UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
The following unaudited pro forma financial information has been prepared to assist you in your analysis of the financial effects of the merger of Key into Cimarex. We derived this information for each of the respective companies as follows:
The information prepared is only a summary and you should read it in conjunction with the historical financial statements and related notes contained in the annual reports and other information that Key has filed with the Securities and Exchange Commission or is included elsewhere in this proxy statement/prospectus, as well as the historical financial information for Cimarex included beginning on page F-1 of this proxy statement/prospectus.
You should consider several factors when comparing the historical financial information of Cimarex and Key to the Unaudited Pro Forma Combined Condensed Financial Information, including the following:
The Unaudited Pro Forma Combined Condensed Financial Information is for illustrative purposes only. The financial results may have been different had Cimarex been an independent company and had the companies always been combined. You should not rely on the Unaudited Pro Forma Combined Condensed Financial Information as being indicative of the historical results that would have been achieved had the merger occurred in the past or the future financial results that the combined company will achieve after the merger.
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In addition, the purchase price allocation is preliminary and will be finalized following the closing of the merger. The final purchase price allocation will be determined after closing based on the actual fair value of current assets, current liabilities, indebtedness, long-term liabilities, proven and unproven oil and gas properties, identifiable intangible assets and the final number of shares of common stock issued for Key's outstanding shares of common stock and for stock options that are outstanding at closing. We are continuing to evaluate all of these items; accordingly, the final purchase price may differ in material respects from that presented in the Unaudited Pro Forma Combined Condensed Balance Sheet.
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The following pro forma financial statements are estimates of the Unaudited Combined Condensed Financial Information of Cimarex as of June 30, 2002, the nine months ended June 30, 2002 and the year ended September 30, 2001, assuming the acquisition of Key.
UNAUDITED PRO FORMA COMBINED CONDENSED BALANCE SHEET
As of June 30, 2002
(In Thousands)
| | Cimarex Historical | Key Historical | Purchase Accounting Adjustments | Cimarex Pro Forma Combined | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Assets | ||||||||||||||
| Cash and cash equivalents | $ | 3,183 | $ | 1,040 | $ | — | $ | 4,223 | ||||||
| Accounts receivable | 29,272 | 15,192 | — | 44,464 | ||||||||||
| Other current assets | 7,876 | 1,961 | — | 9,837 | ||||||||||
| Total current assets | 40,331 | 18,193 | — | 58,524 | ||||||||||
Property and equipment, net | 223,158 | 204,385 | 69,100 | (2a) | 496,643 | |||||||||
Other assets | 1,442 | 1,519 | (1,253 | )(2a) | 1,708 | |||||||||
| Goodwill | — | — | 60,822 | (2a) | 60,822 | |||||||||
| Total assets | $ | 264,931 | $ | 224,097 | $ | 128,669 | $ | 617,697 | ||||||
Liabilities | ||||||||||||||
| Current liabilities | $ | 28,916 | $ | 20,736 | $ | — | $ | 49,652 | ||||||
| Debt, classified as current | — | 33,000 | 4,200 | (2a) | 37,200 | |||||||||
| Deferred taxes | 48,082 | 33,753 | 26,615 | (2a) | 108,450 | |||||||||
| Other long term liabilities | 1,520 | 333 | — | 1,853 | ||||||||||
| Total liabilities | 78,518 | 87,822 | 30,815 | 197,155 | ||||||||||
| Stockholders' equity | 186,413 | 136,275 | 97,854 | (2b) | 420,542 | |||||||||
| Total liabilities and stockholders' equity | $ | 264,931 | $ | 224,097 | $ | 128,669 | $ | 617,697 | ||||||
See the accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
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UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the Nine Months Ended June 30, 2002
(In Thousands, except per share data)
| | Cimarex Historical | Key Historical | Purchase Accounting Adjustments | Cimarex Pro Forma Combined | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | ||||||||||||||
| Oil and gas sales | $ | 79,520 | $ | 55,547 | $ | — | $ | 135,067 | ||||||
| Gas marketing | 37,451 | — | — | 37,451 | ||||||||||
| Other income | 2,027 | 289 | 32 | (2d) | 2,348 | |||||||||
| 118,998 | 55,836 | 32 | 174,866 | |||||||||||
Costs and expenses | ||||||||||||||
| Gas marketing purchases | 36,147 | — | — | 36,147 | ||||||||||
| Production | 10,920 | — | 11,301 | (2d) | 22,221 | |||||||||
| Lease operating | — | 12,359 | (12,359 | )(2d) | — | |||||||||
| Depreciation, depletion and amortization | 27,369 | 27,844 | (1,208 | )(2c) | 54,005 | |||||||||
| Reduction to carrying value of oil and gas properties | — | 45,140 | (45,140 | )(2c) | — | |||||||||
| Production, property and other taxes | 8,083 | 3,480 | 1,058 | (2d) | 12,621 | |||||||||
| General and administrative | 6,826 | 9,541 | — | 16,367 | ||||||||||
| Interest expense | 223 | 1,013 | — | 1,236 | ||||||||||
| Capitalized interest | — | (388 | ) | — | (388 | ) | ||||||||
| Interest income | — | (32 | ) | 32 | (2d) | — | ||||||||
| 89,568 | 98,957 | (46,316 | ) | 142,209 | ||||||||||
Income (loss) before income taxes | 29,430 | (43,121 | ) | 46,348 | 32,657 | |||||||||
Income tax provision (benefit) | 14,719 | (15,455 | ) | 17,612 | (2e) | 16,876 | ||||||||
Net income (loss) | $ | 14,711 | $ | (27,666 | ) | $ | 28,736 | $ | 15,781 | |||||
Earnings (loss) per share | ||||||||||||||
| Basic | $ | 0.55 | $ | (1.97 | ) | $ | 0.39 | |||||||
| Diluted | $ | 0.55 | $ | (1.97 | ) | $ | 0.39 | |||||||
Weighted average shares outstanding | ||||||||||||||
| Basic | 26,591 | 14,039 | — | 40,630 | ||||||||||
| Diluted | 26,591 | 14,039 | 285 | (2f) | 40,915 | |||||||||
See the accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
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UNAUDITED PRO FORMA COMBINED CONDENSED STATEMENT OF OPERATIONS
For the Year Ended September 30, 2001
(In Thousands, except per share data)
| | Cimarex Historical | Key Historical | Purchase Accounting Adjustments | Cimarex Pro Forma Combined | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Revenues | ||||||||||||||
| Oil and gas sales | $ | 215,777 | $ | 108,657 | $ | — | $ | 324,434 | ||||||
| Gas marketing | 99,140 | — | — | 99,140 | ||||||||||
| Other income | 2,136 | 228 | 168 | (2d) | 2,532 | |||||||||
| 317,053 | 108,885 | 168 | 426,106 | |||||||||||
Costs and expenses | ||||||||||||||
| Gas marketing purchases | 93,819 | — | — | 93,819 | ||||||||||
| Production | 13,091 | — | 15,224 | (2d) | 28,315 | |||||||||
| Lease operating | — | 16,823 | (16,823 | )(2d) | — | |||||||||
| Depreciation, depletion and amortization | 49,699 | 39,612 | 13,063 | (2c) | 102,374 | |||||||||
| Reduction to carrying value of oil and gas properties | 78,082 | 45,140 | 25,697 | (2c) | 148,919 | |||||||||
| Production, property and other taxes | 18,965 | 6,872 | 1,599 | (2d) | 27,436 | |||||||||
| General and administrative | 10,068 | 4,579 | — | 14,647 | ||||||||||
| Interest expense | (1,509 | ) | 2,005 | — | 496 | |||||||||
| Capitalized interest | — | (1,148 | ) | — | (1,148 | ) | ||||||||
| Interest income | — | (168 | ) | 168 | (2d) | — | ||||||||
| 262,215 | 113,715 | 38,928 | 414,858 | |||||||||||
Income (loss) before income taxes | 54,838 | (4,830 | ) | (38,760 | ) | 11,248 | ||||||||
Income tax provision (benefit) | 19,585 | (1,213 | ) | (14,729 | )(2e) | 3,643 | ||||||||
Income (loss) before cumulative effect of change in accounting method | $ | 35,253 | $ | (3,617 | ) | $ | (24,031 | ) | $ | 7,605 | ||||
Earnings (loss) per share before cumulative effect of change in accounting method | ||||||||||||||
| Basic | $ | 1.33 | $ | (0.26 | ) | $ | 0.19 | |||||||
| Diluted | $ | 1.33 | $ | (0.26 | ) | $ | 0.19 | |||||||
Weighted average shares outstanding | ||||||||||||||
| Basic | 26,591 | 13,974 | — | 40,565 | ||||||||||
| Diluted | 26,591 | 13,974 | 336 | (2f) | 40,901 | |||||||||
See the accompanying Notes to Unaudited Pro Forma Combined Condensed Financial Information.
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NOTES TO UNAUDITED PRO FORMA COMBINED CONDENSED FINANCIAL INFORMATION
Note 1—Basis of Presentation
Cimarex will account for the acquisition of Key as a purchase. In the distribution of Cimarex to stockholders of Helmerich & Payne, 26,591,321 common shares of Cimarex stock will be distributed to the owners of Helmerich & Payne in the pro rata spin off of the oil and gas producing assets and marketing operations owned by Helmerich & Payne. At the closing of the merger, Cimarex will exchange one share of Cimarex common stock for each share of Key common stock outstanding.
The accompanying Unaudited Pro Forma Combined Condensed Balance Sheet gives effect to the acquisition of Key as of June 30, 2002. The accompanying Unaudited Pro Forma Combined Condensed Statement of Operations for the nine months ended June 30, 2002 includes historical revenues and expenses of Cimarex and have been adjusted for the pro forma effect of the merger as if it occurred at October 1, 2000. Results of Key for the three month period ended December 31, 2001 are included in the Unaudited Pro Forma Combined Condensed Statements of Operations for both the nine month period ended June 30, 2002 and the year ended December 31, 2001.
Cimarex's fiscal year ends on September 30 and Key's fiscal year ends on December 31.
The accompanying Unaudited Pro Forma Combined Condensed Balance Sheet and the Unaudited Pro Forma Combined Condensed Statement of Operations do not include all information and notes required for complete financial statements.
Earnings per share for the nine months ended June 30, 2002 and for the year ended September 30, 2001 for Cimarex have been calculated based on the net income of Cimarex using the number of Cimarex shares expected to be issued to the stockholders of Helmerich & Payne upon the consummation of the distribution of 26,591,321 Cimarex shares. Earnings per share on a combined basis uses the 26,591,321 shares of Cimarex shares to be issued upon consummation of distribution to Helmerich & Payne, Inc. stockholders plus the weighted average shares outstanding for Key adjusted as described below in Note 2(f).
Note 2—Pro Forma Adjustments to Record the Acquisition of Key
The following adjustments have been made to the Unaudited Pro Forma Combined Condensed Balance Sheet at June 30, 2002 and the Unaudited Pro Forma Combined Condensed Statement of Operations, for the nine months ended June 30, 2002 and for the year ended September 30, 2001, respectively.
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and are subject to change. The following table reflects the calculation of the preliminary allocation of purchase price for the acquisition of Key:
| | (In thousands, except share and per share data) | ||||
|---|---|---|---|---|---|
| Calculation of preliminary allocation of purchase price: | |||||
| Shares of Cimarex common stock to be issued to Key shareholders | 14,080,468 | ||||
| Average Key stock price per share | $ | 15.96 | |||
| Fair value of Cimarex common stock issued | $ | 224,724 | |||
| Plus—Fair value of Key options to be assumed by Cimarex (all of which will be vested) | 9,405 | ||||
| Plus—Estimated direct merger costs to be incurred by Cimarex | 4,200 | ||||
| Total purchase price | 238,329 | ||||
| Plus—Fair value of liabilities assumed: | |||||
| Current liabilities, including $33,000 of current portion of long-term debt | 53,736 | ||||
| Deferred income tax liability | 60,368 | ||||
| Other long-term liabilities | 333 | ||||
| Less—Fair value of non oil and gas assets: | |||||
| Cash and cash equivalents | (1,040 | ) | |||
| Accounts recievable | (15,192 | ) | |||
| Other current assets | (1,961 | ) | |||
| Other long term assets | (266 | ) | |||
| Less—Fair value of property and equipment: | |||||
| Proved oil and gas properties | (258,200 | ) | |||
| Unproved oil and gas properties | (14,032 | ) | |||
| Furniture, fixtures and equipment (reclassified from other assets) | (1,253 | ) | |||
| Residual purchase price allocated to non-amortizable goodwill | $ | 60,822 | |||
The calculation of the estimated purchase price assumes that the number of Cimarex shares to be issued is equal to Key's outstanding shares as of June 30, 2002. Key's outstanding shares has changed since our announcement date and may change between June 30, 2002 and the date the merger closes.
The closing market price of Key's common stock on the day of the merger announcement was $16.10 per share. The cost of the acquisition reflects the average of that price and the closing prices of Key's common stock for the two days preceding and the two days following announcement, which average was $15.96 per share.
The entry to record the purchase provides a deferred tax liability at the expected effective tax rate of the combined companies of 38%, including state taxes, based on the changes to the book basis of the identifiable tangible and intangible assets and liabilities acquired. There is no corresponding increase in tax basis as this transaction has been structured such that it is intended to be a tax-free transaction. No deferred tax liability has been established for the goodwill because amortization is not deductible for tax purposes.
The remaining goodwill represents the fair value of the continuation of the management team of Key. The value stems from a proven track record of Key to generate exploratory prospects and develop oil and natural gas reserves.
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common stock issued by Cimarex. The pro forma combined stockholders' equity of Cimarex reflects the following:
| | (in thousands) | ||
|---|---|---|---|
| Stockholders' equity of Cimarex as of June 30, 2002 | $ | 186,413 | |
| Fair value of common stock issued to acquire Key | 224,724 | ||
| Fair value of Key options to be assumed by Cimarex (all of which will be vested) | 9,405 | ||
| Pro forma stockholders' equity after the acquisition of Key | $ | 420,542 | |
Note 3—Cost Savings and Expenses of the Merger
Expected cost savings resulting from operating synergies and the elimination of merger-related costs have not been reflected as adjustments to the historical data. The cost savings are expected to result from the consolidation of the corporate headquarters of Cimarex and Key and rationalization of capital spending. Cimarex estimates that it will incur approximately $4.2 million in fees and expenses associated with the merger. Key estimates that it will incur fees and expenses of approximately $5.0 million, which are being expensed as incurred by Key. There are no arrangements to have Helmerich & Payne or Cimarex reimburse any of Key's merger-related costs.
Note 4—Selected Pro Forma Supplemental Oil and Gas Information
The tables set forth below reflect unaudited pro forma disclosures about the combined company's oil and gas activities. The information was prepared from internally generated information and records of Cimarex and Key.
Production and average sales price information:
| | Oil (MBbl) | Gas(MMcfe) | ||||
|---|---|---|---|---|---|---|
| For the twelve months ended December 31, 2001 | ||||||
| Production | 2,326 | 58,463 | ||||
| Average sales prices (per Bbl of oil and per Mcf of gas) | $ | 24.20 | $ | 4.02 | ||
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Productive wells as of December 31, 2001:
| | Oil | Gas | ||||||
|---|---|---|---|---|---|---|---|---|
| | Gross | Net | Gross | Net | ||||
| Area: | ||||||||
| Mid-Continent | 3,445 | 140.2 | 1,361 | 354.1 | ||||
| Gulf Coast | 206 | 35.5 | 227 | 51.1 | ||||
| Western | 684 | 61.8 | 164 | 32.0 | ||||
| Kansas | 165 | 91.0 | 466 | 266.0 | ||||
| 4,500 | 328.5 | 2,218 | 703.2 | |||||
Net undeveloped acres as of December 31, 2001:
| California | 13,307 | |
| Colorado | 470 | |
| Kansas | 15,714 | |
| Louisiana | 27,769 | |
| Michigan | 4,124 | |
| Mississippi | 9,234 | |
| Montana | 5,893 | |
| Nevada | 4,864 | |
| New Mexico | 670 | |
| North Dakota | 277 | |
| Oklahoma | 32,825 | |
| Texas | 90,103 | |
| Utah | 5,794 | |
| Wyoming | 39,421 | |
| 250,465 | ||
Estimated proved oil and gas reserves and standardized measure as of December 31, 2001:
| | Cimarex | Key | Combined | |||||||
|---|---|---|---|---|---|---|---|---|---|---|
| Oil (MBls) | 5,309 | 9,215 | 14,524 | |||||||
| Gas (MMcf) | 213,184 | 91,978 | 305,162 | |||||||
| Equivalent (Bcfe) | 245.0 | 147.3 | 392.3 | |||||||
| Standardized measure of discounted future net cash flows (millions) | $ | 187.4 | $ | 147.1 | $ | 334.5 | ||||
| Percentage of proved developed | 98.1 | % | 99.5 | % | 98.6 | % | ||||
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