeited. |
| (d) | Warrants issued in connection with the acquisition of evaluated oil & gas properties. Beta will be entitled to call these warrants at any time on and after the date that its common stock is traded on any exchange, including the NASD Over-the-Counter Bulletin Board, at a market price equal to or exceeding $12.00 per share for 10 consecutive trading days. |
| (e) | Warrants granted to a new director for services. |
| (f) | Warrants granted to an employee. |
(Information subsequent to December 31, 1999 is unaudited)
Pro Forma Information
As stated in Note 2, Beta has not adopted the fair value accounting prescribed by FAS123 for employees. Had compensation cost for stock options issued to employees been determined based on the fair value at grant date for awards in the year ended December 31, 1998 and 1999 consistent with the provisions of FAS123, Beta's net loss and net loss per share would have been adjusted to the pro forma amounts indicated below:
December 31, 1998 December 31, 1999
----------------- -----------------
Net loss $(2,473,000) $(5,470,000)
============ ============
Loss per common share $(.39) $(.67)
====== ======
During the year ended December 31, 1997, and the three months ended March 31, 2000 Beta did not grant exercisable warrants or options to employees. As a result, there would be no effect on Beta's net loss or net loss per share.
The fair value of each warrant is estimated on the date of grant using the minimum value option-pricing model in 1998 and the Black Scholes option pricing model for 1999 using the following assumptions:
1998 1999
---- ----
Expected volatility 0% 54.42%
Expected life in years 2-3 2
Dividends None None
Risk free interest rate 5.6% 5.07% - 5.84%
The weighted average fair value of the options on the grant dates was $4.31 per share for 1998 and $1.68 for 1999.
Cancellation of Warrants
On June 21, 1999, certain warrant holders agreed to cancel 87,296 warrants to purchase common stock consisting of 20,000 warrants exercisable at $5.00 per share and 67,296 warrants exercisable at $7.00 per share. All of the cancelled warrants were non-callable with expiration dates on March 12, 2003. The warrants were cancelled for no consideration pursuant to a request by the National Association of Securities Dealers, the "NASD". The warrant holders were certain NASD member firms and their employees who participated in Beta's 1998 private placement, as well as Beta's legal counsel. The cancellation request was made and complied with because the NASD determined that these warrants could be deemed "underwriter's compensation" and the continued existence of these warrants could result in the compensation for the initial public offering exceeding the NASD guidelines. Therefore, all such warrants which could be deemed "underwriter's compensation" in excess of NASD guidelines have been cancelled for no consideration.
(Information subsequent to December 31, 1999 is unaudited)
(6) INCOME TAXES
Income tax (expense) for the period from inception through December 31, 1997 and the years ended 1998 and 1999 is comprised of the following:
Inception Year ended Year ended
(June 6, 1997) to December 31, December 31,
December 31, 1997 1998 1999
---------------------- -------------------- --------------------
Current:
Federal $ - $ - $ -
State - (800) (800)
---------------------- -------------------- --------------------
$ - $ (800) $ (800)
====================== ==================== ====================
Deferred:
Federal $ - $ - $ -
State - - -
---------------------- -------------------- --------------------
$ - $ - $ -
====================== ==================== ====================
The actual income tax (expense ) benefit differs from the "expected" tax (expense) benefit (computed by applying the U.S. Federal corporate income tax rate of 34% for each period) as follows:
Inception
(June 6, 1997) Year ended Year ended
to December 31, December 31, December 31,
1997 1998 1999
----------------- --------------- ---------------
Amount of expected tax
(expense) benefit $ 68,535 $ 810,458 $ 1,829,677
Non-deductible expenses (713) (23,759) (13,846)
State taxes, net - (800) (800)
Change in beginning balance
of valuation allowance (67,822) (786,699) (1,815,831)
----------------- --------------- ---------------
Total $ - $ (800) $ (800)
================= =============== ===============
(Information subsequent to December 31, 1999 is unaudited)
The components of the net deferred tax asset recognized as of December 31, 1998 and 1999 are as follows:
December 31, December 31,
1998 1999
---------------- ----------------
Long-term deferred tax assets (liabilities)
Net operating loss carryforwards $ 1,714,694 $ 3,989,087
Furniture, fixtures and equipment - (130)
Oil and gas properties (605,173) (695,387)
---------------- ----------------
1,109,521 3,293,830
Valuation allowance (1,109,521) (3,293,830)
---------------- ----------------
Net long term deferred tax asset $ - $ -
================ ================
At December 31, 1999, Beta has net operating loss carryforwards of approximately $9,500,000 which expire in the years 2012 through 2019. Beta has California net operating loss carryforwards for the year ended December 31, 1999 of $8,600,000 which expire in 2005.
Utilization of the tax net operating loss carryforward may be limited in the event a 50% or more change in ownership occurs within a three year period.
(7) OTHER
Related Party Transactions
During the period from inception (June 6, 1997) through December 31, 1997, and for the years ended December 31, 1998 and 1999, a director of Beta was paid $20,000, $60,000 and $77,500, respectively, pursuant to a consulting contract for management and geologic evaluation services. In addition, the director subscribed to 350,000 shares of Beta's common stock at a price of $0.05 per share ("founder shares").
A second director of Beta subscribed to 50,000 founder shares at a price of $0.05 per share. In addition, a legal firm with whom the director is a shareholder, subscribed to 20,000 founder shares at a price of $0.05 per share. The legal firm represents Beta as general counsel. The legal firm also received 20,000 common stock purchase warrants presently exercisable at a price of $6.00 per share until expiration on September 1, 2004.
A third director of Beta subscribed to 400,000 founder shares at a price of $0.05 per share.
Beta entered into an expense sharing agreement with Beta Capital Group, Inc., a company owned by the President and Chairman of the Board, and the Treasurer of Beta. The agreement provides for the allocation and reimbursement of certain office expenses such as office rent, secretarial support, office supplies, marketing materials and telephone charges between Beta and Beta Capital Group, Inc. During the period from inception through December 31, 1997 Beta made payments totaling $9,940 to Beta Capital Group, Inc. in connection with this agreement. During the years ended December 31, 1998 and 1999 Beta paid $17,000 and $2,891, respectively, in connection with this agreement.
(Information subsequent to December 31, 1999 is unaudited)
Leases
Effective October 1, 1999, Beta entered into a new agreement to lease office space. The lease agreement provides for a 36 -month term expiring in September 2002. Monthly rent payments under the lease agreement commenced in October 1999. Beta is recognizing rent expense ratably over the term of the lease. Total minimum future rental payments under this lease are as follows:
Year ended December 31, 2000 $ 41,472
===========
Year ended December 31, 2001 $ 47,969
===========
Year ended December 31, 2002 $ 37,363
===========
Rent expense for the period ended December 31, 1997 and the years ended December 31, 1998 and 1999 amounted to approximately $8,000, $ 31,000 and $33,000, respectively.
Beta Acquisition of Red River Energy, Inc.
Beta Oil & Gas, Inc. (“Beta”) entered into an agreement on November 19, 1999 to purchase Red River Energy, Inc. of Tulsa, Oklahoma, a private oil and natural gas company. The purchase price will be paid by the issuance of approximately 2.25 million shares of Beta common stock. The purchase is subject to approval by Beta shareholders.
The assets of Red River Energy, Inc. consist of four components: 1) a 97.4% working interest (80% net revenue interest) in a 30,160 acre unit which is currently producing approximately 3.65 MMBTU/d and 120 Bopd from 22 active wells in the Hunton Limestone formation in Central Oklahoma; 2) an 85% working interest (68% net revenue interest) in 7,500 acres which are currently producing 960 MMBTU/d from 45 wells in the Atoka and Gilcrease formations in Eastern Oklahoma; 3) a gas gathering system consisting of 40 miles of pipeline which is currently transporting approximately 1650 MMBTU/d in Eastern Oklahoma; and 4) a 46 well coal bed methane project also located in Eastern Oklahoma which is currently under development and producing approximately 600 MMBTU/d. Red River Energy, Inc. is the operator of all its properties.
Stock Option Plan
On August 27, 1999, the board of directors approved an incentive and non-statutory stock option plan which authorizes the Compensation Committee to grant stock option awards to officers, directors and employees. The plan provides, among other things, the following:
€ The maximum number of shares which may be optioned and sold under the plan is 700,000 shares.
€ The per share exercise price for common shares to be issued pursuant to the exercise of an option shall be no less than the fair market value of Beta's common stock as of the date of grant.
€ The per share exercise price for common shares to be issued to persons owning more than 10% of the voting stock of Beta at the date of grant, shall be no less than 110% of the fair market value of Beta's common stock as of the date of grant.
€ The maximum term of the options shall be a maximum of ten years or such lesser time period as the board of directors determines. The maximum time period for options to be issued to persons owning more than 10% of the voting stock of Beta at the date of grant shall be five years from the date of grant.
(Information subsequent to December 31, 1999 is unaudited)
The plan is subject to approval by the shareholders of the Company.
Employment Contracts
Beta has executed an employment contract dated June 23, 1997 with its president who also serves as a director. The contract provides for an indefinite term of employment at an annual salary of $150,000 commencing in October of 1997 and an annual car allowance of up to $12,000. The contract may be terminated by Beta without cause upon the payment of the following:
| (a) | Options to acquire the common stock of Beta in an amount equal to 10% of the then issued and outstanding shares containing a five year term, piggyback registration rights and an exercise price equal to 60% of the fair market value of the shares during the sixty day period of time preceding the termination notice, such amount not to exceed $3.00 per share. |
| (b) | A cash payment equal to two times the aggregate annual compensation. |
| (c) | In the event of termination without cause, all unvested securities issued by Beta to the Employee shall immediately vest and Beta shall not have the right to terminate or otherwise cancel any securities issued by Beta to the Employee. |
On June 23, 1997, Beta entered into an employment agreement with a shareholder. The agreement provides for a two year term at an annual salary of $60,000 for services as "Vice President of Capital Markets". Under separate agreement, the Shareholder subscribed to 350,000 shares of Founders Shares at a price of $0.05 per share. The subscription agreement provides that the shares shall vest over a three year period.
Deferred Compensation
In 1998, the Company began to offer a simple individual retirement account (IRA) plan for all employees meeting certain eligibility requirements. Employees may contribute up to 3% of the employees eligible compensation. Beta's contribution to the plan for the years ended December 31, 1998 and 1999 was $4,693 and $-0- respectively.
(8) OTHER ASSETS
Other assets of approximately $166,000 and $465,000 at December 31, 1998 and 1999, and $697,000 as of March 31, 2000, respectively, consisted of unapplied well prepayments.
(Information subsequent to December 31, 1999 is unaudited)
(9) UNAUDITED SUPPLEMENTARY OIL AND GAS RESERVE INFORMATION,br>
The following supplementary information is presented in compliance with United States Securities and Exchange Commission regulations and is not covered by the report of Beta's independent auditors. The information required to be disclosed for the years ended 1998 and 1999 in accordance with FASB Statement No. 69, "Disclosures About Oil and Gas Producing Activities," is discussed below and is further detailed in the following tables. There were no oil and gas reserves as of December 31, 1997.
The reserve quantities and valuations for fiscal 1998 are based upon estimates by Veazey & Associates, Inc. and Beta's management. The reserve quantities and valuations for fiscal 1999 are based upon estimates by Ryder Scott Company. Proved reserves are 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, i.e. prices and costs as of the date the estimate is made. Prices include consideration of changes in existing prices provided only by contractual arrangements, but not on escalations based upon future conditions. Reservoirs are considered proved if economic producibility is supported by either actual production or a conclusive formation test. The area of a reservoir considered proved includes (A) that portion delineated by drilling and defined by gas-oil and/or oil-water contacts, if any, and (B) the immediately adjoining portions not yet drilled, but which can reasonably be judged as economically productive on the basis of available geological and engineering data. In the absence of information on fluid contacts the lowest known structural occurrence of hydrocarbons controls the lower proved limit of the reservoir.
Proved developed reserves are reserves that can be expected to be recovered through existing wells with existing equipment and operating methods. Additional oil and gas reserves expected to be obtained through the application of fluid injection or other improved recovery techniques for supplementing the natural forces and mechanisms of primary recovery should be included as "proved developed reserves" only after testing by a pilot project or after the operation of an installed program has confirmed through production response that increased recovery will be achieved.
Beta wishes to emphasize that the estimates included in the following tables are by their nature inexact and are subject to changing economic, operating and contractual conditions. At December 31, 1999 most of Beta's reserves are attributable to recently completed wells that have little or no production history as of that date. Reserve estimates for these wells are subject to substantial upward or downward revisions after production commences and a production history is obtained. Accordingly, reserve estimates of future net revenues from production may be subject to substantial revision from year to year. Reserve information presented herein is based on reports prepared by independent petroleum engineers.
The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and, as such, do not necessarily reflect Beta's expectations for actual revenues to be derived from those reserves nor their present worth. The limitations inherent in the reserve quantity estimation process, as discussed previously, are equally applicable to the standardized measure computations since these are the basis for the valuation process.
(Information subsequent to December 31, 1999 is unaudited)
CHANGES IN QUANTITIES OF PROVED PETROLEUM AND NATURAL GAS RESERVES
------------------------------------------------------------------
FOR THE YEARS ENDED DECEMBER 31, 1998 and 1999 (Unaudited)
----------------------------------------------------------
PROVED RESERVES (Bbls) (Mcfs)
Balance at December 31, 1997 - -
Extensions and discoveries 1,461 1,596,740
------------ -----------
Balance at December 31, 1998 1,461 1,596,740
Extensions and discoveries 13,932 4,228,627
Revisions of previous estimates (370) (1,180,302)
Production (1,822) (475,065)
------------- -----------
Balance at December 31, 1999 13,201 4,170,000
============= ==============
Oil Gas
PROVED DEVELOPED RESERVES (Bbls) (Mcfs)
December 31, 1997 - -
============= =============
December 31, 1998 1,461 1,596,740
============= =============
December 31, 1999 13,201 4,170,000
============= =============
(Information subsequent to December 31, 1999 is unaudited)
For purposes of the following disclosures, estimates were made of quantities of proved reserves and the periods during which they are expected to be produced. Future cash flows were computed by applying year-end prices to estimated annual future production from proved oil and gas reserves. The average year-end price for oil was $13.14 and $ 23.06 per barrel at December 31, 1998 and 1999, respectively. The average year-end price for gas was $1.85 and $2.19 per mcf at December 31, 1998 and 1999, respectively. Future development and production costs were computed by applying year-end costs to be incurred in producing and further developing the proved reserves. Future income tax expenses were computed by applying, generally, year-end statutory tax rates (adjusted for permanent differences, tax credits and allowances) to the estimated net future pre-tax cash flows. The discount was computed by application of a 10% discount factor. The calculations assume the continuation of existing economic, operating and contractual conditions. However, such arbitrary assumptions have not proven to be the case in the past. Other assumptions of equal validity could give rise to substantially different results.
For the year For the year
ended December ended December
31, 31,
1998 1999
---------------- ----------------
Future cash inflows $ 2,978,861 $ 9,141,659
Future costs-
Production (343,478) (905,242)
Development (81,621) (701,771)
---------------- ----------------
Future net cash inflows before income tax 2,553,762 7,534,646
Future income tax - -
---------------- ----------------
Future net cash flows 2,553,762 7,534,646
10% discount factor (837,154) (1,521,674)
---------------- ----------------
Standardized measure of discounted future net cash flows $ 1,716,608 $ 6,012,972
================ ================
(Information subsequent to December 31, 1999 is unaudited)
The following are the principal sources of changes in the standardized measure of discounted future net cash flows:
For the year For the year
ended December ended December
31, 31,
1998 1999
---------------- ----------------
Standardized measure of discounted future net cash
flows--beginning of year $ - $ 1,716,608
Oil & gas sales, net of costs - (1,117,941)
Extensions and discoveries, net of future costs 1,716,608 6,374,495
Changes in prices and costs - 447,063
Change in development costs - (443,525)
Accretion of discount - 171,661
Revisions of previous estimates - (1,135,389)
---------------- ----------------
Standardized measure of discounted future net cash
flows--end of year $ 1,716,608 $ 6,012,972
================ ================
During 1999, Beta recognized downward revisions in oil and gas reserves due to disappointing production results associated with two wells in which Beta recorded reserves at December 31, 1998.
Independent Auditor's Report......................................................................................D-3
Statements of Revenues and Direct Operating Expenses - For the Years Ended
December 31, 1998 (unaudited) and 1999 and For the Three Months Ended
March 31, 1999 and 2000 (unaudited)..........................................................................D-4
Notes to Statements of Revenues and Direct Operating Expenses.....................................................D-5
We have audited the accompanying statement of revenues and direct operating expenses of the certain properties being sold to Red River Energy, Inc. (ONEOK properties) of ONEOK Resources Company (see Note 1) for the year ended December 31, 1999. This statement is the responsibility of the ONEOK Resources Company’s management. Our responsibility is to express an opinion on the financial statement based on our audit.
We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the statement of revenues and direct operating expenses is free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the statement. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall statement presentation. We believe that our audit provides a reasonable basis for our opinion.
The accompanying statement of revenues and direct operating expenses was prepared for the purpose of complying with the rules and regulations of the Securities and Exchange Commission (for inclusion in the proxy statement of Beta Oil & Gas, Inc.) as described in Note 2 and is not intended to be a complete presentation of the ONEOK properties’ revenues and expenses.
In our opinion, the statement of revenues and direct operating expenses referred to above present fairly, in all material respects, the revenues and direct operating expenses of the ONEOK properties for the year ended December 31, 1999 in conformity with generally accepted accounting principles.
/s/ Hein + Associates, LLP
Hein + Associates, LLP
Orange, California
June 15, 2000
ONEOK PROPERTIES
STATEMENTS OF REVENUES AND DIRECT OPERATING EXPENSES
FOR THE YEARS ENDED FOR THE THREE MONTHS ENDED
DECEMBER 31, MARCH 31,
1998 1999 1999 2000
------------------ ------------------ ------------------ ------------------
(unaudited) (unaudited) (unaudited)
REVENUES:
Oil and gas sales $ 1,767,840 $ 2,087,384 $ 384,776 $ 657,610
COSTS AND EXPENSES:
Oil and gas production costs 767,200 940,267 216,007 221,718
---------------- ---------------- ---------------- ----------------
EXCESS OF REVENUES OVER DIRECT OPERATING
EXPENSES $ 1,000,640 $ 1,147,117 $ 168,769 $ 435,892
=============== ================ ================ ================
See accompanying notes to this financial statement
ONEOK PROPERTIES
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(Information the year ended December 31, 1998 and subsequent to
December 31, 1999 is unaudited)
1. NATURE OF OPERATIONS:
--------------------
On May 1, 2000, ONEOK Resources Company (ONEOK) entered into a purchase and sale agreement (the agreement) to sell certain oil
and gas properties and related assets (collectively, the properties) to Red River Energy, Inc. (Red River). The purchase price at
January 1, 2000, the effective date, $6,041,680, was subject to certain adjustments including net revenues (as defined in the
agreement) between the effective date and the closing date. The net purchase price at closing, June 15, 2000, was approximately
$5,608,808 and is subject to additional adjustment. The properties, are primarily designated as oil wells with associated gas
leases and are located in the following three geographic concentrations: mid-continent including Kansas, Oklahoma, North Texas and
the Texas Panhandle, West Texas, and Texas Gulf Coast.
2. BASIS OF PRESENTATION:
---------------------
Revenues and direct operating expenses for the oil and gas properties included in the accompanying statements represent ONEOK's
interest in the properties and are presented on the accrual basis of accounting. Certain costs, such as depreciation, depletion,
and amortization, general and administrative expenses and federal and state income taxes were not allocated to the above
properties because the property interests and related assets acquired represent only a portion of ONEOK's business and the costs
incurred by ONEOK are not necessarily indicative of the costs to be incurred by Red River. Historical financial information
reflecting financial position, results of operations and cash flows of the properties are not presented because the entire
acquisition cost was assigned to the oil and gas property interests. Accordingly, historical statements of revenues and direct
operating expenses have been presented in lieu of the financial statements required under Rule 3-05 of the Securities and Exchange
Commission Regulation S-X.
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make
certain estimates and assumptions that affect the reported amounts of revenues and direct operating expenses during the reporting
period. Actual results could differ from those estimates.
ONEOK PROPERTIES
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(Information the year ended December 31, 1998 and subsequent to
December 31, 1999 is unaudited)
3. RELATED PARTIES:
---------------
Included in oil and gas revenues for the properties is approximately $11,919 for the year ended December 31, 1999 and $2,367 and
$981 for the three months ended March 31, 1999 and 2000, respectively, related to the sales to affiliates of ONEOK.
4. COMMITMENTS:
------------
Pursuant to the terms of the agreement, certain claims, litigation or disputes pending as of the effective date and certain
matters arising in connection with ownership of the properties prior to the effective date are retained by ONEOK.
ONEOK is not aware of any claims, litigation or disputes which should be accrued or disclosed in accordance with FASB5
"Accounting for Contingencies."
5. UNAUDITED SUPPLEMENTARY OIL AND GAS RESERVE INFORMATION:
-------------------------------------------------------
The following supplementary information is presented in compliance with United States Securities and Exchange Commission ("SEC")
regulations and is not covered by the report of the Company's independent auditors.
The information required to be disclosed for the years ended 1998 and 1999 in accordance with FASB Statement No. 69, "Disclosures
About Oil and Gas Producing Activities," is discussed below and is further detailed in the following tables.
Proved oil and gas reserves are 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 developed oil and gas reserves are those reserves expected to be recovered through
existing wells with existing equipment and operating methods. Proved undeveloped oil and gas reserves are 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. Approximately 74% and 69% of the proved reserves (on a barrels of oil equivalent basis) attributable
to the ONEOK properties at December 31, 1998 and 1999, respectively were proved developed with the remaining reserves being
proved undeveloped. Reserve estimates require substantial judgement on the part of petroleum engineers resulting in imprecise
determinations, particularly with respect to new discoveries. Accordingly, it is expected that the estimates of reserves will
change as future production and development information become available. At December 31, 1998 and 1999, all of the properties'
proved oil and gas reserve quantities are located in Texas, Kansas, and Oklahoma. The following table presents estimates of the
properties' net proved oil and gas reserves and changes therein for the years ended December 31, 1998 and 1999:
ONEOK PROPERTIES
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(Information the year ended December 31, 1998 and subsequent to
December 31, 1999 is unaudited
Changes in Quantities of Proved Petroleum and Natural Gas Reserves (unaudited)
------------------------------------------------------------------------------
PROVED RESERVES
--------------------------------------------------
OIL GAS
(BBLS) (MCF)
-------------------------------------------------- ------------------- --------------------
Proved reserves, December 31, 1997 197,243 4,914,245
--------------------------------------------------
--------------------------------------------------
Purchase of minerals in place 562,100 456,400
--------------------------------------------------
Production (48,445) (555,306)
--------------------------------------------------
Revisions of previous estimates and other 69,582 69,801
--------------- ---------------
--------------------------------------------------
--------------------------------------------------
Proved reserves, December 31, 1998 780,480 4,885,140
--------------------------------------------------
--------------------------------------------------
Purchase of minerals in place 69,900 1,072,500
--------------------------------------------------
Production (62,843) (462,565)
--------------------------------------------------
Revisions of previous estimates and other 5,398 92,029
--------------- ---------------
--------------------------------------------------
--------------------------------------------------
Proved reserves, December 31, 1999 792,935 5,587,104
=============== ===============
--------------------------------------------------
Standardized Measure of Discounted Future Net Cash Flows (unaudited) - Statement of Financial Accounting Standards No. 69
------------------------------------------------------------------------
prescribes guidelines for computing a standardized measure of future cash flows and changes therein relating to estimated
proved reserves. ONEOK has followed these guidelines which are briefly discussed below.
Future cash inflows and future production and development costs are determined by applying year-end prices and costs to the
estimated quantities of oil and gas to be produced. Estimates of future income taxes are computed using current statutory
income tax rates including consideration for estimated future statutory depletion and tax credits. The resulting net cash
flows are reduced to present value amounts by applying a 10% discount factor.
The assumptions used to compute the standardized measure are those prescribed by the Financial Accounting Standards Board and,
as such, do not necessarily reflect ONEOK's expectations for actual revenues to be derived from those reserves nor their
present worth. The limitations inherent in the reserve quantity estimation process, as discussed previously are equally
applicable
to the standardized measure computations since those estimates are the basis for the valuation process.
ONEOK PROPERTIES
NOTES TO STATEMENT OF REVENUES AND DIRECT OPERATING EXPENSES
(Information the year ended December 31, 1998 and subsequent to
December 31, 1999 is unaudited
The future cash flows presented by Red River in the future will be based upon its cost structure and timing of future
development and production may be significantly different from those of ONEOK. The following summary sets forth ONEOK's future
net cash flows relating to proved oil and gas reserves as of December 31, 1998 and 1999 based on the standardized measure
prescribed in Statement of Financial Accounting Standard No. 69.
YEAR ENDED DECEMBER 31,
1998 1999
-------------------------- -----------------------
Future cash inflows $ 17,395,529 $ 31,071,083
Future costs-
Production (12,908,981) (12,879,318)
Development (1,108,428) (1,220,328)
--------------------- ---------------------
Future net cash inflows before income tax 3,378,120 16,971,437
Future income tax - (4,545,052)
-------------------- --------------------
Future net cash flows 3,378,120 12,426,385
10% discount factor (1,141,044) (4,493,528)
-------------------- --------------------
Future net cash flows $ 2,237,076 $ 7,932,857
==================== ====================
Changes in the Standardized Measure (unaudited) - The following are the principal sources of changes in the standardized
--------------------------------------------------
measure of discounted future net cash flows for the years ended December 31, 1998 and 1999:
YEAR ENDED DECEMBER 31,
1998 1999
-------------------------- -----------------------
Standardized measure, beginning of year $ 3,917,761 $ 2,237,076
Purchase of minerals in place 493,790 1,616,289
Sale of oil and gas produced, net of production
costs (1,000,640) (1,147,117)
Changes in income taxes, net 116,055 (2,473,702)
Changes in prices and costs (1,917,868) 9,105,682
Changes in development costs 615,944 88,938
Accretion of discount 391,776 223,708
Revisions of estimates and other (379,742) (1,718,017)
-------------------- --------------------
Standardized measure, end of year $ 2,237,076 $ 7,932,857
==================== ====================
Annex E
[GRAPHIC OMITTED][GRAPHIC OMITTED]
BETA OIL & GAS, INC.
AMENDED AND RESTATED
1999 INCENTIVE AND NONSTATUTORY
STOCK OPTION PLAN
1.Purpose of Plan. The purpose of this 1999 Incentive and Nonstatutory Stock Option Plan are to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentive to the Employees, Directors and Consultants ofBETA OIL & GAS, INC. (the “Company”) and to promote the success of the Company’s business. Options granted hereunder may be either “incentive stock options,” as defined in Section 422 of the Internal Revenue Code of 1986, as amended, or “nonstatutory stock options,” at the discretion of the Board and as reflected in the terms of the written stock option agreement.
2. Definitions. As used herein, the following definitions shall apply:
(a) "Board" shall mean the Board of Directors of the Company, or if a Committee is appointed, "Board" shall refer to the Committee if the context so requires.
(b) "Code" shall mean the Internal Revenue Code of 1986, as amended.
(c) "Common Stock" shall mean the $.001 par value common stock of the Company.
(d) "Company" shall meanBETA OIL & GAS, INC., a Nevada corporation.
(e) "Committee" shall mean the Committee appointed by the Board of Directors in accordance with paragraph (a) of Section 4 of the Plan, if one is appointed, or the Board if no committee is appointed.
(f) "Consultant"shall mean any person who is engaged by the Company or any Subsidiary to render consulting services and is compensated for such consulting services.
(g) "Continuous Status as an Employee"shall mean the absence of any interruption or termination of service as an Employee. Continuous Status as an Employee shall not be considered interrupted in the case of sick leave, military leave, or any other leave of absence approved by the Board; provided that such leave is for a period of not more than 90 days or reemployment upon the expiration of such leave is guaranteed by contract or statute.
(h) "Employee"shall mean any person, including officers and directors, employed by the Company or any Parent or Subsidiary of the Company.
(i) "Incentive Stock Option"shall mean an Option which is intended to qualify as an incentive stock option within the meaning of Section 422 of the Code and which shall be clearly identified as such in the written Stock Option Agreement provided by the Company to each Optionee granted an Incentive Stock Option under the Plan.
(j) "Non-Employee Director"shall mean a director who:
(i)Is not currently an officer (as defined in Section 16a-1(f) of the Securities Exchange Act of 1934, as amended) of the Company or a Parent or Subsidiary of the Company, or otherwise currently employed by the Company or a Parent or Subsidiary of the Company;
(ii) Does not receive compensation, either directly or indirectly, from the Company or a Parent or Subsidiary of the Company, for services rendered as a Consultant or in any capacity other than as a director, except for an amount that does not exceed the dollar amount for which disclosure would be required pursuant to Item 404(a) of Regulation S-K adopted by the United States Securities and Exchange Commission; and
(iii) Does not possess an interest in any other transaction for which disclosure would be required pursuant to Item 404(a) of Regulation S-K adopted by the United States Securities and Exchange Commission.
(k) "Nonstatutory Stock Option"shall mean an Option granted under this Plan which does not qualify as an Incentive Stock Option and which shall be clearly identified as such in the written Stock Option Agreement provided by the Company to each Optionee granted a Nonstatutory Stock Option under this Plan. To the extent that the aggregate fair market value of Optioned Stock to which Incentive Stock Options granted under Options to an Employee are exercisable for the first time during any calendar year (under the Plan and all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such Options shall be treated as Nonstatutory Stock Options under the Plan. The aggregate fair market value of the Optioned Stock shall be determined as of the date of grant of each Option and the determination of which Incentive Stock Options shall be treated as qualified incentive stock options under Section 422 of the Code and which Incentive Stock Options exercisable for the first time in a particular year in excess of the $100,000 limitation shall be treated as Nonstatutory Stock Options shall be determined based on the order in which such Options were granted in accordance with Section 422(d) of the Code.
(l) "Option" shall mean an Incentive Stock Option, a Nonstatutory Stock Option or both as identified in a written Stock Option Agreement representing such stock option granted pursuant to the Plan.
(m) "Optioned Stock" shall mean the Common Stock subject to an Option.
(n) "Optionee" shall mean an Employee or other person who is granted an Option.
(o) "Parent" shall mean a "parent corporation," whether now or hereafter existing, as defined in Section 424(e) of the Code.
(p) "Plan" shall mean this 1999 Incentive and Nonstatutory Stock Option Plan.
(q) "Share" shall mean a share of the Common Stock of the Company, as adjusted in accordance with Section 11 of the Plan.
(r) "Stock Option Agreement" shall mean the agreement to be entered into between the Company and each Optionee which shall set forth the terms and conditions of each Option granted to each Optionee, including the number of Shares underlying such Option and the exercise price of each Option granted to such Optionee under such agreement.
(s) "Subsidiary"shall mean a "subsidiary corporation," whether now or hereafter existing, as defined in Section 424(f) of the Code.
3.Stock Subject to the Plan. Subject to the provisions of Section 11 of the Plan, the maximum aggregate number of Shares which may be optioned and sold under the Plan is 700,000 shares of Common Stock. The Shares may be authorized, but unissued, or reacquired Common Stock. If an Option should expire or become unexercisable for any reason without having been exercised in full, the unpurchased Shares which were subject thereto shall, unless the Plan shall have been terminated, become available for future grant under the Plan.
4.Administration of the Plan.
(a)Procedure. The Plan shall be administered by a Committee appointed by the Board consisting of two or more Non-Employee Directors to administer the Plan on behalf of the Board, subject to such terms and conditions as the Board may prescribe. If the Company has a class of its equity securities registered under the Securities Exchange Act of 1934, as amended ("1934 Act"), the Board shall appoint the Committee.
(i)Once appointed, the Committee shall continue to serve until otherwise directed by the Board (which for purposes of this paragraph (a)(i) of this Section 4 shall be the Board of Directors of the Company). From time to time the Board may increase the size of the Committee and appoint additional members thereof, remove members (with or without cause) and appoint new members in substitution therefor, fill vacancies however caused, or remove all members of the Committee and thereafter directly administer the Plan.
(ii)Members of the Board who are granted, or have been granted, Options may vote on any matters affecting the administration of the Plan or the grant of any Options pursuant to the Plan.
(b)Powers of the Board.Subject to the provisions of the Plan, the Board (or the Committee, subject to the approval of the Board) shall have the authority, in its discretion:
(i)To grant Incentive Stock Options, in accordance with Section 422 of the Code, and Nonstatutory Stock Options or both as provided and identified in a separate written Stock Option Agreement to each Optionee granted such Option or Options under the Plan; provided however, that in no event shall an Incentive Stock Option and a Nonstatutory Stock Option granted to any Optionee under a single Stock Option Agreement be subject to a “tandem” exercise arrangement such that the exercise of one such Option affects the Optionee’s right to exercise the other Option granted under such Stock Option Agreement;
(ii)To determine, upon review of relevant information and in accordance with Section 8(b) of the Plan, the fair market value of the Common Stock;
(iii)To determine the exercise price per Share of Options to be granted, which exercise price shall be determined in accordance with Section 8(a) of the Plan;
(iv)To determine the Employees or other persons to whom, and the time or times at which, Options shall be granted and the number of Shares to be represented by each Option;
(v)To interpret the Plan;
(vi)To prescribe, amend and rescind rules and regulations relating to the Plan;
(vii)To determine the terms and provisions of each Option granted (which need not be identical) and, with the consent of the holder thereof, modify or amend each Option;
(viii)To accelerate or defer (with the consent of the Optionee) the exercise date of any Option, consistent with the provisions of Section 7 of the Plan;
(ix)To authorize any person to execute on behalf of the Company any instrument required to effectuate the grant of an Option previously granted by the Board; and
(x) To make all other determinations deemed necessary or advisable for the administration of the Plan.
(xi)To determine whether a holder of Nonstatutory Stock Options granted under this Plan shall have engaged in conduct which is contrary to the best interests of the Company and whose Nonstatutory Stock Option is therefore subject to cancellation as set forth in Section 7.
(c)Effect of Board's Decision. All decisions, determinations and interpretations of the Board shall be final and binding on all Optionees and any other permissible holders of any Options granted under the Plan.
5.Eligibility.
(a)Persons Eligible. Options may be granted to any Employee, Director, Officer or Consultant of the Company selected by the Board. Incentive Stock Options may be granted only to Employees. An Employee, who is also a director of the Company, its Parent or a Subsidiary, shall be treated as an Employee for purposes of this Section 5. An Employee or other person who has been granted an Option may, if he is otherwise eligible, at the discretion of the Committee, if a Committee has been appointed, or the Board, be granted an additional Option or Options.
(b)No Effect on Relationship. The Plan shall not confer upon any Optionee any right with respect to continuation of employment or other relationship with the Company nor shall it interfere in any way with his right or the Company's right to terminate his employment or other relationship at any time.
6.Term of Plan. The Plan became effective on the date first approved and adopted by the Board of Directors, as set forth on the last page of this Plan. It shall continue in effect for 10 years from the date of such approval and adoption, unless sooner terminated under Section 13 of the Plan.
7.Term of Option. The term of each Option shall be 10 years from the date of grant thereof or such shorter term as may be provided in the Stock Option Agreement. However, in the case of an Incentive Stock Option granted to an Optionee who, at the time the Option is granted, owns stock representing more than 10% of the total combined voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Option shall be five years from the date of grant thereof or such shorter time as may be provided in the Stock Option Agreement.
The Nonstatutory Stock Options granted to, and held by, any person under this Plan, may be deemed canceled and forfeited by the Board, if the Board, in its sole discretion, determines that the conduct of the holder of such Nonstatutory Stock Option has been contrary to the best interests of the Company and could reasonably be deemed by the Board to have a material adverse effect on the Company or the business of the Company.
8.Exercise Price and Consideration.
(a) Exercise Price. The per Share exercise price for the Shares to be issued pursuant to exercise of an Option shall be no less than the fair market value of Shares of common stock as of the date of grant of the option or such higher price as may be determined by the Board, but the per Share exercise price under an Incentive Stock Option shall be subject to the following:
(i) If granted to an Employee who, at the time of the grant of such Incentive Stock Option, owns stock representing more than 10% of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall not be less than 110% of the fair market value per Share on the date of grant.
(ii) If granted to any other Employee, the per Share exercise price shall not be less than 100% of the fair market value per Share on the date of grant.
(b)Determination of Fair Market Value. The fair market value per Share on the date of grant shall be determined as follows:
(i) If the Common Stock is listed on the New York Stock Exchange, the American Stock Exchange or such other securities exchange designated by the Board, or admitted to unlisted trading privileges on any such exchange, or if the Common Stock is quoted on a National Association of Securities Dealers, Inc. system that reports closing prices, the fair market value shall be the closing price of the Common Stock as reported by such exchange or system on the day the fair market value is to be determined, or if no such price is reported for such day, then the determination of such closing price shall be as of the last immediately preceding day on which the closing price is so reported;
(ii) If the Common Stock is not so listed or admitted to unlisted trading privileges or so quoted, the fair market value shall be the average of the last reported highest bid and the lowest asked prices quoted on the National Association of Securities Dealers, Inc. Automated Quotations System or, if not so quoted, then by the National Quotation Bureau, Inc. on the day the fair market value is determined; or
(iii) If the Common Stock is not so listed or admitted to unlisted trading privileges or so quoted, and bid and asked prices are not reported, the fair market value shall be determined in such reasonable manner as may be prescribed by the Board.
(c) Consideration and Method of Payment. The consideration to be paid for the Shares to be issued upon exercise of an Option, including the method of payment, shall be determined by the Committee or the Board and may consist entirely of cash, check, other shares of Common Stock having a fair market value on the date of exercise equal to the aggregate exercise price of the Shares as to which said Option shall be exercised, or any combination of such methods of payment, or such other consideration and method of payment for the issuance of Shares to the extent permitted under the Nevada Business Corporation Act.
9.Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option granted hereunder shall be exercisable at such times and under such conditions as determined by the Board, including performance criteria with respect to the Company and/or the Optionee, and as shall be permissible under the terms of the Plan.
In the sole discretion of the Board, at the time of the grant of an Option or subsequent thereto but prior to the exercise of an Option, an Optionee may be provided with the right to exchange, in a cashless transaction, all or part of the Option for Common Stock of the Company on terms and conditions determined by the Board.
An Option may not be exercised for a fraction of a Share.
An Option shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Option by the person entitled to exercise the Option and full payment for the Shares with respect to which the Option is exercised has been received by the Company. Full payment, as authorized by the Board, may consist of a consideration and method of payment allowable under Section 8(c) and this Section 9(a) of the Plan. Until the issuance (as evidenced by the appropriate entry on the books of the Company or of the duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a shareholder shall exist with respect to the Optioned Stock, notwithstanding the exercise of the Option. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in Section 11 of the Plan.
Exercise of an Option in any manner shall result in a decrease in the number of Shares which thereafter may be available, both for purposes of the Plan and for exercise under the Option, by the number of Shares as to which the Option is exercised.
(b)Termination of Status as an Employee. In the case of an Incentive Stock Option, if any Employee ceases to serve as an Employee, he may, but only within such period of time not exceeding three months as is determined by the Board at the time of grant of the Option, after the date he ceases to be an Employee of the Company, exercise his Option to the extent that he was entitled to exercise the Option at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of such termination, or if he does not exercise any portion of the Option which he was entitled to exercise at the date of termination within the time specified herein, the Option shall terminate.
(c) Disability of Optionee. In the case of an Incentive Stock Option, notwithstanding the provisions of Section 9(b) above, in the event an Employee is unable to continue his employment with the Company as a result of his total and permanent disability (as defined in Section 22(e)(3) of the Code), he may, but only within such period of time not exceeding 12 months as is determined by the Board at the time of grant of the Option from the date of termination, exercise his Option to the extent he was entitled to exercise it at the date of such termination. To the extent that he was not entitled to exercise the Option at the date of termination, or if he does not exercise any portion of the Option which he was entitled to exercise at the date of disability within the time specified herein, the Option shall terminate.
(d)Death of Optionee. In the case of an Incentive Stock Option, in the event of the death of the Optionee:
(i)During the term of the Option if the Optionee was at the time of his death an Employee the Company and had been in Continuous Status as an Employee or Consultant since the date of grant of the Option, the Option may be exercised, at any time within 12 months following the date of death, by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that would have accrued had the Optionee continued living and remained in Continuous Status as an Employee 12 months after the date of death; or
(ii)Within such period of time not exceeding three months as is determined by the Board at the time of grant of the Option after the termination of Continuous Status as an Employee, the Option may be exercised, at any time within 12 months following the date of death, by the Optionee’s estate or by a person who acquired the right to exercise the Option by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination.
10.Nontransferability of Options.. In the case of an Incentive Stock Option, the Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner (a “sale or other transfer”) other than by will or by the laws of descent and distribution and may be exercised, during the lifetime of the Optionee, only by the Optionee. In the case of a nonstatutory stock option, an Option may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner during the period ending one year from the date of grant and thereafter only (i) after written notice to the Board and (ii) in a manner which is in compliance with all applicable provisions of the Securities Act of 1933, as amended (“1933 Act”) and the 1934 Act to the reasonable satisfaction of the Company. Upon any permitted sale or other transfer, the transferee shall remain subject to all terms and conditions of the Plan and the Stock Option Agreement.
11.Adjustments Upon Changes in Capitalization or Merger. Subject to any required action by the shareholders of the Company, the number of Shares covered by each outstanding Option, and the number of Shares which have been authorized for issuance under the Plan but as to which no Options have yet been granted or which have been returned to the Plan upon cancellation or expiration of any Option, as well as the price per Share covered by each such outstanding Option, shall be proportionately adjusted for any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, or any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company; provided, however, that conversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” Such adjustment shall be made by the Board, whose determination in that respect shall be final, binding and conclusive. Except as expressly provided herein, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason thereof shall be made with respect to, the number or price of Shares subject to an Option.
In the event of the proposed dissolution or liquidation of the Company, the Option will terminate immediately prior to the consummation of such proposed action, unless otherwise provided by the Board. The Board may, in the exercise of its sole discretion in such instances, declare that any Option shall terminate as of a date fixed by the Board and give each Optionee the right to exercise his Option as to all or any part of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. In the event of the proposed sale of all or substantially all of the assets of the Company, or the merger of the Company with or into another corporation in a transaction in which the Company is not the survivor, the Option shall be assumed or an equivalent option shall be substituted by such successor corporation or a parent or subsidiary of such successor corporation, unless the Board determines, in the exercise of its sole discretion and in lieu of such assumption or substitution, that the Optionee shall have the right to exercise the Option as to all of the Optioned Stock, including Shares as to which the Option would not otherwise be exercisable. If the Board makes an Option fully exercisable in lieu of assumption or substitution in the event of such a merger or sale of assets, the Board shall notify the Optionee that the Option shall be fully exercisable for a period of 30 days from the date of such notice, and the Option will terminate upon the expiration of such period.
12.Time of Granting Options. The date of grant of an Option shall, for all purposes, be the date on which the Board makes the determination granting such Option. Notice of the determination shall be given to each Employee or other person to whom an Option is so granted within a reasonable time after the date of such grant. Within a reasonable time after the date of the grant of an Option, the Company shall enter into and deliver to each Employee or other person granted such Option a written Stock Option Agreement as provided in Sections 2(r) and 16 hereof, setting forth the terms and conditions of such Option and separately identifying the portion of the Option which is an Incentive Stock Option and/or the portion of such Option which is a Nonstatutory Stock Option.
13.Amendment and Termination of the Plan.
(a)Amendment and Termination. The Board may amend or terminate the Plan from time to time in such respects as the Board may deem advisable; provided that, the following revisions or amendments shall require approval of the shareholders of the Company in the manner described in Section 17 of the Plan:
(i)An increase in the number of Shares subject to the Plan above 700,000 Shares, other than in connection with an adjustment under Section 11 of the Plan;
(ii)Any change in the designation of the class of Employees eligible to be granted Incentive Stock Options; or
(iii)Any material amendment under the Plan that would have to be approved by the shareholders of the Company for the Board to continue to be able to grant Incentive Stock Options under the Plan in accordance with the Code.
(b)Effect of Amendment or Termination.Any such amendment or termination of the Plan shall not affect Options already granted and such Options shall remain in full force and effect as if the Plan had not been amended or terminated, unless mutually agreed otherwise between the Optionee and the Board, which agreement must be in writing and signed by the Optionee and the Company.
14.Conditions Upon Issuance of Shares. Shares shall not be issued pursuant to the exercise of an Option unless the exercise of such Option and the issuance and delivery of such Shares pursuant thereto shall comply with all relevant provisions of law, including, without limitation, the 1933 Act, the 1934 Act, the rules and regulations promulgated thereunder, applicable state securities laws, and the requirements of any stock exchange upon which the Shares may then be listed, and shall be further subject to the approval of legal counsel for the Company with respect to such compliance.
As a condition to the existence of an Option, the Company may require the person exercising such Option to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares and such other representations and warranties which in the opinion of legal counsel for the Company, are necessary or appropriate to establish an exemption from the registration requirements under applicable federal and state securities laws with respect to the acquisition of such Shares.
15.Reservation of Shares. The Company, during the term of this Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. Inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company’s legal counsel to be necessary for the lawful issuance and sale of any Share hereunder, shall relieve the Company of any liability relating to the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained.
16.Option Agreement. Each Option granted to an Employee or other persons shall be evidenced by a written Stock Option Agreement. The Stock Option Agreement shall be in the form and shall include the terms and conditions set forth onExhibit Aattached hereto.
17.Shareholder Approval. Continuance of the Plan shall be subject to approval by the shareholders of the Company. Such shareholder approval and any shareholder approval required under Section 13 of the Plan, may be obtained at a duly held shareholders meeting by the affirmative vote of the holders of a majority of the outstanding shares of the voting stock of the Company, who are present or represented and entitled to vote thereon, or by majority written consent of the shareholders in accordance with the provisions of the Nevada Business Corporation Act.
18. Information to Optionees. The Company shall provide to each Optionee, during the period for which such Optionee has one or more Options outstanding, copies of all annual reports and other information which are provided to all shareholders of the Company. The Company shall not be required to provide such information if the issuance of Options under the Plan is limited to key employees whose duties in connection with the Company assure their access to equivalent information.
19. Gender.As used herein, the masculine, feminine and neuter genders shall be deemed to include the others in all cases where they would so apply.
20.CHOICE OF LAW. ALL QUESTIONS CONCERNING THE CONSTRUCTION, VALIDITY AND INTERPRETATION OF THIS PLAN AND THE INSTRUMENTS EVIDENCING OPTIONS WILL BE GOVERNED BY THE INTERNAL LAW, AND NOT THE LAW OF CONFLICTS, OF THE STATE OF NEVADA.
Adopted by Directors: Effective January 6, 1999
Adopted by Shareholders: Effective ____________
BETA OIL & GAS, INC.
organized under the laws of Nevada
ATTEST:
By/s/ Steve Antry /s/Lisa Antry
Chairman Secretary
The undersigned acknowledges that he/she/it/they have received a copy of the Proxy Statement, dated _____, 2000, concerning the proposed merger of the Company's wholly owned subsidiary, Beta Acquisition Company, Inc., an Oklahoma corporation, with and into Red River Energy, Inc., an Oklahoma corporation. On the basis of his/her/its/their review of the information contained in such Proxy Statement, the undersigned hereby (please check the appropriate box If you sign and return the enclosed consent forms to the Company without checking either of these boxes, the consent forms will be treated as though you consented to the proposed merger)
€ Consents € Withholds Consent
as to the following resolution:
RESOLVED, that the Agreement and Plan of Merger, dated November 19 , 1999 as amended, by and between the Company and Beta Acquisition Company, Inc. and Red River Energy, Inc. and the shareholders of the Red River Energy, Inc. and the merger of Beta Acquisition Company, Inc. with and into Red River Energy, Inc., as described in the Agreement and Plan of Merger, is hereby ratified and approved by the shareholders of the Company.; and
RESOLVED FURTHER, that this consent may executed in multiple counterparts, all of which shall be taken together and considered a single consent.
FAILURE TO RETURN THIS REQUEST FOR CONSENT WILL HAVE THE EFFECT OF WITHHOLDING CONSENT WITH RESPECT TO THE RESOLUTION SET FORTH ABOVE. TO BE APPROVED UNDER NEVADA LAW AND THE COMPANY'S BYLAWS THE RESOLUTION MUST RECEIVE THE CONSENT OF THE HOLDERS OF RECORD OF A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK AS DETERMINED ON JULY 17, 2000, THE RECORD DATE.
Dated: __________________, 2000.
Signature
Signature (if held jointly)
Please sign exactly as your name(s) appear(s) herein. Where more than one owner is shown above, each should sign. When signing in a fiduciary or representative capacity, please add your full title as such. If a corporation is submitting this Consent, it should be executed in its full corporate name by a duly authorized officer. If a partnership or limited liability company is submitting this Consent, it should be signed in the full name of the entity by an authorized person.
The undersigned acknowledges that he/she/it/they have received a copy of the Proxy Statement, dated August 8, 2000, which in part under Proposed No. 2 discusses the Company's Amended and Restated 1999 Incentive and Nonstatutory Stock Option Plan ("Plan"), a copy of which is appended to the Proxy Statement as Appendix D. Based on his/her/its/their review of the information contained in such Proxy Statement, pertaining to the Plan, the undersigned hereby (please check the appropriate box. If you sign and return the enclosed consent forms to the Company without checking either of these boxes, such consent forms will be treated as though you consented to the proposed Plan)
€ Consents € Withholds Consent
as to the following resolution:
RESOLVED, that the Shareholders of the Company hereby ratify and approve the adoption of the Company's Amended and Restated 1999 Incentive and Nonstatutory Stock Option Plan by the Company's Board of Directors: and
RESOLVED FURTHER, that this consent may executed in multiple counterparts, all of which shall be taken together and considered a single consent.
FAILURE TO RETURN THIS REQUEST FOR CONSENT WILL HAVE THE EFFECT OF WITHHOLDING CONSENT WITH RESPECT TO THE RESOLUTION SET FORTH ABOVE. TO BE APPROVED UNDER NEVADA LAW AND THE COMPANY'S BYLAWS THE RESOLUTION MUST RECEIVE THE CONSENT OF THE HOLDERS OF RECORD OF A MAJORITY OF THE ISSUED AND OUTSTANDING SHARES OF THE COMPANY'S COMMON STOCK AS DETERMINED ON JULY 17, 2000, THE RECORD DATE.
Dated: __________________, 2000.
Signature
Signature (if held jointly)
Please sign exactly as your name(s) appear(s) herein. Where more than one owner is shown above, each should sign. When signing in a fiduciary or representative capacity, please add your full title as such. If a corporation is submitting this Consent, it should be executed in its full corporate name by a duly authorized officer. If a partnership or limited liability company is submitting this Consent, it should be signed in the full name of the entity by an authorized person.